Worldwide Tax Summaries 20142015

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Worldwide
Tax Summaries
Corporate Taxes
2014/15
Quick access
to information
about corporate
tax systems in
155 countries
worldwide.
Worldwide Tax
Summaries
Corporate Taxes 2014/15
All information in this book, unless otherwise stated, is up to date as of 1 June 2014.
This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.
2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is
a separate legal entity. Please see www.pwc.com/structure for further details.
Foreword
Welcome to the latest edition of Worldwide Tax Summaries

(WWTS), one of the most comprehensive tax guides available.
This years edition provides detailed information on corporate
tax rates and rules in 155 countries worldwide.
The country summaries, written by
our local PwC tax specialists, include
recent changes in tax legislation as
well as key information about income
taxes, residency, income determination,
deductions, group taxation, credits and
incentives, withholding taxes, indirect
taxes, and tax administration. All
information in this book, unless otherwise
stated, is up to date as of 1 June 2014.
If you have any questions, or need more

detailed advice on any aspect of tax,
please get in touch with us. The PwC tax
network has member firms throughout
the world, and our specialist networks
can provide both domestic and crossborder perspectives on todays critical
tax challenges. A list of some of our key
network and industry specialists is located
at the back of this book.
Our online version of the summaries is

available at www.pwc.com/taxsummaries.
The WWTS website is updated regularly
and provides quick access to the latest
tax information and changes. Some of
the enhanced features available online
include Quick Charts to compare rates
across jurisdictions, and reference
materials on OECD, EU, and WTO
member countries, among other valuable
information. You may also access WWTS
content through Tax Analysts at
www.taxanalysts.com/wts.
I hope you will find these summaries

useful, and please dont hesitate to contact
any PwC specialist with comments or
feedback on WWTS.
www.pwc.com/taxsummaries
Rick Stamm
Vice Chairman, Global Tax Leader
PwC US
+1 646 471 1035
[email protected]
Foreword
Contents
Foreword................................................ 1
Country chapters
Albania................................................... 7
Algeria................................................. 17
Angola.................................................. 23
Antigua and Barbuda............................ 34
Argentina............................................. 44
Armenia............................................... 62
Aruba................................................... 75
Australia............................................... 91
Austria...............................................116
Azerbaijan..........................................135
Bahrain..............................................148
Barbados............................................152
Belarus...............................................169
Belgium..............................................192
Bermuda............................................217
Bolivia................................................222
Bosnia and Herzegovina.....................232
Botswana...........................................253
Brazil.................................................261
Bulgaria.............................................284
Cambodia...........................................299
Cameroon, Republic of.......................311
Canada...............................................321
Cape Verde.........................................350
Caribbean Netherlands.......................365
Cayman Islands..................................370
Chad..................................................373
Chile..................................................384
China, Peoples Republic of.................395
Colombia............................................412
Congo, Democratic Republic of the.....430
Congo, Republic of.............................443
Costa Rica..........................................463
Croatia...............................................473
Curaao..............................................490
Cyprus................................................504
Czech Republic...................................518
Denmark............................................530
Dominica, Commonwealth of.............546
Dominican Republic...........................553
Ecuador..............................................562
Egypt..................................................572
El Salvador.........................................583
Contents
Equatorial Guinea..............................593
Estonia...............................................599
Fiji......................................................609
Finland...............................................623
France................................................638
Gabon................................................666
Georgia..............................................679
Germany............................................688
Ghana................................................702
Gibraltar............................................715
Greece................................................724
Greenland..........................................746
Guatemala..........................................754
Guernsey, Channel Islands.................764
Guyana..............................................771
Honduras...........................................777
Hong Kong.........................................787
Hungary.............................................801
Iceland...............................................823
India..................................................836
Indonesia...........................................862
Iraq....................................................880
Ireland...............................................885
Isle of Man.........................................912
Israel..................................................920
Italy....................................................941
Ivory Coast (Cte dIvoire)..................970
Jamaica..............................................980
Japan...............................................1004
Jersey, Channel Islands....................1026
Jordan..............................................1033
Kazakhstan.......................................1042
Kenya...............................................1053
Korea, Republic of............................1064
Kuwait..............................................1085
Kyrgyzstan........................................1098
Lao Peoples Democratic Republic....1111
Latvia...............................................1119
Lebanon...........................................1136
Libya................................................1150
Liechtenstein....................................1156
Lithuania..........................................1167
Luxembourg.....................................1184
Macau..............................................1202
Macedonia.......................................1212
Madagascar......................................1224
PwC Worldwide Tax Summaries
Malawi.............................................1233
Malaysia...........................................1244
Malta................................................1264
Mauritius.........................................1277
Mexico.............................................1292
Moldova...........................................1323
Mongolia..........................................1341
Montenegro.....................................1355
Morocco...........................................1365
Mozambique....................................1377
Myanmar..........................................1388
Namibia, Republic of........................1398
Netherlands......................................1413
New Zealand....................................1432
Nicaragua.........................................1450
Nigeria.............................................1459
Norway............................................1472
Oman...............................................1490
Pakistan...........................................1499
Panama............................................1511
Papua New Guinea...........................1521
Paraguay..........................................1537
Peru.................................................1545
Philippines.......................................1561
Poland..............................................1576
Portugal...........................................1597
Puerto Rico......................................1625
Qatar................................................1642
Romania...........................................1651
Russian Federation...........................1678
Rwanda............................................1699
Saint Kitts and Nevis.........................1710
Saint Lucia.......................................1721
Saudi Arabia.....................................1730
Senegal............................................1745
Serbia...............................................1754
Singapore.........................................1765
Sint Maarten....................................1782
Slovak Republic................................1793
Slovenia...........................................1807
South Africa.....................................1820
Spain................................................1838
Sri Lanka..........................................1882
Swaziland........................................1896
Sweden............................................1902
Switzerland......................................1912
Taiwan.............................................1930
Tajikistan..........................................1941
Tanzania..........................................1950
Thailand...........................................1961
Timor-Leste......................................1976
Trinidad and Tobago........................1986
Tunisia.............................................1997
Turkey..............................................2021
Turkmenistan...................................2042
Uganda............................................2050
Ukraine............................................2063
United Arab Emirates.......................2085
United Kingdom...............................2090
United States....................................2115
Uruguay...........................................2136
Uzbekistan, Republic of....................2151
Venezuela.........................................2165
Vietnam...........................................2186
Zambia.............................................2201
Zimbabwe........................................2212
Global Tax Contacts
Our global tax network.....................2224
Tax Code of Conduct for the
Global PwC Network........................2226
Human Resource Services................2229
Indirect Taxes...................................2233
International Tax Services................2237
Legal Services...................................2242
Mergers and Acquisitions..................2245
Sustainability and Climate Change...2250
Tax Controversy and
Dispute Resolution...........................2252
Tax Management and
Accounting Services.........................2255
Tax Policy and Administration..........2260
Transfer Pricing................................2262
Value Chain Transformation.............2265
Global Tax Industry Leaders.............2267
Worldwide Tax Summaries
Editorial Team..................................2268
Contents
Country chapters
Albania
PwC contact
Loreta Peci
PricewaterhouseCoopers Audit sh.p.k.
Blvd. Deshmoret e Kombit, Twin Towers,
Tower 1, 10th floor,
Tirana, Albania
Tel: +355 4 2242 254
Email: [email protected]
Significant developments
As of 1 January 2014, the corporate income tax (CIT) ratechanged from 10% to 15%.
Taxes on corporate income

Albanian law applies the principle of worldwide taxation. Resident entities are taxed on
all sources of income in and outside the territory of Albania, while non-resident entities
are taxed on income generated only in the territory of Albania.
As of 1 January 2014, theCIT rate in Albania is 15% (previously 10%). CIT is assessed on
the taxable profits calculated as taxable income less deductible expenses.
Local income taxes
Local taxes on income depend on a number of factors, such as type of activity,

municipality where the business is located, and the annual turnover. Consequently,
these taxes may vary from 20,000 Albanian lek (ALL) to ALL 143,000.
Corporate residence
Based on Albanian legislation, a legal entity is deemed to be resident in Albania if it has
its head office or its place of effective management in Albania.
Permanent establishment (PE)
PE in Albania means a fixed place of business where an entity carries out, wholly or
partly, its business activities, including, but not limited to, an administration office, a
branch, a factory, a workshop, a mine, and a construction or installation site.
The determination of a PE, where applicable, is based on the provisions of the double tax
treaties (DTTs) that Albania has entered into with a number of countries. When dealing
with DTT provisions, the Albanian tax authorities refer to the Organisation for Economic
Co-operation and Development (OECD) commentaries.
Other taxes
Value-added tax (VAT)
The standard VAT rate is 20%, and the standard VAT period is the calendar month.
Taxable transactions include goods and services supplied domestically as well as goods
imported into Albania by a taxable person. The following transactions are also taxable:
Transactions performed for no consideration or for a consideration less than market
value.
Albania
Albania
Barter transactions.
The private use of taxable goods by a taxable person (self-supply).
Determination of VAT payers
Taxable persons are all physical persons and legal entities registered, or required to be
registered, for VAT purposes.
The VAT registration threshold in Albania is annual turnover over ALL 5 million. Any
person providing taxable supplies and whose annual turnover does not exceed ALL 5
million is not required to register, although voluntary registration is possible.
Taxpayers who, in the course of their business activity, provide services in the list of free
professions (e.g. translators, lawyers, attorneys, pharmacists, dentists, economists), are
required to register for VAT purposes in Albania, regardless of their annual turnover.
VAT obligations for non-resident entities
Foreign entities not registered with the Albanian tax authorities, carrying out business
activities in Albania, are subject to 20% VAT in Albania when services rendered are
related to immovable property located in Albania. This is applicable regardless of the
value of the services supplied.
In this case, the foreign entity is obligated to register and pay VAT in Albania by
nominating a VAT representative.
In cases where the foreign entity is in non-compliance with the above requirement, the
tax liabilities and respective penalties derived from such non-compliance should be paid
by the local beneficiary of the services.
Zero-rated goods and services
The following goods and services are subject to 0% VAT in Albania:

Export of goods.
The supply of goods related to the international transport of goods or passengers.
The supply of goods and services in relation to trading and industrial activities at sea.
Services related to transport of goods and passengers.
Services related to international telecommunications.
VAT-exempt goods and services
The following are considered VAT exempt:

The lease of land.
The lease of buildings (only if the rental period is limited to two months), except
in cases where there is a contract between parties in which the supply is deemed as
taxable.
Provision of services performed by Albanian subcontractors relevant to the processing
of semi-finished goods intended for export.
Financial services.
Postal services (only if the post does not import or carry out other postal services and
its annual turnover doesnt exceed ALL 5 million).
Gambling, casino, and racetrack services.
Written media and books.
Advertising in electronic and written media.
Interest payments on leasing transactions.
Export of services.
The sale of land and buildings, although the construction process itself is subject to VAT.
The supplies made against a reduced payment by religious or philosophical
organisations for the purpose of spiritual welfare.
8
Albania
Albania
The supplies of packages and materials used for the manufacture and confection of
drugs.
Educational services.
Hydrocarbon operations.
Supply of free goods distributed for emergencies.
The supply of drugs and health services provided by private or public institutions
are exempted from VAT, as of 1 January 2014. Previous to this change, the supply of
drugs and health services was subject to a reduced VAT rate of 10%.
VAT calculation
The amount of VAT to be paid is calculated as the difference between the VAT applied
to purchases (input VAT) and the VAT applied to sales (output VAT). If the input is
higher than the output, then the difference is a VAT credit which can be carried forward
to subsequent months. Otherwise, if the output VAT is higher than the input VAT, the
difference represents VAT payable to the state.
Taxpayers who carry out taxable VAT activities, as well as VAT-exempt activities, can
credit only that portion of their input VAT that corresponds to the VATable activities.
To determine the amount of input VAT that can be claimed from the state, the taxpayer
should estimate a VAT credit coefficient, being the rate of the taxable VAT activities over
total activities.
Items of machinery and equipment imported by Albanian registered entities for their
own use in the business activity (i.e. not for resale) are subject to a VAT deferral scheme
under which the payment of VAT is postponed up to 12 months with a possibility of
extension for an additional 12-month period.
VAT reimbursement
Taxable entities have the right to claim VAT reimbursement if the period in which VAT
credits are carried forward exceeds three consecutive months and the total amount of
accumulated VAT credit is equal to or above ALL 400,000.
Following the request for VAT reimbursement, taxable entities have the right to obtain
the reimbursement of VAT credit within 60 days after the request is submitted. For all
taxable persons who are considered as exporters based on the criteria established by the
Instruction of Council of Ministers, the deadline for tax authority approval, or not, of
VAT reimbursement requests is within 30 days.
VAT returns
The submission of VAT returns and sales and purchase books must be done electronically
by all taxpayers.
Electronic submission deadlines fall on the dates below:
For VAT books, the deadline is the fifth day of the following month.
For VAT returns and for the payment of the related VAT liability, the deadline is the
14th day of the following month.
As of January 2014, even the VAT representatives are subject to electronic submission of
VAT books and returns.
Customs duties
Albania uses the Harmonized Code System for tariff classification.

The customs duty rates range from 0% to 15%, depending on the type of goods.
Albania
Albania
Import of machineries and equipment for use in the taxpayers business activity are
generally subject to customs duties at the zero rate.
Customs duties on imports of vehicles are 0%.
Excise duties
Any individual or legal entity (including their fiscal representatives) that either produces
or imports into the territory of the Republic of Albania any commercial goods defined to
be subject to excise tax, is subject to excise tax in Albania.
Albania levies excise tax on the following products:

Beer: ALL 3.6/litre to ALL 7.1/litre, depending on the annual quantity in hectolitre.
Wine, champagne, fermented and sparkling beverage: ALL 52/litre.
Other alcoholic drinks: ALL 100/litre to ALL 400/litre.
Tobacco and its by-products: ALL 3,000/kg.
Cigarettes containing tobacco: ALL 4,500/1,000 pieces.
Liquid by-products of petroleum: ALL 20/litre to ALL 50/litre.
Solid by-products of petroleum: ALL 5/kg to ALL 40/kg.
Fireworks: ALL 200/kg.
Pneumatic tyres: ALL 20/kg to ALL 40/kg for new purchased tyres and ALL 100/kg
for used tyres.
Incandescent lamps: ALL 100/unit.
Plastic, glass, and mixed packages: ALL 100/litre, ALL 10/litre, and ALL 20/litre
respectively.
Reimbursement of excise tax can be obtained on:
The excise tax paid on fuel used by entities engaged in the constitution of energy
resources with installed capacities of not less than 5 MW for both its own needs and
for sale.
The excise tax paid on fuel used in green houses as well as in production of industrial
and agricultural products.
50% of the excise tax paid for plastic, glass, and mixed packaging used as input in the
local recycling industries of these materials.
Real estate tax
Entities that own real estate property in Albania are subject to real estate tax.
Real estate tax on buildings
Real estate tax on buildings is calculated based on the type of activity the business entity
owning the building carries out.
Type of activity
I.
Residential buildings:
Built before 1993
Built during and after 1993
II.
Other buildings:
Used for commercial and administrative services
Other buildings
III.
Owned or in use buildings in approved territories, such as
touristic villages, etc.
10
Albania
Tax rate (Area1/Area2/

Area3) (ALL/sq m/year)
15/10/5
30/12/6
400/300/200
100/60/40
400/400/400
Albania
Real estate tax on agricultural land
Real estate tax on agricultural land is levied on each hectare and varies depending
on the district where the agricultural land is located and on the land productivity
categorisation.
Stamp duties and notary taxes
There are no stamp duties on the sale contract of land or other properties. There are,
however, notary taxes that are, in nature, similar to stamp duties. The notary tax on sales
contracts that relate to change in ownership of immovable properties is ALL 1,000. The
notary tax on sales contracts that relate to change in ownership of movable properties is
ALL 700.
Depending on the agreement reached between the seller and the buyer, the notary tax
can be paid either by the seller, or by the buyer, or shared between both of them.
Registration taxes
The fee for the registration of a business entity is ALL 100.
Payroll-related taxes
Entities shall withhold personal income tax from the gross salaries of their employees.
Employers shall pay social and health contributions (SHC) to the tax authorities at a rate
of 15% and 1.7%, respectively. The social contributions are paid between the minimum
and maximum gross salary for SHC purposes, which are ALL 19,026 and ALL 95,130,
respectively. As of 1 January 2014, the health contributions are calculated on the total
gross salary. Previously, health contributions were calculated on the minimum and
maximum gross salary set for SHC purposes.
Branch income
Branch offices in Albania are subject to the same taxes as all other forms of legal entities.
Income determination
Inventory valuation
Inventory is valued at the end of each tax period using the methods stipulated in the
Accounting Law, which should be applied systematically. The methods stipulated in the
National Accounting Standards for the valuation of inventory at year-end are the average
cost and first in first out (FIFO) methods.
Capital gains
Capital gains are taxed at the rate of 15%.
Dividend income
Dividends and other profit distributions received by a resident entity from another
resident entity or from a non-resident entity are not subject to CIT for the resident
beneficiary of such income. This applies despite the participation quote (in amounts or
number of shares) of the entity distributing profits in the shareholder capital, voting
rights, or its participation in initial capital of the beneficiary.
Interest income
Interest income is taxed at the rate of 10%.
Albania
11
Albania
Foreign income
Albanian resident corporations are taxed on their worldwide income. If a DTT is in force,
double taxation is avoided either through an exemption or by granting a tax credit up to
the amount of the applicable Albanian CIT rate.
Albanian legislation does not contain any provisions under which income earned abroad
may be tax deferred.
Deductions
Depreciation and amortisation
Allowed tax depreciation and amortisation rates and methods for each category of fixed
assets are shown below:
Asset category
Buildings and machinery and other fixed structures installed in
the building
Computers, software products, and information systems
Other assets
Intangible assets (including goodwill and start-up expenses)
Method
Rate (%)
Reducing-balance basis
5
Straight-line basis
25
20
15
Land, fine art, antiques, and jewelleries are non-depreciable assets.

Depreciation and amortisation of fixed assets at amounts higher than those allowed for
tax purposes is considered a non-deductible expense.
Interest expenses
Interest paid in excess of the average 12-month credit interest rate applied in the
banking system, as determined by the Bank of Albania, is a non-deductible expense. The
amount of deductible interest expense may also be limited by thin capitalisation rules
(see Thin capitalisation in the Group taxation section).
Bad debt
Bad debts are only deductible if the following conditions are met simultaneously:
An amount corresponding with the bad debt was included earlier in income.
The bad debt is removed from the taxpayers accounting books.
All possible legal action to recover the debt has been taken.
This applies to all entities except those operating in the financial sector.
Charitable contributions
There are no provisions in Albania regarding the tax treatment of charitable

contributions. In general, contributions are considered as non-deductible expenses for
CIT purposes.
Fines and penalties
Fines and other tax-related sanctions are non-deductible expenses.
Taxes
Income taxes, VAT, and excise duties are non-deductible expenses.
Other significant items
The Albanian legislation also defines the following specific costs as non-deductible:
12
Albania
Albania

Expenses not supported with fiscal invoices.

Expenses paid in cash of amounts exceeding ALL 150,000.
Benefits in kind and gifts.
Wages, bonuses, and any other form of income deriving from an employment
relationship and paid to the employees in cash.
Provisions and reserves (with some exemptions applicable to the financial sector).
Expenses for technical services, consultancy, and management received from
foreign entities that are not registered for tax purposes in Albania and for which no
withholding tax (WHT) has been paid by 31 December, at the latest.
Losses, damages, wastage incurred during production, transiting, or warehousing,
exceeding the norms defined by laws and related instructions.
Impairment losses on fixed assets.
Representation and reception expenses exceeding 0.3% of annual turnover.
Sponsorship expenses exceeding 3% of profit before tax and sponsorships of press
and publications exceeding 5% of profit before tax.
The amounts allocated to special reserve accounts in banks and insurance companies
are deductible, provided that they do not exceed the limits stated in the Bank of Albania
regulations.
Employers contributions towards the life and health insurance of employees are deductible.
Banks can deduct only loan impairments (provisions) calculated under International
Financial Reporting Standards (IFRS) for CIT purposes.
Net operating fiscal losses
Fiscal losses may be carried forward up to three consecutive years. However, losses may
not be carried forward if more than 50% of direct or indirect ownership of the share
capital or voting rights of the company is transferred during the tax year.
Albanian legislation does not allow losses to be carried back.
Payments to foreign affiliates
Payments to foreign affiliates are subject to WHT unless tax relief is requested in
accordance with the local legislation or any DTT in place. These payments are tax
deductible if they are properly documented and incurred for business purposes only.
Payments to foreign affiliates made for the purpose of profit transfer might be subject
to price revaluation by the tax authorities. Any transactions/payments made to foreign
affiliates shall be performed on an arms-length basis.
Group taxation
There is no group taxation in Albania.
Transfer pricing
Transfer pricing adjustments may be made if the conditions set in a transaction

between related parties differ from those that would have been set if the parties were
independent. In particular, the following are regarded as related parties:
A legal entity and any person who owns, directly or indirectly, at least 50% of the
shares or voting rights in that entity.
Two or more legal entities if a third person owns, directly or indirectly, at least 50% of
the shares or voting rights in each entity.
Albania
13
Albania
Thin capitalisation
The interest paid on outstanding loans and prepayments exceeding four times the amount of
net assets are not deductible. This rule does not apply to banks and insurance companies.
Controlled foreign companies (CFCs)

There is no CFC regime in Albania.
Tax credits and incentives

The following entities are exempt from CIT:
Legal entities that conduct religious, humanitarian, charitable, scientific, or
educational activities.
Trade unions or chambers of commerce, industry, or agriculture.
International organisations, agencies for technical cooperation, and their
representatives, the tax exemptions of which are established by specific agreements.
Foundations or non-banking financial institutions established to support
development policies of the government through credit activities.
Film studios and cinematographic productions (among other types of entity/activity)
that are licensed and funded by the National Cinematographic Centre.
Foreign tax credit
Albania does not apply foreign tax credits except in the case of DTTs (see Foreign income
in the Income determination section).
Withholding taxes
The gross amount of interest, royalties, dividends, and shares of partnerships profits
paid to non-resident companies is subject to a 10% WHT, unless a DTT provides for a
lower rate.
The 10% WHT is levied on the gross amount of payments for technical, management,
installation, assembly, or supervisory work, as well as payments to management and
board members.
If a non-resident company does not create a PE in Albania, and a DTT exists between Albania
and the home country of the non-resident company, the payment of WHT can be avoided.
Double tax treaties (DTTs)
Albania has signed 39 DTTs, of which 35 are in force.

WHT rates envisaged by applicable DTTs are provided in the following table:
Recipient
Austria
Belgium
Bosnia and Herzegovina
Bulgaria
China
Croatia
Czech Republic
Egypt
14
Albania
Dividends
5/15 (6)
5/15 (6)
5/10 (6)
5/15 (6)
10
10
5/15 (6)
10
WHT (%)
Interest
5
5
10
10
10
10
5
10
Royalties
5
5
10
10
10
10
10
10
Applicable from
1/1/2009
1/1/2005
1/1/2009
1/1/2000
1/1/2006
1/1/1999
1/1/1997
1/1/2006
Albania
Recipient
Estonia
France
Germany
Greece
Hungary
India
Ireland
Italy
Korea
Kosovo
Kuwait
Latvia
Luxembourg
Macedonia
Malaysia
Malta
Moldova
Netherlands
Norway
Poland
Qatar
Romania
Russia
Serbia and Montenegro
Singapore
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Dividends
5/10 (6)
5/15 (6)
5/15 (6)
5
5/10
10
5/10 (5)
10
5/10
10
0/5/10 (3)
5/10
5/10
10
5/15 (6)
5/15
5/10
0/5/15 (1)
5/15
5/10
5
10/15
10
5/15
5
5/10
0/5/10 (4)
5/15
5/15
5/15
5/15
WHT (%)
Interest
5
10
5
5
N/A
10
7
5
10
10
10
5/10 (2)
5
10
10
5
5
5/10 (2)
10
10
5
10
10
10
5
7
6
5
5
10
6
Royalties
5
5
5
5
5
10
7
5
10
10
10
5
5
10
10
5
10
10
10
5
6
15
10
10
5
7
0
5
5
10
10
Applicable from
1/1/2006
1/1/2012
1/1/2001
1/1/1996
1/1/2012
1/1/2000
1/1/2009
1/1/2006
1/1/2014
1/1/2009
1/1/1999
1/1/1995
1/1/2001
1/1/2004
1/1/2006
1/1/2000
1/1/1995
3/5/2012
1/1/1995
1/1/1998
1/1/2006
1/1/2012
1/1/2010
4/5/2011
1/1/2000
1/1/2001
1/1/1997
-
Notes
1.
2.
3.
4.
5.
6.
If the recipient company directly or indirectly owns 50% of the capital of the paying company, 0%
rate of the gross amount of the dividends applies. If the recipient company directly or indirectly owns
25% of the capital of the paying company, 5% rate of the gross amount of the dividends applies. A
tax rate of 15% of the gross amount of the dividends applies in all other cases.
A tax rate of 5% of the gross amount of the interests applies in case of interests in a contracting
state, which are paid to a loan granted by a bank or any other financial institution of the other
contracting state, including investment banks and savings banks and insurance. A tax rate of 10% of
the gross amount of the interests applies in all other cases.
If the recipient company or any other governmental body is resident of other contracting state, 0%
rate of the gross amount of the dividend applies. If the recipient company (other than a partnership)
directly or indirectly owns at least 10% of the capital of the paying company, 5% rate of the gross
amount of the dividends applies. A tax rate of 10% of the gross amount of the dividends applies in all
other cases.
If the recipient company (other than a partnership) directly or indirectly owns at least 75% of the
capital of the paying company, 0% rate of the gross amount of the dividends applies. If the recipient
company (other than a partnership) directly or indirectly owns at least 10% of the capital of the
paying company, 5% rate of the gross amount of the dividends applies. A tax rate of 10% of the
gross amount of the dividends applies in all other cases.
capital of the paying company, 5% rate of the gross amount of the dividends applies. A tax rate of
10% of the gross amount of the dividends applies in all other cases.
capital of the paying company, 5% rate of the gross amount of the dividends applies. A tax rate of
15% of the gross amount of the dividends applies in all other cases.
Albania
15
Albania
Tax administration
Taxable period
The tax year is the calendar year.
Tax returns
The final CIT return is due by 31 March of the year following the tax year.
Payment of tax
Predetermined advance payments of CIT are due either by the 15th day of each month
or by the end of each quarter.
According to the tax laws, CIT is paid during the year on a prepayment basis. The
amount of monthly CIT prepayments is determined as follows:
Years of activities
Year 1
Year 2
Year 3
Period from January to April

Taxpayers estimation
CIT of Year 1 divided by
months of activity in Year 1
Period from May to December

CIT of Year 1 divided by months of activity in Year 1
CIT of Year 2 less CIT prepaid during January
to April in Year 2 divided by 8 months
Companies should decide on the use of their prior fiscal year after-tax profit within six
months of the subsequent year and submit the decision to the tax authorities no later
than 31 July. The decision should state the amount allocated as statutory reserve, the
amount to be used for investments and/or for increase in share capital, and the amount
to be distributed as dividends.
The final due date for the payment of the final CIT for a fiscal year is 31 March of the
following year. Note that this payment is calculated as the total amount of CIT selfassessed from the taxpayer for that particular fiscal year less total CIT instalments paid
related to that year.
Companies have the obligation to pay the tax on dividends to the tax authorities no
later than 30 July of the year the financial results are approved, regardless of the fact of
whether the dividend has been distributed or not to the shareholders.
Tax audit process
Generally, the Albanian tax system is based on self-assessment, which is under

continuous audit by the tax authorities. Such audits include all types of taxes that the
business is subject to. If any discrepancies result from the tax audit, the tax authorities
issue an assessment notice, which the taxpayer might appeal within 30 calendar days.
Statute of limitations
With regard to Albanias tax administration practices, the statute of limitations of a tax
audit is five years. However, the statute of limitations can be extended by 30 calendar
days in cases where:
a new assessment is made as a result of an appeal against a previous tax assessment
a tax assessment is made as a result of a tax audit or investigation of the taxpayer by
the tax administration, or
the taxpayer is subject to a penal case related to ones tax liabilities.
Topics of focus for tax authorities
The tax authorities main focus during a tax audit are areas related to transfer pricing,
which is becoming an increasing area of focus; WHT; and aspects affecting CIT, such as
expense deductibility.
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Albania
Algeria
PwC contact
Arnaud Chastel
PricewaterhouseCoopers Algrie
Lotissement Piette, N56, rue N06
Paradou - Hydra 16 035, Alger
Tel: +33 1 56 57 56 57
Recent significant corporate tax developments in Algeria include the following:
Temporary exemption from corporate tax for investing companies creating 100 jobs
or more or which invest in strategic sectors.
Five year reduction of corporate for companies whose securities are introduced on
the stock exchange.
Car manufacturers are obligated to create industrial or semi-industrial activity in
Algeria within three years.
Limitation of the reinvestment obligation to tax advantages granted during the
exploiting phase only.
Suppression of the obligation to submit foreign direct investments to the National
Investment Council.

Corporate tax is due on activities performed in Algeria. It is applied according to the
following two regimes:
The 24% withholding tax (WHT), which covers the corporate income tax (IBS), the
tax on business activities (TAP), and the value-added tax (VAT) (i.e. three taxes in
one), is required to be levied on services. The calculation base is the gross amount of
the services invoiced.
The standard tax regime, which includes the following taxes:
IBS at the rate of 25% computed on profit before tax.
TAP at the rate of 2% computed on the invoiced turnover.
VAT at the rate of 17% (except any specific exemption).
Branch tax at the rate of 15% calculated on net profit after IBS.
Note that production activities are subject to IBS at the rate of 19% instead of 25%.
Nil corporate tax returns include the payment of a minimum corporate tax amounting to
5,000 Algerian dinars (DZD).
Corporate residence
Algerian domestic tax law does not contain a clear and explicit definition of a
permanent establishment or a fixed place of business. The tax law refers only
to permanent place of business (installation professionnelle permanente), which,
conceptually, actually suggests setting-up of a local commercial entity such as a branch
or the like.
Algeria
17
Algeria
In the absence of a double tax treaty (DTT), the basic principle that governs taxation of
non-resident entities is that such entities are taxable in Algeria on their Algerian-source
income whatever the way and the location where the work is carried out, provided only
that the same are rendered or used in Algeria.
As a consequence, it will be present in Algeria through the execution of the related
contract (services contract) to be performed in Algeria. From an Algerian point of view,
it is not an investment and is by nature temporary. Note that it is possible to execute
several contracts under the same establishment.
In the presence of a DTT, a foreign company will be taxed in Algeria if it has a PE only.
Other taxes
VAT is imposed on the supply of goods or services in Algeria. It includes all economic
activities conducted in Algeria. The zero rate is also applied to all exports. The standard
VAT rate is 17%. The reduced rate is 7%, applying to various basic items.
Monthly VAT returns and payments are due by the 20th day of the following month.
Customs duties
Algerian imports are subject to payment of customs duties in the following increments:
duty-free, 5%, 15%, or 30%.
Property taxes
An annual property tax is imposed on real estates in Algeria. Rates depend on the
location of real estate.
Transfer taxes
A transfer tax is applicable to land and buildings at a rate of 5% for registration fees, plus
1% as a tax for land publicity.
Stamp taxes
Stamp duty is imposed at varying rates on transactions, including the execution of

various documents and deeds.
Payroll taxes
There is individual income tax withheld on salary and assimilated incomes (minus
employee social security contributions). The income tax is withheld by applying the
progressive scale rates (marginal rate 35%).
Social security contributions
The employer must contribute 26% of the employee gross salary for social security
contributions. The employee must pay 9% of gross salary.
Branch income
Branch tax is 15%. Note that since 2010, it is no longer possible to register a branch in
Algeria. However, under certain conditions, a foreign company could operate in Algeria
by registering its contract to local tax authorities. Under this scenario, a 15% tax rate
applies on the distribution of profits.
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Algeria
Algeria
Taxable income is determined by adding back non-deductible expenses and deducting

other items.
Inventory valuation
The inventory valuation method for tax purposes must match the book method.
Capital gains
Capital gains are taxed as ordinary income. For certain assets, 35% relief is given where
the assets have been held for up to three years, and 70% relief is given where the assets
have been held longer.
Dividend income
Dividends to non-resident shareholders are subject to WHT at source of 15%. For

resident shareholders, dividends are subject to WHT at source of 10%.
Interest income
Interest income is taxed along with company income at 25%.
Rental income
Rental income is taxed along with company income at 25%.
Royalty income
Royalties are taxed at 24%. This rate could change in presence of a DTT.
Unrealised gains/losses
Unrealised gains are taxed as dividends.
Foreign currency exchange gains/losses
Foreign currency exchange gains are taxed along with company income at 25%.
Deductions
Taxable income is determined by adding back non-deductible expenses and deducting
other items.
The depreciation rates are determined according to tax administration instructions, for
example:
The depreciation rate for office items is 10% or 20%.
The depreciation rate for industrial buildings is 5%.
The depreciation rate for cars is 20% or 25%. The depreciation base for cars is limited
to DZD 1 million.
Start-up expenses
Start-up expenses are deductible when paid.
Interest expenses
Interest expenses are deductible when paid.
Bad debt
Bad debt is deductible when suing in justice.
Algeria
19
Algeria
Charitable contributions are deductible up to a limit of DZD 1 million.
Pension expenses
Pension expenses are deductible when paid.
Payments to directors
Payments to directors are deductible.
Research and development (R&D) expenses
R&D expenses are deductible when paid up to a limit of 10% of the taxable benefit and
DZA 100million. The deductible amount has to be reinvested.
Bribes, kickbacks, and illegal payments
Bribes, kickbacks, and illegal payments are non-deductible.
Fines and penalties
Fines and penalties are non-deductible.
Taxes
Taxes are non-deductible, except for TAP, registration duties, customs duties, and real
estate taxes.
Net operating losses
Carryforward losses are permitted until the fourth fiscal year following that of loss.
Carryback losses are not permitted.
Payments to foreign affiliates are deductible.
Group taxation
When an Algerian company holds 90% or more of the shares of one or more Algerian
companies, the group may choose to be taxed as a single entity. Hence, the subsidiaries
are treated as branches of the parent company, and corporate tax is payable only by the
parent company. Under this system, the profits and losses of all controlled branches,
subsidiaries, and partnerships in Algeria are consolidated. The consolidated group may
also benefit from other tax advantages.
Transfer pricing regime
An arms-length approach to transfer pricing applies. All entities registered with the tax
department responsible for multinational companies (Direction des Grandes Enterprises)
must submit documentation to support their transfer pricing practices within 30 days
after a request is made by the Algerian tax administration.

Foreign tax credit
Algerian tax law does not provide for unilateral tax relief. A tax treaty, however, may
provide for bilateral relief. This is a complex area in Algeria, and it is recommended that
you contact us for specific advice.
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Algeria
Algeria
Withholding taxes
The WHT levied on services is 24%, which covers IBS, TAP, and VAT (i.e. three taxes in
one). The calculation base is the gross amount of the services invoiced.
The WHT levied on dividends is 15%. In the presence of a tax treaty, the WHT cannot
exceed 5%.
The WHT levied on royalties is 24%. In the presence of a tax treaty, the WHT cannot
exceed 5%, 10%, or 12%, depending on different cases.
Tax administration
Taxable period
The taxable period is the calendar year.
Tax returns
Foreign companies are required to file an annual tax return before 30 April together
with a detailed statement of proceeds paid to third parties with respect to subcontracted
services, hiring of personnel and equipment, leases, and technical assistance services.
Payment of tax
Corporate tax is paid when the tax return is submitted.
Tax audit process
As a general rule, the tax administration informs the company that a tax audit has to be
performed. The tax audit notification indicates the audited taxes (in all cases: IBS/TPA/
VAT) and the concerned period. The company has some rights. Indeed, it can be assisted
by an expert, and it can ask the tax administration about several issues subject to audit.
The tax audit is concluded by sending a final tax reassessment notification.
The statute of limitations is four years.
The tax administration will focus on non-deductible expenses and the declaration of
turnover.
Other issues
Exchange controls
A non-resident foreign company can open a non-resident account in local currency

(i.e. dinars) called INR account based on the contract to be performed and on its
registration to tax. An INR account can be used only for the object (purpose) for which it
is opened.
A non-resident foreign company can also open a CEDAC (Compte Etranger en Dinars
Algriens Convertible) account, which must be fed (credited) only from abroad in foreign
currency.
The CEDAC account allows payment in dinars as well as in hard currency; furthermore,
there will be no restriction or limitation for transferring back abroad in foreign
currency any remaining sum in the CEDAC account or for drawing any foreign payment
instrument. The exchange rate that will be used for converting dinar to foreign currency
is the official rate at the date of the debit.
Algeria
21
Algeria
Please note that a non-resident foreign company will not be able to transfer any balances
from INR accounts to its CEDAC account or abroad without the express authorisation
of the central bank, except in case of reimbursing temporary funding from the CEDAC
account (such reimbursement must be for the exact same amount).
Choice of business entity
Foreign companies can run a business in Algeria through a legal entity (SPA) or PE.
As for a legal entity, the foreign company cannot hold more than 49% of joint venture
capital in Algeria.
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Algeria
Angola
PwC contact
Pedro Calixto
PricewaterhouseCoopers
Presidente Business Center
Largo 4 de Fevereiro n. 3 , 1 andar - Sala 137.
Luanda - Repblica de Angola
Tel: +244 222 311 166
Under the ongoing tax reform, the Corporate Income Tax (CIT) Code changes are
expected to be releasedvery soon. Some of the expected changes include the reduction
of the CIT rate to 30% and the increase of the withholding tax (WHT)rate to 6.5%.

The standard CIT rate of 35% is levied on the taxable income of the following CIT payer
groups (although, in practice, the last two are not applicable in actual Angolan economic
reality):
Group A - Tax is levied on actual profits as shown in taxpayers accounting records
(e.g. public and private companies, permanent establishments [PE] of foreign
entities), adjusted accordingly with the provisions of the CIT code.
Group B - Tax is levied on taxpayers presumable profit (taxpayers not included in
groups A or C).
Group C - Taxation is based on profits that taxpayers could normally earn/obtain
(e.g. small family companies).
Resident entities are subject to CIT on worldwide income. Non-resident entities deemed
to have a PE in Angola are subject to CIT on Angola-source income.
Special regimes, rules, and tax rates are provided for the oil and gas industry and the
mining industry.
Exemptions from CIT are provided for:

Agricultural companies (for up to ten years).

Cooperatives.
Culture associations.
Non-resident shipping operators (as long as reciprocity exists).
Investment income tax (IAC)
Investment income tax (Imposto sobre a Aplicao de Capitais or IAC) is due on interest,
dividends, royalties, and other income of a similar nature. In Angola, the IAC code
divides such income into two taxable sections, as follows:
Section A
Section A investment income includes the following:

Interest on credit facilities.
Interest on loans.
Income derived from deferred payments.
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23
Angola
Tax is due at the moment that the interest or income is earned or at the moment when it
is presumed to have been earned.
Note that a minimum annual interest rate of 6% is deemed on loan agreements and
credit facilities, except if another rate is proven through a written contract.
Section B
Section B investment income includes the following:

Dividends.
Capital remunerations of members of cooperatives.
Bond interest.
Treasury bond interest.
Interest on shareholders loans.
Income derived from profits of non-public interest entities not collected until the end
of the year.
Gambling income.
Royalties.
For the purposes of this group of income, note that:
The concept of royalties includes the remuneration of any kind attributed to the
use of or consent to use copyrighted literature; arts or science works, including
movies and films or recordings for radio or television transmissions; patents; brands;
drawings or models of a plan; formulas; or secret processes. The concept of royalties
also applies to the use of or the consent to use industrial, commercial, or scientific
equipment and information related to an experience acquired on the industrial,
commercial, or scientific sector.
A minimum annual interest rate equal to the rate used by commercial banks on credit
operations is deemed interest for shareholders loans.
Tax is due at the moment the effective attribution of income (dividends) is earned
(interest) or paid (other income).
Exemptions
The following income is exempt from IAC:

Interest on deferred payment of commercial transactions.
Payment of dividends to Angolan CIT payers that hold a share higher than 25% for
more than one year.
Interest from financial products approved by the Ministry of Finance that intend to
encourage savings, capped to capital invested of 500,000 Angola kwanza (AOA) for
each person.
Interest from housing saving accounts intended to encourage savings for main
permanent dwelling.
IAC rate
The IAC rate is 15%, except for the following income, for which the rate is 10%:

Dividends.
Capital remuneration of members of cooperatives.
Bond interest.
Interest from treasury bonds (or 5% for interest of bonds with a maturity equal to or
greater than three years).
Interest from shareholders loans.
Royalties.
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Angola
Angola
Tax is withheld by the payer on Section B income.
For Section A income, tax is assessed by the taxpayer through a tax return to be filed
in January of the following year. When the payment of that income is made to a nonresident entity, Angolan law provides that the tax payment obligation shifts to the
Angolan resident entity paying the income.
Any IAC paid is regarded as a tax deductible cost and, in addition, 65% of that tax paid
is deducted up to the CIT liability. The only exception will be any investment income tax
paid on dividends exempted.
Local income taxes
There are no local taxes on income in Angola.
Corporate residence
Business entities with a head office or effective management in Angola are considered
resident entities and are taxed on worldwide income.
Angola has not signed any double tax treaties; consequently, its domestic tax provisions
apply with regards to PE.
The Angolan concept of tax PE is inspired in the United Nations (UN) Double Tax Treaty
Model. A foreign entity is deemed to create a PE in Angola if it:
has a branch, an office, or place of management in Angola
has a construction or installation site, or provides supervision over such site, only
when such site or activities exceed a period of 90 days in any given 12-month period,
or
carries out services in Angola, including consulting, acting through employees or
other personnel contracted for that end, when such services are provided for a period
of at least 90 days in any given period of 12 months.
Other taxes
Consumption tax
There is no value-added tax (VAT) or sales tax in Angola. However, a consumption tax
exists, which is similar to that of an excise duty. For goods imported or producedlocally,
the rates vary from 2% to 30%. For services, the following rates apply:
Type of service
Lease of areas designated for collection and parking of motor
vehicles
Leasing of machinery and other equipment, as well as work carried
out in tangible assets
Leasing of areas used for conferences, colloquiums, seminars,
exhibitions, showrooms, advertising, or other events
Consultancy services, namely legal, tax, financial, accounting, IT,
engineering, architecture, economics, real estate, audit services, and
legal services
Photographic services, film processing and imaging, IT services, and
construction of web sites
Port, airport, and customs agent services
Consumption tax rate (%)

5
10
10
5
5
5
Angola
25
Angola
Type of service
Private security services
Tourism and travel services promoted by travel agencies or equivalent
tour operators
Canteen, cafeteria, dormitory, real estate, and condominium
management services
Access to cultural, artistic, and sporting events
Road, sea, train, and air transportation of cargo and containers,
including the management of warehouses related to this transport,
and passenger transportation, if provided in Angolan territory
Consumption tax rate (%)

5
10
5
5
5
For all the services mentioned above, the tax compliance obligations are the
responsibility of the Angolan service providers, who can then add the tax to the amount
charged to the acquirers. However, if the service providers are non-resident entities in
Angola, the obligation will revert to the resident entities acquiring the services, if they
are liable to pay CIT.
Service providers are exonerated from the obligation to pay consumption tax in the
provision of services to oiland gas companies, but will only receive from the latter the
amount due for the services, although the assessed consumption tax should be included
in their invoices.The obligation of paying the tax is now with the oiland gas companies,
pursuant to the provisions of theConsumption Tax Regulation.
The consumption tax amount supported by oil and gas companies will be deductible for
petroleum income tax purposes.
Note that there are expected changes in the Consumption Tax Code that will reduce the
scope of services liable to taxation and some compliance obligations regarding oil and
gas companies.
Customs duties
Duties are levied on imports at ad valorem rates varying from 2% to 30%. The range
of taxation for both consumption tax and import duties varies according to the type of
goods. The rates are set out in the tariff book.
Listed equipment may be imported temporarily, if a bank guarantee is provided.
A 0.1% statistical fee and a 1% stamp duty is also due on importation plus customs fees
(from 1% to 3%).
A special exemption regime applies for the oil industry for some listed equipment.
Stamp tax
Stamp tax is payable on a wide variety of transactions and documents, at specific

amounts or at a percentage based on value.
Important examples include:
Type of operations
On receipts
Stamp tax on receipts (in cash or in kind) is still
applicable.
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Angola
Stamp tax rates

The rate of stamp tax for receipts is of 1%.
Angola
Type of operations
Financial operations
Stamp tax is applicable to financial operations,
such as credit utilisation (and not only open credit
accounts) and bond guarantees, interest and
commission charged by financial institution, as well
as foreign withdrawals, foreigner public debt bonds,
foreign notes, and coins.
Stamp tax rates
Credit facilities are subject to stamp tax on

the utilisation of such funds, and, depending
on the period, the rates of stamp tax will vary
from 0.3% to 0.5%.
For regular credit, bank overdrafts, or credit

where the period is not determined, stamp
As a general rule, stamp tax is due for the entity that tax applies at a rate of 0.1%.
provides the credit and charge for the interest and
commissions being then charged to the borrower or Housing credits are subject to stamp tax at a
the interest/commissions debtor.
rate 0.1%.
Financial leasing on real estate and financial
and operational leasing of tangible assets
(maintenance and technical assistance
included) are now subject to stamp tax at a
rate of 0.3% and 0.4%, respectively.
Real estate operations
Stamp tax is due on a paid acquisition of real estate Stamp tax applies on the acquisition of real
estate at a rate of 0.3%.
by the acquirer.
Stamp tax is also due on letting and sub-letting, as Stamp tax applies on the registration of
letting and sub-letting contracts at a rate of
well as on financial leasing of real estate, except
when the leasing is for a permanent dwelling, which 0.4%.
is exempt from stamp tax.
It is now clear in the law that tenants and sub-tenants
are liable to stamp tax on letting and sub-letting.
Corporate operations
Stamp tax is due on the initial or increase of share
On share capital and increase of share capital
capital, whether made in cash or in kind.
stamp tax applies at a rate of 0.1%.
Insurance
Insurance provided by national companies is subject The stamp tax applies on the amount of
to stamp tax, being the tax settled by the insurance premium paid, and rates may vary from 0.1%
company cost of insured person. The commissions to 0.3%, depending on the policys nature.
generated in the insurance mediation business will
also be subject to stamp tax.
Commissions for mediation are subject to
stamp tax at a rate of 0.4%.
Premiums and commission related to life insurance
products, insurance against accidents at work, health
insurance, and agricultural processing and livestock
insurance are exempt from stamp tax.
Other operations
In addition to the operations referred to above, the The following other stamp taxes are
new table also refers the stamp tax applicable to
applicable:
written agreements, financial and operation leasing Transfer of industrial or agricultural
in tangible assets, customs operations, cheques,
business: Stamp tax applies at a rate of
lending, civil deposits, gambling, licences, traders
0.2%.
books, deeds, report, credit bonds, and transfer of Stamp tax of 1% on the import value.
business, among other acts.
The following exemptions apply:

Credit granted for a period of up to a maximum of five days, micro-credit, credit
related to young accounts and old age accounts, and others of a similar nature that
does not exceed the amount of AOA 17,600 each month.
Credit derived from credit card utilisation, when the reimbursement is made free of
interest, according to the terms of the contract.
Angola
27
Angola
Credits related with exportation, when duly documented with the respective customs
clearance.
Amounts due on the mortgage for the acquisition of a permanent dwelling.
On interest and commissions charged on financial operations, such as young
accounts, old age accounts, and credits related to export under the terms mentioned
above.
Interest from Treasury Bonds and Angolan Central Bank notes.
Commissions charged for subscriptions, deposit and withdrawal from units of
investment funds, as well as the charges from pension funds.
Commission charged on the opening and utilisation of saving accounts.
Credit operations (including interest) for periods not exceeding one year, provided
these are obtained exclusively to cover treasury needs, when realised between
shareholders and entities in which a direct capital shareholding not lower than 10%
is held and which has remained in their ownership for a year (consecutively), or since
the incorporation of the respective entity.
Loans bearing the characteristics of shareholder loans, including the respective
interest, made by shareholders to the company in respect of which an initial period
not shorter than one year is stated and no reimbursement is occurred before the end
of that period.
Treasury management operations, carried out between companies within the same
group.
Insurance premiums and commissions related to life insurance, work accidents,
health, and agriculture and livestock insurance products.
Real estate income tax (IPU)
IPU is levied on rental income earned by individuals or companies owning real estate
assets.It is based on actual rental income when the assets are leased and on the assets
registered value when the assets are not leased.
Leased assets
IPU is levied on rental income at a 25% rate.

The rental income is automatically reduced by 40% of its value, as it is presumed to
finance all real estate related expenses.
Therefore, in practice, IPU applies at an effective 15% rate on rental income (i.e. 25%
multiplied by 60% of rental income), with a minimum amount of 1% of the asset
registered value.
A real estate asset is registered at the higher of (i) its valuation (based on criteria and
tables to be published, which will take into account the area [square metres] and the
characteristics of the property) or (ii) the value of its latest transfer.
Assets that are not leased
IPU is levied as follows for assets that are not leased:

Patrimonial value (AOA)
Up to 5 million
Over 5 million (on the excess) (1)
IPU rate (%)

0
0.5
Notes
1.
An asset registered at AOA 35 million will pay IPU only on AOA 30 million, resulting in an IPU payable
of AOA 150,000.
Exemptions
The only accepted exemptions of IPU are the following:

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Angola
Angola
State public institutions and associations that are granted with the public utility
statute.
Property of Embassies or Consulates of foreign countries, provided there is
reciprocity.
Religious temples.
Payment
Rents paid by Angolan entities (individuals or companies) that carry out commercial
activity must withhold the 15% IPU from rents paid. The IPU so withheld must be paid
over to the tax authorities by the end of the following month.
For any other cases, owners of real estate assets must pay the IPU in January and July of
the following year. At the request (by July each year) of the IPU taxpayer, if approved,
the IPU is payable over four instalments in January, April, July, and October of the
following year.
Filing requirements
IPU Model 1 must be filed by IPU taxpayers each January, disclosing the rents effectively
received in the preceding year, distinguishing the leases agreed and received.
Real estate transfer tax (SISA)
SISA is levied at a 2% rate for all acts that involve onerous permanent or temporary
transmission of real estate. The value liable to tax is the higher of (i) the sale value or (ii)
the registered value.
Exemptions of SISA are only applicable to the following entities:
State public institutions and associations that are granted with the public utility
statute.
Property of Embassies or Consulates of foreign countries, provided there is
reciprocity.
Religious temples.
Real estate transferred for less than AOA 6,864,000 only when (i) at the first sale and
(ii) for residential purposes.
Branch income
Branch taxable income is taxed on the same basis as separate legal entities. Income
remitted by a branch to the head office is not subject to IAC.
Inventory valuation
Inventory is valued at the historic acquisition cost. Any other method of valuation needs
to be approved by the tax authorities.
Capital gains
Capital gains arising from the disposal of fixed assets are taxed as part of normal income.
Capital gains are determined by the difference between the sales proceeds and the
acquisition value, deducted from tax deductible depreciation, adjusted by a devaluation
coefficient.
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29
Angola
Dividend income
Dividends received are exempt from CIT, provided that the share participation is
owned for two consecutive years (or since the incorporation of the entity where the
participation is held) and the share participation is not less than 25%.
Dividends from Angolan participations owned by insurance companies to fund their
technical reserves are also exempt from CIT.
Interest income
Interest from public bonds is exempt from CIT.
Rental income
Rental income, as being liable to real estate income tax, is not liable to CIT. See the Other
taxes section for more information.
Royalty income
Royalty income is taxed as normal income. Any IAC paid is regarded as a tax deductible
cost and, in addition, 65% of that tax paid is deducted, up to the CIT liability.
Foreign income
An Angolan resident CIT payer is taxed on all its foreign income. Any income tax proved
to be paid outside the country for activity carried on outside the country will be credited
against the CIT liability.
No tax deferral provisions exist in Angola.
Deductions
Depreciation
Depreciation should be computed using the straight-line method; any other method
must be approved by the tax authorities.
The tax depreciation rates should respect the limits imposed by Government Ruling
755/72, and, in absence of this Ruling, the tax authorities interpretation, as follows:
Type of asset
Office building
Industrial building
Computers
Office equipment
Furniture
Software
Light passenger vehicles
Start-up expenses
Rate (%)
2
4
33.33
10
10
33.33
33.33
33.33
Depreciation not accounted for at cost is not permitted as a deduction in the following
years.
Further, depreciation of land and goodwill is not accepted for tax purposes.
30% of the increase on depreciation resulting from a legal revaluation of fixed assets is
not accepted for tax purposes, as well as the total increase in depreciation resulting from
free revaluation of the fixed assets.
30
Angola
Angola
Interest expenses
Interest costs are accepted as deductible for tax purposes.
Bad debt
Write-off of debts is considered as deductible only if the write-off resulted from a

bankruptcy court process.
Provisions
The only provisions accepted as deductible for tax purposes are:

Doubtful debts within an annual limit of 2% of the clients current total account value
and provided that a 6% accumulated provision limit is not exceeded.
Inventory depreciation within limits that vary from 1% and 8% (annual and
accumulated), depending on the nature of the companys activity.
Those respecting the limits and rules imposed by the Insurance Supervision Institute
for insurance companies, as well as the Central Bank for FinancialInstitutions.
Provisions for possible losses resulting from a court process.
Donations are accepted as deductible, up to a limit of 2% of the taxable income, if the

donations are granted to Angolan education, science, charity, and cultural institutes. If
granted to Angolan government, central and local administration bodies, the donations
are fully deductible.
Fines and penalties
Fines and penalties are not accepted for tax purposes.
Taxes
All taxes are deductible for CIT purposes, except the CIT itself or taxes supported on
behalf of others (e.g. employment income tax supported on behalf of the employees).
Tax losses are deductible from the taxable income of the following three years.
Carryback of losses is not allowed.
Payments to foreign affiliates are accepted for tax purposes, although the arms-length
principle should be respected.
Group taxation
Thereis a special rule for group taxation in Angola that, in general terms, allowsfor
single taxation of the sum of the taxable income of all companies within the group. For
this regime to be applied, it is mandatory that the holding company is an Angolan one.
Transfer pricing
Recently, legislation has introduced a new special regime for so called major taxpayers,
being the ones identified in alist published by the Ministry of Finance. This regulation
provides a special regime of taxation, additional specific reporting, and administrative
obligations, namely the obligation of audited accounts and to prepare special transfer
pricing documentation (e.g. the same will have to, under certain requisites, organise
their transfer pricing documentation and submit it to the tax authorities). This will be
applicable to those major taxpayers that have registered annual profits higher than 70
million United States dollars (USD).
Angola
31
Angola
Thin capitalisation
There are no thin capitalisation rules in Angola.

Foreign tax credit
Any income tax proved to be paid outside the country for activity carried out outside the
country will be credited against the CIT liability.
Investment incentives
Profits retained and then reinvested by the company in new installations or equipment
during the following three financial years may be deductible from taxable income during
the following three years after the investment is finalised. Note that this benefit is not yet
regulated.
Special regulations also provide tax and customs incentives for investment projects in
strategic economic development areas and sectors. One such incentive can provide up to
15 years of CIT exemption.
Withholding taxes
WHT is applicable on payments for services provided to Angolan entities. For Angolan
taxpayers, this is regarded as an advance payment of the CIT due at the year-end. For
non-resident companies, this is a final tax.
The payments subject to this WHT are those related to:
Construction, improvement, repair, or conservation of immovable property withheld
at a rate of 3.5% on the gross payments (CIT rate of 35% applicable on a 10% deemed
margin).
Other services, namely technical assistance and management fees, withheld at a
rate of 5.25% on the gross payments (CIT rate of 35% applicable on a 15% deemed
margin).
Due to the IAC, Angola does not have a separate WHT for dividends, interest, and
royalties (see the Taxes on corporate income section for more information).
Tax administration
Taxable period
The tax year follows the calendar year.
Tax returns
The annual corporate tax return must be submitted by the last business day of May of
the year following the year to which the income relates.
Payment of tax
Tax is paid in four instalments. The first three correspond to advance payments based
on the expected tax to be paid or, if unknown at that date, 75% of the taxable income
computed on the previous year multiplied by the tax rate (35%). The instalments
are paid in January, February, and March, and the final instalment is paid with the
submission of the annual tax return on the last business day of May.
32
Angola
Angola
Tax audit process
The tax authorities carry out audits to the monthly and annual tax returns to identify
any possible internal inconsistencies.
Taxpayers may disagree with any tax decision they are notified of and file an appeal to
their respective Taxpayers Chief within 15 days upon receiving the tax notification.
Based on an unsatisfactory decision of the Taxpayers Chief, the taxpayer may also file a
hierarchic appeal addressed to the National Director of Taxes (DNI) within 15 days upon
receiving the tax notification.
The judicial stage, in which appeals against the final decisions of the DNI are handled
by the courts, has a very low degree of success as there are still no specialised tax courts
and the courts will ask for technical support from the same public entities that carry out
the tax audits.
The statute of limitations in Angola is five years.
The main areas of focus of the tax authorities relate to compliance in respect of payment
in due time of any WHTs due, as well as the 1% stamp tax on receivables. Further, they
usually try to investigate the deductibility of costs according to their nature.
Legal regime on invoices and equivalent documentation
Taxpayers (individuals or corporate entities whose residency, registered office, effective

management, orPE is in Angola) should ensure that their software provide for the
invoices to be duly dated, sequentially numbered, and include certain mandatory
information, amongst which we highlight, for its novelty in regards to the previous
regime, the obligation for the invoices and equivalent documents to be written in
Portuguese and expressly mention that they were computer processed.
Taxpayerswhoissue invoices or equivalent documents that do not follow this regime
will be subject to payment of fines and penalties (corresponding to 20% of the amount of
the non-issued invoice, which may increase up to 40% in the event of a repeated fault),
and, in the hands of the acquirer, the respective cost will not be accepted as deductible
for tax purposes.
Angola
33
Antigua and Barbuda

PwC contact
Louisa Lewis-Ward
PricewaterhouseCoopers SRL
The Financial Services Centre
Bishops Court Hill
PO Box 111
St. Michael, BB14004
Barbados, West Indies
Tel: +1 246 626 6756
On 1 May 2013, specific reforms to the Social Security Act came into effect to ensure
the viability and sustainability of the social security scheme. These include an increase
in the overall contribution rate by 2% and an increase in the base on which the tax is
assessed. This increase is shared equally between employer and employee. The employer
will now contribute 6% to the scheme on behalf of the employee while each employee
will contribute 4%. In addition, the ceiling on insurable income moved from 4,500 East
Caribbean dollars (XCD) to XCD 6,500 per month.
There have not been any significant corporate tax developments in the first half of 2014.

Companies incorporated in Antigua and Barbuda pay corporate income tax (CIT) on
their worldwide income, with relief available under existing double taxation agreements
(DTAs). Non-resident companies deriving income from Antigua and Barbuda are
liable for CIT and should be registered if they have a physical presence in Antigua and
Barbuda.
Antigua and Barbuda imposes a flat CIT rate of 25%.
Taxable income or chargeable income is ascertained by deducting from income all
expenses that are wholly and exclusively incurred during the year for the production of
that income. Chargeable income is normally arrived at by adjusting the net profit per the
financial statements for non-taxable income, non-deductible expenses, and prior period
losses of up to 50% of chargeable income.
Where a person resident in Antigua and Barbuda makes to another person not resident
in Antigua and Barbuda a payment other than interest, that person shall deduct or
withhold 25% of that amount.
Reduced CIT rate for certain financial institutions
Financial institutions licensed under the Banking Act that maintain, throughout the
tax year, residential mortgage rates at or below 7% are subject to a reduced CIT rate of
22.5%.
Corporate residence
A corporation is deemed to be a resident if it is incorporated in Antigua, if it is registered
as an external company doing business in Antigua, or if the central management and
control of its business are exercised in Antigua.
34
Antigua and Barbuda
Antigua and Barbuda

The concept of a PE is described within a number of Antigua and Barbudas DTAs. A

PE is, in general, created in line with the Organisation for Economic Co-operation and
Development (OECD) Model Convention.
A PE is not defined in the Income Tax Act; however, any company that would meet the
general definition of a PE must be registered.
Other taxes
Antigua and Barbuda Sales Tax (ABST)
ABST is an indirect tax and is levied at the rate of 15% on the value of a wide range of
goods and services imported or supplied in Antigua and Barbuda by ABST-registered
persons. The rate applied in respect of hotel accommodation is 12.5%.
A number of services, including financial services, local transport, the sale of residential
land, education, long-term accommodation (greater than 45 days), and medical and
veterinary services are exempt. Intergroup transactions are taxable.
Persons operating under the ABST regime must be registered for ABST. The threshold
for ABST registration is XCD 300,000 in taxable activity per 12-month period. A period
in the ABST Act represents one month.
Certain supplies are zero-rated, including exports, basic food items, water, electricity
for residential use, sale of new residential property, construction of new residential
premises, and fuel.
Registered persons may deduct input tax from their output tax in calculating the tax
payable for that ABST accounting period. Where input tax exceeds output tax, the
registrant will be entitled to a refund of ABST.
Customs duties
All imports are subject to customs duties, ABST, Antigua and Barbuda Revenue Recovery
Charge, and an environmental levy. In all instances, certain exemptions will apply.
Customs duty is levied on a wide range of imported goods at rates from 0% to 70% as
specified in the Custom Duties Act. Customs duty is levied on goods based on the cost,
insurance, and freight (CIF) values and rates determined by the Caribbean Community
(CARICOM) Common External Tariff.
Antigua and Barbuda Revenue Recovery Charge
The Antigua and Barbuda Revenue Recovery Charge is applied at a flat rate of 10%
on the CIF value on all goods imported into or produced in Antigua and Barbuda.
Exemptions will include entities with which the government has International Assistance
Agreements, certain government entities, and most supplies or imports of fuel.
Excise taxes
There are no excise taxes in Antigua and Barbuda.
Property taxes
Property tax is levied annually at graduated rates on the basis of the market value of real
property (as assessed by the Property Valuation Department) and its use (residential or
commercial).
Property tax rates are as follows:
Antigua and Barbuda
35
Antigua and Barbuda

Agricultural land: 0.10%.

Residential land: 0.20%.
Residential building: 0.30%.
Buildings classified as other property: 0.50%.
Land classified as other property: 0.40%.
Allowances and tax rebates are available as follows:

Dwelling house allowance of XCD 150,000 from the taxable value.

5% rebate for payment of tax on or before the due date.
New dwelling house will be exempt from tax for the first two years of being habitable.
Between 25% and 100% tax rebate available for special development property and
property for public use; 25% for hotels.
Non-citizens undeveloped land tax
Undeveloped land tax is levied on the basis of the value of land owned by non-citizens
that has not been developed. The tax takes effect from the date of declaration by the
government.
Rates of tax are as follows:
First year of ownership: 10%.
Second year of ownership: 15%.
Third and subsequent years of ownership: 20%.
The charge is cumulative and based on market value as assessed.
Stamp tax
Stamp tax applies to a very wide range of transactions (e.g. bill of sale, leases,
mortgages, contract, bill of lading).Stamp tax on transfer of real property and shares are
specifically covered below.
Transfer of real property
Stamp tax is imposed on both the buyer and the seller and is levied on the consideration
for the sale or the value of property (as assessed by the Chief Valuation Officer),
whichever is higher. The stamp tax for vendors is 7.5%, and the stamp tax for purchasers
is 2.5%.
Non-citizens vendors are required to pay a land value appreciation tax at the rate of 5%,
which is assessed on the difference between the value of property when purchased, plus
improvements, and the value of property at the time of sale.
Non-citizens purchasers are also required to pay 5% of the value of property with
reference to a non-citizens licence required to hold property in Antigua and Barbuda.
Transfer of shares
Stamp tax is imposed on both the buyer and the seller and is levied on the market value
of the shares or book value of the shares, whichever is higher. The stamp tax for vendors
is 5%, and the stamp tax for purchasers is 2.5%.
A non-citizen must obtain a licence (at a cost of XCD 400) to hold shares or be a director
in a company that owns land or has a lease on land in excess of five acres for a period
greater than five years.
Environmental levy
Environmental levy is calculated based on dollar value rates from XCD 0.25 to XCD
2,000 and is used to finance the cost of protecting and preserving the environment.
36
Antigua and Barbuda
Antigua and Barbuda

Life insurance premium tax
A premium tax of 3% is levied on the premium income (net of agents commission) of all
life insurance companies, whether resident or non-resident.
General insurance premium tax
A premium tax of 3% is levied on the premium income, excluding motor business (net
of agents commission), of all general insurance companies, whether resident or nonresident.
Statutory payroll deductions

The employer portion of social security contributions is 6% of chargeable income of up

to XCD 6,500 per month as of 1 May 2013 (previously 5% of chargeable income of up to
XCD 4,500 per month).
Medical benefits
The employer portion of medical benefits payments is 3.5% of salary and wages of an
employee who is between 16 and 60 years of age.
Branch income
Branch income is taxed on the same basis and at the same rate as that of corporations. A
resident branch of a foreign company shall be regarded as a separate company and shall
be taxed on the same basis as that of a locally registered corporation.
Recharges of expenses from head office to the branch are subject to withholding tax
(WHT) at a rate of 25%. The recharges have to be justifiable, consistent, and cannot just
be based on a percentage allocation.
Inventory valuation
Inventories are generally stated at the lower of cost or net realisable value. First in first
out (FIFO) and average cost methods of valuation are generally used for book and tax
purposes. However, the Commissioner of Inland Revenue will normally accept a method
of valuation that conforms to standard accounting practice in the trade concerned. Last
in first out (LIFO) is not permitted for tax or book purposes.
Capital gains
Capital gains are not subject to tax in Antigua and Barbuda.
Dividend income
Dividends received by a company resident in Antigua from another company resident

in Antigua are taxed at the CIT rate of 25%. Credit is given to the recipient for the tax
already paid on the dividend in computing the tax liability.
Stock dividends
An Antiguan corporation may distribute a tax-free stock dividend proportionately to all

shareholders.
Interest income
Interest income received by a company registered in Antigua is taxed at the CIT rate of
25%. Interest earned on local and other CARICOM government securities are normally
exempt from the payment of CIT.
Antigua and Barbuda
37
Antigua and Barbuda

Foreign income
An Antiguan corporation is taxed on foreign branch income as earned and on foreign

dividends as received. Double taxation is avoided by means of foreign tax credits
where active tax treaties exist and through deduction of foreign income taxes in other
cases (the United Kingdom [UK] and CARICOM). There is also relief from British
Commonwealth taxes. See Foreign tax credit in the Tax credits andincentives section for
more information.
Deductions
Depreciation
Depreciation allowed for tax purposes is computed by the diminishing-balance method

at prescribed rates (see table below). Initial allowances are granted on industrial
buildings and on capital expenditures incurred on plant and machinery by a person
carrying on a trade or undertaking, as defined. In addition, an annual allowance of 2% is
granted on all buildings. Conformity between book and tax depreciation is not required.
Any gain on the sale of depreciated assets is taxable as ordinary income up to the
amount of tax depreciation recaptured.
Assets
Building, roads, fencing, and pavements
Plant and machinery, generators
Furniture, fixtures, fittings, and equipment
Air conditioning units
Motor vehicles
Computer hardware, accessories, and software
Depreciation rate (%)

2
10
10
12.5
20
33.33
Goodwill
Goodwill and trademarks are not depreciating assets, and amortisation is not allowed.
Start-up expenses
There are no specific provisions in relation to deductions for start-up expenses. However,
certain start-up expenses, such as costs of incorporation and other initial start-up costs,
may qualify for a five year straight-line write-off.
Interest expenses
No deduction is allowed for interest on loans owing to shareholders, directors, their

spouses, children or relatives, or to any related parties. Only interest paid to banks and
financial institutions licensed under the Financial Institutions (Non-Banking) Act on
loans borrowed at commercial rates and terms is deductible.
Bad debt
General allowances made for bad debts are not deductible. For a bad debt claim to
be deductible, it must be specific and the taxpayer must prove to the Inland Revenue
Department (IRD) that the debt arose during the year.
Cultural and social contributions
A deduction of 50% of all substantial contributions made by any person with respect
to sport, education, or culture in Antigua and Barbuda is allowed against a persons
assessable income from trade, business, or profession. Contributions must be in excess of
XCD 10,000 in any assessment year, and deductions during any assessment year will be
limited to XCD 250,000.
38
Antigua and Barbuda
Antigua and Barbuda

Restriction on rents paid
Rents paid by a company to shareholders, directors, their spouses, children or relatives,

or to any related parties in excess of 5% of the otherwise chargeable profits of the
company may not be deducted.
Restriction on compensation
Salaries, wages, directors fees and other payments made for services rendered by
the shareholders, directors, their spouses, children, or relatives in excess of 25% of
otherwise chargeable profits may not be deducted.
Fines and penalties
Fines and penalties imposed under Antiguan tax law are not deductible expenses.
Taxes
There are no provisions in the Income Tax Act in relation to the deductibility of taxes
paid by a company. However, in general, ABST, ABST input tax credits, and adjustments
under the ABST Act are disregarded for income tax purposes. Other taxes, including
property tax, transfer taxes, payroll taxes, and insurance premium taxes, except income
tax and share transfer tax, are deductible to the extent they are incurred in producing
chargeable income.
Income tax losses may be carried forward for six years following the year in which the
loss was incurred. However, the chargeable income of a company in any one income year
may not be reduced by more thanone halfby losses brought forward. No carryback of
losses is permitted.
An Antiguan corporation may claim a deduction for royalties, management fees, and
interest charges paid to foreign affiliates, provided the payments are equal to or less
than what the corporation would pay to an unrelated entity. The deductibility of any
payments to a foreign affiliate will be subject to an arms-length test and WHTs.
Group taxation
Group taxation is not permitted in Antigua and Barbuda.
Transfer pricing
There are no provisions for transfer pricing in the tax laws of Antigua and Barbuda.
Thin capitalisation
There are no provisions for thin capitalisation in the tax laws of Antigua and Barbuda.

Tax incentives are currently available under the following legislation.
Fiscal Incentives Ordinance (1975)
The Fiscal Incentive Ordinance provides manufacturers of an approved product with

an exemption from taxes for varying periods, up to a maximum of 15 years. After the
period of exemption, relief by way of tax credits of up to 50% of CIT paid on profits
derived from certain export sales may be obtained. The net losses arising during the
tax holiday period (i.e. the excess of accumulated tax losses over total profits) may be
carried forward and relieved against profits following the expiration of the tax holiday in
accordance with the normal rules for set-off of losses.
Antigua and Barbuda
39
Antigua and Barbuda

International Business Corporations (IBC) Act (1982)
An IBC is an entity incorporated under the IBC Act for the purpose of carrying on
international trade or business. The IBC structure allows for a comprehensive range
of business opportunities, including international banking, trust business, insurance,
manufacturing, and other international trade activities, to persons outside of Antigua
and Barbuda within a tax-free environment. An IBC is exempt from the payment of CIT,
ABST,and WHT.
The Investment Authority Act (2006)
The Investment Authority Act provides the framework for the promotion of investment
opportunities in Antigua and Barbuda by introducing a system of registration of
businesses, an investment code, and a range of incentives that are available to both
resident and non-resident investors. The available incentives and concessions to which
an investor may be entitled for consideration are as follows:

Exemption from the payment of customs duty.

Reduction of property tax.
Exemption from CIT.
Reduction of stamp duty.
Exemption from WHT.
The amount of the incentives and concessions depend on the amount of the investment
and the number of employees in the proposed business.
The investment categories are as follows:
Capital investment of up to XCD 1 million or employs up to 26 persons: This investor
may qualify for exemption from the payment of customs duty on certain imports,
reduction in property tax by up to 10%, exemption from the payment of CIT and WHT
for up to three years, and a reduction of stamp duty by up to 10% on the sale of land
and buildings used in the business operation.
Capital investment of over XCD 1 million, employs over 26 persons, and has at
least one director or owner who is a resident of Antigua and Barbuda: This investor
could qualify for exemption from the payment of customs duty on certain imports,
reduction in property tax by up to 20%, exemption from the payment of CIT and
WHT for up to five years, and a reduction of stamp duty by up to 20% on the sale of
land and buildings used in the business operation.
WHT for up to ten years, and a reduction of stamp duty by up to 30% on the sale of
WHT for up to 12 years, and a reduction of stamp duty by up to 40% on the sale of
40
Antigua and Barbuda
Antigua and Barbuda

The Small Business Development Act (2007)
The Small Business Development Act provides the framework for the growth of the
smallbusiness sector in Antigua and Barbuda by introducing a system of registration
of small businesses and a range of concessions that are available to the business.The
available concessions to any small business that would be entitled for consideration are
as follows:
Concession on customs duty of up to 100% (includes raw material, building material,
equipment, vehicles, furniture, furnishings, appliances, fixtures and fittings, tools,
spare parts, and machinery and equipment used in the construction and operation of
the business).
Property tax reduction of up to 75%.
CIT exemption for a period not exceeding five years.
CIT exemption after the initial five year period of up to 10%.
WHT exemption for a period of up to three years.
Stamp duty exemption on the registration of a mortgage.
Stamp duty exemption on the transfer of property and any applicable non-citizen
land holding licence.
A small business to which this Act applies must meet all of the following criteria:

No more than 25 employees.

Not a wholly owned or majority owned business or subsidiary of a larger company.
Capital investment not exceeding XCD 3 million.
Annual sales that do not exceed XCD 2 million.
Majority owned by citizens of Antigua and Barbuda, or majority owned by noncitizens with all of the following restrictions:
Over 50% of the products must be exported.
Minimum investment of XCD 500,000.
At least 50% of the employees must be citizens of Antigua and Barbuda.
At least 40% of the goods and services used in production must be acquired from
businesses in Antigua.
Foreign tax credit
Double taxation is avoided by means of foreign tax credits where active tax treaties exist
and through deduction of foreign income taxes in other cases (the United Kingdom and
CARICOM). A foreign tax credit is also available to persons in Antigua and Barbuda who
have paid or are liable to pay British Commonwealth income tax.
Residents
The relief available from tax in Antigua and Barbuda for a person resident in Antigua
from tax payable in Antigua and Barbuda is the British Commonwealth income tax rate
if that rate does not exceedone halfthe tax rate in Antigua and Barbuda. If the British
Commonwealth income tax rate exceeds the Antigua and Barbuda tax rate, then the
relief will be limited toone halfthe tax rate in Antigua and Barbuda.
Non-residents
The relief available from tax in Antigua and Barbuda for a person not resident in Antigua
from tax payable in Antigua and Barbuda isone halfthe British Commonwealth income
tax rate if that rate does not exceedone halfthe tax rate in Antigua and Barbuda. If the
British Commonwealth income tax rate exceeds the Antigua and Barbuda tax rate, then
Antigua and Barbuda
41
Antigua and Barbuda

the relief will be limited to the amount by which it exceededone halfthe rate of British
Commonwealth income tax.
No relief is available unless similar provisions exist in the laws of the relevant British
Commonwealth country.
Withholding taxes
Tax is currently withheld from income as follows:
WHT (%)
Recipient
Dividends
Resident
0
corporations
and individuals
Non-resident
25
corporations
Non-resident
25
individuals
Residents of a CARICOM member state:
Corporations
0
Individuals
0
Dividends
(preferred
shares)
0
Management
fees, royalties,
and other
Interest and payments to a
rentals
non-resident
0
0
Interest
on bank
deposits
0
25
25
25
25
25
20
25
15
15
15
15
15
15
15
0
Note that interest payments on bank deposits made to non-resident individuals are not
subject to WHT. Interest payments on bank deposits made to non-resident corporations
are taxed at the rate of 25%.
Where a non-resident lends money at arms length for the purpose of promoting
industrial, commercial, scientific, housing, or other development, the rate of WHT is
10%. Prior approval must be sought from the Commissioner of Inland Revenue, and it is
recommended that Cabinet approval also be obtained.
WHT becomes due at the time of payment or accrual and must be paid within seven days
thereof.
Tax treaties
There is a tax treaty with the United Kingdom and a DTA between member states of
CARICOM.
The UK tax treaty provides that persons in either the United Kingdom or Antigua and
Barbuda are entitled to relief from CIT and WHT. The treaty allows for the following
relief:
Where a UK resident is liable to pay income tax in the United Kingdom in respect of
the same income that is taxable in Antigua and Barbuda, one will be entitled to relief
at a rate that is equal to the amount by which the tax rate in Antigua and Barbuda
exceedsone halfthe UK rate.
If the tax rate in Antigua exceeds the UK tax rate, then one will be entitled only to
relief at a rate equal toone halfthe UK tax rate.
42
Antigua and Barbuda
Antigua and Barbuda

Tax administration
Taxable period
Taxes are assessed on a fiscal-year basis.
Tax returns
The taxpayer must file a CIT return, which includes audited financial statements,
within three months of the fiscal-year end. The authorities will subsequently raise an
assessment.
If a return is not filed on a timely basis, the authorities have the power to issue estimated
assessments. There is a 5% penalty for late filing (minimum of XCD 500). The taxpayer
can object to assessments raised within 30 days and ask the Commissioner of Inland
Revenue to review and revise. In the event that the objection is unsuccessful, the
taxpayer may appeal to the Tax Appeal Board. The Commissioner of Inland Revenue has
the power to enforce the collection of tax prior to the determination of any objection
or appeal. The Commissioner also has the discretion to order a stay on the collection
and payment of all or part of any assessed tax until such time as the objection or appeal
is finalised if it would be unjust not to do so.Assessments for the past six years may be
reviewed and revised.
Payment of tax
Advance tax is payable in monthly instalments and is ordinarily based on the tax
chargeable and assessed in the previous fiscal year. The standard amount of each
instalment is determined as one-twelfth of the tax chargeable in the previous fiscal year.
If the assessment for the prior year has not been finalised, the Commissioner of Inland
Revenue can raise an assessment based on best judgment.
The balance of tax due after deduction of advance tax, as notified in the assessment,
is payable at the time of submitting the annual CIT return, which must not be later
than three months after the financial year-end or one month after service of the final
assessment.
Tax is deemed to be in default if not paid within 30 days of the date on which it becomes
due and payable. A penalty of 20% and interest of 1% per month is charged on unpaid
taxes in default.
Tax audit process
The Antiguan tax system for companies is based on self-assessment; however, the IRD
undertakes ongoing compliance activities to ensure that corporations are meeting their
tax obligation. There is no specific approach used by the IRD in relation to compliance
and audit activities. Compliance activities generally take the form of reviews of specific
issues and audits.
The IRD can reassess CIT returns within a six-year period. In addition, the IRD can make
additional assessments of tax, interest, or penalties.
The IRD does not have any specific compliance program; however, when an audit is
done, the focus is mainly on the detection of basic non-compliance, such as omission
of income, inclusion of non-deductible expenses, and classification of items between
expenses and capital items.
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PwC contact
Jorge A.San Martin
Edificio Bouchard Plaza
Bouchard 557
C1106ABG Ciudad de Buenos Aires
Argentina
Tel: +54 11 4850 6722
Issuance of white list
On 27 May 2013, the Argentine government issued Decree 589/2013, which eliminated
the list of no or low-tax jurisdictions from the income tax regulations (the so called
black list) and empowered the tax authority (AFIP) to establish a new white list
of countries, territories, and tax regimes that are considered to be cooperative
with respect to tax transparency. Cooperative countries are those that have signed
either double tax treaties (DTTs) with broad exchange of information clauses or tax
information exchange agreements (TIEAs) with Argentina, or that are in the process of
negotiating a DTT or TIEA.
The white list was published in December 2013 through General Resolution (AFIP)
3576, which took effect on 1 January 2014. Notably, certain jurisdictions that were
traditionally considered tax havens under prior law, such as the Cayman Islands,
Bermuda, the British Virgin Islands, and Jersey, are now viewed as cooperative. The
complete list is available on the AFIPs website (www.afip.gov.ar/genericos/novedades/
jurisdiccionesCooperantes.asp).
New tax on capital gains and dividends
On 23 September 2013, the Argentine government enacted a 15% tax on capital gains
arising from the transfer of stock and quotas as well as other securities. The new law also
includes a 10% tax on dividend distributions.
This legislation also repeals the current exemption available for foreign beneficiaries
on income derived from Argentine share transfers. Thus, foreign beneficiaries will
be subject to a 13.5% effective income tax withholding rate on gross proceeds or,
alternatively, a 15% income tax on the actual capital gain if the sellers tax cost basis can
be duly documented for Argentine tax purposes.
Additional regulations are expected to provide further guidance regarding the
mechanism/procedure to withhold and remit the tax to the authorities.
New information regime
On 19 December 2013, the AFIP issued General Resolution (AFIP) 3572 (GR 3572),
creating a new database in which local taxpayers must disclose their relationships with
domestic and foreign related parties. For purposes of this rule, the definition of related
party is broad and goes beyond economic or legal ownership.
Additionally, GR 3572 introduces a new information regime pursuant to which
Argentine taxpayers are required to report, on a monthly basis, all their transactions
with local related parties.
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Surtax on triangulated exports
By means of General Resolution (AFIP) 3577, the Argentine authorities introduced

a new surtax on income derived from export transactions where there is a mismatch
between the jurisdiction where the products are shipped and the jurisdiction where the
buyer is located.
The surtax rate is 0.5% on the exports freight on board (FOB) value and is increased to
2% when the buyer is located in a non-cooperative jurisdiction.

Profits tax
The rate of profits tax on net taxable business profits is 35%. Legal entities resident in
Argentina are subject to tax on Argentine and foreign-source income. Resident legal
entities are able to claim any similar taxes actually paid abroad on foreign-source income
as a tax credit. The tax rate applies on net income determined on a worldwide basis.
Corporations, limited liability partnerships (LLPs), and branches, as well as other
entities, are required to make a flat and final income tax withholding of 35% from
dividend payments to resident or non-residents beneficiaries, to the extent that the
amount of such dividends exceeds the net taxable income determined at a corporate
level in accordance with the general tax rules (so-called equalisation tax).
On 23 September 2013, the Argentine government established a new 10% tax rate on
dividend distributions, without prejudice to the application of the so-called equalisation
tax, if applicable. Additional regulations are expected to provide further guidance
regarding the mechanism/procedure to withhold and remit the tax to the authorities.
Argentine-source income (e.g. royalties, interests) received by foreign entities is subject
to withholding tax (WHT) in full and final settlement at source (see the Withholding taxes
section).
Tax on minimum notional income
In addition to the profits tax, there is a tax on minimum notional income. The rate is
1% on the value of fixed and current assets. The presumed tax, imposed annually, is
applied only in excess of the profits tax of the same fiscal year. In addition, payment of
this presumed tax, not offset by the profits tax, will be treated as payment on account of
profits tax chargeable during a maximum period of ten years.
Banking and insurance entities are only subject to this tax on 20% of the corresponding
taxable assets.
Local income taxes
See Turnover tax in the Other taxes section.
Corporate residence
Corporate residence is determined on the basis of centres of activity, which may be the
location of a companys economic activity or management activity.
Centres of activity in Argentina of non-Argentine corporations are treated as PEs.
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Other taxes
VAT is assessable on the sales value of products (e.g. raw materials, produce, finished,
or partly finished merchandise) with few exemptions, most services (e.g. construction,
utilities, professional and personal services not derived from employment, rental), and
on import of goods and services. The VAT rate is 21%, although certain specific items are
subject to a 27% or 10.5% rate. VAT is payable by filing monthly tax returns.
The increased rate of 27% applies to utilities services (e.g. telecommunications,
household gas, running water, sewerage, andenergy) not rendered to dwelling-purposes
real estate.
A reduced rate of 10.5% applies to certain transactions, including (but not limitedto)
the following:
Construction of housing.
Interest and other costs on personal loans granted to final consumers by financial
institutions.
Sales and imports of living bovine animals, supply of publicity and advertising in
some specific cases.
Any passenger transportation operating inside the country when the distance does
not exceed 100 km.
Medical assistance in some specific cases.
Certain capital goods, depending on the Customs Duty Code.
VAT paid on purchases, final imports, and rental of automobiles not considered as
inventory cannot be computed by the purchaser as a VAT credit. The same tax treatment
applies to other services, such as those provided by restaurants, hotels, andgarages.
VAT exemptions
Among others, the following transactions are exempt from VAT:

Sales of books, ordinary natural water, common bread, milk, medicine, postage
stamps, aircraft used in commercial activities and for defence or internal safety, and
ships or boats acquired by the national government.
Supply of certain services, such as services rendered by the government (national,
provincial, or local) or by public institutions; school or university education provided
by private institutions subject to public educational programmes; cultural services
supplied by religious institutions; hospital and medical care and related activities;
transportation services for sick or injured persons in vehicles specially designed
for the purpose; tickets for theatre, cinema, musical shows, and sport events; the
production and distribution of motion picture films; local transport of passengers
(e.g. taxis, buses) up to 100 km; and international transportation.
Rental of real estate for housing purposes.
VAT exemption on importation
The following import transactions are also exempted from VAT:

Final importation of goods qualifying for exemption from customs duties under
special regimes for tourists, scientists and technicians, diplomatic agents, etc.
Final importation of samples and parcels exempted from customs duties.
VAT export reimbursement regime
Exports of goods and services are treated as zero-rated transactions. Nevertheless, input
VAT related to these transactions can either be used as a credit against output VAT or
refunded pursuant to a special procedure.
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Services rendered within the country shall be deemed to be exports if they are
effectively applied or economically utilised outside the country.
Exporters must file an export return with the tax authorities, reporting the VAT
receivables related to their exports to be reimbursed on VAT paid in relation to the
export operations. This return has to be filed within the following tax period in which
the export took place. A report certified by a public accountant with respect to the value,
registrations, and other characteristics related to the refund must be attached to the
export return.
The tax credit related to exports and other taxable activities can only be refunded in
proportion to the exports, and can be fully refunded to a cap of 21% of the FOB value of
the exported products.
There is no specific method stated in the legislation for allocating the tax credit
related to exports, but taxpayers are able to use any methods of calculation that would
be suitable to their business model. This calculation has to be approved by the tax
authorities.
Finally, it is important to highlight that the tax authorities have to approve the tax credit
to be refunded.
Electronic invoicing
The electronic invoicing regime is mandatory only for specific businesses according to
Appendix I of R.G. 2485, as amended (i.e. software development, consulting, accounting
and audit services, exporters, advertising, mobile telecommunications, supplied services
to government, etc.), and it is optional for the rest of the taxpayers. In order to opt for
applying this regime, an authorisation must be obtained from the tax authorities. As
a result, the tax authorities will assign an Electronic Authorization Code (Cdigo de
Autorizacin Electrnico or CAE).
The fiscal authorities are also allowed to nominate taxpayers to apply this regime, even
though their activities are not included in Appendix I of R.G. 2485. This notification will
be duly made to such taxpayers.
It is important to highlight that the fiscal authorities are expecting to make this regime
mandatory for all the taxpayers in the near future.
Import and export duties
The levels of import duty currently range between 0% and 35%, except in cases where a
specific minimum duty is applied or that involve merchandise with a specific treatment.
These percentages were established considering the individual competitive conditions
prevailing in different production sectors and the relative advantages of contributing
to the introduction of equipment and technology for local industry. In general,
merchandise originating from Latin America Integration Association (LAIA) countries is
entitled to preferential duty.
In the case of export transactions, goods are valued based on the FOB clause and the
approach is based on their theoretical value, rather than a positive basis as in the case of
imports.
Definitive exports of all goods are subject to export duties. The rates vary from 5% to
45%, depending on the tariff code of the merchandise (while 5% is typical, higher rates
are considered for exports of agricultural products or hydrocarbons).
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Excise taxes
Excise tax is assessable on a wide variety of items sold in Argentina (not on exports),
principally on tobacco, wines, soft drinks, spirits, gasoline, lubricants, insurance
premiums, automobile tyres, mobiles services, perfumes, jewellery, and precious stones.
The bases of the assessment and tax rate of some items are as follows:
Products
Tobacco
Alcoholic drinks
Beers
Soft drinks
Jewellery and precious stones
Rates (%)
Nominal
16/20/60
20
8
4 to 8
20
Effective
19.05 to 25
25
8.70
4.17 to 8.70
25
Stamp tax
Stamp tax is levied by each of the 24 jurisdictions, and applies principally to contracts
and agreements, deeds, mortgages, and other obligations, agreements, and discharges
of a civil, financial, or commercial nature of which there is written evidence or, in certain
instances, that are the subject of entries in books of account. The average tax rate is 1%
applicable on the economic value of the contract.
In the city of Buenos Aires, the standard tax rate is 1% of the aggregate amount of the
transactions, contracts, and deeds that are subject to the stamp tax. Special rates of
0.5%, 1.2%, 3%, and 3.6% are also established; and, in the case of transactions involving
uncertain consideration, a fixed tax of 1,000 Argentine pesos (ARS) is applicable (on the
fulfilment of certain conditions).
Turnover tax (gross income tax)
Each of the 24 jurisdictions into which Argentina is divided imposes a tax on gross
revenues from the sale of goods and services. Exports of goods are exempt, and certain
industries are subject to a reduced tax rate. Rates, rules, and assessment procedures are
determined locally.
Information on tax rates of the economically largest jurisdictions is provided as follows:
Jurisdiction
Province of Buenos Aires
City of Buenos Aires
Crdoba
Mendoza
Santa Cruz
Santa Fe
General rate (%) Commerce (%)

4.5
3 to 5
3 to 5
3 to 5
4
2 to 7.5
4
4 to 4.5
3
3 to 5
3.5/3.8 to 4.2
3
Services (%)
3.5 to 5.5
3 to 5
2 to 10.5
4 to 4.5
3
1 to 4.5
Industry (%)
1.75 to 4
1 to 4
0.25 to 1.5
2/3 to 5
1.75
1.75
Real estate tax
Similar to the turnover tax, real estate tax is imposed by each Argentine jurisdiction. It is
levied on the ownership of real estate located in the territory of the jurisdiction.
Real estate tax is usually assessed by the local tax authority, considering the propertys
fiscal value and the tax rates established by the current year tax law.
Tax on financial transactions - on credits and debits on bank accounts

Bank account movements (deposits and withdrawals) are subject to a national tax on
financial transactions at the following rates:
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0.6% of deposits and withdrawals in bank accounts opened in local financialentities.
1.2% of any transactions made in a bank without using a bank account.
The 34% or 17% of the tax on financial transactions effectively paid on bank account
deposit transactions (0.6%) and movement of funds (1.2%), respectively, is creditable
against profits tax and minimum notional income tax and/or respective tax advances.
Wealth tax
An annual wealth tax is levied on the shares or holding in the capital of local companies
owned by individuals or undivided estates domiciled in Argentina or abroad, and/or
companies and/or any other type of legal person domiciled abroad. It shall be assessed
and paid directly by the local company, as a full and final payment on behalf of the
shareholders (the issuing company has the right to recover from the shareholder the tax
paid).
The applicable tax rate is 0.5% on the value of the participation, which is generally
calculated on the difference between assets and liabilities arising from the financial
statements closed at 31 December or during the respective fiscal year.
Payroll taxes
Foreign and local nationals working for a local company must be included on the
local payroll and will be considered as local employees for local labour, tax, and social
security purposes. Both the local company and the employees will be subject to the
corresponding regulations.
All the compensation paid in Argentina or abroad for work performed for the local
company will be considered as local compensation and should be reported to the tax
and social security authorities, as the case may be, and included in the salary slips and
recorded in the local labour books.
The local employer must withhold income tax on an actual and monthly basis and make
the corresponding payments to the tax authorities through monthly WHT returns.
Individual tax rates range from 9% to 35%, and personal deductions areavailable.
The local entity must issue salary slips every month for each employee included on its
payroll, considering the total compensation mentioned above.
Employer social security contributions add between 23% and 27% to payroll costs. There
is a compulsory 13th-month salary. There is no restriction regarding the employment of
foreigners, provided they hold working visas.
Workers (Employees) Compensation: Argentine labour regulations determine
different forms of compensation for employees. These include, but are not limited to,
thefollowing:
Vacation compensation.
Compensation in a case of termination of employment contract with employee (prior
notice of dismissal and to a severance payment, both based on seniority).
Main social taxes and contributions assessable on salaries are as follows:
Social taxes and contributions

Pension fund
National unemployment fund
Percentage of gross monthly earnings (%)

(including 13th month salary)
Employer (2, 3)
Employee (1)
17/21
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Social taxes and contributions

Family allowances fund
Social services institute for pensioner
Social health care plan
Total
Percentage of gross monthly earnings (%)

(including 13th month salary)
Employer (2, 3)
Employee (1)
3
6
3
23/27
17
Notes
1.
2.
3.
Social security charges borne by employees are applicable up to a monthly salary cap, which
currently amounts to ARS 31,167.56 (updated as of March 2014).
Contributions made by employers are applicable to total compensation without application of any
cap.
Employers contributions to the national unemployment fund, family allowances fund, and social
services institute for pensioners is paid at a unified rate of 17%. The rate is increased to 21% for
companies whose main activity consists of rendering services or commerce, provided the amount of
their average total annual sales for the last three years exceeds ARS 48 million.
Branch income
The rate of profits tax on net taxable profits from Argentine sources and from activities
performed abroad by the branch is 35%. Branches are also subject to minimum notional
income tax.
Inventory valuation
Inventory valuation is based on the latest purchase. Thus, the last in first out (LIFO)
method may not be elected for tax purposes. Conformity between book and tax
reporting is not required.
Capital gains/losses
Capital gains and losses attract normal profits tax treatment, except that losses from
the sale of shares and other equity interests may be offset only against the same type of
income.
Capital gains on equity
Gains derived from the transfer of shares, bonds, and other securities are subject to tax,
regardless of the nature and residence of the beneficiary. Resident entities are taxed at
the regular 35% rate on any gain derived from the disposal of equity.
The current legislation also repeals the exemption available for foreign beneficiaries
on income derived from Argentine share transfers. Thus, foreign beneficiaries will
be subject to a 13.5% effective income tax withholding rate on gross proceeds or,
alternatively, a 15% income tax on the actual capital gain if the sellers tax cost basis can
be duly documented for Argentine tax purposes.
Capital gains on debts
Capital gains derived by foreign beneficiaries from the sale of corporate bonds placed by
public offer (obligaciones negociables), notes issued by financial trusts (ttulos de deuda),
or government securities should be exempt from income tax under the provisions of the
Law 23,576 (Obligaciones Negociables Law) and 24,441 (Trust Law).
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Dividend income
Dividends, including stock dividends, are not included in the tax base by the recipient
if distributed by an Argentine company (see the Withholding taxes section for additional
information). However, tax is levied if the dividends are distributed by a foreign
company.
Foreign exchange gains/losses
The general rule is that foreign exchange results (gain or losses) have to be recognised
on an accrual basis. However, in some cases, cash basis is applicable.
Foreign exchange losses can only be offset against foreign-source taxable income.
Foreign income
Foreign income received or held undistributed abroad (in case of investments in nonstock companies) by resident corporations is subject to tax. Argentina does not have a
controlled foreign company (CFC) regime. Tax losses from a foreign source can only be
offset against income from a foreign source.
Deductions
Expenses necessary to generate, maintain, and preserve taxable income, and related to
the company activity, are usually tax deductible, with a few exceptions, to the extent
they are fair and reasonable.
Depreciation and depletion
Depreciation is generally computed on a straight-line basis over the technically

estimated useful life of the assets or, alternatively, over the standard useful life (e.g.
machinery and equipment: 10 years; furniture: 10 years). Depreciation of buildings
and other construction of real estate is 2% per annum on cost (on a straight-line basis),
unless it can be proved that useful life is less than 50 years.
Depreciation of automobiles whose original cost exceeds ARS 20,000 is not deductible.
Related expenses (gasoline vouchers, insurance, rentals, repairs and maintenance, etc.)
are deductible up to an amount of ARS 7,200 per automobile per year.
Conformity between book and tax depreciation is not required.
Profit or loss on the sale of depreciated property is determined with reference to cost less
depreciation, restated for inflation as at March 1992, and is included in ordinary taxable
income.
Percentage depletion is available for natural resources (mines, quarries, woods).
Goodwill
The amortisation of goodwill cannot be deducted for profits tax purposes. At the
moment of sale, the taxable gain will be calculated by deducting the cost expenses
(purchase price).
With regards to self-developed goodwill, at the moment of sale the cost will be the
amount of expenses incurred in obtaining it, provided it was not deducted for profits tax
purposes before.
Research and development (R&D)
R&D expenditures (for the development of intangible assets) may be deducted when
they are incurred or amortised over not more than five years, at the option of the
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taxpayer. Expenditures for R&D in connection with the creation of fixed assets form part
of the assets cost and are amortised over their useful lives.
The amortisation of brands and licences acquired can be deducted if they have a limited
term of duration.
Start-up expenses
Start-up expenses may be deducted when incurred or amortised over not more than five
years, at the option of the taxpayer.
Interest expenses
The tax law establishes a restriction on the deductibility of interest arising from debts
of a financial nature, contracted by taxpayers with controlling/related non-resident
entities, for profits tax purposes (see Thin capitalisation in the Group taxation section).
Bad debt
The deduction of accounting bad debts is not allowed for tax purposes. However, if the
debts fulfil certain characteristics (i.e. bankruptcy, prescription, among others), and
with the corresponding supporting documentation, they can be deducted.
When made to societies and associations expressly exempt from assessment of profits
tax, donations are admissible deductions at up to a maximum of 5% of the donors net
taxable profits, provided certain requirements are fulfilled.
Representation expenses
If adequately documented, representation expenses are permissible deductions at

up to 1.5% of the amount of salaries accrued during the fiscal year. According to the
Regulatory Decree, representation expenses are payments made in order to represent
the company in the market, to improve and maintain its relationship with suppliers and
clients, etc.
Directors fees
Amounts up to the greater of 25% of after-tax profit or ARS 12,500 per individual
are deductible in the financial year to which they apply, provided they are approved
and available for the director before the due date of the tax return, or in a later year
ofpayment.
Fines and penalties
In relation to deductibility of penalties to determine net taxable income, taxpayers

are not allowed to deduct sums paid on their own account corresponding to penalties,
litigation costs, penalty interest, and other costs derived from tax obligations; however,
they are allowed to deduct income tax assessable on them and paid on behalf of third
parties as long as it relates to the obtaining of taxable income.
Taxes
Except for profits tax and the tax on minimum notional income, all taxes aredeductible.
Net operating losses may be carried forward for five years. Loss carrybacks are not
permitted. Furthermore, foreign-source losses must be offset against income from
similarsources.
Losses on derivatives transactions with speculative purposes can only be used to offset
income from the same transactions.
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Transactions between related parties should be at arms length (see Transfer pricing in the
Group taxation section for more information). This principle is extended to transactions
with companies located in low or no tax jurisdictions. Payments to foreign affiliates
or related parties and companies located in low or no tax jurisdictions that represent
income of Argentine source are tax deductible, provided they are paid before the due
date for filing the tax return and the corresponding withholding is paid to the tax
authorities. Otherwise, they would be deducted in the fiscal year in which they are paid.
Technical assistance and services that involve transfer of technology should be covered
by agreements duly registered with the National Institute of Intellectual Property for
information purposes. These transactions are governed by the Transfer of Technology
Law.
Group taxation
Group taxation is not permitted in Argentina.
Transfer pricing
The transfer pricing regulations governing inter-company transactions adopt principles

similar to those of the Organisation for Economic Co-operation and Development
(OECD), pursuant to which companies must comply with the arms-length principle in
order to determine the value of goods and services in their transactions with foreignrelated companies.
The following taxpayers, among others, must generally file, together with their annual
profits tax return, a supplementary return (transactions encompassed by regulations
governing transfer prices) and transfer pricing study:
Taxpayers carrying out transactions with related individuals or legal entities
set up, domiciled, or located abroad. Two or more persons are considered to be
related parties when one of them takes part, either directly or indirectly, in the
administration, control, or capital of the other, or when a person or group of persons
takes part, either directly or indirectly, in the administration, control, or capital of
those persons.
Taxpayers carrying out transactions with related individuals or legal entities set up,
domiciled, or located in countries with low or no taxation, whether related or not.
Argentine residents carrying out transactions with PEs located abroad and owned by
them.
Argentine residents, owners of PEs located abroad, for transactions carried out by
the latter with persons or other type of related entities domiciled, set up, or located
abroad.
The Regulatory Decree provides specific rules to determine the fairness of the transfer
pricing methodology. These rules are similar to those set by the OECD and contemplate
six methods, including the following:

Comparable uncontrolled price (CUP).

Resale price method (RPM).
Cost plus.
Profit split method (PSM).
Transactional net margin method (TNMM).
Special method for export of goods with prices quoted in transparent markets.
There is no specific hierarchy, as each particular transaction must be analysed based

on the assets, functions, and risks involved and on information available. Regulations
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establish that the most appropriate method is that which reflects the economic reality of
the transactions.
Thin capitalisation
Thin capitalisation rules apply as a restriction on the deductibility of interest arising

from debts of a financial nature that are contracted by taxpayers with controlling nonresident entities and can be summarised as follows:
For interest subject to a 15.05% withholding (i.e. paid on loans granted by certain
banking institutions), the portion of interest stemming from financial liabilities
exceeding two times the shareholders equity is not deductible for tax purposes and is
treated as dividends.
Interest subject to a 35% WHT is fully deductible.
According to the Regulatory Decree of the Income Tax Law, the thin capitalisation rules
are also applicable to any case where a lower withholding rate of 35% is applicable
(for instance, interest payments to a related company resident in certain tax treaty
countries).

Argentina does not have a CFC regime.

Foreign tax credit
National taxpayers are entitled to recognise a tax credit for any taxes actually paid in
the countries where they have obtained foreign-source income, in respect of similar
national taxes, up to a cap, which is the increase in their Argentine tax liability due to
the inclusion of the foreign income. Any excess not offset in a given fiscal year may be
carried forward to the next five fiscal years.
Province of Tierra del Fuego Regime
Companies set up in the province of Tierra del Fuego enjoy a general tax exemption
and important benefits in customs matters. Tax exemption includes profits tax, tax on
minimum notional income, tax on personal wealth, and excise tax. The VAT benefit
consists of the release from payment of the technical balance of the tax (VAT debits less
VAT credits). Also, a reduction of the prevailing rate for tax on financial transactions and
the exemption from taxation on the transfer of fuels is contemplated.
Mining activity
An investment regime for mining activity is applicable to natural and legal persons.
Mining ventures included within this regime enjoy fiscal stability (i.e. tax rates will
remain basically the same) for a term of 30 years, except for VAT, which will adjust to
the general regime. Furthermore, the regime grants incentives for profits tax, tax on
assets, import duties, and any other tax for introduction of certain assets. Additionally,
this mining investment law established an exploration recovery regime for the mining
investors, which allows the reimbursement of the VAT credit balances originated in the
mining exploration activity.
This regime allows the reimbursement of such VAT credits after a 12-month period since
the expenditure was incurred, and only if it has been paid.
Through specifics regulations, the authorities established the requirements (e.g. filing
a tax return, filing a report certified by a public accountant with respect to the VAT, a
presentation to the Mining Secretary) to be followed by the taxpayers in order to apply
for this benefit.
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Forestry
There is an investment regime for plantation, protection, and maintenance of forests. It

contains rules similar to those for mining activity taxincentives:
Fiscal stability for a period of 30 years. The period may be extended to 50years.
Refund of VAT resulting from the purchase or final importation of goods, leases, or
services effectively for forestry investment projects in a period of less than 365 days.
Export incentives
Exports of goods and services are exempt from VAT and excise taxes. The temporary
importation of raw materials and intermediate and packaging goods for the
manufacture of products for export is free from duties with the obligation of offering
sufficient guarantees for the import. A reimbursement regime is in place for VAT credits
paid to suppliers in relation to the export activity.
Oil and gas industry
The Argentine government has granted attractive benefits to the oil and gas sector to
encourage the exploration of the nations hydrocarbonsreserves.
This legislation grants special incentives to investments in underdeveloped regions,
speeding reimbursement of VAT (after a three-month period, inputs will be credited
against other federal taxes or returned to the taxpayer), exemption from import duties,
and offering an accelerated depreciation (over three years) for profits taxpurposes.
In addition, a three-year relief from minimum notional income tax, which is levied at 1%
rate on the company assets, is provided by the law.
The incentive package will be in effect for 15, 12, or ten years, depending on whether
the activities are performed in areas identified as (i) continental platform, (ii) within the
country other than continental platform, and (iii) currently in production, respectively.
The benefits noted above will apply to the exploration permits granted as of the
enactment of the law (1 November 2006) and up to five years, for the cases mentioned
in (i), four years, for those described in (ii), and three years in the latter cases.
There also exists a Promotion Regime, which grants similar benefits for the exploration
of alternative sources of energy (e.g. wind energy).
Biotechnology industry
A promotional tax regime for development and production of modern biotechnology has
been introduced. Pursuant to this law, the beneficiaries of the projects that qualify for
this regime are entitled to the following benefits:
Profits tax: accelerated depreciation of capital goods, special equipment, parts, or
components of newly acquired goods destined for the promoted project.
VAT: Early refund of the tax applicable to the assets acquired for the project.
Social security contributions: the amount representing 50% of social security
contributions actually paid on the payroll salaries involved in the project shall be
converted into a tax credit bond that may be applied to payment of national taxes.
Software industry
Under a software promotion regime, taxpayers carrying out software-related activities

as their main purpose may qualify for the following benefits:
Fiscal stability for a ten-year period covering national taxes.
Reduction of social security charges (70% of these charges may be credited against
certain national taxes).
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Profits tax relief (up to 60% of the applicable tax).
While most of the software-related activities qualify for the fiscal stability benefit, the
remaining incentives only apply to software R&D, quality control procedures, and
software exports.
Some changes were introduced in 2011, and the period of application was extended
until 31 December 2019. The possibility of using a bond tax credit, given by an amount
equal to 70% of contributions to the social security system paid by the employer, as
an advance payment of the income tax was provided. There is also an increase in the
control mechanisms.
Province incentives on local taxes
Most of the provinces have legislation establishing incentives for the development of
industries within their boundaries, especially industries that utilise or develop their
natural resources and provide work for their residents. The incentives, in general, consist
of exemptions from provincial and municipal taxes.
Various provinces have investment promotion regimes. Even when there are certain
differences among these regimes, generally they include the following incentives:

Exemption from provincial taxes, such as turnover tax, stamp duty, real estate tax.
Reduced public utility rates.
Support for infrastructure and equipment projects.
Facilities for purchase, rental, or lease without charge of public property.
These regimes are not automatically applied, and a special procedure should be followed
to be entitled to the respective benefits.
Free trade zones
The free trade zones offer exporters the possibility to import free from customs duties,
statistics rate, and VAT all the necessary equipment for construction of a turnkey plant
within the zones. Furthermore, exporters manufacturing within the zones enjoy the
benefit of buying supplies and raw materials from third countries, without having to pay
duties or taxes that lead to increased prices.
Customs authority regulating these goods considers them as stored in a third country;
consequently, incoming products are subject to inspection with the sole purpose of
classifying quantity and type. In other words, goods enjoy a duty-free status until
they enter the Argentine customs territory. Goods may remain in the free zone for a
maximum period of five years.
Withholding taxes
Equalisation corporate tax
Corporations, LLPs, and certain other entities are required to make a flat and final
income tax withholding of 35% from dividend payments or profit distributions to
resident or non-resident payees, to the extent that the amount of such dividends or
profit distributions exceeds the taxable income of the distributing company, determined
by applying the general tax rules (i.e. without considering any exemptions, abatements,
and other adjustments arising from special promotional laws) included in their retained
earnings at the end of the fiscal year, immediately preceding the date of payment or
distribution.
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As of 23 September 2013, dividend distributions made by Argentine entities are subject
to tax at a 10% rate, without prejudice to the application of the so-called equalisation
tax.
Other payments
Other payments to residents and to non-residents are subject to WHT rates as follows:
Recipient
Resident corporations
Resident individuals
Non-resident corporations and individuals:
Non-treaty:
Treaty:
Australia
Belgium
Bolivia
Brazil
Canada
Chile (9)
Denmark
Finland
France
Germany
Italy
Netherlands
Norway
Russia
Spain
Sweden
Switzerland (11)
United Kingdom
Interest (%) (1)

6/28 (3)
6/28 (3)
Royalties (%) (1, 2)

6 (4)
6 (4)
15.05/35
21/28
12
0/12 (5)
15.05/35
15.05/35
12.5
10/15
3/5/10/15
21/28
21/28
3/5/10/15
12 (5)
15
15.05/20 (6)
10/15 (7)
15.05/20 (5)
12
12.5 (8)
15
12
12.5
12
12 (5)
3/5/10/15
3/5/10/15
18
15
10/18
3/5/10/15
3/5/10/15
15
3/5/10/15
3/5/10/15
3/5/10/15
3/5/10/15
Notes
1.
Withholding from payments of interest and royalties to non-residents is based on a flat rate of
35% applied to an assumed percentage gross profit margin. This margin is not contestable, but
the resultant rate may be limited by bilateral treaty. Under the 1998 tax reform, the general margin
for interest paid for credits obtained abroad is 100%. However, a margin of 43% is applicable (i)
if the debtor is a local bank; (ii) if the creditor is a foreign financial institution located in a country
not considered as a low or no tax jurisdiction, or in countries that have signed an agreement
with Argentina for exchange of information and have no bank secrecy laws, which are under the
supervision of the respective central bank; (iii) if the interest is paid on a loan dedicated to the
purchase of tangible assets other than cars; (iv) if the interest is paid on debt certificates (private
bonds) issued by local companies and registered in certain countries that have signed an agreement
with Argentina for the protection of investments; and (v) on interest paid on time deposits with local
banks. Royalties covers a variety of concepts. The rates given in this column relate specifically to
services derived from agreements ruled by the Foreign Technology Law, as follows:
Technical assistance, technology, and engineering not obtainable in Argentina: 21% (35% on
assumed profit of 60%).
Cessation of rights or licences for invention patents exploitation and technical assistance
obtainable in Argentina: 28% (35% on assumed profit of 80%). On non-registered agreements,
the rate is 31.5% (profit of 90% is assumed) or 35% (profit of 100% is assumed), depending on
the case.
Several other concepts of royalties are subject to rates that, in turn, may be limited by treaty. A
broad sample of these concepts and the non-treaty effective rates are set forth in Note 2.
2. Payments to non-residents (only) for royalties, rentals, fees, commissions, and so on, in respect of
the following are subject to withholding at the rates given below on the basis of assumed gross profit
margins (Note 1) unless limited by treaty. The treaty concerned should be consulted to determine any
limitation in each case.
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Payment
WHT (%)
Freight and passenger bookings (other than those covered by special treaties), news and
feature services, insurance underwriting
Containers
3.5
7.0
Copyright
12.25
Rental of movable assets
14.0
Motion picture, video, and sound tape rentals and royalties; radio, television, telex and
telefax transmissions; any other means for projection, reproduction, transmission, or
diffusion of image or sound; sale of assets located in Argentina (10)
17.5
Rental of real estate (10)
21.0
Any other Argentine-source income (unless the non-resident is or was temporarily

resident)
31.5
3.
The higher tax rate is applicable on non-registered taxpayers. On interest paid to corporations by
financial entities or stock exchange/open market brokers, income tax must be withheld at 3% (10% if
not registered); individuals are tax exempt.
4. Resident corporations and individuals who are registered for tax purposes are subject to 6%
withholding (28% if not registered).
5. Interest is exempt if paid on credit sales of machinery or other equipment, specific bank loans at
preferential rate or loans by public entities.
6. The treaty limits taxation of interest to 20% (registered).
7. The 10% rate is applicable to interest on credit sales of capital equipment, any bank loan, or any
financing of public works; otherwise, 15%.
8. Interest paid on loans with guarantee of the Norwegian Institute for Credit Guarantees or paid in
relation to imports of industrial equipment is tax exempt.
9. On 26 June 2012, the DTT with Chile was terminated.
10. Deduction of actual costs and expenses may be optionally exercised.
11. The treaty is undergoing the Argentine and Swiss Congress approval process.
Tax administration
Taxable period
Tax is assessed on a fiscal-year, self-assessment basis.
Tax returns
The due date for filing the profits and the minimum notional income tax return is
during the second week of the fifth month after the fiscal year end. Tax returns are filed
electronically.
Payment of tax
Instalment payments on account of both profits tax and minimum notional income tax
must be made in the course of the tax year. The instalment payments must be made on a
monthly basis, beginning in the first month after the due date of filing of the taxreturns.
Penalties
Penalties derived from tax infractions may be applied by tax authorities, as follows:
Failing to file the tax return: Fines range between ARS 200 and ARS 400.
Tax omission or incorrect tax determination: Fines range from 50% to 100% of
unpaid taxes or incorrect tax calculation.
Tax avoidance: Fines range between two and ten times the avoided tax.
Certain tax infractions may be penalised by closing the business premises for three
to ten days. In addition, fines ranging between ARS 300 and ARS 30,000 may be
imposed.
Simple evasion: Entities or individuals evading payment of social security
contributions or withholdings, or both, payable to the tax authorities under the
social security regime, through deceitful declarations, malicious concealment, or any
fraudulent or deceitful procedure, either through action or omission, in excess of ARS
80,000 per fiscal period, shall be punished with two to six years imprisonment. Such
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amount will be ARS 400,000 in the case of taxes, it being applied by tax and by fiscal
year.
If the infringement qualifies as aggravated evasion: Imprisonment could be extended
from three years and six months to nine years in certain situations.
Interest on late payments
Late payment of taxes is subject to a monthly 3% interest rate. Interest will start accruing
on the day after the filing due date.
Tax audit process
The tax authorities are entitled to audit taxpayers within the statute of limitations
period. Audits consist of revising the calculation of any national or provincial tax based
on formal requirements. Where any assessment is issued by the tax authorities, the
taxpayer is entitled to either accept it or file a claim. Assessments can be done under
a real or estimated basis, depending on the specific case and the information that the
taxpayers have on their transactions. In the case that the taxpayers do not accept the
assessment during the administrative period, they can claim against Tax Courts before
any judicial process.
There are no specific provisions about e-auditing.
The actions and powers of the tax authorities to determine and require payment of
federal taxes, and to implement and enforce fines and closures planned, prescribe:
five years in the case of registered taxpayers, as well as in the case of unregistered
taxpayers who are not legally required to register with the Argentina fiscal authority
(AFIP); or that, having that obligation, had not fulfilled them and, spontaneously,
regularise their situation, and
ten years in the case of unregistered taxpayers.
Note that a one-year suspension of the statute of limitations has taken place for tax
obligations related to fiscal year 2008 and preceding non-barred years. Recently,
another one-year suspension of the statute of limitations was enacted for fiscal year 2013
and preceding years.
The statute of limitations may be extended to ten years in certain provinces with respect
to provincial taxes.
Topics of focus for tax authorities include the following:

Increasing cooperation: tax information exchange.

Tax treaty network still under review.
Tax treaty benefits: substance over form principle.
High penalties and tax criminal law.
Transfer pricing (inter-company charges and export of commodities to international
intermediaries).
Wealth tax: applicability on branches.
Other issues
Exchange control regime
As a result of the devaluation of the Argentine peso at the beginning of 2002, several
regulations were issued to limit the transfer of money abroad. They have been made
more flexible and up-to-date.
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Regulations referring to the entrance of funds to the country, the obligation of
liquidation of foreign currency in the Exchange Market of payments of exports of goods
and services, have been modified in recent years.
Terms to comply with the liquidation obligation used to vary between 60 and 360
days. However, during 2012, the export of goods and services, which are subject to the
inflow of the total collections, suffered reductions in their terms. Sales between related
companies only have 30 calendar days from the shipment date. Notwithstanding the
terms for each tariff code, when they are collected abroad, the funds must be brought
into the Single and Free Exchange Market (MULC) within 15 days. The inflow of services
export receipts must be done within 15 days from its collection.
The AFIP requires advance information and its authorisation in order to import goods,
to pay imports of goods and services, to purchase foreign currency for travel and
tourism, and for making payments abroad related to certain concepts, such as interests,
dividends, and rentals. In that sense, since 2012, the AFIP has implemented a condition
prior to importation of goods into the customs territory, where importers must submit
to the AFIP an Advance Import Sworn Statement (DJAI) prior to issuing the purchase
order or the document used for setting up overseas purchase operations for all final
import destinations for consumption. Regarding import of goods, it is necessary to get
prior conformity not only for paying the import of goods through the MULC but also for
importing goods for consumption.
The AFIP also requires some importers of services, depending on the nature of the
service and the amount of the agreement, to complete an informative procedure
for debts abroad, called an Advance Services Sworn Statement (DJAS). Importers
are allowed to request access to the MULC once they have informed the AFIP of the
operation and it is at the exit status.
In February 2013, the AFIP established an informative regimen called an Advanced
Statement of Payments Abroad (DAPE), which implies the filling of information
referring to payments individuals residing in the country make abroad relating to (i)
financial debts incurred when purchasing goods abroad and sold to third countries; (ii)
interests; (iii) profits and dividends; (iv) courier operations; (v) some import regimes;
and (vi) rental of machinery, tools, and other movable assets. As with the DJAS,
importers are allowed to request access to the MULC once they have informed the AFIP
of the operation and it is at the exit status.
The possibility to create the Formation of Residents External Assets was suspended
in July 2012. According to the rules of the Formation of Residents External Assets,
Argentine residents were allowed to remit foreign currency abroad at up to a monthly
limit of 2 million United States dollars (USD).
Payments for some import services made to related companies, or to bank accounts or
companies located in countries with low taxation, require prior authorisation of the
Argentine Central Bank when exceeding USD 100,000 annually.
In addition, it should be particularly highlighted that a rule issued by the central bank in
mid-2005 requires a compulsory one-year temporary deposit equivalent to 30% of funds
brought by non-residents to Argentina, which must be kept in a reserve (encaje) for the
term of one year. This deposit is made in foreign currency and does not earninterest.
There are some exceptions; for instance, direct investments, such as interest in Argentine
companies (minimum 10%) or real estate, are not subject to this rule, nor are funds that
were borrowed for the acquisition of fixed assets and the re-payment term is longer than
two years.
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Argentina
Legal entities
Foreign companies in Argentina, carrying out their business or activity in Argentina,

must have a local legal vehicle, of which the most common legal entity types are the
following:
Branch.
Corporation (Sociedad Annima or SA).
Local Limited Liability Company (Sociedad de Responsabilidad Limitada or SRL).
Argentine corporations and LLPs, as Argentine residents, are subject to the Argentine tax
system. Branches of foreign companies, whatever the nature of their activities, are taxed
under the same rules as those applicable to corporations and LLPs.
Several documents are required to register an entity with the relevant authorities.
Some of said documentation must be filed in the original language, duly translated and
certified with the Apostille issued pursuant to The Hague Convention or legalised by the
Argentine Consulate of the companys place of origin.
At present, the minimum capital requirement to incorporate an SA is ARS 100,000.
There are no special requirements regarding the minimum amount of capital for SRLs.
A branch does not require capital contributions unless it is engaged in certain specific
activities (e.g. banking and financing). The branch must carry its financial statements
separately from those of the foreign company.
The three legal types are subject, in general terms, to the same legal, tax, and accounting
regulations.
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Armenia
PwC contact
Nerses Nersisyan
PricewaterhouseCoopers Central Asia and Caucasus B.V. Armenian branch
#1 Northern Avenue
NORD Business Center - 6th floor
Yerevan 0001, Armenia
Tel: +374 10 592 166
The following amendmentsgenerally became effective in January 2014:
A new pooling system for calculation of tax depreciation was introduced for assets
bought after 1 January 2014. The maximum annual amortisation and depreciation
rates for assets purchased (constructed) after 1 January 2014 have been increased
(see Depreciation and amortisation in the Deductions section).
Starting from 1 January 2014, imported tobacco production is subject to excise taxes
and value-added tax (VAT) instead of presumptive payments. VATable turnover of
transactions for importing and alienating tobacco products is determined based on
the maximum retail price, VAT excluded, of tobacco products labelled in accordance
with the procedures defined by the government. At the same time, retail sale of
tobacco production by persons who are neither tobacco importers nor producers will
be VAT exempt.

Armenian resident entities, and non-resident entities doing business in Armenia through
a branch or a representative office, are liable for corporate income tax (CIT). Armenia
taxes residents on their worldwide income; non-residents are subject to CIT only on their
Armenian-source income.
The standard CIT rate is 20%.
Taxable income is defined to be the difference between a taxpayers gross income and
deductible expenses:
Gross income encompasses all revenues received by a taxpayer from all economic
activities, unless the revenues are expressly exempted under the law.
Deductible expenses encompass all necessary and documented expenses that are
directly related to conducting business or earning profit, unless a specific provision in
the law restricts the deduction.
Taxpayers engaged in agricultural production are exempt from CIT on that income.
Note that resident entities, branches and representative offices of foreign entities, and
individual entrepreneurs are required to withhold income tax at source on payments
to non-residents not having a permanent establishment (PE) in Armenia (see the
Withholding taxes section).
Investment funds pay CIT based on 0.01% of net assets.
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The turnover tax generally replaces the CIT and VAT obligations for small and medium
enterprises (SMEs). The tax rate is differentiated in accordance to the income type (see
Turnover tax in the Other taxes section).
Presumptive tax system
Taxpayers engaged in certain activities must use the presumptive tax system. Under
this system, the taxpayer pays a fixed tax based on the location and area occupied by
the business and will not be required to pay CIT or VAT. The rate of tax depends on the
activityundertaken, as follows:
Type of business
Activity related to
vehicles
Lottery games
organisers
Base data
For activities carried out by
trucks: the lading in terms of
tons
For activities carried out by
buses: the number of seats
Total value of lotteries sold
during a month
Number of computers for
totalisators
Monthly presumptive
Adjustment ratio
tax payment (AMD*)
Depends on region: 2,000 times the product
1.1 to 1.9
of the base data and the
adjustment ratio(s)
Depends on region:
0.5 to 1.2
25% of base data
75,000 times the
base data in case of
totalisators
1 million times the base
data if connected to the
global internet network
Number of websites
provisioned for organising
internet totalisator
* Armenian drams
Licence payments
Individuals (individual entrepreneurs) and legal entities engaged in certain activities

should make licence payments, which replace CIT and/or VAT. Under this system, the
taxpayer pays a fixed tax based on the location and the business activity base data.
Licence payment rates for some activities are mentioned below.
Type of activities
Transportation of passengers
with passenger cars
Organisation of billiard game
Organisation of table tennis
Barbers shops
Technical maintenance and
repairs of vehicles
Base
Number of
cars
Game table
Game table
Workplace
Workplace
Monthlyrate of licence payment forone unit

(thousand AMD)
Regional
Other
Other Bordering
Yerevan centres
cities location
villages
9.5
5.6
5.6
2.8
1.4
40.0
10.0
15.0
15.0
20.0
7.0
12.0
12.0
20.0
6.0
9.0
12.0
10.0
5.0
4.5
6.0
5.0
1.0
2.25
3.0
Local income taxes
Armenia does not have any local government taxes on income.
Corporate residence
Resident entities are legal and business entities whose existence is established under
Armenian law. Non-resident entities are those whose existence is established under
foreign law.
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63
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The domestic definition for a PE essentially adopts the definition for PE found in
the Organisation for Economic Co-operation and Development (OECD) Model Tax
Convention.
Other taxes
Armenias current VAT law is based loosely on the principles of the European Union
(EU) VAT Directive. Armenia operates the input-output model of VAT. VAT-registered
persons may deduct the VAT paid on their inputs from the VAT charged on their sales
and account for the difference to the tax authorities.
The standard rate of VAT on domestic sales of goods and services and the importation
of goods is 20%. Exported goods and related services are zero-rated. Advertising,
consulting, engineering, legal, accounting, translation, data processing, banking,
financial, and insurance services provided to non-residents are zero-rated if the
non-residents place of business is outside Armenia. Various supplies, including most
financial and education services, are VAT-exempt.
Services supplied in Armenia by non-residents that are not registered in Armenia are
subject to application of a VAT reverse charge.
The liability to account for VAT is based on taxable turnover for transactions
implemented in the previous calendar year. The turnover tax (see below) generally
replaces VAT obligations for SMEs. If revenue exceeds AMD 58.35 million, the taxpayer
may not be considered a turnover taxpayer and should account for VAT on all sales. If
the previous years revenues were less than AMD 58.35 million (e.g. the taxpayer is in
the first year of operations), the taxpayer is obligated to account for VAT only on sales in
the current year that exceed AMD 58.35 million. Taxpayers whose revenues are below
the AMD 58.35 million threshold may voluntarily elect to account for VAT.
Businesses producing/importing excisable goods are required to account for VAT on
their sales.
Some ownership and inter-relation thresholds are also applicable for entities to be
considered as VAT payers.
Generally, VAT payers should file VAT returns on a quarterly basis. However, taxpayers
with sales (excluding VAT) in the previous calendar year exceeding AMD 100 million are
required to file VAT returns monthly. VAT payments must be made and VAT returns filed
within 20 days following the end of the reporting period.
Customs duties
The Customs Code of Armenia regulates customs procedures in Armenia. The most
frequently used customs regimes are import for free circulation, temporary import,
temporary export, and export for free circulation.
Customs levies are payable by persons whose goods cross the customs border of
Armenia. Customs levies consist of customs duties, taxes, duties, and other mandatory
charges.
Generally, customs duty is imposed as an ad valorem duty, which means that the tax is
calculated as a percentage of the customs value of the goods. Armenia uses only two ad
valorem rates: 0% and 10%.
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Customs duty is collected on the customs value of the imported goods. Importers must
take into account specific rules (based on World Trade Organization [WTO] rules) to
determine the customs value on which the import tax will be applied. The general rule is
that the customs value will be the price actually paid or payable for the goods when sold
for export to Armenia.
Customs fees are payable within three days from the provision of customs services, but
not later than the release of goods from customs.
Note, however, that the customs duty framework is currently undergoing significant
modifications due to Armenias accession to the Customs Union with Russia, Kazakhstan,
and Belarus.
Excise tax
Excise tax is payable on alcoholic beverages, tobacco products, and petroleum products,
whether imported or produced domestically, as follows:
Goods
Beer
Grape and other

wines, wine
ingredients
Vermouth and other
types of wine that
contain vegetarian
and other aromatic
extracts
Other brewed drinks
(apple cider, pear
cider, honey-drinks)
Ethyl spirit
Alcoholic drinks
Spirituous liquors
(those made from
grape, distillation
of grape wine or
sugarcane), whisky,
and rum *
Tobacco substitutes
Raw oil and oil
materials
Unit of measure
Factory price (if produced locally) (excluding
VAT and excise tax) or 1 litre; or customs
value on importation or 1 litre

VAT and excise tax) or 1 litre (by
recalculation of 100% spirit); or customs
value on importation or 1 litre (by
recalculation of 100% spirit)
VAT and excise tax) or 1 litre (by
recalculation of 100% spirit); or customs
value on importation or 1 litre (by
recalculation of 100% spirit)
1 kilogram
1 ton
Tax rate
30%, but not less than
AMD 105 for 1 litre
10% of factory price, but
not less than
AMD 100 for 1 litre
AMD 750 for 1 litre

AMD 270 for 1 litre
AMD 900 for 1 litre

AMD 500 for 1 litre
50%, but not less than:
AMD 3,000 for 1 litre (1
to 3 years old spirit)
AMD 8,500 for 1 litre
(11 to 15 years old
spirit)
(16 to 19 years old
spirit)
(more than 20 years old
spirit)
AMD 1,500
AMD 27,000
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Armenia
Goods
Gases produced
from oil and other
hydro-carbons (except
natural gas)
Petrol
Diesel fuel
Unit of measure
1 ton
Motor oil

VAT and excise tax) or 1 kilogram; or customs
value on importation or 1 kilogram
Customs value of importation
Cars having more

than AMD 25 million
customs value
Cigars (containing
tobacco and other)
Cigarillos (containing
tobacco and other)
Filtered cigarettes
containing tobacco,
clove
Unfiltered cigarettes
containing tobacco,
clove, and other
Tax rate
AMD 1,000
1 ton
Customs value or 1 ton
AMD 25,000
AMD 32,500 for 1 ton
AMD 400 for 1 kg
20%
1,000 units
AMD 550,000
1,000 units
AMD 15,000
1,000 units
AMD 5,000
1,000 units
AMD 1,400
* Note that this is valid as of 1 April 2013.
Taxpayers producing excisable goods in Armenia should submit a quarterly excise tax
return by the 20th day of the month following the quarter and make excise tax payments
by the 20th day of each month.
Land tax
Land tax is assessed and collected at the municipal level and is paid biannually by
landowners and the permanent users of state-owned land. Tax on rented land is levied
on the lessor. The land cadastre (valuation system) is used to determine the value of the
land. Land tax for agricultural land is calculated at 15% of the net income determined
by the cadastral evaluation. For non-agricultural land, the rate is 0.5% to 1.0% of the
cadastral value of the land.
Property tax
Property tax is assessed and collected at the municipal level on buildings, motor
vehicles, and means of water transport. The tax rate on buildings is 0.3%, which is paid
on the cadastral value.
Property tax for motor vehicles with up toten seats is calculated as follows:
Capacity (horsepower)
Up to 120
121 to 150
151 to 250
251 and over
Tax rate (per horsepower)

AMD 200
AMD 300
AMD 300 + AMD 1,000 per horsepower in excess of 150
AMD 500 + AMD 1,000 per horsepower in excess of 150
Property tax for motor vehicles with more thanten seats is calculated as follows:
Up to 200
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AMD 100
Armenia
201 and over

AMD 200
The annual property tax on motorcycles is calculated at the rate of AMD 40 for each
horsepower of tax base. The annual rate of property tax on watercraft is calculated at
AMD 150 for each horsepower of tax base.
Beginning from the fourth year after the year of production, the tax base for motor
vehicles and means of water transport is reduced by 10% per year, up to a maximum
reduction of 50%.
Legal entities should calculate property tax and pay this to the municipal budget on a
semi-annual basis. The semi-annual property tax calculations should be submitted to the
local tax inspectorates not later than the 20th day following the reporting half-year.
Transfer taxes
Armenia does not have any transfer taxes.
Stamp taxes
Armenia does not have any stamp taxes.
Turnover tax
As ofJanuary 2013, the Turnover tax is payableby commercial organisations and

individuals (individual entrepreneurs). The Turnover tax replaces VAT and (or)CIT
obligations for SMEs. Mainly, the taxpayer cannot be charged the Turnovertax if the
turnover from the transactions of the previous calendar year exceeds AMD58.35
million. Note that there are also some other requirements to which the taxpayer should
meet to become a Turnover taxpayer.
The Turnover tax is imposed on the reporting period income (revenue) as follows:
Type of income
Trading activities
Production activities
Rental income, interest, royalties, and assets disposal (including estate property)
Income on notary activities
Income on other type of activities
Tax rate (%)

3.5
3.5
10.0
20.0
5.0
Turnover taxpayers are required to submit tax calculation on a quarterly basis andmake
tax payment within 20 days following the end of the reporting period.
Branch income
When a non-resident company conducts business in Armenia through a subdivision
(i.e. a branch or a representative office) and maintains separate accounting records
for that subdivision, taxable income generally should be determined on the same
basis as for resident entities. Note that a subdivision is taxable on dividends received
from Armenian companies and may not carry forward losses, which differs from the
treatment of resident entities (see the Deductions section for more information). However,
the subdivision may be able to overcome these restrictions under a relevant tax treaty.
If it is not possible to determine taxable profit based on the direct method (i.e. taxable
income less deductible expenses) for the subdivision of the foreign entity in Armenia,
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income is determined based on a method agreed upon between the taxpayer and the tax
authorities. The law explicitly recognises the allocation method (the taxpayer allocates a
portion of its worldwide income and expenses to Armenia) as a possible approach.
Armenia has no special tax rules for non-commercial representative offices established
to engage in liaison-type activities. Such offices are subject to the normal CIT, but an
exemption from CIT may be available under a relevant tax treaty if the activities of the
representative office are not sufficient to constitute a PE for the foreign entity.
See the Withholding taxes section for a list of countries with which Armenia has a tax treaty.
Taxable profits are defined as a positive difference between a taxpayers gross income
and deductible expenses. Gross income encompasses all revenues received by a taxpayer
from all economic activities, unless the revenues are expressly exempt from inclusion
under the law. Deductible expenses encompass all necessary and documented expenses
that are directly related to conducting business or earning profit, unless a specific
provision in the law restricts the deduction.
Inventory valuation
Inventories are generally stated at the lower of cost and net realisable value. First in first
out (FIFO) and average cost methods of valuation are generally used for tax purposes.
Capital gains
Capital gains are included in taxable income. Non-residents are taxable on the realised
capital gains from the increase of the value of the assets (including shares) located
inArmenia.
Dividend income
Dividends derived by an Armenian entity from another Armenian entity are exempt
from tax. Dividends derived by non-residents from Armenian entities are subject to 10%
withholding tax (WHT), unless relief is available under a relevant tax treaty (see the
Interest income
Interest income attracts normal CIT treatment.
Foreign income
Resident entities are liable to Armenian tax on their worldwide income. Foreign taxes
should be available for credit against Armenian tax liabilities, up to the amount of
Armenian tax payable on the foreign income.
There are no provisions in Armenian tax law allowing any tax deferral on income
earnedabroad.
Deductions
Expenses incurred in the furtherance of a taxpayers business activities generally are
deductible, unless a specific provision in the law provides otherwise. Expenses that are
not supported by relevant documentation are not deductible.
Fixed assets are required to be depreciated using the straight-line method.

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Armenia
The maximum rates per annum for depreciating fixed assets are:
Maximum depreciation
Asset
rate per annum (%)
Other industrial and commercial buildings, constructions, and transmission
5
devices
Hotels, resorts, rest houses, educational institutions
10
Robot equipment and assembly lines
33.3
Calculating devices and computers
100
Fixed assets with the value up to AMD 50,000
100
Industrial and commercial buildings, constructions, and transmission
100
devices located in a designated disaster area (currently Gyumri)
Other fixed assets
20
Land may not be depreciated.

Intangible assets may be amortised using the straight-line method over the lesser of the
assets useful economic life or ten years.
According to the legislative changes, fixed assets purchased (constructed) after 1
January 2014 should be pooled and depreciated with the following maximum rates:
Asset
Other industrial and commercial buildings, constructions, and transmission
devices
Hotels, resorts, rest houses, educational institutions
Calculating devices and computers
Robot equipment and assembly lines
Other fixed assets
Maximum depreciation
rate per annum (%)
7.5
15
100
50
30
Intangible assets may be amortised using the straight-line method over the lesser of the
assets useful economic life or 20% per annum.
Goodwill
Payments with respect to goodwill and amortisation of goodwill are not deductible in
Armenia.
Start-up expenses
Start-up expenses are fully deductible, provided they are properly documented.
Interest expenses
As a general rule, interest is deductible if the related debt is used to fund business
activities of the taxpayer and the interest rate is not more than double the Central Bank
of Armenia rate (currently, the deductible interest rate is capped at 24%).
In addition to the existing cap (twice of the Armenian Central Banks settlement rate),
the deductible interest expense payable within the tax year should not exceed:
nine times the value of net assets of a taxpayer, if borrowings received from banks
and credit organisations or
twice the value of net assets of a taxpayer, if borrowing received from other entities.
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The net assets are a positive difference between the taxpayers assets and liabilities. The
value of net assets should be considered based on results of the reporting year.
The restriction does not apply to the banks and credit organisations and to the funds
borrowed from international organisations specified by the government. The restriction
also does not apply to the interest payable on funds attracted from publicly placed debt
instruments (securities).
Bad debt
A taxpayer is entitled to deduct bad debts if the taxpayer creates a reserve and allocates
the amount of bad debt in the following proportions:

Up to 90 days from the due date: 0%.

From 91 to 180 days from the due date: 25%.
Beyond 365 days, bad debts of less than AMD 100,000 may be deducted. For larger
debts, the company would need to have pursued the debt through the courts before a
deduction may be taken.
Charitable donations and contributions to non-profit organisations are deductible in

amounts of up to 0.25% of gross income.
Lease payments
Lease payments on operating leases are deductible. The lessor claims a deduction for
depreciation of the leased assets. Financial leasing is treated for tax purposes as if a sale
had been made. The lessee includes the value of the property in the relevant group of
fixed assets and claims depreciation charges. The lessee also deducts the interest and
commission elements of the lease payments in the period in which they are payable.
Similarly, the lessor recognises taxable income for the total principal amount of the lease
at the time when the asset is transferred and recognises the interest and commission
element of the payments over the term of the lease.
Fines and penalties
Commercial fines and penalty expenses are deductible for CIT purposes. Fines and
penalties paid to the state or municipal budgets are not deductible.
Taxes
Non-refundable (non-credited) taxes (e.g. property tax, land tax, expensed VAT), duties,
and other obligatory payments are deductible for CIT purposes.
The deductibility of the following common items is limited for CIT purposes:
Expenses incurred for advertising outside Armenia are limited to the greater of 3% of
gross income or 20% of the value of services or goods exported from Armenia.
Expenses for training of staff outside Armenia is limited to the lesser of 4% of the
gross income of the reporting year or AMD 3 million per employee.
Expenses for foreign trips are limited to 5% of the gross income of the reportingyear.
Representative expenses are limited to the lesser of 0.5% of the gross income of the
reporting year or AMD 5 million.
Companies are entitled to carry forward losses to the five subsequent income years.
Armenian law does not allow the carryback of losses.
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Armenia
Payments to foreign affiliates are deductible if they meet the normal tests for
deductibility.
Group taxation
There are no group taxation provisions available in Armenia.
Transfer pricing
Armenia does not have formal transfer pricing rules. The tax authorities may apply
market prices in limited cases, but this does not happen very often.
It is expected that Armenia will adopt transfer pricing rules from January 2015. It is
expected that the rules will be based on Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations issued by the OECD (OECD Guidelines) on pricing
issues.
Thin capitalisation
Armenia does not have thin capitalisation rules. However, there are certain limitations
on deductibility of interest expenses (see Interest expenses in the Deductions section).

Taxpayers engaged in agricultural production are exempt from tax on that income.
Resident companies that listed on the Armenian Stock Exchange by 31 December
2012, with at least 20% of their shares publicly held by 100 or more shareholders, were
entitled to a reduction in CIT during the 2009 to 2012 income years.
Provided such companies prepared and published their financial statements under
International Financial Reporting Standards (IFRS), they were entitled to a 50%
reduction in their CIT (up to a maximum of AMD 300 million per year). The incentive is
repayable (plus penalties) if the company delists, liquidates (other than for bankruptcy),
or reduces the public issue below 20% before 31 December 2015.
Foreign tax credit
Tax residents are allowed to credit foreign taxes paid on income received abroad against
their Armenian tax liabilities. The amount of foreign tax credit is limited to the amount
of Armenian tax that would arise from the equivalent income in Armenia.
Withholding taxes
Payments to non-residents are subject to the following WHT rates:
Payments for insurance, reinsurance, and transportation are subject to WHT at the
rate of 5%.
Dividends, interests, royalty, income from the lease of property, and increase in the
value of property are subject to WHT at the rate of 10%.
Other income (from services) received from Armenian sources is subject to WHT at
the rate of 20%.
WHT is required to be transferred to the budget not later than the 20th day of the month
following the payment of income. A WHT return should be submitted by 20 February
following the reporting year.
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71
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WHT rates for non-residents may be reduced under a relevant tax treaty.
Recipient
Non-treaty
Treaty:
Austria
Belarus
Belgium
Bulgaria
Canada
China, Peoples Republic of
Croatia
Cyprus
Czech Republic
Estonia
Finland
France
Georgia
Germany (former USSR treaty)
Greece
Hungary
India
Iran
Ireland
Italy
Kazakhstan
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Moldova
Netherlands
Poland
Qatar
Romania
Russia
Slovenia
Spain
Switzerland
Syria
Thailand
Turkmenistan
Ukraine
United Arab Emirates
United Kingdom and Northern Ireland
Dividends (%)
10
Interest (%)
10
Royalties (%)
10
5/15 (1)
10/15 (19)
5/15 (1)
5/10 (3)
5/15 (4)
5/10 (5)
0/10 (6)
0/5 (16)
10
5/15 (7)
5/15 (7)
5/15 (9)
5/10 (5)
15
10
5/10 (5)
10
10/15 (20)
0/5/15 (21)
5/10 (22)
10
5
5/15 (7)
5/10 (5)
5/15 (7)
5/15 (1)
5/15 (7)
0/5/15 (24)
10
5/10 (23)
5/10 (5)
5/10 (17)
5/10 (5)
0/10 (25)
5/15 (26)
10
10
5/15 (7)
5/15 (7)
3
5/10/15 (27)
0/10 (2)
10
0/10 (2)
10
10
10
10
5
0/5/10 (10)
10
5
0/10 (12)
10
0/5 (18)
10
5/10 (14)
10
10
0/5/10 (10)
10
10
5
10
8
10
0/10 (15)
10
5
5
5
10
0
10
5
10
10
10
10
10
0
5
5
10
8
10
10
10
5
5
5/10 (11)
10
5/10 (8)
5/10 (13)
5
0
5
5
10
5
5
7
10
10
10
5
10
5
10
5
10
5
10
0
5
5/10 (11)
5
12
15
10
0
5
5
Notes
1.
2.
3.
72
The direct ownership threshold for the 5% rate is 10%. The 15% rate applies in other cases.
The 0% rate applies to the sale on credit of industrial, commercial, and scientific equipment, and
capital goods, and to interest on loans granted by banks. The 10% rate applies in other cases.
The 5% rate applies if the recipient company directly holds at least 40,000 United States dollars
(USD) of the capital of the company paying dividends. The 10% rate applies in other cases.
Armenia
Armenia
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
The 5% rate applies if the recipient company directly owns at least 25% of the capital of the
company paying dividends and the capital invested exceeds USD 100,000. The 15% rate applies in
other cases.
The 5% rate applies if the beneficial owner is a company that directly owns at least 25% of the
capital of the company paying dividends. The 10% rate applies in other cases.
The 0% rate applies if the recipient company directly or indirectly owns at least 25% of the capital of
the company (during the latest two calendar years) paying dividends, provided that such dividends
are tax exempt in the recipient company country. The 10% rate applies in other cases.
The 5% rate applies to royalties on copyright on software, trademark, model or project, industrial,
commercial, scientific information (know-how) etc. The 10% rate applies to copyright royalties,
including films, etc.
The 5% rate applies if the recipient company directly or indirectly holds at least 10% of the capital of
the company paying dividends. The 15% rate applies in other cases.
The 0% rate applies to government debt and government-assisted debt. The 5% rate applies to
interest on loans or credit granted by banks. The 10% rate applies in other cases.
The 5% rate applies to literary, artistic, or scientific work copyright royalties and to film and
broadcasting royalties. The 10% rate applies in other cases.
The 0% rate applies to the credit sale of industrial, commercial, or scientific equipment, to the credit
sale of merchandise or services, and to loans granted by a bank. The 10% rate applies in other
cases.
The 5% rate applies to copyright royalties. The 10% rate applies in other cases.
The 5% rate applies to interest on loans or credit granted by banks. The 10% rate applies in other
cases.
The 0% rate applies to interest on loans granted by banks. The 10% rate applies in other cases.
The 0% rate applies if the beneficial owner has invested at least 150,000 euros (EUR) in equity. The
5% rate applies in other cases.
The 5% rate applies if the recipient company invested at least USD 40,000 of the capital of the
company paying dividends. The 10% rate applies in other cases.
The 0% rate applies to interest that shall not be taxed by the other contracting country in similar
cases. The 5% rate applies in other cases.
The ownership threshold for the 10% rate is 30%. The 15% rate applies in other cases.
The ownership threshold for the 0% rate is 25% (during the latest two calendar years), provided that
such dividends are tax exempt in the recipient company country. The direct ownership threshold for
the 5% rate is 10%. The 15% rate applies in other cases.
The 5% rate applies if the company receiving dividends has directly owned at least 10% of the
capital (representing at least USD 100,000) of the company paying dividends for at least 12 months.
The 10% rate applies in other cases.
The 5% rate applies if the capital invested by the company receiving the dividends exceeds USD
100,000. The 10% rate applies in other cases.
The ownership threshold for the 5% non-portfolio rate is 10%. The 0% rate applies if the dividends
out of which the profits are paid have been effectively taxed at the normal rate for profits tax and the
dividends are exempt income to the Dutch recipient. The 15% rate applies in other cases.
The ownership threshold for the 0% rate is 25% (during the latest two calendar years), provided
that such dividends are tax exempt in the recipient company country. The 10% rate applies in other
cases.
The 5% rate applies if the recipient company directly holds at least 25% of the capital of the paying
company and the capital invested exceeds 200,000 Swiss francs (CHF). The 15% rate applies in
other cases.
The 5% rate applies if the recipient company directly or indirectly owns at least 25% of the capital
of the company paying dividends and the capital invested is at least 1 million pound sterling (GBP).
The 15% rate applies to the income derived directly or indirectly from immovable property by an
investment that distributes most of this income annually and income from such immovable property
is exempted from tax. The 10% rate applies in other cases.
Tax administration
Taxable period
In Armenia, the taxable period is the calendar year.
Tax returns
The annual CIT return for resident entities must be filed by 15 April.
Payment of tax
The tax corresponding to the CIT return for resident entities is payable by 25 April.
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73
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Taxpayers are also required to make advance CIT payments by the 15th day of the last
month of each quarter. Each advance payment is equal to 18.75% of the CIT paid for the
previous year. For payments before the previous years tax is calculated (e.g. January to
March), tax is paid based on the last filed tax return, and an adjustment is made in the
first advance tax payment made after the previous years tax is calculated to correct the
amount paid. If advance payments exceed the CIT liability for the year, the excess may
be refunded.
Branches of foreign companies pay advance CIT biannually, but only if their CIT for the
preceding year exceeded AMD 2 million. Each advance payment is equal to one-fourth of
the CIT paid for the previous year. The annual tax return for branches is filed by 15 April.
The corresponding tax is payable by 25 April.
Tax audit process

Risk based audits
For the purposes of planning audits, the authorities develop risk criteria that are
approved by the Armenian government. Based on the risk criteria, entities are classified
into the following three categories:
High risk entities.
Medium risk entities.
Low risk entities.
The authorities should approve the audit plan (list of audit targets) for the following
year before 1 December or 1 July of the preceding year. The list of audit targets is
published during the three days after the audit plan has been approved.
Tax audits
The tax authorities may carry out scheduled audits a maximum of once each year for
high risk taxpayers, once each three years for medium risk taxpayers, and once each five
years for low risk taxpayers.
Business entities must be notified of the audit in writing at least three days before the
scheduled audit.
For normal business entities, the scheduled audit should be carried out within 15
business days, although the period may be extended by up to ten days. For companies
whose annual revenue exceeds AMD 3 billion, the period may be extended by up to 75
business days.
The actual period of the inspection for normal business entities should not exceed 30
business days and 90 business days for large companies.
Before starting an audit, the tax inspector must present a written order to the taxpayer
outlining the scope and period of the tax audit. The written order specifies the names of
the officials who may participate in the audit.
There are no specific topics of focus for the tax authorities. In practice, the tax
authorities perform a comprehensive audit of the taxpayers books, covering all taxes
and mandatory payments.
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Armenia
Aruba
PwC contact
Hans Ruiter
L.G. Smith Boulevard 62
Oranjestad, Aruba
Tel: +1 297 522 1647
Extension of temporary investment allowance
The government of Aruba has extended the temporary investment allowance of 6%

for the financial years 2013 and 2014. See the Tax credits and incentives section for more
information.
Imputation payment company (IPC) reform
Changes to the IPC were adopted, via beneficial policy, as of 1 July 2013; however,
it is uncertain which date the IPC reform will be applicable from or if there will be a
transitional period for the old IPC regime. See the Tax credits and incentives section for
more information.
Special zone in San Nicolas
To successfully promote the investment climate in Aruba, a special zone has been
established in San Nicolas, Aruba. See the Tax credits and incentives section for more
information.
Deductibility of interest from the purchasing of local participation
Interest costs due in connection with the financing of an acquisition of a local

participation are fully deductible from the profit, provided that the interest costs will
not be deductible in the first two years after acquiring the participation. From year three
(X+3), the interest costs of the first two years can be deducted from the profit in three
equal parts (in year X+3, X+4, and X+5). The interest costs due from the third year are
fully deductible. This scheme applies as of financial year 2013.

Resident companies are taxed on their worldwide income. Non-resident companies are
taxed on the following Aruba-source income:
Profits allocated to a permanent establishment (PE) or permanent representative in
Aruba.
Profits from real estate located in Aruba.
Profits on loans secured by a mortgage on real estate located in Aruba.
Aruba has a flat corporate income tax (CIT) rate of 28%. Aruba also has special tax
regimes (e.g. the imputation payment company [IPC], the Aruba exempt company,
the fiscal transparent company, the free zone company, the so-called oil refinery or oil
terminal regime), which are ultimately taxed at a lower tax rate.For a full discussion of
these special tax regimes, see the Tax credits and incentives section.
CIT is levied on the income as reflected in the profit and loss statement less any
allowable deductions based on Aruba tax and case law.
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75
Aruba
Corporate residence
The place of residency of a corporation, association, society, foundation, or body is
determined based on the circumstances. If the aforementioned entities are managed
and controlled in Aruba, they will, in principle, be deemed to be resident in Aruba. If the
legal form of an entity is governed by the Aruban law, then its place of residency will be
considered continuously to be in Aruba.
If a foreign entity carries on a business through a PE or a permanent representative in

Aruba, it will be subject to CIT in Aruba. While Aruba does not have rules and regulation
as to the definition and interpretation of the term permanent establishment, a PE is
deemed to exist if the place of execution of a building site or construction, excavation,
maintenance, cleaning, assembly, or installation activities surpasses a period of 30
days. The memorandum of explanation refers to the commentary on Article 5 of the
Organisation for Economic Co-operation and Development (OECD) model convention
for the definition and interpretation of the term permanent establishment.
Other taxes
Turnover tax
Aruba does not have a value-added tax (VAT) or sales tax, but it does have a business
turnover tax. Turnover tax is levied at the rate of 1.5% on the delivery of goods or
services rendered in Aruba. Goods that are imported into Aruba are not subject to
turnover tax. A turnover tax exemption is applicable on exports. The exemption is
applicable if the entrepreneur has asserted that the turnover is realised in connection
with the delivery of goods to customers located outside of Aruba, where the goods in
connection with the delivery are sent or transported to a destination outside Aruba.
Goods are all physical objects as well as electricity, gas, heating, cooling, and such.
Services are all performances rendered against payment. A payment is defined as all
proceeds in connection with the delivery of goods or services rendered. If a payment is
not completely made via money, the fair market value of the compensation should be
taken into account.
In the case of goods, the place of the taxable event is either where the transportation
starts (if sold abroad) or at the physical location of the goods at the moment it is
delivered. The place of the taxable event with regard to services is generally the place
where the entrepreneur is established or from where one has a PE from which the
service is rendered. As an exception to the aforementioned general rule, the place of
the taxable event for certain services (e.g. services related to a real property) is the
place where the actual services are rendered (e.g. the place where the real property is
situated).
Some exemptions apply. For example, no turnover tax is levied on the sale of immovable
property if it is also subject to transfer tax. Furthermore, exemptions also apply to
interest received or payments for hotel rooms or leasing of apartments (insofar as room
tax has been paid on the proceeds) and casino revenues (insofar as gambling duties are
due on these revenues).
The turnover tax is due within 15 days of the calendar month following the calendar
month over which the turnover tax is due. A turnover tax return must be submitted to
the tax authorities together with payment of the amount due.
76
Aruba
Aruba
Import duties
Import duties are imposed by a tariff, which is set as a percentage of the cost, insurance,
and freight (CIF) value of the product. A classification rule has been published that
categorises various imported products into groups. A tariff ranging from 0% to 50% is
levied on the various groups of products.
Excise duties
Excise duties are imposed on products such as spirits, cigarettes, mineral oil, and
distillery. The taxable base of the excise duties is based on either the weight, volume,
and/or the amount of the aforementioned products.
Ground tax
A person or entity that, as of 1 January of each year, owns real estate in Aruba or uses
real estate based on property rights is subject to ground tax. The ground tax is levied on
the registered value, which is determined once every five years by the tax authorities,
and can only be protested in the first year of the aforementioned period (taking into
account the two month objection period as of the date of the assessment). The rate
amounts to 0.4% of the registered value of the real estate minus a general exemption
of 60,000 Aruban florins (AWG). If the real estate is not used or is empty for more than
six months in a year, a reduction in the ground tax due can be requested from the tax
authorities.
Real estate transfer tax
If real estate situated in Aruba is transferred, the buyer of the real estate must pay
transfer tax on the sales price of the real estate (unless the value registered at the tax
authorities is higher, in which case the registered value is the basis for the levy). The
rate for the transfer of the legal ownership of real estate with a value not exceeding AWG
250,000 is 3%. The rate for the transfer of the legal ownership of real estate with a value
exceeding AWG 250,000 is 6% (due on the total amount).
If shares in a real estate company are sold, no transfer tax is due.
Stamp taxes
Stamp taxes are, in principle, due on all documents as indicated in the Stamp State
Ordinance. In practice, it is usually only levied on the documents used in the course of a
legal suit.
Registration taxes
Aruba does not impose registration taxes.
Foreign exchange commission (FEC)
An FEC is due when residents make a payment abroad in connection with certain legal
transactions. The FEC is calculated as 1.3% of the payment abroad. Based on the State
Ordinance, a payment abroad is considered:
a payment with local currency or a payment from a florin account, whether or not by
electronic transfer
a payment with foreign currency or a payment from a foreign currency account,
whether or not by electronic transfer, or
a payment from a foreign currency account held abroad or from an inter-company
account held by a person or entity abroad, whether or not by electronic transfer.
FEC is due to the extent the abovementioned payment is a result of one or more of the
following legal transactions:
the purchase of foreign instruments of payments or foreign monetary instruments
obtaining control over receivables in one or more foreign currencies, or
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77
Aruba
the crediting of an account in name of a non-resident of Aruba held at a foreign
exchange bank or an institution abroad.
Furthermore, FEC will be levied on the purchase of foreign currencies with Aruban
florins.
According to the policy of the Central Bank of Aruba, an exemption for the FEC applies
when cash is transferred to a foreign bank account of an Aruban resident. In order to
apply for this exemption, certain formalities must be met. First, the foreign bank account
of the Aruba resident must be registered at the Central Bank of Aruba. Secondly, the
Central Bank of Aruba must grant a so-called exemption for requirements. In addition,
certain overviews of transactions regarding the foreign bank account must be filed with
the Central Bank of Aruba on a quarterly basis.
Tourist levy
The tourist levy rate is 9.5% of the compensation (including charges) that the tourist
pays for the use of lodging or a hotel room.
The taxable base for the tourist levy on timeshare units is set at:
AWG 179 per day for studio units.
AWG 193.95 per day for one bedroom units.
AWG 223.75 per day for other than the abovementioned units.
The abovementioned fixed fees are not applicable in the event the time-share unit is
made available to other guests that are not time-share guests. In that case, 9.5% tourist
levy is due per day on the compensation paid by other guests for the use of the unit.
With regard to all-inclusive packages, the taxable base is set on 50% of the price of the
all-inclusive package with a minimum of AWG 162 per day, increased with charges (e.g.
service charges and energy charges).
Local citizens registered in the Aruban municipal register are not subject to the tourist
levy. The owner of a condominium is also exempted from the tourist levy.
Wage tax
Wage tax is an advance levy to the personal income tax for employees. Wage tax has
to be withheld as soon as an employment exists, and the employer is, in principle, the
withholding agent. If employment involves a foreign employer, this employer only has to
withhold wage tax if the employer has a PE in Aruba. The tax authority may, however,
appoint a foreign employer as a withholding agent even if there is no PE.
Social security premiums
In Aruba, the following social security premiums are levied in connection with the wage
tax.
Old Age Pension/Widow and Orphans Pension (AOV/AWW) premium
The AOV/AWW premium is paid by the employer and employee. The maximum
premium income for the AOV/AWW is AWG 85,000.
As of 1 January 2014, the premium rate for the AOV is 13.5%. The employers part
is 9.5%, and the employees part is 4%. As of 1 January 2015, the premium rate for
the AOV will increase to 14.5%. The employers part will increase to 10%, and the
employees part will increase to 4.5%.
The premium rate for the AWW is 1%.
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Aruba
Aruba
General health insurance (AZV) premium
The AZV premium, which is paid by the employer and the employee, is 11.5%, up to a
maximum of AWG 9,775. The premium paid by the employer is 8.9%, up to a maximum
of AWG 7,565. The premium paid by the employee is 2.6%, up to a maximum of AWG
2,210. The aforementioned percentages are to be calculated over the premium income,
which is maximised at AWG 85,000.
Sickness, accident, and cessantia insurance premium
The sickness, accident, and cessantia insurance premium, which is only paid by the
employer, consists of three parts: 2.65% for sickness insurance, a flexible rate of 0.25%
up to 2.5% for accident insurance, and an amount of AWG 40 per employee year for
the cessantia insurance. The rate of the accident insurance is dependent on the risk of
the work performed. The premium income for the sickness and accident insurance is
maximised to a wage of AWG65,052. The cessantia is, in principle, paid upon dismissal
of the employee by the employer, unless the dismissal is due to acts of the employee.
Branch income
Branch income is, in principle, determined according to the separate entity approach.
Branches of foreign insurance companies apply a specific profit determination method.
Furthermore, the transfer of profits to the head office is not subject to taxation.
Branch profits are subject to the normal CIT rate of 28%.
Inventory valuation
Inventories may generally be stated on a last in first out (LIFO) or first in first out (FIFO)
basis, provided the method chosen conforms to sound business practices. Conformity of
book and tax reporting is not required.
Capital gains
Capital gains are taxed as ordinary income. However, capital gains realised on the
disposal of a shareholding qualifying for the participation exemption are tax exempt.
The participation exemption applies, in general, if an Aruban company holds shares
or participation certificates in companies, associations, or foundations that carry
on a business. If shares or participation certificates are held in a foreign entity, the
participation exemption only applies if they are not held as an investment and the
foreign entity is subject to a tax on profits.
The capital gain realised on the disposal of assets may be carried over to a special tax
deferral reinvestment reserve but must be deducted from the acquisition costs of the
new asset. In principle, this reinvestment reserve cannot be maintained for more than
four consecutive years. If the reserve has not been used after four years, the remainder
will be subject to taxation.
Capital losses are tax-deductible unless these losses are incurred on shares to which the
participation exemption is applicable.
Dividend income
Provided the conditions of the participation exemption are met (see the Capital gains
section above), an Aruban company is exempt from taxation on all benefits from the
participation, including inter-company (cash) dividends.
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Costs made in connection with the ownership of the participation (i.e. administration
costs, interest, management expenses) are not deductible from the taxable result of the
Aruba parent company.
Stock dividends
Stock dividends are allowed and treated as regular dividend income. The stocks will be
valued at market value for tax purposes.
Interest income
Interest income is taxed as ordinary income.
Foreign income
A resident taxpayer is subject to CIT on its worldwide income. Double taxation of certain
foreign-source income is avoided by means of the exemption method. If there is no legal
possibility to exempt income and prevent double taxation, the foreign tax paid can be
claimed as a deduction.
An Aruba corporation is taxed on foreign interest and other income as earned, and on
foreign dividends when received. Undistributed income of foreign subsidiaries is not
taxable.
The profits of a PE in Curaao, St. Maarten,or the Netherlands, including the Caribbean
Netherlands,are tax exempt in Aruba based on the tax arrangement with the Kingdom
of the Netherlands. In the case of a PE outside the Kingdom of the Netherlands (i.e.
other than the Netherlands,Aruba, Curaao, and St. Maarten), the income realised
through the PE, after deduction of foreign taxes, is tax exempt.
Deductions
Depreciation
Depreciation of tangible fixed assets, excluding land, is taken over the estimated useful
life of the asset. The tax authority has issued the following estimated depreciation table:
Assets
Buildings
Renovation
Inventory
Computer:
Hardware
Mainframe
Machinery and installations
Transportation:
Cars
Rental cars
Trucks and buses
Start-up costs
Goodwill

2/2.5
10
10/20
Residual value (%)

10
0
10
33/50
10/12.5
10
0
0
10
20
33
10
20
20
10
15
15
0
0
The basis for depreciation includes all costs incurred with the purchase of an asset
less the residual value. The straight-line method is customary; however, the decliningbalance method is also acceptable.
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As of 1 June 2010, accelerated depreciation has been introduced on assets that are used
in the course of an industrial business and whose acquisition or production costs are
above AWG 90 million. Aforementioned assets may be depreciated in ten equal annual
parts. Note that IPCs cant apply this facility.
Interest expenses
If interest or other payments (e.g. remunerations paid for the use of material and/or
immaterial goods or services rendered) are made to entities, these payments should
be made at arms length. If the transaction is not at arms length, only the arms-length
payment may be deducted from taxable income.
Even if the transaction is at arms length, the interest or other payments may still not be
deductible from the taxable result of the Aruban company unless the Aruban company
asserts that one of the following circumstances is applicable:
The receiving company is not affiliated (see criteria below) to the Aruban company.
The receiving company is subject to an effective tax rate of at least 15%.
The shares in the receiving company are all held directly or indirectly by a company
whose shares (for at least 50% of the outstanding shares and representing at least
50% of the voting rights) are listed on a qualified stock exchange.
An affiliation with the taxpayer is deemed to exist in the following cases:
The taxpayer has an interest of at least one third in another entity.
An individual or entity has an interest of at least one third in the taxpayer.
A third party has an interest of at least one third in another entity, while this third
party also has an interest of at least one third in the taxpayer.
If an at arms-length payment is made to an affiliated company that is subject to taxation
but pays an effective tax rate of less than 15%, only 75% of the payment made is allowed
as a deduction.
Bad debt
It is possible to make a provision for future expenses with a cause existing on the balance
sheet of the tax year in question; consequently, a provision may be made for bad debts.
The allowable gift deduction is AWG 50,000. The institutionmust be established in

Aruba and serve one of the following interests:

Religious.
Charity.
Cultural.
Sportive.
Scientific.
Public interest.
Fines and penalties
Fines imposed by an Aruban criminal judge, amounts paid to the state to prevent
criminal prosecution, and fines and penalties imposed in accordance to the State
Ordinance on General Taxes are not tax deductible.
Taxes
Taxes paid by the company, with the exception of CIT, are tax-deductible. Taxes paid by
the company with respect to the purchase of an asset (e.g. real estate transfer tax paid
while obtaining real estate) should be capitalised in the cost of the asset.
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A net operating loss may be carried forward to the five years following the tax year in
which the loss was incurred. If the net operating loss has not been offset against profits
within this period, the remaining net operating losses will expire. Net operating losses
incurred by an IPC and companies operating an oil refinery or oil terminal as of 1
January 2010 may be carried forward indefinitely. Carrybacks of net operating losses are
not permitted.
If interest or other payments (e.g. remunerations paid for the use of material and/or
immaterial goods or services rendered) are made to entities, these payments should
be made at arms length. If the transaction is not at arms length, only the arms-length
payment may be deducted from the taxable income.
Even if the transaction is at arms length, the interest or other payments may still not be
deductible from the taxable result of the Aruban company unless the Aruban company
asserts that one of the following circumstances is applicable:
The receiving company is not affiliated (see below) to the Aruban company.
The receiving company is subject to an effective tax rate of at least 15%.
The shares in the receiving company are all held directly or indirectly by a company
whose shares (for at least 50% of the outstanding shares and representing at least
50% of the voting rights) are listed at a qualified stock exchange.
An affiliation with the taxpayer is deemed to exist in each of the following cases:
The taxpayer has an interest of at least 1/3 in another entity.
An individual or entity has an interest of at least 1/3 in the taxpayer.
A third party has an interest of at least 1/3 in another entity, while this third party also
has an interest of at least 1/3 in the taxpayer.
If an arms-length payment is made to an affiliated company that is subject to taxation
but pays an effective tax rate of less than 15%, only 75% of the payment made is allowed
as a deduction.
Group taxation
Fiscal unity
Based on a policy of the Aruban tax authorities, Aruban resident public limited
companies (naamloze vennootschap or NV) with at least 99% of the shares in other
Aruban resident NVs can file a consolidated tax return (i.e. fiscal unity). In order to
apply for this facility, a request must be filed with the Aruban tax authorities. Certain
conditions must be met for the application of this regime, for instance the companies
in the fiscal unity must be of the same tax regime. Advantages of this facility are that
the recognition of inter-company profits may be deferred and losses may be offset with
profits of other companies within the fiscal unity.
Transfer pricing
The arms-length principle (ALP) rule is codified in the Aruban State Ordinance Profit
Tax (SOPT). If a corporate entity or individual participates, directly or indirectly, in
the management, supervision, or the capital of two or more corporate entities, the
conditions related to all transactions between these affiliated parties should be at
arms length. The ALP is applicable on all transfer pricing between affiliated companies
with regard to all mutual legal relations (e.g. purchase prices, management fees,
remunerations for services provided, royalty payments). The conditions should be
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business like, whereas the same conditions should apply as would have if the same
transaction had taken place with a third party.
A documentation obligation is applicable in the SOPT. The explanatory notes on the

bill state that for the meaning and application of the ALP and the documentation
obligation, the OECD guidelines for Multinational Enterprises and Tax Administration
should be considered. The documentation obligation is applicable at the moment that a
transaction takes place.
Non-compliance to the documentation obligation leads to a reversed burden of proof
to the taxpayer. From the explanatory notes of the profit tax return forms, it seems that
the tax authorities require, as a minimum amount of documentation about the transfer
pricing method used, the reason why the method was chosen and a substantiation of the
manner of how the price was determined.
In light of the extensive OECD guidelines and considering the small-scale economy of
Aruba, it is unclear to what extent the aforementioned requirements and the OECD
guidelines should be followed. Up to this moment, the legislature has not provided
detailed implementation guidelines on the documentation obligation.
Thin capitalisation
Aruba does not have thin capitalisation rules.

Aruba does not have CFC legislation.

Aruban CIT legislation no longer provides tax incentives. The legislation does, however,
provide incentives for certain special tax regimes that can be used to reduce the overall
tax liability, such as the IPC, the Aruba exempt company, the fiscal transparent company,
the free zone company, and the so-called oil refinery and oil terminal regime.
Temporary investment allowance
The government of Aruba has extended the temporary investment allowance of 6%

for the financial years 2013 and 2014. The investment allowance is a deduction on the
taxable profit of a company and is applicable on investments greater then AWG 5,000
that are made in a financial year. One of the conditions is that the investment must take
place with an Aruban company or entrepreneur. An Aruban company or entrepreneur
includes an individual or legal entity that is respectively established and carries out
business in Aruba. PEs of foreign legal entities are also included in the definition of an
Aruban company for investment allowance purposes. Legal entities that are incorporated
for the sole purpose of making investments in the context of the investment allowance
do not qualify as an Aruban company or entrepreneur for investment allowance
purposes.
Certain investments do not qualify for the investment allowance (e.g. land, houses, and
cars for personal use; stocks and shares; goodwill; animals; investments designated for
the use by third parties or as part of the exploitation of an oil refinery or an oil terminal).
Furthermore, there are also certain transactions that do not qualify for the investment
allowance (e.g. certain inter-company transactions).
The investment allowance does not apply to investments by oil refineries, free zone
companies, and IPCs.
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If an investment on which the investment allowance was claimed is sold within six years
after the start of the calendar year in which the investment took place, a capital disposal
charge of 6% of the sales price is due.
Maintenance reserve for timeshare resorts
Timeshare resorts are allowed to form a maintenance reserve for repairs and
maintenance of the resort. The aforementioned reserve will be added back to the taxable
income after ten years if the repairs and or maintenance did not take place. Maintenance
reserves formed in earlier years will be recognised.
The imputation payment company (IPC)
The IPC is, in principle, an NV or a limited liability company (vennootschap met beperkte
aansprakelijkheid or VBA) that pays the regular CIT rate of 28%. However, when certain
stringent conditions are met, the shareholder of the IPC can request an imputation
payment of 26/72 of the (formal) dividend distributed. Provided that the 0% dividend
withholding tax (WHT) is applicable, the effective tax rate can be lowered to 2%.
In order to qualify for the IPC status, the following requirements must be met:
The IPC must perform qualifying activities (see below) in Aruba.
An Aruba-resident individual must be a member of the board of managing directors
of the IPC.
The articles of association state that the shares of the IPC are registered and that the
directors keep a shareholders registry in which all shareholders are registered.
The articles of association state that the financial statements are drawn up according
to internationally accepted principles (like IAS or GAAP) and an audit by a qualified
(group of) independent certified public accountant(s) is necessary.
The board of managing directors must notify the tax authorities within a restricted
period, and after the dividend has been distributed, that the shareholder will claim
the imputation payment.
An independent certified public accountant must provide a yearly opinion regarding the
compliance of the abovementioned first three requirements for the IPC status.
The shareholder must also meet certain requirements before the imputation payment
can be granted, including:
The shareholder must hold the (economic and legal ownership of the) shares for an
uninterrupted period of at least 12 months to be eligible for the imputation payment.
The shareholder must file a request (with several enclosures) with the tax authorities
to receive the imputation payment.
The activities of the IPC are limited. The IPC company is not allowed to conduct
non-qualified activities, no matter how small. The following activities are regarded as
qualified activities:
Exploitation of quality hotels. A quality hotel exists when the average revenue per
available room (RevPar) amounts to at least AWG 354, the hotel has a hotel licence,
and is operated at its own risk and account. Note that the RevPar can be changed
annually.
Exploitation of shipping enterprises.
Exploitation of aviation enterprises.
Developing, acquiring, holding, maintaining, and licensing of intellectual and
industrial ownership rights.
Insuring special entrepreneurial risks (captive insurance).
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Holding of shares or other participation certificates. The IPC may not hold more than
5% of low taxed shares or other participation certificates in foreign companies. The
aforementioned are low taxed if they are subject to a profit tax rate of at least 14%.
Active financing (not being a credit institution) of other enterprises or companies,
whether or not intra-group.
Investing of funds, except in real estate and funds that are put at the disposal of group
companies.
Exploitation of a company aimed at generating sustainable energy.
Beneficial policy 2013
On 1 July 2013, the government of Aruba published a beneficial policy that approves
further amendments of certain taxes in anticipation of the amendment of the respective
State Ordinances.
The following changes are adopted, via beneficial policy, as of 1 July 2013; however,
it is uncertain which date the IPC reform will be applicable from or if there will be a
transitional period for the old IPC regime:
The general CIT rate for the IPC will be 10%.
The new IPC has an exemption for dividend WHT. This would imply that the current
refund system would not apply anymore.
Hotels are classified in four categories for CIT. The applicable CIT rate will depend on
the RevPar. The four categories are:
Category I: RevPar USD 185: the CIT rate is 10%.
Category II: RevPar USD 175: the CIT rate is 12%.
Category III: RevPar USD 160: the CIT rate is 15%.
Category IV: Diamond status: the CIT rate is 12%.
The following additional requirements for the use of the IPC regime by hotels are
applicable:
The hotel should be in possession of an earth check or similar certificate as of
January 2015.
A yearly investment must be made by the hotel to improve the sustainability of the
hotel, depending on the category in which the hotel can be classified.
The Aruba exempt company (AVV)
The Aruba exempt company (Aruba Vrijgestelde Vennootschap or AVV) is a particular

form of a NV and is often used for international tax planning purposes. The AVV is, in
principle, subject to CIT against the normal CIT rate and the dividend WHT. However,
the profit of the AVV may be exempted completely from CIT and dividend WHT if its
activities are limited to one or more of the following qualified activities:
Holding of shares or other participation certificates. The IPC may not hold more than
5% of low-taxed shares or other participation certificates in foreign companies. The
aforementioned are low taxed if they are subject to a profit tax rate of at least 14%.
Financing (not being a credit institution) of other enterprises or companies, whether
or not intra-group.
Investing of funds, except in real estate.
Licensing of intellectual and industrial ownership rights.
As mentioned below, the AVV may, if certain conditions are met, also opt for the fiscal
transparency regime for which it will not be subject to CIT and dividend WHT. In this
case, the AVV is not required to perform the abovementioned qualified activities in order
to enjoy the fiscal transparency status.
Fiscal transparent company
An NV, VBA, or AVV may opt, if certain conditions are met, to be treated as a partnership
(fiscal transparent company). The fiscal transparent company is not subject to CIT,
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unless the fiscal transparent company carries on a business in Aruba. In that case, the
shareholder will be subject to CIT with regard to the business it carries through a PE.
Dividends distributed by the fiscal transparent company to its shareholder are not
subject to dividend WHT, since due to its transparency, all income and asset and
liabilities are deemed to be attributed to its shareholder. The main requirements for
this status is that all the companys shares must be registered, and a notification for the
application for this status must be filed with the tax authorities within one month after
the company has been incorporated.
The free zone company
The free zone is a specially designated area in Aruba where goods can be stored,
processed, adapted, assembled, packaged, displayed, spread out, or subject to other
treatments or where services can be provided.
Services include activities consisting of maintenance or repairs of goods of a non-Aruba
enterprise, maintenance or repairs abroad of goods of a non-Aruba enterprise, or
providing advice to or research on behalf of a non-Aruba enterprise/institution/private
person. Financial services, however, are not allowed.
Conditions
A free zone company has to be a limited liability company that is incorporated according
to the laws of Aruba but does not have to be established in the actual free zone. The free
zone company is also only allowed to perform qualifying activities in the free zone (a
designated area in Aruba). If activities are performed that are not allowed, the company
may be banned from the free zone.
Taxation
All profits generated from activities abroad are subject to 2% CIT. The free zone
company must have a licence to perform activities for residents. All activities
performed for residents are subject to the regular CIT rate of 28%. The free zone
company is allowed to generate a maximum of 25% of its turnover with local
consumers.
Based on the beneficial policy 2013, the standard of 25/75% local turnover can be
changed to 50/50% in certain cases (e.g. turnover related to sustainable energy,
medical tourism, sustainable transport, airline companies, sustainable supply of
food, shipping companies, maintenance and repairs). Permission from the Minister of
Finance must be acquired.
No import duties are due if the products are imported, used in the activities in the
free zone in Aruba, and exported abroad.
No turnover tax is due by the free zone company on cross-border supply of goods
and/or the rendering of services.
Based on the beneficial policy 2013, companies established in the free zone are
exempt from dividend WHT.
On request, the free zone company can be exempted from 1.3% foreign exchange
commission (subject to approval of the Central Bank of Aruba). Normally, this
approval is a formality and no foreign exchange commission is due by the free zone
company.
Other characteristics
The free zone company does not have to apply for a business licence or an establishment
licence. Furthermore, a free zone company is subject to a so-called free zone facility
charge of 0.75% of the sales over its turnover.
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Special zone in San Nicolas
To successfully promote the investment climate in Aruba, a special zone has been
established in San Nicolas, Aruba. If a legal person qualifies as a special zone company, it
will be eligible for the following (tax) facilities:

15% CIT for activities that are particularly aimed at the local market.
10% CIT for activities that are more than 75% aimed at exports and hotels.
2% CIT for reinsurance companies
2% CIT for activities related to sustainable development, green energy, and
agriculture, provided that at least 75% of the sales revenue is local.
Exemption from dividend WHT.
50% discount on the property tax payable for a period of five years.
Exemption from turnover tax for the business turnover of companies with a special
zone qualification where the business turnover is realised by services to foreign
residents or established entrepreneurs.
The Minister of Infrastructure may set a lower land value for investors.
The Central Bank of Aruba may grant an exemption of payment of foreign exchange
commission to a company that qualifies as a special zone company, based on a written
and reasoned request, provided that the payment is related to other activities than
that of supply to domestic customers. The exemption may be subject to conditions,
which are subject to change at any time.
The fringe benefits regulation (including expatriate regulation) will apply.
An additional investment allowance of 10% is applicable on all investments in assets,
regardless if purchased from local or foreign suppliers. For companies that apply the
transitional arrangements for companies already established in the district of San
Nicolas, the 10% additional investment allowance applies on a minimum investment
of AWG 50,000. In total, an investment allowance of 16% (6% existing temporary
investment) is applicable if conditions are met. If the temporary investment is
suspended, the additional investment allowance of 10% for the special zone will
remain valid.
The additional investment allowance will be reversed if the assets are disposed of or
otherwise leave the capital of the company within a period of six years. The normal
rules for the disposal charge will apply.
This regime is currently based on the beneficial policy 2013 and will apply for a period of
at least ten years.
Oil refinery or oil terminal regime
In connection with the aim of the Aruba government to improve the investment
climate for the exploitation of oil refineries or oil terminals, a so-called oil refinery or
oil terminal regime was introduced as of 1 June 2010. The regime regards application,
under certain conditions, of a lower CIT rate. Oil refineries or terminals whose shares
are all held directly or indirectly by a company listed on a stock exchange recognised by
the Minister are subject to a 7% CIT rate, while all other oil refineries or oil terminals are
subject to a rate of 12%.
An unlimited carryforward loss compensation applies for companies operating an oil
refinery or oil terminal, and a 0% dividend tax rate applies for distributions from profits
from the operation of an oil refinery and oil terminal.
Foreign tax credit
A tax credit applies to income from abroad that has been subject to tax at source or to
another tax on income. The tax credit is allowed for the income tax levied abroad, but
shall not exceed the Aruba profit tax that is attributable to that foreign income.
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Withholding taxes
Dividend WHT
A dividend WHT is levied on all (formal and non-formal) dividend distributions of

Aruba-resident entities. The tax rate is:
10% of the dividend distribution.
5% of the dividend distribution, if the shares (at least 50% of the outstanding shares
and representing at least 50% of the voting rights) of the distributing company are
listed on a qualified stock exchange. The same tax rate applies if all the shares of
the distributing entity are held directly or indirectly by a company whose shares are
(at least 50% of the outstanding shares and representing at least 50% of the voting
rights) listed on a qualified stock exchange.
0% if the participation exemption (see Capital gains in the Income determination
section) is applicable to the receiving company.
Dividends distributed from Aruba to countries within the Dutch Kingdom are subject to
the Regulation for the Dutch Kingdom (the Regulation).
In certain situations, the Regulation reduces the rate of the dividend WHT from 10% to
7.5% or even 5%. The dividend WHT can be reduced to:
7.5% if the parent company owns at least 25% of the paid-in capital of the
distributing company.
5% if the parent company owns at least 25% of the paid-in capital of the distributing
company and the dividend at the parent company level is subject to a profit tax of at
least 5.5%.
If a company is incorporated under Aruba law and transfers its factual place of
management to another country, all dividend distributions by this relocated company
will remain subject to the Aruba dividend WHT.
Dividend distributions include, among others:

Formal dividend distributions.

Liquidation payment.
Bonus shares.
Paying back of share capital, unless strict conditions are met.
Imputation payment.
Formal requirements
Within 15 days after a dividend becomes payable, a dividend WHT return must be filed
together with payment of the amount due. A dividend is payable if it is at the disposal of
the shareholder (i.e. the board of directors of the distributing company does not have to
take any more action in order for the shareholder to claim the dividend). A dividend is
also payable if the debt becomes interest bearing because of the distribution.
A statement of approval of the Central Bank of Aruba is required if dividends are
distributed to a foreign shareholder. If the dividend exceeds AWG 750,000, a licence
from the Central Bank of Aruba is required.
Tax administration
Taxable period
Generally, the tax year is equal to the calendar year. However, corporate taxpayers may
deviate from this by adopting a different financial year.
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Tax returns
Once a CIT return is issued by the tax authorities, the taxpayer is obligated to file the tax
return within two months after date of issuance. If, within six months after the tax year
has ended, no tax return has been issued, the taxpayer is obligated to request a return
within 15 days after the six months period. It may be argued that this obligation does
not exist if a taxpayer is not subject to taxation.
If the final CIT return cannot be filed within the required two-month period, a request
for an extension may be filed. The tax inspector may grant an extension for a maximum
period of 12 months.
Payment of tax
CIT is due upon receipt of an assessment. The amount of tax due should be paid within
two months after the date of the assessment.
The dividend WHT is due within 15 days after the dividend has become payable. A
dividend WHT return must be submitted to the tax authorities together with payment of
the amount due.
Penalties
The State Ordinance on General Taxes stipulates in which cases a penalty can be
imposed. The Aruban penalty system can be divided into the following two categories.
Omissions
The tax authorities can impose penalties in the event the taxpayer does not (timely)
file a return and in the event the taxpayer does not or partially pay the amounts due
(timely).
The maximum penalty that can be imposed for not filing an assessment tax return (on
time) varies between AWG 500 and AWG 10,000, with a maximum of 5% of the tax due.
The minimum penalty amounts to AWG 250.
The penalty for omissions in the filing of taxes on return, such as the wage tax and
dividend WHT, by the due date amounts to AWG 500. The penalty for not paying the
amounts due by the due date amounts up to a maximum of AWG 10,000.
If the withholding agent for wage tax purposes does not provide an employee with a
wage tax card or fails to have the proper employee documentation on file, a penalty of
up to a maximum of AWG 10,000 can be imposed.
Gross negligence or intent
Gross negligence is deemed present if the reprehensible behaviour of a taxpayer results

in less taxes being paid or levied than otherwise would have been the case. The penalty
amounts to 25% of the additional tax due.
Intent is defined as a wilful and knowing act resulting in less or no taxes being paid or
levied (timely). Conditional intent is defined as wilfully and knowingly accepting the fair
chance that a course of action or omission results in less or no tax being paid or levied
(timely). The penalty amounts to 50% of the additional tax due.
A penalty of 100% of the additional tax due can be levied in case of repetition, fraud, or
substantial amounts not being levied or paid.
Tax audit process
There is no specific cycle for audits. Depending on a desk review of the tax returns of the
last couple of years, an audit may follow.
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An additional assessment can be imposed, in general, until five years after the tax year.
In cases where the taxpayer is considered to be in bad faith, this period can be extended
up to ten years or, in some cases, up to 12 years (e.g. if the tax differences relate to a
component that is being held in a foreign country) after the tax year.
There are no specific topics of focus. In case an audit is started, each aspect may be
investigated. Often, the audit will not only focus on the profit tax, but also the other tax
obligations, such as turnover tax, wage tax, and social security premiums.
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Australia
PwC contact
Tom Seymour
Riverside Centre
123 Eagle Street
Brisbane, Queensland 4000
Australia
Tel: +61 7 3257 8623
The new Australian government, elected in September 2013, proposes a number of
priority tax reforms, including the repeal of Australias carbon pricing mechanism and
the Minerals Resource Rent Tax (MRRT) with effect from 1 July 2014. Legislation to
implement these proposals has not yet been enacted.
Although a loss carryback regime applies to all companies for tax losses incurred
generally from 1 July 2012 such that a company is able to carry tax losses back to
offset against the prior year taxable profit and obtain a refund of tax previously paid
on the prior year profit through a tax offset mechanism, the newly elected government
has proposed that this measure be repealed with effect from the 2013/14 tax year.
Legislation to implement this proposal has not yet been enacted. See Net operating losses
in the Deductions section for more information.
Australias transfer pricing rules were reformed to improve the integrity and efficiency
of the tax system. The most recent reform, which involved modernising Australias
transfer pricing regime in line with international best practice as set out by the
Organisation for Economic Co-operation and Development (OECD), applies in respect
of income years commencing on or after 29 June 2013. See Transfer pricing in the Group
taxation section for more information.
Australia is in the process of tightening its thin capitalisation regime, which seeks to
limit deductions available for interest and other defined debt deductions for certain
inbound and outbound investors. This was part of a package proposed by the previous
Australian government, intended to protect the corporate tax base from erosion and
loopholes, and will broadly include measures to reduce the safe-harbour debt-toequity ratio from 3:1 to 1.5:1 with effect for income years commencing on or after 1
July 2014. Legislation to implement these proposals has not yet been enacted. See Thin
capitalisation in the Group taxation section for more information.
Companies with annual Australian assessable income (including that of affiliates)
of more than 20 billion Australia dollars (AUD) will no longer be entitled to the 40%
research and development (R&D) tax credit for income years commencing on or after 1
July 2013 under measures currently proposed. See R&D tax credit in the Tax credits and
incentives section for more information.
From an employer perspective, employers are required to contribute funds to a
registered superannuation entity on behalf of an employee at a set minimum percentage
of the employees earnings base (the superannuation guarantee scheme), subject
to limited exceptions. From 1 July 2013, the required superannuation guarantee
percentage was 9.25%, and increases to 9.5% from 1 July 2014. See Superannuation
guarantee levy in the Other taxes section.
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New law requires certain large companies to pay instalments of tax on a monthly basis
(instead of quarterly), commencing from 1 January 2014. This change is being phased in
over three years, commencing with companies with turnover of AUD 1 billion or more.
See Payment of tax in the Tax administration section for more information.
Legislation was enacted in June 2013 that will require the Commissioner of Taxation to
publish limited information about the tax affairs of large corporate taxpayers, including
disclosure of the entitys name, Australian Business Number, total income, taxable
income, and tax payable. The first reporting will cover the 2013/14 tax year, with the
first published data occurring in late 2015. See Payment of tax in the Tax administration
section for more information.

Companies are currently subject to federal tax on their taxable income at a flat rate of
30%. The newly elected government proposes to reduce the corporate tax rate to 28.5%
with effect from 1 July 2015 (legislation to give effect to the rate change has not been
made).
Companies that are residents of Australia are subject to Australian income tax on
their worldwide income. Generally, non-resident companies are subject to Australian
income tax on Australian-sourced income only. However, where a company is resident
in a country with which Australia has concluded a double taxation agreement (DTA),
Australias right to tax business profits is generally limited to profits attributable to a
permanent establishment (PE) in Australia.
Local income taxes
There are no state or municipal taxes on income in Australia.
Corporate residence
A company is a resident of Australia for income tax purposes if it is incorporated in
Australia or, if not incorporated in Australia, it carries on business in Australia and
either (i) its central management and control are in Australia or (ii) its voting power is
controlled by shareholders who are residents of Australia.
The concept of a PE is established in both domestic law and various DTAs that have
been concluded with Australia. Where a company is resident in a country with which
Australia has a DTA, it is important to have regard to the definition of PE contained
therein as this will generally apply in priority to the domestic law.
Broadly, under Australias domestic law, a PE is a place at or through which a person
carries on any business, and includes:
A place where the person is carrying on business through an agent (except where the
agent does not have, or does not habitually exercise, a general authority to negotiate
and conclude contracts on behalf of the person).
A place where the person has, is using, or is installing substantial equipment or
substantial machinery.
A place where the person is engaged in a construction contract.
Where the person is engaged in selling goods manufactured, assembled, processed,
packed, or distributed by another person for, or at or to the order of, the firstmentioned person and either of those persons participates in the management,
control, or capital of the other person or another person participates in the
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management, control, or capital of both of those persons, the place where the goods
are manufactured, assembled, processed, packed, or distributed.
Most DTAs contain a definition of PE that is similar, though not identical, to the
definition under domestic law.
Other taxes
Goods and services tax (GST)
The federal government levies GST at a rate of 10%, and distributes the revenue to
state governments. The GST is a value-added tax (VAT) applied at each level in the
manufacturing and marketing chain and applies to most goods and services, with
registered suppliers getting credits for GST on inputs acquired to make taxable supplies.
Food, with some significant exceptions; exports; most health, medical, and educational
supplies; and some other supplies are GST-free (the equivalent of zero-rated in other
VAT jurisdictions) and so not subject to GST. A registered supplier of a GST-free supply
can recover relevant input tax credits, although the supply is not taxable.
Residential rents, the second or later supply of residential premises, most financial
supplies, and some other supplies are input-taxed (exempt in other VAT jurisdictions)
and are not subject to GST. However, the supplier cannot recover relevant input tax
credits, except that financial suppliers may obtain a reduced input tax credit of 75% of
the GST on the acquisition of certain services.
Health insurance is GST-free. Life insurance is input-taxed. General insurance is taxed.
Reverse charges may apply to services or rights supplied from offshore, where the
recipient is registered or required to be registered, and uses the supply solely or partly
for a non-creditable supply.
Wine equalisation tax (WET)
The federal government levies WET at the wholesale level at a rate of 29%, in addition to
10% GST, which is calculated on the price including the WET, and it applies to wine from
grapes, fruit and certain vegetables, mead, and sake. Retailers do not receive an input
tax credit for WET. A rebate is available to a wine producer of 29% of the wholesale
price (excluding WET or GST) for wholesale sales, and of 29% of the notional wholesale
selling price for retail sales and applications for own use (up to a maximum of AUD
500,000).
Luxury car tax
The luxury car tax is levied by the federal government at the rate of 33% of the value of
the car that exceeds the luxury car tax threshold (AUD 60,316 for the 2013/14 financial
year) and is payable on the GST-exclusive value above the threshold. No input tax credit
is available for luxury car tax, regardless of whether the car is used for business or
private purposes.
Customs duties
Imports into Australia are subject to duties under the Australian Customs Tariff. The top
duty rate is 5%, other than for clothing and finished textiles, which are currently taxed
at 10% (to be reduced to 5% in 2015). A textile, clothing, and footwear (TCF) strategic
investment program will operate until 2015.
Australia currently has comprehensive free trade agreements with Chile, Malaysia,
New Zealand, Singapore, Thailand, and the United States. The Australian government
has recently announced the signing of a free trade agreement with Korea, and the
conclusion of negotiations for a free trade agreement with Japan. In addition, a regional
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free trade agreement between Australia, New Zealand, and Southeast Asian nations
commenced on 1 January 2010, which progressively eliminates all barriers to trade in
goods, services, and investments.
Excise duties
Excise duties are imposed at high levels on beer, spirits, liqueurs, tobacco, cigarettes,
and petroleum products. Excise rates for tobacco and alcohol are indexed bi-annually in
February and August based on movements in the consumer price index (CPI). It is also
proposed that fuel excise duties will be indexed on the same basis from August 2014.
Some examples of current excise rates include:
Beer not exceeding 3% by volume of alcohol packaged in an individual container not
exceeding 48 litres: AUD 39.75 per litre of alcohol calculated on that alcohol content
by which the percentage by volume of alcohol of the goods exceeds 1.15.
Tobacco in stick form not exceeding in weight 0.8 grams per stick actual tobacco
content: AUD 0.40639 per stick.
Petroleum condensate, crude petroleum oil, and diesel: AUD 0.38143 per litre.
Liquefied petroleum gas, other than liquefied petroleum gas exempted from excise
duty: AUD 0.075 per litre.
A fuel tax credit system provides a credit for fuel tax (excise or customs duty) that is
included in the price of taxable fuel. Broadly, credits are available to entities using fuel
in their business and to households using fuel for domestic electricity generation and
heating.
Land tax
All states and territories (except the Northern Territory) impose a tax based on the
unimproved capital value of land. In general, the principal place of residence and land
used for primary production is exempt from land tax.
Stamp duty
All states and territories impose a stamp duty on a wide variety of transactions at
different rates. All jurisdictions impose a stamp duty on real estate conveyances, but
most exempt conveyances of goods (not associated with other property) from stamp
duty. The imposition of duty on share transfers involving unlisted entities differs from
state to state. Corporate reconstruction exemptions are available. Advice from a stamp
duty specialist should usually be obtained where substantial stamp duty may be imposed
because the amount of duty may depend on the form of the transaction.
Fringe benefits tax (FBT)
As of 1 April 2014, the federal government levies FBT on employers at the rate of 47%
(previously 46.5%) on the grossed-up value of non-salary and wages fringe benefits
provided to employees (and/or the employees associates) by the employer or associates.
The grossing-up of the value ensures tax neutrality between providing benefits and cash
remuneration. FBT generally is deductible for income tax purposes. There are some
exemptions from FBT, including some minor benefits, remote area housing in certain
circumstances, and specified relocation costs. In addition, there are some concessional
valuation rules, in particular for motor vehicles and living-away-from-home benefits
(although this concession has been significantly scaled back from 1 October 2012,
subject to certain transitional rules). The government is proposing to temporarily
increase the rate of FBT to 49% for the period 1 April 2015 to 31 March 2017. Legislation
to give effect to this increase has not yet been enacted.
Payroll tax
States and territories impose a tax on employers payroll (broadly defined). The various
jurisdictions have harmonised their payroll tax legislation, but some differences remain,
particularly tax rates and the thresholds for exempting employers whose annual payroll
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is below a certain level, after taking into account grouping rules. For example, in New
South Wales, the rate for the year ended 30 June 2014 is 5.45% per annum with an
annual exemption threshold of AUD 750,000. In Victoria, the rate for the year ended 30
June 2014 is 4.9%, and the annual exemption threshold is AUD 550,000. A variety of
rates and thresholds apply in other state and territory jurisdictions.
Superannuation guarantee levy
The federal government effectively requires employers to contribute a certain

percentage of an employees earnings base, subject to limited exceptions, to a registered
superannuation fund or retirement savings account on behalf of the employee. Failure
to make these contributions will result in the employer being liable for a non-deductible
superannuation guarantee charge.
The superannuation guarantee percentage was 9.25% for the financial year ended 30
June 2014, increases to 9.5% from 1 July 2014, and will progressively increase up to 12%
over the coming financial years.
No level of Australian government imposes a social security levy.
Insurance tax
States impose taxes on insurance premiums, which may be substantial.
Minerals Resource Rent Tax (MRRT)
MRRT is a tax applied to the mining profit made from extracting iron ore, coal, anything
produced from a process that results in iron ore or coal being consumed or destroyed
without extraction, or coal seam gas extracted as a necessary incident of mining coal,
before it undergoes any significant processing or value add.
The MRRT liability for each mining project interest in an MRRT year is calculated as
follows:
MRRT liability = (Mining profit - MRRT allowances) x MRRT rate
The effective MRRT rate is 22.5%, being the headline rate of 30% reduced by a 25%
extraction allowance to recognise the miners employment of specialist skills.
MRRT allowances reduce the mining profit and include appropriate recognition for
mining royalties paid under a Commonwealth, state, or territory law, mining losses, and
recognition for the investment in assets relating to upstream mining operations from a
mining project interest that exists at 1 July 2012.
A miners MRRT payable for an MRRT year is then calculated as follows:
MRRT payable = Sum of MRRT liabilities for each mining project interest - Low-profit
offset (if applicable) - Rehabilitation tax offset
Small miners are subject to the MRRT but may be entitled to compliance concessions,
including a low-profit offset that will ensure that a miner who (together with certain
connected entities) has total mining profits for an MRRT year of AUD 75 million or less
has no liability for MRRT. The offset is phased-out for profits between AUD 75 million
and AUD 125 million.
Similar to income tax, MRRT is self-assessed by the miner. The miner is, in most cases,
required to give the Commissioner of Taxation an MRRT return for each MRRT year in
which it has a mining project interest or pre-mining project interest. MRRT is generally
payable by quarterly instalments.
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MRRT applies in addition to normal income tax. MRRT payments (including quarterly
instalments) are, however, deductible for income tax purposes.
The newly elected government proposes to abolish the MRRT with effect from 1 July
2014. Legislation to repeal the MRRT has not yet been enacted.
Petroleum Resource Rent Tax (PRRT)
PRRT applies from 1 July 1986 to all petroleum projects in Australian offshore areas (or
Commonwealth adjacent areas) other than production licences derived from the North
West Shelf project and the Joint Petroleum Development Area in the Timor Sea. From
1 July 2012, PRRT applies to all Australian onshore and offshore oil and gas projects,
including the North West Shelf.
PRRT is applied to a project or production licence area at a rate of 40% of the taxable
profits derived from the recovery of all petroleum in the project, including:

crude oil
condensate
sales gas
natural gas
liquefied petroleum gas (LPG), and
ethane.
The taxable profit of a project is calculated as follows:

Taxable profit = Assessable receipts - Deductible expenditure
Deductible expenditure broadly includes exploration expenditure, all project
development, and operating expenditures.
PRRT is self-assessed by the relevant taxpayer. The taxpayer is, in most cases, required to
give the Commissioner of Taxation a PRRT return for each PRRT year. PRRT is generally
payable by quarterly instalments.
PRRT applies in addition to normal income tax. PRRT payments (including instalments)
are, however, deductible for income tax purposes.
Local municipal taxes
Local taxes, including water, sewerage, and drainage charges, are levied based on the
unimproved capital value of land and include a charge for usage (e.g. water usage).
Branch income
Branch profits are subject to ordinary corporate rates of taxation, and there is no
withholding on repatriated profits.
Inventory valuation
Inventory generally may be valued at cost (full absorption cost), market selling value,
or replacement price. Where, because of obsolescence or other special circumstances,
inventory should be valued at a lower amount, the lower valuation generally may be
chosen, provided it is a reasonable valuation. Special rules apply, however, regarding
the valuation of trading stock for certain companies joining a consolidated group. Last
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in first out (LIFO) is not an acceptable basis of determining cost, nor is direct costing in
respect of manufactured goods and work-in-progress.
Conformity is not required between book and tax reporting. For tax purposes, inventory
may be valued at cost, market selling value, or replacement price, regardless of how
inventory is valued for book purposes. Those who choose to come within the smallbusiness entity measures (broadly defined as taxpayers who carry on business and who,
together with certain connected entities, have an aggregated turnover of less than AUD
2 million for the year) may ignore the difference between the opening and closing value
of inventory if, on a reasonable estimate, this is not more than AUD 5,000.
Capital gains
A capital gains tax (CGT) applies to assets acquired on or after 20 September 1985.
Capital gains realised on the disposal of such assets are included in assessable income
and are subject to tax at the corporate tax rate. In order to determine the quantum of
any gain for any assets acquired before 21 September 1999, the cost base is indexed
according to price movements since acquisition, as measured by the official CPI until
30 September 1999. There is no indexation of the cost base for price movements from
1 October 1999. Disposals of plant and equipment are subject to general rules rather
than the CGT rules. Capital losses are allowable as deductions only against capital gains
and cannot be offset against other income. In calculating capital losses, there is no
indexation of the cost base.
Companies that are residents in Australia generally are liable for the tax on gains on the
disposal of assets wherever situated, subject to relief from double taxation if the gain is
derived and taxed in another country. However, the capital gain or capital loss incurred
by a company from a CGT event in relation to shares in a foreign company is reduced
by a percentage reflecting the degree to which the foreign companys assets are used
in an active business if the company holds a direct voting percentage of 10% or more
in the foreign company for a certain period before the CGT event. Attributable income
from CGT events happening to shares owned by a controlled foreign company (CFC) are
reduced in the same way. Capital gains and capital losses made by a resident company
in respect of CGT events happening in respect of non-tainted assets used to produce
foreign income in carrying on business through a PE in a foreign country are disregarded
in certain circumstances.
Non-resident companies are subject to Australian CGT only where the assets are taxable
Australian property (i.e. Australian real property, or the business assets of Australian
branches of a non-resident). Australian CGT also applies to indirect Australian real
property interests, being non-portfolio interests in interposed entities (including
foreign interposed entities), where the value of such an interest is wholly or principally
attributable to Australian real property. Real property for these purposes is consistent
with Australian treaty practice, extending to other Australian assets with a physical
connection with Australia, such as mining rights and other interests related to Australian
real property. A non-portfolio interest is an interest held alone or with associates of 10%
or more in the interposed entity.
Dividend income
A gross-up and credit mechanism applies to franked dividends (dividends paid out
of profits that have been subject to Australian tax) received by Australian companies.
The corporate shareholder grosses up the dividend received for tax paid by the paying
company (i.e. franking credits attaching to the dividend) and is then entitled to a tax
offset (i.e. a reduction of tax) equal to the gross-up amount. A company with an excess
tax offset entitlement converts the excess into a carryforward tax loss using a special
formula.
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Dividends paid to another resident company that are unfranked (because they are paid
out of profits not subject to Australian tax) are taxable, unless they are paid within a
group that has chosen to be consolidated for tax purposes. Dividends paid between
companies within a tax consolidated group are ignored for the purposes of determining
the taxable income of the group.
Franked dividends paid to non-residents are exempt from dividend withholding tax
(WHT).
An exemption from WHT is also available for dividends that are unfranked under the
dividend imputation rules and are declared to be conduit foreign income (CFI) received
by non-resident shareholders (or unitholders) in an Australian corporate tax entity
(CTE). These rules may also treat the CFI component of an unfranked dividend received
by an Australian CTE from another Australian CTE as not taxable to the recipient,
provided it is on-paid within a specified timeframe. Broadly, income will qualify as
CFI if it is foreign income, including certain dividends, or foreign gains, which are not
assessable for Australian income tax purposes or for which a foreign income tax offset
has been claimed in Australia.
Foreign dividends are not assessable and are not eligible for a tax offset if received by an
Australian resident company from a foreign affiliate where the recipient company has a
voting power of at least 10% in the foreign affiliate. This exemption is subject to change
proposed to take effect broadly from 1 July 2014 so as to prevent dividends attached to
legal form shares that are treated as debt interest for Australian tax purposes from being
exempt, and also to extend the exemption to non-share equity interest (that is, interests
that are classified as equity for Australian tax purposes, but are not legal form shares).
Income of a non-resident entity in which Australian residents hold interests is not
assessable when repatriated to Australia where the income has been previously
attributed to those residents and taxed in Australia (see below).
Stock dividends
Stock dividends, or the issue of bonus shares, as they are known under Australian law,
are, in general, not taxed as a dividend, and the tax treatment is the spreading of the
cost base of the original shares across the original shares and the bonus shares. However,
if a company credits its share capital account with profits when issuing bonus shares, this
will taint the share capital account (if it is not already a tainted share capital account),
causing the bonus share issue to be a dividend. Certain other rules may apply to bonus
share issues, depending on the facts.
Financial arrangements
Special rules apply to the taxation of financial arrangements (TOFA). Financial

arrangement is widely defined to cover arrangements that involve a cash settlable legal
or equitable right to receive, or obligation to provide, something of economic value in
the future.
These measures provide six tax-timing methods for determining gains or losses in
respect of financial arrangements, along with revenue account treatment of the resulting
gains or losses to the extent that the gain or loss is made in earning assessable income
or carrying on a business for that purpose. The default methods are the accruals
method and the realisation method, one or other of which will apply depending on the
relevant facts and circumstances of a particular financial arrangement. In broad terms,
the accruals method will apply to spread an overall gain or loss over the life of the
financial arrangement where there is sufficient certainty that the expected gain or loss
will actually occur. A gain or loss that is not sufficiently certain is dealt with under the
realisation method.
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Alternatively, a taxpayer may irrevocably choose one or more of four elective methods
(i.e. fair value, retranslation, financial reports, and hedging) to determine the tax
treatment of financial arrangements covered by the election. Qualification criteria must
be met before the elective methods may be used. Generally, these criteria require that
the taxpayer prepare a financial report in accordance with Australian (or comparable)
accounting standards and be audited in accordance with Australian (or comparable)
auditing standards.
Exemptions from this regime may be available having regard to the duration of the
arrangement or the nature of the relevant taxpayer and the annual turnover or value of
assets of that taxpayer. Certain types of financial arrangements are excluded from these
rules, including leasing and hire purchase arrangements. Foreign residents are taxable
on gains from financial arrangements under these measures to the extent that the gains
have an Australian source.
Foreign exchange gains and losses
Foreign currency gains and losses are recognised when realised, regardless of whether
there is a conversion into Australian dollars, and are included in or deducted from
assessable income, subject to limited exceptions. There are exceptions to the timing and
characterisation aspects of the realisation approach where the foreign currency gain or
loss is closely linked to a capital asset. To reduce compliance costs with foreign currency
denominated bank accounts, taxpayers may elect to disregard gains or losses on certain
low balance transaction accounts that satisfy a de minimis exemption or may elect for
retranslation by annually restating the balance of the account by reference to deposits,
withdrawals, and the exchange rates at the beginning and end of each year (or by
reference to amounts reported in accordance with applicable accounting standards).
For foreign exchange gains and losses associated with financial arrangements as defined,
the compliance impact of the foreign exchange rules will be reduced only for those
taxpayers who are eligible to and elect the retranslation or financial reports tax-timing
methods under the TOFA measures (as discussed above).
Entities or parts of entities, satisfying certain requirements, are able to choose to account
for their activities in a currency other than Australian dollars for income tax purposes
as an intermediate step to translating the result into Australian dollars (known as the
functional currency choice).
Foreign income
The current basis upon which the foreign income of corporations resident in Australia is
taxed is set out below.
Dividends received directly by a resident company from a foreign company are not
assessable for tax where the resident company has a (non-portfolio) voting interest
of at least 10% in the foreign affiliate and does not receive the dividend in its capacity
as a trustee. With effect for income years commencing on or after 1 July 2014, it is
currently proposed that the exemption will no longer apply to dividends paid on legal
form shares that are treated as debt interests for Australian income tax purposes.
Active foreign branch profits of a resident company from carrying on business
through a PE in a foreign country and capital gains made by a resident company from
the disposal of non-tainted assets used in deriving foreign branch income (except
income and capital gains from the operation of ships or aircraft in international
traffic) are not assessable for tax.
Other foreign income of Australian resident corporations is subject to tax; however, in
most cases, an offset for foreign income tax paid is allowed to the extent of Australian
tax payable on such income.
Generally, limited partnerships are treated as companies for Australian tax purposes.
In certain circumstances, foreign limited partnerships, foreign limited liability
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partnerships, United States (US) limited liability companies, and United Kingdom
(UK) limited liability partnerships will be treated as partnerships (i.e. as a flowthrough entity) rather than as a company for the purposes of Australias income tax
laws.
Australia also has a comprehensive CFC regime. See Controlled foreign companies
(CFCs) in the Group taxation section for more information.
Deductions
A capital allowances regime allows a deduction for the decline in value of depreciating
assets held by a taxpayer. The holder of the asset is entitled to the deduction and may
be the economic, rather than the legal, owner. A depreciating asset is an asset that has
a limited effective life and can reasonably be expected to decline in value over the time
it is used, but does not include land, trading stock, or, subject to certain exceptions,
intangible assets. Deductions are available for certain other capital expenditure.
Intangible assets that are depreciating assets (if they are not trading stock) are:

Certain mining, quarrying, or prospecting rights and information.

Items of intellectual property (IP).
In-house software.
Indefeasible rights to use an international telecommunications submarine cable
system.
Spectrum licences under radio communications legislation.
Datacasting transmitter licences.
Telecommunications site access rights.
Taxpayers that do not qualify as a small business must depreciate the asset over its
useful life (known as effective life) using either straight-line (known as the prime
cost method) or diminishing-value method (straight-line rate multiplied by 200% for
depreciating assets acquired on or after 10 May 2006).
Taxpayers may self-determine the effective life of a unit or plant or may choose the
effective life contained in a published determination of the Commissioner of Taxation.
Non-small-business taxpayers are able to choose to write-off all items costing less than
AUD 1,000 through a low-value pool at a diminishing-value rate of 37.5% per annum.
For those who satisfy the small business entity threshold (broadly defined as taxpayers
who are carrying on business and who, together with certain connected entities, have an
aggregated turnover of less than AUD 2 million for the year), a simplified depreciation
system applies by taxpayer choice and with more attractive depreciation rates, including
(with effect from 1 July 2012) an immediate write off for depreciating assets with a
cost of less than AUD 6,500 (although note that the newly elected government proposes
to reduce this concession to AUD 1,000 for depreciating assets first held on or after 1
January 2014).
Project pool rules allow expenditures that do not form part of the cost of a depreciating
asset to be deductible over the life of a project that is carried on for a taxable purpose.
Amongst other things, items that fall within the rules include the following:
Amounts paid to create or upgrade community infrastructure for a community
associated with the project.
Site preparation costs for depreciating assets (except horticultural plants in certain
circumstances).
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Amounts incurred for feasibility studies for a project.

Environmental assessment costs applicable to the project.
Amounts incurred to obtain information associated with the project.
Amounts incurred in seeking to obtain a right to IP.
Costs of ornamental trees or shrubs.
The so-called blackhole expenditure provisions allow a five-year straight-line writeoff for capital expenditure in relation to a past, present, or prospective business, to the
extent that the business is, was, or is proposed to be carried on for a taxable purpose.
The expenditure is deductible to the extent that it is not elsewhere taken into account
(e.g. by inclusion in the cost base of an asset for CGT purposes) and that it is not denied
deductibility for the purposes of the income tax law (e.g. by the rules against deducting
entertainment expenditure).
Special rules apply for primary producer assets, such as horticultural plants, water
and land care assets, and the treatment of expenditure on R&D (see the Tax credits and
incentives section for more information) and expenditure on certain Australian films.
A luxury car cost limit applies for depreciating the cost of certain passenger motor
vehicles (AUD 57,466 cost limit for the 2013/14 income year).
Expenditure on the development of in-house software may be allocated to a software
development pool and written off over three years, starting in the year after the
expenditure was incurred (40% in year two, 40% in year three, and 20% in year four).
Amounts spent on acquiring computer software or the right to use it (except where
the acquisition is for developing in-house software) generally is treated as incurred on
acquiring a depreciating asset, deductible over its effective life (taken to be four years)
commencing in the first year it is first used or installed ready for use. Shrink-wrapped
software acquired or manufactured for sale generally will be treated as trading stock.
A loss arising on the sale of a depreciating asset (depreciated value of the asset less sale
consideration) is generally an allowable deduction. A gain on the sale of a depreciating
asset, to the extent of depreciation recaptured, generally is taxed as ordinary income.
Gains exceeding the amount of depreciation recaptured are also taxed as ordinary
income.
Subject to exceptions referred to below, capital expenditure incurred after 15
September 1987 in the construction or improvement of non-residential buildings used
for producing assessable income is amortised over 40 years at an annual 2.5% rate.
Capital expenditure on the construction of buildings used for short-term traveller
accommodation (e.g. hotels, motels) and industrial buildings (typically factories) is
amortised over 25 years at an annual 4% rate where construction commenced after
26 February 1992. The cost of eligible building construction that commenced after
21 August 1984 and before 16 September 1987 (or construction contracted before 16
September 1987) is amortised over 25 years at an annual 4% rate. There is no recapture
of the amortised amount upon disposal of the building, except where the expenditure
is incurred after 13 May 1997, in which case recapture will apply, subject to certain
transitional rules.
Similar provisions apply in relation to income-producing residential buildings on which
construction commenced after 17 July 1985.
The cost of income-producing structural improvements, the construction of which
started after 26 February 1992 is eligible for write-off for tax purposes on the same basis
as that of income-producing buildings, that is, at a rate of 2.5% per annum.
The cost of consumables may be either written off immediately, or as used.
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The following expenditure attracts an immediate 100% deduction: environmental
protection activities, dealing with pollution and waste; landcare operations; exploring
or prospecting for minerals (other than costs of mining rights and information acquired
from a non-government third party that start to be held after 7.30pm [AEST] 14 May
2013, which are proposed to be deducted over the shorter of 15 years and the life of the
asset); exploring or prospecting for geothermal energy sources (proposed to be repealed
with effect from 1 July 2014); and mine site rehabilitation.
Tax depreciation is not required to conform to book depreciation.
Percentage depletion based on gross income or other non-cost criteria is not available.
Goodwill
Goodwill and trademarks are not depreciating assets, and tax amortisation is not
available.
Start-up expenses
certain start-up expenses, such as costs of company incorporation or costs to raise
equity, may qualify for a five-year straight-line write-off to the extent that it is capital
expenditure in relation to a current or prospective business that is, or is proposed to be,
carried on for a taxable purpose.
Interest expenses
Special rules classify financial arrangements as either debt or equity interests. These
rules focus on economic substance rather than legal form and take into account related
schemes, and extend beyond shares. In this situation, interest expense on non-share
equity would be treated as a dividend, which is potentially frankable, and would be nondeductible for the paying company/group.
The government is proposing to have a special anti-avoidance rule in respect of the
current law that allows companies to claim a deduction for interest expenses incurred
in relation to offshore investments that generate non-assessable non-exempt dividend
income.
Thin capitalisation measures apply to the total debt of the Australian operations of
multinational groups (including branches of those groups). See Thin capitalisation in the
Group taxation section for more information.
Bad debts
A deduction may be available for bad debts written off as bad before the end of an
income year. Generally, a deduction will only be available where the amount of the debt
was previously included in assessable income, or the debt is in respect of money lent in
the ordinary course of a money lending business. The ability to claim a deduction for a
bad debt is also subject to other integrity measures.
The amount of a commercial debt forgiven (other than an intra-group debt within a
tax consolidated group) that is not otherwise assessable or does not otherwise reduce
an allowable deduction is applied to reduce the debtors carryforward tax deductions
for revenue tax losses, carryforward capital losses, non-deducted capital expenditure,
and other capital cost bases in that order. Any amount not so applied generally is not
assessable to the debtor. Forgiveness includes the release, waiver, or extinguishment of a
debt (other than by full payment in cash) and the lapsing of the creditors recovery right
by reason of a statute of limitations.
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Australia
Charitable contributions are generally deductible where they are made to entities that
are specifically named in the tax law or endorsed by the Commissioner of Taxation
as deductible gift recipients. However, deductions for such gifts cannot generate tax
losses. That is, generally the deduction is limited to the amount of assessable income
remaining after deducting from the assessable income for the year all other deductions.
Entertainment
Subject to limited exceptions, deductions are denied for expenditure on entertainment,

which broadly is defined as entertainment by way of food, drink, or recreation, and
accommodation or travel to do with providing such entertainment.
Fines and penalties
Fines and penalties imposed under any Australian and foreign law are generally not
deductible. This includes fines and penalties imposed in relation to both civil and
criminal matters.
The General Interest Charge (GIC) and Shortfall Interest Charge (SIC), which are
imposed for failure to pay an outstanding tax debt within the required timeframe or
where a tax shortfall arises under an amended assessment, are deductible for Australian
tax purposes.
Taxes
In general, GST input tax credits, GST, and adjustments under the GST law are
disregarded for income tax purposes. Other taxes, including property, payroll, MRRT,
PRRT, and FBT, as well as other business taxes, excluding income tax, are deductible to
the extent they are incurred in producing assessable income or necessarily incurred in
carrying on a business for this purpose, and are not of a capital or private nature.
Where expenditure for services is incurred in advance, deductibility of that expenditure

generally will be prorated over the period during which the services will be provided, up
to a maximum of ten years.
General value shifting rules apply to shifts of value, direct or indirect, in respect of
loan and equity interests in companies or trusts. Circumstances in which these rules
may apply include where there is a direct value shift under a scheme involving equity
or loan interests, or where value is shifted out of an asset by the creation of rights in
respect of the asset, or where there is a transfer of assets or the provision of services for a
consideration other than at market value. The value shifting rules may apply to the head
company of a tax consolidated group or multiple entry consolidated (MEC) group for
value shifts also involving entities outside the group, but not to value shifting between
group members, which the tax consolidation rules address (see the Group taxation
section for more information).
Losses may be carried forward indefinitely, subject to compliance with tests of continuity
of more than 50% of ultimate stock ownership or compliance with a same business test.
For consolidated group companies, the ability to utilise these losses is determined by a
modified version of these tests (see the Group taxation section for more information).
From 1 July 2012, a loss carryback regime applies such that companies can carry tax
losses back to offset prior year taxable profits and obtain a refund of tax previously paid
on those prior year profits through a tax offset mechanism. The key features of the loss
carryback regime include:
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103
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an initial one year carryback period from the 2012/13 income year (i.e. 2012/13 tax
losses can be carried back and offset against tax paid in 2011/12)
a two year loss carryback period to apply from the 2013/14 income year
an AUD 1 million cap on the amount of losses able to be carried back, and
refunds will be limited to the balance of a companys franking account.
The newly elected government is proposing to abolish the loss carryback rules with
effect from the 2013/14 and later income years. If this proposal is enacted, it will mean
that the loss carryback regime only applied to losses incurred in the 2012/13 income
year.
A corporation can deduct royalties, management service fees, and interest charges
paid to non-residents, provided the amounts are commercially realistic and referable to
activities aimed at producing assessable income.
Group taxation
A tax consolidation regime applies for income tax and CGT purposes for companies,
partnerships, and trusts ultimately 100% owned by a single head company (or certain
entities taxed like a company) resident in Australia. Australian resident companies that
are 100% owned (either directly or indirectly) by the same foreign company and have no
common Australian head company between them and the non-resident parent are also
allowed to consolidate as a multiple entry consolidated (MEC) group. The group that is
consolidated for income tax purposes may differ from the group that is consolidated for
accounts or for GST purposes.
Groups that choose to consolidate must include all 100%-owned entities under an all-in
rule, and the choice to consolidate is irrevocable. However, eligible tier-1 companies
(being Australian resident companies that have a non-resident shareholder) that are
members of a potential MEC group are not all required to join an MEC group when
it forms, but may form two or more separate MEC or consolidated groups, if they so
choose, of which the same foreign top company is the 100% owner. If an eligible tier-1
company joins a particular MEC group, all 100% subsidiaries of the company must
also join the group. While the rules for forming and joining MEC groups allow more
flexibility than with consolidated groups, the ongoing rules for MEC groups are more
complex, particularly for tax losses and on the disposal of interests in eligible tier-1
companies, which are subject to cost pooling rules, although for practical purposes
these rules are relevant only if the non-resident is holding or disposing of an indirect
Australian real property interest (see Capital gains in the Income determination section for
more information).
A single entity rule applies to members of a consolidated or MEC group so that for
income tax purposes the subsidiary members are taken to be part of the head company,
while they continue to be members of the group and intra-group transactions are not
recognised. In general, no group relief is available where related companies are not
members of the same consolidated or MEC group. Rollover relief from CGT is available
on the transfer of unrealised gains on assets, which are taxable Australian property,
between companies sharing 100% common ownership where the transfer is between
non-resident companies, or between a non-resident company and a member of a
consolidated group or MEC group, or between a non-resident company and a resident
company that is not able to be a member of a consolidated group.
Consolidated groups file a single tax return and calculate their taxable income or loss
ignoring all intra-group transactions.
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Australia
When a consolidated group acquires 100% of an Australian resident entity, so that it
becomes a subsidiary member, the cost base of certain assets (in general, those that
are non-monetary) of the joining member are reset for all tax purposes, based on the
purchase price plus the entitys liabilities, subject to certain adjustments. In this way, an
acquisition of 100% of an Australian resident entity by a consolidated group is broadly
the tax equivalent of acquiring its assets. Subject to certain tests being passed, tax losses
of the joining member may be transferred to the head company and may be utilised
subject to a loss factor, which is broadly the market value of the joining member divided
by the market value of the group (including the joining member). The value of the loss
factor (referred to as the available fraction) that applies for transferred losses may be
reduced by capital injections (or the equivalent) into the member before it joined, or into
the group after the loss is transferred.
Franking credits and tax losses remain with the group when a member exits, and the
cost base of shares in the exiting member is calculated based on the tax value of its assets
at the time of exit, less liabilities subject to certain adjustments.
Generally, members of the group are jointly and severally liable for group income tax
debts on the default of the head company, unless the group liability is covered by a tax
sharing agreement (TSA) that satisfies certain legislative requirements. A member who
enters into a TSA generally can achieve a clean exit from the group where a payment is
made to the head company in accordance with the TSA.
Transfer pricing
Australia has a comprehensive transfer pricing regime aimed at protecting the tax base
by ensuring that dealings between related, international parties are conducted at arms
length. The arms-length principle, which underpins the transfer pricing regime, uses
the behaviour of independent parties as a benchmark for determining the allocation of
income and expenses between international related parties.
Recent reforms to Australias transfer pricing rules were made to improve the integrity
and efficiency of the tax system. The first phase of the reforms (with retrospective
effect from 1 July 2004) provided the Commissioner of Taxation with the power to
issue transfer pricing assessments under the Associated Enterprises or Business Profits
Articles of Australias DTAs in addition to the Commissioners already existing ability
to raise transfer pricing assessments under domestic law. The final stage of the transfer
pricing reforms, applicable to income years commencing on or after 29 June 2013,
modernised Australias transfer pricing regime in line with international best practice as
set out by the OECD. Under the new regime, which effectively replaced the first phase
reform, transfer pricing adjustments will operate on a self-assessment basis and apply in
respect of certain cross-border dealings between entities and to the allocation of actual
income and expenses of an entity between the entity and its PE, using the internationally
accepted arms-length principle, which is to be determined consistently with the relevant
OECD Guidance material (and applied to both treaty and non-treaty cases). In addition,
companies are now required to have transfer pricing documentation in place to support
their self-assessed positions before the lodgement of the tax return.
Thin capitalisation
Thin capitalisation measures apply to the total debt of the Australian operations of
multinational groups (including branches of those groups). The measures cover
investment into Australia of foreign multinationals and outward investment of
Australian-based multinationals, and include a safe-harbour debt-to-equity ratio of 3:1
for income years ended before 1 July 2014. Interest deductions are denied to the extent
that borrowing exceeds the applicable safe-harbour ratio. Where borrowing exceeds
the safe-harbour ratio, multinationals are not affected by the rules if they can satisfy the
arms-length test (that the borrowing could have been borne by an independent entity).
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105
Australia
A further alternative test is available for outward investing entities based on 120% of
their worldwide gearing.
As mentioned above, the thin capitalisation rules apply to inward investment into
Australia. In particular, they will apply where a foreign entity carries on business
through an Australian PE or to an Australian entity in which five or fewer non-residents
have at least a 50% control interest, or a single non-resident has at least a 40% control
interest, or the Australian entity is controlled by no more than five foreign entities.
Separate rules apply to financial institutions. To facilitate their inclusion in the rules,
branches are required to prepare financial accounts.
International Financial Reporting Standards (IFRS), equivalents of which currently
apply in Australia, make it more difficult for some entities to satisfy thin capitalisation
rules because of the removal of internally generated intangible assets from the balance
sheets. Accordingly, thin capitalisation law allows departure from the Australian
equivalents to IFRS in relation to certain intangible assets and excludes deferred tax
assets and liabilities and surpluses and deficits in defined benefit superannuation funds
from applicable calculations.
There are currently proposals to tighten the thin capitalisation regime with a range of
measures, including reducing the safe-harbour debt-to-equity ratio from 3:1 to 1.5:1 and
the worldwide gearing ratio to 100% and extending its availability to inward investing
entities for income years commencing on or after 1 July 2014. Legislation to implement
these proposals has not yet been enacted.
Under Australias CFC regime, non-active income of foreign companies controlled by

Australian residents (determined by reference to voting rights and dividend and capital
entitlements) may be attributed to those residents under rules that distinguish between
companies resident in listed countries (e.g. Canada, France, Germany, Japan, New
Zealand, the United Kingdom, and the United States) and in other unlisted countries.
In general, if the CFC is resident in an unlisted country and it fails the active income test
(typically because it earns 5% or more of its income from passive or tainted sources), the
CFCs tainted income (very broadly, passive income and gains, and sales and services
income that has a connection with Australia) is attributable. If a CFC is resident in a
listed country, a narrower range of tainted income is attributed even if the CFC fails the
active income test.
When income previously taxed on attribution is repatriated, it is not assessable for tax.

Foreign income tax offsets (FITOs)
FITOs are available to avoid double taxation in respect of foreign tax paid on income that
is assessable in Australia. Generally, a corporation will be entitled to claim a FITO where
it has paid, or is deemed to have paid, an amount of foreign income tax and the income
or gain on which the foreign income tax was paid is included in assessable income for
Australian tax purposes.
The amount of the FITO available is limited to the greater of AUD 1,000 and the amount
of the FITO limit. The FITO limit is broadly calculated as the difference between the
corporations actual tax liability and its tax liability if certain foreign taxed and foreignsourced income and related deductions were disregarded. Excess FITOs are not able to
be carried forward and claimed in later income years.
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Australia
Australia
Inward investment incentives
Depending on the nature and size of the investment project, state governments may give
rebates from payroll, stamp, and land taxes on an ad hoc basis and for limited periods.
Capital investment incentives
Incentives for capital investment are as follows:

Accelerated deductions are available for capital expenditures on the exploration for
and extraction of petroleum and minerals (other than mining rights and information
acquired from a non-government third party that start to be held after 7.30pm
[AEST] 14 May 2013, which are proposed to be claimed over the shorter of 15 years
and the life of the asset), the exploration or prospecting for geothermal energy
sources (proposed to be repealed with effect from 1 July 2014), the rehabilitation
of former mineral extraction sites, certain environmental protection activities,
the establishment of certain carbon sink forests, certain expenditure of primary
producers, and for certain low cost depreciating assets held by small business entities.
There are a number of tax concessions aimed at encouraging investments in the
venture capital sector. Non-resident pension funds that are tax-exempt in their home
jurisdiction, are residents of Canada, France, Germany, Japan, the United Kingdom,
the United States, or another country prescribed by regulation, and satisfy certain
Australian registration requirements, are exempt from income tax on the disposal
of investments in certain Australian venture capital equity held at risk for at least
12 months. A similar exemption is extended to other tax-exempt non-resident
investors, including managed funds and venture capital fund-of-funds vehicles and
taxable non-residents holding less than 10% of a venture capital limited partnership.
These investors are able to invest in eligible venture capital investments through an
Australian resident venture capital limited partnership or through a non-resident
venture capital limited partnership. Eligible venture capital investments are limited to
specified interests in companies and trusts. Detailed rules in the legislation prescribe
the nature of such investments and the characteristics, which such companies and
trusts, and their investments, must possess.
There is a venture capital tax concession applicable to an early stage venture capital
limited partnership (ESVCLP). The thresholds for qualification include requirements
that, amongst other things, the committed capital of the ESVCLP must be at least
AUD 10 million but not exceed AUD 100 million, the investments made must fall
within prescribed parameters as to size and proportion of total capital, and the
ESVCLP must have an investment plan approved by Innovation Australia. Where the
thresholds for their application are met, the ESVCLP provisions provide flow-through
tax treatment to domestic and foreign partners, with the income and capital received
by the partners being exempt from taxation. As the income will be tax exempt, the
investor will not be able to deduct investment losses.
The taxable income derived from pure offshore banking transactions by an
authorised offshore banking unit in Australia is taxed at the rate of 10% (the
government is considering targeted rules to address integrity issues concerning
dealings with related parties).
Refundable tax offsets are available to companies for certain expenditure incurred in
Australia in producing specified classes of film or undertaking specified post, digital,
or special effects production activities in respect of specified classes of films. The
concessions are only available to a company that is either an Australian resident or
a non-resident carrying on business through an Australian PE and which has been
issued with an Australian Business Number (ABN). The availability of the offsets
is subject to a number of conditions, including meeting registration and minimum
spend requirements. The rate of the offset varies from 15% to 40%, depending upon
the nature of the relevant film and activities undertaken.
Australia
107
Australia
R&D tax credit
For companies with an annual turnover of less than AUD 20 million, there is a 45%
refundable R&D tax credit, equivalent to a 150% tax concession. This equates to a cash
savings of 15% on every dollar of R&D spend and will be refundable where the company
is in a tax loss position. Companies with a turnover of greater than AUD 20 million (up to
a proposed upper limit of AUD 20 billion applicable to income years commencing on or
after 1 July 2013) have access to a non-refundable 40% tax credit, equivalent to a 133%
tax concession. This equates to a cash savings of 10% on every dollar of R&D spend.
Under measures currently proposed by the government, companies with annual
Australian assessable income (including that of affiliates) of more than AUD 20 billion
will no longer be entitled to the 40% tax credit for income years commencing on or after
1 July 2013. In addition, the government is proposing to reduce both the refundable and
non-refundable tax credits by 1.5% (to 43.5% and 38.5% respectively) with effect from
1 July 2014. Legislation to give effect to these proposals has not yet been enacted.
Generally, only genuine R&D activities undertaken in Australia qualify for the R&D
tax incentive. However, R&D activities conducted overseas also qualify in limited
circumstances where the activities cannot be undertaken in Australia. Special grant
programmes also may be available to assist corporations in the conduct of certain R&D
in Australia. These grants are awarded on a discretionary basis.
Other incentives
Cash grants for export-market development expenditure are available to eligible

businesses seeking to export Australian-source goods and services.
Withholding taxes
Withholding tax (WHT) rates are shown in the following table.
Recipient
Resident corporations or individuals (34)
Non-resident corporations or individuals:
Non-treaty
Treaty:
Argentina
Austria (5)
Belgium
Canada
Chile (7)
China, Peoples Republic of (8)
Czech Republic
Denmark
East Timor (Timor Sea Treaty) (10)
Fiji
Finland
France
Germany
Hungary
India
Indonesia
Ireland, Republic of
Italy
108
Australia
Dividends (%) (1)

0
Interest (%) (2)

0
Royalties (%) (3)

0
30
10
30
10/15 (4)
15
15
5/15 (6)
5/15 (7)
15
5/15 (9)
15
15
20
0/5/15 (11)
0/5/15 (12)
15
15
15
15
15
15
12
10
10
10
5/10/15 (7)
10
10
10
10
10
0/10 (11)
0/10 (12)
10
10
15
10
10
10
10/15 (4)
10
10
10
5/10 (7)
10
10
10
10
15
5 (11)
5 (12)
10
10
10/15 (13)
10/15 (14)
10
10
Australia
Recipient
Japan
Kiribati
Korea, Republic of
Malaysia
Malta
Mexico
Netherlands
New Zealand
Norway
Papua New Guinea
Philippines
Poland
Romania
Russian Federation
Singapore
Slovak Republic
South Africa
Spain
Sri Lanka
Sweden
Switzerland (26)
Taipei/Taiwan
Thailand
Turkey (29)
United Kingdom (30)
United States
Vietnam
Dividends (%) (1)

0/5/10/15 (15)
20
15
0/15 (16)
15 (17)
0/15 (18)
15
0/5/15 (19)
0/5/15 (20)
15/20 (21)
15/25 (22)
15
5/15 (23)
5/15 (24)
0/15
15
5/15 (25)
15
15
15
15
10/15 (27)
15/20 (28)
5/15 (29)
0/5/15 (31)
0/5/15/30 (32)
10/15 (33)
Interest (%) (2)

0/10 (15)
10
15
15
15
10/15 (18)
10
0/10 (19)
0/10 (20)
10
10/15 (22)
10
10
10
10
10
0/10(25)
10
10
10
10
10
10/25 (28)
0/10 (29)
0/10 (31)
0/10/15 (32)
10
Royalties (%) (3)

5 (15)
15
15
15
10
10
10
5
5
10
15/25 (22)
10
10
10
10
10
5
10
10
10
10
12.5
15
10
5
5 (32)
10
Notes
1.
2.
3.
4.
Dividends paid to non-residents are exempt from dividend WHT except when paid out of profits of
a company that have not borne Australian tax (i.e. unfranked dividends). Dividends include those
stock dividends that are taxable. The rates shown apply to dividends on both portfolio investments
and substantial holdings other than dividends paid in connection with an Australian PE of the nonresident. Unfranked dividends paid to non-residents are exempt from dividend WHT to the extent that
the dividends are declared by the company to be conduit foreign income. There is also a deduction
in certain cases to compensate for the company tax on inter-entity distributions where these are
on-paid by holding companies to a 100% parent that is a non-resident (see Dividend income in the
Income determination section). Dividends paid to a non-resident in connection with an Australian
PE are taxable to the non-resident on a net assessment basis (i.e. the dividend and associated
deductions will need to be included in the determination of the non-residents taxable income, the
dividend is not subject to dividend WHT), and a franking tax offset is allowable to the non-resident
company for franked dividends received.
Australias interest WHT rate is limited to 10% of gross interest, although the treaty may allow for a
higher maximum limit. An exemption from Australian WHT can be obtained for interest on certain
public issues or widely held issues of debentures. Provisions exist to ensure that discounts and other
pecuniary benefits derived by non-residents on various forms of financings are subject to interest
WHT. Interest paid to non-residents by offshore banking units is exempt from interest WHT where
offshore borrowings are used in offshore banking activities (including lending to non-residents). An
offshore borrowing is defined as a borrowing from (i) an unrelated non-resident in any currency or (ii) a
resident or a related person in a currency other than Australian currency. The interest WHT rates listed
above for residents in a treaty country are those that generally apply. It is common for Australias tax
treaties to include a reduced limit for interest derived by certain government entities and/or financial
institutions. One should refer to the relevant treaty for these limits.
Royalties paid to non-residents (except in respect of a PE in Australia of a resident of a treaty country)
are subject to 30% WHT (on the gross amount of the royalty), unless a DTA provides for a lesser rate.
Tax is generally limited to the indicated percentage of the gross royalty.
For Australian-sourced dividends that are franked under Australias dividend imputation provisions
and paid to a person who directly holds at least 10% of the voting power of the company, the limit
is 10% (although note that Australia does not impose WHT on franked dividends). For Argentineansourced dividends paid to a person who holds at least 25% of the capital in the company, the limit
Australia
109
Australia
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
110
is 10%. A 15% limit applies to other dividends. Source-country tax is limited to 10% of the gross
amount of royalties in relation to copyright of literary, dramatic, musical, or other artistic work; the
use of industrial or scientific equipment; the supply of scientific, technical, or industrial knowledge;
assistance ancillary to the above; or certain forbearances in respect of the above. Source-country tax
is limited to 10% of the net amount of royalties for certain technical assistance. In all other cases, it is
limited to 15% of the gross amount of royalties.
The government announced on 4 February 2010 that negotiations to update Australias tax treaty with
Austria would take place in March 2010. No further announcements have been made in relation to the
progress of treaty negotiations.
A 5% dividend WHT rate applies to franked dividends paid by an Australian resident company and,
in the case of dividends paid by a Canadian resident company (other than a non-resident owned
investment corporation), to a company that directly holds at least 10% of the voting power in the
dividend company (although note that Australia does not impose WHT on franked dividends).
Otherwise, the maximum WHT rate on dividends is 15%.
The treaty between Australia and Chile takes effect in respect of Australian WHT on income derived
on or after 1 April 2013, on fringe benefits provided on or after 1 April 2013, and in respect of other
Australian tax, in respect of income years beginning on or after 1 July 2013. A 5% dividend WHT rate
applies to dividends paid to a company that directly holds at least 10% of the voting power in the
company paying the dividends. Otherwise, the maximum WHT rate on dividends is 15%. In respect
of interest, a 5% WHT rate applies to interest derived by a financial institution that is unrelated to
and dealing wholly independently with the payer. Where the 5% rate does not apply, a 15% WHT
rate applies to interest arising in Chile, and a 10% WHT rate applies to interest in all other cases. A
5% royalty WHT rate applies to royalties for the use of, or right to use, any industrial, commercial, or
scientific equipment, and a 10% royalty WHT rate applies in all other cases.
Except Hong Kong and Macau.
The treaty between Australia and the Czech Republic allows Australia to impose a 5% WHT on the
franked part of a dividend in certain circumstances (although note that Australia does not impose
WHT on franked dividends). In the Czech Republic, a rate of 15% applies to the gross amount of
dividends if the dividends are paid to a company that directly holds at least 20% of the capital of the
company paying the dividend.
East Timor does not have a comprehensive DTA with Australia. However, the Timor Sea Treaty
governs the taxation rights between the two countries for petroleum-related activities conducted in
the Joint Petroleum Development Area of the Timor Sea by any person or entity, irrespective of the
residency status of that person or entity. Where the Timor Sea Treaty applies to third-country resident
payees, only 10% of the total gross interest, dividend, or royalty payment is subject to Australian
WHT, as follows:
Interest: 10% of total gross interest paid is subject to WHT at a rate of 10%.
Dividends: 10% of total gross unfranked dividends paid are subject to WHT at a rate of 15%, or
at the relevant DTA rate of the recipient.
Royalties: 10% of total gross royalties paid is subject to WHT at a rate of 10%, or at the relevant
DTA rate of the recipient. However, the other 90% of each such amount is subject to East
Timorese WHT at the same rates.
A zero WHT rate applies to inter-corporate dividends where the recipient directly holds 80% or
more of the voting power of the company paying the dividend. A 5% rate limit applies on all other
inter-corporate dividends where the recipient directly holds 10% or more of the voting power of the
company paying the dividend. A 15% rate applies to all other dividends. A rate limit of 10% applies to
interest, except no tax is chargeable in the source country on interest derived by a financial institution
resident in the other country or a government or political or administrative subdivision or local
authority or central bank of the other country. Amounts derived from equipment leasing (including
certain container leasing) are excluded from the royalty definition and treated either as international
transport operations or business profits.
The source country exempts inter-corporate non-portfolio (i.e. minimum 10% shareholding) dividends
paid out of profits that have borne the normal rate of company tax. There is a 5% rate limit for all
other non-portfolio dividends. A rate limit of 15% applies for all other dividends. A rate limit of 10%
applies to interest, except no tax is chargeable in the source country on interest derived by a financial
institution resident in the other country or a government or political or administrative subdivision
or local authority or central bank of the other country. Amounts derived from equipment leasing
(including certain container leasing) are excluded from the royalty definition and treated either as
international transport operations or business profits.
The source-country limit under the Indian agreement is 10% for royalties paid in respect of the use
of or rights to use industrial, commercial, or scientific equipment or for the provision of consulting
services related to such equipment. In other cases, the limit is 15%.
The source-country limit under the Indonesian agreement is 10% for royalties paid in respect of
the use of or the right to use any industrial, commercial, or scientific equipment or for the supply of
scientific, technical, industrial, or commercial knowledge or information, and it is 15% in other cases.
The source country exempts inter-corporate dividends where the recipient directly holds 80%
or more of the voting power of the company paying the dividend and certain limitation of benefit
thresholds are met. A 5% rate limit applies on all other inter-corporate dividends where the recipient
directly holds 10% or more of the voting power of the company paying the dividend. A rate limit of
10% otherwise applies for dividends. However, where the dividends are paid by a company that
is a resident of Japan, which is entitled to a deduction for the dividends in Japan, the rate limit is
15% where more than 50% of the assets of the paying company consist, directly or indirectly, of
real property situated in Japan and 10% in all other cases. Special rules apply to distributions to
Japanese residents by real estate investment trusts (REITs). A rate limit of 10% applies to interest,
except no tax is chargeable in the source country on interest derived by a financial institution resident
in the other country or a government or political subdivision or local authority or central bank or other
Australia
Australia
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
specified entity of the other country. Amounts derived from equipment leasing (including certain
container leasing) are excluded from the royalty definition and treated either as international transport
operations or business profits.
A zero dividend WHT rate applies to franked dividends paid by an Australian resident company
to an entity that directly holds at least 10% of the voting power in the dividend paying company;
otherwise, a 15% WHT rate applies. In relation to dividends paid by a company resident of Malaysia,
no WHT applies.
Source-country tax in Malta is limited to the tax chargeable on the profits out of which the dividends
are paid.
A zero dividend WHT rate applies to franked dividends paid (in Mexico, those dividends that have
been paid from the net profit account) to a company that directly holds at least 10% of the voting
power in the dividend paying company. In all other cases, a 15% WHT rate will apply to dividends.
Source-country tax is limited to 10% when interest is paid to a bank or an insurance company,
derived from bonds and securities that are regularly and substantially traded on a recognised
securities market, paid by banks (except where the prior two criteria apply), or paid by the purchaser
to the seller of machinery and equipment in connection with a sale on credit. It is 15% in all other
cases.
A zero WHT rate applies in certain cases to inter-corporate dividends where the recipient directly
holds at least 80% of the voting power in the dividend paying company. A rate of 5% applies on all
other inter-corporate dividends where the recipient directly holds 10% or more of the voting power
of the company paying the dividend. A general limit of 15% applies for all other dividends. Sourcecountry tax on interest is limited to 10%. However, no tax is chargeable in the source country on
interest derived by a government or a political subdivision or local authority of the other country
(including a government investment fund or a bank performing central banking functions) or on
interest derived by a financial institution that is unrelated to and dealing wholly independently of the
payer (excluding interest paid as part of a back-to-back loan arrangement and, for New Zealand
payers, where that person has not paid approved issuer levy).
A zero WHT rate applies in certain cases to inter-corporate dividends where the recipient directly
holds at least 80% of the voting power in the dividend paying company for the 12-month period
prior to payment. A rate of 5% applies to all other inter-corporate dividends where the recipient
directly holds 10% or more of the voting power of the company paying the dividend. A general limit
of 15% applies to all other dividends. A general rate limit of 10% applies to interest. However, no
tax is chargeable in the source country on interest derived by a government of the other country
(including its money institutions or a bank performing central banking functions) from the investment
of official reserve assets and on interest derived by a financial institution resident in the other country
(excluding interest paid as part of a back-to-back loan arrangement).
For Australian-source dividends, the limit is 15%. Where dividends are sourced in Papua New
Guinea, the limit is 20%.
Source-country tax is limited to 15% where relief by way of rebate or credit is given to the beneficial
owner of the dividend. In any other case, source-country tax is limited to 25%. Source-country tax
generally is limited to 15% of gross royalties if paid by an approved Philippines enterprise. In all other
cases, the rate is limited to 25% of the gross royalties.
Source-country tax (Australia) is limited to 5% where a dividend is paid to a Romanian resident
company that directly holds at least 10% of the capital of the Australian company paying the dividend
to the extent that the dividend is fully franked. Source-country tax (Romania) is limited to 5% where
a dividend is paid to an Australian resident company that directly holds at least 10% of the capital
of the Romanian company paying the dividend if the dividend is paid out of profits that have been
subject to Romanian profits tax. In other cases, it is limited to 15%.
Source-country tax generally is limited to 15%. However, a rate of 5% applies where the dividends
have been fully taxed at the corporate level, the recipient is a company that has a minimum direct
holding in the paying company, and the recipient has invested a minimum of AUD 700,000 or the
Russian ruble equivalent in the paying company. Where the dividends are paid by a company that is a
resident in Russia, the dividends are exempt from Australian tax.
A 5% rate limit applies on all inter-corporate dividends where the recipient directly holds 10% or
more of the voting power of the company paying the dividend. A rate limit of 15% otherwise applies
for dividends. A general rate limit of 10% applies to interest. However, no tax is chargeable in the
source country on interest derived by a government of the other country (including a bank performing
central banking functions) and on interest derived by a financial institution resident in the other
country (excluding interest paid as part of a back-to-back loan arrangement).
On 30 July 2013, the Australian and Switzerland governments signed a new DTA, which has not yet
entered into force. Once in force, the DTA will apply a 5% WHT rate to dividends paid to companies
that hold directly 10% or more of the voting power of the paying company. Dividends paid to publicly
listed companies, or subsidiaries thereof, or to unlisted companies in certain circumstances, that
hold 80% or more of the voting power of the paying company will be exempt from dividend WHT.
Dividends paid to government or a political subdivision or local authority (including a government
investment fund), a central bank, complying Australian superannuation funds, and tax exempt Swiss
pension schemes will also be exempt from dividend WHT. In all other cases, a 15% WHT rate will
apply. A general rate limit of 10% applies to interest. However, once the new DTA is in force, interest
paid to bodies exercising governmental functions, banks performing central banking functions, banks
that are unrelated to and dealing independently with the payer, complying Australian superannuation
funds, and tax exempt Swiss pension schemes will be exempt from interest WHT. Once in force, the
DTA will apply a 5% WHT on royalties.
Source-country tax (Taiwan) is limited to 10% of the gross amount of the dividends paid to a
company that holds at least 25% of the capital of the company paying the dividends. A rate of 15%
applies in all other cases. To the extent that dividends are franked because they are paid out of profits
Australia
111
Australia
28.
29.
30.
31.
32.
33.
34.
that have borne Australian tax, they are exempt from dividend WHT (See Note 1 above). The treaty
allows Australia to impose a 10% WHT on the franked part of a dividend.
The source-country limit on dividends where the recipient has a minimum 25% direct holding in the
paying company is 15% if the paying company engages in an industrial undertaking; 20% in other
cases. The source-country limit on interest is 10% when interest is paid to a financial institution. It is
25% in all other cases.
The Australian and Turkish DTA takes effect in respect of Australian WHT in respect of income
derived from 1 January 2014. The DTA applies a 5% WHT rate to inter-corporate dividends where the
recipient directly owns 10% of the voting power of an Australian resident company or directly owns
25% of the capital of a Turkish resident company where the profits out of which the dividend is paid
has been subject to the full rate of corporation tax in Turkey. In all other cases, a 15% WHT rate will
apply. The DTA applies a general limit of 10% WHT on interest. However, interest derived from the
investment of official reserve assets by the either the Australian or Turkish government, the Australian
or Turkish central bank, or a bank performing central banking functions in either Australia or Turkey
shall be exempt from interest WHT.
On 28 October 2008, it was announced that the Australian and the United Kingdom governments
would commence negotiations on a revised tax treaty. No further announcements have been made in
relation to the progress of treaty negotiations.
Source-country tax on dividends is generally limited to 15%. However, an exemption applies for
dividends paid to a listed company that satisfies certain public listing requirements and controls 80%
or more of the voting power in the company paying the dividend, and a 5% limit applies to dividends
paid to other companies with voting power of 10% or greater in the dividend paying company.
Source-country tax on interest is generally limited to 10%. However, generally zero interest WHT is
payable where interest is paid to a financial institution or a government body exercising governmental
functions.
Source-country tax on dividends is generally limited to 15%. No source country tax is chargeable
on dividends to a beneficially entitled company that satisfies certain public listing requirements and
holds 80% or more of the voting power in the company paying the dividend. A 5% limit applies
to dividends paid to other companies with voting power of 10% or greater in the dividend paying
company. No limit applies to US tax on dividends paid on certain substantial holdings of Australian
residents in US REITs. In practical terms, US tax on these dividends is increased from 15% to the
current US domestic law rate of 30%. The 15% rate applies to REIT investments made by certain
listed Australian property trusts subject to the underlying ownership requirements not exceeding
certain levels. Investments in REITs by listed Australian property trusts acquired before 26 March
2001 are protected from the increased rate. Source-country tax on interest generally is limited to
10%. However, generally zero interest WHT is payable where interest is paid to a financial institution
or a government body exercising governmental functions. Rules consistent with US tax treaty policy
and practice will allow interest to be taxed at a higher 15% rate (the rate that generally applies to
dividends) and for tax to be charged on intra-entity interest payments between a branch and its head
office. Amounts derived from equipment leasing (including container leasing) are excluded from the
royalty definition.
Source-country tax is limited to 15% (Australia) and 10% (Vietnam).
Where the recipient does not quote a Tax File Number (or Australian Business Number), the payer is
obligated to withhold tax at the rate of 46.5% under the Pay-As-You-Go (PAYG) withholding regime.
No withholding is required in relation to franked dividends.
Other payments
A PAYG withholding regime applies to require the deduction and remittance of taxes
on behalf of foreign resident individuals and entities that are in receipt of the following
types of payments:
Type of payment
Payments for promoting or organising casino gaming junket
arrangements
Payments for performing artists and sportspersons, including
payments to support staff such as art directors, bodyguards,
coaches, hairdressers, and personal trainers:
if recipient is a company
if recipient is an individual
Payments under contracts entered into for the construction,
installation, and upgrading of buildings, plant, and fixtures, and for
associated activities
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Australia
Rate of withholding (%)

3
30
the applicable non-resident
marginal tax rate
5
Australia
Managed investment trust distributions
For managed investment trust fund payments to a non-resident investor, a WHT regime
applies, with divergent outcomes, depending upon whether or not the recipient of such
fund payments is resident of a country identified as being one with which Australia has
an effective exchange of information (EEOI) arrangement and which is regulated as
such for purposes of these rules. For a resident of a regulated EEOI country, a final WHT
at a 15% rate applies for distributions. For residents of non-EEOI regulated countries, a
final WHT at a 30% rate applies.
Distributions from a managed investment trust that holds only certified clean buildings
is eligible for a reduced rate of WHT of 10% where the recipient of the fund payment is a
resident of a regulated EEOI country.
EEOI countries that have been identified by regulation are Anguilla, Antigua & Barbuda,
Aruba, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands,
the Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Macau, Mauritius, Monaco,
the Netherlands Antilles, San Marino, St. Christopher and Nevis, St. Vincent and the
Grenadines, and the Turks and Caicos Islands, as well as countries with which Australia
has concluded DTAs, other than Austria, Chile, Greece, the Philippines, Switzerland,
and Turkey. Australia has entered into EEOI agreements with Andorra, Bahrain, Brunei,
Chile, Costa Rica, Dominica, Grenada, Liberia, Liechtenstein, the Marshall Islands,
Montserrat, Saint Lucia, Samoa, Switzerland, Turkey, and Vanuatu; however, these
countries have not yet been identified in regulations to be EEOI countries.
Tax administration
Taxable period
The Australian tax year runs from 1 July to 30 June. However, a corporation may apply
to adopt a substitute year of income, for example, 1 January to 31 December.
Tax returns
A corporation (including the head company of a tax consolidated group) lodges/files

a tax return under a self-assessment system that allows the Australian Taxation Office
(ATO) to rely on the information stated on the return. Where a corporation is in doubt as
to its tax liability regarding a specific item, it can ask the ATO to consider the matter and
obtain a binding private ruling.
Generally, the tax return for a corporation is due to be lodged/filed with the ATO by the
15th day of the seventh month following the end of the relevant income year or such
later date as the Commissioner of Taxation allows. Additional time may apply where the
tax return is lodged/filed by a registered tax agent.
Payment of tax
A PAYG instalment system applies to companies other than those whose annual tax
is less than AUD 8,000 that are not registered for GST. Most companies are currently
obligated to pay instalments of tax for their current income year on a quarterly basis by
the 21st day of the fourth, seventh, and tenth months of that year and by the 21st day
of the month immediately following that year. Instalments are calculated by applying
an instalment rate to the amount of the companys actual ordinary income (ignoring
deductions) for the previous quarter. The instalment rate is notified to the taxpayer by
the ATO and determined by reference to the tax payable for the most recent assessment.
The ATO may notify a new rate during the year on which subsequent instalments must
be based. Taxpayers can determine their own instalment rate, but there may be penalty
tax if the taxpayers rate is less than 85% of the rate that should have been selected.
Australia
113
Australia
New legislation requires certain large companies to pay instalments of tax on a monthly
basis (instead of quarterly), commencing from 1 January 2014. This change will be
phased in over three years, commencing with companies with turnover of AUD 1 billion
or more from 1 January 2014, followed by companies with a turnover of AUD 100
million or more from 1 January 2015, and those with a turnover of AUD 20 million or
more from 1 January 2016.
Final assessed tax is payable on the first day of the sixth month following the end of that
income year or such later date as the Commissioner of Taxation allows by a published
notice.
Tax audit process
The Australian tax system for companies is based on self-assessment; however, the ATO
undertakes ongoing compliance activity to ensure corporations are meeting their tax
obligations. The ATO takes a risk-based approach to compliance and audit activities,
with efforts generally focused on taxpayers with a higher likelihood of non-compliance
and/or higher consequences (generally in dollar terms) of non-compliance. Compliance
activities take various forms, including general risk reviews, questionnaires, reviews of
specific issues, and audits.
Generally, the Commissioner of Taxation may amend an assessment within four years
after the day of which an assessment is given to a company. Under the self-assessment
system, an assessment is deemed to have been given to the company on the day
on which it lodges its tax return. The four year time limit does not apply where the
Commissioner is of the opinion there has been fraud or evasion, or to give effect to a
decision on a review or appeal, or as a result of an objection made by the company, or
pending a review or appeal. The unlimited period of review of an assessment to give
effect to a transfer pricing adjustment was recently changed to a seven-year period of
review in respect of assessments raised for an income year commencing on or after 29
June 2013.
The ATO annually releases its compliance program that identifies issues that are
attracting its attention, what it sees as risks for the upcoming year, and how it plans to
respond to these risks. The following areas were identified in the 2013/14 Compliance
Program:
For large and multinational businesses, there is a focus on shifting of profits to
lower tax jurisdictions (including, for example, the use of marketing hubs and
business restructures), manipulating equity and debt ratios across borders (i.e. thin
capitalisation), and the use of the tax consolidation regime to gain inappropriate
outcomes.
The use of trusts to conceal income, mischaracterise transactions, artificially reduce
trust income amounts, and underpay tax.
Enhanced and expanded data matching with over 640 million transactions checked
each year to ensure income is correctly reported and claims are not overstated.
Legislation was enacted in June 2013 that will require the Commissioner of Taxation to
publish limited information about the tax affairs of large corporate taxpayers (i.e. those
with a reported total income of AUD 100 million and those with a liability to pay the
MRRT or PRRT), including disclosure of the entitys name, Australian Business Number,
total income, taxable income, and tax payable. The first reporting will cover the 2013/14
tax year, with the first published data occurring in late 2015.
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Australia
Other issues
Intergovernmental agreement (IGA) on the Foreign Account Tax

Compliance Act (FATCA)
In April 2014, the Australian government signed an IGA with the United States in
relation to the implementation of FATCA. The agreement is intended to establish a
framework to assist Australian financial institutions in meeting their obligations under
FATCA.
Australia will enact legislation to give effect to the IGA requiring Australian financial
institutions to collect information about their customers that are likely to be taxpayers in
the United States, and report that information to the ATO. The Australian Commissioner
of Taxation will then pass this information on to the US Internal Revenue Service (IRS).
Legislation has not yet been enacted to give effect to Australias obligations under the
agreement, but is proposed to apply to FATCA reportable accounts maintained on or
after 1 July 2014.
Australia
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Austria
PwC contact
Herbert Greinecker
PwC sterreich GmbH
Erdbergstrae 200
1030 Vienna
Austria
Tel: +43 1 501 88 3300
On 2 July 2013, the Gesellschaftsrechts-nderungsgesetz 2013 was published in the
Austrian Federal Law Gazette. This act simplifies the foundation of a limited liability
company (GmbH)in Austria and includes several amendments to the Austrian tax and
company law system. The law amendments entered into force on 1 July 2013. See Choice
of business entity in the Other issues section for more information.
On 28 February 2014, the Abgabennderungsgesetz 2014 was published in the Austrian
Federal Law Gazette. This act includes significant amendments to the Austrian tax and
company law system. See Accrued expenses, Salary payments, and Payments to foreign
affiliates in the Deductions section; the Group Taxation section; and Choice of business entity
in the Other issues section, as well as Rates of corporate income tax (Krperschaftsteuer) in
the Taxes on corporate income section, for more information.
On 29 April 2014, a draft of the Budgetbegleitgesetz 2014 was published. This act
includes several amendments, but does not result in significant changes in the field of
corporate income taxation.
On 29 April 2014, a draft of the new Grunderwerbssteuergesetz was published. See the
Other taxes section for more information.

Basis of corporate income tax (Krperschaftsteuer)
Corporations (i.e. GmbH, AG) are subject to unlimited taxation in Austria of their
entire (domestic and foreign) income if they have their legal seat or place of effective
management in Austria. A non-Austrian corporate tax resident (with neither a legal seat
nor place of effective management in Austria) is subject to limited taxation on certain
sources of income in Austria.
Rates of corporate income tax (Krperschaftsteuer)
Due to the qualification of corporations as independent tax subjects, a distinction must

always be made between tax ramifications at the level of the company and those at
the shareholder level. At the level of the company, profits are taxed at the standard
corporate income tax (CIT) rate of 25%, regardless of whether profits are retained
or distributed. At the shareholder level, the profit distributions are usually subject to
withholding tax (WHT) of 25%.
There is also a minimum CIT, payable by companies in a tax-loss position. The minimum
CIT can be carried forward without time limitation and can be credited against future
CIT burdens of the company.
The minimum CIT amounts to875 euros (EUR)for stock corporations (AG) for each full
quarter of a year.
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Austria
Austria
As a result of the Gesellschaftsrechts-nderungsgesetz 2013, the minimum CIT fora
GmbH amounts to EUR 125 for the first quarter of 2014 (until 2013 EUR 437.50 per each
full quarter). According to the Abgabennderungsgesetz 2014, the minimum CIT for a
GmbH was increased to EUR 437.50 for each full quarter, beginning with the second
quarter of 2014. However, for GmbHs founded after 30June 2013, the minimum CIT
amounts to EUR 125 for each full quarter of the first five years and EUR 250 for the next
five years.
Local income taxes
There is no additional local income tax levied at the company level.
Corporate residence
A corporation is resident in Austria for tax purposes if either it is registered in Austria
(legal seat) or its place of effective management is located in Austria. The place of
effective management is located where the day-to-day management of the company
is actually carried out and not where singular board decisions are formally made.
However, the definition of place of effective management under Austrian tax law does
not significantly deviate from its definition under the Organisation for Economic Cooperation and Development (OECD) guidelines.
An Austrian PE is defined under Austrian tax law as a fixed establishment where a

business is carried out, in particular:
the place where the management is carried out
plants, warehouses, purchase and sales establishments, and other establishments
where an entrepreneur or ones permanent representative carries out ones business,
or
construction sites, which last for more than six months.
However, the definition of PE is different in some tax treaties. The Austrian tax
authorities generally follow the commentary to the OECD model convention regarding
the PE concept.
Other taxes
Value-added tax (VAT) (Mehrwertsteuer)
Generally, the Austrian VAT law is based on the 6th European Union (EU) VAT Directive.
Under the Austrian VAT law, companies and individuals carrying out an active business
on a permanent basis are qualified as entrepreneurs for VAT purposes. As entrepreneurs,
they have to charge the supply of goods or services provided to their customers with
Austrian VAT at a rate of 20%. A certain limited range of goods and services (such
as food, books, passenger transportation, cultural events) is taxed at the reduced
rate of 10%. Certain other transactions are exempted from Austrian VAT (e.g. export
transactions).
Input VAT
Entrepreneurs are entitled to deduct Austrian input VAT insofar as the input VAT does
not result from goods/services purchased that are directly linked to certain VAT-exempt
sales (e.g. interest income, insurance premium). However, certain transactions are
exempt from Austrian VAT (e.g. export transactions) without limiting the ability of
the entrepreneur to deduct the related input VAT. To be entitled to deduct input VAT,
the entrepreneur must obtain an invoice from ones supplier that fulfils certain formal
requirements.
Austria
117
Austria
VAT filing and payment
Entrepreneurs have to file monthly or quarterly VAT returns by the 15th day of the
second month following the month concerned or by the 15th day of the second month
following the quarter concerned. The balance of the VAT due and the input VAT
deducted has to be paid to the tax office (if VAT burden) or is refunded by the tax office
(if in a net input VAT position) to the electronic tax account of the entrepreneur. A
separate report has to be filed by the entrepreneur at the tax office showing the
cross-border intra EU-transactions made.
Customs duties
Certain cross-border inbound movements of goods from non-EU countries trigger

Austrian customs duty. The duty is levied according to the Austrian customs duty
scheme, which is based on the EU-customs duty scheme. It defines the customs duty
tariffs, dependent on the nature of the good.
Excise taxes
Excise taxes are imposed on certain products, including petroleum (approximately EUR
40 to EUR 600 per 1,000 litres), tobacco products (13% to 47% of price), and alcoholic
beverages (tax rate depends on type of alcohol).
Stability fee for banks
A stability fee for financial institutions was introduced in 2011. According to the
Abgabennderungsgesetz 2014, the taxable base for the stability fee was changed from a
combination of the balance sheet total and the transaction volume of derivatives to the
balance sheet total only. In addition, the stability fee itself was increased from 0.055%
to 0.09% (for EUR 1 billion to EUR 20 billion balance sheet total), respectively, from
0.085% to 0.11% (for balance sheet total over EUR 20 billion). In addition to the stability
fee, there is a contribution of 45% to 55% imposed on the stability fee, which has to be
paid by banks for periods till the end of the year 2017. These contributions are deemed
to be used for stability measures regarding the capital market. The law amendments are
effective as of the second quarter of 2014.
Real estate tax
Local authorities annually levy real estate tax on all Austrian real estate property,
whether developed or not. The tax is levied on the assessed standard ratable value
(Einheitswert) of immovable property. The assessed value is usually substantially lower
than the market value. The effective tax rate depends on the intended use of the real
estate and is calculated using a special multiplier.
Tax rates:
Agricultural area and forestry
1.6for the first EUR 3,650 of the assessed standard ratable value.
2 for the amount of the assessed standard ratable value exceeding EUR 3,650.
Buildings and property are taxed at 2 of the assessed standard ratable value. This
multiplier is reduced for:
Single family houses
to 0.5 for the first EUR 3,650 of the assessed standard ratable value and
to 1 for the next EUR 7,300.
Leasehold and shared property
to 1 for the first EUR 3,650 of the assessed standard ratable value and
to 1.5 for the next EUR 3,650.
All other property
to 1 for the first EUR 3,650 of the assessed standard ratable value.
After the assessed standard ratable value is multiplied by the relevant multiplier, the
real estate tax is calculated by using a special municipal rate fixed by each municipality
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Austria
Austria
(maximum 500%). Finally, the tax amount is reduced by a general reduction of 25% as
stated by law and increased by a 35% inflation adjustment.
Tax is levied at 3.5% on any transaction that causes a change in the ownership of
Austrian real estate or in the person empowered to dispose of such property (e.g. direct
owner). Real estate transfer tax is generally calculated on the basis of the acquisition
price. However, in the case of corporate restructuring under the Reorganisation Tax Act
and in case of real estate transfers free of consideration, the two-fold (in the case of the
former) and the three-fold (in the case of the latter) assessed standard ratable value for
tax purposes is taken as the tax base.
Real estate transactions with a tax base of EUR 1,100 or below are exempt.
Note that an additional 1.1% registration fee becomes due upon incorporation of the
ownership change in the land register. The registration fee is assessed on the basis of the
market value. There is a preferential taxation (threefold ratable value capped at 30% of
the fair market value) in case of family transactions or corporate restructuring qualifying
for the application of theReorganisation Tax Act.
Note that the Austrian Constitutional Court has declared the real estate transfer
tax as unconstitutional and granted a grace period for rectification until 1 June
2014. Subsequently, the legislature has published a law amendment of the
Grunderwerbssteuergesetz that includes several amendments. According to the bill,
the tax for real estate transfers shall be calculated on the basis of the fair market
value (instead of the two-fold or three-fold assessed standard ratable value). The law
amendment enters into force for real estate transactions as of 1 June 2014.
Capital transfer tax (Gesellschaftsteuer)
Capital transfer tax is imposed at a rate of 1% on the initial contribution of capital, other
contractual or voluntary contributions in cash or in kind, and certain hybrid financing
instruments to Austrian corporations. However, in many cases, a taxable event for
capital transfer tax purposes can be eliminated by careful structuring (e.g. contributions
made by the indirect shareholder of an Austrian company [so called grandparent
contributions] do not trigger capital transfer tax).
As a result of the Abgabennderungsgesetz 2014, capital transfer tax will be entirely
abolished as of 1 January 2016.
Stamp duty
Stamp duty is imposed in connection with certain legally predefined transactions for
which a written contract has been established (e.g. lease contracts, bills of exchange,
assignments of receivables). The Austrian administrations understanding of a written
contract is very broad and covers not only paper contracts but also contracts concluded
by electronic means (e.g. electronically signed emails).
The stamp duty is triggered upon the establishment of a legal relationship if at least
one Austrian party is contractually involved or, even if a contract is concluded between
non-Austrian parties only, if the subject of the contract relates to Austria (e.g. lease
contract on Austrian real estate). However, various possibilities are available for most
legal transactions subject to stamp duty to structure them in a way without triggering
stamp duties (e.g. setting up of contracts abroad, offer-acceptance procedure, usage of
audio-tapes).
Loan and credit agreements are not subject to stamp duty.
The stamp duty rates for the most common legal transactions are as follows:
Austria
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Austria
Legal transactions
Lease agreements
Certificates of bonds
Bill of exchange
Assignment of receivables
Stamp duty (%)

1.00
1.00
0.13
0.80
Payroll taxes
Payroll taxes are income taxes levied on employment income, withheld by the employer.
A progressive tax rate is applied to the tax base, being the salary after deduction of
allowances and various expenditures (e.g. social security contribution). The employer
is legally obligated to withhold the payroll tax and liable to do so vis-a-vis the Austrian
tax authority. For more information, see Other taxes in Austrias Individual tax summary at
www.pwc.com/taxsummaries.
Branch income
Austrian branches of foreign corporations are taxed in the same way as Austrian
corporations, except that inter-company dividends received by Austrian branches of nonEU corporations are not tax exempt (see the Income determination section) and Austrian
tax losses can be carried forward only if they exceed non-Austrian profits. Books and
records generally can be kept abroad but must be brought to Austria in case of a tax
audit (upon official request).
Taxable income is determined based on statutory accounts under Austrian generally
accepted accounting principles (GAAP) adjusted for certain deductions and additions
prescribed by the tax law.
Inventory valuation
In general, inventories are valued at the lower of cost or market. If specific identification
during stock movements is not possible, other methods, such as last in first out (LIFO)
and first in first out (FIFO), are permitted when shown to be appropriate. Conformity
between financial book keeping and tax reporting is required.
Capital gains/exit taxation/inbound transfer
Generally, capital gains (short and long-term) are part of the normal annual result of a
corporation and are taxed at the ordinary CIT rate (25%).
A special tax treatment applies to capital gains with respect to the exit of taxable assets.
In the case of a transfer of assets that formed part of a business from Austria to a foreign
country (e.g. allocation of assets to foreign branch), latent capital gains generally
are taxed at the time of the transfer. However, if these assets are transferred to an EU
member state, capital gains taxation can be postponed upon request until the assets are
sold or transferred outside the European Union.
In case of an inbound transfer, generally, the fair market value of the assets is considered
for Austrian income tax purposes (step up). Therefore, any hidden reserves accumulated
abroad are not taxed in Austria.
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Dividend income
Dividends received from an Austrian company at the corporate shareholder level are
generally excluded from the tax base (no minimum stake, no minimum holding period).
This tax exemption refers to domestic dividends only, not to capital gains or losses.
Additionally, dividends received from companies located within the European Union
or from countries within the European Economy Area (EEA)with which Austria has
concluded a comprehensive agreement on mutual assistance regarding the exchange of
information are also tax exempt if the foreign company is subject to a tax similar to the
Austrian CIT and if the foreign CIT rate is not below 15%.
In cases where the dividends from foreign investments are taxable, foreign CIT can be
credited against the Austrian CIT.
Portfolio dividends
Portfolio dividends (i.e. dividends from an investment below 10%) received from
corporations located in member states of the European Union, as well as dividends from
corporations that are located in those EEA and third countries with which Austria has
concluded a comprehensive agreement on mutual assistance regarding the exchange
of information, are generally exempt from CIT. However, under special circumstances,
a switch-over to the credit method, as outlined under International participation
exemption for dividends and capital gains below, has to be considered. Moreover, the
dividend must not be deductible for tax purposes in the source state in order to be tax
exempt at the level of the Austrian recipient (valid for substantial investments and
portfolio dividends).
Stock dividends
A conversion from revenue reserves (retained earnings) to capital by a company does

not lead to taxable income for the shareholder (but triggers 1% capital transfer tax,
which will be abolished as of 1 January 2016). However, capital reductions are treated
as taxable income if within ten years prior to the capital reduction the above-mentioned
increase in capital was repaid to the shareholder. Otherwise, they are tax exempt.
International participation exemption for dividends and capital gains
Dividends received from a foreign company are also tax exempt at the corporate
shareholder level if the Austrian company holds at least 10% of the issued share capital
for a minimum holding period of one year (international participation exemption).
Furthermore, both capital gains and capital losses derived from shares qualifying for the
international participation exemption are tax neutral. This means a deduction of capital
losses is no longer available. However, the parent company can exercise an (irrevocable)
option for each single participation acquired to treat both capital gains and capital losses
as taxable (spread of losses and depreciations over a period of seven years). The option
refers to capital gains (losses) only and does not affect the tax treatment of ongoing
dividend distributions.
Switch-over-clause
In the case of presumed tax abuse, the participation exemption for dividends and capital
gains is replaced by a tax credit (switch-over-clause). The credit system is applied if the
foreign subsidiary does not meet an active-trade-or-business test (i.e. passive income
from royalties, interest, etc. is greater than 50% of total income of subsidiary) and, at
the same time, is subject to an effective foreign CIT rate below 15%. The domestic and
foreign participation exemptions are available to Austrian resident corporations and
to Austrian branches of EU corporations only, but not to Austrian branches of non-EU
corporations.
Interest income
Interest income is taxed at the general CIT rate of 25%.

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Rental income
Rental income is treated as normal business income.
Foreign income
Austrian resident corporations are taxed on their worldwide income. If a double taxation
treaty (DTT) is in force, double taxation is mitigated either through an exemption or
by granting a tax credit equal to the foreign WHT at the maximum (capped with the
Austrian CIT incurred on the foreign-source income). If foreign WHT cannot be credited
at the level of the Austrian corporation (e.g. due to a loss position), Austrian tax law
does not allow one to carry forward the foreign WHT to future assessment periods.
However, if the source of the income is a non-treaty country, exemption or a tax credit
shall be available based on unilateral relief (representing a discretionary decision
of the Austrian Ministry of Finance only but no legal entitlement for the applicant).
Austrian tax law does not provide for a deferral of taxes on foreign income. Special rules
for taxing undistributedincome of foreign subsidiaries are applicable only to foreign
investment funds.
Please note that Austrian Tax Law does not define special controlled foreign company
(CFC) rules. However, under certain circumstances, the Austrian tax administration,
under a substance over form approach, taxes passive income of foreign subsidiaries
of Austrian companies located in low tax jurisdictions (see switch-over-clause under
International participation exemption for dividends and capital gains above).
Deductions
Only the straight-line method is accepted for tax purposes, whereby the cost is evenly
spread over the useful life of an asset. For certain assets, depreciation rates relevant for
tax purposes are prescribed by the tax law and shown in the following chart:
Assets
Buildings (industrial use)
Buildings (banking, insurance)
Other buildings
Automobiles

3.0
2.5
2.0
12.5
Tax depreciation is not required to conform to financial depreciation under Austrian

GAAP. If depreciated property is sold, the difference between tax value and sale
proceeds is taxed as a profit or loss in the year of sale.
Trademarks are usually amortised over 15 years. Other intangibles have to be amortised
over their useful lives.
Goodwill
Goodwill arising in the course of an asset deal for tax purposes must be amortised over
15 years. Goodwill arising in the course of a share deal can be amortised only if the
acquired company is included in a tax group (see the Group taxation section). Goodwill
arising as a result of a corporate merger cannot be amortised.
Organisational and start-up expenses
Generally, organisational and start-up expenses are tax deductible.
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Interest expenses
Interest payments (also inter-company) are generally tax deductible if they meet the
general arms-length requirements. See Thin capitalisation in the Group taxation section
for more information.
Financing costs
According to current tax law, interest expenses resulting from the debt-financed
acquisition of shares are usually tax deductible. This is so even if the Austrian
participation exemption regime applies (see the Income determination section).
However, interest expenses relating to the debt-financed acquisition of shares from
related parties or (directly or indirectly) controlling shareholders are generally nondeductible. This disallowance of interest also applies in circumstances where the
shareholder acquiring the shares has been funded by a debt-financed equity contribution
(insofar as the equity contribution was made in direct connection with the share
acquisition). The deductibility of interest expenses incurred in connection with the debtfinanced acquisition of shares from a third party is not covered by this rule.
Other financing costs (e.g. fees, legal advice) directly related to tax-exempt dividend
income are not deductible. However, foreign exchange expenses or profits accumulated
in connection with the financing of tax-exempted international participations are
treated as a deductible or taxable (respectively) item. However, according to the bill of
the Budgetbegleitgesetz 2014, it is planned that all financing costs that relate to taxexempted international participations will be treated as non-deductible.
Accrued expenses
Certain accruals (such as provisions for liabilities and impending losses) running for
more than 12 months as of the closing date of the accounts are accepted for tax purposes
at 80% of their value only. Exempted from this reduction are provisions for personnel
benefits (severance payments, pensions, vacations, and anniversary awards) for which
specific reduction and computation methods have been provided and provisions that
were already calculated by discounting a future obligation.
As a result of the Abgabennderungsgesetz 2014, long-term accruals made from 30 June
2014 onwards are to be discounted, depending on their actual duration. The discount
rate to be used is 3.5%. Valuation differences resulting for already existing long-term
accruals have to be spread over three years. The exemption for personnel benefits
(severance payments, pensions, vacations, and anniversary awards) will still apply.
In general, lump-sum accruals and accruals for deferred repairs and maintenance are
not allowed for tax purposes.
Bad debt
Valuation allowances for bad debts are, in principle, deductible for tax purposes,
unless they are calculated on a lump-sum basis. In case of inter-company receivables,
appropriate documentation regarding the compliance with the arms-length principle is
required.
Donations to certain charitable institutions are generally tax deductible, up to a limit of

10% of the current years profit.
Furthermore, donations to certain public Austrian institutions, such as universities, art
colleges, or the academy of science, and to non-profit organisations performing research
and educational activities mainly for the benefit of the Austrian science or economy
may also be deducted as operating expenses, up to the limit of 10% of the current years
profit. The same is valid for donations granted to foreign institutions with residence
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in the EU/EEA or third countries with which Austria has concluded an agreement
on mutual assistance regarding the exchange of information. The requirement for
deductibility is that the activities of the organisation are carried out mainly for the
benefit of Austrian science or the Austrian economy.
Meals and entertainment
The deductibility of costs for business lunches generally is limited to 50% of actual
expenses incurred (provided the business lunch had the purpose of acquiring new
business).
The deductibility of entertainment expenses is restricted to advertising expenses.
Salary payments
Payments to a member of the supervisory board (Aufsichtsrat) are tax deductible up to

a limit of 50%. As of March 2014, salaries (including all payments in cash and in kind)
exceeding EUR 500,000 per person and per year are no longer tax deductible. This rule
also covers bonus payments and pension schemes.
Fines and penalties
Fines and penalties are generally not tax deductible.
Taxes
Austrian and foreign taxes on income and other personal taxes, as well as VAT insofar
as it relates to non-deductible expenditures, are non-deductible. Other taxes, such as
payroll or capital transfer taxes, are deductible.
Tax losses can be carried forward without any time limit. However, tax loss
carryforwards generally can be offset against taxable income only up to a maximum of
75% of the taxable income for any given year. Some exceptions apply (e.g. in connection
with tax groups, in the case of liquidations, or the recapture taxation of foreign losses),
allowing a company to charge tax loss carryforwards available against 100% of annual
taxable income.
The Austrian tax law does not provide for a carryback of tax losses.
Loss-trafficking (Mantelkauf)
Tax loss carryforwards may be lost in the case of a share deal being classified as losstrafficking (so called Mantelkauf) or in the course of a legal restructuring leading to
similar results.
Under Austrian tax law, a share deal against compensation is classified as a Mantelkauf
if, from a substance over form perspective, the economic identity of a company is
changed due to the transaction. The change of economic identity of a company is
realised if all of the following structural changes are made to the acquired Austrian
company having the tax loss carryforwards available:
Change of shareholder structure.
Change of the organisational structure.
Change of the business structure.
All three conditions cumulatively have to be met. There is no exact time period defined
within which they have to be met; however, meeting them within one year after the
share transfer usually is regarded as a strong indication for a Mantelkauf.
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Generally, there are no restrictions on the deductibility of royalties, interest, and service
fees paid to foreign affiliates, provided they are at arms length (which should be
appropriately documented by agreements, contracts, calculation sheets, etc.). Payments
to affiliated companies not meeting arms-length standards are treated as a hidden
distribution of earnings (i.e. they are not tax deductible, and WHT is usually triggered at
source). See Transfer pricing in the Group taxation section for more information.
In addition, as of March 2014, interest and royalty payments made by an Austrian
company to affiliated companies located in low tax jurisdictions (effectively taxed below
10%) are non-deductible as well.
Note that the domestic implementation of the EU Interest Royalty Directive, which
abolishes WHT on cross-border payments of interest and licence fees (regardless of
whether taken out by deduction or by assessment) between affiliated companies in the
member states, should be considered.
Group taxation
Two or more companies can form a tax group, provided the parent company directly
or indirectly owns more than 50% of the shares in the subsidiaries. The tax group also
can include foreign group members. However, as of March 2014, the scope of foreign
tax group members has been limited to corporations being resident in EU member
states and in states that have entered into a comprehensive administrative assistance
arrangement with Austria. If a group member withdraws from the group within a
minimum commitment-period of three years, all tax effects derived from its group
membership must be reversed.
Within a tax group, all of the taxable results (profit and loss) of the domestic group
members are attributed to their respective group parent. From foreign tax group
members, tax losses in the proportion of the shareholding quota are attributed to the tax
group parent. The foreign tax loss has to be calculated in accordance with Austrian tax
law. However, it is capped with the amount actually suffered based on foreign tax law.
Starting in 2015, ongoing tax losses from foreign group members can only be recognised
to the extent of 75% of the profit of all domestic group members (including the group
leader). The remaining loss surplus may be carried forward by the group parent. In
addition, foreign tax losses utilised by the Austrian tax group parent are subject to
recapture taxation at the time they are utilised by the tax group member in the source
state, or in the moment the group member withdraws from the Austrian tax group.
Under the recapture taxation scheme, the Austrian tax group has to increase its Austrian
tax base by the amount of foreign tax losses used in prior periods.
For the purpose of the application of the recapture taxation scheme, a withdrawal from
the tax group is also assumed if the foreign group member significantly reduces the
size of its business (compared to the size of the business at the time the losses arose).
Reduction of size is measured on the basis of business parameters such as turnover,
assets, balance sheet totals, and employees, while the importance of the respective
criteria depends on the nature of the particular business.
Under the previous tax group regime, goodwill that arose in the course of a share deal
(acquisition of an Austrian active business company from a third party contractor)
had to be amortised over 15 years, provided that the acquired company was included
in a tax group. Goodwill amortisations have now been abolished and are applicable
only for share deals effected until 28 February 2014. Existing goodwill amortisations
are grandfathered, provided the goodwill amortisation potentially impacted the share
purchase price.
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Write-downs of participations in tax group members are not tax deductible.
Transfer pricing
Under Austrian Tax Law, there are no explicittransfer pricingregulations available

defining, in detail, the local requirements with regards to arms length, the
documentation standards required, penalties, etc. In general, Austria applies the
OECDtransfer pricingguidelines referring to the OECD model tax convention.
Furthermore, Austriantransfer pricingguidelines were recently issued by Austrian tax
authorities. The guidelines represent the Austrian authoritys understanding of intercompany business relationships with regards to their arms-length classification and are
based on the OECDtransfer pricingguidelines.
According to these guidelines, all business transactions between affiliated companies
must be carried out under consideration of the arms-length principle. Where a legal
transaction is deemed not to correspond to arms-length principles, the transaction
price is adjusted for CIT purposes. Such an adjustment constitutes either a constructive
dividend or a capital contribution. Currently, there is the option of applying for a
non-binding ruling of the tax authorities. Additionally, there is an advanced ruling
opportunity available. Under this regulation, binding information in the fields of transfer
pricing, group taxation, and mergers and acquisitions (M&A) can be requested from the
Austrian tax authorities against payment of an administrative fee (the fee rate depends
on the size of the applicants business).
Thin capitalisation
There are no explicit tax regulations available under Austrian tax law stipulating
the minimum equity required by a company (thin capitalisation rules). Basically,
group financing has to comply with general arms length requirements. Therefore, an
Austrian group entity being financed by an affiliated entity must be able to document
that it would have been able to obtain funds from third party creditors under the
same conditions as from an affiliated financing entity. Therefore, the appropriate ratio
between an Austrian companys equity and debt will mainly depend on the individual
situation of the company (profit expectations, market conditions, etc.) and its industry.
Nonetheless, the fiscal authorities in administrative practice (i.e. no safe-harbour rule)
tend to accept a debt-to-equity ratio of approximately 3:1 to 4:1. However, the debtto-equity ratio accepted by tax authorities also strongly depends on the average ratio
relevant for the respective industry sector. If an inter-company loan is not accepted as
debt for tax purposes, it is reclassified into hidden equity and related interest payments
into (non-deductible) dividend distributions.
Furthermore, under Austrian commercial law (for companies subject to statutory
audits), a minimum equity ratio of 8% is claimed. If the equity ratio of the company falls
below 8% and its earning power (virtual period for debt redemption) at the same time
does not meet certain requirements, a formal and public reorganisation process will
have to be initiated.

Foreign tax credit (matching credit)
Generally, foreign WHT can be credited against Austrian CIT (see Foreign income in
the Income determination section). In special cases (e.g. Brazil, China, Korea), the DTT
provides for a matching credit, which allows the credit of a pre-defined amount that
exceeds the actually paid foreign WHT.
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Research and development (R&D) incentives
R&D costs are fully deductible at the time they accrue. An R&D premium of 10% (i.e.
R&D expenses x 10% = tax refund) may be claimed for R&D activities performed in
Austria.
In order to receive the R&D premium of 10%, an expert report (issued by the Austrian
research promotion organisation [FFG]) is required.
The R&D premium is also available in case of contract R&D; however, R&D incentives
cannot be claimed by both principal and agent (the agentis just able toapply for the
premium if the principal does not). In case of contract R&D, the privileged R&D costs are
capped at EUR 1 million per year.
Employment incentives
A tax bonus payment of 6% or, alternatively, an allowance of 20% can be claimed for
expenditures in connection with the training of employees. These incentives can be
claimed for external training expenditures and for in-house training expenditures,
provided that there is a dedicated in-house training department (for in-house training
expenditures, only the allowance can be applied for).
For investment in certain regions, government grants and subsidies are available and are
generally individually negotiated.
Withholding taxes
Dividend WHT
Under Austrian domestic law, there is generally a 25% WHT on dividends (profit
distributions) paid to a foreign parent company. The WHT has to be deducted and
forwarded by the Austrian subsidiary to the tax office.
To end up with the reduced WHT rate as defined under the DTT applicable, Austrian
tax law provides for the following alternative methods of WHT relief: refund method or
exemption at source method.
Refund method
The Austrian subsidiary generally has to withhold 25% WHT on profit distributions
to the foreign parent company, and the parent company has to apply for a refund (of
the difference between 25% WHT and the lower DTT rate). In the course of the refund
process, the Austrian tax administration analyses whether the foreign shareholder can
be qualified as beneficial owner of the dividends paid. If the refund is approved by the
Austrian tax authority, dividend distributions within the following three years can be
done without deduction of WHT (for distributions of a comparable size and provided the
foreign holding structure did not change in the meantime).
Exemption at source method
Relief at the source is available only if the direct parent company issues a written
declaration confirming that it is an active company carrying out an active business
that goes beyond the level of pure asset management (holding activities, group
financing, etc.) and has its own employees and office space at its disposal (substance
requirements).
WHT on dividends paid to EU companies
With regard to dividends paid to EU resident corporate shareholders, Austria has

implemented the EU Parent/Subsidiary Directive according to which domestic WHT
is reduced to zero. The requirements for the reduction are that the EU resident parent
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company, which also has to meet the substance requirements mentioned above (see
Exemption at source method) at the moment of the dividend distribution, must directly
own at least 10% of the share capital of the Austrian subsidiary for a period of at least
one year. In case of foreign EU shareholders being qualified as pure holding companies,
the Austrian tax administration does not allow an exemption at source but claims the
application of the refund method.
Provided the requirements according to the EU Parent/Subsidiary Directive are not
met, Austrian WHT has to be deducted. If an EU parent company cannot credit the
Austrian WHT deducted against the CIT of its resident state (e.g. because the foreign
dividend income is exempted from the CIT or due to a loss position of the shareholder),
it is entitled to apply for a refund of the Austrian WHT. This application has to include
a confirmation/documentation that the Austrian WHT could (fully or partly) not be
credited at the level of the parent company.
Repayment of equity
The tax-wise equity of a company has to be annually reported to the Austrian tax
authority as part of the CIT return (so called Evidenzkonto). This equity can be repaid
to the domestic or foreign shareholders without triggering Austrian WHT. However,
the tax-wise classificationof a dividend as capital repayment has to be shown in the
shareholder resolution about the distribution.
Interest WHT
Interest payments to non-resident companies are currently not subject to WHT (provided
no Austrian real estate property is used as security). However, interest on Austrian bank
deposits received by individuals resident in the European Union is subject to 35% EU
WHT on the basis of the Austrian EU Withholding Tax Act.
As of the beginning of 2015, interest on Austrian bank deposits or Austrian bonds,
where the paying/depositary agent is located in Austria, is subject to 25% WHT. This
law amendment is a result of the Abgabennderungsgesetz 2014 and will apply for nonresident individuals and for resident and non-resident companies.
Royalties WHT
On royalties paid to a non-resident company, Austrian WHT at a rate of 20% has to be

deducted. This tax rate can be reduced under an applicable DTT or under the application
of the EU Interest Royalty Directive, which was implemented in Austrian Tax Law.
Tax treaties
The following table lists the countries with which Austria has signed a DTT and provides
details of the amount of Austrian WHT.
Recipient
Non-residents:
Non-treaty:
Corporations and business enterprises
Individuals
Treaty:
Albania
Algeria
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Dividends (1, 2)
0/25 (5)
25 (6)
WHT (%)
Interest (3) Royalties, licences (4)
0/25
0
0/25
0
25
25
0
0
20
20
5*/15
5+/15
0
0
5
10
Austria
Recipient
Argentina (7)
(DTT was recalled by Argentina in 2009)
Armenia
Australia
Azerbaijan
Bahrain
Barbados
Belarus (White Russia)
Belgium
Belize
Bosnia and Herzegovina (10)
Brazil
Bulgaria
Canada
Chile (39)
China
Croatia
Cuba
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Georgia
Germany
Greece
Hong Kong (18)
Hungary
India
Indonesia
Iran
Ireland
Israel
Italy
Japan
Kazakhstan
Korea
Kuwait
Kyrgyzstan
Latvia
Libya (21)
Liechtenstein (42)
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Dividends (1, 2)
WHT (%)
5+/15
15
5/10/15 (8)
0
5+/15
5*/15
15
5*/15
5*/10
15
0
5+/15
15
7*/10
0+/15
5*/15
10
0+/10
0+/15
10
5*/15
0+/10
0+/15
0**/5+/10 (17)
5+/15
5*/15
0+/10
10
10
10*/15
5*/10
10
25
15
10**/20
5+/15
5*/15
0
5*/15
10/15*
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
5
10
5/10 (9)
0
0
5
0/10**
0
5
10/15/25 (11)
5
10
5/10 (40)
6/10 (12)
0
0/5 (14)
0
5 (13)
0
0/20 (15)
5/10 (16)
5
0
0
0
7
3
0
10
10
5
0/10**
10
0/10**
10
10
2/10 (19)
10
10
5/10 (20)
0+/15 (43)
5*/15
5*/15
0+/15
5*/10
15
0
0
0
0
0
0
5/10 (22)
5/10 (23)
0/10**
0
10/15 (24)
0/10 (25)
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Recipient
Mexico
Moldova
Mongolia
Morocco
Nepal
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Qatar (37)
Romania
Russia
Russian Federation (29)
San Marino
Saudi Arabia
Serbia
Singapore
Slovakia (31)
Slovenia
South Africa
Spain
Sweden
Switzerland
Syria (33)
Tajikistan (38)
Thailand
Tunisia
Turkey
Ukraine
United Kingdom
United States (41)
Uzbekistan
Venezuela
Vietnam
Dividends (1, 2)
5+/10
5*/15
5+/10
5*/10
5*/10+/15
5*/15
15
5*/15
10+++/15
10+/25
5+/15
15
0
0*/5
5*/15 (28)
0
0+/15
5
5*/15
0+/10
10
5*/15
5*/15
10**/15
5*/10
0+++/15 (32)
5*/10
5++/10
10*/25
10*/20
5*/15
5+/10
0
5*/15
5+/15
5+/15
5++/15
5***/10*/15
WHT (%)
0
10
0
5
0
5/10 (26)
0
10
0
15
0
0/10**
0
10
0
0
0
10
0
15
0
5
0
5/10 (27)
0
5
0
3
0
0
0
0
0
0
10
0
5/10 (30)
0
5
0
5
0
5
0
0
0
5
0
0/10**
0
0
0
12
0
8
0
15
0
10/15 (34)
0
10
0
5
0
0
0
0/10**
0
0/10 (35)
0
5
0
5
0
7.5/10 (36)
Notes
1.
2.
3.
130
Dividend distributions attributable to a prior release of paid-in surplus or other shareholder

contributions (classified as capital reserves) are deemed to be a repayment of capital, i.e. no WHT is
incurred. At the shareholders level, dividends received and those classified as contribution refund will
reduce the tax basis assessment for investments. To the extent to which the tax basis would become
negative, such dividends are treated as taxable income (unless taxation is eliminated by a tax treaty).
Under certain treaties, the amount of the WHT is dependent on the extent of the proportion of issued
share capital held by the recipient. Where this is the case, all rates are given. Those marked with +
refer to an investment of 10%, ++ to 15%, +++ to 20%, * to 25%, ** to 50%, and *** to 70%.
Interest on cash deposits in euro or foreign currency in bank accounts, on fixed interest bearing
securities in foreign currency (issued after 31 December 1988), and on fixed interest bearing
securities denominated in Austrian schillings or euro (issued after 31 December 1983) are subject
to a 25% WHT. If the recipient is an individual, this WHT is final (no further income taxation and
inheritance taxation). Companies receiving interest payments may obtain an exemption from WHT
if they provide the bank or other custodial agent with a written confirmation from the recipient
Austria
Austria
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
that such interest payments constitute a part of the recipients operating revenues (exemption
statement). Interest payments to non-residents without a PE in Austria are generally not subject to
WHT (provided the loan is not secured via Austrian land property). At interest payments between
affiliated companies, the regulations stipulated by the EU Interest Directive have to be taken into
consideration.
In case of payments to countries marked with **, the rate is 0% unless more than 50% of the issued
share capital of the company paying the royalties is held by the recipient, in which case the rate
given applies. At royalty payments between affiliated companies, the regulations stipulated by the EU
Interest Directive have to be taken into consideration.
If the recipient holds a participation of less than 10% in the distributing company, the dividends are
subject to a 25% WHT. Since dividends distributed by an Austrian corporation to another Austrian
corporation are generally not subject to taxation, the WHT is credited against CIT upon assessment
of the recipient corporation for the respective tax year.
WHT on dividends from Austrian companies is final, i.e. no further income tax is collected from the
recipient (provided it is an individual).
The treaty was recalled by Argentina in 2009. Austrian tax citizens are protected by section () 48
BAO (Bundesabgabenordnung [Austrian Fiscal Federal Code]) against double taxation. Austria will try
to enter into new negotiations with Argentina.
5% for shares of at least 25% and worth at a minimum of 250,000 United States dollars (USD); 10%
for shares of at least 25% and worth at least USD 100,000; 15% in all other cases.
5% for industrial licences and know-how not more than three years old; 10% in all other cases.
The treaty entered into force on 1 January 2012 and is applicable as of the beginning offiscal year
(FY) 2012.
10% for copyright licence fees in connection with literature, science, and art; 25% for trademarks
licence fees; 15% in all other cases.
6% for industrial, commercial, or scientific equipment; 10% in all other cases.
5% for licence income from copyrights, brands, plans, secret formulas or procedures, computer
software, industrial, commercial or scientific use of equipment, and information.
0% for copyright royalties in connection with the production of literary, dramatic, musical, or artistic
work; 5% in all other cases.
20% for films.
5% for leasing of mobile goods, and 10% for other licences.
0% for shares of at least 50% and worth at a minimum of EUR 2 million; 5% for shares of at least
10% and worth at least EUR 100,000; 10% for shares in all other cases. The treaty was updated
on 4 July 2012, but it has not yet been decided when the amendments will enter into force (0% if a
company directly holds at least 10% of the capital of the company paying the dividends, 10% for
shares in all other cases).
The treaty entered into force on 1 January 2011 and is applicable as of the beginning ofFY 2012
(Austria: 1 January 2012, Hong Kong: 1 April 2012).
2% for licence income from industrial, commercial, or scientific use, and 10% for other licences.
5% for the use of commercial or scientific equipment; 10% in all other cases.
The treaty was signed on 16 September 2010. It has not yet been decided when it will enter into
force.
5% in case of direct (or indirect over a patent-realisation-company) payments of royalties by
companies of the other member state (with an industrial establishment in the other member state),
and 10% for other licences.
5% in case of licence income from industrial, commercial, or scientific use, and 10% for other
licences.
15% for films.
0% for copyright licence fees in connection with literature, art, and scientific use, and 10% for other
licences.
10% for the right of use of copyrights to artistic, scientific, or literary as well as cinematographic
works, and 5% for other licences.
For Portugal, the rate of WHT is 5%, but 10% if more than 50% of the issued share capital is owned
by the recipient.
5% if capital share amounts to at least 10% and worth at least USD 100,000; 15% in all other cases.
The treaty applies to Tajikistan and Turkmenistan. With Russia, a new treaty has been ratified.
5% for copyright licence fees; 10% for other licences.
Until a new treaty will be established, the treaty with Czechoslovakia remains applicable.
For dividend distributions retroactive as of 1 January 2000.
The treaty was signed on 3 March 2009. It has not yet been decided when it will enter into force.
15% for films.
10% for films.
7.5% for fees for technical services; 10% for royalties.
The treaty entered into force on 7 March 2012 and is applicable as of the beginning ofFY 2013.
The newtreaty was signed on 7 June 2011 and entered into forceon 1 July 2012. It is applicable as
of the beginning ofFY 2013.
The treaty was signed on 6 December 2012. It has not yet been decided when it will enter into force.
5% for the use of, or the right to use, any industrial, commercial, or scientific equipment; 10% in all
other cases.
Austria and the United States created a draft for an amendment protocol to the existing DTT, but it
has not yet been decided when it will be signed.
Austria and Liechtenstein signed an amendment protocol to the existing DTT. It is applicable as of the
beginning of FY 2014 for tax years starting on or after 1 January 2014.
As of 2014, 0% for a direct participation of at least 10% and a holding period of at least 12 months;
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Tax administration
Taxable period
The standard tax assessment period in Austria is the calendar year. However, a
companys financial year may deviate. When the tax and financial years deviate, the tax
assessments for a year are based on the profits derived in the financial year(s) ending
in the respective calendar year (e.g. if tax year is 1 June 2014 to 31 May 2015, then
assessment is financial year 2015).
Tax returns
Generally, the CIT return has to be submitted electronically by 30 June of the calendar
year following the year in which the fiscal year of the company ends. However, if the
company is represented by an Austrian certified tax advisor, the tax return can be
submitted by 31 March of the second following year at the latest (if the company will not
be formally requested by the tax office to file it earlier). If the end of a tax year is 31 May
2014 for example, the filing deadline is 30 June 2015 (without tax advisor) or 31 March
2016 (with tax advisor).
Electronic filing of annual CIT returns
The annual CIT return (as well as the annual VAT return) has to be filed by electronic
means. In the case of a company that cannot reasonably be expected to file tax returns
electronically due to the lack of technical prerequisites, filing of the tax return is allowed
to be done via pre-printed forms.
Payment of tax
CIT is prepaid in quarterly instalments during the calendar year, with a final settlement
subsequent to the annual assessment. Prepayments of CIT generally are based on the
most recently assessed tax years tax burden (unless the taxpayer can show that its tax
charge for the current year will be lower).
The difference between CIT as per the final assessment and the prepayments made is
interest bearing from 1 October of the year subsequent to the year when the tax claim
arose up to the date when the assessment is released (late payment interest). Interest at
a rate of currently 1.88% is applied to underpayments (as well as overpayments) of tax.
Tax audit process
Tax audits usually cover CIT, VAT, and WHT. Separate audits are carried out in
connection with payroll taxes and social security contributions.
In general, companies are audited every three to four years. The audit period usually
covers three to four fiscal years, so, generally, each fiscal year is audited.
The duration of a tax audit depends on the number of years covered and on the
complexity of topics (usually between 0.5 and 1.5 years). These topics usually cover
ongoing compliance, such as tax returns. Specific topics vary from company to company
and can involve, for instance,:
Business restructurings (applicability of Austrian reorganisation tax act, transfer of
intangibles, etc.).
Tax groups (all group members are audited together).
WHT on dividends, licences, etc.
Compliance with arms-length principle in case of group transactions (tax auditors
recently tend to focus on transfer pricing issues).
The right to assess CIT is subject to a general limitation period of five years after the end
of the calendar year in which the fiscal year ends. Additionally, the limitation period can
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be extended in cases where certain interruptive events (e.g. tax audit, tax assessment)
take place within the general limitation period. The maximum limitation period is
generally ten years.
The limitation period in case of tax evasion is also ten years.
In certain cases, the maximum limitation period can be extended to 15 years.
Other issues
The most important types of companies in Austria are the limited liability corporation
(GmbH) and the joint stock corporation (AG). Foreign investors generally choose the
GmbH since it provides a higher degree of corporate law control and allows for lower
equity provision.
As a legal entity, the GmbH exists upon registration with the Companies Register.
The application for registration must contain the notarised signatures of all managing
directors. The articles of association must be drawn up in the form of a notarial deed
(written document executed by a public notary) and must, as minimum requirements,
include the name of the company as well as its seat, the business purpose, the amount of
registered capital, and the capital contribution of each of the various owners.
According to the Abgabennderungsgesetz 2014, the minimum share capital for a GmbH
amounts to EUR 35,000 as of March 2014. This regulation is a partial reversal of the
amendments resulting from the Gesellschaftsrechts-nderungsgesetz 2013, where the
minimum registered capital amount was reduced from EUR 35,000 to EUR 10,000.
Formation costs and fees are linked with the amount of the minimum share capital.
As a result of the Abgabennderungsgesetz 2014 and the Gesellschaftsrechtsnderungsgesetz 2013, the minimum share capital for companies founded after 30
June 2013 is EUR 10,000 for the first ten years after foundation. In the case a company
intends to claim this foundation privilege, an amendment of the articles of association is
required. After the first ten years upon incorporation, the minimum share capital will be
automatically increased to EUR 35,000.
Generally, one half of the registered capital must be raised in cash while the remainder
may be contributed in the form of assets (contributions in kind). Of the original
capital contribution, 25%, or at least EUR 17,500 (EUR 5,000 in case of a start-up),
must actually be paid in upon incorporation. Under certain conditions, the capital can
be provided exclusively in the form of assets (incorporation in kind, in this case the
contribution is subject to an audit verifying the market value of the assets contributed).
The articles of association may provide for additional capital contributions payable by
the owners on the basis of a resolution adopted by the shareholder meeting.
The minimum share capital of an AG is EUR 70,000. For an AG, the same payment
regulations apply as for a GmbH, but the owners can agree upon a further capital
contribution going beyond the nominal value of the shares (premium). The premium is
shown on the companys balance sheet as a capital reserve.
Since 2004, the company type Societas Europaea (SE) can be chosen in Austria. The SE
is a stock corporation based on community law. The advantages of this legal form are
the simplification of organisational structures (in particular for international groups)
and the possibility of cross-border transfers of corporation seats without loss of the
legal identity. The SE allows the choice of a business location under an economic point
of view as well as the choice of the most favourable legislation. The minimum share
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capital required for the incorporation of a SE is EUR 120,000 while the statutory seat of
the corporation must be located in the same country where the place of management is
located in.
Restructuring measures (M&A from a business perspective)
Transfers of assets and undertakings can be realised with retroactive effect and be tax
neutral within the framework of the Austrian Reorganisation Tax Act.
The legislation administers the following areas (Article I-VI):

Mergers (within EU also cross border) of corporations.

Special conversion (from corporations to partnerships).
Contribution of businesses and exchange of shares.
Merger of partnerships.
Demerger of partnerships.
Demerger of corporations.
If the reorganisation qualifies for the application of the Austrian Reorganisation Tax Act,
the reorganisation steps are realised tax neutrally and with a retroactive effect as of the
reorganisation due date. Existing tax loss carryforwards can be transferred under certain
conditions as well. Furthermore, several other tax privileges are granted under the
Reorganisation Tax Act for stamp duties, capital transfer tax, etc.
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Azerbaijan
PwC contact
Movlan Pashayev
The Landmark Office Plaza III
12th floor, 90A Nizami Street
Baku AZ1010, Azerbaijan
Tel: +994 12 497 25 15
There have been no significant corporate tax developments in Azerbaijan during the past
year.

In Azerbaijan, resident taxpayers are subject to a profit tax on their worldwide income.
A non-resident enterprise operating in Azerbaijan through a permanent establishment
(PE) must pay tax on the gross income generated from Azerbaijan sources, less any
related deductions attributable to the PE. Gross income of a non-resident enterprise
generated from Azerbaijan sources and not connected with a PE will be taxed at the
source of payment without any deductions allowed for expenses.
Taxable profits are defined to be the difference between a taxpayers gross income and
deductible expenses.
Gross income encompasses all revenues received by a taxpayer from all economic
activities, unless the revenues are expressly exempted under the law.
Deductible expenses encompass all properly documented expenses that are incurred in
the furtherance of a taxpayers business activities.
Domestic enterprises and PEs of non-residents are subject to profit tax at the flat rate of
20%.
Simplified tax system
The Tax Code stipulates payment of taxes based on a simplified system for
enterprises not registered as VAT payers and whosecumulative gross revenue during
anyconsecutive 12-month periodis less than 120,000 Azerbaijani manats (AZN), except
for enterprises producing excisable goods, credit and insurance organisations, and
investment funds and professional participants in the securities market. The simplified
tax is imposed on gross revenue at a rate of 4% in Baku and at a rate of 2% in other
regions of Azerbaijan. A special rate of simplified tax is set for enterprises involved in
residential construction at a fixed amount of AZN 10 per square metre plus an applied
co-efficient, which is determined by regional executive authorities. A special rate of
simplified tax is set for operators of gambling games at a rate of 6% from gross receipts
from game participants.
Other special corporate tax regimes
There are other tax regimes applicable under special agreements concluded between
the Azerbaijan government and foreign oil companies: production sharing agreements
(PSAs) and host government agreements (HGAs). The PSA and HGA regimes apply to all
enterprises involved in these agreements, including foreign oil companies functioning
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as contractors and foreign service companies providing services to the contractor or the
operating company.
There are22 signed and ratified PSAs and two HGAs, each with its own separate tax
regime. Each PSA and HGA isin force, published on the official website of the Ministry
of Taxes (www.taxes.gov.az), and contains a tax article that outlines the tax regime
for that particular agreement. While there are several similarities with respect to tax
terms in the various PSAs, there are some differences, other than merely differing tax
rates (e.g. taxation of foreign subcontractors) or reporting requirements. Additionally,
tax protocols for each PSA and HGA, which provide specific guidance regarding the
procedures for payment of taxes and filing of reports, are negotiated with the Ministry of
Taxes and other executive authorities.
Local income taxes
Local income taxes are paid only by companies and organisations that are in the
property of municipalities. Tax rates do not exceed 20% for profit taxpayers and 4% for
simplified taxpayers.
Corporate residence
A resident enterprise is any legal entity established in accordance with the legislation
of Azerbaijan and performing entrepreneurial activity or any entity that is managed in
Azerbaijan.
A PE of a foreign legal entity is subject to taxation with respect to the income attributable
to such PE. A PE is an establishment of a foreign legal entity, through which it fully or
partially performs commercial activities (for these purposes, a PE may be considered a
management unit, office bureau, agency, construction site, etc.) for 90 cumulative days
or morewithin any 12-month period. Activities of an auxiliary or preparatory nature
(e.g. exclusively storing or exhibiting goods or products belonging to a non-resident,
purchasing goods, collecting data by a non-resident enterprise for its own purposes) do
not create a PE.
Other taxes
VAT is levied on the supply of goods and services, and on the import of goods.
VAT rates
The standard rate of VAT is 18%.

Zero rating applies to the following:
Exportation of goods and services.
Importation under the PSA and HGA regimes.
Importation of goods, the supply of goods, and the implementation of works and
provision of services to grant recipients on the expense of financial aid (grants)
received from abroad.
International and transit cargo and passenger transportation, as well as the supply of
works and services directly connected with international and transit flights.
The supply of gold and other valuables to the National Bank of Azerbaijan.
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Taxable persons
Any person who isregistered or is liable to registeras a VAT payer is regarded as a

taxable person.
Companies are required to register for VAT if their cumulativetaxable income exceeds
AZN 120,000 foraconsecutive 12-month period.
Taxable amount
The taxable base is established by starting with the value of the goods and services
without adding the VAT amount, but including any customs duty and excise duty, if
applicable.
The value of taxable imports consists of the value of the goods determined in accordance
with the customs legislation and taxes and duties (other than VAT) to be paid upon
importation to Azerbaijan.
The amount of VAT to be paid is the difference between the amount of VAT received
on taxable supplies of goods and services and VAT paid on the purchase of goods and
services necessary to generate taxable supplies of goods and services.
The Cabinet of Ministers can grant exemptions for the import of goods and equipment
used for production purposes or to provide advanced technology know-how. Such
exemptions are granted for a specific period and in a specific area, and can only be
granted if it is impossible to satisfy the respective needs from local resources.
Customs duties
The Customs Code sets out the rules governing all aspects of the regime, including:
The establishment of bonded warehouses and duty-free zones.
Temporary imports and the processing of foreign goods in Azerbaijan.
The procedures for the re-import and re-export of goods.
Azerbaijan has adopted the internationally accepted classification system for goods. The
valuation procedures for customs purposes are to be determined in line with the general
principles of the World Trade Organization (WTO).
The rates of customs duties are contained in the list of customs duties for the goods to be
imported to Azerbaijan. These rates vary between 0% and 15%, depending on the type
of goods.
Full or partial relief from the duty on temporary imports (generally, for a period of up to
one year) is also available.
Under the PSA regime, contractors, their agents, and subcontractors are entitled to
import and re-export from Azerbaijan, free from any import duties and restrictions,
goods used for hydrocarbon activities.
Excise duty
Excise duties are imposed on tobacco products, alcoholic beverages, light vehicles,
leisure and sports yachts, petroleum, and lubricants.
Taxable persons
Excise duties are paid by companies and organisations, including companies with
foreign investment, as well as branches, divisions, and other independent subdivisions of
companies in Azerbaijan that render services and sell self-produced goods.
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Taxable operations
The following operations are subject to excise duties:

Release of excise goods produced in Azerbaijan outside the premises of the building
in which they were produced.
Import of excise goods pursuant to the customs legislation of Azerbaijan.
Tax rates
The relevant executive authority shall determine rates of excise tax for excise goods
imported into Azerbaijan (with exception of light vehicles, leisure and sports yachts, and
other floating transports stipulated for these purposes).
The following excise rates apply for the following items produced in Azerbaijan:
Food alcohol (including ethyl alcohol non-denatured with alcohol content of not less
than 80%; ethyl alcohol non-denatured with alcohol content of less than 80%): AZN
0.8 per litre.
Vodka, strong drinks and strong beverage materials, liqueurs, and liqueur products:
AZN 0.5 per litre.
Cognac and cognac products: AZN 0.2 per litre.
Sparkling wines: AZN 0.2 per litre.
Wine and vineyard materials: AZN 0.1 per litre.
Beer (with the exception of non-alcoholic beer) and other beverages containing beer:
AZN 0.08 per litre.
All types of tobacco products: 12.5%.
Excise rates on petroleum materials, light vehicles, leisure and sports yachts, and other
floating transports stipulated for these purposes produced in the Azerbaijan Republicare
established by the Cabinet of Ministers. Excise rates for petroleum materials vary from
3% to 72%of the ex-factory price, depending on the product.
Excise rates for imported excised goods are also established by the Cabinet of Ministers.
Property tax
Property tax is levied on both movable and immovable tangible assets owned by
individuals and companies.
Property tax rates
Property tax is imposed on the average annual book value of the taxable property at the
rate of 1%.
Taxable persons
Taxable persons are comprised of the following:

Resident companies, including companies with foreign investment that are treated
as residents under Azerbaijani law; international organisations engaged in economic
activities; and other enterprises.
Branches and affiliated companies of such taxpayers.
Agencies and representative offices of foreign legal entities located in Azerbaijan.
Non-resident companies performing activities through a PE in the territory of
Azerbaijan.
Enterprises can combine their assets and cooperate as joint owners. Joint owners are
liable to pay tax according to their interest in the property concerned.
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Tax base
The property tax base varies according to the residency status of the taxpayer. Resident
companies are subject to property tax on their tangible assets recorded on their
balance sheet. Non-resident companies carrying out a business activity through a PE in
Azerbaijan are only subject to property tax on their tangible assets connected with the
PE.
The following assets are exempt:
Facilities used for the purposes of the environment, fire protection, and civil defence.
Product lines, railways and motorways, communication and power lines, and
melioration and watering facilities.
Automobile transport taxed for the road tax.
Facilities of companies involved in education, health, culture, and sports that are
used only for the purposes of such areas of activity.
Administration
Companies are required to report the average annual value of taxable property and pay
property tax on a quarterly basis, subject to any necessary recalculations at the end of
the year. Tax payments are due within 15 days of the second month of each quarter. The
payment should be 20% of the previous year property tax amount.
The tax on water and air transport means is estimated on 1 January each year by the tax
offices based on data provided by the organisations responsible for registration of means
of transport. The tax is assessed on the person named in the registration document.
When an asset changes ownership during the tax year, the tax liability is defined as the
liability of the new owner.
Land tax
Land tax is levied on Azerbaijans land resources that are in the possession of or used by
individuals or companies.
Land tax rates
The rate of land tax for agricultural land is AZN 0.06 per unit. The units are determined
by the relevant authority on the basis of the purpose, geographical location, and the
quality of agricultural land in the administrative regions.
The rate of land tax for industrial, construction, transport, telecommunications, trade
and housing servicing, and other dedicated land varies from AZN 0.1 to AZN 10 per 100
square metres, depending on the city or region.
Taxable base
Land plots that are in ownership or used are subject to land tax. Exemptions apply to
various types of land owned or used for public purposes by the state or other public
authorities. The government may grant further tax exemptions and reliefs.
Assessment and procedure of payment
Companies must compute the exact amount of the land tax each year on the basis of
documents evidencing the title of ownership, possession, and use. The computation
must be submitted to the tax authorities by 15 May of each year. The tax must be paid by
15 August and 15 November in equal amounts.
Transfer taxes
No specific transfer taxes are levied upon the transfer of immovable property. However,
certain notary fees and other sale duties applicable to transfer of property may apply.
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Stamp duties
There are no stamp duties. State notary fees are payable upon notarisation of certain
transactions.
Road tax
Legal entities and foreign nationals are subject to road tax. The road tax rate varies
depending on vehicle engine volume, number of axles, weight carried, and how long the
vehicle will be in Azerbaijan (for foreign vehicles).
The minimum rate of annual road tax for passenger cars is set at the fixed rate of AZN
20. The rates for cars withan engine capacity of over 2,000 cm3 vary, depending on the
engine capacity.
Mining tax
Legal entities and individuals involved in the recovery of minerals in Azerbaijan are
obligated to pay the mining tax. The rate depends on the type of mineral extracted and
varies from 3% to 26% of its total wholesale price.
Branch income
In addition to profit tax paid by a PE of a non-resident, the amount transferred from the
net profit of such PE to the non-resident is taxed at the source of payment at a rate of
10%.
Profit tax is levied on an enterprises taxable profits. Profits are defined as the difference
between the gross income and deductions defined by law.
Inventory valuation
Inventory valuation is determined according to national accounting standards.

No other inventory valuation method isrecognised for tax purposes.
Capital gains
There is no separate capital gains taxation in Azerbaijan. Proceeds from the disposal of
capital assets are included in ordinary taxable income.
Dividend income
Dividends distributed to residents and non-residents are subject to withholding tax

(WHT) (taxable at source upon payment). Therefore, the received dividend amounts of
legal entities and physical persons are not taxable for profit (income) tax purposes.
Interest income
If income is received from an Azerbaijani source, interests paid by a resident or a nonresidents PE, or on behalf of such establishment, shall be taxed at the source of payment
at a rate of 10%.
Interests paid on credits (loans) anddeposits (accounts) of resident-banks, including
loan interests paid on financial leasing operations, are not taxable.
Foreign income
If a resident of Azerbaijan directly or indirectly holds more than 20% of shareholders

equity or possesses more than 20% of the voting shares of a foreign legal entity that, in
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turn, received income from a state with favourable taxation, then such income shall be
included in the residents taxable income.
A state with favourable taxation is considered a country in which the tax rate is two or
more times lower than that determined under the Tax Code of Azerbaijan, or a country
in which the laws on confidentiality of information about companies exist (which allow
secrecy to be maintained concerning financial information, as well as the actual owner
of property or receiver of income).
Deductions
All expenses connected with generating income, except for non-deductible expenses and
expenses with limited deductibility, specifically defined by the law, are deductible from
income.
Depreciation
Depreciation may be calculated at the following rates:

Buildings and premises: up to 7%.

Machines, equipment, and calculation appliances: up to 25%.
Means of transportation: up to 25%.
Working cattle: up to 20%.
Expenses incurred for geological and exploration works, as well as for preparatory
works for the production of natural resources: 25%.
Intangible assets with an undetermined period of use: up to 10%. For those with a
determined period of use, pro-rata amount as per the useful life, in years.
Other fixed assets: up to 20%.
Goodwill
Azerbaijani tax legislation does not specify the definition of goodwill.
Start-up expenses
The cost of assets shall include expenses for their acquisition, production, construction,
assembly, and installation as well as other expenses that increase their value with the
exception of expenses for which the taxpayer is entitled to a deduction.
Interest expenses
Interest on loans received from overseas and/or from related parties may be deducted,
limited to the interest rate on loans with similar currency and maturity at the interbank
credit auction. In absence of such an auction, deductions for interest may not exceed
rates of 125% of the interbank auction credit rates published by the Central Bank of
Azerbaijan.
Bad debt
A taxpayer shall be entitled to a deduction for doubtful debts connected with goods,
work, and services that have been realised where income from them was previously
included in the gross income received from entrepreneurial activity. Doubtful debt
deduction shall be allowed only if the debt is written off as worthless in the taxpayers
books.
Charitable contributions are non-deductible expenses in Azerbaijan.
Fines and penalties
No deduction is allowed for financial sanctions or interest calculated for delayed

payment of taxes.
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Taxes
Road, property, land, and mining taxes are deductible.
Other expenses deductible within certain limits

The amount of repair expenses deductible each year is limited to the amount of the
tax written down value of each category of fixed assets as of the end of the previous
year. For buildings and premises, the limit is 2%; for machinery and equipment, the
limit is 5%; and for other fixed assets, the limit is 3%. An amount exceeding these
limits shall be taken as an increase of the residual balance value of the fixed assets in
the appropriate category.
Actual business trip expenses are deductible from income within thelimits
established by the Cabinet of Ministers.
A legal entity engaged in insurance activities is entitled to deduct allocations to
reserve insurance funds within the standards established by the legislation of
Azerbaijan.
Banks and credit entities engaged in certain types of banking activities shall be
entitled to deduct from income the amounts assigned for establishment of special
reserve funds, depending on the classification of assets in compliance with legislation
and in accordance with procedures established by the relevant executive authority.
Non-deductible expenses
The following expenses are non-deductible:

Capital expenses.
Expenses connected with non-commercial activity.
Entertainment and meal expenses, accommodation, and other expenses of a social
nature incurred for employees.
Taxable losses incurred by legal entities may be carried forward for five years to offset
future taxable profit, without limitations. Carryback of losses is not possible.
Payment to charter capital in order to create an affiliate in a foreign country is not tax
deductible and is instead treated as investment to subsidiary on the balance sheet.
Under local transfer pricing rules, payment for goods and services supplied by foreign
affiliates is deductible up to the fair market price of such supplies.
Group taxation
Each taxpayer is liable to fulfil ones own tax liabilities. Azeri tax legislation does not
have the concept of group taxation.
Transfer pricing
The Tax Code provides that relations between associated (interrelated) entities must be
based on the arms-length principle.
Interrelated persons for the purposes of taxation are natural and/or legal persons,
relations between which might have direct effect on economic results of their activities
or the activities of persons they represent.
Thin capitalisation
There is no concept of thin capitalisation in Azerbaijani tax law. However, the Tax Code
provides that interest on loans received from overseas and/or from related parties may
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be deducted, limited to the interest rate on loans with similar currency and maturity at
the interbank credit auction. In absence of such an auction, deductions for interest may
not exceed rates of 125% of the interbank auction credit rates published by the Central
Bank of Azerbaijan.

Foreign tax credit
Azeri legal entities are taxed on worldwide profit; however, any tax paid overseas, up to
the tax amount that would be calculated under Azeri law, will be allowed to offset the
Azeri profits tax. The tax credit may not exceed the tax that would be imposed on such
income in Azerbaijan. This credit applies only to residents of Azerbaijan.
Incentive for agricultural producers
Taxpayers producing agriculture products are exempt from profit tax, VAT, and property
tax until the end of 2018.
Incentivesfor residents of industrial and technology parks
Businesses operating in industrial and technology parks are eligible for certain privileges
and exemptions. The privileges include the following:
Exemption forseven years from the date of registration in these parks from profit/
income and property tax for resident legal entities and private entrepreneurs.
VAT exemption for import of equipment for construction, scientific research works,
and other activities in these parks forseven years or an indefinite period, depending
on the nature of these activities.
The Law on the Special Economic Regime for Export-Oriented Oil and
Gas Activities
The Law on the Special Economic Regime for Export-Oriented Oil and Gas Activities
was adopted in April 2009 and will remain effective for 15 years. This law avails
the following tax incentives to contractors and subcontractors (excluding foreign
subcontractors without PE in Azerbaijan):
Local companies are permitted to choose between (i) profit tax at a rate of 20% or (ii)
5% WHT on gross revenues.
Foreign subcontractors are taxable only by a 5% WHT.
A 0% VAT rate.
Exemption from dividend WHT and taxation on branchs net profits.
Exemption from customs duties and taxes.
Exemptions from property tax and land tax.
In order to derive these benefits, the relevant taxpayer should obtain a special
confirmation certificate from the Ministry of Industry and Energy.
The Law on Special Economic Zones (SEZs)
The companies operating in SEZs shall have the following tax benefits:
A 0.5% tax levied on overall turnoverfrom supplied goods, performed services, or
works.
A 0% VAT rate.
Customs exemptions.
In order to operate in an SEZ, a special residency certificate is necessary. However, the
following companies may not apply for this certificate:
Azerbaijan
143
Azerbaijan
Companies producing or processing oil and gas.
Companies producing alcoholic beverages and tobacco.
Television or radio broadcasting companies.
As of April 2014, no SEZs have yet been established in Azerbaijan.
Incentive for the employment of disabled persons
The rate of profit tax levied on production enterprises belonging to community

organisations for disabled persons, and involving at least 50% of disabled persons, shall
be reduced by 50%.
In determining eligibility for these privileges, disabled persons substituting for
permanent employees, contractors (i.e. who work under contractor agreements, civil
legal contracts), or disabled persons till the age of 18 are not included in the average
number of employees.
Withholding taxes
Income received from Azerbaijan sources not attributable to a PE of a non-resident in
Azerbaijan is subject to WHT at the following rates:
Dividends paid by resident enterprises: 10%.
Interest paid by residents, PEs of non-residents, or on behalf of such PEs (except for
interest paid to resident banks or to PEs of non-resident banks): 10%.
Rental fees for movable and immovable property: 14%.
Royalties: 14%.
Leasing, risk insurance, or reinsurance payments: 4%.
Telecommunications or international transport services: 6%.
Other Azeri-source income: 10%.
If a resident enterprise or a PE of a non-resident receives interest, royalties, or rental fees
taxable at the source of payment in Azerbaijan, it is entitled to consider the tax deducted
from the source of payment, provided that the documents supporting the tax deduction
are in place.
Tax treaties
The following chart contains the WHT rates that are applicable to dividend, interest,
and royalty payments by Azerbaijan residents to non-residents under the tax treaties in
force as of 1 January 2014. If the treaty rate is higher than the domestic rate, the latter is
applicable.
Recipient
Non-treaty
Treaty:
Austria
Belarus
Belgium
Bulgaria
Canada
China (Peoples Republic)
144
Azerbaijan
WHT (%)
Dividends
Individual
Qualifying
companies companies (1)
Interest (2)
10
10
10
15
15
15
10
8
15
10
5/10
15
5/10
10
8
10
10
10
10
10
0/10
0/7
0/10
10
Royalties (3)
14
5/10
10
5/10
10
5/10
5/10
10
Azerbaijan
Recipient
Czech Republic
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iran
Italy
Japan
Kazakhstan
Korea
Latvia
Lithuania
Luxembourg
Macedonia
Moldova
Netherlands
Norway
Pakistan
Poland
Qatar
Romania
Russia
Serbia
Slovenia
Switzerland
Tajikistan
Turkey
Ukraine
United Kingdom
Uzbekistan
WHT (%)
Dividends
Individual
Qualifying
companies companies (1)
Interest (2)
8
8
5/10
10
5
10
10
5
0/10
10
10
10
10
10
10
15
5
10
8
8
8
8
8
0/8
10
10
10
10
10
10
15
15
10
10
10
10
7
7
10
10
5
10
10
5
10
10
5
10
8
8
0/8
15
8
10
10
5
0/10
15
10
10
10
10
10
10
10
10
7
7
7
10
5
8
10
10
10
10
10
10
8
8
8
15
5
5/10
10
10
10
12
12
10
10
10
10
10
10
7
15
10
10
10
10
10
A
Royalties (3)
10
10
5/10
5/10
10
5/10
8
8
10
5/10
10
10
5/10
5/10
10
5/10
8
10
5/10
10
10
10
5
10
10
10
5/10
5/10
10
10
10
5/10
5/10
10
Notes
1.
2.
3.
The lower dividend rate applies if the qualifying company meets certain criteria (e.g. participation and
capital holding criteria).
The lower interest rate applies, inter alia, to interest paid by public bodies or to bank loans.
The lower royalty rate applies to royalties for patents, designs or models, plans, secret formulas or
processes, computer software, know-how, etc.
More detailed information about applicability of lower rates may be found in respective
DTTs.
Azerbaijan
145
Azerbaijan
Tax administration
Taxable period
The tax year in Azerbaijan is the calendar year.
Tax returns
Resident enterprises and PEs of non-residents must file profit tax returns for a calendar
year by 31 March of the following year. During liquidation of a legal entity or a PE of a
non-resident, the tax return should be submitted within 30 days after the adoption of a
decree on liquidation.
A non-resident that has no PE in Azerbaijan and receives income subject to WHT
(except for dividends and interest) may file a tax return with respect to such income and
expenses, connected with the generation of the income, for purposes of reassessment of
profit tax at the rate of 20%.
If a taxpayer applies for an extension of time to file the profit tax return prior to the
expiration of the filing deadline and at the same time settles the full tax amount due, the
filing deadline may be prolonged for up to three months. The prolongation of the terms
for filing the return will not modify the terms of tax payment.
Legal entities and entrepreneurs that withhold tax at the source of payment are
obligated to file the WHT report with the tax authorities within 20 days following the
end of the quarter.
Payment of tax
Taxpayers must make advance quarterly tax payments of profit tax by the 15th day of
the month following the end of the calendar quarter. Payments are determined either (i)
as 25% of tax for the past fiscal year or (ii) by multiplying the amount of actual income
through the quarter by a ratio of tax to gross income for the previous year.
The final payment of profit tax coincides with submission of the declaration of profit tax,
i.e. 31 March.
Tax audit process
The ordinary on-site tax audit shall be conducted not more than once in a year. An
extraordinarytax audit may be performed at any time under the following conditions:
If tax return documents that are necessary for tax calculation and payment are not
submitted in time or not submitted at all upon the warning of the tax authorities.
If incorrect information is found in the report made on the results of tax inspection.
When exceedingly paid amount of VAT, interest, and financial sanction is assigned for
the payment of other taxes, interests, and financial sanctions or assigned as payments
on future liabilities. In such cases, the out of turn tax audit can be conducted only on
taxable VAT operations of the taxpayer.
When application is submitted by the taxpayer to return exceedingly paid amounts of
tax, interests, and financial sanctions.
When the tax authorities obtain information from a known source on hiding
(decreasing) of incomes or object of taxation by the taxpayer.
When, in accordance with criminal legislation, there is a decision of the court or lawenforcement agency on implementation of a tax audit.
In case of failure to provide the documents specified in the Tax Code.
In the event of application for liquidation, reorganisation of the taxpayer legal entity,
or seizure of business operations of the natural person operating without formation
of a legal entity.
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Azerbaijan
Azerbaijan
Tax authorities are entitled to calculate and recalculate taxes, penalties, and financial
sanctions of the taxpayer within three years after termination of the taxable reporting
period and to impose calculated (recalculated) sums of taxes, penalties, and financial
sanctions within five years after termination of the taxable reporting period.
The main issues challenged by the tax authorities during a tax audit include, but are not
limited to, the following:
Application of the 20% profit tax on deemed profit.
Application of benchmarking principle for income of foreign employees subject to tax
in Azerbaijan.
Correctness of claim of input VAT from budget and identification of operations
taxable to VAT.
Taxes withheld on payments to non-resident suppliers in cases where income of nonresidents is considered as Azerbaijani-source income.
Application of VAT on market price of assets that were written off, disposed free of
charge, or at a discount rate.
Challenging the transfer pricing.
Grossed-up WHT paid at cost of the buyer disallowed for deduction.
Deductibility of the head office costs.
Tax Partnership Agreements
Taxpayers may conclude a Tax Partnership Agreement with the tax authorities in order
to minimise tax risks. Minimisation of tax risks is defined as mitigation and elimination
of negative impacts on full or partial execution of duties of taxpayers on tax calculations.
Azerbaijan
147
Bahrain
PwC contact
Ebrahim B Karolia
13th Floor TJ Tower
Building no: 683, Road no: 2811
Block no: 428, Seef District
PO Box 21144
Kingdom of Bahrain
Tel: +973 1711 8800 (ext. 8884)
Tax treaties with Barbados, Bermuda, Czech Republic, Estonia, Georgia, Republic of
Korea, Seychelles, Turkmenistan, and the United Kingdom (UK) have recently entered
into force. Furthermore, treaties with China and Guernsey have recently been signed.
From a United States (US) Foreign Account Tax Compliance Act (FATCA) perspective,
the Central Bank of Bahrain (CBB) issued a circular on 29 August 2013 to the Chief
Executive Officers and Compliance Officers of all CBB licensees informing them
that the government of the Kingdom of Bahrain has decided to pursue a Model 1
intergovernmental agreement (IGA). However, the agreement has not been signed at the
time of this writing.

There are no taxes in Bahrain on income, sales, capital gains, or estates, with the
exception, in limited circumstances, to businesses (local and foreign) that operate in
the oil and gas sector or derive profits from the extraction or refinement of fossil fuels
(defined as hydrocarbons) in Bahrain. For such companies, a tax rate of 46% is levied on
net profits for each tax accounting period, irrespective of the residence of the taxpayer.
Corporate residence
Income Tax Law No. 22 of 1979 (which only applies to oil and gas businesses) does not
define residence.
Other taxes
Value-added tax (VAT) and excise duty
There is currently no VAT or excise duty in Bahrain. However, a VAT system is under
consideration at the Cooperation Council for the Arab states of the Gulf (GCC) level. The
standard rate of VAT is expected to be 5%.
Customs duty
The general rate of customs duty is 5% of the value in cost, insurance, and freight (CIF),
except for alcoholic beverages, which is 125%, and cigarettes, which is 100%.
Certain categories of goods, such as paper and aluminium products, are subject to 20%
duty rate.
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Bahrain
Bahrain
Stamp duty
Stamp duty applies to the transfer and/or registration of real estate only and is levied on
the following basis: 1.5% up to 70,000 Bahraini dinar (BHD); 2% from BHD 70,001 to
120,000; 3% for amounts exceeding BHD 120,000.
Registration and licence fees
Companies are subject to registration fees of BHD 30 and licence fees that vary
according to the nature of their activity.
Social insurance and training levy contributions
Employers social security contribution is 12% for Bahraini workers and 3% for nonBahraini workers, calculated on their monthly salaries.
A training levy is imposed on companies with more than 50 employees that do not
provide approved training to their employees. The applicable rates are 1% for Bahraini
and 3% for non-Bahraini employees, calculated on their monthly salaries.
Municipality taxes
There is a 10% of municipality tax levied on the rental of commercial and residential
property to expatriates.
Branch income
Profit from branch income is taxable in Bahrain at 46% if it is derived from activities in
the oil and gas sector.
There are no specific rules in Bahrain with respect to the calculation of specific items of
income, such as inventory valuation, capital gains, dividend income, interest income, or
foreign income. However, the income tax law requires that taxable profits be calculated
using generally accepted accounting principles (GAAP).
Deductions
The law generally allows deductions for all costs associated with taxable activities
in Bahrain, such as the cost of production, refinement, remuneration of employees
associated with these taxable activities (including social insurance and pensions paid for
the benefit of these employees), and other operational losses.
All reasonable and justifiable costs of production and exploration of products sold
during the current taxable year are deductible for tax purposes, provided that these
expenses have not been deducted elsewhere in calculating net taxable income.
Tax deductions may be claimed with respect to reasonable amounts for depreciation,
obsolescence, exhaustion, and depletion incurred during the taxable year for properties
used by the taxpayer in a trade or businesses from which income, taxable under the
income tax law, is derived. Generally, such amounts may be claimed on a
straight-line basis over the estimated remaining useful life of the properties, unless
otherwise approved by the Minister of Finance.
Bahrain
149
Bahrain
Taxes
All taxes and duties not imposed by the Bahrain income tax law, including customs
duties, may be deducted from taxable income as stipulated in Bahrains income tax law.
Unutilised losses may be carried forward and deducted up to an amount equivalent to

the net income in future years as defined by the Bahrain income tax law. Carryback of
losses is not permitted.
There are no specific restrictions in the income tax law pertaining to payments made to
foreign affiliates.
Group taxation
There is no legislation or mechanism for group relief or the taxation of group activities in
Bahrain. Additionally, there is currently no specific legislation regarding transfer pricing
or thin capitalisation in Bahrain.

There are no tax incentives in Bahrain. There is also currently no legislation regarding
foreign tax relief in Bahrain.
Withholding taxes
There are no withholding taxes (WHTs) on the payment of dividends, interest, or
royalties in Bahrain.
Tax treaties
Bahrain has double tax treaties (DTTs) in force with various countries, including Algeria,
Austria, Barbados, Belarus, Bermuda, Brunei, Bulgaria, China, Czech Republic, Egypt,
Estonia, France, Georgia, Iran, Ireland, Isle of Man, Jordan, Republic of Korea, Lebanon,
Luxembourg, Malaysia, Malta, Mexico, Morocco, the Netherlands, Pakistan, Philippines,
Seychelles, Singapore, Sudan, Syria, Thailand, Turkey, Turkmenistan, the United
Kingdom, the United States, Uzbekistan, and Yemen.
Tax administration
Taxable period
A companys accounting period should normally follow the (Gregorian) calendar year
(i.e. 1 January to 31 December).
Tax returns
The law is silent on the due date for the filing of the final income tax statement.
However, an estimated income tax statement must be submitted on or before the 15th
day of the third month of the taxable year. Where applicable, a taxpayer may also be
required to file an amended estimated income tax statement quarterly thereafter, unless
a final income tax statement has been provided.
Approved accountants must prepare a certified tax return for the return to be acceptable
to the authorities.
150
Bahrain
Bahrain
Payment of tax
Taxes (based on the initial estimated tax statement filed) are payable in 12 equal
monthly instalments. Payments are due starting on the 15th day of the fourth month
of the taxable year. Income tax as per the subsequent amended estimated income tax
statements or the final income tax statement will form the basis of tax payments for the
remainder of the 12 monthly instalments that are yet to be paid. The final payment is
due on the 15th day of the third month after the end of the taxable year or the date the
final income tax statement is filed, whichever is later.
Any excess income tax paid will be credited and used in the first invoice for income tax
following the establishment of the credit by the Minister.
The Income Tax Law No. 22 of 1979 does not specify any statute of limitations.
Bahrain
151
Barbados
PwC contact
Gloria Eduardo
Bishops Court Hill
PO Box 111
Tel: +1 246 626 6700
The double taxation agreement (DTA) with Bahrain entered into force on 16 July 2013,
and the protocol to the DTA with Canada entered into force on 17 December 2013. A
protocol to the DTA with Malta was signed on 25 September 2013.
The Income Tax Act was recently amended to introduce a range of tax concessions for
businesses generating and distributing electricity from a renewable energy source;
businesses producing, distributing, and installing renewable energy systems for
electricity generation; and businesses that supply energy efficient products.
As of 1 October 2013, the concessionary rate of value-added tax (VAT) on the supply of
accommodation by guest houses, hotels, inns, or any similar place, including a dwelling
house normally let or rented for use as a vacation or holiday home, was reduced to 7.5%.
Effective 1 October 2013, the 7.5% rate also applies to supplies of certain goods and
services related to tourism, provided that the registrant satisfies certain criteria.
A municipal solid waste tax was introduced effective 1 April 2014. For 2014/15, it will
be assessed at a rate of 0.3% on the site value of improved land.
The Barbados Revenue Authority was established on 1 April 2014 as a means of
strengthening the overall revenue system. This brings together various government
agencies, including the Department of Inland Revenue, the Value Added Tax Division,
the Land Tax Department, and the Licensing Authority and is intended to create an
environment that will enhance the efficiency and effectiveness of these government
agencies.

Companies resident in Barbados are taxed on income earned from all sources, whether
generated within or outside of Barbados, less expenses incurred for the purpose of
producing assessable incomein a fiscal period not to exceed 53 weeks. Non-resident
companies are generally only taxed on income derived from sources and operations
conducted within Barbados.
Corporate income tax (CIT) rates
The following rates apply to taxes on corporate income:

Type of entity
Regular companies
Small companies (1)
Manufacturing companies (2)
152
Barbados
CITrate(%)
25
15
15
Barbados
Type of entity
Approved developers in special development areas
International business companies, international banks, and international societies
with restricted liability
Life insurance companies (computed on gross investment income)
Companies engaged in the construction of houses (3)
Exempt insurance companies (4)
CITrate(%)
15
2.5to 0.25
5
15
0
Notes
1.
2.
3.
4.
This concessionary tax rate is available to any small company as defined in the Small Business
Development Act.
This concessionary tax rate is available only to companies registered as manufacturers with the
Barbados Customs & Excise Department.
Selling price of the houses must be less than 400,000 Barbados dollars (BBD), including the house
and land.
The exemption is available for a period of 15 years.
Corporate residence
A corporation is deemed to be resident in Barbados if its management and control is
exercised in Barbados.
The concept of a PE is described within a number of Barbadoss DTAs. A PE is, in general,

created in line with the Organisation for Economic Co-operation and Development
(OECD) Model Convention.
Under domestic legislation, a non-resident person is deemed to have been carrying on
business in Barbados, and hence required to file a corporation tax return,wherein an
income year such a non-resident person:
produced, grew, mined, created, manufactured, fabricated, improved, packed,
preserved, or constructed, in whole or in part, anything in Barbados, whether or
notthey exported that thing without settling it prior to exportation, or
solicited orders or offered anything for sale in Barbados through a factor, agent, or
servant, whether the contract or transaction was to be completed inside or outside
Barbados or partly in and outside Barbados.
In either of the circumstances mentioned above, the non-resident shall be deemed to
have been carrying on business in Barbados in that income year and the income of that
business shall be deemed to be income derived from Barbados for that income year.
Other taxes
VAT is levied at the rate of 17.5% on the value of a wide range of goods and services
imported or supplied in Barbados by VAT-registered persons.
A number of services, including financial services, real estate, medical services, and
education are exempt. Intergroup transactions are taxable.
Persons operating under Barbados VAT regime must be registered for VAT. The
threshold for VAT registration is BBD 80,000, but voluntary registration is permitted for
persons whose annual turnover is less than BBD 80,000.
Barbados
153
Barbados
Certain supplies are zero-rated, including exports, basic food items, prescription drugs,
crude oil, and the supply of certain items to the international financial services sector,
e.g. legal and accounting fees. There is a concessionary rate of 7.5% applicable to the
supply of accommodation by guest houses, hotels, inns, or any similar place, including
a dwelling house normally let or rented for use as a vacation or holiday home. As of1
October 2013, this rate alsoapplies tosupplies of certain goods and services related to
tourism, provided thatthe registrant satisfies certain criteria.
Registered persons may deduct input tax from their output tax in calculating the tax
payable for that VAT accounting period. Where input tax exceeds output tax, the
registrant will be entitled to a refund of VAT.
Customs duties
Customs duty is levied on a wide range of imported goods at rates specified in Part 1 of
the First Schedule of the Customs Act. Barbados Customs Tariff is based on the Common
External Tariff of the Caribbean Common Market (CARICOM) with special derogations
for certain items, e.g. spirituous beverages. Customs duty is calculated on either an ad
valorem basis or at specific quantitative rates. The ad valorem rates for most items vary
between 0% and 20%, but certain goods regarded as luxury items are subject to higher
rates (e.g. jewellery 60%). In addition, a select group of items that are produced within
Barbados and CARICOM (including some agricultural products) are subject to a duty
rate of 60% when imported from outside the region.
Manufacturers and agriculturists, including persons involved in fishing and horticulture,
are exempt from the payment of duty on inputs (including packaging materials,
machinery, equipment, and spares) imported for use in their businesses.
The various departments and institutions, international bodies, and organisations listed
in Part II-B of the Customs Tariff are exempt from the payment of customs duty. Specific
goods (e.g. computers), also mentioned in Part II-B, are exempt from customs duty.
Excise taxes
Four categories of goods (both locally manufactured, as well as imported) are subject
to excise taxes. These are motor vehicles, spirituous beverages, tobacco products, and
petroleum products. Most excisable goods are subject to the tax at a specific rate, with
the exception of motor vehicles, which are subject to ad valorem rates.
A few persons and goods are exempt from excise taxes. These include motor vehicles
imported by the diplomatic corps and other organisations exempt from customs
duty under Part II-B of the Customs Tariff, goods imported for temporary use or for
a temporary purpose that will be re-exported within three months, and goods (other
than spirits) intended to be used as raw materials for the manufacture or production in
Barbados of other taxable goods.
Land tax
The following land tax rates arein effect as of tax year 2013/14:
Land
On the improved value of each parcel of land on which there is a
dwelling house that is used exclusively for residential purposes:
On first BBD 190,000
On amounts between BBD 190,000 and BBD 500,000
On amounts between BBD 500,000 and BBD 1,250,000
On amounts exceeding BBD 1,250,000
On the improved value of each parcel of land on which there is a
building other than a residence
154
Barbados
Land tax rate
0
0.10%oftheimprovedvalue
0.45% of the improved value
Barbados
Land
On the site value of each parcel of unimproved land
Land tax rate

0.60% of the site value
B
The following concessions have been granted for land taxes:
A tax cap of BBD 60,000 has been placed on residential property.
For villas, as defined by the Tourism Development Act, a rebate of 25% is granted on
production of a certificate from the Barbados Tourism Authority.
For hotels, as defined by the Tourism Development Act, land tax is calculated and
payableon only 50% of the tax demanded.
For pensioners exclusively occupying their own homes, land tax is calculated and
payable on only 40% of the tax demanded.
A 10% discount is granted if the land tax is paid within 30 days from the date of the
tax demand notice or 5% if paid within 60 days.Hotels and restaurants are allowed to
pay their land tax bills during January to March without losing access to the discount
granted.
Land tax rebates for income year 2012/13 were extended to approved manufacturers
who can certify exports to a value of BBD 100,000 or more in any one calendar year.
The land tax is calculated and payable on no more than 50% of the tax demanded for
that year. Manufacturers are required to have settled all outstanding liabilities with
the Comptroller of Customs and the Commissioner of Inland Revenue to access the
rebates.
Any person certified by the Minister Responsible for Energy to be engaged in the
production of solar energy and/or the manufacture of goods to be used in the
production of solar energywill be entitled toa rebate of no more than 50% of the tax
demanded for that year. Such persons are required to have settled all outstanding
liabilities with the Comptroller of Customs and the Commissioner of Inland Revenue
to access the rebates.
Municipal solid waste tax
The municipal solid waste tax is effective from 1 April 2014. It is payable by any person
who is the owner of improved lands and, for 2014/15, is charged at a rate of 0.3% of the
site value of improved lands.
Payments are to be made to the Revenue Commissioner in two equal installments on or
before 30 June 2014 and 31 December 2014.
Property transfer taxes
Property transfer taxes are levied as set out in the following table:
Property
Shares of companies listed on the Barbados Stock Exchange
Shares of private companies *
Land with a building
Land with no building
Leases of 25 years or more or short-term leases that are
continuously renewed for a period equal to 25 years or more
Transfer tax rate

Exempt
2.5% of value or amount of gross
consideration above BBD 50,000
consideration above BBD 150,000
consideration
consideration
* Any transfer of shares to a person who is resident outside of Barbados, whether or not the transferor
is resident in Barbados, where the assets of the company concerned consists of foreign assets and its
income is derived solely from sources outside Barbados, will not be subject to transfer taxes in Barbados.
Barbados
155
Barbados
Land development duty
Where a person disposes of property situated in a specially designated development

area within 15 years of the date specified by statute, duty may be charged. This may be
at rates of up to 50% on the excess of the value of the consideration over the improved
value at the specified base date, plus certain other expenses and an amount representing
capital appreciation of the property.
Stamp duty
Barbados imposes a stamp duty tax on various instruments, including written

documents. The rates imposed vary depending on the document.Stamp duties
applicable to documents for the transfer of shares, real estate, and for mortgages are set
out below:
Instruments
On sale of shares of companies listed on the
Barbados Stock Exchange
On sale of real estate, leases, and shares in private
companies *
On mortgages
Stamp duty rate

Exempt
BBD 10 per BBD 1,000 or part thereof
BBD 3 on each BBD 500 or part thereof
* Any transfer of shares to a person who is resident outside of Barbados, whether or not the transferor
is resident in Barbados, where the assets of the company concerned consists of foreign assets and its
income is derived solely from sources outside Barbados, will not be subject to transfer taxes in Barbados.
In addition to the CIT computed on the gross investment income of life insurance
companies, a life insurance premium tax is levied on gross direct premium income
earned by resident and foreign life insurance companies as set out in the following table:
New business written for the incomeyear

Renewal business
Resident life
Foreign life
insurance companies(%) insurance companies(%)
6
6
3
5
In addition to the CIT computed on thetaxable profitsof general insurance companies,

a general insurance premium tax is levied on gross direct premium income at a rate of
4.75% in respect of property insurance business and 4% for other general insurance
business.
National Insurance contributions
Every individual between the ages of 16 and 65, who is gainfully employed in Barbados
under a contract of service, must be insured under the National Insurance and Social
Security Act. The current pensionable age is 66, with increases of six months each
scheduled for 1 January 2014 and 1 January 2018, until the new standard retirement
age of 67 is achieved.
Contributions are determined as a percentage of insurable earnings up to a maximum of
insurable earning of BBD 4,360 per month or BBD1,006 per week as of January 2014.
Employers must remit National Insurance contributions by the 15th day of the following
month. The employees share is 10.1%, with the employer paying 11.25%. Self-employed
individuals make contributions quarterly of 16.1% on earnings of up to a maximum of
BBD 4,360 per month.
156
Barbados
Barbados
Branch income
Branches are taxed on the same basis as corporations. In addition, a 10% tax is assessed
on the transfer or deemed transfer of the after-tax profits to the head office that are not
reinvested in Barbados, unless a DTA overrides this.
Inventory valuation
Inventory is generally stated at the lower of cost and net realisable value. First in first
out (FIFO) or average values are generally used for book and tax purposes. Last in first
out (LIFO) is not acceptable for tax purposes. The Inland Revenue will normally accept
a method of valuation that conforms to standard accounting practice in the trade.
Conformity between book and tax values is expected.
Capital gains
Capital gains are not taxed in Barbados.
Dividend income
Dividends between two companies resident in Barbados are not taxed in the hands of the
recipient. Dividends received by a resident Barbados company from a non-resident entity
where the equity interest owned is at least 10% of the non-resident company and the
shareholding is not held solely for the purpose of portfolio investments are not subject to
tax.
Dividends paid by a regular business company to a non-resident shareholderare no
longer subject to withholding tax (WHT) when the amount paid as dividends is derived
from income earned from sources outside of Barbados.
Interest income
Amounts received on account of, in lieu of, or in satisfaction of interest are included
in the calculation of assessable income. In certain instances (to the extent specified by
regulation) certain types of interest may be exempt from inclusion into the calculation of
assessable income, including interest on bonds, debentures, or stock of the government
of Barbados that is beneficially owned by a non-resident; interest on tax reserve and
tax refund certificates; and interest on holdings (within certain limits) of National
Development Bonds, National Housing Bonds, Savings Bonds, and Sugar Industry
Bonds classified as non-taxable bonds, as well as interest income from some CARICOM
countries.
Partnership income
Amounts received from a partnership or syndicate for the income year, regardless of
whether or not these amounts were withdrawn during the income year, are included in
the calculation of assessable income.
Foreign income
A Barbados corporation is taxed on foreign branch income as earned. Double taxation is

avoided by means of foreign tax credits or an exemption where DTAs exist.
Deductions
Business expenses that are reasonable and incurred for the purpose of producing
assessable income are deductible for tax purposes unless disallowed by a specific
provision of the Income Tax Act. Deduction of capital expenditures is specifically
prohibited, but special provisions may allow tax depreciation on these expenditures.
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Depreciation
Depreciation for tax purposes is computed on a straight-line basis at prescribed rates.

The process is accelerated by additional initial allowances in the year of acquisition.
Conformity between book and tax depreciation is not required. Gains on sales of
depreciable assets are taxable as ordinary income up to the amount of tax depreciation
recaptured, and losses on sales below depreciated value are deductible.
Capital allowance
Capital allowance
Initial allowance:
Plant and machinery
Industrial buildings
Annual allowance:
Plant and machinery
Intellectual property
Rate
20%
40%
Various rates
4%
10% of 50% of the
amount expended
Investment allowance * (an incentive allowance limited by statute to entities

operating in certain industries, claimed in lieu of initial allowances):
Basic industry **
Businesses or persons entitled to export allowance for exports outside of
CARICOM countries
Businesses engaged in the manufacture and refining of sugar
Businesses engaged in the manufacture of clay and limestone products
20%
40%
40%
40%
* This allowance is not deducted from the cost of the asset in calculating tax written down value.
** As prescribed by the regulations to the Barbados Income Tax Act.
Manufacturing allowance
Companies involved in the manufacturing sector are granted an additional 50% of the
annual allowance claimed in an income year. Such companies are also often able to
claim investment allowances.
Renewable energy allowance
Companies that have hadan energy audit, retrofitted a building, orinstalled a system to
provide electricity from sources other than fossil fuels are granted an additional 50% of
the annual allowance claimed in an income year.
Commercial building allowance
A deduction is available in respect of a commercial building. For each income year, the
available allowance is calculated at 1% of the land tax improved value, or 10% of the
land tax improved value if the building is registered with the National Trust.
Depletion
For oil and gas companies, depending on certain circumstances, a depletion allowance
of 20% or 10% is given in addition to annual depreciation on prescribed types of capital
expenditure.
Goodwill
Goodwill is not a depreciating asset, and tax amortisation is not available.
Start-up expenses
some of these are treated as costs incurred on account of capital expenditure. Such costs
are therefore not allowable deductions for tax purposes.
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Interest expenses
A Barbados corporation can claim a deduction for interest expenses. However, where
interest claimed as a deduction has not been paid within two years of being accrued (one
year if on a loan from a related party), it should be added back to assessable income.
Bad debts
Amounts representing debts owed that have been established as bad debts during the
income year and have been previously included in calculating assessable income for that
income year or a previous income year are deductible in calculating assessable income.
Charitable contributions are generally deductible where they are made to entities that
are specifically registered as charities or not-for-profit organisations with the Corporate
Affairs and Intellectual Property Office.
Pension expenses
Contributions made by companies under registered pension schemes are deductible in

calculating assessable income.
Fines and penalties
Fines and penalties imposed are generally not deductible.
Taxes
Taxes on income are not deductible.
Losses can generally be carried forward for nine years after the income year in
which they are incurred and may be applied in full against future taxable profits.
Notwithstanding this, a tax loss incurred by a person in respect of residential property
can only be deducted against assessable income earned by that person in respect of
residential property.
Losses of general insurance companies can only be carried forward for five years, and
losses of life insurance companies cannot be carried forward at all.
No carryback is allowed for CIT losses.
A Barbados corporation can claim a deduction for royalties, management fees, and
interest charges paid to foreign affiliates, provided that payments are no greater than
what it would pay to an unrelated party.
Group taxation
Trading losses (i.e. the tax loss for the year, excluding capital allowances) incurred
during an income year of a surrendering company may be set off wholly or partially
against the profits of a claimant company, where both are members of the same group
(defined as where one company is a 75% subsidiary of another, or both companies are
75% subsidiaries of a third company).
Group relief is not available to companies operating in the international business and
financial services sector or any other company that is operating under concessionary
legislation.
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Transfer pricing
Although Barbados has no specific transfer pricing legislation or regulations in place,

the Income Tax Act contains a section dealing with artificial transactions.This enables
the revenue authorities to amend the assessable income of a person where they believe
the main purpose of a non-arms-length transaction is to artificially reduce that persons
assessable income.
In such circumstances, the transaction is disregarded or modified to achieve the effect
that it no longer results in the artificial reduction of that persons assessable income.
Thin capitalisation
Barbados does not have tax provisions relevant to thin capitalisation.
Barbados does not have tax provisions relevant to CFCs.

Foreign tax credit
Barbados allows a credit for foreign taxes (taxes paid in jurisdictions outside Barbados).
The credit should not exceed the Barbados tax attributable to the income derived
outside Barbados.
Agricultural cash rebate
The following rebates may be claimed on agricultural or agro-processing machinery or

plants that are new or imported onto the island for the first time:
Sugar cane harvesters: 10% or 15%.
Other: 18%.
Export allowance
There is a rebate of tax under the Income Tax Act in respect of income from export sales
outside CARICOM.The maximum tax credit on eligible sales is 93%, which is available
where eligible sales exceed 81% of total sales.
Exempt Insurance Act
The Exempt Insurance Act is applicable to companies in Barbados that insure risks
and earn premiums outside the island and for companies that own or manage the
former. Under the Act, all three types of companies are exempt from exchange control
regulations. In lieu of standard CIT rates, exempt insurance companies are subject to tax
at the rate of 0% for the first 15 years; thereafter, the rate is 8% on the first BBD 250,000
of taxable income and 0% on taxable income in excess of BBD 250,000. No WHT is
levied on remittances of dividends or interest.
Exempt insurance companies are subject to an annual licence fee of BBD 20,000 for the
first 15 years.
Fiscal Incentives Act
The Fiscal Incentives Act provides to manufacturers of an approved product a full

exemption from taxes and duties for varying periods, up to a maximum of 15 years.
Foreign currency earnings credit
Persons carrying on business in Barbados may claim a tax credit of up to 93% of CIT
on net profits from foreign currency earnings derived from construction projects or
professional services undertaken outside of CARICOM, international insurance business,
or services provided to the international business sector.
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Employment tax credit
A tax credit of 10% of the actual amount of the expenditure incurred in respect of wages
for the increase in employees is available where:
there is an increase in profits directly attributable to the business
there is an increase in the number of employees who are employed directly in the
operations of the business byan amount of at least 10% of the total workforce
employed during the previous year, and
the increase in the number of employees referred to is maintained for a period of
three years.
The credit is applied in the year in which persons meet the above mentioned criteria.
Any unused credit can be carried forward for three years from the end of the income
year in which the credit was obtained, and no cash refund shall be allowed.
Productivity and innovation tax credit
Entities incurring expenditure that is innovative in nature and leading to the

development of a new manufacturing process, product, service, or organisational
procedure, will be granted a tax credit of 25% of the amount expended in that income
year. The credit will only be granted if the innovation was successfully introduced to the
market as evidenced by increases in sales, productivity, or organisational efficiency.
Any unused tax credit shall be carried forward for a maximum of three years from the
end of the income year in which the credit was obtained, but no cash refund will be
allowed.Certification from the Executive Director of the National Productivity Council is
required.
Renewable energy
A number of tax concessions have been enacted with respect to the conservation of
energy.These measures include a 150% deduction of actual expenditure, not exceeding
BBD 25,000, for each year for five years in respect of the following:
Energy audits.
50% of the cost of retrofitting premises or installing systems to produce electricity
from sources other than fossil fuels.
The business must be current in the payment of its corporation tax, VAT, land tax, and
national insurance contributions, or where not current, has entered into an agreement
with the respective authorities to settle outstanding arrears.
Further tax concessions have been enacted with respect to the generation and sale of
electricity from renewable energy sources and installation and sale of renewable energy
electricity systems or energy efficient products, including:
An income tax holiday of ten years granted on the certificate of the Minister
Responsible for Energy to a developer, manufacturer, or installer of renewable energy
systems and energy efficient products.
150% deduction of interest on a loan in respect of the construction of a new or
the upgrading of an existing propertyto generate, supply, or sell electricity from
renewable energy or for the installation or supply of renewable energy systems or
energy efficient products.
150% deduction for a period often years commencing from income year 2012 of
the amount expended on staff training relating to generation and sale of electricity
from a renewable energy source or installation and servicing of renewable energy
electricity systems or energy efficient products.
150% deduction of expenditure on the marketing of products for the generation
and sale of electricity from a renewable energy source or products related to the
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161
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installation and servicing of renewable energy electricity systems or energy efficient

products.
150% deduction of expenditure on product development and research related to the
generation and sale of electricity from a renewable energy source or the installation
and servicing of renewable energy electricity systems or energy efficient products.
Exemption from the payment of corporation tax by a venture capital fund invested
in the renewable energy and energy efficient sectors for a period of ten years
commencing from income year 2012.
Deduction of contributions to a venture capital fund invested in the renewable energy
and energy efficient sectors for a period of ten years commencing from income year
2012.
Exemption from the payment of WHT on dividends earned by shareholders of
companies solely engaged in the installation or supply of renewable energy electricity
systems or energy efficient products for a period of ten years commencing from
income year 2012.
Exemption from the payment of tax on interest earned by financial institutions for
financing the development, manufacturing, and installation of renewable energy
systems and energy efficient products for a period of ten years commencing from
income year 2012.
Housing Incentives Act
The Housing Incentives Act provides CIT, import duty, WHT, and other concessions
to developers who implement low income housing projects.Approved developers are
subject to CIT at a rate of 15%.
International Business Companies (IBCs) Act
IBCs resident in Barbados but deriving income solely from sources outside Barbados are
taxed at the following rates:
Taxable income (BBD)
Up to 10 million
10 million to 20 million
In excess of 30 million
Rate (%)
2.5
2
1.5
0.25
Freedom from exchange controls is granted to IBCs, as well as duty-free concessions

on certain imports. No WHT is levied on remittances of dividends, royalties, interest,
management fees, fees, or other income paid by IBCs to persons outside Barbados. IBCs
may also claim a credit for taxes paid outside Barbados, provided that this does not
reduce the companys rate of CIT in Barbados to less than 0.25%.
IBCs are subject to an annual licence fee of BBD 850.
International Financial Services Act (IFSA)
The IFSA provides for the establishment of international banking, trust administration,
and other related or ancillary services by eligible companies incorporated in Barbados or
branches of qualified foreign banks. An annual licence fee of BBD 100,000 is payable by
IFSA licensees who are in the business of receiving foreign moneydeposits, while IFSA
licensees who are not involved in deposit taking financial servicesare required to pay
BBD 50,000.
International financial service entities are exempt from exchange controls and are
granted duty-free concessions on certain imports. Profits and gains are taxed at the
same rates as for IBCs. No WHTs are levied on remittances of dividends, interest, or fees.
International financial service entities may also claim a credit for taxes paid outside
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Barbados, provided that this does not reduce the entitys rate of CIT in Barbados to less
than 0.25%.
International Trusts Act
The International Trusts Act is aimed at facilitating the use of Barbados trusts for
purposes previously made possible in many tax-free financial centres. An international
trust is taxed in Barbados as an individual that is resident but not domiciled in Barbados.
This allows the trust to take advantage of a network of tax treaties while not subjecting
its foreign earnings to Barbados tax unless they are remitted there. The Act exempts
trusts from exchange control and WHT requirements. No registration is required.
Market development allowance for export sales or the tourist industry

150% of certain expenditure on research and development for export sales outside of
CARICOM or on tourism development is deductible.
Shipping (Incentives) Act
The Shipping (Incentives) Act was enacted to encourage the development of Barbados
shipping activities by granting CIT, import duty, WHT and other concessions to approved
shipping companies for a period of ten years.
Small Business DevelopmentAct
Companies incorporated under the Companies Act with at least 75% of their shares
owned locally and having share capital of not more than BBD 1 million, annual sales not
in excess of BBD 2 million, and not more than 25 employees may obtain approval as a
small business. Such companies pay CIT at a reduced rate of 15% and are exempt from
the payment of import duties on equipment imported for use in the business and from
stamp duty in some instances.In addition, 120% of certain expenditures directly related
to the development of the business are deductible for tax purposes. Investors in such
businesses are exempt from WHT on interest and dividends earned on their investment.
Societies with Restricted Liability (SRL) Act
An SRL is a hybrid entity that can be recognised as a corporation or partnership in

certain jurisdictions, depending on the nature of its organisational documents. The
entity has limited liability, and membership units are known as quotas. Societies
qualifying under this Act may apply for a licence to operate as international SRLs and, as
such, are taxed at the same rates as IBCs. No WHT is levied on any distributions, interest,
or other income paid by an international SRL to non-residents. International SRLs are
granted duty-free concessions on certain imports, and no exchange control requirements
are applicable. Entity mobility is also a prominent feature of this legislation. Qualifying
societies organised overseas can be continued into Barbados under the Act.
Special Development Areas Act
The Special Development Areas Act provides relief for approved developersconstructing
or improving a building or structure in certain defined locations in Barbados and to
persons financing such work (other than a commercial bank). Persons financing such
work are exempt from income tax on interest received. Approved developers are exempt
from import duties and VAT on inputs for the construction or renovation of buildings,
WHTs on repatriation of interest (for a period of 15 years), land tax, and property
transfer tax payable by vendors on the initial purchase of the company. An approved
developer pays CIT at the rate of 15% and is granted initial and annual allowances on
industrial buildings of 40% and 6%, respectively, and on commercial buildings of 20%
and 4%, respectively.
Qualifying insurance companies
Companies registered under the Insurance Act that derive at least 90% of their
premiums from sources outside of CARICOM and at least 90% of whose risks originate
outside of CARICOM may obtain a certificate of qualification. Such companies are
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163
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entitled to the same exemptions from WHTs and exchange controls as exempt insurance
companies. They are also entitled to the foreign currency earnings credit, which may
reduce their CIT rate from 25% to 1.75% for general insurance business. The rate of tax
on gross investment income applicable to life insurers may fall from 5% to 0.35%.
Tourism Development Act
The Tourism Development Act provides that a qualifying owner of a tourism project or of
a completed tourism product may offset expenditures on construction or the provision of
certain amenities against its profits.
A tourism project includes the following:
The construction of a new hotel.
The alteration or renovation of an existing hotel.
The conversion of an existing building or buildings into a hotel by reconstruction,
extension, alteration, renovation, or remodelling.
The furnishing and equipping of a building to be utilised as a hotel.
The provision of tourist recreational facilities and tourism related services.
The construction and equipping of a new restaurant.
The alteration or renovation of an existing restaurant.
The construction of a new attraction or the alteration or renovation of an existing
attraction.
The restoration, preservation, and conservation of natural sites.
The establishment, restoration, preservation, and conservation of monuments,
museums, and other historical structures and sites.
The construction and furnishing of villas.
The construction and furnishing of timeshare properties.
The addition to a tourism product of any facilities or services intended to increase or
improve the amenities that the tourism product provides.
Concessions extend to the following:
The importation of building materials and supplies without payment of customs duty
and an exemption from the payment of customs duties on specified supplies to be
used for equipping the project.
Arefund of customs duty (including VAT) where the holder of a permit can satisfy
the Comptroller of Customs that the building materials and supplies purchased for a
tourism product have been purchased in Barbados, or in the case of importation that
the customs duty was paid by the holder of the permit.
Income tax concessions with respect to the write-off of interest, accelerated
deduction of expenditure, interest rate subsidy, equity financing, training, and
marketing.
The set off of approved capital expenditures against revenues for a period of 15
yearsby the owner of a qualifying tourism project (except restaurants), which has a
project with a value of up to BBD 200 million.Hotels with capital expenditure over
BBD 200 million are allowed one additional year to write off expenditure for each
additional BBD 20 million expended, up to a maximum of 20 years.
Withholding taxes
WHTs are levied as follows:
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WHT (%)
Recipient
Dividends Interest Royalties
Residents
12.5 12.5 (33)
Non-residents:
Non-treaty
0/15 (1)
15
15
Treaty:
Austria
5/15(2)
0 (3)
0 (3)
Bahrain
0
0
0
Botswana
5/12(4)
10
10
Canada
15
15 (5)
10 (6)
CARICOM
0
15
15
5/10 (8)
10
10
Cuba
5/15 (10)
10
5
Czech Republic
5/15 (10)
5 5/10 (11)
Finland
5/15(2)
5
5
Ghana *
5/7.5(13) 5/7.5(14)
7.5
Iceland
5/15 (2)
10
5
Luxembourg
0/15 (15)
0 (3)
0 (3)
Malta
5/15 (16)
5
5
Mauritius
5
5
5
Mexico
5/10(17)
10
10
Netherlands
0/15(18)
5
5
Norway *
5/15 (2)
5
5
Panama
5 (21) 5/7.5(14)
7.5
Portugal *
5/15 (8)
10
5
Qatar *
0 (3)
0 (3)
5
San Marino *
0/5 (22)
5
0 (3)
Seychelles
5
5
5
Singapore *
0 (3)
12
8
Spain
0/5 (23)
0 (3)
0 (3)
Sweden
5/15 (1)
5
5
Switzerland
0 (25)
0 (25)
0 (25)
United Kingdom *
0/15 (26)
0(3)
0(3)
United States
5/15 (28)
5
5
Venezuela
5/10(30) 5/15 (31)
10
IBCs, ISRLs, QICs, & EICs
(32)
(32)
(32)
Management
fees
Entryinto force
15
1 April 2007
16 July 2013
12 August 2005
5 22 December 1980 (7)
15
7 July 1995
27 October 2000 (9)
16 March 2000
6 June 2012
5
20 August 1992 (12)
24 February 2012
8 August 2011
19 June 2002 (34)
28 January 2005
16 January 2009
12 July 2007 (19)
5
3 July 1991 (20)
18 February 2011
21 April 2008
25 April 2014
14 October 2011
5 1 December 1991 (24)
26 August 1963
- 19 December 2012 (27)
- 28 February 1986 (29)
1 January 2001
* Treaty not yet in force; protocol or treaty awaiting ratification.

Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
The rate is 0% if dividends are paid out of income earned from sources outside of Barbados.
The rate is 15%for portfoliodividends; 5% for holdings of at least 10%.
Interest or royalties are only taxable in the state in which the beneficial owneris resident.
The rate is 12% for portfoliodividends; 5% for holdings of at least 25%.
The rate applies provided that the interest is subject to tax in the other territory.
The rate applies provided that the royalties are subject to tax in the other territory.
Protocol in force from 17 December 2013.
Protocol in force from 9 June 2010.
5% of the gross royalties on any literary, artistic, or scientific work, including films or television
broadcasting, and 10% on any patent, trademark, commercial, or scientific equipment, among
others.
12. Protocol in force from 1 June 2012.
13. The rate is 7.5% for portfoliodividends; 5% for holdings of at least 10%.
14. The rate is 7.5% of the gross amount; 5% if the beneficial owner is a bank.
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15. The rate is 15% for portfoliodividends; 0% for holdings of at least 10%, held for at least 12
uninterrupted months prior to dividend distribution.
16. The rate is 15% for portfoliodividends; 5% for holdings of at least 5%.
19. Protocol in force from 23 December 2010.
20. Protocol in force from 1 June 2012.
21. The rate is 75% of the statutory nominal rate at the time of distribution; 5% for companies with
holdings of at least 25%.
22. 0% if the beneficial owner is a company that directly holds at least 10% of the capital of the company
paying the dividends for an uninterrupted period of at least 12 months prior to the decision to
distribute the dividends.
24. Protocol in force from 12 December 2012.
25. Agreement extended to Barbados by virtue of the agreement between Switzerland and the United
Kingdom, on payments to non-residents from Barbados.
26. Dividends are only taxable in the state in which the beneficial owner is resident. The rate of 15%
applies to dividends paid out of income fromimmovable property by an investment vehicle that
distributes most of this income annually and whose income is exempt from tax, other than where the
beneficial owner is a pension scheme.
27. Treaty in force from 19 December 2012, replacing a treaty that had been in force from November
1970.
28. The rate is 15% for portfolio dividends; 5% for holdings of at least 10%.Dividends paid by a
regulated investment company will bear WHT at a rate of 15%, regardless of the percentage of
shares held by the recipient. Dividends paid by a real estate investment trust (REIT) will qualify for the
5% WHT rate only if the beneficial owner is an individual holding less than 10% of the shares in the
REIT, otherwise, a 30% WHT rate will apply.
29. General effective date 1 January 1984. First protocol in force 29 December 1993. Second protocol in
force 20 December 2004.
30. The rate is 10% for portfolio dividends; 5% for holdings of at least 5%.
31. The rate is 15% generally;5% if the recipient is a bank.
32. International business companies (IBCs), international societies with restricted liability (ISRLs),
exempt insurance companies (EICs),and qualifying insurance companies (QICs)are exempt from
WHTs on payments to non-resident persons or international business entities. Specific legislation
applies.
33. The rate is 0% for pensioners aged 60 years and over.
34. Protocol in force from 30 April 2014.
Tax administration
Taxable period
CIT returns are prepared on a fiscal-year basis.
Tax returns
Companies with fiscal years ending between 1 January and 30 September (both dates
inclusive) are required to file a CIT return on or before 15 March in the year following
the end of the fiscal period. Companies with fiscal years ending any time between 1
October and 31 December (both dates inclusive) are required to file a CIT return on or
before 15 June in the year following the end of the fiscal period.
The Department of Inland Revenue has instituted an online filing system, which is
optional.
Payment of tax
Companies with fiscal years ending between 1 January and 30 September (both dates
inclusive) are required to make an instalment of CIT for the income year in which the
fiscal period ends on or before 15 September of that year. The instalment is 50% of the
net CIT payable for the preceding income year.The remainder of CIT due (if any) must
be paid on filing of the CIT return by 15 March of the following year.
Companies with fiscal years ending between 1 October and 31 December (both dates
inclusive) are required to make two instalments of CIT for the income year in which the
fiscal period ends on or before 15 December of that year and 15 March of the following
year. The instalments are each 50% of the net CIT payable for the preceding income
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year. The remainder of CIT due (if any) must be paid on filing of the CIT return by 15
June of the following year.
It is possible to apply for a reduction or waiver in the instalments if lower profits are
anticipated in the current year when compared with those of the preceding year.
Penalties
The penalties and interest for failing to file a return on time and pay the CIT due are as
follows:
Penalty for failing to file a CIT return by the due date is BBD 500 plus 5% of the tax
assessed at the due date.
Penalty for failing to pay CIT by the due date is 5% of the tax assessed and unpaid at
the due date.
Interest charge of 1% per month on the tax and penalties calculated for each month
during which any amount of tax and penalties remain unpaid on the largest amount
of tax and penalties that were due and unpaid at any time during that month.
The penalty for failing to make an instalment of CIT by the due date is 10% of the CIT
instalment due, plus interest at 0.5% per month on the CIT instalment and penalty
outstanding.
Tax audit process
A person authorised by the Commissioner may, at any reasonable time, audit the books
and records, or other documents that may relate to the information that should be in the
books or records, examine property, request reasonable assistance from the owner, or, as
necessary, seize or retain any documents that may be relevant.
Every person required to deliver a return ofassessable income for an income year shall
keep adequate records and shall retain every such record or voucher for a period of up to
five years after the end of the relevant income year, unless the Commissioner otherwise
directs, before the disposal of such records. Every person carrying on a business must
obtain written permission from the Commissionerof Inland Revenue before disposing of
books or records.
The Barbados tax authorities have been focussed on the efficient collection of taxes and
voluntary compliance. To this end, the Barbados Revenue Authority was established,
effective 1 April 2014, as a means of strengthening the overall revenue system. This
brings together various government agencies, including the Department of Inland
Revenue, the Value Added Tax Division, the Land Tax Department, and the Licensing
Authority and is intended to create an environment that will enhance the efficiency and
effectiveness of these government agencies.
Other issues
Tax information exchange agreements (TIEAs)
TIEAs provide for the exchange of information on tax matters.TIEAs with Denmark,
the Faroe Islands, and Greenlandare in force.A TIEA with South Africa isawaiting
ratification; and TIEAs with France and Germanyhave been initialled and are awaiting
signature.
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Bilateral investment treaties (BITs)
Barbados has entered into BITs with Canada, China, Cuba, Germany, Italy, Mauritius,
Switzerland, the United Kingdom, and Venezuela. BITs with Ghana andthe Belgium/
Luxembourg Economic Union(BLEU) await ratification.
BITstypically cover the following:
Investments of every kind.
National and most favoured nation (MFN) treatment.
Compensation for losses owing to war, revolution, state of national emergency, revolt,
riot, etc. to be no less favourable than that for residents.
Expropriation, providing for compensation equal to market value.
Unrestricted transfer of investments and returns.
Subrogation.
Settlement of disputes, either between one state and nationals or companies of the
other state, or between the two states themselves.
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PwC contact
Sergei Odintsov
PricewaterhouseCoopers FLLC
40 Orlovskaya Street
Office 39
220053 Minsk, Belarus
Tel: +375 17 335 4000
As of 1 January 2014, several amendments to the Tax Code of Belarus have been
introduced. Primarily, such amendments are directed at the further simplification of the
Belarusian tax system, decrease of the tax burden for several categories of taxpayers,
and strengthening of tax control.
The following are among the most significant developments:
A new special tax treatment is established, single tax on imputed income, with
regard to companies conducting maintenance and servicing of cars and other motor
vehicles.
For the purposes of strengthening the tax control of bad faith taxpayers, several
additional duties were imposed on Belarusian banks. In particular, banks are
obligated to provide certain information on their clients accounts.
Amendments provide for the formation of the List of major taxpayers approved by
the Ministry of Taxes and Duties. The companies included in the List are subject to a
somewhat different procedure of submitting financial statements and recording to
tax authorities.
During tax audits, tax authorities are authorised to employ the time management
method: the audit method aimed at determination of a taxpayers actual revenue for
the period within which the observations are made. The method is applicable with
regard to taxpayers conducting business in the sphere of food, domestic, and medical
services.
Foreign companies that have concluded contracts with Belarusian customers on
provision of services (performance of works) under projects in Belarus are no longer
required to establish a representative office in Belarus. These foreign companies
shall be registered with the local tax authorities prior to the start of work on the
respective projects. Tax registration in such cases is technically performed based on
an application for registration to be filed by the respective foreign company (either
directly or via its authorised representative) with the tax authorities controlling the
territory where the project will be technically completed (services provided, works
performed).
As of 1 January 2014, representation of foreign company interests by persons sent
on a business trip to Belarus for negotiations with business partners does not require
establishment of a representative office in Belarus.

The standard corporate income tax (CIT), also known as profits tax, rate is 18%.
All resident companies are obligated to recognise revenue derived from the supply
of goods, works, services, and property rights as of the date when it was recorded in
accounting in line with the accrual method, notwithstanding the date of settlement for
goods, works, services, and property rights supplied.
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CIT is charged on taxable income (net profits). Taxable income is generally determined
as revenues from sales of goods, works, and services, excluding value-added tax (VAT),
less production and business related costs, less other deductible expenses, plus net
results of non-operating income and expenses.
Resident companies are taxed on their worldwide income.
Non-resident companies are taxed on Belarus-sourced income derived through a
permanent establishment (PE) with CIT (at the rate of 18%). Income of non-resident
companies sourced in Belarus that is not related to the activities of a PE is subject to
withholding tax (WHT) (at rates varying from 6% to 15%).
Local income taxes
There are no local taxes due on net profits.
Corporate residence
A company is resident in Belarus if it is incorporated in Belarus.
According to local legislation, a non-resident company is deemed to have a PE in Belarus

in cases where:

it permanently carries out commercial activities in Belarus, in whole or in part

it carries out its activities through a dependent agent
it uses a building site or construction, assembly, or equipment objects, or
it provides services or performs works within a period of 90 days, continuously or in
the aggregate, during a calendar year.
Double taxation treaties (DTTs) may establish different rules of PE recognition.

According to domestic law, where there is a DTT, the provisions of the treaty
shallprevail.
Notwithstanding the activities that create a PE in Belarus, a non-resident company must
be registered with the local tax authorities controlling the territory where activities are
carried out before starting a business in Belarus.
Any profits derived by a non-resident company via a PE in Belarus are subject to 18%
CIT. Expenses incurred by a non-resident company, either in Belarus or abroad, that
relate to a PE can be deducted, subject to local deductibilityrestrictions.
Other taxes
All taxpayers shall recognise revenue for VAT purposes on an accrual basis. The only
exception is set out for taxpayers using the simplified taxation system and keeping
simplified tax records without accounting records. Such taxpayers shall recognise
revenue on a cash basis.
The standard VAT rate is 20%, whereas the preferential rate is 10%.
The 10% preferential rate applies on:
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local supplies of crop products (excluding floriculture, cultivation of ornamental
plants), beekeeping, livestock (except for fur production), and fisheries locally
produced and
import and/or local supplies of certain food products and goods for children.
In general, local supplies of goods, works, and services made by a taxpayer performing
its economic activities in Belarus, as well as the importation of goods, are subject toVAT.
Place of supply rules established by the Tax Code of Belarus should be followed to
determine whether goods, works, and services are supplied locally, and therefore subject
to tax in Belarus.
When a non-resident company, which does not have a PE registered in Belarus, sells
goods or provides works and services that are considered local supplies according to the
place of supply rules, the VAT due on such supplies is paid by the purchaser registered
with the local tax authorities from its own funds. This VAT could be deducted against
output VAT, if any, or refunded from the budget in the establishedorder.
Some exceptions apply to provision of construction and other similar works.
Exemptions with credit (zero-rated) include, but are not limited to, the following:
Supply of goods exported outside of Belarus.
Provision of works and services involving maintenance, loading, reloading, and any
other similar works and services related to supply of exported goods.
Transportation and any directly linked ancillary services related to the export
or import of goods, including transit forwarding, as well as exported works for
goodsprocessing.
Bunker fuel for fuelling aircraft of foreign companies carrying out international
flights and (or) international carriages by air.
Works and services related to repair (modernisation, conversion) of aircraft
(including engines and railway vehicles) and provided to non-resident companies or
individuals.
In order to apply zero-rated VAT on goods carried out from Belarus, VAT payers must
hold supporting documents as evidence that these goods were actually exported from
Belarus to another country. Application of zero-rated VAT on respective works and
services must be supported by the appropriate documents, which have to be provided to
the local tax authorities where the taxpayer is registered for tax purposes.
Exemptions without credit include, but are not limited to, the following:
Disposal of shares in resident legal entities.
Supply of material rights for industrial property objects (e.g. inventions, utility
models, industrial designs, breeding achievements, integrated circuits, know-how,
trade names, trademarks, and service marks).
Supply of securities, derivatives, and other similar financial instruments; certain
limitations apply.
Provision of all types of insurance and re-insurance (co-insurance) services rendered
by insurance and re-insurance agents.
Supply of medicines, medical equipment, instruments, medical products, as well as
drugs, devices, equipment, veterinary products, under certain conditions.
Personal or public health care services, under certain conditions.
Social services supplied by institutions for children and young people care, nursing
homes for the elderly and/or by care/guardianship institutions for disabled or by
other non-profit entities.
Supply of services in the field of culture and art, under certain conditions.
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Public services (services of barbers, baths, and showers; laundry and dry cleaning
services; watch repairing; manufacturing and repair of clothing and footwear; repair
and maintenance of household appliances; repair of personal and householdgoods).
Services provided by religious organisations, if these services correspond to the
purposes set out in their canons, statutes, and other documents.
Funeral services, maintenance of the graves, tombstones, fences, and other objects
associated with burial, as well as works on their production, under certainconditions.
Supply of postage stamps, postcards, and envelopes marked, excise and control
(identification) stamps for marking of goods at their nominal value, stamps which
can be used as a confirmation of fees and charges payable in accordance with
thelegislation.
Supplies of jewels as well as related services, under certain conditions.
Retail trade of goods in duty-free shops, under certain conditions.
Research and development, design, and technological works and services, under
certain conditions.
Education and training services.
Lotteries and gambling, under certain conditions.
Financial services supplied by the banks, under certain conditions.
Goods and equipment imported into Belarus, under certain conditions.
Transactions related to provision of loans.
In order to apply exemptions, taxpayers should ensure that the services and goods
supplied meet the appropriate VAT exemption requirements.
VAT returns shall be submitted on either a monthly or quarterly basis, by the 20th day
of the month following the reporting period. VAT shall be paid on either a monthly or
quarterly basis, no later than the 22nd day of the month following the reporting period.
Customs payments
The Customs Union between Russia, Kazakhstan, and Belarus, with its unified trade
regulations and customs code, has significantly affected administering customs
clearance and payment procedures followed by Belarus in regards to exports and
imports.
Indirect taxation issues within the Customs Union shall be administered in compliance
with the International Agreement on Indirect Taxation and two Protocols signed by the
Customs Union member states.
The following charges are considered customs payments:

Import duties.
Export duties.
Special anti-dumping and countervailing duties.
VAT and excise taxes due upon importation of goods.
Fees for customs processing/services.
Rates of import duties as well as description of goods subject to them are established
by the Single Nomenclature of Goods of the Customs Union (HS Nomenclature) and
Single Customs Tariff of the Customs Union. As of 1 March 2014, Belarus is not allowed
to apply specific rates of import duties different from the ones that are set forth in the HS
Nomenclature.
Export duties are not levied on exported goods, with the following exceptions: certain
soft oil; light distillates; fuels and gasoline; wasted petroleum products; propane,
butane, ethylene, propylene, and other liquefied gases; petroleum coke; petroleum
bitumen, benzol, toluene, xylenes, potash fertilisers; etc. According to the Customs
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Union regulations, rates of export duties in regards to mentioned goods shall be
established by Belarusian government and shall be equal to the rates applied in Russia.
Import and export duties are calculated on the customs value of the goods, which is
defined pursuant to the price of transaction method established by the Customs Union
regulations. Generally, the following components are considered when calculating the
customs value of imported goods:
Contract price of the goods.
Rebates and discounts provided by a supplier, under certain conditions.
Transportation related expenses to the border of the Customs Union (i.e. Belarusian
border).
Insurance premiums.
Cost of containers and other packaging.
Part of direct or indirect income to be derived by the seller from future resale,
transfer, or other use of imported goods.
Special, anti-dumping, and countervailing duties could be imposed as a measure to
protect economic interests of Belarus.
The tax base for VAT calculation due on imported goods includes the total amount of
customs value, import duty, and excise tax paid, if any.
Generally, the taxpayer is required to pay customs duties before the customs clearance of
the appropriate goods; however, under certain conditions, a taxpayer may be provided
with an extension of payment deadlines or allowed to pay only part of customs duties. It
is also possible to pay customs duties in advance.
Electronic customs declaration is currently available for customs clearance of the goods
declared in customsprocedures of temporary exports, re-exports (exports) as well as
re-imports, free circulation (imports), and free customs zones.
Excise taxes
Rules on determination of moment of actual supply of excisable goods are adjusted as

consistent with the obligation of taxpayers to record revenue on an accrual basis.
Excise taxes are imposed on the following goods produced and sold in or imported
toBelarus:
Rectified ethyl alcohol and alcoholic drinks, including beer and wine.
Alcohol-containing food products in the form of solutions, emulsions, suspensions,
produced with the use of ethanol from all types of raw materials, other alcoholcontaining products.
Tobacco (excluding raw tobacco), including cigarettes, cigars, cigarillos, and smoking
tobacco.
Energetic products, including petrol, kerosene, diesel, and bio diesel, gasoline, fuel,
marine fuel, oils for diesel engines, and engines with a carburettor and an injector.
Liquefied hydro carbonated gas and compressed natural gas used as motor fuel.
The tax rate depends on the type and quantity of goods. Rates of excise taxes are
stipulated by the Appendix to the Tax Code of Belarus.Compared to the rates applicable
in 2013, rates of excise taxes effective in 2014 have increased considerably. For instance,
since 1 January 2014, excise rates with regard to tobacco products have increased by
65% comparing to 2013; with regard to petrol have increased by 86%; and with regard
to diesel have increased by 131%. The Tax Code provides for a gradual increase of rates
of excise taxes over the course of the year by establishing different rates effective during
each following half a year.
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The excise tax rate for cigarettes with filters is defined on the basis of (i) maximum retail
price per pack of cigarettes of certain brands declared by a taxpayer and (ii) reference of
certain brands of cigarettes to one of three price groups defined in the Tax Code.
Generally, the following tax rates are applied (1 January 2014 to 30 June2014):
Description of tax object
Rectified ethyl alcohol and alcoholic
drinks, including beer and wine
Tobacco (excluding raw tobacco),
including cigarettes, cigars, cigarillos,
and smoking tobacco
Energetic products (petrol, kerosene,
diesel, and biodiesel, gasoline, fuel,
marine fuel, oils for diesel engines
and engines with a carburettor and
an injector)
Liquefied hydro carbonated gas and
compressed natural gas used as
motor fuel
Taxable item
Tax rate per taxable item (BYR*)
1 litre of 100% alcohol, or
From 200 to 119,700
1 litre of complete product
1 kg of pipe and smoking
From93,800 to 339,000
tobacco, or 1 cigar or
1,000 cigarettes, cigarillos
1 ton
From 350,900 to 2,308,300
1,000 litres and 1,000 cbm
198,400 and 374,400
* Belarusian rubles (BYR)
Excise taxes paid on the purchasing/importation of excisable goods to be used in

manufacturing of goods or provision of works and services in Belarus are considered as
deductible for CIT purposes, with certain exceptions.
The tax is reported and paid on a monthly basis, no later than the 20th day of the month
following the reporting period.
Real estate tax (immovable property tax)
Real estate tax is levied at the annual rate of 1% on the residual value of buildings,
installations, including separated premises, and constructions, including late
construction in progress (if construction works take longer than the deadline established
in technical documentation), owned by legal entities.
Buildings and installations under reconstruction or modernisation are not regarded as
late construction in progress.
The tax base of buildings and constructions located in the territory of Belarus and leased
by individuals to legal entities will be the contract value of the leased real estate not
less than its value established by the evaluation. Evaluation can be made in the order
approved by the President of Belarus as well as by a certified appraiser or local authority
responsible for state registration of real estate.
When the real estate subject to taxation is located in Belarus and leased by a resident
company to a lessee, the lessee is considered a real estate taxpayer. The lessee is also
obligated to pay the tax due on real estate leased from foreign companies that are not
considered as having a PE in Belarus.
The amount of tax, except the tax due on late construction in progress (if construction
works take longer than the deadline established in technical documentation), is
deductible for CIT purposes.
The tax reporting obligation must be fulfilled by a taxpayer before 20March of the
reporting year. Taxpayers are entitled to choose whether to pay tax on a quarterly basis
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by equal parts, not later than the 22nd day of thethird month of each quarter, or once a
year, not later than 22 March of a current tax period (tax year).
Land tax
Belarusian and foreign entities are subject to land tax collected by the local tax
authorities with respect to land that they own or use in Belarus. Since 1 January 2014,
land plots assigned for temporary use and not transferred back to the state by the
due date, land plots occupied without permission, or land plots used contrary to the
intended purpose have also become a part of land tax base. Such land plots are taxed at
the rate increased by coefficient 10.
The tax base depends on plot location and purpose and is normally determined pursuant
to cadastral value of a land plot.
The Tax Code provides for a number of land plot categories that are exempt from, or not
subject to, land tax in Belarus.
The tax is payable on an annual basis at the rates established by the Appendices to the
Tax Code of Belarus. Tax rates for agricultural plots vary from BYR 280 to BYR 77,910
per hectare. Tax rates on the land plots located in towns and rural areas range from
0.025% to 3% payable on the cadastral value.
Land tax is deductible, with some exceptions, for CIT purposes.
Land tax is reported annually, no later than 20 February of thecurrent reporting year.
Taxpayersare entitled to choose whether to pay tax on a quarterly basis, by equal parts
before the 22nd day of the second month of each quarter, or once a year, not later than
22 February of a current year on plots other that agriculturaland not later than 15 April
with regard to agricultural plots.
State dues
State dues are payable by legal entities that apply to the state institutions for the
issuance of documents having legal force or other deeds, bring the cases before the
courts for consideration, use bills of exchange in their activities, etc.
State dues include the following payments and duties:
State fees (payable on suits, applications, appeals, and other documents that are
submitted to or claimed from the courts or prosecution authorities, payable on
applications for state registration of a legal entity, notary public services, real estate
registration services, etc.).
Patent fees (payable for registration and use of intellectual property).
Stamp fees (payable on activities with bills of exchange).
Consular fees (payable on the activities of state consular and diplomatic departments
performed under the request of any applicant).
State dues for state registration of a business entityare not charged if registration related
documents arefiled withthe registration authorities electronically via the official
web-portal. State dues paidare refunded if proceedings in the economic court are
terminateddue to the parties consentto resort to mediation.
Offshore charge
An offshore charge is levied upon the following activities of domestic entities:
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Any transfer of funds to an entity registered in an offshore jurisdiction, to a
third party who is a creditor of that entity, or to the bank account of an offshore
jurisdiction.
In kind performance of obligation to an offshore entity, with some exceptions.
Any transfer of material rights and obligations as a result of changes in commitment
(cession or transfer of debt) between a domestic entity and an offshore entity.
According to Belarusian laws, an offshore jurisdiction is a territorythat is included in the
list of offshore territories established by the President, has a preferential tax treatment,
and/or does not disclose the information related to financial transactions made by
resident entities.
A list of 51 offshore territories has been published. With certain exceptions specified
in the law, all payments to offshore companies or their branches for any kind of work
or services, commodities, interest on loans, insurance premiums, guarantees, etc. are
subject to an offshore charge, which is deductible for CIT purposes.
Tax relief is granted to: (i) repayment of loans including interests on them, borrowed
from entities located in offshore territories, (ii) payments due under international
marine cargoes and forwarding services, and (iii) payments for bank operations under
certain conditions.
An offshore charge is paid at a 15% rate and is deductible for CIT purposes.
The tax is reported and paid on a monthly basis, no later than the 20th day of the month
following the reporting period.
Capital gains tax
Capital gains from disposal of shares/stocks in a Belarusian entity are taxed as part of
the taxpayers profits and are subject to a 9% tax. No tax exemptions are provided by the
Tax Code for the capital gains taxation.
Ecological (environmental) tax
Ecological (environmental) tax is imposed on pollutants discharged into the

environment, storage and disposal of industrial wastes, wastewater discharges, and on
importation of ozone-depleting substances, including those contained in the products.
The amount of tax due is decreased by the amount of disbursed capital investments in
renewable energy plants.
The following are excluded from taxation, including but not limited to:
Pollutants discharged into the air by mobile sources (e.g. cars, vehicles).
Transit of ozone-depleting substances, including those contained in the products
through the territory of Belarus.
As of 1 January 2014, emissions of pollutants into the atmospheric air are subject
to ecological tax, provided the total volume of emissions regarding all the groups of
substances amounts to three or more tons a year.
As of 1 January 2014, emissions of pollutants of the 1st hazard rating and pollutants
having no hazard rating are not subject to ecological tax. The tax base of environmental
tax is the actual quantity of respective pollutants used/discharged. Tax rates of
environmental tax are stipulated by the Tax Code of Belarus.
Environmental tax paid, with certain exceptions, is treated as deductible for
CITpurposes.
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The tax is reported on a quarterly basis, by the 20thday of the month following the
reporting quarter. Taxpayers are entitled to choose whether to pay tax on a quarterly
basis, by the 22nd day of the month following the reporting quarter, or once a year, not
later than 22 April of a current year.
Certain exemptions are provided to legal entities effecting tax payments on the basis
of established annual limits. These taxpayers will have to file an annual tax return and
provide it to a tax authority no later than 20 April of the calendar year.
Tax on natural resources
A tax on natural resources is payable on the actual value of extracted natural resources.
It depends on the kind and quantity of extracted resources.
As of 1 January 2014, the tenfold tax rate for natural resources extracted beyond
established limits has been abolished. As a result, the amount of tax on natural resources
is fully deducted (regardless of being over the limit of natural resources extraction) for
CIT purposes.
If taxpayers calculate the tax on the basis of volumes of extraction specified in
documents being the ground of extraction, the tax is reported and paid on a quarterly
basis. Those taxpayers who calculate the tax on the basis of actual volumes of extraction
fulfil tax reporting and payment liability on an annual basis.
Social insurance contributions (SIC) and other similar payments
All payments to employees are subject to social insurance contributions (SIC) at the total
rate of 35%. SIC at a rate of 34% (28% pension insurance and 6% social insurance)are
paid by an employer and deducted for CIT purposes. SIC at a rate of 1%are withheld
from employees salary and paid by the employer.
In addition to SIC, an employer is liable for payments under mandatory insurance
against accidents at work and professional diseases to the state insurance company
Belgosstrakh on behalf of all its individuals employed. These payments are charged
at flat rate of 0.6%. For employees engaged in certain sectors of the economy, special
coefficients of up to 1.5 are applied; consequently, the amount of payments under
mandatory insurance against accidents at work and professional diseases could increase.
Such payments as dismissal allowances, compensations for moral damages, legally
provided compensations (with some exceptions), insurance premiums payable under
certain personal mandatory and voluntary insurance, dividends and interests from
participation in legal entities, and others, are exempt from SIC and from mandatory
insurance against accidents at work and professional diseases.
Local tax on providers (suppliers)
The local tax on providers is levied on legal entities engaged in gathering/purchasing of

wild plants (or parts thereof), mushrooms, and technical and medical raw materials of
floral origin for their further industrial processing or resale.
Tax base is the cost of gathered items defined on the basis of procurement (purchasing)
prices.
Tax rates do not exceed 5%. Tax on providers is treated as deductible for CIT purposes.
The tax is reported and paid on a quarterly basis.
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Branch income
Non-resident legal entities pay tax on profits attributable to a PE. A PE is broadly defined
as a branch, division, office, bureau, agency, or any other place through which a foreign
legal entity regularly carries out its business activities in Belarus. Belaruss various DTTs
may define a PE differently, which could, in some cases, result in tax relief. Conducting
business through an agent may also create a taxable PE in Belarus.
Taxation of a PE
A PEs profits are computed on substantially the same basis as Belarusian legal entities,
including the composition of tax deductible expenses. The Tax Code provides for the
deductibility of expenses incurred abroad by a head office with respect to its PE in
Belarus (including a reasonable allocation of administration costs).
To calculate a PEs taxable income, a non-resident company is required to provide a tax
authority with financial documents (i.e. accounting records, income statement, general
ledger accounts, invoices, statements of services/works fulfilment, etc.) supporting the
amount of revenue earned and expenses incurred. Generally, a PEs taxable income is
defined on a revenue less costs basis. Documentary support of each revenue and/or cost
item is required.
When it is not possible to calculate a profit attributable to a PE, this profit can be
calculated by the tax authority using one of the following methods:
A profit sharing method (i.e. gross foreign profit is allocated to PE by using one of
the following coefficients related to a PE: working time costs, expenses incurred,
services/works performed).
Benchmarking method (tax authority performs benchmarking study by collecting the
respective ratios/indexes of other entities engaged in similar activities).
Head office expenses related to a PE are considered for calculation of taxable income
in Belarus and require confirmation of an independent foreign auditor. Splitting of
expenses is highly recommended in the audited financial statements of the parent
company (head office).
If a non-resident company is deemed to have a PE in Belarus, it will have to register with
a local tax authority and declare related profit. Profit related to a PE will be taxed by CIT
at a rate of 18%.
Non-resident legal entities operating in Belarus through a PE are required to follow the
filing and payment schedules established for Belarusian legal entities.
Representative office
Non-resident legal entities are also allowed to operate in Belarus via a representative
office or to set up a resident legal entity.
A representative office of a non-resident company is defined as the structural subunit
registered with the Ministry of Foreign Affairs, which is entitled to protect and represent
the interests of a non-resident company.
The representative office is not considered a legal person.
As of 1 January 2014, non-resident legal entities are permitted to open representative
offices in Belarus only for the purposes of carrying out activity of preparatory and
auxiliary character. The scope of such permitted non-commercial activities includes the
following:
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Contribution to the implementation of international treaties of Belarus in areas
of trade, economy, finances, science, technologies, and transport; improving cooperation in these areas; and encouraging a larger amount of data on economic,
commercial, and scientific issues.
Research for investment opportunities in Belarus.
Establishment of legal entities, including joint ventures.
Ticket sale and seats booking of aviation, railway, automobile, and maritime
transports.
Other socially useful and non-commercial activity.
The copy of documents confirming state registration of a non-resident legal entity with
competent authorities of its country of incorporation (to be filed along with the set of
other documents required to open a representative office in Belarus) shall be issued no
later than three months prior to the submission of respective set of documents to the
Ministry of Foreign Affairs of Belarus.
The permitted number of foreigners working in a representative office shall not exceed
five individuals.
A representative office pays taxes due on its primary and auxiliary activities, such as
real estate tax (with some exceptions), customs duties, input VAT, personal income tax,
social security contributions due on employment of individuals,etc.
Inventory valuation
Under domestic accounting legislation, stock used in the production and included in the
cost of produced goods may be generally valued by the following methods:
Cost of each unit.
Average cost.
First in first out (FIFO).
The inventory valuation method used for CIT purposes must be the same method
established by the taxpayers accounting policy.
Capital gains
Capital gains are subject to WHT. See Capital gains tax in the Other taxes section for more
information.
Dividend income
Dividends distributed by a resident company to another resident company are subject to

12% CIT, which is withheld by a paying company.
Dividends distributed by a foreign entity represent non-operating income of a
receiving Belarus entity and are subject to 12% CIT payable by the receiving entity in
Belarus, irrespective of the fact that the foreign entity has paid the WHT on dividends
distributed.
Dividends received by venture companies are exempt from CIT.
Dividends received by taxpayers from Belarusian companies are exempt from CIT in
the hands of such taxpayers since CIT on dividend income is withheld by a respective
dividend-distributing entity.
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Inter-company dividends
The Tax Code provides no exemptions for taxation of inter-company dividends.
Interest income
Interest on most types of bonds, including state, municipal, bank, and corporate bonds,
is exempt from Belarusian CIT under certain conditions provided for in the Tax Code.
CIT at the standard rate of 18% is charged on interest income derived by a Belarus entity
from another resident company.
Interest income derived by a Belarus entity from a foreign entity represents nonoperating income of a receiving Belarus entity and is subject to 18% CIT payable by the
receiving entity in Belarus, irrespective of the fact that the foreign entity has paid the
WHT on interest income.
The following types of income are, inter alia, exempt from CIT:
Target financing received from the state or municipal budget. The taxpayer is
required to hold separate accounting records of income and expenses derived and
incurred within targetfinancing.
Amounts payable to a shareholder, whether in cash or in kind, not in excess of its
contribution to the statutory capital of a legal entity in case of:
its liquidation
a shareholders withdrawal from a legal entity, or
if the shares are purchased by a legal entity from its shareholder.
Payments to a shareholder in the value of its shares or as a result of an increase in
their nominal value made by the legal entitys sources, as long as such payments
do not change the percentage of participation of either shareholder or change the
percentage of participation interest for less than 0.01%.
Goods (works, services), material rights, and monetary means granted:
to the successors by a legal entity in case of its restructuring
as an inter-company transfer pursuant to corporate decision
to taxpayers engaged in crop production, animal husbandry, fish farming, and
beekeeping, provided that this income is spent for the appropriate activities,or
as a foreign gratuitous help on conditions stipulated by the President.
Monetary means or assets received by a taxpayer from its shareholders as their
contributions to the statutory capital, not in excess of amounts provided by the
statutory documents.
Foreign income
Foreign income of Belarusian resident legal entities is taxed, except for dividends, as
ordinary business income at the standard 18% CIT rate.
There are no provisions in the tax legislation that allow tax deferral with regard to
foreign income.
Deductions
Deductible expenses include all the usual costs that an entity actually incurs for the
purpose of earning income or receiving economic benefit, unless the Tax Code of Belarus
or presidential regulations provide otherwise.
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Depreciation
Assets may be depreciated using the directly proportional (straight-line) depreciation

method, indirect disproportionate depreciation method, and production depreciation
method. Depreciation may not exceed maximum rates established by the law.
Almost all types of fixed assets (buildings, premises, equipment, vehicles) are
depreciated for tax purposes in accordance with the established procedures. Land plots
are not depreciated. There are many different depreciation rates established for different
types of fixed assets. Generally, fixed assets may be divided into five basic groups, as
follows:
Group of assets
1
2
3
4
5
Description of the assets

Buildings and constructions, premises
Vehicles and equipment
Cars and vehicles
Inventories (furniture, tools, etc.)
Computers and other related devices
Annual depreciation rate (%)

1 and 2
10
12.5
10
20
Application of an investment deduction is possible, i.e. taxpayers are entitled to classify/

record part of the initial value of fixed assets and intangible assets, as well as investment
in reconstruction, as costs of production and supply of goods (works, services) for CIT
purposes. The amount of the investment deduction is limited to 10% of the initial value
or value of investment in reconstruction with regard to buildings and constructions and
to 20% of the initial value with regard to machines, equipment, vehicles, and intangible
assets.
An investment deduction is applied in a month starting from which
depreciation charges are calculated for accounting purposes and
the value of investment in reconstruction increased the initial value of fixed assets in
accounting records.
An investment deduction cannot be applied with regard to fixed assets and intangible
assets received by a taxpayer free of charge.
Annual re-evaluation of fixed assets isrequiredonly with regard to buildings,
constructions, and transfer units, provided the inflation rate has reached 100%.A
particular companyis entitled to re-evaluate fixed assets on its own initiative as of 1
January of the year following the reporting one.
Goodwill
Goodwill and personnel experience cannot be recognised as intangible assets for CIT
purposes.
Start-up expenses
Deduction of start-up expenses is possible only after registration of a business presence

(i.e. respective resident entity) and starting from the first year of its operations, provided
respective provisions for deductions of such expenses are outlined in the accounting
policy of that resident entity.
Interest expenses
Interest expenses are generally deducted for CIT purposes unless interest is accrued
on past-due loans. Thin capitalisation restrictions must also be considered (see Thin
capitalisation in the Group taxation section).
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Bad debt
Bad debts are deductible only if proved and specific criteria are met.
Amounts not exceeding 10% of an entitys gross profit granted to health, education,
social welfare, culture, and sports state institutions; religious organisations; social
services institutions; and public associations (i.e. Belarusian Society of Disabled
Persons, Belarusian Society of Deaf Persons, Belarusian Fellowship of Visually
Impaired Persons, Belarusian Childrens Fund, and Belarusian Childrens Hospice),or
spent for acquisition of goods, works, or services for the benefit of the named
institutions, are deductible.
Taxes
Generally, the following taxes, dues, and other compulsory charges to the budget are
deductible for CIT purposes:
Excise taxes paid at purchasing/importation of excisable goods to be used in
manufacturing of goods or provision of works and services in Belarus, with
someexceptions.
Environmental tax, with certain exceptions.
Real estate tax, except the tax due on late construction in progress.
Land tax, with some exceptions.
Tax on natural resources, with some exceptions.
State dues.
Offshore charge.
Tax on providers.
Payments for social and other mandatory security.
The following taxes shall not be deducted for CIT purposes:
VAT paid, with certain exceptions (see below).
CIT.
VAT can be treated as deductible for CIT purposes only if acquired goods, works, or
services are used for production or sale of goods, works, or services that are VATexempt.
Limited deductible expenses also include the following:

Modernisation and reconstruction of fixed assets. The value of modernisation or
reconstruction is included in the acquisition costs.
Business trips.
Premiums on certain types of voluntary insurance, with restrictions.
Natural losses, with certain exceptions.
Cost of fuel and energy resources, with restrictions established for certain entities.
Membership fees, contributions, and premiums, with restrictions.
Premiums on certain types of voluntary insurance, with restrictions.
Amounts of financial rebates granted by a supplier to a customer.
Non-deductible expenses also include the following:
Expenses on provision or acquisition of works and services not related to the
taxpayers business activities.
Construction, maintenance, and other works, including all types of repair of assets
that are not used for the purpose of earning income or receiving economic benefit.
Default interest (forfeit), fines, and other sanctions paid to the budget.
Dividends paid and similar type of payments.
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Contributions made to the authorised share capital.
Expenses incurred on purchase and/or creation of depreciable assets.
Depreciation for tangible and intangible assets not used in business, as well as for
tangible assets that are not in operation.
Cost of assets or material rights transferred as advance or a pledge to a third party.
Expenses covered by reserves for future expenses created by a taxpayer in the
prescribed manner.
Interest on overdue loans, as well as on loans related to the acquisition of tangible
and intangible assets, other long-term assets.
Other expenses not related to the deriving of income and not attributed to operating
activities of the entity as well as expenses that are not considered as allowable
deductions under the Tax Code of Belarus.
Belarusian companies are given the possibility to recognise in the current tax period the
tax losses incurred in the previous tax periods. Taxpayers are entitled to carry forward
losses incurred in 2011 and subsequent tax periods. Losses can be carried forward only
for ten years after the tax period when the losses have occurred.
However, tax loss carryforward is not applied to losses:
incurred as a result of activities outside Belarus, if a company is registered as a
taxpayer in a foreign state with regard to such activities, or
incurred in a tax period when a company was entitled to apply CIT relief (tax
exemption) established for several tax periods.
Tax losses cannot be carried forward if, following the results of a relevant previous
tax period (calendar year), a taxpayer received income (profits), notwithstanding the
factthat losses availableto be carriedforward in line with the Tax Code were actually
suffered or not.
Tax losses may not be carried back in Belarus.
Payments to foreign affiliates of a Belarusian resident legal entity in amounts of

financing aimed to cover ongoing costs thereof are deductible for CIT purposes in
Belarus.
Group taxation
Currently, group taxation legislation and regimes are not available in Belarus. Each
Belarusian entity is regarded as a separate taxpayer and may not deduct tax losses of any
other group entity. The Belarus Tax Code does not allow the deduction of foreign losses
from domestic taxable income or domestic losses from foreign taxableincome.
Transfer pricing
Amendments to the Tax Code empower tax authorities to carry out transfer pricing
control. Though Belarusian transfer pricing legislation is not as thorough as it is in the
European Union (EU) member states, taxpayers should be aware of the following:
In the course of the tax audit, tax authorities are entitled to check whether prices set
by particular taxpayers are in line with market prices.
Tax authorities can apply the market price of a transaction for taxation purposes in
the following cases:
Selling of immovable property/real estate when the transaction price is 20% lower
than the market price.
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Entering into a foreign-trade transaction, including one with a related party, when
the transaction price (price of a number of transactions with one person per year)
is simultaneously higher than BYR 60 billion and 20% lower than the market
price.
The tax base for CIT purposes can be adjusted by the tax authorities on the basis of a
market price only if the amount of CIT to be paid to the budget of Belarus goes up as a
result of such adjustment.
To determine the CIT base on the basis of a market price, the tax authorities are
entitled to apply the following methods:
Comparable uncontrolled price method (CUP).
Resale price method.
Cost plus method.
Before the tax audit has been carried out, a taxpayer who applied transaction prices
not corresponding to market prices is entitled to independently adjust the CIT base
according to market prices and pay the remaining CIT.
Moreover, there is a mechanism to control transfer pricing provided by the DTTs
applicable for Belarus. When interests under the loan agreement between related parties
exceeds the arms-length rate/basis (the amount which will be agreed upon between
independent parties under normal business circumstances), a 5% rate of WHT (provided
by the DTT) will be charged on the arms-length interest charge. Excess amounts, if any,
will be taxed by WHT at a 10% rate.
Thin capitalisation
The amount of interest accrued on a loan granted to a taxpayer by a foreign company

that can be deducted for CIT purposes will be limited if, in aggregate,:
a foreign company holds over 20% of shares in the statutory capital of a taxpayer or a
foreign company and a taxpayer are treated as related parties, and
the loan amount exceeds the value of a foreign companys share in the statutory
capital of a taxpayer by more than three times.

Foreign tax credit
If a Belarusian legal entity derives income subject to taxation abroad, the tax paid
abroad may be deducted from the calculated CIT. In accordance with the Tax Code, the
amount deducted from CIT may not exceed that part of the tax calculated in Belarus
that is attributed to the income received in a foreign jurisdiction. If there is a valid DTT
with the country in question, the provisions of the treaty regarding avoidance of double
taxation shall apply.
Special tax treatments
The Belarusian Tax Code provides a more favourable tax environment for particular
resident legal entities. Special tax treatments are available for certain taxpayers
depending on their location, amount of revenue, number of individuals employed, types
of business, etc. Special tax treatments include, but are not limited to, the following:

Simplified taxation.
Tax on farmers and other producers of agricultural products.
Tax on gambling business.
Tax on lotteries.
Tax on electronic interactive games.
Single tax on imputed income.
Free economic zones.
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In cases where activities fulfil the criteria of a special tax treatment, the taxpayer is not
permitted to use the general taxation regime with regard to income deriving from those
activities, with certain exceptions. Concerning simplified taxation and tax on farmers,
the taxpayer is entitled to determine whether to apply such treatment or not.
Incentive for employing disabled persons
Entities employing disabled persons, if their number exceeds 50% of the average number
of employees for the reporting period, are exempt from CIT due on taxable profit derived
from production activity.
Exemption of CIT on profits derived from various activities
Profit of entities engaged in baby food production is exempt from CIT.

Profit derived by insurance companies from investments of insurance reserves under
the contracts of voluntary life insurance is exempt from CIT.
Entities engaged in manufacturing of prosthetic and orthopaedic devices (including
dental prostheses), provision of rehabilitation, and disability services are exempt
from CIT due on profit derived from sales of these items.
Entities deriving profit from sales of plants (except for flowers, ornamental plants),
livestock (except for farming), fish farming, and beekeeping, provided the entities
raise them, are exempt from CIT.
Tax holidays
Profit from the services provided by hotels, sport complexes, ski complexes, touristic
complexes, motels, campgrounds, etc. located at tourist sites established by the
President of Belarus is exempt from CIT for three years starting from the commencement
of its activities, with certain exceptions.
Profit derived by motels, hotels, campgrounds, maintenance stations, and objects of
trade, catering, and cleaning located on the roadsides of national highways is exempt
from CIT for five years starting from the day when the permission for such activities
wasreceived. This privilege does not cover roadside objects located on land plots
granted for construction of gasoline stations.
Scientific and Technological Association incentive
Entities that are members of the Scientific and Technological Association established by
Belarusian State University, in accordance with legislation, are entitled to apply a 5%
CIT rate on their profit derived from sales of information technology and provision of
information technology developmentservices.
Incentives for the production of innovative, high-technology goods and

laser-optical equipment
Income derived from selling goods of ones own production included in the list of
innovative goods approved by the Council of Ministers is exempt from CIT.
Income from selling goods of ones own production that are included in the list of hightechnology goods approved by the Council of Ministers is exempt from CIT, provided
revenue from selling of such goods comprises at least 50% of total revenue of a taxpayer.
If revenue from selling high-technology goods is less than 50% of total revenue, such
income is taxable at a reduced CIT rate of 10%.
Entities engaged in production of laser-optical equipment, accounting for at least 50% of
the entitys total production, can benefit from a reduced CIT rate of 10% under certain
conditions.
Free economic zones
Entities that are registered in Belarusian free economic zones are exempt from CIT for
five years, starting from the date when the profits were declared, in relation to goods,
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works, and services of their own production that are either exported or included in the
list of import-substituting goods and supplied in Belarus. After expiration of this term,
the CIT rate is 9%.
Land plots within the borders of free economic zones, provided to free economic zone
residents registered after 1January 2012 for the purpose of objects construction,
are exempt from land tax for the period of such objects design and construction, but
not more than for five years from the registration date. Free economic zone residents
registered before 1 January 2012 can take advantage of this land tax exemption only
during the period from 1 January 2017 till 1 January 2022, as long as design and/or
construction works are performed.
Moreover, residents of free economic zones are granted, under certain conditions, a
partial VAT relief and a relief for real estate tax on buildings and constructions located in
free economic zones.
High Technologies Park (HTP)
The following tax privileges are granted to residents of the HTP:

Full exemption from CIT.
Full exemption from VAT when selling goods, works, or services in the territory of
Belarus.
Full exemption from VAT and customs duties when importing certain goods for the
purpose of using them in activities connected with high technology.
No land tax is applicable to land plots situated in the HTP on which a construction
project is being carried out; however, this exemption will last no longer than three
years.
Full exemption from real estate tax on buildings and installations, including abovestandard incomplete constructions that are situated in the territory of the HTP.
9% personal income tax (PIT) for employees of residents of the HTP.
No social security contributions on the part of employees income exceeding the
average salary in Belarus.
Taxation of holding companies
A holding company is a group of companies where one company of the group is

considered to be a management company by virtue of influence over decisions passed
by other group companies (i.e. the subsidiaries) as a result of holding 25% and more of
their ordinary stock (shares).
A management company is entitled to create a centralised fund by means of
contributions of subsidiaries from net income thereof. Subject to certain conditions,
monetary means received by a management company (Belarusian tax resident) from
subsidiaries (Belarusian tax residents) for the purpose of a centralised fund formation
as well as monetary means transferred from a centralised fund to subsidiaries are not
considered taxable income for CIT purposes.
Free of charge transfer of assets within aqualifying holding group is exempted from CIT
in Belarus, conditional on certain terms, in particular:
Amanagement company possesses more than 50% of shares (stock) of its subsidiaries
receiving or transferring assets.
Participants of a holding groupreceiving or transferring assets are not under special
tax treatment and are not registered in any free economic zone.
Participants of a holding group receiving or transferring assets do not participate
insecurities market and do not manufacture alcoholic and tobacco products; they are
not banks, non-bank financial intermediaries, or insurance companies.
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Received assets are used to manufacture products, to perform works, andto render
services.
Withholding taxes
The following income of a non-resident entity in Belarus that is not derived through a PE
is deemed to be Belarusian-source income and is subject to WHT at the rates provided:
Income
Freight charges, (including demurrage) and freight-forwarding services (excluding
freight charges for marine transportation and forwarding services)
Interest on any type of debt obligations, including securities
Royalties
Dividends and other similar income
Penalties, fines, and other sanctions received for breach of contractual liabilities
Income derived from sports, entertainment activities, or performers activities
Income derived from innovative, design, research and development activities, design
of technological documentation engineering design, and other similar works and
services
Income from provision of guarantees
Income from provision of disk space and/or communication channel for placing
information on the server and services for its maintenance
Proceeds from the sale, transfer (with title), or lease of immovable property located
in Belarus
Income derived by a foreign entity from the sale of an enterprise as a complex of
assets located in Belarus
Capital gains (income from the sale of shares/stocks) in local companies
Income from the sale of securities (except shares)
Income derived from provision of works and services
WHT(%)
6
10
15
12
15
15
15
15
15
15
15
12
15
15
In calculation of WHT due on certain types of income, a taxpayer is permitted to deduct

related expenses following the rules specified by the Tax Code.
Generally, the tax is withheld and paid to the budget by a local entity, an individual
entrepreneur, a branch, or a PE of a foreign company. When certain types of Belarusiansource income is received (e.g. capital gains, sale, transfer of title of ownership or lease
of immovable property, provision of licenses for software, and other copyright objects), a
WHT shall be paid directly by a foreign entity.
Currently, Belarus has68 DTTs with foreign countries. Where a treaty for the avoidance
of double taxation with the country in question contradicts the local tax regulations, the
treaty provisions prevail.
Reduction of or an exemption from WHT under a DTT may be obtained if a special
residence certificate is completed and provided to the tax authorities before the payment
is made.
If the payment that is covered by the DTT has already been made and WHT at the
local rate was withheld, it is possible to obtain an appropriate refund (reduction)
by completing a special claim for a refund. The claim for a refund must be filed with
additional documents, such as a residence certificate, copies of the contract, and other
documents related to the payment.
The following table indicates WHT rates stipulated in DTTs Belarus is a party to:
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Dividends
(3)
Recipient
Armenia
WHT (%)
Interest Royalties
(4)
10
0/5 (1)
5/15
15
5
5/15
0/5 (1)
0/5 (1)
0/5 (1)
0/10
10
0/10 (1)
10
5/15
10/15
0/10 (1)
10
5
5/10
0/5
10
10
15
Egypt, Arab Republic of

Estonia
Finland
France (2)
Germany
15
10
5/15
15
5/15
10
10
0/5
10
0/5
Hungary
India
Iran, Islamic Republic of
5/15
10/15
10/15
5
10
0/5 (1)
Ireland
Israel
5/10
10
5
5/10
Italy
5/15
0/8 (1)
Japan (2)
15
10
Kazakhstan
15
0/10 (1)
5/15
0/5 (1)
15
5/10
10
0/10 (1)
0/5 (1)
0/10 (1)
0/8 (1)
0/10 (1)
7.5
0/5 (1)
5/15
0/5 (1)
Austria
Azerbaijan
Bahrain
Belgium
Bulgaria
China
Croatia
Cyprus
Czech Republic
Democratic Peoples
Republic of Korea
Denmark (2)
Korea, Republic of
Kuwait
Kyrgyz Republic
Laos
Latvia
Lebanon
Libya
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Construction site
duration before
creation of a PE Treaty benefits
(months) available from
10
12 19 November
2001
5
12 24 March 2002
10
12 29 April 2002
5
12 16 April 2008
5
12
13 October
1998
10
12
17 February
1998
10
18 3 October 1996
10
12
4 June 2004
5
12
12 February
1999
5
12
15 January
1998
10
12 20 November
2007
0
24 28 September
1987
10
12 27 May 1999
10
6
22 July 1998
5
12
13 July 2008
0
24 28 March 1987
3/5 (5)
12 31 December
2006
5
12 24 June 2004
15
6
17 July 1998
5
12 15 November
2001
5
12
9 July 2010
5/10 (6)
12 29 December
2003
6
12 30 November
2009
10
12 27 November
1986
15
12 10 December
1997
5
12 17 June 2003
10
6 27 March 2002
15
12 12 May 1998
5
9 15 March 2014
10
6
31 October
1996
5 an aggregated period 29 December
of more than 9 months
2002
in any 12-month period
5 an aggregated period Has not entered
into force
in a tax year
Belarus
Recipient
Lithuania
Macedonia, Former
Yugoslav Republic of
Malaysia (2)
Moldova
Mongolia
Netherlands
Dividends
(3)
10
5/15
15
15
10
5/15
Oman
Pakistan
Poland
Qatar
0/5 (1)
10/15
10/15
5
Romania
Russia
10
15
Saudi Arabia
Serbia (2)
5
5/15
Singapore
0/5 (1)
Slovakia
Slovenia
South Africa Republic
10/15
5
5/15
Spain (2)
Sri Lanka
18
5/7/10
Sweden
5/10
Switzerland
5/15
Syria
Tajikistan
15
15
Thailand
10
Turkey
Turkmenistan
Ukraine
10/15
15
15
WHT (%)
Interest Royalties
(4)
Construction site
duration before
0/10 (1)
10
12 26 June 1996
10
10
12
26 January
2006
0/15 (1) 10/15 (7)
6
4 July 1988
10
15
12 28 May 1996
0/10 (1)
10
12
27 January
2002
5 3/5/10 (8)
12 31 December
1997
0/5 (1)
10
6 9 January 2008
0/5 (1)
15
6 5 October 2006
10
0
12 1 January 1994
0/5 (1)
5 an aggregated period 24 November
2007
commencing or ending
in a relevant tax year
0/10 (1)
15
12
14 July 1998
0/10 (1)
10 no special provisions
21 January
in the relevant DTT,
1997
local tax legislation
provisions should apply
5
10
6 1 August 2010
8
10
12 24 November
1998
0/5 (1)
5
12 27 December
2013
0/10 (1)
5/10 (9)
12
5 July 2000
5
5
12 31 May 2011
5/10
5/10 an aggregated period 29 December
of more than 120 days
2003
commencing or ending
in a relevant tax year
0
5
12 7 August1986
0/10 (1)
0/10 (1) an aggregated period
12 February
of more than 183 days
2014
0/5 (1) 3/5/10 (10)
12 27 December
1994
0/5/8 (1) 3/5/10 (10)
12 28 December
1999
10
18
6
3 April 2002
0/10 (1)
15
12 16 December
1999
0/10 (1)
15
6 2 September
2006
0/10 (1)
10
12 29 April 1998
0/10 (1)
15
6 29 December
2004
10
15
12
30 January
1995
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Belarus
Recipient
Dividends
(3)
United Kingdom of Great

Britain and Northern
Ireland (2)
United States of America
(2)
Uzbekistan
Venezuela
Vietnam
WHT (%)
Interest Royalties
(4)
Construction site
duration before
12
1 February
2001
24
30 January
1986
5/10
0/5 (1)
5/10 (11)
0 (1)
36
15
0/10 (1)
15
12
5/15
0/5 (1)
5/10 (12)
15
0/10 (1)
15
28 January
1976
11 January
1997
20 January
2009
26 December
1997
Notes
1.
In general, a 0% tax rate applies to interest payments to the governments of contracting states and
to payments guaranteed by the governments of contracting states.
The DTT with this country is in force since Belarus is a successor of the former USSR.
In the case of multiple rates, the lowest rate is applicable with regard to those companies or physical
persons who are the beneficial owners of dividends distributed by a company in which they hold 25%
or more shares.
4. In the case of multiple rates, the lowest rate is applicable with regard to all kinds of loans provided by
a bank.
5. 3% applies to patents and trademarks; 5% applies to copyrights.
6. 5% applies to equipment; 10% applies to all other royalties.
7. 10% applies to patents, trademarks, and equipment; 15% applies to all other royalties.
8. 3% applies to patents and trademarks; 5% applies to equipment; 10% applies to copyrights.
9. 5% applies to copyrights; 10% applies to patents and trademarks.
10. 3% applies to patents; 5% applies to equipment; 10% applies to all other royalties.
11. 5% applies to copyrights; 10% applies to patents and trademarks.
12. 5% applies to copyrights; 10% applies to all other royalties.
2.
3.
Tax administration
Taxable period
The taxable period for CIT is a calendar year. The taxable period for CIT withheld on
dividends accrued by Belarusian companies is a month.
Tax returns
As of 1 January 2014, a CIT return shall be submitted on a quarterly basis, whether

a company has taxable income or not, by the 20th day of the month following the
reporting period.
The above CIT reporting rule is also applicable on PEs of foreign companies as well as
non-commercial representative offices.
CIT withheld on inter-company dividends must be reported by a tax withholding entity
no later than the 20th day of the month following the month in which the dividends
were accrued.
A tax-withholding entity must submit a WHT return to the tax authorities no later than
the 20th day of the month following the month when the payment was made.
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Payment of tax
CIT must be paid on a quarterly basis on actual results of financial and economic activity
for a quarter, no later than the 22nd day of the month following the expired reporting
period. Equal instalments have been abolished since 1 January 2014.
The above deadline shall also be followed by PEs of foreign entities.
CIT on inter-company dividends shall be paid no later than the 22nd day of the month
following the month when dividends were paid.
WHT is to be calculated, withheld, and paid by a Belarusian company or a PE of a nonresident company no later than the 22nd day of the month following the month when
the payment was made.
Tax audit process
Subject to certain exceptions, tax authorities are not permitted to carry out scheduled
audits within two years after the companys incorporation or representative offices (of a
foreign company) registration. Subsequently, scheduled audits can be performed every
one, three, or five years, depending on whether a company is referred to as high-risk,
middle-risk, or low-risk.
Tax authorities can perform off-schedule audits only on the grounds defined in
legislation (e.g. reorganisation or liquidation of a taxpayer, information about tax
violations).
Generally, the statute of limitations for tax liability is either three years after the date
when violation was committed or six months after the date when violation was exposed
by tax authorities.
Below are the main areas that the tax authorities usually monitor in Belarus:
Application of CIT incentives.
CIT treatment of overdue loans and recognition of accounts payable above the statute
of limitations.
Proper justification of deductible marketing, consulting, and other similar costs for
CIT purposes.
VAT deductions and relevant justification thereof.
Tax treatment of reorganisations, mergers, and spin-offs.
Tax treatment of related party transactions.
Tax treatment of charitable and other similar donations.
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Belgium
PwC contact
Axel Smits
Woluwe Garden
Woluwedal 18
B-1932 Sint-Stevens-Woluwe
Belgium
Tel: +32 3 259 3120
Fairness tax
During the budget negotiations at the end of June 2013, a so-called fairness tax has
been adopted by the Act of 30 July 2013. See the Taxes on corporate income section for
more detailed information on the fairness tax.
Notional interest deduction (NID)
The NID rate for tax year 2015 (i.e. accounting years ending between 31 December 2014
and 30 December 2015) is 2.630% (3.130% for small and medium-sized enterprises
[SMEs]).
The Belgian legislation on theNID was amended by the Act of 21 December 2013 in
order to comply with the decision of the European Court of Justice (ECJ) in the Argenta
Spaarbank NV case (C-350/11) of 4 July 2013. The NID legislation was amended in such
a way that as of assessment year 2014 (accounting years ending 31 December 2013 or
later):
foreign permanent establishments (PEs) located in a treaty country no longer result
in a correction of the NID calculation basis, and
the NID basis will be reduced by:
the lower amount of (i) the result of the foreign PEor real estateor (ii) the net
asset value of thePE or real estate multiplied by the NID rate if it concerns aPE
located in the European Economic Area (EEA) or
the net asset value of thePE or real estate multiplied by the NID rate if it concerns
aPE or real estate located in a treaty country outside of the European Economic
Area.
Withholding tax (WHT) measures

Liquidation bonus (enacted)
Currently, the WHT rate on dividend distributions resulting from the liquidation of a
company (liquidation bonus) is 10%. The rate will increase from 10% to 25% as of 1
October 2014.
Value-added tax (VAT) developments

Reduced rate for supply of electricity
As of 1 April 2014, the VAT rate applicable on the supply of electricity to private
customers has been decreased from 21% to 6%.
Threshold for small businesses
As of 1 April 2014, the VAT registration threshold for small businesses has increased
from 5,580 euros (EUR) to EUR 15,000 per annum.
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Quarterly VAT return
As of 1 January 2014, the threshold allowing taxable persons to submit quarterly VAT
returns has been increased from EUR 1 million to EUR 2.5 million per annum.

Corporate income tax (CIT)
In general, the tax base for CIT purposes is determined on an accrual basis and consists
of worldwide income less allowed deductions. The rules are equally applicable to
companies and PEs. It is assumed that all income received by a company is, in principle,
business income. The income tax base is based on the Belgian Generally Accepted
Accounting Principles (GAAP) financial statements of the company.
General rate
CIT is levied at a rate of 33% plus a 3% crisis tax, which is a surtax, implying an effective
rate of 33.99%. This rate applies to both Belgian companies (subject to Belgian CIT) and
Belgian branches of foreign companies (subject to Belgian non-resident CIT). Capital
gains on shares realised without meeting the one-year holding requirement are taxed at
25.75% (25% plus a 3% crisis tax), provided certain conditions are met (and at 0.412%
if this one-year holding period and certain other conditions are met).
Fairness tax
As of tax year 2014, large companies (i.e. notSMEs, see below) are subject to a fairness
tax on their distributed dividends. The fairness tax is a separate assessment at a rate
of 5.15% (5% increased by a 3% crisis surtax) borne by the company distributing the
dividends.
The tax is only applicable if, for a given taxable period, dividends have been distributed
by the company and (part or all of) the taxable profit has been offset against (current
year) NID and/or carried forward tax losses.
First step
The taxable basis of the fairness tax is determined by the positive difference between
the gross dividends distributed for the taxable period and the taxable result that is
effectively subject to the nominal corporate taxes of generally 33.99% (there are some
exceptions). Liquidation bonuses and share buy-back proceeds are not in scope of the
fairness tax.
Second step
This positive difference as determined in the first step will be decreased with the part of
the dividends stemming from taxed reserves constituted, at the latest, during tax year
2014. To identify the origin of the dividends, a last in first out (LIFO) method is applied.
Third step
The outcome of the above calculation is limited by a percentage, being the result of the
following fraction:
The numerator consists of the amount of carried forward tax losses and NID that has
been effectively used in the taxable period at hand.
The denominator consists of the taxable result of the taxable period at hand,
excluding the tax-exempt reductions in the value and provisions.
The fairness tax itself is not tax deductible. The fairness tax due can be offset against
prepayments made and tax credits.
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Large companies are in scope of the fairness tax. The fairness tax is not applicable to
SMEs.
Belgian branches of foreign companies are also in scope of the fairness tax. For Belgian
branches, distributed dividends are, for the purposes of the fairness tax, defined as
the part of the gross dividends distributed by the head office, which proportionally
corresponds with the positive part of the accounting result of the Belgian branch in the
global accounting result of the head-office.
Reduced rates
A progressive scale of reduced rates applies to taxpayers with lower amounts of taxable
income. If the taxable income is lower than EUR 322,500, the following rates apply
(including the 3% crisis tax):
Taxable income (EUR)
0 to 25,000
25,001 to 90,000
90,001 to 322,500
CIT rate (%)

24.98
31.93
35.54
Even if their taxable income does not exceed the aforesaid ceilings, certain companies
are excluded from the reduced rate and always subject to the normal CIT rate. These
companies include, amongst others, companies that are owned 50% or more by one or
more companies.
Surcharge
A surcharge is due on the final CIT amount upon assessment (including the crisis
surtax). The surcharge can be avoided if sufficient advance tax payments are made (see
Payment of tax in the Tax administration section for more information). For tax year 2014
(i.e. accounting years ending between 31 December 2013 and 30 December 2014, both
dates inclusive), the surcharge is 2.25%. For tax year 2015 (i.e. accounting years ending
between 31 December 2014 and 30 December 2015, both dates inclusive), the surcharge
is 1.69%.
Secret commissions tax
A special assessment of 309% (300% plus 3% crisis tax) is applicable to so called secret
commissions, which are any expense of which the beneficiary is not identified properly
by means of proper forms timely filed with the Belgian tax authorities. These expenses
consist of:
Commission, brokerage, trade, or other rebates, occasional or non-occasional fees,
bonuses, or benefits in kind forming professional income for the beneficiaries.
Remuneration or similar indemnities paid to personnel members or former personnel
members of the paying company.
Lump-sum allowances granted to personnel members in order to cover costs proper to
the paying company.
The secret commissions tax is not applicable if the payer demonstrates that the payments
have been reported in the beneficiarys Belgian tax return. The 309% rate is also
applicable to hidden profits that are not part of the property of the company, with the
exception of certain specific hidden reserves. The special assessment of 309% and the
expenses themselves are, however, fully deductible for CIT purposes.
A second escape method from the 309% separate assessment has been introduced if
the amount of the benefit has not been included in the tax return of the beneficiary.
If the amount of the benefit was not included in the tax return of the beneficiary, the
309% assessment will not be applicable if the amount of the benefit is included in a
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tax assessment of the beneficiary and with the agreement of the beneficiary within the
normal assessment period of three years.
Taxable income of non-residents
Certain income attributed by a Belgian tax resident to a non-resident is taxable in

Belgium. A paragraph in the Belgian Income Tax Code functions as a catch all clause to
tax certain payments made to a non-resident of Belgium.
Which income is specifically taxed via this catch all clause would be published via
administrative guidelines issued by the Belgian tax authorities (e.g. technical service
fees would be in the scope).
Local income taxes
No tax is levied on income at the regional or local level. Note that immovable assets
(land, building, and possibly machinery and equipment) situated within the Belgian
territory are, in principle, subject to an immovable WHT that is levied locally.
Corporate residence
A company is considered to be a resident of Belgium for tax purposes if it has its
registered office, its principal place of business, or its seat of management in Belgium.
The seat of management has been defined by Belgian case law as the place from where
directing impulsions emanate or the place where the companys effective management
and central administration abide, meaning the place where the corporate decisionmaking process actually takes place.
The definition of a Belgian establishment under Belgian domestic tax law corresponds,
but is broader than, the definition of a PE under either the Organisation for Economic
Co-operation and Development (OECD) Model Tax Convention or Belgiums double tax
treaties (DTTs). Since the latter prevail over domestic law, Belgium generally cannot
levy tax if a non-resident has a Belgian establishment that does not constitute a PE under
the relevant DTT. Although Belgium would not be entitled to tax the profit attributable
to the Belgian establishment in such a case, the foreign company should still abide by
certain formal tax requirements (e.g. filing a non-resident tax return, responding to
requests for information).
The following situations have been recently included in the Belgian definition of a PE:
A foreign company if, for the same or related products, it carries out services in
Belgium through one or more individuals (that are present in Belgium) for, in total,
more than 30 days during any 12-month period.
Splitting contracts and dividing them over the various group companies is no longer
possible to avoid having a PE in Belgium, as the duration of the projectis counted at
the group level. This anti-abuse measure is not applicable if the taxpayer can prove
that the provision of similar services by different group companies is justified by other
reasons than to avoid the presence of a PE in Belgium.
Other taxes
Scope of VAT
The following transactions are subject to VAT in Belgium if they are considered to take
place in Belgium:
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The supply of goods effected for consideration by a taxable person acting as such.
The supply of services effected for consideration by a taxable person acting as such.
The acquisition of services for consideration from outside Belgium between taxable
persons.
The importation of goods.
Intra-Community acquisition of goods for consideration by a taxable person acting as
such or by a non-taxable legal person (including the transfer of assets).
The self-supply by a taxable person.
Intra-Community supply and intra-Community acquisitions
An intra-Community supply of goods is a supply of goods whereby the goods are moving
from one European Union (EU) member state to another EU member state. In the
member state of departure of the goods, the goods can be, under certain conditions, VAT
exempt. As a result, the intra-Community acquisition of the goods (i.e. the arrival of the
goods in the other member state) will be taxable.
Standard and other VAT rates
The standard VAT rate is 21%. This rate applies to all goods and services not qualifying
for one of the reduced VAT rates.
The following supplies of goods and services have a 12% VAT rate:

Restaurant and catering services, excluding beverages.

Phytopharmaceutical products.
(Inner) tubes.
Certain combustible material.
Margarine.
Social housing and certain renovation works on immovable property.
The following supplies of goods and services have a 6% VAT rate:

Works on immovable property (limited in time and with strict conditions).

Basic necessities, such as food and pharmaceuticals.
Distribution of water through pipelines.
Some printed materials.
Transport services of persons.
Hotels and camping.
Use of cultural, sporting, and entertainment venues.
Works of art, antiques, and collectors items.
Supplies of cars for the disabled, as well as equipment and accessories for such cars.
Supplies of certain devices for therapeutical use.
Contract farming.
Repair of bicycles, shoes and leather goods, clothing, and household linen.
Some housing for private use, for the disabled, and in the social sector.
Copyrights.
Concerts and exhibitions.
Some medical equipment.
Goods and services supplied by social organisations.
Supply of electricity to private customers.
The following supplies of goods and services are VAT exempt with credit (zero-rated):
Exports and certain related services.
Intra-Community supplies of goods and certain related services.
Imports, intra-Community acquisitions, and local trades of goods within VAT
warehouses or under special customs regimes.
Certain transactions on goods placed in a Customs or VAT warehouse.
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Cross-border passenger transportation by ship or aircraft.
Supplies to diplomats and international organisations.
Certain supplies of goods and services to certain vessels and aircraft mainly involved
in international passenger transport.
Certain newspapers, journals, and magazines.
Supply of recovered goods or products.
The following supplies of goods and services are, in principle, VAT exempt without
credit:

Healthcare services.
Social services.
Education services.
Sport services.
Cultural services.
Services of lawyers (as of 1 January 2014, services of lawyers are subject to VAT).
Banking services.
Interest charges.
Financial services (option to tax possible for paying and cashing services).
Insurance services.
Land and real estate sales.
Property leasing and letting.
It should be noted that specific conditions may apply to the above two categories.
VAT grouping
Under a VAT group, independent legal persons are treated as one single taxable
person for VAT purposes if they are closely linked financially, economically, and
organisationally. Hence, for VAT purposes, all supplies of goods and services to or by the
group members are deemed to be made to or by the group itself.
The application of a VAT group has, amongst other, the following consequences:
No issuance of inter-company invoices between companies in the VAT group
(however, internal documents will be required).
No charging of VAT between companies in the VAT group (avoiding VAT prefinancing).
No risks of incorrect VAT treatment of transactions between companies in the VAT
group.
No cascade of limitation of the right to deduct VAT when on charging costs to
companies in the VAT group.
Head office abroad outside the VAT group will be seen as a third party and will trigger
VAT on head office/branch services.
Mutual liability between VAT group members.
Filing of one VAT return for all companies in the VAT group.
Company cars
The input VAT on investment goods (e.g. company cars, immovable property) that
are part of the business assets of a VATable person and that are used for professional
and other purposes (e.g. private use) needs to be deducted immediately following the
professional use of the asset (instead of an immediate deduction of the input VAT at
the moment of purchase followed by a correction later on of this deduction through the
application of a benefit in kind subject to VAT).
The input VAT related to company cars in Belgium is subject to a VAT limitation of a
minimum of 50%, but will, in most cases, even be higher, depending on the private/
professional use of the company car.
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The latest administrative decision contains different methods when company cars
are put at the disposal of employees without consideration (i.e. logbook to register
professional use, a lump-sum method based upon home/work distance, and a general
lump-sum method of a 35% maximum VAT deduction) to determine the private/
professional use of the company car and rules to calculate the tax base in case a company
car is sold or is put at the disposal of the employee under consideration.
Furthermore, with regard to the mixed use of other movable assets than company cars
put at the disposal of employees, etc. without consideration (e.g. cell phones, tablets,
laptops), a general lump sum calculation method has also been introduced.
In the course of September 2013, a new administrative decision was published providing
additional guidance, which enlarged the application of the company cars theory, as
mentioned above, even to certain kinds of light trucks.
E-invoicing and chargeable event
As of 1 January 2013, new rules with respect to (e-) invoices have been implemented. As
a result of these changes, paper and e-invoices are to be treated equally. Amongst others,
the changes include:
An implicit acceptance procedure of e-invoices by customers.
That the guaranteeing of the authenticity andintegrity of the content and legibility
ofthe invoice can be delivered by business controls, which create a reliable audit trail
between the invoice and the supply of goods/services.
An implicit acceptance procedure for self-billing.
Next to that, the issuance of an invoice is no longer a chargeable event. VAT becomes
due, in principle, when the taxable event (tax point) takes place, which is considered at
the moment the supply of the good occurred or the service has been completed. If before
this tax point a payment is received, VAT will also become due on the received amounts
as from the receipt of the price or a part of the price. As from receipt of the payment or
as from the moment the tax point occurred (as mentioned above), the supplier would
be required to issue a correct VAT invoice by the 15th day of the month following
the receipt of the payment or the moment the tax point occurred. Please note, in this
respect, that at the moment VAT becomes due, VAT will also become deductible in the
hands of the recipient of the goods and services if one is in the possession of a correct
VAT invoice.
For the supply of goods and services provided by a taxpayer who regularly supply goods
or services to individuals/private persons where one is not obligated to issue an invoice
(i.e. cash accounting), VAT will become due at the moment of the receipt of the money.
For intra-Community supplies of goods and services, other tax point rules exist, which
differ from the above mentioned general tax point rules.
As the above mentioned tax point rules are new in Belgium, these rules could cause
significant problems, particularly for advance invoices. In this respect, a (optional)
transitional period has been foreseen until 31 December 2014. During this period,
advance invoices will give rise to a VAT deduction even if they are issued by the supplier
before the payment has been received from the client (which will be not the case after 31
December 2014).
Import duties
Goods coming from outside the European Union and imported into Belgium are subject
to import duties. Import duties are calculated based on three main elements:
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Classification
All products are classified based on the rules laid down in the Combined Nomenclature
(CN). A single commodity code (CN-code) applies for every product. An import duty
rate is linked to every CN-code.
Origin
Based on international trade agreements, a preferential import duty rate (read: a lower
import duty rate) may apply to products imported in the European Union meeting the
origin criteria in the country participating in the agreement.
Valuation
The customs value is determined based on one of the six rules laid down in the
Community Customs Code. These valuation rules are harmonised on a global level
through the General Agreement on Tariffs and Trade (GATT) valuation agreement.
Various economic customs regimes are available allowing optimisation schemes
throughout the supply chain.
Excise duties
Excise products are divided into the following two groups:

Community excise products: These are defined as excise products at the EU-level,
and the same procedures should apply in all EU member states. Products in scope
are (i) alcohol, (ii) alcoholic beverages, (iii) energy products, and (iv) manufactured
tobacco.
National excise products: These are defined by the individual countries. Specific
Belgian legislation applies to the national excise products, which are (i) non-alcoholic
beverages and (ii) coffee.
The excise duty rates for Community and national excise products are fixed at the
national level and vary and change regularly. Excise legislation includes compliance.
Property taxes
Immovable property is subject to an immovable WHT (also called real estate tax) due
on a yearly basis. This tax is calculated in function of the so-called cadastral income of
the property (a kind of deemed rental income). The deemed rental income constitutes
the average normal net income of one year (based on rental income of 1976). This
means that the deemed rental income can be considered as a presumed income, which
generally will not match the actual income.
The tax rate depends on where the property is located (as it is a combination of regional,
provincial, and communal tax).
Machinery and equipment can also be considered as immovable property in certain
cases.
Registration duties
Purchases and transfers of real estate located in Belgium, including buildings (except
new buildings, which are subject to VAT as described above), are subject to registration
duty at the rate of 12.5% of the higher of transfer price or fair market value (except in
the Flemish Region, where the applicable rate is 10%).
If the purchase or transfer of land is subject to VAT, no registration duties will be charged
on the purchase or transfer.
In principle, no registration duty is due upon a capital contribution; only a fixed fee of
EUR 50 is due.
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Stamp duties
Stamp duties are due on transactions relating to public funds that are concluded or
executed in Belgium, irrespective of their (Belgian or foreign) origin, to the extent that a
professional intermediary intervenes in these transactions. Exemptions for non-residents
and others are available.
Social security taxes
The employers share of social security taxes is around 30% of the total gross
compensation; the employees share is 13.07%. Social security taxes are deductible in
determining taxable income. For foreign employees with short-term assignments in
Belgium who continue to be subject to the social security schemes of their home country,
an exemption from social security may be granted, depending on the nationality of the
claimant.
Branch income
Branch profits are subject to the normal tax rate for Belgian corporations of 33.99% (or
25.75% for certain capital gains on shares not meeting the one-year holding period or
0.412% for those capital gains meeting the one-year holding period) plus the possible
surcharge for absence/insufficiency of advance payments (see the Taxes on corporate
income section). Transfers of branch profits to the head office abroad do not give rise
to further taxation in Belgium. Branches can benefit from the reduced CIT rates under
specific conditions (see the Taxes on corporate income section).
Capital gains realised on real estate located in Belgium by non-resident companies are
subject to a professional WHT at the normal CIT rate of 33.99%. The professional WHT
is, in fact, an advance payment of the final Belgian non-resident CIT and can be offset
against it. Any balance is refundable.
In general, the taxable basis is the difference between the profits actually realised
and the tax-deductible costs actually incurred in the hands of the Belgian branch
as determined from the separate set of accounts of the Belgian branch. Please note,
however, that no legal requirement exists to keep a separate set of accounts in the hands
of the PE, in case no legal branch is deemed to exist in Belgium.
Should no separate set of accounts be kept, the taxable basis in the hands of the Belgian
branch, in principle, will be determined on the basis of the Royal Decree implementing
the Belgian Income Tax Code (BITC). As a result, the yearly taxable basis will be
determined on 10% of the gross turnover realised in Belgium with a minimum of EUR
7,000 per employee (the minima vary between EUR 7,000 and EUR 24,000, depending
on the kind of business) and an absolute minimum of EUR 19,000. Note that such
determination of the taxable basis is often formalised in a written agreement with the
local Belgian tax inspector without deviating from the tax law criteria as mentioned.
Inventory valuation
Belgian accounting law provides for the following four methods of inventory valuation:
the method based on the individualisation of the price of each item, the method based
on the weighted average prices, the last in first out (LIFO) method, and the first in first
out (FIFO) method. All of these methods are accepted for tax purposes.
Capital gains
Capital gains are subject to the normal CIT rate. For tax purposes, a capital gain is
defined as the positive difference between the sale price less the costs related to the
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disposal of the asset and the original cost of the acquisition or investment less the
depreciations and write-offs that have been deducted for tax purposes.
Capital gains realised on tangible fixed assets and intangible assets could be subject
to a deferred and spread taxation regime, provided that the following conditions are
cumulatively met:
The assets realised had been held by the company for more than five years, and
depreciations had been claimed on them for tax purposes.
The proceeds of the transfer were reinvested fully in tangible or intangible assets
subject to depreciation in Belgium within three years (or five years in the case of
reinvestments in buildings, vessels, or aircraft).
If the above conditions are met, the taxation of the net capital gain is spread over the
depreciation period allowed for tax purposes of the asset that was acquired to fulfil the
reinvestment obligation. Deferred and spread taxation occur at the normal CIT rate.
Capital gains on shares
Net capital gains realised by a large Belgian company (or Belgian branch) on shares are
subject to a 0.412% tax, provided the subject to tax condition and the one-year holding
period are met. The 0.412% tax is not applicable to SMEs.
If the capital gain is realised before the minimum holding period of one year was
reached and the subject to tax condition is met, the capital gain is taxed at a rate
of 25.75% (25% plus a 3% crisis tax). There are some exceptions (e.g. for financial
institutions).
Dividend income
Dividends received by a Belgian company are first included in its taxable basis on a gross
basis when the dividends are received from a Belgian company or on a net basis (i.e.
after deduction of the foreign WHT) when they are received from a foreign company.
Provided certain conditions are met, 95% of the dividend income can be offset by a
dividends-received deduction (DRD).
Dividends-received deduction (DRD)
A DRD of 95% of dividend income can be applied under certain conditions (see below).
Any unused portion of the DRD from dividends received from an EEA subsidiary or a
subsidiary from a country with which Belgium has concluded a DTT with a
non-discrimination clause on dividends can be carried forward to future tax years. The
possibility of carrying forward the unused portion of DRD from qualifying non-EEA
dividends has not been codified, but should continue to apply based on an October 2009
practice note, which resulted from ECJ case-law. The same also applies for dividends
from Belgian subsidiaries.
The DRD is subject to a (i) minimum participation condition and (ii) taxation condition.
Minimum participation condition
According to the minimum participation condition, the recipient company must have,
at the moment of attribution, a participation of at least 10% or an acquisition value of at
least EUR 2.5 million in the capital of the distributing company. The beneficiary of the
dividend must have been holding the full legal ownership of the underlying shares for at
least one year prior to the dividend distribution or commit to hold it for a minimum of
one year.
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Taxation condition
The taxation condition, in summary, means that the dividend income received must
have been subject to tax at the level of the distributing company and its subsidiaries if
the former redistributes dividends received.
The taxation condition is based on five exclusion rules and certain exceptions to these
rules. Basically, the exclusion rules apply to the following:
Tax haven companies, which are companies that are not subject to Belgian CIT (or to
a similar foreign tax) or that are established in a country where the common taxation
system is notably more advantageous than in Belgium. Countries in which the
minimum level of (nominal or effective) taxation is below 15% qualify as tax havens
for the application of the regime (a list of tainted countries has been published). The
common tax regimes applicable to companies residing in the European Union are,
however, deemed not to be notably more advantageous than in Belgium.
Finance, treasury, or investment companies that, although are subject in their
country of tax residency to a taxation system similar to that of Belgium as mentioned
in the item above, nevertheless benefit from a taxation system that deviates from the
one commonly applicable.
Offshore companies, which are companies receiving income (other than dividend
income) that originates outside their country of tax residency and in these countries
such income is subject to a separate taxation system that deviates substantially from
the common taxation system.
Companies having branches that benefit globally from a taxation system notably
more advantageous than the Belgian non-resident corporate taxation system. This
exclusion is deemed not applicable to EU companies with an EU branch.
Intermediary holding companies, which are companies (with the exception of
investment companies) that redistribute dividend-received income, which on the
basis of regulations mentioned under the items above would not qualify for the DRD
for at least 90% of its amount in case of direct holding.
While this is a summary of the major exceptions, numerous exceptions to these exclusion
rules exist and need to be analysed on a case-by-case basis.
Bonus shares (stock dividends)
Distribution of bonus shares to shareholders in compensation for an increase of the share

capital by incorporation of existing reserves is, in principle, tax free. The situation may
be different if the shareholder has the choice between a cash or stock dividend.
Interest, rents, and royalties
Interest that accrued, became receivable by, or was received by a company, and rents
and royalties received by a company, are characterised as business profits and taxed at
the general CIT rate of 33.99%. The income can be offset against available tax assets.
Foreign income
A Belgian resident company is subject to CIT on its worldwide income, and foreignsource profits not exempt from taxation by virtue of a DTT (see the treaty list in the
Withholding taxes section) are taxable at the normal CIT rate in Belgium (i.e. 33.99%).
A foreign tax credit may be available for foreign royalty income and foreign interest
income. See the Tax credits and incentives section for more information.
Undistributed income of subsidiaries, whether or not they are foreign, is not subject to
any Belgian income tax (i.e. no controlled foreign company [CFC] rules).
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Deductions
As a general rule, expenses are tax deductible in Belgium if they are incurred in order to
maintain or to increase taxable income, they relate to the taxpayers business activity,
they are incurred or have accrued during the taxable period concerned, and evidence of
the reality and the amount of such expenses is provided by the taxpayer.
Depreciation of an asset is tax deductible to the extent that it results from a devaluation
of the asset, and the devaluation effectively occurred during the taxable period
concerned. The depreciation methods that are accepted by Belgian tax law are the
straight-line method (linear method) and the double-declining balance method. In
the latter case, the annual depreciation may not exceed 40% of the acquisition value.
The double-declining method may not be used for intangible fixed assets, automobiles,
minibuses and automobiles used for mixed purposes, and for assets, the use of which has
been transferred to a third party (e.g. operational leasing).
Depreciation rates are based on the expected lifetime of the assets concerned, which
are normally agreed upon by the taxpayer with the tax authorities. However, for certain
assets, rates are set by administrative instructions as follows:
Assets
Commercial buildings
Machinery and equipment (depending on the type)
Rolling stock

3
5
20 or 33
20
Intangible fixed assets have to be amortised over a period of at least five years for tax
purposes (except research and development [R&D] expenses, for which the minimum
amortisation period is three years).
For the year of acquisition of an asset, only the proportionate share of an annual
depreciation calculation can be accepted as depreciation for income tax purposes (in
principle to be computed on a daily basis). This provision, however, applies only to
companies that cannot be considered as SMEs (see the Tax credits and incentives section
for the definition). In contrast, SMEs can deduct a full year of depreciation in the year of
acquisition.
Ancillary expenses incurred at the time of acquisition must be depreciated in the same
way as the asset to which they relate (i.e. no full deduction in the year of acquisition,
except for SMEs). Alternatively, ancillary expenses relating to the acquisition of land can
be written down and such write-downs, if they are justified, may constitute a deductible
expense.
Goodwill
Belgian accounting and tax laws allow amortisation of goodwill arising at the occasion
of an asset deal. For Belgian tax purposes, the amortisation period, which depends on
the elements included in the goodwill, is a minimum of five years, and the straight-line
method must be applied. According to the Minister of Finance, clientele (client lists)
should be amortised over a period of ten to 12 years. The aforesaid accounting and
tax amortisation for goodwill is not available if tax-free mergers or de-mergers occur
(i.e. they, among other things, follow the continuity principle from an accounting
perspective).
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Start-up expenses
Incorporation costs, at the election of the taxpayer, may be deducted fully in the year of
incorporation or can be depreciated over a maximum period of five years.
Interest expenses
Interest expenses are, in principle, tax deductible insofar as thin capitalisation limits are
respected (see Thin capitalisation in the Group taxation section) and the interest is at an
arms-length rate.
Provisions and bad debt reserves
Provisions and bad debt reserves are tax deductible provided that:
they are set up to cover clearly identified losses and charges (i.e. not to cover general
risks that have been rendered probable by events) that took place during the taxable
period concerned
they are booked at the end of the financial year in one or more separate accounts on
the balance sheet
they are reported on a specific form enclosed with the tax return, and
they relate to losses and charges that are deductible for Belgian tax purposes.
Charitable contributions may not be less than EUR 40 and may not exceed 5% of the
total net income of the taxable period, with a maximum of EUR 500,000 to be tax
deductible. The law includes an exhaustive list of gifts that are deductible, including
gifts in cash to certain social, cultural, or scientific organisations.
Automobile costs
The deductibility rate of automobile costs in the hands of Belgian companies (and
Belgian branches) varies in a range between 50% and 120% of the automobile costs,
depending on the CO2 emission of the company car and its catalogue value.
Moreover, the deduction for fuel costs is limited to 75%.
Taxes, fines, and penalties
Belgian resident and non-resident CIT, including advance tax payments, any surcharge
imposed in case of insufficient advance tax payments, any interest for late payment of
the CIT, and any Belgian movable WHT, is not tax deductible in Belgium. Immovable
WHT (i.e. real estate tax), secret commissions tax, and foreign taxes, however, are
considered as tax deductible.
Regional taxes and contributions, including penalties, increases, ancillary expenses, and
interest for late payment, are not tax deductible in Belgium (certain exceptions apply).
Any administrative and judicial fines or penalties (except for VAT proportionate fines)
are not tax deductible in Belgium.
Disallowed expenses
The following expenses are not tax deductible in Belgium (this list is not exhaustive):
31% of restaurant expenses.
50% of representation expenses and business gifts (there are exceptions).
Advantages granted to employees for social reasons, with certain exceptions (e.g.
hospitalisation insurance premiums, gifts of a small value).
Capital losses on shares (except upon liquidation, up to the amount of paid-up capital
of the liquidated company).
Brokerage, commissions, commercial discounts, or other payments allocated directly
or indirectly to a person in the form of a Belgian public bribery.
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17% of the benefit in kind of company cars (minimum taxable basis).
Principle: carryforward without limitation in time
Tax losses can, in principle, be carried forward without any limitation in time.
Change of control
If a change in control of a Belgian company takes place (e.g. if the shares of the company
are transferred and along with them the majority of the voting rights), the amount of
tax losses, investment deduction, and NID carried forward available in that company
(before the change of control) can no longer be offset against future profits unless the
change can be justified by legitimate needs of a financial or economic nature in the
hands of the loss realising company (i.e. evidence must be brought that the change is not
purely tax driven).
The condition of legitimate needs of a financial or economic nature is considered to be
fulfilled when the employees and activities of the company are maintained by the new
shareholder or when the companys control is acquired by a company belonging to the
same consolidated group of companies as the former controlling company.
A ruling can be requested from the Belgian tax authorities to obtain upfront certainty on
the Belgian tax treatment of the contemplated operation, so as to ensure the losses are
not forfeited as a result of a change of control.
Tax-free merger or (partial) de-merger
If a tax-free merger or (partial) de-merger takes place, Belgian tax law provides for
a partial transfer/maintenance of the rollover tax losses of the absorbed/absorbing
company. The carried forward tax losses of the companies involved are then reduced
based on the proportionate net fiscal value of the company (before the restructuring)
compared to the sum of the net fiscal values of both the merging entities (before the
restructuring).
No carryback
There is no tax loss carryback provision under Belgian tax law.
A Belgian company can claim a deduction for royalties, management service fees, and
interest charges paid to foreign affiliates, provided such amounts are at arms length.
However, when such payments are made, either directly or indirectly, to a foreign
person, entity, or branch that is not subject to tax or is subject to a tax regime that is
notably more advantageous than the Belgian tax regime on such income, there is a
reversal of the burden of proof. Such charges will be disallowed unless the Belgian
company can prove that the payments are reasonable and that they correspond to
genuine and real transactions.
Fees, commissions, etc. paid to beneficiaries located in foreign countries, which are not
properly reported on Form 281.50 and Summary Form 325.50, will, in principle, be
subject to the secret commissions tax (of 309%).
Payments to tax havens
Companies subject to Belgian CIT or Belgian non-resident CIT that make direct or
indirect payments to recipients established in tax havens are obligated to declare them
if they are equal to or exceed EUR 100,000 during the tax year. The reporting has to be
made on a special form to be attached to the (non-resident) CIT return.
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In the event of non-reporting, the payments will be disallowed expenses for CIT
purposes. Where the payments have been reported duly and timely, their tax
deductibility will be subject to the ability of the taxpayer to prove that (i) said payments
were made as part of genuine, proper transactions and (ii) they were not made to an
entity under an artificial construction.
A tax haven is defined as: (i) a jurisdiction where the nominal corporate tax rate is
less than 10% or (ii) a jurisdiction regarded by the OECD as not being cooperative
concerning transparency and international exchange of information (i.e. on the OECD
black list). A royal decree containing the list of countries where the nominal corporate
tax rate is lower than 10% is published. The countries that are mentioned in the royal
decree are the following:

Abu Dhabi
Ajman
Andorra
Anguilla
the Bahamas
Bahrain
Bermuda
British Virgin Islands
Cayman Islands
Dubai
Fujairah
Guernsey
Isle of Man
Jersey
Jethou
Maldives Islands
Micronesia (Federation
of)
Moldavia
Monaco
Montenegro
Nauru
Palau
Ras el Khaimah
Saint-Barthelemy
Sark
Sharjah
Turks and Caicos Islands
Umm al Qaiwain
Vanuatu
Wallis-and-Futuna
Group taxation
Belgium does not apply any tax consolidation mechanism with respect to corporate tax.
Transfer pricing
The arms-length principle is formally codified in the BITC. In addition, the authorities
can make use of other, more general, provisions in the BITC to challenge transfer prices
(e.g. the general rules on the deductibility of business expenses). The BITC contains
provisions that tackle artificial inbound or outbound profit shifting. These are the socalled provisions on abnormal or gratuitous benefits.
If a Belgian tax resident company grants an abnormal or benevolent benefit, the benefit
should be added back to the taxable income as a disallowed expense unless the benefit
was taken into account to determine the taxable basis of the beneficiary. Even if the
abnormal or gratuitous benefit is taken into account for determining the taxable basis
of the beneficiary, the tax deductibility of the related expenses can still be denied in the
hands of the grantor. Notwithstanding the above exception, the abnormal or benevolent
benefit should be added back to the taxable income when the benefit is being granted to
a non-resident affiliated company. Such granted abnormal or benevolent benefits can be
offset against any tax deductible items (e.g. tax losses carried forward, NID).
If a Belgian tax resident company receives an abnormal or benevolent benefit, and to the
extent that such benefit is received from a related company, the benefit received cannot
be offset by the Belgian company against its current year or carryforward tax losses or
other tax deductions. According to the position of the tax authorities (by the Minister
of Finance), the taxable basis of a Belgian company equals at least the amount of the
benefit received (however, there is a court case against this position).
There are no specific transfer pricing documentation requirements or rules on
the selection of transfer pricing methods included in the Belgian tax legislation.
Nevertheless, the Belgian tax authorities adhere to the OECD Transfer Pricing
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Guidelines for Multinational Enterprises and Tax Administrations and the EU Code
of Conduct. In the administrative guidelines that were issued, taxpayers are urged to
proactively compile a coherent and consistent documentation set, although there is no
legal obligation to do so. If information is requested, the taxpayer must provide the data
requested within (in principle) one month.
Advance pricing agreements (APAs) can be concluded (unilaterally, bilaterally, and
multilaterally) via which the taxpayer can obtain upfront certainty.
Belgium has a special transfer pricing investigation unit with a mission to (i) build up
and share transfer pricing expertise and (ii) carry out in-depth transfer pricing audits
of multinationals present in Belgium through a subsidiary or branch. The number of
transfer pricing audits being initiated in Belgium has increased significantly.
Thin capitalisation
For the purposes of the thin capitalisation rule, equity is defined as the sum of the taxed
reserves at the beginning of the taxable period and the paid-up capital at the end of the
taxable period.
For the purposes of the thin capitalisation rule, debt is defined as:
all loans, whereby the beneficial owner is not subject to income taxes, or, with
regard to the interest income, is subject to a tax regime that is substantially more
advantageous than the Belgian tax regime, and
all intra-group loans.
Bonds and other publicly issued securities are excluded, as well as loans granted by
financial institutions.
Interest payments or attributions in excess of the 5:1 ratio are not tax deductible.
The thin capitalisation rule is not applicable to loans contracted by (movable) leasing
companies and companies whose main activity consists of factoring or immovable
leasing (within the financial sector).
In case the loans are guaranteed by a third party or in case loans are funded by a third
party that partly or wholly bears the risk related to the loans, the third party is deemed
to be the beneficial owner of the interest, if the guarantee or the funding has tax
avoidance as main purpose.
To safeguard companies having a centralised treasury function in Belgium, a netting for
thin capitalisation purposes is allowed at the level of the interest payments and interest
income related to the centralised financing function/cash pool function.
Excess profit rulings
The Belgian tax authorities have at their disposal instruments to make both upward and
downward adjustments to a taxpayers Belgian taxable basis in case of non-arms-length
dealings. Belgium will refrain from taxing profits that a Belgian tax resident company
would not have realised if it had not been party to related-party dealings.
As the cost structure (or the profit potential) of a member of a multinational group of
companies will normally differ from that of a stand-alone entity, its profit will normally
also be higher. Applying the arms-length principle, this profit differential, which does
not result from the functions performed and risks assumed by the respective entities,
should not be allotted to the Belgian group member. As such, Belgian tax law allows for
unilateral adjustments of the Belgian tax base similar to the corresponding adjustments
in Article 9 of the OECD Model Convention. The underlying assumption is that the
excess profit forms part of the profits of the foreign related party.
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The part of profit that is deemed to derive from related-party dealings and that is
exempted from taxation in Belgium and how the part-of-the-profits-of-the-foreignrelated-party condition should be interpreted will need to be submitted to the Belgian
Ruling Office to obtain a ruling in advance. Such rulings are granted for renewable
periods of five years and are based on a detailed functional, economic analysis of the
relevant Belgian activities with a view to determining a profit level commensurate with
the companys functional and risk profile.

Foreign tax credits (FTCs)
Unilateral relief from double taxation of foreign-source income may be provided in the
form of an exemption, credit, or tax reduction, depending on the type of income. Where
taxable, foreign income is subject to tax only on its net amount (i.e. after deduction of
expenses and foreign taxes).
Dividend income FTC
Generally, no FTC is available for foreign dividends.
Royalty income FTC
Unless a more advantageous provision (e.g. a tax sparing provision) would apply based
on a DTT concluded by Belgium (see the treaty list in the Withholding taxes section), an
FTC is granted under Belgian tax law with respect to foreign royalty income, provided
that this income has effectively been subject to taxation in its source country. This
FTC is equal to 15/85 of the net frontier amount (i.e. after deduction of foreign WHT)
of the royalty. The FTC is, in principle, included in the taxable basis of the recipient
company and is only creditable against Belgian income tax to the extent that said foreign
income is included in the taxable basis of the Belgian company. Excess FTC, if any, is not
refundable and cannot be carried forward.
Interest income FTC
Unless a more advantageous provision (e.g. a tax sparing provision) would apply based
on a DTT concluded by Belgium (see the treaty list in the Withholding taxes section),
the Belgian beneficiary of foreign interest income is entitled to an FTC under Belgian
tax law, provided that this income effectively has been subject to taxation in its source
country. The computation of the FTC is based on the net frontier interest income (i.e.
after deduction of foreign WHT) and adjusted with a ratio taking into account the
financial cost. The FTC is, in principle, included in the taxable base of the Belgian lender.
It is creditable against the CIT due but is not refundable in case of excess, neither can it
be carried forward.
Notional interest deduction (NID)
Belgian corporate income taxpayers can claim NID for tax purposes, reflecting the
economic cost of the use of capital, equal to the cost of long-term, risk-free financing.
An SME is a company that does not exceed more than one of the following criteria
during the two foregoing financial years when evaluated on a consolidated level: a
yearly average number of employees of 50, a turnover of EUR 7.3 million (excluding
VAT), or total asset value of EUR 3.65 million.
and 30 December 2014, both dates inclusive) is 2.742% (3.242% for SMEs).
and 30 December 2015, both dates inclusive) is 2.630% (3.130% for SMEs).
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A company that employs more than 100 employees on the basis of an annual average
workforce is automatically considered to be a large company.
As of tax year 2013, new excess NID can no longer be carried forward, whereas, under
the old rules, excess NID (i.e. NID that cannot be claimed owing to the taxpayer having
insufficient taxable income) could be carried forward for a maximum of seven years.
However, the stock of excess NID (stemming from previous years, i.e. tax years 2012
and before) can still be carried forward for seven years (as was previously the case),
though the excess NID that can be applied in a given year is limited to 60% of the taxable
profit (i.e. the profit remaining after setting off carried-forward tax losses and other tax
deductions). The 60% limit is only applicable to the part of taxable profit exceeding EUR
1 million. The portion of excess NID that cannot be used due to the 60% rule (i.e. 40%
of taxable profit minus EUR 1 million) can be carried forward indefinitely.
As for determining the basis on which this deduction is calculated, the companys share
capital plus its retained earnings, as determined for Belgian GAAP purposes and as per
the last year-end date, will have to be taken into account with some adjustment. The
accounting equity as per the last year-end date has to be reduced by, amongst others, (i)
the fiscal net value of financial fixed assets qualifying as participations and other shares,
and (ii) if a company has a foreign PE, located in a jurisdiction with which Belgium
has concluded a tax treaty, the positive difference between the net book value of assets
attributable to the foreign PE and the liabilities (other than equity). The European Court
of Justice confirmed that the latter adjustment is in violation with the EU freedom of
establishment if the head office is an EU company (Argenta Spaarbank NV case (C350/11) of 4 July 2013). Consequently, the NID legislation has been amended in such
a way that as of assessment year 2014 (accounting years ending 31 December 2013 or
later), the NID basis will be reduced by:
the lower amount of (i) the result of the foreign PE or real estate or (ii) the net asset
value of the PE or real estate multiplied by the NID rate if it concerns a PE located in
the EEA or
the net asset value of the PE or real estate multiplied by the NID rate if it concerns a
PE or real estate located in a treaty country outside of the European Economic Area.
The shares qualifying as cash investments and also qualifying for DRD must be excluded
from the NID basis.
In addition, various adjustments should be made in order to avoid abuse.
Investment deductions
The investment deduction is a deduction from the tax base in addition to the normal
tax depreciation on, amongst others, qualifying patents, environmentally friendly R&D
investments, and energy-saving investments.
A company can benefit from a one-shot investment deduction of 13.5% (for tax year
2015, i.e. accounting years ending between 31 December 2014 and 30 December 2015,
both dates inclusive) of the acquisition value of qualifying investments. With respect
to environmentally friendly R&D investments, a company can also opt for a spread
investment deduction of 20.5% (for tax year 2015) of the depreciation on qualifying
environmentally friendly R&D investments.
If there are insufficient or no taxable profits, the investment deduction can be carried
forward without any limitation in time or in amount. Certain restrictions apply as to the
maximum amount of investment deduction carried forward that is tax deductible in a
given year.
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Under certain conditions, the investment deduction carried forward can be lost after a
change of ownership (see Net operating losses in the Deductions section).
Note that the investment deduction for patents and R&D cannot be combined with the
tax credit for patents and R&D.
Patents and R&D tax credit
As an alternative for the above investment deduction for patents and R&D, a company
may opt for a tax credit for which the advantage corresponds to the advantage of
the investment deduction (i.e. 13.5% one-time and 20.5% for a spread investment
deduction for tax year 2015), multiplied by the normal CIT rate of 33.99%. The
investment deduction implies a deduction of the taxable basis, while the tax credit is a
reduction of the tax due. A key advantage of the tax credit for patents and R&D is that it
is refundable if it has not been deducted for five subsequent tax years.
Note that the amount of the tax credit should be deducted from the basis of the NID.
Reduced payroll tax for qualifying researchers
80% of the payroll tax withheld from wages of qualifying researchers by a Belgian
company or establishment does not need to be remitted to the Belgian Tax Revenue if
the researchers are employed in R&D programmes and have a qualifying degree (such
as a degree in [applied] sciences, veterinary medicines, bio-technology, etc.). For the
employees personal tax liability, the Belgian Tax Revenue considers that the payroll
WHT amount was entirely withheld.
Belgian law mentions a definition of scientific research and foresees a reporting
obligation with the Federal Administration for Scientific Policy, which can approve or
reject the request for application if asked for.
Patent income deduction (PID)
The PID allows a taxpayer to deduct, as an extra tax deduction in the tax return, 80%
of qualifying gross patent income. Therefore, only 20% of gross patent income will be
taxable at the normal CIT rate (33.99%), resulting in a maximum effective tax rate of
6.8%.
Qualifying taxpayers are corporate taxpayers in Belgium that are involved in the
development or further improvement of patents through an in-house R&D centre. They
include both Belgian companies and Belgian PEs of foreign companies. The company
must be the owner, licensee, or usufruct holder of the patents for which they claim the
benefits of the PID.
To benefit from the PID, the R&D centre should qualify as a branch of activity or line
of business, which means that it should be a division of an entity that is capable of
operating autonomously. The Belgian company or PE should have relevant substance to
perform and supervise R&D activities, but may use subcontractors, related or unrelated,
in its development of the patents or extended patent certificates. The R&D centre can
be located outside Belgium but must belong to a Belgian legal entity. The condition to
qualify as a branch of activity does not apply to SMEs.
Qualifying patents
The PID applies where patents or supplementary protection certificates are owned by a
Belgian company or establishment as a result of its own patent-development activities
(partly or fully) in an R&D centre in Belgium or abroad. SMEs can also benefit from
the PID even if the patents are not developed or improved within a research centre that
forms a branch of activity.
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The PID also applies where patents or supplementary protection certificates are acquired
by a Belgian company or establishment from a related or unrelated party, in full
ownership, joint ownership, usufruct, or via license agreement, provided it has further
improved the patented products or processes in the companys R&D centre in Belgium or
abroad.
For patents licensed by the Belgian company or establishment to any party, whether
related or unrelated, the tax deduction amounts to 80% of the relevant (gross) patent
income to the extent the income does not exceed an arms-length price.
Withholding taxes
Domestic corporations and branches of foreign corporations paying dividends, interest,
royalties, service fees, and/or certain rentals are required to withhold tax.
A uniform WHT rate of 25% is applicable on dividends, interest, and royalties. There are
some exceptions.
Some WHT reductions/exemptions are still foreseen under Belgian domestic tax law.
A WHT exemption is foreseen for the distribution of profits made by a Belgian
subsidiary to an EU parent company if both the parent and subsidiary have a legal
form that is mentioned in the Annex to the EU Parent-Subsidiary Directive, if both
are subject to CIT, and if the parent company holds, during an uninterrupted period
of at least one year, a shareholding of at least 10% in the capital of the distributing
company (implementation of the Parent-Subsidiary Directive). If the one-year
holding requirement is not fulfilled at the time of distribution, the distributing
company provisionally should withhold the amount of WHT due (but it does not
have to pay the tax authorities). Once the one-year holding requirement is met, the
provisionally withheld tax amount can be paid out to the parent company. If the oneyear holding requirement eventually is not complied with (e.g. because the Belgian
participation is disposed of by the parent company before the one-year holding
requirement is met) then the Belgian company has to pay the amount provisionally
withheld, increased by interest for late payment (at an annual rate of 7%), to the
competent services of the Belgian tax authorities.
The application of the Parent-Subsidiary Directive to dividend payments has been
extended towards non-EU-resident companies. Dividends distributed towards
a country that has concluded a tax treaty with Belgium containing a qualifying
exchange of information clause can be exempt from WHT, subject to the same
conditions as laid down in the Parent-Subsidiary Directive.
A 10% tax is applicable to profits that are attributed or made payable as a result of the
full or partial liquidation of a company. The rate will be 25% as of 1 October 2014.
There are some exceptions.
A reduced WHT rate on dividends of 20% or 15% for SMEs. The reduced WHT is only
applicable on dividend distributions for new ordinary shares originating from cash
contributions made as of 1 July 2013. Transitory measures apply.
There is a WHT exemption on interest on loans granted by professional investors to
banks established in the EEA or in a country that has concluded a DTT with Belgium.
For example, banks situated in France, the United Kingdom, or the United States
should be able to benefit from this exemption.
No Belgium interest WHT arises where two related companies with tax residence
outside Belgium are involved in a financial transaction with the intervention of a
Belgium based intra-group financial enterprise. Under these circumstances, the
Belgium intra-group financial enterprise is not required to retain Belgium interest
WHT if the entity merely intervenes as a paying agent intermediary.
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Belgian domestic tax law also provides for a WHT exemption on the following
movable income sourced in Belgium (this list is not exhaustive):
Income from deposits allocated or attributed to non-resident savers by Belgian
banks.
Income from bonds, treasury bonds, or other similar instruments of which the
beneficiaries are identified as financial institutions.
Income from receivables (this includes income from commercial receivables)
or loans of which the beneficiaries are identified as financial institutions or
professional investors. Professional investors are defined as any Belgian resident
company or branch not being a financial institution or any equivalent. As a result,
interest payments between two Belgian companies are exempt from WHT. The
applicability of this exemption has been extended. As a result, on transactions
with banks situated in a country with which Belgium has concluded a DTT, no
withholding will be due. In practice, this means that on transactions with, inter
alia, French, UK, and US banks no withholding will be due.
Income from bonds paid by a Belgian resident financial institution or by a Belgian
resident company to non-resident savers, provided that such bonds are registered
on a nominal basis with the debtor of the income during the entire period to which
the interest relates and that the foreign beneficiaries of the interest are not located
in a tax haven country or held by more than 50% by Belgian residents.
Income from bonds and loans granted by eligible quoted companies and eligible
intra muros financial companies to non-residents (under certain conditions).
Interest and royalty payments between a Belgian company and an EU tax resident
company (being a legal form as mentioned in the Annex to the Interest and
Royalty Directive) in case of direct or indirect shareholding of at least 25% for
an uninterrupted period of at least one year (i.e. transposition of EU Interest &
Royalty Directive in Belgian tax law).
With respect to payments made to non-resident corporations or individuals, WHT
exemptions and/or reductions can also be found in the DTTs concluded by Belgium.
Recipient
Non-resident corporations
and individuals
Non-treaty:
Treaty:
Albania
Algeria
Argentina
Armenia
Australia
Austria
Azerbaijan
Bangladesh
Belarus
Bosnia-Herzegovina (1)
Brazil
Bulgaria
Canada
Chile
China, Peoples Republic
of (2)
Congo
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Dividends
WHT (%)
Interest (6) Royalties, certain rentals (6)
25
25
25
5/15 (4)
15 (4)
10/15 (4)
5/15 (4)
15 (4)
15 (4)
5/10/15 (4)
15 (4)
5/15 (4)
10/15 (4)
10/15 (4)
10 (4)
5/15 (4)
0/15 (4)
5/10 (4)
5
15
12
0/10
10
15
10
15
10
15
10/15
0/10
10
5/15
10
5
5/15
3/5/10/15
8
10
0/10
5/10
10
5
10
10/15/20
5
0/10
5/10
7
5/10 (4)
10
10
Belgium
Recipient
Croatia
Cyprus
Czech Republic
Denmark
Ecuador
Egypt
Estonia
Finland
France
Gabon
Georgia
Germany
Ghana
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Italy
Ivory Coast
Japan
Kazakhstan
Korea, Republic of
Kosovo (8)
Kuwait
Kyrgyzstan (3)
Latvia
Lithuania
Luxembourg
Macedonia (1)
Malaysia
Malta
Mauritius
Mexico
Moldova (3)
Mongolia
Montenegro (1)
Morocco
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Philippines
Poland
Portugal
Dividends
5/15 (4)
10/15 (4)
5/15 (4)
0/15 (4)
15 (4)
15/20 (4)
5/15 (4)
5/15 (4)
10/15 (4)
15 (4)
5/15 (4)
15/25 (4)
5/15 (4)
5/15 (4)
0/5/15 (4)
10 (4)
5/15 (4)
15 (4)
10/15 (4)
15 (4)
15 (4)
15 (4)
15 (4)
5/15 (4)
5/15 (4)
15 (4)
10/15 (4)
0/10 (4)
15
5/15 (4)
5/15 (4)
10/15 (4)
10/15 (4)
0/15 (4)
15 (4)
5/10 (4)
5/15 (4)
15
5/15 (4)
10/15 (4)
6.5/10 (4)
5/15 (4)
15 (4)
12.5/15 (4)
5/15 (4)
10/15 (4)
10/15 (4)
5/15 (4)
15 (4)
WHT (%)
10 (6)
0
10 (6)
0
10 (6)
5/10
10
0
10 (6)
10
15
15/25
10 (6)
5/10
10
5
15
0
15
10
10 (6)
5/10
0/15
0
10
10
5/10
5
10 (6)
5
15 (6)
0
10 (6)
0
10/15
20
10 (6)
10
15
0
15
0/10
15 (6)
5
16 (4)
10
10
10
10 (6)
10
10
10
15
10
0
10
15 (6)
0
10
5/10
10 (6)
5/10
0/15
0
15
10
10
10
10 (6)
0/10
10 (6)
0
10/15 (6)
10
15 (6)
0
10
5
15
10
10 (6)
10
0/10 (6)
0
10
10
12.5
12.5
15 (6)
0
15 (6)
0/15/20
10 (6)
15
0/5 (6)
5
15
10
Belgium
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Belgium
Recipient
Romania
Russia
Rwanda
San Marino
Senegal
Serbia (1)
Singapore
Slovakia
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Tajikistan (3)
Thailand
Tunisia
Turkey
Turkmenistan (3)
Ukraine
United Kingdom (7)
United States
Uzbekistan
Venezuela
Vietnam
Dividends
5/15 (4)
10 (4)
0/15 (4)
0/5/15 (4)
15 (4)
10/15 (4)
0/5/15 (4)
5/15 (4)
5/15 (4)
5/15 (4)
0/15 (4)
15 (4)
5/15 (4)
0/10/15 (5)
10 (4)
15
15/20 (4)
5/15 (4)
15/20 (4)
15
5/15 (4)
0/5/10 (4)
0/10 (4)
0/5/15 (4)
5/15 (4)
5/15 (4)
5/10/15 (4)
WHT (%)
10
5
10 (6)
0
10 (6)
10
10 (6)
5
15
10
15
10
5 (6)
5
10 (6)
5
10 (6)
5
10 (6)
0
10 (6)
5
10
10
10 (6)
0
0/10 (5)
0
10 (6)
10
15 (6)
0
10/25 (6)
5/15
5/10 (6)
11
15 (6)
10
15 (6)
0
2/10 (6)
0/10
0/5
0/5
0/10 (6)
0
0/15
0
10 (6)
5
0/10 (6)
5
10 (6)
5/10/15
Notes
1.
2.
3.
4.
5.
6.
7.
8.
The treaty concluded with ex-Yugoslavia is still applicable to Bosnia-Herzegovina, Macedonia,

Serbia, and Montenegro.
Not applicable to Hong Kong. Note that a new treaty with China entered into force on 29 December
2013 and is effective as of 1 January 2014.
The treaty concluded with the former USSR is still applicable to Kyrgyzstan, Moldova, Tajikistan, and
Turkmenistan.
It concerns an EU country or the treaty contains a qualifying exchange of information clause. Hence,
the rate of 0% is applicable subject to the same conditions as invoked by the Parent-Subsidiary
Directive (see above). Where multiple rates apply, the difference is generally based on the percentage
of participation the recipient holds (directly) in the capital of the company paying the dividends.
Under the Bilateral II agreement concluded between Belgium and Switzerland, a rate of 0% is
applicable under certain conditions.
With respect to EU countries, a WHT exemption is applicable provided that the conditions laid down
in the Interest & Royalty Directive are met (see above). Furthermore, please note that some treaties
contain an exemption for trade receivables or loans concluded with a governmental body.
The protocol amending the existing DTT between Belgium and the United Kingdom is applicable as
of 1 January 2013 (for Belgian WHT) and as of assessment year 2014 (financial years ending on or
after 31 December 2013) for all other Belgian taxes.
The treaty concluded between Belgium and the former Yugoslavia.
The treaties that are currently in force are listed above. Based on the websites of the
Belgian government, the following tax treaties are signed, modified, or under renegotiation (including some for the exchange of information clause): Australia, Austria,
Bahrain, Canada, Congo, Czech Republic, France, Germany, Greece, Iceland, Ireland,
Isle of Man, Italy, Japan, Kenya, Korea, Kyrgyzstan, Macao, Macedonia, Malaysia, Malta,
Mexico, Moldova, the Netherlands, New Zealand, Norway, Oman, Panama, Poland,
214
Belgium
Belgium
Qatar, Rwanda, Saudi Arabia, Seychelles, Spain, Switzerland, Tajikistan, Turkey,
Uganda, the United Kingdom, and Uruguay.
Tax administration
Taxable period
The assessment is based on the taxable income of a financial year. For the application
of the rules on statutory limitations and of new laws, an assessment year is related
to each taxable period. If the financial yearcorresponds with the calendar year, the
assessment year is the following calendar year (e.g. financial year closing 31 December
2014 corresponds with assessment year 2015). If the financial year does not correspond
with the calendar year, the assessment yearequals the calendar year during which
the financial year ends (e.g. financial year closing 30 June 2014 corresponds with
assessment year 2014).
Tax returns
As a general rule, the annual resident or non-resident CIT return cannot be filed less
than one month from the date when the annual accounts have been approved and not
later than six months after the end of the period to which the tax return refers. For
instance, assuming that the accounting year has been closed on 31 December 2014, the
corporate tax return needs to be filed, in principle, by 30 June 2015 at the latest (this
deadline is often postponed).
Payment of tax
CIT is payable within two months following the issue of the tax assessment. Interest for
late payment is charted at the (non-cumulative) rate of 7% per year.
The advance tax payments needed to avoid the CIT surcharge (see the Taxes on corporate
income section) can be made in quarterly instalments. In the situation where the
companys financial year ends on 31 December 2014, the due dates for the advance tax
payments are 10 April 2014, 10 July 2014, 10 October 2014, and 20 December 2014. If
the due date is a Saturday, Sunday, or a bank holiday, the payment is due on the next
working day. Advance tax payments give rise to a tax credit. The tax credit amounts
to 2.25%, 1.875%, 1.5%, or 1.125% of the advance tax payment made, depending on
whether such payment has been made respectively in the first, second, third, or fourth
quarter (percentages applicable for tax year 2015). If the total amount of credits exceeds
the surcharge, no surcharge is due, but the excess is not further taken into account for
the final tax computation. The taxpayer can choose to either have the excess reimbursed
by the tax authorities or used as an advance tax payment for the next year.
Tax audit process
A tax audit normally begins with a written request for information from the tax
inspector. The taxpayer must provide the data requested within (in principle) one
month. Any documentary evidence considered relevant to the audit can be requested
and reviewed by the authorities. Once the tax inspector has completed the analysis, any
adjustment is proposed in a notification of amendment outlining the reasons for the
proposed amendment. The taxpayer has 30 days to agree or to express disagreement.
The tax inspector then makes an assessment for the amount of tax that the tax inspector
believes is due (taking into account any relevant comments of the taxpayer with which
the inspector agrees). Thereafter, the taxpayer has six months within which to lodge
an appeal with the Regional Director of Taxes. The decision of the Regional Director of
Taxes may be appealed and litigated. In a number of circumstances, the intervention of
the courts can be sought prior to receiving the decision of the Regional Director of Taxes.
Belgium
215
Belgium
Based on the Belgian income tax statute of limitations, the period during which the tax
authorities are authorised to perform a tax audit and adjust the taxable basis is three
years (except in cause of fraud, where the statute of limitations is extended to seven
years) starting from the first day of the assessment year, unless the companys financial
year does not correspond to the calendar year. Note that with respect to payroll tax or
movable WHT, the statute of limitations period is, in principle, five years.
Belgian ruling practice
Belgium has a long tradition of providing formal and informal rulings. Currently, a
taxpayer may request an advance tax ruling on a wide range of subjects, including, but
not limited to, CIT, individual tax, non-resident income tax, legal entity income tax,
VAT, customs, and registration duties. The request should cover a specific and concrete
operation, which effectively is envisaged to be realised in the foreseeable future. The
ruling should be filed before the transaction takes place. In practice, the ruling decision
should be granted prior to the filing of the CIT return of the year of the transaction. A
ruling is binding upon the Belgian tax authorities for a renewable period of a maximum
of five years. Delivery of a requested ruling takes, on average, three months.
The Ruling Office is autonomous from the Belgian tax authorities and has the legal
authority to issue decisions, which are binding upon the Belgian tax authorities. The
Ruling Office increasingly has adopted a constructive approach towards the taxpayer
and is seen in the Belgian tax practice as a powerful insurance instrument in ascertaining
the Belgian tax treatment of contemplated operations.
Topics of interest to Belgian tax authorities include:

Significant increase in transfer pricing audits by the special transfer pricing
investigation unit.
Significant increase in professional WHT audits.
Payments of management fees or technical support fees (secret commissions tax of
309% in absence of reporting).
The deductibility of interest payments (e.g. to tax haven companies).
Transactions with entities based in tax havens.
Lump-sum allowances (secret commissions tax of 309% in absence of reporting).
Substance.
216
Belgium
Bermuda
PwC contact
Richard (Rick) Irvine
Dorchester House
7 Church Street West
Hamilton HM 11, Bermuda
Tel: +1 441 299 7136
The Bermuda government has extended the tax exemption granted to Bermuda
companies under the Exempt Undertakings Act of 1976 from 28 March 2016 until
2035.The extended Undertaking provides protection to companies from any newly
enacted taxes on income or capital gains until 2035. Existing companies are required to
apply for the tax exemption extension.

Income tax and taxes on capital gains are not imposed on corporations in Bermuda.
Corporate residence
From the Bermuda Tax Commissioners perspective, entities that are incorporated in
Bermuda are not considered to be resident in the country unless they have resident
employees subject to the Bermuda Payroll Tax.
Other taxes
There is no VAT or sales tax in Bermuda.
Customs duties
Customs duties are imposed on almost all goods arriving on the island at varying rates.
Excise taxes
There are no excise taxes imposed in Bermuda.
Property taxes
A land tax is imposed on all developed land throughout Bermuda, with certain
exceptions. The tax is assessed on the annual rental value (ARV) of each valuation unit,
depending on whether such unit is a private dwelling or any other dwelling. The owner
of the valuation unit is liable for the land tax.
A progressive scale of tax rates ranges between 0.6% and 23% based on the ARV of the
unit, while commercial properties are taxed on a single rate of tax of 4.4%.
Transfer taxes
There is no transfer tax imposed in Bermuda.
Bermuda
217
Bermuda
Stamp taxes
Bermuda does impose a stamp duty on certain types of legal instruments; however,
exempt companies are not subject to stamp duty.
Social insurance
If an employer has employees in Bermuda for 26 or more weeks in a calendar year, the
employer will have to register and obtain an account number from the Department
of Social Insurance (DSI) (unless previously registered) and pay social insurance tax
for its employees. At the same time, the employer must also apply for and obtain from
the DSI a social insurance number for each employee, which is required to pay social
insurance. Once the employer has registered for a social insurance account number
and the employees have obtained social insurance numbers, the DSI will automatically
send an electronic print-out to the employer with an itemised list of employees as
well as the amount of social insurance tax due for the month. Under certain facts and
circumstances, the employer may also file an Employee Amendment Form, which shows
any change in status (i.e. termination or unpaid leave) of employees that could affect the
amount of social insurance tax due.
The amount of social insurance tax due is calculated as 64.14 Bermudian dollars (BMD)
per employee per week, with the employer and employee each paying half of the liability
(or BMD 32.07). The employer must pay and remit monthly (for all employees), to the
DSI, the total social insurance tax due per employee. The amount of social insurance tax
due per month is based on the number of Mondays in the month and must be paid by the
end of the following month. Employed persons over the age of 65 are not required to pay
their half (BMD 32.07). The employer continues to pay their half (BMD 32.07).
Payroll tax
Under Section 3 of the Payroll Taxes Act 1995, an employer (viewed as the entity
that has control over an individuals remuneration) is required to remit payroll taxes
(currently 14% on all remuneration paid or given, up to a maximum compensation of
BMD 750,000) for each of its employees whose employment in Bermuda exceeds four
consecutive weeks in a calendar year (whether or not with one or more employers). If
an employees stay in Bermuda is for a period of less than four consecutive weeks, the
employer is not obligated to remit the payroll taxes.
Once an employees service period in Bermuda has exceeded four consecutive weeks,
the employer must register the employee with the Office of the Tax Commissioner
(OTC). The employer must obtain a payroll tax account number by filing an application
with the OTC, if no previous account exists for such employee. The application must be
filed within seven days after the end of the quarterly tax period (the four quarters end
on 1 January, 1 April, 1 July, and 1 October) in which the employees stay exceeded four
consecutive weeks. A payroll tax return and remittance of tax must be filed with the
OTC 15 days after the end of each quarterly period (i.e. 15 January, 15 April, 15 July,
and 15 October). A return is due only when an employees stay exceeds four consecutive
weeks in a tax period. The employer may recover from the employee a maximum of
5.25% of the 14% payroll tax, and the employer is allowed an exemption of BMD 600 (of
remuneration paid) per employee for each quarterly tax period. Penalties for tax returns
filed late are 5% of the payroll tax due for each month (or part thereof) that the tax
return is late (with a maximum of 30%).
Compensation subject to the payroll tax under the Payroll Taxes Act includes all
remuneration paid or given to the employee. Remuneration includes:
Wages, salary, leave pay, commission, gratuity, fee, bonus, perquisite, or allowance.
Money paid under a profit-sharing scheme.
Money or anything of value paid or given to an employee or ex-employee in
connection with the permanent termination of employment.
218
Bermuda
Bermuda
Any amount paid with respect to a retirement or provident fund, scheme, or society,
or under a hospital or health insurance scheme.
The value of meals, boarding, lodging, or other benefit of any kind, whether provided
in cash or otherwise.
The rental value of any place of residence provided rent-free, or the difference
between the rent paid and the rental value if the rent paid is lower than the rental
value.
Any gain on the exercise or right to acquire company stock based on services
rendered.
All employers or self-employed persons are required to report remunerations up to
a maximum of BMD 750,000 per annum per employee, deemed employee, or selfemployed person. There is no payroll tax on remunerations above BMD 750,000.
Please note that the Payroll Taxes Act is extremely broad in its definition of
remuneration. Therefore, a Bermuda employer should take caution when calculating the
amount of remuneration paid to an employee.
Annual company fee
Every exempted company shall, in the month of January, forward to the Registrar of
Companies a declaration, signed on behalf of the company, as to the companys principal
business and its assessable capital together with the appropriate fee payable. For the
purposes of the Companies Act 1981, an exempted company means a local company that
does not comply with the requirements of the Companies Act 1981. Exempt companies
are generally owned by non-Bermudans.
Assessable capital of the exempted company (BMD)
0 to 12,000
12,001 to 120,000
120,001 to 1,200,000
1,200,001 to 12,000,000
12,000,001 to 100,000,000
100,000,001 to 500,000,000
500,000,001 or more
Annual company fee (BMD)

1,995
4,070
6,275
8,360
10,455
18,670
31,120
Corporate services tax
A 4% corporate service tax is imposed on a provider of corporate services in

respect of gross earned revenue derived from an exempted undertaking for taxable
corporate services provided during a tax period. Corporate services include corporate
administrative services, corporate management services, corporate secretarial services,
the provision of a registered office, the performance of functions in the capacity of
director or resident representative, and the provision of accounting and/or financial
services.
Hotel occupancy tax
A 7.25% tax is imposed on revenue received from hotels and other forms of
accommodation.
Betting duty
There is a betting duty charge of 20% imposed on all bets made, received, or negotiated
by a person licensed under the Betting Act of 1975.
Bermuda
219
Bermuda
Branch income
Branches are treated the same as other corporations doing business in Bermuda.
Since income taxes are not imposed on corporations in Bermuda, income determination
is not relevant in the context of Bermuda taxation.
Deductions
Since income taxes are not imposed on corporations in Bermuda, deductions from
income are not relevant in the context of Bermuda taxation.
Group taxation
Since income taxes are not imposed on corporations in Bermuda, group taxation is not
relevant in the context of Bermuda taxation.

Bermuda offers no specific tax incentives.
Withholding taxes
There are no withholding taxes in Bermuda.
Tax administration
Since income taxes are not imposed on corporations in Bermuda, tax returns are not
required to be completed for corporate income tax compliancepurposes. For information
regarding tax returns, due dates, and the payment of tax for non-income taxes imposed in
Bermuda (e.g. Social insurance and Payroll tax), please see the Other taxes section.
Other issues
Foreign exchange controls
Exempt companies and permit partnerships are considered as non-residents for

exchange control purposes. This allows these entities to make dividend payments,
distribute capital, open and maintain foreign bank accounts, maintain bank accounts in
any currency, and purchase securities.
There is a Foreign Currency Purchase Tax imposed at the rate of 1% on foreign currency
purchased by a resident from a local bank.
Tax treaties
There are no tax treaties between Bermuda and other nations due to the fact that
Bermuda does not impose direct taxes. However, Bermuda has a double taxation
agreement (DTA) with the Kingdom of Bahrain and a limited tax treaty with the
United States, which only applies to enterprises of insurance. Bermuda also has
220
Bermuda
Bermuda
tax information exchange agreements (TIEAs) with the following 24 countries:
Aruba, Australia, Canada, China, Denmark, Faroe Islands, Finland, France, Germany,
Greenland, Iceland, India, Ireland, Italy, Japan, Mexico, Netherlands, Netherlands
Antilles, New Zealand, Norway, Portugal, Sweden,the United Kingdom, and the United
States.
Under certain circumstances, the United States-Bermuda Tax Treaty provides for
relief from taxation of insurance business profits. The business profits of a Bermudian
insurance company will not be taxed in the United States unless a company has a
permanent establishment (PE) in the United States. The United States-Bermuda Tax
Treaty also provides for mutual assistance on tax matters. The purpose of a mutual
assistance provision is to prevent or decrease tax avoidance. The Unites States also
believed that having a tax treaty with Bermuda would be beneficial for United StatesBermuda diplomatic relations.
Bermudas DTA with the Kingdom of Bahrain includes a provision for the full exchange
of information on criminal and civil tax matters, consistent with the internationally
agreed standard for transparency and the exchange of information for tax purposes set
by the Organisation for Economic Co-operation and Development (OECD).
Bermuda
221
Bolivia
PwC contact
Csar O Lora Moretto
Avenida Mariscal Santa Cruz y Yanacocha
Edificio Hansa, 19th floor
La Paz
Bolivia
Tel: +591 2 240 8181
The Bolivian government, through Law 366 (Oscar Alfaro Law), has introduced certain
benefits for the importation and commercialisation of books and publications, which are
as follows:
Importation of books, newspapers, and magazines in a printed version are exempted
from importation taxes (i.e. value-added tax [VAT]).
Sale of books produced in Bolivia or abroad and official publications carried out by
governmental institutions are taxed at the zero VAT rate.
In August 2013, the Bolivian government approveda new law applicable to financial
institutions (Law 393 - Financial Services Law) that has as itspurposetheregulation
ofall intermediary financing activities and the provision of financial services, including
the organisation and operation of all financial institutions/financial service providers,
protectionof the customers, and active participation of the government as a regulator
within the Bolivian financial sector.
The main tax matters introduced by this new financial law are as follows:
Interest generated as a result of financial leasing of movable goodsis excluded from
VAT.
Depreciation of goods/assets arising from financial leasingis non-deductible for
corporate income tax (CIT) purposes forall parties (i.e. the lessor and the lessee);
however, the lessee can deduct instalments paid in respect of the financial leasing
agreement.
The implementation of voluntary generic provisionsconstitutes non-deductible
expenses for CIT purposes. However, the law clarifies that any provision required by
this law or further regulations and/or by the regulator (Autoridad de Supervisin del
Sistema Financiero or ASFI) will be tax deductible.
In early April 2014, the Bolivian government approved Law 516 (Promotion Investment
Law), which introduced the transfer pricing concept and established that foreign
investments must fulfil transfer pricing regulations if they want to carry on business in
Bolivia. Further regulation is expected to be passed in early July 2014.

All companies in Bolivia are subject toCIT at a rate of 25%. The taxable base is the
profit arising from financial statements prepared in accordance with Bolivian generally
accepted accounting principles (GAAP), adjusted for tax purposes (i.e. by nondeductible and non-taxable items) as per the requirements established in the tax law
and regulations.
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Bolivia
Bolivia
Bolivia taxes the income generated by corporations following the income source
principle (i.e. on a territorial basis). Therefore, income arising from goods and assets
located or utilised economically within Bolivian territory and from any activity carried
out within the country is considered Bolivian income source. Hence, such income
is subject to CIT, regardless of the nationality/residence of the parties involved in
generating such income or the place where the contracts were subscribed.
Additional income tax on certain financial institutions
Financial institutions(except for development banks)with a return on equity index

higher than 13%must pay an additional income tax of 12.5%. This additional income
taxcannot be offset againstthe transaction tax (see below),nor canit be considered
adeductible expense for CIT purposes.
Surtax on extractive activities
There is an additional 25% CIT that affects only extractive activities of non-renewable
natural resources (mining and oil/gas). This additional tax is calculated on the same
basis as the normal CIT, except that two additional deductions are allowed: (i) up to
33% of the accumulated investment as of 1991, and (ii) 45% of the gross revenue of
each extractive operation (e.g. a field or a mining site), with a threshold of 250 million
bolivianos (BOB) for each extractiveoperation.
Special taxes on mining companies
In addition to the general CIT of 25% and the 25% surtax on extractive activities, all
mining companies are also subject to an additional tax, calculated on the taxable net
profits, at the following rates:
12.5%, if the mining company carries out exploitation activities.
7.5%, if the mining company carries out manufacturing activities with raw minerals
that add value.
Mining companies are also subject to mining royalties at a rate of between 1% and 7%
(depending on the kind of mineral), calculated on the total sales price. Note that there is
a 60% discount on the rates of mining royalties if minerals are sold within the Bolivian
market. Mining royalties can be offset against CIT if official mineral prices are lower than
the prices established by the tax law; however, in this case, mining royalties paid will
not be deductible for CIT purposes. On the contrary, if official mineral prices are higher
than the prices established by the tax law, then mining royalties will be considered a
deductible expense for CIT purposes. Note that mining royalties paid on minerals and
metalsthat are not included in thetax lawcan alwaysbe offset against CIT.
Tax on gross income (transaction tax)
The tax on gross income (also known as transaction tax) generally taxes gross income
arising from the performance of any economic or commercial activity (including nonprofitable activities) at a rate of 3% on a monthly basis. However, exceptions exist for the
sale of investments (as defined by the Stock Exchange Law) and the sale of minerals, oil,
and gas within the local market, as long as such sales will ultimately beexported.
Corporations pay either CIT or transaction tax, whichever is higher. From an
administrative perspective, CIT is due and paid at the end of each tax year and is
considered an advanced payment of transaction tax, while transaction tax is due
monthly. If during the year the cumulative monthly transaction tax due exceeds the CIT
prepayment, the taxpayer will be subject to transaction tax on a monthly basis until the
end of the tax year. For example, a corporation pays CIT for the 2013 fiscal year in April
2014. This payment is considered a prepayment for the transaction tax due between May
2014 and April 2015.
Bolivia
223
Bolivia
Local income taxes
There are no local taxes on income in Bolivia.
Corporate residence
A corporation is considered resident in Bolivia if it has been incorporated in Bolivia.
Note that Bolivian commercial laws allow foreign corporations to carry out isolated
commercial acts in Bolivia without the obligation to constitute a permanent
representation in Bolivia; however, such corporations cannot carry out habitual
commercial acts without fulfilling the requirements established to constitute a company
in Bolivia (e.g. through either a subsidiary or a branch). Unfortunately, Bolivian
legislation does not include provisions to regulate situations that could trigger PE nor
does it define what should be understood by carrying out habitual commercial acts.
Other taxes
VAT is levied on the sale of movable goods and provision of services carried out within
Bolivian territory at a rate of 13%, including definitive importations. Since this tax is
included in the final price, the effective tax rate amounts to 14.94% (13%/87%).
Customs duties
Definitive importations are also subject to customs duties at a rate of 10% and 5% for
consumption goods and capital assets, respectively. Customs duties are calculated over
the transaction value of the merchandise valued as per Bolivian customs legislation,
plus transportation and insurance costs.
Taxes on specific goods for consumption (excise tax)

Specific goods are taxed at the following rates:
Product
Cigarettes and tobacco for pipes
Vehicles (except those of high capacity and weight, which will pay a 10% rate of
excise tax)
Tax rate (%)

50 to 55
18
Other specific products taxed by specific measure:

Product
Soft drinks (except natural water and fruit juices)
Energising drinks
Maize liquor
Alcohol
Beers with 0.5% or more volumetric degrees
Wines
Ciders and sparkling wines (except maize liquor)
Liquors and creams in general
Rum and vodka
Other brandies/liquors
Whiskey
224
Bolivia
Tax rate (BOB)

0.38/litre
4.24/litre
0.75/litre
1.43/litre
3.17/litre + 1%
2.92/litre + 5%
2.92/litre + 5%
2.92/litre + 5%
2.92/litre + 10%
2.92/litre + 10%
12.15/litre + 10%
Bolivia
Special tax on hydrocarbons and derived products
A tax is charged on the commercialisation of the following products within the local
market, regardless of whether they are produced in Bolivia or imported:
Product
Gasoline
Premium gasoline
Aviation gasoline
Kerosene
National jet fuel
International jet fuel
National diesel oil
Agro fuel
Fuel oil
Tax rate (BOB)

1.23/litre
2.18/litre
1.85/litre
0.29/litre
0.32/litre
4.28/litre
0.00/litre
0.00/litre
1.25/litre
Direct tax on hydrocarbons
A direct tax on hydrocarbons (IDH) is applied on the production of hydrocarbons,

measured at the wellhead point, at a rate of 32%. To determine the taxable base for this
tax, production of hydrocarbons must be valued taking into account the average sales
price and considering the market (internal/external) where such hydrocarbons were
sold.
Property tax on real estate and vehicles
Real estate and vehicles are annually subject to a property tax calculated at different
rates based on a scale value determined by the municipal government, as follows:
Property value (BOB)
From
Up to
0
200,000
200,001
400,000
400,001
600,000
600,001
Onwards
BOB
0
700
1,700
3,700
Property tax liability

Plus (%)
over excess of (BOB)
0.35
0
0.50
200,000
1.00
400,000
1.50
600,000
Vehicle value (BOB)

From
Up to
0
24,606
24,607
73,817
73,818
147,634
147,635
295,268
295,269
Onwards
BOB
0
492
1,722
4,306
10,949
Vehicle tax liability

Plus (%)
over excess of (BOB)
1.50
0
2.00
24,607
3.00
73,818
4.00
147,635
5.00
295,269
Transfer taxes
Transfer of property and real estate are subject to a transfer tax at a rate of 3%. This tax
must be determined based on the provisions set forth for the transaction tax (tax on
gross income) and is collected by the municipal government where the property/real
estate is registered.
Stamp taxes
There are no stamp taxes in Bolivia.
Bolivia
225
Bolivia
Financial transaction tax
A financial transaction tax is levied on bank transactions (deposit or transfer of funds),

carried out within the domestic financial system, at a rate of 0.15%.
Special tax on lottery and gambling games
A specific tax on lottery and gambling games is applied in Bolivia. The tax is also
applicable to business promotions that involve a raffle or random activities in providing
awards in order to increase sales or attract clients. The tax rate for lottery and gambling
games is 30%, whereas the tax rate for business promotions is 10%.
Social contributions
The Pension Law establishes employer social contribution obligations. Social tax charges
for employers are equal to 16.71% of gross salary in general and 18.71% for the mining
sector.
Tax on sale of foreign currency
This is a transitory tax (36 months) applicable to the sale of foreign currency carried out
by financial institutions (excluding the Central Bank of Bolivia) and bureau de change
within Bolivian territory. This transitory tax is levied on the sale price at a rate of 0.70%
and 0.35% for the financial institutions and bureau de change, respectively.
Branch income
Branch income is subject to the same tax applicable to other types of Bolivian
corporations (i.e. CIT of 25%). However, the net profits of Bolivian branches are deemed
to be distributed to the head office at the annual filing due date for CIT (i.e. 120 days
after the fiscal year end); consequently, a Bolivian branch must withhold 12.5% on
such deemed distributed profits. Note that this can be avoided as long as the head office
decides to reinvest the Bolivian branchs net profits.
Taxable income is determined based on the financial statements prepared under
Bolivian GAAP; then the income is adjusted for tax purposes in accordance with
guidelines provided with respect to non-deductible and non-taxable items.
Inventory valuation
Inventories must be valued at replacement cost or market value for tax purposes,
whichever is lower. Replacement cost is defined as the necessary costs incurred in
acquiring or producing the assets as of the year-end, whereas market value is defined
as the net value that the company would have obtained for the sale of assets in normal
conditions as of the year-end, less commercialisation direct expenses.
Capital gains
Bolivian legislation does not include specific regulations for capital gains. Capital gains
must be included in annual CIT if they are considered Bolivian-source income and will
be taxed at a rate of 25%.
Dividend income
Dividend income obtained from domestic corporations subject to CIT must be excluded
from the net taxable profits of the investor. Dividend income obtained from foreign
corporations is not subject to CIT due to the fact that it is not considered Bolivian-source
income.
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Bolivia
Bolivia
Interest income
Interest income is subject to annual CIT if loans have been economically utilised within
Bolivian territory since associated interest is considered Bolivian-source income.
Rent/royalty income
Rent/royalty income is subject to annual CIT as long as the income comes from an asset
situated or economically utilised in Bolivian territory.
Foreign income
Bolivian corporations are taxed only on income generated within Bolivian territory.
Deductions
As a general principle, expenses may be deducted for CIT purposes as long as they are
necessary to generate Bolivian-sourced income and are properly documented.
Apart from the above, the Bolivian Tax Code (BTC) has established minimum amounts
(BOB 50,000) for which taxpayers must document their economic transactions through
documents of payments recognised by the Bolivian financial system and regulated
by the ASFI (i.e. the bank regulator), including the possibility to document economic
transactions through payments made via foreign financial institutions. Non-compliance
with these requirements implies the lack of the possibility to compute input VAT and to
deduct the associated expenses for CIT purposes.
Depreciation
Depreciation of fixed assets is permitted for CIT purposes if fixed assets contribute to
generate taxable income. Depreciation must be calculated based on a straight-line
method and considering useful lives included in tax law. Fixed assets that are not
included in the tax law must be depreciated under a straight-line method in accordance
with their useful lives, and this needs to be communicated to the tax authorities within
ten working days following the incorporation of the affected fixed assets.
Some of the assets included in the tax law are as follows:
Asset
Building
Fixture and furniture
Machinery
Equipment and facilities
Vehicles
Computer equipment
Tools
Processing plants for the oil/gas industry
Pipeline
Aircraft
Ships and motorboats
Useful life (years)

40
10
8
8
5
4
4
10
10
5
10

2.5
10.0
12.5
12.5
20.0
25.0
25.0
10.0
10.0
20.0
10.0
Goodwill
Intangible assets (including goodwill) with a true cost can be deductible for tax purposes
within a five-year period as long as taxpayers have paid a price for their acquisition.
Bolivia
227
Bolivia
Start-up expenses
Taxpayers may choose to deduct start-up expenses within the first fiscal period or
distribute proportionally their amortisation within a four-year period, commencing the
first year of operation. Note that start-up expenses cannot exceed 10% of paid-in capital.
Interest expense
Interest paid to owners or shareholders is not deductible to the extent the interest rate
exceeds the London Interbank Offered Rate (LIBOR) plus 3% in the case of foreign
owners/shareholders and to the extent the interest rate exceeds the official interest rate
on loans published by the Central Bank of Bolivia for national owners/shareholders.
Interest deductible on shareholder loans may not exceed 30% of the total interest paid to
third parties.
Bad debt
Allowances for bad debt provisions are permitted if determined as required by law,
which establishes an average method based on uncollectable receivables of the last three
years. Uncollectable receivables are defined by current legislation as those that come
from trade receivables and either: (i) remain unpaid for more than one year and have
been sued without obtaining a seizure or (ii) when the receivables do not justify being
sued due to the quantity of the receivables, remain unpaid for more than three years.
Donations are not deductible unless made to non-profit organisations that are not
subject to CIT. These donations are deductible up to a maximum of 10% of the donors
net taxable profit.
Compensation expenses
Salaries, as well as associated compensations, paid to employees without the application

of withholding taxes (WHT) (i.e. RC-IVA) are not deductible. Employees are subject to
RC-IVA at a rate of 13%, which is calculated on the gross salary (including any other
compensation in kind/cash) less social contributions and four minimum national
salaries. RC-IVA must be withheld and paid to the tax authorities by the employer on a
monthly basis.
Provisions for employees severance payments are deductible. Provisions of other
bonuses (e.g. holiday, productivity bonuses) accrued on behalf of employees are tax
deductible as long as they are paid prior to the annual CIT filing due date and the
company demonstrates it has withheld taxes (if applicable).
Fines and penalties
Fines and penalties arising from late tax payments are not tax deductible (except interest
and restatement by inflation associated with tax obligations).
Taxes
Taxes effectively paid by the corporation as a direct taxpayer, other than CIT, are
deductible for tax purposes. Any transaction tax (tax on gross income) that has been
offset against CIT paid is not deductible for CIT purposes.
Taxes paid in the acquisition of fixed assets are not deductible. These taxes must be
included in the cost of the asset and depreciated accordingly.
In broad terms, the following additional items are not deductible for tax purposes,
according to current legislation:
Owners or shareholders personal withdrawals and living expenses.
228
Bolivia
Bolivia
Fees paid to individuals (i.e. acquisition of goods and services) for which no WHTs
have been withheld.
Amortisation of trademarks and other intangible assets, unless a price has been paid
to acquire them.
Provisions that are not specifically authorised by the tax law and regulations.
Depreciation of fixed assets that include a revaluation reserve.
Losses arising from illegal acts.
Tax lossescan be utilisedover the following three fiscal years. New entrepreneurial
productive projects with a minimum capital of BOB 1 million can utilise tax losses over
the five fiscal years following the start-up of operations (including hydrocarbons and the
mining sector).
Financial institutions cannot utilise tax losses accumulated through December 2010;
however, tax losses generated starting from fiscalyear 2011 can be utilised over the
following three fiscal years, as stated above.
Tax losses cannot be restated due to inflation in any case.
Bolivian legislation does not envisage carryback provision for tax losses.
Payments to foreign affiliates are subject to a 12.5% WHT with no restriction if the
Bolivian company is remitting Bolivian-sourced income (e.g. interest on loans, provision
of any kind of services, royalties).
Group taxation
Bolivia does not include group taxation rules within its legislation.
Transfer pricing
Bolivian legislation establishes that transactions carried out between related companies
must be performed at market value or as if they were carried out between third parties
(i.e. sort of arms-length principle), and any excess must be considered non-deductible
for tax purposes. Note that there are not further regulations regarding how taxpayers
must demonstrate that transactions carried out between related parties were carried out
at market value.
In addition to the above, note that in early April 2014, the Bolivian government approved
Law 516 (Promotion Investment Law), which introduced the transfer pricing concept
and established that foreign investments must fulfil transfer pricing regulations if they
want to carry on business in Bolivia. Further regulation is expected to be passed in early
July 2014.
Thin capitalisation
Bolivian legislation does not include provisions for thin capitalisation apart from
establishing restrictions on deductibility of interest when funding is provided by
shareholders (see Interest expense in the Deductions section).

Foreign tax credit
Bolivian legislation does not include provisions regarding recognition of foreign tax
credits.
Bolivia
229
Bolivia
No incentives are granted in Bolivia for domestic or foreign investment; however, further
provisions are expected in this regard due to incoming regulation of Law 516 (Promotion
Investment Law).
Export incentives
Export activities benefit from reimbursement of VAT and customs duties paid in
the process of producing goods to be exported (with some limitations for oil/gas
companies).
Other incentives
Foreign exchange transactions are legal in Bolivia, and a system of free-floating

exchange rates exists.
Tourist and lodging services by hotels to foreign tourists without a residence or address
in the country are exempt from VAT. In addition, importation of books, magazines, and
newspapers are exempted from importation taxes (i.e. VAT), and the sale of produced or
imported books are taxed at the zero VAT rate.
Regional manufacturing tax incentives
New investments in manufacturing in the states of Oruro and Potosi are entitled to the
following tax exemptions:
Exemption
Import tariffs and VAT on
imported machinery
Import tariffs on
imported inputs
Transaction tax
CIT
Conditions of exemption
Machinery imported exclusively for the new industry until start-up of
operations.
They do not replace domestic inputs of the same kind and are destined
to a transformation process. The exemption is granted for the first ten
years of operation.
For ten years from the start-up of operations.
For ten years from the start-up of operations if the amount exempt is
reinvested in fixed assets in the following fiscal year.
Withholding taxes
Payments made to Bolivian residents
Dividends paid to Bolivian residents, either individuals or corporations, are nottaxable.

Payments made by corporations to individuals with respect to the acquisition of goods or
provision of services that are not supported with an invoice or fiscal receipt are subject to
a WHT of 8% on goods and 15.5% on services.
Payments to non-residents
Dividend payments, distributions of profits to the head office by Bolivian branches,

interest payments, royalty payments, and fees paid for any type of services made to nonresidents are subject to a WHT of 12.5%.
Tax treaties
Bolivia currently has in force double tax treaties (DTTs) with the Andean Community
(i.e. Colombia, Ecuador, and Peru), Argentina, France, Germany, Spain, Sweden, and
the United Kingdom.
Beneficial WHT rates on dividend distributions are provided by DTT with Spain and
Sweden at 10% and 0%, respectively, provided the Spanish or Swedish holding company
230
Bolivia
Bolivia
demonstrates it is the ultimate beneficial owner and holds more than a 25% interest in
the Bolivian company.
Tax administration
Taxable period
The taxable year is the fiscal year. The fiscal year varies according to the activity of the
corporation. Banks and commercial and other service activities have a fiscal year end
as of 31 December; industrial, oil, and gas companies as of 31 March; agribusiness and
forestry companies as of 30 June; and mining companies as of 30 September.
Tax returns
CIT is assessed on a self-assessment basis every fiscal year, and the due date for
submission is 120 days after the fiscal year-end. Tax returns must be accompanied by
audited financial statements (if applicable) and ancillary tax information as requested
by the tax authorities.
Payment of tax
CIT is payable in one annual payment 120 days after the fiscal year-end, except for
mining companies, which are obligated to make advance payments on a monthly
basis with respect to the additional tax (i.e. 12.5% and 7.5% for exploitation and
manufacturing mining companies, respectively).
Tax audit process
The tax audit process starts with a formal notification from the tax authorities where
they indicate fiscal periods and taxes to be reviewed, together with a requirement of
information. Tax inspection may generally take a 12-month period. Shortly after the
provision of the finalisation of the tax inspection, a preliminary report of the tax audits
results is provided to the taxpayer in which the total tax debt is described (i.e. tax due,
restatement, interests and penalties) together with the legal arguments supporting the
tax enquires.
Taxpayers do have 30 days after receiving the preliminary report to present all
supporting documentation and technical arguments if they consider that the tax
enquires do not have grounds to be claimed. Tax authorities do have 60 days to review
all documentation/arguments provided by the taxpayer and then issue the final
report, which is the formal document that could be subject to tax litigation, either via
administrative process of by a judicial court. Note that claimed taxes must be paid in
advance if taxpayers decide to litigate directly through the judicial court.
According to the current Bolivian Tax Code, tax authorities have up to a ten year period
to review and recalculate taxes determined by taxpayers. This period is determined as
follows: four years for 2012, five years for 2013, six years for 2014, seven years for 2015,
eight years for 2016, nine years for 2017, and ten years for 2018. This period must be
computed as of the first day of the following year in which the tax payment due date has
occurred (e.g. if the tax payment deadline occurred in August 2013, the period that can
be subject to tax review is 1 January 2014 to 31 December 2018).
There are not specific topics/taxes of focus in which the tax authorities address their
review. This will generally depend on the nature of the taxpayer and the industry where
they belong, e.g. a mining company could be more likely to be subject to tax inspections
than an industrial company. There are no formal statistics to provide information in this
regard.
Bolivia
231

PwC contact
Branka Rajii
PricewaterhouseCoopers d.o.o.
Fra Anela Zvizdovia 1
71000 Sarajevo
Tel: +381 11 3302 100
A branch of a foreign legal entity can be registered in Republika Srpska
(RS)
Recent amendments of the RS Law on Companies and Law on Registration of Business
Entities enable the registration of a branch of a foreign legal entity. The branch is not a
separate legal person and conducts business on behalf of the foreign legal entity. The
branch is registered in the RS Court and in the RS Tax Authority.
Branch of a foreign legal entity in the Federation of Bosnia and

Herzegovina (FBiH)
Amendments to the Company Law of the Federation of Bosnia and Herzegovina that
came into force on 13 October 2013 introduced the possibility for foreign companies
to establish one or more branch offices. The branch offices will have no capacity of a
legal entity, and business activities with third parties are performed in the name and on
behalf of the foreign legal entity that gains rights and obligations through activities of
the branch office.
However, registration of a branch office of a foreign legal entity is still not enabled in
practice since the amendments to the Company Law were not accompanied by the
required amendments to the Law on Registration of Business Entities in the Federation
of Bosnia and Herzegovina that has to prescribe procedures for registration of a
branch office of a foreign company at the registering municipality court and the Tax
Authorities of the Federation of Bosnia and Herzegovina. The amendments to the Law
on Registration of Business Entities are in Parliament procedure, and it is expected they
will be adopted soon. These amendments will fully enable registration of a branch of
a foreign legal entity. Additional amendments to the Corporate Income Tax (CIT) Law
and Value-added Tax (VAT) Law are also required in order for branch offices to become
a feasible option for foreign companies that intend to perform business activities in the
Federation of Bosnia and Herzegovina.
Proposed draft of new CIT Law in the Federation of Bosnia and

Herzegovina introduces additional transfer pricing methods
The Federal Ministry of Finance has prepared a draft of the new CIT Law of the
Federation of Bosnia and Herzegovina that will, among others, introduce additional
methods for determining transfer prices to make it more aligned with the Organisation
for Economic Co-operation and Development (OECD) guidelines.
Currently, FBiH CIT law only recognises the comparable uncontrolled price (CUP) and
cost plus methods.
Additionally, the proposal makes transfer pricing documentation obligatory for all
companies with related party transactions.
The law is expected to pass in 2014, and it is expected to become applicable starting
from 1 January 2015.
232

Bosnia and Herzegovina consists of two entities: Federation of Bosnia and Herzegovina
(FBiH) and Republika Srpska (RS), with a third region, the Brko District (BD), being
administered by both. Direct taxes are imposed at the entity/district level, while indirect
tax regulations are imposed at the state level. CIT systems in Bosnia and Herzegovina
have been partially harmonised in the past few years, but significant differences remain.
The Federation of Bosnia and Herzegovina, Republika Srpska, and the Brko District tax
resident corporations on a worldwide basis. Non-residents are taxed on income realised
in the FBiH, RS, and BD territories.
FBiH CIT
A CIT payer in the Federation of Bosnia and Herzegovina is a resident business

association or other legal entity performing independent and permanent business
activity through the sales of products and providing services on the market for the
purpose of generating profit.
A CIT payer in the Federation of Bosnia and Herzegovina is also a non-resident who
generates profits through business activity from a business unit in the territory of the
Federation of Bosnia and Herzegovina.
A non-resident whose registered seat or management is not in the Federation of Bosnia
and Herzegovina and who does not have a business unit in the Federation of Bosnia and
Herzegovina is subject to withholding tax (WHT) for income generated in the Federation
of Bosnia and Herzegovina.
The CIT rate in the Federation of Bosnia and Herzegovina is 10%.
RS CIT
A CIT payer in Republika Srpska is:

A legal entity from Republika Srpska that generates income from any source in
Republika Srpska or abroad.
A business unit of a legal entity that generates income in the territory of Republika
Srpska.
A non-resident legal entity that conducts business activity and has a permanent
establishment (PE) in Republika Srpska, for income that is related to that PE.
A non-resident legal entity that generates income from immovable property in
Republika Srpska, for the income generated in Republika Srpska.
A non-resident legal entity that generates income in Republika Srpska, not mentioned
above, and is subject to WHT in accordance with the CIT law of Republika Srpska.
The CIT rate in Republika Srpska is 10%.
BD CIT
A CIT payer in Brko District is:

A legal entity from Brko District that generates income from any source in Bosnia
and Herzegovina or abroad.
A business unit of a legal entity with headquarters in the Federation of Bosnia and
Herzegovina or Republika Srpska, for income generated in Brko District.
A non-resident legal entity that conducts business activity and has a PE in Brko
District, for income that is related to that PE.
A non-resident legal entity that generates income from immovable property in Brko
District, for the income generated in Brko District.
233

A non-resident legal entity that generates income in Brko District, not mentioned
above, and is subject to WHT in accordance with the CIT law of Brko District.
The CIT rate in Brko District is 10%.
Corporate residence
FBiH residency
Under FBiH CIT law, a resident is a legal entity whose headquarters (registration) is
entered into a court registry or whose management and supervision over the business
activities is located in the Federation of Bosnia and Herzegovina.
FBiH permanent establishment
A PE of a non-resident is a permanent place of business through which the non-resident

performs activity in whole or partially throughout the territory of the Federation of
Bosnia and Herzegovina.
A PE under FBiH CIT law is considered to be one of the following:

Management headquarters.
Branch office.
Business office.
Factory.
Workshop.
Location of natural resources extraction.
Construction site (construction or mounting project) when the work is performed
during a period exceeding six months.
Providing consulting or business services lasting for a period exceeding three months
consecutively over a 12-month period.
A representative acting independently on behalf of a non-resident related to the
activities of signing a contract or keeping supplies of products delivered on behalf of a
non-resident.
RS residency
Under RS CIT law, a resident is a legal entity registered in Republika Srpska.
RS permanent establishment
A PE is considered to be a place of business of a non-resident in Republika Srpska

(i.e. construction works, installation and assembly works, infrastructure used for
research or exploitation of natural resources or supervisory of the same). A PE shall
also be considered to be a place of business where an individual or legal person has the
authorisation to conclude contracts for a foreign legal entity.
BD residency
The BD CIT law prescribes that a resident is a legal entity registered in Brko District.
BD permanent establishment
A PE of a non-resident in Brko District is considered to be:

construction works, installation and assembly works, infrastructure used for research
or exploitation of natural resources, or supervisory of the same, or
a place of business where an individual or legal person has the authorisation to
conclude contracts for a foreign legal entity.
234

Other taxes
The standard VAT rate is 17%, and the VAT regime applies equally throughout the
country of Bosnia and Herzegovina. There is no reduced VAT rate in Bosnia and
Herzegovina.
Taxable persons are all individuals and legal entities registered, or required to be
registered, for VAT. Any person making taxable supplies of goods and services that
exceeds or is likely to exceed a threshold of 50,000 konvertibilna marka (convertible
mark or BAM) (25,000 euros [EUR]) is required to register as a VAT payer.
The export of goods is zero-rated.
Taxable transactions include the supply of goods and services in Bosnia and Herzegovina
by a taxable person, as well as the importation of goods to Bosnia and Herzegovina by
any person. The following transactions are also taxable:
Transactions for no consideration or for a consideration less than the market value.
The private use of taxable goods by a taxable person (self-supply).
The following services are exempt from VAT in Bosnia and Herzegovina:
The leasing and subletting of residential houses, apartments, and residential premises
for a period of longer than 60 days.
The supply of immovable property, except for the first transfer of the ownership rights
or the rights to dispose of newly constructed immovable property.
Financial services.
Insurance and reinsurance services.
Educational services provided by private or public educational institutions.
Postal services.
The VAT period is one calendar month.
Any tax credit that has not been used after a period of six months shall be refunded.
Registered exporters are to be refunded within 30 days.
Customs duties
The customs policy law and the rates of customs tariffs to be applied exist and are largely
based on European Union (EU) standards. Bosnia and Herzegovina has signed the
Stabilisation and Association Agreement (SAA) and the Central European Free Trade
Agreement (CEFTA).
Excise duties
There is a single excise regime throughout Bosnia and Herzegovina, which levies excise
tax on the following products:
Petroleum products: BAM 0.3 to BAM 0.4 per litre.
Tobacco products: 42% on retail price and an additional BAM 0.75 per pack of 20
cigarettes. If the calculated excise duty is lower than the minimally prescribed excise
duty, then the minimal excise duty should be paid (the minimal duty is determined
every year by the indirect tax authorities by special regulation).
Non-alcoholic drinks: BAM 0.1 per litre.
Alcohol and alcoholic drinks: BAM 8 to BAM 15 per litre of absolute alcohol.
Beer and wine: BAM 0.2 to BAM 0.25 per litre.
Coffee (unroasted, roasted, and ground coffee and coffee extracts): BAM 1.5 to BAM
3.5 per kilogram.
235

Property taxes (real estate)
FBiH property taxes
FBiH property taxes are imposed at the cantonal level (ten cantons in total), and the
rates as well as the taxpayers are different between the cantons. The taxes are paid in the
range of BAM 0.5 to BAM 3 per square metre.
RS property taxes
RS property taxes are imposed at the entity level. The annual tax rate is between 0.05%
and 0.5% of the market value of the property. The applicable tax rate is determined
every year by the municipalities.
BD property taxes
BD property taxes are imposed by the BD assembly. The annual tax rate is between
0.05% and 1% of the market value of the property. The rate is adopted by the assembly
for every year based on the proposed annual budget.
Tax on transfer of land and real estate

FBiH transfer taxes
The FBIH tax on transfer of land and real estate is imposed at the cantonal level. The rate
differs by canton; however, it cannot be higher than 5%.
RS transfer taxes
There is no tax on transfer of land and real estate in Republika Srpska.
BD transfer taxes
There is no tax on transfer of land and real estate in Brko District.

FBiH social security contributions
Mandatory social security contributions in the Federation of Bosnia and Herzegovina are
due by the following rates:
Type of contribution
Contribution for pension and invalid insurance
Contribution for health insurance
Contribution for unemployment insurance
Employees
contributions (%)
17.0
12.5
1.5
Employers
contributions (%)
6.0
4.0
0.5
The base for calculation of social security contributions is the gross salary.
In the Federation of Bosnia and Herzegovina, the employer also pays 0.5% of
contribution for protection from natural and other disasters, as well as 0.5% of the water
protection charge, calculated on net salary.
Personal income tax (PIT) of 10% and social security contributions have to be calculated
and withheld by an employer with the salary payment.
RS social security contributions
In Republika Srpska, the following rates of mandatory social security contributions have
to be applied:
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Type of contribution
Contribution for pension and invalid insurance
Contribution for health insurance
Contribution for unemployment insurance
Contribution for child protection
% of gross salary
18.5
12.0
1.0
1.5
In Republika Srpska, mandatory social security contributions are calculated on gross

salary and have to be withheld by the employer, as an income payer.
BD social security contributions
Persons who are working in Brko District can opt to which fund of pension insurance,
either the fund of Republika Srpska or fund of the Federation of Bosnia and
Herzegovina, they would like to pay pension and invalid insurance contributions.
Health insurance contributions are calculated in the amount of 12% on gross salary.
Other taxes
There are several other taxes introduced at the entity, cantonal, and municipality level.
The duties differentiate based on company location, business size, and type of business.
FBiH other taxes
FBiH other taxes include the communal tax, fire prevention contribution, tourist
community contribution, forestry contribution fee, Foreign Trade Chamber of Bosnia
and Herzegovina duty, Chamber of Commerce FBiH duty, and administrative stamp
duties.
RS other taxes
RS other taxes include the special republic tax, communal tax, forestry contribution fee,
fire prevention contribution, Foreign Trade Chamber of Bosnia and Herzegovina duty,
Chamber of Commerce RS duty, and administrative stamp duties.
BD other taxes
BD other taxes include the communal tax, fire prevention contribution, forestry
contribution fee, Foreign Trade Chamber of Bosnia and Herzegovina duty, and
administrative stamp duties.
Branch income
Representative offices of foreign companies can be registered in all three administrative
units.
A branch of a foreign legal entity can only be registered in Republika Srpska. The tax
treatment of the branch of a foreign legal entity is still quite unclear from the local
perspective, so we recommend contacting a tax and accounting specialist.
Amendments to the Company Law of the Federation of Bosnia and Herzegovina
introduced the possibility for foreign companies to establish one or more branch offices.
However, registration of a branch office of a foreign legal entity is still not enabled in
practice.
BD regulations do not allow registration of branch of a foreign legal entity.
237

Taxable profit is profit determined by adjusting the accounting profit as stated in the
profit and loss statement and determined in accordance with International Financial
Reporting Standards/International Accounting Standards (IFRS/IAS) and accounting
legislation, in accordance with the provisions of the CIT law.
FBiH income
Income for assessment of taxable profit in the Federation of Bosnia and Herzegovina is
income from the sales of products, services, goods, and materials, as well as financial,
extraordinary, and other income calculated in the profit and loss balance in accordance
with accounting regulations and IFRS/IAS.
Income on the basis of collected written-off debt, in the event that it was included
in income in a previous period and was not subject to tax allowable or recognised
expenditure, shall not be included in the tax base.
FBiH inventory valuation
Expenses of production in accordance with accounting regulations and IFRS/IAS shall

be recognised in the value of stocks of unfinished production, semi products, and
finished products for the calculation of taxable profit.
The inventory is valued by using the average price method.
FBiH capital gains
The taxable base shall include profit from liquidation and capital gain from the
balancesheet.
FBiH dividend income
Dividends realised based on participation in the capital of other taxpayers shall not
be included in the tax base. Shares in the profit of a business association will be
considereddividends.
FBiH interest income
Interest income is generally included in the taxable base. The exception, as per FBiH
government decision, is for interest income realised from state bonds issued for war
claims, which should not be included in the taxable base (the CIT law does not explicitly
allow for this, which may be lead to discussion with the tax authority).
FBiH foreign income
The Federation of Bosnia and Herzegovina taxes resident corporations on a worldwide

basis. There are no deferral or anti-deferral provisions in the Federation of Bosnia and
Herzegovina.
RS income
Taxable revenue for the purpose of computing the tax base in Republika Srpska includes
all revenue (domestic and foreign) from whatever source derived, whether in cash or in
kind or whether related or unrelated to the legal persons economic activity.
In the event of revenue received in the form of property (other than cash) or services,
the amount of revenue is equal to the market price of the property or servicesreceived.
RS inventory valuation
Inventory includes goods used for resale, final goods produced by the taxpayer, semifinal goods used for further production, as well as main and auxiliary materials for
production.
238

Purchase value of inventories at the beginning and end of a fiscal year has to be
expressed using the same method for determination of purchase value of inventories.
The purchase value of inventories can be determined by using the first in first out (FIFO)
method or the weighted average cost method.
RS capital gains
Capital gain is realised through the sale or other type of transfer of capital or investment
assets and represents a difference between the sales price and adjusted base of an asset.
The sales price is the contracted price (i.e. the market price established by the competent
tax authority in case it finds the contracted price to be lower than the marketprice).
Capital gains or losses realised during the fiscal year can be offset, and the realised net
gain or loss is added or subtracted from the taxable base, if they are not already included
in the income or expense.
RS dividend income
Income from dividends is not included in the taxable base.
RS interest income
Interest income is generally included in the taxable base.

Income from securities issued by or guaranteed by the state authority, Central Bank BiH,
or local authority, as well as interest income from bank deposits, is excluded from the
taxable base.
RS foreign income
Republika Srpska taxes resident corporations on a worldwide basis. There are no

deferral or anti-deferral provisions in Republika Srpska.
BD income
Taxable income in Brko District includes all income from any source (domestic or
foreign), whether in cash or in kind, independent of the relationship to the business
activity of the legal person.
BD inventory valuation
The purchase value of inventories can be determined by using the first in first out (FIFO)
method or the average cost method.
BD capital gains
Capital gain is realised by sale or transfer of capital and investment goods and represents
positive difference between the sales price and adjusted property base.
Capital gains or losses realised during the fiscal year can be offset, and the realised net
gain or loss added or subtracted from the taxable base, if they are not already included
in the income or expense.
BD dividend income
Income from dividends is not included in the taxable base.
BD interest income
Income from securities issued by or guaranteed by the state authority, Central Bank BiH,
or local authority is excluded from the taxable base.
BD foreign income
Brko District taxes resident corporations on a worldwide basis. There are no deferral or
anti-deferral provisions in Brko District.
239

Deductions
FBiH deductions
Expenditures are deductible from revenue in computing the FBiH tax base if the
expenditures directly relate to the realised revenue.
FBiH depreciation
Depreciation cost is deductible only if it relates to the property subject to depreciation

and being used.
Depreciation of fixed assets is deductible up to the amount established by proportionate
application of the highest annual depreciation rates using the linear method, prescribed
by the FBiH government, as follows:
Assets
Buildings, except:
Management, administration, office, and other buildings for providing service activities
Apartment houses, hotels, restaurants
Roads, communal objects, upper railway rails machine
Equipment, vehicles, mechanicals except:
Equipment for water management, water-supply, and canalisation
Computers and equipment for environment protection
Crops
Livestock units
Intangible non-current assets
Rate(%)
10
3
14.3
14.3
20
14.3
33.3
14.4
40
20
Property being depreciated with a value of less than BAM 1,000 may be fully deducted in
the purchase year, on condition that that the property was put in service.
The purchase value of computer hardware and software may be deducted fully in the
year the purchase was made.
Depreciated assets, once depreciated, shall not be re-included in the depreciation
calculation for the purposes of the tax balance.
Depreciation is allowed for increases in the value of fixed assets due to revalorisation
in accordance with IFRS/IAS, up to the amount of calculated depreciation on the
revalorisation base and by using the proportion method prescribed by law.
FBiH goodwill
Amortisation of goodwill is not tax deductible.
FBiH start-up expenses
Start-up expenses are tax deductible if the expenses occurred, were necessary and
related to the registered company, and if original documentation with regard to those
expenses are available for inspection.
FBiH interest expenses
Interest expense is generally tax deductible, except for interest that is not calculated
at arms length and interest on taxes, social security contributions, and other public
revenue.
FBiH bad debt
The expenses occurring based on the write-off of doubtful debts are deductible. Debts
are considered doubtful if one of the following is fulfilled:
240

The debts have not been collected within 12 months from due date.
The taxpayer has started court procedures in regard to the receivable or started the
enforced collection procedure.
The receivable is registered in the bankruptcy procedure.
Agreement has been reached with the debtor in the bankruptcy or liquidation
procedure.
FBiH charitable contributions
Costs of humanitarian, cultural, educational, scientific, and sports purposes (except

professional sports) are deductible in the amount of up to 3% of total income.
FBiH tax reserves
Tax-deductible expenditures include expenditures to set up reserves for the following:

Severance pay paid up to the prescribed amount.

Expenditures of natural resources renewal.
Expenditures in guaranteed time frames.
Initiated court procedures.
Potential credit losses of banks and microcredit organisations.
FBiH fines and penalties
Fines and penalties are not tax deductible.
FBiH taxes
Taxes are generally tax deductible expenses, except for paid CIT.
FBiH other significant items
Representation costs pertaining to business activity are deductible in the amount of 30%
of representation costs.
Expenses of membership fees to the chambers are deductible in the amount not
exceeding 0.1% of total income, with the exception of membership fees regulated by the
law.
Expenses based on sponsorship are deductible in the amount of 2% of total income.
FBiH net operating losses
Tax losses may be offset against profits in a future tax period, not exceeding five years.
Tax losses are utilised on a first in first out (FIFO) basis.
Tax losses cannot be carried back.
FBiH payments to foreign affiliates
Payments to foreign affiliates are generally allowed if they relate to realised revenue.
RS deductions
Expenditures are deductible from revenue in computing the RS tax base if the
RS depreciation
Depreciation deductions are allowed only with respect to depreciable assets that are
being used.
A depreciable asset is any tangible or intangible asset that is held for use in the
production or supply of goods and services, for rental to others, or for administrative
purposes. Land or any other asset that does not decrease in value through wear and tear
or obsolescence is not considered a depreciable asset.
241

Assets are depreciated using the linear method of depreciation, except for machines and
equipment, which can be depreciated with acceleration (first year at 40%, second year
at 30%, and third year at 30%). The CIT Rulebook prescribes a wide range of accepted
depreciation rates, depending on type of assets, ranging from 1% to 50% annually.
RS goodwill
RS start-up expenses
RS interest expenses
Interest on loans used for business purposes are tax deductible. The exceptions are
interest that is not at arms length, interest on loans for private use, and interest on
overdue tax payments.
RS bad debts and tax reserves
A legal person using the accrual form of accounting is allowed a deduction with respect
to bad debts and reserves.
Legal persons, other than banks, authorised credit institutions, or insurance companies,
are entitled to a bad debt deduction that arose in connection with a sale of goods or
services but only if the revenue from the sale was previously included in the tax base of
the legal person.
A loan or trade receivable is considered to be a bad debt only if the receivable has not
been collected within 12 months from the due date and
the taxpayer has started court litigation for the receivables or if enforced collection
procedure is initiated
the receivables are registered in the bankruptcy procedure of the debtor, or
an agreement has been reached with the debtor who is not a physical or related
person in the bankruptcy or liquidation procedure.
In the case of a bank or other authorised credit institution, a deduction is allowed for
increases in the reserve account for customary losses due to unpaid loans, and the
amount may not exceed 20% of the tax base.
In the case of an insurance or reinsurance company, a deduction is allowed for increases
in reserves as registered in accounting documents and as authorised according to
applicable law. For insurance contracts pertaining to reinsurance, reserves are to be
reduced so that they cover only part of the risk remaining with the insurer, and the
The tax savings resulting from a reduction or cancellation of any reserve that is collected
later on will be included in taxable revenue at the moment of collection in accordance
with this law.
RS charitable contributions
Contributions to public institutions and humanitarian, cultural, and educational

organisations are deductible in an amount not exceeding 3% of the fiscal years total
revenue. Any excess contribution may be carried forward three years.
RS fines and penalties

242

RS taxes
RS other significant items
Expenditures that are recognised and deductible from revenue also include the
following:
30% of the cost of entertainment, meals, and amusements related to the legal
persons economic activity.
Sponsorship expenses in an amount not exceeding 2% of the fiscal years
totalrevenue.
Scholarships to students in an amount of up to 75% of average monthly net salary per
employee in Republika Srpska in accordance with the latest published data from the
body in charge of statistics.
RS net operating losses
Losses may be carried forward and offset against income in the following five years. Tax
losses are utilised on a FIFO basis.
RS payments to foreign affiliates
Payments to foreign affiliates are generally allowed if they relate to realised revenue.
BD deductions
Expenditures are deductible from revenue in computing the BD tax base if the
BD depreciation
Depreciation deductions are allowed only with respect to depreciable assets that are
being used.
A depreciable asset is any tangible or intangible asset that is held for use in the
production or supply of goods and services, for rental to others, or for administrative
purposes. Land or any other asset that does not decrease in value through wear and tear
or obsolescence is not considered a depreciable asset.
Assets are depreciated using the linear method of depreciation, except for machines and
equipment, which can be depreciated with acceleration (first year at 40%, second year
at 30%, and third year at 30%). The CIT Rulebook prescribes a wide range of accepted
depreciation rates, depending on type of assets.
The calculation of depreciation for newly purchased property starts the following month
on the day when it was put to use. The calculation of depreciation for newly constructed
buildings starts from the first day of the following year in which it was put to use.
BD goodwill
BD start-up expenses
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BD interest expense
Interest on loans used for business purposes are tax deductible. The exceptions are
interest that is not at arms length, interest on loans for private use, and interest on
overdue tax payments.
BD bad debts and tax reserves
Legal persons, other than banks, authorised credit institutions, or insurance companies,
shall be entitled to a bad debt deduction that arose in connection with a sale of goods or
services but only if the revenue from the sale was previously included in the tax base of
the legal person. For this purpose, a credit or trade receivable is considered a bad debt
only if one of the following is true:
It is more than 12 months past the due date for payment of the invoiced receivable
and the creditor has sued for the receivables or an enforced collection procedure is
initiated due to receivables.
The receivables are registered in the bankruptcy procedure of the debtor or an
agreement has been reached with the debtor who is not a physical or related person
in the bankruptcy or liquidation procedure.
In the case of a bank or other authorised credit institution, a deduction is allowed for
increases in the reserve account for customary losses due to unpaid loans, and the
In the case of an insurance or reinsurance company, a deduction is allowed for increases
in reserves as registered in accounting documents and as authorised according to
applicable law. For insurance contracts pertaining to reinsurance, reserves are to be
reduced so that they cover only part of the risk remaining with the insurer, and the
BD charitable contributions
Contributions to public institutions and humanitarian, cultural, and educational

organisations are deductible in an amount not exceeding 3% of the fiscal years total
revenue.
BD fines and penalties
BD taxes
BD other significant items
Expenditures that are recognised and deductible from revenue also include the
following:
30% of the cost of entertainment related to the legal persons economic activity.
Awards to employees, up to the prescribed amount.
Costs of business trips, meal allowance, transportation, and holiday allowance, up to
the prescribed amount.
Sponsorship expenses in an amount not exceeding 2% of the fiscal years
totalrevenue.
Scholarships to students in an amount up to 75% of average monthly net salary in
Brko District.
Committee membership fees, up to 0.2% of total revenue in the tax year.
Expenses for research and development (R&D) in accordance with the Rulebook.
244

BD net operating losses
Losses may be carried forward and offset against income in the following five years. Tax
losses are utilised on a FIFO basis.
BD payments to foreign affiliates
Payment to foreign affiliates is generally allowed if it relates to realised revenue.
Group taxation
FBiH group taxation
A business association has the right to request tax consolidation on the condition that all
businesses in the group are residents of the Federation of Bosnia and Herzegovina.
A headquarters company and its branches may form a business association when there is
direct or indirect control between them with no less than 90% share.
A request for tax consolidation must be filed to the authorised branch office of the tax
authorities by a headquarters company.
Each group member is required to file its tax balance, and the headquarters of the
business association may file a consolidated tax balance for the group.
The consolidated tax balance may offset losses of one or more businesses against the
profit of other businesses in the association.
Individual group members are liable for the tax calculated on the consolidated balance
proportionately to the profit from the individual tax balance, and the headquarters is the
payer of the tax calculated on the consolidated balance.
Once approved, tax consolidation shall be applied for the consecutive period of no less
than five years.
When one, several, or all the businesses in the association later opt for individual
taxation, all group members shall be obligated to pay the difference proportionately on
behalf of the tax privilege they have used.
RS group taxation
An affiliated group of legal persons located within Republika Srpska may elect to file a
consolidated annual tax declaration.
An affiliated group of legal persons is a group of one or more legal entities from
Republika Srpska that are connected through the ownership of stock with a common
parent, provided that the common parent owns at least 80% of the stock in a legal
person that is included in the affiliated group. If the common parent does not own at
least 80% of the stock in a legal person that is included in the affiliated group, then the
parent may file a consolidated tax declaration if one or more other legal persons in the
affiliated group own at least 80% of the stock in such legal person.
BD group taxation
An affiliated group of legal persons located within Brko District may elect to file a
consolidated annual tax declaration.
An affiliated group of legal persons is a group of one or more legal entities from Brko
District that are connected through the ownership of stock with a common parent,
245

provided that the common parent owns at least 80% of the stock in a legal person that is
included in the affiliated group.
Transfer pricing
Transfer pricing requirements are imposed at the entity level. The Federation of Bosnia
and Herzegovina, Republika Srpska, and Brko District have different regulations in
place, including different rules in regard to applicable methods, related parties, and
documentation. The regulations in place do not differ if the transactions are within one
entity, cross-border, or international. Basically, this means that all transactions can fall
under the transfer pricing scope.
With Bosnia and Herzegovina not being an EU or an OECD member, the local legislation
does not have the same requirements with respect to transfer pricing documentation as
in EU countries nor does the legislation refer to the OECD guidelines.
FBiH related parties
In the Federation of Bosnia and Herzegovina, a related party is considered to be an

individual or legal person who has the possibility of control or significant influence on
the business decisions of the taxpayer. Owning more than half or individually the most
stocks or shares in a company is considered to be enabled control.
Significant influence is considered to be mutually high sales turnover, technical
dependence, or otherwise gained control over the management.
FBiH prescribed methods
The FBiH CIT law recognises only two methods:

Comparable uncontrolled price (CUP) method (primary method).
Cost plus method.
RS and BD related parties
As per the applicable RS and BD legislation, related parties of a legal person are
considered to be physical or legal persons if those persons possess more than 10% of
active shares with voting rights.
A legal person can be a related party if it possesses more than 10% active shares in the
other person indirectly or directly. Indirect ownership is considered to be:
If a legal person possesses more than 10% of a dependent company, and that
dependent company possesses more than 10% in the other legal person.
If both legal persons have a common shareholder who possesses more than 10%
active shares with voting rights in both legal persons.
RS and BD prescribed methods
The RS and BD regulations prescribe the following five methods that can be used in
order to establish whether the prices are in accordance with the arms-length principle:

CUP method (primary method).

Cost plus method.
Profit split method.
Transactional net margin method.
Thin capitalisation
There are no thin capitalisation rules in Bosnia and Herzegovina.
246

FBiH tax incentives
FBiH foreign tax credit
When a taxpayer generates income or profit through business activities outside of the
Federation of Bosnia and Herzegovina (directly or through a business unit) and pays the
profit tax on such activities, the tax paid abroad shall be credited, up to the amount of
the profit tax that would have been paid for the income or profit generated by the same
activities in the Federation of Bosnia and Herzegovina.
FBiH investment incentive
A taxpayer who invested in production within the territory of the Federation of Bosnia
and Herzegovina for five consecutive years for a minimum fee of BAM 20 million will be
relieved from taxation for a period of five years, starting with the first year in which it
has invested at least BAM 4 million.
FBiH special needs employment incentive
A taxpayer who employs more than 50% of handicap or special needs individuals within
its company for a period of time longer than one year is relieved from CIT for the year in
which more than 50% of handicap or special needs individuals are employed within the
company.
FBiH export incentive
A taxpayer who realises more than 30% of annual income by export will be relieved from
CIT for that year.
RS tax incentives
RS foreign tax credit
If a legal entity from Republika Srpska obtains revenue from a foreign state and the
revenue is taxed both in Republika Srpska and in the foreign state, then the tax paid to
the foreign state, whether paid directly or withheld and remitted by another person, is
to be credited from RS CIT, unless such legal entity from Republika Srpska elects to treat
the foreign tax as a deductible expenditure in determining the fiscal year tax base.
RS investment incentive for production companies
For a taxpayer who invests in property, plant, and equipment (PPE) for performing its
own registered business activity in the territory of Republika Srpska, a deduction is
allowed for the amount of the investment. Only companies registered for production
activity in accordance with special Ministry decision can use this tax incentive.
If the taxpayer disposes of the PPE within three years of the year for which the tax
incentive was used, the taxpayer will have to pay the additional tax as if they never used
the incentive, as well as penalty interest for late payments.
RS employment incentive
For a taxpayer who employs 30 new employees (which were registered in the RS
unemployment agency) for an indefinite period of time during the tax period, a
deduction is allowed for the paid personal income tax and social security contributions
for those employees.
If the taxpayer lets go of employees within three years for whom the tax incentive was
used, the taxpayer will have to pay the additional tax as if they never used the incentive,
as well as penalty interest for late payments.
247

BD tax incentives
BD foreign tax credit
If a legal entity from Brko District obtains revenue from a foreign state and the revenue
is taxed both in Brko District and in the foreign state, then the tax paid to the foreign
state, whether paid directly or withheld and remitted by another person, is to be credited
from the BD CIT, unless such legal entity from Brko District elects to treat the foreign
tax as a deductible expenditure in determining the fiscal year tax base.
BD investment incentive
For a taxpayer who invests in machines and equipment for performing its own registered
business activity on the territory of Brko District, a deduction is allowed for the amount
of the investment.
BD employment incentive
For a taxpayer who employs new employees for an indefinite period of time during the
tax period, a second deduction is allowed for the total amount of paid gross salaries for
the new employees.
Withholding taxes
FBiH WHT
WHT in the Federation of Bosnia and Herzegovina is calculated on non-resident income

generated throughout the territory of the Federation of Bosnia and Herzegovina.
The base for calculation of WHT is the gross amount paid by a resident of the Federation
of Bosnia and Herzegovina to a non-resident for dividends, interest, royalties and
other intellectual property rights, compensations for market research, tax consulting
services, auditors services, fun and sports events, premium insurance for insurance or
reinsurance of risk in the Federation of Bosnia and Herzegovina, telecommunication
services between the Federation of Bosnia and Herzegovina and other countries, as
well as all other services performed on the territory of the Federation of Bosnia and
Herzegovina.
WHT shall be paid at the rate of 5% on dividend payments and 10% for interest,
royalties, and other, if not reduced under a tax treaty.
RS WHT
Any legal or physical person from Republika Srpska, as well as any non-resident legal or
physical person with PE in Republika Srpska, who pays revenue to a non-resident legal
person is to withhold tax from the total payment of revenue and is to remit the withheld
tax to the Public Revenues Account of Republika Srpska.
The WHT applies to the following revenue payments, regardless of whether the revenue
is received in Republika Srpska or abroad:
Payment of interest or its functional equivalent under financial instruments and
arrangements from a resident.
Payment for entertainment or sporting activities carried out in Republika Srpska,
regardless of whether the revenue is received by the entertainer or sportsman or by
another person.
Payment for the performance of management, consulting, financial, technical, or
administrative services, if the revenue is from a resident or if the revenue is paid by or
included in the books and records of a PE in Republika Srpska or if such payment is
deducted for the purpose of determining the tax base.
248

Payment in the form of insurance premiums for the insuring or reinsuring of risks in
Republika Srpska.
Payment for telecommunication services between Republika Srpska and a foreign
state.
Payment of royalties.
Payment of lease for movable property.
Payment for the performance of other services in Republika Srpska.
WHT is not due on dividend payments.
The WHT rate in Republika Srpska is 10%.
BD WHT
Any legal or physical person from Brko District, as well as any non-resident legal or
physical person with PE in Brko District, who pays revenue to a non-resident legal
person is to withhold tax from the total payment of revenue and is to remit the withheld
tax to the Public Revenues Account of Brko District.
The WHT applies to the following revenue payments, regardless of whether the revenue
is received in Brko District or abroad:
Payment of interest or its functional equivalent under financial instruments and
arrangements from a resident.
Payment for entertainment or sporting activities carried out in Brko District,
regardless of whether the revenue is received by the entertainer or sportsman or by
another person.
Payment for the performance of management, consulting, financial, technical, or
administrative services, if the revenue is from a resident or if the revenue is paid by
or included in the books and records of a PE in Brko District or if such payment is
deducted for the purpose of determining the tax base.
Payment in the form of insurance premiums for the insuring or reinsuring of risks in
Brko District.
Payment for telecommunication services between Brko District and a foreign state.
Payment of royalties.
Payment of lease for movable property.
Payment for the performance of other services in Brko District.
WHT is not due on dividend payments.
The WHT rate in Brko District is 10%.
WHT rates based on available double taxation treaties (DTTs)

Recipient
Albania
Algeria
Austria
Azerbaijan
Belgium
China
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Dividends (%)
5/10 (1)
10
5/10 (1)
10
10/15 (1)
10
5/10 (1)
10
5
5/15 (1)
5/15 (1)
Interest (%)
10
10
5
10
15
10
10
10
0
0
15
Royalties (%)
10
12
5
10
10
10
10
10
10
10
15
249

Recipient
Finland
France
Germany
Greece
Hungary
Iran
Ireland
Italy
Jordan
Kuwait
Malaysia
Moldova
Netherlands
Norway
Pakistan
Poland
Qatar
Romania
Slovakia
Slovenia
Spain
Sri Lanka
Sweden
Turkey
United Kingdom
Dividends (%)
5/15 (1)
5/15 (1)
15
5/15 (1)
10
10
0
10
5/10 (1)
5
5/10 (2)
5/10 (1)
5/15 (1)
15
10
5/15 (1)
5/10 (2)
5
5/10 (1)
5/15 (1)
5/10 (1)
5/10 (2)
12.5
5/15 (1)
5/15 (1)
0/5/10 (3)
5/15 (1)
Interest (%)
0
0
0
10
0
10
0
10
10
5
10
10
0
0
20
10
7
7.5
10
0
7
7
10
0
10
10
10
Royalties (%)
10
0
10
10
10
15
0
10
10
10
8
10
10
10
15
10
7
10
10
10
5
7
10
0
10
10
10
Notes
1.
2.
3.
The lower rate applies if the beneficial owner is a company (other than a partnership) that directly
holds at least 25% of the capital of the company paying the dividends.
The lower rates apply if the beneficial owner is a company (other than a partnership) that directly
holds at least 10% of the capital of the company paying the dividends. The competent authorities of
the contracting state shall, by mutual agreement, settle the mode of application of these concessions.
Tax administration
FBiH tax administration
FBiH taxable period
The taxable period is considered to be the calendar month.
FBiH tax returns
An FBiH taxpayer is obligated to file correctly and accurately a completed tax

return (declaration) with the tax balance to the authorised branch office of the tax
administration by 31 March of the following year.
The deadline for submission of annual calculation of business results is 28 February of
the following year.
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FBiH payment of tax
A taxpayer shall pay FBiH CIT pursuant to the final tax declaration. CIT prepayments
are determined based on the tax return from the prior year and have to be paid monthly
until the last day of the month for the previous month.
FBiH tax audit process
The tax system is generally based on self-assessment; however, many large and midsize businesses are under continuous audit by the tax authority and the indirect tax
authorities. The audits may include the entire list of taxes for which the business is
liable. Smaller businesses with lower incomes are generally subject to audit on a random
basis.
FBiH statute of limitations
The statute of limitations is five years.
FBiH topics of focus for tax authorities
The tax authorities focus increasingly on transactions with related parties with respect
to transfer pricing and deductibility of expenses in general.
RS tax administration
RS taxable period
RS tax returns
The RS tax declaration for a tax year shall be filed no later than 90 days upon the end of
the tax year, and in case of a calendar year, no later than 31 March of the current year for
the previous year.
RS payment of tax
A taxpayer shall pay RS CIT pursuant to the final tax declaration. CIT prepayments are
determined based on the tax return from the prior year and have to be paid monthly
until the tenth day of the month for the previous month.
RS tax audit process
basis.
RS statute of limitations
RS topics of focus for tax authorities
BD tax administration
BD taxable period
BD tax returns
The BD tax declaration for a tax year shall be filed no later than 90 days upon the end of
the tax year, and in case of a calendar year, no later than 31 March of the current year for
the previous year.
251

BD payment of tax
A taxpayer shall pay BD CIT pursuant to the final tax declaration. CIT prepayments are
determined based on the tax return from the prior year and have to be paid monthly
until the tenth day of the month for the previous month.
BD tax audit process
basis.
BD statute of limitations
BD topics of focus for tax authorities
Additionally, the BD authority scrutinises allocation of expenses for bank branches
operating in the district, often decreasing or not allowing the allocated expenses of the
headquarters.
252
Botswana
PwC contact
Butler Phirie
Plot 50371
Fairground Office Park
Gaborone
Botswana
Tel: +267 395 2011
Botswana Unified Revenue Services (BURS) is moving to e-Services, and taxpayers are
encouraged to make payments using the Botswana Interbank Settlement System (BISS)
and register with BURS for e-Services. Currently, only value-added tax (VAT) returns
can be filed online.

Botswana has a source-based taxation system.
Corporate income tax (CIT) is charged at a single flat rate of 22%. Manufacturing
companies having the approval from the Minister of Finance for a special tax rate of
15%.
International Financial Services Centre (IFSC) profits
IFSC companies are taxed at a flat rate of 15% and will continue to be taxed at that rate
going forward. Companies must apply for a certificate to be classified as IFSC companies,
which deal only in specified services and only with non-residents.
Mining profits
Mining profits, other than profits from diamond mining, are taxed according to the
following formula:
Annual tax rate = 70 minus (1,500/x), where x is taxable income as a percentage of
gross income.
The tax rate shall not be less than the flat CIT rate of 22%.
Diamond mining
Diamond mining is usually taxed in terms of an agreement with the government of

Botswana.
Local income taxes
There are no local, state, or provincial government taxes on income in Botswana.
Corporate residence
If a companys registered office or place of incorporation is in Botswana or if the
company is managed and controlled in Botswana, then the company is considered a
resident of Botswana.
Botswana
253
Botswana
PE has been defined in the Income Tax Act only in the limited context of interest,
commercial royalty, and management or consultancy fee. However, PE is defined
in all the double taxation agreements (DTAs) that Botswana has entered into with
other contracting states. The definition of PE in the DTA follows the definition in
Convention on Income and Capital.
Other taxes
VAT is imposed on taxable supplies and the importation of goods into Botswana. The
standard VAT rate of 12% applies to all supplies that do not qualify for an exemption or
are not zero-rated.
Vocational training levy (VTL)
VTL is payable when submitting the VAT return by every taxpayer who is registered for
VAT. It is calculated as a percentage of turnover ranging from 0.2% to 0.05%, depending
on the turnover of the company.
Customs and excise duties
Customs and excise duties are charged on importation of goods (including currencies)
into or exported out of Botswana. The import duties may also include anti-dumping and
countervailing duties. No customs duties and excise duties are charged on trade between
Botswana and South Africa, Lesotho, Namibia, and Swaziland, as these five countries
constitute a Southern African Customs Union. In terms of the Botswana/Zimbabwe
Trade Agreement, goods originating from either of the trading partners are exempted
from payment of customs duties under the condition that the goods meet a minimum of
25% local content. Excise duty and local taxes, such as VAT, are due and payable where
applicable.
Property taxes
There are no property taxes in Botswana.
Capital transfer tax (CTT)
CTT is levied on the donee upon the transfer (by way of inheritance or gratuitous
disposal of property) of tangible or intangible, movable or immovable, property, at
12.5%.
Transfer duties on immovable property
Transfer duty is levied at 5% of the value of immovable freehold and leasehold property.
The first 200,000 Botswana pulas (BWP) of such value are exempt from transfer duty in
case of transfer to a Botswana citizen.
In the case of agricultural property, transfer duty is levied at the rate of 30% for a noncitizen. This duty is 5% in the case of a Botswana citizen.
Stamp duty
There is no stamp duty in Botswana.
Branch income
CIT payable on branch profits is 30%.
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Inventory valuation
Inventories are valued at cost less such amounts, if any, that the Commissioner General
believes are reasonable as representing the amount by which the value of such stock
has been diminished because of damage, deterioration, obsolescence, or other cause.
Although not expressly excluded by legislation, last in first out (LIFO) has not been
accepted in practice by the tax authorities.
Capital gains
Gains from disposal of specified capital assets (immovable property and marketable
securities, including shares in private companies) are included in taxable income in the
hands of the corporate taxpayer. Acquisition costs of immovable property are subject to
a 10% compound annual addition for inflation for the period from acquisition to 30 June
1982, and thereafter to an inflation addition based on the increase in the consumer price
index to the date of sale. For other gains, no inflation allowances are granted, but the
taxable gain is set at 75% of the total gain.
Currently, the sale of any shares, units, or debentures of a resident company is exempt
from tax under any of the following circumstances:
The resident company whose shares are being sold is a public company.
The shares, units, or debentures are traded on the Botswana Stock Exchange.
The company has released for trading 49% or more of its equity on the Botswana
Stock Exchange.
This exemption only applies if the shares, units, or debentures were held by the taxpayer
for a period of at least one year prior to the date of disposal.
The aggregate amount of capital losses is offset against the aggregate amount of
capital gains in the same tax year. Any excess of loss is deducted from aggregate gains
over losses accruing in the succeeding tax year only. Capital losses cannot, in any
circumstances, be deducted against other income.
Dividend income
Dividend income from local sources is not subject to tax.
Interest income
In the case of a resident company, interest income is included in gross income and taxed
at the CIT rate. In the case of a non-resident company, interest income is subject to
withholding tax (WHT), which constitutes a final tax.
Royalty income
Royalty income is included in gross income and taxed at the CIT rate. In the case of a
non-resident company, royalty income is subject to WHT, which constitutes a final tax.
Partnership income
Partnership income is taxed in the hands of the partners, in proportion to their share in
the partnership.
Foreign income
Resident corporations are not generally taxed on a worldwide income basis. However,
interest and dividend income from a foreign source is taxed in the hands of the resident
company on an accrual basis. Reliefis given for any WHT imposed on suchincome.
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Deductions
Annual and capital allowances available are as follows.
Companies other than mining companies
Annual taxation allowances for expenditures incurred on machinery and equipment

before 30 June 1982 can be claimed up to 100%. This allowance may be for any
proportion of previously unclaimed expenditures. For expenditures incurred on
machinery and equipment after 30 June 1982, annual allowances are granted,
calculated on cost by the straight-line method on the basis of the expected useful lives
of the individual assets. Guidelines are provided for expected useful lives of different
categories of assets, which vary from four to ten years. Book depreciation is not required
to conform to tax depreciation. The capital allowance claimable on a company motorcar
is restricted to a maximum of BWP 175,000.
An initial allowance of 25% of cost is granted on certain industrial buildings. All
industrial and commercial buildings (excluding residential properties) are granted a
2.5% annual allowance based on cost or, in the case of an industrial building on which
an initial allowance has been claimed, the original cost less the initial allowance.
Balancing allowances and charges are brought to account on the disposal of assets on
which allowances have been claimed. Where disposal value of an item of machinery
or equipment exceeds the difference between expenditures incurred on the asset and
allowances granted, the whole amount is taxable as corporate income or the balancing
charge can be offset against further additions of new equipment, thus providing rollover
relief. However, there is no rollover relief on motorcars except where the cars are used in
a car rental or taxi service business.
Mining companies
In ascertaining the business income for any tax year from a mining business, there
shall be deducted from business income an allowance, to be known as a mining capital
allowance, computed in accordance with 100% of the mining capital expenditure made
in the year in which such expenditure was incurred, with unlimited carryforward of
losses.
Goodwill
Amortisation of goodwill is not allowed as a tax deductible expense.
Start-up expenses
Start-up expenses are not specified in the law. However, pre-incorporation expenses
might be disallowed since, generally, expenses incurred when there is no income are not
allowed.
Interest expenses
Interest paid or accrued to a resident is deductible as an expense. Interest paid to a nonresident will be allowed as a deduction in the year where the relevant WHT on interest
has been remitted to the BURS.
Bad debt
Bad debts written off and specific provisions for bad debt are allowed as a deduction
when computing taxable income. General provisions are not allowed as a deduction.
Donation made to (i) any educational institution recommended by the Ministry of

Education or (ii) any sports clubs or sports associations recommended by the Ministry
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responsible for sports, and approved by the Commissioner General, shall be deducted
when arriving at taxable income, limited to 20% of the chargeable income.
Fines and penalties
Penalties and associated interest are not allowed as a deduction.
Taxes
Any taxes paid are specifically disallowed in computing a companys taxable income.
An allowance is granted for dwelling houses erected for employees by a business other
than a mining business. The amount of the allowance is the lower of cost or BWP 25,000
for each dwelling house constructed.
A deduction of 200% of the cost of an approved training expenditure is allowed.
Companies with shareholders having 5% or more of equity, either directly or indirectly,
are classified as close companies, and there are additional tax regulations in respect of
these shareholders.
Small companies, that is resident private companies whose gross income does not
exceed BWP 300,000, may elect that the company be taxed as a partnership.
Expenses incurred by the company for having its shares listed on the Botswana Stock
Exchange are deductible in determining the chargeable income of the company.
Losses may be carried forward for five years, with the exception of farming, mining,
and prospecting operations, for which there is no time limit. There is no allowance for
carrybacks.
Royalties, interest, and service fees paid to foreign affiliates are generally deductible,
provided such amounts are at arms length and WHT is paid.
In the case of a mining company, head office expenses allowed as a deduction in
ascertaining gross revenue from mineral licence shall be limited to 1.5% of gross income
for the year of assessment, and any excess of such expense above the limit shall be
treated and taxed as adividend.
Where the interest rate on a loan made by a foreign-based mining company to an
affiliate mining company resident in Botswana is considered by the commissioner to be
in excess of the market rate, such excess will be disallowed as a deduction and taxed as
adividend.
Group taxation
There are no concessions for group taxation, other than for wholly-owned subsidiary
companies of the Botswana Development Corporation Limited (BDC).
BDC was established in 1970 to be the countrys main agency for commercial and
industrial development. The government of Botswana owns 100% of the issued share
capital of the Corporation.
Where in any tax year a wholly owned subsidiary of BDC has incurred any assessed
loss, such member may, during the current tax year, by notice in writing to the
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Commissioner General, elect that the whole or part of such assessed loss shall be
deducted in ascertaining the chargeable income of one or more of the other wholly
owned subsidiaries.
Transfer pricing
Botswana currently does not have any transfer pricing regulations, so transfer pricing is
currently monitored through the anti-avoidance provisions contained in Section 36 of
the Income Tax Act.
The arms-length principle should always be followed in transactions between related
parties. If such transactions have created rights or obligations that would not normally
be created between independent persons dealing at arms length, the Commissioner
General may determine the liability in such manner as deemed appropriate. However,
related party balances arising out of normal trading transactions (e.g. credit purchases
with a 30 day credit period) would not be subjected to these provisions.
Interest (at prime rate) should be charged/provided on loans from shareholders/
amounts due to related parties. If no interest has been charged/provided, in terms of the
close company legislation, the BURS may deem interest at the prime rate prevailing at
the beginning of the tax year, as income in the hands of the lender without allowing the
corresponding interest as a charge against the profits of the borrower. The borrower is
obligated to deduct WHT at the prevailing rate on the deemed interest.
Amounts due from shareholders/directors may be deemed as dividend income and shall
form part of the taxable income of the borrower, in which event these will be taxed at
the prevailing dividend WHT rate in the hands of the borrower.
Thin capitalisation
Thin capitalisation rules can be found in the Income Tax Act, but only in relation to
mining companies and IFSC companies.
Where a foreign controlled resident mining company has a foreign debt-to-equity ratio
in excess of 3:1 at any time during the year of assessment, the amount of interest paid
by the resident company during that year on that part of the debt that exceeds the ratio
shall be disallowed as a deduction, and the amount so disallowed shall be treated and
taxed as a dividend.
In case of an IFSC company, where an amount of foreign debt interest is allowable as a
deduction in a particular tax year and, at any time during that tax year, the total foreign
debt exceeds the foreign equity product for that year, then the amount of foreign debt
interest ascertained in accordance with the following formula will be disallowed:
I x (A/B) x (C/365)
A = amount of the excess of the total foreign debt over the foreign equity product.
B = the total foreign debt.
C = the number of days in that tax year during which the total foreign debt exceeded the
foreign equity product by that amount.
I = the foreign debt interest.
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To encourage investment in Botswana, extra tax relief on revenue or capital accounts
will be granted for specific business development projects if the government is satisfied
that such projects are beneficial to Botswana.
Foreign tax credit
A credit for the foreign WHT payable is permitted under domestic law. The credit, which
is offset against the tax charged in Botswana, shall be the lessor of (i) the tax payable in
the foreign country or (ii) the tax charged under the Botswana Income Tax Act on such
amount.
Withholding taxes
WHT, at the following rates, must be deducted from payments to residents and nonresidents unless a DTA exists.
Residents
Interest
Dividends
Payments due under certain construction contracts
WHT rate (%)

10
7.5
3
Non-residents
Interest
Dividends
Payments due under certain construction contracts
Payments for royalties, management, or consultancy fees
Payments for entertainment fees
WHT rate (%)

15
7.5
3
15
10
All rent and commission or brokerage payments to residents or non-residents are subject
to WHT at 5% and 10%, respectively, where the total payment is BWP 36,000 per annum
or more or the monthly payment is BWP 3,000 or more.
Botswana has tax agreements with the following countries, which provide for WHT at
the rates shown.
Recipient
Barbados
France
India
Mauritius
Namibia
Russia
Seychelles
South Africa
Sweden
United Kingdom
Zambia
Zimbabwe
Dividends (%)
5/7.5 (1)
5/7.5 (1)
7.5
5/7.5 (1)
7.5
5/7.5 (1)
5/7.5 (1)
7.5
7.5
5/7.5 (1)
5/7 (1)
5/7.5 (1)
Interest (%)
10
10
10
12
10
10
7.5
10
15
10
10
10
Management and
Royalties (%) consultancy fees (%)
10
10
10
7.5
10
10
12.5
15
10
15
10
10
10
10
10
10
15
15
10
7.5
10
10
10
10
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Notes
1.
5% rate of WHT is applicable if the beneficial shareholder is a company resident in the DTA country
and holds at least 25% of the share capital in the company paying dividends. Otherwise, the other
rate applies.
Tax administration
Taxable period
Botswana has a fiscal year ending on 30 June. However, a business may select its own
accounting year, which may end on a date other than 30 June. This accounting year is
accepted for the computation of the companys taxable income.
Tax returns
Botswana requires self-assessment, which means that the return submitted constitutes
the assessment. The system is one that requires all taxpayers to file tax returns in
standard format (providing information relating to taxable income earned) within four
months after the financial year-end of the company.
Payment of tax
Under the self-assessment tax procedures, if the tax payable for a tax year exceeds BWP
50,000, then estimated tax is required to be paid in equal quarterly instalments over
the period of 12 months ending on the companys financial year-end date. Accordingly,
the first quarterly payment should be made within three months of the beginning of the
financial year and the balance quarterly payments at three monthly intervals thereafter.
The final (balance) payment, if any, is to be made within four months from the end of
the financial year, when submitting the return.
Where the tax is less than BWP 50,000, then the tax is payable within four months from
the companys financial year-end date.
Tax audit process
There is no prescribed audit process, and an audit can be initiated by any factor as
determined by the BURS. The audit or inspection will commence with a request from
the BURS for the taxpayer to make available any such records or information as may be
required.
The assessment should be made any time prior to the expiry of four years after the end
of the tax year to which it relates to. Tax returns submitted that have been assessed may
not be reopened after a period of four years from date of assessment by the BURS.
The BURS is focusing in establishing and strengthening the Large Tax Payers Unit,
minimising the tax gap, and introducing electronic filing.
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Brazil
PwC contact
Carlos Iacia
Centro Empresarial Agua Branca
Avenida Francisco Matarazzo 1400
Torre Torino
05001-903 So Paulo, SP
Brazil
Tel: +55 11 3674 3544
Secretary of Finance defines spread fortransfer pricingrules on
interest payments
While Law No. 12,766, issued on 27 December 2012, changed the deductibility criteria
that previously existed for interest payments, basing the new ones on the market rate
of sovereign bonds in some cases and on the six-month London Interbank Offered Rate
(LIBOR) in others, said law provided for an additional spread that would need to be
defined by the Secretary of Finance.
On 2 August 2013, Ordinance No. 427 was published with the objective of defining
this additional spread, which was set at 3.5%, applicable to all remittances of interest
payments to non-resident related parties carried out based on loans signed asof 1
January 2013.
On the other hand, the spread applicable to the receipt of the minimum amount of
financial revenue by Brazilian residents, for corporate income tax (IRPJ) computation
purposes, under Brazilian transfer pricing rules, was set at 2.5% for agreements signed
asof 2 August 2013. Please note that the applicable rate for such operations carried out
from 1 January 2013 until this date was set to zero.
Attorney General of the National Treasury issues opinion so as to apply

treaty provisions regarding the payment of service fees
On 6 December 2013, the National Treasurys Attorney Generals Office (PGFN)
published Opinion No. 2363/2013, through which it formalised a new understanding
regarding the incidence of withholding income tax on remittances to non-residents
regarding the payment of services rendered without transfer of technology.
Until publication of the new opinion, both the PGFN and the Brazilian Federal Revenue
(RFB), through Normative Act (ADN) No. 1/2000, understood that such payments
should not be classified under Article 7, which provides that business profits of a resident
company should only be taxed in the residence state, but rather under Article 21 or 22
(Other Income), in which case such income would also be subject to withholding tax
(IRRF) at 15% in Brazil.
This understanding was strongly criticised by taxpayers and scholars for its incorrect
interpretation of both Articles 7 and 21/22. Further, in May 2012, the Superior Court
of Justice (STJ) unanimously decided against the levy of IRRF on service fees remitted
by a Brazilian source to foreign service providers located in countries with which
Brazil has signed double tax treaties (DTTs). The Court held that the tax authorities
understanding of the term business profits was too narrow, and that it, in fact,
encompasses a companys main and ancillary activities, which would include income
received from the supply of services.
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In view of this, the PGFN issued its new Opinion on the matter, recognising that its
previous interpretation was incorrect and should be reassessed. The Opinion reflects
the recent STJ decision with a wider definition of the term business profits and urges
the Brazilian tax authorities to review their official position outlined in ADN 1/2000.
Accordingly, remittances to non-residents as payment for services provided should be
considered as forming part of the non-resident companys profits and, as such, should be
taxable only in the residence state, in accordance with a correct interpretation of Article
7.
However, the PGFNs opinion emphasised that this understanding is only applicable to
cases where the services provided do not include the transfer of technology and where
no other treaty provisions exist, such as protocols establishing that technical services fall
under Article 12 (Royalties). In that case, Brazil would be allowed to levy IRRF at 15%
on such payment, pursuant to the wording of the treaties.
Brazilian Federal Revenue (RFB) broadens concept of technical services
On 7 March 2014, the RFB published Normative Instruction (NI) No. 1,455/2014, which,
among many other provisions, introduced an expanded concept of technical services.
Previous regulations defined technical services as any work or undertaking involving
specialised technical knowledge provided by independent professionals. Under the
new definition, technical services include not only those with specialised technical
knowledge, but also those involving administrative assistance, consulting services, as
well as resulting from automated structures (systems) with clear technological content.
This distinction is important and has significant impacts on the taxation of service fees
paid abroad, particularly to countries with which Brazil has signed DTTs. In fact, the
publication of this NI came amidst a change in the way in which the RFB classified
service fees paid to non-residents under DTTs. As reported in the previous edition,
a recently published Opinion by the National Treasurys Attorney Generals Office
urged the tax authorities to review their official position regarding the classification of
technical service fees, which should be regarded as business profits of the foreign entity
under Article 7 (and therefore taxable only in the country of residence), rather than
Article 21/22 (Other Income, in which case Brazil could also tax the income).
While the RFB accepted this new understanding, it relied on the fact that the majority
of DTTs signed by Brazil classify technical service and technical assistance as royalties
and allow Brazil to tax them as such under Article 12. In this sense, the inclusion of
administrative and consulting services in the definition of technical services by the RFB
could mean that many services previously not classified as royalties under DTTs now fall
under Article 12, thus being taxable in Brazil. Such new definition, however, is highly
questionable and is likely to generate significant debate in academic and professional
circles.
New calculation method for capital gains earned in Brazil by nonresidents
NI 1,455 also aims at changing the way in which capital gains earned in Brazil by nonresidents are determined with investments made originally in foreign currency. Capital
gain is defined by Brazilian law as the positive difference between the sales value and
the cost of acquisition.
Previous rules were not entirely clear with regards to whether the gain should be
calculated in Brazilian reais (BRL) or in a foreign currency (e.g. United States dollars
[USD]). It has been the taxpayers general understanding that where an investment is
originally made in US dollars, the capital gain should be calculated in the same currency
and not converted into Brazilian reais, as this would subject the capital gain (or loss) to
often severe exchange rate variations.
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However, the new rules introduced by NI 1,455 clearly provide that the sales value and
acquisition cost are to be converted into Brazilian reais, subjecting local investments
made in foreign currency by non-residents to undesirable exchange rate variations.
Conversion of Provisional Measure 627/2013 into law: How this affects

business and investments in Brazil
On 14 May 2014, the Provisional Measure 627/2013 (PM 627) was converted into Law
No. 12,973/2014. Among other provisions, the law revokes the Transitional Tax Regime
(RTT); provides new rules regarding the treatment of dividends, interest on net equity
(INE), and the amortisation of goodwill arising in connection with acquisitions; and
amends the rules regarding controlled foreign company (CFC) taxation.
The new law will apply from 1 January 2015; however, taxpayers may elect (irrevocably)
to apply the new law from 1 January 2014.
Background
By Law No. 11,638/2007, the Brazilian accounting rules were amended with the
objective to align Brazilian generally accepted accounting principles (GAAP) with
International Financial Reporting Standards (IFRS) from 1 January 2008.
To guarantee tax neutrality in the adoption of the new accounting criteria, the RTT was
introduced by Law No. 11,941/2009, being optional for the 2008 and 2009 calendar
years and mandatory from 1 January 2010.
In September 2013, the RFB issued NI 1,397, which provided that taxpayers should
maintain two separate sets of books, one set for accounting purposes and another
determined pursuant to the accounting principles in force up to 31 December 2007
(referred to herein as the Tax Balance Sheet). NI 1,397 also set out how certain
differences between the accounting and Tax Balance Sheet should be treated from a tax
perspective.
On 12 November 2013, the Executive Branch of the Brazilian government published PM
627, which revoked the RTT as well as amended a number of other aspects of the tax
law, which are discussed further below. During an extensive legislative approval process,
several amendments were made to the original version of PM 627 until its conversion
into Law No. 12,973/2014.
Outlined below are the key matters of interest for multinationals with investments in
Brazil.
Dividends and INE payments
According to the NI 1,397, any portion of dividends paid to a non-resident beneficiary

exceeding the amount calculated in accordance with the Tax Balance Sheet should be
subject to withholding income tax at 15% (or 25% if the beneficiary is located in a tax
haven). Similarly, any portion of INE paid that exceeds the INE amount calculated in
accordance with the Tax Balance Sheet should not be deductible for Brazilian income tax
purposes. These provisions gave rise to intense debate with respect to the legality of NI
1,397.
The new law revokes the RTT, removing the requirement that taxpayers need to
maintain separate tax books for dividends and INE purposes going forward.
Under the new law, a waiver has been granted for dividends derived from the portion of
profits generated between 1 January 2008 and 31 December 2013 at an amount higher
than the amount calculated based on the Tax Balance Sheet, in this case such payments
should not be subject to taxation. In the original version of PM 627, the waiver only
applied for dividends effectively paid until 12 November 2013 and where the election to
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apply the new law from 1 January 2014 was made. These limitations were removed by
the law.
In view of the above, it is possible to conclude that NI 1,397 will still need to be
considered for dividends based on profits accruing between 1 January 2014 and 31
December 2014, where the taxpayer has not made an election to adopt the new law from
1 January 2014. Thus, the same debate on the legality of NI 1,397 remains with respect
to the 2014 calendar year.
A waiver has also been granted for any portion of INE paid exceeding the amount
calculated in accordance with the Tax Balance Sheet, as the new law regulated that
the taxpayer has the option to use from 2008 onward the net equity determined based
on the new accounting principles for INE purposes. In PM 627, the waiver was only
available for taxpayers that elected to apply the new law from 1 January 2014; however,
this requirement was removed from the law.
Goodwill assessments and amortisation
Prior to the new law, where the cost of a share acquisition was higher than the net
equity value of the acquired company, the difference was typically booked by taxpayers
as goodwill, provided that its nature/economic reason was properly documented in an
appraisal report. Upon a merger between buyer and acquired company, the full amount
of goodwill allocated to future profitability was then amortised over a period of not less
than five years.
Under the new law, which is consistent with the current Brazilian accounting standards
(based on IFRS), the acquisition cost of investments must be segregated into:
i. the net equity of the acquired company
ii. the fair market value of the net assets, and
iii. the goodwill deriving from future profitability, which corresponds to the remaining
balance from items (i) and (ii).
Similar to the previous rules, upon a merger between buyer and acquired company
(downstream or upstream), the amount of goodwill can be amortised for tax purposes
over a period of not less than five years, provided certain conditions are complied with.
These conditions include the preparation of an independent appraisal report supporting
the value referred to in (ii) above, which will need to be filed with the RFB or with
the Register of Deeds and Documents, and that the transaction be carried out among
unrelated parties. In the original version of the PM 627, there was an additional
requirement that taxpayers maintain documentation demonstrating that the goodwill
did not arise from a transaction involving an exchange of shares. This additional
requirement has been removed from the law.
Taxpayers wishing to continue to apply the previous rules for goodwill amortisation
in relation to acquisitions made on or before 31 December 2014 will have until 31
December 2017 to complete the merger of the target and the acquiring entity. In the
original version of PM 627, taxpayers had until 31 December 2015 to complete the
merger.
Other general measures to regulate the tax impacts from the new Brazilian
accounting standards
The new law also contemplates other amendments to the general Brazilian tax law
regarding corporate income tax (IRPJ), social contribution on net income (CSLL) and
contributions on gross revenues (PIS and COFINS), which essentially aim to align
Brazilian tax rules with the Brazilian accounting standards (based on IFRS).
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The main issues specifically addressed by the new law include:
Fair value adjustments of capital subscriptions, mergers and acquisitions, and general
restructurings.
Present value adjustments.
Amortisation of intangibles.
Treatment of interest expenses and financial instruments.
Treatment of depreciation.
Stock options and share-based payments.
Impairment.
Leasing.
Concessional contracts for public services.
As a general comment, these changes provide that the legal and contractual nature
of the transactions must prevail for tax purposes, irrespective of its treatment for
accounting purposes. The law specifically provides and regulates conditions for tax
neutrality and tax deferral in connection with the Brazilian accounting standards
and the exceptions that may apply. In this context, the new law imposes additional
obligations on taxpayers in respect of their electronic reporting and accounting
obligations, such as requiring taxpayers to maintain sub-accounts in which it must
recognise and control adjustments in order to secure tax neutrality or achieve tax
deferral.
Important amendments to the Brazilian CFC legislation
The previous Brazilian CFC rules imposed taxation in Brazil of undistributed profits of
foreign controlled or affiliated companies, which were considered to be available to the
Brazilian parent on 31 December of each calendar year. Unlike the previous legislation,
which makes no distinction between controlled and affiliated companies for CFC
purposes, the new law provides for distinct tax treatment in each case.
For controlled companies, the new law will expressly apply to both directly and
indirectly controlled entities individually (top down look through approach). As such,
any investment in a controlled foreign entity must be adjusted yearly to reflect the
change in the investment value corresponding to the profits or losses of the directly
and/or indirectly controlled entity. The change in investment must be recognised
in proportion to the Brazilian parents participation in its equity, and any positive
adjustment relating to profits earned, calculated under the local accounting standards of
the jurisdiction of the controlled entity, must be subject to IRPJ and CSLL annually.
Taxpayers will be allowed to consolidate positive and negative adjustments until 2022,
provided certain conditions are satisfied as defined by the new legislation. Under the
original version of PM 627, taxpayers could only consolidate until 2017.
In case the taxpayer does not choose to consolidate, losses will only be compensated
by the foreign controlled entity with its own future profits. Under the original version
of PM 627, taxpayers only had five years to utilise these losses; however, this limitation
was removed. Accumulated losses accrued before the new law takes effect may also be
compensated without time limitation.
Under certain conditions, taxpayers may choose to pay income tax due on the foreign
profits proportionally to the profits actually distributed to the Brazilian entity, in
subsequent periods to that in which such results were generated. However, in the first
year, even where there is no distribution of profits, 12.5% of profits will be deemed to be
distributed to the Brazilian parent (this was 25% in the original version of PM 627). If
no further profits are distributed, the remaining profits will be deemed to be distributed
in the eighth subsequent year (this was the fifth subsequent year in the original version
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of PM 627). Taxpayers choosing to postpone payment of income tax due should consider
the impact of interest (LIBOR) as well as foreign exchange rates.
Under the previous CFC rules, double taxation was avoided, to a certain degree, by
means of foreign tax credits granted in Brazil for income tax paid on the foreign entitys
profits. The new law expressly extends such foreign tax credits to withholding income
tax paid abroad on the profits distributed to the Brazilian parent with no time limitation.
For affiliated companies, the new law does not require adjustments to the Brazilian
entitys accounts but rather focuses on the profits distributed. Profits will be considered
distributed to the parent when credited or paid or in other specific circumstances
defined by the legislation. As such, any profits earned by a Brazilian entity through a
foreign affiliate will generally only be taxable in Brazil on 31 December of the year in
which they were actually distributed to the Brazilian entity, provided that the affiliate
satisfies certain conditions defined by the new legislation.
The new CFC rules will not apply in the case of activities related to the exploration for oil
and gas in Brazil by directly or indirectly controlled foreign entities and affiliates.
The original version of PM 627 contained provisions that applied the CFC rules to
individuals in certain circumstances. These provisions were not adopted in the law
enacted.
Finally, taxpayers may elect the early adoption of the new law only in relation to the CFC
rules, in which case the taxpayers would apply the remainder of the measures from 1
January 2015 and vice versa.
Modification to the Brazilian tax on financial operations (IOF)
On 4 June 2014, Decree n 8,263 was published, which reduced from 360 days to
180 days the minimum average term of foreign loans subject to the IOF rate at 6%.
Therefore, with the new rule, the 0% IOF rate is now applicable to foreign loans with a
minimum average term greater than 180 days.
It is important to note that the new provisions are applicable to exchange transactions
executed as of 4 June 2014 for the inflow of loan funds into Brazil, including those
executed through simultaneous transactions related to foreign loans subject to
registration before the Brazilian Central Bank, contracted directly or through the
issuance of bonds on international markets.

Brazilian resident companies are taxed on worldwide income. Non-resident companies
are generally taxed in Brazil through a registered subsidiary, branch, or permanent
establishment (PE), based on income generated locally. Other than that, non-resident
companies can be subject to withholding tax (IRRF) on income derived from a Brazilian
source.
Corporate income tax (IRPJ) is assessed at the fixed rate of 15% on annual taxable
income, using either the actual profits method or the presumed profits method (see the
Income determination section).
Surcharge
Corporate taxpayers are also subject to a surcharge of 10% on the annual taxable income
in excess of BRL 240,000.
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Social contribution on net income (CSLL)
All legal entities are subject to CSLL at the rate of 9% (except for financial and insurance
institutions, which are taxed at the rate of 15%), which is not deductible for IRPJ
purposes. The tax basis is the profit before income tax, after some adjustments.
Local income taxes
Corporate income taxes are levied only at the federal level (i.e. there are no state or
municipal income taxes).
Corporate residence
A corporation is considered resident in Brazil if it has been incorporated in Brazil, and its
tax domicile is where its head office is located.
Brazilian tax law has yet to develop rules similar to those existing in other countries,
which treat a non-resident as having a PE under various factual circumstances.
Currently, there are few rules to determine whether a foreign business constitutes a
taxable presence in Brazil, and the concept of PE only appears in Brazils treaties.
In general, a non-resident company may be treated as having a taxable presence if
it operates in Brazil either through: (i) a fixed place of business or (ii) an agent who
has the power to enter into contracts in Brazil in the name of or on behalf of the nonresident.
Other taxes
VAT is payable on imports, sales, and transfers of goods and products in the form of (i)
a federal excise tax (IPI) at various rates in accordance with the nature of the product
(normally around 10% to 15%, but in certain cases ranging to over 300%) and (ii) a
state sales and service tax (ICMS) with rates ranging from 7% to 25%.
Except for services related to freight and transportation, communications, and electric
energy, which are subject to ICMS, income from services rendered is normally subject to
a municipal service tax (ISS), which is not a VAT, with rates ranging from 2% to 5%.
Import tax
Import tax (II) is levied on the cost, insurance, and freight (CIF) price of the imported
good. The rates depend on the degree of necessity and are defined in accordance with
the products tariff code contained in the Mercosur Harmonised System (NCM/SH). The
rates tend to be in the range of 10% to 20%, although there are many exceptions that are
subject to higher or lower rates.
Property taxes
A property tax (IPTU) is levied annually based on the fair market value of property in
urban areas at rates that generally vary according to the municipality and location of
the property. In the municipality of So Paulo, the basic IPTU rate is 1% for residential
properties or 1.5% for commercial properties (both rates may be increased or decreased
according to the market value of the property).
Transfer taxes
A property transfer tax (ITBI) is levied on the transfer of immovable property, with
rates also varying based on the municipality where the property is located. The ITBI
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rate in the municipality of So Paulo is currently 2%, applied over the market value of
theproperty.
A state property transfer tax (ITCMD) is normally payable at rates varying from state
to state on inheritances and donations of goods and rights. In the State of So Paulo,
ITCMD is charged at the rate of 4%.
Tax on financial transactions (IOF)
IOF is a tax levied primarily on certain financial transactions, such as loans, foreign
exchange operations, insurance, and securities, as well as transactions with gold (as
a financial asset) and foreign exchange instruments. The applicable rate will vary
depending on the transaction. The IOF rate may be reduced to 0% in some cases, such
as: (i) exchange transactions relating to the inflow of revenues in Brazil deriving from
the export of goods and services; (ii) exchange transactions relating to the inflow and
outflow of resources in and from Brazil, stemming from foreign loans, with average term
exceeding 360 days; and (iii) remittances of interest on net equity and dividends relating
to foreign investment.
Cross-border loans signed on or after 5 December 2012, with average payment terms of
up to 360 days (one year), are subject to IOF at the rate of 6%, applicable on the foreign
currency exchange transactions (inflow of funds into the country only).
On 4 June 2014, Decree n 8,263 was published, which reduced from 360 days to
180 days the minimum average term of foreign loans subject to the IOF rate at 6%.
Therefore, with the new rule, the 0% IOF rate is now applicable to foreign loans with a
minimum average term greater than 180 days.
It is important to note that the new provisions are applicable to exchange transactions
executed as of 4 June 2014 for the inflow of loan funds into Brazil, including those
executed through simultaneous transactions related to foreign loans subject to
registration before the Brazilian Central Bank, contracted directly or through the
issuance of bonds on international markets.
Social assistance contribution (COFINS)
COFINS, a monthly federal social assistance contribution calculated as a percentage

of revenue, is levied at the rate of 7.6%. A COFINS credit system is meant to ensure
that the tax is applied only once on the final value of each transaction. However, some
taxpayers (such as financial institutions, telecommunication companies, cooperatives,
and companies that opt to calculate IRPJ and CSLL using a presumed profits method)
are still subject to the previous COFINS system, which applies a rate of 3% with no credit
system.
Federal social contribution (PIS)
PIS, which is also a federal social contribution calculated as a percentage of revenue, is

levied at the rate of 1.65%. A PIS credit system is meant to ensure that the tax is applied
only once on the final value of each transaction. However, some taxpayers (such as
financial institutions, telecommunication companies, cooperatives, and companies that
opt to calculate IRPJ and CSLL using a presumed profits method) are still subject to the
previous PIS system, which applies a rate of 0.65% with no credit system.
PIS and COFINS on imports
Importation of goods and services are also subject to PIS and COFINS (in addition to
all other taxes imposed on import transactions). PIS and COFINS are imposed on the
Brazilian entity or individual (the importer of goods or services) and applied at the rates
of 1.65% and 7.6%, respectively. The contributions paid upon import transactions may,
in some instances, be creditable.
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Contribution for Intervention in the Economic Domain (CIDE)
CIDE is a contribution levied at the rate of 10% on remittances made by corporate

taxpayers for royalties and for administrative and technical services provided by nonresidents. CIDE is payable by the local entity, and, therefore, not creditable to the nonresident. CIDE does not represent a liability to the foreign recipient. CIDE is not applied
on the payments relating to the license to use, market, or sub-license software, provided
that it does not involve transfer of technology.
Branch income
Profits of branches of foreign corporations are taxable at the normal rates applicable to
Brazilian resident corporations.
Brazilian taxpayers have the option (subject to some restrictions) to calculate IRPJ and
CSLL using an actual profits method (Lucro Real), which is based on total taxable
income (book results before taxes), adjusted by certain additions and deductions as
determined in the legislation.
Brazilian taxpayers also have the option to calculate IRPJ and CSLL using a presumed
profits method (Lucro Presumido). Under the presumed profits method, the income
is calculated on a quarterly basis on an amount equal to different percentages of gross
revenue (based on the entitys activities) and adjusted as determined by the prevailing
legislation.
Inventory valuation
Brazilian income tax regulations require that inventory may be valued at the actual
average cost or by the cost of the most recently acquired or produced goods. Rulings to
the effect that last in first out (LIFO) is not acceptable have been given.
Capital gains
Capital gains derived from the sale of assets and rights, including shares/quotas, are
taxed as ordinary income. However, profits on certain long-term sales of permanent
assets may be computed for tax purposes on a cash basis.
Except during the year when incurred, capital losses may be offset only against capital
gains. Unused capital losses are treated similarly to income tax losses with regard to
limits on use and carryforward period.
Capital gains derived by non-residents (including transactions carried out abroad
between two non-resident investors, involving assets or rights located in Brazil) are
taxed in Brazil. The Brazilian source performing the remittance of capital gains to the
non-resident (whether a Brazilian acquirer or the local solicitor of a foreign acquiring
entity) must withhold the applicable income tax on such amounts on behalf of the latter
at the rate of 15% (or 25% if the beneficiary is located in a tax haven jurisdiction).
Dividend income
In general terms, no IRRF is payable on cash dividends or profits paid or credited to

either corporate or individual shareholders. Brazilian resident beneficiaries are not
subject to further income tax.
According to the NI 1,397, any portion of dividends paid to a non-resident beneficiary
exceeding the amount calculated in accordance with the Tax Balance Sheet should be
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subject to withholding income tax at 15% (or 25% if the beneficiary is located in a tax
haven). This provision gave rise to intense debate with respect to the legality of NI 1,397.
The new Law No. 12,973/2014 revokes the RTT, removing the requirement that
taxpayers need to maintain separate tax books for dividends going forward.
Under the new law, a waiver has been granted for dividends derived from the portion of
profits generated between 1 January 2008 and 31 December 2013 at an amount higher
than the amount calculated based on the Tax Balance Sheet, in this case such payments
should not be subject to taxation. In the original version of PM 627, the waiver only
applied for dividends effectively paid until 12 November 2013 and where the election to
apply the new law from 1 January 2014 was made. These limitations were removed by
the law.
In view of the above, it is possible to conclude that NI 1,397 will still need to be
considered for dividends based on profits accruing between 1 January 2014 and 31
December 2014, where the taxpayer has not made an election to adopt the new law from
1 January 2014. Thus, the same debate on the legality of NI 1,397 remains with respect
to the 2014 calendar year.
Foreign-source profits are subject to Brazilian income tax.
Financial income
Fixed-rate interest income from short, medium, or long-term financial market

transactions, including swap transactions, is subject to IRRF at rates ranging from 15%
to 22.5%. Non-fixed financial gains related to stock/commodities exchange and/or
futures market transactions are taxed at the rates of 20% (day-trade) and 15% (all other
cases). The total income or gain is considered taxable income, and the tax withheld may
be offset against the total tax due by the corporate taxpayer.
Foreign currency exchange gain/loss
With respect to foreign currency exchange gain/loss, which may arise from receivables
or liabilities denominated in foreign currency, Brazilian tax legislation allows the local
company to elect to consider the related effect, for tax computation purposes, either
upon an accrual or cash basis (i.e. actual receipt/payment of funds).
Foreign income
Brazilian resident companies are taxed on worldwide income. See Controlled foreign
companies (CFCs) in the Group taxation section for more information.
Deductions
Depreciation is allowable on a straight-line basis over the useful life of the asset. The
annual rates normally allowable are 10% for machinery, equipment, furniture, and
installations; 20% for vehicles; and 4% for buildings. Accelerated depreciation is
allowed for companies with a two or three working shift operation by increasing normal
rates by 50% and 100%, respectively.
Depletion allowances are allowed for natural resources on a useful-life basis. Special
incentive depletion allowances are granted for mining operations.
The new Brazilian accounting rules determine that companies must obtain a useful life
study for fixed assets in order to determine the acceptable depreciation rates. For tax
purposes, in line with new Law No. 12,973/2014, the depreciation quota considered
deductible for corporate income tax computation purposes is determined based on the
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application of the annual depreciation rate over the assets acquisition cost. In case the
depreciation quota registered in the books of the company is lower than that calculated
based on the depreciation charts issued by the Brazilian Revenue Service, the difference
can be excluded from the companys taxable income in the computation made under the
actual profits method.
Goodwill
Amortisation of goodwill that arises as a result of accounting for investments in

subsidiary and associated entities by the equity pick-up method is deferred for taxation
purposes until the related investment has been realised (e.g. sold, disposed). However,
under certain requirements, goodwill paid upon the acquisition of the shares or quotas
of a permanent investment may be amortised before this realisation occurs (e.g. after
a merger or a spin-off). It is important to note that the amortisation of goodwill is no
longer accepted under Brazils new accounting practices.
Prior to the new law, where the cost of a share acquisition was higher than the net
equity value of the acquired company, the difference was typically booked by taxpayers
as goodwill, provided that its nature/economic reason was properly documented in an
appraisal report. Upon a merger between buyer and acquired company, the full amount
of goodwill allocated to future profitability was then amortised over a period of not less
than five years.
Under the new law, which is consistent with the current Brazilian accounting standards
(based on IFRS), the acquisition cost of investments must be segregated into:
i. the net equity of the acquired company
ii. the fair market value of the net assets, and
iii. the goodwill deriving from future profitability, which corresponds to the remaining
balance from items (i) and (ii).
Similar to the previous rules, upon a merger between buyer and acquired company
(downstream or upstream), the amount of goodwill can be amortised for tax purposes
over a period of not less than five years, provided certain conditions are complied with.
These conditions include the preparation of an independent appraisal report supporting
the value referred to in (ii) above, which will need to be filed with the RFB or with
the Register of Deeds and Documents, and that the transaction be carried out among
unrelated parties. In the original version of the PM 627, there was an additional
requirement that taxpayers maintain documentation demonstrating that the goodwill
did not arise from a transaction involving an exchange of shares. This additional
requirement has been removed from the law.
Taxpayers wishing to continue to apply the previous rules for goodwill amortisation
in relation to acquisitions made on or before 31 December 2014 will have until 31
December 2017 to complete the merger of the target and the acquiring entity. In the
original version of PM 627, taxpayers had until 31 December 2015 to complete the
merger.
Amortisation of patents, trademarks, and copyrights, based on their legal limited life, is
a deductible expense within approved limits.
Start-up expenses
As a general rule, for tax purposes, start-up expenses may be deferred and amortised on
the straight-line basis over a period of not less than five years, beginning the month in
which the business starts operating.
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New Law No. 12,973/2014 stated that, for purposes of corporate income tax calculation
based on the actual profits method, the following expenses shall not be computed within
the period in which they are incurred: (i) start-up organisation expenses, including from
the initial operation phase, when the company only partially used its equipment or its
installations and (ii) expenses for expansion of industrial activities.
The expenses mentioned above shall be excluded for purposes of computation under the
actual profits method, based on fixed monthly quotas within a minimum period of five
years, as from the beginning of the operation or full utilisation of the plants capacity.
Research and development (R&D) expenditures
At the option of the company, R&D expenditures may be deducted when incurred or
deferred until termination of the project and then amortised over a period of not less
than five years.
New Law No. 12,973/2014 provides that R&D expenses (referred by Law No.
11,195/2005) may be excluded, for purposes of computation based on the actual profits
method, when registered as non-circulating asset intangibles, during the computation
period in which they were incurred.
To use this benefit, the taxpayer must add to the net income, for purposes of
computation based on the actual profits method, the amount of realisation of the
intangible asset, through amortisation, sale, or write-off.
Interest on net equity(INE)
Companies can pay interest (calculated on a pro rata basis and up to a given rate, known
as the long-term interest rate [TJLP], which is currently set at 5%) to partners and/or
share/quota holders, based on the companys net equity. Such interest, which may not
exceed the highest of 50% of the annual profits or 50% of the accumulated earnings
and profits, is deductible for both IRPJ and CSLL purposes and is subject to 15% IRRF at
the source (or 25% if the beneficiary is located in a tax haven jurisdiction). Whenever
the beneficiary is a legal entity subject to normal income tax in Brazil, the tax withheld
at the source may be taken by the recipient as a tax credit against the normal corporate
income tax due or the tax due at the source on distributions of interest. If the beneficiary
is a Brazilian resident individual, such interest will not become subject to any further
taxation.
According to the NI 1,397, any portion of INE paid that exceeds the INE amount
calculated in accordance with the Tax Balance Sheet should not be deductible for
Brazilian income tax purposes. This provision also gave rise to intense debate with
respect to the legality of NI 1,397.
New Law No. 12,973/2014 revokes the RTT, removing the requirement that taxpayers
need to maintain separate tax books for INE purposes going forward.
A waiver has also been granted for any portion of INE paid exceeding the amount
calculated in accordance with the Tax Balance Sheet, as the new law regulated that
the taxpayer has the option to use from 2008 onward the net equity determined based
on the new accounting principles for INE purposes. In PM 627, the waiver was only
available for taxpayers that elected to apply the new law from 1 January 2014; however,
this requirement was removed from the law.
Interest and other payments to entities in a tax haven or under a

privileged tax regime
Provisions similar to those for thin capitalisation (see the Group taxation section) are also
applicable to interest paid or credited by a Brazilian entity to an individual or legal entity
(whether or not a related party) resident or domiciled in a tax haven or in a jurisdiction
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under a privileged tax regime. In these cases, the interest expense is only deductible
for Brazilian income tax purposes if it is viewed as necessary to the companys activities
and the total amount of the Brazilian entitys debt with any foreign party resident or
domiciled in a tax haven or in a jurisdiction under a privileged tax regime does not
exceed 30% of the Brazilian entitys net equity.
The Law also provides that amounts paid, credited, delivered, used, or remitted under
any title, directly or indirectly, to related or unrelated individuals or legal entities that
are resident or domiciled in a tax haven or in a jurisdiction under a privileged tax regime
will only be viewed as deductible for Brazilian income tax purposes if all of the following
conditions are met: (i) the effective beneficiary of the payment is identified; (ii) there
is evidence that the payment beneficiary has operational capacity (i.e. substance);
and (iii) there is adequate documentation to support the relevant payments and the
corresponding supply of goods, rights, or utilisation of services.
Tax havens and privileged tax regime lists
NI 1,037/2010, issued by the Brazilian tax authorities, lists several jurisdictions that are
considered not to tax income or to tax it at a rate lower than 20%, or that deny access to
information regarding shareholding and ownership of assets and rights.
The NI also enumerates jurisdictions that are considered to have privileged tax regimes,
as set forth in Brazilian legislation. The following types of entities are included in the
list:
Holding companies incorporated under the law of Denmark, which do not carry out
substantial economic activity.
Holding companies incorporated under the law of the Netherlands, which do not
carry out substantial economic activity. Note that inclusion has been temporarily
suspended pending a review requested by the Dutch government.
International trading companies (ITCs) incorporated under the law of Iceland.
Offshore companies (KFTs) incorporated under the law of Hungary.
Limited liability companies (LLCs) incorporated under the state law of the United
States, owned by non-residents and not subject to US federal income tax.
Holding companies (ETVEs) incorporated under the law of Spain. Note that
inclusion has been temporarily suspended pending a review requested by the Spanish
government.
ITCs and international holding companies (IHCs) incorporated under the law of
Malta.
It is generally understood that the concept of a privileged tax regime is subject to stricter
transfer pricing, thin capitalisation, and tax deduction rules. As for the jurisdictions
considered as tax havens, besides the tax consequences applicable for privileged tax
regimes, the IRRF rate due on capital gains and cross-border payments, such as services
fees, royalties, and interest, is 25%.
Please note thatPM 627/2013, now converted into Law No. 12,973/2014, introduces
a new conceptof sub-capitalisationthat should impact the application of the Brazilian
CFC rules.
Bad debt
Losses on bad debts are tax deductible, depending on the amounts, time overdue, and
administrative and/or legal actions taken to recover losses. Losses arising from intercompany transactions are not tax deductible.
Donations are deductible, up to certain limits, if recipients are registered as charitable

institutions.
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Travel expenses
Travel expenses may only be considered deductible if they are duly documented and
substantiated.
Medical and pension expenses
Expenses of group medical care and health insurance programmes for employees and
contributions to private supplementary pension schemes are considered deductible if
supplied to all employees indistinctly.
Fines and penalties
Punitive tax/contribution penalties are not deductible for tax purposes.
Taxes/contributions
Taxes, contributions, and related costs, such as late-payment interest, are deductible for
tax purposes on the accrual basis. This rule does not apply to taxes/contributions being
or to be challenged by the taxpayer at any level of litigation, which are deductible for tax
purposes only on a cash basis.
Tax losses may be carried forward without any time limitation. However, the tax
loss may not reduce taxable income by more than 30% of its amount prior to the
compensation of the tax loss itself. Tax loss is defined as the accounting loss adjusted for
tax purposes.
There is no carryback of tax losses.
Payments to foreign affiliates and related companies
Royalties and technical service fees (with transfer of technology or know-how) payable
to foreign companies with a direct or indirect controlling interest in the Brazilian
company are deductible for tax purposes (observing applicable deduction limits),
provided the contract has been duly registered with the National Institute of Industrial
Property (Instituto Nacional da Propriedade Industrial or INPI) and approved by the
Brazilian Central Bank.
With regard to interest expense deriving from loan agreements with related parties/tax
havens, the related interest expenses shall only be deducted for income tax purposes if:
(i) the interest expense is viewed as necessary for the activities of the local entity; (ii)
they are in compliance with the thin capitalisation rules; and (iii) they are in compliance
with the new transfer pricing rules (mandatory for all inter-company loans contracted as
of 1 January 2013), as mentioned in the Group taxation section.
Group taxation
Consolidated tax returns are not permitted in Brazil.
Transfer pricing
The Brazilian transfer pricing rules apply to import and export transactions of goods,
services, and rights between related parties (the legislation provides a broad list of
the parties considered as related for transfer pricing purposes). Under such rules,
the transfer price determined between related parties will be acceptable, for Brazilian
tax purposes, if it is determined that such price is at arms length according to one of
the traditional methods established by the legislation (no profit methods available).
Moreover, all operations with jurisdictions considered as tax havens will also be subject
to transfer pricing rules, whether involving related parties or not.
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Interest
Regarding the Brazilian transfer pricing rules applicable to interest deriving from loan
agreements with related parties, tax havens, or privileged tax regimes, the related
payments must be within the rates established below, in addition to a spread determined
by the Ministry of Finance, in order to be acceptable for tax deductibility purposes:
i.
in case of transaction in United States dollars, subject to fixed interest rate: rate of
Brazilian sovereign bonds issued in US dollars in foreign markets
ii. in case of transaction in Brazilian reais, subject to fixed interest rate: rate of
Brazilian sovereign bonds issued in Brazilian reais in foreign markets, and
iii. in all other cases (e.g. euro): LIBOR for the period of six months.
On 2 August 2013, Ordinance No. 427 was published with the objective of defining
the additional spread, which was set at 3.5%, applicable to all remittances of interest
payments to non-resident related parties carried out based on loans signed asof 1
January 2013.
In the case of transactions in Brazilian reais, subject to a floating interest rate, the
Ministry of Finance may determine a different base rate.
For transactions covered in item (iii) above, contracted in currencies for which there is
no specific LIBOR disclosed, the LIBOR for US dollar deposits must be considered.
Royalties
Operations involving royalty agreements will not be subject to transfer pricing rules if
the related contract is registered with the Banco Central do Brasil (BACEN) and INPI.
Services/Goods/Rights
The adequacy of the price practiced between the related parties in any operations
involving goods, services, and rights may be supported through the application of one of
the following methods, as determined under the Brazilian transfer pricing regulations
(the company may choose the most convenient method).
Methods used on import transactions:
Comparable independent price (PIC) method.
Resale price less profit (PRL) method.
Production cost plus profit (CPL) method.
Methods used in export transactions:
Export sales price (PVEx) method.
Acquisition or production cost plus taxes and profit (CAP) method.
Please note that imports and exports of commodities, quoted in commodities exchange
markets, must be tested through the use of the newly introduced methods PCI and
PECEX, respectively. Based on these methods, taxpayers shall compare the transaction
amounts with the daily average quote for each product.
Relief of proof rules for inter-company export transactions are available.
With regards to the PRL method, some relevant changes were recently introduced, such
as:
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The PRL method shall now be calculated considering a specific mark-up determined
for some industries (*), and a mark-up of 20% for the industries/sectors that are not
specified in the legislation.
(*) 40% mark-up: pharma chemicals and pharmaceutical products; tobacco products;
optical, photographic, and cinematographic equipment and instruments; machines,
apparatus, and equipment for dental, medical, and hospital use; extraction of oil and
natural gas; and oil derivative products. 30% mark-up: chemical products; glass and
glass products; pulp, paper, and paper products; and metallurgy.
The methodology to calculate the former PRL-60 (previously applicable to inputs),
which gave rise to disputes with the tax authorities at the administrative and judicial
courts, should be adopted under the new PRL method (until now it was included in a
normative act issued by the tax authorities).
Taxpayers are no longer required to include custom duty and other customs expenses
in the tested price, nor are they required to include freight and insurance contracted
with third parties, provided such third parties are not located in low tax jurisdictions
or benefit from privileged tax regimes.
The use of the taxpayers own transactions with third parties for purposes of the use
of the PIC method will be acceptable only to the extent the comparable transactions
are equivalent to 5% of the tested transactions.
Thin capitalisation
The Brazilian thin capitalisation rules establish that interest paid or credited by a
Brazilian entity to a related party (individual or legal entity), resident or domiciled
abroad, not constituted in a tax haven or in a jurisdiction with a privileged tax regime,
may only be deducted for income tax purposes if the interest expense is viewed as
necessary for the activities of the local entity and the following requirements are met:
(i) the amount of debt granted by the foreign related party (which has participation in
the Brazilian entity) does not exceed twice the amount of its participation in the net
equity of the Brazilian entity; (ii) the amount of debt granted by a foreign related party
(which does not have participation in the Brazilian entity) does not exceed twice the
amount of the net equity of the Brazilian entity; (iii) the total amount of debt granted by
foreign related parties as per (i) and (ii) does not exceed twice the sum of participation
of all related parties in the net equity of the Brazilian entity; and (iv) in case debt is
only granted by related parties that do not have a participation in the Brazilian entity,
the total amount of debt granted by all of these related parties does not exceed twice
the amount of the Brazilian entitys net equity. If one of the mentioned 2:1 ratios is
exceeded, the portion of interest related to the excess debt amount will not be deductible
for Brazilian income tax purposes.
Profits of foreign subsidiaries, affiliates, and controlled companies are taxed at the date
of the financial statements in which the profits are calculated, regardless of remittance.
Double taxation may be avoided by means of foreign tax credits.
Very recently, the Brazilian Supreme Court (STF) passed judgment on a Direct Action
on the Grounds of Unconstitutionality (ADI), confirming the constitutionality of CFC
legislation with respect to controlled companies located in countries defined as tax
havens under the law and declaring the same CFC legislation unconstitutional with
respect to associated companies located in countries not considered as tax havens by
the law.
No decision was taken in the case of controlled companies located in countries not
defined as tax havens and associated companies located in tax havens.
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Some guidance is still expected from the STF with regard to the applicability of double
taxation treaties (DTTs) in order to avoid the taxation of the profits of foreign controlled
companies.
New Law No. 12,973/2014 introduces new and different tax treatment between
controlled and affiliated companies for CFC purposes (the previous legislation made no
distinction between these types of entities).
For controlled companies, the new law will expressly apply to both directly and
indirectly controlled entities individually (top down look through approach). As such,
any investment in a controlled foreign entity must be adjusted yearly to reflect the
change in the investment value corresponding to the profits or losses of the directly
and/or indirectly controlled entity. The change in investment must be recognised
in proportion to the Brazilian parents participation in its equity, and any positive
adjustment relating to profits earned, calculated under the local accounting standards of
the jurisdiction of the controlled entity, must be subject to IRPJ and CSLL annually.
Taxpayers will be allowed to consolidate positive and negative adjustments until 2022,
provided certain conditions are satisfied as defined by the new legislation. Under the
original version of PM 627, taxpayers could only consolidate until 2017.
In case the taxpayer does not choose to consolidate, losses will only be compensated
by the foreign controlled entity with its own future profits. Under the original version
of PM 627, taxpayers only had five years to utilise these losses; however, this limitation
was removed. Accumulated losses accrued before the new law takes effect may also be
compensated without time limitation.
Under certain conditions, taxpayers may choose to pay income tax due on the foreign
profits proportionally to the profits actually distributed to the Brazilian entity, in
subsequent periods to that in which such results were generated. However, in the first
year, even where there is no distribution of profits, 12.5% of profits will be deemed to be
distributed to the Brazilian parent (this was 25% in the original version of PM 627). If
no further profits are distributed, the remaining profits will be deemed to be distributed
in the eighth subsequent year (this was the fifth subsequent year in the original version
of PM 627). Taxpayers choosing to postpone payment of income tax due should consider
the impact of interest (LIBOR) as well as foreign exchange rates.
Under the previous CFC rules, double taxation was avoided, to a certain degree, by
means of foreign tax credits granted in Brazil for income tax paid on the foreign entitys
profits. The new law expressly extends such foreign tax credits to withholding income
tax paid abroad on the profits distributed to the Brazilian parent with no time limitation.
For affiliated companies, the new law does not require adjustments to the Brazilian
entitys accounts but rather focuses on the profits distributed. Profits will be considered
distributed to the parent when credited or paid or in other specific circumstances
defined by the legislation. As such, any profits earned by a Brazilian entity through a
foreign affiliate will generally only be taxable in Brazil on 31 December of the year in
which they were actually distributed to the Brazilian entity, provided that the affiliate
satisfies certain conditions defined by the new legislation.
The new CFC rules will not apply in the case of activities related to the exploration for oil
and gas in Brazil by directly or indirectly controlled foreign entities and affiliates.
The original version of PM 627 contained provisions that applied the CFC rules to
individuals in certain circumstances. These provisions were not adopted in the law
enacted.
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Finally, taxpayers may elect the early adoption of the new law only in relation to the CFC
rules, in which case the taxpayers would apply the remainder of the measures from 1
January 2015 and vice versa.

Foreign tax credit
Brazilian resident companies are taxed on worldwide income, but they may compensate
the income tax paid in the country of domicile of the branch, controlled, or associated
company, and the tax paid on earnings and capital gains, against the corporate income
tax due in Brazil. The amount of tax effectively paid abroad, to be compensated, may
not exceed the amount of income tax and surtax due in Brazil on the amount of profits,
earnings, and capital gains included in the calculation of taxable income.
Please refer to Controlled foreign companies (CFCs) in the Group taxation section for a
description of the new rules stated by Law No. 12,073/2014 regarding the use of foreign tax
credits.
Investment project incentives
Total or partial exemption from duty, excise tax, and social contributions on imported
equipment is granted on certain approved investment projects.
Approved investment projects are also granted accelerated depreciation on nationally
produced equipment and access to low-cost financing. Sales of some capital equipment
are exempt from state sales tax.
Brazilian corporate taxpayers can apply a percentage of their income tax liability on
deposit for reinvestment and investment in their own approved investment projects.
These approved investment projects are normally granted total or partial income tax
exemption.
The Brazilian legislation also provides tax incentives for projects focusing on
technological innovation.
Greater Brazil Plan (Plano Brasil Maior)
In August 2011, the Brazilian government announced several measures with the aim
to benefit local manufacturers and exporters of goods and services. Referred to as
Brasil Maior (Greater Brazil), the governments plan focuses on increasing national
competitiveness through incentives for technical innovation, research, added value in
production, as well as providing clear advantages for exporters.
Tax incentives related to the realisation of FIFAs 2013 and 2014 Cups
Tax exceptions
In terms of incentives for FIFAs World Cups, the Brazilian legislation grants tax benefits
to those involved with the organisation of FIFAs 2013 and 2014 Football Cups in Brazil,
provided that such entities and events are previously licensed by the Brazilian tax
authorities based on a list provided by FIFA.
These benefits include tax exemptions on import of several perishable goods or
merchandise for use and consumption in the organisation of the events promoted by
FIFA and its related entities, such as trophies, medals, plaques, statuettes, pins and
badges, flags, and other commemorative objects; promotional material, flyers, and the
like; and other similar non-durable material (which useful life is up to one year). The
referred benefits are not applied to the import of durable goods and equipment, which
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shall be imported through the Special Temporary Admission Customs Regime (also with
suspension of taxes).
The legislation also stipulates a series of exemptions on federal taxes granted
exclusively: (i) to FIFA itself and related entities domiciled abroad; (ii) to FIFAs
Brazilian subsidiary and to the Brazilian Broadcasting Source; (iii) to FIFAs service
suppliers established in Brazil; and (iv) to non-resident individuals hired or engaged to
work in the events. The referred entities are mainly exempt from a number of federal
taxes, such as IRPJ, IRRF, IOF, IPI, CSLL, PIS/COFINS-Import, PIS/COFINS, and CIDE,
depending on the case.
Some municipalities have already issued legislation granting ISS exemptions in
connection with FIFAs 2013 and 2014 World Cups.
RECOPA
RECOPA is a special tax regime for the construction, expansion, reform, or

modernisation of football stadiums, which will host the official matches of the 2013
Confederations Cup and the 2014 World Cup, to take place in Brazil. A specific licence is
required prior to fruition of the associated benefits.
Legal entities that hold construction/reform projects approved by the Ministry of
Sports may be entitled to suspension of II, IPI, and PIS/COFINS on the import and local
acquisition of goods and services relating to the construction, expansion, reform, or
modernisation of football stadiums, based on specific requirements and obtaining a
licence with theRFB after formal procedures are carried out.
These suspensions may be converted to a 0% tax rate (exemption) after the
incorporation of such goods in the construction/reform process.
Tax incentives related to the realisation of the Olympic and Paralympic

games
The Brazilian government has also issued legislation that provides for tax measures
applicable to operations involving the organisation or realisation of events directly
related to the 2016 Olympic and Paralympic Games to be held in Rio de Janeiro.
The Law provides for the exemption of federal taxes due on import of goods or services
used exclusively in activities directly related to the organisation or realisation of both
events, such as trophies, medals, plaques, statuettes, pins and badges, flags, and other
commemorative objects; promotional material, flyers, and the like; and other similar
non-durable material (which useful life is up to one year). Taxes included in this
exemption are II, IPI over imports due on customs clearance, and PIS/COFINS-Import,
among other charges and duties.
In order to enjoy these benefits, the International Olympic Committee (IOC) and
associated companies, the Court of Arbitration for Sport (CAS), the World Anti-Doping
Agency (WADA), National Olympic Committees, International Sporting Federations,
media companies and accredited transmitters, sponsors, and IOC and RIO 2016 service
providers must be established in Brazil if they commercialise products or services in
Brazil or employ individuals with or without a formal employment relationship, even if
only for organising or realising the games.
Some municipalities have already issued legislation granting ISS exemptions in
connection with the Olympic and Paralympic Games.
Regional incentives
Income tax exemptions or reductions are also available for companies set up in specified
regions within Brazil, primarily the north and northeast regions. These incentives are
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designed to accelerate the development of certain less-developed regions and industries
considered to be of importance to the economy.
Other incentives
Excise and sales tax exemptions are granted to exporters of manufactured goods.
Withholding taxes
Profits/dividends distributed to resident or non-resident beneficiaries (individuals and/
or legal entities) are generally not subject to IRRF (please see the Income determination
section for more information). This provision is also applicable to dividends paid to nonresident companies located in a tax haven jurisdiction.
The IRRF rate applicable to payments for services rendered by non-resident companies
or individuals is generally 15% but can be increased to 25% in certain cases.
Payments for services, royalties, and interest to non-resident companies located in a tax
haven jurisdiction are subject to IRRF at the rate of 25%.
Certain types of income paid by Brazilian companies to non-resident recipients are
subject to IRRF as follows:
Recipient
Non-resident companies and individuals:
Non-treaty
Tax haven
Treaty (2):
Argentina
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Ecuador
Finland
France
Hungary
India
Israel
Italy
Japan
Korea, Republic of
Luxembourg
Mexico
Netherlands
Norway
Peru
Philippines
Portugal
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Dividends (1)
IRRF (%) (3)

Interest
Royalties
0
0
15
25
15
25
0
15
10/15
15
10/15
15
15
25
15
10
15
15
15
10/15
15
12.5
10/15
15/25
10/15
15
15
10/15
15/25
10/15
15
15
10/15
10/15
15
15
10/15
15
15
15
10/15
10/15
15
15
15
12.5
10/15
10/15
15
10/15
15
15
10/15
15
15
10/15/25
10/15/20
15/25
15
15/25
15/25
15/25
15/25
10/15/25
10/15/25
15/25
15/25
10/15
15/25
12.5/15/25
10/15/25
15/25
10/15
15/25
15/25
15
15/25
15
Brazil
Recipient
Slovak Republic
South Africa
Spain
Sweden
Turkey
Ukraine
Dividends (1)
15
10/15
10/15
25
10/15
10/15
IRRF (%) (3)

Interest
10/15
15
10/15
25
15
15
Royalties
15/25
10/15
10/15
25
10/15
15
Notes
1.
2.
3.
Note that the remittance of dividends is generally not subject to taxation in Brazil.
Treaty rates in excess of those in force for non-treaty countries are automatically reduced. The treaty
concerned should be consulted to confirm that the tax reduction is applicable in each case.
For treaties with multiple IRRF rates, the following rules generally apply:
Dividends: if there was IRRF on dividends, which is not the case according to Brazilian legislation,
the 10% (or 15%) rate would generally apply if the beneficial owner is a company that directly
holds a certain minimum participation in the capital of the company paying the dividends; the
15% (or 25%) rate is considered for all other cases.
Interest: the 10% rate generally applies to loans with a certain minimum term granted for specific
purposes (e.g. acquisition of capital goods); the 15% rate is considered for all other cases.
Royalties: the 10% rate generally applies to royalties arising from the use of, or the right to use,
cinematograph films, films or tapes for television or radio broadcasting, and any copyright of
literary, artistic, or scientific work produced by a resident of a contracting state; the 25% (or 15%)
rate generally applies to royalties arising from the use of, or the right to use, trademarks; and the
15% (or 10%) rate is considered for all other cases.
Tax administration
Taxable period
For tax purposes, a companys year-end is 31 December. A different year-end for

corporate purposes is irrelevant.
Tax returns
With few exceptions, corporate entities, including those that are foreign-controlled,
must file an annual adjusting tax return consolidating the monthly results of the
previous calendar year. This tax return must normally be filed by the end of June
following the tax year ending on 31 December.
Supporting documentation must be retained for at least five years.
Please note that thereare a number of other declarations/returns imposed by the
Brazilian tax authorities, for different taxes, at federal, municipal, and state levels,
which make the tax administration in Brazil notably bureaucratic.
Payment of tax
In the case of income tax, it is calculated monthly, and prepayments must be paid by the
last working day of the subsequent month. Any amounts of income tax due for the year
(exceeding the prepayments performed) must be paid by the last working day of March
of the subsequent year.
There is an option to pay the tax due at the end of each quarter in three instalments, the
first one starting from the subsequent month to the end of the quarter. When income tax
is calculated quarterly, the taxpayer must perform the applicable payment by the last
working day of the month subsequent to the end of the quarter.
There are many other taxes applied in Brazil with different due dates established by the
domestic legislation.
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Tax audit process
Although all income tax returns are checked for mathematical accuracy, only a relatively
small number are selected for further examination. Returns are selected for audit either
manually or by computer, according to various criteria, including type of business,
unusually large or small amounts of income or deductions, and random sampling.
No corporate entity, whether a taxpayer or not, is excused from furnishing information
or explanations required by the tax authorities.
When audits are conducted on the premises of taxpayers, tax inspectors have broad
powers to inspect books and documents and to request information and any data
deemed necessary. This is generally disrupting and, in practice, every effort is made to
expedite the conclusion of these audits.
Whenever a violation is determined during a tax audit, the inspectors must draw up an
infringement notification, which starts the administrative procedure for additional tax
assessments.
On 13 December 2013, an Ordinance issued by theRFB established the criteria
for indicating large Brazilian companies that shall be submitted to a special and
differentiated tax-economic accompaniment regime for the 2014 calendar year.
The tax authorities may generally audit taxpayers up to five years after the close of the
tax year. There is a legal discussion about the moment in which this five year period
begins, also depending on the type of tax considered and on certain situations.
Topic of focus for tax authorities
It should be noted that, over the years, Brazil has applied a form over substance
approach. Nonetheless, as of 10 January 2001, Supplementary Law 104/2001
introduced a substantial modification in the Brazilian tax code (the so-called antiavoidance rule). This law establishes a substance-over-form approach that, once
regulated, may allow the Brazilian tax authorities to disregard tax-driven transactions.
Although Supplementary Law 104/2001 has not yet been regulated, in our local practice
we have seen that tax authorities are keen on assessing taxpayers in relation to the
economic substance of their operations (e.g. the use of special purpose entities to enable
the amortisation of goodwill for tax purposes in Brazil).
Public digital bookkeeping system (SPED)
Brazil has implemented a public system of digital bookkeeping known as SPED, which
aims at gradually replacing paper copies of invoices and tax records for electronic files.
SPED can be defined as an instrument that unifies the activities of reception, validation,
storage, and legalisation of records and documents that are part of the commercial and
tax bookkeeping of companies, through a single, computerised flow of data.
Comprised of three pillars (electronic invoice, digital fiscal bookkeeping, and digital
accounting bookkeeping), the implementation of SPED requires adjustments to
the relationship with tax authorities, clients, suppliers and, mainly, on the internal
operational processes, which will demand an integrated action from different areas (tax,
accounting, information technology, supplies, production, commercial, and others).
On the other hand, occasional inconsistencies from databases, as well as operational
errors related to tax and accounting information to be generated, usually unknown to
the companies administration, are subject to increased visibility and monitoring by the
Brazilian tax authorities.
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It is important to bear in mind that there are many more Brazilian ancillary obligations
to fulfil, based on electronic frameworks established by the relevant federal, state, and
municipal authorities, which may not be comprised within the SPED environment.
On 20 December 2013, a Normative Instruction was published by the Brazilian tax
authorities providing for so-called accounting tax bookkeeping (ECF), in which
Brazilian taxpayers need to inform all operations that impact the computation basis
for corporate income tax and social contribution on net profits. The ECF shall be
transmitted on an annual basis to the SPED system up to the last working day of July of
the subsequent year to the calendar year it refers.
Accordingly, with respect to calendar year 2014, Brazilian taxpayers will no longer file
the income tax return (DIPJ) by the end of June 2015, but rather prepare the ECF, based
on specific provisions, to be filed by the end of July 2015. Also, the preparation of the
income tax control register (LALUR) will not be required, as the ECF shall comprise all
the applicable information.
Ancillary obligations imposed on import and export of services
TheRFB issued regulations thatimposed an ancillary obligation regarding transactions

carried out between Brazilian residents and non-residents involving services, intangible
assets, and other operations. Whenever one of the previous situations takes place, tax
authorities must be informed. The type of information to be disclosed is detailed in
complementary rules issued by the RFB.
Said information is provided by means of an electronic system (SISCOSERV) made
available at the RFB website.
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Bulgaria
PwC contact
Irina Tsvetkova
PricewaterhouseCoopers Bulgaria EOOD
9-11 Maria Louisa Blvd., 8th Floor
1000 Sofia, Bulgaria
Tel: +359 2 91 003
Withholding tax (WHT) amendments
As of 1 January 2014, amendments to the Corporate Income Tax (CIT)Act introduce the
following WHT exemptions and simplifications:
An exemption from WHT is introduced for income from interests on bonds and other
debt securities emitted by a local tax resident and admitted to a regulated stock
exchange in a European Union (EU)/European Economic Area (EEA) member state.
An exemption from WHT is also introduced for income from interests on loans
extended by a tax resident of an EU/EEA member state, issuer of bonds or other debt
securities, provided that the bonds/debt securities are issued for the purposes of
extending a loan to a local legal entity and are admitted to a regulated stock exchange
in an EU/EEA member state.
A lower 5% WHT rate on income from interests and royalties of EU tax residents is
applicable under certain conditions generally in line with the EU Interest/Royalty
Directive and may be directly applied even if the recipient of the income does not
comply with the two-year rule for direct minimum participation at the time of
realising the income.
Amendments to the order for settlement of tax and social security

liabilities
As a result of a decision of the Bulgarian constitutional court, the single account of the
National Revenue Agency (NRA) has been revoked and subsequently split into four
separate accounts. As of March 2014, the payments of tax and health insurance and
social security contributions should be made to four separate bank accounts of the NRA:
for tax liabilities, for general mandatory social security contributions, for supplementary
mandatory retirement provisions, and for health insurance contributions.
New taxation regime for gambling activities
As of January 2014, the taxation of gambling activities has been conceptually changed as
follows:
The alternative tax on online and a significant part of the land-based gambling games
was replaced by a new monthly licensing fee to the State Commission of Gambling.
The scope of the alternative tax on gambling is limited to games on gambling
machines and gambling games for which the bet is included in the price of a phone or
other telecommunication service.
The monthly licensing fees amount to 20% on the difference between the bets
made and the distributed winnings or 20% on the collected participation fees and
commissions for online gambling operators, whereas the fees are 15% on the bets
made or 20% of the collected participation fees and commissions for totto, lotto
sports betting, including horse and dog racing, and betting on random events or
related to the knowledge of facts.
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Bulgaria
Bulgarian tax residents are taxed on their worldwide income. Non-residents are taxed
on their income from Bulgarian sources only, through a permanent establishment (PE)
and/or via WHT, depending on the case (see the Branch income section).
In general, corporate income is subject to CIT at a flat rate of 10%.
Alternative tax
Income earned by organisers of gambling games for which the bet is included in the
price of a phone or other telecommunication service is subject to 15% alternative tax,
applied on the increase in the price of the phone or other telecommunication service
(i.e. the difference between the regular price of the service and the new higher price due
to the gambling game). A fixed-sum tax is applied to the operation of gaming machines.
As of January 2014, online gambling games are exempt from the alternative tax, as
are a significant part of the other land-based gambling games (i.e. totto; lotto sports
betting, including horse and dog racing; and betting on random events or related to the
knowledge of facts).
Tonnage tax regime
A special alternative tax regime applies to the operation of commercial maritime vessels,
as per their net tonnage, at a rate of 10%.
Local income taxes
There are no local government corporate income taxes in Bulgaria.
Corporate residence
A corporation is resident in Bulgaria for tax purposes if it is incorporated in Bulgaria.
PEs of foreign tax residents (e.g. branches) are treated as separate entities similar to
Bulgarian residents for tax and accounting purposes.
The definition of a PE in the Bulgarian legislation follows, in general, the Organisation
for Economic Co-operation and Development (OECD) model; however, it covers a
broader scope of activities leading to a tax presence in Bulgaria. A PE is generally defined
as a fixed place (own, rented, or otherwise used) through which a foreign entity partly
or wholly carries out business activities in the country.
Other taxes
The standard VAT rate is 20%. A reduced VAT rate of 9% applies to certain tourist
services. Some activities are zero-rated, including intra-Community supplies, exports
of goods to countries outside the European Union, and international transport of goods
(i.e. transport to or from countries outside of the European Union).
Some supplies are VAT exempt without the right to a VAT credit, including (but not
limited to) certain land transactions; leasing of residential property to individuals; and
financial, insurance, gambling, educational, and health services. Options to charge VAT
exist for certain land transactions, leasing of residential property to individuals, and
finance lease contracts.
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The following statutory periods for VAT refunds apply:
30 days for persons that have performed supplies subject to zero-rate (e.g. exports)
within the last 12 months exceeding 30% of the total value of all taxable supplies
performed by them in the same period, as well as by large investors meeting certain
specificconditions.
Two months and 30 days in all other cases.
The following mechanism for VAT recovery applies to VAT-registered companies: the
positive or negative difference between the output VAT charged by the company and the
input VAT for the respective month for which recovery is claimed results, respectively, in
VAT payable or refundable. The VAT payable should be remitted to the state budget not
later than the 14th day of the month following the respective month. VAT refundable
is offset against any VAT payable in the following two months, and any remainder is
effectively recovered within 30 days thereafter.
It is possible to claim a refund for VAT paid with respect to assets acquired not earlier
than five years prior to the VAT registration, under certain conditions. In the case of real
estate, the term is 20 years.
As of 1 January 2014, a new regime of cash accounting for VAT was introduced that may
apply to persons with a taxable turnover below 500,000 euros (EUR) for a period of 12
months and a number of other requirements. Taxpayers authorised to apply the new
regime remit VAT upon receiving a payment from their counterparts and are entitled
to VAT credit when they make a payment to their suppliers. Under the new regime, a
person who has received an invoice from a supplier that is using the cash accounting
regime will be entitled to VAT credit upon payment of the invoiced amount.
Customs duties
Customs duties are calculated in accordance with the EU customs tariff and regulations.
Excise duties
Excise duties are charged as a percentage of the sales price or customs value or as a flat
amount in Bulgarian lev (BGN) per unit (or per other quantity measures, depending on
the type of the excisable good), unless a suspension regime applies. For 2014, excisable
products include petrol and diesel fuel, liquefied petroleum gas (LPG), heavy oil,
kerosene, beer and spirits, tobacco and tobacco products, and electricity.
The applicable rates are as follows:
Unleaded petrol: BGN 710 per 1,000 litres.
Diesel: BGN 645 per 1,000 litres if used as motor fuel and BGN 50 per 1,000 litres if
used for heating purposes.
LPG: BGN 340 per 1,000 kg if used as motor fuel and BGN 0 per 1,000 kg if used for
heating purposes.
Kerosene: BGN 645 per 1,000 litres if used as motor fuel and BGN 50 per 1,000 litres
if used for heating purposes.
Natural gas: BGN 0.85 per gigajoule if used as motor fuel (may be increased to BGN
5.10 if the European Commission rules that the rate is incompatible with the state
aid rules); BGN 0.60 per gigajoule if used for production purposes; and BGN 0 per
gigajoule if used by households.
Heavy oil: BGN 645 per 1,000 kg.
Electricity: BGN 2 per MWh (zero rate if used by households).
Beer: BGN 1.50/hl/Plato.
Wine: zero rate.
Ethyl alcohol: BGN 1,100 per hectolitre.
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Cigarettes: 23%ad valoremplus BGN 101/1,000 pieces (minimum total of BGN 148
per 1,000 pieces).
Lower rates may apply in certain cases (e.g. beer produced by independent small
breweries).
The Excise Duties and Tax Warehouse Act provides for the tax warehousing regime
and regulates the production, storage, and movement of excisable products under duty
suspension.
Property tax
The annual property tax rate is determined by each municipality and ranges from 0.01%
to 0.45% of the tax value of property. Individuals and legal entities that are owners of
immovable property (i.e. land and buildings) are liable for property tax. For individuals
and residential properties of enterprises, the taxable base is the tax value as determined
by the municipal authorities based on certain statutory criteria. The taxable base for
properties of enterprises is the higher of the propertys gross book value and its tax value
determined by the respective municipal authorities.
A garbage collection fee is payable for immovable property at a rate determined by the
local municipal council annually.
Transfer tax
A transfer tax is due on the value of transferred real estate or motor vehicles, subject
to certain exemptions (e.g. contributions in-kind, acquisitions under the Law on
Privatisation and Post-privatisation Control). The rate of the transfer tax ranges from
0.1% to 3% and is determined by each municipality.
Stamp duties
There are no stamp duties in Bulgaria.
Insurance premium tax
A tax of 2% is levied on all insurance premiums paid under insurance agreements

covering risks insured in Bulgaria. Life insurance, reinsurance, aircraft, vessels, and
international transport insurance agreements are exempt from this tax. The taxable
base is the insurance premium received by an insurance company under an insurance
agreement.
Insurance companies and their tax representatives are liable to collect the tax and
remit it to the budget monthly by the end of the month following the month when the
insurance premium was collected.
Tourist tax
The tourist tax is levied with respect to the number of nights spent in hotels and other
places for accommodation. The municipalities may determine the tax within a range of
BGN 0.20 to BGN 3 per night, depending on the type of accommodation facility.
The tax is payable on a monthly basis by the 15th day of the following month.
One-off taxes
The following corporate expenses are subject to a one-off tax:

Representative expenses related to a companys business.
Social expenses provided to employees in kind (monetary social expenses are subject
to personal income tax [PIT]).
Expenses related to the exploitation and maintenance of cars where they are used for
management activities (as distinguished from administrative activities).
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The rate of the one-off tax with respect to the above expenses is 10%. Both the expenses
and the related one-off taxes are deductible for CIT purposes.
National insurance contributions
National insurance contributions include social security and health insurance

contributions.
The aggregate rate of social security contributions is 22.7% to 23.4%*, of which 13% to
13.7%* is payable by the employer and 9.7% is payable by the employee.
The aggregate rate of health insurance contributions is 8%, out of which 4.8% is payable
by the employer and 3.2% is payable by the employee.
The total national insurance contribution rate (social security and health insurance) is
30.7% to 31.4%*, out of which 17.8 to 18.5%* is payable by the employer and 12.9% is
payable by the employee.
* The range is due to the rate of contributions payable to the Accident at Work and
Occupational Illness Fund, which is due only by the employer and can vary from 0.4%
to 1.1%, depending on the employers economic activity. The rate for the administration
and services sector is 0.5%.
Branch income
Although branches are not deemed to be separate legal persons, branches of nonresident companies have separate balance sheets and profit and loss accounts and
are subject to CIT at the standard rate of 10% as well as other general taxes (e.g. VAT,
property tax).
Representative offices of foreign entities are not allowed to carry out business activities
and are not subject to CIT. A representative office registered under the Encouragement
of Investments Act may perform only those activities that are not regarded as economic
activities (e.g. marketing activities normally carried out by a representative office and
auxiliary to the activities of its head office). Representative offices do not constitute PEs
of the non-resident entities unless they engage in business activities in breach of the law.
Profits repatriated by a branch to its head office abroad are not subject to WHT.
However, certain income payable by a Bulgarian branch or a PE to other parts of the
enterprise abroad may trigger WHT (e.g. income from technical services, interest,
royalties) unless the respective expenses are not deductible to the branch or the PE, or
are recharged at cost.
The taxable result is based on the statutory accounting principles relating to profit/loss
and adjusted for tax purposes. Statutory accounting is maintained on an accrual basis in
line with the applicable accounting standards.
Small and medium-sized companies may apply specific national standards for the
financial statements of small and medium-sized companies or, optionally, International
Financial Reporting Standards (IFRS). The principles provided by the standards for the
financial statements of small and medium-sized companies are similar to those provided
by IFRS. Certain types of companies, including banks and insurance companies, are
obligated to apply IFRS.
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Inventory valuation
The tax legislation follows the accounting rules for inventory valuation methods. The
accounting rules may restrict the application of certain methods (e.g. last in first out
[LIFO] is not allowed under IFRS).
Inventory valuation and revaluation methods applicable under accounting standards

may be used for tax purposes. Companies may choose the method of inventory valuation
but must apply the chosen method consistently throughout the accounting period. An
inventory of assets and liabilities is carried out in each accounting period. Accounting
gains and losses realised upon revaluation of inventory will not be recognised for tax
purposes and will form a temporary tax difference. These gains and losses will be
recognised for tax purposes in the period in which the inventory isdisposed of.
Capital gains
Realised capital gains are included in corporate income and are taxed at the full CIT
rate.
Note that capital gains from securities will not be subject to taxation if resulting from
shares in listed companies and tradable rights in such shares on a regulated securities
market in the EU/EEA. Assets distributed as dividends are deemed realised at market
value, and any capital gains arising from this will be subject to tax.
Dividend income
Dividends distributed by Bulgarian companies to foreign shareholders and resident

individuals are subject to 5% WHT under the domestic legislation (see the Withholding
taxes section for exceptions for payments to EU/EEA tax residents and under double tax
treaties[DTTs]).
Inter-company dividend payments between Bulgarian companies and dividends

distributed by EU/EEA residents to Bulgarian companies (except for dividends from
special purpose investment companies or in case of hidden distribution of profits) are
not included in the tax base of the recipient company.
Stock dividends
No explicit regulation with respect to stock dividends exists in the Bulgarian CIT act.
Rather, the tax treatment of stock dividends follows the accountingtreatment.
Interest income
Interest income is included in the financial results of the company and is subject to 10%
CIT.
Exchange rate gains/losses
Exchange rate gains and losses are reported in the profit and loss account and reflected
in the assessment of taxable profit.
Foreign income
Income derived outside Bulgaria by resident legal entities and income derived in
Bulgaria by Bulgarian branches of non-residents is included in the taxable base for the
purpose of CIT, regardless of whether such income is subject to taxation abroad.
In instances where the provisions of a DTT are applicable, a tax credit or exemption for
the foreign tax paid may be allowed. There is also a unilateral tax credit that may not
exceed the amount of the tax that would be payable in Bulgaria for the same type of
income.
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Undistributed income of foreign subsidiaries of a Bulgarian resident company is not
taxed.
Deductions
For accounting purposes, depreciation is calculated in accordance with the straightline, progressive, or declining-balance methods of depreciation. Accounting regulations
permit Bulgarian companies to establish a depreciation schedule for each tangible and
intangible fixed asset on the basis of the method chosen by the company.
For tax purposes, only the straight-line method is permitted. For machines and
equipment that are part of the initial investment, accelerated depreciation may also
apply, subject to certain conditions.
For tax purposes, fixed assets are divided into the following seven categories:
Category
I
Assets
Massive buildings, industrial constructions/equipment,
transmission facilities/lines (including electricity)
Machinery, production facilities, apparatuses
Vehicles (except cars), coverage of roads and runways
Computers, peripherals to computers, software and rights to
use software, mobile phones
Cars
Long-term intangibles with legal or contractual limitations on
the period of use
Other assets
II
III
IV
V
VI
VII
Maximumrates(%)
4
30/50
10
50
25
33
15
Under certain conditions, assets classified in Category II that are new may be
depreciated at a maximum rate of 50% for tax purposes.
The depreciation rate for Category VI is determined by the period of limitations, but not
more than 331/3%.
Depletion is not specifically regulated for tax purposes.
Goodwill
Goodwill is not amortisable under Bulgarian tax law.
Start-up expenses
Start-up expenses may be recognised as deductible in the year of establishment of the

company.
Interest expenses
Interest expenses are recognised as deductible expenses, subject to the thin

capitalisation rules applicable in Bulgaria (see Thin capitalisation in the Group taxation
section).
Bad debt
Bad debt impairment costs can be deducted upon expiration of the statute of limitation
period. Also, the impairment costs can be recognised for tax purposes upon transferring
the receivables. Such impairment costs are tax deductible for financial institutions in the
year of recognition.
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Generally, charitable contributions to certain organisations or persons, specified by law,

can be deductible at up to 10% of a companys accounting profit.
Fines and penalties
Expenses for fines and penalties for violation of the legislation are not deductible.
Taxes
CIT is not deductible for tax purposes. However, other taxes, such as one-off taxes on
certain expenses (e.g. representative expenses, certain types of fringe benefits) or local
taxes and fees may be recognised as deductible for CIT purposes.
The taxpayer has the right to carry forward tax losses incurred in a given year over
the following five years. The loss subject to carryforward is the negative amount of
the financial result adjusted for tax purposes, with certain add-backs and deductions
specified in the tax legislation.
Tax losses may be reversed up to the amount of the positive financial result after tax
adjustments (without the effect of the loss subject to be carried forward itself).
Carryforwards of foreign-source losses may only offset income from the same source.
However, EU/EEA-source losses may offset income from other sources, including
Bulgarian sources.
Loss carryback is permitted in very specific cases.
Payments to foreign affiliates may be subject to recalculation by the tax authorities if

such payments are not made at arms length.
Group taxation
No group consolidation is permitted for tax purposes in Bulgaria. All companies must
pay tax on the basis of individually assessable profits and losses.
Transfer pricing
Bulgarian law requires that taxpayers determine their taxable profits and incomes
applying the arms-length principle to prices at which they exchange goods, services,
and intangibles with related parties (transfer prices). Bulgarian transfer pricing rules
generally follow OECD Transfer Pricing Guidelines.
Transfer prices are not set in compliance with the arms-length principle where:
prices of the supply of goods or services differ from the market prices or
loans are received or granted against an interest rate that differs from the market
interest rate effective at the time the loan agreement is concluded.
The market interest rate is defined as the interest payable under the same conditions for
a loan provided or received, notwithstanding the form of the loan, between non-related
parties. The market interest is determined according to the market conditions.
The taxable person should be able to evidence that its relations with related parties are
in line with the arms-length principle.
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For the purposes of transfer pricing rules, market prices are determined by the following
methods:

Comparable uncontrolled price method.

Cost plus method.
Preparation of transfer pricing documentation is not mandatory but is recommendable

for material related party transactions. Recently, the revenue authorities have tended to
focus more on the transfer pricing area.
Currently, there is no possibility to obtain an Advance Pricing Agreement (APA).
However, it is possible to obtain an opinion from the revenue authorities on a caseby-case basis. Such opinions are not binding, but they may provide protection from
assessment of interest for late payment and penalties.
Thin capitalisation
Interest payable by local companies to local or foreign persons may be restricted by the
thin capitalisation rules (which also apply to interest due to non-affiliated companies).
The tax deductibility for interest expenses that exceed interest income is restricted to
75% of the accounting result of the company, exclusive of interest income and expense.
If the accounting result of the company before including the effect of the interest
income and expenses is a loss, none of the net interest expense will be deductible for
tax purposes. Interest on bank loans and interest under financial lease agreements are
subject to thin capitalisation regulations only when the agreements are between related
parties or guaranteed by or extended at the order of a related party.
The thin capitalisation rules do not apply if the debt-to-equity ratio does not exceed 3:1
for the respective tax period.
Interest expenses restricted in a given year under the thin capitalisation rules may be
deducted from the financial result for tax purposes during the following five consecutive
years. This reversal may be made up to the tax allowed interest expenses, as per the
above formula.

Tax incentives may apply in certain circumstances, including:
Partial granting of the CIT due for performance of agricultural activities.
Additional tax deductions for hiring of long-term unemployed, handicapped, or
elderly persons.
Full granting back of the CIT due for investment in regions with high unemployment.
Foreign tax credit
See Foreign income in the Income determination section for a description of the foreign tax
credit regime.
Withholding taxes
Bulgarian companies are required to withhold tax on payments of dividends and
liquidation proceeds; interest (including that incurred under finance lease agreements
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and on bank deposits); royalties; fees for technical services; payments for the use
of properties; payments made under operating leasing, franchising, and factoring
agreements; and management fees payable to non-residents.
Capital gains from the transfer of shares in a Bulgarian company or immovable property
located in Bulgaria realised by a non-resident are also subject to domestic WHT;
however, the tax is payable by the non-resident. Capital gains from securities are not
subject to WHT if they result from shares in listed companies and tradable rights in such
shares on a regulated securities market in the EU/EEA.
Dividends and liquidation proceeds are also taxed where payments are made to resident
individuals and non-profit organisations (for details on dividend payments between
domestic companies, see Dividend income in the Income determination section). Dividends
capitalised into shares (stock dividends) are not subject to WHT.
Interest and royalty payments payable to EU-based associated companies are subject to
a reduced 5% WHT rate in Bulgaria. Associated company criteria are identical to those
in the Interest and Royalty Directive and require a holding of at least 25% of the capital
for at least two years. As of 1 January 2014, the reduced 5% WHT rate on income from
interests and royalties can be applied before the expiration of the two-year participation
period, provided that the participation in the capital does not fall below the required
minimum before the end of this period (i.e. the direct participation is kept for at least
two years). Otherwise, the standard 10% WHT should be applied. Exemption from WHT
on interest and royalties payable to associated companies will be introduced as of 1
January 2015.
Any fees for services and use of rights (in addition to technical services fees and
royalties) accrued to entities in low-tax jurisdictions will attract 10% Bulgarian WHT
unless there is proof of the effective provision of the supply. Subject to 10% WHT
would also be any accruals for penalties or damages payments to entities in low-tax
jurisdictions, except for insurance compensations. The tax legislation introduces a list of
low-tax jurisdictions. These are certain off-shore territories that are explicitly listed, as
well as countries with which Bulgaria has not signed a DTT and in which the applicable
corporate tax rates are more than 60% lower than the applicable rate in Bulgaria.
Certain types of income (other than dividends) accrued by a PE of a foreign person to
other parts of its enterprise located outside the country are subject to WHT (except for
that mentioned in the Branch income section).
Dividends
When a dividend is accrued to a non-resident company or an individual (both resident

and foreign), it is subject to WHT at a rate of 5%, unless the rate is reduced by an
applicable DTT. No differentiation is made between portfolio and substantial holdings
for purposes of this WHT on dividends.
Dividends distributed by a Bulgarian resident company to an entity that is a tax resident
in an EU/EEA member state are not subject to Bulgarian WHT.
Interest
A 10% rate applies to interest (including interest from bank deposits) payable to a nonresident, unless the rate is reduced by an applicable DTT.
Interest on borrowings by the government or the Bulgarian National Bank from
international financial institutions is not taxable if the respective loan agreements
contain relevant exemption arrangements (international treaties override
domesticlegislation).
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Interest paid to an associated EU-based related company is subject to a 5% WHT
(requiring at least 25% holding for at least two years, see above for a description of relief
from the two-year participation period introduced as of 1 January 2014) unless reduced by
a DTT.
As of 1 January 2014, an exemption from WHT is introduced for income from interests
on bonds and other debt securities emitted by a local tax resident and admitted to a
regulated stock exchange in an EU/EEA member state.
An exemption from WHT is also introduced for income from interests on loans extended
by a tax resident of an EU/EEA member state, issuer of bonds or other debt securities,
provided that the bonds/debt securities are issued for the purposes of extending a loan
to a local legal entity and are admitted to a regulated stock exchange in an EU/EEA
member state.
Royalties
Royalties payable to foreign persons are taxed at a rate of 10% at source, unless the rate
is reduced by an applicable DTT.
Royalty payments to an associated EU-based related company are subject to a 5%
(requiring at least 25% holding for at least two years, see above for a description of relief
from the two-year participation period introduced as of 1 January 2014) unless reduced by
a DTT.
Capital gains and technical services
Capital gains and technical service fees payable to foreign residents are subject to 10%
WHT, unless the rate is reduced by an applicable DTT. As per the domestic legislation,
technical services include installation and assembly of tangible assets as well as
consultancy services and marketing research.
Application of DTT relief
Applying DTT relief is generally possible only after completing an advance clearance
procedure with the Bulgarian tax authorities. Companies have to evidence that they
satisfy the requirements for applying the DTT (e.g. tax residence, beneficial ownership,
existence of contractual relationship, actual accrual/payment of the income). The
procedure usually takes 60 days to complete.
The above procedure has to be followed only if the annual income payable by a
Bulgarian resident exceeds BGN 500,000. In all other cases, DTT relief can be applied
directly, through submitting a tax residence certificate and a beneficial ownership
declaration with the payer of the income.
Beneficial ownership is explicitly defined in Bulgarian legislation. A company is
considered a beneficial owner of the income if it has the right to dispose of the income,
has discretion over its use, bears the whole or a significant part of the risk of the activity
from which the income is realised, and does not qualify as a conduit company.
A conduit company is a company that is controlled by persons who would not benefit
from the same type and amount exemption if the income was realised directly by them,
does not carry out any economic activity except for owning and/or administering the
rights or the assets from which the income was realised, and does not own assets,
capital, or personnel relevant to its economic activity or does not control the use of the
rights or assets from which the income was realised.
The conduit company restriction does not apply to companies that have more than a half
of their voting shares traded on a registered stock exchange.
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The following is a summary of the main parameters of the Bulgarian DTTs as of 1
January 2014:
Recipient
Albania (3, 6, 9, 28)
Algeria (24)
Armenia (1, 2, 6, 28, 36)
Austria (6, 10, 35)
Azerbaijan (6, 28, 34)
Bahrain (6)
Belarus (6)
Belgium (6, 10, 27)
Canada (9, 16, 28)
China (2, 6, 9, 28)
Croatia
Cyprus (3, 26, 27)
Czech Republic (11, 27)
Denmark (3, 27)
Egypt (6)
Estonia (9, 16)
Finland (4, 9, 12, 27)
France (5, 27)
Georgia (6)
Germany (11, 16, 26, 27, 36)
Greece (27)
Hungary (6, 27)
India (6)
Indonesia (6)
Iran (6, 9, 28)
Ireland (3, 6, 9, 27, 28)
Israel (18, 19, 20, 21)
Italy (27)
Japan (3, 6)
Jordan (6, 28)
Kazakhstan (8, 9, 28)
Kuwait (3, 22)
Latvia (3, 9, 24, 25, 27, 28)
Lebanon (6)
Lithuania (16, 28, 29)
Luxembourg (3, 10, 27)
Macedonia (3, 6)
Malta (12, 17, 27)
Moldova (3, 6, 9, 28)
Mongolia (6)
Morocco (5, 9, 28)
The Netherlands (3, 7, 9, 27)
North Korea (6)
Norway
Poland (6, 27)
Portugal (3, 6, 27)
Dividends*
5/15
10
5/10
0/5
8
5
10
10
10/15
10
5
5/10
10
5/15
10
0/5
10
5/15
10
5/15
10
10
15
15
7.5
5/10
10/7.5 to 12.5
10
10/15
10
10
0/5
5/10
5
0/10
5/15
5/15
0/30
5/15
10
7/10
5/15
10
15
10
10/15
WHT (%)
Interest**
Royalties**
0/10
10
0/10
10
0/5/10
5/10
0/5
5
7
5/10
0/5
5
0/10
10
0/10
5
10
10
0/10
7/10
5
0
7
10
0/10
10
0
0
0/12.5
12.5
5
5
0
0/5
0
5
0/10
10
0/5
5
10
10
0/10
10
0/15
15/20
0/10
10
0/5
5
0/5
10
0/5/10
7.5 to 12.5
0
5
0/10
10
0/10
10
0/10
10
0/5
10
0/5
5/7
0/7
5
0/10
10
10
5
0/10
10
0
10
0/10
10
0/10
10
10
10
0
0/5
0/10
10
0
0
0/10
5
0/10
10
B
Capital gains
0/10
0
0/10
0/10
0
0
0
0
0/10
0/10
0
0/10
0
0
10
0/10
0/10
0
0
0/10
0
0
10
0
0/10
0/10
7.5 to 12.5
0
10
0
0/10
0
0/10
0
0/10
0
0
0
0/10
0
0/10
0/10
0
0
0
0
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Recipient
Qatar (6, 36)
Romania (3, 6)
Russian Federation (6)
Serbia (3)
Singapore (6)
Slovak Republic (27)
Slovenia (3, 23, 27, 28)
South Africa (3, 6, 23, 24)
South Korea (5, 6)
Spain (3, 27)
Sweden (9, 27, 28)
Switzerland (10, 13, 37, 38)
Syria
Thailand (14, 15)
Turkey (3, 6, 9)
Ukraine (3, 6, 9, 28)
United Arab Emirates (6, 22, 34)
United Kingdom (27)
United States (16, 24, 28, 30,
31, 32, 33)
Uzbekistan (6, 28)
Vietnam (6, 9)
Zimbabwe (3, 6, 9, 28)
Dividends*
0
10/15
15
5/15
5
10
5/10
5/15
5/10
5/15
10
0/10
10
10
10/15
5/15
0/5
10
5/10
10
15
10/20
WHT (%)
Interest**
Royalties**
0/3
5
0/15
15
0/15
15
10
10
0/5
5
10
10
0/5
5/10
0/5
5/10
0/10
5
0
0
0
5
0/5
0/5
0/10
18
10/15
5/15
0/10
10
0/10
10
0/2
0/5
0
0
0/5/10
5
0/10
0/10
0/10
Capital gains
0
0
0
0
0
0
0/10
0/10
0
0
0/10
0
0
10
0/10
0/10
0
0
0
10
15
10
0/10
0/15
0/10
Notes
*Under Bulgarian domestic legislation, dividends distributed to non-residents are subject to 5% WHT,
unless the recipient is a resident of an EU/EEA member state.
** Under Bulgarian domestic legislation, interest and royalty payments to EU-resident companies satisfying
the Interest and Royalty Directive requirements are subject to a reduced 5% WHT rate.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
296
The lower rate applies to dividends paid out to a non-resident that is the direct owner of at least the
equivalent of 100,000 United States dollars (USD) forming part of the capital of the company making
the payment.
The reduced rate for royalties is available for the use of (or right to use) industrial, commercial, or
scientific equipment.
The lower rate applies to dividends paid out to a foreign company that directly controls at least 25%
of the share capital of the payer of the dividends. In the specific cases of the different countries, more
requirements may be in place.
There is no WHT on royalties for the use of (or the right to use) scientific or cultural works.
The lower rate applies to dividends paid out to a foreign company that directly controls at least 15%
of the share capital of the payer of the dividends.
There is no WHT on interest when paid to public bodies (government, the central bank, and, in
several cases, certain governmental bodies).
5% royalties are applicable if the Netherlands applies WHT under its domesticlaw.
Up to 10% branch tax may be imposed on PE profits.
The 10% rate on capital gains from securities applies in specific cases that are described in the
respective treaty.
The zero rate on interest applies if the loan is extended by a bank and also for industrial, trade, and
scientific equipment on credit.
The zero rate on interest applies if the interest is paid to public bodies (government, municipality, the
central bank, or any financial institution owned entirely by the government), to residents of the other
country when the loan or the credit is guaranteed by its government, or if the loan is extended by a
company for any equipment or goods.
The Council of Ministers has stated its intention to renegotiate the DTTs with Malta andFinland.
A 5% rate on royalties applies if the Swiss Confederation introduces in its domestic law WHT on
royalties paid to non-residents.
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14. The 10% rate on interest applies if the interest is received from a financial institution, including an
insurance company.
15. The 5% rate on royalties applies if the royalties are paid for the use of copyright for literary, art, or
scientific work.
16. The lower rate applies to dividends paid out to a foreign company that directly controls at least 10%
of the share capital of the payer of the dividends.
17. The zero rate applies to dividends payable by a Bulgarian resident entity to an entity resident in Malta.
The 30% rate applies to dividends payable by a Maltese entity to a Bulgarian entity.
18. The 10% rate applies to dividends distributed by companies that enjoy a reduced or zero CIT
by virtue of a tax incentive for investments. In all other cases, the rate is equal to one half of the
applicable rate as per the national legislations of Bulgaria and Israel. Nevertheless, the WHT rate may
not be less than 7.5% or more than12.5%.
19. The 5% rate applies to interest payable to banks or other financial institutions. The zero rate applies
to interest payable to certain public bodies (governments, municipalities, central banks) or to
residents of the other country when the loan or credit is guaranteed, insured, or financed by a public
body of that country or by the Israeli International Trade InsuranceCompany.
20. The rate on royalties is equal to one half of the applicable rate as per the national legislations of
Bulgaria and Israel. Nevertheless, the WHT rate may not be less than 7.5% or more than 12.5%.
21. The rate on capital gains from securities is equal to one half of the applicable rate as per the national
legislations of Bulgaria and Israel. Nevertheless, the WHT rate may not be less than 7.5% or more
than 12.5%. However, capital gains from transfers of shares in entities whose real estate properties
exceed 50% of their assets are taxed in the country in which the real estate is located.
22. The zero rate applies to dividends and interest paid to certain public governmental and local bodies
as well as entities fully owned by the state.
23. The 5% rate on royalties applies if the royalties are paid for the use of copyright for literary, art, or
scientific work as well as for the use of industrial, commercial, or scientificequipment.
24. There is no WHT on interest when paid to and beneficially owned by public bodies (government, local
public authorities, the central bank, or any financial institution wholly owned by the government), as
well as on interest derived on loans guaranteed by the foreign government or based on an agreement
between the governments of thestates.
25. The 7% rate on royalties applies if the royalties are paid for the use of, or the right to use,
cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark,
design or model, plan, secret formula, or process.
26. The zero rate applies for capital gains from shares in a Bulgarian resident company that are traded on
the Bulgarian Stock Exchange.
27. In accordance with the EU Parent-Subsidiary Directive implemented in the Bulgarian legislation,
dividends distributed by a Bulgarian resident company to an entity that is a tax resident in an EU
member state may not be subject to Bulgarian WHT.
28. Full WHT at source may be levied on capital gains from the sale of shares in companies, the main
assets of which are direct or indirect holdings in real estate situated in Bulgaria, and in some other
cases (subject to the specifics stipulated in the respective treaty).
29. There is no WHT on interest when paid to public bodies (government, the central bank, governmental
institutions) or any financial institution wholly owned by thegovernment.
30. Pension funds and charities are considered resident persons.
31. The zero rate does not apply to dividends distributed to real estate investment trusts(REITs).
32. The zero rate does not apply to interest paid under a back-to-back loan.
33. The benefits of the treaty are limited to entities that satisfy certain criteria (Limitation of
Benefitsclause).
34. The 5% rate on royalties applies if the royalties are paid for the use of, or the right to use, any patent,
design, model, plan, secret formula, process, or know-how.
35. The treaty provides for 10% WHT on capital gains unless shares were sold on a recognised stock
exchange or seller owned at least 20% of the issuing companys capital.
36. The reduced rate for interest is available for bank loans (subject to specifics in the treaty).
37. The zero rate applies to dividends paid to a pension fund, central bank, or a foreign company (other
than a partnership) if the company directly controls at least 10% of the share capital of the payer for
at least one year.
38. The zero rate applies to interest paid to a pension fund, a public body (i.e. the government, a political
subdivision, a local authority, or a central bank), in relation to a liability for the sale on credit of goods,
equipment or services, as well as to a company with a minimum direct participation of at least 10% in
the payer of the interest for at least one year or where a third company holds a 10% minimum direct
participation in both the payer and the recipient of the interest.
Under some DTTs, technical service payments fall within the definition of royalty
payments and are taxed accordingly.
Tax administration
Taxable period
The financial and tax years coincide with the calendar year.
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Tax returns
Annual profit must be declared no later than 31 March of the year following the financial
(tax) year. Along with their annual CIT returns, companies are required to file financial
information for their business activities during the year in a standard statistical form not
subject to a financial audit. The self-assessment principle is applied.
Payment of tax
If a company realised net revenue from sales of more than BGN 3 millionin the
preceding year, it is liable for monthly CIT payments for each month in the current year.
If the net revenue from sales for the preceding year is below BGN 3 millionbut above
BGN 300,000, the company is liable for quarterly advance CIT payments for each quarter
of the year except the fourth quarter. The amount of the monthly or quarterly CIT
instalments is calculated based on the forecasted taxable profit for the current year.
Companies established during the current year and companies with net revenue from
sales below BGN 300,000 for the preceding year are not required to pay advance CIT
instalments.
The overpaid amount of CIT cannot be offset against advance and annual payments due
for the next period. The overpaid amount may only be effectively claimed for refund by
the taxpayer. The difference between the annual tax declared in the CIT return and the
advance tax paid for the corresponding year must be paid by the deadline for submitting
the tax return on 31 March of the followingyear.
Priority order for settlement of tax and social security liabilities
As of March 2014, the single account of the NRA, introduced in 2013, was revoked
and subsequently split into four separate bank accounts. As a result, payment of tax
liabilities and social security contributions should be made to four separate accounts:
for tax liabilities, for general mandatory social security contributions, for supplementary
mandatory retirement provisions, and for health insurance contributions.
If a taxpayer has several public liabilities (e.g. tax and/or social security liabilities)
to one of the four accounts of the NRA, the one with the earlier payment date will be
settled first.
Tax audit process
Tax audits are usually performed every four to five years, corresponding to the period of
the statute of limitations.
The statute of limitations, i.e. the period within which the state authorities are entitled
to collect the tax liabilities and other related mandatory payments, is five years from the
beginning of the year following the year in which the tax liabilities became payable. The
above periods can be extended in certain cases. However, the maximum period of the
statute of limitations is ten years.
Transfer pricing is likely to become an area of focus for the tax authorities.
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PwC contact
Heng Thy
PricewaterhouseCoopers (Cambodia) Limited
35 Sihanouk Boulevard, Sangkat Tonle Bassac, Khan Chamkarmon
Phnom Penh, Cambodia
Tel: +855 23 860 606
ACLEDA Banks official announcement of accepting tax payments
ACLEDA Bank Plc. (ACLEDA Bank) has officially announced that all tax payments
payable to the General Department of Taxation (GDT) can be made through ACLEDA
Bank at any branch in Cambodia. The details of account numbers for each Phnom Penh
and provincial tax branch and department can be obtained from the ACLEDA Banks
website (www.acledabank.com.kh/kh/eng/ps_cmtaxpayment.php).
Amendment of the specific tax rates on certain goods
The Ministry of Economy and Finance (MEF) has issued Prakas No. 521 MEF PrK. to
implement the new specific tax rates (i.e. 15% and 20%) for certain types of cigarettes
and alcoholic products in accordance with Sub-Decree No. 150 Sub-Decree PK. The
Prakas is effective from 22 April 2014.
Value-added tax (VAT) incentives
The MEF has issued Prakas No. 311 MEF.Prk, dated 19 March 2014, on the
implementation of VAT for supporting industries or contractors supplying products or
services for the purpose of exporting garments, textiles, footwear, bags and handbags,
and headwear. The supporting industries and contractors are separately defined in the
Prakas. The above Prakas replaces Prakas No. 298 MEF.Prk, dated 17 June 2005, which
covered the garment, textile, and footwear industries only. See Value-added tax (VAT) in
the Other taxes section for more information.
The MEF has issued Prakas No. 312 MEF.Prk, dated 19 March 2014, which replaces
Prakas No. 303 MEF.Prk, dated 23 May 2001. The new Prakas stipulates that VAT on the
import and supply of certain agricultural products shall be borne by the government.
Such products include all types of fertilisers, plant seeds, animal medicines, animal
foods, animal species, and agricultural machinery and tools.
The MEF has issued Prakas No. 313 MEF.Prk, dated 19 March 2014, which grants
VAT incentives to contractors who supply milled rice and supporting services to rice
exporters for exporting purposes. See the Tax credits and incentives section for more
information.
Market interest rate on loans for 2013
Further to the Internal Instruction No. 151, dated 22 January 2014, on the
Determination of Interest Expense on Loans, the GDT has set the annual market interest
rate on loans for 2013 at 12% per annum based on the average interest rate of eight
major commercial banks in Cambodia.
Internal instruction on determination of interest expense on loans
The GDT has issued a new internal instruction on assessing tax on determination of
interest on loans, which replaces its Internal Instruction No. 1707 GDT dated 2 October
2013. The new internal instruction highlights the following important points:
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Interest expense or subsidy income will no longer be deemed on loans, whether the
rate is below or above market interest rate, for the purpose of reassessing withholding
tax (WHT) and tax on profit (ToP)/minimum tax.
The maximum interest rate allowed for the purposes of tax deduction shall be:
120% of the market interest rate at the time of obtaining the loan from a third
party or
the market interest rate at the time of obtaining the loan from a related person.
The market interest rate is the average of the interest rates for loans of at least the
five biggest commercial banks in Cambodia, which will be published by the tax
authorities annually.
Taxpayers must notify the GDT of new loans within 30 days of the loan transaction
and submit the loan agreement and other documents that clearly establish the loan
transactions.
In the case of failure to inform the tax administration of a loan or failure to supply
proper documents, the loan shall be deemed as a loan without proof. As a result, the
taxpayers net assets will be deemed to be higher and the loan will be included in the
taxpayers taxable profit and subject to 20% ToP.

Cambodias taxation rules vary according to the taxpayers regime, the classification of
taxpayers under different tax collection and control procedures of the GDT. Real-regime
taxpayers include large or incorporated taxpayers duly registered with the Ministry of
Commerce and the GDT. The majority of foreign investors will fall into the real regime.
Unless otherwise stated, the focus of this summary is on real-regime taxpayers.
Resident taxpayers are subject to tax on worldwide income while non-residents are
taxed on Cambodian-sourced income only. A permanent establishment (PE) is taxable
on its Cambodian-source income only.
Corporate tax rate
The standard rate of corporate income tax, known asToP, for companies and PEs is 20%.
Industry-specific tax rates
Oil and gas and certain mineral exploitation activities are subject to ToP at the rate of
30%.
Insurance companies are taxable at a rate of 5% on the gross premium income and at
the rate of 20% on other income derived from non-insurance/reinsurance activities.
Net interest income of insurance companies received after 4% or 6%WHT is not taxable
income.
Minimum tax
Real-regime taxpayers are subject to a separate minimum tax. The minimum tax is an
annual tax with a liability equal to 1% of annual turnover inclusive of all taxes except
VAT. However, an exemption has been provided for Qualified Investment Projects (QIPs)
(see the Tax credits andincentives section for more information).
As a separate tax to the ToP, the minimum tax is due irrespective of the taxpayers profit
or loss position (i.e. the minimum tax will be liable if the 1% of total annual turnover
exceeds the 20% ToP liability).
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Additional ToP on dividend distribution
A dividend-paying taxpayer is required to pay an additional ToP at the time of dividend

distribution if the profit was previously subject to a 9% or 0% ToP. The rates of
additional ToP vary depending on the profits to be distributed. For profit that has been
subject to ToP at the rate of 20%, 9%, or 0%, that profit will be subject to additional ToP
at the following rate respectively:
ToP
20% (standard rate)
9% (preferential rate, which was no longer applicable after 31
December 2010)
0% (during tax holiday)
Additional ToP
0%
11/91 (approximately 12.09%)
20%
A shareholder is entitled to establish a special dividend account from which the relevant
dividend that was already subject to 20% ToP may be on-paid without further additional
ToP obligations.
A dividend will be exempt from tax in the hands of the shareholder if additional ToP and
WHT for non-resident shareholders has been paid.
Local income taxes
Local income taxes are not applicable in Cambodia.
Corporate residence
Resident taxpayers include companies organised, managed, or having their principal
place of business in Cambodia.
A PE may be determined if there is a permanent place or entity through which the

non-resident persons carry on their business or if there is an exercise of the authority to
conclude a contract on behalf of a foreign entity or if business activities exceed certain
time periods in Cambodia.
Factors to be considered in determining a PE include a place of management, an agent or
office, a warehouse or factory, a workshop, any place of extraction of natural resources,
a plantation, etc. Carrying out projects (e.g. supervisory activities of construction
project, provision of services) exceeding a time period of six months in any 12-month
period may also be considered as having a PE.
Other taxes
VAT is applicable to real-regime entities and is charged at 10% on the value of the supply
of most goods and services.
Exported goods and services rendered outside Cambodia are zero-rated. In addition,
0% VAT applies to the supporting industries or contractors who directly supply goods
(including milled rice) or services (including milled rice production services) to exportoriented garment, textile, footwear, bag, handbag, and headwear manufacturers, milled
rice exporters, and domestic supplies of paddy rice.
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Some supplies are VAT exempt, the main categories being public postal services, medical
and dental services, electricity, transportation of passengers by wholly state-owned
public transport systems, insurance services, primary financial services, and land.
VAT returns and payments are due within 20 days of the following month. Note that
strict record-keeping requirements do exist.
Import and export duties
Import duties are levied on a wide range of products. Rates vary from 0% to 35%.
Following Cambodias entry into the Association of South-East Asia Nations (ASEAN)
during 1999, the government is required to reduce import duties in accordance with the
Common Effective Preferential Tariffs program.
Export duties are levied on a limited number of items, such as timber and certain animal
products (including most seafood).
Specific tax on certain merchandise and services (SPT)
SPT is a form of excise tax that applies to the importation or domestic production
and supply of certain goods and services. SPT on domestically produced goods is
generally applied to the ex-factory selling price, which is defined as 65% of the
selling price before VAT and any discount. For imported goods, SPT is due on the
CIF (cost, insurance, and freight) value inclusive of customs duty. For hotel and
telecommunication services, SPT is payable based on the invoice prices.
For local and international air transportation of passengers, SPT is 10%, payable based
on the air ticket value issued in Cambodia for travel within and outside Cambodia.
The SPT base is inclusive of all taxes other than SPT and VAT. For example, for return
air tickets from Phnom Penh to Singapore costing 2 million Cambodian riel (KHR),
exclusive of airport tax, the SPT payable is KHR 181,818 (KHR 2 million/1.1 x 10%).
Accommodation tax
Accommodation tax is calculated at 2% of the accommodation fee inclusive of all taxes

and other services except accommodation tax and VAT.
Tax for public lighting (TPL)
TPL is imposed on the distribution in Cambodia of both foreign made and locally
produced alcoholic and tobacco products. TPL is levied at 3% of the value of such
products at the time of each in-country sale. Value for these purposes includes all taxes
other than TPL and VAT.
Tax on immovable property (ToIP)
ToIP is levied at 0.1% per annum of the ToIP base. The tax base is 80% of the market
value of the immovable properties stated in Appendix 1 of Prakas No. 371 less the
threshold of KHR 100 million. The immovable property valued below the threshold
is not subject to ToIP. The Prakas also determines that ToIP is effectively collected on
immovable properties located in Phnom Penh and other cities of the provinces.
Immovable property is defined to include land, buildings, and other constructions on
land (e.g. infrastructures built on land, regardless of having a wall or roof). Certain
exemptions exist for government-owned property, agricultural land, property owned
and used for cultural and religious purposes, property of foreign embassies and nongovernmental organisations (NGOs), and property in the special economic zones.
The owners, possessors, and final beneficiaries of immovable property are required to
register and obtain a Tax Identification Number for each immovable property valued
above the threshold from the tax administration where the immovable property is
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located. Any changes in relation to the registered immovable property (e.g. a change of
title) are also required to be reported.
The owners, possessors, and final beneficiaries hold responsibility for calculating ToIP,
preparing and filing a ToIP return, as well as remitting the ToIP liability to the tax
administration once per year by 30 September. A ToIP return is required for every single
immovable property and must be completed and filed separately. Since this is a selfassessment tax, the tax administration will perform tax audit on ToIP in the subsequent
years.
Tax on unused land
Land in towns and other specified areas without any construction, or with construction
that is not in use, and even certain built-upon land, is subject to the tax on unused
land. The tax is calculated at 2% of the market value of the land per square metre as
determined by the Commission for Valuation of Unused Land on 30 June each year. The
owner of the land is required to pay the tax on 30 September each year.
Stamp tax
Property
The transfer of title in certain assets (e.g. land, building, vehicles) and transfer of
company shares (partial or full) are subject to stamp tax. The tax is imposed on the
transfer values at the rate as follows:
Transfer of assets: 4%.
Transfer of shares: 0.1%.
Government contract
Stamp tax is imposed at the rate of 0.1% on the contract value of the public procurement
contract for goods or services.
Document/signage
Stamp tax is to be paid on certain documents relating to the establishment, dissolution,

or merger of a business, other official documents (perhaps more importantly for foreign
investors), and certain advertising postings and signage. Amounts vary according to
such factors as the type of documents, the location of the signage, illumination, and
nationality of any scripted words. For certain documents, the tax amount is fixed up to
KHR 1 million.
Cigarettes
Domestic producers or importers of cigarettes have the obligation to buy and affix
tax stamps on packets of cigarettes. No person is allowed to sell or display packaged
cigarettes for sale without a tax stamp.
Patent tax
Registered businesses must pay a (relatively nominal) patent tax on initial business
registration and annually thereafter. Patent tax is levied with reference to turnover or
estimated turnover.
In practice, the GDT imposes patent tax at the top band regardless of the level of
turnover.
The annual patent tax return and payment are to be filed annually, within three months
of calendar year-end.
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Tax on means of transportation
The tax on means of transportation imposes a number of statutory fees on the

registration of certain vehicles, including trucks, buses, motor vehicles, and ships.
Tax on salary (ToS)/fringe benefits (ToFB)
Cambodias ToS rules follow internationally familiar residency and source principles. A
Cambodian resident taxpayers worldwide salary will be subject to Cambodian ToS. For
non-residents, only the Cambodian sourced salary will be subject to ToS. The place of
salary payment is not considered relevant in determining source.
A distinction is made between cash and fringe benefit salary components. Different tax
scales also apply.
ToS or ToFB is a tax on employees income, but employers are held liable to these taxes if
the employers fail to withhold.
Branch income
Income of a branch is taxable in the same way as those for corporate profits.
Inventory valuation
Inventory can be valued at weighted-average cost, first in first out (FIFO), or current
value at the close of the period, where this value is lower than the purchase price or
production cost. Work-in-progress should be valued at production costs.
Capital gain
Capital gains form part of taxable profit.
Dividend income
Dividend means any distribution of money or property that a legal person distributes
to a shareholder with respect to the shareholders equity interest in such legal person,
with the exception of stock dividends and distributions in complete liquidation of the
company. Whether or not a distribution is a dividend shall be determined under the
preceding condition without regard to whether or not the legal person has current or
accumulated income or profit or earnings.
Inter-company dividends between residents are exempt from ToP (see the Withholding
taxes section for more information).
Gross dividend income received by a resident company from a non-resident enterprise
is subject to ToP. A foreign tax credit for taxes paid on these dividends is allowed for
deduction from the ToP. The maximum amount of the foreign tax credit is the ToP
liability with respect to that dividend income.
Passive income
Designated passive income (such as interest, royalties, and rent) forms part of taxable
profit.
Foreign income
Resident entities are taxed on their worldwide income, and tax credits are available for
foreign taxes incurred. Foreign income is taxable in the period it is earned; there is no
provision allowing tax to be deferred on the income earned overseas.
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Deductions
Property should be depreciated at rates according to four classes of assets as specified in

the tax legislation. Land is not considered a depreciable asset. The straight-line or the
declining-balance method is specifically required to be used for each class of assets.
Assets
Building and structures
Computers, electronic information systems, software, and data
handling equipment
Automobiles, trucks, office furniture, and equipment
All other tangible property
Method
Straight line
Declining balance
Rate (%)
5
50
Declining balance
Declining balance
25
20
Expenditures on intangible property are amortisable over the life of the property or at
10% per annum.
Special depreciation
A QIP will be entitled to a 40% special depreciation in the first year of purchase or, if
later, the first year the assets are used. However, the special depreciation will only apply
to assets used in manufacturing and processing (still to be defined) and only if the
taxpayer has elected not to use a tax holiday. A clawback provision exists for assets held
for less than four years.
Goodwill
Purchased goodwill is a depreciable intangible fixed asset for ToP purposes. If the useful
life of the intangible fixed assets can be determined, the annual depreciation charges
shall be calculated on the useful life by using the straight-line method. If the useful life
cannot be determined, the annual depreciation rate of 10% shall be used.
Start-up expenses
Preliminary and formation expenses are allowed to be fully deducted in the period in
which the expenses arise, or they can be amortised over two years.
Interest expenses
Interest deductibility in any year is limited to the amount of interest income plus
50% of the net profits excluding interest income and interest expense. The excess
non-deductible interest expense can be carried forward to the following tax years
indefinitely.
Based on the GDTs internal instruction, the tax authorities set maximum interest rates
for loans from third parties (i.e. 120% of the market interest rate at the time of obtaining
the loan) and loans from related persons (i.e. the market interest rate at the time of
obtaining the loan). If the interest rate is higher than the maximum interest rate, the
surplus interest expense is not deductible.
Bad debt
A loss on a claim (i.e. bad debt) is deductible where the impossibility to recover the loss
can be clearly shown and that claim has been written off from the accounting books,
except where the giving up of the claim is an abnormal act of management (still to be
defined).
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The charitable contribution expense is deductible to the extent the amount does not
exceed 5% of taxable profit. The taxpayer must have proper evidence supporting the
payments.
Fines and penalties
Additional tax, late tax payment interest, and fines of all types incurred for the violation
of various legal provisions are not deductible.
Taxes
Taxes that are not a charge to the enterprise (e.g. WHT, ToS, ToFB, ToP, and additional
ToP on dividend distribution) are not deductible.
Loss between related parties
No deduction is available for certain losses incurred on dealings between 51%

commonly owned parties.
Taxpayers may carry forward their losses for five years. The carryback of losses is not
permitted. There is no provision for any form of consolidated filing or group loss relief.
To be eligible to carry forward tax losses, a taxpayer must not change its activities or
ownership.
If a taxpayer received a unilateral tax reassessment from the GDT, a taxpayer will not be
able to utilise the tax losses brought forward in the year of reassessment.
An expense payable to a related party that is not paid within 180 days of year end will
not be deductible. A deduction can be claimed in the year in which the payments are
made. This rule is not applicable for an outlay or expense for inventory, capital property,
and depreciable property.
Group taxation
There is no specific provision for group taxation in Cambodia.
Transfer pricing
The GDT has wide powers to redistribute income and deductions between parties under
common ownership in order to prevent the avoidance or evasion of taxes.Common
ownership exists at a relatively low level of 20%.
Thin capitalisation
There is no provision for thin capitalisation in Cambodia.

Foreign tax credit
Residents earning foreign-sourced income can receive credits for foreign taxes paid.
Inbound investment
The Council for the Development of Cambodia (CDC) may be approached for a onestop service to register a project and obtain approval for a QIP status. CDC licensing is,
however, not mandatory (except for certain large, politically sensitive projects) and is
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applicable to those projects that do not fall within the negative list.Some of the projects
in the negative list include the following:
All kinds of commercial activities, import and export activities, and transportation
services (except the railway sector).
Currency and financial services.
Activities that relate to newspapers and media.
Production of tobacco products.
Provision of value-added services of all kinds of telecommunication services.
Real estate development.
The current investment incentives that are applicable to the QIP registered with the CDC
include a ToP exemption period of up to six years or special depreciation (see Special
depreciation in the Deductions section), import duty exemptions, and exemption from
minimum tax. Not all QIPs will be entitled to all incentives.
Annually, a QIP is required to obtain a Certificate of Compliance (CoC) from the CDC to
guarantee its investment incentives. The CoC is intended to provide confirmation that
the QIP has acted in compliance with the relevant tax regulations.
Tax incentives in securities sector
The Royal Government of Cambodia has issued Sub-Decree No.70 to provide tax
incentives to companies listed on the Cambodian Stock Exchange (CSX) and public
investors who hold and/or trade government, equity, and debt securities on the
securities market.
The listed companies are entitled to a 10% reduction on the annual ToP payable for
three years, starting from the beginning of the current financial year if the share is
issued within the first half of the fiscal year or the following financial year if the share is
issued within the second half of the fiscal year. A QIP is not entitled to the tax reduction
during the tax holiday period. Public investors are entitled to a 50% reduction on the
WHT payable on interest and/or dividends received from the above securities for three
years, starting from the launch of the securities market. However, there are various
conditionsunder whichthe Ministry of Economy and Finance can forfeit the tax
incentives granted to the listed companies.
Additional tax incentives for rice farming, paddy rice purchase, and
export of milled rice
The MEF has issuedPrakas to provide additional tax incentives to any enterprises in the
business of rice farming, paddy rice purchase, and export of milled rice, as follows:
VAT:

Domestic supplies of paddy rice: 0%.

Domestic supplies of milled rice: 10%.
Export of milled rice: 0%.
Supplies of milled rice or milled rice production services to rice exporters (subject to
specific conditions): 0%.
Supplies of milled rice or milled rice production services to local market: 10%.
Input VAT related to rice farming, paddy rice purchase, and export of milled rice is
creditable or refundable.
Input VAT related to import of production inputs and equipment to produce milled
rice for export is borne by the government (subject to specific conditions).
Local purchases of production inputs, except for paddy rice: 10%.
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ToP and minimum tax:
Exempt from 1% minimum tax.
Entitled to tax holiday period (i.e. trigger periodplus threeyearsplus three year
priority period).
Exempt from 1% prepayment of ToP during the tax holiday period.
Withholding taxes
WHT needs to be withheld on payments made by residents (and it seems only to those
who fall under the real regime). The withheld tax constitutes a final tax when withheld
in respect of resident and non-residents.
The types of payments caught are as follows.
WHT on payment to residents

Rental: 10%.
Interest: 15% (except payment to a Cambodian bank).
Services: 15% (except payment to a registered taxpayer and supported by a valid VAT
invoice).
Royalties: 15%.
WHT on payment to non-residents

Interest: 14%.
Rent or right for use of property: 14%.
Management or technical fees (not defined): 14%.
Dividends: 14%.
Public investors invested on the CSXare entitled to a 50% reduction on the WHT payable
on interest and/or dividends received from the government, equity, and debt securities
for three years, starting from the launch of the securities market.
WHT is due when the amount is paid. An expense is considered paid when it is recorded
in the accounting records.
Cambodia has not signed any treaties for the reduction of WHTs.
Tax administration
Taxable period
The standard tax year is the calendar year, although different accounting year-ends may
be granted upon application.
Tax returns
The return for annual tax (i.e. ToP/minimum tax) is to be filed annually, within three
months of tax year-end.
Returns for monthly taxes (e.g. 1% prepayments of ToP, WHT, ToS or ToFB, SPT, PLT,
and accommodation tax) are to be filed monthly, within 15 days of the following
month. The deadline will be extended to the next working day if the15th dayfalls on a
Saturday, Sunday, or public holiday.
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Payment of tax
ToP or minimum tax is due for payment three months after tax year-end. The ToP or
minimum tax liability can be reduced by prepayment of ToP payments.
Monthly taxes are due for payment by the 15th day of the succeeding month. The
deadline will be extended to the next working day if the 15th day falls on a Saturday,
Sunday, or public holiday.
Prepayment of ToP
A prepayment of ToP equal to 1% of monthly turnover inclusive of all taxes, except VAT,
is required to be paid on a monthly basis. The prepayment can be offset against the
annual ToP liability and the minimum tax.
Where a taxpayer is in the period of ToP holiday, the taxpayer is also exempted from the
prepayment obligations.However, a nil monthly return will need to be lodged.
Where a taxpayer is not subject to minimum tax, a monthly prepayment of ToP must still
be made. However, unutilised prepayments from a prior year can be used to offset the
current amount due, and no physical payment may be required.
Tax audit process
There are two types of tax audit in Cambodia (i.e. limited and comprehensive tax
audits). Initially, the tax authorities will send a letter to notify the taxpayers to request
for a tax audit. During the tax audit process, tax auditors visit the taxpayers office to
review the documents and discuss any potential tax issues with the taxpayers and may
request supporting evidence. After the visit to the taxpayers office, the tax auditors
issue a notice of tax reassessment (NoTR), which indicates the reassessed tax liabilities
and the basis of their tax reassessment. If the taxpayers agree with the reassessed tax
liabilities, they can proceed with the payment. If not, the taxpayers have to submit an
objection letter to the tax authorities within 30 days of the receipt of the NoTR.
The tax audit period (i.e. the limitation of within which period the tax authorities can
perform tax audits) is as follows:
Within three years of the date of submission of the tax returns.
Within ten years of the date of submission of the tax returns if there is any evidence of
obstruction of the implementation of laws.
Any time with the written consent of the taxpayers.
In practice, the GDT regularly extends the time limit for tax audit up to ten years.
In practice, the tax authorities focus the tax reassessment on various matters, including
payment to third parties overseas, fringe benefits provided to employees, and related
party transactions (e.g. payment of management fee to head office, loans from
shareholder).
Other issues
Statutory financial audit requirement
All enterprises (physical or legal persons) that meet two of the following criteria are
required to have their financial statements audited by an independent external auditor
registered with the Kampuchea Institute of Certified Public Accountants and Auditors
(KICPAA):
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Annual turnover above KHR 3 billion.
Total assets above KHR 2 billion.
More than 100 employees.
QIPs registered with the CDC are required to have their financial statements audited by
independent external auditors registered with the KICPAA.
The law does not state the deadline for the enterprises to submit their audited financial
statements. However, the deadline for audited financial statements to be completed is six
months after accounting year-end (i.e. for the financial year ended 31 December 2013,
the deadline is 30 June 2014).
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Cameroon, Republic of
PwC contact
Nadine Tinen Tchangoum
PricewaterhouseCoopers Tax and Legal
Immeuble PwC, Rue Christian Tobie Kouoh BP: 5689
Douala Bonanjo
Republic of Cameroon
Tel: +237 33 43 24 43/44/45
As of 1 January 2014, the following significant corporate tax developments were
introduced in Cameroon by the 2014 Finance Law:
Thin capitalisation rules are applicable (see the Group taxation section for more
information).
The documentation relating to transfer pricing and the annual tax return shall be
declared at the same time (15 March at the latest) by entities falling under the Large
Taxpayers Unit (LTU).
Capital gains realised in Cameroon or abroad on transfers of rights relating to natural
resources shall be subject to a 16.5% withholding tax (WHT).
The value-added tax (VAT) regime applicable to public contracts has been clarified,
depending on whether the contract is funded with own resources of the state or with
external or joint resources (see the Other taxes section for more information).
Interests on external loans of a maturity period of at least seven years shall be
exempted from any taxes on personal income (namely the 16.5% WHT).
Notwithstanding the provisions relating to the system of declaration, the tax
administration may transmit a pre-completed tax return to the taxpayer who can
submit a request for correction to the competent taxation centre.

Resident corporations in Cameroon are taxed on their worldwide income; non-resident
corporations are taxed only on Cameroon-source income.
The profits subject to the corporate income tax (CIT) are determined with sole regard to
profits earned by entities located in Cameroon (for residents) or transactions effected in
Cameroon (for non-residents having a permanent establishment [PE] in Cameroon).
The net taxable profits are established after deduction of all charges directly entailed by
the exercise of activities subject to assessment in Cameroon.
The total Cameroon CIT rate is 38.5%.
Reduced CIT rate for newly listed companies
The basic CIT rate of 38.5% is reduced to 33% for companies during their first three
years of listing on the national stock exchange of Cameroon.
Minimum tax
There is a 1.1%, 3.3%, or 5.5% minimum tax in Cameroon that is based on turnover.
This minimum tax is an instalment of CIT. As such, it shall be offset against CIT. The
minimum tax is the sole tax payable if it is greater than CIT.
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Local income taxes
A local tax of 10%, called Additional Council Tax, generally applies to the following
taxes:

CIT.
Personal income tax (PIT).
WHT on income from stock and shares.
VAT.
The rate provided in this summary for each tax above is therefore inclusive of a basic
rate plus 10% surcharge.
Corporate residence
An entity is deemed resident if its registered office, centre of activity, or management is
located in Cameroon; if it has resident employees in Cameroon that provide services to
customers; or if it has a PE in Cameroon.
In Cameroon, the internal regulations do not provide for any definition of the concept
of PE. For this reason, the tax authorities may refer to the definitions provided by the
models of the United Nations (UN) and that of the Organisation for Economic Cooperation and Development (OECD) Tax Conventions, which constitute the basis of
the double tax treaties (DTTs) concluded between Cameroon and France, Canada, and
Tunisia.
According to these conventions, a PE is a fixed place of business through which an
enterprise wholly or partly performs its activities.
Other taxes
VAT shall be levied on natural persons or corporate bodies that automatically, habitually,
or occasionally carry out taxable transactions consisting of provisions of services or sales
of goods.
The total VAT in Cameroon is 19.25%. Exports are zero rated. The VAT paid upstream is
recoverable, except where otherwise stated.
Note that VAT is invoiced only by natural and legal persons whose turnover (taxes
excluded) is equal to or above 50 million Communaut Financire Africaine francs (XAF)
and who are under the tax regime of actual earnings.
The Finance Law for the fiscal year 2014 has clarified the tax regime applicable to
public contracts according to the nature of their funding. Public contracts funded with
own resources of the state shall be subject to taxes, duties, and levies provided by the
regulations in force, notably the VAT and registration duties. The taxes and duties linked
to public contracts funded with external or joint resources shall be charged to the budget
of the successful bidder. However, where the public contract financing agreement for a
contract funded with external or joint resources does not provide for payment of VAT,
the latter shall be charged to the counterpart funds earmarked for in the budget of the
project owner or beneficiary Ministry.
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Customs duties
Customs duties of between 5% and 30%, depending on the nature of the goods
imported, are levied based of the customs value.
Excise taxes
An excise duty of 25% is applicable to cigarettes, drinks, cosmetics, luxury items (e.g.
jewels, precious stones), slot machines, and other devices used for games of chance. A
reduced rate of excise duty (12.5%) shall apply to soft drinks and private vehicles with
engine capacities of 2,000 cm.
Real property tax
Cameroon property tax is payable annually on real estate with or without an ownership
certificate or an administrative or judicial order issued. Tax is charged at 0.1% of the
assessed property value.
Properties belonging to clubs, associations, or sporting bodies accredited properties
intended for sports and sports facilities are now exempt from real property tax.
Transfer tax
The sale of a business in Cameroon is subject to a transfer tax rate of 15%.
Registration duty
The registration duty applies to certain deeds listed by the General Tax Code (GTC). The
assessment basis depends on the nature of transactions, and the rate varies from 1%
to15%.
The formation of a company and subsequent capital increases in Cameroon are not
subject to registration duties.
Business licence tax
Any natural person or corporate body carrying on a trade, industry, or profession in

Cameroon shall be liable to a business licence tax. The business licence tax is paid
annually according to a graduated scale and is assessed on turnover.
New enterprises shall be exempt from the payment of the business licence tax during the
first two years of operation.
Employer and employee must contribute on a monthly basis to Cameroons National

Social Insurance Fund at 11.2% and 2.8%, respectively. The basis of contribution
is capped at XAF 300,000 per month. Employers in Cameroon must also contribute
1.75%, 2.5%, or 5% of total salaries to the National Social Insurance Fund for Industrial
Accidents, depending on the risk category of activities performed by employees. The
calculation basis in this category is the gross salary, including the benefits in kind
assessed for their actual amount.
Payroll tax
Employers in Cameroon are required to make monthly contributions of 2.5% of the

total amount of salaries and fringe benefits of their employees to the Housing Loan and
Employment Fund of Cameroon.
Branch income
The local branch of any foreign company is taxed at the same rate as a company. The net
profits (after CIT) of entities having their residence or head office outside Cameroon
(such as the branch of a foreign company) are assumed to be distributed each fiscal year
313
to companies not located in Cameroon. Their net profits (after CIT) shall therefore be
subject to the WHT on distributions at 16.5%.
Inventory valuation
For valuation purpose, the GTC only provides that stocks shall be valued at cost price;
however, if the market price is lower than the cost price, the undertaking shall make
provisions for depreciation of inventory. No reference is made to the accounting method
that shall be used (e.g. first in first out [FIFO], last in first out [LIFO]). Only FIFO and
weighted average methods are allowed under the Organisation for the Harmonisation
of Business Law in Africa (OHADA) Accounting Principles. Where there is any difference
between the valuation method permitted by the GTC and the book valuation, the
accounting result shall be modified accordingly.
Capital gains
Capital gains are normally taxed at full CIT rates.

The net overall capital gains arising from the transfer of shares and stocks; income from
bonds; income from debts, deposits, surety-bonds, and current accounts; profits realised
from the transfer of shares; reimbursement of sums put at the disposal of the company
by a manager or a partner as an advance or a loan; and capital gains on the transfer of
rights relating to natural resources shall be subject to 16.5% WHT.
For transfersrealised abroad, the Cameroonian law enterprise and the transferor shall
be jointly and severally liable to payment of the sums due under such transfer.
Dividend income
Dividends are subject to the WHT of 16.5%. However, dividends shall be treated as
proceeds for the purpose of CIT, and the tax withheld at source is used as instalment for
the payment of CIT.
Interest income
Interests are subject to the WHT of 16.5%. However, interests shall be treated as
proceeds for the purpose of CIT, and the tax withheld at source shall be used as
instalment for the payment of CIT.
As of January 2014, interests on external loans of a maturity period of at least seven
years shall be exempted from the WHT.
Foreign income
As a matter of both fact and law, revenue from abroad earned by corporate bodies
situated in Cameroon shall be subject to CIT in Cameroon. There is no provision on tax
deferral in Cameroon.
Deductions
Depreciation
Depreciation is generally computed on a straight-line basis over the useful life according
to the rates provided for by the GTC, including those that might have already been
deferred in times of deficit.
The following depreciation rates are generally accepted for tax purposes:
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Assets
Construction
Stationary equipment and tools
Portable equipment
Transport equipment
Railway lines
Engines
Rehabilitation
Furniture fittings and other equipment
Fishing equipment and fishing vessels
Depreciation rates (%)

5 to 20
5 to 20
10 to 100
10 to 33.33
1 to 10
5
5 to 25
10 to 33.33
15
The deduction of depreciation can be carried forward indefinitely.
Goodwill
With regard to rules governing the deduction of provisions and depreciation,

impairment of goodwill shall be allowable for CIT purposes.
Start-up expenses
There is no specific provision in the GTC relating to start-up expenses.

However, the OHADA Accounting Principles effectively state that start-up expenses shall
be capitalised and must be completely depreciated as early as possible: over two to five
years, except bond premiums, which are depreciated throughout the life of the loan.
No distribution of profit should be carried out before the complete depreciation of startup expenses.
Interest expenses
Interest expenses are fully deductible.

However, interest paid to partners/shareholders in respect of the sums they leave with
or place at the disposal of the company over and above their capital, irrespective of the
type of company, shall be acceptable within the limits of those calculated at the rate of
the central bank discount rate, raised bytwo points.
Bad debt
The deductibility of provisions for bad debts is subject to the following conditions:
The debt must be specified (i.e. clarification is needed on the nature, amount, and the
debtor).
The company must show that it has unsuccessfully carried out actions for debt
recovery (e.g. reminder letters, notice to pay, complaints).
For losses related to bad debts to be deductible, they should have been subjected to all
amicable or forced collection methods and means provided for by the OHADA Uniform
Act on the Organization of Simplified Procedures for Collection and Enforcement
Procedures. Otherwise, they shall not be deductible.
In this regard, the impossibility of recovering the debt must be evidenced by:
a deficiency report prepared by a bailiff
a bankruptcy decision duly passed by the judge, if necessary, or
a decision passed by a judge, bearing out the debtor who disputed the debt.
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Acts of liberality, gifts, and subsidies shall not represent the charges deductible from
profits.
However, payments made to research and development (R&D) bodies and to collective
philanthropic, educational, sports, scientific, social, and family institutions and bodies,
on condition that the latter are situated in Cameroon, shall be deductible as soon as
there is proof of payment and as long as they do not exceed 0.5% of the turnover for the
fiscal year. Similarly, gifts made on the occasion of a disaster shall be deducted in the
form and conditions determined by order of the Minister of Economy and Finance.
Liberalities, gifts, and subsidies awarded to clubs participating in the elite national
competitions or to recognised organisations responsible for the organisation of official
sport competitions are deductible, provided they are justified, within the limit of 5% of
the annual turnover.
Fines and penalties
Compounding fees, fines, confiscations, and any penalty concerning persons who violate
legal, economic, and fiscal provisions shall not be deducted from the profits subject to
taxation.
Taxes
Only the professional taxes issued for collection during the fiscal year and which are
to be borne by the firm in relation to the operations carried out in Cameroon shall be
subject to deduction.
CIT, WHT, and PIT shall not be considered as deductible expenses for the levying of
taxes.
Any loss sustained in a given year can be carried forward up to the fourth year following
the recording of the loss. The carryback of losses is not permitted in Cameroon.
Payments to foreign entities
Head office overhead expenses for operations carried out in Cameroon and the
remuneration of certain effective services (studies, technical, financial, or accounting
assistance) provided to Cameroonian firms by foreign natural persons or corporate
bodies are not totally deductible.
Fees paid are deductible up to a maximum of:
5% of intermediary earnings as a general rule
2.5% of the turnover for firms specialised in public works, and
7.5% for design firms operating in accordance with regulations relating to design
firms and consulting engineers.
The notion of technical assistance shall include services provided by entities located
either overseas or in Cameroon.
Expenses linked to transactions with natural persons or legal entities resident or
established in a territory or state considered to be a tax haven shall not be deductible.
This rule shall not apply to imports of goods made in those countries. A tax haven is any
state where the tax on the income of a natural person or legal entity is less than a third
of that paid in Cameroon, or any state or territory considered not to be co-operative
in matters of transparency or of exchange of information required for fiscal purpose
by international or financial organisations. The rate of the Cameroonian CIT to be
considered for that purpose is 35%.
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Group taxation
There is specific taxation of groups within the Economic and Monetary Community of
Central Africa (CEMAC) area.
Where a joint stock company and a private limited company own either registered stock
in a joint stock company or shares in a private limited company, the net proceeds of the
share in the second company paid to the first during the financial year shall be deducted
from the total net profit of the latter, less a percentage for costs and charges. This
percentage is fixed at 10% of the total amount of the proceeds. This system shall apply
when all of the following conditions are met:
The stocks or shares owned by the parent establishment represent at least 25% of the
capital of the subsidiary firm.
The parent and subsidiary firms have their registered office in a CEMAC state
(Cameroon, Central African Republic, Chad, Gabon, Equatorial Guinea, and Republic
of Congo).
The stocks or shares allotted at the time of issue are still registered in the name of the
participating company that undertakes to retain them for at least two consecutive
years in registered form.
Transfer pricing
There are provisions in the GTC that relate to transfer pricing.

Within the framework of a tax audit, the documents required for the justification of
transfer pricing shall be presented to the tax inspectors at the start of the procedure.
Items such as business transactions, payments in consideration for intangible rights,
allocations of costs and expenses (head office costs, agreements to share costs,
disbursements, etc.), financial transactions, etc. are particularly targeted for close
scrutiny.
Companies in the LTU shall declare participation in companiesthat are equal to or more
than 25% of the share capital of the latter, as well as the supporting documents for intragroup transactions, at the same time as their annual tax return.
Thin capitalisation
Following the Finance Law for 2014, the deduction of interests on sums of money left
or placed at the disposal of local entities by partners or related companies who directly
or indirectly own at least 25% of the share capital or corporate voting rights has been
capped to:
one and a half times the amount of equity or
25% of profit before corporate tax and before deduction of the said interests and
amortisations taken into account in determining such profit.
Otherwise, interests on the excess amount shall not be deductible.

Three major tax incentives are granted in Cameroon under the tax systems.
The system of reinvestment relief
Any corporate body reinvesting in Cameroon may be granted, under certain conditions,
a reduction in CIT.
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The reinvestment must take a form described by the GTC as construction or extension of
permanent buildings for industrial, agricultural, forestry, tourism, or mining purposes,
including technical offices, housing salaried workers free of charges, etc.
Note that total investment less than XAF 25 million is not eligible for reinvestment relief.
The reinvestment relief consists of a deduction from the taxable basis in an amount
equal to 50% of the investment effected by the undertaking and approved by the tax
authorities. The rate is 25% for telecommunication companies.
The 2014 Finance Law provides that where a property benefits from tax reduction under
the reinvestment system, and is transferred before the end of the fifth year following its
acquisition date, the beneficiary of such reduction shall be bound to pay the fraction of
the company tax or income tax initially deducted.
The private investment tax incentive regime
The private investment tax incentive regime applies to investment operations relating
to the creation, extension, renewal, refurbishing of assets, and/or the transformation of
activities carried out in Cameroon.
The major tax advantages related to the private investment regime in Cameroon are the
following:
During the installation phase: tax incentives for a maximum period of five years.
During the exploitation phase: tax incentives for a maximum period of ten years.
For the development of existing companies: tax incentives for a maximum of five
years.
Possibility of specific advantage for prioritised sectors.
Tax and customs incentives granted to investors consist of exemptions from or
reductions of payment of several taxes, duties, and other fees listed.
Incentives applicable to listed companies
Companies whose ordinary shares are listed on the Cameroon Stock Exchange shall be
entitled to the following CIT reduced rates:
22% for a period of three years for capital increases that represent at least 20% of the
share capital.
27.5% for a period of three years for transfers of shares that represent at least 20% of
the share capital.
30.8% for a period of three years from the date of listing for capital increases or
transfers of shares that represent less than 20% of the share capital.
Companies whose ordinary shares are listed on the bond market in Cameroon shall be
entitled to pay basic CIT at a reduced rate of 33% for three years, effective from the date
of listing.
Foreign tax credit
Taxes paid abroad are not considered as tax credits unless provided as such by
international tax treaties.
Withholding taxes
A special tax is levied at an overall discharging rate of 15% on income paid to natural
persons and corporate bodies domiciled outside of Cameroon by enterprises or
318
establishments based in Cameroon for various services provided or used in Cameroon.
The tax is withheld at source by the Cameroonian entity that pays the remuneration.
It has been clearly highlighted that software acquired overseas shall be subject to the
15% WHT.
Dividends
A total WHT of 16.5% applies to dividends paid to both Cameroon residents and nonresidents. The WHT rate may be reduced under an applicable tax treaty.
Interest
The interest from foreign loans is subject to 16.5% WHT. The WHT rate may be reduced
under an applicable tax treaty.
Asof January 2014, interests on external loans of a maturity period of at least seven
years shall be exempted from the WHT.
Royalties
Royalties paid to non-residents are subject to a 15% WHT (the 10% surcharge is not
applicable). The tax rate may be reduced under an applicable tax treaty.
Tax treaties
Cameroon has tax treaties with Canada, France, Tunisia, and members of CEMAC
(Cameroon, Gabon, Equatorial Guinea, Congo, Chad, and Central African Republic).
Recipient
CEMAC
Canada
France
Tunisia
Dividends (%) Interest (%)

16.5
16.5
16.5
16.5
15
15
12
15
Royalties (%)
N/A
16.5
N/A
15
Head office expenses and

technical assistance (%)
N/A
15
7.5
15
Tax administration
Taxable period
The tax year in Cameroon is the calendar year.
Tax returns
On or before 15 March, taxpayers are expected to submit to the tax administration the
annual return of revenue derived from their business venture during the period serving
as the tax base.
This return must be presented in conformity with the OHADA accounting system.
No one may invoke a claim on the state to shirk their return and payment obligations.
According to the 2014 Finance Law, despite the declarative tax system applicable in
Cameroon, the tax administration may send a pre-completed return of collected revenue
or any other taxable item, with the tax amount owed, to any natural or legal person
paying taxes or duties as per laws and regulations in force.
The taxpayer that feels overtaxed or wrongfully taxed under a pre-filled tax return
procedure shall submit a request for correction to the competent taxation centre within
one month of receipt of such return. In such case, the tax authorities and the taxpayer
319
shall have 30 days within which to decide the final taxes established by a collection
notice (CN).
Failure to pay within 15 days of receiving the CN or respond to a pre-filled tax return in
time shall be tantamount to accepting the terms thereof.
Payment of tax
An instalment representing the 1.1%, 3.3%, or 5.5%minimum tax of turnover realised

during each month shall be paid to the tax authorities not later than the 15th day of the
following month.
Advance payment of 0.5%, 1.1%, 3.3%, 5%, or 10% on imports or purchases of goods for
resale is withheld at source by the supplier or the customs administration, depending on
the tax regime applicable to the buyer or importer.
The balance of CIT is paid, at the latest, on 15 March following the fiscal year-end, when
submitting the CIT return.
Surplus tax payments
A surplus tax payment can be offset against future taxes of the same nature to be paid.
For the specific case of VAT, a reimbursement process is provided for by the GTC under
certain conditions.
Tax audit process
There is no audit cycle in Cameroon.
The topics of focus for tax authorities include the following:

Remunerations paid for services provided to local entities by providers located
overseas.
Transfer pricing.
320
Canada
PwC contact
Christopher P. Kong
PricewaterhouseCoopers LLP
PwC Tower
18 York Street, Suite 2600
Toronto, Ontario, M5J 0B2, Canada
Tel: +1 416 869 8739
Canadas corporate summary reflects all 2014 federal, provincial, and territorial budgets,
except for the 4 June 2014 Quebec budget. The 2014 federal budget continues what was
started years ago, tightening perceived loopholes or inequities in various aspects of the
tax system. Notably, the budget proposes more tax rules to curtail transactions seen as
eroding the Canadian corporate tax base, and to combat international tax evasion and
aggressive tax avoidance. The summary is based on enacted and proposed legislation
and assumes that the proposed legislation will become law.
Eligible capital property (ECP) regime
A public consultation will be held to replace the ECP regime with a new capital cost
allowance (CCA) class for businesses and transfer taxpayers existing cumulative eligible
capital (CEC) pools to the new CCA class. Draft legislative proposals will be released
for comment, and the timing of the implementation will be determined after the
consultation. See Eligible capital property (ECP) regime in the Deductions section for more
information.
Treaty shopping
The 2014 federal budget proposes a domestic anti-treaty shopping rule that uses a
general approach to identify arrangements representing an improper use of Canadas tax
treaties and contains guidance regarding its application. The government had previously
released a consultation paper, Treaty Shopping - The Problem and Possible Solutions, to aid
in examining the range of possible approaches to address the practice of treaty shopping
in Canada. See Treaty shopping in the Tax administration section for more information.
On 19 July 2013, the Organisation for Economic Co-operation and Development (OECD)
released an action plan on base erosion and profit shifting (BEPS). The BEPS initiative
contemplates changes to the OECDs model tax convention and recommendations
regarding the design of domestic rules to address tax treaty abuse, including treaty
shopping, by September 2014.
Tax planning by multinational enterprises
The government is seeking input on issues related to international tax planning by

multinational enterprises. See Tax planning by multinational enterprises in the Tax
administration section for more information.
Cross-border tax compliance
Canada has ratified the Convention on Mutual Administrative Assistance in Tax Matters,
which entered into force, in respect of Canada, on 1 March 2014. The member states
of the Council of Europe and the member countries of the OECD are signatories of the
convention. Under the convention, Canada will exchange tax information based on
OECD standards. See Cross-border tax compliance in the Other issues section for more
information.
Canada
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Canada
Canada and the United States (US) have signed an Intergovernmental Agreement (IGA)
to improve international tax compliance and to implement the US Foreign Account Tax
Compliance Act (FATCA). See US Foreign Account Tax Compliance Act (FATCA) in the
Other issues section for more information.
Back-to-back loan arrangements
The 2014 federal budget targets certain back-to-back loan arrangements that have been
undertaken by taxpayers using an interposed third party to avoid the application of Part
XIII withholding tax (WHT) and/or the thin capitalisation rules by:
introducing a specific anti-avoidance rule relating to WHT on interest payments for
amounts paid or credited after 2014, and
amending an existing anti-avoidance provision in the thin capitalisation rules for
taxation years that begin after 2014.
See Back-to-back loan arrangements in the Group taxation section for more information.
Foreign affiliate amendments
Newly enacted legislation and draft legislative proposals relating to the taxation
of Canadian corporations with foreign affiliates are the culmination of legislative
developments that started a decade ago. See Foreign affiliate amendments in the Income
determination section for more information.
Captive insurance
The 2014 federal budget proposes that, for taxation years beginning after 10 February
2014, an anti-avoidance rule in the foreign accrual property income (FAPI) regime
intended to prevent Canadian taxpayers (e.g. financial institutions) from shifting income
from the insurance of Canadian risks offshore is clarified to ensure it applies to certain
tax planning arrangements sometimes referred to as insurance swaps. See Captive
insurance in the Income determination section for more information.
Offshore regulated banks
For taxation years of taxpayers beginning after 2014, the 2014 federal budget amends
the exception for regulated foreign financial institutions from the FAPI regime to ensure
certain Canadian taxpayers that are not financial institutions, but establish foreign
affiliates and elect to subject those affiliates to regulation under foreign banking and
financial laws, no longer qualify for this exception. See Offshore regulated banks in the
Income determination section for more information.

As a general rule, corporations resident in Canada are subject to Canadian corporate
income tax (CIT) on worldwide income. Non-resident corporations are subject to CIT
on income derived from carrying on a business in Canada and on capital gains arising
upon the disposition of taxable Canadian property (See Capital gains in the Income
determination section for more information). The purchaser of the taxable Canadian
property is generally required to withhold tax from the amount paid unless the
non-resident vendor has obtained a clearance certificate.
Canadian CIT and WHT can be reduced or eliminated if Canada has a treaty with
the non-residents country of residence. A list of treaties that Canada has negotiated is
provided in the Withholding taxes section along with applicable WHT rates.
Federal income tax
The following rates apply for 31 December 2014 year-ends. For non-resident
corporations, the rates apply to business income attributable to a permanent
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Canada
Canada
establishment (PE) in Canada. Different rates may apply to non-resident corporations in
other circumstances. Non-resident corporations may also be subject to branch tax (see
the Branch income section).
Basic rate
Federal rate (%)

38.0
Less: Provincial abatement (1)
(10.0)
Federal rate
28.0
Less: General rate reduction or manufacturing

and processing (M&P) deduction (2)
Net federal tax rate (3, 4)
(13.0)
15.0
Notes
1.
2.
3.
4.
The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories
room to impose CITs. The abatement is available in respect of taxable income allocated to Canadian
provinces and territories. Taxable income allocable to a foreign jurisdiction is not eligible for the
abatement and normally is not subject to provincial or territorial taxes.
The general rate reduction and M&P deduction do not apply to the first 500,000 Canadian dollars
(CAD) of active business income earned in Canada by Canadian-controlled private corporations
(CCPCs), investment income of CCPCs, and income from certain other corporations (e.g. mutual fund
corporations, mortgage investment corporations, and investment corporations) that may benefit from
preferential tax treatment.
Provincial or territorial taxes apply in addition to federal taxes. Provincial and territorial tax rates are
noted below.
For small CCPCs, the net federal tax rate is levied on active business income above CAD 500,000;
a federal rate of 11% applies to the first CAD 500,000 of active business income. Investment
income (other than most dividends) of CCPCs is subject to the federal rate of 28%, in addition to a
refundable federal tax of 62/3%, for a total federal rate of 342/3%.
Provincial/territorial income tax
All provinces and territories impose income tax on income allocable to a PE in the
province or territory. Generally, income is allocated to a province or territory by using
a two-factor formula based on gross revenue and on salaries and wages. Provincial and
territorial income taxes are not deductible for federal income tax purposes. The rates
given apply to 31 December 2014 year-ends and do not take into account provincial tax
holidays, which reduce or eliminate tax in limited cases.
Province/territory
Alberta
Income tax rate (%) (1, 2)

10.0
British Columbia (3)
11.0
Manitoba
12.0
New Brunswick (4)
12.0
Newfoundland and Labrador
14.0 or 5.0
Northwest Territories
11.5
Nova Scotia
16.0
Nunavut
Ontario (5)
12.0
11.5 or 10.0
Prince Edward Island
16.0
Quebec
Saskatchewan (6)
11.9
12.0 or 10.0
Yukon territory
15.0 or 2.5
Notes
1.
2.
3.
When two rates are indicated, the lower rate applies to M&P income.
In all provinces and territories, the first CAD 500,000 (CAD 425,000 in Manitoba and CAD 350,000 in
Nova Scotia) of active business income of a small CCPC is subject to reduced rates that range from
0% to 8.0%, depending on the jurisdiction.
British Columbias rate increased from 10% to 11% on 1 April 2013.
Canada
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Canada
4.
5.
New Brunswicks rate increased from 10% to 12% on 1 July 2013.

The lower Ontario rate applies to profits from M&P, and from farming, mining, logging, and fishing
operations, carried on in Canada and allocated to Ontario.
Corporations subject to Ontario income tax may also be liable for corporate minimum tax (CMT)
based on adjusted book income. The CMT is payable only to the extent that it exceeds the regular
Ontario income tax liability. The CMT rate is 2.7% and applies when total assets are at least CAD 50
million and annual gross revenue is at least CAD 100 million on an associated basis.
6. Saskatchewans M&P rate is as low as 10% (reduced from the 12% non-M&P rate), depending on the
extent to which the corporations income is allocated to the province.
Corporate residence
Under the Income Tax Act, a corporation incorporated in Canada (federally or
provincially/territorially) will be deemed to be resident in Canada. A corporation not
incorporated in Canada will be considered to be resident in Canada under Canadian
common law if its central management and control is exercised in Canada. Where a
corporations central management and control is exercised is a question of fact but
typically is where the Board of Directors meets and makes decisions, provided the Board
takes action.
A corporation incorporated in Canada or a corporation incorporated outside of
Canada but with its central management and control situated in Canada will be deemed
to be a non-resident of Canada if it qualifies as a non-resident of Canada under treaty
tie-breaker rules.
A corporation incorporated in Canada will cease to be a Canadian resident if it is granted
Articles of Continuance in a foreign jurisdiction or if it is a predecessor corporation in
a cross-border amalgamation and the amalgamated corporation is a non-resident of
Canada. Similarly, a foreign corporation will become resident in Canada if it is continued
in Canada or is a predecessor corporation of an amalgamated corporation that is
resident in Canada.
Canadas tax treaties generally provide that the business profits of a non-resident
corporation are not subject to Canadian tax unless the non-resident corporation carries
on business in Canada through a PE situated in Canada and the business profits are
attributed to that PE. Canadas tax treaties may also restrict the imposition of branch tax
to situations where the non-resident corporation carries on business in Canada through
a PE situated in Canada and/or limit the applicable branch tax rate. While the wording
of tax treaties varies, a PE generally is defined as:
a fixed place of business through which the business of the non-resident corporation
is wholly or partly carried on
a place of management, a branch, an office, a factory, and a workshop; a mine, an oil
or gas well, a quarry, or any other place of extraction of natural resources; a building
site, construction, or assembly project that exists for a specified period of time, and
a dependent agent or employee who has and habitually exercises an authority to
conclude contracts in the name of the non-resident corporation.
In some circumstances, a Canadian PE may also arise where services are rendered in
Canada and certain requirements (e.g. relating to the duration of the services) are met.
The Canadian domestic definition of PE (federal and provincial/territorial) generally
mirrors the above.
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Other taxes
Consumption taxes
Federal goods and services tax (GST)
The federal GST is levied at a rate of 5%. It is a value-added tax (VAT) applied at each
level in the manufacturing and marketing chain and applies to most goods and services.
However, the tax does not apply to sales of zero-rated goods, such as exports and basic
groceries, or to tax-exempt supplies, such as health care, educational services, and
certain services provided by financial institutions.
Generally, businesses pay GST on their purchases and charge GST on their sales, and
remit the net amount (i.e. the difference between the GST collected and the input tax
credit for the tax paid on purchases). Suppliers are entitled to claim input tax credits
for the GST paid on expenses incurred relating to their supplies of standard-rated and
zero-rated goods and services, but not on expenses relating to the making of tax-exempt
supplies.
Harmonised sales tax (HST)
Five provinces have fully harmonised their sales tax systems with the GST and impose a
single HST. The HST includes the 5% GST and a provincial sales tax (PST) component. It
is imposed on essentially the same base as the GST. HST rates follow.
Province
New Brunswick
Nova Scotia (1)
Ontario
HST rate (%)

13
13
15
13
14
Notes
1.
Nova Scotia will maintain its HST rate at 15% until sustainable fiscal balances are achieved. The
rate was to decline to 14% by 1 July 2014, and to 13% by 1 July 2015.
Retail sales tax
British Columbia, Manitoba, and Saskatchewan each levy a retail sales tax at 7%, 8%
(7% after 30 June 2023), and 5%, respectively, on most purchases of tangible personal
property for consumption or use in the province and on the purchase of specific services.
Quebecs sales tax is structured in the same manner as the GST and applies to most
goods and services that are subject to the GST. The Quebec sales tax (QST) rate is
9.975%, resulting in an effective combined QST and GST rate of 14.975% (i.e. 9.975%
provincial component plus the 5% GST). Quebec administers the GST in that province.
Neither Alberta nor the three territories (the Northwest Territories, Nunavut, and the
Yukon) impose a retail sales tax. However, the GST applies in those jurisdictions.
Customs duties
Customs duties generally are intended to protect Canadian industry from foreign
competition and not as a source of revenue. The majority of most-favoured-nation
(MFN) duty rates are below 10%; notable exceptions are footwear, textiles and
apparel, and certain food products (the last may be subject to tariff rate quotas).
Goods imported from developed countries with which Canada does not have free trade
agreements will attract the MFN duty rate. Many products, however, are duty-free,
regardless of their country of origin.
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Qualifying goods that originate in the North American Free Trade Agreement (NAFTA)
territory (Canada, the United States, and Mexico) can enter Canada duty-free. Canada
has implemented free trade agreements (FTAs) with Chile, Colombia, Costa Rica, the
European Free Trade Association countries, Israel, Jordan, Panama, and Peru, has
signed FTAs with Honduras and the Republic of Korea, and is negotiating agreements
with several other countries. Like the NAFTA, these agreements set out rules of origin
for determining whether the goods are eligible for preferential duty rates under the
particular FTA.
In October 2013, Canada and the European Union (EU)signed an agreement in
principle that will reduce trade barriers between them. The Canada-EU Comprehensive
Economic and Trade Agreement will require ratification by both Canada and the
European Union before it enters into force.
Canada extends preferential duty rates to most (but not all) products imported from
developing countries (the General Preferential Tariff). The government announced that,
effective 1 January 2015, General Preferential Tariff treatment will be withdrawn from
72 countries, including China, Hong Kong, and Thailand. Countries that are entitled
to the Least Developed Countries Tariff are not affected. In either case, goods must
satisfy rules of origin and be shipped directly to Canada from the beneficiary countries
to qualify for these rates.
Excise taxes and duties
Excise duties are levied at various rates on spirits, wine, beer, malt liquor, and tobacco
products manufactured in Canada, while imports are subject to customs duties (see
above).
Excise tax is imposed on petroleum products and automobiles. In addition, a 10% federal
excise tax is imposed on insurance against a risk in Canada if it is placed by insurers
through brokers or agents outside Canada or with an insurer that is not authorised
under Canadian or provincial/territorial law to transact the business of insurance.
Certain premiums are exempt, including those for life, personal accident, marine, and
sickness insurance.
Property taxes
Property taxes are levied by municipalities in Canada on the estimated market value
of real property within their boundaries and by provinces and territories on land not
in a municipality. In most provinces and territories, a general property tax is levied on
the owner of the property. Some municipalities levy a separate business tax, which is
payable by the occupant if the premises are used for business purposes. These taxes are
based on the rental value of the property at tax rates that are set each year by the various
municipalities. School taxes, also generally based on the value of real property, are
levied by local and regional school boards or the province or territory.
Land transfer tax
All provinces and territories levy a land transfer tax or registration fee on the purchaser
of real property within their boundaries. These levies are expressed as a percentage, in
most cases on a sliding scale, of the sale price or the assessed value of the property sold
and are generally payable at the time title to the property is registered. Rates generally
range from 0.02% to 2%, depending on the province or territory, but may be higher if
the purchaser is a non-resident. Some exemptions (or refunds) are available. Additional
land transfer taxes apply for properties purchased in the municipalities of Montreal or
Toronto. Other municipalities may also impose these taxes and fees.
Federal capital taxes
The federal government does not levy a general capital tax. It imposes the Financial
Institutions Capital Tax (Part VI Tax) on banks, trust and loan corporations, and life
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insurance companies at a rate of 1.25% when taxable capital employed in Canada
exceeds CAD 1 billion. The threshold is shared among related financial institutions.
The tax is not deductible in computing income for tax purposes. It is reduced by the
corporations federal income tax liability. Any unused federal income tax liability can be
applied to reduce Part VI Tax for the previous three and the next seven years. In effect,
the tax constitutes a minimum tax on financial institutions.
Provincial capital taxes
The provinces do not levy a general capital tax, but most do impose a capital tax on
financial institutions. Capital taxes are deductible for federal income tax purposes. The
federal government had proposed to limit the deductibility of capital taxes, but has
delayed implementing this proposal indefinitely. However, a proposed interim measure
disallows a deduction for any increase in these taxes, with certain exceptions. The
territories do not impose capital taxes.
Provincial capital taxes on financial institutions are imposed at the following rates for 31
December 2014 year-ends. Certain exemptions and reduced rates apply.
Province
Alberta
British Columbia
Manitoba (1)
New Brunswick
Nova Scotia
Ontario
Quebec (2)
Saskatchewan (3)
Banks, trust and loan corporations (%)

5
4
4
4
5
3.25
Notes
1.
2.
3.
Financial institutions in Manitoba with taxable paid up capital under CAD 4 billion are not subject to
capital tax.
Quebec applies a compensation tax of 2.8% (nil after 31 March 2019) on payroll.
Saskatchewans rate for financial institutions that have taxable paid-up capital of CAD 1.5 billion or
less is 0.7%. Financial institutions that qualified for the 0.7% capital tax rate in taxation years ending
after 31 October 2008 and before 1 November 2009 are subject to a 0.7% capital tax rate on their
first CAD 1.5 billion of taxable capital and a 3.25% capital tax rate on taxable capital exceeding
CAD 1.5 billion.
Additional taxes on insurers
All provinces and territories impose a premium tax ranging from 2% to 4.4% on
insurance companies (both life and non-life). In addition, Ontario and Quebec impose
a capital tax on life insurance companies. Quebec also levies a compensation tax on
insurance premiums at a rate of 0.3% (nil after 31 March 2019).
Part III.1 tax on excess designations
Federal Part III.1 tax applies at a 20% or 30% rate if, during the year, a CCPC designated
as eligible dividends an amount that exceeds its general rate income pool (GRIP), or a
non-CCPC pays an eligible dividend when it has a positive balance in its low rate income
pool (LRIP). A corporation subject to Part III.1 tax at the 20% rate (i.e. the excess
designation was inadvertent) can elect, with shareholder concurrence, to treat all or part
of the excess designation as a separate non-eligible dividend, in which case Part III.1 tax
will not apply to the amount that is the subject of the election.
Eligible dividends are designated as such by the payor and include dividends paid by:
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public corporations, or other corporations that are not CCPCs, that are resident in
Canada and are subject to the federal general CIT rate (i.e. 15% in 2014), or
CCPCs, to the extent that the CCPCs income is:
not investment income (other than eligible dividends from public corporations),
and
subject to the general federal CIT rate (i.e. the income is active business income
not subject to the federal small business rate).
Non-eligible dividends include dividends paid out of either income eligible for the
federal small business rate or a CCPCs investment income (other than eligible dividends
received from public companies).
Social security taxes
For 2014, employers are required to pay, for each employee, government pension
plan contributions up to CAD 2,425.50 and employment insurance premiums up to
CAD 1,279.15. However, Quebec employers contribute, per employee, a maximum of
CAD 2,535.75 in Quebec government pension plan contributions, CAD 1,041.01 in
employment insurance premiums, and CAD 539.58 to a Quebec parental insurance plan.
Provincial/territorial payroll taxes
Employers in Manitoba, Newfoundland and Labrador, Ontario, and Quebec are subject
to payroll tax. Maximum rates range from 1.95% to 4.3%. In addition, Quebec employers
with payroll of at least CAD 1 million must allot 1% of payroll to training or to a
provincial fund. Employers in the Northwest Territories and Nunavut must deduct from
employees salaries a payroll tax equal to 2% of employment earnings.
Branch income
A non-resident corporation will be subject to income tax at normal corporate rates on
profits derived from carrying on a business in Canada. However, Canadas tax treaties
generally restrict taxation of a non-residents business income to the portion allocable to
a PE situated in Canada.
In addition, a special 25% branch tax applies to a non-residents after-tax profits
that are not invested in qualifying property in Canada. The branch tax essentially is
equivalent to a non-resident WHT on funds repatriated to the foreign head office. In
the case of a corporation resident in a treaty country, the rate at which the branch tax
is levied may be reduced to the WHT rate on dividends prescribed in the relevant tax
treaty (generally 5%, 10%, or 15%). Some of Canadas treaties prohibit the imposition of
branch tax or provide that branch tax is payable only on earnings in excess of a threshold
amount. The branch tax does not apply to transportation, communications, and ironore mining companies. Nor does it apply to non-resident insurers, except in special
circumstances.
Whether or not a treaty applies, a non-resident corporation that has a PE in Canada may
be subject to federal and provincial capital taxes (i.e. financial institutions only). See the
Other taxes section.
Inventory valuation
In most cases, all property included in inventory can be valued at fair market value,
or each item can be valued at its cost or fair market value, whichever is lower. Most
well-established and reasonable approaches to inventory costing can be used for tax
purposes, except for the last in first out (LIFO) method. Conformity between methods
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used for book and tax reporting is not mandatory, but the method chosen should be used
consistently for tax purposes. Inventory must be valued at the commencement of the
year at the same amount as at the end of the immediately preceding year.
Capital gains
Half of a capital gain constitutes a taxable capital gain, which is included in the
corporations income and taxed at ordinary rates. Capital losses are deductible, but
generally only against capital gains. Any excess of allowable capital losses over taxable
capital gains in the current year can be carried back three years and carried forward
indefinitely, to be applied against net taxable capital gains from those years, except in
the case of an acquisition of control. No holding period is required. Intent is a major
factor in determining whether the gain or loss is income or capital in nature.
Non-resident corporations are subject to CIT on taxable capital gains (50% of capital
gains less 50% of capital losses) arising on the disposition of taxable Canadian property.
Taxable Canadian property of a taxpayer includes, among other things:
Real estate situated in Canada.
Both capital and non-capital property used in carrying on a business in Canada.
In general, shares in a Canadian-resident corporation that are listed on a stock
exchange if, at any time in the preceding 60 months:
25% of the shares of the corporation are owned by the taxpayer or persons related
to the taxpayer, and
more than 50% of the fair market value of the shares is derived from real property
situated in Canada, Canadian resource properties, and timber resource properties.
In general, shares in a Canadian-resident corporation that are not listed on a stock
exchange if, at any time in the preceding 60 months, more than 50% of the fair
market value of the shares is derived directly from property similar to that described
above for shares of a public corporation.
However, in specific situations, the disposition by a non-resident of a share or other
interest that is not described above may be subject to Canadian tax (e.g. when a share is
deemed to be taxable Canadian property).
The general requirement is that a non-resident vendor of taxable Canadian property
must report the disposition to the Canada Revenue Agency (CRA) and obtain a clearance
certificate in respect of the disposition. If no certificate is obtained, the purchaser is
required to withhold and remit to the CRA 25% of the sales proceeds.
Relief from the reporting and 25% withholding requirements may be available if
specified conditions are met (e.g. if the gain from the disposition is not taxable in
Canada by virtue of a tax treaty Canada has with another country). However, if the
parties to the transaction are related, relief is available only if the CRA is notified.
Dividend income
Dividends received by one Canadian corporation from another Canadian corporation

generally can be deducted in full when determining taxable income. However, dividends
received by a specified financial institution on certain preferred shares are an important
exception and are taxed at full corporate rates.
Dividends on most preferred shares are subject to a 10% tax in the hands of the
recipient, unless the payer elects to pay a 40% tax (instead of a 25% tax) on the
dividends paid. The payer can offset the tax against its income tax liability. The tax is
not imposed on the first CAD 500,000 of taxable preferred-share dividends paid in a
taxation year. Nor does it apply to dividends paid to a shareholder with a substantial
interest in the payer (i.e. at least 25% of the votes and value).
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Dividends received by private corporations (or public corporations controlled by one or
more individuals) from Canadian corporations are subject to a special refundable tax of
331/3%. The tax is not imposed if the recipient is connected to the payer (i.e. the recipient
owns more than a 10% interest in the payer) unless the payer was entitled to a refund of
tax in respect of the dividend. When the recipient pays dividends to its shareholders, the
tax is refundable at CAD 1 for every CAD 3 of dividends paid.
Stock dividends
If the payer is resident in Canada, stock dividends are treated for tax purposes in the
same manner as cash dividends. The taxable amount of a stock dividend is the increase
in the paid-up capital of the payer corporation because of the payment of the dividend.
Stock dividends received from a non-resident are exempt from this treatment. Instead,
the shares received have a cost base of zero.
Interest income
Interest that accrued, became receivable by, or was received by a corporation is taxable
as income from a business or property, as the case may be.
Rental income
Rents received by a corporation are taxable as income from a business or property, as the
case may be.
Royalty income
Royalties received by a corporation are taxable as income from a business or property, as

the case may be.
The foreign exchange gains and losses of a Canadian taxpayer that arise from business
transactions (i.e. on income account), including the activities of a branch operation, are
generally fully includable in income or fully deductible, as the case may be. Any method
that is in accordance with generally accepted accounting principles (GAAP) may be used
to determine foreign exchange gains or losses on income transactions, provided that
the treatment is consistent with previous years and conforms to the accrual method of
accounting.
A foreign exchange gain or loss that is on capital account is treated the same as any other
capital gain or loss. The accrual method of accounting cannot be used for purposes of
reporting gains or losses on capital account. This follows from the CRAs view that a
taxpayer has not made a capital gain or sustained a capital loss in a foreign currency
until a transaction has taken place. Therefore, paper gains and losses are disregarded.
Partnership income
For Canadian tax purposes, a partnership is treated as a conduit, and the partners
are taxed on their share of the partnership income, whether or not distributed.
A corporation is not restricted from being a member of a partnership. Income is
determined at the partnership level and is then allocated among the partners according
to the terms of the partnership agreement. However, certain deductions, such as
depletion allowances, exploration and development expenses, and donations, will
flow through to be deducted by the various partners directly, as will any foreign tax
credits, dividend tax credits, or investment tax credits (ITCs). Partners generally may
deduct expenses incurred directly, such as interest on borrowings to acquire partnership
interests, in computing income from the partnership.
Corporate partners with taxation years ending after 22 March 2011 are generally
prevented from deferring taxation on partnership income in respect of partnerships in
which they (together with related parties) hold a greater than 10% interest (share of
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income or entitlement to assets); income from these partnerships must be accrued up to
the end of the corporations taxation year.
The accrual is based on partnership income for the fiscal period ending in the
corporations taxation year (the formulaic amount), unless a lower amount is
designated by the partner. Penalties can apply if the designated amount reported is
less than both the formulaic amount and the actual prorated income of the subsequent
partnership fiscal period. Upon request, permission to change the partnerships fiscal
period may be granted. Partnerships in multi-tier structures must adopt the same fiscal
period (generally, 31 December). Certain transitional reserves may be available for up to
five years.
Joint venture income
An unincorporated joint venture is not recognised as a separate legal entity, and no

specific statutory rules govern the taxation of a joint venture in Canada. However, many
business arrangements that are set up as a joint venture may be considered partnerships,
and treated as such for Canadian tax purposes. Whether a partnership exists in a
particular situation is a legal question based on the specific facts and circumstances.
Consistent with the partnership anti-deferral rules (discussed in Partnership income
above), corporate participants must report their actual share of joint venture income
or loss up to the end of their own year-end for tax years ending after 22 March 2011. A
transitional reserve will be allowed, in respect of the additional income included in that
year by a corporate participant (i.e. any actual income of the participant for the stub
period), using the same rules as for the partnership transitional reserve. However, to
claim a reserve, the corporation had to file an election with its tax return for that first
year.
Non-resident trusts (NRTs) and offshore investment funds
An NRT will generally be deemed to be resident for Canadian tax purposes if (i) it
has Canadian resident contributors or (ii) certain former Canadian residents have
contributed to an NRT that has Canadian resident beneficiaries. However, an election
can be filed to deem the creation of a separate notional trust for tax purposes, referred
to as a non-resident portion trust. Canadian tax will apply only to the income or gains
from the properties held by the trust that are not included in the non-resident portion
trust. Properties included in the non-resident portion trust are those properties that
have not been directly or indirectly contributed by a Canadian resident or certain former
Canadian residents (or property substituted for those properties or income derived from
those properties). Many direct or indirect transfers or loans of property or services can
be deemed to be contributions to an NRT.
For taxation years ending after 20 March 2013, newly enacted legislation deems an
NRT other than an immigration trust to be resident in Canada if a Canadian-resident
taxpayer transfers or lends property to the trust (regardless of the consideration
received) and the property held by the trust may revert to the taxpayer, pass to persons
to be determined by the taxpayer, or be disposed of only with the taxpayers consent.
However, the 2014 federal budget eliminates the exemption for immigration trusts,
generally for taxation years ending after 10 February 2014.
The offshore investment fund rules affect Canadian residents that have an interest as a
beneficiary in these funds. If these rules apply, the taxpayer will be required to include
in its income an amount generally determined as the taxpayers cost of the investment
multiplied by a prescribed income percentage less any income received from the
investment. For taxation years ending after 4 March 2010, recently enacted legislation
increases the prescribed income percentage by 2% (to the prescribed rate of interest plus
2%), and extends the statute-barred period for taxpayers who have invested in offshore
investment funds by three years. For taxpayers who voluntarily filed under the former
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proposed foreign investment entity (FIE) rules, the legislation provides transitional
measures to allow the income or deductions claimed even though those rules were never
enacted, or to have the taxation years reassessed to remove the income or deductions
claimed under the FIE rules. Also, for certain non-discretionary trust funds in which
a Canadian-resident person, and persons that do not deal at arms length with the
person, have interests in aggregate of 10% or more of the total fair market value of the
total interests in the trusts, the trust is deemed to be a controlled foreign affiliate of the
Canadian beneficiary and is thereby subject to the Canadian FAPI rules.
Earnings of specified investment flow-throughs (SIFTs)
Certain earnings of SIFTs (i.e. publicly traded income trusts and partnerships) are
subject to a SIFT tax and are deemed to be a dividend when distributed. The rules are
intended to discourage corporations from converting to income trusts. The rules do not
apply to Real Estate Investment Trusts (REITs) that meet certain conditions.
Foreign income
Corporations resident in Canada are subject to Canadian federal income taxes on

worldwide income, including income derived directly from carrying on business in a
foreign country, as earned. In addition, resident corporations may be taxable currently
on certain passive and active income earned by foreign subsidiaries and other foreign
entities. Relief from double taxation is provided through Canadas international tax
treaties, as well as foreign tax credits and deductions for foreign income or profits taxes
paid on income derived from non-Canadian sources.
20 Tax Information Exchange Agreements (TIEAs) have entered into force (one on
behalf of five jurisdictions). Canada is currently negotiating eight other TIEAs; two have
been signed and await entry into force. To encourage non-treaty countries to enter into
TIEAs:
an exemption is available for dividends received in Canada from the active business
income of foreign affiliates resident and carrying on their active business in
non-treaty countries that have a TIEA with Canada, and
active business income earned by foreign affiliates in non-TIEA (and non-treaty)
countries will be treated as FAPI, which is taxable in Canada on an accrual basis, if a
TIEA with Canada is not concluded within a specified period from a written request
to commence negotiations or from the commencement of negotiations.
Foreign investment income earned directly, other than dividends, is taxed as earned,
with a non-business foreign tax credit and a deduction for foreign income or profits taxes
available, subject to certain limitations. Dividends received by private corporations from
non-connected foreign corporations are subject to the special refundable tax of 331/3%
(see above), to the extent that the dividends are deductible in determining taxable
income.
The tax treatment of foreign dividends received by a corporation resident in Canada will
depend on whether or not the payer corporation is a foreign affiliate of the recipient.
Dividends received from foreign corporations that are not foreign affiliates are taxed
when received, with a non-business foreign tax credit and a deduction for foreign
income or profits taxes available, subject to certain conditions. Dividends received
from foreign affiliates may be permitted to flow tax-free between foreign affiliates up
to Canada, subject to certain limitations pertaining to the nature of the earnings from
which the dividends were paid, the foreign income or profits taxes paid, and WHTs paid
in respect thereof.
See Controlled foreign affiliates and foreign accrual property income (FAPI) in the Group
taxation section for a discussion on foreign affiliates, controlled foreign affiliates, and FAPI.
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Foreign affiliate amendments
Legislation enacted in 2013 relating to the taxation of Canadian corporations with

foreign affiliates is the culmination of legislative developments that started over a
decade ago. It provides taxpayers and their advisors some stability in this area for the
first time in over ten years. Some provisions have retroactive effect. Key changes include:
New income inclusion rules for upstream loans made by foreign affiliates.
Foreign tax credit generator rules that target hybrid investments in foreign entities
that are used to artificially create credits and deductions for foreign taxes when the
taxpayer does not bear the economic cost of the tax.
The creation of a hybrid surplus regime to track certain capital gains realised by a
foreign affiliate on the disposition of certain shares or partnership interests.
New rules dealing with distributions made by foreign affiliates (generally deemed to
be dividends).
New stop-loss rules applicable to dispositions of foreign affiliate shares or partnership
interests.
New rules for the streaming of passive capital losses realised by foreign affiliates.
New foreign affiliate reorganisation rules applicable to liquidations, dissolutions, and
foreign mergers (including absorptive mergers) involving foreign affiliates.
A new anti-avoidance rule targeting increases in the exempt earnings of a foreign
affiliate.
Draft legislative proposals that further refine the taxation of Canadian corporations with
foreign affiliates were released on 12 July 2013.
Shareholder loan rules
Non-resident controlled Canadian corporations are permitted to make certain loans to

foreign parent companies or related non-resident companies without being subject to
the deemed dividend WHT. To benefit from this elective relief, the Canadian corporation
must include in income interest at the prescribed rate plus 4%. The legislation also
applies to loans made by, or to, certain partnerships. The election may be filed, on
a loan-by-loan basis, for loans or indebtedness that become owing to a corporation
resident in Canada after 28 March 2012.
Foreign affiliate dumping rules
Transactions described as foreign affiliate dumping transactions involve an investment

in a foreign affiliate by a corporation that is (i) resident in Canada and (ii) controlled
by a non-resident of Canada. When these rules apply, a dividend will be deemed to
have been paid by the corporation to its foreign parent to the extent of any non-share
consideration given by the corporation for the investment in the foreign affiliate, and
any increase in the paid-up capital pertaining to the investment will be denied. The rules
define investment broadly to include:
an acquisition of shares or contribution of capital
transactions where the foreign affiliate becomes indebted to the corporation (or a
related Canadian company), and
an acquisition of certain options in shares or debt of the foreign affiliate.
Any deemed dividend will be subject to Canadian WHT (as reduced by the applicable
treaty). The legislation generally applies to transactions occurring after 28 March 2012.
Draft legislative proposals that further refine the foreign affiliate dumping rules were
released on 16 August 2013.
Captive insurance
The 2014 federal budget proposes that, for taxation years beginning after 10 February
2014, an anti-avoidance rule in the FAPI regime intended to prevent Canadian taxpayers
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(e.g. financial institutions) from shifting income from the insurance of Canadian risks
offshore is clarified to ensure it applies to certain tax planning arrangements sometimes
referred to as insurance swaps. If the anti-avoidance rule applies, the foreign affiliates
income from the insurance of the foreign risks and any income from a connected
agreement or arrangement will be included in computing its FAPI.
Offshore regulated banks
For taxation years of taxpayers beginning after 2014, the 2014 federal budget narrows
the exemption that excludes the income of foreign financial institutions from the FAPI
regime. Under current rules, Canadian taxpayers that are not financial institutions
may set up a regulated foreign financial institution to earn offshore income that is
included in earnings that can be repatriated to Canadian corporate shareholders as
tax-exempt dividends. The proposals are intended to prevent Canadian taxpayers from
obtaining unintended tax advantages by setting up a foreign financial institution that
has as its main purpose investing or trading in securities for its own account, and not to
facilitate financial transactions for customers. The government will continue to monitor
developments in this area to determine if further action is required.
Deductions
Business expenses that are reasonable and paid out to earn income are deductible
for income tax purposes unless disallowed by a specific provision in the Income Tax
Act. Some expenses are deductible subject to limitation, e.g. charitable donations,
entertainment expenses, and the cost of providing an automobile to employees.
Deduction of capital expenditures is specifically prohibited, but special provisions may
allow depreciation or amortisation of these expenditures.
Because Canadian corporations are taxable on worldwide income, there are basically
no territorial limits on the deductibility of related expenses. Payments to affiliates are
deductible if they reflect arms-length charges. Transfers of losses and other deductions
between unrelated corporate taxpayers are severely limited after an acquisition of
control.
Generally, depreciation for tax purposes (capital cost allowance) is computed on a

pool basis, with only a few separate classes (pools) of property. Annual allowances
are generally determined by applying a prescribed rate to each class on the decliningbalance basis. For example, the prescribed annual rate is 20% on most furniture and
fixtures, 30% on automotive equipment, and 4% to 10% on most buildings. In the year
of acquisition, only half of the amount otherwise allowable may be claimed on most
classes of property. Generally, capital cost allowance (CCA) may not be claimed until
the taxation year the property is available for use. The taxpayer can claim any amount
of CCA up to the maximum. CCA previously claimed may be recaptured if assets are
sold for proceeds that exceed the undepreciated cost of the class. Temporary incentives
to accelerate depreciation for eligible manufacturing and processing machinery and
equipment acquired after 18 March 2007, and before 2016, revise the rate and method
from 30% declining-balance to 50% straight-line.
Eligible capital property (ECP)
Three-quarters of capital expenditures for goodwill and certain other intangible

properties can be amortised at a maximum annual rate of 7%, on a declining-balance
basis. A portion of proceeds may be taxable as recapture or as a gain on disposition.
A public consultation will be held to replace the ECP regime with a new CCA class for
businesses and transfer taxpayers existing cumulative eligible capital (CEC) pools to the
new CCA class. Detailed draft legislative proposals will be released for comment, and the
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timing of the implementation will be determined after the consultation. The proposed
rules include:
A new class of depreciable property for CCA purposes, with a 5% annual deprecation
rate, in which eligible expenditures (those currently added to CEC) would be
included at a 100% inclusion rate.
Special treatment for goodwill and other expenditures and receipts that do not relate
to a specific property of the business, and that would be eligible capital expenditures
or eligible capital receipts under the ECP regime - expenditures will be grouped
together and treated as the cost of a single goodwill property, and for receipts, the
lesser of that cost and the amount of the receipt will reduce the CCA pool, with the
excess (if any) treated as a capital gain.
Transitional measures, such as for calculating and transferring CEC pool balances to
the new CCA class as of the implementation date (the opening balance of the new
CCA class for a business would equal the balance at that time of the existing CEC pool
for that business), for the first ten years the depreciation rate for the new CCA class
would be 7% for expenditures incurred before the implementation of the new rules,
and certain receipts related to pre-transition property or expenditures will reduce the
new CCA pool balance at a 75% rate.
Mining and oil and gas activity
Generally, mining and oil and gas companies are allowed a 100% deduction for
exploration costs and certain pre-production development costs. Other development
costs are deductible at the rate of 30% on a declining-balance basis. Capital property
costs are subject to the depreciation rules noted above under Depreciation. In addition, in
certain cases, significant asset acquisitions and assets acquired for a new mine or major
expansion benefit from accelerated depreciation of up to 100% of the income from the
mine. For certain oil sands assets acquired after 18 March 2007, accelerated depreciation
has been reduced gradually since 2011 and will be eliminated by 2015. Newly enacted
legislation further phases out the accelerated depreciation for other mining assets over
the 2017 to 2020 calendar years, generally for expenses incurred after 20 March 2013.
Newly enacted legislation also treats pre-production mine development expenses as
Canadian development expenses (30% declining balance), instead of as Canadian
exploration expense (100% deduction), generally for expenses incurred after 20 March
2013, subject to a phase-in over three calendar years, from 2015 to 2017.
Provinces levy mining taxes on mineral extraction and royalties on oil and gas
production. Most are deductible.
ITCs are available federally (and in some provinces) to individuals who invest in shares
to fund prescribed mineral exploration expenditures. The federal credit in 2014 for
qualified flow-through share investments is 15% of qualifying mining grassroots
exploration expenditures. Certain mining exploration and pre-production expenditures
that are incurred by a Canadian corporation and not used for flow-through are eligible
for an ITC that is being phased out:
for pre-production mining exploration expenses from 10% to 5% in 2013, and nil
after 2013, and
for pre-production development expenses from 10% to 7% in 2014, 4% in 2015, and
nil after 2015 (transitional relief may be available).
The individual and corporate credits can be used to offset current taxes payable or
carried over to certain previous or subsequent taxation years.
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Scientific research and experimental development (SR&ED)
Canada provides a generous combination of deductions and tax credits for SR&ED.
Current (and before 2014, capital) expenditures on SR&ED can be deducted in the
year incurred or carried forward indefinitely to be used at the taxpayers discretion to
minimise tax payable. See Scientific research and experimental development (SR&ED)
credit in the Tax credits and incentives section for information on the tax credits currently
available.
Start-up expenses
Expenses related to the incorporation, reorganisation, or amalgamation of a

corporation, (i.e. cost of affidavits, legal and accounting fees, costs of preparing articles
of incorporation) are not deductible for income tax purposes. They are considered to
be eligible capital expenditures, for which 75% of the capital cost of the expenditure is
amortised at a maximum rate of 7% per year on a declining-balance basis (see Eligible
capital property [ECP] above for proposed changes to the ECP regime). Expenses incurred
after the date of incorporation generally are deductible for income tax purposes if
reasonable in amount and incurred to earn income from the business.
Interest expenses
Interest on borrowed money used for earning business or property income, or interest
in respect of an amount payable for property acquired to earn income, is deductible,
provided the interest is paid pursuant to a legal obligation and is reasonable under the
circumstances.
Doubtful accounts and bad debts
A reasonable reserve for doubtful accounts may be deducted for tax purposes. The
reserve calculation should be based on the taxpayers past history of bad debts,
industry experience, general and local economic conditions, etc. Special rules apply for
determining reserves for financial institutions. A taxpayer can deduct the amount of
debts owing that are established to have become bad debts during the year, provided the
amount has previously been included in the taxpayers income or relates to loans made
in the ordinary course of business. Recoveries of bad debts previously written off must
be included in income in the year of recovery.
Business meals and entertainment
Deductions by a corporation for business meals and entertainment expenses are

limited to 50% of their cost. This includes meals while travelling or attending a
seminar, conference, or convention, overtime meal allowances, and room rentals
and service charges, etc. incurred for entertainment purposes. If the business meal
and entertainment costs are billed to a client or customer and itemised as such, the
disallowance (i.e. the 50% not deductible) is shifted to the client or customer.
Insurance premiums
Insurance premiums relating to property of a business are generally deductible, but

life insurance premiums are generally not deductible if the company is the named
beneficiary. However, if a financial institution lender requires collateral security in the
form of life insurance, a deduction is allowed for the associated net cost of any pure
insurance for the period.
Charitable donations made to registered Canadian charitable organisations are

deductible in computing taxable income, generally to the extent of 75% of net income. A
five-year carryforward is provided.
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Fines and penalties
Most government-imposed fines and penalties are not deductible. Fines and penalties
that are not government-imposed are generally deductible if made or incurred by the
taxpayer for the purpose of gaining or producing income from the business or property.
Taxes
Federal, provincial, and territorial income taxes are not deductible in determining
income subject to tax. The tax treatment of federal capital taxes and provincial payroll
and capital taxes is discussed in the Other taxes section.
Net operating losses generally may be carried back three tax years and forward 20 (ten
years if the loss was incurred in taxation years ending before 2006 and after 22 March
2004, seven years if before 23 March 2004). Special rules may prohibit the use of losses
from other years when there has been an acquisition of control of the corporation.
Corporate loss trading
Newly enacted legislation introduces an anti-avoidance measure to support the

restrictions on the deductibility of losses, and the use of certain other tax benefits,
where there has been an acquisition of control of a corporation. This measure applies
when a person or group of persons acquires shares of a corporation to hold more than
75% of the fair market value of all of the shares of the corporation without otherwise
acquiring control of the corporation, and if it is reasonable to conclude that one of the
main reasons that control was not acquired was to avoid the loss restriction rules. The
legislation generally applies for shares acquired after 20 March 2013, unless the shares
were acquired pursuant to a written agreement entered into before 21 March 2013.
Interest, rents, royalties, management fees, and other payments made to related nonresidents are deductible expenses to the extent that they are incurred to earn income
of the Canadian corporation and do not exceed a reasonable amount. In certain cases,
the receipt of these payments by a foreign affiliate of the Canadian corporation or of a
related person can give rise to FAPI, which is taxable on an accrual basis in Canada.
Group taxation
Group taxation is not permitted.
The federal government has completed its review of the taxation of corporate groups
and has determined that moving to a formal system of corporate group taxation, such
as the introduction of rules governing loss transfers or consolidated reporting, is not
currently a priority. The government will continue to work with provinces and territories
to address their concerns about loss utilisation.
Transfer pricing
Canadian transfer pricing legislation and administrative guidelines are generally

consistent with OECD Guidelines. Statutory rules require that transactions between
related parties be carried out under arms-length terms and conditions.
Penalties may be imposed when contemporaneous documentation requirements are not
met. A taxpayer will be deemed not to have made reasonable efforts if the taxpayer does
not maintain complete and accurate documentation to evidence that it has determined
and used arms-length prices for its related-party transactions. The documentation must
be prepared on or before the taxpayers documentation due date, which is six months
after the end of the taxation year.
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The transfer pricing penalty is 10% of the transfer pricing adjustment if the adjustment
exceeds the lesser of CAD 5 million and 10% of the taxpayers gross revenue for the
year. The penalty is not deductible in computing income, applies regardless of whether
the taxpayer is taxable in the year, and is in addition to any additional tax and related
interest penalties.
Canada has an Advance Pricing Arrangement (APA) program that is intended to help
taxpayers determine transfer prices acceptable to the local tax authorities and, when
negotiated as bilateral or multilateral APAs, with tax authorities in other jurisdictions.
Under this program, 291 APAs have been completed or are in progress.
Many of Canadas international tax agreements contain provisions concerning income
allocation in accordance with the arms-length principle. These include a Mutual
Agreement Procedure, which is a treaty-based mechanism through which taxpayers can
petition competent authorities for relief from double taxation resulting from transfer
pricing adjustments.
Transfer pricing adjustments
When the Canadian transfer pricing rules have applied to adjust, for tax purposes,
amounts related to transactions between a Canadian corporation and one or more
non-arms length non-residents (a primary adjustment), the related benefit to the
non-residents is treated by the CRA as a deemed dividend (a secondary adjustment),
subject to WHT, which can be eliminated, at the discretion of the Minister of Revenue,
if the amount of the primary transfer pricing adjustment is repatriated to the Canadian
corporation.
Thin capitalisation
Thin capitalisation rules can limit interest deductions when interest-bearing debt
owing to certain non-residents (or persons not dealing at arms length with certain
non-residents) exceeds one and a half times the corporations equity (two times the
corporations equity for taxation years beginning before 2013). The rules have been
extended to apply:
to debts of a partnership in which a Canadian-resident corporation is a member, for
taxation years beginning after 28 March 2012, and
to Canadian-resident trusts and non-resident corporations and trusts that operate in
Canada in respect of existing and new debt, for taxation years beginning after 2013.
Disallowed interest will be treated as a dividend for WHT purposes for taxation years
ending after 28 March 2012.
Back-to-back loan arrangements
To target certain back-to-back loan arrangements that have been undertaken by

taxpayers using an interposed third party to avoid the application of WHT and/or the
thin capitalisation rules, the 2014 federal budget:
introduces a specific anti-avoidance rule relating to WHT on interest payments, for
amounts paid or credited after 2014, and
amends an existing anti-avoidance provision in the thin capitalisation rules, for
taxation years that begin after 2014.
In both cases, the new rules will apply to arrangements when:
a taxpayer has a debt owing to a third-party intermediary, and
a non-resident person uses its property to secure the debt, holds limited recourse debt
of the intermediary, or makes a loan to the intermediary on condition that a loan be
made to the taxpayer.
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When such arrangements exist, the taxpayer will be deemed to owe amounts to the nonresident person, for thin capitalisation purposes, equal to the lesser of the outstanding
debt and the fair market value of pledged property or the amount of the limited recourse
loan or the loan made on condition. Related amounts of interest will also be deemed to
have been paid or payable to the non-resident person for thin capitalisation purposes,
and for WHT purposes to the extent that WHT would otherwise have been reduced by
virtue of the arrangement.
Controlled foreign affiliates and foreign accrual property income

(FAPI)
Under Canadas FAPI rules, Canadian corporations are taxed on certain income of
controlled foreign affiliates (typically, certain income from property, income from a
business other than active, income from a non-qualifying business, and certain taxable
capital gains) as earned, whether or not distributed. A grossed-up deduction is available
for foreign income or profits taxes and WHTs paid in respect thereof. In general, a
foreign corporation is a foreign affiliate of a Canadian corporation if:
the Canadian corporation owns, directly or indirectly, at least 1% of any class of the
outstanding shares of the foreign corporation, and
the Canadian corporation, alone or together with related persons, owns, directly
or indirectly, at least 10% of any class of the outstanding shares of that foreign
corporation.
The foreign affiliate will be a controlled foreign affiliate of the Canadian corporation if
certain conditions are met (e.g. more than 50% of the voting shares are owned, directly
or indirectly, by a combination of the Canadian corporation, persons at non-arms length
with the Canadian corporation, a limited number of Canadian-resident shareholders,
and persons at non-arms length with those Canadian-resident shareholders).

Foreign tax credits
Taxpayers that have foreign-source income and are resident in Canada at any time in
the year are eligible for foreign tax credit relief. Separate foreign tax credit calculations
are prescribed for business and non-business income on a country-by-country basis. All
provinces and territories also allow a foreign tax credit, but only in respect of foreign
non-business income taxes.
Income or profits taxes paid to foreign governments generally are eligible for credit
against a taxpayers Canadian income taxes payable. The credit in respect of taxes paid
on foreign income is restricted to the amount of Canadian taxes otherwise payable on
this income. Generally, foreign tax credits are available only to reduce Canadian tax on
foreign-source income that is subject to tax in the foreign country.
Foreign business income or loss is computed for each foreign country in which a branch
is located. Excess foreign business income tax credits may be carried back three years or
forward ten. The foreign non-business income tax credit applies to all foreign taxes other
than those classified as business income tax. No carryover is allowed with respect to the
non-business income foreign tax credit. Unused foreign non-business income tax may be
deducted in computing income.
Regional incentives
In specified regions of Canada (i.e. Atlantic provinces, the Gasp region, and Atlantic
offshore region), a 10% federal ITC is available for various forms of capital investment
(generally, new buildings and/or machinery and equipment to be used primarily in
manufacturing or processing, logging, farming, or fishing). The ITC is fully claimed
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against a taxpayers federal tax liability in a given year. Unused ITCs reduce federal
taxes payable for the previous three years and the next 20, or may be 40% refundable to
CCPCs. Changes to the 10% federal ITC that generally apply to assets acquired after
28 March 2012:
phase out (subject to possible transitional relief) the ITC for certain oil and gas and
mining activities, from 10% to 5% in 2014 and 2015, and nil after 2015, and
ensure that qualified property includes certain electricity generation equipment and
clean energy generation equipment used primarily in an eligible activity (except oil
and gas or mining activities).
The provinces and territories may also offer incentives to encourage corporations
to locate in a specific region. Income tax holidays are available in Newfoundland
and Labrador, Nova Scotia, Ontario, Prince Edward Island, and Quebec for
certain corporations operating in specific industries (e.g. in Ontario and Quebec,
commercialisation of intellectual property; in Prince Edward Island, bioscience or
aviation) or meeting certain conditions (e.g. job creation for Newfoundland and
Labrador).
Industry incentives
Canada offers many tax incentives at the federal, provincial, and territorial levels, for
various industries and activities, including those related to:

Research and development (see below).

Film, media, computer animation and special effects, and multi-media productions.
Manufacturing and processing.
Environmental sustainability.
Scientific research and experimental development (SR&ED) credit
In addition to the SR&ED deduction, a taxpayer can benefit from an ITC, which is
generally a 15% non-refundable credit (20% for taxation years ending before 2014;
pro-rated for taxation years straddling 1 January 2014) on SR&ED expenditures that can
be applied against taxes payable. Alternatively, this tax credit can be carried back three
years or forward 20, to be applied against taxes owing.
A qualifying CCPC can qualify for a 35% refundable tax credit annually on its first
CAD 3 million in expenditures. This enhanced credit is subject to certain income and
capital limitations.
SR&ED ITCs have been extended to certain salary and wages (limited to 10% of salary
and wages directly attributable to SR&ED carried on in Canada) incurred in respect of
SR&ED carried on outside Canada.
In addition to the federal SR&ED incentives, all provinces (except Prince Edward
Island) and the Yukon provide tax incentives to taxpayers that carry on research and
development (R&D) activities.
The Independent Panel on Federal Support to Research and Development released
the report, Innovation Canada: A Call to Action, that provides advice in respect of the
effectiveness of federal programs to support business and commercially oriented R&D,
the appropriateness of the current mix and design of these programs, as well as possible
gaps in the current suite of programs and what might be done to fill them. As a result,
changes:
require more detailed information about SR&ED program tax preparers and billing
arrangements on SR&ED claims filed starting 1 January 2014
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apply a CAD 1,000 penalty per claim for missing, incomplete, or inaccurate
information for SR&ED program claims filed after 2013
provide that capital property acquired generally after 2013 is not deductible as an
SR&ED expenditure nor eligible for ITCs
reduce the overhead proxy rate from 65% to 60% for 2013 and to 55% after 2013,
and
allow only 80% of SR&ED contract payments (net of SR&ED capital expenditures) to
an arms-length contractor incurred after 2012 to be eligible for ITCs.
Withholding taxes
WHT at a rate of 25% is imposed on interest (other than most interest paid to armslength non-residents), dividends, rents, royalties, certain management and technical
service fees, and similar payments made by a Canadian resident to a non-resident of
Canada.
Canada is continually renegotiating and extending its network of treaties, some with
retroactive effect. This table summarises WHT rates on payments arising in Canada.
The applicable treaty should be consulted to determine the WHT rate that applies in a
particular circumstance.
Recipient
Resident corporations and individuals
Non-resident corporations and
individuals:
Non-treaty
Treaty:
Algeria
Argentina
Armenia
Australia
Austria
Azerbaijan (7)
Bangladesh
Barbados
Belgium
Brazil
Bulgaria
Cameroon
Chile (5)
Colombia
Croatia
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt
Estonia (7)
Finland
Dividends (%)
0
Related-party
interest (%) (1)
0
Royalties (%) (2)

0
25
25
25
15
10/15 (4)
5/15 (4)
5/15 (4)
5/15 (4)
10/15 (4)
15
15
5/15 (4)
15/25 (4)
10/15 (4, 5)
15
10/15 (4)
10/15 (4)
5/15 (4)
5/15 (4)
15
5/15 (4)
5/15 (4)
18
5/15 (4)
15
5/15 (4)
5/15 (4)
15
12.5
10
10
10
10
15
15
10
15
10
15
15
10
10
10
15
10
10
18
15
15
10
10
0/15
3/5/10/15
10
10
0/10
5/10
10
0/10
0/10
15/25
0/10 (5)
15
15
10
10 (5)
10
0/10
10
0/10
0/18
10/15 (5)
15
10 (5)
0/10
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Recipient
France
Gabon
Germany
Greece
Guyana
Hong Kong (6, 8)
Hungary
Iceland
India
Indonesia
Israel
Italy
Ivory Coast
Jamaica
Japan
Jordan
Kazakhstan (7)
Kenya
Korea, Republic of
Kuwait
Kyrgyzstan (7)
Latvia (7)
Lebanon (3)
Lithuania (7)
Luxembourg
Malaysia
Malta
Mexico
Moldova
Mongolia
Morocco
Namibia (3)
Netherlands
New Zealand (9)
Nigeria
Norway
Oman
Pakistan
Papua New Guinea
Peru (5)
Philippines
Poland (10)
Portugal
Romania
Russia (7)
Senegal
Serbia (11)
Singapore
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Dividends (%)
5/15 (4)
15
5/15 (4)
5/15 (4)
15
5/15 (4)
5/15 (4)
5/15 (4)
15/25 (4)
10/15 (4)
5/15 (4)
15
5/15 (4)
15
15
5/15 (4)
10/15 (4)
5/15 (4)
15/25 (4, 5)
5/15 (4)
5/15 (4)
15 (5)
5/15 (4)
5/15 (4)
5/15 (4)
5/15 (4)
15
15
5/15 (4)
5/15 (4)
5/15 (4)
15
5/15 (4)
5/15 (4)
5/15 (4)
12.5/15 (4)
5/15 (4)
5/15 (4)
15
15
10/15 (4)
15
5/15 (4)
10/15 (4)
5/15 (4)
10/15 (4)
15
5/15 (4)
15
Related-party
interest (%) (1) Royalties (%) (2)
10
0/10
10
10
10
0/10
10
0/10
15
10
10
10
10
0/10
10
0/10
15
10/15/20
10
10
10
0/10
15
0/15
10
0/5/10
15
10
15
10
10
10
10
10
10
10 (5)
15
15
10
10
10
10
15 (5)
0/10
10
10 (5)
10
5/10
10
10 (5)
10
0/10
15
15
15
0/10
10
0/10
10
10
10
5/10
15
5/10
10
0/10
10
0/10
10
5/10
12.5
12.5
10
0/10
10 (5)
0/10
15
0/15
10
10
15
15
15
10
10
5/10
10
10
10
5/10
10
0/10
15
15
10
10
15
15
Canada
Recipient
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tanzania
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine (7)
United Kingdom
United States
Uzbekistan (7)
Venezuela
Vietnam
Zambia
Zimbabwe
Dividends (%)
5/15 (4)
5/15 (4)
5/15 (4)
15
15
5/15 (4)
5/15 (4)
20/25 (4)
15
5/15 (4)
15
15/20 (4)
5/15 (4)
5/15 (4)
5/15 (4)
5/15 (4)
5/15 (4)
10/15 (4, 5)
5/10/15 (4)
15
10/15 (4)
Related-party
interest (%) (1)
10
10
10
15
15
10
10
15
15
10
15
15
10
10
10
0 (12)
10
10
10
15
15
Royalties (%) (2)

0/10
10
6/10
0/10
0/10
0/10
0/10
20
5/15
0/10
0/15/20
10
0/10
0/10
0/10
0/10
5/10
5/10
7.5/10
15
10
Notes
1.
Interest: Canada does not impose WHT on interest (except for participating debt interest) paid or
credited to arms-length non-residents. Most treaties have an explicit provision for higher WHT on
interest in excess of fair market value in non-arms-length circumstances.
2. Royalties: A zero royalty rate generally applies to:
copyright royalties and payments for a literary, dramatic, musical, or other artistic work (but not
royalties for motion picture films, work on film or videotape, or other means of reproduction for
use in television), and/or
royalties for computer software, a patent, for information concerning industrial, commercial, or
scientific experience (but not royalties for a rental or franchise agreement), or for broadcasting.
Most treaties explicitly provide for higher WHT on royalties in excess of fair market value in
non-arms-length circumstances. A zero rate of tax may apply in certain circumstances.
3. The treaty has been signed, but is not yet in force. In the absence of a treaty, Canada imposes a
maximum WHT rate of 25% on dividends, interest, and royalties.
4. The lower (lowest two for Vietnam) rate applies if the beneficial owner of the dividend is a company
that owns/controls a specified interest in the paying company. The nature of the ownership
requirement, the necessary percentage (10%, 20%, 25%, or higher), and the relevant interest
(e.g. capital, shares, voting power, equity percentage) vary by treaty.
5. If the other state (Canada for the treaty with Oman) concludes a treaty with another country providing
for a lower WHT rate (higher rate for Kenya), the lower rate (higher rate for Kenya) will apply in respect
of specific payments within limits, in some cases.
6. Canadas treaty with China does not apply to Hong Kong.
7. The treaty status of the republics that comprise the former USSR is as follows:
Azerbaijan, Estonia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Russia, Ukraine, and Uzbekistan:
new treaties entered into force (see table for rates).
Other republics: no negotiations are underway.
Belarus, Tajikistan, and Turkmenistan will not honour the treaty with the former USSR. As a result,
Canada will impose a maximum WHT rate of 25% on dividends, interest, and royalties until a new
treaty enters into force. For other republics that comprise the former USSR, the status of the former
treaty with the USSR is uncertain. Because the situation is subject to change, Canadian taxpayers are
advised to consult with the CRA as transactions are carried out.
8. The Canada/Hong Kong Special Administrative Region of the Peoples Republic of China treaty and
Protocol entered into force on 29 October 2013. Its provisions apply in Canada:
for purposes of non-resident WHT, to amounts paid or credited after 31 December 2013, and
for other taxes, for taxation years beginning after 2013.

Before then, the rates were 25%.
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9.
A new treaty and Protocol with New Zealand was signed on 3 May 2012. Upon ratification, its
provisions will apply in Canada:
for purposes of non-resident WHT, to amounts paid or credited after the end of the first month
after they enter into force, and
for other taxes, for taxation years beginning after the calendar year they enter into force.
The rates in the table are from the new treaty and Protocol. Under the new treaty and Protocol, the
WHT rate will be reduced from 15% to:
5% on dividends paid to a company that owns at least 10% of the payors voting stock (the rate
will remain 15% on other dividends)
10% on interest, but certain interest payments will be exempt, and
10% on royalties, but certain royalties for the use of computer software, patents, and know-how,
and certain copyright royalties, will be subject to a rate of 5%.
10. A new treaty and Protocol with Poland entered into force on 30 October 2013. Its provisions apply in
Canada:
The rates in the table are from the new treaty and Protocol. Under the new treaty and Protocol, the
WHT rate:
is reduced from 15% to 5% on dividends paid to a company that directly owns at least 10% of
the payors capital (the rate will remain 15% on other dividends)
is reduced from 15% to 10% on interest, but certain interest payments will be exempt, and
remains 10% on royalties, but certain royalties for the use of computer software, patents, and
know-how will be subject to a rate of 5%, and certain copyright royalties will no longer be exempt
and will be subject to a rate of 5%.
11. The Canada/Republic of Serbia treaty and Protocol entered into force on 31 October 2013. Its
provisions apply in Canada:

Before then, the rates were 25%.
12. For the United States, the zero rate applies between related persons, subject to the Limitation of
Benefits article.
Tax administration
Taxable period
The tax year of a corporation, which is normally the fiscal period it has adopted for
accounting purposes, cannot exceed 53 weeks. The tax year need not be the calendar
year. Once selected, the tax year cannot be changed without approval from the tax
authorities.
Tax returns
Both the federal and the provincial/territorial corporation tax systems operate on an
essentially self-assessing basis. All corporations must file federal income tax returns.
Alberta and Quebec tax returns must also be filed by corporations that have PEs in those
provinces, regardless of whether any tax is payable. Corporations with PEs in other
provinces that levy capital tax must also file capital tax returns. Tax returns must be filed
within six months of the corporations tax year-end. No extensions are available.
Certain corporations with annual gross revenues exceeding CAD 1 million are required
to electronically file (e-file) their federal CIT returns via the internet. Also, information
return filers that submit more than 50 information returns annually must e-file via the
internet. Penalties are assessed for failure to e-file.
Payment of tax
Corporate tax instalments are generally due on the last day of each month (although
some CCPCs can remit quarterly instalments, if certain conditions are met). Any balance
payable is generally due on the last day of the second month following the end of the tax
year.
Functional currency
The amount of income, taxable income, and taxes payable by a taxpayer is determined
in Canadian dollars. However, certain corporations resident in Canada can elect to
determine their Canadian tax amounts in the corporations functional currency.
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Tax audit process
The tax authorities are required to issue an assessment notice within a reasonable time
following the filing of a tax return. These original assessments usually are based on
a limited review, if any, of the corporations income tax return. However, the notice
of assessment will identify any changes made (e.g. correcting discrepancies on any
balances carried forward).
Traditionally, all corporations with gross income over CAD 250 million and their
affiliates are assigned a large case file team and audited annually. Medium-sized
corporations (gross income between CAD 20 million and CAD 250 million) generally
are selected based on a screening process and identified risks. Smaller corporations,
which are usually CCPCs with gross income under CAD 20 million, have been subject
to compliance or restricted audits, selected based on statistical data and a screening
process. Audits of CCPCs are generally restricted to covering the current and one
previous taxation year.
However, the CRA announced in the fall of 2010 that, over the next five years, it will
implement a new risk assessment model to select corporations, partnerships, income
trusts, and private equity funds for audit. Large corporations and their affiliated entities
are to be classified as high, medium, or low risk, and their categorisation will dictate
the scope of the audit undertaken. Factors that determine the risk category include the
taxpayers history with the CRA, the type of industry, and the internal controls in place.
The CRA will target its resources on high-risk taxpayers, with minimal resources spent
on lower-risk taxpayers. The approach includes face-to-face meetings with the senior
management of corporations classified as high risk to discuss their risk profile and
measures that could be taken to change the profile to a more desirable level. The CRA
has undertaken a risk assessment of all large corporations in its files. To date, however,
they have met with only approximately 300 of the estimated 1,000 large corporations on
file.
In 2010, the CRA issued a policy paper describing the powers that CRA officials have to
obtain information and supporting documentation from taxpayers, registrants, and third
parties. It also discusses the CRAs policies and procedures for obtaining information,
and how concerns with any specific information gathering process can be addressed by
taxpayers or their representatives. The paper confirms that auditors determine what
information is relevant for the review being conducted. It lists the compliance tools that
can be used to obtain the information and the consequences for non-compliance. The
CRA expects transparency and cooperation from the taxpayer, registrant, or third party
to benefit the compliance process.
A reassessment of the tax payable by a corporation that is not a CCPC may be made
within four years from the date of mailing of the original notice of assessment, usually
following a detailed field audit of the return and supporting information. The limitation
period is three years for CCPCs. The three-year and four-year limits are extended a
further three years in some cases (e.g. transactions with non-arms-length
non-residents). Reassessments generally are not permitted beyond these limits
unless there has been misrepresentation or fraud. Different time limits may apply for
provincial reassessments.
Appeals
A taxpayer that disagrees with a tax assessment or reassessment may appeal. The first
step is to file a formal notice of objection within 90 days from the date of mailing of
the notice of assessment or reassessment, setting out the reasons for the objection and
other relevant information. Different time limits may apply for provincial reassessments.
Corporations that qualify as large corporations must file more detailed notices of
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objection. The CRA will review the notice of objection and vacate (cancel), amend, or
confirm it. A taxpayer that still disagrees has 90 days to appeal the CRAs decision to the
Tax Court of Canada, and if necessary, to the Federal Court of Appeal and the Supreme
Court of Canada. However, the Supreme Court hears few income tax appeals.
Topics of interest to Canadian tax authorities include:

Transfer pricing (inbound and outbound), including the deductibility of:
royalty payments made by Canadian corporations to non-arms-length
non-residents
business restructuring expenses incurred by a group of corporations located in
more than one country
interest paid on loans if the funds derived from the loans are used offshore
guarantee fees paid by Canadian corporations to related non-resident
corporations, and
management fees and general and administrative expenses.
The offshoring of Canadian-source income by factoring the accounts receivable of
Canadian corporations.
Treaty shopping to reduce Canadian WHT and capital gains tax.
The manipulation of tax attributes, including:
surplus stripping to reduce Canadian WHT by artificially increasing a Canadian
corporations paid-up capital and subsequently distributing the surplus as a return
of capital
arrangements that manipulate the adjusted cost base of capital assets, and
the acquisition of tax losses realised by arms-length entities.
The requirement to withhold tax on certain payments made to a non-resident that
relate to fees, commissions, or other amounts in respect of services rendered in
Canada.
The residency (i.e. central control and management) of foreign affiliates.
General Anti-Avoidance Rule (GAAR)
The GAAR was first introduced in 1988 and was designed to challenge transactions or
series of transactions that would directly or indirectly result in a tax benefit when:
a taxpayer relies on specific provisions of the Income Tax Act to achieve an outcome
that those provisions seek to prevent
a transaction defeats the underlying rationale of the provisions that are relied upon,
or
an arrangement circumvents the application of certain provisions, such as specific
anti-avoidance rules, in a manner that frustrates or defeats the object, spirit, or
purpose of those provisions.
If GAAR applies, the CRA may deny any deduction, exemption, or exclusion in
computing taxable income or the nature of any payment or other amount may be
recharacterised to deny the tax benefit that would result from an avoidance transaction.
Tax planning by multinational enterprises

The government is seeking input on:
What are the impacts of international tax planning by multinational enterprises on

other participants in the Canadian economy?
Which of the international corporate income and sales tax issues identified in the
BEPS Action Plan should be considered the highest priorities for examination and
potential action by the government?
Are there other corporate income or sales tax issues related to improving
international tax integrity that should be of concern?
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What considerations should guide the government in determining the appropriate
approach to take in responding to the issues identified?
Would concerns about maintaining Canadas competitive tax system be alleviated by
coordinated multilateral implementation of base protection measures?
What actions should be taken to ensure the effective collection of sales tax on
e-commerce sales to residents of Canada by foreign-based vendors?
Foreign reporting
Reporting requirements apply to taxpayers with offshore investments. The rules impose
a significant compliance burden for taxpayers with foreign affiliates. Failure to comply
can result in substantial penalties.
Tax compliance reporting
On 1 October 2012, the federal government introduced the Red Tape Reduction Action
Plan, which will be implemented over the subsequent three years. The plan puts into
practice common-sense solutions to barriers identified by Canadian businesses, such as
Canadian tax compliance reporting. The action plan has three major themes:
Reducing the burden on business.
Making it easier to do business with regulators.
Improving service and predictability.
Tax avoidance
An avoidance transaction that meets certain conditions is a reportable transaction and

must be reported to the CRA. Quebec also has a provincial reporting regime for certain
aggressive tax planning transactions, and other provinces are considering implementing
similar disclosure rules for these transactions.
Tax evasion and aggressive tax avoidance
To help the CRA combat international tax evasion and aggressive tax avoidance:
Draft legislation will require certain financial intermediaries to report to the CRA
international electronic funds transfers of CAD 10,000 or more, starting in 2015.
The court order process for obtaining information or documents from a third party
has been streamlined.
The Stop International Tax Evasion Program was launched in January 2014; under
the program, the CRA will compensate certain persons who provide information that
leads to the assessment or reassessment of over CAD 100,000 in federal tax.
For Form T1135 (Foreign Income Verification Statement):
if a taxpayer fails to report income from a specified foreign property on Form
T1135 and the form was not filed on time or a specified foreign property was not,
or not properly, identified on the form, the normal assessment period for this form
is extended by three years, and
more detailed information is required to be reported on the form for taxation years
ending after 30 June 2013.
Treaty shopping
The 2014 federal budget proposes a domestic anti-treaty shopping rule that uses a
general approach to identify arrangements representing an improper use of Canadas
tax treaties and contains guidance regarding its application. The main elements of this
proposed rule are set out in the budget documents, and the government had initiated
a consultation period, which ended on 12 April 2014. The government had previously
released a consultation paper, Treaty Shopping - The Problem and Possible Solutions,
to aid in examining the range of possible approaches to address the practice of treaty
shopping in Canada.
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On 19 July 2013, the OECD released an action plan on BEPS. The BEPS initiative
contemplates changes to the OECDs model tax convention and recommendations
regarding the design of domestic rules to address tax treaty abuse, including treaty
shopping, by September 2014.
Other issues
Forms of business enterprise
Canadian law is based on the British common-law system, except in Quebec where a
civil-law system prevails. The principal forms of business enterprise available in Canada
are the following.
Corporation: A legal entity distinct from its shareholders, whether public or private,
incorporated federally, provincially, or territorially.
Partnership: A business relationship between two or more persons (i.e. individuals,
corporations, trusts, or other partnerships) formed for the purpose of carrying on
business in common. Not treated as a legal entity distinct from its partners.
Sole proprietorship: An unincorporated business operated by an individual that is
carried on under the individuals own name or a trade name.
Trust: A relationship whereby property (including real, tangible, and intangible) is
managed by one person (or persons, or organisations) for the benefit of another. May
hold commercial enterprises.
Joint venture: Generally, the pursuit of a specific business objective by two or more
parties whose association will end once the objective is achieved or abandoned. Not
treated as a legal entity distinct from the participants.
Foreign investors usually conduct business in Canada through one or more separate
Canadian corporations, although operation as a branch of a profitable foreign
corporation may be preferable during the start-up period. In addition, foreign investors
may participate as partners in partnerships carrying on business in Canada or as joint
venturers.
Cross-border tax compliance
Canada has ratified the Convention on Mutual Administrative Assistance in Tax Matters,
which entered into force, in respect of Canada, on 1 March 2014. The member states
of the Council of Europe and the member countries of the Organisation for Economic
Co-operation and Development are signatories of the convention. Under the convention,
Canada will exchange tax information based on OECD standards, but is not required to
collect taxes on behalf of another country, or provide assistance in the service of related
documents. Canada will continue to negotiate a provision on helping to collect tax on a
bilateral basis, and has agreed to include such a provision in certain of its bilateral tax
treaties.
US Foreign Account Tax Compliance Act (FATCA)
Canada and the United States have signed an IGA to improve international tax
compliance and to implement the US FATCA. The IGA must be ratified under Canadian
laws before it comes into force. The IGA is a Model I Reciprocal Agreement, meaning
that financial institutions in each country will report specific information to their own
governments, which will then automatically exchange that information annually on a
reciprocal basis. The new reporting regime is effective July 2014, with Canada and the
United States beginning to receive enhanced tax information from each other in 2015.
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Leveraged life insurance arrangements
Newly enacted legislation eliminates certain tax benefits for:

Leveraged insured annuities: Generally for taxation years ending after 20 March
2013, annual accrual-based taxation applies, premiums are not deductible, and death
benefits no longer increase a private corporations capital dividend account (CDA).
10-8 arrangements: No deductions are allowed for interest on related borrowings and
insurance premiums that relate to a period after 2013, and the CDA is not increased
for death benefits that become payable after 2013 and are associated with the
borrowing.
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Cape Verde
PwC contact
Leendert Verschoor
PricewaterhouseCoopers & Associados - SROC, Lda.
Palcio Sottomayor
Rua Sousa Martins 1 - 3
1069-316 Lisboa
Portugal
Tel: +351 213 599 642
State Budget for 2014
Law 52/VIII/2013 approved the 2014 Cape Verdean State Budget and was published on
30 December 2013 in the Official Gazette. This document describes the main changes in
the Cape Verdean tax legislation following the entry into force of the 2014 Cape Verdean
State Budget, effective as of 1 January 2014.
Amendment to the Unique Property Tax (IUP)
The IUP rate is reduced from 3% to 1.5%, applicable to buildings subject to taxation on
their tax property value.
Tourism tax and customs statistics tax
The tourism tax and the customs statistics tax, implemented with the State Budget Law
for 2013, remain applicable in 2014.
Value-added tax (VAT) rate on services related to tourism
It is clarified that the VAT rate of 6%, which was increased to 15% by the State Budget
Law for 2013, applicable to accommodation in the hotel sector or in sectors with a
similar function, as well as for restaurant services, is only applicable to contracts signed
until 31 December of 2012, related with services rendered until 31 December 2013. For
that purpose, only contracts deposited with the tax authorities by 31 January 2013 may
benefit from the reduced VAT rate.
Tax reform
A tax reform regarding taxation of corporate entities and individuals is on course,

waiting for Parliament approval. It is expectable that new Codes (Corporate Income Tax
and Individual Income Tax) will enter into force on 1 January 2015.

Cape Verde has a single tax on income, called Imposto nico sobre os Rendimentos (IUR),
which is levied on profits arising from business activities carried out in Cape Verde
by resident companies or individual entrepreneurs and by Cape Verdeanpermanent
establishments (PEs) of non-resident entities.
Taxable profit is computed according to the local accounting rules and adjusted for tax
purposes. The taxation system in Cape Verde is based on a territorial principle; if the
source of the income is located abroad, no Cape Verde taxation is imposed on it.
Income tax rates
The following IUR rates are applicable:
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Companies are subject to a tax rate of 25%, where taxable income corresponds to the
profit less any tax benefits and any losses carried forward, as stated in the tax return.
Non-residents without a PE in Cape Verde are subject to a 20% WHT on the amount
of the invoice.
Surcharge
The IUR rate is increased by a fire brigade surcharge, called Taxa de Incndio, of 2% on
the tax due. This surcharge is levied in the municipalities of Praia (Island of Santiago)
and Mindelo (Island of So Vicente).
Corporate residence
A company or entity is deemed to be resident in Cape Verde if its registered head office
or its place of effective management is in the Cape Verde territory.
Non-resident companies deemed to have a PE in Cape Verde are also subject to tax in
Cape Verde. Under Cape Verdean tax law, a non-resident company is deemed to have a
PE if the non-resident company:
has any fixed installation or permanent representation located in Cape Verde through
which, among others, activities of a commercial, industrial, or agricultural nature, or
fishing and rendering of services are carried out (including agricultural, fishing, and
cattle raising explorations, or other quarries or any other places of natural resources
extraction) or
carries out its activity in Cape Verde through employees, or any other personnel hired
for that purpose, for a period (continuous or not) of not less than 90 days within a
12-month period.
Other taxes
The VAT system in Cape Verde closely follows the European Union (EU) VAT system and
is assessed at the standard rate of 15%.
The standard VAT rate of 15% is a general tax on consumption, applicable to the import
and sale of goods and services in Cape Verde territory.
Change of VATable amount
The VAT rate will be applied on 100% of the amount on the following supplies of goods
and services:

Diesel, fuel, oil, and fuel-oil.

Electricity.
Tap water from the public supply.
Telecommunication services.
Road passenger transport and transport of goods by sea.
Exempt transactions
The VAT regulations establish two types of exempt transactions: exempt transactions
without credit and exempt transactions with credit (i.e. zero-rated transactions). VAT
incurred is recoverable in as far as the goods and services are used for the purposes of
the taxed transactions of a taxable person or for zero-rated transactions.
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Exempt transactions without credit include the following:
Hospital and medical care and closely related activities undertaken by bodies
governed by public law, or comparable activities undertaken by other hospitals and
centres for medical treatment.
The provision of medical care through the exercise of the medical and paramedical
professions, as well as the supply of transport services for sick or injured persons, and
the supply of human organs, blood, and milk.
The supply of services and goods closely linked to welfare and social security work.
The supply of services and goods closely linked to the protection of children and
young people by bodies governed by public law.
The provision of childrens or young peoples education, school or university
education, including the supply of services and goods closely related thereto.
The supply of services, and goods closely linked thereto, by non-profit-making
organisations.
The supply of copyright and art objects by the original creators or their heirs.
The supply by the public postal services of stamps and stamped paper.
The supply of certain cultural, educational, technical, and recreational services.
Garbage removal.
Burial and cremation supplies.
Banking, financial, insurance, and reinsurance transactions, including related
services performed by insurance brokers and insurance agents.
Immovable property transactions (excluding the provision of accommodation in
the hotel sector or in sectors with a similar function, the granting of facilities for
collective parking of vehicles, the leasing of permanently installed machinery and
equipment, and the granting of facilities for exhibitions and advertising).
Specified basic foodstuffs and pharmaceutical products.
Goods used in agriculture, stockbreeding, forestry, and fisheries.
Exempt transactions with credit (i.e. zero-rated transaction) on imports include the
following:
Import of goods whose supply qualifies for exemption.
Re-import of goods by the person who exported them, in the state in which they were
exported, where they qualify for exemption from customs duties.
Services in connection with the import of goods where the value of such services is
included in the taxable amount.
Import of gold by the central bank.
Import into ports by sea fishing undertakings of their catches, unprocessed or after
undergoing preservation for marketing but before being supplied.
Import of goods under diplomatic and consular arrangements that qualify for
exemption from customs duties.
Import of goods for the fuelling and provisioning of sea-going vessels and aircraft.
The most important exemptions with credit (i.e. zero-rated) for exports and connected
transactions include the following:
Supply, modification, repair, maintenance, chartering, and hiring of aircraft used by
airlines operating both on domestic and international routes, and the supply, hiring,
repair, and maintenance of equipment incorporated or used therein.
The supply of goods for the fuelling and provisioning of such aircraft.
Services meeting the direct needs of such aircraft or their cargoes.
Customs duties/Import tariffs
Customs duties are levied at rates ranging from 0% to 50% on the customs value of most
imported goods. Since Cape Verde imports the majority of the goods it consumes, a 50%
tariff protection applies for certain domestically produced goods.
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Raw materials or capital goods can be imported with an exemption from customs duties
or at a low rate.
Special consumption tax
A special consumption tax is imposed at rates ranging from 10% to 150% on goods
that are deemed superfluous, luxurious, or undesirable for economic, social, or
environmental policy reasons.
The excise duty rate is 40% in the case of beers, wines, vermouths, and other alcoholic
drinks, and 20% in the case of tobacco.
Vehicles used for transportation, up to 5 tons, are subject to rates of up to 150%,
according to their age:

Up to four years: not applicable.

More than four and up to six years: 40%.
More than six and up to ten years: 80%.
More than ten years: 150%.
Property taxes
A property tax, called Imposto nico sobre o Patrimnio (IUP), is levied at the rate of
1.5% in Cape Verde.
IUP is due on the ownership of immovable property on an annual basis by the owner of
the real estate, registered as such on 31 December of the relevant year. The taxable basis
corresponds to 25% of the value attributed by the Evaluation Commission.
IUP is also due on the transfer (gratuitously or for a consideration) of real estate, based
on the value of the contract declared by the transferee.
Exemption of IUP due on the acquisition is granted to:
Cape Verdean emigrants who own saving bank accounts.
Retired individuals.
Projects with Touristic Utility Status (see the Tax credits and incentives section for more
information).
In taxable transfers (not exempt), IUP is payable by the transferee.
IUP is also due on the capital gains arising from the sale of:
plots of land for construction, if the sales price is more than double the purchase
price, and
buildings or other real estate, if the sale price exceeds the purchase price by more
than 30%.
IUP on capital gains is normally paid by the transferor, on the highest of the declared
price and the official value of the property concerned.
Capital gains obtained by companies that are in the business of buying real estate for
resale are not subject to IUP.
Stamp duty
Stamp duty is payable on a wide variety of transactions and documents, at rates that
may be set in specific amounts or on a percentage basis.
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Stamp duty rates:
Item
Loans
With determined term, over one year
With undetermined term or under one year (for each month)
Bank interest and fees/commissions
Guarantees
Insurance
Promissory notes, securities
Corporate structuring operations
Real estate purchases and sales
Sale of a business as a going concern
Letting of immovable property
Property leasing
Emoluments, registrations acts
Contracts
Stamp duty rate

0.5%
0.05%
3.5%
0.5%
3.5%
0.5%
0.5%
1%
5%
10%
1%
15%
CVE 1,000 *
* Fixed exchange rate 1 euro (EUR) = 100.265 Cape Verdean escudos (CVE) under an exchange
agreement between Cape Verde and Portugal.
Ecologic charge
Cape Verdes ecologic charge is applied to packing material, whether empty or full,
imported or produced internally, non-biodegradable or made out of metal, glass, or
plastic.
The ecologic charge varies from CVE 2 to CVE 100 per item, depending on the quantity
or weight of the goods.
This fee is due by the local producer or the importer.
Exemptions are available in the case of packing material used in medicine, essential food
(e.g. corn, rice, sugar, flour, and milk), and construction (e.g. cement). Packing material
that is exported, reutilised, or recycled is also exempt.
Tourism tax
As of 1 May 2013, a tourism tax is applied to accommodation in the hotel sector. The tax
amounts to CVE 220 per person per night, for people over 16 years of age, and cannot
exceed ten consecutive nights.
Branch income
A branch is not considered a separate legal entity distinct from the foreign head office. It
is governed by the domestic law of Cape Verde.
From a tax perspective, branches are subject to IUR if considered a PE under Cape Verde
law.
Taxable income is computed on the basis of the accounting income, adjusted by
deducting from taxable profits the prior years losses and any deductions under the tax
(incentive) legislation.
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Inventory valuation
The tax law does not foresee any mandatory inventory valuation method that should
be adopted by Cape Verdean taxpayers. For tax purposes, accepted inventory methods
should be consistent with the accounting rules in force and with generally accepted
local business practice. Such methods should be applied in a consistent manner over
the financial years and based on the prices effectively paid or established by official
documents (for regulated prices).
Capital gains
Capital gains are not subject to a separate capital gains tax and are treated and taxed as
ordinary business income.
The gain corresponds to the amount by which proceeds from disposal exceeds the cost of
asset acquisition.
Capital gains realised from the sale of shares and part of the capital of companies with
a registered head office or place of effective management in Cape Verde, if owned for at
least one year, are not subject to taxation.
Dividend income
Dividend income is currently fully exempt from taxation in Cape Verde.
Interest income
There is no special tax provision regarding interest income. Interest income is treated
and taxed as ordinary business income.
Foreign income
Resident companies and PEs of non-resident companies are taxable on a territorial base
principle, meaning that income obtained outside Cape Verde is not subject to taxation
therein.
Deductions
Depreciation
Depreciation is considered a deductible cost with respect to all fixed assets (except land),
up to the limits determined by the applicable tax law.
As a general rule, depreciation must be computed by using the straight-line method.
Tax authorities may allow other depreciation methods on the basis that the actual
depreciation is higher than the one calculated at regular rates or according to the
taxpayers accounting practice.
Under the straight-line method, the maximum depreciation that is deductible is
calculated by applying the general depreciation rates set out in a Ministerial Decree of
28 January 1984 to the adjusted purchase cost or production cost.
Land is not depreciable.
Main depreciation rates:
Group Asset
1
Plantations, land for exploration, other land and natural resources

To be determined on a
case-by-case basis
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Group Asset
2
Buildings and other constructions:
Residential, commercial, and industrial buildings
Light structures (fibreglass wood, wood, metal) and other
constructions
Quays, docks, and similar harbour infrastructure
Walls, silos, parks, roads, adornments, runways
3
Basic equipment, machines, and other installations:
Fishing gear
Electronic, sound, laboratory, telephone, and radar equipment
Telecommunication stations and installations
Water installations
Machines
Oil pipelines, fuel and gas reservoirs
Transformation stations, air networks, equipment, and
underground cables for communications and transport of
energies
Other equipment and machines
4
Tools (for industries/others)
5
Cargo and transport material:
Animals and lightweight motor vehicles
Aircraft
Ships and boats
Cranes, barges, etc.
Trucks
Other cargo and transport material
6
Administrative and social equipment and furniture:
Furnishings and decorative items
Calculating machine, typewriter, and accounting machine
Metallic furniture
Non-metallic furniture
Clothes, tableware, and glasses
Others administrative and social equipment and furniture
7
Packing material (wood/metal/other)
8
Other tangible fixed assets
9
Intangibles:
Patents, trademarks, licences, concessions, and other rights
Formation and organisation of the company
Other intangibles

4
10
2
5
25
20
12.5
6.66
16.66
8.33
5
10
20/25
12.5
14.28
10
7.14
20
16.66
16.16
20
8.33
12.5
50
25
14.28/20/33.33
10
10
33.33
33.33
Goodwill
Goodwill is an asset subject to impairment tests. The goodwills impairment is not a

deductible cost for tax purposes.
Start-up expenses
Start-up expenses include, among others, cost incurred with set-up and organisation
of companies, projects, and increase of capital. Start-up expenses are considered a
deductible cost up to the limits derived from the applicable tax law, 33.33% per year
being deductible over a period of three years.
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Interest expenses
Interest expenses are deductible if considered indispensable for the realisation of taxable
profits/gains.
Bad debt
Provision regarding bad debts is accepted as a deductible cost within the following
limits: 4% of accounts receivable per year, with a cumulative maximum of 5%.
Charitable contributions granted to certain entities whose main activity consists of the
execution of initiatives in the social, cultural, environmental, scientific or technologic,
sports, and educational areas are considered as cost for tax purposes (within certain
limits, and in certain circumstances, with an additional deduction).
Fines and penalties
Tax (and fines) penalties are not deductible for tax purposes.
Taxes
Taxes paid in connection with the activity of the company are tax deductible, excluding
IUR. The annual IUP can be deducted from the IUR assessed.
Income tax losses can be offset against taxable profit and can be carried forward for
three years. Carryback of tax losses is not allowed in Cape Verde.
The tax losses incurred by a company are not transferable to another company unless
previously accepted by the tax authorities.
Currently, there are no special restrictions on the deductibility of royalties, interest,

and service fees paid to foreign affiliates, provided that the payments are regarded as
indispensable to generate taxable profits and gains and to maintain the business of the
company.
Group taxation
There is no special tax regime for groups of companies in Cape Verde.
Transfer pricing
There is no special tax regime regarding transfer pricing in Cape Verde.
Thin capitalisation
There is no special tax regime regarding thin capitalisation in Cape Verde.

Foreign Investor Status (Estatuto do Investidor Externo)
The Foreign Investor Status, which has granted some tax benefits at the level of the
investor (e.g. exemption from WHT on distribution of profits and on interest related to
the financing of the investment) was revoked by the New Investment Code with effect
from 1 January 2013. The tax benefits already granted or for which recognition has
been requested prior to the entry into force of the Tax Benefits Code and the Investment
Code are maintained. Investment projects submitted for analysis and approval to the
competent authorities prior to the entry into force of the Tax Benefits Code continue to
be regulated under the legislation in force at the date of the respective submission.
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Industrial Activity Law
The following tax and customs benefits are provided for industrial activity:
IUR benefits
An IUR credit is available for up to 50% of the eligible investments made in an industrial
activity. Any unused tax credit may be carried forward for ten years, subject to certain
limitations.
Eligible investments include the acquisition of new fixed assets, patents, and licences
regarding technologies.
IUP benefits
Industrial activities may benefit from an exemption from IUP on the acquisition of
immovable property used exclusively for industrial purposes; however, the recognition
of such tax exemption should be approved by the municipality.
Customs duty benefits
Industrial activities benefit from an exemption from customs duties on the import of
construction material, machines, utensils, semi and finished materials, products, and
raw materials used in the production of goods.
Stamp duty benefits
Financing transactions of industrial projects are exempt from stamp duty.
International Business Centre (IBC) of Cape Verde
The Cape Verdean Agency for Foreign Investment is the entity responsible for granting
the licences to operate within the IBC, upon previous proposal of the Zona Franca
Comercial S.A.. The following tax benefits are applicable to entities licensed to operate
in the IBC on income from industrial or business activities and services in respect of
operations carried out with other IBC licensed entities or with non-residents entities
(without a PE in Cape Verde).
Note that these tax benefits are not applicable to entities engaged in tourism, banking
and insurance, real estate, or construction.
IUR benefits
Reduced IUR rates of 5%, 3.5%, or 2.5% are applicable to entities that create
respectively 5, 20, or 50 jobs.
The IUR rate is 2.5% in case of the creation oftwo jobs for entities licensed to operate
within the International Service Centre.
Under current IUR law, foreign-sourced income is not subject to taxation in Cape Verde.
VAT and customs duty benefits
All the exemptions foreseen in the VAT regulation and customs law apply.
An exemption from customs duties applies with respect to certain goods, equipment, and
materials used within the scope of the activity developed and licensed under the IBC.
Tax and financial incentives for internationalisation of Cape Verdean

companies
A regime that provides for tax and financial incentives for investment projects in order to
promote the internationalisation of Cape Verdean companies is in force.
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Cape Verde
Cape Verde
The following incentives, to be granted under a contract of not more than three years,
apply to internationalisation projects of companies with head office and place of
effective management in Cape Verde that are undertaken before 31 December 2020.
IUR benefits
Investments that are eligible for the regime of tax benefits for internationalisation may
benefit from:
Reduced IUR rate of up to 50%, applicable until the term of the investment contract.
Exemption from IUR on income obtained by qualified expatriate employees.
Additionally, a deduction for creation of employment ranging between CVE 26,000
(approximately EUR 235) and CVE 35,000 (approximately EUR 320) for each new job
created may apply.
IUP benefits
An exemption from IUP may be available on the acquisition of immovable property for
the establishment or expansion of the activity of the investor.
VAT and customs duty benefits
Exemptions provided for in the VAT Code apply, as well as customs duties incentives as
provided for in the general applicable legislation.
Stamp duty and other benefits
An exemption from stamp duty is available on the incorporation of companies on an

increase of share capital of existing companies, and on financing transactions.
An exemption from notary and registration fees is available on the incorporation and
registration of companies.
Tax benefits for social housing
Entities responsible for the construction of social housing, duly authorised by the
competent regulatory authority (Comisso de Coordenao e Credenciao do Sistema
Nacional de Habitao de Interesse Social or CCC-SNHIS), may benefit from the following:
Only 30% of the income derived from the activity carried out within the scope of the
social housing project is subject to IUR, under certain conditions.
A refund of 80% of the VAT incurred in the Cape Verdean market is available in cases
where those entities carry exclusively exempt operations without the right to deduct
input VAT.
A reduction of 75% of customs duties levied on construction material listed in an
annex to the diploma is available.
Development promotion entities, provided they are also authorised by CCC-SNHIS, are
also eligible for VAT benefits.
Touristic Utility Status (Estatuto de Utilidade Turstica)
Cape Verde may grant Touristic Utility Status to certain touristic projects. Touristic
Utility Status is granted to the following types of touristic projects:
Installation: Granted to new touristic projects.
Functioning: Granted to touristic projects starting to operate.
Refurbishment: Granted to touristic projects in case of refurbishment projects with a
value of at least 25% of the initial investment.
Cape Verde
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Cape Verde
Touristic Utility Status generally allows for the following tax incentives and benefits:
IUR credit of up to 50% of the eligible investments made in tourism, touristic
promotion activities, and real estate tourism project investment.
Exemption from IUP on the acquisition of real estate used for construction and
installation of touristic projects, if granted by the municipality.
Exemption from customs duties on the importation of materials and equipment used
in touristic projects.
Exemptions from stamp duty on the financing of tourism investments.
Tax incentives for renewable energies
There is a regime for promotion, encouragement and access, licensing, and exploitation
inherent to the exercise of independent production and self-production of electricity
based on renewable energy sources.
Water, wind, solar, biomass, biogas or industrial, agricultural or urban waste, oceans
and tides, and geothermal are to be considered sources of renewable energy. Under the
regime, renewable energy producers may benefit from the following.
IUR benefits
An IUR credit is available for up to 50% of the eligible investments made in renewable
energies projects.
An exemption from customs duties and other customs charges applies on the
importation of capital goods, raw materials and supplies, finished and semi-finished
products, and other materials that are incorporated or used in the production of goods
or services involved in the production of electrical energy from renewable sources.
IUP and stamp duty
Exemptions from IUP and stamp duty are granted on the acquisition of immovable
property and other assets related to the investment project or its financing.
Shipping transport industry incentive

IUR benefits
IUR credit is available for up to 50% of the eligible investments made in shipping, air,
and sea transportation projects.
An exemption from customs duties applies on the importation of shipping material for
the maintenance, production, and repair of shipping and respective equipment.
IUP and stamp duty
Exemptions from IUP and stamp duty are granted on the acquisition of immovable
property and other assets related to the investment project or its financing.
Job creation incentives
Entities taxed under the verification method are entitled to deduct the following
amounts for each created permanent job:
CVE 26,000 (approximately EUR 235) for each job created in the municipalities of
Boa Vista, Praia, and Sal.
CVE 30,000 (approximately EUR 270) for each job created in the remaining
municipalities.
CVE 35,000 (approximately EUR 320) in case of a disabled person.
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Cape Verde
Cape Verde
Media, telecommunications, and internet
Importation of good, materials, equipment, vehicles, and other equipment exclusively

for the purpose of telecommunications and media are exempt from customs duties.
Tax benefits to the financial sector
The Tax Benefit Code has introduced several measures in the financial sector, as follows.
Financial investments
Income derived from certificates of deposit and long term bank deposits benefit from an
IUR exemption of up to 75% (depending on the maturity date of the deposits).
Securities market (bonds)
Income derived from bonds or similar products (except debt securities listed in the
securities market) obtained until 31 December 2017 benefit from a 5% IUR flat rate.
Additionally, dividends from shares listed in the stock exchange, placed at the disposal
of its holders until 31 December 2017, are exempt from IUR.
Investment funds (securities and real estate funds)
Income derived from securities funds, when established and operating under the Cape
Verdean legislation, is taxed as follows:
Income obtained in the Cape Verdean territory is exempt from IUR (except capital
gains).
Foreign income is subject to a 10% IUR flat rate (except capital gains).
Capital gains are subject to a 10% IUR rate.
Income derived from real estate funds, established under the Cape Verdean legislation,
is taxed as follows:
Real estate income benefits from a 10% IUR rate (after deduction of the respective
expenses).
Capital gains benefit from a 15% IUR rate over 50% of the income, resulting in an
effective rate of 7.5%.
Income received by unit holders in securities funds and real estate investment funds,
established under Cape Verdean legislation, is exempt from IUR.
Venture capital funds
Income derived from venture capital funds, established under Cape Verdean legislation,
as well as income received by the unit holders in venture capital funds, is exempt from
IUR.
International financial institutions
International financial institutions within the scope of Law 43/III/88, of 27 December,

benefit from:
Customs duties exemption on the importation of materials and equipment that are
exclusively for the setting-up of the financial institution.
IUR exemption until 31 December 2017 and a 2.5% IUR rate from 1 January 2018
onwards.
Stamp duty exemption in transactions with non-residents entities.
Cape Verde
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Cape Verde
Individuals and entities considered as clients of such international financial institutions,
benefit from:
IUR exemption, regardless of the type of income.
Stamp duty exemption.
Holding companies (Sociedades Gestoras de Participaes Sociais)
Capital gains or losses realised by holding companies, as well as financing expenses

incurred with the acquisition of shares, held for at least 12 months, are not taken into
account for the purposes of computation of the taxable profit of such holding companies.
This rule does not apply in case of shares acquired from associated enterprises or from
entities located in territories with a more favourable tax regime.
Tax benefits with social nature and customs duties benefits

Training, internships, and grants
Companies taxed under the verification method may deduct 150% of the following
costs:
Costs related to the training of employees.
Costs associated with the hiring of young people for internship positions.
Costs associated with scholarships granted to students.
Donations
Companies may deduct 130% of the amounts donated to the following entities and
activities, up to 1% of the turnover, under certain conditions:
Entities that develop, among others, social, cultural, sportive, educational,
environmental, scientific, technological work, and health services.
State, municipalities, and any other public services.
Municipal associations.
Foundations.
Customs duties benefits
Under certain conditions, the following business sectors, among others, may benefit
from customs duties exemption on the importation of products, materials, and
equipment related to the activity/project:

Agriculture, livestock, and fishing activity.

Civil aeronautics.
Diplomatic and consular missions.
Aid to economic development.
Foreign citizen retired.
Sports and musicals.
Fire corporation.
Tax benefits to other sectors of investment
Eligible investments made in activities such as information technology and scientific

research may benefit from:
IUR credit of up to 50%.
Exemptions from IUP, stamp duty, and customs duties on the acquisition of
immovable property and other assets related to the investment project or its
financing.
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Cape Verde
Cape Verde
Withholding taxes
WHT of 15% is due on payments of interest and royalties made between resident
companies.
Payments of services between resident companies are generally not subject to WHT.
Rental payments due by resident companies are, however, subject to WHT of 10%.
For a Cape Verde-based recipient, tax withheld is a payment on account against the final
single income tax due.
Any non-Cape Verdean resident entity carrying out an economic activity in Cape Verde is
subject to a final 20% WHT, applied on interest, royalties, rents, services, and fees.
Dividends are not subject to WHT, irrespective of the residence status of the recipient.
Tax treaties
Under the Cape Verde/Portugal tax treaty, WHT is limited as follows:

Royalties: 10%.
Interest: 10% (0% applies to interest paid by public bodies).
Note that WHT on dividends under the Cape Verde/Portugal tax treaty is limited to 10%.
However, dividends are currently not taxed in Cape Verde.
The tax treaty signed between Cape Verde and Macau has entered into force. WHT is
limited as follows:
Royalties: 10%.
Interest: 10%.
Dividends: 10% (currently, dividends are not taxed in Cape Verde).
Tax administration
Taxable period
As a general rule, the tax year is the calendar year. A different tax year may be applied,
subject to authorisation from the Ministry of Finance, in the case of non-resident
companies with a PE in Cape Verde and in other situations duly justified by economical
reasons.
Tax returns
Taxpayers are required to file a tax return by 31 May of the year following the end of the
tax year.
Payment of tax
Corporate taxpayers must make a prepayment of their income tax liability for the
current tax year. The prepayment is calculated as 30% of the preceding tax years income
tax liability and should be paid by 20 January of the following year.
Taxpayers are required to self-assess the tax due by 31 May of the year following the end
of the tax year.
The tax authorities will verify the tax return and raise a final assessment of tax liability
by 20 July of the same year. The taxpayer must then pay the remaining tax due by 31
July.
Cape Verde
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Cape Verde
Tax audit process
There are no specific rules regarding the tax audit cycle in Cape Verde.
The statute of limitations period in Cape Verde is for five years.
The main topics of focus for Cape Verdean tax authorities include cost incurred for assets
considered of mixed use (e.g. vehicles, communications), personnel costs, management
fees, and payments to non-residents.
Large Taxpayers
Taxpayersthat meet at least one of the following criteria qualify as a Large Taxpayer
and shall bemonitored by the Special Tax Office for Large Taxpayers:
Turnover exceeding CVE 200 million, based on the annual income tax return.
High level of inherent risk, based on a matrix developed by specific software.
Taxes paid exceeding CVE 15 million, correspond to the sum of payments of
corporate income tax (CIT), WHT, VAT, and stamp duty.
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Cape Verde
Caribbean Netherlands
PwC contact
Steve Vanenburg
Julianaplein 38
Willemstad, Curaao
Tel: +599 9 4300 000
The reduced real estate tax rate for the years 2011 and 2012 has been extended to the
years 2013 and 2014. The tax rate for these years is 5% for hotels and 15% for other real
estate. As of the year 2015, these rates will be 20% and 10%, respectively.
This results in an effective tax rate for 2011 to 2014 of 0.2% of the market value of hotel
property and 0.6% for other real estate and from 2015 onwards an effective tax rate of
0.4% and 0.8%, respectively.

Income from immovable property is subject to real estate tax. The real estate tax is levied
based on the value of real estate. As is the case at present, the value is established for
five years each time. The income is deemed to be 4% of the value of the real estate, and
the tax rate is 10% for hotels and 20% for other real estate. Therefore, the tax effectively
amounts to 0.4% and 0.8% of the value, respectively.
Please note that for the years 2011 to 2014 a reduced tax rate of 5% applies for hotels
and 15% for other real estate, which results in an effective tax rate of 0.2% and 0.6%,
respectively.
In cases where the value of the real estate has increased as a result of construction,
improvement, expansion, or renovation, the increase in value will be tax exempt for the
first ten years.
Exemptions apply for the dwelling that serves as the principal residence and land that is
being commercially operated for agricultural or forestry purposes. A five year exemption
applies for the increase in value of real estate as a result of new construction, renovation,
and expansion.
A revenue tax is levied on the revenues from shares and profit-sharing certificates,
as well as on distributions from foundations, special purpose funds, or a closed-end
common fund. The rate of the revenue tax is 5%.
There are no other taxes on income or capital gains.
The revenue tax and the real estate tax only apply if certain requirements of residency
have been met. A corporation that is established in the Caribbean Netherlands that does
not meet certain criteria will, for the purpose of the revenue tax and the real estate tax,
be deemed to be established in the Netherlands and will be taxed accordingly. That
means that instead of revenue tax and real estate tax, the Dutch corporate income tax
of 20% to 25% will apply, as well as the Dutch dividend tax of 15% (see the Corporate
residence section for more information).
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Corporate residence
Corporate residence is, in principle, determined by the place of incorporation. However,
other factors may also determine residence. For example, a foreign company with
effective management in the Caribbean Netherlands is considered to be a resident.
For purposes of the revenue tax and the real estate tax, however, a resident corporation
is deemed to be established in the Netherlands unless specific criteria have been met, the
purpose of which is to guarantee commercial ties with the Caribbean Netherlands.
An entity is deemed to be established in the Caribbean Netherlands, not the Netherlands,
based on the following criteria:
It has been admitted to a bonded warehouse for commerce and services, or
It obtained a declaration from the Inspector of Taxes that one of the following
conditions applies:
It is not active in financial services or insurance, turnover is not more than 80,000
United States dollars (USD), and assets are not more than USD 200,000.
The assets usually consist of less than 50% of investments, participations,
liquidities, and assets that are made available for use to persons outside the
Caribbean Netherlands, as well as assets, directly or indirectly, used for financing
persons outside the Caribbean Netherlands.
It usually provides permanent work to at least three persons living in the
Caribbean Netherlands who engage independently in activities relating to the
assets mentioned above and whose responsibility is in line with their job position,
and it has, at its disposal, real estate situated in the Caribbean Netherlands for a
period of at least 24 months with a value of at least USD 50,000 for the activities,
and this real estate is used as an office with facilities that are customary in the
financial sector.
It holds, at a minimum, 95% of the shares of an entity as mentioned above.
Resident corporations that do not meet these criteria are deemed to be established in
the Netherlands, which causes them to be subject to the Dutch corporate income and
dividend withholding taxes (WHT). This does not apply to foundations, special purpose
funds, or a closed-end common fund.
Other taxes
Sales tax
A general expenditure tax (Algemene Bestedings Belasting or ABB) has replaced the levy
of import duties, as well as the former sales tax (Omzetbelasting or OB and Belasting op
Bedrijfsomzetten or BBO), of the former Netherlands Antilles. The rate is 8% in Bonaire
and 6% in Saba and St. Eustatius.
The rate for insurances is 9% and 7%, respectively.
The rate for services, includingrestaurants and bars, is 6% and 4%, respectively.
A rate of 25% applies to cars, unless it concerns a very low energy car, in which case the
rate is 0%.
ABB is levied in respect of:
Sale of goods by manufacturers.
Delivery of services within the levy area.
Import of goods.
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Therefore, the sale of goods will only be subject to tax once, at the manufacturer or at
the time of import. The sale of bread has been exempt. In addition, the supply of grain,
potatoes, and rice will also be exempt. Other exemptions that apply, similar to the
former OB and BBO legislation, are:

Public transportation.
Medical services and hospitals.
Water and electricity.
Fuels and other products, including supplies, for international transportation.
Renting of houses.
Excise taxes
Excise tax is due on gasoline. On Bonaire, excise tax is also due on alcohol, with different
tariffs for liquor, wine, and beer, as well as for tobacco. This does not apply to Saba and
St. Eustatius.
The excise rates are:
USD 41.86 per hectolitre of gasoline or approximately USD 1.60 per gallon on Bonaire
(USD 1.30 on Saba and St. Eustatius).
Only on Bonaire:

USD 67.04 per hectolitre of beer.

USD 128.50 per hectolitre of wine.
USD 12.85 per volume percent of alcohol per hectolitre of distilled products.
USD 5.34 per 100 cigarettes.
USD 9.78 per 100 cigars.
USD 4.89 per 100 cigarillos.
USD 30 per kilogram of smoking tobacco.
Property taxes
There is an annual property tax of 0.3% on the value of real estate.
Transfer taxes
The transfer of immovable property on the islands of the Caribbean Netherlands is

subject to a 5% transfer duty.
Stamp tax
No stamp tax is levied in the Caribbean Netherlands.
Branch income
Entities not established in the Caribbean Netherlands are only taxed on the fixed income
of local real estate, at a rate of 20% on an income of 4% of the value of the property the
corporation owns in the Caribbean Netherlands or, in case of hotel property, 10% on an
income of 4%.
Please note thatfor the years 2011 to 2014 a reduced tax rate of 5% applies for hotels
and 15% for other real estate.
The revenue tax does not apply to the remittance of profits from the permanent
establishment (PE) to the head office of the corporation. No other taxes are levied.
The criteria for deemed residency in the Caribbean Netherlands do not apply to PEs,
except for a PE of a corporation that is a resident of Aruba, Curaao, or St. Maarten. In
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cases where the activities of such a PE would not qualify for deemed residency in the
Caribbean Netherlands if it had been a corporation, this PE is liable to taxation in the
Netherlands.
In the Caribbean Netherlands, there is a tax on the fixed income of local real estate (real
estate tax) and on profits distributed to shareholders (revenue tax). As long as income
is not distributed, profits other than from real estate are not subjected to tax. Therefore,
there are no regulations with regard to income determination.
Deductions
No deductions are allowed on the fixed income with regard to real estate tax or the
distributions of profit for revenue tax purposes.
Group taxation
Distribution of profits to another corporation on one of the islands of the Caribbean
Netherlands is exempt from revenue tax if the other corporation holds, at minimum, a
5% interest in the corporation that is making the distribution.

A corporation that has been designated as a bonded warehouse for commerce and
services is exempt from ABB and excise tax. As a result, goods in transshipment remain
tax free. However, if goods that have been admitted to a bonded warehouse are sold
within the Caribbean Netherlands, this will be considered importing these goods and
ABB and excise tax will be due.
Withholding taxes
A revenue tax of 5% is levied on distributions from corporations as well as distributions
from foundations, special purpose funds, or a closed-end common fund.
Tax treaties
The Caribbean Netherlands currently has a tax treaty in effect with Norway. A double
tax agreement (DTA) has been negotiated with Jamaica, but this has not entered
into force yet. See the Other issues section for a description of tax information exchange
agreements (TIEAs).
Tax arrangement for the Kingdom of the Netherlands (TAK)
As part of the Kingdom of the Netherlands, the Caribbean Netherlands is party to a

federal tax agreement with Aruba, Curaao, and St. Maarten (TAK)as well as a tax
agreement for the Netherlands (TAN) with regard to the attribution of tax between the
Netherlands and the Caribbean Netherlands. Subject to the TAK and the TAN, dividends,
interest, and royalties paid to a company resident in the Caribbean Netherlands may
qualify for reduced rates of WHTs in the subject countries or in the Netherlands.
Dutch dividend WHTs are 15% if the Caribbean Netherlands company owns less than
10% of the Dutch company. If the Caribbean Netherlands companys interest is 10% or
more, Dutch WHT can be reduced to 0%. Aruban dividend tax will be reduced from the
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statutory rate of 10% to 5%. In the Caribbean Netherlands, the dividends will not be
taxed when they are received. However, at the time the dividends are distributed to the
shareholder, they will be subject to the 5% revenue tax.
The TAN came into force on 1 January 2011. The TAK is to be revised. Negotiations have
already started between Aruba and Curaao each with the Netherlands. In the end, the
existing TAK will then be replaced by separate bilateral agreements. The government
of Curaao has announced that an agreement between the Netherlands and Curaao
has been signed and is expected to enter into force on 1 January 2015. There is no
certainty when the old TAK will be replaced with regard to the other countries within
the Kingdom.
Tax administration
Tax returns
Revenue tax returns must be filed and the amount due must be paid at the end of the
quarter of the year in which the distribution has been made.
The real estate tax is levied by way of a tax assessment.
Payment of tax
Revenue tax must be paid at the time of filing and in a lump sum on the basis of the selfassessment.
The real estate tax must be paid within two months of the date of the tax assessment.
A reassessment can be imposed until five years after the tax year.
Other issues
TIEAs have been signed with several countries, including Australia, Canada, Denmark,
Mexico, New Zealand, Spain, Sweden, and the United States. As a result, the Caribbean
Netherlands, as part of the former Netherlands Antilles, has been moved to the white list
of the Organisation for Economic Co-operation and Development (OECD) Global Forum.
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Cayman Islands
PwC contact
Frazer Lindsay
Strathvale House
90 North Church Street
PO Box 258
George Town, Grand Cayman
Cayman Islands
KY1-1104
Tel: +1 345 914 8606
There have been no significant corporate tax developments in the Cayman Islands
during the past year.

Corporate income, capital gains, payroll, or other direct taxes are not imposed on
corporations in the Cayman Islands.
Corporate residence
Since no corporate income, capital gains, payroll, or other direct taxes are currently
imposed on corporations in the Cayman Islands, corporate residency is not relevant in
the context of Cayman Islands taxation.
Entities engaged in scheduled trade and business in the Cayman Islands (as defined in
the Trade & Business Licensing Law) are required to have a trade and business licence.
Effecting and concluding contracts in the Cayman Islands and exercising, in the Cayman
Islands, powers necessary for the carrying on of a business outside the Cayman Islands is
generally not considered to be engaging in trade and business in the Cayman Islands.
Other taxes
There is no VAT imposed in the Cayman Islands.
Import duties
Import duty is paid, generally at a rate of 22% to 27%, on importation of most goods.
Please refer to the Cayman Islands Customs website (www.customs.gov.ky) for the latest
list of tariff rates.
Excise taxes
There are no excise taxes in the Cayman Islands.
Property taxes
There are no property taxes in the Cayman Islands.
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Cayman Islands
Cayman Islands
Stamp duties
Stamp duty is paid, generally at a rate of 7.5%, on transfers of Cayman Islands

immovable property. Stamp duty, in the form of a transfer tax equal to the applicable
stamp duty, also applies to transfers of shares in land holding companies.
Cayman Islands stamp duty may also be payable if any documents are executed in, after
execution brought to, or produced before a court of the Cayman Islands. Such stamp
duty will be nominal in most instances and is capped at 500 Cayman Islands dollars
(KYD).
Stamp duties also apply on legal or equitable mortgages or charges of immovable
property or debentures. The stamp duty ranges from 1% to 1.5%, depending on the sum
secured.
Branch income
Branches are treated the same as other corporations doing business in the Cayman
Islands.
Since no corporate income, capital gains, or other taxes are imposed on corporations
in the Cayman Islands, income determination is not relevant in the context of Cayman
Islands taxation.
Deductions
Since no corporate income, capital gains, or other taxes are imposed on corporations in
the Cayman Islands, deductions from income are not relevant in the context of Cayman
Islands taxation.
Group taxation
in the Cayman Islands, group taxation is not relevant in the context of Cayman Islands
taxation.

in the Cayman Islands, tax incentives are not relevant in the context of Cayman Islands
taxation. However, Cayman entities carrying on business outside the Cayman Islands
can register as exempted companies (i.e. a company formed primarily to do business
outside of the Cayman Islands and subject to certain requirements) and can apply under
the Tax Concessions Law for an undertaking to be issued by the Governor-in-Council
(i.e. the Cayman Islands government) exempting such company from any tax on profits,
income, gains, or appreciation that might be introduced in the period of 20 years
following the grant of such concessions. The concession is extendable for a furtherten
years after expiry. Exempted limited liability partnerships (i.e. certain partnerships
formed primarily to do business outside of the Cayman Islands) can apply under the
Exempted Limited Partnership Law for a similar concession that is for 50 years (rather
than 20 years).
Cayman Islands
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Cayman Islands
Withholding taxes
Currently, no withholding taxes (WHTs) are imposed on dividends or payments of
principal orinterest.
Tax administration
No tax returns, forms, or procedures are required to be completed for tax compliance
purposes in the Cayman Islands.
The Tax Information Authority serves as the competent authority in the Cayman Islands.
Other issues
Tax information reporting
The Cayman Islands currently has 30 signed Bilateral Agreements, of which 25 are in
force. Please refer to the Tax Information Authoritys website (www.tia.gov.ky/html/
assistance.htm) for the latest list of Bilateral Agreements.
The Cayman Islands agreed with the United Kingdom (UK) government to implement
the Savings Directive, and so the Reporting of Savings Income Information (European
Union or EU) Law (2007 Revision) came into force, setting out a reporting regime
whereby Cayman paying agents making interest payments to individuals who are
tax resident in a EU member state may have to report interest paid. The Cayman Tax
Information Authority receives or facilitates submission of such information reporting.
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Cayman Islands
Chad
PwC contact
Dominique Taty
Fidafrica SA
Immeuble Alpha 2000
20th Floor
Rue Gourgas - Plateau
Abidjan 01
Cte dIvoire
Tel: +255 20 31 54 60
There have been no significant corporate tax developments in Chad during the past year.

The profits subject to the company tax are determined with sole regard to profits earned
by businesses carried out or transactions conducted in Chad.
The net taxable profits are established after deduction of all charges directly entailed by
the exercise of activities subject to assessment in Chad. As income from other countries
is not liable to tax, foreign charges and losses are not deductible either.
The corporate tax rate in Chad is 40%.
Minimum tax
There is a minimum tax of 1.5% based on the turnover and an additional 1 million
Central African CFA francs (XAF) as the minimum/floor rate.
Local income taxes
There are no local income taxes in Chad.
Corporate residence
Registered entities (i.e. companies, branches, and subsidiaries) conducting economic
activities in Chad are liable to pay corporate tax. Specifically:

Limited companies.
Limited partnership with shares.
Limited liability companies.
Cooperative societies and their unions.
Public institutions.
Agencies of the state with financial autonomy.
Municipal bodies and any other legal entity engaged in an operation for gain.
Real estate companies, regardless of their form.
Civil companies, other than real estate companies, involved in industrial, commercial,
or agricultural activities.
Limited partnerships, on the share of profits relating to the rights of sponsors.
Associations in participation, including financial syndicates, on the share of profits
relating to the rights of sponsors.
Chad
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Chad
Co-owners of shipping companies, on the share of profits relating to the rights of
sponsors of associated co-owners, other than those with unlimited liability or whose
names and addresses are not listed with the tax administration.
According to the Economic and Monetary Community of Central Africa (CEMAC) Fiscal
Convention, a legal person is domiciled in ones permanent home; this expression
denotes the centre of vital interests, i.e. the place with which personal relations are
closer.
Consequently, the domicile (permanent home) of legal persons is the place of the
registered office or the statutory social place. It constitutes PEs such as:

The head office of management.

A branch.
An office.
A factory.
A workshop.
A mine, quarry, or other place of extraction of natural resources.
A building or construction site or assembly.
A facility used for storage, display, or delivery of goods belonging to the business.
A warehouse belonging to the business, stored for storage purposes, and of display of
delivery.
A fixed installation of business used for the purpose of purchasing goods.
Other taxes
Valued-added tax (VAT)
The standard VAT in Chad is 18%.

An operation performed in Chad that constitutes an economic activity and for which
payment is made, unless included in the list of exemptions in the law governing VAT, is
liable for VAT, even if the residence of the natural person or the registered office of the
legal entity is located outside Chad.
The VAT law provides a list of transactions exempted from VAT that includes the
following:
Sales of products that are directly made by farmers, cattle farmers, or fishermen to
consumers, farming, and fishing operations.
Imports operations and sales of newspapers and periodicals, other than the
advertising revenues.
Exports and related international transportation.
There are no specific rules relating to refunds to non-residents.
There are no refunds of the excess in practice. If the amount paid exceeds the VAT
payable, the credit can be offset against the VAT payable until the end of the second
financial year following the birth of this credit. After that, it becomes a loss, which is
deductible under corporate tax.
Customs duties
The tax base of customs duties corresponds with the customs valuation, namely
the selling price of the goods plus cost of delivery to Chad (costs of insurance,
transportation, etc.).
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The rates of customs duties depend on the nature of the goods and range from 5% to
30%. These rates can be summarised as follows:

Goods of first need (basic necessities): 5%.

Raw materials and goods of equipment: 10%.
Intermediate and miscellaneous goods: 20%.
Consumer goods: 30%.
Excise duty
Excise duty applies to goods of great consumption: cigarettes, drinks (water, beers, and
wines), cosmetics, and luxury products. Excise duty rates depend on the nature of the
goods and range from 5% to 25% of the value of the good.
This value differs depending on the origin of the good. If the good has been
manufactured in the CEMAC zone, the value corresponds with the selling price charged
by the manufacturer. If the good is imported into the CEMAC zone, the value is the sum
of the freight value plus insurance costs and customs duties.
The rates are as follows:
Water: 5%.
Beer under 6.5% alcohol: 15%.
Tobacco, perfume, jewellery, electronic devices (except computers, telephones etc.),
private vehicle with an engine capacity above 1600 cm, and weapons: 20%.
Other alcoholic drinks: 25%.
Real property tax
The annual real property tax differs according to whether it is a built or an unbuilt
property and whether it is located in NDjamena or elsewhere. The tax is imposed in the
municipality where the property is situated.
The tax rate on built property is 10% in NDjamena and 8% elsewhere.
The tax rate on unbuilt property is 21% in NDjamena and 20% elsewhere.
The calculation base is the potential revenue of that property. The potential revenues
correspond to four-fifths of the rental value, the rental value being 10% of the market
value. For rural unbuilt property, the market value is fixed to XAF 50,000 per hectare.
Some temporary exemptions are granted to new buildings or additions to constructed
buildings after 1 January 1968 from this tax in some conditions. In case of construction
or reconstruction, owners can benefit from temporary exemptions as follows:

If the villa is owned by a corporation: 2 years.

If the villa belongs to an individual and put on rental: 2 years.
If the villa is built or rebuilt for commercial and industrial use: 2 years.
New construction or reconstruction and additions to buildings for a holiday resort,
for approval (accreditation), or for furnished rent are excluded.
Accommodation tax
The person occupying a building (owner or tenant) has to pay the following amount as
accommodation tax annually:
Type of construction
For constructions in local material
For hard or semi-hard constructions
NDjamena (XAF)
3,000
10,000
Elsewhere (XAF)
1,500
5,000
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Type of construction
For R+ hard constructions
NDjamena (XAF)
10,000 and a supplement
of 10,000 per level
Elsewhere (XAF)
5,000 and a supplement
of 5,000 per level
Transfer tax
Fixed or proportional transfer duties must be paid on the transfer of ownership

of estates, personal property, and real property. Transfer duties are also due on
contributions to companies and divisions of property.The proportional fees for the
following transfers are:
Transfers of ownership interests in companies whose capital is not divided into
shares: 3%.
Transfers of shares, founders shares, or profit shares: 3%.
Transfers of bonds of companies and legal entities: 3%.
Transfers of the right to lease or of the benefit of a promise to lease of real estates:
10%.
Transfers of goodwill (business) against payment: 10%.
Transfer of leases of real estate: 3%.
Transfers of pension against payment: 3%.
The undivided shares and portions of real property acquired by bidding are subject to
land transfer tax against payment at 10%.
Transfers and delegations of term debts: 3%.
The perfect transfer of notarised promissory notes containing the creation of a
mortgage and other mortgage bonds: 5%.
Real estate returns are subject to land transfer (against payment) tax of 10%.
Transferring ownership for consideration of movable property: 6%.
Judicial transfer (against payment) of ownership or usufruct of both developed and
undeveloped land is 12.5%.
These transfers are generally registered within three months of their entry into
possession.
Stamp duties
Stamp duties must be paid on each civil or judicial document intended to be used as
evidence. Stamp duty is generally XAF 1,000 per page.
All claims for reimbursement submitted to the Board are subject to a stamp duty of XAF
2,000.
Requests to the administration for professional competitions are subject to a stamp duty
of XAF 1,000.
Applications for allocation of land are subject to a stamp duty of XAF 1,000.
Invoices for supplies to the administration of less than XAF 1 million are subject to a
stamp duty of XAF 5,000. The same applies to certificate of sales of reshaped vehicles
and materials, of vehicles of the state and public bodies.
All invoices that accompany an order of the administration in lieu of a service contract or
a public market are subject to a stamp duty of XAF 5,000.
Any application, other than those mentioned above, addressed to the tax authorities is
subject to a stamp duty of XAF 2,000.
The subscription contracts to the mobile and landline phones are subject to a stamp duty
of XAF 1,000. Telephone companies are responsible for the collection of those duties
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and pay back spontaneously on the 15th day of every month to the Stamp Tax Treasury
(Stamp and Registration Directorate). A penalty of 25% of the amount due, plus a fine of
XAF 25, is awarded for late payment.
The post-paid invoices of mobile and fixed telephone companies are subject to a stamp
duty of 10%.
Registration duty
The registration duty applies to certain deeds listed by the general tax code. The
assessment basis depends on the nature of transactions, and the rate varies from 1%
to15%.
Any natural person or corporate body carrying on a trade, industry, or profession in

Chad shall be liable to a business licence tax. The business licence tax is paid annually
and is assessed as follows:
A determined duty based on 0.1% of the first XAF 2 billion of turnover; above that,
only 1/10 of the turnover is taxed.
10% of the rental value of the premises.
10% of the determined duty for the National Social Security Fund.
7% of the determined duty for the Consular Commercial Chamber.
XAF 480 per year for the Rural Intervention Fund.
10% of the annual rental value of business premises.
For a new company, the determined duty is calculated based on the projected turnover
estimated by the taxpayer as compared to similar activities or those achieved during the
first 12 months of activity.
The business licence tax is due 31 December of the tax year.
Capital gains and dividends tax
Capital gains and dividends are taxed at 20%.
The monthly contribution to Chads Social Security Fund is 16.5% of total salaries for the
employer (upper limit: XAF 82,500 per month) and 3.5% for the employee (upper limit:
XAF 17,500 per month), withheld by the employer.
Payroll tax
Employers in Chad are required to make monthly contributions of 7.5% of the total
amount of salaries and fringe benefits paid to permanent employees.
Apprenticeship tax
Employers in Chad are required to make monthly contributions of 1.2% of the total
amount of salaries and fringe benefits of their employees (permanent and temporary) to
the National Professional Training Fund (FONAP).
Branch income
In Chad, there is a presumption of distribution of profits realised by branches. These
profits are deemed distributed to their headquarters and are therefore subject to tax on
income from capital gains at the rate of 20%.
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However, this presumption of distribution is simple. Branches can provide evidence
that the profits they have made have not actually been transferred but remained in the
accounts of the branch.
Inventory valuation
Stocks shall be valued at cost price; however, if the market price is lower than the cost
price, the undertaking shall make provisions for depreciation of inventory.
Capital gains
Capital gains are taxed at 20%.
Dividend income
Dividends are taxed at 20%.
Interest income
The interest paid to associates or shareholders in respect of sums paid by them in

the social fund in addition to their share of capital is taxable within the limit of that
calculated at the advance rate of the bank of emission and increased by two points.
Foreign income
Income from other countries is not liable to tax in Chad.
Deductions
Expenses are deductible under the following conditions:

They must lead to a reduction of the assets.

They must be incurred in the interest of the enterprise.
They must be regularly included in the accounts of the entity and justified by receipts.
They must be related to the present fiscal year or a former fiscal year.
They must not be considered as non-deductible by the law.
Depreciation
According to accountancy principles, depreciation is calculated based on the probable

length of use of the asset. The straight-line system of depreciation is applicable, and
rates vary according to the nature of the business activity concerned and the normal
useful life of the assets involved.
From an accountancy point of view, it is possible to depreciate whatever amount
corresponds to the above mentioned principles. However, from a tax point of view,
depreciation (i.e. enabling a deduction of the depreciated amount from the taxable
income) is only possible under the condition that the depreciation has been entered into
the statement of accounts. Therefore, only a legal entity in Chad owning the assets is
able to depreciate its assets.In addition, if depreciation in the statement of accounts is
higher than the depreciation authorised, the difference is not deductible and has to be
reinstated in the taxable income.
The starting point for depreciation is the day of first use. If this date is not the first day of
the financial year, the first years depreciation is reduced pro-rata.
It should be noted that, despite the above, goods that are leased are depreciated at the
rate that they are paid for.
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Depreciation of goods that are made available for free to managers and supervisors of
the business are deductible if the corresponding benefit in kind is declared.
The sum of depreciation applied to the acquisition or creation of an asset cannot, at the
end of each financial year, be less than the amount of depreciation calculated on the
linear system and spread out over the normal usage period.
Depreciation in loss-making years may be carried forward to the first profitable financial
year, and to subsequent years if necessary.
Goodwill
There are no provisions for goodwill as regards deduction of expenses.
Start-up expenses
There are no provisions for start-up expenses.
Interest expenses
Interests paid for the depositing of funds by a shareholder are deductible within the base
rate of the central bank plus two points, calculated on the basis of the share capital.
Bad debt
Provisions for credit customers are deductible once they meet the conditions for
deductible expenses mentioned above.
Donations and liberalities are deductible within a 0.5% limit of the annual turnover, net
of tax, when they are duly justified. However, a decision from the Minister of Finances is
required.
Fines and penalties
Tax and customs penalties are not deductible.
Taxes
Income taxes are not deductible.
The following expenses are not deductible:

Provisions for laying off employees.
Provisions for self-insurance.
Insurance premiums paid for a third-party.
The following expenses are not fully deductible:
Foreign social security contributions are deductible only within 15% of the base
salary of the expatriates when related to a compulsory retirement plan. Nonetheless,
Chads social security contributions are fully deductible.
Restaurants, hotels, receptions, and related costs are deductible within a 0.5% limit
of the turnover, net of tax.
Travel expenses for expatriates and their families for vacation are deductible, limited
to one trip per year.
Losses arising from normal business activities of the company are deductible and may be
carried forward for up tothree years. Carryback of losses is not permitted.
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There is a specific regulation relating to head office and foreign technical assistance costs
that are subject to a 10% limitation of deductibility.The scope of the 10% limitation
covers study expenses, technical assistance, and other expenses, including commercial
and industrial royalties, paid to the head office of an enterprise established outside Chad
and outside the CEMAC zone.Duly justified, these costs are only deductible within 10%
of the intermediary fiscal profit (accounting profits plus non-allowable charges/costs)
prior to their deduction.
Group taxation
There is a specific taxation of groups within the CEMAC area.
The stocks or shares owned by the parent establishment represent at least 25% of the
capital of the subsidiary firm.
The parent and subsidiary firms have their registered office in a CEMAC state
(Cameroon, Central African Republic, Chad, Gabon, Equatorial Guinea, and Republic
of Congo).
participating company that undertakes to retain them for at least two consecutive
Transfer pricing
The Tax Code acknowledges that dependent or controlled companies may transfer
benefits indirectly to their company abroad it is dependent on or to the company abroad
it is controlled by.
In order to calculate the real benefit, the indirectly transferred benefits (by means of
increase of purchase price or decrease of sales price to the controlling company or by any
other means) are incorporated into the result established by the accounts.
If the tax administration does not have enough precise elements to determine the
benefit, it will establish the taxable benefit by way of comparison to companies normally
operated in Chad.
The Tax Code provides further, in accordance with CEMAC regulation, that interest paid
to shareholders on sums that they lend over and above their share capital is deductible at
the rate for loans allowed by the central bank increased by two percentage points. This
deduction is only possible if the amounts lent do not exceed 50% of the share capital.
Thin capitalisation
Chad applies Organisation for the Harmonization of Business Law in Africa (OHADA)
regulations with regards to thin capitalisation rules.
In cases where the equity capital gets, due to the recorded losses in the summarising
financial statement, below 50% of the share capital, a shareholder consultation has to be
organised within four months to decide upon a potential anticipated dissolution of the
company.
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If the dissolution is excluded, the company has to reconstitute its equity capital up until
it equals 50% of the share capital within the two years following the date of the end of
the loss-making financial year. Otherwise, provided it stays above the legally required
share capital minimum, the company has to reduce its share capital of an amount at least
equal to the losses that it has not been able to charge against reserves.
In cases where no decision has been taken regarding dissolution, any interested person
may claim dissolution of the company in front of a court. Any interested person is
allowed to bring a legal action if the reconstitution of the equity capital has not taken
place within the legal timeline.
This action ceases to exist the day the cause for dissolution ceases to exist or if the court
has ruled on the grounds.

Chad does not offer any tax incentives.
Foreign tax credit
There are no provisions for foreign tax credit in Chad.
Withholding taxes
Withholding tax (WHT) on commerce of retail goods
A 4% WHT rate applies to natural persons and legal entities that purchase or sell
wholesale or retail goods. This WHT also applies to imports.
Companies with more than one shareholder that regularly pay their taxes may apply for
a suspension of payment of WHT (renewable every three months).
WHT on capital gains
WHT on capital gains is 20% and applies to residents and non-residents.
WHT on income of non-residents
WHT on income of non-residents is 25%. It applies to income of any legal or natural

person that is not resident in Chad.
WHT on personal income
The employer withholds tax on personal income every month.
WHT on income from public procurement contracts financed from

outside of the country and income from petroleum projects
Chads lowest WHT rate on income is of 12.5%. It applies in either of the following two
cases:
On income of agents, consultancy firms, and corporations executing a contract within
the framework of public procurement contracts financed from outside of the country.
On income of companies working within the petroleum projects.
WHT on interests of bonds, certificates, and notes
Bonds and notes are subject to a WHT of 20% of the interests for registered bonds and
30% of the interests for bearer participation certificates.
WHT on rent
WHT on rent is 15% for residents and 20% for non-residents.

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Tax treaties
Chad has one tax treaty with the member states of CEMAC (Cameroon, Gabon,
Equatorial Guinea, Congo, Chad, and Central African Republic).
WHT benefits on payments made to CEMAC residents
To avoid double taxation of incomes of CEMAC origin, the provisions of the Convention
provide a principle of exclusive taxation in one.
Regarding revenues of services, they will be taxed only in the country of location of the
beneficiary of incomes (i.e. no WHT in the country of payment of incomes).
Regarding incomes from securities (dividends, interest on deposits, interest on bonds,
etc.), they will be taxed only in the country of distribution (i.e. no WHT in the country of
payment of incomes).
Tax administration
Taxable period
Companies must, in principle, close off their yearly financial accounts on 31 December
each year. Where a company begins operations later in the year (say June 2014), it has
the option of operating for a minimum of 12 months or a maximum of 18 months to
close off its accounts.
Tax returns
Corporate tax returns are due on 15 April.
Payment of tax
Certain taxes are considered instalment payments of corporate tax. Once the amount of
corporate tax is known, these payments are deductible from the amount and only the
balance has to be paid on 15 April. These taxes include the minimum corporate tax, the
quarterly instalment payments, and the 4% discharge for retail goods, if applicable.
Minimum corporate tax (monthly)
The minimum corporate tax payment must be made prior to the 15th day of the month
following the month of achievement of the turnover. However, for the payment of the
floor rate, payment may be made in four instalments of XAF 250,000 each, 15 days after
the end of the quarter.
If this instalment payment exceeds the annual corporate tax, the remainder is lost.
One third instalment payments (paid three times quarterly)
Corporations that fulfil the following conditions are subject to quarterly instalment
payments:
Liable to corporate tax.
Made a profit during the prior fiscal year.
The amount of the corporate tax of the prior fiscal year is superior to at least
XAF100,000.
The quarterly instalment payments are equal to one-third of the difference between the
corporate tax due during the prior fiscal year and the minimum income tax paid during
the same period.
The payment must take place before the tenth day of April, July, and October.
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Tax audit process
In brief, the tax audit exercised by the Direction Gnrale des Impts (Directorate General
of Taxes) in Chad consists of three different types of control:
Audit of monthly, quarterly, and annual tax returns, which requires no prior notice by
the tax administration to the taxpayer.
Spot checks, which are done on one or more taxes on a group of operations over
a period of less than one fiscal year. Prior notice is obligatorily given by the tax
administration to the taxpayer.
General verification, which is the most important audit and needs prior notice by
the tax administration to the taxpayer. This type also involves the other two audits
aforementioned, so that the taxpayer can perform the necessary adjustments on
previous declarations.
In all the audits, there are contradictory and contentious proceedings. The contradictory
proceeding is engaged when the tax administration finds deficiency, inaccuracy, or
omission in the information on the tax returns and notifies the taxpayer thereof. The
contentious proceeding, on the other hand, is engaged when the taxpayer, in turn,
disagrees with the observations of the tax administration and challenges its position
directly with the tax administration and/or with the courts.
According to Article R. 33 of the General Tax Code (GTC) of Chad:

The total or partial omissions found in the tax base, the inadequacies and inaccuracies,
or the taxation errors, can be repaired by the tax administration until the end of the
third year following that in which the tax or fee is payable.
Furthermore, any omission or insufficiency of tax revealed by a proceeding before the
criminal courts or by a contentious claim may, without prejudice to the general period
of repetitions established above, be repaired until the end of the third year following the
revelation of the facts.
Topics of focus for tax authorities include the following:

Obligation to file a return.

The verification of the return filed.
Taxation of office/Arbitrary Assessment.
The right of access to taxpayers documents.
Obligation to pay tax.
Procedure for the abuse of control.
Limiting the right of control.
Tax collection procedure.
Prosecution measures.
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PwC contact
Francisco Selame
Avenida Andrs Bello 2711
Torre de la Costanera, Cuarto Piso
Santiago, Chile
Tel: +56 2 940 0460
Law N 20.727
Law N 20.727, published on 31 January 2014, modified certain tax provisions, as

follows:
The compulsory use of electronic invoices and other tax documents will be gradually
established for value-added tax (VAT) purposes (see VAT in the Other taxes section for
more information).
International taxation provisions in respect to the foreign tax credit have been
modified (see Foreign tax credit in the Tax credit and incentives section for more
information).
Income tax reform
On 1 April 2014, the Chilean executive branch sent a major tax reform bill to the
Chilean Congress. The bill contains several material modifications to existing Chilean
tax principles, and is expected to be the most significant reform package that has been
introduced in the last 30 years. This legislation, if enacted, could have a significant
impact on multinational corporations, funds and other entities investing or operating in
Chile (see Income tax reform in the Other issues section for more information).

First Category tax
The basic tax on income of a legal entity domiciled or resident in Chile and engaged
in commerce, mining, fishing, or industrial activities is the First Category tax, which is
assessed at a 20% rate on the entitys worldwide income.
Non-domiciled and non-resident shareholders and partners of a Chilean entity are
subject to an additional withholding tax (WHT) of 35% on their Chilean-source
distributions or remittances, with a credit granted for the First Category tax paid on the
underlying profits. This results in an effective tax rate of 35%.
Local income taxes
Chilean legislation does not establish any local income taxes.
Corporate residence
Companies incorporated in Chile are considered to be domiciled in the country.
An entity may be considered as a PE under double taxation treaty (DTT) terms but not
under the local legislation. In this case, in principle, the correspondent WHT should
apply over the gross basis of the remittance.
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However, Chilean Internal Revenue Service (IRS) rulings have interpreted the relation
between the two different PE concepts, in the sense that, notwithstanding the local
requirements are not met, the taxpayer can choose to be treated as a local PE in order to
be allowed to deduct the expenses that are incurred for the purpose of the PE.
Other taxes
VAT is payable on the transfer of goods and the provision of services at a rate of 19%. In
general terms, this tax is levied over the price of the following goods and services:
Sales and other agreements used to transfer the ownership of tangible goods, or
real estate owned by a construction company, provided that said operations are
customary. The law assumes that all sales made within the ordinary course of
business are customary.
Services that are commercial, industrial, or financial, or that are connected to
mining, construction, insurance, advertising, data processing, and other commercial
operations.
Imports, customary or not.
Normally, the sale of fixed assets is not subject to VAT, unless the assets are sold before
the end of their useful lives or within four years from the date of acquisition. The sale
of immovable property as fixed assets is subject to VAT only when the sale takes place
within 12 months from the date of acquisition.
VAT works on a credit-debit system. The tax borne by a company or business in the
acquisition of goods or services is called the VAT credit. The VAT charged on the goods
and services sold to customers is called the VAT debit. As a general rule, the seller or
service provider is obligated to withhold and pay the VAT. The tax amount is added to
the invoice; consequently, the final consumer is the economic taxpayer.
Exceptionally, when a seller or service provider is not domiciled in Chile or when,
for other reasons, the IRS has difficulties assessing the correct payment of VAT, the
responsibility to withhold and pay the tax is transferred to the buyer or beneficiary of the
service.
The tax is paid every month by deducting the VAT credit from the VAT debit. The
balance due to tax authorities (when the debit is larger than the credit) must be paid no
later than the 12th day of the month following that of the transaction.
If on a given month the VAT credit is larger than the VAT debit, the balance may be kept
and carried forward to the following months.
Law N 20.727 gradually establishes the compulsory use of electronic invoices and
other tax documents, such as credit and debit notes, purchase invoices, etc. The
implementation of this system is schedule as follows:

Large companies by 1 November 2014.

Medium and small urban companies by 1 August 2015.
Medium and small rural companies by 1 February 2016.
Urban micro companies by 1 August 2016.
Rural micro companies by 1 February 2017.
There are qualified exceptions to this electronic regime, such as zones where there is no
public electricity, zones declared as a disaster area, and other exceptions authorised by
the IRS.
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Law N 20.727 also establishes the requirement of express acknowledgement of the
receipt of the invoice in order to be able to use the fiscal credit.
Customs duties
As a general rule, the customs duty rate is 6%. However, as Chile has an extended
network of free trade agreements (FTAs), reduced or zero customs duties rates are
available.
Duties on goods are imposed on the cost, insurance, and freight (CIF) price, without
deducting special discounts.
In general, Chile has a very open economy and there are no significant barriers to
foreign trade.
Excise taxes
Alcoholic and non-alcoholic beverages and certain luxury items, such as jewels, are
subject to additional sales taxes ranging from 13% to 50%.
A variable gasoline tax is also levied on the difference between a fixed amount and the
sales price of gasoline and diesel oil.
Real Estate Tax
Real Estate Tax is levied over an official valuation of real estate at an annual rate of 1.2%
in case of non-farming real estate, and 1% for farming real estate. Some real estate is
exempt from this tax.
Transfer taxes
Currently, Chilean law has not established any transfer taxes.
Stamp tax
Stamp tax is levied mainly on documents that evidence money lending operations, and
its rate varies depending on the executed document.
The maximum stamp tax rate is 0.4%. For documents payable on demand or without an
expiration date, the tax rate is 0.166%.
Branch income
Branches of foreign corporations operating in Chile are taxed on their worldwide
income, subject to the First Category tax at a 20% rate.
Additionally, branches are subject to a 35% rate WHT on amounts remitted or
withdrawn during the calendar year, which is payable in April of the year following the
distribution. The First Category tax is creditable against the WHT; consequently, the
total tax burden of a branch is 35%.
As a general rule, for purposes of the First Category tax, corporate income is determined
on an accrual basis.
Inventory valuation
Inventories must be valued in accordance with monetary correction provisions, basically

by adjusting raw material content and direct labour to replacement cost (which is
generally the most recent cost), but excluding indirect costs. No conformity is required
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between book and tax reporting for income determination. Last in first out (LIFO) is not
allowed.
Capital gains
Capital gains are subject to normal taxation unless special provisions, such as those
pertaining to gains on the sale of shares/quotas or monetary correction on capital
repayments, establish exemptions.
Under domestic laws, in certain circumstances, the capital gains derived from the
following securities will be subject to a preferential tax treatment:

Stock of listed local companies.

Investment funds quotas, listed on an authorised stock exchange market.
Mutual funds quotas, if the fund invests in stock trade values.
Investment funds quotas not participating in a stock exchange market or mutual
funds, where at least a 90% of the investment portfolio is in a stock exchange market.
Note that, due to indirect sales provisions, capital gains arising from the sale of
foreign companies holding Chilean assets may be subject to Chilean taxation if certain
requirements are met.
Dividend income
Dividends received from Chilean corporations are not subject to the First Category tax.
Interest income
No specific provision exists in Chile for interest income; consequently, interest income is
subject to First Category tax.
Foreign income
Resident corporations are subject to taxes on their worldwide income. In general,

foreign income and dividends received by a domestic corporation are subject to Chilean
taxation in the financial year when received (i.e. on a cash basis). A tax credit for taxes
paid abroad is granted, subject to the regulations of the Income Tax Law.
Branches of foreign corporations are taxed on their income without regard to the results
of the head office.
Deductions
A First Category taxpayers net taxable income is calculated by deducting from gross
income those expenses incurred to generate it that have not already been deducted as
costs.
As a general rule, expenses are not deductible for income tax purpose if they are not
incurred to generate taxable income.
Depreciation rates are calculated based on the assets estimated useful life. The
normal depreciation terms for new assets are as follows: heavy machinery, 15 years;
trucks,seven years; factory buildings, in general, 20 years to 40 years. At the request
of the Foreign Investment Committee or the taxpayer, the IRS may reduce the normal
useful life.
Annual depreciation is calculated based on the straight-line method. However, taxpayers
may recover capitalised costs by using the accelerated depreciation method for up to
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one-third of the normal useful life regarding new or imported fixed assets, provided that
the normal period of depreciation is at least three years.
Accelerated depreciation may be used only to reduce the taxable basis of the First
Category tax. For the purpose of the tax applicable to distributions of dividends,
accelerated depreciation is not considered.
No conformity is required between book and tax depreciation.
For tax purposes, depletion for natural mineral resources is allowed on a unit-ofproduction basis.
Goodwill
In the case of goodwill and negative goodwill provisions, that is to say when the amount
paid is higher/lower than the absorbed entitys tax equity in a statutory merger process
or by the reunion of 100% of interests, the law establishes that the difference must be
either added or deducted proportionately into the non-monetary assets of the target
with a cap of its fair market value. The difference (if any) will be considered as deferred
loss/incomethat has to be recognised for tax purposesover aperiod often years on a
straight-line basis.
Provided there are no non-monetary assets in the absorbed entity, goodwill will be
considered as an intangible that can be amortised as a necessary expense in a period of
up to ten years.
Start-up expenses
Start-up expenses must be capitalised and considered as an asset for tax purposes.
However, they can be amortised over a six-year period counted from the year in which
they were incurred or the start up of commercial activities.
Furthermore, they are usually deducted when the income is generated.
Interest expenses
As long as the interest paid meets the general requirements set forth by the Income Tax
Law, interest expenses can be deducted.
Bad debt
In general, bad debts are deductible only if (i) they are a consequence of operations
related to the business purpose, (ii) they have been timely written off into the
accounting records, and (iii) the company has prudentially exhausted all reasonable
means to collect them.
Determination of whether the company has prudentially exhausted all reasonable means
to collect the bad debts varies according to the total amount of the debts. Therefore, a
simple estimation or general provision for bad debts is not allowable.
Charitable contributions may be deducted from gross income, provided they are made
to the institutions established by certain laws (i.e. primary and secondary educational
institutions; universities, professional or technical education institutions, National Fire
Brigade, National Solidarity Fund, etc.).
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In case of charitable contributions, the total annual tax deduction for this purpose is
limited, as the deductible amount for this purpose may not exceed 5% of the companys
net taxable income.
Fines and penalties
Fines and penalties imposed for breaking the law or a contract are not deductible,
although a deduction is usually available for the legal costs incurred in defending such
an action.
Taxes
Taxes imposed by Chilean laws are deductible, provided they are related to the
companys normal activities. However, income taxes and special contributions for
promotion or improvement are not deductible.
An indefinite carryforward of losses is allowed. Consistent with monetary correction,

losses are carried forward, adjusted by a cost-of-living increase. No carrybacks are
allowed, except when the taxpayer has retained tax profits and has a subsequent tax loss.
The deductibility of payments made abroad for the use of trademarks, patents, formulas,
and consulting and other similar services is limited to a maximum of 4% of the income
derived from sales and services in the corresponding year, unless the royalty is subject to
an income tax with a rate of greater than 30% in the country of the beneficiary.
Transfer pricing regulations in Chile are in line with general Organisation for Economic
Co-operation and Development (OECD) principles (see the Group taxation section).
Group taxation
Consolidated returns are not allowed in Chile.
Transfer pricing
The transfer pricing legislation generally adheres to the OECDin its Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
The law establishes contemporaneous documentation requirements, filing of an
informative return, and specific penalties for non-compliance.
Although the law does not explicitly mention the adoption of the methods established
inthe OECD Guidelines, the methods described therein are in line with them. The rules
also adopt the best method rule and allow the use of other unspecified methods when
the methods described in the Chilean Income Tax Law are deemed not appropriate to
determine the arms-length nature of the inter-company transactions.
Finally, the Income Tax Law includes the ability to enter into advance pricing
agreements (APAs), unilateral or multilateral. The Chilean tax authority can reject,
totally or partially, the request, and such decision is not subject to an administrative
appeals procedure. APAs should be valid for four years and are subject to renewal or
extension.
Thin capitalisation
Thin capitalisation rules apply in case of related party loans at a 3:1 debt-to-equity ratio.
In this regard, the total annual amount of such loans is deemed to exceed the 3:1 ratio
if the monthly average value of the sum of all related party loans and financial liabilities
that the debtor holds at the end of the tax year in which the loan was granted exceeds
three times the debtors adjusted tax equity.
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Foreign tax credit
In order to avoid double taxation, the Chilean Income Tax Law recognises a tax credit
mechanism in which the tax effectively paid abroad may be deducted from the taxes to
be paid in Chile.
In order to regulate this matter, the Chilean Income Tax Law distinguishes between
those countries with which there is a DTT in force with Chile and those that do not have
a DTT in force with Chile.
Law N 20.727 amended certain foreign tax credit provisions, as follows:
The foreign tax credit may be used even if the foreign tax was paid by an indirect
subsidiary of the company remitting the funds to Chile, provided that all the entities
are domiciled in the same country and that the remitting entity directly or indirectly
participates in 10% or more of the equity of the company paying the foreign tax.
The foreign tax credit may be carried over for First Category tax purposes even if the
company is in a tax loss situation or if the First Category tax is lower than the credit.
The total available credit is raised from a 30% cap to a 35% cap in respect to income
taxes paid in countries with which Chile has a DTT in force. In respect to those
countries with which Chile has no DTT, the tax credit cap is 32%.
The principal investment incentives are the following:

Tax benefits and other incentives for companies operating in the northernmost and
southernmost parts of the country.
Tax benefits to forestry companies, contracts for oil operation, and nuclear
materialoperations.
Inbound investment incentives
The principal incentives to encourage foreign capital contributions are statutory

guarantees covering the repatriation of capital, remittance of profits, non-discrimination
toward foreign investment, and access to the foreign exchange market for remittance
purposes. In general, foreign investors are subject to the same legislation as national
investors. A guaranteed income tax rate of 42% may be granted for ten years or,
provided the capital investment project exceeds 50 million United States dollars (USD),
20 years for the development of industrial or extractive projects.
The overall rate is comprised of the corporate tax on profits and WHT on dividend
or branch profit distributions. The tax rate on dividend or profit distributions is the
difference between 42% and the underlying tax paid at the corporate level. The option
to be subject to an overall effective tax rate of 42% without change for ten or 20 years
is usually not exercised by foreign investors because the current combined effective tax
rate on profits and dividend distribution is 35% under the general taxregime.
Under the Foreign Investment Contract, a foreign investor may request for tax stability
with respect to VAT and customs duty regimes. With respect to customs duties, however,
stability is granted only for the importation of certain machinery and equipment not
available in Chile.
Export incentives
The principal incentives for exports can be summarised as follows:
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Taxes paid in the importation or acquisitions of goods required in the export activity
are reimbursed.
VAT on exports is zero-rated.
Chile has signed FTAs with Australia, Bolivia, Canada, Central America (i.e. Costa Rica,
El Salvador, Guatemala, Honduras, and Nicaragua), China, Colombia, the European
Union, Mexico, Panama, Peru, Republic of South Korea, Turkey, and the United States.
All these agreements provide for reduced customs duties.
Withholding taxes
Dividends paid to a non-resident recipient are subject to a 35% withholding of
additional tax, with the First Category tax paid at the corporate level being creditable
against this WHT. This credit is added to the amount that is distributed to form the
taxable base for the additional tax. Consequently, the tax burden for a non-resident
recipient of dividends, including taxes at the company level, is 35%.
Branches are subject to a 35% rate WHT on amounts remitted or withdrawn, less the
First Category tax credit. See the Branch income section for more information.
In the case of a foreign investor that has applied for the 42% tax invariability, the
effective tax burden is 42%.
Interest paid to non-residents is subject to WHT at a general 35% rate. Interest on loans
granted by foreign banks or financial institutions is subject to a sole 4% WHT. Thin
capitalisation rules requesting a 3:1 debt-to-equity ratio become applicable when the
debt generating interest subject to the 4% rate is secured by related entities.
Royalties paid to non-residents are subject to the WHT at a 30% rate. Royalty payments
in connection to software are subject to additional WHT at a 15% rate. Such rate is
increased in case the beneficiary of the payment is resident in a tax haven or in case the
payment is made to a related entity.
Tax treaties
The following table shows the higher and lower rates on WHT applicable by Chile and
the countries with which DTTs exist. The application of one or the other rate will depend
on the specific provisions of each treaty.
Please note that Chile has signed DTTs with Austria, South Africa, and the United States
that are not yet inforce.
Recipient
Australia
Belgium
Brazil
Canada
Colombia
Croatia
Denmark
Ecuador
France
Ireland
Malaysia
Mexico
Dividends (%)
5/15 (18)
15
10/15 (3)
5/15 (4)
0/7 (6)
5/15 (8)
5/15 (4)
5/15 (4)
15
5/15 (4)
5/15 (8)
5/10 (11)
Interest (%)
5/10/15 (19)
5/15 (1)
15
10/15 (5)
5/15 (7)
5/15 (7)
5/15 (9)
5/15 (10)
5/15 (1)
5/15 (1)
15
5/10/15 (12)
Royalties (%)
5/10 (2)
5/10 (2)
15
10
10
5/10 (2)
5/10 (10)
10
5/10 (2)
5/10 (2)
10
10
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Recipient
New Zealand
Norway
Paraguay
Peru
Poland
Portugal
Russia
South Korea
Spain
Sweden
Switzerland
Thailand
United Kingdom
Dividends (%)
15
5/15 (4)
10
10/15 (3)
5/15 (8)
10/15 (3)
5/10
5/10 (16)
5/10 (11)
5/10 (11)
15
10
5/15 (11)
Interest (%)
10/15 (13)
5/15 (9)
10/15 (14)
15
5/15 (9)
5/10/15 (15)
15
5/15 (9)
5/15 (1)
5/15 (7)
5/15 (1)
10/15 (14)
5/15 (1)
Royalties (%)
10
5/10 (2)
15
15
5/10 (2)
5/10 (2)
5/10
5/10 (2)
5/10 (2)
5/10 (2)
5/10 (2)
10/15 (17)
5/10 (2)
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
15% as a general rule. Interest arising from bank or insurance company loans, bonds, some
securities that are regularly negotiated on stock markets, and credit sales of industrial equipment is
taxed at a 5% tax rate.
10% as a general rule. 5% is applicable for the use or the right to use some equipment.
10% if the beneficiary owns at least 25% of the companys shares. 15% in all other cases.
15% as a general rule. 10% if the most favoured nation clause applies.
5% if the beneficiary is a bank or an insurance company. 15% in all other cases.
15% as a general rule. It could be 5% by the application of the most favoured nation clause.
5% for the use of, or the right to use, some equipment. 10% by the application of the most favoured
nation clause.
15% as a general rule. If the most favoured nation clause applies, 10% as a general rule, 5% if
interest is paid to a bank.
15% as a general rule. 10% if interest is paid to banks or insurance companies, or if the most
favoured nation clause applies.
10% if the beneficiary is a bank or an insurance company. 15% in all other cases.
15% as a general rule. 10% or 15%, depending on the interest source.
15% as general rule. 10% for the use of, or the right to use, any copyright of literary, artistic, or
scientific work, or for the use of, or the right to use, industrial, commercial, or scientific equipment.
5% if the interest is paid to a financial institution. 10% in all other cases. However, Chile may tax
interest arising in the country at a 15% rate.
Tax administration
Taxable period
The tax year coincides with the calendar year.
Tax returns
The tax system is one of self-assessment by the taxpayer, with occasional auditing by the
tax authorities. Annual tax returns must be filed with the IRS before 30 April of each
year with respect to the operations of the previous calendar year.
Note that there are many other sworn statements with different deadlines, from March
until June of each year.
Payment of tax
Taxes are payable when the annual tax return is submitted in April of each year.
Taxpayers, in general, are subject to monthly advance payments on account of their
annual income taxes. The difference between the advance payments and the final tax bill
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is payable in cash at the time the tax return is filed. If prepayments exceed the final tax
bill, the excess is reimbursed by the Treasury.
Tax audit process
Generally, the Chilean tax system is based on self-assessment; however, many large
businesses are under continuous audit by the Chilean IRS. Businesses and individuals
are also generally subject to audit on a random basis.
As a general rule, the statute of limitations is three years. However, it can be extended to
six years if no tax return was filed or if the tax return was maliciously false.
The tax authority is currently focused on transfer pricing issues.
Other issues
Foreign Account Tax Compliance Act (FATCA) agreement
On 5 March 2014, Chile entered into a bilateral intergovernmental agreement (IGA)

with the United States (US) in order to comply with FATCA.
Chile signed a Model 2 IGA, which is a non-reciprocal exchange of information
agreement. The execution of this agreement will imply that Chilean Financial
Institutions with US account holders, in order to avoid paying the 30% rate WHT that
FATCA establishes, will have to register with the US Treasury and US IRS and sign a
Foreign Financial Institutions Agreement with them in order to be FATCA compliant.
In this context, each Chilean financial institution that enters into these agreements with
the US tax authorities will be required to report to the US IRS directly the individual US
account holders information.
In accordance with the Chilean Bank Secrecy Law, Chilean financial institutions, in
respect to those account holders that do not authorise them to disclose their account
information to the US IRS, will only be able to disclose their information in aggregate.
This will mean that the US IRS, in order to obtain the specific information of those US
account holders, will need to request it directly from the Chilean IRS, under the terms of
the DTT between both countries, once it is in force.
Tax reform
On 1 April 2014, the Chilean executive branch sent a major tax reform bill to the
Chilean Congress. The bill contains several material modifications to existing Chilean
tax principles, and is expected to be the most significant reform package that has been
introduced in the last 30 years. This legislation, if enacted, could have a significant
impact on multinational corporations, funds and other entities investing or operating in
Chile.
The following principal amendments are introduced by the tax reform bill:
The First Category tax rate would gradually increase from 20% to 25% (i.e. 21% in
2014, 22.5% in 2015, 24% in 2016, and 25% from 2017 onwards).
Shareholder-level taxation would be imposed on an attributed basis instead of on
a cash basis when earnings are distributed to shareholders. Under the tax reform
proposal, profits would be taxed at the shareholder level under an attribution
mechanism, regardless of whether they are distributed. This would eliminate the
Taxable Profits Fund Ledger (known as FUT for its Spanish acronym). However, a
series of new registries are introduced in order to sustain the attribution mechanism.
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The underlying First Category tax paid at the entity level would remain creditable
against the final shareholder tax, such that the total income tax payable in Chile
would remain at 35%. However, the 35% rate would apply whether or not earnings
remain undistributed in Chile. In order to reach this 35% rate, the entity of source
will be required to withhold 10% of the income subject to attribution (note that this
10% WHT is not required if the shareholders are only Chilean individuals). Thus,
the 25% First Category tax paid by the entity of source plus the 10% withholding
reaches the 35% final tax burden without the need of a cash disbursement by the
final shareholder. This is a significant change, and would, if passed, take effect on
1 January 2017. Profits generated between 1 January 2015 and 31 December 2016
would still be subject to taxation on a cash basis at the shareholder level, subject
to certain limitations. Taxable profits generated before the enactment of the bill
(historical FUT) would remain subject to the current cash-basis tax treatment, subject
to specific allocation rules.
Anti-deferral rules would be introduced for passive income earned by a Chilean
entitys controlled foreign companies (CFCs). Passive income would include
dividends, interest, and royalties. The bill would allow a foreign tax credit against the
Chilean income tax imposed on such passive income. The CFC rules would become
effective on 1 January 2017.
A limit on the deductibility of interest, payments for services, and other cross-border
payments made to related parties would be introduced. The bill would allow a
deduction only on a cash basis and to the extent the applicable cross-border payment
and WHT was paid. This rule would become effective on the first day of the month
following enactment of the law.
A new green tax would be introduced on certain goods that are deemed harmful to
the environment. The green tax would apply to emissions from fixed sources as well
as to the importation of diesel-powered light vehicles.
The maximum stamp tax rate would increase from 0.4% to 0.8%, effective 1 January
2016.
Decree Law N. 600 (Foreign Investment Statute) would be repealed. However,
foreign investors who have an agreement in force with the Foreign Investment
Committee would continue to be subject to the laws applicable to such agreements
according to the current provisions.
General anti-avoidance rules (GAARs) aimed at tax-motivated transactions would
be introduced. The GAARs would allow the Chilean IRS to disallow tax benefits
obtained from abusive, contrived, or aggressive tax planning. In addition, the rules
would penalise taxpayers and tax advisers engaged or collaborating in the design and
planning of these structures. The bill also would give the Chilean IRS authority to
obtain any information necessary to enforce these rules.
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PwC contact
Peter Ng
PricewaterhouseCoopers Consultants (Shenzhen) Limited Shanghai Branch
10th Floor
Shui On Plaza
333 Huai Hai Zhong Road
Shanghai 200021
Peoples Republic of China
Tel: +86 21 2323 1828
Pilot Program of indirect tax reform
In order to mitigate the multiple taxation issue associated with goods and services and
to support the development of modern service industries in China, the State Council
resolved to introduce a Pilot Program in the city of Shanghai from 1 January 2012 to
expand the scope of value-added tax (VAT) to cover transportation and certain specified
modern service industries that were originally subject to business tax (BT).
The Pilot Program has been rolled out to the whole country from 1 August 2013.
It is generally contemplated that the Pilot Program will be expanded to the other service
industries that are still subject to BT before the end of 2015.
See VAT in the Other taxes section for more information.

Tax resident enterprises (TREs) are subject to corporate income tax (CIT)on their
worldwide income.A non-TRE that has no establishment or place in China is taxed only
on its China-source income. A non-TRE with an establishment or place in China shall pay
CIT on income derived by such establishment or place from sources in China as well as
income derived from outside China that effectively is connected with such establishment
or place.
Under the CIT law, the standard tax rate is 25%.
A lower CIT rate is available for the following sectors/industries:
Qualified new/high tech enterprises are eligible for a reduced CIT rate of 15%. An
enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in
order to qualify as a new/high tech enterprise.
Integrated circuit (IC) production enterprises with a total investment exceeding 8
billion renminbi (CNY), or that produce integrated circuits with a line-width of less
than 0.25 micrometre, are eligible for a reduced CIT rate of 15%.
Key software production enterprises and IC design enterprises are eligible for a
reduced CIT rate of 10%. An enterprise has to fulfil a set of prescribed criteria and be
subject to an assessment in order to qualify as a key software production enterprise or
key IC design enterprise.
From 1 January 2009 to 31 December 2018, qualified technology-advanced service
enterprises in 21 cities (e.g. Beijing, Shanghai, Tianjin, Guangzhou, and Shenzhen)
are eligible for a reduced CIT rate of 15%. This incentive is only available to certain
technology-advanced service sector members, and an enterprise has to fulfil a set of
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prescribed criteria and be subject to an assessment in order to qualify as a technologyadvanced service enterprise.
Enterprises established in the Qianhai Shenzhen-Hong Kong Modern Services
Industry Cooperation Zone are eligible for a reduced CIT rate of 15%, provided
that the enterprise is engaged in projects that fall within the Catalogue for CIT
Preferential Treatments of the zone.
Enterprises established in Zhuhais Hengqin New Area are eligible for a reduced CIT
rate of 15%, provided that the enterprise is engaged in projects that fall within the
Catalogue for CIT Preferential Treatments of the area.
Enterprises established in the Pingtan Comprehensive Experimental Zone are eligible
for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that
fall within the Catalogue for CIT Preferential Treatments of the zone.
Qualified small and thin-profit enterprises are eligible for a reduced CIT rate of 20%.
If the annual taxable income is less than CNY 100,000, the CIT rate is further reduced
to 10% for the period from 1 January 2014 to 31 December 2016. An enterprise has to
fulfil certain conditions in order to qualify as a small and thin-profit enterprise.
From 1 January 2011 to 31 December 2020, encouraged enterprises in the Western
Regions are eligible for a reduced preferential CIT rate of 15%.
Local income taxes
There is no local or provincial income tax in China.
Corporate residence
Enterprises established in China are always TREs. A foreign enterprise with a place of
effective management in China is also regarded as a TRE.
An establishment or place is defined in the CIT regulations as an establishment or place

in China engaging in production and business operations, including the following:

Management organisations, business organisations, and representative offices.

Factories, farms, and places where natural resources are exploited.
Places where labour services are provided.
Places where contractor projects, such as construction, installation, assembly, repair,
and exploration are undertaken.
Other establishments or places where production and business activities are
undertaken.
Business agents who regularly sign contracts, store and deliver goods, etc. on behalf
of the non-TRE.
Other taxes
China has a turnover tax system consisting of the following three taxes: value-added tax
(VAT), business tax (BT), and consumption tax.
The sales or importation of goods and the provision of repairs, replacement, and
processing services are subject to VAT. VAT is charged at a standard rate of 17%, and the
rate for small-scale taxpayer is 3%. The sales of certain necessity goods may be subject to
VAT at a reduced rate of 13%, as specified in the VAT regulations.
The VAT system is a consumption-based VAT system, which means that input VAT on
fixed assets is fully recoverable, except for situations specified in the VAT regulations.
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Export of goods from China may be entitled to a refund of VAT incurred on materials
purchased domestically. The refund rates range from 0% to 17%. There is a prescribed
formula for determining the amount of refund, under which many products do not
obtain the full refund of input VAT credit and suffer different degrees of export VAT
costs.
In order to mitigate the multiple taxation issue associated with goods and services and
to support the development of modern service industries in China, the State Council
resolved to introduce a Pilot Program in the city of Shanghai from 1 January 2012 to
expand the scope of VAT to cover transportation and certain specified modern service
industries that were originally subject to BT.
The Pilot Program has been rolled out to the whole country since 1 August 2013.
The industries that have been selected for the Pilot Program and the applicable VAT
rates (for general VAT payers) are set out in the following table.
Pilot industries
Tangible movable property leasing service
Transportation service
Postal service
Basic telecommunications service
Value-added telecommunications service
Certain modern service industries, including:
Research, development, and technical service.
Information technology service.
Cultural creative service.
Logistic auxiliary service.
Certification and consulting service.
Broadcasting, cinematic, and television service.
Applicable VAT rate (%)

17
11
11
11
6
Small-scale VAT payers in the above Pilot Industries are subject to the VAT rate of 3%.
Enterprises (including foreign enterprises) providing Pilot Services are now subject to
VAT instead of BT.
It is generally contemplated that the Pilot Program will be expanded to the other service
industries that are still subject to BT before the end of 2015.
Business tax (BT)
A BT is imposed on services, transfer of intangible assets, and immovable property

taking place within China. Services taking place within China refers to situations where
the service provider, the service recipient, or both are in China. This may make services
even being rendered outside China subject to BT in China. BT rates are 3% or 5%, except
for the leisure and entertainment industry, which may be subject to a rate of up to 20%.
BT is not recoverable but is deductible for CIT purposes.
As indicated above, under the Pilot Program of indirect tax reform, enterprises providing
Pilot Services (including the transfer of certain intangible assets) are now subject to VAT
instead of BT.
Customs duties
In general, a customs duty is charged in either specific or ad valorem terms. For specific
duty, a lump sum amount is charged based on a quantitative amount of the goods
(e.g. CNY 100 per unit or per kg). For ad valorem duty, the customs value of the goods
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is multiplied by an ad valorem duty rate to arrive at the amount of duty payable. The
applicable duty rate generally is determined based on the origin of the goods.
An exemption from customs duty applies to machinery and equipment imported by a
foreign investment enterprise within the amount of its total investment, for its own use,
if the project falls within the encouraged category of the Catalogue for the Guidance of
Foreign Investment Industries and the imported machinery or equipment is not within
the list of commodities that are not exempted from customs duty.
A customs duty and VAT exemption may be allowed on importation of raw materials
for contract processing or import manufacturing. Goods may be imported into, and
exported out of, designated Free Trade Zones and Bonded Logistics Zones without
liability to customs duty or VAT.
Consumption tax
A consumption tax is imposed on 14 categories of goods, including cigarettes, alcoholic

beverages, and certain luxury and environmental unfriendly items. The tax liability is
computed based on the sales amount and/or the sales volume, depending on the goods
concerned. Consumption tax is not recoverable but is deductible as an expense for CIT
purposes.
Real estate tax
A real estate tax, which is based on the value of the property or rental received, is
assessed annually on land and buildings used for business purpose or leased. The
tax rate is 1.2% of the original value of buildings. A tax reduction of 10% to 30% is
commonly offered by local governments. Alternatively, tax may be assessed at 12% of
the rental value. Real estate tax is deductible for CIT purposes.
Urban and township land-use tax
An urban and township land-use tax is levied on taxpayers who utilise land within the
area of city, country, township, and mining districts. It is computed annually based
on the space of area actually occupied by a taxpayer multiplied by a fixed amount per
square metre that is determined by the local governments.
Arable land occupation tax
Arable land occupation tax is levied on companies and individuals who build houses
or carry out non-agricultural construction on arable lands. It is computed based on the
space of area actually occupied by a taxpayer multiplied by a fixed amount per square
metre that is determined by the local governments and is settled in a lump sum.
Land appreciation tax
A land appreciation tax is levied on the gain from the disposal of properties at
progressive rates from 30% to 60%. Land appreciation tax is deductible for CIT
purposes.
Stamp tax
All enterprises and individuals who execute or receive specified documentation,

including 11 types of contracts and a few specified documents, are subject to stamp
tax. The stamp duty rates vary between 0.005% on loan contracts to 0.1% for property
leasing and property insurance contracts. A flat amount of CNY 5 applies to certification
evidencing business licences and patents, trademarks, or similar rights.
Deed tax
A deed tax, generally at rates from 3% to 5%, may be levied on the purchase, sale, gift,
or exchange of ownership of land use rights or real properties. The transferee/assignee
is the taxpayer.
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Urban construction and maintenance tax
Urban construction and maintenance tax is imposed at a certain rate on the amount
of Chinas indirect taxes (i.e. VAT, BT, and consumption tax) payable by the taxpayer.
Effectively, the taxpayers of indirect taxes are also the taxpayers of urban construction
and maintenance tax. It is charged at three different rates depending on the taxpayers
location: 7% for urban areas, 5% for county areas, and 1% for other areas.
Educational surtax
Educational surtax is imposed at 3% on the amount of Chinas indirect taxes (i.e. VAT,
BT, and consumption tax) payable by the taxpayer. Effectively, the taxpayers of indirect
taxes are also the taxpayers of educational surtax.
Local educational surtax
Local educational surtax is levied at 2% on the amount of Chinas indirect taxes (i.e. VAT,
BT, and consumption tax) payable by the taxpayer. Effectively, the taxpayers of indirect
taxes are also the taxpayers of local educational surtax.
Motor vehicle acquisition tax
A motor vehicle acquisition tax at a rate of 10% of the taxable consideration will be
levied on any purchase and importation of cars, motorcycles, trams, trailers, carts, and
certain types of trucks.
Vehicle and vessel tax
A vehicle and vessel tax is a tax that is levied on all vehicles and vessels within China. A
fixed amount is levied on a yearly basis. Transport vehicles generally are taxed on a fixed
amount according to their own weight, with passenger cars, buses, and motorcycles
being taxed on a fixed unit amount. Vessels are taxed on a fixed amount, according to
the deadweight tonnage.
Vessel tonnage tax
Vessel tonnage tax is levied on any vessel entering into a port inside the territory
of China from overseas and is collected by the General Customs. The tax payable
is computed based on the net tonnage multiplied by the applicable tax rate that is
determined based on the net tonnage and the term of the tonnage tax licence.
Resource tax
The exploitation of crude oil and natural gas is subject to resource tax on a sales turnover
basis. The exploitation of other natural resources, including coal, other raw non-metallic
metals, raw ferrous metals, non-ferrous metallic minerals, and salt (including solid and
liquid salt), is subject to resource tax on a tonnage or volume basis. The range of tax
rates are specified by the State Council.
For Sino-foreign joint ventures exploiting crude oil or natural gas established before 1
November 2011, mine area usage fees are levied in lieu of resource tax.
Tobacco tax
Tobacco tax is levied on taxpayers who purchase tobacco leaves within the territory of
China. The tax is assessed at the rate of 20% on the purchasing value and shall be settled
with the local tax bureau at the place of the purchase.
Cultural business development levy
Companies and individuals engaged in entertainment and advertising businesses shall

pay cultural business development levy at 3% on the relevant income.
399

Employers are responsible for making social security contributions to pension funds,
medical funds, unemployment funds, maternity and work-related injury, etc. for their
employees. The percentage of social security to be borne by the employers and the
contribution base vary from city to city.
Branch income
Under the CIT law, a branch of a non-TRE in China is taxed at the branch level. If there
is more than one branch, they may elect to file their tax at the main office in China on a
consolidated basis. There is no further tax upon remittance of branch profits.
Taxable income is defined as gross income in a tax year after deduction of non-taxable
income, tax exempt income, various deductions, and allowable losses brought forward
from previous years. The accrual method of accounting should be used.
Gross income refers to monetary and non-monetary income derived by an enterprise
from various sources, including, but not limited to, the sales of goods, provision of
services, transfer of property, dividends, interest, rentals, royalties, and donations.
Non-taxable income refers to fiscal appropriation, governmental administration charges,
governmental funds, and other income specified by the central government.
Inventory valuation
Inventory must be valued according to costs. In computing the cost of inventories, the
enterprise may choose one of the following methods: first in first out (FIFO), weighted
average, or specific identification.
Unrealised gain or loss due to changes in fair value
An unrealised gain or loss due to changes in the fair value of financial assets, financial
liabilities, and investment properties held by an enterprise is not taxable/deductible for
CIT purpose. The gain/loss is taxable/deductible only when the asset/liability actually is
disposed of or realised.
Capital gains
Capital gains are treated in the same way as ordinary income of a revenue-nature for a
TRE.
Dividend income
An exemption exists for CIT on dividend derived by a TRE from the direct investment
into another TRE except for where the dividend is from stocks publicly traded on the
stock exchanges and the holding period is less than 12 months.
Interest income
Interest income is treated as ordinary income.
Rental income
Rental income is treated as ordinary income.
Royalty income
Royalty income is treated as ordinary income.
400

Partnership income
Partnerships registered in China are not subject to CIT. The income of a partnership is
taxable at the partners level.
Unrealised exchange gains
Unrealised exchange gain (loss) from the year-end translation of assets (liabilities)
denominated in foreign currency generally is taxable (deductible).
Foreign income
The worldwide income of a TRE and its branches both within and outside China is
taxable. There are no provisions in the CIT law that allow foreign income directly
earned by the TRE to be deferred for tax purposes. The CIT law contains a controlled
foreign company (CFC) rule under which the unremitted earnings of a foreign company
controlled by Chinese enterprises may be taxable in China (see the Group taxation section
for more information). A foreign tax credit is allowed for foreign income taxes paid on
foreign-source income.
Deductions
Generally, an enterprise is allowed to deduct reasonable expenditures that actually have
been incurred and are related to the generation of income.
Depreciation of fixed assets
Fixed assets with useful lives of more than 12 months must be capitalised and
depreciated in accordance with the CIT regulations. Generally, depreciation is calculated
by the straight-line method. Shorter tax depreciation life or accelerated depreciation
may be allowed due to advancement of technology or suffering from constant vibration
or severe corrosion. Production-nature biological assets, such as livestock held for
breeding and commercial timber, also have to be capitalised and depreciated using the
straight-line method.
Under the straight-line method, the cost of an item, less its residual value, is depreciated
over the useful life of the asset. Residual value should be reasonably determined based
on the nature and usage of the asset. The CIT law provides minimum useful lives for the
following assets:
Assets
Buildings and structures
Aircraft, trains, vessels, machinery, mechanisms, and other production equipment
Appliances, tools, and furniture etc. related to production and business operations
Means of transport other than aircraft, trains, and vessels
Electronic equipment
Production-nature biological assets in the nature of forestry
Production-nature biological assets in the nature of livestock
Years
20
10
5
4
3
10
3
Amortisation of intangibles and goodwill
A deduction is allowed for amortisation of intangible assets, such as, but not limited to,
patents, trademarks, copyrights, andland use rights. Generally, intangible assets have
to be amortised over a period of not less than ten years. For an intangible asset obtained
through capital contribution or assignment, it can be amortised according to the useful
life prescribed in the laws or agreed in the contracts, if any. However, acquired goodwill
is not deductible until the invested enterprise is entirely transferred or liquidated.
401

Organisational and start-up expenses are tax deductible fully in the first year of
operation.
Research and development (R&D) expense
For R&D expenses incurred for new technology, new products, or new craftsmanship, an
extra 50% of the actual expenses incurred are also tax-deductible as an incentive.
Asset loss
Asset loss (including bad debt loss) may be deductible in the tax year during which such
loss is incurred, provided that supporting documents are submitted to and accepted by
the in-charge tax bureau before annual income tax reconciliation filing.
Interest expenses
Interest on loans generally is tax-deductible. For interest expenses on borrowings from

non-financial institutions by a non-financial institution, the portion that does not exceed
the commercial rate is deductible. The tax deduction of interest paid to related parties
is subject to the thin capitalisation rule under the CIT law (see the Group taxation section
for more information).
Reserves and provisions
Provisions for asset impairment reserves (e.g. bad debt provisions) and risk reserves
generally are not tax-deductible unless otherwise prescribed in the tax rules. Financial
institutions and insurance companies may deduct certain provisions and reserves subject
to the caps specified in the relevant tax circulars.
Contingent liabilities
The CIT law does not specifically address the deductibility of contingent liabilities.
According to the general principle of the CIT law, contingent liabilities are liabilities that
an enterprise has not actually incurred and thus shall not be tax-deductible.
Charitable donations
Charitable donations are tax-deductible at up to 12% of the annual accounting profit.

Non-charitable donations, as well as sponsorship expenditures that are non-advertising
and non-charitable in nature, are not deductible.
Wages and staff welfare expenses
Reasonable wages and salaries of employees incurred by an enterprise are taxdeductible. Directors fees are also tax-deductible.
Basic social security contributions, including basic pension insurance, basic medical
insurance, unemployment insurance, injury insurance, maternity insurance, and
housing funds, that are made by an enterprise in accordance with the scope and criteria
as prescribed by the state or provincial governments are deductible.
Commercial insurance premiums paid for investors or employees shall not be taxdeductible unless it is paid for safety insurance for workers conducting special types of
work.
Staff welfare expenses, labour union fees, and staff education expenses are taxdeductible at up to 14%, 2%, and 2.5% of the total salary expenses, respectively. For
qualified enterprises, the cap for tax-deductible staff education expenses is increased to
8% of the total salary expenses.
402

Entertainment expenses
Entertainment expenses are tax-deductible to the lesser of 60% of the costs actually
incurred and 0.5% of the sales or business income of that year. The excess amount must
not be carried forward to and deducted in the following tax years.
Advertising expenses and business promotion expenses
Advertising expenses and business promotion expenses are deductible at up to 15%

(30% for certain enterprises in the cosmetics, medicine, and beverage industries) of the
sales (business) income of that year unless otherwise prescribed in the tax regulations.
Any excess amount is allowed to be carried forward and deductible in the following tax
years. Advertising expenses and business promotion expenses incurred by the tobacco
industry are entirely not tax-deductible.
Fines and penalties
Fines, penalties, and losses arising from confiscation of property are not deductible for
CIT purposes.
Taxes
CIT payments and surcharges that are imposed on overdue taxes are not deductible for
CIT purposes.
Tax losses can be carried forward for no longer than five years starting from the year
subsequent to the year in which the loss was incurred. Carryback of losses is not
permitted.
Payments to affiliates
Management fees for stewardship are not deductible, but services fees paid for genuine
services provided by affiliates in China or overseas and charged at arms length should
be deductible. Other payments to affiliates, such as royalties, are also tax-deductible,
provided that the charges are at arms length.
Group taxation
Group taxation is not permitted under the CIT law unless otherwise prescribed by the
State Council.
Transfer pricing
All enterprises are required to conduct transactions with related parties on an armslength basis. The Chinese tax authorities are empowered to make adjustments to
transactions between related parties that are not conducted at arms length and result
in the reduction of taxable income of the enterprise or its related parties using the
following appropriate methods: comparable uncontrolled price method, resale price
method, cost plus method, transactional net margin method, profit split method, and
other methods that are consistent with the arms-length principle. China also adopts
stringent requirements on the disclosure of related party transactions in the filing of the
annual tax return. In addition, there is also a requirement to prepare contemporaneous
transfer pricing documentation if the amount of related parties transactions with an
enterprise exceeds a certain prescribed threshold.
The CIT law also contains transfer pricing provisions relating to cost sharing
arrangements and advance pricing arrangements (APAs). In addition, it also contains a
few tax avoidance rules, such as a CFC rule, a thin capitalisation rule, and general antiavoidance rules.
403

Thin capitalisation
The CIT law has a thin capitalisation rule disallowing interest expense arising from
excessive related party loans. The safe harbour debt/equity ratio for enterprises in the
financial industry is 5:1 and for enterprises in other industries is 2:1. However, if there
is sufficient evidence to show that the financing arrangement is at arms length, these
interests may still be fully deductible even if the ratios are exceeded.
Under the CFC rule, the undistributed profits of CFCs located in low-tax jurisdictions
with an effective income tax rate of less than 12.5% may be taxed as a deemed
distribution to the TRE shareholders. The Chinese tax authorities have published a list of
countries (i.e. a white list) that they do not regard to be low-tax jurisdictions.

The CIT law adopts the Predominantly Industry-oriented, Limited Geography-based
tax incentive policy. Key emphasis is placed on industry-oriented incentives aiming at
directing investments into those industry sectors and projects encouraged and supported
by the state. The tax incentive policies mainly include the following and are applicable to
both domestic and foreign investments.
Tax reduction and exemption
CIT may be reduced or exempted on income derived from the following projects:
Projects/industries
Agriculture, forestry, animal-husbandry, and fishery
projects
Specified basic infrastructure projects
Environment protection projects and energy/water
conservative projects
Qualified new/high tech enterprises established in
Shenzhen, Zhuhai, Shantou, Xiamen, Hainan, and
Pudong New Area of Shanghai after 1 January 2008
Software enterprises
Integrated circuits design enterprises
Integrated circuits production enterprises with a
total investment exceeding CNY 8 billion or that
produce integrated circuits with a line-width of less
than 0.25um, provided that its operation period
exceeds 15 years
Integrated circuits production enterprises that
produce integrated circuits with a line-width of less
than 0.8um
Qualified energy-saving service enterprises
Encouraged enterprises in underprivileged areas of
Xinjiang
CIT incentive
Exemption or
50% reduction
3 + 3 years tax
holiday (2)
3 + 3 years tax
holiday (2)
2 + 3 years tax
holiday (1)
Valid period
All years, as long as it is
engaged in these projects
Starting from the first
income-generating year
2 + 3 years tax
holiday (1)
2 + 3 years tax
holiday (1)
5 + 5 years tax
holiday (3)

profit-making year
profit-making year
profit-making year
2 + 3 years tax
holiday (1)

profit-making year
3 + 3years tax
holiday (2)
2 + 3 years tax
holiday (1)

Notes
1.
2.
3.
404
2 + 3 years tax holiday refers to two years of exemption from CIT followed by three years of 50%
reduction of CIT.
3 + 3 years tax holiday refers to three years of exemption plus three years of 50% reduction of CIT.
5 + 5 years tax holiday refers to five years of exemption plus five years of 50% reduction of CIT.

For income derived from the transfer of technology in a tax year, the portion that does
not exceed CNY 5 million shall be exempted from CIT; and the portion that exceeds CNY
5 million shall be allowed a 50% reduction of CIT.
A CIT exemption applies to the dividend derived by a TRE from the direct investment
into another TRE, except where the dividend is from stocks publicly traded on the stock
exchanges and the holding period is less than 12 months.
A CIT exemption also applies to the income derived by recognised non-profit-making
organisations engaging in non-profit-making activities.
Reduced tax rate
The CIT rate may be reduced under certain conditions for different industries (see the
Taxes on corporate income section for more information).
Reduction of revenue
Where an enterprise uses resources specified by the state as its major raw materials to
produce non-restricted and non-prohibited products, only 90% of the income derived is
taxable.
Offset of certain venture capital investment
For a venture capital enterprise that makes an equity investment in a non-listed small to
medium-sized new/high tech enterprise for more than two years, 70% of its investment
amount may be used to offset against the taxable income of the venture capital
enterprise in the year after the holding period has reached two years. Any portion that is
not utilised in that year can be carried forward and deducted in the following years.
Investment tax credit
Enterprises purchasing and using equipment specified by the state for environmental
protection, energy and water conservation, or production safety purposes are eligible for
a tax credit of 10% of the investment in such equipment. Any unutilised amount can be
carried forward and creditable in the following five years.
Other incentives
There are also tax incentives in relation to the deduction of expenses and cost (e.g.
50% additional R&D deduction, shorter tax depreciation period, and accelerated
depreciation). See the Deductions section for more information.
Foreign tax credit
A TRE is allowed to claim foreign tax credit in relation to foreign income tax already paid
overseas in respect of income derived from sources outside China based on a countrybasket principle. The creditable foreign tax also includes foreign income tax paid by
qualified CFCs. However, the creditable amount may not exceed the amount of income
tax otherwise payable in China in respect of the foreign-sourced income. In addition,
there is a five-year carryforward period for any unutilised foreign tax.
Withholding taxes
Foreign enterprises without establishments or places of business in China shall be
subject to a unilaterally concessionary rate of withholding tax (WHT) at 10% on gross
income from dividends, interest, lease of property, royalties, and other China-source
passive income unless reduced under a tax treaty. Nevertheless, dividends distributed by
a foreign investment enterprise out of its pre-2008 profit are still exempted from WHT.
WHT rates under Chinas tax treaties with other countries/nations are as follows (as of
31 May 2014):
405

Recipient
Albania
Algeria
Armenia
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Botswana (9)
Brazil
Brunei
Bulgaria
Canada
Croatia
Cuba
Cyprus
Czech Republic
Denmark
Ecuador (6, 9)
Egypt
Estonia
Ethiopia
Finland
France
Georgia
Germany
Greece
Hong Kong Special
Administrative Region
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Jamaica
Japan
Kazakhstan
Korea, Republic of
Kuwait
Kyrgyzstan
Laos
Latvia
406
Dividends (%)
10
5/10 (3a)
5/10 (3a)
15
7/10 (3b)
10
5
10
5/10 (3a)
10
5/10 (3j)
10
5
15
5
10
10/15 (3f)
5
5/10 (3a)
10
5/10 (3a)
5/10 (3a)
3/5 (6)
8
5/10 (3a)
5
5/10 (3a)
10
0/5/10 (3c)
10
5/10 (3a)
5/10 (3d)
Interest (%) (1)

10
7
10
10
7/10 (4a)
10
10
10
10
10
10
10
7.5
15
10
10
10
10
7.5
10
7.5
10
8/10 (6)
10
10
7
10
10
10
10
10
7
Royalties (%) (2)

10
10
10
10
6/10
10
10
10
10
10
7
10
5
15/25 (5a)
10
7/10
10
10
5
10
10
7/10
8/10 (6)
8
10
5
7/10
6/10
5
7/10
10
7
10
5/10 (3a)
10
10
10
5/10 (3b)
10
10
5
10
10
5/10 (3a)
0/5 (3k)
10
5
10
10
10
7/10
10
10
10
10
10
10
10
6/10
7/10 (4a)
7/10
10
7/10
7.5
10
10
10
10
10
10
10
5
10
10
10
5 (in Laos)
5 (in Laos)
10 (in Mainland China) 10 (in Mainland China)
5/10 (3a)
10
7

Recipient
Lithuania
Luxembourg
Macao Special
Administrative Region
Macedonia
Malaysia
Malta
Mauritius
Mexico
Moldova
Mongolia
Morocco
Nepal
Netherlands
New Zealand
Nigeria
Norway
Oman
Pakistan
Papua New Guinea
Philippines
Poland
Portugal
Qatar
Romania
Russia
Saudi Arabia
Seychelles
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sudan
Sweden
Switzerland
Syria
Tajikistan
Thailand
Trinidad and Tobago
Tunisia
Turkey
Turkmenistan
Uganda (9)
Ukraine
United Kingdom
United States
Uzbekistan
Dividends (%)
5/10 (3a)
5/10 (3a)
5/10 (3a)
Interest (%) (1)

10
10
7
Royalties (%) (2)

10
6/10
7
5
10
5/10 (3a)
5
5
5/10 (3a)
5
10
10
10
15
7.5
15
5
10
15 (3m)
10/15 (3g)
10
10
10
10
10
0/5 (3l)
5
5/10 (3a)
10
5
5
10
10
5
5/10 (3a)
10
5/10 (3a)
5/10 (3a)
15/20 (3a)
5/10 (3e)
8
10
5/10 (3a)
7.5
5/10 (3a)
0/7 (3k)
5/10/15 (3i)
10
10
10
10
10
10
10
10
10
10
10
10
10
7.5
10
10
10
10
10
10
10
10
10
10
10
10
7/10 (4a)
10
10
10
10
10
10
10
10
10
8
10
10
10
10
10
10
10
7
10
10
10
10
10/15 (5b)
7/10
10
10
10
10
10
15
6/10
10
7.5
10
10
12.5
10
10/15 (5b)
7/10
10
10
7
10
10
10
6/10
10
10
7/10
6/10
10
10
6/10
6/10
10
8
15
10
5/10 (5c)
10
10
7/10
10
10
6/10
7/10
10
407

Recipient
Venezuela
Vietnam
Yugoslavia (8)
Zambia
Dividends (%)
5/10 (3h)
10
5
5
Interest (%) (1)

5/10 (4a)
10
10
10
Royalties (%) (2)

10
10
10
5
Source: State Administration of Taxation, China

Notes
This table is a summary only and does not reproduce all the provisions relevant in determining the
application of WHT in each tax treaty/arrangement.
1.
2.
3.
4.
5.
6.
7.
8.
9.
408
0% is due on interest paid to government bodies, except for Australia, Bosnia and Herzegovina,
Brunei, Cyprus, Israel, Slovenia, and Spain. Reference should be made to the individual tax treaties.
The lower rate on royalties applies for the use of or right to use any industrial, commercial, or
The following notes apply to dividend WHT:
a. The lower rate applies where the beneficial owner of the dividend is a company (not a partnership)
that directly owns at least 25% of the capital of the paying company.
b. The lower rate applies where the beneficial owner of the dividend is a company that directly owns
at least 25% of the voting shares of the paying company.
c. The lowest rate (i.e. 0%) applies where the beneficial owner is a company that directly or
indirectly owns at least 50% of the capital of the paying company and the investment exceeding 2
million euros (EUR). The lower rate (i.e. 5%) applies where the beneficial owner is a company that
directly or indirectly owns at least 10% of the capital of the paying company and the investment
exceeding EUR 100,000.
d. The lower rate applies where the beneficial owner of the dividend is a company that directly owns
at least 25% of the capital of the paying company.
e. The lower rate applies where the beneficial owner of the dividend is a company that directly or
indirectly owns at least 25% of the capital of the paying company.
f. The lower rate applies where the beneficial owner of the dividend is a company that owns at least
10% of the voting stock of the paying company.
g. The lower rate applies where the beneficial owner of the dividend is a company that directly owns
h. The lower rate applies where the beneficial owner is a company (other than a partnership) that
directly owns at least 10% of the capital of the paying company.
i. The lowest rate (i.e. 5%) applies where the beneficial owner of the dividend is a company that
directly holds at least 25% of the capital of the paying company. The highest rate (i.e. 15%)
applies where those dividends are paid out of income or gains derived directly or indirectly from
immovable property within the meaning of Article 6 by an investment vehicle that distributes most
of this income or gains annually and whose income or gains from such immovable property is
exempted from tax. The 10% rate applies in all other cases.
j. The lower rate applies where the beneficial owner of the dividend is a company (not a partnership)
that directly owns at least 25% of the capital of the paying company within at least 12
consecutive months before the payment takes place.
k. The lowest rate (i.e. 0%) applies where the beneficial owner of the dividend is (i) the government
of the other contracting state or any of its institutions or other entity wholly owned, directly or
indirectly, by the government of the other contracting state or (ii) a company that is a resident of
the other contracting state whose shares are at least 20% owned, directly or indirectly, by the
government of the other contracting state.
l. The lowest rate (i.e. 0%) applies where the beneficial owner of the dividend is the government
of the other contracting state or any of its institutions or other entity wholly owned, directly or
indirectly, by the government of the other contracting state.
m. In the case of Papua New Guinea, the WHT shall be limited to 10% of the dividend while the
Chinese tax law existing on the date of the signing of the tax treaty regarding dividends still
applies; otherwise, the tax rate shall be 15%.
The following notes apply to interest WHT:
a. The lower rate applies to interest payable to banks or financial institutions.
The following notes apply to royalties WHT:
a. The higher rate applies to trademarks.
b. The higher rate applies to copyright of literary, artistic, or scientific work, including cinematograph
films or tapes for television or broadcasting.
c. The lower rate applies to royalties paid for technical or economic studies or for technical
assistance.
The lower rates apply in cases where the dividend, interest, or royalty paid from Ecuador to China is
applicable to the Foreign Exchange Control Tax in Ecuador.
The tax treaty with the former Socialist Federal Republic of Yugoslavia is now applicable to Bosnia
and Herzegovina.
The tax treaty with the former Federal Republic of Yugoslavia is now applicable to the nations of
Serbia and Montenegro.
These tax treaties have not yet entered into force as of 1 January 2014.

In addition to the above tax treaties, China has also entered into tax information
exchange agreements (TIEAs) with a few countries. For example:

Argentina.
Bahamas.
Bermuda.
British Virgin Islands (BVI).
Cayman Islands.
Guernsey.
Jersey.
Isle of Man.
Tax administration
Taxable period
The tax year commences on 1 January and ends on 31 December.
Tax returns
Enterprises are required to file their annual income tax return within five months
after the end of the tax year, together with an audit certificate of a registered public
accountant in China. Information on related party transactions must be filed with the
annual income tax return.
Payment of tax
Enterprises are required to file and pay provisional income taxes on a monthly or
quarterly basis within 15 days following the end of each month/quarter. Three options
are available to the taxpayer in computing the provisional tax: (i) actual profits of the
month/quarter, (ii) average monthly or quarterly taxable income of the preceding year,
or (iii) other formulas approved by the local tax authorities.
Settlement of tax payment is due, in conjunction with the annual income tax return,
within five months after the end of the tax year.
Tax audit process
There is no fixed audit cycle in China. Tax audit targets are selected pursuant to certain
criteria.
For unintentional errors (e.g. calculation errors) committed by the taxpayer in its tax
filing, the statute of limitation is three years and extended to five years if the amount of
tax underpaid is CNY 100,000 or more. For transfer pricing adjustments, the statute of
limitation is ten years. There is no statute of limitation for tax evasion, refusal to pay tax,
or defrauding of tax payment.
Recent focus of Chinese tax authorities
Since 2009, the Chinese tax authorities have strengthened their tax administration on
transfer pricing and income derived by non-TREs. The State Administration of Taxation
(SAT) has released a number of tax circulars addressing the tax administration of
transfer pricing, foreign contractors and service providers, WHT on passive income, etc.
Under the CIT Law, non-TREs are subject to CIT on the capital gain derived from the
disposal of equity investment in Chinese companies. In addition, the transfer has to be
effected at fair value so that any gain shall be recognised for tax purpose at the time
when the transaction takes places (unless the transaction qualifies for deferral tax
treatment provided under the tax regulations). The Chinese tax authorities have, in
recent years, challenged and clawed back CIT on several equity transfer cases whereby
409

non-TREs disposed of their equity investment in China to related parties at cost or below
fair value. In addition, they have become more knowledgeable on valuation theories
and methodologies and are applying them in reviewing valuation reports in order to
ascertain the fair value of equity transfer transactions for tax purposes.
In addition, the Chinese tax authorities have geared up their efforts in recent years to
scrutinise investment structures involving intermediate holding companies incorporated
in low-tax jurisdictions. One of their focuses is on the indirect equity transfer of Chinese
companies by non-TREs. The income derived by a non-TRE from the disposal of a nonChinese company is not taxable under Chinas domestic income tax law. However, if the
Chinese tax authorities are of the view that the non-TRE transferor has used an abusive
arrangement to indirectly transfer the equity of the Chinese company (i.e. interposing
and disposing of the special purpose vehicle for no reasonable commercial purpose, but
just for avoidance of China withholding income tax), it may re-characterise the equity
transfer based on the substance over form principle and disregard the existence of the
special purpose vehicle. Once the special purpose vehicle is disregarded, the transfer
would be effectively a transfer of the underlying Chinese companys equity, and the
transfer gain would be China source and subject to China withholding income tax.
The SAT has also released circulars relating to the claiming of treaty benefits by
non-TREs and interpretation of certain articles and terms in the tax treaties, such as
dividends, royalties, beneficial ownership, etc. Aggressive tax planning (including,
but not limited to, tax-avoidance and treaty-abusive arrangements) not supported by
reasonable commercial purposes and substance will be subject to scrutiny by the Chinese
tax authorities.
On 26 July 2010, the SAT issued a Departmental Interpretation Note (DIN) for the
tax treaty concluded between China and Singapore. It is the first time the SAT has
introduced a set of technical views, interpretation, and practice guidelines for the
implementation of a tax treaty in such a comprehensive manner. More importantly,
this set of interpretation is also applicable to other tax treaties concluded by China if
the provisions of the relevant articles in those tax treaties are the same as those in the
China/Singapore tax treaty. Thus, it is likely to have a wide impact to tax residents of
other countries/regions that have entered into tax treaties with China.
General anti-avoidance rules (GAAR)
There is a GAAR provision in the CIT law allowing the Chinese tax authorities to make
adjustments to taxable revenue or taxable income where business arrangements,
structures, or transactions are entered into without reasonable commercial purpose and
result in a reduction, exemption, or deferral of tax payment. The Chinese tax authorities
may initiate a GAAR investigation if they suspect that an enterprise undertakes any of
the following arrangements: abuse of preferential tax treatments, abuse of tax treaties,
abuse of corporate structure, use of tax havens for tax avoidance purposes, or other
arrangements that do not have a reasonable commercial purpose.
Other issues
Foreign companies, enterprises, or individuals may establish equity joint ventures,

contractual joint ventures, wholly foreign-owned enterprises, or representative offices in
China. Certain foreign financial institutions, including banks and insurance companies,
may, subject to approval, set up branches in China. Foreign investors are allowed to
establish foreign invested partnerships in China. For certain foreign invested industries
and projects, approval is needed from the relevant Chinese government authorities.
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Exchange controls
Foreign exchange transactions are administered by the State Administration of Foreign

Exchange (SAFE) and its branches. The regulatory administration on foreign exchange
transactions of an enterprise depends on whether the transaction is a current account
item or a capital account item. Current account items refer to ordinary transactions
within the context of international receipts and payments, including, but not limited
to, balance of payments from trade, labour services, and unilateral transfers. Capital
account items refer to items of increase or decrease in debt and equity due to inflow or
outflow of capital within the context of international receipts and payments, including,
but not limited to, direct investment, all forms of loans, and investment in securities.
Generally, a payment that falls under the category of a current account may be remitted
to overseas if supported with proper contracts, invoices, and tax payment/exemption
certificates. In the past, most of the transactions under the category of capital account
items had to be approved by the SAFE. Since the end of 2012, the SAFE has relaxed the
administration of certain capital account items so that approval is no longer needed for a
few types of transactions.
Intellectual properties
Patents, trademarks, and copyrights are governed by separate laws and administered
by separate governmental bodies. The government encourages the development and
transfer of intellectual properties. The transfer of technology and technical services are
currently exempted from BT.
Mergers and acquisitions (M&A) activities
Both Chinese domestic and foreign investors increasingly are using M&A transactions to
establish or expand their Chinese operations.
The Ministry of Finance (MOF) and the SAT jointly released a tax circular that addresses
the CIT treatments for six forms of restructuring transactions, namely, change in legal
form, debt restructuring, equity acquisition, assets acquisition, merger, and spin-off.
The general principle is that enterprises undergoing corporate restructuring should
recognise the gain/loss from the transfer of relevant assets/equity at fair value when
the transaction takes place. However, if certain prescribed conditions are satisfied, the
parties involved could opt for special tax treatments, which are essentially tax deferral
tax treatment. In other words, recognition of gain/loss of the transferor from transfer
of assets/equity can be deferred with respect to the equity-payment portion; and the
transferee may take over the transferors tax basis of the acquired assets/equity. Such
special tax treatments are only available to a very few specific types of cross-border
transactions.
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PwC contact
Carlos Chaparro
PricewaterhouseCoopers Servicios Legales y Tributarios
Calle 100 #11A-35 Piso 3
Bogot, Cudinamarca
Colombia
Tel: +57 1 634 0555
The Colombian government did not introduce any tax bills in 2013. The Colombian
government did, however,issue several decrees regulating the applicable tax law.
The most important tax decrees that were introduced by the Colombian government
refer to the following matters:
The Colombian government issued a formal regulation listing the jurisdictions
deemed as tax havens for tax purposes.
As of 2014, the black list for tax purposes came into effect, which potentially
increases withholding taxes (WHTs)(capped at 33%) and imposes more demanding
requirements to qualify for a deduction, including, but not limited to, demonstration
of adequate substance.
The regulation alsocreates a grey listof jurisdictions temporarily out of scope,
subject to Colombia and those jurisdictions concluding taxinformation exchange
agreements (TIEAs).
All taxpayers of the income tax for equality (CREE) are now required to act as selfwithholding agents on any taxable income.
Further regulation brings the definition of permanent establishment (PE) even closer
to Organisation for Economic Co-operation and Development (OECD) guidelines.
Regulations regarding creditability of output value-added tax (VAT) paid in the
acquisition of fixed assets were enacted.
The banking tax rate reduction to 0.2% (down from 0.4%) for 2014 has been
postponed for a year, effectively keeping the 0.4% ratefor 2014.
Colombias treaty network keeps growing, with Mexico being addedas of1 January
2014 to the current list of fully operating double taxation treaties (DTTs). Treaties
with Portugal and the Czech Republic have just been signed into law and will now
require Constitutional Court clearance before final ratification by the states. A tax
treaty with India is expected to come into force in 2015.

National companies (i.e. incorporated in Colombia under Colombian law) are taxed
on worldwide income. Foreign non-resident companies and local branches of foreign
companies are taxed on their Colombian-source income only. The current general
corporate income tax (CIT) rate is 25%, which is applied on taxable income.
Taxable income is generally defined as the excess of all operating and non-operating
revenue over deductible costs and expenses. The customary costs and expenses of a
business are generally acceptable as deductible expenditure for CIT purposes, provided
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they are necessary, reasonable, and have been realised during the relevant tax year
under the accrual or cash method of accounting, as the case may be.
The current general capital gains tax rate is 10%.
Qualifying businesses located in free trade zones (FTZs) enjoy a reduced rate of 15%
(while subject to capital gain tax at 10% where applicable).
Minimum presumptive tax
CIT payers are required to pay a minimum amount of income tax, which is determined
based on the so-called presumptive income method. Under this method, presumptive
taxable income is measured as 3% of net assets (or tax equity) as of 31 December of the
prior tax year as reported by the taxpayer on the corresponding CIT return. The CIT rate
is then applied to the greater of regular taxable income (revenue less allowable costs and
expenses) or presumptive taxable income (exempting certain business activities).
In order to determine the taxable base for presumptive income purposes, it is
necessary to subtract from the total amount of net assets, which is the base to calculate
presumptive income, the following amounts:
The net asset value of the shares owned in national companies.
The net asset value of the assets affected by force majeure.
The net asset value of assets associated with operations in unproductive periods.
Each year, taxpayers must compare the value resulting from the application of the
foregoing two systems. The income tax for the taxable year will be calculated on the
higher value resulting from this comparison. If presumptive income is higher than the
ordinary net income, the difference constitutes an excess of presumptive income, which
can be carried forward (adjusted for inflation) to any of the following five taxable years
and offset against the net income determined by the taxpayer.
Income tax for equality (CREE)
From 2013 through 2015, 25% rate CIT payers are liable for an additional 9% CREE.
Beginning in 2016, the rate is reduced to 8%. Collections will be used to fund cuts on
payroll taxes as well as health contributions to the social security system, which 25%
rate CIT payers will enjoy on select headcount.
Structurally, the CREE works as an income tax.
Qualified 15% rate FTZ users existing as of 31 December 2012 are grandfathered, as
well as those in the process of being qualified. This means that 15% rate CIT payers (FTZ
users), and other entities that, at 1 January 2013, have already commenced the process
of qualification as FTZ users, should continue to have the same tax rate.
The taxable basis will generally be calculated as revenue (excluding capital gains) minus
the following:

Rebates, discounts, and returns.

Non-taxed revenue.
Allowable costs and expenses.
Select exempt income from Andean Tax Treaty countries and others.
Tax loss and presumptive taxable carryforward are not eligible to offset the taxable
amount, although the potential impact on deferred assets for tax loss needs to be
considered.
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Please be aware that in no case can the taxable amount be lower than 3% of the
taxpayers net equity as of the end of the last year (i.e. the same system is in place as for
the income tax, where even loss-making taxpayers may be subject to liability). It is worth
mentioning that the liability for this tax will be used to determine the amount of foreign
tax credit that may be claimed by a resident.
All taxpayers are required to act as self-withholding agents on taxable income, at a rate
that depends on their main activity of business (0.4%, 0.8%, or 1.6%).
Stability Agreement Regime
As of 1 January 2013, the Legal and Tax Stability Framework was repealed. Applications
under consideration will be grandfathered and approved if they meet the applicable
requirements. Any already executed Legal Stability Agreements will continue to apply
until expiration.
Local income taxes
In addition to CIT and CREE (explained in this section), there is a local (municipal) tax,
known as industry and trade tax. Formore information, seeIndustry and trade tax in the
Other taxes section.
Corporate residence
Corporate residence is determined by the place of incorporation of any given company.
For CIT purposes, companies incorporated under foreign laws that have their main
domicile abroad are considered foreign companies, whereas any company incorporated
in Colombia under Colombian law qualifies as a national company even if fully owned
by foreign shareholders.
As of 1 January 2013, the Colombian internal legislation incorporates the concept of PE.
This concept follows theOECD criteria and means a fixed place of business throughout
which an entity carries out its activity, whether partially or totally.
A PE will also be incorporated when a person (other than an independent agent) has the
capacity to conclude contracts on behalf of the foreign entity, except for preparatory and
auxiliary activities.
In order to define what should be understood as preparatory and auxiliary activities,
local regulations have adopted the OECD criteria.
Colombian law upholds the triggering of a PE upon the presence of a fixed place of
businessthat is located in a given place and features a certain degree of permanence (no
cut-off timeline is provided) where a non-resident entity conducts part or the whole of
its business.
Auxiliary and preparatory activitiesthat do not cause a PE to exist are listed out. The
regulations reiterate that a PE is subject to income tax on domestic income attributable
to its course of business as well as on any domestic income directly earned.
Also, a PE will be subject to domesticWHT rates whenever engaged with resident
parties.
However, payments or accruals to non-residents having a PE may continue to be subject
to rates set out for non-residents if the underlying transaction is unrelated to the PEs
purpose. A PE will be required to make annualCIT andCREEfilings. In 2014, the
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government released additional regulations under which PEs are given the capacity to
withhold and remit taxes as well as to charge and collect VAT to the extent of taxable
transactions.
Requisites for registration of a PE are set out and include, inter alia, good standing
documentation or proof of existence as well as an active account at a local bank or
financial institution.
A PE is required to prepare contemporaneous documentation (in addition to transfer

pricing compliance requirements) with a functional and technical analysis of the
assets, liabilities, capital, risks income, costs, and expenses attributable to its business
in Colombia. In addition, a PE must, for tax purposes, prepare separate accounts for
purposes of the attribution of income and capital gains.
Effective place of management
Following the introduction of effective place of management rules in 2013, guidance is

now available (Regulation 3028 of 27 December 2013) on how to register a non-resident
entitythat is effectively managed in Colombia and treated as aresident for tax purposes.
The process requires submission of a good standing documentation, proof of identity of
the legal representative (or attorney if a mandate to register exists), and availability of
an active bank account at a resident bank or financial institution.
The rules require a non-resident entity effectively managed in Colombia to carry local
books under the applicable Generally Accepted Accounting Principles(GAAP) as
well as to satisfy tax compliance requirements (for 2013) upon completion of the tax
registration.
In 2014, the government released additional regulations under which non-resident
entities effectively managed in Colombia are given the capacity to withhold and remit
taxes as well as to charge and collect VAT to the extent of taxable transactions.
Tax havens
As of 1 January 2014, Colombian regulations include a formal list of 44 jurisdictions

considered as tax havens for all tax purposes.
The following are some of the jurisdictions included in the black list:

British Virgin Islands (BVI)

Hong Kong
The Bahamas
Cayman Island
Liechtenstein
Monaco
There is also a temporary grey list, where inclusion on the black list is postponed to
October 2014, as currently Colombia is in the process of signingTIEAs with the following
countries:

Barbados
Bermuda
State of Kuwait
State of Qatar
Bailiwick of Guernsey
Republic of Panama
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Any payment or accrual, regardless of its nature, that constitutes taxable income for a
beneficiarythat is deemed as resident, established, located, or functioning in a tax haven
jurisdiction is subject to a 33% WHT.
Transactions with entities that are tax haven residents are subject to the transfer pricing
regime. As a result, Colombian taxpayers must file a transfer pricing report and a
transfer pricing informative return for such transactions, regardless of whether or not
the entitys equity or gross income is lower than the threshold established by Colombian
law for applying such compliance obligations.
In addition, if the transaction occurs with a related party, the resident taxpayer is
required to prepare and submit an additional supporting study, proving the details of the
functions performed, along with any assets used or risks assumed, and the full costs and
expenses incurred by the tax haven resident while rendering the service or in the overall
conduct of the activity to which the deduction relates.
Other taxes
The Colombian VAT taxes the sale in the country of any items of tangible personal
property that are not fixed assets and are not covered by an exemption, the provision of
services within the national territory (certain services supplied outside Colombia but
imported also attract VAT), and the importation of tangible personal property that is not
covered by an exemption.
The Colombian VAT is based on a credit-debit system throughout the entire chain of a
business. However, certain products are only taxed at the manufacturer level (one-phase
VAT). For purposes of VAT calculation, the VAT payer may credit the VAT (input) paid to
vendors (certain limitations apply) against any VAT (output) collected from customers.
The general VAT rate is 16%. However, certain services and goods are taxed at 5% and
0%.
The following are the most significant goods and services taxed at 5%:
Agricultural goods.
Basic groceries.
Private security services and temporal work related services (some qualifications are
required).
Medical care services.
The following are the most significant goods and services taxed at 0%:

Meat, fresh eggs, and dairy products.

Biofuel.
Services to be exported (some requirements are needed).
Internet services for low to mid-income residential customers.
Manufactured goods to be exported.
Tourism services to be supplied to non-resident individuals.
Under current law, there are VAT exemptions available for the following items, among
others:
Equipment and materials for the construction, installation, assembly, and operation
of environmental monitoring and control systems.
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Imports of raw materials and supplies made under the so-called Vallejo Plan for
further processing and incorporation into products that are to be subsequently
exported (see the Tax credits and incentives section for more information on the Vallejo
Plan).
Temporary importation of heavy machinery and equipment for basic industries
(mining, hydrocarbons, heavy chemistry, the iron and steel industry, metallurgy,
power generation and transmission, and the water industry).
Importation of machinery and equipment, which is not produced in the country, for
recycling and processing of waste and refuse.
Regular imports by major exporters of industrial equipment, which is not produced in
the country, for the transformation of raw material.
Freight transportation.
Public transportation of passengers in the national territory by water or land.
Transportation of gas and hydrocarbons.
Interest and other financial income from credit operations.
Financial leasing.
Public utilities.
Restaurant and cafeteria services.
Withholding VAT
VAT withholding on the purchase of goods and services for most domestic transactions
is 15%.
A non-resident supplier of VAT-subject services does not require VAT registration.
Rather, it is the locally-based recipient that must apply a reverse-charge (100% of the
VAT). No VAT fiscal representation is allowed.
VAT compliance
Filing frequency depends on taxpayers annual revenue on 31 December of the

previous taxable year. For businesses with annual revenue in excess of 92,000 tax value
units(TVU) (approximately2.47 billion Colombian pesos [COP]), the frequency is
bimonthly. If annual revenue is not in excess ofTVU 92,000but is higher than TVU
15,000 (approximately COP 402 million), the filing frequency is quarterly. For small
businesses (annual revenue below COP 402 million), the frequency is yearly.
No VAT filings are required for periods where no inputs or outputs exist.
VAT credit
VAT paid to vendors is creditable even if paid at rates higher than those at which taxable
sales are made. Where a receivable arises above that credit, a refund will be available
upon request, subject to certain circumstances.
As of 2014, VAT paid on certain fixed assets is partially creditable against CIT of a specific
taxpayer in accordance with a yearly cap set by the government.
Consumption tax
A national consumption tax is levied against the following select services and goods:
Mobile phone services at 4%.
Certain vehicles, aircraft, and other goods at 8% or at 16%.
Restaurant and cafeteria services at 8%.
Customs duties
Imports, according to customs rules, consist of the entry of goods to the national
customs territory from the rest of the world, or from an FTZ, with the purpose of
remaining permanently or temporarily in it for the achievement of a specific purpose.
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As a general rule, the importation processes before the Colombian Internal Revenue
and Customs Service (DIAN) can only be carried out by users registered in the
Customs Information System, either as Customs Agencies (previously called Customs
Intermediation Companies) or Permanent Customs Users (UAPs). The latter may file
their own customs declarations.
According to the Harmonized System of Designation and Coding of Goods approved
by the World Trade Organization (WTO), imported goods are classified into subentries
composed of six digits. Also, two digits are added, which are for exclusive use of the
Andean Community (CAN), and two final digits, which correspond to the digits for use
of Colombia. The customs subentry or harmonized tariff schedule (HTS) code, which is
the ten-digit result, is exposed in the Colombian Customs Tariff, which is governed by
Decree 4927 of 2011, which also reflects the applicable tariff of each duty. VAT, which is
also part of the customs duties, is regulated in the Colombian Tax Code.
The general VAT rate for the importation of goods is 16%, and the customs duties range
between 0% and 20%.
Excise taxes
There are some excise taxes for the consumption of beer and its derivatives, wine, liquor
and its derivatives, and cigarettes and similar products.
The excise taxes are of municipal in nature. Therefore, the tax rates and applicable laws
vary from one municipality to another.
Property tax
The property tax is a municipal tax that is imposed annually on real estate property
located in urban, suburban, or rural areas. It is levied on both improved and unimproved
real estate; consequently, the taxpayers of this tax are the owners or holders of the real
estate property.
The taxable base of this tax is the current cadastral value of the property, as adjusted for
inflation. In some cities, such as Bogot, the taxable base is the value of the property as
appraised by the taxpayer directly.
Property tax rates depend upon the nature and usage of the property, and generally
range between 0.4% and 1.2%.
This tax is fully deductible for CIT purposes, provided the same has a causal nexus with
the income producing activity of the taxpayer (for example, where the tax is paid on
rental property).
Stamp tax
The stamp tax rate is 0%.
Capital gains tax
The capital gains tax rate is 10%.
Financial transactions tax
The financial transactions tax is a permanent tax on financial transactions, the collection
of which is the responsibility of regulated financial institutions and the Central Bank
(Banco de la Repblica).
The tax rate is 0.4%, and the taxable event is the carrying out of financial transactions
that involve the disposal of resources deposited in checking or savings accounts as well
as in deposit accounts with Banco de la Repblica, and the issuance of cashiers checks.
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50% of the total tax paid is deductible for CIT purposes, regardless of whether or not the
transactions have a causal nexus with the income producing activity of the taxpayer.
The law establishes a series of operations and transactions that are exempted from this
tax.
The financial transactions tax will be reduced to 0.2% (down from 0.4%) for 2015, to
0.1% for 2016 and 2017, and to 0% for 2018 and onwards.
Payroll taxes and social security contributions

There are three major payroll taxes and contributions.
General pensions system.
Health social security system.
General system of professional risks.
The basis for contributions is determined by the monthly salary (excluding non-salary
items) earned by the employee, which may not be, for ordinary salaried employees, less
than the minimum legal monthly salary (COP 616,000 in fiscal year [FY] 2014) and may
not exceed 25 minimum legal monthly salaries (COP 15,400,000 in FY 2013).
For employees who earn an integral salary, the basis for pension contributions will be of
the lower of 25 minimum legal monthly salaries or 70% of such integral salary.
Amounts of contributions
In the two regimes (public and private), the amounts of contributions are currently
28.5% of the monthly salary.
Out of this percentage, 75% (approximately 20.5% of the monthly salary) must be borne
by the employer and 25% (approximately 8% of the monthly salary) must be borne by
the employee.
However, employees who earn more than four minimum legal monthly salaries must
contribute an additional 1%, which will be destined to the pension solidarity fund,
created by law to cover the risks of workers with scarce resources. Also, employees who
earn more than 16 minimum monthly salaries must contribute an additional percentage
(between 0.2% and 1%), depending on the amount of salary received.
For professional risks (Aportes de Riesgos Profesionales), the employer must pay a
contribution ranging from 0.375% to 8.7% of the monthly salary, which is an insurance
that covers risks of labour related illnesses or accidents, permanent disability, death, and
incapacity also derived from the employees activity.
In addition, for employees with salaries higher than ten minimum monthly wages,
employers must pay a payroll tax of 9% on salary items only, the basis of which is 100%
for ordinary salaried employees and 70% for integral salaried employees.
Industry and trade tax
The industry and trade tax is a municipal tax that is imposed on revenue obtained from
the exercise of industrial, commercial, or service activities in any Colombian municipal
jurisdiction. It can be viewed as a special form of a turnover tax.
The industry and trade tax rates are determined by each municipality, and, as a rule,
they range between 0.2% and 1%. All of this tax can be deducted for CIT and CREE
purposes when effectively paid.
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Branch income
Branch income is taxed at 25%. AdditionalCREE is applicable at 9% for 2013 to 2015
and 8% from 2016 (see Income tax for equality [CREE] in the Taxes on corporate income
The branch taxable base is limited to domestic income.
Branches are required to prepare contemporaneous documentation (in addition to
transfer pricing compliance requirements) with a functional and technical analysis of the
assets, liabilities, capital, risks, income, cost, and expenses attributable to its business in
Colombia.
In addition, the branch must, for tax purposes, prepare separate accounts for purposes
of the attribution of income and capital gains.
Branch profits are categorised as dividends; consequently, if profits are taxed at the
branch level, no further taxation is required.
In fact, under the re-categorisation of branch profits to dividends, the dividend tax (at
33%) is only imposed on remittance of dividends out of untaxed earnings.
Inventory valuation
The value of inventories, which includes all expenses and direct and indirect charges
necessary to put an item in a position to use or sell, must be determined using one of the
following methods: first in first out (FIFO), last in first out (LIFO), specific identification,
or weighted average. Special rules may authorise the use of other methods of recognised
technical value.
Capital gains
Capital gains are taxed separately from income. See Capital gains tax in the Other taxes
Dividend income
The so-called double taxation on corporate earnings was eliminated from the Colombian
tax system many years ago. This means that shareholders of Colombian companies are,
as a rule, not required to pay any income taxes on dividend distributions to the extent
that dividends are paid out from earnings that were already taxed at the corporate level
prior to the dividend distribution.
When the dividends are paid out from earnings that went untaxed at the corporate level,
a foreign shareholder is required to pay income taxes on the dividends at 33% via a WHT
collected by the distributing company. Certain DTTs offer limited or full relief for the
33% WHT on dividends.
Branch profits are categorised as dividends (see the Branch income section for more
information).
Interest income
Interest income derived from activities in Colombia is considered part of the CIT and
CREE base for Colombian entities; however, if interest is paid or accrued to a nonresident that is not compelled to file CIT in Colombia, a WHT is accrued over the
payment or deposit at a rate of 33% if the loan term does not exceed of one year or 14%
if the loan term does exceed of one year.
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Note that there are some special conditions derived from DTTs that decrease the WHT
rate.
Royalties
Royalties paid in favour of a Colombian entity are subject to taxes in Colombia;

consequently, such royalty payments are part of the CIT base. If royalties are paid in
favour of a non-resident (i.e. in favour of an entity that is not compelled to file CIT in
Colombia), WHT is generally accrued over the payment or deposit at a rate of 33%.
Certain DTTs offer limited relief for the 33% WHT on royalties (e.g. 10%).
Foreign income
The following cases, among others, qualify as foreign-source income:

Income obtained from external debt, if it complies with some requirements provided
by law. Interest produced by this external debt is not taxed via CIT, and there is no
WHT liability. Additionally, the expense derived from this concept will be 100%
deductible.
Income derived from technical services of repair and maintenance of equipment
carried out abroad.
There are no tax deferral provisions in Colombia.
Deductions
In Colombia, the customary costs and expenses of a business are generally acceptable
as deductible expenditure for CIT and CREE purposes, provided they are necessary,
reasonable, and have been realised during the relevant tax year under the accrual
method of accounting. Examples of common (and not so common) deductions include
the items below.
Depreciation
As a general rule, the acquisition cost of tangible fixed assets is fully depreciable for CIT
and CREE purposes. The normal estimated useful lives are as follows:
Asset
Buildings and pipelines
Machinery and equipment, office furniture, and fixtures
Vehicles and computer equipment
Useful life (years)

20
10
5
The acceptable methods for depreciation are:

Straight-line: The straight-line method is the easiest and most commonly used
method of depreciation by companies; it is calculated by dividing the value of the
asset by the assets useful life.
Declining-balance: This method takes into consideration an accelerated rate of
depreciation and is useful for those assets in which a higher value is lost during the
beginning years of usage. Under the declining-balance tax depreciation method, in
no case will a residual value lower than 10% of the assets cost be allowed nor will
accelerated depreciation based on additional shifts be deductible.
Any other method of recognised value in accordance with the opinion of the tax
authorities.
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Depreciation rates can be increased by 25% for each additional eight-hour shift of
asset use (and pro rata for fractions thereof). When tax depreciation exceeds book
depreciation, the taxpayer is required to establish a reserve equivalent to 70% of the
difference. Recapture of depreciation on the sale of depreciated property is taxed at
25%.
Depletion
Depletion is available under certain specific circumstances.
Amortisation of intangible assets
As a general rule, taxpayers can amortise, for CIT and CREE purposes, the cost of any
acquired intangible asset over a period of five years, at a minimum, unless the taxpayer
is able to prove that the amortisation period should be less because of the specific nature
or conditions of the business.
Goodwill
As a general rule, goodwill is deductible for CIT and CREE purposes, provided it is
related to the business purpose or income producing activity. In order for such goodwill
to be deductible, the intangible (goodwill) must fit the definition of an asset subject
to be amortised. Amortisable investments are ones that, under the normal accounting
rules, are subject to demerit and should be recorded as assets subject to be amortised in
a period exceeding one year.
Goodwill cannot be amortised in a period of less than five years.
Goodwill on share purchases
Goodwill tax amortisation on share purchases of residents or non-resident entities is

permitted, provided:
a loss of value (impairment) is technically proven
the acquiring vehicle remains separate from the entity owning the business (except
when, while not entirely clear, the reorganisation is required under law), and
taxable dividends are distributed to the acquiring vehicle.
If these requirements are not met, no amortisation is allowed.
Nevertheless, there is a grandfather rule that allows taxpayers to amortise the goodwill
acquired on share purchases that occurred prior to 1 January 2013 where goodwill
was recognised, or on share purchase agreements entered into prior to the same date,
but where completion is subject to approval or clearance by an authority, provided the
relevant application was filed before 31 December 2012.
Banking institutions under surveillance by the financial authority are allowed to
amortise goodwill on share purchases, even if registered after 1 January 2013.
Start-up expenses
Start-up expenses are deductible for CIT purposes, provided they are necessary,
reasonable, and have been realised during the relevant tax year under the accrual
method of accounting.
Interest expenses
Taxpayers are generally entitled to deduct any interest paid to financial institutions or to
third parties, provided certain requirements are met.
The Colombian Tax Regime has incorporated thin capitalisation rules (see Thin
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Bad debt
Bad debt is deductible for CIT and CREE purposes, provided the company keeps it
accounting books under the accrual method, the debt is originated as a result of the
development of an income producing activity, and the following requirements are met:
The debt is due for over a year.
The company is able to prove that the debt has a nature of bad debt.
The company has registered the provision, related to the bad debt, within the same
fiscal period.
The debt does exist at the moment of the registration of the provision.
The company has included the debt in the calculation of its CIT and CREE for
previous fiscal periods.
Some specific charitable contributions are allowed as deductions, provided they are
made to certain institutions dedicated to development of health, education, culture,
religion, sports, scientific and technological research, ecology and the protection of
the environment, or to social development programs of general interest. Most of these
charitable contributions are limited with respect to their deduction.
Expenses incurred abroad
As a general rule, the deduction of expenses incurred abroad that are not subject to
WHT are limited to 15% of the taxpayers net income.
Fines and penalties
Fines and penalties are not deductible for CIT and CREE purposes.
Taxes
It is important to mention that the current tax regulations state the following as the only
taxes that can be claimed as a deductible expense:

100% of the industry and trade tax.

50% of the financial transactions tax.
100% of the property tax.
The VAT that cannot be treated as output.
Some local stamp taxes.
Special deductible items
Colombian income tax laws have established certain special deductible items, which
include the following:
100% of the industry and trade tax and real property tax actual payments and 50% of
the financial transactions tax actual payments are deductible.
100% of acquisition costs are available as a tax amortisation or depreciation base.
175% of the investments made in certain scientific and/or technological projects or
in professional training projects of governmental, public, or private institutions of
higher education are deductible. This deduction cannot exceed 40% of the taxpayers
net income as determined before subtracting the amount of the investment.
100% of the investments made for the control and improvement of the environment
are deductible. This deduction cannot exceed 20% of the taxpayers net income as
determined before subtracting the amount of the investment.
Net tax losses (adjusted for inflation) incurred in 2007 or thereafter may be carried
forward without limitation. There is no loss carryback provision. Certain limitations
apply to the offset of losses transferred on merger reorganisations.
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Colombia
Payments to foreign related parties
Royalties and similar charges
Royalties and the costs of exploitation or acquisition of all kinds of intangible property
that are charged by foreign related parties are allowable as CIT and CREE deductions,
provided that the corresponding WHT is collected at generally 33% (10% in the case
of most DTTs). Other types of payments are subject to the general rules for expenses
incurred abroad.
Management overhead expenses
Management overhead expenses paid to a foreign related party (e.g. the parent
company) are deductible, provided they meet the arms-length test under transfer
pricing regulations and provided the management services are real and are specifically
related to the income producing activity of the local subsidiary that pays them.
These expenses must also be carefully documented such that the local subsidiary can
provide evidence to the authority of the fact that they are specifically related to its
Colombian operations: to the planning and direction of the operations, the setting and
implementation of management controls, the measurement of progress made toward
specific business goals, the related financial results, etc. Where these services are
supplied inside Colombia, a 33% WHT is also required to ensure deductibility.
Interest
Interest and related financial costs (including foreign exchange losses) paid to foreign
related parties are deductible, provided they meet the arms-length test under transfer
pricing regulations and the thin capitalisation rules (see the Group taxation section).
Furthermore, interest and the related financial costs paid on short-term financing
relating to imports of merchandise and raw materials directly supplied by foreign related
parties are also deductible for CIT purposes. Interest paid or accrued to a non-resident
triggers WHT over the payment or deposit at a rate of 33% if the loan term does not
exceed of one year or 14% if the loan term does exceed of one year.
Financial and non-financial institutions registered with the Colombian Central Bank are
permitted to extend loans into Colombia.
Group taxation
Group taxation or group consolidation is not allowed for CIT purposes in Colombia.
Transfer pricing
In Colombia, transfer pricing rules are applicable to the transactions performed by local
taxpayers with foreign related parties. Thus, for CIT purposes, Colombian taxpayers
must determine their income, costs, expenses, assets, and liabilities on the basis of
prices and profit margins used in comparable transactions entered into with or between
independent or unrelated parties.
In general terms, the rules related to comparability criteria, supporting documents, and
advanced pricing agreements (APAs) follow international transfer pricing standards.
However, they introduce a wide definition of related companies for transfer pricing
purposes, including subordination and individual or joint control exercised by a foreign
parent company or by individuals located in Colombia or abroad.
The law presumes that transactions with foreign non-domiciled entities located in socalled tax havens are transactions performed with related parties and are subject to
transfer pricing rules (see Tax havens in theCorporate residence section).
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Colombia
Colombia
If (i) the gross equity (assets) of the local taxpayer on 31 December of each year is equal
to or higher than the equivalent to TVU 100,000(COP 2,748,500,000 for FY 2014) or
(ii) the gross income obtained by the local taxpayer in a given year is equal to or higher
than the equivalent to TVU 61,000 (COP 1,676,585,000 for FY 2014), it shall be required
to prepare transfer pricing supporting documents (i.e. a transfer pricing study) and to
file with the tax authority an informative return in connection with the transactions
performed, during the corresponding year, with the foreign related parties.
If the local taxpayer does not file the transfer pricing return, the penalty will be up to
TVU 20,000 (COP 549,700,000). There are other applicable penalties depending on the
nature of the omission, but there is a relief based on a bracket system.
Thin capitalisation
Thin capitalisation rules for income tax purposes are applied on a 3:1 basis to related or
unrelated party debt, regardless of domestic or cross-border transactions.
Debt exceeding the ratio is any total average interest bearing debt for the year less three
times the net (tax) equity as of 31 December of the preceding year.
The proportion of non-deductible interest is debt in excess of three times such net equity.
That proportion is then applied to the total interest accrued or paid in the taxable year.

Foreign tax credit
Foreign income taxes are creditable against CIT, subject to certain limitations. Generally,
the amount of the credit cannot exceed the sum of Colombian taxes imposed over the
same income (CIT plus the CREE). DTTs provide for more comprehensive credit systems
as well.
The foreign tax credit on dividend income is enhanced to include a third-tier of credit
availability, subject to specific ownership requirements. A third-tier of credit means that
Colombian entities can claim a tax credit not only for taxes paid by a company in which
it has a direct investment, but also for taxes paid by a company in which it has an indirect
investment.
The tax credit can be claimed in the year of payment or in any of the following four
years.
CIT exemptions
As items of exempt income, the law has established the following:

The principal and interest (as well as related commissions and fees) paid pursuant to
public foreign debt operations.
Income from the sale of electric power generated from wind, biomass, or agricultural
waste, for a period of 15 years, provided the seller issues and negotiates Greenhouse
Gas Reduction Certificates.
Income obtained from slow yield crops and plantations, including cocoa, rubber,
palm oil, citrus, and other fruits.
Income obtained from river transportation services with shallow draft vessels and
barges, for a period of 15 years, starting in 2003.
Income obtained from hotel services offered in new hotels that are built within 15
years counted from 2003, for a term of 30 years, until 2032.
Income obtained from hotel services offered in refurbished or enlarged hotel
facilities, where the related work is started within 15 years counted from 2003, for a
term of 30 years.
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425
Colombia
Income obtained from ecotourism services, for 20 years starting in 2003.
Income obtained from investment in new forestry plantations, sawmills, and
plantations of timber-yielding trees.
Income obtained from new medicinal and software products developed in Colombia
and protected under new patents registered with the authorities, with a high content
of national research and technology, until 2017.
The gain in trading derivatives that are qualified as securities are not subject to CIT,
provided that the underlying asset is stock traded in the Colombian stock exchange,
indexes, or participations in funds tracking such stock.
Special CIT rate for free trade zones (FTZs)
FTZ industrial users enjoy a special CIT rate. The so-called FTZ industrial goods users
and industrial service users pay CIT at a reduced rate of 15% on income earned from
their FTZ operations.
Note that capital gains are taxed at the standard CIT rate of 10%.
Reduction to the statutory CIT rate for small companies
Small companies (not exceeding approximately COP 1.611 billion in total assets or 50
employeesfor FY 2014) are subject to CIT at the following reduced rates: 0% of the
statutory CIT rate for the first two years, 25% of the statutory CIT rate for the third year,
50% of the statutory CIT rate for the fourth year, and 75% of the statutory CIT rate for
the fifth year.
Reduction of payroll fees for small companies
New small companies (not exceeding approximately COP 1.611 billion in total assets or
50 employees for FY 2014) are subject to payroll fees at the following reduced rates: 0%
of the payroll fees for the first two years, 25% of the payroll fees for the third year, 50%
of the payroll fees for the fourth year, and 75% of the payroll fees for the fifth year.
Tax credit on payroll fees paid
A tax credit is granted to employers hiring employees under 28 years old; women above
40 years old that have not been legally employed in the previous year; low-income
workers earning less than 1.5 times the minimum monthly wage (approximately COP
900,000for FY 2014); and disabled, reintegrated (from armed conflict), or displaced (as
victims of armed conflict) workers, subject to certain requisites and time limitations (two
to three years).
Vallejo Plan for raw materials
The Vallejo Plan allows for the total or partial suspension of customs duties upon receipt,
within the national customs territory, of specific goods destined to be totally or partially
exported within a certain period of time, after having undergone transformation,
manufacture, or repair, including the materials needed for these operations.
Withholding taxes
The Colombian tax system provides for WHT as a general mechanism of advance tax
collection. Under the law, as a general rule, all corporate entities are required to collect
or withhold taxes from payments made to third parties. The WHT collection agents must
collect the applicable WHT amounts, deposit the withheld amounts with the authority,
file monthly WHT returns, and issue WHT certificates to the payees. The payees who are
also CIT return filers credit the withheld taxes against the annual CIT liability computed
on their returns.
Foreign non-resident persons are taxed on their Colombian-source income only.
Generally, the full tax liability accruing on payments made to foreign non-resident
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Colombia
persons is satisfied via the collection of the applicable WHT. The WHT rate on payments
made to foreign non-resident persons for taxable dividends, royalties, and taxable
interest is 33%. On payments made for consulting, technical assistance, and technical
services, the WHT rate is 10% (whether supplied inside or outside Colombia). On
payments made for software licences, the WHT rate is 26.4%.
On other types of payments that give rise to Colombian-source income, the general WHT
rate is 14%, with the foreign non-resident payee being required to file a CIT return in
Colombia to report the final CIT liability, at 33% of net income (and being entitled to a
refund where the final liability is less than the amount withheld at the 14% rate or being
required to pay the deficit should the case be the opposite).
WHT returns do not need to be filed where there are no taxes to declare or pay.
Offsetting of WHT
WHT returns filed on a non-payment basis will be treated as not filed, except if
the filer has a refundable tax credit balance over TVU 82,000 (approximately COP
2,253,770,000) to offset the outstanding payment. A six-month deadline applies for the
taxpayer to apply the offsetting of the credit balance. Otherwise, late filing penalties will
apply.
Self-withholding on some exports
There is a 1% self-withholding tax on exports for the mining, oil, and gas industry. The
self-withholding is creditable against the CIT liability.
Exempt interest
Interest payments made abroad on loans or cross-border leasing agreements are subject
to a 14% WHT if the loan term exceeds one year. If the loan or cross-border agreement
has a term not exceeding one year, a 33% WHT is triggered.
Summary WHT chart for payments to non-Colombian entities

Type of payment
Dividends (if paid out of untaxed earnings)
Taxable interest
Royalties
Royalties on software licences
Technical assistance, consulting, and technical services
Other types of payments
WHT rate (%)

33
14 or 33
33
26.4
10
14
DTT rates
Recipient
Non-treaty
Treaty:
Canada
Chile
Mexico
Spain
Switzerland
Dividends (%) (1)

33
Taxable interest (%) (2)

14/33
Royalties (%) (3)

33
5/15
0/7
0/33
0/5
0/15
0/10
5/15
0/10
0/10
0/10
10
10
10
10
10
Notes
1.
2.
The treaty rate depends on the participation of the shareholder in the Colombian company that
distributed the dividends.
The rate depends on whether the lender is a financial entity or not.
Colombia
427
Colombia
3.
If services are locally untaxed, there is no WHT; otherwise, a 10% WHT will apply.
Tax administration
Taxable period
For CIT and CREE purposes, the taxable period is the calendar year, with no exceptions
being admissible.
Tax returns
Income tax return filing due dates are set by the government every year. Usually, they
fall in the month of April; but in the case of large taxpayers, the filing due dates are
usually in February.
Payment of tax
For CIT purposes, corporate taxpayers are divided into large taxpayers and other
taxpayers. Large taxpayers pay their estimated outstanding CIT liability (outstanding
after deducting applicable WHT from the estimated final liability) in three instalments
over the year in which they file their annual CIT return. The due date varies according to
the last digits of its NIT (Number of Tax Identification).
Other taxpayers pay their estimated outstanding CIT liability in two instalments over the
year in which they file their annual CIT return. The due date varies according to the last
digit of its NIT.
Tax audit process
The audit cycle corresponds to the taxable period, which for the case of CIT and CREE is
one year.
The statute of limitations is generally two years following the actual filing of the return
(a longer statute of limitations applies in certain cases).
When no tax return filing has occurred, the statute of limitations is five years (counted
asof the date on which the tax return should have been filed).
While there are no specific topics to be observed by the tax authorities when performing
an audit, usually they look at the formal compliance requirements and the correct
application and deductibility of cost and expenses.
Anti-abuse regulations
Colombian regulations establish some anti-abuse provisions, which allow the tax
authority to disregard the transactions considered not to have a valid commercial or
business purpose and which tend to modify, reduce, eliminate, or defer the applicable
tax consequences.
Under the anti-abuse regulations, the tax authority will be allowed to re-classify the
nature of the transaction performed by the taxpayer and to assign the tax consequences
applicable to the real transaction.
Other issues
The most common type of company used in Colombia is the so-called simplified
stock company or simplified corporation, known as an SAS (sociedad por acciones
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Colombia
Colombia
simplificada). Besides SAS, foreign investors also use branch offices of an offshore entity
as their investment vehicles inColombia.
As a general rule, from a high-level perspective, there are no major differences between
a branch office and a subsidiary (such as an SAS) as far as Colombian taxation is
concerned.
All the taxes discussed in this summary would apply equally to a branch operation or a
subsidiary operation. However, from a commercial perspective, and specifically from the
perspective of corporate liability, operating through a branch office means that the head
office is exposed to direct liability for all the obligations of the branch, tax obligations
included. Operating through a subsidiary means that only the subsidiary is liable for
its obligations as a general rule, that is to say that the shareholders are not liable for
company obligations. Of corporations, the advisable choice would be an SAS, which is
very flexible in nature, easy to incorporate, and can be held by one single shareholder
(regular corporations require a minimum of five shareholders).
Mergers/De-mergers
Mergers and de-mergers are tax free, subject to limitations as follows:

The surviving or the beneficiary entity must be a resident.
De-mergers must be over units of business/going concern (substance requirement).
If merger/de-merger participants are unrelated, shareholders owning at least 75%
(85% where participants are related) must receive, as a result, shares proportional in
value to what they had prior to the merger or de-merger.
Shareholders must receive at least 90% of value in shares (99% if participants are
related).
Shareholders selling shares received within two years of the merger/de-merger must
increase any income tax due on the sale by 30%.
Mergers/de-mergers failing to meet these standards will be treated as taxable
dispositions. Where participants are not residents, the tax-free status is available if assets
held in Colombia represent 20% or less of the aggregate of assets of the group.
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Congo, Democratic Republic of the

PwC contact
Emmanuel Le Bras
PricewaterhouseCoopers Tax & Legal
88 Avenue du Gnral de Gaulle
Pointe Noire, Republic of Congo
Tel: +242 05 534 09 07
As per the Finance Act 2014 No. 14/002 of 31 January 2014, substantial changes have
been made to the Ordinance-Law No. 69/009 on corporate income tax (CIT). These
changes are described below. With the exception of some of them, these changes are
effective immediately as of January 2014.
Minimum income tax
The minimum CIT has been changed from 0.1% to 1% of yearly turnover.
The minimum level for CIT cannot be less than 750,000 Congo Democratic francs (CDF)
for medium companies.
The CIT for dormant companies that have not de-registered is:
CDF 500,000 for large companies.
CDF 250,000 for medium companies.
CDF 30,000 for small companies.
Restriction on the deductibility of non-arms-length expenses
The new 2014 Finance Law enacted the concept of abnormal act of management (or
non-compliant arms-length transaction), which should not be limited to corporate
expenses but should also include any form of donations and free payment to third parties
not resulting from an equivalent benefit for the taxpayer.
The aforementioned law broadly provides for restriction on the deductibility of expenses
where they are not arms length compliant, including payments for services received,
interests, and royalty payments to related parties.
In fact, the law extends the restriction on the deductibility of amounts paid as payments
for services, interests, and royalties when the service provider or the beneficiary is
located in a tax haven.
As regards interest, deductibility conditions have been strengthened when it involves
interest paid to a foreign shareholder or any other person who is directly or indirectly in
any interdependence with the taxpayer.
With the 2014 Finance Law, services directly related to oil activities rendered by foreign
suppliers to an oil company are exonerated from VAT as per the regulatory conditions.
The sale and import of wheat, maize, wheat flour, and corn flour are VAT exempt.
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Corporate income tax (CIT), known as impt sur les bnfices et profits (IBP) in the
Democratic Republic of the Congo (DRC), is paid on profits realised by acompany or an
individual that carries out any operational activity in the country.
The Democratic Republic of the Congo levies taxes on resident companies and
individuals on a territorial basis (or source basis) of taxation. Foreign-sourced profits
(e.g. dividends received from a foreign subsidiary) are thus exempt from CIT.
Non-resident companiesor individualsthat carry out an activity in the Democratic
Republic of the Congo are taxable on profits they realise through permanent
establishments (PEs) or fixed establishments that are located in the Democratic Republic
of the Congo.
The CIT rateis 35% (30% for mining companies).
Minimum income tax
There is a minimum tax of 1% of the yearly turnover for companies other than small
companies. Note that the minimum tax cannot be less than CDF 750,000 for medium
companies. Also note that turnover includes, inter alia, all profits and interest received,
as well as exception profits, in essence any credits on the income statement that have the
nature of income or gain, as well as capital gain.
Tax on rental income
Rental income related to buildings, houses, offices, premises, warehouses, etc. is taxed in
the Democratic Republic of the Congo at the rate of 22% and is administered at the level
of every provincial tax authority.
In order to secure the payment of this tax, the tax code has put into practice
awithholding tax (WHT) system. The tenant is liable to withhold 20% of the rentals paid
and to remit this tax to the authority. The tax authority may challenge rentals that are
not at arms length by referring to the rental prices of similar houses.
Local income taxes
There are no local or provincial government direct taxes on income (except for the tax on
rental income that is administered at the level of provinces).
Corporate residence
Companies incorporated in the Democratic Republic of the Congo are considered
resident companies, regardless of where they are managed and controlled.
A non-resident company is deemed to have a PE in the Democratic Republic of the Congo

in either of the following cases:
It has a material place of business (e.g. head office, branch) or any other fixed or
permanent installations producing revenues in the Democratic Republic of the Congo.
Without having a material place of business, it carries out a professional activity
under its own name during a period of at least six months.
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Other taxes
VAT rates
The VAT base includes whatever sums, amounts, goods, or services that are received as
compensation for an operation; this involves subsidies as well as any other costs, taxes,
rights, or any related levies, whatever their nature, excluding the VAT itself. For imports,
VAT is normally charged on the customs value of the goods concerned, plus the customs
duty and import-related expenses. There are two rates:
A standard rate of 16%.
A rate of 0% on exports and assimilated transactions.
VAT exemptions
The main exempted activities include some banking and financial services, education,
medical services, charitable and social activities, and transactions that are subject to a
specific taxation.
The import of wheat flour, corn, and corn flour, as well as the local sale of bread, wheat
flour, corn, and corn flour, are also VAT exempt.
Application to non-residents
A non-resident having no PE in the Democratic Republic of the Congo but who raises an
invoice on a DRC resident is required to appoint a VAT representative who is based in the
Democratic Republic of the Congo and who will be accountable for the payments and
collections that rest with the supplier non-resident. Failing to appoint a representative
will result in the authorities holding the DRC resident customer liable for the payment of
VAT that is due by application of a reverse-charge mechanism.
Mechanisms of VAT
An entrepreneur is entitled to offset VAT paid on purchase of goods and services used
for business purposes against VAT charged on sales of goods and/or services. Businesses
exempted from VAT on part of their sales are, in principle, entitled to deduct VAT paid on
a pro rata basis (i.e. the ratio between the turnover related to VATable activities and the
global turnover).
No VAT credit is allowed for expenditures not necessary for business purposes,
nor on some specific expenditure (e.g. except in some specific circumstances, fuel,
accommodation or entertainment for directors and employees, gifts, company cars).
VAT returns must be filed by the 15th day of each month in respect of transactions
made the previous month. The net amount of VAT payable must be remitted to the tax
authorities together with the return. If VAT paid exceeds VAT charged, the resulting VAT
credit can be carried forward.
Refund of VAT can only be requested in some very specific circumstances.
Customs duties
Customs duty on imports
Customs duty on imports is calculated on the cost, insurance, and freight (CIF) value of
the goods. The customs tariff on imports is the following:
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Example of goods
Chemical products
Machine tools
Material for transport of merchandise
Flour
Aggregate
Petrol, diesel, kerosene
Clothing
Furniture
Cigarettes
Customs tariff rate (%)

5
10
20
Imported goods are also subject to the following levies at the time of border crossing:
VAT on imports (wheat flour, corn, and corn flour are exempt from VAT).
For certain goods, consumption and excise duties.
Various para-fiscal levies.
Customs regulation also allows for certain suspensive rates, such as temporary
admission.
Customs duty on exports
Customs duty on exports applies to certain categories of products produced locally,

which are:

Crude coffee.
Electric current.
Mineral products and their concentrates.
Mineral oils.
Timber.
Scrap metals.
The bond value on exports of the said goods is fixed either by ministerial decree upon
suggestion of the customs administration, or in the absence of a decree, by reference to
the value of the goods when they leave the Democratic Republic of the Congo.
The rates of customs duties on exports are the following:
Example of goods
Coffee
Electrical energy
Diamond (small-scale mining)
Gold (small-scale mining)
Diamond (industrial mining)
Gold (industrial mining)
Minerals (copper, nickel, lead, etc.)
Timber
Silver
Platinum
Customs duty rate (%)

1.0
1.5
3.0
5.0
6.0
10.0
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Consumption and excise duties
Scope
The following goods are affected by consumption and excise duties:

Alcohol and alcoholic drinks.

Carbonated drinks.
Mineral oils (petrol, oil, jet A1, diesel, etc.).
Lubricating oil and lubricant.
Liquid for hydraulic brakes and other liquids for hydraulic transmissions.
Perfumes.
Cosmetics and make-up products.
Hair preparations.
Soaps, organic surface-active agents, lubricating preparations, polish, and creams for
footwear.
Plastic articles.
Rubber articles.
Tobacco.
Vehicles.
Telecommunications industrys products.
Applicability and tax base
Consumption and excise duty is applicable to:

the production in the Democratic Republic of the Congo of consumer goods subject to
duty and
the import of these products to the Democratic Republic of the Congo.
Consumption and excise duties accrue on imports, as do customs duties and VAT.
On imports, the tax base on consumption and excise duties is the raised CIF value of
the customs duties, except for mineral oils, for which the tax base is the average fiscal
threshold price.
Rates
The rates of consumption and excise duties vary from 5% to 60% according to the
products concerned.
Excise and consumption duties
Beer
Grape juice
Cider and poires and other alcoholic beverages
Juice and lemonade
Ethylic alcohol unaltered of less than 80%, spirits, and liquors
Ethylic alcohol unaltered of less than 80%, spirits, and liquors
(medical and industrial)
Ethylic alcohol unaltered of more than 80%, perfumes, and scent
Aromatic and other grape fruit
Tobacco manufactured
Brand new vehicles
Old vehicles from 1 to 5 years
Old vehicles from more than 5 years
Soaps, cigars, cream, and shoes
Beauty products and make-up items
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Tax basis
Selling price
Selling price
Selling price
Selling price
Selling price
Selling price
Rate (%)
27/35
30
30/45
8/10/15
60
5
Selling price
Selling price
Ad valorem rate
Ad valorem rate
Ad valorem rate
Ad valorem rate
Ad valorem rate
Ad valorem rate
15
37
20/40
2
5
10
10
10/15/20

Excise and consumption duties
Mobile phone related products
Chemical industry products
Plastic stuffs (plastic bags and sacks)
Tax basis
Ad valorem rate
Ad valorem rate
Ad valorem rate
Rate (%)
10
10
20
C
Para-fiscal taxes
Various para-fiscal taxes shall be collected at the time of the import and/or export of
goods in the Democratic Republic of the Congo.
The main applicable levies include the following:
Administrative payment: 2% of the CIF value.
Congolese Control Office (OCC) payments: 1.5% of the CIF value, plus various other
administrative charges (Laboratory and analysis charges: 30 United States dollars
[USD] maximum per test).
Office de Gestion du Fret Maritime (OGEFREM) payment: 0.58% of the CIF value.
Funds for the Promotion of Industry (FPI) charge: 2% of the CIF value.
Cost of inspection from the Bureau of Inspection, Valuation, Assessment, and Control
(BIVAC): 1.5% of the free on board (FOB) value.
Property tax (IF)

Scope
IF is applicable to constructions (i.e. villas, apartments, and other buildings) and land
located in the Democratic Republic of the Congo.
The person subject to this tax is the owner (bearer of title deed, holding, long leasehold,
mining) of the construction on 1 January of the tax year.
The following are exempt from IF:
The public administrations of states, provinces, and towns, and public businesses
disposing of no other resources than those coming from budgetary grants.
Licensed religious, scientific, or philanthropic institutions.
Private non-profit making organisations involved in religious, scientific, or
philanthropic works and having obtained civil personality.
Foreign states as far as embassy offices, consulates, or lodgings of diplomats or
consuls are concerned (upon condition of reciprocity).
Some constructions and land are, notwithstanding, exempt from IF, notably depending
on the status of their owner. From this perspective, the following are exempt from the
property tax on goods:
Constructions and land allocated by the owner exclusively for agriculture or farming,
including constructions serving to prepare agricultural or farming products, on the
condition that at least 80% of these derive from the farming of the property owner
concerned.
Constructions and land allocated by the owner for non-profit purposes:
for the execution of a public service, teaching, scientific research, the setting up of
hospitals, hospices, clinics, free clinics, or other similar charitable institutions
for chambers of commerce having obtained civil personality, or
for social activity of mutual companies and professional unions (syndicates)
having obtained civil personality, with the exception of locales providing
accommodation, a public house, or any business.
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Tax base
The tax rates vary according to the nature of the goods (villas, buildings of more than
one floor, flats, and other buildings) and locality ranks.
For villas, rates are fixed per square metre of area (between USD 0.3 and 1.5), while for
other taxable items the contribution is determined on an inclusive basis (by floor, by flat,
by unused land- in Kinshasa, the rate for one floor is USD 75).
Transfer tax
The transfer of a building in the Democratic Republic of the Congo gives rise to the
payment, by the purchaser, of a registration duty amounting to 3% of the buildings
value for a normal sale.
Stamp taxes
There are no stamp taxes in the Democratic Republic of the Congo.
Branch income
Tax rates on branch profits are the same as on corporate profits. However, the costs
incurred abroad by the head office of the branch are not deductible in theDemocratic
Republic of the Congo, and the branch is liable for taxation of deemed distributed profits
on top of the CIT. On profits realised, a branch will pay both the 35% CIT and a 20% tax
based on 50% of the net profits after deduction of CIT.
Taxable income consists of profits from any industrial, commercial, agricultural, or real
estate operations entered into by the taxpayer in the Democratic Republic of the Congo,
as well as any increases in the net assets as a result of such activities and any increases
derived from capital gains either realised or not, of any nature and origin.
Inventory valuation
The following three inventory valuation methods have been permitted under the local
DRC accounting law:
Average cost of goods in stock at time of issuance, multiplied by the number of object
or quantity output (i.e. weighted average cost method).
Last in first out (LIFO).
However, since adhesion of the Democratic Republic of the Congo into the Organisation
for the Harmonisation of Business Law in Africa (OHADA) law treaty effective from 12
September 2012, or as from 1 January 2015 as far as accounting matters are involved,
the valuation methods permitted are as follows:
The weighted average cost method.
LIFO.
Capital gains
There is no specific tax regime applicable to capital gains in DRC Tax Law.
Capital gains are included in the corporate taxable basis of the local entity benefitting
from the capital gain and, as such, subject to the 35% CIT.
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Dividend income
Local-sourced dividends received by a local company are subject to a 20% income tax
rate under standard law. The DRC Tax Law does not organise any kind of participation
exemption regime or tax credit regime for dividends received.
Interest income
Local-sourced interest received by local companies is subject to the standard CIT regime.
Foreign income
If an income is considered as foreign-sourced, by application of the territoriality

principle, it is not taxable in the Democratic Republic of the Congo.
Deductions
To arrive at taxable income, a taxpayer may deduct all costs actually incurred and which
have served in the production of income of the company during the year.
Depreciation
Depreciation of fixed assets used in the companys operations may be deducted.

Depreciation rates are as follows:
Nature of the good
Buildings
Machinery and equipment
Vehicles
Fixtures, facilities
Items nature
Building - general purpose or heavy equipment
Building - specific purpose
Computer equipment
Software
Motor vehicles
Furniture and fittings
Office equipment

2 to 5 (depending on the materials used)
10
20 to 25 (depending on its use)
10
Useful lives adopted (years)
20 to 25
8
3 to 5
3 to 5
4 or 5
8 or 10
10
As per the OHADA accounting law, however, assets should be depreciated as per the
practice of the specific industry so as to depreciate each category of asset over the related
normal expected useful life.
Goodwill
There is no specific provision relating to depreciation of goodwill in DRC Tax Law.

However, it is generally agreed that taxpayers can amortise goodwill in accordance with
the linear system. The amortisation of goodwill rate is at the discretion of the taxpayer,
but with the risk that the tax authorities can assess the rate otherwise.
Start-up expenses
Start-up expenses are deductible, provided they are staggered over three or four years.
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Interest expenses
Interest costs on funds borrowed from third parties and invested in the companys
operations are, in principle, deductible. Further to the tax authorities, the deduction, in
principle, requires an effective payment.
Please note that if the borrower is a private limited company and if the lender is one of its
shareholders, the interest on loans paid are not deductible from the CITbasis.
Bad debt
As a general rule, any kind of provisions (e.g. for bad debts) may not be deducted to
arrive at taxableincome.
Charitable contributions or donations are not deductible.
Fines and penalties
Legal or administrative fines of any nature are not deductible.
Taxes
The following are examples of other expenses that may be deducted to arrive at taxable
income:
Rents actually paid and rental expenses linked to buildings or parts of buildings used
in the exercise of the activity and any overheads derived from their maintenance,
lighting, etc.
Overheads costs, from maintenance of furniture and equipment used in connection
with the companys activities.
Wages, salaries, bonuses, and allowances of employees and workers used in the
operation, as well as benefits in kind if these have been added to remunerations paid.
Professional expenses directly related to the acquisition of income.
The following are examples of other expenses that may not be deducted to arrive at
taxableincome:
Expenses of a personal nature (i.e. for private purposes), such as accommodation,
school fees, leave indemnities, and any other expenses not necessarily incurred in the
business.
Expenses linked to rental properties as a landlord as well as related
depreciationexpenses.
Tax losses can be carried forward for the next five years following the tax loss year;
however, the losses must be deducted from the first year of tax profits of the company.
There is no carryback loss regime in the Democratic Republic of the Congo.
As a general rule, payments to foreign affiliates should be at arms length.

In respect of payments made by a local company to a foreign company for services (e.g.
management services, technical assistance services), such expenses are deductible,
provided that:
the services rendered can be clearly identified
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the services cannot be rendered by a local company, and
the amount paid for the service is not overstated and is commensurate to the nature
of the service itself.
Group taxation
There is no group taxation regime per the DRC tax legislation.
Transfer pricing
Transfer pricing rules are limited to the following provisions:

Interests on loans are not considered as deductible expenses for the borrower,
provided that it is a private limited company and that the lender is a shareholder.
Where a local company is directly or indirectly controlled by a foreign company, any
abnormal advantage given to the latter or related person is considered as an indirect
distribution of profits and is then added back to the profits of the local company.
In respect of payments made by a local company to a foreign company, for services
(management services, technical assistance services), the Tax Code provides that
such expenses may be deductible if (i) the services rendered can be clearly identified,
(ii) the services cannot be rendered by a local company, and (iii) the amount paid for
the service is not overstated and is commensurate to the nature of the service itself.
Thin capitalisation
There are no thin capitalisation rules in the DRC tax legislation. However, one may need
to consider other types of regulations in that respect.

Investment Code
The Investments Code allows for a certain number of tax, customs, and general order
measures designed to favour direct investments (notably a CIT holiday during a defined
investment period that would differ depending on the location of the investments). The
preferential tax treatment measures of the Investments Code apply to direct investments
and/or to entities that carry them out.
The regime of the Investments Code does not apply to numerous sectors, notably:
Mining and hydrocarbon.
Banking and insurance.
Trade.
In order to take advantage of the provisions of the Investments Code, the following
conditions must be fulfilled by the investor:
The investor must be a Congolese legal entity.
The investment must be at least USD 200,000.
The investing company must comply with the rules and regulations relating to
environment.
The investing company must undertake to train local personnel in technical and
executive duties.
The investing company must undertake to create an added value of 35% of its initial
investment (within a stipulated time period to be agreed).
The application file is examined by the National Agency for the Promotion of
Investments in the Democratic Republic of the Congo (ANAPI) and then sent to the
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Minister of Finance, who decides on the grant of the advantages foreseen in the
Investments Code to the applicant, by the way of a Ministerial Order.
Mining
The Mining Code, completed by the Mining Regulations, sets out a preferential customs
and fiscal regime that deviates on some important points from the standard regime.
The tax rules set-up by the Mining Code are supposed to be exhaustive and exclusive (it
provides for all the taxes and customs duties owed to the Treasury by eligible entities, to
the exclusion of any other form of taxation) and stable. This regime applies to all holders
of a mining title or career, or for which a mining title or career is established, as well as to
(i) affiliated companies carrying out mining activities and (ii) sub-contractors carrying
out mining activities resulting exclusively from contracts concluded with the bearer of
the mining title.
Among other tax preferential features of the Mining Code, the following apply:
A reduced CIT rate of 30%.
Absence, under conditions, of WHT on interest paid in relation to loans denominated
in foreign currency and concluded abroad.
A reduced 10% WHT rate for dividends.
A reduced 10% exceptional tax for expatriates remuneration.
A possibility to deduct some specific provisions.
A possibility for specific elements to carry forward related losses without timing
limitations.
A revision of the Mining Code is currently under discussion.
Hydrocarbons
The tax regime of oil companies is mainly provided in the production sharing contracts
as well as in the Ordinance-Law 081-013 of 2 April 1981 bearing general regulations
regarding Mining and Hydrocarbon (a revision of this Ordinance-Law is currently under
discussion).
Foreign tax credit
No specific provision relating to foreign tax credits are provided for in DRC law.
Withholding taxes
The following DRC-sourced payments are subject to a WHT in the Democratic Republic
of the Congo:
Dividends.
Royalties.
Interest. Note that if the interest is paid to a local company, the WHT does not apply
since the interest is included in the taxable income of the company charging such
interest.
Directorship fees.
Service fees paid to foreign individuals or entities not established in the Democratic
Republic of the Congo.
The Democratic Republic of the Congo has entered into double tax treaties (DTTs)
with Belgium and South Africa. However, there are still discussions from the DRC tax
authorities about their effective entry into force.
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WHT rate and payments
The standard rate of WHT on dividends, royalties, interest, and directorship fees is 20%,
which is based on the gross amount of sums paid.
If the payee does not withhold the tax from the amount invoiced and pays the tax of 20%
directly, then the tax authorities consider that the basis of the 20% tax is composed of
the amount invoiced plus the amount of the tax.
Consequently, in the case that the DRC company takes in charge the corresponding WHT,
the WHT rate will be 25% (20/80) and the amount of tax will not be tax-deductible.
For royalties, the WHT is charged on the net amount of the royalties paid. The tax
authorities consider that the net amount of royalties is calculated by deducting 30%
from the royalties invoiced (i.e. the taxable basis will be 70% of the royaltiesinvoiced).
The rate of WHT on amounts paidas compensationfor services provided by foreign
individuals/entitiesis 14%, which is based on the gross amount of sums paid.
The treaties concluded by the Democratic Republic of Congo with Belgium and South
Africa provide for reduced rates for dividends, interest, and royalties. It is also generally
agreed that, by application of treaty, services furnished by providers being tax resident
of those countries and being not established in the Democratic Republic of Congo should
not be subject to the 14% services fees WHT (however, one may note that the DRC tax
authorities are still discussing the entry into force of these treaties on the grounds that
they have not yet been published in the official gazette).
The table below provides a summary of different WHT rates:
Recipient
Resident
Non-resident
(not established)
Treaty:
Belgium
South Africa
Dividends
10/20
10/20
Interest
N/A
0/20
WHT (%)
Royalties
20
20
Directorship fees
20
20
Services
N/A
14
10/15
5/15
0/10
0/10
10
10
20
20
N/A
N/A
Tax administration
Taxable period
The taxable period is 1 January to 31 December.
Tax returns
The yearly CIT return is due by 31 March of the following year.
Payment of tax
Final payment of CIT is required when submitting the yearly tax return, which is due by
31 March of the following year.
CIT is payable in local currency through a DRC bank account by a wire transfer to the
bank account of the Public Treasury. Consequently, in order to operate in the Democratic
Republic of the Congo, the opening of a bank account in a DRC bank is mandatory.
Moreover, the tax authorities require the bank account number of the applicant in order
to grant a taxpayer number.
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The collection of CITis performedon an instalment basis. Collection by way of
prepayment has been abrogated.
Instalments of corporate tax
Instalments, in respect of CIT, apply to taxpayers who come under the supervision of
two specific kinds of tax departments: the Directorate General (DGE), the department of
the tax authorities in charge of the most important taxpayers, and the Centre des Impts
(CDI), tax centres.
These taxpayers have to pay two instalments each representing 40% of the CIT paid
during the previous fiscal year (including the amounts assessed by the tax authorities).
This, therefore, totals 80% of the CIT actually paid in the previous year. The first
instalment must be paid before 1 August, and the second instalment before 1 December.
Both payments are offset against the final CIT due for the fiscal year. The balance is paid
when the tax return is submitted.
Tax audit process
In practice, there is a tax audit every year.
Since 27 February 2013, a company may get audited up to four years after submission of
a tax return (previously five years).
The tax authorities shall discuss any relevant topic in relation to any tax.
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PwC contact
Prosper Bizitou
88 Avenue du Gnral de Gaulle
Pointe Noire, Republic of Congo
Tel: +242 05 534 09 07
Further to the promulgation and publication of the 2014 Finance Act, the following new
tax measures have been introduced:
The corporate income tax (CIT) rate is now at 30% (previously 33%).
Donations and gifts made to beneficiaries in the Republic of Congo are deductible
from CIT basis at a limit of 0.5 of the turnover net of taxes; that limit is 0.5% as
regards donations and subsidies made for the support and development of sport; 50%
of amounts of donations and payments upon the occurrence of a natural disaster or
accidental disaster are deductible.
Goods with a unit value of less than 500,000 Central African CFA francs (XAF)
(previously XAF 100,000) can be fully amortised in the year of acquisition,
irrespective of their duration of use.
Net capital gains realised as part of a direct or indirect transfer of social assets and/or
rights resulting in a change of control of a Congolese company are taxable.
Companies experiencing permanent or temporary cessation of activity are now
required to make a declaration to the tax authorities within 15 days of the effective
cessation and provide a certificate of tax morality for the same year; with particular
regard to companies subject to the deemed profit tax of 7.7%, they are now required
to file, at the end of each contract, a statement of cessation of activities, together with
a report of termination detailing the activities covered by the contract, co-signed by
both parties.
Clarity on the exemption from withholding tax (WHT) of 5% on revenue for legal
entities subject to CIT.
WHT on revenue of foreign entities with duration of work of not more than six
months or more than six months for foreign entities with no permanent professional
installation.
Occupancy tax on any construction of durable materials or facilities occupied
by natural or legal persons as habitation, office, trade, industry, and other local
inhabited and its outbuildings.
Premiums transferred in reinsurance perceived by foreign reinsurance companies
not domiciled in a CIMA member state are exempted from the 20% WHT until 31
December 2016.
The business tax has been totally reformed.
The direct or indirect transfer of assets or social rights of Congolese companies is now
subject to a registration duty of 5% calculated on the value of the assets transferred
and social rights of these companies. This registration duty is also due in the event of
change of control of the company by a change of at least 60% shareholding.
Private contracts, as well as contracts signed abroad or in jurisdictions where
registration is not required, no longer have to be registered within three months after
their signature. They can be registered at any time.
The liability of the dividend tax is extended to Congolese companies subject to the
deemed profit tax scheme.
VAT charged on the price elements of a taxable transaction related to services
provided by a non-resident during a given month is now deductible in the same
month.
Congo, Republic of
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Tax filing deadlines are now set between the 10th day and the 20th day of each
month, and between the 10th day and the 25th day for the month of August.
Special economic zones and industrial zones have been instituted. A special tax
regime is applicable in said zones.
Health free zones have been established. A special tax regime is applicable in said
zones.

Congolese registered companies are taxed on the territoriality principle. As a result,
Congolese companies engaged in business outside of the Republic of Congo are not
taxed in the Republic of Congo on the related profits.
In the absence of a tax treaty stating otherwise, a non-resident company is liable for CIT
on income realised in the Republic of Congo or derived from or resulting from work/
services of any nature supplied or used in the Republic of Congo.
The standard CIT rate in the Republic of Congo is 30%, with certain exceptions.
A 20% WHT is imposed on income sourced in the Republic of Congo that is derived by
foreign companies not necessarily engaged in activities in the Republic of Congo.
Minimum tax
The minimum tax payable is 1% of the annual turnover and cannot be less than XAF 1
million (XAF 500,000 if annual turnover is less than XAF 10 million).
A 2% minimum tax is payable by companies showing losses during two consecutive fiscal
years. The 2% rate is applied to the sum of gross turnovers and products and benefits
realised by the company in the most recent year in which it earned a profit. The 2% tax
is not deductible for CIT purposes. However, in a companys first profit-making year after
incurring the losses, half of the 2% tax is deductible.
Industry specific rates
A CIT rate of 25% applies for agricultural companies, microfinance companies, and
private schools organised as a company.
A CIT rate of 30% applies for mining companies and real estate companies.
A CIT rate of 35% is applied on a deemed profit equal to 22% of the total gross
remuneration (i.e. an effective tax rate of 7.70% of the taxable turnover made in the
Republic of Congo) derived from services rendered by:
foreign companies that qualify for this simplified tax regime and
local companies and branches that realise more than 70% of their annual turnover
with oil companies and oil services companies (in this case, the deemed profit tax is
regarded as a final burden).
Note that these companies revert to the general taxation regime the year after the
turnover realised with oil and gas sector companies becomes less than 70% of their
annual turnover.
Headquarters operations of foreign companies
The headquarters operations of foreign enterprises taxation regime is subject to prior

approval by the tax authorities.
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If enacted, headquarters operations of foreign enterprises and international groups will
be granted a favourable tax status in the Republic of Congo. For those that qualify, CIT
is charged on a deemed profit equivalent to a prescribed percentage of headquarters
expenses. The percentage of which is currently unknown.
To qualify, the headquarters must be registered under the form of a public limited
company or branch and must act solely for the benefit of the group in the area of
management, control, or coordination.
Global flat taxation
The global flat tax is at 10%. It is calculated on the annual turnover of small and
medium-size enterprises taxable under the flat rate regime, whose turnover does not
exceed XAF 40 million.
Local income taxes
See Business tax and accessory taxes in the Other taxes section.
Corporate residence
A company is considered resident in the Republic of Congo if it has its registered office or
principal office for all its activities in the Republic of Congo.
There is no general definition for a PE. However, a PE has been defined by the double
tax treaties (DTTs) signed between Congo and France, the Common Organisation for
Africa and Madagascar (OCAM), and the Customs and Economic Union of Central Africa
(UDEAC) to include a place of management, a branch, an office, a factory, a workshop,
and a mine, oil or gas well, quarry, or other place of extraction of natural resources.
Other taxes
The Congolese VAT rate is 18%. In addition to VAT, a surtax calculated at the rate of 5%
applies to the amount of VAT, which must be invoiced and paid at the same time as the
VAT. Therefore, the VAT rate is globally 18.9%. The surtax is not deductible (final cost).
Under the provisions of the VAT Law, all economic activities conducted in the Republic
of Congo are subject to VAT, regardless of their purpose, profitability, or the legal
status of the business performing them, and irrespective of whether these activities are
habitual, occasional, or originate in the Republic of Congo or from a foreign country.
Therefore, any person, natural or legal, engaged in an industrial, commercial, or
professional activity is subject to VAT unless specifically exempt by law.
Section 8 of the VAT Law states a service is considered as provided in the Republic of
Congo when the service is used or exploited in the Republic of Congo.
In principle, an entrepreneur is entitled to credit the VAT paid on purchases of goods,
equipment, and services for use in business (input VAT) against the total of the tax
charges to ones customers for deliveries made and services rendered (output VAT).
Taxpayers not exclusively carrying out transactions giving rise to a VAT deduction
shall deduct VAT proportionally on the portion of the income pertaining to taxable
transactions and not a flat rate, as was previously the case.
Congo, Republic of
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VAT payers carrying structural VAT credit have the obligation to do inventories in the
presence of tax administration representatives for companies in October, failure to
which the VAT credit shall be cancelled.
VAT payers now have the obligation to provide an excerpt of their VAT trial balance of
each account on VAT in accordance with the accounting system used by the company,
failure to which all VAT deductions shall be added back.
Exporters subject to VAT who realise more than 80% of their sale transactions abroad
are obligated to withhold VAT paid on the purchases of goods and services (the list of
exporters entitled to withhold VAT will be published by the tax authorities).
VAT resulting from tax assessment is not deductible.
VAT paid in cash in connection with invoices exceeding XAF 500,000 is not deductible.
A VAT return must be filed on a monthly basis before the 20th day of every month.
Customs duties
Whenapplicable, import duties are payable at rates ranging from 5% to 30% on the
customs value of imported goods. Customs value is calculated on the cost, insurance,
and freight (CIF) level.
Customs duties rates

Group
Basic necessities
Raw materials and capital goods
Intermediate and miscellaneous goods
Consumer goods
Rates (%)
5
10
20
30
Additional entry taxes
Additional entry taxes apply on the importation of goods, such as:

Economic and Monetary Community of Central Africa (CEMAC) integration tax: 1%
on CIF value.
Statistic tax: 0.2% on CIF value.
Organisation for the Harmonisation of Business Law in Africa (OHADA) contribution:
0.05% on CIF value.
Economic Community of Central African States (CEEAC) contribution: 0.04% on CIF
value.
2% customs duties reduced rate
In addition to a VAT exemption on imports, as an exceptional measure, a 2% customs

duty reduced rate on imports of machinery and equipment used for agriculture, flower,
forest, and fish industries, as well as fertilisers and other goods necessary for agriculture,
is applicable.
Computer royalty
A 2% computer royalty, to cover expenses incurred by the Customs Administration

on computer data processing, is applicable without exception or exemption to all
importation and exportation of goods. The royalty applies on the customs taxable value
of any imported or exported goods in the Republic of Congo.
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Excise taxes
Excise duties on all locally made products are due at the rate of 10% while imported
goods are subject to excise duty at the rate of 25%.
Land tax on built properties
Land tax is payable annually on built properties and is due from the owner. However,
properties built for the purpose of accommodation are exempt for ten years, and
properties built for business purposes are exempt for five years. The effective rate is
determined every year by the local council.
The land tax is levied on the rental value after a deduction of 75% (decline,
maintenance, and repair expenses) for properties built for business purposes. The land
tax is levied on the cadastral value after a deduction of 75% (decline, maintenance, and
repair expenses) for properties built for accommodation purposes.
Land tax on non-built properties
Land tax is payable annually on non-built properties and is due from the owner.
However, properties intended for plantations and breeding are temporarily exempt for a
three to ten year range. The effective rate is determined every year by the local council.
The land tax is levied on 50% of the cadastral value, determined every year by the
Ministry of Finances. The land tax is arbitrarily assessed by hectares in rural areas
according to the nature of the plantations.
Rent tax
Rent tax is payable annually on the rental of built property. It also applies on non-built
property for business purposes. The rent tax is imposed on the occupant of the premises
(whether the occupant is the owner, a tenant, or a subtenant).
The rent tax, which is equal to one-twelfth of the rents due within a year, is due annually
on or before 20 March. For new lease agreements, the rent tax is due within three
months of the effective date of the lease agreement and is calculated as a proportion of
the rents due until the end of the year.
The rent tax is paid by the tenant on behalf of the owner, or by the subtenant on behalf
of the tenant. The tenant/subtenant has the legal obligation to pay this tax on behalf of
the lessor. Tenant and subtenants make a once-a-year deduction between 1 January and
30 April of the same year from all the rents due to the owner.
A 50% fine, assessed on the amount of the tax, is due for any late payment of the rent
tax.
Registration fees and stamp duties
Lease agreement registration fees amount to 3% of the value of the annual rent paid
during the tax year, including premises charges if any. Additional centimes also apply
at a 5% rate of the registration fees. Stamp duties and registration fees should be paid
for the total duration of the lease agreement. In the case where the lease agreement is
renewed, stamp duties and registration fees should be paid for the renewable period.
Stamp duty ranges from XAF 200 to XAF 20,000 on certain documents.
Examples of documents that are subject to stamp duty include:
Letters of agreement and other letters, which are prepared for use as evidence of act,
fact, or condition of civil nature.
Notarial deeds and their copies.
Visas and flight tickets.
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The following fees for the registration of contracts are due within three months from
date of signature:
Purchase orders for public contracts at the rate of 2% for contracts with a value
exceeding XAF 10 million.
Subcontracts in building construction and public work sector at a fixed fee of XAF
100,000.
Insurance contracts are registered free of charge and failure to register such contracts
will be subject to penalty at the fixed fee of XAF 3 million.
A fixed fee of XAF 1 million for the registration of every oil services contract with
foreign companies and their sub-contractors before the execution of the contract.
All insurance policies carried out by oil, mining, and telephone companies are subject
to registration free of charge; failure to register will result in penalties that total XAF
3 million.
Registration fee on lease of movables and immovables used for habitation or
commercial purposes at the rate of 3%.
Registration fee on the transfer of rights in a lease at the rate of 10%.
Private contracts, as well as contracts signed abroad or in jurisdictions where
registration is not required, no longer have to be registered within three months after
their signature. They can be registered at any time.
Insurance contracts shall be registered and tax on insurance paid on the 20th day of the
month following the insurance subscription. All importers have an obligation to insure
imported equipment with local insurance companies.
Transfer of company shares are subject to a 5% registration fee.
The direct or indirect transfer of assets or social rights of Congolese companies is now
also subject to a registration duty of 5% calculated on the value of the assets transferred
and social rights of these companies. This registration duty is also due in the event of
change of control of the company by a change of at least 60% shareholding.
Oil and gas
Specific rules and caps apply for the upstream (production) oil and gas industry.
Tax on pollution
The tax on pollution is payable by petroleum and mining extracting companies in the
production phase, at the rate of 0.2% on the annual turnover.
This tax constitutes a non-deductible expense for the extracting mining/hydrocarbon
company in the production phase.
This tax is due in the course of the year and payable quarterly by instalment,
proportionally to the production realised during the just-ended quarter and not later
than the 20th day of the month following the end of the quarter.
Business tax and accessory taxes
The business tax (patente, in French) is a tax collected for local communities. Business
tax has been fundamentally reformed by the 2014 Finance Act.
Legal entities that carry out, in the Republic of Congo, a commercial activity, industrial
activity, or any other activity not included in the statutory exemptions are subject to
business tax.
The 2014 Finance Act removes the previous fixed and variable rates and instates the
following taxable basis:
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For taxpayers under the general regime: the annual turnover, excluding taxes of the
previous fiscal year declared or assessed by the administration, for fiscal years ended
on 31 December of the year N-1 and to be filed to the tax administration between 10
May and 20 May of the year N.
For taxpayers that do not realise turnover: all operating expenses in the Republic of
Congo.
A surtax of 3% is also calculated on the business tax.
Newly registered companies in their first calendar year are exempt from paying business
tax.
Foreign companies subject to the deemed profit tax regime are taxed for the entire
year from the start of operations in the Republic of Congo on the basis of the estimated
contract value of their services.
The business tax is payable on the basis of graduated rates as follows:
Annual turnover (XAF)
Below 1,000,000
1,000,001 to 20,000,000
20,000,001 to 40,000,000
40,000,001 to 100,000,000
100,000,001 to 300,000,000
300,000,001 to 500,000,000
500,000,001 to 1,000,000,000
1,000,000,001 to 3,000,000,000
3,000,000,001 to 5,000,000,000
5,000,000,001 to 20,000,000,000
Above 20,000,000,000
Rate
XAF 10,000
1%
0.75%
0.5%
0.25%
0.2%
0.18%
0.175%
0.150%
0.125%
0.055%
The accessory taxes levied by the Chambers of Commerce are reduced by four points,
from 7% to 3%. It is calculated on the amount of business tax payable.
The National Investment Fund tax previously calculated at 20% on the amount of
business tax plus various taxes payable is suppressed.
Business tax is due for 12-month period from 1 January to 31 December of the taxation
year, and must be paid in full by the taxpayer, not later than 20 March of each year (in
practice it is 20 April). Beyond this date, the taxpayer is liable to a penalty of 100% of the
amount in excess of the principal amount.
Business tax due by foreign companies subject to the deemed profit tax is payable within
15 days after the beginning of activities. Otherwise, a penalty of 100% is applied.
Business tax paid to the Inland Revenue is not refundable.
Tax on company-owned cars
The tax on company-owned cars applies to the previous fiscal year company-owned cars
and is due on 20 March at the latest.
With the exception of estate cars, private cars of companies falling into the category of
own use cars for the issuance of vehicle registration documents are subject to tax.
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The tax rates vary from XAF 200,000 for engine ratings not over nine horsepower, to
XAF 500,000 for the rest.
Cars registered more than ten years ago are exempt from tax.
Single tax on remuneration
A single tax, at the rate of 7.5% on the gross salary of employees, shall be borne by
the employer. This tax is payable on the 20th day of the following month after the
remunerations were due.
The employer shall be liable for the following social contributions:

Family allowance fixed at the rate of 10.035% of gross salary, benefits in kind
inclusive, capped at XAF 7.2 million annually.
Work accident contribution fixed at the rate of 2.25% on gross salary, benefits in kind
inclusive, capped at XAF 7.2 million annually.
Old age, invalidity, and death insurance fixed at the rate of 8% of gross salary,
benefits in kind inclusive, capped at XAF 14.4 million annually.
Branch income
70% of the net profits made by branch offices and foreign companies carrying out
business are automatically considered as distributed profits and subject to tax on
dividends at the rate of 20%.
Taxable income is based on financial statements prepared according to standard
statements of the OHADA treaty.
Business expenses are generally deductible, unless specifically excluded by law.
Inventory valuation
Stocks are valued at cost price. However, if the market price is lower than the cost price,
the undertaking shall make provisions for depreciation of inventory.
Capital gains
Capital gains are treated as ordinary business income and are taxed at the standard CIT
rate of 30%. However, a capital gain realised on the disposal of a fixed asset in the course
of trading is excluded from income for a period of three years if the taxpayer reinvests
the gain in new fixed assets for the business.
If the business is totally or partially transferred or discontinued, only half of the net
capital gain is taxed if the event occurs less than five years after the start-up or purchase
of the business and only one-third of the gain is taxed if the event occurs five years or
more after the business is started or purchased. However, the total gain is taxed if the
business is not carried-on in any form.
Capital gains realised by non-residents on transfers of shares of Congolese companies
are subject to taxation at the rate at 20%. This tax shall be paid upon registration of the
deed of transfer of the considered shares. Under such sale transactions, the seller, the
buyer, and the company whose shares are transferred are jointly and severally liable for
the levied tax.
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Net capital gains realised as part of a direct or indirect transfer of social assets and/or
rights resulting in a change of control of a Congolese company become subject to CIT.
Dividend income
Dividends are treated as ordinary business income and are taxed at the standard CIT
rate of 30% for resident corporations.
After three years, profits credited to the non-compulsory reserve are considered to be
dividends and are accordingly subject to the 20% WHT on dividends.
Amounts claimed as a result of a tax adjustment and added back to revenue, if not
invested in the company, are subject to tax on dividend.
Dividends received from a Congolese company (DivCo) by a commercial company

incorporated in the Republic of Congo (HoldCo) are exempt from CIT and subject to a
final 20% WHT if the following conditions are met:
HoldCo and DivCo are incorporated in the CEMAC.
HoldCo holds 25% of the capital of DivCo.
HoldCo holds the shares for at least two years from the date of purchase.
However, 10% of dividends that are deemed to represent the share of cost and expenses
are included in the taxable profits of HoldCo and liable for the CIT.
If the above conditions are not met, dividends received from a Congolese company by
another Congolese company are subject to a 20% WHT, which is an advance payment of
the recipients CIT.
Interest income
Subject to any specific provisions, interest paid or deemed to be paid is subject to a WHT
at the rate of 20% of the interest paid.
The interests paid are deductible for CIT purposes for the Congolese company to the
limit of 20% of the taxable profit before deduction of the expenses in question.
Foreign income
Resident companies are taxed only on income (except for dividends received abroad)
derived from their activities carried out in Congo.
Deductions
Generally, a deduction is allowed for all expenditures incurred to obtain, collect, and
maintain business profits. To be deductible, expenses should be incurred necessarily for
the normal purposes of the business and be supported by suitable evidence.
In general, all types of fixed assets, except land, are depreciable for tax purposes as long
as they can be shown to have been acquired for business purposes of the corporation.
Depreciation must be calculated on the original purchase price. The straight-line method
is used, and the Congolese General Tax Code sets forth maximum rates of depreciation.
Goods costing less than XAF 500,000 per item may be written-off at purchase as
expenses.
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Depreciation recorded when the company is in a loss position may be carried forward
without limitation and deducted from the first available taxable profits, provided it was
appropriately disclosed in the annual CIT return.
Recoverable and identifiable packaging is regarded as a fixed asset and is recorded in
a fixed asset account at the time of purchase. This packaging is regarded as returnable
packaging when the supplier intends to act as the sole owner of the packaging.
Unrecoverable packaging is recorded as an expense and is deductible for tax purposes.
Exceptional accelerated depreciation may be authorised in certain circumstances for
heavy equipment with a value of more than XAF 40 million. This special accelerated
depreciation does not apply to private vehicles owned by the enterprises.
The following list contains maximum rates of depreciation as set forth in the General Tax
Code:
Assets
Construction
Fixed devices and equipment
Movable equipment
Transport materials
Furniture, fittings, and other equipment
Fishing equipment
Hotels, bars, and restaurants
Plastic equipment (moulding)
Equipment subject to chemical action
Rates per year (%)

5 to 20
5 to 25
10 to 100
5 to 33.33
10 to 33.33
10 to 20
10 to 50
10 to 33.33
20
Exceptional depreciation method
The exceptional depreciation method is an accelerated depreciation method.

Companies may elect the accelerated depreciation method for heavy materials and
equipment that:

are purchased new for a value higher than XAF 40 million

have a useful life of at least three years
are used for manufacturing, processing, transport, and handling, and
are bound to an intensive use.
The application for the accelerated depreciation method must be submitted to the head
office of taxes within three months of the purchase of the assets to be depreciated. The
option is granted upon approval of the Ministry of Finances. If the administration fails
to respond to the application for accelerated depreciation within three months, the
application is tacitly granted.
Under the exceptional depreciation method, a 40% deduction may be taken in the
year of acquisition of the previously mentioned assets, increased with the normal rate
calculated on the residual value after application of the accelerated depreciation. These
assets are depreciated on a straight-line basis thereafter.
Goodwill
There is no specific provision relating to amortisation of goodwill in the Republic of

Congo.
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Start-up expenses
There is no specific provision in the Congolese General Tax Code on the deduction of
start-up expenses. Start-up expenses that occurred in the first year of incorporation (N)
are deductible in the second year of operation (N+1).
According to the OHADA Uniform Act relating to Accounting Systems and Accountancy,
start-up expenses can be amortised either in one year (in such case, they are booked in
the deductible expenses during the first fiscal year) or in two years (50% during the first
fiscal year and 50% during the second fiscal year).
Interest expenses
Interests are deductible, subject to the following conditions:

General limit: Regardless of the form under which a legal entity is registered, the
deduction is allowed with an interest rate limited to the rate of the advances in
current accounts on states funds of the Bank of the States of Central Africa (BEAC)
raised by two points. Currently, the ceiling for the deduction of interests is 7.25%.
For private limited companies and public limited companies, the deduction is allowed
according to the status of control over the management of the enterprise, as follows:
For shareholders who have control over the company de facto or de jure, the
deduction is allowed only to the extent that the sums paid do not exceed, for the
shareholders as a whole, half of the paid-up capital and are within the limit sets
forth in the general limit.
For other shareholders, the general limit applies.
Bad debt
Expenses and debts not recovered within two years after their account recording shall be
added back to the taxable basis of the first fiscal year subject to general accounting audit
even if the fiscal year is statute barred.
Donations and gifts made to beneficiaries in Congo are deductible from CIT basis at
a limit of 0.5. The limit is 0.5% as regards donations and subsidies made for the
support and development of sport. 50% of amounts of donations and payments upon the
occurrence of a natural disaster or accidental disaster are deductible.
Fines and penalties
Penalties relating to violation of regulations are not deductible.
Taxes
Taxes, other than income taxes, are usually deductible. Examples of deductible taxes
include customs duties, excise duties, payroll taxes, business tax and accessory taxes,
registration taxes, and unrecoverable VAT.
CIT itself is not deductible, nor is the special tax on company-owned cars.
Taxes withheld on remuneration, paid to third parties (third parties taxes), and remitted
to the tax office by a Congolese enterprise are not deductible.
For tax purposes, losses may be carried forward to offset profits earned in the three
succeeding fiscal years. Carryback losses are not permissible.
As mentioned above, depreciation recorded when the company is in a loss position may
be carried forward without limitation.
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Allowable deductions include sums paid abroad to foreign companies for:

actual services, notably overhead for the operations made for the benefit of a
company based in the Republic of Congo, including costs of studies; technical,
financial, and accounting assistance; commissions and fees; and interests, and
use of patents, licences, trademarks, drawings, manufacturing processes, patterns,
and similar rights to the extent the payer proves they correspond to actual operations,
and they are neither abnormal nor excessive.
Subject to the provisions of tax treaties (France, CEMAC, OCAM), the deduction is
allowed within a limit of 20% of taxable profits before deduction of the expenses in
question. For specific activities, such as, namely, public works business, the limitation of
deductibility is capped at 2% of turnover.
In the event of losses, the rate is applied on the results of the last profit period, which
is not statutory limited. In the absence of profits during the period out of statutory
limitation, the sums paid are not allowed as tax deductions.
When the sums are not allowed, as a whole or in part, in the deductible expenses, they
are deemed to be paid benefits and are subject to tax on the dividends at the rate of 20%.
Royalties for the transfer or concession of patents, trademarks, drawings, and other
similar titles are deductible to the extent the payer proves they are still valid. When these
royalties benefit an enterprise contributing in the management or share capital of an
enterprise in the Republic of Congo, they are deemed to be paid benefits and are subject
to tax on the dividends at the rate of 20%.
Commission or brokerages, relating to goods purchased on behalf of enterprises based
in Congo, are allowable tax deductions up to 5% of the purchase amount made by the
central purchasing office, the head office, or the intermediaries. The reductions shall
benefit enterprises based in the Republic of Congo. An original suppliers invoice must
be attached to the intermediarys invoice.
The payer shall prove that:
the purchases necessitated the interventions of a broker or intermediary
the commissions provided better supply conditions compared with the actual
situations on the market, and
the commissions are not excessive compared with the nature of the services.
Group taxation
There is specific group taxation within the CEMAC area.
The stocks or shares owned by the parent company represent at least 25% of the
capital of the subsidiary company.
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The parent company and subsidiary companies have a registered office in the CEMAC
state (Cameroon, Central Africa Republic, Chad, Gabon, Equatorial Guinea, and
Republic of Congo).
participating company, which undertakes to retain them for at least two consecutive
Another group taxation regime is also available upon option and under certain
conditions, wherein the taxable profits of the groups companies can be consolidated at
the level of the holding company, which will pay the tax due.
Transfer pricing
For companies under the control, de facto or de jure, of companies or groups situated
outside the Republic of Congo, payments made by whatever means are considered as
transfer of profits and subject to CIT and tax on income from securities if the transfer
includes:

Increase in the purchase price or decrease in the sale price.

Payment of excessive royalty or without a consideration.
Loans without interest or at an unjustifiable rate.
Reduction of debts.
Benefits that are out of proportion in relation to the service rendered.
Transfer pricing rules have been reinforced, and taxpayers can request their transfer
method to be approved by the tax authorities before implementation.
Thin capitalisation
There are no specific thin capitalisation rules in the Republic of Congo.
Holding companies
A taxation regime applies to incorporated holding companies complying with certain

conditions.
Within this regime, capital gains on shares are:
subject to CIT at standard rate if the shares transferred have been held during less
than two years
subject to a reduced CIT rate (25% of the standard rate, i.e. 8.25%) if the shares
transferred have been held during more than two years, and
tax exempted if (i) the shares transferred have been held for more than two years and
if (ii) the shares held include at least 60% of shares of CEMAC resident companies.
In addition, these companies benefit from other tax advantages, such as a WHT
exemption on certain types of interest as well as a reduced WHT on dividend paid (i.e.
50% of applicable rate).

The current investment regime in the Republic of Congo was set out by Law No. 6-2003
of 18 January 2003, which established the investment charter. The charters application,
Decree No. 2004-30 of 18 February 2004 established modes of business registration.
Scope: The following may be registered under the investment charter:
Businesses wishing to pursue an activity in the Republic of Congo, except for
activities such as brokerage, trade, import and production of arms, and import or
processing of toxic waste and by products.
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Under certain conditions, commercial activities linked to collection, storage,
distribution, and export of locally produced products, except alcoholic beverages
and tobacco.
New activities (as opposed to pre-existing activities).
Forestry businesses benefiting from a forestry permit called the forestry
development unit.
New companies coming from the redemption of a registered company.
Conditions of eligibility for the investment charter: To be eligible, a company must
satisfy the following conditions:
Be registered with the Trade and Personal Credit Registry in the Republic of
Congo.
Create permanent employment, to be carried out over a minimum of 280 days per
year.
Maintain company share capital equal to or greater than 20% of investments.
Primarily use local principal materials necessary for the production of the finished
or semi-finished product, when available, with equal conditions concerning price,
quality, and time of delivery to outside, in the case of industry.
Primarily use local business services, when available, with equal conditions
concerning quality, price, and time of realisation regarding payments to external
businesses, for the case of service businesses.
Be registered at the Congolese National Welfare Fund.
Open an account at a local bank or any other financial, savings, or credit
establishment.
Primarily use a local workforce, when available, with the same expertise as the
foreign workforce.
Registration procedure: Entitlement to the benefits prescribed by the charter is
subject to obtaining a registration agreement, provided by the National Investment
Commission.
Fiscal and customs benefits set out by the Investment Charter: These benefits vary
according to privileged regimes, motivation measures, and in a general manner.
Privileged regimes
The charter sets out three privileged regimes:

General regime (G).
Special regime (S).
Preferential development zone regime.
General regime (G)
The general regime applies to businesses that fulfil the aforementioned general
requirements and carry out investments greater than or equal to XAF 100 million.
Special advantages are conferred according to the period of activity of the registered
business.
During the set-up period and the first three exploitation tax years, the company receives
several benefits, as follows:
In customs matters, the company benefits from the provisions of the CEMAC customs
code relative to asset improvement mechanisms for export activity and from the
suspension of customs duty in the form of temporary admission or franchise for
natural resource research activities.
In fiscal matters, the company benefits from the 50% reduction of registration fees for
business foundation, increases in capital, company mergers, and transfer of company
stocks and shares.
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For the three first exploitation tax years and until the first year of sale or first service, the
following fiscal benefits are added with the aforementioned reduction of registration
duties:
Total exemption from the tax on company earnings.
Companies that are subject to CIT because of their size or activity will be exempt
from CIT.
Businesses that are subject to personal income tax because of their size or activity
will be exempt from personal income tax.
The authorisation to proceed to accelerated depreciation.
The authorisation to carry forward losses for the first three tax years.
The application of zero-rate VAT on exported products.
Special regime (S)
The special regime applies to businesses that fulfil the aforementioned general
requirements and carry out investments between XAF 30 million and XAF 100 million.
In addition to the advantages of the aforementioned (G) regime, businesses registered
under the (S) regime benefit during the set-up period and the first three exploitation tax
years from the moderation of registration duties for the incorporation of the business,
increases in capital, company mergers, and transfer of company stocks and shares.
This moderation of registration duties is granted exclusively by decree of the Minister
in charge of the Economy and Finances upon a decision of the National Investment
Commission.
Preferential development zone regime
All exporting businesses registered under the investment charter are eligible for the
preferential development zone system, including free-trade zones.
The institution, organisation, and function of the preferential development zone are
fixed by a specific text.
Incentives to set up in remote areas
All new businesses registered under (G) or (S) regimes that are located in a remote
area benefit from a reduction of 50% on the tax on company earnings in the fourth and
fifth year following the first three tax years for which the business benefited from total
exemption from the tax on earnings or personal income tax.
The business is considered as belonging to a remote area from the moment its
production units are set-up and 90% of the production unit workforce is working in the
remote location.
The appraisal of a zones location results from the exclusive competency of the National
Investment Commission.
Incentives for social and cultural investment
All new businesses registered under (G) or (S) regimes carrying out investments of a
social and cultural character may benefit from a fiscal reduction by ministerial decree of
the Minister in charge of Finance and the Economy, upon the decision of the National
Investment Commission.
These benefits may not, however, be added to those mentioned above and allocated to
remote areas, even if the business concerned is set-up in such a location.
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General measures
For the duration of the privileged regime, and subject to current texts, the company shall
enjoy fiscal stability in terms of local and state taxes.
Privileged regimes (G) and (S) are allocated only once and are not renewable. The
business may receive fiscal and customs advantages pertaining to the set-up period.
Fiscal advantages concerning the exploitation period are applicable only after the set-up
period.
The end of the set-up period is certified by decision of the Minister in charge of Finance
and the Economy after the adoption of the verification report by the National Investment
Commission.
Respect of the aforementioned general requirements set out by the charter is a
prerequisite for benefiting from these motivation measures.
Export incentives
A measure is reserved for businesses that export at least 20% of their production.
The benefits are as follows:
The provisions of the CEMAC customs code, relating to asset improvement
mechanisms.
Exemption from customs duties and taxes on manufactured products, except
computing fees and statistic tax.
Application of a zero-rate VAT on exported products.
Non-manufactured goods remain subject to the common law export system.
Incentive to reinvest earnings
A measure is reserved for businesses that carry out new investments of at least one-third
of existing assets.
The benefit conferred consists of a 50% reduction of the tax on company earnings for the
three years following the realisation of the investment.
Notwithstanding, this benefit is granted upon the following conditions:
The business declares to the permanent secretary of the National Investment
Commission its investments, planned investment, and the state of existing capital
assets.
The National Investment Commission, on the report of checking teams, verifies if the
new investments correspond to one-third of the preceding capital assets.
All investments are realised within one year.
Investments generate new employment.
Investments increase capacity of production by at least 10%.
The business has sound ethical concerns.
Institution of preferential tax regime for special economic and

industrial zones and health free zones
The 2014 Finance Act provides for incentives in special economic zones as follows:

CIT and dividend tax exemptions for six years.

From seven to ten years: CIT and dividend tax rate of 5%.
Beyond ten years: CIT rate of 15% and dividend tax rate of 10%, permanently.
Single tax on remuneration rate of 2.5%, permanently.
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Exemption from registration fees for company creation and 50% reduced rates on
transfer deeds.
The 2014 Finance Act provides for incentives in industrial zones as follows:

CIT and dividend tax exemption for five years.

From six to ten years: CIT rate of 10% and dividend tax rate at 5%.
Beyond ten years: CIT rate of 20% and dividend tax rate of 10%, permanently.
Single tax on remuneration rate of 2.5%, permanently.
Exemption from registration fees for company creation and 50% reduced rates on
transfer deeds.
The 2014 Finance Act provides for incentives in health free zones, as follows:
CIT total exemption.
Dividend tax rate of 5%.
Single tax on remuneration rate of 2.5%.
It should be noted that eligibility requirements for the preferential regimes described
above have not been set yet.
Foreign tax credit
There are no specific rules relating to foreign tax credits in the Republic of Congo.
Withholding taxes
Services, dividends, and attendance fees
Services
Services rendered by foreign suppliers are subject to a 20% WHT.

In addition, companies that have no tax residence in the Republic of Congo are subject to
a 20% WHT if they earn revenues realised in the Republic of Congo or coming from the
Republic of Congo, and which come from works or services of any nature performed or
used in the Republic of Congo.
WHT does not apply to resident suppliers of a country that has signed an international
tax treaty with the Republic of Congo, provided certain conditions are met.
Payments made by building and public work companies to their subcontractors
WHT is applicable on payments made by building and public work companies to their
sub-contractors, including to engineering offices, at the following rates:
3% for sub-contractors taxable on their net profit.
10% for sub-contractors taxable on a deemed profit (Rgime du forfait).
Non-observances, omissions, or underpayments are sanctioned by a XAF 5 million fine
and by the non-deductibility of the amounts so paid. Late payments are sanctioned by a
2% penalty per month or portion of month, with a maximum of 100%.
For the considered sub-contractors, said withholding is considered as an instalment of
tax.
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Dividends
Dividends distributed by a Congolese company are subject to a 20% WHT unless a

different rate applies under an international tax treaty (e.g. France, CEMAC, OCAM).
The same rate applies for dividends distributed to a resident shareholder.
Under the tax treaty between France and Congo, the applicable WHT rate is 15%. There
is no specific rate defined in the CEMAC and OCAM tax treaties.
Attendance fees
Attendance fees are subject to a 22% WHT unless a different rate applies under an
international tax treaty (e.g. France, CEMAC, OCAM).
Payments to local independent contractors
Payments to local independent contractors (self-employed contractors, i.e. those not

registered with the Congolese Trade Registry) are subject to a WHT at the rate of 5%
from such payments, to be remitted to the Public Treasury.
Late remittance of the WHT is subject to a late payment penalty of 50% within the first
two months and 100% if the late payment exceeds two months.
The application of the 5% WHT also applies to companies regrouping professionals and
increases penalties in case of non-payment (200% penalty, plus 5% interest per month
for late payment).
Revenues of legal entities subject to CIT are excluded from the application of the WHT of
5%.
WHT rates summary

Recipient
Dividends (%) Interest (%) Royalties (%)
20
0
0
20
0
0
Non-resident corporations and individuals (Non-treaty)
20
20
20
Treaty with:
France
15
0
15
OCAM
20
0
0
CEMAC
20
0
0
Tax treaties
The Republic of Congo is a member of CEMAC, which unites the following six states:
Cameroon, Central African Republic, Republic of Congo, Gabon, Equatorial Guinea, and
Chad.
The Republic of Congo has signed the following tax treaties.
The tax treaty of the Common Organisation for Africa and Madagascar
(OCAM)
The member states of this organisation adopted a tax cooperation agreement 29

January 1971, which was ratified by the Republic of Congo on 3 September 1971. The
OCAM, which initially had 14 members, had 17 members when it was dissolved by
the Conference of Heads of State in 1985. Those members were Cameroon, Central
African Republic, Chad, Congo, Ivory Coast, Dahomey, Gabon, High Volta, Madagascar,
Mauritius, Niger, Rwanda, Senegal, Togo, and the Democratic Republic of Congo. The
Republic of Congo has not denounced the application of this tax treaty.
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The tax treaty of the CEMAC Convention
The Republic of Congo signed the UDEAC Convention of 13 December 1966, which was
designed to avoid or to limit double taxation among the member states: Cameroon,
Central African Republic, Congo, Gabon, Equatorial Guinea, and Chad. This tax treaty
remains significant to companies interested in affiliate creation in Central Africa
countries.
The tax treaty between the Republic of Congo and the French Republic
This tax treaty, which concluded on 27 November 1987, was designed to avoid double
taxation and to prevent tax evasion related to income tax, inheritance tax, registration
law, and stamp duty.
Tax administration
Taxable period
The taxable period is the calendar year.
Tax returns
The annual CIT return is a specific form (Dclaration Statistique et Fiscale or DSF) that
should be prepared in accordance with OHADA accounting principles. The form cannot
be completed electronically.
The fiscal year 2013 Finance Act states that effective as of fiscal year 2013 to be declared
in 2014, companies will have to use the new CEMAC CIT return form, which has been
modified to be compliant with Congolese tax law (new form for the determination of the
CIT basis and new tax balances for debts and liabilities).
The books must be maintained in French and in Central African CFA francs. This
accounting system must follow the OHADA chart of accounts. All entries have to be
booked under OHADA standards throughout the year.
The annual CIT return must be filed within four months following the end of the fiscal
year of the company (i.e. before 20 May).
Payment of tax
Resident companies are required to pay quarterly instalments of tax (20 February,
20 May, 20 August, and 20 November), and these quarterly instalments are generally
calculated with reference to the most recent CIT return. Special calculations of
instalments apply to new taxpayers.
Based on the self-assessment system, when submitting annual tax returns due by20 May
every year, taxpayers must pay the amount of tax calculated in the annual tax return to
the extent this amount exceeds tax instalments paid during the year.
Non-resident companies and individuals shall appoint tax representatives in the
Republic of Congo. The Congolese resident shall be considered as tax representative if
the non-resident person fails to appoint a tax representative.
Tax audit process
Tax audits are usually announced by a letter from the tax authorities to the entity
concerned of their intention to audit, while stating the period to be audited and the
taxes that will be covered by the audit.
The tax authorities may organise meetings with the taxpayer to inform the taxpayer
of the preliminary outcomes of the audit, and the taxpayer has the possibility to make
counter remarks.
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Thereafter, the tax authorities notify the taxpayer, in writing, of their proposed tax
adjustments, and the taxpayer makes counter remarks in writing within 30 days from
date of receipt of the tax adjustment notice.
Based on whether the tax authorities find the counter remarks from the taxpayer
grounded or not, a letter confirming the tax adjustments or renouncing the proposed
tax adjustments shall be sent to the taxpayer, who has the choice to either pay the taxes
claimed, negotiate for a reduction of fines, or open up a tax litigation process.
The taxpayer may negotiate the taxes, fines, and the mode of payment of the tax claimed
by the tax authorities thereby renouncing ones right to open up tax litigation.
The taxpayer has the right to request from the Director General of Taxation and Real
Estate a transactional mode of payment of fines or payment of tax by friendly settlement.
If the taxpayer opts for the transaction, the taxpayer loses the right to object the
outcome of the transaction and is obligated to immediately pay the taxes due (principal
and penalties) according to the agreement.
To open up a tax litigation process, the taxpayer will pay a prior deposit of 10% of the
sum contested as guarantee and 5 per thousand of the sum contested for the treatment
of the tax claim file and will submit the tax claim file to the Tax Head Office if the
amount of the claim exceed XAF 30 million and to the Director of Tax Department if the
amount claimed is less than XAF 30 million.
The tax authorities will respond to the tax counter claim of the taxpayer, who, if not
satisfied, could open a court claim.
Generally, the statute of limitations period for CIT is four years following the year in
which the tax was due. However, this rule does not apply in the case of fraudulent acts
reported by the tax administration.
The tax authorities particularly focus on aspects such as:

Compliance of deductible expenses.
CIT compliance.
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Costa Rica
PwC contact
Ramon Ortega
Scotiabank Building
3rd floor
Santo Domingo
Dominican Republic
Tel: +1 809 567 7741
There have been no significant corporate tax developments in Costa Rica during the past
year.

The Costa Rican tax system is based on the principle of territoriality, according to which
any business that carries on industrial, agricultural, or commercial activity in Costa Rica
is subject to income taxation on local income in the same way as a registered business,
irrespective of the place of incorporation. Such corporations doing business in Costa Rica
are subject to the permanent establishment (PE) rules.
Under the Costa Rican income tax law, income from transactions carried out abroad may
be regarded as non-Costa Rican-source income and is not subject to income taxes.
In addition, it is important to bear in mind that Costa Rican income tax applies specifically
to those incomes that directly originate in the lucrative activities carried out by the
taxpayer within the countrys territory.
Corporate income is taxed at a 30% rate. However, the law establishes special regulations
for small companies whose gross income does not exceed 100,513,000 Costa Rican
colones (CRC). For this category, the following rates apply:
10% for companies with gross income up to CRC 49,969,000.
20% for companies with gross income of more than CRC 49,969,000, but not more
than CRC 100,513,000.
30% for companies with gross income over CRC 100,513,000.
Please note that these corporate income tax (CIT) brackets are adjusted yearly, effective
1 October to 30 September of the following year. The tax brackets listed are for the 2014
fiscal year.
Local income taxes
There are no provincial income taxes in Costa Rica; however, there is a municipal tax.
The rate depends on the municipality in which the company is located, but most apply a
percentage of net income or sales.
Corporate residence
In most cases, the place where a company is incorporated is regarded by Costa Rican
authorities as the corporate residence.
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According to Costa Ricas tax system, a PE of non-domiciled persons in the country is every
office, factory, building, or any other real estate; plantation, mining, forest, agricultural,
and farming development; warehouse or any other permanent business centre, included
the temporary use of warehouse facilities as well as the ones destined to the purchase and
sale of merchandise and products inside the country; and any other company property of
non-domiciled persons that develops commercial and lucrative activities in Costa Rica.
The Costa Rican Tax Administration has manifested that the essential characteristic of a
PE is given by a territorial criteria, according to which the income and earnings generated
in Costa Rica as well as the assets located in it are taxable, not taking into consideration
the nationality or domicile of its owner.
The Tax Administration also applies the criteria of theOrganisation for Economic and
Co-operation and Development (OECD) to determine when a person can be considered
a PE of a company in a determined state. Accordingly, the Tax Administration takes into
consideration the following conditions to determine the existence of a PE:
The existence of a business centre (i.e. facilities such as an office or business centre or,
in certain cases, machinery).
Said business centre must be permanent (i.e. must be established in a determined place
with a significant level of permanence).
The company has to develop its essential activity through this permanent centre (i.e.
the persons who depend in a way or another on the company [the staff] must develop
the companys business inside the country on which the permanent centre is located).
Notethat the Costa Rican Tax Administration uses these OECDcriteria to support and
base its administrative resolutions; therefore, they hold a significant importance for the
Costa Rican tax system. Regarding these criteria, the OECD has established as a generally
accepted principle that a company will be treated as the owner of a PE in a determined
state if a person acts on behalf of that company under certain circumstances, even if they
are not in the presence of a permanent business centre in said state. These circumstances
are as follows:
The person has to be an agent on account of the non-domiciled company: A dependent
agent, individual, or company, under an employment regime or outside of this, that,
due to the nature of its activities or to the scope of its faculties, involves the nondomiciled company in commercial activities of certain significance.
The person or local company has to be a dependent agent with enough faculties to
celebrate and subscribe agreements on behalf of the non-domiciled company. The
faculties of the person or local company have to be sufficient to involve the nondomiciled company in business activities inside the country on which the person or
local company are situated.
The agent has to be authorised to negotiate all elements and details of agreements on
which the non-domiciled company is involved and obligated, even if said agreement
is signed by another person in the country on which the non-domiciled company is
located. In other words, it isnt simply a mere authorisation to sign the agreement.
The faculty to subscribe agreements must include those agreements that are part of
the main commercial activity of the company. It is irrelevant the fact that the person
has the faculty to celebrate agreements exclusively related to internal operations of the
company.
The agent has to take risks on behalf of the abroad domiciled company.
The agent has to act accordingly to detailed instructions or general control of the
abroad domiciled company.
The concept of PE under this context implies that this agent uses its authority on
a repeatedly basis and not only on isolated cases. The faculties must be exercised
regularly in the country on which the agent is located, a characteristic that is
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determined according to the real commercial situation. A person or company whose
activities are limited to the following conditions and circumstances is not considered a
PE:
Its activities consist only in storage, expose, or delivery of goods and merchandise
that belong to the company domiciled in another country.
Its activity consists only in purchase of goods or merchandise or compiling
information for the abroad domiciled company.
Its activity consists only in developing any other auxiliary or preparatory activity for
the company.
To consider a person as a PE of a company in a state, it has to be determined if the
activities that this person develops are, by themselves, an essential and significant part
of the activities of the company as a whole, which is why every case must be studied
and analysed according to its own particular circumstances.
Other taxes
Sales tax
A fixed sales tax rate of 13% is applied at all stages of the sale of merchandise or the
invoicing of certain limited services. The tax is levied on (i) sales of merchandise within
the national territory (except sales of land, buildings, exports, and certain basic necessity
items, such as basic foodstuffs, certain medicines, and veterinary products); (ii) the
value of services performed by restaurants, bars, motels, printing companies, social and
recreational clubs, painting and repair shops, and others; and (iii) imports consisting of
merchandise for personal use or consumption or to satisfy commercial needs.
Selective consumption tax
The selective consumption tax may be applied at a rate of up to 100% and is levied on
goods that are considered non-essential. The tax base is the cost, insurance, and freight
(CIF) price plus import duties for imported items or the sales value for items produced in
Costa Rica. The tax is levied at only one stage in the sale of merchandise. Payment of the
tax is required at the time of importation or, for articles produced in Costa Rica, within 15
days of the month of the sale.
Customs duties/import tariffs
In Costa Rica, all importation of goods and merchandise, with certain exemptions,
are liable for corresponding import tariffs and customs duties. Other taxes (e.g. sales
tax, selective consumption tax) are also levied on the importation of said goods and
merchandise.
The most important legal instruments for customs regulations are the Central American
Uniformed Customs Code, the Customs Law and its rulings, and other administrative
rulings that are periodically issued by the Customs Authority.
Property tax
Each local municipal government is in charge of real estate appraisal. The annual property
tax to be applied throughout the Costa Rican territory is 0.25% of the appraised value,
registered in the respective municipality where the tax liability originates.
Real estate transfer tax is calculated as 1.5% of the selling price of the real estate or its
property tax value, whichever is greater. The tax is triggered by the direct sale of the real
estate or through the indirect transfer of real estate when there is a modification in the
control of the entity holding the real estate.
Stamp duties
Stamp duties in Costa Rica are determined according to the transaction that is carried out
(e.g. property transactions, service contracts, movable assets transactions).
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Registration tax
There is a registration tax on every corporation/company that is registered in the Costa

Rican Mercantile Registry and every new corporation that is formed.
The rate of this tax is CRC 199,700 for commercially active companies and CRC 99,850 for
inactive ones (commonly known as shelf companies). The taxable event happens every
1 January and affects all companies, corporations, and branches that are registered in
the Mercantile Registry to that date. For existing companies, the tax is paid during the 30
calendar days following 1 January; for new companies, the tax is paid at the moment of
their registration.
Franchise tax
The payments realised abroad for the use of a franchise will be subject to remittances
abroad with a 25% withholding tax (WHT).
Withholdings on salary
Companies are required to withhold from employees the amount corresponding to the tax
on salary according to the following progressive table on a monthly basis:
Salary (CRC)
Up to 752,000
752,000 to 1,128,000
Over 1,128,000
Withholding rate (%)

0
10
15
Companies must withhold the monthly contribution to social security and submit its own
contribution calculated as a percentage of the monthly income received by the employee:
Employee`s contribution
Employer`s contribution
Contribution rate (%)

9.17
26.17
Branch income
Branch income is subject to tax at the same rates as corporate income. There is a WHT
of 15% on dividends distributed within the country and a 15% tax, in lieu of a dividend
WHT, on profits transferred abroad.
Inventory valuation
Inventories are generally stated at cost and can be valued using the compound averagecost method, first in first out (FIFO), last in first out (LIFO), retailer method, or specific
identification method. Since all entities must keep legal records, any adjustment resulting
from different methods of inventory valuation for tax and financial purposes should be
recorded.
Capital gains
There is no capital gain tax on the sale of real estate or securities when such sales are not a
habitual activity. There is a capital gain tax, at the regular rate, on the sale of depreciable
assets when their sale price is higher than their adjusted basis (book value).
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Dividend income
Dividends between domestic subsidiaries and other domestic corporations are not subject
to taxes. There are no ownership requirements to qualify for this exclusion.
Stock dividends
Stock dividends are subject to CIT at 15% if the stock is not listed in an officially
recognised stock exchange or 5% if the stock is registered in a stock exchange officially
recognised by the Costa Rican government.
Dividends paid in the form of stock of the distributing company are allowed and are
exempt from taxes.
Interest income
Interest income coming from sources related to normal business activities is taxable.
Interest income coming from investments on financial entities included in the National
Banking System is subject to an 8% withholding on the source as definitive tax.
Interest coming from investments abroad is considered non-Costa Rican-source income
and is not taxable.
Foreign income
Foreign-source income is not taxable in Costa Rica.
Deductions
In general, any costs and expenses that are useful, necessary, and pertinent for the
production of actual or potentially taxable income will be deductible from the companys
gross income, as long as they are duly supported by documentation authorised by the law
and they comply with the following requirements:
That they are necessary expenses to obtain actual or potential income, taxed under the
law.
That any withholding obligations, as stated in other sections of the law, have been
carried out.
That the supporting documentation has been authorised by the Tax Administration.
However, the Tax Administration may reject or disregard, in whole or in part, any
expenses that it considers excessive, inadmissible, or not indispensable to obtain taxable
income.
Depreciation
The straight-line and sum-of-the-years-digits methods of depreciation are allowed over

the following useful lives:
Assets
Buildings
Furniture and fixtures
Vehicles
Agricultural plantations
Useful life (years)

50
10
10
10
3to 20
The Tax Administration, at the request of the taxpayer, can adopt technically acceptable
special depreciation methods in cases duly justified by the taxpayer. In addition, the
Tax Administration can authorise, through general resolution, accelerated depreciation
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methods on new assets acquired by corporations with monetary activities requiring
constant technological updates, higher installed production capacity, and productive
reconversion processes in order to maintain and strengthen their competitive advantage.
Goodwill
If the intangible asset can be amortised, the gain is considered taxable and the loss is
considered deductible from the income tax base. However, if the intangible asset is not
amortisable, the gain is not taxable and the loss is not deductible.
Start-up expenses
A companys organisational expenses may be deducted in the tax year in which they are
paid or credited, or, if they accumulate, in five consecutive tax years, starting from the
date of start of productive operations, until the balance is exhausted. Organisational
expenses will be considered to be those costs and expenses that are necessary to initiate
the production of taxable income, that, in accordance with the law, are deducted from
gross income.
Interest expenses
Interest and other financial expenses paid or incurred by the taxpayer during the fiscal
year directly related to the management of their business and the creation of taxable
income are deductible from gross income, as long as those interest expenses are not
capitalised.
Note that those interest expenses with rates that exceed the usual market rates will not be
considered deductible expenses by the Tax Administration.
Bad debt
Manifestly uncollectible unpaid debt will be deductible as long as this debt is originated
in habitual operations from the taxpayers business and all legal actions towards its
collection have been exercised.
All donations duly supported by documentation that are given to the government, public
institutions, municipal corporations, public universities, to the Social Protection Board,
to the Educational Boards, to the Costa Rican Red Cross, and other institutions, such as
those foundations and associations with non-charitable, scientific, and cultural ends that
are authorised by the Tax Administration to receive deductible donations, among other
entities, will be deductible from gross income.
Taxes
With the exception of sales tax, selective consumption tax, specific taxes over consumption
and special duties established by law, penalties and interest paid over any tax obligation,
and the income tax itself, all other taxes that affect the goods, services, and negotiations of
the companys habitual commercial activity will be considered deductible.
Losses incurred by industrial and agricultural enterprises may be carried forward and
deducted from the taxable profits for the following three years for industrial enterprises
and five years for agricultural enterprises. Loss carrybacks are not allowed.
Corporations may claim deductions for royalties, technical and management service fees,
and interest charges paid to foreign affiliates, provided that a tax of 25% for royalties,
franchises, and other services, and a tax of 15% for interest, is withheld. However, the
deductions for technical, management service fees, and royalties may not exceed 10% of
gross sales in the aggregate if paid to the parent company.
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Group taxation
There is no group taxation in Costa Rica.
Transfer pricing
With the issuance of Decree No. 37898-H Provisions on Transfer Pricing, published on
13 September 2013, taxpayers are forced to evaluate the prices agreed upon in operations
of goods or services sold to related companies, locally and abroad, considering the prices
that will be agreed between independent parties and in compliance with the Principle of
Free Competition and Economic Reality.
Additionally, the Decree indicates, in the definition of this principle, that taxpayers must
determine their income considering costs and deductions for these operations using the
prices and amounts of considerations that would be agreed upon between individuals or
independent entities in comparable operations.
According to the definition related to binding parties, legal or natural persons that
directly or indirectly participate in the address, control, or capital of the taxpayer, or due
to another cause may systematically influence their pricing decisions, shall be deemed to
be related. Also, there are presumed as related parties, those persons or entities residing in
jurisdictions without sufficient powers to exchange tax information. In addition, there are
other specific conditions for a person or an entity to be qualified as a binding party.
The Decree establishes the need for an Analysis of Comparability (Functional Analysis) to
consider the following elements:

Characteristics of the operations, products, or services.

Functions or activities, including assets and assumed risk.
Contract terms and conditions.
Economic circumstances.
Business strategies.
Identification of prices and comparable transactions (internal and external).
Also, the methods for the determination of prices in comparable operations are
established and mentioned in the following list:

Non-controlled comparable price.

Additional cost.
Resale price.
Split profit.
Net margin of the transaction.
The Decree authorises the Tax Administration to check the assessment of prices with
related parties made by the taxpayer; however, when as a result of the application of
a convention for the avoidance of double taxation, an adjustment to the Costa Rican
company is generated, the company may request verification of the origin of the
adjustment.
The Tax Administration shall dictate the general documentation guidelines that the
taxpayer must comply with in relation to the valuation of its transactions with related
parties; however, the Decree establishes that it must be made available for the Tax
Administration in Spanish and that it must be kept for five years according to the
provisions of article 109 of the Code of Norms and Tax Procedures. Likewise, a list of the
information and documentation (formal obligations) that the taxpayer must keep has
been established, which includes the details of the activities and functions, organisational
structure, registration information from the parties, financial statements, and method
used.
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In addition, the Decree establishes an annual informative return for taxpayers who are
engaged in transactions with related parties and for large taxpayers, large territorial
taxpayers, and companies located within a free zone. Note, however, that the annual
informative return has not been provided by the Tax Administration, so it is not yet in
force.
Lastly, the Decree allows the application of advance pricing agreements (APAs) between
the taxpayer and the Tax Administration, which will be valid for three years once
approved.
The Tax Administration is currently working on a resolution for the informative returns
and then will work on a resolution expanding upon the features and requirements of
APAs.
Thin capitalisation
In Costa Rican legislation, there is no mention of thin capitalisation rules. However, as

with transfer pricing, the Tax Administration applies general rules and principles for the
treatment of these types of situations. For instance, the Income Tax Law gives the Tax
Administration the faculty of reviewing and rejecting all expenses that it may consider
excessive, not proportional, or unreasonable.

Foreign tax credit
Costa Ricas tax system does not allow for the possibility of foreign tax credits.
Free zones
Entities established in free zones may enjoy exemption from import duties on goods,
income tax, sales tax, export tax, selective consumption tax, real estate transfer tax, and
WHT on payments abroad, as well as the discretionary use of foreign currency generated
abroad. However, these incentives will be affected by the rules established by the World
Trade Organization (WTO) in force in the year 2015.
Drawback industries
Special benefits exist for industries that import semi-manufactured materials for assembly
in Costa Rica and export finished products. Benefits consist of duty-free imports of raw
materials for subsequent export as manufactured products. Machinery for these industries
may also be imported duty-free.
Tourism development
The Incentive Law for Tourism Development grants several tax benefits, such as
exemption from import duties on certain tourism service-related goods and from
property tax for companies dedicated to tourism, but only for those with a signed tourism
agreement.
Withholding taxes
Payments to non-domiciled foreign corporations or individuals
Regarding payments to non-domiciled foreign corporations or individuals, taxes are

withheld as follows:
Payment
Dividends
Interest and other financial expenses (1, 2)
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WHT rate (%)

5/15
0/15
Costa Rica
Payment
Royalties, patents, trademarks, franchises, and formulas
Technical service and management fees
Personal services from a Costa Rican source:
Employees
Directors
Others
Transportation and communication services
WHT rate (%)

25
25
10
15
30
8.5
Notes
1.
2.
No tax is withheld if the recipient is a bank or a financial institution recognised as a first-class bank
by the Central Bank of Costa Rica or a supplier of merchandise. Interest or financial expenses paid to
parties other than those aforementioned are subject to a 15% WHT. An 8% WHT applies to interest on
bearer documents issued by financial entities registered at the Central Banks General Auditors Office
or stock exchange. No WHT applies to interest paid on securities issued by the Workmens Bank or the
Mortgage Housing Bank and its authorised institutions or on foreign currency securities issued by the
state banks.
Banks or non-resident financial entities that are part of a local financial group are payers of a special
tax. The taxpayers mentioned in Note 2 must pay, in lieu of tax on remittances abroad, a local currency
tax equivalent to 125,000 United States dollars (USD) per annum. The tax period will run from 1
January to 31 December of each year.
Tax treaties
Free-trade bilateral treaties
Costa Rica is a full member of the Central American Common Market, which guarantees
free trade among the countries of the area. It also has a free-trade bilateral treaty in force
with Mexico (1994), the Dominican Republic (1998), Chile (1998), Canada, Panama,
and Peru. The US-Central American-Dominican Republic Free Trade Agreement (CAFTADR) entered into force on 1 January 2009. These agreements aim to provide favourable
conditions for the exchange of merchandise between contracting parties.
Double taxation treaties (DTTs)
Law No. 8888, regarding the DTT between Costa Rica and Spain, was published in the
Official Gazette on 6 December 2010. This treaty entered into force on 1 January 2011
with the purpose of avoiding double taxation and tax evasion between the two countries.
Tax administration
Taxable period
The tax year in Costa Rica is a 12-month period from 1 October to 30 September. Current
legislation contemplates that other fiscal year-ends may be adopted with the prior
approval of the Tax Administration.
Tax returns
With certain exceptions, all corporations must file a tax return by 15 December on the
basis of a fiscal year-end of 30 September. Entities with an operating period of less than
four months may present a return together with the following years tax return.
The tax system is one of self-assessment with occasional auditing by the Tax
Administration.
Payment of tax
In March, June, and September, all corporations and taxpayers must prepay instalments
that total 75% of the average income taxes paid in the past three fiscal years, or the
amount paid in the prior year, whichever is greater. Failure to pay on these dates results
in the accrual of interest unless the taxpayer has requested, on a timely basis, that the Tax
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Administration eliminate the corresponding payments. Any amount owed in excess of the
instalments should be paid by 15 December.
Tax audit process
For a tax audit to begin, it is necessary that the Tax Administration send a notification
to the taxpayer to be audited. The taxpayer is selected according to one of the selection
criteria previously established, and this should be indicated in the communication at the
beginning of the tax audit. The Tax Administration must start the audit within two months
of the communication to the taxpayer.
Once the audit is completed, the auditors hold a meeting with the company and invite
them to correct the issues found.
If the company does not accept the correction, then the Tax Administration will present a
tax assessment with the issues and tax adjustment. The taxpayer has 30 days to respond to
the assessment as well as to pay it. An appeal may be requested to the Tax Administrative
Court, where the administrative section finishes. Further appeals are handled by the
judicial court.
The statute of limitations isfour years starting from 1 January of the year following
the income tax return filing. For taxpayers with an ordinary tax period with a due date
to file their 2013 period return on 15 December 2013, the statute of limitations starts
counting on 1 January 2014; however, for taxpayers with a special period of January to
December with a due date to file their 2013 period return on 15 March 2014, the statute of
limitations starts counting on 1 January 2015.
Important topics for tax audits are sales tax credits, gross margin on sales, employee
benefits, and income tax.
Other issues
Costa Rica has aTIEA with the United States, effective since 12 February 1991, whereby
both countries agree to exchange information, from and/or in relation to public and
private entities and individuals, at the request of the partys corresponding authority in
relation to any tax relevant issue.
Costa Rica has also signed TIEAs with several other countries: Argentina, Australia,
Denmark, Ecuador, Faroe Island, Finland, France, Greenland, Iceland, Mexico, The
Netherlands, Norway, and Sweden.
Foreign Account Tax Compliance Act (FATCA) agreement
In November 2013, Costa Rica`s Treasury Department and the Deputy in charge of
negotiations of the US embassy in Costa Rica signed an intergovernmental agreement
(IGA). The IGA will allow Costa Rica`s financial entities to comply with the provisions
established in FATCA. The IGA was chosen under Model 1, in which each entity must
submit a report to the Treasury Department, and it will be this entity that is in charge of
the transfer of information to the United States Treasury Department.
The IGA must be sent for ratification to the Costa Rican Congress for the agreement to
enter into force; at the same time, the technological platform for FATCA compliance is
being developed.
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Croatia
PwC contact
Hrvoje Jeli
PricewaterhouseCoopers Savjetovanje d.o.o.
Ulica kneza Ljudevita Posavskog 31
10000 Zagreb, Croatia
Tel: +385 1 6328 888
On 1 July 2013, Croatia became the 28th member state of the European Union (EU).
Croatian legislation has been harmonised with the EU legislation.
The most significant change is the harmonisation of the new Value-added Tax (VAT)
Actwith the provisions of the EU VAT Directive.

Profit tax is paid at a flat 20% rate by enterprises engaged in independent activities on
a long-term basis for the purpose of deriving profit, branches of foreign enterprises,
enterprises that control shares in capital (unless the object of investment itself pays
profit tax), and natural persons who choose to pay profit tax instead of personal income
tax.
The profit tax base is the accounting profit adjusted for deductions and disallowed items.
Croatian residents pay profit tax on profit derived in Croatia and abroad, and nonresidents (e.g. branches) pay profit tax only on profits derived in Croatia. The tax base
also includes gains arising from liquidation, sale, change of legal form, and division of
the taxpayer where it is determined at the market rates.
Payments into voluntarily pension funds paid by an employer for an employee under
certain conditions prescribed by Corporate Income Tax (CIT) Act are also considered
expenditures.
Expenditures are not considered to be expenditures if they are not related to the
taxpayers business activity.
The profit tax base is reduced by the following items:
Income from dividends and profit sharing.
Unrealised profits from value adjustments of shares (increase of financial asset
value), if these were included as profit in the profit and loss (P&L) account.
Income from collected written-off claims that were included in the tax base in the
previous tax periods but not excluded from the tax base as recognised expenditure.
The amount of depreciation not recognised in previous tax periods, up to the amount
prescribed by the CIT Act.
The amount of tax relief or tax exemption in line with special regulations (i.e. costs
of education, costs of research and development (R&D), costs of a new employees
salary).
For reinvested profit, other than that earned in the banking or the financial nonbanking sector.
Croatia
473
Croatia
The profit tax base is increased by the following items:
Unrealised losses from value adjustments of shares (decrease of financial asset
value), if these were included as expenses in the P&L account.
The amount of depreciation in excess of the amounts prescribed by the CIT Act.
70% of entertainment costs (food and drink, gifts with or without the printed firm
logo or product brand, and expenses for vacation, sport, recreation and leisuretime, renting cars, vessels, airplanes, and holiday cottages). Entertainment costs do
not include the costs of goods and merchandise adapted by a taxpayer for business
entertainment purposes, labelled not for sale, and other promotional objects with
the name of the firm or merchandise or other advertising objects (e.g. glasses,
ashtrays, table cloths, mats, pencils, business diaries, cigarette lighters, tags) put to
use in the selling area of the purchaser and given to consumers, provided that their
value does not exceed160 Croatian kuna (HRK) per item.
30% of the costs, except insurance and interest costs, incurred in connection with
owned or rented motor vehicles or other means of personal transportation (e.g.
personal car, vessel, helicopter, airplane) used by managerial, supervisory, and other
employees, provided that the use of means of personal transportation is not defined
as salary.
Asset shortfalls exceeding the amount prescribed by the Croatian Chamber of
Economy or Croatian Chamber of Trades and Crafts, in accordance with the VAT Act
and on the basis of which no personal income tax was paid.
The costs of forced collection of tax and other levies.
Fines imposed by competent bodies.
Late payment interest charged between associated persons.
Privileges and other economic benefits granted to natural or legal persons for the
purpose of causing or preventing a certain event in favour of the company (generally
related to commissions paid to parties acting on behalf of the taxpayer).
Donations in excess of the amounts prescribed by the CIT Act.
Expenditures identified during tax authoritys audit, including VAT and contributions
related to hidden profit payments and withdrawals from shareholders, company
members, and physical persons performing independent activities taxable by profit
tax.
Any other expenditure not directly related to profit earning, as well as other increases
in the tax base, which were not included in the tax base.
Local income taxes
A legal entity that is liable to pay profit tax and is registered for the performance of the
business activity may be subject to tax on trade name at the amount of up to HRK 2,000,
depending on the decision of the municipality or city.
Corporate residence
In terms of the CIT Act, residents are legal or natural persons whose seat is recorded
in the Register of Companies or other register in Croatia, or whose place of effective
management and control of business is in Croatia. Residents are also entrepreneurs/
natural persons with domicile or habitual residence in Croatia, whose business activity is
recorded in a register or other records.
A non-resident is any person who does not satisfy one of the requirements referred to
above.
Definition of a business unit of a non-resident is based on the Organisation for Economic

Co-operation and Development (OECD) guidelines, which provides that a non-residents
business unit is a place of management, a branch, an office, a factory, a workshop, a
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mine, an oil or gas well, a quarry, or any other place of extraction of natural resources
or construction site or project for a period longer than six months, including agents
acting in its name, having the right to conclude contracts or hold stock of products that
it distributes on the Croatian market in the name of a foreign entrepreneur. The business
unit of a non-resident also includes the performance of services (i.e. advisory and
business consulting services) for the same or a related project, which lasts for more than
three months in a 12-month period.
Other taxes
As of 1 July 2013, a new VAT Act came into force finalising the harmonisation process
of the Croatian VAT system with the provisions of the EU VAT Directive. Consequently,
the provisions of the new VAT Act are now in line with the provisions of the EU VAT
Directive.
VAT is payable on sales of goods and supply of services, import of goods, and intraCommunity acquisition of goods.
Croatia has not introduced any VAT grouping rules.
VAT rates
The general VAT rate is 25%.

A reduced rate of 13% is applicable for:
Organised stays (accommodation or accommodation with breakfast, full or half
board, in all kinds of commercial hospitality facilities) and agency fees with respect to
the above mentioned services.
Services of preparing food and restaurant services, as well as preparing and serving
non-alcoholic drinks and beverages, wine, and beer in such premises, in accordance
with special legislation.
Periodic newspapers and magazines of publishers for which there is no obligation
of adoption of the statute of media according to a special law (with the exception
of those that consist entirely of advertisements or are used mainly for advertising
purposes).
Edible oils and fat of animal and vegetable origin.
Childrens food and processed cereal based foods for infants and small children.
Water delivery, except for water in bottles and other packaging on the market.
White sugar from cane or beet.
Concert tickets.
A reduced rate of 5% is applicable for:
Bread and milk, including baby food used as a substitute for mothers milk.
Books of a scholarly, scientific, artistic, cultural, and educational character as well as
school textbooks (primary, secondary, and tertiary education, including materials
printed on paper and other media, such as CD-ROMs, video cassettes, and audio
tapes).
Certain medicines and surgical implants.
Scientific journals.
Services rendered by cinemas.
Daily newspapers of publishers for which there is an obligation of adoption of the
statute of media according to a special law (with the exception of those that consist
entirely of advertisements or are used mainly for advertising purposes).
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Reporting obligations
Taxpayers have to file monthly VAT returns by the 20th day of the month following the
reporting month. Exceptionally, taxpayers who do not have any transactions with EU
taxpayers (inbound or outbound) and whose aggregate value of goods delivered and
services provided in the previous year does not exceed HRK 800,000 can submit the VAT
return quarterly.
Annual VAT returns must be submitted by 28 February of the year following the
reporting year.
In addition, both intra-Community acquisitions and supplies as well as services provided
to or received from an EU registered taxpayer have to be reported in a recapitulative
statement, submitted by the 20th day of the month following the reporting month.
Where the amount of input tax credits exceeds the entitys VAT liability, a taxpayer
is entitled to a refund of the difference or may choose to use the difference as a VAT
prepayment.
VAT registration
VAT payers are defined as entrepreneurs that deliver goods or perform services in
Croatia. An entrepreneur is a legal entity or a natural person that continuously and
independently performs an activity for the purpose of deriving profit. In addition
to those that may be regarded as normal taxpayers, domestic enterprises receiving
imported services from foreign enterprises and legal entities and individuals that issue
invoices or receipts including VAT without authorisation are also liable to pay VAT.
A taxpayer is required to register for VAT where turnover in the previous year exceeded
HRK 230,000. Voluntary registration is also possible.
Reclaiming of input VAT is granted to EU registered VAT taxpayers. No tax representative
is required.
Entrepreneurs registered in third countries can apply for a VAT refund, provided
reciprocity agreements are in place and a tax representative is used.
Determination of VAT base
The VAT base for goods and services supplied is the considerationthat includes
everythingthat the supplier has received or is supposed to receive from the buyer or a
third person in connection to the supply, including the subventions directly related to
price of goods and services supplied.
Where no consideration is provided, for instance where goods are exchanged, the VAT
base is considered to be the market value of the goods or services. The VAT base of
imports is the customs value as prescribed by customs regulations, increased by customs
duties, import duties, special taxes, and other fees paid during customs clearing.
VAT-exempt supplies
VAT-exempt supplies include rental of residential property (with some exceptions);

granting of credits and credit guarantees; transactions related to bank accounts, interest,
winnings from special games of chance in casinos, slot machine clubs, and other forms
of gambling; supplies of domestic and foreign legal tender, securities and shares, and
supplies of gold by the central bank.
Other exemptions include the following:
Services and deliveries of goods by public institutions in the field of culture, such
as museums, galleries, archives, libraries, theatres, religious communities and
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institutions, primary and secondary schools, universities, and student catering and
boarding institutions.
Medical services, including services conducted by doctors, dentists, nurses,
physiotherapists, and biochemistry laboratories engaged in private practices; services
of medical care performed in healthcare institutions; and services performed by
social care institutions and child and adolescent careinstitutions.
Supplies (transfers) of real estate (land, buildings, parts of buildings, housing
premises, and other structures) with the exception of newly built buildings.
Temporary imports of goods thatare exempt from customs duty.
Customs duties
Croatian customs legislation and policies have been fully harmonised with the EU
legislation. Goods imported from non-EU countries are subject to import customs
clearance, and goods exported from the EU customs territory must be declared for
export customs clearance. For performance of customs clearance procedures, each
person has to be identified by an Economic Operator Registration and Identification
(EORI) number, which is issued by the Customs office upon request.
Excise duties
There are a number of excise duties and special taxes levied on specific products. They
are levied at a fixed amount and are payable by the producer or importer. VAT is applied
first, after which the fixed amounts are added.
Excise taxes
Product
Oil derivatives
Natural gas
Excise tax rate

From HRK 100 to HRK 4,300 per 1,000 l/kg
HRK 4.05 per MWh for business purpose heating
Cole and coke

Electricity
HRK 8.10 per MWh for non-business purpose heating

HRK 2.30 per Gj
HRK 3.75 per MWh for business use
HRK 7.5 per MWh for non-business use
Tobacco products:
Cigarettes
Cigars and cigarillos

Fine-cut tobacco
Other tobacco for smoking
Beer
Alcohol:
At 15% alcohol or higher

HRK 210 per 1,000 pieces plus 37% of retail price

Minimal excise duty is HRK 598.50 per 1,000 pieces
HRK 600 per 1,000 pieces
HRK450 per kg
HRK380 per kg
HRK 40 per 1 volume percentagealcohol in 1 hectolitre (hl)
Less than15% alcohol

Ethyl alcohol
HRK 800 per hl

HRK 500 per hl
HRK 5,300 per hl
Special taxes
Product
Coffee and soft drinks:
Roasted coffee
Coffee extracts, essence, and concentrates
Roasted coffee contained in finished products
Special taxes
HRK 6 per kg
HRK 20 per kg
HRK 6 per kg of coffee net mass
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Product
Special taxes
Coffee extracts, essence, and concentrates in
HRK 20 per kg of coffee net mass
finished products
Sugar or sweetener added water, aromatised
HRK 40 per hl
water (mineral water and fruit juicesexempt)
HRK 40 per hl
Other drinks with max 1.2% alcohol (mixture of
beer and soft drinks with more than 0.5% alcohol
exempt)
Syrups and concentrates for soft drinks
HRK 240 per hl
preparation
Powders and granules for soft drinks preparation
HRK 400 per 100 kg
Motor vehicles on which no special tax was already
paid for the use on public roads:
Passenger cars, pick-up vehicles
From 1% to 14% depending on the purchase
price, and from 1.5% to31% depending on
CO2 emission in g/km
Motor cycles, mopeds, bicycles, and ATV
From 2.5% to 5.5% depending on the
vehicles
motor volume in cm3, and from 5% to 15%
depending on the level of gas emission
Producers, dealers, and dealers of used motor
Obligated to register in the registry of motor
vehicles
vehicle producers and dealers eight days
before the beginning of the activities. Also,
they are obligated to deposit a security
instrument for the payment of special taxes.
Acquisition of used motor vehicles on which special
5% of the market value
tax on motor vehicles was paid; supply was not
subject to VAT, gift, or inheritance tax
Liability and comprehensive road vehicle insurance
15% of the contractual amount for obligatory
premiums
motor vehicle insurance premium
10% of the contractualamount for
comprehensive motor vehicle insurance
premium
Property taxes
There are no property taxes in Croatia.
Real estate tax
The acquisition of real estate is subject to taxation. Real estate includes agricultural,
construction, and other land as well as residential, commercial, and other buildings.
Transactions include the sale, exchange, and any other means of acquiring real estate for
consideration.
Tax is charged at 5% of the market value of the real estate on the contract date and is
paid by the acquirer.
Stamp tax
There are no stamp taxation provisions in Croatia.
Chamber of Commerce contribution
Employers pay a mandatory contribution to the Croatian Chamber of Commerce. The

amount varies between HRK 42 and HRK 3,973, depending on company size.
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Branch income
Foreign corporations carrying on business in Croatia are taxed on their Croatian-source
income at a 20% rate.
Inventory valuation
Inventories are generally valued at the lower of their acquisition cost or net realisable
value. Taking into consideration the accounting principles set out in the Accounting Act
and the International Accounting Standards (IAS), a company can choose to adopt the
most favourable method.
Capital gains
Capital gains or losses are covered by the profit tax regime. They are either an increasing
or decreasing item to the profit tax base.
Dividend income
Dividend and profit shares payments made to resident companies are not taxable.
Dividends and profit shares paid to non-resident companies are taxed at the withholding
tax (WHT)rate of 12%. Please see the Withholding taxessection for more information.
Interest income
Interest income is taxable at the rate of 20% as a part of total income stated in the P&L
account.
Interest income on loans between related companies has to be determined at the
minimum interest rate prescribed by the Ministry of Finance or Croatian National Bank
(prescribed interest rate in Croatia is 7%).
Foreign income
The tax base of a resident taxpayer subject to profit tax is the profit earned both in
Croatia and abroad, excluding the case where the taxpayer has registered a branch office
abroad and taking into account the provisions of respective double tax treaties (DTTs).
Deductions
Depreciation
Most companies depreciate assets on a straight-line basis; this is because depreciation

calculated this way, at the prescribed rates, is recognised for tax purposes. Companies
are, however, free to use any depreciation method defined in the IAS and to estimate the
useful lives of all fixed assets in accordance with their accounting policies.
Prescribed annual depreciation rates are as follows:
Assets
Buildings and ships of over 1,000 gross registered tonnage
(GRT)
Basic herd and personal cars
Intangible assets, equipment, vehicles (except personal cars),
and machinery
Computers, computer hardware and software, mobile
telephones, and computer network accessories
Depreciation
period (years)
20
Depreciation
rate (%)
5
5
4
20
25
50
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Assets
Other non-mentioned assets
Depreciation
period (years)
10
Depreciation
rate (%)
10
However, depreciation expenses in excess of the amount allowed for tax purposes are
taxable. The value adjustment of tangible fixed assets rarely occurs in practice, except in
the case of financial assets and claims.
The CIT Act no longer allows taxpayers to wholly write off plant and equipment acquired
or built during the tax period. The cost of depreciation of assets that are not used for
business purposes is not deductible.
Plant and equipment are considered to be acquired in the period in which installed or
ready for use. Plant and equipment includes: tools of trade, information technology
infrastructure (including software), furniture and fittings, and motor vehicles (excluding
vehicles for personal use).
If the taxpayer writes off a portion of a depreciable asset, the remaining undepreciated
portion will be depreciated at the rate prescribed by law. According to the CIT Act, the
taxpayer can double the depreciation rates.
Land and forests (renewable resources) are not depreciated.
Financial assets, cultural monuments, and art work are not depreciated.
Depreciation of vessels, aircrafts, condominiums, and vacation houses can be tax
deductible only if certain conditions are met.
Goodwill
Goodwill paid on the acquisition of a business must be amortised over five years. It is
usually the difference between the estimated statistical value of assets and liabilities and
their book value.
However, the amortisation of goodwill arising from mergers and acquisitions is not
recognised for taxation purposes.
Start-up expenses
Start-up expenses depend on the amount of share capital and are included in operating
costs for profit tax purposes.
Interest expenses
According to the CIT Act, late payment interests are tax deductible, unless those interests
are due to related companies transactions, no matter if the late payment interests are
charged by resident or non-resident related parties.
Interest on loans between related companies is also deductible, up to the amount
prescribed by the Ministry of Finance or Croatian National Bank (prescribed interest rate
in Croatia is 7%) and if compliant with thin capitalisation rules (4:1).
Bad debt
Value adjustments arising from the adjustment of the value of claims against customers
for goods delivered and services rendered are recognised as deductible expenditures
if more than 60 days elapsed between the maturity of the claim and the end of the
tax period, and if the claims were not paid up to 15 days before filing the tax return.
The claim needs to be recorded in the business books as revenue, and all measures for
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debt collection have to be taken (legal actions) in accordance with best management
practices.
Donations in a form of gifts in kind or cash for cultural, scientific, educational, health,
humanitarian, sports, religious, environmental, or other socially beneficial purposes are
tax deductible by 2% of the revenues generated in the previous year. Exceptionally, the
amount may exceed 2% of the revenues generated in the previous year, provided that it
is granted pursuant to the decisions of competent ministries on the financing of special
programs and activities.
Fines and penalties
Fines and penalties prescribed by Croatian administrative and judicial authorities are
considered to be non-deductible expenses.
Taxes
There are no provisions for tax treatment of taxes paid/accrued. For foreign tax credits,
please see the Tax credits and incentives section.
Tax losses may be carried forward and utilised within five years following the year in
which the losses were incurred and must be utilised in the order in which they occurred.
The losses may not be transferred to any third entity except in the case of merger, demerger, or acquisition. Tax losses cannot be carried back.
Utilisation of tax losses from previous years in case of statutory changes of legal
entities is prescribed in detail in the CIT Act, limiting the entitlement where the
legal predecessor is inactive and in case of a significant change in business activity or
ownerships structure.
The treatment of payments made to foreign affiliates is dealt with through the
mechanism of the profit tax base. The profit tax base is increased for any concealed
profit payments made. The tax authorities may audit the expenditure of non-resident
taxpayers, examining expenditure on goods and services abroad as well as management,
intellectual property (IP), and other fees and payments that may have the character of a
profit transfer. If the tax authorities discover that transactions have been used to conceal
profit transfers, the difference between the declared price/fee and the average market
price/fee will be added back into the taxpayers tax base.
Group taxation
There are no group taxation provisions in Croatia.
Transfer pricing
Prices between a Croatian entity and its foreign related parties must be set at fair market
value (the arms-length principle). Provisions on transfer pricing and interests are also
introduced in transactions between resident related parties if one of the parties has:
beneficial tax status (i.e. reduced tax rates) or
entitlement to carry forward tax losses from previous years.
If the prices between related entities are different than those between non-related
resident and non-resident entities, the tax base must be calculated with prices that
would be charged between unrelated companies. In order to determine the market value
of the related partys transaction, the following methods can be used:
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Comparable uncontrolled price.

Resale price.
Cost plus.
Profit split.
Net-profit.
Thin capitalisation
Interest on loans from a shareholder or a member of a company holding at least 25%

of shares or voting power of the taxpayer will not be recognised for tax purposes if the
amount of the loan exceeds four times the amount of the shareholders share in the
capital or their voting power. Interest on loans obtained from financial institutions is
exempt from this provision. Loans from a shareholder or a member of a company are
considered to be:
a third-party loan if it is guaranteed by the shareholder and
loans from related parties.

The Act on Investment and Development of the Investment Environment provides the
following relief and incentives for taxpayers.
Investment incentives are usually organised as corporate tax credits applicable for up to
ten years upon completion of various conditions.
General incentives apply for investors profit earned as a result of an investment under
the following conditions:
Investment amount (EUR*)
0 to 1 million
More than 3 million
Tax benefit rate (%) Period (years)

50
10
75
10
100
10
Necessary to employ
(employees)
5
10
15
* euros
Furthermore, tax benefits for micro entrepreneurs are introduced. A minimum

investment of EUR 50,000 allows tax incentives in the form of a 50% decrease of the tax
rate over a period offive years, with a minimum ofthree new jobs.
Tax benefits cannot exceed investment amount.
Incentives for investments in technological development and

innovation activities, strategic business support activities, and high
value-added services
In addition to developing and innovative activities, as well asbusiness support activities,

a new investing category of high value-added services has been introduced. It relates to:
Creative services (activities in a field of architecture, design, marketing, and art).
Touristic services (projects related to accommodation facilities withfour or more
stars; accommodation facilities in cultural and historic buildings; activities for
developing health, congress, nautical, and cultural tourism; recreation centres and
parks and environmental projects in tourism).
Managing, consulting, and educational services.
Industrial engineering services.
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These investments allow an additional non-refundable monetary subsidy over the
incentive for creating new jobs, as follows:
Investment type
Technological development and innovation activities
Strategic business support activities and services of high
value added
Additional non-refundable subsidy (%)

50
25
Additionally, a non-refundable money subsidy for the purchase of equipment in

the amount of up to 20% of justified costs related to investment in technological
development and innovation activities and strategic business support activities
(maximum amount of up to EUR 500,000) can be granted to a company, provided that
equipment bought is high technology equipment.
Incentives for investments into capital intensive and work intensive

projects
An investment qualifies as capital intensive if the minimum amount of the investments

is EUR 5 million and 50 new jobs are created. Those projects can benefit from additional
non-refundable subsidies between 10% and 20% of recognised costs of new plants,
objects, equipment, and other capital costs, depending on the unemployment rate of the
county where located.
Work intensive projects are those with at least 100 new jobs created within a three year
period from the start of the investments project. Initial incentives can be increased by an
additional 25% for 100 new jobs, and up to 100% for 500 new jobs.
Custom free zones
Taxpayers that were engaged in or participating in the building of infrastructure

within a zone, in projects with a value exceeding HRK 1 million before July 2008, and
that did not fully utilise the incentive prescribed by the Investment Incentive Act, are
exempt from paying profit tax until the full amount has been used, but no later than 31
December 2016.
Employment subsidies are incentives for creating new jobs and incentives for training
required by the new jobs.
Newly created jobs should be kept for at leastfive years.
Unemployment rate (%)
Up to 10
10 to 20
More than 20
Non-refundable cash subsidy

(%)
10
20
30
Maximum costs per employee

(EUR)
3,000
6,000
9,000
Incentives for training required by new jobs are also increased, as given in the table
below.
Entrepreneurs size
Large
Medium
Small
General training
(% of non-refundable subsidy)
60
70
80
Specific training
(% of non-refundable subsidy)
25
35
45
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Registered scientific organisations, centres of scientific excellence, individual scientists,

and groups of scientists are entitled to apply for the state subsidies and tax incentives for
scientific research, basic research, applied R&Dresearch.
Depending on the type of research (e.g. scientific, basic, applied research, or technical
feasibility) and size of entrepreneur (i.e. small, medium, or large entrepreneur,
according to the Accounting Act), the percentage of the costs covered by state subsidy
can vary between 25% and 100%. Additionally, the profit tax base can be decreased
(depending on the same criteria) by up to 150% of the amount of the costs covered by
the state subsidy, where the profit tax liability decrease is granted up to the amount of
the percentage of the costs covered by state subsidy.
Foreign tax credit
If a domestic taxpayer has paid tax abroad on profit derived abroad, the tax paid can be
included in its profit tax return, up to the profit tax rate in Croatia. The amount of paid
tax abroad, which can be offset with the domestic tax, is calculated in the following way:
The domestic tax rate is charged on the revenues/profit derived from abroad, and the
result represents the highest amount of tax that can be offset with the domestic tax.
If the amount of paid tax abroad was charged at a rate lower than 20%, the actual
amount of foreign tax paid can be offset with the domestic tax.
Withholding taxes
General rules
Taxpayers who pay fees for the use of IP rights (the right to reproduction, patents,
licences, copyrights, designs or models, manufacturing procedures, production
formulas, blueprints, plans, industrial or scientific experience, and such other rights);
fees for market research services, tax consulting services, legal, auditing, or such other
services; or interest to foreign legal entities, natural persons excluded, shall, when
making the payment, calculate and withhold tax at a rate of 15%.
Note that tax is not withheld from interest payments on the following:
Commodity loans for the purchase of goods used for carrying out a taxpayers
business activity.
Loans granted by a non-resident bank or other financial institution.
To holders of government or corporate bonds who are non-resident legal persons.
Exceptionally, WHT on dividends and profit shares are taxed at the rate of 12%. If
the company uses a tax allowance for reinvested profit, other than that earned in the
banking or the financial non-banking sector, WHT on such dividends and profit shares is
not applied.
Taxpayers who pay fees for the use of IP rights, pay interest, or pay out dividends and
shares in profit to a natural resident person have to withhold 25% in the case of IP rights,
40% for interest, and 12% for dividends and shares in profit.
EU directives
The CIT law provisions and certain EU directives provide special treatment for
dividends, royalties, and interest paid to related companies in EU member states.
Regarding interest and royalty payments, full exemption only applies to payments
between related companies provided that:
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there is a direct minimum holding of 25% for an uninterrupted period of at leasttwo
years and
the beneficial owner of the interest or royalties is a company of another member state
or aPE situated in another member state of a company of a member state.
Regarding dividend and profit shares payments, full exemption applies when dividends
and shares of profits are distributed to a parent company of different EU member state
provided that:
the recipient of the dividend or profit share has a minimum holding of 10% in the
capital of a company distributing the dividend or profit share, and
the minimum holding is held for an uninterrupted period of at leasttwo years.
The recipient of a dividend or profit share is any company:
thattakes one of the forms that are subject to the common system of taxation
applicable to parent companies and subsidiaries of different EU member states
resident in a member state for tax purposes and, under the terms of a DTT concluded
with a third state, not considered to be resident for tax purposes outside the
European Union, and
subject to one of the taxes in the common system of taxation applicable to parent
companies and subsidiaries of different EU member states, without the possibility of
an option or of being exempt.
Treaty rates
If a country has a DTT signed with Croatia, WHT rates are lowered if the treaty rate is
lower than the non-treaty rate. There are specific applications that need to be fulfilled in
order to benefit from a DTT between countries.
The following countries have a DTT with Croatia:
Recipient
Non-treaty countries
Treaty countries:
Albania
Armenia
Austria
Azerbaijan
Belarus
Belgium
Bulgaria
Canada
Chile
China
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Dividends (%)
12
Interest (%)
15
Royalties (%)
15
10
0/10 (15)
0/15 (1)
5/10 (16)
5/15 (2)
5/15 (3)
5/10 (4)
5
5/15 (5)
5/15 (6)
5
5
5/10 (18)
5/15 (8)
5/15 (2)
0/15 (9)
5
5/15 (8)
5/10 (4)
5/10 (4)
0/10 (23)
10
5
0/10 (36)
10
0/10 (24)
10
5
10
5/15 (25)
0/10 (26)
0
5
0/10 (27)
0
0
0/5 (37)
0
10
0
10
5
0
10
10
0
10
0
10
5/10 (38)
10
10
10
10
10
0
5
0
10
0
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Recipient
Iceland
Indonesia
Iran
Ireland
Italy
Israel
Jordan
Korea
Kuwait
Latvia
Lithuania
Macedonia
Malaysia
Malta
Mauritius
Moldova
Montenegro
Morocco
Netherlands
Norway
Oman
Poland
Qatar
Romania
Russia
San Marino
Serbia
Slovakia
Slovenia
South Africa
Spain
Sweden
Switzerland
Syria
Turkey
Ukraine
United Kingdom
Dividends (%)
5/10 (12)
10
5/10 (4)
5/10 (10)
15
5/10/15 (14)
5/10 (11)
5/10 (4)
0
5/10 (4)
5/15 (8)
5/15 (2)
5/10 (12)
5 (19)
0
5/10 (4)
5/10 (4)
8/10 (17)
0/15 (1)
15
0
5/15 (2)
0
5
5/10 (20)
5/10 (4)
5/10 (4)
5/10 (4)
5
5/10 (21)
0/15 (13)
5/15 (7)
5/15 (2)
5/10 (10)
10
5/10 (4)
5/15 (22)
Interest (%)
0/10 (27)
0/10 (28)
5
0
0/10 (29)
0/5/10 (30)
10
5
0
0/10 (27)
0/10 (27)
0/10 (26)
10
0
0
5
10
0/10 (31)
0
0
0/5 (32)
0/10 (26)
0
0/10 (26)
10
0/10 (33)
10
10
0/5 (34)
0
0/8 (35)
0
5
10
10
10
10
Royalties (%)
10
10
5
10
5
5
10
0
10
10
10
10
10
0
0
10
10
10
0
10
10
10
10
10
10
5
10
10
5
5
8
0
0
12
10
10
10
Notes
1.
2.
3.
4.
5.
6.
7.
486
The 0% rate applies if the recipient (beneficial owner) is an entity that directly holds at least 10% of
the capital of the payer. The 15% rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that directly or indirectly holds at
least 10% of the capital of the payer. The 15% rate applies to other dividends.
the capital of the payer.The 10% rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that directly or indirectly controls at
least 10% of the voting power of the payer, or directly holds at least 25% of the capital of the payer.
The 15% rate applies to dividends paid by an investment corporation resident of Canada that is
owned by a non-resident and in all other cases.
the capital of the payer. The 15% applies to other dividends.
The 5% rate applies if the recipient is an entity that directly holds at least 25% of the voting power of
the payer. The 15% applies to other dividends.
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8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
least 10% of the capital of the payer. The 15% rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that directly controls at least 10% of
the voting power of the payer. The 10% rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that holds at least 25% of the
capital of the payer, provided that ownership is not achieved for the purposes of exploiting these
provisions. The 10% rate applies to other dividends.
The 0% rate applies if the recipient is an entity that directly holds at least 25% of the capital of the
payer. The 15% rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that directly holds at least 25%
of the capital of the payer. The 10% rate applies if the recipient is an entity (beneficial owner) that
directly holds at least 10% of the capital of the payer, which is a resident of Israel and dividends are
paid out of the profit that is subject to lower corporate tax rate than usual. The 15% rate applies to
other dividends.
least 25% of the capital of the payer and if the dividends arent subject to CIT in the other contracting
state. The 10% rate applies to other dividends.
the capital of the payer and has invested in the payer at least EUR 150,000. The 10% rate applies to
other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity (except a partnership) that directly
holds at least 25% of the capital of the payer if dividends are held for at least one year without
interruption and are published within this period. The 5% also applies if the beneficial owner is a
pension fund or other similar institution. The 10% rate applies to other dividends.
The 5% rate applies if dividends are paid from a Croatian resident to a resident in Malta. If a resident
from Malta pays dividends to a Croatian resident the rate cannot be higher than the CIT on profit from
which dividends are paid out.
the capital of the payer and that share shall be at least 100,000 United States dollars (USD). The 10%
rate applies to other dividends.
The 5% rate applies if the recipient (beneficial owner) is an entity that holds at least 25% of the
capital of the payer. The 10% rate applies to other dividends.
The 5% rate applies if the recipient is an entity that directly or indirectly holds at least 25% of the
voting power of the payer. The 15% applies to other dividends.
Interest to the government, local authority, and the Central Bank is exempt from WHT.
Interest on commercial claims for debts, interest on an issued, guaranteed, or insured loan or credit
with the purpose of promotion of export, interest on loan from banks, interest on deposits held in
banks, and interest that is paid to the state or local authority is exempt from WHT.
The 5% rate applies to interests on loans granted by bank and insurance companies. The 15% rate
applies to other interest.
Interest arising in a contracting state and derived by the government of the other contracting state,
a local authority, and the Central Bank thereof or any financial institution wholly owned by that
government, or by any resident of that other contracting state with respect to debt and claims
indirectly financed by the government of that other contracting state, or the local authority, or the
Central Bank thereof or any financial institution wholly owned by the government is exempt from
WHT.
Interest arising in a contracting state and derived by the government of the other contracting
state, local authority, and the Central Bank thereof or any financial institution wholly owned by that
government, or interest on loans from the government is exempt from WHT.
Interest arising in the contracting state and derived by the government of the other contracting state,
local authority, the Central Bank, or any other financial institution wholly owned by the government is
exempt from WHT.
Interest is exempt from WHT when the payer of interest is the government or local authority in the
contracting state or when interest is paid to the government, local authority, or agency of the other
contracting state that is wholly owned by the government or local authority, or when interest is paid
to any other agency on loans arising from the application of contracts between contracting states.
The 5% rate applies to interest on all type of loans granted by banks. The rate of 10% applies to
other interest. Interest arising in a contracting state and derived by the government of the other
contracting state, a local authority, and the Central Bank thereof, or on a loan that is approved,
guaranteed, or insured by an insurance institution, or financing of international business transactions
to the extent that it acts on behalf of the other contracting state is exempt from WHT. Interest arising
in a contracting state and paid to a resident of the other contracting state who is the beneficial
owner is also exempt from WHT to the extent that such interest is paid to the seller of any industrial,
commercial, or scientific equipment or other property that is sold on credit.
Interest paid to the government or Central Bank of the other contracting state is exempt from WHT.
Interest paid to the government is exempt from WHT.
Interest is exempt from WHT when the payer is the government or local authority, when the receiver
is the government, local authority, or body wholly owned by the government or the local authority,
and when interest is paid in the name of the government to the other bodies (including financial
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34.
35.
36.
37.
38.
institutions) related with a loan that the government received under the agreement between the
governments of the contracting states.
Interest on loans that give, approve, or guarantee the government, local authority, Central Bank, or
institution authorised for insurance and financing of international business transactions is exempt
from WHT.
Interest on loans from banks, interest on sale on credit for industrial, commercial, or scientific
equipment, interest on sale on credit for commercial goods, and interest from the government,
Central Bank, or other financial institution owned and controlled by the government is exempt from
WHT.
Interest arising in a contracting state and derived by the government of the other contracting state, a
local authority, and the Central Bank thereof, or on a loan that is approved, guaranteed, or insured by
the government of the contracting state, Central Bank, or the agency (including financial institution)
that is owned or controlled by the government is exempt from WHT.
Interest is exempt from WHT when the payer of interest is the government, Central Bank, or
government agency or institution.
The 5% rate applies on royalties for use or the right to use any type of industrial, commercial, or
scientific equipment. The 10% rate applies to other royalties.
In addition to the current WHT rates of 15% and 12%, an increased rate of 20% applies
to all services not listed under General rules (see above) paid to foreign entities whose
place of seat or management is incountries considered to be tax havens or financial
centres on the list of countries published by the Ministry of Finance.This provision does
not apply to EU member countries and countries with which Croatia has signed a DTT.
Countries listed by the Ministry of Finance are as follows:

Andorra
Anguilla
Antigua and Barbuda
Aruba
Bahamas
Bahrain
Barbados
Belize
Bermuda
Brunei Darussalam
Cayman Islands
Christmas Island
Cook Islands
Dominica,
Commonwealth of
Dominican Republic
Falkland Islands
Fiji
Gibraltar
Grenada
Guam
Guernsey
Guyana
Hong Kong
Isle of Man
Jersey
Liberia
Liechtenstein
Macau
Maldives
Marshall Islands
Monaco
Monserrat
Nauru
Netherlands Antilles
Niue
Palau
Panama
Saint Kitts and Nevis
Saint Lucia
Saint Vincent and the
Grenadines
Samoa
Seychelles
Solomon Islands
Tonga
Trinidad and Tobago
Turks and Caicos Islands
Tuvalu
US Virgin Islands
Vanuatu
Tax administration
Taxable period
The profit tax shall be assessed for a period that is normally a calendar year. The tax
authorities may agree, at the request of a taxpayer, that the tax period should not
correspond with the calendar year, where the tax period may not exceed 12 months. The
chosen tax period cannot be changed for five years.
Tax returns
All profit tax taxpayers are obligated to submit an annual profit tax return to the tax
authorities no later than four months after the end of the tax period for which profit tax
is assessed.
The Ministry of Finance administers taxation matters through the tax administration.
These organisations have responsibilities and powers defined by law.
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Payment of tax
Every taxpayer is required to make monthly profit tax advances (on the last day of each
month) on the basis of the previous years tax return.
In the first year of operation, taxpayers are not obligated to pay any profit taxadvances.
Profit tax is assessed at the end of the tax period, and the assessed amount, less any
instalments made, is payable by the day of submission of the tax return.
Tax audit process
The Inspection Sector of the Croatian tax authority performs a tax audit of a taxpayer.
The tax audit process is usually performed as follows:

Notification of a tax audit is sent to the taxpayer.

Tax audit is conducted.
Minutes of the tax audit are issued.
Taxpayer can object to the minutes within a prescribed filing deadline. If objection
shows new facts and evidence, the tax inspector will prepare supplementary minutes.
Resolution of the tax audit is issued within 60 days as of the day (supplementary)
minutes have been provided to the taxpayer.
Appeal against the resolution can be filed within 30 days as of the day the taxpayer
received the resolution. It needs to be replied to within two months as of the day the
appeal has been filed.
After a rejected appeal, the taxpayer can initiate court litigation procedures.
The Croatian tax authority is entitled to review the tax returns of a company within
three years following the end of the year in which the tax return is submitted. This
period may be extended to a maximum of six years where the three-year period has
been interrupted by actions taken by the tax authorities, such as a tax audit. Where the
tax authority considers that there may be a significant impact from the results of the
investigation, earlier years may be examined. This means that, in theory, even the closed
years can be reopened and additional taxes can be imposed.
Topic of focus for tax authorities
Tax authorities are focusing on business relations with related parties. The recent
conduct of the tax authority implies that transfer pricing documentation is expected to
be delivered along with the income tax return (PD form).
Binding opinions
Opinions and instructions issued by tax authority central offices are binding for all
tax authority regional offices,and thegoal is to ensure uniformity of the tax authority
representatives treatment of taxpayers.
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Curaao
PwC contact
Steve Vanenburg
Julianaplein 38
Willemstad, Curaao
Tel: +599 9 4300 000
Recent tax developments
Real estate tax
As of 1 January 2014, a new real estate tax has replaced the old land tax. The tax
ratesare as follows:
Value of real estate (ANG*)
Over
Not over
0
350,000
350,000
750,000
750,000
-
Tax on column 1 (ANG)

0
1,400
3,400
Tax on excess (%)

0.4
0.5
0.6
* Antilles guilders
Export regime
Curaao has introduced a new export regime for companies that are active
internationally. The most important requirement is that 90% or more of the companys
business income is the result of transactions with foreign clients. There is no distinction
between income from trade or from services. The regime supports the following
activities:
Export of goods.
International trade and services.
Repair and maintenance services performed on behalf of foreign clients or performed
abroad.
International warehousing services.
Providing of loans and licences, providing the use of intellectual property, acting as a
holding company, or being a member of a cooperation.
Other services performed for foreign clients.
There are also some specific activities excluded from the export regime, such as:
Acting as a director of companies whose registered office or effective management is
situated in Curaao and other similar trust services.
Services performed by a notary public, lawyers, accountants, tax advisers, and other
such services.
The effective tax rate for the new regime is approximately 4%.
Transitional legislation
While the offshore tax regime was abolished in 2001, qualifying offshore companies
incorporated before 1 January 2002 may continue to apply the old regime until 2019,
provided that certain conditions are met under transitional legislation.
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Resident corporations are taxed on worldwide income. Non-resident companies are
taxed on the following Curaao-source income:
Income attributable to a permanent establishment (PE).

Income from real property situated on Curaao.
Interest on loans secured by a mortgage on property situated on Curaao.
Capital gains are not differentiated from operating income and are subject to the same
applicable rates. Corporations are taxed on their income as reflected in their profit and
loss account, less certain deductible items.
Companies are generally taxed at a flat rate of 27.5%.
Special minimum rates apply to the taxable income of certain companies:
Type of company
E-zone companies
Export companies
New industries and hotels
Land development companies
Rate (%)
2
4
2
2
Shipping business
Shipping companies are subject to the general profit tax rate of 27.5% but may apply for
the tonnage regime. If applicable, their profit is calculated based on the rates provided
in the table below. If a shipping company applies the tonnage regime, the actual profits
or losses are not taken into account, regardless of whether they are regular profits or
capital gains.
The calculated profit based on the table below is subject to the general profit tax rate of
27.5%.
Over (tons)
0
10,000
25,000
Not over (tons)

10,000
25,000
Profit per net ton (ANG)

2.00
1.35
0.60
Exempt companies
Please see the Tax credits and incentives section for information on tax exempt companies.
Companies under transitional offshore rules
The transitional rules distinguish three types of offshore companies.

Offshore companies that, on the last day of the financial year that ended before
1 January 2002, had all (or almost all) investments in or revenues from portfolio
investments, royalties, holding companies, finance companies, or technical support
subject to tax rates of 2.4% to 3% (while capital gains and losses were not taken
into account) will be grandfathered through the last day of the financial year of the
company that starts before 1 July 2019.
Offshore companies that, on the last day of the financial year that ended before 1
January 2002, had all (or almost all) their profit subject to tax rates of 4.8% to 6%
or, under certain circumstances, 2.4% to 3% and that had a valid ruling with the tax
inspector (e.g. trading companies, banks, captives commissions, and fee-earning
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491
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companies) on the aforementioned date or for which a request for (extension of) such
a ruling had been filed on that date will be grandfathered through the last day of the
financial year of the company that starts before 1 July 2019.
January 2002, had invested all (or almost all) investments in or revenues from real
estate property or rights connected thereto, located outside the Netherlands Antilles.
These revenues were, under the old offshore regime, exempt from tax. For profit tax
purposes, these companies will be grandfathered through the last day of the financial
year of the company that starts before 1 July 2019.
Specific rules are applicable to companies that were incorporated after 30 June 1999
but before 31 December 2001. These companies may also qualify for the aforementioned
transitional rules, provided that these companies have been active in a meaningful
way. In principle, a company will not be considered to have been active in a meaningful
way if the assets of the companies consist predominantly of deposits or receivables on
shareholders or affiliated parties.
The grandfathering period continues until 2019.
Corporate residence
effective management on Curaao is considered to be a resident. A company that has
been established on Curaao will always be considered a resident of Curaao.
Offshore entities on Curaao must have a local managing director. This function is easily
provided by one of the many trust companies established on Curaao.
The definition of a PE on Curaao is generally in line with the Organisation for Economic
Co-operation and Development (OECD) model.
Transfer of legal seat
Legislation has been enacted under which a Curaao company is allowed to transfer its
legal seat to another jurisdiction (if permitted under the laws of the outside jurisdiction)
and a foreign company is allowed to migrate to Curaao.
Other taxes
Turnover tax
A 6% turnover/sales tax is levied on the revenue derived from services and deliveries
rendered by an entrepreneur or company on Curaao. Specific goods and services are
subject to a rate of 9%. These are, among others:
Motor vehicles, yachts, and recreational craft (e.g. surfboard, jet ski, water scooter,
kayak) and renting these vehicles, yachts, and craft.
Food prepared for immediate use (e.g.takeaway, fast food) as well as food and drink
consumed in hotels, cafes, bars, and restaurants.
Soft drinks, alcoholic beverages, and tobacco.
Digital storage devices upon which computer games, movies, music,and similar data
are stored as well as rental of these storage devices.
In addition to services rendered on Curaao, if a foreign entrepreneur performs a service
from abroad to a customer on Curaao, this service is subject to turnover tax.
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Non-commercial rental of property is also subject to turnover tax.
A limited number of services and deliveries are exempt, such as:

Exports.
Electricity and water.
Certain services to non-residents.
Medical services.
Services at the airport or in the harbour regarding imported or exported goods or
goods in transit.
Advisory and management services provided to or by offshore companies and
offshore banks.
Rental of a dwelling that is the principal residence of the tenant.
An entrepreneur liable to turnover/sales tax must file a declaration, with the Tax
Inspectorate before the 16th day of the month following the month concerned, at the
Tax Collectors office.
Import tariffs
Import tariffs vary, in general, between 5% and 27%. There is also a range of products
that may be imported without import duties. Below, we provide some examples, but we
note that in each category there may be specific exemptions to the general tariff.

Basic food products are tax exempt.

Other food products are generally taxed at a rate of 5.5% up to 13%.
Books, computers: 0%.
Furniture: 22%.
Cars: 27%.
Excise taxes
Excise tax is due on gasoline; alcohol, with different tariffs for liquor and beer; and
tobacco.
Some examples include:
ANG 0.4725 per litre of gasoline.
ANG 23 per volume percent of alcohol per hectolitre of distilled products.
ANG 14.55 per 100 cigarettes (imported).
Land and property taxes
As of 1 January 2014, a new real estate tax has replaced the old land tax. The tax
ratesare as follows:
Value of real estate (ANG)
Over
Not over
0
350,000
350,000
750,000
750,000
-
Tax on column 1 (ANG)

0
1,400
3,400
Tax on excess (%)

0.4
0.5
0.6
Transfer taxes
The transfer of immovable property located on Curaao is subject to a 4% transfer tax.
Stamp taxes
A stamp tax is levied in two ways, in the form of stamps and as stamped paper.
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Stamp tax applies to documents such as government licences, leases, agreements, and
court documents. The rate depends on the type of document. As an example, the stamp
tax for bank checks is ANG 0.25. The general rate for each page of a legal document is
ANG 10 as of 1 February 2014 (previously ANG 5).

Basic health care insurance
The basic health care insurance insures all residents against the costs of healthcare.
The premium is 12% (10% for those who are entitled to old age pension). In case of
employment, the employer must pay 9% and the employee pays 3%. The maximum
premium income is ANG 100,000.
Employers also pay 1.9% for insurance against loss of income of the employee in case of
illness. The maximum premium income is ANG 62,852.
Accident insurance
Employees are insured against loss of income as a result of an accident that occurs at
work. The premium varies from 0.5% to 5%, depending on the class of risk, to be paid
fully by the employer. Maximum premium income is ANG 62,852.
Old age insurance (AOV) and widows and orphans insurance (AWW)
The collective premium for AOV and AWW amounts to 16%, up to an income of ANG
100,000, of which 9.5% is to be paid by the employer.
Additionally, anyone who enjoys an income of more than ANG100,000 must pay a
premium of 1% on the excess income. In case of wage income, this is borne by the
employee.
Withholding obligation
Employers must not only withhold wage tax but also the employee part of social security
premiums from their employees and pay the amount withheld, together with the
amount payable by the employer, to the tax collector.
Branch income
Tax rates on the profits of PEs are the same as for resident corporations.
There are specific rules for the PE of an insurance company. In that case, the company
may elect to declare profit based on a percentage of premiums received by the PE, as
well as premiums the company has received from insured residents and from insured
risks on Curaao. The insurance company may also elect to declare a profit that is in the
same proportion to total profit of the company as the aforementioned premiums to total
premiums.
No tax is withheld on transfers of profits to the head office.
Inventory valuation
Both the last in first out (LIFO) and first in first out (FIFO) methods of inventory
valuation are permitted, provided the chosen method conforms to sound commercial
practice. Conformity of book and tax reporting is not required. However, occasions or
situations for differences are very rare.
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Capital gains
Capital gains or losses are, in principle, considered ordinary income and subject to
standard corporate rates. An exemption from profit tax is granted for advantages
(dividends and capital gains) from a qualifying participation (see Dividend income
below).
The gain on disposal of depreciable assets may be carried over to a special tax deferral
reinvestment reserve but must then be deducted from the acquisition cost of the later
acquired asset. The reserve may be maintained for a maximum of four years. If the
reserve has not been fully applied, the remainder will be liable to taxation in the fourth
year.
Under the transitional regime for offshore companies (investment, holding, finance, and
patent holding companies), capital gains and losses are tax exempt.
Dividend income
In general, a full participation exemption applies to all local as well as foreign

participations for dividends as well as for capital gains. However, it is required that
dividends be derived from an active participation (non-portfolio investment) or a
participation that is subject to tax.
Expenses incurred in connection with a qualifying participation (including capital
losses) are not deductible, unless it can be demonstrated that these are indirectly
incurred to realise profits that are subject to tax on Curaao.
Non-portfolio investment clause
A participation is deemed to be active if the gross income of that participation consists

of not more than 50% of dividends, interest, or royalties received other than from an
enterprise of that participation.
Subject-to-tax clause
A participation is deemed to be subject to tax if it is subject to a tax rate of at least 10%.

If at least one of these clauses has been met, the 100% participation exemption will
apply. If none of these clauses are met, the participation exemption is limited to 63%
of dividends. Consequently, the dividends would be subject to an effective tax rate of
10.17% (37% x 27.5% regular tax rate).
The 100% exemption also applies to income other than dividends, such as capital gains
derived from qualifying participations.
Immovable property
The aforementioned clauses do not apply to dividends from a participation that (almost)
exclusively (directly or indirectly) holds immovable property. The 100% participation
exemption applies to these dividends.
Definition of dividend
A dividend is defined as a distribution of profits on shares or profit-sharing notes, paid

from statutory profits or profit reserves. Dividends shall not be considered payments
for the purchase of own shares or profit-sharing notes, distributions on shares upon
liquidation, repayment of paid-up capital, or the distribution of bonus shares.
Minimum cost-price threshold for participations
The minimum cost-price threshold for shareholdings, profit-sharing notes, or voting

rights of less than 5% is ANG 890,000.
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Interest income
There is no specific regime for interest received. Interest income is therefore taxed at the
same rate as other income.
Foreign income
A Curaao corporation is taxed on foreign interest and other income as earned, and on
foreign dividends when received. Undistributed income of foreign subsidiaries is not
taxable.
Curaao has adopted a definition of a branch (permanent establishment/permanent
representatives) that is in line with the definition in the OECD Model Double Taxation
The profits of a PE in Aruba, St. Maarten, or the Netherlands, including the Caribbean
Netherlands, are tax exempt on Curaao based on the tax arrangement with the
Kingdom of the Netherlands. In the case of a PE outside the Kingdom of the Netherlands
(i.e. the Netherlands, Aruba, Curaao, and St. Maarten), the income realised through
the PE, after deduction of foreign taxes, is tax exempt. In the case of a foreign loss, this is
not deductible.
The profits of a branch with more than 50% low-taxed passive investment income will
only be 63% exempt. In case of a loss, 63% of the loss will not be deductible. The branch
profit is in line with the treatment of participation profits and losses.
Foreign real estate is always deemed to be part of a PE and, as such, is fully tax exempt.
Deductions
Depreciation of tangible fixed assets, excluding land, is taken over the estimated
useful life of the asset. The depreciable base includes purchase price, customs duties,
shipping costs, and installation costs, less residual value, if any. The straight-line
method is customary, but the declining-balance method is also acceptable. In addition,
an accelerated deduction ofone-third of the assets depreciable basis may be taken.
The assets remaining cost basis (two-thirds) is depreciated using one of the acceptable
methods.
The cost basis of certain intangible assets, such as patents, trademarks, and copyrights,
can be amortised over their expected useful lives. Goodwill and other intangibles
resulting from the excess of purchase price over the cost basis of assets purchased are
amortised over three to five years.
The tax department has issued the following estimated depreciation table.
Assets
Buildings
Renovation
Inventory
Computer:
Hardware
Mainframe
Transportation:
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Rate (%)
2/2.5
10
10/20
Residual value (%)

10
0
10
33/50
10/12.5
10
0
0
10
20
10
Curaao
Assets
Rental cars
Trucks and buses
Start-up costs
Goodwill
Rate (%)
33
10
20
20
Residual value (%)

15
15
0
0
Start-up expenses
Start-up expenses should be capitalised and may be depreciated, comparable to

goodwill, over five years.
Anti-abuse rules regarding interest and loans
Due to existing anti-abuse rules, the deduction for interest paid on intra-group debts
relating to certain transactions is disallowed. However, if the taxpayer provides credible
evidence of overriding commercial reasons for the transaction, or in case the interest in
the hands of the recipient is taxed at an effective tax rate that is considered adequate by
Curaao standards, the interest may be deductible.
In case of intra-group financing, for profit tax purposes the amount of interest paid or
received should be based on arms-length principles.
In case of profit participating loans, the interest will be qualified as a dividend and
will not be deductible. Interest received on such loans may meet the definitions of the
participation exemption if the creditor also holds a qualifying participation in the debtor.
A write-down of an intra-group loan may be denied in case of a profit-participating loan,
or if at the time of issuance it was foreseeable that the loan would never be fully repaid.
Provision for bad debt
sheet of the tax year in question. Therefore, a provision may be made for bad debts.
Charitable donations to qualifying entities within the Kingdom of the Netherlands

may be deducted to the extent that they exceed 1% of net income and ANG 100 after
utilisation of tax loss carryforwards. The maximum deduction is 3% of net income.
Expenses that are connected to a criminal offence for which a taxpayer has been
convicted are not deductible. Bribes paid to public servants and politicians are not
deductible.
Fines and penalties
Fines and penalties are not deductible in cases where they have been imposed by a
criminal court in Curaao, or have been paid to avoid prosecution, and in cases of
administrative fines imposed by a government agency in Curaao.
Taxes
Taxes, other than the corporate profit tax itself, incurred in the course of doing business
are deductible.
Deduction of certain expenses (e.g. costs for food, drink, and entertainment) are only
deductible in part. These costs are often referred to as mixed costs. The non-deductible
portion is 10% of the total of these expenses.
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Losses may be carried forward for a period of ten years. Start-up losses during the
first four years for companies having tax holidays may be carried forward indefinitely.
Carrybacks are not permitted.
The Corporate Tax Act provides for specific limitations for deduction of interest in
certain cases of restructuring and refinancing involving the creation of artificial flows
of interest payments to persons who are tax exempt or subject to lower taxes in their
jurisdiction.
Group taxation
Fiscal unity
The Corporate Tax Act provides for fiscal unity treatment for corporate profit tax
purposes. Resident companies with wholly owned resident subsidiaries can qualify
for this regime. The parent company is entitled to submit one consolidated income tax
return on behalf of the entire fiscal unity group. As a result, only the parent company is
assessed.
Within certain limitations, losses of one company can be offset against the profits made
by another company in the fiscal unity group. No profits need to be recognised on intercompany transactions, as these are disregarded for tax purposes. The fiscal unity applies
for profit tax purposes only; the participating entities remain separate and identifiable
under civil law.
Fiscal unity relief is confined to companies organised under the laws of Curaao, the
Netherlands, Aruba, or St. Maarten. The companies that invoke this relief must have
their place of management on Curaao.
On the basis of the non-discrimination provision of a relevant tax treaty, entities
established under the laws of a tax treaty party may also be admitted to the fiscal unity
regime provided that they are resident on Curaao.
Transfer pricing
There are no specific regulations with regard to transfer pricing. However, based on case
law, businesses can be required to show that in case of intra-company transactions, these
transactions have been made at arms length.
Thin capitalisation
In cases where a company receives a loan from an associated exempt private limited
liability company (Besloten Vennootschap or BV), and the amount of the loan is more
than three times the net equity of the company, the interest on the loan is not deductible
for the part that is more than three times the net equity.

Foreign tax credit
shall not exceed the Curaao profit tax that is attributable to that foreign income.
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Inward investment and capital investment
There are tax incentives or holidays for the establishment of new economic enterprises
and hotels with a predetermined minimum employment and capital investment. Special
provisions relate to the taxation of shipping and insurance companies.
Investment allowance
For a minimum investment of ANG 5,000, an 8% investment allowance on acquisitions

and improvements (for new buildings, 12%) is permitted as a deduction from taxable
profit in the year of investment and in the subsequent year for businesses operating on
Curaao.
Accelerated depreciation and tax rollover reserve
An accelerated deduction ofone-third of the assets depreciable basis may be taken. If a

profit results at the time of sale of capital assets with the intention to replace that asset,
the profit may be placed in a tax rollover account.
Export regime
Curaao has introduced a new export regime for companies that are active
internationally. The most important requirement is that 90% or more of the companys
business income is the result of transactions with foreign clients. There is no distinction
between income from trade or from services. The regime supports the following
activities:
Export of goods.
International trade and services.
Repair and maintenance services performed on behalf of foreign clients or performed
abroad.
International warehousing services.
Providing of loans and licences, providing the use of intellectual property, acting as a
holding company, or being a member of a cooperation.
Other services performed for foreign clients.
There are also some specific activities excluded from the export regime, such as:
Acting as a director of companies whose registered office or effective management is
situated in Curaao and other similar trust services.
Services performed by a notary public, lawyers, accountants, tax advisers, and other
such services.
The effective tax rate for the new regime is approximately 4%.
Tax exempt company
It is possible to elect tax-exempt status for a BV. To qualify for the exemption, a number
of conditions must be met, including (but not limited to) the disclosure of beneficiaries,
management, financials, and the activities (only investment and financing activities)
of the company. Recently, the licensing of intellectual and industrial property rights
and other comparable property and usage rights have been added to the list of allowed
activities.
Another condition has been added that requires that no more than 5% of the revenues
of the exempt company consist of dividends from subsidiaries that are not subject to a
tax regime comparable to that of Curaao. A profit tax regime is comparable to that of
Curaao if the foreign tax regime provides for a profit tax rate of at least 13.75% (50% of
the Curaao tax rate).
The subject-to-tax requirement is also met if the foreign tax regime appears on a list
of comparable tax regimes. The list that has been issued includes all European Union
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(EU) and OECD member states and all jurisdictions with which Curaao has a tax
treaty. According to the list, the subject-to-tax requirement is also met in the case of
a jurisdiction that is included in the white list issued by the OECD, provided that no
special tax regime is applicable.
Independent expert
Currently, an independent expert is required to certify that the exempt company meets
the requirements for exempt status. If more than 5% of the revenues of the exempt
company consist of dividends from subsidiaries that are not subject to a tax comparable
to that of Curaao, the independent expert must inform the Inspectorate of Taxes. The
inspector notifies the company that it no longer meets the requirements for exempt
status. The exempt status is then terminated starting the first day of the year following
the year in which the notification becomes final.
Ocean shipping companies
Ocean shipping companies are taxed on a fixed profit per net ton of ANG 0.60 up to
ANG 2.00 (or per 10 net ton in case of management and control). International aviation
companies may apply a reduced tax rate against 80% of their profit, as their profits are
deemed to be gained outside of Curaao. As a result, the overall effective tax rate is
9.66%.
E-zone companies
An e-zone is an area designated for international trade and services. The activities of
companies established in an e-zone must be focused on trading or providing services to
companies located outside of Curaao. There are two types of e-zones:
Designated areas where, amongst others, goods can be stored, processed, machined,
assembled, packaged, displayed, and released or handled in any other way. On
Curaao, there are two of this type of e-zone that are dedicated to goods, one located
at the harbour, and the other at the airport.
E-zones where international trade and trade supportive services may be performed,
supported by electronic communication and information equipment (e-commerce).
There are several e-commerce zones on Curaao.
E-zone companies are subject to a minimum 2% corporate profit tax until 1 January
2026. They will be granted special facilities regarding turnover tax.
New industries and hotels are granted partial exemption from profit tax and a minimum
2% tax rate for a period of five to 11 years. A minimum investment is required. Losses
incurred during the first four years of operations may be used to offset taxable income
for an indefinite period of time.
Land development companies are granted a tax holiday. They are exempt from tax on
profits realised on the sale of the developed land. A minimum investment of ANG 1
million is required. Activities should be expected to enhance the economic development
of Curaao.
Private foundations
Private foundations are exempt from Curaao profit tax, and their distributions are
exempt from Curaao gift tax, as are contributions of assets to the foundation by a nonresident. Gift tax in the contributors country may be applicable.
The private foundation is a variant of the long-existing common foundation. The most
important difference is that the purposes of a common foundation may not include
making distributions (other than distributions of an idealistic or social nature). This
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restriction does not apply to private foundations, whose purpose may include making
distributions to the founders and others. A private foundation may not run a business
or enterprise for profit. If, however, a private foundation does realise profits from a
business or enterprise, that profit will be taxed at the normal tax rate of 27.5%. Acting
as a holding company or investment company is not considered running a business. The
private foundation is intended to be an alternative to the Anglo-Saxon trust, especially in
civil law jurisdictions.
It is possible to opt for a taxable status for a private foundation. In that case, its profits,
other than those arising from active business activities, will be taxed at a rate of 10%.
Transparent companies
It is possible to opt for a transparent status. This option is only available to a BV or a

limited liability company (Naamloze Vennootschap or NV) established according to
Curaao law. It is, however, possible to convert a corporation that has been established
elsewhere to a BV or NV, at which time the transparent status can be requested. Newly
established companies can request the status from the start, if the request is filed with
the Inspectorate within three months. Existing companies can request the status as of
the next following year.
A transparent company will be treated as a partnership for tax purposes, and the
shareholders will be treated as the partners in that partnership.
Withholding taxes
Although a dividend withholding tax (WHT) was approved in 1999, it has been decided
that for the foreseeable future this tax will not enter into force. If it is decided that the
tax will enter into force, there is a mandatory transitional period during which the tax
will not be applicable to legal entities resident at that time on Curaao.
Tax treaties
Curaao currently has tax treaties in effect with Aruba, the Netherlands, Norway, and St.
Maarten. A double tax agreement (DTA) has been negotiated with Jamaica, but this has
not entered into force yet. See the Other issues section for a description of tax information
exchange agreements (TIEAs).
As part of the Kingdom of the Netherlands (TAK), Curaao is party to a federal tax
agreement with the Netherlands, Aruba, and St. Maarten. Subject to this treaty,
dividends, interest, and royalties paid out to a Curaao company may qualify for reduced
rates of WHT in the subject countries.
Dutch dividend WHT is 15% if the Curaao company owns less than 25% of the Dutch
company. If the Curaao companys interest is 25% or more, Dutch WHT can be reduced
to 8.3%.
The WHT regime in the TAK also applies to the old Curaao offshore companies.
The TAK is to be revised. Negotiations have already started between Aruba and Curaao
each with the Netherlands. In the end, the existing TAK will then be replaced by separate
bilateral tax agreements. The government of Curaao has signed a new agreement with
the Netherlands that is expected to enter into force on 1 January 2015. Agreements with
Aruba and St. Maarten have not been finalised. The old TAK will remain in force with
regard to Aruba and St. Maarten until a separate agreement has been signed with each
of these countries.
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Tax administration
Taxable period
Profit tax is levied by way of a self-assessment system. Returns are to be filed on a

calendar-year basis. Non-resident corporations may file their returns based on a calendar
year basis or on a different book year. On request, this may also apply, for example,
when a resident company is the subsidiary of a foreign parent company (i.e. only a local
company must request for a different tax year-end).
Tax returns
A provisional return must be filed within three months after the end of the book year. A
final return must be filed within six months after the end of the book year.
For the provisional return, no extensions are granted. For the final return, an extension
may be requested. In general, no extensions will be granted for more than 12 months
after the book year.
Payment of tax
Payment is to be made at the time of filing and in a lump sum on the basis of the selfassessment. This means that if the book year equals the calendar year, the provisional
return is due before 1 April of the following year, and the final return before 1 July of the
following year.
In general, at the time of filing the provisional return, an amount equal to the profit tax
of the previous year must be paid; the remaining balance due for the year for which the
return is filed must be paid at the time of filing the final return.
For example, if the tax due for the year 2013 was 100, then at the time of filing the
provisional return for 2014, which is due before 1 April 2015, that same amount must be
declared and paid. If there is reason to believe that the amount for the year 2014 will be
lower than for 2013, upon request, the estimated lower amount may be paid at the time
of filing the provisional return.
At the time of filing the final return for the year 2014, which is due before 1 July 2015,
the balance due must be paid, or if the total amount is less than the amount already paid
up, a repayment will follow.
Tax audit process
As the profit tax is levied based on self-assessment, the tax department does not issue a
final tax assessment. There is no specific cycle for audits. Depending on a desk review of
the tax returns of the last couple of years, an audit may follow.
A reassessment can be imposed until five years after the tax year. In cases where the
taxpayer is considered to be in bad faith, a reassessment can be imposed until ten years
after the tax year.
investigated. Often the audit will not only focus on the profit tax, but also the other tax
obligations, such as sales tax, wage tax, and social security premiums.
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Other issues
Exchange controls
In general, exchange control regulations are very liberal for offshore companies.
Offshore companies established on Curaao can obtain non-resident status for exchange
control purposes, which basically provides for total exemption from exchange controls.
Onshore companies are subject to slightly stricter rules. These companies are subject to a
licence fee of 1%.
Business combinations
The Corporate Tax Act provides for a tax facility for business mergers. In a business
merger, a company acquires all or a substantial part of the trade or business of another
company with a view towards combining the business operations of the two companies
into a permanent financial and economic organisation. If the business is transferred as
part of a business merger, the gains realised by the transferor are not subject to profit tax
if certain conditions are met.
Although there is no specific provision in the Corporate Tax Act with regard to legal
mergers, legal split-ups, and re-incorporations, the Tax Inspectorate has announced that
when certain conditions are met, a tax facility also applies in these cases.
TIEAs have been signed with several countries, including Australia, Canada, Colombia,
Denmark, Mexico, New Zealand, Spain, Sweden, and the United States. As a result,
Curaao, as part of the former Netherlands Antilles, has been moved to the white list of
the OECD Global Forum.
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Cyprus
PwC contact
Nicos Chimarides
Julia House
3 Themistocles Dervis Street
CY-1066 Nicosia, Cyprus
Tel: +357 22 555270
Cyprus is expanding and updating its double tax treaty (DTT) network. In this regard,
Cyprus had seven new/amended DTTs effective as of 1 January 2014, these being with
Austria, Estonia, Finland, Kuwait, Portugal, Ukraine, and the United Arab Emirates.
Cyprus also recently signed new/amended DTTs with Lithuania, Norway, and Spain.
The standard value-added tax (VAT) rate increased to 19% as of 13 January 2014.

All companies that are tax residents of Cyprus are taxed on their income accrued or
derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is
taxed on income accrued or derived from business activity that is carried out through
a permanent establishment (PE) in Cyprus and on certain other income arising from
sources in Cyprus.
The standard corporate income tax (CIT) rate in Cyprus is 12.5%.
The Cyprus CIT law provides explicitly for a number of exemptions for many and varied
types of incomes, profits, and gains (see the Income determination section for more
information).
Special Defence Contribution (SDC)
SDCis imposed only on non-exempt dividend income, passive interest income, and
passive rental income earned by Cyprus tax residents.Non-tax residents of Cyprus are
exempt from SDC.
Dividends generally are exempt from SDC, subject to certain rarely applicable limitations
(see Dividend income in the Income determination section).
Interest received by close-ended or open-ended collective investment schemes (CIS) is
never subject to SDC. Such interest is only taxed under CIT (after deducting allowable
expenses) at the standard CIT rate of 12.5%.
Interest received by companies in the ordinary course of business, including interest
closely connected to the ordinary course of business, is also only taxed under CIT (after
deducting allowable expenses) at the standard CIT rate of 12.5%.
When companies receive interest that does not satisfy the conditions prescribed
immediately above, the interest is subject to SDC (without expense deduction) at the
rate of 30% as of29 April2013 (previously 15%). Such passive nature interest would,
however, be exempt from CIT.
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Gross rental income reduced by 25% is also subject toSDC at the rate of 3% in addition
to CIT of 12.5%.
Tonnage tax
For ship-owning companies, the profits derived by the owner of a ship registered in
theEuropean Union (EU) or European Economic Area (EEA) (as well as other foreign
jurisdictions, subject to conditions) from its operation/charter outare fully exempt from
all direct taxes. The term owner includes a bareboat charterer of a non-Cyprus flag
vessel parallel registered in Cyprus. A similar exemption applies to charterers and ship
managers.
Instead of CIT, ship owners, charterers, and managers pay tonnage tax on the net
tonnage of the ships they own, charter, or manage. In addition, there is no tax on
dividends paid at all levels of distribution by the above persons out of profits subject to
tonnage tax and related capital gainson the sale of the ship and no capital gains tax on
the sale or transfer of a ship, share in a ship, or shares in a ship-owning company. The
same legislation also provides for income tax exemption of the salaries and benefits of
the captain, the officers, and the crew aboard a Cyprus flag vessel.
This treatment applies until 2020 and is compulsory for Cyprus flag ship owners, but
optional for other ship owners, charterers, and ship managers.
Local income taxes
There are no local government taxes on income in Cyprus.
Corporate residence
Only companies managed and controlled in Cyprus are treated as tax resident of Cyprus.
Cyprus domestic income tax legislation also explicitly provides for the determination of
a taxable PE of a non-Cyprus tax resident company in Cyprus. These specific legislative
provisions are in line with the relevant article of the Organisation for Economic Cooperation and Development (OECD) model treaty.
Other taxes
VAT is imposed on the provision of goods and services in Cyprus as well as on the
acquisition of goods from the European Union and the importation of goods into Cyprus.
Taxable persons charge VAT on their taxable supplies (output tax) and are charged with
VAT on goods or services that they received (input tax).
As of 13 January 2014, the standard VAT rate in Cyprus is 19% (previously 18%). Two
reduced VAT rates, a 9% (previously 8%) rate and a 5% rate, apply in Cyprus:
The reduced VAT rate of 9% applies on accommodation, restaurant and catering
services, as well as on certain local passenger transport services. The term restaurant
and catering services includes the supplies of prepared and unprepared foodstuffs
and beverages that are accompanied by sufficient support services that enable the
immediate consumption of the foodstuffs and beverages supplied.
The reduced rate of 5% applies on foodstuffs, pharmaceutical products, books and
newspapers, as well as on a variety of other goods and services that are beyond the
scope of this summary.The reduced rate of 5% also applies, subject to conditions, on
the sale of new buildings/houses to individuals/eligible persons, who will use them
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as their primary and main residences, provided the contract has been signed after 1
October 2011.
Exports from Cyprus are zero-rated (i.e. no VAT must be charged on the export, and
the company is entitled to recover the relevant input VAT suffered). The services for the
international transport of passengers as well as the transportation of goods either from
or to countries outside the European Union are also zero-rated.
Supplies of goods to businesses resident in other EU member states are outside the scope
of Cyprus VAT.
Certain education services, as well as the majority of financial, insurance, and medical
services, are exempt from Cyprus VAT. Supplies of land and buildings also are exempt
from VAT unless the supply relates to new buildings before first use.
VAT registration
VAT registration is compulsory for business with:

turnover in excess of 15,600 euros (EUR) during the 12 preceding months or
an expected turnover in excess of EUR 15,600 within the next 30 days.
Business with turnover of less than EUR 15,600, or with supplies that are outside the
scope of VAT but for which the right to claim the amount of the related input VAT is
granted, have the option to register on a voluntary basis.
An obligation for registration also arises for businesses that make acquisition of goods
from other EU member states in excess of EUR 10,251.61 during any calendar year.
In addition, an obligation for VAT registration arises for businesses engaged in the
provision of intra-Community services for which the recipient must account for VAT
under the reverse charge provisions. Furthermore, an obligation for VAT registration
arises for businesses carrying out economic activities from the receipt of services from
abroad for which an obligation to account for Cyprus VAT under the reverse charge
provision exists, subject to the registration threshold of EUR 15,600 per any consecutive
12-month period.
No registration threshold exists for the provision of intra-Community supplies of
services.
Exempted products and services, and disposals of items of capital nature, are not taken
into account for determining annual turnover for registration purposes.
Registration is effected by completing the appropriate application form.
VAT declaration and payment/return of VAT
VAT returns must be submitted quarterly, and the payment of VAT must be made by the
tenth day of the second month that follows the month in which the tax period ends.
VAT registered persons have the right to request for a different filing period. Approval of
the VAT authorities is required. The VAT Commissioner also has the right to request for a
taxable person to file ones VAT returns for a different period.
Where in a quarter input VAT is higher than output VAT, the difference is refunded
(subject to certain conditions) or is transferred to the next VAT quarters.
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Customs duties
Customs duties may be imposed upon the importation of goods into Cyprus. The
customs duties are imposed in accordance with the provisions of the applicable
legislation.
Whether customs duties are imposed depends on the nature of the goods and the
respective customs duty codes.
Excise taxes
Excise taxes are imposed on certain products, including means of transport, petroleum,
tobacco products, and alcoholic drinks.
Immovable property tax (IPT)
The registered owner of immovable property situated in Cyprus is liable to an annualIPT

calculated on the market value of the property as at 1 January 1980. The rates effective
asof 1 January 2013 are the varying rates as noted in the table below, which apply
per owner, not per property. Property owners whose property has a total value of EUR
12,500 (based on 1 January 1980 values) are exempt from IPT.
Property value (as at 1 January 1980) (EUR)
Up to 40,000
40,001 to 120,000
120,001 to 170,000
170,001 to 300,000
300,001 to 500,000
500,001 to 800,000
800,001 to 3 million
Over 3 million
Tax rate ()
6
8
9
11
13
15
17
19
Accumulated tax (EUR)

240
880
1,330
2,760
5,360
9,860
47,260
TheIPT is payable by 30 September each tax year, based on the 1 January 1980 values of
the immovable properties owned by a taxpayer on 1 January of the same tax year.
Stamp duty
The general rule is that Cyprus stamp duty is imposed only on writteninstruments
relating to assets located in Cyprus or to matters that will take place in Cyprus. The
applicable rates are based on the value stipulated in each instrument and are nil for
values up to EUR 5,000, 0.15% for values from EUR 5,001 up to EUR 170,000, and 0.2%
thereafter, subject to an overall maximum amount of stamp dutyof EUR 20,000.
Capital duty
Upon incorporation ofa Cypruscompany
Upon incorporation ofa Cypruscompany, capital duty is due on the authorised share
capital at EUR 102.52 plus 0.6% of the authorised share capital. It is important to note
that the 0.6% rate applies only to the authorised share capital and not to any share
premium.
As for the issued share capital, there is no stamp duty payable if the shares are issued
at their nominal value. There is a flat duty of EUR 17.09 if the shares are issued at a
premium.
Upon subsequent increases
Upon subsequent increases, capital duty is due on the authorised share capital at 0.6%
of the nominal value of the additional share capital.It is important to note that the 0.6%
rate applies only to the authorised share capital and not to any share premium.
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As for the issued share capital, EUR 17.09 is due on every issue batch, whether the shares
are issued at a premium or not and irrespective of the number of shares issued every
time.
Capital gains tax
Capital gains, other than those from immovable property, are not taxed in Cyprus. A
20% tax is imposed on gains arising from the disposal of immovable property situated in
Cyprus or the disposal of shares of companies (other than companies whose shares are
listed in any recognised stock exchange) that own such immovable property. In the case
of disposal of company shares, the gain is calculated exclusively on the basis of the gain
from the immovable property situated in Cyprus. The value of the immovable property
will be its market value at the time the shares were disposed of.
The taxable gain is the difference between thedisposal proceeds and the original cost of
the property plus improvements as adjusted for inflation up to the date of disposal on the
basis of the consumer price index in Cyprus. In the case of property acquired before 1
January 1980, the original cost is deemed to be the value of the property as at 1 January
1980 on the basis of the general valuation conducted by the Land Registry Office under
the Immovable Property Law.
Other expenses that are related to the acquisition and disposal of immovable property
also are deducted, subject to certain conditions (e.g. interest costson related loans,
transfer fees, legal expenses).
Employed persons are compulsorily insured under a state-administered social insurance

fund. Contributions to the fund are borne by both employer and employee. The
employers contributions are made as a percentage of earnings to the followingfunds:
Funds
Social insurance fund
Redundancy fund
Training development fund
Social cohesion fund
Holiday fund (option for exception)
Employer contribution (%) (1)

7.8 (2, 3)
1.2
0.5
2.0
8.0
Notes
1.
2.
3.
With the exception of the social cohesion fund, the maximum amount of monthly earnings on which
the contributions are paid is EUR 4,533 for 2014. This maximum is usually adjusted for inflation
annually at the beginning of each calendar year.
The rate of 7.8% (previously 6.8%) is applicable from 1 January 2014.
The employee must also contribute at the same rate as the employer to the social insurance fund, but
not to the other funds.
Special Contribution
For 2014, the following Special Contributions are payable on the gross monthly earnings
and pensions of private sector employees, self-employed individuals, and private sector
pensions from work/business within Cyprus:
Gross monthly emoluments from employment/pension (EUR)
0 to 1,500
1,501 to 2,500
2,501 to 3,500
Over 3,500
Contribution (%) (1)

0
2.5 (minimum EUR 10)
3.0
3.5
For 2013, the following Special Contributions were payable on the gross monthly
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earnings and pensions of private sector employees, self-employed individuals, and
private sector pensions from work/business within Cyprus:
Gross monthly emoluments from employment/pension (EUR)
0 to 2,500
2,501 to 3,500
3,501 to 4,500
Over 4,500
Contribution (%) (1)

0
2.5 (minimum EUR 10)
3.0
3.5
Notes
1.
In the case of employed individuals, the employer is liable for half the Special Contribution and the
employee for the other half.
Branch income
The rate of tax on Cyprus branch profits is the same as on corporate profits. No further
tax is withheld on transfers of profits or fundsto a foreign head office.
Inventory valuation
Inventories generally are stated at the lower of cost and net realisable value. Last in first
out (LIFO) is not permitted for taxation purposes. First in first out (FIFO) is permitted.
Conformity between book and tax reporting is not required.
Capital gains
Profits from disposals of corporate titles are unconditionally exempt from income tax.
Titlesis defined as shares, bonds, debentures, founders shares, and other titles of
companies or other legal persons incorporated in Cyprus or abroad and options thereon.
According to a circular issued by the Cyprus tax authorities, the term includes, inter alia,
futures/forwards on titles, short positions on titles, swaps on titles, depositary receipts
on titles, repos on titles, units in open or close CISs, international collective investment
schemes (ICISs), undertakings for collective investment in transferable securities
(UCITSs), investment trustsand funds, mutual funds, real estate investment trusts
(REITs), and units in stock exchange indices on titles.
Capital gains on immovable property are taxed at a separate rate in Cyprus. See Capital
gains tax in the Other taxes section for more information.
Dividend income
Dividends received from other Cyprus companies are excluded from all taxes unless they
are indirectly declared after the lapse of four years from the end of the year in which the
profits weregenerated, in which case they may become taxable to SDC at 17% (20% up
to 31 December 2013).
Dividends earned from foreign investments are exempt from income tax in Cyprus. Such
dividend income is also exempt from SDCunless:
more than 50% of the foreign paying companys activities result directly or indirectly
in investment income and
the foreign tax is significantly lower than the tax burden in Cyprus (i.e. an effective
tax rate of less than6.25%).
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Note that where the Cyprus participation exemption on foreign dividend income is not
available, then any foreign withholding tax (WHT) imposition on dividends paid to the
Cyprus company will be credited against the Cyprus flat SDC rate of 17% (20% up to
31 December 2013)on such dividends. Furthermore, in some cases, an underlying tax
credit will also be granted.
Stock dividends
A Cyprus corporation can distribute tax-free dividends of common stock (bonus shares)
proportionately to all common stock shareholders.
Interest income
See Special Defence Contribution (SDC) in the Taxes on corporate income section for a
description of the tax treatment of interest income.
Rental income
See SpecialDefence Contribution (SDC)in the Taxes on corporate income section for a
description of the tax treatment of rental income.
Foreign income
Resident corporations are subject to tax on their worldwide income. However, foreignbranch income (see below), as well as dividend income from abroad (see Dividend income
above), is exempt from taxation in Cyprus.
Profits from a branch/PE abroad are exempt from CIT. This exemption is always
applicable, unless:
more than 50% of the foreign PEs activities directly or indirectly result in investment
income and
the foreign tax on the income of the foreign PE is significantly lower than the tax
burden in Cyprus (i.e. an effective tax rate of less than 6.25%).
Where foreign income is taxed in Cyprus, double taxation is avoided through unilateral
relief, by giving credit for foreign taxation, or by treaty relief. This credit may not exceed
the Cyprus taxes imposed on the sameincome.
Deductions
Generally, expenditure wholly and exclusively incurred for the generation of taxable
income is deductible against the companys taxable income. Such expenditure should be
supported by invoices and relevant receipts or other supporting documents.
For tangible assets, depreciation is computed on a straight-line basis at set rates that
vary, depending on the type of asset. On the sale of such depreciated property, tax
depreciation may be recaptured and taxed as ordinary income, depending upon the
amount of sale proceeds.
Plant and machinery acquired during the tax years 2012, 2013, and 2014 is eligible to
claim accelerated tax depreciation at the rate of 20% per annum (excluding assets that
are already eligible for a higher annual rate of tax depreciation).
In case of industrial and hotel buildings that are acquired during the tax years 2012,
2013, and 2014, tax depreciation at the accelerated rate of 7% per annum may be
claimed.
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Any expenditure of a capital nature for the acquisition or development of qualifying
intellectual property (IP) will be claimed as a deduction in the tax year in which it
was incurred and inthe immediate four following years on a straight-line basis (see
Intellectual property [IP] regime in the Tax credits and incentives section).
Goodwill
Any amounts paid for the acquisition of trading goodwill should be deductible upon the
subsequent sale of such trading goodwill.
Start-up expenses
Start-up expenses, such as formation expenses, are generally not tax deductible in the
computation of the companys taxable income.
Any expenditure on scientific research of a capital nature for which notax

depreciationis granted is deductible from taxable income and spread equally over the
year in which it has been incurred and the five subsequent years. Scientific research
expenditure of a revenue nature is deducted in the year incurred.
See Intellectual property (IP) regime in the Tax credits and incentives section as well.
Interest expenses
Generally,interest expenses incurred by the company for the generation of its taxable
income should be deductible in the companys tax computation.
Interest financing assets that generate tax-exempt income is not deductible in the first
seven years of ownership of such assets. Interest expense associated with such assets
held beyondseven years becomes tax deductible from thereon.
From 1 January 2012, interest expense financing the acquisition of 100% shareholdings
in subsidiaries that are directly or indirectly trading is deductible.
Bad debts
Bad debts of any business should generally be deductible, provided they arewrite-offs/
provisions against specific trading receivables and the taxpayer can evidently prove that
all necessary steps were taken beforehand to recover them.
Charitable donations or contributions made for educational, cultural, or other charitable

purposes to the Republic ofCyprus (including local authorities), or to approved
charitable institutions, are wholly deductible, provided that these expenses are
supported with relevant vouchers.
Fines and penalties
Fines and penalties are generally not deductible in the computation of the taxable
income of the company.
Taxes
Taxes that are deducted in computing profits for CIT purposes include VAT not recovered
and the employers share of contributions to the social insurance and otherfunds, as well
as the Special Contribution.
Tax losses can be carried forward (from the end of the tax year in which the loss
occurred) and set-off against taxable profits of the next five years. Carryback of tax
lossesisnot permitted.
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A Cyprus corporation can claim a deduction for royalties and interest charges paid
to foreign affiliates, and a reasonable amount of head office expenses of an overseas
company, provided such expenditures can be justified as having been incurred in the
production of the income and subject to the rules generally applicable for the deduction
of such expenditure.
In the case of insurance companies, the amount of head office expenses should not
exceed 3% of the net premiums in Cyprus for the general insurance business and 2% for
the life insurance business.
Group taxation
Group relief provisions allow, subject to certain conditions, companies of the same group
to transfer losses from the loss-making companies to profitable companies. A group
includes only Cyprus tax-resident companies or Cyprus PEs of foreign companies with at
least a 75% direct or indirect holdingrelationship between them.
Transfer pricing
Transactions between related parties should be carried out at pure commercial terms
(i.e. at arms length). If not carried out at pure commercial terms, the Cyprus tax
authorities have the powers within the tax legislation to adjust results for tax purposes
to thosethat would apply at pure commercial terms.
There are no legal requirements to keep transfer pricing documentation; however, in
practice, it is strongly recommended that the taxpayerbe able tosupport the armslength nature of transactions.
The Cyprustax authorities have communicated that the transfer of shares of companies
within a group at a value different than the market value should not have any adverse
Cyprus tax implications in certain circumstances.
Thin capitalisation
There are no thin capitalisation provisions in the Cyprus tax law.
There are no CFC provisions in the Cyprus tax law.

Foreign tax credit
credit regime.
The Cyprus holding company
The exemptions for dividends received from abroad (see Dividend income in the Income
determination section), foreign PE trading profits (see Foreign income in the Income
determination section), and profits from transactions in titles (see Capital gains in the
Income determination section), together with the fact that Cyprus does not withhold
taxes on dividend, interest, and royalty (unless right is used in Cyprus) payments made
abroad, and its extensive DTT network, as well as full adoption and access to all EU
Directives, make Cyprus an ideal holding company EU jurisdiction.
512
Cyprus
Cyprus
The Cyprus financing company
The low CIT rate of 12.5% imposed on interest incomes, coupled with acceptable thin
spreads under certain conditions, make Cyprus a very competitive financing company
EU jurisdiction.
Intellectual property (IP) regime
The income tax law provides for generous exemptions from tax of income related to IP.
More specifically:
80% of any income generated from ownedIP (net of any direct expenses) is exempt
from income tax
80% of profit generated from the disposal of ownedIP (net of any direct expenses) is
exempt from income tax
the definition of IP includes copyrights, patents, and trademarks
registrable IPs need not be registered in Cyprus to benefit from this IP regime, and
any expenditure of a capital nature for the acquisition or development of IP can be
claimed as a deduction in the tax year in which it was incurred and the immediate
four following years on a straight-line basis.
The Cyprus international collective investment schemes (ICISs) and

undertakings for collective investment in transferable securities
(UCITSs)
The sole objective of ICISs and UCITSs is the collective investment of funds of the
unitholders.
ICIS can take the following legal forms:

International fixed capital company.

International variable capital company.
International unit trust scheme.
International investment limited partnership.
UCITS can take the following legal forms:

Common fund.
Variable capital investment company.
ICISs and UCITSs are liable to tax or not depending on their legal status.
Under certain conditions, management fees charged for the management of ICISs and
UCITSs funds can be exempt from VAT.
Withholding taxes
Under Cyprus legislation, there is no WHT on dividends, interests, and royalties paid
to non-residents of Cyprus except in the case of royalties earned on rights used within
Cyprus, which are subject to WHT of 10%. Such Cyprus WHT on royalties may be
reduced by DTTs entered into by Cyprus orby the EU Interest and Royalty Directive as
enacted in the Cyprus tax legislation.
Recipient
Dividends
0
WHT (%) (1)

Interest
0
Royalties
0/10 (2)
Cyprus
513
Cyprus
Recipient
Treaty countries:
Armenia
Austria
Belarus
Belgium
Bulgaria
Canada
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Germany
Greece
Hungary
India
Italy
Kuwait
Lebanon
Malta
Mauritius
Moldova
Montenegro (25)
Norway (35)
Poland
Portugal
Qatar
Romania
Russia
San Marino
Serbia (25)
Seychelles
Singapore
Slovak Republic
Slovenia
South Africa
Spain (23)
Sweden
Syria
Thailand
Ukraine
United Kingdom
United States
514
Cyprus
Dividends
WHT (%) (1)

Interest
Royalties
0/5 (30)
10
5/10/15 (17)
10/15 (8)
5/10 (22)
15
10
0/5 (28)
0/15(6, 32)
15
0
5/15 (13)
10/15 (12)
5/15 (12)
25
0
10/15 (14)
0
0
0
5
15
0
5/10 (26)
10
0
0/5 (34)
10
0
10
5/10 (16)
0
10
0
0
10
5/15 (31)
0
0/5 (9)
5/15 (8)
0/15 (8)
10
5/15 (19)
0
0
0
5
0
5
0/10 (6, 18)
0/7 (6)
0/15 (4)
10
0
0
15
0
0
0/10 (10)
0
10
0/10 (6)
0/10 (10)
0
10
0
5
10
0
5
10
0
0/5 (6)
10
0
0/10 (6)
0
0
10
0
0/7/10 (6, 24)
0/10 (6)
5
0
0
0/10 (6)
0/10 (4)
10/15 (20)
2
0
10
0/10 (10)
5
0
5
0
10
0/10 (5)
10
0/10 (29)
0
10
0
0
0/5 (3)
0
0/5 (11)
0
10 (15)
0/5 (11)
0
5
0
10
0
5
10
0
5
10
5(27)
5 (7)
0
0
10
5
10
5 (7)
5
0
0
0
10
5/10/15 (21)
5/10 (33)
0
0/5 (3)
0
Cyprus
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
Under Cyprus legislation, there is never any WHT on dividends and interest paid to non-residents of
Cyprus.
Royalties earned on rights used within Cyprus are subject to WHT of 10%.
A WHT rate of 5% is applicable on film and TV royalties.
0% if paid to a government, central bank, or public authority of the other state or for export
guarantee.
0% on literary, dramatic, musical, or artistic work.
0% if paid to the government, central bank, or public authority of the other state.
This rate applies for patents, trademarks, designs or models, plans, secret formulas, or processes,
or any industrial, commercial, or scientific equipment, or for information concerning industrial,
commercial, or scientific experience.
A rate of 15% if received by a company controlling less than 25% of the share capital of the paying
company or, in all cases, if received by an individual.
A rate of 5% if received by a company holding less than 10% of the share capital of the paying
company or, in all cases, if received by an individual or a company not limited, at least partly, by
shares.
0% if paid to a government, bank, or financial institution.
A WHT rate of 5% is applicable on film royalties.
A rate of 15% if received by a company holding less than 10% of the share capital of the paying
A rate of 15% if received by a company controlling less than 10% of the voting power in the paying
A rate of 15% if received by a company holding less than 10% of the shares of the paying company
or, in all cases, if received by an individual.
The treaty rate is 15%; however, the maximum WHT per Cyprus tax legislation is 10% (see Note 2).
A rate of 10% on dividends if paid by a company in which the beneficial owner has invested less than
EUR 100,000 in the share capital of the company paying the dividends.
If investment is less than EUR 200,000, dividends are subject to 15% WHT, which is reduced to 10%
if the recipient company controls 25% or more of the paying company.
No WHT for interest on deposits with banking institutions.
A rate of 15% if a dividend is paid by a company in which the beneficial owner holds less than 20%
of the share capital of the paying company and the beneficial owner has invested less than EUR
100,000.
A rate of 10% on interest received by a financial institution or when it relates to sale on credit of any
industrial, commercial, or scientific equipment or of merchandise.
5% WHT applies for any copyright of literary, dramatic, musical, artistic, or scientific work. A 10%
rate applies for industrial, commercial, or scientific equipment. A 15% rate applies for patents,
trademarks, designs or models, plans, secret formulas, or processes.
5% WHT applies to companies directly holding at least 25% of the share capital of the company
paying the dividend. In all other cases, the WHT is 10%.
The treaty with Spain will be effective from its date of entry into force in relation to WHT. Entry into
force is expected during 2014.
A rate of 7% is applicable if paid to a bank or financial institution.
Serbia and Montenegro apply the Yugoslavia/Cyprus treaty.
5% rate applies if received by a company (excluding partnerships) that directly holds 25% of the
shares. A rate of 10% applies in all other cases.
Applies to any consideration for the use of, or the right to use, any copyright of literary, artistic
or scientific work (including cinematograph films and films, tapes or discs for radio or television
broadcasting), computer software, any patent, trademark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial, or scientific experience.
0% rate applies if received by a company (excluding partnership) that directly holds at least 10% of
the share capital of the paying company for an uninterrupted period of no less than one year; 5%
applies in all other cases.
10% for patent, trademark, design or model, plan, secret formula or process, computer software or
industrial, commercial, or scientific equipment, or for information concerning industrial, commercial,
or scientific experience.
A WHT rate of 5% is applicable if a dividend is paid by a company in which the beneficial owner has
invested less than EUR 150,000.
The provisions of the Parent-Subsidiary EU directive are applicable.
A WHT rate of 15% is applicable if received by a company controlling less than 10% of the share
capital of the paying company or the duration of any holding is less than one uninterrupted year. A
rate of 15% also applies if received by an individual
A 5% WHT will be levied on payment of royalties in respect of any copyright of scientific work, any
patent, trademark, secret formula, process, or information concerning industrial, commercial, or
scientific experience. 10% WHT will be levied in all other cases.
A 0% WHT applies if the recipient company (partnership is excluded) directly holds 10% of the share
capital of the paying company for an uninterrupted period of at least two years. A rate of 5% applies
in all other cases.
These rates apply under the existing treaty applicable with Norway. A new treaty was signed on
24 February 2014 but is still not in effect. Once effective, the new treaty rates will be 0%/15% on
dividends, 0% on interest, and 0% on royalties.
Cyprus
515
Cyprus
Tax administration
Taxable period
In Cyprus, the tax year is the calendar year.
Tax returns
Business organisations are required to prepare audited accounts based on International

Financial Reporting Standards (IFRS). Tax returns are completed based on these
accounts on a calendar-year basis.
Electronic submission
Companies should be registered online and submit their annual tax returns
electronically. In this respect, the submission deadline of the 2013 corporate tax returnis
31 March 2015.
Payment of tax
Corporate entities must pay provisional tax on the current years income. As of 1January
2013, such provisional tax payment is madein two equal instalments on31 July and 31
December of the tax year. A final payment must be made on or before 1 August of the
following year on a self-assessment basis to bring the total payments of tax to the total
actually due according to the tax return.
Tax audit process
The Cyprus tax process is one of self-assessment. Within the statute of limitations (see
below), the Cyprus tax authorities may raise enquiries, which can range from simple
information requests to detailed technical challenges over treatments adopted in the tax
return.
These enquires are often settled between the taxpayer and the Cyprus tax authorities by
exchange of information via correspondence and meetings. Where agreement cannot be
reached litigation may be necessary.
A taxpayer may also request that the Cyprus tax authorities review the companys open
tax years if the taxpayer requires a tax clearance certificate (e.g. upon commencement of
voluntary liquidation).
The Cyprus tax authorities have six years from the end of the relevant tax year to enquire
and examine the tax affairs of the taxpayer. However, if fraud or wilful default has been
established, the statute of limitations extends to 12 years.
For companies in a tax-loss position per the self-assessment return, the Cyprus tax
authorities are not restricted to the above mentioned six year (or 12-year period);
however, outside of this period, any enquires may only restrict or nullify a loss.
Tax authorities generally focus on the tax statements being computed based on IFRS
prepared and audited financial statements and on the principles of taxation as per the
tax laws and their issued circulars.
Other issues
Transfers of assets and liabilities between companies can occur without tax
consequences within the framework of a tax-exempt qualified reorganisation.
Reorganisations include mergers, demergers, partial divisions, transfers of divisions of
516
Cyprus
Cyprus
activities, exchanges of shares, and transfers of registered office of a European company
(SE) or a European cooperative company (SCE).
Cyprus
517
Czech Republic
PwC contact
David Borkovec
PricewaterhouseCoopers esk republika, s.r.o.
PricewaterhouseCoopers Legal s.r.o., advoktn kancel
Hvezdova 1734/2c,
140 00 Prague, Czech Republic
Tel: +420 251 152 561
Changes were also made to the value-added tax (VAT) legislation with effect from 1
January 2014. The most important changes were made in respect of VAT treatment of
transfer of immovable property.
For 2014, an amendment has been introducedthat increases the research and
development (R&D)allowance by 110% of the difference by which qualifying costs of
the current period exceed those of the past period. From 2014, gift and inheritance
taxes are abolished, and taxation of income from transfers for no consideration is newly
subject to income tax (mostly with the same tax result as until the end of 2013). The
Income Tax Act suffered terminology changes as a result of introduction of a brand new
Civil Code and introduced a new institute of trust.
Substantial tax changes are planned from 2015, when a one-stop-shop system for
collection of taxes and social security contributions will be introduced (amendment
to the tax legislation has been approved, but changes are expected even prior to the
law becoming effective). Hand in hand, exemption of dividend income and liquidation
surplus will be introduced. However, the exemption should not apply to profit shares
from collective investment vehicles (both Czech and foreign). The new rules on taxation
of profit shares should apply only to profits generated after the effective date of the
change.

Corporate income tax (CIT) applies to the profits generated by all companies, including
branches of foreign companies. Corporate partners in general partnerships (i.e.
unlimited) and corporate general partners (i.e. unlimited) in a limited partnership are
subject to CIT on their share of the profits in the partnership.
Czech resident companies are required to pay CIT on income derived from worldwide
sources. Non-resident companies are required to pay CIT on income sourced in the
Czech Republic.
The 19% CIT rate applies to all business profits, including capital gains from the sale of
shares (if not exempt under the participation exemptionregime).
There is a special tax rate of 15% levied on dividend income of Czech tax resident
entities from non-resident entities (unless subject to participation exemption).
Local income taxes
There are no local income taxes in the Czech Republic.
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Czech Republic
Czech Republic
Corporate residence
A company is resident in the Czech Republic for CIT purposes if it is registered in, or has
a place of management located in, the Czech Republic.
Under domestic law, the creation of a PE of a foreign tax resident in the Czech Republic
is triggered by a fixed place available for carrying out business activities, long-term
provision of services (for more than six months in any 12 consecutive months), or
presence of a dependent agent, unless an applicable double taxation treaty (DTT)
stipulates otherwise. For interpretation purposes, the Organisation for Economic Cooperation and Development (OECD) Model Tax Commentary is followed. The Czech
Republic tends to have a service PE clause included in its DTTs.
Other taxes
VAT is charged at 21% on the supply of goods and services within the Czech Republic,
but certain supplies (such as groceries) are taxed at a rate of 15%.
Exports are generally exempt from VAT with a credit. Some supplies are exempt without
a credit, including the lease of real estate (with certain exceptions), financial and
insurance services, radio and TV broadcasting, education, health, and welfare.
VAT registration
Companies seated in the Czech Republic whose turnover exceeds 1 million Czech korun
(CZK) in any consecutive 12-month period must register as a VAT payer with the tax
authorities.
For non-resident companies, there is no registration threshold, but they must register as
a VAT payer if they:
make any supply subject to Czech VAT (unless the liability to declare and pay VAT is
shifted to the recipient of the supply), or
supply goods from the Czech Republic to another European Union (EU) member
state.
A company can register as a VAT payer voluntarily even if its turnover fails to reach the
threshold if it renders or is going to render taxable supplies or VAT exempt supplies with
credit in the Czech Republic.
Under certain circumstances, companies not registered for VAT to whom VAT liability
arises due to acquired goods or services become persons identified for VAT. A person
identified for VAT only pays VAT from received supplies without being entitled to recover
related input VAT.
VAT returns and payments
The VAT return must be filed and tax paid within 25 days after the end of the taxable
period. The taxable period is a calendar month (or calendar quarter under certain
circumstances). As of 2014, companies have to submit all VAT returns to the Czech tax
authorities electronically.
Customs duties
The Czech Republic is an EU member state; consequently, the EU customs code applies.
Czech Republic
519
Czech Republic
Excise taxes
Excise tax is charged on the production or import of certain products, such as tobacco
and tobacco products, wines, semi-products, spirits and pure ethanol, beer, fuel, and
mineral oils.
Energy taxes
Energy tax is charged on natural gas and certain other gases, solid fuels, and on
electricity sold to final customers in the Czech Republic.
Real estate tax
Real estate tax is payable annually by the owner of land or buildings. The amount of
the tax is dependent on area, location, and usage of the land or buildings. Paved areas
used for business purposes (such as concrete areas in logistics centres) are taxable, with
taxpayers obligated to self-assess the tax. However, some areas (e.g. publicly accessible
parking lands in shopping malls) are not taxable.
As of 2014, real estate transfer tax is governed by a separate law, but the rules mostly
remain the same, as well as the tax rate of 4% on the greater of the transaction price or
the officially appraised value. The taxpayer may be contractually agreed (previously, it
was the transferor with the transferee as a guarantor).
Stamp duties
There are no stamp duties in the Czech Republic. Certain business operations in which a
notary has to be involved by operation of law are subject to notarial fee.
Social security and health insurance contributions
Employers contribute 34% of the employees gross salary to the state health and social
security funds. A cap on only the social security premium is available.
Road tax
Road tax is payable annually with respect to vehicles (including private vehicles) used
for commercial purposes. Rates vary depending on engine capacity and vehicle size.
Branch income
A foreign company can trade in the Czech Republic through a Czech branch. A branch
usually creates a Czech PE of the foreign entity for CIT purposes (depending on the
character of the activities carried out through the branch). The basis of taxation is
the same as for corporations (i.e. tax base is calculated as taxable revenues less taxdeductible costs). In some cases, it may be possible for taxpayers to negotiate with the
tax authorities regarding the basis on which profits are attributed to the branch.
A branch is liable for tax on its attributable profits at the standard CITrate.
The starting point for the calculation of the CIT base is the accounting resultas per the
Czech accounting standards. The tax non-deductible costs are then added and nontaxable revenues deducted from the accounting result.
Inventory valuation
Stock (i.e. inventory) is valued at cost. Czech legislation specifically provides for the use
of the arithmetical average cost and first in first out (FIFO) methods to value stock. Last
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Czech Republic
Czech Republic
in first out (LIFO) and the replacement-cost methods (except for livestock) may not be
used.
Capital gains
No separate capital gains tax is levied in the Czech Republic. Capital gains are included
in the CIT base and taxed as ordinary income in the year in which theyarise.
Capital gains from the sale of shares may be exempt from Czech taxation if all of the
following conditions are met:
The Czech or EU parent holds at least 10% of the shares of the subsidiary for at least
12 months.
The subsidiary is a tax resident of the Czech Republic or another EU member state.
Both the parent and the subsidiary have one of the legal forms listed in the Annex to
the EU P/S directive.
The parent or the subsidiary are not exempt from corporate taxation or may not
choose to be exempt, and the tax rate applicable to their income is greater than 0%.
If the subsidiary is not a tax resident of the Czech Republic or another EU member state,
the exemption may be applied, provided that the subsidiary is a tax resident of a country
where there is a DTT in place with the Czech Republic, it has a legal form similar to a
limited liability company or a joint stock company, it is subject to CIT at the nominal rate
of at least 12% in a year when dividends are paid, and the time test of 10% for at least 12
calendar months is met. The time test may be met both prospectively and retrospectively.
Dividend income
Dividends received by Czech tax resident corporations from non-resident entities are
subject to a special tax rate of 15%, unless exempt under the participation exemption
regime described below.
Dividends paid by Czech tax resident corporations to Czech resident entities are subject
to 15% final withholding tax (WHT), unless exempt under the participation exemption
regime.
Dividends paid by Czech tax resident corporations to Czech non-resident entities are
subject to 15% final WHT, unless exempt under the participation exemption regime
or decreased under the relevant DTT. Dividends paid to entities that areresidents of
countries outside of the European Union and European Economic Area (EEA), and
countrieswith which the Czech Republic does not have an enforceable DTTor tax
information exchange agreement (TIEA), are subject to 35% WHT.
Participation exemption regime
Dividend income may be exempt from Czech taxation (i.e. WHT, when a Czech company
is paying dividends, and CIT, when a Czech company is receiving dividends) if all of the
The Czech or EU parent holds at least 10% of the shares of the subsidiary for at least
12 months.
The subsidiary is a tax resident of the Czech Republic or another EU member state.
Both the parent and the subsidiary have one of the legal forms listed in the Annex to
the EU P/S directive.
The parent or the subsidiary are not exempt from corporate taxation or may not
choose to be exempt, and the tax rate applicable to their income is greater than 0%.
Regarding dividends paid, provided that conditions above are met, the exemption also
applies when dividends are paid by a Czech subsidiary to Switzerland, Norway, or
Iceland.
Czech Republic
521
Czech Republic
Regarding dividends received, if the subsidiary is not a tax resident of the Czech
Republic or another EU member state, exemption on dividends received by a Czech
resident may be applied, provided that the subsidiary is a tax resident of a country
where a DTT with the Czech Republic is in place, it has a legal form similar to a limited
liability company or a joint stock company, it is subject to CIT at the nominal rate of at
least 12% in a year when dividends are paid, and the time test of at least 10% for at least
12 consecutive calendar months is met.
Interest and royalty income
Interest and royaltiesreceived by Czech tax residents are included in the standard tax
base subject to the 19% CIT rate.
Czech-source interest and royalty income received by Czech tax non-residents is
subject to 15% WHT, unless subject to domestic exemption or a DTT stipulates
otherwise.Interest and royaltiespaid by Czech tax residents to entities that areresidents
of countries outside of the European Union and European Economic Area, and
countrieswith which the Czech Republic does not have an enforceable DTTor TIEA, are
subject to 35% WHT.
Under domestic law, interest and/or royaltyincome is exempt if it is paid by a Czech
resident to an EU resident recipient who is a beneficial owner of the interest and/or
royalty income, provided that for at least 24 months before the payment:
the payer is in at least a 25% parent-subsidiary or at least a 25% direct sister relation
to the recipient of the income and
the interest and/or royaltyis not attributable to a Czech PE of the recipient.
The exemption is applicable subject to approval by the tax authorities.
Exchange gains and losses
Realised foreign exchange gains and losses are accounted for in profit and loss accounts
and represent taxable revenues or tax-deductible costs, respectively. The same treatment
applies to unrealised foreign exchange differences; however, there are court cases dated
2012 concluding that unrealised foreign exchange income is not taxable as it is only
virtual income rather than a real increase of the taxpayers property.
The default functional currency is the Czech koruna. A Czech company cannot opt for
any foreign currency to be the functional currency for tax purposes.
Foreign income
Companies resident in the Czech Republic are taxed on their worldwide income. A Czech
corporation is taxed on its foreign branch income when earned (accrual basis) and on
foreign dividends when approved by general meeting.
The participation exemption regime described above may be applicable.
There is no controlled foreign company (CFC) legislation in the Czech Republic.
Deductions
Methods of tax depreciation are prescribed by tax legislation and are independent
from depreciation methods for accounting purposes. Tax depreciation is calculated
on an asset-by-asset basis, applying the straight-line or accelerated basis methods of
depreciation at statutory rates. Under both methods, depreciation expense in the first
year is lower than for subsequent years. The company may choose which method to
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Czech Republic
apply to a new asset, but once the choice is made, it cannot be altered. All assets are
classified into six groups, which determine the number of years over which the asset will
be written off, as follows:
Assets
Office machines and computers, tools
Engines, motor vehicles, machines, audio-visual equipment
Elevators, escalators, turbines, air conditioning equipment,
electric motors, and generators
Buildings made of wood and plastic, long-distance lines, and
pipes
Buildings (except for those listed in groups 4 and 6), roads,
bridges, tunnels
Administrative buildings, department stores, historical
buildings, and hotels
Depreciation
group
1
2
3
Minimum
depreciation
period (years)
3
5
10
20
30
50
Tangible assets (i.e. assets that are subject to tax depreciation) are defined by tax
legislation generally as assets with economic useful lives of greater than one year and
acquisition prices higher than CZK 40,000. Certain assets, such as buildings, are always
considered tangible assets.
Taxpayers are generally not obligated to depreciate a tangible asset for tax purposes
every year. Depreciation may be interrupted in any year and continued in a later year
without a loss of depreciation potential.
Tangible assets are generally depreciated by the taxpayer with ownership title. Certain
exceptions apply, for instance, technical appreciation of a rented asset carried out by a
tenant may be depreciated by that tenant, subject to certain conditions.
Depreciation can start only once the assets are put into use and comply with the
requirements of specific laws.
Certain assets have special depreciation methods (e.g. moulds are depreciated based on
expected life or number of products).
The value to be used as the basis for tax depreciation depends on how the asset is
acquired, for example:
Acquisition cost (construction and equipment costs, architect fees, legal fees, notarys
fees, etc.), if the asset is acquired for consideration.
Internal costs incurred, if the asset is acquired or produced internally.
Intangible assets are defined by tax legislation as software, valuable rights, intangible
results of R&D, and other assets regarded as assets for accounting purposes, provided
that they:
were acquired from a third party or developed internally for the purpose of trading
with them
have an acquisition price of more than CZK 60,000, and
have a useful life of greater than one year.
Intangible assets are amortised for tax purposes based on the number of years that
the taxpayer has a licence for the assets, if the licence is for a limited number of years.
Czech Republic
523
Czech Republic
Otherwise, amortisation for tax purposes will vary depending on the asset (e.g. software
is amortised over 18 months, results of R&D is amortised over 36 months).
Goodwill
Goodwill arisen as a result of the purchase of a business (or its part) as a going concern
may be evenly amortised for 180 months. Any other goodwill (e.g. arisen within a
merger) is disregarded for tax purposes.
Start-up expenses
Start-up expenses exceeding CZK 60,000 with a useful life of more than one year
accounted in line with Czech generally accepted accounting principles (GAAP) should be
amortised evenly for a period of 60 calendar months.
Interest expenses
Interest as accrued and duly accounted for under Czech GAAP is generally tax
deductible, with the following exceptions:
Interest disallowed based on the thin capitalisation restriction (please refer to Thin
Interest disallowed for its relation to income that is tax exempt or taxed outside the
standard tax base.
Interest disallowed due to its relation to holding a subsidiary.
Bad debt
Doubtful or bad receivables that have not yet become statute-barred may be provisioned
for under special rules. Generally, provisions may be created for trade receivables
overdue for more than 18 months. Provisions of 100% may be created for debts overdue
for 36 months. For receivables, banks, insurance companies, and defined financial
institutions have their specific system for provisioning.
Certain charitable donations are deductible. The minimum deductible donation is CZK
2,000 and the maximum deductible donation is 10% of the tax base.
Travel expenses and meal allowances
Payments for travel expenses and meal allowances that are made to employees are taxdeductible, but only within the statutory limits.
Fines and penalties
Contractual fines and penalties are generally tax deductible on a cash basis. Noncontractual fines are not tax deductible.
Taxes
Road tax, real estate tax, and most other taxes, with the exception of income taxes,
are deductible, as are social security contributions paid by an employer with respect to
employees.
Fees paid to members of other statutory bodies of companies (i.e. board of directors
of joint stock companies and cooperatives) for their services are deductible for tax
purposes.
Losses incurred in a tax year may be carried forward to offset taxable profits generated
in the following five tax years. Losses may not be carried back. The possibility to utilise
tax loss carried forward has been extended even to cross-border mergers (subject to
certain limitations).
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Czech Republic
Czech Republic
Generally, deductions may be claimed for royalties, management service fees, and
Group taxation
Currently, the Czech Republic does not permit group taxation. Each company in a group
is taxed individually. Consolidated tax base applies only for the general partners and
their shares in profit of their general partnership.
Transfer pricing
For tax purposes, prices agreed between related parties have to meet the definition
of the arms-length principle, and these prices are often subject to tax audits by tax
authorities. The consequences of incorrect transfer pricing adjustments are tax exposure
and penalties. In the case of companies receiving investment incentives, incorrect
transfer pricing can cause a loss of the investment incentives. Generally, pricing methods
as described in OECD guidelines should be followed.
Although there is no legal requirement to keep transfer pricing documentation, in
practice it is strongly recommended to keep it as the taxpayer bears the burden of proof
upon challenge of prices by tax authorities.
Taxpayers may request the tax administrators to issue an advance pricing agreement
(APA) regarding progressing or future transactions between related parties.
Thin capitalisation
Thin capitalisation rules apply in the Czech Republic and may limit the tax deductibility
of interest payments on debt financing from related parties as well as in certain cases
from third parties (e.g. back-to-back financing with a bank interposed between two
related parties).
Below is a brief summary of the thin capitalisation rules:
The tax-deductibility test applies not only to interest but also to all so-called financial
costs on loans (e.g. interest plus other related costs, such as bank fees).
Thin capitalisation applies only to related-party loans.
The debt-to-equity ratio for related-party loans is 4:1 (6:1 for financial services
industry), i.e. interest on such part of the related-party loans by which the principal
of these loans exceeds four times the accounting equity (based on Czech GAAP) of
the borrower is tax non-deductible.
Unrelated-party loans (e.g. bank loans) guaranteed by a related party are not
considered related-party loans for thin capitalisation purposes. If, however, a bank
provides a back-to-back loan to a Czech entity where the loan is provided to the bank
by a related party, such a bank loan to the Czech entity is considered a related party
loan.
Interest on profit-participating loans is not deductible for tax purposes.
There is no CFC legislation in the Czech Republic.
Czech Republic
525
Czech Republic
Foreign tax credit
Foreign tax credits are available only under tax treaties. If credit is not available under a
treaty, CIT paid abroad may be deducted as an expense in the following year, provided it
is imposed on the income included in Czech taxable income.
Investment incentives are available only to Czech entities (including Czech subsidiaries
of foreign companies). Incentives include income tax relief, financial support for the
creation of new jobs, financial support for training or retraining of employees, cash grant
on capital expenditures, and a transfer of land at a specially reduced price.
The amendment to the Act on Investment Incentives introduced a new system
of incentives, which includes changes in support of existing production in the
manufacturing industry and incorporated the support of technology centres and
strategic services.
Research and development (R&D) allowance
Up to 100% of specific R&D expenses (or costs) incurred in a given tax year may be
deducted from the tax base as a special tax allowance. These costs are deducted twice
for tax purposes: once as a normal tax-deductible cost and then again as a special tax
allowance. From 2014, an additional 10% may be applied from the difference by which
the current year qualifying costs exceed those of the prior period.
The following costs can be included in the R&D tax allowance:
Direct costs (e.g. personnel costs of R&D engineers, consumed materials).
Tax depreciation of fixed assets used for R&D activities.
Other operational expenses directly related to the realisation of R&D activities (e.g.
telecommunications fees, electricity, water, gas).
Only qualifying expenses are deductible for tax purposes and must be separately
identified from other expenses (or costs). This allowance does not apply to costs of
purchased services or intangible results of R&D acquired from other entities, except
for expenses (or costs) incurred in connection with the certification of the results of
R&D projects. In addition, expenses that were supported from public sources are also
excluded.
Any non-utilised R&D allowance may be carried forward for three subsequent years.
A taxpayer may request a binding ruling with respect to R&D costs from the respective
tax office in the event that the taxpayer is unsure of whether certain R&D costs are
eligible for the allowance.
Withholding taxes
Czech corporations are required to withhold tax on payments of dividends, interest, and
royalties as follows:
Recipient
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Czech Republic
Dividend (%) (1)

15
15
Interest (%) (2) Royalties (%) (3)

0
0
0
0
Czech Republic
Recipient
Non-treaty
Treaty:
Albania
Armenia
Australia
Austria
Azerbaijan
Bahrain
Barbados
Belarus
Belgium
Bosnia
Brazil
Bulgaria
Canada
Croatia
Cyprus
Democratic Peoples Republic of Korea
Denmark
Egypt
Estonia
Ethiopia
Finland
France
Georgia
Germany
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Italy
Japan
Jordan
Kazakhstan
Korea, Republic of
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mexico
Dividend (%) (1)
15/35
15/35
15/35
5/15
10
5/15
0/10
8
5
5/15
5/10
5/15
5
15
10
5/15
5/10
5
0/5
0/10
0/15
5/15
5/15
10
5/15
10
5/10
5/15
Local rates
5
5/15
5/15
10
10/15
5/15
5/15
15
10/15
10
10
5/10
0/5
5/15
5
5/15
5/15
5/15
0/10
5
10
0/5
5/10
10
0
5/10
0
5
0/5
10
0
10/15
0/10
0/10
7.5
0
0
0/10
0
0/15
0/10
0/10
0
0
0/8
0
0/10
0
0
0
0/10
0/12.5
0
0/10
0
0/10
0/10
0/10
0/10
0
0/10
0
0/10
0
0
0/12
0
0/10
10
5/10
10
5
10
10
5/10
5
0/10
0/10
15/25
10
0/10
10
10
0/10
0/10
10
15
10
10
0/1/5/10
0/5/10
5/10
5
0/10
10
10
10
10
12.5
10
5
0/5
0/10
10
10
0/10
0/10
10
5/10
10
0/10
0/10
12
5
10
Czech Republic
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Czech Republic
Recipient
Moldova
Mongolia
Morocco
Netherlands
New Zealand
Nigeria
Norway
Panama
Philippines
Poland
Portugal
Romania
Russia
Saudi Arabia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Syria
Tajikistan
Thailand
Tunisia
Turkey
Ukraine
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Dividend (%) (1)

5/15
10
0/10
0/10
15
12.5/15
0/15
0/10
10/15
5
10/15
10
10
5
0/10
5
5/15
5/15
5/15
5/15
15
0/10
0/15
10
5
10
10/15
0/10
5/15
0/5
5/15
5/15
5/10
5/10
10

5
10
0/10
10
0/10
0/10
0
5
0/10
10
0/15
15
0
0/5/10
0/5/10
0/10
0/10
10/15
0/5
10
0/10
10
0/7
10
0
10
0
10
0/10
0/5/10
0
10
0
0/10
0/5
10
0
10
0
0/5
0/10
0/10
0
0/5
0
10
10
12
0/7
10
0/10
5/10/15
0/12
5/15
0/10
0/10
5
10
0
10
0
0/10
0
0/10
0/5
10
0/10
12
0/10
10
Notes
1.
2.
3.
528
The lower rate applies if the recipient is a company that owns at least a certain amount of the capital
or a certain amount of the voting shares of the company paying the dividend directly. Non-treaty
residents: Dividends paid to residents of countries outside of the European Union and European
Economic Area, and countries with which the Czech Republic does not have an enforceable DTT or
TIEA, are subject to 35% WHT.
The lower rate applies mostly in situations when the interest is received by the government or a stateowned institution or is paid by the government. Non-treaty residents: Interest paid to residents of
countries outside of the European Union and European Economic Area, and countries with which the
Czech Republic does not have an enforceable DTT or TIEA, is subject to 35% WHT.
The lower rate applies mostly to cultural royalties. Non-treaty residents: Royalties paid to residents of
countries outside of the European Union and European Economic Area, and countries with which the
Czech Republic does not have an enforceable DTT or TIEA, are subject to 35% WHT.
Czech Republic
Czech Republic
Tax administration
Taxable period
A corporation may choose either a calendar year or an accounting year as its taxyear.
Tax returns
Returns must be filed within three months of the end of the tax period.
A three-month extension of the filing deadline is available if a taxpayer is represented by
a registered tax advisor or if the taxpayer is subject to a statutory accountingaudit.
In some special cases, a filing deadline of less than three months may apply (e.g. upon
merger or liquidation). This shorter deadline may, however, be extended if approved by
the tax office.
Payment of tax
Tax payments are due on the same day as the filing deadline.
A company is obligated to make CIT advances based on its last known tax liability. The
tax advances are paid semi-annually or quarterly, depending on the amount of the last
known tax liability.
Upon filing a tax return, tax advances paid during the year for which the tax return
is filed will offset the tax liability declared in the tax return. Any outstanding amount
must be paid on the date the tax return is due. Any overpayment will be refunded upon
request or may be credited against future tax liabilities.
Tax audit process
There is no statutory tax audit cycle. Entities are picked by the tax authorities based on
selected criteria (e.g. tax loss position, huge marketing costs) or randomly.
The tax may be assessed within three years after the deadline for regular tax return
filing. In certain cases (e.g. filing of supplementary tax return), such assessment period
may be prolonged by one year, maximally up to ten years. Tax liability arisen as result of
criminal action may be assessed any time within two years after the year of the relevant
penal court decision becoming effective.
The tax authorities seem to focus on marketing costs, intra-group relations, entities
in tax loss position, entities with tax investment incentives, and entities with an R&D
allowance.
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Denmark
PwC contact
Jan M. Huusmann
Strandvejen 44
DK 2900 Hellerup, Denmark
Tel: +45 3945 9452
Taxation of dividends and interest paid by Danish entities to foreign group companies
has been a hot topic in Danish taxation in the last few years. One of the main issues
still seems to be whether holding companies incorporated in the European Union (EU)
can qualify as the beneficial owner of dividend and interest payments received from
Danish group entities or if such payments should be subject to Danish withholding taxes
(WHTs).
A number of cases have been publicly disclosed, but several cases have been appealed
and are currently pending in the Danish courts and may not be concluded for years.
As a result of the cases mentioned above and the general focus on private equity
acquisitions of Danish companies, tax law changes have been introduced in 2013
and 2014 in relation to intragroup acquisitions and certain other transaction where
shares are sold against remuneration in both shares and cash. The new rules have
been introduced in order to avoid circumvention of Danish WHT. If, for example,
company A sells shares in an affiliated company B to another affiliated company C,
and compensation to company A is paid in other than shares, then the proceeds will
be characterised as dividends for Danish tax purposes. This only applies if company A,
before the transfer of shares, cannot receive dividends from company B.
Another focus area for the Danish tax authorities is tax deductions. On a broad scale, the
Danish tax authorities are testing the deductibility of costs, such as costs related to the
creation of tax exempt income (e.g. dividends from and capital gains on certain shares),
transactions costs, costs related to obtaining loans, establishment costs, etc.

According to Danish tax law, a territoriality principle prevails. Hence, a Danish company
is not taxed on its worldwide income. Instead, income from a permanent establishment
(PE) outside Denmark or from real estate located abroad is excluded from taxable
income. Non-resident companies are taxed only on profits distributed from income
sourced in Denmark.
The corporate income tax (CIT) rate is 24.5% for the income year 2014 (previously 25%)
and will be lowered to 23.5% in 2015 and 22% from 2016 onward.
Hydrocarbon income tax
A special CIT is levied on profits from the exploration and extraction of oil and gas on
the Danish continental shelf at a rate of 52% under the system applicable for licences
granted after 1 January 2004. CIT is deductible in computing the hydrocarbon tax.
Tonnage Tax Scheme
Danish tax law provides for a special tax scheme for shipping entities.
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Denmark
Denmark
The main principle of the Tonnage Tax Scheme is that qualifying shipping entities
are not taxed on the basis of their actual income derived from their business but on a
fictitious income based on the net tons carrying capability of their fleet used for purposes
covered by the Tonnage Tax Act.
The Tonnage Tax Scheme is available to:
Danish shipping entities organised as limited liability companies (Aktieselskab [A/S]
or Anpartsselskab [ApS]).
foreign shipping companies with the place of management and control in Denmark,
and
EU shipping companies with a PE in Denmark.
The scheme is available upon application to the Danish tax authorities. A decision to
enter into the scheme is binding for a period of ten years.
As a general rule, group-related shipping companies based in Denmark must make the
same choice regarding the Tonnage Tax Scheme. However, shipping companies that do
not have the same management or operating organisation and do not conduct business
in related fields may be exempt from the joint decision provision.
The Tonnage Tax Scheme is restricted to certain types of business activities. The entity
must carry out commercial transportation of passengers or cargo between different
destinations. The ships must be owned or chartered on a bareboat or time-charter with
a call/buy option by the company basis and have a minimum gross tonnage of 20 tons.
Certain restrictions apply for ships chartered on a time charter basis without a call/buy
option. The ships must be strategically and commercially run from Denmark.
Income from activities that are carried out in close connection with this business, such as
the usage of containers and loading facilities, etc. may also be included in the Tonnage
Tax Scheme. Ships used for exploration, diving, fishing, towing, sand dredging, etc. are
specifically exempt from the scheme. The same applies for certain types of ships, such
as barges, floating docks, etc. However, EU or European Economic Community (EEC)
registered ships used for towage activities at sea (i.e. not in and around ports) during at
least 50% of their operating time during the income year may be included in the tonnage
tax system.
Ship management companies may also use the Danish Tonnage Tax Scheme. A ship
manager is defined as a company doing business with crew management and technical
management of ships qualified for use in the tonnage tax system. It is a requirement that
the ship manager has taken over the full operating responsibility and all obligations and
responsibilities according to the International Safety Management codex.
Taxable income
The taxable income for the part of the business that qualifies for the Tonnage Tax
Scheme is determined for each ship as a fixed amount of Danish kroner (DKK) per 100
net tons (NT) per day according to the following:
Ship net ton (NT)
0 to 1,000
1,001 to 10,000
10,001 to 25,000
Over 25,000
Fixed amount per day (DKK per 100 NT)

8.97
6.44
3.85
2.53
Denmark
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Denmark
The income is taxed at the ordinary CIT rate (24.5%, declining to 22% in 2016). No
deductions relating to shipping income will be allowed. However, special rules apply for
financial income and financial expenses, and in relation to so called thin capitalisation,
which entails that there is a deduction right for net financial income under certain
circumstances and to a certain extent. Income that does not qualify for the Tonnage Tax
Scheme is taxed according to the general tax provisions in Denmark.
Depreciation
Shipping entities that apply the Tonnage Tax Scheme from the time of their
establishment may not deduct depreciation for tax purposes. Special rules apply for
shipping entities that were already in existence when they elected to become subject to
the scheme and for entities that elect to include certain other assets at a later point in
time that were not previously subject to the scheme.
Gains on the sale of ships
Gains on the sale of ships that have not been used in the scheme prior to 1 January 2007
are tax exempt. The same applies to gains on the sale of contracts on the delivery of
ships, provided that the ship was destined to be delivered after 1 January 2007. Gains
on the sale of ships used in the scheme in prior years are taxable. The taxable gain is
calculated as the sale price minus the purchase price plus improvements. Any losses on
ships acquired and sold within the same income year as the income year in which a gain
is realised may be offset against the gain.
Local income taxes
There is no local CIT or similar surcharge.
Corporate residence
A corporation is resident in Denmark for tax purposes if it is incorporated in Denmark
and registered in the Companies Register as having a Danish place of business. Further,
foreign companies having their actual place of management in Denmark are also tax
resident in Denmark. The actual place of management is typically the place where the
management decisions concerning the companys day-to-day operations are made.
Non-resident companies are only liable to tax in Denmark on business profit if derived
trough a PE in Denmark. The existence of a PE is determined according to Danish tax
law, which makes either a reference to a specific double taxation treaty (DTT) or to text
similar to Article 5 of the Organisation for Economic Co-operation and Development
(OECD) Model Convention.
Other taxes
The general VAT rate is 25% of the price charged (exclusive of VAT).
Exemption or a special reduced rate of 0% applies to a limited range of supplies (e.g.
newspapers; hospital treatment; insurance and reinsurance services; most financial
activities, including deposits of money, loans, and provision of loans).
Denmark was one of the first countries to introduce a VAT system. Since the first VAT Act
came into force on 3 July 1967, the VAT legislation in Denmark has undergone several
changes. The most important changes have been modifications to bring the legislation in
line with the Council Directive 2006/112/EC on the common system of VAT.
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Denmark
Denmark
Compared to the Directive, the Danish VAT legislation includes minor deviations and the
use of various discretionary provisions.
All supplies of goods and services by so-called taxable persons (entrepreneurs who
independently carry out economic activity) are subject to VAT, unless specifically
exempted. The VAT exemptions are restricted to a limited range of services and
goods but are nonetheless subject to discussions and complications in the Danish VAT
jurisprudence. Transactions are subject to Danish VAT only when they are deemed to
take place in Denmark. For the sake of tax neutrality, VAT is also levied on (i) imports
(i.e. receipt of goods from non-EU territories), (ii) intra-Community acquisitions (i.e.
receipt of goods from EU member states), and (iii) purchase of most types of services
from abroad.
In order to avoid VAT being borne by anyone other than the final consumer, those who
qualify as taxable persons can, with some exceptions, recover VAT charged by their
suppliers according to the invoice/credit method, provided that the purchases relate
to VAT taxable transactions. VAT is recovered either via the periodical VAT return (as a
deduction in VAT payable) or by filing a special application.
In general, it is the suppliers responsibility to collect and report VAT on supply of goods
or services.
Customs duties
Denmark is a member state of the European Union, and, according to EUs Common
Customs Tariff, many goods imported into Denmark from outside the European Union
are subject to customs duties. The rates of duty vary widely between goods.
Excise duties
According to Danish tax law, several excise duties are levied on different products.
Some of the excise duties are enacted based on EU regulations while others are enacted
according to domestic law only.
Excise duties are chargeable on a long list of goods, including hydrocarbon oil products,
certain packaging, alcoholic drinks and tobacco, chocolate and products containing
sugar, coffee/tea, etc.
The excise duty rates depend on the type of goods (e.g. chocolate, packaging) as well as,
in some cases, the category of the goods (e.g. plastic bags, paper bags). Furthermore,
many of the excise duty rates are regulated every year.
Only goods sold in Denmark (or taken into Denmark) are liable to the Danish excise
duties. Companies importing goods into Denmark or companies producing goods in
Denmark must be registered with the Danish tax authorities to settle the excise duties.
This will often also be the case even though they are selling the goods on to other
companies in Denmark.
The type of registration is decisive for when the companies must pay the excise duties.
Companies just storing goods must register and settle excise duties in Denmark in spite
of the fact that the goods are not being sold in Denmark.
As excise duties are a tax for national consumption in Denmark, a company can, in
principle, obtain a reimbursement of the excise duties on products sold outside of
Denmark. Companies are entitled to a reimbursement even if the company is not
registered for the excise duties in question and even if the excise duties have been paid
by previous resellers, etc.
Denmark
533
Denmark
Property taxes
Owners of non-residential property must pay land tax annually. The land tax rate
is set by the municipalities and must be between 1.6% and 3.4% of the value of the
land. Municipalities may also levy a special coverage charge on certain properties at a
maximum of 1% of the value minus the value of the land. Land tax and coverage charge
are deductible from CIT.
Stamp tax
Stamp tax is payable on a few documents, such as a deed of transfer of real estate (0.6%
of the transfer sum). There is no stamp duty on transfer of shares.
Employers tax (social security charges)
The employers contribution to Arbejdsmarkedets Tillgspension (ATP) (i.e. old-age

pension) charges is DKK 2,160 per annum for a full-time employee.
Companies that provide VAT-exempt services are liable to pay the employers tax, which
is calculated on the total annual salary cost. The rate can be as high as 11.4%, which is
the rate for 2014 for banks and other financial institutions, the most significant sector
paying the employers tax. This tax is deductible for income tax purposes.
Other than these taxes, an employers obligation for social security taxes is minimal. The
main social security charge is an additional income tax of 8% on salaries and wages,
which is borne by employees.
Environmental taxes/Energy taxes
Danish companies must pay environmental taxes, which were introduced to reduce
companies energy consumption, discharges of fluids with an environmental impact, and
emission. These taxes are paid to the companies that provide the energy, who then pay
the taxes to the Danish tax authorities.
In general, almost all VAT-registered companies in Denmark can obtain a reimbursement
of some of the environmental taxes on energy (also called energy taxes). The size of
the reimbursement of the energy taxes depends on the type of energy used and to what
extent the companies can deduct VAT.
Branch income
Danish branches and PEs of foreign companies are taxed under the same rules and rates
as Danish resident companies. There is no branch remittance tax or other similar tax on
branch profits. As a branch is considered to be the same legal entity as the headquarters,
interest paid from the branch to the headquarters is not tax deductible.
Taxable income generally is calculated as income determined for accounting purposes
that is adjusted and modified for several items, as prescribed by the tax laws. Typical
timing differences include reserves, work in progress, and depreciation.
Inventory valuation
Inventory is valued at acquisition cost, current market value, or manufacturing cost (if
manufactured by the company itself) according to a first in first out (FIFO) principle.
The company may opt for different principles for each category of goods and may change
principle from income year to income year, provided certain conditions are met.
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Denmark
Capital gains
Gains and losses realised on the sale of tangible and intangible assets, including
goodwill, are generally included in taxable income. However, gains realised on the sale
of shares are tax-exempt if the shares qualify as either subsidiary shares, group shares
or tax-exempt portfolio shares.
Subsidiary shares are shares held by a corporate shareholder that holds a minimum
of 10% of the share capital in a subsidiary that is located in the European Union,
European Economic Area (EEA), or a country with which Denmark has a DTT. A special
anti-avoidance rule applies, which is targeted at Danish shareholders joining their
shareholdings in order to reach the 10% threshold.
Group shares are defined as shares in companies with which the shareholder is jointly
taxed or might be jointly taxed. The definition of a group is therefore the same as in the
joint taxation rules and generally corresponds to the definition of a group for accounting
purposes. The location where the companies are registered is irrelevant, as long as the
companies are affiliated.
If the shares do not constitute group shares, subsidiary shares, or treasury shares, they
constitute portfolio shares. Portfolio shares are divided into two types: tax-exempt
portfolio shares and taxable portfolio shares.
Tax-exempt portfolio shares consist of shareholdings less than 10% in unlisted
companies.
The residual constitute taxable portfolio shares, unless held by the company that has
issued the shares (gain on own shares are also tax exempt).
Gains on taxable portfolio shares are fully taxable regardless of holding period, whereas
losses on the sale of portfolio shares are generally tax-deductible.
Gains realised on the sale of real estate property are taxable, whereas losses are not
tax-deductible unless the property is a building qualifying for tax depreciation. A loss
realised on the sale of land and other buildings may be utilised only against taxable
profits on the sale of real estate properties in the same year or may be carried forward
infinitely.
A capital gain may, under certain conditions, be deferred if the capital gain is reinvested
in properties. Reinvestment must be made no later than the income years following the
income year of disposal.
Gains and losses on financial instruments generally are included in taxable income,
according to the mark-to-market principle, which is required. There are special rules for
losses on certain share-based contracts.
Dividend income
Dividends received on subsidiary shares or group shares are tax exempt regardless
of the length of the ownership period, whereas dividends received on portfolio shares
(both tax exempt and taxable) are fully included in taxable income.
Regardless of whether the shares qualify as subsidiary shares or group shares,
dividends are fully taxable if received from a foreign company that can deduct the
dividends paid, unless a tax exemption is provided for in the EU Parent-Subsidiary
Directive.
Denmark
535
Denmark
Stock dividends
Stock dividends may be distributed to shareholders free of tax, provided that the
dividends are in proportion to the existing shareholdings (i.e. bonus shares).
Interest income
Interest income is generally included in the determination of taxable income.
Foreign income
As a general rule, foreign-source income, such as interest, is included in taxable income.

However, income from a PE or real estate outside Denmark is excluded from taxable
income.
The income of a foreign subsidiary may be taxed in the hands of its Danish parent
company if the subsidiary constitutes a controlled foreign company (CFC). See the Group
taxation section for more information.
Deductions
Depreciation, amortisation, and depletion
Tax depreciation need not be in conformity with book depreciation.

Annual depreciation allowances on machinery and equipment may be claimed under
the diminishing-balance method at up to 25%. The depreciation base is the cost of
fixed assets less sales proceeds from disposals and depreciation allowances previously
claimed.
New machinery and equipment acquired between 30 May 2012 and 31 December 2013
could be included in the base with a supplement of 15%. Hence, 115% of costs of new
fixed assets was added to the base and depreciated at up to 25% per year. If a company
has applied this principle, the assets in question must be kept on a separate account until
the end of the tax year 2017.
For ships, the depreciation rate is 20% in the year of construction and a 12% decliningbalance basis in subsequent years.
Depreciation allowances on buildings (other than residential buildings and office
buildings not adjoining an industrial building) may be claimed at up to 4% on the
straight-line basis.
Airplanes, trains, and utility plants can be depreciated only at a 17% declining balance
(presently subject to phasing-in rates, the rate will be 15% for the tax year 2016
onward).
Rails, telecommunications facilities, and certain other long-life plant and equipment can
be depreciated only at a 7% declining balance.
Depreciation allowances that are recaptured as part of a capital gain on the sale of an
asset generally are fully taxable.
Acquired goodwill and other intangible property rights can be amortised at up to oneseventh per year on a straight-line basis. Costs related to the purchase of patents or
know-how (including rights/licences to utilise patents or know-how) can either be fully
expensed in the year of acquisition or amortised over a seven-year period on a straightline basis.
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Certain restrictions regarding the depreciable value of goodwill apply in the case of
group transactions. Goodwill on the purchase of shares cannot be amortised for tax
purposes.
Depletion of the cost of acquisition or exploitation of natural resources is subject to
special rules.
Starts-up expenses
No specific rules in Danish tax law govern the treatment of start-up expenses. Instead,
these expenses are treated according to general tax law.
Companies may, under certain conditions, benefit from a scheme allowing for a cash
payment equal to the tax value (25% for tax year 2014 even though the CIT rate for tax
year 2014 is 24.5%) of negative taxable income, provided the negative income is created
from research and development (R&D) costs (see the Tax credits and incentives section).
Interest expenses
See Thin capitalisation and interest relief limitations in the Group taxation section.
Bad debt
Companies may deduct loss on bad debt.

The main rule for calculation and taxation of companies gains and losses on receivables
for tax purposes will be the inventory principle (i.e. taxation based on the difference in
value at the beginning and end of the assessment year). Use of the inventory principle
means that recognition of losses on these types of receivables for tax purposes is not
conditional on a final loss having been ascertained.
Special rules apply to gains and losses on trade and inter-company receivables, as these,
as a main rule, should be calculated according to realisation principles. Companies may,
however, opt for the inventory principle for each category of receivables.
Companies may deduct a small amount in gifts to certain organisations approved by

the Danish tax authorities and mentioned in the Danish tax authorities guidelines. The
deduction cannot exceed DKK 14,800 per year (for tax year 2014).
Furthermore, companies may deduct gifts to cultural organisations that receive
a maintenance grant for operating expenses from either the government or the
municipality. According to these rules, there is no limitation in terms of value, but
certain restrictions regarding the use of the gift are applicable.
Finally, gifts to certain charitable organisations within Denmark or the European Union
may be deducted, provided the recipient uses the funds for research. Deductibility is
conditioned upon the organisation being approved by the Danish tax authorities. No
limitation in regards to amount is applicable.
Fines and penalties
Fines and penalties are, in general, not deductible, as these are not considered
operational expenses.
Even if considered economically reasoned and custom in certain jurisdictions, amounts

used for bribery of officials are not deductible.
Denmark
537
Denmark
Taxes
Taxes are non-deductible for CIT purposes, except for employers tax, non-recoverable
VAT, land tax, and coverage charge (see the Other taxes section).
Tax losses may be carried forward indefinitely. However, the utilisation of tax losses
carried forward may be restricted. According to the rules, taxable income up to DKK
7,635,000 (for 2014) can always be eliminated by tax losses carried forward, whereas
taxable income exceeding DKK 7,635,000 can merely be reduced by 60% as a result of
tax losses carried forward. For Danish tax consolidation groups, the rules apply for the
group collectively. If losses are restricted, the limitation must be allocated to each of the
companies according to complex rules.
Certain restrictions on the right to carry tax losses forward apply when more than 50%
of the share capital or 50% of the voting rights at the end of the financial year are owned
by shareholders different from those that held control at the beginning of the income
year in which the tax loss was incurred.
Similarly, under certain circumstances, tax losses are cancelled if a Danish company
receives a debt forgiveness or comparable transaction. However, there are numerous
exceptions (e.g. inter-company transactions).
Tax losses may not be carried back and utilised in previous income years.
A Danish corporation can claim a deduction for royalties, management fees, and similar
payments made to foreign affiliates, provided that such amounts are made on an armslength basis and reflect services received. Interest at normal commercial rates paid to
foreign affiliates generally will be allowed as a deduction but is subject to very complex
thin capitalisation and interest relief limitation rules.
Group taxation
Mandatory Danish tax consolidation
A mandatory tax consolidation regime obligates all Danish resident companies and
Danish branches that are members of the same domestic or international group to
file a joint group tax return. The definition of a group generally corresponds with the
definition of a group for accounting purposes. The tax consolidated income is equal to
the sum of the taxable income of each individual Danish company and branch that are a
member of the consolidated group.
The top parent company participating in the Danish tax consolidation group will be
appointed the role of a so-called management company; this company is responsible for
settling advance and final corporate tax payments of all group members.
Companies included in a mandatory tax consolidation are jointly and severally liable
for payment of corporate taxes. WHTs on dividends, interest, and royalty payments are
also covered by the joint and several liability. For companies with external minority
shareholders, the company has a reduced liability and is merely liable if none of the
other jointly taxed companies are able to pay the taxes.
Elective cross-border tax consolidation
A non-Danish subsidiary may be included as a member to a Danish tax grouping,

provided that the group includes all of its foreign companies and branches in the Danish
tax grouping. In effect, this all-or-nothing provision rules out the possibility for major
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Denmark
international groups to have their Danish subgroup file a Danish group tax return that
includes only certain hand-picked (typically loss-making) foreign group members.
If a general cross-border tax consolidation is established, it will be binding for ten
years; however, there are certain possibilities of breaking the ten-year period (e.g. in
connection with takeovers).
The comments under Mandatory Danish tax consolidation with respect to the
calculation of the tax consolidation income, management company, etc. generally also
apply to international tax consolidation.
Transfer pricing
Danish transfer pricing rules apply to transactions between related parties (e.g. intergroup transactions) whether the transactions are made between residents or nonresidents. The rules apply when a company or person directly or indirectly owns at least
50% of the share capital or 50% of the voting rights in another company.
Companies are obligated to disclose in the annual tax return certain information
regarding type and volume of intra-group transactions. Companies also are obligated
to maintain detailed and extensive transfer pricing documentation to substantiate that
intra-group transactions are conducted in accordance with arms-length principles.
A company is subject to fines for failure to comply with the documentation rules. The
penalty is DKK 250,000 per company per income year plus 10% of any increase in the
taxable income as a result of a tax audit.
Furthermore, rules on an auditors statements regarding transfer pricing documentation
are applicable. The Danish tax authorities can require a company to obtain an auditors
statement if certain criteria are met. The auditor must state whether any circumstances
regarding the performed work causes the auditor to conclude that the transfer pricing
documentation of the company does not provide a true and fair view.
Thin capitalisation and interest relief limitations
Danish resident companies and Danish branches of foreign companies are subject to
three sets of restrictions, each of which may seriously limit or disallow Danish tax relief
for financing costs. There is no recharacterisation of interest as dividends.
Firstly, there is the thin capitalisation rule. This rule works to disallow gross interest
costs and capital losses on related party debt to the extent the overall debt-to-equity
ratio exceeds 4:1. Related party debt is defined so as to include external bank debt if
group member companies or shareholders have provided guarantees to the bank. This
rule does not apply if the controlled debt is less than DKK 10 million. When calculating
the 4:1 ratio, a special consolidation rules applies if two or more companies are
considered affiliated (note that the definition of affiliated companies differs from the
definition under the Danish rules on joint taxation).
Secondly, there is an asset-based rule. To the extent a Danish company on a stand-alone
basis or, if part of a joint tax group, together with group companies has net financing
costs in excess of DKK 21.3 million, tax relief may be obtained only within an amount
equal to 4.2% (for tax year 2014) of the tax basis of certain assets of the group. Net
financing costs consist of, among other things, interest income/expenses, taxable gains/
losses on debt, receivables and financial contracts, taxable gains/losses on shares, and
taxable dividends.
Thirdly, there is an earnings before interest and tax (EBIT) based rule that works to limit
interest relief to an amount equal to 80% of the Danish companys/tax groups taxable
EBIT income. This rule applies the same definition of net financing costs as the assetwww.pwc.com/taxsummaries
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539
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based rule, and it also allows for a minimum deduction of DKK 21.3 million in cases
where EBIT is too low or negative.
According to the Danish CFC rules, a Danish company has to include in its taxable
income the total income of a subsidiary, foreign or Danish, if such subsidiary qualifies as
a CFC. A subsidiary qualifies as a CFC if all of the following criteria are met:
The Danish company, together with other group member companies, directly or
indirectly owns more than 50% of the capital or controls more than 50% of the voting
rights in the subsidiary.
More than half of the subsidiarys taxable profits, as hypothetically assessed under
Danish tax laws, are predefined CFC income types (mainly interest, royalty, capital
gains, etc.).
During the income year, the subsidiarys CFC assets (assets, where the return is
characterised as a CFC income type) make up more than 10% of the subsidiarys total
assets.
There is no black or white list that exempts subsidiaries resident in certain countries.

Foreign tax credit
According to Danish tax law, relief is generally available to credit foreign tax paid
on non-Danish source profits against the Danish tax on the same profits. As Danish
companies are not taxed on income from foreign PEs or properties, the rules have
limited application.
For share holdings of 10% or more of the share capital in foreign companies, Denmark
has further rules allowing underlying tax relief in respect of foreign dividends, so that
tax suffered at lower levels can be relieved where dividends flow to Denmark via a chain
of companies. As Danish tax law, as a main rule, exempts dividends from companies
resident in countries with which Denmark has a tax treaty in which the Danish recipient
company holds 10% or more, this rule, as well, has a limited application.
Capital expenditure incentives
A small variety of tax incentives are available in the form of deductions for capital
expenditures.
Danish tax law allows for an immediate write-off of capital expenditures for R&D.
Alternatively, the taxpayer may choose to take tax depreciation in the same year and
the following four years on a straight-line basis. Costs incurred in connection with the
exploration for raw materials may also be fully deducted in the same year.
Companies in a loss making situation may not benefit from an immediate write-off of
capital expenditures. However, companies have been granted the opportunity to apply
to the Danish tax authorities for a payment equal to the tax value (25% for tax year 2014
even though the CIT rate is 24.5% for tax year 2014; the tax applied will be equal to the
CIT rate for tax year 2015 onward) of negative taxable income. It is a condition that the
negative taxable income relates to R&D costs. The rule does not cover costs incurred in
connection with exploration for raw materials.
Tax payment according to this rule cannot exceed an amount of DKK 5 million (tax value
of DKK 25 million) for tax year 2014. For companies participating in joint taxation, the
limit of DKK 5 million applies for all companies in total.
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Costs related to purchase of patents and know-how (including rights/licences to
utilise patents or know-how) may either be fully expensed in the year of acquisition or
amortised over a seven-year period on a straight-line basis.
Withholding taxes
WHTs on payments to foreign corporations and non-resident aliens
Dividends
Dividends paid to a parent company in another EU member state or a state with which
Denmark has a DTT are exempt from WHT, provided that the shares qualify as subsidiary
shares. The same applies for dividends paid on group shares (that are not also subsidiary
shares, i.e. holdings below 10%), provided that the recipient company is resident within
the EU/EEA.
Dividends paid on portfolio shares to a foreign shareholder are levied WHT of 27%.
If the portfolio shareholder is situated in a country with which Denmark has a tax
information exchange agreement (TIEA), the tax rate on the dividend is reduced to
15% and the difference between the higher WHT rate and the lower WHT rate may
be reclaimed. However, the reduced rate does not apply if the shareholder is resident
outside the European Union and together with related entities owns more than 10% of
the capital in the Danish distributing company.
Interest
Interest generally is not subject to WHT unless paid to a foreign group member company
that is tax resident outside the European Union and outside any of the states with which
Denmark has concluded a tax treaty. In this situation, interest WHT is levied at 25%.
Certain other exemptions apply, mainly relating to CFC taxation.
For recipients resident in countries within the European Union with which Denmark
does not have a tax treaty, it is a condition that the paying company and the recipient
company are associated as mentioned in the EU Interest/Royalty Directive.
Royalties
Royalties are subject to a 25% WHT. In most cases, the payer may reduce its withholding
in accordance with the tax treaty applicable to the payee. Also, the EU Interest/Royalty
Directive may provide an exemption from WHT if the payee is an immediate parent,
sister, or subsidiary company resident in the European Union.
Recipient
Non-treaty (4):
Non-resident individuals
Treaty:
Argentina
Australia
Austria
Bangladesh
Belgium
WHT (%)
Dividend
Qualifying companies (1a+b) Others Interest (2)
0
27
0
27
0
27
27
27
0 (1a)
15
0 (1a)
0 (1a+b)
0 (1a)
0 (1a+b)
15
15
15
15
25 (3, 5)
0
Royalty
25 (5)
25
25 (5)
25
0 3/5/10/15
(7)
0
10
0
0
0
10
0
0
Denmark
541
Denmark
Recipient
Brazil
Bulgaria
Canada
Chile
Croatia
Cyprus
Czech Republic
Egypt
Estonia
Faroe Islands
Finland
Georgia
Germany
Greece
Greenland
Hungary
Iceland
India
Indonesia
Israel
Italy
Jamaica
Japan
Kenya
Korea, Republic of
Kuwait
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mexico
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Romania
Russia
Serbia (6)
542
Denmark
WHT (%)
Dividend
0 (1a)
25
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a)
10
0
0 (1a)
10
0
0 (1a+b)
15
0
0 (1a+b)
15
0
0 (1a)
20
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a)
10
0
0 (1a+b)
15
0
0 (1a+b)
18
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a+b)
15
0
0 (1a)
25
0
0 (1a)
25
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a)
28
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a+b)
15
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
0
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
25
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1a+b)
10
0
0 (1a+b)
15
0
0 (1a)
10
0
0 (1a)
15
0
Royalty
15/25 (7)
0
0/10 (7)
5/15 (7)
10
10
0
5
20
5/10 (7)
0
0
0
0
5
10
0
0
20
15
0
10
5
10
10
20
10/15 (7)
10
0
5/10 (7)
5/10 (7)
0
10
0
0
10
10
0
10
0
12
15
5
10
4
0
10
Denmark
Recipient
Singapore
Slovak Republic
Slovenia
South Africa
Sri Lanka
Sweden
Switzerland
Taiwan
Tanzania
Thailand
Trinidad and Tobago
Tunisia
Turkey
Uganda
Ukraine
United Kingdom
United States
Venezuela
Vietnam
Zambia
WHT (%)
Dividend
0 (1a)
10
0
0 (1a+b)
15
0
0 (1a+b)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a+b)
15
0
0 (1+a)
15
0
0 (1a)
10
0
0 (1a)
15
0
0 (1a)
10
0
0 (1a)
20
0
0 (1a)
15
0
0 (1a)
20
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a+b)
25
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a)
15
0
0 (1a)
15
0
Royalty
10
5
5
0
10
0
0
10
20
5/15 (7)
15
15
10
10
10
0
0
5/10 (8)
15
15
Notes
1.
2.
3.
4.
5.
6.
7.
8.
Denmark does not operate a system of WHT on dividends when the parent company holds:
a. at least 10% of the share capital of the distributing Danish company, provided the receiving
company is resident in a EU/EEA member state or a state with which Denmark has entered a
double tax treaty (subsidiary shares) or
b. less than 10% of the share capital in the distributing company, provided that the receiving
company is an EU/EEA-resident and the distributing and the receiving company are affiliated
companies (group shares).
Interest generally is not subject to WHT unless paid to a foreign group member company that is tax
resident outside of the European Union and outside of any of the states with which Denmark has
concluded a tax treaty. In this situation, interest WHT is levied at 25%.
Exemptions apply if the receiving company is directly or indirectly controlled by a Danish parent
company or if the receiving company is controlled by a company resident in a state with which
Denmark has a double tax convention and that company may be subject to CFC taxation. Finally,
an exemption applies if the receiving company establishes that the foreign taxation of interest is not
less than three-quarters of the Danish corporate taxation and that the interest is not paid to another
foreign company subject to taxation that is less than three-quarters of the Danish corporate taxation.
Denmark has terminated its treaty with Spain and France with effect from 1 January 2009. The
termination means that each country will tax the relevant income according to its domestic tax rules.
New treaties are not expected to be agreed in the near future. Companies in Spain and France
receiving dividends from a Danish company may, however, qualify for tax exempt dividends since
they are EU member states.
The EU Interest/Royalty Directive may provide an exemption from WHT if the payee is an immediate
parent, sister, or subsidiary company resident in the European Union.
Serbia has succeeded in the treaty between Denmark and Yugoslavia.
Different rates apply depending on the characteristics of the assets on which royalty is paid.
The 10% rate is applicable for royalties, whereas the 5% rate is applicable to fees for technical
support.
Tax administration
Taxable period
Danish corporate taxpayers are taxed on an annual basis. Corporate taxpayers may
choose a tax year that is different from the calendar year.
Denmark
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Tax returns
Tax returns are completed on the basis of audited financial accounts with adjustments
for tax. Tax returns should be filed no later than six months following the end of the
accounting year. Corporations with an accounting year-end that falls in the period from
1 January to 31 March must file a tax return no later than 1 August in the same calendar
year.
The tax system, in practice, is based on self-assessment. Tax assessments are made
automatically by the tax authorities on the basis of the tax return. However, the tax
authorities may subsequently audit the tax return.
Payment of tax
CIT must be paid on a current year basis in two equal instalments due on 20 March and
20 November. The authorities request payments of 50% of the average of the last three
years final income tax. In addition, voluntary additional payments may be made at the
same dates; such voluntary payments are adjusted by 0.3% (for tax year 2014) when set
against the final tax bill.
The final tax bill is settled by 20 November in the following year. Underpaid tax is then
payable by 20 November with a surtax of 4.6% of the tax amount (for tax year 2014).
Overpaid tax is refunded by November of the following year with interest of 1.1% (for
tax year 2014).
Tax audit process
The Danish tax system is based on self-assessment. Companies are, in general, subject to
audit on a random basis, but some large companies/groups are subject to annual audit
by the Danish tax authorities.
The general statute of limitations is 1 May in the fourth calendar year after that of
the end of the relevant accounting period. This limitation is extended for another two
years with respect to inter-company (transfer pricing) issues and certain tax-exempt
restructurings.
Once a year, the Danish tax authorities publish a list of topics subject to increased focus
by the tax administration during their audit. Transfer pricing issues are on top of this list.
In general, all aspects of transfer pricing are in focus. However, specific topics certainly
seem to have caught the tax authorities attention. These are mainly transactions
with group companies resident in countries with which Denmark does not have a tax
convention, use and transfer of intangible assets, restructurings, and companies making
continuous losses.
Attention has also been drawn to whether Danish entities have complied with the WHT
requirements regarding dividends and interest.
Last but not least, the tax authorities have increased their focus on tax deductions for
costs related to the creation of tax-exempt income, such as dividends from and capital
gains on certain shares.
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Denmark
Other issues
Tax-free restructuring
Restructuring (e.g. mergers, demergers, share exchanges, drop-down of assets) can, in

many cases, be carried out tax-free under the provisions of the EU Mergers Directive
as implemented into Danish law. These types of restructuring can be carried out
in a tax-exempt manner without prior approval from the tax authorities. However,
several objective conditions must be fulfilled. Formation, merger, reorganisation, and
liquidation expenses are mostly non-deductible.
Danish Intergovernmental Agreement (IGA) with the United States (US)

Denmark has entered into an Intergovernmental Agreement (IGA Model 1) with the
United States on the Danish implementation of the Foreign Account Tax Compliance Act
(FATCA). The IGA is implemented into Danish law and is, to a large extent, an overlay
to existing Danish tax reporting rules applying to Danish banks. The scope of FATCA is,
however, wider than the existing rules in terms of both entities and products covered
and customer due diligence procedures. The IGA implies that Danish foreign financial
institutions (FFIs) must report to the Danish tax authorities instead of directly to the US
Internal Revenue Service (IRS). The Denmark-US IGA contains important exceptions for
both the Danish mutual fund and pension savings industries.
Denmark
545
Dominica, Commonwealth of
PwC contact
Louisa Lewis-Ward
Bishops Court Hill
PO Box 111
Tel: +1 246 626 6756
There have been no significant corporate tax developments in Dominica during the past
year.

Resident companies are taxed on gains or profits accrued directly or indirectly from all
sources, whether in and out of Dominica, and are subject to tax at a flat rate of 30%.
Non-resident companies are taxed on Dominican-source income. The gross amount of
such income is liable to 15% withholding tax (WHT).
Associations of underwriters are taxed at 30% on 10% of the gross premium arising
in Dominica, and life insurance companies are taxed at 30% on 20% of the gross
investment income arising in Dominica.
Corporate residence
Companies are regarded as resident if they are incorporated in Dominica or managed
and controlled through a permanent establishment (PE) in Dominica.
A PE is defined in Dominica as a fixed place or premises through which the business is

wholly or partly carried on. A PE includes:

A place of management.
A branch or office.
A factory or workshop.
Premises used as a sales outlet.
A building site or construction or assembly project.
The maintenance of plant and machinery for rental.
Other taxes
VAT applies to practically all supply of services and import of goods or import of services,
other than an exempt import. The tax is imposed at a rate of 15% of the value of every
taxable supply by a taxable person in Dominica, except if the supply is classified as
accommodations and diving activity, which carries a rate of 10%.
546
Certain transactions are zero-rated or exempt from VAT. Export sales by VAT-registered
persons are zero-rated.
Certain supply of services is exempt from VAT, including services provided by financial
intermediaries, schools, and medical practitioners. Exempt imports include goods
imported by Dominicans returning home for permanent residence, motor vehicles
imported by natural persons on change of permanent residence, unconditional gift of
goods to an approved charitable organisation, other than for purposes of re-sale, etc.
Every registered person is required to file a tax return for each tax period with the Inland
Revenue Division (IRD) within 20 calendar days after the end of the period, whether or
not tax is payable in respect of that period. This return should be in the form prescribed
by the IRD and should state the information necessary to calculate the tax.
Customs duties
Customs duties are charged on a wide range of imported goods. On approval by the
Cabinet of Minsters (Cabinet), through the advice of Invest Dominca, exemptions are
granted for raw materials and plant and machinery used in manufacturing and for
certain items imported by hotels under construction, extension, or refurbishing projects.
Excise taxes
Excise tax is imposed on taxable goods (other than taxable goods previously imported
into Dominica) removed for consumption in Dominica from a warehouse of a
manufacturer registered or required to be registered and taxable goods imported into
Dominica. Excise taxes are calculated either on the chargeable value of the goods or via
the authorised tariff code.
For both importers and local manufacturers, the due date for payment is the 20th day of
each calendar month.
Taxable goods include alcohol, cigarettes, petrol, and vehicles.
Tax rates are currently as follows:
Good
Stout/beer
Wine
Shandy
Brandy/ginger/vodka
Whiskey
Rum
Cigarette
Petrol (jet fuel, kerosene)
Petrol (diesel)
Petrol (gas)
Vehicles
Liquor and cordial
Excise tax rate

XCD* 1.2/litre
XCD 1.2/litre
XCD 0.28/litre
XCD 8.5/litre
XCD 12.6/litre
XCD 2.6/litre
XCD 22/kilogram
XCD 1.14/gallon
XCD 2.38/gallon
XCD 3.00/gallon
15% and 28%
XCD 2.6/litre
* East Caribbean dollar
Property taxes
There are no property taxes administered by the IRD. However, there is municipal tax,
which is collected by the town and village councils. The rate varies from district to
district (e.g. 1.25% on the assessed value of the property).
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Stamp taxes
Stamp tax is charged on any document that evidences a legal or contractual relationship
between two or more parties. Additionally, many types of commercial and legal
documents must be stamped, denoting the payment of taxes, which may be either at a
fixed rate or at an ad valorem rate, depending, for example, on the value of the property
transferred.
For a conveyance or transfer on sale of any property (except stock and debentures), a
stamp duty of 6.5% on the value of the property, real or personal, transferred shall be
paid, of which 2.5% shall be paid by the transferor and 4% by the transferee. A judicial
fee of 2.5% and an assurance fee of 1% are also paid by the transferee. Stamp duty, as set
out above, shall also be paid on any stock or shares of a company or corporation whose
assets consist of 50% or more real property.
Branch income
The tax rate on branch income is the same as that on income earned by resident
companies. Every non-resident company carrying on business in Dominica is liable to
WHT of 15% on such part of the profits of the business for any year of assessment as is
remitted out of Dominica.
Where a controlled company fails to make a sufficient distribution in relation to any
year of assessment, it is liable to pay tax on the undistributed profits of that year of
assessment at the rate of 15%. A controlled company means a resident company that is
owned by not more than five shareholders, excluding the government and any company
that is not itself a controlled company.
In determining the amount of a sufficient distribution, the Comptroller of the IRD
shall give regard to the nature of the sources of its income and the financial resources
available to it and may, where satisfied that it would be detrimental to the business of
the company to regard the whole of its chargeable income after deduction of the tax
payable thereon as a sufficient distribution, direct that such proportion thereof as the
Comptroller may specify (hereinafter referred to as a retention allowance) may be
retained for the purpose of the business without liability to tax.
Inventory valuation
Stocks generally are valued at the lower of cost or market value. Obsolescence is
permitted where it occurs, but there are no provisions to account for monetary inflation
on inventory valuation.
Capital gains
There is no tax on capital gains except in instances where such gains comprise a portion
of the income-earning activities of the business. In such instances, the corporate tax rate
applies.
Dividend income
Dividends are subject to tax at a rate of 30%. However, there is a tax credit given that is
equal to the amount by which the tax payable of a company has been increased by the
inclusion of such dividend in its taxable income.
Interest income
The corporate tax rate applies to interest income. However, income earned on securities
issued by member governments of the Eastern Caribbean Central Bank and any income
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accruing to the buyer, seller, or issuer from any transfer of securities that are listed on
the Eastern Caribbean Securities Exchange through the facilities of that Exchange is tax
exempt.
Any expenditure incurred for the purpose of producing exempt income is not deductible.
Foreign income
There are no provisions in Dominica for deferral of foreign-source income.
Deductions
Capitals allowances are available in Dominica.

Annual allowances for wear and tear, ranging from 3% to 20%, are granted on the
acquisition of industrial and commercial buildings; on plant and machinery, including
motor vehicles and furniture; and on fixtures and equipment.
The Comptroller of the IRD may also grant, on application, a higher rate for annual
allowance for assets that have higher or abnormal wear and tear.
Goodwill
Neither the amortisation of impaired goodwill nor the related write-off of it is an

allowable deduction.
Start-up expenses
All expenditures incurred in connection with incorporation costs for the establishment
of a company are deductible unless considered as capital expenditure.
Interest expenses
Interest on any loan, including interest payable on debentures, is an allowable deduction

to the extent that the amount of such loan was used for the purpose of producing
assessable income.
Bad debt
Bad debt expense is deductible, provided it has been brought to account in generating
the companys assessable income for any income year.
Charitable contributions are an allowable deduction when the contributions are

made by way of subscription or donation to a business or professional organisation
approved by the Cabinet, where it is satisfied that the organisation is a non-profit body
established with the object of maintaining and advancing the standards of the business
or profession.
Fines and penalties
Fines and penalties are not allowable deductions.
Taxes
Taxes are not allowable deductions, except taxes imposed on any immovable property
used for the purpose of producing assessable income.
Net operating losses may be carried forward up to a maximum five years. In carrying
losses forward, the amount that can be claimed in any subsequent year is the full
amount of the available loss.Losses cannot be carried back.
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There are no restrictions on the deductibility of interest paid to foreign affiliates if the
transaction is carried out at arms length and at commercial rates. However, deduction
for management charges, which is subject to 15% WHT, is restricted to the lesser of
such charges or 5% of all allowable deductions, excluding such charges and capital
allowances.
Group taxation
Group tax filing is not allowed in Dominica.
Transfer pricing
Related party transactions are accepted if they are made on an arms-length basis.
The Comptroller of the IRD has the power, under the Income Tax Act, to make any
adjustment deemed necessary to place such transaction at arms length.
Thin capitalisation
No provision exists for thin capitalisation in Dominica.

Foreign tax credit
Dominica is signatory to the CARICOM Double Taxation Agreement (DTA) Order 2008,
which provides relief against double taxation and seeks to prevent fiscal evasion with
regard to taxes on income, profits, or gains. Where income has accrued to a resident and
has been taxed in a foreign country with which there is no DTA, or is income to which
a DTA, if there is one, does not relate, credit for tax on such income is allowed for the
lesser of the tax payable in the foreign country or the tax charged under Dominican tax
law.
Tax holidays
Tax holidays are available for manufacturing companies. The incentives are aimed at
increasing the manufacturing base of Dominica, the level of exports, and the use of
local materials and labour in production. An approved manufacturing enterprise will be
granted a tax holiday up to a maximum of 15 years. In determining the length of the tax
holiday, the extent of the local value added to approved products is taken into account.
Income tax incentives and other fiscal concessions are provided under the Fiscal
Incentives Act and other concessions granted by the Cabinet. The extent of the incentives
and concessions granted are specific to the legislation or Cabinet conclusions and
depend on the impact that the investment would have on local employment, exports,
and the generation of foreign exchange earnings. The incentives granted include the
following:
Duty free importation of raw materials, machinery, components, and spare parts and
other inputs used in manufacturing, and the duty-free importation of construction
materials, equipment, and other inputs used in the construction and operation of
hotels and other hospitality products.
Income tax waivers of up to 100% of the taxable income of companies engaged in
manufacturing, tourism, and agriculture and other employment generating activities,
for periods of up to 15 years.
Whole or partial waivers of stamp duties, Alien Landholding License fees, and WHT
with respect to investments in specific areas, or in specific industries and activities.
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Export allowances for goods manufactured in Dominica and exported. Companies
who engage in such activity are given tax exemption on the export of such goods up
to a maximum of ten to 15 years.
Withholding taxes
Resident corporations and persons that make certain payments of an income nature to
non-residents are required to withhold tax on these payments:
Payment
WHT (%)
Dividend
15
Interest or discounts
15
Rental, lease, premium, or licence in relation to immovable property
15
Rental of plant, machinery, equipment, or other movable property
15
Royalty
15
Management charge
15
Commission or fee, not being in respect of employment
15
Annuities or other periodic payments
15
Distribution of income of a trust
15
Any other payment of an income nature
15
Profits of a non-resident company from carrying on business in Dominica that is remitted
15
out of Dominica
Tax administration
Taxable period
Returns must cover a 12-month period, which may be changed only with the
Comptrollers permission.
Tax returns
Tax returns must be filed within three months of the companys fiscal year-end. An
extension of the filing date may be obtained.
Financial statements must be submitted with the returns, together with a schedule
reconciling taxable income with book income and various other schedules of additional
information.
The system is one of self-assessment. Upon receipt of the returns, the IRD examines the
information provided and issues a notice of assessment at any time, subject to the statute
of limitations. The IRD may also issue assessments in the absence of returns.
Payment of tax
Tax is payable in instalments on 31 March, 30 June, and 30 September in each income

year (or the end of the third, sixth, and ninth month where the accounting year of
the company is other than a calendar year), based on the preceding income year. Any
remainder is payable on or before 31 March of the subsequent year (or the end of the
third month after the end of the accounting year where the accounting year of the
company is other than a calendar year).
Tax audit process
The IRD carries out audits of a selection of tax returns, usually at the taxpayers place of
business. Audits may be carried out at any time prior to the expiration of the statute of
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limitations, whether or not notices of assessment have been issued. The IRD has wide
powers in determining the information it requires for these audits.
Within 30 days after the date of service of a notice of assessment or reassessment, the
taxpayer may submit a written objection to the IRD on any matters in such assessment
or reassessment. If the IRD confirms its assessment, the taxpayer may file an appeal
with the Appeal Commission, which comprises four persons appointed by the Cabinet. A
decision by that body may be further appealed to the High Court. An appeal against on
an order from this Court may be made to the Court of Appeal.
Assessments are not final until six years after the end of the income year, within which
period assessments may be made at any time. In cases of misrepresentation or failure to
disclose any material fact, a reassessment can be made at any time.
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PwC contact
Ramon Ortega
Scotiabank Building
3rd floor
Santo Domingo
Dominican Republic
Tel: +1 809 567 7741
Corporate income tax (CIT) rate
The CIT rate for 2014 is 28% (previously 29%). The CIT rate from 2015 onward is 27%.

The Dominican Republic follows a territorial concept (i.e. resident companies, branches,
and permanent establishments [PEs] are generally subject to taxation on Dominicansource income only); consequently, the tax treatment for corporations, partnerships,
and limited liability companies is similar in most aspects.
For fiscal year 2014, the CIT rate is a flat rate of 28%. The CIT rate will decrease to 27%
from fiscal year 2015 onward. Please note that the asset tax is an alternative minimum
tax that is payable when it is higher than a companys CIT liability (see Asset tax in the
Other taxes section).
Dividends/profits remitted abroad or paid locally are subject to a withholding tax
(WHT) of 10% as a definitive tax payment.
Local income taxes
In the Dominican Republic, local government income taxes do not apply.
Corporate residence
A company is resident when it is registered or incorporated under the laws of the
Dominican Republic. Foreign entities are considered as domiciled when they are
registered in the Dominican Republic as a branch or PE, and they are subject to local tax
in the same manner.
According to local tax legislation, which follows the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital, a
PE is defined as a fixed place of business where a foreign entity or individual performs all
or part of its activities, such as:

An address in the Dominican Republic.

Office.
Branches.
Workshop.
Mine.
Petroleum or gas well.
Quarry or any other natural resource extraction place.
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Assembly projects, including supervision activities of such projects.
Construction/supervision activities derived from the sale of machinery and
equipment when its cost exceeds 10% of the sale price of such equipment.
Consulting services, provided these exceed six months within the same fiscal period.
Representatives or dependent or independent agents, when these act on behalf of the
entity.
Other taxes
Tax on the Transfer of Industrialised Goods and Services (ITBIS)
ITBIS is a value-added tax (VAT) applied to industrialised goods (movable) and services
at a rate between 8% and 18%, with exemptions established by law to certain goods and
services.
Exempt goods include a wide variety of goods, among which are basic products (eggs,
milk, grains, live animals, frozen meats), seeds for planting, fruits and vegetables,
medicine, insecticide and pesticides, books/magazines, educational material,
wheelchairs, and prosthesis.
Exempt services include educational, health, financial (including insurance), pensions,
ground transportation of people and cargo, electricity, water and waste pick-up, housing
rental and personal care, and exported services.
A 0% rate applies to exports, including sales to free trade zones (FTZs).
Tax on gross sales made by FTZs to local market
A 3.5% tax was created on the gross sales of goods and services made by companies in
Dominican FTZs to individuals and legal entities in the local market.
Customs duties
Customs duties are assessed at various rates depending on the nature of the goods and
their country of origin. Free trade agreements exist (e.g. the Central America-Dominican
Republic-US Free Trade Agreement [DR-CAFTA]) that decrease the customs duty rates
for goods imported from the member countries.
Selective consumption taxes (Impuesto Selectivo al Consumo or ISCs)

ISC is applied to the acquisition or import of certain goods and services.
There is an ISC for alcoholic goods and cigarettes, adjusted by inflation annually:
Alcohol: ranges from 356.84 Dominican pesos (DOP) to DOP 437.56 for every litre of
pure alcohol.
Cigarettes: DOP 40 for a 20 pack and DOP 20 for a 10 pack.
There is a 16% ad valorem ISC for fossil fuel and petroleum derivatives. A DOP 2 tax
(adjustable by inflation on a quarterly basis) is charged per gallon of regular and
premium fuel and diesel.
There are ISCs that vary based on the product, which range from:
10% on the transfer of alcoholic beverages, applied on the retail price. Imports and
transfers made by local manufacturers are accountable for this tax.
20% on the transfer of tobacco products, applied on the retail price. Imports and
transfers by local manufacturers are accountable for this tax.
19.5% to 130% on the consumption of certain imported goods (listed in the law) that
are considered to be non-essential.
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10% on telecommunications services.
16% on insurance services.
0.0015% on the value of cheques or wire transfers made through financial entities
(this tax does not apply to cash withdrawals or credit card use).
Asset tax
Asset tax/Law No. 557-05, modified by Tax Reform Law No. 253-12, imposes a 0.5%
tax on total assets, net of depreciation, amortisation, and bad debt reserves. Share
investments in other companies, land in rural areas, immovable property pertaining to
livestock and agriculture, asset revaluations, and tax advance payments are excluded
from this tax base.
The asset tax is a minimum tax filed and liquidated through the annual CIT return (Form
IR-2) and paid applying the following rules:
CIT is allowed as a credit against the asset tax.
If CIT is greater than the asset tax, the obligation to pay the asset tax is cancelled and
CIT is paid instead.
If CIT is less than the asset tax, the difference (in order to complete the asset tax
value) shall be paid in two equal instalments as follows:
First instalment shall be paid during 120 days subsequent to closing date.
Second instalment shall be paid within six months after first quotes due date.
Entities may request a temporary exemption from the asset tax. Entities that require
large capital (among other requirements established by General Ruling 3-06) may make
such a request, which should be submitted at least 90 days before the filing due date.
The local internal revenue service shall evaluate the merits of the request and approve or
deny, as appropriate.
If the entity has an income tax credit arising from excess advance payments, it may
request the refund of such balance be applied against the asset tax.
In the case of financial institutions, power generation and distribution companies,
pension fund entities, and stock brokerage companies, the tax is calculated based on the
fixed assets book value.
According to Rule 07-2007, construction companies may seek exemption from the asset
tax, provided that such entities meet the requirements established in this rule.
Pursuant to the Tax Reform Law, the asset tax will be abolished in 2016, provided that
the tax burden goal of 16% of gross domestic product (GDP) is met in 2015.
Real Property Transfer Tax
The Real Property Transfer Tax is assessed at a basic rate of 3% on any transfer of
ownership of real estate.
Stamp taxes
Stamp taxes have been abolished in the Dominican Republic.
Branch income
Branch profits are taxed at the same rate as corporate profits. Tax Reform Law No. 25312 imposes a 10% WHT as definite payment on remittances abroad.
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Dominican Republic
Inventory valuation
The last in first out (LIFO) method of inventory valuation is established for tax purposes.
Other methods may be authorised upon request.
Capital gains
Capital gains are added to ordinary taxable income and subject to the CIT rate. Capital
gains are defined as the difference between the sale price of an asset and the acquisition
or production price, adjusted for inflation.
Dividend income
Dividend distributions in cash are subject to a 10% WHT as a sole and definite payment.
Stock dividends
Stock dividends are not subject to taxation.
Interest income
Interest income is considered as part of taxable income; in the case of non-resident nondomiciled taxpayers, the tax should be paid through WHT.
Foreign income
Dominican-resident companies, branches, and PEs are subject to taxation on income

from Dominican sources and on income from foreign sources arising from investments
and financial gains. Tax determined on income from foreign source is subject to a credit
mechanism. Taxes paid in the country where the income is originated can be credited up
to the amount of the tax payable in the Dominican Republic on the same income.
Deductions
Depreciation allowances on fixed assets are determined by the declining-balance method

at the following rates:
Assets
Buildings
Office furniture, fixtures, computers, light vehicles, etc.
Other assets not specified

5
25
15
The fiscal book value is adjusted by the annual inflation rate.

Amortisation of intangible assets (e.g. patents, authors rights, drawings, franchises, and
contracts without set expiration date) is not deductible.
Goodwill
Goodwill is not deductible.
Start-up expenses
The Dominican tax legislation does not establish specific provisions regarding the
deduction of start-up expenses. The general deductions rule is the accrual method.
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Interest expenses
Interest expenses are deductible, provided they are associated with the acquisition,
maintenance, and/or exploitation of taxable income-generating assets.
The interest expense deduction is limited when the beneficiary is a non-resident located
in a tax haven or in a low taxation jurisdiction, or when the interest is not otherwise
subject to tax by the recipient. Thin capitalisation rules may also limit the deduction (see
Thin capitalisation in the Group taxation section).
Bad debt
Bad debts are deductible only in the year the loss is suffered. Authorisation may be
obtained to use an alternative method, which consists of creating a provision allowing
the deduction only in the year the bad debts qualify as doubtful, up to 4% of the balance
of the accounts receivable at year-end.
Donations made are not tax deductible in the Dominican Republic.
Fines and penalties
Fines and penalties are considered non-deductible expenses.
Taxes
Income taxes are not deductible. Other taxes can be deductible; however, interest and
surcharges imposed on taxes are not deductible in general.
For tax purposes, the following significant items should be considered:

Changes in methods are not allowed without prior approval.
Bonuses paid to employees within 120 days after the end of the taxable year are
deductible for the year just ended.
The carryforward of losses of legal entities can be used to offset profits up to the
fifth year following the year in which the losses were generated, with a maximum
amortisation of 20% in each year. For the fourth year, the deduction allowed should not
exceed 80% of the net taxable income. In the fifth year, the percentage is 70%.
There is no carryback loss mechanism in the Dominican Republic.
Payments to foreign affiliates for royalties, interest, or service fees are deductible,
provided that the 29% WHT was paid (10% on interest).
Group taxation
Group taxation is not permitted in the Dominican Republic.
Transfer pricing
Per the Dominican Tax Code (DTC), related party transactions carried out between
Dominican companies, regardless of whether the companies are foreign-owned or
not, or with companies located in areas of low or no taxation, must be carried out
in accordance with the prices agreed in the transfer of goods or services between
independent parties.
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Dominican Republic
These provisions shall also apply to transactions carried out by Dominican companies
with related companies located in the country that is benefiting from a favourable tax
regime.
The tax authorities, following the procedures in the current tax laws in the exercise of
its powers of determination, verification, or investigation, may challenge the values
declared by taxpayers if such values:
do not correspond to the economic reality of the operation involved, or
differ substantially from independent companies under similar conditions.
Persons are considered related parties or related persons or entities, resident or not in
the Dominican Republic, when among them there is a financial dependency or capital of
both is mostly owned by one of them, following (but not limited to) these criteria:
One party participates, directly or indirectly, in the management, control, or capital
of the other.
The same natural persons, companies, or firms participate, directly or indirectly, in
the management, control, or capital of such parties.
An individual, company, or companies have the ability to influence the business
decisions of the company.
When participation is defined in terms of the share capital or control of voting rights,
a direct or indirect participation of at least 25% will be necessary in either case.
Regarding the advance pricing agreement (APA) regime, an APA may be requested from
the tax authorities that sets the values of the transactions carried out between related
parties if made prior to completion. Please note the following:
The APA may be approved, denied, or modified by the tax authorities with customer
acceptance and is valid within 36 months after approval.
Subsequent agreements may be valid for up to 36 months; in cases in which it has
expired and no new agreement exists, the existing agreement shall continue in effect
until it is approved before a new APA.
The tax authorities may challenge the taxpayers declared values included within the
APA when they do not correspond with the criteria agreed in the APA and apply the
penalties established in the DTC.
For economic sectors, whose business has particular ties or high linkage between the
parties, the tax authorities may determine a minimum price or profit margin. Once
such price or margin is set, according to the sector, the companies covered by the
scheme will act as independent companies. The price or minimum tax profit margin
of the taxpayer may be calculated taking into account the total income, the assets
used in the business operations during the fiscal year, the total amount of costs and
expenses, and/or other sector variables.
Finally, taxpayers must file an annual Informative Tax Return of transactions between
related parties, which shall contain detailed information of each transaction, the related
partys identification, transfer pricing method, etc.
Thin capitalisation
According to the thin capitalisation rule, the maximum debt-to-equity ratio allowed to
taxpayers is 3:1; over this threshold, the deduction of interest expense is limited.

In the Dominican Republic, tax incentive laws exist for the following.
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Dominican Republic
Tourism incentives
Law 158-01 on the Promotion of Tourist Development for New or Low Development
Locations in Provinces and Areas with Great Tourist Potential, and for the Creation of
the Tourist Promotion Official Fund, enacted on 9 October 2001, establishes special
incentives and benefits to individuals or companies, residing in the Dominican Republic,
that promote or invest capital in any tourist activity described in said Law. In order to
benefit from said Law, a special Resolution shall be obtained from the Council for the
Promotion of Tourism. However, Tax Reform Law No. 253-12 eliminated exemptions
to resident physical/juridical persons that invest in tourism projects (directly to the
promoters/developers) within the specified tourist development zones.
Alternative energy incentives
Law 57-07 provides significant incentives for the use and development of renewable
sources of energy. The renewable energy sources subject to this law include bio-fuel, biodiesel, ethanol, and wind, solar, and other renewable energy.
Additionally, the credit on investment expense granted to self-power producers is 40%.
Industrial renovation and modernisation incentives
The main objective of Law 392-07 about competitive development and local industrial
manufacture is to promote policies and support programs for industrial renovation and
innovation so to diversify local production, create industrial parks, and link the country
to international markets. Main benefits include VAT exemption on import of machinery
and materials, priority on imports granted at customs, and accelerated depreciation.
Industrial FTZ operations
Law 8-90 about Export FTZs was created to promote employment, production, and
economic growth. Entities that would like to benefit from said Law shall be engaged
in manufacture/service within a confined space (FTZ park). Special FTZ classification
entities, which are entities located outside an FTZ park (e.g. call centres), were
abolished with Law No. 253-12.
Border development incentives
Law No. 28-01, dated 1 February 2001, creates a special development frontier zone for
industrial, agro-industrial, agriculture/livestock, metalmechanic, free zone, tourism,
metallurgical, and energy companies that exist at the time of promulgation of said
law, and those that may be installed in the future within the border of the Dominican
Republic and Haiti. Main incentives include 100% exemption on CIT and VAT, as well as
customs duties.
Foreign tax credit
Taxes paid abroad on foreign income taxed in the Dominican Republic may be credited
up to the amount of the Dominican tax liability generated by such income. The credits
should be determined on a case-by-case basis.
Withholding taxes
WHT on dividends
Dividends paid in cash to resident and non-resident individuals or corporations are

subject to a WHT of 10%.
The WHT on payments to foreign corporations, which are not permanently established
in the Dominican Republic, are as follows:
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Dominican Republic
WHT (%)
Recipient
Non-treaty, basic
Treaty (Canada)
Dividends and
interest
10
18
Royalties
28 (1)
18
Technical
assistance Other services
28 (1)
28 (1)
28 (1)
28 (1)
Notes
1.
28% WHT rate to be reduced to 27% from 2015 onward.
WHT on transfers of shares
There is a 1% WHT on the value of the transfer of shares received by the seller. Foreign
entities are not exempt from this obligation. In this case, WHT may be made by a person
appointed as WHT agent by the tax authorities.
Such WHT is a payment on account against capital gain tax, payable by the seller
through the Form IR-2 (legal entities) or Form IR-1 (individuals), as applicable.
However, if they can substantiate that the transaction will not generate a capital gain or
that the 1% WHT would generate a capital loss, they may request the tax authorities, no
later than 30 days prior to withholding filing/payments due date, to be exempt from this
obligation.
This 1% WHT should be filed and paid to the tax authorities through the monthly WHT
return (IR-17 Form) within the first ten days of the month following the payment to the
seller. In case the purchaser is an individual, the 1% WHT is not applicable.
WHT on interest payments
Financial institutions are appointed as 1% WHT agents on the value paid or credited on
account for interest payments of any nature to legal entities.
The interests paid by financial institutions will constitute a deductible expense for tax
purposes, provided the WHT was made.
In addition, this rule obligates financial institutions to provide a monthly electronic file,
directly to the tax authorities or through the Banks Superintendency, containing all the
information related to the interest payment, including the date, value, and identity of
the beneficiary.
Tax administration
Taxable period
The Dominican Tax Code establishes as year-end one of the following: 31 December, 31
March, 30 June, or 30 September. Once the year-end is selected, any change should be
authorised by the tax authorities.
Tax returns
The Corporate Annual Tax Return (Form IR-2) must be filed within 120 days after yearend. Tax authorities may allow extensions of up to 60 days, upon request.
Tax returns are based on self-assessment and must be filed on electronic forms supplied
by the internal tax department.
Payment of tax
The balance of any tax due must be paid no later than the due date for filing the return.
Corporations domiciled in the country and PEs of foreign enterprises shall be obligated
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to make advance payments on the 15th day of every month for tax related to the period
in progress.
Tax audit process
The audit cycle is not established by law or practice. During the statute of limitations, tax
authorities select the taxpayers subject to audit based on internal criterion.
The statute of limitations is three years, and five years if the entity has been notified of a
tax audit, counting from the filing due date.
Among the topics of focus are: non-deductible expenses, withholdings, VAT, and
proportionality of VAT credits.
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Ecuador
PwC contact
Pablo Aguirre
Diego de Almagro N 32-48 & Whymper 1st. Floor
Quito, Pichincha
Ecuador
Tel: +593 2 382 9351
There have been no significant corporate tax developments in Ecuador during the past
year.

Resident entities are taxed on their worldwide income. Non-resident entities are subject
to tax on Ecuadorian-source income only.
International Financial Reporting Standards (IFRS) are in force for all entities. Local
tax authorities have established that for corporate income tax (CIT) purposes, and
corresponding pre-payments, companies are obligated to follow these accounting
principles.
Taxes on corporate income are levied at the following rates:
Type of income
Distributed or undistributed profits of local corporations and branches
Reinvested profits of local corporations and branches
CIT rate (%)

22
12
Local income taxes
No other government taxes on income are imposed on companies.
Corporate residence
Corporate residence is determined by the place of incorporation. For foreign branches, it
is the place stated in the domiciliary deed.
According to the tax legislation, a company can be deemed to have a PE in Ecuador if

it maintains any place or fixed centre, within the country, in which a foreign company
develops all or part of its activities.
The corresponding regulations point out that a PE also exists when a foreign company
maintains, within the country, a person or an entity that acts on its behalf and habitually
exercises an economic activity. It contemplates several instances where this is applicable,
among them:
A person with legal representation, which is normally granted through a power of
attorney or through a legalised decision by the company and includes the capacity to
legally act on behalf of the company.
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A person working under a contractual relationship for a foreign company to carry out
economic activities on behalf of that company.
A centre for the direction of the activities of the foreign company.
A branch, agency, or office that acts on behalf of the foreign company.
An office for the provision of technical consultancy services related to contracts that
are executed in the country.
Other taxes
VAT is levied at the rates of either 12% or 0% on the transfer of goods, import of goods,
and the rendering of services, as well as on services rendered within the country or
imported. Royalties and intangible property imported or locally paid are also levied with
a 12% VAT.
The following are transactions exempt from VAT:

In-kind contributions to capital of companies.

Inheritance and assets obtained from liquidation of companies.
Transfer of business as a whole, amalgamations, mergers, takeovers, and spin-offs.
Donations to public entities and non-profit organisations.
Transfers of shares and securities.
Goods and services that are subject to 0% rate are explicitly listed in the law.
Among others, the following goods are taxed at a 0% rate upon either importation or
local transfer of ownership:
Most agricultural goods and foodstuff, when these remain in their natural state; this
includes refrigerated or packaged goods that have not undergone further processing.
Also included in this category are milk, meats, sugar, salt, bread, butter and
margarine, flour, and cooking oil.
Drugs, medicines, and other pharmaceutical products, including raw materials for
their production.
Fertilisers, insecticides, animal foods, and similar products, including the raw
materials required for processing such goods.
Agricultural machinery and equipment.
Goods that are exported.
Paper, books, magazines, and newspapers.
Among others, the following services are taxed at a 0% rate:
Transportation of persons and cargo, except air transportation of persons and local
air transportation of cargo.
Book printing services.
Housing rental.
Water, electric, sewage, and other public services, including garbage collection.
Exported services.
The 12% VAT paid on imports and local purchases can be deducted from the 12%
VAT charged on sales or services rendered. VAT paid on raw materials, fixed assets,
or components required for the production of goods or rendering of services is also
creditable when the final product is considered taxable at 12%. On the other hand, VAT
paid on raw materials, services, components, or fixed assets necessary for production of
export goods isrecoverable.
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The 12% VAT paid in the acquisition of goods and services utilised for the production or
rendering of services levied at 0% VAT is not creditable. Therefore, it will be considered
as part of the cost.
Companies designated as special taxpayers (qualified as such by the tax authorities,
which, in recognition of its economic importance defined in special parameters,
contributes to the effective collection of taxes, subject to special regulations regarding
the compliance of their formal duties and payment of taxes) are required to withhold
30% of VAT applicable on their purchases of goods taxed at 12%, and 70% of VAT
applicable on their purchase of services taxed at 12%, except with respect to services
rendered by professionals, in which case 100% of VAT charged must bewithheld.
In the importation of services, VAT at 12% must be self-determined and withheld at
100% by the local entity. This VAT is creditable.
Customs duties
Since Ecuador is a member of the Andean Community, goods to be imported are

classified under the Common Nomenclature of the Andean Countries participating
in the Cartagenas Agreement (NANDINA) Pact, which is based on the Customs
Cooperation Council Nomenclature (also known as the Brussels tariff nomenclature).
Most consumer good imports pay 25%, while intermediate goods are usually imported
at a 10% or 15% rate. Raw materials and capital goods generally pay 0% to 5%. Ecuador
has negotiated exceptions under the Andean common tariff that allow lower duties on
certain capital goods and industrial inputs. There is duty-free import of agricultural
goods and equipment.
The price listed on the commercial bill or invoice is the basis for the assessment of duties,
except when the Central Bank of Ecuador (CBE) considers the listed price unreasonable,
in which case market prices in arms-length transactions will be used. The burden of
proof lies with the importer.
In addition to import duties, all imports are subject to 12% VAT and other minor taxes
that do not exceed 1%.Charges are based on the cost, insurance, and freight (CIF) value
of the merchandise.
All Ecuadorian imports and exports are subject to inspection by authorised international
verification companies operating in the country (there are some imports exempt from
verification). Goods are appraised for value, quantity, quality, and weight at the port of
origin.
Special consumption tax (Impuesto a los Consumos Especiales or ICE)

ICE is imposed on domestic and imported goods which are explicitly listed in the law.
This tax is levied at a progressive rate from 5% to 35% on certain automobiles and
15% on airplanes, helicopters, and boats. The taxable basison cigarettes andalcoholic
beverages is obtained by the number of produced or imported cigarettes or degrees of
alcohol, respectively. It must be paid monthly and is collected upon sales. The ICE tax
base for imported goods is the ad valorem value.
Foreign assets tax (Impuesto a los Activos en el Exterior)
The tax base for the foreign assets tax is the average monthly balance of cash deposits
held in foreign entities by private entities registered in the stock market and regulated by
the Superintendent of Banks and Companies. The monthly tax rate is 0.25% (0.35% for
assets held in tax haven jurisdictions).
Remittance tax (Impuesto a la Salida de Divisas)
Remittance tax of 5% is imposed on the transfer of money abroad in cash or through

cheques, transfers, or courier of any nature carried out with or without the mediation
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of the Ecuadorian financial system, included transfer from foreign bank accounts.
Dividends are exempt from this tax, under certain considerations.
Stamp taxes
No stamp taxes are levied in Ecuador.
Redeemable Tax on Non-Returnable Plastic Bottles
A tax is levied on the bottling of beverages in non-returnable plastic bottles utilised for
containing alcoholic and non-alcoholic drinks, beverages, soft drinks, and water. In the
case of imported beverages, this tax is levied upon their customs clearance for home use.
For each plastic bottle levied with this tax, the rate is up to two cents of a United States
dollar (USD 0.02). This amount is fully reimbursed to whoever collects, delivers, and
returns the bottles.
Taxpayers of this tax are the bottlers of drinks contained in plastic bottles and importers
of drinks in plastic bottles.
Milk products and medicines filled in plastic bottles are exempt from this tax.
This tax is not considered as a deductible expense for CIT purposes.
Environmental Tax on Vehicle Pollution (ETVP)
ETVP is levied to offset environmental pollution caused by the use of ground

transportation motor vehicles.
Taxpayers of ETVP are individuals, undivided inheritances, and national or foreign
corporations who are proprietors of ground transportation motor vehicles.
There are several vehicles exempt from this tax, including government vehicles, public
transportation of passengers, school buses, taxis, ambulances, moving hospitals,
vehicles regarded as classical, electric vehicles, and those destined for the use and
transportation of handicapped individuals.
The taxable base of the ETVP corresponds to the cylinder capacity of the vehicle motor,
expressed in cubic centimetres, and a percentage related to the potential level of
environmental pollution provoked by motorised vehicles in connection with the vehicles
motors years of antiquity.
Social Security contributions
Employers and employees pay contributions to the Social Security at the rates of 12.15%
and 9.45%, respectively, on the minimum monthly taxable wages as established for
the different contributing categories by the Social Security. Such categories are revised
annually.
Labour profit sharing
Although it is not considered a tax, companies are obligated to pay 15% of their pre-tax
earnings to their employees. This payment is considered a deductible expense for CIT
computation purposes.
Municipal taxes
Municipal asset tax
The municipal asset tax is levied on all individuals and companies required to keep
accounting records in accordance with Ecuadorian tax legislation. This tax is levied
annually at a rate of 1.5 per thousand (or 0.15%) of total assets less current and
contingent liabilities, as shown on the balance sheet.
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Municipal real estate tax
The city governments assess an annual municipal property tax , which ranges between
0.25 per thousand and 5 per thousand (0.025% to 0.5%) of the commercial value of the
property, as determined by valuation carried out by the city government, for both urban
and rural properties (rural property is taxed at a maximum of 0.3%).
Municipal tax on capital gain in the transfer of real estate (Plusvala)
The real estate transfer tax applies to the transfer of real estate. It is taxed at 10% of
profits.
Branch income
Distributed or retained branch profitsare taxed at a 22% rate. No further taxes are
payable when profits are remitted to headquarters, except if located in a tax haven
country. Re-invested profits are levied at a 12% CIT rate. Companies must increase their
share capital within the following fiscal year to be beneficiaries of the CIT rate reduction.
Countries and territories considered as tax havens by tax authorities

Albania
Andorra
Angola
Anguilla
Antigua and
Barbuda
Aruba
Ascension Island
Azores Islands
Bahamas
Bahrain
Barbados
Belice
Bermudas
Brunei
Darussalam
Bulgaria
Cabo Verde
Campione
Ditalia
Canaria
Cayman Islands
Chipre
Christmas
Islands
Cocos Island or
Keeling
Commonwealth
of Dominica
Cook Islands
Djibouti
Emirates of
Saudi Arabia
Estonia
French Polinesia
Gibraltar
Granada
Greenland
Guam
Guernsey,
Jersey,
Alderney, Great
Stark Islands,
Herm, Little
Sark, Brechou,
Jethou Lihou
Guyana
Hong Kong
Ireland
Kingdom of
Jordania
Kingdom of
Swaziland
Kingdom of
Tonga
Kiribati
Kuwait
Labuan
Liberia
Liechtenstein
Luxembourg
Macao
Macedonia
Madeira
(Portugal)
Maldivas
Malta
Man Islands
Marshall Islands
Mauricio
Mnaco
Montenegro
Montserrat (UK)
Myanmar
Nauru
Netherlands
Antilles
Nigeria
Niue
Norfolk Islands
Oman
Ostrava
Pacific Islands
Palau
Panama
Pitcairn
Puerto Rico
Qatar
Qeshm Islands
Saint Elena
Saint Kitts and
Nevis Islands
Saint Lucia
Saint Marino
Saint Peter
Islands and
Miguelon
Saint Vincent
and the
Grenadines
Salomon Islands
Samoa
Serbia
Seychelles
Sri Lanka
Svalbard Islands
Tokelau
Triesta (Italy)
Trinidad and
Tobago
Tristan Da
Cunha
Tunisia
Turks and Caicos
Islands
Tuvalu
United States *
Vanuatu
Virgin Islands
(British)
Virgin Islands
of the United
States
Yemen
* Delaware, Nevada, Wyoming, and Florida (under certain conditions).
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Inventory valuation
The valuation of inventories is not specifically treated in the tax law, IFRS must be
applied.
Capital gains
Occasional gains from stock sales are tax exempt, and gains from investment funds and
investment trusts are CIT exempt, as long as the income has been taxed at source. Gains
on the sale of fixed assets are added to the taxable base and levied at regular CIT rates,
except gains derived from occasional sales of real estate, which are tax exempt.
Dividend income
Dividends received by a resident company or foreign company, not domiciled in a tax

haven, from a resident company are tax exempt.
Interest income
In general terms, interest income is considered as part of the CIT base for Ecuadorian
entities.
Foreign income
Foreign-source income is considered exempt for tax purposes if the company

demonstrates that the income tax was paid abroad. Income generated in tax haven
jurisdictions is not considered to be part of this exemption and should be added to
regular income.
Deductions
As a general rule, payments on operations that exceed USD 5,000 should be made
through an institution of the financial system; otherwise, such operations will become
non-deductible.
Straight-line depreciation applies, at rates specified by law. The director of the Internal
Revenue Service of Ecuador can authorise higher rates of depreciation in cases such as
obsolescence, excessive use, and faster than expected wear-out of assets.
Annual depreciation rates are as follows:
Asset
Real estate (except land), aircraft, naval crafts, and similar property
Facilities, machinery, equipment, and furniture
Vehicles, trucks, and tractors used for construction
Computer equipment and software

5
10
20
33.33
Depreciation rates apply to the cost of assets.

In the case of vehicles, if, at the time of purchase of the vehicle, its appraisal exceeds
USD 35,000, the deductibility on the excess will not apply, unless it is an armoured car
or a vehicle exempt from the tax on vehicles. The limitation on the deductibility will also
not apply in the cases of taxpayers that have car rental business as their only activity.
Intangible assets are amortised either within the terms specified in the contract or over a
20-year period.
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Goodwill
There are no specific rules in Ecuador about goodwill. However, it can be amortised as
an intangible asset.
Organisation, experimentation, and preoperational expenses are to be amortised over

five years at the rate of 20% per year.
Interest expenses
Interest on debts incurred for business purposes are deductible.

In general, foreign loan interests are deductible for CIT purposes to the extent that the
credits are registered before the CBE and the interest rates do not exceed the referential
rates established by the CBE.
Interest paid for loans granted by a related party are subject to withholding tax (WHT)
at 22%.
According to thin capitalisation rules, interest payments for foreign loans granted by
a related party are deductible only if the foreign debt does not exceed 300% of the
entitys equity. In case of branches, the ratio applies considering the total of the assigned
equity. Credits granted by the head office to its branch are not considered as loans;
consequently, any financial cost related to it is non-deductible.
If the above mentioned criteria are not met at the moment of the registration of the
loan before the CBE, the excess will not be deductible for CIT purposes. This does not
eliminate the obligation of the WHT on the total amount of the interests.
Interest paid on loans obtained from non-resident financial institutions is deductible and
not subject to WHT unless the interest rate is higher than the referential interest rate
established by the CBE. In such cases, any excess is subject to a 22% WHT. The above
mentioned rules do not apply for financial entities domiciled in tax haven countries; in
such cases, interest expense is non-deductible.
Bad debt
If the bad debt provision is less than 1% of the portfolio granted in the year, it will be
deductible. Any excess will be non-deductible.
Payments for charitable contributions are non-deductible for CIT purposes.
Fines and penalties
Interest and fines paid as penalties imposed on late payments of tax obligations and on
CIT payments are not deductible for CIT calculation purposes.
Taxes
Taxes, rates, and levies related to the generation of taxable income, as well as
contributions to the Social Security system, are deductible.
The carryforward of losses is allowed to a maximum of five years, with an amortisation

limit of 25% per year over the taxable base. There is no loss carryback.
In most cases, payments made abroad are deductible, as long as income taxes have
been withheld (at the rate of 22% over the taxable base). Professional fees, royalties,
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commissions, or any payment made abroad is subject to WHT at a rate of 22% over the
taxable base. Payments on imports are deductible and are not subject to WHT.
Group taxation
Group taxation is not permitted in Ecuador.
Transfer pricing
The transfer pricing regime in Ecuador is based on the Organisation for Economic Cooperation and Development (OECD) guidelines. Related party transactions must be
carried out at arms length. Formal documentation requirements exist.
Thin capitalisation
A thin capitalisation rule on foreign loans granted by related parties at a 3:1 ratio over
equity must be considered. For branches of a foreign corporation, only capital must be
taken into account.

Foreign tax credit
There are no provisions in Ecuador for a foreign tax credit. In general terms, income
taxed abroad is considered as exempt income, with some special exceptions.
Handicapped employee and new employee hiring incentives
An amount equivalent to 150% and 100% of remunerations of handicapped and new

employees, respectively, can be considered an additional deduction for income tax
calculation purposes. In the case of handicapped employees, the deduction will apply
over the excess of the minimum handicapped employees that the employeris obligated
to hire. New employees must be working with the company for at least six months.
CIT exemptions
Investments made by new companies located outside the cities of Quito and Guayaquil,
in specific sectors determined by law, will have a five year CIT exemption.
Tax credit on remittance tax paid
5% remittance tax paid on imports of raw material and goods included in a list issued
by the authorities and used for the production of other goods and services can be
considered as a tax credit for CIT computation purposes.
Withholding taxes
Prepaid dividends are subject to a 22% WHT.
Dividends paid to non-resident entities generally are not subject to WHT. However,
dividends paid to non-resident entities in tax haven countries are subject to 13% WHT at
source.
Interest paid on loans obtained from non-residents is subject to a 22% WHT unless
reduced by tax treaty. Royalties paid to a non-resident are subject to 22% WHT unless
reduced by tax treaty.
Revenues from occasional services provided by non-resident individuals are levied
at 22% WHT. Payments made abroad to non-resident individuals and companies are
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subject to a 22% WHT. Other payments made abroad, other than dividends or profits,
are subject to a 22% WHT.
Periodically, the Internal Revenue Service of Ecuador establishes WHT percentages on
local payments, which are not greater than 10%. Current rates are 1%, 2%, 8%, and 10%
withholding. Specifically:

Dividend payments to resident individuals are subject to a 0% to 10% WHT.

Dividend payments to resident companies are subject to a 0% WHT.
Interest payments to resident individuals are subject to a 2% WHT.
Interest payments to resident companies are subject to a 0% to 8% WHT.
Royalty payments to resident individuals are subject to an 8% WHT.
Royalty payments to resident companies are subject to a 2% WHT.
Tax treaties
As a member of the Andean Community, Ecuador has adopted Decision 578, which
provides relief from double taxation for individual or company members. Furthermore,
Ecuador has similar tax treaties with the countries provided in the table below. A treaty
with China is expected to be in force from financial year 2015.
Recipient
Non-treaty
Treaty:
Andean Community
Belgium
Brazil
Canada
Chile
France
Germany
Italy
Korea, Republic of
Mexico
Romania
Spain
Switzerland
Uruguay
Dividends (%)
0
0 to 10
Interest (%)
0 to 8
2
Royalties (%)
2
8
0/13
22
22
0
0
0
0
0
0
0
0
0
0
0
0
0
0
22
10
15
15
15
10/15
10/15
10
12
10/15
10
5/10
10
15
22
10
15/25
10/15
10/15
15
15
5
5/12
10
10
5/10
10
10/15
Tax administration
Taxable period
The fiscal year is the calendar year.
Tax returns
The tax system operates on the basis of self-assessment, with subsequent inspection by
the taxauthorities.
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Tax filing deadlines begin on 10 April and continue up to 28 April. The tax return due
dates are determined by the ninth digit of the companys Tax Identification Number
(TIN).
Payment of tax
Local tax authorities have established that for CIT purposes, and its corresponding prepayments, companies are obligated to follow IFRS accounting principles.
Corporations are required to keep accounting records and must makeCIT prepayments
in two equal instalments in July and September, based on the following calculation:
The sum of 0.4% of the taxable income, 0.4% of total assets, 0.2% of total equity, and
0.2% of deductible expenses from the last fiscalyear.
The final CIT obligation cannot be lower than the total amount of the tax prepayment
calculated; there are minimum exceptions to this rule. The final CIT payment is due
between 10 April and 28 April.
Tax audit process
In general terms, tax authorities look at the consistency of the information delivered
by the taxpayers and information reported by third parties. Tax authorities can issue
communications in the order to require explanations on any detected inconsistency.
Additionally, accounting inspections can be performed.
Fiscal authorities have three years from the date of filingto start proceedings for tax
audits or assessment and collection of taxes.
The statute of limitations is extended from three to six years if the corresponding tax
returns have not been filed or are incompletely filed. A tax audit can be reopened,
verified, or amended within one year from the date of completion.
Tax authorities usually focus on substance, formal compliance requirements, and

consistency of information filed.
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Egypt
PwC contact
Abdallah ElAdly
Plot No 211
Second Sector
City Centre
New Cairo 11835, Egypt
Tel: +20 2 27597887
There have been no significant corporate tax developments in Egypt during the past
year.
Pending legislation
Please note this information is current as of 1 June 2014. Typically, pending legislation is
announced in June or July. Please visit the Worldwide Tax Summaries website at
www.pwc.com/taxsummaries to see any significant corporate tax developments that
occurred after 1 June 2014.

Resident companies are taxed on worldwide income. Non-resident corporations and
partnerships pay tax on income derived from their permanent establishments (PEs) in
Egypt.
The corporate income tax (CIT) rate in Egypt is 25% on the net profits of a company.
The above rate applies to all types of business activities except for oil exploration
companies, whose profits are taxed at 40.55%. In addition, the profits of the Suez Canal
Authority, the Egyptian Petroleum Authority, and the Central Bank of Egypt are taxable
at a rate of 40%.
Local income taxes
In Egypt, there are no other local income taxes for corporate income other than those
mentioned throughout this summary.
Corporate residence
Foreign corporations and partnerships are classified as residents of Egypt if they meet
one of the following conditions:
The entity is established according to the Egyptian law.
The government or a public authority owns more than 50% of the capital of
theentity.
The effective place of management is in Egypt.
The executive regulations of the law indicate that Egypt is considered as the effective
place of management if the entity meets any two of the following conditions:
Daily managerial decisions take place in Egypt.
Members of the board of directors hold their meetings in Egypt.
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At least 50% of the board members or managers reside in Egypt.
The major shareholders (owners of more than 50% of the shares or voting rights)
reside in Egypt.
The PE concept is defined in the Income Tax Law as follows:

Headquarters.
Branch.
Building used as sale outlet.
Office.
Factory.
Workshop.
Places of extraction of natural resources.
Farms.
Building site, construction or assembly point, installations, supervisory activities of
the same.
An agent who has the power to ratify contracts on behalf of a foreign company.
An independent broker or agent who is proved to have dedicated most of ones time
during the year in the interest of a foreign company.
A foreign company that is deemed to have a PE risk, according to the Egyptian
Companies Law, should incorporate a legal entity in Egypt.
There are several legal forms existing under the Egyptian Companies Law from which a
foreign company can choose to incorporate, and these are: joint-stock company, limited
liability company, branch, or a representative office.
Other taxes
Sales tax
The standard sales tax rate is 10% of the value of commodities (except for those referred
to in special schedules of the law) and 5% to 10% for specific services. Some examples
of the commodities subject to sales tax rates other than the standard 10% rate are as
follows:
Cement: 5%.
Specific types of televisions and fridges: 25%.
Air conditioners: 25%.
The Sales Tax Department is responsible for assessing the tax on the sales of locally
produced goods and imported goods, except for those exempted by a special decree.
Consequently, all natural persons and legal entities are required to collect general sales
tax and remit it to the Sales Tax Department. This includes manufacturers and providers
of taxable services and every importer of commodities or taxable services.
There are some amendments that might be made to the sales tax law. However, they are
not approved yet. The timeframe regarding the introduction of a value-added tax (VAT)
is still uncertain.
Customs duties
The liability for customs duty rests with the person who is importing the goods from
abroad.
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Customs duty rates on imported goods range from 5% to 40%, with the exception of
vehicles for which different rates apply.
Where entities import machines and equipment as capital assets, and to establish the
companys project, the machines and equipment will be charged customs duty at 5%.
Component parts, which are imported to be assembled in Egypt, are assessed customs
duty based on the complete product. Then, it is reduced by a percentage ranging from
10% (if the local content of the final product is less than 30%) to a maximum of 90% (if
the local content exceeds 60%).
Machines, equipment, and similar capital assets (with the exception of private motor
cars) imported on a temporary basis are subject to fees at 20% of the original customs
duty for each year or fraction of a year during which they remain in Egypt until they are
exported.
There is also a proposed new law regarding this issue, which is currently at the draft
stage.
Excise taxes
There are no excise taxes in Egypt.
Real estate taxes
The Real Estate Tax Law takes into consideration the different variables that can affect
the value of a property, such as location, value of similar buildings, and the economic
situation of the district in which the property is located. This is to be updated every five
years.
Real estate tax is levied annually on all constructed real estate units. This covers land
and building, excluding plant and machinery.
Such tax is assessed based on the rental value of the land and building, and these value
assessments are set by the committees, after approval of the Minister or whomever the
Minister delegates, and published in the Official Journal. Based on the announcement,
any taxpayer can appeal the rental value assessment.
The real estate tax rate is 10% of the rental value, and the calculation of the rental value
differs for residential units and non-residential units. Specific percentages of deductions
are provided by the law to account for all the expenses incurred by the taxpayer,
including maintenance costs.
The new Real Estate / Property Tax Law is not yet applicable.
Stamp tax
There are two distinct types of stamp tax, which are imposed on legal documents, deeds,
banking transactions, company formation, insurance premiums, and other transactions,
as follows:
The nominal stamp tax is imposed on documents, regardless of their value. The tax
rate for items such as contracts is 0.9 Egyptian pounds (EGP) for each paper.
Percentage or proportionate stamp tax is levied based on the value of transactions.
An annualproportional tax at the rate of 0.4% is imposed on thehighest debit balance
in each quarterof credit facilities and loans and advances provided by Egyptian banks
or branches of foreign banks during the financial year. The bank and the customer each
bear half of the tax.
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Loans from other establishments are not subject to this tax.
The law also levies a 0.1% tax on both the seller and the buyer for any Egyptian or
foreign securities sale transactions, either listed on the stock exchange or not, excluding
Treasury bills and bonds. The Misr for Central Clearing, Depository, and Registry
(MCDR) or the stock exchange administration are entities obligated to collect the tax
due resulting from all sales and purchase transactions and remit it to the competent tax
authority within the first 15 days of the month following the sale transaction.
Stamp tax is imposed on advertisements at the rate of 20% (previously 15%).
Social insurance (employers contribution)
The social contribution of the employer is 26% of the basic salary (up to EGP 987.5) and
24% of the variable salary (up to EGP 1,590).
Branch income
Branches of foreign corporations operating in Egypt receive tax treatment identical to
that of corporate entities for the results of their activities in Egypt.
A branch, but not a subsidiary, may deduct a head office charge of an amount of up to
10% of its taxable income.
Inventory valuation
Egyptian generally accepted accounting principles (GAAP) should be applied to

inventory valuation, and all methods that are acceptable by Egyptian GAAP can be used.
The methods acceptable are the same as those acceptable under International Financial
Reporting Standards (IFRS).
Capital gains
A foreign company is taxed on all capital gains realised in Egypt under the condition that
the entity is deemed to have a PE in Egypt. However, capital gains on the sale of Egyptian
securities listed on the Egyptian Stock Exchange are nottaxable.
Capital gains are not taxed separately; they are considered as part of the companys
income and taxed accordingly (i.e. at the 25% CIT rate) after deducting all tax
Dividend income
Dividends distributed by a company residing in Egypt are not subject to corporate taxes.
Conversely, dividends that non-resident companies distribute are subject to the Egyptian
corporate tax, after deducting foreign taxes paid abroad.
Stock dividends
Stock dividends receive the same treatment as ordinary dividends.
Interest income
Interest expenses are deducted from interest income when calculating the interest
income to be included in taxable income.
Rent/royalty income
Rent/royalty income are not taxed separately; they are considered as part of the
companys income and taxed accordingly (i.e. atthe 25% CIT rate).
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Foreign income
Income from any source, domestic or foreign, received by a corporation within Egypt
is subject to corporate tax. The scope of tax covers the activities carried out inside and
outside Egypt, which are administered or managed within Egypt.
There is no provision for deferring income earned abroad.
Deductions
In order for expenses to be acceptable for tax deduction, such expenses must be:
actual and supported by documents
business related, and
necessary for performing the companys activity.
The tax law set the depreciation and amortisation rates for tax purposes to the following:
5% of the cost of purchasing, establishing, developing, and renovating buildings and
establishments is deductible based on the straight-line method.
10% of the cost of purchasing, developing, and improving intangible assets is
deductible based on the straight-line method.
Computers, information systems, software, and data storage sets are depreciated at a
50% rate on a declining-balance method.
All others assets are depreciated at a rate of 25% of the depreciation basis for each
fiscal year, on a declining-balance method.
Accelerated depreciation
A company may deduct 30% accelerated depreciation from the cost of new or used
machines and equipment used in industries during the first fiscal year of their
employment.
Goodwill
According to Article 25 of the Egyptian Income Tax Law, goodwill is amortised at the
rate of 10% using the straight-line method.
Start-up expenses
Start-up expenses are tax deductible, and the whole amount can be amortised for the
first year.
Interest expenses
Interest expenses are deductible for tax purposes after offsetting any tax-exempt
interestincome.
Interest expense deductions are only allowed if the following conditions are fully met:
The interest rate does not exceed twice the discount rate as determined by the Central
Bank of Egypt at the beginning of the calendar year in which the tax year ends.
The interest expense is in return for loans complying with the local thin capitalisation
rule: 4:1 debt-to-equity ratio.
The Egyptian transfer pricing rules (i.e. arms-length principle) must be followed (see
Transfer pricing in the Group taxation section for more information). In case of a tax
audit, if the interest rate isnt proven to be at arms length, the tax authority has the
right to adjust this price to arrive at a neutral price and re-calculate the taxes due
accordingly.
The loan is business related.
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Bad debt
According to Article 28 of the Egyptian Income Tax Law, deduction of bad debts shall
be allowed, subject to submitting a report from the external auditor indicating the
fulfilment of the following conditions:
The company is maintaining regular books and records.
The debt is related to the company activities.
That debt value should have been previously included within the company accounts
and records.
The company shall have taken serious procedures for settlement of such debt and has
been unable to collect it after 18 months from its due date.
Donations to the government are tax deductible. Donations to Egyptian charities are also
deductible, but only up to 10% of taxable income.
Fines and penalties
Financial fines and penalties paid by the taxpayer because they or one of their
subordinates has committed a deliberate felony or misdemeanour are not deductible.
Taxes
Income tax payable according to the Income Tax Law is not deductible.
The following other items are not deductible:

Reserves and appropriations of all different types.
Profit shares, distributed dividends, and the attendance fees paid to shareholders for
attending the general assemblys meetings.
Compensation and allowances obtained by the chairmen and board members.
Workers profit share to be distributed according to the law.
A company may carry losses forward for a period not to exceed five years. Nevertheless,
if a change occurs in the ownership of its capital exceeding 50% of the shares, stocks, or
the voting rights, if the company is either a Joint Stock Company or a Company Limited
by Shares whose shares are not listed on the Egyptian Stock of Exchange, and if the
company changes its activity, the company cannot carry the losses forward.
In general, companies cannot carry losses back, except for contracting companies, which
are allowed a loss carryback period of five years.
Payments to head office
A branch may deduct head-office charges of up to 10% of its taxable income. Moreover,
the branch or subsidiary should withhold taxes before the payment of interest, royalties,
and service fees to non-resident foreign corporations or affiliates.
Group taxation
The Egyptian tax law treats every company in a group of companies as a separate legal
entity. Thus, affiliated companies or subsidiaries cannot shift the profits/losses within
the group.
Transfer pricing
Transfer pricing rules follow the arms-length principle, specifying that any transaction
between related parties should be at arms length (i.e. marketvalue).
Egypt
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The law does not specify penalties with regard to transfer pricing. However, the law
states that the Egyptian tax authorities may adjust the pricing of transactions between
related parties if the transaction involves elements that would not be included in
transactions between non-related parties, and whose purpose is to shift the tax burden
to tax exempt or non-taxable entities. Where this is the case, the tax authorities may
determine the taxable profit on the basis of the neutral price. The acceptable methods
for determining such neutral price, according to the rule of the law, are as follows:
Comparative free price (same as Comparable Uncontrolled Price method [CUP]).
Total cost with an added margin of profit (same as Cost Plus method).
Resale price.
On 29 November 2010, the Egyptian Tax Authority launched the Transfer Pricing
Guidelines (TP Guidelines). The TP Guidelines are being issued as a series of parts, the
first part of which was issued in final version to the public and provides guidance on the
arms-length principle, how to establish comparability, choosing the most appropriate
transfer pricing method(s), and documentation requirements. The coming parts
should cover more complex transfer pricing topics, specifically transactions involving
intellectual property, intra-group services, cost contribution arrangements, and
advanced pricing agreements.
Taxpayers are required to prepare contemporaneous documentation studies to support
the arms-length nature of their controlled transactions. The Egyptian tax authority
does not require the submission of transfer pricing documentation studies with the tax
return; rather, they are required to be available upon request in a tax audit. Studies are
acceptable in English, but a translation may be requested from the taxpayer.
The Egyptian tax authority explained that TP Guidelines will be utilised as a practical
guide to assist taxpayers and tax inspectors in understanding how to implement and
examine transfer pricing transactions. Egyptian TP Guidelines were compared to
the Organisation for Economic Co-operation and Development (OECD) by an OECD
representative and were found to be similar.
Thin capitalisation
The Egyptian thin capitalisation rule provided by the Egyptian Income Tax Law dictates
that the debt-to-equity ratio is 4:1. Accordingly, the Law disallows the deductibility of
debit interests of Egyptian companies on loans and advances if such loans and advances
are in excess of fourfold the equity average (which is calculated according to the
financial statements prepared pursuant to the Egyptian accounting standards).
The debit interest includes all amounts chargeable by the company in return for loans,
advances of any kind obtained thereby, bonds, and bills. Loans and advances include, for
purposes of this item, bonds and any form of financing by debts through securities with
fixed or variable interest.
For determining the equity, the following items represent the basis for the calculation:
the paid-up capital in addition to all reserves and dividends reduced by retained losses,
provided that the differences of the adjusted account is not included in the reserves
account and is determined to be non-taxable. In case of retained or carryforward losses,
they must be used to reduce retained profits and reserves solely; the percentage is
calculated on the basis of total loans and advances in proportion to the remaining equity
amount after deducting the retained losses with a minimum of the paid-up capital.

Egypt offers no specific tax incentives.
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Foreign tax credit
The foreign tax paid by a resident company on its profits earned abroad is deductible
from the tax payable in Egypt; however, losses incurred abroad are not deductible.
Withholding taxes
A corporation paying invoices must withhold 0.5% to 5% of payments, depending on
the services and commodities, to local taxpayers and remit them quarterly to the tax
department.
Payments of interest, royalties, and services by a domestic corporation to foreign or nonresident bodies are subject to withholding tax (WHT) as follows.
Interest
Interest on loans with a three-year term or more entered into by private sector
companies is exempt from WHT, while loans of less than three years are subject to 20%
WHT on interest. However, an applicable double tax treaty (DTT) between Egypt and
the foreign country may result in the reduction of such tax rate. Please see below for the
ministerial decree affecting the treatment of interest and royalty payments.
Royalties
Royalty payments are subject to the 20% WHT. However, an applicable DTT signed
between Egypt and the foreign country may result in a reduction in this rate. Please see
below for the ministerial decree affecting the treatment of interest and royalty payments.
Service payments
Service payments are subject to the 20% WHT. However, an applicable DTT signed
between Egypt and the foreign country may result in the exemption of these payments if
the services are performed abroad and not through PE in Egypt.
For payments withheld on behalf of non-resident entities, tax shall be remitted to the tax
authority the day following the withholding of the amount (previously within 15 days of
the end of month in which the payment takes place).
Tax treaties
Egypt has concluded DTTs with about 50 countries, which could change the tax
treatment of transactions carried out between Egyptian entities and residents of a treaty
country.
Recipient
Non-treaty
Treaty:
Albania
Algeria
Austria
Bahrain
Belarus
Belgium
Bulgaria
Canada
China
Cyprus
Czech Republic
Denmark
Interest (%)
20
Royalties (%)
20
10
5
15
10
15
15
15
10
15
15
15
10
10
15
15
15
15
8
10
15
20
Egypt
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Recipient
Finland
France
Interest (%)
15
15
Georgia
Germany
Greece
Holland
Hungary
India
Indonesia
Iraq
Ireland
Italy
Japan
Jordan
Korea
Kuwait
Lebanon
Libya
Macedonia
Malaysia
Malta
Morocco
Netherlands
Norway
Oman
Pakistan
Palestinian Territories
Poland
Romania
Russia
Serbia & Montenegro
Singapore
South Africa
Spain
Sudan
Sweden
Switzerland
Syria
Tunisia
Turkey
Ukraine
United Kingdom
United States
Yemen
10
15
10
12
15
20
15
20
10
20
20
15
15
10
10
10
15
10
20
12
20
12.50
15
15
12
15
10
15
15
12
10
20
15
15
15
10
10
12
10
15
15
10
Royalties (%)
20
15%franchise
15% for other royalties
10
15
10
12
15
20
15
16
10
15
15
20
15
10
5
10
15
12
10
12
15
15
15
15
12
15
15
15
15
15
12
10
14
12.50
20
15
10
12
10
15
15
10
Procedures for applying the WHT on payments to non-residents
A ministerial decree dictates that the reduced rate of WHT on interest or royalties
provided by an applicable DTT should not be automatically applied. The rate of 20%
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(Egyptian tax rate) should be imposed upon deduction. However, under certain
conditions, the foreign recipient of payments will be able to get a refund for the amount
resulting from the variance between the normal rate of 20% and the reduced treaty rate.
Certain documents should be submitted to the tax authority along with the refund
claim.
A special unit responsible for interest and royalty WHT refunds is tasked withreviewing
each refund case and with issuing refund letters (subject to compliance with the
requirements of the 2009 Ministerial Decree). A refund letter is required to be able to get
a refund of excess WHT from the tax office to which the taxes were actually paid.
Note that free zone entities, which are considered tax exempt, are obligated to withhold
tax when dealing with non-resident entities and shall remit the tax to the tax authority.
Tax administration
Taxable period
The tax year is the financial year of the taxpayer.
Tax returns
The taxpayer is required to assess taxes due for every financial year and settle them with
the tax return.
The corporate tax return is due within four months from the end of the financial year; so
if a companys financial year ends 31 December, then the tax return has to be filed before
the end of April of the following year.
Payment of tax
Advance payments are deducted from taxes assessed per the tax return, and the balance
is payable in a lump sum at the date of submitting the tax return.
The advance payment (i.e. WHT) is submitted on a quarterly basis.
Penalties
If the taxpayer included a tax amount in the tax return that is less than the finally
assessed tax, the taxpayer is liable to a fine based on the non-included percentage, as
follows:
5% of the tax payable on the non-included amount if such amount is equivalent to
10% up to 20% of the final tax due.
15% of the tax payable on the non-included amount if such amount is more than 20%
up to 50% of the final tax due.
40% of the tax payable on the non-included amount if such amount is more than 50%
of the final tax due.
Tax audit process
The audit cycle proceeds as follows:
Inspection
The tax authority inspects the company based on its documents and records in order
to assess the total tax due on the company and determines the difference in tax due as
per the company declaration and the tax authority assessment. The authority issues an
assessment including the total tax due on the company. If the company objects to the
inspection result, the dispute is transferred to the Internal Committee.
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Internal Committee
The dispute is transferred to the Internal Committee to discuss the dispute points that
arose from the inspection further to issue a modified assessment based on its opinion. If
the company objects to the Internal Committee result, the dispute is transferred to the
Appeal Committee to review the dispute points arising from the Internal Committee.
Appeal Committee
The Appeal Committees decision is final and binding on the company and the tax
department unless a case is appealed by either of them at the court within 30 days of
receiving the decision. Based on the fact that the total taxes due on the assessment as per
the Appeal Committee are considered final if they are not paid within the appropriate
period, there will be penalties for the late payment.
Court
If the decision of the Appeal Committee is not satisfactory for either party, the case will
be transferred to the court system, which is considered the final stage of the disputes.
Normally, the court will appoint an expert witness to investigate the case and prepare a
report. The court process usually takes a long period of time.
The statute of limitations is five years according to the Egyptian Income Tax Law and is
extended to be six years in case of tax evasion.
The most important topic for tax authorities is transfer pricing.
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El Salvador
PwC contact
Ramon Ortega
Scotiabank Building
3rd floor
Santo Domingo
Corner of John F. Kennedy and lope de Vega Avenues
Santa Domingo, Dominican Republic
Tel: +809 567 7741
On 11 November 2013, the Constitutional Chamber of the Supreme Court of El Salvador
declared the Income Tax Law provisions implementing the alternative minimum tax (a
1% tax on gross income) unconstitutional. As a result, the alternative minimum tax is no
longer in force.

The corporate income tax (CIT) rate is 30% and this rate is applicable on the total
amount of the companys revenues.
CIT is based on the principle of territoriality, and, by general rule, taxes are paid
on goods located, activities realised, and capital invested in El Salvador as well as
on services rendered or utilised in the country. Nevertheless, there is a special rule
regarding securities and financial instruments, since such income is considered to be
obtained in El Salvador if the issuing entity is domiciled in El Salvador.
Taxable income is equal to gross income net of costs and expenses considered necessary
for generating and maintaining the related source of income and other deductions
allowed by law. Gross income is comprised of income or profits collected or accrued,
either in cash or in kind, from any sources in El Salvador.
Corporations are required to follow the accrual method of accounting, and income is
computed for 12-month periods beginning on 1 January and ending on 31 December of
each year.
Income tax advance payment
A 1.75% tax is applied to gross revenues accrued. This tax is paid monthly as an advance
payment that is applied against the CIT at the end of the year.
Local income taxes
There is a municipal tax related to taxpayers income. This tax depends on the location
of the operations where the taxpayer performs its activity.
Corporate residence
A company incorporated in El Salvador is a resident entity in the country for tax
purposes and subject to CIT on Salvadorian-source income. Also, branches from
foreign companies authorised in El Salvador and entities operating as a permanent
establishment (PE) are considered resident entities for tax purposes and subject to CIT
on Salvadorian-source income.
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The general rule for the determination of the corporate domicile is that it will be the one
established on the incorporation document.
The PE for a company is determined by a fixed place of business with installed

infrastructure owned or leased by the company, with employees hired in the country,
and where the taxpayer performs its activity.
Other taxes
VAT (i.e. Impuesto al Valor Agregado or IVA) is levied at a rate of 13% over the taxable
amount. As a general rule, the taxable amount is the price or remuneration agreed upon
by the parties. For imports, the taxable amount is the customs value.
The following transactions are subject to VAT when performed within the Salvadoran
territory:
Transfer/sale of tangible movable goods.
Withdrawal of tangible movable goods from the inventory made by the company for
self-consumption by its partners, directors, or personnel.
Import of goods and services.
The supply of services of any type, whether permanent, regular, continuous,
or periodic, including technical advice and project designs; lease and sublease
agreements over tangible goods; lease and sublease agreements over real estate
for commercial purposes; lease of services in general; construction of real estate
properties or building contracts; auctions; freight, whether inland, air, or maritime;
and lease, sublease, and any form of use regarding trademarks.
The following imports are exempt from VAT:
Imports made by diplomats and consulate representatives of foreign nations
with presence in the country according to international agreements adopted by
ElSalvador.
Imports made by international organisations to which El Salvador is a party.
Travellers luggage according to customs regulations.
Donations to non-profit organisations.
Imports made by municipalities, if the goods imported are for the public benefit of the
community.
Imports of machinery by taxpayers duly registered for this purpose, which will be
part of the taxpayers fixed assets.
Vehicles for public transportation, which can only be transferred after five years.
The following services are exempt from VAT:
Health services rendered by public institutions.
Lease and sublease of real estate properties for housing.
Services rendered under a labour relationship, as well as those rendered by public
andmunicipal employees.
Cultural public performances authorised by competent authorities.
Educational services rendered by authorised entities, i.e. Ministerio de Educacin
(the Ministry of Education).
Interest on deposits and loans provided by local financial institutions or entities
registered at the Salvadoran Central Bank (BCR).
Interest on securities issued by the government and/or private entities traded
through a stock exchange.
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Water supply by public institutions.
Public transportation.
Insurance premiums covering individuals, and reinsurance in general.
VAT is levied on exports at a rate of 0%. Foreign-source income is not subject to VAT.
VAT paid by a registered taxpayer company on its purchases (tax credits) is credited
against VAT charged to its customers (tax debits) on a monthly basis.
VAT returns are filed on a monthly basis within the first ten working days of each month
following the period under taxation.
Customs duties
In El Salvador, the Arancel Centroamericano de Importacin (Central America Import

Duty) is applied, which is constituted in the Sistema Arancelario Centroamericano (SAC)
(Duty Central American System) and its correspondent duties for import.
All duties for import are ad valorem and are applied at the cost, insurance, and freight
(CIF) value of the merchandise. The duty is common for all the countries in Central
America.
Excise taxes
Tax on simple or sweetened soft drinks
An ad valorem tax on simple or sweetened soft drinks is levied at the rate of 10% over
the selling price to the public as suggested by the manufacturer, importer, or distributor,
excluding VAT and returnable bottletaxes.
Tax on the production and importation of alcohol and spirits
A tax is levied on domestically produced or imported alcohol and spirits at rates ranging
from 0.09 United States dollars (USD)to USD 0.16 for each 1% of alcohol volume per
litre or in proportion thereof. Spirits and alcohol also have an ad valorem tax levied at
the rate of 8% over the suggested selling price to the public, excluding VAT.
Tax on tobacco products
A tax is levied at USD 0.005 per cigarette, cigar, little cigarette, or other tobacco product.
Also, an ad valorem tax is levied at the rate of 39% over the suggested consumer selling
price to the public, excluding VAT.
Tax on transfer of real estate property
A 3% tax is applied to transfers of real estate property. This tax is applied to the amount
by which the value of the real estate exceeds USD 28,571.43.
Stamp taxes
No stamp taxes are assessed as the pertinent law was abrogated in 1992.
Capital gains tax
Capital gains are taxed at a flat rate of 10% of net profits, except when gains are realised
within 12 months following the purchase date, in which case they are taxed as ordinary
income. Capital losses can only be offset against capital gains. Whenever capital losses
exceed capital gains, the remaining balance may be carried forward to future capital
gains within a five-year period.
Annual business tax
Companies are required to register themselves with the Registry of Commerce and pay
an annual business licence fee assessed on the companys assets, as follows:
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Assets (USD)
2,000 to 57,150
57,151 to 114,286
114,287 to 228,572
An additional charge for each office, branch, or agency property of a company
Fee (USD)
91.43
137.14
228.57
34.29
If the assets exceed the amount of USD 228,572, there is an additional duty of USD
11.43 for each additional USD 100,000 in assets or fraction thereof. In any case, the
relevant duties are limited to USD 11,428.57.
Social security contributions (ISSS) are mandatory for both employee and employer and
are destined to public health services.The employees contributions are withheld from
the employees monthly salary and are transferred by the employer to the Salvadorian
Institute of Social Security through monthly payrolls.The contribution amounts are
summarised in the table below:
Monthly employees salary (USD)
0 to 685.71
Employees rate (%)

3
Employers rate (%)

7.50
Note: For individuals who have salaries above USD 685.71, the social security contribution applicable is
USD 20.57 for the employee and USD 51.49 for the employer.
Contributions to pension fund (AFP) are mandatory for both employee and employer.
The employees contributions are withheld from the employees monthly salary and
are transferred by the employer. The employers contributions are paid to the AFP.
Both contributions are reported to the Pension Fund Administrator through a monthly
payroll. The percentages are summarised below:
0 to 5,904.77
Employees rate (%)

6.25
Employers rate (%)

6.75
Payroll taxes
Entities with more than ten employees must also pay a payroll tax that is destined
to the National Institute of Professional Development (INSAFORP), which promotes
professional development through courses and complementary studies. The percentages
are summarised below:
0 to 685.71
Over 685.71
Employers rate (%)

1
0
Municipal taxes
Municipal taxes are assessed according to a progressive tariff list issued by each
municipality. The taxes are applicable to the companys assets located in each
municipality, and are paid on a monthly basis. The tariff lists are applied separately to
commercial, industrial, and financial sectors.
Branch income
In El Salvador, tax rates on branch profits are the same as for domestic corporations.
Dividends and profits paid or credited by headquarter (HQ) representatives, affiliates,
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branches, subsidiaries, agencies, and others not domiciled in El Salvador are subject to
5% withholding tax (WHT).
The law does not provide separate treatment for administrative offices located in El
Salvador.
The general regulations indicate that branches, agencies, and/or establishments
permanently operating in the country, with owned or leased installed infrastructure,
employing domestic staff, and performing their economic activities in a material and
perceptible manner in the country are subject to the same taxes as companies duly
incorporated.
In El Salvador, income is considered taxable if it is obtained from goods located in the
country, activities undertaken within the national territory, or services rendered or
utilised in the country.
Inventory valuation
For tax purposes, taxpayers are authorised to use any one of the following inventory
methods, provided they are technically appropriate for the particular business,
consistently applied, and easily audited:

Purchase or manufacturing costs.

Last purchase costs.
Direct average allocation costs.
Average costs.
Last in first out (LIFO).
Specific methods for fruits and farm products.
Specific method for cattle.
Other than the methods enumerated above, taxpayers are not permitted to use
other methods for valuing their inventories except with prior authorisation of the
tax office, provided that in the latters judgement the method in question contains
clear determination and bona fide elements available to the office. Once an inventory
valuation method is adopted, the taxpayer may not change it without the tax offices
prior authorisation.
Capital gains
Capital gains are subject to capital gains tax, except when gains are realised within 12
months following the purchase date, in which case they are taxed as ordinary income.
See Capital gains tax in the Other taxes section for more information.
Dividend income
Cash profits or dividends remitted or credited to shareholders are subject to a 5% WHT.
Interest income
Interest income is taxable in El Salvador when the entity paying the interest is resident
in El Salvador, when the capital is invested in the country, and when the risk is assumed
in El Salvador.
Partnership income
Partnership income is taxable if it is Salvadorian-source income; nevertheless, no

specific provisions exist in El Salvador regarding partnership income.
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Rent/royalties income
Rent and royalties income is taxable if it is Salvadorian-source income; nevertheless, no

specific provisions exist in El Salvador regarding rent and royalties income.
Condoned debts
Condoned debts are considered taxable income and must be included as part of the
income generated in that fiscal period.
Foreign income
Under the territoriality source of income principle, extraterritorial income is not taxable
in El Salvador, with the exception of income and other benefits from securities and other
financingoperations. In this case, interest arising from loans granted to a resident of El
Salvador is considered as taxable income, and the person or entity making the payment
should withhold 10% of the interest. If financial services are rendered between related
parties, the withholding must be at 20%.
Deductions
All business expenses considered necessary to produce taxable income and/or maintain
income sources (e.g. freight, marketing, power, telecommunications, water, salaries,
lease contracts, merchandise and transport insurance, fuel, and interest paid on loans
used by income generating sources) are deductible for income tax purposes.
Depreciation is calculated using the straight-line method, which results in the following
maximum annual rates for determining depreciation deductions.
Assets
Buildings
Machinery
Vehicles
Other movable assets
Rate (%)
5
20
25
50
Depreciation of new software is permitted at a rate of 25% of purchase or production

costs.
Amortisation of goodwill, trademarks, and other similar intangible assets are not
deductible for income tax purposes.
Start-up expenses
In El Salvador, there is not a special regulation for expenses related to the starting up of
a company.
Interest expenses
Interest expenses are deductible if the amount of the loan is invested in a source that
generates taxable income.
Bad debt
In El Salvador, bad debt is deductible if the following requirements are presented:

The debt is generated from the business activity.

The debt had been registered as taxable income.
The debt is registered in the accounting system.
The debt has been expired for 12 months.
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The deductibility of charitable donations is limited to 20% of the donors net income
after deducting the donation amount.
Fines and penalties
In general, penalties, late payment charges, and fines of that type are not deductible.
Taxes
Taxes paid are not deductible.
Operating losses cannot be carried forward to future years or carried back. Capital
losses, however, may be carried forward to offset capital gains for five years.
Remittance of royalties, interest income, and service fees to foreign affiliates are
deductible, provided proper contracts are in place, the corresponding withholdings are
applied (i.e. 20% WHT for non-domiciled entities, 25% for entities domiciled in tax
havens), and there is sufficient evidence that these services have actually been received.
Group taxation
There are no grouping rules in El Salvador between independent entities. Each entity,
even if related, is treated separately and must report and pay their taxes independently.
Transfer pricing
In El Salvador, it is mandatory for entities that have operations with related parties or
with entities resident in tax havens to undertake these operations in compliance with the
arms-length principle.
Local tax authorities can establish the value of the operations according to market prices
rules if, according to their point of view, these operations have not been undertaken
according to the arms-length principle.
Thin capitalisation
No specific provision for thin capitalisation exists in El Salvador.

El Salvador offers a wide range of incentives to attract foreign investment and drive
new commercial and industrial developments. There are also no restrictions on foreign
ownership or on mergers, acquisitions, or joint ventures.
There are two specific laws in El Salvador that seek to encourage foreign investment
by improving the countrys competitiveness in all areas involving the granting of tax
incentives. These laws are the Industrial and Commercial Free Zone Law and the Law of
International Services.
The Industrial and Commercial Free Zone Law No. 405, dated 3 September 1998, grants
companies the following incentives:
CIT exemption.
VAT exemption.
Municipal tax exemption.
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Exemption from real estate transfer taxes when land is intended to be used for
productive activities.
Exemption from duties for imports on machinery, raw materials, equipment, and
intermediate goods used for production.
An option to sell merchandise or services linked to international trade produced in
the free zone in the Salvadoran market as long as the corresponding import taxes,
CIT, VAT, and municipal taxes are paid on the final goodsor services.
Any foreign company may establish and function in a free zone or bonded warehouse
and benefit from these incentives if they are engaged in production, assembly,
manufacturing, processing, transformation, or commercialisation of goods and services
and/or rendering of services linked to international or regional trade, such as gathering,
packaging and repackaging, cargo consolidation, distribution of merchandise, and other
activities connected or complementary to them.
The Law of International Services No. 431, dated 11 October 2007, grants the same
benefits as the Free Zone Law, but the beneficiaries are companies operating in Service
Centres specially created according to this law and dedicated to international services as
defined therein.
Foreign tax credit
There is no foreign tax credit available in El Salvador.
Withholding taxes
Payments or amounts credited to non-residents arising from income obtained in El
Salvador are subject to a 20% WHT. Income earned in El Salvador covers income from
assets located in the country, from any activities performed or capital invested in the
land, and from services rendered or used in the national territory, regardless of whether
they are provided or paid outside the country. Income from services used in the country
is income earned in El Salvador by the service provider, irrespective of whether the
relevant income generating activities are performed abroad. Note that payments to
foreign entities located in tax haven regimes are subject to a 25% WHT.
Payments to resident individuals with respect to services rendered, other than under a
labour relationship, are subject to a 10% WHT.
The acquisition of intangible goods among resident entities in the country is subject to a
10% WHT.
Certain transactions are subject to a reduced WHT rate of 5%, such as the following:

Dividends.
International transport services paid to non-residents.
Insurance services, re-insurances, and bondings paid to non-residents.
Payments for transfer of intangible assets or use of the rights to intangibles and
tangible assets related to films, movies, music records, cable TV, satellite, etc.
Moreover, a treaty to avoid double taxation exists between El Salvador and Spain, this
treaty established reduced WHT, such as the following:
12% WHT (or 5% since the local rate is more favourable to the taxpayer) made to
dividend payments. Note that the payment is exempt from WHT if the dividend is
paid by a local entity to a Spanish company that owns 50% or more of the capital of
the local entity.
10% WHT made to interest payments.
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10% WHT made to rent and royalties payments.
10% WHT made to payments for services.
Tax administration
National taxes, fees, and other contributions on all types of goods, services, and income
in El Salvador are levied by the National Congress. Local governments (municipalities)
may suggest contribution rates and propose their approval to the National Congress by
way of a specific law.
The Ministry of Finance (Ministerio de Hacienda) controls the states finances and
defines and guides the governments financial policy. It also harmonises, directs, and
implements its policies on taxation through its agencies.
Taxable period
In El Salvador, the fiscal year is from 1 January to 31December.
Tax returns
CIT annual returns must be filed each year no later than 30 April, following the end of
the year under taxation.
Payment of tax
Taxes are due on the date established for filing the tax returns. In El Salvador, tax
payments are made together with the filing of tax returns, and payments must be made
at the banks of the local financial system.
In addition, public and private legal entities resident in the country for tax purposes,
other than farm and cattle concerns, are required to make advance income tax
payments at 1.75% of gross revenues. These advance payments are due, together
with the corresponding return, within ten working days following the corresponding
calendarmonth and are ultimately applied against the CIT at the end of the year.
Tax audit process
In El Salvador, the audit cycle is constituted by the following steps:

Tax administration issues a resolution of an auditor designation.

The requirement of financial information of the company.
The requirement of complimentary documentation to verify possible issues.
The tax administration issues an audit report where the issues are expressed.
A resolution hearing is issued by the tax administration, which gives the taxpayer the
right to provide evidence to refute the issues made by the mentioned authority.
Final resolution is determined regarding the complimentary tax or the penalties to be
paid.
In El Salvador, the statute of limitations for the compliance of the payment of tax debts
is ten years.
The tax administrations power to perform a tax audit is for three years in the case of tax
returns presented on time by the taxpayer; five years in the case of tax returns presented
in a delayed way, but this time is going to start from the day after the extemporary
presentation; and five years in cases where the taxpayer has not presented the tax
return.
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In El Salvador, when the tax administration performs a tax audit, it focuses on the
following topics:
Compliance of the transfer pricing rules, this can be considered as the main element
for the tax authorities.
Compliance of the obligations held with non-domiciled subjects, especially those
domiciled in tax havens.
Deductions.
VAT issues.
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Equatorial Guinea
PwC contact
Sbastien Lechne
Main Road Malabo 2 EGICO Tower, 3rd and 4th Floor, PO Box 431
Equatorial Guinea
Tel: +240 333 09 14 34
There have been no significant corporate tax developments in Equatorial Guinea during
the past year.

The corporate income tax (CIT) must be paid by any resident entity.
Taxable profit is determined by deducting from gross income all expenses tied to the
performance of taxable activities in Equatorial Guinea. In principle, all expenses are
deductible, but the Tax Code provides deductibility rules for some of them.
Resident companies are subject to CIT on their worldwide income. Non-resident entities
are subject to a 10% withholding tax (WHT) on gross income derived from sources in
Equatorial Guinea.
The CIT rate is 35% on taxable profits.
Minimum income tax (MIT)
MIT is 1% of the turnover of the company for the previous year. This amount cannot be
lower than 800,000 Central African CFA francs (XAF) (even if the company does not
generate any revenue).
MIT can be totally or partially deducted from the CIT to be paid.
Local income taxes
There are no local income taxes in Equatorial Guinea.
Corporate residence
A legal entity present in Equatorial Guinea more than three months within a calendar
year, or more than six months within two consecutive calendar years, and performing an
economic activity or providing paid services in the country is considered as a resident for
taxation purposes.
The notion of residence applies equally to any kind of activity (even if there is some
specificity in the oil and gas sector).
The notion of permanent establishment is not defined in the Tax Code. Authorities
mainly refer to the notion of residence as defined above.
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Other taxes
VAT is an indirect tax on consumption based on turnover.

All operations performed in Equatorial Guinea are subject to VAT unless they are
included in the list of exemptions provided by the Equatorial Guinea Tax Code or a
specific tax regime.
VAT is generally chargeable on the following:

Goods sold or assigned for valuable consideration.

Services provided.
Self-consumed goods and services.
Imports.
Other operations carried on by individuals or legal entities in their sphere of business,
professional, and individual activities, including extraction activities.
The standard VAT rate is 15%.

A rate of 0% is applicable to a specific list of products and equipment provided in the Tax
Code (e.g. certain medical products, some equipment for construction).
A reduced rate of 6% is applicable to a limited list of basic consumables and books.
Custom duties
The customs duties are based on the categories of goods as follows:

Category I: Primary necessity goods: 5%.

Category II: Raw material and materials: 10%.
Category III: Intermediary goods and miscellaneous: 20%.
Category IV: Current consumption goods: 30%.
Excise taxes
Excise taxes are applicable on specific goods, such as alcoholic drinks and tobacco. The
rates are from 20% to 50% plus a special Economic and Monetary Community of Central
Africa (CEMAC) contribution from 0% to 35%.
Real property tax
A 1% urban property tax applies annually to 40% of the value of the land and the
buildings on such land. Urban property is defined by the Tax Code as any land with or
without buildings and the buildings built thereon, whenever located in urban areas.
Transfer tax
For the transfer of goods between residents and non-residents, and between nonresidents, there is a 3% tax on the value of the goods.
Real estate transfers between residents are taxed at the rate of 5% on the value of the
real estate. The rate increases to 25% on real estate transfers between residents and nonresidents, and between non-residents.
Stamp duties
Stamp duties are payable on a variety of instruments and transactions and vary
depending on the concerned legal act.
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Employers contribute 1% of gross salary to the Work Protection Fund (Fondo de

Proteccin al Trabajo in Spanish) and 21.5% to the National Social Security Fund
(INSESO for its Spanish acronym) on a monthly basis.
Employees contribute 0.5% of net salary to the Work Protection Fund and 4.5% to the
INSESO on a monthly basis.
Branch income
Branch income is subject to CIT. We understand there is no branch remittance tax, even
if tax authorities try to apply this tax sometimes.
Inventory valuation
Inventory is evaluated at cost price for tax purposes. The tax method generally matches
the book method.
Capital gains
Capital gains are, in principle, subject to CIT.

Some exemptions and specific tax regimes can apply, as follows:
Capital gains that come from the assignment, in the ongoing operation, of the
components of the fixed assets will not be included in the taxable profit of the fiscal
year in the course of which they have been obtained if the taxpayer puts them in a
special account named capital gains to be reused and is committed to reinvesting
in new fixed assets in the company before the expiration of a period of time of three
years, starting from the close of this fiscal year, an amount equal to the amount of
these capital gains plus the cost of the assigned components.
Capital gains different from those obtained on goods, resulting from free assignment
of stock, corporate portions, or liabilities, as a consequence of the merger of
corporations, limited partnerships by shares, or limited companies, will be exempt
from the tax regarding the profits made by those corporations, on condition that the
take-over company or the new company has its corporate headquarters in Equatorial
Guinea.
Dividend income
All dividends received by a resident company are subject to CIT.

A personal income WHT of 25% is applicable on dividends paid to individuals or
companies not having their usual domicile or headquarters in Equatorial Guinea. This
tax is a final tax for those taxpayers.
The net products of the shares owned and earned by the parent company from its
subsidiary can be deducted from the total net profits of the parent company after
offsetting from this amount 25% (expenses and charges lump sum amount) if the:
shareholder holds at least 25% of shares of the subsidiary and
shareholder guarantees the shares have always been registered in the name of
the participating company and commits it will hold these shares for at least two
consecutive years.
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This proportional part is established at 10% of the amount of these products and
represents the management expenses already deducted from overhead costs.
Interest income
Interest earned by companies established in Equatorial Guinea is subject to CIT (35%

rate).
Interest earned by companies not having their usual domicile or headquarters in
Equatorial Guinea is considered as dividend income and is subject to WHT at a 25% rate.
Foreign income
Resident companies are subject to CIT on their worldwide income.

There is no tax deferral in Equatorial Guinea.
Deductions
Depreciation
A straight-line method of computation of depreciation should be applied to fixed assets

according to the normal useful lives of the assets involved, as provided by the Tax Code.
Goodwill
Goodwill is, in principle, not deductible.
Start-up expenses
Start-up expenses can be amortised.
Interest expenses
Interest expenses are deductible if they do not exceed the limit for loans set up by the
Central Bank.
Bad debt
Bad debts are deductible, given they are supported.
Charitable contributions are deductible, given they are for philanthropic, sport,
educative, scientific, social, or family purposes and do not exceed 0.5% of the turnover
for the fiscal year of the company.
Fines and penalties
Fines and penalties are not deductible.
Taxes
Only professional taxes are deductible.
Net operating losses can be carried forward for three years (five years for companies
belonging to the oil and gas sector). Losses cannot be carried back. Losses of one entity
cannot be transferred to another entity in a reorganisation.
In theory, when the results of a company, no matter the kind of company, are negative
during a maximum period of three consecutive years, this company will immediately be
removed from the register by the Tax Administration for the practice of the activity for
which it was registered, except when the company is newly created.
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The deductibility of the technical assistance made by the parent company to its
subsidiary is limited to 50% of the intermediary tax result (accounting result plus
potential fiscal reintegration).
In case of a deficit, the relevant basis for the evaluation of the foreign technical
assistance amount to be reintegrated will be the intermediary result of the last
beneficiary fiscal year.
Group taxation
Equatorial Guinea law does not provide specific provisions for taxation of groups.
Transfer pricing
There are no specific rules regarding transfer pricing, even if there are indirect
references in the Tax Code.
Thin capitalisation
According to the Tax Code:

Interest paid to the partners for amounts made available to the company, in addition
to their capital contributions, no matter the form of the company, will be admitted [for
deduction] within the limits established for the advances of the Central Bank.
In incorporated or limited companies, the deduction of interest will not be allowed
for partners or shareholders that have the right to hold, or actually hold, the company
management except to the extent that the amounts deposited do not exceed the
combination of the contributions of these partners or shareholders.

Some tax and customs exemptions can be granted by the government for some specific
economic sectors (e.g. oil and gas sector, public work sector). These exemptions shall
be negotiated in the contract signed between the company and the administration (e.g.
Production Sharing Contract, Public Work Contract).
Foreign tax credit
There is no foreign tax credit in Equatorial Guinea.
Withholding taxes
WHT in the non-oil and gas sector
There is a 10% tax withheld on the gross incomes obtained in Equatorial Guinea by nonresidents.
There is a 25% WHT on royalties for non-CEMAC residents.
Dividends and interests paid to non-residents are subject to 25% WHT.
WHT on the oil and gas sector

In Equatorial Guinea:
a 6.25% WHT must be applied to payments made to a resident entity within the oil
and gas sector and
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a 10% WHT must be applied to payments made to a non-resident entity within the oil
and gas sector.
In practice, the tax authorities consider this tax only applies to sales of services.
The tax basis is composed of the gross amount paid to the provider.
Tax administration
Taxable period
The taxable period is from 1 January to 31 December for CIT purposes.
Tax returns
CIT returns must be filed within the first four months of the year following the taxable
fiscal year.
Payment of tax
Payment of CIT must be made within 15 days from the day following the date of receipt
of the tax liquidation issued by the Ministry of Finance and Budget.
The MIT of 1% of the previous years turnover is payable by 31 March.
Penalties
Penalties of XAF 200,000 per month late, up to 75% of the tax owed, apply for late filing
of CIT returns.
A penalty of 50% to 100% of the undeclared amount applies in case of shortfall in the
return and in case of arbitrary settlement, 50% of the total amount if the good faith of
the taxpayer is established or assumed and 100% wherever the taxpayer does not prove
good faith.
Tax audit process
There is no specific provision related to the tax audit cycle in Equatorial Guinea.
The statute of limitations is five years from the date the tax is due.
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Estonia
PwC contact
Villi Tntson
PricewaterhouseCoopers AS
Prnu mnt 15
10141 Tallinn
Estonia
Tel: +372 614 1970
Estonia is regarded as offering a relatively favourable income tax regime, as all
undistributed corporate profits are tax exempt. Estonia levies a corporate income
tax (CIT) only on profits that are distributed as dividends, share buy-backs, capital
reductions, liquidation proceeds, or deemed profit distributions. Distributed profits
are generally subject to 21% corporate tax (21/79 on the net amount of the profit
distribution). According to the law amendment passed by the Parliament on 16 June
2011, the CIT rate will be reduced to 20% in 2015.
Tax treaties with Bahrain, Cyprus, Mexico, Thailand, Turkmenistan, and Uzbekistan
became effective and are applicable from 1 January 2014. Additionally, a treaty with
Morocco was signed in 2013 but is not yet effective.

All undistributed corporate profits are tax exempt. This exemption covers both active
(e.g. trading) and passive (e.g. dividends, interest, royalties) types of income. It also
covers capital gains from the sale of all types of assets, including shares, securities, and
immovable property. This tax regime is available to Estonian resident companies and
permanent establishments (PE) of non-resident companies that are registered in Estonia.
The taxation of corporate profits is postponed until the profits are distributed
as dividends or deemed to be distributed, such as in the case of transfer pricing
adjustments, expenses and payments that do not have a business purpose, fringe
benefits, gifts, donations, and representation expenses.
Distributed profits are generally subject to the 21% CIT at 21/79 of the net amount of
profit distribution. For example, a company that has profits of 100 euros (EUR) available
for distribution can distribute dividends of EUR 79, on which it must pay CIT of EUR 21.
According to the law amendment passed by the Parliament on 16 June 2011, the CIT rate
will be reduced to 20% in 2015.
From the Estonian perspective, this tax is considered a CIT and not a withholding tax
(WHT), so the tax rate is not affected by an applicable tax treaty. Certain distributions
are exempt from such tax (see the Income determination section).
In Estonia, resident companies are taxed on profits distributed from their worldwide
income, while PEs of non-residents are taxed only on profits distributed from income
derived from Estonian sources. Other Estonian-source income derived by non-residents
may be subject to final WHT or CIT by way of assessment.
Local income taxes
There are no local income taxes in Estonia.

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Corporate residence
A legal entity is considered resident in Estonia for tax purposes if it is established under
Estonian law. There is no management and control test for the purpose of determining
corporate residency.Most tax treaty tie-breakers for legal entities are based on
competent authority procedures.
A PE (including a branch registered in the Commercial Register) of a foreign entity is

deemed to be a non-resident taxpayer. Under the domestic law, which deviates from
Convention, a PE is defined as an enterprise through which the permanent business
activities of the non-resident are conducted in Estonia. A PE is deemed to be created as
a result of the business activities conducted in Estonia that are geographically linked
or have movable character or as a result of the business activities of an agent that is
authorised to conclude contracts in the name of the non-resident.
Other taxes
The following transactions are subject to Estonian VAT:

Taxable supplies of goods and services (the place of supply of which is Estonia).
Taxable imports of goods.
Taxable intra-community acquisitions of goods.
The standard VAT rate is 20%. A reduced rate of 9% is applied to books, periodicals with
few exceptions, hotel accommodation services, and listed pharmaceuticals.
The VAT rate on the export of goods and certain services is 0% (i.e. exempt with credit).
Some services, such as health care, insurance, certain financial, and transactions with
securities, are exempt (i.e. exempt without credit).
Transactions in real estate are generally exempt from VAT, but there are certain
significant exceptions (e.g. transactions in new and significantly renovated buildings).
Taxpayers can elect to add VAT to real estate transactions if certain conditions are met.
The reverse charge mechanism applies to the supply of gold, waste metal, and real
estate, under which VAT is accounted for by the VAT liable purchaser and not by the
supplier. For real estate and investment gold, the reverse charge applies only when the
seller has opted for taxation.
If the taxable supplies of Estonian resident businesses or a PE of a non-resident business
in Estonia exceed EUR 16,000 in a calendar year, VAT registration is required. Voluntary
registration is also possible. Certain transactions of non-resident businesses require
Estonian VAT registration without any threshold.
The VAT accounting period is generally a calendar month, and VAT should be declared
and paid on or before the 20th day of the following month.
Under certain conditions, a European Union (EU) taxable person that is not registered
for VAT in Estonia will be entitled to a refund of input VAT paid in Estonia. Non-EU
taxable persons are entitled to claim VAT refunds based on reciprocity.
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Estonia has implemented a system that allows, under certain conditions, a company
to account for VAT on imports on the VAT return without paying VAT to the customs
authority.
Customs duties
After becoming a member of the European Union, Estonia also became a member of the
Customs Union. The Community Customs Code and related implementation regulations
apply, meaning that:
trade between Estonia and other EU countries is customs-free
imports from non-EU countries are subject to EU customs tariffs, and
numerous free trade agreements concluded between EU and non-EU countries apply
to Estonia.
Excise duties
Excise taxes are levied on tobacco, alcohol, electricity, some packaging materials, and
motor fuel.
Land and property taxes
Land is subject to an annual land tax, which is calculated on the assessed value of land
at rates between 0.1% and 2.5%, depending on the municipality. The tax is paid by the
owners of land, or sometimes by the users of land, in two instalments, by 31 March and 1
October (amounts not exceeding EUR 64 are paid in one instalment by 31 March).
There is no property tax (i.e. tax on the value of buildings).
Property transfers are generally subject to state and notary fees.
Transfer taxes
There are no transfer taxes in Estonia.
Stamp taxes
Certain transactions may be subject to insignificant stamp taxes (i.e. state fees).
Social security and unemployment insurance
Employers operating in Estonia (including non-residents with a PE or employees in

Estonia) must pay social tax on certain payments to individuals at the rate of 33%
(where 20% is used for financing public pension insurance and 13% is used for financing
public health insurance). Social tax paid by employers is not capped and mainly
applies to salaries, directors fees, and service fees paid and fringe benefits granted to
individuals.
In addition to social tax, employers are also required to pay and withhold unemployment
insurance contributions. Employers must pay 1% and employees must pay 2% (collected
by employers through payroll withholding). The contributions mainly apply to salaries
and service fees paid to individuals.
Compulsory accumulative pension scheme
Employers payroll withholding includes 2% contributions to the compulsory

accumulative pension scheme if the employee has joined that pension scheme.
Heavy goods vehicle tax
The heavy goods vehicle tax is paid for the following classes of vehicles that are
registered with the Estonian National Motor Vehicle Register and are intended for the
carriage of goods:
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Lorries with a maximum authorised weight or gross laden weight of not less than 12
tons.
Road trains composed of trucks and trailers with a maximum authorised weight or
gross laden weight of not less than 12 tons.
The tax is paid by the owners or users of the vehicles. The quarterly tax rates range from
EUR 0 to EUR 232.60 per heavy goods vehicle.
Gambling tax
Gambling tax is imposed on amounts received from operating games of skill, totalisator,
betting, lotteries, and promotional lotteries. Tax is also charged on gambling tables and
machines used for games of chance located in licensed premises. The tax is paid monthly
by authorised operators.
Local taxes
Local taxes can be imposed by rural municipalities or city councils; however, the fiscal
significance of local taxes is almost non-existent. Local taxes include advertisement tax,
road and street closure tax, motor vehicle tax, tax on keeping animals, entertainment
tax, and parking charges.
Branch income
Registered PEs of non-residents, much as with resident companies, are subject to CIT
only in respect of profit distributions, both actual and deemed, as defined in domestic
law.
Transactions and dealings between a head office and its PE(s) should be conducted on
arms-length terms. Thus, such profits should be attributed to a PE of a non-resident
taxpayer that the PE would be expected to make if it were a distinct and separate
taxpayer engaged in the same or similar activities, and under the same or similar
conditions, and dealing in a wholly independent manner with its head office.
Distributable profits are determined based on financial statements drawn up in
accordance with Estonian Generally Accepted Accounting Principles (GAAP) or
International Accounting Standards (IAS)/International Financial Reporting Standards
(IFRS), and there are no adjustments to accounting profits for tax purposes (e.g. tax
depreciation, tax loss carryforward or carryback).
The CIT liability associated with the distribution of dividends is accounted for as an
expense at the time the dividends are declared, regardless of when the profits were
generated or distributed.
Dividends paid by Estonian companies are generally subject to 21/79 CIT at the level of
the distributing company. However, dividends distributed by Estonian companies are
exempt from CIT if the distributions are paid out of:
dividends received from Estonian, EU, European Economic Area (EEA), and Swiss tax
resident companies (except tax haven companies) in which the Estonian company has
at least a 10% shareholding
profits attributable to a PE in the EU, EEA, or Switzerland
dividends received from all other foreign companies in which the Estonian company
(except tax haven companies) has at least a 10% shareholding, provided that either
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the underlying profits have been subject to foreign tax or if foreign income tax was
withheld from dividends received, or
profits attributable to a foreign PE in all other countries provided that such profits
have been subject to tax in the country of the PE.
In addition, stock dividends (bonus shares) distributed to stockholders are exempt from
21/79 CIT charge.
Certain domestic and foreign taxes can also be credited against the 21/79 CIT charge
under domestic law or tax treaties.
Deductions
Distributable profits are determined based on financial statements drawn up in
accordance with Estonian GAAP or IAS/IFRS, and there are no adjustments to
accounting profits for tax purposes (e.g. tax depreciation, tax loss carryforward or
carryback).
Fringe benefits
Employers operating in Estonia (including non-resident companies that have a PE or

employees in Estonia) are liable to Estonian taxation on any fringe benefits granted to
their employees (including directors).
Fringe benefits are subject to an exceptional tax treatment in Estonia, as only the
employer is obligated to pay taxes on the fringe benefits furnished to the employee.
Taxable fringe benefits received by a resident employee are generally not included in the
taxable income of the employee for Estonian tax purposes. Fringe benefits are subject to
21/79 CIT and 33% social tax. For example, where the amount of the benefit is EUR 100,
the CIT due by the employer would be EUR 26.58 (21/79 x 100) and the social tax due
EUR 41.77 (0.33 x 126.58), for a total fringe benefit tax charge of EUR 68.35.
Gifts, donations, and representation expenses
The 21/79 CIT is generally due on gifts and donations. Gifts and donations made to
certain qualifying recipients are only subject to 21/79 CIT if such expenses exceed one of
two limitations:
3% of the calculated social tax base for the existing calendar year or
10% of the profit of the last financial year according to statutory financialstatements.
Representation expenses, those expenditures whose character and primary purpose is
for representational or entertainment related activities, are generally subject to 21/79
CIT only if they exceed the threshold of EUR 32 per month plus 2% of the calculated
social tax base of the calendar month in which the expenses are paid.
Taxes
All taxes paid are deductible for CIT purposes. In certain circumstances, domestic or
foreign taxes may be creditable against the 21/79 CIT charge under domestic law or an
applicable tax treaty.
The 21/79 CIT is generally due on expenses and payments that do not have a business
purpose and that are regarded as deemed profit distributions. These may include,
for example, late payment interest on tax arrears, penalties imposed by law, bribes,
purchase of services or settlement of obligations not related to taxpayers business, and
acquisition of assets not related to taxpayers business.
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Furthermore, there are specific anti-tax haven rules treating certain transactions and
dealings with tax haven companies as deemed profit distributions, which are therefore
subject to 21/79 CIT. These include the following:
Acquisition of securities issued by a tax haven entity (exception for certain
listedsecurities).
Acquisition of an ownership interest in a tax haven entity.
Payment of fines or penalties to a tax haven entity, unless settled by court
orarbitrage.
Granting loans or making prepayments to a tax haven entity or otherwise acquiring a
claim against a tax haven entity.
Payments to foreign affiliates are deductible for tax purposes (i.e. not subject to 21/79
CIT as deemed profit distributions) if the payment serves a business purpose, provides a
benefit to the payer, is at arms length, and is substantiated by sufficient documentation.
Payments to foreign affiliates may also be subject to various WHT. Certain payments to
affiliates located in tax haven countries are always subject to 21/79 CIT or a 21% WHT
rate.
Group taxation
There is no form of consolidation or group taxation for CIT purposes in Estonia.
Transfer pricing
Transfer pricing rules are applicable to all types of transactions between related parties.
Both domestic and cross-border transactions with related parties must be conducted at
arms length. Estonian tax legislation includes a relatively broad definition of related
parties. Under the present corporate tax system, if the transactions between related
parties do not follow the arms-length principle, then the subsequent transfer pricing
adjustments are treated as hidden profit distributions subject to 21/79 monthly CIT.
As a general rule, Estonian group companies and PEs of foreign companies are obligated
to prepare transfer pricing documentation to prove the arms-length nature of the intercompany transactions with all related parties.
However, this documentation requirement does not apply to small and medium-size
enterprises (SME), unless they have conducted transactions with entities located in lowtax territories. A company or PE is deemed to be an SME if the consolidated results of
the previous financial year of an Estonian company or a PE, together with its associated
enterprises or head office (i.e. at the group level), are below all of the following criteria:
EUR 50 million annual sales.
EUR 43 million balance sheet.
250 employees.
Apart from the formal transfer pricing documentation and general requirement to
disclose the transactions with the related parties in the annual reports, there are no
additional reporting requirements related to transfer pricing in relation to inter-company
transactions.
Thin capitalisation
There are no thin capitalisation rules in the Estonian tax legislation.
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Estonia has no CFC rules for corporate taxpayers.

There are no special tax incentives in Estonia. However, the entire Estonian corporate
tax system, which provides for an indefinite deferral for taxing corporate profits, may
be viewed as a tax incentive that promotes reinvestment of profits and thus stimulates
economic growth.
Foreign tax credit
In certain circumstances, domestic or foreign taxes may be creditable against the 21/79
CIT charge under domestic law or an applicable tax treaty. See the Income determination
Withholding taxes
Withholding agents must withhold CIT from certain payments. Withholding agents
include resident legal entities, resident individuals registered as sole proprietorships
or acting as employers, and non-residents having a PE or acting as employers in
Estonia. The tax must be reported and paid by the tenth day of the month following
the payment. CIT is not withheld from payments to resident companies, registered sole
proprietorships, and registered PEs of non-resident companies. The following rules are
in place with respect to payments that are subject to WHT:
There is no WHT on dividends.
As of 1 January 2014, there is no WHT on interest payments to non-residents.
Royalties (including payments for the use of industrial, commercial, or scientific
equipment) paid to non-residents are generally subject to a 10% WHT rate under
domestic law, but reduced rates may be available under double tax treaties (DTT).
Certain royalty payments to associated EU and Swiss companies that meet certain
conditions are exempt from WHT.
Rental payments to non-residents for the use of immovable property located in
Estonia and movable property subject to registration in Estonia (excluding payments
for the use of industrial, commercial, or scientific equipment) are subject to a 21%
WHT rate under domestic law, but DTTs may exempt payments for the use of movable
property from WHT.
Royalties and rental payments to resident individuals are subject to a 21% WHT rate.
Payments to non-resident companies for services provided in Estonia, including
management and consultancy fees, are subject to a 10% WHT rate under domestic
law, but may be exempt under DTTs. Service fee payments to tax haven entities are
always subject to a 21% WHT rate.
Salaries, directors fees, and service fees paid to individuals are subject to a 21% WHT
rate under domestic law, but DTTs may exempt service fee payments to non-resident
individuals from WHT.
Payments for the activities of non-resident artistes or sportsmen carried out in
Estonia are subject to a 10% WHT rate.
Certain pensions, insurance benefits, scholarships, prizes, lottery winnings, etc.
paid to non-residents and resident individuals are subject to a 21% WHT rate under
domestic law.
For non-residents without a PE in Estonia, the tax withheld from these payments at
domestic or treaty rates constitutes final tax in terms of their Estonian-source income,
and they do not have any tax reporting requirements in Estonia.
Estonia
605
Estonia
For certain types of Estonian-source income, non-residents are liable under Estonian
domestic law to self-assess their Estonian tax and submit a tax return to the Estonian tax
authorities. These types of income include:
Taxable capital gains.
Profits derived from business conducted in Estonia without a registered PE.
Other items of income from which tax was not withheld but should have been
withheld.
From 2014, Estonia has effective tax treaties with the territories listed in the table below.
A treaty has been signed with Morocco but is not yet effective.
The following WHT rates apply to dividends, interest, and royalties paid to a recipient or
beneficial owner resident in a tax treaty country. The lower of the domestic or the treaty
rate is given.
Recipient
Non-treaty
Treaty:
Albania
Armenia
Austria
Azerbaijan
Bahrain
Belarus
Belgium
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India
Isle of Man
Israel
Italy
Jersey
Kazakhstan
Korea, Republic of
Latvia
Lithuania
Luxembourg
Macedonia
Malta
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Estonia
Dividends (%) (1)

0
Interest (%) (2)

0
Royalties (%) (3)

0/10
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
5
10
0/5/10 (4)
10
0
10
0/5/10 (4)
0/5
10
10
10
0
0/10
0/5/10 (4)
0/5/10 (4)
0/5/10 (4)
10
0/5/10 (4)
0/5/10 (4)
0/5/10 (4)
5/10 (4)
10
0/5/10 (4)
0
0
0/5/10 (4)
0
15
5/10 (4)
0/5/10 (4)
0/10
0/5/10
5
0/10
Estonia
Recipient
Mexico
Moldova
Netherlands
Norway
Poland
Portugal
Romania
Serbia
Singapore
Slovakia
Slovenia
Spain
Sweden
Switzerland
Thailand
Turkey
Turkmenistan
Ukraine
United Kingdom
United States
Uzbekistan
Dividends (%) (1)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Interest (%) (2)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Royalties (%) (3)

10
10
0/5/10 (4)
5/10 (4)
0/10
0/10
0/10
5/10 (5)
7.5
0/10
0/10
0/5/10 (4)
0/5/10 (4)
0/5/10 (4)
8/10 (6)
5/10 (4)
10
10
0
0/5/10 (4)
5/10 (4)
10
Notes
1.
2.
3.
4.
5.
6.
Under the domestic law, the rate is nil for all non-resident individual and corporate shareholders.
As of 1 January 2014, under the domestic law, the rate is nil for all non-resident individual and
corporate shareholders.
The rate is nil for arms-length royalties paid to an associated EU or Swiss company if certain
conditions are met.
The lower 5% rate applies to royalties paid for the use of industrial, commercial, or scientific
equipment.
The lower 5% rate applies to royalties paid for the use of copyright royalties, excluding software
royalties.
The lower 8% rate applies to royalties paid for the use of industrial, commercial, or scientific
equipment.
Tax administration
Taxable period
The tax period is a calendar month.
Tax returns
The combined CIT and payroll tax return (form TSD with appendices) must be
submitted to the local tax authorities by the tenth day of the month following a taxable
distribution or payment. Tax returns may be filed electronically via the Internet.
Payment of tax
CIT and payroll taxes must be remitted to the local tax authorities by the tenth day of
the month following a taxable distribution or payment. No advance CIT payments are
required.
Advance rulings
The aim of the advance ruling system is to provide certainty on the tax consequences
of specific transactions or combination of transactions taking place in the future. The
ruling is binding on the authorities (and not on the taxpayer) if the transaction was
Estonia
607
Estonia
made within the deadline and the description provided in the ruling and the underlying
legislation has not been substantially changed in the meantime. Estonian legislation
specifically excludes obtaining rulings when the interpretation of the legislation is
objectively clear, the situation is hypothetical, or the main purpose of the planned
transaction is tax avoidance. In addition, transfer pricing valuation issues are excluded
from the scope of the binding ruling system.
Tax audit process
There is no statutory tax audit cycle in Estonia.
As a general rule, the statute of limitations is three years. In case of intentional tax
evasion, it is five years.
The main topics of focus for tax authorities are envelope wages, VAT fraud, and transfer
pricing.
Other issues
Company restructurings
In accordance with the EC Directive 2009/133/EC on mergers, divisions, partial

divisions, transfers of assets, and exchanges of shares concerning companies of different
member states, the mergers, divisions, and re-organisations of companies are generally
tax-neutral in Estonia. The principle of going concern is applied in taxation of referred
restructuring transactions.
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Estonia
Fiji
PwC contact
Jerome Kado
Level 8
Civic Tower
272 Victoria Parade
Suva
Fiji
Tel: +679 331 3955
The 3% limitation for claiming head office charges or similar payments as a tax
deduction has been repealed, effective 1 January 2012.
The following amendments to the Fiji Income Tax Act became effective 1 January 2014:
A corporate income tax (CIT) rate of 10% is applicable for companies listed on the
South Pacific Stock Exchange (SPSE).
The Employment Taxation Scheme has been extend until 2018, and the definition of
qualified employees now includes apprentices and trainees.
The 40% export income deduction has been maintained in 2014.
There have been changes in the Tax Free Region (TFR) incentives.
The maximum turnover threshold for CIT exemption of entities in the agriculture,
fisheries, and tourism industries has been increased from 300,000 Fijian dollars (FJD)
to FJD 500,000.
The threshold for claiming a 150% tax deduction for cash donations to an approved
Sports Fund has been reduced from amounts in excess of FJD 100,000 to amounts in
excess of FJD 50,000.
The income of a shipping company derived from servicing Rotuma and the Lau Group
shall be exempt from CIT, subject to certain conditions.
The gain derived from the sale of shares for the purpose of listing on the SPSE shall
be exempt from income tax, subject to certain conditions.
A 150% tax deduction is available for cash donations not less than FJD 10,000 to the
Disaster Rehabilitation Fund.
A 150% tax deduction is available for cash sponsorship of more than FJD 100,000 but
not exceeding FJD 200,000 towards the hiring of international sporting coaches.
A 150% tax deduction is available for cash donations not exceeding FJD 50,000
towards any approved housing project for squatters by the Fiji government.
Effective 1 January 2014, any gain on the disposal of shares in any Unit Trust in Fiji shall
be exempt fromcapital gains tax (CGT), subject to certain conditions.
Effective 28 January 2011, the direct supply of fish (except fish fillets and other fish
meat) by a locally registered fishing company to a local fish processor is zero-rated for
value-added tax (VAT) purposes.

Resident corporations are taxed on their worldwide income. Non-resident corporations
may only be taxed on their Fiji-sourced income.
Fiji
609
Fiji
Normal tax is payable and assessed on the chargeable income of the business calculated
by subtracting deductible expenses from all assessable income specified under Section
11 of the Fiji Income Tax Act.
Normal tax is payable on taxable income at the following rates:
Type of company
Non-resident shipping companies in respect of outgoing business
from Fiji
Rate (%)
2
Non-resident company that establishes its regional or global

headquarters in Fiji (subject to certain conditions)
Company listed on the SPSE with a minimum 40% resident
shareholding
Company listed on the SPSE
17
18.5 (effective 1 January
2013 to 31 December 2013)
10 (effective 1 January 2014)
All other companies, including non-resident companies carrying on

business in Fiji (e.g. branch profits)
20
Corporate residence
A company incorporated in Fiji is considered a resident in Fiji. A company not
incorporated in Fiji is resident in Fiji if it carries on business in Fiji and either its practical
management and control are in Fiji or its voting powers are controlled by shareholders
who are residents of Fiji.
PE is determined based on the applicable tax treaty. There is no specific definition of

permanent establishment under the Fiji Income Tax Act. However, generally a PE may
be defined as a fixed place of business and includes the following:
A place of management, branch, office, factory, warehouse, or workshop, but not a
liaison office.
A mine, oil or gas well, quarry, or other place of extraction of natural resources.
A building site, or a construction, assembly, or installation project, or supervisory
activities connected with such site or project, but only if the site, project, or activities
continue for more than six months.
The furnishing of services by the person, including consultancy services, through
employees or other personnel engaged by the person for such purpose, but only if
activities of that nature continue for the same or a connected project for a period or
periods aggregating more than six months in any 12-month period.
A person, referred to as an agent, acting on behalf of another person, referred to as
the principal, if the agent:
has and habitually exercises an authority to conclude contracts on behalf of the
principal or
habitually maintains a stock of trading stock from which the agent regularly
delivers trading stock on behalf of the principal but does not include an agent of
independent status.
Other taxes
VAT of 15% generally applies on the supply of goods and services in Fiji by a registered
person in the course or furtherance of a taxable activity carried on by that person. The
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Fiji
Fiji
threshold amount for VAT registration is FJD 100,000for the supply of goods and/or
services.
The supply of financial services (except for certain insurance services), residential
accommodation, and education by an approved institution is exempt.
The sale of edible oil, tin fish, rice, flour, tea, powdered milk, and kerosene are zerorated. The direct supply of fish by a locally registered fishing company to a local
fish processor is also zero-rated. Furthermore, exports of goods and services and
international transportation are zero-rated. The export of services, however, is zerorated only under certain conditions.
The due date for lodgement of VAT returns and payment of any VAT payable is the end of
the month following the taxable period, which is normally a month. However, where an
entitys supplies do not exceed FJD 300,000, it may opt to lodge VAT returns and pay any
VAT payable on an annual basis.
Under certain conditions, directors of companies with insufficient funds may be held
liable for any outstanding VAT or CIT liability of the company and may be sued in their
personal capacity.
Customs duties/import excise taxes
Import excise tax (from 5% to 15%) applies to selected goods (in addition to thefiscal
duties imposed on importation), including:

Alcohol and tobacco.

Used or second-hand liquefied petroleum gas (LPG) powered motor vehicles.
New or used licensed mini buses.
Some goods that are also locally manufactured.
Certain white goods and luxury items.
Excise taxes
Excise tax is payable on tobacco, alcohol products, and carbonated soft drinks
manufactured in Fiji, based on quantities produced.
Property taxes
There are no property taxes at the national level. However, the municipalities may
charge property rates in their respective areas.
Stamp duties
Under the Fiji Stamp Duties Act, stamp duty is payable in respect of instruments,
including, but not limited to, declaration of trusts, leases, mortgages, transfer of
property (or interest therein), and shares.
Capital gains tax (CGT)
Capital gains made from the following assets may be subject to CGT of 10%:

Land or an interest therein.

Vessels of over 100 tonnages.
Yachts.
Shares, securities, equities, or other financial assets (except shares listed on the
SPSE).
Intangible assets.
Interest in a partnership or trust.
Aircraft.
Option, right, or other interest in an asset referred to above.
Fiji
611
Fiji
A capital gain made on disposal of an asset that is used solely to derive income exempt
from tax under the Income Tax Act shall be exempt from CGT.
Foreign tax paid in respect of the disposal of a capital asset may be allowed as a tax
credit against the CGT payable.
There is no carryforward of capital losses in calculating CGT.
A person who disposes of a capital asset, whether liable for CGT or not, is required to
lodge a CGT return.
Effective 1 January 2014, any gain on the disposal of shares in any Unit Trust in Fiji shall
be exempt from CGT, subject to certain conditions.
Service turnover tax (STT) (formerly hotel turnover tax)
STT at the rate of 5% is imposed on turnover of a person conducting a business involving

the provision of a prescribed service, which includes the following:
Provision of accommodation, refreshments, and any other services by a hotel.
Any services provided in a vessel that is principally or wholly engaged in the carriage
of tourists in Fiji.
Provision of meals, beverages,andany other servicesin a bar.
Provision of services in a nightclub.
Provision of in-bound tour services.
Live entertainment provided by artists for a fee.
Provision of services for recreational activity for gain.
Provision of services relating to exhibition of films to the public or section thereof by
an exhibitor where a charge is made for admission, including services provided by
cinema operators.
Provision of services by rental car operators.
Provision of meals, beverages, and any other servicesby bistros or coffee shops with
an annual gross turnover over FJD 1.5 million.
Provision of meals, beverages, and any other serviceson sale by restaurants with
annual gross turnover over FJD 1.5 million.
Provision of charter flight services by an aircraft or helicopter with an annual gross
turnover over FJD 300,000.
Provision of all water sports, including underwater activities and river safaris, with
an annual gross turnover in excess of FJD 300,000.
Provision of accommodation in a private residence or property that accommodates
tourists, international students, or overseas visitors who are paying guests with an
annual gross turnover of over FJD 50,000, subject to certain exclusions.
The due date for payment is aligned with the VAT Decree requirements (i.e. end of the
month following the taxable period).
Fringe benefit tax (FBT)
FBT of 20% is payable by the employer on the grossed-up value of certain fringe benefits
provided to employees (the effective tax rate is 25%).
Contributions to the Fiji National Provident Fund (FNPF)
The FNPF is a compulsory superannuation scheme for local employees. Under the FNPF
Decree, employers are required to contribute 16% of cash emoluments of employees
to the Fund. Employers may recover one-half (8%) of the required contribution from
employees.
Employers are not required to contribute to the FNPF for expatriate employees.
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Fiji
Fiji
Telecommunication levy
Telecommunication levy of 1% is imposed on all voice call charges.
Credit card levy
Credit card levy of 2% is imposed on the outstandingcredit card balance at the due date
for payment for the credit card holders monthly billing cycle, including interest and
other bank charges. The credit card provider shall be liable to pay the levy on behalf of
the credit card holder.
Third party insurance levy
Third party insurance levy of 20% is imposed on the total third party insurance premium
collected in a month.
Gambling turnover tax (GTT)
Under the Gambling Turnover Tax Decree of 1991, GTT is imposed on the value of
consideration paid or payable in respect of the provision of prescribed gambling services
(i.e. acceptance of bets and provision of tickets for any lottery) at the rate of 15%.
Branch income
The profits of a foreign companys branch operating in Fiji are subject to the same tax
rate as the tax rate levied on profits of a resident corporation (i.e. 20%).
Normal tax is payable and assessed on taxable income of the business. Taxable income
is calculated by subtracting allowable deductions from all assessable income (i.e. all
sources of income).
Inventory valuation
Inventories are normally valued at the lower of cost and net realisable value. While the
first in first out (FIFO) method is acceptable, the last in first out (LIFO) method is not, for
either book or tax purposes. Conformity between book and tax reporting is not required,
and there are no special provisions for valuing inventories or determining inventory
flows.
Capital gains
Any profit or gain accrued or derived from the sale or disposal of real or personal
property, or any interest therein, shall be subject to income tax when:
the business of the company comprises dealing in such property
the property is acquired for the purpose of selling or otherwise disposing thereof, or
any profit or gain is derived from the carrying on or carrying out of any undertaking
or scheme entered into or devised for the purpose of making a profit.
Notwithstanding the above, the profit or gain derived from a transaction that does
not form part of a series of transactions and that is not itself in the nature of trade or
business shall not be included.
In such a case, the capital gain may be subject to CGT of 10% (see Capital gains tax [CGT]
in the Other taxes section for more information).
Dividend income
Transfers of property by private companies to shareholders and associates may be

deemed to be a dividend paid by that company. In the case of the sale of a company,
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613
Fiji
the total retained earnings of the company shall also be deemed dividends paid by the
company.
Dividends received from a company incorporated in Fiji by resident corporations are
exempt from tax.
Interest income
Interest income over FJD 200 derived by a resident from a financial institution shall be
appropriately subject to resident interest withholding tax final tax of 20%, which may be
claimed as a tax credit against income tax payable on income. Exempt income shall not
be subject to withholding taxes (WHTs).
Partnership income
The income of the partners from a partnership for any income year is equal to each
partners respective share of income from that partnership. Each partner declares
income separately and is individually liable for filing a tax return for each applicable
year.
Liability of directors/shareholders
Directors/shareholders of companies in liquidation or with insufficient assets to satisfy

tax liabilities may be held liable for any outstanding tax liability of the company, under
certain conditions.
Where a foreign-controlled business in Fiji produces less income than might be expected,
the revenue authorities may determine the income for tax purposes.
An entity normally residing outside Fiji that disposes of an interest in land in Fiji held
directly or through a shareholding in a company may be assessed for income tax on the
profit on that disposal.
Foreign income
Resident corporations are taxed on their worldwide income. Foreign income derived
from a treaty country is taxed according to the treaty. Foreign income sourced from
a non-treaty country by a Fiji tax resident is subject to income tax in Fiji. A credit is
allowed in Fiji for foreign tax paid on foreign income. The tax credit is limited to the
lesser of the Fiji tax payable or the foreign tax paid on such income. There are no special
provisions for taxing undistributed income of foreign subsidiaries.
Deductions
Generally, expenses wholly and exclusively incurred in deriving assessable income are
allowable deductions. Expenditures that are capital or domestic in nature are generally
not deductible.
Depreciation is calculated on the cost of a businessasset on a straight-line basis. The

prescribed rates of depreciation are based on the estimated life of the asset. Upon
disposal of a businessasset, either recoupment of depreciation claimed is taxable or
the excess of tax written-down value over sale proceeds is deductible. The taxpayer has
an option to set-off recoupment of depreciation against the cost of replacement assets.
Conformity between book and tax depreciation is not required.
There are seven broad bands of depreciation rates for assets acquired after 1 January
1998, and the prescribed effective life of the asset is used to determine the relevant
depreciation rate. The seven broad bands and the depreciation rates are as follows:
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Fiji
Fiji
Band
1
2
3
4
5
6
7
Effective life (years)

2 to less than 3
3 to less than 5
5 to less than 62/3
62/3 to less than 10
10 to less than 20
20 to less than 40
40 and over
Standard rate (%)

50
331/3
20
15
10
5
2.5
Maximum rate (%)

60
40
24
18
12
6
3
An optional 20% loading, which applies on the broadband rate, may be claimed. Assets
acquired before 1 January 1998 continue to be depreciated at the former rates.
Subject to certain conditions, accelerated depreciation is available for (i) buildings
constructed between 1999 and 2014 that are to be used for agricultural, commercial,
or industrial purposes; (ii) multi-storey, multi-unit residential buildings; and (iii) other
capital expenditure considered of benefit for the economic development of Fiji. Up to
one-fifth of the expenditure may be claimed in each of any five years of an eight-year
period.
Certain renewable energy plant and water storage facilities also qualify for a 100%
write-off.
Capital expenditure aimed at economising on the consumption of fuel, electricity, or its
derivatives, or on an asset using energy sources indigenous to Fiji, may be eligible for
accelerated depreciation at varying rates.
The cost of the acquisition of a mining lease or tenement and the cost of development of
mines may be written off in equal instalments in any five of the first or last eight years of
a nine-year period, commencing with the year in which the expenditure was incurred.
A deduction for depletion of other natural resources is not available.
Goodwill
Goodwill, and the amortisation thereof, is generally not deductible for income tax
purposes.
Start-up expenses
Start-up expenses are generally not deductible for income tax purposes.
Interest expenses
Interest expenses that are revenue expenditure wholly and exclusively incurred in
deriving taxable income are deductible in calculating taxable income. Interest expense
not appropriately subject to resident withholding tax final tax shall not be deductible for
tax purposes.
Provisions
Provisions for expenses not yet incurred (e.g. bad debts) are not tax-deductible.
Deductions are generally permitted in respect to amounts that are actually paid or
written off.
Contributions to approved charitable organisations of up toFJD 100,000 are deductible.

There are certain other specific donations that qualify for varying levels of deductions,
including:
Fiji
615
Fiji
Donations to the Fiji Heritage Foundation, which qualify for a deduction of 150%.
Cash donations exceeding FJD 50,000 to the Poverty Relief Fund for education,
which qualify for a deduction of 200%.
Cash donations exceeding FJD 50,000 (effective 1 January 2014, previously FJD
100,000) to a Sports Fund (as approved by the Commissioner of Inland Revenue) for
purposes of sports development in Fiji, which qualify for a deduction of 150%.
Total cost of new computers, laptops, and tablets of not less than FJD 10,000 but
not exceeding FJD 100,000 donated to urban and rural schools registered with the
Ministry of Education qualify for a deduction of 150% and 200%, respectively.
Effective 1 January 2014, the following payments qualify for a deduction of 150%:
Cash donations of not less than FJD 10,000 to the Disaster Rehabilitation Fund.
Cash sponsorships of more than FJD 100,000 but not exceeding FJD 200,000
towards the hiring of international sporting coaches.
Cash donations not exceeding FJD 50,000 towards any approved housing project
for squatters by the Fiji government.
Fines and penalties
Generally, fines and penalties are not deductible for income tax purposes.
Taxes
Taxes levied on income are not deductible. Only 50% of the employers statutory FNPF
contribution paid by the employer shall be allowed as a deduction for tax purposes in the
year the contribution was paid (see Contributions to the FNPF in the Other taxessection for
more information).
Employee cost not appropriately subject to Pay-As-You-Earn (PAYE) final withholding
taxes shall not be allowed as a deduction for tax purposes.
From 2012, losses may be carried forward for four consecutive years (previously
eight years), provided the company can demonstrate a minimum 51% continuity of
shareholding between the year of loss and the year of claim. Notwithstanding the
change in ownership, losses may also be carried forward where a company carries on the
same business in the carried forward year as it did in the loss year.
In relation to certain hotel business, tax losses may be carried forward for eight years
(previously 13 years). Please refer to the Hotel industry incentives in the Tax credits and
incentives section.
Loss carrybacks are not permitted.
Subject to the normal rules of deductibility, a deduction may be claimed for royalties,
management service fees, and interest charges paid to foreign affiliates.
Group taxation
Group taxation is not available in Fiji.
Transfer pricing
Transfer pricing provisions state that the tax authority may allocate income and
expenses between associates (related entities) to reflect income and expenses on an
arms-length basis.
The Income Tax (Transfer Pricing) Regulations provide that the Organisation for
Economic Co-operation and Development (OECD) Transfer Pricing guidelines may be
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Fiji
Fiji
used in interpreting the provisions of the Regulations in determining income or expenses
on an arms-length basis.
Thin capitalisation
There are no thin capitalisation rules in Fiji.

The tax incentives in Fiji are designed primarily to promote export sales and to
encourage the development of industries that are considered of benefit to the economic
development of Fiji.
Export income deduction
A deduction for export income is allowed in accordance with the following:

Year of assessment
2013
2014
2015
Percentage of export income to be deducted (%)

40
40
10
Export income means net profit derived by a taxpayer from the business of exporting
goods and services; and the Commissioner of Inland Revenue may, where separate
records for export income are not maintained, determine such income on the basis of a
formula as set out in the legislation.
The 5th Schedule of the Fiji Income Tax Act, Export Incentives, has been repealed.
However, the existing beneficiaries are expected to continue to enjoy the incentives
under this schedule until the expiry of the incentives granted.
Information communication technology (ICT) tax incentives
The income of an information communication technology operator may be exempt from

CIT, provided that the business employs 50 employees or more for six months within
the income year and 60% or more of the total value of its services in that income year is
exported, if it is:
operating on or before 1 January 2007 in the declared Kalabu Tax Free Zone (exempt
from 1 January 2007 to 31 December 2016) or
granted a licence after 1 January 2009 (exempt for a period of 13 years from the date
of issue of the licence).
The following tax incentives are available to taxpayers engaged in new ICT business and
for existing taxpayers so engaged who are able to show a significant increase in capacity
and number of employees:
80% tax exemption for businesses employing more than 101 employees.
60% tax exemption for those that employ between 60 and 100 employees.
40% tax exemption for those employing 10 to 59 employees.
Information communication technology business means an entity engaged in software
development, call centres, or internet service provision. It does not include an internet
caf, any retail or wholesale of information technology products, or the repair, sale, or
service of any such products.
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Employmentincentives
Salary and wages paid to first-time employees for the first 12 months of employment
qualify for a 150% deduction.Effective 1 January 2014,the definition of qualified
employees includes apprentices and trainees. This deduction is available until 31
December 2018.
Hotel industry incentives
Approved capital expenditure incurred in building, renovating, or expanding a hotel is

subject to an investment allowance of 55% of the approved expenditure, in addition to
normal depreciation.
Under the Short Life Investment Package (SLIP), the following concessions are available
to a company:
Exemption from CIT for a period of ten years, provided that the capital investment in
the hotel is more than FJD 7 million.
Duty-free entry of certain capital equipment, plant, and machinery, upon receiving
provisional approval from the Minister.
Permission to generate own electricity, the excess to be sold to the Fiji Electricity
Authority.
Any tax losses incurred by an entity granted approval for the investment allowance or
SLIP may be carried forward foreight years, but may only be set off against income of
the hotel business or from the hotel premises.
The recipients of provisional approval for hotel investment tax incentives are required
to commence implementation of the hotel projects within one year from the date
provisional approval is granted.
Filmmaking and audio-visual incentives
A tax exemption or reduced tax rate is available on the income of non-resident

employees of an approved non-resident company engaged or intending to be engaged in
making a film in Fiji.
A resident entity (excluding an entity holding a broadcast license in television or
radio in Fiji or with substantial shareholdings in the same) may deduct up to 150%
of expenditure on audio-visual production in respect of income in the year of the
expenditure. Audio-visual productions include production for exhibition or sale of
theatrical films, broadcast television, direct-to-video and video disk programme, audio
recording, computer software, and interactive websites.
A tax exemption is available on the income derived by a taxpayer from the commercial
exploitation of a copyright until the taxpayer has received from the commercial
exploitation a return of up to 60% of the expenditure. The expenditure must be of
capital nature and in relation to the audio-visual production costs in respect of a
qualifying audio-visual production.
Tax concessions are also available for residents of areas declared as studio city zones by
the appropriate government minister.
Tax Free Regions (TFRs)
The following concessions may be available to a newly incorporated entity engaged in

trade, business, or manufacture in the TFRs:
Exemption from CIT for a period of five to 13 consecutive fiscal years for a new
activity established between 1 January 2009 to 31 December 2014, depending on the
level of investment.
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Exemption from CIT for a period of 13 consecutive fiscal years for a new activity
established from 1 January 2015 with an initial capital investment of FJD 2 million.
Duty-free entry of raw materials, machinery, and equipment (including parts and
materials) required for the establishment of the business.
The areas declared TFRs are Vanua Levu, Rotuma, Kadavu, Lomaiviti, Lau, and Korovou
to Tavua.
Other tax incentives
An investment allowance of 55% is available for the construction or refurbishment and

renovation of a vessel, in addition to normal depreciation,subject to certain conditions.
An approved mining company may, for a specified period, be exempt from CIT or
taxed at a lower rate. The holder of a valid prospecting licence may write off approved
expenditure on prospecting for minerals against income from all sources.
A 150% deduction is available for direct capital expenditure incurred by commercial
banks in rural banking programmes.
Investors engaged in value adding processes in the food processing, agricultural
processing, fisheries, or forestry business may be able to claim a 100% deduction with
respect to amounts invested or re-invested (for expansion), provided that the businesses
meet the 50% local content rule.
A CIT exemption may be available to a taxpayer engaged in the following commercial
agricultural farming and agro-processing activities, subject to certain conditions:
Any new activity approved and established between 1 January 2009 and 31
December 2009, for a period of four toten consecutive fiscal years, depending on the
level of capital investment.
Any new activity with a capital investment of at least FJD 2 million approved and
established between 1 January 2010 and 31 December 2014, for a period often
consecutive fiscal years.
Income derived by a taxpayer from a new activity in processing agricultural commodities
into bio-fuels may be exempt from CIT for a period often years, under certain
conditions.
An exemption from CIT for a period of five years may be available to a taxpayer engaging
in renewable energy projects and power cogeneration.
Entities in the agriculture, fisheries, and tourism industries, with a maximum turnover
threshold of FJD 500,000 (effective 1 January 2014, previously FJD 300,000), may also
be exempt from CIT.
An investment allowance equal to 60% of the qualifying expenditure is available as
a deduction for investment in Fixed Line Next Generation Networks. A qualifying
expenditure means an expenditure of FJD 50,000 or more incurred for the purpose of
acquiring a capital asset in any of the years from the 2009 year of assessment to the 2012
year of assessment.
A 150% deduction is available on expenses incurred in reorganising a company for the
purpose of listing on the SPSE.
Effective 1 January 2014, any gain derived from the sale of shares for the purpose of
listing in the SPSE shall be exempt from income tax, subject to certain conditions.
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40% of capital expenditure of not less than FJD 50,000 incurred by any existing business
located in Vanua Levu is allowed as a deduction for tax purposes, subject to certain
conditions.
A 150% deduction is available on expenditure not exceeding FJD 250,000 incurred in
marketing goods and services for export to any of the South Pacific countries, excluding
Australia and New Zealand.
Effective 1 January 2014, the income of a shipping company derived from servicing
Rotuma and the Lau Group shall be exempt from CIT, subject to certain conditions.
Foreign tax credit
A credit is allowed in Fiji for foreign tax paid on foreign income, limited to the lesser of
the Fiji tax payable or the foreign tax paid on such income.
Withholding taxes
WHT (%)
Recipient
Resident
corporations
Non-resident
corporations:
Non-treaty
Treaty:
Australia
India
Japan
Korea, Republic of
Malaysia
New Zealand
Papua New Guinea
Singapore
United Kingdom
Know-how, Professional
Royalties management fees
fees
0
0
0
Dividends
0
Interest
20 (1)
15
10
15
15
15
15
5
0 to 15 (4)
10/15 (2)
15
15
15
5/15 (3)
0
15
10
10
10
10
15
10
10
10
0
10
15
10
10
10
15
15
15
10
10
15
15
10
10
10
15
15
15
10
10
15
0to 15 (4)
0 to 10 (4)
0to 15 (4)
0to 15 (4)
0to 15 (4)
0to 15 (4)
0to 15 (4)
0to 15 (4)
0 to 10 (4)
0to 15 (4)
Notes
1.
2.
3.
4.
Applies to interest (over FJD 200) on savings and deposits with commercial banks and other financial
institutions but is not applicable if income is exempt.
10% of gross amount of dividends if beneficial owner is a company (other than a partnership) that
directly holds at least 25% of the capital of the company paying the dividends; 15% in all other
cases.
5% of gross amount of dividends if beneficial owner is a company (other than a partnership) that
directly holds at least 10% of the capital of the company paying the dividends; 15% in all other
cases.
Depending on the provisions of the applicable double taxation agreement.
Tax administration
The Tax Administration Decree (TAD) was promulgated with the stated intention of
harmonising the administration of the various tax laws, including CIT and VAT. CGT,
FBT, and STT are now also covered by the provisions of the TAD.
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If a due date falls on a Saturday, Sunday, or holiday, the due date is the last working day
before the due date.
Taxable period
Tax is assessed on income derived during the calendar year preceding the year of
assessment. Returns are therefore generally accepted on a calendar-year basis, although
approval is also given to use an alternative fiscal-year basis. For purposes of assessment
of returns completed on a fiscal-year basis, the calendar year in which more than onehalf of the fiscal year falls is deemed to be the calendar year in which the income is
derived.
Tax returns
The Fiji tax system is not based on self-assessment. Returns of income contain
information on the basis of which assessments are raised by the tax authorities.
The due date for lodgement of CIT returns is three months after the end of the income
year. However, under the Tax Agent Lodgement Programme, an extension of time may
be granted to lodge the CIT returns.
Payment of tax
Final payment of CIT (i.e. the balance of actual tax payable) is generally due one month
after an assessment is issued.
Advance tax payments are required to be made inthreeinstalments, as follows:
First advance: Due on the last day of the sixth month of the current fiscal year (33.3%
of theimmediately preceding income yearstax payable).
Second advance: Due on the last day of the ninth month of the current fiscal year
(33.3% of theimmediately preceding income yearstax payable).
Third advance: Due on the last day of the fiscalyear (33.4% of theimmediately
preceding income yearstax payable).
The TAD provides for various ways to ensure the collection of taxes, including, but not
Departure prohibition order: A departure prohibition order may be used by the tax
office to prevent taxpayers from leaving the country without settling outstanding
taxes.
Garnishee orders: The tax office may garnish bank accounts for outstanding taxes.
Registration of charges on personal and real properties of the taxpayer.
Distress and sale of personal property.
Temporary closure of business.
Penalties
Administrative penalty provisions have been amended and increased under the TAD.
Some of the penalties are as follows:
Failure to register: Every person who fails to apply for registration as required
pursuant to the Decree commits an offence against the Decree and will, on
conviction, be liable to a fine not exceeding 50% of the tax payable where the delay
does not exceed six months; or a fine not exceeding the tax payable where the delay
exceeds six months.
Late filing of a return: A registered person who fails to lodge a taxreturn is liable for
a penalty of 20% of the tax payable in the case where tax is payable and a penalty of
5% of the tax payable for every month of default.
Late payment of tax payable: Where any tax remains unpaid on the expiry of the due
date, a penalty of 25% of the tax payable in respect of that taxable period will apply.
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Failure to comply with the late payment penalty: Every person who fails to comply
with the late payment penalty is liable for penalty of 5% of the unpaid tax for each
month of default.
Failureto maintain proper records: A registered person who fails to keep, retain, or
maintain account, documents, or records is liable for a penalty of 75% (knowingly or
recklessly made) or 20% (in other cases).
Insufficient payment of advance taxes:Ataxpayer who makes advance payment of
taxes less than the required amount per instalment is liable for a penalty of 40%.
Tax audit process
The Fiji Revenue and Customs Authority (FRCA) undertakes ongoing compliance
activity to ensure corporations are meeting their tax obligations. Compliance activities
take various forms, including questionnaires, reviews of specific issues, and audits.
Generally, the tax authority may issue notices of amended assessment within six years
after service of a notice of assessment. However, the six-year limit does not apply in
cases of fraud, wilful neglect, or serious omission.
Under the TAD, fraud is defined as an act of making a false statement to the tax
authority; wilful neglect is defined as the deliberate act to minimise tax payable; and
serious omission is defined as the omission of any amount of tax as determined by the
tax authority.
The FRCA has recently been focusing on transfer pricing issues, the introduction and
implementation of PAYE tax as a final tax, FBT, and the introduction of the proposed
new Income Tax Decree.
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PwC contact
Petri Seppl
PricewaterhouseCoopers Oy
Itmerentori 2
FI-00180 Helsinki, Finland
Tel: +358 20 787 7909
At the end of 2013, the Finnish Parliament approved several significant changes to the
Finnish tax legislation, including the following:
The corporate income tax (CIT) ratewasreduced to 20% for tax years ending in 2014
(previously 24.5%).
The deductibility of interest expenses for intra-group loans was restricted to 25%
of fiscal earnings before interest, tax, depreciation, and amortisation (EBITDA)
(previously the limitation was 30% of fiscal EBITDA).
Entertainment expenses are fully non-tax deductible as of tax year 2014.
An additional tax deduction exists for education costs of employees.
The research and development (R&D) incentive was limited to fiscal years 2013 and
2014 only (originally 2013 through 2015).
Accelerated depreciations on production investments were limited to fiscal years
2013 and 2014 only (originally 2013 through 2015).
The taxation of dividends received by companies changed, as follows:
Dividends received by a non-listed company from a listed companys shares are
100% taxable income if the company owns less than 10% of the share capital
of the distributing listed company (before 75% taxable and 25% tax-exempt
income).
Dividends distributed by a non-resident company are tax-exempt income if the
distributing company is such as mentioned in the EC Parent-Subsidiary Directive
or other company resident in a European Union (EU) or European Economic Area
(EEA) country thatis liable to pay at least 10% tax for its income. However, the
dividend is 100% taxable if a non-listed company receives a dividend distributed
by a listed company and the recipients ownership is less than 10%.
Dividends distributed by a non-resident company (other than resident in anEU/
EEA country) are 100% taxable income. However, tax treaties usually prevent the
taxation of certain subsidiary dividends.
Distributions from reserves for invested unrestricted equity are primarily taxed as
dividends as of 2014.
The applicable withholding tax (WHT) rate on dividends and royalties paid to a nonresident company was reduced to 20% (previously 24.5%).
On 5 March 2014, Finland signed an intergovernmental agreement (Model 1 IGA
agreement) with the United States (US) on the applicability of the Foreign Account
Tax Compliance Act (FATCA). By virtue of the agreement, tax information shall be
exchanged automatically every year between Finland and the United States.

Finnish resident companies are subject to Finnish CIT on their worldwide income (i.e.
unlimited tax liability). Also, Finnish permanent establishments (PEs) of non-resident
companies are subject to Finnish CIT on their worldwide income attributable to the PE.
The CIT rate is 20%.
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Local income taxes
No local income taxes are levied in Finland on the income of a company.
Corporate residence
A company is deemed to be resident on the basis of incorporation. Consequently, a
company is deemed to be resident in Finland if it is incorporated (registered) in Finland.
A PE is, in general, formed in line with the Organisation for Economic Co-operation and
Development (OECD) Model Convention.
Other taxes
The general VAT rate is 24%. A reduced rate of 14% is applied to food and animal feed.
The reduced VAT rate of 14% also applies to restaurant and catering services. A reduced
VAT rate of 10% is applied to certain goods and services (e.g. books, subscriptions of
newspapers and magazines lasting one month or longer, accommodation, passenger
transport).
A zero rate applies in certain instances (e.g. intra-Community supplies of goods and
exports of goods). Additionally, certain services (e.g. financial services, insurance
services, and certain educational services) are exempted from VAT.
Customs duties
Many goods imported into Finland from outside the European Union are subject to
customs duties. The rates of duty are provided by the EUs Common Customs Tariff and
vary widely.
Excise duties
Alcohol and alcoholic beverages, tobacco products, liquid fuels, electricity, natural gas,
and coal are subject to EU harmonised excise duties. National excise duties are levied in
Finland on waste delivered to landfill sites, lubricating oil, oil imported into or through
Finland, ice cream, sweets, soft drinks, beverage containers, and tall oil.
Real estate tax
Municipalities impose an annual real estate tax. The tax is levied on the taxable value of
buildings and land. The municipal council determines the applicable tax rates, although
the minimum and maximum tax rates are set by tax legislation (e.g. 0.32% to 0.75%
for permanent dwellings, 0.6% to 1.35% for other real estate). The tax is deductible
from taxable business income if the real estate is used for business purposes. The tax is
deductible from taxable income of the so-called other source of income if the real estate
is used to acquire other taxable income than business income.
Transfer tax
A transfer tax of 4% of the sales price is payable on the transfer of real estate situated in
Finland. The transfer of shares in Finnish companies (other than housing companies and
real estate companies) and other domestic securities is subject to a transfer tax of 1.6%.
The transfer of shares in Finnish housing companies and real estate companies is subject
to a transfer tax of 2%.
A transfer tax of 2% of the sales price is payable on the transfer of shares in a foreign
or Finnish company whose activities consist mainly of owning or holding (directly or
indirectly) real estates in Finland, provided that either the transferor or the transferee
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is a resident of Finland or, alternatively, a Finnish branch of a foreign credit institution,
a Finnish branch of a foreign investment firm, or a Finnish branch of a foreign fund
management company.
Generally, the transfer tax is payable by the transferee.
No transfer tax is payable on the transfer of securities that are subject to trading on
a regulated market or multilateral trading facility in the European Economic Area.
Similarly, no transfer tax is payable if both the seller and the transferee are nonresidents. Transfer tax is, however, always payable on transfers between non-residents if
the transferred shares are shares in a Finnish housing or real estate company.
Stamp tax
No stamp taxes are levied in Finland.
Public service broadcasting tax
Public service broadcasting tax (Yleisradio or YLE tax) for companies and organisations
is based on the taxable income for a tax year. The tax amounts to 140 euros (EUR) per
year if the taxable income of the organisation is at least EUR 50,000. For organisations
with taxable income exceeding EUR 50,000, the tax is levied at EUR 140 plus 0.35%
of the taxable income exceeding EUR 50,000. The maximum of the annual tax is EUR
3,000, which will be payable by organisations with taxable income of EUR 868,000 or
more.
YLE tax is deductible in the taxation of a company.
Bank tax
A temporary tax on Finnish deposit banks is applicable for years 2013 to 2015. The bank
tax rate is 0.125% of the amount of risk-weighted assets and it is non-deductible for CIT
purposes. The tax is collected from the Finnish deposit banks. The Finnish branches
of foreign banks are outside of the scope of the tax. The bank tax will be abolished if a
framework for the recovery and resolution of credit institutions and investment firms is
established at the EU level.
The purpose of the bank tax is to collect funds in advance in case of possible new
problems in the financial sector. Thus, the intention is to limit taxpayers liabilities in any
future bank crises.
According to the Finnish social security legislation, both Finnish and foreign employers
have a liability to pay several social security payments in Finland in cases where an
employee performs ones tasks partly or wholly in Finland. The liability concerns all
employers, regardless of the form of the company and whether the foreign company has
a PE in Finland. The percentage rates for the employers (and employees) social security
contributions are revised on an annual basis.
Compulsory social security contributions payable by the employer in 2014, according to
the paid salaries, are as follows:
Employers social security charge: 2.14% (no cap).
Employers pension insurance contribution: 17.75% (on average, no cap).
Employers unemployment insurance contribution: 0.75% for the first EUR 1,990,500
of gross salaries and 2.95% for the portion of the gross salaries exceeding EUR
1,990,500 (no cap).
Group life insurance premium: 0.067% (on average, no cap).
Accident insurance premium: 0.9% (on average, no cap).
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The new rates for employers social security charge are applicable to salaries paid as of
1 January 2014. The employers social security charge is paid to the regional tax office,
and the other contributions are paid to the insurance company. All of these contributions
are tax deductible as salary cost.
Compulsory social security contributions payable by the employee in 2014 are as
follows:
Employees pension insurance contribution: 5.55% or 7.05% used for employees of
age 53 or over (no cap).
Employees unemployment insurance contribution: 0.50% (no cap).
The above mentioned contributions are tax deductible for the employee. These
contributions are withheld from the gross salary at the time of salary payment and
remitted by the employer to the appropriate insurance company together with the
employers pension and unemployment contributions.
Employees sickness insurance contribution: 2.16% (no cap).
The sickness insurance consists of two payments, a daily allowance contribution of
0.84% and a medicare contribution of 1.32%. From these two contributions, only
the daily allowance contribution is tax deductible for the employee. The medicare
contribution is not tax deductible. Unlike other employees social security contributions,
the sickness insurance contribution is included in the WHT rate of the employees
personal WHT card and, thus, withheld and remitted to the tax authorities together with
the withheld income taxes and is finally settled in the final assessment.
If an employee is regarded as a foreign-posted employee and has an A1 certificate or a
certificate of coverage from ones home country, neither the aforementioned employers
social security contributions nor the employees social security charges are payable in
Finland.
Branch income
As a general rule, a branch is taxed like a corporation (tax rate 20%) on the profits
attributable to it, provided the branch constitutes a PE in Finland. No tax is withheld on
transfers of (taxed) profits to the head office.
Companies and other legal entities may have income from three different sources:
income from business activities, agricultural income, and personal source income. The
net taxable income is calculated separately for each source. The expenses of one source
of income cannot be deducted from the taxable income of another source, and a loss
from one source of income cannot offset taxable income from another source. All taxable
income received by a company is taxed at the CIT rate of 20%, irrespective of the source
to which it is attributable.
Income from business and professional activities falls into business source income
(taxed in accordance with the Business Income Tax Act or BITA), while income from
non-business activity is personal income. Typically, personal income is passive income
derived, for example, from investments. As an example, rental income from real estate
let to non-related companies is usually regarded as personal source income. The same
can apply to a dividend received from stock exchange quoted companies, where the
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recipient of the dividend is a passive holding company. Farming and forestry income are,
as a main rule, treated as agricultural source income.
In general, Finland has a very broad income concept, and taxable income includes
all income derived from a companys activities, though there are some significant
exceptions, including (among others):
Capital contributions by shareholders.
In most cases, dividends from unlisted companies (see Dividend income below).
Liquidation gains and capital gains qualifying for the participation exemption (see
Capital gains below).
Proceeds from disposal of companys own shares.
Merger gain.
There is no general distinction between capital gains and other income; capital gains of a
company are taxed as part of its general income either in the business income basket or
the other income basket. No rates other than the general CIT rate of 20% are applied to
any part of taxable income of a company.
Taxable income of a company generally is computed on an accrual basis (i.e. income
is taxable in the year it is earned). However, exemptions to this main rule do exist,
including unrealised exchange gains and losses, which are taxable/deductible in the
year of the rate change.
Inventory valuation
Inventories may be written down to the lower of direct first in first out (FIFO) cost,
replacement cost, or net realisable value. Conformity between book and tax reporting is
required.
Capital gains
Capital gains and losses are generally included in the taxable business income (i.e. sales
proceeds are included in the taxable income, and the undepreciated balance of the asset
sold is deducted in the sales year) and treated as ordinary income. However, the entire
stock of machinery and equipment is treated as a single item, and the capital gain on
machinery and equipment is entered as income indirectly by deducting the selling price
from the remaining value of the stock of machinery and equipment.
Capital gains arising from the sale of shares are tax exempt via a participation
exemption, under certain circumstances. Specifically, capital gains arising from the sale
of shares are tax exempt if:
the seller is not a company carrying out private equity activities (as defined by the
BITA)
the seller has owned continuously, for a period of at least one year, at least 10% of the
share capital of the target company, and
the shares are part of the sellers fixed assets and the shareholding is included in the
sellers business income source for tax purposes.
For the participation exemption to apply, the target company cannot be a real estate
company, a housing company, or a company the activities of which mainly include
owning of real estates. The target company must also be a Finnish company, a company
referred to in the European Commission (EC) Parent-Subsidiary Directive, or a company
resident in a country with which Finland has concluded a tax treaty that applies to the
target companys dividend distribution.
Note that a capital gain is taxable to the extent that the gain corresponds with a previous
tax-deductible write-down or provision made in connection with the acquisition cost of
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shares, subsidies received for acquiring shares, or previous capital losses deducted for
Finnish tax purposes from intra-group transfer of the shares.
Capital losses are non-deductible in situations where capital gains are exempt from tax.
Dividend income
Dividends received by a Finnish company are tax exempt in most cases.

However, dividends received by a Finnish company are fully taxable (100%) if:
the dividend is received from a publicly quoted company, the receiving company is
not a publicly quoted company, and the shareholding is less than 10% of the equity of
the distributing company
the dividend is distributed by a non-resident companythat is not such as mentioned
in the EC Parent-Subsidiary Directive or other company resident in an EU or EEA
countrythat is not liable to pay at least 10% tax for its income, or
the dividend is distributed by a company resident outside the European Union or
European Economic Area.
Note that most of the Finnish tax treaties include provisions enabling tax-exempt
dividends from the tax treaty country in case of at least a 10% shareholding.
Furthermore, dividends received are partly (75%) taxable if the dividend is received on
shares belonging to investment assets and the receiving company does not own at least
10% of the equity of the distributing company that is resident in another EU member
state and covered by the EC Parent-Subsidiary Directive or the dividend is received
on shares belonging to investment assets and the distributing company is resident
in Finland or an EEA country but not a company covered by the EC Parent-Subsidiary
Directive (note that only financial, pension, and insurance institutions may have assets
that are considered as investment assets).
Stock dividends
Stock dividends (bonus shares) may be distributed to stockholders, which are

corporations and other legal entities with some exceptions, free of tax on the
shareholder (see Dividend income above).
Distributions from reserves for invested unrestricted equity
Distributions from reserves for invested unrestricted equity are, in general, deemed as
dividends as of 2014. However, distributions from non-listed companies can be deemed
as capital gain if they are:
a return of capital investment made by the same taxpayer
distributed within ten years of the investment, and
clarified by the taxpayer that the abovementioned conditions are met.
Distributions cannot be deemed as a capital gain if the reserves for invested unrestricted
equity have been formed in conjunction with a merger and acquisition (M&A) process.
For investments made prior to 1 January 2014, this new legislation is applied for the first
time in financial year 2016.
Interest income
Interest income of a company is taxed as part of its general income, thus the regular CIT
rate of 20% is applied.
Foreign income
A Finnish corporation is taxed on foreign dividends when the decision to distribute

dividends is made and on foreign branch income and other foreign income (e.g. interest
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and royalties) as earned. The principal method of avoiding double taxation is the credit
method, although the exemption method is still applied in a few older treaties (see the
Tax credits and incentives section for more information).
Deductions
As with taxable income, the concept of deductible costs is wide and covers, in general,
all costs incurred in the pursuance of taxable income. Significant exceptions to this rule
include (among others):

Income taxes (see below), tax late payment interests, and punitive tax increases.
Fines and other punitive payments.
100% of entertainment costs.
Capital losses and liquidation losses if capital gains from the sale of shares of a target
company would qualify for the participation exemption (see Capital gains in the
Income determination section).
Losses from the disposal of a companys own shares.
Merger losses.
Interest expenses exceeding 25% of taxable EBITDA (see Thin capitalisation in the
Group taxation section).
As the accrual method is applied to the calculation of taxable income, expenses are
usually deductible in the year they are realised (i.e. the year the obligation to pay has
arisen).
The maximum annual rates of depreciation calculated on net book value (decliningbalance method) are 25% for machinery and equipment and from 4% to 20% for
buildings and other constructions, depending on the type and estimated life of the
asset. Net book value is defined as cost less accumulated depreciation and, in the case of
machinery and equipment, proceeds on disposal of the assets. The straight-line method
is applied to certain intangible assets and capitalised expenditures and to assets with
long economic use, such as dams. Tax depreciation is limited to the cumulative charges
made in the books.
Costs related to qualifying intangible property are usually amortisable over a period of
ten years or a shorter period if the economic life is proven to be less than ten years.
The capital cost of mines, sandpits, quarries, and peat bogs is written off in proportion to
the quantities extracted. Short-lived items (the economic life of which is three years or
less) may be written off immediately.
Land is not a depreciable asset.
Temporary double depreciation for investments in production is applied for fiscal years
2013 and 2014. The double depreciation is applied to new factories and workshops and
new equipment and machinery used in factories and workshops. Such new investments
should be taken into use in 2013 and 2014. The double deduction can be made up
to two years in a row during 2013 and 2014. The double depreciation is 50% of the
undepreciated balance for machinery and equipment and 14% of the undepreciated
balance for buildings.
Goodwill
Acquired goodwill is amortisable for tax purposes over its economic life, up to a
maximum of ten years.
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Start-up expenses
Start-up expenses are generally deductible expenses when determining taxable income.
Interest expenses
As a general rule, interest expenses are fully deductible. However, as of 2014,

deductibility of interest expenses for intra-group loans is restricted to 25% of fiscal
EBITDA (previously 30% of fiscal EBITDA) (see Thin capitalisation in the Group taxation
section).
Bad debt
In general, bad debts incurred from sales receivables, etc. are tax deductible. The bad
debts must also be deducted for accounting purposes. Additionally, loan receivables
may be tax deductible in cases where external loans or ownership of less than 10% is in
question.
Donations are deductible for CIT purposes in certain cases.

In order for a donation to be tax deductible, the amount of the donation should be at
least:
EUR 850, but not more than EUR 250,000, if made to an EEA member state or to
a publicly financed university or other higher educational institution in the EEA to
benefit the sciences, the arts, or the Finnish cultural heritage, or
EUR 850, but not more than EUR 50,000, if made to an association, foundation, or
other institution in the EEA nominated by the Tax Administration and to benefit the
sciences, the arts, or the Finnish cultural heritage.
Donations of not more than EUR 850 (e.g. to charitable purposes) are, in general, tax
deductible.
Taxes
No income taxes are deductible when determining taxable income. However, the real
estate tax and YLE tax are deductible.
Education costs of employees
Employers are allowed to make an additional tax deduction for certain education costs
of their employees. It is required that the employer has made a qualifying education
plan and the education relates to the current or future tasks of the employee. The
deduction entails both internal and external courses. The amount of the deduction is
the average daily salary of all employees working for the employer multiplied by the
amount of all qualifying educational days of all employees. This amount is subsequently
divided by two. The maximum amount of qualifying education days is three days per
employee within the tax year in question. The deduction has no tax consequences for the
employees.
Losses may be carried forward for ten subsequent years. However, the right to carry
forward losses may be forfeited in certain instances, such as in cases where there is
a direct or indirect change in the ownership of the company operating at a loss. Loss
carrybacks are not allowed.
A Finnish corporation may claim a deduction for royalties, service fees, and interest
charges paid to foreign affiliates, provided the underlying transaction is beneficial to it
and the amounts paid are at arms length.
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Group taxation
Companies within a group are not consolidated for CIT purposes. However, via group
contributions (i.e. lump sum payments of cash based on annual taxable profits), group
companies may even out their taxable profits and losses, which leads effectively to the
same result as consolidation would. A group contribution is a deductible cost for the
granting company and taxable income for the receiving company, provided that all of
the following are true:
Both companies belong to a structure where there is a direct or indirect common
ownership of at least 90%, and the structure has existed for the entire tax year.
Both companies are Finnish resident for tax purposes.
Both companies are limited liability companies or co-operatives with business
activities (i.e. have a source of income from business activities, see the Income
determination section) and are not financial, insurance, or pension institutions.
The contribution is recorded in the annual statutory accounts of both companies
involved and must affect their annual net income.
The accounting period for both companies ends at the same date.
The amount of contribution does not exceed the taxable business income of the
granting company.
The contribution is not considered a capital investment.
Based on case law, the ownership chain may also be traced via foreign entities, provided
there is a tax treaty between Finland and the country wherein the ultimate parent for the
group is resident.
Transfer pricing
All transactions between related parties must happen at arms length. The requirement
is imperative even in relation to purely domestic transactions. If the arms-length
requirement is not followed, income or deductions of a company may be adjusted for tax
purposes, in addition to which a risk for substantial penalties exists.
A Finnish company is obligated to prepare transfer pricing documentation to support
transactions between its non-Finnish related parties. Documentation is subject to
statutory requirements regarding content, which vary depending on the volume of
related party transactions. The documentation requirement does not concern small and
medium-sized companies that have less than 250 employees or feature a turnover of no
larger than EUR 50 million and a balance sheet of no more than EUR 43 million.
Thresholds are calculated at the group level. Failure to present appropriate
documentation within 60 days from the tax authorities request may lead to a punitive
tax increase. The documentation may be requested six months after financial year end at
the earliest.
Thin capitalisation
The Finnish parliament has recently approved a new law concerning intra-group
interest deduction limitations. Deductibility of interest expenses for intra-group loans
is restricted to 25% of fiscal EBITDA. Excess interest can be carried forward to future
years. The limitation rules do not apply if (i) net annual interest expense (including both
intra-group and third party interest) does not exceed EUR 500,000 or (ii) if the Finnish
companys equity-to-gross-assets ratio is greater than or equal to the group-consolidated
ratio. The limitations will be applied for the first time in the tax assessment for fiscal year
2014.
In addition, the amount of debt and rate of interest should be at arms length. If not, a
possibility for application of the general anti-avoidance provision may exist.
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The CFC rules are applicable with respect to foreign entities in low tax jurisdictions
controlled by Finnish residents. The undistributed profits of such foreign entities may
be taxed as profit of the Finnish resident direct or indirect shareholders. The entity is
deemed to be controlled by Finnish residents if at least 50% of the capital or total voting
rights are directly or indirectly held by Finnish residents or if Finnish residents have
the right to at least 50% of the profits of the entity. The taxable person in such a case
is the Finnish resident shareholder who directly or indirectly owns at least 25% of the
capital of the corporate body or has the right to at least 25% of the profits of the entity. A
foreign entity is considered to be low taxed if the actual income tax burden of the foreign
corporation in its country of residence is lower than three-fifths of the tax burden of a
comparable Finnish corporation (i.e. an effective rate of less than 12%, which is threefifths of the Finnish tax rate of 20%).
Foreign PEs of non-resident companies can be regarded as equal to foreign companies,
provided that the PEs profits are not taxed in the head office state. Due to the
transitional period, the PE provision will be applicable to PEs of foreign entities only as
of 1 January 2015.
Certain types of businesses are excluded from the scope of the CFC rules (e.g. income
principally from industrial, manufacturing, or shipping activities, as well as sales or
marketing activities related to such activities, if they are directed principally to the
country of residence of the sales or marketing company). Also, companies resident in
a country with which Finland has a double tax treaty (DTT) generally are outside the
scope of the CFC rules if the company does not benefit from any special tax incentives
in that treaty country. Tax treaty countries that are not covered by this rule are
exhaustively mentioned in a specific black list provided by the Ministry of Finance.
These countries are Barbados, Bosnia-Herzegovina, Georgia, Kazakhstan, Macedonia,
Malaysia, Moldova, Montenegro, Serbia, Singapore, Switzerland, Tajikistan, United Arab
Emirates, Uruguay,andUzbekistan.
In addition to these two mentioned exclusions, the Finnish CFC rules are not applicable
in cases of genuine economical establishment in a foreign country, which is either
an EU/EEA member state or a tax treaty state not on the black list. The genuine
economical establishment is evaluated in light of the requirements of the business in
question and paying special attention to capable personnel and office space located in
the low tax jurisdiction.

Foreign tax credit
The principal method of avoiding double taxation is the credit method, although the
exemption method is still applied in a few older treaties. Foreign tax can be credited
against taxes payable in Finland on the same income over the same period on a pro-rata
basis. The credit is given for taxes paid to a foreign state and covered by the relevant
double tax treaty. The maximum credit is the lesser of either the amount of the foreign
tax or an amount equal to the Finnish tax payable on the income from a foreign state.
This maximum is calculated on a source-by-source basis. Unused credit of foreign tax
paid may be carried forward for five years on an income basket basis.
Research and development (R&D) activities
R&D related costs may be deducted annually, or they can be capitalised.

The Finnish Parliament has approved a temporary tax incentive for tax years 2013
and 2014 (originally 2013 to 2015) concerning R&D costs. According to the law, an
additional deduction on salary expenses of personnel involved in R&D is allowed
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in taxation. The amount of additional deduction on R&D salary expenses is 100%
(minimum EUR 15,000 and maximum EUR 400,000).
Withholding taxes
Finnish corporations paying certain types of income are required to apply a 20% or 15%
WHT on payments to foreign corporations and a 30% WHT on payments to non-resident
individuals or other than corporate entities.
According to domestic legislation, interest paid to a non-resident is usually tax exempt in
Finland.
Dividends paid to a company referred to in the EC Parent-Subsidiary Directive, owning
at least 10% of the capital of the dividend distributing company, are also tax exempt.
No WHT is levied on dividend payments received by companies resident in the EU/EEA
area (other than in Liechtenstein), which would have been tax-free if paid to a Finnish
corporate body, if the WHT cannot be credited in the companys country of residence.
The domestic WHT rate is 15% if the requirements for WHT exemption listed above are
not met and
the non-resident recipient is a financial, insurance, or pension institution resident in
the EU/EEA area (other than Lichtenstein)
the shares belong to its investment assets, or
the non-resident recipient is a non-listed company or a private company resident in
the EU/EEA area (other than Lichtenstein) receiving dividends from a resident listed
company in which it holds less than 10%.
See the table below for WHT rates on dividends and other payments from Finland to nonresidents.
For countries not included in table, the WHT rate is 20% (corporate entity) and 30%
(individual or other than corporate entity).
Note that each tax treaty should be studied carefully because there are often exceptions
to general rules.
WHT (%)
Recipient
Argentina
Armenia
Australia
Austria
Azerbaijan
Barbados
Belarus
Belgium
Bosnia-Herzegovina
Brazil (see protocol)
Bulgaria
Canada
Dividend (portfolio)/
interest on
cooperative capital
15
15
15
10 (2)
10
15 (5)
15
15 (2)
15
20/30
10 (2)
15
Dividend (direct
investment) *
10 [25%]
5 [25%]
5 [10%] (6, 14)
0 [10%] (2, 14)
5 [25%] (8)
5 [10%] (14)
5 [25%]
5 [25%] (2)
5 [25%]
20/30
10 (2)
5 [10%] (14)
Investment
fund profit
share Royalties
20/30
15 (18)
0
10 (6)
20/30
5 (8)
0
5 (25)
20/30
5 (4)
20/30
5 (1, 5)
0
5
0 5 (1, 25)
0
10
20/30
20/30
0 5 (1, 25)
20/30
10 (1)
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WHT (%)
Recipient
Croatia
Cyprus
Czech Republic
Denmark (including the
Faroe Islands)
Egypt
Estonia
France
Georgia
Germany
Great Britain
Greece
Hungary
Iceland
India
Indonesia
Israel
Italy
Japan
Kazakhstan
Korea, Republic of
Kyrgyzstan
Latvia
Liechtenstein
Lithuania
Luxembourg (10)
Macedonia
Malaysia
Malta
Mexico
Moldova
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Romania
Russia
Singapore
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interest on
cooperative capital
10
15
15 (2)
15 (2)
15 (2)
Investment
fund profit
share Royalties
20/30
10 (9)
0
10
0
0 (25)
0 10 (1, 16,
25)
0 [10%]
0
0
Dividend (direct
investment) *
5 [25%]
5 [25%]
5 [10%] (2)
5 [25%] (2)
10
10
20/30
20/25
15 (2)
5 [25%] (2)
20/30 (15) 10 (12, 25)
0
0
0
0
10 0 [50%]/5 [10%] (8)
0
0
15 (2)
10 [25%] (2) See dividend 5 (1, 25)
(15)
0 (5)
0
0 (5, 15)
0 (5)
13 (2)
13 (2)
0 10 (1, 25)
15 (2)
5 [25%] (2)
0 5 (1, 25)
15 (2)
0 [10%]
0
0
10
10
20/30
10
15
10 [25%]
20/30
15 (4)
0 (5)
0 [10%] (2, 14)
0 (5, 15)
0 (5)
15
5 [10%]
0
10
15 (2)
10 [50%] (2)
0 5 (1, 25)
15
10 [25%] (8)
0
10
15
5 [10%]
0
10
15
10 [25%]
0
10
15
5 [25%]
0
5
15 (2)
5 [25%] (2)
20/30 (15) 10 (12, 25)
20/30 (2, 24)
20/30 (2, 24)
20/30
20/30
15 (2)
5 [25%] (2)
20/30 (15) 10 (12, 25)
15 (2)
5 [25%] (2)
0 5 (1, 25)
15
0 [10%] (14)
0
0
15
5 [10%]
20/30
5
15
5 [10%] (2, 14)
0
0
0
0
20/30
10
15
5 [25%]
0
7 (6)
10
7 [25%]
20/30
10
15 (2)
0 [5%]
0
0
15
15
20/30
10
15 (2)
0 [10%]
0
0
20 (21)
12 [25%]
20/30
10
20/30
15 [10%] (14)
20/30 15/25 (3)
15 (2)
5 [25%]
0
5 (25)
15 (2)
10 [25%] (2)
0
10 (25)
5 (2)
5 (2)
0 5 (19, 25)
12
5 [30%] (7)
0
0
15
5 [25%]
0
10
10
5 [10%] (14)
24.5/30
5
Finland
WHT (%)
Recipient
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tajikistan
Tanzania
Thailand
Turkey
Ukraine
United States
Uruguay
Uzbekistan
Vietnam
Zambia
interest on
cooperative capital
15 (2)
Dividend (direct
investment) *
5 [25%] (2)
15 (2)
15
15 (2)
15
15 (2)
10
15
20
20/30
15
15
20/30 (23)
15 (22)
15
15
15
15
5 [25%] (2)
5 [10%]
10 [25%] (2)
15
0 [10%]
0 [10%]
5 [25%]
20
20 [25%] (13)
15 [25%]
5 [20%]
20/30 (23)
5 [10%] (14, 22)
5 [25%]
5 [10%] (14)
5 [70%]/10 [25%]
5 [25%]
Investment
fund profit
share Royalties
0 10 (1,16,
24)
0
5 (25)
0
0
0
5 (25)
0
10
0
0
0
0
0
5
0
20
20/30
15
20/30
10
0
10 (17)
20/30 (23) 20/30 (23)
0
0
0
10 (20)
0
10 (6)
20/30
10
20/30 15 (1, 11)
Notes
* The recipient is a company whose share in the company making the payment is at least the percentage
indicated in brackets.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
Tax is not levied on literary, scientific, or artistic royalties (for film royalties see text of treaty).
If corporate entity, then:
no tax if these dividends were tax free under Business Tax Act and if the recipient does not
receive a full credit for the Finnish tax in the country of residence, and
no tax on dividend paid to a company meant in the EC Parent-Subsidiary Directive owning at
least 10% of the capital of the paying company.
The tax rate is 15% on films, tapes used in television or radio broadcasts, use of copyright of literary,
artistic, or scientific works, or royalty paid for usufruct.
The tax rate is 10% on literary, scientific, artistic, and film royalties.
The tax rate for an individual is 30% if income is tax-exempt in the country of residence.
A lower tax in certain cases.
Foreign capital greater than 100,000 United States dollars (USD) when dividend becomes due and
payable.
See the treaty for additional requirements.
The tax rate is 7% on industrial, scientific, and commercial royalties.
The tax agreement does not apply if the recipient is a special holding company.
The tax rate is 5% on royalties from films and tapes.
The tax rate is 5% on royalties paid for the use of industrial, commercial, or scientific equipment.
The tax rate is 15% if the payer is also an industrial enterprise.
The 10% is calculated on the total voting stock.
There is no tax on profit shares meant in EC Directive 2003/48/EC.
The tax rate is 1% for finance lease of equipment and 5% for operating lease of equipment and
computer software.
The tax rate is 5% for the use of secret process or for know-how; there is no tax for computer
software or patent.
The tax rate is 10% on industrial royalty, 3% on royalties to news agency, and 5% on artistic royalty
to the author or the authors mortis causa successor.
The tax rate is 2.5% on royalties paid for the use of industrial, commercial, or scientific equipment or
computer software.
The tax rate is 5% on royalties paid for the use or the right to use of industrial, commercial, or
scientific equipment or software.
The tax rate is 15% if the recipient is a company.
There is no tax on dividends to qualified parents-subsidiaries and pension funds.
There is no tax if the recipient proves that one has domicile (individual) or is incorporated in the
United Arab Emirates.
If corporate entity tax is 15% or 20%.
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25. There is no tax on royalties between associated companies meant in EC Directive 2003/49/EC.
Non-treaty areas include Andorra, Antigua and Barbuda, Bahama Islands, Bahrain,
Belize, Cayman Islands, Channel Islands, Gibraltar, Grenada, Greenland, Hong Kong,
the Spitsbergen, Jan Mayen, Liberia, Macao, Mauritius, Monaco, Panama, Samoa, San
Marino, Vanuatu, and Virgin Islands.
Tax administration
Taxable period
The tax year is generally the calendar year. A company having an accounting period
other than the calendar year is taxed for the accounting period or the accounting periods
ending during the calendar year.
Tax returns
A company must file a CIT return within four months from the end of the accounting
period.
Payment of tax
Income taxes are levied as prepayments during the tax year. Advance tax payments for
companies are collected in two or 12 instalments during the tax year. If the total amount
to be paid is not more than EUR 1,700, the instalments are due in the third and the ninth
month of the accounting period. If the total amount to be paid exceeds EUR 1,700, the
instalments are due monthly (due date is the 23rd day of each month).
If the final taxes exceed the advance payments, the difference is payable in the form
of a supplementary payment due on the 25th day of the month following the month
during which the final assessment is completed (ten months after the end of accounting
period). Interest is payable on the supplementary amount if paid after the filing deadline
of the CIT return (see above).
The YLE tax will be included in the advance taxes payments as of 2014.
After the assessment of the taxes, any excess prepayments are refunded without
application.
Tax audit process
Tax audits are performed at irregular intervals by tax auditors, who are entitled to
examine the accounts of a company and to request additional information necessary to
the examination. Generally, the taxpayer receives an advance notice of an audit from the
tax authorities.
Tax assessment must be completed within ten months from the end of the tax year. After
the assessment, a tax office can change an incorrect assessment. A correction for the
benefit of the taxpayer has to be made in five years, calculated from the beginning of the
year following the assessment year.
Any correction disadvantageous for the taxpayer must be made within the following
time limits, calculated from the beginning of the year following the assessment year:
One year: All errors.
Two years: Writing errors made by the administration, calculation errors, and other
comparable errors, as well as errors caused by erroneous or inadequate information
given by third parties.
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Five years: If the taxpayer has failed to file ones return or has filed an incomplete,
false, or misleading return.
Current issues of special focus for tax audits are transfer pricing and PEs.
The Tax Account system
The Tax Account system is a taxpayer-specific information system under which

unprompted taxes (e.g. VAT and employers social charges) are declared on a monthly
basis. Payments are made through regular payment channels.
Tax types not covered by the Tax Account system are income tax, real estate tax,
inheritance tax, gift tax, forestry fees, and transfer tax. It is important to note that WHTs
are declared through the Tax Account system.
Other issues
Company restructurings
In accordance with the EC directive 2009/133/EC on mergers, divisions, partial

divisions, transfers of assets, and exchanges of shares concerning companies of different
EU member states, it is possible to carry out the said restructurings tax neutral if
statutory conditions are met. In cross-border situations, both parties should be resident
in the European Union. The principle of going concern is applied in taxation (i.e. the
receiving company receives the assets with the values the transferring company had for
those assets in itstaxation).
Notification duty for construction businesses
As of1 October 2013, a monthly notification duty of the employee and contract
information to the Tax Administration applies to construction work subscribers and the
main contractor of a joint construction site.
Foreign Account Tax Compliance Act (FATCA)
On 5 March 2014, Finland signed an IGA concerning FATCA with the United States.
On the basis of the agreement, Finland will bring into force legislation according to
which Finnish financial institutions are required to carry out specific due diligence
procedures in order to identify their customers subject to tax in the United States and
to report information relating to these customers income and wealth to the Finnish Tax
Administration. The information to be reported includes, for example, interest income,
income from dividends and derivatives, life insurance payments, and gross sales prices
of shares and bonds. The Finnish Tax Administration shall forward the information to
the US Internal Revenue Service (IRS).
The financial sector will begin to recognise their customers in accordance with FATCA as
of 1 July 2014. The first reporting to the Finnish Tax Administration takes place in 2015.
Also, Finland has publicly announced that it will be among the early adopters of the
Common Reporting Standard (CRS) for Automatic Information Exchange published
by the OECD. The first customer recognition procedures should begin as of January in
2016, and the first exchange of information should take place in September 2017.
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France
PwC contact
Michel Combe
Landwell & Associs
Crystal Park
61 rue de Villiers
92208 Neuilly-sur-Seine Cedex
France
Tel: +33 1 56 57 45 86
New restriction of interest deduction (new anti-hybrid-financing
measures)
The Finance Bill for 2014 adds a new test to the existing rules governing interest
deductions for financing by a party that is directly or indirectly related to a French
borrower.
Under the new rule, interest deductions will be allowed only if the French borrower
demonstrates that the lender is, for the current financial year, subject to a corporate tax
on the interest that equals 25% or more of the corporate tax that would be due under
French tax rules. When the lender is domiciled or established outside of France, the
corporate tax determined under French law equals the tax liability that the lender would
have owed on the interest had it been resident or domiciled in France.
Taxpayers must provide documentation to support the corporate tax calculation if
requested by the French tax authorities.
It is still unclear whether the interest disallowed under this provision will be considered
as a deemed distribution and therefore subject to French internal withholding tax
(WHT)and 3% distribution tax.
The measure applies retroactively to interest booked during fiscal years ending on or
after 25 September 2013.
New tax on high remunerations owed by French entities
Finance Bill for 2014 has created an exceptional 50% surtax on the gross remuneration
in excess of 1 million euros (EUR). This tax is equal to 50% of the gross amount of
remuneration exceeding EUR 1 million paid per year per individual. However, the tax
iscapped at 5% of the companys turnover.
The new provision provides for a wide scope of remuneration. See the Other taxes section
for more information.
Tighter temporary corporate income tax (CIT) surcharge - increase of

the rate applicable
The 5% CIT surcharge assessed on the CIT amount due by companies whose turnover
exceeds EUR 250 million is increased to 10.7%. This new rate is applicable for fiscal
years ending between 31 December 2013 and 30 December 2015.
Transfer pricing regulations
Light but annual transfer pricing documentation is to be provided within six months
from CIT filing, reporting all intra-group flows in excess of EUR 100,000 and any change
in the transfer pricing policy compared to the previous period. This obligation applies for
financial years closed as of 31 December 2013.
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As of 1 January 2014, upon tax audit, companies whose gross assets exceed EUR 400
million, have a turnover that exceeds a specific threshold (EUR 152.4 million or EUR
76.2 million, depending on the activity of the company), or that are part of a group that
meet those criteria, and assuming they have management accounts or consolidated
accounts, will have to provide the French tax administration analytical and consolidated
accounts.
Identically, as of 1 January 2014, rulings granted by foreign tax authorities have to be
part of the transfer pricing documentation.
Finally, it will no longer be possible, as of 1 January 2014, to defer the collection of
corporate tax reassessed when a mutual agreement procedure is launched.
Increased penalties in case of tax evasion
The French Tax Code (FTC) incorporates new sets of provisions in relation with tax
evasion, increasing penalties and enhancing situations where penal sanctions apply.
Value-added tax (VAT) rates
The VAT rate increased as of 1 January 2014 (Third Amended Finance Act for 2012)
from 19.6% to 20% for the common rate and from 7% to 10% for the second reduced
rate.

France levies CIT at a rate of 33.33%.
A resident company is subject to CIT in France on its French-source income. In that
respect, income attributable to foreign business activity (if there is no treaty in
force between France and the relevant foreign country) or to a foreign permanent
establishment (PE) (if a tax treaty applies) is excluded from French tax basis.
A non-resident company is subject to CIT in France on income attributable to French
business activity or to a French PE, as well as on income from real estate located in
France.
Social contribution tax
Concerning large size companies, a social contribution tax amounting to 3.3% is

assessed on the CIT amount from which a EUR 763,000 allowance is withdrawn.
Temporary CIT surcharge
A CIT surcharge of 10.7% assessed on the CIT amount is due by companies whose
turnover exceeds EUR 250 million.
This temporary surcharge is applicable to fiscal years ending on or after 31 December
2013 until 30 December 2016. For fiscal years ending on or after 31 December 2011 until
30 December 2013, the surcharge was 5%.
3% additional contribution on dividend distributions
Dividend distributions (or deemed distributions for tax purposes) made as of 17 August
2012 by French companies are subject to a genuine 3% additional tax, which comes
on top of underlying CIT. The 3% tax is not due (i) by French companies meeting the
European Union (EU) small and medium enterprise (SME) criteria, (ii) by foreign
partners in a tax transparent French partnership, and (iii) by French branches of EU
companies.
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France
Tax credits are not creditable, with the possible exception of foreign tax credits eligible
under a double tax treaty (DTT).
Distortion of taxation resulting from the form of establishment in France (branch vs.
subsidiary) will generate new litigations based on EU principles. Foreign investors may
revisit the most appropriate structure (branch vs. subsidiary) for investment in France.
Patent box regime
Under certain conditions, income derived from the sale or license of patents or
patentable inventions is taxed at a reduced corporate tax levied at the rate of 15%.
Capital gains
A reduced tax rate of 15% applies to certain capital gains. See Capital gains in the Income
determination section for more information.
Local income taxes
No tax is levied on income at the regional or local level.
Corporate residence
France is defined as metropolitan France (excluding the overseas territories [TOM],
but including the continental shelf), Corsica, and the overseas departments (DOM, i.e.
French Guyana, Guadeloupe, Martinique, Reunion).
As a general rule, a resident company is a company that is incorporated under French
commercial laws.
The notion of PE is not defined by the FTC and has been specified by a case law of the
French Administrative Supreme Court (i.e. Conseil dEtat). The notion of PE refers to
an enterprise exploited in France that can be materialised in one of the three following
situations:
Business activity conducted through an establishment (i.e. a fixed business
installation operating with some degree of autonomy [e.g. a branch, sales office]).
Business conducted in France by a dependent agent.
Existence of a complete commercial cycle in France.
Other taxes
Turnover taxes
Turnover taxes are assessed on goods sold and services rendered in France, and operate
much like a VAT. As of 1 January 2014, the normal rate is 20% (previously 19.6%). Sales
of certain kinds of medicines and transports of persons are taxable at a 10% (previously
7%) reduced rate. Food products, subscription to gas and electricity (under certain
circumstances), sales of books, and products and services provided to disabled persons
are taxable at a 5% (previously 5.5%) rates. Other specific sales and services are taxable
at a 2.1% reduced rate. Exports and certain specific services invoiced to non-French
residents are zero-rated.
Business-to-business (B2B) suppliers of services are generally taxable at the location of
the customer and not at the location of the supplier. For business-to-consumer (B2C)
suppliers of services, the place of taxation is generally where the supplier is established.
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Turnover taxation applies only to taxable persons, partly taxable persons, and nontaxable legal persons that are registered for turnover taxes.
Specific turnover taxation rules apply to leases of transportation equipment; cultural,
arts and sports services; electronic and telecommunication services; and transportations
of goods.
Customs duties
Depending on their country of origin, goods may be subject to customs duties. The rules
are aligned with the EU customs regulations.
Under certain circumstances, the payment of the duties can be deferred depending on
the terms and conditions of the warehousing arrangements.
Excise taxes
Some specific goods are subject to excise duties, notably:

Alcohol and alcoholic drinks (e.g. wine, beer, ethylic alcohol).
Processed tobaccos (e.g. cigars, cigarettes, tobacco).
Oil and gas products.
Real estate tax
All properties located in France are subject to a 3% real estate tax. The tax is assessed
annually on the fair market value of the real estate, in proportion to the direct or indirect
interest held. All entities in the chain of ownership are jointly liable for the payment of
the tax.
Automatic exemptions apply in three situations. First, to entities whose French real
estate assets represent less than 50% of their total French assets. Second, to entities
listed on a regulated market whose shares, units, or rights are significantly traded
on a regular basis. Third, to entities having their registered office in France, in an EU
member state, or in a country that has concluded a DTT with France providing for an
administrative assistance or a non-discrimination clause, where:
their direct or indirect interest in the French real estate is less than either EUR
100,000 or 5% of the fair market value of the French real estate
they are pension funds or public charities recognised as fulfilling a national interest
whose activities justify the need to own French real estate, or
they are non-listed French real estate funds (socit de placement prpondrance
immobilire capital variable [SPPICAV] or fonds de placement immobilier [FPI]) or
foreign funds subject to equivalent regulations.
Where an automatic exemption does not apply, a claim may be submitted for conditional
exemption.
Territorial economic contribution
The territorial economic contribution (Contribution Economique Territoriale or CET) is

comprised of two different taxes: the companies land contribution (Cotisation Foncire
des Entreprises or CFE) and the companies added value contribution (Cotisation sur la
valeur ajoute des entreprises or CVAE). Although they have a similar scope, the taxes are
subject to very different rules.
The CFE tax is based on the rental value of assets that are subject to the real estate tax,
excluding movable goods and equipment. For industrial plants, the taxable base is
reduced by 30%. There is a specific rental value for each town and an upgrading ratio is
set forth at the national level each year.
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The CVAE is based on a companys added value. Only taxpayers that are not exempt from
the CFE and whose turnover is greater than EUR 152,500 are subject to CVAE. However,
tax relief equal to the amount of the tax is provided for companies whose turnover
is below EUR 500,000. The tax rate for companies whose turnover ranges from EUR
500,000 to EUR 50 million is assessed according to a progressive scale, which ranges
from 0% to 1.5%.
There is an upper ceiling on the added value that applies to the CET. As a consequence,
tax relief applies and is equal to the excess of the sum of CFE and CVAE over 3% of the
added value of the company.
Registration duties
Registrations duties mentioned hereafter are imposed on the purchaser. However, the
seller may be liable for these duties in case of non-settlement by the purchaser.
Transfer of goodwill
The transfer of goodwill is subject to a registration duty at a rate of 3% on the part of the
transfer price amounting from EUR 23,000 to EUR 200,000 and at a rate of 5% on the
part exceeding EUR 200,000.
Transfers of shares
The transfer of sharesis subject to registration duty at a rate of 3% with no cap.

The transfer of listed shares recorded by a deed will be subject to registration duty at a
rate of 0.1%.
Several exemptions are added to the list of the transactions that are not subject to
transfer duties:
Transactions subject to the financial transaction tax (FTT).
Repurchase by companies of their own shares intended to be sold to the subscribers
of a company employee saving plan, with some exceptions.
Transactions between companies in the same group within the meaning of Article
L233-3 of the French Commercial Code.
Transfer of ownership resulting from a merger, a contribution, or a spin-off made
under the provisions of Article 210 A and 210 B of the FTC and acquisition shares of a
company by its employees.
Transfer of interest or quotas in legal entities whose capital is not divided into shares
The transfer of interests or quotas in legal entities whose capital is not divided into
shares (e.g. Socit responsabilit limite [SARLs] or Socit en nom collectif [SNCs],
which are a form of private limited liability corporate entity) is subject to a registration
duty of 3%.
Transfer of shares in non-quoted real estate companies
The transfer of shares in non-quoted companies whose assets consist principally of

immovable property is subject to a registration duty of 5%. In case of disposal of shares
held in real estate companies, the taxable basis for transfer tax purposes is equal to the
fair market value of the real estate assets or rights reduced by the debt contracted for the
acquisition of such assets or rights. Other kinds of debts are not taken into account to
compute the taxable basis of the transfer tax.
Transfer of real estate
The sale of land and buildings is subject to registration duty at a rate of 5.09% on the
transfer price, including expenses.
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Exit tax rules in case of transfer of French head office or establishment
Under prior law, in the case of a transfer of assets outside France as part of a transfer
of a head office or an establishment, unrealised gains were immediately taxable. In the
future, in the case of a transfer to an EU member state or, under certain conditions, to a
European Economic Area (EEA) member state, taxpayers will be able to either pay the
full amount of tax immediately or pay it over five years in five equal instalments.
Systemic risk tax
A bank tax known as a systemic risk tax has been implemented to prevent excessive risk
behaviour by banks. This tax is payable by certain financial institutions (including credit
institutions).
It should be noted that fund entities (e.g. hedge funds or securitisation vehicles) are
outside the scope of the tax.
French banks are subject to the bank tax on their worldwide business activities. The
equity requirements that are used as the taxable basis for the calculation of the bank
tax are calculated on a consolidated basis. Therefore, institutions that fall within the
scope of the tax and that belong to a consolidated group are not subject to the tax on an
individual basis.Where they are not part of such a group, institutions pay a contribution
calculated on their individual position. The taxable basis is made up of the minimum
equity required of the institution, as set out by the Prudential Control Authority to meet
reserve ratio requirements in accordance with Basel II standards and specified during
the previous calendar year.
The rate of the bank tax amounts to 0.25% of the taxable basis, and any amounts paid in
that respect will be deductible for CIT purposes.
A tax return must be filed by 30 June every year, and the tax due must be settled at the
same time.
Subject to the principle of reciprocity, it should be noted that taxpayers, for which the
registered office or the group parent company is located in a country that has enforced a
similar tax on systemic risk, can benefit from a tax credit. This tax credit can be used to
settle the tax due or can be reimbursed.
Payroll tax
Companies that are not liable for VAT on at least 90% of their annual turnover are
subject to payroll tax (taxe sur les salaries) regarding salaries paid during the following
calendar year. Companies below the 90% trigger are liable for the payroll tax on the
complement of their VAT recovery ratio, called the counter VAT recovery ratio.
Payroll tax is assessed on gross salaries. The rate varies from 4.25% to 13.6%. A new
20% rate has been created for annual gross salaries above EUR 150,000. The taxable
base has also been extended to compulsory or voluntary profit sharing.
Financial transaction tax (FTT)
FTT applies to acquisitions for consideration of equity securities or similar securities

in the meaning of the French Monetary and Financial Code issued by certain Frenchlisted companies (i.e. financial instruments giving access to capital or to voting rights
in the company and securities issued under foreign law representing French-eligible
securities). FTT applies regardless of whether the transaction is executed inside or
outside of France.
The tax is due by the investment service provider (ISP) that has executed the
purchase order or, when there is no ISP, by the custodian, irrespective of its place of
establishment.
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In most cases, the central securities depositary will be in charge of centralising the
collection of the tax, the reporting to the French tax authorities, and the payment of the
tax to the French Treasury.
The tax rate is 0.2% computed based on the acquisition price of the shares.
New tax on high remunerations owed by French entities
Finance Bill for 2014 has created an exceptional 50% surtax on the gross remuneration
in excess of EUR 1 million euros. This tax is equal to 50% of the gross amount of
remuneration exceeding EUR 1 million paid per year per individual. However, the tax
iscapped at 5% of the companys turnover.
The new provision provides for a wide scope of remuneration. Indeed, gross
remuneration owed for a given year will include the following:

Wages, salaries, and similar items, as well as cash, in-kind, and fringe benefits.
Directors attendance fees and similar items.
Pensions and supplemental retirement allocations.
Indemnifications, allocations, and other benefits granted upon retirement.
Amounts granted as part of compulsory or voluntary profit-sharing plans.
Grants of stock options, free award of shares, and similar items.
Equity warrants for entrepreneurs.
Reimbursements to other entities for any of the above categories.
The remuneration items listed above are included in the taxable basis regardless of their
payment date. As a general rule, remuneration is included in the tax base when it is
accounted for as an expense. Stock options, free awards shares, and equity warrants for
entrepreneurs are included in the tax base of the year in which they are granted.
The tax base generally corresponds to the amount recorded on the employers books.
Pensions and similar items will be computed differently if paid in annuity versus granted
in capital. For stock options and equity warrants for entrepreneurs, the enterprise can
generally choose between the fair market value of the shares attached to the options
or warrants determined in the consolidated accounts (such as International Financial
Reporting Standards [IFRS]) and 25% of the fair market value of the shares attached
to the options or warrants at the decision date to grant the options or warrants. For free
award shares, the enterprise can choose between the fair market value of the shares
determined in the consolidated accounts (such as IFRS) or the value of the shares as of
the date of the decision to grant the shares. The election must be made before the tax
payment.
For remuneration due in 2013, the tax must be declared and paid before 30 April 2014.
Branch income
Tax rates on branch profits are the same as on corporate profits. As a principle, branch
profits are deemed to be distributed to the head office. WHT is levied on French
branches of non-resident non-EU corporations at the rate of 30%, or a reduced tax treaty
rate (e.g. for the United States [US], 5%), on net profits. Refund (limited or full) of tax
may be claimed to the extent that the taxable amount exceeds the dividend(s) actually
distributed by the foreign corporation during the 12 months following the close of
the fiscal year concerned, or to the extent the dividends are distributed to residents of
France.
Profits realised in France by non-resident corporations whose head offices are located
in an EU country are not subject to branch WHT, provided that certain conditions are
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met (e.g. effective head office in an EU country or non-resident corporation subject to
corporate taxation).
Inventory valuation
Inventories must be valued at the lower of cost or market. Cost must be determined in
accordance with the first in first out (FIFO) or the average-cost method. The last in first
out (LIFO) method is prohibited.
Capital gains
Capital gains generally are taxable as ordinary income and subject to CIT at the standard
rate of 33.33%, regardless of the duration of ownership of the assets sold.
However, a reduced rate of 15%, increased by the social contribution tax, is applied to
capital gains on the disposal of patents or patentable inventions, as well as on income
from the licensing of patents or patentable inventions.
Gains on the sale of shares in subsidiaries held for at least two years benefit from
significant relief (88% of such capital gains are excluded from CIT, with the remaining
12% portion being taxed at the standard 33.33% rate).
Capital gains and losses on shares sold to a related company
Capital gains derived from the disposal of shares held in subsidiaries for less than two
years are immediately taxable at the common rate of CIT.
Capital losses derived from such disposal are not immediately deductible. In such a case,
the loss will be deducted if, before a period of two years (as from the date of acquisition
by the purchaser):
the vendor stops being subject to CIT
the shares are, after a restructuring of the transferee company, held by a company
that is not related to the vendor, or
the shares stop being held by the related company (notably further to a new sale).
If no event mentioned above arises within a period of two years starting from the
acquisition by the vendor, the capital loss that has not been immediately deducted is
treated in accordance with the long-term regime (i.e. the capital loss is therefore not
deductible).
Otherwise, the vendor has to join to its corporate tax return a specific form mentioning
capital losses that are not immediately deducted.
Capital gains of non-residents
As a general rule, non-resident companies are not taxable in France regarding capital
gains derived from the disposal of French assets unless these are part of a PE.
There are two main exceptions to this principle:
Capital gains derived from the disposal of real estate assets located in France or
derived from the disposal of French real estate non-listed companies are subject in
France to WHT at a 33.33% rate.
Capital gains derived from the disposal of shares held in a French company subject
to CIT are subject in France to WHT at a 19% rate in the specific case where the seller
has owned, at any point in time during the five years preceding the sale, at least 25%
of the rights in the profits of the French company.
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Note that in the specific case where the non-resident company is located in a noncooperative state or territory (NCST), all capital gains derived from the disposal of
French assets are subject to WHT in France at a specific rate of 75%.
Dividend income
Dividends generally are taxable as ordinary income and subject to CIT at the standard
rate of 33.33%.
For information on the taxation of inter-company dividends, see Participation exemption
regime in the Group taxation section.
Interest income
Interest income generally is taxable as ordinary income and subject to CIT at the
standard rate of 33.33%.
Foreign income
Resident corporations are not taxed on foreign-source income derived from activities
carried out abroad through foreign branches and foreign PEs. Other foreign income
is not taxable until actually repatriated to French resident corporations. As a result,
undistributed income of foreign subsidiaries is not taxable. The only exception to
the territoriality principle is provided by Article 209 B of the Tax Code, known as
the Controlled Foreign Company (CFC) rules (see the Group taxation section for more
information).
Deductions
Depreciation
The depreciation of fixed assets has to be carried out component by component. The
components of a fixed asset have to be depreciated separately according to their own
lifetime.
Declining-balance depreciation is allowed for certain new and renovated assets whose
useful life is in excess of three years.
For assets bought or manufactured between 4 December 2008 and 31 December 2009,
the rate is computed by multiplying the rate of straight-line depreciation by:
1.75, if the useful life of the asset is three or four years
2.25, if the useful life of the asset is five or six years, or
2.75, if the useful life of the asset is more than six years.
For assets bought or manufactured after 31 December 2009, the rate is computed by
multiplying the rate of straight-line depreciation by:
1.25, if the useful life of the asset is three or four years
1.75, if the useful life of the asset is five or six years, or
2.25, if the useful life of the asset is more than six years.
Goodwill
Under current French tax rules, goodwill (e.g. clientele, trademarks) cannot be
amortised.
Start-up expenses
No specific rules apply regarding deduction of start-up expenses.
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Research and development (R&D) and software expenses
Concerning R&D and software expenses, a business may elect to immediately deduct
costs incurred in R&D of software or to amortise their cost straight-line over a maximum
period of five years.
The cost of acquiring software may be written off straight-line over 12 months.
The cost of patents acquired can be amortised over a five-year period.
Interest expenses
In principle, interest expenses are tax deductible.
New restriction of interest deduction
The Finance Bill for 2014 adds a new test to the existing rules governing interest
deductions for financing by a party that is directly or indirectly related to a French
borrower.
Under the new rule, interest deductions will be allowed only if the French borrower
demonstrates that the lender is, for the current financial year, subject to a corporate tax
on the interest that equals 25% or more of the corporate tax that would be due under
French tax rules. When the lender is domiciled or established outside of France, the
corporate tax determined under French law equals the tax liability that the lender would
have owed on the interest had it been resident or domiciled in France.
Taxpayers must provide documentation to support the corporate tax calculation if
requested by the French tax authorities.
The measure applies retroactively to interest booked during fiscal years ending on or
after 25 September 2013.
Carrez Amendment
In accordance with Article 40 of the fourth amended Finance Act for 2011 (i.e. Carrez
Amendment), interest expenses incurred by a French company for the acquisition of
participation or shareholding acquisitions will not be deductible for CIT purposes unless
the French acquiring company is in a position to demonstrate that it actually:
makes decisions relating to the acquired participation and
exercises an actual control or influence over the participations.
The purpose of the legislation is to prevent the interest deduction for the participation
acquisition by a French entity when the acquired participation is effectively managed
outside of France.
This rule does not apply where:
the total fair market value of the participations owned by the French acquiring
company does not exceed EUR 1 million
the participation acquisition has not been financed by debt at the level of the French
acquiring company or at the level of a company of the same group, or
the debt-to-equity ratio of the group is equal to or higher than the acquiring
companys debt-to-equity ratio.
Additional limit on interest deductions
As of 1 January 2014, 25% (previously 15%) of the net finance expenses of a company
subject to French CIT are not deductible. This limit applies in addition to existing limits.
In a tax group, this limit applies to the consolidated tax result of the group. This is a
permanent disallowance, as there is no mechanism to carry the disallowed interest
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forward to subsequent fiscal years. Net finance expense is defined as the total amount
of finance expense incurred as consideration for financing granted to the company,
reduced by the finance income received by the company in consideration for financing
granted.
Rents incurred as part of a rental agreement between related parties or a leasing
agreement also are included in finance expenses after the deduction for depreciation
of the lessor. However, rents paid in relation to real estate rental agreements between
related parties should be excluded. This limit applies to both related and third party
financing, regardless of the purpose of the financing.
This limit does not apply if a companys net finance expense is lower than EUR 3 million.
In a tax group, this applies if the net finance expense of the group is lower than EUR
3 million. Groups need to consider the impact of this provision on how tax is shared
among the members of the tax group in the tax sharing agreement.
In addition, in a tax consolidated group, this limit does not apply to the portion of net
finance expense resulting from financing transactions between members of a French tax
unity.
Thin capitalisation
Please see comments regarding thin capitalisation in the Group taxation section.
Bad debt
Bad debts that are definitively non-recoverable are treated, from a tax point of view, as
losses.
Under certain conditions, a tax-deductible reserve can be established for debts whose
collection is uncertain.
Charitable donations made by companies to certain foundations or societies are

deductible at up to 60% of their amount (limited to EUR 5,000 of the turnover before
taxes).
Taxes
Most taxes, including unrecoverable turnover taxes, registration duties, and CET, are
deductible. The major exceptions are CIT and tax penalties.
Corporate tax losses

Carryforward of tax losses
Tax losses carried forward are available to offset the firstEUR 1 millionof taxable profits
and 50% of taxable profits in excess of this.
The carryforward is conditional to certain limitations, namely that the entity continues
the same business activities. The FTC provides criteria for measuring such a change of
activity that jeopardises the right to carry forward net operating losses. Under certain
circumstances, a ruling can be obtained from the French tax authorities to keep the net
operating losses despite a business reorganisation.
Carryback of tax losses
Tax losses are available for carryback to the fiscal year immediately preceding that in
which the losses arise and up to a maximum of EUR 1 million. Any unused surplus will
be carried forward and used as set out above. In addition, the election to carry back tax
losses must be filed prior to the deadline for submission of the tax return for the lossmaking period.
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Tax groups
The overall tax losses of a French tax group, as well as pre-election tax losses of the
individual members of the group, will be attributed, whether carried forward or carried
back, in the same manner and within the same limits as those set out above.
Payments to foreign related parties
Payments to foreign affiliates are allowed, as long as they meet the arms-length test. If
they do not, Article 57 of the FTC provides that income directly or indirectly transferred
to the foreign related parties, through either the increase or the reduction of the
purchase or sales price of goods and services, or through any other means, must be
added back to taxable income. For the purpose of this provision, foreign related parties
are defined as parent subsidiaries or sister companies.
Where the payments are made to companies located in a country with a privilege tax
regime, the French taxpayer must prove that the transaction is bona fide and that the
amount due is not exaggerated (see the Group taxation section for more information on
countries with a privilege tax regime).
Royalties
Article 11 of the Finance Act for 2012 restricts the conditions for deducting licensing
royalties where the licensor and the licensee are related parties. A full deduction for
the royalty expense may only be allowed if the licensee can demonstrate, and properly
document, that:
the use of the licence results in added value for the licensee over the entire licensing
period and
such use is real (i.e. does not consist of an artificial scheme).
Group taxation
Tax consolidation regime
French corporations and their 95% owned domestic subsidiaries may elect to file one
single tax return, thus allowing the offset of losses of one group corporation against the
profits of a related corporation. CIT is then levied on the aggregate income after certain
adjustments for intra-group provisions (e.g. debt waivers, dividend distributions) have
been made.
When shares in a company that will be integrated into the group are acquired by a group
company from individuals or legal entities that control this group, either directly or
indirectly, a portion of the groups overall financial expense incurred by the members of
the group is progressively added back to the groups taxable income on a straight-line
basis over a nine-year period.
A French subsidiary can be included in a tax consolidated group even if its parent
company is not located in France. However, at least 95% of the share capital of the
foreign company must be held, directly or indirectly, by the French company that is head
of the tax consolidated group. In addition, the foreign company must be subject to CIT,
be located in the European Union or in a member state of the European Economic Area
whose tax treaty with France includes a mutual administrative assistance clause to fight
tax fraud and tax evasion, and hold 95% of the lower-tier subsidiarys shares.
A PE of a foreign company subject to French CIT can be a member of a French tax
consolidated group if the shares of the foreign company are held by other French
companies, which are members of the consolidated group.
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Provisions on the tax neutrality of intra-group transaction flows (e.g. dividends,
amortisation, waivers of debts, interest, and capital gains/losses on the sales of shares)
have been modified to treat tax consolidated groups with an intermediate foreign
company the same as other tax consolidated groups.
Allocation of the tax charge within a tax consolidated group
In an important decision dated 12 March 2010 (Wolseley Centers France), the French
Supreme Court disagreed with the French tax authorities by ruling that the tax charge of
the group can be freely allocated between members of the consolidated tax group.
Following this decision, group companies are free to enter into a tax consolidation
agreement stating the conditions for the allocation of the group tax charge or, where
applicable, the tax savings arising from the group arrangement.
The Supreme Court concludes that since the terms of an agreement to allow a reallocation taking into account the specific results of each of the group companies,
the terms of this re-allocation cannot be regarded as an indirect subsidy. However,
this allocation should not undermine the corporate benefit of each group member
nor the minority shareholders rights; otherwise, this will result in an abnormal act of
management.
Underpriced sale of asset between two entities of a same tax consolidated

group
In a decision dated 10 November 2010 (Socit Corbfi), the French Supreme Court has
specified that an underpriced sale of an asset between two members of the same tax
group must be neutralised at the group level only after the computation of the entities
results on a standalone basis.
First, on a standalone basis, the seller has to add back the advantage given to the buyer
(i.e. the difference between the fair market value and the amount paid) and the buyer
adds back this advantage as if it was a dividend. Second, when reprocessing the different
entities results, the advantage added back by the buyer has to be neutralised at the
group level.
French parent companies (i.e. companies incorporated in France and holding qualifying
shares that represent at least 5% of the issued capital of subsidiaries, French or foreign)
have the option of excluding 95% of the subsidiaries net dividends from CIT (5% of
charges and expenses must be added back to the parent companys taxable results). The
French parent-subsidiary regime extends to certain shares without voting rights. There is
no formal commitment to have held the shares for at least two years, and companies can
benefit from this regime from the acquisition date of the shares. However, the obligation
remains to hold the shares over this two-year period. Certain shares of listed real estate
companies are not eligible to the French parent-subsidiary regime.
The taxation of dividends received by a parent company from its subsidiary cannot be
capped at the amount of the expenses actually incurred by the parent company. Thus,
the tax liability will be equal to 5% of the dividends received, tax credits included.
The French parent-subsidiary regime is not applicable to dividends paid from entities
located in an NCST.
Distribution followed by absorption or sale of subsidiary
The rules abolish the possibility for a company to accumulate the exemption of dividends
received from its subsidiaries (under the participation exemption regime or the tax
consolidation regime) and the deduction of a loss in value resulting from the dividends
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distribution due to previous distributions at the time of the securities exchange or sale of
shares.
In principle, the subsidiarys shares must be kept by the parent company for at least
two years in order to benefit from the participation exemption regime. However, some
operations lead to a break of the two-year holding period. In that case, the exchanged
shares are deemed withheld until the sale of the securities received in exchange.
The exchanged shares will be deemed kept for the application of the participation
exemption regime only if the gain or loss is not taken into account in the result of that
exchange. If the gain or loss is included in the result, the dividends received may not
benefit from the participation exemption regime and will be taxed.
Transfer pricing
New regulations
Light but annual transfer pricing documentation is to be provided within six months
from CIT filing, reporting all intra-group flows in excess of EUR 100,000 and any change
in the transfer pricing policy compared to the previous period. This obligation applies for
financial years closed as of 31 December 2013.
As of 1 January 2014, upon tax audit, companies whose gross assets exceed EUR 400
million, have a turnover that exceeds a specific threshold (EUR 152.4 million or EUR
76.2 million, depending on the activity of the company), or that are part of a group that
meet those criteria, and assuming they have management accounts or consolidated
accounts, will have to provide the French tax administration analytical and consolidated
accounts.
Identically, as of 1 January 2014, rulings granted by foreign tax authorities have to be
part of the transfer pricing documentation.
Finally, it will no longer be possible, as of 1 January 2014, to defer the collection of
corporate tax reassessed when a mutual agreement procedure is launched.
Transfer pricing documentation
Large corporations located in France (i.e. with annual turnover or amount of gross assets
in excess of EUR 400 million) are required to provide documentation containing general
information regarding the relevant group of companies, including main activities,
operational and legal structures of the related companies, functions performed and risks
borne, main intangible assets, and group transfer pricing policy, amongst others.
Advanced pricing agreements (APAs)
APAs are available for taxpayers only on the basis of international agreements entered
into in accordance with Article 25 of the Organisation for Economic Co-operation
and Development (OECD) Model Tax Convention. Currently, taxpayers are also
allowed to enter into APAs with the French tax authorities on a unilateral basis. In
practice, taxpayers are entitled to submit their transfer pricing policy to the French tax
authorities. Agreement of the tax authorities to the APA precludes a later challenge as
long as facts and circumstances described in the APA and actual ones are identical.
Thin capitalisation
Under current rules, the tax deduction of interest paid by a French company to its
foreign controlling shareholders is subject to the following three restrictions:
Interest rate limitation
Under the amended Article 212 of the FTC, tax deduction of interest paid to related
parties is limited to the higher of (i) the average annual interest rate applied by credit
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institutions to companies for medium-term variable rate loans or (ii) the interest that
the borrowing company could have obtained from independent banks under similar
circumstances. This rate is 2.79% for financial years ending on 31 December 2013.
Having passed this interest rate test, French indebted companies have to pass a second
test: the debt ratio.
Debt ratio
That part of interest paid to related parties that is deductible under the rate limitation
test is disqualified if it exceeds all of the three following limitations during the same
financial year:
Interest relating to financing of any kind granted by related parties, within the limit
of 1.5 times the net equity of the borrower.
25% of adjusted net income before tax (rsultat courant avant impt, defined as the
operating income, increased by certain items).
Interest income received from related parties (i.e. there is no limitation on thin
capitalisation grounds when the borrowing company is in a net lending position vis-avis related entities).
The portion of the interest that exceeds the three above limits is not deductible, except if
it is lower than EUR 150,000.
Carryforward of excess interest
That part of the interest that is not deductible immediately by the borrowing company
can be carried forward, without time limit, for relief in subsequent years, provided there
is an excess capacity during such years. The amount in excess is, however, reduced by
5% each year, from the second financial year following the financial year in which the
interest expense has been incurred.
Exceptions
The thin capitalisation rules do not apply to interest payable by banks and credit
institutions, and also to certain specific situations such as interest in connection with
intra-group cash pools or with certain leasing operations.
The thin capitalisation rules do not apply if the French indebted company can
demonstrate that the debt-to-equity ratio of the worldwide group to whom it belongs
exceeds its own debt-to-equity ratio.
Deductibility is also facilitated within a French tax consolidated group. The thin
capitalisation rules apply to each company member of the group taken on a stand-alone
basis. Any excess interest incurred by such company is, however, not carried forward by
it. Instead, it is appropriated at the group level.
Extension of the thin capitalisation mechanism to loans granted by related

parties
In the specific case where the repayment of a loan granted by a third party (including
banks) is guaranteed by a related party or by a third party whose commitment is itself
secured by a related one, then the proportion of interest that is payable on that part of
the loan that is secured in this way is potentially subject to thin capitalisation rules.
The provisions will not apply where the loan:
takes the form of a bond issued by way of a public offering or under equivalent
foreign regulations, although this excludes private placements
is guaranteed by a related party solely by way of a pledge of shares in the debtor,
security over the debtors receivables, or shares in a company directly or indirectly
owning the debtor so long as the holder of such shares and the debtor are members of
652
France
France
the same tax group; as a result, this exception will not apply where a foreign company
grants a pledge of shares in its French subsidiary to guarantee the bank loan granted
to it
is obtained in the context of a refinancing to allow the debtor to complete the
mandatory repayment of a pre-existing debt, which is required as a result of a direct
or indirect takeover of the debtor (allowed up to the amount of the loan principal
repaid and accrued interest to that date), or
has been obtained prior to 1 January 2011 in connection with an acquisition of
securities or the refinancing of such acquisition debt.

The CFC rules provide that:
French corporations are required to include in their taxable income profits made by
their more than 50% owned foreign subsidiaries and branches. The 50% holding is
determined by direct and indirect control of shares and voting rights.
The minimum holding threshold has to be reduced to 5% if over 50% of the share
capital of the foreign entity is indirectly held through French or foreign companies
controlled by the French parent company. However, if the shares in the foreign entity
are listed on a regulated market, the French tax authorities will have to demonstrate
that the French parent company, together with other entities holding shares in such
foreign entity, is acting in concert.
The CFC rules are only applicable if the foreign legal entity or PE in which the French
company owns the requisite percentage of shares is in a country with a privileged
tax regime. A privileged tax regime is defined by the FTC as a tax regime in which
a foreign jurisdiction subjects taxable income of a foreign entity to at least 50% or
lower of the income tax liability that would have been incurred in France, had the
activity of the foreign entity been performed in France.
Profits of the foreign entity that fall under the CFC rules are no longer taxed
separately. They are now aggregated with the other taxable profits of the French
parent company. Consequently, any tax losses incurred by the French parent company
may be offset against the foreign entitys profits.
The French parent company can avoid the application of the CFC rules if it
demonstrates that the foreign entity carries an effective trading or manufacturing
activity, conducted from its country of establishment or registered office.
Furthermore, the CFC rules, in principle, are not applicable with respect of foreign
branches or subsidiaries located in another EU country. However, this exception
is not applicable if the French tax authorities can demonstrate that the foreign
entity located in another EU country constitutes an artificial arrangement, set up
to circumvent French tax legislation. This concept is similar to the abuse of law
concept, although it does not have all the same characteristics.

Foreign tax credit
Under DTTs signed by France, several methods have been established to avoid double
taxation. The main one is the traditional deduction of a tax credit from tax effectively
paid. However, some treaties establish a tax exemption or the exclusive right to tax. Also,
a tax-sparing clause is included in some treaties, which allows for the deduction of not
only the tax actually paid but a higher amount of tax.
Tax credit to boost competitiveness and employment
To improve the competitiveness of the French economy and reduce employment costs,
France has a tax credit that is available to French and foreign enterprises subject to CIT
in France.
France
653
France
Partnerships will pass their tax credit through to their partners, provided the partners
are subject to French tax.
There are no requirements regarding the nature of the activity carried out in France.
The regime is effective from 1 January 2013, and the tax credit is calculated as a
percentage of the wages paid during the calendar year to employees receiving less than
2.5 times the French regulated minimum wage (SMIC).
The current gross monthly SMIC is EUR 1,430. The rate applicable for this tax credit is
6% for calendar year 2014 (previously 4%) and subsequent years. The tax credit can be
offset against the CIT liability payable by the taxpayer with respect to the calendar year
during which the wages are paid. Any excess credit can be carried forward and offset
against the tax liability of the taxpayer during the nextthree years.
Credits unused afterthree years will be refunded to the taxpayer. The receivable
(unused credits) can be transferred or sold only to credit institutions. Finally, special
provisions apply in the case of mergers and assimilated restructuring operations.
R&D tax credit
The R&D tax credit is determined on the basis of the eligible R&D expenses incurred
during the calendar year.
Currently, the R&D credit equals 30% of the R&D eligible expenses incurred during the
year, up to EUR 100 million in eligible R&D expenses, and 5% beyond this amount. In
addition, eligible R&D expenses incurred by the company can be included in the basis
for computation of the tax credit at up to 100% of that amount.
Moreover, the 30% standard rate is increased to 40% and 35% for the first and the
second year, respectively, during which the company incurs eligible R&D expenses, or
after the expiration of a period of five consecutive years during which the company did
not benefit from the tax credit, provided, in both cases, that the concerned company is
not affiliated with another company that benefited from the R&D tax credit within the
same time period.
The tax code classifies eligible technical and scientific research operations in three areas:
fundamental research, applied research, and experimental development.
The eligible expenditures include the following:
Tax deductible depreciation expenses relating to fixed assets, created or acquired
newly, assigned to eligible R&D works/projects, including patents acquired.
Costs relating to staff qualifying as scientists and/or engineers (staff costs relating to
young graduate doctors are retained at up to 200% during the 24 months following
their hiring by the company).
Expenses resulting from outsourced R&D works/projects.
Expenses incurred for patent registration and/or in connection with the defence of
patents.
Expenses relating to the monitoring of technical developments.
Premiums paid in connection with insurance contracts relating to the legal defence of
patents.
Operating costs are now taken into account by retaining 50% of the R&D staff costs
plus 75% of the depreciation on the assets allocated to the research. Also, spending on
outsourcing to private research organisations now is included in the limit of three times
the total amount of other research expenses qualifying for the tax credit.
654
France
France
The use of patented or patentable technologies in manufacturing
Companies that are involved in the manufacturing of products in France containing

patented or patentable technologies, or companies that incorporate such technologies
into goods that are manufactured in France, benefit from a reduced effective rate of tax.
In the case of a licensing arrangement between connected French companies, the
licensor will benefit from a reduced 15% tax rate on royalty income, whereas the
licensee company will benefit from a tax deduction at 33.33%.
In order for a licensee company to benefit from full deductibility for royalties paid, the
rules require that the licensee company effectively exploits the rights available to it.
No particular incentives are available to foreign investors in France. However, the

government offers a comprehensive programme of tax incentives and development
subsidies to encourage investment in underdeveloped areas.
Capital investment is encouraged through the declining-balance method of depreciation
as well as through exceptional depreciation for certain capital expenditures.
Withholding taxes
Payments to resident corporations and individuals are not subject to WHT.
Payments to non-resident corporations and individuals are subject to WHT, as shown
below.
Column 1
Country of residence
Non-treaty:
Treaty:
Algeria
Argentina
Armenia
Australia
Austria
Bahrain
Bangladesh
Belgium
Benin
Bolivia
Botswana
Brazil
Bulgaria
Burkina Faso
Cameroon
Canada
Central African Republic
China
Comoro Islands (Mayotte)
Congo, Republic of
Dividend WHT (%)

Column 2
Column 3
Column 4
Individuals and nonParent
Shareholding required
parent companies
companies
to be a parent
21/30 (38)
30
15
15
15
15
15
0
15
15
30
15
12
15
15
15 (19)
15
15
15
10
15/25
20
5
15
5
0
0
0
10
0 (1)
30
15
5
15 (2)
0/5 (1)
30 (2)
15
5
5
10
15/25
15
10
10
10
10
10
10
25
10/15
10
10
10
France
655
France
Column 1
Croatia
Cyprus
Czech Republic
Ecuador
Egypt
Estonia
Finland
Gabon
Georgia
Germany
Ghana
Greece
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Ivory Coast
Jamaica
Japan
Jordan
Kazakhstan
Kenya
Korea, Republic of
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Holding company (4)
Macedonia
Madagascar
Malawi
Malaysia
Mali
Malta
Mauritania
Mauritius
Mayotte
Mexico
Monaco
Mongolia
Morocco
Namibia
656
France
Dividend WHT (%)

Column 2
Column 3
Column 4
parent companies
companies
to be a parent
15
0
10
15
0/10 (1)
10
10
0 (1)
10
15
15
0
0
15
0/5 (1)
10
0/15
0/5 (1)
10
15
15
10
0/5/10
10/50
15
0 (3)
10
15
5
10
21/30 (38)
0/30 (1)
10
15
0/5 (1)
10
15
5
10
10
10
15
10
25
20
15
25
15
0/10 (1)
10/50
15
5
10
15
0/5/15 (1)
10
15
15
15
15
10
10
5
10
15
5
10
15
5
10
10
10
15
10
10
0
0
15
0/5 (1)
10
0
0
15
0/5 (1)
10
15
0/5 (1)
10/25
30
30
15
0
10
25
15
25
30
30
15
5
10
15/30
30 (2)
15
0 (1)
10
30
30
15
5
10
30
25 (2, 5)
15
0/5
5/10
25
25
10
15
5
10
0/15
0/15 (6)
15
5
10
France
Column 1
Netherlands
New Caledonia
New Zealand
Niger
Nigeria
Norway
Oman
Pakistan
Philippines
Poland
Polynesia, French
Portugal
Qatar
Romania
Russia
Russian Federation
St. Pierre & Miquelon
Saudi Arabia
Senegal
Singapore
Slovakia
South Africa
Spain
Sri Lanka
Sweden
Switzerland (8)
A (9)
B (10)
C (11)
Thailand
Togo
Trinidad and Tobago
Tunisia
Turkey
Ukraine (12)
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Zambia
Zimbabwe
Dividend WHT (%)

Column 2
Column 3
Column 4
parent companies
companies
to be a parent
15
0/5 (1)
10/25
15
5 (36)
15
15
25
15
12.5 (36)
10
15
0
10
0
0
15
10
10
15
10 (36)
10 (37)
15
5
10
30
30
25
15
0/5 (1)
10
0
0
10
0 (1)
10
15
5/10/15 (7)
15
5
10
15
5
0
0
15
15
15
10
10
10
0/10 (1)
20
15
5
10
15
0
10
30
30
15
0/15 (1)
10
15
15 (8)
30
20
15/30
15
30
20
15
0
15
15
10
15
15
30
15
0 (8)
0/15 (8)
30
15
25 (2)
10
30
15
0/5
0
0/5 (1)
0/5
5
0/5
5
30
10
10 (8)
10 (8)
25
10
10/50
10
10/80
10
10
10
50
25
France
657
France
Column 1
Non-treaty: (13, 14, 15)
Treaty:
Algeria
Argentina
Armenia
Australia
Austria
Bahrain
Bangladesh
Belgium
Benin
Bolivia
Botswana
Brazil
Bulgaria
Burkina Faso
Cameroon
Canada
Quebec
Central African Republic
China
Comoro Islands (Mayotte)
Congo, Republic of
Croatia
Cyprus
Czech Republic
Ecuador
Egypt
Estonia
Finland
Gabon
Georgia
Germany
Ghana
Greece
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Ivory Coast
Jamaica
Japan
658
France
Interest
Column 5
For instruments other
than borrowings
0 (16)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
WHT (%)
Royalties
Column 6
Distributions
Column 7
Automatically levied on
after-tax profits of PEs
33.33
25
5/10 (34)
18
5/10 (34)
5
0
0
10
0
0
15
10
10/15/25 (18)
0/5 (39)
0
15 (19)
10 (19)
10
0
6/10 (20)
33.33
15
0
0 (21, 39)
0/5/10 (23, 35, 39)
15
15
0/5/10 (35, 39)
0
10
0
0
10
0/5 (39)
0
0
0
10
10
0
0/10 (19, 21)
0/5 (23, 39)
0/10 (25)
10
0
0
5
5
15
0
25
15
0/10 (22)
25 (17)
0
5
15
0/5 (22)
25 (17)
15
5
5
25 (17)
0
25 (17)
15
0
0/10 (22)
0 (22)
15
0
0
0/15 (22)
0
0
0
0
0/25 (22)
0/5 (22)
5
0
10
15
0/25 (22)
5/10
0
0
10
0
France
Column 1
Jordan
Kazakhstan
Kenya
Korea, Republic of
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Holding company (4)
Macedonia
Madagascar
Malawi
Malaysia
Mali
Malta
Mauritania
Mauritius
Mayotte
Mexico
Monaco
Mongolia
Morocco
Namibia
Netherlands
New Caledonia
New Zealand
Niger
Nigeria
Norway
Oman
Pakistan
Philippines
Poland
Polynesia, French
Portugal
Qatar
Romania
Russia
Russian Federation
St. Pierre & Miquelon
Saudi Arabia
Senegal
Singapore
Slovakia
South Africa
Spain
Sri Lanka
Interest
Column 5
0
0
12
0
0
0
0
0
0
10 to 15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0/15/50
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
WHT (%)
Royalties
Column 6
5/15/25 (18)
10
10
10
0
0/5/10 (35, 39)
33.33
0/5/10 (35, 39)
0
33.33
0
10/15 (26, 27)
0/33.33 (19)
10 (27)
0
0/10 (23, 39)
0
0/15 (23)
0
10 (20, 23)
33.33
5 (23)
5/10 (28)
10 (23)
0
10 (23)
10
0
12.5
0
7
10
15
0/10 (23)
33.33
0/5 (39)
0
0/10 (39)
0
0
10 (23)
0
0
0/33.33 (29)
0/5 (23)
0
0/5 (30, 39)
0/10 (31)
Distributions
Column 7
5
5
25
5
25
0
25
0
0/5 (22)
25
0
25
10
15
25 (17)
0/10 (22)
25 (17)
15
25 (17)
0
25
0
0
0
0
10
15
25 (17)
25
0
25
0
10
25
25 (17)
0/15 (22)
25
0/10 (22)
0
25
10
25
0
15
10
0
0
25
France
659
France
Column 1
Sweden
Switzerland (8)
A (9)
B (10)
C (11)
Thailand
Togo
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Zambia
Zimbabwe
Interest
Column 5
0
WHT (%)
Royalties
Column 6
0
Distributions
Column 7
0 (22, 23)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0/5 (8, 32)

0/5 (8, 32)
33.33
5/15 (29)
0
0/10 (20)
5/15/20 (33)
10
0/10
0
0
0
0
5
10
0/33.33 (19)
10
0 (8)
0 (8)
0 (8)
25
25 (17)
10
25 (17)
7.5
25
0
0 (22)
5
0
0
0
10
0
Explanation of columns
Column 2: Individuals and companies not qualifying as parents are subject to the WHT rates for dividends
as indicated in this column.
Columns 3 and 4: Column 3 indicates the WHT rate for dividends paid to a foreign parent company.
To be considered as a parent company, the foreign company must hold a specified percentage of the
French companys share capital or voting rights. These minimum percentages range from 0% to 50%,
as indicated in Column 4, and certain other conditions must be met (see each treaty). If no percentage is
indicated, either no minimum shareholding is required or the tax treaty does not reduce the WHT rate of
30%.
No WHT is levied on dividends paid to an EU parent company by a French company that is subject to CIT,
provided all the following conditions are met:

The EU parent company has held a minimum percentage of the share capital of the distributing
company, directly and continuously, for at least two years. As of 1 January 2009, the participation
required is 10%.
The EU parent company is the effective beneficiary of the dividends.
The EU parent company has its effective seat of management in an EU state and is not deemed to be
domiciled outside the European Union under an applicable tax treaty.
The EU parent company is one of the legal forms enumerated by the relevant Directive.
The EU parent company is subject to CIT in the member state where it has its effective seat of
management.
There is an anti-avoidance rule.
Column 5: The tax mechanism has been changed so as to exempt the interest from WHT in France except
where the interest is paid to a financial institution established in a non-cooperative state or territory (WHT
at a rate of 75% applicable). The payer can, however, be exempt if one proves that the main purpose and
effect of such a payment is not to take advantage of locating the income in such a jurisdiction.
These provisions apply to income paid as of 1 March 2010. A special provision applies to loans entered
into outside of France by French companies and some investments funds prior to this date. Interest paid
on these loans and on related loans after 1 March 2010 will continue to be exempt.
Column 6: There is no requirement to withhold income tax on royalties paid to EU companies if all the

660
The taxpayer is a French resident company or a French PE of a company resident in another EU

member state.
France
France

The recipient of the income is an EU resident company.

The taxpayer and the recipient are at least 25% associates, which means that either one directly
holds 25% or more of the share capital or voting rights in the other, or a third party directly holds 25%
or more of the capital or voting rights in them both.
Column 7: WHT is automatically imposed on after-tax profits of a PE unless certain conditions are met.
The rate is 25% or the reduced tax treaty rate.
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
See explanation of Columns 3 and 4.

Exceptions where the dividends are excluded from the taxable income of the company that has
received the dividends.
A rate of 15% is applicable for dividends distributed by certain companies.
The 1929-type Luxembourg holding companies are not entitled to any of the benefits of the FranceLuxembourg tax treaty.
A 25% rate applies if dividends are not included in the income taxed to either corporate or income
tax.
No WHT applies if dividends are taxable in Morocco.
The 5% rate applies to dividends when three conditions are fulfilled, as follows: (1) the effective
recipient of the dividends must have invested at least EUR 76,224.51 in the company that pays these
dividends; (2) the recipient must be a company liable for corporate tax; and (3) the latter company
must be exempt from corporate tax. The rate is 10% when only condition (1) or conditions (2 and 3)
are fulfilled. In all other cases, the rate is 15%.
An addendum signed on 22 July 1997 modifies the provisions of the French-Swiss tax treaty relating
to dividends, interest, and royalties, and provides for the removal of the 5% WHT on profits realised
by French PE of Swiss resident companies.
The rate indicated applies to Swiss resident companies controlled by Swiss residents.
The rate indicated applies to Swiss resident companies that are controlled by non-Swiss residents
(non-UE) (Article 11.2.b ii) and meet the conditions of Article 14 of the tax treaty. In the case of
column 3, the 15% rate applies to these companies, provided both the recipient and the distributing
company are not quoted on a stock exchange. If these conditions are not met, the tax exemption
applies.
The rate indicated applies to Swiss resident companies controlled by non-Swiss residents but not
complying with Article 14 of the tax treaty.
The 5% rate applies to gross dividends if the effective recipient is a Ukrainian company that holds,
directly or indirectly, at least 10% of the French companys capital. The rate is 0% if the participation
exceeds 50% and EUR 762,245. It is 15% in all other cases.
Non-treaty recipients of royalties and management fees are subject to a 33.33% withholding rate.
Where a treaty exists, management fees are exempt from WHT unless they are included in the
definition of royalties subject to WHT.
In France, the WHT is levied on a provisional basis at 25% of the net profit. This amount is reduced
to the extent it exceeds the dividends actually paid by the company during the previous 12 months,
and the amount of dividends paid to residents of France. Consequently, if the foreign head office
undertakes not to distribute dividends in a given year, the after-tax profits of its French branch are not
subject to WHT, even when they are transferred abroad.
WHT on interest on loans with a contract is 0%, while withholding on other interest is in a range from
15% to 50%. For treaty rates, consult the individual entry in the table.
The WHT rate can be 60% for certain securities if the investors identity is not disclosed.
The WHT is levied on the following amount: French net profit divided by the total foreign company net
profit, multiplied by the amount of the distribution.
The rate of 10% is applicable on royalties for the use of literary, artistic, or scientific works, including
films; 25% on royalties for the use of trademarks; and 15% otherwise.
No WHT is applicable on a royalty arising from the use of or the right to use literary, artistic, or
scientific works (excluding film).
WHT is reduced to 6% for royalties paid for the lease of industrial, commercial, or scientific
equipment.
A rate of 5% (Cyprus) and 10% (Israel) is applicable on royalties paid for the use or the right of the
use of films.
Profits realised in France by foreign corporations whose head offices are located in a European
country are not subject to WHT if certain conditions concerning the foreign corporation are met
(effective head office in a European country; foreign corporation subject to corporate taxation).
No WHT is applicable on a royalty arising from the use or the right to use literary, artistic, or scientific
works.
The rate of 25% is applicable on royalties paid for the use of trademarks.
No WHT is levied on certain royalties paid in the field of audio visual techniques.
The rate of 15% is applicable on royalties paid for the use of industrial property and trademarks.
A rate of 33.33% is applicable on royalties paid for the use of or the right to use films.
The rate of 5% is applicable on royalties paid for the use of literary, artistic, or scientific works,
excluding films.
The rate of 33.33% is applicable on royalties paid for the use of literary and artistic works, including
films, and for information concerning commercial experience.
No WHT is levied on royalties paid for the use of or the right to use literary or artistic works, excluding
films and recordings.
No WHT is levied on royalties paid for the use of or the right to use copyrights or films.
France
661
France
32. No WHT is levied on royalties paid for the use of or the right to use industrial, commercial, or
33. The rate of 20% is applicable on royalties paid for the use of trademarks, 15% for the use of
industrial property, and 5% for the use of literary, artistic, or scientific works.
34. The rate of 5% is applicable on royalties for the use of literary, artistic, or scientific works, not
including films.
35. The rate of 5% is applicable on royalties for the use or the right to use industrial, commercial, or
36. The reduced rate is applicable if the beneficial owner is a company (other than a partnership).
37. Voting shares solely.
38. French domestic law decreases the WHT rate from 30% to 21% concerning individuals who are
resident in another EU member state, in Iceland, and in Norway.
39. See explanation of Column 6.
Anti-avoidance rules applicable to Non-Cooperative States or

Territories (NCSTs)
The French parent-subsidiary regime is not applicable to dividends paid from entities
located in an NCST.
WHT on passive income is 75% for transactions with an NCST person or entity.
For French tax purposes, a state or territory is considered non-cooperative if it meets all
of the following criteria:
It is not a member of the European Community.
It has been reviewed and monitored by the OECD Global Forum on Transparency and
Exchange of Information.
It has not concluded at least 12 administrative assistance agreements/treaties that
allow a complete exchange of information for tax purposes.
It has not concluded an administrative assistance agreement/treaty with France.
Payments (e.g. interests, royalties, payments for services) made to an NCST person or
entity are, as a general rule, not tax deductible. In addition, it is not possible to offset
WHT in France with any foreign WHT borne by the entity located in an NCST.
Moreover, concerning shareholders (individuals and companies) located in an NCST, a
tax amounting to 75% is levied on capital gains derived from the disposal of shares in
French companies, whatever the level of shareholding.
Tax administration
Taxable period
The ordinary taxable period is equal to 12 months. Conformity with the calendar year
is not requested. In particular cases, the duration of the taxable period can be different
from 12 months (e.g. newly established companies are allowed to have taxable periods
longer than 12 months; companies that are involved in extraordinary transactions
[merger, de-mergers, etc.], as well as companies that are liquidated, may have taxable
periods shorter than 12 months).
Tax returns
Regarding fiscal years that end on 31 December, CIT returns are due by the end of April
of the following year.
Accounting records to be provided in computerised format in case of tax

audit
Companies are required to keep their accounting records in computerised form and to
provide them to the tax authorities in the same format. Printed records are no longer
accepted for audits initiated as of 1 January 2014, meaning that such electronic files
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must be provided for fiscal year 2011 and following years when audited in fiscal year
2014.
Payment of tax
Payment of tax is made during the fiscal year by way of four instalments totalling
33.33% of the taxable income of the preceding year (i.e. by 15 March, 15 June, 15
September, and 15 December for fiscal years that end on 31 December). Regarding fiscal
years that end on 31 December, final CIT payment is due on 15 April of the following
year.
Currently, for companies that have gross income in excess of EUR 500 million, the last
down-payment is now assessed on the basis of the estimated taxable income of the
present year (in case of significant increase of the taxable profits in comparison with the
previous fiscal year). This modification leads to an anticipated payment of CIT.
Interest and penalties
Regarding CIT, VAT, registration duties, and business tax:

late payment is subject to late interest computed at a rate of 0.4% per month (4.80%
per year) and to a 5% penalty, and
late filing is subject to late interest computed at a rate of 0.4% per month (4.80% per
year) and to a 10% penalty.
Moreover, a penalty of 40% applies in case of bad faith and is increased to 80% in case of
fraud.
Tax audit process
The French tax authorities are responsible for verifying that taxpayers obligations
are correctly complied with and, if necessary, for making adjustments by issuing tax
assessments.
Once an assessment is notified by the tax inspector and if the taxpayer disagrees with
such an assessment, the taxpayer has 30 days to answer (with a possible 30 days
extension upon request) and to provide comments to the French tax authorities.
Following an exchange of written correspondences between the tax inspector and
the taxpayer, either party may submit any disagreement on a factual issue to the
departmental or national tax commission. The decision of this commission is not binding
on the taxpayer or on the French tax authorities.
In cases where the disagreement between the French tax authorities and the taxpayer
still remains, the taxpayer can file a claim with the French civil courts or with the French
administrative courts, depending on the type of tax that has been subject to assessment
by the tax inspector.
Statute of limitation
Regarding CIT, the general statute of limitation expires at the end of the third year
following the one that has triggered the tax liability.
Under certain circumstances, the statute of limitation can be extended (e.g. fraud,
undisclosed/hidden activity); statute of limitation can also be interrupted (e.g.
notification of a notice of reassessment).
Transfer pricing, business reorganisation, financing arrangements, and VAT are standard
elements reviewed during tax audit.
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The ruling system
To secure the tax status of a situation, foreign companies and individuals can request a
private ruling from the French tax authorities as to whether their activities constitute a
PE or fixed base.
The French tax authorities have to provide an answer within three months after the
receipt of the request. In the absence of response from the French tax authorities within
this period of time, the foreign company or individual will be deemed not to have a PE in
France.
APAs are also provided by the French tax authorities for transfer pricing purposes (see
the Group taxation section for more information).
Other issues
France and the United States sign bilateral agreement on the
implementation of the Foreign Account Tax Compliance Act (FATCA)
On 14 November 2013, France and the United States signed a bilateral

Intergovernmental Agreement (IGA) intended to implement FATCA. FATCA was enacted
by the United States in 2010 to combat offshore tax evasion by US persons. France, with
the United Kingdom, Germany, Spain, and Italy, was an original member of the G5
countries that agreed with the United States to advance the principles of FATCA under
the concept of bilateral IGAs in order to address many of the legal barriers faced by
financial institutions in complying with FATCA.
The French government has committed to drafting local laws and regulations to
implement FATCA among all financial institutions resident in France (including French
branches of foreign companies). Broadly speaking, the banking, life insurance, and asset
management industries will be most affected, but certain estate (patrimonial) vehicles,
holding companies, as well as hedging, finance, and treasury centres of non-financial
groups could also be impacted, depending on the nature of their activities.
As expected, the US-France IGA is based on the Model 1A version with an Annex II
negotiated to include provisions specific to the local French market and that contains
categories of French financial institutions qualifying for exempt beneficial owner or
deemed-complaint status.
Compliance with FATCAs due diligence, reporting, and, in some cases, withholding
requirements is necessary for foreign financial institutions (FFIs) to avoid suffering 30%
withholding on certain US-source income and payments. The French IGA is intended
to simplify the FATCA requirements for French financial institutions, but, in most cases,
still requires significant efforts to maintain compliance.
The following are key points specific to the US-France IGA to consider:
Inclusion of the most favoured nation clause allowing adoption of certain provisions
from other IGAs that may be more favourable to French financial institutions.
Consistent with Notice 2013-43, the timetable for implementation of FATCA has
been synchronised with the intended amendments to the US Treasury Regulations,
starting with the entry into force of key provisions effective 1 July 2014.
Annex II of the French IGA describes various classes of exempt beneficial owners and
deemed-compliant financial institutions.
The deemed-compliant financial institutions described in Annex II are treated as
Non-Reporting French Financial Institutions under the French IGA. In turn, these
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compliant FFIs under the US regulations and do not have to register to obtain a
global intermediary identification number (GIIN).
Collective investment vehicles, including investment entities established in France
that are regulated as collective investment vehicles, socits de crdit foncier
and socits de financement de lhabitat, are Non-Reporting French Financial
Institutions treated as deemed-compliant FFIs.
The asset management industry should benefit from an exemption related to
employee savings plans and a special status that is intended to reduce the FATCA
obligations of investment vehicles and management companies that can ensure the
absence of US investors and non-participating financial institution customers.
The agreement also provides specific provisions for certain French institutions and
financial products, including:
Exemption for certain local banks with an almost exclusively local client base. This
could be beneficial to French institutions following the mutual banking model.
Most regulated savings products (savings books and savings plans), which are
excluded from the definition of a financial account and will not be treated as US
Reportable Accounts, whereas the share savings plan (PEA) remains within the
scope of FATCA.
Products dedicated to retirement planning (Article 39, Article 82 , Article 83,
Madelin, Madelin agricole, Perp, Pere, and Prefon), which are excluded from the
definition of financial accounts and will not be treated as US Reportable Accounts.
Pension funds will also benefit from a specific exemption.
The next step is for the French government to implement local laws adopting the
provisions of the IGA. Given the rapidly approaching 1 July 2014 effective date, French
financial institutions, as well as non-financial organisations with financial institutions
within their groups, should be taking steps based on the IGA (and in some cases US
Treasury Regulations) to ensure they are prepared to comply.
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Gabon
PwC contact
Christophe Relongoue
PricewaterhouseCoopers Tax and Legal
366 Rue Alfred-Marche
Libreville
Gabonese Republic
Tel: +241 01 74 59 11
Further to the promulgation of the Financial Act for 2014, the following new tax
measures have been introduced:
Taxation of any capital gains realised on the transfer of legal rights of persons or
entities whose asset is, in its majority, constituted of such rights or rights directly or
indirectly owned in a company located in Gabon.
Extension from three to five years of the time limit for the carry forward of losses.
Extension of the benefit from the simplified tax regime applicable to oil
subcontractors to the end of the considered year when the end of the biennial period
expires after the first quarter of the said year.
Increase from 15% to 20% of the transferable securities income tax rate (IRCM/tax
on dividend) applicable to legal entities.
Possibility for entities having temporary difficulties to file for a request before the tax
authorities to be declared on sleep and benefit from a tax exemption for a duration
that cannot exceeded two years.
Increase of the branch tax from 10% to 15%. This rate is reduced to 10% in case of
existence of a tax treaty.
New rule for the determination of the basis of the land tax on built properties.
New rates applicable for registration duties.
New rules concerning the tax audit procedure.
New rules concerning the supporting documentation to provide in the scope of
transfer pricing.

Subject to the provisions of double tax treaties (DTTs), profits subject to corporate
income tax (CIT) in Gabon are those obtained by companies exploited in Gabon or those
relating to operations carried out in this country.
The CIT rate is fixed at 30%.
The CIT rate is 35% for companies operating in the oil and mining sectors and 25% for
the following entities:

companies owning intellectual property shares

the Gabonese Development Bank
authorised companies of property promotions
public companies
non-profit partnerships and collectives, and
authorised companies of the tourism sector.
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CIT is assessed on profits minus deductible expenses and charges. Profits are composed
of all operations carried out in Gabon by companies during the period of taxation,
including, notably, capital gains on fixed assets.
Non-resident companies shall be taxed via withholding tax (WHT) at the rate of 10% for
income raised in Gabon if they have no permanent establishment (PE) in Gabon.
In cases where non-resident companies have PE in Gabon, they shall be subject to CIT on
the income raised in Gabon via the Gabonese PE.
Impt Minimum Forfaitaire (IMF)
The IMF is a lower limit to the CIT and is calculated as 1% of the global turnover carried
out during the fiscal year of taxation. Note that the IMF cannot be less than 1 million
Central African CFA francs (XAF), even in the case of a negative turnover.
New companies (as defined in Articles 194, etc. of the Gabonese Tax Code), without
consideration of the sector of activity,are exempt from this minimum tax during the first
two fiscal years of their existence.
Local income taxes
There are no local government taxes on income in Gabon.
Corporate residence
As a general rule, a resident company is a company that is incorporated under
commercial laws in force in Gabon.
From a general treaty perspective, a PE designates a permanent business installation

through which a company carries out the whole or part of its activity.
The expression permanent establishment notably includes the following:

Head office.
Branch.
Office.
Plant.
Workshop.
Mine, oil or gas shaft, quarry or other place of natural resources extraction.
Building site or assembly line.
Other taxes
VAT is a cumulative tax levied on the sale of goods and the provision of services rendered
or used in Gabon.
There are four rates of VAT:
Standard rate: 18%, which applies to all transactions unless otherwise provided for
by thelaw.
Reduced rates:
10%, which applies to manufacturing operations and sales of products mentioned
in a limitative list provided by Article 221 of the new Gabonese Tax Code,
including mineral water, chicken, and sugar.
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5%, which applies to sales and services relating to cement.
Zero-rate: 0%, which applies to exports and international transports.
Taxable persons are individuals or legal entities carrying out, usually or occasionally, in
an independentmanner, taxable operations in the scope of an economic activityand for
an onerous consideration.
The aforesaid persons, subject to CIT or personal income tax (PIT), being registered or
not, are liable to VAT should their turnover out of taxes reach XAF 60 million.
Customs duties
Gabon is member of the Central African Economic and Monetary Community (CEMAC),
a customs union that comprises countries from Central Africa.
Merchandise entering into the CEMAC customs territory is subject to importation duties
registered into the Customs Tariff.
Four customs regimes are available in Gabon, notably one standard regime and three
specific regimes (an exemption regime, a temporary admission regime, and a reduced
tax regime).
Apart from customs duties, the importation of merchandise in Gabon is subject to the
community tax of integration (CCI) at a rate of 0.4% and to the Organisation for the
Harmonisation of Business Law in Africa (OHADA) withholding (duty) at a rate of
0.05% of the customs value of the imported merchandise.
Excise duty
Excise duty principally applies to luxury goods, such as alcoholic drinks, perfume and
cosmetic products, caviar, salmon, cigars, and cigarettes.
The rates of the excise duty are between 20% and 32%.
Tax on property
Tax on buildings (Contributions Foncires des Proprits Bties or CFPB) is levied

annually at the rate of 15% of the rental value of the building after deduction of 25%
for deterioration and maintenance. For properties booked into the assets of a companys
balance sheet, the rental value of the premises is equal to 10% of the market (purchase)
value.
Tax on non-built property is levied annually at the rate of 25% of the taxable revenue
corresponding to 4% to 5% of the rental value or 10% of the purchasevalue.
Transfer tax
The tax on funds transfer is due on remote transfer operations carried out in Gabon at
destination of countries outside the Central Africa Monetary Union (UMAC) countries.
The tax is calculated on the amount of the funds to be transferred, except for related fees
and commissions paid by the giver.
The rate of the transfer tax is 1.5%.
Stamp duty
A stamp duty is levied on all paperwork relating to civil and judicial actions and to
documents that could be produced in court as evidence.
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All signatories for mutually binding contracts, lenders and borrowers for loans, and
ministerial officials who receive or modify deeds announcing unstamped deeds or books
are jointly responsible for the payment of stamp duties and fines.
Business license tax
The business license tax applies to both individuals and entities, Gabonese and foreign,
engaged in a profession, business, or industry in Gabon.
Business license tax corresponds to a professional tax borne annually. It is deductible
from the taxable income for CIT purposes.
The rates of this tax vary according to the profession, business, and location within
Gabon territory (this tax may vary between XAF 15,000 and XAF 540,000).
The head of the group of companies is exempted from the payment of the business
license tax.
Franchise tax
The franchise tax is a fixed annual duty varying from XAF 10,000 to XAF 500,000,
according to the size, nature, and location of thecompany. Each company that carries on
a trade, business, or activity that is not expressly exempted is liable for franchise tax.
Activities that are expressly exempted from franchise tax are those carried out by
companies of provident, craftsmen, teachers and professors, lyrical and dramatic artists,
farmers, cattle-breeders, fishers, etc.
Registration duties
Registration duties in Gabon are fixed, proportional, or progressive, depending on the

nature of the acts and transfers in question.
Tax on insurance premiums
Insurance or annuity agreements made with insurance companies or any other

Gabonese or foreign insurer are subject to an annual obligatory tax.
The tax is levied on the sums charged by the insurer and on any accessory payments
made to this party by the insured party according to the following rates:
Nature of the policies
Marine policies
Life policies
Fire policies
Other (e.g. personal liability, transportation)
Reinsurance
Rate (%)
5
Exempt
30
8
Exempt
Employers must contribute to the social security system (National Social Security Fund
or CNSS).
The taxable basis for social security contributions is made up of gross salaries, including
indemnities having the function of a salary and any benefits in kind. However, there is
an annual ceiling of XAF 18 million(or XAF 1.5 millionper month).
The social security contributions are determined according to the following rates:
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Contribution
Family allowances
Industrial accidents (work injuries)
Retirement pensions
Health evacuation funds
Medication distribution
Hospitalisations
Total
Rate (%)
8
3
5
0.6
2
1.5
20.1
Branch income
Taxation of branch income is the same as for corporate income. However, a 15% WHT
on profit is due at the time the profit is taken by the head office (located abroad) of the
branch. This rate is reduced to 10% in case of the existence of a tax treaty.
Simplified tax regime for oil subcontractors
There is a simplified tax regime specific to the oil sector, which is a lump-sum tax regime
granted for a biennialperiod. The request to benefit from such a tax regime is renewable
for an additional period of two years, at least. Should the biennial period end after the
first quarter of a considered year, the benefit from the simplified tax regime will apply
until the end of the said year.
Features of this specific regime are as follows:

The option for this regime is irrevocable for a period of two years, renewable once.
The total duration of the benefit of such a regime cant exceed four years.
The companies must perform their activities exclusively in the scope of oil operations.
The option is granted by the Director of the General Tax Office to foreign companies.
The subcontractor must have signed, with an oil company, a temporary agreement for
the provisions of services to this company.
The option is no longer granted to companies that have been in Gabon for more than
nine years. The duration of nine years is calculated from the year during which the
company started its activities in Gabon.
The subcontractor must constitute a Gabonese branch office.
The rate for the 2013 and 2014 fiscal years is 8.75%, corresponding to CIT (5.95%)
andPIT for expatriate employees (2.80%).
Specific regime for regional offices (quartiers gnraux)
A regional office is a company or a branch that renders various administrative services,

such as management or accounting, exclusively to other companies of the same group
based in a given geographical area (usually a group of countries).
Taxation is based on the expenses of the regional office. A rate, between 5% and 12%,
is applied to operating expenditures to determine the tax basis. The CIT rate is then
applied to that basis.
Inventory valuation
Stocks are estimated at cost price. If the market price as of date is lower than the cost
price, the company has to make provisions for depreciation of inventory.
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Capital gains
Capital gains arising from the transfer of assets must be used for the calculation of
taxable profits. However, the tax on capital gains can be deferred if a company reinvests
an amount equal to the capital gain and the sale price of the transferred asset back into
its fixed assets within three years.
Capital gains realised on the transfer of legal rights of persons or entities, whose asset
is, in its majority, constituted of such rights or rights directly or indirectly owned in a
company located in Gabon, are subject to CIT in Gabon.
Dividend income
The rate of transferable securities income tax (Impt sur le Revenu des Capitaux Mobiliers
or IRCM) is 20% on distributed dividends.
IRCM charged on the beneficiaries of the earnings is withheld at source by the
distributing company. It is paid over to the Registration Officer within 30 days from the
payment of the dividends.
Inter-company dividends are taxed at a reduced rate in full discharge of the 10% WHT
if paid and received by or from companies with their registered office in a CEMAC
country, shares were allotted at the time of issue or kept for two years, and the Gabonese
company owns more than 25% of the share capital of the subsidiary.
Interest income
Interest income paid to companies is subject to a 20% WHT in Gabon. When paid in
respect of bonds of five years or more, it is subject to a 10% WHT.
Foreign income
Foreign interest, royalties, and dividends are included in taxable income, subject to
international tax treaties. Note that tax treaties provide that certain/all types of income
are not includable in Gabon taxable income. Gabon has tax treaties with France,
Belgium, the other countries of CEMAC, and the African and Malagasy Common
Organisation(OCAM).
The concept of deferred tax is not applicable in Gabon.
Deductions
Depreciation
The straight-line method and an accelerated depreciation method are permitted in

Gabon. Tax and book conformity is obligatory (i.e. annual depreciation must be booked
to preserve taxdeductibility).
The main depreciation rates provided by the Gabonese tax code are the following:
Asset
Buildings
Machinery, equipment
Office furniture
Office equipment
Vehicles
Computing equipment
Rate (%)
5
5 to 33.33
15
10
20 to 33.3
25to 100
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Goodwill
There is no provision in the Gabonese Tax Code concerning the tax treatment of
goodwill.
Start-up expenses
During the first five years of activity, a start-up can use an accelerated depreciation
method on the acquired equipment goods under certain conditions and subject to
specific provisions of the Gabonese Tax Code applicable to start-ups. Applicability
of these provisions must be requested from the General Tax Manager prior to the
incorporation of the company.
Interest expenses
Interests paid to shareholders with respect to the sums made available by them to the
company are only deductible within the global limit amounting to half of the share
capital and within the limit of the intervention rate on invitation to tender (TIAO) of the
Bank of the Central African States raised by 2%, provided that the share capital is fully
paid up.
Bad debt
Bad debt can be deducted from the result of the fiscal year during which the debt
became completely unrecoverable, subject to the irrecoverable character of the
compromised debt being justified due to the situation of the debtor.
Provisions
To be tax deductible, provisions must relate to existing liability or loss. General

provisions are not deductible.
Charitable contributions do not, in principle, constitute expenses deductible from the

taxable result. However, contributions for charity can be deducted, provided that the
donation is made to the profit of organisms of public interest located in Gabon and that
the donation is justified.
The deduction is limited to 1/1,000 of the companys turnover for the considered fiscal
year.
Fines and penalties
Fines and third-party taxes borne by companies are not tax deductible.
Taxes
Only professional taxes for which the recovery proceeding has started in the current
fiscal year and for which the company is effectively liable due to operation carried out in
Gabon can be deducted.
The Gabonese Tax Code does not provide the possibility to carry back losses. It does,
however, provide for a five-year carryforward for net operating losses.
Regarding depreciation deferred in the accounts, they can be carried forward
indefinitely.
Management fees paid to a foreign parent company are deductible if they meet all of the
following conditions:
They reflect real transactions.
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They do not present an abnormal characteristic.
They are not exaggerated.
Management fees determined in a lump sum basis are not deductible.
Management fees exceeding 10% of the taxable profit before deduction of the said fees
are not deductible.
Interests paid to shareholders are deductible only within the limit of the Central Banks
(BEAC) normal rate for advances plus two percentage points, on the condition that the
registered capital is entirely paid. The portion exceeding the ceiling is not deductible and
is thus subject to taxation.
Group taxation
Specific group tax regime
There is a specific tax regime derogatory to the common law tax regime that is
applicable, under conditions, to groups of companies.
According to the provisions of Article 11 b. of the Law No. 44/2010, modified by the
2013 Finance Act, groups of companies are those constituted by companies subject to
CIT, or a foreign equivalent tax, united between them through direct or indirect capital
links of at least 50% andthat allowone of them or several companies, jointly, to control
the others.
The control is defined as:
either the direct or indirect holding of the majority of the vote in another company or
the nomination, during two consecutive years, of the majority of the members of the
board of directors of another company.
To be eligible for this specific tax regime, and without any prejudice of other activities
performed to the profit of third parties, the head of the group of companies must
perform to the profit of other companies of the group an activity relating exclusively to
the following fields:
Provisions of services of any kind, notably technical, accounting, financial,
administrative, data processing, legal, human resources, and commercial
corresponding to functions of management, coordination, and control of the groups
companies.
Research and development (R&D) to the sole profit of the group.
Management of the finance intra-group.
Each company subject to CIT that is a member of the group and fulfils the conditions
provided by the law will be subject to a separate taxation of its results according to the
rules of common law and subject to amendments expressly provided by the law for the
determination of the taxable result.
The express amendments provided in the scope of the specific tax regime applicable to
groups of companies are the following:
Capital gains
Net capital gains are taxed at a reduced rate of 20% when they are realised in the scope
of intra-group operations.
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Expenses deductible from the taxable result subject to CIT
The following expenses are deductible within the group:
Head office fees and management fees determined in a lump sum basis, according to
the conditions of allocation of the expense between the companies members of the
group defined in a previous ruling with the tax authorities.
The whole of the interests on partners current accounts (i.e. on the sums put, by
the partners, at the disposal of a company of the group) within the sole limit of the
intervention rate on invitation to tender (TIAO) of the Bank of the Central African
States (equivalent to 4%) raised by 2%.
Rents of movables carried out within the group by the mother company or between
companies of the same group.
10% WHT
Sums subject to CIT according to the provisions of Article 206 of the Gabonese Tax
Code paid by a Gabonese debtor member of a group of companies to a foreign company
member of the same group are exempted from the 10% WHT even though no DTT
aiming to avoid double taxation has been concluded between Gabon and the country of
residence of the beneficiary of the remunerations.
Transferable securities income tax (IRCM)
Companies of the group that benefit from transferable securities income originating
from Gabon are exempted from IRCM when the said revenues are paid by a company
member of the group.
In return, payments carried out by the head of the group of companies to the profit of its
partners (individuals or legal entities) are subject to IRCM at a unique and at source rate
of 10% (instead of 20%).
It is to be noted that the transferable securities incomes having their source abroad and
which gave rise to taxation in their country of origin give the right in Gabon to a tax
credit of the amount of the taxation that is deductible from the CIT of the fiscal year of
perception of the incomes. The aforesaid tax credit applies even though no DTT aiming
to avoid double taxation has been concluded between Gabon and the country of origin
of the incomes.
VAT
The head of the group of companies is liable for VAT.

Members of a group of companies could, however, on option, consider the following
provisions of services performed within the group as being out of the scope of
application of VAT:
Provisions of services of any kind, notably technical, accounting, financial,
administrative, data processing, legal, human resources, and commercial.
Fees relating to studies.
Putting at disposal of personal.
Management of finance.
The option for the subjection of the abovementioned operations must be formulated by
the concerned taxpayers on express request addressed to the General Tax Manager.
Registration duties
Deeds relating to incorporation, increase or reduction of share capital, breaking up with

or without clearance, merger, scission, partial contribution of assets, and transfer of
shares of a company member of a tax group, are subject to a fixed duty of XAF 20,000.
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In the absence of a more favourable duty provided by the common law of registration,
the changes of ownership and use that are not provided at Article 6 of the Gabonese Tax
Code are subject to a proportional rate of 1% when carried out by members of the same
tax group.
Requirements relating to declaratory obligations
The adherence to the group tax regime must be notified in writing by the head of
the group of companies to the General Tax Manager accompanied by the list of the
companies included in the tax perimeter of the group.
Each company remains liable for the periodical returns applicable to its activity.
For the purpose of calculation and verification of the returns, each tax return relating to
the CIT of each company of the group will be gathered and filed at the same time by the
head of the group of companies before the Tax Office.
Transfer pricing
The Gabonese Tax Code provides rules regarding transfer pricing issues.
According to these rules, any payment considered to be a result of mismanagement will
be subject to the CIT rate at 30% (35% for companies operating in the oil and mining
sectors) plus penalties.
Indeed, Article 12 of the Code provides that By virtue of law or in fact, for companies
which are dependent of companies or groups of companies located outside the CEMAC
area, or for those which possess the control of companies located outside the CEMAC
area, payments or expenses realised by any mean whatsoever, comparable to abnormal
act of management, constitute transfer of profits subject to corporate income tax.
It is applicable for the following:
Payments constituting increase or decrease of purchases or sales.
Payments of excessive royalties or royalties without compensation.
Relinquishment of revenues (underestimated sale price, free of charge service
provision, granting of a free loan or a loan with low interests).
The abnormal act of management is not limited to expenses; it also includes any form of
advantages or allowances granted to third parties without any equivalent compensation
for the company.
Article 13 of the Gabonese Tax Code provides that The advantages or assistance
granted by companies belonging to the same group can only be considered as resulting
from a normal management if the company which grants these advantages or assistance
demonstrates the existence of its own interest in acting as such. The general interest of
the group is not sufficient to justify such practices.
The Finance Act for 2014 provides documentation requirements concerning transfer
pricing. According to Article P831 bis of the Gabonese Tax Code, the following
documents must be made available and provided to the tax authorities upon request:
General information about the group of related entities, notably:
A general description of the activity, including any changes that occurred since the
beginning of the activity.
A general description of the legal and operational structures of the group of
related entities, including an identification of each entity.
A general description of the exercised functions and assumed risks of the related
enterprises.
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A list of the main intangible assets owned (notably licences, brands, know-how).
A general description of the group transfer pricing policies.
Specific information relating to the company:
A description of the spread activity, including any changes that occurred during
fiscal years.
A description of the operations carried out with other related entities, including
the nature and the amount of the flow and including royalties.
A list of the agreements pertaining to costs allotment together with copies of any
prior agreement on transfer prices and rescripts pertaining to the determination of
transfer prices affecting the companys results.
A presentation of the methods of determination of transfer prices according to
the arms-length principle, including an analysis of the exercised functions, the
assets that are used, and the risks that are assumed, together with an explanation
concerning the selection and application of this or these method(s).
An analysis of the elements of comparison considered as relevant by the company,
when the chosen method requests it.
Thin capitalisation
There is no specific tax rule under Gabon legislation related to thin capitalisation.

Foreign tax credit
DTTsinclude provisions relating to the attribution of foreign tax credits. Such tax credits
aim to limit the double taxation of profits that are subject to taxation in both member
states of the treaty.
Tax credits for job creation
There is a mechanism in place for granting corporate tax credits for any salaried
appointments of Gabonese personnel.
This tax credit is equal to 20% of the gross salary paid to new employees and is subject
to the creation of a minimum number of jobs, according to the size of thecompany as
follows:
Two jobs, for companies with less than 20 employees.
Three jobs, for companies with 20 to 50 employees.
Five jobs, for companies with more than 50 employees.
Note that the tax credit is granted only on newly created jobs since the preceding
fiscal year.Contracts concluded with the employees must also be for an undetermined
duration, and the new jobs must not result from the diminution of existing jobs.
Due to the provisions of the Investments Law, any private investment in Gabon can
benefit from:
A common law framework.
Privileged frameworks.
Specifically agreed frameworks.
Depending on the frameworks it is eligible for, a company can benefit from customs
privileges and tax breaks.
Industrial companies already set up in Gabon and wishing to increase their production
capacity can be admitted to a preferential tariff framework. This entails the application
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of a global reduced rate of 5% for duties and taxes paid on imports of equipment
(excluding materials, furniture, and spare parts), provided that these correspond to an
investment schedule and their value is in excess of XAF 100 million.
New industrial companies can also benefit from this framework, provided they are not
subject to any of the other privileged frameworks outlined by current legislation.
The granting of this privileged tariff framework occurs on the basis of a decision by the
Minister of Finances, following a proposal from the Director of Customs and Indirect
Taxes.
Capital investment incentive
New companies are exempt from the IMF, the minimum taxation of CIT, during the first
two years of operations.
Social housing incentive
There are some tax exemptions applicable exclusively to authorised companies during
the performance ofa social housinginvestment project.
Favourable measures are applicable with regards to the importations of materials,
engines, and equipment destined to authorised companies. Indeed, such importations
are exempt of customs duties. They can also be imported under the normal temporary
admission.
The concerned companies may apply before the Customs Authorities in order to benefit
from the abovementioned regime.
The concerned companies are those authorised for the planning of urban lands intended
for social habitat and the building of housings of a socio-economic nature and industrial
units of manufacturing of materials and other inputs used for the building of social
housings. The above mentioned tax exemptions relate to CIT, VAT, and business license
tax.
Tourism incentive
Companies having hotel activityin the tourism sector are exempted from CIT during
the first three years of existence, provided that the amount of the investment equals or
exceeds XAF 300 million. If not (investment of less than XAF 300 million), aforesaid
authorised companies investing in the tourism sector can benefit, duringa fiveyearperiod,from a 5% tax credit.
Withholding taxes
10% WHT
When they are paid by a debtor established in Gabon to individuals or companies subject
to CIT or PIT that do not have a permanent professional base in Gabon, the following
amounts are subject to a 10% WHT:
All amounts paid pursuant to the practice of an independent profession in Gabon.
Payments received by inventors, payments relating to copyrights, and all payments
relating to intellectual and commercial property as well as assimilated rights.
All amounts paid for services materially rendered or effectively used in Gabon.
Interest, arrears, and all others fixed-income investment-products pertaining to
income declared as professional revenue of the beneficiary.
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Net profits carried out by branches of foreign companies having their head offices
abroad are also subject to a 15% WHT in Gabon before they are taken into account by
the foreign companies.
Transferable securities income tax (IRCM)
IRCM is due at a 15% rate on revenues from stocks and shares paid to legal entities.
It is due by beneficiaries of these revenues and must be withheld by the distributing
company.
Tax administration
Taxable period
Companies are required by law to have a 31 December closing of any fiscal year.
Tax returns
Returns for the previous calendar year are to be filed before 30 April of each year.
Payment of tax
Tax is payable to the General Tax Office in two instalments on 30 November and 30
January. The balance of the tax duemust be paid by 30 April. The first instalment must
equal one-quarter of the tax assessed in the previous year and the second instalment
must equal one-third of this tax.
Tax audit process
There is no a specific audit cycle in Gabon.
The tax administration can proceed to tax audit until the fourth year following the year
for which the tax is due.
The tax administration shall particularly focus on the following aspects:

Compliance of deductibility of management fees.

Compliance of deductibility of corporate expenses.
Compliance of WHT on payments made to foreign services providers.
Payment of VAT on behalf of third parties.
Other issues
Legal reserve
According to the provisions of the OHADA Uniform Act relating to commercial

companies and economic interest groups, one-tenth of the years profits, reduced, if
applicable, by any previous losses, must be put into a reserve account named Legal
Reserve.
The endowment of this reserve ceases to be obligatory when its value reaches one-fifth
(20%) of the company share capital.
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Georgia
PwC contact
Robin McCone
PricewaterhouseCoopers Central Asia and Caucasus B.V.
#7 Bambis Rigi Street
Business Center Mantashevi
Tbilisi 0105, Georgia
Tel: +995 32 50 80 50
There have been no significant corporate tax developments in Georgia during the past
year.

Corporate income tax (CIT) in Georgia is applied to taxable profit at a rate of 15%.
Taxable profit is defined as gross income minus deductible expenses.
Resident enterprises are subject to CIT on worldwide income.
Non-resident enterprises carrying out economic activities in Georgia through a
permanent establishment (PE) are subject to CIT with respect to gross income earned
from Georgian sources, which can be reduced by deductions attributable to such
income.
Non-resident enterprises earning income from Georgian sources, other than through a
PE, are subject to withholding taxes (WHTs) (see the Withholding taxes section for more
information).
Local income taxes
There are no local income taxes imposed on the profit of legal entities.
Corporate residence
A resident enterprise is any legal entity that is established under the laws of Georgia or
has its place of effective management in Georgia.
The domestic definition for a PE essentially adopts the definition for PE found in
Convention.
Local legislation provides the definition for economic activity to be any activity
undertaken with the intent to gain profit, income, or compensation, regardless of the
results of such activity, unless otherwise provided by the tax code.
Other taxes
The standard VAT rate is 18% and applies to the sale of all goods and services supplied
in Georgia carried out as an economic activity. Goods are considered to be supplied
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in Georgia if they are transferred in or their shipment originates in Georgia. Services
generally are considered to be supplied in Georgia if they are performed in Georgia.
However, special rules apply for services relating to immovable property and certain
services provided to non-residents.
The export and re-export of goods is exemptfrom VAT with the right to credit input tax
(formerly referred to as zero-rated). VAT-exempt supplies include financial services,
goods and services required for oil and gas operations, and medical services.
Reverse-charge VAT applies to services provided to Georgian taxpayers by a non-resident
entity.
A VAT payer is a person who is registered or required to be registered as a VAT payer.
Any person whose annual taxable turnover exceeds 100,000 Georgian lari (GEL) in any
continuous period up to 12 months or who produces or imports excisable goods must
register as a VAT payer. In addition, an enterprise that expects to perform one-off taxable
transaction of more than GEL 100,000 must also register as a VAT payer no later than the
second day aftereffecting the transaction.
Customs duties
Import tax is levied on goods that cross the economical borders of Georgia (except
export). Depending on the types of products, general rates on imported goods are: 0%,
5%, and 12%. Imported cars are taxed at GEL 0.05 multiplied by the volume of the
engine, plus 5% of import tax on each additional year of ownership.
Excise tax
Excise tax is levied on specified goods that are produced in Georgia or imported into
Georgia. Excise tax generally is calculated with reference to the quantity of goods (e.g.
volume, weight) or, in the case of automobiles, on the basis of the engine capacity and
vehicle age. Excise tax rate varies from GEL 0.15 to 400 for one unit.
Excise tax applies to the following goods:

Alcoholic drinks (i.e. GEL 5 per litre of whiskey).

Condensed natural gas, except for pipeline.
Oil distillates.
Goods produced from crude oil.
Tobacco products.
Automobiles.
The export of excisable goods is exempt from excise tax with the right to credit.
Property tax
Property tax is payable at the rate of 1% on the annual average residual value of fixed
assets (except for land) on the balance sheetas well ason leased out property of
Georgian entities or foreign entities with taxable property in Georgia. For immovable
property acquired before 2005, the average residual value must be multiplied by a
coefficient of between 1.5 and 3, depending on the acquisition date.
Land tax
The annual land tax rate for agricultural land varies according to the administrative unit
and the land quality.
The base tax rate per 1 hectare of agricultural land varies from GEL 1.50 to GEL 100.
The tax is further adjusted by a territorial coefficient of up to 150%, depending on the
location.
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The base tax rate payable on non-agricultural land is GEL 0.24 per square metre, which
is further adjusted by a territorial coefficient not exceeding 150%.
Transfer taxes
There are no transfer taxes in Georgia.
Stamp taxes
There are no stamp taxes in Georgia.
Branch income
Branch income is taxed at the general rate of 15%. There is no tax on branch profit
remittances.
Taxable income is determined as the difference between the gross income of a taxpayer
and the relevant deductions granted under the Georgian tax code.
Inventory valuation
A taxpayer is required to record the value of goods produced or acquired as the outlays
(except for depreciation charges) or the purchase price in tax accounting. Furthermore,
the taxpayer shall include the storage and transportation expenses in the value of such
goods.
A taxpayer is entitled to record the cost of inventory using the individual accounting
method, the average weighted cost method, or first in first out (FIFO).
Capital gains
The Georgian tax code does not define any separate tax for capital gains. Capital gains
are taxable as normal business income at the general CIT rate.
Dividend income
Dividends received by local legal entities (except for sole enterprises and entrepreneur
partnerships) are not subject to taxation at source and shall not be included in gross
income.
Dividends received by non-resident enterprises from resident enterprises are subject to
WHT at source (see the Withholding taxes section for more information).
Interest income
Resident legal entities and PEs of non-residents that received interest income that was
taxed at source in Georgia are entitled to a credit on tax paid to the state budget.
Interest income received from a licensed financial institution is not subject to WHT
at source, and it should not be included in the gross income of a recipient unless the
recipient is another licensed financial institution.
Rent/royalty income
Rent and royalty income received by resident companies and/or PEs of non-resident
enterprises should be included in the gross income of the enterprise and taxed at the CIT
rate of 15%.
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Foreign income
Resident legal entities are subject to CIT on their worldwide income. Foreign income is
subject to CIT at 15%. There is no tax deferral available under the Georgian tax code.
Deductions
Expenses connected with the receipt of income generally are deductible from income,
provided sufficient primary documentation is available.
Depreciation
The declining-balance method of depreciation applies to fixed assets for tax purposes.
The maximum rate of depreciation is 20% for most fixed assets, though buildings
and construction are subject to depreciation at the rate of 5% (please contact us for
additional information regarding other groups and rates).
A taxpayer is entitled to fully deduct costs of fixed assets (excluding those contributed
to capital) in the year when the fixed assets are put into operation (a form of capital
allowance). In case the taxpayer employs the right of full deduction in this manner, this
method may not be changed for five years.
Intangible assets (e.g. goodwill) are amortisable in proportion with the period of
beneficial use. However, intangible assets of value less than GEL 1,000 are fully
deductible from gross income.
If the period of beneficial use of an intangible asset cannot be defined, it is amortisable
at the rate of 15%.
Start-up expenses
Expenses incurred before registration of an entity as a taxpayer (e.g. public registry fee)
are not deductible under Georgian tax legislation.
Interest expenses
Interest paid on loans is deductible within the limits established by the Finance Minister.
The annual deductible interest rate limitation established by the Minister of Finance of
Georgia for the year 2014 is 24%.
Bad debt
A taxpayer is entitled to deduct bad debt only if all of the following conditions are met:
The bad debt is related to the taxpayers goods or services sold.
Income receivable from the sale of goods or services was previously included in
taxable gross income.
The bad debt has been written off and recorded as such in the taxpayers
accountingrecords.
Charitable contributions are deductible, up to 10% of taxable profit.
Fines and penalties
Fine and penalties paid to the state budget are not deductible.
Taxes
CIT is disallowed for deduction.
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The following other expenses are not deductible:

Expenses not related to the generation of income.
Expenses related to the receipt of income exempted from CIT.
The deduction of certain expenses is subject to limitations, including:
Representation expenses, up to 1% of gross income.
Repair expenses, up to 5% of the book value of the relevant asset at the end of the
year. Any excess must be capitalised and deducted throughdepreciation.
Losses may be carried forward for five years but may not be carried back.
A taxpayer may elect to extend the carryforward period to ten years. However, this also
results in the statute of limitations period being extended from six to 11 years.
International financial companies,international enterprises, and Special Trading
Companies are not entitled to carry forward losses.
An international financial company is a financial institution that, on behalf of the
application of plenipotentiary representative, gets state registered, is granted as
international financial company, and is given a status confirming certificate.These
are resident companies that, after application, were granted the status of international
financial company.
An international enterprise is an enterprise operating in the free industrial zone
(FIZ), which, for the purposes of tax exemption, is granted the status of international
enterprise.
There is no special tax regime in Georgia for payments made to the foreign affiliates;
as such, general rules will apply. Payments may be classified as equity, financing, or
service fee. Any such transaction will need to be at arms length in accordance with the
Georgian transfer pricing rules.
Group taxation
Georgian law does not provide for taxation of groups.
Transfer pricing
The transfer pricing rules introduced in the tax code are broadly based on the OECD
arms-length principle adopted in tax treaties and by most countries when they
implement domestic transfer pricing rules.
The law recognises the five OECD transfer pricing methods for evaluating whether prices
are at arms length:


Cost plus method.
Net profit margin method.
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The tax code stipulates that in accordance with the Ministry of Finance (MoF)
instructions, the tax authority may recalculate the taxes if they can prove that the prices
applied by related parties of transactions differ from the market prices.
According to the instructions issued by the MoF in December 2013, the methods for
assessing the transfer pricing assessment rules have been explained, and the following
procedures have been established:

Determination of comparability of independent transactions.

Transaction adjustment procedure.
Information to be represented by the parties of the transaction to the tax authority.
Documentation list.
Sources of information on market prices.
Price range application procedure.
The taxpayer becomes liable to present documentation to the tax authority in support
of ones position in considering income received to be consistent with market principles
within 30 days of the formal request of the Revenue Service. The report can be written
in both Georgian and English but should be translated in Georgian in case it is requested
by the Revenue Service. The companies also have an option to sign an Advance Pricing
Agreement (APA) in which the transfer pricing methodology will be agreed for specific
transactions with the tax authority, who will no longer have the right to charge fines/
taxes on these transactions.
The following general penalties, determined by tax legislation, apply for non-compliance
with the arms-length principle or failing to prepare or submit transfer pricing
documentation:
An understated tax liability (e.g. VAT, CIT) is subject to a penalty of 50%of the
understated tax.
Late payment of taxes is subject to interest at a rate of 0.06% per overdue day.
Failing to submit a required document is generally subject to a penalty of GEL 400.
Thin capitalisation
Interest expense may be disallowed if a companys debt-to-equity ratio exceeds 3:1

(5:1 for leasing companies). The thin capitalisation rules do not apply to financial
institutions, entities that have gross income of less than GEL 200,000, and entities with
interest expense that is less than 20% of their taxable income before deducting such
interestexpense.

Foreign tax credit
Income tax or profit tax paid on income earned from outside Georgia may be credited
against CIT payable in Georgia. The amount of credited taxes may not exceed the
Georgian tax payable on the foreign income.
CIT exemptions
The following are exempt from CIT (the list is not exhaustive):
Income of budgetary, international, and charitable organisations (including grants,
membership fees, and donations), except for the profit from commercial activity.
Profit received from financial services conducted by international
financialcompanies.
Gains on sales of securities issued by international financial companies.
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Free industrial zone (FIZ)
The following rules apply for enterprises located in an FIZ:

Income received by an international enterprise from its permitted activities
conducted in an FIZ is exempt from CIT.
The importation of foreign goods into an FIZ is free of customs duties and VATexempt.
Operations carried out in an FIZ are VAT-exempt without the right to credit.
Property located in an FIZ is exempt from property tax.
The personal income tax of employees is paid by those individuals through selfreporting.
Withholding taxes
Non-resident enterprises earning income from Georgian sources, other than through a
PE, are subject to WHT at the following rates:
Income
Dividends
Royalties
Interest
Oil and gas subcontractor income
International transportation/communication
Income from services rendered in Georgia
Other Georgian-source income
Insurance and re-insurance
WHT (%)
5
10
5
4
10
10
10
0
For those countries with which Georgia has entered into double tax treaties (DTTs), the
WHT rates are the following:
Recipient
Armenia
Austria
Azerbaijan
Bahrain
Belgium
Bulgaria
Croatia
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Germany
Greece
Hungary
India
Iran
Ireland
Dividends (%)
5/10
0/5/10
10
0
5/15
10
0/5/10
5
5/10
0/5/10
10
0
0/5/10
0/5/10
0/5/10
8
0/5
10
5/10
0/5/10
Interest (%)
10
0
10
0
10
10
10
5
8
0
10
0
0
0
0
8
0
10
10
0
Royalties (%)
5
0
10
0
5/10
10
5
5
0/5/10
0
10
0
0
0
0
5
0
10
5
0
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Recipient
Israel
Italy
Kazakhstan
Kuwait
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Qatar
Romania
San Marino
Serbia
Singapore
Slovak Republic
Slovenia
Spain
Switzerland
Turkey
Turkmenistan
Ukraine
United Kingdom
Uzbekistan
Dividends (%)
5
5/10
15
0/5
5/10
5/15
0/5/10
0
0/5/15
5/10
10
0
8
0
5/10
0
0
5
0/10
10
10
10
5/10
0
0/15
5/15
Interest (%)
0/5
0
10
0
5
10
0
0
0
0
10
0
10
0
10
0
5
5
0
0
10
10
10
0
0
10
Royalties (%)
0
0
10
10
5
10
0
0
0
0
10
0
5
0
10
0
5
5
0
0
10
10
10
0
0
10
Tax administration
The tax departments under the Ministry of Finance are responsible for tax administrative
matters in Georgia.
Taxable period
The tax year is the calendar year in Georgia.
Tax returns
A CIT return should be submitted before 1 April of the year following the reporting
period.
Payment of tax
CIT is paid in advance in four equal instalments, before 15 May, 15 July, 15 September,
and 15 December. The advance instalments are estimated according to the previous
years annual tax. A taxpayer with no prior-year CIT obligation is not required to make
advance payments.
Final payment is due by 1 April of the year following the reporting period. Excess CIT
payments may be offset against other tax liabilities.
Tax audit process
There are two types of tax audits: desk tax audit and field audit. The tax audit may be
conducted based on the order of the Revenue Service of Georgia. The Revenue Service
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sends a notice to the taxpayer no less than ten working days before the commencement
of the audit. The audit should commence no later than 30 days after receiving such
notice by the taxpayer. Normally, the tax audit may last for three months, and may be
extended to another two months with the approval of the head of the Revenue Service.
The findings should be presented to the taxpayer in the form of a tax act.
The statute of limitations is six years in Georgia. For those taxpayers who decide to
increase the loss carryforward to ten years, the statute of limitations is 11 years. The
statute of limitations period will decrease to five years in 2015 and four years in 2016.
In recent periods, the tax authorities have become largely focused on transfer pricing
issues during tax audits.
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PwC contact
Dieter Endres
PricewaterhouseCoopers AG
Wirtschaftsprfungsgesellschaft
Friedrich-Ebert-Anlage 35-37
60327 Frankfurt am Main
Germany
Tel: +49 69 9585 6459
There was little significant legislative activity up to the general election held in
September 2013 and there has been none since. Indeed, the only tax point of
significance over the past 12 months was the adoption of the Authorised Organisation
for Economic Co-operation and Development (OECD) Approach (AOA) to computing
permanent establishment (PE)income as though it had been earned by an independent
enterprise. This amendment applies to the tax year 2013 onward. An implementing
decree giving guidance on some of the more problematical concepts has been published
as a discussion draft, but has not yet been finalised.
The lead partner in the last coalition government, the Christian Democratic Union
(CDU)/Christian Social Union (CSU), narrowly missed an absolute majority of
parliamentary seats in the September general election. The new government was
constituted in December as a coalition between the CDU/CSU and the second largest
parliamentary grouping, the Social Democratic Party (SPD). The coalition agreement
mentions taxes only in general terms and does not propose any specific reforms.
However, it does indicate an intention to slightly simplify compliance procedures, to
move towards a self-assessment system, at least for corporations, and to step-up the
struggle against tax evasion/avoidance, especially within international groups of
companies. However, in that latter regard, it suggests waiting until the OECD Base
Erosion and Profit Shifting (BEPS)conclusions are available in 2015. It also suggests
pressing internationally for a system of automatic information exchanges as the more
viable alternative to the present OECD model agreement on information exchanges only
on request.

Germany taxes its corporate residents on their worldwide income. However, most
double tax treaties (DTTs) exempt income attributable to a foreign PE. Non-residents
with PE or property income are taxed by assessment on German-source income; those
earning royalties and dividends are taxed by withholding at source. Interest paid abroad
is, in most cases, free of German tax altogether.
German business profits are subject to two taxes, corporation tax and trade tax.
Corporation tax (Krperschaftsteuer)
Corporation tax is levied at a uniform rate of 15% and is then subject to a surcharge of
5.5% (solidarity levy).
Trade tax (Gewerbesteuer)
The effective rate of trade tax varies by location from a minimum of 7%, which is the
legal minimum and applies in a few small villages in depressed areas, to the Munich rate
of 17.1%. The local rates in most cities range between 14% and 16%, while those in small
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towns can be as low as 12%. The basis for this tax is the adjusted accounting profit: in
particular, 25% of all financing costs over100,000 euros (EUR), including the implicit
financing costs in leasing, rental, and royalty payments, are added back to taxable
income.
If the basis for the two taxes is identical (unlikely in practice), the overall burden on
corporate profits earned in Munich would be 33%. In Frankfurt, the burden would be
32%. In Berlin, the burden would be 30.2%.
Corporate residence
A corporation is resident in Germany for tax purposes if either its place of incorporation
or its main place of management is in Germany. A corporation meeting neither of these
criteria will be regarded as non-resident with tax obligations limited to its income from
German sources. These include active business activities through a PE or the letting
of property, as well as investment income, royalties, and equipment rental (leasing).
Income of the first two categories is generally taxed by assessment on the actual net
earnings. That of the last three is usually taxed at source by withholding from the
gross amount payable. Interest paid abroad is generally tax-free. However, interest on
convertible or profit-sharing bonds is taxed as a dividend; interest on a German property
or ship mortgage is seen as property or shipping income respectively.
Domestic law defines a PE as any fixed business facility serving the corporate purpose.
Fixed is not defined further, but is generally taken to imply a duration of at least six
months. A permanent representative is someone who habitually deals on behalf of the
principal acting on the principals instructions, again without any specific time limit.
Germany consistently follows the OECD model in her tax treaty PE definitions; thus
purchasing activities, delivery stores, and independent agents acting in the ordinary
course of their business are regularly excluded from the PE concept. Some, but not all, of
Germanys recent tax treaties reflect the Authorised OECD Approach to PE income. This
approach has been adopted into domestic law and is generally followed unless doing
so would lead to double taxation from continued adherence to the old approach (of
treating a PE as part of the same legal entity as its head office) in the other state.
Other taxes
Proceeds of sales and services effected in Germany are subject to VAT under the common
system of the European Union (EU)at the standard rate of 19% (7% on certain items,
such as food and books). The taxpayer generally is entitled to deduct the VAT charged on
inputs from that payable on outputs.
VAT is administered by the tax office responsible for the corporation tax assessment
of a company. It is based on returns filed monthly or quarterly by the tenth day of the
following month (monthly where the output tax in the previous year was more than EUR
7,500) drawn up on the basis of the actual transactions during the filing period as shown
in the books of account. A permanent filing extension of one month is available against
an advance payment of one-eleventh of the total net tax due during the previous year.
Otherwise, payment is due when the return is filed.
Legally, VAT is an annual tax. Each taxpayer must file an annual return for each calendar
year, regardless of the actual accounting date for the business. The VAT return is filed
together with the corporation and trade tax returns. If the annual return does not agree
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with the total of the monthly or quarterly returns, the tax office can be expected to ask
for a detailed explanation and to penalise any irregularity.
Customs duties
Customs duties are levied under a common system on imports into the European Union.
The rate is set at zero on most imports from EU candidate countries and on many
imports from countries with which the European Union has an association agreement.
For manufactured products from other countries, the rates generally lie within the range
of 0% to 10%. The basis is the import value of the goods and thus includes uplifts for
royalty or other payments associated with their use but not apparent from the transit
documents.
The European Commission (EC) also sets countervailing duties from time to time on
specific imports from specific countries in order to counter dumping attempts. The
countervailing duty rate is set to fully absorb the dumping margin and is therefore
usually much higher than 10%.
Excise taxes
Excise taxes on fuel, electric power, insurance, and some other products are not a
compliance issue for businesses other than dealers in bonded goods and insurance
companies, although they can be a significant additional cost factor for business users.
These excise taxes also have an environmental element in as much as the rates are set to
discourage excessive use of pollutants. However, an air passenger duty is the only tax on
pollution as such. Energy producers (such as power stations) can claim a refund of the
excise tax borne in the cost of the energy products used in the production process.
Property taxes
There are no taxes on wealth or capital employed. There is a minor local authority tax on
property, but the effect of this is partly offset by an additional trade tax deduction.
Stamp taxes
The only significant German stamp tax is the real estate transfer tax on the consideration
on conveyances of German property. The rate varies by province: 3.5% for property
in Bavaria and Saxony; 4.5% in Hamburg; 5.5% in the Saar; 6% in Berlin; 6.5% in
Schleswig-Holstein; 5% elsewhere.
This tax is also levied on indirect transfers from the acquisition of at least 95% of
the shares in property owning companies. This applies to shares in the shareholder
throughout the corporate chain. If the transfer is indirect, and therefore without its own
specific consideration, the basis for the tax is 12.5 times the annual rentable value. This
value is derived from rents actually achieved over the past three years or estimated from
statistics maintained by the local authority.
The tax is not levied on direct or indirect transfers without consideration in the course of
a corporate reorganisation under the laws of a member state of the European Economic
Area (EEA), provided at least 95% of the ultimate interest in the property remains
unchanged for five years before and after the transaction.
Real estate transfer tax is currently under attack before the Constitutional Court.
All employers are required to account for social security contributions on wages and
salaries paid, up to set monthly limits. There are four separate types of insurance: for
old-age pensions, unemployment benefits, health care, and invalidity care. Employees
regularly earning more than EUR 4,462.50 per month can opt out of the health and
invalidity insurances if they take out appropriate coverage with a private insurance
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company. The pension and unemployment insurances are compulsory for all employees.
The upper monthly salary limits are EUR 5,950 (EUR 5,000 in the eastern part of
Germany) for the pension and unemployment insurances and EUR 4,050 for the health
and invalidity insurances. The rates are as follows:

Pension insurance: 18.9%, of which the employees share is one half.

Unemployment insurance: 3.0%, of which the employees share is one half.
Health insurance: 15.5%, of which the employees share is 8.2%.
Invalidity insurance: 2.05%, of which the employees share is one half.
Branch income
Both corporation tax and trade tax are imposed on the taxable income of a foreign
companys German branch. The rates are the same for branches as for resident German
companies, although the withholding tax (WHT) on dividend distributions by German
companies is not deducted from profits transferred by a German branch to its foreign
head office.
Strict conformity between book and tax reporting is no longer required. Rather,
a company must draw up its financial statements according to the dictates of fair
presentation, but may exercise all valuation and other options in the tax acts in its own
best tax interest without regard to the accounting treatment for the item concerned.
It must keep a register of all variances between the financial statements and the tax
computation showing the basis on which each arose and its reversal. IFRS financial
statements are not accepted as a basis for computing taxable income.
Inventory valuation
Inventories normally are valued at the lower of actual cost, replacement cost, and
net realisable value. However, any write-downs below actual cost must be for specific
reasons. If specific identification of the inventories is not possible, valuation at either
standard or average cost is acceptable. The last in first out (LIFO) method is accepted as
an option. First in first out (FIFO) is not accepted unless its assumption accords with the
facts, although this condition is often fulfilled in practice.
Long-term liabilities and accruals
Non-interest bearing long-term liabilities, other than advance payments received, must
be discounted at 5.5% per year. A similar provision applies to refurbishment (to restore
an asset to its original condition) and other accruals that accumulate over time.
Capital gains
Generally, capital gains realised by a corporate entity from a disposal of business assets
are treated as ordinary income. It is possible to postpone the taxation of part or all of the
gain on real estate by offsetting the gain against the cost of a replacement property.
Capital gains from the sale of investments in other companies are exempt from
corporation and trade taxes. Corresponding losses are not deductible. However, 5% of
the capital gains are added back to taxable income as non-deductible directly-related
expenses.
Dividend income
Dividends received on significant holdings are exempt from corporation and trade taxes
without a minimum holding period. Portfolio dividends are taxable. A portfolio holding
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is less than 10% for corporation tax and less than 15% for trade tax. 5% of the tax-free
gross dividend is added back to taxable income as non-deductible business expenses.
Note that banks do not enjoy this exemption on dividends from securities held for
trading.
Stock dividends
In principle, a declaration of stock dividends (by converting reserves to capital stock)

by a company will not lead to taxable income for the shareholder or to other tax effects.
Subsequent capital reductions, however, will be treated as cash dividends in most
circumstances. There is no German tax reason for distributing a stock dividend as
opposed to merely leaving accumulated profits on the books to be carried forward. The
decision, therefore, depends upon the situation in the investors home country.
Interest income
Interest received is taxed as part of a companys ordinary trading income. There is no

exemption corresponding to the trade tax disallowance of 25% of the interest expense
or to the general tax disallowance of net interest expense in excess of 30% of earnings
before interest, tax, depreciation, and amortisation (EBITDA) under the interest
limitation rule (see the Deductions section). However, since the interest limitation is based
on the net interest margin, a company can benefit from earning income as interest as
opposed to an interest substitute.
Foreign income
Foreign income, except dividends, received by a German corporation from foreign

sources is included in taxable income for corporation tax unless a tax treaty provides for
an exemption. Foreign PE income, in most cases, is exempt from corporation and trade
taxes, while double taxation on most items of passive income (e.g. interest and royalties)
is avoided by foreign tax credit or, at the taxpayers option, by a deduction of the foreign
taxes as an expense.
Irrespective of any tax treaty, income from a foreign branch or partnership is not charged
to trade tax.
A Foreign Tax Act sets anti-avoidance (including controlled foreign company [CFC])
rules with respect to subsidiaries in certain lines of business subject to a low-tax regime.
A low-tax regime is one in which the rate applicable to the income in question is less
than 25%. Most forms of passive income fall under the CFC rules, which essentially
attribute the income to the German shareholder as though it had been earned directly.
Active business income is not generally caught where the business operates from
properly established facilities.
Investment income held in an EU/EEA subsidiary is also exempt from attribution,
provided the subsidiary is commercially active in its country of operation and maintains
at least a minimum establishment.
Other provisions give the tax office the right to insist on full disclosure of all the facts
and circumstances surrounding a transaction as a condition for the deduction of a
business expense incurred within an essentially tax-free environment for the supplier.
This rule operates independently of ownership or shareholding considerations.
Deductions
Depreciation on movable fixed assets is calculated on the straight-line method over the
assets anticipated useful life. The declining-balance method was available for assets
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capitalised in 2009 and 2010 at a maximum of two and a half times the straight-line
rate, but in no case to exceed 25%. If this option was taken, it may be continued within
subsequent years. On the other hand, a taxpayer is free to change from decliningbalance to straight-line at any time. This election is by individual asset and cannot be
reversed later. Depreciation takes the residual value of the asset into account only if it is
material, with any gains on a sale being treated as normal business income.
Buildings are depreciated on a variety of straight-line or reducing-rate systems designed
to reach a full write-down between 25 and 50 years, depending on the age of the
building and on whether the taxpayer was its first owner.
In addition to normal depreciation, special depreciation is deductible for tax purposes in
certain limited circumstances (e.g. small businesses, ancient monuments, buildings in
designated renovated city zones).
Intangibles are amortised straight-line over their estimated useful lives; goodwill is
amortised over 15 years.
Start-up expenses
Start-up and formation expenses are deductible as incurred.
Interest limitation
Annual net interest expense (the excess of interest paid over that received) of group
companies is only deductible at up to 30% of EBITDA for corporation and trade tax
purposes. The 30% limitation applies to all interest, whether the debt is granted by a
shareholder, related party, or a third party.
This limitation does not apply where the total net interest expense for the year is less
than EUR 3 million or where the net amount paid to any one shareholder of more
than 25% (or a related party) is no more than 10% of the total. However, this latter
concession is dependent on the demonstration that the equity to gross assets ratio of
the company is no more than two percentage points below that of the group as a whole.
Unused EBITDA potential may be carried forward for up to five years to cover future
excess interest cost. This carryforward is otherwise subject to the same principles as the
loss carryforward, including curtailment on change of shareholder(s).
It is emphasised that the interest limitation is additional to, and not a substitute for, the
transfer pricing requirement that related party finance be at arms length.
Bad debts
Bad debts incurred on trading with unrelated parties are deductible once irrecoverability
is apparent and all attempts to pursue the debt have failed or been abandoned. Provision
for future bad debts may be made; general provisions must reflect the past experience
of the business; specific provisions require specific justification based on the actual
circumstances. Loans to shareholders of more than 25% or to their related parties may
not be written down or off with tax effect, unless a third party creditor would have
granted the loan or allowed it to remain outstanding in otherwise similar circumstances.
Donations to recognised charities in cash or in kind are deductible, up to the higher of

20% of otherwise net taxable income or 0.4% of the total of sales revenue and wages
and salaries paid during the year. Donations to charities registered in other EU/EEA
member states also qualify for deduction if the recipient charity meets the German
requirements for recognition.
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Fines and penalties
Fines and other penalty payments levied by a court, or by an authority, with an intent
to punish are not deductible. By contrast, those levied to confiscate ill-gotten gains, or
to relieve damage to the victims or to the public good, are deductible. Penalty payments
levied for attempted tax evasion are not deductible, but late payment surcharges are
deductible if the tax itself is, for example VAT.
Taxes
All taxes borne are deductible except for corporation tax, trade tax, and the VAT on most
non-deductible expenses.
Net operating losses are carried forward without time limit. For corporation tax (but not
trade tax), there is an optional carryback to the previous year of up to EUR 1 million.
The loss relief brought forward claimable in any one year is limited to EUR 1 million plus
60% of current income exceeding that amount. The remaining 40% of income over EUR
1 million is charged to trade and corporation taxes at current rates. This is referred to as
minimum taxation.
The loss carryforward ceases if a single (immediate or ultimate) shareholder acquires
more than 50% of the issued capital (voting rights) within a five-year period. An
acquisition of between 25% and 50% leads to a corresponding reduction in the loss
carryforward.
Under the statute, these forfeiture rules do not apply to share acquisitions in connection
with the recovery of a troubled business, where the change is part of a group internal
reorganisation without effect on the single ultimate shareholder, or inasmuch as the loss
carryforward is covered by hidden reserves in the companys assets that, on realisation,
will lead to German taxation. This excludes the appreciation in value of shareholdings
in other companies as well as business assets held in foreign PEs. However, the
European Commission has chosen to view the exemption from the forfeiture rules for
share acquisitions within the context of a corporate recovery bid as unlawful state aid.
Application of the provision has been suspended since April 2010; the government
lost its appeal before the European Court of Justice against the Commissions decision
because of a missed deadline, but is supporting a number of companies in their own
actions against the Commission.
A German corporation can claim a deduction for royalties, management service fees,
and, subject to the interest limitation, interest charges paid to foreign affiliates, provided
the amounts are at arms length. Detailed provisions covering both form and substance
define this. In particular, all services must be covered by prior written agreement, and it
is also necessary to conclude agreements for the purchase and sale of goods in writing
where this would be usual between third parties (e.g. for quantity rebates on sales).
The substance tests must be satisfied, both as to value for money and as to business
relevance. Thus, the manager of a German subsidiary must be able to show both an
adequate business benefit from a related party transaction and that the company could
not have obtained a better deal on the open market. These and all other aspects of
inter-company (related-party) trading fall under strict and extensive documentation
requirements, breach of which can lead to serious penalties.
Special features for trade tax
There are a number of differences between the income subject to trade tax and to
corporation tax. The most significant is the trade tax disallowance of one-quarter of the
interest costs, including interest implicit in leasing, rental, and royalty charges. Banks
have an exemption from this interest disallowance.
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Group taxation
If a German parent holds more than 50% of the voting rights in a domestic subsidiary,
the two may conclude a formal, five-year, court-registered profit pooling agreement.
The ensuing relationship is then referred to as an Organschaft. Effectively, the annual
results of an Organschaft are pooled in the accounts and tax returns of the parent.
Profits and losses within a group can therefore be offset, but there is no provision for the
elimination of intra-group profits from the total tax base. It should also be noted that any
loss incurred within an Organschaft is excluded from offset in the same or another year
if a foreign country takes it into account in the taxation of an Organschaft member, or of
any other entity.
Transfer pricing
Extensive rules on transfer pricing in respect of all transactions with foreign related
parties are in force. The basic principle is that all trading should be at arms length, but
the documentation requirements go far beyond the level of documentation normally
found sufficient to demonstrate a conscientious approach to true third party business.
Failure to meet these rules exposes the company to serious risk of penalties as well as
unfavourable estimates by the authorities, who have the right to exercise every possible
leeway or margin to the taxpayers disadvantage.
Thin capitalisation
There are no thin capitalisation rules as such; their substitute is the interest limitation
to, basically, 30% of EBITDA discussed in the Deductions section.
Germany operates a CFC regime aimed at passive income sheltered abroad and taxed at
less than 25%. Essentially, the income is added to that taxable in Germany in the regular
manner against a credit for the foreign tax actually paid and not recoverable by either
the foreign entity or its shareholder. Active business income, except from tourism and
the arms trade, is generally exempt from the CFC net, provided it is earned through a
properly established facility of a scale appropriate to the activity concerned. Treaty and
EU directive rules exempting foreign income are respected, although taxpayers do have
to demonstrate their treaty entitlement.

Germany does not offer tax incentives except in very limited circumstances, not
usually of direct business relevance (e.g. special depreciation for buildings under a
conservation order). Partly, this is a question of the state budget, and partly, it reflects
the constitutional requirement for equal treatment of all taxpayers.
Other incentives
A limited investment grant scheme for capital investment in the eastern part of Germany
was phased out at the end of 2013.
Local authorities may offer facilities on favourable terms, such as the provision of cheap
land on industrial estates.
Foreign tax credit
If foreign-source income is not exempt from German taxation, a credit will be given
for the foreign tax actually paid and not otherwise recoverable. However, the credit
is limited to the corporation tax (including the solidarity levy) on the net income
after deducting the related expense. Unused credit is lost, as there are no provisions
for carryforward or for offset against other taxes, such as trade tax. There are still a
few cases of fictitious foreign tax credits under tax treaties with developing countries
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(to protect the treaty partners investment incentives), but German treaty policy is to
abandon such provisions at the first opportunity.
Withholding taxes
Resident corporations paying certain types of income are required to withhold tax as
shown in the following tables. There is also a solidarity levy of 5.5% on the tax due.
General
Recipient of German-source
income
Resident corporations and
individuals
Non-resident corporations and
individuals (1):
EU corporations (5, 6)
Non-treaty corporations
Non-treaty individuals
Dividends (1)
25
0
25
25
WHT (%)
Interest
(1, 2, 3)
Royalties
25
0
0
25
25
0
15
15
Movable asset
rentals (4)
0
0
15
varies
Notes
1.
2.
3.
4.
5.
6.
Corporate recipients of dividend and interest income (interest on convertible and profit-sharing
bonds) can apply for refund of the tax withheld over the corporation tax rate of 15%, regardless of
any further relief available under a treaty.
Generally, only interest paid by banks to a resident is subject to a WHT. A 25% tax is also withheld
from income on convertible or profit-sharing bonds.
Interest paid to non-residents other than on convertible or profit-sharing bonds is generally free of
WHT. Tax on loans secured on German property is not imposed by withholding, but by assessment to
corporation tax at 15% (plus solidarity levy) of the interest income net of attributable expenses. The
tax authorities can order a WHT of 15.825% (including solidarity levy) if ultimate collection of the tax
due is in doubt. Both forms of tax are reduced by treaty relief.
Movable asset rentals are taxed by assessment rather than by withholding. For corporations, the rate
is the standard 15% corporation tax rate (plus solidarity levy) unless reduced by treaty.
Where the EC Parent/Subsidiary Directive applies, dividends paid by a German company to a
qualifying parent company resident in another EU member state are exempted from German WHT.
The minimum shareholding is 10%, to be held continuously for at least one year.
The EC Interest and Royalties Directive exempts payments from WHT if made to an associated
company in another EU member state. The association must be through a common shareholding of
at least 10%, to be held continuously for at least one year.
Treaty rates
WHT (%)
income
Albania
Algeria
Argentina (5)
Armenia (5, 6)
Australia (5)
Austria (5)
Azerbaijan (7)
Bangladesh (5)
Belarus (7)
Belgium (5, 8)
Bolivia (5)
Bosnia-Herzegovina (5, 9)
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Germany
Dividends (1)
5/15
5/15
15
15
15
5/15
5/15
15
5/15
15
10
15
Interest (1, 2, 3)
5
10
10/15
5
25
0
0/10
25
0/5
0/25
25
25
Royalties
5
10
15
0
10
0
5/10
10
3/5
0
15
10
Movable asset
rentals (4)
0
0
15
0
10
0
0
10
5
0
15
10
Germany
WHT (%)
income
Bulgaria (5)
Canada (10)
Croatia (5)
Cyprus
Czech Republic (11)
Denmark (5)
Ecuador
Egypt (5, 12)
Estonia (5)
Finland (13)
France
Georgia (5)
Ghana (5)
Greece
Hungary (5)
Iceland
India (5)
Indonesia (5, 24)
Iran
Israel (23)
Italy (5, 14)
Ivory Coast (5)
Jamaica (20)
Japan
Kazakhstan (5)
Kenya
Korea, Republic of (5)
Kosovo (5, 9)
Kuwait (5)
Kyrgyzstan (5)
Latvia (5)
Liberia
Liechtenstein
Lithuania (5)
Luxembourg
Macedonia (5)
Malaysia (20)
Malta (5)
Mauritius (5)
Mexico (5)
Moldova (5, 6)
Mongolia (5)
Montenegro (5, 9)
Morocco
Namibia (5)
Netherlands (15)
Dividends (1)
5/15
5/15
10
5/15
5/15
5/15
5/15
15
15
5/15
10/15
5/15
0/5/10
5/15
25
5/15
5/15
10
10/15
15/20
5/15
25
15
15
10/15
15
5/15
15
5/15
15
5/15
5/15
5/15
10/15
0/5/15
5/15
5/15
5/15
5/15
5/15
5/15
5/15
15
5/10
15
5
10/15
10/15
Interest (1, 2, 3)
5
0/10
25
25
0
0
25
10/15
15
25
0
0
25
25
10
0
0
10
25
15
0
15
25
25
10/12.5
10
25
15
25
25
25
25
25
10/20
0
25
0
5
10
25
0
5
25
2
25
10
25
0
Royalties
5
0/10
10
0
0
5
0
15
15/25
10
0/5
0
0
8
0
0
0
10
10/15
10
0
0/5
0/5
10
10
10
10
15
10
10
10
10
10
10/15
0
10
5
5
7
0
10
10
0
10
10
10
10
0
Movable asset
rentals (4)
5
10
7
0
0
5
0
15
15
5
5
0
0
0
0
0
0
10
10
10
0
5
5
10
10
10
10
15
2
10
10
0
5
10
0
5
0
0
7
0
0
10
0
10
10
10
10
0
Germany
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WHT (%)
income
New Zealand (5)
Norway (5)
Pakistan (5)
Philippines (5, 16)
Poland (5)
Portugal (5)
Romania (5)
Russia (5)
Serbia (5, 9)
Singapore (5)
Slovakia (11)
Slovenia (5)
South Africa (17)
Spain
Sri Lanka (5)
Sweden (5)
Switzerland (5)
Syria
Taiwan
Tajikistan (5)
Thailand (18, 20)
Trinidad and Tobago (19, 20)
Tunisia (21)
Turkey (5)
Turkmenistan (5, 6)
Ukraine (5, 18)
USSR (5, 6)
United Arab Emirates (5)
United Kingdom (5, 17)
United States (5, 22)
Uruguay (5)
Uzbekistan (5, 18)
Venezuela (5)
Vietnam (5)
Yugoslavia (5, 9)
Zambia
Zimbabwe (5)
Dividends (1)
15
0/15
10/15
10/15
5/15
15
5/15
5/15
15
5/15
5/15
5/15
7.5/15
5/15
15
0/15
0/15
5/10
10
5/15
15/20
10/20
10/15
5/15
15
5/10
15
5/10
5/10/15
0/5/15
5/15
5/15
5/15
5/10/15
15
5/15
10/20
Interest (1, 2, 3)
25
25
5
25
25
25
25
0
25
8
0
25
10
0
25
25
25
10
10
25
0/10/25
10/15
10
10
25
25
0
0
0
25
10
25
25
25
25
10
25
Royalties
10
0
10
10/15
5
10
3
0
10
8
5
5
0
0
10
0
0
12
10
5
5/15
0/10
10/15
10
0
0/5
0
10
0
0
10
3/5
5
10
10
10
7.5
Movable asset
rentals (4)
10
0
10
10
5
10
0
0
10
8
5
0
0
0
10
0
0
0
0
0
0
10
0
10
0
0
0
10
0
0
0
0
5
10
10
10
7.5
Notes
1.
2.
3.
4.
5.
698
Corporate recipients of dividend and interest income (interest on convertible and profit-sharing
bonds) can apply for refund of the tax withheld over the corporation tax rate of 15%, regardless of
any further relief available under a treaty.
Generally, only interest paid by banks to a resident is subject to a WHT. A 25% tax is also withheld
from income on convertible or profit-sharing bonds.
Interest paid to non-residents other than on convertible or profit-sharing bonds is generally free of
WHT. Tax on loans secured on German property is not imposed by withholding, but by assessment to
corporation tax at 15% (plus solidarity levy) of the interest income net of attributable expenses. The
tax authorities can order a WHT of 15.825% (including solidarity levy) if ultimate collection of the tax
due is in doubt. Both forms of tax are reduced by treaty relief.
Movable asset rentals are taxed by assessment rather than by withholding. For corporations, the rate
is the standard 15% corporation tax rate (plus solidarity levy) unless reduced by treaty.
The treaty does not (effectively) limit the taxation of profit-based interest income; thus, the domestic
rate (plus solidarity levy) applies.
Germany
Germany
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
The USSR treaty continues in force with Armenia, Moldova, and Turkmenistan.
The lower royalty rate applies to commercial and industrial royalties, as opposed to cultural royalties.
Mortgage interest to a Belgian business is exempt unless the recipient holds at least 25% of the
voting rights in the payer.
The Yugoslav treaty continues in force with Bosnia-Herzegovina, Kosovo, Montenegro, and Serbia.
Croatia, Macedonia, and Slovenia have their own treaties.
The higher royalty rate applies to film and television (TV) royalties, licences to use trademarks and
names, and to franchises.
The Czechoslovak treaty continues to apply to the Czech Republic and to Slovakia. Interest on profitsharing bonds is taxed as a dividend.
25% on trademark royalties.
The higher royalty rate of 5% applies to commercial, industrial, and scientific royalties.
Cultural royalties are exempt.
Interest on convertible and profit-sharing bonds is taxed as a dividend; mortgage interest is exempt.
The 15% royalty rate applies to copyrights.
Treaty relief on interest, royalties, and rentals is conditional on taxation in country of receipt.
The 5% royalty rate applies to copyrights.
Royalties for copyrights, except for films and TV, are exempt.
The 10% interest rate applies in certain circumstances where the recipient is a bank.
The 15% royalty rate applies to patents, trademarks, films, and TV.
The dividend exemption applies to corporate shareholders with at least 80% throughout the previous
12 months.
The 5% royalty rate applies to industrial, commercial, film, and TV royalties.
The 10% royalty rate applies to access to industrial, commercial, or scientific experience.
Treaties signed, but awaiting ratification: China, Costa Rica, Georgia (protocol on
information exchange and mutual assistance), Netherlands, Norway, Oman, Philippines,
and South Africa.
Tax administration
Taxable period
The tax year in Germany is the calendar year.
Tax returns
Returns are filed for each calendar year and reflect the financial statements for the
business year ending in that calendar year. Assessments are issued once the tax office
has reviewed the return.
In principle, returns are due by 31 May of the following year. However, there is a
virtually automatic extension to 31 December for those filing with professional
assistance. A further extension to 28/29 February is possible, if justified under the
circumstances. Known late-filers and those with a record of other irregularities can be
asked to submit their returns before these extension dates, though not before 31 May.
Electronic returns
Monthly or quarterly returns for WHT from employee salaries, dividends, interest,
royalties, and other payments, and for VAT must be submitted electronically. The same
applies to the annual returns for corporation tax, trade tax, and VAT. There is also an
electronic filing requirement for the financial statements supporting the return.
Payment of tax
Taxes are payable in quarterly instalments during the year, with a final settlement
when the assessment is issued (usually five to six weeks afterwards). The quarterly
instalments are based on the estimated ultimate liability. Usually, this is the total tax due
shown by the last assessment issued, as adjusted by any rate changes. The corporation
tax instalments are due on the tenth day of March, June, September, and December.
For trade tax, the due dates are the 15th day of February, May, August, and November.
Failure to pay by the due date followed by a three day grace period leads to a penalty of
0.5% per month.
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Corporation and trade tax assessments bear interest on the net amount payable after
deduction of all credits and previous payments. The rate is 0.5% per month simple
interest, and the period runs from 1 April of the second year following the year of
assessment. The interest period is independent of the actual date of assessment. It thus
runs in retrospect on assessments issued later, for example following a tax audit.
Rulings
Tax offices are able to issue binding rulings in respect of planned transactions, provided
the taxpayer can show a particular interest in the tax consequences of the intended
action. The fee varies between EUR 241 and EUR 91,456, depending upon the amount of
tax involved (no fee is charged if the tax amount is less than EUR 10,000).
Advance pricing agreements (APAs)
A taxpayer can request the Central Tax Office to negotiate an APA on related-party
transactions with a foreign tax authority on ones behalf. The vehicle is the mutual
agreement procedure under the treaty, and the fee is a lump sum EUR 20,000 for each
new agreement.
Tax audit process
Germany relies heavily on tax audits as a means of ensuring taxpayer discipline. Audits
of small businesses are carried out at random, although those for larger operations
and for the local subsidiaries of foreign groups tend to be regular. With some district
variations, audits are usually conducted at four to five yearly intervals, though not
always with equal intensity for the entire period since the auditors previous visit.
The statutory limitation period for the issue or correction of assessments is four years
from the end of the year in which the return was filed. If no return was filed, the period
runs from the end of the third year following the end of the year of assessment. The fouryear period is extended to five in cases of taxpayer negligence and to ten in the event of
evasion.
The statutory limitation period for the collection of tax debts is five years from the end of
the year in which payment became due.
Topics of focus for the tax authorities
Tax office reviews of tax returns prior to issuing the assessment notice and payment
demand are often rather superficial. Audits, though, are intense, being field reviews on
site often lasting for several weeks or even months. Companies with an international
focus can expect significant audit emphasis on all aspects of their dealings with their
foreign business partners. If the company is a member of an international group, its
most important audit component will usually be its transfer pricing on its dealings with
foreign related parties and the relevant documentation. It is emphasised that these
two topics are separate fields, as documentation deficiencies can lead to unfavourable
estimates on the taxpayer, even if the taxpayer is able to justify the taxpayers group
company pricing in terms of overall result.
Other issues
International exchange of information
For several years, Germany has been forceful in promoting the international exchange
of tax information. Ideally, the government would like the information exchange to be
automatic, but has been prepared to accept limiting exchanges to specific requests if the
other state insists and is willing to discourage evasion with a meaningful WHT. However,
attitudes are hardening, not least in the wake of Foreign Account Tax Compliance Act
(FATCA) and the Bundesrat refusal to ratify an agreement with Switzerland, seen by
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many as being too protective of evaders. Indeed, Germany is now pressing for a fully
automated system within the European Union and for EU insistence on this from
European tax havens outside.
In 2012, Germany participated in a working group with France, Italy, Spain, the United
Kingdom (UK) and the United States (US) with the task of drafting a model FATCA
agreement designed to keep Germanys own banks FATCA-compliant, acquire equivalent
rights from the United States in respect to Germanys own taxpayers, and to resolve
potential legal difficulties arising from co-operation of Germanys own banks with the
tax authorities of a foreign power. A bilateral agreement with the United States on this
model was signed on 31 May 2013, and Germany has agreed with the other members of
the working group to exchange information on the same lines as a pilot project within
the European Union. The current hope is that this will lead to a European FATCA in the
form of an EU legal act ensuring a multilateral exchange of information between all
member states.
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PwC contact
George Kwatia
No. 12 Airport City
Una Home, 3rd Floor
Accra
Ghana
Tel: +233 302 761 459
2013 amendments
In keeping with its commitment to expand the tax base and ensure efficiency in tax
administration, the government made various amendments to the income tax laws in
2013. The purpose of these amendments, amongst others, includes streamlining the tax
refund process and leveraging technology to simplify tax refunds under the current tax
relief programme.
Effective 23 May 2013, the government made some changes to the income tax laws,
including the following:
Increased the deductible cost of non-commercial vehicles from the prior limit of
25,000 Ghana cedi (GHS) to GHS 75,000 for capital allowance calculations.
Effective 12 July 2013, other changes in the tax laws included the following:
The National Fiscal Stabilisation Levy (NFSL)of 5% on the profit before tax for some
special companies and institutions was re-introduced and shall apply for the years
2013 and 2014.
Interconnect services were included in the base amount on which communications
service tax (CST) is imposed.
The Value-added Tax (VAT) Act was amended to remove the supply and import of
telephone handsets from the list of supplies exempt from VAT.
A new VAT Act was passed on the 30 December 2013 thatincreases the standard
rate from 12.5% to 15%, bringing the total VAT charge to 17.5%, including the 2.5%
National Health Insurance Levy (NHIL).
With the introduction of the new VAT Act, the annual VAT threshold has been
increased from GHS 90,000 to GHS 120,000. The new VAT Act also expanded the
scope and coverage of the tax to include the sale of immovable property by an estate
developer; the supply of financial services that are rendered for a fee, commission, or
a similar charge, except life insurance or reinsurance services; the supply of domestic
transportation by air and the supply of haulage as well as the rental or hiring of
passenger and other vehicles; the business activities of auctioneers and promoters
of public entertainment; the business of gymnasium and spa; and the manufacture
or supply of pharmaceuticals listed under chapter 30 of the Harmonised Systems
Commodities Classification Code, 1999 other than supplies at the retail stage.
By the provisions of the new VAT Act, the allowable period for deducting input tax
has been reduced from three years to six months.
Customs and excise (duties and other taxes) were amended to impose duty on
telephone sets, including mobile, cellular, and satellite phones, at a rate of 20% and
excise duty of 10% on the ex-factory price on plastics and plastic products.
A special import levy on the cost, insurance, and freight (CIF) value of imported
goods was introduced and shall apply for the years 2013 through 2015.
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Effective financial year 2013, the long awaited Transfer Pricing Regulations were passed
into law andare expected tobe applied from the 2013 financial year onwards.
Following the passing of the Local Content Regulations for the mining industry, on
19 November 2013, the local content regulations for petroleum operations were also
passed.
The government, in its 2014 budget statement, put forth proposals to increase
withholding tax (WHT) rates for non-residents; royalties, natural resource payments,
and rents; and technical and management service fees by 5%. In furtherance of this, on
30 December 2013, Parliament passed an amendment act, Act 871, to introduce some of
the proposed changes (see the Withholding taxes section).
Other amendments that are still pending include the following:
Introduction of the Windfall Tax Bill, which seeks to impose an additional tax of 10%
on the profits of mining companies.
Consolidation of the tax laws, which would enable the tax authority to offset tax
credits due to a taxpayer against the liabilities of the taxpayer in order to reduce the
need for tax refunds.

A resident is taxed on income accruing in, derived from, brought into, or received in
Ghana. The income of a resident is treated as accruing in or derived from Ghana unless
attributable to a permanent establishment (PE) of the resident outside Ghana.
A non-resident is taxed on income accruing in or derived from Ghana. The income of a
non-resident is treated as accruing in or derived from Ghana if the income is attributable
to a PE of the non-resident in Ghana.
National corporate income tax (CIT) is payable on the following:
Income accruing in, derived from, brought into, or received in Ghana in respect of
gains or profits from a trade, business, profession, or vocation.
Dividends, interest, or discounts.
Any charge or annuity.
Royalties, premiums, and any other profits arising from property, including rents.
Receipts, including royalties and deferred payments of any kind.
The general CIT rate is 25%.
Companies listed on the Ghana Stock Exchange (GSE) are subject to a reduced CIT rate
of 22% (this rate is applicable for only a three-year period for companies thatlisted on
the GSE after 1 January 2004).
Mining companies pay CIT at a rate of 35%, while the hotel and hospitality industry pays
a reduced rate of 20%.
The CIT rate for companies engaged in non-traditional exports is 8%, while banks
lending to the agricultural and leasing sectors pay a CIT rate of 20%.
Local income taxes
Ghana has no local, state, or provincial government taxes on income.
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Corporate residence
Corporate residence is determined by the place where the trade, business, profession,
or vocation is carried on. A company is resident if it is incorporated under the laws of
Ghana or has its management and control exercised in Ghana at any time during a year
of assessment.
Where a non-resident corporate body carries on any trade, business, profession, or
vocation in Ghana (part of the operations of which may be carried on outside Ghana),
the full gains or profits of the trade, business, profession, or vocation are deemed to be
derived from Ghana.
A PE is determined under the tax law as the place where a person carries on business, as
well as a place where a person:
carries on business through an agent, other than a general agent of independent
status acting in the ordinary course of business as such
has, is using, or is installing substantial equipment or machinery, or
is engaged in a construction, assembly, or installation project for 90 days or more,
including a place where a person is conducting supervisory activities in relation to
such project.
A non-resident carrying on business in Ghana through a PE is subject to tax in Ghana
only on that income attributable to the PE in Ghana as well as any deemed repatriated
profits of the branch.
Other taxes
Other than exempt goods and services, VAT of 15% and the National Health Insurance
Levy (NHIL) of 2.5% are charged on the following:
Every supply of goods and services made in Ghana.
Every importation of goods.
Supply of any imported service.
The VAT and NHIL is charged on the supply of goods and services where the supply is a
taxable supply and made by a taxable person in the course of business.
VAT and NHIL are payable:
in the case of taxable supply, by the taxable person making the supply
in the case of imported goods, by the importer, and
in the case of imported services, by the receiver of the service.
Most professional services are also subject to the same VAT and NHIL rates, including
the following:

Management services.
Insurance brokerage and other services.
Financial, tax, and economic consulting.
Engineering and technical services.
Accounting services.
Courier services.
Legal services.
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Provision of satellite television.
Architectural services.
Services rendered by surveyors.
Exports of goods and services are zero-rated. Unless specifically exempt, supplies of all
goods and services are subject to VAT.
Customs and excise duties are imposed on the importation of goods at the port of entry
and certain manufactured goods produced or imported into Ghana.
The current rates of excise duties range from 150% on tobacco products, to 22.5% on
wines, to 17.5% on water.
In addition, a Special Import Levy Act was amended to impose tax on theCIF value of
imported goods. The levy varies from 1% to 2%, depending on the type of goods, and is
expected to apply for three years, up to 2015.
Property taxes
Property tax rates are payable by owners of immovable property to the local District
Assembly. The rate of property tax differs depending on the location of the property.
The Local Government Act 1993 enjoins all employers to deduct from the remuneration
of every employee general or special rates imposed by the Rating Authority (District
Assembly) as a basic amount.
Stamp taxes
Stamp duty is paid, at rates ranging between 0.25% to 1% and GHS 0.05 to GHS 25,
depending on the type of transaction and the instrument. The stamp duty is not a tax
on transactions but on documents brought into being for the purposes of recording
transactions. It is therefore a tax on documents or specific instruments that have legal
effect, such as the following:

Insurance policies.
Awards of cost in matters of dispute.
Conveyances or transfers on the sale of any property.
Appointment letters of new trustees.
Natural resource leases or licences (e.g. mining, timber).
Agreements or memoranda of agreement.
Bills of exchange (e.g. issue of cheques).
Bills of lading.
CGT is payable by every person, including a corporate body, on any capital gain accruing
or derived from the realisation of any chargeable asset situated in Ghana. These
chargeable assets include buildings of a permanent or temporary nature; business and
business assets, including goodwill; land, other than agricultural land; and any assets
declared as chargeable by legislative instrument made under the law.
Capital gains in excess of GHS 50 are subject to tax at 15%. However, gains resulting
from a merger, amalgamation, reorganisation, or reconstruction are exempt from CGT
under certain conditions, as are gains accruing to or derived from a venture capital
financing company.
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A 20-year exemption that was granted on gains from the sale of securities of companies
listed on the GSE and that ended in January 2011 was extended for five additional years
to encourage transactions on the stock exchange and, in the long term, to make the
securities market more vibrant and fluid.
Details of further exemptions can be found in the income tax laws of Ghana.
Communications service tax (CST)
CST of 6% is levied on charges payable by both individual and corporate users of

electronic communication services (ECS) provided by service providers other than
private electronic communication services. The levy is also applicable to any form of
recharge and is payable once a person makes a payment for ECS regardless of whether
or not that person is authorised or permitted to provide ECS under the Electronic
Communication Act (Act 755). Note that the definition of electronic communication
includes interconnection.
The social security contribution scheme is structured into three tiers, with the first two
requiring mandatory contributions and the last one being voluntary. The employee
is required to contribute 5.5% with the employer contributing 13%. Of the total
contribution of 18.5%, 13.5% is contributed to the first tier and 5% to the second tier
schemes.
Effective 2 July 2013, the National Pensions Authority requires expatriate workers
to make contributions to the Social Security and National Insurance Trust (SSNIT).
However, after negotiations with officials of the SSNIT authority, it has indicated that it
has suspended the registration of expatriates until further directives from the National
Pensions Regulatory Authority.
National Fiscal Stabilisation Levy (NFSL)
With effect from 12 July 2013, the 5% NFSL is re-introduced, following its suspension
in 2011, and is expected to run for two years ending within the 2014 year of assessment.
It is proposed to be terminated in June 2014 per the 2014 government of Ghana budget
statement. The levy has now been imposed on specified companies and institutions to
raise revenue for fiscal stabilisation of the economy. These specified companies and
institutions include:

Banks (excluding rural and community banks).

Non-bank financial institutions.
Insurance companies.
Telecommunications companies liable to collect and pay the CST under the CST Act,
2008 (Act 754).
Breweries.
Inspection and valuation companies.
Companies providing mining support services.
Shipping lines, maritime and airport terminals.
The levy shall apply to the aforementioned industries irrespective of any existing
exemption granted to an entity under any other laws in Ghana. The tax payable
shall not be a deductible expense in arriving at the CIT liability of an entity, and the
Commissioner shall issue an assessment to an entity for the amount of tax payable for
the period.
NFSL is payable in four equal instalments at the end of each quarter (i.e. March, June,
September, and December).
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Branch income
The CIT rate on branch profits is the same as that on corporate profits.
However, a non-resident entity that conducts activities in Ghana through a PE is required
to pay a further 10% on earned repatriated profits, payable within 30 days.
Until 22 May 2013, branch profit tax was triggered when profits were repatriated
or were deemed to have been repatriated by PE of a non-resident person. Thus, any
movement on a branchs accumulated profit account from one basis period to another
was deemed as repatriated profit provided the sum of the opening (beginning of
the year) plus current years profits, less the closing (end of the year) balance of the
accumulated profit account, resulted in a difference.
Inventory valuation
The Internal Revenue Act (IRA) 2000 (Act 592), under Section 31, provides general
guidance on the principles of stock (inventory) valuation for income tax purposes. A
company that accounts for tax on an accrual basis is required to account for inventory
using the absorption-cost method. A company accounting for tax purposes on a cash
basis may calculate the cost of stock using a prime-cost method or absorption-cost
method. The closing value of inventory is valued for tax purposes at the lower of cost or
market value.
Capital gains
Capital gains are taxed at a separate rate in Ghana. See Capital gains tax in the Other taxes
Dividend income
A dividend paid to a resident company by another resident company is exempt from tax
where the company receiving the dividend controls, directly or indirectly, 25% or more
of the voting power in the company paying the dividend.
Stock dividends
The issue of stock dividends is permitted under Section 74 (1) of the Ghana Companies
Code 1963, Act 179. It is, however, subject to income tax at the dividend WHT rate of
8%.
Interest income
Interest received by a resident company from another resident company is subject to

WHT at a rate of 8%.
However, no WHT applies on any interest paid by an individual person, on government
of Ghana bonds, or on interest received by a resident financial institution.
In addition, interest of an approved unit trust scheme or mutual fund is exempt from tax.
Exempt income
Specific exemptions from tax include the following:

Income of a local authority.

Income of a statutory or registered building society.
Income of a charitable or an educational institution.
Income of organisations formed for the purpose of promoting social or sporting
amenities.
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Income accruing from a farming enterprise, for a limited period.

Income of a registered trade union.
Income of rural banks, for the first ten years of operations.
Gain or profit from the business of operating ships or aircraft by non-resident persons
if an equivalent exemption is granted by the persons country of residence to persons
resident in Ghana.
Investment income of a pension or provident society.
Income or profit of any registered cooperative society.
Foreign income
Resident corporations are taxed on their foreign income as and when it is brought into
or received in Ghana. Foreign income is taxed together with other income derived in
Ghana, and double taxation is avoided through treaties or foreign tax credits. No special
rules exist for taxing undistributed income of foreign subsidiaries.
Deductions
Depreciation of depreciable assets in the accounts of a business is not an allowable

deduction in computing taxable profits. It is instead replaced by capital allowances at
prescribed statutory rates, as follows:
Class Comments
1
Assets pooled (allowance calculated on a reducing-balance basis). Mainly
computers and data handling equipment.
2
automobiles, buses, mini buses, construction and earth-moving equipment,
trailers and trailer-mounted containers, plant and machinery used in
manufacturing.
3
Assets not pooled (allowance calculated on a straight-line basis). Mainly mining
and petroleum rights assets, such as exploration and development costs,
buildings, structures and works of a permanent nature related and plant and
machinery.
4
railroad cars, locomotives and equipment, vessels and similar water
transportation equipment, aircraft, public utility plant, equipment, office
equipment and fixtures, and any other depreciable asset not elsewhere
classified.
5
Assets not pooled (allowance calculated on a straight-line basis). Mainly other
building structures and works of a permanent nature.
6
Assets not pooled (allowance calculated over the useful life of the asset). For
other intangible assets.
Rate
40%
30%
20%
20%
10%
Useful life
Allowances are granted only on the following conditions:

The taxpayer must own the asset.

Capital expenditure must be incurred.
The asset must be used in the trade.
The asset must be in use up to the end of the basis period.
Capital allowances are granted for every year in which the asset is in use. Balancing
allowances and charges are made, as the case may be, on disposal of the asset.
For intangibles, such as goodwill, patents, trademarks, and copyrights, the law allows
for capital allowance deduction over the useful life of the asset.
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Foreign exchange losses of a capital nature may be capitalised and capital allowances
granted where the loss is incurred in the production of income from a business.
Start-up expenses and pre-operating costs
Although the tax law does not specifically mention start-up expenses or pre-operating
costs, generally a deduction is allowed for start-up and pre-operating costs incurred by a
business, provided such expenses are wholly, exclusively, and necessarily incurred in the
production of income of the taxpayer.
Interest expenses
Any sum payable by way of mortgage or debenture interest by any company to a nonresident, except where tax has been deducted and accounted for, is considered nondeductible.
Bad debts
A deduction is allowed for bad debts incurred in the normal course of business, other
than advances made on capital accounts. A bad debt is allowed as a deduction if the
taxpayer has taken all reasonable steps to pursue payment and the person reasonably
believes payment will not be made.
Any amounts recovered in respect of a bad debt previously written off should be
included in income and subject to tax accordingly.
An existing debt that becomes a bad debt after a 50% or more change in underlying
ownership is not allowed as a bad debt deduction after the change in ownership has
taken place.
The following contributions/donations are allowable as deductions in ascertaining the

taxable income of a person:
Contributions made to a charitable institution or fund approved by the government.
Payments towards a scholarship scheme approved by the government for a technical,
professional, or other course of study.
Donations made for the purpose of any rural or urban area and approved by the
government.
Donations for the purpose of sports development approved by the government.
Donations to the government for worthwhile government causes approved by the
Commissioner.
Fines and penalties
Fines and penalties arising as a result of non-compliance with the provisions of the tax
law are generally not allowable deductions.
Taxes
Taxes are not deductible in determining taxable income.
No other special deductions are allowed. Principal non-deductible expenses include the
following:
Domestic or private expenses, including cost of travel between residence and place of
business or employment.
Any disbursement or expense not being wholly and exclusively paid or expended for
the purpose of acquiring income.
Capital withdrawn or any sum employed or intended to be employed as capital.
Capital employed in improvement.
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Any sum recoverable under an insurance contract of indemnity.
Rent of or any expense in connection with premises or a part of premises not
occupied or used for the purpose of producing business income.
Any payment to a provident, savings, or other society or fund unless specifically
allowed by the tax Commissioner General (CG); this may change under tiers 2 and 3
under the new Pensions Act.
Tax losses can be carried forward and deducted from assessable income for the five years
immediately following the year in which the loss was incurred. This provision covers
the following industries: farming and agro-processing, mining, manufacturing (mainly
for export), tourism, and information communications technology (ICT) (i.e. software
development).
Carryback of losses is permitted for persons deriving income relating to a long-term
contract, except this is not allowed where there has been a change in ownership of 50%
or more compared with the prior year. A long-term contract of a business includes a
contract for manufacture, installation, or construction that is not completed within the
companys accounting year in which it is commenced.
No special restrictions are imposed on the deductibility of royalties, interest, and service
fees paid to foreign affiliates, provided they are expenses incurred wholly, exclusively,
and necessarily in the production of the income. However, the CG may disallow certain
transactions if they are deemed artificial or fictitious.
Group taxation
No form of combined reporting of results of operations by a group or affiliates is
permitted.
Transfer pricing
The Transfer Pricing Regulations follow the internationally accepted guidelines

published by the Organisation for Economic Co-operation and Development (OECD),
only with a much broader perspective on the nature of entities and transactions.
The Regulations cover transactions between related parties, including PEs and
employees, and also prescribe the transfer pricing methods and documentation that
entities are required to maintain and retain.
The Regulations also require entities with related party transactions to file a return on an
annual basis.
Thin capitalisation
Interest expenses and foreign exchange currency losses incurred by an exemptcontrolled resident entity are not allowed as a deduction in arriving at the chargeable
income of the entity if the entity is thinly capitalised. An exempt-controlled entity is
deemed to be thinly capitalised if its exempt debt to exempt equity ratio exceeds the
ratio 2:1.
A resident entity is deemed to be exempt-controlled if at least 50% of the underlying
ownership or control is held by a non-resident person, either alone or together with an
associate or associates.
Thin capitalisation provisions do not apply to resident financial institutions.
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There are currently no thin capitalisation provisions in the Petroleum Income Tax Laws,
and, as such, the provisions are deemed not to apply to petroleum licence holders.

Foreign tax credit
A resident is entitled to a credit in respect to any foreign income tax paid to the extent
to which the tax paid is in respect to the residents foreign taxable income. The foreign
tax credit available on a specific income type should not exceed the average rate of
Ghanaian income tax of the resident for a year.
Inward investment
Under the Ghana Investments Promotion Centre Act 1994, various incentives are
available to encourage investments in the country, particularly in the areas of
agriculture; manufacturing industries engaged in export trade or using predominantly
local raw materials or producing agricultural equipment, etc.; construction and building
industries; mining; and tourism.
Incentives generally include exemption from customs import duties on plant and
machinery; reduced CIT rates; more favourable investment and capital allowances on
plant and machinery; reduction in the actual CIT payable, where appropriate; retention
of foreign exchange earnings, where necessary; guaranteed free transfer of dividends or
net profits, foreign capital, loan servicing, and fees and charges in respect of technology
transfer; and guarantees against expropriation by the government.
Capital investments
Venture capital tax incentives include the following:

Relief from stamp duty in each year on subscriptions for new equity shares in venture
capital funds.
Full tax exemption from CIT, dividend WHT, and CGT for five years.
Carryforward of losses from disposal of shares during the tax-exempt period to the
post-exempt period, up to five years.
Chargeable income tax deduction equal to 100% of their investment, for financial
institutions that invest in venture capital subsidiaries.
Free zone developers/enterprises
Companies registered to operate as free zone developers/enterprises do not pay CIT for
the first ten years of operation. After the ten year corporate tax holiday has expired, the
CIT rate is not expected to exceed 8%. The CIT rates applicable to free zone companies
after the ten year tax holiday are as follows:
Entity
Agro processing companies outside regional capitals
Agro processing companies in the Northern, Upper East, and Upper West Regions
Agro processing companies in regional capitals and Tema in the Greater Accra
Region apart from Northern, Upper East, and Upper West Regions
Entities engaged in wood processing, commercial, service, or enclave developers
Manufacturing companies outside capitals
Garments and textiles manufacturing companies
Other manufacturing companies
2014 CIT (%)

0
0
4
8
5
4
6
Income from goods and services provided to the domestic market after the tax holiday
period is taxed at 25%.
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Tax holidays
A tax holiday is available to companies that partner with the Minister responsible
for Works and Housing in the construction and sale or letting of low cost affordable
residential premises and are certified as such by the Minister responsible for Works and
Housing.
Tax holidays are also extended to entities in agro-processing, farming business, and for
venture capital financing entities.
Withholding taxes
Income
Resident persons:
Interest (excluding individuals and resident financial institutions)
Dividend
Rent (for individuals and as investment income)
Fees to lecturers, invigilators, examiners, part-time teachers, and
endorsement fees
Commissions to insurance agents, sales persons, and fees to
directors, board members, etc.
Commissions to lotto agents
Supply of goods and services exceeding GHS 500
Non-resident persons:
Dividend
Royalties, natural resources payments, and rents
Management, consulting, and technical service fees, and
endorsement fees
Repatriated branch after tax profits
Interest income
Short-term insurance premium
Income from telecommunication, shipping, and air transport
WHT rate (%)
Final tax
8
8
8
10
No
Yes
Yes
Yes
10
No
5
5
No
No
8
15
20
Yes
Yes
Yes
10
8
5
15
Yes
Yes
Yes
Yes
Ghana has, for the relief from double taxation on income arising in Ghana, DTTs with
the following countries:
Recipient
Belgium
France
Germany
Italy
The Netherlands
South Africa
Switzerland
United Kingdom
Dividends (%) (1)

5/15
7.5/15
5/15
5/15
5/10
5/15
5/15
7.5/15
Interest (%)
10
10
10
10
8
5/10 (2)
10
12.5
Royalties (%)
10
10
8
10
8
10
8
12.5
Technical or
management
service fees (%)
10
10
8
10
8
10
8
10
Notes
1.
2.
712
The lower rate applies where the recipient holds at least 10% of the shares. The higher rate applies in
any other case.
5% for non-resident banks. 10% in any other case.
Ghana
Ghana
The government of Ghana recently signed a DTT with Denmark and is also pursuing
DTTs with various countries, including the Czech Republic, Mauritius, Sweden, Syria,
the United Arab Emirates, and the United States.
Tax administration
Taxable period
The tax year runs from 1 January to 31 December. Corporations with financial periods
other than the calendar year are taxed on their financial period ending during the
calendar year.
Tax returns
Companies are expected to submit a tax return not later than four months after the end
of the financial year. They may file an application for extension of filing time for not
more than two months.
Assessments
The CG publishes in the Gazette or print media a list of persons who are under the Large
Taxpayer Office and are under the self-assessment scheme. Companies under the selfassessment scheme are required to make an estimate of their annual chargeable income
to be derived for the year and the tax to be payable thereon. The annual tax estimated by
the taxpayer is paid in quarterly instalments on or before the last day of the third, sixth,
ninth, and12th months of the period. These tax instalments are an advance payment
deductible against the actual tax payable at the end of the year.
An entity that is not under the self-assessment scheme may be issued with a provisional
assessment by the CG. The CG may, at the start of the year, serve a provisional
assessment on a taxpayers chargeable income and estimated tax payable. The taxpayer
is required to proceed and make advance quarterly tax instalment based on the
provisional assessment.
The revenue office has, however, been gradually moving towards a self-assessment
system, with some taxpayers in selected tax offices being required to go under the
self-assessment regime. From the 2013 year of assessment, all medium taxpayersare
required to make their own estimates of annual chargeable income.
The CG was also given the mandate to issue assessment to all taxpayers required to pay
the National Fiscal Stabilisation Levy of 5%.
Payment of tax
CIT is due for payment at the same time as the due date for filing the return. Where
a taxpayer is under self-assessment or is issued with a provisional assessment, the
tax is payable in four equal instalments at the end of each quarter (i.e. March, June,
September, and December) in each year of assessment, but such payments are not
deemed to be the actual tax payable.
At the end of the year, all taxpayers are required to file final tax returns and pay any tax
outstanding. The final return and tax are due within four months after the financial yearend.
There are also instances where the CG may issue an additional assessment after conduct
of an audit. Where such assessment is served, the tax is payable within 30 days after
service of the notice. At the discretion of the CG, the time for payment may be extended.
Ghana
713
Ghana
Penalties
Where tax is not paid by the due date, a penalty is assessed at 10% of the tax payable in
addition to the tax unpaid up to three months after the due date; thereafter, the penalty
is 20%.
Tax audit process
The Ghana Revenue Authority (GRA) assesses taxpayers on a regular basis. The IRA
gives powers to persons authorised by the GRA to gain full and unlimited access to the
taxpayers premises, records, and electronic information. Industries such as mining,
upstream oil and gas, and financial institutions are more likely to be selected for a tax
audit. Also, request for a tax refund is also likely to lead to a tax audit. The GRA usually
gives notice of its intention to perform a tax audit and, after performance, prepares a
report on its findings, which is then shared with the taxpayer.
The IRA requires all taxable persons (excluding employees) to maintain records of all
receipts and payments, revenue and expenditure, and all assets and liabilities of the
business for a period of not less than six years. This is in conjunction with the fact that
the Statute of Limitation bars actions to recover tax after 12 years. The IRA further
requires withholding agents to maintain records of payments made to a payee and tax
withheld from those payments for up to five years.

Topics of focus include:

Tax refunds.
CST.
NFSL.
Reverse VAT (in the case of imported services).
Transfer pricing sensitisation of taxpayers.
Other issues
Local Content and Local Participation Regulations
Local Content and Local Participation Regulations applicable to mining entities obligate
mining contactors and sub-contractors to conform to the requirements for recruitment of
expatriates, train Ghanaians, and give preference to local products and services in their
operations.
On 19 November 2013, Parliamentpassed the Petroleum (Local Content and Local
Participation) Regulations, 2013 (LI 2204).
The Regulations aim at providing a transparent monitoring system to meet the objectives
of the governments Local Content Policy. Further, the Regulations are expected to help
facilitate job creation through the use of local expertise forgoods and services, business,
and financing in the petroleum industry value chain.
Ring fencing for mining entities
In determining the chargeable income for a basis period, mining companies are no
longer able to deduct expenses incurred in one mining area against revenue from
another mining area.
714
Ghana
Gibraltar
PwC contact
Edgar Lavarello
PricewaterhouseCoopers Limited
International Commercial Centre
Casemates Square
Gibraltar
Tel: +350 200 73520
On 16 October 2013, the European Commission announced that it had opened a formal
state aid investigation procedure in order to investigate certain aspects of Gibraltars
Income Tax Act 2010 (the Act).
The investigation originated from a complaint filed by the Spanish government with the
European Commission on 1 June 2012 where it is alleged that the Act constitutes state
aid for two reasons.The first claim is that the Act was state aid in favour of an alleged
offshore sector through the combined effect of the application of the territorial system
of taxation and the exemption from tax of passive income.The second claim is that the
Gibraltar corporate tax system was regionally selective in that it differs from, and is
more favourable than, the corporate tax system applied in the United Kingdom.
The European Commission does not call into question the territorial system of taxation,
which is the reference system of corporate taxation under the Act and which has been in
operation in Gibraltar since the 1950s. This is an important issue for Gibraltar because
its entire corporate tax system has been underpinned by the territorial system since
inception. The European Commission has also categorically rejected Spains argument
that the corporate tax system in Gibraltar is regionally selective.This is significant as it
is the first time ever that the European Commission has officially and formally stated
its opinion on the critical issue of regional selectivity and Gibraltar since the European
Court judgments under the previous tax regime.
The Commissions preliminary assessment is that the tax exemption for passive interest
and royalty income under the Act may have involved state aid because it departed from
the general corporation tax system for the reason that it could grant a special advantage
to the particular group of companies that produce this type of income. Unlike dividends,
the exemption of which can be justified by the need to avoid double taxation, the
Commission found no valid justification for the exemption of interest or royalty income.
Gibraltar introduced an amendment to the Act that, as of 1 July 2013, repealed the
exemption for interest receivable, so that a company is now taxable where the interest
exceeds 100,000 British pounds (GBP) per year whether it is received from Gibraltar
or abroad. Following this amendment, the Act was endorsed by both the European
Council of Economic and Finance Ministers of the 27 European Union (EU) Member
States (ECOFIN) and the Code Group as being compliant with the EU Code of Conduct
for Business Taxation.As a result of this, the Commission has acknowledged that the
necessary legislative actions have been taken to rectify this concern from this point
onwards. The Commissions investigation on interest receivable is therefore only
concerned with the limited period between 1 January 2011 and 1 July 2013.
The Commission also considered the non-taxation of interest where the amount received
does not exceed GBP 100,000 and has decided that such an exemption is regarded as a
legitimate simplification measure.
Gibraltar
715
Gibraltar
An amendment to the Act was also passed so that, with effect from 1 January 2014,
royalty income received or receivable by a Gibraltar company is taxable at the standard
corporate income tax (CIT) rate.
If the Commission were to decide that unlawful state aid has been granted, it will order
recovery of the aid from the beneficiaries, unless such a recovery would be contrary to a
general principle ofthe EUlaw.
announced in June or July. Please visit the Worldwide Tax Summaries website at www.
pwc.com/taxsummaries to see any significant corporate tax developments that occurred
after 1 June 2014.

Companies are subject to Gibraltar taxation on income accrued in and derived from
Gibraltar.
The standard CIT rate is 10%, with utility and energy providers and companies that
abuse a dominant position paying a higher rate of 20%.
Corporate residence
A company will be considered resident in Gibraltar if the management and control of its
business is exercised from Gibraltar.
The location of central management and control will be established under legal
principles laid down in the United Kingdom (UK) and is the place of the highest form of
control and direction over a companys affairs, as opposed to decisions on the day-to-day
running of the business.
Gibraltar has not entered into any double tax treaties (DTTs); consequently, there are no
provisions on PE from a general treaty perspective.
Other taxes
There is no VAT in Gibraltar.
Import duties
Goods imported into Gibraltar are subject to import duty at the rate of 0% to 12%. The
most noticeable exceptions are fuel, tobacco, alcohol, and motor vehicles.
Excise taxes
There is no provision for excise taxes in Gibraltar.
Property tax
A general business property rate is levied annually on all businesses in Gibraltar. The
amount varies depending on the property and is subject to an annual review.
716
Gibraltar
Gibraltar
Stamp duty
Stamp duty is payable on the transfer or sale of any Gibraltar real estate or shares in a
company owning Gibraltar real estate (on an amount based on the market value of said
real estate) at the following rates:
GBP 200,000 or less: 0%.
Between GBP 200,001 and GBP 350,000: 2% on the first GBP 250,000 and 5.5% on
the balance.
Over GBP 350,000: 3% on the first GBP 350,000 and 3.5% on the balance.
Stamp duty is also payable on mortgages secured on Gibraltar real estate at the rate
of 0.13% for mortgages less than GBP 200,000 and 0.20% for mortgages over GBP
200,000.
Gaming tax
Gaming tax is levied at 1% of the gaming income. The tax paid is subject to a minimum
of GBP 85,000 and maximum of GBP 425,000.
Capital duty
Capital duty of GBP 10 is payable on the initial authorisation of share capital or any
subsequent increase thereto.
Social insurance contributions
Social insurance contributions are payable by every employer in respect of every

employee.
Employer contributions are 20% of gross earnings, subject to a minimum of GBP 15 per
week (GBP 65 per month) and a maximum of GBP 32.97 per week (GBP 142.87 per
month).
Branch income
The basis for taxation of branches of foreign enterprises is the same as for corporations.
Allowable head office charges or expenses incurred by a Gibraltar branch for the
common purpose of the company and its branches, or for the purposeofthe head office
or another branch exclusively, are limited to 5% of turnover of the Gibraltar branch (see
Payments to foreign affiliates in the Deductions section).
Generally, companies are subject to Gibraltar taxation on income accrued in and derived
from Gibraltar.
Inventory valuation
Inventory is valued at the lower of historical cost or net realisable value. Generally, there
are no material differences between accounts prepared on a normal accounting basis
and those prepared on a tax basis.
Capital gains
Capital gains are not subject to tax in Gibraltar.
Dividend income
There is no charge to tax on the receipt by a Gibraltar company of dividends from any
other company.
Gibraltar
717
Gibraltar
Interest income
Companies with a banking or money lending licence and earning interest as a trading
receipt will have that interest treated as income chargeable to tax.
Interest received or receivable by a Gibraltar company, arising from an inter-company
loan, will be chargeable to tax at the standard CIT rate. Where the interest received or
receivable is less than GBP 100,000 per annum, the interest is exempt from any charge to
taxation.
All other interest received or receivable is not taxable in Gibraltar.
Royalty income
With effect from 1 January 2014, income from royalties received or receivable by a
Gibraltar companyis taxable at the standard CIT rate. Prior to 1 January 2014, income
from royalties was not taxed in Gibraltar.
Foreign income
Foreign income is not normally taxed in Gibraltar.
Deductions
For the purpose of ascertaining assessable income, all expenses wholly and exclusively
incurred in the production of income shall be deducted.
Capital allowances
The first GBP 30,000 of qualifying expenditure on plant and machinery (including
fixtures and fittings) and the first GBP 50,000 of qualifying expenditure on computer
equipment is fully deductible in the first year as a first year allowance.
Thereafter, qualifying assets are pooled and are subject to an annual capital, or wear and
tear, allowance. Allowances are available for plant and machinery (including fixtures
and fittings), computer equipment, and motor vehicles at the rate of 15% (20% for
companies that are obligated to pay the higher CIT rate, see the Taxes on corporate income
section) and are calculated on a reducing balance basis.
Capital allowances for industrial buildings are deductible at the rate of 4% per annum
on a straight-line basis.
Goodwill
Amortisation of goodwill is not a deductible expense.
Start-up expenses
Expenditure incurred with a view to carrying on a trade is treated as incurred on the first
day on which the trade is carried on for the purposes of computing the profits or gains of
the trade.
Interest expenses
Full deduction is available in respect of interest expenses, subject to anti-avoidance rules

(see the Group taxation section for more information).
Bad debt
Only specific bad debts or specific bad debt provisions are deductible to the extent
that they are respectively estimated to be bad during the said period, notwithstanding
that such bad debts were payable prior to the commencement of the period. General
doubtful debt provisions are not an allowable expense.
718
Gibraltar
Gibraltar
A charitable donation is not considered as having been wholly and exclusively expended
for the purposes of the production of the income of the trade and is therefore not
allowable as a deduction for tax purposes.
Fines and penalties
Fines and penalties, including those resulting from late payment of taxation or from
failure to make the necessary tax submissions, are deemed to be a tax and are therefore
not a deductible expense.
Taxes
No deduction is allowed for any tax charges under the Income Tax Act.
Additionally, no deduction is allowed in respect of the following:

Domestic or private expenses.

Expenses not incurred wholly and exclusively in the generation of income.
Any expenses of a capital nature.
Any sum recoverable under an insurance contract or contract of indemnity.
Property expenses not incurred for the purposes of producing income.
Depreciation of assets (although capital allowances are available, see above).
Employee remuneration not accompanied by a certified statement of name, address,
and amount of remuneration (in respect of Gibraltar employment only).
Certain business entertainment expenditure falling within guidelines published by
the Commissioner.
Interest paid to a non-Gibraltar resident that is more than a reasonable commercial
rate.
In the case of a company that has income, some of which is chargeable to tax and some
of which is not, the deductions allowed shall be apportioned on a pro-rata basis between
the chargeable and non-chargeable income.
A trading loss incurred in an accounting period may be offset against trading income
arising in the same period or subsequent period, provided that within a period of three
years there has not been both a change in the ownership of the company and a major
change in the nature or conduct of the trade.
There is no provision for the carrying back of losses.
In the case of branches, the amount of general head office expenses incurred that is
deductible is limited to 5% of its turnover.
The Income Tax Act 2010 includes anti-avoidance provisions. These provisions state
that if the amount charged for goods or services by a connected person is not at arms
length, then the expenses that are allowed are subject to the lowerof:
the expense
5% of the gross turnover of the company, or
75% of the pre-expense net profit of the company.
Gibraltar
719
Gibraltar
Group taxation
Companies are assessed on an individual basis, and trading losses of group members
may not be offset against profits of other members of the group.
The Income Tax Act contains a generic anti-avoidance clause that allows the
Commissioner to disregard an arrangement that the Commissioner believes is fictitious
or artificial. In addition, it includes the following specific anti-avoidance measures.
Where a taxpayer seeks to reduce their liability to tax by creating an artificial split
between activities in Gibraltar and outside of Gibraltar, the Commissioner shall use antiavoidance provisions to defeat such an attempt.
Transfer pricing
The amount of interest payments to connected personsthatare inexcess of that payable

at arms length will be deemed to be a dividend. Where the amount charged for goods
and services by connected persons is not at arms length, this will be disallowed as a
taxable expense. Any expenses allowed will be subject to the lesser of (i) the expense,
(ii) 5% of the gross turnover of the company, and (iii) 75% of the pre-expense profit of
the company.
Thin capitalisation
Interest paid on a loan to related partiesthat are not companies(or loans where security
is provided by related parties) where the ratio of the value of the loan capital to the
equity of the company exceeds 5:1 will be considered as dividend payments and thus not
deductiblefor tax purposes. This provision is not applicable to Gibraltar banks or money
lenders.
Back-to-back loans
Since interest income is not taxable on back-to-back loans, the interest expense is not
deductible.
Dual employment
Income from dual employment contracts is taxed in Gibraltar if both employers are
connected persons.
Transfer of assets abroad
Where assets are transferred abroad with the purpose of avoiding tax and the taxpayer
has the power to enjoy these assets either now or in the future, then any income or
benefits received from these assets will be deemed to be income chargeable to tax.

Development aid
In order to encourage private development in Gibraltar, promoters and developers of

approved projects are offered certain incentives, such as tax relief, import duty relief,
and rates relief.
In order to qualify for the above reliefs, the project needs to be a new project that is for
the economic benefit of Gibraltar and the aim of which is:
to create a tangible immovable asset in Gibraltar that will remain in existence after
the applicant has ceased to derive the benefits under the licence
to provide more than two additional units of housing accommodation in Gibraltar
to contribute materially to the development of the tourism industry in Gibraltar
to afford any new employment opportunities or career prospects in Gibraltar, or
720
Gibraltar
Gibraltar
to improve materially the economic or financial infrastructure of Gibraltar.
The project needs to be completed within a specified time (dependent on the type of
project) following the issue of the licence, and the applicant must not expend less than
the prescribed amount for the project.
Applications for development aid must be made to the Minister for Trade.
Deduction of approved expenditure on premises
For taxpayers with an interest in a building situated in Gibraltar, an allowance is

available for approved expenditure on the painting, decorating, repair, or enhancement
of the frontage of that building.
The approved amount will be available as a deduction against the taxpayers income.
This deduction is in addition to any deduction, relief, or allowance given in accordance
with any other provision of the Income Tax Act in respect of the same expenditure.
The claim for the deduction must be made within two years after the end of the year of
assessment with respectto which the deduction is claimed.
Commercial property rate incentives
There are early payment discounts available on property rates, depending on the
business conducted from the premises.
Withholding taxes
There are no withholding taxes (WHTs) in Gibraltar, except in the following cases:
Payments to subcontractors in the construction industry. Unless the subcontractor
is in possession of an exemption certificate, tax is withheld at the rate of 25% of the
amount that relates to the labour and profit element of the contract.
Payments to employees under the Pay As You Earn (PAYE) system. Under the PAYE
regulations, employers are obligated to deduct an amount of tax in accordance with
the employees tax code.
Tax administration
Taxable period
The taxable period is the accounting period of the company, which begins on the later of
the beginning of the accounting period and the date when the company first receives a
source of taxable income and ends on the earlier of the end of the accounting period, 12
months from the beginning of the accounting period, or the date on which trade ceased.
Tax returns
Companies with income subject to tax in Gibraltar are required to file a return and
calculate their tax liability for the year. The return, together with the estimated liability,
needs to be accompanied by payment of the tax due nine months (previously six
months) after the date of the companys financial year end. The change in the filing
deadline from six to nine months has not yet been enacted; however, the Commissioner
of Income Tax has confirmed that, pending the finalisation and enactment of the
legislative amendment, it will be applied in practice in respect of accounting periods
ending on or after 1 July 2013.
Gibraltar
721
Gibraltar
Companies with turnover of less than GBP1 millionare obligated to file accounts
accompanied by an Independent Accountants Report together with the tax return
withinsix months of the companys financial year end.
Companies with turnover of GBP1 millionor more may submit unaudited accounts
together with the tax return but are required to file audited accounts within nine months
of the companys financial year end.
Payment of tax
Companies are required to make payments on account of future liabilities on 28

February and 30 September in each calendar year. Each payment should be equal to
50% of the tax based on the previous years tax liability.
The balance of tax due (i.e. the actual liability less payments on account) ispayable on
the date of filing of the return.
Penalties and fines
The following penalties and fines are applicable:

For the late payment of tax, there is a penalty of 10% of the amount of tax due on the
day immediately after such payment was due. If unpaid for 90 days, a further amount
of 20% of the tax due is charged; and if still unpaid after this period, then a 10%
per annum surcharge will be added, which is compounded on a daily basis until the
amount of the tax and penalties are fully paid.
Failure to file a return by the due date will result in a penalty of GBP 50 with a further
penalty of GBP 300 if the return is not submitted within three months after the due
date.
Failure to respond to a notice or request to submit information or documentation will
result in a fine of GBP 200 on the day the failure occurs and a penalty of up to GBP
500 per day thereafter. Failure to comply beyond a three month period, if convicted,
can result in imprisonment.
For fraudulently, recklessly, or negligently delivering to the Commissioner an
incorrect return, accounts, or information, there is a fine of up to 150% of the
difference between the actual tax due and the tax due as per the original declaration.
The amount of the penalty will depend on:
the amount of the tax lost and/or delayed
the gravity of the offence (i.e. if deliberate or an honest mistake), and
the level of cooperation in the investigation.
Failure to pay to the Commissioner PAYE or social insurance that has been
withheld or should have been withheld will become a criminal offence leading to
imprisonment and/or a fine.
If an amount of PAYE and/or social insurance exceeding GBP 5,000 is outstanding
for over three months, the Commissioner will, after giving 14 days notice, publish in
the Gibraltar Gazette the name of the person whom the Commissioner has reason to
believe has failed to comply with the PAYE regulations.
Failure to notify the Commissioner of an arrangement, the main benefit of which is to
avoid the payment of tax, will result in a fine of GBP 100 on the day the failure occurs
and a penalty of GBP 200 per day thereafter.
Tax audit process
The Gibraltar tax system is based on self-assessment. However, the Income Tax Office
has powers to make an enquiry into the tax return of a company within a period of
12 months from the date when the return is due to be filed or, if filed later than the
deadline, 12 months from the date it was filed. If the Commissioner of Income Tax
believes a return to be fraudulent, the above time limits will not apply.
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Gibraltar
Gibraltar
A taxpayer may appeal against a disputed assessment by notice in writing addressed to
the Commissioner within 28 days of the date of service of the notice of the assessment.
The Commissioner has up to six years following the date of assessment to revise any
incorrect assessments. There is no limit where the incorrect assessment is as a result of
fraud, wilful default, or neglect.
Gibraltar
723
Greece
PwC contact
Mary Psylla
268 Kifissias Avenue
GR-152 32 Athens
Greece
Tel: +30 210 6874 543
Pursuant to a recent major tax reform, applicable from 1 January 2014 onwards, the
Greek corporate income taxation (CIT) regime has been significantly amended.
More specifically, a new Income Tax Code has been ratified by the Greek Parliament by
the voting of L.4172/2013, as amended by L.4223/2013 and L.4254/2014, and entered
into force on 1 January 2014.
Although the CIT rate has not been amended, much of this summary has been updated
to reflect important changes throughout the corporate tax regime.

The CIT rate of legal entities is set at 26%.
Resident corporations are taxed on their worldwide income. Non-resident corporations
are taxed in Greece on any Greek-source income they derive.
Shipping companies
The Greek tonnage tax regime model intends to tax shipping activity and applies
to Greek or foreign ship-owning companies with vessels flying a Greek flag and
foreign ship-owning companies with vessels flying a foreign flag that maintain a ship
management company in Greece that is exclusively engaged in ship management
activities. The Greek tonnage tax regime applies to vessels of A and B category that are
either flying a Greek or foreign flag. In the case of vessels flying a foreign flag, the foreign
ship-owning company should maintain a ship management office in Greece. Category A
vessels include cargo vessels, tankers, steel hull vessels for dry or liquid cargo that ply/
to between foreign ports, passenger vessels, drilling platforms, etc. Category B vessels
include small boats and any other motor vessels not listed under category A.
The gross tonnage is calculated by multiplying coefficient rates by each scale of gross
registered tonnage. This taxable tonnage is then multiplied by an age corrected rate.
Various exemptions/reductions of the tonnage tax apply, such as:
Vessels built in shipyards in Greece, under a Greek flag, are exempt from tax for the
first six years.
50% reduction for vessels operating regular routes between Greek/foreign ports or
solely between foreign ports.
The tonnage tax exhausts the tax liability of the owner, and, if the owner is a company,
this extends to its shareholders. Tonnage tax also exhausts the tax liability in relation to
operating profits and capital gains arising out of the sale of the vessel flying the Greek
flag. Tonnage tax also exhausts the tax liability of the foreign owner ship company flying
724
Greece
Greece
a vessel under a foreign flag managed by a ship management company in Greece, as well
as of the shareholders thereof. No CIT or dividend withholding tax (WHT) is levied on
shipping profits.
This tax burdens the ship owners or ship-owning companies, while the ship management
companies are jointly and severally liable for the payment thereof.
An obligation of the liable parties for submitting before the Ministry of Mercantile
Marine an annual statement indicating the name, flag, total tonnage, and age of the
vessel under the foreign flag is established.
For calculating the tonnage tax (tax rates and tax brackets, criteria) and the special tax
return and payment of tax, the provisions on the tonnage tax payable for Greek flagged
vessels apply in analogy. A credit for the tonnage tax paid abroad is provided.
Annual financial contribution for ship-owning companies
An annual financial contribution for the years 2014, 2015, and 2016 is imposed on
ship-owning companies with vessels flying a Greek or foreign flag, provided that the
management of said vessels is performed by a ship management company established in
Greece according to article 25 of L.27/1975.
The annual financial contribution is equal to double the final amount of tonnage tax
payable according to articles 1 and 26 of L.27/1975, without calculating the deductions
or reductions of article 5 and 26 par 1 and 5 of L.27/1975.
Annual contribution imposed on foreign ship management companies
An annual contribution (referring only to fiscal years 2012 through 2015) is imposed on
offices or branches of foreign enterprises that have been established in Greece by virtue
of Article 25 of L.27/1975 and that are engaged in the chartering, insurance, average
(damage) settlements, purchase, chartering or shipbuilding brokerage, or chartering of
insurance of ships under Greek or foreign flag of total tonnage over 500 shipping tons,
as well as the representation of ship owner companies or undertakings, whose object is
identical to the abovementioned activities.
Greek and foreign companies of L.27/1975 that are engaged in the management of
vessels flying a Greek or foreign flag (that are subject to tonnage tax), as well as in other
activities approved by the license of operation, are exempt. Passenger coastal ships or
merchant vessels that perform internal routes are exempt.
This contribution is imposed on the total amount of imported foreign exchange,
calculated on a minimum 50,000 United States dollars (USD), and is calculated on the
following tax scale:
Bracket of annual total
foreign exchange (USD)
200,000
200,000
Excess amount
Rate
(%)
5
4
3
Tax per bracket

Total foreign
(USD) exchange (USD)
10,000
200,000
8,000
400,000
Total tax
(USD)
10,000
18,000
A special tax return for calculating the contribution on the basis of the imported foreign
exchange of the previous year should be filed within March of each year. Upon filing
of said tax return, one-quarter of the annual contribution is payable. The remaining
contribution is paid in three instalments (June, September, and December).
The distribution of profits by a foreign ship owning company maintaining an office or
branch in Greece by virtue of Article 25 of L.27/1975 that is exclusively engaged in the
Greece
725
Greece
chartering, insurance, brokerage, etc. of vessels to Greek individual tax residents is
subject to tax at a rate of 10%.
This tax applies to dividends paid or credited and shall be rendered to the Greek State by
the beneficiary of the dividend.
The 10% tax also applies to cases of distributions of profits by the abovementioned
companies in the form of extraordinary fees and percentages (bonus) to BoD members,
directors, and officials, in addition to the regular remuneration, exhausting the tax
liability of the beneficiaries for said income.
Local/state/provincial tax rates
No local taxes on income are paid at a local level. However, it should be noted that
the aforementioned rates are reduced by 40% for profits of companies derived from
activities carried out on islands with less than 3,100 inhabitants.
Corporate residence
A legal entity or other entity is considered as tax resident in Greece if one of the
following conditions is met:
It has been incorporated or established according to the Greek legislation.
It has its registered seat in Greece.
The place of effective management is located in Greece.
The determination by the tax authorities that the effective management of a legal
entity is exercised in Greece is made on the basis of the actual facts and circumstances
of each case and by taking into account mainly the place of exercising the day-to-day
management, the place of making strategic decisions, the place where the annual
general meeting of shareholders or partners is held, the place where the books and
records are kept, the place where the meeting of the members of the Board of Directors
or other executive management board takes place, and the residence of the members
of the Board of Directors or other executive management board. The residence of the
majority of the shareholders or partners may also be taken into consideration.
For determining a legal entity as being tax resident in Greece, the exercise of effective
management in Greece for any period during the tax year is sufficient.
Companies that are established and operate according to L.27/1975 on the taxation of
vessels [etc.] and L.D. 2687/1954 on the investment and protection of foreign capital
are explicitly excluded from the application of these new provisions on tax residence.
The definition of a PE of foreign legal entities in Greece is similar to the one included
in the Organisation for Economic Co-operation and Development (OECD) Model
Convention on the Double Tax Treaties (DTTs) for the Avoidance of Double Taxation;
however, where a DTT applies, its provision will override the domestic definition.
The term permanent establishment includes especially:

A place of management.
A branch.
An office.
A factory.
A workshop.
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A mine, an oil or gas well, a quarry, or any other place of extraction of natural
resources.
In order for a construction site in Greece to constitute a PE, a time period of at least
three months is required, instead of the time period of 12 months provided in the OECD
Model Convention.
A distinction applies between the cases of maintaining a PE through a dependent agent
and not maintaining a PE when performing activities through an independent agent
(e.g. broker, general commission agent).
Other taxes
G
The standard VAT rate is 23%. The reduced rate on basic necessities is 13%. A super
reduced rate of 6.5% for accommodation in hotels or similar establishments (including
holiday accommodation and letting of places in camping or caravan sites), medicines
of CN3003 and 3004, and vaccines of CN3002 intended for human consumption is
applicable. The aforementioned rate is also applicable for childrens books, colouring,
and drawing books.
Supplies of goods and services to individuals and legal entities subject to VAT and
established in European Union (EU) countries (intra-Community supplies) are exempt
from VAT (zero rated). Exports of goods and certain services to non-EU countries are
also exempt (zero rated).
With the following exceptions, real estate leases are generally exempt from VAT. Lease
contracts for shopping centres and logistics centres may be subject to VAT on the
condition that the taxable person opts for the submission to taxation of the leasing
right. Additionally, a right to elect to subject leases of property used for the exercise
of professional activities, either independently or as part of mixed contracts, to VAT
applies.
Customs duties
Many goods imported into Greece from outside the European Union are subject to
customs duties. The rates of duty are provided by the EUs Common Customs Tariff.
Excise taxes
Excise taxes are imposed on energy and electricity products (e.g. petrol, natural gas,
electricity), manufactured tobacco, and alcoholic products. The tax rates vary depending
on the category of products.
Uniform Tax on the Ownership of Real Estate Property (ENFIA)
Up to 2013, real estate property held in Greece was subject to Annual Real Estate Tax
and a Special Real Estate Duty. However, from 2014 onwards, the ownership of real
estate property/property rights in Greece is subject to the ENFIA, which consists of a
principal tax imposed on each real estate property and a supplementary tax imposed on
the total value of the property rights on real estate property of the taxpayer subject to
tax.
More specifically, said tax is no longer imposed on the basis of the objective value of real
estate property, but will be determined on the basis of various factors, according to the
final registration of the property at the land registry or ownership title.
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The principal tax on buildings is calculated by multiplying the square metres of the
building by the principal tax ranging from 2 to 13 euros (EUR) per square metre and
other coefficients affecting the value of the property (e.g. location, use).
The principal tax on land is calculated by multiplying the square metres of the land by
the principal tax ranging from EUR 0.003 to 9 per square metre and other coefficients
affecting the value of the property (e.g. location, use).
The supplementary tax is imposed on the total value of the rights to property at a rate
5, with the exception of property that is self-used by the legal entity.
Each transfer of real estate, which is not subject to VAT, is subject to real estate transfer
tax. From 1 January 2014 onwards, the real estate transfer tax is imposed at a rate of 3%
on the taxable value of the property.
Stamp taxes
Rentals of non-residential properties are subject to 3.6% stamp duty (with the exception
of shopping centres and logistics centres subject to VAT).
In general, loans and interest may be subject to a 2.4% stamp duty. However, there are a
number of exemptions, the main one covering bank loans and bond issues.
Other stamp duties may apply, in certain limited cases.
Contribution tax on capital accumulation following incorporation
A 1% tax contribution is imposed on capital accumulation (share capital increase) by:

business companies and joint ventures
associations of all degrees and any other form of company, legal entity, or union of
persons or society aiming to make profits, and
branches of foreign companies (unless of EU origin).
ForGreek Societe Anonyme (SA)companies, an additional 0.1% duty is payable on
capital to the competition committee.
The capital concentration tax is on longer imposed upon the incorporation/
establishment of legal entities.
Branch income
Profits of branches of foreign companies are subject to CIT at a rate of 26%.
Inventory valuation
Inventories are stated at the lower of cost or market (replacement value). The Greek tax
system recognises various valuation methods such as first in first out (FIFO), last in first
out (LIFO), weighted average, etc.
Capital gains
In general, capital gains are included in the taxable profits of Greek companies.
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The income derived from the goodwill arising upon the transfer of Greek government
bonds or Greek treasury bills that are acquired by legal entities that do not qualify as
Greek tax residents and do not maintain a PE in Greece is tax exempt.
Capital gains tax on sale of listed shares
Capital gains derived from the sale of listed and non-listed shares are considered
business income taxable at the CIT rate of 26%.
The sale of listed shares is also subject to a transaction duty at a rate of 0.2%.
Dividend income
Dividend income is generally taxable.

However, a tax exemption of intra-group dividends received by Greek tax resident legal
entities or PEs of foreign legal entities in Greece applies, provided that:
the legal entity distributing the profits is included in the forms enumerated in Annex
I, Part A of Directive 2011/96/EE, as in force
the legal entity distributing the profits is tax resident in an EU member state and is
not considered as tax resident in a third country in application of the provisions of a
DTT concluded with such third country
the legal entity distributing the profits is subject to one of the taxes listed in Annex I,
Part II of Directive 2011/96/EE or any other tax substituting one of those taxes
the recipient taxpayer holds at least a minimum participation of 10% of the value or
the quantity of the share or principal capital or voting rights of the distributing legal
entity, and
the minimum participation percentage is held for at least 24 months (although
the exemption may be provided prior to the completion of 24 months secured by a
guarantee).
In case of further distribution of the reserve created by dividends received from foreign
subsidiaries, both the underlying CIT and dividend WHT that may have been paid by the
foreign subsidiary are credited against the Greek dividend WHT.
Stock dividends
Stock dividends are treated as cash dividends for CIT purposes.
Interest income
Interest income is generally taxable.
Partnership income
Both general partnerships (Omorrythmi Etairia or OE) and limited partnerships

(Eterrorythmi Etairia or EE) are not tax transparent. They are generally taxed according
to a progressive income tax scale with two income brackets, taxable at a rate of 26%
for income up to EUR 50,000 and 33% for any exceeding amount, provided that single
entry accounting books are kept. In cases where double entry accounting books are kept,
partnerships are taxed at the CIT rate of 26%.
Rents/royalties income
Income derived from rents and royalties is taxed as ordinary income.
Foreign income
Resident corporations are taxed on their worldwide income. Foreign income received by
a domestic corporation is taxed together with other income. If related income tax is paid
or withheld abroad, a tax credit is generally available up to the amount of the applicable
Greek income tax.
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Losses from foreign sources may not be set off against profits generated in Greece.
Exceptionally, losses from foreign sources may be set off with profits arising in other EU
or European Economic Area (EEA) member states, provided that they are not exempt on
the basis of the DTT concluded and applied by Greece.
Deductions
Depreciation
Mandatory depreciation on a fixed annual basis applies by using fixed depreciation rates
stipulated in the law. The transfer of depreciated amounts between fiscal years is not
permitted.
The rates of depreciation are determined on the basis of the following table:
Category of assets of the enterprise
Buildings, installations, facilities, industrial and special installations, nonbuilding facilities, warehouses, and stations, including their annexes (and
special loading and unloading vehicles)
Plots of land used for mining and quarries, unless used for ancillary
mining activities
Public means of transportation, including airplanes, trains, vessels, and ships
Machinery and equipment (aside from personal computers and software)
Means of transportation of individuals
Means of transportation of goods (internal transports of goods)
Intangible assets, royalties, and expenses of multiannual depreciation
Personal computer equipment, principal and ancillary and software
Other fixed assets of the enterprise
Rate of depreciation
per tax year (%)
4
5
5
10
16
12
10
20
10
Specifically for intangible assets and royalties, the rate may be adapted on the basis of
the lifetime of the right.
An option for the lessee to depreciate a leased asset is provided in cases where there
is a financial leasing agreement, provided that specific conditions are met. A financial
leasing agreement is defined as any oral or written agreement by which the lessor
(owner) is obligated, in return for a rent, to provide to the lessee (user) the use of an
asset, provided that one or more of the following criteria are met:
The ownership of the asset is passed on to the lessee following the end of the lease
agreement.
The lease agreement includes a term of preferential offer for the purchase of the
equipment at a price below market value.
The period of the lease covers at least a percentage of 90% of the financial life of
the assets as it derives from the abovementioned table, even in cases where the
ownership title is not transferred after the end of the lease agreement.
At the time of concluding the lease agreement, the present value of the rents amounts
to at least 90% of the market value of the asset that is leased.
The assets that are leased are of such special nature that only the lessee may use them
without proceeding to important modifications.
Goodwill
There are some court cases that support the deductibility of goodwill as a start-up
expense, but the specifics of each case must be carefully considered.
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The amount of start-up expenses (including costs for acquisition of real estate) is
amortised, either as a lump sum during the year of its realisation or in equivalent
instalments within a five year period. Specifically, expenses realised by financial leasing
companies in relation to the acquisition of real estate, which will constitute the object of
an agreement of the same law, may be depreciated in equivalent amounts, in analogy to
the years of duration of the agreement.
Interest expenses
Interest deductibility restrictions apply.

Non-deductible expenses include interest expenses on loans undertaken by the
enterprise from third parties, to the extent that they exceed the interest that would arise
if the interest rate was equal to the interest rate of loans on open deposit/withdrawal
accounts provided to non-financial enterprises, as indicated in a Statistical Bulletin of
the Central Bank of Greece at the prior time period closest to the date such loan was
undertaken.
The above interest deductibility restrictions do not apply to inter-bank loans and bond
loans issued by SAs.
Bad debt
The amounts of bad debt provisions and the write-off thereof are deductible, as follows:
For uncollected due debt up to the amount of EUR 1,000 for a time period exceeding
12 months, the taxpayer may form a provision at a percentage of 100% of the said
claim.
For uncollected due debt exceeding the amount of EUR 1,000 for a time period
exceeding 12 months, the taxpayer may form a provision according to the following
table:
Duration of late payment (in months)
Greater than 12
Provision (%)
50
Greater than 18
75
Greater than 24
100
The condition for the deduction of the provision for the aforementioned two cases is that
all appropriate actions have been taken to ensure the right of collecting the said claim.
The formation of provisions of bad debt is prohibited in the following cases:
For due debt of shareholders or partners of the enterprise with a minimum
participation percentage of 10% and the subsidiary companies of the enterprise
with a minimum participation percentage of 10%, unless the claim of such debt is
pending before court or court of arbitration, or if the debtor has filed an application
for bankruptcy or for a procedure of rationalisation or an enforcement procedure has
commenced against the debtor.
For due debt that are covered by insurance or any guarantee or other contractual or
in rem security or for debts of the state or local authorities or for those that have been
provided by a guarantee of those bodies.
It is provided that a claim may be written off, provided that the following conditions are
cumulatively met:
An amount corresponding to the debt has been previously recorded as income.
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It has been previously written off from the books of the taxpayer.
All legal actions for the collection of the debt have been exhausted.
This provision will apply for provisions formed in the tax years commencing from 1
January 2014 onwards.
Banks may deduct provisions of bad debt at a percentage of 1% on the amount of the
annual average of real grants, as indicated by their monthly accounting statements.
Aside from the aforementioned deductibility percentage, banks may deduct from their
income additional special provisions regarding their clients, for which the settlement of
interest has ceased. Moreover, specific provisions on leasing and factoring companies are
included.
Fines and penalties
Fees from activities constituting a criminal offence, from penal clauses, fines, and
penalties are not recognised as deductible expenses.
Taxes
Taxes, other than income tax, extraordinary contributions, and VAT corresponding
to non-deductible expenses that are not deductible as input VAT, are recognised as
A general rule on the deductibility of all real and evidenced business expenses realised
for the benefit or in the frame of the usual transactions of the company, the value of
which is not deemed as higher or lower than the market value, and duly registered in
accordance with the rules of recording of transactions is established, with the exception
of the restrictively enumerated expenses that are not deductible.
The non-deductible expenses include:
Some cases of loan interest (see Interest expenses above).
Every kind of expense concerning the acquisition of goods or receipt of services of a
value exceeding EUR 500, provided that the partial or total payment was not made
through a means of bank payment.
Unpaid insurance contributions.
Provisions, with the exception of the explicitly regulated bad debt provisions (see Bad
debt above).
Provision or receipt of services in cash or in kind that constitute a criminal offence.
Deemed income in case of self-use of property, to the extent that the latter exceeds a
percentage of 3% of the objective value of the property.
Expenses for the organisation and conducting of informative conferences and
meetings concerning the hospitality (meals and stay) of clients or employees if
exceeding the amount of EUR 300 per participant and to the extent that the total
annual expense exceeds a percentage of 0.5% of the annual gross income of the
enterprise.
Entertainment expenses, with the exception of such expenses realised by taxpayers
having as a main object the provision of entertainment services.
Private consumer expenses.
Total of expenses that are paid to tax residents in non-cooperative states or states
with a preferential tax regime, unless the taxpayer proves that these expenses refer to
real and usual transactions that do not have as their objective the transfer of profits or
income or capital with the purpose of tax avoidance or evasion.
Expenses relating to tax-exempt dividends.
Net operating and capital losses
Losses can be carried forward five years. Carrybacks are not permitted.
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Pursuant to a new rule on the abuse of provisions on the transfer and setoff of losses,
in cases where the direct or indirect ownership or voting rights of an enterprise are
changed at a percentage exceeding 33% during a tax year, the carryforward of tax losses
ceases to apply unless the taxpayer can prove that the change in ownership occurred for
commercial or business purposes.
Royalties, interest, and service fees paid to foreign affiliates are deductible expenses
under certain requirements and conditions.
Special restrictions on transactions with non-cooperative states and

states with preferential tax treatment
Greek tax law has established rules in relation to non-cooperating states and states with
preferential tax treatment.
Non-cooperating states are defined as states that are not EU member states and have not
concluded agreements of administrative assistance in the tax sector with Greece or with,
at least, 12 other states. Non-cooperative states are enumerated in a Ministerial Decision
to be issued annually.
Pursuant to the Ministerial Decision for 2014, the non-cooperating states for 2014 are
specified as follows:

Andorra
Anguilla
Antigua and Barbuda
the Bahamas
Bahrain
Barbados
Bermuda
former Yugoslav
Republic of Macedonia
(FYROM)
Gibraltar
Grenada
Guatemala
Hong Kong
Isle of Man
Jersey
Lebanon
Liberia
Liechtenstein
Malaysia
Marshall Islands
Mauritius
Monaco
Nauru
Netherland Antilles
Niue
Panama
Philippines
St. Lucia
St. Kitts and Nevis
St. Vincent and the
Grenadines
Samoa
Seychelles
Singapore
Uruguay
US Virgin Islands
Vanuatu
A legal entity, irrespective of its legal form, is considered located in a preferential tax
regime, even if its residence of registered office is located in an EU member state, in
cases where it is not subject to taxation in this state or is de facto not subject to taxation,
or is subject to tax on income or capital at an amount that is equal to or lower than 50%
of the tax that would have been due, in accordance with Greek tax legislation, if such
entity were resident or were maintaining a PE in Greece.
Pursuant to the Ministerial Decision for 2014, states with preferential tax treatment for
2014 are specified as follows:

Albania
Andorra
the Bahamas
Bahrain
Belize
Bermuda
Bosnia andHerzegovina
Bulgaria
Cayman Islands
Cyprus
former Yugoslav
Republic of Macedonia
(FYROM)
Gibraltar
Guernsey
Ireland
Isle of Man
Jersey
Liechtenstein
Macau
Marshall Islands
Monaco
Montenegro
Montserrat
Nauru
Oman
Paraguay
Qatar
San Marino
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Saudi Arabia
Seychelles
Turks and Caicos

Vanuatu
Group taxation
Group taxation is not permitted in Greece.
Transfer pricing
Related entities are obligated to document the prices of their intra-group transactions.
An exemption from maintaining a transfer pricing documentation file is provided if:
the above transactions or transfer of operations amount to up to EUR 100,000
annually and the total turnover of the liable party does not exceed EUR 5 million
annually, or
the above transactions or transfer of operations amount to up to EUR 200,000
annually and the total turnover of the liable party exceeds EUR 5 million annually.
The transfer pricing documentation file is accompanied by the Summarized Table of
Transfer Pricing Information which is submitted electronically to the tax administration
within four months following the end of every fiscal year.
The transfer pricing documentation file is kept at the registered seat of the liable party
for the whole time period that the books and records are required to be kept, and should
be provided to the tax administration within 30 days from the receipt of the relevant
request.
The obligation of updating the respective transfer pricing file is provided in case of a
change of market circumstances that affect the data included therein. The update is
made in the tax year in which the change takes place
The option of obtaining an Advance Pricing Arrangement (APA) of the methodology of
specific future intra-group transactions with related parties is integrated in the Code of
Tax Procedures. The object of the APA constitutes the total of the criteria used for the
determination of the prices of intra-group transactions during a specific time period,
which include mainly the transfer pricing methodology used, comparable or reference
data, and the respective adjustments, as well as the critical assumptions on future
developments. The object of the APA may constitute every other specialised matter
concerning the pricing of transactions with related parties.
The validity of the APA decision cannot exceed four years, and it cannot enter into force
retroactively (i.e. the tax year that has lapsed at the time the application for the APA
has been submitted). The issuance of the APA decision does not impede the subsequent
application of a mutual settlement procedure according to the applicable DTT.
The APA decision may be renewed, revoked, or cancelled by a decision of the tax
administration, provided that the legal conditions are met.
The delayed submission of the summarised table of transfer pricing Information and
of the transfer pricing documentation file incurs a penalty calculated at a percentage
1/1,000 of the declared gross profits (not below EUR 1,000 and not exceeding EUR
10,000).
The penalty for the non-submission, or inaccurate or incomplete submission, of
the summarised table of transfer pricing information or of the transfer pricing
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documentation file is calculated at a percentage 1/100 of the declared gross profits (not
below EUR 10,000 and not exceeding EUR 100,000).
A repetition within five years of the first infringement incurs double the initial penalty,
whereas a second repetition within five years from the first infringement incurs
quadruple of the initial penalty.
Thin capitalisation
The thin capitalisation rules are determined in connection to the taxable profits before
interest, tax, and depreciation (EBITDA). More specifically, interest expenses are not
deductible to the extent that the surplus of interest expenses compared to interest
income exceeds a percentage of 30% of EBITDA.
In application of a transitional provision, this limit will be:

60% from 1 January 2014.

The aforementioned limit does not refer to net interest expenses that do not exceed the
amount of EUR 5 million, and from 1 January 2016 this amount is reduced to EUR 3
million.
Any excess amount of non-deductible interest expenses may be carried forward
indefinitely to future years and will be deductible in future years to the extent that these
future years indicate an uncovered EBITDA amount.
The aforementioned rules do not apply to credit institutions, leasing companies, and
factoring companies that are licensed by the Bank of Greece or respective regulatory
authorities of other EU member states.
CFCs rules have been introduced into the Greek legislation applicable from 1 January
2014 onwards. More specifically, the taxable income of a taxpayer with tax residence in
Greece shall be increased by the undistributed income of a legal person or legal entity
with tax residence in another country, under the following conditions:
The taxpayer, alone or together with affiliated persons, directly or indirectly owns
shares, voting rights, or equity in excess of 50% or is entitled to receive more than
50% of the profits of that legal person or legal entity.
The above legal person or legal entity is subject to taxation in a non-cooperative state
or in a country with a preferential tax regime (see the lists in the Deductions section).
More than 30% of the net income before taxes earned by a legal person or legal
entity falls into at least one of the categories of income derived either from interest,
dividends, royalties, income from immovable property, or income from insurance,
banking, or other financial activities.
It is not a company whose principal class of shares is subject to trading on a regulated
market.
The above do not apply to legal persons or legal entities with tax residence in the
European Union or residence in a country that is a contracting member of the European
Economic Community (EEC) unless the establishment or the financial activity of such
legal entity constitutes a fictitious situation with the view to avoid taxation.
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Foreign tax credit
Tax paid abroad for income taxable in Greece is credited but is limited to the amount of
Greek tax due.
Incentives for the maintenance of workplaces
Legal entities that suffer a reduction of turnover for two consecutive accounting
periods without reducing their workforce can enjoy a reduction of the tax rate by three
percentage units. However, a revocation of the granted benefit and imposition of further
tax in case of reduction of personnel or increase of the turnover within the three-year
period is provided.
Apart from the aforementioned tax incentives, L. 3908/2011 on Bolstering of Private

Investments for Economic Growth, Entrepreneurship and Regional Sustainability (the
new Investment Incentive Law) includes the following tax incentives:
Any investment plan in any sector of the economy may receive benefits under the law.
Only certain cases explicitly specified in the law are exempt (e.g. power generation
from photovoltaic arrays).
The types of subsidised expenditures for tangible and intangible assets are
indicatively mentioned, whereas the expenses that may not be subsidised are
exhaustively enumerated. Especially the subsidy percentage for the expenditure
of intangible assets may not exceed 50% of the total eligible expenditure of the
investment plan.
The term of new enterprises is specifically defined for the new laws purposes. An
enterprise is considered as new, if the establishment procedures have not been
completed before the enterprise applies for aid according to the new law or if it has
been established within the past 24 months prior to filing the application.
There are three types of aid: (i) tax exemption, (ii) subsidy, and (iii) leasing subsidy.
The new law lists three categories of General Investment Plans and specifies the type
of aid for each of them: (i) General Entrepreneurship which only the tax exemption
may be granted for, whereas for the (ii) Technological Development and the (iii)
Regional Sustainability investment plan, the subsidy and/or the leasing subsidy
may be granted in principle, with different percentages for the existing and the new
enterprises. The remaining percentage may be covered by tax exemption.
The law also lists four categories of Special Investment Plans: (i) Youth
Entrepreneurship, (ii) Major Investment Plans, (iii) Integrated Long-Term Investment
Plans, and (iv) Synergy and Networking. The aids granted are further specified by
type, volume, and/or percentage for each of them.
The percentages of aid available are specified in conjunction with the division of the
country into three zones (A, B, and C) and are the following:
Zones
ZONE A (Prefecture of Attica, Prefecture
of Viotia)
ZONE B (Prefectures with GDP per capita
> 75% of the average GDP of the country)
ZONE C (Prefectures with GDP per capita
< 75% of the average GDP of the country)
CIT aid available (%)

Large Medium-sized Small and micro
enterprises
enterprises
enterprises
15
20
25
30
35
40
40
45
50
In any case, the above percentages should comply with the ceiling set by the Regional
State Aid Map (RSAM) approved by the European Commission.
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Additional aid is granted for investment plans in Industrial Entrepreneurship Zones
and Innovation Zones up to the ceiling set by the RSAM. Benefits are also granted up
to the ceiling set by the RSAM, by enterprise size, for investment plans on islands and
regional units of islands that belong administratively to the regions of the mainland.
The law sets a ceiling for each aid of EUR 15 million for a single enterprise and EUR
30 million for the total of cooperating and related companies.
The application can be filed throughout the entire year but is evaluated twice a
year (May in relation to applications filed until 30 April and November in relation
to applications filed until 30 October, although such periods can be prolonged by
ministerial decisions). Additionally, conditions for approval are further specified.
The law specifies the conditions and evaluation criteria for each investment project
and determines, in general, the procedure for evaluation, approval, and monitoring
of implementation of investment projects.
The mode of payment of each type of aid is further determined. Especially for the aid
of tax exemption, the law stipulates that the amount of tax exemption aid is annually
formed with the following restrictions:
The enterprise is entitled to the use benefit of the incentive from the fiscal year in
which the decision on the completion and beginning of the productive operation
of the investment has been published. In this fiscal year, the ceiling of tax
exemption to be used is set at of the approved amount of the tax exemption aid.
In the following fiscal year, the ceiling of tax exemption to be used, including the
aid for the first fiscal year, is set up to the total of the approved amount of the tax
exemption aid.
The remaining amount of the approved tax exemption aid may be covered within
15 fiscal years following the fiscal year in which the decision on the completion
and beginning of the productive operation of the investment has been published.
The amount of the tax exemption aid shall be shown as a tax-free reserve in a special
account in the enterprises accounting books and shall consist of the income tax on
the net profits reported in the initial timely income tax return, which shall not be paid
based on the tax exemption granted.
Where the equipment is acquired through leasing, the tax exemption to which the
enterprise is entitled in each fiscal year is calculated on the part of the purchase price
of the equipment that is included in the rents already paid by the end of this fiscal
year.
The law stipulates that the amounts of subsidies and leasing subsidies as well as of tax
exemption shall be shown as tax-free reserves in special accounts. Said reserves may
not be distributed or capitalised and shall be returned in case of dissolution of the
enterprise. In case of distribution or capitalisation, certain penalties shall be imposed.
The law stipulates that any aid to be paid is exempt from any tax, stamp duty, right,
and any other charge in favour of the state or any third party.
Finally, the law specifies the obligations of the beneficiary enterprises and penalties
in case of non-compliance.
The above rules are very detailed, and analytical and careful advice needs to be sought
before making any decision in respect thereof.
Withholding taxes
WHT rates are as follows:
Type of income
Dividends
Interest
Royalties and other payments
WHT rate (%)

10
15
20
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Type of income
Fees for technical projects, management fees and
consultancy and other related services
By exception, fees received by contractors of every kind
of technical projects and lessors of public, municipal,
association, or port proceeds
WHT rate (%)

20
3% on the value of the project under
construction or lease payment
Legal entities tax resident in Greece are not subject to WHT in relation to royalties, fees
received for the provision of consultancy and other related services, and management
fees, unless provided to general government bodies.
Legal entities that are not tax resident in Greece and do not maintain a PE in Greece are
not subject to Greek WHT in relation to technical services, consultancy services, or other
related services and management fees.
Conversely, foreign legal entities that maintain a PE in Greece are subject to Greek WHT
in relation to the provision of the aforementioned services.
Legal entities that are tax resident in Greece or foreign legal entities that maintain a PE
in Greece are not subject to WHT in relation to royalty payments.
The exemption from the obligation of WHT for payments of dividends, interest, and
royalties by a Greek subsidiary to its parent company seems to include payments of
dividends, interest, and royalties to Greek parent companies.
For the exemption, the following conditions apply:
The receiving legal entity should own shares, parts, or a participation of at least 25%,
on the basis of the value or number, in the share capital, right to profits, or voting
rights of the distributing taxpayer.
The minimum holding percentage of shares or parts or participations should be held
for at least 24 months (subject to providing a bank guarantee, in which case the
exemption may apply prior to completing the 24-month holding period).
The receiving legal entity should be:
included in the forms enumerated in Annex I Part A of Directive 2011/96/EU, as in
force, and in Annex I Part A of Directive 2003/49/EC, as in force
tax resident in an EU member state according to the legislation of such state and
not considered as tax resident in a third country aside from the EU in application
of the terms of the DTT concluded with such third state, and
subject, without the option or exemption, to one of the taxes mentioned in Annex I
Part B of Directive 2011/96/EU, Annex I Part B of Directive 2003/49/EC, or to any
other tax that may in the future replace one of those taxes.
Payments of interest of bank loans, including default interest, as well as interest of intrabank deposits, are exempt from WHT.
Interest received from Greek government bonds and treasury bills by legal entities that
are not tax resident in Greece and that do not maintain a PE in Greece are not subject to
WHT.
The following table provides a summary of the WHTs applicable under the respective
DTTs entered into by Greece:
Recipient
Resident individuals and companies
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Greece
Dividends (%)
10
Interest (%)
15
Royalties (%)
20
Greece
Recipient
Non-resident individuals and companies:
Non-treaty
Treaty:
Albania
Armenia
Austria (3)
Azerbaijan
Belgium
Bulgaria
Canada
China
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Georgia
Germany
Hungary
Iceland
India
Ireland
Israel
Italy
Korea, Republic of
Kuwait
Latvia
Lithuania
Luxembourg
Malta
Mexico
Moldova
Morocco
Netherlands
Norway
Poland
Portugal
Qatar
Romania
Russia
San Marino
Saudi Arabia
Serbia
Slovakia
Slovenia
South Africa
Dividends (%)
Interest (%)
Royalties (%)
10
15
20 (1)
5
10
5/15 (4)
8
5/15 (7)
10
5/15 (7)
5/10 (2)
5/10 (2)
25
Domestic
38
10
5/15 (2)
47
Domestic
8
25
45
5/15 (2)
Domestic
5/15 (7)
Domestic
15
5/15 (2)
5
5/10 (2)
5/15 (2)
38
5/10 (2)
10
5/15 (2)
5/10 (2)
35
40
Domestic
15
5
45
5/10 (2)
5/10 (2)
5
5/15 (2)
Domestic
10
5/15 (2)
5
10
8
8
5/10 (6)
10
10
10
10
10
10
8
15
10
10
10
8
10
10
8
Domestic
5
10
10
8
5
10
10
8
8
10
10
10
8/10 (12)
10
10
15
5
10
7
10
5
10
10
10
8
5
5
7
8
5
10
0/10 (13)
10
10
0/5 (5)
10
5
15
5/10 (11)
0/10 (9)
5
5
0
10
10
Domestic
5
10
0/5 (9)
10
15
5/10 (11)
5/10 (11)
5/7 (8)
8
10
8
10
5/7 (8)
10
10
10
5
5/7 (8)
7
5
10
10
10
10
5/7 (8)
Greece
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Greece
Recipient
Spain
Sweden
Switzerland
Tunisia
Turkey
Ukraine
United Kingdom
United States
Uzbekistan
Yugoslavia
Dividends (%)
5/10 (2)
Domestic
5/15 (2)
35
15
5/10 (2)
5
Domestic
Domestic
8
5/15 (2)
Interest (%)
8
10
7
15
12
10
5
0
0/Domestic (10)
10
10
Royalties (%)
6
5
5
12
10
10
5
0
0
8
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
The non-resident legal person, legal entity, or individual pursuing business activity may elect to be
taxed on income from royalties and fees for technical services, administration fees, and fees for
consulting or similar services in accordance with the rules applicable to tax residents who receive
such fees and then credit the WHT against the income tax due.
The rate of 5% applies in case the beneficiary is a company (excluding a partnership) and directly
holds at least 25% of the capital of the paying company.
It should be taken into account that such rates are based on the DTT applicable as of 1 January
2011, whilst other rates have been applicable in the past.
The rate of 5% will apply if the beneficial owner is a company that directly holds at least 25% of the
voting power of the company paying the dividends.
The rate of 5% is applicable only for the right to use cinematograph films.
Rate of 5% applies to loans not incorporated into negotiable instruments and granted bybanks.
A rate of 5% is applicable to shareholders of 25% and above.
The rate is 5% applies if the royalties consist of payments of any kind received as a consideration
for the use of or the right to use any copyright of literary, artistic, or scientific work, including
cinematograph films.
Exemption (0 rate) applies to payments of any kind received as a consideration for the use of, or
the right to use, any copyright of literary, artistic, or scientific work including cinematograph films and
films or tapes for television or radio broadcasting.
Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness) received from
sources within Greece by a resident or corporation of the United States (US) not engaged in trade or
business in Greece through a PE therein, shall be exempt from Greek tax but only to the extent that
such interest does not exceed 9% per annum; but such exemption shall not apply to such interest
paid by a Greek corporation to a US corporation controlling, directly or indirectly, more than 50% of
the entire voting power in the paying corporation.
The 5% rate is applicable if the royalties consist of payments of any kind received as a consideration
for the use of industrial, commercial, or scientific equipment, and the 10% rate is applicable for all the
other cases.
The 8% rate is applicable when the beneficiary of the interests is a bank or a financial institution, 10%
rate is applicable for all the other cases.
Exemption (0 rate) applies to copyright royalties and other like payments in respect of the
production or reproduction of any cultural or artistic work (but not including royalties in respect
of motion picture films nor royalties in respect of works on films or videotapes or other means of
reproduction for use in connection with television broadcasting).
In general, it should be noted that certain DTTs may include specific clauses in specific
cases that are not all captured in the table; therefore, a careful review of each DTT is
highly advisable.
Tax administration
Taxable period
The taxable period is the calendar year, which may end either on 30 June (for legal
persons or legal entities keeping double entry books) or 31 December. The taxable year
should not, in any case, exceed 12 months.
The exceptional case of closing the accounting period, for income tax purposes, at a
date other than the 31 December or 30 June is limited only to Greek legal entities/other
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entities that are directly or indirectly owned at a percentage exceeding 50% by foreign
legal entities/other entities.
Tax returns
CIT returns of Greek SAs, limited liability companies (LLCs), and branches of foreign
companies are filed on a special form by the last day of the sixth month following the end
of the tax year.
Tax returns are required to be submitted electronically.
The CIT return constitutes the basis for the direct assessment of tax, which arises without
a further action by the tax administration, simultaneously with the submission of the tax
return by the taxpayer.
The taxpayer also has the right to amend the tax return by paying the respective difference
in tax or by establishing ones rights for a refund of tax paid in excess according to the
amended tax return.
Moreover, the taxpayer may request the issuance of a corrective tax assessment act in case
of filing an amending tax return for which an administrative assessment tax act has been
issued, and the tax administration is obligated to issue such corrective tax assessment if
the amending tax return is accepted.
Payment of tax
CIT and tax prepayment (80% [100% for banks operating in Greece] of the current years
CIT less tax withheld at source) based on the tax return are paid in eight equal monthly
instalments, the first of which should be paid upon filing.
For newly established companies, the pre-payment is reduced to 50% for the first three
years of operations.
Tax audit process

Tax audit procedures
The tax audit commences with the issuance of an audit order for tax open years, usually
not more than five. The order concerns the audit of all tax issues (CIT, VAT, WHT, capital
gain tax, etc.). The duration of the audit may vary from a few weeks to a few months, in
certain cases.
The tax administration performs a tax audit from its offices on the basis of the financial
statements, tax returns, and other documents that are submitted by the taxpayer, as well
as the documents and information in its possession.
The performance of a complete on-site tax audit must be notified to the taxpayer by a
previous written notification. A complete on-site tax audit is performed without prior
notification in cases where indications of tax avoidance exist.
The tax administration may have access to the books and records and to other documents
of the taxpayers, as well as to the receipt of copies thereof. The tax administration has
the same rights with regard to books and records that are kept electronically. It is noted
that the legal entity subject to keeping books and records must maintain these books and
records for at least five years.
An extension of the on-site tax audit may be granted once for six months, as well as for
another six months in extraordinary cases.
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The right for a new audit of a tax period already audited is provided only in case new data
arises that affects the calculation of the tax liability. New data is defined as all data that
could not have been known to the tax administration upon the commencement of the
original tax audit.
The election of the cases subject to audit will be made on the basis of risk analysis criteria.
Exceptionally, cases may be elected on the basis of other criteria, according to a decision of
the General Secretary of Public Revenue.
The tax administration may use the following audit techniques for the indirect
determination of the taxable basis:

The proportionality principle.

The analysis of the liquidity of the taxpayer.
The net position of the relation between the sales price to the total turnover.
The amount of bank deposits and expenses in cash.
The procedure of notification of the taxpayer of the results of the tax audit is provided.
More specifically, a temporary corrective assessment of tax is issued in case a
differentiation of tax arises on the basis of the tax returns of the taxpayer and the results
of the audit.
Following the submission of such decisions and within 20 days from the receipt of the
notification thereof, the taxpayer may submit its views in writing, whilst after that point a
final corrective assessment of tax sheet is issued, which is notified to the taxpayer.
Audit Authority for Taxpayers with Great Wealth
The special audit authority Audit Authority for Taxpayers with Great Wealth, competent
for the whole Greek territory, performs provisional, temporary, and ordinary tax audits,
as well as the audit of real estate property and of the annual expenses of individuals. The
audit of foreign real estate companies not disclosing their ultimate beneficiary individuals
and of Greek real estate companies in which a foreign legal entity participates without
disclosing the ultimate beneficiary individuals are also assigned to the Audit Authority
for Taxpayers with Great Wealth. Moreover, the Audit Authority for Taxpayers with
Great Wealth is also competent for the certification and enforced collection of revenue of
taxpayers with great wealth.
Audit Authority for Large Enterprises
The Audit Authority for Large Enterprises is responsible for the performance of ordinary
audits of taxpayers with annual gross income exceeding EUR 25 million for the fiscal year
closing within 2009, of affiliated enterprises drafting consolidated financial statements
irrespective of their gross income on the condition that the gross income of at least one of
the affiliated enterprises exceeds EUR 25 million for the fiscal year closing within 2009,
and unaudited cases prior to any business restructuring effected until 2011 irrespective of
the gross revenues and the competent tax authority responsible for the taxation of their
income on the condition that the company or any of the companies resulting from the
business restructuring falls within the ambit of the Audit Authority for Large Enterprises.
The Audit Authority for Large Enterprises is also competent for the enforced collection of
revenue of large enterprises located in the whole Greek territory.
Following the audit and the notification of tax audit findings, the company may in turn:
File a petition before the special administrative procedure (out-of-court settlement
procedure) before the Directorate for Dispute settlement of the tax administration in
case of an explicit or silent, even negative, rejection of the reservation by the General
Secretary of Public Revenue, with the claim of reviewing the tax assessment act, in case
the content of the tax assessment act is questioned within a deadline of 30 days from
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the notification of the act or the realisation of the failure. The direct filing of a petition
before the competent administrative courts against acts of the tax administration is
inadmissible. Exceptionally, the direct petition before the competent administrative
courts against a preventative tax assessment act is permitted (challenging the
fulfilment of the conditions for issuing this act) (article 35, par.1).
Take the case to court (filing of a recourse). The first decision normally takes two to
three years and another six to eight years until a decision by the Court of Appeal and
Supreme Court is issued. There are several measures being currently implemented in
an attempt to reduce this time.
There is also a possibility to take the case to a Fiscal Arbitration Body. The Fiscal
Arbitration Body is competent to arbitrate over dispute resolution arising from tax
assessments exceeding EUR 150,000, by filing an application and subject to the consent
by the Minister of Finance. The commencement of operation of the Fiscal Arbitration
Body is to be determined by a Presidential Decree to be issued following the suggestion
of the Ministers of Finance and Justice; to date (April 2014), such Presidential Decree
has not been issued.
Criminal sanctions are also imposed on the companys representative under certain
conditions, which are waived in the case of settlement on the amount of taxes assessed.
Tax auditors practice
In the past, complexity of the Greek tax legislation and the vagueness of its requirements
enabled the tax auditors to dispute either the companys results reflected in its accounting
records or to disallow expenses. This is true in all tax audits and, in spite of companies
endeavours to comply with the tax requirements, tax audits have always resulted in
assessment of additional taxes and penalties.
The amount of additional taxes depends mainly on the following:

Companys vulnerability because of nature of business and transactions.

Taxes already paid on the basis of the companys income tax returns.
Profits declared by competitors.
Weaknesses and shortcomings that the tax auditors might reveal, if a full audit is
carried out.
In respect of deductible expenses, the legislation prescribes, among other requirements,

that such expenses must be realised for the benefit of the company or in its ordinary
course of normal business activity to represent, a valid transaction at a value that is not
over or under the market value based on the data available by the tax administration,
properly recorded in the companys books in the respective period to which they relate,
and can be evidenced by appropriate documentation, without defining what a business
expense is. Consequently, the tax auditors dispute the deductibility of various items
arguing that, in their opinion, they are not contributing to the companysbusiness income.
Greek SAs and LLCs whose annual financial statements are subject to a statutory audit
by individual Certified Auditors and audit firms are required to obtain an annual tax
certificate from their certified auditors upon the completion of a tax audit conducted,
confirming compliance with Greek tax legislation. The tax audit is conducted on specific
tax areas as defined by a special audit program issued by the Ministry of Finance in
cooperation with the Committee of Accounting Standardization and Auditing (ELTE).
The audit program will be updated annually and is in accordance with the provisions of
International Standard on Non-Audit Assurance Engagements 3000.
The tax administration may issue an administrative, estimated, or corrective tax

assessment within five years from the end of the year in which the deadline for filing the
respective tax return lapsed.
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This five-year prescription period may be extended for one year if:
the taxpayer files an initial or amending tax return within the fifth year of the
prescription period
an application for the granting of information from a foreign state has been filed
and commences from the date of the receipt of the respective information by the tax
authority, or
an out-of-court settlement petition/judicial appeal/petition has been filed and
commences from the issuance of a decision that is not subject to petition/appeal.
Exceptionally, for cases of tax avoidance, the tax administration has the right to issue an
administrative, estimated, or corrective tax assessment within 20 years from the end of
the year in which the deadline for filing the respective tax return lapsed.
In case of a corrective tax assessment resulting in an amendment of the tax assessment
act for a year for which the prescription period of the states right to audit has lapsed, the
adaptation is made to the last year for which said right has not been prescribed.
Other issues
The main differences between a subsidiary (i.e. SA or LLC) and a branch of a company
from the law/establishment perspective are as follows:
A subsidiary is a separate legal entity from its parent company, whereas a branch does
not form a separate legal entity, does not have its own shareholders, and consequently
the funds needed for its operation are transferred from the overseas parent company.
The parent company of a branch must be either the equivalent of a Greek SA or an LLC,
whereas there is no such restriction for subsidiaries.
The day-to-day management of a branch is exercised by the legal representative, a
person appointed by the parent company, whereas an SA is represented by itsBoD and
an LLC is administered and directed by the administrator(s).
No minimum capital is required for the establishment of a branch or LLC; nevertheless
the share capital of the parent company should be at least EUR 24,000 if it is an SA.
An SA appears to be a more prestigious type of company than a branch and an LLC.
This has a mainly psychological effect. Certain investors still tend to opt for the
establishment of an SA company, particularly if they would like to participate in public
tenders, etc.
The main legal differences between an SA and an LLC in Greece from a company law/
establishment perspective are as follows:
An SA is managed by a BoD consisting of at least three members, whereas an LLC can
be managed by only one individual, the administrator (legal entities are permitted
to be appointed as BoD members or administrators). Both BoD members and
administrators have to acquire a Greek tax registration number and a Greek residence
permit before the establishment of the companies. Obtaining a residence permit for
non-EU citizens is a time consuming procedure.
The shareholders of an SA are not required to be registered with the Greek tax
authorities, whereas the partners of an LLC have to be registered with the Greek tax
authorities and this may prove to be a time consuming procedure.
An SA is established by virtue of registration or approval (in case the companys share
capital is higher than EUR 3 million as well as in special cases) of the notarial deed
that embodies the companys Articles of Association (AoA). The announcement of the
Ministry of Development, containing a summary of the AoA, must be published in the
Bulletin of Societes Anonymes and Limited Liability Companies of the Government
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Gazette. Generally, the registration of a SA requires approximately one to two working
days after submission of relevant documentation. However, the time period may be
extended to ten working days, in the case that a special approval by the Ministry of
Development is required. Whereas an LLC is established by a notarial deed, which
incorporates the companys AoA, filed with the relevant authority (Registry with the
Court of First Instance). A summary of the AoA must be published in the Bulletin of
Societes Anonymes and Limited Liability Companies of the Government Gazette. Such
registration usually takes three to five working days after the signature of the notarial
deed.
An SA company is supervised by the Greek Ministry of Development (Prefecture),
which necessitates certain filings to be performed (e.g. minutes of BoD, general
announcements, financial statements). Whereas, at least at this stage, no supervising
authority exists for an LLC and thus its filing requirements are lessrestrictive.
The Private Company (PC)

The PC constitutes a legal entity and is commercial in nature, even if its object is not
per se commercial. The capital of the PC can be freely determined by the partners and
can amount to zero, whilst its partners participate in the PC by means of capital, noncapital, and guarantee contributions.
The PC is not entitled to acquire, either directly or indirectly, its own capital parts.
The PC has its registered seat in the municipality referred to in its AoA, while the
transfer of the registered seat of the PC in another country of the European Economic
Area does not necessarily result in the dissolution of the PC, provided that the recipient
country recognises the transfer and the continuity of legal personality. The PC is not
obligated to have its actual seat in Greece, whilst the PC is capable of establishing
various types of secondary establishments either in Greece or abroad.
The term of the PC is definite; if not otherwise stipulated in the AoA of the PC, the PC
has a term of 12 years following its establishment.
The PC is administered and represented by one or more administrators.
The administrator represents the PC and conducts in its name all actions pertaining to
the administration of the PC, the management of its assets, and, in general, the pursuit
of its objects. Actions of the administrator, even if falling outside the corporate objects,
bind the PC vis--vis third parties, unless the PC proves that the third party knew or
ought to have known the violation of the companys objects.
The provisions of One Stop Shop Authority are accordingly applied to the
establishment of the PC. The establishment of the PC is effected by means of registering
the PC with the General Electronic Commercial Registry (GEMI).
The PC drafts: (i) the balance sheet, (ii) the profit and loss account, (iii) the
appropriation account, and (iv) the appendix incorporating all required information
for the comprehension of the financial statements, as well as the report of the
administrator in relation to the corporate activity for the ending fiscal year.
The PC is dissolved: (i) at any time following a resolution of the partners, (ii) when
its definite term has expired, unless the term of the PC is extended by virtue of a
resolution of the partners, (iii) if the PC defaults, and (iv) in all other circumstances
contemplated by the law or the AoA.
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Greenland
PwC contact
Tobias Stein
Strandvejen 44
DK 2900 Hellerup, Denmark
Tel: +45 3945 9452
Over the last 12 months, the only change to corporate tax was the abolition of a seldomused loss carry back rule. However, some significant changes are on their way.
The Greenlandic Mineral Resources Authority (MRA) recently sent a draft Strategy
Report for the oil and mineral business for 2014 through 2018 (currently only issued in
Danish and Greenlandic) into hearing. The hearing process ended on 7 February 2014.
Subsequently, the final strategy will be presented to the Greenlandic government later
this year.
According to the proposed Strategy Report, all companies with mineral exploration
licences (current and future) will be required to pay a government royalty as a condition
for grant of a production licence.
Regarding future exploration licences for oil companies, changes to the tax system are
proposed. Currently, oil companies are supposed to pay a corporate tax of 30% and/
or dividend withholding tax (WHT) of 36%, pay a surplus royalty of 7.5%, 17.5%,
and 30%, which should be paid when the internal rate of return exceeds, respectively,
21.75%, 29.25%, and 36.75% plus the official Danish discount rate, and carry the
state-owned company with 12.5% (open door area 8%). It is now proposed to change
the system and add a gross royalty of 2.5% and change the basis for the surplus royalty
rate from profit exceeding internal rate of return to a payback method. Consequently,
according to the draft report, oil companies will, in the future, pay a surplus royalty of
7.5%, 17.5%, and 30%, which should be paid when the accumulated turnover exceeds
the accumulated costs by 35%, 45%, and 55%, respectively. The state participation will
be reduced to 6.25%.
The Strategy Report says that it is not directly possible to change the tax structure for
existing oil licences. This might be because of the way the oil exploration licences are
drafted compared to the existing mineral licences.
After the new government was established in April 2013, the mining companies in
Greenland have, in their negotiations for production licences, been met with demands
for paying a higher part to the government than expected when the exploration licences
were issued. When they received the exploration licences, it was only expected that they
should pay corporate tax and WHT on dividends. Now, it is proposed in the Strategy
Report for 2014 through 2018 that mining companies shall pay a gross royalty of 5%
based on turnover (for some minerals a bit different) on future licences. Apparently,
this is not only for licences awarded in the future but also, to some extent, for mining
companies with existing exploration licences in order for them to obtain a production
licence.
Since these changes will be implemented predominantly through licence terms rather
than legislation, it is not entirely clear when and to what extent the changes will be
finally implemented.
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Greenland
Greenlandic companies are taxable to Greenland on their worldwide income, except
for income from real estate outside of Greenland, which is exempt. Very few double tax
treaties (DTTs) offer relief since Greenland only has DTTs covering corporate tax with
Denmark, the Faroe Islands, Iceland, and Norway.
The corporate tax rate is 30% for both Greenlandic and foreign companies. On top of the
corporate tax there is a surcharge of 6% of the corporate tax payable, and the effective
corporate tax rate is therefore 31.8%. Oil and mineral licence holders are exempt from
the 6% surcharge according to current practice.
There are no industry-specific or special-tax regimes in Greenland. However, it is
determined in all oil exploration licences that oil licensees pay a so-called surplus
royalty on top of the corporate tax. In the current oil licences, the surplus royalty rates
are in three tiers of 7.5%, 17.5%, and 30% when the internal rate of return exceeds
21.75%, 29.25%, and 36.75% plus the Danish discount rate, respectively. If the basis for
surplus royalty is negative and never has been positive, the loss is carried forward with
an addition of 21.75%, 29.25%, and 36.75%, respectively, plus the Danish discount rate.
The surplus royalty is deductible from the corporate tax.
Changes to the surplus royalty system have been proposed, but not yet enacted. Please
refer to the Significant developments section for a discussion of the proposed changes.
Local income taxes
There are no local corporate income taxes or similar charges in Greenland.
Corporate residence
A corporation is resident in Greenland for tax purposes if it is registered in the Danish
Companies Register with its principal seat of business in Greenland or if it has its
effective seat of management in Greenland. The effective seat of management is
typically the place where the management decisions concerning the companys day-today operations are made.
Non-resident companies are liable to tax in Greenland on business profits derived trough
a PE in Greenland. Generally, Greenland may be assumed to rely on the principles of the
Organisation for Economic Co-operation and Development (OECD) model tax treaty
in the determination of whether a PE exists. There is virtually no published practice on
the issue. Apart from income from a PE, foreign companies are tax liable on income in
connection with the exploration and exploitation of oil, gas, and minerals, regardless of
whether a PE exists. This includes all activity ultimately serving the extractive industries,
including all kinds of subcontractors and service providers to the industry.
Other taxes
There is no VAT in Greenland.
Import duties
There are no general import duties on operating equipment in Greenland. However, if

present in Greenland for more than an eight months period, operating equipment has to
be declared to the Greenlandic tax authorities for statistical purposes. There are import
duties on some assets, such as cars, etc.
Greenland
747
Greenland
However, import duties may be imposed on construction equipment in the near future.
This is currently being discussed, and a bill might be proposed to the Greenlandic
Parliament during the spring.
There are also import duties on alcohol, cigarettes, food products, etc. The fares vary
depending on the exact goods in question.
Excise duties
There are Greenlandic excise duties on fishing of some fish species, alcohol produced
in Greenland, lottery and gambling activities, motor vehicles, and various other excise
taxes. The duties depend on the exact circumstances.
Property taxes
There are no property taxes in Greenland.
Stamp taxes
Stamp tax is payable on a few documents, such as a deed of transfer of real estate and
ships (1.5% of the transfer sum), including on transfer of shares in companies that own
ships.
Capital gains taxes
There are capital gains taxes on receivables, equity instruments, real estate, financial
contracts (derivatives), and depreciable assets, including oil, gas, and mineral licences.
The tax rate is identical to the general corporate tax rate, effectively 31.8% (30% for oil,
gas, and mineral licence holders).
Losses on financial instruments may only be deducted from gains on financial assets.
Employers are obligated to pay 0.9% of all paid wages and salaries as social security
contribution.
All Danish, Greenlandic, and Faroese employers are subject to Danish social security
payments (ATP). This applies to both foreign and Danish employees. However, foreign
employees are exempt unless they are working in Greenland for more than six months.
Foreign employers are exempt from ATP unless they employ Danish employees who are
not residents in Greenland.
Branch income
Greenlandic PEs of foreign companies, and taxable income connected to oil, gas, and
mineral activities, are taxed under the same rules and rates as Greenlandic resident
companies. There is no branch profits remittance tax or other similar tax on branch
profits. As a branch is considered to be the same legal entity as the headquarters, interest
paid from the branch to the headquarters is not tax deductible.
Unusually, if one foreign company has more than one location or PE in Greenland, these
are treated as separate taxable entities with no possibility of consolidation.
Taxable income generally is calculated as income determined for accounting purposes,
which is adjusted and modified for several items as prescribed by the tax laws. One
typical timing difference is depreciation.
748
Greenland
Greenland
Inventory valuation
There are no formal rules about inventory valuation in Greenland. Generally, inventory
is valued at acquisition cost according to a first in first out (FIFO) principle.
Capital gains
Capital gains are subject to capital gains taxes. See Capital gains taxes in the Other taxes
Dividend income
Income from dividends is generally included in taxable income. There is no relief, such
as participation exemption or the like, meaning that any form of Greenlandic holding
structure is generally inefficient. Dividends from foreign companies, however, are tax
free, provided that the recipient holds at least 25% of the shares in the distributing
company for at least one year.
Interest income
Interest income is generally included in taxable income.
Rental income
Rental income is generally taxable in Greenland; however, rental income from real
estate located outside of Greenland is not taxable.
Royalty income
Royalty income is taxable in Greenland.
Partnership income
Partnership income is treated similarly to other income. Partnerships are generally

fiscally transparent.
Unrealised gains/losses
Unrealised gains/losses are not taxable in Greenland. Greenland does not use a mark-tomarket principle on capital gains.
Stock transactions
Gains and losses on equity transactions are taxable.
Foreign currency exchange gains/losses
Foreign exchange gains/losses are taxable in Greenland if realised; however, only

foreign exchange gains/losses on receivables are taxable, not on debentures.
Foreign income
Greenlandic companies are taxable to Greenland on their worldwide income, except for
certain income relative to foreign real estate; consequently, income from foreign PEs is
taxable to Greenland.
The income of a foreign subsidiary may be taxed in the hands of its Greenlandic parent
company if the subsidiary constitutes a controlled foreign company (CFC). See Controlled
foreign companies (CFCs) in the Group taxation section for more information.
Deductions
The general deduction scheme is fairly normal, although the Greenlandic Tax Agency
seems to have a restrictive view of the kinds of expenses that are deductible. One very
unusual feature is that dividends paid are deductible for the distributing company.
Greenland
749
Greenland
Tax depreciation is not required to be in coherence with book depreciation.

Operating assets can be depreciated by 30% a year on a declining-balance basis, ships
and aeroplanes can be depreciated by 10% on a straight-line basis, and buildings and
installations can be depreciated by 5% on a straight-line basis. Oil and mineral licences
can be depreciated over 10 years (oil) and 4 years (minerals) on a straight-line basis. If
the lifetime of the licence is shorter than 10 or 4 years, the licences are depreciated over
the lifetime of the licence on a straight-line basis.
Depreciation allowances that are recaptured as part of a capital gain on the sale of an
asset generally are fully taxable.
Unusually, companies are allowed a depreciation relief corresponding to gains on
divested depreciable assets; however, this rule may not reduce the companys income
to less than zero (or less than the balance of depreciable assets in the case of operating
assets).
Goodwill
Goodwill can be depreciated as an operating asset (i.e. by 30% on a declining-balance

basis).
Start-up expenses
No specific rules in Greenlandic tax law govern the treatment of start-up expenses.
Instead, these expenses are treated according to general tax law.
Interest expenses
Interest expenses are generally deductible under Greenlandic tax law. However there are
some limitations (see Thin capitalisation in the Group taxation section).
Bad debt
Companies can deduct losses on bad debt for Greenlandic tax purposes only to the
extent the losses are realised. Note that there is a high threshold for when a loss is
deemed to be realised.
Contributions to charity are not deductible for Greenlandic tax purposes.
Pension expenses
Pension expenses are deductible as operating expenses.
Payments to directors
Payments to directors are deductible as operating expenses.
R&D expenses may be deductible or not, depending on whether they are deemed
operating expenses or capital expenses.
There is no published practice on the deductibility of bribes, kickbacks, return

commissions, and the like. In Danish and Greenlandic practice, illegal payments are
generally not deductible. Since 2008, any bribery payments, whether in or outside
Greenland and whether towards a national or international authority, have been a
criminal offence. Consequently, it may reasonably be inferred that no such payments are
deductible.
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Greenland
Greenland
Fines and penalties
Fines and penalties are not deductible for Greenlandic tax purposes.
Taxes
Income taxes are, in general, not deductible for corporate tax purposes. Excise duties are
deductible.
A highly unusual item is that dividends distributed are deductible in the hands of the
distributing company. If a decision to distribute is made before the deadline for filing
the income tax return (1 May) on the basis of the preceding years profits, the deduction
may be carried back into the preceding year.
Tax losses can be carried forward for up to five years. However, oil and mineral licence
holders can carry losses forward indefinitely.
Tax losses may not be carried back and utilised in previous income years.
Tax losses are forfeited at significant change of ownership or, unusually, activity of the
company. Dispensation is available. Significant is interpreted as 30% of ownership
rights.
A Greenlandic corporation can claim a deduction for royalties, management fees, and
similar payments made to foreign affiliates, provided that such amounts are made on
an arms-length basis and reflect services received. Interest at normal commercial rates
paid to foreign affiliates generally will be allowed as a deduction but is subject to thin
capitalisation (see Thin capitalisation in the Group taxation section).
Group taxation
Joint taxation is not possible in Greenland.
Transfer pricing
Greenlandic transfer pricing rules apply to transactions between related parties (e.g.
intra-group transactions). The rules apply when a company or person directly or
indirectly owns at least 50% of the share capital or 50% of the voting rights in another
company.
Companies are obligated to disclose in the annual tax return certain information
regarding type and volume of intra-group transactions. There is currently no practice
regarding requirements for transfer pricing documentation.
Thin capitalisation
Greenland limits interest deductions according to the thin capitalisation rule. This rule
works to disallow gross interest costs and capital losses on related party debt to the
extent the overall debt-to-equity ratio exceeds 2:1. Related party debt is defined so as to
include external bank debt if group member companies or shareholders have provided
guarantees to the bank. This rule does not apply if the controlled debt is less than 5
million Danish kroner (DKK).
According to the Greenlandic CFC rules, a Greenlandic company has to include in its
taxable income the CFC income of a foreign subsidiary if all of the following criteria are
met:
Greenland
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Greenland
The Greenlandic company, alone or together with other group companies, individual
owners, and/or their next of kin, controls the foreign company.
During the income year, the subsidiarys financial assets, on average, make up more
than 10% of the subsidiarys total assets.
The foreign company is taxed substantially lower than under Greenlandic taxation.
There is no black or white list that exempts subsidiaries resident in certain countries.
CFC income is defined in some detail and includes a broad spectrum of passive and
financial income.

There are no tax credits or tax incentives in Greenland in general. However, current oil
licence holders do, in their surplus royalty basis, qualify for an extra deduction in their
capital and operating expenditure of 21.75%, 29.25%, and 36.75%, respectively, plus
the Danish discount rate, provided that the surplus royalty basis never has been positive.
This is akin to the so-called uplift known to other oil tax regimes.
It is also possible for mineral licence holders to get a tax holiday from the corporate tax.
However, this is only possible if the corporate tax is replaced entirely by other forms of
fiscal levies or duties, which provide the Greenlandic government with at least the same
income as the corporate tax would have done.
Foreign tax credit
According to Greenlandic tax law, relief is generally available to credit foreign tax paid
on non-Greenlandic source profits against the Greenlandic tax on the same profits. If
relief is offered by treaty, the level of relief is capped at the level offered by the treaty.
There are only treaty provisions to this effect with Canada, Denmark, the Faroe Islands,
Iceland, and Norway.
Withholding taxes
Greenland has the following WHTs:
Dividends: 36% to 44%, depending on the local municipality (may be reduced by
treaty). It should be noted that paid dividends are deductible in the corporate tax
base.
Interest: There is no WHT on interest.
Royalty: 30% (may be reduced due to treaty reduction).
Treaty rates are as follows:
Recipient
Denmark
Faroe Islands
Iceland
Norway
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Greenland
Dividends (%)
35
No relief (44% to 46%)
35
35
Interest (%)
0
0
0
0
Royalties (%)
10
25
15
10
Greenland
Tax administration
Taxable period
The taxable period is the calendar year. Permission can be granted to use a 12-month
period other than the calendar year, provided that the period starts on the first day of a
calendar month.
Tax returns
Tax returns are completed on the basis of audited financial accounts with adjustments
for tax. Tax returns should be filed no later than four months following the end of the
income year, meaning 1 May for companies using the calendar year as the income year.
The tax system, in practice, is based on self-assessment. Tax assessments are made by the
tax authorities on the basis of the tax return.
Payment of tax
The corporate tax is due for payment by 20 November of the following year. Greenland
does not have an on account tax system, so there are no advantages in paying the tax
prior to this date.
Tax audit process
Tax audit is a rather informal procedure, whereby questions for clarification and/
or documentation may be asked by the Greenlandic Tax Agency. There are few rules
governing audit other than statutory limitation rules.
The general statute of limitations is 31 October in the fifth calendar year after that of the
end of the relevant income year.
There does not seem, presently, to be particular focus areas of the Greenlandic Tax
Agency, and none have been publically announced.
Greenland
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Guatemala
PwC contact
Edgar Mendoza
6a calle 6-38 Z.9
Edif. Tivoli Plaza
4to Nivel
Guatemala City, Guatemala
Tel: +502 2420-7800 ext. 844
On 21 December 2013, Decree 19-2013 entered into force, which introduced
amendments to Decree 10-2012 (Tax Modernization). The most significant amendment
is with regards to the transfer pricing provisions, which have been delayed and will not
enter into force until 2015.

The tax system of Guatemala is a unitary system, whereby income of all kinds, other
than capital gains, is lumped together and subject to a single tax. The components
of gross income subject to tax are usually business income, interest, dividends, rent,
salaries, and services. Companies are subject to income tax only on their Guatemalasource income. Dividends and other income payable abroad are taxed separately by way
of withholding taxes (WHTs).
For income tax purposes, there are two main systems that taxpayers may subscribe to:
the system on earnings from lucrative activities and the simplified optional system on
income from lucrative activities. The taxpayer chooses what system the company is
registered at. Once a system is chosen, it cannot be modified until the next tax period.
The request for the modification must be requested before the tax authorities at least
one month prior to the new tax period.
These systems are explained below.
System on earnings from lucrative activities
Under the system on earnings from lucrative activities, the tax is determined and paid at
the end of each quarter, without prejudicing the end-of-period final tax liquidation. The
tax rate is 28% on net income for 2014 (previously 31%) and 25% for 2015.
This system allows taxpayers to deduct costs and expenses incurred during the period,
according to requirements established by law.
Simplified optional system on income from lucrative activities
Under the simplified optional system on income from lucrative activities, the tax is
payable under flat tax withholdings (the tax is to be retained by either the customer or
the recipient of services) or by direct remittances to the tax office made monthly within
the first ten working days of the month following the invoice date. The tax rate for 2014
is 5% on gross income that ranges from 0.01 Guatemalan quetzales (GTQ) to GTQ
30,000 and 7% on the excess (previously 6%).
Local income taxes
There are no specific state or provincial government taxes on income other that the two
systems previously described.
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Guatemala
Guatemala
Corporate residence
The place of incorporation determines corporate residence. Entities incorporated
under Guatemalan laws are required to have their fiscal and corporate residence in
Guatemalan territory.
PE includes activities conducted in the country in a continuous manner, either in a

fixed business place or facilities conducting work of any kind, except for insurance and
refinancing activities, brokers, independent agents, etc. acting in the normal turn of
events.
Other taxes
A 12% VAT is levied on the sale or transfer of merchandise and on non-personal services
rendered or effected in Guatemala. The tax is payable to the government by way of the
invoice method, whereby the tax charged to the customers is offset by the VAT paid over
purchases, and the government collects the net resulting amount. The issuance and
circulation of credit titles is VAT-exempt.
Sale of goods
The taxable amount on the sale of goods includes the sales price, less any discounts
provided under sound commercial practices, plus other charges shown on the invoice.
Services
The taxable amount of services includes the price of the service, less any discounts
provided under sound commercial practices, plus financial charges and products used to
render the services.
Imports and leases
The tax base for imports is the value declared for import duties computation purposes.
The tax base for leases of movable or immovable property is the value of the lease.
Exempted sales and services
The following items are exempt from VAT:

Importations made by:
cooperatives legally constituted as registered on imported machinery, equipment,
and other goods relating to the activity or service of thecooperative
individuals and juridical entities under temporary importation regulations, and
diplomatic and consular missions accredited before the Guatemalan
government.
Banking institution services and their agents.
The issuance, circulation, and transfer of credit bonds, value bonds, and stocks of
anykind.
Interest accrued by credit bonds and other obligations issued by mercantile
partnerships, negotiated through an authorised stock exchange.
Exports of goods and services.
Contributions and donations to educational, cultural, assistance, or security service
partnerships, constituted as not-for-profit entities.
VAT return
The amount payable to the Superintendencia de Administracin Tributaria (SAT),

Guatemalas tax authority, is the difference between the debits and credits accrued
Guatemala
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Guatemala
during the tax period (one month) and is paid monthly by filing a tax return in the
following calendar month at the end of each tax period.
Refunds of VAT
The VAT credit can be claimed on monthly, quarterly, or semiannual tax periods. The
refund of VAT credit corresponds to exporter taxpayers who cannot offset the VAT credit
with VAT debts.
In addition, the VAT credit can be claimed by those taxpayers who have a high
percentage of sales to entities exempt from VAT.
Import duties
The Customs Duties on Imports (DAI) are contained in the Central American Tariff
System (SAC), which contains the tax rates applicable to goods imported into the
Guatemalan Territory, ranging from 0% to 20%.
The import duties apply to the customs value declared by the importer.
Excise taxes
Excise taxes are applicable to specific activities, such as Fuel Distribution Tax, Alcohol &
Beverages Distribution Tax, and Tobacco Distribution Tax.
Real estate tax
Real estate taxes are assessed annually at GTQ 2 per thousand on declared property
values of from GTQ 2,000 to GTQ 20,000, at GTQ 6 per thousand on values from GTQ
20,000 to GTQ 70,000, and at GTQ 9 per thousand on values in excess of GTQ 70,000
(e.g. property valued at GTQ 1 million will pay real estate taxes of GTQ 9,000).
Transfer of property
VAT is payable on the first sale of real estate, and subsequent sales are taxed under the
stamp tax regime.
Stamp taxes
Other than sales invoices, contracts, and documents subject to VAT, and other minor
exemptions, a stamp tax must be paid on all documents covering commercial and legal
transactions (e.g. collection of dividends), either by preparing the document on papel
sellado, which is special stamped paper, or by affixing stamps on the documents. This tax
is also assessed on documents issued abroad, other than drafts or promissory notes and
commercial invoices from foreign suppliers. Letters of credit and acceptances involving
international transfers of funds are generally exempt from stamp taxes.
The normal tax rate is 3% and is calculated on the face value of the documents or on the
gross value of the related transaction.
The stamp tax on dividend payments or credits has been repealed, and a 5% income tax
should be paid on dividend payments or credits in account equity.
Solidarity tax (Impuesto de Solidaridad or ISO)
The ISO tax rate of 1% is assessed on the net assets of a corporation, or on the gross
income of a corporation, whichever is higher, and there is no limit on the amount to be
paid. Tax paid may be credited against the corporations income tax. If the ISO exceeds
the income tax, no reimbursement is possible.
The tax is to be paid quarterly on the basis of the corporations opening balance sheet for
each fiscal period.
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Guatemala
Guatemala
Corporations contribute 12.67% of their monthly payroll and employees contribute

4.83% of their monthly salary to social security.
Branch income
In Guatemala, branches are taxed as any other legal entity. There are no specific taxes
for branches.
Inventory valuation
For tax purposes, taxpayers are authorised to use any of the following methods for
valuing stocks (i.e. inventory), provided they technically fit the taxpayers business and
are consistently applied:

Cost of production.
Weighted average.
Historical price of assets.
Estimated cost at a fixed price (additional for livestock activities).
Capital gains
The regime of capital income, capital gains, and capital losses is established with the
following tax rates:

Real estate equity income: 10%.

Income from trading movables: 10%.
Capital gains and losses: 10%.
Incomes from lotteries and raffles: 10%.
Capital losses can be netted only against capital gains, up to a maximum of two years.
Dividend income
Dividends earnings and profits are subject to a 5% income tax.
Interest income
All interest income is subject to a 10% income tax.
Foreign income
Foreign-source income received by a domestic corporation is non-taxable under

Guatemalan income tax law, provided that it does not relate to a service or activity
rendered in Guatemalan territory.
Deductions
Taxpayers under the system on earnings from lucrative activities may deduct costs and
expenses from gross income, including the following.
Depreciation
Depreciation is calculated annually using the straight-line method. The tax authority
may authorise a different method on request of the taxpayer. The annual maximum rates
allowed as deductible expenses are the following:
Guatemala
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Guatemala
Asset
Building and improvements
Vehicles
Tools
Tree and vegetable species
Computer equipment
Any other depreciable asset
Rate (%)
5
20
20
20
25
15
33.33
10
Intangible assets
Intangible assets (e.g. goodwill, trademarks, manufacturing processes, patents,

software, know-how) may be deductible under the straight-line method of amortisation
over a period that depends on the conditions of the acquisition or creation of the
intangible asset concerned, and cannot be less than five years. Goodwill actually paid
can be amortised over a period of a minimum often years.
Start-up expenses
Start-up expenses are deductible.
Interest expense
The deduction of interest expense may not exceed the result of multiplying the
interest rate by three times the average net total assets reported by the taxpayer in the
corresponding annual tax return.
Uncollectible accounts
Uncollectible accounts arising in normal business operations can be deducted

individually or, alternatively, via an allowance for doubtful accounts, which shall not
exceed 3% of the debit balances of accounts and notes receivable.
Duly proven donations made to the government, the municipalities, and their agencies,
as well as to duly authorised not-for-profit welfare, social service, and scientific
associations and foundations, universities, political parties, and guild entities are
deductible. The maximum deductible amount for income tax purposes of each period
shall not exceed 5% of the donors net income, up to a maximum of GTQ 500,000 per
year.
Employee pension/retirement funds
The deduction of provisions to establish or increase employee pension and retirement

funds or reserves is allowed, provided the government approves the related plans.
Severance compensation payments
Severance compensation payments are allowed as deductible expenses as well as

limited allocations (not to exceed 8.33% of total annual salaries and wages) to a reserve
for severance compensation. Provisions pertaining to actual liability for severance
compensation per year are also allowed, provided the related plans, based on collective
bargaining agreements, are approved by the employer and employees.
Fines and penalties
Charges, penalties, and interest charged by any government institutions are not
deductible.
758
Guatemala
Guatemala
Taxes
All taxes are deductible, except income tax and VAT when these are not considered as a
cost.
Operating losses may not be carried forward for deduction from otherwise taxable
profits. Guatemalan laws also do not permit carryback of losses.
Deduction for royalties will be allowed, up to 5% of gross income. The deductible

expenses for technical services rendered from abroad shall not exceed 5% of gross
income.
Expenses incurred abroad by non-residents in connection with income earned from
Guatemalan sources cannot be deducted for income tax purposes by merely having
the supporting receipts, as the regulations to the law do not permit such a deduction
for these purposes, unless these expenses are related with the Guatemalan company
operations and these expenses are needed for generating taxable income.
Group taxation
There is no consolidation for tax purposes, as each group entity is treated as an
independent taxpayer that shall file its own tax returns.
Transfer pricing
Note that under Decree 19-2013, the following transfer pricing provisions have been
delayed and will not enter into force until 2015.
From a Guatemalan transfer pricing perspective, the scope of application of the rules of
valuation of transactions between related parties reaches any operation that has been
carried out between a person living in Guatemala with a resident abroad.
Local legislation allows the selection of traditional methods and profit-based methods
consistent with the Organisation for Economic Co-operation and Development (OECD)
guidelines as well as a sixth method applicable to imports and exports.
Advance pricing agreements (APAs) are permitted, and it is also stated that the tax
authority can reclassify activities according to its true nature in accordance with Tax
Code statements.
Thin capitalisation
Thin capitalisation applies regarding deductible expenses for interest paid. The
deductible amount for such costs may not exceed the value of multiplying the annual
maximum simple interest rate determined by the Guatemalan Monetary Board for tax
purposes by three times the amount of average total net assets submitted by the taxpayer
in the annual income tax return.
Average total net assets is defined as the sum of total net assets of the previous year
and total net assets at the end of the year in force (both values must
correspond to the
amounts filed in the annual income tax return of each period of final settlement) divided
by two. Total net assets are defined by law to correspond to the book value of all goods
that are actually the property of the taxpayer.
Guatemala
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Guatemala
Foreign tax credit
Guatemala has no provisions or agreements signed to avoid international double

taxation, and no foreign tax credit is allowed.
Drawback industries (maquila)
The Law of Promotion and Development of Exports Activities and Drawback Industries is
known in Guatemala as maquila. This law seeks to promote, encourage, and develop the
manufacture of products within areas controlled by the Customs Authority for export
to countries outside the Central American region, as well as to regulate exporting and
drawback activities.
The exporter may apply for authorisation to operate under any of the following three
systems provided by the law:
Export under a temporary admission system.
Export under the reimbursement of duties system.
Export under the total added national component system.
Tax incentives and benefits of the law include the following:
Exemption of taxes, import duties, and other charges on imports of machinery and
equipment, including VAT.
Discontinuance of VAT payments on temporary raw material imports.
Exemption of income tax for ten years on profits obtained under this law.
Free Trade Zones Law
The Free Trade Zones Law seeks to encourage and regulate the establishment of free
trade zones that promote domestic development by activities carried out within certain
zones, particularly those that tend to strengthen export activities, generate employment,
and transfer technology.
Tax incentives and benefits of the law include the following:
Import duties exemption.
Income tax exemption as follows:
Ten-year period for the administrative agency.
Ten-year period for industrial & service permit holders.
Five-year period for commercial permit holders.
Exemption of real estate taxes for a five-year period.
Exemption of tax stamps on the conveyance of title over properties.
Dividends or profits distributed by the administrative agency and permit holders shall
also be considered tax-exempted income.
Exemption of custom duties and any other charges on import and consumption of fuel
oil, bunker, butane, and propane gas used exclusively in the free tradezone.
Foreigners working in the free trade zone are subject to the provisions of the
immigration law and the Labour Code.
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Guatemala
Guatemala
Withholding taxes
The following WHT rates apply on payments to non-resident corporations or individuals:
Payment
Dividends, international freight, telecommunications (1), electric energy
Interest (2)
Royalties; salaries; commissions; professional fees; professional, technical,
economic, or financial assessment
Other
WHT (%)
5
10
15
25
Notes
1.
2.
For international news transmission supplied from abroad to local entities, the rate is 3%.
Interests will not be taxed (i.e. no withholding applies) when:
These interests are paid to a multilateral entity.
These interests are paid from a Guatemalan banking or financial entity to a similar entity abroad.
Non-residents can operate in Guatemala with or without PE; accordingly, income tax
treatment depends of the circumstance as follows:
Non-residents with PE will be subject to income tax, choosing one of the two methods
of payment established for residents.
Non-residents without PE will be subject to WHT, applying specific rates according to
the nature of the services rendered.
Tax treaties
Guatemala has no tax treaties in force.
Tax administration
Taxable period
Under the system on earnings from lucrative activities, the annual final tax liquidation
period begins on 1 January and ends on 31 December of each year.
Under the simplified optional system on income from lucrative activities, taxes are paid
on a monthly basis.
Tax returns
Under the system on earnings from lucrative activities, returns are due after the end of
the fiscal period (31 December) but no later than 31 March of each year.
The income tax return shall be accompanied by the documents required by the
regulations, which might include a:

balance sheet
statement of results of operations
statement of cash flows, and
statement of cost of production.
Guatemala
761
Guatemala
Documents must be duly certified by a professional or an independent accounting firm.
The financial statements that accompany the return shall agree with both those recorded
in the financial statements ledger and those destined for publication.
Both the income tax return and exhibits thereto shall be signed by the taxpayers, their
agent, or their legal representative or by any other responsible persons so determined by
this law and the tax code.
Under the simplified optional system on income from lucrative activities, there is an
obligation to file an annual informative tax return, which is due on 31 March of each
year.
Payment of tax
Under the system on earnings from lucrative activities, taxpayers are required to prepay
their estimated annual income tax liability in quarterly instalments. The balance is due
upon filing the return.
Taxpayers may choose one of the following procedures for computing estimated
quarterly tax liability:
Tax on income shown by partial closure of accounts or computation of presumed
liquidation of operations at the end of each quarter.
Tax on 5% of overall gross income earned during the corresponding quarter of the
preceding year (5% of the 30% income tax rate equals 1.5%).
Tax equivalent to one-fourth of the tax paid for the immediately preceding taxyear.
Under the simplified optional system on income from lucrative activities, tax is payable
via flat tax withholdings (the tax is to be retained by either the customer or the recipient
of services) or by direct remittances to the tax office made monthly within the first ten
working days of the month following the invoice date.
Taxes on income are governed by the income tax law, Ley de Actualizacin Tributaria,
and its related regulations. Administration of the law is vested with the SAT.
Taxpayers registered before the tax administration under this system will settle and pay
the tax through the withholding system. Persons or entities obligated to withhold are
those taxpayers who pay or credit into account for the acquisition of goods and services
to the taxpayers registered under this system.
Tax audit process
The tax authorities can request specific information at any moment. If necessary, a tax
audit can be carried out. The tax authorities must formally notify the taxpayer of any
specific adjustments, and the taxpayer has 30 working days to file a response. After
filing the response, the taxpayer will be again be notified by the tax authorities if the
adjustments are confirmed or overturned.
The right of the tax administration to checks, adjustments, corrections, or

determinations of tax liabilities; settle and enforce interest and penalties; and enforce
payment of taxpayers must be brought within four years. In the same period, taxpayers
must exercise their right of recourse for overpaid or unduly charged taxes, interest,
penalties, and fines.
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Guatemala
The tax authorities normally focus on the following:

Deductible expenses.
VAT credits.
WHT.
Capital gains.
Other issues
Accurate and current information regarding taxation in Guatemala is often difficult to
obtain as the country lacks reporting services such as those available in other countries.
It is also difficult to determine how the tax laws will be applied in practice in complex
situations. The laws and regulations are limited and ordinarily cover only the most
common situations. The system of legal precedent resulting from court decisions
is narrowly used, and each issue is resolved by reference to the respective codes.
Guatemala has shown little interest in tax planning, but it is possible to have informal
consultations with the tax authorities and to obtain authoritative rulings in many cases.
Discrepancies between government and management criteria are commonly brought to
judgment by the Constitutional Court, whose binding sentences generally abrogate the
laws in dispute.
Guatemala
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Guernsey, Channel Islands

PwC contact
David Waldron
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port, Guernsey GY1 4ND
Channel Islands
Tel: +44 1481 752081
Guernsey has signed Intergovernmental Agreements (IGAs) with the United States (US)
and United Kingdom (UK) regarding the implementation of the Foreign Account Tax
Compliance Act (FATCA). For further information, please see the Other issues section.
Guernsey has signed tax information exchange agreements (TIEAs) with 55 jurisdictions
and full double taxation agreements (DTAs) with Hong Kong, Isle of Man, Jersey,
Liechtenstein, Luxembourg, Malta, Mauritius, Monaco, Qatar, Seychelles, Singapore,
and the United Kingdom.
The intention to introduce a Share Transfer Duty on Real Property was announced in
the 2013 Guernsey Budget. It has been recognised that Document Duty, a duty levied on
the sale of real property, is being avoided where real property transactions have been
through a corporate vehicle. It is expected that the draft law will be published towards
the end of 2014 and the duty will be in line with the current Document Duty rates.
The Treasury and Resources Department Minister has indicated that the review of the
implementation of a General Sales Tax in Guernsey is on his agenda. However, this is in
the early stages and has yet to be debated by the States of Guernsey.

Resident corporations are liable to tax on their worldwide income. Non-resident
corporations are subject to Guernsey tax on the Guernsey-source income.
Companies pay income tax at the current standard rate of 0% on taxable income.
Income derived from a banking business is taxable at 10%. Banking business is
broadly defined as income that arises as a result of the provision of credit facilities by
any type of company and the utilisation of customer deposits.Income derived from
licensed fiduciaries (with regulated activities), licensed insurers (in respect of domestic
business), licensed insurance intermediaries, and licensed insurance managers isalso
taxable at 10%, with effect from 1 January 2013. Relief is available for eligible expenses
that are allocated against different streams of income.
Any income derived from the exploitation of property located in Guernsey or received by
a publicly regulated utility company is subject to tax at the higher rate of 20%.
Exempt companies
Some collective investment schemes (CISs) and unit trusts may qualify for exempt
status, which will place them completely outside the Guernsey tax regime. In addition,
any body that forms part of, or contributes to, the overall structure of a CIS may claim
exempt company status. This removes doubt in relation to the entities that are involved
764

in the management or support of a CIS qualifying for exempt status. For each year for
which exempt status is sought, a charge of 600 pounds sterling (GBP) is levied.
One of the following conditions, among others, must be met for the company to be
considered exempt:
The company is beneficially owned outside of Guernsey.
No Guernsey-resident individual or company has a beneficial interest in the company
(with the exception of shareholders, loan creditors, or nominees/trustees).
Loans to participators
If a company makes loans with preferential terms to an individual or entity connected

with the company, this will be deemed to be income in the hands of the debtor, and the
creditor company will be required to account for, withhold, and pay the tax. Certain
exemptions apply.
Local income taxes
Guernsey does not operate any local government taxes.
Corporate residence
All Guernsey-registered companies are regarded as tax resident on the island unless
granted exempt company status. In addition, a company will be treated as a resident in
Guernsey (regardless of where it is incorporated) if shareholder control is exercised by
persons resident on the island.
The Income Tax (Guernsey) Law, 1975 defines PE as including:

a branch
a factory, shop, workshop, quarry or building site, or
a place of management.
Note that the fact that a bodys directors regularly meet at a particular place does not, in
itself, make that place a PE of that body.
Other taxes
Guernsey does not operate a VAT or goods and services tax (GST).
In accordance with the European Community (EC) Customs Code and the Implementing
Regulation, Customs Import Duty is liable on all goods arriving in the Customs territory
of the Community. The rates of duty are set by the European Community and are the
same in all countries of the European Community.
The rates vary according to the commodity. Some may be as high as 22% while for other
goods the rate may be free.
The Channel Islands are not within the fiscal territory of the European Union (EU), and,
as such, the Community Regulations that concern excise duties do not apply. Excise duty
is classed as an internal tax.
765

The rates are reviewed annually by the States of Guernsey and set at budget time, which
is usually in November. These cover Guernsey and Alderney, while Sark has its own rates
set by the Chief Pleas.
An additional 15% rate of duty is applicable on some goods originating in the United
States.
Property taxes
Income from Guernsey land and buildings is subject to Guernsey income tax at 20%, no
other property taxes apply.
Transfer taxes
Guernsey does not levy transfer taxes.
Stamp taxes
Guernsey does not levy any stamp duties.
An employer, for the purposes of Social Insurance, is anyone who has employees. An
employee is anyone who is gainfully occupied in employment under a contract of service
in Guernsey or Alderney.
In general, contributions are required from both employer and employee in respect of
any employed person who is over school-leaving age and under 65. Employer social
security contributions are levied on the gross employment income of the employee at
6.5%.
Employer social security contributions for 2014 are calculated on a monthly lower
earnings limit of GBP 554, which is the level of earnings at which an employer becomes
liable for the payment of contributions. The upper limit for 2014, which is the highest
level of earnings on which contributions are calculated, is GBP 11,037 per month.
Branch income
Branch income is taxed in the same manner as companies, at the appropriate rate
according to the activity being undertaken.
No further tax is withheld on the transfer of profits abroad to group companies, provided
no Guernsey-resident individual has an interest in the company.
Inventory valuation
Inventory is valued at the lower of historical cost or net realisable value. Use of last in
first out (LIFO) is not permitted. Generally, there are no material differences between
accounts prepared on a normal accounting basis and those prepared on a tax basis.
Capital gains
Capital gains are not subject to tax in Guernsey.
Dividend income
All dividends paid by a standard tax-paying company (0%) are deemed to have been
paid from income arising after 31 December 2007 (i.e. after the introduction of the
zero/ten tax regime), unless the company elects to have them treated otherwise.
766

Stock dividends
Stock dividends may be treated as income.
Interest income
Interest income received by a standard tax-paying company is taxable at 0%.

Please refer to the Taxes on corporate income section for further information on companies
liable to tax at the company intermediate rate (10%).
Foreign income
Resident corporations are liable to tax on their worldwide income. Income tax is levied
on foreign branch income when earned, and on investment income from foreign
dividends, interest, rents, and royalties. Double taxation is mitigated either through
unilateral relief (by giving credit for foreign taxation of up to three-quarters of the
effective Guernsey rate) or by treaty relief.
Deductions
Normally, business deductions are allowed if they are incurred wholly and exclusively
for the purpose of trade.
Depreciation
Annual allowances are granted for income tax purposes in respect of the following:
Assets
Buildings:
Stone, brick, concrete, or other substantial
structures
Buildings of a less substantial construction
Farm Buildings
Motor vehicles, buses, lorries, and motorcycles
Computer hardware
Machinery and plant
Glasshouses:
Expenditure in respect of initial allowance*
Other expenditure
Basis
Rate (%)
Reducing-balance
1.25
Reducing-balance
Straight-line
5
5 or 10 (depending on
material utilised)
25
20
20
Reducing-balance
Straight-line
Reducing-balance
Straight-line
Straight-line
10
5
* Section 123 (3) of the Law defines expenditure and circumstances on which initial allowances can be
claimed in respect of glasshouses.
Goodwill
The amortisation of goodwill is not a deductible expense in Guernsey.
Start-up expenses
Pre-trading expenditure incurred within the 12 months prior to the commencement of

trade, which would have been allowable had it occurred on the first day of trading, may
be allowed as a deduction in computing the profits of the first accounting period.
Interest expenses
Interest is a deductible expense where it is incurred wholly and exclusively for the
purposes of trade.
767

Bad debt
Bad and doubtful debts discovered in the accounting period to have become bad or
irrecoverable may be deducted from taxable profits, but the deduction may not exceed
the amount written off as such in the books of the business.
Charitable donations by companies are not deductible for Guernsey tax purposes.
Fines and penalties
Fines or penalties incurred are not deductible for Guernsey income tax purposes.
Taxes
Income tax paid is not deductible in computing taxable income.
Losses from one class of income may be used to offset the profits from another class of
income if both classes are subject to tax at the same rate. Unrelieved trading losses may
be carried forward to offset future trading income.
Upon cessation of trade, operating losses arising from balancing allowances may be
carried back to the previous two years of charge to be relieved against past trading
profits.
Guernsey-source royalties and long-term interest are subject to taxation at source. Relief
is obtained by the retention of the tax deducted. Short-term interest, unless owed to
an authorised bank, is not deductible, unless the advance in respect of which it is paid
is used wholly and exclusively for the purposes of trade. Other fees must be paid on an
arms-length basis.
Group taxation
Group loss relief may be claimed when both companies are members of the same
group and the companies are either carrying on business in Guernsey through a PE or
incorporated in Guernsey. Loss relief is available only against income taxed at the same
rate.
A claim for group loss relief must be made by the claimant company within two years
after the end of the calendar year in which the relevant accounting period ended, and
the claim must be accompanied by a declaration by the surrendering company that it
consents to the surrender.
Transfer pricing
Guernsey does not currently have specific transfer pricing legislation in place. However,
the general anti-avoidance provisions do apply.
Thin capitalisation
Guernsey does not currently have specific thin capitalisation legislation in place.
However, the general anti-avoidance provisions do apply.

In view of the low rate of tax, no special incentives are available to local businesses in
Guernsey.
768

Foreign tax credit
Guernsey has full DTAs in place with Hong Kong, Isle of Man, Jersey, Liechtenstein,
Luxembourg, Malta, Mauritius, Monaco, Qatar, Seychelles, Singapore, and the United
Kingdom and TIEAs with 55 other jurisdictions.
If no bilateral agreement exists, relief available to Guernsey-resident companies is the
lesser of the other territorys effective rate or three quarters of the Guernsey effective
rate.
Withholding taxes
Companies paying dividends to Guernsey resident individuals are required to deduct
or account for the difference between the tax incurred by the company and the
shareholders individual tax rate (20%) on actual distributions.
A company is required to withhold tax when it is acting as an agent and making

payments to a non-resident liable to Guernsey tax.
Guernsey does not levy any other forms of withholding tax (WHT).
Tax administration
Taxable period
The tax year runs from 1 January to 31 December, although companies can adopt a yearend of their choice.
Tax returns
It is compulsory for all Guernsey companies to file their tax returns online.
Companies are required to file their income tax return on 30 November following
the calendar year in which the accounting period ends. Should a company meet the
conditions below, a simplified return may be filed without either a computation or
financial statements.
In order to qualify for a simplified return, a company must have none of the following:

Guernsey employees (other than directors).

Guernsey-resident individual beneficial owners.
Income from utilities (e.g. Guernsey water or electricity companies).
Income from Guernsey properties.
Income from a banking business.
Loans to Guernsey participators.
Distributions made to Guernsey-resident individuals.
Should a company have Guernsey-resident individual beneficial members and/or make

loans to participators, it will be required to submit quarterly returns accounting for
distributions and loans advanced.
Payment of tax
In Guernsey, tax is payable in two instalments, on 30 June and 31 December in the year
of charge (calendar year). If liabilities have not been determined, this may necessitate
initially raising estimated assessments based on prior year figures and raising a final
assessment when the figures are agreed. Once the Income Tax Office has received the
companys income tax return, they will issue an assessment detailing the final balancing
769

income tax payment due. This amount will be due to be paid within 30 days of the
issuing of the final assessment.
Tax audit process
The Income Tax Office will assess each company tax return as and when it is received,
and the turnaround time from submission of a return to the issue of a final assessment
varies dependent upon the workloads of the Income Tax Office but is generally dealt
with in around three months.
The Director can raise an assessment in respect of any income that has not been assessed
at any time no later than six years after the end of the year of charge in which the
income arose.
There are no current areas that the Guernsey Income Tax Office is particularly focusing
on in regards to corporate taxpayer compliance.
Other issues
US-Guernsey IGA
On 13 December 2013, Guernsey signed an IGA regarding the implementation of

FATCA. The IGA is subject to ratification by Guernseys Parliament, and implementation
of the agreement will be through Guernseys domestic legislative procedure. It is
currently anticipated that any such legislation will come into force in 2014 and its
operative provisions will take effect from 1 July 2014.
UK-Guernsey IGA
On 22 October 2013, Guernsey signed a FATCA-style IGA with the United Kingdom
(UK-Guernsey IGA) under which mandatory disclosure requirements may be imposed
in respect of Investors in the Fund who are UK resident or who are non-UK entities
controlled by one or more UK resident individuals, unless a relevant exemption
applies. The UK-Guernsey IGA is subject to ratification by Guernseys Parliament, and
implementation of the agreement will be through Guernseys domestic legislative
procedure. It is currently anticipated that any such legislation will not come into effect
until late 2014 at the earliest.
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Guyana
PwC contact
Allyson West
11 - 13 Victoria Avenue, Port of Spain,
Trinidad & Tobago
Tel: +1 868 299 0700
There have been no significant corporate tax developments in Guyana during the past
year.

Resident companies are liable to tax on their worldwide income. Non-resident
companies that carry on a trade or business in Guyana are subject to tax on the income
that is derived from Guyana.
The current rates of corporate tax are as follows:
Type of company
Telephone companies
Commercial companies *
Other companies (non-commercial)
Corporate tax rate (%)

45
40
30
* A commercial company is one that derives at least 75% of its gross income from goods not
manufactured by it or if it is engaged in telecommunication, banking, or insurance (other than long-term
insurance).
Minimum Corporation Tax (MCT)
Commercial companies (other than insurance companies) are subject to tax at the rate
of 40% of chargeable profits or 2% MCT of turnover, whichever is higher. Any excess
MCT over tax at the normal rate is carried forward for setoff against corporation tax
payable in subsequent years, provided that in no year is the tax payable reduced to less
than 2% of turnover.
Local income taxes
There are no additional income taxes imposed on companies.
Corporate residence
Corporate residence is determined by reference to the location of the central
management and control of the business of a company. There are no specific provisions
within the law, and, as such, common law principles established by the courts are
generally applied in determining residence. The place of incorporation is regarded
as merely one of the factors to be taken into account in determining where central
management and control are located.
There are no specific provisions in the legislation dealing with PE, so common law
principles are applied.
Guyana
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Guyana
Other taxes
VAT is charged at the rates of 16% or 0% on the taxable supply of goods and services
within Guyana by a registered person.
Zero-rated supplies include goods for export, electricity supplied by Guyana Power and
Light, water supplied by Guyana Water Incorporated, and international travel. Exempt
supplies include educational services, residential rent, and financial services.
Customs duties
Customs duty is paid on all goods imported into Guyana. The rates of duty vary between
5% and 150%, depending on the classification of the item in question. Rates of duty are
highest on luxury items, which include perfumes.
Excise taxes
Excise tax is imposed on specific imported or home-produced products. These products

include alcoholic beverages, tobacco products, petroleum products, and motor vehicles.
Property taxes
Property tax is an annual tax charged on the net property of a person at the end of each
year. Property for the purpose of this tax refers to movable or immovable rights of any
kind and effects of any kind. Net property is the amount by which the total value of the
property exceeds the total value of all debt owned by the person at that time.
The tax is payable on 30 April at the following rates:
Net property of a company (GYD *)
On the first 1.5 million
On every dollar of the next 5 million
On every dollar of the remainder
Property tax rate (%)

0
* Guyanese dollars.
Stamp taxes
Stamp duty is levied at various rates on several instruments, including affidavits,

statutory declarations, deeds of conveyance, mortgages, share transfers, awards of
arbitrator, powers of attorney, agreements, bills of exchange, receipts, and policies of
insurance.
As an employer, a company is also required to deduct and remit social security

contributions on behalf of employees. Social security contributions are due on monthly
earnings of employees up to GYD 143,455 and weekly earnings up to GYD 33,105. The
rates of contribution are 7.8% for employers and 5.2% for employees.
Branch income
A branch is subject to tax in Guyana on all income directly or indirectly accruing in or
derived from its operations in Guyana. The tax rates applicable on branch profits are the
same as on corporate profits. In addition, branch profits, after deduction of corporate
tax and reinvestments, are subject to withholding tax (WHT) at the rate of 20%. The
position noted may be varied by the provisions of any applicable double taxtreaties
(DTTs).
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Guyana
Guyana
Inventory valuation
Inventory is valued at the lower of cost and net realisable value. Cost is generally
determined using the average cost method for accounting and tax purposes, but the first
in first out (FIFO) method is also acceptable.
Capital gains
Capital gains tax is imposed at the rate of 20% on the net chargeable gains derived
from the disposal of capital assets. Gains derived from the disposal of an asset within
12 months of its acquisition are treated as ordinary income and subject to corporate tax
at the applicable rates. Gains derived from the disposal of assets held for more than 25
years are exempt from tax.
Dividend income
Corporate tax is payable on dividends received by resident companies from non-resident

companies. However, dividends paid by resident companies to other resident companies
are exempt from tax.
Interest income
Interest income is taxed at the applicable rate of corporate tax.
Foreign income
Income earned by a non-resident company in Guyana is subject to tax in the year the
income was earned. There is no deferral regime in Guyana.
Deductions
All revenue expenses wholly and exclusively incurred in the production of income are
generally deductible.
Depreciation
Tax depreciation rates (wear and tear allowances) apply to the following classes of
assets, as follows:
Class of assets
Aircraft
Boats
Buildings (housing and industrial)
Motor vehicles
Office equipment, including computers and computer software
Other
Plant and machinery

33 1/3
10
5
10
20
50
15
20
Buildings that house machinery are depreciated using the straight-line method. Other
assets may be depreciated using the declining-balance or straight-line methods.
Goodwill
Goodwill expense is generally not allowable in arriving at chargeable income.
Start-up expenses
No specific rules exist in respect of start-up expenses, but such expenses are generally
not deductible.
Guyana
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Guyana
Interest expenses
Interest expense incurred in the production of income is deductible. There is no

restriction to the deductibility of this expense.
Bad debt
A bad debt is deductible where it has been incurred in the trade in which the company
is engaged and has been respectively estimated to the satisfaction of the tax authority to
have become bad in the year of income when the claim is made.
Charitable donations are not deductible unless they are made under a deed of covenant.
Fines and penalties
Fines and penalties are not generally deductible.
Taxes
Taxes are not generally deductible in arriving at taxable profit.
Companies may carry forward losses for an unlimited number of years, but the losses
may not reduce the taxable income in any year by more than 50%. Loss carrybacks are
not permitted.
A corporation engaged in business in Guyana may claim a deduction for royalties and
interest charges paid to foreign affiliates, provided the appropriate WHT is deducted and
properly accounted for. Deductions for administrative, technical, professional, or other
management services fees paid to a non-resident company or branch, referred to as
head office expenses, are restricted to 1% of the annual turnover.
Group taxation
There is no provision under the legislation for group taxation in Guyana. All companies
are taxed separately.
Transfer pricing
There is no transfer pricing legislation or rules in Guyana, although the issue has been
discussed and is expected to be more formally considered in the future. However, the
current Act contains a general anti-avoidance provision, and the tax authority monitors
multinationals to ensure that their transactions are conducted at arms length and in
conformance with the applicable tax legislation.
Thin capitalisation
There are no thin capitalisation rules in Guyana.

Various tax incentives are available, depending on the nature of the industry that the
companies are engaged in, including the following:
Customs duty and VAT exemption on most plant, machinery, and equipment.
Customs duty and VAT exemption on raw materials and packaging materials used in
the production of goods by manufacturers and small businesses.
Unlimited carryover of losses from previous years.
Accelerated depreciation on plant and equipment.
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Guyana
Guyana

Full and unrestricted repatriation of capital, profits, and dividends.

Tax deduction for scientific research expenses.
Initial and annual allowances.
Tax holidays.
Tax holidays are granted in respect of pioneering activities, that is, to companies whose
trade or business are wholly of a developmental and risk-bearing nature and likely to be
instrumental to the development of the resources of and beneficial to Guyana.
This does not include trade or business carried on by a gold or diamond mining company
or a company carrying on petroleum operations.
Tax holidays are granted for a period of up to ten years.
Foreign tax credit
Foreign tax relief is available under DTTs with Canada, the United Kingdom, and
Caribbean Common Market (CARICOM) countries.
Unilateral relief is also available for foreign taxes paid in non-treaty countries with tax
systems and legislation similar to those in Guyana. For British Commonwealth countries,
the relief is 50% of the relief that would be available if the foreign country were a treaty
country. For other countries, the relief is 25% of such available relief. The available relief
is the lower of the tax rate in Guyana and the tax rate in the other country.
Withholding taxes
WHT is chargeable on gross payments to non-residents and must be remitted to the tax
authority within 30 days of making the payment. In cases where the treaty rate is higher
than the statutory rate, the lower statutory rate applies. The rates of WHT for various
payments are shown in the table below.
Recipient
Non-Treaty
Treaty:
Canada
United Kingdom
CARICOM
Dividends (%)
20
Interest (%)
20
Royalties (%)
20
15
10
0
15
15
15
10
10
15
Tax administration
Taxable period
The tax year is the calendar year. Tax is assessed during a tax year on income earned
during the year of assessment, which is generally the calendar year preceding the tax
year. Companies with an accounting year other than a calendar year may, however, be
allowed to account for taxes by adopting their accounting year as their income year.
Tax returns
Tax returns must be filed by 30 April of the tax year.
Payment of tax
Corporate tax is payable in advance quarterly instalments on the preceding years tax
liability. Advance tax payments are due on 15 March, 15 June, 15 September, and 15
December of the calendar year prior to the tax year. However, the Commissioner of
Guyana
775
Guyana
Inland Revenue may require the company to calculate the payments based on estimated
income for the current year.
Any balance of tax due must be paid by 30 April of the tax year.
Penalties
Failure to file a tax return and pay the balance due by 30 April of the tax year incurs a
further charge of 45% on the outstanding tax for the first year and 50% thereafter.
Tax audit process
Companies are generally selected at random for audits, and the frequency is usually
every three years. Companies are generally required to provide financial information
and supporting documentation to the tax personnel.
The tax authority is the Guyana Revenue Authority.
A company carrying on business in Guyana is required to keep proper accounts and

records and is required to retain these accounts for a period of at least eight years after
the completion of the transactions, acts, or operations to which they relate.
The Commissioner is empowered to raise an assessment for tax or additional tax within
seven years after the expiration of the year of assessment.
The following issues are currently being focused on by the tax authorities:

Tax evasion and corruption.

Strengthening tax administration.
Creation of tax policies and forecasting analysis capability.
Business registrations and compliance.
Other issues
Foreign investment restrictions
There are no restrictions on the repatriation of capital and investment income, and
residents and non-residents have unlimited access to foreign exchange markets and to
repatriate funds.
Exchange controls
There are no exchange control rules in place in Guyana.
Businesses operating in Guyana may establish a local company or register an external

company. Additionally, companies may operate through a joint venture.
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Guyana
Honduras
PwC contact
Ramon Ortega
Scotiabank Building
3rd Floor
Santo Domingo, Dominican Republic
Tel: +809 567 7741
Effective 2 April 2013, the special temporary contribution for the protection of the
environment from the miningsector has been reformed to differentiate the applicable
contribution rate between non-metallic and metallic mining activities (see Special
temporary contributions in the Other taxes section).
Effective 25 June 2013, companies under special tax regimes are allowed to sell their
partial or total production in the local market; income from local sales will be subject to
the regular corporate tax regulations (see the Tax credits and incentives section).
Effective 6 September 2013, The Organic Work Regions and Economic Development Law
(Ley Orgnica de las Zonas de Empleo y Desarrollo Econmico) allows the beneficiaries of
this law touse reduced rates forincome tax, sales tax, property tax, real estate tax, and
flat tax (see the Tax credits and incentives section).
Effective 1 January 2014, the tariff and customs legislation has been reformed to grant
tax exonerations in general; the government established in the Decree No.278-2013 a
list of the valid tariff and customs tax exonerations decreesthat continue to have the
corresponding benefits (see the Tax credits and incentives section).
Effective 1 January 2014, the income tax legislationhas been reformed to grant tax
exonerations in general; the government established in the Decree No.278-2013 a list
of the valid income tax exonerations decreesthat continue to have the corresponding
benefits (see the Tax credits and incentives section).
Effective 1 January 2014, the capital gain tax withholding rate to non-residents
increased from 2% to 4%. The same reform requires the government offices to makea
corresponding 10% withholding tax (WHT)on capital gains on payments made due
to purchase and sale transactions of goods, indemnifications, purchase of rights, and
securities (see the Other taxes section).
Effective 1 January 2014, domiciled companies are subject to a 1.5% tax on gross income
equal to or greater than10 million Honduran lempiras (HNL) when the corporate
income tax (CIT)is less. There is a reduction of the rate to 0.75% for the cement
industry, public services provided by government companies, the human pharmaceutical
and medicine industry, the oil and petroleum products industry, and bakeries. There are
some exceptions to the rule (see the Taxes on corporate income section).
Effective 1 January 2014, domiciled or resident companies are subject to the 10%
dividend tax (see the Withholding taxes section).
Effective 1 January 2014, the Temporary Solidarity Contribution regulation has been
reformed to make the 5% on net taxable income over HNL1 millionpermanent (see
Taxes on corporate income section).
Honduras
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Honduras
Effective 1 January 2014, the Sales Tax Law has been reformed to increase the general
tax rate to 15% for goods and services. The rate increased to 18% for alcoholic
beverages, beer, and cigarettes (see the Other taxes section).
Effective 1 January 2014, the Decree No. 278-2013 regulates the term of tax exoneration
to 12 years to those companies under special tax regimes with no specific term for their
tax benefits specified in their corresponding resolution issued by the government (see the
Tax credits and incentives section).

Honduran resident companies are taxed on their worldwide income. Non-resident
companies are subject to CIT only on income derived from Honduran sources.
The CIT rate for a resident company is 25% of its net taxable income.
Minimum tax
Domiciled companiesare subject to a 1.5% tax on gross income equal to or greater

than HNL 10 million when theCIT is less. There is a reduction of the rate to 0.75% for
the cement industry, public services provided by government companies, the human
pharmaceutical and medicine industry, the oil and petroleum products industry, and
bakeries. There are some exceptions to the rule.
Solidarity Contribution
The Solidarity Contribution is a non-deductible surcharge levied on all companies on

taxable income over HNL 1 million. The Solidarity Contribution tax rate is 5%.
Income tax anti-evasion measures
A law created in response to tax evasion and fraud establishes payment of an income
tax of 1% on gross income equal or greater than HNL 100 million for all taxpayers who
report losses for two years in a row or two out of five. The 1% tax paid will be considered
as a credit in the resulting income tax, surtax, or net asset payable in the annual returns.
There are some exemptions to the rule.
Municipal income taxes

Industry, commerce, and services tax
Companies doing business in Honduras are levied the following municipal tax on annual
gross income:
From (HNL)
1
500,001
10,000,001
20,000,001
30,000,001
To (HNL)
500,000
10,000,000
20,000,000
30,000,000
And over
Range (HNL)
500,000
9,500,000
10,000,000
10,000,000
Tax per 000

0.3
0.4
0.3
0.2
0.15
Corporate residence
The place of incorporation is regarded by Honduran authorities as the corporate
residence. Non-resident companies are companies incorporated/registered outside of
Honduras.
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Honduras
Honduras
There is a provision in the transfer pricing rules that provides the following definition of
PE:
Permanent establishment is a fixed place of business where a natural or juridical person
resident or domiciled in another state performs part or all of its activities in Honduras.
Likewise, a foreign resident will be considered to have a permanent establishment in
Honduras when it acts in the national territory through an independent agent that is not
acting under the regular framework of its activity.
There are some exceptions to the rule.
There is no treaty definition of PE since, at the present time, Honduras is not a signatory
of any double taxation treaty (DTT) with another jurisdiction in the world.
Other taxes
Sales tax
Sales tax is charged on all sale and purchase transactions of goods and services made in
Honduran territory.
The general tax rate is 15%. It applies to most goods and services, with the exception of
machinery and equipment, basic grains, pharmaceutical products, raw materials for the
production of non-taxable goods, petroleum products, school supplies, and insecticides,
among others.
The import and sale of beer, other alcoholic beverages, cigarettes, and other tobacco
products are subject to 18% sales tax.
There is a 15% sales tax applicable to some PCS, cellular, internet broadband, cable TV,
and energy services, depending on the amount of consumption billed by the supplier.
There is an 18% sales tax levied on first class and business class air tickets.
Customs duties
The duty assessed by the Honduran government at the time of customs clearance ranges
between 0% and 15% for most items.
Honduras is a member of the Central American Common Market (CACM), which
also includes Costa Rica, El Salvador, Guatemala, and Nicaragua. Honduras rates on
most goods from outside CACM are currently within the 0% to 15% range. Under the
Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) with the
United States (US), about 80% of US industrial and commercial goods can now enter
the region duty-free, with the remaining tariffs to be phased out over ten years. Nearly
all textile and apparel goods that meet the Agreements rules of origin are now duty-free
and quota-free, promoting new opportunities for US and regional fibre, yarn, fabric, and
apparel manufacturing (the Agreements tariff treatment for textile and apparel goods
was made retroactive to 1 January 2004).
It is necessary to first obtain the appropriate Harmonized System (HS) classification
number for determining when a particular product can enter the CAFTA-DR region dutyfree. With this number, it is then possible to check the country and product-specific tariff
elimination schedule.
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Ad valorem import taxes can be as high as 20%. In addition, imports are subject to the
sales tax of 12% or 15% that applies to the sum of the cost, insurance, and freight (CIF)
value, the ad valorem duty, and the customs fees.
Excise taxes
There is an excise tax levied on the production and importation of cigarettes, sodas,
beer, and alcoholic beverages.
Cigarettes are levied at HNL 350 per unit.
Excise tax on sodas, beer, and alcoholic beverages are levied according to the following
table:
Description
Soda/other prepared drink
Beer
Wine
Brandy, cognac, vermouth
Whisky
Rum 40
Rum 38
Rum 36
Gin, vodka, tequila, liquor, creams, prepared beverages
Aguardiente 45
Aguardiente 40
Aguardiente 38
Aguardiente 30
Tax rate per litre (HNL)

0.61
4.34
5.45
29.43
29.43
17.92
17.02
16.13
29.43
12.81
10.54
8.81
6.32
Net assets tax
The net assets tax is an annual 1% tax on the net asset value of the company. It applies
to the gross value of assets less reserve for accounts payable and any accumulated
depreciation allowed under the income tax law and other deductions allowed by law.
The law also allows a special deduction of HNL 3 million.
The net assets tax is in lieu of CIT when CIT is less than the amount due for net asset
tax. Resident companies during their preoperative period (i.e. the period in which the
company started operations but has not issued its first invoice) and companies operating
in free trade zones (FTZs), among others, are exempt from the net assets tax.
Non-resident companies are not liable for the net assets tax.
Transfer taxes
Transfer taxes are levied on real estate transactions at HNL 1.5 per every HNL 1,000.
Stamp taxes
There are no provisions for stamp taxes in Honduras.
Capital gains tax
In general, a 10% tax is applied on capital gains, regardless of the persons residence
status. Under the Zolitur law territory, a special regime, the tax rate is a 4% flat tax on
capital gains.
The payment of capital gains tax must be made within ten business days after the agreed
amount of the transaction has been determined.
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In instances where a transaction is subject to the capital gains tax and a non-resident is
involved, the buyer has an obligation to withhold 4% of the transaction amount as an
advance payment to this tax and must pay it to the government within ten business days
of the date of the transaction.
The government offices makea corresponding 10%WHT on capital gains on payments
made due to purchase and sale transactions of goods, indemnifications, purchase of
rights, and securities.
Payroll taxes and contributions
Payroll taxes and contributions are paid by employers at the following rates:
Social security: 7.2%, with a ceiling of HNL 4,800.
Instituto Nacional de Formacin Profesional (INFOP): 1%.
Housing fund (Rgimen de Aportaciones Privadas or RAP/Fondo Social para la
Vivienda or FOSOVI): 1.5%.
Special temporary contributions

For the term of five years:
Under the Special Temporary Security Contribution on Financial Transactions

(Contribucin Especial por Transacciones Financieras Proseguridad Poblicional),
financial transactions are subject to 0.2% WHT, with some exceptions.
Companies providing mobile communication services will pay a special temporary
contribution of 1% on gross monthly income.
Under the special temporary contribution for the protection of the environment from
the mining sector, there is a 2.5% contribution on the freight on board (FOB) value of
the exports filed for non-metallic activity and a 6% contribution for metallic activity.
The special temporary contribution from the food and beverages business under
special tax regimes is 0.5% on gross monthly income.
The cooperatives special contribution is 3.6% on annual net surplus.
Municipal taxes
Companies doing business in Honduras are also subject to the rules and regulations of
the respective municipalities. Taxes and obligations are ruled by the Plan de Arbitrios.
Some of these tax obligations include the following:
Industry, commerce, and service tax, which is based on gross income per year (see the
Taxes on corporate income section).
Public services fee, which is paid for services such as waste management.
Real estate tax, which is a tax on urban and rural real estate.
Sign tax, which is a tax on public advertising.
Branch income
Branch income is subject to income tax on income generated from Honduran source at
the rates applicable for corporate income.
Income is computed in accordance with generally accepted accounting and commercial
principles, subject to certain adjustments required by the tax law.
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Inventory valuation
Inventories are generally valued using the first in first out (FIFO), last in first out (LIFO),
and weighted-average cost methods.
Capital gains
Capital gains are not generally subject to CIT, but may be subject to capital gains tax. See
Capital gains tax in the Other taxes section for more information.
Dividend income
The income from dividends is considered other income, thus non-taxable under the
general income tax rates. There is a 10% tax rate applicable on the dividends paidto
non-residents.
Stock dividends
Stock dividends are also not taxable.
Interest income
Honduran Bank interests are subject to a 10% WHT at the moment the interest is
given, when the sum is over HNL 50,000. Interests from abroad are considered asother
income. For income tax reconciliation, interest income is considered non-taxable when
subject to the 10% WHT.
Royalty income
Royalties are taxed in the same manner as general income if the recipient is a local
company or branch. If the recipient is a non-resident, then the application of a WHT will
apply.
Foreign income
Deferral and anti-deferral of foreign income are not regulated in Honduras.
Deductions
The net taxable income of an enterprise is determined by deducting all the ordinary and
necessary expenses incurred in thegeneration of income, including amortisation and
depreciation; municipal taxes; donations made in favour of the state, the central district,
the municipalities, and legally recognised educational institutions, charities, and
sporting facilities; mandatory employer-employee contributions to the social security
system; and reasonable charges for royalties and management services.
In general, all expenses incurred in the generation of taxable income are considered
as deductible for income tax purposes. However, there are some non-deductible
expenses, even if incurred in the generation of income (e.g. interest paid to owners or
shareholders, capital losses).
Depreciation
Depreciation may be computed using the straight-line method. Companies may also
obtain authorisation from the tax authorities to use other depreciation methods.
However, after a company selects a depreciation method, it must apply the method
consistently thereafter. The following are the applicable straight-line method rates for
some common assets.
Asset
Buildings
Plant and machinery
Vehicles
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Rate (%)
2.5 to 10
10
10 to 33
Honduras
Asset
Furniture and office equipment
Tools
Rate (%)
10
25
Goodwill
Goodwill can be amortised over a period of five years.
Start-up expenses
Organisation or reorganisation expenses are deductible for the total amount as long as
they do not exceed 10% of the initial capital stock. These expenses can be amortised over
five years.
Interest expenses
Interest expenses are deductible as long as they are incurred in order to generate
income. Interest paid to stockholders, owners, or spouses are not deductible.
Bad debt
Taxpayers can record a bad debt provision of 1% of the total credit sales, which will not
exceed 10% of the accounts receivable balance.
Contributions to organisations legally recognised by the government are deductible.
Capital losses
Capital losses are not deductible to determine the net taxable income. Capital losses can
only be netted against capital gains, which are subject to a tax rate of10% (see Capital
gains tax in the Other taxes section).
Provisions for contingent liabilities, such as severance pay, are not deductible for tax
purposes; actual payments during the fiscal period, for those liabilities, are considered
to be deductibleexpenses.
Fines and penalties
Taxes
With the exception of the Solidarity Contribution, net asset taxes, CIT, and sales tax
(i.e. if sales tax paid is used as a credit to net the sales tax payable to the government),
taxes and contributions paid to district or municipalities are deductible expenses when
determining taxable income.
Companies engaged in agriculture, manufacturing, mining, and tourism may carry

forward losses for three years. However, certain restrictions apply. Losses may not be
carried back.
Payments to foreign affiliates are deductible as long as the service is effectively received.
Group taxation
No provisions exist for group taxation in Honduras.
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Transfer pricing
The Transfer Pricing Law for Honduras published in the Diario Oficial La Gaceta
establishes the transfer pricing regulations applicable in Honduras effective as of
January 2014. There is a period of one year to adopt the transfer pricing policies and to
negotiate with the tax authority the corresponding advance pricing agreements (APAs).
Thin capitalisation
At the present time, there are no provisions for thin capitalisation in Honduras.

Companies operating under a special tax regime are exempted from CIT, sales tax,
customs duties, and some municipal taxes. These special tax regimes are the following:

FTZs.
Industrial processing zone (Zona Industrial de Procesamiento or ZIP).
Temporary import regime (Rgimen de Importacin Temporal or RIT).
Tourism incentive law.
Law promoting the generation of electric energy with renewable resources (Ley
de Promocin a la Generacin de Energa Elctrica con Recursos Renovables), which
provides tax exemptions for projects generating 50MW and over.
Law for the Promotion and Protection of Invesment (Ley para la Promocin y
Proteccin de Inversiones), which provides special tax treatment (i.e. partial CIT rate
reduction of up to 70%) for some types of investments and when some requirements
are met.
In the regulations for the FTZs there is a consideration for international service
companies (e.g. business processing operations [BPOs], call centres and contact
centres, shared service centres) that will have the same tax exoneration provided by
this regime.
The Call Centre and BPO Promotion Law, which provides a tax holiday on import of
tools, parts, accessories, furniture and office equipment, and all goods involved with
the companys active business as well as an income tax holiday on revenue from all
the business activities carried out within the FTZs.
Companies must comply with some governmental requirements to operate under one of
the above mentioned special regimes.
Companies under special tax regimes are allowed to sell their partial or total production
in the local market; income from local sales will be subject to the regular corporate tax
regulations.
The Organic Work Regions and Economic Development Law (Ley Orgnica de las Zonas
de Empleo y Desarrollo Econmico) allows the beneficiaries of this law touse reduced
rates for income tax, sales tax, property tax, real estate tax, and flat tax.
There is a reform to the tariff and customs legislationthat grants tax exonerations in
general; the government established in the Decree No.278-2013 a list of the valid tariff
and customs tax exonerations decreesthat continue to have the corresponding benefits
(contact yourlocal PwC practice for more information).
There is also a reform to the income tax legislationthat grants tax exonerations in
general; the government established in the Decree No.278-2013 a list of the valid income
tax exonerations decreesthat continue to have the corresponding benefits (contact your
local PwC practice for more information).
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Effective 1 January 2014, the term of tax exoneration is limited to 12 years to those
companies under special tax regimes with no specific term for their tax benefits specified
in their corresponding resolution issued by the government.
Drawback industries
Special benefits exist for industries that import semi-manufactured materials for
assembly in Honduras and export finished products. Benefits consist of duty-free imports
of raw materials for subsequent export as manufactured products. Machinery for these
industries may also be imported duty-free.
Foreign tax credit
There are no provisions for foreign tax credits in Honduras.
Withholding taxes
H
WHT for residents
Distribution or payment of dividends or any other form of distribution of retained

earnings or reserves to resident or domiciled individuals and/or legal entities is taxed
via WHT at 10%.
The tax authority is empowered to withhold 3% on CIF from import operations for
commercial purposes as an advance payment to income tax to those companies or
individuals not duly registered with the tax authority, not complying with CIT filing, or
in liquid arrears for any tax administered by the Direccin Ejecutiva de Ingresos (DEI).
There are some exceptions to the rule.
WHT for non-residents
For non-residents in Honduras, any income derived from Honduran sources is taxable
under the following table of the Income Tax Law:
Income source
Real estate and movable property rent, except dividends and interest
Royalties from mining operations and other natural resources
Salaries paid for services and other remuneration for rendering of services within
national territory or abroad
Profit transfers from branch office to head office
Dividends
Royalties
Interest paid on commercial operations, bonds, securities or negotiable instruments,
and other types of obligations
Income from operation of airplanes, ships, and vehicles
Income from operation of telecommunication companies
Insurance premiums
Income obtained from public shows
Films and video tapes for cinemas, TV, video clubs, and cable TV
Any other income not mentioned previously
WHT (%)
25
25
25
10
10
25
10
10
10
10
25
25
10
Tax treaties
Honduras has not signed any tax treaties with foreign jurisdictions.
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Tax administration
The DEI is the tax authority in Honduras. It is responsible for the administration of
the tax and customs system. Taxpayers may request approval from the DEI regarding
direct or indirect taxes (e.g. accelerated depreciation methods on new assets acquired
by corporations with monetary activities requiring constant technological update,
higher installed production capacity and productive re-conversion processes in order to
maintain and strengthen their competitive advantage).
Taxable period
The statutory tax year runs from 1 January through to 31 December. However, taxpayers
may apply to use a special tax year by requesting an authorisation from the DEI.
Tax returns
Companies must file a CIT return on 30 April every year.
Payment of tax
Mandatory advance tax payments are payable each quarter, based on the income tax
paid for the preceding taxyear. Final tax is due with the CIT return on 30 April every
year.
Tax audit process
The audit cycle can begin after (i) the date the tax return should have been filed or (ii)
sometime after the taxpayer made a request before the tax authority (e.g. tax credit, loss
carryforward).
The statute of limitation for legal actions is applicable for taxpayers, in order to
challenge and request payment, and for the fiscal authority, to review, notify, and
request payment. Such limitation is established according to the following terms:
Four years for those conducting operations in customs regime and five years for
registered taxpayers.
Ten years for those who have the obligation to be registered and currently are not.
Ten years for those who have withheld information when declaring/filing.
Limitation of actions and powers of the fiscal authority will be interrupted according to
the following:
Determination of the tax by the fiscal authority counted from the day following
notification of resolution.
Notification of the resolution in which the fiscal authority confirms assessment,
interests, penalties, or fines in liquid payable amounts, counted from the day
following the resolutions notification.
Legal appeal filed by the taxpayer, counted from the day following the filing of the
appeal.
Express acknowledgement from the debtor, counted from the day following the
acknowledgement.
Payment plans agreement granted to taxpayers according to law, counted from the
day following the formal agreement.
Exercise of the appropriate legal actions, counted from the day following their
initiation.
Relapse in the lack of complete or partial payment from the taxpayer, as established in
the Tax Code, will be considered as criminal tax fraud.
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Hong Kong
PwC contact
Reynold Hung
PricewaterhouseCoopers Limited
21/F Edinburgh Tower, The Landmark
15 Queens Road Central
Central, Hong Kong
Tel: +852 2289 3604
New legislation enacted
The following pieces of legislation were enacted/became effective in the first half of
2014:
Inland Revenue (Amendment) Ordinance 2014: This ordinance extended the
concessionary profits tax rate (i.e. 50% of the normal rate) currently applicable to
offshore reinsurance business to offshore captive insurance business. Effective from
year of assessment 2013/14, the assessable profits from qualifying offshore captive
insurance business carried on by authorised captive insurance corporations will be
subject to a profits tax rate of 8.25% instead of the normal rate of 16.5%.
Stamp Duty (Amendment) Ordinance 2014: This ordinance (i) increased the duty
rates of Special Stamp Duty (SSD) (which is levied on the resale of Hong Kong
residential properties within certain periods from the date of acquisition) from 5%15% to 10%-20% and extends the property holding period within which SSD will
be charged from 24 months to 36 months and (ii) introduced a 15% Buyers Stamp
Duty (BSD) on acquisition of residential properties by any persons (including Hong
Kong and overseas incorporated companies) other than an individual who is a Hong
Kong permanent resident. Although the ordinance was enacted in February 2014, the
two measures mentioned above are applied retrospectively to residential property
transactions executed on or after 27 October 2012.
The new Companies Ordinance became effective on 3 March 2014. It revamped
Hong Kongs company law regime and brought various changes to the regulatory
framework for Hong Kong companies. One of the changes is the introduction of the
court-free procedures for amalgamation of wholly owned group companies. The
Hong Kong tax authority is currently studying the tax issues involved in a corporate
amalgamation and is expected to provide clarification on the tax treatment of those
issues in the future.
Signing of the Hong Kong (HK)-United States (US) Tax Information

Exchange Agreement (TIEA)
Hong Kong and the United States signed a TIEA on 25 March 2014. The agreement is the
first of its kind signed by Hong Kong and allows the free exchange of tax information on
request between Hong Kong and the United States.
The HK-US TIEA provides the necessary legal basis for Hong Kong to provide, upon
request by the United States, certain information that needs to be reported by the
financial institutions in Hong Kong to the United States under the Foreign Account Tax
Compliance Act (FATCA). Further to the signing of the TIEA, Hong Kong agreed in
substance with the United States in May 2014 on an intergovernmental agreement (IGA)
to facilitate financial institutions in Hong Kong to comply with the FATCA. It is expected
that a Model 2 IGA will be formally signed between Hong Kong and the United States
before the end of 2014.
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Hong Kong adopts a territorial basis of taxation. Profits tax is payable by every person
(defined to include corporation, partnership, and sole proprietorship) carrying on a
trade, profession, or business in Hong Kong on profits arising in or derived from Hong
Kong from that trade, profession, or business. However, capital gains and receipts that
are capital in nature are not subject to tax. Dividends from local companies chargeable
to tax are exempt, whereas dividends from overseas companies are generally offshore
in nature and not subject to tax in Hong Kong. The tax residence of a person is generally
irrelevant for profits tax purposes. The tax treatments of public and private companies
are the same.
Certain income that would not otherwise be subject to Hong Kong profits tax is deemed
to arise in or be derived from Hong Kong from a trade, profession, or business carried on
in Hong Kong and thus becomes taxable in Hong Kong. This includes royalties received
by a non-resident for the use of or right to use a patent, design, trademark, copyright
material, secret process or formula, or other property of a similar nature in Hong Kong,
or for the use of such intellectual properties (IPs) outside Hong Kong, but the royalties
paid can be claimed as a deduction by a person for profits tax purposes.
The tax rates are 16.5% for corporations and 15% for unincorporated businesses.
There are special rules for determining the tax liabilities of certain industries, such as
shipping, air services, and financial services. There is also a special tax framework for
Islamic bonds (i.e. sukuk) that provides for the same tax treatments for sukuk vis--vis
their conventional counterparts.
Incomes from certain qualifying debt instruments (QDIs) are either tax exempt or
subject to a concessionary tax rate (i.e. 50% of the regular profits tax rate). However,
there is a specific anti-avoidance provision under which the concessionary tax rate/tax
exemption does not apply to incomes derived from QDIs by a person who is an associate
of the issuer of the QDIs.
Offshore funds having Hong Kong fund managers and investment advisors with full
discretionary powers are exempt from Hong Kong profits tax on profits derived in
Hong Kong from six types of specified transactions that are carried out or arranged
by specified persons. However, there are also specific anti-avoidance provisions in the
Inland Revenue Ordinance (IRO) deeming certain resident persons to be subject to
profits tax on their share of the non-resident persons tax-exempt profits.
Profits derived from the business of reinsurance of offshore risks and qualifying offshore
captive insurance business are subject to profits tax at a concessionary tax rate (i.e. 50%
of the regular profits tax rate).
Corporate residence
In general, for Hong Kong profits tax purposes, corporate residency is not important in
determining taxability of an entity. The decisive factors for taxability are (i) whether
a corporation is carrying on a trade, profession, or business in Hong Kong, and (ii)
whether the profits are arising in or derived from Hong Kong.
However, where it is necessary to determine the corporate residence, such as for the
purpose of a comprehensive double tax agreement (CDTA), companies incorporated in
Hong Kong and companies that are normally managed or controlled/centrally managed
and controlled (depending on the provisions of the relevant CDTA) in Hong Kong are
generally considered as a Hong Kong tax resident.
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Hong Kong
For Hong Kong profits tax purposes, whether a foreign corporation is carrying on
a trade, profession, or business in Hong Kong and the source of profits, rather than
whether there is a PE in Hong Kong, are the decisive factors in determining taxability.
The existence of a PE is generally irrelevant for profits tax purposes except in the
situation where a CDTA of Hong Kong is applicable.
Other taxes
Hong Kong does not have a VAT, goods and services tax, or sales tax.
Customs duties
There is no tariff on general imports in Hong Kong.
Excise tax
Duties are levied on limited categories of dutiable commodities (i.e. tobacco, liquor,
methyl alcohol, and hydrocarbons), regardless of whether they are imported or locally
manufactured.
Property tax
Property tax is charged annually to the owner of any land or buildings (except
government and consular properties) in Hong Kong at the standard rate of 15% on the
net assessable value of such land or buildings. Net assessable value of a property is the
consideration payable to the owner for the right to use the land or buildings less rates
paid by the owner and a 20% notional allowance.
Rental income derived by a company from a Hong Kong property is subject to profits tax.
The company that is subject to profits tax may apply for an exemption from property tax
in respect of the property. If no exemption is applied, the property tax paid can be used
to offset against the profits tax payable by the company.
Stamp duty
Stamp duty is charged on transfer of Hong Kong stock by way of sale and purchase at
0.2% of the consideration (or the market value if it is higher) per transaction. Hong
Kong stock is defined as stock the transfer of which must be registered in Hong Kong.
For conveyance on sale of immovable property in Hong Kong, the stamp duty payable
depends on the property consideration and ranges from a flat rate of 100 Hong Kong
dollars (HKD) (for property consideration of up to HKD 2 million) to the highest rate of
4.25% of the consideration of the property (for property consideration exceeding HKD
20 million), with marginal relief upon entry into each higher rate band.
For lease of immovable property in Hong Kong, stamp duty is calculated at a specified
rate of the annual rental that varies with the term of the lease. Currently, the applicable
rate ranges from 0.25% (for lease period of not more than one year) to 1% (for lease
period of more than three years).
Exemption is available to certain transactions, such as transfer of shares between
associated corporate bodies and certain stock borrowing and lending transactions,
provided that the specified conditions for exemption are satisfied.
Special Stamp Duty (SSD)
There is an SSD on resale of residential property within 36 months from the date
of acquisition. The SSD is imposed on top of the ad valorem stamp duty payable on
conveyance on sale or agreement for sale of residential property, with a few exemptions.
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The SSD payable will be calculated based on the stated consideration or the market
value (whichever is higher) of the resold property at the regressive rates indicated
below.
20% for residential properties held for six months or less.
15% for residential properties held for more than six months but for 12 months or
less.
10% for residential properties held for more than12 months but for 36 months or
less.
Buyers Stamp Duty (BSD)
A BSD is payable on acquisition of Hong Kong residential properties by any person

(including Hong Kong and foreign companies) other than a Hong Kong permanent
resident. The BSD is charged at a flat rate of 15% on the stated consideration or the
market value of the property acquired, whichever is higher. The BSD is imposed on top
of the ad valorem stamp duty and the SSD (if applicable), with exemptions in certain
situations.
Business registration fees
Every person who carries on a business in Hong Kong is required to apply for
business registration with a fee within one month from the date of commencement
of thebusiness. The business registration certificate has to be renewed either on an
annual basis or every three years with a payment of a business registration (renewal)
fee. Special registration and licence fees are applicable to banks and deposit-taking
companies.
Capital duty
There is currently no capital duty in Hong Kong.
Government rates and rent
Rates are an indirect tax levied on properties in Hong Kong. Rates are charged at 5%
of the rateable value, which is the estimated annual rental value of a property at the
designated valuation reference date of 1 October.
Privately owned land in Hong Kong is normally held by way of a government lease
under which rent is payable to the Hong Kong SAR Government in return for the right
to hold and occupy the land for the term (i.e. duration) specified in the lease document.
Currently, government rent is calculated at 3% of the rateable value of the property and
is adjusted in step with any subsequent changes in the rateable value.
Mandatory Provident Fund (MPF) contribution
Under the MPF scheme, an employer is required to make a mandatory contribution

for an employee in the amount equal to 5% of the monthly income of that employee.
Effective 1 June 2014, the maximum level of income for contribution purpose is
HKD 30,000 per month (previously HKD 25,000). An employer may make voluntary
contributions in addition to the mandatory contribution required.
Branch income
The tax rate for branches is the same as that for corporations. The Hong Kong profit of a
foreign corporation with a branch in Hong Kong is determined according to the accounts
maintained for the Hong Kong operation (or business). If the Hong Kong accounts do
not disclose the true profits arising in or derived from Hong Kong attributable to the
Hong Kong operation, the Hong Kong profit will be computed according to the ratio of
turnover in Hong Kong to total turnover (or the proportion of Hong Kong assets over
total assets) on the worldwide profits. Alternatively, the Hong Kong Inland Revenue
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Hong Kong
Hong Kong
Department (HKIRD) tax assessor may estimate the profits of the Hong Kong branch. In
certain situations, the profits of the Hong Kong branch can be estimated based on a fair
percentage of the turnover in Hong Kong.
Inventory valuation
Inventory may be stated at the lower of cost or market value. Last in first out (LIFO) may
not be used for tax purposes. First in first out (FIFO) must be consistently applied.
The prevailing accounting standards require financial assets and liabilities held for
trading purpose (e.g. shares and securities held as trading stock) to be carried at market
value, with fluctuations in values of such assets and liabilities taken to the profit and loss
accounts, irrespective of whether the profits or losses are realised. Following the recent
court decision in the Nice Cheer case, the increases (unrealised gains) in the market
values of trading securities are not taxable while the decreases (unrealised losses) may
be deductible when they are recorded in the financial statements.
There are special tax provisions for valuation upon cessation of a business under which
inventory is valued at market value, unless it is sold to a person carrying on business in
Hong Kong, who may deduct a corresponding amount as the cost of the inventory in
computing the assessable profits.
Capital gains
Gains from realisation of capital assets or receipts that are capital in nature are not
taxed.
Dividend income
Dividends from local companies chargeable to tax are exempt, whereas dividends from
overseas companies are generally offshore in nature and not subject to Hong Kong
profits tax. Hong Kong corporations may declare bonus issues (i.e. stock dividends),
which are not taxable in the hands of the recipients.
Interest income
Interest income received by or accrued to a corporation carrying on a trade or business

in Hong Kong is subject to profits tax. Exemption is provided to interest income derived
from any deposit placed in Hong Kong with a financial institution, unless the deposit
secures a borrowing the interest expense of which is deductible. This exemption,
however, does not apply to interest accruing to a financial institution.
Interest accruing to a bank or financial institution will be deemed to be sourced and
taxable in Hong Kong if the interest arises through or from the carrying on of business in
Hong Kong by the bank or financial institution.
Royalties
Royalties paid or accrued to a non-resident for the use of or right to use in Hong Kong or
outside Hong Kong (if the royalties are deductible in ascertaining the assessable profits
of a person for Hong Kong profits tax purposes) a trademark, patent, design, copyright
material, secret process, or other property of a similar nature, or for the use in Hong
Kong of cinema or television tape or any sound recording, are deemed to be taxable in
Hong Kong.
A total of 30% of the sum receivable is deemed to constitute profits subject to tax in
normal situations. Where such royalties are received by or accrued to an associated
corporation, however, 100% of the sum is deemed to constitute profits under certain
circumstances.
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791
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Partnership income
Partnership business is taxed as a single entity, although an individual partner can use
its share of losses incurred by a partnership to offset against the assessable profits of
its other business. In general, there is no special registration requirement other than
business registration for a partnership. The assessable profits of a partnership are
basically determined in the same way as those of a corporation, with certain special
rules (e.g. salaries or other remunerations paid to a partner or a partners spouse are not
deductible).
Unrealised exchange gains/losses
In general, unrealised exchange gains/losses are taxable/deductible if they are

recognised in the profit and loss accounts in accordance with the generally accepted
accounting principles (GAAP), provided that they are revenue in nature and with a
Hong Kong source. The nature and source of exchange gains/losses are determined by
the nature and source of the underlying transactions. Exchange gains/losses arising
from ordinary business transactions (e.g. trade receivables or payables) are taxable/
deductible whereas exchange gains/losses arising from capital transactions (e.g. sale of
capital assets) are non-taxable/non-deductible.
Foreign income
Hong Kong resident corporations are not taxed on their worldwide income. Foreignsourced income, whether or not remitted to Hong Kong, is not taxed. As such, there is no
specific tax provision dealing with deferral or non-remittance of foreign earnings. Nor
does Hong Kong have any controlled foreign company (CFC) legislation.
Deductions
Expenses that are incurred for producing profits chargeable to tax and that are not
capital in nature are generally tax deductible. In addition, special tax relief is available
for certain capital expenditure. There are special rules for deduction of certain expenses
(e.g. interest expenses).
Accounting treatments are usually followed in determining the assessable profits, except
when there is an explicit rule in the IRO. Accrued expenses recognised in the profit and
loss accounts in accordance with the GAAP are usually deductible if they are incurred for
producing profits chargeable/subject to tax and are not capital in nature.
Expense items for which a tax adjustment is necessary in determining the amount of
taxable profits from the accounting profits include: tax depreciation allowance vs.
accounting depreciation, expenses that are capital in nature, general provisions that are
non-deductible, and non-deductible interest expenses on borrowings used to finance
non-income producing assets.
Set out below are the Hong Kong profits tax treatments of some common expense items.
Tax depreciation of fixed assets
Tax depreciation allowances/deductions are available for capital expenditure incurred

on the construction of buildings or structures and in the provision of machinery and
plant for trade or business purposes, as follows:
Industrial buildings and structures: An initial allowance of 20%, in addition to
an annual allowance of 4%, of the cost of construction or cost of purchase from a
developer is granted for an industrial building or structure occupied for the purpose
of a qualifying trade. Provision is made for balancing allowance or charge in the year
of assessment in which the building is disposed of to adjust the written-down value
792
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of the building to the disposal price. Balancing charges are restricted to the total of
initial and annual allowances previously given.
Commercial buildings and structures: An annual allowance of 4% of the capital
expenditure incurred on the construction is applicable. A balancing allowance or
charge applies upon disposal. Balancing charges are restricted to the total annual
allowances previously given.
Plant and machinery: An initial allowance of 60% of the capital expenditure on plant
and machinery is given for the year of assessment during the basis period in which
the expenditure is incurred. An annual allowance is also given for depreciation at
three prescribed rates on the reducing value of each of the three depreciation rate
pools. The three prescribed rates are 10%, 20%, and 30%, and the reducing value
of each of the three depreciation rate pools is original cost less initial and annual
allowances and sales proceeds. Provision is made for balancing charges when plant
and machinery within one of the three depreciation rate pools is sold or disposed of
and the reducing value of that pool is less than the sale price, which is capped at the
original amount incurred in the pool. In addition, balancing allowances or charges
may be applicable upon cessation of business. Otherwise, sales proceeds are deducted
in calculating the reducing value on which the annual allowance is calculated.
Book depreciation is adjusted for tax purposes in accordance with the above
depreciation allowances granted under the IRO.
Goodwill
Cost of acquisition of goodwill/amortisation of goodwill is not deductible as it is capital

in nature.
In general, company formation/start-up expenses that are incurred before the

commencement of a trade, profession, or business and that are for the establishment of
the overall income producing structure are capital in nature and not tax deductible.
Research & development (R&D)
There is a specific provision allowing the deduction of expenditure incurred on R&D

(including payments made to an approved research institute and in-house expenditure),
provided that certain specified conditions are met.
Interest expenses
There is no thin capitalisation rule in Hong Kong. However, deduction of interest

expense is subject to stringent and complicated rules that are designed to guard against
loan arrangements with an intention to avoid Hong Kong profits taxes.
Bad debt
A bad or doubtful debt incurred in any trade, business, or profession, proved to the
satisfaction of the HKIRD to have become bad during the basis period for a year of
assessment, is deductible. The deduction is limited to debts that were included as a
trading receipt in ascertaining the taxpayers assessable profits or debts in respect of
money lent in the ordinary course of a money-lending business in Hong Kong.
If any bad or doubtful debt that has previously been allowed as a deduction is ultimately
recovered, it will be treated as taxable profits of the basis period in which it is recovered.
A deduction is allowed for cash donations to approved charities made in the basis period
for a year of assessment if the aggregate of such donations is not less than HKD100. The
deduction is limited to 35% of the assessable profits of the year of assessment.
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793
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Pension expenses
A deduction is allowed for regular/ordinary contributions to a mandatory provident

fund scheme or recognised occupational retirement scheme made by an employer in
respect of an employee to the extent that the contributions do not exceed 15% of the
employees total emoluments for the period to which the contributions relate.
Special payments, other than the ordinary contributions to a mandatory provident fund
scheme or recognised occupational retirement scheme, are capital in nature but can be
deducted evenly over a five-year period under a specific provision of the IRO.
There are also specific rules for deduction of provisions for contributions to a mandatory
provident fund scheme or recognised occupational retirement scheme.
Payments for directors
Director fees or other remunerations paid by a corporation to its directors are generally
deductible under the normal deduction rule. Nevertheless, no deduction is allowed on
salaries or other remunerations paid to a sole proprietor or any partners or partners
spouses of a partnership business.
Generally speaking, general provisions for expenses are not deductible, whereas specific
provisions are deductible if the HKIRD is satisfied that the amount has been incurred
(i.e. the taxpayer has a legal/contractual obligation to pay such amount in future) and
that the provision represents a reasonably accurate estimate of the future liability.
Special deductions
There are special deduction rules for expenditures incurred:

for refurbishment of a building or structure, other than a domestic building or
structure
on environmental protection installation and machinery
on environment-friendly vehicles
on machinery or plant used specifically and directly for any manufacturing process,
computer hardware (other than that which is an integral part of machinery or plant),
computer software, and computer systems (collectively known as prescribed fixed
assets)
for registering trademarks, designs, or patents used in the production of taxable
profits, and
on the purchase of patent/know-how rightsand specified IP rights (i.e. copyrights,
registered trademarks, or registered designs), provided certain specified conditions
are met.
Fines and penalties
Fines and penalties are generally not deductible, as the HKIRD does not consider them to
be expenses incurred for producing profits chargeable/subject to tax.
Taxes
Taxes paid on corporate profits are generally not deductible for the purpose of
calculating the assessable profits. However, the HKIRD generally accepts that a foreign
tax that is an expense that must be borne regardless of whether or not a profit is derived
(e.g. a foreign withholding tax [WHT] levied on the gross amount of interest or royalties
received), as opposed to a charge on the profits themselves, is deductible under the
general deduction provision. Where interest income or gains from the sale of a certificate
of deposit or bill of exchange are deemed to be subject to profits tax, a deduction is
allowed for foreign taxes of substantially the same nature of Hong Kong profits tax
paid in respect of the same income, provided that the taxpayer is not eligible for double
taxation relief under a CDTA.
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Net operating losses incurred in an accounting year can be carried forward indefinitely
to offset future profits of the business. A corporation carrying on more than one business
may have losses in one business offset profits of the others, with any balance being
carried forward. Net operating losses cannot be carried backward.
Capital losses are not tax deductible.
Royalties and service fees paid/payable by a Hong Kong corporation to foreign affiliates
are deductible, provided they are incurred for the production of profits chargeable/
subject to tax. There is no special restriction on the deductibility of these payments.
Interest payable to a foreign affiliate is not deductible if the recipient is not chargeable/
subject to Hong Kong profits tax on the interest income received.
Group taxation
Hong Kong does not have a consolidated or group taxation regime.
Transfer pricing
Strictly speaking, there is no comprehensive transfer pricing legislation in Hong Kong.

While a few existing provisions in the IRO may be employed by the tax authority
to tackle non-arms-length transactions, such provisions are primarily aimed at
transactions with closely connected non-residents or tax avoidance transactions rather
than specific legislation on transferpricing.
There are two Departmental Interpretation and Practice Notes (DIPNs) issued by the
HKIRD to address the transfer pricing issues in Hong Kong. DIPN 45 focuses on the
administrative/procedural issues involved in providing double tax relief in a treaty
context, such as when such relief is available and what are the procedures for claiming
such relief.DIPN 46 outlines the HKIRDs view on the legislative framework for transfer
pricing in Hong Kong (including the statutory provisions in the IRO and the articles
in a CDTA that are relevant to transfer pricing) and provides guidance on numerous
transfer pricing related issues, such as the application of the arms-length principle
and the acceptable transfer pricing methodologies, which are largely in line with the
Organisation for Co-operation and Development (OECD) transfer pricing guidelines.
The DIPN also spells out the documentation that taxpayers should consider retaining to
support their transfer pricing arrangements and explains the interaction between the
transfer pricing and sourcing rules in Hong Kong.
In general, the HKIRD adopts the arms-length principle and will seek to apply the
OECD transfer pricing guidelines except where they are incompatible with the express
provisions in the IRO.
An advance pricing arrangement (APA) program was launched in Hong Kong in April
2012. The objectives of the APA program are to help taxpayers obtain tax certainty on
their complex or significant transfer pricing arrangements and reduce the risk of double
taxation arising from related-party transactions. Resident enterprises or non-resident
enterprises with a PE in Hong Kong may apply for an APA in respect of their transactions
with associated enterprises under a CDTA, provided that certain conditions (including
the threshold for an APA application) are met.
At the initial stage, the HKIRD is primarily focused on bilateral APA or multilateral APA
applications in respect of cross-border related-party transactions involving countries that
are CDTA partners with Hong Kong.
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DIPN 48, which set out the details of the APA program, was issued by the HKIRD in late
March 2012. DIPN 48 provides guidance on various aspects of the APA regime, such as
the timeframe and threshold for an APA application, the various stages involved in the
APA process, an audit involving years covered by a concluded APA, and possible rollback
of the transfer pricing methodology agreed under an APA to prior years. The appendices
of the DIPN include various sample documents for use in an APA application.
Thin capitalisation
Hong Kong does not have thin capitalisation rules.

Hong Kong does not have a CFC regime.

Foreign tax credits
Foreign tax credits are available if foreign taxes are payable/paid on income derived
from a jurisdiction that has entered into a CDTA with Hong Kong and the same income is
subject to tax in Hong Kong. See the Withholding taxes section for a list of jurisdictions that
have entered into a CDTA with Hong Kong.
Foreign investment incentives
Hong Kong does not have any specific incentives for foreign investment, except that
offshore funds may be exempt from profits tax under certain circumstances.
Withholding taxes
There is no WHT on dividends, interest, or royalties. However, the 4.95%/16.5% (for
corporations) or 4.5%/15% (for unincorporated businesses) tax on royalties received by
non-residents (see Royalties in the Income determination section) is, in effect, similar to a
WHT.
Resident consignees are required to furnish quarterly returns to the HKIRD showing
the gross proceeds from sales on behalf of their non-resident consignors and to pay to
the Commissioner of Inland Revenue (CIR) a sum equal to 0.5% of such proceeds. The
HKIRD normally accepts this as satisfying the Hong Kong tax obligations of the nonresident.
Hong Kong has so far entered into 29 treaties with different jurisdictions. The following
table shows the applicable WHT rates for payments made from Hong Kong payers to
non-treaty and treaty country corporate recipients. The rates shown in the table are
the lower of the domestic and treaty rates. For WHT rates on payments received by
Hong Kong recipients from treaty country payers, please refer to the summaries of the
respective treaty countries.
Recipient
Non-treaty
Treaty:
Austria (4)
Belgium (4)
Brunei (4)
Canada (5)
China, the Peoples Republic of (PRC) (4)
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Dividends (%) (1)

0
Interest (%) (1)

0
Royalties (%)
4.95 (2)
0
0
0
0
0
0
0
0
0
0
3
4.95 (3)
4.95 (3)
4.95 (3)
4.95 (3)
Hong Kong
Recipient
Czech Republic (4)
France (4)
Guernsey (5)
Hungary (4)
Indonesia (4)
Ireland (4)
Italy (6)
Japan (4)
Jersey (5)
Kuwait (5)
Liechtenstein (4)
Luxembourg (4)
Malaysia (4)
Malta (4)
Mexico (5)
The Netherlands (4)
New Zealand (4)
Portugal (4)
Qatar (5)
Spain (4)
Switzerland (4)
Thailand (4)
United Kingdom (4)
Vietnam (4)
Dividends (%) (1)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Interest (%) (1)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Royalties (%)
4.95 (3)
4.95 (3)
4
4.95 (3)
4.95 (3)
3
4.95 (3)
4.95 (3)
4
4.95 (3)
3
3
4.95 (3)
3
4.95 (3)
3
4.95 (3)
4.95 (3)
4.95 (3)
4.95 (3)
3
4.95 (3)
3
4.95 (3)
Notes
1.
2.
3.
4.
5.
6.
Hong Kong IRO does not impose WHT on dividends and interest currently. However, the treaties
provide for a maximum WHT rate on dividends and interest should Hong Kong IRO impose such
WHT in the future. Some of the treaties also provide for a reduced WHT rate on dividends and interest
if conditions specified in the treaties are met.
Generally, royalties paid to non-resident corporations that are not otherwise chargeable to Hong
Kong profits tax are subject to WHT at 4.95%. The 16.5% rate applies if the royalties are received by
or accrued to a non-resident from an associate, unless the Commissioner is satisfied that no person
carrying on business in Hong Kong has, at any time, wholly or partly owned the property in respect of
which the royalties are paid.
Since a higher rate is specified in the treaty, the lower domestic/non-treaty rate of 4.95% will apply.
Ratified and effective.
Ratified and is effective from year of assessment 2014/15 (i.e. 1 April 2014).
Not yet ratified.
Tax administration
Taxable period
A year of assessment (or tax year) begins on 1 April of a year and ends on 31 March of
the following year. The period that is used to compute the taxable profits for a year of
assessment is called the basis period, which is normally the financial year ended in the
year of assessment.
Tax returns
Tax returns are issued on the first working day of April each year. The filing deadline is
usually within a month from the date of issue. However, corporations whose financial
year ended after 30 November and are represented by a tax representative are normally
granted with an extension for filing their returns. The exact filing due date depends on
the accounting year-end date of the taxpayer.
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The basis of assessment is the accounting profits of the financial year ending within
the year of assessment, with appropriate adjustments for tax purposes. A tax return
is usually filed together with a tax computation showing the tax adjustments to the
accounting profits in arriving at the taxable profits or allowable tax losses for a given
year of assessment.
Corporate taxpayers are also required to attach their audited accounts as supporting
documents when filing a profits tax return, unless they qualify as a small corporation
as defined by the HKIRD (i.e. mainly those with gross income for a basis period of
not exceeding HKD 2 million plus a few other conditions). Small corporations are not
required to attach supporting documents with their profits tax returns but are still
required to keep those documents and submit them upon request. A branch of a foreign
corporation doing business in Hong Kong is required to file a profits tax return annually,
and the HKIRD may require audited accounts of the foreign corporation to support the
Hong Kong branchs profits tax return.
Notice of assessment will be issued after the tax return has been examined by the
HKIRD. Taxpayers may be subject to post-assessment investigation or field audit under
the computerised random selection procedures of the HKIRD at a later date.
Payment of tax
The dates of payment of tax are determined by the CIR and specified in the assessment
notice. A system of provisional tax payments applies whereby estimated tax payments
are made during the current year. The provisional profits tax payable is normally
estimated based on the previous years profits tax liability. The provisional profits tax
already paid is credited against the final profits tax assessed for a year of assessment,
which is determined after filing of the return.
For companies with an accounting year-end date of 31 December, the provisional
tax payments for a given tax year (to be paid in two instalments) are usually due in
November of the current year and January of the next year, whereas the final tax
payment for a given tax year is usually due in November of the year in which the return
is issued.
Tax audit process
There is no specific tax audit cycle in Hong Kong. Tax audit targets are selected with
reference to certain criteria determined by the HKIRD.
An additional assessment may be made by a HKIRD tax assessor if a taxpayer chargeable

to tax has not been assessed to tax or has been assessed at less than the proper amount.
The assessment must be made within the relevant year of assessment or within six
years after the end of that year of assessment. The time limit for making additional
assessments is extended when a taxpayer either has not been assessed, or is underassessed, due to fraud or wilful evasion. In that case, an additional assessment may be
made up to ten years after the end of the relevant assessment year.
A statement of loss is not an assessment, and the above six-year time limit does not apply
to issue or revision of a statement of loss. A tax loss year remains technically open until
the sixth year after the first year in which the taxpayer has an assessable profit after
utilising all the tax losses brought forward.
Profits tax issues that are often subject to close scrutiny of the tax authority include
offshore claim of profits, capital claims of income, transactions with related parties and
closely connected non-residents, and deductibility of expenses (e.g. interest expenses,
share-based payments, and intra-group management/service fees).
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General anti-avoidance rules (GAAR)
The IRO includes a GAAR (i.e. section 61A) allowing the HKIRD to disregard a
transaction or counteract the tax benefit conferred by a transaction if the sole or
dominant purpose of entering into such a transaction is to obtain a tax benefit.Whether
the sole or dominant purpose of entering into a transaction is for obtaining a tax benefit
will be assessed according to a set of factors stipulated in section 61A.Another GAAR
in the IRO is section 61, which empowers the HKIRD to disregard a transaction that
reduces or would reduce the amount of tax payable by any person if that transaction
is considered artificial or fictitious.Although both GAARs could be used, in practice,
section 61A is more often invoked by the HKIRD in tackling tax avoidance schemes.
Specific anti-avoidance provision for related party transactions
In addition to the general anti-avoidance provisions described above, there is a specific

anti-avoidance provision dealing with transactions with closely connected non-residents.
Under the specific provision, if a resident person carries on a business with a closely
connected non-resident person such that no profits or less than the ordinary profits are
derived by the resident person in the course of such business, the non-resident person
can be assessable and chargeable to tax in respect of profits derived from such business
in the name of the resident person.
Other issues
Foreign investment restrictions
In general, Hong Kong does not impose restriction to foreign investors to make
investments in Hong Kong, and wholly foreign owned companies are allowed. The only
exception is the restriction on foreign ownership of Hong Kongs licensed television/
sound broadcasters, of which the collective foreign ownership ceiling is 49% of the
voting power. In addition, an approval from the Broadcasting Authority must be
obtained for holding, acquisition, or exercise of voting control by a foreign investor of
more than 2% of a licensee.
Exchange controls
Hong Kong does not have any foreign exchange control. There is no restriction on entry
or repatriation of capital or remittance of profits from investments. Funds can be freely
remitted to persons outside Hong Kong by various means, such as dividends, interest,
royalties, service fees, and branch profits, etc.
The principal forms through which a business can be conducted in Hong Kong are as
follows:
Company incorporated in Hong Kong (either private or public via listing on the Stock
Exchange of Hong Kong).
Branch of a foreign company.
Representative or liaison office of a foreign company.
Joint venture (can be set up either as a company or partnership).
Partnership.
Sole proprietorship.
Of the above, privately incorporated companies and branches of foreign companies are
most commonly used by foreign investors, as limited liability is usually desirable.
Intellectual property (IP) regulations
The Intellectual Property Department is responsible for monitoring the IP regime and
ensuring the protection and enforcement of IP rights in Hong Kong. The Department is
also responsible for investigating complaints against infringements and has extensive
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powers of search and seizure. Registration and protection of patents, copyrights,
trademarks, and registered designs are each governed by a separate ordinance.
Mergerand acquisition (M&A) activities
There are no specific restrictions on M&A activities in Hong Kong. The following tax
considerations are relevant in the M&A context:
Dividends or other forms of distribution of profits (e.g. distribution of branch profits
to the head office) are generally not taxable.
Capital gains arising from an M&A transaction is not taxable in the hands of the
transferor, whereas amortisation of the goodwill in the transferees accounts is not
tax deductible due to its capital nature.
For a share deal, stamp duty is payable on the transfer of Hong Kong shares at 0.2%,
unless an exemption applies; for an asset deal, stamp duty is payable on conveyance
of immovable property in Hong Kong at progressive rates of up to 4.25%.
Gains derived from transfer of revenue items (e.g. trade receivables) in an asset deal
will be subject to profits tax.
There is no special tax concession/incentive relating to M&A transactions.
Tax losses in the acquired company can generally be carried forward indefinitely to
set off against future assessable profits. However, there are specific anti-avoidance
provisions in the IRO that prevent the transfer of shares of a company with
accumulated tax losses to owners of a profitable company for the sole or dominant
purpose of utilising the tax losses (i.e. offsetting the tax losses against the profits
generated from other trade, profession, or business of the transferee).
800
Hong Kong
Hungary
PwC contact
Tams Lcsei
PricewaterhouseCoopers Hungary Ltd
Bajcsy-Zsilinszky t 78.
H-1055 Budapest
Hungary
Tel: +36 1 461 9358
As of 1 January 2014, the following significant changes were introduced to the
Hungarian tax system.
In the case of a reported shareholding, the minimum shareholding acquisition has

changed from 30% to 10%.
In addition to the taxpayer, its related company may also deduct the direct costs of the
taxpayers own research and development (R&D)efforts from its pre-tax profit, in the
proportion agreed between them.
The loss carryforward rules relating to transformation have been supplemented.
The tax advantage that can be achieved by applying the tax incentive for team sports,
performing arts, and film productions has been significantly reduced.

Resident taxpayers are subject to all-inclusive or unlimited CIT liability. Non-residents
are subject to CIT on their income from their Hungarian branchs business activities.
The CIT rate is 10% on the first HUF 500 million of a positive CIT base, without any
further preconditions. The tax base above this limit is subject to 19% CIT.
Minimum tax base
If a companys CIT base or the pre-tax profit, whichever is higher, is less than 2% of its
total revenues reduced by the cost of goods sold, the value of mediated services, and the
income of the foreign permanent establishments (PE) (i.e. the minimum tax base), the
company can choose to file a declaration and pay CIT either according to the general
provisions or on its minimum tax base.
Real estate holding companies
A company and its related parties are defined as real estate holding companies if at least
75% of the book value of their assets is domestic real estate and if they have a foreign
shareholder that is not resident in a country that has a double tax treaty (DTT) with
Hungary or the treaty allows capital gains to be taxed in Hungary.
The tax base of real estate holding companies in cases of share transfers and share
capital decreases is the positive amount of the consideration minus the acquisition price
of the shares less the costs of acquisition and of administration. The tax rate is 19%.
Please note that the definition of the payer for CIT purposes is very different from the
definition used for stamp duty purposes.
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801
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Energy suppliers income tax
The energy suppliers income tax rate is 31%. The scope of the definition of energy
suppliers also includes universal suppliers and authorised distributors of electricity and
natural gas.
If the energy supplier entity possesses a development tax incentive (see the Tax credits
and incentives section), then it is possible to claim this tax incentive for up to 50% of the
energy suppliers income tax liability as well.
Local business taxes (LBTs)
All municipalities are entitled to LBTs. LBTs are deductible for Hungarian CIT purposes
and are not normally treated as income tax in the application of the tax treaties.
The LBT base is the net sales revenue reduced by the cost of goods sold, subcontractors
work, the costs of materials, mediated services, and R&D costs. However, taxpayers
are only allowed to deduct from the LBT base part of the cost of goods sold and part of
the value of mediated services as calculated based on brackets determined in relation
to their annual sales revenues. General service fees, depreciation, and labour costs are
typically not deductible for LBT purposes. 100% of royalty, interest, or dividend income
and the LBT base of a foreign PE of a Hungarian company are exempt from LBT. The LBT
rate may differ from municipality to municipality but is capped at 2% by law.
Innovation contribution
Companies defined as such in the Accounting Act, except for small and medium-sized
enterprises and branches, are also subject to an innovation contribution. The tax base of
the innovation contribution is the same as the LBT base. The tax rate is 0.3%.
Corporate residence
Corporations are residents for CIT purposes if they are incorporated in Hungary,
although foreign corporations may also be deemed to be Hungarian residents for CIT
purposes if their place of effective management is in Hungary.
Foreign entities may carry out business through resident corporations or through PEs
(branches). Commercial representative offices may be opened for auxiliary activities
that do not create a taxable presence.
Hungary treats PEs as separate and distinct entities, and profit is attributed to a PE
based on the principles set out in the Organisation for Economic Co-operation and
Development (OECD) guidelines.
In the Corporate Income Tax Act, a PE is defined as fixed business premises (machinery
or equipment) through which the entrepreneurial activity of an enterprise is partly or
wholly carried on, regardless of the title of the taxpayer to those premises. A PE may
consist of any of the following: a place of management; offices, including representative
offices registered in Hungary; factories and workshops; and mines, crude oil or natural
gas wells, quarries, or other places from which natural resources are extracted.
Construction sites (including assembly) and related supervisory activities constitute a
PE if they last, in the aggregate, for at least three months in a calendar year. All activities
carried out at the same construction site qualify together as a single PE, regardless of
whether they are based on separate contracts or were ordered by different persons.
Construction sites are defined as sites that represent a unit for economic, business, and
geographical purposes.
802
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Hungary
PEs are also created by the direct utilisation of natural resources by a foreign person.
A foreign person is deemed to have a PE in Hungary if it utilises natural resources or
immovable property for consideration, including the alienation orcapital contribution
of any rights related to the immovable property or natural resources.
A non-resident enterprise is considered to have a PE with respect to activities undertaken
on its behalf by another person if its agent is authorised to conclude contracts in
Hungary on behalf of the non-resident entity and the agent regularly exercises this right
or maintains a stock of goods and products from which it regularly makes deliveries in
the name of the non-resident entity.
The insurance of risks occurring in Hungary and insured on behalf of the non-resident
person by another person constitutes a PE of the foreign insurer, except for reinsurance
activities.
Furthermore, as mentioned above, a foreign taxpayer must also be treated as having a
PE if it has a Hungarian branch.
The definition of a PE does not include the following:
Establishments used solely for the purpose of storing and presenting the goods or
products of a non-resident person.
The stockpiling of goods and products of a non-resident person solely for the purpose
of storing, presenting, or processing by another person.
Establishments used for collecting information, or purchasing goods and products,
exclusively for the non-resident person.
Establishments used for other activities of a preparatory or auxiliary nature.
Activities of independent agents, provided they are acting in their ordinary course of
business.
Note that a different definition of a PE is applicable for LBTs, and no definition is
available for special taxes.
Other taxes
VAT is payable on sales of goods and the supply of services. VAT is also payable on
the importation of goods, on the intra-Community acquisitions of goods, and on the
purchase of certain services provided to Hungarian taxable persons by foreign taxable
persons.
VAT rates
The general VAT rate is 27%.

A reduced VAT rate of 18% is applicable for some products (e.g. milk, certain dairy
products, products made from cereals, flour, and starch). The 18% VAT rate is also
applicable to commercial accommodation services and to services that grant admission
to musical and dancing events.
A reduced VAT rate of 5% is available for certain pharmaceutical products, audio books,
printed books, newspapers, district heating services, certain live performance activities,
and certain products of the pig sector.
Exempted, out of scope transactions
Certain services are exempt from VAT, including, but not limited to, medical, cultural,
sporting, and educational services provided as public services. VAT exemption is also
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available for financial and insurance services. The intra-Community supplies of goods,
services, and exports are also treated as exempt transactions.
Generally, the supply of a building or parts of a building, the land on which it stands,
and the rental of real estate are VAT exempted. An option is available to apply VAT on
the supply or rental of this real estate. VAT exemption cannot be applied to the supply of
building plots.
There as some special transactions that may be out of scope of the Hungarian VAT,
provided that special conditions are met. These include the acquisition of any
contributions in kind, the acquisition of any assets by way of succession, and the transfer
of business as a going concern.
Reverse charge mechanism
A domestic reverse charge applies between Hungarian taxable persons for the following
activities:

Services related to immovable property (e.g. construction, maintenance).

Sales of waste materials.
Sales of carbon quotas.
Sales of real estate and land if the application of VAT was chosen.
Sales of certain agricultural products (e.g. maize, wheat, barley, rye).
VAT recovery
VAT deduction is available only for the business-related element of purchases that were
made partially for non-business purposes.
If a taxpayer has a negative VAT balance in a VAT period, the amount can be recovered,
provided that the VAT balance reaches or exceeds an absolute value of HUF 1 million for
monthly filers, HUF 250,000 for quarterly filers, or HUF 50,000 for annual filers.
As a general rule, the deadline for remitting VAT reclaims is 75 days, irrespective of the
amount concerned. However, if all incoming invoices, regarding which the VAT was
deducted in the VAT return, are settled (paid fully to the suppliers) until the due date of
the related VAT return, a 45-day deadline can be applied.
Directive for refunds of foreign taxable persons
Taxable persons with their establishment in an EU country, other than Hungary, or in

Switzerland or Lichtenstein can recover local VAT. The refund applications have to be
submitted electronically. Reclaim requests should be submitted to the tax authority of
the country where the EU-registered taxable person is established.
Reporting obligations
All types of intra-Community transactions have to be reported in the periodic European

Community (EC) List in Hungary.
Taxpayers registered in Hungary have to submit domestic recapitulative statements
about those transactions where the VAT amount reaches or exceeds HUF 2 million
together with the basic data of the related business partner. In respect of the incoming
invoices, those cases also have to be considered and included where the sum of the VAT
on all transactions carried out by the same partner in a given VAT period reaches or
exceeds HUF 2 million. If a domestic recapitulative statement has to be prepared (i.e.
there are transactions with a VAT amount higher than the referred threshold), the VAT
return can only be submitted in electronic form.
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Group taxation
The VAT Act allows all companies that have established business presences in Hungary
and qualify as related enterprises to form a VAT group. The essence of a VAT group is
that its members act under a single VAT number in their transactions (i.e. they issue
invoices under a shared VAT number and submit a single, joint tax return) and the
supplies of products and services between the members do not qualify as business
transactions from a VAT perspective.
Customs duties
Hungarian customs legislation and policies have been fully harmonised with EU
legislation.
The EU customs legislation is comprised of the following main regulations:
Council Regulation 2913/92/EEC establishing the Community Customs Code.
Council Regulation 2454/93/EEC laying down provisions for the implementation of
Council Regulation 2913/92/EEC establishing the Community Customs Code.
Council Regulation 1186/2009/EEC setting up a Community system of reliefs from
customs duty.
Council Regulation 2658/87/EEC on the tariff and statistical nomenclature and on
the Common Customs Tariff.
Excise taxes
The following goods are subject to excise duty:

Mineral oils.
Alcohol and alcoholic beverages. Any product with an alcohol content of 1.2% or
more by volume qualifies as an alcohol product.
Beers.
Wines.
Sparkling wines.
Intermediate alcoholic products.
Tobacco products.
As of 1 January 2014, the excise duty rates are as follows:
Petroleum products: HUF 110,350 to HUF 124,200 per thousand litres or HUF
4,425 to HUF 116,000 per thousand kilograms, depending on the type of petroleum
product.
Alcohol products: HUF 333,385 to HUF 476,270 per hectolitre of pure alcohol.
Beer: HUF 1,620 per alcohol degree and per hectolitre, HUF 810 per alcohol degree
and per hectolitre for beer produced in a micro-brewery.
Wines: HUF 0 for grape wines; HUF 9,870 per hectolitre for wines made from other
types of fruit.
Sparkling wines: HUF 16,460 per hectolitre.
Intermediate alcoholic products: HUF 25,520 per hectolitre.
Cigarettes: HUF 12,500 per thousand cigarettes plus 31% of the retail sale price, but
a minimum of HUF 24,920 per thousand cigarettes. The tax base per cigarette also
depends on the length of the cigarette (without filter). It is double if the length of the
cigarette is 8 cm to 11 cm, triple if the length is 11 cm to 14 cm, and so on.
Cigars and cigarillos: 28.5% of the retail price.
Fine-cut tobacco: 52% of the retail price, but a minimum of HUF 12,460 per
kilogram.
Other tobacco: 32.5% of the retail price, but a minimum of HUF 12,460 per kilogram.
The Customs Body of the National Tax and Customs Authority is responsible for excise
duty. The European Unions excise duty rules apply in Hungary.
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Property and land taxes
Hungarian municipalities have the right to levy property tax and land tax at their own
discretion until the below caps are reached.
Property tax
The owner of a building is subject to property tax liability annually on the first day of the
calendar year.
The local government can determine the tax base in either of the following ways:
The net floor space of the building expressed in square metres, with a maximum tax
rate of HUF 1,100/m2.
The adjusted market value of the building, with a maximum tax rate of 3.6% of the
adjusted market value.
Land tax
The owner of land is subject to land tax liability annually on the first day of the calendar
year. Undeveloped plots of land situated within the area of jurisdiction of a local
government, including peripheries, are subject to this tax. The local government can
determine the tax base in either of the following ways:
The actual area of the plot expressed in square metres, with a maximum tax rate of
HUF 200/m2.
The adjusted market value of the plot, with a maximum tax rate of 3% of the adjusted
market value.
Stamp duties
The most common types of stamp duty are gift duty and duty on transfers of property for
consideration. Stamp duty is levied on movable and immovable property and property
rights if they were acquired in Hungary, unless an international agreement rules
otherwise.
Gift duty
Gift duty arises on the date when a contract concerning a gift is concluded.
Transfers of movable property, immovable property, and property rights without
consideration are subject to gift duty. In these cases, however, gift duty is only incurred if
the transaction was formally documented; except for immovable property with a market
value of more than HUF 150,000, where gift duty must be paid in any event.
The base of gift duty is the net value of the gift, which is the market value minus any
liabilities related to the gift. The general duty rates vary, depending on the type of
property: 9% on residential property and 18% on other assets.
Transfers of movable assets without consideration and acquisitions of claims without
consideration including waivers of claims and assumptions of debts are exempt from
gift duty, provided that the recipient is a company. However, as of January 2014, this
exemption only applies if in the country where the non-resident beneficiary is based,
both the rate of the tax corresponding to the corporate tax and the rate of the tax on
the sale of the shareholding are no less than 10%. The same conditions apply to the
exemption of preferential exchange of shareholdings, preferential asset transfer, and
transfer of assets between related parties.
Duty on transfer of property for consideration
The obligation to pay duty on the transfer of movable and immovable property for
consideration arises on the date when the contract is concluded.
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Transfer of real estate, property right, and the transfer of companies that own domestic
real estate are subject to stamp duty. In this latter case, stamp duty only applies for
acquisitions of direct or indirect participations (stocks, shares, co-operative shares,
investor shares, converted investor shares) of at least 75% in a company that owns
domestic real estate. For stamp duty purposes, a company that owns domestic real estate
is a company (i)in which the book value of the domestic real estate represents at least
75% of the assets or (ii) that holds at least 75% of the shares of another company in
which the book value of the domestic real estate represents at least 75% of the assets.
The stamp duty for the transfer of real estates and the transfer of companies that own
domestic real estate is 4% up to HUF 1 billion and 2% of the amount exceeding HUF 1
billion up to a maximum of HUF 200 million per real estate.
There are special rules for real estate trading companies and financial leasing service
providers. Under certain circumstances, exemptions are available more generally.
Stamp duties are also levied on certain court procedures (e.g. Court of Registration) and
on submissions to certain authorities (e.g. appeals to the tax authority). Stamp duty is,
for instance, levied in an amount of:
HUF 100,000 on the registration of a private stock company or a limited liability
company
HUF 600,000 on the registration of a public stock company or a European Company
HUF 100,000 on the registration of any other entity with legal personality (except
from public stock companies and European Companies)
HUF 50,000 on the registration of a branch office, and
HUF 50,000 on the registration of a representative office.
Registration tax
Registration tax is charged on passenger cars, motor homes, and motorcycles before they
can be registered and put into service in Hungary. The registration tax is also payable by
fleet operators. The duty is payable with the first domestic registration, import, intraCommunity purchase, or in the case of a conversion.
The registration tax rate from 1 January 2014 is applied as follows:
Passenger cars: HUF 45,000 to HUF 4.8 million, depending on the technical features
of vehicles (cc, engine type) and environmental classification.
Hybrid cars: HUF 76,000.
Electrical cars: HUF 0.
Motorcycles: HUF 20,000 to HUF 230,000, depending on technical features of the
motorcycles (cc).
The registration tax is levied by the Customs Body of the National Tax and Customs
Authority.
Public health product tax
The first domestic distributor of certain products, as well as the acquirer of goods that
are brought from abroad and used for the domestic manufacture of own products that
will be sold in Hungary, are liable to pay a product tax. The duty rates from 1 January
2014 are as follows:
Beverages (depending on sugar content and tariff number): HUF 7 or for syrups and
concentrates HUF 200 per litre.
Energy drink (depending on tariff number, methyl-xanthine, and taurine content):
HUF 40 or HUF 250 per litre.
Cocoa powder with added sugar (depending on tariff number, sugar, and cocoa
content): HUF 70 per kilogram.
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Other pre-packed product with sugar (depending on tariff number, sugar, and cocoa
content): HUF 130 per kilogram.
Salty snacks (depending on tariff number and salt content): HUF 250 per kilogram.
Seasonings (depending on tariff number and salt content): HUF 250 per kilogram.
Flavoured beer and alcoholic beverages (depending on tariff number and sugar
content): HUF 20 per litre.
Fruit jam (depending on tariff number and sugar content): HUF 500 per kilogram.
Environmental protection product fee
The following products are subject to the environmental protection product fee: other
crude oil products, tyres, packaging materials, batteries, commercial printing paper,
and electrical and electronic products (based on customs tariff numbers applicable on 1
January 2010).
The following entities are liable to pay the product fee:
The first domestic distributor or user for own purposes.
In the case of domestically manufactured other crude oil products, the first buyer
from the first domestic distributor.
In the case of toll manufacturing, the party that orders the toll manufacturing.
Product fee rates from 1 January 2014 are as follows:
Tyres: HUF 52 per kilogram.
Packaging materials: HUF 17 to HUF 50 per kilogram.
Commercial packaging materials (packaging of beverages, plastic shopping bags):
HUF 17 to HUF 1,800 per kilogram.
Oil: HUF 112 per kilogram.
Batteries: HUF 60 or HUF 80 per kilogram.
Paper-based advertisement materials: HUF 64 per kilogram.
Electrical and electronic products: HUF 50 to HUF 500 per kilogram.
The Tax Body of the National Tax and Customs Authority controls the payment and
reporting of the product fee and carries out product fee inspections. The product fee is
self-assessed. The product fee returns must be submitted quarterly to the tax authority
via its electronic system. An advancement payment is payable for the fourth quarter.
The product fee penalty is generally 100% of the product fee shortfall in cases of nonpayment or underpayment.
Environmental load charges
Environmental pollution charges were introduced to protect the natural environment, to

reduce its impairment, to encourage the users of the environment to engage in activities
aimed at the preservation of the natural environment, and to provide funding from the
central budget for environmental protection and nature preservation.
Emitting entities liable to pay charges include those who operate point-source emitters
subject to registration, pursue activities subject to a water right permit, or who do not
use available public drainage systems and dispose of their sewage under a water right
permit or a permit from the local water management authorities.
Qualifying materials include sulphur dioxide, nitrogen oxides, mercury, phosphorous,
cyanides, and others.
The load charge is calculated on the basis of the quantity of emitted materials multiplied
by the fee rate. Basically, the amount of the fee payable depends on the hazard level of
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the emitted material, e.g. HUF 50 per kilogram for sulphur dioxide and HUF 220,000
per kilogram for mercury.
Energy tax
Goods are subject to energy tax at the following rates:

Electricity: HUF 295 per megawatt hour.
Coal: HUF 2,390 per thousand kilograms.
Natural gas: HUF 88.5 per gigajoule.
The following entities are subject to energy tax:
Energy traders.
End-users.
Producers.
The tax is self-assessed, and the Tax Body of the National Tax and Customs Authority is
responsible for the related administration procedures, except in the case of imports.
Food chain supervision fee
The purpose of the food chain supervision fee is to raise revenue for the operation of a
regulatory body tasked with the official supervision of the food chain.
The supervision fee is payable by the following natural persons or economic operators:
Persons who place animals on the market that are kept for food production, breeding,
or experimental purposes.
Persons who place food or fodder crops, seeds, plant products, and planting material
on the market.
Food businesses.
Registered or authorised feed businesses.
Persons who manufacture or place on the market veterinary medicines or veterinary
medicinal products.
Persons who manufacture or place on the market EEC fertiliser or other products
subject to authorisation.
Persons involved in the handling, use, further processing, and transport of animal byproducts or placing derived products on the market.
Businesses engaged in the transport of live animals.
Persons operating facilities for the cleaning and disinfection of vehicles used for
transport of live animals, isolation facilities for receiving animals from different
stocks, livestock loading ramps, assembly centres, trading sites, feeding and watering
stations, rest stations and livestock fairs.
Persons manufacturing and storing plant propagation material.
Persons operating a registered or authorised laboratory.
Persons placing devices on the market that are used for marking animals.
The fee is 0.1% of the net sales revenue (excluding excise duty and the public health
product tax) derived in the preceding year from these activities.
The taxpayers concerned will have to comply with their reporting obligation by 31 May.
The annual supervision fee is payable in two equal instalments: the first instalment by 31
July, and the second by 31 January.
Telecommunication tax
The telecommunication tax applies to telecommunications service providers. The

telecommunication tax rate is HUF 2 per minute for calls made and HUF 2 per message
sent for private individuals, and HUF 3 per minute for calls made and HUF 3 per
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message sent for parties other than private individuals. The monthly ceiling is HUF 700
per number for private individuals and HUF 5,000 per number for entities other than
private individuals.
Tax on financial transactions
The scope of the tax on financial transactions includes payment service providers with
a registered address or branch office in Hungary, credit institutions entitled to provide
foreign currency services, and special services intermediaries entitled to provide
intermediated foreign currency services.
The financial transaction tax applies to the following payment services:

Bank transfers.
Direct debits.
Postal cash payments.
Cash payments from payment accounts (including cash withdrawals using a credit
card).
Cash transfers.
Bank card payments.
Letters of credit.
Cashing cheques.
Foreign currency exchanges.
Debt repayments.
Commissions and banking fees.
Other transactions in which the amount of the transaction is deducted from the
payment account credit balance.
No tax will be payable for the following transactions if certain conditions are fulfilled:
Technical transfers between accounts held at the same bank.
For investment services, transfers between the payment account and the client
account, if the investment service provider is a related party of the financial service
provider.
Payments from limited purpose accounts (long-term investment accounts, voluntary
pension accounts, subsidised accounts for minors [START account], and custodial
accounts).
Cash pool related payment transactions within the same financial service provider.
Transactions between financial service providers (including among others financial
institutions, investment companies, etc.).
Payment transactions from social security and family allowance administrative
accounts.
Unapproved (or approved but incorrectly made) payment transactions and their
corrections.
The tax base is the amount of the transaction (debit amount, amount paid, amount
of currency sold, etc.). The tax rate has changed considerably compared to the earlier
rate of 0.1%. In most cases, the amount payable will be 0.3% of the amount of the
transaction but may not be more than HUF 6,000 per transaction. This cap will not apply
to transactions in which the duty is payable by the State Treasury or Magyar Posta Zrt, or
in case of cash withdrawal.
Bank tax
In Hungary, the bank tax is levied on financial institutions. The rates, among others,
are 0.15% on the adjusted balance sheet totals of up to HUF 50 billion, and 0.53% on
adjusted balance sheet totals of HUF 50 billion and above. Financial institutions are also
subject to 30% tax on their profit before taxation; however, this tax liability is deductible
from the bank tax calculated on the balance sheet totals.
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Insurance premium tax is applicable on voluntary vehicle liability insurance policies

(CASCO) and on property and casualty insurance policies in Hungary.
The insurance tax should be paid by the insurance companies after the gross insurance
premium received on insurance policies insuring risks located in Hungary. Insurance
companies subject to the tax include:
insurance companies headquartered in Hungary
foreign insurance companies Hungarian branches, or
insurance companies providing cross-border insurance services if these entities,
which are headquartered abroad, render taxable insurance services in Hungary.
The above mentioned entities should apply two different tax rates.For voluntary
vehicle liability insurance policies, the rate of the tax is 15%; for property and casualty
insurance, the rateis 10%.
We note that this tax should be paid neither after the mandatory vehicle liability
insurance, nor after life and health insurance.
Accident tax
The base of the accident tax is the yearly fee of compulsory motor vehicle liability
insurance. The tax rate is 30%.
Employment-related tax and social security contributions payable by

employers
The social tax base is the gross income paid to the employee. The tax rate is 27%.
The rate of training fund contribution on employment income is 1.5%. The tax base is
the gross income paid to the employee.
Branch income
Foreign companies may establish branch offices in Hungary. A branch office is an
organisational unit of a foreign company without legal personality, vested with financial
autonomy, and registered in the Hungarian companies register as a branch office of
the foreign company. The provisions of the Hungarian Accounting Act apply to branch
offices, which must prepare reports using double-entry bookkeeping. Statutory audits
are obligatory, except for the branches of corporations whose registered office address is
in the European Union.
A branch office is regarded as established when it has been entered into the companies
register. A branch office may start operating once the application for registering the
branch office has been submitted to the Court of Registration, provided that it indicates
under registration on its corporate correspondence. Until a branch has been registered,
it cannot carry out any activities that are subject to official permission. A branch office is
considered dissolved upon its removal from the companies register.
Branch offices are treated as PEs for taxation purposes. They must determine their tax
base according to the general rules applicable to Hungarian companies. The profit for
the year (calculated on the basis of the Hungarian accounting system and adjusted by
specific provisions of the Corporate Tax and Dividend Tax Act or CDTA) is subject to CIT
of 10% on the first HUF 500 million of the positive CIT base. The tax base above this
limit is subject to 19% CIT. The definition of PE is similar to that in the tax treaties but
somewhat broader. For treaty countries, the respective treaty definition applies.
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A foreign companys CIT base is determined for all its domestic PEs (except for branches)
collectively and for its branches separately. A branch should account for costs and
revenues as if it were independent from its foreign parent company.
For a Hungarian PE, earnings before taxes are reduced by cumulated administrative
costs incurred proportionately at the headquarters and any of its PEs, with the maximum
proportion defined as the revenues of the PE compared to all revenues of the foreign
company.
However, if there is a treaty between Hungary and the other country, the provisions of
the treaty have priority over domestic law. Therefore, the provisions of the treaty have to
be followed in the first instance, and all costs related to the activity of the branch have to
be allocated to the branch, without the above restrictions in domestic law, and all profit
realised with respect to the branch must also be allocated to the branch. The allocation
method must be consistent from year to year, unless there is a good reason for changing
it.
The foreign parent must continuously provide the assets and funds required for the
operation of the branch office and the settlement of its liabilities. The employees of a
branch office are in a legal relationship with the foreign company, and the foreign parent
exercises employers rights. A branch is considered to be related to its parent company/
headquarters. Therefore, the prices used in inter-company transactions have to be at
arms length, and transfer pricing documentation has to be prepared.
The CIT base should be calculated by modifying the accounting pre-tax profit by
adjustments and deductions as provided by the CDTA.
Inventory valuation
Inventories are generally valued at their historical cost unless their fair market value is
significantly lower than their book value, in which case the fair market value should be
recorded. Cost may be determined on the basis of first in first out (FIFO) or average cost.
Capital gains
Capital gains (losses) are treated as ordinary income (losses) for tax purposes. The gain
on the sale of depreciable assets equals the sales revenue reduced by the net value of the
asset for CIT purposes.
If a participation (of at least 10%) or an intangible asset is registered within 75 days of
acquisition and held continuously for at least one year, capital gains from the sale or
contribution in kind of the participation is exempt from CIT in general. Any additional
acquisitions in the case of a registered participation may also be registered, provided
that the 10% participation was already registered.
Stock transactions
Shareholders of a real estate holding company are also subject to CIT on their income
from the alienation of the shares in the real estate holding company. Transfers of direct
or indirect participations in companies that own real estate may be subject to CIT.
Dividend income
Except in the case of controlled foreign companies (CFCs) (see the Group taxation
section), dividends received and accounted for as income in the given tax year are taxfree.
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Interest income
No specific provision exists in Hungary for interest income; consequently, interest

income is taxable for CIT purposes.
Royalty income
50% of royalty income is deductible for CIT purposes, up to 50% of pre-tax profit.
Royalties as revenues are derived from (i) permission for the exploitation of patents,
from the industrial design of assets under industrial law, and from know-how; (ii)
permission to use trademarks, business names, and business secrets; (iii) permission to
use copyrights and similar rights attached to protected work; and (iv) transfers of the
property described above (except for trademarks, business names, and business secrets).
Tax deferral may be chosen for unrealised exchange gains/losses.
Foreign income
Taxpayers resident in Hungary and foreign entrepreneurs must calculate their CIT
base exclusive of any income that is subject to taxation abroad if so prescribed by
an international treaty. In any other case, a foreign tax credit is available for income
taxes paid abroad (see Foreign tax credit in the Tax credits and incentives section for more
information).
In Hungary, there are no provisions under which income earned abroad may be tax
deferred.
Deductions
In general, costs and expenses incurred in relation to the taxpayers income-generating
business activity are deductible for CIT purposes.
Accrued expenses are recognised for taxation purposes in the tax year they affect.
Accounting depreciation that is accounted as expenditure, and thus included in

the accounting profit, should be added to the CIT base. Tax depreciation calculated
according to the CDTA reduces the tax base, even if the tax depreciation is higher than
the accounting depreciation. The tax depreciation of tangible assets should be calculated
using the straight-line method on the basis of the historical value from the time when
the asset was first used for business purposes.
Examples of tax depreciation rates include the following:
Assets
Computers and other high-tech machinery
Vehicles
Other tangible assets
Buildings (long-life structure)
Rented buildings

33 or 50
20
14.5
2
5
Assets newly acquired since 2003 can be depreciated at 50% annually; these instruments
include, among other items, machinery and intellectual property (IP).
There is no prescribed amortisation rate for intangibles. The historical value, the
residual value, and the useful life should be considered.
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Additionally, goodwill cannot be amortised either for accounting or tax purposes
if it does not lose its value during its use. However, if extraordinary amortisation is
accounted on goodwill, the extraordinary amortisation will also be recognised for CIT
purposes. In the case of transformations, specific amortisation rules apply.
Companies are not obligated to capitalise the costs of formation/reorganisation. The

capitalisation of these costs is at the companys discretion, but the company should
comply with its accounting policy. Furthermore, only the direct costs of formation/
reorganisation that are not classified as investments or renovations and are likely to be
recovered ultimately can be capitalised.
Interest expenses
Interest expenses are deductible if the following conditions are met:

Interest incurs in relation to the companys profit generating activity.
Thin capitalisation rules are fulfilled (see Thin capitalisation in the Group taxation
section).
Interest is not paid to a CFC.
Bad debt
Under the Accounting Act, bad debts are only deductible for CIT purposes if they are
supported by legally valid third-party documents that the receivable cannot be collected.
Expenses claimed that cannot be enforced in court and expired claims are not deductible
for CIT purposes.
In addition to the above, 20% of eligible bad debts are deductible from the CIT base if
the debt was not settled within 365 days from the due date.
Grants made or assets that are transferred without consideration, as well as liabilities
assumed or services provided free of charge, will qualify as business expenses if the
taxpayer has a declaration from the recipient stating that the recipients profit will not be
negative without the income received.
Grants will always qualify as non-business expenses if they are provided to a foreign
person or foreign resident company.
In the case of film and sports (football, basketball, handball, ice-hockey, and water polo)
sponsorship grants, the amount of support is deductible both from the CIT base (as an
expense) and from the CIT amount, provided that an official sponsorship certificate is
available.
Development reserve
50% of pre-tax profit may be assigned as development reserve. The maximum value of
the reserve is HUF 500 million; however, it has increased from four years to six years for
development reserves included in the 2008 financial statement. For other development
reserves, the period remains four years.
Intellectual property (IP) reserve
Further, there is a possibility to create an IP reserve, from income from sales or capital
contribution of intangible assets that generate royalty income, deeming that income
non-taxable. The IP reserve should be shown as part of the tied-up reserve in the
companies books. The IP reserve may be used to buy intangible assets that generate
royalty income at the company within three years from its creation; otherwise, CIT and
late payment penalty should be paid on the amount.
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Tax base allowance regarding R&D
A tax base allowance is only applicable for R&D activities if the taxpayer carries out basic
research, applied research, or experimental research activities for its own purposes. The
direct cost of the basic research, the applied research, and the experimental research,
or the amount of depreciation on the research activity (if the cost of R&D activity is
capitalised), is deductible from the tax base.
300% of the direct costs of research activity (up to a maximum of HUF 50 million) are
deductible from the tax base if the research activity is carried out jointly with a higher
education institution, the Hungarian Academy of Sciences, or a research institute
established by them.
A cooperation agreement may be concluded with a research institution operating either
as a central budgetary organ or as a majority state-owned business organisation.
Employee benefit expenses
Employee benefits and the fringe benefit tax payable on them are tax-deductible.
Bribes, kickbacks, other illegal payments
Bribes, kickbacks, and illegal payments are not recognised as business costs for CIT
purposes and are non-deductible from the tax base.
Fines and penalties
Fines and penalties are not deductible for CIT purposes.
Taxes
Taxes are usually deductible for CIT purposes, except for CIT, recoverable VAT, and the
income tax of energy suppliers and public utility service providers.
Losses can be carried forward indefinitely, and the tax authoritys approval is not
required. However, the tax authority may later audit whether a company has exercised
its rights in accordance with the intended purpose of these rights when carrying losses
forward.
The companys tax losses carried forward cannot be utilised if:
the majority of the companys shares is directly/indirectly acquired by an
independent entity (an entity who was not one of the companys owners in the
preceding two financial years)
the activity of the company changes significantly in the two years following the
transformation, or
the successor company does not generate any revenue from at least one activity of the
predecessor.
Losses carried forward may only be used to offset up to 50% of the tax base calculated
without losses carried forward.
Note that earlier tax losses must be used first (FIFO principle), and the losses of
predecessors are also deductible from the successor companys CIT base.
Losses cannot be carried back (except for agricultural companies, who may account
deferred losses by self-revision or by correcting the amount of tax paid in the previous
two tax years).
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There is no general restriction on the deductibility of a consideration due to a foreign

entity, provided the payment is a justifiable business cost. General anti-avoidance
provisions (abuse of law, substance-over-form) may also result in non-deductibility. If
the parties are considered to be related parties under the definition of the CDTA, the
Hungarian tax office is entitled to adjust the Hungarian partys tax base to reflect the
market price (arms-length price) if the parties did not make the adjustment themselves.
Considerations due for services are only deductible if the actual performance of the
services is supported and the Hungarian taxpayer can prove that it benefits from the
service.
Thin capitalisation rules may apply to interest on any non-banking debt in excess of
three times the equity (see Thin capitalisation in the Group taxation section).
The consideration paid to a CFC is not deductible for CIT purposes unless the taxpayer
is able to prove and keeps documentation that it serves the purposes of business
operations. For further details on the CFC rules, see the Group taxation section.
Group taxation
Group taxation is not available for CIT purposes in Hungary. See Value-added tax (VAT)
in the Other taxes section for a description of group taxation for VAT purposes.
Transfer pricing
If parties qualify as related parties (as defined in the Hungarian CDTA) and the price
applied differs from the arms-length price, the CIT base should be modified by a proper
transfer pricing adjustment. In addition, the foreign PEs of a Hungarian company and
the Hungarian head office also qualify as related entities and are subject to transfer
pricing regulations.
Taxpayers are obligated to prepare transfer pricing documentation on intra-group
transactions. The documentation has to be prepared for every contract between related
parties (including in-kind contributions made at the time of establishment).
Transfer pricing documentation is not required to be prepared for transactions between
a resident taxpayers PE and a related company if the resident taxpayer under the
provisions of an international treaty adjusts the corporate tax base ensuring that it does
not include the foreign taxable income.
When determining the transfer prices applied between related companies, in addition
to the traditional methods (comparable uncontrolled price, resale-minus, and costplus methods), it is also possible to use the transactional net margin method and the
profit-split method. In addition to these methods, companies may continue to use other
methods if the traditional methods are inadequate.
Taxpayers are allowed to prepare two types of documentation: country-specific
documentation or consolidated transfer pricing documentation. Taxpayers may prepare
consolidated transfer pricing documentation if this does not jeopardise comparability,
and the contracts:
have the same subject matter and all their terms and conditions are identical or only
slightly different or
closely relate to each other.
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Taxpayers are required to make a declaration in their CIT returns as to which type of
documentation they choose.
In summary, the requirements of the country-specific documentation have not
changed as of 2014 compared to previous documentation requirements. This type of
documentation must include, for example, the following:

A functional analysis.
Industry and company analyses.
An economic analysis.
A financial analysis.
An account of the process of selecting the transfer pricing methodology.
Consolidated transfer pricing documentation must consist of two main parts:

The core documentation, which includes the standard data for each company within
the group that is resident in any EU member state.
Country-specific documentation, which describes the agreements between the
taxpayer and its related parties.
The documentation has to be available no later than the filing deadline for the CIT
return in any given year; otherwise, the tax authority may assess a default penalty of
up to HUF 2 million for each case of missing or deficient documentation. In the case of
a repeat offence, it is up to HUF 4 million for each missing or deficient documentation.
For the repeated lack or deficiency of the same documentation, the penalty may go up
to four times the original penalty levied. Note, however, that this documentation only
has to be prepared and kept in the companys files, rather than being filed with the tax
authority.
Thin capitalisation
Thin capitalisation rules may apply to interest on any non-banking debt in excess of
three times the equity. Where debt means the average daily balance of outstanding
loans, outstanding debt securities offered privately and bills payable (with the exception
of bills payable on account of suppliers debts), and any other liability other than loans,
debt securities, and bills payable shown in the balance sheet that entails the payment of
interest from the taxpayers profit (with the exception of debts of credit institutions and
financial companies incurred in connection with and for the purposes of financial service
activities); and equity means the average daily balance of subscribed capital, capital
reserve, retained earnings, and tied-up reserves (or own funds of the like). Debt includes
non-interest bearing loans as well.
Back-to-back arrangements are exempted from the thin capitalisation calculation.
CFCs are foreign persons or entities established abroad and/or foreign resident entities
if, among other conditions, they are owned by a resident private individual/entity who
is deemed to be the beneficial owner (i.e. has a certain ownership share or voting ratio
or dominant influence in the enterprise) or if the majority of their income derives from
Hungarian sources and, in both cases, the effective tax rate of the persons/entities is
lower than 10%. If a foreign companys tax base is negative or zero and a multi-rate
corporate tax system is in place in the given country, the lowest tax rate must be no less
than 10% in order for an entity not to qualify as a CFC.
Certain exceptions may be available (for companies in EU member states, OECD
member states, and treaty countries, if a real economic presence can be proved). It is the
taxpayers obligation to provide proof on the (lack of) CFC status.
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Foreign tax credit
Foreign tax credit is available for income taxes paid abroad, up to the Hungarian tax
payable on the creditable income (at a maximum of 90% of income tax paid abroad).
The foreign income has to be classified by country of origin and revenue type. The
deducted tax may not exceed the lesser of either the applicable foreign tax or the
applicable tax based on the taxation treaty between Hungary and the given country.
If there is no taxation treaty, 90% of the tax payable abroad is credited against the tax
liability, up to a hypothetical tax liability calculated by using the average Hungarian tax
rate. Full tax credit is applicable if so described by a tax treaty. The average tax rate is
the CIT rate, reduced by the applicable tax allowances, divided by the tax base. Indirect
costs should be allocated in proportion to the revenue of the branch office to the total
revenue of the whole company.
Development tax incentive
Each development tax incentive may be claimed for a ten-year period (beginning on the
completion of the development) on the CIT returns over a maximum period of 14 years
from the original application for the incentive. In any given tax year, the tax incentive is
available for up to 80% of the tax payable but in total up to the state aid intensity ceiling.
Applications for the tax incentive only have to be submitted to the Ministry for National
Economics if the aggregated eligible costs of the investment exceedHUF 100 million.
If the investment is below this threshold, taxpayers only need to notify the Ministry
for National Economics before starting the investment. Tax incentives are available for
investments if:
the net present value of the investment is at least HUF 3 billion or
the net present value of the investment is at least HUF 1 billion in certain designated
areas and provided that:
the investment results in the creation of new facilities or the extension of existing
facilities, or
the investment results in substantially changed products or production processes
(excluding investments in basic research, applied research, and experimental
development), and
in the four years following the year in which the tax incentive is first used against
the tax base:
the annual average number of employees has increased by at least 150
compared with either the year before the investment was made or the average
number of employees for the three years preceding the investment (by 75 in
certain designated areas) or
the annual wage costs have increased by 600 times the minimum wage effective
on the first day of the tax year (by a multiple of 300 in certain designated areas)
compared with either the annual wage costs of the year before the investment
was commenced or the average annual wage cost for the three years preceding
the investment.
Provided that the investment results in the creation of new facilities or the extension
of existing facilities, or substantially changed products or production processes, the
Ministry may also grant incentives to companies that invest:

at least HUF 100 million in equipment for zoogenic food production

at least HUF 100 million in environmental protection projects
at least HUF 100 million in broadband internet services
at least HUF 100 million in the production of films and videos
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at least HUF 100 million in basic research, applied research, and experimental
development projects
at least HUF 100 million in projects financed by an issue of stock market-quoted
shares, if (i) the project is started before the last day of the third calendar year
following the date of issue, (ii) the total nominal value of the shares issued by the
fifth year following the start of the project continuously reaches 50% of the value
of the registered shares, (iii) the total issue price reaches 50% of the eligible costs,
and (iv) at the date of the application for the incentive the company has at least 25
shareholders or at least 25% of the issued shares are owned by shareholders where
each of them does not have more than 5% of the issued shares nominal value
at least HUF 500 million in projects initiated by small and medium-sized enterprises,
if certain criteria are met
at least HUF 100 million in projects implemented and operated in a free
entrepreneurship zone,or
at least HUF 100 million in certified energy efficiency improving project.
Tax incentives may also be granted for projects that create new jobs. The restrictions
prescribed in the CDTA regarding the headcount of staff and the percentage of new
entrants to the labour market that may be claimed for such investments have been
abolished, although the conditions prescribed in the relevant decree must still be met.
In addition, the law stipulates that a taxpayer will be required to submit a request for
tax allowance to the minister in charge of fiscal policy before commencement of the
investment project, and the date of completion of the project must be reported 90 days
after completion of the investment project.
Free entrepreneurship zone
The free entrepreneurship zone contains over 900 settlements in the unprivileged areas
of Hungary designated by the government and coordinated by the regional business
development agency that is comprised of individual regions, separated by public
administration, borders, and topographical lot numbers, that are treated jointly for
regional development purposes.
Tax holidays
Tax holidays may be granted in relation to film and theatre subsidies, developments, and
small and medium-sized entities (SMEs).

Film, performing arts, and spectator sports incentives
In Hungary, companies are encouraged to subsidise film production, performing

arts, and spectator sports through the high rate of tax savings available. As sponsors,
companies are able to achieve tax savings up to 104.75% of the financial support they
provide for film makers, performing artists, or sport clubs.
Tax incentive for SMEs
A tax incentive is available for SMEs (basically, those with a maximum of 250
employees; annual net revenue of a maximum of 50 million euros [EUR]; or a maximum
annual balance sheet total of EUR 43 million). SMEs that take a loan from a financial
institution for the acquisition or production of tangible assets may deduct 40% of the
interest paid on the loan from their tax due and may deduct 60% of the interest paid on
loans that have been taken since 1 January 2014, up to a maximum deduction of HUF
6 million. However, taxpayers engaged in certain business sectors cannot use this tax
incentive (e.g. transportation, agricultural activity).
In order to be eligible for the above tax incentives, the wages and salaries need to be kept
at a certain required level, according to relevant regulations.
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In addition, a new type of tax allowance may be used in the future to support team
sports (football, basketball, handball, ice-hockey, and water polo). The relevant
government decree provides detailed rules on the application of this tax incentive.
Withholding taxes
Under the domestic rules, there is no withholding tax (WHT) on dividends, interest, or
royalties.
Foreign organisations are not subject to WHT on interest, royalties, and service fees
received from Hungarian resident companies.
Tax administration
Taxable period
CIT must be calculated by reference to the accounting year, which is either the calendar
year or, for group companies, the groups accounting year.
Tax returns
Returns must be lodged by the last day of the fifth month following the last day of the
accounting year (31 May for a calendar year taxpayer). The tax payable is determined by
self-assessment.
Tax returns may be submitted either electronically or in paper format. However,
those who are legally obligated to submit monthly tax and contribution returns (e.g.
employers and payers) may only submit tax returns electronically.
Payment of tax
CIT instalments must generally be reported and paid quarterly or monthly (above
HUF 5 million tax payable). The final (top-up) payment is due by the last day of the
fifth month following the last day of the accounting year (31 May for a calendar year
taxpayer). In the case of taxpayers with net sales revenues of over HUF 100 million,
100% of the expected final payment is due by the 20th day of the last month of the
accounting year. However, a late payment penalty is only levied if the company fails to
pay at least 90% of the expected final payment by the above deadline. The late payment
penalty is 20% of the difference between the tax advances paid (including the top-up
payment) and 90% of the actual CIT liability.
Tax audit process
Generally, the tax authority selects the taxpayers subject to tax audit based on certain
criteria, which are communicated to the public, and an elaborate risk assessment model.
Tax audits can vary in the following ways: the tax authority can (i) re-audit tax returns,
(ii) monitor the redemption of government guarantees, (iii) audit the fulfilment of
certain tax obligations, (iv) gather data and information, (v) monitor compliance with
duty payment obligations, or (vi) re-audit previously audited tax periods.
A tax audit period can cover any years that are not lapsed (five years after the last day
of the calendar year in which the taxes should have been declared or reported, or paid
in the absence of a tax return or declaration) or not closed by a re-audit of tax returns.
The tax audit starts when a company receives the notice of audit and finishes when that
company receives the report containing the tax authoritys findings. The deadline for the
completion of the tax audit is between 30 and 90 days, although, in special cases (e.g.
related tax audit, request for assistance from foreign tax authorities), it can last over a
year.
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Once the tax authority has completed the audit process, it issues its minutes. The
minutes detail all the findings of facts of the audit and serves as the background of
the tax assessment, and the basis on which the tax authority will pass its first-instance
resolution. Upon receipt of the minutes, the taxpayer has the opportunity to submit its
remarks to the minutes and raise any disagreement with the findings of the audit.
In case of a dispute, the tax assessment of the tax authority may be appealed and
challenged before the second-instance tax authority, which has the right to annul the
first-instance resolution and decide on the merits of the case, or to instruct the firstinstance tax authority to carry out a new audit if the facts and circumstances have not
been appropriately and fully developed.
The decision of the second-instance tax authority is final and binding. Following the
receipt of this decision, the company may appeal to the court. The court may uphold,
amend, or annul the Resolution of Second Instance and, if it is necessary, may order a
new process in relation to the tax audit.
The superior tax authority or the minister in charge of taxation (minister appointed
for the supervision of the tax authority, i.e. Minister of Ministry for National Economy
in Hungary) may take regulatory action on request by the taxpayer. The superior tax
authority or the minister can also amend or annul the unlawful resolution, and, if it is
necessary, a new procedure can be ordered.
In general, the statute of limitations is five years from the end of the calendar year in
which the tax return should be filed. Self-revision interrupts the term of limitation.
The tax authority will take more stringent measures against aggressive tax planning
(tax planning that takes advantage of unintended administrative or legal loopholes)
using its international experience and cooperation agreements.
Generally, the following categories of taxpayersmay expect to be scheduled for tax
audits:
Taxpayers whose records show frequent changes in registered address orownership.
Businesses that have operated for several years with substantial loans from
theirshareholders.
Taxpayers that declared significant amounts of payable and deductible VAT during
their pre-company period.
Taxpayers that have been in continuous operation despite continuing losses.
Taxpayers that spend a significant portion of their sales revenues on services.
Taxpayers that have significant tax base decreasing items, tax allowances, and
subsidies related to investments.
Taxpayers that deduct R&D expenses.
The tax authority will also pay more attention to the actual content of transactions
conducted between related parties and to the methods companies use to determine the
arms-length price.
Other issues
Principal forms of doing business
Branch.
Partnership.
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Limited liability company.
Private company limited by shares.
Public company limited by shares.
Mergers and acquisitions (M&A) from a business and tax perspective
Mergers in Hungary are tax-free transformations if that they qualify under the definition
of preferential transformation. Preferential transformation means that a company,
without going into liquidation, transfers all its assets and liabilities to another company
in exchange for the issue to its shareholders of securities representing the capital of that
other company, and a cash payment not exceeding 10% of the nominal value, or, in the
absence of a nominal value, of the accounting par value of those securities.
In a preferential transformation, the predecessor company does not have to amend
its tax base by the difference between the adjusted book value and the book value.
The adjusted book value means the historical value of assets less any depreciation
deducted from the tax base plus the readjusted amount of extraordinary depreciation.
Furthermore, for shareholders, the income accounted in excess of the historical value
of the shares they acquire in the preferential transformation is also not taxable for CIT
purposes for as long as the shareholder holds its participation.
In any other case, if two companies merge, the difference between the market value
and the book value of the assets and liabilities is taxable for the successor company.
Furthermore, the predecessor company may decrease its tax base by the amount of
the difference between the adjusted book value of its assets and their book value if the
adjusted book value is the higher of the two. The company will increase its tax base if the
book value is higher than the adjusted book value.
International Financial Reporting Standards (IFRS) adoption
Companies defined in Section 4 of Decision no. 1606/2002/EC (mainly companies listed

on the stock exchange) have to prepare their consolidated annual reports according
to the IFRS. However, non-listed subsidiaries of EU-listed entities are exempt from the
preparation of IFRS consolidated financial statements. If a company chooses IFRS,
Hungarian Accounting Rules (HAR) financial statements must also be prepared and filed
with the Court of Registration.
Foreign Account Tax Compliance Act (FATCA) agreement with the

United States (US)
Hungary and the United States signed an Intergovernmental Agreement (IGA) on 4

February 2014 in order to implement the US FATCA. The Hungarian IGA is based on
the Model 1 A Agreement, which means a reciprocal information exchange between
the Hungarian tax authority and the US Internal Revenue Service (IRS). As part of the
negotiations regarding the IGA, Hungary can include further entities and accounts into
Annex II of the Agreement with exempted or deemed-compliant status compared to the
originally issued Model Agreement. Change to the local legislation for FATCA and IGA
purposes are currently in the process of being adopted by the Hungarian Parliament.
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Iceland
PwC contact
Jhanna . Jnsdttir
PricewaterhouseCoopers ehf.
Skogarhlid 12
105 Reykjavik, Iceland
Tel: +354 550 5356
Derivatives
Profits from derivatives, which were previously treated as interest income, are now
treated as profits/losses from sales. This means that losses from derivatives can be used
against profits from derivatives within the calendar year, which was not possible when
profit was treated as interest income.
Cross-border mergers
Rules regarding taxation in relation to cross-border mergers between Icelandic limited

liability companies (LLCs) and LLCs fromEuropean Economic Area (EEA) and European
Free Trade Association (EFTA) countries are now in the Icelandic Tax Act. Tax will be
levied on uncapitalised profit, which can be postponed for five years.
Transfer pricing
Special transfer pricing rules based on the Organisation for Economic Co-operation and
Development (OECD) model are now in the Icelandic Tax Act. The rules are based on
the arms-length rule, have definitions of related parties, and define what parties require
transfer pricing documentation.

Resident corporations pay tax on their worldwide income less operating expenses.
Deductible operating expenses are comprised of all the expenses and costs needed to
provide, insure, and maintain income.
Corporate income tax (CIT) forLLCs and limited partnership companies is assessed at a
rate of 20%. CIT for other types of legal entities (e.g. partnerships) is assessed at a rate
of 36%.
Non-resident corporations receiving payments for services or business operations
carried out in Iceland, as well as corporations operating a permanent establishment
(PE) in Iceland or receiving a profit from such establishments, are subject to CIT for their
Icelandic income at the same rate as applies to resident corporations.
Corporate residence
In general, all corporations incorporated and registered in Iceland are considered to be
tax residents in Iceland. The same applies to corporations that have their home address
in Iceland according to their articles of association or if the management of the company
is carried out in Iceland.
Foreign corporations are regarded as Icelandic tax residents if the effective management
is carried out in Iceland.
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The Internal Revenue Directorate can decide with a ruling whether a corporations
residence is in Iceland. The ruling can be appealed to a court of law.
Apart from the above mentioned, when defining whether a business activity in Iceland
constitutes a PE, definitions in tax treaties are taken into consideration as well as
commentaries to the OECD Model Tax Convention.
Other taxes
VAT is a consumption tax levied on all stages of domestic business transactions. VAT is
levied on all goods and services, as well as on the imports of goods and services, unless
specific exemptions apply.
VAT rates
The general VAT rate is 25.5%.

The following goods and services are subject to a reduced VAT rate of 7%:

Rental of hotel and guest rooms and other accommodation.

Subscription to radio and television.
Newspapers, periodicals, and magazines.
Books, both Icelandic and translated, musical notation as well as their audio
recordings. Same applies to compact discs and other similar media as well as
electronic media.
Geothermal hot water, electricity, and fuel oils used for heating houses and
swimming pools.
Food and other consumables for people as detailed in an addendum to the VAT Act.
Access to roads and other transport related constructions.
Compact discs, records, audio cassettes, and other equivalent mediums for music only
and not videos. Same applies to electronically published music without video.
Condoms.
Reusable cloth diapers and diapers inserts.
Certain services and goods are zero-rated, which means that there is, in fact, no VAT
charge. Zero-rated VAT mainly applies to exported goods and services provided abroad.
VAT entities
Businesses engaged in the trade of taxable goods and services for business purposes
must register and collect VAT.
Services exempt from VAT
The VAT Act details certain services that are exempt from the tax, such as healthcare
services, social services, the operation of schools, various education services, cultural
activities, athletic activities, passenger transportation, postal services, sale of real estate
(not including the rental of hotel and guest accommodation), rental of car parking lot,
insurance activity, services of financial banks as well as securities trading, lotteries and
betting pools, artistic activities, services of travel agencies, funeral services, and all
services of ministers of the church.
Those selling taxable goods and services totalling less than 1 million Icelandic krna
(ISK) per 12-month period are also exempt from paying VAT.
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Agent for non-resident parties
Non-residents who are engaged in taxable transactions in Iceland but are neither
domiciled nor have permanent residence in Iceland must appoint a VAT agent with
residence in Iceland to report on their behalf. Both parties are liable for the VAT
payments (responsible for ensuring remittance of VAT). If a non-resident does not
appoint a VAT agent, the purchaser of the services/goods is responsible for paying the
VAT (reverse charge).
VAT accounting periods and due dates
VAT is generally filed and paid on a bimonthly basis. The due date for payment of VAT
is one month and five days after the end of the settlement period. For example, the due
date for the January and February payments is 5 April.
If the VAT is not paid on the due date, a 1% penalty charge is added for every day up to a
total of 10%. Late penalty interests also apply.
VAT reimbursement
Foreign enterprises, which are neither residents of Iceland nor have a PE here, may
obtain reimbursement of VAT paid on goods and taxable services that have been
purchased or imported for the commercial purposes of such enterprises in Iceland.
Such reimbursement can be effected to foreign enterprises that would be subject

to registration in Iceland according to Article 5 and Article 6 of the VAT Act if the
enterprises in question were engaged in such business in Iceland. This means that
such enterprises as travel agencies, insurance companies, banks, and other financial
institutions cannot obtain such reimbursement.
Another prerequisite is that the enterprise shall neither have sold goods nor taxable
services in Iceland during the period to which the application refers.
Parties domiciled abroad can get partial VAT reimbursement on goods they have bought
in Iceland if they take them abroad with them within three months from the date of
purchase. They then must provide the goods, along with any necessary documents, to
the appropriate reimbursement company or to the customs authorities on the date of
departure, and the purchase price must amount to at least ISK 4,000.
Customs duties
The Directorate of Customs controls import, transit, and export and also collects duties,
taxes, and various state revenue. The general rule is that import duties are to be paid
on imported goods (customs, excise duties, VAT, and various other charges) unless
otherwise stated in the law. For import of some products, other conditions, such as an
import licence, may need to be submitted.
Iceland, Liechtenstein, Norway, and Switzerland are members of the EFTA. The EFTA
Convention established a free trade area among its member states. In addition, the
EFTA states have jointly concluded free trade agreements with a number of countries
in Central and Eastern Europe as well as in the Mediterranean region, Mexico, and
Singapore. Also the EFTA states entered into the Agreement on the EEA in 1992. The
current contracting parties are, in addition to the three EFTA states, the European
Community (EC) and the 25 EC member states. Iceland also has a bilateral agreement
with its two neighbouring countries, Greenland and Faeroe Islands.
Excise taxes
An excise duty is levied on a variety of goods specified in the Icelandic Excise Tax
Act. They include goods, new and second-hand, that are imported from abroad or
manufactured, processed, or packed in Iceland. There is no excise duty on exports.
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The excise duty is either a quantity-based or a price-based charge. The quantity charge
is based on each kilogram or litre of the relevant goods. The price charge is based on the
duty-added import price for imported goods or on the factory price of goods produced in
Iceland. Several rate brackets apply to each, but the system has been greatly simplified in
recent years.
The excise tax based on quantity ranges from ISK 11 to ISK 42,000 per kg or litre. The
excise tax based on manufacturing price is, in general, 15%, 20%, or 25%.
Property taxes
A municipal property tax is applied annually on the assessed value of real estate in
Iceland.
Stamp taxes
Stamp duty is levied on documents regarding change of ownership of real estate and
land and ships registered in Iceland.
The stamp duty rate is 0.8% and 1.6%, depending on whether the rightful owner is an
individual or a legal entity.
When issuing deeds and purchase agreements of real estate and land, a 0.8% or 1.6%
stamp duty is levied on the officially registered value of the real estate. The same applies
to the deeds and purchase agreements of ships.
All other documents bear no stamp duty.
Turnover taxes
There is an agricultural charge of 1.2% of agricultural turnover.
Payroll taxes
Employers are responsible for social security contribution. The general rate is 7.59%.
An additional social security contribution for fishermen is 0.65%. The social security
contribution for taxpayers who have submitted the E-101 form is 0.425%.
The minimum contribution by employers into their employees pension fund is 8% of
each employees salary. An employers additional contribution into private pension funds
is 2% against a contribution from the employee.
Taxes on natural resources

Carbon tax
A carbon tax for liquid fossil fuels is paid to the treasury. Liquid fossil fuels are gas and
diesel oils, petrol, aircraft and jet fuels, and fuel oils. All importers of fossil fuels are
liable for the carbon tax regardless of whether it is for retail or personal use. The tax rate
is:

ISK 5.90 per litre of gas and diesel oils.

ISK 5.15 per litre of petrol.
ISK 6.50 per kilo of mineral oil gas and other carbohydrate gases.
ISK 7.30 per kilo of fuel oil.
Tax on electricity/hot water
A special tax is collected from parties that sell electricity and/or hot water to end users.
Carbohydrate tax
Corporations licensed for carbohydrate research, and/or processing, as well as anyone

who directly or indirectly participates in the processing or distribution of carbohydrates,
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must pay a processing tax, which is independent of processing performance, and a
carbohydrate tax on profits.
Bank tax and an additional bank tax
Financial services permitted to operate as banks and savings banks are subject to 0.376%
tax on total debt exceeding ISK 50 billion at year-end.
Financial Activities Tax (FAT)
A 5.5% taxis levied on all salary payments made by financial institutions, including
insurance companies. The tax is collected monthly.
A temporary addition to FAT
In assessment year 2014, an addition of 6% to FAT will be levied and collected on total
salary payments that exceed ISK 1 billion. This tax is paid by the same entities that are
subject to the general FAT.
Accommodation tax
Those who sell accommodation that is subject to VAT are liable to collect and return a
tax of ISK 100 for each sold night.
National Broadcasting Fee
There is a National Broadcasting Fee of ISK 19,400 per year.
Branch income
A branch is treated as an extension of a trading activity of the overseas parent company
incorporated in another jurisdiction and is not a separate legal entity.
Due to the fact that a branch acts in the name of the overseas parent company, a branchs
income is taxable in accordance with the parent company (i.e. if the parent company is
an LLC, the branch is subject to a CIT rate of 20%).
Tax treaties may allow Icelandic CIT as a credit against foreign income tax imposed on
the parent company.
There is no branch profits remittance tax on the repatriation of profits to the parent
company.
Inventory valuation
The valuation method of raw materials and finished goods is on a first in first out (FIFO)
basis or via the average cost method. When computing the value of produced goods,
both direct and indirect production cost must be taken into account. For tax purposes,
inventories can be further written down at a rate of 5% of calculated value.
Last in first out (LIFO) is not permitted.
Capital gains
Capital gains are treated as taxable income in the year that transfer of ownership occurs
and, as such, taxed as part of the general corporate income. Capital gains are generally
not subject to withholding tax (WHT). There are rules that allow full deduction of net
capital gains from the sale of shares, so, in general, corporations are not subject to
taxation on capital gains from sale of shares.
Iceland
827
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Dividend income
Dividend income is treated as taxable income and taxed as a part of corporate income.
There are extensive rules that allow full deduction of the dividend, so, in general,
corporations are not subject to taxation on dividends. Dividends are subject to WHT
(currently 20%), which is a temporary payment towards the final tax assessment.
Interest income
Interest income derived from bank deposits, mutual and investment funds, bonds, or
other financial deeds; any kind of exchange rate profit; and any other income from
monetary assets are subject to 20% tax.
Interest income of foreign parties is subject to 10% WHT in Iceland.
Profit from derivatives
Profits from derivatives, which were previously treated as interest income, are now
treated as profits/losses from sales and are subject to 20% tax. Losses from derivatives
can be used against profits from derivatives within the calendar year, which was not
possible when profit was treated as interest income.
Foreign income
Income earned abroad is generally taxed as a part of corporate income since a resident
company is subject to CIT on its worldwide income.
Controlled foreign company (CFC) rules stipulate that profits of companies in lowtax jurisdictions must pay income tax of such a profit in direct proportion to shares,
regardless of distribution. A low tax jurisdiction is defined as a jurisdiction where the
CIT rate is less than two-third of the Icelands tax rate (i.e. 13.3%, being two-thirds
of 20%). See Controlled foreign companies (CFCs) in the Group taxation section for more
information.
Double taxation of foreign income is avoided either through tax treaties or domestic tax
provisions.
Deductions
Deductible operating expenses are comprised of all the expenses and costs needed to
provide, insure, and maintain income (e.g. interest expense, employee expense, travel
expense, insurance expense).
Depreciation
Assets
Ships, ship equipment, and personal vehicles
Aircraft and accessories
Heavy machinery, industrial machinery, and equipment
Rigs, pipeline systems, and more for the use of research and production
of hydrocarbons
Office equipment
Machinery, equipment, and vehicles that are not covered in the above
categories
Residential, commercial, and office accommodation
Factory buildings, garages, warehouses, etc.
Purchased proprietary rights for ideas and trademarks, such as
copyrights, publishing rights, information rights, patents, and logos
828
Iceland

10 to 20*
10 to 20*
10 to 30*
10 to 30
20 to 35*
20 to 35*
1 to 3
3 to 6
15 to 20
Iceland
Assets
Purchased goodwill

10 to 20
* The depreciation base for these assets is their purchase value less earlier depreciations (book value).
The method used to calculate depreciation is the straight-line method.
Goodwill
Purchased goodwill can be written down at 10% to 20% per year.
Start-up expenses
Purchased fishing rights (quotas) cannot be depreciated.

Start-up costs for agricultural production rights can be depreciated without revaluation
over five consecutive years. The following assets can be depreciated in full in the year
they are initiated or paid with steady payments over five years:
Start-up costs, such as enterprise registration and obtaining operation licences.
Cost of research, developments, marketing, obtaining patents and trademarks. If
the use of individual assets does not fall into the same depreciation category, the
depreciation base will be dependent on how much of it is used, so that if an asset is
used for three-quarters or more for the same operation, the whole asset will have the
same depreciation percentage.
Interest expenses
Interest expenses are deductible, provided that the loan was taken for business
purposes.
Bad debt
As a general rule, 5% of bad debt can be written off. Certain conditions must be met in
order to write off a higher percentage of bad debts.
Temporary provisions in Icelandic tax law allow corporations to make a credit entry
for only 50% of debt write-off totalling ISK 50 million and 75% of debt write-off for
amounts over ISK 50 million in income years 2009 through 2014. The requirement for
the provision is that the debt is business-related and operating loss and transferable loss
has been offset.
The debt write-off can be carried forward from the income year 2010 to the income
year 2014. The transferrable amount that can be carried forward on a yearly basis is the
amount that exceeds the transferable operating losses and the possible operating loss,
tax depreciation, and write-down each year. All assets that can be depreciated have to
be depreciated and all possible write-downs on receivables and stock have to be done to
fulfil the requirements of the provisions. No dividend can be distributed for the income
years 2010 through 2014, and the company can also not be merged, wound up, or be
jointly taxed with another company during the period. At the end of this five year period
(i.e. at the end of the income year 2014), it will be possible to transfer any debt write-off
that exceeds ISK 500 million as profit with an equal amount each year from the income
year 2015 to the income year 2019. If the write-off does not exceed ISK 500 million, the
amount will not be subject to taxation.
Charitable contributions up to 0.5% of total income are deductible.
Pension expenses
Payments to obligatory pension funds for employees at a minimum of 8% of wages are

deductible.
Iceland
829
Iceland
Bribes, kickbacks, and other illegal payments are not deductible.
Fines and penalties
Taxes
Taxes levied on business profit are not considered to be deductible; consequently, CIT
is not deductible. However, social security contributions and other labour taxes are
deductible.
Operating losses may be deducted from income from business and independent
economic activity. Tax losses can be carried forward for ten years and utilised over ten
years from the year that the loss was incurred.
No carryback of losses is allowed.
An Icelandic corporation can claim a deduction for royalties, management fees, and
similar payments made to foreign affiliates, provided that such amounts are made on
an arms-length basis and reflect services received. Interest at normal commercial rates
paid to foreign affiliates generally will be allowed as a deduction on the condition that
the loan terms are comparable to those that would have been agreed upon by unrelated
parties.
Group taxation
Companies may opt for consolidated taxation if a company owns at least a 90% share in
another company. Consolidated taxation means, among other things, that losses of one
company can be offset against profits of other companies. Consolidated taxation cannot
be extended to non-resident companies or PEs of foreign companies.
Transfer pricing
On 1 January 2014, specific transfer pricing rules based on the OECDs arms-length
principle came into force. The transfer pricing rules include a definition on related
parties and they also state that certain corporations are bound to documentation duties
regarding transactions with related parties.
In addition to specific rules regarding transfer pricing, there are also certain provisions
in domestic law that contain the so-called arms-length principle, which state that when
a deal or transaction between the parties significantly differs from what is thought to be
normal in such transactions, the tax base can be determined and reassessed according to
what the tax authorities consider to be normal.
These adjustments can be performed only within the domestic statute of limitation
period, i.e. six years.
Thin capitalisation
There are no specific rules regarding thin capitalisation in Iceland, but anti-avoidance
principles can be applied (see Transfer pricing above).
Any individual who either directly or indirectly owns a share in any kind of a company,
fund, or organisation domiciled in a low-tax jurisdiction must pay income tax on
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the profit of such corporations in direct proportion to ones own share, regardless of
distribution.
The same applies to taxpayers chairing companies, funds, organisations, or associations
in a low-tax jurisdiction from which they receive direct or indirect benefits. In order for
the above to apply, the foreign party must be domiciled in the low-tax jurisdiction, half
the ownership of the foreign party must be directly or indirectly in the hands of Icelandic
taxpayers, or they must have effective management and executive control within the
income year.
CFC regulations do not apply if a fund or an organisation is protected by a double
taxation treaty (DTT) between Iceland and the low-tax country or if such entities
are registered in another EEA member country where they have legitimate business
operations and the countries have assigned a DTT between them.

Foreign tax credit
The Income Tax Act offers a foreign tax credit to mitigate the potential for double
taxation. The credit applies only to taxes of a nature similar to the tax being reduced
by the credit (i.e. taxes based on income). This credit is limited to the amount of tax
attributable to foreign-source income.
Temporary Reimbursements in Respect of Filmmaking in Iceland
On account of Act No. 43/1999 on Temporary Reimbursement in Respect of Filmmaking

in Iceland, it is possible to have 20% of production expenses incurred in the production
of films or television material in Iceland reimbursed. When more than 80% of the total
production cost of a motion picture or television programme is incurred in Iceland, the
reimbursement shall be calculated from the total production cost incurred within the
EEA. Production costs refer to all costs incurred in Iceland deductible from the revenues
of enterprises pursuant to the provisions of the Act on Income Tax. Payments pertaining
to employees and contractors are only to be included in production costs if they are
verifiably taxable in Iceland.
Application for reimbursement of production costs shall be submitted to the Ministry of
Industry. The application, with supporting documentation, shall be submitted before
production commences in Iceland.
In assessing whether a proportion of the production costs of a motion picture or
television programme shall be reimbursed, the following conditions must be fulfilled:
The production shall be suitable for promoting Icelandic culture and the history and
nature of Iceland.
The production shall be suitable for enhancing the experience, knowledge, and
artistic ambition of the parties involved. A specific company shall be established in
Iceland for the production; an Icelandic branch or agency of a company registered in
another member state of the EEA shall be considered a specific company.
Information about the subject of the production or programme shall be made
available.
An itemised estimate of the production costs and sources of funding shall be made
available, together with confirmation by the funding parties and a declaration by the
applicant to the effect that the production conforms to the aims of the Act.
Information about the content of the proposed production of a motion picture or a
television programme shall be made available, such as a script and information about
filming locations.
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831
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A statement shall be made available to the effect that the material to be produced is
intended for general distribution to cinemas or television stations.
The subject matter of the film or television programming should not violate the
provisions of law relating to film inspection and the ban on violent films, nor the
provisions of the General Penal Code concerning pornography.
A confirmation that all taxes and debts in Iceland have been paid.
Act No. 43/1999 on Temporary Reimbursements in Respect of Filmmaking in Iceland
expires at year end 2016. All projects approved by that date will be reimbursed in
accordance with the law.
Innovative companies are entitled to a special deduction from CIT amounting to 20% of
expenses incurred on the projects, provided certain conditions are met.
The maximum amount on which the deduction is calculated within each company
shall not exceed ISK 100 million for each operating year. In the case of purchased R&D
services, maximum expenses shall not exceed ISK 150 million.
Withholding taxes
Dividends paid to a resident company are subject to 20% WHT. Dividends paid to a
non-resident company are subject to 18% WHT. The final taxation of dividends paid to a
company within the EEA is nil, as WHT will be reimbursed in the year following payment
upon filing a tax return.
Interest paid to resident company is subject to 20% WHT, and interest paid to nonresident company is subject to 10% WHT.
Gross royalties paid to a non-resident are taxable at the standard 20% CIT rate and
subject to withholding.
Recipient
Treaty rates:
Belgium
Canada
Czech Republic
Denmark
Estonia
Faroe Islands
Finland
France
Germany
Greece
Greenland
Hungary
India
Italy
Korea, Republic of
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Iceland
Dividends (%)
18
20
Interest (%)
10
10
Royalties (%)
20
37.34 to 46.24
5/15 (1)
5/15 (1)
5/10 (2)
5/15 (2)
0/15 (1)
5/15 (2)
0/15 (1)
0/15 (1)
0/15 (1)
5/15 (2)
5/15 (2)
5/15 (2)
5/10 (2)
10
5/15 (2)
5/15 (6)
5/15 (2)
10
10
10
0
0
10
0
0
0
0
8
0
0
10
0
0
10
0
0/10 (3)
10
10
0
5/10 (4)
0
0
0
0
10
15
10
10
0/10 (5)
5
10
Iceland
Recipient
Latvia
Lithuania
Luxembourg
Malta
Mexico
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovakia
Spain
Sweden
Switzerland
Ukraine
United Kingdom
United States
Vietnam
Dividends (%)
5/15 (2)
5/15 (2)
5/15 (2)
5/15 (1)
5/15 (1)
0/15 (1)
0/15 (1)
5/15 (2)
10/15 (2)
5/10 (2)
5/15 (7)
5/10 (2)
5/15 (2)
0/15 (1)
5/15 (2)
5/15 (2)
5/15 (1)
5/15 (1)
10/15 (2)
Interest (%)
10
10
0
0
10
0
0
10
10
3
0
0
5
0
0
10
0
0
10
Royalties (%)
5/10 (4)
5/10 (4)
0
5
10
0
0
10
10
5
0
10
5
0
0
10
0
0/5 (8)
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
The lower rate applies to corporate shareholders with a minimum ownership of 10%.
The lower rate applies to corporate shareholders with a minimum ownership of 25%.
The lower rate applies to copyright royalties (except films, etc.) and royalties for computer software
or patent, or for information concerning industrial, commercial, or scientific experience (except
information provided in connection with a rental or franchise agreement).
The lower rate applies to royalties paid for the use of industrial, commercial, or scientific equipment.
The lower rate applies to the right to use computer software or patent concerning industrial,
commercial, or scientific experience.
The lower rate applies to corporate shareholders with a minimum ownership of 10%, and which has
been held for a period of at least 12 months preceding the date the dividends were declared.
The lower rate applies to Russian corporate shareholders with a minimum ownership of 25% of
capital in the Icelandic company and the foreign capital invested exceeds 100,000 United States
dollars (USD).
The higher rate applies to royalties for the use of trademarks, know-how in relation to a trademark,
and films, etc.
Tax administration
Taxable period
The tax year is the calendar year. However, in certain circumstances and upon
application, the Internal Revenue Directorate can allow a different fiscal year from the
calendar year.
Tax returns
At the beginning of every year, the Internal Revenue Directorate determines the time
limit for taxpayers to submit their tax returns and supporting documentation. The
deadline for receipt of tax returns from corporations is generally 31 May each year. This
deadline is extended upon application. Those who have their tax returns prepared by
professional services can generally have the deadline extended until 10 September each
year.
The final assessment must be completed no later than ten months after the end of the
income year. Tax assessments for corporations will be available at the end of October.
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Payment of tax
Advance tax payments are due on the first day of every month, except January and
October. Corporations pay income tax in advance, which is in turn deducted from the
final tax assessment in October each year. The advance tax is collected in the months
of February to September and amounts to 8.5% of the income tax on each due date. In
total, the advance tax payments amount to 68% of the income tax. Any deficit remaining
when final tax is assessed must be paid in equal instalments in November and December.
Income tax payments on dividends and interest income are due every quarter. Due dates
in 2014 are 20 April, 20 July, 20 October, and 20 January (2015), and the final deadline
for payment is 15 days later.
Tax audit process
The Icelandic tax authorities select returns for examination using a variety of methods.
Some returns are selected based on electronic selection; some are selected based on a
formal supervisory plan. A tax audit can also be traced to information obtained by the
tax authorities through efforts to identify participants of tax avoidance transactions.
The examination generally takes place by formal, written communication. The rules of
the procedure are very strict, and the process can take from a few weeks to a year/years.
Appeal rights involve two administrative levels and also two judiciary levels.
Tax authorities in Iceland have the right to reassess tax returns for CIT six years prior
to the year of the assessment (i.e. the statutory period of limitation is six years). The
statutory period only reaches a maximum of two years in time if tax returns have
been filled out properly and all necessary information presented for tax authorities to
establish a correct assessment. This means that in the year 2014, tax authorities can, in
theory, reassess the companys tax back to income year 2008.
The topic of focus for tax authorities in Iceland is tax avoidance in general.
Other issues
Foreign currency financial statements/Accounting in foreign currencies
Companies can apply to the Registry of Annual Accounts for an authorisation to keep
their books and prepare their annual accounts in a foreign currency. An application
must be filed no later than two months before the beginning of the companys fiscal
year. The authorisation is valid for five years, and the Registry of Annual Accounts is
responsible for ensuring that the authorised companies continue to fulfil one or more of
the following necessary conditions:
The companys main business operations take place abroad or the company is a part
of a foreign company group.
The company owns foreign subsidiaries or shares in foreign companies, and its main
business transactions are with those companies.
The companys main place of business is Iceland, while a considerable number of
their transactions are in foreign currencies.
A considerable portion of the companys investments and related debts are in foreign
currencies.
If the company deems that it no longer fulfils the conditions, it must notify the Registry
of Annual Accounts. The Registry can postpone its decision of the authorisations
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discontinuance for two fiscal years if the situation that is causing the fact that the
company does not continue to fulfil the necessary conditions is deemed to be temporary.
The average exchange rate for the fiscal year must be used when converting income and
expenses, depreciations included, into Icelandic krna. The exchange rate at the end of
the fiscal year must be used when converting assets, debts, and capital. Exchange rate
differences that may arise do not affect income on profit and loss accounts.
Rules on foreign exchange
In 2008, the Central Bank of Iceland issued rules on foreign exchange in order to restrict
or temporarily prevent certain types of cross-border capital movements or foreign
exchange transactions related thereto, which, according to the Central Bank of Iceland,
can cause serious and considerable instabilities in exchange rates and financial matters.
The Act on Foreign Exchange defines capital movements as:
The issue, sale, or purchase of shares, debt instruments, drafts, unit shares in mutual
funds, and other long-term and short-term securities.
Deposits in and withdrawals from accounts with depository institutions.
Lending, borrowing, and the issue of securities not related to international
transactions with goods and services.
The import and export of share certificates and domestic and foreign currencies.
Forward contracts, options, currency and interest-rate swaps, and other related
foreign exchange transactions in which the Icelandic krna is one of the denominated
currencies.
Presents, grants, or other transactions equivalent to the ones detailed above.
Capital movements of foreign currencies
All capital movements of foreign currencies between countries are prohibited, with
the exception of payments for the purchase of goods and services or other capital
movements specifically exempt from the regulations, according to Rules No. 300/2013
on Foreign Exchange, issued by the Central Bank of Iceland.
Capital movements of domestic currencies
Capital movements between countries in domestic currencies are also prohibited. There
are several exceptions to this rule.
Capital movements specifically exempt from the above regulations are as follows:
Capital movements in relation to the purchase or sale of goods and services (not
including lending, borrowing, and the issue of securities not related to international
transactions with goods and services) and payments in cash or by withdrawals from
an account the buyer has in an Icelandic depositary institution.
Capital movements in relation to real estate purchases in Iceland or business
transactions with securities issued in the domestic currency and payments by
withdrawals from an account the buyer has in an Icelandic depositary institution.
Capital movements in relation to claims from a liquidated company and payments
of contractual debts according to composition agreements, according to Act No.
21/1991.
Cross-border mergers
Rules regarding taxation in relation to cross-border mergers between Icelandic LLCs

andLLCs from EEA and EFTA countries are now in the Icelandic Tax Act. Tax will be
levied on uncapitalised profit, which can be postponed for five years.
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India
PwC contact
Rahul Garg
PricewaterhouseCoopers Pvt Ltd
Building No. 10, Tower - C
17th & 18th floor,
DLF Cyber City, Gurgaon
Haryana -122002
India
Tel: +91 124 3306807
Safe harbour provisions
The introduction of safe harbour rules has been a step in the right direction to reduce
litigation and bring about certainty for both the taxpayer and tax administration. The
effective utilisation of this step would help the tax administration in focusing their
limited resources on risk-based high-value assessments, providing certainty to taxpayers
and ensuring the steady flow of revenue to the government. The safe harbour rules
are to be used in a manner such that transfer pricing disputes are minimised, investor
confidence is restored, and Indias competitive advantage is maintained.
Advance pricing agreement (APA) rules
The APA is an arrangement between the taxpayer and the tax authority covering future
transactions, with a view to solve potential transfer pricing disputes in a cooperative
manner. The APA has been made effective since 1 July 2012, and the Central Board of
Direct Taxes (CBDT) has notified rules providing procedures and necessary forms for
application/administration of APAs.
The rules have provided for unilateral and bilateral/multilateral APAs. This is a welcome
step since a unilateral APA may not assure relief from double taxation to multinational
enterprises (MNEs). The government has shown an inclination towards bilateral APAs
by questioning the taxpayer on reasons for filing a unilateral APA application in cases
where a Double Taxation Avoidance Agreement (tax treaty) exists. However, in case
the bilateral APA negotiated between competent authorities is not acceptable to the
taxpayer, the taxpayer may, at its option, continue with the process of entering into a
unilateral APA without benefit of the mutual agreement process.

A resident company is taxed on its worldwide income. A non-resident company is taxed
only on income that is received in India, or that accrues or arises, or is deemed to accrue
or arise, in India.
The corporate income tax (CIT) rate applicable to an Indian company for the tax year
2013/14 is 30% (plus surcharge, education cess, and secondary and higher education
cess). Resident companies are liable to pay surcharge at 5% on the amount of CIT if the
total income exceeds 10 million Indian rupees (INR) and at 10% if income exceeds INR
100 million.
Foreign companies (i.e. companies that have been registered under the laws of a county
other than India) operating in India are taxed at 40% (plus surcharge, education cess,
and secondary and higher education cess). For tax year 2013/14, surcharge for foreign
836
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companies is 2% if income exceeds INR 10 million and 10% if income exceeds INR 100
million.
The education cess is 2%, and the secondary and higher education cess is 1%.
Minimum alternative tax (MAT)
Resident companies are liable to pay MAT on their adjusted book profits (not on income
from life insurance business) where the tax liability for the year is not less than 19.055%
(including surcharge, education cess, and secondary and higher education cess).
Non-resident companies are liable to pay MAT on their adjusted book profits from Indiasourced income where the tax liability for the year is not less than 19.055% (including
surcharge, education cess, and secondary and higher education cess).
Surcharge is payable only where total taxable income exceeds INR 10 million.
Income
Less than INR 10 million
More than INR 10 million but
less than INR 100 million
More than INR 100 million
Domestic company
Foreign company
Rate of MAT (%)
Including surcharge,
Including surcharge,
education cess, and
education cess,
secondary and higher
and secondary and
education cess
higher education cess
Basic
(effective tax rate)
Basic
(effective tax rate)
18.5
19.055
18.5
19.055
18.5
20.008
18.5
19.436
18.5
20.961
18.5
20.008
Sick companies (companies whose losses have wiped out their net worth and that are
doubtful of being revived and nursed back to profitability) are not subject to MAT.
Companies are allowed to take the benefit of carrying forward the credit of tax paid
under MAT for ten years.
A Special Economic Zone (SEZ) developer and a unit in an SEZ are liable to pay MAT.
Tonnage tax scheme
The tonnage tax scheme, a presumptive tax provision, can be chosen by a non-resident
company that has a place of effective management in India, owns at least one qualifying
ship, and whose main objective is to carry on the business of operating qualifying ships.
The tonnage tax scheme is in place ofCIT and is leviedon the basis of tonnage of vessels
owned, operated, or chartered by it instead of net income generated by commercial
operations. Under a presumptive tax system, taxpayers can opt to be taxed at a predesignated tax rate on its revenues.
Under this scheme, deemed income shall be assessed at a rate of 7.5% of the amount
paid or payable (whether in or out of India) for carriage of passengers, livestock, mail, or
goods shipped from any port in India, and the amount received or deemed to be received
in India on account of carriage of passengers, livestock, mail, or goods shipped to any
port outside India shall be treated as profits and gains of business.
Treaty rates will apply to non-resident shipping companies if they are lower than under
the tonnage tax scheme.
A government company, or a public company formed and registered in India with the
main object of operating ships, is eligible for a deduction not exceeding the lower of 50%
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of its profits and the sum transferred to a special reserve to be utilised in accordance
with the provisions of the Income Tax Act, 1961.
Direct taxes code
A new Direct Taxes Code (DTC) Bill has been proposed to replace the existing Income
Tax Act, 1961. We await the new draft of the DTC under the new government.
Local income taxes
There are no local, state, or provincial taxes on income in India at present.
Corporate residence
A company is treated as a resident of India if:
it is an Indian company or
during the tax year, the control or management of its affairs is situated wholly in
India.
A company that is not caught by either of these conditions is treated as a non-resident.
Note that the term non-resident company is used inter-changeably with the term
foreign company throughout this summary, except where explicit reference is intended
to non-resident companies.
A partnership firm, a limited liability partnership (LLP), and other non-individual
entities are treated as resident in India if any portion of their control and management
is in India. They are non-resident if their control and management is situated wholly
outside India.
A PE is defined in India as a fixed place of business through which the business of an

enterprise is wholly or partly carried on.
Other taxes
Value-added tax (VAT)/Central sales tax (CST)
The sale of movable goods in India is chargeable to tax at the central or state level. The
Indian Constitution grants powers to state legislatures to levy tax on goods sold within
that state. Such sales are, therefore, chargeable to VAT at the rates specified under the
VAT laws of the relevant state. All goods sold in the course of inter-state trade are subject
to CST.
Where goods are bought and sold by registered dealers, on an inter-state basis for
trading or for use in the manufacture of other goods or specified activities (such as
mining or telecommunication networks), the rate of sales tax is 2%, provided Form C
is issued by the purchasing dealer. In the absence of Form C, the applicable rate would
be the rate of VAT on such goods in the originating state. Inter-state procurement, on
which CST is charged by the originating state, is not eligible for input tax credit in the
destination state and is a cost to the buyer.
Under the VAT regime, the VAT paid on goods purchased within the state is eligible for
VAT credit. The input VAT credit can be utilised against the VAT/CST payable on the sale
of goods. It is, thus, ensured that the cascading effect of taxes is avoided and only the
value addition is taxed.
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Currently, there is no VAT on imports into India. Exports are zero-rated. This means that
while exports are not charged to VAT, VAT charged on components purchased and used
in the manufacture of export goods or goods purchased for export is available to the
purchaser as a refund based on the state VAT legislations.
The state VAT is charged at different rates varying from 5% to 15% with a few exceptions
where the VAT is charged at a lower or higher rate. The rate of VAT depends on the
nature of the goods involved and varies from state to state.
A turnover threshold is prescribed so as to exclude small traders from the ambit of VAT.
A tax under composition scheme, at a lower rate, may be levied on small traders within a
specified turnover limit in lieu of VAT.
Entry tax/Octroi duty
Entry tax is a tax on the entry of specified goods into the state from outside the state
for use, consumption, or sale therein. Entry tax continues to exist under the VAT regime.
However, in certain states, it has been made VATable and can be offset against the output
VAT liability in the state. Where entry taxes have been imposed in lieu of octroi, there is
no offset available, and hence they are a cost. Typically, the rate of entry tax ranges from
0.5% to 15%, depending upon the state.
The levy of entry tax has been considered unconstitutional by the High Courts in
many states. The state governments have filed petitions before the Supreme Court to
challenge the decisions of the High Courts, and, at present, the matter is pending final
adjudication before the Supreme Court.
Octroi is a municipal levy that is levied at the time of entry of specified goods into
the limits of the relevant municipal corporation. Thus, octroi is leviable, if there is
movement of goods from one city to another in the same state, in the event that the cities
fall under the jurisdiction of two different municipal corporations.
Customs duty
Customs duty is levied by the Central Government on goods imported into, and exported
from, India. The rate of customs duty applicable to a product imported or exported
depends upon its classification under the Customs Tariff Act, 1975. With regard to
exports from India, customs duty is levied only on a very limited list of goods.
The Customs Tariff is aligned with the internationally recognised Harmonised System of
Nomenclature (HSN) provided by the World Customs Organization.
Customs duty is levied on the transaction value of the imported or exported goods.
According to Section 14 of the Customs Act, 1962 (CA), the concept of transaction value
is the sole basis for valuation for the purpose of import and export of goods. While
the general principles adopted for valuation of goods in India are in conformity with
the World Trade Organization (WTO) agreement on customs valuation, the Central
Government has passed independent Customs Valuation Rulesthat apply to the export
and import of goods.
The customs duty applicable to any product is composed of a number of components,
which are as follows.
The Basic Customs Duty (BCD) is the basic component of customs duty levied at the
effective rate under the First Schedule to the Customs Tariff Act (CTA) and applied to
the landed value of the goods (i.e. the cost, insurance, and freight [CIF] value of the
goods plus landing charges). The peak rate of BCD is 10%.
The additional customs duty in lieu of excise duty (commonly known as
Countervailing Duty [CVD]) is equivalent to, and is charged in lieu of, the excise
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duty applicable on similar goods manufactured or produced in India. CVD is typically
calculated on the sum of the landed value of the goods and the applicable BCD.
However, the CVD on specific consumer goods intended for retail sale in India is
calculated on the basis of the maximum retail sale price (MRP)printed on their
packs less the specified abatement. The present rate of excise duty is 12%, and,
consequently, the rate of CVD is also 12%. The education cess and secondary and
higher education cessthat are leviable on CVD have been exempted. CVD is typically
calculated on the landed valueplus BCD.
Education cessat 2% andsecondary and higher education cessat 1% are also
levied on the aggregate of the customs duties (except in cases of safeguard duty,
countervailing duty, and anti-dumping duty).
An additional duty of customs (ADC) to countervail state taxes and VAT of 4% is
charged in addition to the above duties on imports, subject to certain exceptions. ADC
is calculated on the aggregate of the assessable value of the imported goods, the total
customs duties (i.e. BCD and CVD), and the applicable education cess and secondary
and higher education cess.
BCD, education cess, andsecondary and higher education cesslevied on the aggregate
of duties of customs are a cost of any import transaction. The duty incidence arising
on account of the CVD and ADC may be set off or refunded, subject to prescribed
conditions. Where goods are imported for purposes of manufacture, the Indian
manufacturer may take a credit of the CVD and ADC paid at the time of import for offset
against the output excise duty. In the case of service providers, only the credit of the CVD
is available. Similarly, the Central Government provides exemption from payment of
ADC on import of certain specified goods, subject to fulfilment of prescribed conditions.
The Central Government has also prescribed a refund mechanism in relation to ADC
paid on goods imported for the purpose of trading in India, subject to fulfilment of the
conditions prescribed under the governing notifications and circulars issued in this
regard.
CENVAT (Excise duty)
Central Value Added Tax (CENVAT) is an excise duty levied by the Central Government
on the manufacture or production of movable and marketable goods in India.
The rate at which excise duty is levied on the goods depends on the classification of the
goods under the Central Excise Tariff Act, 1985. The excise tariff is primarily based on
the eight digit HSN classification adopted so as to achieve conformity with the customs
tariff.
The excise duty on most consumer goodsthat are intended for retail sale is chargeable
on the basis of the MRP printed on the package of the goods. However, abatements
are admissible at rates ranging from 15% to 55% of the MRP. Goods, other than those
covered by MRP based assessments, are generally chargeable to duty on the transaction
value of the goods sold to an independent buyer. In addition, the Central Government
has the power to fix tariff values for imposingad valoremduties on the goods.
Presently, the excise duty rate is 12% with a few exceptions of lower or higher rates.
However, thereis also a partial or complete exemption for specified goods from payment
of excise duties available. Education cess at 2% and secondary and higher education cess
at 1% are applicable on the aggregate of excise duties. Thus, the effective rate of excise
duty is 12.36%.
The central excise duty is a modified VAT wherein a manufacturer is allowed credit of
the excise duty paid on locally sourced goods and the CVD and ADC paid on imported
goods. The CENVAT credit can be utilised for payment of excise duty on the clearance
of dutiable final products manufactured in India. Manufacturers of dutiable final
products are also eligible to take advantage of the CENVAT credit of the service taxes
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paid on input services used in or in relation to the manufacture of final products and
clearances of final products from the place of removal, subject to the fulfilment of certain
conditions.
Service tax
Service tax is levied on all services provided or agreed to be provided in a taxable

territory, except the following:
Services on the negative list.
Services specifically exempted by notification.
The rate of service tax is 12%. In addition, education cess at 2% and secondary and
higher education cess at 1% are also levied on the taxable services. Thus, the effective
rate of service tax is 12.36%.
Typically, the onus of payment of service tax lies with the provider of services. However,
for certain services (e.g. import of services), the onus of paying the service tax lies,
either fully or partially, with the service recipient.
The Central Government took a major step towards the transition to a national
integrated GST in 2006. In this regard, a Joint Working Group (JWG) was constituted
by the Empowered Committee (EC) to study global GST models and identify suitable
models for introduction in India.
The EC released its First Discussion Paper on the proposed GST in India on 10 November
2009. In the discussion paper, the government indicated that the GST shall have two
components; one levied by the centre (Central GST or CGST) and the other levied by
the states (State GST or SGST). The CGST and the SGST would be applicable on all
transactions of goods and services made for a consideration except for exempted goods
and services, goodsthat are outside the purview of the GST, and transactionsthat are
below the prescribed threshold limits. The exact date of implementation of the GST
is not yet decided. Details of taxesthat would be subsumed into the dual GST are as
follows.
The following taxes will be subsumed into the CGST:
Excise duty.
CVD/ADC.
Service tax.
The following taxes will be subsumed into the SGST:

VAT.
Entertainment tax.
Luxury tax.
Lottery taxes.
State cesses and surcharges.
Entry tax not in lieu of octroi.
It is likely that the CST will be phased out in the GST regime.
The EC prepared its final recommendation on the revised GST Constitutional
Amendment bill and submitted it to the Union Finance Ministry, which will now go to
Parliament for final decision. The Finance Minister has expressed disappointment over
not being able to introduce GST in the Interim Budget for 2014/15. Unfortunately, again,
there is no timeline or vision put forth for introduction of GST.
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Advance ruling for customs, excise, and service tax
In order to enable foreign investors to ascertain their indirect tax liabilities arising
from proposed business ventures in India, the Central Government has constituted the
Authority for Advance Rulings (AAR) as a high level quasi-judicial body. The functions
of the AAR consist of giving advance rulings on a specific set of facts relating to specified
matters under customs, central excise, and service tax.
Advance rulings may be sought by any non-resident investor entering into a joint
venture in India in collaboration with another non-resident, or a resident of India, or
by a resident setting up a joint venture in India in collaboration with a non-resident.
Through the Finance Act 2005, this facility has also been made available to existing
joint ventures in India. The Central Government is also empowered to include any other
class or category of persons as eligible for the benefit of an advance ruling. Under the
customs law, the Central Government has allowed a resident public limited company to
be eligible for an advance ruling. The Central Government has also allowed a resident
public limited company to apply for advance ruling under central excise and service tax
law in relation to a proposed new line of business.
Further, the definition of activity has also been expanded under the customs and excise
law to enable the existing importer/exporter or manufacturer, as the case may be, to
seek advance ruling for a proposed new line of business. In addition, the advance ruling
can now be sought on the issue of admissibility of credit of service tax paid or deemed
to have been paid on input services used in or in relation to manufacture of excisable
goods. Earlier, it was only limited to the inputs used in or in relation to manufacture of
excisable goods.
Property taxes
Municipal tax on a property is levied on the basis of the municipal law prevalent in each
city. The rate of tax levied varies from city to city in India, and is generally related to the
prevailing market prices for property in each locality.
Transfer taxes
Documents evidencing transfer of shares have to be stamped under the Indian Stamp
Act. Transfer of other movable property is chargeable to stamp duty under the respective
State Acts, or under the Indian Stamp Act, in case a state has not passed its own Stamp
Act. See the discussion under Stampduties below.
Immovable property or rights in it can be transferred by way of sale, lease, licence, or
easement. Sale of immovable property requires a conveyance deed on which stamp duty
is payable, and must be registered with the Registrar of Assurances of the state under
the Registration Act 1908. A lease agreement also needs to be stamped and registered
compulsorily. A licence is defined in Section 52 of the Indian Easements Act (IEA),
as a grant of a right to do something in or upon the property that would be unlawful
but for such grant, which is not an easement or interest in the property. Easement is
defined in Section 4 of the IEA as the right given to an occupier of a land, to continue
enjoyment of whichone can do or prevent something from being done on land that is
notones own. An easement agreement also needs to be registered. Other non-tax laws
governing transfers of immovable property include the Transfer of Property Act, 1882
and the Benami Transactions Prohibition Act. The last-mentioned Act prohibits, on pain
of confiscation, the purchase and registration of property in the names of persons who
are not the true beneficial owners, which has been used as a way of hiding undisclosed
wealth. There are also some state-level Acts (e.g. the Maharashtra Ownership Flats Act).
Stamp duties
In India, stamp duty is charged on certain documents (not the transaction). No

documentthat has not been duly stamped can be introduced as evidence in any court
proceedings. However, this does not affect the legality of transactions. Improperly
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stamped documents can be impounded by any public officer. The Bombay Stamp Act also
provides for imprisonment and fine for executing improperly stamped documents. The
Registrar of Assurances can also refuse to register any document thatthe Registrarfeels
is improperly stamped. Stamp duty is charged at both central and state levels. State level
stamp duties vary from state to state, and on document type.
The Indian Stamp Act, 1899 applies to the whole of India except to those states that
have enacted their own Acts. Six states have so far enacted their own stamp law (Jammu
and Kashmir, Maharashtra, Gujarat, Rajasthan, Karnataka, and Kerala) while some
states have adopted Schedule I of the Indian Stamp Act, with or without modification.
Even in states that have enacted their own Acts, stamp duty on certain instruments of
commercial character, such as transfer of shares, is always leviable under the Indian
Stamp Act because, under the Constitution of India, duty on certain instruments can
only be levied by the Union of India, whereas, in respect of all other instruments or
documents, either the state or the Union can levy duty.
An important source of revenue for state governments is the stamp duty charged on
transfer of immovable properties, where rates are prescribed by each state in respect of
transfer of property within their jurisdiction. Interestingly, the stamp laws do not define
what immovable property is; the definition is imported either from Section 3 of the
Transfer of Property Act, 1882 or from the General Clauses Act, 1897. Payment of stamp
duty is mandatory for immovable property transfers, whereas for other transactions
involving movable assets other than actionable claims, stamp duty is not payable if there
is delivery of possession without executing a conveyance.
Buyers of newly constructed properties are also required to pay service tax and VAT
calculated as percentages of the total consideration, and are obligated to withhold tax
from the seller. The cumulative cash flow impact of these three tax requirements, in
addition to stamp duty and registration charges, have increased transaction costs of
buying immovable property in India to very high levels.
Dividend distribution tax (DDT)
Indian companies distributing or declaring dividends are liable to pay DDT at 15% (plus
surcharge, education cess, and secondary and higher education cess). This tax is payable
on declaration, distribution, or payment, whichever is earlier, and it is in addition to the
CIT payable on business profits.
SEZ developers and units in a SEZ are liable to pay DDT at 15% (plus applicable
surcharge, education cess, and secondary and higher education cess).
A holding company does not have to pay DDT on dividends paid to its shareholders to
the extent that it has received dividends from its Indian or foreign subsidiary company
on which DDT has been paid by the respective subsidiary. However, the benefit will not
be available if the holding company is itself a subsidiary of another company.
Securities transaction tax (STT)
STT is applicable to transactions involving the purchase/sale of equity shares,

derivatives, units of equity-oriented funds through a recognised stock exchange, or
the purchase/sale of a unit of an equity-oriented fund to any mutual fund. The STT
leviablein respect ofsuch transactions varies for each kind of instrument, whether
delivery based or non-delivery based.
Wealth tax
All companies are liable to pay wealth tax assessed at 1% of the value of specified net
assets if the value of net wealth exceeds INR 3 million. Valuation of assets is in terms of
specific rules notified by the government.
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Payroll taxes and social security payments
For all employees in India working in an establishment covered under the Employees
Provident Fund and Miscellaneous Provisions Act, 1952, a part of contribution
representing 8.33% of the employees pay is remitted by the employer to the Employees
Pension Fund within 15 days of the close of every month. Foreign workers holding
a passport of a country with which India has signed a social security agreement are
required to contribute to the social security system 12% of ones salary. However, foreign
workers can detach themselves from the scheme under a special provision on obtaining
a detachment/coverage certificate issued by an appropriate social security institution
indicating the period of employment in India being less than the maximum period of
detachment agreed in the agreement.
Branch income
Branches of foreign companies are taxed on income that is received in India, or which
accrues or arises in India, at the rates applicable to foreign companies. There is no
withholding tax (WHT) on remittance of profits to the companys head office.
Inventory valuation
Inventories are generally valued at cost or net realisable value, whichever is lower.
Generally, there is conformity between book and tax reporting. The first in first out
(FIFO) and average cost methods are acceptable, provided that they are consistently
applied.
Capital gains
Capital gains refer to the gains made on the transfer of a capital asset, including
extinguishment of the rights in an asset. Capital assets are either short-term capital
assetsor long-term capital assets. Long-term capital gains are eligible for concessional
rate of tax.
Short-term capital assets are capital assets held for a period of less than 36 months. In
the case of shares, listed securities, or units of specified mutual funds or zero-coupon
bonds, the short-term holding period is less than 12 months. Capital assets that do not
qualify as short-term capital assets are considered as long-term capital assets.
Normally, long-term capital gains are determined after increasing the cost by prescribed
inflation factors. In the case of foreign companies, capital gains on the transfer of shares
or debentures in Indian companies are computed in the foreign currency in which the
shares or debentures were acquired, and the capital gains are thenreconverted into
Indian currency to compute the tax liability thereon.
Capital gains are taxed as follows:
Long-term capital gains on the transfer of shares in a company, or units of an equityoriented fund, that are subject to STT are exempt from taxation. However, such gains
are taxable under MAT provisions.
Other long-term capital gains are subject to taxation at 20% (plus the surcharge,
education cess, and secondary and higher secondary education cess). However, longterm capital gains arising from the transfer of listed securities, units, or zero-coupon
bonds are taxed at 10% (without adjusting the cost for inflation) or at 20% (after
adjusting the cost for inflation), whichever is more beneficial to the taxpayer. These
rates exclude surcharge, education cess, and secondary and higher education cess.
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Long-term capital gains arising to a non-resident (not being a company) or a foreign
company from transfer of unlisted securities, shares, debentures, etc. are taxable at
10% without any indexation benefit.
Short-term capital gains on the transfer of shares in a company or units of an equityoriented fund that are subject to STT are taxed at 15% (plus the surcharge, education
cess, and secondary and higher education cess).
Other short-term capital gains are subject to taxation at the normal CIT rates
applicable to a company.
In the case of certain overseas financial organisations (e.g. off-shore funds and foreign
institutional investors), long-term capital gains arising on the transfer of units purchased
in foreign currency are taxable at 10% (plus the surcharge, education cess, and
secondary and higher education cess) on the gross amount.
Long-term capital gains earned by non-residents on the transfer of bonds relating
to Indian companies (issued abroad in accordance with government guidelines or
approved schemes and acquired in foreign currency) are taxable at 10% (plus surcharge,
education cess, and secondary and higher education cess) on the gross amount of gains.
The rules of carryforward and offset of loss for capital gains are as follows:
Capital losses arising from the transfer of a short-term capital asset can be offset
against capital gains arising from any other asset in the same tax year.
Capital losses arising from the transfer of a long-term capital asset can be offset only
against capital gains arising from the transfer of any other long-term capital asset.
Capital losses that cannot be offset in the tax year in which they are incurred can be
carried forward and offset against future capital gains at any time within a period of
eight years after the year of loss.
When depreciable assets forming part of a block of assets for tax purposes are
transferred, as a result of which the value of the block becomes negative, the excess
of transfer price over the value of the block is treated as short-term capital gains,
taxable at the same rate as business income.
Taxability of shares received by way of transfer at less than fair market

value of shares
Where a partnership firm or a closely held unlisted company receives shares of another
closely held company for no consideration or at a price that is lower than the fair market
value of the shares, then the difference will be deemed to be the income of the recipientcompany.
Share premium in excess of fair market value to be treated as income
Any amount received towards consideration for issue of shares by any closely held
company (other than a venture capital undertaking receiving from a venture capital
fund/company or from any other notified person to be notified by the Central
Government) in excess of the fair market value of such shares will be considered as
its income. The company is entitled to justify the price in terms of valuation under the
prescribed rules or in terms of the value of the companys tangible and intangible assets.
If such explanation is satisfactory in the opinion of the tax officer, the sum shall not be
taxed.
Dividend income
Dividend income received from Indian companies is not taxable in the hands of all
shareholders. This applies to resident as well as non-resident shareholders.
Income received by overseas financial organisations (offshore funds) from units of
specified mutual funds, or from the Unit Trust of India, that is purchased in foreign
currency, as well as interest received by non-residents on bonds issued abroad by Indian
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companies in terms of government guidelines and acquired in foreign currency, are
taxable at 10% on the gross amount of income. Dividends (other than those received
from Indian companies) and interest earned by foreign financial institutions from
investment in the Indian capital market are taxable at 20% on the gross amount.
Income received from units of specified mutual funds is not taxable in the hands of the
recipient. The distributing mutual fund is liable to pay a distribution tax of 25% or 30%
(plus surcharge, education cess, and secondary and higher education cess). The above
tax is not chargeable in respect of income distributed by an equity-oriented fund in
respect of distribution under such scheme.
Stock dividends (bonus shares) distributed are not taxed at the time of receipt in the
hands of the recipient shareholders, but capital gains provisions are applicable to the
sale of these stock dividends.
Buyback of shares
An additional tax is payable on transactions involving buyback of shares by unlisted

companies from its shareholders. A tax at 20% is payable by the company on the
difference of consideration paid on buyback and the issue price of shares. The buyback
consideration received will be tax exempt in the hands of the receiver. No tax credit will
be allowed in case of such taxes paid either to the company or to the shareholder.
Interest income
Interest income received by a resident company is taxable at normal CIT rates.

Interest income received by a non-resident company is taxed at a concessional rate of
withholding at 20%, subject to conditions.
Partnership/LLP income
A partnership firm and an LLP are taxed as separate legal entities. The share of income of
partners from a partnership firm or an LLP is exempt from tax. Partnerships and LLP are
taxed at 30% (plus education cess and secondary and higher education cess).
The interest payment to partners on capital or current account is allowed as tax
deductible expenditure; however, the maximum interest rate allowable for tax purposes
is 12% per annum. A working partner can be paid salary, bonus, commission, or
remuneration. The maximum permissible deduction in respect of remuneration payable
collectively to all working partners is based on the book profit of the firm, at slab rates
for different levels of book profit.
There are no specific rules under the tax law for determining the nature of unrealised
foreign exchange gains or losses. However, there are various judicial precedents
available that lay down principles for classification of foreign exchange gains or losses.
Profit/loss is considered to be trading profit/loss if foreign currency is held on
revenue account, as trading assets, or as a part of circulating capital invested in the
business.
Profit/loss is considered to be of a capital nature if a foreign currency loan is taken for
a capital asset or fixed asset.
Foreign income
A resident company is taxed on its worldwide income. A non-resident company is taxed

only on income that is received in India, or that accrues or arises, or is deemed to accrue
or arise, in India. This income is subject to any favourable tax treaty provisions. The
Finance Act, 2012 has amended the tax law to provide that payments for allowing/
transferring the right to use software, customised data, or transmission of any signal by
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satellite, cable, optic fibre, or similar technology are taxable as royalty income deemed to
accrue or arise in India, whether or not the location of such right or property is in India.
Double taxation of foreign income for residents is avoided through treaties that
generally provide for the deduction of the lower of foreign tax or Indian tax on the
doubly taxed income from tax payable in India. Similar relief is allowed unilaterally
where no treaty exists, in which case a resident would be taxed under the Indian tax law
but would be allowed a deduction from the Indian income tax payable of a sum being
the lower of the Indian tax rate on the doubly taxed income or the rate of tax prevailing
in the other country in which income is already taxed.
Deductions
Expenses that are revenue in nature are, by and large, allowed as a deduction to
businesses and professionals if they are:
incurred wholly and exclusively for the purpose of the business or profession
not in the nature of a personal expense, and
not in the nature of a capital expense.
Depreciation
Depreciable assets are grouped in blocks, and each block is eligible for depreciation at
a prescribed rate (ranging between 15% and 100% for different kinds of machinery,
5% and 100% for different kinds of buildings, 10% for furniture, 15% for windmills,
and 25% for intangible assets) on the opening value (net of depreciation charged in
preceding years), plus cost of acquisition, less deletions, during the year. A deletion is
the reduction by way of sale, discarding, demolition, or destruction of the assets, and the
amount realised is reduced.
Depreciation is restricted to 50% of the prescribed rate if the asset acquired is used for
less than 180 days during the year of acquisition. If money receivable on the transfer
exceeds the opening written-down value plus acquisitions of assets falling within the
block concerned, the excess is taxed as a short-term capital gain at the same tax rate as
that applicable to business income.
Additional depreciation of 20% on the cost of new plant and machinery (other than
ships or aircraft) is allowable in the year of commissioning for manufacture. This benefit
is extended to power generating and distributing business. Power-generating or powerdistributing companies have the option to either apply the reducing-balance method
provided under the normal schedule or charge depreciation on a straight-line basis. The
straight-line rates are alignedwith power companies book depreciation rates.
Know-how, patents, licences, franchises, and similar intangible assets can form part of a
block of depreciable assets, provided they are owned and put to use in the course of their
business and are eligible for depreciation at the prescribed rate, which is25%.
Tax depreciation is not required to conform to book depreciation. However, an
Accounting Standardmandates companies to reconcile both and provide for deferred tax
assets, liabilities, expenses, and incomes.
An investment allowance benefit is allowed for companies engaged in the business of

manufacture of articles or things. The benefit of deduction is allowed for investment
made in new plant and machinery acquired and installed during tax years 2013/14
and 2014/15. An allowance of 15% of the value of the investment made is available if
aggregate investment during these years is more than INR 1 billion. The assets have
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to be held for more than five years, and, if the asset is sold before this period, the
investment benefit claimed will be reversed in the year of sale.
Investment in new plant and machinery will not include assets like plant or machinery
used earlier in or outside India, any plant or machinery installed in any office premises
or in residential accommodation (or guest house), any office appliances (including
computers or computer software), vehicle, ship, or aircraft.
Goodwill
The Indian Supreme Court has held that goodwill and commercial brand equity that are
acquired in the course of amalgamation are intangible assets entitled to depreciation.
Start-up expenses
Certain expenses are incurred by taxpayers either before the start-up of a business or
after start-up of business, in connection with extension of the industrial undertaking, or
in connection with setting-up a new unit. One-fifth of such expenditure is allowed as a
deduction each year, over a period of five years.
Interest expenses
Any interest paid by an assessee (taxpayer) on capital borrowed for the purposes of
the taxpayers business or profession is tax-deductible without any limits. However, if
such interest is paid to certain related persons, then, to the extent the interest payment
is considered excessive or unreasonable, the tax officer is empowered to disallow the
deduction. If the capital is borrowed for acquiring a capital asset for the purpose of
extension of an existing business or profession, then interest liability pertaining to
the period until the time the asset is put to use cannot be allowed as a tax-deductible
expense and will have to be added back to the cost of such asset. SeeExpenses allowable
on actual payment basis below.
Bad debts
The amount of any bad debt, or part thereof, that has been written off as irrecoverable
in the accounts of the assessee (taxpayer) for the year is allowed as a tax-deductible
write-off. If any part of the sum written off is subsequently recovered, the recovered sum
is taxable in the year of recovery.
Any charitable contribution made by a company to any charity is allowed as a taxdeductible expense, subject to certain conditions. The tax deductibility ranges from
50% to 100% of the charitable contribution, depending upon the nature of charity. The
tax deductibility is restricted to charitable contributions that are less than 10% of the
taxpayers total taxable income.
Expenses allowable on actual payment basis
Certain expenses, such as, but not limited to, employees provident fund dues (i.e.
retirement benefit funds), bonus to employees, and interest payable to financial
institutions and banks, are allowed as tax deductible expenses only on actual payment.
Tax disallowances are attracted if certain payments are delayed beyond their due dates
under the respective laws.
Bribes, kickbacks, illegal payments
Expenditure incurred by a taxpayer that is illegal is deemed not to have been incurred
for the purposes of the business or profession, and no deduction of such expenditure will
be allowed.
Fines and penalties
Under the tax law, there are various procedural compliances (viz., audit of books of
accounts, submission of tax returns, disclosure of particulars of income, etc.)that
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need to be complied with by taxpayers by the respective due dates prescribed therein.
Non-compliance/delayed compliances of these procedures attract interest and penal
consequences. There are prosecution provisions as well for certain offences. Penalties
and fines paid for infraction of, or non-compliance with, any law are not deductible
as business expenditure. Prosecution proceedings are criminal proceedings, and, in
such proceedings, courts presume a culpable mental state on the taxpayers part. The
burden of proving beyond all reasonable doubt (and not merely by preponderance of
probability) the absence of such a state is on the taxpayer.
Taxes
All taxes (tax, duty, cess, or fees by whatever name called) relating to business (other
than income tax and wealth tax) incurred during the tax year are deductible in that year,
provided they are paid by the following 30 September. Otherwise, they are deductible in
the year of payment.
Losses can be carried forward and offset against income from subsequent year(s) for
periods set out in the following table:
Types of losses
Unabsorbed depreciation
Other business losses (other than speculation business losses)
Speculation business losses
Capital losses
Time limit
Perpetually
8 years
4 years
8 years
Note thatunabsorbed depreciation has to be set off before business losses.

There are no provisions in India for carrying losses back to earlier years.
Indian companies can claim deduction for payments on account of royalties, and for
interest and fees for technical or management service provided by foreign affiliates,as
long as they are not capital in nature, are incurred wholly and exclusively for the
purpose of the business, and requisite tax has been withheld from such payments.
However, where the requisite tax has not been withheld from such payment, or has not
been paid into the government treasury after withholding, such payments are deductible
in the year the tax is paid into the government treasury.
Group taxation
Group taxation is not permitted under the Indian tax law.
Transfer pricing
Transfer pricing on international transactions
The Indian transfer pricing regulations stipulate that income arising from international
transactions between associated enterprises should be computed at arms-length
price. Furthermore, any allowance for expenses or interest arising from any
international transaction is also to be determined at arms-length price. There is no
concept of an arms-length range.
The expressions international transactions and associated enterprises have been
defined in the Indian transfer pricing regulations. Various (presently six) methods for
computation of arms-length price have been specified under the Indian transfer pricing
India
849
India
regulations, which are broadly in line with the Organisation for Economic Co-operation
and Development (OECD) Guidelines, and taxpayers are required to adopt the most
appropriate method. Taxpayers are also required to maintain a comprehensive set of
prescribed information and documents relating to international transactions that are
undertaken between associated enterprises, on an annual basis, within the prescribed
timelines (due date of filing the income tax return). Further, taxpayers are required to
obtain an Accountants Report from an independent accountant certifying the nature
and amount of international transactions. The certificate needs to be filed along with the
income tax return. The burden of proving the arms-length character of the transaction is
primarily on the taxpayer.
The Indian transfer pricing regulations adopt an arithmetic mean of comparable prices
as the arms-length price, with a flexibility of deviation from the percentage that is
notified by the Central Government as +/- 1% for wholesalers and +/- 3% for others.
The term wholesaler has not been clearly defined and is likely to cause some amount of
litigation unless clarified.
Where the transfer pricing officer is of the opinion that the arms-length price was not
applied, the officer may re-compute the taxable income after giving the taxpayer an
opportunity to be heard. Stringent penalties are prescribed in cases of failure to comply
with the provisions of the Indian transfer pricing regulations.
The Central Board of Direct Taxes (CBDT) has released the final Safe Harbour Rules,
which are not arms-length prices, but are in the nature of presumptive taxation,
which generally enthuse taxpayers to opt for the same, as a compromise as it promises
to eliminate thepossibility of protracted tax litigation. The final Safe Harbour
Rules prescribe, amongst other things, who the eligible taxpayers are, international
transactions covered sector-wise, the target operating profit margin/Safe Harbour rates,
the procedure for filing, the timeline for audit, and also a new Form 3CEG (Application
to Opt for Safe Harbour). The Safe Harbour Rules are initially made applicable for a
maximum of five tax years beginning tax year 2013/14.
Domestic transfer pricing
Transfer pricing provisions also apply to specified domestic transactions. Any allowance,
expenditure, or interest on allocation of any cost or expense or any income in relation to
any specified domestic transaction shall be computed having regard to the arms-length
price.
Only those cases where the aggregate of such transactions entered into by the assessee
in the previous year exceed INR 50 million are covered.
Advance pricing agreements (APAs)
The APA is an arrangement between the taxpayer and the tax authority covering future
transactions, with a view to pre-empt potential transfer pricing disputes in a co-operative
manner. The CBDT has notified detailed rules providing the procedures and necessary
forms for application/administration of APAs.
The rules provide for constitution of an APA team (team), which shall consist of an
income tax authority and experts from economics, statistics, law, and other necessary
fields. APAs can be applied to existing, as well as proposed, transactions.
In line with expectations, the rules have provided for both unilateral and bilateral/
multilateral APAs. This is a welcome step since a unilateral APA may not be able to
assure relief from double taxation to MNEs. The government has shown an inclination
towards bilateral APAs by questioning the taxpayer on reasons for filing a unilateral APA
application in cases where a tax treaty exists. However, in caseswhere abilateral APA
negotiated between competent authorities is not acceptable to the taxpayer, the taxpayer
850
India
India
may, at its option, continue with the process of entering into a unilateral APA without
benefit of a mutual agreement process.
While clarification on certain aspects will be required, the government has provided
constructive rules primarily in line with mature jurisdictionsthat are expected to
encourage MNEs to opt for the APA process.
The salient features of the procedure laid down for APAs are pre-filing consultation,
application for APA, withdrawal of APA, defective application, procedure, compliances
post-APA, cancellations of APA, and revisions and renewal of APA.
Thin capitalisation
No prescribed debt-to-equity ratios or thin capitalisation rules exist under Indian

taxation law. However, interest paid to related parties at rates or on terms that are
considered unreasonably high are disallowable by the tax officer.
India currently has no CFC rules, so there will be no Indian tax on foreign profits that
remain unremitted from offshore subsidiaries.

Tax incentive provisions normally have conditions applicable for the period within
which the preferred activity should be undertaken and the period for which the tax
incentive is available. It may also be necessary to fulfil certain other conditions such as
forming of a new undertaking.
Tax incentives for undertakings other than infrastructure development

undertakings
New industrial undertakings located in backward states and districts notified as such
are entitled to full tax exemption of profits for the first three or five years of operation,
followed by a partial tax exemption of 30% of profits for the next five years. The list
of backward districts has been categorised into category A and category B districts,
depending upon the current level of infrastructure development in those areas. The
initial tax holiday period is five years in the case of category A districts and three years in
the case of category B districts. A similar incentive is also applicable for hotels satisfying
prescribed conditions.
If certain conditions are met, a tax holiday is permitted on the profits earned by an
undertaking engaged in any of the following:

Integrated business of handling, storage, and transportation of food grains.

Developing and building of housing project.
Scientific research.
Commercial production or refining of mineral oils.
Setting up and operating a cold chain for agricultural produce.
Processing, preservation, and packaging of fruits or vegetables.
Operating and maintaining a hospital in a rural area.
The tax holiday periods range from five to ten years, and the percentage of the rebate
is 30%, 50%, or 100% in initial years and 30% in the later years. The number of years
constituting initial and later years varies from sector to sector.
India
851
India
Tax incentives for infrastructure development undertakings
Enterprises engaged in the business of power generation, transmission, or distribution;

developing or operating and maintaining a notified infrastructure facility, industrial
park, or SEZ; or in substantially renovating and modernising the existing network of
transmission or distribution lines (between specified periods); or in laying and operating
a cross-country natural gas distribution network are eligible for a tax exemption of 100%
of profits for any ten consecutive years falling within the first 15 years of operation
(first 20 years in the case of infrastructure projects, except for ports, airports, inland
waterways, water supply projects, and navigational channels to the sea).
Infrastructure facility means roads, including toll roads, bridges, rail systems, highway
projects, water supply projects, water treatment systems, irrigation projects, sanitation
and sewerage systems or solid waste management systems, ports, airports, inland
waterways, inland ports, or navigational channels to the sea.
Tax incentives for exports
The export profits from a new industrial undertaking satisfying prescribed conditions
established in a Free Trade Zone (FTZ), Software Technology Park (STP), or Electronic
Hardware Technology Park (EHTP), or a 100% export-oriented undertaking (EOU) or a
unit in a SEZ are exempt from income tax for ten years, commencing from the first year
of manufacture. However, this exemption is available only if the manufacturing activity
commenced before the end of the tax year 2010/11.
The export profits from a new industrial undertaking satisfying the prescribed
conditions established in an SEZ is eligible for tax exemption of 100% of profits for the
first five years, from the year of commencement of manufacturing, followed by a partial
tax exemption of 50% of profits for the next five years. A further tax exemption of 50% of
the profits for five years is also available after that, subject to an equal amount of profit
being retained and transferred to a special reserve in the books of account.
Tax incentives for units in the North Eastern Region of India
Measures are in place to facilitate the development of the North Eastern Region of
India and of the state of Sikkim. Undertakings located in these states that (i) begin to
manufacture or produce any eligible article, (ii) undertake substantial expansion, or (iii)
commence an eligible business between 1 April 2007 and 1 April 2017 are eligible for a
100% deduction of profits for ten consecutive years.
A list of eligible businesses has been provided by the Indian government. The eligible
businesses include hotels (not below two-star category), adventure and leisure sports
including ropeways, the provision of medical and health services in nursing homes
with a minimum capacity of 25 beds, operating a vocational training institute for hotel
management, catering and food crafts, entrepreneurship development, nursing and
para-medical training, civil aviation related training, fashion design and industrial
training, running an information technology-related training centre, manufacturing of
information technology hardware, and bio-technology. Businesses other than the above
listed eligible businesses are not entitled to claim the tax holiday.
Tax incentives for hotels/convention centres located in specified

districts
A tax holiday of five years is provided to hotels (two, three, or four star) and convention
centres located in the National Capital Territory of Delhi and the districts of Faridabad,
Gurgaon, Gautam Budh Nagar, and Ghaziabad, provided the date on which the hotel
began functioning, or by which construction of convention centre was completed, was
before 31 July 2010. Hotels located in a specified district having a World Heritage Site,
that are constructed and that have started functioning at any time during the period 1
April 2008 to 31 March 2013, are eligible for a tax holiday for a period of five years.
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Tax incentives for certain income relating to offshore banking units
and international financial services centre
A scheduled bank, or any bank incorporated by or under the laws of a country outside
India, that has an offshore banking unit in an SEZ or an international financial services
centre with a specified income that is subject to prescribed conditions is eligible for a tax
exemption of 100% of the specified income for five consecutive years beginning from
the year in which the permission under the Indian Banking Regulation Act, 1949 was
obtained and for 50% of the specified income for five consecutive years.
Tax incentive of capital expenditure on certain specified businesses
Capital expenditure is allowed at 100% in respect of the following specified businesses:

Setting up and operating cold chain facilities.
Setting up and operating warehousing facilities for storage of agriculture produce.
Setting up and operating an inland container depot, freight station, or warehousing
facility for storage of sugar and beekeeping and honey and beeswax production.
Laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
anetwork.
Building and operating a hotel of two-star or above category in India.
Building and operating a hospital with at least 100 beds.
Developing and building a housing project under a scheme for slum redevelopment
or rehabilitation framed by the government.
Developing and building specified housing projects under an affordable scheme of
the central/state government.
Investing in a new plant or newly installed capacity in an existing plant for production
of fertiliser.
In case of certain specified businesses (commencing operations on or after 1 April 2012),
such as cold chain facility, warehousing for agriculture produce, hospital with at least
100 beds, notified affordable housing projects and production of fertilizer, the deduction
is 150% of capital expenditure that is incurred on or after 1 April 2012.
The following characteristics and conditions may be noted:
Any sum received or receivable in cash or in kind on transfer, etc. of the capital asset
shall be considered as business income if expenditure on such an asset has been
allowed as a deduction under this section.
Any loss computed in respect of the above specified businesses shall be allowed to
be offset or carried forward and offset only against the profits and gains of specified
businesses.
The specified business should:
not be set up by splitting up or reconstruction of a business already in existence
not be set up by transfer of used machinery or plant exceeding 20% of the total
value of the machinery or plant used in such business, and
have been approved by the prescribed authority (i.e. the government).
Research and development (R&D) expenditure
The weighted deduction available in respect of expenditure incurred on scientific

research in an in-house R&D facility approved by the prescribed authority is 200% of
such expenditure for companies engaged in specified businesses.
A payment made to an approved research association undertaking research in social
science or statistical research or to an Indian company to be used by it for scientific
research is eligible for a weighted deduction of 125% of the payment made.
India
853
India
Contributions made to the National Laboratory, approved scientific research
associations, universities, and the Indian Institute of Technology are 200% deductible.
Foreign tax credit
credit regime.
Withholding taxes
There is an obligation on the payer (either resident or non-resident) of income to
withhold tax when certain specified payments are credited and/or paid. Some of the
expenses that require tax withholding are as follows.
Payments by resident companies

Nature of payment
Specified type of interest
Non-specified type of interest
Professional or technical service
Commission and brokerage
Rent of plant, machinery, or equipment
Rent of land, building, or furniture
Contractual payment (except for individual/
Hindu undivided family [HUF])
Contractual payment to individual/HUF
Royalty or fees for technical services
Payment threshold for WHT

(INR) (1)
None
5,000 (2)
30,000
5,000
180,000
180,000
30,000 (single payment) 75,000
(aggregate payment)
30,000 (single payment) 75,000
(aggregate payment)
30,000
WHT rate (%)

10
20
10
10
2
10
2
1
10
Notes
1.
2.
Payments have different threshold limits. The payer is only required to withhold tax if the total
payment within a tax year to a single person (except where specified otherwise) is above the limits
specified above.
The threshold limit for WHT for non-specified type of interest is INR 5,000, except in the case of
interest received from a bank, co-operative society, or deposit with post office, for which it is INR
10,000.
If the Permanent Account Number (PAN) of the deductee is not quoted, the rate of WHT
will be the rate specified in relevant provisions of the Income Tax Act, the rates in force,
or the rate of 20%, whichever is higher.
The definition of royalty also includes consideration for use of, or right to use, computer
software. Transfer of all or any rights in respect of any right, property, or information
includes transfer of all or any right to use computer software (including granting of
a licence), irrespective of the medium through which such a right is transferred and
irrespective of whether any right or property is located in India. Hence, while applying
WHT on such payments in the nature of royalty, one needs to consider the definition of
royalty as amended by the Budget 2012 with retrospective effect from 1 June 1976.
Payment to non-resident companies

Nature of payment
Dividend
Interest on foreign currency
854
India
WHT rate (%)

0
10
India
Nature of payment
Interest on money borrowed in foreign currency under a loan agreement or by way
of long-term infrastructure bonds (or rupee denominated bonds) (time period for
borrowing is July 2012 to July 2015)
Interest on investment in long-term infrastructure bonds issued by Indian company
(rupee denominated bonds or government security)
Royalty and technical fees
Long-term capital gains other than exempt income
Income by way of winning from horse races
Other income
WHT rate (%)

5
5
25
20
30
40
Notes

Percentage to be increased by a surcharge, education cess, and secondary and higher education
cess to compute the effective rate of tax withholding.
Income from units of specified mutual funds is exempt from tax in the hands of the unit-holders.
Dividends received from Indian companies are tax-free in the hands of the shareholder.
Short-term capital gains on transfer of shares of a company or units of an equity-oriented fund would
be taxable at 15% if they have been subjected to STT.
Long-term capital gains on transfer of shares (through stock exchange) in listed companies or units of
an equity-oriented fund are exempt from tax if they have been subjected to STT.
There is no threshold for payment to non-resident companies up to which no tax is required to be
withheld.
If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant
provisions of the Income Tax Act, the rates in force, or the rate of 20%, whichever is higher.
Treaty rates
Some tax treaties provide for lower WHT rates from certain types of income, as follows:
WHT (%)
Recipient
Albania
Armenia
Australia
Austria
Bangladesh
Belarus
Belgium
Botswana
Brazil
Bulgaria
Canada
China (Peoples Republic of China)
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Ethiopia
Fiji
Finland
France
Georgia
Germany
Dividend (1)
10
10
15
10
10 (3)/15
10 (9)/15
15
7.5 (9)/10
15
15
15 (3)/25
10
Interest
10
10
15
10
10
10
10 (11)/15
10
15
15
15
10
10 (3)/15
10
15 (9)/25
N/A (5)
10
10
10
10 (11)/15
N/A (5)
10
10
10 (6)
10
10
10
10 (6)
10
10
Fee for
technical
Royalty (12) services (12)
10
10
10
10
10/15 (2)
10/15
10
10
10
N/A (5)
15
15
10
10
10
10
25 (15)/15
N/A (5)
15 (7)/20
20
10 (2)/15
10 (2)/15
10
10
Treaty yet to be notified.
15
15
10
10
20
20
N/A (5)
N/A (5)
10
10
10
10
10 (6)
10 (6)
10
10
10
10
India
855
India
WHT (%)
Recipient
Greece
Hungary
Iceland
Indonesia
Ireland
Italy
Japan
Jordan
Kazakhstan
Kenya
Korea, Republic of
Kuwait
Kyrgyz Republic
Latvia
Libya
Lithuania
Luxembourg
Malaysia
Malta
Mauritius
Mexico
Mongolia
Montenegro
Morocco
Mozambique
Myanmar
Namibia
Nepal
Netherlands
New Zealand
Norway
Oman
Philippines
Poland
Portugal
Qatar
Romania
Russian Federation
Saudi Arabia
Serbia
Singapore
Slovenia
South Africa
Spain
Sri Lanka
Sudan
Sweden
856
India
Dividend (1)
(14)
10 (6)
10
10 (9)/15
10
15 (3)/25
10
10
10
15
15 (4)/20
10
10
10
(14)
5 (3)/15
10
5
10 (9)/15
5 (3)/15
10
15
5 (9)/15
10
7.5
5
10
10 (3)/15
10 (6)
15
15 (9)/25
10 (3)/12.5
15 (3)/20
15
10 (9)/15
5 (3)/10
10
10
5
5 (9)/15
10 (9)/15
5 (3)/15
10
15
7.5
10
10 (6)
Interest
(14)
10 (6)
10
10
10
15
10
10
10
15
10 (13)/15
10
10
10
(14)
10
10
10
10
(14)
10
15
10
10
10
10
10
10 (14)/15
10 (6)
10
15
10
10 (13)/15
15
10
10
10
10
10
10
10 (11)/15
10
10
15
10
10
10 (6)
Royalty (12)
(14)
10 (6)
10
15
10
20
10
20
10
20
15
10
15
10
(14)
10
10
10
15
15
10
15
10
10
10
10
10
15
10 (6)
10
10
15
15
22.5
10
10
10
10
10
10
10
10
10
10 (6)/20
10
10
10 (6)
Fee for
technical
services (12)
N/A (5)
10 (6)
10
N/A (5)
10
20
10
20
10
17.5
15
10
15
10
N/A (5)
10
10
10
10
N/A (5)
10
15
10
10
N/A (5)
N/A (5)
10
N/A (5)
10 (6)
10
10
15
N/A (5)
22.5
10
10
10
10
N/A (5)
10
10
10
10
20 (6)
10 (6)
10
10 (6)
India
WHT (%)
Recipient
Switzerland
Syria
Taipei
Tajikistan
Tanzania
Thailand
Trinidad & Tobago
Turkey
Turkmenistan
Uganda
Ukraine
United Kingdom
United States
Uruguay
Uzbekistan
Vietnam
Zambia
Dividend (1)
10
5 (3)/10
Interest
10
7.5
5 (3)/10
5/10 (3)
15 (3, 8)/20
(8, 9)
10
15
10
10
10 (9)/15
10
15
15 (3)/25
10
10
10 (13)/25
10
10 (11)/15
10
10
10
5 (11)/12.5
10 (13)/15
10 (11)/15
10
10
5 (10)/15
10
10
10
Fee for
technical
Royalty (12) services (12)
10
10
10
N/A (5)
10
N/A (5)
10
20
15
N/A (5)
10
10
15
15
10
10
10
10
10
10
10
N/A (5)
10 (2)/15
10 (2)/15
10 (2)/15
10 (2)/15
10
15
10
10
10
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
The treaty tax rates on dividends are not relevant since, under the current Indian tax legislation, most
dividend income from Indian companies that is subject to DDT is exempt from income tax in the
hands of the recipient.
10% for equipment rental and ancillary services:
for other cases in the first five years: 15% if government or specified organisation is the payer and
20% for other payers.
for subsequent years: 15% in all cases (income of government organisations is exempt from
taxation in the country of source).
If at least 10% of capital is owned by the beneficial owner (company) of the company paying the
dividend or interest.
If at least 20% of capital is owned by the beneficial owner (company) of the company paying dividend
or interest.
In absence of specific provision, it may be treated as business profits or independent personal
services under respective treaties, whichever is applicable.
The most favoured nation clause is applicable. The protocol to the treaty limits the scope and rate
of taxation to that specified in similar articles in treaties signed by India with an OECD or another
country.
If royalty relates to copyrights of literary, artistic, or scientific work.
If the company paying the dividend is engaged in an industrial undertaking.
If at least 25% of capital is owned by the beneficial owner (company) of the company paying the
dividend.
If at least 25% of capital is owned by the company during at least six months before date of payment.
If paid on a loan granted by a bank/financial institution.
The tax rate for royalties and fees for technical services, under the domestic tax laws, is 10%. This
rate is to be increased by a surcharge at 2.5% on the income tax and education cess at 2% and
secondary and higher secondary education cess at 1% on the income tax including surcharge. As
a consequence, the effective tax rate is 10.558%. This rate applies for payments made under an
agreement entered into on or after 1 June 2005. Accordingly, a tax resident can either use the treaty
rate or domestic tax rate, whichever is more beneficial.
If interest is received by a financial institution.
Taxable in the country of source as per domestic tax rates.
If royalty payments arise from the use or right to use trademarks.
List of limited agreements between India and other countries
A list of the countries with which India has entered into limited agreements for double
taxation relief with respect to income of airlines/merchant shipping, is given here.
India
857
India
Country
Afghanistan
Ethiopia
Iran
Lebanon
Maldives
Pakistan
Peoples Democratic
Republic of Yemen
SAARC Countries
Government Notification Reference

GSR 514(E), dated 30.09.1975
GSR 8(E), dated 04.01.1978 as corrected by Notification No. GSR
159(E), dated 02.03.1978
GSR 284(E), dated 28.05.1973
GSR 1552 and 1553, dated 28.06.1969
SO 34(E), dated 10.01.2011 by Notification No. 3/2011
GSR 792(E), dated 29.08.1989
GSR 857(E), dated 12.08.1988
SO 34(E), dated 10.01.2011 by Notification No. 3/2011
Tax information exchange agreements (TIEAs) between India and other

countries
A list of the countries with which India has entered into TIEAs for effective exchange of
information relating to tax matters is given below:
Country
Bahamas
Belize
Bermuda
Cayman Islands
Guernsey
Isle of Man
Jersey
Liberia
Monaco
San Marino
Date of notification
Notification No. 25/2011 [F. No. 503/6/2009-FTD-I], dated 13-5-2011
Notification No.61/2011[F. No.503/03/2009-FTD-I]/S.O. 2902(E), dated
27-12-2011
Notification No. 30/2012 [F. No. 503/1/2009-FTD-I]/SO 1782(E), dated 9-82012
Notification No. 26/2011 [F. No. 503/01/2008 - FTD-I], dated 13-5-2011
Notification No. 26/2012 [F. No. 503/6/2008-FTD-I]/S.O. 1541(E), dated
10-7-2012
Notification No. 32/20012-FT&TR-II [F. No. 503/02/2010-FT&TR-II]/SO
1877(E), dated 17-8-2012
Notification No. 43/2012[F.NO.503/04/2009-FT&TR-II]/SO 2427(E), dated
10-10-2012
Signed on 19 December 2013
Tax administration
Taxable period
For India, the tax year ends on 31 March. Taxpayers can follow any accounting year,
provided they file a set of audited results approved by its Board for the tax year ending
31 March.
Tax returns
Accounts for tax purposes must be made up to 31 March. For persons having business/
professional income, the electronic return of income is required to be filed by 30
September of the succeeding tax year.
Quarterly withholding tax returns
Quarterly statement of taxes withheld are to be filed electronically with the tax
authorities on or before 15 July, 15 October, and 15 January for the first three calendar
quarters of the tax year and on or before 15 May following the last calendar quarter of
the tax year.
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Obligation to submit tax return for assets located outside India
A resident taxpayer having any asset (including financial interest in any entity) located
outside India or signing authority in any account located outside India is mandatorily
required to furnish a tax return.
In cases where taxpayers have assets outside India, the extant time limits of four and six
years for reopening tax assessment (where income has escaped assessment) has been
increased to 16 years. In case of a person who is treated as an agent of a non-resident,
the time limit for issuing reassessment notice has been extended from two years to six
years.
Payment of tax
Tax is payable in advance (if tax for the year exceeds INR 10,000) in specified
instalments for every quarter, before the 15th day of the succeeding month, during the
tax year (April to March) in respect of the income of the tax year ending 31 March. Any
balance of tax due on the basis of the return must be paid on a self-assessment basis
before the return is filed. A tax return will be treated as defective if the tax liability along
with interest is not paid on or before the date of submission of the tax return.
Tax audit process

Audit for income tax purposes
Persons carrying on business are required to get their books of account audited for
income tax purposes where the turnover is INR 10 million. For persons carrying on a
profession, the turnover threshold is INR 2.5 million. The penalty for non-compliance
with this audit requirement is INR 0.15 million, subject to 1% of total turnover/gross
receipts.
Special audit
Tax authorities, at any stage of proceedings, having regard to nature, complexity, and
volume of accounts or doubts on correctness of accounts or other reasons, may, after
taking necessary approval of Chief Commissioner, direct the taxpayer to get ones
accounts audited and to furnish the report.
The statute of limitations under the Income Tax Act, 1961 in the case of submission of
returns, assessment of returns, and reassessment of returns is four years from the end of
the relevant tax year.
WHT provisions and their applicability to cross-border deals are a topic of great current
interest to tax authorities. Transfer pricing (i.e. pricing of international transactions
with associated enterprises) is also an area that is witnessing increased attention by tax
authorities in recent years.
General Anti Avoidance Rule (GAAR)
GAAR provisions were proposed in Budget 2012. They were based on the
recommendations of a committee chaired by Dr. Parthasarathi Shome. Budget 2012
considered most of this committees recommendations and provided thatthe GAAR
provisions would become effective from 1 April 2016. These provisions empower
the tax department to declare an arrangement entered into by a taxpayerto be
anImpermissible Avoidance Agreement (IAA), the consequence of which will be
denial of tax benefit under both the provisions of the Income Tax Act, 1961 and under
the tax treaty. The provisions can be invoked for any step in or part of any arrangement
entered and that arrangement or step may be declared as an IAA. The provisions would
be attracted only where the main purpose of the IAA is to obtain tax benefit. Recently,
the Central Government filed a review petition before the Supreme Court in the context
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of an Andhra Pradesh High Court decision (Sanofi Pasteur Holdings), requesting it to
constitute a seven-member bench and revisit the very concept of tax avoidance and tax
planning, as laid down in three of its earlier decisions (McDowell & Co, Azadi Bachao
Andolan, and Vodafone Holdings). If this does come to pass, such a decision may
materially affect the GAAR provisions as proposed.
Procedural aspects of GAAR have been notified, which would also take effect from 1
April 2016. A major relaxation introduced has been introduction of a threshold of INR
30 million of tax benefit sought for invoking GAAR. The rules have exempted income
earned by any person from transfer of investments in listed securities in India made
before 30 August 2010 from the purview of the anti-abuse provisions. Tax benefits
obtained after 1 April 2015 are, however, not so exempted. Securities and Exchange
Board of India (SEBI)-registered foreign institutional investors (FIIs) are exempted
from applicability of the anti-abuse provisions if they do not take advantage of any tax
treaty entered into by India, but would apply to IAAs.Investments in FIIs by non-resident
investors by way of offshore derivative instruments (like Participatory Notes) are also
exempted from the ambit of the GAAR provisions.
Other issues
Mergers and acquisitions
The expression merger has not been defined in the Income Tax Act but has been
covered as part of the definition of the term amalgamation. Amalgamation is defined
as a merger of one or more companies with another, or the merger of two or more
companies to form a new company, in such a way that all the assets and liabilities
of the amalgamating company or companies become the assets and liabilities of the
amalgamated company, and held by the amalgamated company for a minimum period
of five years, and shareholders holding not less than 75% in value of the shares in
the amalgamating company or companies become shareholders of the amalgamated
company.
Capital gains
No capital gains tax is levied on the transfer of capital assets by an amalgamating

company to the amalgamated company, provided the amalgamated company is an
Indian company. Similar is the position in case of a demerger by a demerged company to
a resulting company.
In cases where shares of an Indian company are transferred by a foreign company or
a demerged foreign company to any another foreign company or resulting foreign
company, there is no tax payable, provided it satisfies certain specified conditions.
Furthermore, the shareholder of the amalgamating company or demerged company
is not liable to pay capital gains tax on the exchange of shares with that of the
amalgamating company or the resulting company under the scheme of amalgamation.
Carryforward of accumulated losses of amalgamating company
The losses and unabsorbed deprecation of the amalgamating company are deemed to be
those of the amalgamated company in the year in which the amalgamation takes place,
provided it satisfies certain specified conditions.
In the case of amalgamation of a company owning an industrial undertaking, the
amalgamated company shall achieve the level of production of at least 50% of the
installed capacity of the undertaking before the end of four years from the date of
amalgamation and continue to maintain the minimum level of production till the end
of five years from the date of amalgamation. If these conditions are violated, the benefit
claimed will be taxed in the hands of the amalgamated company in the year of default.
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In case of demerger of a company, the accumulated losses or unabsorbed depreciation of
the demerged company directly relatable to the undertaking or the division transferred
is allowed to be carried forward and offset in the hands of the resulting company.
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PwC contact
Ay Tjhing Phan
JI HR Rasuna Said Kav X-7 No. 6
Jakarta 12940, Indonesia
Tel: +62 21 521 2901
Over the past 12 months, the government has issued several regulations that include,
among others, those addressing enhancement of digital use for tax compliance and
several regulations under the economic policy packages.
The enhancement of digital use was reflected in the introduction of electronic valueadded tax (VAT) invoices, improvement in e-Filing, and an e-payment system for tax and
social security contributions.
In the second half of 2013, the government released economic policy packages in two
phases, with the aim to (i) maintain the stability of the national economy following the
weakening of the rupiah (IDR), (ii) increase the competitiveness of national industries,
(iii) increase the absorption of manpower, and (iv) support export-oriented sectors.
Several tax-related action plans under the economic policy packages include:

Relaxing the facilities restrictions in bonded zones for domestic products.

Eliminating luxury-goods sales tax (LST) for certain products.
Eliminating VAT on certain books.
Providing tax reliefs for labour-intensive companies in certain industries.
Relaxing tax exemption and drawback facilities for exports.
Increasing the income tax rate on imports of consumer products.
Indonesia also increased the number of its double taxation agreements (DTAs) through
the enforcement of a DTA with Suriname in 2014. In regard to tax information exchange
agreements (TIEAs), San Marino recently ratified its TIEA with Indonesia. Other than
San Marino, Indonesia has signed TIEAs with Bermuda, Guernsey, Jersey, and the Isle of
Man.
Since Indonesia is largely a self-assessment tax environment, enforcement remains a
priority of the tax authorities; consequently, the Indonesian Tax Office (ITO) continues
its efforts in combating abuse by targeting tax audits on certain industries and highwealth individuals, while transfer pricing audits are also on the increase and a primary
area of concern for multi-nationals.
Particularly in investment areas, the government has recently issued the long-awaited
new Negative List of Investment, which provides more flexibility on investment in
certain businesses, such as power plants and port business operated under a Public
Private Partnership scheme, which are offered a higher foreign ownership level.

Taxable business profits are calculated on the basis of normal accounting principles
as modified by certain tax adjustments. Generally, a deduction is allowed for all
expenditures incurred to obtain, collect, and maintain taxable business profits. A timing
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difference may arise if an expenditure recorded as an expense for accounting cannot be
immediately claimed as a deduction for tax (see the Deductions section).
Resident corporations are taxed based on worldwide income. A foreign company
carrying out business activities through a permanent establishment (PE) in Indonesia
will generally be required to assume the same tax obligations as a resident taxpayer.
Resident taxpayers and Indonesian PEs of foreign companies have to settle their tax
liabilities either by direct payments, third party withholdings, or a combination of both.
Foreign companies without a PE in Indonesia have to settle their tax liabilities for their
Indonesian-sourced income through withholding of the tax by the Indonesian party
paying the income.
Corporate income tax (CIT) rates
A flat CIT rate of 25% applies to net taxable income.
Public company discount
Public companies that satisfy a minimum listing requirement of 40% (being put in the
collective custody of a custody and settlement institution) and certain other conditions
are entitled to a tax discount of 5% off the standard rate, providing an effective tax rate
of 20%.
Small company discount
Small enterprises (i.e. corporate taxpayers with an annual turnover of not more than
IDR 50 billion) are entitled to a 50% tax discount of the standard rate, which is imposed
proportionally on taxable income on the part of gross turnover up to IDR 4.8billion.
Certain enterprises with gross turnover of not more than IDR4.8 billion are subject to
final income tax at 1% of turnover.
Final income tax
Certain types of income are subject to a final income tax at a specified percentage of the
gross amount of income, without regard to any attributable expenses.
Income
Rental of land and/or building
Proceeds from transfers of land and building rights
Fees for construction work performance
Fees for construction work planning
Fees for construction work supervision
Interest on time or saving deposits and on Bank of Indonesia Certificates (SBIs),
other than that payable to banks operating in Indonesia and to governmentapproved pension funds
Interest on bonds, other than that payable to banks operating in Indonesia and
government-approved pension funds
Sale of exchange-traded shares on the Indonesian stock exchange
Income from lottery prizes
Taxrate(%)
10
5
2/3/4
4/6
4/6
20
15
0.1
25
Resident companies, PEs, representatives of foreign companies, organisations, and

appointed individuals are required to withhold the above final tax from the gross
payments to resident taxpayers and PEs.
Special industries and activities
Companies engaged in upstream oil and gas and geothermal industries typically have
to calculate CIT in accordance with their production sharing contracts (PSCs). Certain
companies engaged in metal, mineral, and coal mining are governed by a contract of
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work (CoW) for the income tax calculation. Different provisions may apply to them,
pertaining to corporate tax rates, deductible expenses, and how to calculate taxable
income.
Note that such contractual-based concessions are no longer available to new mining
projectssince the enactment of the Mining Law in 2009. The Mining Law stipulates that
general prevailing tax laws/regulations apply to mining projects; consequently, any
tax facilities should be provided accordingly, except as otherwise stated in a particular
mining licence.
Local income taxes
There are no local taxes on income in Indonesia. For a list of other local taxes, see Regional
taxes in the Othertaxes section.
Corporate residence
A company is treated as a resident of Indonesia for tax purposes by virtue of having its
establishment or its place of management in Indonesia.
Under the Income Tax Law, a non-resident company may be treated as having a taxable
presence if it runs a business or conducts activities in Indonesia, which can be in the
form of:

a place of management
a branch of the company
a representative office
an office building
a factory
a workshop
a warehouse
a room for promotion and selling
a mining and extraction of natural resources
a mining working area for oil and natural gas
a fishery, animal husbandry, agriculture, plantation, or forestry location
a project of construction, installation, or assembly
the furnishing of services in whatever form by employees or other person, insofar
conducted not more than 60 days within a 12-month period
a person or corporation acting as a dependent agent
an agent or employee of an insurance company that is not established and domiciled
in Indonesia that receives insurance premiums or insures risk in Indonesia, and
the computers, electronic agent, or automated equipment owned, leased, or used by
an electronic transactions provider to conduct business via the internet.
Where the non-resident company is resident in a country that has a tax treaty with
Indonesia, the rules on a PE creation may be changed; usually there is a longer time test
for certain activities performed in Indonesia.
Other taxes
With a few exceptions, VAT is applicable on deliveries (sales) of goods and services
within Indonesia at a rate of 10%. VAT on export of goods is zero-rated while the import
of goods is subject to VAT at a rate of 10%. Zero-rated VAT is also applicable on exported
services, but subject to a Ministry of Finance (MoF) limitation. Currently, only certain
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exported services, including toll manufacturing services, are subject to the 0% VAT rate.
Services performed within the Customs Area for customers outside of the Customs Area
are considered as locally delivered and aretherefore subject to the regular VAT rate of
10%. Inbound use or consumption of foreign services or intangible goods, with a few
exceptions, is also subject to a self-assessed VAT at a rate of 10%.
The VAT law allows the government to change the VAT rate within the range of 5% to
15%. However, since the enactment of the VAT law in 1984, the government has never
changed the VAT rate.
In general, VAT collection is based on the accrual principle, whereby VAT must be
collected at the time of delivery of taxable goods or services. The term delivery, in this
case, is defined as the time when risk and ownership of goods have been transferred
or when income from a service delivery can be reliably estimated or measured. In the
accrual system, income or receivables are acknowledged when a transaction takes
place, regardless of whether the transaction has been paid for or not. The recognition
of revenue or receivables is indicated by the issue of a commercial invoice, which is a
source document for this recognition and a basis for recording it.
VAT filing is done on a monthly basis, with payment and filing being due no later than
the last day of the month following the taxable delivery.
Luxury-goods sales tax (LST)
In addition to VAT, some goods (e.g. certain household appliances, sport equipment,
motor vehicles, luxury residences) are subject to LST upon import or delivery by the
manufacturer to another party at rates currently ranging from 10% to 125%.
Import duty
Import duty is payable at rates from 0% to 150% on the customs value of imported
goods. Customs value is calculated on the cost, insurance, and freight (CIF) level.
Group
Automobiles
Automobile parts
Vessels
Electronic goods
Footwear
Beverages, ethyl alcohol,
and alcoholic drinks
Essential oils and resinoids
Agricultural products
Textile,textile products,
and accessories
Others
Good
Passenger and commercial vehicles
Ships, boats, and floating structures
Ethyl alcohol, beer, wine, spirits, and other

beverages
Odoriferous substances
Animal and vegetable products
Bags, harnesses, apparels, and clothing
accessories, etc.
Chemicals, pharmaceutical products, plastic, and
rubber products, etc.
Rate (%)
5 to 40
0 to 10
0 to 5
0 to 12.5
5 to 25
5 to 30, IDR 14,000
to IDR 125,000/litre
5 to 150
0 to 25
5 to 15
0 to 25
As a commitment to liberalising trade, the Indonesian government is progressively

lowering import duty rates on most products. Higher duty rates remain to protect certain
industries and goods regarded as sensitive for security or social and cultural reasons.
Duty relief/exemption/deferral
The Indonesian government offers duty relief, duty exemption, and duty deferral
concessions to foreign and domestic investors in order to promote the development of
local and export industries. Such concessions include the Badan Koordinasi Penanaman
Modal (BKPM) Masterlist, Bonded Zone, Bonded Warehouse, import duty exemption
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and drawback for exports, Free Trade Zone (FTZ) in Batam, Bintan, and Karimun,
Association of Southeast Asian Nations (ASEAN) duty rates, Free Trade Area (FTA)
agreement duty rates, Indonesia-Japan Economic Partnership Agreement (IJEPA), and
MITA (main partners)lanes.
Land and building tax
Land and buildings tax(Pajak Bumi dan Bangunan or PBB)is a part of regional taxes,
which are governed under Regional Taxes and Retribution (Pajak Daerah dan Retribusi
Daerah or PDRD) Law in which each regional government has to issue a regulation
(Peraturan Daerah or PERDA) to regulate PBB in its territory.
The scope of PBB under PDRD Law covers all land and building except for forestry,
plantation, and mining areas, which are governed by separate regulations.
Under PDRD Law, the PBB rate is maximum 0.3% and the tax due is calculated by
applying the tax rate on the sale value of the tax object (Nilai Jual Objek Pajak or NJOP)
deducted by non-taxable NJOP. The non-taxable NJOP is set at minimum of IDR 10
million. Any changes are to be made by issuing a PERDA.
Tax on land and building transfer
A transfer of land and building will cause income tax on the deemed gain on the
transfer/sale to be charged to the transferor/seller. The tax is set at 5% of the gross
transfer value or the government-determined value, whichever is greater(see Final
income tax in the Taxes on corporate income section).
Duty on the acquisition of land and building rights
In a land and building transfer, the acquirer is liable for duty on the acquisition of land
and building rights (Bea Pengalihan Hak atas Tanah dan Bangunan or BPHTB)at a
maximum of 5% of the greater of the transaction value or the government-determined
value. Similar to PBB, BPHTB has been made a part of regional taxes.
Stamp duty
Stamp duty is nominal and payable as a fixed amount of either IDR 6,000 or IDR 3,000
on certain documents.
Regional taxes
A corporate taxpayer may be liable for a number of regional taxes and retributions. The
rates range from 1.5% to 35% of a wide number of reference values determined by the
relevant regional governments. The following are regional taxes, other than PBB and
BPHTB, that may apply:

Motor vehicle tax.

Motor vehicle ownership transfer fee.
Motor vehicle fuel tax.
Surface water tax.
Cigarette tax.
Hotel tax.
Restaurant tax.
Entertainment tax.
Advertisement tax.
Road illumination tax.
Non-metal and rock minerals tax.
Parking tax.
Ground water tax.
Swallow-nest tax.
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Employers areresponsible for ascertaining that their employees are covered by

the workers social security program managed by Badan Penyelenggara Jaminan
Sosial(BPJS), which provides compensation in the event of working accidents, deaths,
and old age (55 years), as well as sickness or hospitalisation. The program calls for
premium contributions from both the employers and the employees. Employees
contributions are collected through payroll deductions. The premium contributions
borne by employers are calculated as a percentage of regular salaries/wages, ranging
from 0.24% to 4%.
As of1 January 2014, the scheme applies to all employees, including expatriates who
have been working in Indonesia for more than six months. Previously, the scheme was
not compulsory for such expatriates.
Branch income
Branch profits are subject to the ordinary CIT rate of 25%. The after-tax profits are
subject to a withholding tax (WHT) (i.e. branch profits tax or BPT) at 20%, regardless of
whether the profits are remitted to the home country. However, a concessional WHT rate
may be applicable where a tax treaty is in force (see the Withholding taxes section for more
information). The BPT may be exempt if the profits are entirely reinvested in Indonesia
(see the Tax credits and incentives section for more information).
Inventory valuation
Inventories must be measured at cost by using either the average or first in first out
(FIFO) method. Once a costing method is adopted, it must be applied consistently.
Capital gains
Capital gains are generally assessable together with ordinary income and subject to tax
at the standard CIT rate. However, gains from the transfer of land and buildings are not
subject to regular CIT but rather are subject to final income tax at a rate of 5% of the
transaction value or the government-determined value, whichever is higher.
The proceeds from sales of shares listed on the Indonesian stock exchange are not
subject to normal CIT. Instead, the proceeds are subject only to a final WHT of 0.1% of
the gross sales consideration. An additional tax of 0.5% applies to the share value of
founder shares at the time an initial public offering takes place, irrespective of whether
the shares are held or sold. Shareholders may elect not to pay this tax, in which case the
actual gain will be subject to normal tax at the time the shares are sold.
Dividend income
In principle, dividend income received by a resident taxpayer from a limited liability

company (generally referred to as a Perseroan Terbatas or PT) is taxable as ordinary
income for the taxpayer receiving the dividend. However, if the dividend recipient is a
PT with a minimum shareholding of 25% in the company paying the dividend and the
dividend is paid out of retained earnings, it is exempt from CIT.
Where the recipient is not resident in Indonesia, a WHT rate of 20% applies, subject to
variation by tax treaties (see the Withholding taxes section for more information).
The same rules apply to stock dividends (bonus shares), including dividends paid out of
share premium (agio).
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Interest income
Interest income on time or saving deposits and on Bank of Indonesia Certificates (SBIs)
received by a resident company or a PE is taxed at a final tax rate of 20%.
Gains and losses arising from currency fluctuations are generally recognised on an
accrual basis in accordance with the prevailing Indonesian Accounting Standards, which
resemble International Accounting Standards in most respects.
Foreign income
Foreign branch income of an Indonesian company must be accounted for as Indonesian

taxable income under the controlled foreign companies (CFCs) regulation. These rules
apply to Indonesian tax residents owning at least 50% of the paid-up capital (shares)
in a CFC. The rules make no reference to such terms as tax avoidance or tax evasion
and therefore apply even if the CFC is domiciled in a non-tax haven country. The
only situation in which the rules do not apply is when the CFCs shares are listed on a
recognised stock exchange. In very broad terms, under the CFC rules, the Indonesian
shareholder of the CFC is deemed to receive a dividend with respect to the CFC profits
based on a shareholding proportionalcalculation.
Deductions
In general, expenses incurred in the ordinary course of business (to obtain, collect, and
maintain taxable income) are deductible, subject to the requirements for documentary
support.
Note that expenses relating to gross income subject to final income tax are not
deductible for CIT purposes.
Depreciable/amortisable assets include both tangible and intangible property or costs,

including the cost of extending building use rights, rights for business use, rights for
use, and goodwill, with a useful life of more than one year, except land that is owned
and used in business. Depreciation and amortisation may be calculated under the
straight-line method or the declining-balance method on an individual asset basis.
Once a method is chosen, it should be applied consistently. In calculating depreciation,
depreciable assets are divided into the following classes:
Class
Property:
Useful life of four years
Useful life of eight years
Useful life of 16 years
Useful life of 20 years
Buildings:
Permanent
Non-permanent
Depreciation/amortisation rate (%)

Straight-line method
Declining-balance method
25
12.5
6.25
5
50
25
12.5
10
5
10
Special rules apply for assets used in certain business fields and/or certain areas. Tax
depreciation need not conform to book depreciation.
The costs incurred for acquiring rights, with a beneficial life of more than one year, for
mining, oil, and natural gas concessions; forest concessions; and other rights to exploit
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natural resources should be amortised by the production-unit method. Except for the
right to acquire oil and natural gas concessions, the depletion rate used should not
exceed 20% per annum.
The costs of incorporation and expansion of the capital of an enterprise are claimed in
full in the year in which the expenditure is incurred or are amortised using either the
declining-balance or straight-line method at the above rates.
Costs incurred before the commencement of commercial operations with a useful life of
longer than one year are capitalised and amortised according to the above rates.
Interest expense
Interest incurred in the ordinary course of business is deductible as long as the related
loan is used for business purposes.
Interest on loans relating to time deposits (which income is subject to a final tax) is not
deductible.
Interest on loans used to buy shares where dividends to be received are not subject to
income tax is also not deductible.
Bad debts
Uncollectible debts are deductible for tax purposes, with the following conditions:
The creditor has recognised the amount of uncollectible receivables as expenses in
the commercial income statement.
The taxpayer must submit a list of uncollectible account receivables to the Directorate
General of Tax.
A legal case to enforce collection has been brought to a District Court or government
agency that handles state receivables, there is a written agreement on cancellation of
receivables/debt release and discharge between the concerned creditor and debtor, it
has been publicised in a general or a special publication, or the debtor has otherwise
acknowledged that his/her debts have been cancelled.
Donations for national disasters, education facilities, sport development, and social
infrastructures, with certain conditions, may be deductible in the fiscal year when the
donations are provided.
Benefits in kind
Most benefits received in kind by employees, such as free housing, are not tax-deductible
to the entity providing the benefit. Free motor vehicle and telephone expenses, including
depreciation, are tax-deductible but only for 50% of the total expenses incurred.
Expenses for meals and transportation made available to all staff are tax-deductible.
Apart from these, certain benefits in kind (e.g. housing provided in remote areas as
designated by the MoF, Integrated Economic Development Areas as designated by
Presidential Decree) can also be claimed as tax-deductible expenses.
Fines and penalties
Fines, penalties, and interest on underpayment of taxes are not deductible.
Taxes
Land and buildings tax and regional taxes may be deducted from taxable income. With
several exceptions, input VAT is also deductible against taxable income as long as it is
not claimed as a credit against output VAT.
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Losses may be carried forward for a maximum period of five years. Carrying back of
losses is not permitted. Offsetting losses within a corporate group is not permitted.
WHT is applied as a final tax on the recipient for payments of royalties, interest,
and service fees to foreign non-resident companies. Excessive and non-arms-length
payments to related parties are disallowed as deductions. The tax law denies deductions
for all payments from a branch to its head office for royalties, interest, and services
provided by the head office (exceptions apply for loans between bank branches and their
head offices).
Group taxation
Consolidated returns are not allowed in Indonesia.
Transfer pricing
Transactions between related parties must be consistent with the arms-length principle.
If the arms-length principle is not followed, the Director General of Tax (DGT) is
authorised to recalculate the taxable income or deductible costs arising from such
transactions applying the arms-length principle.
Under the General Tax Provisions Law, the government requires specific transfer pricing
documentation to prove the arms-length nature of related-party transactions.
Detailed transfer pricing disclosures are required in the CIT return, which include the
following:
The nature and value of transactions with related parties.
The transfer pricing methods applied to those transactions and the rationale for
selecting the methods.
Whether the company has prepared transfer pricing documentation.
Transfer pricing disputes may be resolved through the domestic objection and appeal
process, or, where the dispute involves a transaction with a related party in a country
that is one of Indonesias tax treaty partners, the parties may request double tax relief
under the Mutual Agreement Procedures (MAP) article of the relevant tax treaty.
Taxpayers may apply for an MAP and continue the domestic dispute resolution process
at the same time. An MAP application shall be discontinued if an appeal decision is
declared by the Tax Court prior to the finalisation of the MAP.
The tax law authorises the DGT to enter into Advance Pricing Agreements (APAs) with
taxpayers and/or another tax countrys tax authority on the future application of the
arms-length principle to transactions between related parties. The process may or may
not involve cooperation with foreign tax authorities. Once agreed, an APA will typically
be valid for a maximum of three tax years after the tax year in which the APA is agreed.
The APA can also be applied to tax years before it was agreed if certain conditions are
met, such as the tax year has not been audited and there is no indication of tax crime.
However, the rollback of an APA to prior years is not automatic and will be subject to
agreement between the taxpayer and the DGT.
Increase in transfer pricing focused investigations
The number of tax audits with transfer pricing as the key focus area has significantly
increased following the issuance of new regulations relating to transfer pricing.
Transactions under particularly close scrutiny include payments of royalties and
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technical or management services fees, inter-company services, royalty and financing
transactions, and exports to related parties.
Where a taxpayer has no documentation available to substantiate these transactions,
there is a high risk that deductions for the payments will be denied in full. In this
regard, the 30-day time limit within which a taxpayer must produce any documentation
requested by the ITO during an audit is being strictly enforced. Any documentation
provided after the 30-day time limit is being disregarded by the ITO in its decision
making process.
Several transfer pricing specific audits have been conducted by the ITO for the past year.
The ITO will identify high priority targets for transfer pricing specific audits based on:
profit performance of the company (companies that have incurred consistent losses
will be the highest priority, but there is also a risk of being selected for companies
with profits below industry norms) and
materiality of the companys related party transactions.
The ITO has issued questionnaires to several taxpayers who are not under an audit that
focus primarily on transfer pricing issues. It is possible that the information gathered by
the ITO from these questionnaires will lead to follow-up investigations or audits in some
cases.
Effective from 1 July 2013, the DGT has reinforced new tax audit procedures for
taxpayers with related party transactions. This new regulation provides more clarity and
is more relevant with the current transfer pricing issues in practice (e.g. the use of the
median point as the basis of correction, mandatory use of the comparable uncontrolled
price (CUP) method for interest and the use of multiple year data for comparables). New
comprehensive forms required to be completed by the taxpayers during a tax audit are
also provided in the regulation.
Thin capitalisation
The MoF is authorised to make a determination on an appropriate ratio of debt to equity.

Under the law, debt between related parties may be re-characterised as equity, thus
giving rise to the disallowance of a tax deduction for related costs. However, the MoF has
not yet issued a ruling on these matters.
See Foreign income in the Income determination section for a description of the CFC regime.

Foreign tax credit
Tax paid or payable in foreign countries upon income from abroad received or obtained
by a resident taxpayer may be credited against tax payable in Indonesia in the same
fiscal year.
The amount of tax credit is the same amount as income tax paid or payable abroad, but
shall not exceed tax payable calculated according to the Indonesian tax law.
Tax holiday
Several companies have recently been granted tax facilities by the government in the
form of a CIT exemption or reduction fora period of five to ten years from the start of
commercial production. After the end of the CIT exemption, the company will receive
a 50% CIT reduction for two years. These facilities are provided to firms in pioneer
industries that have a wide range of connections, provide additional value and high
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externalities, introduce new technologies, and have strategic value for the national
economy. Currently, five business sectors may enjoy the tax holiday: base metals, oil
refinery and/or base organic chemicals sourced from oil and gas, renewable energy,
machinery, and telecommunication.
To be eligible for the abovefacilities, taxpayers should be newly incorporated in
Indonesiano earlier than 14 August 2010, should have a legalised new capital
investment plan of a minimumIDR 1 trillion, should deposit a minimum of 10% of their
planned investment value inbanks located in Indonesia, and should not withdraw the
deposit prior to the realisation of the investment plan.
An application must be submitted to the Minister of Industry(MoI) or to the
BKPM Chairman. A proposal for the MoFs approval will be made by the MoI or the
BKPMChairman after carrying out research on the applicant. Tax holiday proposals
must be submitted to the MoF by 15 August 2014.
If the facilities are granted, taxpayers should submit periodic reports on the realisation
of their investment plans and the use of their funds deposited in the Indonesian bank or
banks. Failure to realise the investment plan and to submit the above periodic reports
will result in the termination of the tax facilities.
The DGT, on behalf of the MoF and based on the recommendation of the BKPM
Chairman, may provide the following tax concessions to PT companies following their
investment in certain designated business areas and/or in certain designated regions
with a high priority on the national scale:
A reduction in net income of up to 30% of the amount invested (generally amount
spent on assets), prorated at 5% for six years from commercial production date, and
provided that the assets invested are not transferred out within six years.
Acceleration of fiscal depreciation deductions.
Extension of tax loss carryforwards for up to ten years.
A reduction of the WHT rate on dividends paid to non-residents to 10%.
The tax facilities will be provided for investment in the form of tangible fixed assets,
including land to be used for conducting the business.
The tax facilities can be used in the tax year when the taxpayer has realised at least 80%
of their investment plan and after a decision letter on the realisation is issued by the
DGT. The decision letter can only be issued after the DGT has performed a field audit.
After the tax facilities are granted, the taxpayers must submit to the DGT certain regular
reports (e.g. investment realisation reports). Taxpayers must also maintain separate
records for assets eligible to receive the facilities and for those that are not, and enclose
audited financial statements when submitting their CIT return.
The list of investments eligible for the tax facilities covers 129 types of investment,
which include 52 types of investment in particular sectors and 77 types of investment in
particular sectors and regions.
Taxpayers who have enjoyed the income tax facilities above cannot enjoy the tax holiday
facility, and vice versa.
The same tax facilities may be granted by the DGT to companies conducting business in
an Integrated Economic Development Area (Kawasan Pengembangan Ekonomi Terpadu
or KAPET). Specific approval must be obtained from the DGT for these tax facilities. If
872
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the company has bonded zone (Kawasan Berikat or KB) status, the tax facilities will also
include those typically enjoyed by a KB company, for example:
Non-collection of VAT and sales tax on certain luxury goods transactions.
Exemption from prepaid income tax on the importation of capital goods and other
equipment directly relating to production activities.
Postponement of import duty on capital goods and equipment and goods and
materials for processing.
Exemption from import duty for four years on machinery and certain spare parts.
The designation of an area as a KAPET is set out in a specific presidential decree.
Currently, there are approximately 13 areas designated as KAPETs.
Reinvestment of branch profits
PEs that reinvest their after-tax profits in Indonesia within the same year or no later than
the following year are exempt from branch profit tax on these profits. The reinvestment
should be one of the following forms:
As a founder or aparticipant founder in a newly established Indonesian company
through capital participation.
As a shareholder of an established Indonesian company through capital participation.
Acquisition of a fixed asset used by the PE to conduct its business or activities in
Indonesia.
Investment in the form of an intangible asset used by the PE to conduct its business or
activities in Indonesia.
Shares in a newly established company shall not be transferred until, at a minimum, two
years from the date that the company commences commercial production.With regard
to the investment in an established Indonesian company, acquisition of a fixed asset,
or investment of an intangible asset, the investment shall not be transferred until, at a
minimum, three years after the investment.
Other incentives
Income earned by venture capital companies in the form of profit sharing from their
investments in Indonesia is exempt from tax, provided that the following conditions are
met:
Entities are small or medium-scale businesses in one of the sectors designated by the
Indonesian government.
Investments are not listed on the Indonesian stock exchange.
Withholding taxes
Indonesian income tax is collected mainly through a system of WHTs. Where a particular
income item is subject to WHT, the payer is generally held responsible for withholding or
collecting the tax. These WHTs are commonly referred to using the relevant article of the
Income Tax (Pajak Penghasilan or PPh) Law, as follows.
Article 23/26 Income Tax (PPh 23/26)
PPh 23/26 is levied on a variety of payments to corporations and individuals, resident

and non-resident, at the following rates:
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WHT (%)
Recipient
(5)
Non-resident
corporations and
individuals
Non-treaty
Treaty:
Algeria
Australia
Austria
Bangladesh
Belgium
Brunei
Bulgaria
Canada
China
Croatia
Czech Republic
Denmark
Egypt
Finland
France
Germany (1)
Hong Kong
Hungary (3)
India
Iran
Italy
Japan
Jordan (3)
Korea (North)
Korea (South) (2)
Kuwait
Luxembourg (1)
Malaysia (4)
Mexico
Mongolia
Morocco
Netherlands
New Zealand (3)
Norway
Pakistan (1)
Papua New Guinea
(1, 6)
Philippines
Poland
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Dividends
Substantial
Portfolio
holdings
15
0
Interest (7) Royalties (8)

15
15
Branch
profits (9)
N/A
10
10
15
15
N/A
20
20
20
20
0/20
15
15
15
15
15
15
15
15
10
10
15
20
15
15
15
15
10
15
15
7
15
15
10
10
15
10
15
10
10
10
10
10
15
15
15
15
15
15
10
10
10
15
15
10
10
10
10
10
15
10
10
10
5
15
10
7
10
10
10
10
10
10
10
10
10
10
10
10
15
15
10
15
0/15
0/10
0/10
0/10
0/10
0/15
0/10
0/10
0/10
0/10
0/12.5
0/10
0/15
0/10
0/10/15
0/10
0/10
0/15
0/10
0/10
0/10
0/10
0/10
0/10
0/10
0/5
0/10
0/10
0/10
0/10
0/10
0/10
0/10
0/10
0/15
0/10
15
10/15
10
10
10
15
10
10
10
10
12.5
15
15
10/15
10
10/15
5
15
15
12
10/15
10
10
10
15
20
12.5
10
10
10
10
10
15
10/15
15
10
10
15
12
10
10
10
15
15
10
10
12.5
15
15
15
10
10
5
20
10
7
12
10
20
10
10
0/10
10
12.5
10
10
10
10
20
15
10
15
20
15
15
10
0/10/15
0/10
15
15
20
10
Indonesia
WHT (%)
Recipient
Portugal
Qatar
Romania
Russia
Seychelles (3)
Singapore
Slovakia
South Africa (3)
Spain
Sri Lanka
Sudan
Suriname
Sweden
Switzerland (1)
Syria
Taiwan
Thailand
Tunisia
Turkey
Ukraine
United Kingdom
United States of
America
Uzbekistan
Venezuela (1)
Vietnam
Zimbabwe (1, 6)
Dividends
Substantial
Portfolio
holdings
10
10
10
10
15
12.5
15
15
10
10
15
10
10
10
15
10
15
10
15
15
10
10
15
15
15
10
15
10
10
10
10
10
20
15
12
12
15
10
15
10
10
10
15
10
15
10
10
15
15
20
10
10
15
10
Interest (7) Royalties (8)

0/10
10
0/10
5
0/12.5
12.5/15
0/15
15
0/10
10
0/10
15
0/10
10/15
0/10
10
0/10
10
0/15
15
0/15
10
0/15
15
0/10
10/15
0/10
10
10
15/20
0/10
10
0/15
15
0/12
15
0/10
10
0/10
10
0/5
5
0/10
10/15
0/10
10
0/10
0/10
0/15
0/10
10
20
15
15
Branch
profits (9)
10
10
12.5
12.5
20
15
10
20
10
20
10
15
15
10
10
5
20
12
10
10
5
10
10
10
10
10
10
Domestic Article 23 WHT is also payable at the rate of 2% for most types of services where the recipient
of the payment is an Indonesian resident.
Notes
1.
2.
3.
4.
5.
6.
7.
Service fees, includingfor technical, management, and consulting services, rendered in Indonesia are
subject to WHT at rates of 5% for Switzerland, 7.5% for Germany, 10% for Luxembourg, Papua New
Guinea, Venezuela,and Zimbabwe, and 15% for Pakistan.
VAT is reciprocally exempt from the income earned on the operation of ships or aircraft in
international lanes.
The treaty is silent concerning branch profit tax rate. The ITOinterprets this to mean that the tax rate
under Indonesian Tax Law (20%) should apply.
Labuan offshore companies (under the Labuan Offshore Business Activity Tax Act 1990)are not
entitled to the taxtreaty benefits.
In the case of dividends received by a resident shareholder, portfolio shareholding refers to share
ownership of less than 25% of the paid-up capital. In this respect, the dividend tax withheld by
the payer constitutes a prepayment of the income tax liability of the shareholder. Substantial
shareholding refers to the share ownership of 25% of the paid-up capital or more.
Ratified but not yet effective, pending the exchange of ratification documents. Expected effective
date is 1 January 2015.
Interest:
Lower rate or exemption if received by a financial institution.
Exempt if paid to the government.
Lower rate or exemption if paid by an approved industrial undertaking.
Exempt if paid by a bank and received by a bank.
Exempt if paid to a bank but linked to a government loan agreement or paid to specific financial
institutions/banks.
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8.
9.
Royalties:
Lower rate for payments in connection with literary or artistic copyrights, including film royalties.
Lower rate for payments in connection with industrial, commercial, or scientific equipment.
Lower rate for payments in connection with patents, designs, secret formulas/processes, or
industrial, commercial, or scientific equipment/experience.
Branch profits:
PEs that reinvest their after-tax profits in Indonesia within the same year or no later than the
following year are exempt from branch profit tax on these profits (see the Tax credits and
incentives section).
The issue of beneficial ownership has come under tax office scrutiny. For treaty
WHT rates to apply to passive income such as interests, dividends, and royalties, the
recipient of such income must be the beneficial owner. The recipient must also provide
a Certificate of Domicile (CoD) in the form required by the ITOand certified by their
home country tax authority that the recipient is a tax resident of that country. The CoD
in the form prepared by the other countrys tax authority may only be used in limited
circumstances. Further, the CoD form also requires a number of declarations to be made
by the recipient that acknowledges that the use of the treaty jurisdiction was not merely
for obtaining the benefit of the treaty. These declarations place onerous obligations on
both the Indonesian payer and the recipient entity. Without a certified CoD, a WHT at a
rate of 20% will apply. These aspects need to be considered when paying income of this
nature.
Article 22 Income Tax (PPh 22)
PPh 22 is typically applicable to the following:

Event
1.
The import of goods using an Importer Identification Number
(Angka Pengenal Impor or API):
i. Certain end customer goods
ii. Soybeans, wheat, and flour wheat
iii. Other than (i) and (ii)
2.
The import of goods without an API
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
876
The auctioned imported goods

The sale of goods to the government requiring payment from
the State Treasury and Proxy of Budget User(Kuasa Pengguna
Anggaran or KPA) (1)
The sale of goods to State Owner Enterprises (Badan Usaha
Milik Negara or BUMN) (1)
The purchase of oil fuel by state-owned gas stations (2)
The purchase of oil fuel by private gas stations (2)
The purchase of oil fuel by parties other than state and private
gas stations (2)
The purchase of gas fuel (2)
The purchase of lubricants (2)
The purchase of cement by local distributors
The purchase of paper products by local distributors
The purchase of steel products by local distributors
The purchase of automotive products by local distributors
The purchase of pharmaceutical products by local distributors
The purchase of motor vehicles from Sole Agents (Agen
Tunggal Pemegang Merek or ATPM), Agents (Agen Pemegang
Merek or APM), and general importers (3)
Indonesia
Taxrate(%)
7.5
0.5
2.5
7.5
Tax base
Import value
(i.e. CIF value
plus duties
payable)
Import value
(i.e. CIF value
plus duties
payable)
7.5 Auction prices
1.5 Selling prices
1.5
Selling prices
0.25
0.3
0.3
Selling prices
Selling prices
Selling prices
0.3
0.3
0.25
0.1
0.3
0.45
0.3
0.45
Selling prices
Selling prices
Selling prices
Selling prices
Selling prices
Selling prices
Selling prices
Selling prices
Indonesia
Event
17. The purchase of materials by manufacturers or exporters in
forestry, plantation, agriculture, cattle breeding, and fishery
from wholesalers
18. The purchase of very luxurious goods
Taxrate(%)
0.25
Tax base
Selling prices
Selling prices
Notes
1.
2.
3.
4.
In events 4 and 5, the PPh 22 collectors (State Treasury, BUMN, etc.) must withhold PPh 22 from the
amount payable to a particular vendor, except payments for the purchase/use of: (i) oil fuel, gas fuel,
lubricants, postal products; (ii) water and electricity; (iii) oil, gas (including upstream by products) from
a contractor of a PSC or contractors head office; and (iv) geothermal and electricity from a contractor
of a joint operation contract. There is also an exemption for the purchase of goods with a value of up
toIDR 2 million andIDR 10 million for events 4 and 5, respectively. In the other events, the importer
or the buyer of the designated goods must pay PPh 22 in addition to the amounts payable for the
goods imported or purchased.
The withheld PPh 22 constitutes a pre-payment of corporate/individual income tax liabilities, except
for the purchase of oil fuel, gas fuel, and lubricants by distributors/agents, which is categorised as
final tax.
Exemption applies on the purchase of very luxurious motor vehicles since it is already subject to PPh
22 in event 18.
The tax does not apply, either automatically or with an Exemption Certificate issued by the DGT, on
the following types of imports:
Import/purchase of goods not subject to income tax.
Import of goods exempted from import duties and/or VAT or subject to 0% import duty.
Goods that have been temporarily imported (i.e. goods for re-export).
Goods for re-importing (i.e. exported and re-imported in the same quality or to be repaired/tested
for subsequent re-exporting).
The PPh 22 exemption also applies to the import/purchase of gold bars for the production of
jewellery for re-export and related to the use of the government school operations subsidy
(Bantuan Operasional Sekolah or BOS) fund.
Tax administration
Payments of tax and tax returns filing
Tax liabilities for a particular period or year must typically be paid to the State Treasury
through a designated tax-payment bank (bank persepsi) and then accounted for at the
DGT office through the filing of the relevant tax returns. The tax payments and tax
return filing for a particular tax must be undertaken monthly or annually, depending
upon the tax obligation in question.
Corporate tax liabilities may be settled either by direct payments, third party
withholdings, or a combination of both. Monthly tax instalments constitute the first
part of tax payments to be made by taxpayers as a prepayment of their current year CIT
liability. A monthly tax instalment is generally calculated using the most recent CIT
return. The tax withheld by third parties on certain income or tax to be paid in advance
on certain transactions (i.e. imports) also constitute prepayments for the current year
corporate tax liability of the income recipient or the party conducting the import. If the
total amounts of tax paid in advance through the year are less than the total CIT due,
the company concerned has to settle the shortfall before filing its CIT return. Returns for
transaction taxes, such as WHT, must be filed on a monthly basis.
A summary of these tax obligations is as follows:
Monthly tax obligations

Type of tax
Article 21/26 (Payroll) WHT
Article 23/26 Income Tax
Tax paymentdeadline
Taxreturnfilingdeadline
The 10th of the following month The 20th of the following month
Article 25 Income Tax Instalment The 15th of the following month The 20th of the following month
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Type of tax
Article 22 Income Tax on
imports/payments to Tax
Collectors
Article 4(2) Final Income Tax
VAT and LST
Tax paymentdeadline
Taxreturnfilingdeadline
Prior to the tax return filing
The end of the following month
deadline
Annual tax obligations

Type of tax
Corporate Income Tax
Land and Building Tax (PBB)
Tax payment deadline

The end of the fourth month after the
book year end before filing the tax
return
Six months after the receipt of a Tax
Due Notification Letter from the ITO
Tax return filing deadline

The end of the fourth month
after the book year end
N/A
Penalties
Late payments of the above taxes incur interest penalties at 2% per month, with a
maximum of 48%. Part of a month, for example a single day, is considered a full month.
Late filing of a tax return or failure to file a tax return incurs an administrative penalty at
the following amounts:
Type of tax return
VAT return
Other monthly tax returns
CIT return
IDR
500,000
100,000
1,000,000
Tax assessments
Indonesia uses a self-assessment system under which taxpayers are trusted to calculate,
pay, and report their own taxes in accordance with prevailing tax laws and regulations.
However, the DGT may issue tax assessment letters to a particular taxpayer if it finds
that, based on a tax audit or on other information, the taxpayer has not fully paid all
tax liabilities. A tax assessment letter may also be issued by the DGT to a taxpayer who
ignores a warning letter to file a tax return within a specified period. Failure to maintain
books in accordance with the prescribed standards is another condition that may lead
the DGT to issue an official tax assessment.
Tax audit process
The tax audit of a company may cover only a particular tax or all taxes for a particular
tax period (a tax month) or tax year. It may be conducted at the companys premises, at
the DGT offices, or at both.
Conditions triggering a tax audit
A tax refund request will always trigger a tax audit. Due to the requirement for the DGT
to decide on a refund request within 12 months, a tax audit will typically begin from
a few weeks to several months from the refund request date. A corporate tax refund
request will normally trigger a complete tax audit covering all taxes. A refund request of
any other tax will normally trigger a tax audit covering only one particular tax. The DGT
will likely broaden the tax audit scope to include other taxes.
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Other events that may trigger a tax audit include the following:
A tax return in an overpayment position (not necessarily accompanied by a refund
request).
An annual income tax return presenting/claiming a tax loss.
The taxpayer has changed its fiscal year or bookkeeping method or performed fixed
assets revaluation.
A tax return not filed within the prescribed time or filed after the deadline stated in a
warning letter, which has been selected to be audited based on a risk analysis.
A tax return meeting certain (undisclosed) DGT criteria.
Under the current Tax Administration Law, the DGT can issue an underpaid tax
assessment letter for the years 2008 onwards withinfive years after the incurrence of a
tax liability, the end of a tax period (month), or the end of (part of) a tax year.
Other issues
Business combinations and splits
Transfers of assets in business mergers, consolidations, or business splits must generally

be dealt with at market value. Gains resulting from this kind of restructuring are
assessable, while losses are generally claimable as a deduction from income.
However, a tax-neutral merger or consolidation, under which assets are transferred at
book value, can be conducted but are subject to the approval of the DGT. To obtain this
approval, the merger or consolidation plan in question must pass a business-purpose
test. Tax-driven arrangements are prohibited, and tax losses from the combining
companies may not be passed to the surviving company.
Subject to a similar, specific DGT approval, the same concession is also available for
business splits that constitute part of an initial public offering (IPO) plan. In this case,
within one year of the DGTs approval being given, the company concerned must have
made an effective declaration regarding registration for an IPO with the Financial
Services Authority (Otoritas Jasa Keuangan or OJK). In the event of complications
beyond the companys control, the period may be extended by the DGT for up to four
years.
Recently, San Marino ratified its TIEA with Indonesia. Other than San Marino, Indonesia
has signed TIEAs with Bermuda, Guernsey, Jersey, and the Isle of Man.
Exchange of Information (EOI)
Indonesia, along with 34 Organisation for Economic Co-operation and Development

(OECD) member countries and 12 other countries, has committed to a new global
standard to carry out automatic EOI through the Declaration on Automatic EOI in Tax
Matters during a recent OECD annual Ministerial Council Meeting.
This commitment is supported by a new comprehensive EOI procedure issued by the
MoF, which is applicable for international tax agreements (e.g. DTAs and TIEAs) in place
prior to or after 1 April 2014.
EOI can be carried out through several channels, which may be initiated by a relevant
unit under the DGT (domestic request) or initiated by a country/jurisdiction partner
(foreign request). The competent authority to manage EOI in Indonesia is the Director of
Tax Regulation II under the DGT.
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PwC contact
Stephan Stephan
PricewaterhouseCoopers Jordan
Third Circle, Jabal Amman
14 Hazza Al-Majali Street
PO Box 5175, Amman 11183
Jordan
Tel: +962 6 500 1300
In December 2013, an amendment to Instruction No. 5 was made, whereby other
industries/activities (non-upstream) contracted with oil and gas companies are subject
to withholding tax (WHT) at a rate of 3.3%.

All income derived from Iraq is subject to tax in Iraq, regardless of the residence of the
recipient.
The effective corporate income tax (CIT) system presented in Iraq for juristic persons
(except partnerships) is based on a statutory CIT rate of 15% at all income levels, with
no progressive tax rate scale.
Foreign oil company income tax
The income realised in Iraq from contracts concluded with foreign oil companies, their
branches or offices, and subcontractors working in Iraq in the oil and gas production
sector and related industries is taxed at a rate of 35%.
Local income taxes
To the best of our knowledge, there are no local, state, or provincial taxes on income in
Iraq.
Corporate residence
One of the key issues in determining when a company becomes taxable in Iraq is
whether the foreign company is considered to be doing business in Iraq or with Iraq.
In 2009, with Instructions No. 2/2008, the Iraqi tax administration provided a clearer
distinction between business in Iraq and business with Iraq.
Once the determination has been made that the company is trading in Iraq, the
company should legally register in Iraq and then register with the General Commission
for Taxes (GCT). A company that is registered with the GCT will be subject to CIT and
will be required to file a CIT return.
It is important to note that the current Iraq income tax law does not clearly define a
PE; consequently, it is important to monitor commercial activity being performed in
the country to ensure compliance with the registration requirements and tax law. The
company should consult with their internal tax department and external advisers if they
have signed a contract to provide any type of services inside Iraq to determine if the
company should have a legal registration and begin to file CIT returns.
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Other taxes
Sales tax
A sales tax of 10% of the value of services is imposed on services rendered by deluxe and
first class restaurants and hotels in Iraq. There are no other sales taxes in Iraq.
Custom duty
The customs duty system and procedures in Iraq are currently evolving. Customs duties
are levied based on percentages set in the custom tariff and agricultural agenda that
is annexed to the Custom Tariff Law. For the purposes of the Custom Tariff Law, the
custom tariff and agricultural agenda refers to the schedule comprised of itemised and
codified sections and notes based on the international harmonised system adopted by
the World Customs Organization (WCO).
Excise taxes
There is no tax provision in the Iraqi Tax Law addressing excise taxes.
Property taxes
A basic tax of 10% is assessed on the annual revenue for all real estate and is collected
from the real estate owner or the long-term lessee (five years). In cases where the
owner or long-term lessee cannot be located, the person occupying the real estate will
be assessed. Note that the annual revenue for each real estate is discounted by 10% for
expenses and maintenance before assessing the tax on that real estate.
Transfer taxes
There are no restrictions or taxes on transferring funds into or out of Iraq.
Stamp duty
All direct and indirect contracts related to credit facilities and other banks activities (e.g.
letter of credit contracts) are subject to stamp fees at a rate of 0.2% of the contract value.
Branch income
The tax treatment for a branch is similar to a local Iraqi corporation. In general, CIT is
imposed on corporate entities and foreign branches with respect to taxable profit from
all sources arising or deemed to arise in Iraq. However, certain limitations apply to head
office expenses.
A corporation has to determine its profit/loss according to its income statement for a tax
period as established under the Unified Accounting System (Iraqi Generally Accepted
Accounting Principles [GAAP]). However, to reach the taxable income, positive or
negative adjustments have to be made to the profit/loss as determined according to
GAAP.
Inventory valuation
There is no tax provision in the Iraqi Tax Law addressing inventory valuation.
Capital gains
Capital gains on sales of depreciable assets are taxed at the normal CIT rate. To the best
of our knowledge and legal practice, gains derived from the sale of shares and bonds not
in the course of a trading activity are exempt from tax. Capital gains derived from the
sale of shares and bonds in the course of a trading activity are taxable at the normal CIT
rate.
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Dividend income
Under the tax law, dividends paid out of profits that have been subject to tax are not
taxed again in the hands of the shareholder.
Interest income
Interest income deemed to arise in Iraq is taxed at the normal CIT rate.
Rent/royalty income
Rent and royalty income deemed to arise in Iraq are taxed at the normal CIT rate.
Foreign income
There is no tax provision in the Iraqi Tax Law addressing foreign income.
Deductions
In general, all expenses incurred by the taxpayer in order to produce income during
the year are deducted from income, provided that such expenses are confirmed by
acceptable documents, with some exceptions.
Depreciation
The Iraqi Depreciation Committee sets the maximum depreciation rates for various
types of fixed assets (please contact us for additional information regarding the specific
rates). If the rates used for accounting purposes are greater than the prescribed rates,
the excess is disallowed.
The depreciation method is either a straight-line method or declining-balance method.
Goodwill
Iraqi tax law does not contain a provision that covers the deductibility of goodwill.
Start-up expenses
Iraqi tax law does not contain a provision that covers the deductibility of start-up
expenses.
Interest expenses
Iraqi tax law does not contain a provision that covers the deductibility of interest
expenses.
Bad debt
Bad debt is deductible if it was included in earlier income and there is proof of the
unsuccessful steps to collect it.
Charitable contributions to the Government and Socialist Sector departments and to

scientific, cultural, educational, charitable, and spiritual organisations, which are legally
recognised (provided that the Minister of Finance has issued a list containing the names
of these organisations), are deductible.
Bribes and illegal payments
Bribes and illegal payments are not allowed or deductible.
Fines and penalties
Broadly speaking, fines and penalties are not deductible items.
Taxes
Broadly speaking, taxes are not deductible items.

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Under the tax law, losses of a taxpayer from some sources of income arising in Iraq,
substantiated by legally accepted documents, are generally deducted from profits arising
from other sources.
Losses that cannot be settled in this manner shall be carried forward and deducted from
the income of the taxpayer over five consecutive years, provided that losses may not
offset more than half of the taxable income of each of the five years and the loss is from
the same source of income from which it has arisen.
Losses cannot be carried back.
Iraqi tax law does not contain a provision that covers the deductibility of payments to
foreign affiliates.
Group taxation
Iraqi tax law does not contain any provisions for filing consolidated returns or for
relieving losses within a group of companies.
Transfer pricing
The precise meaning of transfer pricing under the effective Iraqi tax system is rather
unclear from a tax and legal perspective.
We note that while having no specific transfer pricing legislation, Iraq does have a
third party arms-length provision contained within its tax legislation; whereby, if a
non-resident taxpayer is engaged in business with a resident and it appears to the tax
authority that due to the connection existing between the resident and the non-resident,
and the substantial control of one over the other, that the business relationship is
arranged in a manner that leaves no profits to the resident, or the profits left are much
less than what is normally earned, the tax shall be assessed on the actual profits of the
non-resident and charged to the resident as if the resident is the business agent for the
non-resident.
Thin capitalisation
Iraqi tax law does not contain a provision that covers thin capitalisation.

In accordance with the Iraqi Investment Law, approved industrial projects are given
certain custom duty and tax incentives; however, oil and gas is not one of the sectors that
is normally granted investment promotion exemptions incentives.
The tax incentives may include corporate tax, individual tax, and others; however, the
tax incentives vary from one project to another.
The Board of Investment Promotion has the authority to add any sector or specific
project to the list of sectors or projects that benefit from the investment promotion
lawincentives.
Foreign tax credit
Income tax paid to a foreign country on income earned in that country may be credited
against tax paid to Iraq. The amount of the credit may not exceed the amount of tax
assessed in Iraq.
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Withholding taxes
Under the tax law, the amount due from any residing taxpayers to a non-resident,
whether the payment is made in cash or credited to the account, is subject to WHT at
the rate of 15% if such amounts are related to interest on debentures, mortgages, loans,
deposits and advances, as well as annual allowances, pension salaries, or other yearly
payments. Dividends are not subject to WHT since dividends paid out of profits that have
been subject to tax are not taxed again in the hands of the shareholder.
In December 2013, an amendment to Instruction No. 5 was made, whereby other
industries/activities (non-upstream) contracted with oil and gas companies are subject
to WHT at a rate of 3.3%.
Tax administration
Taxable period
The taxable year in Iraq is the calendar year.
Tax returns
The statutory time line for filing tax returns is the first day of June of the year of
assessment. If the self-assessment of tax is not accepted by the tax authorities, tax is
assessed on the income of the taxpayer based on the information available to the tax
authorities.
Failure to file a tax return may lead to an estimate of income and assessment of tax by
the tax authorities; however, such an assessment does not relieve the taxpayer from
responsibility for non-submission of the return within the statutory time line stipulated
by law.
Payment of taxes
Payment of the tax liability has to occur within 21 days from the assessment date by the
tax authority. There is no requirement of quarterly payments during the taxable year.
Tax audit process
Tax inspection is mandatory in Iraq, as the tax authority will scrutinise the financial
statements of the taxpayer to determine the tax liability and, accordingly, issue a tax
clearance.
The statute of limitations is five years. However, the tax authority has the right to go
back beyond five years in certain instances.
Topics of focus for tax authority
Obtaining a tax clearance from a tax audit/inspection is becoming increasingly

important for importation and government bidding purposes, as well as for other areas
that affect the continuation of operations.
Iraqi GAAP
The Iraqi tax law requires all taxpayers to maintain books and records in accordance
with Iraqs local unified accounting system (Iraqi GAAP).
These books shall constitute tax books/accounts. This accounting treatment will
determine when income is accrued and costs are incurred for computing taxableprofits.
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Ireland
PwC contact
Feargal ORourke
One Spencer Dock
North Wall Quay
Dublin 1, Ireland
Tel: +353 1 792 6480
Irelands International Tax Strategy
In conjunction with The Finance (No. 2) Act 2013, the Irish Minister of Finance
published a new international tax strategy statement in order to provide a clear and
accurate picture of Irelands corporation tax regime for the foreign direct investment
(FDI) sector. The strategy includes the following key points:
Ireland is open for business and has a very strong record of attracting companies of
real substance.
Ireland is committed to maintaining an open, stable, and competitive tax regime. This
scores well with regard to good governance and transparency.
Ireland is committed to competing for new FDI into Ireland.
Ireland has been active in efforts to counter aggressive tax planning at European
Union (EU) and Organisation for Economic Co-operation and Development (OECD)
levels. This is in addition to efforts through domestic legislation, engagement with
developing countries, and support of the automatic exchange of information.
As part of Irelands International Tax Charter outlined in this policy document, and in
addition to the commitment to the 12.5% tax rate, the Charter highlights the following
principles:
Ireland is committed to full exchange of tax information with our treaty partners.
Ireland is committed to global automatic exchange of tax information, in line with
existing and emerging OECD rules.
Ireland is committed to actively contributing to the OECD and EU efforts to tackle
harmful tax competition.
Research and development (R&D) tax credit
Tax incentives for companies undertaking in-house R&D activities are at the forefront
of Irelands attractiveness as a knowledge economy. Recent changes announced in
The Finance (No.2) Act 2013 continue to enhance the attraction of Ireland as an R&D
location.
Extended volume basis for calculating the R&D tax credit
The Finance (No. 2) Act 2013 once again expanded the limited volume-based approach
of calculating the R&D tax credit. Going forward, the first 300,000 euros (EUR) of
qualifying R&D expenditure will now benefit from the 25% R&D tax credit on a volume
basis (thus ignoring the 2003 base year spend), meaning that companies engaging in
qualifying R&D activities are guaranteed a credit of EUR 75,000 in respect of their first
EUR 300,000 of qualifying R&D expenditure.
Increase in R&D outsourcing limit
The Finance (No.2) Act 2013 increased the outsourcing limit for sub-contracted R&D
costs that are eligible for the tax credit. The Act has increased the limit from 10% to 15%
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of the qualifying in-house R&D costs incurred by a company. This is particularly aimed at
companies that find it difficult to access the required R&D expertise.
Use of R&D tax credit to reward key employees
As a result of prior year Finance Acts, companies in receipt of the R&D credit now have
the option to use a portion of the credit to reward certain key employees by way of a taxfree credit. However, prior to The Finance (No. 2) Act 2013, a key employee was liable
to pay Revenue an amount of the credit used to reduce their income tax liability where
a claim was subsequently found to be incorrect. The Finance (No. 2) Act 2013 amended
the legislation so that the onus to repay a liability for an incorrect R&D credit claim is
now on the employer.
Company residence/Stateless Companies
The Finance (No.2) Act 2013 announced that Irish incorporated companiesthat
are managedand controlled in an EU/double tax treaty (DTT) territorythat has an
incorporation test of tax residency and are therefore not considered tax resident
anywhere (i.e. Stateless Companies) will be regarded as being Irish tax resident. This
amendment applies from 24 October 2013 in the case of companies incorporated on or
after that date, and from 1 January 2015 in the case of companies incorporated prior to
that date.
Exit tax for migrating companies
In response to recent decisions of the Court of Justice of the European Union (CJEU),
the Finance (No. 2) Act 2013 provides for an optional scheme of deferred payment of
any exit tax arising where a company migrates its tax residence to another EU/European
Economic Area (EEA) member state from 1 January 2014. Under the new legislation,
the immediate charge to exit tax may be deferred and paid either in six equal annual
instalments or within 60 days of the subsequent disposal of migrated assets (subject to
payment being made with ten years of date of migration).
The new provision should apply to companies who do not qualify as an excluded
company under the current legislation.
An excluded company is a company with at least 90% of its issued share capital held by
a company that is
not resident in Ireland
under the control of persons resident in a DTT territory and not under the direct or
indirect control of Irish resident persons.
An excluded company should be able to avail itself of a full exemption from exit tax on
the migration of its tax residence in certain instances.

Corporation tax is chargeable as follows on income and capital gains:
Standard rate on income
(trading rate)
12.5%
Higher rate on income

(passive rate)
25%
Capital gains rate

33%
Resident companies are taxable in Ireland on their worldwide profits (including gains).
Non-resident companies are subject to Irish corporation tax only on the trading profits of
an Irish branch or agency and to Irish income tax (generally by way of withholding) on
certain Irish-source income.
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Non-trading (passive) income includes dividends from companies resident outside
Ireland (with some exceptions), interest, rents, and royalties. Legislation provides that
certain dividend income (e.g. income from foreign trades) is taxed at 12.5% (see the
Income determination section). The higher rate (i.e. 25%) also applies to income from a
business carried on wholly outside Ireland and to income from land dealing, mining, and
petroleum extraction operations.
An additional profit resource rent tax applies to certain petroleum activities. Depending
on the profit yield of a site, the tax rate applicable can range from 25% to 40%.
Close companies (see the Income determination section) may be subject to additional
corporate taxes on undistributed investment income (including Irish dividends) and
on undistributed income from professional services. Examples of professional services
include professions such as solicitor, accountant, doctor, and engineer.
Local income taxes
Ireland does not levy local or regional taxes on income.
Corporate residence
A company that is incorporated, or has its place of central management and control,
in Ireland will be regarded as resident in Ireland for the purposes of corporation tax
and capital gains tax. This is subject to the following two exceptions where a company
incorporated in Ireland is not considered a tax resident.
A treaty exception applies if the Irish incorporated company is, by virtue of an Irish DTT,
considered to be tax resident in the treaty partner country and not resident in Ireland.
An active trading exception applies if the Irish incorporated company or its 50% affiliate
carries on a trade in Ireland and the company has qualifying ownership. A 50% affiliate
is essentially a company where:
one company is a 50% subsidiary of the other or both companies are 50% subsidiaries
of a third company
there is an entitlement to at least 50% of the profits available for distribution, and
there is an entitlement to at least 50% of the assets available in the case of a winding
up of the other company.
Qualifying ownership requires that the Irish incorporated company or a 50% or more
affiliate/parent is listed on a stock exchange in an EU member state or a territory that
has a tax treaty with Ireland or, in the absence of such a listing, that the ultimate control
(more than 50%) of the Irish incorporated company rests with persons who are tax
resident in EU or treaty countries.
However, Finance (No.2) Act 2013 announced that the above exceptions will not
apply to Irish incorporated companiesthat are managedand controlled in an EU/DTT
territorythat has an incorporation test of tax residency and are therefore not considered
tax resident anywhere. Such companies will be regarded as being Irish tax resident. This
amendment will apply from 24 October 2013 in the case of companies incorporated on
or after that date, and from 1 January 2015 in the case of companies incorporated prior
to that date.
Non-resident companies are subject to Irish corporation tax only on the trading profits
attributable to an Irish branch or agency, plus Irish income tax (generally by way of
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withholding, though this is not the case with Irish-source rental profits) on certain Irishsource income.
For non-resident companies, the liability to corporation tax depends on the existence
of any kind ofbranch or agency through which a trade is carried on. The meaning of
branch or agency for Irish tax purposes is set out in statute. The corporation tax liability
of a non-resident company will be reduced by a DTT if the company does not have a PE
in Ireland.
Subject to the terms of the relevant DTT, a non-resident company will have a PE in
Ireland if:
it has a fixed place of business in Ireland through which the business of the company
is wholly or partly carried on or
an agent acting on behalf of the company has and habitually exercises authority to do
business on behalf of the company in Ireland.
A fixed place of business includes (but is not limited to) a place of management, a
branch, an office, a factory, a workshop, an installation or structure for the exploration
of natural resources, a mine, oil or gas well, quarry, or other place of extraction of
natural resources, or a building or construction or installation project. A company is
not, however, regarded as having an Irish PE if the activities for which the fixed place
of business is maintained or which the agent carries on are only of a preparatory or
auxiliary nature (also defined in the statute).
Other taxes
VAT is charged at 23% on the supply of most goods and services in the course or
furtherance ofbusiness.
There are currently two main reduced rates of VAT. A 13.5% rate applies, inter alia, to
most building services, labour intensive services, domestic fuel, and power. In addition,
a reduced 9% VAT rate is applicable to certain supplies in the tourism sector. These
include restaurant and catering services, hotel and holiday accommodation, and various
entertainment services (e.g. admissions to cinemas, theatres, museums, sporting
facilities). This temporary reduced rate of 9% was due to increase to 13.5%, but the
Minister subsequently announced that the 9% rate would be retained for the foreseeable
future.
Exports, most basic food items, oral medicines, books, and childrens clothing and
footwear are zero-rated.
Some supplies are exempt from VAT. The main exempt categories are most banking
services, insurance services, medical services, passenger transport, education
andtraining, and letting of immovable goods (although an option to tax may be
possible in certain circumstances).
Zero rating is preferable to exemption because most VAT costs incurred in making a
zero-rated supply can be recovered, while those incurred in making an exempt supply
generally cannot.
If a business is fully engaged in a VATable business (irrespective of the rate), it will be
entitled to reclaim VAT incurred, subject to the normal rules of deductibility.Businesses
engaged in exempt supplies will not be in a position to reclaim VAT; consequently, it
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will be a real cost.Any business engaged in both VATable and exempt supplies will be
required to apportion the VAT incurred appropriately.
Customs duties
Many goods imported into Ireland from outside the European Union are subject to
customs duties. The rates of duty are provided by the EUs Common Customs Tariff.
Excise duties
Excise duties are chargeable on most hydrocarbon oil products, electricity supply,
alcoholic drinks, and tobacco products imported into or produced in Ireland.
Stamp duty
Stamp duty is a tax on instruments. It is payable on transfers of land and on other assets
whose legal title cannot be passed by delivery. It is chargeable on instruments of transfer
executed in Ireland and on instruments, wherever executed,that relate to Irish property
or relate to matters to be done in Ireland. Stamp duty on the transfer of assets between
associated companies may be fully relieved from stamp duty, provided the following key
conditions are met:
The companies have a 90% relationship (that is, one company is, directly or
indirectly, the beneficial owner of at least 90% of the ordinary share capital of the
other and is entitled to at least 90% of the profits available for distribution and at
least 90% of the assets in the case of a winding-up of the other company, or a third
company has these rights, directly or indirectly, in respect of both companies).
This relationship is maintained for a period of at least two years after the transfer of
the assets (to avoid the relief being clawed back).
There is an exemption for transfers of intellectual property (IP), and the categories of IP
qualifying for this exemption are the exact same as those for which IP capital allowances
are available (see Intellectual property [IP] regime in the Tax credits and incentives section).
Stamp duty is payable based on the higher of the consideration paid for the transfer
or the market value of the assets transferring. Rates of 1% to 2% apply for transfers of
residential property, 2% for transfers of non-residential property (commercial/industrial
land and buildings but also business assets such as goodwill, debtors, contracts, etc.),
and a rate of 1% is levied on transfers of shares.
Capital duty on share capital
Ireland does not levy capital duty on share capital of companies.
Capital taxes
Ireland does not levy tax on the net worth of companies.
Employed persons are compulsorily insured under a state-administered scheme of payrelated social insurance (PRSI). Contributions are made by both the employer and the
employee. The employer is responsible for making PRSI contributions up to a rate of
10.75%, and these are an allowable deduction for corporation tax purposes.
Levies on insurance policies
A levy of 3% of gross premiums received by insurers applies inrespect of non-life

insurance policies relating to risks located in Ireland. This levy is payable four times per
annum, within 25 days of the end of each quarter (i.e. within 25 days from quarters
ending 31 March, 30 June, 30 September, and 31 December).
A levy of 1% of gross premiums received by insurers applies in relation to certain classes
of life insurance policies relating to risks located in Ireland. This levy is payable four
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times per annum, within 25 days of the end of each quarter (i.e. within 25 days from
quarters ending 31 March, 30 June, 30 September, and 31 December).
An additional contribution of 2% to the Insurance Compensation Fund applies to
premiums received in relation to non-life insurance policies. Similar to the 3% non-life
insurance levy, the contribution applies where premiums are received in respect of risks
located in Ireland. The contribution is also payable four times per annum in conjunction
with the non-life insurance levy on premiums.
Reinsurance business is excluded from the levy.
There is also a stamp duty liability of1 euro (EUR) on each non-life insurance policy
where the risk is located in Ireland.
Certain voluntary health insurance policies are subject to fixed levies, up to EUR 350 per
policy.
Emissions allowances
Legislation was introduced in relation to the tax treatment of emission allowances under
the EU Emissions Trading Scheme. The legislation distinguishes between allowances
acquired free of charge from the Environment Protection Agency under the EU Scheme
and those that are purchased.
Environmental taxes
In Ireland, a levy (currently 22 cent per bag) is imposed upon consumers provided with
a plastic bag when purchasing goods in supermarkets and other retail outlets. Under the
applicable legislation, retailers are obligated to collect 22 cent in respect of every plastic
bag or bag containing plastic, regardless of size, unless specifically exempted, that is
provided to customers and remit all plastic bag levies collected to Irish Revenue. As a
result of the levy, most non-supermarket retailers provide paper carrier bags, and many
retailers provide bags for life, which are made from non-plastic material and, therefore,
not subject to the environmental levy.
Carbon tax
A carbon tax has been introduced on mineral oils (e.g. auto fuels, kerosene) that are
supplied in Ireland. The rates of carbon tax on oil and gas broadly equate to EUR 20 per
tonne of CO2 emitted. Relief applies where mineral oils are supplied to an Emissions
Trading Scheme (ETS) installation or for electricity generation. Pure biofuels are exempt
from carbon tax. There is full relief for the biofuel component of the fuel. Where biofuel
has been mixed or blended with any other mineral oil, the relief from carbon taxes shall
apply to the biofuel content of the mixture or blend, regardless of the percentage.
A carbon tax has also been introduced on natural gas and solid fuel where supplied for
combustion. Again, reliefs apply where these fuels are supplied to ETS installations
or used in electricity generation, chemical reduction, or in the electrolytical or
metallurgical processes.
Local taxes
Local taxes known as rates are not based on income but rather are levied on the
occupiers of business property by reference to a deemed rental value of the property
concerned. The level of rates levied can depend on the region in which the property is
located. Rates are an allowable deduction for corporation tax purposes.
Local authorities are also empowered to levy charges on all occupiers for specific services
(e.g. water supply). These charges are also deductible for corporation tax purposes.
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Branch income
Irish branches of foreign companies are liable to corporation tax at the rates that apply
to Irish resident companies. No tax is withheld on repatriation of branch profits to the
head office.
Irish trading profits are computed in accordance with Irish Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS),
subject to any adjustment required by law. Prior-year adjustments may arise on the
first-time adoption of IFRS, which may result in double counting of income or expenses
or of income falling out of the charge to tax. Generally speaking, in order to avoid such
an outcome, transitional adjustments exist whereby amounts of income or expenses that
could be double-counted or that would fall out of the charge to tax are identified and the
amounts concerned are taxed or deducted as appropriate over a five yearperiod.
Inventory valuation
Each item of inventory is valued for tax purposes at cost or market value, whichever is
lower, and this will normally accord with the accounting treatment. The method used
in arriving at cost or market value of inventory generally must be consistent and must
not be in conflict with tax law. The first in first out (FIFO) method is an acceptable
method of calculation for tax purposes. The base-stock method has been held to be an
inappropriate method for tax purposes, as has the last in first out (LIFO) method.
Capital gains
Companies are subject to capital gains tax in respect of gains arising on the disposal
of capital assets. The taxable gain is arrived at by deducting from the sales proceeds
the cost incurred on acquiring the asset (as indexed to reflect inflation only up to 31
December 2002). The resulting gain is taxable at 33%. In cases of disposals of interests
in offshore funds and foreign life assurance policies, indexation relief does not apply;
while atax rate of 33% applies to non-corporate shareholders in respect of funds and
policies located in EU/EEA/DTT countries, and a rate of 33% or 40% applies to funds or
policies located in all other jurisdictions. A reduced rate of 25% exit tax applies to Irish
corporate shareholders investing in Irish funds. Special rules apply to gains (and losses)
from the disposal of development land in Ireland.
Companies that are tax resident in Ireland (i.e. are managed and controlled in Ireland or
incorporated in Ireland and not qualifying for exclusion from Irish residence by virtue of
incorporation) are taxable on worldwide gains. Non-resident companies are subject to
capital gains tax on capital gains arising on the disposal of Irish land, buildings, mineral
rights, and exploration rights on the Irish continental shelf, together with shares in
unquoted (unlisted) companies, whose value substantially (greater than 50%) is derived
from these assets. Non-resident companies also are subject to capital gains tax from the
realisation of assets used for the purposes of a business carried on in Ireland.
Losses arising on the disposal of capital assets may be offset against capital gains in
the accounting period or carried forward for offset against future capital gains. No
carryback of capital losses is permitted. There is no facility to offset capital losses against
business income or to surrender capital losses within a tax group.
Irish capital gains tax legislation facilitates corporate reorganisations on a tax-free basis
in situations where there is a share for share exchange. Assets can be transferred within
certain company groups without capital gains tax applying (see the Group taxation
section for further information).
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Participation exemption from capital gains
A participation exemption is available to Irish resident companies on the disposal of a

shareholding interest if:
a minimum of 5% of the shares (including the right to profits and assets on winding
up) is held for a continuous 12-month period
the share sale takes place during the period for which the minimum 5% holding is
held
the sale takes place within two years after meeting the holding requirement, to take
account of gradual dispositions over time
the company whose shares are sold is resident in an EU member state (including
Ireland) or in a country with which Ireland has a DTT at the time of the disposal (this
includes tax treaties that have been signed but not yet ratified), and
a trading condition is met at the time of the disposal whereby either: (i) the business
of the company whose shares are disposed of consists wholly or mainly of the
carrying on of one or more trades or (ii) taken together, the businesses of the Irish
holding company and all companies in which it has a direct or indirect 5% or more
ownership interest consist wholly or mainly of the carrying on of one or moretrades.
If the Irish holding company is unable to meet the minimum holding requirement but
is a member of a group (that is, a parent company and its 51% worldwide subsidiaries),
the gain arising on the disposal still will be exempt if the holding requirement can be
met by including holdings of other members of the group. Thus, the Irish company may
be exempt from capital gains tax on a disposal of shares even if it does not directly hold
a significant shareholding. The exemption also applies to a disposal of assets related
to shares, such as options and convertible debt. However, it does not apply to a sale of
either shares or related assets that derive the greater part of their value (more than
50%) from Irish real property, minerals, mining rights, and exploration and exploitation
rights in a designated area. Shares deriving their value from non-Irish real property,
minerals, and mining rights qualify for exemption if the other conditions are met.
Capital losses arising on the disposal of a shareholding where a gain on disposal would
be exempt under the participation exemption are not deductible.
Dividend income
Dividends from Irish companies are exempt from corporation tax. Dividends paid out
of the trading profits of a company resident in an EU member state or a country with
which Ireland has a DTT (or a country with which Ireland has ratified the Convention
on Mutual Assistance in Tax Matters) may be taxed at the 12.5% rate, provided a claim
is made. The 12.5% corporate tax rate applies to the same type of dividends received
from companies resident in non-treaty countries, that is, where the company that paid
the dividend is a listed company or is part of a 75% listed group the principal class of
the shares of which are substantially and regularly traded on the Irish Stock Exchange, a
recognised Stock Exchange in an EU member state or a country with which Ireland has a
DTT, or on such other Stock Exchange as is approved by the Minister for Finance for the
purposes of this relief from double taxation.
A 12.5% corporate tax rate is also applicable to foreign dividends paid out of trading
profits of a company resident in a country that has ratified the Convention on Mutual
Assistance in Tax Matters. Such countries include Azerbaijan and Ukraine. Please note
that Brazil and Indonesia have signed, but have not yet ratified, the Convention.
Foreign dividends received by an Irish company where it holds 5% or less of the share
capital and voting rights in that foreign company are exempt from corporation tax where
the Irish company would otherwise be taxed on this dividend income as tradingincome.
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Dividends from Irish resident companies are not liable to further tax, other than a
surcharge on close companies if the dividend is not redistributed. Broadly speaking,
a close company is a company that is under the control of five or fewer participators.
Participators can include individual shareholders, corporate shareholders, loan
creditors, any person with a right to receive distributions from the company, etc. Where
not less than 35% of the shares of a company (including the voting power) are listed, a
company will not be regarded as a close company.
A close company surcharge of 20% is payable on certain non-trading income (for
example, rental income, certain dividend income, and interest income) if it is not
distributed to shareholders within 18 months of the accounting period in which the
income was earned. A close company making a distribution and the close company
receiving a distribution have the option jointly to elect to have the dividend disregarded
for surcharge purposes. This can give close companies the option of moving trading
income up to a holding company without incurring a surcharge. Generally speaking,
close companies avoid the surcharge through the payment of dividends within the
prescribed period. Capital gains accruing to a non-resident company that would be close
if it were resident can be attributed to Irish resident participants in certain instances.
Stock dividends
Stock dividends taken in lieu of cash are taxed to the shareholder on an amount
equivalent to the amount that would have been received if the option to take stock
dividends had not been exercised. If the recipient is an Irish resident company and it
receives the stock dividend from a quoted (listed) Irish company, then there will be no
tax. For a quoted (listed) company paying the stock dividend, dividend withholding tax
(WHT) with the appropriate exemptions and exclusions applies. Other stock dividends
(bonus issues) are generally non-taxable.
Interest income
Interest income earned by Irish companies generally is taxable at the rate of tax for
passive income of 25% (interest may be regarded as a trading receipt for certain
financial trader companies). It is possible to offset current year trading losses against
passive interest income arising in the same year on a value basis. It is not possible to
offset prior year trading losses against current year interest income unless that interest
constitutes a trading receipt of the particular company.
Foreign income
Resident companies are liable to Irish tax on worldwide income. Accordingly, in the case
of an Irish resident company, foreign income and capital gains are, broadly speaking,
subject, in full, to corporation tax. This applies to income of a foreign branch of an Irish
company as well as to dividend income arising abroad.
In general, income of foreign subsidiaries of Irish companies is not taxed until remitted
to Ireland, although there are special rules that seek to tax certain undistributed capital
gains of non-resident close companies.
Foreign taxes borne by an Irish resident company (or Irish branch of an EEA resident
company), whether imposed directly or by way of withholding, may be creditable in
Ireland (see Foreign tax credit in the Tax credits and incentives section).
Deductions
In general, expenses incurred wholly and exclusively for the purposes of the trade are
tax-deductible.
General accruals and provisions are not tax-deductible.
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Depreciation
Book depreciation is not deductible for tax purposes (except in the case of certain
IP assets). Instead, tax depreciation (known as capital allowances) is permitted on a
straight-line basis in respect of expenditure incurred on assets that have been put into
use by the company. The following rates are applicable:
Asset type
Plant and machinery
Industrial buildings used for manufacturing
Motor vehicles
IP assets
Tax depreciation rate (%)

12.5
4
12.5
Book depreciation or 7
The allowances are calculated on the cost after deduction of grants, except for plant
and machinery used in the course of the manufacture of processed food for human
consumption. In this case, the allowances are calculated on the gross cost. Allowances
on cars are restricted to a capital cost of EUR 24,000 and may be restricted further (to
50% or zero), depending on the level of carbon emissions of thevehicle.
Accelerated capital allowances
A 100% first-year capital allowance is available in respect of expenditures incurred on

certain approved energy-efficient equipment up to 31 December 2014. The categories of
equipment that may be eligible for inclusion are:

Information and communications technology.

Heating and electricity provision.
Electric and alternative fuel vehicles.
Heating, ventilation, and air conditioning (HVAC) control systems.
Lighting.
Motors and drives.
Building energy management systems.
Refrigeration and cooling systems.
Electro-mechanical systems.
Catering and hospitality equipment.
Leasing
Ireland operates an eight-year tax depreciation life on most assets. A beneficial tax
treatment applies to finance leases and operating leases of certain assets. For short life
assets (i.e. those with a life of less than eight years), Ireland allows such lessors to follow
the accounting treatment of the transaction that provides a faster write-off of the capital
cost of an asset rather than relying on tax depreciation over eight years. This effectively
allows the lessors to write-off their capital for tax purposes in line with the economic
recovery on the asset.
Goodwill
The amortisation of goodwill is generally not allowable as a deduction. However, a tax

deduction may be available for capital expenditure on the acquisition of certain goodwill
(see Intellectual property [IP] regime in the Tax credits and incentives section).
Start-up expenses
A deduction may be allowed in respect of pre-trading expenses that are incurred for the
purposes of a trade and within three years of the commencement of the trade. Such
expenses may be offset against the income of that same trade.
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Interest expenses
A deduction for interest is allowed only to the extent that borrowings are used for the
purpose of a trade or acquisition of certain non-trading assets.
Expenditure on scientific R&D and payments for the acquisition of know-how in

general are allowable deductions, as are the costs of obtaining or extending patents and
obtaining and renewing trademarks.
Bad debts
A deduction is available for bad debts written off in the accounts of a company as
irrecoverable. Specific bad debt provisions may also be deductible once they satisfy Irish
GAAP or IFRS accounting standards. The creation of a general bad debt provision is not a
deductible expense.
Companies are entitled to a deduction, as a trading expense, for qualifying donations to

approved charities, educational institutions, schools, churches, research foundations,
sports bodies, and other approved organisations that satisfy certain conditions. To
qualify for a tax deduction, the donation(s) to an organisation in a 12-month accounting
period must amount to at least EUR 250.
Costs incurred for third-party entertainment are not tax-deductible. Entertainment

includes the provision of accommodation, food, drink, and any other form of hospitality,
including the provision of gifts. Expenditure on bona fide staff entertainment is
allowable as a deduction, provided its provision is not incidental to the provision of
entertainment to third parties. Certain promotional costs are tax-deductible if they are
incurred wholly and exclusively for the purposes of the trade.
Pension expenses
Contributions to certain employee pension schemes and the cost of setting up such
schemes are deductible. Pension contributions are allowable as a deduction for
employers in the year in which they are paid.
Fines and penalties
Fines and penalties imposed for breaking the law, civil penalties, interest, and late filing
surcharges imposed by the Revenue Commissioners are generally not deductible.
Taxes
Taxes that are deductible in computing profits for corporation tax include VAT not
recovered, the employers share of PRSI contributions, and local taxes (i.e. rates levied
on commercial property and local authority charges).
Losses are computed for tax purposes in the same way as business profits. Trading losses
can be offset against other income of any nature, either in the current or preceding
accounting period (of equal length). The amount of losses required to shelter the income
is dependent on the tax rate that would have been applied to the income in the absence
of the loss relief. Any excess losses can be carried forward indefinitely against future
trading income. Certain changes in ownership may prevent the carryforward of losses to
future periods. Terminal losses that arise within 12 months of the date a company ceases
to trade may be carried back threeyears.
Generally, deductions can be claimed for royalties, management service charges, and
most interest charges paid to foreign affiliates, provided the amounts do not exceed what
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would be paid to unrelated entities. Depending on the circumstances, certain elections
may be required. Ireland does not have any thin capitalisationrules.
Group taxation
The concept of fiscal unity or consolidated group tax does not exist in Ireland. However,
trading losses as computed for tax purposes may be offset on a current period basis
against taxable profits of another group company. As with loss relief in a single company,
the amount of losses required to shelter the income is dependent on the tax rate that
would have been applied to the income in the absence of the loss relief.
A group consists of a parent company and all of its 75% subsidiaries, with all group
members being tax resident in Ireland, in another member state of the EEA or in a
country with which Ireland has a DTT. It is also possible to trace through companies
quoted on certain recognised stock exchanges (or 75% subsidiaries of companies so
quoted). Non-Irish members may only surrender losses from activities that would, if
profitable, be subject to Irish tax.
Capital losses cannot be surrendered within a group.
Relief from capital gains tax is available on intra-group transfers of capital assets. Where
a capital asset is transferred from a resident company to another resident company in a
75% group, no capital gains tax charge arises. A group, for capital gains tax purposes,
consists of a principal company and its 75% subsidiary companies. A 75% subsidiary is
defined by reference to the beneficial ownership of ordinary share capital, owned either
directly or indirectly. A capital gains tax group can include EEA resident companies for
the purpose of analysing the beneficial ownership of a company.
It also is possible for an Irish resident company and an Irish branch of an EEA company
in the same group to transfer capital assets without crystallising a capital gains charge,
provided the asset transferred remains within the scope of the charge to Irish capital
gains tax.
Subsequent to an intra-group transfer, a charge to capital gains tax will arise
wheneither:
the asset is sold outside the group, in which case the tax is calculated by reference
to the original cost and acquisition date of the asset when first acquired within the
group or
a company owns an asset that was transferred by a group company and subsequently
leaves the group within a ten-year period of the intra-group transfer. The gain on this
intra-group transfer crystallises and becomes payable at thispoint.
Cash pooling and treasury activities
Ireland is a popular location for cash pooling and treasury activities, with a large number
of multinationals centralising intra-group treasury activities to avail themselves of the
low corporate tax rate of 12.5%. To further enhance the attractiveness of Ireland as a
treasury location, the corporate treasury sector sought and recently obtained changes to
facilitate international cash-pooling operations. Under a typical cash-pool arrangement,
interest payments by the Irish cash-pool leader typically would constitute short interest
for tax purposes because of the overnight/short-term nature of these arrangements.
Prior to the recent change, an interest payment by an Irish cash-pool leader to a group
company (75% or more direct or indirect relationship) resident outside the European
Union in a country with which Ireland does not have a DTT may have been regarded
as a dividend for tax purposes. There were two tax consequences of this. Firstly, this
interest was not deductible for corporation tax purposes, giving rise to an Irish tax cost
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of 12.5%. Secondly, dividend WHT at a rate of 20% may have applied, although there
are a number of exemptions from dividend WHT that may be relevant, depending on the
specific circumstances.
A relieving provision was introduced, which applies to accounting periods ending on or
after 1 January 2012 in respect of short interest. Short interest is generally regarded
as interest on a loan/deposit where the term is less than a year. Essentially, the Irish
company will be entitled to a tax deduction for the interest payable to any group
company resident outside the European Union in a non-treaty country, provided the
recipient country taxes foreign interest income at a rate equal to or greater than the Irish
corporate tax rate of 12.5%. If the recipient country taxes foreign interest at a rate of less
than 12.5%, then relief will be given in Ireland at that effective tax rate. If the recipient
country exempts foreign interest, then no interest relief will be available in Ireland. It
should be noted that this will affect not only cash-pooling operations but all forms of
short-term lending (i.e. less than one year).
Transfer pricing
Ireland has enacted broad-based transfer pricing legislation. The legislation endorses the
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
and adopts the arms-length principle. The introduction of general transfer pricing
legislation in Ireland was widely anticipated and brings the Irish tax regime into
line with international norms in this area. This regime applies to domestic as well as
international related-party arrangements.
Multinationals with operations in Ireland will be familiar with Irelands corporate tax
rates of 12.5%for active or trading income and 25% for passive income. The transfer
pricing regulations will only apply to related-party dealings entered into by a taxpayer
engaged in a trade that is within the charge to tax under Case I or Case II of Schedule D.
Therefore, income that is characterised as passive income and subject to tax at a rate
of 25% will fall outside the scope of the transfer pricing legislation. Passive income for
the purposes of these rules may include interest, royalties, dividends, and rents from
property where the income arising is not derived from an active trade. For example,
interest income arising to a bank will clearly constitute income from an active trade;
consequently, any interest arising to a bank from a related-party arrangement will fall
within the scope of the transfer pricing rules.
The rules confer a power on the Irish tax authorities to re-compute the taxable profit or
loss of a taxpayer where income has been understated or where expenditure has been
overstated as a result of certain non-arms-length arrangements. The adjustment will be
made to the Irish taxable profits to reflect the arrangement had it been entered into by
independent parties dealing at arms length.
The legislation also places an obligation on a taxpayer to provide documentation as
may reasonably be required to support the arms-length nature of the related-party
arrangements and that documentation will need to be prepared on a timely basis.
Guidance notes issued by the Irish tax authorities on transfer pricing documentation
support the legislative basis and indicate that a company is required to have transfer
pricing documentation available for inspection if requested by the Irish tax authorities.
Notably, the guidance notes state that it is best practice that the documentation is
prepared at the time the terms of the transaction are agreed. Additionally, the guidance
notes state that in order for a company to be in a position to make a correct and
complete tax return, appropriate transfer pricing documentation should exist at the time
the tax return is filed. It is worth noting that the taxpayer can maintain documentation
in the form of its choosing. Additionally, where documentation exists in another
territory that supports the Irish arrangement, this will also be sufficient from an Irish
transfer pricing perspective, provided that the documentation is in English. The Irish
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tax authorities have also confirmed that they will accept documentation that has been
prepared in accordance with either the OECD Transfer Pricing Guidelines or the code of
conduct adopted by the EU Council under the title EU Transfer Pricing Documentation.
Note that arrangements entered into between related parties prior to 1 July 2010 are
grandfathered and thereby excluded from the scope of the transfer pricing rules. There
is also an exemption from the rules for small and medium-sized enterprises. Broadly
speaking, small and medium-sized enterprises include enterprises employing less than
250 people and that have either a turnover of less than EUR 50 million or assets of less
than EUR 43 million.
The Irish tax authorities monitor compliance with the transfer pricing rules through
the Transfer Pricing Compliance Review (TPCR) programme. Under this programme,
companies selected are notified to undergo a self-review of their compliance with the
Irish transfer pricing rules. Companies selected are requested to provide a transfer
pricing report to the tax authorities within three months.
The Irish tax authorities have clarified that the TPCR programme is not a formal audit,
so this allows for voluntary disclosures to be made at any time during the process. The
outcome of a TPCR will be a Revenue letter indicating either (i) no further enquiries
or (ii) issues that need to be further addressed within the TPCR process. However, in
some instances, a case selected for TPCR may be escalated to an audit (e.g. in cases
where a company declines to complete a self-review or where the output from the review
indicates that the companys transfer pricing policies may not be in accordance with the
arms-length standard).
Thin capitalisation
Ireland does not have any thin capitalisation rules.

Ireland does not have CFC rules.

The main tax incentives in Ireland are:
12.5% corporation tax rate on active business income.
A 25% credit on incremental R&D spending over the base year of 2003; total effective
tax deduction of 37.5%.
Ability to exploit IP at favourable tax rates.
Accelerated tax depreciation allowances for approved energy efficient equipment.
Ability to carry out investment management activities for non-Irish investment funds
without creating a taxable presence in Ireland for such funds.
An effective legal, regulatory, and tax framework to allow for the efficient
redomiciliation of investment funds from traditional offshore centres to Ireland.
R&D credit
A tax credit of 25% is available on incremental R&D expenditure (i.e. current year
qualifying expenditure over qualifying expenditure incurred in a base year fixed at
2003) incurred by a company. This credit is in addition to the normal 12.5% revenue
deduction available for the R&D expenditure that gives rise to an effective corporation
tax deduction of 37.5%. A limited volume-based approach applies for the purposes of
calculating the tax credit so that the first EUR 300,000 of qualifying R&D expenditure
will benefit from the 25% R&D tax credit without reference to the base year (i.e. 2003)
spend. This means that companies engaging in R&D are guaranteed a credit of EUR
75,000 in respect of their first EUR 300,000 of expenditure. A separate R&D tax credit
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is available in respect of expenditure incurred on the construction or refurbishment
of a qualifying R&D building. In order to qualify, 35% of the building must be used for
qualifying R&D activities, and this threshold is measured over a four-year period. This
is of particular assistance where R&D is carried on in a manufacturing environment.
The credit available is equal to 25% of the expenditure incurred on the construction or
refurbishment of a qualifying building, and the qualifying amount is restricted according
to the R&D use. The incremental basis does not apply for expenditure incurred on
qualifying R&D buildings.
The R&D tax credit is available for offset against the current year corporation tax
liability of the company in the first instance. Any excess can be carried back for offset
against the prior year corporation tax liability to generate a tax refund, and any further
excess can be monetised over a three-year cycle. The amount that can be monetised is
limited to the greater of the corporation tax payable by the company in the preceding
ten years or the payroll tax liabilities of the company for both the period in which the
R&D expenditure is incurred and the prior year (subject to an adjustment dependent
upon previous claims).
In addition, companies may account for the R&D tax credit through their profit and loss
account or income statement in arriving at the pre-tax profit orloss. This immediately
impacts the unit cost of R&D, which is the key measurement used by multinational
corporations when considering the locations of R&D projects. Companies that are
in receipt of an R&D tax credit have the option, in certain instances, to reward key
employees through an alternative use of that credit. In effect, the company may
surrender a portion of their R&D credit (that could otherwise have been used to reduce
corporation tax) to key employees to reduce their effective rate of tax to 23% (the
average effective rate of tax for such employees would typically be in excess of 40%
in the absence of such R&D tax credit). In order to qualify as a key employee, the
individual must perform 50% or more of their employment duties on qualifying R&D
activities.
The R&D regime caters to pre-trading expenditure incurred on qualifying R&D activities.
Where a company incurs R&D expenditure but has not yet commenced to trade, an R&D
claim in this regard must be made within 12 months from the end of the accounting
period in which the company first commences totrade.
As a result of The Finance (No. 2) Act 2013, sub-contracted R&D costs of up to the 15%
of qualifying in-house R&D expenditure incurred by a company can qualify for the R&D
tax credit.
It should be noted that expenditure incurred on the acquisition of intangible assets
that qualify for capital allowances under the IP regime and expenditure incurred in
registering/applying for legal protection for intangible assets that are developed as a
result of R&D activities do not qualify for the R&D credit.
Legislation provides for a tax deduction for capital expenditure incurred by a company,
which is carrying on a trade, on the acquisition of qualifying IP assets. The definition
of IP assets is widely drafted and includes the acquisition of, or the licence to use, the
following:

Patents and registered designs.

Trademarks and brand names.
Know-how (broadly in line with the OECD model tax treaty definition of know-how).
Domain names, copyrights, service marks, and publishing titles.
Authorisation to sell medicines, a product of any design, formula, process, or
invention (and rights derived from research into same).
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Applications for legal protection (for example, applications for the grant or
registration of brands, trademarks, patents, copyright, etc.).
Expenditure on computer software acquired for commercial exploitation.
Goodwill, to the extent that it relates directly to the assets outlined above.
Capital allowances will be available at the same rate as the depreciation/amortisation
charge for financial accounting purposes. Alternatively, the company may elect to claim
allowances over a period of 15 years.
Tax deductions (e.g. financing costs, IP capital allowances) are available for offset
against income generated from exploiting qualifying IP assets, up to a maximum
deduction of 80% of the relevant IP profits. The remaining 20% is taxable at the 12.5%
corporation tax rate on the basis that the company is carrying on a trade. There is no
clawback, provided the IP is held for five years.
A shorter write-off period of eight years has also been retained for acquired software
rights under the existing capital allowances regime where the rights are not acquired for
commercial exploitation (i.e. were acquired for end use by the company).
Exemption for new start-up companies
A corporation tax holiday applies to certain start-up companies that commence to trade
during 2012, 2013, and 2014. The relief applies for three years where the total amount
of corporation tax payable does not exceed EUR 40,000 in each year. Marginal relief
is available where corporation tax payable is between EUR 40,000 and EUR 60,000.
The relief available is now linked to the amount of employers PRSI paid by a company
in an accounting period and is intended to target the relief at companies generating
employment.
The Finance Act 2013 allows unused relief arising in the first three years of trading (due
to insufficiency of profits) to be carried forward for use in subsequent years.
Section 110 company
Ireland has a favourable tax regime for entities known as Section 110 companies. A
Section 110 company is an Irish resident special purpose company that holds and/or
manages qualifying assets and satisfies a number of conditions. A Section 110 company
can provide an onshore investment platform, which should be eligible to access Irelands
DTT network where the Irish company is the beneficial owner of the income flow.
The Section 110 regime has been in existence almost 25 years and, with appropriate
structuring, can provide for an effective corporate tax rate of close to 0%. The regime
is widely used by international banks, asset managers, hedge funds, private equity
firms, and investment funds in the context of securitisations, investment platforms,
collateralised debt obligations (CDOs), collateralised loan obligations (CLOs),
acquisition of distressed loan portfolios, big ticket leasing, and capital markets bond
issuances.
Section 110 companies are permitted to invest in financial assets, commodities, and
plant and machinery. The term financial asset is widely defined and includes both
mainstream financial assets, such as shares, loans, leases, lease portfolios, bonds, debt,
and derivatives, as well as assets such as greenhouse gas emissions allowances and
carbon offsets.
In addition, the extension of the Section 110 regime to include plant and machinery has
increased the attractiveness of Ireland as the preferred destination for aircraft financing
and leasing activities.
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Grants
Cash grants may be available for capital expenditures on machinery and equipment
and industrial premises, training of employees, creation of employment, rent subsidies,
R&D, manufacturing and exporting products, providing services to customers overseas,
etc. The level of grant aid depends on a number of factors and is specific to each project.
Rates depend on the location of the new industry.
Foreign tax credit
Foreign taxes borne by an Irish resident company (or Irish branch of an EEA resident
company), whether imposed directly or by way of withholding, may be creditable
in Ireland. The calculation of the credit depends on the nature of the income item,
but for income sources other than dividends and some related party interest, the
credit is limited to the Irish tax referable to the particular item of income. A system of
onshore pooling of excess foreign tax credits applies to dividends from 5% or greater
corporate shareholdings, and excess credits in the dividend pool can be carried forward
indefinitely. A similar pooling system applies to some related party interest and also to
foreign branch income.
An Irish resident company with a branch or branches outside Ireland is generally
taxable in Ireland on the foreign branch profits with a credit for foreign taxes paid on
those profits. A unilateral form of credit relief for foreign taxes paid by foreign branches
operating in countries with which Ireland does not have a tax treaty is also available. To
the extent that there were foreign taxes on branch profits that were not utilised in the
relevant period (that is, where credit for foreign tax exceeds the Irish tax payable), these
unused credits can be carried forward indefinitely and credited against corporation tax
on foreign branch profits in future accounting periods.
A form of pooling of tax deductions in relation to foreign tax on royalties may be
applicable where the royalty income is taken into account in computing the trading
income of a trade carried on by the company.
Finance Act 2013 introduced an additional tax credit on certain dividends received by an
Irish Holdco from an EU/EEA subsidiary that is subject to either the 12.5% or 25% rate
of Irish tax.
The additional tax credit will provide for a credit up to the amount of Irish tax in
instances where the Irish nominal rate is lower than nominal rate of tax on the
underlying profits in the country where the profits are sourced.
Withholding taxes
Irish resident companies are required to withhold tax on certain types of payments as set
out below (see sub-sections below for WHT exemptions and table at end of this section for
WHT rate reductions).
Recipient
Resident companies
Non-resident companies and individuals
Dividends
0
20
20
WHT (%)
Interest Patents, royalties
20
20
20
20
20
20
Dividend WHT
Dividend WHT applies at 20% to dividends and other distributions. However, an

exemption may be available where the recipient of the dividend is either an Irish
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company or a non-Irish company eligible for the Parent-Subsidiary Directive (which in
Ireland requires a 5% or greater shareholding).
Exemptions from dividend WHT also are available where the recipient of the distribution
falls into one of the categories listed below and provided an appropriate declaration is
made to the company paying the distribution in advance of the distribution. In a move
to significantly ease the administrative burden in applying for exemption for dividend
WHT, this declaration is now self-assessed and valid for up to six years.
Irish tax resident companies (a declaration is not required for Irish tax resident
companies that hold a 51% or greater shareholding of thecompany).
Non-resident companies, which are resident in a country with which Ireland has a
tax treaty or in another EU member state, where the company is not controlled by
Irishresidents.
Non-resident companies that ultimately are controlled by residents of a tax treaty
country or another EU member state.
Non-resident companies whose principal class of shares is traded on a recognised
stock exchange in a treaty country or another EU member state or on any other stock
exchange approved by the Minster for Finance (or if recipient of the dividend is a 75%
subsidiary of such a listed company).
Non-resident companies that are wholly owned by two or more companies the
principal class of shares of each of which is traded on a recognised stock exchange
in a treaty country or another EU member state or on any other stock exchange
approved by the Minister for Finance.
Individuals who are resident in a tax treaty country or in another EU member state.
Certain pension funds, retirement funds, sports bodies, collective investment funds,
and employee share ownership trusts.
Companies that make a dividend distribution are required, within 14 days of the end
of the month in which the distribution is made, to make a return to the tax authorities
containing details of the recipient of the dividend, the reason for any exemption from
dividend WHT, and to pay over any tax withheld.
Interest WHT
Financial institutions operating in Ireland are obligated to withhold tax (deposit

interest retention tax or DIRT) out of interest paid or credited on deposit accounts in the
beneficial ownership of resident companies, unless the financial institution is authorised
to pay the interest gross. The rate increased from 33% to 41% effective from 1 January
2014. There is no DIRT on interest paid to non-residents where a written declaration
of non-residence is completed. Certain annual interest payments are subject to WHT at
20%. Interest payments by companies to companies resident in other EU member states
or in treaty countries are generally not subject to WHT. The EU Interest and Royalties
Directive may also provide an exemption from WHT for payments between associated
companies.
Royalties WHT
Royalties, other than patents, are not generally subject to WHT under domestic law.
Documentation and reporting may be required to access lower treaty withholding rates
in other cases. The EU Interest and Royalties Directive may also provide an exemption
from WHT for payments between associated companies. Associated companies, for the
purpose of this directive, are companies where one can directly control at least 25% of
the voting power of the other or at least 25% of the voting power of both companies is
directly controlled by a third company. In all cases, all companies must be resident in a
member state of the European Union.
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WHT on capital gains
Where any of the following assets is disposed of, the person by whom or through whom
the consideration is paid (i.e. the purchaser) must deduct capital gains tax at 15% from
the payment:
1. Land or minerals in Ireland or exploration rights in the Irish continental shelf.
2. Unquoted (unlisted) shares deriving their value or the greater part of their value
(more than 50%) from assets described in (1).
3. Unquoted (unlisted) shares issued in exchange for shares deriving their value or the
greater part of their value from assets as described in (1).
4. Goodwill of a trade carried on in Ireland.
The requirement to withhold tax is not required where the consideration does not
exceed EUR 500,000 or where the person disposing of the asset produces a certificate
from the Revenue Commissioners authorising payment in full. A clearance certificate
may be obtained by making application on Form CG50 to the Revenue Commissioners
supported by a copy of the agreement or contract for sale. The certificate may be
obtained on the grounds that the vendor is Irish resident or that no capital gains
tax is due in respect of the disposal or that the capital gains tax has been paid. WHT
is creditable against the capital gains tax liability of the vendor, and any excess
isrefundable.
To avoid the requirement to withhold, clearance must be obtained before the
consideration is paid. There is no exemption from the withholding procedure where the
asset is held as trading stock or where the transaction is intra-group and a capital gains
tax liability does not arise. Failure to obtain the certificate will lead to the purchaser
being assessed to capital gains tax for an amount of 15% of theconsideration.
Professional services withholding tax (PSWT)
Individual income tax at the standard rate (currently 20%) is deducted from payments
for professional services by government departments, state bodies, and local authorities.
Credit is granted for any PSWT withheld against the corporation tax (or income tax for
an individual) liability of the accounting period in which tax is withheld.
Relevant contracts tax (RCT)
RCT is a WTH that applies in the construction, forestry, and meat-processing industry
in Ireland. It applies where a principal contractor engages a sub-contractor under a
relevant contract to carry out relevant operations.
The RCT system applies regardless of whether or not the parties to the contract are
resident in Ireland, the parties are liable to tax in Ireland in respect of those operations,
the contract is executed outside Ireland, or payments under the contract are made
outside Ireland.
It is important to note that principal contractors, liable to RCT, may not necessarily
operate in the above industries. In the case of construction, in particular, relevant
contracts may be entered into by a variety of entity types. For example, electricity
generation, oil and gas, and telecommunications undertakings are all classed as
principal contractors. Relevant operations are broadly defined. Examples are repairs to
buildings and structures; ground works; installation, alteration, and repairs to various
systems in buildings (e.g. electrical, ventilation, water supply, telecommunications);
mining and exploration works; and certain haulage contracts.
Where RCT applies, the principal contractor must deduct tax at rates of 20% or 35%
from such payments and remit this to the Revenue, unless the sub-contractor has a
0% RCT rate and Revenue authorise the principal contractor to make the payment
gross. The rate that is applied to a sub-contractor will principally depend on the subwww.pwc.com/taxsummaries
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contractors tax compliance record. The 20% rate will apply to sub-contractors who
are registered with Revenue and have a good tax compliance record. The 35% rate will
apply where the sub-contractor is not registered for tax in Ireland or has an inadequate
tax compliance record. A zero rate of RCT applies where the sub-contractor applies to
Revenue and provides evidence that there is a bone fide business and the sub-contractor
is substantially tax compliant. Principals must notify each payment on Revenues
online system and obtain an authorised rate before making any payment; otherwise,
penalties may apply. The gross amount receivable under the contract is included in the
computation of the profit of the sub-contractor, and the sub-contractor is entitled to
credit for, or offset of, the tax suffered.
WHT rate reductions and exemptions
Exemptions and rate reductions apply under domestic law and under taxtreaties. Where
an exemption from WHT is not available (please see sections above for domestic law
exemptions), a reduced rate of WHT may apply under an applicable tax treaty. The table
below sets out the reduced rates of WHT that may be available to payments from Ireland
of dividends, interest, and royalties under an applicable tax treaty.
Recipient
Non-treaty
Albania
Armenia
Australia
Austria
Bahrain
Belarus
Belgium (21)
Bosnia-Herzegovina
Bulgaria
Canada
Chile
China
Croatia
Cyprus
Czech Republic
Denmark
Egypt (20)
Estonia
Finland
France
Georgia
Germany
Greece
Hong Kong
Hungary
Iceland
India
Israel
Italy
Japan
Korea, Republic of
Kuwait
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Ireland
Dividends (1)
20
0 (23)/5 (4)/10
0 (4)/5 (14)/15
0
0
0
0 (23)/5 (4)/10
0
0
5 (4)/10
5 (6)/15
5 (12)/15
5 (13)/10
5 (7)/10
0
5 (13)/15
0
5 (4)/10
5 (13)/15
0
20
0 (24)/5 (9)/10
5 (14)/15
5 (13)/15
0
5 (14)/15
5 (4)/15
10
0
15
20
0
0
WHT (%)
Interest (2)
20
0 (26)/7
0 (26)/5 (8)/10
10
0
0
0 (26)/5
15 (17)
0
0/5 (17)
0 (26)/10
5 (8)/15
0 (26)/10
0
0
0
0
0 (26)/10
0/10 (17)
0
0
0
0
0/5 (17)
0 (26)/10
0
0
0 (26)/10
5 (8)/10
0/10 (17)
10
0
0
Patents, royalties (3)

20
7
5
10
0
0
5
0
0
10 (17)
0 (27)/10
5 (28)/10
6 (28)/10
10 (17)
0
10 (17)
0
10
5 (28)/10 (17)
0
0
0
0
5 (17)
3
0
0 (28)/10
10
10
0
10
0
5
Ireland
Recipient
Latvia
Lithuania
Luxembourg (22)
Macedonia
Malaysia (21)
Malta
Mexico
Moldova
Montenegro
Morocco
Netherlands (18)
New Zealand
Norway
Pakistan (18)
Panama
Poland
Portugal
Qatar (20)
Romania
Russia
Saudi Arabia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
Thailand (19)
Turkey
Ukraine (19)
United Kingdom
United States
Uzbekistan (20)
Vietnam
Zambia
Dividends (1)
5 (13)/15
5 (13)/15
20
0 (25)/5 (7)/10
10
5 (7)/15
5 (7)/10
5 (15)/10
0 (23)/5 (16)/10
6 (4)/10
0/15
0
0 (23)/5 (14)/15
20
5
0 (4)/15
15
0
3
10
0 (4)/5
5 (15)/10
0
0 (4)/10
5 (4)/15
5 (15)/10
0
0
0 (7, 23)/15
0 (11)/10
5 (13)/15
5 (4)/15
0
5 (6)/15
5 (7)/15
5 (14)/10
5 (10)/10
0
WHT (%)
Interest (2)
0/10 (17)
0/10 (17)
0
0
0 (26)/10
0
0 (26)/5 (8)/10
0 (26)/5
0 (26)/10
0 (26)/10
0
10
0
special provisions (5)
0 (26)/5
0/10 (17)
0/15 (17)
0
0/3 (17)
0
0
0 (26)/10
0 (26)/5
0
0/5 (17)
0
0
0
0
0 (26)/10/15 (11)
10 (8)/15
5 (8)/10
0
0
0
5
0 (26)/10
0
Patents, royalties (3)

5 (28)/10 (17)
5 (28)/10 (17)
0
0
8
0/5 (17)
10
5
5 (28)/10
10
0
10
0
0
5
0/10 (17)
0/10 (17)
5
0/3 (17)
0
5/8
5 (28)/10
5
0/10 (17)
0/5 (17)
0
5/8/10 (11, 17)
0
0
5/10/15 (11)
10
5 (28)/10
0
0
0
5
5/10/15 (11)
0
Irish tax legislation allows for favourable treatment in situations where a DTT has been signed but not yet
ratified.
Notes
1.
2.
3.
4.
5.
6.
See Dividend WHT sub-section above for domestic WHT exemptions.

See Interest WHT sub-section above for domestic WHT exemptions.
See Royalties WHT sub-section above for domestic WHT exemptions.
Where the beneficial owner of the dividends is a resident of a contracting state and is a company that
directly holds at least 25% of the capital of the company paying thedividends.
Refer to Ireland/Pakistan DTT.
Where the beneficial owner of the dividends is a resident of the contracting state and is a company
that controls, directly or indirectly, 10% or more of the voting power in the company paying the
dividends.
Ireland
905
Ireland
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
Where the beneficial owner of the dividends is a resident of the contracting state and is a company
that directly controls 10% or more of the voting power in the company paying the dividends.
For loans from banks and for some territories sales on credit of equipment.
Where the beneficial owner of the dividends is a resident of the contracting state and controls,
directly or indirectly, at least 10% of the voting power in the company paying the dividend and has
invested more than EUR 100,000 in the capital of the company paying the dividend.
directly holds at least 70% of the voting power of the company paying thedividends.
Refer to DTT.
directly controlsat least 20% of the voting power of the company paying thedividends.
Where the beneficial owner of the dividends is a resident of a contracting state and is a
companythatdirectly holdsat least 25% of the voting powerof the company paying thedividends.
companythatdirectly holdsat least 10% of the capital of the company paying thedividends.
Where the beneficial owner of the dividends is a resident of a contracting state and is a companythat
controls, directly or indirectly, at least 25% of the voting powerof the company paying thedividends.
companythatholds, directly or indirectly, at least 10% of the capital of the company paying
thedividends.
The EU Interest and Royalties Directive may provide an exemption fromWHT for payments between
associated companies.
These treaties are currently under renegotiation.
Treaty signed but not yet in effect.
Effective from 1 January 2014.
Protocol to treaty signed but not yet in effect.
Protocols to existing agreements expected to be signed shortly.
Where the dividend is paid to the government/state-owned body of the other contracting state.
Where the beneficial owner of the dividends is a resident of the contracting state and directly or
indirectly controls at least 50% of the voting power in the company paying the dividend and has
invested more than EUR 2 million in the capital of the company paying the dividend.
Where the beneficial owner of the dividends is a resident of the contracting state and is a
companythat directly or indirectly controls at least 25% of the voting powerof the company paying
thedividends for an uninterrupted period of 12 months or is a recognised pension fund.
Where the beneficial owner of the interest is a government/state-owned body, state fund, or financial
institution, the lower rate of WHT may apply.
Exempted for the use of, or right to use, copyright royalties and other like payments in respect of
the production or reproduction of any literary, dramatic, musical, or artistic work (but not including
royalties in respect of motion picture films nor royalties in respect of works on film or videotape or
other means of reproduction for use in connection with television broadcasting) computer software or
any patent or for information concerning industrial, commercial, or scientific experience.
Where the payment relates to the use of, or right to use, industrial, commercial, or scientific
equipment.
Ireland is currently negotiating treaties with the following countries:

Argentina
Azerbaijan
Jordan
Taiwan
Tunisia
Tax administration
Taxable period
The tax accounting period normally coincides with a companys financial accounting
period, except where the latter period exceeds 12 months.
Tax returns
Corporation tax returns must be submitted within nine months (and no later than the
23rd day of the ninth month) after the end of the tax accounting period in order to avoid
a surcharge (maximum of EUR 63,485) or a restriction of 50% of losses claimed, to a
maximum of EUR 158,715.
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Ireland
Payment of tax
Corporation tax payment dates are different for large and small companies. A small
company is one whose corporation tax liability in the preceding period was less than
EUR 200,000. Interest on late payments or underpayments is applied at approximately
8% per year.
Large companies
For large companies, the first instalment of preliminary tax totalling 45% of the expected
final tax liability, or 50% of the prior period liability, is due six months from the start of
the tax accounting period (but no later than the 23rd day of the month).
The second instalment of preliminary tax is due 31 days before the end of the tax
accounting period (but no later than the 23rd day of the month). This payment must
bring the total paid up to 90% of the estimated liability for the period.
The balance of tax is due when the corporation tax return for the period is filed (that is,
within nine months of the end of the tax accounting period, but no later than the 23rd
day of the month in which that period of nine months ends).
Small companies
Small companies are only required to pay one instalment of preliminary tax. This is due
31 days before the end of the tax accounting period (but no later than the 23rd day of
the month).
The company can choose to pay an amount of preliminary tax equal to 100% of the
corporation tax liability for its immediately preceding period or 90% of the estimated
liability for the current period. As is the case for large companies, the final instalment is
due when the corporation tax return is filed.
Tax audit process
A system of self-assessment and Irish Revenue audits is in operation in Ireland.
Irish Revenue may undertake an audit of a companys tax return within a period of four
years from the end of the accounting period in which the return is submitted.
The Irish tax authorities intend to monitor compliance with the new transfer pricing
rules through the TPCR programme. Under this programme, companies selected will be
notified to undergo a self-review of their compliance with the Irish transfer pricing rules.
Companies selected will be requested to provide a report to the tax authorities within
three months.
Other issues
Asset management
Irish tax legislation contains provisions aimed at promoting Ireland as a leading location
for the management of both Undertakings for Collective Investment in Transferable
Securities (UCITS) and non-UCITS funds. UCITS IV brought about fundamental changes
to both the management and structuring of UCITS. One of the reforms introduced
permits UCITS management companies located in one EU jurisdiction to manage
UCITS domiciled in another EU jurisdiction. One of the areas of concern is whether the
activities of the management company could bring a foreign UCITS within the charge to
tax in the management companys home jurisdiction (e.g. by creating a branch or agency
or causing the fund to be regarded as tax resident there). Irish legislation provides that
an Irish management company managing a non-Irish UCITS will not be regarded as a
Ireland
907
Ireland
branch or agency of the non-Irish UCITS and will not bring the profits of the foreign
UCITS within the charge to Irish tax or treat the foreign UCITS as an Irish regulated
fund.
Following theUnited States (US) and OECD review of offshore domiciles, which has
resulted in increased regulation and tax obligations, fund managers are being forced to
consider possible alternative onshore jurisdictions for their investment fund products.
Because of the international reputation of its asset management industry and the
favourable corporate tax regime, Ireland is seeing a significant trend in investment
managers moving their investment platforms to Ireland from the traditional offshore
jurisdictions. Company law changes also allow corporate funds to migrate to Ireland
through a re-registration process, whereby the fund company would benefit from its
continued existence, including the ability to retain the funds performance track record
post migration and avoid potential adverse tax consequences and costs that typically
arise from a merger of an offshore fund with a new onshore fund. The Irish Central Bank
has introduced a coordinated authorisation process to facilitate speed to market, which
at present is a key advantage in comparison to delays being experienced in other EU
domiciles.
International funds sector
Legislation has introduced a number of provisions designed to support and enhance the
international funds sector in Ireland, as set out in further detail below:
Funds re-domiciling to Ireland
Where the Central Bank has authorised an investment fund that has re-domiciled to
Ireland from certain offshore centres, a declaration can be made by the fund stating that
the unitholders are non-Irish resident, to ensure that no Irish tax charge arises in respect
of such non-residents, thereby clarifying the tax exemption applying to payments made
by Irish funds to non-resident investors. To the extent that there are any Irish resident
unitholders, these need to be identified in the declaration and tax accounted for, where
appropriate, on any payments made to such unitholders.
Cross-border fund mergers involving Irish funds
Measures have been introduced confirming that mergers (both inbound and outbound)
involving an Irish fund with a fund located in a member state of the European Union,
European Economic Area, or an OECD country with which Ireland has entered into a
DTT will not give rise to a charge to tax in respect of Irish resident investors. Effectively,
the charge to tax is deferred until the ultimate disposal of the replacement units. The
calculation of any future gain on such units is calculated by reference to the cost of the
original units.
No charge to Irish tax shall arise on the transfer of units in the formation of certain
master/feeder structures.
A number of significant stamp duty exemptions are available for collective investment
vehicles.
Real Estate Investment Trusts (REITs)
REITs were introduced by Finance Act 2013 with a view to boosting the real estate
industry in Ireland. The REIT will be exempt from tax on income and capital gainsif
certain conditions are met, notably the requirement to distribute at least 85% of
property income annually and that at least 75% of the aggregate income of the REIT
must derive from carrying on property rental business. There are also requirements
regarding the number of properties held and the financing arrangements. Distributions
made by the REIT will be subject toWHT of 20%, with exemption/reduced rates
available for eligible investors. The REIT must be incorporated and resident in Ireland
and listed in an EU jurisdiction. This vehicle provides access to market for smaller
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Ireland
Ireland
investors and facilitates capital injections into the Irish property market without an
additional layer of taxation.
Legislative changes: New Irish corporate structure for investment funds
The Irish funds industry continues to work with the Irish government to explore new
products that could enhance the competitiveness of Irelands fund offering on the global
stage.
The Irish Minister for Finance has committed to the introduction of a corporate structure
for regulated investment funds.
Currently, investment funds in Ireland structured as companies are incorporated as
public limited companies (plc) under the Irish Companies Acts.The new corporate
structure will be specifically designed for investment funds and will not be subject to the
legislation governing other types of companies, thereby removing the need to comply
with certain requirements under the Companies Acts. The legislation will also increase
the range of structures open to investment managers and promoters establishing funds
in Ireland.
One of the main advantages of the new corporate structure will be the ability of this
structure to check-the-box (an election to be regarded as tax transparent) for US tax
purposes, whereas an Irish plc cannot avail of this election. This is seen as a very positive
development in the funds industry, particularly in the context of investment funds
seeking to re-domicile from traditional tax haven jurisdictions to a regulated jurisdiction
like Ireland.
It is intended that the new corporate fund will qualify for the tax exemptions that apply
to Irish regulated funds.
Investment limited partnership
Finance Act 2013 confirmed the tax transparency of investment funds structured as
investment limited partnerships under the Investment Limited Partnership Act 1994.
Previously, such funds were regarded as opaque under Irish tax legislation. This change
and further measures expected to be announced in the coming months further enhance
the flexibility and competitiveness of Irelands product offering in this area.
Islamic finance
Through a combination of pre-existing tax legislation and specific amendments to tax

legislation introduced in 2011, Irish tax law facilitates most Islamic finance transactions,
including ijara (leasing), takaful (insurance), re-takaful (reinsurance), murabaha
and diminishing musharaka (credit arrangements), mudaraba and wakala (deposit
arrangements), and sukuk. While there is no specific reference in the legislation to
Islamic Finance, rather the reference is to Specified Financial Transactions, overall, the
premise of the legislation in Ireland is to ensure that Islamic finance transactions are
treated in the same favourable manner as conventional financing transactions.
The legislation also facilitates the favourable taxation (and tax impact) of UCITS
management companies. The UCITS structure is one of the most commonly used
structures for many different types of Islamic funds, such as retail Islamic equity funds,
Shariah-compliant money market funds, Shariah-compliant exchange traded funds
(ETFs), etc. This demonstrates the desire of Irish government and Irish tax authorities
to enhance the attractiveness of Ireland as a location for Islamic finance transactions
by extending to this form of financing the relieving provisions that currently apply to
conventional financing.Since the introduction of the facilitating legislation in Ireland
in 2011, subsequent Finance Acts have seen the introduction of more minor or technical
changes, all intended to facilitate the development of the industry in Ireland.
Ireland
909
Ireland
Islamic insurance
The Irish Revenue has provided guidance in respect of the Irish tax treatment of general
takaful (non-life), re-takaful (reinsurance), and family (life) takaful arrangements.
Legislative changes are not currently required to facilitate Islamic insurance in Ireland.
Choice of legal entity
Foreign investors tend to operate either through an Irish legal entity or as a branch of a
foreign entity. Both are equally valid means of doing business in Ireland, and the choice
will normally depend on the commercial fact pattern and individual circumstances of
the investor parent company.
Mandatory disclosure
In a move to promote transparency between taxpayers, practitioners, and tax

authorities, provisions relating to the disclosure of tax schemes are applicable. These
require promoters of such schemes to provide information to the tax authorities within a
specified time of having made the scheme available. A transaction that comes within the
new law and must therefore be reported to Revenue is not necessarily a tax avoidance
transaction for the purposes of existing legislation.The rules are wide reaching and
essentially cover all tax heads, including corporation tax, income tax, capital gains tax,
stamp duty, VAT, customs duties, and excise duties.
Foreign Account Tax Compliance Act (FATCA) intergovernmental

agreement (IGA)
In December 2012, the Charg daffaires at the US Embassy in Ireland and the Minister
for Finance of Ireland signed an intergovernmental agreement (the US-Ireland IGA), for
which enabling provisions were enacted into Irish tax legislation in Finance Act 2013.
The IGA changes the way in which FATCA affects Irish financial institutions. Its effect
is to give Irish laws and regulations precedence in governing FATCA compliance for
Irish entities, and it provides that reporting will be carried out to the Irish Revenue
Commissioners, rather than to the US Internal Revenue Service (IRS). The reporting
requirements will apply to all Irish financial institutions, as defined, regardless of
whether the entity has US account holders or US assets.
US-Ireland IGA
The US-Ireland IGA defined the types of Irish financial institutionsthat are in scope for
FATCA as:

a custodial institution
a depository institution
an investment entity, or
aspecified insurance company.
Specific definitions are attached to each type of entity above.

For the asset management industry, the IGA covers investment funds, their
administrators and investment managers, as well as other parties involved in the
running of the fund. The Irish regulations clarify that the fund is the party with primary
responsibility for complying with the relevant obligations, but that certain due diligence
and reporting responsibilities can be delegated to a third party, such as the fund
administrator, at the funds discretion.
The US-Ireland IGA also defines the types of institutions that are either exempt from the
scope of FATCA or that can qualify as Deemed-Compliant Financial Institutions. Entities
qualifying under the Deemed Compliant status will benefit from a reduced compliance
burden under FATCA. Such entities include non-profit organisations, financial
institutions with a local client base, and certain collective investment vehicles. Collective
910
Ireland
Ireland
investment vehicles may qualify under the Deemed Compliant status where all of the
interests in the vehicle are held by or through one or more financial institutions that are
not non-participating financial institutions.
IGA benefits
Under the IGA and its enabling Irish provisions, reporting Irish financial institutions
will not be required to sign an agreement with the IRS, as envisaged by the FATCA
regulations. Instead, relevant entities must report account holder information annually
to Irish Revenue Commissioners. The Irish Revenue Commissioners will then collate and
exchange this information with the IRS.
Under the US-Ireland IGA, reporting Irish financial institutions are considered to be
compliant with local regulations, and, as a result, those entities should not suffer 30%
FATCAWHT on US-source income or gross proceeds. Similarly, reporting Irish financial
institutions should not be obligated to operate 30% FATCAWHT on such payments
made to recalcitrant account holders or investors, provided the requirements of the IGA
are met.
This is a very positive feature of the US-Ireland IGA, and means that the task of
developing complex WHT systems to identify and withhold on payments to certain
account holders is avoided in most cases.
IGA requirements
Some of the key requirements of reporting Irish financial institutions under the USIreland IGA include the following:
Register as a reporting Irish financial institution and receive a Global Intermediary
Identification Number (GIIN).
Apply due diligence procedures to identify and report certain information on US
Reportable Accounts (as defined) and accounts held by non-participating financial
institutions.
Update account on-boarding procedures with effect from 1 July 2014 to identify
whether the account holder is considered a US person (individual accounts) and
classify and document the account into different categories of account holder (entity
accounts).
Annually report certain details on US reportable accounts.
Ireland
911
Isle of Man
PwC contact
Kevin Cowley
Sixty Circular Road, 3rd Floor
Douglas IM1 1SA
Isle of Man
Tel: +44 1624 689689
Tax treaties
During 2013, the Isle of Man signed four more double tax agreements (DTAs) and two
more tax information exchange agreements (TIEAs). These latest agreements mean
that the Isle of Man has now entered into 41 tax cooperation agreements that meet
the Organisation for Economic Co-operation and Development (OECD) international
standard on tax co-operation and transparency.
In December 2013, the Isle of Man signed an intergovernmental agreement (IGA) with
the United States to improve international tax compliance and to implement the Foreign
Account Tax Compliance Act (FATCA). Information will be exchanged as of 2015.
Additionally, in October 2013,the Isle of Man became the first British dependency to
sign an agreement with the United Kingdom extending the automatic disclosure of tax
information. The agreement is modelled on the requirements of FATCA. The UK and Isle
of Man governments have agreed to start exchanging additional information as of 2016.

Companies resident in the Isle of Man are taxed on their worldwide income and are
required to file an annual income tax return reporting worldwide taxable profits
calculated in line with local legislation and practice.
A non-resident company incorporated outside the Isle of Man but having a place of
business or a permanent establishment (PE) on the Isle of Man will be taxed on the
profit attributable to the Isle of Man establishment.
The majority of companies pay income tax at 0% in the Isle of Man.
A 10% rate of tax applies to income received by a company from any of the following
sources:
Banking business.
Land and property in the Isle of Man (including property development, residential
and commercial rental or property letting, and mining and quarrying, but excluding
farming).
Retail business in the Isle of Man where the taxable profits are over the small
company limit of 500,000 Isle of Man pounds (IMP).
The general rules for the calculation of taxable income are the same whether a company
is liable to tax at 0%, 10%, or a combination of both rates. Both resident and nonresident companies are taxed on their income at the same rates.
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Isle of Man
Isle of Man
Unilateral relief from double taxation in respect of foreign-source income is given by way
of tax credit.
Local income taxes
There are no profit based taxes levied by local government in the Isle of Man. However,
commercial business rates are payable. Premises are assessed and given a rateable value
that forms the basis of the annual rates charge levied.
Corporate residence
A company incorporated in the Isle of Man is automatically resident for tax purposes and
must therefore file an annual income tax return, whether it pays tax at 0% or 10%.
A company that is incorporated elsewhere will be considered resident in the Isle of Man
if it is managed and controlled in the Isle of Man, and will be taxed on their worldwide
income accordingly. Managed and controlled is generally interpreted as being the place
where the board of directors meets, although this is not always conclusive.
In cases where a company is resident in a country with which the Isle of Man has a tax
treaty, then a tie-breaker may operate to determine residence.
Note that a company that is incorporated in the Isle of Man will not be resident if itcan
prove to the satisfaction of the Assessor that:
its business is centrally managed and controlled in another country
it is resident for tax purposes under the other countrys law
either it is resident for tax purposes under the other countrys law under a DTA in
which a tie breaker clause applies or the highest rate at which any company may be
charged to tax on any part of its profits in that other country is 20% or higher, and
there is a bona fide commercial reason for its residence status in the other country,
which is not motivated by a desire to reduce Isle of Man tax.
A place of business includes a PE, such as a branch office or shop, factory, workshop, or
mine. The definition of a PE is not set out in statute, and, in cases where the company is
resident in a country with which the Isle of Man has a DTA, the terms of the agreement
will determine the companys residence.
Other taxes
VAT is a transaction-based tax applied on the domestic supply of most goods and
services and is currently charged at a standard rate of 20%. VAT is designed to be a tax
borne by the final consumer, and there is a mechanism for businesses to recover VAT
incurred in a supply chain, subject to meeting certain conditions.
For VAT purposes, the Isle of Man forms a single VAT jurisdiction with the United
Kingdom, and the VAT rules are broadly identical. This means that VAT is charged on
supplies between Isle of Man and UK businesses as if they were domestic supplies.The
Isle of Man has its own tax authorities who work in conjunction with the UK tax
authorities.
Isle of Man
913
Isle of Man
Some supplies are charged at 0%, including food, books and publications, and public
transport, and there is also a 5% rate applied to domestic property repairs, amongst
others. Finally, some supplies are exempt from VAT, including insurance and financial
services, betting and gaming, education, and health.
In addition to VAT, the Isle of Man forms a common jurisdiction for customs and excise
duties with the United Kingdom, and, again, the rules are broadly identical. Customs
duties are levied on most goods imported from outside the European Union (EU) into
the Isle of Man, and there are various rates of duty that apply.Excise duties apply to
such things as alcohol, tobacco, and fuels, and there are various rates of duty that apply.
There is also a levy on commercial passenger flights known as Air Passenger Duty.
Property taxes
There are no property-related taxes for companies other than income tax payable at a
rate of 10% on their profits from the rental or development of land or property situated
in the Isle of Man, and business rates as detailed in the Taxes on corporate income section.
Transfer taxes
There are no capital transfer taxes in the Isle of Man.
Stamp taxes
There is no stamp duty payable in the Isle of Man.
Betting duty
There are no other transaction taxes in the Isle of Man other than betting duty on
gaming transactions, which is levied at differing rates of up to 15%, depending on the
nature of the gaming transaction and whether it is online or land-based.
National Insurance contributions
In addition to deducting National Insurance contributions from their employees

earnings, employers in the Isle of Man are required to make a secondary National
Insurance contribution in respect of each of their employees, depending on the
individuals circumstances.
The standard rate of secondary contribution is 12.8% on earnings over IMP 117 per
week, but reduced rates apply in certain circumstances where the employee is a member
of a pension scheme.
From 6 April 2012, in order to reduce the costs of taking on additional employees,
employers have been able to apply for an exemption from paying the secondary
contribution where certain conditions are met. This concession will be in force until 5
April 2015.
Branch income
The income of branches is taxed in the same way as other corporate income in the
Isle of Man. Foreign companies with branches in the Isle of Man will be taxed at the
appropriate rate on the profits attributable to the Isle of Man establishment.
The general rules for the calculation of taxable income are the same whether a company
is liable to tax at 0%, 10%, or a combination of both rates.
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Isle of Man
Isle of Man
Inventory valuation
Inventories are generally stated at the lower of cost or market value. Any method of
valuation that accords with sound commercial principles is acceptable for tax purposes,
provided it is adopted consistently at the beginning and end of the accounting period
and does not conflict with tax law. In practice, inventories are normally valued for tax
purposes at the lower of cost or net realisable value. A first in first out (FIFO) basis of
determining cost where items cannot be identified is acceptable, but not the base stock
method or the last in first out (LIFO) method.
In general, the book and tax methods of inventory valuation must conform.
Capital gains
There is no capital gains tax in the Isle of Man.
Dividend income
Dividends are taxed at the standard rate of 0%. Dividends received from Isle of Man
companies will not have suffered withholding tax (WHT).
Banking income
Licensed banks are taxed at 10% on income from deposit taking, and any related
activities, and interest earned from the investment of regulatory reserves only.
Income earned on capital and reserves in excess of the regulatory capital, group funded
lending, fiduciary deposits, assurance, insurance, custody, trust, and corporate services
are not banking business and are therefore taxed at 0%.
General expenses are allocated against 0% and 10% income streams on a pro rata basis.
Rental income
Companies with profits arising on rental income in respect of land or property situated
in the Isle of Man are charged to income tax at a rate of 10%. This applies whether or not
the company is resident in the Isle of Man.
Foreign income
Resident corporations are liable to tax on their worldwide income (albeit the relevant
rate of tax is often 0%). UK tax is relieved under the treaty with the United Kingdom by
way of tax credits. However, the treaty does not cover dividends or debenture interest.
Where a liability to tax at 10% arises, the Isle of Man grants unilateral relief from double
taxation in respect of all foreign-source income arising outside the United Kingdom by
way of tax credit.
Deductions
Relief is given in calculating the taxable profit of a company if the expense is incurred
in the normal course of the business and is incurred wholly and exclusively for business
purposes. However, certain expenses that are deductible in the computation of profits
are not allowable for tax purposes. These include depreciation, unpaid but accrued
pension and bonus payments, certain lease payments, and interest paid to non-Manx
resident lenders.
Depreciation
Depreciation charged in accounts in not allowable for tax purposes. Instead, relief for
depreciation is given using capital allowances based on a reducing-balance method.
Plant and machinery, tourist premises, industrial buildings, commercial buildings
within a designated area, fish processing buildings, and agricultural buildings and works
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Isle of Man
have an initial allowance of 100%. There are restrictions on allowances for expensive
motorcars.
Isle of Man government grants are not taken into account in determining the amount of
expenditure on which allowances may be given.
Upon disposal, allowances will be reclaimed on the resale value, restricted to cost.
Goodwill
No relief is given against trading profits for the purchase of goodwill.
Start-up expenses
Start-up expenses incurred in the three years prior to the commencement of

trading, which would have been deductible as a trading expense if incurred after the
commencement of trading, are treated as a loss arising in the year trading commenced,
and relief for these losses can be claimed subject to the normal loss-relief rules.
Interest expenses
Interest paid to lenders subject to Isle of Man tax is allowable in full. Interest paid to
lenders not subject to Isle of Man taxation is allowable if it is incurred in the normal
course of the business and is wholly and exclusively for business purposes. Only interest
charged at a reasonable commercial rate will be allowed as a deduction.
Bad debt
Relief against trading profits is only available in respect of specific bad debts. General
provisions are not allowable.
Broadly, trading companies are able to claim a deduction for donations made to
charities, subject to a maximum of IMP 15,000 or 1% of their taxable income, whichever
is greater.
Fines and penalties
No relief is available for any payments made in respect of fines or penalties, whether
related to income tax compliance or otherwise.
Taxes
Local income taxes paid are not deductible when calculating net taxable profit.
Losses can be carried forward indefinitely against future profits from the same trade.
Trading losses incurred may be carried back against preceding year profits. There are
additional rules that apply in the opening years of trade. Terminal losses in the last year
of trade can be carried back against profits for the previous three years of trading.
There is no transfer pricing regime in the Isle of Man. If, however, the Assessor of Taxes
is of the opinion that the main purpose, or one of the main purposes, of any transaction
is the avoidance or reduction of tax liability, assessments may be made to counteract that
avoidance or reduction of tax liability.
For details of WHTs, please see the Withholding taxes section.
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Isle of Man
Group taxation
Trading losses and excess capital allowances may be surrendered (subject to certain
restrictions) between 75% affiliates resident in the Isle of Man. Similar concessions are
available to members of a consortium, but only a fraction of the loss or excess may be
set-off, that fraction being equal to the members share in the consortium in the relevant
year of assessment.
Transfer pricing
There is no transfer pricing regime in the Isle of Man. If, however, the Assessor of Taxes
is of the opinion that the main purpose, or one of the main purposes, of any transaction
is the avoidance or reduction of tax liability, assessments may be made to counteract that
avoidance or reduction of tax liability.
Thin capitalisation
There is no specific thin capitalisation rule in the Isle of Man.

There is no CFC regime in the Isle of Man.

In view of the low rate of income tax in the Isle of Man, there are no special tax
incentives available.
Foreign tax credit
See Foreign income in the Income determination section for a description of foreign tax
credits.
Withholding taxes
WHT should be deducted from certain payments made to non-residents by Isle of Man
resident companies as follows:
Rent from Manx land and property: 10% if paid to a company, 20% if paid to an
individual.
Dividends: WHT is not required.
Loan interest and royalties: WHT is generally not required, but there are certain
exceptions that may apply.
Other: The Assessor of Income Tax in the Isle of Man has the power to require WHT,
at a rate determined by the Assessor (typically 20%), on payments of taxable income
made to a non-resident (e.g. payments made to non-resident sub-contractors).
Tax administration
Taxable period
An accounting period for tax filing purposes can be no more than 12 months.
Tax returns
All companies are required to submit income tax returns on an accounting-period basis,
whether they are liable to tax at 0% or at 10%. The tax return is due for submission
one year and one day following the end of an accounting period. Where the financial
statements cover more than 12 months, two (or more) returns may be required.
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As of April 2015, companies will be required to file their income tax returns online.
Fixed rate penalties apply if returns are filed late. The Assessor of Taxes also has the
powers to raise a default assessment where a tax return has not been filed.
Payment of tax
Payment of tax is due within one year and one day of an accounting period end. Interest
is charged on tax paid late.
Tax audit process
Companies are subject to an audit of their accounts on an annual basis unless they
qualify for exemption under the regulatory codes and guidelines issued by the Isle of
Man General Registry.
Where a company qualifies for exemption from the audit requirement, it must make an
election during the course of the relevant financial period.
All Isle of Man registered companies are required to file an annual return to the Isle of
Man Companies Registry.
Generally, the Assessor of Taxes may make an enquiry into a tax return no later than 12
months from the date that the tax return is delivered to the Assessor.
If, however, the Assessor discovers that income tax has not been assessed that should
have been assessed, the Assessor is able to make an assessment of that tax within a
period of four years from the end of the relevant accounting period.
The Assessor also has powers to require the production of documents.
The Isle of Man government is focussed on delivering openness and transparency

across all areas of Isle of Man taxation. The government and the tax authorities work
closely with international bodies such as the EU Code of Conduct group and the EUs
Economic and Financial Affairs Council to ensure that the Island is fully compliant with
international standards in areas such as tax transparency and exchange of information.
The Island is already recognised on the OECD White List as being in the top tier of
countries for transparency and information exchange.
The Isle of Man is focussed on reducing the avoidance of income tax and national
insurance contributions of individuals using personal service companies and has
introduced new legislation which came into effect on 6 April 2014 to tackle this issue.
There is also more focus on the taxation of dividends paid to shareholders, particularly
in relation to whether a payment is a bona fide dividend or disguised remuneration.
Other issues
Tax treaties
During 2013, the Isle of Man has signed four more DTAs and two moreTIEAs. These
latest agreements mean that the Isle of Man has now entered into 41 tax cooperation
agreements that meet the OECD international standard on tax co-operation and
transparency.
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Isle of Man
In December 2013, the Isle of Man signed an IGA with the United States to improve
international tax compliance and to implement FATCA. Information will be exchanged
as of 2015.
Additionally, in October 2013, the Isle of Man became the first British dependency to
sign an agreement with the United Kingdom extending the automatic disclosure of tax
information. The agreement is modelled on the requirements of FATCA. The UK and Isle
of Man governments have agreed to start exchanging additional information as of 2016.
There are several different entities through which businesses may operate in the Isle
of Man. These include companies, limited liability companies, partnerships, limited
partnerships, and protected cell companies.
Isle of Man
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Israel
PwC contact
Doron Sadan
PwC Israel, Kesselman & Kesselman
Trade Tower
25 Hamered Street
Tel-Aviv 68125
Israel
Tel: +972 3 795 44 60
Effective 1 January 2014, the regular corporate tax rate increased to 26.5% from the
25% rate that was in force for 2013.
Tax rates with regard to approved enterprise (AE) income, whichis taxed at flat rates
further to the 2011 Amended Law, have been increased, effective 1 January 2014, to 9%
for area A and 16% for the rest of the country.
Currently, under domestic tax law, a withholding tax (WHT)rate of 15% applies
for distributions of AE profits earned during the benefit period. Effective 1 January
2014, aWHT rate of 20% generally shall apply to dividends paid from profits of an AE
governed by the 2011 Amended Law, subject to a reduced rate further to an applicable
tax treaty.

Israel-incorporated companies and foreign companies that have a branch presence
in Israel are both subject to Israeli corporate tax. An Israeli-resident entity is subject
to Israeli corporate tax on worldwide income while a non-resident entity is subject to
Israeli corporate tax only on income accrued or derived in Israel. Income sourcing rules
determine when income is to be considered from an Israeli source.
As of 1 January 2014, the corporate tax rate is 26.5% (previously 25%).
AEs are subject to reduced rates of tax depending upon the level of foreign ownership
and location (see the Tax credits and incentives section).
Local income taxes
Israel does not impose local taxes on corporate income.
Corporate residence
The following are considered to be resident in Israel:
A company incorporated in Israel.
A company whose business is managed and controlled from Israel.
In the absence of a definition of the term management and control either in Israeli
legislation or a direct discussion of this term by the Israeli courts, it may be difficult to
determine whether a company that is incorporated outside of Israel shall be viewed
as managed and controlled from Israel. This is a complex subject that needs to be
addressed on a case-by-case basis. When an entity is both an Israeli tax resident and a
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resident of a foreign jurisdiction that is party to an income tax treaty with Israel, most
treaties provide a tiebreaker test in the determination of an entitys taxresidency.
Foreign resident entities might be exempt from corporate tax to the extent that its
activities do not constitute a PE under the tax treaty applicable between Israel and the
foreign residents country of residency.
Whether a non-resident has a taxable presence under Israeli domestic tax law is far less
clear than the definition of PE under a relevant tax treaty. There is no detailed legislation
or Israeli court decisions that directly address this issue. In general, where there is no tax
treaty protection, a non-resident is subject to tax on income accrued or derived in Israel,
which is a taxation threshold lower than the PE criterion.
Other taxes
The current rate of VAT is 18%.
Exports of goods and certain services and various other transactions are zero-rated,
and certain transactions are exempt. Banks and other financial institutions pay VATequivalent taxes at the rate of 18% based on their total payroll and on profits. Not-forprofit organisations pay VAT-equivalent tax (wage tax) at the rate of 7.5% of their total
payroll.
Customs duties
Customs duty is imposed on certain products imported into Israel. The rates of duty
depend upon their classification according to the Harmonised Customs Tariff and the
country of origin. Israel has concluded free-trade agreements with the United States,
Canada, Mexico, the European Union (EU), and the European Free Trade Association
(EFTA).
Excise taxes
The government imposes excise taxes on a variety of goods (e.g. fuel, tobacco). The
excise taxes are levied item-by-item.
Municipal tax
Municipal tax is levied annually on buildings by local municipalities based on the size,
location, and purpose of the property.
Real estate - capital gains
Capital gains on real estate are subject to the Land Appreciation Tax Law. The law relates
to any real estate in Israel, including houses, buildings, and anything permanently
fixed to land; real estate rights; and leases for 25 years or more. Tax calculations closely
follow the calculation of company tax on capital gains (see Capital gains in the Income
determination section).
The tax rate on the real gain is the applicable corporate tax rate (26.5% in 2014).
A special tax rate may apply with respect to real estate acquired prior to 1960.
Transfer tax
The purchaser of real estate is generally subject to acquisition tax at rates up to

a maximum of 10% (the highest rate applies when the purchase price exceeds
approximately 15.5 million Israeli shekels [ILS]).
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Stamp taxes
There are no stamp taxes imposed in Israel.
Employers national insurance contributions
Employers are obligated to pay national insurance contributions based on a percentage

of each employees income on a monthly basis. Employers are responsible for
withholding employees contributions from wages and remitting these together with
the employers own contributions. The employers contribution rates (current as of April
2014) for Israeli-resident employees are 3.45% up to monthly income of ILS 5,453 and
6.75% on the difference between ILS 5,454 and the maximum monthly income of ILS
43,240.
For non-resident employees, the employer rates are significantly lower and are 0.49% up
to monthly income of ILS 5,453 and 1.91% on the difference between ILS 5,454 and the
maximum monthly income of ILS 43,240. The minimal National Insurance payments for
non-resident employees do not provide any retirement benefit for the non-resident but
generally provides a certain element of work accident coverage.
When an irregular salary payment in excess of one quarter of the usual salary is made,
special provisions apply to the computation of social charges by which the application of
this payment is equally attributed to the current month and to the past 11 months.
Israel has social security totalisation agreements with 14 countries that may allow for
an exemption from Israeli National Insurance throughout the employment period of the
employee in Israel.
Branch income
A branch is liable for tax at the standard corporate rate on Israel-source income. No tax
is withheld on transfers of profits to the foreign head office unless the branch is an AE
(see the Tax credits and incentives section).
In general, the annual results (i.e. the excess of income over expenses or vice versa) of
an Israeli company or branch, as detailed in the taxpayers financial statements, form the
basis for computing the taxable income of the business.
The base amount is then adjusted pursuant to the provisions of the tax law to arrive at
taxable income.
Inventory valuation
Inventories are generally valued at the lower of cost or market value (i.e. net realisable
value). Conformity is required between book and tax reporting of inventory. The first in
first out (FIFO) or weighted-average basis of valuation is acceptable; the last in first out
(LIFO) method is not accepted.
Capital gains
Capital gains tax is generally payable on capital gains by residents of Israel on the sale of
assets (irrespective of the location of the assets) and by non-residents on the sale of the
following:
Assets located in Israel.
Assets located abroad that are essentially a direct or indirect right to an asset or to
inventory, or that are an indirect right to a real estate right or to an asset in a real
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estate association, located in Israel. Taxation applies only in respect of that part of the
consideration that stems from the above property located in Israel.
Assets that are a share or the right to a share in an Israeli entity.
Assets that are a right in a foreign resident entity that is essentially a direct or indirect
right to property located in Israel. Taxation applies only with respect to that part of
the consideration that stems from the property located in Israel.
The cashless transfer of rights and assets arising from certain mergers, spin-offs, and
asset transfers may be exempt from tax upon meeting various requirements.
Determination of the capital gain - Computation of real gain and inflationary

components
Company tax on capital gains is imposed on the disposal of fixed and intangible assets
where the disposal price is in excess of the depreciated cost.
For tax purposes, the capital gain is generally calculated in local currency, and there are
provisions for segregating the taxable gain into its real and inflationary components.
The inflationary amount is the original cost of the asset, less depreciation (where
applicable), multiplied by the percentage increase in the Israeli consumer price index
(CPI) from the date of acquisition of the asset to the date of its sale. The inflationary
amount component is exempt to the extent it accrued after 1 January 1994 and is
generally subject to tax at the rate of 10% if it accrued before that date.
The real gain component, if any, is taxed at the rates set out further below.
A non-resident that invests in capital assets with foreign currency may elect to calculate
the inflationary amount in that foreign currency. Under this option, in the event of a
sale of shares in an Israeli company, the inflationary amount attributable to exchange
differences on the investment is always exempt from Israeli tax.
Sale of assets (including publicly and non-publicly traded shares)
The real gain is generally subject to tax at the corporate tax rate applicable in the year of
the gain (26.5% in 2014). Special exemptions may apply for non-residents (see further
below).
Special rule for retained profits upon sale of shares
In the case of a disposal by corporations of: (i) non-traded shares and (ii) traded shares
when the seller generally directly or indirectly holds at least 10% of the sold Israeli
company during the 12-month period preceding the sale, special provisions apply to
such part of the real gain that is attributed to the sellers share of retained profits. The
share of retained profits is the amount of gain equal to the proportional part of the
retained profits of the company that the seller of the shares would have rights to by
virtue of those shares. Detailed rules apply in determining this profit component.
Generally, the sellers proportionate part of the companys retained profits is taxed as
if this amount had been received as dividends immediately before the sale (i.e. at a tax
rate of 0% in the case of an Israeli-resident corporate shareholder or at a tax rate of 30%
when the seller is a non-Israeli resident corporate shareholder that generally holds 10%
or more in the rights of the Israeli company [it is unclear if this 30% rate may be reduced
by an applicable tax treaty]). The part of the retained profits that is attributed to the
period ending on 31 December 2002 is subject to tax at the rate of 10%.
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Special exemptions for non-residents
Publicly traded Israeli shares
Non-residents corporations not having a PE in Israel are exempt from tax on capital
gains from the sale of shares of an Israeli company traded on the Israeli stock exchange
or on a foreign stock exchange. Certain exceptions apply.
Where the shares were purchased by the non-resident prior to being publicly traded,
subject to the availability of exemptions detailed below, capital gains tax might apply for
the portion of the gain that was generated up to the day of the shares public listing but
not to exceed the capital gain actually arising upon the sale of the share and provided
that the value on the day of public listing was more than their value on the date of
purchase and that the proceeds upon sale exceeded the value on the date of purchase.
Non-publicly traded shares
For purchases after 1 January 2009, an exemption exists under domestic law for
non-residents, regardless of their percentage holding in an Israeli company, from
gains derived from the sale of securities not traded on a stock exchange, provided the
The investment is not in a company in which, on the date of its purchase and in the
two preceding years, the main value of the assets held by the company, directly
or indirectly, were sourced from an interest in (i) real estate or in a real estate
association (as defined in the Income Tax Ordinance [ITO]); (ii) the use in real estate
or any asset attached to land; (iii) exploitation of natural resources in Israel; or (iv)
produce from land in Israel.
The capital gains were not derived by the sellers PE in Israel.
The shares were not purchased from a relative (as defined in the ITO) or by means of
a tax-free reorganisation.
A non-resident company shall not be eligible for this exemption if Israeli residents are
controlling shareholders or benefit or are entitled to 25% or more of the income or
profits of the non-resident company, either directly or indirectly.
For shares purchased between 1 July 2005 and 1 January 2009, more restrictive
conditions apply in order to be eligible for the exemption. Detailed rules apply.
Treaty exemption
Non-residents may qualify for a tax treaty capital gain exemption, depending upon the
particular circumstances and the provisions of the applicable tax treaty (e.g. in some
tax treaties, no capital gains exemption is allowed where the holding in the sold Israeli
company exceeds a certain percentage).
When assets are attributable to an Israeli PE or are real estate rights (including rights in
a real estate association), a treaty exemption will generally not be available.
The Israel Tax Authority (ITA) is very sensitive to treaty shopping, and it will be
necessary to demonstrate to the ITA that the foreign holding entity has business
substance in its country of residence and that the structuring of the holding through that
entity was not implemented for tax treaty benefit purposes.
Capital losses
Capital losses may offset all capital gains (including gains from Israeli or foreign
securities) and gains from the sale of property (whether Israeli or foreign source).
Where the capital loss is from a non-Israeli asset (including when carried forward into
future years), the loss must first be offset against foreign source capital gains.
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Capital losses derived from the sale of securities may also be offset against interest and
dividend income generated from the sold security and also against interest and dividend
income received from other securities (where the income was not subject to tax of more
than 25%).
Capital losses from the sale of shares are generally reduced by any dividends received
by the selling corporation during the 24 months preceding the sale, unless tax on the
dividends of at least 15% was paid.
Capital losses can generally be carried forward indefinitely and set-off only against
capital gains.
Exit tax
When an Israeli tax resident, including a company, ceases to be an Israeli resident for
tax purposes, its assets are deemed to have been sold one day before it ceased being an
Israeli resident. Although exit tax is primarily applicable to individuals, this might also
apply to corporations incorporated outside of Israel whose management and control is
transferred from Israel to another jurisdiction at a particular time.
Any gain attributable to the deemed sale of assets may be paid on the day the residency
ceased or it may be postponed until the date the assets are actually realised. When the
tax event is deferred to the sale date of the assets, the amount of the Israeli capital gain
portion is determined by taking the real capital gain at the time of realisation, multiplied
by the period of ownership from the day on which it acquired the asset until the day it
ceased being an Israeli resident, divided by the entire period from the day of the assets
acquisition until the day of realisation. The Minister of Finance is authorised to prescribe
provisions for the implementation of the exit tax including provisions for the prevention
of double taxation and the submission of tax reports, but no provisions have yet been
issued.
Dividend income
Received by an Israeli-resident company
Dividends received by an Israeli-resident company from another Israeli-resident

company that originate from income accrued or derived in Israel are exempt from
corporate tax, except for dividends paid from income of an AE (see the Tax credits and
incentives section). This affords the opportunity to transfer after tax profits within an
Israeli group of companies for further investment.
Dividends received by an Israeli-resident company from a non-resident company, as well
as dividends received from an Israeli company that arise from foreign source income of
the distributing company, are generally taxable for the receiving company at the rate of
26.5%. Under certain circumstances, the receiving company may elect to be taxed on
such dividends at the corporate tax rate, in which case it will also be entitled to a foreign
tax credit with respect to corporate taxes paid by the company distributing the dividend
(i.e. an underlying tax credit).
Received by a non-resident shareholder
Dividends received by a non-resident shareholder from an Israeli company are generally

subject to tax at the rate of 25% (30% if paid to a 10% or more shareholder), subject to a
reduced rate of tax under an applicable tax treaty.
Several of Israels tax treaties have very beneficialWHT rates for dividends being paid
from Israel. The ITA is very sensitive to treaty shopping, and it will be necessary to
demonstrate to the ITA that the foreign holding entity has business substance in its
country of residence that will support its residency for treaty purposes and that the
structuring of the holding through that entity was not implemented for tax treaty benefit
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Israel
purposes. Furthermore, many of the treaties contain a beneficial ownership clause as a
condition to enjoying the treaty WHT rates.
Interest income
Received by an Israeli-resident company
Interest income received by an Israeli-resident company is subject to the regular

corporate tax rate (26.5% in 2014).
Received by a non-resident
Interest income received by a non-resident company is generally subject to tax at the rate
of 26.5% or subject to a reduced rate of tax under an applicable tax treaty.
Interest received by a non-resident from deposits of foreign currency with an Israeli bank
is exempt from tax, subject to certain conditions.
Rent/royalties income
Rent and royalty income, less allowable deductions for tax purposes, is subject to tax at
the regular corporate tax rate (26.5% in 2014).
Partnership income
From an Israeli tax perspective, a partnership is, in principle, a fiscally transparent

vehicle. Accordingly, Israeli tax law does not tax partnerships as such; however,
generally, each partner is taxed in respect of its share of the partnership income, with
the taxable income allocated to a corporate partner taxed at the regular company tax
rate. Consequently, the actual distribution of partnership income to a partner is a nontaxable event.
Foreign income
An Israeli-resident company is liable for tax on its worldwide income. Double taxation
is avoided by way of a foreign tax credit mechanism that also applies unilaterally in the
absence of an applicable double taxation treaty (DTT) (see the Tax credits and incentives
section).
Under the controlled foreign company (CFC) regime in Israeli tax law, an Israeli
company or individual may be taxed on a proportion of the undistributed profits of
certain Israeli-controlled non-resident companies in which the Israeli shareholder has a
controlling interest (10% or more of any of the CFCs means of control). See Controlled
foreign companies (CFCs) in the Group taxation section for more information.
Deductions
Costs incurred by a branch or a company are deductible as a business expense for tax
purposes where they are incurred wholly and exclusively in the production of income.
The amount of the deduction may be limited or disallowed further to other ITO
provisions and income tax regulations.
Depreciation
The ITO and tax regulations prescribe standard annual rates of tax depreciation for
assets serving in the production of taxable income. Depreciation is generally on a
straight-line basis for industrial and other enterprises based on the specific asset types as
set out in the tax regulations.
Accelerated rates of depreciation may be available in regard to certain activities (such as
industrial) where there is unusual wear and tear due to additional shifts of equipment
use. Detailed rules apply.
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Depreciation is not permitted on land.
Goodwill
In general, under Israeli tax regulations, goodwill purchased after 1 July 2003 may be
amortisable by the purchaser over a ten-year period (10% annually).
Organisational and start-up expenses are generally not immediately deductible but,
rather, are to be capitalised for tax purposes.
Interest expenses
Interest expenses incurred in the production of taxable income are generally deductible.
Since there are no thin capitalisation rules in Israel, there are no specific debt-toequity ratio requirements and there is no limit to the amount of debt that may be used
in establishing a branch or local company operation in Israel. Interest and linkage
payments arising from late tax payments are generally not deductible for tax purposes.
Interest charges between related parties must be set based on transfer pricing principles.
Detailed rules apply.
Bad debt
Provisions for bad debts are deductible in the year in which it is evident that the debt has
become irrecoverable. Detailed rules apply for making this determination.
Charitable contributions do not constitute a regular business expense. However, a tax

credit may be available (see Tax credit for donations in the Tax credits and incentives
section).
Research and development (R&D) costs
Special tax relief is provided under the ITO for R&D costs incurred (see the Tax credits
and incentives section).
Pension expense
Pension fund contributions made to recognised funds are generally deductible for the
employer, provided, inter alia, the contributions do not exceed a prescribed level and are
effected on a regularbasis.
Directors fees
Payments for commercially justifiable director fees should generally be deductible.
Accrued expenses
Payments are generally deductible on an accrual basis for commercially justifiable

expenses representing arms-length consideration. However, when payments made to
foreign residents attract WHT, the deduction will generally be allowed, provided the
payment is effected within the tax year. Alternatively, such payments may be deductible
in a tax year if the applicable WHT is deducted within three months after the tax yearend and remitted to the tax authorities within seven days of the deduction, together
with index linkage differences and interest accrued since the year-end.
However, accrued expenses for severance pay, vacation pay, recreation pay, holiday
allowances, and sick pay are not deductible, even if there is an obligation to make these
payments. They are only deductible in the year in which they are actually paid to the
beneficiary or to a recognised fund.
Based on Israeli court decisions, contingent liabilities may be deductible for tax purposes
upon satisfying the following criterion: (i) according to accepted accounting principles,
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the taxpayer must include in its balance sheet a suitable provision for the potential
liability; otherwise, its income will be considered to have been incorrectly reported; (ii)
the circumstances of the case and the technical means according to accepted accounting
practice must be provided, enabling a determination of the amount of the liability; and
(iii) there is a high probability that the potential debt with respect to which the provision
was made will become an absolute debt.
Excess (disallowed) expenses
Israeli tax law disallows the partial deduction of certain employee-related expenses
incurred by a company doing business in Israel. These include so-called excess
expenses. Examples of these are (i) payments for business, travel, and meals that
exceed allowable deductions; (ii) expenses incurred in respect of a benefit granted by
an employer to its employees but that cannot be attributed to a particular employee; and
(iii) certain vehicle maintenance expenses (all expenses relating to a company owned
vehicle that was also designated for use of an employee are generally tax deductible as
the employee is taxed in this regard upon an imputed amount).
A company is obligated to pay a monthly advance on excess expenses in the amount of
45% of the excess expense. The amount paid as an advance in respect of excess expenses
is deemed a payment on account of the regular tax advances and payments that the
company must pay for corporate tax and is offset against them, but it is not refundable
(i.e. when a taxpayers tax liability in a given year is lower than the excess expense
advances paid, the unutilised amount shall be carried forward to future tax years).
Detailed rules apply.
Fines and penalties
Payment of fines and penalties are generally not deductible.
Taxes
Municipality taxes incurred in the production of taxable income are generally

deductible.
Business losses can be offset against income from any source in the same year. Loss
carrybacks are not allowed. Losses may be carried forward and set-off without time limit
against income from any trade or business or capital gains arising in the business, but
not against income from any other source.
Payments of interest, royalties, and management fees to foreign affiliates are deductible
if based on normal commercial terms and practices and evidenced by an inter-company
agreement and transfer pricing documentation. Where such payments attract WHT,
the deduction will only be allowed where such tax has been withheld and paid in
accordance with certain requirements. All cross-border payments to foreign affiliates
for goods and services have to comply with arms-length pricing standards (see Transfer
pricing in the Group taxation section).
Group taxation
As a general rule, a parent company and its subsidiaries may not submit consolidated
tax returns. Only groups of industrial companies in the same line of business, as well
as parent companies that control industrial companies in the same line of business and
have at least 80% of their assets invested in industrial companies, are eligible to file
consolidated tax returns.
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Transfer pricing
The ITO and its accompanying regulations contain elaborate transfer pricing provisions,
including the arms-length principle, that apply to any international transaction in which
there is a special relationship between the parties to the transaction and for which a
price was settled on for property, a right, a service, or credit. In general, the regulations
are based upon internationally recognised transfer pricing principles (i.e. United
States tax regulations or Organisation for Economic Co-operation and Development
[OECD] rules). These regulations generally require the taxpayer to support the pricing
of international transactions with a transfer pricing study, inter-company agreements,
and other documentation. In accordance to Israeli High Court Rulings, the terms of
transaction conducted between related parties should be set in written contracts.
Since transfer pricing is a subject that receives considerable attention from the ITA in
its examination of related inter-company transactions, transfer pricing principles and
documentation requirements should be carefully adhered to.
A taxpayer is required to include in its annual corporate tax return a special form
entitled Declaration of International Transactions providing details for every crossborder transaction conducted with related parties. The taxpayer must sign the form,
which includes a declaration that the transactions with related parties abroad were in
accordance with the arms-length principle, as defined in the Israeli transfer pricing
regulations promulgated under the ITO. As a result of this form and declaration, the
importance of appropriate transfer pricing documentation hasincreased.
Thin capitalisation
Israel has no statutory or regulatory provisions or other rules concerning thin

capitalisation for tax purposes as exist in certain other jurisdictions. Since there are no
thin capitalisation rules and Israel has no specific debt-to-equity ratio requirements, a
company may be financed with minimum capital, and there is no limit to the amount of
debt that may be used. Transfer pricing principles shall generally apply with regards to
interestcharges.
Under the CFC regime in Israeli tax law, an Israeli company or individual may be taxed
on a proportion of certain undistributed profits of certain Israeli-controlled nonresident companies in which the Israeli shareholder has a controlling interest (10% or
more of any of the CFCs means of control). A CFC is a company to which a number
of cumulative conditions apply, including that most of its income or profits in the tax
year were derived from passive sources (e.g. capital gains, interest, rental, dividend,
royalties) and such passive income has been subject to an effective tax rate that does not
exceed 15%.

Foreign tax credit
Double taxation is avoided by way of a foreign tax credit mechanism that also applies
unilaterally in the absence of an applicable DTT. The foreign tax credit is limited to the
Israeli corporate tax payable with respect to the same income. Foreign-sourced income is
divided into baskets (i.e. categories) on the basis of the income source (e.g. dividends,
business income), and a particular credit limitation applies to each basket. Excess
uncredited foreign income can be carried forward for the subsequent five tax years.
Approved enterprises (AEs)
AE status, which provides for cash and tax benefits, may be granted under the Law
for the Encouragement of Capital Investments (the Law) to enterprises that increase
the productive capacity of the economy, improve the balance of payments, or provide
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929
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new employment opportunities. Qualification conditions include, inter alia, that the
enterprise is an industrial enterprise as defined in the Law. It is important to examine if
the contemplated business operations in Israel qualify as an industrial enterprise under
the Law. R&D services performed in Israel on behalf of a foreign resident may qualify as
an industrial enterprise, provided that an approval is received from the Office of Chief
Scientist.
The extent of the benefits provided under the Law also depends upon the geographical
location in which the industrial enterprise is located.
New AE programmes and expansion of prior existing AE programmes are governed by
the Law, which underwent a major amendment on 29 March 2005 (2005 Amended
Law) and also on 29 December 2010 (2011 Amended Law), effective for 2011 and
thereafter.
AE programmes that commenced their period of benefits generally prior to 2005 may
still be subject to the Laws provisions prior to these amendments.
The 2011 Amended Law is intended to simplify the manner of taxation that applies
to income generated from an AE by applying a uniform tax rate for all AE-generated
taxable income. Prior to these amendments, as summarised below, the corporate tax
rate applicable to an AE depended upon many factors, including the tax route selected,
the geographical area in which the industrial site is located, the level of foreign
investment ownership, and attribution of taxable income between different tiers of AE
plans further to complex formulas.
It should be noted that the 2011 Amended Law shall apply for income generated by an
AE during 2011 and thereafter. Transition rules allow AE owners to elect to continue
with the AE tax benefits allowed for under the Law prior to these amendments or to
choose, in any tax year, to commence to apply the new provisions of the Law and to
waive the remaining benefit period those AE benefits provided under the Law prior to its
amendment. It should also be noted that once such an election is made by the taxpayer
to implement the new provisions, it may not be altered in future tax years.
This general overview will address the Law as applicable prior to the 2011 Amended Law
as well as setting forth the material tax law changes under the 2011 Amended Law.
Cash grants (also applicable under the 2011 Amended Law)
AEs located in certain development areas are eligible for cash investment grants,
which vary according to the geographic location of the enterprise. Grant amounts and
conditions are subject to governmental change from time to time.
AE tax incentives prior to 2011 Amended Law

Reduced tax rates
In addition to financial incentives for the establishment or expansion of an AE, various

tax incentives are available once a new AE or expansion thereof is operational.
The reduced tax rates generally apply for a seven-year benefit period (or a ten-year
period in certain cases of local companies established in development area A or in the
case of a foreign investor company, see below), commencing with the year in which the
AE first generates taxable income.
Generally, this seven or ten-year period of benefits is limited to 12 years from the year
of implementation. For AE plans governed prior to the 2005 amendment to the Law,
the period of benefits cannot extend beyond 12 years from the year the enterprise
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commenced its operations or beyond 14 years from the year in which approval of status
as an AE was granted, whichever is earlier.
Locally owned companies
Income derived by a company from an AE during the maximum seven-year period of

benefits is generally subject to company tax at a rate of 25%.
A WHT rate of 15% (subject to a possible reduction under a tax treaty) applies to
dividends paid from profits of an AE earned during the benefits period, if distributed
either during the benefits period or during the subsequent 12 years. Note that dividends
from non-AE profits that are paid to non-residents are generally subject to a maximum
30% WHT rate that may be further reduced under the terms of a relevant tax treaty.
Foreign investors companies (FICs)
A company that qualifies as an FIC is entitled to enhanced tax benefits on AE income.

In general, an FIC is a company having more than 25% of its share capital (in terms of
rights to shares, profits, voting, and the appointment of directors) and its combined
share capital and investor loan capital owned by foreign residents. To qualify for FIC
status, a foreign investor must make an investment in the company of at least ILS 5
million.
An FIC benefits from reduced company tax on the profits of an AE for a period of ten
years (instead of seven years) commencing with the first year in which taxable income is
generated. The total period of benefits is restricted as discussed above.
An FIC enjoys reduced company tax rates applicable to its AE income as shown below:
Percentage of foreign ownership
Over 25% but less than 49%
49% or more but less than 74%
74% or more but less than 90%
90% or more
Company tax rate (%)

25
20
15
10
The foreign ownership percentage is annually determined as the lowest level retained
during the specific tax year.
Dividends paid by an FIC out of the profits of its AE are subject to tax in the hands of the
recipient at the rate of 15%, without limitation as to their distribution date, provided the
dividends are distributed out of AE profits derived during the benefits period.
Alternative system of tax benefits for AEs (tax holiday)
Companies with new or expanding AEs may elect to forego all government cash
grants and receive, instead, a total exemption (i.e. tax holiday) from company tax on
undistributed profits of the AE for ten years in development area A, for six years in
development area B, and for two years in development area C. The area of incentive is
the area in which the companys facilities are located.
The tax holiday provides an Israeli tax exemption so long as the AE profits generated
in the exemption period are retained within the company. Should a subsequent
distribution of such profits occur, company tax and dividend WHT is imposed on the
income distributed, at the rates which would have been applicable if the tax holiday
had not been elected (i.e. 25% or at a lower rate if the company is an FIC with a foreign
ownership percentage of 49% or more during those years).
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Under certain anti-avoidance provisions applicable to tax holidays, amounts paid or
credited directly or indirectly by an AE to a relative, a major shareholder, or to a related
entity controlled by either a relative or a major shareholder may be treated as a deemed
taxable distribution of profits by the AE.
Ireland track and strategic investment track
For companies having an AE in development area A that seeks to distribute dividends

while maintaining a low company and dividend tax burden, there is an Ireland track
under which the aggregate Israeli corporate and dividend WHT for a foreign resident
shareholder is 15% and for an Israeli resident shareholder is 24.8%. This track is in
contrast to the standard alternative benefit track discussed above, which provides a tax
holiday, provided that profits remain undistributed.
Furthermore, a strategic investment track allows for an exemption during the benefit
period from company tax and dividend WHT for a company having (depending on its
location within area A of the country) very significant investment and revenue levels.
This means that during the benefits period, a company eligible for benefits from income
accrued under this track will have no tax liability whatsoever for its productive activity
arising from such investment and for the distribution of profits. Detailed rules apply to
these tracks.
Qualifying for AE status

Minimal investment amount
For entitlement of tax benefits under the alternative benefit track, there must be a
certain minimal investment amount (minimum qualifying investment) towards
purchasing productive assets (e.g. machinery and equipment, but not buildings) within
three years.
Automatic approval
Where an investment project meets all of the eligibility criterion under one of the
alternative tracks (standard alternative track, Ireland track, or strategic investment
track) as set out in the Law and in regulations to be issued, a project will automatically
qualify for the AE taxation benefits under the Law with no need for prior approval from
the ITA (i.e. a green lane).
Interruption of entitlement to benefits
Under the Law, following its amendment in 2005, the examination as to whether an
owner is entitled to enjoy AE benefits for a tax year is determined on a year-by-year basis.
Consequently, if in any tax year during the benefit period a company does not meet
any of the conditions required under the Law, then for that tax year it is not entitled to
benefits. However, if the company again meets the conditions during the benefit period,
the company is entitled to the benefits during the remainder of the benefit period.
Mixed enterprises
Special rules govern the allocation of taxable income of mixed enterprises. These
are essentially entities that derive only part of their income from an AE or entities
that operate under a number of approvals relating to separate investment projects.
The company tax payable in respect of income from each part of a mixed enterprise is
separately computed, and a composite WHT is applicable to dividends distributed by a
mixed enterprise.
Neutralisation of assets
Assets used in the operation of an enterprise that are not part of an AE are regarded as
non-approved assets. Consequently, turnover that is deemed to be generated from the
non-approved assets will result in non-AE income that should be taxed at the regular
Israeli corporate tax rate applicable for the relevant year.
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AE 2011 Amended Law overview
In contrast to the FIC regime under the pre-2011 Law, under the provisions of the 2011
Amended Law, acompany may elect to be taxed in regard to its AE incomeat flat tax
rates, which vary depending upon the location of the AE. This is a major change in
policy from the pre-Amendment FIC route discussed above, which encouraged foreign
investment in Israeli companies having AE programs by providing for increasingly
reduced rates (e.g. 10% rate where 90% foreign owned). Further to the amendments,
there will no longer be available any deferral of corporate tax for undistributed profits
(i.e. cancellation of the tax holiday route) nor will there be any additional AE tax
benefits specifically linked to foreign investment. Notwithstanding the cancellation of
the tax holiday route, a distribution or deemed distribution of profits that were taxexempted under the tax holiday route before the legislative change had taken effect shall
continue to be subject to company tax at the applicable AE reduced rates, in addition to
the dividend WHT that will be imposed on the income distributed.
The uniform tax rates legislated under the 2011 Amended Law as of 2014 and thereafter
are9% for a company located in area A and 16% if located in the rest of the country.
The 2011 Amended Law shall apply for income generated by an AE during 2011 and
thereafter. Transition rules allow current AE owners to elect to continue with the AE tax
benefits allowed for under the Law prior to the 2011 Amendments or to choose in any
tax year to commence to apply the new provisions of the Law and to waive the remaining
benefit period for those AE benefits provided under the Law prior to its amendment.
Once such an election is made by the taxpayer to implement the new provisions, it may
not be altered in future tax years. According to the approach of the ITA, the election in
regard to the application of the Amended Law must be filed by 31 May of the relevant
tax year (e.g. 31 May 2015 in order to elect the 2011 Amended Law for 2015).
Dividends paid from generated profits from an AE governed by the 2011 Amended Law
are subject to a WHT rate of 20% for distributions, subject to areduction under the
terms of an applicable tax treaty.
Under special relief provided under the ITO, which was enacted for the purpose of
encouraging taxpayers to invest in R&D activities, R&D costs can generally be deductible
for tax purposes even when they represent capital costs.
The ITO provision generally distinguishes between two types of investors in R&D
projects:
The R&D project is conducted or sponsored by the owner of an enterprise in the fields
of industry, agriculture, transportation, and energy, and it is intended to develop this
enterprise.
The R&D costs are borne by a taxpayer that is not the owner of an enterprise in
the above mentioned fields or the taxpayer participates in R&D costs of another
developer in consideration for a reasonable return, when such R&D projects also
enjoy government grants.
In regard to the first group of taxpayers, the R&D expenses shall be deducted in the
tax year incurred when such expense has been approved as an R&D expense by the
relevant government department (the approval in regard to industrial related projects is
generally granted by the Office of the Chief Scientist [OCS]). When such OCS approval
is not obtained, the expense shall be deducted over three tax years.
The R&D expenses incurred by the second group of taxpayers shall generally be
deducted over two tax years. The deductible expenses allowed to a participant in R&D
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costs of another developer generally may not exceed 40% of the taxable income of the
investor in the year in which the expenses had been incurred.
For acquisitions between 1 January 2011 and 31 December 2015, an Israeli tax resident
company that acquires a controlling interest in a private Israeli company that meets
certain R&D activity levels shall be entitled to amortise its acquisition amount (i.e.
consideration paid for shares less the purchased companys positive equity capital if any)
from its taxable income equally over five years beginning with the tax year following
the acquisition. Entitlement to this deduction is subject to the fulfilment of detailed
qualifying conditions, which include inter alia that both companies have AE plans in the
year of acquisition, meet certain R&D investment levels, employ a certain prescribed
percentage of employees having academic degrees in certain qualifying fields, and
for the first three years of the amortisation period the R&D expenses of the acquired
company are incurred for its own company or that of the purchasing company and at
least 75% of such expenses are incurred in Israel. Detailed rules apply.
Tax credit for donations
A tax credit is granted in respect of donations to approved state and charitable

institutions aggregating at least ILS 190 (for 2014) in a tax year. The donor is allowed a
tax credit equal to the amount of the contribution times the corporate tax rate applicable
during the year, provided the amount eligible for the credit does not exceed the lower
of the following: (i) 30% of the corporations taxable income in that year or (ii) ILS
9,304,000 (in 2014). The above figures are adjusted each year according to the CPI.
Excess unused tax credits may be carried forward for three years, subject to detailed
rules.
Incentive to promote foreign investment in Israeli corporate bonds
In order to promote foreign investment in the Israeli corporate bonds market, there is an
exemption from tax with respect to interest income received by foreign investors on their
commercial investments in Israeli corporate bonds traded on the Tel Aviv stock exchange
(TASE). The exemption is not granted to a foreign investor that has a PE in Israel or
is related to, or holds 10% more of the means of control in, the investee company. In
addition, in order for the exemption to apply to a foreign investor that has special
relations with the investee company, regularly sells products to or provides services to
the investee company, or is employed by the investee company, the investor must prove
that the interest rate on the corporate bond was determined in good faith.
Withholding taxes
Under Israeli domestic tax law, a 25% WHT on payments of Israeli-source income is
generally deducted by an Israeli paying bank from all income remittances abroad, unless
a tax certificate is obtained from the ITA authorising withholding-exempt remittances or
a reduced rate of tax pursuant to an applicable tax treaty.
Set out below is a listing of WHT rates for dividends, interest, and royalties under
domestic tax law and pursuant to tax treaties in force. Detailed rules apply under certain
tax treaties for eligibility to the treaty-reduced rates (e.g. beneficial ownership, having
no permanent establishment in Israel). The applicable tax treaty should be consulted to
determine the relevant WHT rate and to examine detailed conditions that may apply for
the specific circumstance.
Recipient
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Dividends (%)
0/25 (1)
25/30 (1, 2)
Interest * (%)
25
25 (32)
Royalties (%)
25
30
Israel
Recipient
Non-resident corporations:
Non-treaty
Treaty:
Austria
Belarus
Belgium
Brazil
Bulgaria
Canada
Croatia
Czech Republic
Denmark
Estonia
Ethiopia
Finland
France
Georgia
Germany
Greece
Hungary
India
Italy
Jamaica
Japan
Korea, Republic of
Latvia
Lithuania
Luxembourg
Malta
Mexico
Moldova
Netherlands
Norway
Philippines
Poland
Portugal
Romania
Russia
Singapore
Slovakia
Slovenia
South Africa
Spain
Sweden
Switzerland
Taiwan (R.O.C.)
Thailand
Turkey
Dividends (%)
Interest * (%)
Royalties (%)
25/30 (2)
25
25
25
10
15
10/15 (3)
10/12.5 (4)
15
10
5/10/15 (5)
5/15 (6)
0/10 (73)
0/5 (7)
5/10/15 (8)
5/15 (9)
5/10/15 (10)
0/5 (71)
25
20/25 (11)
5/15 (12)
10
10
10/15 (13)
15/22.5 (14)
5/15 (15)
5/10/15 (16)
5/10/15 (17)
5/10/15 (17)
5/10/15 (18)
0/15 (75)
5/10 (19)
5/10 (20)
5/10/15 (21)
25
10/15 (22)
5/10 (23)
5/10/15 (24)
15
10
5/10 (25)
5/10 (26)
5/10/15 (27)
25
10
0
5/10/15 (28)
10
10/15 (29)
10
15
5/10 (33)
15
15
5/10 (34)
15
7/10 (35)
5/10 (36)
10
5 (74)
5
5/10 (37)
10
5/10 (38)
0/5 (72)
15
10
0
10
5/10 (39)
10
15
10
7.5/10 (40)
5/10 (41)
10
5/10 (41)
5
10
5
10/15 (42)
25
10
5
10
5/10 (43)
10
7
2/5/10 (44)
5
25
5/10 (45)
25
5/10 (37)
7/10 (46)
10/15 (47)
10
0/10 (49)
5/10 (50)
0/10 (51)
10/15 (52)
12.5 (53)
0/15 (54)
10 (55)
5
5
0
0
5
10
0/10 (56)
0
0/5 (57)
10
0
10
10
0/10 (58)
10
10
2/5 (59)
5
5/10 (60)
5
0
10
5
5/10 (61)
10
15
5/10 (62)
10
10
10
5
5
5
0 (63)
5/7 (64)
0 (65)
5
10
5/15 (66)
10
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Recipient
Ukraine
United Kingdom
United States
Uzbekistan
Vietnam
Dividends (%)
5/10/15 (30)
15
12.5/25 (31)
10
10
Interest * (%)
5/10 (37)
15
10/17.5 (48)
10
10
Royalties (%)
10
0 (67)
10/15 (68)
5/10 (69)
5/7.5/15 (70)
Notes
* Some Israeli tax treaties provide for an exemption from WHT on interest involving governmental and
quasi-governmental parties. Such exemptions are not separately indicated in the table above.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
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Dividends between Israeli resident companies are generally exempt from Israeli tax. Dividends
paid from a foreign resident company received via an Israeli payer (e.g. bank) to an Israeli resident
company or individual are subject to WHT at the rate of 25%.
30% rate applies in the case of a 10% or more shareholder (detailed rules apply).
10% where beneficial owner directly holds at least 25% of the capital of the company paying the
dividends.
At a rate that is 50% of the rate that would have been imposed but for this provision but not to
exceed 12.5% and not less than 7.5%. A 10% rate applies where paid from profits generated by an
enterprise entitled to special tax rates under the Encouragement of Investment Law.
5% if the beneficial owner is a company (other than a partnership) that directly holds at least 25%
of the capital of the company paying the dividends; 10% rate if the beneficial owner is a company
that directly holds at least 10% of the capital of the company paying the dividends where that latter
company is a resident of Israel and the dividends are paid out of profits that are subject to tax in
Israel at a rate that is lower than the normal rate of Israeli company tax; 15% rate applies in all other
cases.
5% if the beneficial owner is a company (other than a partnership) that directly holds at least 15% of
the capital of the company paying the dividends; 15% rate in all other cases.
the capital of the company paying the dividends; 5% rate in all other cases.
5% if the beneficial owner is a company (other than a partnership) that directly holds at least 10%
Israel at a rate that is lower than the normal rate of Israeli company tax; 15% rate in all other cases.
5% if the beneficial owner is a company (other than a partnership) that directly controls at least 10%
of the voting power in the company paying the dividends; 15% rate in all other cases.
5% if the beneficial owner is a company that directly or indirectly holds at least 10% of the capital
of the company paying the dividends; 10% rate if the beneficial owner is a company that directly or
indirectly holds at least 10% of the capital of the company paying the dividends and the dividends
are paid out of profits that are subject to tax in Israel at a rate that is lower than the normal rate of
Israeli company tax; 15% rate in all other cases.
At the domestic Israeli tax rate.
5% if the recipient directly holds at least 10% of the capital of the company paying the dividends.
the capital of the company paying the dividends.
15% if the beneficial owner is a company (other than a partnership) that directly or indirectly holds at
least 10% of the voting power of the company paying the dividends.
5% if the beneficial owner is a company that owns at least 25% of the voting shares of the company
paying the dividends during the period of six months immediately before the end of the accounting
period for which the distribution of profits takes place.
5% if the beneficial owner is a company that directly or indirectly holds at least 10% of the capital
of the company paying the dividends; 10% rate if the beneficial owner is a company that holds 10%
of the capital of the company paying the dividends and the dividends are paid out of profits that are
subject to tax at a rate that is lower than the normal rate of the corporation tax; 15% rate in all other
cases.
the capital of the company paying the dividends; 10% rate if the beneficial owner is a company that
directly holds at least 10% of the capital of the company paying the dividends where the dividends
are paid out of profits that by virtue of provisions in the Israeli Law of Encouragement of Investments
in Israel are exempt from tax or subject to tax at a rate that is lower than the normal rate of Israeli
company tax; 15% rate in all other cases.
the capital of the company paying the dividends; 10% rate if the beneficial owner is a company that
directly holds at least 10% of the capital of the company paying the dividends and the dividends are
paid out of profits that are subject to tax in Israel at a rate that is lower than the normal rate of Israeli
company tax; 15% rate in all other cases.
5% if the beneficial owner is a company that directly or indirectly holds at least 10% of the capital of
the company paying the dividends.
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21. With respect to dividends paid to a company that directly holds at least 25% of the capital of the
company paying the dividends: (i) 10% where the dividends are paid out of profits that, by virtue
of provisions in Israeli law for the encouragement of investment in Israel, are exempted from tax or
subject to tax at a rate that is lower than the standard rate levied on the profits of a company resident
in Israel; (ii) 5% where paid out of regularly taxed profits. A 15% rate applies in all other cases.
22. 10% if the beneficial owner is a company (excluding partnership) that directly holds at least 10% of
the capital of the paying company.
23. 5% if the recipient directly holds at least 15% of the capital of the company paying dividends.
24. 5% if the beneficial owner is a company (other than a partnership) that directly holds at least 25%
25. 5% if the beneficial owner directly holds at least 10% of the capital of the company paying the
dividends.
26. 5% if the recipient directly or indirectly holds at least 10% of the capital of the company paying the
dividends.
27. 5% of the gross amount of the dividends if the beneficial owner is a company (other than a
partnership) that directly holds at least 10% of the capital of the company paying the dividends; 10%
of the gross amount of the dividends if the beneficial owner is a company that directly holds at least
10% of the capital of the company paying the dividends and the dividends are paid out of profits that,
by virtue of law of the state in which the payer is a resident, are exempt from company tax or subject
to company tax at a rate that is lower than the normal rate in that state; 15% of the gross amount of
the dividends in all other cases.
29. 10% if the recipient holds at least 25% of the capital of the company paying the dividends.
of the capital of the company paying the dividends; 10% if the beneficial owner is a company that
directly holds at least 10% of the capital of the company paying the dividends where that latter
Israel at a rate that is lower than the normal rate of Israeli company tax; 15% in all other cases.
31. 12.5% but only if (i) during the part of the paying corporations taxable year that precedes the date
of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of
the outstanding shares of the voting stock of the paying corporation was owned by the recipient
corporation, and (ii) not more than 25% of the gross income of the paying corporation for such prior
taxable year (if any) consists of interest or dividends (other than interest derived from the conduct
of a banking, insurance, or financing business and dividends or interest received from subsidiary
corporations, 50% or more of the outstanding shares of the voting stock of which is owned by
the paying corporation at the time such dividends or interest is received). A 15% rate applies for
payments from income derived during any period for which the paying corporation is entitled to
the reduced tax rate applicable to an AE under Israels Encouragement of Capital Investments Law
(1959). A 25% rate applies in all other cases.
32. Different rates ranging from 15% to 35% apply for certain types of instruments. Interest paid to a
10% or more shareholders is subject to tax at the highest marginal tax rate (50% in 2013). Detailed
rules apply.
33. 5% for interest in connection with the sale on credit of any industrial, commercial, or scientific
equipment or on any loan of whatever kind granted by a bank.
34. 5% for interest in the case of a bank or other financial institution.
35. 7% for interest received by any bank or financial institution.
36. 5% for interest paid on a loan granted by a bank.
37. 5% for interest paid on any loan of whatever kind granted by a bank.
38. 5% where in connection with the sale on credit of any industrial, commercial, or scientific equipment,
or sale on credit of any merchandise by one enterprise to another enterprise, or on any loan of
whatever kind granted by a bank loans made by banks; 10% in all other cases. An election can be
made to be taxed on the net amount of the interest as if such interest were business profits.
39. 5% for interest paid in connection with the sale on credit of any industrial, commercial, or scientific
equipment, sale on credit of any merchandise by one enterprise to another enterprise, or on any loan
of whatever kind granted by a bank.
40. 7.5% for interest if received by any bank or financial institution.
41. 5% where paid on any loan of whatever kind granted by a bank.
42. 10% where paid to a bank or a financial institution.
43. 5% where paid in connection with the sale on credit of any industrial, commercial, or scientific
equipment, or sale on credit of any merchandise by one enterprise to another enterprise, or on any
loan of whatever kind granted by a bank.
44. 2% applies to government debt or government-assisted debt; 5% rate applies when paid to a
financial institution; 10% rate applies in all other cases.
45. 5% in connection with the sale on credit of any industrial, commercial, or scientific equipment, or in
connection with the sale on credit of any merchandise by one enterprise to another enterprise, or on
any loan granted by a financial institution.
46. 7% for interest paid on any loan of whatever kind granted by a bank.
47. 10% for interest received by any financial institution (including an insurance company).
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48. 10% for interest derived from a loan of whatever kind granted by a bank, savings institution, or
insurance company or the like. 17.5% rate for other interest. An election may be made to be taxed on
interest income as if that income were industrial and commercial profits.
49. 0% for literary, dramatic, musical, or artistic work copyright royalties (excluding in respect of motion
picture films or films for use in connection with television).
50. 5% for copyright royalties for literary, artistic, or scientific work (excluding cinematograph films) or
for the use of, or the right to use, industrial, commercial, or scientific equipment or road-transport
vehicles.
51. 0% for copyright royalties for literary, dramatic, musical, artistic, or scientific work (excluding in
respect of films for cinema or television).
52. 15% for trademark royalties.
53. The rate is 50% of the rate that would have been imposed but for the treaty provision but not to
exceed 12.5% and not to be less than 7.5%.
54. 0% for copyright royalties for the production or reproduction of any literary, dramatic, musical, or
artistic work (but not including royalties in respect of motion pictures).
55. For industrial, commercial, and scientific equipment royalties, the 10% rate applies to the adjusted
amount of the royalties (70% of the gross amount of the royalties).
56. 0% for copyright royalties for literary, artistic or scientific work (excluding cinematograph films).
57. 0% for copyright royalties for literary, dramatic, musical, or artistic works.
58. 0% for copyright royalties for literary, artistic, or scientific work (excluding cinematograph films or
tapes for television or broadcasting).
59. 2% for industrial, commercial, and scientific equipment royalties.
60. 5% for industrial, commercial, and scientific equipment royalties.
61. 10% for royalties for cinematograph films and films or video-tapes for radio or television
broadcasting.
62. 5% for industrial, commercial, or scientific equipment royalties.
63. For royalties in respect of cinematograph or television films, the WHT rate shall not exceed tax at the
rate applicable to companies on 15% of the gross amount of the royalty.
64. 5% for royalties for copyrights of literary, dramatic, musical, artistic work, or for the use of, or the right
to use, industrial, commercial, or scientific equipment.
65. The definition of royalties does not include any royalty or other amount paid in respect of (i) the
operation of a mine or quarry or of any other extraction of natural resources or (ii) in respect of
cinematograph including television films.
66. 5% for royalties for literary, artistic, or scientific work, excluding cinematograph films or films or tapes
used for radio, or television broadcasting.
67. For royalties in respect of cinematograph or television films, tax may be imposed in Israel, but not to
exceed tax at the rate applicable to companies on 15% of the gross amount of the royalty.
68. 10% for copyright or film royalties.
69. 5% of the gross amount of the royalties where such royalties consist of payments of any kind
received as a consideration for the use or the right to use any copyright of literary, artistic, or scientific
work (excluding cinematograph films).
70. 5% for royalties for any patent, design or model, plan, secret formula, or for the use of, or the right
to use, industrial, commercial, or scientific equipment, or for information concerning industrial,
commercial, or scientific experience; 7.5% for technical fees; 15% for all other royalties.
71. 0% if the beneficial owner is a company (other than a partnership) that directly holds at least 10% of
the capital of the company paying the dividends or where paid to certain qualifying pension funds.
72. 0% if to a pension fund or if paid on publicly traded corporate bonds or in respect of a loan, debtclaim, or credit guaranteed or insured by an institution for insurance or financing of international trade
transactions that is wholly owned by Israel.
of the capital of the company paying the dividends where such holding is being possessed for an
uninterrupted period of no less than one year and the dividends are declared within that period; or
where paid to certain qualifying pension funds.
74. An election can be made to be taxed on the interest income as if that income were business profits.
75. 0% if the beneficial owner is a company that directly holds at least 10% of the capital of the company
paying the dividends; 15% in all other cases.
Tax administration
Taxable period
The tax year is generally the calendar year. Certain entities may apply to have their tax
year-end on different dates, specifically, mutual funds, government companies, quoted
companies, and subsidiaries of foreign publicly listed companies.
Tax returns
The Israeli system is based on a combined form of assessment and self-assessment.

The statutory filing date is five months following the end of the tax year, which for a
calendar year taxpayer would be 31 May. It is possible, however, to secure extensions of
the filing date.
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Payment of tax
Generally, 12 monthly advance payments are levied at a fixed ratio of the companys
turnover. Alternatively, a company may be required to make ten monthly payments
beginning in the second month of its tax year, each payment being a fixed percentage of
the previous years tax assessment.
Penalties
Penalties are imposed on overdue advance payments and on delays in the submission of
tax returns. The balance of any taxes due is payable from the beginning of the following
tax year and is linked to the CPI; it bears interest of 4% until paid.
When the ITA determines that a taxpayer has a tax deficiency exceeding 50% of the total
tax due and the taxpayer has not proven to the satisfaction of the ITA that it was not
negligent in its tax reports filed (or where there was a failure to file reports), a penalty
equal to 15% of the tax deficiency shall be imposed.
A penalty equal to 30% of the tax deficiency may be imposed when an additional tax
liability exceeding ILS 500,000 is issued by the ITA further to a tax assessment and the
tax deficiency is more than 50% of the total tax due (additional conditions apply).
Tax audit process
A tax return, once filed, constitutes a self-assessment that remains open to review by the
ITA for three years from the end of the tax year in which the tax return is filed (within
four years after the end of the said tax year with the Commissioners approval). If no
return is filed and a tax officer believes a taxpayer owes tax, the tax officer may issue a
best judgement assessment without time limit.
An assessment issued by an Assessing Officer may be challenged by the taxpayer in
writing within 30 days stating in the objection the reasons why the assessment is not
correct. A different Assessing Officer will then review the facts of the case. If following
the filing of the objection the taxpayer reaches an agreement with the Assessing Officer,
the tax assessment shall be amended and a notice of tax served on the taxpayer. If
no agreement is reached, the Assessing Officer may determine the tax by issuing a
Written Order, which may confirm, increase, or reduce the original tax assessment. If
following the conclusion of the statute of limitation periods of three or four years (as
discussed above) or within one year after the appeal was submitted, whichever is later,
no agreement is reached and no Written Order was issued, then the taxpayers objection
shall be deemed to have been accepted.
An appeal of a Written Order may be made by the taxpayer directly to the Israeli district
courts. There is no special tax court system in Israel. A decision of the district court may
be appealed to the Supreme Court as a court of civil appeals.
Detailed rules apply to the procedural appeal process.
The statute of limitation period for corporate tax is three years from the end of the
tax year in which the relevant tax return is filed. The Commissioner of the ITA has the
authority to extend this period to four years.
Some key tax issues that the ITA has focused on recently include:
Transfer pricing.
Treaty shopping to reduce WHT and capital gains tax.
WHT on payments to overseas service providers and for payments in regard to
software.
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Other issues
Choice of business entities
Investments and business operations in Israel may be structured in a variety of ways.

The following are the common types of business entities in Israel: (i) Israeli public or
private company; (ii) foreign company in Israel (i.e. a branch); (iii) Israeli general or
limited partnership; (iv) foreign general or limited partnership; (v) other entities such as
cooperative societies; and (vi) other arrangements (e.g. contractual joint ventures).
Israeli tax law allows for non-taxable reorganisations in situations in which the
ownership and business enterprise of the original parties is continued after the
reorganisation takes place, allowing for the deferral of the tax liability until the shares
or assets transferred in such reorganisations are actually sold. Different qualifying
requirements and conditions apply (e.g. obtaining a ruling from the ITA in certain
cases), depending upon the tax residency of the parties and the type of transfer.
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PwC contact
Fabrizio Acerbis
TLS Associazione Professionale di Avvocati e Commercialisti
Via Monte Rosa 91
20149 Milano, Italy
Tel: +39 02 9160 5001
The major recent changes in the Italian tax rules that occurred in the last 12 months are
the following:
Changes to Regional Production Tax (Imposta Regionale sulle Attivit Produttive or
IRAP) rules.
Changes to Corporate Income Tax (Imposta sul Reddito sulle Societ or IRES) rules.
Increase in the annual limit for tax credit off-setting and conformity mark.
Assets step-up election.
Increase of the tax advance payments for fiscal years 2013 and 2014.
Infiscal year2013 only, financial and insurance entities apply an 8.5% increase to the
standard IRES rate.
Changes to value-added tax (VAT).
Transfer pricing changes.
Introduction of Financial Transaction Tax (FTT).
Please note that Italy tax updates are generally expected to occur between June and
November in connection with the finance bill and approval of related laws. In this
respect, we suggest visiting the Worldwide Tax Summaries website at www.pwc.com/
taxsummaries after November each year in order to check whether or not relevant
changes affect your business.
Changes to IRAP
As of fiscal year 2014, the following measures were enacted for IRAP purposes in order
to reduce the tax burden, in particular for labour intensive companies:
A 10% reduction to standard rates.
An increase in the deductions related to employees with an open-ended contract,
women, and young workers.
Changes to IRES
From fiscal year 2014, the rate to be applied on Allowance for Corporate Equity (ACE) is
increased.
New incentives are introduced with reference to finance lease expenses regarding
agreements drawn up as of fiscal year 2014.
As of 2013, the write-off of receivables is acknowledged also for tax purposes (i.e. IRES)
if carried out in accordance with applicable accounting standards (local generally
accepted accounting principles [GAAP] or International Financial Reporting Standards
[IFRS]).
As of 2013, the IRES deductibility of expenses related to companies cars has been
reduced.
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Increase in the yearly limit for tax credit off-setting and conformity
mark
Starting from 2014, the yearly limit for tax credit off-setting is increased to 700,000
euros (EUR). However, starting from fiscal year 2013, in order to offset IRES and IRAP
tax credits exceeding EUR 15,000, a conformity mark is needed.
Assets step-up election
Business-related assets can be elected for step-up for accounting and tax purposes.
The payment of a 16% substitutive tax for depreciable assets (12% for not-depreciable
assets) is required. The higher value attributed to the assets is acknowledged for tax
purposes starting from the third fiscal year following the step-up period.
Increase of the tax advance payments for fiscal years 2013 and 2014
For fiscal years 2013 and 2014, the total amount of tax (IRES and IRAP) advance
payments to be carried out is determined respectivelyat 102.5% andat 101.5%. Special
rules apply for financial and insurance entities whose tax advance payments are equal to
130% infiscal year2013 only.
Infiscal year2013 only, financial and insurance entities apply an 8.5%

increase to the standard IRES rate
Infiscal year2013 only, financial and insurance entities apply an increase (surtax) of
8.5% in addition to the standard IRES rate (27.5%). The overall IRES rate is equal to
36%.
Changes to VAT
As of June 2014 and March 2015, there are new obligations to issue electronic invoices
to Italian public entities.
The standard VAT rate is increased from 21% to 22% as of 1 October 2013.
Starting from 2013, new invoicing rules implementing the European Union (EU)
Directive 45/2010 are effective.
Transfer pricing changes
Transfer pricing adjustments arising on tax audit are also relevant for IRAP purposes for
companies financial years commencing on or after 1 January 2008.
As of 2014, companies operating in Italy in the on-line advertising industry and related
ancillary activities must use profit level indicators other than those based on costs for
calculation of transfer price.
Introduction of the Financial Transaction Tax (FTT)
As of 1 March 2013, the FTT is applicable on the transfer of property of shares and other
equity instruments for transactions executed on regulated markets.

Applicable rates
Italian corporate entities are subject to a corporate income tax, known as IRES, and to a
regional production tax, known as IRAP.
The standard rates are as follows:
27.5% for IRES.
3.5% for IRAP (3.9% up to fiscal year 2013).
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Forfiscal year2013 only, an 8.5% increase (surtax) to the IRES rate was applied
tofinancial and insurance entities.
A 6.5% increase (surtax) to the IRES rate is applied to companies operating in the areas
of oil, gas (refining, production, or trade), and electrical energy (production or trade)
whose turnover exceeded EUR 3 million and whose taxable income was EUR 300,000 in
the prior fiscal year. Limited from 2011 to the 2013 tax period, an additional increase of
4% was applicable (total surtax of 10.5%).
The following increased IRAP rates are applicable for certain entities:
3.80% for entities with a determined governmental exclusive right to provide services
(4.20% up to fiscal year 2013).
4.20% for banks and financial entities (4.65% up to fiscal year 2013).
5.30% for insurance corporations (5.90% up to fiscal year 2013).
Regions have the power to slightly increase or decrease IRAP rates.
General rules
IRES
The IRES taxable base is determined according to the worldwide taxation principle,
which states that, regardless of the location/jurisdiction where the income is produced,
to the extent that the income is legally attributable to an Italian resident entity, the
income is taxed in Italy. IRES is charged on the total net income reported in the financial
statements of the company as adjusted for specific tax rules. Non-resident companies are
taxed only on Italian-source income.
IRAP
There are different methods of computation for the IRAP taxable base, depending
on the nature of the business carried out by the taxpayer. Labour costs (with limited
exceptions), provisions for liabilities and risks, and extraordinary items cannot be taken
into account when determining the IRAP taxable base.
For sales and manufacturing companies, the IRAP taxable base is broadly represented by
the companys gross margin in its financial statements. In addition to the non-deductible
items mentioned above, interest income and expense and provisions for bad debts are
excluded for the purposes of the IRAP taxable base.
For banks, the IRAP taxable base is broadly defined as follows:

Intermediation margin reduced by 50% of dividends.

90% of amortisation costs relating to fixed tangible and intangible assets.
90% of other administrative expenses.
Net value of adjustments and reassessment for bad debts.
Special rules apply to financial institutions, other than banks.

IRAP is levied on a regional basis, and regions are allowed to increase or decrease
the standard IRAP rate up to 0.92%. Companies with facilities in different regions
must allocate their overall taxable base to the different regions on the basis of the
employment costs of personnel located at the various sites. Facilities become relevant to
the calculation of IRAP if they have been established for more than three months. Italian
companies with permanent establishments (PEs) abroad, as well as shipping companies
qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on
the income earned through these PEs.
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For fiscal year 2013, an increase in the IRAP rates equal to 0.15% was provided for the
regions of Campania, Molise, and Calabria.
Companies are allowed to deduct from the IRAP taxable base the following items:
The total amount of the social security and welfare contributions related to the openended contract employees.
A fixed amount, on an annual basis, equal to EUR 4,600 for every employee working
under an open-ended contract and equal to EUR 10,600 for women and employees
under 35 years (higher amounts are foreseen for employees in Abruzzo, Basilicata,
Calabria, Campania, Molise, Puglia, Sardegna, and Sicilia). The deductions cannot
be used by companies operating in specific sectors (e.g. concession regimes in
infrastructure, electric, water, transport).
As of 2014, the above-mentioned fixed deductions are increased to EUR 7,500 and to
EUR 13,500, respectively. Furthermore, companies increasing the number of employees
with open-ended contracts can deduct the relating cost up to EUR 15,000 for each
employee.
Substitutive tax on reorganisations (mergers, demergers, contributions

in kind)
Corporate restructurings, such as contributions in kind, (assets versus shares
transactions) mergers, and demergers, are, in principle, tax neutral even if, for financial
accounting purposes, the transaction results in the recognition of higher values of the
assets or of goodwill. Companies may elect to obtain partial or full recognition for tax
purposes of the step-up in the financial accounting values of assets or of the goodwill
arising from the corporate restructurings, provided they pay a substitutive tax.
The substitutive tax is calculated on the step-up in tax basis and is based on progressive
rates of 12% to 16%. The first EUR 5 million is taxed at 12%, the tranche above EUR 5
million but less than EUR 10 million is taxed at 14%, and the amount in excess of EUR 10
million is taxed at 16%. The substitutive tax may also be paid in three annual instalments
of 30% in the year of election, 40% in year two, and 30% in year three plus interest at
the rate of 2.5% per year on the deferred amounts. The substitutive tax is not deductible
for the purposes of IRES or IRAP.
In addition, stepped-up values of goodwill and trademarks may be depreciated for
tax purposes over ten tax years instead of the normally allowed 18 years by paying a
substitutive tax of 16%. The higher tax depreciation arising from this election is effective
from the tax period subsequent to the one in which the substitutive tax is paid. For
example, if a merger transaction occurred in year one and the substitutive tax was paid
in year two, the increased tax depreciation would begin in year three.
Assets step-up election
Resident corporations and non-Italian corporations having an Italian PE may elect to

step-up, both for accounting and tax purposes, the value of certain assets, intangibles,
and equity investments in controlled or connected companies by paying a so-called
substitutive tax. The assets to be stepped-up are those resulting in the financial
statements as at 31 December 2012. Entities drawing-up their financial statements
under IFRS are excluded from the provision at hand. The step-up must be carried out
in the 2013 financial statements. The step-up could be carried out even on a defined
homogeneous category of assets, provided that all the assets related to that category are
included.
The substitutive tax is set at 16% for depreciable or amortisable assets and intangibles,
and 12% for non-depreciable assets. The higher value attributed to the assets is relevant
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up occurred (i.e. fiscal year 2016 for companies with a calendar year). A three years
recapture period is defined following the fiscal year ongoing as at 31 December 2013.
In case stepped-up assets are transferred during such a recapture period before the fiscal
year ongoing as at 31 December 2017, the standard taxation applies on the capital gain/
loss based on the asset value before the step-up.
An equity reserve corresponding to the step-up performed should result in the company
accounts. The distribution of such a reserve to shareholders as well as the use for reasons
different from loss coverage is a taxable event in the hands of the company. Taxpayers
can free up the reserve by paying an additional 10% substitutive tax.
Tonnage tax
Italian tax resident shipping companies, as well as non-resident shipping companies

operating in Italy through a PE, can qualify for and then elect to be subject to the Italian
tonnage tax regime. The regime basically allows for the determination of presumptive
income based on the net tonnage of the qualifying ships apportioned to the effective
shipping days (tonnage income). The tonnage income is subject to IRES only.
To qualify for the tonnage tax, ships must: (i) have a net tonnage of more than 100 net
tons (NT); (ii) be used for goods transportation, passenger transportation, salvage,
towing, and other services; and (iii) operate in international shipping as defined by
the rules disciplining Italian International Registry. Ships chartered out on a bare boat
charter are excluded. Chartered ships with crew are included in the tonnage tax regime
if their global net tonnage is less than 50% of the total net tonnage.
Tonnage income is calculated on the basis of the ships net tonnage. The daily income is
determined according to the following rate system:
Ships net tonnage (NT)
0 to 1,000
1,001 to 10,000
10,001 to 25,000
above 25,001
Daily income in EUR per NT

0.0090
0.0070
0.0040
0.0020
No deductions are allowed from tonnage tax income.

Income and expenses from the following activities are all deemed to be covered by the
tonnage income determined as previously discussed:

Transport of goods.
Transport of passengers.
Salvage and towing.
Other services that need to be performed on the high seas.
Charges related to the above-mentioned activities (e.g. administrative and
commercial expenses, insurances fees).
Other operations performed in close connection with the transportation operations
(e.g. loading and unloading).
Other minor activities.
Capital gains or losses arising from the transfer of ships that have been acquired by a
company while under the tonnage tax regime are also deemed to be included in tonnage
tax income. Conversely, for capital gains arising from the transfer of a ship acquired
prior to election for the tonnage tax regime, the difference between the sale price and
the net tax cost as of the last tax period prior to the election for the tonnage tax regime is
subject to the ordinary tax regime. Tax losses, in this latter case, are tax deductible.
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An election for the tonnage tax regime should be made for all of a companys or groups
qualifying vessels. So called cherry picking is not allowed. Election for the tonnage tax
regime is on a voluntary basis, but, once elected, it remains in effect for ten years. The
election is renewable.
Corporate residence
Companies having their legal or administrative headquarters or their principal business
activity within the Italian territory are considered to be resident companies and are
taxable in Italy on their worldwide income.
A foreign company holding one or more Italian subsidiaries is deemed to be resident of
Italy for tax purposes if at least one of the following conditions exists:
The foreign company is, either directly or indirectly, held by Italian tax resident
persons.
The board of directors of the foreign company is made up mainly of Italian
residentindividuals.
Non-resident companies are subject to IRES and IRAP only on their Italian-source
income. Specifically, Italian non-resident companies having a PE in Italy are subject to
IRES and IRAP with respect of the taxable income generated from the PE in Italy.
The domestic definition of PE is substantially aligned with the Organisation for

Economic Co-operation and Development (OECD) model.
Corporate residence of a trust
Trusts are considered as persons subject to corporate taxation.

Residence is defined on the basis of the location of the place of management and of the
main object of the trust. In the first instance, trusts that operate through an appropriate
structure are deemed to be tax resident in Italy if the said structure is located in Italy.
In the absence of any such structure, trusts managed by a trustee will be deemed as tax
resident in Italy if the trustee is tax resident in Italy. In addition, trusts that have the
largest part of their assets located in Italy are deemed a tax resident in Italy.
Note that there are anti-avoidance rules for Italian non-resident trusts, setting out the
specific conditions on which these trusts can become Italian tax resident.
Other taxes
Italian VAT (Imposta sul Valore Aggiunto) applies to the supply of goods and services
carried out in Italy by entrepreneurs, professionals, or artists and on importations
carried out by anyone. Intra-Community acquisitions are also subject to VAT taxation
under certain situations.
The Italian standard VAT rate is 22%. Reduced rates are provided for specifically listed
supplies of goods and services, such as 4% for listed food, drinks, and agricultural
products and 10% for electric power supplies for listed uses and listed drugs. IntraCommunity supplies and exports are exempt from VAT.
Specific supplies of goods and services expressly listed in the law are exempt from VAT
(e.g. hospital and medical care, education, insurance services, specific financial services,
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supply, leasing of particular immovable property). Other specifically listed transactions
are also out of the VAT application scope (e.g. transfer of money, transfer of going
concern).
Input VAT on purchases of goods and services related to business activity generally is
allowed for recovery. Special limitations apply in relation to specific items (e.g. cars,
entertainment expenses) and to companies carrying out both exempt from VAT with no
right to deduct and taxable transactions.
The filing deadline for VAT returns is 30 September.
Service supply rules
Generic services supplied by a taxable person to another taxable person (business-tobusiness or B2B) are in the scope of the Italian VAT if the services are supplied to Italian
taxable persons or to PEs of an Italian non-resident entity.
The specific rules are as follows:
For services related to immovable property, reference must be made to the place in
which the immovable property is located.
For the transportation of passengers, the place in which the transportation takes
place must be identified, including the proportion of the distance covered.
For catering and restaurant services, the place in which the activity will be physically
carried out must be identified.
For short term hiring, leasing, and similar means of obtaining transport services, the
place in which the vehicle is used must be identified (use and enjoyment rule has
been implemented on these services).
The general rule for services supplied by a taxable person to a non-taxable person
(business-to-consumer or B2C) identifies the place of taxation with the country of
residence of the supplier.
Several rules, in addition to the B2B general rules, exist for the following:

Brokerage services.
Goods transport services.
Services related to movable goods and ancillary activities related to transports.
Long term hiring/leasing of means of transport services.
Electronic services supplied by extra-EU suppliers.
Telecommunications and television/radio broadcast services.
In addition, special rules are provided for certain services rendered to final customers
established outside the European Union.
In relation to the VAT treatment of cultural, artistic, sporting, scientific, educational,
recreational, and similar services, VAT is due in the country where the activities were
physically carried out for B2C activities and VAT is due in the country of the recipient for
B2B activities other than admission. For B2B services in respect of admission, the place
of supply is where the events take place.
Time of supply for certain services
Time of supply is the time of completion in case of:

supply of services falling under the general rule (i.e. generic supply of services)
rendered by EU and non-EU taxable persons to taxable persons established in Italy,
and
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supply of services falling under the general rule rendered by taxable persons
established in Italy to EU and non-EU taxable persons.
In case of periodic or continuous supply of services, the time of supply is the date of
maturity of the consideration.
Moreover, the above supplies of services, if performed/received by taxable persons
established in Italy continuously over a period longer than one year and if no payments
are carried out, even partially, in the same period, shall be considered carried out at the
end of each calendar year up to completion of the same supplies.
Reporting obligation
Transactions carried out with subjects resident in black list countries (i.e. tax haven
jurisdictions) must be disclosed in periodical communications to be electronically filed
with the tax authorities. The transactions to be reported are those higher than EUR 500.
A taxable person must also communicate the total amount of the output transactions
rendered towards each customer and input transactions received from each supplier. As
regards the communication related to transactions for which there is no obligation to
issue an invoice, the threshold for this fulfilment is EUR 3,600, VAT inclusive. Specific
transactions are excluded from the communication (e.g. importations, exportations, and
other transactions that have already been communicated to the tax authorities, such as
insurance, electricity supply, and telephone services contracts).
Reverse-charge mechanism extension
According to the reverse-charge mechanism, the obligations related to supply of goods

and provision of services carried out in Italy by non-resident taxable persons towards
taxable persons established in Italy are fulfilled by the latter. Due to the implementation
of the EU Directive 45/2010, the recipient of goods and/or services has to integrate
the invoice received by the EU supplier or has to issue a self-invoice in case of a nonEU supplier and record it in the VAT sales register and VAT purchase register within a
defined timeline changed as of 1 January 2013.
The reverse-charge mechanism obligation has been extended to the supply of all goods
and services in the scope of the Italian VAT carried out by non-resident entities to
taxable persons resident in Italy. Non-resident entities (including those having an Italian
VAT number through indirect or direct registration) cannot charge Italian VAT to an
Italian established VAT person.
VAT credit offset with other taxes
To offset a VAT credit against other taxes for an amount higher than EUR 5,000, it is
necessary to wait until the 16th day of the month following the filing of the yearly VAT
return on which the credit is shown.
Furthermore, in order to avoid abuse, taxpayers intending to offset a VAT credit for an
amount greater than EUR 15,000 are required to ask their tax advisors or auditors to
affix their signature to the VAT return, which is known as the conformity mark.
Electronic invoicing to public entities
As of June 2014, there will be an obligation to issue electronic invoices to Italian

ministers, tax agencies, and national social security and welfare entities. With reference
to the other national public entities, such an obligation will be in place as of 31 March
2015. After the mentioned terms, the receiving entities will no longer be entitled to
accept paper invoices and, accordingly, they will not proceed with the payments.
Particular conditions apply for the format of the invoices under discussion as well as for
the related e-archiving obligations.
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Registration tax
Specific deeds and contracts must be filed with the local registration tax office either
upon signature or if specific circumstances occur, and the relevant tax must be paid.
Depending on the nature of the contract and on the assets that are the object of the
contract, as well as on the form of the contract, registration tax is levied as a fixed
amount or as a percentage of the value of the goods and/or rights that are the object
of the contract. As a general rule, no proportional registration tax is due in the case of
transactions subject to VAT.
VAT and registration tax on lease of immovable properties
Leases of residential and commercial buildings, or portion thereof, generally are exempt
from VAT with no right to deduction and subject to the registration tax at 2% or 1% rate.
Different VAT rates, VAT treatment, and registration tax treatment apply depending
on the type of buildings the lease refers to (e.g. residential, commercial buildings),
the supplier (e.g. individual, constructions companies, taxable persons other than
construction companies).
Specific rules apply in case of financial leases of residential and commercial buildings
from a registration tax perspective.
Customs duties
At the moment of the importation of goods into the EU territory, customs duties are
applied. The amount of customs duties to pay depends on the value and nature of
the goods imported. In particular, for each kind of good, the Common Customs Tariff
provides a tax rate to be applied to the value or number of the goods imported.
The correct classification of the goods is one of the most important issues to consider
when an economic operator introduces goods in Italy. A wrong classification can give
rise to the application of higher customs duties, and the operator could face a tax burden
not due, or to the application of lower customs duties, and this situation could lead to a
Tax Assessment by Italian Customs Authority.
The value of the goods is represented by the transaction value, hence, the price actually
paid or payable for the goods when sold for exportation to the customs territory of the
EU, provided that:
there are no restrictions as to the disposal or use of the goods by the buyer
the sale or price is not subject to some condition or consideration for which a value
cannot be determined with respect to the goods being valued
part of the profits of any subsequent resale, disposal, or use of the goods by the buyer
will not be accrued, directly or indirectly, to the seller, and
the buyer and seller are not related, or, where the buyer and seller are related, that
the transaction value is acceptable for customs purposes.
In determining whether the transaction value is acceptable, the fact that the buyer and
the seller are related is not, in itself, sufficient for considering the transaction value as
not acceptable. Where necessary, the circumstances surrounding the sale are examined,
and the transaction value is accepted if the relationship did not influence the price.
The price actually paid or payable is the total transaction amount paid for the imported
goods and includes all payments made as a condition of sale of the imported goods
by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the
seller.
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In determining the customs value, the following items shall be added to the price, to
the extent that they are incurred by the buyer and are not included in the price (list not
exhaustive):
Commissions and brokerage.
Royalties and licence fees related to the goods under assessment.
The cost of transport and insurance of the imported goods.
At the same time, provided that they are shown separately from the price actually paid
or payable, the following items shall not be included in to the customs value (list not
exhaustive):
Charges for the transport of goods after their arrival at the place of introduction into
the customs territory of the European Union.
Charges for construction, erection, assembly, maintenance, or technical assistance,
undertaken after importation of imported goods such as industrial plant, machinery,
or equipment.
Buying commissions.
A reduced or zero rate of duty at importation can be applied when the goods imported
have a preferential origin. The preferential origin depends on the existence of
commercial agreements between the European Union and other non-EU states or by
facilities provided by the European Union to non-EU states unilaterally.
The application of a reduced or zero rate of duty can even depend on the existence of
preferential tariff treatment or on the existence of a particular exemption provided by
law for some kind of goods.
Any person may appoint a representative in ones dealings with the Customs Authority
to perform the activities and formalities laid down by customs rules. Such representation
may be direct, in which case the representative shall act in the name and on behalf of
another person, or indirect, in which case the representatives shall act in ones own
name but on behalf of another person.
For direct representation, a forwarding agent, holder of a particular licence, must be
appointed.
The representative must be established within the European Union.
Excise duties
The following goods are subject to excise duties:

Energetic products (e.g. petrol, gas oil, natural gas, coal).

Alcohol and alcoholic drinks (e.g. wine, beer, ethylic alcohol).
Processed tobaccos (e.g. cigars, cigarettes, tobacco).
Electric power.
The subjection of a product to excise duties has to be verified on the basis of its customs
combined nomenclature code.
The tax liability, depending on the products, arises:
at the moment of importation or production (and the excise duties must be paid at
the moment in which they are released for consumption in Italy)
when the excisable goods are used for heating or as fuel, and
when the excisable goods are released for consumption or used for own use.
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As a general rule (with exception of natural gas and coal, coke, and lignite), with
reference to excise goods released for consumption during a month, the payment of the
relative excise duties has to be done within the 16th day of the following month.
With reference to excise goods imported, customs rules are applied as far as the
procedure and terms of payment are concerned.
The production, processing, and holding of excise goods, except from natural gas, coal,
coke, lignite, and electric power, are subject to a suspensive regime performed through a
fiscal warehouse.
In order to manage a fiscal warehouse, it is necessary to acquire a licence issued by the
Italian Customs Authority, and there are specific obligations for the owner of a fiscal
warehouse (e.g. provide for a particular guarantee, keep a particular accounting system
for the goods stored, be subject to controls performed by Italian Customs Authority,
where requested).
The Italian legislation provides for many exemptions with regards to the use of excise
goods.
Furthermore, under certain circumstances, a tax refund is granted to the operator who
released for consumption, if, afterwards, the products are not consumed in Italy.
Stamp duty taxes
Stamp duty taxes (Imposta di Bollo) apply on a certain list of deeds or documents
provided for by the relevant law provision (e.g. checks, bills of exchange, statements of
account, certificates, books of account, deeds of transfer of quotas, and, in some cases,
invoices).
According to the kind of deed, stamp duty tax is due at the moment of the deeds origin
or in case of use (e.g. if the deed is filed to the Italian Registration Office). Moreover,
it can be a fixed amount or as an amount proportional to the value of the deed or
document.
Stamp duty tax can be paid:
ordinarily, through a physical stamp attached on the document, or
virtually, through electronic means (in this case, a specific authorisation from the
Italian tax authorities and a specific process procedure are needed).
Stamp duty tax is usually alternative to VAT; however, in case of considerations partially
subject to VAT and partially not subject to VAT, the invoice is subject to stamp duty tax if
the total amount of the considerations not subject to VAT exceeds EUR 77.47. Moreover,
some transactions are stamp duty tax exempted (e.g. inter-Community supply of goods).
For transactions that are exempted from VAT (with restriction on VAT credit) and for
transactions out of scope of VAT, exceeding EUR 77.47, an amount of EUR 2 is due as
stamp duty tax for each issued invoice.
Imposta Municipale Unica (IMU)
IMU is the municipal tax on real estate. It is levied annually either on the owner or on
the financial lessee of real estate (i.e. buildings, development land, and agricultural
land). The standard tax rate is 0.76%. Depending on the municipality and on the status
of the taxpayer, the tax rate can be increased or decreased.
The taxable base is generally determined on the basis of the so called cadastral value
(i.e. capitalisation of the deemed standard income that is expected to be derived from
the real estate).
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As of fiscal year 2014, other local taxes are levied with reference to municipal services.
Financial Transaction Tax (FTT)
The FTT is applicable on transactions carried out starting from 1 March 2013 (for
derivatives, the starting date is 1 September 2013).
The FTT is applicable on the transfer of the property of:

portfolio shares and other equity instruments issued by Italian resident companies
instruments or securities representing shares, regardless of the residence of the issuer
shares, due to convertible bonds, and
derivative instruments whose underlying are securities issued by Italian resident
companies (these are subject to a special tax scale, on the notional amount).
The FTT tax base is the net daily balance of transaction on the same financial
instruments by the same person.
The applicable general rate is equal to 0.22% in 2013 and to 0.20% from 2014 on. The
tax rate is reduced to 0.12% for transactions that are operated on regulated markets and
multilateral trading systems (0.10% as from 2014 on).
Branch income
The tax regime for PEs is the same as for corporate Italianentities (e.g. joint-stock
companies). Accordingly, a PE is subject to IRES as well as IRAP. Both taxes are
determined on the basis of the relevant financial statements related to the business
activities carried out by the PE.
Transfer pricing principles apply to transactions between the head office and its Italian
PE.
In principle, positive and negative components of a companys income statement are,
respectively, taxed or deducted on an accruals basis (under the accrual principle) for tax
purposes. Additionally, in order to be taxed/deducted, income items have to be certain
under a legal standpoint and either objectively determined or capable of objective
determination as to their amount (under the certain and objective determination
principle). Income statement items accrued in the statutory accounts not meeting the
above criteria are not allowed for tax deduction nor taxed as income in the tax period.
Deduction or taxation of income is correspondingly deferred to future tax periods when
the criteria are met.
Expenses generally are deductible if they relate to activities generating revenues
concurring to the companys taxable income (under the inherence to business principle)
and provided they are included in the relevant statutory accounts (under the imputation
principle). An exception to this general rule is made for those income statement items
accrued in the statutory accounts relating to a tax period different from that in which
they become relevant for tax purposes in accordance with the principles of certainty
and objective determination as described above. These items are taken into account in
determining taxable income in the tax period when the latter conditions are met.
For IRAP purposes, relevant income and expense are those reported in the financial
statements.
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Specific rules have been released for entities that have adopted IFRS for Italian statutory
financial reporting purposes. These provisions are aimed to align income determination
rules with IFRS.
Inventory valuation
Italian tax law allows the application of all the most commonly used inventory valuation
methods: last in first out (LIFO), first in first out (FIFO), average cost. For IRES only, the
reference prices used to calculate the written down value of the inventory items cannot
be lower than their market prices during the final month of the tax period.
Companies operating in the oil and gas sector are required to adopt either average cost
or FIFO for tax purposes.
Capital gains
Capital gains are taxable in the tax period in which they are realised, as follows:
Fixed assets: the gain realised on the sale of fixed assets is taxable for both IRES and
IRAP purposes. Additionally, for IRES purposes, tax on capital gains can be spread
over a maximum of five years. This treatment is allowed if the company owned the
fixed assets for not less than three years.
Financial Investments: a specific participation exemption regime (PEX) is
applicable. Under this regime, capital gains realised by Italian companies on sales of
shareholdings are 95% exempt from IRES.
PEX applies if all of the following conditions are met:
The shareholding was held uninterruptedly for at least 12 months prior to the sale.
The investment was classified under financial fixed assets in the financial statements
relating to the first tax period of uninterrupted ownership.
The subsidiary is actually carrying on a commercial activity (e.g. investments in
companies mainly performing management of their own real estate are not entitled
to PEX benefits).
The majority of the subsidiarys income is not generated in a tax haven country or one
with a privileged tax regime.
The third and fourth conditions must be met both at the time of the sale of the
investment and in the three preceding years. If these conditions are not met, the capital
gain realised by the company is ordinarily taxed. Capital losses arising from the sale or
write-down of shareholdings meeting PEX conditions are basically not tax deductible.
Likewise, the capital losses realised on sales of non-PEX investments are tax deductible.
Specific exemptions are provided for those entities adopting IFRS for Italian statutory
accounts reporting purposes.
Specific anti-dividend washing rules provide that where capital losses arise from the
disposal of shareholdings that are not eligible for PEX, such losses are deductible only for
the part exceeding the tax exempt amount of dividends (see Dividend income discussion
below) received from the shares in question in the 36 months prior to the disposal.
Capital gains on financial investments generally are excluded from the IRAP taxable
base.
Dividend income
Dividends received by Italian resident companies from Italian companies or from

companies resident in countries other than tax havens (i.e. not included in the black
list) are excluded from the IRES taxable base for 95% of their amount. Conversely,
no exemption applies to dividends paid by entities that are resident in tax haven
jurisdictions (unless those dividends derive from profits that were already taxed under
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the Italian controlled foreign company [CFC] rules). There are specific rules for entities
adopting IFRS for Italian statutory financial reporting purposes. For such entities,
dividends from investments in shares and other financial instruments held for trading
are fully taxable.
Dividends generally are excluded from the IRAP taxable base.
Interest income
Interest income is generally part of the taxable base.
Foreign income
An Italian resident corporation is taxable on all income whether produced in Italy

or abroad. Profits earned by subsidiaries that are resident or located in countries or
territories other than tax havens are taxed only on distribution of the relevant profits.
Double taxation is, in principle, avoided by means of foreign tax credits.
Shell companies
Resident companies and PEs of non-resident companies can be qualified as nonoperating entities if,alternatively, one of the following conditions is met:
The entity is in a tax loss position for three consecutive tax periods.
The average revenues recorded in the current fiscal year and in the prior two years
are lower than the amount resulting by applying certain deemed return percentages
to the average balance sheet value of specific assets in the current fiscal year and the
two previous years.
The main assets to be taken into consideration are shares and shareholdings, financial
receivables, owned or leased real estate, and owned or leased tangible and intangible
assets. The value of any assets acquired or sold during the fiscal year must be adjusted
according to the ownership period.
These conditions must be checked every year. Therefore, it is possible for an entity to be
non-operative in one year and operative in the following year.
The shell company is assessed as having a minimum taxable income for both IRES and
IRAP purposes.
For IRES purposes, the taxable income of a non-operative entity is determined as the
sum of such values emerging from the application of specific percentages to the book
values of the above-mentioned assets.
The current IRES standard rate for entities qualified as shell companies is 38%.
Tax losses generated in a tax period when the company was deemed to be non-operating
cannot be carried forward.
For IRAP purposes, labour costs and other non-deductible items have to be added back
to the deemed minimum IRES income as outlined above.
These rules are not applicable in the first year of a companys incorporation. Exemptions
from these rules can be achieved:
by means of an advance ruling from the Italian tax authorities aimed at assessing the
specific circumstances that caused the company not to earn the minimum amount of
income or
by specific objective situations provided for by Italian law (e.g. company directly or
indirectly held by listed companies).
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Shell companies are also subject to limitations in their ability to recover VAT credits.
Deductions
The principles outlined in the section on Income determination also apply for deductible
costs.
All fixed assets that are used in the business of the company, except land, are depreciable
for tax purposes (for both IRES and IRAP).
For IRES, the maximum depreciation rates for fixed tangible assets are set forth in a
Ministerial Decree. Such depreciation rates are different, depending on the type of asset
and on the economic sector in which the company operates. In the event that financial
accounting depreciation exceeds the amounts allowed for tax purposes, temporary
differences arise. Tax depreciation of fixed tangible assets is allowed from the tax period
in which the asset is first used. In the first tax depreciation period, the depreciation rate
cannot exceed one-half of the normalrates.
It is worth pointing out that a project aimed at achieving the grouping of the
tax amortisation rates has been announced by the government. Timing for the
implementation of such a project is still uncertain.
Land is not a depreciable asset. Amortisation of goodwill derived from an asset deal and
amortisation of trademarks are deductible for an amount not exceeding one-eighteenth
of the cost in any year.
Patents, know-how, and other intellectual property may be amortised over a two-year
period.
Concession rights may be depreciated with reference to the utilisation period as
determined either by law or in the relevant agreement.
For IRAP purposes only, depreciation and amortisation (other than as related to
goodwill and trademarks) are deductible in accordance with the amounts reported in
the financial statements, regardless of the limits outlined above.
Finance leasing
Leasing expenses booked in the profit and loss statement pursuant to Italian GAAP are
fully deductible from the IRES taxable base if the relevant agreement has a minimum
duration period. In particular, if the agreement is executed as of 1 January 2014, the
duration required is the following:
For fixed tangible assets, at least half of the depreciation period as set forth in the
above Ministerial Decree.
For real estate, at least 12 years.
Longer minimum duration periods are provided for financial leasing agreements
executed before 1 January 2014.
Interest expense
Generally, interest expense is fully tax deductible up to the amount of interest income.
Thereafter, excess interest expense is deductible at up to 30% of the gross operating
margin (interest deduction capacity) as reported in the financial statements. Gross
operating margin is defined as the difference between operating revenues and expenses
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excluding depreciation of tangible and intangible assets and charges for leased assets as
stated in the profit and loss account for the year.
Net interest expense in excess of the yearly limitation is carried forward indefinitely.
Hence, net interest expense not deducted in previous years can be deducted in any
future fiscal year as long as total interest in that year does not exceed 30% of gross
operating margin. If net interest expense is lower than the annual limit (i.e. 30% of gross
operating margin), this difference can be carried over to increase the companys interest
deduction capacity in future years.
Where an election is made for the domestic tax consolidation regime, (as discussed in the
Group taxationsection), the net interest expense limitation applies to the consolidated
tax group. As a consequence, if a company participating in a tax group has an excess
interest deduction capacity, this excess may be used against the interest deduction
deficit in another company belonging to the same tax consolidation group. Under
specific conditions, non-resident subsidiaries can also be virtually included in the tax
consolidation for the sole purpose of transferring their excess capacity over 30% of
gross operating margin in order to increase the overall interest deduction capacity of the
Italian group.
The above-mentioned rules are not applicable for financial institutions, such as banks
and insurance companies, where the deductibility of interest expense (for both IRES and
IRAP purposes) is limited to a fixed amount of 96% of the interest expense shown in the
income statement of these entities.
Allowance for Corporate Equity (ACE)
The ACE is a deduction that corresponds to the net increase in the equity employed in
the entity, multiplied by a rate yearly determined by the Ministry of Finance. This rate is
equal to 4% for fiscal year 2014, to 4.5% for fiscal year 2015, and to 4.75% for fiscal year
2016. Previously, the rate was equal to 3%.
The relevant increase is determined by the equity contributions and by the retained
earnings (except profits allocated to a non-disposable reserve) less the following items:
Reductions of the net equity with assignment to shareholders, including, in
particular, dividend distribution.
Investments in controlled companies.
Certain intra-group business acquisitions.
If the allowance for a year is higher than the net IRES taxable base, the difference will be
carried forward to the next periods.
To calculate the equity increase, the reference equity is that disclosed in the financial
statements for the fiscal year current as at 31 December 2010, net of the profits for the
same year.
Bad debts
Yearly provision for bad debts not guaranteed by third parties and relating to sales
of goods and services is tax deductible at up to 0.5% of the receivables gross value.
Deduction shall no longer be permitted when the total amount of the bad debts reserve
exceeds 5% of the above-mentioned gross value of the receivables as of the end of the
fiscal year.
Regardless of the above, losses on bad debts shall be deductible if supported by precise
and objective elements or, in any case, if the debtor is subject to bankruptcy proceedings.
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A loss on a bad debt can be deducted for IRES purposes whenthe following conditions
jointly apply:
The term for paymenthas elapsed by six months.
The receivablehas a determined threshold. In particular, the itemis up toEUR 2,500
for smallcompanies and up to EUR 5,000 for bigcorporations (with turnover over
EUR 100 million).
The loss is tax deductible, regardless of the amount, when the collection right is
prescribed.
Moreover, losses are tax deductible in case of derecognition of bad debts applied in
compliance with accounting standards (both Italian GAAP and IFRS), always provided
the inherence test is met.
Deduction of charitable contributions is allowed. The amounts allowed for deductions

depend on the specific features of the recipient entity, and specific limitations are set by
the law.
For IRES purposes, expenses for gifts and entertainment that meet the requirements
(both qualitative and quantitative) contained in the specific Ministerial Decree are fully
deductible in the tax period in which they are incurred. Entertainment expenses that do
not meet these requirements cannot be deducted.
Expenses related to gifts with a value of EUR 50 or less are entirely deductible.
Travel expenses
For IRES purposes, the deduction for travel expenses incurred within the municipality
is limited to 75% of the amount incurred. However, the VAT related to such costs is fully
recoverable.
Car costs
Starting from 2013, the IRES deductibility of expenses related to cars used by companies
is changed as follows:
From 40% to 20% for carsthat are not assigned to employees or are granted to
employees solely for business use.
From 90% to 70% for cars granted to employees for both business and private
purposes.
Car costs may be entirely deducted if (i) automobiles are absolutely necessary for the
companys business or (ii) automobiles are an essential element in the companys activity
(i.e. vehicles owned by a car rental company).
Telephone expenses
For IRES purposes, up to 80% of the total expenses related to both mobile and landline
telephones are deductible.
Fines and penalties
Fines and penalties are generally not considered inherent costs and are, consequently,
not deductible for tax purposes.
Taxes
The following IRAP items are deductible in determining the IRES taxable base:
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The 10% of IRAP paid during the year.
An amount determined on the IRAP paid on the cost of employees, net of the relevant
deductions.
IMU, municipal tax on real estate, is deductible for IRES purposes up to 20% of the
amount paid in the fiscal year, whereas no deduction is allowed for IRAP purposes. Only
for fiscal year 2013, the deduction was equal to 30%.
Purchases from suppliers resident in tax haven jurisdictions
The costs of goods and services purchased from entities that are resident in tax haven
jurisdictions are deductible on the condition that the taxpayer can, upon request of the
tax authorities, provide evidence that the foreign counterparts carry out a real business
activity or that the transactions were carried out for good and sound economic reasons
(e.g. better economic conditions, the foreign supplier is the sole distributor for that
product).
An official list of tax haven jurisdictions (known as the black list) has been issued by the
Ministry of Finance. A list of countries that are not considered to have a privileged tax
regime (known as the white list) is expected, and countries not on this white list will be
deemed tax havens. Specific disclosure is required in a companys income tax return for
the expenses arising in tax haven jurisdictions.
Tax losses can be carried forward for IRES purposes and used to offset income in the
followingtax periods without any time limitation.
Tax lossescan only be offset withtaxable incomefor an amount not exceeding 80%
of the taxable income. Thus, corporations arerequiredto pay IRESon atleast 20% of
taxable income.
Note that losses arising in the first three years of activity can be offset with 100% of
taxable income.
For IRAP purposes, tax losses may not be carried forward.
Specific (tax anti-avoidance) rules limit the carryforward of tax losses in the event of:
change of control and
an effective change of the main activity (performed by the company carrying forward
the losses).
The aforementioned changes must occur together in order for the limitations to be
applicable. The change of the main activity is relevant for these purposes if it takes place
in the tax period in which the change of control occurs or in the two subsequent or
preceding periods.
Specific anti-abuse provisions are also applicable to net operating losses in cases of
merger ordemerger.
In Italy, tax losses may not be carried back.
Transactions with foreign affiliated companies should be at fair market value and,
generally, as defined by OECD guidelines. See Transfer pricing in the Group taxation
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Group taxation
Domestic tax consolidation
Companies belonging to the same group can elect domestic tax consolidation. This
allows the determination of a single IRES taxable base comprised of the taxable income
and losses of each of the participating entities. The tax consolidation does not operate
for IRAP purposes.
Where an overall tax loss position arises, this can be carried forward and used against
future consolidated taxable income. Conversely, tax losses arising in fiscal years
preceding the domestic tax consolidation election can be carried forward and used only
by the company to which these losses belong.
The taxable basis determined by each company participating in the tax consolidation
arrangement is included in its entirety. No apportionment is made in relation to the
percentage of control.
In order to validly elect the Italian domestic tax consolidation regime, the following
conditions must be met:
The consolidating entity must be an Italian tax resident company, and it must hold,
directly or indirectly, more than the 50% of the share capital of the consolidated
entities (so called legal control).
This control must be in place from the beginning of the tax period for which the tax
consolidation is applied for.
All of the companies participating in the group must have the same year-end.
Provided that specific requirements are met, Italian PEs of foreign companies can also
participate as controlling entities in a tax consolidation.
The consolidation arrangement operates on an elective basis. Taxpayers may select
whether to be included or not, and it is not necessary for all the Italian group/sub-group
companies to jointly elect for the tax consolidation.
Once the election is made, it cannot be revoked for three fiscal years.
Worldwide tax consolidation group
A worldwide tax consolidation group is available, allowing the consolidation of

foreignsubsidiaries.
In addition to the requirements set out for the domestic tax group system, the following
conditions apply:
The ultimate parent company must be either owned by individuals who are tax
residents of Italy or listed on the Italian Stock Exchange.
The option must be exercised for all foreign companies (under the all in, all out
principle).
Income for each company is apportioned in the tax consolidation based on the actual
percentage of control exercised by the ultimate parent company that is an Italian
taxresident.
A number of additional requirements need to be fulfilled in order for a worldwide tax
consolidation to be operative, including a mandatory audit of the financial statements of
all the foreign subsidiaries.
Once the election is made, it cannot be rescinded for five fiscal years.
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Transfer pricing
Income derived from operations with non-resident corporations that directly or

indirectly control the Italian entity, are controlled by the Italian entity, or are controlled
by the same corporation controlling the Italian entity have to be valued on the basis of
the normal value of the goods transferred, services rendered, and services and good
received if an increase in taxable income is derived there from. Possible reductions in
taxable income as a result of the normal value rule are allowed only on the basis of
mutual agreement procedures or the EU Arbitration Convention.
The normal value is the average price or consideration paid for goods and services of
the same or similar type, carried on at free market conditions and at the same level of
commerce, at the time and place in which the goods and services were purchased or
performed. For the determination of the normal value, reference should be made, to
the extent possible, to the price list of the provider of goods or services, and, in their
absence, to the price lists issued by the chamber of commerce and to professional tariffs,
taking into account usual discounts.
Penalty protection regime with transfer pricing documentation support
Transfer pricing rules provide for a penalty protection regime in case of transfer pricing
audit, provided that the taxpayer has prepared proper documentation detailing the
compliance of inter-company transaction to the arms-length principle.
The regulation applies to transactions incurred between Italian entities and non-resident
entities belonging to the same group (transfer pricing rule are not applicable to domestic
transactions). No specific methods have been introduced to test the arms length of
transactions; reference is made to the OECD guidelines. As of 2014, an exception has
been introduced for corporations involved in on-line advertising and related ancillary
activities that are required not to use cost-based indicators for transfer pricing purposes,
unless an advance pricing agreement (APA) has been defined with the tax authorities on
this.
On the base of the transfer pricing regulation, taxpayers can obtain penalty protection if
they provide the Italian tax authorities with:
Documentation to support the inter-company transactions drawn up in the specific
format detailed in a Regulation issued by the Italian tax authorities and drawn up in
the Italian. The tax authority confirmed that information in annexes (inter-company
contracts and transactions diagram) can be in the English.
Notification that documentation has been prepared and available by checking the box
in the annual corporate income tax return.
The information required is based on the EU Code of Conduct for Transfer Pricing
documentation.
Based on the group structure, a Master File and/or Country File have to be prepared.
Italian-based groups and Italian sub-groups owning non-Italian subsidiaries must
produce both a Master File and a Country File. Italian subsidiaries of multinational
groups need to produce a Country File only.
The sub-group provisions are onerous, especially so where they relate to branches.
Where a foreign entity has an Italian branch but the company itself is also a holding
company, a Master File is required for the foreign entitys subgroup, even if there is no
holding directly attributed to the branch.
Sub-holding companies based in Italy with at least one non-Italian subsidiary, which
need to produce a Master File, may instead produce the Master File for the entire group
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in English.If it does not contain all the information in the Italian Regulation, they will
need to supplement it.
Documentation must be signed by the legal representative of the company and provided
to the authority upon request within ten days. Also, an electronic copy must be provided
at authority request.
Small and medium companies (defined as those with an annual turnover of less than
EUR 50 million) need to update the economic analysis only every three years, provided
that no significant change in the business occurred. Otherwise, it is necessary to update
the economic analysis each year.
As of 2014, it has been clarified that transfer pricing adjustments arising on tax audits
are also relevant for IRAP for companies financial years commencing on or after 1
January 2008. Moreover penalties will not be levied in relation to the additional IRAP
applicable to transfer pricing adjustments assessed by the tax authorities for the fiscal
years from 2008 to 2012, unless the assessment has become final before 1 January 2014.
Relief from penalties is granted on the additional IRAP applicable to transfer pricing
adjustments to taxpayers who have prepared transfer pricing documentation in line with
Italian regulation.
International ruling procedures are available, to agree transfer pricing methodology
with the tax authorities.
The agreement executed between the tax authorities and the taxpayer is binding for
the fiscal year during which the agreement is executed and for the following two fiscal
years, unless significant changes in the circumstances relevant for the conclusion of the
agreement executed by the taxpayer take place.
Thin capitalisation
Italy no longer has thin capitalisation rules per se. Instead, net interest expense is
deductible only up to an amount equal to 30% of gross operating margin (see Interest
expense in the Deductions section for more information).
An Italian company that controls, either directly or indirectly, an entity located in a tax
haven jurisdiction is required to consolidate the taxable income arising in proportion
to the percentage of shareholding held, irrespective of whether the profits have been
distributed or not.
Income from CFCs is taxed separately from the other taxable income of the business
at the standard IRES rate (i.e. other tax losses cannot be used to offset CFC income).
Foreign taxes paid by the CFCs are recoverable by way of a corresponding tax credit.
Dividends received by an Italian shareholder from a CFC are excluded from taxable
income up to the amount of the taxable income attributed under the above CFC
provisions. The excess of any dividends over income already included through the CFC
regime is fully taxable in the hands of the shareholder.
Where companies are located in a tax haven, the CFC rules also apply for companies
holding not less than the 20% of the companys share capital or entitled to not less
than 20% share of the companys profits. In such instances, there are specific rules
to determine the taxable income attributable to the Italian resident shareholder. The
taxable income is determined by applying specific income ratios to the business assets of
the CFC as they appear in the relevant accounts.
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Exemption from these CFC rules can be achieved by means of an advance ruling from
the Italian tax authorities. To obtain such a ruling, adequate evidence must be provided
to demonstrate at least one of the following:
The foreign company is mainly and effectively engaged in sales and/or industrial
activities in the market of the foreign host state or territory. Banks, other financial
entities, and insurance companies must demonstrate that most of the financial
resources and related proceeds are made in or the result of yields, respectively, from
the market of the foreign host state or territory. However, this exemption cannot be
requested where more than 50% of the income of the foreign subsidiaries is derived
from passive income (e.g. holding or investment in securities, receivables, or other
financial assets, transfer or licence of intangible rights) or from intra-group services.
No less than 75% of all the proceeds of the CFC have been taxed in jurisdictions that
are not tax privileged countries (e.g. a company resident in Hong Kong has all of its
operations in China mainland and it is subject to ordinary taxation there).
The CFC rules also extend to controlled companies that are located in a jurisdiction with
a privileged tax regime that is not a tax haven, if the following conditions exist:
The effective tax is less than 50% of the tax that would have been charged had the
company been resident in Italy.
More than 50% of revenue is derived from so-called passive income or from intragroup services.
By means of an advance ruling, the Italian parent company is able to obtain an
exemption from these rules if it is able to provide proper evidence that the establishment
of the company in the privileged tax jurisdiction is not for tax avoidance purposes
(unfair tax advantage).

Foreign tax credit
Where foreign-source income definitively is taxed abroad, a tax credit can be claimed for
use against a companys IRES liability. The amount of the tax credit that can be claimed
is the lower of the foreign tax incurred and the proportion of the IRES liability related to
the foreign-source income. For partially exempt income (e.g. dividends), the foreign tax
credit is reduced in proportion to the amount of the income taxable in Italy.
If an Italian company receives foreign income from more than one country, this
limitation is applied separately to each country.
Foreign taxes borne by the foreign PE of an Italian resident company are allowed to be
offset against the overall consolidated tax liability (IRES).
Any excess of foreign tax credit over the maximum amount allowed for recovery in the
same tax period can be carried back or carried forward for eight years and recovered if
specific conditions are met (e.g. same source country of the income, occurring because
of an excess of the IRES liability related to the foreign-source income).
Inward investment, capital investment, and research and development

(R&D) investment incentives
A number of incentives have been established to attract new industry to southern Italy
and certain depressed mountain areas in central and northern Italy.
Tax credits are given to companies that increase the number of their employees and that
invest in R&D.
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The possibility of taking advantage of these rules, however, depends on the taxpayer
fulfilling specific conditions and on the actual availability of financial resources by the
Italian state. These financial resources generally are set in the annual state budget.
Withholding taxes
A20% base standard withholding taxes (WHT) rate is applicableon the yields on loans
and securities (bonds, shares, etc.) paid by Italian resident entities to both Italian and
non-Italian resident investors. Starting from 1 July 2014, the standard rate is increased
to 26%.
The said standard WHT rate, however, does not affect the applicability of those rules
allowing either the application of reduced WHT rates or the full exemption from the said
withholdings (e.g. double tax treaties [DTTs], EU directives, special domestic tax rules).
Interest on Treasury bonds is subject to a 12.5% domestic WHT.
WHT chart
Domestic corporations paying certain types of income are required to withhold as shown
on the following chart. The numbers in parentheses refer to the notes below.
Recipient
EU resident corporations
Swiss resident corporations
Treaty countries (8):
Albania
Algeria
Argentina
Armenia
Australia
Austria
Azerbaijan
Bangladesh
Belgium
Bosnia and Herzegovina (Yugoslavia Ex)
Brazil
Bulgaria
Byelorussia
Canada
Croatia
Cte dIvoire
Cyprus
Czech Republic
Denmark
Ecuador
Egypt
Dividends (%)
0
0/20 (2)
0/1.375 (4, 5)
0 (6)/DTT rates
Interest (%)
0/20 (1)
0/20 (1)
0 (4)/DTT rates
0 (6)/DTT rates
Royalties (%)
0
20 (3)
0 (4)/DTT rates
0 (6)/DTT rates
20 (7)
20
30 (3)
10
15
15
5/10
15
15
10
10/15
15
10
15
10
5/15
5/15
10
15
15/18
15
15
0/15
15
20
0/5
0/15
0/20
0/10
0/10
0/10
10
0/10/15
0/15
10
0/15
0
0/8
10
0/10
10
0/15
10
0
0/10
0/10
0/25
5
5/15
10/18
7
10
0/10
5/10
10
5
10
15/25
5
6
0/5/10
10
5
10
0
0/5
0/5
5
15
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Recipient
Estonia
Ethiopia
Finland
France
Georgia
Germany
Ghana
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Japan
Jordan
Kazakhstan
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
Mauritius
Mexico
Moldova
Mongolia
Montenegro (Yugoslavia Ex)
Morocco
Mozambique
Netherlands
New Zealand
Norway
Oman
Pakistan
Philippines
Poland
Portugal
Qatar
Romania
Russia
San Marino
Saudi Arabia
Senegal
Serbia (Yugoslavia Ex)
Singapore
Slovak Republic
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Dividends (%)
5/15
10
10/15
5/15
5/10
10/15
5/15
15
10
10
5/15
15/25
10/15
15
10/15
10/15
10
5/15
0/5
5/15
5/15
5/15
15
5/15
10
15
5/15
15
5/15
5/15
10
10/15
15
5/10/15
15
15
5/10
15/25
15
10
15
5/15
10
5/10
0/15
5/10
15
10
10
15
Interest (%)
0/10
0/10
0/15
0/10
0
0/10
10
0/10
0/12.5
0
0
0/15
0/10
10
10
10
10
0/10
0
0/10
0
0/10
0/10
0/10
0/15
0/10
20
0/15
5
0/10
10
0/10
0/10
0/10
0/10
0/15
0/5
0/30
0/10/15
0/10
0/15
5
0/10
10
0/13
5
0/15
10
0/12.5
0
Royalties (%)
5/10
20
0/5
0/5
0
0/5
10
0/5
15
0
5
20
10/15
0
0/10
10
10
10
10
5/10
0
5/10
10
0
15
0/10
15
0/15
5
5
10
5/10
10
5
10
5
10
30
25
10
12
5
10
0
0/10
10
15
10
15/20
0/5
Italy
Recipient
Slovenia
South Africa
South Korea
Soviet Union Ex (9)
Spain
Sri Lanka
Sweden
Switzerland
Syria
Tanzania
Thailand
Trinidad and Tobago
Tunisia
Turkey
Uganda
Ukraine
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Zambia
Dividends (%)
5/15
5/15
10/15
15
15
15
10/15
15
5/10
10
15/20
10/20
15
15
15
5/15
5/15
5/15
0/5/15
10
10
5/10/15
5/15
Interest (%)
10
0/10
0/10
0
0/12
0/10
0/15
12.5
0/10
15
0/10
10
0/12
15
0/15
0/10
0
0/10
0/10
0/5
0/10
0/10
0/10
Royalties (%)
5
6
10
0
4/8
10/15
5
5
18
15
5/15
0/5
5/12/16
10
10
7
10
8
0/5/8
5
7/10
7.5/10
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
The actual applicable rate depends on the nature of the recipient. Applicable rates are as follows: 0%
applies on loan agreements and ordinary notes when the recipient is a corporation; 20% rate in all
other cases. Starting from 1 July 2014, the standard rate is increased to 26%.
0% is applicable on dividends received by shareholders holding no less than 20% of the share capital
(2% in the case of listed entities), so called qualified investments. The rate applicable to nonqualified investments is 20%. Starting from 1 July 2014, the standard rate is increased to 26%.
The rate is applicable on 75% of the gross amount of the royalty paid.
Pursuant to the EU Directives and provided that the requirements set forth therein are met, payments
of dividends, interest, and royalties made by an Italian company to an EU resident group company
can be WHT exempt. Specifically for the dividends, the minimum shareholding requirement (to benefit
from this exemption) is currently equal to 10%.
Should the full WHT exemption not apply, 1.375% is applicable on dividends paid to EU tax resident
corporations.
Pursuant to the 2004 Swiss EU tax agreement and provided that the requirements contained therein
are met, payments of dividends, interest, and royalties made by an Italian company to a Swiss tax
resident group company can be WHT exempt.
Non-resident persons have the right to obtain reimbursement for up to one-fourth of the withholding
effected, upon proof of the actual taxation of the dividends in the foreign country where the recipient
is a resident.
Provided that all conditions are met, domestic tax legislation is applicable if more favourable for
the taxpayer. In a number of circumstances, tax treaties may provide for particular tax rates mainly
dependent on the nature of the instruments and on the profile of the recipients/payers. In such cases,
the applicable WHT must be verified from an analysis of the relevant tax treaty.
The treaty with the former USSR remains applicable with respect to Kyrgyzstan, Tajikistan, and
Turkmenistan.
Tax administration
Taxable period
The ordinary taxable period is equal to 12 months. Conformity with the calendar year
is not requested. In particular cases, the duration of the taxable period can be different
from 12 months (e.g. newly established companies may be allowed to have taxable
periods of up to 18 months; companies that are involved in extraordinary transactions
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[merger, de-mergers, etc.], as well as companies that are liquidated, may have taxable
periods shorter than 12 months).
Tax returns
IRES and IRAP returns must be filed by the end of the ninth month following the tax
year-end.
The ordinary filing deadline for WHT agent returns is 31 July for both the simplified
WHT return and the ordinary WHT return.
Payment of taxes
For IRES and IRAP purposes, the tax law provides for both advance payments and
settlement payments. As a general rule, the advance payments are equal to the net tax
payable for the previous tax period and are due during the tax period to which they
refer. The measure of the advance payments due is increased to 102.5% (130% for
financial and insurance entities) forfiscal year2013 and to 101.5% forfiscal year2014.
Advance payments are split into two instalments:
40% by the 16th day of the sixth month following the tax year-end.
60% by the end of the 11th month following the tax year-end.
Settlement payments are due by the 16th day of the sixth month following the tax yearend to which they refer.
Tax payments should be performed through a specific form to be electronically filed to
the tax authorities (i.e. F24 form).
Offsetting of taxes
Payables and receivables (not claimed for refund) resulting from a return regarding
different taxes are allowed for off-setting within a yearly limit of EUR 700,000
(previously EUR 516,457.90).
Furthermore, in order to offset tax credits exceeding EUR 15,000, a so-called conformity
mark affixed by a qualified professional on the related return is required.
No offsetting is allowed in case of unpaid taxes resulting from an official payment notice
and exceeding EUR 1,500.
Administrative penalties
Failure to file a tax return results in a penalty ranging from 120% to 240% of the taxes
due. Minimum penalties (ranging from EUR 258 to EUR 1,032) are applicable if no tax
liability emerged in the return.
A tax return showing either a taxable income lower than the one assessed or a tax credit
higher than those owed to the taxpayer (i.e. an untrue tax return) results in a penalty
ranging from 100% to 200% of the higher taxes ultimately due.
Omitted and/or late payments of taxes of whichever kind and nature result in a penalty
equal to 30% of the unpaid/late paid tax.
Special rules apply where similar violations are repeated over various years.
Self-disclosure of tax law breaches are allowed on payment of the higher taxes and
of reduced penalties. Such self-disclosure is allowed on condition that no tax audit is
in progress in relation to the tax period in which the breach took place. The reduced
penalties are always computed on the floor of the applicable range of penalties. The
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actual reduction depends on the time elapsed between the occurring of the breach and
the self-disclosure itself. In this respect, reduced penalties may range from 1/10 to 1/8.
Software based tax controls (so-called Studi di settore)
The Italian Tax law provides for special tax control procedures for those enterprises
whose total turnover does not exceed EUR 7.5 million. The controls, so-called Studi di
Settore, are based on standardised economic models of the different business fields and
are aimed at assessing whether or not a specific subjects taxable income is in line with
its own standard model (on statistical basis).
A higher possibility of undergoing tax audit should be considered for entities not
meeting the expected profitability and/or turnover resulting from these automated
controls.
Tax audit process
For larger companies having a yearly turnover exceeding specific thresholds (that are in
the process of being progressively decreased to EUR 100 million), administrative checks
on tax returns may be carried out within the year following that in which the tax return
has been filed.
Tax audit can take place at the taxpayers premises as well as in the tax authorities
offices. The statute of limitations provides that tax auditors can stay at a taxpayers
premises for not longer than 60 working days (30 days ordinary term plus 30 days of
extension). At the end of this period, the audit must come to an end unless extraordinary
issues arise. Tax auditors must take note of the observations and requests made by the
taxpayer. At the end of their audit, the tax auditors must draw up a tax audit report
whereby the outcome of the audit activity must be detailed and the findings (if any)
must be illustrated and motivated. A copy of the report has to be filed with the tax office.
The tax office receiving the tax audit report examines the findings reported by the tax
auditors and starts the assessment procedure, which may lead to the issuing of a tax
assessment notice bearing the request for payment of higher taxes and/or penalties.
Tax controversy and dispute resolutions
Should the taxpayer accept all of the challenges raised by the tax authorities, it may take
advantage of the application of reduced penalties. The reduced penalties may range
from 1/6 to 1/3 of the minimum applicable penalties, depending on the status of the
controversy.
In case the taxpayer decides not to accept the challenges by the tax authorities, a
settlement procedure can be initiated. The favourable outcome of the settlement
procedure brings forth (in addition to the agreed-upon reduction of challenged taxes)
the reduction of penalties: ordinarily down to 1/3 of the minimum applicable penalties.
In case no settlement is either achieved or requested for, the taxpayer may start a tax
dispute before the Court. The judicial proceedings are structured in three tiers:
Provincial Tax Commission, in first instance.
Regional Tax Commission, in second instance.
Supreme Court of Cassation.
The Italian tax authorities are entitled to make an assessment in relation to direct taxes
(IRES and IRAP), VAT, and WHT returns up to the end of the fourth calendar year
following the year in which the tax return was filed. Under certain circumstances (e.g.
no return filed or fraud giving rise to criminal law penalties), the above deadlines may
be extended.
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Extraordinary transactions (such as mergers, de-mergers, etc.) continue to be a topic of

focus for tax authorities due to the potential applicability of tax anti-abuse rules.
As a response to recent cases of carousel-frauds on VAT, cross-border transactions are
being more heavily scrutinised.
Over the last few years, we experienced an increasing focus by the tax authorities on
transfer pricing and PE related issues.
The beneficial ownership condition is very carefully scrutinised in case of payments
where a nil or reduced WHT is applied based on EU Directive or applicable DTT, in
particular when the ultimate owner of the group is non-EU.
Other issues
Adoption of IFRS and taxation
The Italian tax law provides for two basic principles and some specific rules for taxation
of a company adopting International Accounting Standards (IAS)/IFRS in the statutory
financial statements:
Derivation principle (Principio della Derivazione): the taxable base of companies is
determined starting from the net income arising from the profit and loss, increased
or decreased by items directly booked to equity pursuant to the application of IAS/
IFRS. To such income, the general tax adjustments set forth by the Corporate Income
Tax Law apply. In this respect, as exception to the general tax criteria, the accrual
principle, and the qualification and classification criteria stated by the IFRS are
relevant for the calculation of the taxable base.
Neutrality principle (Principio della Neutralit): such principle aims to neutralise
the effects deriving from the movement to IAS/IFRS (First Time Adoption or FTA).
Conversely, such principle does not grant an equal treatment for companies adopting
or not IAS/IFRS (in fact, specific rules are applicable only to IAS/IFRS adopters, e.g.
taxation of dividend on held for trading securities, derivatives).
The following specific rules applicable to IAS adopters must be considered:
Adjustments or recognitions of transactions made in equity and/or in the other
comprehensive income (OCI)are relevant for tax purposes, to the extent that such
items are in compliance with general taxprinciples.
For equity instruments, the legal classification is prevailing over the accounting one
(debt vs. equity classification).
Under certain conditions, unrealised profits and losses recognised in the profit
and loss become taxable and deductible (e.g. fair value on securities other than
shareholdings and on derivatives transactions).
The tax treatment of transactions between IFRS adopters and non-IFRS adopters is
based on the accounting principle adopted by each company (e.g. financial leasing
transaction).
Depreciation and amortisation are permitted within the rates provided by the tax
rules and limited to the amount booked in the profit and loss statement. In this
respect, the abolition of the imperative systematic depreciation of the goodwill
and its substitution by the goodwills review for impairment does not affect the tax
deduction of the goodwill amortisation that should be made solely for tax purposes.
Negative components booked in the income statement as expenses for personnel
settled with equity instrument under IFRS 2 are, in principle, deductible for IRES
purposes (stock options).
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In order to identify financial instruments with hedging purposes, IFRS adopters are
allowed to give relevance to the classification made in the financial statement. In
particular, financial instruments designated in the financial statement as hedging
instruments in compliance with IFRS principles are considered also as hedging
instruments for fiscal purposes (hedging accounting approach including the fair
value option [FVO]).
Given the possibility, under the IAS 39 accounting principle, to reclassify financial
securities in a different portfolio from that of the initial booking, the value at which
the security is booked in the new portfolio is tax relevant.
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PwC contact
Dominique Taty
PricewaterhouseCoopers Tax and Legal S.A.
Immeuble Alpha 2000
20th Floor
Rue Gourgas - Plateau
Abidjan 01
Cte dIvoire
Tel: +225 20 31 54 60
As of fiscal year 2014, companies selling goods or providing services to entities
benefiting from a conventional value-added tax (VAT) exemption, as well as diplomatic
institutions, are eligible for VAT refunds.
Companies investing in the construction of economical housing that previously were
allowed to claim VAT refunds can now benefit from VAT exemption under the procedure
of VAT exemption certificates. The exemption is also extended to notary fees on sales of
houses built under these programs.
Companies eligible for the important housing investment regime, which perform
programs of construction of at least 10,000 economic and social houses for seven years,
can benefit from a deduction of 80% on their taxable profits (5% effective corporate
income tax [CIT] rate).

Tax on industrial and commercial profits in Cte dIvoire is levied at 25%, subject to a
minimum tax. The rate is 30% for companies in the telecommunication, information
technology, and communication sectors.
Taxable corporate income in Cte dIvoire is based on worldwide income for resident
companies (for exceptions, see Foreign income in the Income determination section). Nonresident entities are subject to withholding tax (WHT) at 20%, subject to existing double
taxation agreements (DTAs), on their Cte dIvoire source income when they do not
have a permanent establishment (PE). Non-residents with a PE are taxed in the same
way as a resident.
Minimum tax
The minimum tax is based on total turnover and is calculated at the rate of 0.5%
(0.15% for banking activities, 0.1% for oil companies), with a minimum tax of 3 million
Communaut financire dAfrique (Financial Community of Africa or CFA) francs (XOF)
and a maximum tax of XOF 35 million.
Local income taxes
The income tax is levied at the national level. There is no local income tax.
Corporate residence
In Cte dIvoire, companies are considered resident in tax jurisdictions where they have
a registered fixed establishment (e.g. subsidiaries, branches, representative offices).
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A non-resident is considered as having a PE in Cte dIvoire when its activities involve

a comprehensive commercial cycle in Cte dIvoire or when it operates though a
dependent agent in Cte dIvoire.
According to DTAs, a non-resident is considered as having a PE in Cte dIvoire when it
has a registered establishment, including a subsidiary, a branch, a representative office,
a mine or an oil well, a building site, a manufacture plant, or a trading establishment.
Sometimes, a time threshold of six months is considered.
Other taxes
VAT is a non-cumulative tax levied on the sale of goods and services at the rate of 18%.
Subject to certain restrictions, VAT is recoverable.
The rate is reduced to 9% for milk, pasta products that contain 100% durum wheat
semolina, and equipment designed for the production of solar energy.
Customs duties
Customs duties rates range from 0% to 20%, depending on the classification of the
imported goods according to the customs tariff.
Upon import, goods are also subject to the statistical duty (1%), to community levy
(1%), and to VAT (18%).
Special taxes, depending on the nature of the imported goods, may apply, such as excise
duties.
Statistical duty
The statistical duty is levied together with the customs duties during the customs
clearance procedures of imported goods.
The rate of the statistical duty is 1% on the cost, insurance, and freight (CIF) value of the
imported goods.
Community levy
The community levy is due together with the customs duties during the customs
clearance procedures of imported goods.
The rate of the community levy is 1% on the CIF value of the imported goods.
The community levy does not apply to goods imported from member countries of the
West African Economic and Monetary Union (UEMOA), which includes Cte dIvoire,
Senegal, Burkina Faso, Mali, Benin, Togo, Niger, and Bissau Guinea.
Excise duties
Excise duties apply on cigarette imports, alcoholic or non-alcoholic beverages, and oil
products.
Real estate tax
A real estate tax is imposed at the following rates:

1.5% for undeveloped lands.
4% on land revenue.
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11% on developed land or 15% when the built property is used by the company itself.
The rate is reduced to 4% for unoccupied buildings.
Property owners are required to withhold 15% of rentals, payable on the 15th day of
each month to the tax authorities. This is an advance payment on the annual real estate
tax by the owner of the estate property.
Transfer taxes
In the case of the transfer of property through a direct sale, taxes are assessed at the
following rates:
10% for lease transfers.
6% for the sale of real estate.
10% for the sale of businesses.
For mortgages, the rate is 5% for the financial lessor at the acquisition of the good and
1% for acquisition of the immovable property by the lessee from the excise of the option.
Stamp duty
A direct tax is paid for any document subject to a registration procedure, for an
acknowledgment of a cash payment, and for bills of exchange.
Special tax for equipment
A special tax is paid by all taxpayers for the purpose of the equipment of the government.
The tax is calculated on 0.1% of total turnover and is paid monthly.
Business franchise tax
The business franchise tax includes a turnover tax and a proportional tax. The turnover
tax is calculated on turnover at the rate of 0.5%, with a minimum tax of XOF 300,000
and a maximum tax of XOF 3 million. The proportional tax rate is 18.5% and is based on
the rental value of the professional office location (based on general office rents).
Tax on banking operations
A cumulative tax of 10% is levied on bank services rendered. Tax on banking operations
charged by banks to companies is fully deductible fromoutput VAT.
Registration taxes
Registration of capital contributions is taxed, whether the capital or increase in capital is

made in cash or in kind. The rate is 0.3% for contributions up to XOF 5 billion and 0.1%
for contributions over XOF 5 billion, with a minimum tax of XOF 18,000. Increases in
capital by incorporation of reserves are taxed at 6%.
In the event of a capital increase through a merger, the increase in the share capital of
the acquiring company is taxed at half the rates above.
Insurance premiums are subject to tax as follows:

Policy type
Marine policies
Life policies
Fire policies
Health policies
Export credit insurance
Other (e.g. personal liability, transportation)
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Tax rate (%)

7.0
Exempted when contracts duration is more than
three years
25.0
8.0
0.1
14.5

Premiums paid under commercial shipping insurance policies for maritime risks are
exempt. The tax may be paid by the insurance company, its agent, or the subscriber, in
cases where the subscriber had to pay the premium to a foreign insurance company.
Tax on telecommunication services
A specific tax of 5% is applicable on the turnover of mobile telecommunication,

information technology, and communication of companies. Companies operating in the
telecommunications, information technology, and communications sector should invest
20% of the amount of dividends transferred abroad in bonds of the public Treasury.
Payroll taxes
Taxes are levied at the rates of 2.8% for local employees and 12% for expatriate
employees on the total taxable remuneration, including salaries, benefits, and benefits
in kind.
Employers must contribute to the social security system (CNPS) at the following rates:
Contribution
Family allowance
Work injury
Retirement pension

5.75
2.0 to 5.0
7.7
Monthly ceiling (XOF)

70,000
70,000
1,647,315
Branch income
The tax rate for branch income is the same as that for corporate income. After-tax branch
earnings are subject to a 15% tax (Impt sur le revenu des valeurs mobilires or IRVM)
calculated on 50% of the taxable profit. This is analogous to the WHT on dividends.
Inventory valuation
Inventory is generally stated at the lower of cost or market value. Last in first out (LIFO)
and first in first out (FIFO) methods are permitted. Book and tax conformity is required.
Capital gains
Capital gains are normally taxed at full corporate rates. However, the tax on capital
gains, exclusive of recaptured depreciation, can be deferred if the gain is reinvested
within three years.
Dividend income
Dividends are brought into taxable income at 50% of the net amount earned by the
company (after 15% WHT).
The exemption is increased to 95% for dividends received from a subsidiary if a parent
company domiciled in Cte dIvoire owns 10% of the subsidiary.
Stock dividends
Stock dividends are unusual, but in the event they are declared, they are not taxable to
the recipient.
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Interest income
Interest from loans is brought into taxable income at 50% of the net amount earned by
the company after 18% WHT.
Foreign income
Resident corporations are taxed on their worldwide income, except for profits derived
from business conducted through a PE outside Cte dIvoire. Since income derived from
business conducted outside Cte dIvoire is not taxable, no tax credit is allowed. Interest
and dividends from foreign sources are entitled to certain deductionsto alleviate
instances of double taxation. Subject to provisions of tax treaties, no deductions or tax
credits are allowed for revenue from royalties and services.
Deductions
Depreciation is generally computed on a straight-line basis over the useful life of the
asset (e.g. 20 years for buildings, three years for automobiles). Accelerated depreciation
is sometimes permitted for machinery. The following depreciation rates are generally
accepted for tax purposes:
Assets
Buildings
Machinery, equipment (rate depending on equipment)
Office furniture
Office equipment
Vehicles
Computing equipment

5
8/10/20
10
20
33.3
20 to 50
A time coefficient is applied to the rate of depreciation to obtain the declining balance.
Depreciation rates may be amended, but only after agreement with the tax authorities.
New plants and equipment may be depreciated at twice the normal rate in the first
year of use, provided they are depreciated over at least six years. Under certain
circumstances, buildings used for staff housing may be depreciated at 40% of cost in
the first year. Annual depreciation must be booked to preserve tax deductibility. The
whole or any part of the annual charge can then be deferred in annual accounts for fiscal
years showing a tax loss. Recaptured depreciation is taxed at full rates. Tax and book
conformity is obligatory.
Depletion allowances, as such, do not exist, but tax incentives are available for
exploration to replace depleted natural reserves.
Goodwill
Goodwill (capital gain) deriving from the transfer of assets is included in taxable profit.
The gain may be exempt from the income tax basis if the taxpayer commits to reinvest
the purchase price of the transferred assets plus the goodwill in the three following
years.
If the reinvestment is not completed in the three years, the gain will be subject to income
taxation.
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Start-up expenses
Start-up expenses (e.g. legal fees, registration duties on share capital subscription, the
costs of any registration procedure, advertisement expenses) have to be amortised over a
period from two to five years.
Interest expenses
Interest paid to shareholders may be deducted. The maximum interest rate allowed is
related to the Banque Central des Etats de lAfrique de lOuest (BCEAO) rate plus three
points. The reimbursement of the loan must take place in the five years following the
loan.
Bad debt
Provisions for bad debts are deductible, provided that a minimum set of collection
procedures have been engaged.
Bad debts are deductible for income tax purposes unless the debt results from abnormal
business decisions.
Charitable contributions to recognised sport and health associations are deductible.

Charitable contributions to individuals or non-recognised beneficiaries are not tax
deductible.
Fines and penalties
Fines borne by corporations are not tax deductible.
Taxes
Regular taxes paid by corporations are deductible for income tax purposes.
Third party taxes (such as WHT on non-resident service providers) borne by
corporations are not tax deductible.
In respect to legal reserves, 10% of net profit must be transferred to a reserve for legal
fees until the reserve equals 5% of the paid-up share capital.
To be tax deductible, provisions must relate to existing liability or loss. General reserves
are not deductible.
Losses may be carried forward for five years.

Losses derived from depreciation can be carried forward indefinitely.
Losses cannot be carried back.
Reasonable royalties, interest, and management and service fees paid to foreign parent
companies are tax deductible. However, the deductions should not exceed 5% of the
turnover and 20% of the overhead. Otherwise, the portion exceeding the ceiling is not
tax deductible. The onus is on the taxpayer to prove that expenses are justified and
reflect real transactions.
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Group taxation
Group taxation is not permitted in Cte dIvoire.
Transfer pricing
Profits directly or indirectly transferred to related non-resident companies are

disallowed from the income tax basis.
The tax administration may inquire on transfer pricing when local subsidiaries having
most of their transactions with non-resident group companies record losses.
Transfer price documentation is not generally requested.
Thin capitalisation
The deduction of the interest of loans granted on top of the share capital by related
parties is subject to restrictions (see Interest expenses in the Deductions section).
When, because of losses, the equity of the company is less than 50% of the share capital,
the company must be recapitalised in the two following years, unless the company is
dissolved.

Foreign tax credit
Since income derived from business conducted outside Cte dIvoire is not taxable, no
tax credit is allowed.
Investment zones
The aim of the Investment Code is to:

help create companies in other regions than the economic capital city (Abidjan)
help the employment of nationals
help companies doing business in a sustainable manner
develop the regions of the country, and
favour the existence of local small and medium-sized enterprises (SME).
The Investment Code regimes involve the creation of three zones (A, B, and C),
depending on the location of the company:
Zone A covers Abidjan District.
Zone B covers any town inCte dIvoire with more than 60,000 inhabitants.
Zone C covers any town inCte dIvoire with less than 60,000 inhabitants.
The duration for the granted tax benefit is:
5 years for Zone A.
8 years for Zone B.
15 years for Zone C.
The Investment Code includes two specific tax incentive regimes: the Investment
Declaration Regime and the Investment Approval Regime. Both regimes apply to all
economic activities, excluding finance and banking, non-industrial buildings builders,
and commerce activities.
For the Investment Approval Regime, the minimum investment cost is XOF 200 million
(VAT and working capital exclusive).
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The benefit from the Investment Code is granted by the Centre for the Promotion of
Investments (named CEPICI), after an application is filed by the requestor.
During the investment period, the beneficiary enjoys the following:
Reduction of 50% of the customs duties on the equipment and materials included on
the filed list together with the first spare parts, when the investment is less than XOF
1 billion.
Reduction of 40% of the customs duties of the equipment and materials included on
the filed list together with the first spare parts, when the investment is more than XOF
1 billion.
Exemption from VAT on purchase of equipment, material, and first spare parts.
After the completion of the investment, the beneficiary enjoys the following exemptions
during a period that depends on the Zone the company is located in:
Exemption from CIT.
Exemption from business franchise tax.
Exemption from real estate tax (only for Zone C in the Investment Declaration
Regime).
Exemption from registration taxes on share increases (only for Zone C in the
Investment Declaration Regime).
Reduction of the payroll taxes due on employees wages. The reduction is 80% for
Zone B and 90% for Zone C in the Investment Declaration Regime and 50% for Zone
A, 80% for Zone B, and 90% for Zone C in the Investment Approval Regime.
These incentives may not be combined with sector-specific investment programs, such as
those for mining and hydrocarbons.
With prior approval of the tax authorities and varying with geographical location,
35% to 40% of the total investment in fixed assets related to commercial, industrial, or
agricultural activity may be deducted from taxable income. The deduction is limited to
50% of taxable profits. The balance of deduction of the first year may be carried forward
over the three following years.
Export incentives
No VAT is levied on export sales.

Sales and provisions of services made to export companies, which process certain farm
products (i.e. cocoa, coffee, banana, hevea, and palm tree oil) and realise at least 30% of
their turnover from exports, are free from VAT. The exemption is granted for the purpose
of avoiding new cases of VAT credits in this line of business.
The above measure has been extended to 31 December 2014.
It has also been extended to the following activities:
The manufacturing and sale of natural and synthetic fibre bags.
The sale of softwood lumber and timber products by enterprises benefiting from the
export authorisation granted by the Department of Water and Forestry.
Export incentives for the mining industry
During the exploration phase, investments may be exempt from payroll tax; VAT on
goods and services; additional tax (on the sale of goods) on imports and purchases; all
import taxes and duties, including VAT on materials, machines, and equipment used
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in research activities; registration duties applicable to in-kind or cash share-capital
contributions; real estate tax; CIT; and minimum tax.
Mining subcontractors can benefit from the same customs exemptions granted to mining
title holders.
During the production phase, mining activities may have a five-year exemption from CIT
and relief from all import duties, including VAT on recovered investments required for
exploitation, special equipment tax, business franchise tax, etc. In addition, they may be
granted temporary admission of machines and equipment that facilitate research and
exploitation. Mining subcontractors are exempt from customs duties, including VAT on
importing of liquid or gas fuels, lubricants, and chemical or organic products intended
for the treatment of minerals, for the whole duration of the mine.
A tax on profit is levied as soon as investment funds are recovered. Mining enterprises
may not combine these incentives with those of the Investment Code.
Export incentives for petroleum service contractors
A special and optional tax treatment applies to petroleum service contractors that meet
established criteria. Corporate tax, distribution tax, payroll tax, income tax on salaries,
and the tax on insurance premiums are calculated on the turnover of the contractor. The
total taxes represent 5.636% of turnover. Standard rates apply for business franchise tax
and social security contributions for local personnel. The exemption from customs duties
and VAT for oil companies is extended to petroleum service contractors.
Withholding taxes
Impt sur le revenu des valeurs mobilires (IRVM): 15% on dividends and directors
fees.
Impt sur le revenue des crances (IRC): 18% on interest payments, reduced to 13.5%
(individuals) and 16.5% (businesses) on bank deposit interest. The revenue realised
by individuals on Treasury Bonds is subject to 10% tax on terms of up to 12 months
and to 5% tax when ranging from three years to five years. Foreign banks are subject
to 18% tax on loan interest or 9% on equipment loans with minimum three-year
terms.
Impt sur les benefices non commerciaux (BNC): 25% of 80% of revenues on royalties,
licence fees, and management and service fees paid by Ivorian companies to foreign
companies (effective rate: 20% of net amount paid). Treaties with Belgium, Canada,
France, Germany, Italy, Norway, Switzerland, and the United Kingdom provide
a maximum BNC rate of 10% on royalties and management fees. The tax treaty
between the member states of the West African Economic and Monetary Union
(UEMOA) provides a maximum BNC rate of 15% on royalties.
Interest on certificates of deposit (bons de caisse): 25%.
WHT on public contracts for services
Any payment made by government bodies or public institutions to non-resident persons

or companies for a contract for goods or services is subject to a 20% WHT, subject to
DTAs (see Impt sur les benefices non commerciaux above).
Resident persons or companies are not subject to this WHT, except for individual service
(or goods) providers registered under the standard tax regime for small companies (see
below).
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WHTon small-size businesses
A 7.5% WHT is applicable on the remunerations paid to individual service providers

registered under the standard tax regime for small companies.
A 10% WHT is applicable on payments made by government bodies or public institutions
for a contract for services (or goods).
WHT on writers revenue
A 7.5% WHT applies to occasional revenue paid to individuals or companies as royalties

on books, scientific studies, and artistic productions.
Tax administration
Taxable period
Companies are required by law to have a 31 December fiscal year-end.
Tax returns
Financial statements are filed annually, according to local generally accepted accounting
principles (GAAP). The deadline for the filing is 30 April for entities with more than XOF
1 billion turnover, 30 May for entities with less than XOF 1 billion turnover, and 30 June
for entities under the standard tax regime for small companies.
Payment of tax
Payment of CIT is due on 20 April (1/3 of the due amount), 20 June (1/3 of the due
amount), and 20 September (the last 1/3 of the due amount) following the end of the
fiscal year.
Tax audit process
Many types of tax audits are available to the tax administration, which may request any
accounting-related document for the purpose of tax audit.
The most common is the general tax audit of the taxpayers situation, which covers the
statute of limitation period. It is carried out with a notice at least five days before the
beginning of the audit. The audit is carried out on the premises of the taxpayer for a
maximum of 12 months, and a primary tax assessment is issued.
The taxpayer then has 30 days to agree or challenge the assessment, and the definitive
assessment is issued within a maximum of three months following the primary tax
assessment.
Further challenge of the definitive assessment is possible before the head of the tax
administration and the court.
The statute of limitations covers the current year and the three prior years.
The tax administration generally focuses on compliance with the CIT filing deadline and
on the payment of the instalments.
For consistency of the tax return, the tax administration focuses on the filing of
the additional records (Annual Financial Statements, Etat 301: Annual Salary
Statement, Etat 302: Annual Fees Statement), records of the provisions, tax losses, and
amortisations carried forward.
During tax audits, the focus is on transactions with non-resident related parties.
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PwC contact
Eric Crawford
Scotiabank Centre
Cnr. of Duke & Port Royal Street
Kingston, Jamaica
Tel: +1 876 932 8323
The government of Jamaica has indicated its commitment to a comprehensive
programme of tax reform and. in the continued pursuit of this, enacted a number of laws
in 2013 that impacted the following areas of taxation.
Tax incentives/waivers regime
Under the previous regime, tax incentives were available for a wide range of activities
under separate and specific incentive programmes, which often involved awarding
waivers in a discretionary manner. This regime was overhauled in 2013, and legislation
has been passed that is intended to eliminate ministerial discretionary powers in
granting or validating tax relief and has put in place a more transparent, rule-based
regime for limited tax incentives to replace the former (mostly sectoral) schemes.
This includes the following:
Developing a rule-based regime for charitable organisations and a mechanism for
harmonising the tax treatment of charitable organisations via the enactment of the
new Charities Act, 2013 and the Charitable Organizations (Tax Harmonization)
(Miscellaneous Provisions) Act, 2013, respectively.
Introducing an omnibus tax package for granting incentives via the Fiscal Incentives
(Miscellaneous Provisions) Act, 2013.
Introducing the Income Tax Relief (Large-scale Projects and Pioneer Industries) Act,
2013.
Regulation and tax treatment of charitable organisations
Historically, there has been no single statutory provision governing the lawful existence
and regulation of charities in Jamaica, and there were various statutes that provide
for certain fiscal entitlements to be extended to charities. These included a range of
exemptions, incentives, and waivers, the latter based on the statutory power of the
Minister of Finance to exercise discretion to forgive the tax liability.
The Charities Act, 2013 has implemented a mechanism for the regulation of charitable
organisations by a single authority and has established a comprehensive legal and
institutional framework for that purpose. The government has ceased the granting
of waivers to charities other than under the new legislation, and, with effect from 1
December 2013, all charitable organisations must be registered under the new regime
in order to be eligible for exemptions granted under the Act. A transitional period of
six months has been provided for organisations that were organised or operated for
charitable purposes before the new legislation came into force to be registered within
six months of the date that the Act came into force; failing which, the organisation will
cease to be regarded as a registered charitable organisation (RCO) (pending any future
approvals).
In an effort to address the abundance of waiver facilities that existed owing to
inconsistencies in the provisions pertaining to charities and charitable purposes across
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tax types, the tax treatment accorded to these entities has been harmonised by the
Charitable Organizations (Tax Harmonization) (Miscellaneous Provisions) Act, 2013
(Tax Harmonization Act). The following enactments have been amended for this
purpose:

The Customs Act

The General Consumption Tax Act
The Income Tax Act
The Property Tax Act
The Stamp Duty Act
The Transfer Tax Act
The Tax Harmonization Act also removes the ministerial power under these laws to
grant discretionary tax waivers in relation to an RCO.
Fiscal Incentives (Miscellaneous Provisions) Act (FIA)
Under the FIA, which became effective as of 1 January 2014, the government of Jamaica
ceased to grant incentives under legacy incentive legislation and commenced granting
tax incentives under the FIA. Additionally, the Income Tax Act has been amended to
include the new tax incentives that are now available under the FIA (see Income tax
reform below).
Repealed incentive enactments
The FIA provides that the following legacy incentives are repealed from 1 January 2014:

The Cement Industry (Encouragement and Control) Act

The Export Industry (Encouragement) Act
The Foreign Sales Corporation Act
The Hotels (Incentives) Act
The Industrial Incentives Act
The Industrial Incentives (Factory Construction) Act
The International Finance Companies (Tax Relief) Act
The Motion Picture Industry (Encouragement) Act
The Petroleum Refining Industry (Encouragement) Act
The Resort Cottages (Incentives) Act
The Shipping (Incentives) Act
Additionally, the Income Tax Act was amended to remove the incentive provisions
pertaining to approved farmers and discontinue various incentives that were embedded
in the capital allowances regime. The General Consumption Tax (GCT) Act was also
amended to repeal the zero-rated status that was applicable to items imported by
beneficiaries under the repealed enactments that are listed above.
No new approvals will be granted under these legacy incentives on or after 1 January
2014. Persons who were granted approval under any of the above legacy incentives
before 1 January 2014 (continuing beneficiaries) shall continue to be entitled to the
benefits afforded under that legacy incentive until they expire. Such persons may elect
to forgo their remaining entitlement under that legacy incentive in order that they may
benefit under the FIA. See the Tax credits and incentives section for more details.
Incentive enactments retained
The following incentives, however, have been retained:

The Jamaica Export Free Zones Act

The Income Tax Act (Junior Stock Market Companies)
The Bauxite and Alumina Industries (Encouragement) Act
The Urban Renewal (Tax Relief) Act
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Persons who have been granted approval under these incentive programmes will
continue to benefit under the current tax regime; however, the income tax incentives
that are available to companies that meet the requirements of the Junior Market Rules
for admission to the Jamaica Stock Exchange Junior Market have been modified. Prior
to 1 January 2014, the income of companies listed on the Junior Market qualified for the
following remission of income tax (subject to the following conditions being met):
1. 100% of the income tax payable in the first five years from the date of admission to
the Junior Market.
2. 50% of the income tax payable by the company in the five years following the period
specified in 1 above.
Under the new rules:
A company listed on the Junior Market prior to 1 January 2014 shall continue to
benefit from the incentive in the manner described above (i.e. over the ten-year
period).
A company listed on the Junior Market on or after 1 January 2014 shall benefit from
relief of 100% of the income tax payable by the company in the first five years from
the date of its admission. No relief will be granted thereafter.
Key features of the tax incentive programme under the FIA
Important features of the tax incentive programme that was introduced by the FIA
include the following:
Introduction of an employment tax credit (ETC), which is intended to be a tradeoff for the various sectoral incentives and special rates of capital allowances that
were previously available to certain industries/activities, such as manufacturing,
agriculture, and tourism. See Employment tax credit (ETC) below for details.
Revamping the capital allowances regime, which allows, among other features, for
enhancing the annual write-off rates for capital expenditure incurred on or after 1
January 2014 on certain assets and features of the new regime and expanding the
definition of industrial buildings. See Revision of the capital allowances regime below
for details.
Restricting the use of tax losses, which limits the amount of tax losses carried forward
from prior years that may be deducted in computing chargeable income in any year of
assessment. See Restriction of tax losses carried forward below for details.
Tax incentives for pioneer industries
The Income Tax Relief (Large-Scale Projects & Pioneer Industries) Act is designed to
encourage innovation and high-value investments. It provides a mechanism through
which additional income tax incentives can be offered in circumstances where the
Minister of Finance & Planning designates a project as an approved large-scale project or
an economic activity as an approved pioneer industry. An approved large-scale project
is one which is capable of generating high levels of investment and employment. An
approved pioneer industry refers to an economic activity not currently being carried
out in Jamaica on a substantial commercial basis and involving the innovative use of
technology, cultural assets, or other available resources.
The Minister shall make this designation subject to affirmative resolution in Parliament.
Participants in either a designated large-scale project or a pioneer industry may
subsequently be approved by Ministerial Order, which will stipulate the extent of relief
granted. The income tax relieved under all orders issued pursuant to this mechanism in
any year will be capped at 0.25% of the countrys gross domestic product (GDP) for the
previous financial year.
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Income tax reform
The FIA has amended certain provisions of the Income Tax Act as follows.
With effect from 1 January 2014, a CIT rate of 25% is applicable to all Jamaica resident
companies (other than regulated companies), as well as non-resident companies
carrying on business in Jamaica. Large unregulated companies, which were previously
liable to income tax at the rate of 30% will, therefore, see their tax rate fall back to 25%,
in line with most other taxpayers (see the Taxes on corporate income section for the various
classifications of companies for income tax purposes).
Employment tax credit (ETC)
The ETC is a non-refundable tax credit that is available to certain persons (referred to as
eligible persons) in computing their income tax liability commencing 1 January 2014
(i.e. the year of assessment 2014). However, a number of taxpayers are ineligible for this
tax credit, including:

Regulated companies.
Continuing beneficiaries under legacy incentive legislation.
Companies listed on the Jamaica Stock Exchange Junior Market.
Approved group head office companies.
Persons benefiting from incentive legislation that has been retained.
The ETC is the total of the statutory payroll levies (Education Tax, National Housing
Trust, National Insurance, and Human Employment and Resource Training [HEART]
contributions) and is capped at 30% of the income tax payable on profits from business
operations. In order to benefit from the ETC, the monthly statutory returns that report
the statutory payments must be filed on or before the due dates and the payments
remitted by that date (i.e. by the 14th day of the month following that to which they
relate). The tax credit therefore provides tax-compliant businesses with an opportunity
to reduce the effective income tax rate on their trading profits to as low as 17.5%.
The ETC may not be claimed against any income tax chargeable on non-trading income
(e.g. passive investment income) nor can it be claimed in the year of assessment where
the taxpayer incurred a tax loss on business operations. The amount must be utilised in
the year that the statutory payments are made and is not available to be carried forward
or backward to be utilised in other years of assessment. As a transitional measure, the
ETC will apply to a fraction of the entitys income that is reported in its income statement
for a period ending in 2014, where the year-end is other than 31 December. The fraction
specified is the number of months falling in calendar year 2014 divided by the number
of months included in the companys income statement. There are also anti-avoidance
rules that seek to prevent regulated companies from migrating their activities and profits
into unregulated companies so as to benefit from the ETC.
Where a company makes a distribution (dividends and certain other benefits to
shareholders), the credit is clawed back by the Inland Revenue Department to the extent
of 10% of the distribution, less the tax payable by the recipient of the distribution. The
credit clawed back must be repaid to the Inland Revenue Department within 14 days of
the end of the month in which the distribution is made.
Revision of the capital allowances regime
Under the previous capital allowances structure, initial allowances were available at the
rate of 20% on industrial buildings and structures and machinery and plant in the year
of expenditure. Annual allowances were generally available on the reducing-balance
basis on buildings ranging from rates of 2.5% to 5% and at various rates for machinery
and equipment (excluding computers). Computers were written down at an annual
rate of 22.5% on the straight-line basis. Special rates of capital allowances ranging from
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20% to 100% were also available to certain industries/business activities in the form of
investment allowances and accelerated depreciation (special capital allowances).
The FIA provides that a new capital allowances regime is applicable to capital
expenditure incurred on or after 1 January 2014. Capital expenditure incurred prior to 1
January 2014 will continue to be written off for income tax purposes in accordance with
the rates prescribed above. Important features of the new regime include the following:
Annual write-off rates are now more in line with the anticipated normal working
lives of assets and are calculated on the straight-line basis (see Depreciation in the
Deductions section for a table of prescribed rates).
Expansion of the definition of industrial buildings or structures and enhancement
of the write-off rates, which now range from 4% to 12.5% for certain buildings and
structures.
An increase in the rate of initial allowance to 25% for machinery that is used
directly in the production of primary products or in the manufacture and automated
packaging of such goods. However, there will no longer be initial allowances on office
equipment, telephones, and most other types of assets.
Reduction of the number of asset categories in the machinery and plant category and
associated annual allowance write-off rates. There will now be only two rates, 12.5%
and 20%, calculated on the cost.
The allowable base cost, on which annual allowances are calculated, increased for
private motor vehicles, from 3,200 Jamaican dollars (JMD) to the Jamaican dollar
equivalent of 35,000 United States dollars (USD). Certain anti-avoidance provisions
are also proposed with a view to preventing abuse of this increase in tax relief
granted.
Extension of capital allowances for capital expenditure on a wide list of intellectual
property (IP) rights, as well as extension of relief to pure or applied science and
research and development (R&D) costs.
Various capital allowances that were designed to provide incentives to particular
activities (i.e. investment allowances [other than for electricity undertakings], special
capital and special annual allowances) were repealed.
The new regime also includes transitional rules to allow a taxpayer who benefitted from
a legacy incentive that has been repealed and who elects to forego ones remaining
entitlement to such incentive by 30 June 2014 to benefit from the new rates of capital
allowances on expenditure incurred prior to 1 January 2014. To the extent that no
capital allowances were previously claimed, the expenditure will be deemed (for the
purpose of claiming the new capital allowance rates) to have been incurred on 1 January
2014, subject to certain conditions being met.
Restriction of tax losses carried forward
Commencing in 2014, any claim for deduction of tax losses incurred in a prior year will
be capped at 50% of the taxpayers chargeable income (before deduction of tax losses)
of the year in which the claim is being made.
This cap will not apply:
for the five years of assessment following the first year of operation of a new trade,
profession, or business, or
where the taxpayers gross revenue from all sources for the relevant year of
assessment is less than the amount referred to in section 27(1)(b)(i) of the GCT Act
(currently JMD 3 million per annum).
Previously, tax losses carried forward from prior years could be set off in full against a
taxpayers chargeable income (before the deduction of tax losses).
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Imposition of withholding tax (WHT) on insurance premiums
With effect from 30 April 2014, WHT has been imposed at the rate of 15% on all
insurance premiums paid by Jamaican residents to non-residents. However, premiums
paid by registered Jamaican insurance companies will be exempt from this WHT, subject
to satisfying certain conditions.
GCT amendments
As indicated above, under the FIA, certain relief from GCT that was available to
beneficiaries under repealed tax incentive legislation has been terminated as of 1
January 2014. Previously, the GCT Act accorded a zero-rated status to imported items
that were exempt from customs duty pursuant to these repealed enactments.
The FIA also provides that continuing beneficiaries under the Hotels (Incentives) Act
and the Resort Cottages (Incentives) Act will continue paying GCT on hotel operations
at the concessionary rate of 10%, on the condition that they elect to forego the benefits
to which they are entitled under these repealed enactments by 30 June 2014. Otherwise,
these operators will be liable to GCT at the standard rate (currently 16.5%) as of 1 July
2014.
The GCT Act has also been amended to provide certain tax relief to charitable
organisations that are registered pursuant to the new Charities Act.
Minimum business tax (MBT) regime
An MBT has been introduced and became effective as of 1 April 2014. The MBT of JMD
60,000 per annum has been levied on all corporate bodies incorporated under the
Companies Act, the Building Societies Act, the Friendly Societies Act, or the Industrial
& Provident Societies Act, as well as on individuals carrying on a trade, profession, or
business whose chargeable income (less emoluments and an amount equivalent to the
annual tax-free threshold) exceeds JMD 3 million per annum.
The MBT is payable in two tranches: JMD 30,000 on 15 June and 15 September of the
year of assessment to which it relates. The MBT is creditable against the taxpayers
income tax liability for the year of assessment. In the case of an individual taxpayer, any
excess MBT credit may be refunded or carried forward. Companies, however, are not
entitled to a refund or carryforward of excess MBT.
Changes to customs and stamp duty regimes

Revision of customs tariff structure
Recent amendments to the Customs Act have updated the customs tariff regime and are
aimed at simplifying the tariff structure, reducing opportunities for the misclassification
of goods to categories that previously attracted a 0% rate of customs duty and reducing
variances in customs duty rates, particularly for goods that are classified within the same
tariff heading.
The new tariff structure came into operation on 1 January 2014 and implemented the
following changes:
The customs duty rate on a wide range of consumer goods that previously attracted a
zero rate has been increased to 5%.
Subject to the Caribbean Community (CARICOM) Common External Tariff (CET),
the rates of customs duty on basic building materials, non-consumer goods acquired
primarily for productive use, and goods acquired for medical, pharmaceutical, dental,
optical, and veterinary use have been reduced to 0%.
The customs duty rates on a wide range of consumer goods (e.g. luxury items), which
previously attracted higher rates of duty have converged to a standard maximum rate
of 20% (subject to CET requirements).
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985
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Certain measures have been implemented to minimise abuse of the new system,
including subjecting the lists of eligible inputs for relief to parliamentary review.
Productive inputs relief
As part of the new incentive package made available by the government, effective 1
January 2014, a mechanism is now in place to provide relief from customs duty and
additional stamp duty on the importation of certain productive inputs. Productive
inputs include goods that are imported as raw materials, intermediate goods,
consumables, and packaging materials that are directly used in the production of
primary products or the manufacture of goods. In addition to the manufacturing
and agricultural sectors, relief will also be granted on certain products imported
for use in the tourism, creative arts, and healthcare industries. The production of
primary products pertain to agriculture (cultivation, breeding, rearing, etc.), while the
manufacture of goods may involve a determination by the Commissioner of Customs as
to whether the process involved in transforming raw materials or intermediate goods
into prescribed goods qualifies as the manufacture of goods.
The relief is subject to the proviso that these items are not available in adequate supplies
from a local manufacturer or from a manufacturer within the Common Market area.
Tax administration
A number of measures were also addressed, including implementing a policy to write off
tax arrears, enhancing the information gathering powers of Tax Administration Jamaica
(TAJ), and achieving uniformity in the framework for administering domestic tax laws.
Policy to write off tax arrears
A number of tax laws grant discretionary powers to the Minister with responsibility
for finance to remit or waive tax upon application. Previously, there was no legislative
provision giving power for uncollectible tax arrears to be written off.
A mechanism has now been established by the amended Tax Collection Act to:
provide for the formulation of a system wherein the Commissioner General of TAJ
has been empowered to determine whether arrears of taxes, as well as the penalty
thereon, are collectible, and
give the Minister power to write off such arrears and penalties upon the
recommendation of the Commissioner General.
Revenue administration
Amendments to the Revenue Administration Act (RAA) have granted legal authority
to the Commissioner General to obtain third-party information on persons who may
not be under examination or assessment by the tax authorities and have included
provisions to facilitate more effective exchange of information with Jamaicas treaty
partners under the various double taxation treaties (DTTs).
Using the powers available under the RAA, the Commissioner General implemented a
system of mandatory electronic filing for certain taxpayers, (commencing with large
taxpayers in respect of income tax returns for the 2013 year of assessment, which
were due on 15 March 2014).

A resident corporation is taxable on its worldwide income. Non-resident companies are
subject to tax on Jamaican-sourced income. Tax is imposed on certain sources of income,
such as interest, dividends, royalties, and fees by way of withholding at a rate of 331/3%
986
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for corporations. Lower rates of withholding are possible, provided that the recipient is
resident in a country that has concluded a DTT with Jamaica.
The CIT regime is as follows:
Classification
Definition
CIT rate (%)
With effect from 1 January 2013:
Regulated company
A company that is regulated by the Bank of Jamaica,
331/3
Financial Services Commission, Office of Utilities Regulation,
or the Ministry of Finance and Planning.
Unregulated company A company that is not a regulated company.
25
With effect from 1 April 2013:
Large unregulated
A company that is not a regulated company and has gross
30
company
annual income of not less than JMD 500 million.
The combined rates resulted in an effective CIT rate of
28.75% for year of assessment 2013 (3/12 x 25% + 9/12 x
30%).
With effect from 1 January 2014, a CIT rate of 25% is applicable to all Jamaica resident
companies (other than regulated companies), as well as non-resident companies
carrying on business in Jamaica. Transitional rules may apply for the year of assessment
2014 to large unregulated companies that make up their annual accounts other than to
31 December; however, we anticipate that this matter will be clarified in due course.
Building societies (similar to Savings and Loans Associations) are taxed at the rate of
30% on their profits.
Life insurance companies are taxed at 15% on their investment income, net of
management expenses, both terms of which are defined by the Income Tax Act.
Additionally, regionalised life insurance companies pay income tax on gross premiums
(derived from life assurance, pensions, and annuity business) at the rate of 3% while
others pay at the rate of 4%.
The income of certain organisations is specifically exempt from income tax. These
include pension and superannuation funds and charitable organisations approved by the
Commissioner General of Tax Administration Jamaica.
Local income taxes
Income tax is imposed at the national level. Income tax is not separately imposed at the
local level.
Corporate residence
A corporation, wherever incorporated, is resident in Jamaica if the central management
and control of its business is exercised in Jamaica. Normally, this is the case if meetings
of directors and shareholders are held in Jamaica and major policy decisions of the
corporation are made in Jamaica.
The termPE is not defined by local law. In the case of a treaty jurisdiction, the relevant
treaty will prescribe the meaning of the term. Where a companys activities create a PE,
this may require the company to be registered for taxpurposes.
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Other taxes
General consumption tax (GCT)
The GCT is a value-added tax (VAT), and the standard rate is currently 16.5%. Higher
or lower rates of GCT, however, are applicable to certain goods and services. GCT at the
rate of 25% applies to the provision of telephone services (including phone cards) and
handsets, while the tax is imposed on hotels and other businesses in the tourism sector at
an effective rate of approximately 10%. However, operators within the tourism industry
who were granted approval under the Hotel (Incentives) Act or the Resort Cottages
(Incentives) Act prior to 1 January 2014 and who do not elect to forego the remaining
benefits to which they are entitled under these repealed enactments no later than the 30
June 2014, will be liable to GCT at the standard rate as of 1 July 2014.
A rate of 16.5% applies to the supply ofelectricity to commercial or industrial customers,
whilesuppliesto residential customers are exempt from GCT.
GCT is also charged on imported services. Where services areimportedfrom a
supplierwho is not resident in Jamaica, the recipient of those services is deemed to
be the registered taxpayer and is liable to account for GCTon the service. This may be
available as a credit in some cases against the tax payable by the recipient of the service.
The list of items and services exempt from GCT includes a range of basic food items,
prescription drugs, medical supplies, and other items.
Customs duties
Customs duty is levied on the customs value of goods imported, which is determined in
accordance with the World Trade Organization (WTO) rules on customs valuation. The
rates are specified by a prescribed Customs Tariff, havingregard (where appropriate)
tothe Common External Tariff agreed between CARICOM member states.
In addition to normal customs duties, a customs administration fee (CAF) and an
environmental levy of 0.5% are imposed on the value of imports. The CAF imposes a
range of fees based on the nature of the service provided.
An additional 5% GCT is levied on the commercial importation of goods subject to GCT.
However, certain categories of imports are excluded from this advance GCT charge.
Other import levies apply in certain instances,includingadditional stamp duty (ASD)
and a standard compliance fee.
Special consumption tax (SCT)
SCT, at various rates, is applicable to some goods, such as tobacco products, liquor,
motor vehicles, and petroleum products.
Property tax
All land in Jamaica is valued for property tax purposes on the site value or unimproved
value. The property tax structure is applicable as follows:
Unimproved property values (JMD)
Not exceeding 100,000
100,000 to 1 million:
For the first 100,000
For every dollar thereafter
Exceeding 1 million:
For the first 100,000
For the next 900,000
For every dollar thereafter
988
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Rate of tax
JMD 1,000
JMD 1,000
1.5%
JMD 1,000
1.5%
2.0%
Jamaica
Transfer tax
A transfer tax of 5% is applicable on the market value of the asset transferred (limited
to 37.5% of the capital gain derived, if any) on the transfer of land, buildings, securities,
and shares. Transactions on the Jamaica Stock Exchange (JSE) are exempt from transfer
tax, as are the transfer of registered corporate bonds, whether or not the company is
listed on the JSE.
Stamp duty
There is stamp duty of 1% payable on the transfer/disposal of shares and 4% for real
property sold/transferred. Transfers of shares on the JSE are exempt from stamp duty,
as are the transfer of registered corporate bonds, whether or not the company is listed
on the JSE. Stamp duty is also imposed at a nominal rate of JMD 100 on instruments
effecting a refinancing of an existing mortgage. Where, however, the mortgage is
increased, the normal stamp duty rates shall apply to the amount by which the mortgage
increased.
Minimum business tax (MBT)
An MBT has been introduced and became effective as of 1 April 2014. An MBT of JMD
60,000 per annum has been levied on all corporate bodies incorporated under the
Companies Act, the Building Societies Act, the Friendly Societies Act, or the Industrial
& Provident Societies Act, as well as on individuals carrying on a trade, profession, or
business whose chargeable income (less emoluments and an amount equivalent to the
annual tax-free threshold) exceeds JMD 3 million per annum.
The MBT is payable in two tranches: JMD 30,000 on 15 June and 15 September of the
year of assessment to which it relates. The MBT is creditable against the taxpayers
income tax liability for the year of assessment. In the case of an individual taxpayer, any
excess MBT credit may be refunded or carried forward. Companies, however, are not
entitled to a refund or carryforward of excess MBT.
Asset tax
An ad valorem asset tax at the rate of 0.14% is imposed on the taxable value of the assets
of deposit-taking institutions regulated by the Bank of Jamaica, as well as securities
dealers and insurance companies regulated by the Financial Services Commission. The
taxable value of assets is broadly determined as the value of assets on the balance sheet
with adjustments for certain items specific to each type of institution.
For other entities, a fee ranging from JMD 5,000 to JMD 100,000 is imposed and is
payable on or before 15 March annually, depending on the aggregate value of assets.
The minimum fee is payable where the aggregate value of the assets is less than JMD
50,000, and the maximum fee is payable where the aggregate value of the assets is
greater than JMD 50 million.
Contractorslevy
Payments to contractors (including sub-contractors) in respect ofconstruction,

haulage,and tillage operations are liableto a withholding of acontractors levy of 2%
of the gross amount paid. This must be remitted to TAJ within 14 days of the end of
the month in which the paymentismade. The levy paid is allowable as a credit against
the income tax liability of the contractor in the year of assessment in which the levy is
deducted. To the extent that there is any excess, it is not refundable.
Guest accommodation room tax (GART)
GARTis levied at a specific rate onhotels and other touristaccommodation facilities

based on room occupancy.GART is tiered depending on the number of rooms at
thehotel or other tourism accommodation facility.
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Telephone call tax
Tax is imposed on telephone calls,including inbound calls terminating on fixed or

mobile networks. The following rates of tax are imposed:
JMD 0.05 per minute on calls originating and terminating on the local fixed network.
JMD 0.40 per minute on all other calls (whether domestic or international)
originating in Jamaica.
USD 0.075 per minute on international calls that terminate in Jamaica on amobile
network.
The telephone tax is included in the taxable base for the purpose of calculating GCT.
Payroll taxes
Payroll taxes are imposed at the national level on employees emoluments, including
resident expatriates who undertake work in Jamaica. The taxes comprise Pay-As-YouEarn (PAYE) Income Tax for employees only, National Housing Trust (NHT), National
Insurance Scheme (NIS) contributions, Education Tax, and Human Employment and
Resource Training (HEART) contributions.
Employers are obligated to deduct and remit payroll taxes by the 14th day of the month
following the month of deduction. Employers and employees contribute at the following
rates:
Payroll Tax
PAYE Income Tax
NIS contributions
Education Tax
NHT contributions
HEART contributions
Basis
Taxable emoluments (less
the applicable annual nil rate
threshold)
Gross annual emoluments up to
a maximum of JMD 1.5 million
Taxable emoluments
Gross emoluments
Gross emoluments
Employee rate (%) Employer rate (%)

25.00
0.00
2.50
2.50
2.25
2.00
0.00
3.50
3.00
3.00
Branch income
Branch income is taxed at the same rate as that of local corporations and on a similar
basis. The transfer of profits to the head office is subject to a WHT of 331/3% or at a lower
treaty rate, where applicable.
A branch operation, irrespective of the nature of its business activities, is subject to
Jamaican tax on income derived from the island and elsewhere. In computing the
income for tax purposes, expenses incurred, wholly and exclusively for the purpose
of the branchs trade, are deductible, including a reasonable proportion of head office
expenses.
Transactions between the branch, its head office, and affiliates should be at arms-length
values.
Inventory valuation
Inventories are valued at the lower of cost or market value. The Commissioner General
has made no pronouncement, but last in first out (LIFO) is not generally permitted.
990
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Any method of valuation that accords with standard accounting practice is acceptable
for tax purposes, provided it is consistently applied at the beginning and end of the
accounting period and it is not in contravention of the Income Tax Act.
Capital gains
There is no tax on capital gains. There is, however, a transfer tax on the market value of
certain assets transferred and stamp duty payable on the transfer/disposal of shares or
real property. See the Other taxes section for more information.
Dividend income
Ordinary dividends paid by Jamaican tax resident companies to Jamaican tax resident
shareholders are liable to tax at the rate of 15%.The tax is to be deductedon payment
by the distributing company and represents the final tax on such dividends.The
Income Tax Act provides relief from taxation for dividends received by Jamaican tax
resident corporate shareholders where they hold at least 25% of the voting rights of the
distributing company (referred to as group relief).
Additionally, the dividend income on which tax is payable may not be offset by tax
losses, and expenses incurred to earn the dividend are not deductible in arriving at
chargeable income, with the exception of expenses incurred in respect of specified
dividend income. Specified dividend income refers to the dividend income of companies
that are subject to tax and are regulated by the Bank of Jamaica or the Financial Services
Commission and whose dominant trade or business is comprised of making investments
in loans, securities, and other financial assets. However, this exception does not apply to
dividends enjoying group relief.
Preference dividends that qualify as tax deductible expenses of the paying company (see
below) continue to be liable totax at a rate of 25% where the recipient is an individual
and at the applicable CIT rate where paid to a company. Dividends paid to non-resident
shareholders are subject to income tax thereon at the default rate of 331/3% in the case
of a company and 25% in the case of an individual (subject to any treaty protection or
incentive relief available).
Subject to certain conditions being met, a company may claim an income tax deduction
in respect of preference dividends paid during the year of assessment. However, to the
extent that these preference dividends do not qualify for this income tax deduction, they
will be treated on the same basis as ordinary dividends.
Stock dividends
Stocks issued by way of the capitalisation of retained earnings (referred to as bonus

issues) do not create a taxable distribution in the hands of the shareholders.
Interest income
Interest income is included in chargeable income and is subject to tax when received.
Where interest is paid by a prescribed person, tax is deducted at source at the rate of
25% (see the Withholding taxes section for more information). The interest payable on
certain securities issued by the government of Jamaica has been designated as being
exempt from tax.
Foreign income
Resident corporations are taxable in Jamaica on their worldwide gains or profits. This
includes the income of a foreign branch of a Jamaican company, as well as dividends
arising abroad.
Tax deferral is not permitted in Jamaica.
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Deductions
Expenses are deductible to the extent that they were incurred wholly and exclusively to
earn the income and are claimed in the year in which they were incurred.
Depreciation
Under the revised capital allowances regime, new rates of capital expenditure apply to
capital expenditure incurred on or after 1 January 2014. Capital expenditure incurred
prior to 1 January 2014 continue to be written off for income tax purposes in accordance
with the rates prescribed under the previous regime. The new capital allowances
structure has expanded the definition of industrial buildings and structures to include:
a building or structure used directly in the production of primary products, as
defined
a hotel or resort cottage within the meaning of Section 2 of the Tourist Board Act
a hospital or other healthcare facility primarily for the care of in-patients
a multi-storey car park constructed exclusively for parking motor vehicles
a building located in a free zone defined in Section 2 of the Jamaica Export Free
Zones Act (or in due course a Special Economic Zone), and
subject to the approval of the Commissioner General, a building or structure
constructed pursuant to an arrangement between a public authority and another
person for the provision of public goods or services.
Capital allowances are now available for capital expenditure on a wide list of IP rights.
The new regime also provides relief to pure or applied science, as well as R&D costs.
Additionally, various special forms of capital allowances, such as the investment
allowances, special capital allowances, and special annual allowances that were
designed to provide incentives to particular activities, have been repealed.
The new rates of capital allowances are as follows:
Asset category
Buildings/leasehold:
Non-industrial buildings
Initial allowance Annual allowance

rate (%)
rate (%)
20
All commercial buildings:

Buildings and structures primarily constructed of
See Buildings/
concrete, steel, brick, stone, cement, or similar materials leasehold above.
See Buildings/
Buildings and structures primarily constructed of other
inorganic materials, such as galvanised iron, corrugated leasehold above.
metal, or similar materials
Buildings and structures primarily constructed of wood or See Buildings/
other organic materials
leasehold above.
Plant and machinery:
Machinery directly used in the production of primary
25
products or in the manufacture of goods, or automated
machinery used for packaging such primary products or
manufactured goods
Automatic data processing equipment, calculators,
25
cash registers, and other equipment falling within Tariff
Headings 84.70 and 84.71, as well as parts/accessories
thereof
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See All
commercial
buildings below.
See All
commercial
buildings below.
4
10
12.5
12.5
20
Jamaica
Asset category
Equipment falling with Tariff Headings 84.69 and 84.72, as
well as parts/accessories thereof. Telephones and other
equipment falling within Tariff Heading 85.17, as well as
parts/accessories thereof
Other plant and machinery (excluding motor vehicles)
Motor vehicles:
Private motor vehicles based on a cap of USD 35,000
Trade vehicles
R&D
IP rights:
General
Expenditure less than JMD 1 million
Initial allowance Annual allowance

rate (%)
rate (%)
0
20
12.5
0
0
0
12.5
20
20
0 1 over the lower of

14 years and the
period rights may
be used
0
20
Previously, tax depreciation was generally computed on the reducing-balance basis over
the anticipated normal working life of the asset at specified rates. An election could be
made for machinery and equipment to be depreciated at higher rates on the straight-line
basis.
In the year of expenditure, initial allowances were available at the rate of 20% on
industrial buildings and structures and machinery and plant. Annual allowances were
generally available on the reducing-balance basis on buildings ranging from rates of
2.5% to 5% and at various rates for machinery and equipment (excluding computers).
Computers were written down at an annual rate of 22.5% on the straight-line basis.
Special rates of capital allowances ranging from 20% to 100% were also available
to certain industries/business activities in the form of investment allowances and
accelerated depreciation (special capital allowances).
Generally, capital gains on depreciable property are not taxed. However, a recharge
limited to the extent of the capital allowances (tax depreciation) allowed (balancing
charge) is taxable. Tax depreciation may not conform to book depreciation.
Goodwill
The amortisation or write-off of goodwill is not an allowable deduction.
Start-up expenses
The costs of incorporation and other expenses incurred in connection with establishing a
business are not deductible against income.
Interest expenses
A deduction is available for interest that is paid on capital employed in acquiring income.
Additionally, where interest is paid to a non-resident, tax must be withheld and remitted
to the tax authorities in order to secure a deduction.
Bad debts
A deduction is available in respect of specific debts that become bad during the year of
assessment.
Approved donations (not exceeding 5% of taxable income) to certain qualified charities

and educational institutions are deductible.
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Foreign exchange gains and losses arising from trading are included in or deducted from
chargeable income when realised. Foreign exchange gains and losses arising on capital
assets are not taxable or allowable for tax purposes; however, where they pertain to
fixed assets, on realisation, they may become part of the underlying acquisition cost and
tax depreciation computed thereon.
Fines and penalties
Fines, penalties, and interest arising from tax arrears are not deductible.
Taxes
Taxes on income are not deductible. Additionally, GCT, contractors levy, transfer tax
and stamp duty incurred on capital assets, input tax credits for GCT purposes, as well
as the asset tax, aregenerally disregarded for income tax purposes. Other taxes, such as
property tax, payroll taxes, and other business taxes, are deductible, to the extent that
they were incurred to earn the income.
Commencing in 2014, any claim for deduction of tax losses incurred in a prior year will
be capped at 50% of the taxpayers chargeable income (before deduction of tax losses)
of the year in which the claim is being made.
This cap will not apply:
for the five years of assessment following the first year of operation of a new trade,
profession, or business, or
where the taxpayers gross revenue from all sources for the relevant year of
assessment is less than the amount referred to in section 27(1)(b)(i) of the GCT Act
(currently JMD 3 million per annum).
Previously, losses incurred could be carried forward indefinitely until fully utilised.
There are provisions designed to disallow the deduction of such losses where the
company that has accumulated them is sold under certain circumstances.
Tax losses are not available for carryback.
Royalties, management fees, and interest charges paid to foreign affiliates are deductible
to the extent that these payments are made at arms-length rates. WHT should be paid
in respect of such services, normally at 331/3% where payment is to a company and 25%
in the case of individuals, unless a lower rate is provided for under a DTT. Furthermore,
interest paid to non-residents is not deductible until the WHT is remitted.
Group taxation
Group taxation is not permitted in Jamaica.
Transfer pricing
There are no specific transfer pricing rules in Jamaica. Transactions between connected
parties are accepted if they are conducted on an arms-length basis. The Commissioner
General, however, has the power to restate the value of such transactions if a view is
formed that they are conducted at artificially high/low consideration for the purpose of
avoiding tax.
Thin capitalisation
There are no provisions for thin capitalisation in the tax laws of Jamaica.
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There is no CFC regime in Jamaica.

Previously, a number of incentive laws granted approved persons relief from taxation
for a specified number of years. The regime was overhauled in 2013, and a more
transparent, rule-based system for limited tax incentives was put in place to replace the
former (mostly sectoral) schemes.
This includes the following:
Developing a rule-based regime for charitable organisations and a mechanism for
harmonising the tax treatment of charitable organisations via the enactment of the
new Charities Act, 2013 and the Charitable Organizations (Tax Harmonization)
(Miscellaneous Provisions) Act, 2013, respectively.
Introducing an omnibus tax package for granting incentives via the Fiscal Incentives
(Miscellaneous Provisions) Act, 2013.
Introducing the Income Tax Relief (Large-scale Projects and Pioneer Industries) Act,
2013.
Tax relief for registered charitable organisations (RCOs)
Historically, there has been no single statutory provision governing the lawful existence
and regulation of charities in Jamaica, and there were various statutes that provide
for certain fiscal entitlements to be extended to charities. These included a range of
exemptions, incentives, and waivers, the latter based on the statutory power of the
Minister of Finance to exercise discretion to forgive the tax liability.
The Charities Act, 2013 has implemented a mechanism for the regulation of charitable
organisations by a single authority and has established a comprehensive legal and
institutional framework for that purpose. The government has ceased the granting
of waivers to charities other than under the new legislation, and, with effect from 1
December 2013, all charitable organisations must be registered under the new regime
in order to be eligible for exemptions granted under the Act. A transitional period of
six months has been provided for organisations that were organised or operated for
charitable purposes before the new legislation came into force to be registered within
six months of the date that the Act came into force; failing which, the organisation will
cease to be regarded as an RCO (pending any future approvals).
In an effort to address the abundance of waiver facilities that existed owing to
inconsistencies in the provisions pertaining to charities and charitable purposes across
tax types, the tax treatment accorded to these entities has been harmonised by the
Charitable Organizations (Tax Harmonization) (Miscellaneous Provisions) Act, 2013
(Tax Harmonization Act). The following enactments, which grant certain relief to RCOs,
have been amended for this purpose:

The Customs Act

The General Consumption Tax Act
The Income Tax Act
The Property Tax Act
The Stamp Duty Act
The Transfer Tax Act
The Tax Harmonization Act also removes the ministerial power under these laws to
grant discretionary tax waivers in relation to an RCO.
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Fiscal Incentives (Miscellaneous Provisions) Act (FIA)
Under the FIA, which became effective as of 1 January 2014, the government of Jamaica
ceased to grant incentives under legacy incentive legislation and commenced granting
tax incentives under the FIA.
Repealed incentive enactments
The FIA provides that the following legacy incentives are repealed from 1 January 2014:

The Cement Industry (Encouragement and Control) Act

The Export Industry (Encouragement) Act
The Foreign Sales Corporation Act
The Hotels (Incentives) Act
The Industrial Incentives Act
The Industrial Incentives (Factory Construction) Act
The International Finance Companies (Tax Relief) Act
The Motion Picture Industry (Encouragement) Act
The Petroleum Refining Industry (Encouragement) Act
The Resort Cottages (Incentives) Act
The Shipping (Incentives) Act
Additionally, the Income Tax Act was amended to remove the incentive provisions
pertaining to approved farmers and discontinue various incentives that were embedded
in the capital allowances regime. Under the FIA, certain relief from GCT that was
available to beneficiaries under repealed tax incentive legislation has been terminated
as of 1 January 2014. Previously, the GCT Act accorded a zero-rated status to imported
items that were exempt from customs duty pursuant to the repealed legislation.
No new approvals will be granted under these legacy incentives on or after 1 January
2014. Persons who were granted approval under any of the above legacy incentives
before 1 January 2014 (continuing beneficiaries) shall continue to be entitled to the
benefits afforded under that legacy incentive until they expire. However, such persons
may elect to forgo their remaining entitlement under that legacy incentive in order that
they may benefit under the FIA. Benefits available under the FIA include the availability
of an ETC (see Employment tax credit [ETC] below) and enhanced rates of capital
allowances (see Depreciation in the Deductions section).
Incentive enactments retained
The following incentives, however, have been retained:


The Bauxite and Alumina Industries (Encouragement) Act
Persons who have been granted approval under these incentive programmes will
continue to benefit under the current tax regime.
The Jamaica Export Free Zones Act offers concessions to manufacturers who can operate
within a designated free zone area as well as in stand-alone free zones approved by the
Ministry of Industry, Investment, and Commerce (MIIC). Exporters benefiting from
this scheme obtain 100% relief from income tax and duty exemption on capital goods,
consumer goods, raw material, or imports for the construction, extension, and repair of
free-zone premises.
996
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Jamaica
Companies approved to operate in one of Jamaicas free zones must be registered or
incorporated in Jamaica under the Companies Act. They must also obtain approval from
the Jamaica Free Zone Council to undertake an approved activity.
The incentives offered under the Jamaica Export Free Zones Act are to be phased out by
31 December 2015, given Jamaicas commitments under WTO agreements. Free zones
will gradually be replaced by a WTO-compliant special economic zone regime from
which licensed activities may be carried on.
The Urban Renewal (Tax Relief) Act provides tax incentives to persons approved under
the Act in connection with undertaking programmes of development in areas designated
as special development areas, with a view to improving or restoring them. The tax
incentive provides certain tax benefits, including relief from income tax on rental income
and interest earned by an investor in an Urban Renewal Bond. There is also exemption
from stamp duty and transfer tax on the transfers of property.
A tax credit of 331/3% of expenditure on capital improvement works in a designated
special development area (e.g. Downtown Kingston) is also available. In addition,
lessees of the improved properties, who satisfy certain criteria, are able to claim a tax
deduction of double the rental paid.
Subject to certain conditions being met, a company listed on the Junior Market on or
after 1 January 2014 is eligible for relief of 100% of the income tax payable by it in the
first five years from the date of its admission. The income of companies listed on the
Junior Market prior to 1 January 2014 qualified for the following remission:
1. 100% of the income tax payable in the first five years from the date of admission to
the Junior Market.
2. 50% of the income tax payable by the company in the five years following the period
specified in 1 above.
The Hotels (Incentives) Act (HIA)
The HIA provides that an approved hotel enterprise or approved extension (so
designated by the Minister of Tourism) is entitled to relief in respect of profits or gains
arising from an approved hotel enterprise or extension during the concession period,
which is usually ten years. Approved hotel enterprises or extensions also benefit
from exemption from customs duty and GCT on building material imported for the
construction or repair of the approved hotel enterprise or approved extension, as well as
certain equipment and supplies imported to outfit the hotel.
The FIA provides that continuing beneficiaries under the HIA will continue paying GCT
on hotel operations at the concessionary rate of 10%, on the condition that they elect to
forego the benefits to which they are entitled under this repealed enactment by 30 June
2014. Otherwise, these operators will be liable to GCT at the standard rate (currently
16.5%) as of 1 July 2014.
The Act also provides exemption from income tax on dividends to Jamaican-resident
shareholders received from an approved hotel enterprise/extension as well as to nonresident shareholders who are not liable to income tax on the dividends in their country
of residence.
As indicated above, no new approvals are being granted under the HIA as of 1 January
2014.
Jamaica
997
Jamaica
The Export Industry (Encouragement) Act (EIEA)
The incentives provided under EIEA are available to companies incorporated in Jamaica
whose products are exclusively for sale outside of Jamaica and CARICOM. The company
must be declared an approved export manufacturer in relation to an approved export
product by the MIIC. The incentive is also available to companies that are designated as
partial exporters.
Benefits available under the EIEA include relief from income tax on export profits and
duty exemption on machinery and equipment, consumer goods, raw material, packaging
material, and imports for the repair and maintenance of the factory. Although the
benefits provided under the EIEA are initially allowed for a specified period, the MIIC
has the authority to extend the incentive period by order.
As indicated above, no new approvals are being granted under the EIEA as of 1 January
2014.
Employment tax credit (ETC)
The ETC was introduced by the FIA and is comprised of a non-refundable tax credit
that is available to certain persons (referred to as eligible persons) in computing
their income tax liability commencing 1 January 2014 (i.e. year of assessment 2014).
However, a number of taxpayers are ineligible for this tax credit and include:

Regulated companies.
Continuing beneficiaries under legacy incentive legislation.
Companies listed on the Jamaica Stock Exchange Junior Market.
Approved group head office companies.
Persons benefiting from incentive legislation that has been retained.
The ETC is the total of the statutory payroll levies (Education Tax, National Housing
Trust, National Insurance, and HEART contributions) and is capped at 30% of the
income tax payable on profits from business operations. In order to benefit from the
ETC, the monthly statutory returns that report the statutory payments must be filed
on or before the due dates and the payments remitted by that date (i.e. by the 14th day
of the month following that to which they relate). The tax credit therefore provides
tax-compliant businesses with an opportunity to reduce the effective income tax rate on
their trading profits to as low as 17.5%.
The ETC may not be claimed against any income tax chargeable on non-trading income
(e.g. passive investment income) nor can it be claimed in the year of assessment where
the taxpayer incurred a tax loss on trading operations. The amount must be utilised in
the year that the statutory payments are made and is not available to be carried forward
or backward to be utilised in other years of assessment.
Where a company makes a distribution (dividends and certain other benefits to
shareholders), the credit is clawed back by the Inland Revenue Department to the extent
of 10% of the distribution, less the tax payable by the recipient of the distribution. The
credit clawed back must be repaid to the Inland Revenue Department within 14 days of
the end of the month in which the distribution is made.
Tax incentives for pioneer industries
The Income Tax Relief (Large-Scale Projects & Pioneer Industries) Act is designed to
encourage innovation and high-value investments. It provides a mechanism through
which additional income tax incentives can be offered in circumstances where the
Minister of Finance & Planning designates a project as an approved large-scale project
or an economic activity as an approved pioneer industry. An approved large-scale
project is one that is capable of generating high levels of investment and employment.
998
Jamaica
Jamaica
An approved pioneer industry refers to an economic activity not currently being carried
out in Jamaica on a substantial commercial basis and involving the innovative use of
technology, cultural assets, or other available resources.
The Minister shall make this designation subject to affirmative resolution in Parliament.
Participants in either a designated large-scale project or a pioneer industry may
subsequently be approved by Ministerial Order, which will stipulate the extent of relief
granted. The income tax relieved under all orders issued pursuant to this mechanism in
any year will be capped at 0.25% of the countrys GDP for the previous financial year.
Productive inputs relief
As part of the new incentive package made available by the government, effective 1
January 2014, a mechanism is now in place to provide relief from customs duty and
additional stamp duty on the importation of certain productive inputs. Productive
inputs include goods that are imported as raw materials, intermediate goods,
consumables, and packaging materials that are directly used in the production of
primary products or the manufacture of goods. In addition to the manufacturing
and agricultural sectors, relief will also be granted on certain products imported
for use in the tourism, creative arts, and healthcare industries. The production of
primary products pertain to agriculture (cultivation, breeding, rearing, etc.), while the
manufacture of goods may involve a determination by the Commissioner of Customs as
to whether the process involved in transforming raw materials or intermediate goods
into prescribed goods qualifies as the manufacture of goods.
The relief is subject to the proviso that these items are not available in adequate supplies
from a local manufacturer or from a manufacturer within the CARICOM Common
Market area.
Non-resident deposits
Non-residents who place deposits with Jamaican banks can earn interest free of
Jamaican tax in certain circumstances. The deposits may be designated in foreign
currency or Jamaican dollars.
Employee Share Ownership Plan (ESOP)
Certain tax benefits accrue to employees and employers in respect of contributions to an

approved ESOP as well as the allocation of shares from such plans.
Foreign tax credit
The avoidance of double taxation is achieved by means of foreign tax credits available
under most tax treaties or by means of deduction in the case of the CARICOM treaty.
Under the provisions of the Income Tax Act, a foreign tax credit is also available to
companies in Jamaica that have paid or are liable to Commonwealth Income Tax. Where
recourse cannot be had through either of these methods, by convention, partial relief by
way of expense deduction is granted against income for the foreign tax.
Withholding taxes
The Jamaican Income Tax Act refers to deduction at source and not to withholding. The
following references are to deduction at source. If it is proved that this exceeds the tax
actually payable, refunds are made.
Prescribed persons, primarily financial institutions, are required to withhold tax at
source at a rate of 25% on interest income earned on investment instruments (subject
to any lower rate as prescribed in a DTT). The Income Tax Act has been amended to
provide a wider definition of the term interest. Prescribed persons, as defined, include
the Accountant General; banks operating under the Banking Act or the Bank of Jamaica
Jamaica
999
Jamaica
Act; institutions operating under the Financial Institutions Act; building societies;
societies registered under the Industrial and Provident Societies Act, unless certain
conditions are met; the Ministry of Finance & Planning; life insurance companies;
companies registered under the Companies Act in which the government or an agency of
the government holds more than 50% of the ordinary shares and which issues interest
bearing securities; issuers of commercial paper; unit trust management companies;
and any person who is connected with any of the persons mentioned above (with the
exception of the Accountant General).
As is indicated in the Income determination section, the Income Tax Act provides that,
there is a requirement to deducttax at the rate of 15% where dividends are paid to
Jamaican tax resident shareholders, excluding corporate shareholders who hold 25% or
more of the voting rights of the paying company. The tax deducted at source represents
the final tax in respect of the dividends.
With effect from 30 April 2014, WHT has been imposed at the rate of 15% on all
insurance premiums paid by Jamaican residents to non-residents. However, premiums
paid by registered Jamaican insurance companies will be exempt from this WHT, subject
to satisfying certain conditions.
Generally, all WHTs, including taxes withheld from dividend, interest, royalties, and
fees must be remitted to the Inland Revenue Department within 14 days of the end of
the month in which the payment is made in order to avoid the imposition of interest and
penalties.
WHT (%)
Recipient
Non-treaty:
Treaty:
Canada
CARICOM countries
Denmark
France
Germany
Israel
Norway
Spain
Sweden
Switzerland
United Kingdom
United States
Dividends
Substantial
Portfolio
holdings
15 (1)
0 (1)
15 (2)
15 (2)
Interest
25 (3)
25 (3)
Royalties
0
0
Management
fees
0
0
331/3
25
331/3
25
331/3
25
331/3
25
331/3
25
15
0 (4)
5 (5)
15
15
15
22.5 (8)
15 (5)
10 (5)
22.5(5,8)
15 (5, 6)
15 (5, 6)
15 (5, 6)
22.5
0 (4)
5 (5)
10 (6)
10 (6)
10 (6)
15
15 (5)
5 (5)
15 (5)
10 (5)
22.5 (5)
10 (5)
15
15 (4)
7.5 (5)
12.5
10
12.5 (7)
15
12.5
10
12.5
10
12.5
12.5
10
15 (4)
10
10
10
10
10
10
10
10
10
10
10
12.5
15
331/3
10
10
10
331/3
10
10
10
10
12.5
331/3 (9)
Notes
1.
1000
Substantial holdings refer to resident companies that hold 25% or more of the voting rights of the
paying company.
Jamaica
Jamaica
2.
3.
4.
5.
6.
7.
8.
9.
Tax is withheld at the rate of 15% where a dividend is paid by a company resident in Jamaica to a
resident individual shareholder, regardless of shareholding.
Tax is deducted from interest paid to Jamaican residents if payment is made by a prescribedperson.
Rates apply only to specified member states.
The lower treaty rates do not apply if the recipient has a permanent establishment (PE) in the other
territory that is effectively connected with the company paying the dividend.
A rate of 15% applies to an individual regardless of shareholding.
Reduced to 10% if received by a bank recognised as a banking institution under the laws of that
state.
A rate of 22.5% applies to an individual regardless of the shareholding.
Nil in the absence of a PE.
A WHT rate of 25% is required to be applied in respect of interest paid or credited by

prescribed persons. However, certain categories of interest income earned on long-term
savings accounts (LSAs) were made exempt from tax, including:
Interest paid or credited in respect of investments or deposits made by individuals
with prescribed persons if:
the deposit remains a minimum of five years without any withdrawal from the
principal sum invested
the deposit or investment (other than interest accrued or credited) does not
exceed JMD 1 million in any year
the account is not transferable, except on the death or bankruptcy of the depositor
or investor, and
not more than 75% of the interest accrued in any year is withdrawn during the
year.
Benefits derived from investments in certain life insurance policies may also be
exempt from income tax if specified criteria are satisfied.
Tax administration
Jamaica has established the following departments to handle tax administration:
Tax Administration Jamaica (TAJ) operates as a semi-autonomous revenue authority
whose functions include compliance and tax collection, administrative and legal
support, audit and assessment of income tax, general consumption tax, stamp duty,
and transfer tax. The Commissioner General has responsibility for the direction,
supervision, and administration of TAJ and is supported in undertaking this role by
several Deputy Commissioner Generals.
The Revenue Appeals Division of the Ministry of Finance processes appeals to
decisions made by TAJ.
The Jamaica Customs Agency has the powers of an executive agency and has
responsibility for administering taxes at the ports of entry.
There is also a Financial Investigations Division in the Ministry of Finance, which
investigates customs breaches and fraudulent acts in respect of tax legislation.
Taxable period
A corporation is subject to tax on its income for a calendar year. However, where the
Commissioner General of TAJ is satisfied that a corporation normally prepares financial
statements to a date other than 31 December, the company may be permitted to use the
profits of its own financial year rather than the calendar year as the basis of assessment.
The basis period should not exceed 12 months; however, a company wishing to file its
income tax return for a period exceeding this period must obtain the approval of TAJ.
Tax returns
Income tax returns are due for filing by 15 March in the year following the year of
assessment and are based on a system of self-assessment of the tax payable.
Jamaica
1001
Jamaica
Payment of tax
Tax is payable in quarterly instalments on the 15th day of March, June, September,
and December of each tax year. Quarterly instalments are based on an estimate of the
years liability or the actual tax payable for the previous year. The balance of income tax
payable for a taxation year, after deduction of the instalments of estimated tax, is due
on 15 March of the following year. Interest is charged on unpaid tax at a rate of 20% per
annum while the amount remains unpaid. A penalty of up to 50% may also be imposed if
TAJ issues an assessment.
TAJ has implemented an electronic tax system that taxpayers may use to file various tax
returns and remit taxes.
Tax assessments and audits
The Commissioner General is empowered to conduct audits on selected tax returns or

to assess a taxpayer for additional tax at any time prior to the expiration of the statute
of limitation, which is six years, except in certain cases. Tax audits can be carried out
whether or not notices of assessment have been issued. Tax assessments may be raised
where the Commissioner General is of the opinion that a taxpayer has been assessed for
less tax than the taxpayer ought to have been charged, or where the taxpayer failed to
file a tax return.
In support of the ongoing policy and legislative reform of the tax regime, the revenue
authorities have been focusing on enhancing voluntary compliance, improving business
processing, modernising their operations so as to increase revenue collection and
efficiency, and simplifying tax administrative processes. Within the overall aim of
broadening the tax base, in particular, TAJ has intensified its focus on certain segments
of taxpayers, such as large taxpayers, high-wealth individuals, professional groups,
unregistered entities, and stop-filers. Compliance mechanisms include improving the
resources of the Large Taxpayer Office (LTO) and the introduction of mandatory filing
for certain segments of taxpayers on a phased basis. Legislation has also been passed to
introduce a debt write-off policy for tax arrears.
Other issues
Corporate tax calculation - Calendar year 2014
JMD
Net profit before taxation
Add:
Depreciation charged in the financial statements
Interest payable, 2014 - accrued (1)
Interest receivable, 2013 - now received (1)
Donations not approved
Subscriptions disallowable
Interest for late payment of income tax
Legal fees re increase in share capital
Bad debts - increase in general provision (2)
Balancing charge (3)
Capital expenditure charged in the financial statements
Less:
Interest payable, 2013 - now paid (1)
1002
Jamaica
500,000
12,000
7,000
15,000
5,000
4,000
21,000
50,000
7,500
120,500
JMD
10,000,000
JMD
742,000
20,000
Jamaica
Interest receivable, 2014 - accrued (1)

Gain on disposal of fixed assets
Losses carried forward from year of assessment 2013 (4)
Capital allowances (5)
JMD
17,000
18,000
14,000
455,000
JMD
(524,000)
Taxable income
10,218,000
Income tax payable at 15% on dividends from Jamaican

resident companies
(1,600,000)
Net taxable income
240,000
8,618,000
Income tax payable at 25%
2,154,500
Less: ETC (6)
(654,000)
Total income tax payable

Less:
Estimated (advance) tax payments
Foreign tax credit
Tax deducted from local bank interest
Tax deducted from local dividends received
JMD
1,740,500
J
1,100,000
11,000
3,833
260,000
1,374,833
Net tax payable by 15 March 2015
365,667
Notes
1.
2.
3.
4.
5.
6.
Interest paid/received is dealt with on the cash basis, hence the adjustments for the amount
receivable/payable.
Reserve for specific bad debts is allowed.
Recapture of excess tax depreciation is allowed.
Restricted to 50% of the prior year tax losses carried forward.
Tax depreciation is granted in lieu of book depreciation.
Capped at 30% of tax payable on business operations (excludes income from investments).
Jamaica
1003
Japan
PwC contact
Kazuya Miyakawa
Zeirishi-Hojin PricewaterhouseCoopers
Kasumigaseki Building 15 FL
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo 100-6015
Japan
Tel: +81 3 5251 2400
2014 Tax Reform
One year early termination of the Restoration corporation surtax
As a part of the Special Measures to Secure the Financial Resources to Implement the
Restoration from the Tohoku Earthquake in 2011, a corporation surtax was introduced
for a three-year period from the first fiscal year beginning on or after 1 April 2012.
To help enable the revitalisation of the Japanese economy, the 2014 Tax Reform targeted
to lower the corporate tax burden by terminating the corporation surtax one year earlier
than planned. Under the 2014 Tax Reform, the effective corporate tax rate has changed
as follows:
Corporate tax rate
(Tokyo-based)
Corporations subject to the
size-based enterprise tax
regime
Other than above
From first fiscal year beginning From first fiscal year beginning
on or after 1 April 2012 (%)
on or after 1 April 2014 (%)
38.01
35.64
39.43
37.11
Adoption of AOA (attribution of profits to a branch) as a basic principle
After many years of discussion and drafts, and following the approval by the
Organisation for Economic Co-operation and Development (OECD) Committee on Fiscal
Affairs on 22 June 2010 and the release by the OECD Council on that same day of a
revised Model Tax Convention, the OECD, on 22 July 2012, released its final Report on
the Attribution of Profits to Permanent Establishments (PEs).
Under this revised Model Tax Convention, a new Article 7 applies the Authorised OECD
Approach (AOA) to the calculation of attributable income (under the principle of what is
generally referred to as the functionally separate entity approach).
The 2014 Tax Reform seeks to amend Japanese domestic rules with regard to the
taxation of PEs in Japan to be consistent with the revised Model Tax Convention, as well
as trends in international tax law and practice. This significantly affects the principles
and approach to international taxation as applied under Japanese tax law, and will
affect both the taxable income calculation of Japanese branches of foreign corporations
as well as the calculation of foreign tax credits for Japanese corporations.
The amendments will apply from tax years commencing on or after 1 April 2016.
A new protocol to the United Kingdom (UK)-Japan Tax Treaty
The Ministry of Finance of Japan announced that a protocol to the UK-Japan Tax Treaty
was signed on 17 December 2013.
1004
Japan
Japan
The protocol amends the existing tax treaty, which entered into force in 2006. Key
aspects of the protocol include:
The elimination of withholding taxation on certain interest and dividends.
Capital gain exemption on the transfer of shares in a foreign subsidiary, if certain
conditions are met.
Mitigation of the restrictions on the equivalent beneficiary condition in the limitation
on benefit clause.
Introduction of a new article for taxation on business profits (i.e. recognition of
internal dealings between head office and branch and application of arms-length
principles), reflecting the revision of the OECD model tax convention in 2010.
Introduction of arbitration proceedings in mutual agreement procedures.
Introduction of assistance in the collection of taxes.
The protocol shall be subject to ratification, and enter into force on the date of the
exchange of instruments of ratification.
Consumption tax
According to recent amendments to the Consumption Tax Law, the consumption tax rate
increased to an 8% rate on an interim basis (as of 1 April 2014) and will further increase
to a 10% rate (as of 1 October 2015).

A domestic corporation in Japan is taxed on its worldwide income. A foreign corporation
is taxed only on its Japan-source income.
Corporation tax
The corporation tax rates are provided in the table below. While they were reduced,
based on the December 2011 Tax Reform, for fiscal years beginning 1 April 2012, a
temporary surtax of 10% is being charged, by the enactment of the Special Restoration
Tax Law, to the taxpayer of corporation tax for three years from the first tax year that
begins during the period between 1 April 2012 and 31 March 2015.
Company size and income
Paid-in capital of over 100 million
Japanese yen (JPY)
Paid-in capital of JPY 100 million or less,
except for a company wholly owned by a
company that has paid-in capital of JPY
500 million or more:
First JPY 8 million per annum

Over JPY 8 million per annum
Corporation tax rate (%)

25.5
Corporation surtax (2)
10% of the corporation

tax before certain tax
credit, etc.
15.0 (1)
25.5
Notes
1.
2.
This is a temporary rate, which, if not extended by legislation, will revert to a 19% rate during fiscal
years beginning on or after 1 April 2012 but prior to 1 April 2015.
The surtax applies to the two-year period from the first tax year that begins during the period
between 1 April 2012 and 31 March 2014 (one-year early termination under the 2014 Tax Reform).
National local corporate tax
Effective from tax years commencing on or after 1 October 2014, a new national local
corporate tax will be introduced. Corporate taxpayers will be obligated to file and pay
the national local corporate tax at a fixed rate of 4.4% of their corporate tax liabilities.
Japan
1005
Japan
Standard enterprise tax (and Special Local Corporate Tax)
Enterprise tax is imposed on a corporations income allocated to each prefecture. This

allocation is generally made on the basis of the number of employees and number of
offices in each location.
The standard rates of enterprise tax, including a Special Local Corporate Tax, are shown
below. Under the 2014 Tax Reform, the applicable rate is increased from tax years
commencing on or after 1 October 2014.
Taxable base
Next JPY 4 million per annum
Enterprise tax (%)

Current Amended
2.7
3.4
4.0
5.1
5.3
6.7
Special Local Corporate Tax

Current
Amended
81% of
the current
enterprise tax
43.2% of
the current
enterprise tax
If the paid-in capital of a corporation is JPY 10 million or more and the corporation
has places of business in more than two prefectures, the graduated rates above are not
applicable.
For utilities and insurance companies, the standard tax rate is shown as follows:
Taxable base
Net revenue (net utility charges or
net insurance premiums)
Enterprise tax (%)

Current Amended
0.7
0.9

Current
Amended
81% of
43.2% of
the current
the current
enterprise tax
enterprise tax
Size-based enterprise tax (and Special Local Corporate Tax)
Instead of the above general enterprise tax, a size-based enterprise tax (Gaikei Hyojun
Kazei) is applied to a company whose paid-in capital is more than JPY 100 million as of
the year end.
Factors such as the size of a corporations personnel costs and its capital (the amount
of paid-in capital) will determine the additional amount of tax payable. The existing
profit-based enterprise tax will also continue to apply at the tax rates indicated below.
Therefore, a loss company in Japan may be required to pay tax based on value-added
activities and the corporations paid-in capital. The applicable standard rates are shown
below. Under the 2014 Tax Reform, the applicable rate is increased from tax years
commencing on or after 1 October 2014.
Taxable base
Profit-based tax:
Tax rate (%)

Current
Amended
1.5
2.2
2.2
3.2
2.9
Additional value-based tax

Capital-based tax
4.3

Current
Amended
148% of
the current
enterprise tax
67.4% of
the current
enterprise tax
0.48
N/A
0.2
N/A
Inhabitants tax
Inhabitants tax is imposed on a corporations income allocated to each prefecture and

city (municipal borough). The allocation is generally made on the basis of the number of
employees, in the same way as enterprise tax.
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Japan
Japan
The standard tax rate is 5% (3.2% from tax years commencing on or after 1 October
2014) as prefectural tax and 12.3% (9.7% from tax years commencing on or after 1
October 2014) as municipal tax. However, the tax rate may be increased up to 6% (4.2%
from tax years commencing on or after 1 October 2014) for prefectural tax and 14.7%
(12.1% from tax years commencing on or after 1 October 2014) for municipal tax,
depending upon the determination of each local government.
In addition to the above, inhabitants tax is imposed on a per capita basis, in the range
from JPY 70,000 (in the case that the amount of paid-in capital is JPY 10 million or less,
and the number of employees in each prefecture and city is 50 or less) to JPY 3.8 million
(in the case that the amount of paid-in capital is over JPY 5 billion and the number
of employees in each prefecture and city is over 50). The inhabitants tax amount is
determined by the local government by the factors of paid-in capital and the number of
employees.
Effective tax rate
The total corporate income tax burden (i.e. effective tax rate) varies depending upon the
size of a companys paid-in capital. Since enterprise tax is deductible, the effective tax
rate is less than the total of the statutory rates of corporation tax, inhabitants tax, and
enterprise tax.
As a consequence of the permanent reduction of the corporation tax rate, the
introduction of temporary surtax, and the 2014 Tax Reform mentioned above, the
effective tax rate will be altered hereafter. The following is the summary of the effective
applicable tax rate in the case of a large corporation operating in Tokyo (taking no
thought of an additional-value-based tax and capital-based tax out of the enterprise tax
above):
Tax year
Beginning between 1 April 2012
and 31 March 2014
Beginning on or after 1 April 2014
Effective corporation tax rate (%)

Small and medium enterprises (SMEs) Large corporations
39.43
38.01
37.11
35.64
Corporate residence
Domestic and foreign corporation
A company that has its head office in Japan is a domestic corporation. The nationality of
its shareholders or place of central management is not relevant.
A corporation other than a domestic corporation is regarded as a foreign corporation.
Under domestic tax law, the scope of Japan-source income in respect of which a foreign
corporation is taxable depends upon the type of taxable presence that it has in Japan.
The types of taxable presence that a foreign corporation may have in Japan include the
following:
Branch, factory and other fixed places in which business is conducted in Japan, mine,
quarry, building for rent, etc. but exclude a specified place used only for the business
of purchasing assets and for keeping them (Direct PE).
Construction, installation, assembly project, or supervisory services related thereto
for a period of greater than one year.
Japan
1007
Japan
Certain agents (Agent PE), as follows:
A person in Japan who has an authority to conclude contracts for a foreign
corporation (excluding contracts to purchase assets) and exercises such authority
continuously (Contracting Agent).
A person in Japan who keeps for a foreign corporation a certain quantity of assets
sufficient to meet ordinary demand from the foreign corporations customers and
delivers the said assets to the customers according to their requirements (Fills
Order Agent).
A person in Japan who, solely or principally for or on behalf one foreign
corporation, habitually performs an important part of solicitation of orders,
negotiations, or other acts leading up to the conclusion of contracts with respect to
the business of the foreign person (Secure Order Agent).
As a matter of law, the articles of Japans tax treaties have precedence over domestic tax
law. In general, there are no significant differences between the definitions of PE under
domestic tax law and Japans tax treaties. However, once a PE has been established for a
foreign corporation under domestic law, all Japan-source income is taxable to the PE (as
opposed to just income attributable to the PE, as is the case under most treaties).
Note that the 2014 Tax Reform seeks to amend Japanese domestic rules with regard to
the taxation of PEs in Japan to be consistent with the revised Model Tax Convention,
as well as trends in international tax law and practice. This will significantly affect the
principles and approach to international taxation as applied under Japanese tax law,
and will affect both the taxable income calculation of Japanese branches of foreign
corporations as well as the calculation of foreign tax credits for Japanese corporations.
The amendments will apply from tax years commencing on or after 1 April 2016.
Other taxes
Consumption tax
Consumption tax (value-added tax or VAT) is levied when a business enterprise transfers
goods, provides services, or imports goods into Japan. As of 1 April 2014, the applicable
rate is 8% (previously 5%). As of 1 October 2015, the rate will increase to 10%. Exports
and certain services to non-residents are taxed at a zero rate. Specified transactions,
such as sales or lease of land, sales of securities, and provision of public services, are not
subject to taxation.
Consumption tax paid by the business enterprise attributable to taxable revenue shall
be creditable/refundable by filing the consumption tax return to the extent that such
transaction is recorded in the accounting book and relevant invoices are kept.
Customs duty
A customs duty is levied on imported goods based on the custom tariff table.
Excise taxes
Excise taxes were abolished by introduction of consumption tax.
Fixed assets tax
The annual fixed assets tax is levied by the local tax authorities on real property and
depreciable fixed assets used for business purposes. Real property is taxed at 1.7%
(standard rate including city planning tax) of the value appraised by the local tax
authorities. The depreciable fixed assets tax is assessed at 1.4% of cost after statutory
depreciation.
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Stamp duty
A stamp duty is levied on certain documents prepared in Japan. The tax amount is
generally determined based on the amount stated in the document.
Registration and licence tax
Registration and licence tax is levied where certain property is registered, at a rate from
0.1% to 2% of the taxable basis or at a fixed amount. The taxable basis depends upon the
property being registered (e.g. the amount of paid-in capital registered by a company or
the value of real estate as assessed by local tax authorities).
Labour and Social Insurance
There are four types of insurance systems in Japan that enterprises employing workers
that meet certain conditions must enrol in. Workers accident compensation insurance
is borne entirely by the employer. Employment insurance, health insurance/nursing
care insurance, and employees pension insurance is born by both the employer and
employee. The rates are provided under the relevant laws and regulations.
Family corporation tax
If an individual shareholder together with their family members own, either directly
or indirectly, more than 50% of the total issued shares or voting rights of a Japanese
corporation, the corporation is treated as a family corporation (with the exception of
corporations with paid-in capital of JPY 100 million or less) and is subject to the family
corporation tax in addition to corporation tax.
A family corporation is liable for an additional tax at the rates shown below on its
undistributed current earnings in excess of specified limits.
Taxable undistributed current earnings
Family corporation tax rate (%)

10
15
20
Business premises tax
Business premises tax is levied and designated by each city in Japan, such as Tokyo,
Osaka, Nagoya, Fukuoka, and other cities with a population of more than 300,000. A
company that uses business premises in excess of 1,000 square metres and/or has more
than 100 employees in a designated city is responsible to pay this tax based on the usage
of the business (JPY 600 per square metre) and gross payroll (0.25% of gross payroll).
Branch income
Branch profits are taxed in the same manner as corporate profits. However, the family
corporation tax does not apply to a branch of a foreign corporation. In addition, no
withholding tax (WHT) is imposed on the repatriation of branch profits to the home
office.
The taxable income of a corporation is the aggregate income from all sources. There
is no specific requirement to differentiate between the types of income. In principle,
accounting for tax purposes follows generally accepted accounting principles (GAAP) in
Japan, and income of a corporation is determined on an accrual basis.
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Inventory valuation
Inventory cost should be determined by applying one of the following methods accepted
for corporate tax purposes: actual individual cost, first in first out (FIFO), weighted
average, moving average, most recent retail, selling price reduction, and lower of cost or
market.
Capital gains
Capital gains and losses are classified as ordinary income and losses respectively.
Under certain circumstances (e.g. qualified reinvestment, exchange property), taxes
generally levied on capital gains may be deferred (i.e. provided rollover relief) as long as
certain requirements are met. A special relief is available in the case of expropriation of
real property by either the national or local government.
The recognition of capital gains or losses from the transfer of certain assets between
group companies are to be deferred until the asset is transferred to another group
company or a non-group company.
Dividend income
Dividends received from a Japanese corporation are excluded from taxable income for
corporate income tax purposes, provided that the recipient corporation owns 25% or
more of the outstanding shares in the dividend-paying corporation for a continuous
period of six months or more, ending on the date on which the dividend is declared.
If a corporation owns less than 25% of the shares in the dividend-paying corporation,
50% of the dividends received from the dividend-paying corporation are excluded from
taxable income.
Interest expense that is allocable as an investment cost of the shares that generate the
dividend income effectively reduces the amount of dividend income. Note that this rule
is not applicable to dividends between 100% group companies.
95% of dividends received by a company from a foreign company in which it has
held at least 25% of the outstanding shares for a continuous period of six months or
more, ending on the date on which the dividend is declared, can be excluded from the
companys taxable income.
If the foreign company is resident in a country with which Japan has concluded a tax
treaty for the avoidance of double taxation, and such treaty provides for the allowance
of an indirect foreign tax credit for taxes paid by the foreign company on the profits
out of which the dividend is paid where the company holds a certain percentage of the
foreign companys outstanding shares (e.g. 10% based on the tax treaty between the
United States and Japan), that percentage will apply for the purpose of determining the
availability of the above exemption to the extent that it is lower than25%.
The WHT for dividends is applicable at a rate of 15% (previously 7%) national tax and
5% local tax on and after 1 January 2014 or 20% (national tax) depending on the type
of stock from which the dividends were received, and a tax credit may also be available
for such WHT. The WHT (national tax) is subject to the income surtax of 2.1%, which is
levied for the income earned for the period from 1 January 2013 through 31 December
2037.
Interest income
Interest received is included in taxable income. The WHT for interest is applicable at
a rate of 15% national tax and 5% local tax and a tax credit may be available for such
WHT. As with dividend income, the WHT (national tax) is subject to the income surtax
of 2.1%, which is levied for the income earned for the period from 1 January 2013
through 31 December 2037. Note that under the 2013 Tax Reform, only national tax
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will be withheld at source for interest income received on or after 1 January 2016 by a
corporate recipient.
Foreign income
A Japanese corporation is subject to Japanese corporate income taxes on its worldwide

income. However, to avoid double taxation of foreign-source income, Japanese
corporations are allowed to claim a tax credit against corporation and inhabitants
taxes for foreign income taxes paid directly. See Foreign tax credit in the Tax credits and
incentives section for more information.
Undistributed profits of a foreign subsidiary (i.e. controlled foreign company [CFC])
located in a tax haven are included in the Japanese parent companys taxable income
under certain conditions. See Anti-tax haven (CFC) rules in the Group taxation section for
more information.
Deductions
Depreciation is deductible in the calculation of taxable income for corporation tax

purposes. Depreciable assets include tangible property (e.g. buildings, attachments
to buildings, structures, machinery and equipment). Certain intangible assets are also
eligible for amortisation (e.g. goodwill, patents and trademarks).
With regard to depreciation methods, a taxpayer may adopt one of the allowable
methods for each of the types of depreciable property. Tangible property is generally
depreciated using either the straight-line method or the declining-balance method.
Intangible property is generally amortised under the straight-line method.
Useful lives for assets are set forth on the table in detail. For reference, the following is
the brief table of useful lives for typical assets.
Types of assets
Concrete buildings
Metal building
Electrical facilities and lighting
Heating and air conditioning
Motor vehicles
Personal computers
Digital telephone equipment
Patents
Software
Useful lives (years)

21 to 50 (depending on uses)
15
15
4
6
8
3 or 5 (depending on uses)
Start-up expenses
Start-up expenses, such as corporation organisation costs and opening costs (i.e. costs
to begin business after the corporation is established), are treated as deferred assets and
allowed to be amortised on a voluntary basis.
Interest expenses
Interest expenses on borrowing are deductible in the calculation of taxable income in

principle. However, the interest payment to related parties in the corporate group may
be disallowed to be deducted to some extent in certain cases. See Thin capitalisation and
Interest expense deduction limitation in the Group taxation section.
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Reserves
Reserves recorded in the books of accounts, except for reserves for doubtful receivables
and return of goods not sold, are not deductible for corporate tax purposes.
Reserve for doubtful receivables
The deductibility of a reserve for doubtful receivables is limited by the following

two components: (i) an estimate of irrecoverable amounts from a debtor and (ii) a
calculation of the limit in the aggregate based on either the actual historical bad debt
percentage or statutory percentage (reduced for large corporations), excluding the
irrecoverable amount of receivable in (i) above.
Per the December 2011 Tax Reform, the reserve for doubtful receivables is abolished,
except for SMEs, banks, insurance companies, and other similar financial corporations.
The abolishment is phased in over four years, as follows:
% of the deductible amount (100% =
Applicable tax years
deductible amount before 2011 Tax Reform)
Beginning between 1 April 2012 and 31 March 2013
75
50
25
Beginning on or after 1 April 2015
0
Reserve for return of goods not sold
A deductible reserve for return of goods not sold is available to corporations such as
publishers, wholesalers of books, and others, provided that the corporation sells the
merchandise under an unconditional repurchase agreement.
Except for certain designated donations, the tax deduction for charitable contributions is
limited to certain amounts, as follows:
Donation
Deduction limit
General donation
((0.25% of capital plus capital surplus) + (2.5% of income)) x 1/4
Donation made to designated ((0.375% of capital plus capital surplus) + (6.25% of income)) x 1/2
public purpose companies
Donations subject to this limitation include economic benefits considered to be given as

a subsidy. Donations to foreign affiliates are not fully deductible.
In the case that a donation occurs between group companies (as defined), there will be
no tax implications for either the donor or donee (i.e. no deduction for the donor and no
taxation for the donee).
Directors remuneration
The remuneration paid to directors is deductible only in the following three cases:
Fixed monthly payments.
Fixed payments in accordance with an advance notice to the tax office.
Performance bonuses paid in proportion to the companys earnings to directors
who engage in the operation of the companys business, to the extent that certain
If the amount of remuneration is deemed unreasonable by the tax authority, only the
reasonable amount is deductible for tax purposes.
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In principle, entertainment expenses are not deductible for tax purposes. However, an
SME, defined as a company with paid-in capital of JPY 100 million or less (except for a
company wholly owned by a company that has paid-in capital of JPY 500 million or more
after the group taxation regime is effective) may take a tax deduction up to the smaller
of the actual disbursement for the entertainment expense or JPY 8 million. With regard
to expenses for eating and drinking, a company may deduct such expenses as far as the
expense does not exceed JPY 5,000 per person (excluding expenditures for internal
purposes) for tax purposes.
Note that under the 2014 Tax Reform, corporations will be able to deduct 50% of the
entertainment expenses for food and drink (excluding entertainment for internal
purposes).
Fines and penalties
Taxes
Enterprise tax and business premises tax are deductible in the calculation of the taxable
income for corporation tax purposes on a cash basis. However, corporation tax and
inhabitants tax are not deductible. Fixed assets tax and other taxes are deductible, when
assessed. Foreign income taxes also may be deductible if the Japanese corporation does
not elect to claim a foreign tax credit.
For corporation tax and enterprise tax purposes (indirectly for inhabitants tax
purposes), a tax loss can be carried forward to offset future income in the case that a
taxpayer files a blue form tax return (see Tax returns in the Tax administration section) or
if the tax loss is incurred as a result of certain disaster events.
The use of carried forward net operating losses is limited to 80% of current taxable
income, effective for tax years beginning on or after 1 April 2012. Such limitation does
not apply to SMEs and certain investment vehicle corporations. However, the period
within which net operating losses can be carried forward is extended from seven years
to nine years for the losses incurred in the tax year ending on or after 1 April 2012 on
condition that taxpayers maintain their books and records in which net operating losses
were recognised.
SMEs and certain investment vehicle

corporations:
Deductible losses against taxable income
Carryforward years
Corporations other than above:
Deductible losses against taxable income
Carryforward years
Fiscal year beginning

before 1 April 2012
Fiscal year beginning

on or after 1 April 2012
100%
7 years
100%
9 years
100%
7 years
80%
9 years
Where there is a change in ownership of a corporation followed by certain events, such

as the cessation of business or a significant change in its business within a five-year
period following a business acquisition, the utilisation of its tax loss is restricted.
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Carryback of tax losses is generally available for one year for national corporation tax
purposes. This carryback rule is suspended until the fiscal year ending 31 March 2016
(except in specified circumstances, e.g. year of liquidation).
No carryback of losses is allowed for enterprise tax and inhabitants tax.
In order to support a deduction in Japan for expenses incurred by a foreign affiliate

and charged to a Japanese corporation, in general, it should be demonstrated that the
service arrangement between the foreign affiliate and the Japanese corporation satisfies
arms-length criteria for purposes of Japans transfer pricing laws and regulations.
Generally, fees that are paid by a Japanese subsidiary to a foreign affiliate should be
deductible for Japanese tax purposes if the following conditions are met:
The services should have the same character as services that take place between nonrelated companies or such services are essential to Japans activities.
There is a written service agreement.
The services were requested by the Japanese corporation.
The rendering of services is documented with evidence (e.g. requests for services
from the Japanese subsidiary, regular invoices sent by the foreign affiliate).
The service charges are reasonable.
Group taxation
Consolidated tax regime
Under the consolidated tax regime, a consolidated group can report and pay national
corporate income tax on a consolidated basis. A consolidated group may be formed
by a Japanese parent company and its 100% owned (directly or indirectly) Japanese
subsidiaries. The taxpayer may file an application to elect a consolidated group filing for
tax purposes, but the election must include all of the parents eligible subsidiaries. Once
the election is made, the consolidated filing, in principle, cannot be revoked unless there
is a specific event, such as an ownership change, that causes the qualifying conditions of
a consolidated filing to fail or an application to discontinue the consolidated group has
been approved by the Commissioner of the National Tax Agency (NTA).
The taxable income of the consolidated group is computed on a consolidated basis by
aggregating the taxable income or losses of each member of the consolidated group
followed by the consolidation adjustments. Profits from intra-group transactions, except
for transfer of certain assets as defined, should be included in the aggregate taxable
income. Gains or losses from the intra-group transfer of certain assets are deferred.
Pre-consolidation tax losses of a subsidiary can be carried forward into a consolidated
tax group if certain conditions are met, but may only be offset against taxable income of
the subsidiary for the calculation of a consolidation income.
The consolidated national corporate income tax liability is determined by applying
the corporate income tax rate to the consolidated taxable income and adjusted for
consolidated tax credits. The total tax liabilities are allocated back to each member
company. The parent company files the consolidated return and pays the national
corporate income tax for the group; however, each member company remains jointly
and severally liable for the consolidated groups total national corporate income tax
liability.
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Local corporate income taxes levied on member companies are paid on a separate
company basis, but the amount of local tax payable may be affected because of the
consolidated filing.
Group taxation regime
A group taxation regime is applicable to domestic companies that are wholly owned
by a domestic company, foreign company, or individual (group companies). Unlike
the consolidated tax regime, the group taxation regime automatically applies to group
companies.
The key points of this regime are summarised as follows:
The recognition of capital gains or losses from the transfer of certain assets (including
the transfer of assets as a result of a non-qualified or taxable merger) between
group companies is deferred until the asset is transferred to another group company
or a non-group company. The scope of assets is the same as that under the tax
consolidation system (i.e. fixed assets, land, securities, monetary receivables, and
deferred expenses [excluding securities for trading purposes and assets with a book
value of less than JPY 10 million]).
Where a donation occurs between group companies, there are no tax implications
for either the donor or donee (i.e. no deduction for the donor and no taxation for
the donee). Note that this treatment is not applied to a group company owned by an
individual. This is consistent with the treatment of a donation between members of a
consolidated tax group.
A dividend received from a group company can be fully excluded from taxable
income without any reduction for allocable interest expense. This is consistent with
the treatment of dividends between members of a consolidated tax group.
A group company that would otherwise qualify as an SME on a stand-alone basis is not
eligible for SME benefits (e.g. reduced corporate tax rate, preferable allowable ratios
for deductible portion of bad debt provisions, partial deductibility of entertainment
expenses, carryback of tax losses) if the SME is owned by a parent company or two or
more parent companies of the group that has paid-in capital of JPY 500 million or more.
Where a corporation that is a member of a 100% group is in the process of liquidation
and is expected to be dissolved, any loss from the impairment or devaluation of the
shares of the liquidating corporation cannot be recognised by the parent company as a
tax deductible expense.
Transfer pricing
If a corporation that is subject to corporation tax sells property to or buys property

from a foreign-related person, or provides services or conducts other transactions with
a foreign-related person, and consideration is received or paid by the corporation, the
transaction is required to be carried out at an arms-length price for corporation tax
purposes.
A foreign-related person is a foreign corporation that maintains certain special
relationships with the subject corporation, such as parent-subsidiary, brother-sister, or
substantial control relationship.
The arms-length price for the sales or purchase of inventory may be determined using
one of the four following methods:


Cost plus method.
Other method.
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The most appropriate method should be applied in order to calculate the arms-length
price.
Note that as a result of recent amendments to the OECD Guidelines, the Berry Ratio has
become a specifically allowed method under the 2013 Tax Reform, in addition to the
three traditional transactional methods (comparable uncontrolled price method, resell
minus method, cost plus method) as well as other methods (i.e. profit split method and
transactional net margin method [TNMM]).
An advanced pricing agreement (APA) system is available to confirm the arms-length
pricing system proposed by a taxpayer. In general, corporations entering into an APA are
advised to file a request for mutual agreement procedures (MAP) in order to obtain the
agreement of the competent authorities of each country.
Thin capitalisation
Interest paid on debt to controlling foreign shareholders is disallowed to the extent the
average balance of debt on which that interest is paid is more than three times the equity
of controlling foreignshareholders.
Interest expense deduction limitation
The deductible portion of a corporations net interest expense to a related party is

restricted to 50% of the adjusted income. The net interest is calculated as interest
expense to related parties less corresponding interest income. The adjusted income is
defined as taxable income, adding back interest expense, depreciation expense, and
exempted dividend income but excluding extraordinary income or loss.
Anti-tax haven (controlled foreign company or CFC) rules
Undistributed profits of a foreign subsidiary (i.e. CFC) located in a tax haven are
included in the Japanese parent companys taxable income under certain conditions.
Tax havens are defined as certain countries or territories that do not impose corporate
income tax or that tax the income of a foreign subsidiary at a rate of 20% or less. A
Japanese corporation owning a 10% or more direct or indirect interest in a CFC is
required to include its pro-rata share of the taxable retained earnings of the CFC in its
gross income under certain circumstances.
A dividend paid by a CFC is not deductible when calculating its undistributed income.

Foreign tax credit
A Japanese corporation is subject to Japanese corporate income taxes on its worldwide

income. However, to avoid double taxation of foreign-source income, Japanese
corporations are allowed to claim a tax credit against corporation and inhabitants taxes
for foreign income taxes paid directly.
Creditable foreign taxes are defined as taxes that (i) are incurred directly by the
taxpayer; (ii) are levied by foreign governments and local authorities in accordance
with local tax laws; (iii) are levied on corporate income; and (iv) have the same
characteristics as Japanese income tax, corporation tax, and local income-based taxes.
A tax for which refund can be claimed optionally by the taxpayer after the tax payment,
or a tax whose payment grace period can be decided by the taxpayer, are not regarded as
foreign tax.
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In order to prevent the credit from reducing corporation tax on Japan-source income,
certain limitations are set on the amount of foreign tax that can actually be credited. The
ceiling is 35% for the foreign tax paid in the tax years beginning on or after 1 April 2012.
A foreign tax credit is not applicable for enterprise tax purposes, although foreign
branch income attributable to a business executed outside Japan is exempt from
enterprise tax.
Generally speaking, the foreign tax credit system does not apply to the extent the
dividend income from the foreign subsidiary is subject to the dividend exemption
system.
Foreign corporations with a PE in Japan should note that under the 2014 Tax Reform
Proposal, when a foreign corporations PE in Japan is subject to taxation in Japan as
well as in jurisdictions other than its country of residence, double taxation may arise.
To alleviate an unfair tax burden, it is proposed to introduce a foreign tax credit regime
applicable to PEs in Japan similar to that which applies to Japanese corporations.
However, foreign tax (including WHT) paid in the enterprises country of residency
would not, in principle, be creditable under consequential changes to the foreign tax
credit regime.
Tax credit for research and development (R&D) cost
The tax credit for R&D cost is calculated based on gross R&D cost. The credit is limited to
20% the corporation tax liability. Note that under the 2013 Tax Reform, the R&D credit
limitation is increased to 30% for tax years commencing on after 1 April 2013 through
31 March 2015. In the case that the amount of the credit exceeds the limitation, the
excess amount can be carried forward for one year.
In addition to the R&D credit, for tax years beginning during the period 1 April 2008 to
31 March 2014, a taxpayer may claim an additional tax credit based on its incremental
R&D expenditure or excess R&D cost over sales, as follows:
5% of the excess R&D costs over the annual average of R&D costs for the last three
years.
Excess R&D costs over 10% of the average sales amount multiplied by a tax credit
ratio equal to ((R&D costs/average sales) - 10%) x 0.2).
The limitation of this additional tax credit is 10% of the corporation tax liability.
Note that under the 2014 Tax Reform,the temporary R&D tax incentive (incremental
R&D cost based tax credit) above is amended as follows:
The applicable period is extended for three years.
In the formula of the credit calculation, if certain requirements are met, up to 30%
(currently 5%) of the incremental R&D cost is allowed as a credit.
New investment incentive to improve production efficiency
Under the 2014 Tax Reform, a new investment incentive was enacted for corporations
for investments in production facilitiesthat improve production efficiency. Unlike the
investment incentive introduced in the 2013 Tax Reform, an increase in the amount
of investment compared to the previous year is not required. However, corporations
eligible for the incentive are limited to enterprisesthat acquire new facilities to improve
production efficiency. When certain requirements are met, a corporation is allowed to
claim 100% depreciation of assets when the assets are placed in service.
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Special tax treatment for investment in certain equipment
SMEs filing blue form tax returns may elect, under certain conditions, to claim
accelerated depreciation of 100% of the base acquisition cost or a special tax credit
equivalent to 10% of the base acquisition cost on designated equipment to the extent
that it is acquired between 1 April 2014 and 31 March 2017. The maximum tax credit is
limited to 20% of the taxpayers corporate tax liability.
The Incentive for New Investment into Production Facilities is applicable to any
industrythat invests in new production facilities (30% special depreciation or 3%
tax credit on acquisition cost, up to 20% of corporate tax liability, etc., and subject to
certain conditions). In addition, an investment incentive applies to SMEsthat invest
in equipment and furnishings pursuant to certain facility remodeling (30% special
depreciation or 7% tax credit on acquisition cost, up to 20% of corporate tax liability
[one-year carryforward of any excess], and subject to certain conditions). The SME tax
incentive is granted to an SME engaged in the distribution, retailing, service, and/or
agriculture business. This incentive is effective for tax years beginning on or after 1 April
2013 through 31 March 2015.
Note that under the 2014 Tax Reform, a new investment incentive was enacted for
corporations for investments in production facilitiesthat improve production efficiency.
When certain requirements are met, a corporation is allowed to claim 25%, 50%, or
100% depreciation of assets when the assets are placed in service, or 2%, 4%, or 5% tax
credit (limited to 20% of the corporate tax liability before the credit).
Special tax treatment for Designated International Strategic Area
Qualifying corporations doing business in certain designated metropolitan areas

(Designated International Strategic Area) will be granted the following tax incentives:
If qualifying corporations are engaged in specified businesses in the Designated
International Strategic Area, certain capital expenditures (JPY 20 million or
more for machinery and equipment and JPY 100 million or more for building and
construction) incurred for the specified businesses will be eligible for either (i) a
deduction equal to 50% of the capital expenditures (building is limited to 25%) or
(ii) a tax credit equal to 15% of the capital expenditures (building is limited to 8%),
with the maximum credit amount in any given tax year being equal to 20% of the tax
liability before the credit, with a one year carryforward.
If qualifying corporations are engaged primarily in specified businesses in the
Designated International Strategic Area, they will be entitled to an income exclusion
of up to 20% for five years, provided they are incorporated in the Designated
International Strategic Area and incur certain capital expenditures. If qualifying
corporations claim the 20% income exclusion, they will not be entitled to the tax
credit regime described above.
Qualifying corporations will be eligible for the tax credit regime described above with
respect to capital expenditures incurred from the effective date of the law concerning
this regime through 31 March 2016. Corporations will be eligible for the 20% income
exclusion regime for five years once they are specified as qualifying corporations during
a period from the effective date of the law concerning this regime through 31 March
2016.
Tax incentives for Asian headquarters
A qualifying corporation filing blue form tax returns that will be primarily engaged in
the operational management or R&D activities established by an international foreign
corporation will be entitled to claim a 20% income exclusion over five years from the
date of designation (during the period from the effective date of the law concerning this
regime through 31 March 2015) as a qualifying corporation pursuant to the relevant law.
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Investment incentive designed for National Strategic Special Areas
As a part of certain legislation (the Law of National Strategic Special Areas) approved
by the Diet on 7 December 2013, tax incentive measures designed for National Strategic
Special Areas (special depreciation or tax credit by investment in such designated areas)
are introduced in the 2014 Tax Reform.
Employment promotion taxation
If qualifying corporations increase the number of employees subject to employment

insurance by 10% or more and by five people (two in the case of SMEs) or more from the
end of the prior tax year, the qualifying corporations will be eligible for the tax credit
equal to the increased number of the employees multiplied by JPY 400,000 with the
limitation of 10% (20% in the case of SMEs) of the tax liability before the credit, subject
to certain conditions for the tax years that commence from 1 April 2011 (excluding years
ending before 30 June 2011) to 31 March 2016.
Under the 2013 Tax Reform, a new tax incentive was introduced to allow an employer
corporation to claim a tax credit based on increases in salary payments (tax credit equal
to 10% of the increased salary amount with a limitation of 10% [20% in case of SME]
of the tax liability, subject to certain conditions). The employer corporation is allowed
to claim a credit by either increased employment incentive or employment promotion
incentive as explained above. To take a credit, the employer corporation must be a blue
form filer. The credit is effective for tax years commencing from 1 April 2013 to 31
March 2018.
New incentive for venture capital investment
To assist venture capital investment, certain procedures to accredit venture capital

partnerships will be legislated in the Industrial Competitiveness Enhancement Law.
Investment tax incentives will also be introduced to allow corporate investors the ability
to take a loss from a venture capital investment on an accelerated basis compared to
current rules. A qualified investor is allowed to deduct a tax reserve for the investment
loss at up to 80% of the book value of the investment.
New incentive for corporate reorganisation
To promote business reorganisation within the same industry in order to improve

business profitability, a corporation can apply to be a qualified corporation by
submitting a business reorganisation plan pursuant to a new Industrial Competitiveness
Enhancement Law. A qualified investor is allowed to deduct a tax reserve for the
investment loss at up to 70% of the book value of the investment or loan.
Tohoku Earthquake and special tax legislation

Corporate tax refunds by loss carrybacks
Under the current law, one year tax loss carrybacks are allowed for SMEs. Other
corporations are allowed a one year tax loss carryback in the year of liquidation. In
the Tohoku Legislation, corporations that incurred a specified disaster loss from the
Tohoku Earthquake (the Tohoku Earthquake Disaster Loss) may carry back such loss
for two years for national tax purposes. Such carryback may be elected either with the
annual corporate tax return or an interim tax return based upon a full interim closing
of the corporate books. For local tax purposes, the tax loss carryback is not applicable,
although carryforward of all losses (including the Tohoku Earthquake Disaster Loss) is
allowed over the normal nine year carryforward period.
Special depreciation for newly acquired assets relating to the Tohoku

Earthquake
A corporation may claim a special depreciation of certain assets in the year of acquisition
in addition to normal depreciation. The qualified assets should be acquired and placed in
service between 11 March 2011 and 31 March 2016 and satisfy either (i) or (ii) below:
Japan
1019
Japan
i
ii
Newly acquired assets to replace assets destroyed in the Tohoku Earthquake,

including:
Buildings, structures, machinery, or equipment.
Registered vessels, aircraft, or vehicles.
Newly acquired assets placed in service in a business carried out at the affected
area*, including buildings, structures, machinery, or equipment.
* Areas where destroyed buildings or structures were located and surrounding areas
where machinery or equipment were installed.
Assets
Buildings, structures
Machinery, equipment;
registered vessels,
aircraft, vehicles
Special depreciation rate applicable

Special depreciation rate
to the assets acquired and put into applicable to the assets acquired
service between 11 March 2011 and and put into service between 1
31 March 2014 (%)
April 2014 and 31 March 2016 (%)
SMEs Other than SMEs
SMEs
Other than SMEs
18
15
12
10
36
30
24
20
Rollover relief given to newly acquired assets to replace old assets
Under the current statutes, up to 80% of the capital gain realised when a corporation
acquires an asset to replace an old one may be deferred. Under the Tohoku Legislation,
for certain assets acquired between 11 March 2011 and 31 March 2016, the entire
amount of capital gain may be deferred. Qualified replacement assets include the
following:
Real estate or depreciable assets located in Japan purchased to replace real estate
(including buildings or structures fixed to the land) in the affected area that had been
acquired prior to 11 March 2011.
Real estate or depreciable assets purchased in the affected area to replace real estate,
buildings, or structures located other than in the affected area.
When applying the rollover relief rules, the due date for acquiring replacement assets is
extended for a further two years if it is difficult to acquire the replacement asset by the
normal due date as a result of the Tohoku Earthquake.
Additional special tax relief for restoration of the affected area
The following additional tax incentives were introduced on 14 December 2011. Please
note that a corporate taxpayer must choose one of (i), (ii), or (iii) below, where (ii) can
be chosen only where employment promotion taxation (see above) is not applied.
i. Tax incentive for a newly established company doing business in designated areas
A newly established company satisfying certain criterion is not subject to tax on income
for the first five years of its existence. However, in effect, the tax holiday is more akin to a
deferral since the income is offset by a special reserve that is reversed in later years.
The tax incentive applies to a company that acquires machinery, equipment, and
building structures in a specified industrial concentration area that is organised by an
approved local government and designated by 31 March 2016 by the local government
as a company that contributes to providing opportunities for employment (Designated
Company) and newly established on or after the date when the designated restoration
planning is approved.
If a Designated Company set up reserves for reinvestment in each of the tax years
(including a day) within a designated period (five years from the date on which a
1020
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Japan
company is designated), the amount of reserve (which may be set up to be 100% of
taxable income) is deductible and may essentially defer tax for ten years.
In a tax year where a Designated Company reinvests in machinery or building in a
specified industrial concentration area, a corporation is allowed to claim a deduction
of the lesser of (i) special depreciation up to the balance of the reserve and (ii) special
depreciation equal to the reversed reserve amount.
ii. Special corporation tax credit
A Designated Company is allowed to enjoy a tax credit for 10% of salary paid (but
limited to 20% of corporation tax due) to employees within a specified industrial
concentration area.
iii. Special depreciation and special tax credit
A Designated Company is allowed to enjoy special depreciation or a special tax credit

for (i) machinery and equipment and (ii) buildings and structures acquired by 31 March
2016 in a specified industrial concentration area.
Special depreciation: Depreciation rates applicable for machinery and equipment are
100% if acquired and used by 31 March 2014, and 50% if acquired and used by 31
March 2016. The depreciation rate applicable for buildings and structures is 25%.
Special tax credit: The rates of tax credit applicable for (i) machinery and equipment
and (ii) building and structures are 15% and 8%, respectively, but limited to 20% of
corporation tax due. Any tax credits in excess of this limitation can be carried forward
for four years.
Withholding taxes
Tax treaty network
As of 1 May 2014, Japan has entered into 60 tax treaties with 80 countries and/or
regions. Companies making certain payments are required to withhold income taxes
using the following rates.
Recipient
Japanese corporations
Foreign corporations, non-resident
individuals:
Non-treaty (5):
Treaty (6):
Australia
Austria
Bahamas (7)
Bangladesh
Belgium
Bermuda (7)
Brazil
Brunei
Bulgaria
Canada
WHT (%)
Dividends
Substantial
Portfolio (3) holdings (1)
20
20
20
20
15 (3)
15 (3)
10
20
15
15
12.5
10
15
15
0/5
10
10
10
12.5
5
10
5
Interest
0/20 (4)
0/20 (4)
Royalties (2)
0
0
0/15/20 (5)
20
10
5
10
10
10
10
10
10
12.5 12.5/15/25 (8)
10
10
10
10
10
10
Japan
1021
Japan
Recipient
Cayman Islands (7)
Czechoslovakia (former) (9)
Denmark
Egypt
Finland
France
Germany
Guernsey (7)
Hong Kong
Hungary
India
Indonesia
Israel
Italy
Jersey (7)
Kazakhstan
Korea, Republic of
Kuwait
Liechtenstein (7)
Luxembourg
Macao (7)
Malaysia
Man, Isle of (7)
Mexico
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portuguese Republic
Romania
Samoa (7)
Saudi Arabia
Singapore
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Thailand
Turkey
USSR (former) (24)
United Kingdom
United States
1022
Japan
WHT (%)
Dividends
Substantial
Interest
10
10
10
15
10
10
15
10
10
15
15
0/15/20
15
10
10
10
0/5
10
15
10
10
10
5
10
10
10
10
10
10
10
15
10
10
15
10
10
15
5
10
15
10
10
15
5
10
15
5
10
10
5
0/10
15
5
10
15
5
10
15
0/5 (14)
10/15
10
0/5 (15)
0/10 (15)
15
0
0/15
15
5
10
10
5/7.5 (16)
10
15
10
10
10
10
10
10
5/10
0/5/10
10
10
10
10
5
0/10
15
5
10
15
5
10
15
10
10
20
20
0/15/20 (20)
15
0/5 (21)
10
10
0/5
0/10
15
15/20 (22)
10/25 (22)
15
10
10/15 (23)
15
15
10
10
0/5
10
10
0/5
10
Royalties (2)
10
0/10 (9)
10
15/20 (10)
10
0
10
5
0/10 (11)
10 (12)
10
10
10
10
5 (13)
10
10
10
10
10
0
5
10
10
10/15 (17)
0/10 (11)
5
10/15 (18)
5/10 (19)
10
10
10
0/10 (20)
10
0
15
10
0/10 (24)
0
0
Japan
Recipient
Vietnam
Zambia
WHT (%)
Dividends
Substantial
10
10
0
0
Interest
10
10
Royalties (2)
10
10
Notes
The applicable treaty rates are effective as of 1 May 2014.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
The tax treaty rates apply only to corporate shareholders. The applicable treaty should be checked
for conditions required to claim the reduced rate.
The applicable treaty should be reviewed because certain tax treaties exclude film royalties and/
or gain from copyright transfer from taxable income. Note that WHT may be subject to the income
surtax of 2.1%, which is levied for the income earned for the period from 1 January 2013 through 31
December 2037.
Dividends and interest paid to foreign corporations or non-resident individuals are subject to a 15%
national WHT and 5% local tax. Note that national WHT (15%) may be subject to the income surtax
of 2.1% (the combined rate is 15.315%), which is levied for the income earned for the period from 1
January 2013 through 31 December 2037.
Interest on bank deposits and/or certain designated financial instruments is subject to a 15% national
WHT (20% national WHT on loans). Taxation of such interest is fully realised by tax withholding, so
resident individuals are not required to aggregate such interest income with other income. Interest
on loans made by resident individuals is not subject to WHT; instead, it is taxed in the aggregate
with other income. Note that national WHT (15%, 20%) may be subject to the income surtax of 2.1%
(the combined rate is 15.315%, 20.42%), which is levied for the income earned for the period from 1
January 2013 through 31 December 2037.
Dividends, interest, and royalties earned by non-resident individuals and/or foreign corporations are
subject to a 20% national WHT under Japanese domestic tax laws in principle. An exceptional rate of
15% is applied to interest on bank deposits and certain designated financial instruments. Interest on
loans, however, is taxed at a 20% rate. A special exemption from WHT applies to certain long-term
corporate bonds issued to non-residents in foreign countries. Note that national WHT (15%) may be
subject to the income surtax of 2.1% (the combined rate is 15.315%), which is levied for the income
earned for the period from 1 January 2013 through 31 December 2037.
Tax treaties with many countries provide reduced tax rates, as indicated. Some treaties, however,
provide higher tax rates (e.g. Brazil, Thailand) or do not provide rates (e.g. Egypt, New Zealand). In
these instances, rates specified under Japanese domestic tax laws apply. Each treaty should be
consulted to see if a reduced rate for dividends (in the case of substantial holdings) is applicable.
The tax treaty was concluded mainly for the purpose of information exchange.
The tax treaty with Brazil provides a 25% tax rate for certain royalties (trademark). However, the WHT
rate cannot exceed 20.42% (including the income surtax of 2.1%) on any royalties to be received by
a non-resident taxpayer of Japan under Japanese income tax law. Film royalties are taxed at 15%.
Any other royalties are taxed at 12.5%.
The treaty with the former Czechoslovakia is applied to the Czech Republic and the Slovak Republic.
It stipulates that cultural royalties are tax exempt.
Film royalties are taxed at 20%, and other royalties are taxed at 15%.
Cultural royalties are tax exempt.
The rate of 10% for royalties includes consideration for technical services.
The rate for royalties is reduced from 10% to 5% by Protocol.
Dividends received from subsidiaries, by parent companies that have met certain conditions, are
exempt from WHT.
Dividends received from subsidiaries for which the parent company has over 50% shareholding are
tax exempt. Interest received by government and other specific entities, or paid as a consequence of
sale on credit of any equipment, merchandise, or service, is tax exempt.
A 5% rate is applied to a company that has over 50% shares with direct voting rights, and a rate of
7.5% is applied to a company that has over 25% shares with direct voting rights.
Film royalties are taxed at 15%. Any other royalties are taxed at 10%.
Cultural royalties are taxed at 10%.
Royalties paid for the use of certain equipment are taxed at 5%.
Interest paid to financial institutions is tax exempt, as well as film and copyright royalties. Patent
royalties are subject to a 10% rate.
If certain conditions for beneficial owners are met, dividends are taxable only in the contracting state
of which the beneficial owner is a resident.
Dividends paid by a corporation that is engaged in industrial undertakings are taxed at 15%. Interest
paid to financial institutions is taxed at 10%.
Interest paid to financial institutions is taxed at 10%.
The treaty with the former USSR is applied to Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan,
Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. It stipulates that cultural royalties
are tax exempt.
Japan
1023
Japan
Tax administration
Taxable period
The tax year is the corporations annual accounting period specified in its articles of
incorporation. A Japan branch of a foreign corporation must use the same accounting
period that is adopted by the corporation in its home country.
Tax returns
Corporate income tax returns (i.e. the national corporation tax return, enterprise tax
return, and local inhabitants tax return) are self-assessment tax returns.
If a corporation meets certain conditions, such as keeping certain accounting books, and
makes an application for it in advance, it is allowed to file a blue form tax return. A blue
form filing corporation may benefit from loss carryforward and other benefits.
A corporation (including a branch) is required to file the final tax return within two
months after the end of its annual accounting period. If a corporation cannot file the
final return because of specific reasons, the due date of final return may be extended for
one month with the tax authoritys approval.
Payment of tax
Income taxes payable on the final corporate income tax return should be paid on or
before the filing due date of the final tax returns (usually two months after the end of
the corporations accounting period). If an extension of time for filing is granted, the
taxes may be paid on or before the extended due date with interest accrued at a rate of
1.9% (for the year 2014) per annum for the period from the day following the original
due date (i.e. two months after the end of an accounting period) to the date of the actual
payment.
Provisional tax payments are required for a corporation that has a fiscal period longer
than six months. Provisional taxes generally are computed as one-half of the tax
liabilities for the previous year, but they may be reduced by the filing of interim tax
returns that reflect semi-annual results of the operations. The provisional tax payment
is required to be made within two months after the end of the sixth month of the
corporations accounting period.
Penalties
If the tax return is filed late, a late filing penalty is imposed at 15% to 20% of the tax
balance due. In the case that a corporation voluntarily files the tax return after the due
date, this penalty may be reduced to 5%.
An under-payment penalty is imposed at 10% to 15% of additional tax due. In the case
that a corporation amends a tax return and tax liabilities voluntarily after the due date,
this penalty may not be levied.
In addition, interest for the late payment of tax is levied at 2.9% per annum for the first
two months and increases to 9.2% per annum thereafter (for the year 2014).
Consolidated taxation
The parent company will file the consolidated tax return and pay national corporate
income tax for the group. The consolidated tax return and payment due dates are the
1024
Japan
Japan
same as previously discussed; however, the due date of the final return may be extended
for two months.
For local corporate income taxes, each member of the consolidated group must
separately file the returns and pay the taxes.
Tax audit process
Generally speaking, corporate tax audit is performed in cycles of three to five years
duration. However, this period may be shortened in the case that some significant tax
matters were pointed out in the prior audit and so on. If taxpayers request a downward
correction, a tax audit will be performed to make sure of it.
With regard to tax audit procedures, tax laws have not clarified them thus far. Prior to
conducting a tax audit, in principle, tax agents are required to notify taxpayers, and,
upon completion of tax audits, tax agents are required to provide to taxpayers a brief
written summary of their findings, etc.
The statute of limitations to request a downward correction of prior year tax liabilities is
five years (six years for transfer pricing) from when the original tax return was filed.
The statute of limitations with regard to upward corrections by the tax authorities is also
five years (six years for transfer pricing).
Japan
1025
Jersey, Channel Islands

PwC contact
Garry Bell
PricewaterhouseCoopers CI LLP
37 Esplanade
St Helier, Jersey JE1 4XA
Channel Islands
Tel: +44 1534 838361
There have been no significant corporate tax developments in Jersey during the past
year.

Resident companies are generally taxed on their worldwide income. A permanent
establishment (PE), e.g. a branch of a company, is taxed on profits attributable to the PE.
Non-resident companies are taxable on Jersey real estate income.
Companies pay income tax at a rate of 0%, 10%, or 20% on taxable income. The general
rate applicable is 0%; the 10% and 20% rates apply to certain companies/income
streams as explained in this section. The tax rate applies to the company as a whole, the
only exception being Jersey-source property income, which is taxed at 20% regardless of
the classification of the property holding company.
Certain Collective Investment Funds and Securitisation Vehicles can elect to be exempt
from tax on income, other than income from Jersey land or property, for an annual fee of
600 pounds sterling (GBP).
The 20% tax rate applies to Jersey-based utility companies, such as telephone, gas, and
electricity companies. Additionally, income from Jersey real estate, including rental
income, property development profits, and income from exploiting Jersey land (e.g.
quarrying activities) is subject to tax at 20%. Companies involved in oil importation and
supply are also taxed at 20%.
The 10% rate applies to financial services companies. A company is defined as a financial
services company if:
it is registered under the 1998 financial services law to carry out investment business,
trust company business, or fund services business as an administrator or custodian in
relation to an unclassified or an unregulated fund
it is registered under the 1991 banking business law, or
it holds a permit under the collective investment funds law of 1988 as an
administrator or custodian.
The 0% rate applies to all entities that are not exempt, financial services entities,
or utility companies, including fund managers who do not hold any of the permits
mentioned above.
Local income taxes
There are no local government taxes on income.
1026

Corporate residence
A company is regarded as tax resident in Jersey if it is incorporated in Jersey or if it has
its place of central management and control in Jersey. However, a Jersey incorporated
company that is managed and controlled elsewhere will not be regarded as a Jersey
resident, provided certain conditions are satisfied.
Under domestic legislation, a PE, in relation to a company, includes a branch of

the company, a factory, shop, workshop, quarry or a building site, and a place of
management of the company; however, the fact that the directors of a company regularly
meet in Jersey shall not, of itself, make their meeting place a PE.
For a definition of PE contained in Jerseys double tax agreements (DTAs), the relevant
clause and agreement should be reviewed. In general, it may include a branch,
management, or other fixed place of business, but not an agency, unless the agent has,
and habitually exercises, a general authority to negotiate and conclude contracts or has a
stock of merchandise from which the agent regularly fills orders.
Other taxes

The standard rate of GST is 5%.
Companies with taxable supplies of more than GBP 300,000 per annum are required to
register for GST.
International service entity (ISE) status
To address the difficulty of irrecoverable input tax in the financial services sector, and to
mitigate the administrative cost of GST for exporters in general, Jersey has introduced
the concept of an ISE. Where an entity qualifies for this status:
it will not be required to register for GST
services to it will be zero-rated (i.e. treated as an export) where the supply exceeds
GBP 1,000, and
input tax on purchases less than GBP 1,000 may be reclaimed.
ISE status is automatically available to a wide variety of service providers and
administered entities based in Jersey, upon application and payment of the relevant fee,
including licensed banks, licensed trust service providers, licensed fund administrators,
fund managers, and managed managers.
Other entities not automatically eligible under one of the categories above, including
companies, partnerships, trusts, unrecognised funds, and special purpose vehicles, may
still obtain ISE status if they fulfil certain criteria.
The ISE must be included on a list maintained by the Comptroller of Taxes. The list will
refer either to the entity itself or (e.g. for administered entities) a class of entities as
submitted by the administrator.
Customs duties
A common customs tariff is applicable on all goods imported from outside the European
Union (EU). The amount is dependent on what the goods are and where they are
imported from.
1027

Excise taxes
An excise duty tax is payable on imported alcohol, tobacco, and fuel at varying rates.
Property taxes
There are no property taxes in Jersey apart from income tax on Jersey-source property
income and stamp duty on Jersey real estate.
Stamp duty
Stamp duty is payable on the purchase or transfer of Jersey real estate, with rates
ranging from 0% to 5%. Mortgages secured by a charge over Jersey real estate are
subject to stamp duty at rates of up to 0.5% of the amount borrowed. No stamp duty is
payable on the transfer of shares.
Land transaction tax
A land transaction tax applies when shares in companies are transferred and the
ownership of which confers a right of occupation of residential real estate in Jersey. The
amount of land transaction tax payable is equal to the stamp duty that would have been
suffered if the real estate were held directly.
Employers are responsible for paying employer social security contributions at a rate of
6.5% on each employees gross earnings, up to the monthly standard earnings limit of
GBP 3,834 for 2013 (annual limit GBP 46,008). Employer social security contributions
of 2% apply to employees earnings above the standard earnings limit, up to an upper
earnings limit (GBP 12,686 monthly/GBP 152,232 annual).
Branch income
Branch income is taxed at the rate applicable to the company. No further tax is withheld
on the transfer of profits abroad.
Inventory valuation
Inventory is valued at the lower of historical cost or net realisable value. The last in
first out (LIFO) method is not permitted. Generally, there are no material differences
between accounts prepared on a normal accounting basis and those prepared on a tax
basis.
Capital gains
Capital gains are not subject to tax in Jersey.
Dividend income
There is no requirement to withhold tax at source when paying dividends. If a dividend

is paid out of profits that have suffered tax at a 10% or 20% rate, then the net dividend
will be accompanied by a tax credit at the applicable rate. Repayment of the tax credit
can be claimed by Jersey investment companies and financial services companies
receiving the dividends, subject to certain restrictions. However, trading companies
subject to tax at 0% are not entitled to claim a repayment of any of the tax credit.
Stock dividends
Stock dividends are taxed as income.
1028

Interest income
Interest income forms part of taxable income and is taxed at the rate applicable to the
company.
Foreign income
Income tax is levied on foreign branch income when earned and on foreign dividends,
interest, rents, and royalties. Double taxation is mitigated by either the granting of
unilateral relief to the extent of taxing foreign income net of foreign taxes or by treaty
relief, which gives credit for foreign tax. Concessional credit relief might be granted in
certain limited circumstances upon application.
In addition to the long standing DTAs with the United Kingdom and Guernsey, Jersey
now has DTAs with Australia, Denmark, Estonia, Faroes, Finland, France, Germany,
Greenland, Hong Kong, Iceland, Isle of Man, Luxembourg, Malta, New Zealand, Norway,
Poland, Qatar, Singapore, and Sweden. The scope varies from agreement to agreement,
but most are of limited scope.
Deductions
Normally, business deductions are allowed if they are incurred wholly and exclusively
for trade purposes.
Capital allowances are available using the diminishing-balance method on machinery

and equipment, including vehicles, at a rate of 25%. For this purpose, all such assets are
pooled, and the allowance is calculated by reference to the value of the pool.
On disposal of an asset, the lower of cost and sale proceeds of the asset is deducted from
the pool. A balancing charge is levied if the proceeds exceed the balance of the pool.
Motor vehicles costing more than GBP 21,000 and greenhouses are subject to special
rules and are not pooled with other assets.
By concession, an alternative is to claim the full cost of replacement in the year of
replacement.
Capital allowances are not applicable to buildings or the depletion of natural resources.
Goodwill
Goodwill expenditure is non-deductible for Jersey income tax purposes.
Start-up expenses
Once a company has commenced its trade, start-up expenditure will be allowable for tax
purposes if it is not capital in nature and has been incurred wholly and exclusively for
trade purposes.
Interest expenses
Interest expense will be allowable if it is incurred for the purposes of a trade or is paid in
connection with a loan taken out for a qualifying purpose. From 2014, interest relief may
be restricted if the interest exceeds the amount that could reasonably be expected to be
charged on a commercial basis.
Bad debts
Trading bad debts are normally allowable for Jersey income tax purposes unless they
relate to a general provision.
1029

Charitable contributions are generally non-deductible for tax purposes, unless the
contribution itself provides a benefit to the trade (i.e. marketing).
Fines and penalties
Fines and penalties are generally non-deductible for tax purposes.
Taxes
Local income tax paid is not deductible in computing taxable income. ISE fees paid are a
tax-deductible expense.
No distinction is drawn between different types of income or losses arising from different
trades or sources, apart from Jersey property income, which is separately streamed.
Unrelieved losses may be carried forward and used to offset profits in future accounting
periods. Alternatively, losses can be group relieved to group companies in the same
income tax rate band.
There are now only very limited circumstances where a company can obtain relief for
carrying back losses.
There are no withholding taxes (WHTs) on patent royalties paid by Jersey companies to
non-residents.
Group taxation
Group taxation is not permitted in Jersey. However, there are provisions for group relief
between group companies subject to the same rate of tax. It is not possible to relieve
losses between two companies taxed at different rates. It is not possible for group
companies to relieve losses from Jersey property rental income. Also, it is only possible
to relieve losses from Jersey property development profits and from quarrying activities
against profits arising from the same activities.
Transfer pricing
There are no specific rules in relation to transfer pricing in Jersey. There is, however, a
general anti-avoidance provision in Jersey tax law. It may be applied by the Comptroller
of Taxes if a transaction or a combination or series of transactions is entered into for the
avoidance or reduction of Jersey income tax. In addition, from 2014, interest relief may
be restricted where the interest incurred exceeds the amount that could reasonably be
expected to be charged on a commercial basis.
Thin capitalisation
There are no specific rules in relation to thin capitalisation in Jersey.

There are generally no special incentives for locally owned businesses in view of the low
rate of tax.
Foreign tax credit
There is no local foreign tax credit regime in Jersey. DTAs need to be considered as
appropriate. Unilateral relief may be available under very limited specific circumstances.
1030

Withholding taxes
There are no WHTs on dividends or interest paid by Jersey companies.
Tax administration
Taxable period
The tax year is the calendar year. Companies are assessed on income earned in respect of
the financial year that ends within the applicable calendar year of assessment.
Tax returns
The system relies on the filing of a return of information with the Jersey tax authority,
which then raises an assessment (in the case of companies taxed at 10% or 20% on all or
part of their income). Companies taxed at 0% are required to submit a tax return but are
not required to submit accounts and tax computations.
There is a filing deadline for the corporate return of 6pm on the last Friday in July and a
late filing penalty of GBP 250.
Payment of tax
For companies, tax is payable in arrears during the calendar year following the year of
assessment.
Under the law, tax is due the day after the assessment is made. In practice, an estimated
assessment is made by the tax office in February/March, which is then appealed based
on information at that time. A payment is suggested based on the appeal with the
company making a top up payment (if necessary) prior to the surcharge deadline (the
first Friday after the first Monday each December) or once a final computation has been
produced and submitted.
Tax paid after a prescribed date (usually the first Friday in the December following the
year of assessment) incurs a 10% surcharge.
Tax audit process
There is no formal tax audit process in Jersey. The Jersey tax office can enquire into a
return that is under appeal.
There is no statutory limitation date, as such. If the Comptroller discovers profits have
not been fully assessed, the Comptroller can issue an amended/additional assessment
at any time not later than five years after the expiration of the year of assessment. If the
error involves fraud, wilful default, or neglect, then the assessment can be revised at any
time.
One of the main focuses for the Jersey tax authorities is the drafting of
intergovernmental agreement (IGA) guidance notes to provide practical assistance to
business and tax staff who deal with entities affected by the agreements.
Other issues
Intergovernmental agreements (IGAs)
On 13 December 2013, the Jersey authorities signed an IGA with the United States to
facilitate tax reporting under the Foreign Account Tax Compliance Act (FATCA) regime.
The Jersey authorities have also signed a similar IGA with the United Kingdom.
1031

The Jersey tax authorities are committed to being tax transparent, with an increased
emphasis on agreeing further DTAs and TIEAs. Jersey has signed TIEAs with 32
countries and are negotiating DTAs with several other jurisdictions (see Foreign income in
the Income determination section for a description of DTAs that have been signed).
1032
Jordan
PwC contact
Stephan Stephan
PricewaterhouseCoopers Jordan
Third Circle, Jabal Amman
14 Hazza Al-Majali Street PO Box 5175
Amman 11183, Jordan
Tel: +962 6 500 1300
A new draft income tax law has been submitted for review to the Legislation and
Opinion Bureau in Jordan, but is not yet effective.
The temporary income tax law for the year 2009 is in force until the elected Parliament
enacts the final income tax law.
There are resolutions that were released in 2011/12 with regard to the Jordan
Investment Board, which include the Free Zone Law and Development Area Law that
were merged together, but the related new instructions and regulations are not yet
released. This has created unclear tax mechanism and reporting requirements.

The corporate tax rates in Jordan are applied based on the industry/business activities
from which the taxpayer generates income. The corporate tax rates are as follows:
30% for banks.
24% for telecommunication, insurance, and financial intermediation companies
(including exchange and finance leasing companies).
14% for other companies.
Jordanian resident corporations are not subject to income tax on their worldwide
income unless that income is raised from sources that originate and relate to Jordanian
deposits and funds. However,for foreign branches of Jordanian resident corporations,
20% of the branch net income after taxes is subject to Jordanian corporate tax.
Non-resident corporations are taxed through withholding tax (WHT) (see the
Local income taxes
There are no local income taxes in Jordan.
Corporate residence
An entity will be deemed to be resident in Jordan if it has been established and
registered in accordance with the provisions of the Jordanian legislation in force and (i)
has an office or branch practicing management and supervision of its work in Jordan,
(ii) whose management head office or actual office is located in Jordan, or (iii) which
the government or any official or public institutions own more than 50% of its capital.
There are no clear provisions in the Jordan income tax law to define PE.
Jordan
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Jordan
Other taxes
Sales tax
A general sales tax similar in operation to a value-added tax (VAT) is imposed at the rate
of 16% on the following transactions:
Sales of goods or services, or both.
Importing any service or goods from outside Jordan or from the free zone areas and
markets inside Jordan.
Special tax rates are applied on certain items (see Excise tax below).
A zero rate is applied to the export sales of goods and services outside Jordan or to the
free zone areas and markets. A zero rate is also applied to sales inside Jordan of certain
food items, books, magazines, manure, farm tractors, other agricultural tools, and salt.
Goods exempt from sales tax include fish, eggs, animals, bread, water packed in less
than 5 litres, trees and plants, fruits, vegetable oils, honey, tea, sugar, gold, money,
potash, emergency and fire vehicles, electricity, and pharmaceutical products.
Services exempt from sales tax include the following:

Air transport.
Education.
Disposal of sewage and waste.
Public health and similar activities.
Activities of religious organisations.
Activities of social organisations.
Customs duties
Certain goods imported to Jordan are subject to customs duties. Customs duties vary
depending on the type and the origin of imported goods, as prescribed by the Customs
Tariff. The Customs Tariff is based on the Harmonised Commodity Description and
Coding System (HS Nomenclature).
Excise tax
Excise tax is the special sales tax that is imposed on certain goods and services, including
cement, iron used in construction, tobacco products, wines, spirits, cars, beer, fuel, and
lubricants.
Property taxes
There is a property tax in Jordan that is paid annually, and the tax rate is determined
by the municipality depending on the location and size of the property and, in case of
buildings, depending on annual rental value.
Transfer property taxes
Transfer of property is subject to tax at a rate of 9% (registration fee at a rate of 5% and

sale of property tax at a rate of 4%).
Stamp duty
An ad valorem stamp duty of 0.3% or 0.6% is levied.
Payroll tax
A company should withhold payroll tax from monthly salaries and benefits at rates
ranging from 7% to 14%.
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Jordan
Social security tax
A social security tax is imposed on the employer and the employee by rates of 12.75%
and 6.75%, respectively, on the monthly salaries and certain allowances in kind. The
employer should report and withhold these contributions on a monthly basis.
Branch income
Operating branches of non-resident companies registered in Jordan are taxed based on
their activities/business being carried out in Jordan at the prevailing corporate tax rates.
Non-operating branches of non-resident companies registered in Jordan are generally
prohibited from carrying on any commercial activity in Jordan.
Any income incurred in or from Jordan, regardless of the place of payment, shall be
subject to tax. This includes, but is not limited to, income from:
Professional services or activities.
Interest, commissions, discounts, currency differences, deposit profits, and profits
from banks and other legal resident persons.
Royalties.
Selling goods produced in Jordan, whether sold in Jordan or exported.
Selling or leasing of movable properties located in Jordan.
Leasing immovable properties located in Jordan and the income from key money.
Selling or leasing intangible assets in Jordan, including goodwill.
Insurance premiums due according to insurance and re-insurance agreements for risk
in Jordan.
All forms of telecommunication services, including international
telecommunications.
Transportation between Jordan and any foreign country.
Service compensation gained by a non-resident person from Jordan for a service
provided to any person if the activity or the work related to this compensation was
carried out or the output of this service was used in Jordan.
Any contract in Jordan, such as construction contracting, commercial agencies
profits, and any other similar entities, whether their source is inside or outside
Jordan.
Any other employment or business activity, or investment, which has not been
exempted according to the provisions of the law.
The following shall be exempted from tax:
The Kings allocations.
Income of public and official institutions and municipalities, excluding its income
from rent and key money.
Income of unions, professional commissions, cooperation societies, and other
societies legally registered and licensed from non-profit activities.
Income of any religious, charity, cultural, educational, sports, or health institutions
with a public character, not aiming to achieve profit and the income of charity awqaf
(public endowment), and income from the Orphans Development Fund investment.
Income of exempted registered companies according to the companies law, which
is incurred from activities undertaken outside Jordan, except income derived from
income sources subject to tax according to the provision of the law.
Profits from stocks and dividends distributed by a resident to another resident, except
profits of mutual investment funds of banks and financial companies.
Jordan
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Jordan
Capital gains incurred inside Jordan, other than profits from assets subject to
depreciation.
Income derived from inside Jordan from trading in dividends and stocks, bonds,
equity loan, treasury bonds, mutual investment funds, currencies, commodities in
addition to futures and options contracts related to any of them, except that incurred
by banks, financial companies, financial intermediation and insurance companies,
and legal persons who undertake financial lease activities.
Income from trading in immovable properties located in Jordan, except the
following:
Income incurred from such trade by a legal person.
Income incurred from building and selling real estate.
Income derived by non-Jordanian resident investors from sources outside Jordan
that are initiated from their investments of their foreign capital, returns, profits, and
proceeds from their investments liquidation, returns, or selling of their projects,
shares, or stocks after transferring them outside Jordan in accordance to the enacted
Investment Law or any other law that will replace it.
Compensation paid by insurance entities, other than what is paid as reimbursement
for the loss of income from business activity or employment.
Any income generated by banks and financial companies not operating in Jordan
from banks operating in Jordan, such as deposit interest, commissions, and deposit
profits from investment in interest-free banks and financial companies.
Profits gained by re-insurance companies from insurance contracts concluded with
insurance companies operating in Jordan.
Income covered by double taxation agreements (DTAs) concluded by the
government, to the extent of that which is covered under these agreements.
The income of public or private pension funds and savings funds and any other funds
approved by the Minister shall not be subject to tax if this income is derived from the
employees and employers contributions.
Certain types of local origin goods and services exports outside Jordan may be totally
or partially exempted from tax as set forth in regulations issued for this purpose.
Inventory valuation
Inventory is generally valued in accordance to the International Financial Reporting

Standards (IFRS) accounting framework.
Capital gains
Capital gains are not taxable in Jordan, except for capital gains that are generated from
depreciable assets and goodwill.
Dividend income
Dividend incomereceived from a resident juristic person isnot taxable in Jordan.

However, dividend income received from a non-resident juristic person is subject to
income tax.
Foreign income
Jordanian resident corporations are not subjected to income tax on their foreign income,
except for foreign branches of Jordanian resident corporations, whereby 20% of the
branch net income after taxes is subject to Jordanian corporate tax.
Deductions
Depreciation and amortisation of fixed assets are determined using the straight-line
method, provided that the provisions, procedures, and rates shall be defined by the
depreciation regime issued for this purpose.Assets with a cost of less than 100 Jordanian
dinars (JOD) shall be totally deducted in the tax period in which they were acquired.
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Jordan
Goodwill
Purchased goodwill can be amortised using the straight-line method, provided that the
provisions, procedures, and rates shall be defined by a regulation issued for this purpose.
Start-up expenses
There is no clear provision in the enacted temporary Jordan income tax law to define
the treatment of start-up expenses; however, these expenses can be accepted at the
establishment year.
Interest expenses
Interest and Murabaha (profit-sharing) paid by banks or financial institutions are

deductible.
Interest and Murabaha that are paid by any taxpayer other than banks and financial
institutions and finance leasing companies are deductible, provided that the deduction
shall not exceed the rates that are determined in the thin capitalisation rules (see Thin
Bad debt
Bad debts are deductible.
A person may deduct any amount paid during the tax period as a donation to any of the
governmental departments, public or official institutions, or municipalities from the
gross income in the period in which the payment occurred.
Any person may deduct subscriptions and donations paid in Jordan without any
personal benefit, for religious, charitable, humanitarian, scientific, environmental,
cultural, sport, and professional purposes if the Council of Ministers approves its
character. The deductible amount according to the provisions of this paragraph shall
not exceed 25% of the taxable income after deducting what is provided for in the first
paragraph above and before making this deduction.
Fines and penalties
Fines and penalties are not acceptable expenses for income tax purposes.
Taxes
Taxes and fees paid on taxable activities are deductible.

Foreign income tax paid for income earned from sources outside Jordan that was subject
to tax under the provisions of the tax law is deductible.
Approved expenses, including the following, are deductible:

Insurance premiums.
Maintenance expenses for assets that were spent within the tax period, provided that
such expenses do not exceed 5% of their value.
Amounts paid as civil compensation under contracts concluded by the taxpayer for
the purpose of carrying out taxable activities.
Amounts paid by the employer for employees to the Social SecurityCorporation.
Hospitality and travel expenses incurred by the taxpayer.
Expenditures for employees medical treatment, meals during duty, travel, transport,
and life insurance against work injuries or death.
Marketing, scientific research, development, and training expenses.
Expenses of prior tax periods that were neither defined nor final.
Jordan
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Jordan
Losses may be carried forward indefinitely, but the carryback of losses is not permitted.
A resident generally may claim a deduction for royalties, management service fees, and
interest charges paid to foreign affiliates taking into account the transfer pricing regime
and the applicable WHT.
Group taxation
Group taxation is not permitted in Jordan.
Transfer pricing
Any disposition transaction which is not based on arms length, is with parties that have
mutual interests, and leads to a decrease in the taxable income is ignored, and the real
profits are estimated according to the regular market value of the transactions.
Any illusionary or fake disposition transactions are ignored and the tax due is estimated
as if there were no transactions.
Thin capitalisation
Interest and Murabaha that are paid by any taxpayer other than banks and financial
institutions and finance leasing companies shall be accepted as a deduction, provided
that the deduction shall not exceed a 3:1 rate of relative value (i.e. total debt to the paid
capital or average owners equity, whichever is higher).

Jordan has had tax reductions for selective sectors categorised by development zones.
Generally, these have required pre-approval.
Foreign tax credit
Foreign tax credit treatment is not available in Jordan.
Withholding taxes
Dividends paid
Dividends are not taxable in Jordan.
Non-resident WHT
With respect to services performed by a non-resident juristic or natural person, under

the income tax law, Amounts received or earned by the non-resident person from the
Kingdom, which are derived from services provided to any person if the work or service
related has been performed in the Kingdom or if the outcome of such services has been
used in the Kingdom as well, is subject to tax in Jordan.
The current WHT rate on services performed by a non-resident juristic or natural person
is 7% of the payment.
Resident WHT
Resident juristic or natural persons that perform any services in Jordan are subject to a
WHT on the services performed. The applicable WHT rate is the rate prevailing at the
time the service is performed. The current WHT rate on services performed by a local
service provider is 5% of thepayment.
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Jordan
Jordan
Some services are excluded from the 5% WHT regulation, provided that the service
provider has an income tax identification number, including the following services:

Shipping services and related brokerage services.

Road transport services and related brokerage services.
Air transport services.
Financing lease services.
Hotels and restaurants services.
Clearance services.
Programming services provided by the company.
Hospital services provided by hospitals.
Advertising services.
Cleaning services.
Security services.
Training services provided by the company.
Insurance activities services.
Banking services provided by banks.
Communication activities and services provided by primary telecom companies
(defined in the tax law as being communications companies individually licensed in
accordance with the provisions of the communications law in effect and regulations
and instructions issued pursuant thereto).
Transportation and distribution of electric power services provided by the Electricity
Company Plc.
Contracting services implemented under contractor certified by the Jordanian
Contractors Association.
Public safety services.
Maintenance services that include value of materials and goods and labourwages.
Food processing services, correspondence, and transport and laundry provided
tohospitals.
Loading and unloading services.
Services that are executed by a juristic person, excluding civil companies, and have a
tax number (income and sales).
Any other service approved by the Minister upon the recommendation of the General
Director.
Tax treaties
Jordan has entered into income tax treaties with Algeria, Azerbaijan, Bahrain, Bulgaria,
Canada, Croatia, the Czech Republic, Egypt, France, India, Indonesia, Iran, Iraq, South
Korea, Kuwait, Lebanon, Libya, Malaysia,Malta, Morocco, the Netherlands, Pakistan,
Palestine, Poland, Qatar, Romania, Sudan, Syria, Tunisia, Turkey, Ukraine, the United
Kingdom, and Yemen.
Jordan has transportation agreements with many countries and is negotiating treaties
with more countries.
Tax administration
Taxable period
A taxpayers due tax shall be computed on a calendar year basis.

A taxpayer who closes ones accounts on a date other than the end of the calendar year
may calculate the due tax according to the fiscal year, provided that prior approval shall
be obtained from the General Director of the income tax department.
Jordan
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Jordan
A taxpayer who commences activity within the first half of the calendar year shall
compute the due tax for the period from the establishment date until the end of the
calendar year.
A taxpayer who commences activity within the second half of the calendar year may
compute the due tax for the period from the establishment date until the end of the next
calendar year.
Tax returns
Taxpayers are obligated to file tax returns before the end of the fourth month following
the end of the tax period, including details related to income, expenses, exemptions,
and tax due. Tax returns are submitted by any of the following means approved by the
department according to terms and procedures to be determined by instructions:
Registered mail.
Banks.
Any licensed company to undertake the tasks of public or private mail post approved
by the Council of Ministries upon the recommendation of the Minister.
Electronic means.
The date of filing is considered to be the earlier of the date of receipt by the department,
post seal, or deposit receipt at a bank or licensed company. In the case of sending
electronic mail, implementation instructions have not yet been introduced to determine
the approved date of submitting the same.
Payment of tax
The tax balance is due before the end of the fourth month following the end of the tax
period.
A taxpayer who is carrying out business activities and has gross income in the previous
tax period exceeding JOD 500,000 from these activities is required to remit two advance
payments on the accrued income tax from these activities using the rates determined
for each tax period mentioned in the following schedule. The advance payments
are calculated according to the income tax in the financial statements presented to
the income tax department for the concerned period. In the absence of the financial
statements for this period, the income tax included in the immediate preceding tax
declaration will be used to calculate the advance payments.
Tax period
2012 and following years
Rate on accrued income tax (%)

37.5
The first advance payment is due within a period not exceeding 30 days from the last
day of the first half of that income tax period.
The second advance payment is due within a period not exceeding 30 days from the last
day of the second half of that income tax period.
Fines and penalties
Failure to pay tax on the assigned dates according to the provisions of the tax law will
result in a delay fine at a rate of 0.4% of the value of the tax due or any deductible
amounts for each full or partial week of delay.
If a taxpayer submits a tax return and pays the declared tax in a timely manner, but the
declared tax is less than the actual amount due, a shortage fee for such differences will
be imposed, as follows:
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Jordan
Jordan
15% of the shortage if the difference exceeds 20% but less than 50% of the tax due by
law.
80% of the shortage if the difference exceeds 50% of the tax due by law.
Tax audit process
The tax audit is likely to take place within one year from the date of filing the return.
The tax auditor may not audit a tax return after four years from the date of filing the
return.
The Council of Ministers seeks to make substantial changes to the income tax rates, with
a focus on the principle of progressive tax. The Council of Ministers have sent a draft
amended tax law to the Legislation and Opinion Bureau for their input before sending it
to the Parliament.
Jordan
1041
Kazakhstan
PwC contact
Michael Ahern
PricewaterhouseCoopers Tax & Advisory LLP
34 Al-Farabi Avenue
Building A, 4th Floor
Almaty, 050059, Kazakhstan
Tel: +7 727 330 3200
In October 2013, Kazakhstan ratified a double tax treaty (DTT)with the United
Arab Emirates. In November 2013, Kazakhstan ratifieda DTT with Luxembourg. The
conventions entered into force on 1 January 2014.
Starting from 2014, the introduction of electronic value-added tax (VAT) invoices is
planned in Kazakhstan.
Also starting from 2014, the Kazakhstan tax authorities plan to introduce a new risk
management system that will remotely valuate levels of risk associated with taxpayer
activities. The level of risk will increase if a taxpayer has transactions with pseudo,
liquidated, or bankrupt taxpayers. Depending on the level of risk, the tax authorities
will issue a tax notification to taxpayers for provisions of clarification or demanding
additional actions.
Additionally, in 2014, the vehicle tax rate for vehicles with engine volume of more than
3,000 cubic centimetres is planned to increase.

The tax rate for corporations is 20% and is based on a calendar year. All Kazakhstan
legal entities and branches of foreign legal entities are subject to corporate income tax
(CIT). Taxable income is determined as the taxpayers aggregate annual income less
allowable deductions.
Resident companies are taxable in Kazakhstan on their worldwide profits, while nonresident companies operating through a permanent establishment (PE) in Kazakhstan
are subject to Kazakhstan CIT only on the profits attributable to that PE.
Non-residents without a PE in Kazakhstan that receive income from sources in
Kazakhstan are generally subject to income tax withheld at source of payment
on Kazakhstan-source income (please see the Withholding taxes section for more
information).
Reduced CIT rates
A reduced CIT rate of 6% applies to the qualified agricultural income of legal entities
producing agricultural products.
In addition, taxpayers operating in special economic zones (SEZs) may enjoy full
exemption from CIT if certain statutory requirements established for such benefits are
met (see the Tax credits and incentives section for more information).
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Kazakhstan
Kazakhstan
Excess profit tax (EPT)
EPT rates are progressive and range from 0% to 60%. The tax base is comprised of
the portion of net income of subsurface users exceeding 25% of deductions for EPT
purposes. Subsurface users may include asset acquisition costs, capital costs, and losses
(with certain limitations) as deductions.
Local income taxes
There are no local income taxes in Kazakhstan.
Corporate residence
Generally, Kazakhstan incorporated companies or other legal entities that have their
place of effective management located in Kazakhstan are treated as Kazakhstan tax
residents.
Non-resident legal entities having business activities in Kazakhstan may create a PE in

the following cases:
Fixed place PE: a non-resident enterprise carries on business activities in Kazakhstan
through a fixed place, including, but not limited to, through a place of management.
Services PE: a non-resident enterprise renders services in Kazakhstan through
employees or other personnel engaged by the non-resident for such purposes,
provided that these activities continue for more than 183 days within any consecutive
12-month period for the same or connected projects.
Construction PE: a construction site, in particular a shop or an assembly facility,
performance of projecting work, forms a PE, notwithstanding the timing of
performing operations.
Agency PE: a non-resident enterprise carries on business activities in Kazakhstan
through a dependent agent.A dependent agent is an individual or legal entity that
meets all of the following criteria simultaneously:
Has the contractual authority to represent the non-residents interests in
Kazakhstan and makes use of this authority by acting and signing (negotiating)
contracts on behalf of the non-resident.
The business is carried on outside the activity of either a customs broker or
professional participant of the securities market or other brokerage type of
business (except for activity as an insurance broker).
Carries on activities that are not limited to those of a preparatory and auxiliary
nature.
Other taxes
The current VAT rate is 12%. This tax is applicable to the sales value of products,
works, and services, as well as imports. Exports of goods are taxed at 0%. There is a
list of goods, works, and services exempt from VAT (e.g. financial services provided
by financial institutions, financial leasing services, notary and advocacy services,
operations with financial securities and investment gold).
Goods and services are subject to VAT if they are deemed to be supplied in Kazakhstan
under the place of supply rules.
VAT refunds are generally available with respect to excess input VAT, provided certain
criteria are met.
Kazakhstan
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Kazakhstan
The VAT reporting period is the calendar quarter.
Customs duties
Customs duties apply to goods imported to the Customs Union countries from third
countries. The customs duties rates are established either based on a percentage (in
general ranging between 0% and 30%; higher rates exist for certain goods) of the
customs value of goods or in absolute terms in euros.
Goods of the Customs Union countries should be generally exempt from Kazakhstan
customs duties.
In addition to membership in the Customs Union, Kazakhstan concluded a number
of bilateral and multilateral Free Trade Agreements with the Commonwealth of
Independent States (CIS), which provides for exemption of goods circulated between the
CIS member states from customs duties, if certain conditions are met.
Kazakhstan is not yet a World Trade Organization (WTO) member.
Customs fees
A customs processing fee is assessed at 60 euros (EUR) for the main page of a customs
declaration plus EUR 25 for each supplemental page.
Excise taxes
Excise taxes apply to the sale and import of crude oil, gas condensate, petrol/gasoline
(excluding aviation fuel), diesel fuel, spirits and alcoholic beverages, beer, tobacco, and
passenger cars.
Type of excisable good
Crude oil, gas condensate, petrol/gasoline, diesel
Alcoholic beverages and beer, tobacco
Passenger cars
Excise tax rate

KZT* 0 to 5,000 per tonne
KZT 0 to 2,450 per item of measure (pieces
or litres)
KZT 100 per each cm of engine capacity
* Kazakhstani tenge
Property tax
Property tax is assessed annually at a general rate of 1.5% of the average net book value
of immovable property.
Land tax
Entities and individuals that own land plots (or land share in cases of commonly shared
ownership of land plots) must pay land tax annually. Land tax rates vary based on the
purpose for which the land is used as well as the size and quality of the land.
Transfer taxes
There are no transfer taxes in Kazakhstan.
Stamp taxes
There are no stamp taxes in Kazakhstan.
Vehicle tax
The vehicle tax rate is based on monthly calculation indices and determined in
accordance with the type of vehicle, engine volume, operation period of the vehicle
(aircraft only), and other factors.
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Kazakhstan
Social tax
Employers must pay social tax at the rate of 11% of gross remuneration (salaries and
certain benefits provided) of all employees (local and expatriate). A deduction is
available for obligatory pension contributions.
Mineral extraction tax
The mineral extraction tax applies to the monetary value of extracted volume of crude
oil, gas condensate, natural gas, minerals, and groundwater.
The tax is calculated based on the value of the extracted content, which is computed
by applying average global prices to the extracted volume (adjusted for content). The
determination of average global prices is based on the list of publications that are
considered official sources for computation of mineral production tax (Platts Crude Oil
Marketwire and Crude Argus).
Currently, the tax rates for crude oil and gas condensate range from 5% to 18%,
depending on the accumulated production volume for the calendar year. For
hydrocarbons, rates can be reduced by 50% if they are supplied to domestic refineries on
the basis of a sale/purchase agreement or tolling agreement.
The tax rate for natural gas is set at 10%. For domestic sales of natural gas, tax rates
range from 0.5% to 1.5%.
Tax rates for minerals that have undergone initial processing (except for widespread
minerals) and for coal vary between 0% and 22%.
Branch income
The net income of branches of foreign legal entities, after CIT at 20%, is subject to a
branch profits tax at a rate of 15%, which may be reduced under an applicableDTT. As
such, the effective tax rate for the income of branches of foreign legal entities equals
32% if there is no reduction under a DTT.
Kazakhstan legal entities are taxable on aggregate annual income earned worldwide.
Non-resident legal entities, carrying out business activities through a PE in Kazakhstan,
are taxable on income attributed to the activities of that PE. All taxpayers must apply the
accrual method for recognition of income.
Inventory valuation
For tax purposes, inventory is valued in accordance with International Financial

Reporting Standards (IFRS) and Kazakhstan financial accounting legislation.As such,
permitted inventory valuation methods include first in first out (FIFO), weighted
average, and specific identification methods.
Capital gains
Capital gains are subject to ordinary CIT rates. An exemption is available for capital
gains realised from the sale of shares and participation interests in Kazakhstan legal
entities or consortiums that are not engaged in subsurface activities and are held for
more than three years.
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Kazakhstan
Dividend income
Dividend income of a Kazakh resident company on inbound dividends is exempt from

Kazakh taxation. Dividends from a Kazakhstan resident company to another Kazakhstan
resident company are exempt from taxation, except for dividends paid by certain types
of investment funds.
Interest income
Interest income should be included in the aggregate annual income of a taxpayer and
taxed at the 20% CIT rate.
Foreign exchange gain
Foreign exchange gain should be determined in accordance with the provisions of IFRS
and Kazakhstan financial accounting legislation. The excess of foreign exchange gain
over foreign exchange loss should be included in the aggregate annual income of a
taxpayer.
Foreign income
Foreign income is subject to ordinary CIT.

There are no provisions for tax deferrals in Kazakhstan.
For additional information, please refer to Controlled foreign companies (CFCs) in the
Group taxation section.
Deductions
Allowable deductions generally include expenses associated with activities designed
to generate income, unless specifically restricted for deduction by tax legislation. All
expenses require supporting documentation.
Tax depreciation is calculated using the declining-balance method at depreciation rates

ranging from 10% to 40%, applied to the balances of four basic categories of assets:
Buildings and facilities (except for oil and gas wells and transmission facilities): 10%.
Machinery and equipment (except for machines and equipment for oil and gas
production, and also computers and equipment for information processing): 25%.
Computers and equipment for information processing: 40%.
Fixed assets not included into other groups, including oil and gas wells, transmission
equipment, oil and gas machinery and equipment: 15%.
Goodwill
There are no special provisions in the Kazakhstan Tax Code with respect to deductibility
of goodwill expenses.
Start-up expenses
The Kazakhstan Tax Code does not specifically address deductibility of start-up
expenses, but, generally, expenses incurred in relation to business activities and aimed
at earning revenue occurring at start-up should be deductible.
Interest expenses
Interest paid to unrelated third parties and credit partnerships created in Kazakhstan are
deducted in full. For information about taxation of interest paid to related parties, please
refer to Thin capitalisation in the Group taxation section.
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Kazakhstan
Bad debt
Amounts of receivables that were not paid within three years are to be recognised as
bad debt expenses. Such expenses can be deducted in full by a taxpayer, provided that
(i) these receivables are reflected in the books of a taxpayer and (ii) proper supporting
documents are in place.
Charitable contributions are entitled to decrease taxable base but are capped at 3% of
the companys annual taxable income.
Foreign exchange loss
Foreign exchange loss should be determined in accordance with the provisions of IFRS
and Kazakhstan financial accounting legislation. The excess of foreign exchange loss
over foreign exchange gain is allowed for deduction.
Fines and penalties
Generally, deductions are available for forfeits, fines, and penalties that are not payable
to the state budget.
Taxes
Taxes remitted to the state treasury of Kazakhstan are deductible, except for the
following:

Taxes excluded prior to the calculation of the aggregate annual income.

Income taxes paid in Kazakhstan and other countries.
Taxes paid in preferential tax jurisdictions.
Excess profit tax.
Net operating losses may be carried forward for up to ten years. Loss carryback is not
permitted under Kazakhstan tax legislation.
Payments to foreign affiliates are deductible for CIT purposes if the payments are
intended to generate income, are supported by documentation, and comply with
Kazakhstan transfer pricing law.
Group taxation
Kazakhstan tax law does not permit group taxation.
Transfer pricing
Under Kazakhstan transfer pricing law, both customs and tax authorities have the right
to monitor and adjust prices used in cross-border and certain domestic transactions
when prices are perceived to deviate from market prices, even if such transactions are
with unrelated parties. If the authorities adjust prices, the re-assessed liability will
include taxes, duties, penalty interest, and fines to the state budget.
Transfer pricing rules impact the following transactions:
International commercial transactions.
Domestic transactions that directly relate to international commercial operations
where:
the sale relates to a subsurface use contract
one of the parties has tax preferences, or
one of the parties has losses for two years prior the year of the transaction.
Kazakhstan
1047
Kazakhstan
Thin capitalisation
Deduction of interest paid to related parties, to unrelated parties under related parties
warranties, or to parties registered in a country with privileged taxation depends on the
borrowers capital structure; such that deductible interest will be limited with reference
to an acceptable proportion of debt-to-equity (7:1 for financial institutions, 4:1 for all
other entities). The list of jurisdictions with privileged taxation, the so called black list
established by the government, includes 61 jurisdictions (see the Kazakhstan summary at
www.pwc.com/taxsummaries for a current list).
Under the CFC rules, if a Kazakhstan legal entity has 10% or more of direct or indirect
ownership in the share capital or voting rights in a non-resident company, registered
or located in a country with privileged taxation (see above), the legal entity is subject
to Kazakhstan CIT on the portion of the undistributed profits from the non-resident
company.

Foreign tax credit
In general, the Kazakhstan Tax Code allows taxpayers to credit the foreign income
taxes paid against the income taxes payable in Kazakhstan, provided the documents
confirming the payment of such taxes are available.However, a tax credit may not be
granted in certain cases (e.g. for taxes paid in countries with privileged taxation).
Investment incentives are available to certain Kazakhstan legal entities that fit certain
criteria and possess objects (e.g. certain fixed assets), for which investment incentives
may be applied. Generally, the investment incentives allow companies to fully deduct,
for CIT purposes, the cost of the investment objects and the cost associated with their
reconstruction and modernisation either at once or within the first three years of their
use.
Based on the Investment Law, incentives are granted under an investment contract
between the government and companies and focus on priority sectors of the economy, as
determined by the government.
Special economic zones (SEZs)
Currently, the following SEZs have been established in Kazakhstan:

Astana, the New City in Astana (the expiry date is in 2027).
Aktau Sea Port in Aktau (the expiry date is on 1 January 2028).
Ontustik in Sairam district of South-Kazakhstan region (the expiry date is on 1 July
2030).
National Industrial Petrochemical Park in Atyrau region (the expiry date is on 31
December 2032).
Burabai in Akmola region (the expiry date is on 1 December 2017).
Park of Innovative Technologies (the expiry date is 1 January 2028).
Saryarka in Karaganda region (the expiry date is 1 December 2036).
Horgos - the eastern gates in Almaty region (the expiry date is 2035).
Pavlodar in Pavlodar (the expiry date is 1 December 2036).
In order to enjoy the incentives available in SEZs, a legal entity must meet the following
requirements:
It must be registered by the tax authorities in the territories of SEZs.
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Kazakhstan
Kazakhstan
It must have no structural subdivisions beyond the boundaries of the territories of the
SEZs.
90% of aggregate annual income must constitute income earned from activities in the
SEZ consistent with the objectives of the SEZs formation.
The general incentives available for legal entities in SEZs are:
CIT: 100% reduction.
VAT: 0% rate (for goods fully consumed during realisation of activities corresponding
to purposes of creation of the SEZ and included in the list of goods established by the
government of Kazakhstan).
Land tax: 0% rate.
Property tax: 0% rate.
Withholding taxes
Kazakhstan-source income of non-residents and the proceeds from the sale of shares in
subsurface users are subject to withholding tax (WHT) at the rates shown in the table
below.
A non-resident legal entity is exempt from dividend WHT if:
the holding period of shares or participation interest is greater than or equal to three
years
the entity paying the dividends is not a subsurface user, and
50% or more of the charter capital value of the entity paying the dividends is not the
property of a subsurface user.
Types of income at a source of payment
Dividends, capital gains, interest, royalties
Any income of an entity registered in a tax haven jurisdiction
Insurance premiums under risk insurance agreements
Income from international transportation services; insurance premiums under risk
reinsurance agreements
Other income
WHT rate (%)

15
20
15
5
20
Benefits paid by a company to a shareholder, founder, participant, or related party,

falling under the definition of constructive dividends, are taxed at a rate of 15%.
The rate of WHT may be reduced under an applicable DTT. A list of DTTs concluded and
ratified by Kazakhstan is detailed below:
WHT rates between Kazakhstan and treaty countries as of 1 January

2014
Recipient
Non-treaty
In-force treaties:
Armenia
Austria
Azerbaijan
Belarus
Belgium
Dividends (%)
15
Interest (%)
15
Royalties (%)
15
10
5/15 (4)
10
15
0/5/15 (8, 4)
10
10
10
10
10
10
10
10
15
10
Kazakhstan
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Kazakhstan
Recipient
Bulgaria
Canada
China
Czech Republic
Estonia
Finland
France
Georgia
Germany
Hungary
India
Iran
Italy
Japan
Korea
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Malaysia
Moldova
Mongolia
Netherlands
Norway
Pakistan
Poland
Romania
Russia
Singapore
Slovakia
Spain
Sweden
Switzerland
Tajikistan
Turkey
Turkmenistan
Ukraine
United Kingdom
United States
Uzbekistan
Pending treaties:
Macedonia
Serbia
Slovenia
Dividends (%)
10
5/15 (1)
10
10
5/15 (2)
5/15 (1)
5/15 (4)
15
5/15 (2)
5/15 (2)
10
5/15 (5)
5/15 (4)
5/15 (11)
5/15 (4)
10
5/15 (2)
5/15 (2)
5/15 (12)
10
10/15 (2)
10
0/5/15 (9, 10)
5/15 (10)
12.5/15 (10)
10/15 (3)
10
10
5/10 (2)
10/15 (7)
5/15 (4)
5/15 (1)
0/5/15 (9, 10)
10/15 (6)
10
10
5/15 (2)
5 (1)
5/15 (1)
5/15 (1)
10
Interest (%)
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
12.5
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
Royalties (%)
10
10
10
10
15
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
15
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
5/15 (2)
10/15 (2)
5/15 (2)
10
10
10
10
10
10
Notes
1.
2.
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5% if the beneficial owner is a company owning, directly (or indirectly in case of Canada and the
United Kingdom), at least 10% of the voting power of the company paying the dividends.
5% (10% in the cases of Moldova and Serbia) if the beneficial owner is a company that directly holds
Kazakhstan
Kazakhstan
3.
10% if the beneficial owner is a company directly or indirectly holding at least 20% of the capital of
the paying company.
4. 5% if the beneficial owner is a company (other than a partnership) that owns not less than 10% of the
capital of paying company.
5. 5% if the recipient is a company (other than a partnership) that directly owns not less than 20% of the
capital of paying company.
6. 10% if the actual owner is a legal entity that owns not less than 30% of the authorised capital of the
legal entity paying the dividends.
7. 10% if the beneficial owner is a company that directly holds at least 30% of the capital of the
company paying the dividends.
8. 0% if dividends are paid in consideration of an investment of at least 50 million United States dollars
(USD) in the paying company.
9. 0% if the company receiving the dividends directly or indirectly holds at least 50% of the capital of
the paying company and has made an investment in the company paying the dividends of at least
USD 1 million, which investment is guaranteed in full or insured in full by the government of the first
contracting state, the central bank of that state, or any agency or instrumentality (including a financial
institution) owned or controlled by that government, and has been approved by the government of
the other contracting state.
10. 5% (or 12.5% in case of Pakistan) if the beneficial owner is a company that directly owns (or
indirectly in case of the Netherlands and Pakistan) at least 10% of the capital of paying company.
11. 5% if the beneficial owner is a company directly or indirectly owning, for the period of six months
ending on the date on which entitlement to the dividends is determined, at least 10% of the voting
power of the company paying the dividends.
12. 5% if the beneficial owner is a company (other than a partnership) that directly owns not less than
15% of the capital of the paying company.
Tax administration
K
Taxable period
The tax year in Kazakhstan is the calendar year.
Tax returns
Annual CIT declarations are due by 31 March of the year following the tax year-end.
However, a taxpayer may be granted a 30 calendar-day extension of the deadline, upon
request.
Certain taxpayers are required to submit their estimated calculation of monthly advance
payments of CIT.
The deadline for other tax returns is the 15th calendar day of the second month
following the reporting period. However, a taxpayer may be granted a 30 calendar-day
extension of the deadline, upon request.
Payment of tax
For CIT, advance payments are due every 25th day of the month. Taxpayers with
aggregate annual income during the tax period preceding the previous tax period of
less than 325,000 times the amount of the monthly calculation index established for the
relevant financial year (approximately USD 3.72 million) are exempt from the obligation
to calculate and pay CIT advance payments. Payment of any outstanding CIT liabilities
is required within ten calendar days following submission of the annual CIT declaration
(i.e. 10 April).
Most other taxes are payable by the 25th day of the second month following the end of
reporting period.
Fines and interest penalties
Interest penalties are assessed on late tax payments at 2.5 times the Kazakhstan National
Bank refinancing rate. As of 6 August 2012, the National Bank refinancing rate was set at
5.5% per annum.
Substantial fines are imposed for understatement of tax liabilities. Generally, the fines
amount to 50% of the understated tax.
Kazakhstan
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Kazakhstan
For advance CIT payments, an administrative fine of 40% applies to understated
advance tax payments compared with the final declared CIT, provided the understated
amount is greater than 20% of the final declared amount.
If a taxpayer is deemed to have concealed taxable income, a fine of 150% of the
concealed amount may be assessed.
Tax audit process
Kazakhstan tax authorities have the right to conduct regular tax audits (at least once a
year). Generally, there are two types of audits:
Planned tax audits. The list of entities that fall under tax audit is published semiannually on the official website of the Kazakh government.
Unplanned tax audits. Tax authorities may conduct unplanned tax audits.
Information about misstatements in tax returns or any other discrepancy may trigger
an unplanned tax audit.
The statute of limitations for tax purposes in Kazakhstan is five years. For taxpayers
operating under subsurface use contracts, the tax authorities maintain the right to
assess or revise the assessed amount of excess profit tax and other taxes and obligatory
payments to the budget, where a methodology of calculation uses one of the following
indices: internal rate of return (IRR) or internal revenue rate or R-factor (earning yield),
during the effective period of a subsurface use contract and five years after the end of
the effective period of a subsurface use contract.
Tax audits may be comprehensive or thematic. Comprehensive tax audits cover all
applicable taxes, while thematic tax audits may cover only some specific tax liabilities.
As a rule, Kazakh tax authorities are form, rather than substance, driven during audits.
Other issues
Accounting system
Kazakhstan legal entities should maintain accounts and produce financial statements in
accordance with IFRS or national accounting standards (depending on the size of the
company and other factors). In most cases, tax treatment follows accounting treatment.
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Kazakhstan
Kenya
PwC contact
Steve Okello
Rahimtulla Tower
Upper Hill Road
Nairobi, Kenya
Tel: +254 20 2855116
The Finance Act 2013 introduced a few amendments to the Income Tax Act and the
Customs and Excise Act.
Excise duty on money transfer
The Finance Act 2013 provides for the collection and payment of excise duty on money
transfer services and other fees charged by financial institutions. The excise duty shall be
charged, collected, and paid by cellular phone service providers, banks, money transfer
agencies, and other financial institutions.
Railway Development Levy (RDL)
The Finance Act 2013 introduced the RDL, which shall be paid by the importer on all
goods imported into the country for home use at the rate of 1.5% of the customs value
of the goods. This levy shall be for the construction of a standard gauge railway network
in order to facilitate the transportation of the goods. RDL on imports from East Africa
Community partner states was abolished with effect from March 2014.
Withholding tax (WHT)on assignment of rights in the oil & gas and
mining sector
The Finance Act 2012 introduced a 10%WHT on the amount or value of the
consideration from the sale of property or shares in respect of resident oil companies,
mining companies, or mineral prospecting companies. This was a final tax. The Finance
Act 2013 has brought an amendment to make theWHT paid not a final tax for oil
companies, which are defined to mean a petroleum company within the meaning of the
Ninth Schedule.

Resident companies are taxable in Kenya on their worldwide profits, while non-resident
companies are subject to Kenya corporate income tax (CIT) only on the trading profits
attributable to a Kenyan permanent establishment (PE).
The normal rate of CIT for resident companies, including subsidiary companies of
foreign parent companies, is 30%. The CIT rate for branches of foreign companies and
PEs is 37.5%.
Industry-specific rates
There are special provisions for non-resident shipping companies and airlines; nonresidents providing broadcast, internet, and messaging services; and non-resident
petroleum industry subcontractors providing exploration and production services in
Kenya.
Kenya
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Kenya
Entity
Export processing zone (EPZ) enterprises:
First ten years
Next ten years
Thereafter
Registered unit trusts/Collective investment schemes
Newly listed companies:
20% of shares listed: first three years after listing
30% of shares listed: first five years after listing
40% of shares listed: first five years after listing
Rates on gross income of non-residents derived in Kenya:
Transmission of messages
Ownership or operation of ships and aircraft
CIT rate (%)

0
25
30
Exempt (subject to conditions)
27
25
20
5
2.5
Local income taxes
There are no local or provincial taxes on income, as all taxes are collected by the central
government. However, county governments are empowered by the Constitution to
impose property and entertainment taxes at the county level.
Corporate residence
Kenya-incorporated companies are treated as Kenyan-tax resident. Additionally,
companies incorporated overseas are also treated as Kenya resident if their
management and control is exercised in Kenya in a particular year of income under
consideration. A company may also be declared a tax resident in Kenya pursuant to a
declaration in a legal notice by the Minister.
A business carried on in Kenya through a fixed place of business gives rise to a PE for
branch purposes, as does a building site, or a construction or assembly project, that has
existed for six months or more. Note that the definition of a PE may be modified by a
double tax agreement (DTA).
Other taxes
The VAT Bill 2013 was assented to on 14 August 2013, and now Kenya has a new VAT
Act, 2013. The less voluminous Act has significantly changed the content of the VAT
legislation by incorporating the current subsidiary legislation (VAT rules, orders, and
regulations) into the principal legislations.
VAT is levied on the supply of taxable goods and services in Kenya, as well as on the
importation of taxable goods and services into Kenya.
The following VAT rates apply in Kenya:
Activity
Standard rate on all goods and services that are neither exempt nor zero-rated
Export of goods and services, certain other goods and services
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Kenya
VAT rate (%)

16
0
Kenya
Certain goods and services are designated as exempt from VAT. Exempt supplies do not
count towards the registration threshold (see below), and the related input VAT is not
recoverable.
Zero rating applies to the export of goods or services. The supply of goods or services to
certain designated persons and projects are also zero-rated.
The threshold for VAT registration is taxable supplies of 5 million Kenyan shillings (KES)
per year. Registered persons must record their turnover using an approved electronic
tax register or signature device. Only registered persons may recover input tax. An input
tax credit is not available for several items, such as non-commercial vehicles, office
furniture, and hospitality and entertainment services. An excess input tax credit may be
carried forward or refunded, subject to certain conditions.
Import (customs) duty
Import duty is levied under the East African Community Customs Management Act.
Imports of goods are generally subject to import duty of 0% for raw materials and capital
goods, 10% for intermediate goods, and 25% for finished goods. Enterprises established
in an EPZ are exempt from customs duty on machinery and inputs for exported products.
Where raw materials that are not subject to 0% import duty are used to manufacture
goods for export outside the East African Community, one may apply for remission
under the import duty remission scheme. This is subject to a requirement for proof of
export and execution of a bond.
Excise duty
Excise duty is imposed on the manufacture or importation of certain commodities and

services, such as mobile phone services, bottled water, soft drinks, cigarettes, alcohol,
perfumes, fuels, and motor vehicles, at varying rates. There are various classes for each
category and commodity where different rates of duty apply.
Category Goods description
Beer
Beer
Raw spirits Undentured ethyl alcohol strength by
volume of 80% or higher
Other
Wines
alcoholic
beverages Cider
Spirits, whisky, rum, gin,
and vodka
Premixed alcoholic beverages of strength
not exceed 10% by alcohol content
Cigarettes
Tobacco
and
tobacco
products
Soft drinks Carbonated drinks and juices
Bottled water
Excise duty rates

KES 70 per litre or 50% of the ex-factory
selling price, whichever is higher
KES 1,200 per mile or 35% of the retail
sales price, whichever is higher
70%
KES 3 per litre or 5% of the retail sales
prices, whichever is higher
Kenya
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Kenya
Category Goods description
Other
Plastic bags (1)
excisable Motor vehicles
products
Cosmetic products
Imported used computers (used computers
more than three years from date of
manufacture)
Excisable Mobile cellular phone services and other
services
wireless telephone services
Money transfer services
Excise duty rates

50%
20%
5%
25%
10%
10%
Notes
1.
Manufacturers who use plastic bags for packing their products will now be entitled to claim excise
duty paid on their plastic bags from the Kenya Revenue Authority (KRA).
Stamp duty
Stamp duty is payable on transfer of properties, leases, and securities. For other
properties, other rates of stamp duty apply as specified in the Schedule to the Stamp
Duty Act. The rates of stamp duty are shown below:
Activity
Transfer of immovable property:
Urban
Rural
Creation or increase of share capital
Transfer of unquoted shares or marketable securities
Transfer of quoted shares of marketable securities
Registration of a debenture or mortgage:
Collateral security
Supplemental security
Lease:
Period of three years and under
Period over three years
Stamp duty rate

4%
2%
1%
1%
0*
0.05%
KES 20 per counter part
1% of annual rent
2% of annual rent
* Transfer of quoted securities is exempt.
Land purchased for expansion and development of schools is exempt from stamp duty,
provided the land does not revert to any other use and approval has been obtained from
the relevant authorities.
Compensating tax
Where a company pays dividends out of profits that have not been subject to CIT, the
company will be liable to pay a compensating tax. The compensating tax rate is 42.8%.
The aim of this tax is to ensure that all dividends are paid out of profits that have
suffered CIT.
Turnover tax for small business taxpayers
A resident taxpayer whose annual gross turnover does not exceed KES 5 million will
be taxed at the rate of 3% per quarter of ones turnover. In such a case, the taxpayer
will not be required to register for VAT. Turnover tax does not apply to rental income,
management or professional fees, training fees, income subject to WHT as a final tax,
and income of incorporated companies. Loss making businesses are allowed to make an
election to be exempted from turnover tax. A written application for exemption has to be
made to the Commissioner, and there is a procedure to be followed.
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Kenya
Kenya
Business permit
Every person who carries on a business in Kenya is required to apply for a business
permit from the relevant local authority. The business permit is usually based on the size
of ones business and is renewable on an annual basis.
Catering levy
The catering levy is payable to Catering Levy Trustees by hotels and restaurants at a rate
of 2% of turnover.
National industrial training levy
All employers are required to pay to the Directorate of Industrial Training a monthly levy
of KES 50 per employee. The only exemption is for employers remitting the catering levy.
Advance tax on motor vehicles
Advance tax is payable at varying rates per year on commercial vehicles and is creditable
against CIT for the year.
The FBT is payable on interest-free or low-interest loans granted to employees. FBT

is paid by the employer, whether exempted from tax or not, at the resident CIT rate
of 30%. The benefit is the difference between actual interest charged and the interest
computed using the Commissioners prescribed rate published quarterly. The directors
and employees are not personally taxed on the benefit.
Employers national social security contributions
Employees are also obligated to contribute monthly to the National Social Security Fund
(NSSF) a standard amount of KES 200, with an equal amount of contribution from the
employer.
Local government rent and rates
Rent and rates are levied annually on properties in Kenya, and the rateable value that is
payable to the local authority or central government shall vary in each county based on
various forms of ratings, such as area rate, agricultural rental value, or site value.
Branch income
The profit of a PE is taxed at the branch income tax rate of 37.5%, but there is no further
taxation on the distribution of branch profits. However, there are certain restrictions
with respect to costs paid to the head office.
Inventory valuation
Inventory is stated at the lower of cost or net realisable value, with the exception of
biological assets, whose value is prescribed by the Commissioner.
Capital gains
Taxation of capital gains was suspended in 1985.
Dividend income
Kenya-source dividends are taxable income in Kenya unless the recipient is a Kenya
resident company holding 12.5% or more of voting power of the company paying the
dividend. However, for companies holding less than 12.5% of the votes, and other
resident taxpayers, the 5% WHT is the final tax. Dividends paid to non-residents and any
Kenya
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Kenya
overseas holding company attract 10% WHT. There are special provisions in relation to
dividends received by financial institutions, including insurance companies.
Stock dividends
Stock dividends issued in a ratio not proportionate to shareholding of the existing equity
are considered as taxable dividends to the extent of the disproportionate increase in the
value of the ownership of the company.
Interest income
Interest income is generally included in the determination of taxable income.
Foreign income
In principle, Kenya tax profits on a worldwide basis, and profits received from non-Kenya
branches are computed and taxed in the normal way for Kenya tax resident companies.
However, Kenya tax liability will generally be reduced by credit for local direct taxes
paid, either under a treaty or via the Kenyas unilateral relief rules. Companies are not
allowed to defer income until the income is repatriated or remitted to Kenya.
Deductions
The general principle in Kenya is that expenses are deductible if they are incurred wholly
and exclusively to generate taxable income.
No deduction is allowed for accounting depreciation or impairment. However, capital

allowances are permitted at varying rates (on a straight-line basis) for certain assets
used for business purposes, including buildings and machinery used in manufacturing,
industrial buildings and hotels, machinery and plant, agricultural works, and mining.
Capital deductions
Investment deduction:
Qualifying investment exceeding KES 200 million (outside Nairobi
or the municipalities of Mombasa or Kisumu)
Other qualifying investment
Industrial building allowance: *
Hostels and certified education buildings (straight-line)
Qualifying rental residential (straight-line)
Other qualifying buildings (including hotels, straight-line)
Commercial building allowance (straight line) *
Wear and tear allowance:
Plant and machinery (reducing-balance):
Class 1
Class 2
Class 3
Class 4
Telecommunication equipment (straight-line)
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Kenya
Rate (%)
150
100
50
25
1
25
37.5
30
25
12.5
20
Kenya
Capital deductions
Other allowances:
Computer software (straight-line)
Capital expenditure under a concessionaire arrangement
Rate (%)
20
Equal proportions over the
period of the concession
Mining specified minerals:

Year one
Year two through seven
Farm works (straight-line)
40
10
100
* Different percentages apply for previous years.
Goodwill
Cost acquisition of goodwill and amortisation of goodwill are not deductible since they
are capital in nature.
Start-up expenses
There is a specific provision allowing the deduction of start-up expenses, provided that
the required conditions have been met.
Interest expenses
A deduction for interest is allowed only to the extent that the borrowings are used for the
purpose of trade. Where a non-resident person controls a company alone or with four
or fewer other persons, interest restriction or thin capitalisation rules apply (see Thin
Bad debts
Bad debts are deductible in the year in which it is evident that the debt has become
irrecoverable. Detailed rules apply for making this determination.
Donations to charities and for certain public works are deductible, subject to
certainconditions.
Fines and penalties
Generally, fines and penalties are not deductible as they are not considered to be
expenses incurred for producing profits chargeable to tax.
Taxes
Kenyan income taxes are not deductible while computing income tax of a person.
However, foreign income taxes incurred are generally deductible as an expense if tax
credit relief is not available under a DTA.
Losses calculated under the tax rules may be carried forward against income from the
same source for a maximum of five years, including the year in which the losses arise.
Losses cannot be carried back, except for petroleum companies, where losses can be
carried back for three years from the year of income in which the petroleum company
ceased permanently to produce petroleum.
Transfer pricing rules based on Organisation for Economic Co-operation and

Development (OECD) principles apply to transactions with foreign affiliates (both
companies and branches/PE). Additionally, there are restrictions on the deductibility of
expenses incurred outside of Kenya by non-residents with a Kenyan PE. Transfer pricing
is not limited to anti-avoidance.
Kenya
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Kenya
Group taxation
Each company in a group is taxed as a separate entity in Kenya.
Transfer pricing
A company that has related party transactions is required to ensure such transactions are
at arms length. The company is therefore required to prepare a transfer pricing policy
to justify the pricing arrangements. The Commissioner is allowed to specify conditions
and procedures on the application of the methods for determining the arms-length price
and to adjust the prices if they do not conform to the arms-length principle.The policy
should be prepared and submitted to the KRA upon request.
Thin capitalisation
In Kenya, a company is thinly capitalised if all of the following occur:

The company is in control of a non-resident person alone or together with four or
fewer persons.
The company is not a bank or financial institution.
The highest amount of all loans held by the company at any time exceeds the sum of
three times the revenue reserves (including accumulated losses) and the issued and
paid up share capital of all classes of shares of the company.
A company that is thinly capitalised cannot claim a deduction on the interest expense
incurred by the company on loans in excess of three times the sum of revenue reserves
and issued and paid up capital of all classes of shares of the company. The company
also cannot claim a deduction for any foreign exchange loss realised by the company
with respect to any loans from its shareholders in the period that the company remains
thinlycapitalised.

Foreign tax credit
For business income, there is no relief for foreign tax paid except as provided for by a
DTA (if applicable) between Kenya and the other country.
Investment deduction
Qualifying investments exceeding KES 200 million incurred outside Nairobi or the
municipalities of Mombasa or Kisumu are allowed an investment deduction of 150%. All
other qualifying investments are allowed a 100% investment deduction in the year the
asset is put into service.
Export processing zone (EPZ)
Companies located in an approved EPZ, principally to export goods, are taxed at a 0%

CIT rate for ten years from its commencement and at a rate of 25% for the next ten
years.
Listed companies
Companies listed on the Nairobi Stock Exchange are entitled to reduced rates of income
tax for a period depending on the proportion of share capital listed (see the Taxes on
corporate income section for the rates).
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Withholding taxes
WHT is levied at varying rates (3% to 30%) on a range of payments to residents and
non-residents. Resident WHT is either a final tax or creditable against CIT. Non-resident
WHT is a final tax.
Payments
Dividend > 12.5% voting power
Dividend < 12.5% voting power
Interest:
Bearer instruments
Government bearer bonds (maturity 2 years)
Bearer bonds (maturity 10 years)
Other
Qualifying interest:
Housing bonds
Bearer instruments
Other
Royalty
Management or professional fees
Consultancy fees - Citizen of East Africa Community
Training (including incidental costs)
Rent/leasing:
Immovable property
Others (other than immovable)
Pension/retirement annuity
Contractual fees
Sale of property or shares in oil, mining, or mineral prospecting
companies
Resident WHT
rate (%)
Exempt
5
Non-Resident
WHT rate (%)
10
10
25
15
10
15
25
15
N/A
15
10
20
15
5
5
5
N/A
N/A
N/A
20
20
15
20
N/A
N/A
Varied *
3
10
30
15
5
20
20
* This will vary depending on the payments paid out.
Double tax agreements (DTAs)
Lower rates may apply to non-residents where there is a DTA in force. The table
below shows the maximum rates of tax that recipients in those countries with a DTA
with Kenya can be charged on dividends, interest, royalties, and management and
professional fees. The table only includes agreements that are currently in force.
WHT (%)
Recipient
Canada
Denmark
France
Germany
India
Norway
Sweden
United Kingdom
Zambia
Dividends
15
20
10
15
15
15
15
15
0 (3)
Interest
15
20 (1)
12
15 (1)
15
20 (1)
15
15 (1)
0 (3)
Royalties and management/

professional fees
15
20
10 (5)
15
20 (4)
20
20
15 (2)
0 (3, 5)
Notes
1.
Interest paid by the government and the Central Bank of Kenya is tax-exempt.
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2.
3.
4.
5.
The rate is 12.5% for management and professional fees.

No Kenya tax is due if subject to tax in Zambia.
The rate is 17.5% for management and professional fees.
Management and professional fees subject to normal WHT rates.
Where the treaty rate is higher than the non-treaty rate, the lower rate applies.
Tax administration
Taxable period
A company has discretion to determine its corporate tax year, provided it is a 12-month
period. However, any changes in corporate tax year-end must be approved by the
Commissioner of the KRA.
Tax returns
Resident companies and PEs of non-resident companies must file a self-assessment tax
return accompanied by audited or certified accounts annually. The return is due within
six months following a companys year-end.
Payment of tax
Instalment tax payments must be made quarterly during the year based on the lower
of 110% of the previous years liability or an estimate of the current years liability.
Agricultural companies are required to pay estimated tax in two instalments of 75% and
25% during the year. Any balance of tax at the end of the year must be paid within four
months of the financial year-end.
Payment of agency taxes
The tax withheld from payments must be paid by the 20th day of the month following
the month in which the deduction is made.
Penalties for non-compliance
If a self-assessment tax return is not submitted by the due date, a penalty of 5% on the
unpaid tax for the year may be imposed, subject to a minimum of KES 10,000. Failure or
late submission of an EPZ company return will be subject to a penalty of KES 2,000 per
day for as long as the failure continues.
A penalty of 20% and interest at 2% per month are imposed on underestimation and
late payment of instalment tax and any balance of tax. Interest is charged only on the
principal tax due.
Failure to make a deduction or to remit the WHT deducted attracts a penalty equal to
10% of the amount of tax involved (subject to a maximum of KES 1 million) and accrues
interest at 2% per month.
Tax audit process
There is no prescribed audit process, as an audit can be triggered by any factor as

determined by the revenue authority. Generally, tax audits should be carried out after
every two to four years. The audit or inspection will commence with a request from the
revenue authority for the taxpayer to make available any such records or information as
may be required.
The tax authorities must commence an audit before the expiry of seven years after the
end of a year of income. The revenue authorities may go back past seven years where
fraud is suspected. There is no time limit for completing tax audits. However, they are
normally completed within a reasonable time, especially if there are no major disputes.
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The issues that are often subject to close scrutiny by the tax authority include relatedparty transactions and transaction taxes (e.g. VAT).
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PwC contact
Seong-Cheon Ko
Samil PricewaterhouseCoopers
LS Yongsan Tower, 14th Floor
92 Hangangdaero
Yongsan-gu
Seoul 140-702, Korea
Tel: +82 2 709 0725
The latest amendments to corporate income tax (CIT) and other major tax laws, most of
which entered into effect in January 2014, address the Korean governments efforts to
increase tax revenue collection without directly increasing taxes.
These efforts are highlighted by amendments to reform the existing tax exemptions or
reductions. For example, a uniform tax credit rate applied to investment in facilities
for research and development (R&D), energy saving, and environment conservation
is gradated by three categories of company scale such as large, medium and small,
and midsize. In other words, the larger the company scale is, the smaller the credit
rate is. However, few changes were made to the existing tax incentives for job-creating
investment by domestic and foreign investors. New tax credits have been introduced
to facilitate the innovative economy (e.g. the Korean patent box regime, tax credits for
merger or acquisition of technology innovative small and medium-sized enterprises
[SMEs]).
The latest amendment also includes a few changes that should affect inbound
investment.The existing tax incentives for qualifying inbound investment shall be
waived for investments made via any of specified countries with which Korea has not
concluded an income tax treaty, an information exchange agreement, or an investment
promotion and protection agreement. This change will not be enforced before 1 January
2015.
From 1 January 2014, the withholding tax (WHT) exemption or reduction shall no
longer be available for dividend income paid to foreign investors in qualifying foreign
direct investments (FDIs).
The Foreign Investment Promotion Act (FIPA) was amended and proclaimed on 1
January 2014. Subsequently, the Enforcement Decree of the FIPA has been announced
to ease restrictions on the existing minimum stock ownership requirements for a
holding company in subsidiaries. Designed to prevent the concentration of economic
power and control of subsidiaries by means of insignificant stock ownership, a listed
holding company is currently required to own 20%, 40%, and 100% or more of stock
in a subsidiary, a grandson subsidiary, and a great grandson subsidiary, respectively,
under the Monopoly Regulation and Fair Trade Act. The FIPA has been amended to
permit a joint venture (JV) (great grandson JV) between a holding companys grandson
subsidiary and a foreign investor if certain requirements are met.
Reflecting the governments commitment to detect and tax the underground economy,
the amended tax laws strengthen compliance requirements for taxpayers to report assets
held or income earned in foreign countries and increase penalties for non-compliance.
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The basic Korean CIT rates are 10% on the first 200 million Korean won (KRW), 20% for
the tax base between KRW 200 million and 20 billion, and 22% for the excess.
Resident corporations are taxed on their worldwide income, whereas non-resident
corporations with a permanent establishment (PE) in Korea are taxed only to the extent
of their Korean-sourced income. Non-resident corporations without a PE in Korea are
generally taxed through a WHT on each separate item of income.
Agriculture and fishery surtax
When a corporate taxpayer claims certain tax credits or exemptions under the Special
Tax Treatment Control Law (STTCL), a 20% agriculture and fishery surtax is levied on
the reduced CITliability.
Minimum tax
Corporate taxpayers are liable for the minimum tax, which is defined as the greater
of 10% (to the tax base of up to KRW 10 billion, 12% on the excess up to KRW 100
billion, 17% on the excess above KRW 100 billion) of the taxable income before various
deductions and exemptions pursuant to the STTCL applied to arrive at adjusted taxable
income or the actual tax liability after various deductions and exemptions are applied.
For SMEs, the minimum tax is the greater of 7% of adjusted taxable income or actual tax
liability. For middle market companiesthat exceed the size of SMEs, an 8% minimum tax
rateis applicable for the first three years, startingfrom the year when the size exceeds
an SME for the first time, and a 9% rate is applicable for the next two years.
Local income tax
Local income tax was amended from a resident tax surcharge of 10% on CIT liability to
its own tax rates and brackets. Effective from January 2014, the basic local income tax
rates for corporation are 1% on the first KRW 200 million, 2% for the tax base between
KRW 200 million and KRW 20 billion, and 2.2% for the excess. The major change is that
the local income tax is no longer a surcharge of CIT, but a separate income tax that has
its own tax base, tax exemption and credits, and tax rates. For example, tax exemption
and credits for CIT purpose are no longer available for local income tax purposes.
Corporate residence
A corporation having its head office or principal office in Korea is a resident corporation.
A corporation with a place of effective management in Korea is also treated as a resident
corporation.
A non-resident corporation is generally deemed to have a tax presence (i.e. PE) in Korea
if one of the following applies:
It has any fixed place of business in Korea, where the business of the entity is wholly
or partly carried on.
It is represented by a dependent agent in Korea, who has the authority to conclude
contracts on its behalf and who has repeatedly exercised that authority.
Its employee(s) provides services in Korea for more than six months within 12
consecutive months.
Its employee(s) continuously or repeatedly renders similar services in Korea for
two or more years, even if each service visit is for less than six months within 12
consecutive months.
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Exceptions to a PE in Korea for a non-resident corporation include fixed places of
business used only for purchasing or storage of property at which no sales activities,
advertising, publicity, collecting, or furnishing of information, or other activities that are
preparatory or auxiliary to the conduct of business, occur.
Other taxes
VAT is levied at a rate of 10% on sales and transfers of goods and services, except zerorated goods and services (e.g. goods for exportation, services rendered to non-residents,
international transportation service by ships and aircraft, other goods and services
supplied for foreign exchange earnings) and exempt goods and services (e.g. basic life
necessities and services, such as unprocessed foodstuffs and agricultural products;
medical and health service; finance and insurance services; duty-exempt goods).
Electronic VAT invoicing is a compulsory requirement. If a taxpayer fails to issue the
electronic VAT invoice or report electronically to tax authorities, the relevant penalties
shall be imposed.
Customs duties
Customs duties are generally assessed on imported goods. Importation refers to the
delivery of goods into Korea (in case of goods passing through a bonded area, delivery of
such goods into Korea from such a bonded area) to be consumed or to be used inKorea.
Individual consumption tax
The individual consumption tax is imposed on specific luxury goods, high-priced durable
consumer goods, goods subject to consumption restraints, and certain luxury activities
for the purpose of supplementing the VAT single-rate scheme. Tax rates range from2%
to 20%; in certain circumstances, a fixed amount is levied (e.g. KRW 12,000 per person
for golf course greens fees).
Property taxes
An annual tax ranging from 0.07% to 5% is charged on the statutory value of land,
buildings, houses, vessels, and aircraft. Five times the property tax rate is applied to
property that is newly constructed or expanded in theSeoul metropolitan area for five
years from its relevant registration date.
Securities transaction tax
A securities transaction tax of 0.5% is imposed on the total value of securities at the
time of transfer, but the government is authorised to adjust the tax rate in certain
circumstances. The flexible tax rate prescribed by the Presidential Decree is 0.3% on
transactions in both the Korea Stock Exchange and Korean Securities Dealers Automated
Quotations (KOSDAQ).
Acquisition taxes
Acquisition tax is charged on the price of real estate, motor vehicles, construction
equipment, golf membership, boats, etc. The minimum rate is 1%. A weighted rate is
charged on acquisitions in the Seoul metropolitan area or on acquisition of luxury items,
such as villas, golf courses, and yachts.
Stamp taxes
Stamp tax is levied on a person who prepares a document certifying establishment,

transfer, or change of rights to property in Korea. The stamp tax ranges from KRW 100
to KRW 350,000, depending on the type of taxable document. As of 1 January 2014,
the electronic stamp system has been implemented to make it mandatory to use stamps
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bought online rather than paper stamps bought in banks or post offices. The use of paper
stamps will be permitted as an interim measure until the end of 31 December 2014.
Registration taxes
Registration tax ranging from 0.1% to 5% is charged upon the act of registering the
creation, alteration, or lapse of property rights or other titles and incorporation with the
concerned authorities. Registration tax shallnot be applied to theregistration made as a
result of the act of acquisition as defined in Chapter 2 of the Local Tax Act. Registration
tax upon the registration of title or right and incorporation for corporationslocated in
large cities may be subject to three times the rates otherwiseapplied.
Gift tax
Gift tax is imposed on a person who acquires property by gift. If CIT or individual income
tax is imposed on the gifted property, however, the gift tax shall not be imposed. Gift tax
ranges from 10% on not more than KRW 100 million in tax base to the top marginal tax
rate of 50%.
There are four types of social security contributions in Korea, namely national pension,
national health insurance, employment insurance, and workers accident compensation
insurance. Employers and employees are almost equally required to bear a total amount
of 8.145% of salaries for the first three types of social security taxes (i.e. national
pension, national health insurance, and employment insurance), while the workers
accident compensation insurance is borne by employers only, which varies by industry,
ranging from 0.6% (banking, insurance) to 34% (coal mining) of salaries.
Branch income
In general, a branch office of a foreign corporation is taxed in the same manner as
resident companies.
Remittance of retained earnings from a Korean branch to its head office is subject to
reporting to a designated foreign exchange bank in Korea under the Foreign Exchange
Transaction Act.
If the tax treaty between Korea and the country in which a foreign corporation is
residing allows the imposition of a branch profits tax, the tax is imposed on the adjusted
taxable income of the Korean branch.
Where applicable, the branch profit tax is levied in addition to the regular CIT, which is
imposed at the rate of 20% (or at a reduced rate as provided in a treaty) of the adjusted
taxable income of the Korean branch.
Gross income consists of gains, profits, income from trade and commerce, dealings in
property, rents, royalties, and income derived from any ordinary transactions carried on
for gain or profit.
Inventory valuation
Inventories generally are stated at either the lower of cost or market (LCM) or cost
method. Any one of LCM and six cost methods, including specific identification, first
in first out (FIFO), last in first out (LIFO), weighted-average, moving-average, and
retail method, can be elected for tax purposes. The method elected should be applied
consistently each year unless an application for change has been submitted before
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three months from the year-end. Different valuation methods may be used for different
categories (i.e. products and merchandise, semi-finished goods and goods in process,
raw materials, goods in stock) and different business places.
For inventory costing under Korean International Financial Reporting Standards
(K-IFRS), LIFO is not an acceptable accounting method. Consequently, taxable income
arising from adjusting the inventory balance booked under LIFO using other acceptable
costing methods (e.g. FIFO, weighted average) is allowed to be spread in its recognition
over a five-year period since the first year adopting K-IFRS.
Stock valuation
The valuation of securities or bonds shall be made using the cost method. For the cost
method, the weighted-average cost method or moving-average cost method shall be
applied for the purpose of valuation of securities and the individual cost method may be
used for valuation of bonds.
Capital gains
For the purposes of taxation, gross income does not include income derived from gains
from capital transactions such as capital surplus; gains on reduction of paid-in capital;
or gains from merger, divisions, comprehensive share transfer, or comprehensive share
exchange. However, gains from treasury stock transactions are taxed, and losses are
deductible from taxable income.
Note that capital gains from the disposal of non-business purpose land or houses may be
subject to additional capital gains tax at the rate of 10% in addition to the normalCIT.
For SMEs, however, the 10% additional tax will be waived until the end of December
2014 and apply from January 2015.
Dividend income
All distributions to shareholders are taxed as dividend income, whether paid in cash or
in stock.
However, a qualified domestic holding company that owns more than80% (40% in
case of listed subsidiary) share ownership in its domestic subsidiary will receive a 100%
deduction for dividends while an80% deduction is allowed for share ownership of 80%
(40% in case of listed subsidiary) or less. A domestic corporation other than a qualified
holding company will also receive a 100% deduction for share ownership of 100%, 50%
for more than50% (30% in case of listed subsidiary) share ownership, and 30% for
share ownership of 50% (30% in case of listed subsidiary) orless.
Interest income
Except for certain cases, all interest income must be included in taxable income.
Generally, interest income is included in taxable income as it is received.
Rental income
A company engaged in the business of the rental of real properties is also taxed on the
deemed rental income calculated at the financial institutions interest rate on the lease
security money as well as on the recognised rental income.
Royalty income
Royalties are considered to be taxable income when earned.
Gains and losses on foreign currency translation
Companies are allowed to recognise unrealised gains and losses on foreign currency
translation of their monetary assets in a foreign currency. This recognition is also
allowed with respect to currency forward transactions and swaps to hedge foreign
exchange risks of such assets. In this regard, a taxpayer can choose whether to recognise
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unrealised gains and losses or not for tax purposes. Once elected, the same method must
be consistently used.
Foreign income
Resident corporations are taxed on their worldwide income. A Korean company is taxed
on its foreign-sourced income as earned at normal CIT rates. To avoid double taxation,
taxes imposed by foreign governments on income recognised by a resident company
are allowed as a credit against the income taxes to be paid in Korea or as deductible
expenses in computing the taxable income. In general, foreign taxes will generally be
applied as credit rather than as a deduction.
Income of foreign subsidiaries incorporated outside Korea is not included in the taxable
income of a resident company. Income is recognised by a resident company only upon
the declaration of dividends from a foreign subsidiary. Therefore, the Korean tax impact
may be delayed through deferring the declaration of dividends unless the anti-tax haven
rule under the Law for Coordination of International Tax Affairs (LCITA) is triggered.
Korean anti-tax haven rules state that accumulated earnings (distributable retained
earnings) of a resident companys subsidiary located in a low-tax jurisdiction (i.e. a
tax haven where the effective tax rate on the taxable income for the past three years
averages 15% or less) are taxed as deemed dividends to the resident company that has
direct and indirect interest of 10% or more in such subsidiary. Where the passive income
is more than 50% of gross income, the controlled foreign corporation (CFC) rule shall
apply for the entire amount of retained earnings of the foreign subsidiary. It is amended
in January 2014 to extend the scope of the CFC rule. Even in cases where the passive
income is between 50% and 5% of the foreign subsidiarys gross income, the CFC rule
will apply in a limited manner (i.e. a CFCs retained earnings will be included in taxable
income of the CFCs domestic related parties in proportion of such passive income to its
gross income). However, dividends will be excluded in calculating the amount of passive
income if they are derived from shares issued by the company that is 10% or more
owned by a CFC. This change will not be implemented before 1 January 2015.
The foreign tax paid by a qualifying subsidiary is eligible for foreign tax credit against
the dividend income of a resident company regardless of whether there are tax treaties
with the relevant foreign countries. In connection with percentage of shareholding for
tax credits, a qualifying subsidiary is one in which a resident corporation owns 10%
or more of its shares for more than or equal to six consecutive months after the date of
dividend declaration. Unused foreign tax credits can be carried forward for five years.
Deductions
In general, expenses incurred in the ordinary course of business are deductible, subject
to the requirements for documentary support.
A corporations disbursements of more than KRW 30,000 for goods or services provided
are required to be supported by corroborating documents, such as credit card sales
vouchers, cash receipts, tax invoices, and those vouchers and invoices stored in the
companys enterprise resource planning (ERP) system. The corporation is required to
maintain these documents for five years. If the corporation fails to maintain proper
evidences, a 2% penalty shall be levied on the amount of disbursement.
Accrued expenses are not deductible until the expenses are fixed or paid.
With the exception of land, depreciation of all property, plant, and equipment (PP&E),
which includes buildings, machinery, and auto-vehicles, used to generate income
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is allowed as a deduction for CIT. Generally, interest on debt acquired to purchase,
manufacture, or construct PP&E must be capitalised until the PP&E is operational. This
does not apply to the interest associated with the expansion or improvement of existing
PP&E. A detailed list of fixed assets, gross values (including capitalised interest), the
useful lives of the assets, and the current years depreciation charge must be submitted
to the tax authorities when filing the annual CIT return.
The tax law allows the following methods for calculating depreciation:
Straight-line or declining-balance method for tangible fixed assets, other than plant
and buildings.
Straight-line method for plant, buildings, and intangible assets.
Service-output or straight-line method for mining rights.
Service-output, declining-balance, or straight-line method for tangible fixed assets
used in mining.
In determining depreciation using a straight-line method, salvage value of the assets is
regarded as zero. However, where the declining-balance method is used, 5% salvage
value is required. Changes in the depreciation method must be approved by the tax
authorities in advance, and such approval may only be obtained in exceptional cases (i.e.
merger between two corporations having different depreciation methods). Although the
tax law specifies the useful lives of assets, the useful life of a fixed asset can be increased
or decreased by 25% of the specified useful life at the taxpayers election. The selected
depreciation method should be consistently applied.
The standard useful life and the scope of useful life for assets are provided in the
following tables:
Tangible fixed assets
Autos and transportation equipment (excluding those used
for transportation businesses, leasing service of machinery,
equipment, and consumer goods), tools, equipment, and
fixtures
Ships and aircraft (excluding those used for fishery,
transportation, leasing service of machinery, equipment, and
consumer goods)
All buildings and constructions of brick structure, block
structure, concrete structure, mud structure, mud wall
structure, wooden structure, wooden frame mortar structure,
and other structures
All the buildings and constructions of steel-frame/iron bar
concrete structures, stone structures, brick/stone structures,
steel-frame structures
Standard useful Scope ofuseful

life(years)
life (years)
5
4 to 6
12
9 to 15
20
15 to 25
40
30 to 50
Note that machinery and equipment used for specific industries shall be subject to
different useful lives from four years (e.g. bag manufacturing) to 20 years (e.g. water
supply service).
Intangible fixed assets
Usefullife(years)
Goodwill, design rights, utility model rights, trademarks
5
Patents, fishery rights, extraction rights under the law of development of mineral
10
resources at the sea bottom (may elect activity method), right of management
for toll roads, water rights, right of use for electricity and gas service facilities,
right of use for tap water facilities for industrial use, right of use for general tap
water facilities, right of use for heating facilities
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Intangible fixed assets
Usefullife(years)
Mining rights (may elect activity method), right of use for exclusive telegraph and
20
telephone facilities, right of use for exclusive sidetracks, right of management for
sewage disposal, right of management for tap water facilities
Right of use for dams
50
Note that for used fixed assets (including assets acquired through mergers or spin-offs)
that have been used for more than half of their useful lives, a new useful life may be
filed with the tax authorities within the range of half of the original useful life and the
original useful life filed for the first time of its utilisation.
According to CIT law, depreciation is allowed for tax deduction only when expensed
for book purposes. However, in order to alleviate any dramatic increase in tax burden
due to decreased depreciation expenses through the adoption of K-IFRS, additional
expense deduction through tax adjustment may be allowed on a temporary basis. For
tax purposes, depreciable assets acquired on or before 2013 may be depreciated at the
rate equivalent to the average of three years before the adoption of K-IFRS. Depreciable
assets acquired after 2014 may be depreciated using the tax useful lives only if they
are the same type of existing assets used for the same business line and the calculation
method of deduction is regulated.
Goodwill
Goodwill for tax purposes is defined as value transferred with consideration, apart
from transferred assets included in business transfer, valuated by taking into account
business premium factors of the transferor such as permission/licence, legal privileges,
geographical advantages, business secrets, credit, reputation, transaction partners,
etc.. Goodwill may be amortised over five years using the straight-line method for
taxpurposes.
Start-up expenses
Start-up expenses, such as incorporation expenses, founders salary, and registration

fees and taxes, are deductible when the expenses are actually paid.
Interest expenses
Interest incurred in the ordinary course of business is deductible as long as the related
loan is used for business purposes. There are, however, a number of exceptions to the
general rule, as follows:
If borrowings from a foreign shareholder, or from a third party under apayment
guarantee by the foreign shareholder, exceed three times the equity of the relevant
foreign shareholder, the paid interest and discount fee as to the relevant excessive
portion will be treated as a dividend payment and not allowed as adeduction.
Debenture for which the creditor is unknown.
Bonds and securities on which recipient of interest is unknown.
Construction loans and loans for the purchase of land and fixed assets up to the date
on which the assets are acquired or completed must be capitalised as a part of the
cost of the asset and depreciated over the life of the asset. Interest after the date of
completion or acquisition is deductible as incurred.
Interest on loans related to non-business purpose assets or funds loaned to
relatedparties.
In general, contingent liabilities are not deductible, except for reserves under the
following items, which are counted as losses within the tax limit:
Reserves for retirement allowance.
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Reserves for bad debts.

Liability reserves and emergency reserves prescribed in the Insurance BusinessLaw.
Reserves for non-profit organisations.
Reserves for the write-off of a compensation claim set aside by trust guarantee funds
in each business year.
The amounts enumerated below are also counted as losses in calculating income for the
business year:
The amount of gains from insurance claims used to acquire the same kinds of fixed
assets as the lost fixed assets, or to improve the damaged fixed assets within two years
after the first day of the business year following the business year in which the gains
fall.
The amount of a beneficiarys share of construction costs received by a domestic
corporation engaged in the electricity or gas business, etc., used for the acquisition of
fixed assets.
The amount of the national treasury subsidies actually used for acquisition or
improvement of fixed assets for business.
Bad debt
A doubtful accounts reserve is allowed for tax purposes at up to 1% or the previous

years ratio of actual loss from bad debts to total balance of account receivables at yearend. Actual losses on bad debts are allowed when certain legal proceedings are satisfied
or the statute of limitations has lapsed.
Although companies could set aside bad debt allowances based on reasonable estimates
under the old generally accepted accounting principles (K-GAAP), the new GAAP
for non-K-IFRS users and K-IFRS users requires objective evidence to recognise the
allowance.This stricter rule is expected to create disproportionately higher taxable
income in the first year of adoption.
In order to relieve K-IFRS users from any disproportionate burden for tax payment from
book-tax difference due to the adoption of a new accounting method or treatment, the
current tax law allows for deferral of taxable income recognition in various situations.
One such situation is the taxable income created in accounting for bad debt allowance.
This deferral is currently effective to cover a wider scope of entities over an extended
time period. For tax administration purposes, the scope of entities for deferral will cover
a domestic place of business of a foreign corporation as well as domestic companies.
Deferral will be available through 31 December 2014. The deferred income will be
added back to taxable income of the fiscal year that begins after 1 January 2015. Please
note that non-IFRS users will be excluded from the scope of eligible entities.
Donations to public interest entities, such as government authorities and social welfare
organisations, as well as donations for academic research, technical development, etc.,
are classified as Bub-jung donations. Bub-jung donations are tax-deductible at up to 50%
of the total taxable income for the concerned fiscal year after deduction of net operating
loss (NOL). Ji-jung donations to public entities prescribed by CIT Law (CITL) are also
tax-deductible at up to 10% of the total taxable income for the fiscal year after the
deduction of deductible Bub-jung donations and NOL.
The amount in excess of suchlimit may be carried over forfive years. Donations other
than the statutory donations above will not be deductible for taxpurposes.
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Korea, Republic of
Korea, Republic of
Employee remuneration
There is no statutory limit for employee remuneration, which includes salaries, wages,
stipends, bonuses, retirement payments, pensions, and meal and housing allowances,
as well as all other kinds of subsidies, payments, and compensation. Remuneration of
foreign employees is determined according to their engagement contracts.
Pension expense
For tax purposes, severance allowance may be deducted at up to 5% of the annual total
amount of wages paid. However, the accumulated amount of the severance allowance
reserve may not exceed 15% of the actual aggregate liability to employees for fiscal year
2013. This deduction limit will be reduced by 5% every year from 2013 to be phased out
in 2016. If a corporation subscribes to a corporate retirement planwith an insurance
company to cover future payments of retirement allowances, additional tax deductions
beyond the limits described above are available.
Employers hiring five or more employees are required to set aside retirement pensions
for their employees. Defined contribution (DC) and defined benefits (DB) are the
two available schemes for the retirement pension system. Under the DC scheme, the
premiums paid by the employer are deductible upon payment while deductions for the
reserve under the DB scheme are subject to a limit, similar to the severance insurance.
Payment for directors
Bonuses paid to directors in excess of the amount determined in the articles of

incorporation or at a shareholders meeting, etc. are not deductible. Also, severance
benefits paid to directors in excess of the amount prescribed in the tax law are
notdeductible.
Entertainment expenses of more than KRW 10,000 on an event basis must be supported
by corporate credit card vouchers, cash receipts, or tax invoices in order to be deductible.
In addition, the entertainment expenses in excess of the tax limit are not deductible.
The deductible limit for entertainment expenses in a business year is computed as:
an amount calculated by multiplying KRW 12 million (KRW 18 million for a SME) by
the number of months in the respective business year divided by 12, plus
an amount calculated by multiplying the amount of gross receipts for a business year
by the rates listed in the following table (in the case of receipts from transactions
between related parties, 10% of the amount calculated by multiplying the receipts by
following rates shall be applied).
Amountofgrossreceipts(KRW)
10 billion or less
Over 10 billion up to 50 billion
Greater than 50 billion
Rate
0.2%
KRW 20 million + 0.1% of the excess over KRW 10 billion
KRW60million+0.03%oftheexcess overKRW50billion
Insurance premiums
Insurance premiums paid to an insurance company are deductible if the business

enterprise is the listed beneficiary. Insurance premiums for which the beneficiary is the
employee are also deductible; however, they are treated as salaries for the employees
and are subject to WHT on earned income (this excludes the severance insurance
premium or social security taxes that are borne by employers).
Fines and penalties
Fines, penalties, and interest on underpayment of taxes are not deductible.

Korea, Republic of
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Taxes
Income taxes are generally not deductible in determining income subject to CIT.
Net operating losses (NOLs)
In general, an NOL carryover is allowed for ten years.

Generally, loss carrybacks are not allowed. However, SMEs can carry back an NOL for
oneyear.
With sufficient supporting documentation, interest, royalty, and management service

fees paid to foreign affiliates are deductible for CIT purposes.
Under the LCITA, the following conditions must be met in order for a management
service fee to be deductible:
The services must be provided based on an agreement entered into by the service
provider prior to the service transaction.
The provision of the service can be verified by a schedule of services, description of
services, description of the company providing services and its employees, detailed
explanation of expenses incurred, and other supporting documentation.
A company must be able to anticipate the companys additional profit or reduced
expense through the services provided by a foreign affiliate.
Payment for the provided services should be consistent with arms-length standards.
Group taxation
The consolidated corporate tax filing system can be adopted for a domestic corporation
in cases where two or more wholly-owned subsidiaries exist. A taxpayer may elect the
consolidated filing scheme, but it cannot be revoked for at least five years after the
election of the consolidated tax filing.
Transfer pricing
The LCITA authorises the tax authorities to adjust the transfer price based on an armslength price and to determine or recalculate a residents taxable income when the
transfer price of a Korean company and its foreign counterpart is either below or above
an arms-length price.
The LCITA lists the following methods for determining an arms-length price: the
comparable uncontrolled price (CUP) method, the resale price method, and the costplus method. Furthermore, the Decree elaborates upon the profit-split method, the
transactional net margin method (TNMM), and the Berry Ratio method as methods for
determining an arms-length price based on profits arising from controlled transactions.
The method used and the reason for adopting that particular one for an arms-length
price determination must be disclosed to the tax authorities by a taxpayer in a report
submitted along with ones annual tax return.
Thin capitalisation
In cases where a Korean company borrows from its controlling shareholders overseas, an
amount greater than three times (six times in the case of financial institutions) its equity
interest payable on the excess portion of the borrowing is characterised as dividends to
which the article on dividends in tax treaty applies and is treated as non-deductible in
computing taxable income.
1074
Korea, Republic of
Korea, Republic of
Controlled foreign corporations (CFCs)
Under the Korean CFC rule, when a Korean national directly or indirectly owns at least
10% in a foreign corporation and the foreign companys average effective income tax
rate for the three most recent consecutive years is 15% or less, the amount of retained
earnings as of the end of each business year of the CFC shall be deemed to be paid as a
dividend to the Korean national and subject to tax in Korea.
For more information on the CFC rule, see Foreign income in the Income determination
section.
Anti-tax haven rules
In cases where a Korean company invests in a company located in a tax haven, which
unreasonably has reserved profits in the controlled foreign company, the profits reserved
therein shall be treated as dividends paid out to that Korean company (individual),
despite the fact that the reserved profits are not actually distributed.
Anti-tax haven rules are intended to regulate a company that has made overseas
investments of an abnormal nature. Thus, these anti-tax haven rules apply to those
Korean companies that have invested in a company incorporated in a foreign country
with an average effective tax rate of 15% or less on taxable income for the past three
years.
However, if a company incorporated in such a tax haven country actively engages in
business operations through an office, shop, or a factory, then the anti-tax haven rules
will not apply.
Related party transactions
Under the provision of CITL, the tax authorities may recalculate the corporations
taxable income when CIT is unreasonably reduced due to transactions with related
parties. Generally, if the discrepancy between the transaction price and fair market value
exceeds 5% of the fair market value or KRW 300 million, the transaction will be subject
to this provision.

Foreign tax credit
Taxes imposed by foreign governments on income recognised by a resident taxpayer are

allowed as a credit within the limit against the income taxes to be paid in Korea, or as
deductible expenses in computing the taxable income. In general, foreign taxes will be
applied as credit rather than as a deduction. The excess foreign tax credit can be carried
forward five years.
Tax credits are generally available for qualified investment in facilities for productivity
enhancement, safety, job-creating investments, etc.
Tax credit for investment in facilities for productivity enhancement
If a resident makes an investment in facilities or equipment to increase productivity by

no later than 31 December 2014, then 3% (7% in the case of SMEs) of such investment
amount shall be deducted from CIT. The unused tax credit can be carried forward five
years.
Tax credit for investment in facilities for safety
If a resident or a domestic corporation makes an investment in a facility (excluding any

investment in used assets) for safety that is considered necessary for industrial purposes
no later than 31 December 2014, then an amount of 3% (7% in the case of SMEs)of such
Korea, Republic of
1075
Korea, Republic of
investment shall be deducted from CIT. The unused tax credit can be carried forward
five years.
Tax credit for job-creating investments
The tax credit for job-creating investments consists of a basic credit and an additional
credit. The basic credit is not available at all in the event of decreased employment by
any one person with an exception to SMEs, whichmay claim the basic credit after a
certain amount (KRW 10 million per capita) is subtracted. The basic credit includes a 2%
to 4% tax credit for a company maintaining a status quo employment and an additional
3% tax credit for new job-creating investments. The additional tax credit for job creation
does not exceed the ceilings set at KRW 10 million (KRW 15 million per employee
between the ages 15 and 29, KRW 20 million per specified occupational high school
graduate employee) multiplied by the amount of new employment in net.
Research and development (R&D) tax incentives
The STTCL provides various tax incentives to stimulate R&D activities. These include a
tax credit for research and manpower development expenses, a tax credit for technology
transfer, and tax credits for merger or acquisition of technology innovative SME.
Tax credit for development ofresearch and manpower
Companies presently claim a tax credit in relation to qualifying R&D expenditure to the
extent of either (i) 3% to 4% (8% to 15% for medium-scale companies, 25%for SMEs)
of the current R&D expenses or (ii) 40% (50% for SMEs) of the incremental portion of
the current R&D expenses over the average of the previous four years. The incremental
method can be applied only when the R&D expenses for the prior year exceed the
average R&D expenses for the previous four years. The tax credit has been extended to
include R&D in relation to core technologies as authorised by government ministries as
well as pre-designated strategic growth industries until the end of December 2015, and,
for these industries, the credit rate for the current R&D expenditure is 20% (30% for
SMEs).
Tax credit for technology transfer among SMEs (Korean patent box regime)
Tax credit and reductions have been newly introduced to facilitate the transfer of
technology between companies so as to enhance technical competencies and the
recovery of funds invested in technology more efficiently. Effective 1 January 2014, CIT
on income derived by SMEs from the transfer of patents, etc. is reduced by 50%.
Tax credit for merger or acquisition of technology innovative SME
In cases where a domestic company merges with a technology innovative SME in a

qualified manner, the merger company shall be permitted to take a 10% tax credit
with respect to the payment made in such a merger, up to the value of the acquired
technology. This 10% tax credit will be also available for a company that acquires shares
in a technology innovative SME in a qualified manner no later than the end of December
2015. In this case, if any of requirements for a qualified manner fails to be met, the
amount of tax credited will be collected. In addition, the unused tax credits are allowed
to be carried forward over the next five years.
Tax credit for investment in facilities for technology and human resources
development
A corporation purchasing facilities no later than 31 December 2015 prescribed in the

Presidential Decree with the purpose of R&D and job training is eligible for a tax credit
of up to 3% (5% for medium-scale companies, 7% for SMEs)of such investment. The
unused tax credit can be carried forward five years.
1076
Korea, Republic of
Korea, Republic of
Energy/environmental incentives
Tax credit for investment in energy-economising facilities
If a resident makes an investment (excluding any investment in used goods) not later
than 31 December 2016 in energy-economising facilities, 3% (5% for medium-scale
companies, 10% for SMEs)of such investment shall be deducted from CIT. The unused
tax credit can be carried forward five years.
Tax credit for investment in facilities for environmental protection
If a resident makes an investment (excluding any investment in used goods) in any

facility for the purpose of environmental conservation no later than 31 December 2016,
then 3% (5% for medium-scale companies, 10% for SMEs)of the investment amount
shall be deducted from CIT. The unused tax credit can be carried forward five years.
The Korean government provides various incentives and benefits for inducing foreign
investment under the Foreign Investment Promotion Law.
Foreign invested companies that engage in certain qualified high-technology businesses
can apply for 100% exemption from CIT for five years, beginning from the first year
of profitable operations (from the fifth year, if not profitable until then) and a 50%
reduction for the following two years in proportion to the foreign shareholding ratio.
An exemption from WHT on dividends, which was available for foreign investors in
the same manner as above during the same grace period, shall no longer be granted
from 1 January 2014. However, the WHT exemption on dividends already approved
will not be affected by the tax law change. In addition, the taxpayer can apply for 100%
exemption from local taxes, such as acquisition tax, registration tax, and property tax
on assets acquired for their business for five years after the business commencement
date and 50% reduction for the following two years. For local tax exemption, some local
governments grant longer exemption periods (up to 15 years) in accordance with their
local ordinances. Qualified foreign investment also can be eligible for exemption from
customs duties, VAT, and individual consumption tax on imported capital goods for the
first three years.
In addition, foreign investors satisfying specified criteria are provided with tax incentives
and other benefits for investment in specially designated areas, including foreign
investment zones (FIZs), free economic zones (FEZs), free trade zones (FTZs), and
strategic industrial complexes exclusively developed for foreign invested companies. The
tax incentives for qualifying foreign investors in FIZs are similar to those of the above
foreign invested high-tech companies. Qualifying investors in FEZs, FTZs, and strategic
industrial complexes may receive the 100% exemption from corporate or individual
income tax as well as local taxes for the first three years and 50% reduction for the next
two years. They also receive exemption from customs duties on imported goods for the
first three years.
To receive tax incentives for inbound investment, a register of foreign substantial
shareholders must be filed together with an application for tax incentives from 1 January
2014. In addition, effective 1 January 2015, foreign investment made via specific
countries shall be excluded from the exemption from corporate or individual income
tax and local taxes for inbound investment. They include those countries with which
Korea has not entered into income tax treaties (including tax information exchange
agreements [TIEAs] and investment promotion and protection agreements), such as
Botswana, Republic of Cyprus, Dominican Republic, Guatemala, Lebanon, Nauru, Niue,
Seychelles, and Trinidad and Tobago.
Korea, Republic of
1077
Korea, Republic of
Foreign direct investment (FDI) incentive limitations
The FDI credit limits incentives granted to qualified FDIs. The ceiling has been set to
encompass both investment amount and job-creation. In terms of investment amount,
the level of incentives for FDI has been reduced to 70% of the aggregated FDI amount
for companies benefiting from a seven-year incentive period (50% ceiling for companies
enjoying a five-year incentive period). In terms of job-creation, the level of incentives for
FDI has been reduced to the lower of either 20% of the aggregated FDI amount or KRW
10 million times the companys net increase in employment.
Companies that have enjoyed tax benefits based on job-creation will be subject to tax
assessment in cases where there is a net decrease in employment within the subsequent
two years in comparison to the year that the relevant tax credit was obtained.
Withholding taxes
Foreign corporations with income derived from sources in Korea are subject to CIT on
such income. If the foreign corporation has no domestic place of business in Korea, it
will be subject to tax on its Korean-source income on a withholding basis in accordance
with the tax laws and the relevant tax treaty, if applicable. Any Korean-source income
attributable to a domestic fixed place of business of a foreign corporation will be subject
to Korean CIT.
For residents of countrieshaving a tax treaty with Korea, reduced WHT rates may apply.
An application form must be submitted to the withholding agents in order to apply the
treaty rate. If a beneficiary cannot be identified in the application form, the withholding
agents should withhold the tax at the non-treaty rate.
For dividends, interest, and royalties, the WHT rates are limited as follows (as ofMarch
2014):
Recipient
Resident corporations (1)
Resident individuals (1)
Non-treaty (2)
Treaty:
Albania
Algeria
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Belarus
Belgium
Brazil
Bulgaria
Canada
Chile
Croatia
Czech Republic
1078
Korea, Republic of
Dividends (%)
0
14
Interest (%)
14/25
14/25/30
Royalties (%)
0
0
20
14/20 (36)
20 (39)
5/10 (8)
5/15 (8)
15
5/15 (8)
7
5/10 (8)
10/15 (3)
5/15 (8)
15
10
5/10 (7)
5/15 (8)
5/10 (8)
5/10 (8)
5/15 (8)
5/10 (8)
10
10
15
10
10 (37)
5
10
10
10
10/15 (5)
10
10
10/15 (31)
10
5
10
10
2/10 (15)
15
2/10 (15)
5/10 (22)
10
10
5
10
10/25 (6)
5
10
5/15 (33)
10
0
10
Korea, Republic of
Recipient
Denmark
Ecuador
Egypt
Estonia
Fiji
Finland
France
Germany
Greece
Hungary
Iceland, Republic of
India
Indonesia
Iran
Israel
Italy
Japan
Jordan
Kazakhstan
Kuwait
Kyrgyzstan
Laos
Latvia
Lithuania
Luxembourg
Malaysia
Malta
Mexico
Mongolia
Morocco
Myanmar
Nepal
Netherlands
New Zealand
Norway
Oman
Pakistan
Panama
Papua New Guinea
Peru
Philippines (2)
Poland
Portugal
Qatar
Romania
Russia
Saudi Arabia, Kingdom of
Singapore
Slovak Republic
Dividends (%)
15
5/10 (3)
10/15 (8)
5/10 (8)
10/15 (8)
10/15 (8)
10/15 (3)
5/15 (8)
5/15 (8)
5/10 (8)
5/15 (8)
15/20 (11)
10/15 (8)
10
10/15 (3)
5/10/15 (13)
10/15 (8)
5/15 (8)
10
5/15 (3)
5
5/10 (8)
5/10 (3)
5/10 (8)
5/10 (8)
10/15 (8)
10/15 (8)
5/15 (8)
0/15 (18)
5
5/10 (8)
10
5/10/15 (32)
10/15 (8)
15
15
5/10 (3)
10/12.5 (11)
5/15 (8)
15
10
10/25 (23)
5/10 (3)
10/15 (8)
10
7/10 (8)
5/10 (26)
5/10 (8)
10/15 (8)
5/10 (8)
Interest (%)
15
12
10/15 (9)
10
10
10
10
10
8
0
10
10/15 (12)
10
10
0
7.5/10 (14)
10
10
10
10
5
10
10
10
10
10
15
10
5/15 (19)
5
10
10
10
10/15 (21)
10
15
5
12.5
5
10
15
10/15 (24)
10
15
10
10
0
5
10
10
Royalties (%)
10/15 (4)
5/12 (22)
15
5/10 (33)
10
10
10
2/10 (15)
10
0
10
15
15
10
0
2/5 (15)
10
10
10
2/10 (15)
15
5/10 (33)
5
5/10 (33)
5/10 (38)
10/15 (16)
10/15 (17)
0
10
10
5/10 (20)
10/15 (4)
15
10/15 (22)
10
10/15 (22)
8
10
3/10 (33)
10
10/15 (40)
10/15 (25)
10
10
5
7/10 (22)
5
5/10 (33)
15
0/10 (34)
Korea, Republic of
1079
Korea, Republic of
Recipient
Slovenia
South Africa (2)
Spain
Sri Lanka
Sweden
Switzerland
Thailand (2)
Tunisia
Turkey
Ukraine
United Kingdom
United States (2)
Uruguay
Uzbekistan
Venezuela
Vietnam
Dividends (%)
5/15 (8)
5/15 (8)
10/15 (8)
10/15 (8)
10/15 (8)
5/15 (3)
10
15
15/20 (8)
5/15 (11)
5/10 (3)
5/15 (8)
10/15 (30)
5/15 (11)
5/15 (8)
5/10 (3)
10
Interest (%)
5
10
10
10
10/15 (10)
5/10 (19)
10/15 (27)
12
10/15 (28)
5
10
10
12
10
5
5/10 (19)
10
Royalties (%)
5
10
10
10
10/15 (22)
5
5/10/15 (35)
15
10
5
0
2/10 (15)
10/15 (29)
10
2/15 (15)
5/10 (33)
5/15 (22)
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
1080
Dividends and interest paid to resident individuals by corporations generally are subject to a 14%
WHT rate. In addition to this, there is a resident surtax of 10% on the CIT liability.
In addition to the indicated tax rate, a resident surtax is charged at a rate of 10% of the respective tax
rate.
Lower rate applies in case of equity ownership of 10% or more.
10% rate applies to royalties paid for the use of or the right associated with industrial activities.
10% rate applies if the loan period extends to seven years or more, the recipient is a financial
institution, and the loan is used for certain designated purposes.
25% rate applies to royalties associated with the use of trademarks or trademark rights.
5% rate applies in case of equity ownership of 15% or more.
10% rate applies if the term of loans exceeds three years.
10% rate applies when a recipient of interest income is a bank and income is connected with a loan
with a term in excess of seven years.
10% rate applies if a recipient is a bank.
5% rate applies if a recipient holds 10% or more ownership in a paying corporation but, even in case
of 10% or more ownership, 10% rate applies if the dividends are paid out of profits subject to tax at a
lower rate than the normal corporate tax rate of a country where a payer resides. In other cases, 15%
rate applies.
7.5% rate applies when a recipient of interest income is a bank or a financial institution.
2% rate applies to royalties paid for use of or the right to use industrial, commercial, or scientific
equipment.
10% rate applies if it is for the use of or the right to use industrial, commercial, and scientific
equipment or information.
15% rate applies if royalties are for use of or the right to use cinematography films or tapes for radio
or television broadcasting or any copyright of literary or artistic work.
0% rate applies in case of equity ownership of 10% or more.
5% rate applies if a recipient is a bank.
5% rate applies to royalties for use of copyrighted literature and music.
10% rate applies if the term of the loans exceeds seven years.
Lower rate applies if it is for the use of or the right to use a patent, trademark, design, or secret
formula, or industrial, commercial, and scientific equipment or information.
10% rate applies in cases of equity ownership of 25% or more, or dividend paid by a resident
company engaged in a preferred pioneer area and registered with the Board of Investment.
10% rate applies in cases where the interest is paid in respect of public offering of bonds,
debentures, or similar obligations or interest paid by a company that is a resident of the Philippines,
registered with the Board of Investment, and engaged in preferred pioneer areas of investment under
the investment incentive laws.
10% rate applies in case of royalties paid by a company that is a resident of the Philippines,
registered with the Board of Investment, and engaged in preferred pioneer areas of investment under
the investment incentives laws.
5% rate applies if a recipient holds 30% or more of equity interest in the amount of at least 100,000
United States dollars (USD).
10% rate applies if a beneficial owner of the income is a financial institution (including insurance
company) or resident of Thailand who is paid with respect to indebtedness arising as a consequence
Korea, Republic of
Korea, Republic of
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
of a sale on credit by a resident of Thailand of any equipment, merchandise, or services, except

where the sale was between persons not dealing with each other at arms length.
10% rate applies if the term of the loan exceeds two years.
10% rate applies to royalties for use of copyrighted literature, music, films, and television or radio
broadcasts. Otherwise, 15% rate applies.
10% rate applies if equity ownership is 10% or more and not more than 25% of the gross income of
a paying corporation for a preceding tax year consists of interest or dividends.
10% rate applies when a recipient of interest income is a bank or an insurance company.
5% rate applies when a recipient holds 25% or more of equity interest, and 10%, when a recipient
holds 10% or more of equity interest. In other cases, 15% rate applies.
5% rate applies to royalties paid for the use of or the right associated with industrial, commercial, or
0% rate applies to royalties paid for the use of academic rights.
5% rate applies to royalties paid for the use of or the right associated with any copyright of literary,
artistic, or scientific work, including software, and motion pictures and works on film, tape, or other
means of reproduction for use in connection with radio or television broadcasting. 10% rate applies
to royalties paid for the use of or the right to use a patent, trademark, design or model, plan, secret
formula, or process. 15% rate applies to royalties paid for the use of or the right to use industrial,
commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific
experience.
14% rate applies if interest arises from bonds issued by a Korean company or government bodies.
0% rate applies if a recipient of interest income is government, central bank, etc.
5% rate applies to royalties paid for the use of industrial, commercial, or scientific equipment.
Fees arising from rental of industrial, commercial, scientific equipment, etc. are classified as rental
income subject to 2% WHT.
10% rate applies to royalties paid for technical support.
If a foreign company is located in a foreign jurisdiction designated as a tax haven by the

Minister of Strategy & Finance, any Korean-source income of such foreign company will
be subject to the domestic withholding rate of 20% regardless of whether or not the
foreign company is resident of a treaty country. Currently, only Labuan is designated as
such a jurisdiction. The foreign company may claim a refund of any excess WHT paid
within three years, if it proves to the Korean Tax Office that it is entitled to the reduced
treaty rates as the substantive and beneficial owner of the income. Alternatively, a
foreign company may attempt to seek a pre-approval in order to have the treaty benefits
apply upfront by making an application to the Commissioner of Taxation.
Tax administration
Taxable period
In Korea, the taxable year is on a fiscal-year basis as elected by the taxpayer. However, it
cannot exceed 12 months.
Tax returns
A corporation must file an interim tax return with due payment for the first six months
of the fiscal year, and the filing/payment must be made within two months after the end
of the interim six-month period.
A corporation must file an annual tax return with due payment for the fiscal year, and
the filing/payment must be made within three months from the end of the fiscal year.
In case the external audit is not completed and the financial statements are not fixed, a
corporation can request for extension of tax filing by one month with delinquent interest
of 10.95% per annum.
Payment of tax
Where the tax amount to be paid by a resident corporation is in excess of KRW 10

million, part of the tax amount to be paid may be paid in instalments within one month
of the date of the expiration of the payment period (two months for SMEs).
Where the tax amount to be paid is KRW 20 million or less, the excess of KRW 10 million
may be paid in instalments; and where the tax amount to be paid exceeds KRW 20
million, 50% or less of the tax amount may be paid in instalments.
Korea, Republic of
1081
Korea, Republic of
Functional currency
In instances where the taxpayer adopts to use a foreign currency as its functional
currency, there are three ways to calculate the CIT base: (i) calculate the tax base
using the financial statements in functional currency and translate it into Korean won;
(ii) prepare the financial statements in Korean won and calculate the tax base; or (iii)
translate the financial statements into Korean won and calculate the tax base. Once
elected, the same method must be consistently used.
Tax audit process
For large companies whose sales revenue exceeds KRW 300 billion, a tax audit will be
conducted every five years. Other companies are selected by certain standards, which
were announced by the National Tax Service (NTS).
The statute of limitations is generally five years from the statutory filing due date of
the annual CIT return. However, the statute of limitations is extended further in the
following cases:
Ten years if a taxpayer evades taxes by fraud or unjustifiable means.
Seven years if a taxpayer does not file its tax base by the statutory due date.
Along with the extension of the NOL carryforward period from five years to ten
years, when a taxpayer uses the NOL incurred more than five years ago, the statute of
limitation shall be one year from the filing due date of the fiscal year when the NOL
isutilised.
Period of extinctive prescription for collection of national taxes
The period of extinctive prescription for collection of national taxes is five years (ten
years for national tax payable worth KRW 500 million or more) from the date on which
the governments right to collect a national tax becomes exercisable.
The recent topics of focus for tax authorities are as follows:

Increased scrutiny for tax evasion of the underground economythrough investigating
financial information available under the revised Financial Information Unit (FIU)
Act.
Increased scrutiny for the prevention of offshore tax evasion through aggressive tax
planning.
Gift tax imposed on a transaction giving unfair share of works to an affiliated
company that is deemed a gift to a controlling shareholder.
Prevention of embezzlement through fictitious expenses or tax evasion using
subcontractors.
Deductibility of management service fees or allocated expenses incurred by
foreignaffiliates.
International inter-company transactions and transfer pricing.
Other issues
Exchange controls
Most transactions involving foreign exchange generally do not require approval or

reporting under the Foreign Exchange Transaction Act (FETA), with a few exceptions
as prescribed by the FETA. Receipt of foreign exchange from outside Korea is freely
permitted, and payments to foreign companies are not regulated. Most restrictions on
Korean companies foreign currency transactions with foreigners have been removed.
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However, the government continues to monitor certain flows of foreign currency in an
attempt to minimise incoming speculative currency and outgoing capital flight.
Ever since Koreas currency crisis, most restrictions on short-term as well as mid and
long-term borrowings from overseas by corporations have been removed. Most foreign
currency loans are allowed and are subject to reporting to a foreign exchange bank.
There are no specific regulations, except the reporting requirements, on borrowings
from overseas by foreign investment companies in Korea.
The following types of commercial entities are permitted in Korea:

Corporation (Hoesa): There are five classes of corporation, outlined as follows:
Limited corporation:
Jusik Hoesa (JH): A corporation incorporated by one or more promoters, with
each shareholders liability limited to the amount of contributed capital. This
type of entity is the most commonly used in Korea.
Yuhan Hoesa (YH): A corporation incorporated by one or more members, with
each members liability limited to the amount of that members contribution to
the corporation.
Yuhan Chegim Hoesa: A corporation incorporated by one or more members,
with each members liability limited to the amount of that members capital
contribution. With significantly fewer restrictions for establishment and
operation, Yuhan Chegim Hoesa provides more flexibility and self-control than
YH.
Unlimited corporation:
Hapmyong Hoesa: A corporation incorporated jointly by more than two
members who are responsible for corporate obligations if the assets of the
corporation are insufficient to fully satisfy those obligations.
Hapja Hoesa: A corporation composed of one or more partners who have
unlimited liability and one or more partners with limited liability.
Partnership: Hapja Johap is a legal form of partnership allowed under the
Commercial Code.
Joint venture: A joint venture is generally established as a domestically incorporated
corporation whose shareholders have limited liability regarding the obligations of the
corporation under the Commercial Code.
Branch: A foreign corporation can perform its business operation in Korea by setting
up a taxable presence in the form of a branch office. The branch office can be
classified as a corporation and be taxable under the Corporate Income Tax Law if one
of the following conditions is met; otherwise, the foreign entity shall be classified as
an individual and be subject to the Individual Income Tax Law:
The foreign entity is a corporation under the laws of ones home country.
The foreign entity is composed of only limited liability members.
The foreign entity has an independent ownership of assets or separate right of
lawsuit from its members.
An entity similar to the foreign entity is classified as a corporation under Korean
law.
Liaison office: A foreign corporation can establish a liaison office, which is not
allowed to execute income-generating business activities in Korea.
Sole proprietorship: Sole proprietorships are not a legal form of entity in Korea.
Guidance on taxation of an off-shore partnership
Under the CITL, a foreign corporation is defined as a corporation that has a head office
or principal office in a foreign country (only if the foreign corporation shall not have
the place of effective management in Korea). Based on the nature of business, an offshore partnership would be categorised as a foreign corporation if one of the following
conditions is met:
Korea, Republic of
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Has a legal personality.
Is only comprised of partners with limited liability.
Has legal rights and liabilities that are distinct from its members, including taking
possession of assets or having the legal capacity to be a party against a lawsuit.
The same or the most similar kind of domestic business entity constitutes a
corporation under Korean laws.
Off-shore partnerships with a legal personality like corporate entities prescribed in the
Korean Commercial Act, such as stock corporations (Chusik Hoesa), limited corporations
(Yuhan Hoesa, Yuhan Chegim Hoesa), and unlimited corporations (Hapmyong Hoesa,
Hapja Hoesa), are treated as foreign corporations for Korean CIT purposes. Also, offshore partnerships having the nature of limited corporations prescribed in the Korean
Commercial Act, such as stock corporations (Chusik Hoesa) and limited corporations
(Yuhan Hoesa, Yuhan Chegim Hoesa), are treated as foreign corporations.
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Kuwait
PwC contact
Sherif Shawki Abdel-Fattah
PricewaterhouseCoopers Al-Shatti & Co.
Arraya Tower II, 23rd - 24th Floor
Al-Shuhada Street
Sharq
Kuwait
Tel: +965 2227 5775
Commercial developments
The new commercial law
The Ministry of Commerce in Kuwait has issued the new Companies Law No. 25 of 2012
(Company Law), whichreplaced the Commercial Companies Law No.15 of 1960. The
new law has been drafted to encourage investment in Kuwait and introduces a raft of
new concepts and principles set to shape the way commercial entities operate in Kuwait.
Foreign Direct Investment (FDI)- Change in FDI Law
On 16 June 2013, Law No. 116 of 2013 regarding the Promotion of Direct Investment
in the State of Kuwait (the New Law) was published in the Kuwait Official Gazette. The
New Law, which will be effective six months from the date of issuance (i.e. December
2013), replaces Law No. 8 of 2001 regarding the Regulation of Direct Investment of
Foreign Capital in the State of Kuwait. The Ministry of Commerce was expected to issue
Executive Regulations to this Law within six months following the issuance of the New
Law. However, to date, the Executive Regulations are not yet issued.
Tax developments
The tax department at the Ministry of Finance issued Administrative Order 875 of
2013 on 12 December 2013 through which it has issued new Executive Rules (ERs) and
regulations for the implementation of Kuwaits Decree No. 3 of 1955 as amended by Law
No. 2 of 2008.
These ERs are effective for fiscal periods ending on 31 December 2013 and thereafter.
There have been significant changes in certain ERs, which will have an impact on the tax
filings, inspections, and assessments for a number of taxpayers going forward.
The Department of Inspection and Tax claims (DIT) have issued Circular No. 1 of 2014
(CR 1), which supersedes Circular No. 1 of 2013 and sets out new requirements for the
submission of tax declarations and compliance process.
The DIT now requires more disclosures, analysis, and information to be submitted
along with the tax declaration. Furthermore, the DIT requires taxpayers filing on an
actual basis to submit a report with the DIT applying the same adjustments to costs and
revenue as those previously made by the DIT through the latest assessment within three
months following the submission of the tax declaration.
Although the new guidelines may streamline the filing and assessment procedures,
we expect these changes to increase the amount of coordination and effort required
to comply with the new regulations and guidelines and to impact the way we handle
disputes and the inspection process with the DIT. We further expect the above
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procedures to increase tax collection by the DIT and to reduce the DIT officials efforts
throughout the compliance and inspection process.
This circular is applicable for all tax declarations to be submitted with the DIT as of
6 January 2014. However, CR 1 specifically states that the new regulations apply to
companies that have not filed tax declarations for the years 2010 or 2011 (where a final
tax assessment has been issued for 2009).
Value-added Tax (VAT) Law
The Ministry of Finance (MOF) in Kuwait is currently studying the implementation

of theVAT Law in Kuwait. Substantial steps, studies, training sessions, and internal
meetings within the MOF have been conducted. It is our understanding that VAT Law in
Kuwait would be in line with the Master Framework Agreement to be signed and agreed
by all Gulf Cooperation Council (GCC) states, and it is anticipated that 5% VAT may
apply to most goods and services.
While it was the intention of the government to introduce VAT effective from 2014, in
view of the Arab Spring and domestic political issues, it is our understanding that this
project may be delayed until 2016 or beyond.
Tax treaties
Kuwait has recently ratified the treaties for avoidance of double taxation with Japan,
Spain, and Ireland.
The Kuwait-Japan Treaty is effective from 1 January 2011, the Kuwait-Spain Treaty is
effective from 19 July 2013, and the Kuwait-Ireland Treaty is effective from 1 January
2014.

Kuwait does not impose income tax on companies wholly owned by the nationals of
Kuwait or other GCC countries, including Bahrain, Oman, Qatar, Saudi Arabia, and the
United Arab Emirates. However, GCC companies with foreign ownership are subject
to taxation to the extent of the foreign ownership. Income tax is imposed only on the
profits and capital gains of foreign corporate bodies conducting business or trade in
Kuwait, directly or through an agent.
Income earned from activities in Kuwait shall be considered subject to tax in Kuwait. In
cases where a contract involves the performance of work both inside and outside Kuwait,
the entire revenue from the contract must be reported for tax in Kuwait, including the
work carried out outside Kuwait. Please refer to the Income determination section for more
information on income that is subject to tax in Kuwait.
The current tax rate in Kuwait is a flat rate of 15%.
Foreign companies carrying on trade or business in the offshore area of the partitioned
neutral zone under the control and administration of Saudi Arabia are subject to tax in
Kuwait on 50% of taxable profit under the law.
Zakat
Zakat is imposed on all publicly traded and closed Kuwaiti shareholding companies at a
rate of 1% of the companies net profits.
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Contribution to the Kuwait Foundation for the Advancement of Sciences
(KFAS)
All Kuwaiti shareholding companies are required to pay 1% of their net profits as per
their financial statements, after their transfer to the statutory reserve and the offset of
loss carryforwards, to the KFAS, which supports scientific progress.
Corporate residence
A foreign corporate body is any association formed and registered under the law of any
country or state other than Kuwait that is registered as having a legal existence entirely
separate from that of its individual members. No Kuwait-registered company is subject
to income tax. However, any foreign corporate body that is a shareholder in a Kuwaitregistered company undertaking business in Kuwait is subject to tax (see the Taxes on
corporate income section). For the purposes of this law, GCC residents and entities wholly
owned by GCC residents are treated in the same manner as Kuwaiti business entities.
The interpretation and application of the tax laws in Kuwait is usually not consistent
with internationals standards, and the taxing provisions are usually subjected to the
widest possible interpretation by the tax department to tax all income from Kuwaiti
sources. An insignificant presence of employees or short-term visits to Kuwait by the
representatives of a company may render the entire revenue from the transactions as
taxable in Kuwait. Full value of the contract, including the value of work performed
outside Kuwait, is subject to tax in Kuwait.
Other taxes
There is currently no VAT system in Kuwait.
Customs tariffs
The GCC states have approved a unified customs tariff of 5% on cost, insurance, and
freight (CIF) invoice price, subject to certain exceptions. A higher tariff is imposed on
imports of tobacco and its derivatives and other products as notified.
Excise taxes
There are no excise taxes in Kuwait.
Property taxes
There are no property taxes in Kuwait.
Transfer taxes
There are no transfer taxes (e.g. stamp duty, real estate) in Kuwait.
National Labour Support Tax (NLST)
The purpose of the NLST law is to encourage the national labour force to work in the
private sector by closing the gap in salaries and benefits between public and private
sectors.
As per the law, Kuwaiti companies listed in the Kuwait Stock Exchange (KSE) are
required to pay an employment tax of 2.5% of the companys net annual profits.
There are no social security obligations for expatriate workers. However, for foreign
employees, it is generally necessary to make terminal indemnity payments calculated
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at 15 days pay-per-year for the first three years of service and 2/3 months pay-per-year
thereafter.
For Kuwaiti employees, contributions are payable monthly by both the employer and
employee under the Social Security Law. The employers contribution is 11.5% and the
employees is 8% of monthly salary, up to a ceiling of 2,750 Kuwaiti dinars (KWD) per
month. Benefits provided include pensions on retirement and allowances for disability,
sickness, anddeath.
Branch income
Tax rates on branch profits are the same as on corporate profits.
Income tax is imposed on the profit of a business in Kuwait as calculated by the normal
commercial criteria, using generally accepted accounting principles (GAAP), including
the accrual basis. Note that provisions, as opposed to accruals, are not deductible for tax
purposes. In addition, for contract accounting, revenue is recognised by applying the
percentage of completion method.
Article 2 of the amended tax law provides that income earned from the following
activities in Kuwait shall be considered subject to tax in Kuwait:
Any activities or business carried out either entirely or partially in Kuwait, whether
the contract has been signed inside or outside Kuwait, as well as any income resulting
from supply or sale of goods, or from providing services.
The amounts collected from the sale, rent, or granting of a franchise to utilise any
trademarks, design, patents, copyright, or other moral rights, or those related to
intellectual property rights for use of rights to publish literary, arts, or scientific works
of any form.
Commission earned or resulting from agreements of representation or commercial
mediation, whether such commissions are in cash or in kind.
Having permanent office in Kuwait where the sale and purchase contracts are signed
and/or where business activities are performed.
Profits resulting from the following:
Any industrial or commercial activity in Kuwait.
Disposal of assets, either through the sale of the asset, part of the asset, the
transfer of the assets ownership to others, or any other form of disposal, including
the disposal of shares in a company whose assets mainly consist of non-movable
capital existing in Kuwait.
Granting loans in Kuwait.
Purchase and sale of property, goods, or related rights in Kuwait, whether such
rights are related to monetary assets or moral rights such as mortgage and
franchise rights.
Lease of property used in Kuwait.
Providing services, including profits from management, technical, and consultancy
services.
Carrying out trading activities in the KSE, whether directly or through portfolios
or investment funds.
Inventory valuation
Inventory is normally valued at the lower of cost or net realisable value, on a first in first
out (FIFO) or average basis.
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Capital gains
Capital gains on the sale of assets and shares by foreign shareholders are treated as
normal business profits and are subject to tax at a 15% rate. The tax law provides for
a tax exemption for profits generated from dealing in securities on the KSE, whether
directly or through investmentportfolios.
Dividend income
Treatment of dividends is not specifically addressed in the amended tax law or in its
bylaws. The bylaws to the amended tax law, however, require investment companies or
banks that manage portfolios, funds, or act as custodians of shares for foreign entities
to deduct corporate tax due from payments due to foreign investors. Tax payment
should be made within 30 days from the date of the deduction of tax, together with a list
showing names of the foreign entities and the amount withheld from each.
Under the original tax law, no tax was imposed on dividends paid to foreign
shareholders by Kuwaiti companies.
Interest income
In principle, tax is levied on the foreign companys share of the profits (whether or not
distributed by the Kuwaiti company) plus any amounts receivable for any other income
in Kuwait (e.g. interest, royalties, technical services, and management fees). However,
the Kuwait tax law will still subject the interest received from a Kuwaiti source to tax in
Kuwait, whether this interest is the only source of income for the foreign entity in Kuwait
or the foreign entity has more sources of income in Kuwait than the interest income.
Foreign currency exchange rates and related profits and losses
The tax treatment for realised and unrealised losses and gains related to foreign
currency transactions are as follows:
Unrealised foreign exchange gains are required to be reported in the tax declaration.
However, unrealised gains may be excluded from taxable income for calculating the
tax due for the fiscal year.
Realised foreign exchange gains are taxable in Kuwait and therefore added to
calculate taxable profits.
Unrealised losses are not considered as tax deductible costs and therefore excluded
for calculating taxable profits.
Realised losses may be claimed as tax deductible costs, provided such losses are
supported by adequate supporting information and documents.
Exempt income
The following sources of income are exempt from tax in Kuwait:

Kuwaiti merchants purchasing, transporting, and selling goods imported on their
own account where the foreign supplier has not been involved in Kuwaitoperations.
Profits of a corporate body generated from dealing in securities listed in the KSE,
whether such activities are carried out directly or through investment portfolios
orfunds.
Foreign income
The Kuwait tax law does not clearly state the tax treatment of foreign income. Such
income is currently treated on a case-by-case basis.
Deductions
For expenses to be deductible, they must be incurred in the generation of income in
Kuwait. Such expenses must be supported by adequate documentary evidence.
Kuwait
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Depreciation
Depreciation is taken on a straight-line basis at specified rates. However, within 90

days prior to submission of the tax declaration, the taxpayer may request that the tax
department calculate the depreciation using a different method than the straight-line
method. The tax department shall accept this request if it is based on a reasonable basis
in accordance with the tax accounting principles and rules.
The principal depreciation rates are specified in the law, as follows:
Type of fixed asset
Buildings
Pre-fabricated buildings, furniture, and office equipment
Electronics and electrical equipment
Transportation and freight vehicles (trucks)
Tools and equipment
Cars and buses
Drilling equipment
Software
Computer equipment and accessories

4
15
15
15
20
20
25
25
33.3
Goodwill
In accordance with Executive Rule No. 30, amortisation of incorporated body goodwill is
not allowed as a tax deductible expense.
Start-up expenses
Expenses incurred prior to signing of the contract are not allowed as tax deductible
costs.
Interest expenses
Interest expenses are deductible if they are related to operations in Kuwait and are paid
to a local bank.
Bad debt
Bad debt is deductible if related to operations in Kuwait and final resolution from the
court is available.
Grants, donations, and subsidies paid to licensed Kuwaiti public or private agencies are
deductible.
Fines and penalties
Taxes
Taxes and fees, except income tax, are deductible in Kuwait.
Subcontract costs
A subcontractor is any third party, provider, or beneficiary that in any way executes
a portion of the contract or any phase thereof and is responsible for that portion or stage.
As per the Executive Rule No. 28, subcontract costs are deductible if the following
conditions are fulfilled:
The work performed by the subcontractor is related to the main contract.
The cost of the subcontractor works does not exceed revenues for such works.
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The necessary documents (e.g. the contract, invoices, and settlement documents) are
available.
In the event that the incorporated body implementing the contract sells or assigns it
to the subcontractor or any other party, official written approval from the contracting
body is provided.
In the event that the subcontractor sells or assigns the contract to another
subcontractor, official written approval from the contracting body and the
incorporated body implementing the contract is provided.
During inspection, the tax department shall disallow the amounts paid to subcontractors
if the incorporated body does not notify the tax department of the subcontractors or
does not withhold 5% of the contract value signed with the subcontractor as income tax
retention.
Work in progress
As per the new executive rules released late in 2013, the incorporated body shall be
entitled to carry forward costs of works whose execution has not been completed by the
incorporated body at the end of the financial year to the next year for ongoing contracts
whose revenues can not be reliably measured or for which revenues are estimated,
provided that such revenue should not be less than the cost incurred for such works.
As per the amended tax law, losses may be carried forward for a maximum of three
years, provided that the following situations do not arise in the fiscal period following
the period in which the loss was recorded:
The tax declaration does not include any revenue from the business activities of the
taxpayer in Kuwait.
Change in the legal structure of the taxpayer.
Merger of the taxpayer with another entity.
Liquidation or ceasing of the activities of the taxpayer in Kuwait.
Please note that losses cannot be carried back in Kuwait.
Head office expenses/payments to foreign affiliates
The deduction of head office expenses (the overhead or the indirect expenses) is limited
to 1.5% of the companys Kuwait revenue after deducting the subcontractors shares (if
any).
The direct costs allocated by the head office (e.g. supply of goods, design and
consultancy costs) are regulated as follows.
For goods costs incurred outside Kuwait:
Work conducted by
Head office
Affiliated companies
Third parties
Maximum allowable costs as a percentage of revenue

85%
90%
95%
For design costs incurred outside Kuwait:

Work conducted by
Head office
Third parties

75%
80%
85%
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For consultancy costs incurred outside Kuwait:
Work conducted by
Head office
Third parties

70%
75%
80%
In case there is no separate revenue for the consultancy, design, or goods work, although
the nature of the contract requires the existence of consultancy work, the following
formula shall be applied:
Consultancy, design, or goods revenue = (consultancy, design, or goods costs / total
direct costs) xcontract revenue
Group taxation
If a foreign company conducts more than one business activity in Kuwait, one tax
declaration aggregating the income from all activities is required to be submitted in
Kuwait. In addition, in the case where two affiliates are involved in similar lines of
business or work on the same project, their taxable results may be aggregated for the
assessment of tax by the DIT.
Transfer pricing
Please refer to Head office expenses/payments to foreign affiliates in the Deductions section.
Thin capitalisation
Executive Rule No. 38 deals with the tax treatment of interest and letters of credit.
Through this rule, the DIT will accept the interest paid by a company, provided it is fully
supported, paid to a financial institution, and related to the Kuwait operations. However,
the tax law provides the DIT the right to determine the proper tax treatment on a caseby-case basis (if required).

Foreign tax credit
Foreign taxes paid to a country with which Kuwait has a treaty for avoidance of double
taxation may be eligible for credit up to the maximum of the Kuwaiti tax that would have
been payable on such income.
Leasing and Investment Companies Law No. 12 of 1998
Leasing and Investment Companies Law No. 12 of 1998 allows the formation of
investment and leasing companies having their principal place of business in Kuwait,
with Kuwaiti or foreign shareholders. The law grants a five-year tax holiday to nonKuwaiti founders and shareholders of such companies, beginning on the date of
establishment of the companies.
Foreign Direct Investment Law No.116 of 2013
Withenactment of the new FDI law, a new public authority (the Kuwait Direct
Investment Promotion Authority) will now be formed to take over the roles and the
responsibilities of the Kuwait Foreign Investment Bureau.
The new law gives several incentives and flexibility, including:
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More efficiency within the process by introducing a new public authority, which will
be responsible for determining, evaluating, and granting the licence and approval for
foreign companies operating in Kuwait (compared to the old committee and Council
of Ministers).
More flexibility by allowing foreign companies to have the eligibility to structure and
operate through a branch and representative offices in Kuwait.
The issuance and amendments made to the investment law, as well as the incentives
granted to foreign investors in Kuwait, shall be applicable to activities within specific
economic sectors, including all industries with the exception of oil and gas operations.
Kuwait Free Trade Zone
Businesses set up in the Kuwait Free Trade Zone for carrying on specified operations are
exempt from taxes on operations conducted in the zone. Foreign entities can own 100%
of such businesses.
Build, operate, and transfer (BOT)
Kuwait has begun to use the BOT method in respect of some large infrastructure
projects. Tax and tariff concessions may be built into a BOT contract.
Circular No. 50 of 2002
As per Circular No. 50 of 2002 issued by the DIT regarding treatment of exempted
companies under tax laws and/or other special laws and/or tax treaty, exempted
companies shall comply with the provisions of submission of tax declaration, inspection,
and assessment procedures like other companies in order to be eligible for exemption.
Some of the privileges under this law include:
Exemption from income tax or any other taxes for a period of ten years from the
commencing of the actual operations of the enterprise.
Benefits under double taxation agreements.
Benefits under investment encouragement and protection agreements.
Total or partial exemption from customs duties on imports.
Recruitment of required foreign labour.
Allotment of land and real estate.
Withholding taxes
Apart from the withholding tax (WHT) on dividends arising from trading in the
KSE, there are no other WHTs. However, all government bodies and private entities
are required to retain the final payment due to a contractor or subcontractor until
presentation of a tax clearance certificate from the MOF confirming that the respective
company has settled all of its tax liabilities. The final payment should not be less than 5%
of the total contract value.
Tax treaties
Kuwait has entered into tax treaties with several countries for the avoidance of double
taxation. Treaties with several other countries are at various stages of negotiation or
ratification.
However, little experience has been gained in Kuwait regarding the application of tax
treaties. As a result, disputes about the interpretation of various clauses in tax treaties
between taxpayers and the DIT are not uncommon. Disputes with the DIT regarding tax
treaties normally arise with respect to the following issues:
Existence of a PE.
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Income attributable to a PE.
Tax deductibility of costs incurred outside Kuwait.
The domestic tax law in Kuwait does not provide for WHTs. As a result, it is not yet
known how the Kuwaiti government will apply the WHT procedures included in the
treaties listed in the table below. The WHT rates listed in the table are for illustrative
purposes only.
Recipient
Treaty:
Austria
Belarus
Belgium
Bulgaria
Canada
China
Croatia
Cyprus
Czech Republic
Ethiopia
France
Germany
Hungary
India
Indonesia
Ireland
Italy
Japan
Jordan
Korea
Lebanon
Malta
Mauritius
Mongolia
Netherlands
Pakistan
Poland
Romania
Russian Federation
Singapore
South Africa
Spain
Sri Lanka
Sudan
Switzerland
Syria
Tunisia
Turkey
Ukraine
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Dividends (%)
0
Interest (%)
0
Royalties (%)
0
0
0/5 (3)
10
0/5 (10)
5/15 (13)
0/5 (1)
5/10 (12)
10
0/5 (10)
0/5 (3)
0
5/15 (5)
0
10 (14)
0/10 (3)
0
5
5/10
0/5 (3)
10
0
10/15 (4)
0
0/5 (8)
0/10 (9)
10
0/5 (10)
1
0/5 (3)
0
0
0/5
5/10
0/5 (8)
15
0
0/10 (3)
10
5
0
0/5 (3)
0
0/5 (6)
10
0/5 (1)
10
0/10 (2)
0
0/5 (2)
0
0
0
10 (14)
0/5 (2)
0
0
0/10
0/5 (2)
10
0
0
0/5 (6)
0/5 (8)
0
0/10 (7)
0/5 (10)
1
0
0/7 (2)
0
0
10
0/5 (8)
10
0/10 (11)
0/2.5 (2)
10
0
10
10
10
10
10
10
10
5
10
30
0
10
10
10
20
5
10
10
30
15
30
10
10
10
5
10
15
20
10
10
0
0/5
20
10
10
20
5
10
10
Kuwait
Recipient
United Kingdom
Dividends (%)
5/15 (5)
Interest (%)
0
Royalties (%)
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
The rate is 0% for amounts paid to a company of which the government owns at least 20% of the
equity.
The rate is 0% for interest paid to the government of the other contracting state. Under the Ethiopia
treaty, the rate is also 0% for the interest paid to entities in which the government owns a specified
percentage of the equity and for interest paid on loans guaranteed by the government.
The rate is 0% for dividends and interest paid to the government of the other contracting state. Under
the Ethiopia treaty, the rate is also 0% for dividends paid to entities in which the government owns a
specified percentage of the equity.
The rate is 10% for dividends paid to the government of Kuwait or any of the institutions or any
intergovernmental entities. The rate is 15% for other dividends.
The 5% rate applies if the recipient of the dividends owns, directly or indirectly, at least 10% of the
The rate is increased to 5% if the beneficial owner of the interest carries on business in the other
contracting state through a PE and the debt on which the interest is paid is connected to such PE.
The rate is 0% for amounts paid to the government of the other contracting state and to entities of
which the government owns at least 51% of the paid-up capital.
For dividends and interest, the rate is 0% if the payments are made to the government or a
governmental institution of the other contracting state, or to a company that is a resident of the other
contracting state and is controlled by, or at least 49% of the capital is owned, directly or indirectly,
by, the government or a governmental institution. A 0% rate also applies to interest arising on loans
guaranteed by the government of the other contracting state or by a governmental institution or other
governmental entity of the other contractingstate.
A 0% rate applies if the beneficial owner of the dividends is a company that holds directly at least
10% of the capital of the company paying the dividends.
The rate is 0% if the payments are made to the government or a governmental institution of the other
contracting state, or to a company that is resident of the other contracting state and is controlled by,
or at least 25% of the capital is owned, directly or indirectly, by, the government or a governmental
institution of the contracting state.
The rate is 0% if the beneficial owner of the interest is a resident in the other contracting state and
the loan is secured or financed, directly or indirectly, by a financial entity or other local body wholly
owned by the government of the other contracting state.
The 5% rate applies if the recipient of the dividends owns, directly or indirectly, at least 25% of the
The rate is 5% if the beneficial owner of the dividends is a company that owns 10% or more of the
issued and outstanding voting or 25% or more of the value of all of the issued and outstanding
shares. The 15% rate applies to other dividends.
Dividends or interest paid by a company that is resident of a contracting state is not taxable in that
contracting state if the beneficial owner of the dividends or interest is one of thefollowing:
The government.
A political subdivision or a local authority of the other contracting state.
The Central Bank of the other contracting state.
Other governmental agencies or governmental financial institutions as may be specified and
agreed to in an exchange of notes between the competent authorities of the contractingstate.
Tax administration
Taxable period
Tax is imposed on profits arising in a taxable period, which is defined as the accounting
period of the taxpayer and further assumed to be the calendar year. However, the DIT
may agree to a written request from the taxpayer to change the year-end to a date other
than 31 December. Also, at the taxpayers request, the DIT may agree to extend the
accounting period, provided it does not exceed 18 months.
Tax returns
The taxpayer must submit a tax return, based on the taxpayers books of account, within
three months and 15 days of the end of the taxable period. A foreign entity can request
an extension of up to 30 days for filing the tax declaration.The maximum extension in
time to be granted will be 60 days. If such an extension is granted, no tax payment is
necessary until the tax declaration is filed, and payment must then be in one lump sum.
The taxpayer must keep in Kuwait certain accounting records, which are subject to
inspection by the tax departments officials. Accounting records may be in English and
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Kuwait
may be in a computerised system used to prepare financial statements, provided that the
system includes the required records and the tax department is previouslyinformed.
The tax return should be supported by the following:

Audited balance sheet and profit-and-loss account for the period.

Detailed list of fixed assets (e.g. additions, disposals).
List of inventory (e.g. quantities and values).
List of subcontractors and the latest payments to them.
Copies of current contracts and a statement of income and expenditure for each.
Trial balance, forming the basis of the accounts.
Last payment certificate from the client.
Insurance companies must attach to the Public Budget and the tax declaration
a detailed statement with the reinsured documents and the related terms
andconditions.
As a general rule, an assessment is finalised only after inspection of records by the

tax department. As indicated above, proper documentation must be kept to support
expenditure and to avoid disallowances at the time of tax inspection. If support is
considered inadequate, the assessment is apt to be made on the basis of deemed
profitability. This is computed as a percentage of turnover and is fixed arbitrarily,
depending on the nature of the taxpayers business.
Payment of tax
Tax is payable in four equal instalments on the 15th day of the fourth, sixth, ninth, and
12th months following the end of the tax period. If an extension is approved by the DIT,
all of the tax is payable upon the expiration date of the extension. Failure to file or pay
the tax on time attracts a penalty of 1% of the tax liability for every 30 days of delay or
part thereof.
Objection process
If a company disagrees with an assessment issued by the DIT, the company should
submit an objection within 60 days from the date of the assessment. The DIT is required
to resolve the objection within 90 days of the filing of the objection, after which a revised
tax assessment is issued by the DIT. Upon issuance of a revised tax assessment, any
additional tax is payable within 30 days. If the DIT issues no response within 90 days of
filing the objection, this implies that the taxpayers objection has been rejected.
Appeals process
In case the objection is rejected or the taxpayer is still not satisfied with the revised
tax assessment, the company may contest the matter further with the Tax Appeals
Committee (TAC) by submitting a letter of appeal within 30 days from the date of the
objection response or 30 days from the expiry of the 90 days following submission of an
objection if no response is provided by the DIT.
The matter is then resolved through appeal hearings, and a final revised assessment is
issued based on the decision of the TAC. Tax payable per the revised assessment must
then be settled within 30 days from the date of issuance of the revised assessment.
Failure to do so results in a delay penalty of 1% of the amount of the tax due per the final
assessment for each period of 30 days or part thereof of the delay.
Law No. 2 of 2008 introduced a statute of limitation period of five years into the tax
law. The prior Kuwait tax law did not provide a statute of limitations for tax. However,
under Article No. 441 of the Kuwait Civil Law, any claims for taxes due to Kuwait or
applications for tax refunds may not be made after the lapse of five years from the date
on which the taxpayer is notified that tax or a refund is due.
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Kuwait
The DIT has implemented an active approach to ensure the compliance of local
companies with the tax retention mechanism, especially those who have franchise
operations and agreement with foreign franchisors in Kuwait. In some cases, the DIT has
asked the Kuwaiti companies to settle the 5% retention where the franchisors have failed
to comply with the tax law requirements.
Other issues
Offset program
Kuwait has designed a counter-trade offset program to meet the objectives of its
economic development plan. The offset program derives from the governments concern
that the long-term benefits from job creation and capital accumulation resulting from
government contracts with foreign suppliers unfairly accrue to the suppliers, at the
expense of Kuwaiti companies and citizens. The objective of the offset program is to
remedy this problem by encouraging collaborative business ventures between foreign
contractors and the Kuwaiti private sector. Accordingly, the offset program has been
established with the following objectives:
Promote sustainable economic development in Kuwait, by the assimilation of modern
technology and know-how in the local economy.
Support projects that generate high skilled jobs for Kuwaiti nationals.
Attract foreign investment capital to facilitate economic development in Kuwait.
The following are significant aspects of the program:
All civil contracts with a value of KWD 10 million and more, and defence contracts
with a value of KWD 3 million and more, attract the offset obligations for contractors.
The obligations become effective on the signing date of the contract.
The contractors covered by the offset obligation are required to invest 35% of the
value of the contract with Kuwaiti government bodies.
Offset obligators have the following options for fulfilling their offset obligation:
Implement investment projects suggested by the offset program management.
Propose their own investment projects, and seek approval of the offset program
management.
Purchase of commodities and services of Kuwaiti origin. The MOF is, however, still
finalising detailed regulations in this regard.
Contractors covered by the offset obligation must provide unconditional, irrevocable
bank guarantees issued by Kuwaiti banks to the MOF equal to 6% of the contract
price. The value of the bank guarantee submitted will be reduced gradually based
on the actual execution of its work by the foreign contractor/supplier. The MOF has
the right to cash in the bank guarantee if the offset obligor fails to respect their offset
obligation.
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Kyrgyzstan
PwC contact
Richard Bregonje
PricewaterhouseCoopers Tax & Advisory LLP
34 Al-Farabi Avenue
050059 Almaty, Kazakhstan
Tel: +7 727 330 32 01
The following corporate tax changes were introduced in Kyrgyzstan (with effect from
2013):
The procedure of advance payment, filing, and reporting on profit tax has changed.
Taxpayers (except for zero-rated taxpayers and taxpayers exempt from profit tax)
should file tax reporting and pay to budget a preliminary amount of profit tax on a
quarterly basis (from the second quarter). The reporting period for the preliminary
amount of the profit tax is established as the first quarter, first half year, and first
nine months of the current fiscal period. The advance profit tax amount for the
reporting period shall be determined in the amount of 10% of the profit calculated
for the reporting period according to the rules established by Kyrgyz legislation on
accounting. The advance profit tax amount payable to the budget for the reporting
period shall be defined as the positive difference between the advance profit tax
calculated for the reporting period and advance profit tax calculated for the previous
reporting period.
The Tax Code, pursuant to which the definition of the electronic document and
digital signature of the taxpayer is given, now states that while preparing tax reports
in electronic form, the electronic document must be certified by the digital signature
of the taxpayer, except in cases stipulated by Kyrgyz legislation. Additionally, the
taxpayer is allowed to submit tax reports in electronic form without the digital
signature of the taxpayer in a manner determined by Kyrgyz government.
A new programme, Sochi, was introduced with the help of which filing of taxes is
carried out online (previously it was done through USB stick). See sochi.dostek.kg
Some periods of withholding tax (WHT) payment and reporting have changed:
Now WHT should be paid to the budget not later than the day following the 20th
(previously 15th) day of the month following the month of income payment.
The report on tax withheld at source should be submitted by the tax agent not
later that the day following the 20th (previously 25th) day of the month following
the month of income payment.
WHT on interest should be paid to the budget not later than the day following the
20th (previously 15th) day of the month following the month of interest payment.
During the past year, two new double tax treaties (DTTs) came into effect:
DTT with Lithuania: in force since 20 June 2013; effective since 1 January 2014.
DTT with Korea: in force since 22 November 2013; effective in relation to taxes
withheld at source of payment since 1 January 2014, in relation to other taxes since 1
January 2013.

Pursuant to the tax code, resident entities are subject to a corporate income tax, called
the profit tax, on their aggregate annual income earned worldwide. Non-resident legal
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Kyrgyzstan
entities carrying out business activities through a permanent establishment (PE) in
Kyrgyzstan are subject to profit tax on the income attributed to the activities of that PE.
Profit tax is calculated at a rate of 10% of aggregate annual income less allowed
deductions.
Gold industry profit tax
The profit tax rate for taxpayers extracting and selling gold ore, gold concentrate, gold
alloy, and refined gold is set at 0%.
Additionally, there is a tax (income tax) specifically for taxpayers extracting and selling
gold ore, gold concentrate, gold alloy, and refined gold.
Income tax is calculated at a varying rate of 1% to 20% (depending on the world price of
a troy ounce of gold) of revenues from selling gold alloy and refined gold or of the value
of gold in the gold-bearing ore and gold concentrate calculated on the basis of world
prices.
Local income taxes
There are no local income taxes in Kyrgyzstan.
Corporate residence
There is no concept of corporate residence in the Kyrgyzstan tax legislation.

Legal entities formed under the Kyrgyz law should be taxed in Kyrgyzstan on their
worldwide income, whereas foreign legal entities should be taxed only in relation to
Kyrgyzstan-sourced income.
Under Kyrgyzstan tax legislation, a PE is a permanent place of business through which a

non-resident carries out business operations, including activities performed through an
authorised person. A PE includes the following:
Any place of management, department, office, factory, workshop, mining, oil and gas
wells, land, construction site, or project.
Any services rendered by non-residents by hiring personnel working in the territory
of Kyrgyzstan for a duration of more than 183 calendar days within any consecutive
12-month period.
A PE is not created in Kyrgyzstan if a non-resident is limited to the following activities in
Kyrgyzstan:
Use of warehouses or buildings exclusively for storage or demonstration activities.
Use of a fixed place of business exclusively for preparatory purposes.
Performance of activities in Kyrgyzstan through an agent in cases where such agent
usually performs such activities in the ordinary course of business.
Creation of a PE may be connected with the establishment of a branch or subsidiary.
Both branches and subsidiaries are considered appropriate business vehicles for foreign
investors, and the choice between them is determined by the business the investor is
engaged in, along with various other factors.
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Other taxes
In Kyrgyzstan, VAT is assessed on taxable supply and taxable imports. Input VAT
assessed on purchases used for business purposes is generally offset against output VAT
on taxable supplies. The VAT rate is 12%, except for certain zero-rated supplies and
certain exempt turnover (see below).
All taxpayers registered for VAT purposes are required to charge VAT on their taxable
supply and to calculate and report their VAT liabilities. Taxpayers are required to register
for Kyrgyzstan VAT purposes if their taxable supply in the preceding 12 calendar months
exceeds 4 million Kyrgyzstani som (KGS). Even if an entity is not required to register
for VAT purposes, it may still do so voluntarily by submitting an application to the
appropriate tax committee.
Place of supply of goods
Goods and services are subject to VAT if they are deemed to be supplied in Kyrgyzstan
under the place of supply rules. According to these rules, transactions are deemed to
be made at the place where transport of the goods begins if the goods are transported
by the supplier and at the place where the goods are transferred to the customer in all
other cases. The rules regarding services are more complicated. Services that are not
specifically mentioned are deemed to be supplied at the place where the service provider
has established a place of business. Certain other services are deemed to be supplied at
the place of the purchaser.
Import of goods
Generally, imports of goods are subject to VAT.
Non-deductible input VAT
The input VAT is not allowed for offset if it is subject to payment in connection with the
receipt of goods, works, or services not related to entrepreneurial activity, or if it relates
to inputs for VAT-exempt supplies.
Zero-rated supplies
Certain supplies are zero-rated for VAT purposes. These include exports (except for
certain limited types of export), international transportation, and services connected
with the service of transit air flights related with international transportation. Supply of
goods, works, or services for official use of diplomatic and consular representations is
taxable, but may be refunded, provided that certain conditions are met.
Exempt supplies
Certain supplies are VAT-exempt, including supplies and exports of gold and silver alloy
and refined gold and silver, supplies of pharmaceuticals, land plots, residual buildings
and construction, financial services, and export of works and services. When a taxpayer
generates both taxable and exempt supplies, input VAT proportional to the ratio of the
exempt supply to the total supply is disallowed for offset.
VAT incentives
Certain imports are VAT-exempt, including imports of technological equipment, if used

for ones own production purposes. A preferential offset method of VAT settlement in
respect of certain fixed assets imported to Kyrgyzstan is also available, whereby the
import VAT does not need to be paid to customs but is reflected simultaneously as input
and output VAT in the VAT accounts.
Reverse-charge VAT
The current tax code does not have any provisions on reverse-charge VAT.
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VAT liability calculation and VAT offset carryforward
In general, the VAT liability of a taxpayer is calculated as output VAT (i.e. VAT charged
by a taxpayer) less input VAT (i.e. VAT paid by a taxpayer to its suppliers) in a reporting
period. The excess of input VAT over output VAT may generally be carried forward
against future VAT liabilities.
VAT compliance
The tax period for VAT is a calendar month. The submission of the VAT declaration
is due by the 25th day of the month following the reporting period (except for major
taxpayers, for which it is due by the end of the month following the reporting period).
Payment of the VAT liability is due by the 25th day of the month following the reporting
period.
Sales tax
Sales tax is assessed on Kyrgyz legal entities or foreign entities operating through a PE
in Kyrgyzstan for any sales of goods or rendering of services. The sales tax mechanism
differs from VAT, i.e. the sales tax is levied for the whole sales turnover and does not take
into account the purchases (input turnover).
Sales tax rates are as follows:
In case of the sale of goods, works, or services by VAT payers:
Trading activities: 1%.
Mobile communication activities: 5%.
Other activities: 2%.
In case of the sale of goods, works, or services by non-VAT payers:
Trading activities: 2%.
Other activities: 3%.
The Kyrgyz Tax Code further defines trading activities as activities on sale of goods
purchased for re-sale purposes.
The tax period of sales tax is a calendar month. Taxpayers have to submit tax returns and
make payments of sales tax at the place of tax registration by the 20th day of the month
following the reporting month.
Customs duties and regimes
According to the Customs Code, the customs value of goods imported to the customs
territory of Kyrgyzstan is determined by applying the following methods:

Transaction value of imported goods.

Transaction value of identical goods.
Transaction value of similar goods.
Deductive method.
Computed method.
Provisional method.
Based on the Kyrgyzstan customs legislation, the rates of customs duties may be:
Ad valorem - charged in percentage to customs value of the taxable goods.
Specific - charged within established size for unit of the taxable goods.
Combined - including both above mentioned types.
The rates in percentage range from 0% to 30%; however, the maximum rate of 35% may
be charged if the country of origin in unknown.
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Import restrictions
Generally, all entities or persons have equal rights to import and export or transfer goods
into the Kyrgyzstan territory, including when carrying out foreign trade activity, except
in special cases as stipulated by legislation and international treaties.
Import of certain goods (e.g. weapons, nuclear materials) is subject to licensing.
Temporary import relief
There is a temporary import regime under which foreign goods are used in Kyrgyzstan
with full or partial conditional exemption from the payment of customs duties and taxes
and without application of non-tariff regulatory measures. The term of the temporary
import customs regime may not exceed two years.
Customs duties incentives
Certain items are exempt from customs payments, including:

Transportation vehicles used in the international conveyance of passengers and goods
and items of material and technical supply in transit.
Goods imported in the customs territory or imported from the customs territory for
official and personal use by official state representatives of foreign states.
Kyrgyzstan provides preferential rates or exemptions on the importation (and export)
of certain goods, including goods originating from the states that form free trade zones
or a customs union with Kyrgyzstan and goods originating from developing countries,
included on a special list provided by the government.
Documentation and procedures
Kyrgyzstan pays close attention to formalities/documentation, so it is necessary to

furnish the customs authorities with a set of required documents. For import, such
documents usually include cargo customs declaration, invoices, contracts, etc.
Warehousing and storage
There is a bonded warehouse customs regime in Kyrgyzstan. Under this regime, imports
entering into Kyrgyzstan may be stored in special facilities or special areas that have the
status of a customs warehouse under the customs legislation of Kyrgyzstan. This regime
implies exemption from customs duties and taxes.
Generally, most goods (unless otherwise specifically provided for) can be placed under
the bonded warehouse customs regime. The period for storage of goods at a bonded
warehouse is determined by the person placing the goods into the customs warehouse
but cannot exceed three years from the date when the goods were placed under the
bonded warehouse customs regime.
Re-exports
The re-export regime is similar to that used in international practice. It is defined as a

customs regime under which goods previously imported into Kyrgyzstan are exported
without payment or with a refund of the paid amounts of import customs duties and
taxes and without applying the non-tariff regulatory measures with respect to the goods
in compliance with Kyrgyz legislation.
There are certain conditions under which goods can be re-exported. Customs duties
and taxes are not charged for goods declared as goods intended for re-export. However,
if the goods do not meet the re-export criteria, customs duties and taxes are paid in
the amount that would be payable if the goods, at their importation, were declared for
release for free circulation, as well as interest on them paid at the National Bank rates, as
if deferment was provided with respect to the amounts at placement of the goods under
the customs regime of re-export.
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Excise tax
Certain goods manufactured in Kyrgyzstan or imported to Kyrgyzstan are subject to

excise tax. These include certain alcohol and alcoholic drinks, fortified drinks, tobacco
goods, and oil products.
The rates of excise tax are adopted annually by the Kyrgyzstan government and range
from KGS 10 for 1 litre of wine materials to KGS 3,000 for 1 ton of fuel. The rate for
tobacco goods range from KGS 6 to KGS 580 based on the type of tobacco. Note that the
excise tax oncigarettes and tobacco products will increase each year starting from 1
January 2014till 2016.
Stamp taxes
There are no stamp taxes in Kyrgyzstan.
Subsurface use taxes
The subsurface use taxes consist of separate bonus and royalty taxes on subsurface
users, both Kyrgyz legal entities and branches of foreign legal entities. Under Kyrgyz
legislation, subsurface users are legal entities and individuals who perform exploration
and/or extraction of mineral resources.
The government, depending on the type of mineral resources, establishes the bonus
rates.
The royalty rates are estimated either as a percentage of sales turnover (1% to 12%) or
in absolute terms in Kyrgyzstani som, depending on the type of mineral resources.
Payroll taxes
The employer is obligated to withhold and transfer to the budget the income tax from its
employees gross remuneration less allowable deductions. The income tax rate is 10%.
The social security system in Kyrgyzstan is comprised of the Pension Fund, Obligatory
Medical Insurance Fund, and Employees Recovery Fund. The employer pays social
contributions at 17.25% of employees gross remuneration from its own funds.
The employer is also required to withhold social contributions at 10% out of the salary
that is payable by the employees to the Pension Fund and State Saving Fund.
Local taxes
There are two local taxes in Kyrgyzstan, property tax and land tax.
Property tax
Property tax is a local tax payable quarterly by legal entities owning transport vehicles
and immovable property in Kyrgyzstan, including apartment houses, apartments,
boarding houses, holiday inns, sanatoria, resorts, production, administrative, industrial,
and other buildings or facilities. Certain real estate may not be subject to this tax
according to special lists approved by the government.
In respect of immovable property, the tax rate is established by the city or local
authorities at a rate not to exceed 0.8% of the estimated value of taxable objects, except
for apartment houses and apartments designated solely for residence, for which the
rate may not exceed 0.35% of the estimated value. The estimation can be performed by
the state competent body and independent appraisers. For transport vehicles, the tax is
computed in Kyrgyzstani som, depending on engine volume.
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Land tax
Land tax is paid quarterly by legal entities on the area of owned land. The basic rates are
provided in the tax code, depending on the location and purposes of the land. The basic
rates may range from KGS 0.9 to KGS 2.9 per square metre.
Branch income
Branch income is subject to the profit tax. There is no special branch profits tax in
addition to profit tax.
Aggregate annual income is comprised of all types of income, including, but not limited
to, the following, in addition to gross revenue from the sale of goods, works, or services:

Interest income (except for income already subject to WHT).

Dividends.
Royalties.
Assets received free of charge.
Rental income.
Income from the reduction of liabilities.
Foreign exchange gain.
Write-off liability.
The tax code envisages some profit tax privileges aimed at developing certain areas of
the business economy. Currently, these include privileges/preferences for:
Charity organisations.
Associations of invalids of I and II groups (i.e. persons with disability with different
levels of physical disability), associations of blind and deaf persons.
Agricultural organisations.
Growing of berries, fruits, and vegetables.
Credit unions.
Companies that have been involved in the food industry for less than three years and
included in the Kyrgyzstan governments list of exempt companies.
Non-taxable revenues include, inter alia, the following:
Property received as a charter capital contribution and income from realisation of
shares of organisations.
Property donated to special organisations using such property for development
purposes under the governments social culture plan. Despite being designated as
property used for social culture purposes, such property may still be used for other
purposes (i.e. citizen defence projects, mining equipment, water intakes, heat
networks, roads, stations).
Inventory valuation
There are no special provisions on inventory valuation in the Kyrgyzstan Tax Code.
Inventory valuation is conducted in accordance with the International Financial
Capital gains
Capital gains are subject to the ordinary profit tax rate. There is an exemption available
for capital gains from selling shares that occur on the date of a given sale in the official
lists of the stock exchange in the top two categories of listing.
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Dividend income
Dividends from participation in Kyrgyz legal entities are exempt from profit tax. All other
dividends are subject to the ordinary profit tax rate.
Interest income
Interest income should be included into the aggregate annual income and taxed at the
standard profit tax rate, provided the tax has not already been withheld at the source of
payment in Kyrgyzstan at the 10% rate.
Partnership income
Simple partnerships are not taxpayers in their own right, and income and expenses
flow through to the partners for tax reporting purposes. Kyrgyzstan limited liability
partnerships are taxed as corporations.
Foreign income
Generally, Kyrgyz legal entities are taxable on income earned worldwide. Foreign
income is subject to the ordinary profit tax rate.
There are no tax deferral provisions in Kyrgyzstan tax legislation.
Deductions
K
Depreciation
The tax code establishes a deduction for depreciation based on the declining-balance
method. Depreciable fixed assets are divided into several groups, for which maximum
depreciation rates range from 10% to 50%
Group
I
II
III
IV
V
VI
Maximum rate of
Assets
depreciation (%)
Cars, automobile and tractor equipment for use on roads, special
30
instruments, sundries, and accessories; computers, telephone sets,
peripherals, and equipment for data processing
Automotive transport rolling stock: trucks, buses, special
25
automobiles, and trailers; construction equipment; machines and
equipment for all sectors of industry, including the foundry; smithpressing equipment; electronic and simple equipment, agricultural
machines. Office furniture, intangible assets
Depreciable fixed assets not listed in other groups and expenses
20
equated to them
Railroad, sea, and river transport vehicles, power machines, and
10
equipment: thermal-engineering equipment, turbine equipment,
electric motors and diesel-generators, electricity transmission and
communication facilities, pipelines
Buildings and constructions
10
Taxpayers costs of geological preparation of deposit reserves,
50
design and engineering-research works, and obtaining the licence
for the use of deposits, as well as mining-capital and mining preworks aimed at further extraction of minerals, as well as the fixed
assets of the mining and/or mining-processing enterprises put into
operation and actually used in deposit exploration
Certain expenses are deductible within specified limits, including expenses on repairs,
expenses on procuring and producing capital production assets, and certain other
expenses.
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Kyrgyzstan
Goodwill
Kyrgyzstan domestic tax legislation does not stipulate the allowance of a deduction for
goodwill for profit tax purposes.
Start-up expenses
Kyrgyzstan domestic tax legislation does not stipulate the allowance of a deduction for
start-up expenses for profit tax purposes.
Interest expenses
Deductions for interest actually paid on debts, where the loan proceeds were used
to fund expenses incurred for the taxpayers business activity, are allowed within
limitations provided in the tax code, depending on methodology and nature of the debt.
For example, interest on loans connected with the purchase of depreciable assets is not
deducted, but increases their value.
Bad debt
Bad debt amounts are deductible in Kyrgyzstan. The Tax Code defines a bad debt as
the amount the taxpayer is unable to fully receive as a result of the termination of an
obligation by the court, bankruptcy, liquidation, or death of the debtor, or expiry of the
limitation period provided by the civil legislation of Kyrgyzstan.
Deductions for donations of assets to charity and budget organisations are limited to
10% of taxable income.
Fines and penalties
Fines and interest penalties paid to the state budget are not deductible.
Taxes
The following taxes may be deducted:

Land tax.
Property tax.
VAT not allowed for offset.
Subsurface use taxes.
Generally, other expenses related to the earning of aggregate annual income are
considered deductible for profit tax purposes, including:
Business trip expenses that were actually incurred and supported by appropriate
documentation (per diems during business trips are deductible only within the
established statutory limits).
Commissions on payroll expenses for labour.
Material and social benefits provided to employees.
Representational expenses connected with earning income (transportation, hotel,
and translator services).
Training and retraining of employees.
Scientific development and exploration works (deductions are relevant for fixed
assets).
Any other costs related to earning income, which can be supported by appropriate
documentation in terms of their nature and amount (e.g. invoices, payment orders,
receipts).
The other categories of expenses that are not deductible include:
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Capital expenses and expenses connected with the purchase, production, and
installation of equipment.
Any expenses incurred on behalf of any other third persons, except in cases where
documentation proves business needs for such expenses.
Pricing losses caused by rates, understated below-market prices, and price incentives.
Expenses connected with purchases of services in entertainment, vacations, and
leisure.
Net operating losses can be carried forward for up to five years. There are no provisions
in Kyrgyz legislation allowing carryback of losses.
Payments to foreign affiliates are deductible for profit tax purposes if they are aimed at
earning income and supported by documentation.
Group taxation
Group taxation is not permitted in Kyrgyzstan.
Transfer pricing
While there is no special law on transfer pricing in Kyrgyzstan, rules on transfer pricing
are found in the tax code. The general transfer pricing provisions set in the tax code
do not follow Organisation for Economic Co-operation and Development (OECD)
guidelines (thus, no advance pricing agreement [APA] mechanism is provided).
According to the Kyrgyz transfer pricing regulations, the tax authorities are empowered
to determine the value of the following transactions:
Transfers between related parties.
Barter transactions.
Cross-border transactions.
Thin capitalisation
There are no thin capitalisation limitations under the Kyrgyzstan tax code.

Foreign tax credits
There is no possibility to offset the amount of tax paid outside Kyrgyzstan against the
Kyrgyz tax if there is no DTT with the country.
There are no special tax preferences in the Kyrgyzstan Tax Code; however, Kyrgyz Law
on Investments envisages that in case of changes in the tax and customs legislation,
investors may apply terms that are more beneficial to them.
Special economic zones
There are four special economic zones in Kyrgyzstan: Naryn, Karakol, Bishkek, and
Maimak. The special economic zones generally provide for a tax-neutral regime,
exemption from customs duties, and a liberal currency control regime. However, there
is a special fee for incentives, which varies from 0.1% to 2% of sales (depending on the
region).
Kyrgyzstan
1107
Kyrgyzstan
Park of Innovative Technologies
Activities of residents of the Park of Innovative Technologies are exempt from profits tax,
sales tax, and VAT, providing they meet requirements of the Tax Code of Kyrgyzstan. The
tax rate for employees of residents of the Park of Innovative Technologies and individual
entrepreneurs is 5%.
Withholding taxes
Passive income from sources in Kyrgyzstan by a non-resident that is not connected with a
PE is taxable at the source of payment, without deductions, at the following rates:
Dividends and interest: 10%.
Insurance premiums received under risk insurance or re-insurance agreements: 5%.
Authorship fee and royalty: 10%.
Income obtained by a non-resident from performing activities and services in
Kyrgyzstan, not connected with a PE, is taxable at the source of payment, without
deductions (with the exception of VAT), at the following rates:
Income from telecommunication or freight services in international communication
and transportation between Kyrgyzstan and other countries: 5%.
Income from management and consulting services: 10%.
Other services and activities: 10%.
WHT applies to Kyrgyzstan-source income regardless of whether the payment is made
within or outside of Kyrgyzstan.
The application of DTTs often effectively provides a reduction of WHT rates or, in the
case of non-passive income, an income tax exemption. Note that the application of treaty
privileges is not necessarily automatic, and taxpayers may need to comply with certain
administrative procedures to secure relief.
Tax treaties
According to the tax code, the provisions of international tax agreements and other
acts to which Kyrgyzstan is a party and ratified by the President or the Parliament (as
appropriate) take precedence over the provisions of the tax code.
As of 1 January 2014, Kyrgyzstan has concluded DTTs with the countries listed in the
following table, which shows the corresponding WHT rates:
Recipient
Non-treaty
Treaty:
Austria
Belarus
Canada
China
Finland
Germany
India
Iran
Kazakhstan
Korea, Republic of
Latvia
1108
Kyrgyzstan
Dividends (%)
10
Interest (%)
10
Royalties (%)
10
5/10 (1)
15
15
10
5/10 (1)
5/10 (1)
10
5/10 (1)
10
5/10 (1)
5/10 (1)
10
10
15
10
10
5
10
10
10
10
10
10
15
10
10
5
10
15
10
10
5/10 (5)
5
Kyrgyzstan
Recipient
Lithuania
Malaysia
Moldova
Mongolia
Pakistan
Poland
Russia
Switzerland
Tajikistan
Turkey
Ukraine
Uzbekistan
Dividends (%)
5/15 (4)
5/10 (2)
5/10 (1)
10
10
10
10
5/10 (1)
5/10 (3)
10
5/10 (3)
5/10 (3)
Interest (%)
10
10
10
10
10
10
10
5
10
10
10
10
Royalties (%)
10
10
10
10
10
10
10
5
10
10
10
10
Notes
1.
2.
3.
4.
5.
5% if the beneficial owner is a company (other than a partnership) that owns not less than 10% of the
capital of the paying company.
5% if the beneficial recipient is a company that owns not less than 50% of the capital of the paying
company.
5% from the total amount of royalty paid for the use of, or the right to use, industrial, commercial, or
Tax administration
Taxable period
The taxable period for profit tax is one calendar year.
Tax returns
The tax code stipulates that the Aggregate Annual Income Tax Declaration must be filed
with the tax authorities by 1 March of the year following the reporting year.
Tax authorities may grant an extension for filing a tax return for up to one month upon
application by the taxpayer. Such extension does not relieve or prolong the taxpayers
obligation to pay the tax in a timely manner.
Payment of tax
Tax payments should be made as follows:

Advance payments on profit tax: The procedure of advance payment on profit tax
has changed. Taxpayers (except for zero-rated taxpayers and taxpayers exempt
from profit tax) should file tax reporting and pay to budget a preliminary amount
of profit tax on a quarterly basis (from the second quarter). The reporting period
for the preliminary amount of the profit tax is established as the first quarter, first
half year, and first nine months of the current fiscal period. The advance profit tax
amount for the reporting period shall be determined in the amount of 10% of the
profit calculated for the reporting period according to the rules established by Kyrgyz
legislation on accounting. The advance profit tax amount payable to the budget for
the reporting period shall be defined as the positive difference between the advance
profit tax calculated for the reporting period and advance profit tax calculated for the
previous reporting period.
Final payments on profit tax: 1 March of the year following the reporting year.
Kyrgyzstan
1109
Kyrgyzstan
Tax withheld at the source of payment by a tax agent: by the 20th day of the month
following the month when income was recognised.
Tax audit process
The State Tax Inspectorate of the Ministry of Finance of Kyrgyzstan and its local tax
authorities are the only state authorities that have the right to perform tax audits. The
Kyrgyzstan tax service consists of relevant subdivisions of the revenue committee of the
Ministry of Finance of Kyrgyzstan and its local authorities.
A tax audit is performed based on a written notification from the Head of the State Tax
Inspectorate, which specifies the name of the company to audit, the scope of the audit,
and the terms of the audit. Tax audits may be performed not more than once a year by
one of the tax authorities (district, city, region, or the state tax authorities) and should
not last more than 30 days. If necessary, however, a tax audit may be extended for ten
additional days with written approval from the State Tax Inspectorate.
The period of limitation for tax liability is six years.
Generally, the Kyrgyz tax authorities focus on the support for profit tax deductions,
correctness of tax calculations, and WHT issues during the tax audits. Recently, we have
also observed a rising interest from the tax authorities in transfer pricing issues.
1110
Kyrgyzstan
Lao Peoples Democratic Republic

PwC contact
Sornpheth Douangdy (Pheth)
ANZ Vientiane Commercial Building
33 Lane Xang Avenue, Vientiane, Lao PDR
Tel: +856 21 222 718 9 ext. 1501
Article 19 of the Value-added Tax (VAT) Law No. 04/NA dated 26 December 2006 was
amended and become effective since 3 February 2014. Under this amended Article
19, the rate of VAT on equipment, machinery, and vehicles to be used in production
and invested as fixed assets is 0%, regardless of whether it is domestically produced or
imported.

Profits tax (PT)
All companies (including all forms of legal entities) that are registered under
LaoPeoples Democratic Republic (PDR) law are subject to PT on their worldwide
income. Companies formed under foreign law, operating a business in Lao PDR, and
conducting business in Lao PDR are subject to tax on their income derived in Lao PDR.
The standard rate of PT for companies in Lao PDR is 24%. The 24% rate applies to both
domestic and foreign investors.
Tax holidays and reduced PT rates are applicable to companies whose investment
activitiesqualify as promoted investment activities (see the Tax credits and incentives
Lump-sum tax
The lump-sum tax is imposed on small and medium business operators that are not
registered in the VAT system. The lump-sum tax is paid in lieu of the PT, based on an
agreement with the tax office; consequently, the lump-sum tax is regarded as a tax
within the PT category.
Local income taxes
There are no provincial or local income taxes in Lao PDR.
Corporate residence
There is no definition of residence or permanent establishment (PE)provided in the
Tax Law 2011. However, the concept of PE is provided in the Law on VAT 2009 (Article
3(9)). This article states:
Permanent Business Establishment is referred to as an establishment where a taxpayer
operates her/his business on a regular basis. Establishments considered to be permanent
include administrative offices, branch offices, factories, mining/extraction sites,
construction fields or sites, and any site where undertakings take place.
It is understood that the reason for having no PE definition in the law is because there
is foreign contractor withholding tax (FCWHT) levied on foreign entities conducting
1111

their business activities in Laos. For more information about the FCWHT, please see the
Withholding taxes section.
Other taxes

VAT is imposed on the final consumer of goods and services. Goods and services used for
production, trading, and consumption in Lao PDR, goods imported into Lao PDR, and
services rendered by foreigners to Lao PDR customers are subject to VAT.
Certain goods and services are exempt from VAT. Exempted items include unprocessed
agricultural products, seeds, fertilisers, textbooks, education services, medical services,
banking services, and insurance.
Exported goods and services are zero-rated. The conventional credit method is used
to calculate the VAT payable (i.e. output VAT less input VAT). Excess input VAT can be
carried forward for six months (extendable). Input VAT for exports is refundable.
Business operatorsengaged in production or trading of taxable goods and services must
registerin theVAT system if their annual revenue is 400 million Lao kip (LAK) or more.
Companies below this threshold may voluntarily register. Only registered VAT payers
may claim VAT refunds.
One unique feature of Lao PDR VAT is that VAT is imposed on the services rendered
by overseas service providers to domestic service users (withholding VAT). Domestic
service users have an obligation to withhold VAT out of the service fees paid to overseas
service providers.
Import duties
All goods imported into Lao PDR are subject to import duty. Exemptions are available to
enterprises operating promoted investment activities (see the Tax credits and incentives
Lao PDR has adopted the General Agreement on Tariffs and Trade (GATT) valuation
principles. Duty rates are based on the Association of Southeast Asian Nations (ASEAN)
harmonised tariff nomenclature forimports from ASEAN member countries; otherwise,
normal rates are applied. Duty rates range between 0% and 40% depending on whether
the goods are ASEAN or other source.
Excise taxes
Excise tax applies to the import and sale of certain luxury products. Excisable goods
include alcohol, beer, cigarettes, perfume, cosmetics, motor vehicles, soft drinks,
mineral water, and many types of electrical equipment. Excise tax rates range from 5%
to 150%.
Under the new Tax Law 2011, the excise tax rateson vehicles range from25%to 150%.
However, the rates under Tax Law 2005 are still applicable until the relevant supporting
regulations of the new Tax Law 2011 are issued.
Property taxes
Land taxes vary depending on the location and the type of the land (e.g. land for
construction, agriculture). The calculation of the land tax is based on both the location
and the size of the land and is levied at annual rates per square meter. Land tax is
payable in the first quarter of the relevant calendar year.
1112

Transfer taxes
There are no transfer taxes in Lao PDR.
Stamp taxes
The stamp taxes in Lao PDR range from LAK 2,000 to LAK 20,000, depending on the
types of documents.
Administrative fees
Under the Tax Law, government sectors can collect fees for issuing fiscal licences,
business licences, permits, visas, advertisement boards, broadcasting rights, and other
services. The charges and service fees are set periodically by Presidential Decree.
Social Security Scheme contributions
An enterprise with ten or more employees must register itself and its employees in the
Social Security Scheme and make contribution to the scheme. Both the enterprise and
its employees are obligated to contribute to the Social Security Scheme a combined
9.5% of the employees basic salaries or wages. The enterprise contributes 5% and
each employee contributes 4.5%. At the moment, the basic amount for Social Security
Scheme calculation is capped at LAK 2 million.
Branch income
Branches of foreign companies are taxable on their income from carrying on business in
Lao PDR.
The PT calculation is based on an entitys actual accounting profits as adjusted for tax
purposes. The Lao PDR tax regulations are silent on the treatment of a large number of
items. Generally, in such cases, the tax treatment will follow the accounting treatment.
Some of the more common differences are depreciation, entertainment expenses, and
the non-deductibility of reserves and provisions (until actually paid).
Inventory valuation
Inventory valuation for tax purposes follows the method used for accounting purposes in
Lao PDR.
Capital gains
There is no separate tax on capital gains in Lao PDR. However, profits from the sale of
shares are subject to tax at a rate of 10%. The buyer of the shares is required to withhold
and remit the tax.
The rate of income taxon sales or transfers of real property is 5%.
Dividend income
Dividends received from another Lao PDR company or a foreign company are taxed at a
flat rate of 10%.
Interest income
Interest income is taxable in Lao PDR, except for interest income derived from loans
lent by commercial banks and interest income derived from money deposited with
commercial banks. The rate ofincome taxon interest income is 10%.
1113

Rental/royalties income
Rental income and royalties income are taxable in Lao PDR. The rate of income tax on
rental income is 10%, and the rate of income taxon royalties income is 5%.
Unrealised exchange gains are not taxable and losses are not deductible in Lao PDR.
Foreign income
There is no controlled foreign company (CFC) or similar regime in Lao PDR. Profits of a
foreign subsidiary are taxable when remitted as dividends.
Deductions
Accrued expenses are deductible in Lao PDR. Reserves and provisions are not deductible
until actually settled.
Depreciation
Depreciation rates are prescribed in the tax law and may differ from financial
accounting. Depreciation is on a straight-line basis over prescribed useful lives, as
follows:
Assets
Buildings used for industrial purposes:
with useful life of 20 years or less
with useful life over 20 years
Buildings used for commercial and residential purposes:
Permanent structures
Semi-permanent structures
Machinery, equipment, vehicles
Software
Office equipment
Ships and passenger aircraft
Years
20
50
20
10
5
2
5
20
Goodwill
There is no specific guidance on the deductibility of goodwill or amortisation in Lao

PDR.
Start-up expenses
Start-up expenses are amortisable over two years in Lao PDR.
Interest expenses
Interest is deductible on an accrual basis following the accounting treatment. All

interest payments must be supported by documents showing that the payments are
commercially reasonable. Interest paid to a shareholder is not deductible.
Bad debt
Bad debt reserves are not deductible in Lao PDR. However, a deduction is allowed when
debt is written off.
Charitable contributions in Lao PDR are limited to0.30%of annual revenue.
Entertainment expenses are capped at 0.40% of annual revenue.

1114

Pension expenses
Pension expenses are deductible when paid in Lao PDR.
Bribes, kickbacks, and illegal payments are not deductible in Lao PDR.
Fines and penalties
Fines and penalties are not deductible in Lao PDR.
Taxes
PT and input VAT paid when purchasing fixed assets are not deductible.
Tax losses can be carried forward for three years, but no carryback is allowed. A change
in control will not impact a companys loss carryforward. Capital losses are treated as
ordinary losses.
Payments to foreign affiliates are deductible if in the ordinary course of business.
Group taxation
Consolidation or grouping is not permitted, and each entity must file on a separate basis
in Lao PDR.
Transfer pricing
There are no specific transfer pricing rules in Lao PDR. However, inter-company
transactions should be at arms length.
Thin capitalisation
The ratio of debt to capital must not exceed 70% of the total capital for concession
investment activities.There are no thin capitalisation rules for general investment
activities in Lao PDR.

Foreign tax credit
There is no foreign tax credit regime in Lao tax law. However, certain tax treaties entered
into by Lao PDR do have provisions for either deductibility of foreign tax or a credit.
PT incentives
PTincentives are provided under the Law on Investment Promotion 2009. This law
divides investment areas into threezones, namely Zone 1, Zone 2, and Zone 3, and
divides the investment activities into three different levels of promoted activities, namely
Promoted Activity 1, Promoted Activity 2, and Promoted Activity 3. The PT exemptions
are as follows:
Zone
1
2
Areas
Mountainous, plain, and plateau zones with no
economic infrastructure to facilitate investments.
Mountainous, plain, and plateau zones with a
moderate level of economic infrastructure suitable
to accommodate investments to some extent.
Promoted
Activity 1
(years)
10
Promoted
Activity 2
(years)
6
Promoted
Activity 3
(years)
4
1115
Zone
3
Areas
Mountainous, plain, and plateau zones with good
infrastructure to support investments.
Promoted
Activity 1
(years)
4
Promoted
Activity 2
(years)
2
Promoted
Activity 3
(years)
1
PTexemption starts from the date of the enterprise beginning its business operations.
For activities producing new products, research, and new technology, the PT exemption
commences from the date the enterprise starts making profit. After finishing the period
of PT exemption as mentioned above, the enterprise shall pay PT in accordance to the
Tax Law.
Mining and hydro power concession and tree plantation shall comply with concerned
laws.
Incentives related to customs duty and other taxes
In addition to the incentives related to PT, investors shall also be entitled to the following
customs duty and other tax incentives:
Exemption from PT in the next accounting year for a business that spendsits net
profit to expand its business.
Exemption from import duty on raw materials, equipment, spares parts, and vehicles
that are directly used for production. As for import tax exemption of these items, one
shall comply with specific regulations.
Exemption from export duty for exporting general products. As for export of natural
resources and products from natural resources,one shall comply with concerned laws
and regulations. Importation of all types of fuel is not exempted from import duties
and taxes.
Investor can transfer the annual losses to the next following year to be deducted
from profit within the period ofthree years; however, the losses shall be audited
and certified by the tax officer. After this period, the remaining loss is not allowed to
be deducted from profit anymore. In the case of the Special and Specific Economic
Zones, the incentives related to customs duties and other taxes shall comply with the
Decrees on the establishment and management of each zone.
Specific promotion incentives
Investment in hospitals, kindergartens, academic schools, vocational schools, colleges,

universities, research centres, and some activities related to public utilities shall
obtainan exemption of rental or land concession as follows:
Zone 1: exemption of rental or land concession for 15 years.
Zone 2: exemption of rental or land concession for ten years.
Zone 3: exemption of rental or land concession for three years.
Investment in hospitals, kindergartens, academic schools, vocational schools, colleges,
universities, research centres, and public utilities shall obtain an additional five year
period of PT exemption.
Withholding taxes
WHT is applied to various types of payments made to domestic and foreign recipients.
Payment
Dividends andprofit from sale of shares
1116
WHT rate (%)

10

Payment
Loan interest, commission, and guarantee fees
Interest and guarantee fees
Intellectual property royalty
Sale or transfer of real property
WHT rate (%)

10
10
5
5
Lao PDR has double tax treaties (DTTs) with the following countries, and WHT rates
under the treaties are as follows:
Recipient
Brunei
China
Kuwait (not in force)
Malaysia
Myanmar
North Korea
Russia
South Korea
Thailand
Vietnam
Dividends (%)
5
5
5
10
10
10
Interest (%)
5
10
10
10
10
10
Royalties (%)
5
10*
5
0
5
5
* The rate stipulated under Lao PDR lawis lower than the limit provided in the DTT.
Foreign contractor withholding tax (FCWHT)
A FCWHT on payments to foreign contractors applies where a Lao PDR contracting

party contracts with a foreign party that does not have a licence to do businessin
Lao PDR (regardless of whether the services are provided in Lao PDR or outside Lao
PDR). The FCWHT comprises both a PT and VAT element and isthe final tax on the
foreign company. The FCWHT withholding and filing obligation rests with the Lao PDR
customer.
For foreign contractors, PT must be withheld at a deemed percentage of taxable
turnover. The deemed rates are determined according to the nature of the contract or
activity.
Activity
Commerce
Production
Transportation and construction
Service
Deemed profit margin (% of

business revenue)
5
8
10
20
Deemed PT rate (%)

1.2
1.92
2.4
4.8
The above rates are under Article 21 of Instruction No. 2137/MOF on Implementation of
the Tax Law 2005. According to the Tax Department, these rates are applicable until the
relevant supporting regulations of the new Tax Law 2011 are issued.
These PT rates are then added to the VAT at 10% to determine the total FCWHT. For
example, a foreign service charge of LAK 1,000 would result in LAK 70 of PT and LAK
100 of VAT for a total FCWHT of LAK 170.
1117

Tax administration
Taxable period
PT is determined on a calendar year basis.
Tax returns
The tax return is due by the final day of March of the subsequent year. Submission of the
final tax return will be followed by an audit by the Tax Department.
Payment of tax
PT is payable quarterly in advance, with a final payment after year end. The first three
payments must be paid by 10 April, 10 July, and 10 October of the current tax year.
The final payment is due with the submission of the final tax return by 10 March of
the subsequent year. The quarterly payments are based on the prior years PT (or
expected tax for the current year). Any excess PT payment can be carried forward to the
subsequent year.
Tax audit process
Most large companies are audited annually in Lao PDR.
The statute of limitations is generally three years in Lao PDR.
There are no areas of special focus in tax examinations in Lao PDR.
1118
Latvia
PwC contact
Zlata Elksnina-Zascirinska
PricewaterhouseCoopers SIA
Kr. Valdemara iela 21
LV-1010 Riga, Latvia
Tel: +371 6709 4400
Attractive holding company regime new withholding tax (WHT) rules
Amendments to the Corporate Income Tax (CIT) Act provide WHT exemption on the
following payments:
Dividends paid to any non-resident company that does not reside in a tax haven
(effective from 1 January 2013).
Interest payments to any non-resident company that does not reside in a tax haven
Royalty payments to any non-resident company that does not reside in a tax haven
Dividends, interest, and royalties paid to residents of tax havens are subject to 15%
WHT. If dividends are paid to residents of tax havens more than once a year, extra
payments are subject to 30% WHT as of 1 January 2014.
In case of the sale of real estate, a European Union (EU)/tax treaty resident may choose
between 2% WHT payment calculated on total income or 15% tax on profit.
Tax incentive for deductibility of research and development (R&D) costs

The new CIT rules provide that certain R&D costs may be deducted by multiplying the
costs by three.
Significant tax incentives no longer available
As of2014, tax losses cannot be transferred among group companies (see the Group
taxation section).
Also as of2014, it is no longer possible to reduce taxable income by notional interest
if shareholders reinvest profits in the development of their company instead of taking
them outas dividends.

The standard CIT rate is 15%. The tax is assessed on a companys financial profit (loss)
that has been adjusted by certain corrections required by law. There are no other taxes
on corporate income stated either by the government of Latvia or by local municipalities.
Non-resident companies are taxed on their Latvia-source income through permanent
establishment (PE) at the standard CIT rate. If no PE is created, non-residents may be
taxed with 0% to 15% WHT for qualifying payments (e.g. management fees, payments
to tax havens).
Latvia
1119
Latvia
Micro-business tax (MBT)
The Micro-business Tax Act gives existing and newly-formed businesses the opportunity
of acquiring micro-business status and registering for MBT if they meet the following
criteria:

The shareholders are individuals.

The turnover does not exceed 100,000 euros (EUR)in a calendar year.
The number of employees does not exceed five at any time.
Members of the board are concurrently employees of MBT payer.
Remuneration of MBT payer employee does not exceed EUR 720 per month.
The standard MBT rate is 9% of a micro-businesss turnover, up to EUR 100,000, and

covers payroll taxes, business risk duties, and CIT.
The standard rate may be increased in the following cases:
If its quarterly staff count exceeds five, then 2% per extra employee will be added to
the standard rate.
If the turnover exceeds EUR 100,000 in a calendar year, the excess will attract a rate
of 20%.
If an employees net income exceeds EUR 720 a month, the excess will also attract a
rate of 20%.
There is no extra rate of MBT where a taxpayer has reported a steady revenue growth
rate inthe financial statements over the last two tax years capped by 30% per year.
Similar rules apply to a microbusiness`s headcount growth, capped by one to two
employees per year.
2014 year amendments (in force as of 1 January 2014) provide that if a microbusiness
has reported no revenue or if its MBT charge for the tax period (calendar year) does not
exceed EUR 50, the MBT payer has to pay a charge ofEUR 50 within 15 days after the
date of filing the tax return for the fourth quarter of the tax year.
Amendments proposed starting with the 2015 tax year
As of1 January 2015, the standard MBT rate of 9% is applicable only on a microbusinesss turnover up to EUR 7,000, while the turnover part from EUR 7,000.01 till EUR
100,000 is subject to MTB at:
11% asof 2015
13% asof 2016, and
15% asof 2017.
Corporate residence
A company is resident in Latvia if it is incorporated or had to be incorporated in Latvia.
Under the Latvian Taxes and Duties Act, a non-resident has a PE in Latvia if all three of
the following conditions are met simultaneously:
The non-resident uses a fixed place for activities in Latvia.
The place for activities is permanently used or is established for the purpose of being
used permanently.
The place for activities is used for the performance of commercial activities.
1120
Latvia
Latvia
In addition, it is considered that a non-resident has a PE in Latvia if the non-resident
performs in Latvia at least one of the following activities:
Uses a construction site or performs building or installation activities or supervision
or consultative activities related to the construction site or aforementioned activities.
Uses equipment or installations, drilling platforms, and special ships intended for the
research or extraction of natural resources, or carries out supervisory or consultative
work related thereto.
Within a time period, which together exceeds 30 days in any six-month period,
provides services, including consulting, management, and technical services, utilising
ones employees or associated personnel.
Uses the activity of an individual, legal, or other person for the benefit of ones
commercial activities, provided that this person is authorised to enter into contracts
in the name of the foreign entity and the person regularly (more than once in a
taxation period) exercises such an authority.
Note that the PE risk for entities located in treaty countries should be tested in
accordance with the relevant double tax treaty (DTT).
Other taxes
The following VAT rates apply in Latvia:

Description of goods
The standard rate on supplies of goods and services, commodity imports, services
rendered by non-residents and treated as supplied in Latvia, and intra-Community
acquisitions of goods.
A reduced rate on medicines, medical devices, specialised baby food, domestic public
transport services, household heating charges, firewood and wooden heating material
to households, textbooks, original literature publications, accommodation services,
newspapers and other periodical publications, and electronically supplied media
information.
Exemption with credit on supplies of goods within the European Union to taxable
persons registered for VAT in other EU member states.
Exemption with credit on commodity exports and imports not released for free
circulation in the European Union, supplies of goods and services to diplomats,
supplies of goods and services financed by foreign aid, import of gas that is supplied
through natural gas system, import of electricity and heat and cooling energy.
VAT (%)
21
12
0
0
A number of services are exempt, including education, financial, medical, and insurance
services; nursery fees; and the sale of used real estate, including land (except for
building land, which is taxable).
Customs duty
Customs duty is levied on goods imported into Latvia. The rate of customs duty generally
is between 0% and 20% of the value of imported goods, depending on the type and
origin of such goods. Exports are generally exempt from customs tax.
Excise duty
An excise duty is levied on specific categories of goods, mostly as a fixed amount per
unit. Excise duties are applied to the following goods, whether made in Latvia or
imported:
Latvia
1121
Latvia
Product
Oil and oil products
Alcohol
Beer
Tobacco products
Coffee
Certain soft drinks
Natural gas
Excise amount
Up to EUR 455.32 per 1,000 litres, depending on the type of the product.
EUR 64 to EUR 1,337.50 per 100 litres, depending on the type of alcohol.
EUR 3.10 for each percent of absolute alcohol, but not less than EUR 5.69
per 100 litres of beer.
EUR 45 per 1,000 cigars or cigarillos.
EUR 60 per 1,000 cigarettes less than 80 mm in length plus 25% of
the maximum retail selling price, but not less than EUR 100 per 1,000
cigarettes.
EUR 120 per 1,000 cigarettes plus 25% of the maximum retail selling price
for cigarettes 80mm to 110mm in length, but not less than EUR 200 per
1,000 cigarettes.
for cigarettes 111mm to 140mm in length, but not less than EUR 300 per
1,000 cigarettes.
for cigarettes exceeding 140mm in length, but not less than EUR 400 per
1,000 cigarettes.
EUR 60 per 1,000 grams of fine-cut smoking tobacco intended for the
rolling of cigarettes.
EUR 60 for other smoking tobacco.
EUR 142.29 per 100 kg.
EUR 7.40 per 100 litres.
EUR 17.07 per 1,000 m3 for use as heating fuel.
EUR 99.60 per 1,000 m3 for use as fuel.
Real estate tax
The real estate tax is payable annually for:

Business properties, such as land and buildings used for economic activities, as well
as engineering structures, such as motorways, streets, roads, parking places, bridges,
elevated highways, tunnels, pipelines, communication lines, and power lines.
Buildings that form part of a private dwelling house development (also if owned by a
company but not used for living purposes).
Municipalities may determine the real estate rate within the interval from 0.2% to 3%. If
a municipality does not announce the rates until 1 November before the taxation period,
then statutory rates apply.
Municipalities can apply a tax rate higher than 1.5% if buildings are not maintained
according to maintenance requirements.
Statutory real estate tax rates are as follows:
The standard rate of 1.5% on the cadastral value of land, buildings, and engineering
structures.
A progressive rate for dwelling houses, their parts, and any parts of a non-residential
building that are functionally used for living and not used in trade or business:
0.2% of cadastral values up to EUR 56,915.
0.4% of cadastral values exceeding EUR 56,915; but not exceeding EUR 106,715.
0.6% of cadastral values exceeding EUR 106,715.
Up to 3% for uncultivated land capable of agricultural use, unless it is up to one
hectare in area or subject to statutory restrictions on agricultural activity. By law,
uncultivated land capable of agricultural use is agricultural land that is not used
for making or growing agricultural products (including harvesting, grazing, and
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keeping animals for agricultural purposes) or is not kept in good agricultural and
environmental condition. Municipalities may also determine an additional rate 1.5%
for uncultivated land, thus the total rate for this land may reach 4.5%.
Newly constructed or reconstructed buildings used for economic activity are exempt
from real estate tax for one year after completion. Other reliefs are available under the
Real Estate Tax Act or determined by municipalities.
As of 1 January 2014, a rate of 3% is applied for buildings under construction if the
permitted construction period has expired. The tax is applicable until the building is
accepted for service. The rate will be charged on the highest of cadastral value of the
related land and the cadastral value of the building itself.
As of 1 January 2014, the residential property owned by companies is eligible for
reduced rates (0.2% to 0.6%), but only in cases where the property is rented out and the
rent rights are properly registered within the Land Register of Latvia.
Stamp duty
Stamp duties are levied on certain legal and other kinds of services, such as court trials,
company formation and registration, licences for certain types of business activity,
provision of information, notary services, operation of bills of exchange, and registration
of real estate at the Land Registry (e.g. in case real estate is sold: 2% of the higher of
deal value or cadastral value, capped at EUR 42,686.15 per property).
Stamp duty is not payable if re-registration of real estate in the Land Registry is
necessary due to the reorganisation process. Stamp duty payable for re-registration of
the title to immovable property in case of contribution in kind to a companys capital is
1%.
National social insurance contributions (NSIC)
The company as an employer is liable to pay 23.59% NSIC calculated on employees

gross salary.
Natural resource tax
Any natural resources acquired as a result of economic activities (e.g. surface and
underground water, dolomite, and quartz sand), the collection of edible park snails,
taking advantage of useful features of the bowels of the earth by pumping natural
gas or greenhouse gases into geological structures, pollution (waste, emissions, and
pollutants), products harmful to the environment (e.g. lubricating oil, electric batteries,
oil filters, and tyres), electrical and electronic equipment and appliances, radioactive
substances, packaging, disposable tableware, means of transport, the volume of emitted
greenhouse gasses that is not included in the number of emission quotas surrendered,
coal, coke, and lignite are subject to a natural resource tax in Latvia. The rates are
specific for each product and are based on weight, volume, or the amount of the product.
The taxpayer may reduce the natural resource tax by taking part in recycling programs
for packaging, products harmful to the environment, electrical and electronic equipment
and appliances, and means of transport. Taxpayers do not have an obligation to recycle,
themselves, to be entitled to the relief; instead, they can conclude an agreement with the
recycling company.
For some of the products, the taxpayer must also pay the disposal tax. The rates differ for
a large variety of products.
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Vehicle taxes
There are two vehicle taxes in Latvia, a vehicle usage tax and a light corporate vehicle
tax. The first is payable for exploitation of trucks, and the second is payable for light
vehicles held or owned by a company.
Vehicle usage tax
The vehicle usage tax is payable on a yearly basis for the usage of vehicles, and it must be
paid in full prior to the state technical inspection.
The vehicle usage (exploitation) tax amount depends on vehicle classification by vehicle
features under statutory provisions. The amount of tax dependson various criteria, such
as vehicle type (e.g. bikes, cars, trucks), vehicle gross weight, vehicle engine volume,
vehicle maximal engine power, etc.
For example, the vehicle usage tax for trucks with gross weight up to 12,000 kg is
payable only in accordance with the gross weight of these trucks in the following
amounts:

Up to 1,500 kg: EUR 17.07.

Between 1,501 kg and 1,800 kg: EUR 34.15.
Between 2,601 kg and 3,500 kg: EUR102.45.
Light corporate vehicle tax (LCVT)
LCVT is paid for vehicle(s) owned or held (e.g. rented) by a person engaged in economic
activity, which is registered for the first time after 1 January 2005, and with information
on the engine volume in the registration certificate. There is a fixed rate of LCVT
calculated according to the engine volume, as follows:
Up to 2,000 cc: EUR 27.03 per month.
From 2,001 cc to 2,500 cc: EUR 42.69 per month.
Over 2,500 cc: EUR 56.91 per month.
For vehicles not mentioned in the above criteria, the LCVT will be EUR 42.69 per month.
Car and motorcycle duty
Cars and motorcycles registered for the first time or after modification are subject to a
car and motorcycle duty. This duty is payable by any individual or entity registered as the
owner of a car or motorcycle.
The applicable tax rates for new cars or cars registered in foreign countries after 1
January 2009 are calculated based on the carbon dioxide (CO2) on each kilometre
constituted by the car. The rates range from EUR 0.43 to EUR 7.11 where the CO2 is
from 120 grams to 350 grams for each kilometre. The rate for new motorcycles or
motorcycles registered in foreign countries after 1 January 2009 is EUR 0.14 for each
cubic-centimetre of the engines capacity.
For other cars, rates range from EUR 106.72 to EUR 853.72, depending on age and
capacity. For other motorcycles depends on age and is 25% of the rate for cars.
Lottery and gambling tax
A lottery and gambling tax is levied on licensed organisers of games or lotteries. Licence
fees range from EUR 4,270 to EUR 427,000. Game organisers, gambling places, and
gambling machines are subject to the gambling tax. The tax rates depend on the number
and type of gambling machines or percentage of income for several gambling types.
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Electricity tax
The electricity tax is levied on electricity supplied to final consumers or consumed

by suppliers. The rate is EUR 1.01 per mega-watt-hour. Exemptions are available
to producers of electricity and for electricity used by domestic public transport and
households.
Local duties
Certain activities are subject to local duties (e.g. construction permits).
Branch income
As a general rule, branches and resident companies are taxed alike, with certain
adjustments for payments to the head office. Branch income is subject to a 15% CIT.
Inventory valuation
Dictated by the matching and prudence concepts, stock should be valued at the lower
of cost or net realisable value. Cost must be computed on a first in first out (FIFO) basis.
Cost can mean purchase price or production cost. Any unrealised losses from stock
revaluation are non-deductible.
Capital gains
From 1 January 2013, capital gains from trading in non-public shares, except shares of
companies established in tax havens, are not taxable and losses are not tax deductible.
Capital gains from trading in other non-public securities are taxable and losses are tax
deductible. Transactions with public EU/European Economic Area (EEA) securities
remain tax neutral, capital gains are not taxable and losses are non-deductible. Capital
gains from other public securities (except shares) are taxable and losses are nondeductible.
Capital gain on the disposal of a capital asset is calculated as the difference between the
sale proceeds and cost. This gain is subject to a 15% CIT as ordinary income. Unutilised
losses arising on the sale of securities other than EU/EEA public securities before 2013
may be offset in chronological order against the companys taxable income of future tax
periods.
Dividend income
From 1 January 2013, dividends received from any companies abroad or in Latvia are
exempt from CIT, except for dividends from companies registered in blacklisted tax
havens (a list of tax havens is provided by the Cabinet of Ministers).
Stock dividends
The distribution of new shares to a companys shareholders in proportion to their

existing shareholdings (after a share capital increase by conversion of accrued capital) is
not a taxable event for the shareholders.
Interest income
Interest income is taxed at the 15% CIT rate.
Foreign income
Resident companies are taxed on their worldwide income. Income is taxed for the given
taxation period; there is no possibility to defer taxation until the profit is repatriated
to Latvia. Income tax paid abroad included in the taxable base is allowed as a credit
against the CIT charged for the year. However, the credit must not exceed the Latvian
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tax attributable to the income taxed abroad. Any unused tax credits may not be carried
forward.
Deductions
Fixed assets may be depreciated for tax purposes according to the reducing-balance
method by applying the following rates to tax written-down values:
Types of property
Buildings, structures, and perennial plantations
10
Technology and energy installations, fleet, railway
20
Computer hardware and software, information systems, electronic equipment
70
Light passenger cars (except special purpose vehicles), motorcycles, and
30
air transport means
Oil rigs, oil exploration and extraction ships, sea and river transport means
15
Other fixed assets
40
The value of new technological equipment is multiplied by a coefficient (1.5 from 2009 to
2020) before claiming capital allowances. The effect of applying a coefficient is reversed if
the new technological equipment is disposed of within five years from acquisition.
Non-business assets are ineligible for capital allowances.
Intangible assets are eligible for capital allowances on a straight-line basis over the
following recovery periods:
Concessions: ten years.
Patents, licences, and trademarks: five years.
R&D expenses: one year.
Any intangible assets not fitting into any of these categories (such as goodwill) are
ineligible for capital allowances.
The cost of intangible investments is increased by a coefficient of 1.5 if such investments
result in a trademark or patent being registered.
Start-up expenses
There is no specific treatment for start-up expenses. Generally, after registration of the
company for tax purposes, expenses are deductible. Expenses accrued before registration
of a company cannot be deducted for CIT purposes due to the lack of supporting
documentation with company identifying information. However, input VAT on goods
purchased or services received prior to registration for VAT purposes is recoverable
if the goods purchased and services received or used will further be used for taxable
transactions.
Interest expenses
The CIT Act imposes restrictions on deductibility of interest payable on loans or credits,
factoring transactions, and finance leases under two methods. For further details, please see
Thin capitalisation in the Group taxation section.
Bad debts
Bad debts may only be deducted for CIT purposes if certain conditions are met.
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Donations paid to charitable institutions, non-profit making foundations, churches and

monasteries, and various other welfare institutions are not tax deductible, but may qualify
for a tax relief if certain criteria are met (see the Tax credits and incentives section).
Luxury vehicles
Luxury vehicles (i.e. light passenger cars with a value greater than EUR 50,000, excluding
VAT) are not eligible for capital allowances. A tax deduction is denied for expenses
incurred in using and maintaining luxury vehicles and for lease or hire purchase payments
associated with leasing such vehicles. These rules do not, however, apply to special
purpose vehicles (such as emergency vehicles and special passenger vehicles).
Provisions
Any increase in general provisions and reserves for the tax period as compared with the
previous tax period is non-deductible. These provisions include accruals for accrued
benefits, bonuses and commissions, and other expenses.
Non-business expenses
A tax deduction is not allowed for any expense not directly related to business activities.
In fact, non-deductible expenses have to be multiplied by a coefficient of 1.5 (except
donations made to qualifying institutions). Effectively, such expenses are taxed at 22.5%
(15% x 1.5).
Non-business expenses include costs that are not directly related to commercial
activities; all expenses incurred for the leisure and recreation of owners and employees;
entertainment trips taken by owners and employees in company vehicles; any benefits,
gifts, credits, and loans turned into gifts to owners and employees; and any other
disbursements in cash or in kind to owners or employees that are not part of remuneration
or that are not related to the taxpayers commercial activities.
Representation expenses
Under the Latvian CIT Act, representation expenses are costs that a company incurs in
developing and maintaining its prestige at a level acceptable to society. Representation
expenses include costs incurred in holding public conferences, receptions, and meals, and
the cost of producing items to represent the company (e.g. items bearing its logo). 40% of
representation expenses are deductible for CIT purposes.
Fines and penalties
Fines, contractual penalties, and statutory interest on arrears (including increase in

principal debt) levied under the Taxes and Duties Act and specific tax laws are not
deductible.
Taxes
Excise duties, employers national social insurance contributions, natural resource taxes,
customs duties, and real estate taxes are deductible.
Tax losses may be carried forward for an unlimited period of time if accrued since 2008.
Tax losses accrued before 2008 may be carried forward eight years (for more details, please
see table below).
Year losses accrued
2005
2006
2007
2008 and after
Last year losses can be used

2013
2014
2015
Not limited
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The carryback of losses is not permitted.
A company in which more than 50% of shares (a controlling interest) have changed
hands may utilise its tax losses if it continues for five years the same business that it
carried on during the two years prior to the change of control. When companies are
reorganised by a merger or spin-off, it may be possible to utilise losses accrued.
In general, a Latvian company may deduct the full amount of royalties, service fees,
and interest (subject to statutory limits) made to related parties to the extent that such
payments are made at arms length. Such payments may be subject to a WHT (see the
Withholding taxes section). However, if a taxpayer fails to deduct the WHT due, the
amounts paid cease to be deductible for tax purposes.
Group taxation
Group consolidation is not permitted for tax purposes. As of 2014, it is no longer possible
for the members of a group of Latvian companies, whose parent directly or indirectly
owns 90% of the capital of its subsidiary or subsidiaries, to surrender their current-year
tax losses to one another.
Transfer pricing
The Latvian Regulation governing the application of the CIT Act states that for transfer
pricing calculation purposes, use may be made of the Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations, a document issued by the
Organisation for Economic Co-operation and Development (OECD).
Latvian law requires that related-party transactions be in compliance with the armslength principle. Under the arms-length principle, the conditions made or imposed
between two related enterprises in their commercial or financial relations must not
differ from those that would be agreed between independent enterprises engaging in
similar transactions under similar circumstances.
A tax audit may examine and adjust the price of a transaction in the following
circumstances:
The transaction is between related parties.
Barters and set offs.
A price deviation exceeds 20% of prices that the taxpayer has applied to similar goods
or services over a short period.
Exports and imports.
The transfer pricing requirements for the arms-length price of a related-party
transaction primarily apply to transactions between two or more related companies.
Also, Latvian legislation requires the taxpayer to adjust ones taxable income for the
difference between the price applied to a transaction and the arms-length value if the
transaction involves:

individuals related to the company

related foreign companies
companies exempt from CIT or enjoying CIT relief pursuant to other Latvian laws
a Latvian-related company with which it forms a single tax group, or
a company located in a jurisdiction with a more favourable tax regime.
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This provision may apply to any transaction, including purchases and sales of fixed assets
and goods, supplies of services, loans and borrowings, and intellectual property (IP). It
is possible to use corresponding adjustments and adjust taxable income if a related party
has made adjustments of its income according to transfer pricing rules. It is possible
only if the related party is registered in the European Union or a country that has an
effective DTT with Latvia and documentary evidence from the respective tax authorities
is received.
Obligatory transfer pricing documentation requirements in Latvia entered into force on
1 January 2013. According to the amendments in Latvian legislation, Latvian taxpayers
who enter into transactions with any of the parties listed above and whose annual
turnover exceeds EUR 1,430,000, and related-party transactions amounting to EUR
14,300 or more, have to prepare transfer pricing documentation for those transactions
exceeding statutory limits.
Within one month after receiving a request from the Latvian tax authorities, a taxpayer
must submit full transfer pricing documentation containing the following information:
Industry analysis giving a general overview of the industry in which the taxpayer
operates.
Company analysis.
Functional analysis giving information on the related parties functions, risks, and
assets.
Economic analysis, including:
a description of how the transfer pricing method was selected and
a benchmarking study.
While the full transfer pricing documentation requirement applies to entities exceeding
statutory limits in respect of turnover and the annual amount of related-party
transactions, other entities will still be required to prove that their transfer pricing
is at arms length. Normally, Latvian tax authorities expect taxpayers to be able to
demonstrate which transfer pricing method is used and how it has been applied (i.e. a
benchmarking study of third-party comparables showing that the prices applied by the
taxpayer fall within the arms-length range).
As of 2013, Latvian taxpayers can apply for an Advance Pricing Arrangement (APA) with
the State Revenue Service (SRS). The APA is an administrative act issued by the SRS to
address a taxpayers request in relation to establishing the conditions and methodology
to set transfer prices in related-party transactions for a maximum period of three years.
An option to apply for an APA with the SRS is available to companies whose value of the
transaction with foreign related parties is expected to exceed EUR 1,430,000 a year.
The fee payable to the SRS for the APA application is EUR 7,114 per APA application
payable in the following manner:
20% when submitting the APA application to the SRS.
80% after the SRS issues an official decision for initiating the APA with the taxpayer.
Please also note that in case the SRS refuses to initiate the APA with the taxpayer, they
reserve the right not to refund the initial 20% of the APA fee.
Thin capitalisation
Thin capitalisation rules apply when claiming a tax deduction for interest payments on
loans and finance leases.
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Taxable income should be adjusted for either:
interest paid in excess of interest calculated by applying to the liability 1.57 times
the average short-term interest rate at Latvian banks as determined by the Central
Statistical Office for the last month of the tax period or
interest in proportion to the excess of the average liability over an amount equal to
four times shareholders equity at the beginning of the tax year less any revaluation
reserve.
The higher of these calculations should be added to taxable income.
The following interest payments are fully deductible:
Interest paid on borrowings from credit institutions resident in Latvia, EEA member
states, or countries with which Latvia has an effective DTT.
Interest paid to the Latvian Treasury, Nordic Investment Bank, European Bank for
Reconstruction and Development, European Investment Bank, European Council
Development Bank, or the World Bank Group.
Interest paid on Latvian or EEA debt securities in public trading.
Interest expenses incurred by credit institutions and insurance institutions, regardless
of the lender.
Interest paid on borrowings from a financial institution is deductible up to the amount of
interest calculated by applying to the liability 1.57 times the average short-term interest
rate at Latvian banks as determined by the Central Statistical Office for the last month of
the tax period. The qualifying financial institution must meet the following criteria:
It is resident in Latvia, the EEA, or a country with which Latvia has an effective DTT.
It provides lending services or finance lease and is monitored by the controlling
institution that supervises credit institutions or the financial sector.

There is no CFC regime in Latvia.

Foreign tax credit
Tax paid abroad on income included in the taxable base is allowed as a credit against
the CIT charged for the year. However, the credit must not exceed the Latvian tax
attributable to the income taxed abroad and must be substantiated by confirmation from
the foreign tax administration. Any unused tax credits may not be carried forward.
Donations to public benefit organisations
CIT charge may be reduced by 85% of amounts donated to qualifying state-funded

institutions; Latvian-registered societies, establishments, and religious organisations;
or to institutions qualifying as public-benefit organisations under the Public Benefit
Organisations Act. Such a reduction may not exceed 20% of the total CIT charge. When
making a donation, the donor is not permitted to impose an obligation on the recipient
to carry out any acts that may be classified and treated as consideration.
Donation relief is also available for donations to EU/EEA entities that have statuses
similar to public-benefit organisations in the country of residence.
Large investment relief
CIT relief is available for investments over EUR 10 million in qualifying industries in
new, unused fixed assets (buildings and structures classified as industrial buildings and
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new plant and technological equipment) used for business purposes. The available tax
relief is 25% of the amount of investments made (15% for investments over EUR 50
million). Investment projects must be completed within five years after the tax relief is
granted by the Cabinet of Ministers.
Investments have to enable a company to launch a new line of business or to modernise
its existing production, which includes manufacturing new goods, a shift of business
activity from producing one type of goods to producing another type of goods, or a
complete overhaul of the manufacturing process.
Free ports and special economic zones (SEZs)
Companies operating in SEZs are entitled to CIT and real estate tax relief. These areas
include the free ports of Ventspils and Riga and the SEZs of Rezekne and Liepaja.
The qualifying companies may apply CIT relief of 80%. The CIT must be calculated at a
15% rate, resulting in an effective CIT rate of 3%. The companies may also apply 80%
WHT relief for payments made to non-resident companies.
Real estate tax relief amounts to 80%, and the municipality may waive the remaining
20%. Therefore, when meeting certain criteria, qualifying companies may decrease real
estate tax to zero.
The amount of total CIT and real estate tax relief that may be claimed by the company
depends on the amount of qualifying investments made by the company in the free port
or SEZ area. Depending on the size of the company, the total tax relief available ranges
from 50% to 70% from the amount of investments made.
Deferred tax on asset replacements
Latvia will allow a deferred payment of tax on profits arising on the sale of a replaced
asset in order to encourage manufacturing companies to replace inefficient and outdated
plant and machinery.
If a company acquires a functionally similar asset within 12 months before or after
the old equipment is disposed of, then any income (profit) on the disposal of the
old equipment is ignored in this tax period (i.e. the profit is deductible from taxable
income). Tax payment is deferred until the new equipment is sold and may be further
postponed if the equipment is replaced.
Tax incentive for deductibility of research and development (R&D) costs
There is a possibility to apply accelerated amortisation of R&D related costs (for tax
purposes, costs are multiplied by three). This is a new relief (since 1 January 2014) to
encourage R&D and will apply to employment related costs and R&D service agreements
signed with specific scientific institutions registered in an EU/EEA or a tax treaty country
(both type of costs that accrue after 1 July 2014). The IP that results from the R&D
activity must be the taxpayers property for at least three years. To qualify for R&D costs
relief, the taxpayer must have its own project documentation that meets certain rules.
Withholding taxes
The following types of payments to non-residents and, in some cases according to
Latvian transfer pricing rules, to related Latvian companies using CIT reliefs are subject
to WHT.
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Dividends
As of 1 January 2013, dividends paid to any company, except residents of blacklisted

low-tax countries and territories, are exempt from WHT.
As of 1 January 2014, it will be possible to pay extraordinary dividends to both private
and legal persons that are established, situated, or created in a tax haven. This will
attract 30% WHT.
Interest and royalties
As of1 January 2014, payments to any non-resident company will be tax exempt,
excluding payments to tax havens. In certain cases, for payments to tax havens, the
company may obtain State Revenue Service (SRS) confirmation that WHT does not
apply, provided that the payment has not been made to reduce the taxable income.
Rental payments
Rental payments for movable/immovable property in Latvia are subject to a 5% WHT,

except payments for aircraft used in international flights and payments for the rights to
use or use of industrial, commercial, or scientific equipment, which are exempt.
Management fees
Management and consulting fees are subject to a 10% WHT. The term management
and consulting means activities carried out by a non-resident directly or by outsourced
personnel to ensure the management of a Latvian company or to provide necessary
advice. DTTs may reduce the rate to 0%.
Disposal of real estate
A 2% WHT applies to proceeds from real estate disposals. This applies to income from
disposed shares or other participation in a Latvian or foreign-registered company or
other entity, if real estate in Latvia made up (in the period of disposal or the previous
period, whether directly or indirectly, through shareholdings in one or more other
entities established in Latvia or abroad) more than 50% of the asset value of the
company being disposed of.
In case of the sale of real estate, EU/tax treaty residents may choose between a 2% WHT
payment calculated on total income or 15% tax on profit.
A Latvian company can rely on a DTT to reduce the rate of WHT on any payments
previously mentioned. To this end, the Latvian company must obtain a valid residence
certificate for each type of payment to each recipient prior to making the actual
payment. A valid residence certificate is one approved by the foreign tax authority and
the Latvian tax authority.
Please see the following table for WHT rates applicable to the payments described
above:
Recipient
Dividends
Related Latvian
0
companies using certain
CIT reliefs
Companies in tax
15/30
havens (4)
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WHT (%)
Rental
Disposal of
Interest Royalties payments Management real estate
(1)
(1)
(2)
fees
(3)
10
0
5
10
2
5/15
15
15
15
15
Latvia
Recipient
Treaty:
Albania
Armenia
Austria
Azerbaijan
Belarus
Belgium
Bulgaria
Canada
China
Croatia
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India
Ireland
Israel
Italy
Kazakhstan
Kirghizia
Korea
Lithuania
Luxembourg
Macedonia
Malta
Moldova
Montenegro
Morocco
Netherlands
Norway
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
Spain
Sweden
Dividends
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
WHT (%)
Rental
Disposal of
Interest Royalties payments Management real estate
(1)
(1)
(2)
fees
(3)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
5
5
5
5
5
5
5/7
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
0/5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
2/15
Latvia
1133
Latvia
Recipient
Switzerland
Tajikistan
Turkey
United Kingdom
United States
Ukraine
Uzbekistan
Dividends
0
0
0
0
0
0
0
0
Interest
(1)
0
0
0
0
0
0
0
0
WHT (%)
Rental
Disposal of
Royalties payments Management real estate
(1)
(2)
fees
(3)
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
0
5
0
2/15
Notes
1.
2.
3.
4.
No WHT from 1 January 2014, excluding companies in tax havens.

Rental payments for movable/immovable property in Latvia are subject to a 5% WHT, except
payments for aircraft used in international flights and payments for the rights to use or use of
industrial, commercial, or scientific equipment, which are exempt.
EU/tax treaty resident may choose either to pay 2% from sales proceeds or 15% from profit.
15% applies to all payments to companies located in tax havens, with the following exceptions:
5% for interest on deposits and current accounts paid by Latvian banks.
Repayments of loan principal are exempt.
Goods/securities acquired at market prices are exempt.
30% for dividends that are paid more than once per year.
Tax administration
Taxable period
The fiscal year may not exceed 12 months and is normally based on the calendar year.
However, companies are permitted to choose alternative start and end dates for the tax
year. The first year of trading may last up to 18 months.
Tax returns
Tax returns are filed annually, together with annual accounts, within one month after
they have been approved but not later than four months after the end of financial year.
Thus, if the financial year ends on 31 December, the CIT return and annual accounts
must be filed not later than by 1 May of the following year. Larger companies may file the
CIT return and annual accounts not later than seven months after the end of financial
year.
Payment of tax
CIT usually is paid monthly on or before the 15th day of each month, with a final
adjustment when the annual tax return is filed. Monthly tax instalments are based on
the tax liability in the previous fiscal year and adjusted by the consumer price index.
A company may choose quarterly instalments if its monthly advances in the previous
period were less than EUR 711. For a new company, advance payments are voluntary.
Tax audit process
The tax audit commences with an audit note for open tax years (not more than three
years since the tax payment was due, and, from 2013, five years in case transfer prices
are audited). The duration of the audit may vary from a few weeks to a few months, in
certain cases, not exceeding 90 days. It can be extended to 150 days if information is
requested from foreign tax authorities. In case a simultaneous tax audit with a foreign
tax administration is initiated, the prolongation of such tax audit is not limited.
1134
Latvia
Latvia
Tax authorities should inform a taxpayer of a tax audit no later than ten working days
prior to the commencement of the audit with notification about documents the tax
authorities may like to receive.
During a tax audit, the auditor notifies the taxpayer about irregularities of calculation of
tax payments and any possible fines that could be charged. Prior to issuing the tax audit
decision, the auditors invite the taxpayer to final negotiations to discuss the tax audit
results.
Following the tax audit and the notification of tax audit findings, the company may in
turn:
Negotiate with the tax authorities with a view to reducing the tax burden and
achieve an out of court settlement. The out of court settlement offers the possibility
to reduce fines and late payment penalties calculated (not the additional principal
amount of tax calculated) by 50% to 85%. The conclusion of such a settlement
presupposes that the company accepts the findings of the audit for the audited years.
Appeal the decision to the Director General of the SRS.
Only after receiving the decision of the Director General of the SRS, may the taxpayer
take the case to court. An advance payment of additional tax calculated and late
payment penalties is required. The first decision normally takes up to two years and
another two years until a decision by the Court of Appeal and Supreme Court is
issued.
The right of the Latvian tax authorities to collect unpaid taxes is three years since the
relevant tax payment was due. Transfer prices may be examined for five years from 2013
onwards.
Topics of interest to the Latvian tax authorities include:

Transfer pricing, non-arms-length lending, and other arrangements with related
parties.
Non-business, marketing, and representation expenses.
Payments to and from non-resident companies, including tax haven companies.
Obligation to register PE in Latvia.
Unpaid payroll taxes or hidden employment relationships.
Recoverability of input VAT.
Latvia
1135
Lebanon
PwC contact
Wadih AbouNasr
Saba House bldg, Block B&C
Said Freiha Street
Hazmieh
Lebanon
Tel: +961 (5) 428 600
The Ministry of Finance (MoF) is in the process of establishing new tax laws connected
with the oil and gas sector in Lebanon.Our understanding is that the MoF will
recommend a different treatment for such companies from the current tax law, whether
related to the corporate income tax (CIT), value-added tax (VAT), or personal income
tax (PIT). Therefore, this tax summary may not be applicable to oil and gas companies
considering establishing in Lebanon.
Following the Council of Ministers approval of the agenda for the Licensing Round
during its session of 27 December 2012, the Ministry of Energy and Water (MoEW)
issued, on 21 February 2013, Decree no. 9882 regarding the rules and procedures for
launching of the Pre-Qualification Round for Oil Exploration in Lebanon.
The MoF issued Decision No. 1157/1, dated 25 October 2013, stating that taxpayers
registered for VAT are required to electronically submit VAT, built property tax (BPT),
and payroll tax declarations available on the MoF portal starting in 2014.
Electronic filing was introduced in the first quarter of 2014. Taxpayers will be subject to
applicable penalties in cases where the electronic-tax declarations were not filed within
the legal deadline. Note thatdiplomats, counsellors, and international organisations are
exempt from the electronic-tax filing requirement.
The MoF also issued Instructions No. 1916/S1, dated 17 May 2013, that relates to the
cancellation of Instructions No. 2982/S1, dated 8 September 2010, where VAT at 0%
was applied to recharge of expenses from an entity in Lebanon to another entity abroad
(VAT at 0% - export of services with the right of refund).
This new treatment for recharge of expenses from an entity in Lebanon to another entity
abroad is now subject to VAT at 10%.
It should be noted that the application of this treatment was effective 17 May 2013.

Under the income tax law in Lebanon, tax is levied based on income type. Accordingly,
the income tax law divides income into the following three categories:
Chapter I - profits from industrial, commercial, and non-commercial professions.
Chapter II - salaries and wages and pension salaries.
Chapter III - revenues from moveable capital (Chapter III mainly covers all types of
dividend income, board member appropriations from profits, and interest income,
including interest on bonds and treasury bills).
1136
Lebanon
Lebanon
The income tax law does not provide for a single tax on income. Accordingly, where a
taxpayer has income from different sources, each type of income is taxed according to
the tax chapter it falls under. The applicable rates are as follows:
CIT: 15%.
Capital gains tax: 10%.
Dividend distribution withholding tax (WHT): 10% (may be reduced to 5% in certain
cases).
Non-resident WHT: 7.5% for services and 2.25% for other than services.
Payroll tax: from 2% to 20%.
Moveable capital WHT: 5% or 10%.
Not all businesses are taxed in the same manner. Depending on the relative size and
structure of a business, the tax method applied is assessed depending on real (or actual)
profits or deemed profits.
Real profit method
In Lebanon, tax is charged on the total income or profits derived in Lebanon. Based on
the income tax law and the principle of territoriality, the main premise for considering a
profit to have been realised in Lebanon is if it was generated through an effort or activity
exerted in Lebanon.
The tax base (the determination of profits) and the tax rates differ between resident and
non-resident taxpayers.
For resident corporate entities, CIT is computed at 15% based on the taxpayers
accounting profits after adjustments resulting from tax rules through the schedule of
accounting-to-tax calculation.
The use of the real profit method is mandatory for the following:

Corporations (SAL).
Limited liability companies (SARL).
Companies of individuals.
Branches of foreign companies.
All entities employing more than four employees or importing goods.
Small entities may choose voluntarily to be subject to the real profit method; however,
once they choose the real profit method, they cannot revert back to the deemed profit
method.
Concerning tax on non-residents, WHT applies at 2.25% on payments for goods and
7.5% on payments for services.
Deemed profit method
A deemed profit method is imposed on insurance and savings institutions, taxable

transport companies, oil refineries, and public work contractors.
Taxation is based on deemed profits and is levied at a flat rate of 15%.
The rate of deemed profit for public work contractors, as approved by the MoF, is
currently set at either 10% or 15% of total amounts collected per year, based on the type
of activity performed by the contractor.
For insurance companies, the deemed profit rate is 8% for all insurance activities.
Lebanon
1137
Lebanon
Local income taxes
There are no local government taxes on income in Lebanon.
Corporate residence
Tax is levied on all corporeal/natural and incorporeal/artificial persons, resident in
Lebanon or outside, on all profits that they generate in Lebanon. The main premise for
considering profits to have been realised in Lebanon is when such profits have occurred
from an effort exerted in Lebanon, irrespective of the identity of the taxpayer or place
ofresidency.
Tax is levied on profits generated by two categories of taxpayers: resident taxpayers and
non-resident taxpayers.
Resident taxpayers
A person, establishment, or company is considered resident for tax purposes, even if not
physically resident in Lebanon, when any of the following two terms are satisfied:
Have an office or a fixed place of business in their name in Lebanon, even when they
are not undertaking their business in a normal and repetitive manner.
Practising a profession or business activity in a normal or repetitive manner in
Lebanon, even if they do not have a known registered place of business in Lebanon.
This is because they are considered to have practised their profession from the place
in which they contact their customers, even if such place is a hotel or a caf.
Non-resident taxpayers
Non-resident taxpayers can consist of persons residing in Lebanon and persons residing
outside Lebanon. A corporeal person residing in Lebanon is subject to the non-resident
WHT (see the Withholding taxes section for more information) if neither of the following
two terms are satisfied:
Practise a certain trade in a normal and repetitive manner in Lebanon, irrespective of
whether or not they have a known registered place of business.
Have a known registered place of business in Lebanon.
A person residing outside Lebanon is subject to the non-resident WHT on the amounts,
revenues, profits, or proceeds obtained from Lebanon as a result of undertaking an
activity in whole or in part on Lebanese territory or as a result of exploiting rights in
Lebanon.
There are no clear provisions in the Lebanese income tax law to define PE.
Other taxes
The standard VAT rate in Lebanon is 10%. Unless specifically exempt, VAT is levied on all
commercial transactions undertaken by business entities. Export of goods and services
and export-related services, international transport, and some of the intermediate
operations are zero-rated. Banking, financial services, and insurance operations are
exempt from VAT.
Customs duties
Modern, simple, and efficient assessment means are adopted by the customs authorities
(e.g. electronic declarations, declaration in advance, applying international procedures
1138
Lebanon
Lebanon
in clearing the goods, selective inspection, auditing the goods after their release, and
adopting the unique declaration).
Customs rates are imposed and modified according to decisions from the Lebanese
customs authorities. These decisions are adopted based on the need of the Lebanese
markets of some goods and the will to protect national production sectors.
Safeguard measures are provided for in relation to imported goods. The purpose behind
such measures is to protect the domestic production sectors when an increase of imports
is witnessed when compared to the same period during the previous year.
The rates are determined based on a specific schedule created in conformity with the
Harmonised System of Nomenclature. This conformity with the unified system allows
Lebanon to represent an importer friendly environment for importers.
The normal rates are applied where there is no preferential agreement. When the origin
of the good or part of the good is from a country with which Lebanon has a preferential
customs treatment, preferential rates apply.
Customs rates in Lebanon are either determined in percentage or paid as a lump sum per
unit of imported products.
Excise taxes
Excise taxes are mainly applicable in Lebanon on certain beverages and spirits, tobacco
products, gasoline, and vehicles.
Built property tax (BPT)
TheBPT is an annual progressive tax, ranging between 4% and 14%, on built property.
Stamp duty
Two kinds of stamp duties are levied. A proportionate stamp duty of 0.3% is levied on
all deeds and contracts (written or implied) that mention specific payments or other
sums of money. A fixed stamp duty ranging between a minimum of 100 Lebanese pounds
(LBP) and a maximum of LBP 2 million is applicable on documents in accordance with
schedules appended to the stamp duty law.
Capital gains tax
Under local legislation, companies are permitted to revalue their fixed assets every five
years. Capital gains recognised from such a revaluation, as well as any profits that may
be realised from the disposal of fixed assets, are subject to a capital gains tax of 10%.
Income from disposal of shares realised by a company is subject to 10% capital gains tax
when the shares are classified as financial assets in the companys balancesheet.
Income from disposal of shares realised by a company whose main activity is the
acquisition of investments is subject to 15% CIT.
Registration taxes
The estimated cost of establishing a company in Lebanon is around 7,500 United States
dollars (USD). This includes lawyers fees and registration fees. The registration fees will
increase if the company is established with capital exceeding the minimum requirement.
However, the registration fees should not normally exceed 1% of the value of capital.
For branch offices and representative offices, establishment costs are lower and may be
estimated at USD 5,000.
Lebanon
1139
Lebanon
When transferring ownership of real estate, registration fees of approximately 6%
areapplicable.
Payroll taxes
Employers are responsible for withholding and declaring payroll taxes on behalf of their
employees. Payroll tax is levied at progressive rates of 2% to 20%.
Branch income
Net income derived from a branchs operations in Lebanon is subject to Lebanese CIT,
levied under the real profit method at a rate of 15%. Taxable profits of foreign branch
offices are deemed to be distributed on a yearly basis and are subject to a dividend
distribution tax at the rate of 10%.
Representative offices
Representative offices do not pay CIT as long as they do not carry out commercial
activities. Representative offices are required to submit annual tax declarations along
with detailed company information that includes employee information, a balance
sheet, an income statement, a non-resident tax schedule, and a schedule of payments to
professionals. The declaration, with all relevant documentation, should be submitted
as one single set. All the information included should be based on accounting records.
The deadline for submitting the declaration depends on the legal form of the parent
company (i.e. before 1 June of the following year for SAL or SARL companies and before
1 May of the following year for others).
Inventory valuation
For tax purposes, inventory is valued using the weighted average cost method.
Capital gains
Note that income from disposal of shares realised by a company whose main activity is
the acquisition of investments is subject to 15% CIT.
Dividend income
Dividends received as a result of a taxable persons activity are deemed trading income
and are subject to 15% CIT. Dividends received as passive income are subject to 10%
tax in Lebanon. However, dividends received from Lebanese entities are exempt from
CIT, as the dividend tax is withheld at source, but are not exempt from further tax upon
distribution from the recipient entity.
Stock dividends
The Lebanese law is silent on the tax implications of stock dividends. However, when
share capital is increased by reducing retained earnings, no tax is applicable.
Interest income
Interest earned by corporations is added to taxable income. Relief is given for the WHT
suffered on bank accounts, treasury bills, and bonds issued to the extent of the CIT due.
1140
Lebanon
Lebanon
Rental income
Rental income should be deducted from the accounting result to reach the taxable
result. Moreover, expenses related to property that is rented out should be added back to
the accounting result to reach the taxable result.
ABPT is paid on rental income at progressive rates ranging between 4% and 14%.
Royalties income
Royalties received by a holding company from Lebanese companies for patents and the
like are taxed at a rate of 10%. Royalties received by holding companies from abroad are
exempt from tax.
Royalties received by other than holding companies are taxed as ordinary income
at15%.
Unrealised exchange gains and losses are not treated differently from any other gain
or loss for tax purposes, i.e. unrealised exchange gains are subject to CIT at 15% and
unrealised exchange losses are deductible for CITpurposes.
Foreign income
Resident corporations are not taxed on foreign-source income derived from activities
carried out abroad through foreign branches.
Deductions
Depreciation
Depreciation of property, plant, and equipment (at rates fixed by ministerial decree)
isdeductible. The depreciation method to be used is the straight-line method. If a
depreciation rate that is higher than the low rate is adopted, the MoF should be notified.
The allowable depreciation rates are as follows:
Assets
Low rate (%)
Buildings (commercial, touristic, and services)
2
Buildings (industrial and artisanal)
3
Buildings and constructions (commercial or industrial)
6
Freehold improvements and decorations
6
Technical installations and industrial equipment
8
Computer hardware and software
20
Vehicles (cars)
10
Vehicles (transport of goods/buses)
6
Sea transport
5
Air transport
20
Office equipment and furniture
8
Glassware and silverware (hotels, restaurants, etc.) Inventory at year-end
Gas cylinders
High rate (%)

5
10
20
25
25
50
25
20
10
25
25
Inventory at year-end
20
Goodwill
Under Lebanese tax rules, goodwill cannot be amortised.
Organisation and start-up expenses
Organisation and start-up expenses are amortised over three to five years for
taxpurposes.
Lebanon
1141
Lebanon
Interest expenses
Interest on business loans is deductible, under certain conditions. Interest paid on the
taxpayers capital is not deductible.
Bad debt
Bad debts are deductible if all means for collection of the debt have been exhausted.
Provisions for bad debts are deductible if a debtor has been declared bankrupt. Surplus
provisions are added to profits.
Charitable contributions are deductible if made to approved charitable, social, cultural,

or sporting institutions, within certain limits.
Gifts
Gifts given by the company in cash are non-deductible.

Gifts given by the company in-kind to customers when the amount of each gift exceeds
LBP 1 million per person per year and when the total amount of gifts in-kind exceeds 1%
of the turnover are non-deductible.
Fines and penalties
Fines and penalties are not deductible in Lebanon.
Taxes
Taxes and duties incurred in the course of business (except CIT) aredeductible.
Taxes due to foreign governments on income earned in Lebanon are non-deductible.
Exceptional taxes and fines are non-deductible.
Other deductible expenses include:

Cost of goods sold.
Cost of services rendered.
Rent of business premises or, if the premises are owned by the taxpayer,
theirdepreciation.
Salaries, wages, and other employee benefits, including end-of-serviceindemnities.
General business expenses, including insurance premiums.
Reserves for severance payments, pensions, and disability payments. Surplus
provisions are added to profits.
Advertising and publicity expenses, within certain limits.
Travel, telephone, and vehicle expenses, within certain limits.
Entertainment expenses that are properly supported.
Board remuneration against services performed.
Accrued expenses as long as their occurrence is certain.
Employees life insurance premiums are deductible as long as they are included in the
employees benefits subject to payroll tax.
Other non-deductible expenses include:
With the exception of normal maintenance expenses, costs that increase the value of
the property, plant, or equipment (such costs should be capitalised and depreciated
in accordance with the fiscal depreciation rates).
Losses or share-in-costs resulting from enterprises, offices, and branches situated
outside Lebanon.
1142
Lebanon
Lebanon
Representation allowances in excess of 10% of an employees basic salary, as well as
unjustifiable and unreasonable salaries.
Personal expenses, such as payments deducted by an employer or partner for the
management of the business and for certain business expenses incurred by the
employer or partner.
Appropriations made to board members that do not comprise remuneration for work
done.
Provisions, other than those specifically allowed by law. Examples of non-deductible
provisions include provisions for bad debts, provisions for slow moving items, and
provisions for bonuses, contingencies, andcharges.
Tax losses may be carried forward for up to three years after the year in which they were
originally incurred. The carryback of losses is not available.
Capital losses may be used to offset taxable profits of the current year but may not be
carried forward.
Payments to foreign affiliates are generally subject to WHT.

Based on guidance issued by the MoF, recharges from the head office located abroad
(including advertising) are deductible up to a certain limit, calculated as follows:
(Assets of the branch in Lebanon / Consolidated assets) x Central administrative
expenses.
However, a ceiling of 3% of the branchs revenues is applied.
Group taxation
There is no group taxation in Lebanon.
Transfer pricing
In Lebanon, there are no clear and detailed transfer pricing or general anti-avoidance
rules. However, even in the absence of clear transfer pricing rules, exchanges or
transactions made between related parties should be done on an arms-length basis.
The tax administration has the right to reassess related-party transactions and adjust
their value in order to reflect the taxable amount related to the period under study.
Thin capitalisation
In Lebanon, there are no clear or detailed thin capitalisation rules.

Foreign tax credit
There are no specific regulations concerning foreign tax credit in Lebanon.
Holding companies
Lebanese holding companies are exempt from CIT and from WHT on dividends.
However, they are subject to a tax on their paid-up capital and reserves. In any given tax
year, total tax payments on paid-up capital and reserves are capped at LBP 5 million.
Lebanon
1143
Lebanon
Interest, management fees, and royalties received by holding companies from abroad are
exempt from tax in Lebanon.
Holding companies are subject to a 10% tax on interest received from loans granted for
a period less than three years to companies operating in Lebanon. Management fees
received by the holding company from companies operating in Lebanon are subject to
a 5% tax. Capital gains on financial assets in Lebanese companies held for less than two
years are subject to a 10% tax. Royalties received from Lebanese companies for patents
and the like are taxed at a rate of 10%.
Offshore companies
Offshore companies are exempt from CIT and from the WHT on dividends, and are
instead subject to a lump-sum annual tax of LBP 1 million. Contracts related to offshore
activities outside Lebanon are exempt from Lebanese stamp duty.
Offshore companies are required to be registered as SAL companies and, with a
few exceptions, are subject to the same regulations as a SAL company. The business
objectives of an offshore company are limited.
Permanent exemptions from CIT
Companies and organisations that are granted an indefinite exemption from CIT include
the following:

Educational institutions.
Hospitals, orphanages, asylums, and other shelters that admit patients free ofcharge.
Shipping, sea, and air transport associations (subject to certain restrictions).
Farmers, provided they do not display farm produce and cattle outlets or sell products
and meat after conversion tax.
Syndicates and other types of professional associations.
Miscellaneous non-profit organisations and co-operatives.
Holding companies and offshore companies.
Public sector bodies that do not compete with private institutions.
Reinvestment incentives
Industrial companies using operating profit to finance certain capital investments are
exempt from up to 50% of their CIT liabilities for a period of up to four years, provided
that such exemptions do not exceed the original investments made. In areas designated
development zones, 75% of a companys tax liabilities may beexempt.
In order to take advantage of this regulation, investments should consist of capital
expenditures designed to increase a companys manufacturing capacity or of investments
in housing facilities for the companys staff and other employees.
Withholding taxes
WHT on interest
The income, revenues, and interest earned from accounts opened at Lebanese banks
and from treasury bonds are subject to a 5% WHT that is non-refundable and cannot be
carried forward. This WHT is considered as an advance payment on the current CIT due
to the extent of that amount and acts as a minimum tax in situations where the tax due is
lower than the tax on interestpaid.
Non-resident WHT
Revenues earned by non-residents in Lebanon are subject to an effective WHT of 2.25%

on revenue from the sale of materials and equipment, and 7.5% on the revenue in the
case of sale of services.
1144
Lebanon
Lebanon
Movable capital WHT
A 10% WHT is levied on income derived from movable capital generated in Lebanon.
Taxable income is comprised of the following:

Distributed dividends, interest, and income from shares.

Directors and shareholders fees.
Distribution of reserves or profits.
Interest from loans to corporations.
WHT on dividends
Tax is withheld from dividends paid to shareholders/partners at a rate of 10%. The

dividend distribution tax rate may be reduced to 5% under specific conditions.
DTTs provide the following WHT benefits. Note that treaty rates do not override lower
non-treaty rates. Treaty members may take advantage of the non-treaty rates.
Recipient
Non-treaty
Treaty:
Algeria
Armenia
Bahrain
Belarus
Bulgaria
Cyprus
Czech Republic
Egypt
France
Iran
Italy
Jordan
Kuwait
Malaysia
Malta
Morocco
Pakistan
Poland
Qatar
Romania
Russia
Senegal
Sultanate of Oman
Syria
Tunisia
Turkey
UAE
Ukraine
Yemen
Dividends (%)
10
Interest (%)
10
Royalties (%)
7.5
15
5/10 (1)
0 (2)
7.5
5
5
5
10
0 (2)
5
5/15 (10)
10
0 (2)
5
5 (4)
5/10 (5)
10
5
0 (2)
5
10
10
5/10 (6)
5
5
10/15 (8)
0 (2)
5/15 (9)
10
10
8
0 (2)
5
7
5
0 (2)
10
0 (2)
5
0 (2)
10
0 (2)
10
0 (2)
10
10
5
0 (2)
5
5
10
10
10
5
10
0 (2)
10
5
10
5
0 (2)
5
5
0 (2)
5/10 (3)
5
7.5
5
0 (2)
10
5
8
5
5/10 (7)
7.5
5
0 (2)
5
5
10
10
18
5
10
5
10
7.5
Lebanon
1145
Lebanon
Notes
1.
Shall not exceed:

5% of the gross amount of the dividends if the beneficial owner is a company (other than a
partnership) that directly holds at least 25% of the equity capital of the company paying the
dividends.
10% of the gross amount of the dividends in all other cases.
2. Dividends, interest, or royalties arising in a contracting state and paid to a resident of the other
contracting state shall be taxable only in that other state.
3. Shall not exceed:
5% of the gross amount of royalties paid for the use of, or the right to use, any industrial,
commercial, or scientific equipment.
10% of the gross amount of royalties paid for the use of or the right to use, any copyright of
literary, artistic, or scientific work, including cinematograph films and films or tapes for radio or
television broadcasting any software, patent, trademark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial, or scientific experience.
4. Where the dividends are paid by a company that is:
Aresident of Lebanon to a resident of Malta who is the beneficial owner thereof, the Lebanese tax
so charged shall not exceed 5% of the gross amount of the dividends.
Aresident of Malta to a resident of Lebanon who is the beneficial owner thereof, the Malta tax on
the gross amount of the dividends shall not exceed that chargeable on the profits out of which the
dividends are paid.
dividends.
dividends.
10% of the gross amount of royalties paid for the use of or the right to use, any copyright of
literary, artistic, or scientific work, including cinematograph films and films or tapes for radio or
television broadcasting.
5% of the gross amount of royalties paid in other cases.
dividends.
dividends.
5% of the gross amount of the dividends if the beneficial owner is a company that has owned at
least 10% of the capital of the company paying the dividends for a period of at least 12 months
preceding the date the dividends were declared.
Tax administration
Taxable period
Lebanons fiscal year runs from January to December and is based on the Gregorian
calendar. With the special approval of the local tax authorities, companies may, however,
use their own accounting year.
Tax returns
Taxes on business income in any given year are based on the profits of the previous
financial year.
Tax returns by artificial persons (entities) must be filed by 31 March of the year following
the year of income. Tax returns by capital companies must be filed by 31 May of the year
following the year of income.
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Lebanon
Lebanon
Submission deadlines of annual declarations for institutions that are exempt from
income tax (other than companies) are as follows:
Before 1 February for institutions adopting the cash basis of accounting.
Before 1 April for institutions adopting the accrual basis of accounting and for
representative offices that represent non-corporate entities.
Before 1 June for representative offices that represent corporations.
If taxpayers fail to submit a tax return, realisation penalties will be due.
Payment of tax
The same deadlines for tax returns apply for tax payments.
If taxpayers fail to make payment, late payment penalties will be due.
Tax audit process
The most common ways for the tax authorities to select companies for tax audits are the
size of the company, the type of business, and certain risk assessment measures.
Tax audits typically cover a single type of tax.
In a typical situation, a tax audit is likely to take less than one year from first information
request to substantive resolution.
The tax administration has four years to collect its rights. The period is calculated from
the end of year that follows the current business year.
The taxable person may request the refund of excess tax within four years starting from
the end of the year where the refund right was created.
The tax administration can exceed the statute of limitations in cases where a profit or
revenue has been proven by a court order, arbitration, or inheritance clearance. The
extension is limited till the end of the calendar year following the end of the year in
which the tax administration was notified of such event.
Under the statute of limitations, a company should keep its accounting books and
documentation for ten years.
Lately, several topics have been of interest to the tax authorities in Lebanon, including
transfer pricing, payments of royalties and management fees to non-resident parties,
provisions, and employee compensation.
Other issues
Foreign ownership of real estate restrictions
The following restrictions apply to foreign ownership of real estate:

Up to 3,000 square metres does not require Council of Ministers approval.
Exploitation and normal lease right extending for a period of more than ten years
cannot be attained without obtaining approval.
Real estate owned by foreigners, for which approval has been obtained, cannot
exceed, over all of the Lebanese territory, 3% of the total area of Lebanon. In each
province, the total area owned should not exceed 3% of its area. With respect to
Beirut, the total area owned should not exceed 10% of its area.
Lebanon
1147
Lebanon
The approval is nullified if not acted upon during a period of one year.
When approval is granted, the building on the real estate should be constructed
within a period of five years (renewable once by the Council of Ministers).
Lebanons commercial law provides for a range of business entities available to both
local and foreign investors. These consist of the following:

Sole proprietorships.
General partnerships.
Limited partnerships.
Joint-stock companies (SAL).
Limited liability companies (SARL).
Holding companies.
Offshore companies.
Representative offices and branches of foreign companies.
Legal structures commonly used by foreigners in conducting business in Lebanon are

SALs, SARLs, and branchoffices.
Joint-stock companies (Socit anonyme libanaise or SAL)
Lebanese joint-stock companies are permitted to engage in all kinds of business activity.
Shareholders of a SAL have no liability beyond their actual capital subscriptions.
With a small number of exceptions (such as real estate companies and banks), there are
no limits on the amount of capital that can be held by foreign investors.
The management of a SAL is entrusted to a board of directors with a minimum of three
and a maximum of 12 members. The majority of board members must be Lebanese, but
the chairman may be a foreign national.
Certain types of businesses, such as banks and insurance companies, are required to
incorporate as joint-stock corporations. Minimum capital: LBP 30 million.
Taxation: the applicable CIT rate is 15% in addition to a WHT on dividends of 10%,
reduced to 5% in certain cases, mainly if the shares arelisted.
Limited liability companies (Socit responsabilit limite or SARL)
Members of a limited liability company are partners, and the companys capital is
divided into parts rather than shares. Partners are liable only to the extent of their parts,
and individual partners claims on the companys capital are fixed in the partnership
deed.
All partners may be foreigners, with the exception of companies seeking to engage in
commercial representation.
Limited liability companies may not be active in certain sectors of the economy, such as
in insurance, banking, fund management, or air transportation.
The transfer of parts in a limited liability company is subject to the consent of partners
representing at least three-quarters of the capital. Existing partners enjoy priority in the
purchase of parts offered for transfer.
A limited liability company is managed by one or several directors (managers) who
may or may not be selected from among the partners. Minimum capital: LBP 5
million.
Taxation: the applicable CIT rate is 15% in addition to a WHT on dividends of 10%.
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Lebanon
Intellectual property
The law in Lebanon does not contain a clear definition of authors rights. It protects all
products of the human intellect whether written, pictorial, sculptural, scriptural, or oral,
regardless of its value, importance, destination, or form of expression.
The law provides patent protection for inventions and plant varieties and a sui generis
protection for layout designs of integrated circuits. Furthermore, the law provides
protection for undisclosed information. According to an assessment conducted by
the World Intellectual Property Organization (WIPO) in July 2002, the Patent law
is in complete conformity with the WTOs Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS). It was also pointed out that the provisions of the
Plant Varieties exceed the minimum requirements of the TRIPS Agreement.
The law does not explicitly protect notorious trademarks and geographical indications.
However, those are provided protection via Lebanons membership to the Paris
Convention. Moreover, geographical indications are provided protection under the
provisions of the Law on Customs, the Law on Fraud Control, and the Criminal Law.
The copyright protection originally available to literary and artistic works is now
extended to computer software, video films, and all kind of audio-visual works. The law
provides stiffer penalties for offenders and better compensation to the persons whose
rights have been infringed. The manner in which the copyright is breached has also been
extended.
Lebanon
1149
Libya
PwC contact
Husam Elnaili
PricewaterhouseCoopers/Al Motahedoon LLC
Aldool Street, Ben Ashour
Tripoli, Libya
Tel: +218 21 360 9830 ext. 110
Since 2011, there have been no significant corporate tax developments. We are aware
that the relevant authorities are drafting new legislation with respect to Income Tax and
Petroleum Law, but uncertainty exists as to whether these drafts will become legislation
due to the current political uncertainty.

For any Libyan registered entity, income arising both in Libya and abroad (i.e.
worldwide) is assessable for corporate income tax (CIT) purposes in Libya.
CIT is imposed annually on the same basis for Libyan controlled corporate entities,
foreign controlled corporate entities, and branches of foreign companies.
CIT is levied on taxable profits at a flat rate of 20%.
Jehad Tax
There is a flat rate of Jehad Tax assessed at 4% on taxable corporate profits.

Jehad Tax was established by Law 44 of 1970. The purpose of the tax is to further the
Muslim cause, in a peaceful manner, throughout the world.
Local income taxes
Libya has no provincial income tax laws.
Corporate residence
Corporate residence is not specifically dealt with under the laws of Libya. The tax
authorities will seek to assess any income derived from services provided in Libya.
Double tax treaties (DTTs) being signed introduce the concept of PE. However, general
law requires that any foreign entity seeking to provide services in Libya should obtain
a business licence, which necessitates it registering as a legal entity. Historically,
unregistered foreign entities have provided services in Libya, but this is not in line with
the law and it is becoming difficult to do so.
Other taxes
There is no VAT in Libya.
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Libya
Customs duties
Customs duties were abolished in 2005, except for tobacco and tobacco products.
A service fee of 5% on the value on most imports also exists. There are various
exemptions to this service fee, specifically under Investment Law and within the oil
sector.
Other dues and taxes on importation are estimated at 0.5%. Initially, a temporary import
licence is issued for six months that can be extended to a maximum of three years. A
guarantee or a deposit can be provided by the importer to the Customs Department.
Excise taxes
Libya has no excise taxes.
Property taxes
Libya has no specific property taxes.
Transfer taxes
Libya has no transfer taxes.
Stamp duty
Stamp Duty Law levies a schedule of duties and rates on various documents and
transactions. The most relevant to corporate entities is Schedule 28, which prescribes
the rate of duties on contracts for the provision of services or supply. The duty on main
contracts is 1% and on subcontracts is 0.1%. Note that there is a duty of 0.5% on all
payments to the Tax Department as well.
Social security contributions (INAS)
Social security contributions are payable by all persons working in Libya, including
expatriates.
Social security contributions are computed on gross income, and current rates are as
follows:
Gross income
Employees contribution
Employers contribution
Contribution from public treasury
Total
Foreign branch (%)

3.75
11.25
15
Libyan entity (%)

3.75
10.50
0.75
15
Social security is withheld by the employer and payable monthly, within ten days after
the month end. For social security purposes, a late payment fine of 5% per annum is
assessed on the amount due.
Branch income
Tax rates on branch profits are the same as on corporate profits. However, the Income
Tax Law allows the Tax Department to assess income tax on branches of foreign
companies as a percentage of turnover via the deemed profit basis of assessment. Tax is
therefore payable even where tax losses are declared.
The level of deemed profit applied to turnover varies according to the branchs type of
business activity. This ranges from 10% to 15% for civil works and contracting (turnkey
projects), 15% to 25% for oil service, and between 25% and 40% in the case of design/
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1151
Libya
consulting engineers. A deemed profit of between 5% and 7% is also assessed on
supply. The deemed profit percentage applied to any year will be higher than the profit
percentage declared in the annual tax return since the deemed profit basis is applied
during the course of a tax audit and is effectively a revenue generating exercise for the
tax authorities. Historically, tax audits have not resulted in credits or reimbursements.
No specific rules apply on income determination for the following categories:

Interest income.
Partnership income.
Rent/royalties income.
Foreign income.
The Income Tax Law allows entities to account on an accrual basis or on a cash basis.
Inventory valuation
The Commercial Code allows inventory to be valued at the lower of cost and net
realisable value.
Capital gains
Any chargeable gains on the sale of capital assets are taxed as ordinary income. For
entities assessed on a deemed profit basis, capital gains should be added to the deemed
taxable income.
Dividend income
Historically, dividend income has not been subject to any additional taxes.
Libyan taxation laws do not contain any special provisions regarding inter-company
dividends.
Stock dividends
Stock dividends are not specifically dealt with in Libyan taxation laws. The current
practice is for dividend distributions not to be taxed.
Deductions
Taxable income is determined after deducting all expenditure and costs incurred in the
realisation of the gross income (for more details on the deemed profit basis of assessment
on branches of foreign companies, see the Branch income section).
For any entity (not a foreign branch) seeking to be assessed on an add-back basis, it
should ensure, in accordance with Stamp Duty Law, that the majority of its costs can be
supported by tax-registered documents, i.e. declared payrolls and registered contracts
and invoices.
Depreciation
Depreciation should be calculated in accordance with the Executive Regulations of the

law.
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Libya
Assets
Buildings:
Building in which machines are fixed
Building without fixed machines
Moveable buildings
Means of transport:
Passenger
Cargo and freight:
Less than 3 tons
Over 3 tons
Ships
Fishing boats
Aeroplanes
Furniture:
Office, ship, and domestic furniture
Hotel, restaurant, cafes, and hospital furniture
Work camps outside of cities
Food utensils and furnishings for restaurants, hotels, and the like
Machines:
Office machines
Electric generators
Computers and accessories
Software
Other machines
Depreciationrate(%)
4
2
10
20
15
10
5
5
8
15
20
20
25
15
20
25
50
15
Goodwill
Purchased goodwill can be amortised on a straight-line basis over five years.
Organisation and start-up expenditure
Organisational and start-up expenditure can be capitalised and amortised over five years
on a straight-line basis.
Interest expenses
No specific rules apply for the deduction of interest expenses.
Bad debt
Bad debts are only recognised to the extent that they have been recognised as such
legally.
Donations to charities recognised by the state are permitted at up to 2% of net income.
Fines and penalties
No specific rules apply for the deduction of fines and penalties.
Taxes
No specific rules apply for the deduction of taxes.
Losses may be carried forward and deducted from future profits, for up to five years. The
Income Tax Law has no provision for the carryback of losses.
Libya
1153
Libya
No specific rules apply for the deduction of payments to foreign affiliates.
Group taxation
There is no recognition of a group for taxation purposes.
Transfer pricing
No transfer pricing rules exist in the general law.
Thin capitalisation
No thin capitalisation rules exist in the general law.

Foreign tax credit
Under general tax law, no provision exists for allowing the deduction of foreign tax
credits.
CIT exemption
Exemptions to CIT exist, most notably, under the Investment Law. General projects
registered under the Investment Law are permitted a five-year CIT holiday with a
possibility to extend for a further three years.
Exemptions also exist for strategic infrastructure projects. Such exemptions must be
awarded by the legislative body, either by ratifying the relevant contract, which includes
a tax exemption clause, or by the issuance of a separate law.
Customs and stamp duties exemption
The Investment Law also provides exemptions for customs duties and stamp duty. The
exemptions that exist are bestowed on subcontractors to the relevant projects.
The Petroleum Law provides exemption to customs duties on oilfield-specific equipment
and materials, which is also provided to oil service companies.
Withholding taxes
Libyan law has no withholding taxes (WHTs). Generally, for unregistered foreign entities
seeking to register a contract with the tax authorities, CIT will be assessed (and must
be settled) on a deemed profit basis at the time of registration. It may be possible to
negotiate a WHT in preference to the aforementioned general procedure for a significant
contract where there is greater uncertainty as to the estimated contract value.
Tax administration
Taxable period
The tax year is generally a calendar year, although assessments can be made on the basis
of a companys own year-end, provided permission is granted in advance from the Tax
Department and the company then adheres consistently to the same date.
Tax returns
All corporate entities must make an annual filing within four months of its year-end or
within one month of its audit report, whichever is earlier.
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Libya
Payment of tax
CIT is payable on a quarterly basis (10 March, 10 June, 10 September, and 10 December)
normally commencing the first quarter date after an assessment has been issued.
Late payment penalties
A late payment penalty is assessed on the tax due at the rate of 1% to a maximum of
12%. In addition, the remaining quarterly payments are due immediately for failing to
make an instalment on time.
The law also imposes the following penalties:
A fine of not less than three times the amount of unpaid tax due shall be applied to
any person who fails to pay tax by the due date.
Without prejudice to any harsher penalty, a fine of not less than four times the
amount of tax due and unpaid will be applied to any person who, with intent to evade
all or part of the tax, commits any of the following acts or abets, agrees, or aids a
person who commits such an act:
The making of false statements in declarations submitted under this law.
The preparation of false accounts, books and records, reports, or budgets.
The use of fraudulent means to conceal or attempt to conceal taxable amounts due
under this law.
Tax audit process
Tax audits typically occur every three or four years.
The statute of limitations for CIT purposes is seven years.
The tax authorities focus during audits continues to be on confirming revenue, ensuring
major services providers contracts are tax registered, and seeking additional undeclared
salaries and benefits.
Other issues
Statutory Books
Business entities operating in Libya are required by Libyan Law to maintain a General
Ledger and a General Journal (i.e. the Statutory Books).
Before use, these must be stamped as registered with the Revenue Authorities and the
Commercial Court. It should be noted that a Ledger or Journal will not be registered if it
already contains accounting entries (i.e. one cannot register existing books of account).
Similarly, transactions pre-dating the date the books are registered will be disallowed.
In theory, transactions should be entered daily, but in practice, most companies write up
their statutory records on the basis of monthly transactions summaries.
The Tax Inspector will always request production of the Statutory Books at the
commencement of a tax audit. If these are not available, a perfunctory audit of the
English (or other language) books of account will be made, and it is likely that there will
be a punitive increase in taxable income as a consequence.
The new Commercial Code allows approved computer based ledgers to be used instead
of the traditional manual ledgers.
Libya
1155
Liechtenstein
PwC contact
Dr. Marco Felder
PricewaterhouseCoopers AG
Vadianstrasse 25a/Neumarkt 5
CH-9001 St Gallen
Switzerland
Tel: +41 58 792 4418
Changes applicable for tax period 2013
On 24 April 2013, the Liechtenstein parliament accepted various changes in the

Liechtenstein Tax Act. The most important developments impacting corporate taxpayers
are as follows:
Loss carryforward is limited to 70% of the taxable annual profit, while the other 30%
can still be carried forward indefinitely. As a consequence, 30% of the taxable profit is
subject to annual taxation even if corresponding losses from previous years exist.
Losses due to the notional interest deduction (currently 4% of modified equity) are
no longer accepted; consequently, a negative result due to this deduction does not
generate loss carryforward.
As approved by the European Free Trade Association (EFTA) Surveillance Authority
(ESA), software and technical/scientific databases now explicitly qualify for the
Liechtenstein intellectual property (IP) box.
The first two changes above are applicable for 2013 tax assessments. The extension of
the Liechtenstein IP box to software and technical/scientific databases is applicable for
the 2012 tax period.
Proposed changes for tax period 2014
Currently, the Liechtenstein Parliament is debating various changes to the Liechtenstein

Tax Act. The most important developments impacting corporate taxpayers are set out
below:
Notional interest deduction (NID) on equity
According to the Liechtenstein Tax Act, modified equity is defined as the equity amount
minus own shares, participations in corporations, net assets in foreign real estate and
permanent establishments (PEs),and assets not operationally necessary. Similar to the
developments in Belgium, however, foreign real estate and PEs shall no longer reduce
modified equity, which is the basis for the notional interest calculation.
In addition, modified equity shall be further reduced by 6% of all assets qualifying
for the NID. This means that, after deducting non-qualifying assets (own shares,
participations, non-operating assets), an additional deduction of 6% on the remaining
assets has been suggested.
Alternatively, a reduction of the NID rate is in discussion (deviation between the NID
rate and the standard interest rate on wealth for individuals).
Losses from foreign PEs and group loss offsetting
Currently, losses from a foreign PE can be offset with taxable net corporate income, to
the extent these losses were not already taken into account in the country where thePE
is situated or in another country. If that PE records profits in the following years, these
profits needed be added to taxable net corporate income again. The government now
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Liechtenstein
Liechtenstein
proposes to limit the maximum period for such loss-take-over tofive years. Afterwards,
the losses will be added up if not yet added to the taxable profit due to foreign loss
offsetting. The same limitation of loss take-over is also proposed for group taxation.
Minimum tax
The government proposes to apply the minimum tax on all corporations. Currently, in
the case of taxpayers whose exclusive purpose is to operate a commercially conducted
business and whose average balance sheet total over the last three years did not exceed
500,000 Swiss francs (CHF), the minimum corporate income tax (CIT) is not levied.
Old reserves (coupon tax)
Due to administrative and financial aspects, the government proposes to raise coupon
tax on all old reserves by 31 December 2015. The coupon tax rate shall be reduced to
2.5% (instead of 4%) for the tax years 2014 and 2015.
Recent developments with regard to tax treaties

The double taxation treaty (DTT) between Germany and Liechtenstein entered into
force and is applicable as of 1 January 2013.
The DTT between Austria and Liechtenstein was revised and, particularly, includes a
zero rate withholding tax (WHT) on dividend payments. It entered into force and is
applicable as of 1 January 2014.
The DTT with Malta was signed on 27 September 2013.
The tax information exchange agreement (TIEA) with Japan is applicable asof 1
January 2013.
The TIEA with Canada entered in force on 26 January 2014 and is applicable for the
tax period 2015 and beyond.
TIEAs with China, Guernsey, India, Mexico, and South Africa have been signed.

In principle, all corporations, foundations, and establishments are subject to a profit
tax at a flat rate of 12.5%. Resident companies are subject to unlimited tax liability on
worldwide income. Non-resident companies are subject to limited tax liability on income
from properties or branches within Liechtenstein.
Minimum tax
All legal entities are subject to an annual minimum tax of CHF 1,200. This tax can be
fully credited to the profit tax.
The full tax amount is due even if the corporation is not resident in Liechtenstein for the
whole tax period.
Under the lone exception, minimum tax is not due if the total assets of a legal entity did
not exceed CHF 500,000 during the last three years.
Corporate residence
A company is considered to be resident in Liechtenstein if its registered seat (address) or
place of effective management is within Liechtenstein.
Companies that have neither a domicile nor effective place of management in
Liechtenstein, as well as special asset dedications without legal personality, are subject
to limited tax liability for the following income:
Liechtenstein
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Liechtenstein
Corporate income from the cultivation of domestic real estate used for agriculture
and forestry.
Rental and lease income from real estate situated within Liechtenstein.
Taxable net corporate income of permanent establishments (PEs) situated in
Liechtenstein.
Please note that Liechtenstein has only a few DTTs (see the Withholding taxes section).
However, Liechtenstein is in the process of negotiating various new DTTs and has
included PE definitions according to the Organisation for Economic Co-operation and
Development (OECD) model treaty.
Other taxes
Liechtenstein has adopted the VAT law of Switzerland, having its own administration in
Vaduz.
The general VAT rate is 8%. A reduced rate of 2.5% is applicable to deliveries of food,
drugs, newspapers, magazines, and books. Furthermore, lodging/accommodation is
taxed at a reduced rate of 3.8%. Note that various services are VAT-exempt (e.g. health,
social security, education, banking, insurance).
Any person who, irrespective of legal form, carries on a business is liable for VAT. Any
person liable for VAT that is involved in domestic entrepreneurial activity with a taxable
turnover that is less than CHF 100,000 within a financial year can be exempted from
taxation. Special regulations apply for non-profit institutions as well as for non-profit
sport or cultures clubs. Reverse charge is applicable for services and certain deliveries
from an entity domiciled abroad.
According to the customs union treaty of 1923 between Liechtenstein and Switzerland,
Switzerland customs duties and import tariffs are applicable for Liechtenstein as well.
The tariffs and duties depend on various specific attributes of the products and are listed
on comprehensive tariffs and duties lists. Therefore, the specific tariffs and duties must
be checked for every case individually.
Excise taxes
Several excise taxes apply in Liechtenstein (e.g. petroleum tax, tobacco tax, car tax, CO2
tax, beer tax, salt tax, taxation of distilled spirits).
Property taxes
No property taxes are applicable in Liechtenstein.
Stamp duty
According to the customs union treaty of 1923 between Switzerland and Liechtenstein,
the Swiss stamp duty tax law of 27 June 1927 is applicable in Liechtenstein. The stamp
duty law includes the stamp duty tax and the security transfer tax.
Stamp duty tax
Upon the formation of legal entities whose capital is divided into shares (e.g. company
limited by shares, limited liability company, establishment with capital divided into
shares) the stamp duty amounts to 1% of the nominal value or the higher amount
effectively paid (above par). The first CHF 1 million is tax exempt.
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Liechtenstein
The same duty also becomes due when the capital is increased or when the shareholders
make contributions without increasing the capital. There is no stamp duty tax on bonds
and money market certificates.
Various exemptions should also be considered.
Security transfer tax
Security transfer tax is due on all transactions of qualifying securities, if a security

dealer is involved. The tax amounts to 0.15% for domestic securities (Switzerland and
Liechtenstein) and 0.3% for foreign securities.
In particular, banks and financial intermediaries qualify as security dealers and are liable
for the payment of the security transfer tax. Furthermore, legal entities with qualifying
securities with a book value of more than CHF 10 million also qualify as security dealers
and are also liable for the payment of the security transfer tax.
Formation tax (Grndungsabgabe)
Unless Swiss stamp duty law applies, a formation tax in the amount of 1% of the
statutory nominal capital is levied upon the formation or relocation of legal companies
in Liechtenstein (e.g. foundations) as well as for capital increases.
The general tax rate of 1% is reduced to 0.5% for amounts greater than CHF 5 million
and to 0.3% for amounts greater than CHF 10 million. The first CHF 1 million is tax
exempt.
Foundations are subject to the formation tax at a tax rate of 0.2%.
Real estate profit tax
Capital gains from the sale of real estate, or equivalent actions with the same result, are
subject to a separately assessed real estate profit tax. The taxable gain is generally the
difference between proceeds of the sale and the original purchase price of the property
plus any capital expenditure incurred. The basic tax rate is between approximately
3% and 24%, depending on the amount of taxable real estate gain. The transfer of the
economic ownership of real estate (e.g. via the sale of the majority of the shares in a real
estate company) triggers real estate tax as well.
Liechtenstein levies a tax on certain insurance premiums. The tax rate amounts to 5% of
the cash premium (2.5% for life insurance). Cash premiums in foreign currency have to
be converted to Swiss francs at the time the tax claims arise.
Various exemptions should also be considered.
Branch income
The principles applicable to corporations also apply for branch income, provided that
transactions with the head office or other branches are at arms length. Liechtenstein
taxation is imposed on the profit attributable to the branch.The minimum tax of CHF
1,200 is also applicable.
There is no WHT on profit transfer to the head office.
Liechtenstein
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Liechtenstein
The corporate profit tax is determined according to the taxable corporate net income,
which is based on the financial statement under consideration of the following
provisions.
Inventory valuation
Inventories must be stated at the lower of cost or market. Cost is generallydetermined

by the first in first out (FIFO) or by the average cost method. The tax authorities permit
a general reserve against stock contingencies of up toone-third of the inventory cost or
market value at the balance sheet date without inquiry into its justification, provided a
detailed record of inventory is available for review by the tax authorities. The need for
a reserve in excess of this amount (e.g. for obsolescence, slow-moving-stocks) must be
substantiated to the satisfaction of the tax authorities.
Capital gains
Capital gains derived from the sale of shares are tax-exempt. Capital gains from the sale
of real estate are subject to a separately assessed real estate profit tax (see the Other taxes
Dividend income
Dividend income and liquidation proceeds are tax-exempt.
Interest income
Interest income is taxable and must be at arms length if it is in respect to related parties
(for safe harbour rates, see Interest expenses in the Deductions section).
Foreign income
Resident corporations operating locally are generally taxed on their worldwide income.
However, income from foreign real estate and PEs situated abroad is exempt from
taxation in Liechtenstein.
Deductions
Depreciation of tangible fixed assets and amortisation of intangible assets is allowedif

it is commercially justified. For tax purposes, either the straight-line (depreciation
based on the acquisition value) or the declining-balance method (depreciation based on
the book value) may be used. Depreciation and amortisation not recorded in statutory
accounts are not deductible for tax purposes.
A special (higher) rate of depreciation may be allowed for assets used only for short
periods or for assets for which a rapid decrease in value can be proved.
The depreciation/amortisation rate per annum of various property types are provided
below. Note that these depreciation rates relate to write-downs on the book value. If
the write-down is performed on the acquisition value, then the rates enumerated below
should be reduced by half.
Property type
Immovable assets:
Real estate (dwelling houses, offices, shops, restaurant and hotel buildings,
industrial buildings, factories, warehouses, and parking spaces)
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Rate per
annum (%)
5
Liechtenstein
Rate per
Property type
annum (%)
Movable assets:
Mobile structures, technical installations (air conditioning plant, gas and electricity
15
mains for industrial purposes), elevators, investments in foreign real estate, high
rack warehouses, and airplanes
Office furniture and machines, workshop, and storeroom equipment
20
Furniture used for the hotel and restaurant trade
25
Machines and accessories for production purposes, vending machines, telephone
30
installations, and operating applications
Machinery used in more than one shift or used under heavy conditions, motor
35
vehicles
Information technology (hardware and software), office furniture and machines,
50
workshop and storeroom equipment, hotel and restaurant cookery, cutlery, and linen
Officially approved installations and equipment against water pollution, energy50
saving equipment, and installations using solar energy
Intangible assets:
Goodwill, patent, licence, and other rights of use
40
Start-up expenses
Please see Formation tax (Grndungsabgabe) in the Other taxes section.

In general, the expenses for a start-up are tax deductible as long as they are
economically justified.
Interest expenses
Interest paid by a corporation to a third party is a deductible business expense. Interest

paid to related parties (affiliates or shareholder) has to reflect the fair market rate and
has to be at arms length.
With respect to related parties, the tax administration of Liechtenstein annually issues
safe harbour interest rates to be used on loans denominated in Swiss francs on the one
hand and in foreign currencies on the other hand. The corporation may deviate from
these safe harbour rates as long as it can prove that the rates are at arms length and
more appropriate in the present case.
Safe harbour rates 2014

Loans in Swiss francs
For loans made to related parties:
Financed from equity and no interest-bearing debt capital
Financed from debt capital:
Cost price
At least
For loans received from related parties
Minimum interest rate (%)

2.0
+ 0.5
2.0
Maximum interest rate (%)
2.0
For loans in euros (EUR) and United States dollars (USD), the same mechanism applies;
however, the interest rate of 3.5% needs to be considered in 2014 instead of the 2% rate
to be used for loans in Swiss francs. Furthermore, tax authorities ask for an economic
justification if loans are not in the currency of the statutory accounts.
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The applicable rates for other currencies can be requested from the Liechtenstein tax
authorities.
Notional interest deduction (NID) on equity
The NID on equity is a standardised deduction for interest on equity based on the
multiplication of the modified equity by the interest rate (according to the annual
finance law). For 2014, the equity interest rate is 4%. Losses due to the NID are not
accepted; consequently, a negative result due to this deduction does not generate loss
carryforward.
To determine the modified equity, the following terms have to be considered:
Paid-in capital and open reserves plus taxed hidden reserves, such as:
Deduction of own shares.
Deduction of participations/shares.
Deduction of foreign real estate.
Deduction of assets belonging to foreign PEs.
Deduction of non-operating related assets.
Equity increases and decreases, based on the capital at the beginning of the business
year.
Modified equity
Loans
Profit
Interest on loans
(4%)
Example 1 Example 2 Example 3

Example 4 Example 5 Example 6
1,000,000
500,000
500,000
1,000,000 1,000,000 1,000,000
0
500,000
500,000
0
0
0
100,000
100,000
200,000 1,000,000,000
30,000
60,000
0
(20,000)
(20,000)
0
0
0
Profit
Interest on equity
(4%)
Taxable profit
Profit tax rate
Tax burden
100,000
(40,000)
80,000
(20,000)
180,000 1,000,000,000
(20,000)
(40,000)
30,000
(40,000)
60,000
(40,000)
60,000
12.50%
7,500
60,000
12.50%
7,500
160,000
12.50%
20,000
999,960,000
12.50%
124,995,000
(10,000)
12.50%
0
20,000
12.50%
2,500
7.50%
9.38%
11.11%
12.50%
0.00%
4.17%
Effective tax rate
Provisions
Bad debt provision
It is admissible to set up an accounting provision for specific impaired debt; additionally,

it is possible to account for a general bad debt provision of up to 10% on receivables from
Liechtenstein and Switzerland and up to 15% on receivables from any other country if
no specific provision has been accounted for the corresponding debt. These provisions
are not accepted regarding receivables to corporations and institutions under public law,
banks, or for inter-company receivables.
Inventory provision
See Inventory valuation in the Income determination section for a description of the
inventory provision regime.
Provisions on financial investments
Provisions on financial investments are possible but must be proved by an established

corporate evaluation method or other suitable documents.
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Other provisions
Provisions at the expense of the profit and loss statement are admissible for obligations
during the business year whose amount is not yet determined or for other immediately
imminent losses during the business year.
Charitable contributions to legal persons and special asset dedications with domicile in
Liechtenstein, in another country member of the European Economic Area (EEA), or in
Switzerland, which are exempt from tax liability in light of exclusively and irrevocably
common-benefit purposes, are deductible, up to the amount of 10% of the taxable
corporate net income.
Deduction for income from intellectual property (IP)
A deduction of 80% is allowed on the net income from IP rights that was created or
acquired after 1 January 2011. IP rights, in the sense of the tax law, consist of patents,
supplementary protection certificates, utility models, trademarks and designs, which
must be protected by registration in a national, foreign, or international Register, as well
as softwareand technical/scientific databases.
The Liechtenstein IP box has been approved by the ESA.
Fines and penalties
Fines and penalties are generally not tax deductible.
Taxes
Taxes are not deductible in Liechtenstein.
A loss can be carried forward and offset against the profits for future years. There is no
timelimitation of loss carryforwards as well as loss offsetting. Losses cannot be carried
back.
For assessments as of 2013, the loss carryforward is limited to 70%. The other 30%
can still be carried forward indefinitely. As a consequence, 30% of the taxable profit is
subject to annual taxation even if corresponding losses from previous years exist.
Interest, royalties and licences, and other fees to foreign affiliates are allowed as
deductions to the extent that they meet the arms-length test (i.e. equivalent to charges
that would be made by an unrelated third party).
For interest payments between affiliated companies or between shareholders and
companies, Liechtenstein tax authorities publish safe harbour rules annually (i.e.
generally accepted interest).
Group taxation
Resident and non-resident corporations have the possibility to opt for group taxation
if they meet the legal requirements (such as more than 50% of capital and 50% of
voting rights). The ultimate group leader must either be a corporation domiciled in
Liechtenstein or with the effective place of management in Liechtenstein.
In order to form multi-level group structures, sub-groups may also be built. The same
rules are applicable for the group leader of the sup-group as for the primary group
leader.
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The group leader can decide, for each company that fulfils the conditions, which
company will be included in the group or not.
Losses of group members can be offset against profits of the (sub) group leader within
the same year. The offsetting is only possible under the following conditions:
Only losses incurred after the option for group taxation can be considered.
Losses need to be calculated according to Liechtenstein profit calculation rules.
The losses are allocated to the (sub) group leader according to the direct participation
quota of the (sub) group leader to the group member whose losses should be offset. If
the losses cannot be used at the level of the (sub) group leader, they can be allocated to
other group members. However, the minimum tax is applicable for each group member.
Losses that have been attributed to the (sub) group leader must be adjusted in the
following cases:

Losses can be offset against profits on the level of the group member.
Exit of group member from the group.
Reduction of participation quota of a group member.
Depreciation is made on a participation due to losses.
The (sub) group leader must provide evidence annually that no adjustment needs to be
made.
Transfer pricing
Liechtenstein does not have specific transfer pricing rules apart from the rule that intragroup transactions are carried out at arms-length terms.
Thin capitalisation
Liechtenstein does not have thin capitalisation rules.

As of 1 January 2011, tax privileges for certain legal structures, such as domiciliary and
holding companies, have been abolished. Companies that benefited from such privileges
will continue to be taxed accordingly through 2013, unless they opt for the ordinary
taxation scheme. These companies also have to pay the minimum tax of CHF 1,200
annually.
The following tax incentives are applicable as of 1 January 2011:
Profit tax exemption for corporations that have an irrevocable charitable, cultural, or
ideal purpose without commercial activity.
Profit tax exemption of dividend income and capital gains on shares/participations
(especially interesting for holding companies).
Notionalinterest deduction on equity.
Private asset structure (PVS).
Deduction for income from IP.
Private asset structure (Privatvermgensstrukturen or PVS)
Liechtenstein offers tax privileges for PVSs. A PVS has no economic activity. The purpose
of a PVS is to acquire, hold, administrate, and sell financial instruments according to the
assets management law as well as cash and bank accounts. Participations may only be
held if it can be proved that the shareholders or beneficiaries have no influence on the
administration of this company.
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The articles of the PVS must contain a clause that the regulations for PVS are applicable.
Exemptions of this rule are applicable for legal entities that existed before the
introduction of the tax law as of 1 January 2011.
The investors of a PVS must be individuals who administrate their own assets or
structures acting in the interest of individuals.
The company or the audit company needs to confirm, upon formation or after major
changes, that the conditions for the PVS structure are fulfilled. This is supervised by the
tax authority or a neutralcertified accountant.
A PVS only pays the minimum tax of CHF 1,200 annually.
This tax scheme was qualified as in conformity with the provisions on state aid set out in
Article 61 of the Agreement on the European Economic Area by the ESA.
Avoidance of double taxation
Foreign taxes shall be allowable against domestic taxes (credit method) under
circumstances where (i) the income is derived or wealth is owned in a country that has
concluded an agreement for the avoidance of double taxation with Liechtenstein and
such agreement provides for a tax credit or (ii) reciprocity is granted. Income or wealth
shall be exempted from taxation in Liechtenstein (exemption method) if the agreement
for the avoidance of double taxation provides tax exemption or if reciprocity is granted.
Withholding taxes
Coupon (withholding) tax
Until the end of 2010, Liechtenstein had a coupon tax of 4% on dividend payments and
certain interest payments. The coupon tax was abolished as of the beginning of 2011.
This means that no coupon tax is due on new reserves incurred after the end of 2010 or
on interest payments. However, the coupon tax still applies with regard to old reserves
(reserves existing on 1 January 2011). The tax base for calculation of the coupon tax
on old reserves is the taxable capital dated 31 December 2010 (i.e. equity according to
commercial balance sheet, adjusted with taxed hidden reserves). With regards to future
distributions, old reserves have priority. This means the coupon tax of 4% will be due on
every distribution up to the amount of the old reserves.
Tax treaties
Currently, a comprehensive DTT on income is in effect with Austria, Germany, Hong

Kong, Luxembourg, San Marino, the United Kingdom (UK), and Uruguay, as well
as a limited one with Switzerland. An extension of the treaty with Switzerland is in
negotiation.
Liechtenstein has concluded TIEAs with the following governments: Andorra, Antigua
and Barbuda, Australia, Denmark, Germany, Faeroe Islands, Finland, France, Greenland,
Iceland, Ireland, Japan, Monaco, Netherlands, Norway, St. Kitts and Nevis, St. Vincent
and Grenadines, Sweden, the United Kingdom, and the United States. Recently, TIEAs
have been signed with Canada, India, and Mexico (not yet in force). A TIEA with
Belgium was signed on 10 November 2009 but has not yet entered into force.
The governments of Liechtenstein and the United Kingdom signed a Memorandum
of Understanding (MOU) relating to cooperation in tax matters, which includes the
Liechtenstein disclosures facility (LDF). According to these regulations, financial
intermediaries in Liechtenstein are required to show that their UK costumers have been
declaring their Liechtenstein investments to the tax authorities in the United Kingdom.
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In certain circumstances, even accounts or assets outside of Liechtenstein can be
transferred in order to take advantage of the terms of the LDF.
Tax administration
Taxable period
The tax year corresponds with the business year. Therefore, the applicable accounting
period, which may end at any date within the calendar year, is the basis for corporate
taxation.
Tax returns
Corporations resident in Liechtenstein or with PEs in Liechtenstein must file a tax return
by 1 July of the calendar year following the fiscal year-end.
Due to a substantiated written request, the tax authority may extend the submission
deadline by six months. A deadline extension requires the payment of the provisional
invoice. In especially justified cases, the submission deadline may be extended once
again. Such a request must be made before expiry of the first deadline extension.
The tax assessment issued by the tax administration is based on the companys tax
return, including the attachments and the financial statements filed.
Payment of tax
Companies must pay tax within 30 days of receipt of the assessment. The defaults charge
rate is 4%.
Tax audit process
Generally, the Liechtenstein tax system is based on self-assessment. In the past, the
Liechtenstein tax authority assessed an entity based on the documents and information
provided by the entity itself and additional documents or explanations requested by the
tax authorities. In the future, it is intended that the Liechtenstein tax authority will carry
out external tax audits in-house. However, at the moment it is unclear how the entities
will be selected and how often a tax audit will take place.
The limitation of the right to assess a tax is five years, starting after the end of the tax
year in terms of periodic tax and after the end of the year in which the taxable incidence
had taken place in terms of non-periodic tax.
The tax authority especially focuses on payments between affiliated companies (e.g.
inter-company loans). Furthermore, all provisions and depreciations will be checked
under the premise of economic necessity.
Other issues
Restructurings
Restructurings (e.g. change of corporate form, merger, spin-off) can be carried out tax
neutrally, if certain conditions are met.
Allrestructurings have in common that they can only be carried out tax neutrally if they
are performed at tax book value and if the assets remain taxable within Liechtenstein.
Furthermore, specific/additional conditions must be met for each kind of restructuring.
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Lithuania
PwC contact
Kristina Krisciunaite
PricewaterhouseCoopers UAB
J. Jasinskio 16B
LT-01112 Vilnius
Lithuania
Tel: +370 5 239 23 00
The following recent amendments have been introduced into the Lithuanian tax
legislation:
The investment project incentive has been prolonged to 2018. Also, the application of
investment project reliefhas beenextended to lorries, trailers, and semi-trailers.
Funds granted for producing a film or a part ofa filmcan be deducted from taxable
income and from tax due during the period of 2014to 2018 if specific conditions are
met.
As of1 January 2014, reduction of taxable profit by accumulated tax losses is limited
to 70% of the taxable profit for the current year (except for entitiesthat are subject to
thereduced corporate income tax [CIT] rate of 5%). The rest of the accumulated tax
losses can be carried forward for an unlimited period of time.
The final payment deadline for CIT has been aligned with the annual CIT return
submission deadline (i.e. the first day of the sixth month of the following tax period).
As of1 January 2014, a double tax treaty (DTT)with Kyrgyzstan entered into force.

The standard CIT rate is 15%. However, small companies and agricultural companies
can apply a reduced CIT rate of 5%, if certain conditions are met.
Generally, CIT is applied on taxable income received by a Lithuanian tax resident from
its local and worldwide activities. Taxable income is calculated by reducing general
income of a certain tax period with deductible expenses and non-taxable income.
Income of a tax resident company is not subject to taxation in Lithuania if it was received
from activities through a permanent establishment (PE) in a foreign country that is in
the European Economic Area (EEA) or that has a DTT with Lithuania and if the income
was subject to taxation there.
Furthermore, CIT may be reduced or even not applied if foreign-sourced income
received not through a PE is taxed with a withholding tax (WHT) in a foreign country
and this country has a DTT with Lithuania.
Non-resident companies are generally taxed on Lithuania-sourced income received
through a local PE and reduced by deductible expenses or on income subject to WHT in
Lithuania.
Reduced CIT rate for small companies
Entities with fewer than ten employees and less than 1 million Lithuanian litas (LTL) in
gross annual revenues can benefit from a reduced CIT rate of 5%.
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CIT regime for certain maritime activities
The rate of CIT on certain maritime activities is 15%, with the base set by reference to
the functional capacity of the ship. This fixed CIT may be applied to maritime entities
that fulfil certain conditions indicated in the law. An election must be made to the tax
authorities to apply this regime.
Local income taxes
There is no local or municipal CIT in Lithuania.
Corporate residence
A company is resident in Lithuania if it incorporates there or its activities create a PE for
tax purposes.
According to local legislation, a foreign company is deemed to have a PE in Lithuania

when:

it permanently carries out commercial activities in Lithuania in whole or in part

it carries out its activities through a dependent representative (agent)
it uses a building site or construction, assembly, or equipment objects, or
it uses equipment, including drilling installations and ships, for exploration or
extraction of natural resources.
DTTs may establish different rules of PE recognition. According to domestic law, where
there is a DTT, the provisions of the treaty take precedence.
A PE must be registered as a taxpayer with the tax authorities in the territory where its
activities are carried out. Its profits are subject to CIT at the rate of 15%.
Other taxes

The reduced rate of 9% applies to:
Books and non-periodical publications.
Periodical publications meeting certain criteria.
Public transport services performed on regular routes determined by the Ministry of
Communications or municipalities.
Supply of heating to residential premises and supply of hot water (applicable until 31
December 2014 but could be extended).
Accommodation services (starting from 1 January 2015).
The reduced rate of 5% applies to:
Technical aid devices and their repair services for the disabled.
Pharmaceuticals and medical aid devices, when their acquisition cost is wholly or
partly compensated following the provisions of the Law on Health Insurance.
The compensational rate for farmers is 6%.
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Lithuania
In general, supplies of goods and services made by a taxable person performing its
economic activity for a consideration within the territory of Lithuania, as well as imports
of goods, are subject to VAT.
Exempt with credit (zero-rated)
Goods and services that are exempt with credit (zero-rated) include, but are not limited
to, the following:
Supply of goods exported outside of the European Union (EU).
Goods acquired by non-EU resident passengers in Lithuania and carried out from the
European Union.
Goods and services for vessels and aircraft.
Transportation and any directly linked ancillary services related to export of goods
and any directly linked ancillary services related to the import of goods when the
value of these services shall be included in the customs value of the goods.
Transportation of imported goods carried to a VAT exemption warehouse or
temporarily stored under customs supervision, placed in a free economic zone or free
warehouse, put under customs warehousing procedure, processed under customs
supervision, temporarily imported for processing without levying customs duties,
temporarily imported without implicitly levying customs duties, or put under internal
or external transit procedure.
Issuance of International Road Transportation (TIR) and Admission Temporaire/
Temporary Admission (ATA) transportation documents.
Insurance and certain financial services directly related to export of goods from the
European Union.
Supply of goods to sponsorship or charity recipients registered in Lithuania and listed
in the Lithuanian law on charity and sponsorship, if the goods are exported by the
recipients as sponsorship or charity to non-EU organisations that may be recipients of
sponsorship or charity under the law.
Supply of maintenance and processing services for movable property supplied to nontaxable persons established outside Lithuania that have no fixed establishment within
the country, provided that the property was temporarily imported for maintenance,
repair, processing, etc. in the European Union and will be carried out from the
European Union after supply of these services.
Services of disclosed agents participating in certain transactions of supply of goods or
services to local taxable and non-taxable persons where zero-rated VAT is applied and
transactions of supply of goods or services where the supply of goods or services is
considered carried out outside the European Union.
Supply of goods to VAT payers registered in another EU member state when these
goods are carried out from Lithuania to another EU member state.
Supply of new means of transport supplied to any person when new vehicles are
carried out from Lithuania to another EU member state.
Supply of goods subject to excise duty when they are supplied to a company not
registered for VAT purposes and the goods are carried out from Lithuania to another
EU member state.
Supply of goods in certain cases related to international trade.
In order to apply zero-rated VAT on goods carried out from Lithuania, VAT payers must
hold supporting documents as evidence that these goods were actually exported from
the European Union or carried out from Lithuania to another EU member state.
Exempt without credit
Goods and services that are exempt without credit include, but are not limited to, the
following:
Personal or public health care services, under certain conditions.
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Supply of human organs, blood, human milk, and dental prostheses supplied by
dentists or dental technicians.
Transportation of ill, wounded, or other persons requiring medical care by special
means of transport.
Social services supplied by institutions for children and young people, nursing homes
for the elderly, and/or by care or guardianship institutions for disabled or by other
non-profit entities.
Education and training services.
Cultural and sports services rendered by non-profit entities.
Services provided by political parties, trade unions, and other non-profit membership
based legal entities to their members when these services correspond to that set out
in the articles of association and are provided free-of-charge, except for membership
fees.
Services provided by religious communities, other communities, and centres to their
members if these services correspond to the purposes of these communities set out in
their canons, statutes, and other documents and are provided free-of-charge, except
for donations.
Postal services and directly related goods supplied by government-listed universal
postal services providers, except for individually negotiated postal services.
Radio and TV broadcasting services provided by non-profit legal entities.
All types of insurance and re-insurance services and related services rendered by
insurance and re-insurance agents.
Financial services meeting certain requirements.
Lotteries and gambling.
Postage stamps and other government-listed special signs available for sale against
their nominal value (this provision shall be applied only to the postage stamps that
can be used as a confirmation of payment for postal services in Lithuania).
Letting of residential premises (except for accommodation services provided by
hotels, motels, camping, and other accommodation services or letting of residential
premises not indicated above when the letting period does not exceed two months).
Letting or sale of immovable property, other than residential premises (certain
exceptions apply).
Supply of goods where the VAT payer has not deducted any proportion of the VAT on
purchases and/or importation thereof (certain conditions apply).
Intra-Community acquisitions (i.e. acquisitions of goods from other EU member states)
are VAT-exempt, provided that:
the supply of such goods in Lithuania would be VAT-exempt or zero-rated or the
import of such goods would be VAT-exempt
the purchaser who is a foreign taxable person would be able to refund this VAT, and
triangular transactions meet certain criteria.
Sale and contribution in kind of a business or part of a business is treated as being out of
scope of VAT (under certain conditions).
Option to tax
Option to tax is applicable to:

Lease of immovable property.
Sale or other transfer of old immovable property (i.e. used for more than 24 months).
Financial services meeting certain requirements.
Option to tax may be exercised only if the customer is a taxable person registered for
VAT purposes. Option to tax the lease of immovable property can also be applied for
diplomatic agencies, EU institutions, and/or international organisations. If a VAT payer
decides to use the option to tax, it is valid for at least 24 months.
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Customs duties
EU customs law is applicable in full.

EU customs law, also known as the Community Customs Code, compiles the rules,
arrangements, and procedures applicable to goods traded between the European
Community and non-member countries. The Community Customs Code indicates an
obligation on a person to pay the amount of the import or export duties that apply to
specific goods under the Community provisions in force. The application of the EU
customs law means that:
trade between Lithuania and other EU countries is customs-free
imports from non-EU countries are subject to EU customs tariffs, and
numerous free trade agreements concluded between EU and non-EU countries apply
to Lithuania.
Excise taxes
Excise duty is imposed on the following goods produced in or imported into Lithuania:
ethyl alcohol and alcoholic drinks, including beer and wine; processed tobacco,
including cigarettes, cigars, cigarillos, and smoking tobacco; energy-related products,
including petrol, kerosene, gasoline, fuel oil, natural gas, and their substitutes and
additives; coal, coke, and lignite; and electricity. The tax rate depends on the type and
quantity of goods.
Land tax
Lithuanian and foreign entities are subject to land tax collected by the municipalities
for the land they own in Lithuania. Roads for general use and forestland are exempt.
The assessment and payment terms are set forth by the municipalities, which are also
entitled to grant land tax incentives.
The annual land tax rate ranges from 0.01% to 4%, depending on local municipalities.
There is a transitional period set for years 2013 to 2016 if the taxable value of land
increases during this period. Please see the table below describing the main features of
the land tax in force as of 1 January 2013:
Tax rate
0.01% to 4%, defined by municipality

The average market value determined in the map of values established
according to the mass valuation.
The mass valuation is performed not rarer than every five years.
Taxable value
A possibility to apply the value determined during the individual valuation if
it differs from the market value by more than 20% (principles are similar to
real estate tax).
Declaration
Template of a tax return is completed and sent by the tax authorities until
1 November.
Payments
One annual payment due 15 November.
Additional comments Transitional application: Gradual increase of the tax from 2013 to 2016.
Land lease tax
State-owned land that is leased for Lithuanian and foreign companies is subject to land
lease tax at a rate established by the municipalities. The minimum tax rate set by the
government is 0.1%, and the maximum rate is 4% of the value of the land.
Real estate tax
The real estate tax rate ranges from 0.3% to 3%. Tax is levied on the value of real estate
owned by individuals and used for commercial purposes or owned by legal entities
(with certain exemptions). Municipal councils establish a specific tax rate for real estate
situated in their territories annually.
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State dues (stamp taxes)
There are no stamp duties applied in Lithuania; however, minor fees for the services of
state institutions, such as the issuance of documents having legal force and other deeds,
may apply.
Environmental tax
Environmental tax is imposed on pollutants discharged into the environment, a few

specified products (e.g. tyres, batteries), and certain types of packaging.
Tax on natural resources
A tax on natural resources is payable on the value of extracted natural resources.
The rate of social security contributions ranges from 30.98% to 32.6% for employers and
is 9% for employees. At present, there are no lower or upper limits set for social security
contributions on employment related income.
Contributions to the Guarantee Fund
Contributions to the Lithuanian Guarantee Fund are calculated by employers at a rate of

0.2% on the gross salary payable to employees. The Guarantee Fund provides support to
employees in case of employers bankruptcy.
Branch income
A branch of a foreign company is defined as a structural subunit of a foreign company,
which has an establishment in Lithuania and is entitled to engage in commercial
activities in Lithuania as well as conclude contracts and undertake obligations according
to the power of attorney issued to the branch by its founder. A branch does not have the
status of a legal person. It is taxed in the same manner as a PE (see the Taxes on corporate
income section).
Inventory valuation
Under domestic accounting legislation, stock used in the production and included
in the cost of produced products is valued in the financial statements by the first in
first out (FIFO) method. The last in first out (LIFO), weighted-average, progressiveaverage, actual-price, or another method that corresponds to the stocks movement can
also be used. However, the method used must be disclosed in the notes to the annual
accounts, and, among other things, the note must report the profit that would have been
calculated if the FIFO method of valuation had been used. For CIT purposes, usage of
another method than FIFO should be approved by the tax authorities.
Capital gains
Capital gains are taxed as part of the corporate profit of the enterprise.
Capital gains are treated as non-taxable income when they are derived from the transfer
of shares in a company incorporated in the European Economic Area or in a country
with which Lithuania has a valid DTT and that pays CIT or an equivalent tax. This holds
true if the Lithuanian holding company holds more than 25% of voting shares for a
continuous period of (i) at least two years or (ii) at least three years when the shares
were transferred in one of the established forms of reorganisation. Certain restrictions
apply.
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Dividend income
The receiving company does not include the dividends received from other entities in its
taxable income.
Interest income
Interest income is treated as general taxable income and is subject to 15% CIT.
Exemptions from taxable income
The following types of income are exempt from CIT:

Insurance indemnity not in excess of the value of lost property or other losses or
damages, the refunded part of insurance premiums in excess of the premiums
deducted from income in accordance with the procedure established, and the part of
insurance indemnity in excess of the premiums deducted from income in accordance
with the procedure established.
Proceeds of a bankrupt company received from sale of its property.
The balance of the formation fund of an insurance company as prescribed by the law
on insurance.
Investment income of investment companies with variable capital and closed-end
investment companies acting in accordance with the law on collective investment
undertakings and investment income of investment companies acting in accordance
with the law on collective investment undertakings for informed investors, except for
dividends and other distributable profits.
Income derived by health care institutions for their services that are financed from
the funds of the Compulsory Health Insurance fund.
Income derived from revaluation of fixed assets and liabilities as established by
laws and regulations, except for income derived from the revaluation of derivative
financial instruments acquired for hedging purposes.
Default interest, except for that received from foreign companies registered or
otherwise organised in blacklisted territories or residents of such territories (see
Blacklisted territories in the Deductions section).
All or part of the profit gained from legal entities of unlimited civil liability that are
payers of CIT and with income that is subject to CIT under the law or to a similar tax
under respective statutes of foreign countries, with certain exceptions.
Fees collected by seaports and airports, charges for air traffic navigation services, and
funds collected from the lease of seaport-owned land.
Results arising from adjustments made for the previous tax periods as prescribed by
the law on accounting.
Indemnification for damages received by the company, with certain exceptions.
Compensation received according to the Lithuanian programmes of the EU financial
support relating to taking fishing ships for scrap.
Life insurance payments received by insurance companies, provided the term of the
life insurance policy is valid for not less than ten years or at the date of the receipt of
the insurance benefit the recipient has reached the pension age in accordance with
the additional law on pensions. Additionally, life insurance investment income of
insurance companies, except for dividends and other distributable profit, is exempt
along with investment insurance income of insurance companies received according
to the contracts of life insurance occupational pensions concluded in accordance with
the law on accumulation of occupational pensions.
Direct and other compensational allowances that are received by units performing
agricultural activities to maintain their level of income, which meet the requirements
established in the laws and other legal acts of Lithuania.
Foreign income
Income is not subject to taxation in Lithuania if it was received from activities through
a PE in a foreign country that is in the European Economic Area or that has a DTT with
Lithuania and if the income was subject to taxation there. Since such income is not
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subject to taxation in Lithuania, costs related to the income cannot be deducted from
income that is subject to taxation in Lithuania.
Deductions
Allowable deductions include all the usual costs that an entity actually incurs for the
purpose of earning income or receiving economic benefit unless the law on CIT provides
otherwise.
Depreciation
Tangible and intangible assets may be depreciated using a directly proportional

(straight-line) depreciation method, a production depreciation method, or a doubledeclining-balance depreciation method. Depreciation may not exceed maximum rates
established by the law. For certain typical assets, depreciation rates relevant for tax
purposes are shown in the chart below:
Asset
New buildings used for business activities
Residential buildings
Plant and machinery
Trucks (not older than 5 years)
Computer and communications equipment
Software
Depreciation period
(years)
8
20
5
4
3
3
Annual depreciation
rate (%)
12.5
5
20
25
33.3
33.3
Goodwill
Goodwill can be amortised for tax purposes in a straight-line method over 15 years after
a merger of a purchasing company and an acquired company, if certain conditions are
met.
Start-up expenses
Generally, start-up expenses are deductible for tax purposes.
Interest expenses
Interest expenses are generally deductible for tax purposes. Interest expenses should
be recognised as non-deductible for tax purposes if, after acquisition, a purchasing
company and an acquired company are merged and debt used for acquisition of shares is
pushed down to the acquired company and certain conditions are not met.
Interest paid to related parties may be non-deductible for tax purposes if thin
capitalisation rules are infringed and the interest rate on a debt from related party does
not correspond to a fair market interest rate (see Transfer pricing and Thin capitalisation
in the Group taxation section).
Bad debts
Bad debts are deductible only if proved and specific criteria are met. Provisions are nondeductible.
Generally, double the amount of donation/sponsorship can be deducted for tax purposes
(i.e. 200% deduction is available) but only if donation/sponsorship was provided to
registered recipients and only up to a limit of 40% of taxable result before deduction of
sponsorship and utilisation of tax losses carried forward.
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Fines and penalties
Fines and penalties are generally non-deductible for tax purposes.
Taxes
All taxes, fees, and other compulsory payments to the state budget are deductible for
CIT purposes, except VAT paid to the budget and CIT. Note that VAT can be treated as
deductible for CIT purposes if it is input or paid import VAT that is non-refundable for
VAT purposes and this input or paid import VAT is calculated on deductible expenses.
Limited deductible expenses also include the following:

Maintenance, repair, and reconstruction expenses of tangible fixed assets: if the
repair or reconstruction increase the service period and improve the qualities (useful
characteristics of the fixed assets), the value of repair or reconstruction shall be
added to the acquisition value of the tangible fixed assets.
Business travel expenses: deductible with restrictions.
Advertising and representation expenses: 75% of representation expenses are
deductible.
Natural losses: deduction limited to not more than 1% of turnover.
Contributions and expenses for the benefit of employees: deductible with restrictions.
Special provisions of credit institutions and insurance companies: calculated
according to the methods established by the Bank of Lithuania and the Commission
of Insurance Supervision.
Sponsorship: the double amount deductible (i.e. 200% deduction is available) but
only if provided to registered recipients and only up to 40% of taxable result before
deduction of sponsorship and utilisation of tax losses carried forward.
Membership fees, contributions, and premiums: deductible with restrictions.
Non-deductible expenses also include the following:
Default interest (forfeit), fines, and late interest paid to the state budget as well as
other sanctions imposed for violations of laws and regulations of Lithuania.
Interest or any other indemnity paid due to non-performance of contractual
obligations by related parties.
Amount of the limited deductible expenses in excess of the established limits.
Expenses attributed to allowable deductions more than 18 months past, although
the payments for goods or services supplied by the entities registered or otherwise
organised in blacklisted territories (see below) have not been made.
Sponsorship and gifts that do not correspond to the requirements of CIT law.
Payments to blacklisted territories (see below) if they are not verified and payments
are not subject to WHT.
Indemnification for damages inflicted by the entity.
Dividends or otherwise distributed profits.
Other expenses not related to the deriving of income and not attributed to operating
activities of the entity as well as the expenses that are not considered allowable
deductions under the law.
Amounts resulting from adjustments and corrections of errors of previous tax
periods.
Expenses related to revaluation of fixed assets and securities.
Deductible or limited deductible expenses attributed to non-taxable income.
Expenses related to income from certain international maritime activities if a
maritime entity chose to apply a fixed CIT.
Operating losses may be carried forward for an indefinite period, provided that certain
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Current year operating losses incurred after 1 January 2010 can be transferred to
another legal entity of the group if certain conditions are met.
Losses incurred due to the transfer of securities and/or derivative financial instruments
may be carried forward for five years.
As of1 January 2014, reduction of taxable profit by accumulated tax losses is limited to
70% of the taxable profit for the current year (except for entities that are subject to the
reduced CIT rate of 5%). The rest of the accumulated tax losses can be carried forward
for an unlimited period of time.
No carryback of losses is available in Lithuania.
Payments to foreign affiliates (e.g. interest, royalties, management fees, fees for other
services) are deductible for tax purposes if the payment serves a business purpose,
provides a benefit to the payer, is at arms length, and is substantiated by sufficient
documentation. Payments to foreign affiliates may also be subject to various WHTs.
Certain payments to affiliates located in tax haven (blacklisted) countries are subject to
15% WHT rate.
Blacklisted territories
A blacklisted territory is a foreign country or territory that is included on a list of

offshore territories established by the Minister of Finance that meets at least two of the
following criteria:
Similar tax rate in such territory is below 75% of that set in the Lithuanian CIT law.
In such territory, different rules for levying a similar tax are applied, depending on
the country where the parent company (controlling entity) is registered or otherwise
organised.
In such territory, different rules for levying a similar tax are applied, depending on
the country where the business is conducted.
The company (the controlled taxable entity) has entered into agreement with the tax
administrator of that territory with regard to the application of a tax rate or tax base.
There is no effective exchange of information in such territory.
There is no financial and administrative transparency in such territory, the
tax administration rules are not quite clear, and the application thereof is not
communicated to tax administrators of other countries.
A list of 58 offshore territories has been published. With certain exceptions specified in
the law, all payments to offshore companies or their branches for any work or services,
commodities, interest on funding, insurance premiums, guarantees, etc. are nondeductible for CIT purposes unless the Lithuanian entity provides evidence to the state
tax authorities that:
the payments are related to usual activities of the paying and the receiving business
entities
the receiving foreign business entity manages the property necessary to carry out
such usual activities, and
there is a connection between the payment and the economically grounded business
operation.
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Group taxation
Group taxation legislation and regimes are not available in Lithuania. Each Lithuanian
entity is regarded as a separate taxpayer and may not deduct tax losses accumulated
from previous tax periods at the level of any other group entity.
Transfer of current year operating tax losses incurred to an entity of the same group of
companies is allowed if certain requirements are met.
Transfer pricing
All transactions between associated parties must be performed at arms length. The tax
authorities have a right to adjust transaction prices if they do not conform to market
prices.
The Lithuanian rules refer to the Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations established by Organisation for Economic Cooperation and Development (OECD) to the extent that they do not contradict with the
domestic rules.
According to the Lithuanian transfer pricing regulations, companies may apply the
following methods, although traditional methods should be given preference:


Cost plus method.
All entities with an annual revenue exceeding LTL 10 million, as well as all banks,
insurance companies, and credit institutions are required to prepare transfer pricing
documentation in a specifically prescribed form. The documentation may be in a foreign
language, but upon request has to be translated to Lithuanian.
Advance pricing agreements (APAs) and binding rulings are available in Lithuania.
Taxpayers can apply for an APA or a binding ruling from the Lithuanian tax authority in
respect of future transactions.
Decisions in the form of a binding ruling or APA will be issued by the Lithuanian tax
authority regarding the application of tax legislation provisions and pricing principles.
The above mentioned decisions will be particularly relevant to companies planning to
undertake new transactions where the taxation principles of such transactions are not
clearly defined in the tax legislation and to international companies planning to perform
significant transactions with associated parties.
Thin capitalisation
The Lithuanian thin capitalisation rules apply in respect to borrowings from related
parties as well as borrowings from third parties guaranteed by related parties. The
debt-to-equity ratio is 4:1. The above provisions do not apply if a Lithuanian company
can prove that the same loan under the same conditions would have been granted by a
non-related entity.

Foreign tax credit
A company may reduce tax payable on certain foreign-sourced income in Lithuania by

taxes paid on that income in a foreign country if that Lithuanian company has received
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appropriate notice from that foreign country. The tax credit may not exceed the CIT rate
payable in Lithuania.
Investment project incentive
Entities involved in an investment project are able to reduce their taxable profits by up
to 50% of the actually incurred acquisition costs of long-term assets meeting certain
requirements. Please note that depreciation (amortisation) expenses of such assets shall
be deducted in a common manner.
Taxable profits can be reduced by such costs incurred from 2009 to 2018.
This relief is applied to the following categories of fixed assets:
Machinery and equipment.
Computer and communication equipment.
Software and acquired intellectual property (IP) rights.
As of 1 January 2014, the application of investment projects relief is extended to lorries,
trailers, and semi-trailers.
The costs exceeding the above mentioned 50% limit can be carried forward for four
years.
There are certain criteria defining what could be considered an investment project. The
project should be precisely described to meet the criteria allowing it to use the tax relief,
and the tax authorities should be properly notified about the project.
Tax relief for research and development (R&D)
Expenses, except for fixed assets depreciation (amortisation) expenses, incurred for
R&D purposes can be deducted three times in the tax period when they are incurred,
provided that R&D works performed are related to ordinary business activities.
A company applying tax relief for R&D has to prepare R&D documentation. This
documentation has to cover the performed project, substantiate conformity with certain
tax requirements, and specify the amount of expenses for R&D activities.
Funds granted for producing a film or a part of a film
Funds granted for producing a film or a part ofa filmcan be deducted from taxable
income and from payable CIT due during the period of 2014to 2018 if the following
conditions are met:
The film meets the criteria of cultural substance and evaluation of the production.
Not less than 80% of the film production expenses are incurred in Lithuania, and the
amount exceeds LTL 150,000.
Total amount of funds granted by all companies may not exceed 20% of total
expenses of the film production.
Certain restrictions for reduction of taxable income and tax due apply.
Free economic zones
Entities that invest in Lithuanian free economic zones are entitled to partial or complete
CIT relief (depending on the investment amount), relief of tax on real estate, and 50%
relief of land lease tax. Two free economic zones (in Klaipda and Kaunas) are currently
operating and five more (in Kdainiai, Panevys, iauliai, Akmen, and Marijampol)
were established in 2012 and are currently under development.
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Lithuania
Withholding taxes
Domestic legislation
Generally, income of a foreign entity in Lithuania not derived through a PE is deemed to

be Lithuanian-source income and is subject to WHT at the following rates:
Interest on any type of debt obligations, including securities: 10%.
Proceeds from the sale, transfer (with title), or lease of immovable property located
in Lithuania: 15%.
Income derived from sports activities or performers activities: 15%.
Income from distributed profits: 15%.
Royalties: 10%.
Annual payments (tantiems) to the members of the board or supervisory board: 15%.
Indemnities received for the infringement of copyrights or neighbouring rights: 10%.
0% WHT is applied on royalties paid to related parties meeting requirements of the
European Commission (EC) Interest and Royalty Directive.
Lithuanian WHT on interest paid to EU entities or DTT tax residents is 0%.
WHT is not applied on government securities issued on international financial markets,
interest accumulated and paid on deposits, and interest on subordinated loans that meet
the criteria established by legal acts adopted by the Bank of Lithuania.
Dividends distributed by a resident company to another resident company are subject to
a 15% CIT, which is withheld by a distributing company.
The dividends distributed by a resident company are exempt from WHT if the recipient
company has held not less than 10% of the voting shares in the distributing company
for at least a 12-month period and the distributing entity is subject to 5% or 15%
Lithuanian CIT rate. However, this relief is not applied if the foreign entity (recipient)
is registered or otherwise organised in blacklisted territories (see Blacklisted territories
in the Deductions section), as specified by the Ministry of Finance. Please note that the
requirement of the 12-month holding period does not necessarily have to be fulfilled on
the day of dividend distribution.
The receiving company may reduce its payable CIT for that period when dividends were
received by the amount of CIT withheld from the received dividends. Any excess credit
may be offset with other taxes payable.
Dividends distributed by a foreign entity are subject to a 15% WHT that is to be paid by
the receiving Lithuanian entity.
Dividends distributed by a foreign company to a Lithuanian company are exempt from
WHT if the distributing foreign entity is established in the EEA and related profit is
properly taxed in the domiciled country.
The dividends are also exempt from WHT if the recipient company has held not less
than 10% of the voting shares in the distributing company for at least a 12-month period
and the receiving entity is subject to 5% or 15% Lithuanian CIT rate. This participation
exemption satisfies the requirements of the EC Parent-Subsidiary Directive. The
exemption also applies to dividends paid by non-EU foreign companies, except those
registered or organised in blacklisted territories.
According to the changed provisions of the CIT Law, the payments received by a foreign
entity for the activities of the members of the supervisory board in Lithuania are
recognised as income of the foreign company in Lithuania, regardless of the frequency
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of such payments and whether they are paid as tantiemes or as other types of payments.
These payments are subject to 15% WHT, which should be withheld by the paying
company in Lithuania. The tax is applicable only if the member of the supervisory board
is a foreign company (not an individual).
Tax treaties
Where a treaty for the avoidance of double taxation and prevention of fiscal
infringement with the country in question contradicts the local regulations, the treaty
provisions prevail. Lithuania now has 50 DTTs in force with foreign countries.
The following WHT rates apply to dividends, interest, and royalties paid to a recipient or
beneficial owner resident in a tax treaty country. The lower of the domestic or the treaty
rate is given.
Recipient
Non-treaty
Treaty:
Armenia
Austria
Azerbaijan
Belarus
Belgium
Bulgaria
Canada
Croatia
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Great Britain and Northern Ireland
Greece
Hungary
Iceland
India
Israel
Italy
Kazakhstan
Korea, Republic of
Kyrgyzstan
Latvia
Luxembourg
Macedonia
Malta
Mexico
Moldova
Netherlands
Norway
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Dividends (%) (1)

0/15
Interest (%) (2)

0/10
Royalties (%) (3)

10
0/15
0/15
0/10
0/10
0/15
0/10
0/15
0/10
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/15
0/10
0/15
0/15
0/15
0/10
0/15
0/15
0/10
0/15
0/15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0/10
0
0
0
0
0
0
0
0
0
0
0
0
0
0
10
0/5/10 (4)
10
10
0/5/10 (4)
0/10
10
10
10
0/10
0/5/10 (4)
0/10
0/5/10 (4)
0/5/10 (4)
10 (4)
0/5/10 (4)
0/5/10 (4)
0/5/10 (4)
0/5/10 (4)
5/10 (4)
10
0/5/10 (4)
5/10 (4)
0/5/10 (4)
10
5/10 (4)
10
0
0/5/10 (4)
10
0/10
10
10
0/5/10 (4)
5/10 (4)
Lithuania
Recipient
Poland
Portugal
Romania
Russian Federation
Serbia
Singapore
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
Ukraine
United States of America
Uzbekistan
Dividends (%) (1)

0/15
0/10
0/10
0/10
0/10
0/10
0/10
0/15
0/15
0/15
0/15
0/10
0/15
0/15
0/10
Interest (%) (2)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Royalties (%) (3)

0/10
0/10
0/10
5/10 (4)
10
7.5
0/10
0/10
0/5/10 (4)
0/5/10 (4)
5/10 (4)
5/10 (4)
10
5/10 (4)
10
Notes
1.
2.
3.
4.
Dividends are exempt from WHT if the recipient company has held not less than 10% of the voting
shares in the distributing company for at least a 12-month period and the distributing entity is subject
to a 5% or 15% Lithuanian CIT rate. However, this relief is not applied if the foreign entity (recipient) is
registered or otherwise organised in blacklisted territories (see Blacklisted territories in the Deductions
section), as specified by the Ministry of Finance. If participation exemption criteria are not met, the
standard WHT rate of 15% should be applied. However, some of the DTTs allow applying WHT at a
reduced rate of 10%.
Under the domestic law, the rate is nil if interest is paid to a company established in a country that
has a DTT with Lithuania or is a member of a European Economic Area. In other cases, except for
Latvia where 0% WHT is established in the DTT, 10% WHT rate should be applied.
Under the domestic law, 0% WHT is applied on royalties paid to related parties meeting requirements
of the EC Interest and Royalty Directive.
Royalties for the use of industrial, commercial, or scientific equipment: 5%; other royalties: 10%.
Reduction of, or exemption from, WHT under a DTT may be obtained if a special
residence certificate (Form DAS-1) is completed and approved by the tax authorities
before a taxable payment is transferred. If a payment that would have been subject to a
tax treaty has already been made and WHT at the local rate was withheld, it is possible
to obtain an appropriate refund (reduction) by completing a special claim for a refund of
the Lithuanian tax withheld at source (Form DAS-2) and obtaining the approval of the
tax authorities.
In addition, the tax authorities may require completion of a special certificate giving
information about income received and taxes paid in Lithuania (Form DAS-3).
Tax administration
Taxable period
The Lithuanian tax year runs from 1 January to 31 December. However, a corporation
may apply to adopt a substitute year of reporting (e.g. 1 July to 30 June).
Tax returns
CIT
CIT returns must be submitted by the first day of the sixth month of the following tax
period (1 June for companies using the calendar year).
If advance CIT due is calculated based on activity results for the previous year, the
advance CIT return for the first nine months of the tax period is to be submitted by
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the last day of the first month (usually January) of the tax period. The return for the
remaining months of the tax period is to be submitted by the last day of the tenth month
(usually October) of the tax period. If the taxpayer has chosen to pay the advance
amount based on the projected amount of CIT for the current year, the return must be
submitted not later than the last day of the first month of the tax period.
WHT on dividends
A tax-withholding entity must submit to the tax authorities a special form of a return
reporting the dividends paid and tax withheld within ten calendar days after the end of
the month of the dividend payment.
WHT on payments other than dividends
A tax-withholding entity must submit to the tax authorities a special form of a return
reporting the amounts of payments paid and taxes withheld during the calendar month
no later than 15 days after the end of the month in which the amounts were paid.
Payment of tax
CIT
The final payment deadline for CITis aligned with the annual CIT return submission
deadline (i.e. the first day of the sixth month of the following tax period).
If advance CIT due is calculated based on the activity results for the previous year, the
advance amount of CIT for the first nine months of the tax period is calculated based on
the actual CIT amount for the tax period before the previous tax period. For example,
the CIT for the first nine months of 2014 would be calculated based on the appropriate
portion of the actual amount of CIT for 2012. The advance amount for the remainder of
the tax period is based on the actual amount of CIT for the previous period, for example,
tax for the last three months of 2014 would be based on the appropriate portion of the
actual amount of CIT for 2013. Thus, the advance CIT amount for each quarter would be
equal to one-fourth of the actual tax amount calculated for the tax periods discussed.
The taxpayer may choose to pay the advance amount based on the projected amount
of CIT calculated for the current year. The advance tax (one-fourth of the advance CIT)
must be paid no later than the last day of the respective quarter, and for the last quarter
by the 25th day of the last month of the quarter.
The advance amount of CIT calculated on the basis of the projected amount of CIT for
the tax period shall account for not less than 80% of the actual amount of the annual
CIT; otherwise, late payment interest shall be calculated in respect of each amount of
advance CIT that was not paid for the quarter.
If the amount of tax indicated in the annual CIT return exceeds the amount actually paid
during the tax period (i.e. the advance CIT), the taxpayer is obligated to transfer the
additional amount no later than the annual CIT return submission deadline (i.e. by the
first day of the sixth month of the following tax period). Overpaid tax can be offset with
other tax dues or refunded in accordance with the law on tax administration.
WHT on dividends
WHT on dividends is to be calculated, withheld, and remitted by a Lithuanian company

that pays dividends within ten calendar days after the end of the month of the payment.
WHT on payments other than dividends
WHT on payments other than dividends is to be calculated, withheld, and remitted by

a Lithuanian company or a PE of a foreign company no later than the return submission
deadline.
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Tax audit process
The Lithuanian tax system for companies is based on self-assessment; however, the tax
authorities undertake ongoing compliance activity to ensure corporations are meeting
their tax obligations. The tax authorities take a risk-based and materiality approaches
to compliance and audit activities, with efforts generally focused on taxpayers with a
higher likelihood of non-compliance and/or material consequences of non-compliance.
Compliance activities take various forms, including general risk reviews, questionnaires,
reviews of specific issues, and tax audits.
Generally, the tax authorities may investigate current and five previous tax periods.
However, the limit of ten previous tax periods applies where the tax authorities are of
the opinion there has been fraud or tax evasion.
The Lithuanian tax authorities are focusing on the following areas of corporate
taxpayers compliance:
Obligation to register PE in Lithuania (investigations of foreign companies that
perform activities in Lithuania without registering as local taxpayers).
Compliance with transfer pricing rules and thin capitalisation rules.
Applications of tax reliefs (e.g. investment project incentive, relief for R&D).
Proper recognition of costs for non-business related assets and expenses.
Social security contributions optimisation schemes.
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Luxembourg
PwC contact
Wim Piot
PricewaterhouseCoopers, Socit cooprative
400, route dEsch
B.P. 1443 L-1014 Luxembourg
Tel: +352 49 48 48 1
Luxembourg did not introduce major changes in its tax law for the year 2014
and continues steering its economic policies towards a stable tax and regulatory
environment.
The government continues its efforts in extending Luxembourgs favourable tax treaty
network (68 treaties are in force as of 1 January 2014) and also revisiting existing
treaties in the view of introducing the internationally agreed tax standards in terms of
exchange of information.

Luxembourg taxes its corporate residents on their worldwide income and non-residents
only on Luxembourg-source income.
Businesses with taxable income lower than 15,000 euros (EUR) are subject to corporate
income tax (CIT) at a rate of 20%. The CIT rate is currently 21% for companies with
taxable income in excess of EUR 15,000.
The CIT does not apply to tax transparent entities (e.g. general or limited partnerships or
European Economic Interest Grouping).
Minimum CIT
Minimum CIT of EUR 3,000 (i.e. EUR 3,210 taking into account the solidarity surtax) is
applicable to all corporate entities having their statutory seat or central administration
in Luxembourg that own fixed financial assets, transferable securities, and cash at bank
(including receivables due by affiliated companies) exceeding 90% of their total assets.
Minimum CIT ranging from EUR 500 to EUR 20,000 (increased by the solidarity surtax),
depending on a companys total assets, is applicable to all other corporations having
their statutory seat or central administration in Luxembourg (i.e. it is applicable to all
corporations not falling within the scope of the EUR 3,000 minimum CIT noted above),
as follows:
Total assets (EUR) *
Up to 350,000
350,001 to 2,000,000
2,000,001 to 10,000,000
10,000,001 to 15,000,000
15,000,001 to 20,000,000
20,000,001 and above
Minimum CIT (EUR) **

535
1,605
5,350
10,700
16,050
21,400
* Total assets of the company as shown in its accounting balance sheet as at the end of the fiscal year
** Including solidarity surtax
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Luxembourg
The minimum CIT is to be considered as an advance tax payment of any present or
future CIT that will be due by the corporation. As an exception to general Luxembourg
tax principles, this minimum CIT will not be reimbursed to the taxpayer.
The tax credits for investments provided by the Luxembourg Income Tax Law (LITL)
for the recruitment of unemployed persons, for expenses related to further professional
education, and for venture-capital investments are creditable only against the amount of
CIT in excess of the amount of minimum CIT as determined above.
For tax-consolidated entities, the head of the tax unity will bear the aggregate amount
of minimum CIT that would have been borne by each member of the tax unity had these
not been consolidated, capped at EUR 20,000 (increased by the solidarity surtax).
The Luxembourg tax authorities issued a circular on 1 August 2013 clarifying some
aspects of the minimum CIT. Main clarifications are:
When incorporation/dissolution of an entity occurs within the fiscal year, the
minimum tax is due for the full amount (i.e. no pro-rata).
A Luxembourg permanent establishment (PE)of a foreign collective entityis out of
the scope of the minimum CIT asof tax year 2013.
When real estate properties/PEs are located in a treaty country, the net value of
assets whose taxation rights are exclusively allocated to the other contracting state
of a double tax treaty (DTT) entered into by Luxembourg is not to be taken into
account when determining the total gross assets of the company. Hence, the company
will either be subject to the so-called Soparfi minimum tax (if at least 90% of its
remaining assets are financial assets) or to the progressive minimum CIT in all other
cases.
Solidarity surtax
A 7% solidarity surtax is also imposed on the CIT amount.

Taking into account the solidarity surtax, the aggregate CIT rate is 22.47% for
companies with taxable income in excess of EUR 15,000.
Municipal business tax on income
Municipal business tax is levied by the communes and varies from municipality to
municipality. The municipal business tax for Luxembourg City is 6.75%.
The effective combined CIT rate (i.e. CIT, solidarity surtax, and municipal business tax)
for Luxembourg City is 29.22%.
Corporate residence
Based on domestic law, a company is considered to be resident in Luxembourg if either
its registered office or place of central administration is located in Luxembourg. The
registered office is designated as such in the companys articles of incorporation.
The place of central administration is generally understood to mean the place where
the company is managed and controlled. While this term is not legally defined, the
location of the companys major establishment is determined by facts and circumstances,
including the following:
The place where meetings of the board of directors are held.
The place where shareholders meetings are held.
The place where the companys officers make their decisions.
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The place where the companys books and records are kept.
The place where other, similar factors evidencing management control occur.
The provisions on PEs included in the tax treaties concluded by Luxembourg generally
follow the wording of the Organisation for Economic Co-operation and Development
(OECD) model.
Under Luxembourg domestic tax law, a similar PE concept exists but is defined in a
broader way and is to be understood as every fixed piece of equipment or place that
serves for the operation of an established business.
Other taxes
Proceeds of sales and services, which are deemed to take place in Luxembourg, are
subject to VAT at the standard rate of 15% (lowest standard VAT rate in the European
Union [EU]) or, on certain transactions, at 12% (e.g. wine, advertising pamphlets),
6% (e.g. supply of gas or electricity), or 3% (e.g. food [except alcohol beverages],
pharmaceutical products, books [including e-books], radio and television broadcasting
services [except adult entertainment]). Some transactions, such as export and related
transport, are zero-rated. Please note that the European Commission (EC)has decided
to refer Luxembourg to the Court of Justice of the European Union for applying the
super-reduced rate of 3% on supply of e-books.
Taxpayers whose activities are subject to VAT are entitled to offset against their VAT
payable the amount of such tax charged to them by their suppliers or reverse charged
(i.e. self-accounted) by them on import or acquisitions of goods or services from abroad.
The periodicity of VAT returns can be monthly, quarterly, or annual depending on
certain conditions (e.g. turnover or incoming transactions subject to VAT).
Banking, financial, insurance, and reinsurance transactions generally are exempt
activities. The VAT paid on costs made for these transactions cannot be recovered except
when related to services performed for persons established outside the European Union.
VAT on expenses made in the context of passive holding activities, which are considered
as outside the scope of VAT, are not recoverable.
A Standard Audit File for Tax (SAF-T), containing reliable accounting data, has been
implemented by the VAT authorities. This specific file is used by taxable persons to
make information available to Luxembourg VAT authorities during a VAT audit. Only
specific taxable persons (subject to the Luxembourg Standard Chart of Accounts) having
a certain minimum number of transactions (+/- 500) and registered under a normal
filing regime with a turnover exceeding EUR 112,000 are firstly concerned. On the
other hand, some entities, notably those subject to the supervision of the Commission de
Surveillance du Secteur Financier (CSSF) and insurance/reinsurance companies, are not
yet subject to these SAF-T obligations.
Based on a European Regulation, goods entering within the territory of the European
Union may be subject to customs duties/import tariffs. Applicable rates are based on the
nature and on the quantity of the products.
Excise duties
In addition to VAT, some products are subject to specific excise duties. In Luxembourg,
these products are electricity, mineral oils, manufactured tobacco, and alcohol.
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Excise duties are not based on the sale price of the products but on the quantity. Excise
duty becomes chargeable at the time, and in the EU member state, of release for
consumption. Release for consumption occurs in any of the following instances:
The departure of excise goods from a duty suspension arrangement.
The holding of excise goods outside a duty suspension arrangement where excise
duty has not been levied, pursuant to the applicable provisions of Community law
and national legislation.
The production of excise goods outside a duty suspension arrangement.
The importation of excise goods, including irregular importation, unless the
excise goods are placed, immediately upon importation, under a duty suspension
arrangement.
Stamp taxes
There is no stamp duty in Luxembourg.
Net wealth tax
Both Luxembourg resident companies and Luxembourg branches of non-resident

companies are subject to net wealth tax levied at a rate of 0.5% on their net wealth,
based on prescribed valuation methods. In general, assets are taken into account at
market value (except for real estate, which is subject to a special regime). Shareholdings
qualifying for the participation exemption (see Dividend income in the Income
determination section) generally are exempt from net wealth tax.
Resident companies and Luxembourg branches of non-resident companies may claim
a reduction of their net wealth tax liability by making an allocation to a special reserve
before the closing of the tax year following the year for which the net wealth tax
reduction is claimed. To this end, an amount corresponding to five times the net wealth
tax that should have become payable must be kept in this special reserve for the five
years following the year in which it was allocated. The reduction, however, may not
exceed the amount of CIT in excess of the minimum CIT, before tax credits, due for that
same year.
Subscription tax
Investment funds are subject to subscription tax (at various rates) on their total net
assets evaluated at the last day of each quarter. Institutional funds and monetary
funds are subject to an annual rate of 0.01% and the other funds to an annual rate of
0.05%. Funds of institutional funds and monetary institutional funds are exempt from
subscription tax.
Exemptions from subscription tax are available for exchange traded funds, and an
extension of exemption is available for funds dedicated to multi-employer pension
vehicles or to several employers providing pension benefits to their employees.
Where a foreign Undertakings for Collective Investment (UCI) is managed by a
Luxembourg-based management company (or where the UCIs place of effective
management is located in Luxembourg), the UCI will not be deemed to be domiciled in
Luxembourg and therefore not be subject to any tax in Luxembourg.
General registration taxes
General registration taxes (inclusive of the transcription tax described below) are levied
at 7% on the market value of real estate purchased or transferred (10% in the commune
of Luxembourg City for some categories of properties) and 1% on mortgages on real
estate. The taxes are deductible for CIT purposes.
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Note that a fixed registration duty of EUR 75 is levied on certain transactions involving
Luxembourg entities (i.e. incorporation, amendment to the articles of association, and
transfer of seat to Luxembourg).
For Luxembourg real estate assets, contribution made to a company remunerated by
shares are subject to a proportional registration duty of 0.6% (0.9% for Luxembourg
City for some categories of properties) and a transcription tax of 0.5%. Contribution
remunerated by means other than shares remain subject to a proportional registration
duty of 6% (9% for some categories of properties located in Luxembourg City) and
a transcription tax of 1%. Transfers made within the framework of a corporate
reorganisation may be exempt from any proportional registration duty under certain
conditions.
Commune (municipalities) real estate tax
Communes (municipalities) levy an annual real estate tax, the basis of which is the
unitary value of real estate, which represents its estimated value in 1941. The basic
rate varies from 0.7% to 1% of the unitary value, according to the category of property,
and is multiplied by a coefficient, which varies with communes and different types of
property. For commercial properties, the coefficient in Luxembourg City is 750%, which
should be applied to 1% of the unitary value. The real estate tax is deductible for CIT
purposes.
Branch income
Branch income generally is taxed at CIT rates. However, the municipal business
tax generally only applies if the branch is carrying on commercial activity within
Luxembourg.
Inventory valuation
Inventories generally are valued at the lower of actual or market cost. There is no
statutory specified method. In general, the first in first out (FIFO), the last in first out
(LIFO), and the weighted-average costs methods of inventory valuation are acceptable
for income tax purposes, provided the method is in accordance with the facts.
Dividend income
Dividends received by a Luxembourg resident company (or by a domestic PE of a nonresident company in certain cases) should, in principle, be subject to CIT.
Dividends received may be tax exempt in Luxembourg, according to the so-called

participation exemption regime, if the conditions described below are satisfied:
The distributing company is:
a collective entity falling within the scope of the EU Council Parent Subsidiary
Directive
a Luxembourg resident joint-stock company, which is fully taxable and does not
take one of the forms listed the LITL, or
anon-resident joint-stock company that is fully liable (in its state of residence) to a
tax corresponding to the Luxembourg CIT (i.e. as a general rule, it is required that
the foreign tax is compulsorily levied at an effective rate of at least 10.5%, on a
basis similarto the Luxembourg one).
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The beneficiary company is:
a Luxembourg resident collective entity, which is fully taxable and takes one of the
forms listed in the LITL
a Luxembourg resident joint-stock company, which is fully taxable and does not
take one of the forms listed in the LITL
a domestic PE of a collective entity falling within the scope of the Parent
Subsidiary Directive
a domestic PE of a joint-stock company that is resident in a country with which
Luxembourg has concluded aDTT, or
adomestic PE of a joint-stock company or of a cooperative society, which is a
resident of a European Economic Area (EEA) member state (other than an EU
member state).
At the date on which the income is made available, the beneficiary has been holding
or undertakes to hold, directly (or through a tax transparent entity, see Transparent
entities below), for an uninterrupted period of at least 12 months, a participation in
the share capital of the subsidiary of at least 10% or with an acquisition price of at
least EUR 1.2 million.
Capital gains
Capital gains (and losses) generally are taxed as ordinary income (or losses). It is
possible to defer the taxation of gains on certain fixed assets where the gain is used to
acquire replacement items. Under certain conditions, exempted capital gains and hidden
reserves may be unrealised in a merger or another form of reorganisation of resident
companies or other EU companies.
In general, capital gains on the disposal of qualifying shareholdings held by entities

eligible to the participation exemption regime are tax exempt, provided (i) the
shareholding constitutes at least 10% of total ownership or an acquisition price of at
least EUR 6 million and (ii) the disposing company has held or intends to hold the
qualifying shareholding for at least 12months.
A recapture system exists wherein the capital gain realised will become taxable up to
the amount of the aggregate expenses and write-downs in relation to the participation
deducted during the year of realisation of the exempt capital gain and in previous years.
The purpose of the system is to avoid a taxation vacuum, which could result if the
deductibility of expenses and write-downs connected to the participation was allowed,
while the income arising from the participation is tax exempt. This system should, in
principle, remain tax neutral, as the company should have available carryforward losses
for an equivalent amount (unless previously used to offset other taxable income).
Taxation of non-resident corporate investors on gains upon disposal of shares

In principle, should a non-resident corporate investor (non-treaty protected) derive
income from the disposal of an important participation (i.e. representing at least 10%
of the share capital) in a Luxembourg company within six months of its acquisition, said
capital gain will be subject to CIT in Luxembourg unless a tax treaty provides otherwise.
Non-resident investors are not subject to the aforementioned capital gains tax upon
disposal of shares in a Luxembourg Socit dInvestissement Capital Variable (SICAV),
Socit dInvestissement en Capital Risque (SICAR), and Socit de gestion de Patrimoine
Familial (SPF).
Interest income
Under Luxembourg accounting and tax principles, interest income is recognised on an

accrual basis and is fully subject to tax at the effective combined CIT rate of 29.22% (for
Luxembourg City).
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Transparent entities
From a Luxembourg tax perspective, a transparent entity is seen as having no legal

personality distinct from that of its partners (those transparent entities are commonly
referred to as partnerships) for CIT and net wealth tax purposes, although it may be
regarded as a separate legal entity from a civil/corporate law point of view. Provided
that the partnership carries out a commercial activity, however, it will be liable to
municipal business tax on its own.
Foreign income
A Luxembourg tax resident company is liable for CIT on its worldwide income. Foreignsource income is therefore taxable in Luxembourg, unless a DTT provides for an
exemption.
Dividends from foreign subsidiaries are taxed when received, except where exempt as
mentioned above. Profits of a foreign branch that are not exempt by means of a DTT
may, however, benefit from a foreign tax credit. Any foreign taxes paid in excess of the
tax credit are deductible as expenses. Luxembourg is, however, using the exemption
method in most of its DTTs.
Deferral of taxation for income earned abroad is not provided for under Luxembourg
domestic tax law.
Deductions
Depreciation
Depreciation rates must be consistent with economic reality. The depreciation must be
calculated on the total acquisition cost, bearing in mind the normal life of the asset and
the estimated residual value. As generally provided by the Luxembourg tax law, the
accounting depreciation should be followed for tax purposes.
Depreciation normally is calculated using the straight-line method. However, the
declining-balance method is permitted for fixed assets, other than buildings and
intangible assets. The depreciation rate may not, however, exceed three times the rate
applicable according to the straight-line method, or 30% (four times the applicable rate
in the case of assets used exclusively for scientific and technical research, or 40%).
It is permissible to change from the declining-balance method to the straight-line
method, but the converse is not allowed. Tax depreciation must be reflected in the
financial accounts prepared for commercial purposes.
In the event of a sale of a depreciated asset, the net book value at the moment of the
disposal must be compared with the sale price of that asset. If this comparison indicates
a profit, corresponding income tax may be due unless the sale price is reinvested in
eligible assets. Capital losses are deductible.
Under certain conditions, fixed assets with a value of less than EUR 870 or an economic
life that is not in excess of one year can be expensed fully in the year of acquisition.
Special accelerated depreciation on 80% of the cost of fixed assets is available for
assets that protect the national environment, save energy in Luxembourg, or permit the
development of workplaces for handicapped workers, under certain conditions.
Goodwill
Goodwill is generally amortised over a five-year maximum period. It can, however, be

amortised for a period longer than five years if this period does not exceed the useful
economic life of this asset. The Luxembourg tax treatment will follow the applicable
accounting treatment.
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Start-up expenses
Formation expenses can either be directly charged to the profit and loss account of the
year in which they are incurred or depreciated on a straight-line basis over a five-year
maximum period. The accounting treatment is followed for Luxembourg tax purposes.
Interest payments
Interest payments are, in principle, deductible to the extent they comply with the armslength principle (see Transfer pricing in the Group taxation section).
Non-deductibility of the interest payments may arise in case they depend on the
profits realised by the company or are derived from loans structured in the form of
bonds or similar securities. Also, the deductibility will be limited in case the company
is considered as being thinly capitalised (see Thin capitalisation in the Group taxation
section).
Bad debt
Provisions for bad debts are generally tax deductible.
Gifts for scientific, charitable, or public purposes and to institutions in the general
interest are deductible, subject to a maximum of 20% of the net income or up to an
amount of EUR 1 million (the minimum being EUR 120) with a possibility to spread the
deduction over two years.
Shareholdings
Expenses linked to a shareholding qualifying for the participation exemption, including

write-downs in the value of the shareholding booked as a consequence of a dividend
distribution, are not deductible up to the amount of the exempt dividend. Recapture
rules may apply in the event of disposal of the shareholding. Basically, the effect of this
rule is that capital gains realised will become taxable up to the amount of the aggregate
expenses and write-downs in relation to the participation deducted during the year of
disposal and the previous years. The qualifying shareholding is exempt from net wealth
tax.
Severance payouts or golden handshakes
Severance payouts or golden handshakes are deductible for CIT and municipal business
tax purposes, up to EUR 300,000.
Fines and penalties
Fines and penalties suffered by the taxpayer are not to be considered as operating
expenses and are therefore not tax deductible.
Taxes
Several taxes are deductible in determining income subject to CIT, including the
registration duties and real estate tax. Also, certain taxes are credited against the
computed amount of income tax owed, including taxes withheld from Luxembourg
dividend income, tax withheld abroad from dividend and interest income received by a
Luxembourg corporation (subject to limitations), and investment tax credits (see the Tax
credits andincentives section).
The main non-deductible taxes are CIT, municipal business tax, and net wealth tax, as
well as interest and penalties for late payment of said taxes.
Net operating losses can be carried forward for an unlimited period but cannot be
carried back.
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Royalties, management service fees, and interest charges paid to foreign affiliates by
a Luxembourg company are deductible items, provided they are equal to what the
company would pay an unrelated entity for comparable services.
Group taxation
Luxembourg permits tax unity. Generally, the conditions to qualify for tax unity
includethat:
each company is a fully taxable company that is resident in Luxembourg (the top
entity may be a Luxembourg PE of a fully taxable non-resident company)
at least 95% of each subsidiarys capital is directly or indirectly held by the
parentcompany
each companys fiscal year starts and ends on the same date, and
tax unity is requested jointly by the top company and each subsidiary that becomes a
member of the group.
Tax unity lasts for a five-year period, and taxable income/loss is computed on the
consolidated result. Tax losses that occurred before the consolidation period may be
offset only against tax profits of the company that incurred the loss. Tax losses that are
sustained by a group member during the consolidation period are offset against the tax
profits of the other group members. Tax losses arising during the consolidation period
that exist after the consolidation period are attributed to the parent company.
Transfer pricing
Luxembourg largely follows the transfer pricing guidelines issued by the OECD in the
absence of detailed transfer pricing regulations in Luxembourg. LITL has prescribed the
general transfer pricing provisions in Article 56 LITL, which requires that transactions
between related parties are carried out in line with the arms-length principle. This
article provides that where there is a transfer of profit possibly due to the fact that a
Luxembourg taxpayer has a special economic relationship with a non-resident taxpayer,
then the tax authorities may determine the financial result regardless of the reported
profit. The concept of a special economic relationship can be described as any economic
relationship that differs from a regular/commercial economic relationship between two
parties. The special economic relationship goes beyond the related party definition as
stated in article 9 of the OECD Model Convention.
Furthermore, Article 164(3) LITL characterises certain transactions as a hidden
distribution of profits where a direct or indirect shareholder receives an advantage
from a company that said shareholder would not have received if there had not been
a shareholding relationship.The hidden distribution of profits in Luxembourg is
included in the profit of the taxpayer and subject to tax at the prevailing statutory rate
of corporation tax. In addition, it may be subject to 15% withholding tax (WHT) on the
gross amount received, except in case a reduced rate applies under the provisions of the
relevant DTT or the EC Parent-Subsidiary Directive.
Transfer pricing documentation is prepared based on OECD transfer pricing guidelines
and EU transfer pricing documentation guidelines. Transfer pricing documentation is
neither required at the time of the transaction nor at the filing of the tax return. During
the course of a tax assessment, the tax authorities may request documentation from the
taxpayer to evidence the reasonableness of an intra-group pricing arrangement. There
are no transfer pricing methods prescribed for determining the arms-length standard,
and the taxpayers and the tax authorities largely follow the transfer pricing methods
prescribed in the OECD transfer pricing guidelines.
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In terms of the burden of proof, the tax authorities have to prove that there is an erosion
of the taxable base in Luxembourg, whereas the taxpayer has to prove that the intercompany transactions did not result in a reduction or cancellation of taxes. The statute
of limitations is generally five years from the end of the year in which the tax liability
arises. This period may be extended if a deferred payment is granted. In case of tax
evasion or fraud, the statute of limitations can be extended up to ten years. There are no
specific penalties in relation to transfer pricing in Luxembourg, but the penalty regime
under the corporate tax will be applicable.
Although Luxembourg has no formal procedure for applying advance pricing
arrangements (APAs), the income tax authorities are quite flexible in this area. There
have been a few cases in Luxembourg where bilateral APAs have been concluded,
although in general, unilateral advanced tax agreements are obtained on an individual
basis. Recently, the tax authorities have increased their focus on transfer pricing. As a
result, two Circulars describing the tax treatment for intra-group financing transactions
have been issued by the Luxembourg tax authorities.
According to the Circular of 28 January 2011 (L.I.R. n 164/2), the internationally
acceptable arms-length principle should be applied for the determination of the
compensation for Luxembourg companies that are principally engaged in on-lending
transactions. The remuneration of the related entities should be determined based on
the functions performed, assets utilised, and risks born by the Luxembourg company.
A written confirmation from the tax authorities can be obtained if the Luxembourg
company meets the substance and equity at risk requirements with regard to the onlending activity. In respect of the equity at risk requirement, the Luxembourg company
must be at risk for an amount equal to the lesser of 1% of the nominal value of the loan
or EUR 2 million. In addition, the arms-length price has to be determined by way of a
transfer pricing analysis.
On 8 April 2011, the Luxembourg tax authorities issued a second Circular (L.I.R.
n164/2bis) clarifying the application of Circular L.I.R 164/2 of 28 January 2011. This
Circular explains that, as of 1 January 2012, the income tax authorities are no longer
bound by confirmation obtained before 28 January 2011 in relation to existing intragroup lending activities financed with borrowings falling within the scope of Circular
L.I.R. 164/2.
Thin capitalisation
No thin capitalisation ratio is specifically provided by the Luxembourg tax law.

In practice, the tax authorities apply an 85:15 debt-to-equity ratio for the intra-group
financing of participations. Should the 85:15 ratio not be complied with by the taxpayer,
the surplus of interest can be re-qualified by the tax authorities as a hidden distribution
of profits that would be non-deductible and potentially subject to a 15% WHT.

Foreign tax credit
credit regime.
Inbound and capital investment incentives
Luxembourg tax law provides for various incentives, with specific requirements, in the
areas of risk capital, audiovisual activities, and environmental protection, as well as for
research and development (R&D), professional training, and recruitment of unemployed
persons.
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The most commonly used incentives are the investment tax credits. Luxembourg tax law
provides for two types of investment tax credits.
First, a tax credit is available that, asof tax year 2013, amounts to 12% of the increase
in investment in tangible depreciable assets made during the tax year. The increase in
investment over a given tax year is computed as the difference between the current value
of all qualifying assets and the reference value allocated to the same type of assets.
Independently, the company may benefit from a 7% tax credit on the first EUR
150,000 of qualifying new investments, and, asof tax year 2013, a 2% tax credit on
the amount of new investments exceeding EUR 150,000 in tangible depreciable assets
as well as investments in sanitary and central heating installation in hotel buildings
and investments in buildings used for social activities. The above 7% and 2% rates
are increased to 8% and 4% for investments eligible for special depreciation (i.e.
investments favouring the protection of the environment, the realisation of energy
savings, or the creation of employment for handicapped workers). However, certain
investments are excluded from the credit calculation, including investments in real
property, intangible assets, and vehicles (unless specifically stated by the law).
Domestic law requires that investments be physically operated in Luxembourg in
order to be eligible for the incentive, unless the investment consists in shipping vessels
operating in international waters. In addition, the tax benefit of the tax credit is limited
to investments that are made within a Luxembourg business establishment and that are
intended to be used permanently in Luxembourg.
Further to the European Court of Justices decision dated 22 December 2010
(Tankredeerei, C-287/10), the Luxembourg Tax Authorities issued a Circular letter
confirming that the investment tax credit must be granted to any investment used within
the EU and EEA member states. Although Luxembourg domestic tax law has not yet
been amended accordingly, the application of investment tax credit may be requested
for the current tax year, as well as for tax years already assessed but still subject to the
introduction of a claim.
An IP regime is applicable to qualifying IP rights acquired or developed after 31

December 2007. This regime provides for an 80% tax exemption of the net income
deriving from the use and the right to use qualifying IP rights, under certain conditions.
Qualifying IP rights include patents, trademarks, design, domain names, models, and
software copyrights.
An 80% deduction of net deemed income is also available under certain conditions for
self-developed patents, which are used internally by the taxpayer.
The net capital gain realised upon disposal of the qualifying IP rights also benefits from
the 80% exemption.
Finally, qualifying IP rights may be fully taxexempt for net wealth tax purposes under
certain conditions.
R&D incentives
Luxembourg entities involved in innovative and R&D activities can benefit from financial
support in addition to the specific IP tax regime and general tax incentives.
Innovation loans may be granted by the Socit Nationale de Crdit et dInvestissement
and may carry a fixed interest rate lower than the market rate. Financial support may
also be granted in the form of cash grants or interest subsidies.
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R&D projects or programmes receive financial support up to a maximum eligibility
(percentage of costs eligible for the incentives) depending on the size of the beneficiary
(private research companies or organisations) as follows:
Large (25% to 100% depending on the investment).
Mid-size (35% to 100%).
Small (45% to 100%).
These incentives are available for:

experimental development
experimental development and cooperation
industrial research
industrial research and cooperation, or
fundamental research.
Innovation in process and organisation and investment in innovation pools can benefit
from financial support of between 15% and 35% (50% for public research companies).
Promotion and development of innovation pools can benefit from financial support of up
to 50% for private organisations or 75% for public research companies.
Research regarding technical feasibility can benefit from financial support of up to
40% or 50% if prior to experimental development and up to 65% or 75% if prior to
experimental research.
Other incentives by entity

Investment funds
Investment funds resident in Luxembourg generally are exempt from CIT, municipal
business tax, and WHT on dividends. These investment funds are subject to the
previously described subscription tax and to the general registration duty regime.
Financial participation company (Soparfi)
A Soparfi (Socit de Participation Financire) is neither a specific type of company nora

special tax regime. It is rather used to refer to resident companies that hold and manage
the shareholdings of subsidiaries. A Soparfi is subject to CIT, municipal business tax, and
net wealth tax, but it does benefit from Luxembourgs DTTs, EU Directives (e.g. Parent
Subsidiary Directive), the domestic participation exemption on dividends received, and
capital gains on qualifying participations.
Private wealth management company (Socit de gestion du Patrimoine

Familial or SPF)
The SPF has been tailored to enter the private sphere of individuals for the purpose of
wealth management. Its corporate objective is restricted to the acquisition, holding,
management, and disposal of financial assets, to the exclusion of any commercial
activity. As a general rule, an SPF is exempt from Luxembourg taxation on income and
wealth tax in Luxembourg. A yearly subscription tax of 0.25% is due on the basis of paidup capital, share premium, and excessive debts. Subscription tax, however, is capped
at EUR 125,000. No WHT applies on dividends distributed by an SPF. Non-resident
investors are not taxed in Luxembourg on dividends paid by an SPF or on capital gains
realised on shares in an SPF.
Securitisation companies (SCs)
An SC is a company that carries out securitisation activities or participates in

securitisation transactions. SCs are subject to normal corporate taxation based on their
net accounting profit (i.e. gross accounting profits minus expenses). However, the
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commitment to remunerate the security holders (both capital and debt) issued by the
SC qualifies as interest on debt even if paid as return on equity. SCs are not subject to net
wealth tax in Luxembourg.
Venture capital vehicle (Socit dInvestissement en Capital Risques or

SICAR)
The SICAR benefits from an attractive tax regime. SICARs are notably exempt from net
wealth tax. Incorporated under a corporate form, the SICAR is subject to income tax at
the normal rate with the benefit of an exemption on income and gains (e.g. dividends,
capital gains, liquidation proceeds, interest) from transferable securities qualifying as
risk capital as well as income arising from investments in liquid assets pending their
investment in risk capital for a maximum of 12 months. In addition, it can benefit from
the European directives and DTTs. Under the form of a limited partnership, the SICAR is
treated as a tax transparent entity, and investors are taxed according to the rules of their
country of residence. SICARs treated as tax transparent entities do not benefit from the
European directives and DTTs. The SICAR mainly targets qualified or informed investors
(i.e. professional investors).
Financial services companies
Banks, securities depositaries, insurance, and reinsurance companies, as well as other

financial service companies, may benefit from preferential regulations when establishing
their taxable basis for CIT (e.g. provision for the neutralisation of unrealised exchange
gains, general banking risk provision, provision for guarantee of deposits, mathematical
reserves, and/or catastrophe reserves).
Shipping companies
Luxembourg-resident shipping companies are not subject to municipal business tax and
can benefit from investment tax credits and accelerated depreciation (even for used
assets).
Withholding taxes
Dividends paid by a Luxembourg fully taxable company to its corporate shareholders
resident in a treaty country, which hold or commit themselves to hold a participation of
at least 10% in the Luxembourg company (or shares with an acquisition price of at least
EUR 1.2 million) for an uninterrupted period of at least 12 months, may be exempt from
WHT (see Note 1 below for more details).
The following taxes are withheld on payments made. The WHT due on dividends paid to
residents of a treaty country cannot exceed the non-treaty rate.
Recipient
and individuals:
Non-treaty
Treaty (1, 5):
Armenia
Austria
Azerbaijan
1196
Luxembourg
Dividends (%)
Substantial
Portfolio
holdings (1)
15
0
15
15

0
0
10 (4)
0
15
0/15
15
15
10
0/5 (21)
0/5 (6)
0/5 (7)
0
0
0
0
0
0
Luxembourg
Recipient
Bahrain
Barbados
Belgium
Brazil
Bulgaria
Canada
China, Peoples Republic
of (10)
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Italy
Japan
Kazakhstan
Korea, Republic of
Laos (32)
Latvia
Liechtenstein
Lithuania
Macedonia
Malaysia
Malta
Mauritius
Mexico
Moldavia
Monaco
Mongolia
Morocco
Netherlands
Norway
Panama, Republic of
Poland
Portugal
Qatar
Romania
Russia
Dividends (%)
Substantial
Portfolio
holdings (1)
10
0 (26)
15
0 (27)
15
0/10 (8)
25
0/15 (9)
15
0/5 (6)
15
0/5 (19)
10
0/5 (6)
15
15
15
15
15
10
15
7.5
10
15
15
10
15
15
15
15
15
15
15
15
10
15
15
15
10
15
10
15
10
15
15
15
15
15
15
15
15
10
15
15
0/5 (6)
0/5 (6)
0/5 (6)
0/5 (12)
0/5 (12)
0/5 (22)
0/5 (20)
0/7.5
0 (10)
0/5 (6)
0/5 (6)
0
0/10 (6)
0/5 (20)
0/5 (21)
0
0/5 (15)
0/5 (31)
0/10 (6)
0/5 (9)
0/5 (6)
0/5 (25)
0/5 (6)
0/5 (6, 29)
0/5 (16)
0/5 (6)
0/5 (9)
0/5 (9)
0/5 (23)
0/5 (21)
0/5 (16)
0/10 (6)
0/2.5 (6)
0/5 (6)
0/5 (9)
0 (30)
0/15
0/5 (24)
0/5 (6)
0/5 (17)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Luxembourg
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1197
Luxembourg
Recipient
San Marino
Seychelles
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka (32)
Sweden
Switzerland
Tajikistan
Thailand
Trinidad and Tobago
Tunisia
Turkey
United Kingdom
United States
Uzbekistan
Vietnam
Dividends (%)
Substantial
Portfolio
holdings (1)
15
0 (26)
10
0 (9, 29)
10
0/5 (18)
15
0/5 (6)
15
0/5 (6)
15
0/5 (6)
15
0/5 (6)
10
0/7.5 (33)
15
0 (26)
15
0/5 (28)
15
0 (9, 29)
15
0/5 (6)
10
0/5 (9)
10
0/10
20
0/5 (6)
10
0/5 (9)
15
0/5 (14)
15
0/5 (13)
15
0/5 (6)
15
0/5/10 (11)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Notes
These notes are not extensive. The full text of the DTT should be checked for a comprehensive view on
the conditions of application of reduced rates.
1.
Under Luxembourg domestic law, no WHT is levied on dividends paid by a Luxembourg qualifying
subsidiary to an entity that is:
a collective entity falling within the scope of the Parent Subsidiary Directive
a Luxembourg resident joint-stock company, which is fully taxable and does not take one of the
forms listed in the LITL
a PE of a collective entity falling under the previous categories
a collective entity that is resident in a country with which Luxembourg has concluded a DTT and
is fully liable to a tax corresponding to the Luxembourg CIT, or a domestic PE of such an entity
a Swiss resident joint-stock company that is subject to Swiss CIT without benefiting from any
exemption
a joint-stock company or a cooperative society that is resident in an EEA member state (other
than an EU member state) and is fully liable to a tax corresponding to the Luxembourg CIT, or
a PE of a joint-stock company or of a cooperative society that is resident in an EEA member state
(other than an EU member state), and
at the date on which the income is made available, the beneficiary has been holding or
undertakes to hold, directly, for an uninterrupted period of at least 12 months, a participation of
at least 10%, or with an acquisition price of at least EUR 1.2 million in the share capital of the
income debtor.
Qualifying shareholders need to be fully taxable collective entities subject in their country of residence
to a tax similar to that imposed by Luxembourg. As a general rule, this requirement is met if the
foreign tax is compulsorily levied at an effective rate of at least 10.5%, on a basis similar to the
Luxembourg one.
2. Interest paid to non-residents generally is not subject to WHT in Luxembourg. However, interest that
represents a right to profit participation on a bond may be assimilated to a dividend and subject to
WHT. Further analysis should be made to determine the applicable reduced rate on the basis of the
treaty (i.e. pursuant to dividend or interest clause). The WHT that may be due as a consequence of
the EU Savings Directive (Council Directive 2003/48/EC dated 3 June 2003) is not mentioned.
3. Royalties paid to non-residents are not subject to WHT in Luxembourg, whether the companies are
associated or not.
4. A WHT of 10% is withheld on defined interest income paid by a Luxembourg paying agent to resident
individuals. Interest indirectly cashed through investment funds are out of the scope of this WHT.
5. DTTs have been concluded with Albania, Andorra, Botswana, Brunei, Croatia, Cyprus, Guernsey, Isle
of Man, Jersey, Kuwait, Kyrgyzstan, Oman, Saudi Arabia, Serbia, Taiwan, Ukraine, and Uruguay, but
are not yet in force. New DTTs with Czech Republic and Singapore were signed in 2013, but domestic
transposition procedures are still pending.
1198
Luxembourg
Luxembourg
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
The recipient company holds at least 25% of the Luxembourg companys capital. In some rare cases,
a holding period requirement may have to be met as well (e.g. Spain, Switzerland). For the DTT
concluded with Korea, taking into consideration recent changes, the 10% WHT should apply if the
beneficial owner is a company (other than a partnership)that directly holds at least 10% of the capital
of the company paying the dividends.
The recipient company owns at least 30% of the companys capital and the equivalent of an
acquisition price of USD 300,000.
The recipient company owns a 25% investment or the equivalent of an acquisition price of EUR
6,197,338. The investments may be held by several Belgian companies, provided one owns at least
50% of the shares of each of the others. The investment must be held since the beginning of the
financial year of the recipient of the dividends.
The recipient company holds at least 10% of the Luxembourg companys capital.
No WHT is levied if the recipient company holds at least 10% of the Luxembourg companys capital
or a participation with an acquisition price of at least EUR 1.2 million.
The rate of 5% of WHT on the gross amount of the dividends applies where the effective recipient
company directly or indirectly owns at least 50% of the share capital of the paying company or has
contributed more than 10 million United States dollars (USD) or the equivalent in Luxembourg or in
Vietnamese currency, in the capital of the company paying the dividends; the rate of 10% of WHT on
the gross amount of the dividends applies where the beneficial owner is a company that directly or
indirectly holds at least 25% but less than 50% of the capital of the company paying the dividends
and has contributed not more than USD 10 million, or the equivalent in Luxembourg or Vietnamese
currency, in the capital of the company paying the dividends.
The recipient company directly or indirectly owns 25% of the companys capital. Indirect participation
includes the holding through several treaty resident companies located in the same country, provided
one owns more than 50% of the shares of each of the others.
A 5% WHT is levied on dividend distributions where the beneficial owner is a company that holds at
least 10% of the voting rights of the paying company. No WHT is levied when the US company has
held, during an uninterrupted period of two years, a direct shareholding of at least 25% of the voting
power of the paying company and certain conditions regarding the nature of activities performed by
the distributing company are met.
The recipient company directly or indirectly owns 25% of the companys voting rights. Indirect
participation includes the holding through several treaty resident companies located in the same
country, provided one owns more than 50% of the voting rights of each of the others.
The recipient company holds at least 25% of the Luxembourg companys voting shares during the
period of six months immediately before the end of the accounting period in which the distribution of
profits takes place.
The dividends are taxable at a rate of 5% if the beneficial owner is a company that directly holds at
least 10% of the capital of the company paying the dividends. No WHT is levied when the beneficiary
company has held, during the 12 preceding months, a direct shareholding of at least 25% of the
capital of the paying company. The holding period must be met before the date of distribution of
the dividend. Furthermore, certain conditions regarding the nature of activities performed by the
company must be met.
The recipient company holds at least 10% of the Luxembourg companys capital and the acquisition
price reaches at least EUR 80,000 (or its equivalent in roubles).
The recipient company holds at least 10% of the Luxembourg companys capital. Dividends paid to
the government of Singapore are exempt.
The beneficial owner is a company (other than a partnership) that directly or indirectly controls at
least 10% of the voting power in the company paying the dividends.
The recipient company holds at least 10% of the Luxembourg companys voting shares (Germany/
Luxembourg) or at least 25% of the Luxembourg companys voting power (Ireland/Luxembourg).
The rate of 5% of WHT on the gross amount of dividends applies where the recipient company holds
at least 10% of the Luxembourg companys capital.
The rate of WHT is 5% if the beneficial owner is a company that directly holds at least 10% of the
capital of the company paying the dividends and made an investment in the capital of the paying
company of more than EUR 100,000 or the equivalent in Georgian currency. No WHT is levied
when the beneficiary company directly holds at least 50% of the capital of the company paying the
dividends and made an investment in the capital of the paying company of more than EUR 2 million
or the equivalent in Georgian currency.
No WHT is levied when the beneficiary company holds at least 10% of the company paying the
dividends. The rate of 5% of WHT on the gross amount of dividends applies where the beneficial
owner is an individual who directly holds at least 10% of the company paying the dividends and was
a resident of the other contracting state for the 48-month period immediately preceding the year in
which the dividends are paid.
No WHT is levied when the beneficiary of the dividend is a joint stock company that has directly
held a participation of at least 10% (or with an acquisition price of at least EUR 1.2 million) of the
distributing companys share capital for an uninterrupted period of at least 12 months. The rate of 5%
of WHT applies if said participation has been held for less than 12 months.
No WHT is levied when the recipient company holds at least 10% of the Luxembourg companys
capital. A holding period requirement has to be met for Sweden and San Marino.
No WHT is levied when the beneficiary of the dividends is a joint-stock company that has directly
held a participation of at least 10% of the distributing companys capital for an uninterrupted period
of at least 12 months preceding the decision to distribute the dividend.
A 5% WHT if the beneficial owner is a company (other than a partnership) that directly holds at least
25% of the capital of the company paying the dividends. No WHT is levied if the beneficial owner is
a company (other than a partnership) that is a resident of the other contracting state and that holds,
Luxembourg
1199
Luxembourg
29.
30.
31.
32.
33.
directly for an uninterrupted period of two years preceding the date of payment of such dividends, at
least 25% of the capital of the company paying the dividends. The provision applies only to dividends
from the fraction of the holding that has been the uninterrupted property of the company that is
beneficial owner during said period of two years.
DTTsapplicable asof 1 January 2014.
The 2012 protocol to the 1995 DTT with Poland entered into force on 25 July 2013 and appliesas
of1 September 2013 for WHT and asof 1 January 2014 for all other tax matters. The 0% WHT
applies to dividends paid to a company that directly holds at least 10% of the capital of the paying
company for a continuous period of 24 months before the dividends are paid; otherwise, the rate is
15%.
DTTs applicable as of 1 January 2015.
Tax administration
Taxable period
The taxable period for Luxembourg fully taxable resident entities follows the financial
year (i.e. accounting year) of the company.
Companies generally use the calendar year for accounting purposes but may, in practice,
apply a different accounting year. The taxable period would, in such cases, correspond
to this different accounting year.
Tax returns
Companies must file their tax returns by 31 May of each year following the calendar year
during which the income was earned.
Assessments are issued after the end of the tax year and normally can be finalised within
five years, although the delay may extend to ten years if the declaration is found to
be incomplete or inexact, with or without the intention of fraud. Once issued, the tax
assessment notice is, in principle, final (unless new facts come to light).
A self-assessment procedure applies to Luxembourg resident companies. Tax
assessments are issued by the tax authorities immediately upon receipt of the tax return,
based on the taxable profit reported by the company. The tax authorities may then
reassess or request more information on the return within the period of five years that
follows the reception of the tax return.
Payment of tax
Quarterly tax advances must be paid. These payments are fixed by the tax administration
on the basis of the tax assessed for the preceding year or on the basis of the estimate
for the first year. This estimate is given by the company pursuant to the request of the
Luxembourg tax authorities.
Final payment of CIT must be paid by the end of the month that follows the month of
reception by the company of its tax assessment.
Other issues
Implementation of the Foreign Account Tax Compliance Act (FATCA)
An Intergovernmental Agreement (IGA) has been signed by Luxembourg and the United
States on 28 March 2014 that will provide needed clarity around the implementation
of the provision of FATCA for the financial institutions (FIs) resident in and branches
located in Luxembourg.
The IGA must be ratified under Luxembourg law by the Luxembourg Parliament before
it comes into force, and, afterwards, it needs to be transposed in Luxembourg law.
1200
Luxembourg
Luxembourg
However, Luxembourg FIs are considered to have an IGA in effect as of the date of
signature of the agreement through the time that local legislation is implemented or 31
December 2015 (whichever is earlier).
The Direct Tax Authority will most likely issue an implementing circular that will
provide additional guidance on the provisions of the IGA, and it is expected that industry
organisations will publish accompanying commentary.
Annex II of the Luxembourg IGA includes the categories of non-reporting FIs defined
in the Model I IGA template, such as Collective Investment Vehicle (CIV) or Sponsored
Investment Entity, but it also differs from the Model I IGA template with respect to some
specific items.
Luxembourg
1201
Macau
PwC contact
Grace Cheung
PricewaterhouseCoopers (Macau) Ltd.
29/F, Bank of China Building
323 Avenida Doutor Mario Soares
Macau, SAR
Tel: +853 8799 5121
Tax incentives for the tax year 2014
On 16 December 2013, the Legislative Assembly approved certain tax incentives

proposed by the Chief Executive of Macau in the Budget for the financial year 2014. The
key tax incentives include the following:
The tax-free income threshold for complementary (corporate) tax will be increased
from 32,000 Macanese patacas (MOP) to MOP 300,000 for income derived in the tax
year 2013. Taxable income over MOP 300,000 is taxed at 12%.
The standard MOP 3,500 reduction in property tax liabilities will continue to be
available in the tax year 2014 for both self-use and rental properties.
Restaurants will continue to be exempt from tourism tax in the tax year 2014.
Insurance policies written or renewed in the tax year 2014 and banking transactions
in the tax year 2014 will continue to be exempt from stamp duty.
Admission tickets for performances, exhibitions, and entertainment programs will
continue to be exempt from stamp duty in the tax year 2014.
Commercial and industrial operations will continue to be exempt from the annual
industrial tax in the tax year 2014.
On 30 May 2013 and 13 March 2014, the government of Macau signed TIEAs with
the Republic of Malta and Japan, respectively. Together with the five comprehensive
tax arrangements/agreements that Macau has signed with Belgium, Cape Verde,the
Peoples Republic of China, Mozambique, and Portugal, Macau has enlarged the network
of agreements to implement the internationally agreed standards on transparency and
exchange of information for tax purposes through the signing of a total of 17 double
taxation agreements (DTAs) or TIEAs to date.
The TIEAs with the Republic of Malta and Japan will become effective upon completion
of the necessary ratification procedures by the respective jurisdictions.

Complementary tax is imposed on the worldwide income earned by Macau registered
entities, irrespective of where their residence or headquarters are situated and
irrespective of the nature of the income. The exception to the foregoing is rental income
from leasing of immovable properties located in Macau, which is taxed separately under
the property tax regime.
Generally, if a foreign entity is engaged in commercial/industrial activities and/
or rendering services in Macau, the resultant gain from such commercial/industrial
activities and/or services rendered will be subject to complementary tax.
1202
Macau
Macau
According to the Macau Complementary Tax Law, complementary tax is imposed on a
progressive rate scale ranging from 3% to 9% for taxable profits below or equal to MOP
300,000 and 12% for taxable profits over MOP 300,000. Taxable profits below MOP
32,000 are exempt from tax.
According to the Budget for the financial year 2014 approved by the Legislative Assembly
(2014 Budget), the tax-free income threshold for complementary tax has been increased
from MOP 32,000 to MOP 300,000 for income derived in the tax year 2013 (taxable
income in excess of MOP 300,000 is taxed at 12%). Such increase in the tax-free income
threshold has been granted since the tax year 2007. While it is generally believed that
the direction of the Macau government policy will remain stable at least for the medium
term, the changes in the tax-free income threshold and the tax brackets beyond the tax
year 2013 are subject to approval by the Legislative Assembly on an annual basis, unless
such amendments are written into the relevant tax laws.
Types of taxpayers and associated tax bases

Group A taxpayers
Taxpayer entities whose registered capital reached MOP 1 million, or whose average
taxable profits reached MOP 500,000 per year in three consecutive years, will
automatically become Group A taxpayers in the tax year following the year in which the
relevant notification is issued by the Macau Finance Bureau (MFB). A taxpayer entity
can also elect to become a Group A taxpayer by filing a Group A declaration form. Profits
of Group A taxpayers are assessed based on the actual accounting income after making
necessary tax adjustments.
Group B taxpayers
Group B taxpayers refer to any individual or any other form of companies not mentioned
above and those taxpayers that do not keep detailed accounting records. Profits of Group
B taxpayers are assessed on a deemed basis if the reported income is below the internal
parameters set by the MFB for taxpayers in similar industries.
Corporate residence
Corporate residence is generally determined by reference to the place of establishment.
There is no specific definition of PE in the Macau Complementary Tax Law. Technically

speaking, there are two major criteria for determining whether a foreign entity should
be subject to complementary tax, and the key phrases are engaging in commercial/
industrial activities and/or rendering services in Macau. These phrases are also not
defined. Generally, if a foreign entity is engaged in commercial/industrial activities and/
or rendering services in Macau, the resultant gain from such commercial/industrial
activities and/or services rendered will be subject to complementary tax.
Other taxes
There is no VAT regime in Macau.
Apart from consumption tax imposed on tobacco and spirits entering into Macau, there
are no customs duties/import tariffs in Macau.
Macau
1203
Macau
Consumption tax (excise duty)
Consumption tax is imposed only on tobacco and spirits entering into Macau.
There are two methods for determining the amount of consumption tax payable, by
quantity or by value. The former method of assessment is based on the weight or volume
of goods and the latter is based on the price of the goods imported into Macau. The rate
of consumption tax varies depending on the classification of the imported goods.
Property tax
Property tax is imposed annually on the owner of buildings situated in Macau. This is
first payable after acquiring a property or upon the expiry of the property tax exemption
period, if applicable. Different exemption periods are granted, depending on the
location of the property. Additional exemption periods may apply in special cases.
For leased properties, property tax is charged at 10% on the actual rental income, and by
application, a maximum deduction based on 10% of the rental income derived to cover
repair and maintenance expenses incurred will be granted, if approved by the MFB.
For self-use properties, property tax is charged at 6% on the official ratable value as
established by the appointed committee of the MFB. A deduction of 10% of the official
ratable value to cover repair and maintenance expenses will be automatically granted for
self-use property. If the property is not occupied, the owner can apply for an exemption
from property tax, the approval of which is entirely at the discretion of the MFB.
According to the 2014 Budget, there is a standard MOP 3,500 reduction in the property
tax liabilities assessed in the tax year 2014 for both self-used and rental properties.
Stamp duty
Stamp duty is payable on certain types of documents and stampable transactions at a

small fixed amount or at rates ranging from 0.1% to 10% on the value represented by the
documents and transactions.
The charge to stamp duty has been extended to property transfers and the irrevocable
transfer of certain assets. Stamp duty at progressive rates ranging from 1% to 3% is
payable on transfer of immovable property with a surcharge of 5% on the duty payable,
resulting in effective stamp duty rates of 1.05% to 3.15%. The irrevocable transfer of
certain assets without consideration is subject to a 5% stamp duty.
Insurance policies, written or renewed, and banking transactions have been exempt from
stamp duty since 2005. This exemption has been approved by the Legislative Assembly
and will continue to be available in the tax year 2014.
Admission tickets for performances, exhibitions, and any kind of entertainment
programmes is exempt from stamp tax for the tax year 2014, as approved by the
Legislative Assembly. This exemption, if extended, will be published by the Macau
government on an annual basis.
Special Stamp Duty (SSD)
The transferor of a residential property, commercial property, office, car-parking space,

or property under constructionis subject to SSD at 20% on the value of the property if
the property is resold within a year of its purchase.The SSD rate is reduced to 10% if
the resale takes place between one and two years after the purchase.The SSD is also
applicable to transfers of an 80% or more shareholding interest in a Macau company that
has properties.
1204
Macau
Macau
Buyer Stamp Duty (BSD)
A company, an entrepreneur, or a non-Macau resident acquiring a residential property in

Macau is subject to BSD at a flat rate of 10%, on top of the existing Stamp Duty and SSD,
if applicable.
Professional (Salaries) Tax
Professional Tax is payable by anyone receiving income from employment services

performed in Macau or from a Macau employment. In Macau, the Professional Tax
reporting, withholding, and remittance obligations rest with the employer.
Social security fund contribution
Social security fund contribution in the total amount of MOP 45 per month is payable for
resident employees. The employer contributes two-thirds of the amount (i.e. MOP 30)
and the employee contributes one-third of the amount (i.e. MOP 15).
Annual industrial tax
The annual industrial tax has been exempted for the tax year 2014 and has been
exempted on an annual basis by the Macau government since 2002.
Under the Industrial Tax Code, all commercial or industrial operations carried out in
Macau are subject to industrial tax at the beginning of each year. The amount of the tax
is dependent upon the nature of the business. The table below is an illustration of the tax
amounts applicable to certain types of businesses in Macau.
Type of business
Commercial banks
Construction companies
Hotels
Insurance companies
Textile companies
Tax (MOP)
80,000
500
500
500
500
Special gaming tax
Special gaming tax is levied at 35% on the gross gaming revenue derived by gaming
concessionaires authorised to carry on the operation of games of chance in Macau under
Law 16/2001.
Tourism tax
Tourism tax is imposed at the rate of 5% on bill of services, excluding

telecommunication and laundry services, and service charges of up to 10%, rendered
in Macau by establishments such as hotels, guest houses, dancing halls, night clubs,
massage/sauna parlours, gymnasium, karaoke, and the like. Such tax is generally borne
by consumers.
Restaurants are exempt from tourism tax in the tax year 2014 and have been exempt, via
an exemption published on an annual basis by the Macau government, since 2002.
Motor vehicle tax
Motor vehicle tax is imposed on the sale of new motor vehicles to consumers and the
importation of new motor vehicles for self-use. Exemptions are available to certain
persons and organisations and for certain specific usages. Generally, motor vehicle tax
is levied based on the listed selling prices as registered with the MFB. The rate of motor
vehicle tax varies depending on the type of motor vehicle and its value.
Land rent
Land rent is payable by lessees of leasehold land in Macau on an annual basis.

Macau
1205
Macau
According to the 2014 Budget, land rent below MOP 100 shall not be collected by the
MFB in the tax year 2014. However, any such amount already collected shall not be
refunded.
Branch income
Branch income is subject to tax at the same rate as that for corporations. The taxable
income is ascertained based on branch accounts.
The paragraphs below describe the tax acceptable treatments under the prevailing
Complementary Tax Law and are for reference only.
Inventory valuation
Inventory should be stated at actual cost, and conformity between book and tax
reporting is required. Market selling price or replacement cost is allowed only in special
circumstances, and prior approval of the Director of the MFB is required for adoption of
such inventory valuation methods. The write-down of inventory values is not permitted.
Capital gains
Gains or losses from the realisation of capital assets of a corporate taxpayer are treated
as current revenue or expense items for complementary tax purposes.
Dividend income
Dividends from all sources are subject to complementary tax in the hands of a recipient
incorporated in Macau unless the dividends were paid out of profits that have been
taxed at the corporate level in Macau. Where dividends to shareholders are paid out of
profits of a Macau entity that have not been taxed in Macau, complementary tax will
technically be charged on the dividend distribution to the shareholders.
Interest income
Interest income received by or accrued to a corporate taxpayer in Macau is subject to

complementary tax.
Foreign income
Companies incorporated in Macau are subject to complementary tax on worldwide

income, wherever received or credited. There are no provisions in the Macau
Complementary Tax Law that allow foreign income to be deferred for tax purposes.
Currently, double taxation relief is available under the respective DTAs that Macau has
with Cape Verde, the Peoples Republic of China, Mozambique, and Portugal.
Deductions
Please note that the assessor is empowered to disallow any business expenses (e.g.
entertainment, travelling) where the amount incurred is considered to be excessive.
Depreciation
An initial allowance of 20% is granted on buildings. The rates of tax depreciation are
detailed in Decree-Law No.4/90/M, dated 5 March 1990. The Decree-Law prescribes
the maximum annual tax depreciation rates and the number of years of asset life for
different asset classes under the straight-line method. For illustration, the maximum
depreciation rates and the maximum useful life currently applicable to the general types
of assets are set out below:
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Assets
Office and residential buildings
Machinery and installations, air conditioning, elevators, equipment
Tools
Laboratory, telex and interior telephone equipment, furniture, filing
systems, typewriters, and accounting machines
Computer hardware
Office installations
Trucks
Automobiles
Intangible assets, pre-operating expenses incurred prior to
commencement of business
Deferred expenses arising in connection with increases in share capital,
changes in form of business enterprises, issuance of debentures,
marketing and other studies, and financial expenses incurred for the
acquisition or own production of fixed assets prior to completion
Patents
Manufacturing licences, concessionary agreements, and similar rights
Trademark
Maximum
annual
percentage
rate (%)
4
2
10 to 20
20 to 33.3
16.66 to 25
Maximum
number of
years
50
100
20 to 10
10 to 6
12 to 8
25
14.29
14.29
20
33.33
8
14
14
10
6
33.33
10
*
*
20
*
*
* At the discretion of the authorities.
In the case of commercial and industrial buildings, depreciation is not allowed for the
value attributable to the cost of the freehold land. Where the value of the freehold land
cannot be determined from the total cost of land and buildings, a portion equal to 20% is
deemed to be attributable to the land value for the purpose of determining the value of
buildings to be depreciated.
Depreciation can be claimed either on a prorated basis in accordance with the prescribed
annual rates for assets that are not acquired at the beginning of the financial year or on
an annual basis.
The cost of repairs and maintenance exceeding 10% of the acquisition cost of the asset in
a given year is deemed to be an expense of a capital nature and should be capitalised and
depreciated over the remaining life of the asset.
Goodwill
Cost of acquisition of goodwill/amortisation of goodwill is generally deductible to the

extent it is incurred in the generation of assessable profits.
Interest expenses
There is no thin capitalisation rule in Macau. However, the MFB may assess the
reasonableness of the interest rate charged for interest expense paid to related parties.
Bad debts
The amount provided against doubtful trade receivables is an allowable tax deduction,
but the provision cannot exceed 2% of the total receivables, except in the case of banks,
where the minimum provisions required under the local banking regulations are fully
tax-deductible.
Debts considered uncollectible may be written off only when adequate proof can be
shown, usually by way of bankruptcy court proceedings.
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A deduction of up to 0.2% of the companys turnover is allowable for donations to

charitable organisations recognised by the tax authority.
Pension expenses
The employers contribution to the staff provident fund legally registered in Macau is
fully tax-deductible, up to 15% of the employees basic salary.
Fines and penalties
Tax fines are not deductible.
Taxes
Taxes, except for complementary tax and taxes paid on corporate profits, are generally
deductible to the extent they are incurred in the generation of assessable profits.
An amount provided against stock obsolescence of up to 3% of the total stock value at

year-end is allowed as a tax deduction.
Losses arising from insurable risks are not allowable as a tax deduction.
Staff social welfare expenses paid for the benefit of employees, for example canteens
and libraries, are fully tax-deductible.
Agreed tax losses can be carried forward for three consecutive years for Group A
taxpayers. Group B taxpayers are not allowed to carry their tax losses forward to future
years. Tax losses cannot be carried back in Macau.
The regulations make no specific mention of royalties and service fees paid to foreign
affiliates. The MFB generally monitors the deductibility of such payments. Payments to
foreign service providers for consulting services or construction-related services are not
deductible if such consulting contracts are not properly registered in Macau.
Group taxation
There is no provision for group taxation in Macau.
Transfer pricing
There is no transfer pricing provision in the Macau tax regime.
Thin capitalisation
There is no thin capitalisation provision in the Macau tax regime.

Foreign tax credit
There is no foreign tax credit provision in the Macau Complementary Tax Law. Foreign
tax credit is only available under the relevant provisions of the comprehensive tax
arrangement/agreements that Macau has entered into with the Peoples Republic of
China, Portugal, Mozambique, and Cape Verde, respectively.
A 50% reduction in complementary tax and stamp duty on certain transactions, as

well as exemptions from annual industrial tax (currently exempt for all taxpayers)
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and property tax (up to periods prescribed by the MFB), are allowable for taxpayers in
the manufacturing industry (as defined in the Decree-Law) whose capital investment
is aimed at the introduction of new products or high technology, improvement of
productivity, and increase in exports of goods to new markets.
Where profits are retained in reserves and reinvested in installation of new equipment
within the following three financial years, the reinvested reserves can be deducted from
taxable profits, provided that the reinvested reserves are attributable to profits earned
from normal business operations and the investment is considered to be beneficial for
the economic development of Macau.
Offshore services business incentives
Profits derived by approved offshore institutions from prescribed offshore servicerelated activities are exempt from all forms of taxes, such as complementary tax, annual
industrial tax (currently exempt for all taxpayers), and stamp duties.
Incentives for owners of touristic facilities
Additional incentives, such as an extended property tax exemption period, exemption

from annual industrial tax (currently exempt for all taxpayers), reduction in stamp duty,
as well as acceleration of depreciation for complementary tax purposes, are available to
owners of facilities that qualify as touristic facilities.
Withholding taxes
Currently, there is no provision in the Macau Complementary Tax Law for the
withholding of taxes from payments made by domestic corporations to overseas
companies.
Tax administration
Taxable period
The Macau tax year is on a calendar-year basis.
Tax returns
Assessments are made by the MFB upon review of the tax returns, which must be lodged
before 31 March or 30 June of each year for Group B or Group A taxpayers, respectively.
Payment of tax
A provisional tax payment calculated based on the declared taxable profit for a Group
A taxpayer or final assessed profit for a Group B taxpayer is payable in two equal
instalments, in September and November. However, if the amount is not greater than
MOP 3,000, payment will be requested in one lump sum amount in September. For
Group A taxpayers, a final tax assessment will be issued upon completion of the tax
assessment by the MFB and will be due around a months time after issuance.
Tax audit process
There is no specific tax audit cycle in Macau. The MFB is empowered by the Macau
Complementary Tax Law to carry out tax audit whenever the information provided by a
taxpayer in its tax return is considered unclear or insufficient, and subsequent replies to
the MFBs queries, if any, are considered inadequate.
The statute of limitations period is five assessment years from the relevant year of
assessment for both Group A and Group B taxpayers.
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The MFB generally focuses on the deductibility of expenses (e.g. staff costs, provisions,
depreciation, management fees, payments made to overseas service providers, bad
debts, donations).
Other issues
A foreign company conducting business (except for short-term projects) in Macau is

obligated to set up a legal establishment, which can be in the form of a company or a
branch.
There are two types of Macau companies: companies limited by shares and companies
limited by quotas. The capital and corporate governance requirements for a company
limited by shares are higher than a company limited by quotas, and, in general, a
company limited by quotas is used by investors that are not in regulated industries.
Exchange of information
Law 20/2009 is the legislation that governs the exchange of information by Macau
with other tax jurisdictions within the scope of bilateral tax treaties or arrangements.
Its objective is to promote the transparency of the Macau tax administration and to
demonstrate Macaus willingness to cooperate with treaty partners in combating tax
avoidance or tax evasion activities.
The information to be exchanged under Law 20/2009 is strictly confined to information
collected for tax purposes only, and includes the following:
Information collected within the jurisdiction of the MFB.
Information collected by the MFB from financial institutions that are governed by the
Macau Financial System Act and offshore institutions that are governed by the Macau
Offshore Law (the Institutions).
So far, Macau has concluded TIEAs or DTAs that comply with the latest internationally
agreed standards with 17 different tax jurisdictions. The following tables summarise the
TIEAs and DTAs that Macau has signed, and the TIEAs and DTAs that are in negotiation:
TIEAs have been signed by Macau with the following countries:

Australia
Denmark
Faroe Islands
Finland
Greenland
Iceland
India
Jamaica
Japan
Malta
Norway
Sweden
TIEAs are in negotiation with the following countries:

Argentina
Germany
Ireland
New Zealand
DTAs have been signed by Macau with the following countries:
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Treaty partners
Belgium
Cape Verde
The Mainland of China
Mozambique
Portugal
Effective date
Not yet effective
11 January 2011
1 January 2004 (Note that the first protocol
and the second protocol became effective on
15September2010and 8 October 2011, respectively)
11 January 2011
1 January 1999
DTAs are in negotiation with the following jurisdictions:

Hong Kong
Vietnam
It is believed that more comprehensive DTAs or TIEAs will be signed between Macau and
other tax jurisdictions in the near future to demonstrate Macaus willingness to continue
to cooperate with the Organisation for Economic Co-operation and Development
(OECD) countries in combating tax avoidance or evasion activities.
As the information of a Macau taxpayer is becoming more transparent under
comprehensive DTAs or TIEAs, it is important for Macau companies with crossborder transactions to perform periodic tax health checks to ensure that tax planning
arrangements, if any, that have been put in place in the past, remain technically
defensible. As Macau offshore companies continue to be a focus of investigations for
many tax jurisdictions, it is important to ensure that such companies have adequate
commercial substance in Macau and the companies transfer pricing policies are
supported by appropriate transfer pricing documentation and transfer pricing studies.
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Macedonia
PwC contact
Paul Tobin
9-11 Maria Louisa Blvd., 8th Floor
1000 Sofia
Bulgaria
Tel: +359 2 9355 116
There have been several significant corporate tax developments in Macedonia during the
past year.
Under recent amendments applicable as of 2014, uncollected receivables arising from
loans (or transactions that are considered loans in their economic substance) and not
repaid in the same year in which the loan was granted are considered taxable expenses.
Accordingly, these expenses are subject to 10% corporate income tax (CIT) on an annual
basis. The taxation of the receivables does not depend on whether the debtor is a related
party to the creditor or not. On the other hand, taxpayers have the right to use a tax
credit and to reduce their tax base for the amount of the collected receivables that have
been previously taxed with CIT in the period when part or the full amount of such loan
is repaid.
As of 2014, in addition to the distributed profit to individuals (foreign or domestic
residents) or non-resident legal entities, profit distributed to Macedonian legal entities
is subject to CIT at the moment of the distribution as well. For the purposes of avoidance
of double taxation, the taxpayer that received dividend income that was already taxed
with CIT will not have to include this amount in the tax base upon distribution of its own
profits.
In 2013, the Macedonian Value-Added Tax (VAT) Law was amended. One of the changes
is that, as of July 2014, the VAT period for voluntary VAT registered taxpayers is the
calendar quarter.
As of July 2013, the rates of excise duty payable on tobacco products have changed. In
addition, starting from July 2014 up to July 2023, the rate of the specific and minimum
excise duty on some tobacco products will increase gradually every year.

Generally, all resident and non-resident legal entities operating through a permanent
establishment (PE) are liable to pay CIT in Macedonia.
Macedonian resident entities are taxed on their worldwide income. Non-resident entities
are taxed on their Macedonian-source income. Non-business organisations (including
governmental bodies) are taxed on income from their business activities (if any).
The CIT rate is 10%.
There are two separate tax bases for CIT, which are subject to filing of two separate tax
returns.
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The first tax base is the sum of taxable expenses and understated revenues decreased by
any available tax credits and tax reliefs. In this case, tax is payable on an annual basis
regardless of whether the corporate taxpayer incurs profit or loss.
The second tax base is the amount of dividends or other type of profit distributions by
the taxpayer in monetary or non-monetary form. The definition of other type of profit
distributions covers the increase of registered capital as a result of asset revaluation
as well as payments from profit to shareholders, members of managing bodies, and
employees, based on the taxpayers decision. As of 2014, in addition to the distributed
profit to individuals (foreign or domestic residents) or non-resident legal entities,
profit distributed to Macedonian legal entities is subject to CIT at the moment of the
distribution as well.
For the purposes of avoidance of double taxation, the taxpayer that received dividend
income that was already taxed with CIT will not have to include this amount in the tax
base upon distribution of its own profit.
Taxpayers are obligated to cover the losses from previous years prior profit
distribution. The distributed amount is taxed at the moment of payment. Upon each
profit distribution, a corporate taxpayer is obligated to submit a tax return containing
information for the dividend beneficiary and the year from which the profit to be
distributed arises. If the profit arose prior to 2009, CIT is not payable.
Undistributed profit is tax exempt. Undistributed profit is determined in accordance
with the accounting regulations and standards decreased by the amount of CIT paid on
taxable expenses and understated revenue.
Simplified tax regime for companies
Companies (except companies that provide banking, financial, and insurance services,
as well as services in the field ofgames of chance and entertainment games) can
choose to benefit from the simplified tax regime based on their overall annual income.
Provided other criteria prescribed in the CIT Law are met, companies will qualify for the
simplified tax regime if their overall annual income from all sources is between 3 million
Macedonian denars (MKD) and MKD 6 million. These companies will pay 1% CIT on
their overall income from all sources as stated in their income statement and financial
statements for the respective calendar year.
Provided their overall annual income in the following three years is within the above
range, companies under the simplified tax regime cannot request to be excluded from
the simplified tax regime.
Under the simplified tax regime, exemption from CIT is available for companies with an
overall annual income from all sources of up to MKD 3 million.
Local income taxes
There are no local government taxes levied on corporate income.
Corporate residence
A company is resident in Macedonia for tax purposes if it is established or maintains its
headquarters in the territory of Macedonia. Foreign legal entities with headquarters
abroad are non-residents for tax purposes, but their Macedonian branches are liable for
tax on any profit generated in the territory of Macedonia if they are considered as a PE
for the foreign legal entity in Macedonia.
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Generally, a PE is a fixed place of business through which the business of an enterprise is

wholly or partly carried on, either directly or through a dependent agent.
More specifically, the domestic law provides that a PE may include a place of
management, a branch office, an office, a factory, a workshop, mining activities, or any
other place of extraction of natural resources.
A building site or construction or installation project, as well as related supervision
activities, may constitute a PE if it lasts longer than six months.
Furthermore, the provision of services, including consulting services with regard to one
or several related projects, is deemed to give rise to a PE if such activities last longer than
90 continuous days within any 12-month period. If one or several persons establish a PE
as per above, any other non-related project on which they are working on becomes part
of the PE, irrespective of its duration.
The PE should be registered as a corporate taxpayer at the beginning of its activity in the
country for the purposes of obtaining a tax number.
Other taxes
In general, the VAT regulations are in line with the provisions of the sixth European
Union (EU) VAT directive.
The standard VAT rate is 18%. This rate applies to overall turnover and imports of goods
and services. A lower rate of 5% applies to supplies of certain goods and services,such
as supply offood for human consumption; drinking water from public supply systems;
computers and software; agricultural material and equipment; pharmaceutics and
medical equipment; publications, such as books, pamphlets, newspapers, and other
printed material, except for publications mainly used for advertising purposes; transport
of passengers; and accommodation services, bed and breakfast services, as well as halfboard and full-board services provided by hotelkeepers in the country, etc.
All taxpayers whose total annual turnover exceeds MKD 2 million or whose total
supplies, as projected at the beginning of the business activity, will exceed this amount,
are liable to register for VAT purposes.
Residents that do not meet the criteria above may voluntarily register for VAT purposes
at the beginning of each calendar year.
The standard VAT period is one calendar month. However, if the total turnover in the
previous calendar year did not exceed MKD 25 million, the tax period is the calendar
quarter. Under the recent amendments applicable as of July 2014, the VAT period for
voluntary VAT registered taxpayers has changed from calendar year to calendar quarter.
A taxpayer is obligated to submit a VAT return for each tax period within 25 days
following the end of the relevant tax period.
Customs duties
Customs duties generally apply to most products imported into Macedonia. The customs
rates under the most favoured nation treatment for agricultural products are up to 31%,
whereas the customs rates for industrial products are below 23%.
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Macedonia has signed trade agreements with Turkey, Ukraine, and European Free
Trade Association (EFTA) member states. The country is a member state to the Central
European Free Trade Agreement (CEFTA) and has signed a Stabilisation and Association
Agreement with the European Community.
The import of industrial products with preferential origin and certain raw precious
metals is exempt from customs duties.
According to the Stabilisation and Association Agreement 2001 between Macedonia and
the European Union, generally, products with Macedonian origin can be exported into
EU countries free of customs duties.
Excise duties
Excise duties are levied with respect to a limited number of goods produced or imported
in Macedonia. Petroleum products, alcohol and alcoholic beverages, tobacco products,
and passenger motor vehicles are subject to an excise duty at a flat or percentage rate.
The excise period is one calendar month, and excise duty is payable within 15 days as of
the end of the calendar month. The excise duty for alcohol beverages and tobacco goods
is levied by way of purchasing excise stamps.
The excise duty for petroleum products is payable per kilo/litre and ranges between
MKD 0.1 and MKD 24.
Alcohol and alcoholic beverages are taxable per litre/percentage of alcohol. Some
categories of alcoholic beverages (e.g. wine) are subject to no excise duty. Maximum
excise duty payable is up to MKD 340 per litre on pure alcohol.
The excise duty for tobacco products is combined and is calculated both per unit/kilo
and as a percentage from the retail price as follows:
MKD 21.37 per cigar and 0% from its retail price.
MKD 1.30 per cigarette and 9% from its retail price. If the combined excise is under
the amount of MKD 1.50 per piece, the minimum excise will be applied in that
amount.
MKD 1,500 per kilo smoking tobacco and 0% from its retail price.
As of July 2014 up to July 2023, the rate of the specific and minimum excise duty on
cigars will increase gradually every year.
The excise duty for passenger motor vehicles is calculated as a percentage of the market
value or the custom value of the vehicle. It ranges from 0% for vehicles valued up to
3,000 euro (EUR) to 18% for vehicles valued above EUR 30,000.
Property tax
Property tax is paid annually on the ownership of real estate, including land
(agricultural, construction, forest, and pastures) and buildings (residential buildings
or flats, business buildings and business premises, administrative buildings and
administrative premises, buildings and flats for rest and recreation, and other
construction facilities, as well as installations constructed on the buildings or below and
permanently attached to thebuildings).
The person liable for property tax is the legal entity or the individual owner of the
property. If the owner is not known or cannot be reached, the person liable for property
tax is the user of the property. A property taxpayer may also be the taxpayer who
usufructs the property; and if the property is owned by several persons, each of them is a
property taxpayer proportionately for the portion owned. A property taxpayer is also the
legal entity who uses real estate owned by the state and the municipality.
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The property tax base is the market value of the real estate. The market value of the real
estate is determined in accordance with the methodology prescribed by the government.
Property tax rates are proportional and range from 0.10% to 0.20%. The rates may be
determined on the basis of the type of the property. As an exception, property tax rates
on agricultural land not used for agricultural production may be increased outside the
above range (i.e. from three to five times in relation to the basic rates).
The amount of the rates is decided by the Municipal Councils.
Transfer tax
The transfer of the right to ownership of real estate for or without compensation, as
well as other means of acquiring real estate for or without compensation, between legal
entities or natural persons is subject to transfer tax.
The person liable for transfer tax is the seller of the real estate. As an exception, a
taxpayer may also be the buyer of the real estate, if agreed in the sale and purchase
agreement. When replacing real estate, the taxpayer is the party that replaces the real
estate of greater value.
When selling real estate in bankruptcy and executive procedure, as well as when
realising agreements on mortgage, the taxpayer may be the buyer of the real estate.
In the case of transfer of ownership of an ideal share in real estate, taxpayers are each of
the owners separately.
The tax base is the market value of the real estate at the moment the tax liability arises.
When replacing real estate, the tax base is the difference between the market values of
the real estate being replaced.
When selling real estate in bankruptcy and executive procedure, the tax base is the
attained selling price.
The market value is determined by a special municipal commission in accordance to the
methodology prescribed by the government.
Tax rates are proportional and range from 2% to 4%. The tax rates are determined by the
municipal councils by way of decision.
There are certain exemptions from transfer taxes available for specifically determined
cases (i.e. transfer of shares, sale of securities, the first sale of residential premises for
the first five years from the end of their construction, etc.).
Stamp taxes
Stamp taxes are not payable in Macedonia.
Garbage collection fee
A garbage collection fee is payable for immovable property, depending on the type
of property and on the surface area used. It is calculated on the basis of a tariff and is
collected together with the bills for water usage.
Companies and individuals are liable for paying communal taxes for usage of certain
rights and services (mainly for usage of the urban space in the municipalities, posting
commercials, etc.).
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Branch income
Branch offices are registered in the Trade Registry. Branches are subject to CIT in
accordance with the general statutory provisions. The foreign parent company is fully
liable for the obligations of its established branch office in Macedonia.
A foreign company that is entitled to carry out commercial activities pursuant to its
national legislation may establish a commercial representative office in Macedonia.
Representative offices are not legal entities and may not carry out any commercial
activities. Representative offices are not subject to CIT.
Capital gains, as well as income from dividends, interest, rent, and royalties are treated
as ordinary income of the taxpayer and are included in its general taxable base in
accordance with accounting rules and standards. Since the accounting profits of a
company are not taxable until distributed, such income is not subject to CIT before that
time.
Inventory valuation
There are no provisions in the tax legislation regarding inventory valuation.
Deductions
Tax base on taxable expenses and understated revenues
The CIT Law exhaustively lists the expenses that are not recognised for tax purposes and
are part of the tax base on taxable expenses and understated revenues.
Hidden profit distribution
Hidden profit distributions are taxable as part of the tax base on taxable expenses and
understated revenues. The following transactions with shareholders or their related
parties are considered as hidden profit distribution subject to CIT:

Sales of goods/services on terms below the market price.

Purchase of goods/services on terms above the market price.
Providing loans with an interest lower than the market one.
Arrangements under which gains are realised by the shareholders or their related
parties.
Unjustified shortages are also taxed as hidden profit distribution if not reimbursed from
the salary of the authorised person.
Some of the transactions as per above may be regulated under the transfer pricing
provisions in the CIT Law as well. It seems that the purpose of these provisions was to
tax the non-fair transactions with shareholders and their related parties that do not fall
under the related-party definition as per the CIT Law.
Non-business-related expenses
Expenses that are not related to the business activity of the taxpayer are taxable.
Depreciation
Corporate taxpayers can apply depreciation methods and rates as well as perform
impairment of their fixed assets under applicable accounting standards without any tax
consequences.
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Goodwill
There are no specific provisions in the tax legislation with regard to goodwill.
Start-up expenses
There are no specific provisions in the tax legislation with regard to start-up expenses.
Interest expenses
Interest paid on non-business related credits of the taxpayer, as well as interest on credits
for purchase of passenger vehicles, furniture, carpets, works of art, and decorative
objects, is a taxable expense. Interest on business-related credit is also taxable, provided
it falls under the thin capitalisation or transfer pricing rules (see Thin capitalisation or
Transfer pricing in the Group taxation section for more information).
Impairment and write-off of receivables
Impairment of receivables is not taxable for banks, saving institutions, and insurance
companies if impaired in accordance to the methods prescribed by law. As to other
corporate taxpayers, impairment of receivables is a taxable expense if not based on an
effective court decision or reported and confirmed as debts in liquidation or bankruptcy
procedure.The taxpayers are entitled to a tax credit for the tax paid on collected
impaired receivables in the year of collection.
Write-off of receivables is a taxable expense for all corporate taxpayers.
Donations and sponsorships expenses are taxable if not pursuant to the manner, the
conditions, and the procedure set forth in the Law on Donations and Sponsorships in
Public Activities. If compliant with the law requirements as per above, donations are
taxable if the annual amount borne by the taxpayer exceeds 5% of its overall revenue,
whereas sponsorship expenses are taxable if above 3% of the overall revenue of the
taxpayer.
Compensation expenses
Employees related expenditures (e.g. organised transportation to/from work,

organised food [cantina], business trip allowance, field allowance, family separation
allowance, one-off severance payment, retirement allowance, annual holiday allowance,
anniversary awards) are taxable if paid over the amount prescribed by law and collective
agreement.
Voluntary pension insurance contributions are taxable if their annual amount per
employee exceeds four average monthly gross salaries paid out in the previous calendar
year.
The monthly allowances and expenses to the managing board members are taxdeductible, up to 50% of the average gross monthly salary paid out in the country in the
previous year.
Insurance expenses
Personal insurance premiums paid for members of the management board and the
employees (if not paid out of their salary) are taxable expenses. Only the collective
insurance of the employees for work-related injuries is a non-taxable expense for
corporate taxpayers.
Expenses for gifts, business dinners, recreation, and entertainment are taxable, up to
90% of the annual amount borne by the taxpayer.
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Scrapping
Expenses for scrapping exceeding the standards for the particular industry set forth
in the Rulebook on the standardised amounts of debris, scrap, waste, wreckage, and
scattering of goods and specific products are taxable. Scrapping expenses caused by vis
major or an uncontrollable event are not taxable.
Fines, penalties, and taxes
Fines and tax penalties, penalty interest on unpaid public duties, and expenses for
enforced payments, as well as withholding tax (WHT) borne by the taxpayer on behalf of
third parties, are taxable.
Loss carryforwards are not specifically regulated in the Macedonian tax legislation.
However, due to the concept of corporate income taxation of distributed profit, in
essence, accounting losses could be carried forward indefinitely. This is because of the
fact that profit can be distributed only if losses from previous years are covered.
Loss carrybacks are not allowed under the Macedonian tax legislation.
Tax losses on taxable expenses and understated revenues
Tax losses arising from taxation of taxable expenses and understated revenues can be
carried forward in the next consecutive five years. Such tax losses are recognised when
the tax credit and reliefs exceed the amount of taxable expenses in the tax return on
taxable expenses and understated revenues.
There are no specific provisions in the tax legislation with regard to payments towards
foreign affiliates.
Group taxation
There are no tax consolidation provisions in Macedonia.
Transfer pricing
The transfer pricing provisions are extended to cover not only the expenses but also the
revenues resulting from related party transactions.
The difference between the market price and the transfer price is a taxable expense in
the tax return on taxable expenses and understated revenues. The cost plus method, in
addition to the comparable uncontrolled price method, are applicable. No reference is
made to other methods accepted by the Organisation for Economic Co-operation and
Development (OECD).
The part of the interest paid on loans to related parties that exceeds or is below the
interest payable between unrelated parties is considered taxable.
Penalty interest imposed between related parties shall be considered as a taxable
expense.
Transfer pricing rules do not apply on expenses for interest under credits and penalty
interest paid to related parties that are banks or financial institutions.
Upon request by the Macedonian tax authorities, companies should provide enough
documentation as evidence that the transactions with related parties were in line with
the arms-length principle.
Macedonia
1219
Macedonia
Thin capitalisation
Part of the interest related to a loan received from a non-resident shareholder, who
directly holds at least 25% of the capital in the company, that exceeds three times
its share in the equity in the company will be taxable during a tax period. Thin
capitalisation rules do not apply to loans received from banks or other financial
organisations. Also, thin capitalisation rules do not apply for newly established
companies within the first three years of operation.

Foreign tax credit
The taxpayer is allowed a tax credit for the tax paid on foreign income abroad, up to the
amount of tax payable for that income in Macedonia. However, a tax credit for the WHT
paid abroad is allowed only if a double tax treaty (DTT) is in place.
The WHT on dividends and CIT paid abroad can be credited against the corporate tax
liability on profit distribution. The foreign WHT paid on other types of income, except
dividends, can be credited against the corporate tax liability on taxable expenses and
understated revenues.
Technological industrial development zones
A taxpayer that is a registered user within a technological industrial development zone is

exempt from profit tax payment for a period of ten years from the commencement of the
performance of the activity in the zone under terms and conditions and according to a
procedure determined with the Law on Technological Industrial Development Zones.
Withholding taxes
All domestic legal entities and domestic physical persons that are registered for carrying
out an activity, as well as foreign legal entities or physical persons that are non-residents
but have a PE in Macedonia, are obligated to withhold tax when paying certain types
of income to a foreign legal person and to pay the tax withheld to a respective suspense
account simultaneously with the payment of the income.
The WHT rate is 10% and is applied on the following forms of incomes payable abroad:

Dividends.
Interest.
Royalties.
Income from entertainment or sporting activities in Macedonia.
Income from management, consulting, financial services, or services related to
research and development.
Income from insurance or reinsurance premiums.
Income from telecommunications services between Macedonia and a foreign country.
Income from the lease of immovable property in Macedonia.
As an exception, WHT is not applicable to the following forms of income:

The after-tax profit of a PE transferred to its foreign headquarters.

Interest from bonds issued or guaranteed by the government.
Interest on deposits in banks located in Macedonia.
Income from transactions in state securities on the international financial markets.
1220
Macedonia
Macedonia
If a DTT is in place, WHT shall be payable in accordance with the provisions from the
DTT. Taxpayers are obligated to obtain approval from the Macedonian tax authorities
prior to applying the tax rates from the DTT.
Macedonia has signed DTTs with the 43 countries listed in the chart below:
Recipient
Albania
Austria (1)
Azerbaijan
Belarus (2)
Belgium (2, 8)
Belgium (1, 4)
Bulgaria (2)
China
Croatia (2)
Czech Republic (2)
Denmark (2, 3)
Egypt (4)
Estonia (2)
Federal Republic of Yugoslavia (2, 5)
Finland (1)
France (1)
Germany (1)
Hungary (2)
Iran (4)
Ireland (6)
Italy (2)
Kazakhstan (2, 4)
Kosovo (2)
Kuwait (4)
Latvia (1, 7)
Lithuania (1)
Luxembourg (2)
Moldova (2)
Morocco
Netherlands (1)
Norway (2)
Poland (2)
Qatar
Romania
Russia
Slovakia
Slovenia (2)
Spain (1)
Sweden (2)
Switzerland (2)
Taiwan
Turkey (2)
Ukraine (2)
Dividend
10
0/15
8
5/15
10/15
5/15
5/15
5
5/15
5/15
0/5/15
10
0/5
5/15
0/15
0/15
5/15
5/15
10
0/5/10
5/15
5/15
0/5
0
5/10
0/10
5/15
5/10
10
0/15
10/15
5/15
0
5
10
5
5/15
5/15
0/15
5/15
10
5/10
5/15
WHT (%)
Interest
Royalties Other income
10
10
0
0
0
0
8
8
0
10
10
0
15
10
0
10
10
0
10
10
0
10
10
0
10
10
0
0
10
0
0
10
0
10
10
0
5
5
0
10
10
0
10
0
0
0
0
0
5
5
0
0
0
0
10
10
0
0
0
0
10
0
0
10
10
0
10
10
0
0
15
0
5
5/10
0
10
10
0
0
5
0
5
10
0
10
10
0
0
0
0
5
5
0
10
10
0
0
5
0
10
10
0
10
10
0
10
10
0
10
10
0
5
5
0
10
0
0
10
0
0
10
10
0
10
10
0
10
10
0
Macedonia
1221
Macedonia
Recipient
Dividend
0/5/15
WHT (%)
Interest
Royalties Other income
0/10
0
0
Notes
1.
The lower rate applies to dividends paid out to a foreign company that controls at least 10% of the
share capital of the payer of the dividends.
2. The lower rate applies to dividends paid out to a foreign company that controls at least 25% of the
share capital of the payer of the dividends.
3. The zero rate applies to dividends paid out to pension funds.
4. These DTTs are still not in force.
5. The DTT with Federal Republic of Yugoslavia now applies both to Serbia and Montenegro.
6. The zero rate applies to dividends paid out to recognised pension funds and to foreign companies
that continuously control at least 25% of the share capital of the payer of the dividends for 12 months
before the dividends payment. The 5% rate applies to dividends paid out to foreign company that
controls at least 10% of the share capital of the payer of the dividends. The 10% rate applies to
dividends paid out in all other cases.
7. The tax rate of 10% for royalties payments applies only for utilisation or right to utilise
cinematographic films and films or tapes for radio and television transmission. The 5% rate applies
on all other cases.
8. The DTT concluded between the Socialist Federal Republic of Yugoslavia (SFRY) and Belgium is still
applicable for Macedonia.
9. The zero rate applies to dividends paid out to pension schemes and to foreign companies that
continuously control at least 25% of the share capital of the payer of the dividends for 12 months
before the dividends payment. The 5% rate applies to dividends paid out to foreign company that
controls at least 10% of the share capital of the payer of the dividends. The 15% rate applies to
dividends paid out in all other cases.
10. The zero rate applies on interest paid on loans or prolonged credit paid from one enterprise to
another enterprise and, on interest paid to the other contracting state, to one of its political divisions
or municipalities or public entities of that state.
Tax administration
Taxable period
The taxable period for which CIT is determined covers one calendar year.
Tax returns
Taxpayers are obligated to calculate and pay CIT on taxable expenses and understated
revenues on the basis of a tax return on taxable expenses and understated revenues,
which must be submitted to the Public Revenue Office by the end of February of the
following year or, if filed electronically, by 15 March of the following year.
Taxpayers who distribute profit are obligated to calculate and pay CIT on the basis of a
tax return on profit distribution, which should be submitted to the tax authorities up to
the date of profit distribution.
Small taxpayers who fall under the simplified tax regime are obligated to calculate
and pay the tax due on the basis of a tax return on overall income, which should be
submitted to the tax authorities by the end of February of the following year or, if filed
electronically, by 15 March of the following year.
Payment of tax
Corporate taxpayers are obligated to pay monthly CIT advance payments during the
year within 15 days of the end of each month.
Monthly CIT advance payments are calculated as one-twelfth of the tax obligation on
taxable expenses and understated revenues for the previous calendar year, increased by
the index of cumulative retail price growth as determined by the State Statistical Bureau.
The difference between the advance payments and the final CIT liability as determined
in the tax return on taxable expenses and understated revenues should be paid within
1222
Macedonia
Macedonia
30 days as of the deadline for submission of the tax return on taxable expenses and
understated revenues. Daily penalty interest of 0.03% is due on late tax payments.
In case the sum of monthly advance payments exceeds the final tax liability in the tax
return on taxable expenses and understated revenues, the taxpayer may request for
a refund of overpaid tax. The tax should be refunded within 60 days as of the date
of submitting the request. If the taxpayer does not ask for a tax refund, the overpaid
amounts will be considered as advance payment for the following period.
Tax audit process
The tax audit may include one or more taxes, one or more fiscal periods, or only certain
tax issues. The extent of the tax audit is determined solely by the tax authorities and
is based on their estimation of risk in respect of the specific taxpayer. VAT audits are
commonly conducted when VAT refund is requested by the taxpayer, and, in this case,
the tax audit is usually limited in the area of VAT. The advance notice for tax audit for big
taxpayers and concerns is four weeks, whereas the advance notice for all other taxpayers
is two weeks. In cases where the tax authorities find that it would represent an obstacle
for the tax audit, an advanced notice will not be given to the taxpayer.
The statute of limitations is five years as of the end of the calendar year in which the tax
event occurred. In case of tax evasion, the statute of limitations is ten years as of the end
of the calendar year in which the tax event occurred.
Other issues
M
The Macedonian Trade Companies Law provides for the following types of entities:

General partnerships.
Limited partnerships.
Limited liability companies.
Joint stock companies.
Limited partnerships by shares.
Foreign business entities may register a branch office or a representative office in
Macedonia.
Macedonia
1223
Madagascar
PwC contact
Andriamisa Ravelomanana
PricewaterhouseCoopers Tax&Legal
Rue Rajakoba Augustin,
Ankadivato,
Antananarivo,
Madagascar
Tel: +261 20 2221 763
Withholding tax (WHT) on purchase of local products from nonregistered suppliers
Purchases of goods from non-registered suppliers by manufacturers and exporters are

subject toWHT at a rate of 5% payable to the tax authorities within 15 days following
the month of payment of the goods.
Transaction with a company established in a very favourable tax

regime
Payments made to a foreign company established in a country having a very favourable

fiscal regime are not tax deductible unless there is proof of effectiveness of the services
and reasonability of the amount.
Inter-company transactions
Inter-company transactions must be conducted at fair market value. The notion of fair
market value and effectiveness of the services is determined by a complementary note.
All inter-company transactions must be documented.
Inter-company loan agreement
Shareholders loan agreements and inter-company loan agreements must be submitted

according to the tax registration formalities.
E-Business
Businesses engaged in telecommunication, radio diffusion, television, and services

provided via electronic means are subject to value-added tax (VAT).
Companies having more than one place of business

Each place of business is subject to declaration of existence.
Tax audit
During tax audit, tax authorities can access all the taxpayer data available on servers,
terminals, and any supporting systems. They can also access company documentation in
relation to transfer pricing.
New statutory obligations for industrial companies and traders
Industrial companies must keep cost accounting. Industrial companies and traders must
have stocks sheets.

Taxation of residents
Resident corporate entities are subject to corporate income tax (CIT) based on realised
worldwide income.
1224
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Madagascar
A corporate entity having an annual turnover of less than 20 million Malagasy ariary
(MGA) is subject to CIT at a rate of 5% of 70% of turnover, with a minimum tax of MGA
16,000.
A corporate entity registered in Madagascar and having an annual turnover exceeding
MGA 20 million is subject to CIT at a rate of 20%.
The tax payable cannot be less than 5/1,000 of turnover plus a fixed amount of MGA
100,000 for taxable persons carrying on agricultural, artisan, transportation, industrial,
hotel, or mining activities. The minimum tax cannot be less than 5/1,000 of turnover
plus MGA 320,000 for other activities.
Taxation of non-residents
Only Madagascar-source income is taxable for non-residents.

Revenue of foreign businesses that do not have a permanent establishment (PE) in
Madagascar is subject to WHT at a rate of 10% of any income realised in Madagascar.
Local income taxes
No other local income taxes are applicable in Madagascar.
Corporate residence
Companies are considered resident in Madagascar if they are registered in Madagascar
or have a legal existence in Madagascar.
While there is no definition of PE in the Madagascar tax law, companies usually are
required to have a legal existence when they carry out business in Madagascar or have
revenue from ownership of assets in Madagascar.
Other taxes
The VAT rate is 20%, and the VAT rate on export is 0%. VAT input is recoverable under
certain conditions.
VAT is applicable to all transactions realised in Madagascar by a VAT vendor. Services are
considered to be performed in Madagascar if such services are used in Madagascar or
invoiced to a taxpayer established in Madagascar.
Business engaged in e-commerce is subject to VAT.
Transport companies are allowed to claim VAT input on gasoline used for land
transportation. The objective is to reduce the impact of cost of oil and gas on
transportation fees.
Any corporate entity or individual person who realises an annual turnover exceeding
MGA 200 millionis a VAT vendor. For a business realising annual revenue less than MGA
200 million, VAT vendor registration is an option.
A foreign company that has no PE in Madagascar but renders services to a Madagascar
taxpayer must appoint a tax representative to collect and pay VAT on its behalf.
Otherwise, the beneficiary of the services must collect and pay VAT on behalf of the
foreign supplier.
Madagascar
1225
Madagascar
All transactions made by a VAT vendor with a non-VAT vendor must be done via the
banking system when the value of the transaction exceeds a threshold fixed by Decree.
Custom and import tax
The importation of goods is subject to payment of custom and import tax payable to the
custom office.
In addition, Gasynet fee, corresponding to 0.5% of the cost, insurance, and freight (CIF)
value of goods, is applicable on importation of goods.
Excise duty
Excise duty applies on a range of goods and services, such as tobacco, alcohol, lighters,
and communication by mobile phones. Excise duty rate ranges from 7% to 325% or a
fixed amount per litre or per unit.
Real estate ownership tax
Real estate ownership tax is imposed annually at the rate of 5% to 10% on the rental
value of the property. Land ownership is also taxable at a rate depending on the nature
of the land.
Registration fees
Registration fees are applicable to transfers of title ownership (e.g. sales, donations) of
movable and immovable assets, to transfers of interests, to share capital increases, and to
lease agreements.
Registration fee rates are 0.5% to 6%, depending on the nature of the transaction.
Payroll tax
Salary income taxes, called Impt sur les Revenus Salariaux et Assimils (IRSA), are levied
at a rate of 20% on the total taxable remuneration of employees, including salaries,
allowances, and benefits in kind. Employers are responsible for withholding and paying
salary income taxes on behalf of employees.
Employers must contribute to Caisse Nationale de Prvoyance Sociale, Madagascars

national social security fund, which includes pensions and accident insurance. The
contribution is capped at 13% of eight times the legal minimum salary per employee.
Health contributions
Employers must contribute to the health system assessment at a rate of 5% of the total
amount of taxable remuneration of its employees. The contribution is capped at 5% of
eight times the legal minimum salary per employee.
Tax on insurance contracts
All insurance or life annuity conventions concluded with a company, insurance firm, or
with any other Madagascan or other insurer are subject to an annual tax on insurance
contracts at a rate of 3% to 20% levied on the insurance premiums.
Branch income
The tax on branch income is the same as for corporate income. The branch income tax
base is the income realised by the branch in Madagascar.
1226
Madagascar
Madagascar
Inventory valuation
There are no provisions for valuing inventories or determining inventory flows in

Madagascar. The tax treatment will follow the accounting treatment.
Capital gains
There is no provision for capital gains in Madagascar, except for capital gains on the sale
of real estate by an individual. Capital gains made by a company on the sale of assets and
interests are considered as normal business income that is subject to CIT.
Dividend income
Dividends received by a company are considered as business income subject to CIT.
Stock dividends
Stock dividends are unusual, but they are considered as business income that is subject
to CIT.
Interest income
Interest income received by a resident taxpayer from another entity established in

Madagascar is subject to WHT at a rate of 20%. Revenue already subject to WHT is no
longer taxable to CIT.
Foreign income
Foreign income earned by corporate bodies situated in Madagascar is considered as

normal business income subject to CIT unless a tax treaty is established and indicates
otherwise. There is no provision for tax deferral in Madagascar.
Deductions
Depreciation
The amount of deductible depreciation should not exceed the amount that is calculated
according to the following rates of depreciation provided by the law:
Asset

5
Plant and machinery
10
Mining exploration and development (licence)
33
Transportation (car)
20
Transportation (utility cars, vans, trucks)
25
Computers
25
Electricity generators
10
With the exception of buildings, it is also possible to practise a graduated depreciation.

In this case, the annual depreciation corresponds to 30% of the net book value of the
asset.
In case of loss, depreciation of assets can be deferred and carried forward to the next
financial years until absorption.
Goodwill
There is no provision concerning deductibility of goodwill in the Madagascar tax code.
Madagascar
1227
Madagascar
Start-up expenses
There is no specific tax provision on start-up expenses. Accounting rules are applicable
for the profit and loss recognition.
Start-up and prospecting expenses for the installation of an overseas establishment, as
well as the costs of running such a foreign establishment, for the first three years are tax
deductible. However, the amounts deducted must be reported, in equal amounts, to the
taxable income of the five consecutive years from the fifth year following the creation of
the foreign establishment.
Interest expenses
Interest expenses are deductible. However, interests on inter-company loans are subject
to thin capitalisation rules (see Thin capitalisation in the Group taxation section for
more information). In addition, interest on inter-company loans is not deductible if
the loan agreement is not documented by a written agreement submitted according to
registration procedures.
Bad debt
To be tax-deductible, provisions for doubtful debt must be subject to justification of

existence of amicable or judicial settlement.
Payments made for the benefit of educational, social, or cultural recognised public
associations; accredited bodies for scientific research; or for the promotion and creation
of businesses for achievement of planned economic and social development are
deductible within the limits of 0.5% of annual turnover.
Gifts in kind or in cash granted in case of natural calamities and donations in cash
granted to a corporation established by decree for the interest of the nation are also
deductible.
Any other charitable contributions are not deductible.
Deductible wages
Salaries and wages that are not included in salary income taxes or not declared to Caisse
Nationale de Prvoyance Sociale are not deductible.
Fines and penalties
Taxes
Except for CIT, taxes in relation to business in Madagascar are deductible.

Third-party taxes borne by the company are not tax-deductible.
Accumulated loss can be carried forward for the next five financial years following the
period in which the loss occurs. Carryback of losses is not permitted in Madagascar.
For branches, the deductible amount of overhead that the head office can charge to the
branch is limited to 1% of the turnover of the branch.
For interest on inter-company loans, only interest calculated on twice the amount of the
share capital, at a rate practised by the Central Bank plus two points, is deductible.
1228
Madagascar
Madagascar
Payments to foreign companies established in a country having a very
favourable fiscal regime
Payments made to a foreign company established in a country having a very favourable

fiscal regime are not tax deductible unless there is proof of effectiveness of the services
and reasonability of the amount.
Group taxation
There is no provision regarding group taxation in Madagascar.
Transfer pricing
There is a provision in the tax law allowing the tax authority to claim a tax adjustment
in cases where the transactions between a Madagascar entity and a foreign entity
controlling or controlled by the Madagascar entity are not concluded at fair market
value.
The following transfer pricing methodologies are acceptable:

Methods of comparable prices on the free market.

Cost plus method.
Transactional method on net margin.
Transactional method on profit split.
Effectiveness of services and fair market value must be justified by appropriate

documentation.
Thin capitalisation
Under Malagasy tax law, deductible inter-company financial interest cannot exceed
the interest calculated on twice the share capital at the rate of the Central Bank of
Madagascar plus two points (the April 2014 rate of the Central Bank of Madagascar is
9.5%).
Inter-company loan agreements must be submitted according to registration formalities
within two months from the execution date. Failure of submission of an inter-company
loan agreement according to registration formalities implies non-deductibility of interest
on the inter-company loan.

The following activities benefit from a special tax and/or customs regime:
Microfinance activity
Microfinance benefits are available for entities specialising in lending money on the basis
of small or medium scale value.Entities duly licensed to practise microfinance activities
are exempt from CIT during the first five years. After this period, the microfinance
company is subject to CIT at a rate of 20%.
Free zone (free trade zone)
Free-zone law is available for industrial and other service providers that export all of
their products. If eligible under the free-zone law, a CIT exemption is provided during
the first two to five years and a reduced CIT of 10% is levied thereafter.Exemption from
customs duties on importation is also provided.
Madagascar
1229
Madagascar
Companies investing in renewable energy, tourism, industrial, civil
work and construction, and transformation
Companies investing in renewable energy, tourism, industrial, civil work and

construction, and transformation can benefit from a tax reduction equal to the tax
calculated on 50% of the amount of investment that they realised during the related
tax year. The right to reduction that can be used for the tax year cannot exceed 50% of
tax actually due. The balance is carried forward with the same limitation to subsequent
years, until clearance.
Big investment mining
A mining company committing to invest more than 50 millionUnited States dollars

(USD) is considered a big investment mining company. The big investment mining law
provides a minimum income tax exemption, a reduced CIT rate for the transformation
entity (i.e. the entity in charge of processing the extracted minerals), exemption
from custom and importation duties, and VAT reimbursement on locally purchased
equipment and investments.
Petroleum code
The petroleum code provides a custom and importation duties exemption for
hydrocarbon research, exploration, and exploitation activities.
Leasing law
The leasing law provides that leasing activities can benefit from CIT exemption and
reduction of tax rate during the first four years.
Foreign tax credit
Except under a tax treaty, there is no foreign tax credit rule under Malagasy tax law.
Withholding taxes
Purchases of goods from non-registered suppliers by manufacturers and exporters are
subject to WHT at a rate of 5% payable to the tax authorities within 15 days following
the month of payment of the goods.
Impt sur les revenus des capitaux mobiliers (IRCM): WHT on interest of 20% is
applicable on financial loan interest. However, interest paid to banks, financial
institution, and foreign financial organisation is exempt.
WHT of 20% is applicable on remuneration of a member of a board of directors or a
single director.
Income tax for non-resident entity: Management fees, royalties, technical and
assistance fees, licence fees, equipment rental fees, and any income realised by
foreign suppliers is subject to WHT at a rate of 10%.
Madagascar has signed two tax treaties.
Recipient
Non-treaty
Treaty:
France
Mauritius
1230
Madagascar
Dividends (%)
0
Loan interest (%)

20
Royalties, management
fees, services fees (%)
10
25 (max)
10 (max)
15
10
15 (max)
5 (max)
Madagascar
Tax administration
Taxable period
The financial year may be spread over any period of 12 months. There is no need to
obtain prior authorisation in order to close the financial year on a date other than 31
December or 30 June.
Tax returns
CIT returns are due before 15 May each year for companies whose financial year ends at
31 December, before 15 November each year for companies whose financial year ends at
30 June, and no later than the 15th day of the fourth month from the date of closing of
the financial year for all other year-ends.
Payment of tax
CIT is payable bimonthly in provisional instalments. The balance is payable before

15 May each year for companies whose financial year ends at 31 December, before 15
November each year for companies whose financial year ends at 30 June, and within
four months from the date of closing of the financial year for all other year-ends.
Taxpayers can decide to suspend the payment of bimonthly income tax instalments,
but they must pay a penalty of 80% if the final tax due is more than the previous years
income tax.
WHT on foreign services is payable to the tax authorities within one month of the date
of payment.
WHT on interest and on payments to members of boards of directors are payable before
15 May each year for companies whose financial year ends at 31 December, before 15
November each year for companies whose financial year ends at 30 June, and no later
than the 15th day of the fourth month from the date of closing of the financial year for
all other year-ends.
Tax audit process
The tax authority carries out audits of a selection of tax returns, usually at the taxpayers
place of business. Audits may be carried out at any time prior to the expiration of the
statute of limitations.
During tax audit, tax authorities can access all the taxpayer data available on servers,
terminals, and any supporting systems.
After examination of available information, the tax authority issues a notice of
assessment, and the taxpayer has 30 days after the date of reception of the notice of
assessment to answer and submit its written objection to the tax authority. If the tax
authority confirms its assessment, the taxpayer has two options:
i
ii
15 days from the confirmation of assessment, the taxpayer may request the opinion
of the Tax Administrative Appeal Commission (CFRA). 30 days from the CFRA
opinion, the Director of Tax Audit issues the final decision. The decision of that body
may be further appealed to the Court (State Council) within 30 days.
30 days from the confirmation of assessment, the taxpayer may file a claim to the
DCFC. 30 days from the answer of the DCFC, the Director of Tax Audit issues the
final decision. Ultimately, decisions of the Director of Tax Audit may be further
appealed to the Court (State Council) within 30 days.
The tax limitation period is three years.

Madagascar
1231
Madagascar
Areas where tax authorities usually claim adjustment are:

VAT reverse on foreign services.

Completeness of VAT output on revenue.
Sales without invoices.
Expenses without invoices.
Employees remuneration not subject to salary tax.
Payment to non-registered suppliers.
1232
Madagascar
Malawi
PwC contact
Vyamala Moyo
Top Floor, Hannover House
Corner Independence Drive and Hannover Street
Blantyre, Malawi
Tel: +265 1 820 322
As of 1 July 2013, net operating losses can be carried forward for a maximum period of
six years.

Malawi does not have separate legislation for the determination of taxable income of
different types of legal persons. Taxation of all income is included in the Taxation Act.
Section 11 of the Taxation Act defines income as the total amount in cash or otherwise,
including any capital gain, received by or accrued to a person in any year or period
of assessment from a source within or deemed to be within Malawi. The taxpayers
assessable income excludes any amount exempt from tax under this act.
Income deemed to arise in Malawi
The liability for Malawi tax is based on the source of the income rather than residence of
the person. Certain transactions may be deemed to be from a source within Malawi even
if effected outside Malawi. Section 27 of the Taxation Act limits the income that may be
deemed to have arisen in Malawi to the following:
Remuneration for services rendered or work performed in Malawi.
Remuneration for services rendered or work performed in or out of Malawi where the
amount may be claimed as a tax-deductible expense by a permanent establishment
(PE) in Malawi.
Amounts incurred, claimed, or claimable in connection with a PE in Malawi.
Realised exchange gains and losses arising in connection with a PE in Malawi or
foreign exchange assets and liabilities held in Malawi.
Capital gains and losses realised with respect to tangible property located in Malawi
and interests in companies incorporated in Malawi.
Summary of tax rates

Entity
Locally incorporated companies (1)
Mobile telecommunications companies
Branches of companies not incorporated in Malawi
Companies in Export Processing Zones
Companies in priority industries (2):
For a period not exceedingten years
In all other cases for companies incorporated in Malawi
In all other cases for Malawi branches of external companies
Income tax rate (%)

30
33
35
30
0
15
20
Malawi
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Notes
1.
2.
In the case of a mining company, an additional resource rent tax of 10% is levied on profits after tax
if the companys rate of return exceeds 20%. The basis for calculating rate of return has not been
defined.
Agricultural produce processing has been designated as a priority industry.
Non-resident tax
Non-resident tax is payable on income due to a non-resident at the rate of 15% of the
gross income.
Any income payable to a person who is not resident in Malawi (who has not been in
Malawi for an aggregate period of 183 days) arising from a source within Malawi is
liable to a final WHT of 15% of the gross of such income. Non-resident tax is applicable
where the recipient of the income does not have a PE in Malawi from which the income
emanated.
Non-resident tax should not be charged on income of residents of countries that have a
standing double tax agreement (DTA) with Malawi. Currently, the following countries
have a DTA with Malawi: Denmark, France, the Netherlands, Norway, South Africa,
Sweden, Switzerland, and the United Kingdom.
Local income taxes
There are no local income taxes in Malawi.
Corporate residence
A corporate entity is considered a resident for tax purposes in Malawi if it has a PE in
Malawi.
The Taxation Act defines a PE as an office or other fixed place of business through
which business activity is carried on. This short definition is wide in scope. Care must be
exercised when considering this definition in situations that may be affected by a DTA.
Each DTA contains a specific and far more detailed definition of what constitutes a PE.
Other taxes
VAT is applicable on taxable goods and services. There are three classes of supplies for
VAT: taxable supplies (at the rate of 16.5%), zero-rated supplies, and exempt supplies.
A taxable person can claim input VAT on inputs used in making taxable supplies.
A taxable person should complete VAT returns and make VAT payment, where
applicable, on a monthly basis within 25 days after the end of the month.
Zero-rated supplies include exercise books, fertilisers, motor vehicles for the transport of
goods, and salt.
The following supplies aretax exempt: machinery, financial services, bread, and
newspapers.
Customs duties
Customs duty is applicable on goods imported into Malawi. The basis for calculating
duty is cost, insurance, and freight (CIF). There are three types of import duties:
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Malawi
customs duty, import excise, and import VAT. The rate of customs duty varies from
product to product.
The following are the customs and excise measures that are effective in Malawi:
Returning residents will have to clear, duty free, a motor vehicle owned for more than
12 months under CPC 430.
Duty free on importation of diagnostic and laboratory reagent under CPC 405 by
Health Institutions.
Removal of VAT on imported goods on water supply.
Removal of duty on imported electronic fiscal devices.
Removal of taxes applicable on large buses with seating capacity of more than 45
passengers (including the driver).
Reintroduction of the Industrial Rebate System.This is a major relief to the
manufacturing sector; however,given the abuse of the scheme in the past and the
Ministers intimation, it will be subject to serious monitoring by the Malawi Revenue
Authority.Taxpayers will be required to register with the Malawi Revenue Authority.
Other measures are in alignment with the Common Market for Eastern and South
Africa (COMESA) and South African Development Community (SADC) tariff
structures.
Excise duties
Domestic excise is chargeable on certain goods manufactured in Malawi and on certain

services such as alcoholic drinks, tobacco, and cell phone airtime. The rate of excise
varies depending on the goods and services.
Tobacco levy
Buyers of tobacco must pay a levy of 0.2% for every kilogram of tobacco bought.
Property taxes
There are no property taxes in Malawi.
Transfer taxes
There are no transfer taxes in Malawi.
Stamp duties
Stamp duties apply on certain documentation.
Turnover tax
Turnover tax is applicable for businesses with a turnover between 2 million Malawian
kwachas (MWK) and MWK 6 million. The turnover tax rate is 2% of turnover.
Resource rent tax for miners
Miners pay resource rent tax of 10% on after-tax profits if the rate of return exceeds
20%. This tax was introduced recently, and details of operation, like a formula for the
determination of the tax, have not been provided.
Fringe benefits tax (FBT)
A fringe benefit is defined as any asset, service, or other benefit in kind provided by or
on behalf of an employer to an employee if such benefit includes an element of personal
benefit to the employee. The employer providing such benefits is liable for payment of
FBT. FBT is charged at the rate of 30% of the taxable figure.
Take note that a benefit need not be wholly for personal use in order to be considered for
FBT.
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Note as well that no benefit in cash, no matter what it is termed as, can be treated as a
fringe benefit. All monies paid in cash (rather than in kind) should be considered for pay
as you earn (PAYE) deduction.
However, subsistence allowances, given to employees working out of their duty station
for instance, presumably to cater wholly, exclusively, and necessarily for the needs
such as accommodation, meals, transport, etc. ought not be taxed. This applies also for
reimbursement of expenses incurred in business.
Every employer shall register for FBT within the month in which one begins to provide
fringe benefits.
The sums due as FBT shall be remitted to the Malawi Revenue Authority (MRA) in
quarterly instalments not later than 14 days after the end of each quarter of a period
of 12 months ending 30 June, and remittance should be accompanied with a duly
completed FBT return in Form FBT 2.
Note that the value for FBT should not be included in the employees certificate of gross
emoluments.
Assessment of housing fringe benefits
The taxable value of a housing fringe benefit is the greatest of (i) 10% of salary where
the house is unfurnished, (ii) 12% of salary if furnished, or (iii) the rental value.
Where the house occupied by the employee is owned by the employer, the taxable value
is reduced by 50%.
Motor vehicles
FBT is applicable on motor vehicles allocated for use by members of staff and does not
include pool cars or cars that are strictly commercial in nature.
The taxable value is 15% of the original cost of the vehicle.
School fees (for children/dependants)
50% of the cost to the employer for school fees is a taxable benefit, where payment is
made directly to the educational institution. Education allowances payable to employees
are not subject to FBT as the allowance is considered part of normal salary and taxable
as such.
Utilities, household items, vacations, travel, and domestic services
The taxable value of utilities (e.g. electricity, water, and telephone expenses), household
items, vacations, travel, and domestic services (e.g. gardener, cook, house boy, guard,
nanny) is the entire cost to the employer. Except that for a house owned by the employer,
the cost of gardener, security guard, and watchman shall not constitute a taxable benefit.
Interest free loans and loans given at interest lower than the commercial rate
Where an employer gives a loan to an employee that is interest free or bears interest that
is lower than the predetermined commercial rate, the difference between the interest
offered and the commercial rate is a taxable benefit.
Branch income
There is a 35% tax on taxable income of a branch of a foreign company, except for cell
phone operations, who pay tax at the rate of 38%. Locally incorporated companies pay
tax at the rate of 30%, except for cell phone operators,who pay tax at the rate of 33%.
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No dividend WHT is applicable on repatriation of profits.
Inventory valuation
Inventory is stated at cost or net realisable value (i.e. market price) for tax purposes.
There is no specific requirement for the valuation of cost. The only legal emphasis is
consistency in the application of the selected method. This means that one cannot
change from one valuation method to another over different tax periods.
Capital gains
The tax basis for capital gains is the cost of the asset adjusted by the applicable consumer
price index (inflation index). Once determined, the taxable gain is subject to corporate
tax at the rate applicable to the particular entity.
Capital gains arising from the disposal of personal and domestic assets not used in
connection with trade are exempt from corporate tax.
Capital gains arising from the sale of shares held for more than one yeartraded on the
Malawi Stock Exchange are nottaxable.
Rollover relief
If a business asset is sold and the taxpayer acquires a qualifying replacement asset, the
taxpayer may claim rollover relief. This means that the taxpayer does not immediately
pay the tax on the gain. Instead, the cost of the replacement asset is reduced by the
amount of the gain. The taxpayer must declare this in the tax return.
A qualifying replacement asset is an asset similar to, or related in service or use to, the
asset disposed of. The replacement asset must be acquired within 18 months of the
disposal giving rise to the gain.
Dividend income
Dividend income is exempt from corporate tax; however, dividends received from
Malawi sources are subject to a 10% dividend WHT, which is a final tax. Note that
although the word final has not been defined, it is applied as meaning that dividend
WHT suffered may not be offset against an income tax liability.
Interest income
Interest is added to the other income categories and taxed at a rate applicable to the
person that earns the income. There is a mandatory WHT on interest earned from
financial institutions unless the earner is exempted.
Foreign exchange gains realised on foreign currency assets or liabilities are taxable.
Foreign exchange losses realised on foreign currency assets or liabilities are tax
deductible.
Unrealised gains and losses are carried forward until realised and then included in
income or allowable expenditures. The maintenance of records that accurately track
unrealised exchange rate adjustments from year to year is necessary to ensure correct
tax computations.
Tax-exempt income
The following are common examples of other tax-exempt income:

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The income of agricultural, mining, and commercial institutions or societies not
operating for private pecuniary profit or gain of the members.
The income of clubs, societies, and associations formed, organised, and operated
solely or principally for social welfare or civic improvement or other similar purpose,
provided that the income of such bodies may not be divided among or used for the
benefit of the members or shareholders.
The income of ecclesiastical, charitable, and educational institutions of a public
character.
Foreign income
Generally, income whose source is not Malawi is not taxable in Malawi.
Deductions
Taxable income is calculated by deducting allowable items from assessable income.
Section 28 of the Taxation Act defines tax-allowable deductions as any expenditures and
losses (not being of a capital nature) wholly, exclusively, and necessarily incurred by the
taxpayer for the purpose of trade or in the production of income.
Capital allowances
Capital allowances (i.e. depreciation allowances) are applicable as stipulated in the

Taxation Act at various rates.
Capital allowances, which are available to companies and individuals in business, are
allowed as follows:
Asset
Industrial and farm buildings, hotels, and docks (1, 2, 3)
Staff housing (3)
Plant, machinery, and equipment (1, 2, 3, 4)
Furniture and fittings (3)
Motor vehicles (3, 4, 5, 6)
Commercial buildings (7)
Computers
Initial
10
10
20
20
20
20
Allowances (%)
Investment
40/100
40/100
-
Annual
5
5
10/20
10
20
2.5
40
Notes
1.
2.
3.
4.
5.
6.
7.
The 100% investment allowance is available only on new and unused qualifying assets, as indicated
above, belonging to and used by a manufacturer or farmer. The rate for used qualifying assets is
40%. The investment allowance is claimable only in the first year of use.
Where an investment allowance is claimed, the initial allowance is not allowed to be claimed on the
same asset. The initial allowance is claimable only in the first year of use.
Annual allowances at the above rates are based on cost less investment and initial and annual
allowances previously granted.
Investment allowance on plant and machinery excludes motor vehicles intended or adapted for use
on roads.
A 20% annual allowance is standard, but the Commissioner General may vary the amount.
No initial allowance is granted on private motor vehicles. These include saloons, sedans, station
wagons, and double cabin pickups. However, the restriction does not apply where the motor vehicle
is used for hiring purposes.
The building must be newly constructed at a cost of no less than MWK 100 million.
On disposal, assets are subject to balancing charges (capital gains) or balancing

allowances.
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If an asset is subject to extensive use, such as machinery working double shifts, so that
its expected economic life is reduced, the Commissioner General may agree to increase
the rates of annual allowances.
Lease, patent, trademark, and copyright premium
The tax-deductible amount of a premium paid for the right of use or occupation of land
or buildings, plant or machinery, patent design, trademark, copyright, or any other
property of a similar nature is one of the following:
The amount of premium or consideration divided by the number of years for which
the right of occupation or use is granted.
Where the period for which the right of occupation or use is granted exceeds 25
years, the deduction is one-twenty-fifth of the premium or consideration.
The premium is tax deductible only where the asset or right with respect to which the
premium or consideration is paid is used for the generation of income. If a taxpayer
acquires ownership of the asset or right, no further deduction of the premium or
consideration is allowed from the date ownership is acquired.
Goodwill
The legislation does not prescribe treatment for goodwill. It has been the practice that
goodwill is not deductible for tax purposes.
Pre-operating expenditures
A manufacturer may claim as a deduction any expenditure incurred in the course of

establishing the business, provided that the following are true:
The expenditure was incurred not more than 18 months before commencing
business.
The expenditure would have been allowed as a deduction if it had been incurred after
commencing business.
Interest expenses
Interest that arises out of financing operations is allowable, while interest due to late
payment of a debt is not allowable.
Bad debt
Specific bad debts are tax deductible and taxable in the following year. Bad debts written
off are allowable and taxable upon eventual recovery.
Donations to approved charities and approved non-profit institutions formed for the
purpose of social welfare, civic improvement, educational development, or other similar
purposes are deductible. The minimum individual donation allowable is MWK 500. The
minimum donation for other approved charities is MWK 250. In both cases, there is no
maximum donation.
Socialcontributions
50% of social contributions towards construction of hospitals, schools, and sponsorship

of school sports activitiesare tax deductible.
Research and development (R&D) expenditures
Research expenditures are fully allowable as a deduction if they are for experiments and
research relating to trade.
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Pension contributions
The tax-allowable amount of ordinary pension contributions made by an employer to an

approved pension fund is subject to limitations. The limit with respect to each employee
is the lowest of one of the following per annum:
The actual contribution.
Up to 15% of employees annual salary.
Fines and penalties
Fines and penalties are not tax deductible in any way.
Taxes
Taxes are not allowed as deductible expenses, except where they are local taxes.
Current taxable income may be offset against net operating losses brought forward, and
current operating losses may be increased by net unexhausted trading losses brought
forward. Manufacturers and taxpayers in the agricultural industry may carry losses
forward indefinitely, while other taxpayers may carry losses forward for only six years.
Net operating losses may not be carried back.
A deduction is allowed for payments to foreign affiliates if such payments are expended
wholly, exclusively, and necessarily for the production of income or for the purposes of
trade, and it can be demonstrated that the transaction is at arms length.
Group taxation
Group taxation is not permitted in Malawi.
Transfer pricing
There are transfer pricing regulations in Malawi. There is also a tax anti-avoidance
provision that is used to check transactions between related parties. If transactions
between related parties result in profits that are lower than what would be expected
if the company was trading with an independent party, then the tax authorities can
challenge the transaction.
Thin capitalisation
There are no thin capitalisation rules in Malawi.

There are no restrictions on the level of external borrowings. If a Malawi company wants
to borrow money from a foreign entity (whether or not a bank), it will require exchange
control approval. In such instances, Reserve Bank does not consider the debt-to-equity
ratio. It looks at the terms and conditions to see that they are what would be commonly
available on the open market between unrelated parties. As you can see, this is an antitransfer pricing measure.
If a new application is made for exchange control approval of foreign ownership
(normally this is when there is a new business/investment into Malawi), Reserve Bank
will look at the external debt to local equity ratio. There are no fixed rules, but Reserve
Bank does not normally like external debt to be more than twice equity (i.e. 1:2 equity
to external debt). It does give approval for external ownership where the proportion
of external debt is higher than this as it looks at each proposal on its own merit. The
applicant would have to justify the higher level of external debt in such a case.
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Malawi
There is no CFC regime in Malawi.

Foreign tax credit
Malawi does not have a provision for recognition of a foreign tax credit because the
taxation regime is based on source.
Export allowances
Exporters, including those manufacturing in bond, are entitled to claim additional tax
allowances for non-traditional exports:
On the export of non-traditional products, there is a 25% tax allowance on taxable
income derived from exports.
There is a 25% transport tax allowance on international transport costs for
non-traditional exports. Traditional exports are tea, coffee, cane sugar, and
unmanufactured tobacco and tobacco refuse.
Export allowances may not be claimed in respect of exports from mining operations.
There is a 100% investment allowance on new and unused industrial buildings,

plant, and machinery fortaxpayers in the manufacturing industry. A 40% investment
allowance forused versions of thesame items is also applicable.
Farming operations
Farming operations receive a 100% allowance with respect to expenditures incurred

during any year of assessment on the following:

Stumping, levelling, and clearing of land.

Work in connection with the prevention of soil erosion.
Boreholes.
Wells.
Aerial and geophysical surveys.
Water control work, including any canal, channel, dyke, furrow, and any flood control
structure, whether or not of a permanent nature.
Water conservation work, meaning any reservoir, water dam, or embankment
constructed for the impounding of water. In the case of water conservation work,
the Taxation Act limits the amount deductible to amounts actually paid, where the
farmer incurs a liability in terms of any law relating to natural resources.
Where a farmer derives taxable income from growing timber, the farmer may elect that
the taxable income is determined in accordance with the following rules:
Carryforward the cost of planting the timber until the timber reaches maturity.
Add annually to the cost of planting the timber an amount calculated as 5% of the
cost of planting the timber until the timber reaches maturity.
When the timber is sold, a proportionate amount of the total of the carryforward cost
and annual added cost is deducted from the proceeds.
In each year of assessment, the annual added cost is treated as taxable income in the
hands of the farmer.
A farmer may not deduct any expenditure that has been recovered through a subsidy
or claim a capital allowance on any assets where the expenditure has been recovered
through a subsidy.
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Mining operations
Mining operations receive a 100% allowance with respect to mining expenditures

incurred during any year of assessment. Mining expenditures are defined as capital
expenditures incurred in Malawi by a person carrying on or about to carry on mining
operations in Malawi:
In searching for or in discovering and testing or in winning access to deposits of
minerals.
In the acquisition of or of rights in or over such deposits, other than the acquisition
from a person who has carried on mining operations in relation to such deposits.
In the provision of plant and machinery and industrial buildings that would have
little or no value to such person if the mine ceased to work.
On the construction of any buildings or works that would have little or no value if the
mine ceased to be worked.
On development, general administration, and management prior to the
commencement of mining operations.
Persons engaged in mining operations are not entitled to claim the export tax allowance
on non-traditional exports or the 15% transport tax allowance on international transport
costs for non-traditional exports.
Withholding taxes
Dividend WHT
Dividend WHT is a final tax and is charged at 10%. The dividend is not included in the
taxpayers taxable income, and the WHT is not deducted from the taxpayers tax liability.
WHT rates
Nature of payment
Royalties
Rents
Payment of more than MWK 60,000 per annum for any supplies to traders
andinstitutions
Commission
Payment for carriage and haulage
Payment to contractors and subcontractors in the building and
constructionindustries
Payment for public entertainment
Payment of more than MWK15,000 for casual labour
Services
Bank interest in excess of MWK 10,000
Fees
WHTrate(%)
20
15
3
20
10
4
20
20
20
20
10
WHT treatment under tax treaties

Recipient
France
Netherlands
Norway
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Dividends
0
10
5
Interest
0
0
10
WHT (%)
Royalties
0
0
5
Rent
15
15
15
Management fees
0
0
0
Malawi
Recipient
South Africa
Sweden
Switzerland
United Kingdom
Dividends
10
0
0
0
Interest
15
0
0
0
WHT (%)
Royalties
0
0
0
0
Rent
0
15
15
15
Management fees
15
0
0
15
WHT exemption
There is WHT exemption for compliant taxpayers. A compliant taxpayer is defined as

one that has settled all their tax liabilities with the tax authorities, including customs
and excise.
Tax administration
Taxable period
The taxable period for income tax is a 12-month period ending on 30 June of each year.
For businesses whose year-end is 31 Julyand 31 August, the applicable tax year-end is
the preceding 30 June, while all the years ending in the subsequent months have the
following 30 June as a year-end.
Tax returns
Income tax returns are due within 180 days after the end of the financial year.
Payment of tax
Tax is payable inquarterlyinstalments within 25 days of the month following the end of
the quarter,with the balance of the tax being paid upon submission of the return.
Penalties
A penalty for late submission of returns is MWK 200,000.
Tax audit process
The target for the tax authorities is to audit 30% of the taxpayers in any fiscal year. This
translates to approximately three years per audit cycle.
There is no statute of limitations in Malawi, except for the mandatory seven-year

periodfor keeping records.
The tax authorities have recently focussed on transfer pricing and have consequently
established a unit responsible for this. All multinationals are under scrutiny to check if
they are dealing at arms length with related entities.
Commissioner Generals power to increase taxable income
The Commissioner General is empowered to increase the taxable income and liability of
a taxpayer when of the opinion that the main purpose or one of the main purposes of a
transaction was the avoidance or reduction of tax or where the main benefit that might
have been expected to accrue from a transaction was the avoidance or reduction of tax.
Malawi
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PwC contact
Jagdev Singh
Level 10, 1 Sentral
Jalan Travers
Kuala Lumpur Sentral
50470 Kuala Lumpur
Malaysia
Tel: +60 3 2173 1469
The Malaysian government has proposed the introduction of GST from 1 April 2015 at
the standard rate of 6%. GST will replace the current sales and service tax regime on
that date. The announcement made on 25 October 2013 gives businesses a lead time of
17 months to make the necessary preparations.
Businesses making taxable supplies must register for GST where the annual sales
turnover exceeds 500,000 Malaysian ringgit (MYR). GST will be administered by the
Royal Malaysian Customs Department.
In line with the GST implementation in 2015, the Malaysian government has proposed
for incentives to be given. For corporate entities, the incentives include:
Reduction of the corporate income tax (CIT) rate by 1% (to 24% from 25%) from
year of assessment 2016:
Type of company
Resident company (other than company described
below)
Resident company:
with paid-up capital of MYR 2.5 million or less
that does not directly or indirectly control another
company that has paid-up capital of more than
MYR 2.5 million, and
is not directly or indirectly controlled by another
company that has paid-up capital of more than
MYR 2.5 million.
Non-resident company
Income
(MYR)
Current tax
rate (%)
25
Proposed
tax rate (%)
24
On the first
500,000
20
19
In excess
of 500,000
25
24
25
24
Accelerated capital allowance (ACA) for expenditure incurred on purchase of

information and communication technology (ICT) equipment and software (years of
assessment 2014 to 2016).
Deduction for expenditure incurred on GST related training of employees in
accounting and ICT (years of assessment 2014 and 2015).
Training grant of MYR 100 million for GST training of employees (years of assessment
2013 and 2014).
Financial assistance of MYR 150 million for the purchase of accounting software by
small and medium enterprises (SMEs) (years of assessment 2014 and 2015).
Real property gains tax (RPGT)
With effect from 1 January 2014, the RPGTrates have been increased (see the Other taxes
1244
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Malaysia
For both resident and non-resident companies, CIT is imposed on income accruing in or
derived from Malaysia. The current CIT rates are provided in the following table:
Type of company
Resident company (other than company described below)
Resident company:
with paid-up capital of MYR 2.5 million or less
that does not control, directly or indirectly, another company
that has paid-up capital of more than MYR 2.5 million, and
is not controlled, directly or indirectly, by another company
that has paid-up capital of more than MYR 2.5 million.
Chargeable
income (MYR)
On the first
500,000
In excess of
500,000
CIT rate (%)

25
20
25
25
Petroleum income tax
Petroleum income tax is imposed at the rate of 38% on income from petroleum
operations in Malaysia. On 29 March 2013, a law was enacted to provide an effective
petroleum income tax rate of 25% on income from petroleum operations in marginal
fields with effect from 30 November 2010. No other taxes are imposed on income from
petroleum operations.
Local income taxes
There are no other local, state, or provincial government taxes on income in Malaysia.
Corporate residence
A company is tax resident in Malaysia in a basis year (normally the financial year) if, at
any time during the basis year, the management and control of its affairs are exercised in
Malaysia. Generally, a company is regarded as resident in Malaysia if at any time during
the basis period for a year of assessment, at least one meeting of the Board of Directors is
held in Malaysia concerning the management and control of the company.
Generally, a non-resident entity is regarded as having a PE in Malaysia if it has a fixed

place of business in Malaysia, where the business of the entity is wholly or partly carried
on. A non-resident company may also be deemed to have a PE in Malaysia under certain
circumstances, such as the following:
It is represented by a dependent agent in Malaysia who has the authority to conclude
contracts on its behalf and who has repeatedly exercised that authority.
It carries on supervisory activities in Malaysia for six/nine months in connection with
a construction, installation, or assembly project.
Other taxes
Sales tax
A single-stage ad valorem tax (sales tax), at rates ranging from 5% to 10%, is imposed on
all goods imported into or manufactured in Malaysia, unless specifically exempted.
Service tax
Service tax is imposed at the rate of 6% on the value of taxable services sold or provided
by taxable persons. A list of taxable services and taxable persons is found in the
Service Tax Regulations 1975.
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In the recent 2014 Budget, it has been announced that a GST of 6% will be implemented
from 1 April 2015. When implemented, GST will replace the current sales tax and
service tax.
Import duties
Import duties are levied on goods that are subject to import duties and imported into
the country. Import duties are generally levied on an ad valorem basis but may also be
imposed on a specific basis. The ad valorem rates of import duties range from 2% to
60%. Raw materials, machinery, essential foodstuffs, and pharmaceutical products are
generally non-dutiable or subject to duties at lower rates.
Excise duties
Excise duties are imposed on a selected range of goods manufactured and imported into
Malaysia. Goods that are subject to excise duty include beer/stout, cider and perry, rice
wine, mead, un-denatured ethyl alcohol, brandy, whisky, rum and tafia, gin, cigarettes
containing tobacco, motor vehicles, motorcycles, playing cards, and mahjong tiles.
The rate of excise duties vary from a composite rate of MYR 0.1 per litre and 15% of
the value for certain types of spirituous beverages, to as much as 105% of the value of
motorcars (depending on engine capacity).
Property tax
Property tax is levied on the gross annual value of property as determined by the local
state authorities.
Real property gains tax (RPGT)
RPGT is charged upon gains from disposals of real property, which is defined as:
any land situated in Malaysia, as well as any interest, option, or other right in or over
such land, or
shares in a real property company (RPC), which is a controlled company holding real
property or shares in another RPC or a combination of both, where the total defined
value is not less than 75% of its total tangible assets.
Effective for disposals from 1 January 2014, RPGT is imposed on companies as follows:
Holding period from date of acquisition
Up to three years
RPGT rate (%)

30
In the fourth year
20
In the fifth year
15
Exceeding five years
Stamp duty
Malaysia imposes stamp duty, which is payable by the buyer/transferee, on chargeable

instruments. Some examples are provided as follows:
Transaction type
Sale/transfer of properties (excluding stock,
shares, or marketable securities)
Sale/transfer of stock, shares, or marketable
securities
Service/loan agreements
1246
Malaysia
Value chargeable
Market value
Stamp duty rate (%)

1 to 3
Consideration paid or market

value, whichever is higher
Value of services/loans
0.3
0.5
Malaysia
Windfall profit levy
A levy is imposed on crude palm oil and crude palm kernel oil at a maximum of MYR
50 per ton where the price exceeds MYR 2,500 per ton in Peninsula Malaysia, and MYR
3,000 per ton in the states of Sabah and Sarawak.
Contract levy
A levy of 0.125% on contract works having a contract sum above MYR 500,000 is
imposed on every registered contractor by the Construction Industry Development
Board.
Human resource development levy
Employers engaged in the manufacturing and services sectors that employ more than a
specified number of employees must contribute to the Human Resource Development
Fund (HRDF). The levy required to be paid is at the rate of 1% of the employees
monthly wages on a monthly basis.
Branch income
Tax rates on branch profits of a company are the same as CIT rates. No tax is withheld on
transfer of profits to a foreign head office.
Inventory valuation
Inventories are generally stated at lower of cost or net realisable value. Cost may be
determined using one of several methods (e.g. unit cost, average cost, or first in first out
[FIFO]), as long as the basis used is consistent for each year.
Capital gains
Generally, gains on capital assets are not subject to tax, except for gains arising from the
disposal of real property situated in Malaysia, which is subject to RPGT (see the Other
taxessection for more information).
Dividend income
Malaysia is under the single-tier tax system. Dividends are exempt in the hands
of shareholders. Companies are not required to deduct tax from dividends paid to
shareholders, and no tax credits will be available for offset against the recipients tax
liability. Corporate shareholders receiving exempt single-tier dividends can, in turn,
distribute such dividends to their own shareholders, who are also exempt on such
receipts.
Stock dividends
A Malaysian corporation may distribute bonus shares tax-free to shareholders.
Interest income
Interest income accruing in or derived from Malaysia or received in Malaysia from

outside Malaysia is subject to CIT. However, exemption is provided on interest income
received in Malaysia from outside Malaysia. Other exemptions granted include interest
income earned by a non-resident person from deposits placed in designated financial
institutions in Malaysia.
Foreign income
Under the Income Tax Act 1967, a Malaysian tax-resident company and a unit trust
are not taxed on their foreign-sourced income, regardless of whether such income is
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received in Malaysia. However, income of a resident company from the business of air/
sea transport, banking, or insurance is assessable on a worldwide basis.
Taxation on a worldwide basis does not apply when income attributable to a Labuan
business activity of a Labuan branch or subsidiary of a Malaysian bank is subject to tax
under the Labuan Business Activity Tax Act 1990. This exception will not apply if the
Labuan entity has made an irrevocable election to be taxed under the Income Tax Act
1967 in respect of its Labuan business activity.
In respect of Malaysian-owned banks, insurance companies, and takaful (Islamic
insurance) companies, the profits of newly established branches abroad or remittances
from new subsidiaries abroad are tax exempt for five years, provided that the
applications to establish branches or subsidiaries abroad are received by the Central
Bank of Malaysia no later than 31 December 2015.
Relief from double taxation is available by means of a bilateral credit if there is a
governing tax treaty or unilateral relief where there is no treaty. The relief is restricted to
the lower of Malaysian tax payable or foreign tax paid if there is a treaty, or one-half of
the foreign tax paid if there is no treaty.
Undistributed income of foreign subsidiaries is not taxable.
Deductions
Capital allowance
Capital allowance (tax depreciation) on industrial buildings, plant, and machinery is

available at prescribed rates for all types of businesses. Initial allowance is granted in the
year the expenditure is incurred and the asset is in use for the purpose of the business.
Annual allowance at the prescribed rates calculated on cost is given for every year during
which the asset is in use at the end of the basis year for the purposes of the business. The
following are examples of capital allowance rates currently available:
Qualifying asset
Initial allowance (%) Annual allowance (%)
Industrial building, whether constructed or purchased
10
3
Heavy machinery
20
20
General plant and machinery
20
14
20
10
Office equipment
20
10
Motor vehicles *
20
20*
Small value assets of less than MYR 1,000
100
(subject to a maximum total cost of MYR 10,000)
* Restrictions apply on maximum qualifying capital expenditure.
Accelerated capital allowance is available for certain types of industrial building, plant,
and machinery, some of which includes buildings used as a warehouse, buildings used
as a school or an educational institution, computers, information technology equipment,
environmental protection equipment, waste recycling equipment, and plant and
machinery used in specific industries.
Goodwill
Cost of acquisition of goodwill/amortisation of goodwill is not deductible, as these

expenses are capital in nature.
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Start-up expenses
In general, start-up expenses incurred before the commencement of a trade, profession,

or business are capital in nature, as they were expended to put the person in a position
to earn income. However, there are specific deductions allowed, such as incorporation
expenses and recruitment expenses (conditions apply).
Interest expenses
Interest expense is allowed as a deduction if the expense was incurred on any money
borrowed and employed in the production of gross income or laid out on assets used or
held for the production of gross income. Where a borrowing is partly used to finance
non-business operations, the proportion of interest expense will be allowed against the
non-business income.
Bad debt
Debts must be specifically identified and reasonably estimated to be irrecoverable to

qualify for a tax deduction.
Donations to charitable institutions
A deduction is allowed for cash donations to approved institutions (defined) made in the
basis period for a year of assessment. The deduction is limited to 10% of the aggregate
income of that company for a year of assessment.
Fines and penalties
Fines and penalties are generally not deductible.
Taxes
Taxes on income are generally not deductible, whereas indirect taxes, such as sales tax
and service tax, are deductible.
The carryforward of business losses and capital allowances is not available for deduction
in subsequent years of assessment if the company does not meet the conditions of a
shareholders continuity test. However, per policy issued by the Ministry of Finance,
these conditions currently apply only to dormant companies. Carryforward of business
losses and capital allowances is unlimited in time for non-dormant companies.
Current-year business losses may be utilised against all sources of income. Utilisation of
carried-forward losses is restricted to income from business sources only. Utilisation of
capital allowance is also restricted to income from the same underlying business source.
Currently, there are no provisions to carry back losses to prior years of assessment.
A Malaysian company can claim a deduction for royalties, management service fees, and
interest charges paid to foreign affiliates, provided that these are made at arms length
and the relevant withholding taxes (WHTs), where applicable, have been paid.
Group taxation
A company that qualifies for group relief may surrender a maximum of 70% of its
adjusted loss for a year of assessment to one or more related companies if the following
conditions are met by both the claimant and surrendering companies:
Both must be resident and incorporated in Malaysia.
Each has paid-up capital of ordinary shares exceeding MYR 2.5 million at the
beginning of the basis period.
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Both have the same (12-month) accounting period.
They are related throughout the basis period for a particular year of assessment as
well as the 12 months preceding that basis period.
Both are not currently enjoying specific stipulated incentives, such as pioneer status,
investment tax allowance, reinvestment allowance, etc.
Related company is defined by the Income Tax Act 1967 and involves the application of
a two-tier test. The companies are regarded as related if:
either company owns at least 70% of the ordinary share capital of the other company
or a third company owns at least 70% of each of the companies, and
the holders of ordinary shares are entitled to at least 70% of the distributable profits
and assets of the company on winding up.
Companies that wish to avail themselves of group relief must make an irrevocable
election to surrender or claim the tax loss in the return to be filed with the Inland
Revenue Board for that year of assessment.
Transfer pricing
The Director General of Inland Revenue (DGIR) is empowered to make adjustments on

transactions of goods and services if the DGIR is of the opinion that the transactions
were not entered into on an arms-length basis.
The transfer pricing rules that apply to controlled transactions (defined, including
financial assistance) specify the methods to determine the arms-length price and the
circumstances under which the DGIR may re-characterise transactions. The advance
pricing arrangement rules that apply only to cross-border transactions outline the
application procedures for unilateral, bilateral, or multilateral advance pricing
arrangements.
Thin capitalisation
Under the provision for thin capitalisation, the portion of the interest charge that relates
to the amount of financial assistance that is excessive is disallowed as a deduction.
However, the implementation of specific rules relating to this provision has been further
deferred to31 December 2015.

Malaysia has a wide variety for incentives covering the major industry sectors. Tax
incentives can be granted through income exemption or by way of allowances.
Generally, when income is exempted, any dividends paid out of such exempt income
are not taxable in the hands of the shareholders. Where incentives are given by way of
allowances, any unutilised allowances generally may be carried forward indefinitely
to be utilised against future statutory income. The following are the major types of
incentives available in Malaysia.
Pioneer status (PS) and Investment tax allowance (ITA)
Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other
industrial or commercial sector, that participate in a promoted activity or produce a
promoted product may be eligible for either PS or ITA.
PS is given by way of exemption from CIT on 70% of the statutory income for five
years and the remaining 30% is taxed at the prevailing CIT rate. ITA is granted on 60%
qualifying capital expenditure incurred for a period of five years to be utilised against
70% of the statutory income, while the balance 30%is taxed at the prevailing CIT rate.
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A company that intends to undertake reinvestment before expiration of its PS or ITA
status may opt for reinvestment allowance, provided it surrenders its PS or ITA status.
The PS and ITA incentives are enhanced for the following types of projects:
Qualifying industry
Projects of national and strategic importance
involving heavy capital investment and high
technology.
High-technology companies engaged in
areas of new and emerging technologies.
Companies manufacturing specialised
machinery and equipment.
Existing locally owned companies
reinvesting in production of heavy machinery,
specialised machinery, and equipment.
Companies providing technical and
vocational training, and private higher
education institution providing qualifying
science courses.
New companies investing and existing
companies reinvesting in utilising oil palm
biomass to produce value-added products.
Small scale companies (defined) that meet
with specified conditions.
Hotel operators undertaking new investments
in 4 and 5 star hotels in Sabah/Sarawak
(for applications until 31 December 2013,
proposed extension to 31 December 2016).
Hotel operators undertaking new investments
in 4 and 5 star hotels in Peninsular Malaysia
(for applications until 31 December 2013,
proposed extension to 31 December 2016).
Providers of industrial design services (for
applications until 31 December 2016).
Pioneer status
Incentive TRP (1)
100% of
5+5
SI (2)
100% of SI
100% of SI
70% of
increased
SI
-
100% of SI
100% of SI
Investment tax allowance

Incentive TRP (1)
100% QCE (3)
5
against 100% SI
60% QCE against

100% SI
10 100% QCE against
100% SI
5
60% new QCE
against 70% SI
- 100% QCE against

70% SI
10
10 100% QCE against

100% SI
60% QCE against

100% SI
5 100% QCE against
100% SI
70% of SI
60% QCE against

70% SI
70% of SI
100% of SI
Notes
1.
2.
3.
Tax relief period (in terms of years).

Statutory income.
Qualifying capital expenditure.
Special incentive schemes

Reinvestment allowance
A resident company in operation for not less than 36 months that incurs capital
expenditure to expand, modernise, automate, or diversify its existing manufacturing
business or approved agricultural project is entitled to reinvestment allowance as
follows:
The allowance is given for 15 years from the first year of claim.
An allowance of 60% of QCE incurred to be utilised against 70% of statutory income.
The remaining 30% is taxed as the prevailing CIT rate.
The 70% restriction does not apply to projects that achieved the level of productivity
as prescribed by the Minister of Finance.
The allowance will be withdrawn if the asset for which the allowance is granted is
disposed of within five years.
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Approved service projects
A resident company undertaking a project approved by the Minister of Finance in

the transportation, communications, utilities, and services subsectors may enjoy the
following incentives:
Investment allowance of 60% of QCE incurred within five years to be utilised against
70% statutory income.
Alternatively, income tax exemption of 70% of statutory income for a period of five
years.
Buildings used solely for the purposes of such projects qualify for an industrial
building allowance.
Export incentives
A resident company engaged in manufacturing or agriculture that exports manufactured

products, agricultural produce, or services is entitled to allowances between 10%
and 100% of increased exports (subject to satisfying prescribed conditions), which is
deductible at up to 70% of statutory income.
Regional operations
Operational headquarters company (OHQ)
A Malaysian incorporated company that provides qualifying services to its offices and
related companies, within or outside Malaysia, may enjoy CIT exemption for a period of
ten years. Income exempted includes business income, interest, royalties, and income
from services (not exceeding 20% of total income of qualifying services) provided to
related companies in Malaysia.
Expatriates working in an OHQ are taxed only on the portion of chargeable income
attributable to the number of days they are in Malaysia. An OHQ is also granted special
facilities (subject to conditions), including:
Approvals for expatriate posts.
Ability to obtain credit facilities in foreign currency from licensed banks in Malaysia,
without approval of the Central Bank of Malaysia.
Ability to invest freely in foreign securities and lend to related companies outside
Malaysia.
Ability to open foreign currency accounts with licensed banks in Malaysia or banks in
Labuan.
International procurement centre (IPC) and Regional distribution centre

(RDC)
An IPC engaged in the procurement and sale of raw materials, components, and finished
products to its related or unrelated companies within or outside Malaysia may, subject
to conditions, enjoy income tax exemption for ten years on income from qualifying
activities in respect of export sales.
An RDC operates similarly to an IPC, except an RDC is only allowed to deal with its own
brand of goods. The RDC enjoys the same incentives as an IPC.
Other available non-fiscal incentives available to IPC/RDC include:
Approval for expatriate posts.
One or more foreign currency accounts for the retention of export proceeds with any
licensed commercial bank, without any limit on account balances.
Ability to enter into foreign exchange forward contracts with a licensed commercial
bank to sell forward export proceeds based on projected export.
Exemption from foreign equity ownership restrictions.
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International trading company
International trading companies are exempt for five years on income equivalent to 20%
of increased export value, up to a maximum of 70% of statutory income. To qualify for
the incentive, the company must meet the following three conditions:
Be incorporated in Malaysia, with 60% Malaysian ownership.
Achieve minimum annual sales of MYR 10 million, not more than 20% of which may
be derived from the trading of commodities.
Use local services (banking, finance, and insurance) and infrastructure (local ports
and airports) in its operations.
Financial services sector

Islamic securities
Tax deductions are allowed for expenses incurred in the issuance of Islamic securities,
including Islamic Securities based on the Wakalah principle, approved by the Securities
Commission or the Labuan Financial Services Authority, until year of assessment 2015
only.
Islamic banking and takaful business
Effective from year of assessment 2007 until year of assessment 2016, full income tax
exemption for ten years is granted to:
Islamic banks licensed under the Islamic Financial Services Act 2013, on income from
Islamic banking business conducted in international currencies.
Takaful (Islamic insurance) companies licensed under the Islamic Financial Services
Act 2013, on income from takaful business conducted in international currencies.
Islamic fund management
Full income tax exemption is available on statutory income on management fees

received by resident fund management companies for managing funds of foreign and
local investors established under Syariah principles (until year of assessment 2016).
Such funds must be approved by the Securities Commission.
Special purpose vehicle (SPV) for Islamic financing
An SPV established solely for the purpose of issuance of Islamic securities under the
Syariah principles (approved by the Securities Commission or established under the
Labuan Companies Act 1990) is not subject to income tax and is not required to comply
with administrative procedures under the income tax law. The company that establishes
the approved SPV is deemed to be the recipient of the SPVs income and will be taxed
accordingly, but that company will be allowed a deduction for the cost of issuance of
Islamic securities.
Islamic stock broking company
Establishment expenditure incurred prior to the commencement of an Islamic stockbroking company is allowed as a deduction, provided the company commences business
within two years from the date of approval. Applications must be received by the
Securities Commission before 31 December 2015.
Agro-sukuk, retail sukuk, and retail bonds
A company that issues agro-sukuk, retail sukuk, and retail bonds approved by the
Securities Commission or the Labuan Financial Services Authority is eligible for double
deduction on certain expenses and stamp duty exemption, subject to meeting certain
conditions. This incentive is available until year of assessment 2015.
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Treasury management centre (TMC)
A locally incorporated company providing centralised treasury management services to

its group of related companies (within or outside the country) in Malaysia may enjoy the
following incentives (for applications until 31 December 2016):
Income tax exemption of 70% of statutory income from qualifying treasury services
rendered to related companies for five years.
WHT exemption on interest payments on overseas borrowings from overseas used for
qualifying activities.
Stamp duty exemption on loan and service agreements for qualifying activities.
Expatriates working in the TMC are taxed only on the portion of their chargeable
income attributable to the number of days they are in Malaysia.
Tun Razak Exchange (TRX) (formerly known as Kuala Lumpur International

Financial District)
The TRX is a joint property development comprising office towers for finance and
banking, residences, and retail spaces in Kuala Lumpur. To accelerate the development
of the TRX, the following incentives have been given:
Stamp duty exemption on loan and service agreements forTRX Marquee status
companies.
Industrial building allowance and accelerated capital allowance forTRX Marquee
status companies.
Income tax exemption of 70% of statutory income for five years for property
developers in TRX.
Additional 50% tax deduction of rental payment incurred by TRX Marquee status
companies for buildings used for business in TRX.
Deduction of relocation cost incurred by TRX Marquee status companies to relocate
to TRX.
It is also proposed that a full ten-year income tax exemption be given for TRX Marquee
status companies.
Business Trust (BT)
BT is established under the Capital Market and Services Act 2007 and is a hybrid
structure that combines elements of a company with elements of a unit trust.The BT is
given income tax treatmentsimilar to that of a company.The following incentives are
given on a one-off basis at the initial stage of establishment of the BT:
Stamp duty exemption on instruments of transfer of businesses, assets, or real
properties acquired for instruments executed from1 January 2013 but not later than
31 December 2017.
The disposer of real properties or shares in RPCsto BT is given RPGT exemption for
disposal of real properties or shares in RPCs from 1 January 2013 but not later than
31 December 2017.
Real estate investment trusts (REIT)/Property trust fund (PTF)
REIT/PTFs are vehicles that mobilise funds from unit holders comprising individuals
and companies for investments in the property sector and related assets. REIT/PTFs
are exempted from tax on all income, provided that at least 90% of their total income
is distributed to unit holders. If the 90% distribution condition is not complied with,
all income will be taxed at the prevailing income tax rate at the REIT/PTF level and tax
credit will be claimed by the unit holders on distributions received from the REIT/PTF.
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Unit holders are taxed asfollows:
Unit holders
Individuals (whether resident or non-resident), body of persons,
or other unincorporated persons
Resident company
Institutional investor (pension fund, collective investment scheme,
or other person approved by the Minister of Finance)
WHT rate
10% (until 31 December 2016)
25%
None (income to be included in
annual tax return)
10% (until 31 December 2016)
Other incentives available are:

Real property gains tax and stamp duty exemptions on disposal/transfer of real
property to an REIT/PTF.
Tax deduction given for consultancy, legal, and valuation service fees incurred on the
establishment of an REIT.
Foreign fund management company
A foreign fund management company providing fund management services to foreign

clients is taxed at a concessionary rate of 10% in respect of income derived from the
management of foreign funds, while income arising from services rendered to clients in
Malaysia is taxed at the prevailing CIT rate.
A foreign fund management company is a Malaysian incorporated company licensed
under the Capital Markets and Services Act 2007. Its activities are regulated by the
SecuritiesCommission.
Export of financial services
Income tax exemption on statutory incomefor a period of five years is granted to

Malaysian banks, insurance companies, and takaful companies on profits of newly
established branches overseas or income remitted by new overseas subsidiaries.
Applications to establish new branches or subsidiaries overseas should be received by
the Central Bank of Malaysia not later than 31 December2015.
Venture capital company (VCC)
A VCC investing in a venture company (VC), which is not the VCCs related company at
the point of first investment, will be given a deduction on the value of investment made
in a VC. Where the deduction is not claimed, the VCC is eligible for the following income
tax exemption on income from all sources, other than interest income from savings or
fixed deposits, and profits from Syariah-based deposits:
Conditions
Exemption period
At least 70% of invested funds is invested in VC, or
10 years
At least 50% of invested funds is invested in VC in the form of seed capital.
At least 30% of invested funds is invested in VC in the form of seed capital,
5 years
start-up, or early stage financing, and
Applications received by Securities Commission until 31 December 2013
Petroleum sector
The following incentives are provided for petroleum operations:

Accelerated capital allowance on qualifying capital expenditure incurred from year of
assessment 2010 to 2024 for petroleum operations in marginal fields.
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Investment allowance of 60% of qualifying capital expenditure to be utilised against
70% statutory income for a period of ten years.
Exemption for a portion of chargeable income from marginal fields resulting in a
reduction of the effective tax rate from 38% to 25% for petroleum operations in
marginal fields.
Special economic regions
The following special economic regions were launched as part of the Malaysian
governments plan for regional growth and development:
Economic region
Iskandar Malaysia (formerly known as Iskandar
Development Region [IDR])
www.iskandarmalaysia.com.my
Northern Corridor Economic Region
www.koridorutara.com.my
East Coast Economic Region www.ecerdc.com
Sabah Development Corridor www.sedia.com.my

Sarawak Corridor of Renewable Energy
www.sarawakscore.com.my
Location
Southern Johor
Year of launch
2006
States of Perlis, Kedah,

Penang, and northern Perak
States of Kelantan,
Terengganu, Pahang, and
district of Mersing in Johor
Western, central, and eastern
regions of Sabah
Central Sarawak
2007
2007
2008
2008
Special incentives, on top of the existing incentives given by the Malaysian government,
will be customised for the purpose of each economic region. At present, special
legislation has been enacted only in respect of Iskandar Malaysia (IM) to grant the
following exemptions/incentives:
Entity
IDR status
company
Developer
Development
manager
Non-resident
service provider
Individuals
working in IDR
Incentive
10 years income tax exemption on statutory income from the provision of
qualifying services to a person situated within designated nodes in the IDR or
outside Malaysia. Operations to commence before 31 December 2015.
Income tax exemption on statutory income from the disposal of rights over land
in designated nodes (until year of assessment 2015).
Income tax exemption on rental or disposal of buildings in designated nodes
(until year of assessment 2020).
Income tax exemption on statutory income from the provision of management,
supervisory, and marketing services to an approved developer (until year of
assessment 2020).
Income tax and WHT exemptions on income from technical fees, interest, or
royalties received from approved developers in IDR designated nodes or IDR
status companies.
A qualified knowledge worker is taxed at the rate of 15% on chargeable income
from employment with a designated company engaged in a qualified activity
(e.g. green technology, educational services, healthcare services, creative
industries, financial advisory and consulting services, logistics services, tourism)
in that specified region. Employment must commence between 24 October
2009 and 31 December 2015.
Information and communication technology

MSC Malaysia
MSC Malaysia is Malaysias initiative for the global information technology (IT) industry
and is designed to be the research and development (R&D) centre for industries based
on IT. It is an information communication technology hub equipped with high-capacity
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global telecommunications and logistics networks. MSC Malaysia is also supported
by secure cyber laws, strategic policies, and a range of financial and non-financial
incentives for investors. It is managed by the Multimedia Development Corporation
(MDeC), a one-stop shop that acts as the approving authority for companies applying
for MSC Malaysiastatus.
MSC Malaysiastatus is awarded to both local and foreign companies that develop or use
multimedia technologies to produce or enhance their products and services as well as for
process development. MSCMalaysia companies are eligible for incentives, which include
the following:
PS (five + extendable by five years) of 100% on statutory income or ITA of 100% for
five years for a new company or existing company on its additional income.
Eligibility for R&D grants (for majority Malaysian-owned MSC Malaysia company).
Exemption from indirect taxes on multimedia equipment.
Unrestricted employment of local and foreign knowledge workers.
Freedom to source funds globally for investments.
Protection of intellectual property and cyber laws.
No censorship of the internet.
Globally competitive telecommunication tariffs and services guarantees, world-class
physical and IT infrastructure, and excellent R&D facilities.
Offshore trading through websites in Malaysia
Income received by companies undertaking offshore trading (buying and selling of

foreign goods to non-residents) via websites in Malaysia is taxed at a reduced rate of
10% for a period of five years. The approval of the Minister of Finance must be obtained.
Green incentives
Green Building Index (GBI) certification
A resident in Malaysia awarded a GBI certificate by the Board of Architects Malaysia

from 24 October 2009 until 31 December 2014 is granted 100% allowance on qualifying
expenditure incurred for the purpose of obtaining the GBI certificate, to be utilised
against 100% of statutory income.
Renewable energy source
Companies engaged in generating energy from renewable sources (biomass,

hydropower, or solar power) can enjoy the following incentives for applications received
before 31 December 2015:
full income tax exemption on statutory incomefor ten years, or
ITA of 100% QCE against 100% statutory income for five years.
Energy conservation
Companies undertaking contracting service activities to conserve usage of energy can

enjoy the following incentives for applications received before 31 December 2015:
full income tax exemption on statutory incomefor ten years, or
ITA of 100% QCE against 100% statutory income for five years.
Biotechnology industry
Companies undertaking biotechnology activity with approved bionexus status from

Malaysian Biotechnology Corporation Sdn Bhd will be eligible for the following
incentives:
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Full income tax exemption on statutoryincomefor ten years from the first year in
which the company derivesstatutory income or ITA of 100% on QCE incurred for a
period of five years.
Concessionary tax rate of 20% on statutory income from qualifying activities for ten
years upon expiry of the tax exempt period.
Accelerated industrial building allowance (over ten years) for buildings used solely
for the purpose of its new business or expansion project.
Exemption of import duty and sales tax on import of raw materials and machinery.

Contract R&D company
Companies that provide R&D services to third parties are eligible for:
full exemption of theirstatutory incomefor a period of five years (extendable by five
years), or
ITA of 100% of QCE incurred within a period of ten (extendable by ten years) to be
utilised against 70% of statutory income.
R&D company
The ITA incentive is also available to companies undertaking R&D services for their
group and third parties.
In-house R&D
Companies undertaking in-house R&D projects are eligible for ITA at the rate of 50% of
QCE incurred within a period of ten years.
Commercialisation of resource-based R&D findings
A company that invests for the sole purpose of financing a project on commercialisation
of resource-based and non-resource based (for applications until 31 December
2017)R&D findings (which is wholly owned by a public research institute or public
institute of higher learning in Malaysia) is given a deduction equivalent to the value of
that investment.
The subsidiary undertaking the commercialisation of R&D findings is granted 100% tax
exemption on statutory income for ten years.
Other incentives
Shipping
A tax-resident person (including a partnership) carrying on shipping business using

Malaysian ships is exempt from tax on income. Effective from year of assessment 2014,
this exemption is reduced from 100% to 70% of statutory income and determined on
a per ship basis. The balance of 30% of statutory income is deemed to be total income
chargeable to tax. However, it is envisaged that, in practice, the implementation of this
change will be from year of assessment 2015.
Healthcare service providers
A healthcare service provider providing healthcare services to foreignclients (foreign

companies, partnership, and citizens) is given income tax exemption equivalent to 100%
of the value of increased services to be utilised against 70% of statutory income(until
year of assessment 2014).
Healthcare facilities
Qualifying private healthcare facilities are eligible for 100% tax exemption on statutory
income for five years in respect of the construction of hospitals and expansion and
refurbishment of existing ones (for applications until 31 December 2014).
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Incentives for Mines Wellness City (MWC)
The Malaysian Investment Development Authority has issued guidelines on incentives

for MWC:
Incentive
Operator
Development
manager
Developer
Application period
Applications received on
or after 1 January 2013
to 31 December 2026.
PS of 70% of statutory income for five years for

income from qualifying activities in MWC.
ITA of 60% on QCE incurred within five years,
PS of 100% exemption on statutory income from
management, consultancy, supervisory, or marketing
services to MWC developer in MWC from the first year
of assessment statutory income is derived until year of
assessment 2023.
Applications received on
or after 1 January 2013.
1. PS of 100% exemption on statutory income from

disposal of rights over land/building from the first
year of assessment statutory income is derived
until year of assessment 2023, or
2. Income tax exemption on rental income from the
first year of assessment statutory income is derived
until year of assessment 2026, and
3. Stamp duty exemption of 50% on instrument of
transfer/lease of land/building.
1 and 2: Applications
received on or after 1
January 2013.
3: Instruments executed
from 1 January 2013 to
31 December 2023.
Profit oriented private schools and international schools
The following incentives are given to profit oriented private schools and international
schools (for applications received by 31 December 2015):
70% income tax exemption for a period of five years, or
ITA of 100% on qualifying capital expenditure incurred within five years to be offset
Foreign tax credit
See Foreign income in the Income determination section for a discussion of the foreign tax
credit regime.
Withholding taxes
Corporations making payments of the following types of income are required to
withhold tax at the rates shown in the table below. See Note 5 for other sources of income
subject to WHT.
WHT (%)
Recipient
Non-resident
corporations and
individuals:
Non-treaty
Treaty:
Albania
Australia
Austria
Dividends (1)
0
0
Interest (2) Royalties (3a, 3b)

0
0
0/5
0
Special classes of
income/Rentals (4, 5)
0/15
10
10
0
0
0
0/10
0/15
0/15
10
0/10
10
10
0
10
Malaysia
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WHT (%)
Recipient
Dividends (1)
Bahrain
0
Bangladesh
0
Belgium
0
Bosnia and Herzegovina *
0
Brunei
0
Canada
0
Chile
0
China, Peoples
0
Republic of
Croatia
0
Czech Republic
0
Denmark
0
Egypt
0
Fiji
0
Finland
0
France
0
Germany
0
Hong Kong
0
Hungary
0
India
0
Indonesia
0
Iran
0
0
Italy
0
Japan
0
Jordan
0
Kazakhstan
0
Korea, Republic of
0
Kuwait
0
Kyrgyzstan
0
Laos
0
Lebanese Republic
0
Luxembourg
0
Malta
0
Mauritius
0
Mongolia
0
Morocco
0
Myanmar
0
Namibia
0
Netherlands
0
New Zealand
0
Norway
0
Pakistan
0
Papua New Guinea
0
Philippines
0
Poland
0
Qatar
0
Romania
0
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0/5
8 (3c)
0/15
0/10
0/10
10
0/10
8
0/10
10
0/15
0/10 (3d)
15
10
0/10
10
0/10
0/12
0/15
0/15
0/15
0/15
0/15
0/10
0/10
0/15
0/10
0/10
0/15
0/10
0/15
0/10
0/15
0/10
0/15
0/10
0/10
0/10
0/10
0/10
0/15
0/15
0/10
0/10
0/10
0/10
0/10
0/15
0/15
0/15
0/15
0/15
0/15
0/5
0/15
10
10
0/10
10
10
0/10
0/10
7
8
10
10
10
10
8
0/10 (3d)
0/10
10
10
0/10
10
10
10
8
8
10
10
10
10
10
5
0/8
0/10 (3e)
0/10 (3f)
0/10
10
0/10
0/10
8
0/10
Special classes of
10
10
10
10
10
10
5
10
10
10
10
10
10
10
10
7
5
10
10
10
10
10
10
10
10
10
10
10
10
10
10
8
10
10
10
10
10
5
8
10
10
10
10
10
10
8
10
Malaysia
WHT (%)
Recipient
Russian Federation
San Marino
Saudi Arabia
Senegal *
Seychelles Republic
Singapore
South Africa
Spain
Sri Lanka
Sudan
Sweden
Switzerland
Syria
Thailand
Turkey
Turkmenistan
United Kingdom
Uzbekistan
Venezuela
Vietnam
Zimbabwe
Dividends (1)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0/15
10
0/10
10
0/5
8
0/10
10
0/10
10
0/10
8
0/10
5
0/10
7
0/10
10
0/10
10
0/10
8
0/10
0/10
0/10
10
0/15
0/10 (3f)
0/15
10
0/10
10
0/5
10
0/10
8
0/10
10
0/15
10
0/10
10
0/10
10
Special classes of
10
10
8
10
10
5
5
5
10
10
8
10
10
10
10
0
10
8
10
10
10
10
Notes
* Treaties pending ratification
Restricted tax treaties dealing with taxation of specific transport operations in international traffic have
also been signed with Argentina and the United States.
1.
2.
3.
4.
Dividends:
Malaysia has no WHT on dividends in addition to tax on the profits out of which the dividends are
declared. Some treaties provide for a maximum WHT on dividends should Malaysia impose such
a WHT in the future.
Interest:
Interest on loans given to or guaranteed by the Malaysian government is exempt from tax.
Interest paid to a non-resident by a commercial or merchant bank operating in Malaysia is also
exempt from tax.
Royalty:
a. Approved royalty payments under certain treaty provisions are exempt from WHT.
b. Royalty income received by non-resident franchisors under franchised education scheme
programmes by the Ministry of Education is exempted from tax.
c. Royalty does not include payments in respect of the operation of oil or gas wells, or the extraction
of mineral deposits or other natural resources.
d. Royalty does not include amount paid in respect of motion picture films or of tapes for radio or
e. Royalty does not include natural resource royalties.
f. Royalty does not include royalty paid in respect of (literary or artistic copyrights - Norway only)
or of motion picture films or of tapes for television (or radio - Thailand only) broadcasting, or of
the operation of a mine, oil well, quarry, or any other place of extraction of natural resources or of
timber or other forest produce.
Special classes of income:
Contract payments to non-resident contractors in respect of services under a contract project are
subject to a 13% deduction of tax (10% on account of the contractors tax liability and 3% on
account of their employees tax liability). This deduction of tax at source does not represent a final
tax, which is determined upon the filing of the tax return.
Payments made to non-residents in respect of the provision of technical services performed in
Malaysia and rental of movable properties are subject to a 10% WHT (unless exempted under
statutory provisions for purpose of granting incentives).
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5.
Other income:
WHT is also applied in respect of income of a non-resident from sources other than the following:
Sources shown in the preceding table.
A business source.
An employment source.
The rate of WHT on such income is 10%. This is applicable on payments made to residents of all
the treaty partners listed, except for certain countries (including Germany, Turkmenistan, Bosnia
and Herzegovina, Senegal, and Jordan) where the respective tax treaties have provided for such
type of income to be taxed only in the contracting state in which the recipient is resident.
Tax administration
Taxable period
Assessment of income is on a current-year basis. A company is taxed on income from

all sources (whether business or non-business) arising in its financial year ending in
the calendar year that coincides with that particular year of assessment. For example,
a company that closes its accounts on 30 June of each year is taxed on income earned
during the financial year ending on 30 June 2014 for year of assessment 2014.
Tax returns
Under the self-assessment system, companies are required to submit a return of income
within seven months from the date of closing of accounts. Particulars required to be
specified in the return include the amount of chargeable income and tax payable by the
company. The tax return is deemed to be a notice of assessment and is deemed served on
the company upon the date the tax return is submitted.
E-filing or online filing of tax returns via the Internet is available. E-filing is encouraged
by the Inland Revenue Board.
Payment of tax
Tax payable under an assessment upon submission of a tax return is due and payable by
the last day of the seventh month from the date of closing of accounts.
Companies are required to furnish estimates of their tax payable for a year of assessment
no later than 30 days before the beginning of the basis period (normally the financial
year). However, a newly established company with paid-up capital of MYR 2.5 million
or less that meets with certain specified conditions is exempted from this requirement
for two years, beginning from the year of assessment in which the company commences
operation. A revised estimate can be submitted in the sixth and ninth months of the basis
period for a year of assessment.
Companies are then required to pay tax by monthly instalments (based on the estimates
submitted) commencing from the second month of the companys basis period.
A company commencing operations in a year of assessment is not required to furnish
estimates of tax payable or to make instalment payments if the basis period for the year
of assessment in which the company commences operations is less than six months.
Tax audit process
The tax authorities have issued a Tax Audit Framework that outlines the rights and
responsibilities of audit officers, taxpayers, and tax agents in respect of a tax audit. A tax
audit may cover a period of one to three years of assessment determined in accordance
with the audit focus. The years of assessment to be covered in a tax audit may, however,
be extended depending on the issues identified during an audit.
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Malaysia
Additional assessments can be made within five years (previously six years prior to 1
January 2014) after the expiration of the relevant year of assessment. This time limit is
not applicable where fraud, wilful default, or negligence has been committed.
Some issues that the tax authorities have focused on recently include:
Deductibility of certain expenses (e.g. entertainment, provisions, management
service fees, allocated expenses from foreign related counterparts).
The correctness of tax incentive claims.
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PwC contact
Neville Gatt
167 Merchants Street
Valletta VLT1174, Malta
Tel: +356 2564 6711
During the course of 2013 and the beginning of 2014, there have been a number of
changes to Maltese tax law. Some of the more salient changes included:
An intergovernmental agreement (IGA) to improve international tax compliance
and to implement the Foreign Account Tax Compliance Act (FATCA) was concluded
between the Republic of Malta and the United States (US).
The possibilities of income tax consolidation and value-added tax (VAT) grouping are
contemplated in Maltese tax law. Rules covering the precise terms and conditions of
such income tax consolidation and VAT grouping are to be issued.
The double tax treaty (DTT) entered into between Malta and Israel in 2008 entered
into effect on 1 January 2014.
The DDT between Malta and India entered into force on 7 February 2014 and shall
become effective as of 1 January 2015.
Malta has reached a bilateral tax information exchange agreement (TIEA) with the
Cayman Islands; however, this is not yet in force.

Companies are subject to income tax at a flat rate of 35%. There is no corporate tax
structure separate from income tax.
A company incorporated in Malta is considered as both domiciled and resident in Malta
and is consequently taxable on a worldwide basis.A non-Maltese incorporated company
that is resident in Malta through management and control is subject to Maltese tax on
income arising in Malta and on income received in/remitted to Malta.
Petroleum profits tax
Petroleum profits tax is levied as income tax with similar deductions being allowed in
respect of incurred expenditure.In the case of a Production Sharing Contract signed
after 1 January 1996, any petroleum profits are taxed at the standard corporate tax rate
of 35%. However, all other petroleum profits are subject to a 50% tax rate.
Insurance profits tax
Insurance profits tax is levied as income tax and subject to the normal standard tax
rate of 35% as other corporate profits; however, the manner in which such profits are
ascertained is subject to a number of detailed rules that take into account the special
nature of the insurance industry. In the case of non-resident companies, the computation
is applied with reference only to business carried on in or from Malta.
Shipping profits tax
A tonnage tax system is applicable under Maltese law. Such regime covers profits from
shipping activities as defined under the applicable regulations that are derived by
qualifying Maltese-flagged and European Union (EU)/European Economic Area (EEA)
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vessels as well as non-EU/EEA vessels satisfying certain additional rules. Furthermore,
qualifying ship management activities are also entitled to the tonnage tax system.
Corporate residence
All companies incorporated in Malta are considered to be both domiciled and resident
in Malta. Other bodies of persons (including companies incorporated overseas) are
considered to be resident in Malta when the control and management of their business
are exercised in the country.
Although Maltese tax legislation contains a number of references to the term permanent
establishment, the term is not defined by Maltese legislation. Indeed, in terms of
Maltese domestic tax law, a non-resident is, in principle, subject to Maltese tax on
income arising in Malta, irrespective of the existence or otherwise of a PE in Malta
(naturally subject to any DTT provisions that would apply if in conflict with Maltese tax
law).
In the event the Maltese Revenue is required to interpret such a term, reference would
typically be made to the definition contained in the Organisation for Economic Cooperation and Development (OECD) Model Convention.
Other taxes
Supplies of goods and services in Malta are subject to VAT at the standard rate of 18%
(7% on accommodation in hotels and licensed premises; 5% onsupply of electricity,
the importation of works of art, collectors items and antiques, certain confectionery,
medical accessories, printed matter, and items for exclusive use by the disabled). Exports
to countries outside the European Union, food, and certain other goods and services are
exempt from VAT and provide a right to credit of VAT remitted.
Customs duties
Goods imported from outside the European Union may be subject to customs duties.
A Customs Code provides for customs procedures and concepts, which are based on
European Community requirements.
Excise duties
Excise duties are chargeable on certain energy products, certain alcoholic drinks, certain
manufactured tobacco products, and mobile telephonyservices.
Property taxes
Maltese tax legislation does not contain any wealth taxes or other similar taxes on
property, save for the property transfers tax outlined below.
Property transfer taxes
Transfers of immovable property situated in Malta are generally subject to a final

withholding tax (WHT) of 12%, which is, in most cases, charged on the transfer value
of the property. The term transfer is attributed a very wide definition and encompasses
any alienation of property under any title. There are, however, a number of instances
where the transfer of immovable property is taxed under the normal taxing provisions,
i.e. mainly the gain (not the transfer value) being chargeable at the corporate tax rate.
A reduced rate of WHT of 10% applies with respect to a transfer of immovable property
that has been restored, subject to the satisfaction of certain conditions.
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Stamp duty
Stamp duty is charged on, among other transactions, transfers of immovable property
(5% for both residents and non-residents) and marketable securities (2%; 5% in the
case of transfers of shares in property companies). Furthermore, in the event that the
market value of shares held by a person is reduced following a change in the companys
issued share capital or voting rights and the value shifts onto the other shareholders, the
transferor would be deemed to have transferred the said value to the transferee(s) and
such value shifting may be subject to a stamp duty liability (although certain exceptions/
exemptions may apply).
Maltese legislation also provides for the possibility of a stamp duty exemption in a
number of instances, subject to the satisfaction of certain conditions. Some of the more
commonly availed of exemptions include the acquisition or disposal of marketable
securities by or in the following: (i) licensed collective investment schemes; (ii) licensed
persons providing management, administration, safekeeping or investment advice to
collective investment schemes; (iii) companies being owned as to more than 50% by
non-Maltese residents and satisfying certain other conditions; and (iv) a company that
carries on or intends to carry on more than 90% of its business outside of Malta.
Employers social security contributions
Employers are obligated to pay social security contributions at the rate of 10% of the
individual employees salary and at fixed rates of 41.21 euros (EUR) per week for annual
salaries exceeding EUR 21,431, provided the employee is born on or after 1 January
1962 (note that the employee is also required to pay an equivalent weekly amount).
Branch income
The tax rate on branch income is the same as that for resident companies. Other than the
tax charged on a branchs income, no tax is withheld on transfers of profits to the head
office.
Inventory valuation
Inventory valuations are generally made at the lower of cost or market value. In general,
the book and tax methods of inventory valuation will conform. However, the last in
first out (LIFO) method is not accepted for taxation purposes. Obsolescence is accepted
where proven, but there are no provisions to take into account the effects of monetary
inflation on the inventory valuation.
Capital gains
Tax is chargeable on capital gains realised on the transfer of immovable property (real
estate), shares and other securities, business goodwill, business permits, copyrights,
patents, trade names, trademarks, interests in a partnership, and beneficial interests in a
trust. In the case of transfers of immovable property, a final WHT of 12% on the transfer
value applies. Note that there are certain cases where the 12% final WHT on the transfer
value may not apply, and the transfers will be subject to the normal tax on capital gains
regime with the chargeable profit being taxed at the taxpayers applicable rate(s).
Furthermore, similarly to the stamp duty situation set out above, in the event that the
market value of shares held by a person is reduced following a change in the companys
issued share capital or voting rights and the value shifts onto the other shareholders,
the transferor will be deemed to have transferred the said value to the transferee(s) and
such value shifting may be subject to a tax on capital gains (although certain exceptions/
exemptions may apply).
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No tax is levied on investments that yield a fixed rate of return. A tax exemption applies
in certain instances and subject to the satisfaction of certain conditions on the capital
gain arising on the transfer of shares in a company listed on a recognised stock exchange
other than shares held in certain collective investment schemes. If the capital gain
arising on the transfer of listed shares is subject to tax, then special rules apply with
respect to the calculation of the gain and such gain will be subject to tax separately at the
rate of 15%.
Subject to the satisfaction of certain conditions, if the asset is transferred between group
companies, no loss or gain is deemed to arise from the transfer. Note that a provision
exists that brings to charge the transfer of shares in property companies (as specifically
defined) that were originally subject to intra-group tax deferral when the transferor and
the transferee cease to be members of the original group within six years from the date
of such intra-group transfer.
Gains realised from the transfer of other assets fall outside the scope of the tax.
Gains arising outside Malta and derived by a company that is either not domiciled
or not ordinarily resident in Malta are not subject to tax. There are also a number of
exemptions provided in the law. For example, capital gains realised by non-residents on
transfers of units in Maltese collective investment schemes, similar investments relating
to linked long-term insurance business and shares, or securities in Maltese companies
(except for companies holding certain Maltese immovable property) are exempt from
tax.
Rollover relief
Rollover relief is granted with respect to capital assets used in a business for a period of
at least three years and which are transferred and replaced within one year by an asset
used solely for similar business purposes (i.e. no tax is chargeable on the capital gain).
In such instances, the cost of acquisition of the new asset is reduced by the gain on the
transfer of the previous asset that would otherwise have been taxable.
Maltese tax law also provides for the surrendering and claiming of allowable losses
between companies that form part of the same group (see the Group taxation section
for more information) as well as for reorganisation relief, subject to certain specific
conditions.
Dividend income
Dividends received by one resident company from another, whether or not a subsidiary,
are taxable on the gross amount in the recipients hands. If the distributed profits have
been taxed, no further tax should be chargeable to the recipient company. However, for
resident shareholders, if the corporate rate of tax in the year in which the profits are
earned is lower than that in the year in which they are distributed, an amount equivalent
to the difference in rates (topping up) is payable. If the distribution is made from
untaxed income, the dividend will be tax-free in the hands of the recipientcompany.
Dividends and gains on disposal of shares received by a corporate investor from a nonresident company (or from a non-resident limited partnership), as well as profits from
a foreign branch, may qualify for a participation exemption in Malta, subject to the
satisfaction of certain statutoryconditions.
The participation exemption may also apply to gains upon the disposal of equity
holdings in Maltese-resident entities. Distributions of taxed income by Maltese-resident
companies are not subject to further tax under the full imputation system.
Stock dividends
A Maltese company may distribute bonus shares from profits, whether of an income or
capital nature, and from share premium and capital redemption reserves. When bonus
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1267
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shares represent a capitalisation of profits, they are deemed to be dividends for tax
purposes. Such bonus shares are subject to tax in the recipients hands, gross of any tax
paid at the corporate level on the relative profits, but tax credits equivalent to the grossup of tax are available to stockholders.
Interest income
Interest is chargeable to tax under the provisions of Article 4(1)(c) of the Income Tax
Act and subject to the standard corporate tax rate. Nevertheless, in the event the receipt
of interest falls within the definition of investment income as established by Maltese
tax legislation, a WHT of 15% may be generally applicable. Furthermore, in the case of
interest income payable to non-Maltese residents, such interest should be exempt from
Maltese tax, subject to the satisfaction of certain statutory conditions.
Foreign income
A company is taxable on its worldwide income when it is ordinarily resident and

domiciled in Malta. A company that is either not ordinarily resident or not domiciled
in Malta is taxable on its foreign income only insofar as such income is remitted to/
received in Malta. Foreign tax is relieved by way of tax credits. This may occur under the
terms of a DTT. Where no treaty exists, the foreign tax can be relieved through a system
of unilateral relief. Relief for underlying tax is also granted with respect to dividend
income, either in terms of a DTT or as unilateral relief. Such relief may be available if,
among other things, evidence of tax paid abroad is produced.
Profits of Malta resident companies are subdivided for Maltese tax purposes into five
accounts: the Immovable Property Account, the Final Tax Account, the Maltese Taxed
Account, the Untaxed Account, and the Foreign Income Account. The last of these
includes, among other things, taxable profits of Maltese-resident companies resulting
from foreign investments; profits of a foreign PE; and profits resulting from foreign
investments, assets, or liabilities of an onshore bank licensed in Malta. Income allocated
to the Foreign Income Account for which no evidence of tax paid abroad is available can
qualify for a flat-rate foreign tax credit of 25%.
The Immovable Property Account includes profits and income derived directly or
indirectly from immovable property situated in Malta. The Final Tax Account includes,
among other items, profits that have been subject to a final tax at source or were exempt
from tax and such exemption is extended to shareholders upon a distribution of such
profits. The Maltese Taxed Account includes any other taxed profits while the Untaxed
Account represents the difference between the distributable profits and the profits
allocated to the other taxed accounts.
Under Maltas system of taxation of dividends, shareholders receiving distributions
from the Maltese Taxed Account and/or the Foreign Income Account may be entitled
to a tax refund of part or the full tax paid by the distributing Maltese company on such
profits being distributed. The tax refund may be either a six-sevenths refund, a fivesevenths refund, a two-thirds refund, or a full refund of the tax suffered by the Maltese
distributing company on the distributed profits. The type of the tax refund depends on
the nature of the income to be distributed.
Deductions
The basic condition for deductibility of expenses is that deductions are allowable only
with respect to expenditures that are wholly and exclusively incurred in the production
of income. However, the Maltese Income Tax Act also provides a number of exceptions
whereby specific expenses of a capital nature may also be tax deductible, subject to
the satisfaction of the statutory conditions applicable thereto. The following are some
further comments on specific items of expenditure.
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Tax depreciation is computed on the straight-line method. The rate of depreciation on

plant and machinery varies according to the category of the plant and machinery in
question.
Maltese tax law prescribes the minimum number of years over which items of plant and
machinery are to be depreciated as follows:
Category
Computers and electronic equipment
Computer software
Motor vehicles
Furniture, fixtures, fittings, and soft furnishings
Equipment used for constructions of buildings and excavation
Catering equipment
Aircraft- aircraft airframe
Aircraft - engines
Aircraft - engine or airframe overhaul
Aircraft - interiors and other parts
Ships and vessels
Electrical and plumbing installations and sanitary fittings
Cable infrastructure
Pipeline infrastructure
Communications and broadcasting equipment
Medical equipment
Lifts and escalators
Air conditioners
Equipment mainly designed or used for the production of water or electricity
Other machinery
Other plant
Years
4
4
5
10
6
6
6
6
6
4
10
15
20
20
6
6
10
6
6
5
10
The wear and tear rate on industrial buildings and structures (including hotels and car
parks) may not exceed 2% per annum. New acquisitions of industrial buildings and
structures are entitled to a concurrent extra 10% allowance in the year of acquisition.
The total allowances over the assets useful life may not exceed 100% of its cost. If a
surplus arises on disposal of a tax-depreciated asset, it is either added to the years
income or utilised to reduce the cost of any replacement. If the asset has been underdepreciated, a balancing allowance is granted.
No deduction is available for the depletion of natural resources.
The rules on tax deductions for wear and tear of plant and machinery provide for certain
specific treatment in particular situations, including, among other things, thefollowing:
To establish the cost of an asset when it is transferred between related companies,
the lower of the actual cost of the asset or the tax written-down value adjusted by
any balancing charge or allowance incurred by the transferring company should
beapplied.
Deductions for wear and tear are allowed only where proper records and
documentation have been kept that support the cost of the respective assets.
A proportional deduction is allowed where an asset is used partly in the production of
income and partly for other purposes.
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Goodwill
In the event that goodwill were to fall within the purport of intellectual property (IP) for
the purposes of the tax deductibility rules under Maltese tax law, then it may possibly
be argued that an expenditure on goodwill may be tax deductible. However, this would
need to be analysed on a case-by-case basis.
Start-up expenses
Certain pre-trading expenses (i.e. staff training, advertising, salaries/wages) are also
allowed as a deduction, subject to the satisfaction of the following conditions:
i
ii
The expenditure is incurred not more than 18 months before the commencement of
the trade or business.
The expenditure is not deductible in ascertaining the trading or business income of
the person carrying on such trade or business but would have been so deductible
under (i) above had it been incurred after that time.
In the event the above conditions are satisfied, such expenditure is treated as incurred
on the day on which the trade or business is first carried on by the person.
Interest expenses
Interest on any borrowed money is an allowable deduction if it is paid on capital

employed in acquiring income. The expense is allowable even though the borrowing
would have been made for a capital purpose, but it is deductible only against the income
derived in the same year from the employment of that capital. This special rule is in
addition to the deduction for interest paid on money due on revenue account (such
interest should be deductible under the general rule of deductibility), such as interest
on trade debts or charged on normal business overdraft facilities. There isa restriction
in respect of interest deductibility where the relevant advance is in connection with the
financing of Maltese immovable property and subject to certain other conditions.
Bad debt
Bad debts incurred in any trade, business, profession, or vocation are allowed in the
year they become bad if proved to the satisfaction of the tax authorities. No deduction
is given for provisions for bad debts and for bad debts incurred in activities other than a
trade, business, profession, or vocation. Any bad debt that is later recovered is deemed
as income for the year in which it is received.
The general rule is that charitable contributions are not deductible for Maltese tax
purposes unless expressly provided for by law.
Fines and penalties
The general rule is that fines and penalties are not deductible for Maltese tax purposes.
Nevertheless, there is an exception to this general rule that provides that interest paid
or payable by any person in terms of the Maltese VAT Act will be treated as expenses
incurred in the production of the income of that person for income tax purposes.
Taxes
The typical interpretation is that taxes suffered are not deductible for Maltese tax
purposes, although certain exceptions may possibly apply.
Capital expenditures on scientific research, patents, and IP rights are written off over a
number of years. In the case of scientific research, a deduction may be granted at 150%
of the expenditure.
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The Income Tax (Deductions) Rules of 2001 provide for specific conditions on
deductions with respect to the use of cars and the payment of employee compensation.
The cost on which capital allowances on certain motor vehicles may be claimed is
restricted to EUR 14,000. Deductions for lease payments on cars are restricted in a
manner that corresponds with the stated restriction of EUR 14,000 that applies to capital
allowances on owned cars. With respect to payment of employee compensation, the
Deduction Rules require that in order for employee compensation to be allowed as a
deduction for tax purposes in the hands of the employing company, it must have been
duly accounted for. In particular, the employee compensation must have been reported
on the appropriate forms and within the statutory time limit to the Office of Inland
Revenue. The rules also provide for restrictions on deductibility of emoluments with
respect to the payment of certain fringe benefits to employees.
Net operating losses may be carried forward indefinitely until absorbed. There is no
carryback of losses, not even in terminal years. Unabsorbed capital allowances may be
carried forward only against the same underlying source of income. Where the source
ceases to exist, any remaining balance of unabsorbed capital allowancesis lost.
There are no restrictions on the deductibility of royalties, interest (except for interest,
discount, or premium that are in any manner connected to Maltese immovable property
and subject to the satisfaction of certain other statutory conditions, in which case, the
interest/discount/premium should not be tax deductible in Malta), and service fees paid
to foreign affiliates as long as the particular expenses are considered to be incurred in
the production of the particular income and satisfy the applicable statutory conditions.
Interest, discount, premium, or royalties derived by non-residents are exempt from tax,
subject to the applicable statutory requirements.
Group taxation
Two companies that for tax purposes are resident exclusively in Malta, where one
company is a 50% plus subsidiary of the other or both are 50% plus subsidiaries of a
third Malta-resident company, qualify as members of a group of companies. Allowable
losses may be surrendered by a company to another company within the group
where both companies have concurrent accounting periods and form part of such
group throughout the entire basis year for which this relief is claimed; however, such
surrendering of losses may not occur where the surrendering or claimant company is
carrying on the business of insurance. The possibility of income tax consolidation has
been introduced in Maltese tax law; however, rules covering the precise terms and
conditions of such tax consolidation are still to be issued.
Transfer pricing
Malta does not operate a sophisticated transfer pricing regime. There are some general
anti-avoidance provisions and brief references to transactions at arms length. However,
the Maltese tax authorities will typically still consider it desirable that transactions
between residents and non-residents broadly adhere to the arms-length principle, that
is, prices that would have been concluded between independent enterprises. However,
no specific rules are available on the manner in which an arms-length price is to be
established.
Thin capitalisation
The Maltese tax regime does not contain thin capitalisation rules.
No anti-CFC rules or legislation are applicable in Malta.

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Foreign tax credit
A credit for foreign taxes may be applied against the Maltese tax charge (see Foreign
income in the Income determination section for more information).
Inbound investment
Investments by foreigners may be readily repatriated together with profits.

The Malta Enterprise Act and other related legislation provide a comprehensive package
of incentives for inbound investment. These incentives are reserved for enterprises
carrying on certain activities in Malta, mainly manufacturing activities. The focus is
on high-value-added activities, and approval of a projects eligibility for benefits by the
Malta Enterprise may be required. In general, eligibility does not depend on whether the
company produces for the local or for export markets. The main tax incentives include
the following:
Enterprises carrying out qualifying activities, which mainly include manufacturing
activities, qualify for investment tax credits whereby a percentage of up to 30%
(50% in the case of small-sized enterprises and 40% in the case of medium-sized
enterprises) of qualifying expenditures are off-set against the tax charge (not against
taxable income). Note that the percentages are in the process of being reduced in
terms of the EU Guidelines on Regional State Aid. Any unused credits are carried
forward and added to the credits for subsequent years. The amount carried forward is
increased by a percentage rate that is based on EU parameters as updated from time
to time.
Certain tax credits and special incentives may be available, subject to certain
conditions. These tax credits are calculated on the basis of specific expenditures
incurred by a company, while the special incentives grant tax exemptions on all or
part of the chargeable income in specifiedcircumstances.
No further tax is charged on distributions from profits that had previously been taxed
at a reduced rate. This benefit is also extended to amounts that were not subject to
tax on account of the investment allowance, investment tax credits, and specific tax
credits/special incentives.
The combination of certain tax treaties and Maltese domestic law lowers the Maltese
tax rate on certain companies receiving certain industrial assistance (i.e. mainly
assistance in terms of the Malta Enterprise Act, Business Promotion Act, and Business
Promotion Regulations) to15%.
Capital investment
In the case of qualifying companies, an investment allowance of 50% on plant and

machinery and of 20% on industrial buildings and structures may be available (subject
to certain capping rules), bringing the total allowances granted during the lifetime of
the assets up to 150% and 120%, respectively. Apart from the investment allowances,
normal allowances for wear and tear are also available on such assets (see Depreciation
and depletion in the Deductions section for more information).
International business profits
Tax benefits are available for shareholders with respect to distributions by such
companies of specified types of income. A beneficial tax regime is also available in
respect of collective investment schemes.
The Maltese fiscal implications relative to trusts vary, depending on a number of
circumstances, including: (i) the particulars of the parties involved (e.g. domicile or
residence of the trustees or beneficiaries), (ii) the act or event under review (e.g. the
settlement of property, transfers of beneficial interests, distributions of trust assets),
and (iii) the nature of the trust assets. Furthermore, in certain circumstances, tax
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transparency provisions are set out in the law, particularly so as to allow, among other
things, the application of tax exemptions that would have applied to beneficiaries if
there was no trust relationship.
An option exists for a step-up in the cost of acquisition of assets situated outside Malta
(including companies) effecting a change in domicile or residence or becoming Maltese
companies as a result of cross-border mergers.
Any income derived from the ownership, use, or lease of aircraft when such aircraft is
employed for international transport shall be deemed to arise outside Malta and hence
outside the Maltese tax base, irrespective of the country of incorporation of the aircraft
or whether the aircraft calls or operates from Malta.
Withholding taxes
Domestic corporations paying certain types of income are subject to deduction of tax-atsource obligations as follows:
Recipient
Dividends (%) (1)

0
0/15 (5)

Non-treaty
0
Treaty:
(4)
Albania
0
Australia
0
Austria
Possible imputation refund of 2.5% of
the tax suffered at company level (4)
Bahrain
0
Barbados
0
Belgium
0
Bulgaria
Possible imputation refund of 5% of
Canada
0
0
Croatia
0
Cyprus
0
Czech Republic
0
Denmark
0
Egypt
0
Estonia
0
Finland
0
France
0
Georgia
0
Germany
0
Greece
0
Guernsey
0
Hungary
0
Iceland
0
India
0
Ireland
0
Interest(%) Royalties(%)
35 (2)
0
25 (2)
0
0 (3)
0 (3)
0 (3)
0 (3)
Malta
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Recipient
Isle of Man
Israel
Italy
Jersey
Jordan
Korea, Republic of
Kuwait
Latvia
Lebanon
Libya
Lithuania
Luxembourg
Malaysia
Montenegro
Morocco
Netherlands
Norway
Pakistan
Poland
Portugal
Qatar
Romania
San Marino
Saudi Arabia
Serbia
Singapore
Slovakia
Slovenia
South Africa
Spain
Sweden
Switzerland
Syria
Tunisia
United Kingdom
United States
Uruguay
Dividends (%) (1)

0
0
0
0
0
0
Possible imputation refund of 20% to
25% of the tax suffered at company
level (4)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Interest(%) Royalties(%)
Notes
Treaties relating to international air and shipping traffic are in force with Switzerland and theUnited States.
The numbers in parentheses refer to the following notes:
1.
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No WHT is imposed on dividends distributed by Maltese companies (except for distributions of

untaxed income to resident persons other than companies, refer to Note 5) because no additional
tax is imposed on distributions other than the tax charged on the company with respect to the
distributed profits. Malta makes no distinction between portfolio and substantial holdings. Under
Maltese law, the dividend is grossed up by a figure representing the tax imposed on the companys
profits when these were originally earned thereby. Under Maltas full-imputation system of taxation of
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2.
3.
4.
5.
dividends, the corporate tax is assimilated with the shareholders personal income tax with respect to
the dividend. In the shareholders hands, the dividend is taxed at the gross amount, and the relevant
amount of corporate tax offsets the shareholders tax liability on income from all taxable sources with
no further tax liability being imposed on the shareholder in respect of such dividends.
Withholding of tax may be required only where the interest is debenture interest or interest on any
other loan advanced to a corporation for capital purposes. The WHT is, in effect, a prepayment of the
recipients final liability because a reassessment on income is made upon the submission of returns.
Any resulting overpayment is refunded.
Interest and royalty income derived by non-residents is exempt from tax in Malta as long as certain
conditions are complied with (e.g. they are not effectively connected to a PE of the recipient situated
in Malta).
On the basis that Malta operates the full-imputation system of dividends, dividends are not subject
to further tax when distributed by a company registered in Malta to a non-Maltese resident.
Furthermore, if the rate provided under the Dividends Article in the respective treaty provides for a
lower rate than the Maltese corporate tax rate incurred by the company on the respective profits
(standard corporate tax rate of 35%), then this may result in a refund of Maltese tax in terms of
Maltas full imputation system (such a refund situation may arise in the treaties with Austria, Bulgaria,
Kuwait, Libya, and Romania). In a number of treaties, the rate of deduction and of tax is reduced to
15% in the case of companies enjoying certain tax incentives. See also Note 1 with respect to Maltas
full-imputation system of taxation of dividends.
Distributions of dividends by a Maltese company where the dividend represents a distribution of
untaxed income to a resident person other than a company or a non-resident person (including a
non-resident company) who is owned and controlled, directly or indirectly, by, or who acts on behalf
of, an individual who is ordinarily resident and domiciled in Malta will be subject to a 15% WHT.
Tax administration
Taxable period
The year of assessment is a calendar year, but a company may obtain authorisation from
the Maltese Revenue to have a different year end (i.e. other than 31 December).
Tax returns
An income tax return for income earned during the previous year must be filed for every
year of assessment. The tax return for a company must be submitted by the later of nine
months following the end of the financial year or by 31 March following the year of
assessment (however, in recent years the Commissioner of Inland Revenue has provided
concessionary extensions to such statutory deadlines in the case where the tax return is
submitted electronically). Penalties are incurred on late filing of returns. The tax return
submitted by the company is a self-assessment, and the Commissioner of Inland Revenue
will not raise an assessment unless there is not agreement with the self-assessment.
Payment of tax
Companies pay tax in the currency in which their share capital is denominated.
During the basis tax year, a company is generally required to make provisional tax (PT)
payments every four months. In general, the PT payments are based on the last selfassessment filed by the company, and payments are divided into three instalments of
20%, 30%, and 50%, respectively. Any tax liability that is still due at the tax return date
after deducting all tax credits must be settled immediately with the submission of the
return. Interest at 0.75% per month is charged on any unpaidtax.
In certain instances, especially for companies with mostly international operations,
PT may not be payable, and the tax payment is normally paid on the earlier of the date
profits are distributed or 18 months after the end of the relative accountingperiod.
The employer is required to withhold income tax and social security contributions from
employees salaries and pass on such tax/contributions to the Office of Inland Revenue.
This system of WHT at source is referred to as the Final Settlement System (FSS),
and the employer is legally required to operate such a system. The salary from which
the withholding is to be effected should also include the value of any taxable fringe
benefits. There are three main categories of fringe benefits: (i) use of motor vehicles, (ii)
use of other assets including accommodation, and (iii) other benefits. The method of
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valuation in each case varies, and the employer is required to refer to the Fringe Benefits
Regulations (and also to the fringe benefits guidelines) so as to calculate the correct
value of any fringe benefits being provided to the employees and to deduct the right
amount of taxaccordingly.
Tax audit process
The Maltese Inland Revenue is entitled to raise an investigation and notify the taxpayer
in writing that the department is initiating a tax enquiry. In such investigations,
the taxpayer will typically be required to provide information and supporting
documentation in respect of queries raised by the Revenue. The taxpayer has a right to
appoint a representative on their behalf.
An assessment (as from year of assessment 1999) may be issued by the Maltese Revenue
no later than six years from the end of the respective tax year. In the event of non-full
disclosure or wilful incorrect/misleading information, the aforesaid prescription period
will not apply.
In respect of the payment of tax, additional tax, interest, or any penalty, an action may
be taken during any time from the date on which it becomes due and payable up to eight
years from that date or, where an assessment in respect thereof has been made, from the
date on which that assessment becomes final and conclusive.
We are not aware of any particular topics of focus by the Maltese tax authorities.
One might say that typically the Maltese Revenue is particularly wary with respect to
activities and transactions concerning immovable property situated in Malta.
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PwC contact
Anthony Leung Shing
PricewaterhouseCoopers Ltd.
2rd floor
HSBC Centre
18 Cybercity, Rduit 72201
Republic of Mauritius
Tel: +230 404 5071
Mauritius and the United States (US) signed a tax information exchange agreement
(TIEA) and an inter-governmental agreement (IGA) on 27 December 2013 for the
implementation of the FATCA between the two countries.

A corporation resident in Mauritius is subject to tax on its worldwide income. A nonresident corporation is liable to tax on any Mauritius-source income, subject to any
applicable tax treaty provisions. Corporations are liable to income tax on their net
income, currently at a flat rate of 15%.
Mauritius has a credit system of taxation whereby foreign tax credit is given on any
foreign-source income declared in Mauritius on which foreign tax of similar character
to Mauritian tax has been imposed. All corporate bodies incorporated in Mauritius
(except companies holding a Category 2 Global Business Licence andcertain approved
funds and associations) are subject to income tax. This applies to all associations and
other registered bodies. Income derived by local partnerships is shared and taxed in the
hands of the partners. Foreign corporations carrying on business, or having a place of
business, in Mauritius are also liable to income tax on income derived from Mauritius.
Residentsocits are not liable to corporate tax.
Socit means a socit formed under any enactment in Mauritius and includes:

a socit de fait or a socit en participation

a limited partnership
a joint venture, and
a socit or partnership formed under the law of a foreign country.
Income tax is payable on total net income before distribution at the following rates:
Entity
Global Business Category 1(GBC1) companies and offshore trusts (see below)
Freeport operatorsor Private FreeportDeveloperscarrying on Freeport activities
other than providing goods and services on local markets
Global Business Category 2(GBC2) companies (see below)
All other companies
Rate (%)
15
Exempt
Exempt
15
Global Business Category 1 (GBC1) companies are liable to tax at the rate of 15%.
However, they are entitled to a foreign tax credit equivalent to the higher of 80% of the
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Mauritius tax chargeable or the actual tax suffered abroad in respect of foreign-source
income. The maximum effective tax rate is therefore 3%.
Global Business Category 2 (GBC2) companies incorporated under the laws of Mauritius
are exempt from income tax and are not tax residents for treaty purposes. For more
information, see the Tax credits and incentives section.
Alternative minimum tax (AMT)
Companies paying or declaring dividends must pay tax either under the normal rules or
an AMT, whichever is higher.
AMT is calculated where the normal tax payable for an income year by a company is less
than 7.5% of its book profit.The AMT is the lesser of 7.5% of its book profit or 10% of
dividends declared in respect of that year.
Book profit is the profit computed in accordance with internationally accepted
accounting practices, excluding:
dividends received from resident companies
profits or loss on disposal of fixed assets, and
profits or gains or loss from sale of securities.
AMT does not apply to the following:

Companies that have not declared any dividend.

Companies that are exempt from payment of tax.
GBC1 companies.
Where the amount representing 10% of dividends declared does not exceed the
normal tax payable.
A manufacturing company or a company operating a hotel in respect of income
derived for the period 1 January 2013 to 31 December 2014.
Special levies
Banks
All banks are required to pay a special levy calculated according to their book profit
and their operating income derived during, or itschargeable income in respect of, the
preceding year. Operating income means the sum of net interest income and other
income before deducting non-interest expense.
The rates of the special levy on banks are as follows:
Year of assessment commencing
1 January 2013
1 January 2014 and 1 January 2015
1 January 2016 and subsequent years
Rates
3.4% on book profit; 1.0% on operating income
Segment A: 10% of chargeable income;
Segment B: 3.4% on book profit;
1.0% on operating income
1.7% on book profit; 0.5% on operating income
Segment A: Banking transactions with residents.

Segment B: Banking transactions with non-residents and corporations holding a Global
Business Licence.
Except where the levy is computed on chargeable income, no levyshall be paid in a year
where in the preceding year:
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the bank incurred a loss, or
the book profit of the bank did not exceed 5% of its operating income.
Telephony service providers
Providers of public fixed or mobile telecommunication networks and services (including

information and communication services, such as value added services and mobile
internet) are liable to a solidarity levy. The solidarity levy is calculated according to the
book profit and turnover for the preceding income year of the operator. The applicable
rates are as follows:
Years of assessment commencing 1 January 2013 and 1 January 2014: 5% of the book
profit and 1.5% of the turnover of the operator.
Book profit means the profit derived by an operator from all its activities and computed
in accordance with International Financial Reporting Standards (IFRS).
Corporate Social Responsibility (CSR) Fund
Every year, a company has to set up a CSR Fund equivalent to 2% of its chargeable
income of the preceding year to:
implement an approved programme by the company
implement an approved programme under the National Empowerment Foundation,
or
finance an approved non-governmental organisation (NGO).
Note that the following entities are not subject to the CSR regulations:
A company holding a GBC1 Licence under the Financial Services Act.
A bank holding a banking licence under the Banking Act, in respect of its income
derived from its banking transactions with non-residents or with corporations
holding a Global Business Licence under the Financial Services Act.
An IRS company referred to in the Investment Promotion (Real Estate Development
Scheme) Regulations 2007.
A non-resident socit, a trust, or a trustee of a unit trust scheme.
Socit means a socit formed under any enactment in Mauritius and includes:

a socit de fait or a socit en participation

a limited partnership
a joint venture, and
a socit or partnership formed under the law of a foreign country.
The CSR Fund is either disbursed by the company on approved projects/NGOs or

remitted to the Mauritius Revenue Authority (MRA) if not expensed fully. The CSR Fund
is managed by the government, and its specific objectives are to:
encourage companies to manage their own programmes, impacting the intersection
of economic with social and environmental development, and
facilitate the contribution of companies to support existing Approved National
Programmes implemented by companies, national agencies, or NGOs.
Please also note the following:
Any amount underpaid (not exceeding 20% of the Fund provided)in respect of a year
can be carried forward to the following year to form a part of the CSR Fund for that
following year, and the remaining amount should be remitted to the MRA.
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Any amount overpaid compared to the amount provided can be carried forward
(in an amount not exceeding 20% of the amount provided) and offset in equal
instalments against any amount to be remitted in respect of thefive succeeding years.
The carryforward does not apply to any excess arising in respect of more thantwo
consecutive years.
The CSR Fund in respect of a year includes any amount brought forward to that year.
The CSR Fund shall apply in all respects to a resident socit, other than a resident
socit holding a Global Business Licence under the Financial Services Act, and its net
income shall be deemed to be its chargeable income and any distribution of its net
income shall, for the purposes of the CSR Fund, be deemed to be dividends.
Local income taxes
Local income taxes levied by local administration, such as urban councils, do not exist in
Mauritius.
Corporate residence
Under domestic law, a company is resident in Mauritius for tax purposes if it is
incorporated in Mauritius or centrally managed or controlled in Mauritius.
A company not incorporated in Mauritius is resident in Mauritius only if it is centrally
managed and controlled in Mauritius.
In the absence of a tax treaty, any income derived from the following is taxed in
Mauritius:
Any business carried on wholly or partly in Mauritius.
Any contract wholly or partly performed in Mauritius.
A GBC2 company is not considered a resident in Mauritius for the purposes of double
taxation treaties (DTTs).
Under a tax treaty, a company is considered a resident in Mauritius if it is incorporated in
Mauritius or if its effective management is in Mauritius.
Generally, a PE is created under a tax treaty if one of the following criteria is met:
Branch, office, factory, workshop, or installation used for extraction of natural
resources.
Building site, construction, installation, assembly, or supervisory services where the
activity on the site lasts for a minimum of six months or 12 months, depending on the
tax treaty.
Other taxes
VAT is charged by VAT-registered entities at the standard rate of 15% on all goods and
services supplied by them in Mauritius (except those taxed at 0%), other than the
following exempt supplies (not an exhaustive list):
Bread, wheat, and cereal flours (excluding wheat flour).
Medical, hospital, and dental services, including clinical laboratory services, services
provided in a health institution, and veterinary services.
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Educational and training services provided by institutions approved by the Mauritius
Qualification Authority.
Construction of building for residential purpose, provided letter of intent relating to
an Integrated Resort Scheme was issued prior to 1 October 2006.
Sale or transfer of an immovable property, a building or part of a building, apartment,
flat, or tenement.
Banking services, except:
services provided to merchants accepting credit/debit card
services in respect of safe deposit locker, and issue and renewal of credit/debit
cards
services for keeping and maintaining customers accounts, and
services supplied by a bank holding a banking licence under Banking Act 2004 in
respect of its banking transactions with non-residents and corporations holding a
Global Business Licence.
An entity should register for VAT if turnover exceeds 4 million Mauritian rupees (MUR)
a year. However, certain service providers (e.g. accountants and auditors, attorneys and
solicitors, consultants, surveyors, valuers) should register for VAT irrespective of their
turnover.
VAT-registered persons with annual taxable turnover exceeding MUR 10 million
should submit their VAT return monthly and within 20 days following the end of the
taxable month. Otherwise, VAT return filing is completed quarterly (i.e. within 20 days
following the end of a taxable quarter). The taxable quarter is a period of three months
ending at the end of March, June, September, or December. However, where the VATregistered persons are filing pay-as-you-earn (PAYE) returns electronically under the
Income Tax Act, they are required to file the VAT returns electronically by end of the
month following the taxable period.
Customs duties
Customs duty is levied on commodities imported into Mauritius. The rate of duty
applicable is the rate in force under the Customs Tariff Act at the time the bill of entry is
validated at the Customs.
A number of exemptions and concessions are available to industries, organisations, and
persons under the Customs Tariff Act.
Excise taxes
An excise duty is levied at the time of importation on selected commodities, which

includes spirits, vehicles, and petroleum products at corresponding prescribed rates.
A levy is also chargeable on some specified excisable goods, whether the goods are for
home consumption or not, at corresponding prescribed rates.
Campement site tax
Per the Land (Duties and Taxes) Act, every owner of a campement site situated in a
specified zone is subject to an annual tax known as the campement site tax, varying
between MUR 2 to MUR 6 per square metre.
The tax shall be payable to the authorised officer on or before 31 July in every year.
Land transfer tax
Per the Land (Duties and Taxes) Act, land transfer tax is levied on the transfer of land
(excluding the value of any building thereon) and is payable by the transferor at the rate
of 5%.
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Land transfer tax is also payable at the above rates by the transferor upon transfer of
the shares of a company owning immovable properties, based on the value of shares or
property, whichever is the lower.
Leaseholdtax
Per the Land (Duties and Taxes) Act, leasehold tax is levied on the registration of a deed
of transfer of leasehold rights in state land. Both the lessor and the lessee are liable to
leasehold tax (in equal proportion) at the rate of 20% on the open market value of the
leasehold right at the time of transfer.
Registration duty
The Registration Duty Act provides for a duty at an effective rate of 5% of the sum of
money paid as a condition of an exchange of immovable property, or a division in kind of
immovable property, where such sum does not exceed MUR 100,000.
The transfer of shares of a company other than those listed on the Stock Exchange
of Mauritius or traded on the secondary market is subject to registration duty if the
company holds immovable property.
The following transactions are not subject to registration duty:
A transfer of immovable property from ascendant to descendant (or vice versa).
A transfer of property made to a company holding a letter of approval for the
implementation of a project under the Real Estate Development Scheme, provided
that the transferor holds shares in the company equivalent to at least the value of the
land transferred.
A transfer of immovable property or shares between companies forming part of a
group of companies, as defined in the Companies Act 2001.
A transfer of immovable property where such transfer takes place between companies
having the same shareholders for the sole purpose of merging.
Stamp duty
Stamp duty is levied and paid to the Registrar General on every document at the time of
registration, transcription, inscription, or erasure of inscription. Stamp duty varies from
MUR 25 to MUR 1,000.
Branch income
Tax rates on branch income are the same as on corporate profits. No tax is withheld on
the remittance of profits by way of dividend to a head office.
Inventory valuation
Inventories should be valued at the lower of historical cost or net realisable value. The
last in first out (LIFO) basis of valuation is not allowed for tax purposes.
Conformity is required between book and tax reporting. Where the revenue authority
is not satisfied that the basis of valuation is acceptable (e.g. where the LIFO basis has
been applied) it will make such adjustment as it believes is appropriate to determine the
profits arising from the business carried on.
Capital gains
There is no tax on capital gains in Mauritius. However, certain transactions are taxed as
ordinary business profit instead of capital gains. Where a transaction is in the nature of
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trade, the MRA may take the view that it is an ordinary trading transaction and assess
the gains derived as income.
Any gains derived from the sale of shares held for less than six months are classified as
trading income and are therefore taxed as ordinary income.
Gains realised from the sale of any property or interest in property acquired in the
course of a business, as part of a profit-making undertaking or scheme, are taxable as
ordinary income.
Dividend income
Companies, whether resident or not, are exempt from tax on dividends received from
resident companies.
Dividend income received from abroad by a company resident in Mauritius (non-GBC1
company) is subject to tax at the rate of 15%. Credit for any foreign tax withheld is
given, subject to documentary evidence provided to the MRA.
Dividend income received from abroad by a GBC1 company is subject to tax at an
effective rate of 3%.
Stock dividends
A resident company can distribute stock dividends (bonus shares) proportionately to all
of its shareholders. Stock dividends per se or convertible into cash are not taxable in the
hands of the recipient. Dividends in kind (i.e. other than cash or shares) are treated as
taxable benefits.
Interest income
Interest income received by resident companies (non-GBC1 companies) is liable to tax at

the rate of 15%.
A GBC1 company receiving interest income from abroad is liable to tax at the effective
rate of 3%.
Interest income payable by any person, other than banks or non-bank deposit-taking
institutions operating under the Banking Act, to non-residents and individuals is liable to
withholding tax (WHT) at the rate of 15%(final tax).
Foreign income
Resident corporations are taxed on their worldwide income, but tax credit and treaty
relief is generally available in order to avoid double taxation (see Foreign tax credits in the
Tax credits andincentives section for more information).
Undistributed income of foreign subsidiaries is not subject to any special taxation as
long as the income of the foreign subsidiary before distribution is not included in the
accounts of the local parent company. Dividends paid by the foreign subsidiary to
the local parent company will, however, be taxable to the latter, whether or not such
dividends are actually received in Mauritius.
Deductions
Depreciation
Annual allowance rates vary between 5% and 100% of base value (unless stated
otherwise), as per the following table:
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Capital expenditure incurred on

Industrial premises excluding hotels
Industrial premises dedicated to manufacturing
Commercial premises
Hotels
Plant or machinery:
Costing MUR 50,000 or less
Costing more than MUR 50,000:
Ships or aircraft
Aircraft and aircraft simulators leased by a company engaged in
aircraft leasing
Motor vehicles
Electronic and high precision machinery or equipment,
computer hardware and peripherals, and computer software
Plant and machinery (excluding passenger car) by a
manufacturing company
Other
Improvement on agricultural land for agricultural purposes
Scientific research
Green technology equipment
Landscaping and other earth works for embellishment purposes
Renovation works undertaken by hotels, restaurants, and retail outlets
Golf courses
Acquisition or improvement of any other item of a capital nature that is
subject to depreciation under the normal accounting principles
Rate of annual allowance

Percentage of
Base value
Cost
5
30
5
30
100
20
100
25
50
50
20
35
25
50
50
50
33
15
5
Tax depreciation need not conform to book depreciation. Depreciation is generally

recaptured on disposal or sale when balancing charges or allowances are computed.
Goodwill
Goodwill amortised under normal accounting principles is not allowed as an expense for
tax purposes. However, the cost amount can be capitalised, and an annual allowance of
5% of cost can be claimed.
Leasing agreements
There has been a substantial increase in leasing activity over the last decade. Where an
asset is transferred under a financial lease agreement, the lessee is entitled to capital
allowances on the value of the asset, including finance charges, as if it was an outright
sale by the lessor.
On the other hand, the lessor cannot capitalise the leased assets in its books, and no
capital allowance is claimed on the assets leased. However, the lessor is taxable on the
interest income derived from the assets leased.
There are no special rules for operating leases.
Set-up costs
Set-up costs are not allowed for tax purposes as they are considered as pre-operational
expenses.
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Interest expenses
Expenditure incurred on interest is deductible, provided it is incurred in respect of

capital employed exclusively in the production of income.
A request can be made by the tax authorities to support any claim made in respect of
interest expense by a certificate from a qualified auditor certifying that the amount of
interest claimed has been incurred on capital employed exclusively in the production of
gross income.
Interest paid by a GBC1 company to a non-resident is exempt from corporate tax.
The tax authorities may refuse to allow a deduction on expenditure incurred as interest
where it is found that:
the interest is payable to a non-resident who is not chargeable to tax on the amount of
the interest, or
the interest is not likely to be paid in cash within a reasonable time.
Bad debt
A provision for bad or doubtful debt is generally not deductible unless a court ruling has
been obtained against the debtor.
Donations/gifts, whether to charitable institutions or not, are not allowed for tax
purposes.
Fines and penalties
Fines and penalties are not allowed for tax purposes as they are expenses not exclusively
incurred for the production of gross income.
Taxes
Income taxes and foreign taxes paid are not normally deductible; however, some taxes
(e.g. municipal taxes relating to buildings, land transfer tax, irrecoverable input VAT)
are deductible.
A bank or an approved financial institution may claim as deductions any irrecoverable

loans due by a company in liquidation in respect of which winding-up procedures have
started or by a company in receivership.
Losses made in an accounting year are carried forward for a maximum of five years.
A company may claim to carry forward to an income year any loss it incurred in any
former income year, provided the company can demonstrate a 50% continuity of
shareholding at the end of those income years. Losses resulting from capital allowances
can be carried forward indefinitely. Loss carrybacks are not permitted.
Where a company takes over another company engaged in manufacturing activities, or
two or more companies engaged in manufacturing activities merge into one company,
any unrelieved loss of the acquiree may be transferred to the acquirer in the income
year in which the takeover takes place, on such conditions relating to safeguard of
employment as may be approved by the Minister of Finance.
Royalties, interest, and service fees payable to foreign affiliates are allowed as expenses,
provided they correspond to actual expenses incurred, are reasonable, and do not
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exceed what would be paid under an arms-length agreement. There are certain
limitations if the recipient of the interest is not liable to Mauritius tax. Royalties paid to
non-residents by GBC1 companies, banks out of their foreign-source income as defined
in the Income Tax Act, and trusts are tax-exempt.
Group taxation
There are no group taxation provisions in the Mauritius tax legislation other than the
transfer of losses by tax incentive companies, sugar factory operators, subsidiaries
located in the Island of Rodrigues, and manufacturing companies upon their take-over
(see Net operating losses in the Deductions section for more information).
Transfer pricing
Mauritius does not have any specific transfer pricing legislation.However, it does
contain an arms-length provision requiring transactions between related parties to
reflect a commercially objective value, which would be the amount charged for the
services were the parties not connected.
Thin capitalisation
Mauritius does not have specific thin capitalisation legislation; however, it does have
other anti-avoidance provisions as described below:
If a company has issued debentures to each of its shareholders, subject to the number,
the nominal value, or paid-up value of the shares in that company, any interest paid
on debentures and claimed as a deductible expense may be disallowed and treated as
dividend.

Global Business Category 1 and 2 companies
A GBC1 company can trade with a Mauritian resident as well as non-residents.

Transactions made with a Mauritian resident are taxed at the rate of 15%, whereas
transactions with non-residents are taxed at an effective tax rate of 3%.
The registration and application of GBC1 companies should be submitted to the
Financial Services Commission (FSC) through a duly licensed Management Company on
a prescribed form accompanied by the following:
The certified supporting documents.
The applicable processing fees and relevant fees.
A GBC1 company is tax resident in Mauritius and may apply for a Tax Residence
Certificate (TRC) from the Director General of the MRA should this be required by the
tax authorities in the jurisdiction in which the company is conducting its business.
Investors may benefit from an extensive network of double taxation agreements (DTAs).
Entities holding a GBC1 Licence wishing to avail to the benefits of a tax treaty must
obtain a TRC issued by the MRA.
A GBC1 company is encouraged to have more substance in Mauritius by ascertaining the
following:
It has at least two directors, resident in Mauritius, of sufficient calibre to exercise
independence of mind and judgment.
It maintains, at all times, its principal bank account in Mauritius.
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It keeps and maintains, at all times, its accounting records at its registered office in
Mauritius.
It prepares, or proposes to prepare, its statutory financial statements and causes or
proposes to have such financial statements to be audited in Mauritius.
In addition to the requirements mentioned above, when determining whether a
corporation is managed and controlled from Mauritius, the Commission shall also
consider whether a corporation meets at least one of the following criteria:
The corporation has or shall have office premises in Mauritius.
The corporation employs or shall employ on a full time basis, at the administrative/
technical level, at least one person who shall be resident in Mauritius.
The corporations constitution contains a clause whereby all disputes arising out of
the constitution shall be resolved by way of arbitration in Mauritius.
The corporation holds, or is expected to hold, within the next 12 months, assets
(excluding cash held in a bank account or shares/interests in another corporation
holding a Global Business Licence) that are worth at least 100,000 United States
dollars (USD) in Mauritius.
The corporations shares are listed on a securities exchange licensed by the
Commission.
The corporation has, or is expected to have, a yearly expenditure in Mauritius that
can be reasonably expected from any similar corporation that is controlled and
managed from Mauritius.
The above will have to be complied with by GBC1s by 1 January 2015.
A GBC1 company can apply for a TRC to show substance in Mauritius.The TRC is
generally issued within a period of seven days from the date of application, provided
that the person has submitted the return required under the Income Tax Act 1995.
A GBC2 company is required to have, at all times, a registered agent in Mauritius. Only
a management company shall act as the registered agent of a company holding a GBC2
Licence. A GBC2 company is defined as a resident corporation conducting business
outside Mauritius and can engage in activities other than the following:
Banking.
Financial services.
Holding, managing, or otherwise dealing with a collective investment fund or scheme
as a professional functionary.
Providing registered office facilities, nominee services, directorship services,
secretarial services, or other services for corporations.
Providing trusteeship services by way of business.
An applicant for a GBC2 Licence must submit the following forms/documents to the FSC
through a management company:
The application form, duly filled in and signed.
The certified supporting documents.
The applicable processing fees and relevant fees.
The fees payable to the FSC for registering a GBC1 and a GBC2 company are as follows:
Fee
Processing
Annual Licensing
GBC1 (USD)
500
1,750
GBC2 (USD)
100
235*
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* This amount excludes the annual registration fee of USD 65, or such other fee as the Registrar of
Companies may determine, payable to the Registrar of Companies.
The TRC is renewable on an annual basis and issued in two formats, one specific to India
and one general for any other country.
A GBC2 company is a limited liability company incorporated in Mauritius. However,
GBC2 companies are exempt from Mauritius tax and are not required to file tax returns.
GBC2 companies are therefore not able to access the tax treaty network of Mauritius.
Companies in the Freeport zone
The income of a Freeport operator derived from Freeport activities is exempt from
income tax, except income that is derived from goods or services provided on the local
market.
Income tax exemption for vessel owners
Owners of foreign vessels registered in Mauritius are exempt from income tax on
income derived from the operation of such vessels, including any income derived from
the chartering of such vessels. Owners of local vessels registered in Mauritius are also
exempt to the extent that the income is derived from deep-sea international trade only.
Foreign tax credits
Generally, double taxation is avoided by means of unilateral credit relief for foreign
tax paid. The net amount of foreign income that has borne tax is grossed up at the
foreign rate of tax, and the foreign tax paid is allowed as a credit against the Mauritius
tax payable. However, the tax credit cannot exceed the Mauritius tax referable to the
relevant foreign income. Unused credit is not refunded.
Regarding foreign income derived from countries with which Mauritius has treaties
for the avoidance of double taxation, a tax credit is given for foreign tax in accordance
with the treaties. There are clauses in the double taxation conventions that provide that
income arising from certain specified foreign sources is to be exempt from Mauritius tax.
Mauritius has signed double taxation conventions with 37 countries (see the Withholding
taxes section for a listing).
The following treaties await ratification: Congo, Egypt, Gabon, Guernsey, Kenya,
Nigeria, Russia, and Rwanda.
The following treaties await signature: Burkina Faso, Ghana, Morocco, and Malta.
The following treaties are being negotiated: Algeria, Canada, Cape Verde, Czech
Republic, Greece, Hong Kong, Malawi, Montenegro, Portugal, Republic of Iran, Saudi
Arabia, St. Kittsand Nevis, Tanzania, Vietnam, and Yemen.
A GBC1 company may, in the absence of evidence of payment of foreign tax, claim as tax
credit (presumed tax credit) an amount equal to 80% of the Mauritius tax chargeable
on the foreign-source income. The presumed tax credit may also be claimed by a bank
against the tax payable on income derived from banking transactions with non-residents
and with GBC1 and GBC2 companies.
In the case of foreign dividends, the general tax credit includes foreign tax imposed
on the profits out of which the dividends are paid (underlying tax), provided that the
shareholding in the foreign company is at least 5%.
Mauritius also allows a tax-sparing credit under its local tax legislation.
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Withholding taxes
There is no WHT in Mauritius for payments made by GBC companies to non-residents
not carrying out any business in Mauritius. There is no WHT on dividends received
from resident companies. The table below shows the rates of WHT applicable for the
following payments:
Payment
Interest payable by any persons (other than banks or non-bank deposit-taking
institutions operating under the Banking Act) to individuals and non-resident
companies
Royalties payable to:
Resident
Non-resident
Rent
Payments to contractors and sub-contractors
Payments to providers of services (architect, attorney/solicitors, barrister, dentist,
doctor, engineer, land surveyor, legal consultant, project manager in the construction
industry, quantity surveyor, and property valuer)
Payment made by ministry, government department, local authority, statutory body, or
the Rodrigues Regional Assembly on contracts, other than payments to contractors
and subcontractors and payments to providers of services as specified at point
above:
For the procurement of goods and services under a single contract, where the
payment exceeds MUR 300,000
For the procurement of goods under a contract, where the payment exceeds MUR
100,000
For the procurement of services under a contract, where the payment exceeds
MUR 30,000 rupees
Payments made to the owner of an immovable property or ones agent
Payments made to a non-resident for any services rendered in Mauritius
WHT (%)
15
10
15
5
0.75
3
1
1
3
5
10
Reduced WHT rates with treaty countries are provided below.

Recipient
Bangladesh, Peoples Republic of
Barbados
Belgium
Botswana
China
Croatia
Cyprus
France
Germany
India
Italy
Kuwait
Lesotho
Luxembourg
Madagascar
Malaysia
Mozambique
Namibia
Dividends (%)
10
5
5/10 (2)
5/10 (2)
5
0
0
5/15 (3)
5/15 (3)
5/15 (3)
5/15 (3)
0
10
5/10 (2)
5/10 (2)
5/15 (3)
8/10/15 (4)
5/10 (2)
Interest (%)
(1)
5
10
12
10
0
0
(1)
0
(1)
(1)
0
10
0
10
15
8
10
Royalties (%)
(1)
5
0
12.5
10
0
0
15
10
15
15
10
10
0
5
15
5
5
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Recipient
Nepal
Oman
Pakistan
Qatar
Rwanda
Senegal
Seychelles
Singapore
South Africa
Sri Lanka
Swaziland
Sweden
Thailand
Tunisia
Uganda
United Kingdom
Zambia
Zimbabwe
Dividends (%)
5/10/15 (5)
0
10
0
0
0
0
0
5/15 (3)
10/15 (6)
7.5
0/15 (7)
10
0
10
0
10/15
5/15 (3)
10/20
Interest (%)
10/15
0
10
0
0
0
0
0
0
10
5
0
10/15
2.5
10
0
(1)
10
10
Royalties (%)
15
0
12.5
5
0
0
0
0
0
10
7.5
0
5/15
2.5
10
0
15
5
15
Notes
1.
2.
3.
4.
5.
6.
7.
Same rate as under domestic law.

of the gross amount of the dividends in all other cases.
of the gross amount of the dividends in all other cases.
8% of the gross amount of the dividends if the beneficial owner is a company that directly holds
at least 25% of the capital of the company paying the dividends; 10% of the gross amount of the
dividends if the beneficial owner is a company that holds less than 25% of the capital of the company
paying the dividends; 15% of the gross amount of the dividends in all other cases.
dividends if the beneficial owner is a company that directly holds at least 10% of the capital of the
company paying the dividends; 15% of the gross amount of the dividends in all other cases.
dividends in all other cases.
If the beneficial owner of the dividends is a resident of the other contracting state, the tax so charged
shall not exceed 15% of the gross amount of the dividends. However, if the beneficial owner is a
company (other than a partnership) that holds at least 10% of the voting power of the company
paying the dividends, the dividends shall be exempt from tax in the contracting state of which the
company paying the dividends is a resident.
Tax administration
Taxable period
Companies are assessed for a year beginning 1 January and ending 31 December on
their income for the preceding year ending 31 December. Where a company closes its
accounts at a date other than 31 December, it may elect to adopt as a basis year the
accounting year ending in the 12-month period preceding the year of assessment.
Tax returns
Every company, both taxpayer and non-taxpayer, must file a return of its income on
the basis of the income year preceding the year of assessment. The return must be filed
within six months of the financial year-end.
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Payment of tax
Any tax due should be paid when the return is filed and within the six months deadline.
Advance Payment System (APS)
Every company (except non-resident trusts and non-resident partnerships) having gross
income exceeding MUR 4 million or that has taxable income is required to submit an
APS statement and pay any tax for the quarter immediately following the end of the
accounting year.
Tax under APS can be calculated based on the following:
25% oftaxable income for the accounting year immediately preceding the
commencement of that quarter or
the actualtaxable income of the current quarter.
The APS statement shall be filed and tax (if any) shall be payable within three months
from the end of the quarter.
Penalties
If timely payment is not made, a penalty representing 5% of the amount of tax due is
payable. In addition, interest at the rate of 1% of the tax unpaid for each month or part
of a month is payable until the tax is paid. A penalty of MUR 2,000 for each month or
part of a month is also prescribed for failure to file a return, subject to a maximum of
MUR 20,000.
Tax audit process
Tax audits are carried out on a sample basis throughout the year. Generally, the audits
are fairly detailed, but more protracted enquiries are carried out into cases where fraud
is suspected.
While there is no statutory time limit for recovering tax already assessed, the Director
General is barred from making an assessment for a period beyond four years preceding
the current tax year.
Other issues
Mauritius is among those countries that have signified their intention of concluding an
IGA with the United States since the latter would enhance cooperation and the exchange
of information framework in place between these countries and the United States.
The Mauritius Bankers Association (MBA) has addressed the common, high-level issues
that MBA members would face and lays down in an industry position paper, addressed
to the Ministry of Finance and the Bank of Mauritius, some key recommendations from
a legal and regulatory standpoint to ensure a smooth implementation of the FATCA
provisions.
Mauritius and the United States signed a TIEA and an IGA on 27 December 2013 for the
implementation of the FATCA between the two countries.
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PwC contact
Mauricio Hurtado
Mariano Escobedo No. 573
Col. Rincn del Bosque
CP 11580 Mxico, DF
Mxico
Tel: +52 55 5263 6045
2014 Mexican tax reform
In January 2014, the 2014 Mexican tax reform package, which was published on 11
December 2013 in the Mexican Official Gazette, entered into force.
Some of the tax reform provisions that are most relevant to multinationals with
connections to Mexico are as follows:
Income tax
The income tax law in force until December 2013 was repealed. The most salient aspects
of the new income tax law are as follows:
Maintains the 30% corporate income tax (CIT) rate, eliminating the scheduled
reduction to 29% in 2014 and to 28% in 2015.
Does not allow a deduction for technical assistance, interest, or royalty payments
(including those related to machinery and equipment leases) when paid to a foreign
entity that controls or is controlled by the Mexican entity and (i) when and to the
extent that the recipient is a transparent entity whose owner or owners are not
subject to tax in its jurisdiction, (ii) the recipient country of tax residence considers
the payment to be disregarded, or (iii) the recipient does not include the payment as
part of its taxable income under its jurisdictions rules.
Does not allow a deduction for payments to residents of tax haven jurisdictions (as
defined by Mexican law), unless supported by transfer pricing documentation.
Does not allow a deduction for expenses that are also deducted by another related
entity, unless the corresponding income is included in the related entitys taxable
income in the same or in a subsequent tax year.
Gives the Mexican tax authorities the ability to require that the foreign related party
provide a sworn statement through a legal representative that the item of income for
which a treaty benefit is claimed would otherwise be subject to double taxation.
Limits (at 53%) deductions for tax-exempt salaries and benefits, as well as for
contributions to pension and retirement plans. If the employer reduces the
employees benefit package, then the deduction for tax-exempt salaries and benefits
will be limited to 47%.
Increases from one to four years the minimum leasing period for applying the income
tax exemption to non-resident pension funds on the sale of real estate or shares, 50%
or more of whose value is comprised of real estate.
Eliminates the special tax treatment currently applicable to Real Estate Investment
Companies (REICs or SIBRAS).
Repeals the provision that allows companies to defer income recognition on
instalment sales.
Maintains the deduction for estimated expenses related to taxable income from real
estate or urban development projects, manufacturing of fixed assets requiring a long
manufacturing process, and rendering time-sharing services.
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Maintains special treatment, with some modifications, for persons exclusively
engaged in agriculture, livestock, forestry, and fisheries activities.
Eliminates the option to depreciate certain assets on an accelerated basis. The 100%
rate deduction remains for investments on machinery and equipment for energy
generation from renewable sources and for adaptations intended to facilitate access
to the taxpayers facilities for the physically disabled.
Foreign residents
The new income tax law also:

Increases the top tax bracket rate for individuals from 30% to 35%. This is also the
top withholding tax (WHT) rate that applies to most Mexican-sourced payments
made to non-residents. Note, however, that tax treaties may allow for reduced
withholding rates if the taxpayer meets certain requirements.
Imposes a 10% income tax on capital gains realised on the sale of shares (including
certificates of participation in trusts, ownership interest, etc.) listed on the Mexican
stock exchange. Such gains were exempt from tax until 2013. The applicable income
tax on the gain obtained must be withheld by the broker/intermediary; however,
there is no obligation to make this withholding if the investor is a resident in a
country with which Mexico has signed a tax treaty to avoid double taxation and
provides the broker with a sworn oath statement explaining said situation and
providing their registration number or tax ID issued by the proper authorities in their
country. If this is not provided, the income tax must be withheld.
Imposes a new 10% income tax withholding on dividends distributed to resident
individuals or foreign residents (including foreign corporations). This new WHT
applies as of 2014, but not to distributions of profits subject to corporate-level tax
prior to 2014. This provides an opportunity to apply reduced withholding rates under
an applicable tax treaty.
Financial service entities
For financial service entities, the new income tax law:

maintains the reserves deduction for insurance and bonding companies
eliminates the contingency reserves deduction for banking institutions, providing a
specific procedure to reflect the pending tax effects at December 2013, and
does not change the interest regime or the 4.9% income tax withholding rate
applicable to interest paid to banks that are resident in countries with which Mexico
has signed a tax treaty.
Maquiladora regime
The new law modifies the definition of Maquila operation. Revenues associated with
productive activities must now be derived solely from Maquila activities, as provided
under the IMMEX decree. Additionally, the new law includes rules on machinery and
equipment ownership that are consistent with the current IMMEX decree definition.
Repealing the income tax and flat tax laws eliminates the tax reduction benefits granted
by Presidential decrees. This has the effect of increasing the effective income tax rate on
Maquila profits from 17.5% to 30%.
Two transfer pricing methods that were applicable to Maquilas were eliminated, leaving
only the safe harbour and advance pricing agreement (APA) alternatives.
Temporary imports under IMMEX and similar programs will be subject to the 16% value
added tax (VAT) rate; however, such imports will qualify for VAT relief when obtaining
special certification from the tax authorities related to the adequate control of such
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imports. The new law defers the 16% VAT on such imports for one year from the release
date of the certification process rules.
The new law taxes sales of goods located in Mexico, between a foreign resident and a
Maquiladora, at the regular 16% VAT rate.
Maquiladoras will no longer withhold VAT on domestic suppliers. This could have a
negative impact on their cash flow.
Foreign residents with shelter maquiladora operations in Mexico will continue to have
permanent establishment (PE) protection, but this protection is limited to four years.
Maquiladora entities will not qualify for the new simplified consolidation taxation
regime.
Presidential Decree for Maquiladora industry
On 26 December 2013, a Presidential Decree was published in Mexicos Official Gazette,

and grants the following benefits to the Maquiladora industry:
An additional deduction for 47% of tax-exempt benefits paid to employees involved
in the relevant Maquila operation (starting in 2014, the Mexican tax law limits this
deduction to 53% of tax-exempt benefits). Maquiladoras applying this benefit should
inform the Mexican tax authorities of the amount of the benefit granted, and how it
was determined, in a report due March of each taxable year.
For Maquiladoras operating under the grandfathering rule applicable to
Maquiladoras established prior to 2010 (i.e. currently not obligated to comply with
the rule requiring that 30% or more of the machinery and equipment used in the
Maquila operation be owned by the foreign principal), the decree establishes a twoyear period to comply with this requirement on a prospective basis.
For sales of goods that are located in Mexico between a foreign resident and a
Maquiladora that are taxed at the 16% VAT rate, the Maquiladora may credit the VAT
in the same month of the saleif certain requirements are met. Starting in 2015, this
benefit will applyif a certification is secured.
Additionally, on 30 December 2013, the Mexican tax authorities published new
Miscellaneous Tax Regulations (MTR). Among other rules, the MTR include further
guidance in connection with the Maquiladora industry, as follows:
The new Mexican income tax law establishes that revenues associated with
productive activities must derive solely from Maquila activities. In this regard, this
rule provides that such revenues may also include those obtained for other Maquila
services rendered to related parties resident abroad and other miscellaneous income,
provided that the Maquilas books clearly identify every type of income and related
expenses.
Income relating to the manufacture and distribution of finished goods for resale
cannot be considered as solely derived from Maquila manufacturing activities, but
enforcement of this rule will be deferred until 1 July 2014. Therefore, until such date,
Maquiladoras may consider that their total income (including income relating to the
manufacture and distribution of finished goods for resale) qualifies as income derived
solely from the Maquila activities provided that its books clearly identify each type of
activity and related income. Entities in this situation need to discontinue or spin off
the non-Maquila activities by 1 July 2014.
A transitory regulation also provides that a foreign principal may still apply safe
harbour protection relating to PE immunity contemplated in the 2013 Income Tax
Law, provided that the foreign principal is resident in a country with which Mexico
has a double tax treaty (DTT) and the principal is fully compliant with any treaty
requirements applicable to its Mexican activities.
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Mining entities
The new law eliminates the 100% tax deduction for a mining companys pre-operating
expenses. The reform also includes:
a mining royalty at the rate of 7.5% on a profit calculated by subtracting certain
allowed deductions from gross earnings generated by the sales of extracting
activities, and
an additional mining fee equal to 0.5% of gross earnings from the sale of gold, silver,
and platinum.
Tax consolidation
The new law repeals the previous tax consolidation regime. The new law provides three
options for computing the deferred tax, which will be paid as follows:
Deferred tax through 2007 will be paid in accordance with the provisions contained
in the 2013 Income Tax Law.
Deferred tax from 2008 to 2013 will be paid over a five-year period.
Groups that have been consolidating for less than five years may continue consolidating
until the relevant five-year period expires. Taxpayers may elect to apply for a new
simplified tax consolidation regime. This regime would allow a three-year income tax
deferral period, payable by each of the entities integrating the group.
The reforms to the VAT law:

increase the VAT rate applicable in the border area from 11% to 16%
maintain the VAT exemption on mortgage interest, and
apply the 16% VAT rate on hotel and related services to foreign tourists who attend
conferences in Mexico (previously 0% VAT rated). A Presidential Decree published
on 26 December 2013 grants a tax incentive equal to the VAT on such activities, so
that, provided the requirements of the Decree are met, such activities would not be
affected by the 16% VAT rate.
Excise tax
The new law applies an excise tax to soft drinks at 1 Mexican peso (MXN) per litre and to
junk food at an 8% rate.
Flat tax and tax on cash deposits
The tax reform package repeals the flat tax and the tax on cash deposits.
Dictamen fiscal
The option to obtain a statutory tax audit report (dictamen fiscal) remains, but is now
only available to those taxpayers meeting any of the following conditions in the prior
calendar year:
Taxable gross income is greater than MXN 100 million.
Gross assets are greater than MXN 79 million.
The number of employees is at least 300.

Federal corporate income tax (CIT)
CIT applies to Mexican resident taxpayers income from worldwide sources, as well as to
foreign residents on the income attributed to their PEs located in Mexico.
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According to the 2014 Mexican tax reform, the federal CIT rate remains at 30%,
eliminating the scheduled reduction to 29% in 2014 and to 28% in 2015.
All corporate entities, including associations of a civil nature, branches, etc., are subject
to the tax rules applicable to Mexican corporations (unless specifically ruled out, such as
not-for-profit organisations).
Taxpayers engaged exclusively in agriculture, livestock, fishing, and forestry activities
are subject to a reduction of 30% of their tax liability.
Provisions to recognise the effects of inflation for tax purposes in the areas of monetary
assets and liabilities (annual monetary adjustment) and depreciable assets are provided
in the income tax law, even though recent inflation rates have been decreasing.
Once a corporation has paid its CIT, after-tax earnings (i.e. earnings arising from the
after-tax earnings account, Cuenta de Utilidad Fiscal Neta or CUFIN) may be distributed
to the shareholders with no tax charge at the corporate level. Beginning in 2014, a new
WHT on dividend payments to resident individuals or foreign residents (including
foreign corporations) applies at the rate of 10%; this new WHT does not apply to
distributions of profits subject to corporate-level tax prior to 2014. If a corporation
makes a distribution out of earnings that for any reason have not been subject to
CIT, such as distributions of book earnings (i.e. not yet recognised for tax purposes
in Mexico), the corporation will also be subject to CIT on the grossed-up distributed
earnings (gross-up factor is 1.4286).
Tax paid on dividends distributed in excess of CUFIN can be credited against the CIT of
the year or in the two fiscal years following the year in which the tax on the non-CUFIN
distributions was paid. The CUFIN of the tax years in which the credit is applied must be
reduced by an amount equal to the grossed-up dividend distribution.
Federal flat tax
The 2014 Mexican tax reform repealed the flat tax law. The flat tax was in force from
2008 to 2013.
Since Mexican taxpayers are still subject to the filing of the 2013 flat tax return,the
followingis a summary of the flat tax provisions:
Flat tax applied to Mexican resident taxpayers income from worldwide sources, as well
as to foreign residents on the income attributed to their PEs located in Mexico. The flat
tax rate was 17.5% and was applied to the flat tax base.
In general, the flat tax base was the excess of income actually collected relating to: (i)
the sale or disposal of property, (ii) the provision of independent services, and (iii) the
granting of temporary use or enjoyment of assets (i.e. rental income and unrelated party
royalty income) over amounts actually paid for: (i) the acquisition of assets, (ii) the
receipt of independent services, and (iii) the temporary use or enjoyment of assets, as
well as certain (iv) other cash expenses, with the exceptions noted below. Even though
there were no tax losses for flat tax purposes, a tax credit (with similar results to the
application of net operating losses) was available where flat tax deductions exceeded
income in a fiscal year, provided certain conditions were met. This credit could be used
against flat tax liabilities for the subsequent ten years.
Salaries and wages, employer contributions to the social security system, non-taxable
employee benefits, most interest income, and royalties received from related parties for
the temporary use or enjoyment of intangible assets were not included within taxable
income under the flat tax legislation. Accordingly, payments in respect of these types
of expenses were non-deductible items. Nevertheless, the employer could obtain a flat
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tax credit on taxable wages paid and social security contributions made, which was
generally equivalent to deducting these two items.
Certain taxpayers were exempt from flat tax.
The flat tax operated as a supplemental tax to CIT, to the extent the flat tax due was
higher than the income tax due for the fiscal year. Hence, the initial flat tax triggered
was reduced by a credit for an amount equal to CIT of the fiscal year plus any CIT on
distributions exceeding the balance of the after-tax earnings account (i.e. non-CUFIN
distributions).
Flat tax was computed on a cash-flow basis (with certain exceptions) and determined
per calendar year. Nevertheless, advanced monthly flat tax payments were made based
on the year-to-date flat tax gross income, minus the authorised deductions in that same
period.
Depreciation and amortisation were not deductible for flat tax purposes since the
purchase price paid on the acquisition of fixed assets was a deductible item.
Maquiladoras (i.e. foreign-owned companies that process and/or assemble temporarily
imported materials and parts for re-exporting) were subject to specific provisions that
could significantly reduce their effective flat tax rate, to the extent certain conditions
were satisfied. Financial sector entities were subject to flat tax on their financing
intermediation margin, less certain cash expenses paid, pursuant to specific rules
applicable to these entities in the flat tax law.
Local income tax
There are no state taxes on corporate net income.
Corporate residence
The federal tax code provides that corporations are deemed residents in Mexico if the
principal centre of administration or the effective place of management is located in
Mexico. A specific definition of tax resident in any tax treaty overrides domestic law
definitions, provided the taxpayer is eligible to apply the treaty.
When a company ceases to be a Mexican resident in terms of the Mexican federal tax
code or any tax treaty, it is deemed to be liquidated for tax purposes. In such cases, a
notification is required at least 15 days before the change, and the CIT return must be
filed with the Mexican tax authorities within 15 working days following the date on
which the change of tax residency takes place.
The income tax law considers a PE to be any place in Mexico where business activities or
services are carried out or rendered by non-residents, such as agencies, offices, mining
exploration sites, or any other place of exploration, extraction, or exploitation of natural
resources, regardless of the length of time involved.
A foreign insurance company could also be considered as having a PE when it engages
in activities consisting of insuring risk or collecting premiums (with the exception of
reinsurance activities) in Mexico through a party other than an independent agent.
Sites used for display, storage, or purchasing facilities; inventories imported in-bond
to be processed by a third party; short-term construction services; and offices to carry
out auxiliary or preliminary activities and information gathering or scientific research
are not considered to create a PE in Mexico. Non-residents may also keep merchandise
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in bonded warehouses (including merchandise delivered for importation into Mexico)
without being considered as having a PE.
A non-resident is not considered to have a PE in Mexico as a result of the legal or
economic relationships maintained with companies carrying out certain inventory
processing activities (i.e. Maquiladoras) that process goods or merchandise maintained
in Mexico by the non-resident by using assets provided by the non-resident or any
related party, as long as certain requirements are met. The requirements include
the conditions that the non-resident be resident in a tax treaty country and that the
Maquiladora complies with the transfer pricing provisions provided in the Mexican
income tax law.
Maquila operations are generally defined as those with the following characteristics:
Raw materials are supplied by a foreign resident (with which a Maquila contract is
in place) and are temporarily imported to be processed, transformed, or repaired
and are subsequently exported, including, for these purposes, virtual import-export
operations.
The Maquila is also permitted to import goods in accordance with the permanent
importation regime. Additionally, local purchases are allowed, as long as such
goods are consumed in production and/or exported with the temporarily-imported
inventory.
The processing, transformation, or repair of goods must be performed with
temporarily-imported machinery and equipment (M&E) that is the property of the
foreign principal. In this regard, the foreign principal must own at least 30% of such
M&E. It is important to mention that this M&E may not have been previously owned
by the Maquila or by any other Mexican related party.
Companies that were operating under an IMMEX program (Maquiladoras/in-bond
processing companies) prior to 31 December 2009 (grandfathering rule) were not
obligated to comply with the rule requiring that 30% or more of the M&E used in the
Maquila operation be owned by the foreign principal; however, beginning in 2014, all
Maquiladoras are subject to the new Maquiladora rules. In this regard, a Presidential
Decree published on 30 December 2013 establishes a two-year period for Maquiladoras
operating under the grandfathering rule to comply with this requirement on a
prospective basis.
Parties resident abroad and engaged in Maquila operations through shelter Maquila
companies may not be considered as creating a PE in Mexico when certain requirements
are met and certain information is provided to the Mexican Tax Administration in
relation to the gross revenues earned and income taxes paid by its non-Mexican related
party. This PE protection is limited to four years (until 2013, there was no limit period).
A definition of PE in any tax treaty overrides domestic law definitions where the
taxpayer is eligible to apply the corresponding tax treaty.
Other taxes
VAT is payable at the general rate of 16% on sales of goods and services, as well as
on lease payments and imports of goods and services (until 2013, an11% VAT rate
generally applied in the border zones, except on the sale of construction and developed
real estate, which was subject to the general rate). The sale of medicines, as well as the
sale of most food products, is zero-rated. The principal VAT-exempt transactions are
the sale of land, credit instruments (including equity shares), residential construction,
interest paid by banks, medical services, education, salaries and wages, rentals of
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residential property, and the sale of non-amortisable participation certificates on real
estate investment trusts (REITs), provided specific requirements are satisfied.
Although the 2014 VAT law provides that temporary imports under IMMEX and similar
programs will be subject to the general 16% VAT rate (VAT-exempt until 2013), such
imports will qualify for VAT relief when obtaining special certification from the tax
authorities related to the adequate control of such imports. The new law defers the 16%
VAT on such imports for one year from the release date of the certification process rules.
The 2014 VAT law also taxes sales in Mexico of temporarily imported goods by nonresidents to (i) other non-residents, (ii) Maquiladoras, or (iii) companies in the
automotive industry (VAT-exempt, under certain circumstances, until 2013).
The 0% VAT rate, which generally means that no VAT is payable, is applicable to
a substantial number of transactions, including the sale of books, magazines, and
newspapers published by the taxpayer, the exportation of goods and certain services
(including some Maquiladora activities intended for exportation), the sale of certain
basic foodstuffs, agricultural goods and services, sales and rentals of farm machinery
and equipment, and other specified transactions.
Taxes paid by business enterprises on their purchases and expenses related to VATable
activities (including activities subject to the 0% VAT rate) may usually be credited
against their liability for VAT they collect from customers on their own sales, services
rendered, etc. The input VAT credit on goods or services of a general nature, or those
not specially identified with either taxable or exempt activities for VAT purposes,
is computed based on a VAT ratio proportional to the VATable versus VAT activities
(taxable and exempt) carried out by the taxpayer. Creditable VAT paid on purchases and
expenses in excess of VAT collected from customers is recoverable via either a refund,
offset against other Federal taxes, or a credit against subsequent VAT liabilities.
VAT is a cash basis tax, with few exceptions (e.g. VAT on some types of interest must
be paid on an accrued basis); consequently, only the receipt of payment for goods or
services triggers the output VAT liability, and an input VAT credit may be claimed only
when the taxpayer pays VAT to its providers of goods and services. VAT is calculated for
each calendar month as a final tax. In addition, VAT overpayments may be used to offset
the tax liabilities arising from other federal taxes.
VAT must generally be withheld by Mexican residents acquiring or leasing tangible
goods from non-residents if such foreign residents do not have a PE in the country to
which income is attributed. Mexican business entities are required to withhold VAT
on payments to individuals or entities for services consisting of ground transportation
of goods. Mexican corporations must also withhold VAT on commissions paid to
individuals, as well as on independent services rendered by Mexican individuals, and on
tangible goods leased from individuals.
An information return related to the VATable activities carried out by the taxpayer must
be filed on a monthly basis. Definitive monthly VAT payments are required by the 17th
day of the immediately following month.
Mexicos commercial conditions provide an excellent business and investment

opportunity. Mexico is a member of the World Trade Organization (WTO), the AsiaPacific Economic Cooperation Mechanism (APEC), and the Organisation for Economic
Co-operation and Development (OECD).
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Mexico lies in a strategic geographical location for international trade, sharing borders
with the United States (US), while facing Europe and Asia, and representing an easy
entry to the rest of Latin America.
Mexico has signed 12 Free Trade Agreements (FTAs), which provide for preferential
duty rates on foreign trade operations with 44 countries. FTAs signed by Mexico include
the North American Free Trade Agreement (NAFTA) and agreements with Colombia;
Costa Rica; Nicaragua; Chile; the European Union (EU); Israel; Honduras, Guatemala,
and El Salvador (the Northern Triangle FTA); the European Free Trade Association
(EFTA); Uruguay; and Japan. Most FTAs provide 0% duty rates for almost 90% of the
goods to be imported.
General Import Duty rates range from 0% to 35%, but most imports fall within the
range of 3% to 20% (exceptionally, certain food products, shoes, and textiles pay higher
duties).
In general, temporary imports are exempt from customs duties (except for fixed assets in
certain transactions) and VAT payments.
Excise tax
The excise tax law (Impuesto Especial Sobre Produccin y Servicios or IEPS) levies
substantial federal excise rates on the importation and/or sale of certain taxable items,
such as gasoline (% variable), beer (26.5%), wine (26.5% to 53%), spirits (53%), and
cigarettes and other tobacco products (160% plus an additional quota), and on certain
services related to these activities, such as commission, mediation, and distribution of
excise taxable items, as well as services for raffles and gambling (30%). Excise tax is also
applicable to certain telecommunications services (3%).
The 2014 excise tax law applies an excise tax to soft drinks at MXN 1 per litre and to
junk food at an 8% rate.
In general terms, goods are exempt from IEPS when exported. Consequently, the input
IEPS paid by exporters on their purchases is not creditable, and that tax becomes an
additional cost.
IEPS is payable (output tax) and creditable (input tax) on a cash basis. It is payable on
the date that the charge invoiced is collected from the client and can be credited when
the respective payment is made to the supplier. On imports, IEPS is creditable when paid
at the customs offices.
In certain cases, the IEPS legislation allows taxpayers that are not subject to this tax to
credit IEPS paid on the acquisition and/or the importation of certain goods.
There is a specific procedure to calculate the tax for beer producers, bottlers, and
importers; however, the tax can never be lower than 26.5%.
Among other obligations, IEPS taxpayers must file information regarding their 50 main
clients and suppliers before the Mexican Tax Administration on a quarterly basis.
Property taxes
Annual taxes on real property are levied by the Federal District and all the states at
widely varying rates applied to values shown in the property tax records. Assessed
values have increased substantially recently in the Federal District and some other areas.
Title transfer taxes
The transfer of real estate is, almost without exception, subject to a variable transfer tax
at rates averaging 3% to 4%. The tax is levied by most states and the Federal District.
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Stamp taxes
There are no stamp taxes in Mexico.
Compulsory profit sharing
Although not a tax, every business unit with employees (irrespective of the type
of organisation) is required to distribute a portion of its annual profits among all
employees, except general directors and managers. The amount distributable to the
employees is 10% of an adjusted taxable income. The main differences between the
taxable income and the profit sharing basis are the deductible profit sharing actually
paid, which is not deductible for profit sharing purposes; the non-deductible tax-exempt
salaries and benefits, which are deductible for profit sharing; and the tax losses, which
cannot be applied against the profit sharing basis. Special rules apply to a limited
number of specific businesses.
No profit sharing is paid during the first year of operations. Also, special rules apply for
personal service entities and for entities deriving their income from rental activities,
both of which can limit their profit sharing payment to the equivalent of one month of
regular salary.
The profit sharing amount paid out is a deductible item for CIT purposes, provided
certain requirements are met.
Vehicle taxes
There is no federal tax on the ownership of vehicles; however, the states may impose a
similar tax.
Tax is still levied on the acquisition of new vehicles. This tax is payable in addition to
the VAT on the purchase. Note that some vehicles considered as hybrid (e.g. battery
assisted vehicles) are not subject to the new vehicle acquisition tax.
Tax on cash deposits (IDE)
IDE was repealed as of January 2014. During 2013, IDE was applicable at 3% on
monthly cash bank deposits exceeding MXN 15,000 or its equivalent in foreign currency.
This tax could be credited against certain taxes, including CIT.
Financial institutions are no longer required to withhold and remit the IDE to the tax
authorities; however, such institutions are required to report, by 15 February of each
year, to the Revenue Administration Service (Servicio de Administracion Tributaria
[SAT]) the information on customers making monthly cash deposits in excess of MXN
15,000.
Payroll taxes
Most Mexican States levy a relatively low tax on salaries and other income earned by
employees, which is payable by the employer (e.g. Mexico City imposes a 2% payroll tax
payable by the employer).
Employers and employees are required to make contributions to the social security
system. These contributions are based on the daily salary plus any other compensation
paid to the employee.
Branch income
Mexican branches of foreign corporations (i.e. PEs) are generally subject to the same
tax rules as Mexican corporations, with some exceptions. Such exceptions include that
branches may deduct pro rata allocations of head office expenses, provided certain
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requirements are complied with (such as the existence of an applicable tax treaty and
a comprehensive agreement for the exchange of tax information between the relevant
territory and Mexico), but may not deduct remittances to their head offices, even when
such remittances are classified as royalties, fees, commissions, services, or interest.
In general terms, profit distributions to the head office (other than those regarded as a
return to the head office of the capital invested into the branch) either in cash or in kind
from branches or other PEs are subject to the statutory corporate tax rate on the grossedup distribution, unless the remittance is made from the CUFIN account balance (i.e. the
after-tax earnings account).
Recognition of income
Income is generally recognised on an accrual basis. However, the service revenues

of civil entities that render professional services (e.g. law and accounting firms) are
reported on a cash basis.
Inventory valuation
The costing system to be used will be the incurred cost system, based on historic costs or
pre-determined costs. If the requirements provided in the regulations of the income tax
law are met, the direct cost system (based on historical costs) may be used.
Inventory may be determined by any of the following methods:


Identifiable costs.
Average cost.
Retail.
The FIFO method must be applied to each type of merchandise and each movement. The
monetary FIFO method may not be used. Taxpayers selling goods that are identifiable by
serial numbers, at a cost exceeding MXN 50,000, must determine their inventory by the
identifiable cost method.
Once elected, a method is compulsory for five years and can be changed only if the
requirements established in the regulations of the income tax law are fulfilled. The
monetary results of the change in method are amortised over the following five years.
For accounting purposes, different methods and certain variations can be adopted.
However, a record of the differences must be maintained, and such difference will not be
taxable or deductible.
The cost of imported goods may be deducted (and included in the cost of goods sold)
only if it can be supported that the goods were legally imported into the country.
Capital gains
Capital gains are taxed as follows.
Securities
Gains on securities are included in regular taxable income.

The tax basis of shares of Mexican corporations sold may be increased by the inflation
adjustment applicable for the holding period.
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When computing the tax basis of the shares, there are certain items to be considered,
such as: (i) the movement in the after-tax earnings account (CUFIN) of the issuing
company (including the possible negative CUFIN effects), as adjusted for inflation, (ii)
the unamortised prior years tax losses at the date of the sale, (iii) tax losses arising prior
to the date on which the shares were acquired and amortised during the holding period,
and (iv) any capital reductions of the issuing company.
When the sum of: (i) the CUFIN balance at the date of acquisition of the shares, (ii) the
capital reductions paid, (iii) the unamortised prior years tax losses at the date of the
sale, and (iv) the negative CUFIN balance of the issuing corporation is higher than the
sum of: (i) the CUFIN balance at the date of the sale and (ii) the tax losses arising prior
to the date on which the shares were acquired, and amortised during the shares holding
period, the difference must be subtracted from the tax basis of the shares to be disposed
of (potentially resulting in the shares tax basis being equal to zero).
When the aforementioned difference exceeds the tax basis of the shares disposed of, this
excess (restated by inflation) must be subtracted from the tax basis of the shares in any
subsequent share sale by the same taxpayer, even if the shares are issued by a different
company.
The aforementioned procedure allows the average cost (tax basis) of the shares to be
determined, which is then updated and considered as the acquisition cost for future
sales.
A different but simpler procedure is available (optionally) for computing the tax basis of
shares held during a period of 12 months or less.
Deduction of losses arising from the sale of shares is limited to the value of gains from
similar transactions in the same or the following ten fiscal years. Losses may not be
deducted by non-residents selling shares.
A gain from the sale of shares is considered Mexican-source income when the
transferred shares are issued by a Mexican resident or when more than 50% of their
book value arises directly or indirectly from immovable property located in Mexico,
including cases where the shareholding is structured in different levels.
In general terms, the sale by non-residents of shares issued by a Mexican company is
subject to a 25% WHT applicable to the gross amount of the transaction (i.e. without
deductions). However, there may be the option for gains realised by non-residents on
the sale of shares issued by a Mexican company to be taxed by applying the 35% rate to
the net gain (i.e. the value of the transfer less the tax basis of the shares). The tax rate for
these purposes is the same as the top tax bracket rate for individuals.
This net income election is available only if the foreign shareholder is resident of a
country that is not considered a preferred tax regime jurisdiction (tax haven) or a
country with a territorial tax system. The non-resident seller must have previously
appointed a representative in Mexico and have a public accountant assigned to issue a
statutory tax audit report on the transfer of shares. The public accountant issuing the
respective report must specify the accounting value of the shares sold and explain the
factors used in determining the sales price and the market value of the shares if shares
are sold between related parties.
The representative is jointly liable for the tax on the sale of shares, even when the
statutory report is issued by a public accountant.
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The tax authorities may authorise the deferral of taxes that would otherwise be
triggered by the transfer of shares in a group reorganisation (the authorisation must be
obtained prior to the share transfer). The price used on the transaction must be at arms
length. The tax deferred, adjusted for inflation, is due upon the sale of the originally
transferred shares outside the same interest group. An interest group consists of
shareholders that have over 50% common voting stock of the companies.
In principle, authorisations for tax deferral are not granted if the party acquiring or
selling the shares is resident in a tax haven or is a resident of a country that has not
signed a comprehensive exchange of information agreement with Mexico. However,
in the latter case, an authorisation may still be granted if the taxpayer provides
documentation to the Mexican tax authorities stating that the taxpayer has authorised
the foreign tax authorities to provide information to the Mexican authorities regarding
the operation in question.
If the share sale qualifies as an exempt reorganisation under tax treaty rules, the nonresident must appoint a legal representative in Mexico prior to the sale and file a notice
with the Mexican Tax Administration informing them of such appointment and the
details of the reorganisation process intended to be carried out. Additionally, certain
formal requirements are established in the regulations of the Mexican income tax law
that must be satisfied when carrying out this type of transaction.
Tax treaty rules (optionally) override domestic law rules when the seller resides in a tax
treaty country.
Shares sold through the stock market
Capital gains realised on (i) the sale of shares issued by Mexican companies, (ii)
securities exclusively representing such shares, (iii) shares issued by foreign companies
quoted in the Mexican stock market, and (iv) derivative financial operations referenced
to stock indexes and/or to the aforementioned shares, when the sale is conducted in
stock markets or in derivative markets recognised under the Securities Market Law, are
subject to a 10% income tax rate. Such gains were exempt from tax until 2013.
The applicable income tax on the gain obtained must be withheld by the broker/
intermediary; however, there is no obligation to make this withholding if the investor
is a resident in a country with which Mexico has signed a tax treaty to avoid double
taxation and provides the broker with a sworn oath statement explaining said situation
and providing their registration number or tax ID issued by the proper authorities in
their country. If this is not provided, theincome tax must be withheld.
In certain cases, the 10% income tax on the sale of such shares does not apply, but the
general treatment (i.e. 25% on the gross or alternatively 35% on the gain as above
mentioned) must be applied.
Real estate
In determining the taxable gain of real estate, the cost basis of land and buildings may be
adjusted (i.e. increased) for tax purposes on the basis of the period of time for which the
assets have been held. This adjustment is performed by applying inflation adjustment
factors to the net undepreciated balance. Similar rules apply to non-residents electing
to pay tax on net income by appointing a legal representative in Mexico. The rate of tax
on the net gain is 35%. Otherwise, the 25% final WHT on gross income applies to nonresidents.
Gains or losses from the disposal of machinery, equipment, and other fixed assets are
also calculated after adjusting the basis in these assets, by applying inflation factors to
the net undepreciated balance.
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Inflationary gain or loss
Taxpayers are required to calculate an adjustment for inflation (resulting in additional

taxable income or deductible expense) on an annual basis by applying the percentage
increases in the National Consumer Price Index (NCPI) to the value of essentially all
liabilities, reduced by monetary assets, including bank balances, investments (except in
shares), and some debt and receivables.
Dividend income
Dividends received by Mexican corporations from other Mexican corporations need not
be included in gross income. Dividend income must be included within the recipient
corporations CUFIN.
No further corporate-level taxes apply on dividends distributed out of the CUFIN.
However, non-CUFIN distributions (i.e. distributions that for any reason have not been
subject to CIT) are subject to tax at the level of the distributing company at the general
income tax rate on the grossed-up distribution.
Interest income
Interest received by Mexican corporations is generally subject to tax on an accrual basis

and included in gross income (see also Inflationary gain or loss above).
Foreign income
A Mexican corporation is taxed on foreign-source income when earned. Double

taxation is reduced, or possibly avoided, by means of foreign tax credits. However,
the undistributed profits of a foreign subsidiary are not subject to Mexican tax until
dividends are paid, with the exception of companies with investments in entities located
in a tax haven (income subject to preferred tax regimes [PTRs]), in which case income is
generally taxable even if no distributions are received from those entities.
Investments in tax havens (income subject to preferred tax regime)
Investments in tax havens include those made directly or indirectly in entities,

branches, real property, shares, bank accounts, or investment accounts, and any kind
of participation in entities, trusts, joint ventures, or investment funds, as well as in any
other similar legal entities created or incorporated in accordance with foreign law and
located in a tax haven, and including those that are carried out through an intermediary.
A business, entity, trust, or joint venture is considered to be located in a tax haven when
it has a physical presence, an address, a post office box, or effective management in a tax
haven, or when its bank account is held in or through financing entities located in a tax
haven.
Unless it can be demonstrated that the taxpayer does not have management control of
the foreign investments, the taxpayer must include the income generated through such
entities or foreign vehicles in the proportion that corresponds to their direct or indirect
participation in the capital of the entity or vehicle.
Income and profits subject to PTRs are taxed separately. This income cannot be
combined with other taxable income or losses and it is not considered for purposes of
making advance income tax payments. Tax applicable to this type of income is payable
together with the annual CIT return.
The classification of a PTR is not based on the location of the investment but on the tax
effectively paid on the income generated abroad. An investment is considered subject to
a PTR if the income tax paid abroad is less than 75% of the income tax that would have
been incurred and paid in Mexico if the income had been taxed under Mexican rules.
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In general, interest income and the annual inflationary adjustment made to liabilities
of the investment in the tax haven are included in taxable income without subtracting
the annual inflationary adjustment on receivables. However, the annual inflationary
adjustment on receivables may be subtracted from interest income earned, provided an
information return is filed.
Tax on investments in a PTR is determined by applying the general CIT rate to taxable
income. Additionally, net operating loss carryforwards associated with an investment
in a PTR may be amortised against the tax profit of the following tax years arising from
investments in a PTR, and tax deductions related to the investment may also be applied,
as long as accounting records pertaining to those investments are available and the
annual information return on the investments is filed on time.
Undistributed income from investments in entities located in a PTR need not be
immediately included in taxable income (under the provisions discussed above) in
certain particular cases (e.g. income arising from qualified active business activities in
accordance with the applicable legislation and in the case of indirect investments in a
tax haven when certain strict conditions are met).
Income earned in a PTR will be taxed until its distribution where the PTR income arises
from a business activity. This treatment will not be applicable, however, if income such
as interest, dividends, royalties, certain capital gains, and rents (i.e. passive income)
represent more than 20% of the total income generated.
Other specific cases of income on which the tax may apply until distribution include the
case of share transfers within the same group and for income derived from royalties and
interest that do not represent a tax deduction for Mexican tax residents to the extent that
certain specific requirements are fulfilled.
Maquiladoras
As discussed in the Corporate residence section, companies operating under an IMMEX

program (Maquiladoras/in-bond processing companies) are considered to not have a
PE in Mexico. This is the case for the non-resident principal that owns the M&E and
inventory, to the extent it is a resident of a country that has a tax treaty in force with
Mexico, complies with all the terms and requirements of the treaty, satisfies any mutual
agreements between Mexico and its treaty partner, and complies with the transfer
pricing provisions provided in the law.
New Maquiladora legislation
The new 2014 income tax law modifies the definition of Maquila operation. Revenues
associated with productive activities must now be derived solely from Maquila activities.
Additionally, the new law includes rules on machinery and equipment ownership that
are consistent with the IMMEX decree definition (i.e. 30% or more of the machinery and
equipment used in the Maquila operation must be owned by the foreign principal).
Repealing the income tax and flat tax laws eliminates the tax reduction benefits granted
by Presidential decrees. This has the effect of increasing the effective income tax rate on
Maquila profits from 17.5% to 30%.
Two transfer pricing methods that were applicable to Maquilas were eliminated, leaving
only the safe harbour and advance pricing agreement (APA) alternatives.
Presidential Decree for Maquiladora industry
On 26 December 2013, a Presidential Decree was published in Mexicos Official Gazette,

and grants the following benefits to the Maquiladora industry:
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An additional deduction for 47% of tax-exempt benefits paid to employees involved
in the relevant Maquila operation (starting in 2014, the Mexican tax law limits this
deduction to 53% of tax-exempt benefits). Maquiladoras applying this benefit should
inform the Mexican tax authorities of the amount of the benefit granted, and how it
was determined, in a report due March of each taxable year.
For Maquiladoras operating under the grandfathering rule applicable to
Maquiladoras established prior to 2010 (i.e. not obligated to comply with the rule
requiring that 30% or more of the machinery and equipment used in the Maquila
operation be owned by the foreign principal), the decree establishes a two-year
period to comply with this requirement on a prospective basis.
For sales of goods that are located in Mexico between a foreign resident and a
Maquiladora that are taxed at the 16% VAT rate, the Maquiladora may credit the VAT
in the same month of the sale if certain requirements are met. Starting in 2015, this
benefit will apply ifa certification is secured.
Additionally, on 30 December 2013, the Mexican tax authorities published new
Miscellaneous Tax Regulations (MTRs). Among other rules, the MTRs include further
guidance in connection with the Maquiladora industry, as follows:
The new Mexican income tax law establishes that revenues associated with
productive activities must derive solely from Maquila activities. In this regard, this
rule provides that such revenues may also include those obtained for other Maquila
services rendered to related parties resident abroad and other miscellaneous income,
provided that the Maquilas books clearly identify every type of income and related
expenses.
Income relating to the manufacture and distribution of finished goods for resale
cannot be considered as solely derived from Maquila manufacturing activities, but
enforcement of this rule will be deferred until 1 July 2014. Therefore, until such date,
Maquiladoras may consider that their total income (including income relating to the
manufacture and distribution of finished goods for resale) qualifies as income derived
solely from the Maquila activities, provided that its books clearly identify each type of
activity and related income. Entities in this situation need to discontinue or spin off
the non-Maquila activities by 1 July 2014.
A transitory regulation also provides that a foreign principal may still apply safe
harbour protection relating to PE immunity contemplated in the 2013 Income
Tax Law, provided that the foreign principal is resident in a country with which
Mexico has a DTT and the principal is fully compliant with any treaty requirements
applicable to its Mexican activities.
Deductions
The applicable deduction requirements must be complied with no later than the last
day of the tax year to which the deduction applies, although the invoice supporting
the expense may be provided up to the date on which the tax return for the period in
question is filed (or comes due). An expense invoice must contain a date within the year
for which the deduction is claimed.
Deductions for certain business expenses are limited in the case of business meals and
use of company owned cars.
Straight-line depreciation is permitted at the rates specified in the law (i.e. estimated
lives for assets are 20 years for buildings, 3.3 years for computers,4 years for cars, 10
years for certain machinery and equipment, etc.), and the deduction may be increased
by applying the percentage increases in the NCPI from the month in which the asset
was originally acquired. When an asset is disposed of or becomes useless, the remaining
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undepreciated historical cost may also be deducted, after application of the appropriate
inflation adjustment factor to the undepreciated historical cost.
Intangible assets for the exploitation of goods that are in the public domain, or for
rendering public services under concession, are considered deferred assets (i.e. not
deducted as incurred). Therefore, these assets are subject to amortisation for income tax
purposes.
Specific annual depreciation rates are established for goods used in certain industries.
Goodwill
Goodwill is a non-deductible item for Mexican tax purposes, and the corresponding
input VAT (if any) will not be creditable.
Start-up expenses
Start-up expenses incurred prior the commencement of operations may be amortised at

the rate of 10% per year, after applying the adjustment factors.
Interest expenses
In general terms, interest expenses are deductible items if, among others, the principal
is invested in the main activity of the Mexican taxpayer, withholding obligations are
complied with, informative returns disclosing information related to the loan and
transactions carried out with related parties are filed, thin capitalisation rules (3:1 debtto-equity ratio) are satisfied, the transaction is at arms length, and the interest does
not fall into the deemed dividend criteria (see the new 2014 rules for the deductibility of
interest payments at the end of this section).
Bad debts
Bad debts may be deducted on the earlier of the date in which the debt prescribes or
the date in which the taxpayer substantiates the practical impossibility of collection, as
defined by the law, among other detailed rules.
The maximum amount for deductible donations is limited to 7% of the taxable income
of the previous year.
Fines and penalties
In general terms, fines and penalties are non-deductible items for income tax purposes,
except interest for underpayment of taxes.
Taxes
In general, all federal, state, and local taxes levied on a company (not including those
required to be withheld from other parties) represent deductible expenses for CIT
purposes, with the following exceptions:

CIT.
Flat tax (for the six-year period [2008-2013] in which it was in force).
Federal VAT and excise tax when the company is entitled to credit the tax.
Taxes on acquisitions of fixed assets and real estate, which must be capitalised and
deducted as part of the total cost of such assets to be depreciated.
Subject to certain limitations, losses incurred in prior years by a business may be carried
forward and deducted from income earned over a subsequent ten-year period. Net
operating loss carrybacks are not allowed.
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Losses carried forward may be increased by the percentage increase in the NCPI between
the seventh and 12th months of the fiscal year in which they are incurred and thereafter
up to the sixth month of the fiscal year in which they are applied.
Tax loss carryforwards are non-transferable; however, they can be used by the
surviving entity in a merger, with certain restrictions. In the case of a spin-off, tax loss
carryforwards can be divided between the surviving entity and the spun-off entities in
proportion to the following:
Inventories and accounts receivable transferred in the case of commercial entities.
Fixed assets transferred, in all other cases.
Current tax legislation limits the utilisation of tax losses in changes in ownership, with
certain exceptions and limitations.
Taxable income and authorised deductions must be determined on the basis of prices
that would be agreed with independent parties in comparable transactions (armslength values).
For this purpose, taxpayers must secure and maintain contemporaneous documentation
supporting transactions with related parties residing abroad, demonstrating that income
and deductions are based on market values. This documentation must be prepared per
type of transaction and must include all operations carried out with related parties.
Domestic transactions must also be supported by the application of a recognised transfer
pricing method selected in accordance with the preferred ordering methods determined
in the legislation.
Payments made to residents of tax havens (or PTRs) are considered non-deductible
unless it can be demonstrated that the price of the transaction is the same that would
have been set between or among unrelated parties in comparable transactions. Unless
the contrary is demonstrated, it is assumed that operations with companies, entities, or
trusts resident in a PTR are carried out between or among related parties and that prices
are not set as they would be in comparable operations between or among independent
parties.
The sales price of shares (other than publicly traded shares) sold to a related party must
be set at market value and the transaction must be supported by the corresponding
contemporaneous transfer pricing documentation.
Payments to non-residents of a prorated portion of expenses (i.e. allocations of
expenses) are not deductible for Mexican corporations.
The new 2014 income tax law does not allow a deduction for expenses that are also
deducted by another related entity, unless the corresponding income is included in the
related entitys taxable income in the same or in a subsequent tax year.
Technical assistance, royalties, and interest payments
In order to be deductible, payments of technical assistance fees and for the transfer of
technology or royalties must be made directly to companies with the required technical
capabilities to provide the corresponding service and should correspond to services
actually received.
The new 2014 income tax law does not allow a deduction for technical assistance,
interest, or royalty payments (including those related to machinery and equipment
leases) when paid to a foreign entity that controls or is controlled by the Mexican entity
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and (i) when and to the extent that the recipient is a transparent entity whose owner or
owners are not subject to tax in its jurisdiction, (ii) the recipient country of tax residence
considers the payment to be disregarded, or (iii) the recipient does not include the
payment as part of its taxable income under its jurisdictions rules.
Group taxation
The income tax law contains a chapter that allows certain holding companies to
file a consolidated income tax return with their majority-owned subsidiaries. Tax
consolidation is applicable for CIT purposes but not for other taxes (e.g. VAT) or
compulsory employee profit sharing.
The 2014 income tax law repealed the tax consolidation rules that were in effect until
December 2013, but also introduced a new simplified tax consolidation (deferral)
regime.
Due to the repeal of the former tax consolidation regime, the new law provides three
options for computing the deferred consolidated income tax benefit, which will be
payable over a five-year period. On 30 December 2013, the Mexican tax authorities
published, in Mexicos Official Gazette, new MTRs, whichprovide an additional option
and other rules for computing the deferred tax.
The principal requirements for a company to qualify as a holding company for the new
tax consolidation regime are that it must be a Mexican tax resident with no more than
80% of its shares owned by other companies, regardless of their country of residence.
Shares that qualify as placed among the general investing public and non-voting shares
are not considered for this purpose.
Where more than 80% of the holding companys shares are held by a foreign
corporation, the above qualifying rule precludes the possibility of filing a consolidated
return for a Mexican group, for companies that would otherwise qualify. However,
there is an exception in cases where the foreign corporation that owns the shares of the
Mexican holding company is a resident in a country that has executed a comprehensive
agreement for the exchange of tax information with Mexico.
As of January 2014, Republic of Albania, Argentina, Australia, Austria, Bahamas,
Bahrain, Barbados, Belgium, Belize, Bermuda, Brazil, Canada, Cayman Islands, Chile,
China, Colombia, Cook Islands, Costa Rica, the Czech Republic, Denmark, Ecuador,
Finland, France, Georgia, Germany, Ghana, Greece, Guernsey, Hong Kong, Hungary,
Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Japan, Jersey, the Republic of
Korea, Kuwait, Latvia, Lithuania, Luxembourg, Malta, Moldova, the Netherlands, the
Netherlands Antilles, New Zealand, Norway, Panama, Poland, Portugal, Qatar, Romania,
Russia, Samoa, Singapore, Slovak Republic, South Africa, Spain, Sweden, Switzerland,
Ukraine, the United Kingdom, the United States, and Uruguay have agreements of this
nature with Mexico, and other agreements or tax treaties that might contain such an
agreement are awaiting ratification or being negotiated.
The Mexican Tax Administration must authorise the application of the consolidation
regime, and written consent of the legal representative of each of the companies must
be filed before 15 August of the year prior to the first year of consolidation to request the
proper authorisation. Special tax accounts should be prepared by each of the companies
of the group.
There are some entities that are non-qualifying entities for inclusion in the new
consolidation regime, such as non-profit entities, credit institutions, insurance
corporations, trusts, auxiliary credit institutions, stock exchange entities, foreign
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exchange houses and capital investment companies, non-resident companies, companies
in liquidation, civil or social associations, cooperatives, and maquiladoras.
In general terms, the new consolidation regime allows an individual company to offset
losses against profits of other companies in the same group during a three year deferral
period.
The deferred income tax must be paid by each of the entities of the groupon the same
date on which they are required to file their annual income tax return for the year
following that in which the three-year deferral period elapses. The deferred income tax
will be paid updated with the accumulated inflation elapsed from the month in which
the tax was deferred to the month in which the tax is paid.
The deferral benefit must be paid before the three year deferral period if:
A member leaves the consolidated group.
The ownership percentage is reduced.
The group is deconsolidated.
Transfer pricing
Mexican transfer pricing legislation has significantly developed as a result of Mexicos

admission to the Organisation for Economic Co-operation and Development (OECD)
in 1994. This development has resulted in the implementation of transfer pricing
guidelines that are in line with the global economy and market liberalisation.
In general terms, from a Mexican transfer pricing perspective, all related party
transactions (including certain joint-venture relationships) must be reported at arms
length.
Local legislation allows the selection of both traditional methods and profit-based
methods consistent with the OECD guidelines. However, the legislation requires a strict
ordering for the application of a method.
Mexican legislation is generally form over substance oriented; consequently,
contractual terms remain relevant when defining the economic substance of the
transactions subject to the transfer pricing analysis.
Reliable financial information is not always publicly available for Mexican entities.
Hence, reliance is often placed on foreign information, which is then adjusted to
properly reflect local market conditions and render the transactions in question more
comparable.
Thin capitalisation
Interest generated by excess debt lent by a related party is non-deductible for CIT
purposes. Excess debt is defined as more than three times the value of shareholders
equity (i.e. a 3:1 debt-to-equity ratio) as per the taxpayers Mexican generally accepted
accounting principles (GAAP) balance sheet.
In principle, all liabilities are considered in determining the annual average liabilities for
purposes of calculating the ratio and thereby the disallowed interest expense amount.
However, certain liabilities incurred for construction, operation, or maintenance of the
productive infrastructure associated with the strategic areas of Mexico may be excluded
from this computation.
Taxpayers may also be able to obtain a ruling from the Mexican Tax Administration in
order to apply a higher financial leverage (i.e. not the 3:1 debt-to-equity ratio), owing
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to the characteristics of their activities. Also, the thin capitalisation rules do not apply to
the financial sector.
In addition, taxpayers are entitled to use the sum of the average balances of the capital
contributions account (CUCA) and the CUFIN to determine the 3:1 debt-to-equity ratio
instead of shareholders equity. Taxpayers that opt for this tax equity computation must
continue to use it for at least five years. This alternative computation is mandatory for
those taxpayers that do not account for capital following Mexican GAAP.
Specific provisions dealing with the disallowance of interest expenses for debt financing
structured though back-to-back loans should also be closely observed.

Foreign tax credit
The income tax law allows Mexican corporations and individuals a foreign tax credit on
income from foreign sources. The law provides that taxpayers may credit against their
Mexican income tax liability the amount of income tax paid in foreign countries on their
foreign-source income, as long as such income is subject to income tax in Mexico.
In general, credit is available in respect of foreign income taxes directly withheld from
foreign-source income or paid with a tax return filed in the foreign country in the name
of the Mexican resident or by a foreign branch of a Mexican corporation. However, in
the case of dividends or distributions of profits received from corporations resident
in a foreign country, when a Mexican corporation owns at least 10% of the capital of
the foreign corporation for six months prior to the dividend, a deemed-paid credit
can also be taken for the proportionate part of the underlying foreign CIT paid by
that corporation, corresponding to the dividend or distribution of profits received. In
calculating the amount of income subject to Mexican tax in these cases, the dividend
or distribution must be grossed up to include the proportionate amount of tax paid by
the foreign corporation. This credit is allowed also on tax paid on a second holding tier,
provided certain requirements are met.
The foreign tax credit will be allowed up to the effective Mexican rate of tax on
the taxable income (tax result) shown by the annual return under an overall type
limitation. Taxpayers who are not in a position to take full credit for the taxes paid to a
foreign country on foreign-source income are allowed a ten-year carryforward of such
excess foreign taxes, provided certain compliance requirements are met and the credit is
limited to the corporate tax rate of 30%.
The Mexican tax authorities have internal criteria that they follow to determine whether
or not a foreign tax is considered as an income tax for purposes of applying the tax
credit.
Duty-deferral programs
A deferral program is an authorisation provided by the Mexican Ministry of Economy

to those companies importing raw materials or fixed assets to manufacture finished
products within Mexico.
In addition to the benefits described for CIT purposes in the Income determination
section, Maquiladoras are entitled to the following customs benefits:
No payment of import duties for temporarily imported raw materials, as long as they
are exported.
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Temporarily imported raw materials and fixed assets will not be subject to VAT when
the Mexican entity importing the goods obtains a special certification from the tax
authorities related to the adequate control of such imports.
Another program allowing preferential duty rates is the Sectorial Relief Program
(known as PROSEC), which allows manufacturers to apply lower duty rates on the
import of raw materials and machinery required for its productive processes, regardless
of their country of origin and regardless of if they are for the Mexican market or for
export. These programs were created by the federal government in order to establish
competitive tariff conditions for Mexican manufacturers needing to import raw
materials and fixed assets from non-NAFTA countries due to Article 303 of NAFTA
coming into effect.
Companies in Mexico that carry out import operations with values of MXN 300 million
per semester, or IMMEX companies, can take advantage of significant customs and
administrative benefits if registered into the Certified Company Registry (authorised by
the Ministry of Finance). In addition, companies that comply with certain requirements
regarding controls and security within their supply chain, regardless of the MXN 300
million obligation, can also obtain the Certified Company Registry; this specific type
of registry is known as New Scheme of Certified Companies (NEEC for its acronym in
Spanish).
In general terms, the main benefits provided by the Certified Company Registry allows
simplified procedures to process imports and exports, including the reduction in time
and number of reviews when clearing goods at customs facilities.
An income tax incentive for taxpayers involved in certain technological R&D projects
carried out during the year allows a cash subsidy to be yearly determined by the tax
authorities, based on a budget to be approved by the Mexican Congress.
An incentive offers a credit equivalent to 100% of the income tax corresponding to the
salary paid to workers/employees with certain types of disabilities.
A Presidential Decree published on 26 December 2013 offers an additional deduction
equivalent to the 25% of the salary paid to such workers/employees.
Both benefits cannot be applied in the same fiscal year.
Incentives for investments in movie production
A limited credit is applicable for investments in movie production activities through an

immediate tax credit, which is capped at 10% of the total income tax of the prior year,
Incentives for investments in theatre production
A limited credit is applicable for investments in theatre production activities through an

immediate tax credit, which is capped at 10% of the total income tax of the prior year,
Real estate investment incentives
Several tax benefits exist for qualifying real estate investment trusts (i.e. Mexican REITs
or FIBRAS) in Mexico.
Capital investment
There are certain incentives to encourage risk capital investments in Mexico.

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Other incentives
Certain other specific and limited tax incentives are available for taxpayers engaged in
certain activities (e.g. those engaged in air or sea transportation of goods or passengers
with respect to aircraft and ships with a federal government commercial concession
or permit; in the agricultural and forestry sectors; and in-bond warehouses with
respect to real property used for the storage, safeguarding, or conservation of goods or
merchandise).
Withholding taxes
Payments to Mexican residents
Payments to resident corporations and PEs in Mexico are generally not subject to WHT.
Payments by resident corporations to resident individuals are subject to WHT as follows:
Payment
Wages, salaries, and other remuneration
Fees:
Members of boards of directors and advisory boards
Other professional fees
Lease payments on real property
Interest on securities (1)
Interest on non-qualified securities
Dividends
Miscellaneous types of income of individuals, usually sporadic payments
WHT (%)
0 to 35
35.0
10.0
10.0
0.6
20.0
10.0
20.0
Note
1.
WHT on interest paid by financial institutions to Mexican resident investors is generally set at 0.6% of
the invested capital.
Income tax must usually be withheld from payments to non-resident corporations and
individuals. In the case of non-tax treaty countries, the statutory withholding rates are
as noted below.
Income tax of 40%, with no deductions, must be withheld on most payments made to
foreign related parties located in tax havens, in lieu of the tax provided in the domestic
law for non-tax haven residents. This is not applicable in certain cases, such as on
income not subject to Mexican taxation in accordance with the regular provisions for
income earned by non-residents from a source of wealth located in Mexico, income from
dividends, and certain types of interest, including interest payments made to foreign
banks. In these cases, the regular provisions of the domestic law should be applied to
determine the income tax withholding.
Additionally, revenues for intermediation services, including commissions for brokerage,
agents, distribution, and assignment, and generally all income from the negotiation
of third-party interests, are also subject to 40% WHT when paid to tax haven related
residents. The 40% may be reduced if the beneficiary resides in a country with which
Mexico has signed a comprehensive exchange of information agreement.
Non-residents wages and salaries are taxed on the basis of a 12-month earnings period
at the following income tax withholding rates:
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From
0
125,901
1,000,001
Taxable income (MXN)

To
125,900
1,000,000
and above
WHT (%)
0
15
30
The above mentioned rates are also applicable to retirement fund payouts.
However, no tax arises on compensation (wages, salaries, or fees other than board fees)
paid by a non-resident with no establishment in Mexico (even if not subject to tax) to
which the services relate, provided the individual remains in Mexico for fewer than 183
days (consecutive or not) in any 12-month period.
The tax, when applicable, is withheld if the income is paid by a resident (or a nonresident with a PE in Mexico). Otherwise, the tax is generally payable within 15 working
days of the associated payment, by the party earning the Mexican-sourced income.
Statutory withholding rates (not mentioned above) under local legislation are as
follows:
Payment
Professional fees for services rendered in Mexico
Lease payments:
Lease of real property
Lease of containers, airplanes, and ships authorised by the Mexican
Government to be commercially exploited in the transportation of goods or
persons
Lease of personal property
Time-sharing services (1)
Charter agreements
Sales:
Real property located in Mexico (1)
Shares of Mexican companies (1, 2)
Transfers of ownership of Mexican public debt by other than the original
creditors (intended to cover debt-for-equity swaps) (1)
Derivative transactions:
On capital (1)
On debt (3)
WHT (%)
25
25
5
M
25
25
10
25
25
25
25
Same rates
applicable to
interest
Interest (4):
Paid to foreign government financing entities, to duly registered foreign banks
and other entities that provide financing with funds obtained by issuing publicly
traded debt instruments abroad, registered with the Ministry of Finance (5)
Interest on debt instruments placed abroad (6)
Interest payments to specific foreign financial institutions (7)
Other interest payments (not otherwise included above) paid by Mexican
financial institutions to residents abroad
Paid to foreign suppliers of M&E, to others to finance purchases of such assets
or inventory or working capital loans, if the lender is duly registered
Paid to reinsurance entities
Other interest payments
Financial leases (on the portion deemed to qualify as interest or finance
charge)
10
4.9
4.9
21
21
15
35
15
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Payment
Dividends
Royalties (8):
For the use of railroad cars
For the use of copyrights on scientific, literary, or art works, including motion
pictures and radio and television recordings, as well as software and payments
for the transmission of video and audio signals via satellite, cable, optic fibre,
and similar media
On patents, invention or improvement certificates, trademarks, brand names,
and advertising
For the use of drawings or models, plans, formulas, or procedures, and
of scientific, commercial, and industrial equipment; on amounts paid for
information regarding scientific, commercial, and industrial experience; and for
technical assistance
Short-term construction and the respective installation, maintenance, technical
direction, or supervision (9)
Reinsurance premiums
Income obtained by athletes and artists (1)
Income derived from prizes (e.g. lottery tickets or raffles) (10)
Other income (forgiven debts, indemnifications, rights to participate in business,
investments, etc.)
WHT (%)
0
5
25
35
25
25
2
25
1/21
35
Notes
1.
2.
3.
4.
5.
6.
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The non-resident may elect to pay tax at a rate of 35% in 2014 (see Note 11 below for the rate
applicable thereafter) on the net taxable profit in the case of (i) time-sharing services, (ii) share
sales, (iii) sales of real property, (iv) activities of sportsmen/artists, and (v) derivative stock and debt
transactions, provided that the non-resident recipient of the income has a legal representative
resident in Mexico and to the extent that the following specific requirements are met:
For time-sharing services, the resident legal representative must keep the audited financial
statements of the taxpayer available for inspection by the Mexican Tax Administration.
For share sales, a tax opinion issued by a registered public accountant is required.
For shares and debt-for-equity swap transactions, this election is available only where the foreign
taxpayer is not a resident of a country classified as a tax haven or a country with a territorial
tax system. It should be noted that there is an option to defer Mexican income tax arising from
the sale of shares within the same group due to a corporate reorganisation, provided certain
conditions are met and that no legal representative is required for sales of real property by public
deed.
The sale of shares through the Mexican Stock Exchange is subject to a 10% withholding income
tax. When the investor is a resident in a country with which Mexico has signed a tax treaty, such
withholding will not applyif certain requirements are satisfied.
The applicable WHT rate (based on the WHT rates for interest) for debt-derivative transactions is
applied on a net basis. However, if the transaction is liquidated in kind, the applicable WHT rate (on
the same net basis) is 10%.
Interest payments to non-residents are exempt from Mexican income tax when they are paid on the
following:
Loans to the federal government or to the Bank of Mexico (Central Bank) or bonds issued by the
latter organisation to be acquired and paid abroad.
Loans for three or more years granted or guaranteed by duly registered financial entities that
promote exports through special financing.
Preferential loans granted or guaranteed by foreign financial entities to institutions authorised to
receive tax-deductible donations in Mexico, provided these institutions are properly registered
and use the funds for purposes consistent with their status.
Loans derived from bonds issued by the federal government or the Bank of Mexico placed on a
recognised national stock exchange, to the extent the beneficial owner is a foreign resident.
In 2014, a 4.9% WHT rate is applicable when the interest is paid to banks resident in countries with
which Mexico has signed a tax treaty.
The 4.9% WHT rate applies, provided the placement is handled through banks or brokerage firms
resident in a country with which Mexico has signed a tax treaty if there is compliance with the
information requirements established in the general rules issued by the Ministry of Finance. If there
is failure to comply with these requirements, the 10% WHT rate applies. The 4.9% and 10% WHT
rates mentioned in the preceding paragraphs do not apply, and instead a 35% (30% in 2013) WHT
rate is applicable to interest, when the direct or indirect beneficiaries of the interest, either individually
or jointly with related parties, receive more than 5% of the interest arising from the instrument in
question, and are either (i) holders of more than 10% of the voting shares of the issuing company,
either directly or indirectly, either individually or jointly with related parties, or (ii) business entities
holding more than 20% of their shares, either directly or indirectly, either individually or jointly with
parties related to the issuer.
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7.
The 4.9% WHT rate is applicable to interest payments made to foreign financial institutions in which
the Mexican federal government or the Mexican Central Bank has equity participation.
8. The WHT rate is applied to the gross amount of the payment.
9. The non-resident taxpayer may elect to pay 35% tax on the net profit in 2014 (30% in 2013) if the
taxpayer has a resident legal representative and so advises the customer, who then makes no
withholding. When business activities last for more than 183 days, the foreign taxpayer is deemed to
have a PE in Mexico for tax purposes and is taxed in the same manner as a local resident corporation
or branch.
10. The 21% federal rate is applied only in the case of non-qualifying prizes (i.e. income derived from
prizes that is subject to a state tax that exceeds a rate of 6%).
11. The statutory WHT rates mentioned above may be reduced by applying tax treaty provisions. During
the last decade, Mexico has embarked on a policy of negotiating a network of tax treaties with its
principal trading and investment partners.
As of January 2014, the treaties with the following countries are pending ratification
while waiting for the completion of specific formalities by the respective governments
in order to become effective, have not been published yet in the Official Gazette, or are
under negotiation: Jamaica, Lebanon, Malaysia, Malta, Morocco, Nicaragua, Pakistan,
Peru, Saudi Arabia, Slovenia, Thailand, Turkey, United Arab Emirates, and Venezuela.
As of January 2014, tax treaties with the countries listed in the following table have been
published in the Official Gazette and are in force.
The WHT rates negotiated under the tax treaties are as follows:
Recipient
Australia
Austria
Bahrain
Barbados
Belgium
Brazil
Canada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
Estonia
Finland
France
Germany
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Italy
Japan
Korea, Republic of
Kuwait
Dividends (%)
Portfolio Substantial holdings
15
0 (1)
10
5 (4)
0
0
10
5 (1)
15
5 (2)
15
10 (6)
15
5 (4)
10
5 (6)
5 (7)
5 (7)
0
0
10 (7)
10 (7)
15
0 (3)
5 (7)
5 (7)
0
0
0
0
0/5 (9)
0/5 (9)
15
5 (1)
10 (7)
10 (7)
0
0
15
5 (1)
15
5 (1)
10 (7)
10 (7)
10 (7)
10 (7)
10
5 (4)
10
5 (10)
15 (7)
15 (7)
15
5 (8)
15
0 (1)
0
0
Interest (%)
10/15 (25)
10
4.9/10 (20)
10
10/15 (16)
15
10
5/15 (26)
10
5/10
10
5/15 (17)
10/15 (16)
4.9/10
10/15 (24)
5/10 (17, 29)
5/10 (18)
10
4.9/10 (20)
10
10
10
10
5/10 (17, 29)
10
10 (29)
10/15 (25)
5/15 (17)
4.9/10 (20)
Royalties (%)
10
10
10
10
10
10/15 (27, 29)
10
5/10 (29, 30)
10
10
10
10
10
10
10
10 (29)
10
10
10
10
10
10 (31)
10
10
10
15
10
10
10
Mexico
1317
Mexico
Recipient
Latvia
Lithuania
Luxembourg
Netherlands
New Zealand
Norway
Panama
Poland
Portugal
Qatar
Romania
Russia
Singapore
Slovak Republic
South Africa
Spain
Sweden
Switzerland
Ukraine
United Kingdom
United States
Uruguay
Dividends (%)
Portfolio Substantial holdings
10
5
15
0
15
8 (11)
15
0 (12)
15 (7, 13)
15 (7, 13)
15
0 (3)
7.5
5 (32)
15
5 (3)
10 (7)
10 (7)
0
0
10 (7)
10 (7)
10 (7)
10 (7)
0
0
0 (14)
0 (14)
10
5 (1)
15
5 (3)
15
15
15
0
10
5 (7)
5 (5)
0 (34)
5
0
5 (4, 15)
5 (7)
Interest (%)
5/10
10
10
5/10 (21)
10
10/15 (16)
5/10 (17)
10/15 (19)
10
5/10
15
10
5/15 (17)
10
10
5/10/15 (21, 22,
29)
10/15 (16)
5/10 (35)
10
5/10/15 (21, 23)
4.9/10/15 (20, 23)
10
Royalties (%)
10
10
10
10 (28)
10
10
10 (33)
10
10
10
15
10
10
10
10
10
10
10
10
10
10
10
Notes
The applicable tax rates on dividends paid abroad in accordance with the tax treaties executed by Mexico
are detailed below; however, under domestic law, no withholding is applied on distributions of profits
subject to corporate-level tax prior to 2014.
There are certain specific cases of interest paid to parties resident abroad that might be exempted by
certain tax treaties (e.g. interest paid to a pension fund or paid by a bank, interest paid on certain loans
granted or guaranteed by certain entities for exports under preferable conditions), which are not detailed in
the information below.
1.
2.
3.
4.
5.
6.
7.
8.
1318
This rate applies when the recipient corporation that is the beneficial owner of the dividend (except
for civil partnerships) directly owns at least 10% of the capital of the distributing corporation. In
the case of Barbados, Hungary, and South Africa, the specific exclusion of civil partnerships is not
included.
This rate applies where the company that is the beneficial owner of the dividends directly or indirectly
owns at least 25% of the capital of the distributing company.
This rate applies where the company that is the beneficial owner of the dividends (except for civil
partnerships) directly owns at least 25% of the capital of the company distributing the dividends.
In the case of Norway, taxation is limited to the country of residence of the party receiving the
dividends, provided the aforementioned substantial holding rule is satisfied.
This rate applies where the recipient corporation that is the beneficial owner of the dividend owns at
least 10% of the voting shares of the paying corporation. The Mexico-US tax treaty contains a mostfavoured nation clause.
This rate applies where a company that is the beneficial owner of the dividends (except for civil
partnerships, although limited liability partnerships are included) directly owns at least 10% of the
voting shares of the company distributing the dividends.
This rate applies where a company that is the beneficial owner of the dividends owns at least 20% of
the voting shares of the company paying the dividends.
This is the maximum WHT rate for dividends, with no distinction for substantial holdings. In the case
of Ecuador and India, the tax payable on dividends paid to residents in Mexico must not exceed a
limit established in the treaty.
The 5% rate applies when a company that is the beneficial owner of the dividends owns at least 25%
of the voting shares of the company paying dividends during the six months prior to the end of the
tax period in which dividends are paid. Under certain particular rules and provided this ownership
requirement is complied with, dividend payments are only subject to tax in the country of residence
of the recipient of the dividends.
Mexico
Mexico
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
No withholding applies when more than 50% of the shares of the recipient corporation are owned by
residents of France or Mexico or when the beneficial owner of the dividend is a resident individual.
Accordingly, the WHT applies to dividends when more than 50% of the recipient corporations shares
are owned by residents of other countries. However, the WHT must not exceed 5% when the party
receiving the dividend is the effective beneficiary of said dividend. Dividends paid by a company
resident in France to a resident of Mexico, other than a company that directly or indirectly holds
at least 10% of the capital stock of the first-mentioned company, may also be taxed in France, in
accordance with the law of France, but if the recipient of the dividends is the beneficial owner, the tax
thus charged must not exceed 15% of the gross amount of the dividends.
The 5% rate applies where the company that is the beneficial owner of dividends directly or indirectly
owns at least 10% of the capital of the company distributing the dividends. There is a 10% tax rate
that applies when these same ownership requirements are complied with, but the company paying
dividends is a resident of Israel (provided dividends are paid from earnings taxed in Israel at a tax rate
lower than the regular corporate tax rate in Israel).
The applicable tax rate on the gross amount of the dividends when the recipient company (beneficial
owner) (except for civil partnerships) directly holds at least 10% of the capital of the corporation
paying the dividend must not exceed 5% in the case of Luxembourg and 8% in the case of Mexico.
The protocol of the Mexico-Luxembourg tax treaty states that this rate might be reviewed in the
future by the contracting states if the WHT is not fully creditable, and can be adjusted under the
principle of avoiding double taxation, provided the adjusted WHT rate is not lower than 5%.
Dividends paid by a company resident in Mexico to a company resident in the Netherlands (which
is the beneficiary of said dividends) are subject to a maximum tax of 5% on the gross amount of
the dividends if the beneficial owner is a company that directly or indirectly owns at least 10% of
the capital of the company paying said dividends. However, as long as a company resident in the
Netherlands is not subject to Dutch income tax on dividends received from a company resident
in Mexico under the terms of the Dutch income tax law and any future amendments thereto, the
dividends mentioned in the preceding paragraph may only be taxed in the Netherlands (not in
Mexico).
The Mexico-New Zealand tax treaty contains a most-favoured nation clause that may be applicable
in the future.
The exemption on dividend WHT is not applicable in the case of deemed dividends.
To the extent certain requirements provided in the Protocol are met, the WHT may be reduced to 0%.
The 10% rate applies to loans from banks.
The 5% WHT rate is applicable to interest paid to banks.
The 5% rate applies to interest on loans from banks, insurance companies, and retirement and
pension plans.
The 10% rate applies to interest on loans from banks, insurance companies, and securities regularly
and substantially traded on a recognised national stock exchange.
The 4.9% rate applies to interest on loans from banks and insurance companies and to interest on
securities regularly and substantially traded on a recognised national stock exchange.
In the case of the Netherlands, the 5% rate applies to interest on loans from banks and to interest on
securities regularly and substantially traded on a recognised national stock exchange. In the case of
Spain and the United Kingdom, the 5% rate extends to interest paid to insurance companies.
The 10% rate applies to interest paid by financial institutions and interest paid to the original seller of
M&E.
The 10% rate on interest applies in the case of interest paid to the original seller of M&E and interest
paid by banks.
The 10% rate applies to interest on loans from banks and to interest derived from bonds or securities
that are regularly and substantially traded on a recognised securities market, as well as to interest
paid by the purchaser of M&E to a beneficial owner that is the seller of the M&E.
The 10% rate applies to interest on loans from banks and insurance companies, to interest on
securities regularly and substantially traded on a recognised national stock exchange, to interest paid
to the original seller of M&E in a sale on credit, and to interest paid by banks.
The 5% rate is applicable to interest on loans granted by banks and insurance companies, securities
traded on a recognised securities market, and the sale on credit of M&E.
It is understood that the definition of royalties applies to any type of payment received for the
provision of technical assistance services. The 15% rate applies to royalties arising from the use of,
or the right to use, trademarks.
The original rate is 15% but has been reduced to 10% as long as the Netherlands does not impose a
WHT.
Reduced WHT rate results from the application of the most-favoured nation clause.
The 5% rate applies to industrial, commercial, and scientific equipment.
The 10% rate also applies to fees for technical assistance, which are payments of any kind, other
than those mentioned in Articles 14 and 15 of the treaty as consideration for managerial or technical
or consultancy services, including the provision of services of technical or other personnel.
This rate applies where the company that is the beneficial owner of the dividends directly owns at
least 25% of the capital of the distributing company.
The treaty broadly defines royalties and includes payments related to certain software.
This rate applies where the company that is the beneficial owner of the dividends directly or indirectly
owns at least 10% of the capital of the distributing company.
The 5% rate applies on the gross amount of the interest paid to, among others, banks and insurance
institutions.
Mexico
1319
Mexico
Tax administration
Taxable period
In general terms, the taxable period in Mexico is the calendar year.
Tax returns
Corporate taxpayers are required to file annual CITreturns for the preceding calendar
year by 31 March.
Thereafter, taxpayers meeting certain size criteria or belonging to a group that, as a
whole, meets these criteria must submita tax-compliance informative returnby the end
of June.
In lieu of submitting the tax-compliance informative return, business taxpayers meeting
certain size criteria may elect to file a tax-compliance audit report on an annual basis
with the Mexican Audit Administration. This audit report covers all federal taxes other
than customs duties andconsists of audited financial statements and detailed schedules,
together with a report by the auditor stating that no irregularities were observed in
respect of the taxpayers compliance with its federal tax liabilities. Thisreport must
be filled electronically, and the auditor must be an independent certified public
accountant (CPA) registered with the Mexican Audit Administration. The amount of
detailed information required to be filed, and the auditors responsibility in connection
therewith, is significant.
Employees profit sharing payments are generally due by 31 May of the year following
that in which the corresponding profit was obtained.
Information returns must also be filed no later than 15 February each year, reporting on,
amongst others, the following activities performed in the immediately preceding year:

Payments made to parties resident abroad.

Loans received from or guaranteed by non-residents.
Transactions conducted through a business trust.
Parties to which the taxpayer makes payments and withholds income tax.
Parties to which the taxpayer has made donations.
Parties to which the taxpayer has paid dividends, and the value of such payments.
Transactions carried out with suppliers and clients, either local or overseas.
Taxpayers making salary payments are also required to file information returns reporting
salaries paid and salary credit paid in the immediately preceding calendaryear.
An annual information return must be filed on investments made or held in a tax haven.
This must be filed in February of the immediately following year.
An information return on transactions carried out with non-resident related parties must
be filed together with the annual CIT return (no later than March of the following year).
Payment of tax
Corporate taxpayers are required to make estimated payments of CIT by the 17th day of
each month based on their estimated taxable income at the end of the previous month
and calculated principally by applying the profit factor to the cumulative monthly gross
income. The profit factor is determined by dividing the taxable profit by gross income
shown in the annual return for the preceding year, or, if no profit factor is to be found
in that annual return, the factor appearing in the year preceding that and so on, up to
five years, with certain adjustments. For this purpose, gross income includes nominal
income, excluding inflationary adjustments. The balance of CIT for the year is due at the
same time as the annual return.
1320
Mexico
Mexico
Special procedures are provided for computing advance CIT payments and for obtaining
authorisation to reduce the amounts of monthly advances after the sixth month of
the year. No advance payments or adjustments thereto are required in the first year of
operations.
Tax audit process
In general terms, for taxpayers thatelected to file a tax-compliance audit report, the
tax audit (tax inspection) may start with a review of the audit report prepared by the
independent CPA. At this point, the tax authorities may finish the audit if they are
satisfied with the information provided by the CPA; otherwise, tax authorities may
initiate a direct review on the taxpayer either at the tax authoritys offices or at the
taxpayers facilities. Tax authorities may request several documents from the taxpayer
and third parties that carried out transactions with the audited taxpayer.
Tax audits should be concluded within the following 12 months after the audit was
initiated. The period to conclude tax audits for taxpayers that are either part of the
financial system or consolidated for tax purposes is 18 months. In cases where the
Mexican tax authorities request information to tax authorities from foreign jurisdictions,
the period to conclude the audit is two years. The above periods might be suspended
under certain circumstances (e.g. a judicial recourse or appeal initiated by the taxpayer
against the tax authorities). Upon conclusion of the audit, the tax authorities should
issue either a notification explaining tax underpayments observed during the audit
process or a notification of conclusion if no issues remain open at the end of the
inspection.
Finally, tax authorities should issue a notification of assessment within the six months
after the conclusion of the tax audit. At this point, all underpayments claimed by the tax
authorities become due.
In general, the right of the tax authorities to collect taxes, review tax returns, or claim
additional tax expires five years after the date the respective return is filed. However,
in cases where the taxpayer has not secured a federal tax registration number, has no
accounting records, has failed to keep accounting records for the required five-year
period, or has not filed a tax return, the statute of limitations expires in ten years.
Similarly, the period for claiming a refund of overpaid tax expires after five years.
Although there are no formal written communications from the tax authorities dealing
with their topics of focus, in recent years the tax authorities have focused audits on
transactions with non-residents, inter-company transactions, transfer pricing, social
security contributions, and customs duties, among other areas.
Other issues
International Financial Reporting Standards (IFRS) adoption
All companies listed on the Mexican Stock Exchange are required to submit annual
consolidated financial statements accompanied by the opinion of a Mexican
independent CPA. These financial statements must be prepared in conformity with IFRS
and cover three years. Financial institutions and insurance companies must file audited
financial statements with the appropriate regulatory agency.
The adoption of IFRS in Mexico presents companies with great challenges and
opportunities. Changing from Mexican Financial Reporting Standards (MFRS) to IFRS
requires companies to review their financial reporting procedures and criteria. Major
Mexico
1321
Mexico
changes in the requirements often have a ripple effect, impacting many aspects of a
companys information reporting organisation.
Nevertheless, the benefits to Mexican companies in reporting under IFRS are numerous.
Among the greatest of these is the opening up of the Mexican Stock Market to overseas
investors. By adopting IFRS, investors are able to compare two companies on different
sides of the world with greater ease, and thus it is hoped that the change will encourage
investment in Mexican companies.
Adoption of IFRS is not a straightforward process, and it will require time and effort
on the part of the adopting entities to be able to ensure a smooth transition from
MFRS to IFRS and ensure that the changes and benefits from this transition are duly
implemented.
Foreign Account Tax Compliance Act (FATCA) intergovernmental

agreement (IGA)
FATCA was enacted in 2010by the US Congress to target non-compliance by US

taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to
report to the US Internal Revenue Service (IRS) information about financial accounts
held by US taxpayers or by foreign entities in which US taxpayers hold a substantial
ownership interest.
Mexico signed an IGA with the US Treasury on 19 November 2012 under which Mexican
financial institutions are required to report US-owned account information directly to
the Mexican tax authority, rather than to the US IRS. The Mexican tax authority will
then share that information with the US IRS.
The IGA provides that the United States will reciprocate with the sharing of information.
Mexican tax authorities are set to issue a set of administrative rules for banks to comply
with the FATCA IGA.
1322
Mexico
Moldova
PwC contact
Ionut Simion
PricewaterhouseCoopers Advisory SRL
37 Maria Cibotari Street, MD 2012,
Chisinau, the Republic of Moldova
Tel: +40 21 225 3702 / +373 22 251 700
As of 1 January 2014, permanent establishments (PEs) of non-residents performing

entrepreneurial activity in the Republic of Moldova are expressly mentioned as subjects
of taxation with VAT.
Also as of 1 January 2014, the reduced 8% VAT has been reintroduced for:
phytotechnical, horticultural, and zootechnical products produced and delivered
within Moldova, and
beetroot sugar imported and/or delivered within the country.
Additionally, the VAT exemption for long-term assets intended to be included in the
statutory (social) capital has been reintroduced, with the following conditions:
The assets should be used for product manufacture, service supply, and execution of
works.
The assets depreciation should be included in the cost of manufactured products,
supplied service, and executed work.
The assets should not be sold, rented, or leased (under operation or financial leasing)
for a three-year period.
Excise duties
As of 1 January 2014, possibilities to refund excises on account of future liabilities were

extended. Also in 2014, excise duties were increased for cars and fuels, for alcohol
beverages (beer, vermouth, and other fermented beverages), and for cigarettes and
other tobacco products.
Customs duties
As of 15 November 2013, the government approved regulations on the electronic

customs clearance procedure for the export of goods. The procedure of electronic
customs clearance for the export of goods can be used by companies declaring goods by
themselves or by means of a customs broker. Companies are able to perform exports by
means of an electronic customs clearance procedure only at certain nominalised customs
posts. Starting 1 March 2014, this electronic clearance procedure for export of goods is
possible at all customs posts.

Resident companies generally must calculate their taxable base for corporate income
tax (CIT) purposes on their worldwide income. PEs, unlike resident companies, are only
required to calculate their taxable base for CIT purposes on income sourced in Moldova.
Moldova
1323
Moldova
The CIT rate is 12%. If the Moldovan Tax Authority (MTA), applying indirect methods,
re-assesses the income amount compared to the declared gross income, a 15% CIT rate
may be applied to the excess amount.
Individual entrepreneurs are subject to progressive rates of 7% for annual income up to
27,852 Moldovan lei (MDL) and 18% for annual income exceeding MDL 27,852.
Farming enterprises are subject to a 7% CIT rate.
Small and medium companies that are not registered as value-added tax (VAT) payers
(i.e. registered operational revenue up to MDL 100,000 in the previous fiscal year)
should apply a special CIT regime of 3% on their turnover. This special tax regime
is optional for legal entities that are not VAT payers and that registered operational
revenue between MDL 100,000 and MDL 600,000during the previous year.
Local income taxes
There is no separate CIT at the local level. CIT is distributed between the national
state budget and local budgets depending on the establishment of the entity and its
subdivisions in accordance with the existing rules.
Corporate residence
According to Moldovan tax law, a tax resident is a legal entity organised or managed in
Moldova or that has its main place of business in Moldova. In practice, tax residency is
determined by the place of incorporation.
Based on the Moldovan tax law, a PE is a fixed place of business through which a nonresident carries out, wholly or partly, either directly or through a dependent agent,
entrepreneurial activity in the territory of Moldova.
Due to the regulatory environment in Moldova, as well as certain difficulties in
operating a PE in Moldova, foreign enterprises operating through a PE in Moldova are
not common.
Other taxes
The standard VAT rate in Moldova is currently 20%. It is generally applied to local
supplies of goods and services as well as to goods subject to import and services subject
to the reverse charge mechanism.
Apart from the above, certain types of supplies are subject to reduced VAT rates. For
instance, local supplies of bread and bakery products; milk and dairy products; and
phytotechnical, horticultural, and zootechnical products are subject to the reduced 8%
VAT rate. The import and local supply of drugs and certain pharmaceutical products,
natural and liquefied gas, and beetroot sugar are also subject to the reduced 8% VAT
rate.
A number of supplies are subject to the 0% VAT rate (i.e. VAT exempt with the right to
exercise the input VAT deduction), including international transportation and exports
of goods or services. Certain supplies are subject to VAT exemptions, including financial
services and the sale or rental of dwellings and land.
1324
Moldova
Moldova
Input VAT
It should be mentioned that input VAT incurred on acquisitions of goods and/or services
may be deducted, provided it is incurred by a VAT registered payer to perform VATable
supplies within its business activity.
If input VAT relates to acquisitions destined to perform mixed supplies (i.e. both VATable
and VAT-exempt ones), the input VAT deduction right is exercised on a pro-rata basis.
VAT refunds
Should a company register a deductible input VAT exceeding its output VAT, this balance
can be partially refunded only if the company carries out a specific range of business
activities (e.g. export supplies, international transportation services, production of
bakery and dairy products, leasing activity). Otherwise, such VAT amount may be
carried forward to the following months, offset against the companys future output VAT
liabilities.
Additionally, VAT payers performing capital investments in Moldova may be entitled
to refund the recoverable VAT related to these kinds of capital investments. Note that
specific conditions must be met, namely:
The assets should be used for product manufacture, service supply, and execution of
works.
The assets depreciation should be included in the cost of manufactured products,
supplied service, and executed work.
The assets should not be sold, rented, or leased (under operation or financial leasing)
for a three-year period.
The possibility to refund the VAT against future obligations to the national public budget
is also now available, at the request of taxpayers not having debts to the national public
budget.
VAT administration
A company is required to register for VAT purposes if the total turnover within the last
12 consecutive months reached the threshold of MDL 600,000. Also, companies can
follow voluntary registration for VAT purposes if the total turnover within the last 12
consecutive months reached the threshold of MDL 100,000, provided certain conditions
are met.
The fiscal period for VAT purposes is considered the calendar month.
Every VAT payer (sometimes also non-registered entities for VAT purposes) must submit
VAT returns by the end of the month following the reporting one. As of July 2014, the
deadline for submission of tax reports and for fulfilment of tax obligations towards the
budget will be no later than the 25th day of the month following the reporting one. All
VAT payers registered for VAT purposes must submit electronic VAT returns.
Generally, VAT payers must settle payable VAT liabilities by the deadline established for
submission of the VAT return for the related fiscal period (except for VAT on services
supplied by non-residents that are VATable in Moldova).
Generally, VAT payers are required to issue fiscal invoices for the VATable supplies
performed, as well as to keep detailed records of their acquisitions and supplies in the
correspondent VAT ledgers, according to a set of specific rules.
Additionally, all companies registered as VAT payers are required to register their VAT
invoices with a taxable basis exceeding MDL 100,000 in the general electronic register
withinten working days from the date of issuing.
Moldova
1325
Moldova
VAT payers are entitled to a deduction of the amount of VAT paid to suppliers for
material values andservices purchased in Moldova if the fiscal invoice is not registered
by the seller in the register only on condition that the tax authorities are duly informed
of such non-registration of VAT invoice.
Customs duties
Moldovas current customs framework is regulated by the Customs Code, Law on

Customs Tariff, International Agreements concluded by Moldova to date, and by other
legal acts.
Customs duties include customs procedural taxes, customs taxes, VAT, and excise duties.
In general, any kind of goods and means of transport may enter and leave the territory
of Moldova without any restriction. However, certain limitations specifically provided
by the legislation are in force, which cover goods and means of transport crossing the
border by breaching state security, public order, environment, etc.
Note that there are also some environmental pollution taxes related to specific
packaging and goods that importers should pay.
Customs regimes
Definitive and suspensive customs regimes are provided under Moldovan law.
Definitive customs regimes refer to import and export, while suspensive customs regimes
comprise: transit, bonded warehouse, inward processing relief (with suspension),
processing under customs control, temporary admission, and outward processing relief.
Customs valuation
Under Moldovan customs legislation, the customs valuation is generally performed in

accordance with the customs valuation principles in the General Agreement on Tariffs
and Trade (GATT).
The customs value is determined based on one of the six provided valuation methods
(i.e. transaction value, transaction value of identical goods, transaction value of similar
goods, deductive value, computed value, and reserve method). If the first method is not
applicable, then the second method should be applied and so forth.
Preferential tariff treatment
Moldova has concluded free trade arrangements (FTAs) to date with most of the
Commonwealth of Independent States (CIS) countries and is also a Central European
Free Trade Agreement (CEFTA) contracting state. A preferential tariff treatment is
granted for specific categories of goods, depending on their origin and in accordance
with the FTAs to which Moldova is a party.
Until 31 December 2015, Moldova benefits from Autonomous Trade Preferences (ATPs)
from the European Union (EU), which allows unlimited duty-free access to the EU
market for all products originating in Moldova, except for certain agricultural products.
Such agricultural products are accepted for import into the European Union either with
exemptions from customs duties within the limits of specific tariff quotas (e.g. fresh,
chilled, and frozen meat of bovine animals, dairy products, common wheat, barley,
maize, white sugar) or with exemption of the ad valorem component of the import duty
(e.g. tomatoes, grapes, apples).
Favourable tariff treatment
A favourable tariff treatment presumes a reduction or an exemption from customs duty

upon import of specific goods into Moldova, depending on their type or final destination,
according to domestic customs law or international agreements to which Moldova is a
party.
1326
Moldova
Moldova
Moldovan customs law provides the following exemptions, among others, from customs
duty:
Goods imported by individuals for personal use, not exceeding a specific threshold.
Goods released in Moldova under transit, bonded warehouse, or inward processing
relief regimes.
Moldovan goods previously exported and released back within a three-year term
in the same status, as well as compensatory products obtained under outward
processing relief.
Certain movable goods imported by legal entities carrying out leasing activities for
the purpose of paying off their contractual liabilities derived from lease agreements
concluded with Moldovan individuals or legal entities.
Goods imported by legal entities for non-commercial purposes whose customs value
does not exceed 100 euros (EUR).
Customs administration
Moldovan customs legislation provides for:

the concepts and procedures of post clearance audit
the obligation of individuals and companies to maintain the necessary documents for
customs control for six years, and
the obligation of individuals and companies that perform external trade transactions
to maintain the related documents for the purposes of post clearance audit for five
years.
The Customs Service of Moldova uses procedures for issuing binding tariff and
binding origin information. Additionally, companies may use the electronic procedure
of customs clearance for the export of goods, as well as specific simplified customs
procedures.
Excise duties
Excise duties apply to the production and import of cars, tobacco, alcohol, petrol and
lubricants, and other goods. Special excise rates for each type of excisable goods are
established in the tax code. The rates are widely variable and are based on multiple
factors. The excise duty rates are generally indicated as a percentage applied to the value
of goods or as a fixed amount for a certain quantity of excisable goods. However, for
specific types of excisable duties, mixed excise duty rates are applicable.
The following are liable for excise duties:
Any individual or legal entity producing and/or processing excisable goods in the
territory of Moldova.
Any individual or legal entity importing excisable goods, unless there is no specific
exemption provided.
Businesses or individuals that produce and/or process excisable goods in the territory
of Moldova (or intend to do so) must possess excise duty certificates, which must be
granted by the tax authorities before these operations are actually carried out. It is
mandatory for individuals or businesses, upon submitting the relevant applications to
the tax authorities, to attach the details of the excise premises.
Under certain circumstances, excise duty exemptions may apply. Some excise-liable
goods are subject to mandatory excise stamp marking and labelling.
Recently, the excise duty rates have been increased for a series of excisable goods, for
example:
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Wine from fresh grapes: increased from MDL 10 per litre to MDL 10.5 per litre.
Filter cigarettes: changed from MDL 45 for 1,000 units plus 24% of the goods value
to MDL 75 for 1,000 units plus 24% of the goods value.
Tax on immovable property
Tax on immovable property is a local tax paid on real estate (i.e. land and/or
construction on the land) by the property owner or owner of material rights. Residents
and non-residents owning real estate located in the territory of Moldova have similar
obligations.
The 0.1% rate on immovable property used for entrepreneurial activity is applied
either on the propertys estimated value (if such exists) or on its book value, while the
maximum tax rate on property used for agricultural activities is 0.1% of the propertys
book value.
Tax rates for real estate housing, including villages (communes) from Chisinau and
Balti municipalities, are generally higher than for real estate housing from other
municipalities.
Separate rates are applicable for agricultural land with construction buildings on it.
The actual tax rate on immovable property for a legal entity is established in monetary
value (i.e. MDL), depending on its destination (e.g. land for agriculture usage) and
location.
Tax on real estate housing, including villages (communes) from Chisinau and Balti
municipalities, and agricultural land with constructions on them is paid in equal
instalments on 15 August and 15 October for property owned before 1 July. For property
acquired after 1 July, the tax is paid by 31 March (by 25 March starting July 2014).
The respective tax shall be calculated based on the estimated value of the immovable
property.
For the rest of immovable property, taxes have to be paid quarterly based on the book
value.
Companies and individual entrepreneurs who own immovable property will be obligated
to declare the immovable property tax by 1 July of the current fiscal period.
In the event of an owner change during the fiscal year, the previous owner may request
recalculation of the real estate tax in proportion to the period in which they were subject
to taxation.
Transfer taxes
Transfer taxes may be applied for notary acts performed by authorised notaries and
other persons empowered by law. Transfer taxes are applied upon authentication by
a notary of sale-purchase agreements regarding plots of land; transfers of houses into
private property; alienation agreements of houses, apartments, garages, and other
constructions; vehicles; authentication of mortgage agreements; and other evaluative
contracts.
Stamp taxes
According to the law on state tax, stamp tax (state duty) is the amount charged by
specifically authorised state bodies from individuals and legal entities for the exercise of
certain actions or issuance of legal documents of interest to them.
Stamp taxes may be applied for, but not limited to, the following:
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Claims submitted to courts of justice.

Registration of civil status documents.
Issuance of passports to Moldovan citizens and other related documentation.
Residence registration.
Redemption of goods from the state.
Registration of mortgage, for issue of extracts from the Real Estate Register.
Notary acts (i.e. for notarisation of sale-purchase agreements of immovable assets).
Application of the apostil.
Local taxes
Local taxation in Moldova refers to the application of the following main types of taxes
and duties:
Tax on the following natural resources:
Water.
Mineral exploration.
Geological exploration.
Mining operations.
Usage of underground areas for the construction of underground structures not
related to mining operations.
Exploitation of underground structures within the performance of entrepreneurial
activity, not related to mining operations.
Standing wood.
Tax on immovable property.
Duty for the right to perform local auctions and lotteries.
Tax on advertising placement and tax on advertising devices.
Fee for the right to use local symbols.
Land improvement duty.
Tax for commercial and/or services providing units.
Parking tax.
Hotel room occupancy tax.
Resort fee.
Local authorities are authorised to establish the levels of tax rates for local taxes.
Road taxes
Road taxes are fees collected for the use of roads and/or protection zones of the roads
outside the locality limits.
The system of road taxes includes the following:
Tax for the use of roads by vehicles registered in Moldova.
Tax for the use of roads of Moldova by vehicles not registered in Moldova (vignette).
Tax for the use of roads by the vehicles with total mass, axle loads, or dimensions
exceeding the admitted limits.
Tax for the use of road protection zones outside the localities for carrying out
construction or installation works.
Tax for the use of road protection zones outside the locality limits for placing outdoor
advertisements.
Tax for the use of road protection zones outside the locality limits for placing roadside
service objects.
Depending on the type of road tax, the tax law establishes the taxable person, deadlines
for payment of the road tax, tax rates, exemptions (e.g. a legal entity or an individual
shall pay road tax on vehicles registered in Moldova (i) on the date of state registration
of vehicle or (ii) on the date of the vehicle inspection/annual technical testing of the
vehicle).
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Road tax rates for the use of roads by vehicles registered in Moldova vary depending on
the type of vehicle and its specific characteristics (engine capacity, weight, etc.).
The fixed tax rates for vignette vary from EUR 4 to EUR 50, depending on the period the
vehicle stays in the territory of Moldova.
Branch income
Branches
Moldovan law does not distinguish between branches of non-resident companies and
local companies established by a foreign investor. A non-residents branch is established
and registered in Moldova as a legal enterprise fully owned by the foreign investor. As
such, it is subject to the same tax regime as local incorporated companies.
On the other hand, the concept of a tax PE does exist in Moldova. Generally, the PE of
a non-resident entity will be subject to CIT in Moldova on any profits attributable to
that PE. Since there is no local concept of a legal branch that is not a legal entity, nonresidents do not typically intentionally operate in Moldova through a taxable PE.
Representative offices are often established by non-resident entities as a first step to

operating in Moldova. According to the tax law, a representative office can engage only
in auxiliary or preparatory activities. A representative office can perform only a limited
range of activities without being considered a PE of the non-resident.
All representative offices must submit, by 31 March of the year following the reporting
year, the required Tax Reporting Statement on the activity conducted during the year
concerned.As of July 2014, the deadline for submission of such a tax report will be no
later than 25 March of the year following the reporting one.
Resident legal entities are taxed on their worldwide income, while non-resident entities
are taxed on their Moldovan-source income. Taxable income is computed as accounting
profit adjusted in accordance with tax legislation.
Inventory valuation
Currently, Moldovan law provides for the following inventory valuation methods:
standard cost method, retail method, weighted average cost, first in first out (FIFO),
and last in first out (LIFO). As of 1 January 2014, new National Accounting Standards
apply as a recommendation and are mandatory as of 1 January 2015. The new standards
provide for the following inventory valuation methods: specific identification, FIFO, and
weighted average cost.
Assets are generally valued at their acquisition cost, production cost, or market value.
Capital gains
Taxable gain is generally calculated as 50% of the difference between the sale price and
the fiscal value of the capital assets (i.e. all costs related to the acquisition of capital
assets). This taxable portion of the capital gain is then taxed at the normal tax rates.
This capital gain should be included in the total gross amount of income for the year
in which the assets were sold (alienated). Capital gains may be decreased by capital
losses registered in the current or previous year. Some examples of capital assets include
shares, plots of land, options to purchase or sell capital assets, etc.
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Dividend income
Starting with profits earned in 2012, dividends paid by Moldovan legal entities to other
Moldovan legal entities are taxed with the applicable final 6% withholding tax (WHT),
while the distribution of dividends from profit earned during the period between 2008
and 2011 remain subject to the previously applicable final WHT of 15%.
Dividends received by Moldovan legal entities from foreign legal entities are included
in taxable income and taxed at the applicable 12% CIT rate. According to Moldovan
legislation, the beneficiary of such dividends is entitled to a credit for the tax paid in the
foreign country, within certain limits.
Interest income
Interest derived by legal entities on bank deposits with a period exceeding three years,
as well as the interest derived from corporate securities issued in the form of bonds for a
period exceeding three years, is tax exempted until 1 January 2015.
Interest derived from state bonds is also exempt until 1 January 2015.
Revenues obtained from foreign exchange differences are to be included in taxable

income. Foreign exchange losses are CIT deductible in the period they are incurred.
In certain circumstances (e.g. high depreciation of the national currency), foreign
exchange differences should be capitalised to the value of assets in relation to which the
expenses were incurred.
Non-taxable revenues
Moldovan tax law provides for the following main types of non-taxable revenues:
Contributions to the capital of an entity.
Income earned while benefiting from income tax incentives.
Money received from special funds in the form of grants from government-approved
programmes.
The following elements have also been included in the list of non-taxable sources of
income:
Income from reversing impairment losses on depreciation of fixed and other assets.
Income obtained under international projects and grants that contribute to the longterm development of education and research.
Foreign income
Resident legal entities are taxed on their worldwide income, unless a double tax treaty
(DTT) stipulates otherwise. The legal entities, under certain conditions, can benefit from
tax credits provided under a DTT or can apply for unilateral tax credits against income
tax paid in any foreign country, if this income is subject to taxation in Moldova. Such
tax credit shall not exceed the amount that would have been estimated at the CIT rate
applicable in the given tax period. Otherwise, there is no specific tax deferral regime.
Deductions
As a general rule, expenses incurred by a company are deductible for CIT purposes only
if they are deemed as ordinary and necessary, aimed at deriving taxable income, and
justified with adequate supporting documentation.
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The rate of deductible expenses for business purposes (ordinary and necessary) that are
not adequately supported by necessary documentation is 0.2%.
Fixed assets are subject to CIT depreciation under the diminishing-balance method if
their useful economic life exceeds one year and acquisition costs exceed MDL 6,000.
According to the fiscal law, fixed assets are divided into five categories. These categories
are set out according to specific rules, mainly on the assets useful life (i.e. the number
of years during which the assets utilisation generates economic advantages; the useful
life for each type of depreciating asset is regulated by governmental decision). The
depreciation rates vary as follows:

First category: 5%.

Second category: 8%.
Third category: 12.5%.
Fourth category: 20%.
Fifth category: 30%.
Intangible assets are subject to CIT amortisation according to the straight-line method.
Goodwill
The Moldovan tax law does not provide any specific tax rules related to CIT deductibility
of goodwill amortisation. According to the National Accounting Standards that can
be used for tax purposes, the goodwill acquired in a business combination shall not be
amortised.
Start-up expenses
Start-up expenses incurred by companies (e.g. stamp taxes paid upon company
registration, drawing up of registration documents, manufacture of stamp) generally are
considered as intangible assets and are deductible for CIT purposes through the straightline amortisation method during the period of up to five years.
Interest expenses
Different CIT deductibility rules apply for interest on loans used for carrying out
operational activities and for loans used for investment activities performed on an
occasional basis.
As a general rule, deductions for interest and foreign exchange losses are allowed for CIT
purposes, provided such expenses are deemed as ordinary and necessary for carrying
out the activities of the business. Expenses should also be incurred for the purposes of
obtaining taxable income and justified by adequate backup documentation.
If the interest paid by a Moldovan company relates to its operational or day-to-day
activities, the related expenses are deductible for CIT purposes. A few other provisions
should also be considered, namely the following:
Interest expenses incurred based on loan agreements, for the benefit of individuals
and legal entities (except financial institutions and micro-financing organisations,
and leasing companies), by businesses are deductible for CIT purposes, limited to the
average weighted interest rate on credit loans offered by banks to legal entities for the
period of up to 12 months and over 12 months.
If the loan is obtained to acquire/build fixed assets, the related interest expense
should be capitalised to the initial fiscal value of assets until they are commissioned.
The deductibility of this expense is capped at the above limit. The excess difference is
treated as a CIT non-deductible expense for that fiscal year.
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If interest relates to an investment activity, the interest expense is deductible for CIT
purposes within the limit of the income derived from the investment.
Bad debt
Bad debts are deductible for CIT purposes, provided certain conditions are fulfilled and
justifying documents are made available.
Charity and sponsorship expenses are deductible for CIT purposes if borne for the
benefit of public authorities and public institutions financed from the state budget, as
well as non-profit organisations and family-type foster homes within certain conditions,
at up to 10% of taxable income.
Fines and penalties
Fines and penalties related to CIT, related to other taxes and due payments to the state
budget, or for violations of legal acts are not deductible for CIT purposes.
Taxes
CIT is not deductible.
Among others, the following expenses are also generally deductible for CIT purposes:
Research and development (R&D) expenses incurred during the fiscal year as current
expenses, should certain conditions be met.
Business trip expenses, protocol expenses, and expenses on insurance of business
entities, within the limits approved by the government.
Waste, spoilage, and perishability expenses, within the threshold approved by the
companys manager.
Leasing companies are allowed to deduct provisions to cover claims related to nonrecovery of lease rates and interest rates up to 5% from the weighted average balance
from the account receivables, provided certain conditions are met.
Among others, the following expenses are generally not deductible for CIT purposes:
Expenses not adequately supported by necessary documentation, except the 0.2%
rate as mentioned above.
Provisions, except for financial institutions, microfinance organisations, and leasing
companies as mentioned above.
Losses incurred from transactions between affiliated parties.
Fiscal losses
Fiscal losses may only be carried forward in three equal instalments for three
consecutive years following the year the losses were incurred, provided the company
records taxable income. If the company recorded fiscal losses for more than one year,
such losses are carried forward in the order in which they arose. Fiscal losses are
recorded on off-balance-sheet accounts.
Losses may not be carried back.
A Moldovan legal entity generally may deduct expenses related to payments to foreign
affiliates to the extent that these amounts were actually paid and are not in excess of
what it would have paid to an unrelated entity (i.e. arms length). However, the payer
is required to hold documentary evidence for the actually performed transactions. Still,
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certain types of expenses may follow general rules of deductibility that would limit their
amount (e.g. interest expenses on loan agreements).
Group taxation
Moldovan tax law does not provide for group taxation.
Transfer pricing
Currently, transfer pricing regulations in Moldova are at an initial development stage.

However, according to the 2015 to 2017 Medium Term Tax Policy of the Moldovan
government, as well as the available draft law, formal transfer pricing documentation
requirements are expected to be introduced in the Moldovan tax law starting from 2015.
Moldova is currently not an Organisation for Economic Co-operation and Development
(OECD) member country, and the domestic law does not provide for any reference to the
possibility of applying the OECD Transfer Pricing Guidelines.
As a general rule, under Moldovan tax provisions, transactions concluded between
related persons are taken into consideration only if the interdependence of these persons
does not influence the outcome of the transaction. The arms-length principle applies to
transactions with both resident and non-resident related parties.
With reference to the transactions carried out by Moldovan companies with related
parties, Moldovan tax law provides the following specific provisions:
No deduction is allowed for losses incurred on the sale or exchange of property,
performance of work, or supply of services between related parties, carried out
either directly or through intermediaries (regardless of whether the transaction price
corresponds to the market value).
No deduction is allowed for expenses incurred in relation to related parties if no
justification is available for payments and if such expenses do not represent necessary
and ordinary business expenses.
In accordance with Moldovan tax law, a company is considered the taxpayers related
party if one of the following conditions exists:
The company controls the taxpayer.
The company is controlled by the taxpayer.
Both the company and the taxpayer are under common control of a third party.
From a tax perspective, control is the ownership (either directly or through one or more
related persons) of 50% or more in value of the capital or voting power of one of the
companies. For this purpose, an individual will be treated as owning all equity interest
that is directly or indirectly owned by members of ones family.
Two individuals are related parties if they are spouses or relatives up to the fourth
degree.
Thin capitalisation
Moldovan tax law does not provide for a specific thin capitalisation regime.
The deductibility of interest expenses follows the deductibility regime as described under
Interest expenses in the Deductions section.
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Foreign tax credit
Income tax paid in any foreign country, if this income is subject to taxation in Moldova,
is allowed for tax credit, provided that the taxpayer submits a document that justifies
payment (withholding) of the income tax outside of Moldova, certified by the competent
body of the respective foreign country, with its translation into the state language.
The amount of tax credit for any taxable year should not exceed the amount that would
have been estimated at the rate applicable in Moldova with regard to this income.
A tax paid in a foreign country should be creditable for the year in which the income is
taxable in Moldova.
Free entrepreneurial zones (FEZs)
FEZs are territories where domestic and foreign investors can carry out entrepreneurial
activities on preferential terms (i.e. favourable tax, customs, visa, and other regimes).
There are currently seven FEZs in Moldova.
The following types of activities may be carried out in an FEZ:
Production of goods preferentially for export, excluding alcohol and alcoholic
products.
Sorting, packing, marking, and other similar operations of goods transiting the
customs territory of Moldova.
External commercial activities.
Other supportive activities.
There is also an international free port (Giurgiulesti International Free Port) and airport
(Marculesti International Free Airport) with status similar to FEZs that can benefit from
specific tax and customs incentives.
FEZ incentives
For the 2014 year, the following CIT incentives for FEZ investors have been maintained:
Entities that are established in the FEZ and export goods and services from FEZ
outside the customs territory of Moldova or deliver the produced goods to other FEZ
residents for goods to be exported are entitled to apply only 50% of applicable CIT
rate on such gains. For other cases, the CIT rate is 75% of the established one.
The income obtained from export of goods (services) originating from the FEZ
outside the customs territory of Moldova or from supply of the produced goods to
other FEZ residents for goods to be exported is CIT exempted for a period of three
years, provided that the FEZ residents invested in the fixed assets of their enterprises
and/or in development of the infrastructure of the FEZ capital equivalent to at least 1
million United States dollars (USD).
The income obtained from export of goods (services) originating from the FEZ
outside the customs territory of Moldova or from supply of the produced goods to
other FEZ residents for goods to be exported is CIT exempted for a period of five
years, provided that the FEZ residents invested in the fixed assets of their enterprises
and/or in development of the infrastructure of the FEZ capital equivalent to at least
USD 5 million.
From a VAT standpoint, goods and services supplied in the FEZ from abroad, from the
FEZ outside the customs territory of Moldova, in the FEZ from other areas of Moldova,
and those supplied to residents of other FEZs are subject to 0% VAT.
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According to the customs provisions, goods are introduced into the FEZ with no VAT
or customs duty and are not subject to economic policy measures, according to specific
criteria. However, certain taxes in specific situations might be incurred by residents of
the FEZ. Investors in the FEZ are guaranteed and protected from changes in legislation
for a general period of up to ten years, while under certain conditions this period may be
extended to 20 years.
Withholding taxes
Residents
Resident legal entities making payments to individuals (other than salary payments)
must withhold and pay WHT to the MTA at the following rates:
Preliminary WHT:
7% preliminary withholding of payments made for the benefit of resident
individuals, unless such payments are tax exempt.
15% preliminary withholding from interests.
The beneficiary deducts (i.e. recovers) the amount of preliminary WHT from annual
income tax due.
Final WHT:
10% final withholding of an individuals income derived from leasing, rent, and
usufruct of movable and immovable property.
6% final withholding of dividends paid out to individuals, except for dividends for
the profits received between 2008 and 2011, for which the WHT rate is 15%.
15% from the amount withdrawn from the share capital related to the increase
arisen from the distribution of net profit and/or other sources identified as equity
among shareholders (associates) throughout the 2010 to 2011 fiscal period, in
accordance with the share capital venture quota.
The tax charged to residents under this paragraph is a final one and exempts
the recipient of such income from including it into gross income, as well as from
declaring it.
The following tax treatment applies to royalty payments to residents:
Practicing entrepreneurial activity: no WHT at source is applied.
Resident individuals: a final WHT of 12% is applied, without including such income
in the gross income of individuals (except royalty income of individuals aged 60 and
over in the field of literature and art).
Additionally, according to Moldovan tax law, each payer of earnings should pay to the
state budget a tax of:
18% of gambling earnings.
18% of promotional campaigns if the earned amount exceeds 10% of the personal
allowance but does not exceed MDL 50,000.
25% of promotional campaigns if the earned amount equals or exceeds MDL 50,000.
Also, earnings from promotional campaigns and/or lottery earnings are considered
non-taxable income sources if the value does not exceed 10% of the personal allowance
(MDL 951 for 2014).
Non-residents
The following WHT rates apply upon payments to non-residents:

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6% for dividend payouts, except for dividends for the profits received between 2008
and 2011, for which the WHT rate is 15%.
15% from the amount withdrawn from the share capital related to the increase arisen
from the distribution of net profit and/or other sources identified as equity among
shareholders (associates) throughout the 2010 to 2011 fiscal period, in accordance
with the share capital venture quota.
12% for other revenues.
The DTTs in force between Moldova and other countries may provide for more
favourable tax rates than those provided by the local provisions. For their application,
the foreign beneficiary of such income should provide the paying entity with its fiscal
residency certificate before the payments are actually made.
Currently, Moldova has 47 operational DTTs, as outlined below:
Recipient
Albania
Armenia
Austria
Azerbaijan
Belarus
Belgium
Bulgaria
Canada
China
Croatia
Cyprus
Czech Republic
Estonia
Finland
Germany
Greece
Hungary
Ireland
Israel
Italy
Japan
Kazakhstan
Kuwait
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Macedonia
Montenegro
The Netherlands
Oman
Poland
Portugal
Romania
Russian Federation
Dividends * (%)
5/10
5/15
5/15
8/15
15
15
5/10
5/15
5/15
5/10
5/10
5/10
5/15
10
5/15
15
5/15
5/15
5/10
5/10
5/15
15
10/15
0/5
5/15
10
10
5/10
5/10
5/15
0/5/15
5
5/15
5/10
10
10
Interest * (%)
5
10
5
10
10
15
10
10
10
10
5
5
5
10
5
5
10
10
5
5
5
10
10
2
10
10
10
5
5
10
5
5
10
10
10
0
Royalties * (%)
10
10
5
10
15
0
10
10
10
10
10
5
10
10
3/7
0
8
0
5
5
5
0/10
10
10
10
10
10
5
10
10
2
10
10
8
10/15
10
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Recipient
Serbia
Slovakia
Slovenia
Spain
Switzerland
Tajikistan
Turkey
Turkmenistan
Ukraine
United Kingdom
Uzbekistan
Dividends * (%)
5/15
5/15
5/10
0/5/10
5/15
5/10
10/15
10
5/15
0/5/10
5/15
Interest * (%)
10
10
5
5
10
5
10
10
10
0/5
10
Royalties * (%)
10
10
5
8
0
10
10
10
10
5
15
* If multiple rates are listed, then the WHT rate to be applied is subject to fulfilment of specific criteria
provided by the DTT.
Tax administration
Taxable period
The tax year for CIT purposes is the calendar year. For new business entities, the fiscal
year is considered the period beginning with the registration date until the end of the
calendar year.
For WHT and VAT purposes, the fiscal period is the calendar month starting the first day
of the month.
Tax returns
An annual CIT return must be submitted to the MTA by 31 March of the year following
the reporting year.
WHT and VAT liabilities must be declared and settled monthly by the end of the month
following the reporting one.
As of July 2014, the deadline for submission of tax reports and for fulfilment of tax
obligations towards the budget will be no later than the 25th day of the months
mentioned in the legislation.
Farming enterprises with an annual average number of employees not exceeding three
and not registered as VAT payers must submit a unified annual tax return, provided
certain conditions are met.
Adjusted tax returns
Taxpayers who discover that the tax return previously submitted contains an error are
able to submit an adjusted tax return, provided that no written decision was issued by
the tax authority in order to initiate a tax audit and the related tax period is not covered
by a tax control.
Late interest payments will not be applicable in amounts higher than the tax liability
resulting from the adjusted tax return submitted, and no fines will be applicable if the
tax duties are paid before the announcement of a tax audit.
Under amendments to tax legislation, the fine will not apply in certain circumstances of
fiscal violations specified by law, and if already established, it will be entirely cancelled,
if no additional tax liabilities arise.
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Companies that have miscalculated the taxes, and this was not detected in the previous
tax audit, are absolved from fines and late interest payments for violations identified
within the repeated tax audit.
Companies keeping the accounting records and preparing financial reports under
International Financial Reporting Standards (IFRS) will not be fined for violation of
accounting and record keeping for tax purposes for a period of up to two years from the
date of implementation (transition) to those standards.
Payment of tax
Taxpayers must declare and pay the applicable CIT by 31 March of the year following
the reporting year. In 2014, taxpayers that receive income from sources other than
employment income, interest, or royalties (from which residents withhold an income
tax at source) are required to pay interim CIT, no later than 31 March, 30 June, 30
September, and 31 December, amounts equal to 25% of either the total estimated value
of the CIT due for the 2014 fiscal period or the total value of the calculated CIT for the
2013 fiscal period.
As of July 2014, the deadline for submission of tax reports and for fulfilment of tax
obligations towards the budget will be no later than the 25th day of the months
mentioned in the legislation.
Fines and penalties
The MTA is entitled to apply a fine of 30% of the diminished tax liabilities (including CIT
ones).
Under the tax law, the MTA is entitled to apply a fine in the amount of the undeclared
tax if it is a result of tax evasion.
Taxpayers who settle amounts as assessed by the MTA within three business days and
have no other outstanding liabilities may benefit from a 50% reduction of the fines
applied by the tax authorities.
In addition, certain special provisions regarding tax evasion apply. The term tax
avoidance is defined under Moldovan tax law as diminishing the tax liabilities by more
than MDL 30,000 by means of including in accounting, tax, or financial documents
deliberately distorted data on income or expenses or by hiding other objects of taxation.
Should the amount of the tax due exceed MDL 30,000, the tax evasion is regarded as
a criminal offence. According to the Moldovan Criminal Code, legal entities can be
punished for tax evasion with a fine up to MDL 120,000 and preclusion from performing
certain activities or winding-up.
Among the most important fines and sanctions for non-compliance with applicable tax
law, the following are worth mentioning:
The fine for the performance by the taxpayer of an economic activity with the
issuance of a bill without using a cash register is MDL 7,000.
The fine for the failure to provide the VAT invoice in accordance with the tax law
is MDL 3,600 for each VAT invoice but capped to MDL 72,000. The same fines are
applicable for failure to register the fiscal invoice in the general electronic register
managed by the tax authorities.
The fine for hindering the execution of a tax audit by not providing access to
production, storage, commercial, or other facilities is MDL 10,000.
The fine for submitting a tax return containing unauthentic information is MDL 1,000
for each tax return, but being capped to MDL 7,000.
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Tax audit process
The rules governing the tax audit process are stated in the tax code. Generally, the tax
audit duration and frequency depends on its type. For instance, a tax audit performed
at the taxpayer premises should not exceed two months and should be performed no
more than once per year for the same taxes and duties, except for specific circumstances
provided by law.
Also, a tax audit can be performed on a more frequent basis within certain specific
circumstances (e.g. refund of VAT and other taxes, reorganisation).
A repeated tax audit for already audited periods can be performed in a number of cases,
for instance:
In case the results of previous controls are inconclusive, incomplete, or not
satisfactory.
If certain circumstances are identified that attest to the existence of tax
infringements.
In case of reorganisation or liquidation.
Under the general tax rule, the Moldovan tax authorities can assess tax liabilities no
later than four years after the last date established for the submission of the relevant
tax report or for the settlement of that tax liability (if submission of the tax report is
not required). This limitation term does not apply in case of tax-related crimes or nonsubmitting of the corresponding tax returns.
There are no specific topics of focus for the tax authorities. Generally, it depends on the
nature of the taxpayer and the specifics of the activity it performs. The main criterion for
selection of a company to be subject to a tax audit is a risk based one.
Rulings
The law does not provide for the possibility of obtaining binding rulings. However,
comfort letters can be obtained.
Taxpayers that inadequately computed tax liabilities due to incorrect written
explanations issued by the MTA may not be subject to sanctions (i.e. fines and latepayment penalties). Tax liabilities may still be recomputed by the MTA. Written
explanations are issued by the MTA free of charge and may remain valid for an indefinite
period of time, unless cancelled by new legislation or other rulings. Such explanations
are generally issued by the Moldovan competent authorities during a period of up to one
month.
Other issues
The legislation and the approach of the state authorities in Moldova related to corporate
taxation have been and are expected to be subject to changes.
Taxpayers should seek professional advice on specific issues, given that only limited
interpretations have been issued by the MTA.
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Mongolia
PwC contact
Michael Ahern
PricewaterhoseCoopers Tax & Advisory LLP
34 Al-Farabi Avenue
Almaty, 500590, Kazakhstan
Tel: +7 727 330 3200
New drafts of tax legislation
The government of Mongolia has been carrying on a project to draft new tax laws for
over a year. The proposed drafts are:

General Tax Law.

Corporate Income Tax (CIT) Law.
Value-added Tax (VAT) Law.
Personal Income Tax (PIT) Law.
The new drafts of the above tax laws are expected to cover the following changes,
amongst other things:
Refund of 90% of the tax paid by entities with revenue less than 1.5 billion Mongolian
tugrik (MNT).
Increase of loss carryforward to five years.
Increase of the VAT registration threshold to MNT 50 million.
Tax credit of PIT will be in line with the minimum labour wage amount.
Note that these legislative changes have yet to pass to the Parliament for its approval.
Registration of permanent establishments (PEs)
Historically, PE registration was not possible in Mongolia. However, recently, the tax
authorities introduced certain updates to the Taxpayer Registration Regulation.
Under the updated regulation, the tax authority may now register and issue taxpayer
certificates for PEs. The PE of a foreign legal entity is required to be registered as a
taxpayer within 30 days of conducting activities in Mongolia.
The implications of this change are still not clear, and the registration process will need
to be tested in practice. However, this change should allow PEs of foreign legal entities to
file self-assessed tax returns in Mongolia, which were not previously available.
The new Law on Investment
On 3 October 2013, the Mongolian Parliament passed the Law on Investment and the
Law on Implementation of the Law on Investment (effective from 1 November 2013).
Following the issuance of the new laws, the Law of Mongolia on Foreign Investment and
the Strategic Entities Foreign Investment Law (SEFIL) were cancelled. The purpose of
the Law on Investment is to protect the legitimate rights and interests of the investors
in the territory of Mongolia, establish the common legal guarantee for investment,
support investment, stabilise the tax environment, determine the powers of the state
organisations and rights and obligations of the investor, and regulate other relations
concerning investments.
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The Law applies to both domestic and foreign investors that have made an investment
in Mongolia. Investment incentives provided by Law are divided into tax and non-tax
incentives.
Tax incentives include exemptions from tax, tax credits, possibility to use accelerated
depreciation for tax purposes, tax loss carryforward, and deduction of employee training
costs from taxable income. Non-tax incentives include favourable conditions, such as
longer period to possess land, incentives for conducting operations in free trade zones
(FTZs)and technology and science parks, increase of quota of foreign employees,
simplified visa arrangements, etc.
The Law also introduced astabilisation certificatein order to create a more stable tax
environment in Mongolia. By obtaining a stabilisation certificate, investors can stabilise
applicable rates of the following taxes:

CIT.
Customs duties.
VAT.
Minerals royalties.
The holder of a stabilisation certificate will stabilise tax rates for a period from five to 18
years, depending on the amount of investment, industry of investment, and geographic
location of investment in Mongolia. Under the valid period of a stabilisation certificate,
investors will also have the right to apply effective tax rates provided in general
legislation if such rates are more beneficial for investors.
The criteria for issuing a stabilisation certificate are:
the total investment amount specified in the business plan and feasibility study
reaches thresholds specified
an environmental impact assessment should be carried out
the investment should create new permanent jobs, and
the investment should introduce innovative technology.
An investor who made an investment in tobacco and alcohol related activities cannot
benefit from tax stabilisation.
If certain conditions are met, the stabilisation certificate period may be extended by 1.5
times for some projects.
The conditions are that the projects:
produce products that substitute for imported products or export-orientedproducts
thatare important for the long-term social and economic development of Mongolia,
that will require investment of more than MNT 500 billion, and have a development
period of more thanthree years, or
produce value-added, processed products for export.
In addition to above, the law provides for incentives with respect to customs duty
(exemption) andVAT (zero-rate) on imported equipment and machinery during the
construction period of specific projects, as below:
Construction of a factory for processing construction materials, petroleum,
agricultural products, and products intended for export.
Nano, bio, and innovation technology plant construction.
Construction of power plants and railroads.
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Mongolia
Impact to old investors
The Law on Implementation of the Investment Law specifies that investors who
previously invested in Mongolia and meet the conditions to obtain the tax stabilisation
certificate can apply for the tax stabilisation certificate. The certificate can be obtained
based on the investment amount made on projects for the previousfive years from the
date of enforcement of the Law on Investment, and this investment amount should be
confirmed by the audited financial statements.
For those investors who already have in place investment agreements with the
government of Mongolia in accordance with the old Foreign Investment Law and Law on
Minerals, the effective investment agreements will stay in force.
Changes in taxation of mineral resources
The government of Mongolia has approved new guidelines on the methodology of the
imposition and calculation of the mineral royalty fee. The guidelines provide details
for determining sales value of minerals for the purpose of imposing the mineral royalty
fee. For example, the mineral royalty fee on exported coal products will be based on the
export sales contract price of licence holders until 1 January 2015, after which it will be
based on the Chinese coal market price (as it was previously applied).

Mongolian resident economic entities are taxable on aggregate annual income earned
worldwide. Non-resident economic entities carrying out business activities in Mongolia
are taxable on the income earned in the territory of Mongolia and from Mongolian
sources.
Mongolian CIT is levied at the following rates, using a progressive-rate scale that ranges
from 10% to 25%, as follows:
10% applies to the first MNT 3 billionof annual taxable income.
25% applies to any excess of MNT 3 billion of annual taxable income.
However, the income described in the chart below is excluded when determining the
annual taxable income and is taxed at different tax rates on a gross basis:
Source of income
Dividends
Royalties
Interest
Gambling, betting games, and lotteries (net)
Sale of immovable property
Sale of rights (e.g. mining licences, special activity licences, and
other rights granted by the authorised organisations for conducting
specificactivities)
Applicable tax rate (%)

10
10
10
40
2
30
Local income taxes
CIT is levied at the state level in Mongolia. There are no local corporate income taxes.
Corporate residence
A resident legal entity is an economic entity formed under the laws of Mongolia or a
foreign economic entity that has its place of management in Mongolia. There has not
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been further development of this concept, so it cannot be assumed that the standard
place of effective management or control test will apply.
A non-resident company is a foreign economic entity that conducts its business in
Mongolia and earns income from Mongolian sources.
The concept of a PE is not well developed. Historically, non-resident companies suffered

a 20% withholding tax (WHT) on a range of payments unless treaty protection was
available. However, this situation may change with the introduction of changes to the
taxpayer registration procedures, whereby PEs are now theoretically able to register for
tax purposes in Mongolia. Nonetheless, this change is not yet tested in practice.
Other taxes
A VAT at the rate of 10% is imposed on the supply of taxable goods and services in the
territory of Mongolia and on imports into Mongolia.
VAT is specifically levied on the following:

Goods sold in Mongolia.

Work performed and services rendered in Mongolia.
All goods imported into Mongolia to be sold or used.
Goods exported from Mongolia for use or consumption outside Mongolia.
Services provided outside Mongolia are not technically subject to VAT. However, in
practice, the tax authorities do try to apply VAT on such services.
Customs duty
A flat customs tariff of 5% applies with respect to most goods imported into Mongolia,
except for information technology and medical equipment and pure-bred livestock,
which are zero rated, and diesel fuel, which is subject to 1% customs duty (effective
from 1 February 2014).
Export duties apply to certain exported goods, such as unprocessed camel wool, wood,
and wooden materials.
Note that the Mongolian Parliament approved The law on exemption from VAT and
The law on exemption from Customs duty for imported equipment, spare parts, and
tools necessary for construction work to increase capacity of Combined Heat and Power
Plant-4 by T-120/130-130-8MO turbine. The laws are effective from 24 January 2014
until 1 December 2014.
Excise tax
Excise tax is levied on goods manufactured in or imported into Mongolia, such as

tobacco, alcohol, gasoline and diesel fuel, and passenger vehicles. Excise tax is also
levied on the physical units of special-purpose technical devices and equipment used for
betting games and gambling and on the activities of individuals and legal entities that
conduct such activities. The excise tax rate on the goods varies between 0.30 United
States dollars (USD) and USD 10, according to the origin and type.
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The excise tax rates for the gasoline and diesel that are produced in Mongolia are as
follows:
Gasoline:
USD 0 to 11 per tonne (up to 90 octane).
USD 0 to 12 per tonne (above 90 octane).
Diesel: USD 0 to 15 per tonne.
For imported gasoline and diesel, the excise tax rates vary between MNT 0 and MNT
265,000, depending on the port of import.
Immovable property tax
Immovable property tax is an annual tax that varies between 0.6% and 1%, depending
on the decisions made by the local representatives committee, on the value of the
immovable property that is owned. For tax purposes, the value used is the value
registered with the government registration authority. If the property is unregistered,
the insured value is used. In the absence of either a registered or insured value, the
accounting value is used.
This tax does not apply to property owned by persons and financed through the state
budget, to any dwelling houses, or to any buildings and construction for public use.
Transfer taxes
Transfer of rights is treated as sale of right in practice and taxed at 30% under CIT Law.
In the case of transfers of property, stamp duty will be applied.
Stamp duty
Under the Law of Mongolia on State Stamp Duties, there are 44 types of activities subject
to stamp duties, including the following:

Settlement of a legal dispute by a court.

Court involvement in arbitration.
Notary services.
Consulate services.
State registration services for legal entities.
Registration services for foreign invested economic entities and representative offices
of foreign organisations.
Other specific activities that need permissions and rights from the state authorities.
The amount of duty varies depending on the types of services or activities involved.
Fees and taxes applicable to the extractive industry
A range of fees and other taxes are payable for activities in the extractive industry. The
primary ones include the following:
Mining License Fee that is agreed to up front and stated in the mining licence.
Royalties that are paid on the sale of mining products. The rate depends on the
product being mined and the level of processing being performed in Mongolia.
Water Usage Fee.
Water Pollution Fee.
Air Pollution Fee.
Land Use Fee.
Social insurance contribution by employer
Employers social insurance contribution depends on the industry type and is subject to
rates between 11% and 13%, which is comprised of 7% for pension, 0.8% for benefits,
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2% for health, 0.2% for unemployment, and 1% to 3% for industrial accident and
occupational disease insurance. Employer charges are not capped. Social insurance taxes
paid by employers are deductible in determining taxable income.
The employer should also withhold social insurance taxes (10%) from employees and
submit returns electronically and by paper before the 5th day of the following month
on a monthly basis. Payments should be made before the end of the month to the social
insurance fund account.
Branch income
The repatriation of profits from branches of foreign legal entities is subject to branch
profits tax at a rate of 20%.
Please note that it appears it is no longer possible for foreign legal entities to establish
a branch in Mongolia. However, the above provision remains in place for branches that
were previously established in Mongolia.
Inventory valuation
There is no specific provision in the tax law for inventory valuation.
Capital gains
Capital and ordinary transactions are treated in the same way for tax purposes (i.e.
included in annual taxable income). An exception is provided for income from sales of
immovable property, which is subject to tax of 2% on gross sales proceeds.
Taxation of capital gains of non-residents is not clear. The CIT Law could be interpreted
in a way that the net gain from disposal of shares in a Mongolian company should
be subject to CIT. However, since there is no mechanism in practice for non-resident
companies to declare income in Mongolia and show the basis for the taxable gain,
only WHT (20% on the gross payment) charged at source of payment is available. No
mechanism for taxation of capital gains currently exists if the transaction takes place
between two non-residents that have no taxable presence in Mongolia.
Dividend income
Dividend income earned by a Mongolian resident entity is subject to WHT of 10%.

Dividend income to be remitted out of the country to a foreign tax resident is subject to
WHT at 20% but may be reduced by an applicable double taxation treaty (DTT).
Interest income
Interest income is subject to a special income tax of 10%. Interest income to be remitted
out of the country to a foreign tax resident is subject to WHT at 20% but may be reduced
by an applicable DTT.
Partnership income
There is no transparent partnership concept in Mongolia. Partnership income is treated

as income of a legal entity and is subject to CIT.
Rental income
Rental income is included in taxable income for tax determination.
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Royalty income
Royalty income is taxed at a special rate of 10%. Royalty income to be remitted out of
the country to a foreign tax resident is subject to WHT at 20% but may be reduced by an
applicable DTT.
Unrealised currency exchange gains/losses
Unrealised currency exchange gains are not considered as taxable income, and, at the
same time, unrealised losses are not deductible from taxable income.
Foreign investment
Tax stabilisation
The new Law on Investment (effective from 1 November 2013) provides tax incentives,
including exemptions from tax, tax credits, possibility to use accelerated depreciation
for tax purposes, tax loss carryforward, and deduction of employee training costs from
taxable income.
The Law also introduced a stabilisation certificatein order to create a more stable tax
environment in Mongolia. By obtaining a stabilisation certificate, investors can stabilise
applicable rates of the following taxes:

CIT.
Customs duties.
VAT.
Minerals royalties.
The holder of a stabilisation certificate will stabilise tax rates for a period from five to
18 years, depending on amount of investment, industry of investment, and geographic
location of investment in Mongolia (seeStabilisation certificateterms below). Under
the valid period of a stabilisation certificate, investors will also have the right to apply
effective tax rates provided in general legislation if such rates are more beneficial for
investors.
The criteria of issuing a stabilisation certificate are:
the total investment amount specified in the business plan and feasibility study
reaches thresholds specified in the stabilisation certificate terms (see below)
an environmental impact assessment should be carried out
the investment should create new permanent jobs, and
the investment should introduce innovative technology.
An investor who made an investment in tobacco and alcohol related activities cannot
benefit from tax stabilisation.
If certain conditions are met, the stabilisation certificate period may be extended by 1.5
times for some projects.
The conditions are that the projects:
produce products that substitute for imported products or export-orientedproducts
thatare important for the long-term social and economic development of Mongolia,
that will require investment of more than MNT 500 billion, and have a development
period of more thanthree years,or
produce value-added, processed products for export.
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In addition to above, the law provides for incentives with respect to customs duty
(exemption) andVAT (zero-rate) on imported equipment and machinery during the
construction period of specific projects, as below:
Construction of a factory for processing construction materials, petroleum,
agricultural products, and products intended for export.
Nano, bio, and innovation technology plant construction.
Construction of power plants and railroads.
Stabilisation certificate terms
For the mining, heavy industry, and infrastructure sectors, a stabilisation certificate is
issued as follows:
Investment
Amount (MNT
in billions)
30 to 100
100 to 300
300 to 500
more than 500
Stabilisation certificate terms (years)

Central
Region
Khangai
Western
Period
(Gobisumber,
Region
Region
within
Dornogobi,
(Arkhangai,
(Bayanwhich
Dundgobi, Bayankhongor,
Eastern
Ulgii,
Darkhan-Uul,
Bulgan,
Region Gobi-Altai, investment
must be
Orkhon,
(Dornod, Zawkhan,
Umnugobi,
Uws,
made
Ulaanbaatar
Selenge, Uwurkhangai, Sukhbaatar,
Khowd)
(years)
Region
Tuw)
Khuwsgul)
Khentii)
5
6
6
7
8
2
8
9
9
10
11
3
10
11
11
12
13
4
15
16
16
17
18
5
For any other sector, a stabilisation certificate is issued as follows:

Investment amount (MNT in billions)
Central
Region
Khangai
Region
Western
Period
(Gobisumber,
Dornogobi,
(Arkhangai,
Region
within
Dundgobi, Bayankhongor,
Eastern (Bayan-Ulgii,
which
Darkhan-Uul,
Bulgan,
Region Gobi-Altai, Stabilisation investment
Orkhon,
(Dornod,
Zawkhan, certificate
must be
Umnugobi,
Ulaanbaatar
Selenge, Uwurkhangai, Sukhbaatar,
Uws,
terms
made
(years)
Region
Tuw)
Khuwsgul)
Khentii)
Khowd)
(years)
10 to 30
5 to 15
4 to 12
3 to 10
2 to 8
5
2
30 to 100
15 to 50
12 to 40
10 to 30
8 to 25
8
3
100 to 200
50 to 100
40 to 80
30 to 60
25 to 50
10
4
more than
more than
more than 80 more than 60 more than 50
15
5
200
100
Foreign income
Mongolian legal entities pay tax on their worldwide income. Unremitted earnings are
taxed the same as ordinary earnings.
Credit relief is available with respect to foreign tax on income arising from countries that
have DTTs with Mongolia, capped at the level of Mongolian tax that would have been
due on the same income in Mongolia.
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Deductions
Expenses mostly associated with generating aggregate annual income are deductible for
CIT purposes (provided proper documentation is in place), and a list of these expenses is
provided in the legislation. Expenses not on this list are not deductible.
Accrued expenses
Accrued expenses are deductible.
Contingent liabilities are not deductible.
Depreciation of fixed assets and amortisation of intangibles are deductible within the
limits provided in tax legislation. A straight-line method is used and the years of usage
are determined for tax purposes.
Non-current asset class
Useful life (in years)
Building and construction
40
10
Computer, computer parts, and software
3
Intangible asset with undefined useful life
10
Intangible asset with defined useful life (includes licence for mineral
Period in force
exploration and extraction)
6 Other non-current asset
10
7 Building and facilities of manufacture, management of technology park,
20
unit production, and buildings within technology park
8 Machineries, mechanism, equipment, technical parts of manufacturing
3
within the management technology park, unit production, and technology
park
1
2
3
4
5
Goodwill
There is no specific provision in the tax law regarding the deductibility of goodwill.
Organisational and start-up expenses are not deductible.
Interest expenses
Interest expenses are deductible. However, there are limits with respect to the
deductibility of interest expense. See Thin capitalisation in the Group taxation section for
more information.
Bad debt
Bad debt provisions are not deductible. There is no clear guidance in the tax legislation
as to whether bad debt is deductible or not; however, in practice, the tax authorities
disallow deductibility of bad debt.
Charitable contributions are not deductible, except for donations to the fund of
vocational training.
Pension expenses
Compulsory pension insurance premiums paid to the Social Security Authority of

Mongolia are deductible. Additional voluntary insurance premiums are deductible but
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shall not exceed 15% of taxable income. Pension provisions or internal pension fund
expenses are not deductible.
Payment for directors
If a payment for directors is a salary payment on which social insurance and personal
income tax is levied, it is considered as deductible.
Bribes, kickbacks, and illegal payments are not in the list of permitted deductions. Per
anti-corruption law, monetary amounts involved with respect to such payments will be
confiscated and criminal proceedings will be instituted.
Fines and penalties
Fines and penalties are not deductible for tax purposes.
Taxes
Certain taxes paid by a taxpayer, as well as social contributions of employers, are

generally deductible for tax purposes.
Tax losses
Tax losses generally may be carried forward for up to two years. However, the annual
amount of carried forward losses deductible from taxable income may not exceed 50%
of the taxable income in the tax year.
Legal entities involved in the infrastructure and mining industries may carry forward
100% of their losses for up to four to eight years, depending on their investment period
and based on government regulations.
There is no provision for the carryback of losses.
Deductibility of payments to foreign affiliates depends on the nature of the payment, as

follows:
Interest payments are deductible but with restrictions (i.e. thin capitalisation rule
may apply, interest paid on loans for construction of buildings and installation of
equipments needs to be capitalised during that period).
Dividend payments are not deductible.
Technical assistance service payments are deductible.
Payments for other services are deductible.
Group taxation
There are no rules permitting grouping for tax purposes in Mongolia.
Transfer pricing
Transfer pricing provisions are addressed in the CIT Law and the General Tax Law of
Mongolia.
Per the CIT Law of Mongolia, if the following relation is present with a taxpayer, then it
is considered as a related party:
Holds 20% or more of the common stock.
Has the right to receive 20% or more of the dividends or distributions.
Has the right to appoint 20% or more of the management of the economic entity or is
otherwise able to determine its policies.
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If related parties have sold or transferred goods, performed work, or rendered services
among themselves below or above fair market value, the tax authority shall determine
gross taxable income of such goods, work, and services based on value involving
transactions of similar goods, work, and services among non-related parties.
The General Tax Law provides for a broader definition of related entities for transfer
pricing purposes, which is entities authorised to directly and indirectly participate in
management, control, and property rights of any foreign and Mongolian legal entities.
Per Article 48.3 of the General Tax Law, if prices, payments, and fees (hereinafter the
price) used in cooperative production, in the provision of technical services, in sending
human resources, in purchase and sales transactions between related entities abroad
and Mongolia are higher or lower than fair market value, then the fair market value
method shall be used in order to determine taxable income.
Thin capitalisation
A thin capitalisation rule (debt-to-equity ratio is 3:1) applies, and interest paid in excess
of this ratio is not deductible and is treated as a dividend. This is applied on an investorby-investor basis as opposed to the company as a whole; no restriction applies to interest
that is not paid to an investor.

At present, the following types of incentives exist in Mongolia:
Tax stabilisation of certain taxes per investment made (please see Foreign investment in
the Income determination section for details).
Interest on government notes payable (bonds) is exempt from CIT.
Income earned from the production and/or sale of produced equipment and spare
parts intended for the activities of small or medium-sized production businesses in
the territory of Mongolia is exempt from CIT.
Income earned from the sale of a technique or equipment that economises natural
resources, reduces environmental contamination, and is nature-oriented is exempt
from CIT.
Tax losses incurred by a business entity involved in the infrastructure and mining
sector in a given tax year shall be deducted from taxable income for four to eight
consecutive years after such tax year. The period will depend on the size of the
investment, as defined from time to time by the responsible government agency.
In the event that a business entity or a citizen has been found to have made a
donation of up to MNT 1 million to support non-governmental organisations founded
by citizens having developmental disabilities, such amount shall be deducted from
taxable income of such business entity or citizen for the given tax year.
A 50% tax reduction is available from CIT for an economic entity that produces or
grows the following products:
Cereal, potatoes, and vegetables.
Milk.
Fruits and berries.
Fodder plants.
Foreign tax credit
A foreign tax credit is available for foreign taxes paid up to the amount of the Mongolian
tax liability that would have been due on the same amount based on an applicable DTT.
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Withholding taxes
Dividends, interest, and royalties paid, and payments made for goods sold and work/
services provided (directly or electronically), to non-residents are subject to WHT at a
20% rate.
Dividends, interest, and royalties paid to resident companies are all subject to WHT at
10%.
Dividends, interest, and royalties paid to resident individuals are subject to WHT at a
10% rate.
Current DTTs
Beneficial WHT rates (%)
Recipient
Austria
Belarus, Republic of
Belgium
Bulgaria
Canada
China
Czech Republic
France
Germany
Hungary
India
Indonesia
Kazakhstan
Korea, Democratic Peoples Republic of
Korea, Republic of
Kuwait (cancelled, effective from 1 April
2015)
Kyrgyzstan
Malaysia
Poland
Russia
Singapore
Switzerland
Turkey
Ukraine
United Arab Emirates (cancelled,
effective from 1 January 2015)
United Kingdom
Vietnam
Dividends
5/10 (1)
10
5/15 (2)
10
5/15 (7)
5
10
5/15 (7)
5/10 (1, 4)
5/15 (9)
15
10
10
5
5
5
10
10
10
10
0/5/10 (6, 9)
5/15 (5)
10
10
0
5/15 (3)
10
Interest
10
10
10
10
10
10
10
10
10
10
15
10
10
5
5
5
Royalties
5/10
10
5
10
5/10
10
10
5
10
5
15
10
10
10
10
10
10
10
10
10
10
5
10 In accordance
with domestic
legislation
5/10 (10)
5
10
5
10
10
10
10
0
10
7/10 (8)
10
5
10
Technical
fees
N/A
N/A
N/A
N/A
5
N/A
N/A
N/A
N/A
N/A
15
N/A
N/A
N/A
N/A
N/A
N/A
10
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
10
Notes
1.
2.
1352
5% if the recipient is a company (excluding partnerships) and directly owns at least 10% of the
capital of the company paying dividends.
5% if the beneficial owner is a company (excluding partnerships) and directly or indirectly holds at
least 10% of the capital of the company paying dividends.
Mongolia
Mongolia
3.
5% if the beneficial owner is a company that directly or indirectly controls at least 10% of the voting
power in the company paying dividends.
4. 5% if the beneficial owner is a company (excluding partnerships) and directly owns at least 10% of
the company.
5. 5% if the beneficial owner is a company (excluding partnerships) and directly owns at least 25% of
the capital of the company paying dividends.
6. No tax if dividends paid to the government/certain public bodies.
7. 5% if the beneficial owner is a company and directly or indirectly holds at least 10% of the capital of
the company paying dividends.
8. 7% if interest is paid to a bank that is the beneficial owner of the interest and carrying on a bona fide
banking business.
9. 5% if the beneficial owner is a company and directly owns at least 25% of the capital of the company
paying dividends.
10. 5% if interest is received by a bank or a similar financial institution.
Tax administration
Taxable period
The tax year is the calendar year.
Tax returns
Companies must submit a quarterly return by the 20th day of the month following the
end of each quarter and an annual return by 10 February after the end of the tax year.
A withholder must prepare and submit a quarterly return of the tax deducted by the
20th day of the first month of the following quarter and an annual return by 10 February
after the end of the tax year.
Payment of tax
A taxpayer shall pay the taxes due in advance by the 25th day of each month in
accordance with the payment schedule based on the previous year. Quarterly tax
statements should be submitted to the corresponding tax authority by the 20th day
of the first month of the following quarter, and an annual tax statement should be
submitted by 10 February of the following year when the year-end settlement is made.
In practice, the Mongolian tax authorities allow concessions as follows:
Where total tax paid exceeds the tax liability, the excess may be credited against
other taxes due or credited against future tax payments. The overpayment also may,
theoretically, be refunded; however, the practice of refunding in Mongolia is not clear or
consistent.
An economic entity or organisation that has withheld tax from a payment of dividends,
royalties, sale of rights, or a payment of income to a taxpayer should transfer the WHT
to the tax authorities within seven working days. Tax withheld relating to the sale of
immovable property should be transferred to the tax authorities within ten working
days.
Tax audit process
The tax audit cycle is not clearly stated in the tax laws. However, the regular cycle in
Mongolia is three to five years in practice, and it is very common if the company requests
a refund from tax authorities or liquidates its company. Moreover, a tax audit can come
anytime if the tax authorities suspect some risk or misuse of the legislation or receive
information from a trustworthy source about tax evasion.
The statute of limitations in Mongolia is five years for tax arrears, fines, and penalties.
However, the dispute settlement timeframe shall not pertain to payment of tax, fine, and
penalty debts.
Mongolia
1353
Mongolia
The tax authorities normally focus their attention on issues like understatement of
income, overstatement of expenses, and withholding obligations of taxpayers.
Another hot topic in Mongolia right now is transfer pricing. The transfer pricing
concept is at a very early stage of development. Currently there is very limited (if any)
established practice or commonly understood methodology being applied by the tax
authorities. Nevertheless, the basic principle governing Mongolian transfer pricing rules
is that transactions between related parties should be undertaken at fair market value.
1354
Mongolia
Montenegro
PwC contact
Branka Rajii
PricewaterhouseCoopers d.o.o.
Poslovni centar KruevacRimski Trg 50
20000 Podgorica Montenegro
Tel: +381 11 3302 100
The latest amendments to the corporateprofit tax (CPT) were enacted on 31 December
2013 and are effective as of 1 January 2014. The most important changes relate to
limitation of the tax credit for investmentsin underdeveloped municipalities to 200,000
euros (EUR)and introduction of a discount of 6%of the calculated CPT liability for
taxpayers that settle their CPT liabilityby the prescribed deadline.
The property transfer tax was also subject to changes in July 2013, with effect as of 1
January 2014. The most important change relates to introduction of self-assessment as a
method for determination of tax liability.

Entities operating in Montenegro are subject to a 9% CPT.
Resident taxpayers are taxed on their worldwide profit. Non-resident taxpayers are
taxed on their Montenegrin-sourced income or income attributed to their Montenegrin
permanent establishment (PE). Non-residents are also subject to withholding tax
(WHT) on income sourced in Montenegro (see the Withholding taxes section for more
information).
Local income taxes
No local (i.e. municipality) corporate income taxes exist in Montenegro.
Corporate residence
A legal entity is considered to be a tax resident if it is incorporated in Montenegro. In
addition, a foreign corporation may also be deemed a Montenegrin tax resident if the
corporation has a place of effective management in Montenegro. No explicit rules exist
for determination of effective management. In practice, it usually is the place where key
managerial decisions are made or where the board of directors sits.
Montenegrin tax legislation contains very basic PE rules following, in main features, the
guidelines set out in the Commentary to the Organisation for Economic Co-operation
and Development (OECD) Model Tax Treaty. PE is defined as a fixed place of business
through which a non-resident carries out business in Montenegro. PE is deemed to
exist in case of a non-resident having one of the following in Montenegro: place of
management, branch office, office, factory, workshop, mine, gas or oil site, stone pit,
or any other place of natural resources exploitation in Montenegro. A construction site
constitutes a PE only if construction activities last longer than six months.
Montenegro
1355
Montenegro
PE is not deemed to exist in case of a non-resident having storage of inventory
in Montenegro only for the purpose of delivery of goods or having operations in
Montenegro that are of a preparatory or auxiliary nature.
Other taxes
The main principles of the Montenegrin VAT are in line with the European Union (EU)
Sixth Directive guidelines. Taxable supplies are subject to a general 19% VAT rate;
however, certain supplies are taxed at a reduced 7% rate (e.g. bread, milk, books,
medicines, computers) and 0% rate (e.g. export of goods, supply of gasoline for vessels
in international traffic). Prior to 1 July 2013, the standard VAT rate was 17%.
In principle, the VAT base is comprised of consideration (in cash, goods, or services)
received for supplies, including taxes, except VAT (e.g. customs, excise duty), and direct
costs (e.g. commissions, cost of packing, transport). If the consideration is not paid in
cash, or if an exchange of goods for services takes place, the tax base will be the market
value of the goods or services received at the time of supply.
Registration for VAT in Montenegro may be either voluntary or mandatory. Voluntary
VAT registration is possible for small taxpayers who have not realised turnover exceeding
EUR 18,000 in the last 12-month period. Once registered, a company may not apply for
deregistration for at least three years. VAT registration is mandatory for an entity that
realises turnover exceeding the EUR 18,000 threshold in any 12-month period.
VAT is calculated and paid on a calendar-month basis (i.e. a VAT return must be
submitted and VAT liability cleared monthly). VAT calculated on imports is paid along
with customs duties.
Customs duty
Exports
There are no export duties in Montenegro, nor is it forbidden to export any goods.
Exceptionally, the Montenegrin government can impose quantity limitation of exports
only in case of critical shortage of certain goods or for the purpose of protection of nonrenewable natural resources, under certain conditions.
Imports
Customs duties are paid on goods imported into the customs territory of Montenegro
in accordance with the rates and tariffs set forth in the Customs Tariffs, which is in line
with the harmonised system of tariff codes prescribed by the World Trade Organization
(WTO). Customs duties can be levied in two manners, as ad valorem or specific duty per
unit of goods.
For agricultural - alimentary products, a combined duty has been determined, that is,
both ad valorem and specific duty are charged simultaneously.
Ad valorem duties are prescribed within the scope from 0% to 30%. Specific duties range
from EUR 0.04 per 1 kg to EUR 1 per 1kg.
Customs rates stipulated by international agreements are only applied to goods of
preferential origin from countries covered by such agreements. The most important free
trade agreements that Montenegro signed are with the European Union, the European
Free Trade Association (EFTA), the Central European Free Trade Agreement (CEFTA)
states, Russia, Turkey, and Ukraine.
1356
Montenegro
Montenegro
Excise duty
Legal entities that are importers or producers of the following products are subject to the
excise duty:

Alcohol and alcohol beverages.

Tobacco products.
Mineral oils, their derivatives, and substitutes.
Coffee and coffee products.
Mineralised water with sugar or aroma.
Excise duty can be prescribed as a fixed amount and/or as a certain percentage (ad
valorem).
Property tax
Property tax is payable by legal entities who own or have user rights over real estate
located in Montenegro. The annual tax is levied at proportional rates, ranging from
0.1% to 1% on the market value of assets as of 1 January of the current year. In case of
acquisition of new property, the taxpayer is obligated to submit a tax return to the tax
authorities within 30 days from the acquisition date (i.e. registration return for property
tax) and to declare annual property tax by the submission of annual returns. Tax is
payable in two instalments, based on decisions issued by the tax authorities.
Property transfer tax
Transfer tax of 3% is payable on the acquisition of ownership rights over immovable

property.
The taxable base is the market value of the immovable property at the time of the
acquisition. A taxpayer (i.e. the acquirer of immovable property) is obligated to selfassess a tax liability, submit a tax return, and settle a tax liability within 15 days from the
contract date.
Stamp taxes
No stamp taxes are in place in Montenegro.
Payroll tax
Employment income includes all receipts paid or provided to an individual based on

employment (salaries, pensions, benefits in kind, insurance premiums, benefits, and
awards above the non-taxable thresholds). Income generated through other types of
personal engagements similar to employment (e.g. temporary jobs) is also considered
employment income.
While employees are the taxpayers, the employer is responsible for calculating and
withholdingpersonal income tax (PIT) on behalf of its employees.
Employment income is subject to WHT at a flat rate of 9%. Gross salary exceeding EUR
720 is subject to 15% PIT. The 15% rate applies to the part of the salary exceeding EUR
720, while the 9% rate applies to the part of the salary below (and including) EUR 720.
Social security contributions for pension and disability insurance, health insurance, and
unemployment insurance are calculated and withheld by an employer from the salary
paid to an employee. Unlike the other two types of social security contributions, pension
and disability insurance contributions are subject to a specific annual cap (EUR 50,350
for 2013).
Montenegro
1357
Montenegro
Social security contributions are payable by the employer and employee at different
rates. The amount borne by the employer is treated as an operating cost while the
portion payable by the employee is taken from the gross salary.
The rates paid by the employer are as follows:
Pension and disability insurance 5.5%.
Health insurance 3.8%.
Unemployment insurance 0.5%.
The rates paid by the employee are as follows:
Pension and disability insurance 15%.
Health insurance 8.5%.
Unemployment insurance 0.5%.
Environmental charges
Legal entities are subject to environmental charges for the following:

Use of firing or electrical feed equipment with power greater than 1MW.
Import of substances harmful to the atmosphere.
Production or deposit of dangerous waste.
Tax for use of road vehicles (vignettes).
Charges for access to certain services that are of general interest (for use of mobile
telephones, electricity, cable television connection, space denominated for consumers
of tobacco products and acoustic devices).
Branch income
Non-residents carrying out business in Montenegro through a PE are taxed on their
Montenegrin-source income at a rate of 9%. A branch is considered to be a PE.
Taxable profit is calculated by adjusting the accounting profit (determined in accordance
with International Financial Reporting Standards [IFRS] and accounting legislation) in
accordance with the provisions of the CPT Law.
Inventory valuation
Inventory is valued by applying the average weighted cost method or the first in first
out (FIFO) method. If another method is used for book purposes, an adjustment for tax
purposes should be made.
Capital gains
Capital gains realised by the sale or transfer of real estate or other property rights, as
well as shares and other securities, are subject to the 9% CPT rate.
Capital gains may be offset against capital losses occurring in the same period. A capital
loss may be carried forward for five years.
Dividend income
Dividend income of the recipient is exempt from CPT in Montenegro if the distributor is
a Montenegrin corporate taxpayer.
1358
Montenegro
Montenegro
Interest income
Interest income is included in taxable profit and subject to 9% CPT.
Foreign income
A Montenegrin resident receiving foreign income is granted a tax credit in the amount
of the tax paid abroad but limited to the amount that would be calculated using
Montenegrin rates.
There are no provisions that provide for the possibility that taxation of income earned
abroad may be deferred.
Deductions
Depreciation
Depreciable assets are tangible and intangible assets with a useful life of at least one year
and an individual acquisition value of at least EUR 300.
Intangible and fixed assets are divided into five depreciation groups, with depreciation
rates prescribed for each group (I - 5%, II - 15%, III - 20%, IV - 25%, and V - 30%). A
straight-line depreciation method is prescribed for assets classified in the first group
(real estate), while a declining-balance method is applicable for assets classified in the
other groups.
Goodwill
Goodwill is determined according to IFRS and is subject to impairment. There are no

other special provisions on goodwill.
Start-up expenses
There are no special provisions regarding treatment of start-up expenses. Therefore,

they will be deductible if they are incurred for business purpose and properly
documented under the general expense deductibility rule.
Interest expenses
Interest expenses are generally deductible if they are business related and properly
documented. Also, interest and related cost of loans paid out to a creditor with the status
of a related party are recognised as expenses only in the amount that does not exceed
market interest rates between unrelated parties. The exceeding amount is not recognised
as an expense, but it is included in the taxable profit and subject to 9% CPT.
Interest paid out to non-resident legal entities (unless it is revenue of a PE of a nonresident legal entity) is subject to WHT levied at 9%.
Bad debt
Write-offs and provisions for doubtful debts are considered deductible, provided that:
written-off/provided receivables were previously included in the taxpayers revenues
doubtful debts were written-off as uncollectible, and
proof of unsuccessful collection of these debts exists.
Charitable contributions for healthcare, scientific, educational, humanitarian, religious,

environmental protection, and sports-related purposes are recognised for CPT purposes,
up to a threshold of 3.5% of total revenue.
Fines and penalties
Penalty interest for late payment of taxes is not CPT deductible.

Montenegro
1359
Montenegro
Taxes
The basic deductibility rule is that business expenses incurred for business purposes are
CPT deductible. Following that rule, CPT Law provides for full deductibility of taxes.
The following expenditures are also recognised for CPT purposes, up to the prescribed
threshold:
Entertaining expenses, up to 1% of total revenue.
Membership fees paid to chambers of commerce and other associations (except
political parties), up to 0.1% of gross revenue unless the amount of the fees has been
determined by law.
Provisions for redundancy payments and jubilee awards recognised as expenditures,
up to the amount prescribed by the labour law.
Provisions made by banks and insurance companies, in an amount not exceeding the
amount prescribed by the legislation that regulates operation of these entities.
Provisions for special risks of brokers and dealers, up to the amounts prescribed by
the securities law.
Provisions for renewable natural resources, warranties for the sale of goods and
services (guarantee period), and the expected loss from court process (delicate
agreements) if accounted for in accordance with the accounting legislation.
The taxpayer is entitled to carry forward losses incurred in an accounting period over
the following five years. Carryback of losses is not allowed.
Supplies of goods or services from a foreign group entity not established in Montenegro
to a Montenegrin entity must be valued at arms length. Excess expenses recorded over
market value are treated as non-deductible expenses.
With respect to payment of charges of a PE, CPT Law provides that administrative costs
charged by the non-resident head office are non-deductible for CPT at the level of PE.
Group taxation
Tax consolidation is permitted for a group of companies in which all of the members are
Montenegrin residents and the parent company directly or indirectly controls at least
75% of the shares in the other companies. Each company files its own tax return, and the
parent company files a consolidated tax return for the entire group.
Each company is taxed based on its contribution to the consolidated taxable profit (or
loss) of the group.
Tax consolidation is binding for at least five years.
Transfer pricing
The difference between the transfer price and arms-length price is included in the
taxable profit and is taxed accordingly. Parties considered to be related are the parties
between whom special relations exist, which could directly impact the conditions or
economical results of the transaction between them.
Methods permitted in determining arms-length price are the comparable uncontrolled
price (CUP) method (as the primary method), resale minus method, or cost plus
method.
1360
Montenegro
Montenegro
There are no other rules or guidelines introduced apart from the above rules in respect
to transfer pricing.
Thin capitalisation
There are no thin capitalisation provisions in place in Montenegro.

The CPT Law provides only three tax incentives related to businesses: one for newly
established businesses in non-developed municipalities, one for non-governmental
organisations, and a foreign tax credit. The latest CPT amendments introduced a
discount of 6% that is applied on the amount of the calculated CPT liability and is
availableto taxpayers that settle their tax liabilityby theprescribed deadlines (i.e. tax
liability for the previous year should be settled not later than 31 March of the current
year).
Tax exemption for newly established business in underdeveloped

municipalities
Newly established production companies located in underdeveloped municipalities are

entitled to an eight year tax exemption. The maximum amount of tax exemption for the
period of eight years is limited to EUR 200,000.
The incentive is applicable to companies whose business units are established in
underdeveloped regions. In that case, tax holiday is proportional to the amount of
profit generated by such unit over the total profit for the period of eight years from
establishment of the unit.
The tax incentive is not applicable to a taxpayer operating in the sectors of (i) primary
production of agricultural products, (ii) transport, (iii) shipbuilding, (iv) fishery, (v)
steel production, (vi) trade, and (vii) catering, except primary catering facilities.
Tax exemption for non-governmental organisations
Non-governmental organisations (NGOs) registered for business activity are permitted

to decrease the corporate tax base by EUR 4,000, with the condition that profit is used
for realisation of the main goals of an NGO.
Foreign tax credit
Resident taxpayers are entitled to a tax credit up to the amount of corporate tax paid in
another country on income realised in that country. This tax credit is equal to the tax
paid in another country but may not exceed the amount of the tax that would have been
paid in Montenegro.
Withholding taxes
Montenegrin CPT Law imposes WHT on income realised from a Montenegrin source
and distributed to a non-resident. The scope of the WHT applies to dividends and profit
distribution, capital gains, interest, royalties, intellectual property rights fees, and rental
income, as well as fees for consulting, market research, and audit services.
Distributions of dividends and share of profits are also subject to WHT if the recipient is
a Montenegrin resident (either an individual or legal entity).
The general WHT rate is 9%.
Montenegro
1361
Montenegro
Application of a double tax treaty (DTT) may reduce or eliminate Montenegrin WHT.
To qualify for the beneficial rates prescribed by the treaty, a non-resident must prove
tax residency of a relevant treaty country and beneficial ownership over the income. In
order to qualify for a preferential tax rate according to a DTT, a non-resident will need to
provide the tax residency certificate filled out and stamped by the relevant authority of
its country of residence.
Although Serbia is regarded as the legal successor of the Serbia and Montenegro State
Union that ceased to exist in June 2006, the Republic of Montenegro, upon its Decision
on Independence (dated 3 June 2006), continues to honour international treaties
that were applicable in the State Union, including those executed by State Unions
legal predecessors (Federal Republic of Yugoslavia and Socialist Federal Republic of
Yugoslavia, i.e. former Yugoslavia). However, a quite low statutory WHT rate of 9%,
which was enacted after the most of the treaties had been introduced, is usually more
beneficial than treaty rates.
The list of the treaties is provided below:
Recipient
Non-treaty
Treaty:
Albania
Azerbaijan
Belgium
Belorussia
Bulgaria
China
Croatia
Cyprus
Czech Republic
Denmark
Egypt (2)
Finland
France
Germany
Hungary
India (3)
Ireland
Italy
Korea
Kuwait
Latvia
Macedonia
Malaysia
Malta
Moldova
Netherlands
Norway
Poland
Romania
Russia
1362
Montenegro
Dividends (1)
9
WHT (%)
Interest
9
5/15
10
10/15
5/15
5/10
5/15
5
5/10
10
10
5/15
5/15
5/15
5/15
15
5/15
5/15
5/10
10
10
5/10
5/10
5/15
0 (5)
5/10
5/15
5/15
15
5/15
10
5/15
10
10 (7)
15
8
10
10
10
10
10
10
0
15
0
0
0
10
10
10
10
10
10
10
10
10
10
10
0
0
10
10
10
Royalties Applicable from

9
10
10
10
10
10
10
10
10
10
5/10
10
15
10
0
10
10
10
5/10 (4)
10
10
10
5/10 (4)
10
10
5/10 (4)
10
10
10
10
10
10
2006
2014
1982
1999
2006
2001
1998
2005
1987
2006
1983
1989
1988
1976
1989
2003
N/A
2012
1986
2002
2004
2006
1998
1991
2010
2007
1983
1986
1999
1998
1998
Montenegro
Recipient
Serbia
Slovak Republic
Slovenia
Sri Lanka
Sweden
Switzerland
Turkey
Ukraine
United Kingdom
Dividends (1)
10
5/15
5/10
12.5
5/15
5/15
5/15
5/10
5/10 (8)
5/15
WHT (%)
Interest
10
10
10
10
0
10
10
0/10 (7)
10
10
Royalties Applicable from

5/10 (4)
2012
10
2002
5/10 (6)
2004
10
1987
0
1982
10
2006
10
2002
10
2002
5/10 (4)
2014
10
1983
Notes
1.
2.
3.
4.
5.
6.
7.
8.
If the recipient company owns/controls at least 25% of the equity of the paying company, the lower
of the two rates applies.
A new DTT was signed with Egypt in 2005, but it is not applicable yet. Meanwhile, the old treaty is
still applicable.
Instruments of ratification have not been exchanged between the two countries.
A tax rate of 5% will be applicable to literary, scientific, and work of art, films and works created like
films, or other sources of reproduction tone or picture. A tax rate of 10% will be applicable to patents,
petty patents, brands, models and samples, technical innovations, secret formulas, or technical
procedure.
Only in cases when dividends are to be paid to Montenegrin residents. If paid to Malaysian residents,
they are taxable at 9% in Montenegro.
A 5% rate is applicable for intellectual property and 10% rate for industrial property.
A 0% rate is applicable in cases when the income recipient is the government or government-owned
banks.
A 5% rate is applicable in cases when the beneficial owner is a company that holds at least 5% of
the capital of the payer of the income. In all other cases, a 10% rate applies.
Tax administration
Taxable period
The tax year in Montenegro is the calendar year.
Tax returns
Tax returns and supplementary documents (e.g. tax depreciation form) must be filed
with the tax authorities by the end of March of the following year.
Payment of tax
CPT is paid by the end of March of the following year for the previous year. Alternatively,
CPT may be paid in six annual instalments at the taxpayers request. A discount of 6%
is applicable on the amount of the calculated CPT liability for the timely payment of the
tax due (see the Tax credits and incentives section for additional information).
Tax audit process
There are no particular provisions regarding the audit cycle in Montenegro.
The right to assess taxes expires within five years after the end of the year in which the
tax should have been assessed.
The right to collect taxes expires within three years after the end of the year in which tax
has been determined.
Montenegro
1363
Montenegro
Topic on focus for tax authorities
According to our best knowledge, the focus of the tax authorities is proper documenting
of expenses and VAT. Apart from this, we are expecting that in the near future the focus
of the tax authorities will be transfer pricing, following trends of the countries in the
region.
1364
Montenegro
Morocco
PwC contact
Mahat Chraibi
PricewaterhouseCoopers Maroc
35, Rue Aziz Bellal
Marif - Casablanca
Maroc
Tel: +212 5 22 99 98 00
Tax treatment of late payment penalties
Finance Law 2014 provides that late payment penalties should, from a tax perspective,
be recorded on a cash basis.
Also, the expense relating to such penalties should be construed as being tax deductible.
Tax treatment of agricultural companies

Small-scale companies
Agricultural companies with a turnover of less than 5 million Moroccan dirham

(MAD)qualify for a total exemption ofcorporate income tax (CIT) starting 1January
2014. If such companies realise a turnover that exceeds MAD 5 million in say year (n),
they become liable toCIT in year (n), year (n+1), year (n+2), and year (n+3).
Moreover, such companies qualify for a reduced rate of 17.5% during the firstfive fiscal
years following the first year during which they become liable to CIT.
Medium and large-scale companies
Finance Law 2014 provides for a progressive approach to tax medium and large-scale
agricultural companies that realise a turnover exceeding MAD 5 million.
As such, companies with a turnover exceeding MAD 35 million, MAD 20 million, or MAD
10 million should become liable to CIT, respectively, in 2016, 2018, and 2020.

In general, the Moroccan tax code considers that all revenues and capital gains
generated in Morocco are subject to Moroccan taxation.
Companies are taxed on the difference between their trading income and expenditure.
Business expenses incurred in the operation of the business are generally deductible
unless specifically excluded.
The standard CIT rate is 30%. A higher rate of 37% applies to leasing companies and
credit institutions.
A reduced rate of 10% applies to small companies realising taxable income equal to or
less than MAD 300,000.
Morocco
1365
Morocco
Non-resident companies can, under certain conditions, opt for an alternative tax at the
rate of 8% of the amount of their contract, whatever the taxable income is.
Minimum contribution
CIT cannot be lower than a minimum contribution of 0.5% (or 0.25% for specific
products) levied on the turnover and other specific revenues. The minimum contribution
is not due during the first 36 months following the beginning of activities.
The minimum contribution paid in case of loss or the portion of minimum contribution
that exceeds the amount of CIT may be offset against the portion of CIT that exceeds the
minimum contribution until the third year.
Social cohesion contribution
The social cohesion contribution is levied on companies for which the accounting net
income exceeds MAD 15 million in a fiscal year for the three fiscal years starting from 1
January 2013.
This contribution is not tax deductible.
The applicable rates for the social cohesion contribution are as follows:
Net profit (MAD)
Between 15 million and 25 million
More than 100 million

0.5
1.0
1.5
2.0
Local income taxes
There are no local taxes levied on income in Morocco.
Corporate residence
Companies, whether or not established in Morocco, are subject to CIT on all profits
or income relating to property that they own, activities that they carry on, and profitmaking transactions that they carry out in Morocco, even when these are of an
occasional nature.
The notion of PE is not explicitly defined under Moroccan tax law.

However, the Moroccan tax authorities apply this concept for non-resident companies
according to some determined criteria that are inspired from the various tax treaties that
Morocco has signed with other countries.
Indeed, the question of whether an entity will be deemed to have a PE in Morocco is a
question of fact, in particular, subject to having, in Morocco, any fixed place of business
through which a foreign entity conducts industrial or commercial activity for an
indefinite or substantial period of time.
The term fixed place of business includes, for instance, a place of management or
operations, a branch, an agency, a premises used as a sales outlet, a construction of
assembly project, or a purchasing office. Also, in some specific cases, a non-resident
company may be deemed as having a PE if it operates in Morocco through a dependant
agent.
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Other taxes
VAT is levied under the Moroccan Tax Code and is due on all industrial, commercial, and
handicraft transactions taking place in Morocco, as well as on importation operations.
The standard rate of VAT is 20%.Lower rates of 7%, 10%, and 14% apply to specifically
designated operations.
The sale of goods is considered as taking place in Morocco, and thus subject to VAT, if
the goods sold are delivered in Morocco.
The sale of services is considered as taking place in Morocco, and thus subject to VAT, if
the services sold are consumed or used in Morocco.
Two types of exemptions from VAT are provided. The first is an exemption with credit,
equivalent to the zero tax concept. The second is an exemption without credit.
The zero-rated supplies include (but are not limited to) supplies of the following goods
or services:
Exported goods and services.
Certain agricultural equipment supplied under prescribed circumstances.
Investment goods recorded as fixed assets in the company accounting and acquired
during the first 24 months following the beginning of activity.
Offshore banks for certain specific operations, such as interest and commissions.
Goods and services rendered to companies established in free trade zones (FTZs).
Activities related to hydrocarbon exploration, etc.
Exempt supplies without deduction right include (but are not limited to) supplies of the
following goods or services:

Milk, sugar, bread, cereals.

Fiscal stamps.
Newspapers, books, documentaries.
Interest on government loans.
Customs duties
Importation of goods in Morocco gives rise to payment of importation duties, the VAT
on importation, and the special tax on importation called Taxe Parafiscale lImportation
(TPI).
Customs duties are computed on the basis of the ad valorem value of the goods at the
time of their entrance into Morocco.
Customs duties can be reduced if the imported products are covered by free trade
agreements signed by Morocco or other specific regulatory dispositions.
Under Moroccan tax law, the importation operations are subject to VAT at the rate of
20%. Lower rates of 7%, 10%, and 14% apply to specifically designated importations.
The Moroccan tax law also offers some economical customs regimes that provide VAT
exemptions with credit (equivalent to zero rate).
The TPI rate is 0.25% levied on the value of the imported goods.
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Excise taxes
Excise taxes apply to specific products imported or produced in Morocco, such as

tobacco, alcohol, and lubricants.
Professional tax
A professional tax is levied on individuals and enterprises that carry out a professional
activity in Morocco.
The tax consists of a tax on the rental value of business premises (rented or owned) and
fixed assets. The tax rates range from 10% to 30%, with exemption for the five first years
of activity.
The rental value is exempted for the portion of cost exceeding MAD 50 million.
Registration duties
Registration duties are due on all written or verbal conventions, such as property
transfer of real estate, shares, or rights; company set up; equity increase; and goodwill
transfer.
The rates of registration duties range from 1% to 6%. A flat rate of MAD 200 is also
applicable to specific operations and conventions.
For information purpose, the company set up and the capital increase are subject to
registration duties at the rate of 1%.
The transfer of non-listed shares is subject to registration duties at the rate of 3%.
However, a 6% rate is applicable to the transfer of shares of real estate companies.
The applicable rate for the transfer of goodwill is 6%.
The only mandatory social security regime in Morocco is the one managed by the CNSS
fund (Caisse Nationale de Scurit Sociale).
The CNSS rates are as follows and apply to the gross salary, excluding exempted
allowances and indemnities:
Family allocation
Employee portion (%) Employer portion (%)

6.40%
Computation basis
ceiling (MAD)
-
Social allocation
4.29%
8.60%
6,000
Professional tax
1.60%
2.00%
3.50%
Mandatory medical care
Branch income
Non-resident entities are subject to income tax at normal corporate rates derived from
all profits or income relating to property that they own, activities that they carry on, and
profit-making transactions that they carry out in Morocco.
The taxation is levied to the portion of income allocable to the branch located in
Morocco.
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In addition, a 15% branch tax applies to a non-residents after-tax profits. Some treaties
may provide protection against the application of the branch tax.
For resident entities having branches in Morocco, the income is taxable in the hands of
the head office at normal corporate rates.
Inventory valuation
Cost of inventory must be determined in accordance with the first in first out (FIFO) or
the average cost method. The last in first out (LIFO) method is prohibited.
Capital gains
Capital gains are taxable as a part of ordinary business income.
Dividend income
Dividends received by corporate shareholders from Moroccan-resident entities subject to

CIT must be included in business profits of the recipient company, but the dividends are
100% deductible in the computation of taxable income.
The participation exemption in Morocco is also applicable to dividends derived from
foreign subsidiaries.
Interest income
Interest income received from tax resident entities (other than financial institutions) is
subject to a withholding tax (WHT) at the rate of 20%. The WHT is deductible from CIT.
Rents/royalties income
Rents and royalties income are taxable as a part of ordinary business income.
Foreign income
The income derived from activities carried out in a foreign country is not subject to
taxation in Morocco unless the taxation is granted by treaty dispositions.
Note that the participation exemption in Morocco is also applicable to dividends derived
from foreign subsidiaries.
Deductions
Depreciation
Fixed assets are normally depreciated according to their economic life duration
according to the provision of the accounting regulation.
Depreciation is computed according to two methods: the straight-line method and the
declining-balance method.
The tax regulation (through administrative guidelines) has provided indicative
depreciation rates applicable when the company activity or the asset to be depreciated is
specific or particular.
Indicative depreciation rates are as follows:
Asset
Business premises and buildings

4 to 5
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Asset
Light construction (metal frame construction)
Production equipment, tools, and construction fittings
Huge computer facilities
Computers and related items (printers) and programs, as well as vehicles
(cars, trucks, vans, lifters)
Office furniture and software
Non-significant tools

10
10 to 15
10 to 20
20 to 25
20
30
Goodwill
Under Moroccan tax law, goodwill cannot be subject to amortisation. However, a

decrease of the value of goodwill is allowed to be recorded through provisions.
Start-up expenses
The development as well as incorporation expenses shall be capitalised and be tax

depreciated over a period of five years.
The carryforward of any loss due to the above expenses is limited to a period of four
years.
Interest expenses
Interest on loans granted by direct shareholders is deductible if the capital is fully paid
in. Also, the deductible interest is limited to (i) the portion of the loan that does not
exceed the share capital equity and (ii) the interest rate provided, annually, by the
Ministry of Finance (3.45% in 2013).
Bad debt
Bad debts that are definitively non-recoverable (after all recovery procedures have been
undertaken) are treated, from a tax point of view, as deductible losses.
Charitable contributions made by companies are deductible only if they are granted to
foundations and societies explicitly provided by law.
The contributions made to the community enterprise are deductible at up to 0.2% of the
company turnover.
Fines and penalties
Fines and penalties are not tax deductible expenses if they relate to infringements to
legal and regulatory dispositions.
However, expenses relating to late payment penalties (calculated in accordance with the
provisions of the law) should be tax deductible.
Taxes
Taxes constitute deductible expenses, except CIT itself and recoverable taxes.
Tax losses may be carried forward for a period of four years from the end of the lossmaking accounting period. However, the portion of a loss that relates to depreciation
may be carried forward indefinitely.
A carryback mechanism is not allowed under Moroccan law.
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Payments to foreign affiliates are allowed under Moroccan law. However, such payments
should respect the arms-length principle and foreign exchange regulations.
Group taxation
Under Moroccan law, consolidation or group taxation is not allowed.
Transfer pricing
Morocco has a general provision within its tax legislation requiring transactions between
related parties to be at arms length.
Where a Moroccan company is directly or indirectly connected with enterprises situated
inside or outside Morocco, profits transferred indirectly to such enterprises, by means
of increases or decreases in buying or selling prices or by any other means, must be
included among taxable profits on the tax return.
In order to determine the amount to be included among taxable profits, Moroccan tax
authorities will make comparisons with other similar companies carrying on normal
business activities or by mean of direct assessment based on information available to the
tax authorities.
Thin capitalisation
No specific thin capitalisation rules exist in Morocco.

However, the tax law restricts the interest rate on debts issued by shareholders and the
basis of calculating deductible interests.
Interest incurred is tax deductible if the shareholders capital is fully paid. Additionally,
the sum of the shareholder loans generating deductible interests should not exceed the
equity capital subscribed, and the applicable interest rate should not exceed the official
rate calculated annually on the basis of six months treasury bills.

The Moroccan tax law provides several tax incentives for specific sectors of activities.
Export companies
Export companies are exempt from CIT on their profits related to their export turnover
during the first five years following their first export transaction. These companies
benefit from a reduced CIT rate of 17.5% in subsequent years.
Hotel companies
Hotel companies are fully exempt from CIT on their profits relating to foreign currency
turnover for the first five years following their first accommodation operation in
foreign currency. They also benefit from a reduced CIT rate of 17.5% on such profits for
subsequent years.
Mining companies
Exporting mining companies, including those that sell products to export companies,
benefit from a reduced CIT rate of 17.5%.
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Agricultural companies
Small-scale companies
Agricultural companies with a turnover of less than MAD 5 million qualify for a total
exemption ofCIT starting 1 January 2014. If such companies realise a turnover that
exceeds MAD 5 million in year (n), they become liable toCIT in year (n), year (n+1),
year (n+2), and year (n+3).
Medium and large-scale companies
Finance Law 2014 provides for a progressive approach to tax medium and large-scale
agricultural companies that realise a turnover exceeding MAD 5 million. As such,
companies with a turnover exceeding MAD 35 million, MAD 20 million, or MAD 10
million should become liable to CIT, respectively, in 2016, 2018, and 2020.
Capital risk companies
Capital risk companies are exempt from CIT on profits derived within the scope of their
activities (these are profits related to purchases of companies shares that support such
companies development and the sales of such shares thereafter).
Hydrocarbon companies
Companies holding hydrocarbon exploration and exploitation permits are exempt from
CIT for ten years from the beginning of hydrocarbon regular production.
Banks and holding companies located in offshore zones
Banks and holding companies located in offshore zones benefit from a reduction in CIT
for the first 15 years of operation.
Banks may opt for a minimum CIT of 25,000 United States dollars (USD) or pay the tax
at a reduced rate of 10%.
Holding companies pay a flat tax of USD 500 during the first 15 years.
Casablanca Finance City (CFC)
A law was enacted in 2010 for the setting up of a finance area in Casablanca, called,
Casablanca Finance City.
The CFC statute may be granted to specific financial institutions as well as non-financial
institutions that offer such services as auditing, fiscal, legal, financial, actuarial, and
human resources management advisory.
The above statute may also be granted to regional and international headquarters.
Entities established in Casablanca Finance City are exempt, for their export turnover,
from CIT during the first five years following the date they obtain the CFC statute. These
companies benefit, for the export turnover, from a reduced rate of 8.75% in subsequent
years.
Free trade zones (FTZs)
The activities that must be necessarily performed by the companies established in the
FTZs are mainly the followings (the activities may vary for each FTZ):
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Food processing industries.

Textile and leather industries.
Metallurgic, mechanic, electric, and electronic industries.
Chemical and special chemical industries.
Services connected with the aforementioned activities.
Entities established in FTZs are exempt, for their export turnover, from CIT during the
first five years. These companies benefit, for the export turnover, from a reduced CIT
rate of 8.75% for the following 20 years.
Moreover, for entities established in FTZs, the dividends paid to non-residents relating to
activities performed in the FTZ are totally exempted from the WHT on dividends.
Listed shares
Non-resident entities are exempt from capital gains derived from the sale of stocks listed
on the Casablanca stock exchange, excluding the shares of real estate entities.
Foreign tax credit
Income tax paid on income earned from outside Morocco may be credited against CIT
payable in Morocco if provided by treaty.
Withholding taxes
WHT on interests
The standard WHT on interest paid to non-resident entities is set at 10% as provided
by the Moroccan law (unless reduced by treaty). However, the Moroccan law provides
that interest on loans granted in foreign currency with a maturity exceeding ten years is
exempt from WHT.
WHT on dividends
The standard WHT rate on dividends is set at 15% according to the Moroccan law
(unless reduced by treaty).
WHT does not apply to dividends paid to Moroccan companies subject to Moroccan
corporate tax, subject to the delivery of a property attestation.
A branch tax of 15% applies to the net income transferred by the Moroccan branch to
foreign entities (may be reduced by the tax treaty).
WHT on services paid to non-resident entities
According to the Moroccan tax code, all payments of all kind of services rendered by
non-resident entities are subject to WHT at the rate of 10%.
However, it shall be noted that treaties dispositions limit the scope of application of
WHT only to remunerations that constitute royalties. Such dispositions overrule the
domestic tax law provided by the Moroccan law.
Treaty WHT rates
Payments to non-resident corporations and individuals are subject to WHT, as shown

below.
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WHT (%)
Recipient
Arab Maghreb Union (2)
Austria
Bahrain
Belgium
Bulgaria
Canada
China (Peoples Republic)
Czech Republic
Denmark
Egypt
Finland
France
Germany
Hungary
India
Ireland
Italy
Jordan
Korea (Republic of)
Latvia
Lebanon
Luxembourg
Malaysia
Malta
Netherlands
Norway
Oman
Pakistan
Poland
Portugal
Qatar
Romania
Russia
Spain
Switzerland
Syria
Turkey
Ukraine
United Kingdom
United States
Dividends
Individuals and nonqualified companies
(3)
10
10
15
10
15
10
10
15
12.5
15
15
15
12
10
10
15
10
10
10
10
15
10
10
15
15
10
10
15
15
10
10
10
15
15
10
10
10
10
15
15
Qualifying
companies Interest (1)
(3)
(3)
5
10
5
10
6.5
10
7
10
10
10
10
0/10
10
10
10
10
10
10
10
10
10
10
5
10
10
10
10
10
6
10
10
10
10
10
5
10
6
10
5
10
10
10
5
0/10
6.5
0/10
10
10
10
10
5
0/10
10
10
7
10
10
10
5
0/10
10
10
5
10
10
10
7
10
7
10
7
10
10
10
5
10
10
10
10
10
Royalties
(3)
10
10
10
10
5/10 (4)
5/10
10
10
10
10
5/10 (4)
10
10
10
10
5/10 (4)
10
10
10
5/10 (4)
10
10
10
10
10
10
10
10
10
10
10
10
5/10 (4)
10
10
10
10
10
10
10
Notes
1.
2.
3.
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Some treaties provide for an exemption for certain types of interest (e.g. interest paid to public bodies
and institutions). Such exemptions are not dealt with in this treaty chart.
Arab Maghreb Union, the member states of which are Algeria, Libya, Mauritania, Morocco, and
Tunisia.
There is no limitation on WHT under the treaty.
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Morocco
4.
The lower rate (i.e. 5%) usually applies to copyright royalties and other similar payments in respect of
the production or reproduction of any literary, artistic, or dramatic work (excluding cinematographic
and television films), while the 10% rate applies to other types of royalties.
Tax administration
Taxable period
The taxable period corresponds to 12 months. The first taxable period can be less than
one year but should never exceed it.
Tax returns
CIT returns must be filed within three months following the closing of the fiscal year.
Payment of tax
Payment of tax is made during the fiscal year by way of four instalments of 25% each
based on the CIT of the previous year.
In case the CIT of the year exceeds the sum of the four instalments, the company should
proceed to tax regularisation along with the submitting of the taxable income return
after three months following the closing of the fiscal year (i.e. 31 March for fiscal year
corresponding to the calendar year). Otherwise, the exceeding tax amount can be
imputed on the four following instalments. Any remaining excess is reimbursed by the
tax authorities.
The statute of limitations runs until the end of the following fourth year. This period
may be extended in case of deficits or credits.
Topics of focus of tax authorities
The topics of focus of tax authorities depend on each specific situation (sector of activity,
company size, etc.). However, it is very common to find the following points:
Transfer pricing.
Tax treatment of provisions.
Taxation of indemnities and benefits granted to employees.
Other issues
Exchange controls
Foreign investors are allowed, following the accomplishment of some formalities,

to freely transfer abroad the whole proceeds of their investments in Morocco (i.e.
dividends, shares sale price, and liquidation income under the condition that the initial
investment is realised in one of the foreign currencies listed by the Moroccan Central
Bank).
However, some specific transfers of funds into and out of Morocco are subject to prior
authorisations from the exchange control office.
The legal vehicles used by foreign companies for the purpose of setting up a business in
Morocco are the branch and the subsidiary.
Under subsidiary form, the foreign entities generally opt for the corporation (SA) or the
limited liability company (SARL).
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The SARL is most adequate for companies with low investment capital while the SA
is most appropriate for companies that are investing an important amount of capital.
In general, the rules relating to the organisation and functioning of an SARL are more
flexible than those required for an SA.
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Mozambique
PwC contact
Joo Martins
PricewaterhouseCoopers, Lda
Pestana Rovuma Hotel
Centro de Escritrios, 5th floor
Rua de S 114
Maputo
Mozambique
Tel: +258 21 350 400
Mozambique introduced the following changes to the Corporate Income Tax (CIT) Code,
which are effective as of 1 January 2014:
Capital gains resulting from the disposal of shares, participating interests, or rights in
general, between non-residents, whether direct or indirect, free or for consideration,
will be taxable in Mozambique, provided the transaction involves assets located in the
country.
The definition of special relation has been introduced into the transfer pricing
regime.

CITis payable on general corporate income at a tax rate of 32%. For tax years ending
prior to 1 January 2016, income arising from agricultural or cattle breeding activities is
subject to a reduced rate of 10%.
CIT is levied on taxable profits, defined as accounting profits adjusted to comply with tax
law rules.
Corporate entities and other entities with headquarters or permanent establishment
(PE) in Mozambique are subject to CIT based on their worldwide income. On the other
hand, corporate entities and other entities without headquarters or PE in Mozambique
(i.e. non-resident entities) are only subject to CIT on the income earned in Mozambique.
Local income taxes
See Municipality taxes in the Other taxes section.
Corporate residence
Corporate residence is determined on the basis of a companys place of incorporation or
effective management. Thus, all companies with headquarters in Mozambique, as well
as any PE of non-residententities, are considered tax residents and are liable for CIT on
their worldwide income.
Under the relevant internal legislation, a non-resident entity is deemed to have a PE in

Mozambique whenever any of the following circumstances exists:
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It has premises or other fixed places of business through which industrial, trading,
agricultural, rendering of services, or similar activities are totally or partially carried
out.
It has an office, branch, plant, workshop, mines, quarries, oil or natural gas wells, or
other places of extraction of natural resources.
It has a construction, installation, or assembly site when the duration of works exceed
six months, including the activities of coordination, inspection, and supervision
connected to these sites.
It has persons or hired personnel, acting and dealing in Mozambique, who are
not independent agents in the terms of the law but rather acting on behalf of the
company with legal capacity to conclude contracts on its behalf and its name within
the scope of the companys activities.
Other taxes
VAT is chargeable on the sale of most goods and services as well as on imports. The
standard rate is 17%. Usually, VAT is recoverable by corporate entities, except for those
engaged in special business activities (e.g. financial and insurance operations, leasing
[exemption with restrictions], sale of immovable property, some exempt activities).
Customs duties
Custom duties are charged on importation of goods into Mozambique, and the
applicable rates vary from 0% to 20%. Mozambique is part of the Southern African
Development Community (SADC) protocol on commercial trade that exempts from
customs duties some goods produced within the SADC region. However, in order to
benefit from the exemption, the importer should provide proof of the origin of the said
goods through the presentation of the certificate of origin of goods.
Mozambique also has signed agreements with the European Union (EU) based on which
preferential rates are applicable on certain goods imported from such region.
Excise taxes
Excise duties are levied on certain goods manufactured locally or imported, which are
identified in a specific table that is an integrant part of the Excise Duty Act and indicates
the applicable rates. Amongst others, the said table includes goods such as tobacco, beer
and other alcoholic beverages, vehicles, cosmetics, cloths, airplanes, boats, etc.
Examples of excise duty rates include the following:

Alcoholic beverages: 40% (55% for wine of fresh grape).

Tobacco: 75%.
Air vehicle without engine: 35%.
Boats and other recreational or sportive crafts: 35%.
Cloths and respective accessories: 30%.
Property transfer taxes (SISA)
In Mozambique, a property transfer tax is charged on transfers of real estate, excluding

the land, which is owned by the state. The rate of tax is 2% of the selling price of the
building. When the beneficiaries live in a country with a privileged tax regime, the
applicable rate is 10%.
Stamp duties and service charges
Various documents require the payment of stamp duties. Service charges are payable
for the performance of certain services for official purposes, such as those rendered
by public notaries. These duties have been recently amended and vary generally from
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Mozambique
0.03% to 50% on the amount of the transaction supported by the document to be
stamped. In some other cases, the stamp duty comprises fixed amounts, ranging from
0.50 Mozambican metical (MZN) to MZN 5,000.
Social security contributions are payable by employers and employees on monthly

remuneration. The aggregate rate of contribution is 7%, with 4% paid by the employer
and the remaining 3% by the employee.
Municipality taxes
Municipality taxes that should be considered for corporate purposes include the
following:
Municipality tax on real estate
The municipality tax on real estate is levied annually on the value of immovable assets
situated within the municipality and owned or possessed by corporate entities. Effective
tax rates range from 0.4% (for housing purposes) to 0.7% (for office purposes or mixed
activities) of the building value, depending on the municipality.
Municipality tax on economic activities
The municipality tax on economic activities is levied on commercial or industrial

activities carried out within a municipal territory. The tax depends on the activity being
carried out, adjusted by coefficients, which are based on the zone and total area of the
premises in square metres. In Maputo, this tax is calculated based on the following
formula:
Maputo tax on economic activities = Basis rate x Index of category x Index of location x
Index of area occupied
Where the basis rate is the applicable maximum amount of the national minimum salary
(currently MZN 6,817.32) for the year 2013. For the year 2014, the national minimum
salary is currently going through the approval process.
Where the index of the location varies from 1.3 to 1.5, depending on the location of the
premises within the municipality.
Where the index of the area occupied varies from 1.2 to 1.5, depending on the nature of
the activities and the space occupied by the premises.
Municipal vehicles tax
The municipal vehicle tax replaces the vehicles tax within the municipality and is levied
on the use of specific vehicles (e.g. light and heavy vehicles less than 25 years old,
motorcycles less than 15 years old, aeroplanes, and boats for private use). This tax is due
by the owners who are residents of a municipality, regardless of the place of registration
of the vehicle owned.
The rate varies, depending on specific criteria such as type of fuel, engine capacity,
period of registration, and weight.
This tax must be paid between January and March or within 30 days after the
acquisition of the vehicle.
Branch income
From a tax perspective, branches are liable for Mozambican CIT as a separate entity;
consequently, the regime is the same that would apply to a Mozambican resident
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company. However, on the grounds that branches do not distribute dividends, the 20%
withholding tax (WHT) does not apply to the after-tax profits arising in Mozambique.
Inventory valuation
All inventory valuation methods generally accepted and according to international

accounting principles are permitted for tax purposes, provided that the method is:
used by the taxpayer consistently and
based on arms-length prices duly documented and effectively exercised.
Based on the above assumptions, last in first out (LIFO) and first in first out (FIFO)
methods are allowed. Write-downs and depreciation of inventories are not allowed.
Conformity between book and tax reporting is required.
Large companies began adopting International Financial Reporting Standards (IFRS) in
2010.
Capital gains
Capital gains less any capital losses derived from the sale or disposal of tangible fixed
assets, including insurance indemnities received in case of accident, are taxed as part of
normal income. If a taxpayer reinvests the sale proceeds within three tax years following
the year of sale, the gain may be deferred until the end of the third year. A three-year
reinvestment period may be accepted, provided a prior application is submitted to the
Minister of Finance. However, if the taxpayer does not realise the reinvestment, the
CIT that was not assessed during the three-year period will be assessed, along with
compensatory interest.
The Mozambique Parliament recently approved the changes introduced to the CIT Code,
with effects from 1 January 2014, based on which the capital gains arising from indirect
transfers of participating interests of assets located in the country will be subject to
taxation.
Capital gains resulting from the disposal of shares, participating interests, or rights in
general, between non-residents, whether direct or indirect, free or for consideration, are
taxable in Mozambique, provided the transaction involves assets located in the country.
Dividend income
In the case of resident companies, income arising from dividends is excluded from
taxable income, provided that the shares that a resident company holds in another
resident company represents at least 20% of the total capital and are held for at least
two consecutive years (or with an undertaking to hold the shares for this period). The
same applies to income arising from risk capital companies and holding companies
(Sociedade Gestora de Participaes Sociais or SGPSs) or from subsidiaries as a result of
the application of technical reserves in insurance companies. However, in the case of
holdings, the percentage of share capital decreases to 10% and shares should be held for
at least one year.
If the shareholding falls outside the parameters indicated above, the tax withheld (20%)
constitutes a payment on account. A tax credit corresponding to 62.5% of the CIT is
attributable to the gross-up dividend.
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Interest income
Interest is subject to 20% WHT. In the case of foreign entities, the WHT is considered as
a definitive tax. In the case of resident entities, it is considered as an advance of the final
tax.
Interests on treasury bonds and public debt bonds listed on the stock exchange are
subject to definitive WHT at 20%.
Foreign income
Mozambican resident companies are taxed on the total income earned on a worldwide
basis. Please note that there is no provision on tax deferral in Mozambique in relation to
income earned abroad. Double taxation treaties (DTTs) allow tax paid abroad to offset
Mozambican CIT. Mozambique has signed DTTs with Botswana, India, Italy, Macau,
Mauritius, Portugal, South Africa, the United Arab Emirates, and Vietnam.
Deductions
Depreciation
Depreciation is a deductible cost for CIT purposes, according to the regulations of the
Corporate Income Tax Code, subject to restrictive and specific rules.
The main legal principles regarding depreciation are as follows:
The establishment of the applicable rates falls under the competence of the Ministry
of Finance.
The calculation is carried out on a straight-line basis in accordance with the rates
applicable.
The main depreciation rates are:
Assets
Tangible assets:
Residential buildings
Office and administrative buildings
Machinery and installations, air conditioning, and telephone equipment
Lifts
Tools
Laboratory equipment
Telex and interior equipment
Furniture and filing systems
Typewriters and accounting machines
Computers and printers
Computer servers
Warehouse and filing installations:
Of concrete
Of wood
Of steel
Trucks
Automobiles
Intangible assets:
Pre-operating expenses incurred prior to the commencement of business
Rate (%)
2
10
2
12.5
8.33
25
12.5
10
10
16.66
25
20
6.66
8.33
7.14
20
25
33.33
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Assets
Deferred expenses arising in connection with increases in share capital,
changes in form of business enterprises, issuance of debentures, marketing
and other studies, and financial expenses incurred for the acquisition or own
production of fixed assets prior to completion
Patents
Manufacturing licences, concessionaire agreements, and similar rights
Trademark or premium of taking over leases of real estate
Rate (%)
33.33
10
5 (1)
(2)
Notes
1.
2.
Subject to certain conditions set forth by the tax authorities.

Depreciation is only allowed in cases of effective reduction of value within the limits regarded as
reasonable by the tax authorities.
New immovable assets, used for the furtherance of the business, may be depreciated
by increasing to 50% the normal depreciation rates approved by law. This benefit is
also granted to rehabilitated immovable assets, machinery, and equipment used in
agro-industrial activities, provided there is an investment project duly approved by the
government.
Goodwill
Although goodwill is considered for accounting purposes in Mozambique, there is no

provision for goodwill in the tax legislation. Consequently, goodwill should be regarded
as an intangible asset for tax amortisation purposes.
Interest expenses
A basic principle regarding acceptance of costs and expenditures requires that these are
necessary for the companys/branchs activity, i.e. indispensable to generate the profits
and gains obtained by the company. This concept includes, among others, interest and
other financial costs that are, in principle, also deductible for tax purposes unless the
tax authorities assume that the interest rate applicable in one transaction is higher than
the applicable rate applicable in the market, with the exceeding amount being subject to
taxation.
Interest and other types of remuneration above the Maputo Interbank Offered Rate
(MAIBOR) plus two percentage points at time of payment on the shareholders loans are
not tax-deductible costs.
Bad debt
In Mozambique, companies are able to create all the provisions necessary and relevant
for the normal course of business. However, for tax purposes, only the provisions listed
below can be deducted as a cost:

Bad debts.
Depreciation of stock.
Ongoing judicial procedures.
Credit institutions/Insurance companies.
Reconstruction of mines.
Rehabilitation of land.
Any other provisions reflected in the companys accounts will not be accepted as taxdeductible costs.
With regards to provisions for bad debts, companies are only allowed to deduct 1.5% per
year (and 6% accumulated) of the provisions created for bad debts.
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Donations can be deducted as costs for tax purposes, provided specific requirements are
met and the beneficiaries thereof are:
Social and cultural organisations that, acting without lucrative intent, carry out
actions in art, education, science, health, preservation and restoration of cultural
patrimony, or social activities: Donations can be deducted up to the limit of 5% of the
previous years taxable income.
The Mozambican state: Donations can be fully deducted.
It is important to note that this deduction is not applicable automatically, as it is
necessary to present proof that the donation was previously communicated to and
approved by the Ministry of Finance.
Fines and penalties
Fines and other penalties paid due to any infringement, which do not have a contractual
basis, including interest, are not accepted as tax-deductible costs.
Taxes
Taxes paid in relation to the activities of a company are tax deductible, excluding CIT
itself.
Carryback of losses is not allowed in Mozambique. On the other hand, losses may be
carried forward for a period of five consecutive years.
Any payments to non-residents are allowed as deductible expenses, provided that

the amount does not exceed normal rates and that the taxpayer is able to prove
that a business transaction was carried out with the non-resident company. The tax
authorities may redetermine taxable income if, due to a special relationship between
the Mozambican and non-resident companies, certain conditions existed that allowed
a calculation of profit that differed from the profit that would have been calculated
without the existence of such relationship (i.e. the arms-length principle).
Group taxation
There are no group taxation provisions available in Mozambique. Each member of a
group of companies preparing consolidated accounts for accounting purposes must file
separate tax returns in order to be taxed on its profits on a stand-alone basis.
Transfer pricing
The tax authorities may proceed with the necessary corrections for assessing the profits
for tax purposes whenever:
by virtue of special relations between the taxpayer and other entity, different
conditions from those that should be normally agreed upon between independent
entities have been established, and
in consequence of those conditions, the profits for accounts purposes are different
from those that would have resulted had such special relations not existed.
The corrections above shall be equally applicable whenever the profits for accounts
purposes regarding non-resident entities are different from those that should have
resulted if the non-resident entity were a separate entity carrying out similar activities in
similar conditions and with total independence.
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The corrections referred above will also be applicable to entities that carry out activities
simultaneously subject and not subject to the CIT Code, provided that similar evasion
regarding such activities is verified.
Whenever these corrections are applicable to one taxpayer of CIT (Taxpayer 1) by virtue
of special relations with another taxpayer of CIT or of individual income tax (Taxpayer
2), the adjustments reflecting the corrections made in the calculation of the profits for
tax purposes of Taxpayer 1 shall be applicable in the assessment of the profits for tax
purposes of Taxpayer 2.
The definition of special relation has been introduced into the transfer pricing regime.
However, specific transfer pricing regulations remain non-existent, although they are
expected to be approved during this year.
Thin capitalisation
Where loans from related foreign corporations exceed twice the corresponding equity in
the borrowing Mozambican corporation, the interest on the excess borrowing is not tax
deductible. Thin capitalisation rules are in force.
According to the Mozambican thin capitalisation rules, subsidiaries are considered and
treated as thinly capitalised companies if and to the extent that, as at any date of the tax
period, any of their relevant debt-to-equity ratios exceeds a factor of two.
Relevant debt-to-equity ratio, within the context of the law, means the ratio between,
on one hand, the amount of direct and indirect indebtedness of a Mozambican company
towards a specially related non-resident, and on the other, the amount of equity that this
non-resident holds in the Mozambican company.
A specially related non-resident, for these purposes, is an entity with special links with
another, which includes any entity that:
holds, either directly or indirectly, at least 25% of the share capital of the
Mozambican company
though holding less than 25%, has a significant influence on its management, or
both taxpayer and non-resident entity are under control of the same entity, which has
participation in their share capital, either directly or indirectly.
Under any of these circumstances, interest paid to such specially related non-residents
is not allowed as a tax-deductible cost for the Mozambican company in the part that
corresponds to the excessive indebtedness, unless the company can prove that it could
have obtained the same level of indebtedness at comparable conditions from unrelated
parties, taking into account the nature of its business, its sector of activity, dimension,
and other relevant criteria.

Foreign tax credit
Resident companies are allowed to deduct a credit correspondent to a tax paid abroad.
The tax credit to be deducted should be equal to the lower of the amount of Mozambican
corporate tax imputed to income obtained abroad or the amount of foreign tax
effectively paid.
In addition to the guarantees of ownership and remittance of funds abroad, the

Mozambican government also guarantees the concession of tax and customs incentives.
The incentives vary depending on whether a company is starting a new venture or
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rehabilitating one and also on the nature of the project to be developed. The incentives
discussed in this section are the generic benefits applicable to standard projects. Certain
specific benefits also may be applicable depending on the activities of the industry for
the investment project (e.g. agriculture, tourism, science and technology).
Exemption from import duties
An exemption from customs duties and VAT applies upon the importation of capital
equipment, listed in Section K of the Customs Tariff Schedule.
Tax credit for investment
Investments in new fixed tangible assets used in the operations of an enterprise within
the Mozambican territory may benefit from an investment tax credit equal to 5% of
the total investment realised, for a period of five years. This investment tax credit is
offset against CIT, up to the total amount of the tax assessment. This incentive does not
apply when the investment in tangible fixed assets is with respect to the construction,
acquisition, restoration, or extension of buildings, passenger vehicles, furnishings, and
articles of comfort and decoration, leisure equipment, advanced technology, or other
assets not directly associated with the production activity carried out by the enterprise.
When the project is located outside Maputo City, this tax credit is increased to up to 10%.
Advanced technology incentive
The amount invested in specialised equipment classified as advanced technology, during

the first five years from the date of commencement of activity, may be deducted from
taxable income for purposes of calculating CIT, up to a maximum of 10% of taxable
income.
Professional training incentive
Investment expenditures for professional training of Mozambican workers shall, up to

a maximum amount of 5% of the taxable income (10% in case of professional training
related to new/high technology equipment), be deductible from taxable income
for the purposes of calculating CIT during the first five years from the date of the
commencement of such activities.
Exploration incentives
During a period of five years counting from the date of exploration (i.e. the date the
implementing company starts the activities approved under the investment project terms
of authorisation), the following expenditure may be treated as deductible expenditures
for purposes of calculating CIT:
In the case of undertakings carried out in the City of Maputo, 110% of the value of
expenditures for the construction and rehabilitation of roads, railways, airports,
telecommunications, water supply, electric energy, and other works of public utility is
deductible for tax purposes.
In the case of undertakings carried out in the rest of the Provinces, an amount equal
to 120% of the expenditures referred to in the paragraph above is deductible for
taxpurposes.
In the case of expenditures for the acquisition for personal ownership of works of art
and other objects that are representative of Mozambican culture, as well as activities
that contribute to the development of such works, 50% of the expenditures are
Withholding taxes
Any non-resident entity carrying out economic activities in Mozambique, without being
registered as a taxpayer, is liable to a final and definitive 20% WHT that is applied on
all income earned. An exception exists for (i) telecommunications and international
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transport, as well as the respective installation and assembly of equipment made by
those same entities, (ii) construction and rehabilitation of production, transport, and
distribution of electricity infrastructures in the rural zones under the public projects of
rural electrification; and (iii) maritime vessels freight for fishing and coasting activities,
all of which are subject to a 10% WHT rate.
Both Mozambican resident and non-resident recipients are liable to tax on dividends at a
tax rate of 20%.
Tax treaties
In accordance with Mozambiques DTTs, the following tax rates are applicable to
dividends, interest, and royalties:
Recipient
Botswana
India
Italy
Macau
Mauritius
Portugal
South Africa
Vietnam
Dividends
0/12 (4, 5)
7.5
15
10
8/10/15 (1, 2, 3)
10
8/15 (1, 3)
0
10
WHT (%)
Interest
Royalties Capital gains on shares
10
10
0
10
10
0
10
10
0
10
10
0
8
5
0
10
10
(6)
8
5
0
0
5
0
10
10
0
Notes
1.
2.
3.
4.
5.
6.
The 8% rate applies if the recipient of the dividends is a company that has more than 25% of the
share capital in the company that distributes the dividends.
The 10% rate applies if the recipient of the dividends is a company that has less than 25% of the
The 15% rate applies in all other cases.
The 0% rate applies if the recipient of the dividends is a company that has more than 25% of the
The 12% rate applies in all other cases.
Gains are only taxed in the other state if assets of the entity sold are composed of more than 50%
immovable assets.
Tax administration
Taxable period
The tax year is, as a general rule, the calendar year. A different tax year may be applied
(if previously authorised by the Ministry of Finance) for companies that carry out
activities that justify a different year (e.g. held at more than 50% by a company with a
different year) or non-resident companies with a PE in Mozambique.
Tax returns
CIT assessment must be prepared by the companies on annual returns, based on the
accounting records and on adjustments prescribed by the tax regulations.
The submission of the annual tax return is due by the last working day of May for
companies using the calendar year as their tax year. For companies with a tax year that
is not coincident with the calendar year, the presentation of the tax return is due by the
last day of the fifth month subsequent to the respective year-end.
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Payment of tax
Mozambican companies and non-resident companies with a PE in Mozambique must

pay CIT as follows:
In three advance payments (based on 80% of the preceding tax years CIT), due in
May, July, and September of the respective tax year; or, if the tax year chosen is not
coincident with the calendar year, on the fifth, seventh, and ninth months of the
respective tax year.
In three special advance payments (based on 0.5% of the preceding years turnover
less the advance payments made in previous years, which cannot be less than
MZN 30,000 or more than MZN 100,000) due in June, August, and October of the
respective tax year; or, if the tax year chosen is not coincident with the calendar year,
on the sixth, eighth, and tenth months of the respective year.
Final tax should be paid by the last working day of May or the fifth month after the tax
year-end in cases where a different tax year is adopted.
Tax audit process
The tax authorities may carry out an inspection whenever necessary. Normally, the
inspection occurs after the taxpayer files a refund application or on a random basis.
The statute of limitations period is five years, but the company documents must be kept
for ten years.
Based on our experience and through assistance to several clients during the audit
reviews we noted that the Inspectors are focusing their attention to the following
aspects:
Confirmation of the amounts reported on the monthly VAT forms and the annual tax
return to determinate if the figures are the same or not or if there are non-declared
sales.
Confirmation of whether the non-deductible costs were added back to the tax
computation for CIT purposes.
Deductibility of VAT.
Analysis of supplier invoices to confirm the right of deduction of VAT.
Analysis of the companys sales for verification whether there are undisclosed sales.
Authorisation for electronic invoicing.
VAT on self-assessment.
Mandatory books, namely, ledger (dirio), day book (razo), inventory and balance
(inventrio e balano).
WHT on payments to non-resident entities.
Thin capitalisation.
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PwC contact
Chris Woo
PricewaterhouseCoopers Myanmar Co., Ltd.
Room 6A, 6th Floor
Centrepoint Towers, No. 65
Corner of Sule Pagoda Road and Merchant Road
Kyauktada Township, Yangon, Myanmar
Tel: +95 1 378661
A new taxation law has been introduced and legislated with effect from 1 April 2014.
Furthermore, effective 23 January 2014, the Myanmar Special Economic Zone Law 2014
has been introduced to repeal the Myanmar Special Economic Zone Law 2011 and the
Dawei Special Economic Zone Law of 2011 (see Special economic zones [SEZs] in the Tax
credits and incentives section).

Foreign investors may register their companies under the Myanmar Companies Act (CA)
or in conjunction with the Union of Myanmar Foreign Investment Law (MFIL). The
differences between companies registered under the CA and the MFIL are in relation to
their eligibility for tax incentives and longer land use terms, as well as minimum foreign
share capital requirements.
Generally, resident companies are taxed on a worldwide basis, and as such, income
from sources outside Myanmar is taxable. MFIL companies, although treated as resident
companies, are taxed only on income derived from sources within Myanmar.
Non-resident companies are taxed only on income derived from sources within
Myanmar. Income received from any capital assets within Myanmar and from any
source of income within Myanmar is deemed to be income received within Myanmar.
The income is generally subject to tax under the normal rules for residents, except that
different tax rates apply.
A company registered under the MFIL is entitled to enjoy certain exemptions and relief
from taxes (see the Tax credits and incentives section for details).
Type of taxpayer or income
Companies incorporated in Myanmar under the Myanmar CA
Enterprises operating under MFIL
Non-resident foreign organisations, such as a branch of a foreign company
Tax rate (%)

25
25
35
Local income taxes
There is no separate corporate income tax at the local level.
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Myanmar
Corporate residence
A resident company is a company as defined and formed under the Myanmar CA 1913 or
any other existing law of Myanmar.
A non-resident company is one that is not formed under the Myanmar CA 1913 or any
other existing law of Myanmar. Generally, foreign branches are deemed to be nonresident companies.
Currently, there is no definition of a PE under the Myanmar Income Tax Act. In current
practice, the Myanmar tax authorities seek to collect taxes from a non-resident foreigner
on its income received from Myanmar by way of a withholding tax (WHT) mechanism,
regardless of whether the foreigner has a PE in Myanmar or not. The term PE may
be defined in the tax treaties that Myanmar has with other countries. Subject to the
relevant tax treaty, a foreigner who is tax resident of the treaty country may not be
subject to Myanmar taxes if it does not have a PE in Myanmar.
Other taxes
There is no VAT in Myanmar.
Customs duties
Customs duty is levied under the Customs Tariff of Myanmar (2012) at rates of up to
40%.
Companies registered under the MFIL that have obtained permits from the Myanmar
Investment Commission (MIC) may, at the discretion of the MIC, be given relief from
customs duty on machinery, equipment, instruments, machinery components, spare
parts and materials used during the period of construction or expansion, and on raw
materials for the first three years of commercial production (see the Tax credits and
incentives section for details).
Excise duties
Excise duty is levied on alcoholic drinks and is collected by the General Administration
Department under the Ministry of Home Affairs.
Property taxes
Immovable property (land and buildings) situated within the Yangon development
area is subject to property tax. However, as foreign ownership of land and immovable
property is currently expressly prohibited, property tax is not relevant for foreign
investors.
Stamp duties
Stamp duty is levied on various instruments. Some of the rates are given below:
3% of the amount or value of the consideration for conveyances, such as for the sale
or transfer of immovable property, plus an additional 2% for immovable property
situated in Yangon, Mandalay, and Nay Pyi Taw.
0.3% of share value for the transfer of shares.
1.5% of the average annual value of rent for lease agreements between one and
three years, and 3% of the average annual value of rent where the term of the lease
agreement is more than three years.
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Capital gains taxes
Income tax is levied on gains from the sale, exchange, or transfer of capital assets (i.e.
any land, building, vehicle, and any capital assets of an enterprise, which include shares,
bonds, and similar instruments). Intangibles may fall within the definition of capital
assets, and capital gains arising from such assets would also be taxable.
Capital gains from the sale, exchange, or transfer of capital assets in the oil and gas
sector are taxed at different rates from those in other sectors.
Type of taxpayer or income
Capital gains tax (except transfer of shares in an oil and gas company, where
rates ranging from 40% to 50% will apply on gains):
Resident companies
Non-resident companies
Tax rate (%)
10
40
Turnover taxes
Commercial tax, at rates ranging from 0% to 100%, is levied as a turnover tax on goods
and services. The commercial tax that a business charges and collects is known as output
tax, which has to be paid to the Myanmar tax authorities. Commercial tax incurred on
business purchases and expenses are known as input tax. Businesses that are registered
for commercial tax can claim if certain conditions are satisfied.
Commercial tax is imposed on a wide range of specified goods and services produced or
rendered within the country, based on the sales proceeds, and on imported goods (see
Customs duties above for details).
Prior to 1 April 2014, services such as trading, transport, entertainment, insurance, and
printing were subject to commercial tax at 5% of the total receipts. With effect from 1
April 2014, all services are subject to 5% commercial tax except 25 types of services that
are specifically exempt from commercial tax (e.g. home rental services, life insurance,
banking services, public transportation).
Prior to 1 April 2014, no commercial tax was imposed if the sales or receipts from
services for a financial year were not more than 10 million Myanmar kyats (MMK). With
effect from 1 April 2014, the threshold of MMK 10 million has been increased to MMK 15
million.
Commercial tax is exempt on all exports, except for five natural resource items: natural
gas, crude oil, jade, gem stones, and wood.
Companies registered under the MFIL that have obtained permits from the MIC may, at
the discretion of the MIC, be granted exemption from commercial tax on goods that are
manufactured for export (see the Tax credits and incentives section for details).
Registration taxes
There is a registration fee of MMK 1 million payable to the Directorate of Investment and
Company Administration for setting up a company or a branch in Myanmar.
Payroll taxes
An employer is responsible for deducting income tax due from salaries at the time of
payment to employees and must pay the amount within seven days from the date of
deduction. If the employer fails to deduct and pay the tax, the employer is deemed to
be a defaulter and held responsible for such payment. In addition, the employer is also
responsible for filing the statement of annual salary within three months after the end of
the income year, and failure to file by the stipulated deadline may be result in a penalty
of 10% of the amount of tax to be deducted on annual salaries.
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Under Social Security Law 2012, an employer with five or more employees is required
to provide Social Security Scheme benefits to those workers, such as general benefit
insurance and insurance against employment-related injuries.
With effect from 1 April 2014, the rates of contribution by employees and employers
are 2% and 3% of the total salaries and wages, respectively. Prior to 1 April 2014,
the contribution could be made inMyanmar kyatsor in United States dollars (USD),
depending on the currency in which the employee was paid. With effect from 1 April
2014, the contribution will need to be made in Myanmar kyatsfor all currencies that the
salaries are paid in.
The maximum contribution is limited to MMK 9,000 by the employer and MMK 6,000 by
the employee.
Contributions made by the employees are deductible for tax purposes in the hands of
the employees. The employer is obligated to withhold the employees contributions from
their salaries.
Branch income
Generally, foreign branches are deemed to be non-resident companies. Non-resident
companies are taxed only on income derived from sources within Myanmar. The income
is generally subject to tax under the normal rules for residents, except that a branch is
subject to a higher (i.e. 35%) corporate income tax rate.
Income is categorised as income from a profession, business, property, capital gains,
other sources, and undisclosed sources. Income from capital gains is assessed separately.
Tax is levied on total income, after the deduction of allowable expenditure and
depreciation.
The Ministry of Finance, with the approval of the government, may, by notification,
prescribe, amend, and add assessable income and rates of income tax.
Inventory valuation
There are no prescribed inventory valuation methods for tax purposes.
Capital gains
Income from capital gains is assessed separately. See Capital gains tax in the Other taxes
section for details.
Dividend income
Myanmar has a one-tier corporate tax system, under which share of profits received by
a Myanmar taxpayer from an association of persons (i.e. partnerships, joint ventures,
companies, etc.) are exempted from income tax.
Interest income
Interest income and income from movable property are treated as business income.
Partnership income
A partnership is taxed as an entity and not on the individual profit share of the partners.
Partnership income is not taxed in the hands of the partners.
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Foreign income
Resident companies are taxed on a worldwide basis, and, as such, income from sources
outside Myanmar is taxable in Myanmar.
MFIL companies and non-resident companies are not taxed on their foreign income.
There is no deferral regime available to foreign income in Myanmar.
Deductions
In respect of business income, deductions are allowed for expenditure incurred for the
purpose of earning income.
Non-deductible items include capital expenditure, personal expenditure, expenditure
that is not commensurate with the volume of business, payments made to any member
of an association of persons other than a company or a cooperative society, and
inappropriate expenditure.
Income from movable property is considered as business income, and depreciation

allowance for the cost of such movable property can be deducted. Income from
immovable property is generally computed in the same way as business income, except
that no depreciation allowance can be deducted.
Technically, a taxpayer entity is required to claim tax depreciation on the qualifying
assets used for its business purposes based on rates prescribed under the Myanmar
Income Tax Law, using a prescribed tax depreciation claim form. A taxpayer is entitled
to full year tax depreciation in the year the asset is acquired. On the other hand, no tax
depreciation is allowed in the year the asset is disposed of.
The tax depreciation rates of fixed assets as prescribed under the Myanmar Income Tax
Law are as follows:

Buildings: 1.5% to 10%.

Furniture and fittings installed in buildings: 5% to10%.
Machinery and plant: 5% (generally) to 6.25% (items such as electrical appliances).
Machinery equipment: 2.5% to 20%.
Road transport vehicles: 12.5% to 20%.
Miscellaneous: 10% to 20%.
Other miscellaneous:2.5% to 20%.
Goodwill
There is no specific provision under the current Myanmar Income Tax Law governing the
tax deductibility of goodwill.
Start-up expenses
tax deductibility of start-up expenses.
Interest expenses
There is currently no specific provision in the Myanmar Income Tax Law indicating the
tax treatment of interest expenses. In current practice, interest expenses and the related
financing costs are likely deductible only in the year these expenses are incurred or
paid, provided that the interest expenses incurred are commensurate with the volume
of business or benefits that the taxpayer received. Further, interest expenses on the
loan may be deductible for Myanmar corporate income tax purposes when paid to the
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non-resident lender by a Myanmar corporate taxpayer only after the relevant WHTs on
interest have been paid to the Myanmar tax authorities.
Bad debt
tax deductibility of bad debt.
Prior to 1 April 2014, donations/gifts, whether to charitable institutions or not, were

not deductible for tax purposes. With effect from 1 April 2014, deductible charitable
donations are limited to those made to approved charitable organisations/activities and
are subject to an overall limitation of 25% of total income.
Fines and penalties
Fines and penalties are generally not deductible as they are not incurred in the
production of business income.
Taxes
tax deductibility of taxes paid.

Ordinary losses
Losses from any source may be set off against income accruing from any other sources
in that year, except where the loss is from capital assets or a share of loss from an
association of persons. Losses that are not fully deducted in a year can be carried
forward and set off against profits in the next three consecutive years.
There is no provision for the carrying back of losses.
Capital losses
Capital losses and a share of loss from an association of persons cannot be set off against
income from other sources or carried forward.
A Myanmar corporation can claim a deduction for royalties, management service fees,
and interest charges paid to affiliates, provided that these payments are commensurate
with the volume of business.
Group taxation
There is no group taxation regime in Myanmar.
Transfer pricing regime
There are currently no transfer pricing rules in Myanmar.
Thin capitalisation rules
Generally, there is currently no specific safe harbour with respect to a debt-to-equity

ratio in Myanmar. The Central Bank of Myanmar has recently indicated that Myanmar
may introduce a debt-to-equity ratio in the near future. As of May 2014, there is no
indicative timeline on when the ratio will be introduced.
Controlled foreign company (CFC) regime

There are currently no CFC rules in Myanmar.
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Union of Myanmar Foreign Investment Law (MFIL) incentives
Under the new MFIL, companies registered under the MFIL that have obtained permits
from the MIC are entitled to the following special benefits and tax incentives, which are
granted at the MICs discretion:
1. Exemption from income tax for up to five consecutive years for an enterprise. The
exemption may be extended for a further reasonable period, depending on the
success of the enterprise.
2. Exemption or relief from income tax on profits of a business that are maintained in a
reserve fund and subsequently re-invested in Myanmar.
3. The right to deduct depreciation of machinery, equipment, building, or other capital
assets used in the business at rates prescribed by the MIC.
4. Relief from income tax for up to 50% of the profits accrued from the export of
manufactured goods.
5. The right to pay income tax on the income of foreign employees at the rates
applicable to citizens residing within the country.
6. The right to deduct from taxable income research and development costs that are
necessary for the country.
7. The right to carry forward tax losses for up to three consecutive years, provided the
losses are sustained within two years from the end of the tax exemption in (1) above.
8. Exemption or relief from custom duty and/or other internal taxes on imported
machinery, equipment, instruments, machinery components, spare parts, and
materials used in the business, which are required for use during the period of
construction.
9. Exemption or relief from customs duty or other internal taxes on imported raw
materials for the first three years of commercial production following the completion
of construction.
10. If the investor increases the amount of investment and expands the business within
the approved timeframe, it may enjoy exemption and/or relief from customs duty or
other internal taxes on machinery, equipment, instruments, machinery components,
spare parts, and materials that are imported for the expansion of business.
11. Exemption from commercial tax on goods that are manufactured for export.
In addition to foreign investment under the MFIL, foreign investors may invest under the
Myanmar Special Economic Zone Law of 2014 enforced on 23 January 2014 (Myanmar
SEZ Law), which abolished the Myanmar Special Economic Zone Law 2011 and the
Dawei Special Economic Zone Law of 2011.
The Myanmar SEZ Law is a basic law for any SEZ within Myanmar. The main regulatory
body handling foreign investment under the Myanmar SEZ Law is the Central Body for
the Myanmar SEZ.
The Myanmar SEZ Law contains provisions relating to the exempted zone, business
promoted zone, other zone, exempted zone business, other business, developers and
investors, exemptions and reliefs, restrictions, duties of developers or investors, land use,
banks and finance management and insurance business, management and inspection
of commodities by the customs department, quarantine, labour and guarantee of nonnationalisation, dispute resolution, WHT, bank and financial management and insurance
business, etc.
Incentives under the Myanmar SEZ Law include:
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Myanmar
Myanmar
For investors:
Income tax holidays for the first seven years starting from the date of commercial
operation in respect of those investment businesses operated in an exempted zone or
exempted zone businesses.
Income tax holidays for the first five years starting from the date of commercial
operation in respect of those investment businesses operated in a business promoted
zone or other business in a promoted zone.
50% income tax relief for the investment businesses operated in an exempted zone
and a business promoted zone for the second five year period.
For the third five year period, 50% income tax relief on the profits of the business
if they are maintained for re-investment in a reserve fund and re-invested therein
within one year after the reserve is made.
Exemption on customs duty and other taxes for raw materials, machinery and
equipment, and certain types of goods imported for investors in exempted zones;
whereas, for investors in prompted zones, exemption on customs duty and other
taxes for the first five years in respect of machinery and equipment imported that are
required for construction starting from the date of commercial operation, followed by
50% relief of customs duty and other taxes for a further five years.
Carry forward of loss for five years from the year the loss is sustained.
For developers:
Income tax holidays for the first eight years starting from the date of commercial
operation.
50% income tax relief for the second five year period.
For third five year period, 50% income tax relief on the profits of the business if they
are maintained for re-investment in a reserve fund and re-invested therein within one
year after the reserve is made.
Exemption on customs duty and other taxes for raw materials, machinery and
equipment, and certain types of goods imported.
Carry forward of loss for five years from the year the loss is sustained.
Land use may be granted under an initial lease of up to 50 years and renewable for a
period of an additional 25 years. Developers/investors may rent, mortgage, or sell land
and buildings to another person for investment purposes within the term granted with
the approval of the management committee concerned.
The rules and procedures relating to the Myanmar SEZ Law have not yet been
prescribed.
Foreign tax credit
There is no provision for unilateral relief. Relief may be available pursuant to a tax
treaty, but the application of the tax treaties is at the sole discretion of the Ministry of
Finance.
Withholding taxes
Any person making the following payments is required to withhold income tax at the
time of payment at the rates listed below. The tax withheld must be paid to the Inland
Revenue Department (IRD) within seven days from the date of withholding.
Tax withheld from payments to residents will be set off against the tax due on their final
assessments. Tax withheld from payments to non-resident companies is a final tax.
Myanmar
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Myanmar
The application of the tax treaties is at the sole discretion of the Ministry of Finance. In
general, it is suggested by the Company Circle Tax Office (CCTO) under the IRD that
enquiries be made with the CCTO before deducting WHT from payments made to nonresident companies from treaty countries listed below.
For payments for services rendered and for procurement made within the country, or
under contracts or agreements or any other agreement made by a state organisation,
local authorities, co-operatives, partnership companies, or entities formed under any
existing laws, the WHT rates are 2% if the payment is made to a resident and 3.5% if it is
made to a non-resident.
Recipient
Resident national or resident foreigner
Non-treaty
Treaty:
India
Korea, Republic of
Laos
Malaysia
Singapore
Thailand
United Kingdom
Vietnam
Dividends(%)(1) Interest(%)
0
0
Royalties(%)
15
15
20
0
0
0
0
0
0
0
0
10 (2)
10 (2)
10
10 (2)
8/10 (2, 4)
10 (2)
N/A
10 (2)
10
10/15 (3)
10
10
10/15 (3)
5/10/15 (5)
0 (6)
10
Notes
1.
2.
3.
4.
5.
6.
There is no WHT on dividends, branch profits, and share of profits of an association of persons that
have been taxed.
Exempt if paid to the government.
Lower rate for payments in connection with patents, designs, secret formulas/processes, or
Lower rate if received by a bank or a financial institution.
The 5% rate applies for payments in connection with copyrights of literary, artistic, or scientific work,
and the 10% rate applies to payments for services of a managerial or consultancy nature, and for
information concerning industrial, commercial, or scientific experience.
Exempt if the amount is fair and reasonable.
Tax administration
Taxable period
The taxable period of a company is the same as its financial year (income year), which
is from 1 April to 31 March. Income earned during the financial year is assessed to tax in
the assessment year, which is the year following the financial year.
Tax returns
In general, income tax returns must be filed within three months from the end of the
financial year, i.e. by 30 June of the financial year.
Tax returns for capital gains must be filed within one month from the date of disposal
of the capital assets. The date of disposal refers to the date of execution of the deed of
disposal or the date of delivery of the capital assets, whichever is earlier.
If a taxpayer discontinues ones business, returns must be filed within one month
from the date of discontinuance of business. The failure of a taxpayer to file income
tax returns, knowing that assessable income has been obtained, is deemed to have
fraudulent intention.
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Myanmar
Payment of tax
Advance payments are made either in monthly or quarterly instalments throughout the
income tax year based on the estimated total income for the year. The advance payments
and any taxes withheld are creditable against the final tax liability. The date for settling
the final tax liability is specified in the notice of demand issued by the IRD.
Capital gains tax payments are required to be made within one month from the date of
disposal of the capital assets.
Tax audit process
Under the Myanmar Income Tax Law, if it is found that there is a fraudulent intention to
evade tax, the assessment or reassessment of income tax can be made at any time on the
income that has escaped assessment of tax.
Failure by a taxpayer to file a return of income knowing that assessable income has
been obtained, failure to comply with the notice of the IRD to submit accounts and
documents, including the tax return and profit and loss accounts within the time
prescribed, or submitting forged instruments and other documents are included within
the meaning of fraudulent intention. If the tax authority in the course of investigation
finds that a taxpayer has concealed income or particulars relating to income, the
taxpayer may be permitted to fully disclose the facts within the specified time. In
addition, the taxpayer must pay a penalty equal to 50% of the tax increased on account
of the concealment. If the taxpayer fails to disclose the particulars within the specified
time or discloses less than the income concealed, the taxpayer will also be subject to
prosecution, in addition to paying the tax and penalty. If the taxpayer is found guilty, the
taxpayer may be punishable with imprisonment for between three to ten years.
The statute of limitation to raise an assessment is three years after the financial year end.
It does not apply in cases of fraudulent default. Mere filing of the income return and
payment of advance tax in time does not constitute a final tax assessment.
The following issues are currently being focused on by the tax authorities:
Strengthening tax administration and reinforcement of tax compliance.
Creation of tax policies to improve the overall tax collection.
Introduction of international tax principles in the future.
Myanmar
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Namibia, Republic of
PwC contact
Stfan Hugo
344 Independence Avenue
Windhoek, Namibia
Tel: +264 61 284 1000
2014 National Budget
Highlights of the 2014 National Budget that may impact corporate taxpayers include
the following (please note that the changes are not effective until published in the
Government Gazette):
The corporate tax rate for non-mining companies is proposed to be reduced from
33% to 32% as of 1 January 2014 for financial years ending 31 December 2014.
The withholding tax (WHT) payable when a Namibian company pays a royalty to a
non-resident is proposed to be reduced from 9.9% to 9.6%.
The Minister of Finance may table the Export Levy Bill on raw materials and taxes on
environmentally harmful products during 2014, as well as the carbon emission tax on
motor vehicles.
The value-added tax (VAT) threshold is proposed to be increased from 200,000
Namibian dollars (NAD) per annum to NAD 500,000 per annum.

Namibia has a source-based tax system, which means that income from a source within
Namibia or deemed to be within Namibia will be subject to tax in Namibia, unless a
specific exemption is available.
Income earned by foreign companies from a source within or deemed to be within
Namibia will be subject to tax in Namibia. In such cases, the foreign entity must
determine whether it is obligated to register a local entity or branch. A foreign company
is required to register a local company (local subsidiary) or an external company
(branch) if it has established a place of business in Namibia.
In the event that Namibia has entered into a double tax agreement (DTA) with the
country where the foreign company resides, such entity will only be taxable in Namibia
if it has established a permanent establishment (PE) in Namibia. If a PE exists, only the
portion of income attributable to the PE will be subject to tax in Namibia.
Non-residents who do not have a place of business in Namibia may, however, be subject
to WHTs. See the Withholding taxes section for more information.
Calculation of taxable income

Gross income
Less: Exemptions
The total amount, in cash or otherwise, received by or accrued to any

person from a source within, or deemed to be within, Namibia, excluding
receipts of a capital nature (provisions for specific inclusions in gross
income and amounts deemed to be from a Namibian source exist).
The Income Tax Act provides for certain amounts to be specifically
exempt from tax.
Equals: Income
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Less: Deductions
Equals: Taxable income
Expenditures and losses actually incurred to generate income may be

deducted, provided that these expenses are not of a capital nature.
The Income Tax Act specifically provides for certain expenditures to be
deductible and allows a deduction for capital allowances.
Only expenses incurred to generate income may be deducted.
Expenses incurred to generate income exempt from tax are not
deductible. Apportionment should be considered when expenses are
incurred to generate both income and exempt income.
Taxable income is taxed at the corporate tax rate as set out under the tax
rate section below.
Tax rates
The corporate tax rates are summarised below:

Entity
Domestic companies and close corporations (excluding
entities mentioned below)
Branches of foreign companies
Registered manufacturers (only applicable for the first ten
years of registration)
Diamond mining companies and companies that render
services to such companies in connection with diamond
mining
Mining companies (other than diamond mining companies)
and companies that render services to such companies in
connection with mining
Long-term insurers (the rate is applied to gross investment
income)
Petroleum income tax rate
2013 tax rate (%) 2014 tax rate (%)*

33
32
33
18
32
18
55
55
37.5
37.5
13.2
12.8
35
35
* Proposed; still to be enacted and published per the Government Gazette.
Local income taxes
Namibia does not levy income taxes at the local, state, or provincial levels.
Corporate residence
The Namibian tax system is based on source and not on residency. Income derived or
deemed to be derived from sources within Namibia are subject to tax.
The source is determined as the place where income originates or is earned, not the
place of payment. If goods are sold pursuant to a contract entered into within Namibia,
the source of income is deemed to arise in Namibia, regardless of the place of delivery or
transfer of title.
Certain types of income arising outside Namibia may, in the hands of a domestic
company, be deemed to arise in Namibia and be taxed as such. Examples are interest and
certain copyright royalties arising outside Namibia.
The term permanent establishment is not defined or recognised in the Income Tax Act,
but it is included in all DTAs.
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A PE includes, in most cases, a fixed place of business. The establishment of a local
entity or branch will usually create a PE, although the provisions of the related tax treaty
should be considered.
Except for the PE concept embodied in the tax treaties and WHT on service provisions,
corporate residence is of little tax significance since transactions are taxed on a source
basis.
For the list of DTAs, please see the Withholding taxes section.
Other taxes
VAT is a transaction tax, and the implications will vary for different transactions. Some
transactions are taxed at a rate of 15% or 0% while other transactions are exempt from
VAT. Input tax deductions may be claimed, subject to certain provisions.
VAT is levied on every taxable supply by a registered person. A taxable supply means any
supply of goods or services in the course or furtherance of a taxable activity. A taxable
activity means any activity that is carried on continuously or regularly in Namibia that
involves the supply of goods or services for consideration.
VAT is payable on all imports for home consumption in Namibia, subject to certain
exemptions (e.g. in terms of a technical assistance agreement, donations to the state,
goods of which the local supply is zero-rated).
Import VAT is payable on the greater of the free on board (FOB) value plus 10% or
the market value. The payment may be deferred in terms of an import VAT account
registered with the Directorate of Inland Revenue to the 20th day of the month following
the month of importation. Penalties of 10% per month or part of a month and 20%
interest on outstanding import VAT, according to the Customs Asycuda reports on import
VAT account numbers, are levied by the Directorate of Inland Revenue.
A company/branch is required to register for VAT if it supplies goods or services on a
regular basis for consideration and if its taxable supplies (standard rated and zero-rated
supplies) exceed NAD 200,000 in any 12-month period. The registration threshold will
be increased to NAD 500,000 during 2014, as announced in the 2014 Budget Speech by
the Minister of Finance (proposed; still to be enacted and published per the Government
Gazette).
A registered VAT vendor is entitled to deduct input tax credits paid in the course of
taxable supplies made to such person, provided that a tax invoice is available to support
the input tax deduction. It is also important to take note of deemed input tax deductions
and prohibited input deductions. Import VAT paid may be deducted only as input tax if
the import was in furtherance of a taxable activity and the required documentation (e.g.
stamped customs entries) is held by the importer.
VAT returns are due within 25 days following the month to which the VAT relates.
The Inland Revenue system automatically selects VAT periods for audits. An audit will
focus on deposits made into bank statements and whether VAT was charged as required.
It will also focus on whether tax invoices meet the criteria as set out in the VAT Act.
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Namibia is a member of the Southern African Customs Union (SACU), and customs
duties are not levied on intra-SACU trade (i.e. between Botswana, Lesotho, Namibia,
South Africa, and Swaziland).
Customs duties are payable according to the Common Customs Tariff of SACU on
imports from outside SACU. Preferential duty rates apply on imports from Southern
African Development Community (SADC) countries, while goods may be imported
free of customs duties from Zimbabwe in terms of the Namibia-Zimbabwe Free Trade
Agreement.
Excise duties are levied on local production of excisable products (e.g. cigarettes,
liquor, fuel) and are included on most excisable products imported from another SACU
country in terms of the duty at source procedures. Identical excise duty rates are applied
throughout the SACU. Importation of excisable products from outside the SACU is
subject to customs duties and specific customs duties.
Current specific excise/customs duty rates for the above-mentioned products are as
follows:

Cigarettes: NAD 11.60/20 cigarettes.

Beer: NAD 68.92/litre absolute alcohol (AA).
Spirits (whisky, rum, brandy, gin, vodka, etc.): NAD 137.54/litre AA.
Petrol: 3.909 cents/litre.
Diesel and biodiesel: 3.817 cents/litre.
Illuminating kerosene (paraffin): 3.817 cents/litre.
Ad valorem excise/customs duties are levied on certain products (e.g. motor vehicles,
perfumes) in addition to the normal customs duties.
Ad valorem excise/customs duty rates are as follows for the above-mentioned goods:
Motor vehicles: ([0.00003 x A] - 0.75)%, with a maximum of 25%, where A is the
recommended retail price, exclusive of VAT.
Perfumes: 7%.
Fuel levies are payable on petrol, diesel, and illuminating kerosene and may be claimed
back for certain non-road operations (e.g. mining, farming, and construction).
The current fuel levies are as follows:
Petrol: NAD 0.12/litre.
Diesel: NAD 0.10/litre.
Illuminating kerosene (paraffin): NAD 0.47/litre.
Surety in the form of a provisional payment, bank, or insurance guarantee is required
by Customs on all temporary importations to cover import VAT and customs duties (if
applicable).
It is possible to import goods that are subject to customs duties into registered Customs
bonded warehouses, where goods are kept for later use. In this case, the payment of
duties may be deferred until the goods are taken out of the bonded warehouse for home
consumption or acquitted if the goods are subsequently exported.
Namibia is in the process of introducing the AsycudaWorld Customs clearing system,
which will replace Asycuda++. AsycudaWorld is a web-based Java-enabled system, and,
1401
once fully introduced, will enable more user-friendly application to importers and the
Customs authorities.
Property taxes
Property taxes are levied by municipalities based on municipal valuations of properties.
Transfer duty
Transfer duty is payable at 12% of the acquisition value where property is acquired by
non-natural persons (a sliding scale applies to property purchases by natural persons).
While it is normally payable by the buyer, the agreement for the sale of the property may
determine the person liable to pay these costs.
Amendments to the Transfer Duty Act were proposed to include transfer duty on the
sales of shares/members interest in property/mining right-owning entities and are
expected to be tabled during 2013/14. These amendments have not been enacted or
promulgated per the Government Gazette.
Stamp duty
Certain transactions may attract stamp duty. The amount of stamp duty payable differs
and is based on the nature of every individual transaction.
The basic transactions can be summarised as follows:
Transaction
Stamp duty
Agreements or contracts (other than those where NAD 5
duty is specifically provided for in the Act)
Lease agreement or lease
The stamp duty will be based on lease
payments, together with additional
considerations specified in the lease agreement
Transfer or issue of marketable securities and
NAD 2 for every NAD 1,000 or part thereof
other share transactions
of the value/consideration, depending on the
specific transaction
Transfer deed relating to immovable property
NAD 12 for every NAD 1,000 or part thereof
purchased.
of the value/consideration, depending on the
specific transaction
Additional stamp duty of NAD 5 for every NAD 1,000 of debt secured is payable on the
registration of a bond over immovable property.
Annual duty
Annual duty is levied in terms of the Companies Act at an amount of NAD 4 for every
NAD 10,000 (or part thereof) of the issued share capital of a company, with a minimum
duty of NAD 80 per annum. Issued share capital includes ordinary shares, share
premium, and preference shares.
Since a branch does not issue share capital, the issued share capital of the head office
will be used to calculate the annual duty payable in Namibia.
Social security contributions are payable by the employer for employees working in
Namibia. Social security is based on a principle of 50/50 contributions from employers
and employees. It is calculated at 0.9% of earnings, with a minimum monthly
contribution of NAD 2.70 and a maximum monthly contribution of NAD 81.
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Employee taxes
Any remuneration paid by an employer to an employee will place an obligation on

the employer to withhold employee taxes. The employee taxes are due on the 20th
day of the month following the month during which the payment was made. The tax
tables applicable to individuals are provided in the Taxes on personal income section of the
Individual summary.
Late payment of employee taxes will result in penalties of 10% per month and interest of
20% per annum.
Branch income
Branch income that is received or accrued from a source within, or deemed to be within,
Namibia is taxable in Namibia based on the normal corporate tax rules.
A branch is regarded as an extension of its foreign head office. A branch may, therefore,
not deduct fees paid to its foreign head office (unless a tax treaty provides for such a
deduction), as it is argued that a branch cannot transact with itself. Reimbursement of
actual expenses may, however, be deducted, subject to the normal deduction rules.
Transfer pricing rules apply to transactions between a branch and cross-border related
parties.
Inventory valuation
Inventory is valued at cost for tax purposes in Namibia.
The last in first out (LIFO) basis of valuation is only accepted if:
written consent was obtained from the Minister of Finance before such taxpayer
renders ones income tax return for the first year of assessment for which the LIFO
basis was adopted by the taxpayer, and
various conditions are met by the taxpayer as determined by the Minister of Finance.
Capital gains
Other than profits on the sale of mining licences/rights, capital gains are not taxed in
Namibia.
Mining licences/rights
Any sale/donation/expropriation cession, grant, or other alienation or transfer of

ownership of a licence or right to mine minerals has been included in the definition of
gross income. The definition also specifically includes a sale of shares in a company for a
licence or right to mine minerals in Namibia.
Dividend income
Dividends received are exemptfrom tax.Non-resident shareholders tax (NRST) should

be withheld on dividends declared to non-resident shareholders.For more information
on NRST, see the Withholding taxes section.
Interest income
Namibian companies are taxed on interest received from a Namibian source. Persons
other than Namibian companies are subject to a final WHT on interest from banks and
unit trusts.For more information, see the Withholding taxes section.
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Partnership income
The relevant partners of a partnership are regarded as the responsible taxpayers and not
the partnership itself.
In practice, the assessment of a partnership is treated like that of a private business.
The partnership is first treated as a business entity on its own in terms of income and
expenditure. The profit or loss at the end of the year is then allocated to the individual
partners. If they derived a profit from the partnership, it is added to their other nonpartnership income; or if the partnership made a loss, the partners have the right to
deduct it from their non-partnership income.
Rental income
Companies are taxed on rental income received from a Namibian source.
Royalty income
Companies are taxed on royalty income received from a Namibian source.
Foreign income
Corporate tax in Namibia is determined on the source basis; consequently, only income
from a Namibian source or deemed Namibian source is subject to corporate tax.
Deductions
Capital allowances
The cost (including finance charges) of machinery, equipment, and other articles used
by the taxpayer to generate income is deductible in three equal annual allowances. No
apportionment is allowed where an asset is held for less than 12 months.
Buildings used by the taxpayer to generate income qualify for an initial allowance of
20% of erection costs in the year they are first brought into use. Thereafter, an annual
allowance of 4% is deductible for the 20 following years. Additions to existing buildings
(not alterations, improvements, or repairs) qualify for the same 20% and 4% deductions.
Note that the allowance is calculated on the cost of erection and not the cost of
acquisition. The allowance is also only calculated for a period of 21 years from the date
of erection.
Mining exploration and initial development expenditure incurred before
commencement of mining production are deductible in full in the first year that income
is generated from the mine. Subsequent developmental expenditures are written off in
three equal annual allowances.
Capital allowances may also be deducted with respect to patents, trademarks, leasehold
improvements, etc.
A recovery or recapture of allowances previously claimed should be included in the gross
income of a taxpayer in the event that the allowance is recovered or recaptured by way
of disposal, withdrawal from trade for non-trade purposes, or removal from Namibia.
The recapture is calculated at the market value of the asset.
Goodwill
The amortisation of goodwill is not deductible for tax purposes and should be excluded
from calculating taxable income.
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Start-up expenses
Mining
The Income Tax Act allows exploration and initial development expenditure to be
deducted in full during the year in which the mine commences with production.
All exploration expenses incurred before the commencement of mining is therefore
deferred until such time that the mine commences production.
All other industries
The general deduction formula determines that only expenses incurred in the
production of income that are not of a capital nature may be claimed for tax purposes.
The Income Tax Act defines income as income in any year or period of assessment.
Interest expenses
A deduction is allowed in respect of financing expenditure incurred in respect of

any financing agreement for the acquisition of fixed assets utilised in ordinary trade
activities.
The general deduction formula determines that only expenses incurred in the
production of taxable income that are not of a capital nature may be claimed for tax
purposes. Therefore, where the interest can be argued to be incurred in the production
of income, the interest expense will be deductible.
Thin capitalisation legislation may be applied to interest paid on related party loans (see
Thin capitalisation in the Group taxation section).
Bad debt
The Income Tax Act allows a specific deduction for bad debts, provided that the amount
written off was previously included in the taxpayers income.
Charitable contributions/donations
A specific deduction for donations is allowed, provided that it is made to a registered

welfare organisation or an approved educational institution. It is a further requirement
that a certificate should be issued by the welfare organisation/educational institution
in respect of the donation and submitted with the entitys tax return in order for it to
qualify as a deduction. However, this allowance may not create or increase a tax loss.
Fines and penalties
In terms of practise applied by Inland Revenue, tax penalties and fines are not deductible
for tax purposes.
Taxes
Taxes levied on income are not allowed as a deduction.
Assessed tax losses may be carried forward indefinitely if the company continues the
same trade. Tax laws do not allow losses to be transferred to other members of a group,
and anti-avoidance provisions may be triggered by transactions designed to transfer or
exploit assessed losses.
If a company ceases to trade for a full fiscal year, its assessed losses are forfeited,
regardless of subsequent activities. Assessed losses are also reduced in the event of a
compromise agreement with creditors.
Namibian tax legislation does not provide for the carrying back of tax losses.
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For information on payments to foreign affiliates, please refer to the Branch income section,
Group taxation section, and Withholding taxes section.
Group taxation
No taxation of combined operations is allowed in Namibia where operations are
conducted in a group.
Transfer pricing
Namibian transfer pricing legislation is aimed at enforcing the arms-length

principle in cross-border transactions carried out between connected persons. It
is based on guidance set out by the Organisation for Economic Co-operation and
Development (OECD) Transfer Pricing Guidelines for multinational enterprises and tax
administrations.
The objective of the transfer pricing legislation is to provide taxpayers with guidelines
regarding the procedures to be followed in the determination of arms-length prices,
taking into account the Namibian business environment. It also sets out the Minister of
Finances views on documentation and other practical issues that are relevant in setting
and reviewing transfer pricing in international agreements.
The transfer pricing legislation is essentially aimed at ensuring that cross-border
transactions between companies operating in a multinational group are fairly priced
and that profits are not stripped out of Namibia and taxed in lower tax jurisdictions. The
legislation achieves this by giving the Minister of Finance (who essentially delegates to
the Directorate of Inland Revenue) the power to adjust any non-market related prices
charged or paid by Namibian entities in cross-border transactions with related parties to
arms-length prices and to tax the Namibian entity as if the transactions had been carried
out at market-related prices.
In terms of the normal penalty provisions of the Income Tax Act, the Directorate of
Inland Revenue may levy penalties of up to 200% on any amount of underpaid tax.
Consequently, the Inland Revenue may invoke such provisions in the event that a
taxpayers taxable income is understated as a result of prices that were charged in
affected transactions, which were not carried out at arms length. Further, interest will
be charged on the unpaid amounts at 20% per annum.
Thin capitalisation
The Minister of Finance may, if any amount of financial assistance provided by a

foreign connected person is excessive in relation to a companys fixed capital (being
share capital, share premium, accumulated profits, whether capital or not), disallow,
for income tax purposes, the deduction of any interest or other charges payable by the
Namibian person on the excessive portion of the financial assistance provided by the
foreigner.
There is no guidance that provides a definition for excessive. Therefore, each case
should be considered on the basis of the facts provided. The 3:1 ratio is applied by the
Bank of Namibia for exchange control purposes, and this guideline is therefore deemed
suitable until otherwise determined by Inland Revenue.
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Foreign tax credit
A tax credit may be claimed in Namibia for foreign taxes paid on dividends, royalties,
and similar income, limited to the amount of tax payable in Namibia. Proof of the taxes
paid in the foreign jurisdiction should be provided to Inland Revenue in order to claim
the tax credit.
Manufacturing
The following is a high-level comparison of the different tax treatments for normal
companies and registered manufacturing companies. This description does not consider
the specific conditions that should be met in order for these incentives to be utilised.
Note that only the building allowance and preferential tax rate (as set out below) may
create or increase a tax loss.
Building allowance
A building allowance is deductible with respect to buildings used for purposes of trade.
For normal companies, the allowance is calculated as 20% of the cost of construction in
the year in which the building enters service and 4% during the 20 years that follow.
For registered manufacturing companies, the allowance is calculated as 20% of the cost
of construction in the year in which the building enters service and 8% during the ten
years that follow.
Employee allowances
For normal companies, expenditures for remuneration and training of employees are
For registered manufacturing companies, an additional allowance of 25% of
remuneration and training of employees that are directly engaged in the manufacturing
process are deductible. However, this allowance may not create or increase a tax loss.
Deductions sought for training should be approved by the government.
Export expenditure allowance
For normal companies, export expenditures incurred are deductible for tax purposes.
For registered manufacturing companies, an additional allowance of 25% of costs
incurred in an export country, in order to export Namibian manufactured goods to such
country, may be deducted. However, this allowance may not create or increase a tax loss.
Export allowance
Any taxpayer (not required to be a registered manufacturer) that derives income from
the export of goods manufactured in Namibia, excluding meat or fish, may deduct
an export allowance equal to 80% of the taxable income derived from the export of
manufactured goods.
Gross profit derived from the export of manufactured goods as a percentage of total
gross profit should be used to determine the percentage of taxable income that is used to
calculate the export allowance. However, this allowance may not create or increase a tax
loss.
Transport allowance
For normal companies, land-based transport costs (i.e. transport by road or rail) are
1407
For registered manufacturing companies, an additional allowance of 25% of land-based
transport cost in respect of material and components used in the manufacturing process
or equipment imported for direct use in the manufacturing process may be deducted.
However, this allowance may not create or increase a tax loss.
Preferential tax rate
For normal companies with a financial year-end of or after 31 December 2013, the
normal tax rate for companies other than mining companies or registered manufacturers
is 33%.
The tax rate for a registered manufacturer for taxable income with respect to the
manufacturing activity for which they are registered is 18%. This preferential rate is
applicable for a period of ten years from registration as a manufacturer.
Export Processing Zones (EPZs)
In order to become an EPZ company, a particular entity must register with the EPZ
governing body and obtain approval from Inland Revenue.
An EPZ company qualifies for the following benefits:

The company is exempt from corporate tax.

No VAT is payable on the sale of goods or services rendered in the zone.
No VAT is payable on goods imported or manufactured in the zone.
No customs or excise duty is payable on goods imported into the zone.
No stamp duty or transfer duty is payable in relation to the transfer of movable or
immovable property in the zone.
A 75% refund of expenditures incurred in training Namibian citizens.
Some of the provisions in the Labour Relations Act do not apply in the zone.
Enterprises must comply with the following requirements in order to qualify for EPZ
status:
Goods must be exported to countries other than countries in the SACU.
Industrial employment must be created or increased.
Namibias export earnings must be increased as a result of manufactured goods
exported.
EPZ companies may not be involved in retail business operations.
Withholding taxes
WHTs are applicable where dividends and royalties, or similar payments, are declared or
distributed to non-Namibian residents.
Dividends
Dividends declared by a Namibian company to a non-resident holding company are

subject to NRST, a WHT. NRST is payable at the standard rate of 10% if at least 25% of
shares are held in the Namibian company, unless DTA relief is available. Where less than
25% of shares are held in the Namibian company, the NRST payable is 20%, unless DTA
relief is available.
NRST is payable within 30 days after declaration of a dividend.
Interest
A WHT of 10%, calculated on the gross amount of interest, is payable on interest

accruing to any person, other than a Namibian company, from a registered Namibian
1408
banking institution or unit trust scheme. The tax withheld is a final tax, and the financial
institution is responsible to withhold the tax.
Namibian companies, however, are taxed on interest at the corporate tax rate.
It is the obligation of the financial institution to withhold the tax and pay such tax to the
revenue authorities.
No WHT on interest applies to interest paid on loan accounts to foreign entities.
Royalties or similar payments
WHT on royalties are payable when a Namibian company pays a royalty to a nonresident. As of 1 January 2013, WHT is levied at a rate of 9.9% (30% of the corporate tax
rate of 33%) and is payable within 14 days after the end of the month during which the
liability for payment is incurred.
A royalty includes payment for the use or right to use any patent or design, trademark,
copyright, model, pattern, plan, formula, or process, or any other property or right
of a similar nature. A royalty also includes the imparting of any scientific, technical,
industrial, or commercial knowledge or information for use in Namibia. The nature of
fees payable should therefore be carefully considered in order to determine whether the
relevant amount represents a royalty.
Services
Any Namibian resident (i.e. a company incorporated or managed and controlled in

Namibia, and natural persons ordinarily resident in Namibia) paying a management,
consultancy, entertainment, or directors fee to a non-resident must withhold tax at 25%.
Management and consulting fees are specifically defined as: any amount payable for
administrative, managerial, technical, or consultative services or any similar services,
whether such services are of a professional nature or not.
The rate is subject to DTA relief, where applicable.
Summary of WHT payable
The WHT rates and treaty relief for Namibian DTAs can be summarised as follows. Note
that the tax treaties contain certain requirements that should be met before the reduced
tax rate may be applied.
The definitions of dividends, interest, and royalties in the various treaties should also be
considered.
WHT (%)
Recipient
Non-treaty
Treaty:
Botswana
France
Germany
India
Malaysia
Mauritius
Romania
Dividends
10/20 (1)
Interest
10 (2)
10
5/15 (3)
10/15 (3)
10
5/10 (1)
5/10 (1)
10 to 15 (4)
10
10
0
10
10
10
10
Management,
administrative, technical,
Royalties
and consulting fees
9.9
25
9.9 (7)
9.9 (7)
9.9 (7)
9.9 (7)
5
5
5
15
0
0
10
5
0
0
Directors
fees
25
25
25
25
25
25
25
25
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WHT (%)
Recipient
Russian Federation
South Africa
Sweden
United Kingdom
Dividends
5/10 (5)
5/15 (1)
5/15 (3)
5/10/15 (6)
Interest
10
10
10
N/A
Royalties
5
9.9 (7)
5
5
Management,
administrative, technical,
and consulting fees
0
0
15
0
Directors
fees
25
25
25
25
Notes
1.
2.
3.
4.
5.
6.
7.
Lower rate applies where at least 25% of shares are held in the Namibian company. Higher rate
applies otherwise.
Namibian companies are taxed at the corporate tax rate on interest received.
Lower rate applies where at least 10% of shares are held in the Namibian company. Higher rate
applies otherwise.
Rate depends on shareholding.
Lower rate applies where at least 25% of shares are held in the Namibian company and recipient
directly invested at least 100,000 United States dollars (USD) in the equity capital of the company
paying the dividend. Higher rate applies otherwise.
5% where at least 50% of shares are held in the Namibian company. 10% where at least 25% of
shares are held in the Namibian company. 15% otherwise.
Although the treaty refers to 10%, the rate per local legislation is limited to 9.9%.
Mining royalties
The Minerals (Prospecting and Mining) Act levies a royalty on minerals won or mined by
a licence holder in Namibia, based on the table below:
Group of minerals
Precious metals
Base and rare metals
Semi-precious stones
Nuclear fuel minerals
Industrial minerals
Non-nuclear fuel minerals
Oil and gas
Percentage of market value of minerals levied as a royalty (%)

3
3
2
3
2
2
5
Tax administration
Taxable period
The tax year for companies and close corporations is aligned with the financial year.
Tax returns
The income tax return is due within seven months after the financial year-end of
the company and can be extended to five months after the seventh month due date,
provided that no other prior year income tax returns are outstanding.
Payment of tax
The first provisional payment for income tax is due within six months from the
commencement of the companys financial year (at least 40% of tax payable at yearend is paid on first submission). The second provisional payment is due on/before the
last day of the respective tax year (at least 80% of tax payable at year-end is paid on
second submission). The final provisional payment is due within seven months after the
financial year-end of the company.
WHT on dividends are due within 30 days after declaration of the dividend.
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WHT on royalties or similar payments are due within 14 days after the end of the month
during which the liability for payment of the royalty was incurred.
WHT on services is payable to Inland Revenue within 20 days after the end of the month
during which the amount was deducted or withheld.
It is advised that if relief is available under the DTA, a nil form should still be submitted
when payment is made to non-residents. The amount of DTA relief claimed should be
disclosed on the form submitted.
Penalties and interest
The penalties and interest due for late submissions and payments can be summarised as
follows:
Tax area
1st provisional tax
Reason
Late submission
Late payment
Under-estimation
2nd provisional tax Late submission
Late payment
Under-estimation
Income tax return
WHT
Late submission
Late payment
Omission/incorrect statement
Late payment
Penalty Interest (%)

NAD 100 per day penalty for
20
outstanding provisional tax
returns
10%
20
Up to 100% of underpaid
20
amount
20
NAD 100 per day penalty for
outstanding provisional tax
returns
10%
20
Up to 100% of underpaid
20
amount
None
20
10%
20
Up to 200%
20
10%
20
Anti-avoidance
Note that the Income Tax Act, Act 24 of 1981, contains an anti-avoidance section,
Section 95, which enables the Receiver of Revenue to disregard the implications of a
transaction or scheme if it can be proven that:
such transaction or scheme had been entered into to avoid or postpone the payment
of any duty or levy imposed by the Act
such transaction or scheme was entered into or carried out by means or in a manner
that would not normally be employed in the entering into or carrying out of a
transaction, operation or scheme of the nature of the transaction, operation or
scheme in question, or has created rights or obligations that would not normally be
created between persons dealing at arms length under a transaction, operation or
scheme of nature of the transaction, operation or scheme in question, and
such transaction or scheme was entered into or carried out solely or mainly for the
purposes of the avoidance or the postponement of liability for the payment of any tax
duty or levy.
The Receiver of Revenue can, at its sole discretion, impose Section 95 on any transaction
or scheme, which will place the onus on the taxpayer to prove that any/all of the
requirements noted above will not be applicable to the transaction or scheme.
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Tax audit process
The tax audit process is a discretionary process instituted by Inland Revenue. Inland
Revenue will inspect the validity of invoices and whether such expenses are deductible
for tax purposes.
Generally, income tax audits are initiated on amounts being refunded to taxpayers, with
the focus being on high-value refunds.
Subsequent to an audit, a letter will be sent to the taxpayer indicating changes made to
the return of income.
In the event that the taxpayer agrees with the outcome, an assessment is issued. Where
the taxpayer is not satisfied with the outcome, an objection may be lodged within 90
days.
There is no statute of limitation in respect of claiming a refund for excess income tax
paid. Debts to the state prescribe after 30 years.
Topics of focus for the tax authority include import VAT, general compliance, the
construction industry, and employee taxes.
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Netherlands
PwC contact
Sytso Boonstra
Westgate, Thomas R. Malthusstraat 5
1066 JR Amsterdam
The Netherlands
Tel: +31 88 792 3470
The corporate tax system of the Netherlands contains a number of well-known features
providing for an attractive investment climate, such as: the fiscal unity regime with tax
consolidation for group companies, a full participation exemption for capital gains and
dividends from qualifying participations, and several favourable tax regimes (e.g. for
patent income, investment vehicles, and income from ocean shipping activities).
As of 1 January 2014, a number of amendments to the Dutch tax law relevant for
corporate taxpayers have taken effect. From that date, fiscal investment funds that
invest in real estate are allowed to hold a taxable subsidiary for the performance of
activities incidental to their investment activities. Such funds were already allowed to
hold a project development subsidiary. For 2014 and onwards, some minor cutbacks
are made on fiscal incentives. For example, the minimum investment amount for the
energy investment allowance (EIA) and the environmental investment allowance (MIA)
increased to2,500 euros (EUR)per investment.
An important development includes the introduction of measures, focusing on substance
requirements, to address the improper use of Dutch tax treaties and national tax law by
conduit companies. As of 1 January 2014, conduit companies are required to disclose
whether they fulfil these substance requirements (information requirement), among
other things, with respect to the residency of the board members, the qualification
and tasks of the board members, and the place of decision making. If the requirements
are not met and the company applies for relief from international double taxation, the
Netherlands will spontaneously exchange information about the conduit company to the
foreign tax authorities concerned.
On 3 September 2013, the Dutch tax legislator published a proposal to turn the
compartmentalisation doctrine developed in case law regarding the application of the
Dutch participation exemption into formal legislation. A taxpayer that derives income
(capital gains or dividends) from a participationthat first qualified but at a certain point
in time no longer qualifies for the participation exemption, or vice versa, must attribute
the income to the taxable and the tax-exempt period accordingly. Compartmentalisation
applies irrespective of whether the change in eligibility for the participation exemption
is caused by a change in facts and circumstances or change in legislation. When adopted,
the legislation will most likely have retroactive effect to 14 June 2013.
On 14 April 2014, a draft proposal introducing corporate income tax (CIT) liability for
public sector entities (public bodies or publicly owned entities) carrying out economic
activities was published. The draft contains a number of general exemptions that will
apply for activities related to governmental tasks and activities. In addition, a number
of specific exemptions for publicly funded education, academic hospitals, and seaports
(with grandfathering rules) are included. The proposal is a reaction to the invitation
of the European Commission (EC) to end the current system, which, according to the
EC, is liable to have a distortive effect on the competition between public and private
Netherlands
1413
Netherlands
enterprises. It is expected that the amendments will become effective as of 1 January
2016.
Treaty developments
The Netherlands pursue an active tax treaty policy in order to maintain and extend its
wide tax treaty network. Most Dutch bilateral tax treaties are based on the Organisation
for Economic Co-operation and Development (OECD) Model Tax Convention. The
Netherlands has concluded bilateral tax treaties for the avoidance of double taxation on
income and capital (DTCs) with over 90 countries worldwide. In 2013, the Netherlands
signed a revised DTC with China, which provides for a reduced withholding tax (WHT)
on Chinese dividends and which is expected to enter into force as of 1 January 2015.
As of 1 January 2014, the DTC with Mongolia has ended. The DTC with Malawi was
revoked by Malawi with effect from 1 January 2014, in advance of the outcome of the
current negotiation for a new DTC.
The Netherlands also concludes bilateral agreements on the exchange of information
with respect to taxes (TIEAs) with several countries. On 18 December 2013, the
Netherlands signed a Foreign Account Tax Compliance Act (FATCA) Intergovernmental
Agreement (IGA) with the United States (US).

In general, a Dutch resident company is subject to CIT on its worldwide income.
However, certain income can be exempted or excluded from the tax base. Non-resident
entities only have a limited tax liability with regard to income from Dutch sources.
Standard corporate income tax (CIT) rate
The standard CIT rate is 25%. There are two taxable income brackets. A lower rate of
20% applies to the first income bracket, for taxable income up to EUR 200,000.
Fiscal investment fund regime
In general terms, under the existing fiscal investment fund regime, the CIT rate for fiscal
investment funds is 0%, provided that their profit is made available to the shareholders
and holders of certificates of participation no later than eight months after year end.
Fiscal investment funds may also invest in real estate development (or redevelopment)
activities, provided that these activities take place through a subsidiary subject to Dutch
CIT and the development (or redevelopment) activities are exercised for the benefit
of real estate that is (or will be) forming part of the funds own portfolio, an affiliated
fiscal investment funds portfolio, the portfolio of a company in which the fund or
the affiliated fund has a substantial interest, or for the benefit of the subsidiarys own
portfolio (project development subsidiary). As of 1 January 2014, fiscal investment
funds that invest in real estate are allowed to hold a taxable subsidiary that provides
customary services in relation to the real estate held by the Dutch real estate investment
trust (REIT). Examples are conference facilities or the exploitation of an in-house
restaurant.
Exempt investment fund regime
The exempt investment fund regime exists next to the fiscal investment fund regime
described above. In accordance with the exempt investment fund regime, investment
funds as defined in the Dutch Financial Supervision Act (Wet op het financieel toezicht)
that meet certain conditions can request an exemption from CIT. Apart from the exempt
status for CIT purposes, the exempt investment fund is not obligated to withhold
dividend WHT with regard to profit distributions to its shareholders.
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Netherlands
Netherlands
Innovation box regime
A special regime applies with respect to profits, including royalties, derived from a
self-developed intangible asset (developed after 31 December 2006). In this so-called
innovation box, the taxpayer may opt, under certain conditions, for the application of a
lower effective rate on taxable profits derived from these intangible assets. The effective
tax rate of the innovation box is 5%.
The innovation box is applicable if at least 30% of the profits have been originated by
the patent. Companies that have incurred certain qualified research and development
(R&D) costs for the development of intellectual property (IP) for which no patent
was granted are also entitled to the favourable effective tax rate. This is subject to the
condition that these qualified R&D assets became part of the companys assets after 31
December 2007.
The lower effective tax rate of 5% only applies to positive income, allowing innovation
losses to be taken into account in full. It is also possible to include profits from an
intangible asset derived in the period between the patent application and the granting of
the patent in the innovation box regime (not for R&D assets).
Tonnage tax regime
In order to stimulate entrepreneurs engaged in ocean shipping, a favourable regime

(known as the Dutch tonnage tax regime) may be available to certain shipping
companies. Under this regime, the taxable profit of a sea-going vessel is based on its
registered net tonnage multiplied by a fixed amount of deemed profit per ton instead
of the actual profits from the exploitation. The regime only applies to the calculation
of the profit related to the qualifying shipping activities. These activities include
operating vessels in international traffic (including transportation for the purpose of
the exploitation of natural resources at sea), cable and pipe-laying activities at the
bottom of the sea, and towing and dredging and connected activities. The profits from
the qualifying activities are taxed at a deemed tonnage profit according to a five bracket
regressive scale system. The tonnage tax regime applies upon request and for a fixed
period of ten years or multiples of the ten-year period.
Local income taxes
There are no provincial or municipal corporate income taxes in the Netherlands.
Corporate residence
In the Netherlands, corporate residence is determined by each corporations facts
and circumstances. Management and control are important factors in this respect.
Companies incorporated under Dutch law are deemed to be residents of the Netherlands
(although not with respect to certain provisions, such as the participation exemption
and fiscal unity).
Non-resident companies that are neither incorporated nor effectively managed in the
Netherlands are limited in their liability to tax in the Netherlands if they receive Dutch
source income. This could be, for instance, business income derived from a Dutch PE
or permanent representative. The definition of a PE for Dutch tax purposes is largely
inspired by the OECD Model Convention definition and Commentary.
Netherlands
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Netherlands
Other taxes
VAT, known in Dutch as the Belasting over de Toegevoegde Waarde or BTW, is payable on
sales of goods and on services rendered in the Netherlands as well as on the importation
of goods and on the intra-European acquisition of goods. There are three VAT rates,
which are 21%, 6%, and 0%.
The main VAT rate is 21%.
The reduced 6% VAT rate is applicable on certain prime necessities (and also on certain
energy-saving insulation activities on houses).
The special 0% VAT rate is applicable mainly to intra-European Union (EU) supplies,
exports, imports stored in bonded warehouses, services rendered in connection with the
above, and certain other services.
The following are exempt from VAT:
The supply of immovable property two years after putting it into use and lease.
However, if the lessees use of the immovable property is 90% or more for input VATdeductible purposes, the lessor and lessee may opt to be subject to VAT on rent, in
which case the lessor may deduct the VAT charged in respect of theproperty.
Medical, cultural, social, and educational services.
Services provided by banks and other financial institutions in connection with
payment transactions and the granting of credit facilities.
Insurance transactions.
Transactions in shares.
Customs and excise tax
Many goods imported to the Netherlands from outside the European Union are subject
to customs and excise duties. The tariffs and rates that apply to the different goods vary
widely and change regularly.
An excise tax is levied on certain consumer goods (e.g. cigarettes, cigars, mineral oils,
alcoholic products). If the goods are used solely as raw materials, no excise tax is levied.
The excise tax is refundable if the article is exported.
Municipalities impose an annual immovable property tax on the owners of immovable

property. The rates depend on the municipality. The taxable basis is the market value
of the immovable property. Please note that the (assessment of the) value is also of
importance for CIT, as depreciation might be limited based on this value (see Limited
depreciation of immovable property in the Deductions section).
Transfer tax on immovable property
Acquisition of economic or legal ownership of immovable property in the Netherlands is

subject to a 6% transfer tax on market value. Some exemptions are available. Real estate
transfer tax on dwellings is 2%.
Transfer tax on acquisition of shares in a real estate entity
The acquisition of shares in an entity that owns real estate may also be subject to
transfer tax if that entity is characterised as a so-called real estate entity. The threshold
for qualifying as a real estate entity is met if more than 50% of the assets of the entity
consist of real estate and at least 30% consist of Dutch immovable property.
1416
Netherlands
Netherlands
Stamp duty
There are no stamp duties in the Netherlands.
Capital tax
The Netherlands do not levy capital tax on capital transactions (e.g. issue or increase
capital).
Insurance tax
An insurance tax is payable on insurance premiums if the insured is a resident of the

Netherlands or if the insured object is in the Netherlands. The insurance tax rate is
21%. Several exemptions areavailable (e.g. insurances of ships and aircraft operated
in international traffic are exempt from insurance tax). In certain situations, an insurer
outside the European Union may be required to take on a tax representative in the
Netherlands.
Waste management contribution
Companies annually bringing 50,000 or more kilograms of packing material on the

market must pay a waste management contribution (Afvalbeheersbijdrage). The amount
payable varies to the total weight and type of packaging. The contribution aims to cover
the costs of recycling package materials.
Producers and importers of packaging expecting to exceed the threshold must register
with the Packaging Waste Fund (Afvalfonds Verpakkingen) upfront. In the current year,
they must file an estimation of the expected total volume of packing material. The
contribution is then provisionally calculated. Before 1 April of the next calendar year,
the actual amount and type of packaging must be reported. The actual contribution
payable is recalculated accordingly.
Branch income
Rates for Dutch branch profits are the same as for other corporate profits, but no tax is
withheld on transfers of profits to the head office. The tax base is, in principle, calculated
on the same rules as for Dutch-resident companies.
Inventory valuation
In general, stock/inventory is stated at the lower of cost or market value. Cost may be
determined on the basis of first in first out (FIFO), last in first out (LIFO), base stock, or
average cost. The LIFO system may be used for commercial/financial and tax purposes.
There is no requirement of conformity between commercial/financial and tax reporting.
Capital gains
Capital gains are taxed as ordinary income. However, capital gains realised on disposal
of shares qualifying for the participation exemption are tax exempt (see Dividend income
below).
acquired assets. Except in special circumstances, the reserve cannot be maintained for
more than three consecutive years. If the reserve has not been fully applied after three
years, the remainder will be liable to taxation.
Netherlands
1417
Netherlands
Capital losses are deductible, unless attributable to the disposal of a shareholding
qualifying for the participation exemption.
Dividend income
Subject to meeting the conditions for the participation exemption, a Dutch company or
branch of a foreign company is exempt from Dutch tax on all benefits connected with
a qualifying shareholding, including cash dividends, dividends in kind, bonus shares,
hidden profit distributions, capital gains, and currency exchange results.
Participation exemption
The participation exemption will apply to a shareholding in a Dutch company if the

holding is at least 5% of the investees capital, provided the conditions are met.
As a general rule, the participation exemption is applicable as long as the participation
is not held as a portfolio investment. The intention of the parent company, which can
be based on particular facts and circumstances, is decisive. Regardless of the companys
intention, the participation exemption also is applicable if the sufficient tax test (i.e. the
income is subject to a real profit tax of at least 10%) or the asset test (i.e. the subsidiarys
assets do not usually consist of more than 50% of portfolio investments) is met.
For portfolio investment participations not qualifying for the participation exemption,
double taxation will be avoided by applying the tax credit method, unless the portfolio
investment shareholding effectively is not subject to tax at all. For EU shareholdings, it is
optional to credit the actual underlying tax.
Dividends not qualifying under the participation exemption are taxable in full at the
ordinary CIT rate.
Interests of 25% or more in a company of which the assets consist (nearly) exclusively of
portfolio investments should be annually valued, as an asset, at the fair market value.
Costs related to the acquisition and disposal of a participation (e.g. legal fees,
compensations, notary fees) are not deductible for corporate tax.
Losses arising from the liquidation of a (foreign) subsidiary are deductible for CIT,
subject to certain conditions.
Note that a provision limits the deduction of excess interest on debts that are deemed to
be related to the financing of participations (see Anti-abuse rules regarding interest and
loans in the Deductions section).
Profits derived from a company that was created by converting a foreign PE only qualify
for the participation exemption after they exceed the losses from the PE during the
previous years insofar as those losses reduced the taxable profits in the Netherlands
before 1 January 2012. Under certain circumstances, such as the alienation of (part of)
the shares of the company, all non-recaptured losses will be added to the profits of the
Dutch parent company at once. Note that the scope of these anti-abuse provisions has
been extended by including situations in which a foreign intermediate holding company
is interposed.
On 3 September 2013, the Dutch tax legislator published a proposal to turn the
compartmentalisation doctrine developed in case law regarding the application of
the Dutch participation exemption into formal legislation. The proposal is likely to be
enacted in the relatively short term. When adopted, the legislation has retroactive effect
to 14 June 2013. Based on the compartmentalisation doctrine, a taxpayer that derives
income from a participationthat first qualified but at a certain point in time no longer
qualifies for the participation exemption or vice versa must attribute the income to the
1418
Netherlands
Netherlands
taxable and the tax-exempt period accordingly. The proposed legislation will apply to all
changes in the application of the participation exemption regime irrespective of whether
caused by a change in facts and circumstances or change in legislation. It will apply to
both capital gains and dividend distributions. Changes that occurred before 14 June
2013 will be affected.
Stock dividends
Stock dividends are taxed as dividend income to the extent that they are paid out of
earned surplus. They are not taxable if paid out of share premium (agio), provided the
share premium account was not created pursuant to a share-for-share merger, in which
only Dutch companies were involved. In the case of a share-for-share merger, in which
shares in foreign subsidiaries were contributed to a Dutch company, the Dutch company
can distribute the difference between the fair market value and the paid-in capital of the
subsidiaries being contributed as a stock dividend without triggering Dutch dividend
WHT (step-up in basis), provided certain requirements are met.
Work in progress
Profits with regard to work in progress should be accounted before actual completion, to
the extent that the work is completed. All project costs should be recognised in the year
the costs occurred.
Foreign income
In general, a Dutch resident company is subject to CIT on its worldwide income.

However, certain income can be exempted (e.g. due to the application of the
participation exemption described above) or excluded from the tax base.
Certain foreign-sourced income (foreign branch income, real estate income, and other
income) is excluded from the Dutch taxable base. The so-called object exemption,
a method to provide relief for international juridical double taxation in situations of
Dutch companies with a PE abroad, is designed as a tax base adjustment instead of a real
exemption. Consequently, losses of foreign PEs can no longer be offset against profits
of the Dutch head office (except for final losses), but currency exchange results are still
included in the tax base. Also, if the foreign activities cease, any losses upon liquidation
can, in principle, be deducted. For certain low-taxed passive PEs, the object exemption is
replaced by a credit system.
Double taxation of foreign dividends, interest, and royalties is relieved by a tax credit
provided by Dutch tax treaties or unilaterally if the payer of the income streams is
a resident of a developing country designated by Ministerial Order. If no treaty or
unilateral relief applies, a deduction of the foreign tax paid is allowed in computing the
net taxable income.
However, relief by exemption is given for dividends from foreign investments qualifying
for the participation exemption, as discussed above. In that case, there is no Dutch tax to
credit against taxes withheld in the subsidiarys country of residence.
In most circumstances, the foreign dividend is exempt for Dutch CIT under the
participation exemption, as previously discussed. As a consequence, foreign WHT cannot
be credited, and the WHT constitutes a real cost for the companies concerned. A credit
of the foreign WHT is granted against Dutch dividend WHT due on the distribution to
foreign parents of the Dutch company. The credit amounts to a maximum of 3% of the
gross dividend paid, to the extent that it can be paid out of foreign-source dividends
received that have been subject to at least a 5% WHT and the foreign company is liable
for CIT. This tax credit does not result in taxable income for CIT purposes.
Netherlands
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Deductions
Generally, depreciation may be computed by a straight-line or a reducing-balance

method or, in accordance with any other sound business practice, on the basis of
historical cost. Depreciation is applied from the date the asset comes into use. Dutch tax
law includes specific rules (see below) that potentially limit the depreciation of assets
(e.g. immovable property, goodwill, and other fixed assets).
A depletion allowance for natural resources may be granted for tax purposes, when it
conforms to sound business practice and is appropriate for accounting purposes.
Limited depreciation of immovable property
There are special provisions for depreciation of immovable property. A distinction is

made between immovable property held for investment purposes and buildings used in
a trade or business.
Investment property cannot be depreciated to an amount lower than the official
propertys fair market value for tax purposes, which is known as WOZ-waarde. In other
words, a property will not be subject to depreciation unless the carrying amount of the
building and the land on which it is located is higher than its value for tax purposes.
This value is determined by the municipal tax authorities annually. As this value is
based on the assumption that the property is free of lease, the value for tax purposes of
commercial real estate may be lower than fair market value.
Alternatively, the depreciation of buildings employed in a trade or business is limited
to 50% of the propertys value for tax purposes. It should still be possible to value
immovable property at fair market value if this is demonstrably lower than the current
book value. In addition, anti-abuse measures apply to prevent the division of land and
buildings into separate legal entities or to related individuals.
Note that maintenance costs continue to qualify for tax relief and any maintenancerelated value increase does not lead to a compulsory upward revaluation of the property.
Moreover, a property is not required to be revaluated as its value increases due to market
developments.
Depreciation of land is not permitted.
The sale of depreciated assets triggers tax on the difference between the sale price and
the depreciated book value unless a reinvestment reserve is set up (see Capital gains in
the Income determination section).
Limited amortisation of goodwill and depreciation of fixed assets
With regard to goodwill, the amortisation for tax purposes is limited to 10% of the
purchase price per annum. Furthermore, the tax depreciation of other fixed assets (i.e.
inventory, equipment) is limited to 20% of the purchase price or production costs per
annum.
The law provides accelerated depreciation of several specific assets. Accelerated

depreciation applies to investments in assets that are in the interest of the protection of
the environment in the Netherlands and that appear on the so-called VAMIL (Vervroegde
Afschrijving Milieu-investeringen) list. From 2011, the accelerated depreciation facility for
investments in environment-improving assets is limited to 75% of the total (investment)
costs. Prior to 2011, 100% of the investment costs were eligible for the facility. The
earlier proposal to increase the percentage to their pre-2011 level of 100% is withdrawn.
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Netherlands
Accelerated depreciation also is available for certain other designated assets, for
example, investments of starting entrepreneurs.
Also eligible for accelerated depreciation are certain investment made in new business
assets in 2009, 2010, and 2011 and between 1 July 2013 and 31 December 2013. Certain
conditions apply. Investment costs minus residual value of sea-vessels that are operated
mainly from the Netherlands may be depreciated straight-line over five years. Instead of
accelerated depreciation, these taxpayers may choose immediate taxation (see Tonnage
tax regime in the Taxes on corporate income section).
evidence of overriding commercial reasons for the transaction as well as the loan, or
of taxation of the interest in the hands of the recipient at an effective tax rate that is
considered adequate by Dutch standards, the interest may be deductible.
Furthermore, interest paid on certain profit participating loans will be qualified as a
dividend and will not be tax deductible. Interest received upon these loans may meet
the definitions for the participation exemption if the creditor also holds a qualifying
participation in the debtor. Intra-group conduits may be denied a credit of foreign WHT
with respect to royalties or interest received if no economic risk is deployed.
If the interest payment to a group company relates to a loan that is directly or indirectly
granted by a group company in order to finance an acquisition or capital contribution,
the interest will be deductible only if the loan and the underlying transaction are based
predominantly on sound business considerations or if the interest received is effectively
and sufficiently taxed by Dutch standards.
When the debt ultimately is financed externally (outside the group) and a direct
relationship exists between the internal debt and the ultimate external financing, it can
be substantiated that there are sound business reasons for the loan. Furthermore, the
use of tax losses or similar relief claims by the recipient of the inter-company interest
may adversely affect the deductibility of the interest paid. Also, the law states that the
interest deduction related to indebted dividend distributions, paid back capital, and
capital contributions is not only possible in case of sound business reasons but also if the
interest is taxed in the hands of the creditor at an effective tax rate that is considered
adequate by Dutch standards. The latter requirement means that the interest needs to be
subject to an effective tax rate of at least 10% over taxable profits determined according
to Dutch standards. For the determination of a taxable base according to Dutch tax
standards, the tax base limitation for the innovation box is not taken into account.
If the taxpayer makes a reasonable case that the interest is taxable at an effective tax
rate of at least 10%, the tax authorities, nevertheless, have the option to substantiate
that either the liability or the corresponding transaction is not based on sound business
reasons. The tax authorities also have the option to substantiate that the liability is
incurred in order to compensate losses or other rights that were formed in that year or
that will be formed shortly thereafter. This is also applicable to existing loans.
In addition, the deduction of interest (including costs and currency exchange results) on
excess acquisition debt is restricted if the acquired company subsequently joins a Dutch
fiscal unity with the taxpayer. The acquisition debt is considered excessive in so far as it
exceeds 60% of the acquisition price. The interest expenses may only be deducted from
the acquiring companys own profits, meaning that the profits of the target company
that was added to the fiscal unity are not taken into consideration. The restriction is not
applicable if the interest on the debt does not exceed EUR 1 million. Contrary to the
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other existing interest deduction restrictions illustrated above, this new measure also
relates to interest on loans obtained from third parties.
Furthermore, a provision limits the deduction of excess interest on debts that are
deemed to be related to the financing of participations. Under this rule, the taxpayer
is deemed to have debt relating to the financing of participations to the extent that the
average cost price of its participations exceeds its average equity. This is a mathematical
test. However, a few exceptions apply. For example, the cost prices of the participations
that at the time of the initial acquisition led to an extension of the operational activities
of the group are not taken into account for the purpose of the mathematical test. The
participation debt calculated may consist of both loans from affiliated and third parties.
The interest on the deemed participation debt is not deductible to the extent the amount
of the interest exceeds EUR 750,000. The provision for excessive participation interest
also contains a number of specific anti-abuse measures.
Charitable contributions are deductible if certain conditions are met. The gift must be
documented in writing and contributed to a qualifying charity (ANBI or SBBI). The
deductible amount may not exceed 50% of the taxable profits, with a maximum of EUR
100,000.
Limited deductibility of costs relating to remuneration by way of shares

Any remunerations by way of shares, profit-sharing certificates, option rights on shares,
or similar rights are not deductible. However, grandfathering rules exist for situations
where option rights have been granted to employees before 24 May 2006.
Costs related to so-called stock appreciation rights for employees that earn an income
that exceeds EUR 500,000 are not deductible.
Fines and penalties
Most criminal fines and tax penalties are not tax deductible. This applies, for instance,
to fines imposed by a Dutch criminal judge, administrative fines, disciplinary fines, and
penalties from a European institution.
Taxes
Certain taxes, such as the tax on insurance transactions, are deductible. Tax paid on
the transfer of immovable property must be included in the cost price and taken into
account in the course of normal depreciation. The CIT itself is not deductible.
Deduction of certain expenses (e.g. costs for food, drink, and entertainment) paid by
employers for employees are not deductible, in part. These costs are often referred to
as mixed costs. The non-deductible portion is 0.4% of the total taxable wages of all
employees but never less than EUR 4,400 per year. Alternatively, the employer may
choose to deduct only 73.5% of the actual expenses.
Tax losses can be carried back one year and carried forward nine years. This also applies
to start-up losses.
With regard to losses arising in the years 2009, 2010, and 2011, corporate taxpayers may
opt for a temporary extension of the carryback period for losses from one to three years.
This option, however, also means that the maximum period for loss carryforward will be
1422
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Netherlands
limited to six years (instead of nine). Furthermore, the extended measure is limited to
EUR 10 million loss carryback per extra year.
Complex rules may prohibit the utilisation of net operating losses after a change of 30%
or more of the ultimate control in a company. Furthermore, limitations exist on loss
utilisation for holding/finance companies. Based on these rules, losses incurred by a
mere holding or group finance company can be offset only against holding or finance
income in preceding and following years, provided that certain strict conditions are
met. These conditions are meant to counter tax planning, whereby the Dutch company
concerned acquires (e.g. by way of equity contribution or exchange) other assets that
enhance its income streams and its capacity to make use of the losses. Companies
carrying out significant other activities (with 25 or more full-time employees) are, in
principle, unaffected by these loss relief restrictions.
A Dutch corporation generally can claim a deduction for royalties, management service
fees, and interest charges paid to foreign affiliates, to the extent that the amounts are not
in excess of what it would pay an unrelated entity (i.e. arms-length principle). Dutch
companies are obligated to produce transfer pricing documentation describing the
calculation of the transfer price and the comparability of the transfer price with third
party prices.
Group taxation
Fiscal unity regime
A Dutch-resident parent company and its Dutch-resident subsidiaries (if the parent owns
at least 95% of the shares) may, under certain conditions, file a tax return as one entity
(fiscal unity). Group taxation is available for companies having their place of effective
management in the Netherlands, both for Dutch tax and treaty purposes.
The main feature of the fiscal unity is that profits of one company can be offset against
losses of another company forming part of that fiscal unity. Furthermore, inter-company
transactions are eliminated.
In February 2010, the European Court of Justice (ECJ) decided that the Dutch fiscal
unity regime does not violate EU law (the freedom of establishment), insofar as it
disallows a cross-border fiscal unity. However, the ECJ has not yet explicitly dealt with
the effects of the fiscal unity regime, other than cross-border loss utilisation, such as the
transfer of assets between group companies without immediate taxation and the use
of final losses. The Dutch Supreme Court will possibly deal with those issues at a later
stage.
On 17 January 2013, the Amsterdam Tax Court of Appeals referred preliminary
questions to the ECJ on the compatibility of the Dutch fiscal unity regime with the Treaty
on the Functioning of the European Union (TFEU) to the extent it denies a fiscal unity
between a Dutch parent company and its Dutch subsidiaries because of a non-Dutch
resident, German intermediary holding company.
Transfer pricing rules
Based on a general transfer pricing provision in the corporation tax law, all transactions
between related parties must be at arms length. Furthermore, a specific transfer pricing
provision exists with respect to the transactions of an interest and royalty conduit
company. Dutch companies are obligated to produce transfer pricing documentation
describing the calculation of the transfer price and the comparability of the transfer
price with third party prices. If a transaction between related parties is not at arms
length, the taxable income may be corrected by the tax authorities. Moreover,
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1423
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transactions that do not meet the arms-length test may constitute a contribution of
informal capital or a hidden profit distribution.
On the basis of a decree of the State Secretary for Finance regarding transfer pricing,
companies may request an advance tax ruling (ATR) and an advance pricing agreement
(APA). An ATR may be requested on the classification of activities and an APA may
be required on the classification of activities and the arms-length character of the
transferprice.
Thin capitalisation
The thin capitalisation rules, which may limit the deductibility of interest paid on intragroup debts, no longer apply with regard to fiscal years starting on or after 1 January
2013. There are no transitional provisions. Until that date, the thin capitalisation rules
applied to all Dutch companies that were part of a domestic or international group of
companies. The allowed debt-to-equity ratio was 3:1, based on the average of the tax
equity at the beginning and at the end of the year. A higher ratio might have applied
at the request of the taxpayer if the group to which the Dutch company belongs had,
according to the financial statements, a higher, worldwide debt-to-equity ratio. Interest
paid on loans exceeding the 3:1 ratio was disallowed only to the extent it exceeded intercompany interest received. The deduction of interest paid on genuine third party loans
was not limited by the thin capitalisationrules.

Foreign tax credit
credit regime.
Small investments
There is a system of deductions for small investments, the so-called small scale
investment deduction. To calculate this annual deduction, investments of more than
EUR 450 each are totalled to determine the percentage of the deduction.
Total of investments (EUR)
0 to 2,300
2,301 to 55,248
55,249 to 102,311
102,312 to 306,931
Above 306,931
Deduction
0
28% of the value of the total of small investments
EUR 15,470
EUR 15,470 minus 7.56% of the amount exceeding EUR 102,311
No deduction
Investments in energy-efficient assets
For investments in new energy-efficient business assets that meet the Energy List
requirements, an additional deduction (EIA) from corporate income is available. The
minimum investment amount per asset is increased to EUR 2,500 as of 1 January
2014. The allowance equals 41.5% of the annual amount, with a maximum of EUR 118
million, of eligible energy investments. The right to the EIA is declared with the tax
return, provided the investment is reported previously in good time to the Netherlands
Enterprise Agency (www.rvo.nl). An investment can be reported in phases, but the
minimum amount for notification is EUR 2,500.
Investments in environmental assets
For investments in certain new environmental improving assets that meet the
Environment List requirements, an additional deduction (MIA) from corporate income
is available. The minimum investment amount per asset is EUR 2,500 as of 1 January
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Netherlands
2014. The allowance equals 36%, 27%, or 13.5% (depending on the ministerial
classification of the assets) of the annual amount, with a maximum of EUR 25 million,
of eligible environmental investments. The right to the MIA is declared with the tax
return, provided the investment is reported previously in good time to the Netherlands
Enterprise Agency. An investment can be reported in phases, but the minimum amount
for notification is EUR 2,500.
New technology
Wage costs
Conducting certain R&D activities on applied new technology is subsidised by

a reduction of wage tax to be paid on wages of employees engaged in R&D of
technologically new products. The subsidy accrues to the employer when the employee
is credited for the normal amount of wage tax. For the year 2014, the reduction of the
payroll tax and social security contributions amounts to 35% (38% in 2013) of the first
EUR 250,000 (EUR 200,000 in 2013) in R&D wage costs (first bracket) and 14% of the
excess costs. The benefit for each employer (or group of companies) may not exceed EUR
14 million per year.
To obtain the relief under the R&D incentive programme, taxpayers must file an
electronic/online application with the Netherlands Enterprise Agency. The taxpayer
will receive an R&D declaration. The budget for this subsidy is fixed, so the amount of
the subsidy is dependent on budget availability. Note that self-developed and utilised
software falls within the scope of the R&D incentive under certain conditions.
Other costs
In addition to the existing R&D facilities, an additional R&D deduction is available.

For 2014, the additional R&D deduction amounts to 60% (54% in 2013) of the costs
(other than wage costs) and expenses directly related to R&D activities performed by the
taxpayer. An expense equal to or greater than EUR 1 million will be taken into account
over a period of five years, 20% each year.
To receive this additional deduction, taxpayers must file an electronic/online application
with the Netherlands Enterprise Agency. The request must be filled together with the
application for the R&D declaration.
Withholding taxes
Dividends from Dutch corporations are generally subject to a 15% Dutch dividend WHT.
In general, this does not apply to the Dutch cooperative (i.e. co-op) in a business driven
structure, a widely used vehicle for holding and financing activities.
The Netherlands does not levy a WHT on interest and royalty payments.
Domestic corporations are required to withhold taxes as follows:
Recipient
Dividends (%) (1)

0/15
15

Non-treaty situations
Treaty:
Albania
15
0/5/15 (30)
Netherlands
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Recipient
Argentina
Armenia
Aruba
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Brazil
Bulgaria
Canada
Caribbean Netherlands (Bonaire, Saint Eustatius, and Saba)
Croatia
Curaao
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Georgia
Germany
Ghana
Greece
Hong Kong
Hungary
Iceland
India
Indonesia
Israel
Italy
Japan
Jordan
Kazakhstan
Korea, Republic of
Kuwait
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Macedonia
Malawi
Malaysia
Malta
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Netherlands
Dividends (%) (1)

10/15 (2)
0/5/15 (3)
5/7.5/8.3/15 (5, 21, 40)
15 (5)
0 (6) or 5/15 (3, 7)
5/10 (38)
0/10 (8)
10/15 (8)
0/15 (42)
0/5/15 (2, 9)
0 (6) or 5/15 (5, 8)
5/15 (2, 4)
15 (5)
0 (6) or 5/15 (2)
5/15 (10)
0/15 (41)
10 (5, 11)
0/15 (8)
5/7.5/8.3/15 (5, 21, 40)
0 (6) or 0/10 (2, 5)
0 (6) or 0/15 (8)
0/15 (2)
0 (6) or 5/15 (2)
0 (6) or 0/15 (37)
0 (6) or 5/15 (2, 5)
0/5/15 (31)
0 (6) or 10/15 (5, 12)
5/10 (8)
0 (6) or 5/15 (2)
0/10 (42)
0 (6) or 5/15 (2)
0/15 (8)
10/15 (32)
10 (2, 5)
0 (6) or 0/15 (13)
5/15 (2)
0 (6) or 5/10/15 (14)
0/5/10 (15)
5/15 (8)
0/5/15 (17)
10/15 (2)
0/10 (8)
15 (5, 24)
0 (6) or 5/15 (2)
0 (6) or 5/15 (2)
0 (6, 18) or 2.5/15 (2, 18)
0/15 (8)
15 (19)
0/15 (7)
0 (6) or 5/15 (2)
Netherlands
Recipient
Mexico
Moldavia
Montenegro
Morocco
New Zealand
Nigeria
Norway
Oman
Pakistan
Panama
Philippines
Poland
Portugal
Qatar
Romania
Russian Federation
Saint Martin
Saudi Arabia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Surinam
Sweden
Switzerland
Taiwan
Tajikistan
Thailand
Tunisia
Turkey
Turkmenistan
Uganda
Ukraine
United Kingdom
United States
Uzbekistan
Venezuela
Vietnam
Zambia
Zimbabwe
Dividends (%) (1)

5/15 (16)
0/5/15 (20)
5/15 (2, 4)
10/15 (2)
15 (5)
12.5/15 (8)
0/15 (2)
0/10 (8)
10/15 (2)
0/15 (42)
10/15 (8)
0 (6) or 5/15 (5, 8)
0 (6)/10
0/10 (39)
0 (6) or 0/5/15 (22)
5/15 (23)
5/7.5/8.3/15 (5, 21, 40)
5/10 (8)
5/15 (2, 4)
0/15 (5, 7)
0 (6) or 0/10 (2, 5)
0 (6) or 5/15 (2)
5/10 (16)
0 (6) or 5/15 (5, 25)
10/15 (2)
7.5/15 (2)
0 (6) or 0/15 (2)
0/15 (36, 43)
10
15 (24)
5/15 (34)
0/15 (8)
5/15 (2)
15 (5, 24)
0/5/15 (35)
0/5/15 (26)
5/10 (8)
0 (6) or 0/10/15 (33)
0/5/15 (27)
0/5/15 (28)
0/10 (2)
5/7/15 (29)
5/15 (2)
10/15 (2)
Notes
1.
2.
A 0% WHT rate applies to payments to a resident corporation when its shareholding qualifies for the
participation exemption and the shares form part of a company whose activities are carried on in the
Netherlands. However, dividend WHT may be levied on certain profit participating loans.
The lower rate applies if the foreign company directly owns at least 25% of the capital of the Dutch
company.
Netherlands
1427
Netherlands
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
1428
The 5% rate is applicable if the foreign company directly owns 10% of capital of the Dutch company.
The 0% rate is applicable if the dividend originates from ordinary taxed profits and the dividend is tax
exempt in the hands of the recipient.
Based upon the treaty concluded with former Yugoslavia.
Negotiations on (revisions of) tax treaties are currently pending with Angola, Aruba Australia, Belgium,
Brazil, Chile, Colombia, Costa Rica, Curaao, France, Indonesia, Kenya, New Zealand, Poland, Saint
Martin, Singapore, Slovak Republic, and Spain. The new or revised treaties with China, the Czech
Republic, Ethiopia, and Germany are signed but not yet effective.
Indicates that this country is a member state of the European Union. The EU Parent/Subsidiary
Directive applies from 1 January 1992. According to the Directive, dividends paid by a Dutch
company (BV or NV) to a qualifying parent company resident in another EU member state must be
exempt from Dutch WHT, provided certain conditions are met. Among other things, the EU parent
company must hold at least 10% of the Dutch dividend-paying companys capital (or, in certain
cases, voting rights) for a continuous period of at least one year. Please note that the Dutch tax
legislation is more lenient with respect to the minimum holding; it only requires a holding of 5% at
the moment of distribution. A provisional exemption from dividend WHT will apply from the start of
the one-year holding period. The exemption will be cancelled retroactively if, following the dividend
distribution, the one-year holding requirement is not actually met. The Dutch dividend-distributing
company must provide to the Dutch tax authorities a satisfactory guarantee for the payment
of dividend WHT that, but for the provisional exemption, would be due. The exemption is also
applicable if the parent company is a resident of a EU member state and owns at least 10% of the
(voting) shares in the Dutch company but only on the basis of reciprocity (Finland, Germany, Greece,
Luxembourg, Spain, and United Kingdom). Should the WHT exemption not be available under the
EU Parent/Subsidiary Directive, the treaty rate(s) set out in the right-hand side of the same column
(following or) will apply.
The lower rate applies if the foreign company directly or indirectly owns at least 25% of the capital of
the Dutch company.
The lower rate applies if the foreign company directly owns at least 10% of the capital of the Dutch
company.
The 0% rate applies if the foreign company directly owns at least 50% of the capital of the Dutch
company, or invested more than EUR 250,000 in the Dutch company or directly owns 25% of the
capital of the Dutch company and has a statement indicating that the investment in Dutch capital is,
directly or indirectly, guaranteed by the government of Belarus.
The 5% rate applies if the foreign company directly or indirectly owns at least 25% of the capital or at
least 10% of the voting rights in the Dutch company.
The treaty is not applicable for Hong Kong and Taiwan.
The lower rate applies if the foreign company owns at least 25% of the voting shares of the Dutch
company.
The lower rate applies if the foreign company owns at least 25% of the voting rights in the Dutch
company.
The 5% rate is applicable if the Italian company owns at least 50% of the voting shares in the Dutch
company for a continuous period of at least 12 months prior to the date chosen for distribution of a
dividend. The 10% rate is applicable if the Italian company owns at least 10% of the voting shares
in the Dutch company for the continuous period mentioned above. In other cases, the dividend WHT
rate is 15%.
The 5% rate applies if the foreign company owns at least 10% of the voting shares of the Dutch
company for a continuous period of at least six months immediately before the end of the book
year to which the dividend distribution relates. No WHT is levied if the foreign company directly or
indirectly owns at least 50% of the voting power in the Dutch company distributing the dividends for
a period of six months. Also, no WHT is levied if the foreign company is a pension fund.
The lower rate applies if the foreign company directly or indirectly owns at least 10% of the capital of
the Dutch company.
The 0% rate is applicable if the foreign company directly or indirectly owns at least 50% of the capital
of the Dutch company or if it has invested more than 1 million United States dollars (USD) in the
Dutch company, insofar as the government of Kazakhstan has guaranteed the investment; the 5%
rate applies if the recipient company owns at least 10% of the capital of the paying company.
These rates do not apply to dividend payments to Luxembourg 1929 holding companies.
In advance of the outcome of the current negotiation for a new DTC, Malawi has revoked the present
DTC per 1 January 2014. The dividend article of the treaty is not applicable anymore. The national
WHT rate is applicable.
The 0% rate is applicable if the foreign company directly or indirectly owns at least 50% of the capital
of the Dutch company and invested more than USD 300,000 in the Dutch company. The 5% rate is
applicable if the foreign company directly owns 25% or more of the capital of the Dutch company.
The 15% rate is applicable on portfolio investments.
The rate is 15% unless the dividend is paid to a company holding at least 25% of the paid-up capital
in the Dutch company. In this latter case, the WHT rate will be reduced to: (i) 5% if the dividends
received are subject to a profits tax in the other state of at least 5.5% on the dividend or (ii) 7.5% if
the profits tax is less than 5.5%. The combined CIT of the other state and Dutch dividend WHT for
participations of at least 25% must not exceed 8.3%. Depending on the tax percentage levied in the
other state, the Dutch dividend WHT will be restituted accordingly.
The 5% rate is applicable if the recipient of the dividend is the beneficial owner and directly owns
10% of the capital of the Dutch company. The 0% rate is applicable if the recipient of the dividend is
the beneficial owner and directly owns at least 25% of the capital of the Dutch company.
The 5% rate is applicable if the recipient of the dividend is the beneficial owner and directly owns at
least 25% in the capital of the Dutch company with a minimum investment of at least EUR 75,000.
Netherlands
Netherlands
24. The Netherlands applies the treaty with the former Soviet Union unilaterally to Kyrgyzstan, Tajikistan,
and Turkmenistan.
25. The lower treaty rate applies if the Spanish company owns 50% or more of the capital of the Dutch
company or if the Spanish company owns 25% or more of the capital of the Dutch company and
another Spanish company also owns 25% or more of that capital.
26. The 0% rate is applicable if the foreign company directly or indirectly owns at least 50% of the capital
of the Dutch company or invested more than USD 300,000 in the Dutch company. The 5% rate is
applicable if the foreign company directly owns 20% or more of the capital of the Dutch company.
27. The lower rate applies if the foreign company directly owns at least 10% of the voting rights in
the Dutch company. On 8 March 2004, the Netherlands and the United States signed a protocol
amending the applicable tax treaty. Based on this protocol, the WHT on dividends will be reduced
to 0% if the receiving company owns 80% or more of the voting power of the distributing company,
provided that certain other conditions are also met. This reduction of the dividend WHT has taken
effect as of 1 January 2005.
28. The 5% rate is applicable if the foreign company directly owns 25% or more of the capital of
the Dutch company. The 0% rate is applicable if the dividend for that company qualifies for the
participation exemption in the Netherlands. The 15% rate is applicable to portfolio dividends.
29. The 5% rate is applicable if the foreign company directly or indirectly owns at least 50% of the capital
of the Dutch company or invested more than USD 10 million in the Dutch company. The 7% rate
applies to the foreign company owning, directly or indirectly, at least 25% of the capital of the Dutch
company.
30. No dividend WHT is due if the share in the participation is at least 50% and at least USD 250,000
capital is paid in, in the participation. A dividend WHT of 5% is due if the share in the participation is
at least 25%.
31. A dividend WHT of 5% is due if the share in the participation is at least 10%. No dividend WHT is
due if the share in the participation is at least 50% and at least USD 2 million capital is paid in, in the
participation.
32. Based upon most-favoured nation principle.
33. The 0% rate applies if a company controls at least 10% of the voting power of the Dutch company
paying the dividends. The 15% rate applies to dividends arising from income from immovable
property, distributed by certain tax exempt real estate investment vehicles (e.g. REITs or FBIs).
34. In case a Thai company holds at least a 25% share in a Thai company, the Dutch dividend WHT rate
is 5%.
35. If a share of at least 50% is held by a company, no dividend WHT is due. If the share the company
holds is less than 50%, 5% dividend WHT is due.
36. As of 29 December 2004, Switzerland and the European Union concluded a treaty in light of the
EU savings directive. The treaty, amongst others, contains a clause that no dividend tax is withheld
if certain requirements are met. The main requirements are that a shareholding of at least 25% is
held directly for a period of at least two years and both corporations are not subjected to a special
tax regime. Please note that even though the treatment of dividend appears to be equal to the
treatment on the basis of the EU-parent subsidiary directive, the directive is, in fact, not applicable to
Switzerland.
37. The 0% rate applies if the foreign company directly owns at least 5% of the capital of the Dutch
company.
company with a minimum investment of at least EUR 200,000 in the Dutch company.
39. The 0% rate applies if the foreign company directly owns at least 7.5% of the capital of the Dutch
company.
40. The WHT rates are based on the Dutch Belastingregeling voor het Koninkrijk.
41. The WHT rates for the Caribbean Netherlands are based on the Dutch Belastingregeling voor het land
Nederland.
42. No WHT is levied if the foreign company (beneficial owner) receiving the dividends directly holds at
least 10% (15% threshold for the Panama Treaty) of the shares of the Dutch company, provided that
the shares of the foreign company are regularly traded on a recognised stock exchange or at least
50% of the shares of the foreign company is owned by residents of either contracting state or by
companies the shares of which are regularly traded on a recognised stock exchange. Also, no WHT
is levied if the foreign company is a bank or insurance company, a state or political subdivision, a
headquarter owning at least 10% of the shares of the Dutch company, or a pension fund.
company, is a pension fund, or, as far as Switzerland is concerned, the beneficial owner is a social
security scheme.
Tax administration
Taxable period
Generally, the tax year is equal to the calendar year. However, corporate taxpayers may
deviate from this by adopting a different financial year.
Netherlands
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Tax returns
Corporate taxpayers are required to file a tax return annually. The due date is generally
five months after the end of the companys financial year. This filing due date may be
extended upon request by the taxpayer.
The Dutch tax authorities generally make a provisional assessment before issuing the
final assessment after a full examination of the return. The final assessment must be
issued within three years following the financial year. This period is prolonged with the
time of the extension for filing the tax return. The Dutch tax authorities may issue an
additional assessment if it appears that the amount of CIT payable (as calculated in the
final assessment) is too low.
During the current tax year, a provisional assessment can be issued on the basis of prior
years taxable income or on an estimation provided by the taxpayer.
Payment of tax
The CIT assessed must be paid within two months of the date of the provisional or final
assessment. Interest is payable on the CIT due. The interest is calculated from six months
following the financial year. As of 1 April 2014, the minimum interest rate is 8%.
Tax audit process
Corporate taxpayers might be subject to regular audits by tax inspectors. This forms
part of the so-called vertical monitoring tasks of the national tax authorities. In recent
years, there has been a tendency towards a more enhanced co-operation between tax
authorities and taxpayers in the Netherlands (see Horizontal Monitoring in this section
below). Part of this trend is that there are to be less audits in retrospect.
Under certain conditions, the tax administration can impose an additional assessment
within five years from the year in which the tax debt originated (if the filing due date
was extended on request, this period is added). In case of income from abroad, the
period for additional assessment is extended to 12 years. Recently, the Dutch tax
legislature published a proposal to reduce the period for the issuing of an additional
assessment to three years after the tax return is received by the Dutch tax authorities.
The same proposal also suggests extending that period to 12 years in case the taxpayer
intentionally filed an incorrect tax return.
Advance pricing agreement (APA)/Advance tax ruling (ATR)
Taxpayers are able to obtain (legal) certainty concerning their CIT positions. They
may request the Dutch tax authorities to conclude an APA with respect to the transfer
pricing of controlled transactions. Taxpayers may also request the Dutch tax authorities
to provide an ATR with respect to the CIT implications of a (contemplated) set of
transactions.
Horizontal monitoring
If the taxpayer is willing, the Dutch tax authorities, in certain cases, shift their method
from vertical monitoring to horizontal monitoring. Emphasis is placed on cooperation
and on the responsibilities of the parties involved, instead of retrospective control.
Horizontal monitoring is based on mutual trust, understanding, and transparency
between the taxpayers and the Dutch tax authorities. It aims at reducing administrative
burdens and providing legal certainty in advance. Taxpayers need to have a solid Tax
Control Framework.
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Other issues
FATCA IGA with the United States
The Netherlands signed a FATCA IGA with the United States on 18 December 2013. As of
1 July 2014, banks and insurers must be compliant with the FACTA provisions. This USbased legislation will be implemented in Netherlands domestic law and will apply to all
financial institutions worldwide. The FACTA IGA is based on the standard Model 1A IGA
of 4 November 2013 and provides for specific exemptions.
Netherlands
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PwC contact
Geof Nightingale
PricewaterhouseCoopers New Zealand
PricewaterhouseCoopers Tower
188 Quay Street
Auckland
New Zealand
Tel: +64 9 355 8853
Financial reporting standards for small-to-medium sized enterprises
(SMEs)
The Financial Reporting Act 2013, along with the Financial Reporting (Amendments to
other Enactments) Act 2013, changed the financial reporting and audit requirements
for some New Zealand entities. As of 1 April 2014, entities that do not fall under the
definition of large will no longer have to prepare general purpose financial statements
in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP).
The obligation to prepare GAAP accounts is now only for large entities with at least 30
million New Zealand dollars (NZD) in annual turnover and NZD 60 million in assets.
For SMEs, Inland Revenue still requires financial statements to be prepared to support a
tax return, but the requirements are marginally less onerous than prior obligations.
Goods and services tax (GST) registration for non-resident businesses
The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act
2013 introduces a new GST provision for non-resident businesses. From 1 April 2014,
non-resident businesses that do not make taxable supplies in New Zealand will be able
to register for GST, provided they meet certain criteria. The new rules are designed to
enable non-resident suppliers who do not make any taxable supplies (i.e. non-residents
with just a cost centre in New Zealand) in New Zealand to recover GST on the costs they
incur.
A key impact of the provision is to allow New Zealand businesses operating in the
European Community to claim value-added tax (VAT) refunds on costs incurred in
member states that have previously denied such refunds on the basis of a lack of
reciprocity for European businesses operating in New Zealand. With the new GST
registration rules now in force, the member states that limit their VAT refund systems
based on the reciprocity condition can no longer do so.
Financial arrangements rules
The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act
includes an amendment to the financial arrangements rules. Previously, a taxpayer could
elect to treat a short-term agreement for sale and purchase as a financial arrangement.
In some circumstances, this allowed taxpayers to receive a deduction for amounts
that would ordinarily be capital in nature. The new legislation adjusts the amount of
consideration that a party to a short-term agreement for sale and purchase may include
in its financial arrangement calculations. Taxpayers will not be able to claim a deduction
for the costs of acquiring the agreement or any losses on disposal of the agreement.
The new rules apply retrospectively to elections into the financial arrangements rules
made on or after 27 September 2012 unless a taxpayer has obtained a binding ruling or
determination from Inland Revenue.
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Specified mineral mining
The Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act
2014 implements a significant overhaul of the tax regime applying to specified mineral
miners. The changes aim to align the taxation of mining industry participants more
closely with that of taxpayers generally by removing several concessionary features from
the current regime. The regime specifically applies to those involved in the exploration
for or extraction of gold, silver, and iron sands.
The changes apply from the beginning of the 2014/15 income year.
Inland Revenues 2014 compliance management programme
For multinational corporations, Inland Revenue highlights tax avoidance, transfer

pricing, controlled foreign companies (CFCs), and international financing arrangements
as key risk areas, in tune with the Organisation for Economic Co-operation and
Developments (OECDs) current dialogue on the base erosion profit shifting (BEPS)
work.
For SMEs, Inland Revenue is focussing on goods and services tax (GST) errors, employer
deductions, non-resident contractors tax (NRCT), and other minor filing errors.
See Topics of focus for tax authorities in the Tax administration section for more
information.
Double tax agreements (DTAs)

Canada - New Zealand DTA
New Zealand and Canada have signed a new DTA to replace the existing DTA, which was
signed in 1980. The updated agreement will come into force once both countries have
given legal effect to it.
A key feature of the new DTA is lower withholding taxes (WHTs)on dividends and
royalties. The WHT rate for dividends will reduce from 15% to a maximum of 5% for an
investor who holds at least 10% of the shares in the company paying the dividend. The
WHT rate for royalties will reduce from 15% to 10% generally, with a further reduced
rate of 5% for royalties relating to copyright, computer software, and others. The treaty
does not follow some other recent treaties that have reduced WHT on dividends to 0% in
some cases.
Japan - New Zealand DTA
Japan and New Zealands new DTA came into force on 25 October 2013. The new DTA
replaces the 1963 treaty.
In New Zealand, the DTA is effective for WHTs from 1 January 2014 and effective
generally for income years beginning on or after 1 April 2014.
TheWHT rate on dividends has been reduced from 15% to 0% for an investor who holds
at least 10% of the voting power in the company paying the dividend (subject to certain
conditions being met). The WHT rate on royalties has been reduced from 15% to 5%,
and the WHT rate on interest has been reduced from 15% to 10%.
Papua New Guinea - New Zealand DTA
Papua New Guinea and New Zealands DTA entered into force on 21 January 2014.
In New Zealand, the DTA is effective for WHTs from 1 March 2014 and effective
generally for income years beginning on or after 1 April 2014.
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The WHT rate on dividends will reduce to 15% and the WHT rate on interest and
royalties will reduce to 10%.
Vietnam - New Zealand DTA
New Zealand and Vietnam have signed a new DTA, which entered into force on 5 May
2014.
In New Zealand, the treaty will apply to WHTs from 1 January 2015 and to other taxes
from 1 April 2015.
The agreement includes lower WHTs on interest, dividend, and royalty payments
between the two countries. However, unlike other recent DTAs, the treaty does not
provide for a 0% WHT on dividends. A reduced rate of 5% is available for dividends
if the beneficial owner of the dividend holds at least 50% of the voting power in the
company (this is in contrast to other treaties where only 10% voting power is required).
The agreement provides for reduced rates of WHT of 10% on royalties and interest.
DTAs under negotiation
New Zealand is currently negotiating DTAs with China, Luxembourg, Norway, Portugal,
Samoa, and the United Kingdom.
New Zealand is also negotiating new protocols to amend existing treaties with Austria,
Belgium, India, and the Netherlands.

New Zealand resident companies are taxed on their worldwide income, and nonresident companies (including branches) are taxed on New Zealand-sourced income.
The New Zealand corporate income tax (CIT) rate is 28%.
Local income taxes
There are no state or municipal income taxes in New Zealand.
Corporate residence
Residence is determined by place of incorporation, location of head office or centre of
management, or by directors exercising control of the company in New Zealand.
Generally, DTAs to which New Zealand is a party define a PE by reference to a fixed

place of business through which the companys business is carried on.A PE can also exist
without a fixed place of business if the employees of the overseas company habitually
exercise an authority to conclude contracts in New Zealand or provide services in New
Zealand for a period of time.
Other taxes
GST is a form of VAT that applies to most supplies of goods and services. The narrow
category of exempt supplies includes financial services. The rate applied to taxable
supplies is currently 15% or 0%.
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New Zealand
The 0% rate applies to a few supplies only, including exports and financial services
supplied to other registered businesses. The 0% rate also applies to the sale of land
between two registered parties if the purchaser acquires the land with the intention of
using it to make taxable supplies and the land is not intended to be used as a principal
place of residence for the purchaser or an associate.
There is also a reverse charge mechanism that requires the self-assessment of GST on
the value of certain services imported by GST registered persons.
From 1 April 2014, non-residents who do not make taxable supplies in New Zealand will
be able to register for GST, provided they meet certain criteria, allowing them to claim a
refund for their input GST costs.
Customs duties
Customs duty is levied on some imported goods at rates generally ranging from 1% to
10%.
Excise duty
Excise duty is levied, in addition to GST, on alcoholic beverages (e.g. wines, beers,
spirits), tobacco products, and certain fuels (e.g. compressed natural gas, gasoline). The
excise duties are levied item-by-item at rates that vary considerably.
Property taxes
Local authorities levy tax known as rates on land within their territorial boundaries.
Rates are levied on properties based on the properties rateable value.
Transfer taxes
There are no taxes on the transfer of property in New Zealand.
Stamp duty
Stamp duty has been abolished in respect of instruments executed after 20 May 1999.
Accident compensation levy
A statutory-based scheme of accident insurance is funded in part by premiums payable

by employers and employees.
Premiums paid by employers (including the self-employed) fund insurance for workrelated accidents. Employers are liable to pay a residual claims levy and an employer
levy.The employer levy payable is determined according to the industry or risk
classification of the employer and the level of earnings of employees.
Employers are subject to a tax-deductible FBT on the value of non-cash fringe benefits
provided to their employees. Employers can elect to pay FBT at flat rates (for the
2013/14 income year, 49.25% on attributed benefits and 42.86% on pool benefits, i.e.
those benefits that cannot be attributed to a particular employee) applied against the
value of the benefit or can attribute fringe benefits to individual employees and pay FBT
based on each employees marginal tax rate.
Under the attribution option, the applicable FBT rate depends on the net remuneration
(including fringe benefits) paid to the employee. The attribution calculation treats the
fringe benefit as if it was paid in cash and calculates FBT as the notional increase in
income that otherwise would have arisen.
The multi rates for the 2013/14 income tax year are:
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Net remuneration (NZD)
12,530 or less
12,531 to 40,580
40,581 to 55,980
Greater than 55,981
FBT rate (%)

11.73
21.21
42.86
49.25
Fringe benefits include motor vehicles available for private use, loans at below
prescribed interest rates, contributions to medical insurance schemes, and nonmonetary employer contributions to superannuation schemes.
In relation to motor vehicles, employers can value a vehicle on an annual basis either
using 20% of the cost price or market value (GST inclusive) of the vehicle (depending
on whether the vehicle is owned or leased by the employer) or 36% of the vehicles
tax written down value (GST inclusive). In each case, the FBT value must be reduced
proportionately for whole days when the vehicle is not available for private use at any
time.
FBT is also applicable to benefits received by an employee from a third party where there
is an arrangement between the employer and the third party and where the benefit
would be subject to FBT if it had been provided by the employer.
Employer superannuation contribution tax (ESCT)
Employers contributions to an approved superannuation fund (excluding foreign

schemes) are subject to ESCT. This includes employer contributions to KiwiSaver (or
other qualifying registered superannuation schemes).
ESCT is generally deducted at the employees relevant progressive rate based on the total
salary or wages and employer superannuation cash contributions paid to the employee
in the previous year.
Salary or wages plus superannuation contributions (NZD)
Up to 16,800
16,801 to 57,600
57,601 to 84,000
Over 84,000
ESCT rate (%)

10.5
17.5
30
33
Non-resident contractors tax (NRCT)
New Zealand imposes an obligation to deduct NRCT on those making contract payments
to non-residents in relation to certain contract activities undertaken in New Zealand.
Contract activities generally relate to services but also include the granting of a right to
use property in New Zealand. The NRCT rate is generally 15% (or 30% for individuals
and 20% for companies if the relevant paperwork is not provided). Some contractors are
eligible to apply for a certificate of exemption or a reduced rate certificate.
In additional to a certificate of exemption, no NRCT is required to be withheld if the nonresident has full relief from tax under a DTA and is present in New Zealand for no more
than 92 days in a 12-month period.
Payments for contract work amounting to less than NZD 15,000 in a 12-month period
are also exempt from NRCT. In such cases, contractors themselves are responsible for
paying any New Zealand tax owed at the end of the year (provided there is no relief from
tax under a DTA).
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New Zealand
Branch income
A non-resident company is taxed on income generated by business wholly or partially
carried on in New Zealand.Branch profits are subject to ordinary corporate rates of
taxation, and there is no WHT on repatriated profits.
Inventory valuation
Inventory must be valued by a cost-valuation method or, where market-selling value is

lower than cost, may be valued at market-selling value. If the inventory is shares, it must
be valued at cost. Cost is determined under GAAP. Acceptable cost flow methods are first
in first out (FIFO) or weighted-average cost. Some valuation concessions are available to
small taxpayers.
Capital gains
There is no separate capital gains tax. However, the income tax legislation specifically
includes various forms of gain that would otherwise be considered a capital gain
within the definition of income. Taxable income includes gains on the sale of real
estate in certain circumstances and on personal property where the taxpayer acquired
the property for resale or deals in such property or where a profit-making purpose or
scheme can be deemed or imputed.
Dividend income
Inter-corporate dividends paid between New Zealand resident companies are exempt
where there is 100% common ownership.
Dividends from a foreign company
A dividend derived by a company resident in New Zealand from a foreign company is

treated as exempt income unless it is:
a dividend on a fixed rate share or a dividend for which the foreign company has
received a tax deduction in its home jurisdiction, or
a dividend from a portfolioforeign investment fund (FIF) (i.e. interests under 10%)
that is exempt from FIF rules (e.g. an interest in an Australian listed company).
Dividends from foreign companies derived by taxpayers other than companies are
taxable (generally with a credit for any foreign WHTs).
Supplementary dividend tax credit regime
Previously, the supplementary dividend tax creditregime (commonly referred to as

FITC) ensured that foreign investors were not taxed at more than the New Zealand
corporate tax rate by effectively rebating the New Zealand WHT to the extent that the
dividend was fully imputed. As non-resident withholding tax (NRWT) rates have been
reduced to nil on most fully imputed dividends, a supplementary dividend tax credit is
generally no longer required.
The supplementary dividend tax credit regime applies only to fully imputed dividends
paid to shareholders holding less than 10% of the shares in the company and NRWT
rates of at least 15%.
Broadly therefore:
only portfolio investors (i.e. those with less than 10% holdings) with NRWT rates of
at least 15% and supplementary dividend holding companies will qualify for relief
under the supplementary dividend rules, and
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a zero rate of NRWT applies to dividends paid to non-portfolio shareholders (i.e.
shareholders with more than 10% holdings) and to any other dividends subject to
lower tax rates, to the extent they are fully imputed.
The changes affect provisional tax calculations for taxpayers who take into account
their anticipated supplementary dividend tax credits in calculating their provisional tax.
Taxpayers should also consider the need to impute dividends where a tax treaty applies
to reduce the NRWT rate.
The supplementary dividend tax credit regime will cease to apply to holding companies
from the 2013/14 income tax year.
Stock dividends
Bonus issues can be taxable or non-taxable. With a taxable bonus issue, the amount
capitalised becomes available for tax-free distribution upon a subsequent share
cancellation. With a non-taxable bonus issue, the amount capitalised is not available for
tax-free distribution upon a subsequent share cancellation.
Shares issued underprofit distribution plans (PDPs) are treated as taxable dividends.
Interest income
All interest derived by a company is income. The financial arrangement rules may
require income for tax purposes to be recognised on an accrual basis. When this is not
required (because the person is classified as a cash basis person), interest income is
recognised as and when it is received.
The taxation of debt and debt instruments is governed by the financial arrangements
rules, a specific set of timing rules. Income or expenditure (including foreign exchange
gains and losses) from financial arrangements must be recognised on an accrual basis
(generally, yield to maturity or other commercially acceptable method). These rules do
not apply to the income or expenditure of a non-resident if the financial arrangement
does not relate to a business carried on in New Zealand.
Foreign income
A New Zealand corporation is taxed on foreign passive income as earned. Double

taxation with respect to all types of taxable income, including interest, rents, and
royalties, is avoided by the recognition of foreign tax credits.
New Zealand does not offer specific tax deferral rules.
Deductions
For tax purposes, depreciation of property can be computed under the diminishingvalue method, the straight-line method, or a pooling method. The rates of depreciation
depend on the following factors:
Type of asset.
Whether the asset is acquired new or second-hand (i.e. used).
Taxpayers must use the economic depreciation rates prescribed by Inland Revenue.
Fixed-life intangible property (including the right to use land and resource consents) is
depreciable on a straight-line basis over its legal life. Any depreciation recovered on the
sale of an asset (up to its original cost) is taxable in the year of sale.
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New Zealand
The double-declining-balance (accelerated) method applies to most plant and
equipment. Under the double-declining-balance method, equipment with an estimated
useful life of ten years results in diminishing value depreciation deductions of 20% per
annum (i.e. double the straight-line rate of 10% over the equipments ten-year life).
Buildings, certain motor vehicles, high-residual-value property, fixed-life intangible
property, and property acquired prior to the introduction of the new rules cannot be
depreciated under the double-declining-balance method.
The depreciation rate for buildings with an estimated useful life of 50 years or more is
reduced to 0% as of the 2011/12 income year.
Goodwill
Goodwill is generally regarded as a capital asset, thus any payment for goodwill is nondeductible. There is a limited exception for payments made to preserve goodwill.
Start-up expenses
Expenses incurred by a company before the commencement of the business are

generally regarded as outgoings of a capital nature and are therefore not deductible.
However, certain expenditure on scientific research may be deductible, provided that it
is incurred for the purpose of the company deriving assessable income.
R&D costs are tax deductible. Expenses written off as immaterial and not tested against
certain asset-recognition criteria are not automatically deductible for tax purposes.
Unsuccessful software development costs
Taxpayers are allowed an upfront deduction for expenditure incurred on unsuccessful

software development projects in the year that the development is abandoned.
Interest expense
Generally, interest incurred by most companies is deductible, subject to thin

capitalisation rules (see the Group taxation section).
Bad debt
A company is allowed a deduction for bad debt in the income year in which the debt is
physically written off by the company.
A company is allowed a deduction for charitable contributions it makes to listed donee

organisations. The list of approved donee organisations is available on Inland Revenues
website. The deduction available for charitable contributions is limited to the companys
net income for that income year.
Entertainment expenditure
Entertainment expenditure is generally only 50% deductible. However, entertainment

expenditure incurred overseas is 100% deductible.
Legal expenditure
Legal expenditure is deductible if the expenditure is:

incurred in deriving assessable or excluded income or
incurred in the course of carrying on a business for the purpose of deriving assessable
or excluded income.
However, the expenditure is not deductible if it is of a capital, private, or domestic
nature.
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Taxpayers with business-related legal expenditure of NZD 10,000 or less are able to
deduct the full amount of the expenditure in the year it is incurred, whether or not it is
capital in nature.
Fines and penalties
Generally, no deduction is available where a company has incurred expenditure on

fines or penalties paid in breach of statute or regulation. Expenditure on other fines and
penalties requires further evaluation before its deductibility can be determined.
Taxes
FBT is deductible, as is GST payable on the value of a fringe benefit.
Losses may be carried forward indefinitely for offset against future profits, subject to
the company maintaining 49% continuity of ownership. There is no loss carryback.
Losses of a subsidiary are preserved on a spinout (i.e. when shares in the subsidiary are
transferred to shareholders of its parent company).
A New Zealand corporation can claim a deduction for royalties, management service
fees, and interest charges paid to non-resident associates, provided the charges satisfy
the arms-length principle, which forms the basis of New Zealands transfer pricing
regime.
Group taxation
Companies that are 66% or more commonly owned constitute a group. Group
companies are able to offset losses by election as well as by subvention payment. A
subvention payment is a payment made by the profit company to the loss company
and is equal to the amount of loss to be offset. The payment is deductible to the profit
company and assessable to the loss company. Certain companies subject to special bases
of assessment (e.g. mining companies other than petroleum extraction companies) are
excluded from the grouping provisions. Branches of non-resident companies may be
included, provided they continue to carry on business in New Zealand through a fixed
establishment.
Groups of resident companies that have 100% common ownership may elect to be
subject to the consolidated group regime. The group is effectively treated as a single
company and transfers of assets, dividends, interest, and management fees among
members of the group are generally disregarded for tax purposes. The group files a
single return and is issued a single assessment. Group members are jointly and severally
liable for tax purposes.
Losses incurred by a dual-resident company are not available for offset by election or
subvention payment.
Transfer pricing
The transfer pricing rules are based on OECD principles and require taxpayers to value
all cross-border transactions with associates on an arms-length basis.
The transfer pricing rules apply to arrangements for the acquisition or supply of goods,
services, money, intangible property, and anything else (other than non-fixed rate
shares) where the supplier and acquirer are associated persons. Similar rules apply to
the apportionment of branch profits.
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New Zealand
Various methods are available for determining the arms-length consideration. The
taxpayer is required to use the method that produces the most reliable measure of the
amount that independent parties would have paid or received in respect of the same or
similar transactions. Inland Revenue has published guidelines that make it clear that
documentation is required to support a taxpayers transfer prices.
Thin capitalisation
Inbound thin capitalisation rules apply to New Zealand taxpayers controlled by nonresidents, including branches of non-residents. The aim of the rules is to ensure that
New Zealand entities or branches do not deduct a disproportionately high amount of
the worldwide groups interest expense. This is achieved by deeming income in New
Zealand when, and to the extent that, the New Zealand entities in the group are thinly
capitalised (i.e. excessively debt funded).
The outbound thin capitalisation rules are intended to operate as a base protection
measure to prevent New Zealand residents with CFC investments and certain FIF
investments from allocating an excessive portion of their interest cost against the New
Zealand tax base.
To reduce taxpayer compliance costs, the outbound thin capitalisation rules do not apply
when the New Zealand taxpayer has 90% or more of their assets in New Zealand.
Further concessions are available under the outbound rules to taxpayers who do not
fall below this threshold. If the taxpayers interest deduction and dividends paid for fixed
rate shares (the finance cost) is below NZD 1 million, no apportionment of deductible
interest is required. If the finance cost is above NZD 1 million, but below NZD 2 million,
the interest apportionment may be reduced.
An apportionment of deductible interest is required under the thin capitalisation rules
when the debt percentage (calculated as the total group debt/total group assets of a
New Zealand entity or group) exceeds both:
60%(for inbound thin capitalisation) or 75% (for outbound thin capitalisation)
and
110% of the worldwide groups debt percentage.
The use of the debt-to-asset ratio differs from most thin capitalisation models, which
apply to an entitys debt-to-equity ratio. All interest (both related and unrelated party) is
subject to apportionment.
Foreign-owned banks operating in New Zealand are subject to specific thin capitalisation
rules that deem income if the bank does not hold a level of equity equivalent to 6%of
their New Zealand banking risk-weighted assets. In addition, banks are required to have
sufficient equity to equity fund offshore investments that do not give rise to New Zealand
taxable income in full.
The CFC regime imposes New Zealand tax on the notional share of income attributable
to residents (companies, trusts, and individuals) with interests in certain CFCs.
Central to the regime is the definition of a CFC. When five or fewer New Zealand
residents directly or indirectly control more than 50% of a foreign company, or when
a single New Zealand resident directly or indirectly controls 40% or more of a foreign
company (unless a non-associated non-resident has equal or greater control), that
company is a CFC. For interests that do not meet the definition of a CFC, the investment
may be taxed under theFIF regime (see below).
New Zealand
1441
New Zealand
Note that a person with an income interest in a CFC does not have attributed CFC
income or losses if:
the Australian exemption applies or
the CFC passes an active business test.
If the exemptions do not apply, only the CFCs passive (attributable) income is subject to
tax on attribution (on an accrual basis). However, no income attribution is required if a
New Zealand resident has an income interest of less than 10% in the CFC.
Active business test
A CFC passes the active business test if it has passive (attributable) income that is less
than 5% of its total income. For the purposes of the test, taxpayers measure passive
and total income using either financial accounting (audited International Financial
Reporting Standards [IFRS] or New Zealand GAAP accounts) or tax measures of income.
CFCs in the same country may be consolidated for calculating the 5% ratio, subject to
certain conditions.
Australian exemption
A person with an interest in a CFC does not have attributed CFC income or a loss if the
CFC is a resident in, and subject to income tax in, Australia and meets certain other
criteria.
Passive (attributable) income
Attributable, or passive, income is income that is highly mobile and not location-specific
(i.e. income where there is a risk that it could easily be shifted out of the New Zealand
tax base).
The broad categories of attributable income are as follows:
Certain types of dividend that would be taxable if received by a New Zealandresident
company.
Certain interest.
Certain royalties.
Certain rents.
Certain amounts for financial arrangements.
Income from services performed in New Zealand.
Income from offshore insurance business and life insurance policies.
Personal services income.
Income from the disposal of revenue account property.
Certain income related to telecommunications services.
Taxpayers must disclose interests in CFCs in their annual tax returns. Failure to disclose
CFC interests can result in the imposition of penalties.
Foreign investment funds (FIFs)
The FIF regime is an extension of the CFC regime, which subjects persons with interests
in certain foreign entities (which are not CFCs) to New Zealand tax. It also applies when
the investor does not have a sufficient interest in a CFC to be taxed under that regime.
Common examples of investments classified as FIFs include foreign companies, unit
trusts, foreign superannuation schemes, and life insurance policies issued by foreign
entities not subject to New Zealand tax.
The FIF rules can be split into two regimes:
1442
New Zealand
New Zealand
The portfolio FIF rules, which apply to interests of less than 10% in a FIF.
The non-portfolio FIF rules, which apply to interests of 10% or more that are outside
the CFC rules.
Portfolio FIF rules
The portfolio FIF rules apply to interests of less than 10% in foreign companies, foreign
superannuation schemes, and foreign life insurance policies issued by non-resident
life insurers (if the CFC rules do not apply). However, a New Zealand resident does not
generally have FIF income when:
the total cost of FIF interests held by the individual does not exceed NZD 50,000
the income interest is less than 10% in certainAustralian Stock Exchange (ASX) listed
companies or certain Australian unit trusts, or
the CFC rules apply.
There are also exemptions for interests in certain foreign employment-related
superannuation schemes. These include interests held by returning residents and new
migrants acquired before the person became a New Zealand resident or within the first
five years of New Zealand residence.
When an interest is exempt from the FIF rules, distributions are subject to tax on a
receipts basis in accordance with normal principles.
The taxable income of a New Zealand resident with an interest in a FIF that does not
qualify for one of the exemptions is calculated using one of the following methods:

Fair dividend rate (FDR).

Comparative value.
Cost.
Deemed rate of return.
The nature of the interest held and the availability of information restrict the choice of
method.
Taxpayers must disclose interests in certain FIFs in their annual tax returns. Failure to
disclose can result in the imposition of penalties.
Non-portfolio FIF rules
The active income exemption (which applies for CFCs) also includes certain nonportfolio FIFs. If the FIF fails the active business test, passive income will be attributed to
the New Zealand shareholders. There is also an exemption for shareholders with a 10%
or greater interest in a FIF that is resident and subject to tax in Australia.
When investors do not have sufficient information to perform the calculations required
under the active business test (or choose not to apply the active business test), they will
be able to use one of the attribution methods for portfolio FIF investments (see above).

Foreign tax credits
If a New Zealand resident company derives overseas income that is subject to New
Zealand income tax, the company is generally allowed a credit for the foreign income tax
paid in respect of that income. Generally, the credit is limited to the lesser of the actual
overseas tax paid on the overseas income or the New Zealand tax applicable to the
overseas income.
New Zealand
1443
New Zealand
There are limited, specific tax incentives designed to encourage the flow of investment
funds into New Zealand.
Legislation encourages foreign venture capital investment into unlisted New Zealand
companies. Gains derived by certain non-residents from the sale of shares (held on
revenue account and owned for at least 12 months) in New Zealand unlisted companies
that do not have certain prohibited activities as their main activity are exempt from
income tax. The rules apply to foreign investors who are resident in all of the countries
with which New Zealand has a DTA (except Switzerland) and who invest into New
Zealand venture capitalopportunities.
Investment allowances on fixed assets are not available.
Trans-Tasman imputation
Elective rules allow trans-Tasman groups of companies to attach both imputation credits
(representing New Zealand tax paid) and franking credits (representing Australian tax
paid) to dividends paid to shareholders.
Withholding taxes
Resident corporations paying certain types of income are required to withhold tax on
gross income, as shown in the table below.
Recipient
Non-resident corporations and individuals
Non-treaty
Treaty:
Australia
Austria
Belgium
Canada (6)
Chile
Czech Republic
Denmark
Fiji
Finland
France
Germany
Hong Kong
India
Indonesia
Italy
Japan
Korea, Republic of
Malaysia
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New Zealand
Dividends (%)
33(1)
33
Interest (%)
28 (1)
max 33
Royalties (%)
0
-
30 (3)
(2)
15 (4)
15
0/5/15 (5)
15
15
15
15
15
15
15
15
15
15
15
0/5/15 (8)
15
15
15
15
0/15 (9)
15
15
0/10 (5)
10
10
15
10/15 (7)
10
10
10
10
10
10
10
0/10 (8)
10
10
10
10
0/10 (9)
10
15
5
10
10
15
5
10
10
10
15
10
10
10
5
10
15
10
10
5
10
15
New Zealand
Recipient
Mexico
Netherlands
Norway
Papua New Guinea (11)
Philippines
Poland
Russian Federation
Singapore
South Africa
Spain
Sweden
Switzerland
Taiwan
Thailand
Turkey
United Kingdom
United States
Vietnam (16)
Dividends (%)
0/5/15 (10)
15
15
15
15
15
15
5/15 (12)
15
15
15
15
15
15
5/15 (14)
15
15
0/5/15 (15)
5/15 (16)
Interest (%)
10
10
10
10
10
10
10
10
10
10
10
10
10
10/15 (13)
10/15 (14)
10
10
0/10 (15)
10
Royalties (%)
10
10
10
10
15
10
10
5
10
10
10
10
10
10/15 (13)
10
10
10
5
10
Notes
1.
Resident WHT applies to both interest and dividends. Unless the recipient corporation holds an
exemption certificate, and if the recipient provides a tax file number, the default rate of the interest
WHT is 28%. Recipients can elect for the rate of interest withholding to be 30%. The rate of interest
WHT is 30% where the recipient does not provide a tax file number.
The rate of WHT on dividends paid is 33%, but the tax is reduced by the aggregate imputation and
withholding payment credits attached to the dividend or taxable bonus share. Interest and dividends
paid between group companies and in certain other limited circumstances are exempt from the WHT.
2. Resident corporations paying interest to non-associated, non-resident corporations and individuals
need not withhold tax if they have approved-issuer status and the security under which interest is
payable is registered with Inland Revenue. In this case, the resident corporation pays a 2% levy (tax
deductible) on the interest payments instead of the WHT otherwise applicable.
3. Non-resident WHT is imposed on dividends at the following rates, regardless of the jurisdiction to
which the dividends are paid:
0% for fully imputed dividends paid to a shareholder holding 10% or more of the direct voting
interests in the company and fully imputed non-cash dividends.
15% for fully imputed cash dividends paid to a shareholder holding less than 10%.
30% in most other cases, subject to any relief available under a DTA.
4. Net interest income is subject to reassessment at the company tax rate where the payer and the
recipient are associated persons, but WHT is the minimum liability. Non-resident WHT is not
imposed where the recipient of the interest has a fixed establishment in New Zealand.
5. The WHT on dividends is reduced from 15% to 5% for an investing company that has at least a 10%
shareholding in the company paying the dividend. The rate reduces to 0% if the investing company
holds 80% or more of the shares in the other company and meets other criteria. The WHT rate on
interest is 10% but is reduced to 0% if it is payable to eligible financial institutions.
6. New Zealand and Canada have signed a new DTA, which will come into force once both countries
have given legal effect to it. The WHT rate on dividends will reduce from 15% to a maximum of 5%
for an investor who holds at least 10% of the shares in the company that pays the dividend. The
WHT rate on royalties will reduce from 15% to 10% generally, with a further reduced rate of 5% for
royalties relating to copyright, computer software, and others.
7. The WHT on interest is reduced to 10% if the interest received is derived from loans granted by
banks or insurance companies. In all other cases, 15%.
8. The WHT on dividends is reduced from 15% to 5% for an investing company that has at least a 10%
shareholding in the company paying the dividend. The rate reduces to 0% if the investing company
holds 50% or more of the shares in the other company and meets other criteria. The WHT rate on
interest is 10% but is reduced to 0% if it is payable to eligible financial institutions.
9. A new DTA between New Zealand and Japanentered into force on 25 October 2013. The WHT rate
on dividendshas been reduced from 15% to 0% for an investor who holds at least 10% of the voting
power in the company paying the dividend (subject to certain conditions being met). The WHT rate on
royalties has been reduced from 15% to 5%. The WHT rate on interest has been reduced from 15%
to 10% generally and 0% if it is payable to eligible financial institutions. The new WHT rates apply
10. The 0% WHT rate applies where the foreign company owns at least 80% of the voting rights in the
paying company (directly or indirectly) for 12 months prior to the date the dividend is paid. The 5%
New Zealand
1445
New Zealand
11.
12.
13.
14.
15.
16.
rate applies if the foreign company has a direct interest of at least 10% of the voting rights in the
paying company.
New Zealand and Papua New Guineas DTA entered into force on 21 January 2014. The WHT rate on
dividends will reduce to 15% and the withholding rate on interest and royalties will reduce to 10%.
The new WHT rates apply from 1 March 2014.
The standard WHT rate on dividends reduces to 5% for an investing company that has at least a
10% shareholding in the company paying the dividend.
The WHT rate on interest is reduced to 10% if it is received by a financial institution or it is paid with
respect to debt arising from a sale on credit of any equipment, merchandise, or services. The WHT
rate is reduced to 10% for certain types of royalty.
The WHT rate on dividends is reduced to 5% if the beneficial owner is a company holding at least
25% of the capital of the company paying the dividends and 15% in all other cases. The WHT rate on
interest is reduced to 10% if the interest is paid to a bank and 15% in all other cases.
The WHT rate on dividends is 5% for an investor who holds at least 10% of the shares in the
company that pays the dividend; 0% if the investor holds 80% or more of the shares in the company
and meets other criteria; 15% in all other cases. The WHT rate is 10% but is reduced to 0% if it is
payable to eligible financial institutions.
The New Zealand and Vietnam DTA entered into force on 5 May 2014. The WHT rate on dividends
is reduced to 5% if the beneficial owner is a company holding at least 50% of the voting power in
the company paying the dividends and 15% in all other cases. The new WHT rates will apply from 1
January 2015.
Tax administration
Taxable period
Tax returns are based on the fiscal year ending 31 March, although other fiscal year-ends
are possible if permission is obtained.
Tax returns
The system is one of self-assessment, under which the corporation files an income tax
return each year. For those not linked to a tax agent, returns must be filed by 7 July for
March balance dates, or by the seventh day of the fourth month following a substituted
balance date. The terminal tax due date is extended by two months for taxpayers linked
to a tax agent.
Payment of tax
The final assessed tax (terminal tax) is generally payable on the seventh day of the 11th
month following the end of that income year or the 13th month following the end of
that income year if the taxpayer has a tax agent with an extension of time arrangement.
For a standard (31 March) balance date, this means either 7 February or 7 April of the
following year.
Provisional tax payments are generally due in three instalments: (1) 28th day of seventh
month before balance date, (2) 28th day of third month before balance date, (3) 28th
day of month following balance date.
Calculating provisional tax
For the 2014/15 income year (i.e. year ending 31 March 2015), provisional taxpayers
have the following four options:
Where the 2013/14 return of income has been filed, 2014/15 provisional tax can be
based on 105% of the 2013/14 residual income tax.
Where the 2013/14 return of income has not been filed, due to an extension of time
for filing, 2014/15 provisional tax can be based on 110% of the 2012/13 residual
income tax, but only for the first two instalments. The final instalment must be
calculated based on the first option above.
Provisional tax can be based on a fair and reasonable estimate of 2014/15 residual
income tax.
The GST ratio option.
1446
New Zealand
New Zealand
The GST ratio option enables smaller taxpayers to align their provisional tax payments
with their cash flow and reduce their exposure to use of money interest. The option is
intended to benefit those taxpayers with declining, seasonal, or fluctuating income. This
option calculates provisional tax by reference to the taxpayers GST taxable supplies in
the relevant provisional tax instalment period.
Taxpayers can also make voluntary payments. Such payments can be made to minimise
exposure to use of money interest. A taxpayer choosing to estimate residual income tax
is required to take reasonable care when estimating.
When the taxpayers return of income for the year is furnished, the provisional tax paid
for that year is credited against the tax assessed. This results in either a refund or further
tax to pay by way of terminal tax.
Where provisional tax paid is less than the amount of income tax deemed due on that
instalment date, interest is imposed. If provisional tax is overpaid, interest is payable to
the taxpayer. Interest is deductible for tax purposes by business taxpayers, and interest
earned on overpaid provisional tax is gross income for tax purposes. The interest rate for
unpaid tax is 8.40%, while the rate for overpaid tax is 1.75%.
Tax pooling
Taxpayers are able to pool their provisional tax payments with those of other taxpayers
through an arrangement with a commercial intermediary. Tax pooling allows
underpayments to be offset by overpayments within the same pool and vice versa.
Tax penalties
An initial late payment penalty of 1% applies if a tax payment is not made on the due
date. A further 4% late payment penalty applies if the payment is not made within
seven days of the due date. An incremental late payment penalty of 1% is then imposed
monthly until payment is made.
Inland Revenue is required to notify a taxpayer the first time their payment is late
rather than imposing an immediate late payment penalty. If payment is not made by
a certain date, a late payment penalty will be imposed. Taxpayers will be entitled to
one notification every two years. After receiving a first warning, Inland Revenue will
not send further notifications for two years, and an initial late payment penalty will be
imposed in the normal manner.
Shortfall penalties
Shortfall penalties, calculated as a percentage of the tax shortfall resulting from the
action or position taken by the taxpayer in a tax return, may also apply.
There is a 50% discount on certain penalties where the taxpayer has a past record
of good behaviour and, in certain circumstances, a cap of NZD 50,000 on shortfall
penalties for not taking reasonable care or for taking an unacceptable tax position.
Tax audit process
Inland Revenue maintains an active audit programme across all tax types and taxpayer
profiles and regularly publishes information about their compliance focus. Often,
Inland Revenue audits are preceded by a risk review where Inland Revenue requests
information in order to evaluate the risk of non-compliance. Where this review detects
an issue that requires further inspection, Inland Revenue will then advise that an audit
will be commenced.
The general rule is that Inland Revenue has four years from the end of the New Zealand
income tax year (31 March) in which the return is filed to re-assess the return, unless
New Zealand
1447
New Zealand
the return is fraudulent, wilfully misleading, or omits income of a particular nature or
source.
For multinational corporations, Inland Revenue highlights tax avoidance, transfer

pricing, CFCs, and international financing arrangements as key risk areas, in tune
with the OECDs current dialogue on the BEPS work. In particular, Inland Revenue is
focussing on the following:
Transfer pricing: lack oftransfer pricingdocumentation, major downwards shifts in
profitability, widely differing profits between local entities and their global group
members, unsustainable levels of royalties or management fees, transactions with
low or no tax jurisdictions, and chronically recurring losses.
CFCs: technical compliance, possible New Zealand tax residency of CFCs through
local management control or director decision making.
BEPS concerns: taxation of digital goods and services provided over the internet,
hybrid mismatches occurring as a result of variances in tax treatment between
countries and misuse of tax treaties.
GST: associated party transactions, non-routine transactions, and zero rating of goods
or services.
Non-residents: transactions with non-residents and non-resident contractors.
For SMEs, Inland Revenue is focussing on GST errors, employer deductions, NRCT, and
other minor filing errors.
Other issues
International Financial Reporting Standards (IFRS)
The relationship between statutory accounting and taxable income is quasi-dependent.

The year of final adoption for IFRS was 2007, and the impact on significant areas of tax
law is as follows.
Comments on tax regime
New Zealands determination of taxable income starts with the statutory accounts
accounting profit and then specific tax adjustments are made based on rules for revenue
recognition and deductible expenditure in the tax legislation. Changes have been made
to the tax treatment of financial arrangements (a defined tax legislative term) to allow
for the alignment to the accounting recognition of fair values on such arrangements in
specific cases.
Year of adoption cash impact
Mandatory adoption of NZ IFRS accounting standards for most entities (except

for small and medium enterprises) applied for balance dates beginning 1 January
2007. Depending on the specific IFRS adoption adjustment, the resulting income or
expenditure is taken into taxable income based on the ordinary statutory tax provisions.
The key areas, which were changed for tax under IFRS adoption, are the trading stock
provisions (which align tax with accounting standards subject to some provisions)
and the financial arrangement rules. These rules are very broad and deal with the tax
treatment of accrual income or expenditure on debt instruments, debt type instruments,
derivatives, etc.
Thin capitalisation
The thin capitalisation rules work on a debt over assets percentage. It relies mostly
on the tax legislative definition for debt and the amount disclosed in the financial
statements under generally accepted accounting practice as assets (although there are
some other measurement alternatives).
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New Zealand
New Zealand
Debt versus equity classifications
The classification of debt and equity instruments for tax is dependent on the tax
legislative definitions for specific purposes (such as the spreading of any deductions
or income where the financial arrangement rules apply, thin capitalisation, etc.). Tax
applies legal form and does not strictly rely upon the classification applied under IFRS.
Lease versus sale determinations
There are specific tax provisions dealing with finance leases.
Distributable reserves
The level of distributable reserves is based on the company law requirements of solvency
and not specifically on the amounts shown as reserves in the financial statements.
Transfer pricing determination
There have been no specific comments released yet by the New Zealand Revenue
Authority on the adoption of IFRS impact for transfer pricing.
Financial arrangements
Specific timing rules apply to the recognition for income tax purposes of income and
expenditure in relation to financial arrangements, which apply to New Zealand residents
or entities carrying on business in New Zealand.
A number of changes to the financial arrangements rules have been enacted to ensure
that taxpayers who adopt IFRS can continue to use tax rules that rely on accounting
practice. For other taxpayers, the existing tax spreading methodologies continue to
apply but without the option of using the financial reporting method.
The rules include a combination of compulsory methods and elective methods that are
available subject to the taxpayer meeting certain qualification criteria. Two methods
(the expected value method and the equity-free fair value method) assist in reducing
exposure to volatility that might otherwise arise under IFRS fair value accounting.
New Zealand
1449
Nicaragua
PwC contact
Ramon Ortega
Scotiabank Building
3rd Floor
Santo Domingo, Dominican Republic
Tel: +809 567 7741
There have been no significant corporate tax developments in Nicaragua during the past
year.

Nicaragua has a territorial income tax system under which only income generated in,
or that causes effects in, Nicaragua is generally subject to income tax. The corporate
income tax (CIT) is imposed on a corporations profits, which consist of business/
trading income, and passive income. Capital gains are subject to definitive withholding
tax (WHT).General business expenses are allowed as a deduction in computing taxable
income.
Corporate income tax (CIT) rate
CIT is levied only on domestic-sourced income at a flat rate of the higher of:
30% of net taxable income, which is scheduled to reduce by 1% each year from 2016
through 2021 (i.e. gross taxable income less allowed deductions) or
a definitive minimumtaxof 1% on gross income obtained during the fiscal year.
If the company does not have net income, 30% of net income will not be greater than 1%
of gross income.
The law establishes the following exceptions to the 1% definitive minimum tax:
First three fiscal periods of recently incorporated entities. For tax purposes, the
beginning of business operations is when a company generates taxable income.
Taxpayers whose sales pricesare controlled by the government.
Taxpayers that ceased operations on account of force majeure.
Investments subject to a period of development. The Treasury Ministry must approve
such period.
Local income taxes
See Municipal sales and services tax in the Other taxes section.
Corporate residence
Legal entities considered as a tax resident must comply with one of the following
criteria:
Registered according to the Laws of Nicaragua.
Have their fiscal domicile in the territory of Nicaragua.
Have their place of management located in the territory of Nicaragua.
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Nicaragua
Nicaragua
The legal forms permitted in Nicaragua to constitute a corporation are stock
corporations or limited liability companies, either as subsidiaries or branches.
Law 822 has incorporated a definition of PE into the Nicaraguan income tax regime. This
term means a place through which a non-resident taxpayer wholly or partially carries on
business, including, inter alia, the following: a place of management; a branch; an office
or agent; a factory; a workshop; and a mine, an oil or gas well, a quarry, or any other
place of extraction of natural resources.
Such definition also includes a building site or construction or installation project or
connected supervision activities, but only if its duration exceeds six months; and the
performance of consultancy services, provided that they exceed six month within an
annual period.
A PE may also be created where a person other than an agent of independent status acts
on behalf of a non-resident taxpayer if:
this person has in Nicaragua authority to habitually conclude contracts or undertake
acts in the name of the non-resident taxpayer, or
even though this person does not have such authority, this person habitually
maintains in Nicaragua a warehouse of goods or merchandise from which this person
regularly delivers goods or merchandise in the name of the non-resident taxpayer.
Other taxes
The following transactions are subject to VAT when performed within Nicaragua:

Supplies of goods.
Supplies of services.
Importations of goods.
Exports of goods and services.
VAT is imposed at a 15% rate on the sale of goods, rendering of services, grant of use of
assets, and import of goods. Export of goods and services are subject to a 0% rate.
In addition, in the case of supply of services within Nicaragua or the use or enjoyment
of property taxed, either supplied by a non-resident entity or individual or an individual
resident, who are not VAT collectors, the corresponding VAT shall be self-assessed.
VAT exemptions are available for certain items, including medicine, real estate transfer,
sale of used goods, basic food products, credit instruments, tuition, and textbooks and
educational supplies.
Taxpayers may recover VAT paid for the purchase of goods and services used to generate
other goods and services subject to VAT. This is known as VAT liquidation, which is
determined by subtracting VAT credits paid on transactions needed to generate taxable
income for VAT purposes from VAT collected on the sales of goods or the rendering of
services. Note that VAT paid on transactions to generate non-taxable income for VAT
purposes are not allowed as VAT credits.
Nicaragua
1451
Nicaragua
The exemption with right to deduct input VAT applies when:
the input VAT is necessary in the business activity process, for selling of goods or
provision of services, and
the tax is properly detailed, in the invoice of legal document.
VAT returns must be filed on a monthly basis, with payment due in full on the same day.
Taxpayers registered as high taxpayers (with annual income greater than 60 million
Nicaraguan crdobas [NIO]) must present an advanced bi-weekly VAT return in the first
five business days after the 15th day of each month and a definite return in the first15
days of the following month.
Selective consumption tax
A selective consumption tax is applied to goods that are considered to be non-essential.

The tax base is the cost, insurance, and freight (CIF) price for imported items, and the
tax is levied and paid only at that stage (based on the list of products published as an
appendix to Law 822).
Customs duties
Customs duties relate to the importation of any good within the Nicaragua territory for
commercial purposes. The following taxes apply to imports, depending on the product:
Import Custom Duties (DAI), which are the local tariff liens in the importation of
goods agreed to in the Central American Import Tariff.
Excise Tax (ISC), which is an indirect tax levied on selective consumption of goods
(e.g. tobacco cigarettes).
VAT.
Temporary Admission for Active Processing (TAP) regime
Exporters can apply for the TAP regime, which is designed to allow the importation of
goods without payment of duties, import taxes, or other taxes, on condition of being
transformed (i.e. subject to any subsequent operation) to be re-exported or exonerated.
Transfer taxes
Nicaraguas tax system does not impose transfer taxes.
Stamp taxes
Stamp duty is levied on certain types of documents issued in Nicaragua.
Payroll taxes
The employer is responsible to withhold and pay employee income tax on a monthly
basis through withholding income tax return Form IR-122, according to progressive tax
rates.
In principle, social charges apply to nationals and legal residents from the first day of
employment on a monthly basis. Social security contributions are calculated upon the
gross salary of the employee, as follows:
Pension
8
4
Employer
Employee
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Nicaragua
Social security rates (%)

Family health Labour healthcare
6
1.5
2.25
War victims
1.5
Total
17
6.25
Nicaragua
The employer must also pay 2% of its payroll, on a monthly basis, for Training Tax
(INATEC).
Municipal sales and services tax
A monthly 1% tax is levied on all sales of goods and rendering of services in each of the
municipalities of the country.
Municipal registration tax
An annual 2% tax is levied by each municipality on the average of income received in

the months of October, November, and December of the previous year. In the case of the
incorporation of a new establishment or enterprise, the municipal registration tax is 1%
of the capital invested.
Real estate municipal tax
The real estate municipal tax is an annual tax that is levied at a rate of 1% on 80% of
cadastral value, as recorded by the government. If the cadastral value is not available,
the cost or fiscal appraisal value may be used.
Branch income
Branch income received is subject to the general CIT. The repatriation of income from
the branch to the head office in the form of dividends, profits, capital gains, or any other
form that suggest the income repatriated is an economic benefit is considered taxable.
Taxable income is determined by the sum of all income derived from Nicaraguan
sources, less allowable deductions, which generally include all expenses necessary
to generate taxable income.Taxable income is computed according to International
Financial Reporting Standards (IFRS) and modified, as required, by Nicaraguan income
tax law.
Inventory valuation
Last in first out (LIFO), first in first out (FIFO), and the average cost methods are
accepted for inventory valuation purposes. Tax authorities must authorise the change of
a valuation method.
Capital gains and losses
Capital income and capital gains and losses are subject to definitive WHT and are not
treated as ordinary taxable corporate income. The general rule is that capital income
and capital gains are subject to 10% WHT; however, the following exceptions apply:
Capital gains derived from the sale or transfer of Nicaraguan shares that took place
out of the territory of Nicaragua are subject to 5% WHT over the transaction value.
Capital income derived from the lease of fixed assets and non-fixed assets are subject
to 7% and 5% WHT, respectively.
Capital gains derived from the transfer of assets subject to annotation in the public
registry (e.g. real estate, vehicles) will be subject to aWHT based on the amount of
the transaction, as follows:
From
0.01
50,000.01
Good value (USD*)

Through
50,000.00
100,000.00
WHT rate (%)

1
2
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From
100,000.01
200,000.01 or more
Good value (USD*)

Through
200,000.00
WHT rate (%)

3
4
* United States dollars
Dividend income
Stock dividends paid by Nicaraguan entities to resident or non-resident shareholders are

subject to a 10% definitive WHT.
Interest income
Interest received from a Nicaraguan source by residents or non-residents of Nicaragua,

as well as the interest gained by residents from deposits placed in the national financial
system, is subject to a 10% WHT.
Interest earned on government bonds and securities is considered taxable income
subject to a 10% WHT.
The WHT will not apply if the beneficiary of the interest payment is included in the
list of exempt International Credit Institutions and Agencies or Foreign Governments
Development Institutions, provided in the Ministerial Agreement 04-2011, which
requires that the beneficiary should request the Finance and Public Credit Ministry for
the corresponding exemption recognition.
Foreign income
Business enterprises are subject to CIT only on Nicaraguan-source income.
Deductions
Depreciation
Depreciation must be computed using the straight-line method. Depending on the type
of construction and the estimated life of fixed assets, annual rates for depreciation are
asfollows:
Asset
Buildings
Vehicles
Plant and equipment
Other assets
Rate (%)
3/5/10
12/20/33
10/14/20
10/20/50
Alternative method of depreciation
Taxpayers under the TAP regime (see Customs duties in the Other taxes section) may, at
their convenience, request a different depreciation rate (i.e. accelerated depreciation)
from tax authorities. Used fixed assets acquired abroad may also be subject to a different
depreciation rate.
Goodwill
Goodwill, meaning the excess paid over book value in a transaction, can be deductible
for CIT purposes if the capital gain is consider in the sellers CIT return. However, the tax
authorities must authorise the tax periods in which the goodwill will be amortised.
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Start-up expenses
Start-up expenses are amortised over a three-year period of time after the beginning of
business operations.
Interest expenses
As a general rule, deduction of interest is allowed when derived from loansof financial
institutions; however, the interest paid derived from loans of non-financial institutions
will be deductible up to the amount resulting from applying the average lending rate
of the national bank at the date of obtaining the loan, if fixed, or at the date of each
payment, if variable.
In order for interest paid to a non-resident to be deductible, the corresponding 10%
WHT must be withheld and paid.
Bad debt
Corporations are allowed a deduction for receivables as an allowance for doubtful

accounts as long as there is supporting documentation of the credit, identification
documents of the debtor and creditor, and administrative and judicial collection proof.
A deduction is allowed, up to 10% of the corporations income, for charitable

contributions made to the government and its institutions, the Red Cross, and other
organisations.
Compensation
A deduction of up to 10% of the accumulated profits before this expense is allowed for
payments made to employees as bonuses or in addition to their salaries or wages.
Life insurance
A deduction is allowed for employee insurance payments made.
Fines and penalties
Penalties or charges made by tax, customs, social security, or municipal authorities are
not deductible for CIT purposes.
Taxes
In principle, income tax expense is not deductible for CIT purposes. Municipal or local
taxes (i.e. real estate tax, monthly sales and services tax, annual registration tax) are
deductible from CIT.
Losses may be carried forward and deducted from future profits, for up to three years.
The carryback of losses is not allowed.
Payments made from affiliates to foreign related parties are deductible for CIT purposes,
provided the following requirements are met:
The expenses (i.e. royalties, interest, and services) are needed to generate
taxableincome.
The expenses are duly supported (e.g. agreements, invoices, payment receipts).
The expenses are incurred within the fiscal period.
The WHT is applied and paid to the tax authorities.
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Group taxation
Group taxation is permitted only when previously approved by the tax authorities. The
economic group must submit a business case to the tax administration justifying the
economic reason of their request.
Transfer pricing
The Nicaragua tax system recognises transfer pricing as a method of trading. Law 822
regulates transfer pricing rules based on the Organisation for Economic Co-operation
and Development (OECD) regulations (including contemporaneous documentation
requirements) and will become effective on 1 January 2016.
Thin capitalisation
The Nicaragua tax system does not impose any form of thin capitalisation rules.

Foreign tax credit
The Nicaragua tax system does not recognise any form of foreign tax credit.
Tourism incentives
Under present law, and on a case-by-case basis, new companies with tourist activities
may request and the government may grant, during the facilities construction phase,
total exemption of customs duties and partial or total CIT exemption for a maximum
period of ten years.
Renewable energy incentives
The renewable energy sector is covered by a special law with tax benefits or exemptions
in CIT, VAT, customs duties, and municipal tax.
Free trade zones (FTZs)
FTZ industries have a special law with tax benefits or exemptions in CIT, VAT, customs
duties, and municipal taxes.
An industrial export zone decree provides a 15-year exemption from CIT to those
taxpayers located in certain FTZs. There is a 100% exemption for the first ten years and
60% exemption for the following five years.Additional requirements and provisions
apply.
In accordance with the Agreement on Subsidies and Countervailing Measures issued
by the World Trade Organization (WTO), all tax exemptions granted to FTZs shall
be eliminated by the end of 2015. However, Nicaragua falls under the exception of
section 27 of this agreement and qualifies as a country listed in Annex VII (for being a
developing economy) as a country with per capita gross national product (GNP) of less
than USD 1,000, based on World Bank estimates. Due to this exception, it is foreseen
that the tax holiday will still apply to FTZ industries in Nicaragua past 2015.
Withholding taxes
Payments to residents
Dividend payments to resident shareholders (corporations or individuals) are subject to

10% WHT.
Payments of royalties to resident individuals or corporations are subject to 10% WHT.
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Interest paid to a resident individual or legal entity is subject to 10% WHT.
Professional services provided by an individual are subject to 10% WHT.
Payments on the local acquisition of goods and services are subject to 2% WHT.
Payments of royalties, interest, dividends, and service fees to non-resident corporations

are subject to WHT, as follows:
Payment
Royalties
Dividends
Services provided in general
Interest:
Non-financial companies
Financial companies
TV and Radio programming or subscription
WHT rate (%)

10
10
15
10
10
10
Payments of any kind of income to non-resident individuals are subject to WHT of 20%.
In principle, Nicaragua has not signed any agreement or treaty with any country to avoid
double taxation.
Transactions with tax havens
Expenses that are paid by Nicaraguan residents to an individual or entity that is a

resident of a tax haven are subject to a 17% WHT. For this purpose, a tax haven may be:
a foreign territory where the income tax is substantially lower than the Nicaraguan
income tax
a foreign country or territory that has been listed, for the corresponding taxable year,
as an un-cooperative jurisdiction by the Global Forum on Transparency and Exchange
on Information for Tax Purposes, or
a foreign territory that is listed by the Nicaraguan Public Credit and Finance Ministry.
Tax administration
Taxable period
The standard tax year in Nicaragua is the calendar year (from 1 January to 31
December); however, companies can obtain authorisation from the tax authorities in
order to change or have a different year-end: 31 March, 30 June, or 30 September.
Tax returns
Without exception, all corporations are required to file CIT returns for a fiscal year
within the following three months after the fiscal year-end.
Payment of tax
Corporations shall pay fiscal-year income tax in monthly advance payments. The
monthly payable amount is calculated as 1% of gross income.
Final CIT payment is due with the final CIT return (i.e. within the following three
months after the fiscal year-end).
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Tax audit process
The tax authority is entitled to conduct a tax audit of the taxpayer when considered
necessary. The taxpayer has the obligation to submit before the tax auditor the corporate
information and documents related to the generation of income.
The statute of limitation in Nicaragua is up to the last four fiscal ended periods.
In Nicaragua, tax audits are determined randomly; however, high taxpayers or taxpayers
who request reimbursement of tax credit are more likely to be audited. For corporate
tax compliance, the tax authority normally seeks information in regards to taxpayer
operations through the advance income tax returns.
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PwC contact
Taiwo Oyedele
Plot 252E Muri Okunola Street
Victoria Island
Lagos
Nigeria
Tel: +234 1 271 1700
Changes to the process of applying for a tax holiday
A new Regulation, the Pioneer Status Incentive Regulations 2014, has been released
to provide guidance on the application process for tax holiday. The Regulation also
provides additional conditions to those contained in the Industrial Development
(Income Tax Relief) Act for processing an application for the pioneer status incentive.
The pioneer status incentive grants qualifying companies exemption from corporate
income tax (CIT) for an initial period of three years, which can be renewed for a further
two years.
The Regulations provide an update to the list of requirements to be provided by
applicants in addition to the application forms. More prominent in the Regulations is a
service charge of 2% to be paid by a company seeking pioneer status based on estimated
tax savings.
The new transfer pricing regulations
In an attempt to combat perceived income shifting by foreign investors out of Nigeria

and aggressive tax avoidance by local groups, the Federal Inland Revenue Service (FIRS)
has published new transfer pricing rules. The effective date for the application of the
rules is accounting periods commencing after 2 August 2012. For example, a company
with an accounting year end date of 31 December 2012 will be required to have its
transfer pricing documentation in place for the accounting year commencing 1 January
2013.
The rules are designed to provide guidelines on the application of the arms-length
principle in the income tax legislation and to ensure that Nigeria is able to tax businesses
on an appropriate basis corresponding to their economic activities carried out in the
country, especially with respect to related party transactions.
The regulations are to be applied in a manner consistent with the United Nations
(UN) and Organisation for Economic Co-operation and Development (OECD) model
conventions, except where there are inconsistencies between the model conventions
and the local legislation, in which case the provisions of the relevant local tax laws shall
prevail.
The rules cover all transactions between connected taxable persons, which is broadly
defined to include individuals, permanent establishments (PEs) created by head offices,
subsidiaries, associates, partnerships, joint ventures, and trusts to the extent that they
participate directly or indirectly in the management, control, or capital of another,
or both of which have common control, management, or shareholders. Specifically,
the rules will apply to the sale and purchase of goods; lease or sale of tangible assets;
licensing, transfer, or use of intangible assets; provision of services; lending or
borrowing of money; manufacturing arrangements; and any transaction that may affect
profit and loss or any other incidental matter.
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The rules are applicable to both domestic and cross-border related party transactions.

The CIT rate is 30%, assessed on a preceding year basis (i.e. tax is charged on profits for
the accounting year ending in the year preceding assessment).
Resident companies are liable for CIT on their worldwide income while non-residents
are subject to CIT on their Nigeria-source income. Investment income paid by a Nigerian
resident to a non-resident is sourced in Nigeria and subject to withholding tax (WHT) at
source, which serves as the final tax.
In respect of business profits, a non-resident company that has a fixed base or a PE in
Nigeria is taxable on the profits attributable to that fixed based. As such, it is required
to register for CIT and file its tax returns. Any WHT deducted at source from its Nigeriasource income is available as offset against the CIT liability.
Small company rates
For small companies in the manufacturing industry and wholly export-oriented

companies with turnover not exceeding 1 million Nigerian naira (NGN) (about 6,300
United States dollars [USD]), the CIT rate is reduced to 20% in the first five calendar
years of operation.
Petroleum profit tax (PPT)
PPT is a tax on the income of companies engaged in upstream petroleum operations in

lieu of CIT.
The PPT rates vary as follows:
50% for petroleum operations under production sharing contracts (PSC) with the
Nigerian National Petroleum Corporation (NNPC).
65.75% for non-PSC operations, including joint ventures (JVs), in the first five years
during which the company has not fully amortised all pre-production capitalised
expenditure.
85% for non-PSC operations after the first five years.
Tertiary education tax
Education tax is now known as tertiary education tax based on the replacement of the
Education Tax Fund Act with the Tertiary Education Trust Fund (Establishment, etc.)
Act. Both laws have similar provisions, including the imposition of tax on every Nigerian
resident company at the rate of 2% of the assessable profit for each year of assessment.
The tax is payable within two months of an assessment notice from the FIRS. In practice,
many companies pay the tax on a self-assessment basis along with their CIT.
For companies subject to PPT, tertiary education tax is to be treated as an allowable
deduction. For other companies, income/profit taxes are not deductible in arriving at
taxable income. Non-resident companies and unincorporated entities are exempt from
tertiary education tax.
Minimum tax
Minimum tax is payable by companies having no taxable profits for the year or where the
tax on profits is below the minimum tax. However, companies in the first four calendar
years of business, companies engaged in the agriculture business, or companies that
have foreign equity capital of at least 25% are exempt from minimum tax.
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Minimum tax payable is calculated as follows:
Where the turnover of the company is NGN 500,000 or below, minimum tax is the
highest of:
0.5% of gross profits
0.5% of net assets
0.25% of paid-up capital, or
0.25% of turnover of the company for the year.
Where the turnover is higher than NGN 500,000, minimum tax is the highest of the
calculations listed above plus 0.125% of turnover in excess of NGN 500,000.
Alternative tax on distribution
There is a tax on distribution where a company pays a dividend in excess of its taxable
profit. Such a company will be charged tax on the dividend paid as if the dividend is the
taxable profit of the company for that year of assessment.
Alternative tax on deemed income
Non-resident companies are subject to tax on the income or profit derived from Nigeria.
The FIRS often assesses non-resident companies on a deemed income basis. This is done
by applying 20% of turnover as deemed profit and then charging CIT at 30%, resulting
in an effective tax rate of 6% on turnover.
Local income taxes
CIT is payable only to the federal government. State governments collect income taxes
of individuals and unincorporated entities, while local governments are only allowed to
collect levies and rates but not income tax.
Corporate residence
A company is considered resident in Nigeria if such a company is registered or
incorporated under the Companies and Allied Matters Act. This means that a company
formed outside Nigeria under the laws in force in the foreign territory will be considered
as a non-resident company for tax purposes.
Fixed base is not defined but is generally considered to be a location with a degree of
permanence. The following would generally not be considered to be a fixed base:
The use of facilities solely for the purpose of storage or display of goods or
merchandise.
The use of facilities solely for the collection of information.
Other activities that could trigger a tax presence in Nigeria include a dependent agency
arrangement, execution of a turnkey project, or artificial arrangements between related
parties.
Other taxes
The standard VAT rate is 5%, but there is a plan to increase the rate to 10%. A bill is
currently being drafted that includes the proposed increase in VAT rate. Once finalised,
the draft bill will be presented to Parliament for enactment into law. Note, however, that
there has been no progress on this bill in the last 12 months, and we do not expect that it
will be reactivated in 2014.
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Zero-rated items include non-oil exports, goods and services purchased by diplomats,
and goods and services purchased for use in humanitarian donor funded projects.
Exempt items include plants and machinery for use in export processing zones (EPZs) or
free trade zones (FTZs), basic food items, medical products and services, pharmaceutical
products, books and educational materials, and exported services.
Government agencies and oil and gas companies are required to deduct at source VAT
charged by their suppliers and remit to the tax authority. All other organisations are
required to collect VAT charged on their invoices from their customers for filing and
payment to the tax authority.
Customs duties
Customs duties in Nigeria are levied only on imports. Rates vary for different items,
typically from 5% to 35%, and are assessed with reference to the prevailing Harmonized
Commodity and Coding System (HS code).
Excise duties
Excise duty is applicable on beer and stout, wines, spirits, cigarettes, and tobacco
manufactured and sold in Nigeria at rates ranging from 5% to 20%.
Property taxes
Property taxes in Nigeria are usually levied annually by the state government with
varying rates depending on the state and the location of the property within the state.
The two major property taxes are governors consent fee and land registration fee. In
Lagos (which is the economic hub of Nigeria), governors consent fee, land registration
fees, and other levies payable to the state give rise to a total levy of 15% of the transfer
value of the land. Also, Right of Occupancy fee and tenement rates are chargeable by
state and local government authorities.
Stamp duties
Under the Stamp Duty Act, stamp duty is payable on any agreement executed in Nigeria,
or relating, whatsoever, to any property situated in or to any matter or thing done in
Nigeria. Instruments that are required to be stamped under the Stamp Duties Act must
be stamped within 40 days of first execution.
Stamp duty is chargeable either at fixed rates or ad valorem (i.e. in proportion to
the value of the consideration), depending on the class of instrument. Stamp duty
is imposed at the rate of 0.75% on the authorised share capital at incorporation of a
company or on registration of new shares.
Gains accruing to a chargeable person (individual or company) on the disposal of

chargeable assets shall be subject to tax under the Capital Gains Tax Act at the rate of
10%. There is no distinction between long-term and short-term gains and no inflation
adjustment to cost for CGT purposes.
All forms of assets, including options, debts, goodwill, and foreign currency, other than
those specifically exempt, are liable for CGT. The gains on the disposal of shares are
exempt from CGT.
CGT is applicable on the chargeable gains received or brought into Nigeria in respect of
assets situated outside Nigeria.
Capital losses are not allowed as an offset against chargeable gains accruing to a person
from the disposal of any assets.
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Information technology levy
A company with an annual turnover of NGN 100 million or more is required to pay 1% of
its profit before tax as information technology tax. This levy is tax deductible when paid
(typically in the year of assessment following that in which the payment was made).
This tax is applicable to:
Banking and other financial activities, including capital and money market operators,
mortgage institutions, and micro-finance banks.
Insurance activities, including brokerage.
Pension fund administration, pension management, and related services.
GSM services providers and telecommunication companies.
Cyber and internet services providers.
Levy on contracts awarded in the upstream oil and gas sector
The Nigerian Content Development Act was introduced to increase the level of Nigerian
participation in the oil and gas industry. The Act imposes a levy of 1% on every contract
awarded in the upstream oil and gas sector of the economy. Any violation of the Act is
liable for a fine of 5% of the contract value and may result in outright cancellation of the
contract.
Payroll contribution
Under the Employee Compensation Act, all employers are required to contribute 1%
of their payroll cost in the first two years of commencement of the Act (2010 to 2012).
Subsequently, assessments are expected to be issued by the Nigeria Social Insurance
Trust Fund, the body empowered to administer and implement the Act. In practice, a
contribution of 1% of payroll continues to apply.
Branch income
Except in rare circumstances, it is illegal for a non-resident company to operate through
a branch in Nigeria. The Nigeria-source income of a non-resident company is taxable
at the CIT rate of 30% or via the alternative tax on deemed income (see the Taxes on
corporate income section for more information).
The following income is subject to CIT in Nigeria:
Profits accruing in, derived from, brought into, or received in Nigeria in respect of any
trade or business.
Dividends, interest, royalties, discounts, charges, or annuities.
Rent or any premium arising from the right granted to any person for the use or
occupation of any property, where applicable.
Any source of annual profits or gain not falling within the preceding categories.
Fees, dues, and allowances (wherever paid) for services rendered.
Any amount of profits or gains arising from the acquisition or disposal of short-term
money instruments like federal government securities, treasury bills, treasury or
savings certificates, debenture certificates, and treasury bonds.
Inventory valuation
The first in first out (FIFO) valuation method is commonly used. Average and standard
cost methods are also allowed, but last in first out (LIFO) is not permitted. Other than
the accounting requirement in the local generally accepted accounting principles
(GAAP), there are no special statutory provisions for inventory valuation.
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Capital gains
Capital gains are not subject to CIT, but may be subject to CGT. See Capital gains tax in
the Other taxes section for more information.
Dividend income
Dividends received by a Nigerian resident company from another Nigerian resident

company are taxable at source (see the Withholding taxes section for more information)
and not subject to further tax.
Dividends received from non-resident companies are taxable except if repatriated into
Nigeria through government approved channels (i.e. any financial institution authorised
by the Central Bank of Nigeria to deal in foreign currency transactions).
Dividends received from small manufacturing companies are exempt for CIT purposes
during the first five years of operation. Dividends from investments in wholly exportoriented businesses are also exempt.
Stock dividends
Stock dividends (bonus shares) are not taxable at source or included in the taxable
income of the recipient company.
Interest income
Interest payable to a non-resident investor is liable to WHT at 10%, which is the final tax.
Recipients who are resident in a country with a double tax treaty (DTT) with Nigeria
enjoy a reduced rate of 7.5%. Interest received by a Nigerian company is liable to tax at
the CIT rate of 30% with tax withheld at 10% available as an offset against the final tax
liability.
Interest on government bonds is tax exempt. Interest on foreign currency domiciliary
accounts is also exempt.
The following entities income or profit is exempt for CIT purposes:

Statutory or registered friendly societies.
Co-operative societies registered under any ecclesiastical, charitable, or education
establishments of a public character.
Profit of a company established within an EPZ or FTZ (see the Tax credits and
Profit of a registered trade union.
Export profits, as long as proceeds are brought into Nigeria through government
approved channels and invested in raw materials, spare parts, and plant and
machinery (see Export incentives in the Tax credits and incentives section).
Foreign income
A Nigerian resident company is taxable on its worldwide income. On the other hand, a
non-resident company is subject to tax only on income derived from Nigeria.
Dividends, interest, rents, and royalties earned abroad and brought into Nigeria through
government-approved channels are exempt from Nigerian tax; otherwise, the income is
taxable at the CIT rate of 30% and tertiary education tax at 2%. Government-approved
channels mean the Central Bank of Nigeria and any bank or financial institution
authorised to carry out foreign exchange transactions.
Taxable foreign income earned by a Nigerian tax resident entity cannot be legally
deferred.
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Deductions
Expenses are deductible for tax purposes if they are wholly, reasonably, exclusively, and
necessarily incurred for the business or trade.
Depreciation
Capital allowances are calculated on a straight-line basis. Capital allowances claimable

in any year are restricted to two-third of assessable profits for all companies, except
companies in the manufacturing and agricultural sectors, which are excluded from this
restriction.
The following are the capital allowance rates on fixed assets (qualifying expenditures):
Qualifying expenditure
Building (industrial and non-industrial)
Plant expenditure (1)
Mining expenditure
Plantation equipment
Motor vehicle (2)
Ranching and plantation expenditure
Housing estate expenditure
Research and development
Initial allowance (%)

15
25
50/95
95
95
50/95
30
50
95
Annual allowance (%)

10
20
0/25
0
0
0/25
50
25
0
Notes
1.
2.
95% initial allowance for plant used in agricultural production; others 50%.
95% initial allowance is granted for motor vehicles used for public transportation if the company has
a fleet of at least three buses; all other motor vehicles 50%.
The initial allowance is first deducted, and the balance is written off on a straightline basis over a fixed period, depending on the rates of annual allowance. There is a
requirement that assets not yet disposed of cannot be fully written off in the books. A
nominal amount of NGN 10 per asset must be retained in the books till the assets are
disposed of. However, where 95% has been claimed as an initial allowance, the 5%
balance is the value that must be maintained in the books until the final disposal of the
asset.
When assets are sold, the proceeds over the tax written-down value are taxed at 30% to
the extent of the allowances already claimed.
Goodwill
There is no tax deduction for goodwill.
Start-up expenses
Start-up expenses are not specifically stated as non-deductible in the tax law, but,
in practice, they are usually not allowed by the tax authority. This is based on the
assumption that start-up expenses are not directly attributable to any taxable income of
the company, which is a fundamental condition for tax deductibility of expenses.
Interest expense
Interest on money borrowed and employed in producing taxable income is a deductible

expense. There is currently no thin capitalisation regulation in Nigeria, but general antiavoidance rules are usually applied to limit deductible interest on related party loans.
Bad debt
Bad debt incurred in the course of trade is deductible.

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Donations are deductible, subject to the provisions of the law.
Fines and penalties
Any punitive payments for default or violation of law are expressly not deductible for tax
purposes. In practice, this is usually extended to include default surcharges and other
avoidable fines.
Taxes
Any tax on income or profit is not deductible except where such tax was paid on profit
earned outside Nigeria. In this case, if the source country has no DTT with Nigeria,
the foreign tax paid is allowed as a deduction for CIT purposes. State and local taxes
(business rates) and levies may be deducted from taxable income.
Other deductible expenses include the following:

Sum payable by way of interest on capital borrowed.

Rent for the period.
Expenses incurred in respect of salary and wages.
Expenses incurred for repair of assets.
Liability incurred for purpose of trade.
Research and development (R&D) costs.
Losses can be carried forward indefinitely, except for insurance companies where losses
can only be carried forward for four years. Losses made from one line of business cannot
be relieved against another line of business. Losses cannot be carried back.
Payments considered to be artificial are not deductible for tax purposes. Royalties,
management fees, and technical fees require the approval of the National Office for
Technology Acquisition and Promotion (NOTAP) for exchange control purposes and for
tax deduction. NOTAP approved royalties and technical fees are limited to a range of 1%
to 5% of net sales, while management fees are limited to a range of 2% to 5% of profit
before tax, and consultancy fees are limited to 5% of total project cost. Technical fees are
limited to approved man-hour rates.
Trademark fees are disallowed where the trademark owner has more than 75% equity
participation in the local company.
Group taxation
There are currently no provisions for group taxation, group relief, or group filing of tax
returns in Nigeria. Each legal entity within a group is treated as distinct and separate for
tax purposes.
Transfer pricing
The transfer pricing regulations are applied in a manner consistent with the armslength principle in Article 9 of the UN and OECD Model Tax Conventions on Income
and Capital; and the OECD Transfer Pricing Guidelines for Multi-national Enterprises
and Tax Administrations. However, where there are inconsistencies between the model
conventions and the local legislation, the provisions of the relevant local tax laws shall
prevail.
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The rules cover all transactions between connected taxable persons, which is broadly
defined to include individuals, PEs created by head offices, subsidiaries, associates,
partnerships, joint ventures, and trusts to the extent that they participate directly or
indirectly in the management, control, or capital of another, or both of which have
common control, management, or shareholders. Specifically, the rules apply to sale
and purchase of goods; lease or sale of tangible assets; licensing, transfer, or use of
intangible assets; provision of services; lending or borrowing of money; manufacturing
arrangements; and any transaction that may affect profit and loss or any other incidental
matter.
The rules are applicable to both domestic and cross-border related party transactions.
Thin capitalisation
Nigeria has no thin capitalisation rules. However, interest charged between related
parties is expected to reflect arms-length transactions. The tax authority may disallow
any related party interest considered to be excessive.
Note that the tax authorities are currently considering introducing a formal thin
capitalisation rule with a likely 3:1 debt-to-equity ratio.

Nigeria has various tax incentives intended to encourage investment in key sectors of the
economy, as follows.
Tax holidays
Pioneer companies investing in specified industrial activities may, on application,

be granted a tax holiday for a maximum period of five years. Examples of economic
activities that may be granted a tax holiday include glass and glassware manufacturing,
manufacturing of fertilisers, and steel manufacturing.
A new company that engages in the mining of solid minerals is exempt from tax for the
first three years of its operation.
Rural location incentives
Certain incentives are available to companies located in rural areas. The incentives
take the form of tax reductions at graduated rates for enterprises located at least 20
kilometres from available electricity, water, and tarred roads.
Export incentives
Export processing zones (EPZs) and free trade zones (FTZs) are locations within Nigeria
designated by the government as free areas where export trade activities can be carried
on free of tax and foreign exchange restrictions.
A company that is engaged in an approved manufacturing activity in an EPZ and incurs
expenditures in its qualifying building and plant equipment is entitled to 100% capital
allowance in that year of assessment.
In addition, a company that is 100% export oriented but located outside an EPZ will
enjoy a three year tax holiday, provided the company is not formed by splitting up or
reconstruction of an already existing business and the export proceeds form at least 75%
of its turnover.
Profits of companies whose supplies are exclusively inputs to the manufacture of
products for export are exempt from tax. Such companies are expected to obtain a
certificate of purchase of the input from the exporter in order to claim tax exemption.
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Where plant and machinery are transferred to a new company, the tax written down
value of the asset transferred must not exceed 25% of the total value of plant and
machinery in the new company. The company should also repatriate at least 75% of
the export earnings to Nigeria and place it in a Nigerian domiciliary account in order to
qualify for a tax holiday.
Profits of any Nigerian company in respect of goods exported from Nigeria are exempt
from tax, provided that the proceeds from such exports are repatriated to Nigeria and
are used exclusively for the purchase of raw materials, plant, equipment, and spare
parts.
Gas utilisation incentives
Companies engaged in gas utilisation are entitled to:

A tax-free period for up to five years.
Accelerated capital allowance after the tax-free period.
Tax-free dividends during the tax-free period.
Tourism incentives
25% of the income derived from tourism by hotels in convertible currencies is exempt
from tax if such income is put in a reserve fund to be utilised within five years for
expansion or construction of new hotels and other facilities for tourism development.
Interest incentives
Interest accruing on deposit accounts of a non-resident company is tax-exempt, provided

the deposits are made by transfer of funds to Nigeria on or after 1 January 1990 and the
depositor does not become non-resident after making the deposit while in Nigeria.
Interest on foreign-currency domiciliary accounts is also tax-exempt.
Interest on any foreign loans, and interest on any loan granted by a bank for the purpose
of manufacturing goods for export, is exempt from tax as follows:
Repayment period
Over 7 years
5 to 7 years
2 to 4 years
Moratorium
Not less than 2 years
Not less than 1.5 years
Not less than 1 year
Exemption (%)
100
70
40
Interest on any loan granted by a bank to a company engaged in agricultural trade,

fabrication of local plant and machinery, or as working capital to any cottage industry
is 100% tax free if the loan has a moratorium of not less than 18 months and the rate of
interest is not more than the base lending rate.
Investment allowances
An investment allowance of 10% on the cost of qualifying expenditures in respect of

plant and machinery is available as a deduction from assessable profits in the year of
purchase. There is no restriction to the full claim of capital allowance in any year of
assessment for companies in the mining, manufacturing, and agricultural sectors.
Foreign tax credit
Nigeria does not grant automatic tax credits to Nigerian companies for foreign tax on
income derived from other countries. The Nigerian tax laws already provides for tax
exemption for dividends, interest, and royalties.
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Foreign tax credits are only granted based on the provisions of existing DTTs and partial
credits as applicable to Commonwealth countries. In this regard, full tax credits are
usually provided for in the DTTs. Tax credit for members of Commonwealth countries is
granted up to half the Nigerian CIT rate.
Withholding taxes
WHT is applicable on specified transactions as indicated below. There is no distinction
between the WHT rates for resident companies or individuals and non-resident
companies or individuals.
Types of payment
WHT for companies (%) WHT for individuals (%)
Dividends, interest, and rents
10
10
Directors fees
N/A
10
Hire of equipment
10
10
Royalties
10
5
Commission, consultancy, technical, service fees
10
5
Management fees
10
5
Construction/building
5
5
Contracts other than sales in the ordinary
5
5
course of business
The period for filing WHT is 21 days after the duty to deduct arose for deductions from
companies.
The penalty for failure to deduct or remit tax is now 10% of the amount not deducted/
remitted.
Note that companies are required to submit, in electronic form, a schedule of all their
suppliers for the month showing the tax identification number (TIN), address of the
suppliers, the nature of the transaction, WHT deducted, and invoice number.
Nigeria has DTTs with the countries listed in the table below. Nigeria also has tax treaties
with Kenya, Mauritius, Poland, South Korea, Spain, and Sweden; however, these treaties
have not been ratified by the Nigerian National Assembly.
WHT (%)
Recipient
Non-treaty
Treaty:
Belgium
Canada
China
Czech Republic
France
Netherlands
Pakistan
Philippines
Romania
Slovakia
South Africa
Dividend
10
Interest
10
Royalties
10
Management/Technical fees
10
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
10
10
10
10
10
10
10
10
10
10
10
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WHT (%)
Recipient
United Kingdom
Dividend
7.5
Interest
7.5
Royalties
7.5
Management/Technical fees
10
Tax administration
Taxable period
The taxable period is the fiscal year, which runs from 1 January to 31 December.
Tax returns
Companies are required to register for tax and file their audited accounts and tax
computations with the FIRS within six months of their financial year end on a selfassessment basis or 18 months after incorporation (whichever comes first). A company
may file an application for extension of filing tax returns for up to two months at the
discretion of the FIRS.
Upon registration, a company is issued a TIN, which serves as the companys file number
for all federal taxes and future correspondence with the FIRS.
The company must file the following documents with the tax authority on an annual basis:
Tax computation for the relevant year of assessment.
The audited financial statements for the respective period; this should be in conformity
with the local GAAP.
A duly completed and signed self-assessment form for CIT.
Evidence of remittance of the income tax liability (partly or in full).
PPT is payable on an actual year basis. Estimated tax returns must be filed within two
months of the fiscal year. Actual tax returns should be filed within five months after the
end of the accounting period, that is, not later than 31 May.
Assessment
Nigerian companies file their tax returns based on a self-assessment system where the
taxpayer prepares its annual returns and determines its tax liability. However, the FIRS
may apply a best of judgment (BOJ) assessment where it is of the opinion that the tax
returns filed are deliberately misstated or where no returns are filed within the stipulated
period.
Payment of tax
CIT
A company that files its self-assessment within six months after the accounting yearend can apply to the FIRS in writing to pay its income tax in instalments. The maximum
number of instalments the FIRS may approve is three. Evidence of the first instalment
has to accompany the tax returns filed in order to qualify for the instalment payment.
However, all payments have to be made not later than eight months after the financial
year-end.
Assessments are made on a preceding year basis. This means that the financial statements
for a period ended in 2013 will form the basis for the 2014 year of assessment.
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PPT
Payments with respect to PPT in any accounting period of 12 months are made in
12 instalments, with a final 13th instalment (if there is an underpayment). The first
instalment for the year is due by the end of March.
Penalty for non-compliance
Late payment of taxes attracts a 10% penalty and interest at the commercial rate.
A company that files its annual tax return late or fails to submit its accounts by the due
date is liable for a nominal penalty.
Late submission of PPT returns attracts an initial penalty of NGN 10,000 and NGN 2,000
for each day such failure continues, while late payment of tax attracts a penalty of 5% of
the tax not paid.
Tax audit process
Generally, the tax authority will commence a desk examination of a taxpayers returns
immediately after filing. This may be followed by a tax monitoring exercise whereby tax
officers visit taxpayers to conduct interview and on-site high level review of their tax
affairs.
Random or specific tax audit may be carried out usually within six years of filing tax
returns. In unusual cases, a back-duty tax investigation may be conducted for more than
six years, especially where a tax fraud or wilful default is suspected.
Tax audits take a long time to conclude, usually between three to five years.
The tax authority may carry out a tax audit and issue an additional assessment within six
years from the relevant tax year. However, the limitation does not apply in the event of a
fraud, wilful default, or neglect by the company.
Due to the rebasing of Nigerias gross domestic product (GDP), the tax-to-GDP ratio
dropped significantly to less than 10%, especially for the non-oil sectors. The Ministry of
Finance has directed the tax authorities to increase the tax-to-GDP ratio to at least 20%.
The tax authorities are thus focusing on possible ways to generate more tax revenue. As
a result, certain areas of taxation that have previously received very little attention, such
as capital gains tax, stamp duties, and excise duties, are now key areas of focus by the tax
authorities. In addition, related party transactions are increasingly being scrutinised, as
well as non-resident entities doing business in Nigeria. This trend is expected to continue
and possibly intensify in the coming years.
The FIRS commenced a nationwide verification exercise to ensure full compliance with
VAT and WHT requirements in March 2014.
The FIRS has also instructed taxpayers to submit schedules along with their VAT returns
showing the VAT attributable to their different branches in Nigeria. The directive from
the FIRS is meant to elicit relevant information regarding the derivation of VAT revenue
from the different states and local government councils in Nigeria for revenue sharing
purposes.
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Norway
PwC contact
Steinar Hareide
Advokatfirmaet PricewaterhouseCoopers DA
Dronning Eufemias gate 8
PO Box 748 - Sentrum
NO-0191 Oslo
Norway
Tel: +47 95 26 04 29
Changes to tax legislation
With effect from the 2014, the government has made changes to the tax system with the
aim to improve competitiveness and strengthen business growth. The main changes to
the legislation are as follows:
In order to align corporate law to international developments, the tax rate has been
reduced from 28% to 27%. The reduction applies both to companies and individual
taxpayers.
The 50% special tax rate for petroleum companies has been increased to 51% so that
the marginal tax rate of 78% is maintained.
The 30% resource rent tax for hydro power companies has also been increased by 1%
so that the marginal tax rate of 58% is maintained.
To encourage investment, the government has increased the rate of depreciation for
assets in Group D (cars, tractors, other vehicular machinery, instruments, fixtures and
furniture, etc.). The increased rate from 20% to 30% applies to the first year of the
investment.
The research and development (R&D) tax credit scheme has been strengthened to
encourage R&D. The upper limit for annual deductible costs under the R&D scheme
has been increased from 5.5 million Norwegian kroner(NOK)to NOK 8 millionfor
self-developed R&D and from NOK 11 millionto NOK 22 million for purchased R&D
from approved institutions.
Limitation of inter-company interest
Until recently, interest expenses on arms-length terms have been tax deductible in
Norway. As of 2014, limitations on the deductibility of interest expenses between related
parties have been adopted.In general, interest expenses to related parties that exceed
30% of a Norwegian companys taxable income, with some adjustments, will not be tax
deductible. The new regulations will only apply to companies that have more than NOK
5 millionin total interest expenses.
Two parties are related if one party directly or indirectly owns or controls the other
party by at least 50%. Related parties may be resident in Norway or abroad. The interest
deductibility limitation is calculated for each entity in the group. Disallowed interest
deductions may be carried forward for ten years.
The limitation applies both to local and foreign companies that have a taxable presence
in Norway, as well as partnerships, controlled foreign companies (CFCs), etc. The new
regulations will also apply to interest costs on loans entered into prior to 2014.
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A Norwegian resident company is, as a starting point, subject to corporate income tax
(CIT) on its worldwide income. Non-resident companies are, as a starting point, liable
for CIT in Norway when engaged in a business that is either conducted in or managed
from Norway.
CIT is assessed at a rate of 27%.
As a general rule, income is taxable when the right to receive it arises and costs are
deductible when the liability to cover the costs arises. The actual payment is generally
not relevant.
Petroleum tax regime
All upstream petroleum activity on the Norwegian Continental Shelf (NCS) is taxable to
Norway.
Taxation is based on net income at a marginal tax rate of 78%, which is comprised of
the ordinary 27% CIT rate and a 51% special tax. All income is subject to 27% CIT, while
only income from offshore production and pipeline transportation of petroleum from
the NCS (offshore tax regime) is subject to the additional 51% special tax.
All upstream activity on the NCS must be consolidated within the company. There is
no ring fence per oil field, and tax consolidation against other activity is limited. Crude
oil sales from most of the fields are taxed at a predetermined market price set by an
official board (i.e. the norm price). In theory, a norm price may be imposed on gas
sales, but this has not been implemented. Instead, an extensive reporting requirement
was implemented in October 2012. Investments in installations for the exploitation and
production of petroleum, as well as investments in pipelines, are depreciated linearly
over six years.
An investment-based supplementary depreciation (uplift) of 22% (5.5% per year for
four years) is granted on investments in installations for the exploitation and production
of petroleum, as well as investments in pipelines. The rate of uplift was reduced from
7.5% to 5.5% for investments made on or after 5 May 2013. However, according to
special transitional rules, the 7.5% rate may still apply in some cases. The uplift is
deducted against the special tax base. Losses and unused uplift may be carried forward
indefinitely with an annual interest. Both depreciation and uplift may be claimed from
the year of the investment, regardless of whether title has passed or the asset has been
taken into use. If the upstream activity on the NCS ceases, the tax value of losses carried
forward and unused uplift may either be sold or compensated by the Norwegian state.
Exploration costs are tax deductible as incurred. If a loss is created due to exploration
costs, the taxpayer may claim thatthe tax value of such a loss is repaid in the year
following the income year in which the loss was created.
Special rules apply as to the deductibility of net interest costs in the special tax basis
(51%).
A special regime ensures that transfer of licences on NCS is tax exempt; there is no step
up in the tax basis.
Note that income taxed under the special tax is exempted from dividend withholding tax
(WHT).
The Oil Taxation Office has a high focus on transfer pricing.
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Hydro power tax regime
The hydro power tax regime is applicable for the taxation of income derived from the
production, sales, transfer, or distribution of hydro power.
Taxation is based on net income at a marginal tax rate of 58%, which is comprised of
the ordinary 27% CIT rate and a 31% resource rent tax. All income is subject to 27%
CIT, while only income from hydro power production is subject to the additional 31%
resource rent tax.
The resource rent is calculated per hydro power plant. The gross income is, with
some exceptions, calculated based on spot market price per hour multiplied by actual
production. In addition, actual income from green certificates is included in the gross
income. Deductible costs will be the same as for CIT; that is, expenses related to the
power plant except for interest expenses, which are not deductible. Uplift is granted.
Special rules apply to the depreciation of investments in hydro power plants. Rent
expenditure and depreciation related to waterfalls are not deductible, and waterfalls are
not included in the basis for uplift. Tax consolidation is mandatory within the company
and, provided the conditions for group taxation are fulfilled, available on a group level.
Losses (negative resource rent) on a company (eventually on a group) level will be
compensated by the Norwegian state.
Shipping tonnage tax regime
The tonnage tax rules in Norway are in line with those found in other European Union
(EU)/European Economic Area (EEA) countries and imply that shipping income will be
tax-exempt on a permanent basis.
Norwegian tonnage-taxed companies are allowed to keep only certain kinds of assets
inside the tonnage regime (legal assets) and are not allowed to have income from nontonnage-taxed activities except financial income. If the requirements are not fulfilled,
the company will fall outside the scope of the model and be taxed at the ordinary
rate(27%).
Qualifying assets
A tonnage-taxed company must own at least one qualifying asset (i.e. a vessel, for
example bulk, tankers, container vessels, car carriers, tugboats, and entrepreneurial
vessels and auxiliary vessels for use in the petroleum industry), new building contracts,
a 3% share in another tonnage-taxed limited company, or a 3% ownership interest in a
partnership or CFC.
Qualifying and legal business activities/income
Qualifying business income is income from the operation of the companys own and
chartered vessels. A tonnage-taxed company may, for example, charter vessels in and
out on bareboat and time charter terms without limitations. Furthermore, gains upon
disposal of vessels and new building contracts are exempt from taxation.
Income from related activities, such as the sale of goods and services onboard vessels,
loading and discharging vessels, or leasing out containers and operations of ticket
offices, is also exempt from taxation. The exemption also applies to income from the
strategic and commercial management of the companys owned and chartered vessels,
as well as vessels owned or operated by group companies (more than 50% joint
ownership), and vessels operated according to a pool agreement. Pure management
companies are not included (i.e. all companies must have at least one qualifyingasset).
Financial income is permitted, except for income from shares in unlisted companies and
ownership interests in partnerships that are not taxed under the tonnage tax system.
The condition is that financial activities do not constitute a separate business. Net
financial income is subject to ordinary taxation (27%). Currency gains and losses are
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partly taxable/deductible, and interest costs are partly deductible, depending on the
proportion between the companys finance capital and total book capital.
Entrance into the tonnage tax system
Entry into the tonnage tax system is optional and may take place with effect from
1 January every year, provided that the company has fulfilled the conditions for
the application into the tonnage tax system from the beginning of the year. Newly
established companies will have direct entry and may enter into the tonnage tax system
from the date of incorporation. All qualifying companies within the same group are
obligated to make the same election (tonnage taxation or ordinary taxation).
Companies that enter into the tonnage tax system are subject to a formal ten-year lockin period. If a company exits the tonnage tax system before the lock-in period expires,
it will be excluded from the tonnage tax system until after the initial lock-in period
hasended.
Upon entry into the tonnage tax system, the difference between market value and tax
value of the companys assets (including vessels, new building contracts, ownership
interests in partnerships, and shares in CFCs/tax exempt assets) is taxed as a capital gain
(27%) that can be transferred to the gain and loss account. 20% of the balance will be
entered as income each year (balance method). There is continuity for financial assets
and assets covered by the tax-exemption rules (qualifying shares and derivatives).
Exit from the tonnage tax system
A shipping company may exit the regime on a voluntary basis or may be obligated to do
so after breaching specific company requirements within the tonnage tax system. There
should be no exit charge when leaving the regime, and the tax value on the companys
assets will be adjusted to market value at the time of exit. However, a company that
has untaxed gains calculated upon entry into the tonnage tax system could have a tax
liability upon exit.
Local income taxes
There is no county or municipal CIT in Norway.
Corporate residence
Companies that are registered and incorporated in Norway in accordance with
Norwegian company law are, as a general rule, regarded as tax resident in Norway and
taxable for their worldwide income. If effective management at the board/director level
is carried out outside Norway, residency in Norway for tax purposes may cease, and the
company may be subject to exit taxation. Note that several factors should be considered
in order to determine whether tax residency has moved (e.g. other management
functions and the overall connection to Norway).
Foreign corporations will be regarded as resident in Norway if the place of effective
management is in Norway. The place of effective management will be deemed to be in
Norway if, for example, the board of directors makes its decisions in Norway.
According to Norwegian domestic law, a foreign company is liable to tax in Norway

when engaged in a business that is either conducted in or managed from Norway. The
tax liability is limited to income that is derived from Norwegian sources. As a general
rule, non-residents without a PE are not liable for tax on capital gains when selling
Norwegian financial instruments. However, when the property has been used in a
business that is conducted in or managed from Norway, the capital gain or loss has to be
included.
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The legislation does not contain a reference to the treaty concepts of permanent
establishment or permanent representative. The threshold for tax liability is normally
lower under legislation than the taxing right afforded to source states under double tax
treaties (DTTs).
With respect to DTTs, the Norwegian tax authorities will, to a large extent, follow the
Organisation for Economic Co-operation and Development (OECD) Commentaries
when interpreting the relevant DTT, if the wording is similar to the OECD Model Tax
Convention.
Other taxes
The general VAT rate is 25% and applies to all supplies of goods and services not
qualifying for another rate or an exemption. A reduced rate of 15% applies to supply
of food and beverages, excluding tobacco, alcohol, medication, and water from
waterworks. The reduced rate is not applicable to the supply of food and beverages
consumed in restaurants and other food establishments.
A reduced rate of 8% applies to the television licence fee charged for broadcasting
services provided by the Norwegian Broadcasting Company (NRK), domestic passenger
transport services and procurement of such services, domestic ferry services related
to transport of vehicles, accommodation services, cinema tickets, museum and gallery
tickets, amusement park tickets, and sports events.
Exemptions with credit (zero-rated) include, but are not limited to, the following:

Export of goods and services.

Goods and services for Norwegian offshore and non-resident ships.
Transfer of a going concern.
Supply of newspapers and books to recipients.
International transport services.
Sale of vessels and aircrafts for use in taxable activity.
Exemptions without credit include, but are not limited to, the following:

Supply of works of art owned by the artist.

Health services.
Social services.
Financial services including banking, insurance, and the sale of shares.
Sale and lease of real estate (accommodation and lease of parking lots are taxable).
Services supplied by cultural and entertainment institutions.
Exemptions, whereby an option to tax is available, include the letting of immovable

property to VAT liable lessees following a specific VAT registration with the VAT
authorities.
The registration threshold is met when supplies subject to VAT in coherence with the
Norwegian VAT legislation (including self-supplies) exceed NOK 50,000 during a
12-month period. For charitable and public utility institutions and organisations, the
threshold is set at NOK 140,000.
Customs duties
There are quite extensive customs duties on agricultural products, which must be
paid upon importation. However, it is often possible to avoid customs duties on these
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products partly or completely by applying for an exemption from the agricultural
authorities in advance. Some of these exemptions are subject to tariff quotas.
Clothes are also subject to customs duties upon importation to Norway, but imports
comprised by free trade agreements (such as the EEA with the EU) and the General
System of Preferences (for developing countries) are exempt. As a result, clothes will,
as a general rule, not be subject to customs duties as long as the importer presents the
necessary certificates of origin.
There are no customs duties on other products than agricultural products and clothes.
Excise taxes
Excise taxes are calculated on import and domestic production of the following:

Petroleum products, including gas.

Alcoholic beverages.
Non-alcoholic beverages.
Ethanol for technical purposes.
Tobacco.
Chocolate, candy, sugar, etc.
Maritime engines.
Products containing the chemicals TRI/PER.
Products containing the propellant gases HFK/PFK.
There are also excise taxes related to the following:

Registration of vehicles.
Use of vehicles (annual tax).
Emissions of NOx.
Waste treatment.
Sale of electricity.
Property taxes
Real estate may, under certain conditions, be subject to property tax. It is up to the
different municipalities to choose whether it wants to impose property tax on real
estate. Not all municipalities impose property tax on real estate. The applicable rate
varies between 0.2% and 0.7%, which is decided by the municipality. The tax base will
normally be the estimated market value (with some adjustments).
Hydro power producers must pay property tax on the hydro power plants capitalised
value using a capital interest rate of 4.5% for the property tax year 2014. However, the
basis for the calculation of the property tax for 2014 should fall in the range of NOK 0.95
to NOK 2.74 per kWh of the power plant average production for the lastseven years. For
hydro power plants with nominal capacity less than 10,000 kVA, the property tax base
will be the same as the tax value for income tax purposes.
Stamp taxes
A tax is levied on the registration of a change of ownership of real estate. The tax is
calculated at 2.5% of the fair market value.
Net wealth taxes
There is no net wealth tax or other capital taxes for limited liability companies,
investment funds, state-owned enterprises (according to the State-owned Enterprise
Act), inter-municipal companies, and companies in which somebody owns a part in or
receives income from, when the responsibility for the companies liabilities is limited to
the companies capital.
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Some institutional holders (e.g. mutual insurance companies, savings banks, cooperatives, taxable pension funds, self-owned finance institutions, mortgage credit
associations) pay 0.30% (state) net wealth tax. The maximum net wealth tax rate for a
corporate body is 1.00% (state and municipal tax).
Shares in limited liability companies and equity funds are valued at 100% of quoted
value for net wealth tax purposes as of 1January of the year after the relevant income
year. If quoted both on the Norwegian and a foreign stock exchange, the Norwegian
stock exchange value will be applicable. If not quoted, the basis for taxation is the
companys net taxable value for wealth tax purposes as per 1 January of the income
year in question. The basis for taxation of non-quoted shares in foreign companies is,
as a starting point, the assumed market value of the shares as per 1 January of the
assessment year.
National insurance contributions
Employers are subject to pay employers national insurance contributions on the

employees gross salary. The employers contribution rate varies between 0% and 14.1%
based on the municipality of the head office of the business. The contribution shall be
reported and paid on a bimonthly basis.
Exit tax
The exit rules levy taxes upon the migration of assets or liabilities. The tax is calculated
by reference to the accrued but unrealised gains at the time of migration at a rate
of 27%. Exit tax is also levied if Norwegian CFC taxation lapses because the control
requirement is no longer met or if a company:
transfers its tax residency (effective management) to another country
has assets or liabilities that are transferred to a PE that is tax exempt pursuant to a
DTT, or
has assets or liabilities that are transferred from a Norwegian PE of a foreign company
to the head office or a foreign PE of the same company.
Transfer of assets or liabilities to a PE in a country where the DTT in question is based on
the credit method is, however, not regarded as a taxable event.
According to the rules, the tax treatment is different depending on the type of assets
being transferred. Business-related operational equipment and financial assets being
transferred out of Norwegian taxing jurisdiction are considered as taxable events, but
the tax charge may be deferred if certain conditions are met. The main conditions are
that the taxpayer is resident within the EEA/EU and has a guarantee for the deferred tax
and interest charge. The transfer of intangible assets and inventory trigger immediate
and unconditional exit taxation.
De minimis exception rules apply when determining whether the exit tax may be levied.
Exit tax on the transfer of tangible assets is applicable only if the unrealised capital
gains exceed NOK 5 million. Exit tax on the transfer of other assets and liabilities is only
applicable if the unrealised capital gains exceed NOK 1 million.
Exit taxation at both the corporate and shareholder level will also be triggered when
companies transfer tax residency (effective management) to another state.
Carbon dioxide (CO2) tax
A CO2 tax is calculated on petroleum that is flared and on natural gas emitted into the
air, as well as on CO2 that is separated from petroleum and emitted into the air, and
on installations used for production or transportation of petroleum. The CO2 tax is
regarded as a normal operating cost for CIT purposes and is a fully deductible cost both
for corporate and special taxcalculations.
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Type of Petroleum
Petrol
Petroleum, high rate:
Aviation turbine kerosene
Petroleum:
Light oil, diesel oil
Residue
Petroleum, reduced rate:
Residue
Aviation turbine kerosene
Domestic used gas:
Natural gas
LPG
Reduced rate natural gas
Continental shelf:
Residue
Natural gas
NOK per l/Sm3/kg

0.93
NOK per tonne CO2
0.84
329
0.88
0.88
330
281
0.31
0.31
0.56
116
99
219
0.66
0.99
0.05
332
330
25
0.98
0.98
0.98
368
313
419
Natural resource tax
A NOK 0.013 per kWh natural resource tax applies to hydro power activities, based on
one-seventh of the produced kWh for the income year in question and the six previous
years. The natural resource tax is creditable against the standard CIT.
Branch income
Branch income is taxed at the corporate rate of 27% (the same as Norwegian
companies). The basis for taxation is gross income less deductible costs. Both direct and
indirect costs related to the activities carried out in Norway may be deductible.
There is no branch profit tax or other repatriation taxes. However, if assets and/or
liabilities are transferred from a PE in Norway to the head office or another foreign PE
of the same company, this may trigger exit taxation. The transfer of assets to another
corporate entity is subject to regular taxation.
Inventory valuation
Inventory is valued at cost. Cost is normally determined using the first in first out
(FIFO) method. The last in first out (LIFO) method is not acceptable for tax purposes.
Capital gains
Capital gains realised in the course of a business activity are almost always regarded
as taxable income. Gains resulting from real estate transactions are taxed, regardless
of whether they are incurred in connection with business activity. Losses may be offset
against the taxpayers other income.
Capital gains realised on both business-related and non-business-related securities
are, in principle, taxable. In general, any capital gains realised on bonds at maturity
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are regarded as taxable income. Correspondingly, realised losses will be eligible
fordeductions.
Tax-exemption rules for corporate shareholders
Under the tax-exemption rules, corporate shareholders are generally exempt from tax on
dividends received and capital gains on qualifying shares and on derivatives where the
underlying object is qualifying shares. Correspondingly, losses on shares are, in general,
non-deductible. All operational expenses related to exempt income from shares are
fully tax deductible. In order to limit the benefit of these deductions, the tax-exemption
method is, with some exemptions, limited to 97% for received dividends, and the
remaining 3% is taxable for Norwegian corporate shareholders (at a 0.81% effective
tax rate). The 3% taxable income is calculated on dividends. Dividend distributions
within a tax group (where the ultimate parent company directly or indirectly owns
more than 90% of the shares and voting rights) are fully tax exempt. In addition, the
tax-exemption method also applies for certain distributions from partnerships and, on
certain conditions, to foreign-resident companies with taxable activity in Norway (3% of
the income taxable at 27%).
Note that an investment in a company resident in a low-tax country in the EEA has
to fulfil certain substance requirements to qualify for the tax-exemption rules. These
requirements are intended to be in line with the substance requirements of the
European Court of Justices (ECJs) decision in the Cadbury Schweppes case. A country
is considered a low-tax country if the level of effective taxation is less than two-thirds
of the tax that would have been due had the foreign company been resident in Norway.
This is the same test used for the CFC regime (see the Group taxationsection for more
information). The Directorate of Taxes has published a non-exhaustive list of low-tax
jurisdictions (black list) and non-low-tax jurisdictions (white list).
However, for investments outside the EEA, the exemption applies only if a shareholder
owns 10% or more of the share capital and the voting rights of the foreign company for a
consecutive period of two or more years. To be able to deduct losses on the realisation of
shareholdings outside the EEA, the shareholder and/or a related party may not own 10%
or more of the share capital and the voting rights of the foreign company in a two-year
period prior to the realisation. For dividends, the holding period of two years does not
have to be met when dividends are distributed, but can also be met after the ex-dividend
date.
Shareholdings in low-tax countries outside of the EEA do not qualify for the taxexemption rules.
Acquisition and sales related costs (e.g. broker fees) must be added to the cost price of
the shares for tax purposes. Costs incurred to manage acquired tax-exempt shares are,
however, tax deductible.
Norways internal tax rules do not allow taxation of a non-residents capital gain on the
disposal of financial instruments, including shares in Norwegian companies, unless the
non-resident has a PE to which the financial instrument may be allocated.
Stock dividends
Stock dividends (bonus shares) are not taxable on receipt, provided that the dividends
have been distributed in accordance with the Limited Liability Company Acts and
distributed in proportion with the ownership level of the shares.
Interest income
In general, interest income is taxable on an accrual basis.
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Foreign income
A Norwegian resident company is subject to CIT on its worldwide income. Double

taxation of foreign-source income, including foreign-branch income and CFC income, is
mitigated either through tax treaties or domestic tax provisions. A deduction for foreign
tax may either be claimed as an expense or as a credit against Norwegian tax payable
on that income. In most circumstances, foreign dividends are exempt according to the
tax-exemption rules. As a consequence, foreign WHT may not be credited and constitute
a real cost for the companies concerned.
Norway does not have any legislation for the deferral of tax on foreign income.
Deductions
Depreciation
In Norway, the declining-balance method of depreciation is mandatory for capitalised

assets. The depreciation rates given below are the maximum rates.
There is a duty to capitalise an asset that has a value of NOK 15,000 or higher and has an
economic life of at least threeyears.
Asset
Office equipment machines, etc.
Acquired goodwill/business value
Trucks, lorries, buses, taxis, vehicles for persons with disabilities
Cars, tractors, other vehicular machinery, instruments, fixtures and
furniture, etc.
Ships, vessels, offshore rigs, etc.
Aircraft, helicopters
Construction for transmission and distribution of electric power and
electronic equipment in a power company
Buildings and construction, hotels, hostels, inns, etc.
Office buildings
Fixed technical installations in buildings, including heating plant, cooling
and freezing plant, electrical installation, sanitary installation, elevator,
etc.
Depreciationrate(%)
30
20
20
20/30 (1)
14
12
5 (2)
4/6/10 (3)
2
10
Notes
1.
2.
3.
An increased depreciation rate of 30% applies to machines, etc. for the first year of the investment.
Auxiliary and supplementary installations in industrial plants will be depreciated together with the
building and constructions group (10% depreciation if expected operating time is less than 20 years).
In addition, constructions for transfer and distribution of energy, and electronic equipment, used in
other business activities than power generation willbe depreciated at 5%.
The applicable rate is 10% if, from the date of its erection, the structure has an economic life of 20
years or less.
Special depreciation rules apply to assets moved in and out of Norwegian jurisdiction to
and from companies resident outside the EEA.
Goodwill
Acquired goodwill may be amortised according to the declining-balance method at a

maximum of 20% per annum. The tax authorities have, however, on several occasions
recently questioned the allocation to goodwill and claimed that a part of the purchase
price should be allocated to intellectual property, concessions, etc. (which may not be
depreciated unless it is of a time-limited nature). Other intangibles are amortisable on
the condition that they are subject to an evident loss in value (impairment test) or if they
are time-limited.
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Start-up expenses
In general, start-up expenses are deductible, provided that the costs are borne by the
company. Start-up costs could include costs related to registration in the Register of
Business Enterprises, lawyers and accountants fees, drafting articles of association and
shareholders agreement, etc.
Interest expenses
In general, interest expenses are deductible. Norway does not have a rule distinguishing
between different income categories (as in the United Kingdom). If income is exempt
from taxation in Norway pursuant to a tax treaty, corresponding costs or losses would
not be tax deductible.
As of 2014, limitations on tax deductible inter-company interest expenses apply. Please
see the detailed descriptionunder Thin capitalisation in theGroup taxation section for
further information.
Bad debts
In general, receivables are tax deductible if the debt is clearly irrecoverable or realised
(e.g. if the receivable is sold to a third party or waived) and is sufficiently connected
to the companys business (the business requirement). For accounts receivables, a
calculated rate multiplied by the total account receivables at year-end may be deducted.
The rate is calculated based on the two preceding years losses on such receivables
multiplied by a fixed rate set by the Ministry of Finance.
Losses on receivables between group companies (with more than 90% direct or indirect
mutual ownership of shares) and partnerships are, as a main rule, not tax deductible.
However, trade receivables and losses on receivables created in connection with mergers
or demergers are deductible for tax purposes.
Donations to certain charitable institutions are tax deductible. The upper limit for
the tax deduction per year is NOK 12,000. The same limit applies to individuals and
companies. The receiving entity must be pre-approved by the Norwegian tax authorities.
Fines and penalties
Fines and penalties are normally not tax deductible. This also applies to some
administrative charges that are penal in nature. Charges that have no statutory basis in
Norwegian law may be tax deductible, provided that the general conditions are fulfilled.
Taxes
Real estate tax, as well as foreign income and capital taxes paid by the taxpayer,are
deductible when determining corporate income. Foreign taxes derived from income
that is taxable in Norway are deductible only if they have not been credited against
Norwegian tax payable.
Losses may be carried forward indefinitely. Losses incurred in the year of ceasing
business may be carried back for a period of two years.
Royalties and service fees paid to related foreign companies are fully deductible,
provided they meet the arms-length principle. As regards loans, the tax authorities
require that the entity in question is able to service its debts. In addition, any loan terms
should be comparable to those that would have been agreed upon by unrelated parties.
Interest on financing, to the extent that these rules are not satisfied, may be regarded as
dividends and thus non-deductible and, in addition, may be subject to Norwegian WHT.
In addition, as of 2014, limitations on tax deductible inter-company interest expenses
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apply. Please see the detailed descriptionunder Thin capitalisation in theGroup taxation
section for further information.
Group taxation
Income taxes are assessed on companies individually, not on a consolidated basis. This
may be avoided through group contributions between Norwegian companies, provided
common direct or indirect (including foreign) ownership and voting rights is more
than 90%. Furthermore, the Norwegian group contribution rules are, under certain
conditions, also applicable to branches of foreign companies that are resident within the
EEA. Note that group contributions are not deductible for companies engaged in oil and
gas producing activities subject to the Petroleum Tax Act.
Assets may, pursuant to the Group Regulations, be transferred tax-free between group
companies at tax book value for tax purposes and at market value for financial book
purposes. Payment must equal market value of the assets transferred. The same applies
to payment in the form of shares. If the transferee loses the affiliation with the tax group
while still owning the transferred assets, the transferor will be taxed for the difference
between the tax book value and the market value of the assets.
Transfer pricing
In Norway, the arms-length principle for related party transactions is incorporated

into the Tax Act. The transfer pricing provision of the Tax Act states that the OECD
Guidelines shall be taken into account when addressing transfer pricing issues under
Norwegian tax law.
A few years ago, the resources of the Norwegian tax authorities were limited, and
their interest tended to focus on intra-group services and the financing of operations.
However, this has changed considerably as transfer pricing has increasingly become
the focus of the tax authorities attention. In addition, the resourcing issues have been
addressed. It is fairly common for the Norwegian tax authorities to choose test cases that
are subject to substantial investment. During the most recent years, focus has been on
business restructuring and commissionaire arrangements.
Norway does not yet have an advance pricing agreement regime. Nevertheless, it is
becoming more common to discuss complex cases with the tax authorities in advance of
implementation or before assessment. Furthermore, there are no safe harbour rules or
any other official guidance of how to price specific transactions, etc.
Thin capitalisation
There is no fixed debt-to-equity ratio requirement in Norwegian tax law. However, for
companies that are part of a group, adjustments may be made under the arms-length
provisions. Generally, these provisions apply only if the company has obtained a larger
loan from a group company than an independent credit institution would have granted,
or if the agreed level of interest is higher than an independent credit institution would
have required. Naturally, this analysis will vary based on the actual companys credit
worthiness, which consists of several elements, such as the nature of the business,
financial status, future income possibilities, and group relationships. As such, there is no
applicable safe harbour. The company must also be able to service its debts.
If a Norwegian entity is regarded as being thinly capitalised, part of the entitys interest
and debts may be reclassified to dividend and equity.
As of 2014, limitations apply to tax deductible inter-company interest expenses. In
general, interest expenses to related parties that exceed 30% of a Norwegian companys
taxable earnings before interest, taxes, depreciation, and amortisation (EBITDA),
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with some adjustments, will not be tax deductible. The new regulations only apply to
companies that have more than NOK 5 millionin total net interest expenses.
Two parties are related if one party directly or indirectly owns or controls the other party
by at least 50%. Related parties may be resident in Norway or abroad.
External loans can also, under certain conditions, be regarded as intra-group loans if
an entity has provided securities for the debt of a related party. However, an exemption
applies if the security is provided by a company that owns or controls more than 50% of
the shares in the lender or if the security is the shares in the lender.
The interest deductibility limitation is calculated for each entity in the group. Disallowed
interest deductions may be carried forward for ten years.
The limitation applies both to local and foreign companies that have a taxable presence
in Norway, as well as partnerships, CFCs, etc. The new regulations will also apply to
interest costs on loans entered into prior to 2014.
Norwegian residents are taxed directly on their allocable part of the profits from a CFCs
income if the company is resident in a low-tax country, irrespective of whether income
is distributed to the Norwegian investor. A low-tax country, in this respect, is a country
where the effective foreign income taxation of the companys profits is less than twothirds of the effective taxation that would have been due had the company been resident
in Norway. A condition for such taxation is that 50% or more of the foreign companys
shares or capital is held or controlled, directly or indirectly, by Norwegian taxpayers
(alone or together), based on the status at the beginning and end of the income year in
question.
Note that if Norwegian taxpayers own or control more than 60% of the shares or capital
at the end of the income year, Norwegian control exists irrespective of the level of
control at the beginning of the year. Norwegian control ceases to exist if Norwegian
taxpayers own or control less than 50% of the shares or capital at both the beginning
and end of the income year or less than 40% of the shares or capital at the end of the
income year.
On the condition that Norway has signed a tax treaty with the country involved and the
company in question is covered by the treaty, the CFC rules will be applicable only if the
income of the entity in question is mainly of a passive nature. Furthermore, CFC taxation
may also be prohibited if the company in question is resident within the EEA and cannot
be deemed as a wholly artificial arrangement as outlined in the ECJs decision in the
Cadbury Schweppes case. Hence, CFC taxation will be avoided for EEA companies that
fulfil certain substance requirements.

Foreign tax credit
Norwegian limited liability companies that have paid taxes on foreign-source income
may, undercertain conditions, offset the Norwegian tax paid against the foreign tax
paid. The tax credit is limited to the lower of the Norwegian tax paid on the same type of
foreign income and the foreign tax actually paid. It is possible to carry forward unused
foreign taxes for five years. A credit claimed in accordance with the regulations stated
above may not be used in addition to deductions pursuant to other rules and regulations.
These rules are very technical, and it should be noted that there are three different
baskets of income.
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Roll-over regulations
Upon application, the Ministry of Finance has the authority to grant tax relief on the
transfer of assets within a group. The transfer may be carried out between group
companies (more than 90% ownership and voting rights) or partnerships (with mainly
the same owners). If a tax relief is granted, the transfer would not trigger any taxation
at the time of the transfer, but all tax positions, including the tax basis of the transferred
assets, will be transferred to the acquiring company. A condition for the tax relief is
normally that the companies remain within the group.
The Ministry of Finance also has the authority to grant tax relief on the realisation
of property, business, shares, etc. during a reorganisation. The reorganisation must
improve the efficiency of the business to qualify for tax relief, and, accordingly,
administrative effects would not be sufficient. The tax relief must also help companies to
carry out the reorganisation. In addition, the tax relief must not reduce the Norwegian
tax base; the tax positions would be transferred to the new taxpayer.
SkatteFUNN research and development (R&D) tax incentive scheme
The SkatteFUNN R&D tax incentive scheme is a government program that is designed
to stimulate R&D in Norwegian trade and industry. Businesses and enterprises that are
subject to taxation in Norway are eligible to apply for tax relief.
All Norwegian companies and branches with R&D projects can apply for a deduction
of up to 20% of incurred costs, limited up to a cost base of NOK 5.5 million for selfdeveloped R&D and NOK 11 million for R&D purchased from approved institutions.
With effect from 2014, the limit is increased to NOK 8 million for self-developed R&D
and NOK 22 million for purchased R&D. If the company does not have taxable gain
for the income year in question, the company will receive a cash refund for the year
following the income year.
The main criterion for applying for SkatteFUNN is that the company has an R&D project
with the aim of developing a new or improved asset, service, or production process.
There are no requirements regarding type of business. A distinction is made against
ordinary product development without developing new knowledge, functions, etc., the
ordinary day-to-day business operations, etc.
The application for SkatteFUNN must be approved by Norges Forskningsrd (The
Research Council of Norway) and is awarded for a period of a maximum of three years.
If the application is approved, there is a requirement to submit a form attested by the
companys auditor together with the ordinary tax return in order to obtain the tax
incentive.
Withholding taxes
Norway does not levy WHT on payments of royalties and interest, except on interest
derived from primary capital certificates (Egenkapitalbevis).
The internal WHT rate is 25%, which may either be reduced under the tax-exemption
rules or by an applicable tax treaty. To qualify for the tax-exemption rules, the recipient
of the dividends has to be a corporate investor resident in an EEA country and must also
fulfil certain substance requirements.
Dividends
Recipient
Non-treaty
Regular rate (%)

25
Parent/subsidiary rate (%)

25
Norway
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Recipient
Treaty:
Albania
Argentina
Australia
Austria
Azerbaijan
Bangladesh
Barbados
Belgium
Benin
Brazil
Bulgaria
Canada
Chile
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Faroe Islands
Finland
France
Gambia
Georgia
Germany
Greece
Greenland
Hungary
Iceland
India
Indonesia
Israel
Italy
Jamaica
Japan
Kazakhstan
Kenya
Korea, Republic of
Latvia
Lithuania
Luxembourg
Macedonia
Malawi
Malaysia
Malta
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Regular rate (%)
15
15
15
15
15
15
15
15
20
15
25
15
15
15
15
15
5
15
15
15
15
15
15
15
15
10
15
20
15
10
15
10
15
15
15
15
15
15
15
15
25
15
15
15
15
15
5
0
15
5 (1)
10 (1)
0 (11)/5 (4)
0 (1)
10 (2)
10 (3)
5 (3)
5 (1)
20
15
25 (8)
15
5 (4)
5 (5)
15
15
0 (6)
0 (3)
0 (3)
15
5 (1)
0 (3)
0 (3)
5 (3)/0 (1)
5 (1)
5 (3)
0 (1)
20
5 (3)
10
0 (3)
10
15
5 (3)
5 (6)
15
15
15
5 (5)
5 (3)
15 (5)
15
5 (1)
5 (1)
5 (1)
10 (1)
0 (6)
0
0 (14)
Norway
Recipient
Mexico
Montenegro
Morocco
Nepal
Netherlands
Netherlands Antilles
New Zealand
Nordic Treaty
Pakistan
Philippines
Poland
Portugal
Qatar
Romania
Russia
Senegal
Serbia (not Montenegro)
Sierra Leone
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tanzania
Thailand
Trinidad and Tobago
Tunisia
Turkey
Uganda, Republic of
Ukraine
United Kingdom
United States
Venezuela
Vietnam
Zambia
Zimbabwe
Regular rate (%)

15
15
15
15
15
15
15
15
15
25
15
15
15
10
10
16
15
5
15
15
15
15
15
15
15
15
20
15
20
20
15
15
15
15
15
10
15
15
20

0 (1)
15
15
5 (1)/10 (3)
0 (1)
5 (1)
15
0 (3)
15
15 (3)
0 (10)
5 (13)
5 (3)
10
10
16
15
0 (6)
5 (1)
5 (1)
0 (9)
5 (1)
10 (1)
15
0 (3)
0 (3)
20
10 (3)
10 (5)
20
5 (12)
10 (1)
5 (1)
5 (4)
15
5 (3)
5/10 (7)
15
15 (1)
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
25% of the capital.

30% of the capital and an investment of no less than 100,000 United States dollars (USD).
10% of the capital.
10% of the voting rights.
5% for over 70% of the capital; 10% for 25% to 70% of the capital.
Internal Norwegian WHT rate (i.e. 25%).
15% of the capital.
10% of the capital for an uninterrupted 24-month period.
80% of voting rights.
20% of the capital provided that such dividends are exempt from tax in the other state.
10% of the capital for an uninterrupted 12-month period.
10% of the capital for an uninterrupted 24-month period (effective from 1 January 2014).
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Tax administration
Taxable period
The income tax year normally runs from 1 January to 31 December, with assessments
being issued in early autumn of the following calendar year. Companies are liable
for both advance payments and final settlements in the calendar year of assessment.
Companies with a financial year other than the calendar year may use the financial
year for tax purposes in certain instances (e.g. if they belong to a foreign group with
a deviating accounting year, theymay use the financial year of the group for tax
purposes).
Tax returns
Companies are required to file their tax returns by the end of March in the year following
their financial year. If filed electronically, the return must be filed by the end of May.
Upon application, an extension of the time limit to file will normally be granted. The tax
returns and the basic attachments are obligatory for all corporate taxpayers. Additional
requirements may apply for specific business sectors, such as hydro power production.
Under the petroleum tax regime, the filing deadline is the end of April, regardless of
whether filed electronically or not.
The annual assessment is made by one of five regional tax departments, who notify the
taxpayer if it has been determined that the taxable income will deviate from what was
submitted in the tax return.
Payment of tax
Companies are required to make advance payments of tax on 15 February and 15 April
in the year following the income year. The two payments should together cover all of the
expected CIT to be assessed. Any balance must be paid three weeks after the assessment
has been made public (i.e. in early autumn of the year following the relevant accounting
year).
The above applies to all corporate taxpayers, except for taxpayers under the petroleum
tax regime, where tax shall be paid in six instalments.
Tax audit process
The Norwegian tax system is tax return based. The Norwegian tax office carries out tax
audits based on different selection criterions. A tax audit can be caused by the ordinary
review of the tax return, random selection of companies or business sectors, information
obtained from other parties, etc.
The tax office normally gives notice of an upcoming tax audit, but it can also
be unannounced. The examination generally takes place by formal, written
communication, and the process can take from a few weeks to several years.
The tax office has a ten-year limit for reassessing tax assessment for all open years
(from the year after the income year in question). However, a two-year limit applies for
negative adjustments and a three-year limit for positive adjustments if the taxpayer has
provided sufficient and correct information in the tax return.
The taxpayer may file an appeal on the tax assessment within six weeks after the
taxpayer receives it. The time limit for appealing other decisions is normally three weeks
after the tax offices decision.
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The tax offices topics of focus can vary each year and from region to region. The primary
topics of focus lately have been thin capitalisation, transfer pricing, and tax losses on
receivables.
Other issues
Foreign Account Tax Compliance Act (FATCA) agreement with the
United States
In April 2013, Norway entered into an FATCA agreement with the United States. The
agreement is based on theUS FATCA regulations and is the basis for information
exchange between the Norwegian andUS tax authorities with regards to financial
transactions.
According to the agreement, Norwegian financial institutions can report to the
Norwegian authorities instead of reporting to theUS authorities. It is expected that this
will ease the reporting liabilities for Norwegian financial institutions.
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1489
Oman
PwC contact
Russell Aycock
Hatat House A
Suites 204-210
Wadi Adai, Muscat
Oman
Tel: +968 24 559 110
There have been no significant corporate tax developments in Oman during the past
year.

The rate of income tax is uniform for all types of business entities, regardless of whether
it is a corporate entity and/or whether it is registered or not.
The Income Tax Law seeks to tax worldwide income of entities formed in Oman and the
Oman-source income of branches and other forms of permanent establishment (PE).
The income tax rate is as follows:
Taxable profits (OMR*)
First 30,000
Over 30,000
Rate (%)
0
12
* Omani rial
Petroleum income tax
Special provisions are applicable to the taxation of income derived from the sale of
petroleum. The tax rate specified for such companies is 55%. However, the tax rates are
applied on income as determined by the individual Exploration and Production Sharing
Agreement entered into between the government of Oman and the company engaged
in the sale of petroleum. Under these agreements, the government pays the companys
share of income tax from amounts withheld from the governments share of production.
Therefore, the income tax is not actually borne by the company.
Local income taxes
There are no local income taxes in Oman.
Corporate residence
The term resident is not defined in the tax law.
PE is defined in very broad terms and includes places of sale, places of management,
branches, offices, factories, workshops, mines, quarries, and building sites for
construction. However, the mere use of storage or display facilities does not constitute
a PE. The definition of PE references carrying on business in Oman, either directly or
through a dependent agent.
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Oman
Additionally, the definition stipulates that a total stay of 90 days during a 12-month
period creates a PE in Oman. However, this 90-day period applies to rendering of
consultancy services or other services only. Under this definition, while the sale of goods
into Oman will not be deemed to be a taxable activity, a contract for the supply and
installation of equipment is likely to attract tax. By the same criterion, services rendered
by personnel visiting Oman will be treated as taxable activities, applying the 90-day rule.
Other taxes
There is no VAT or sales tax in Oman.
Customs duty
Customs duty of 5% of cost, insurance, and freight (CIF) value applies to most non-Gulf
Corporation Council (GCC) source goods. Exemptions apply for certain food items,
medical supplies, etc.
Excise taxes
There are no excise taxes in Oman.
Property taxes
There are no property taxes in Oman.
Stamp duty
Stamp duty is applicable on transfer of land and property at 3% of the value.
A 17% social security contribution is applicable to employees who are Omani nationals,
but not to expatriate employees. The employee pays a contribution of 6.5% of salary, and
the employer pays the balance of 10.5%.
Municipal taxes
Municipal taxes apply to the following items:

Property rents: 3%.
Hotel occupancy: 5%.
Leisure and cinema houses: 10%.
Branch income
Branches of foreign entities (regardless of country) are subject to tax at the rate of 12%
on income over OMR 30,000.
Expenses incurred by the head office that can be identified as directly related to the
branchs activity are deductible. The deduction for other head office expenses is limited
to 3% of the branchs gross income for the year. This rate is 5% for banks and insurance
companies, and 10% for high tech industrial activities.
Inventory valuation
Inventory should be valued using a method that complies with International Accounting
Standards.
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Capital gains
Gains on sales of securities listed on the Muscat Securities Market are exempt from
taxation. Gains on transfers of other assets are taxable as ordinary income.
Dividend income
Dividends received from Omani entities are exempt from taxation. Foreign-source
dividends are taxable. Foreign-source dividends are taxed as the same rates as corporate
income.
Stock dividends
There are no provisions in the tax law that address stock dividends.
Interest income
Interest income is taxable as business income.
Rent/royalty income
Rental income and royalties are taxed as business income.
Unrealised exchange gains are not taxable. Similarly, any unrealised loss is not
deductible from the total taxable income.
Foreign income
Worldwide income of an entity formed in Oman is taxed in Oman. Credit for foreign
taxes paid is given under the law; however, this may not exceed the amount of Omani
tax payable on such income.
The Oman tax law does not contain rules on deferral of foreign income.
Deductions
Depreciation
Depreciation is taken on a straight-line basis on the following classes of assets at the

annual rates shown.
Asset
Permanent buildings
Semi-permanent buildings
Docks, sea barriers in ports, pipelines, roads, and railway lines
Aircraft and ships
Hospital buildings, educational establishments, and equipment for scientific research
Rate (%)
4
15
10
15
100
The rate of depreciation allowed is doubled in the case of buildings used for industrial
purposes.
The tax law now provides for calculation of depreciation on a net book value basis
for the following class of assets. A pooling concept has been introduced, whereby
assets subject to same rate of depreciation may be pooled together for purposes of
depreciation.
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Pool
First pool is comprised of machinery and equipment, including computer software
installations, furniture and fixtures, and vehicles
Second pool is comprised of drilling equipment
Third pool is comprised of other machinery and equipment not included above
Rate(%)
33.33
10
15
Goodwill
Goodwill is amortisable for tax purposes, generally over the life assigned for
International Financial Reporting Standards (IFRS) accounting purposes.
Start-up expenses
Expenses incurred before the commencement of business are allowed as a deduction in

the first taxable year (or period).
Interest expenses
Deduction of expenses incurred for the purpose of earning income is generally allowed.
Interest expense is allowed for loans from unrelated parties or on loans from banks.
Interest paid to related parties is allowed only to the extent the loan terms are at arms
length.
Bad debts and other contingencies
Amounts charged to the profit and loss account for creating provisions in respect of
bad debts, stock obsolescence, warranties, and similar types of contingencies are not
tax deductible. Deduction is allowed only at the time of write-off. However, provisions
created by licensed banks in respect of bad debts are allowable within the limits
approved/required by the Central Bank of Oman.
Charitable donations are limited to specified institutions and organisations and are
subject to an overall limitation of 5% of total income.
Meals, entertainment, officers compensation, etc.
All expenses incurred for the generation of gross total income are allowed. There
are no specific restrictions on deduction for expenses like meals and entertainment,
compensation for officers, and life insurance payments for employees. There are limits
on the deductibility of directors fees.
Social security payments
Social security contributions paid by employers in respect of employees may also be

deducted.
Pension payments
Contributions to pension funds, domestic and foreign, are deductible, provided the fund
is licensed (in Oman or the country where it was established) and complies with certain
other specified conditions.
Illegal payments
Payments of bribes or kickbacks, and other illegal payments, are not deductible.
Fines and penalties
Civil fines and penalties are not deductible.
Taxes
Taxes on income, whether incurred in Oman or elsewhere, are not deductible in arriving
at taxable income. A credit may be available for taxes paid in a foreign jurisdiction.
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Other significant items/restrictions on allowable expenses
The tax law has imposed restrictions on the deductibility of certain other expenses. The
principal items affected are the following:
Sponsorship fees paid to Omani sponsors are restricted to 5% of net taxable income
before sponsorship fees. Net taxable income is determined after offsetting any losses
carried forward.
Charges or expenses allocated from the head office or other group companies are
limited to 3% of gross income (5% for banks and insurance companies, and 10% for
high tech industrial activities).
Commissions paid by insurance companies are restricted to 25% of net premiums
collected.
Leasing companies are treated at par with banks as far as deduction for loan loss
provision is concerned. Leasing companies are allowed deductions for loan loss
provisions, subject to the limits or recommendations of the Central Bank of Oman.
Losses arising on sale of investments listed on the Muscat Security Market are not
allowed as a deduction from taxable income.
Any expense or costs that have been incurred to generate income exempted from tax
are not allowed as a deduction from taxable income.
Amounts paid as tax consultancy or advisory fees are disallowed.
Carryforward of losses is limited to five years, except in the case of companies that
incurred losses during a mandatory tax-exempt period, where the net losses may be
carried forward indefinitely for offset against future profits.
Payments to foreign affiliates normally receive in-depth scrutiny from the tax
authorities. Accordingly, proper documentation should be obtained in order to establish
that these transactions are made at an arms-length basis.
Group taxation
Businesses are taxed as separate entities, and the tax law does not recognise group
taxation.
Transfer pricing
Transactions between related parties must be valued at arms length. There is no specific
guidance on acceptable methods for determining an arms-length price.
Inter-company payments
All inter-company payments are scrutinised in detail to ensure that the profits are not
transferred to avoid payment of tax.
Thin capitalisation
If the debt-to-equity ratio exceeds 2:1 in the case of related party debt, interest on
the excess debt is not deductible for tax purposes. This rule does not apply to banks
and insurance companies, PEs of foreign companies, or proprietary (Omani owned)
establishments.

There is no CFC regime in Oman.
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Foreign tax credit
A foreign tax credit is available to Omani companies or establishments (proprietorships)

who suffer foreign taxes on income that is also taxed in Oman. The credit is limited to
the amount of tax incurred in Oman. The taxpayer is required to submit an application
to the Secretariat General for Taxation to claim such credit.
Exempt activities
Income from the principal activities listed below is exempt from tax, if an exemption is
applied for and obtained.

Industry and mining.

Export of products manufactured or processed locally.
Operation of hotels or tourist villages.
Agriculture and animal husbandry and the processing of agricultural produce.
Fishing and fish processing and aquaculture.
University education, college or institutes of higher studies, private schools,
nurseries, training colleges, and institutes.
The exemption is valid for a period of five years from the date of commencement of
production or the practice of activities and may be made subject to such conditions as
the Minister of Commerce and industry may specify. The exemption is renewable for a
period not exceeding five years, subject to approval by the Financial Affairs and Energy
Resources Council.
Exempt income
The following income is exempt from income tax in Oman:

Dividends received from an Omani company.
Profits or gains on disposal of securities listed on Muscat Security Market.
Omani marine companies, whether wholly owned by Omanis or with foreign and
Omani ownership and registered in Oman, are exempt from tax. Foreign marine
companies conducting activities in Oman through an authorised agent are exempted
from tax with effect from the date of commencement of activity, provided that
reciprocal treatment is afforded by the country of the foreign company.
Income realised by foreign airlines carrying on business through PEs in Oman is
exempt from tax. This exemption is limited to the extent of the income from operating
airplanes for international transport, provided reciprocal treatment is accorded in the
airlines home country.
Income realised by investment funds established in Oman under the Capital Market
Authority Law or established overseas for dealing in shares and securities listed on
Muscat Security Market is exempt.
Foreign companies engaged in oil and gas exploration activities, while taxable under
the law, normally have their tax obligations discharged by the government under the
terms of the Exploration and Production Sharing Agreement.
Foreign companies working for the government in projects deemed to be of national
importance may be able to negotiate a tax protection clause whereby any tax paid by
them is reimbursed by the government.
Withholding taxes
Foreign companies that do not have a PE in Oman for tax purposes and that derive
income from Oman in the nature of the following are subject to withholding tax (WHT)
at 10% of gross income from such sources:
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Royalty.
Consideration for research and development (R&D).
Consideration for use of or right to use computer software.
Management fees.
Such WHT is required to be withheld by the Omani-based company and paid to the tax
department within 14 days of the end of the month in which tax is deducted or payments
are due or made to the foreign company.
There is no WHT on dividends and interest payments.
The term royalty has been defined under the law to include consideration for the
use of intellectual property, including computer software, cinematography films,
tapes, discs, or any other media, patents, trademarks, drawings, etc. The term further
includes consideration for using industrial, commercial, or scientific equipment
and consideration for information concerning industrial, commercial, or scientific
experience or consideration for granting rights to exploit mining or other natural
resources.
The maximum WHT rates provided by the Oman DTTs are shown in the table below.
There are also agreements with various countries that are not yet in force.
Recipient
Belarus
Brunei
Canada
China
Croatia
France
India
Italy
Korea
Lebanon
Mauritius
Moldova
Morocco
Pakistan
Seychelles
Singapore
South Africa
Thailand
Tunisia
Turkey
United Kingdom
Uzbekistan
Vietnam
Dividends (%)
5
5
5 (1)/15
5
0
0
10 (1)/12.5
5 (2)/10
5 (1)/10
5 (3)/10
0
5
5 (1)/10
10 (1)/12.5
5
5
5 (1)/10
10
0
10 (2)/15
0/10 (8)
7
5 (5)/10 (6)/15
Interest (%)
5
10
10
10
5
(7)
10
5
5
10
0
5
10
10
5
7
0
10 (4)/15
10
10
0
7
10
Royalties (%)
10
10
10
10
10
7
15
10
8
10
0
10
10
12.5
10
8
8
15
5
10
8
10
10
Notes
1.
2.
3.
4.
5.
1496
10% minimum shareholding required.

Interest received by financial institutions (including insurance companies) or loans/debt claims
guaranteed by the government of the source state.
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6.
7.
8.
25% to 60% minimum shareholding required.

Only the country from which the payment is made (source country) may tax.
Dividends paid out of income derived from immovable property by an investment company or
investment fund.
Tax administration
Taxable period
The tax year is the calendar year. Assessments can be made on the basis of a year-end
other than 31 December, provided permission is granted in advance by the Omani tax
authorities and the company then adheres to the year-end on a consistent basis.
Tax returns
A provisional declaration of tax must be submitted in the prescribed form within three
months from the end of the accounting period to which it relates. The final annual
return of income should be submitted in the prescribed format within six months from
the end of the accounting period to which it relates. Reasonable time extensions can
be sought and are normally provided for filing the provisional and annual returns of
income, but these do not defer payment of tax, which will be subject to additional tax at
1% per month from the due date to the actual date of payment.
In the case of companies having a paid-up capital in excess of OMR 20,000, the annual
return of income should be accompanied by audited accounts signed by an auditor
registered in Oman. The law requires accounts to be drawn up in accordance with
IFRS consistently applied. It specifically provides for accrual accounting unless prior
permission of the Secretary General of Taxation (the Secretary General) has been
obtained. The accounts must be submitted in local currency unless prior approval of the
Secretary General has been obtained for submitting them in foreign currency.
Delay or failure in submitting the provisional or annual returns may attract a penalty of
not less than OMR 100 and not more than OMR 1,000.
Failure to file the provisional or annual returns of income may result in an estimated
profit assessment by the Secretary General.
Failure to submit audited accounts as required under the Law is deemed to result in an
incomplete annual return of income and may attract an estimated profit assessment.
The law confers wide powers on the Secretary General for requesting information.
Experience has shown that, notwithstanding the presentation of audited accounts,
the tax department requests very detailed information and supporting documentation
relating to revenue and expenses. Failure to provide such information or the provision
of incorrect information can result in an additional assessment by the Secretary General
and/or various penalties on the company and/or the officer responsible for providing
the information.
Payment of tax
Any tax estimated to be payable in respect of an accounting period should be paid with
the provisional assessment and topped up for any additional amount computed as
payable following submission of the annual return of income. Failure to pay taxes by the
due date attracts interest at the rate of 1% per month from the date on which such tax
was due to the date of payment.
The difference between the amount paid and the amount assessed, subject to filing of
an objection, should be paid within one month from the date of the assessment. The
additional amount assessed attracts interest at the rate of 1% per month from the date
on which such tax was due to the date of payment.
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Under the Law, the Secretary General has the authority, with the approval of the
Minister and the Tax Committee, to sequester and sell the assets of a taxable entity to
recover the taxes due.
If decisive proof is presented to the Secretary General that any person has paid tax for
any year exceeding the tax due and payable for such tax year as finally settled, such
person has the right to recover the tax. However, if any tax has become payable by such
person in respect of another tax year, the excess amount will be adjusted against the
future tax liability. Any request for recovery must be presented within five years from the
end of the tax year to which it relates.
Where the taxpayer fails to declare correct income in the tax return for any tax year,
the Secretary General may impose a fine not exceeding 25% of the difference between
the amount on the basis of the correct taxable income and the amount of tax as per the
return submitted.
Objections and appeals
A company has a right to object to any assessment issued by the Secretary General. The
objection document should be prepared in writing (in English and in Arabic) and filed
with the office of the Secretary General for Taxation within 45 days from the date of
assessment. The Secretary General is required to give a judgment within five months,
extendable up to another five months at the Secretary Generals discretion, from the
date of receiving the objection. The tax demanded may be kept in abeyance on request.
No additional tax is payable until the Secretary General issues the judgment.
The tax authorities have a period of up to five years from the end of the year in which a
tax return is submitted to complete the assessment for that tax year. However, where the
entity has not submitted any tax return, the tax authorities have a period of ten years to
complete the assessments.
Maintenance of records
The Law requires accounting records and supporting documentation to be maintained

for ten years after the end of the accounting period to which these records relate.
Related party transactions are likely to attract particular scrutiny by the tax authorities.
Taxpayers should maintain documentation that proves that transactions are carried on
at arms length.
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Pakistan
PwC contact
Syed Shabbar Zaidi
A.F. Ferguson & Co., Chartered Accountants (a member firm of PwC network)
State Life Building 1-A
I.I. Chundrigar Road
Karachi-74000
Pakistan
Tel: +92 21 32413849
The following significant developments in corporate taxation have recently occurred in
Pakistan:
The rate of sales taxhasincreased from 16% to 17%.
Minimum tax hasincreased from 0.5% to 1% of turnover.
The province of Khyber Pakhtunkhwa has introduced an Act to collect and levy sales
tax on services. Now, three provinces, Sindh, Punjab, and Khyber Pakhtunkhwa have
introduced their own sales tax acts.
Banking companies are now required to give access to prescribed information of their
deposit holders to the Federal Board of Revenue.
Penalties against offences under the tax law have been enhanced.
The corporate tax rate for tax year 2014 (only) hasdecreased from 35% to 34%.
Pending legislation
announced in June or July. Please visit the Worldwide Tax Summaries website at www.
pwc.com/taxsummaries to see any significant corporate tax developments that occurred
after 1 June 2014.

A resident company is taxed on its worldwide income. Non-resident companies
operating in Pakistan through a branch are taxed on their Pakistan-source income,
attributable to the branch, at rates applicable to a company. The federal corporate tax
rates on taxable income are as follows:
Company type
Banking company
Public company other than a banking company
Any other company
Small company (see the Tax credits and incentives section for more information)
Tax rate (%)

35
35
35
25
Note that the corporate tax rate for tax year 2014 (only) has decreased from 35% to 34%
for companies other than banking companies.
The term public company implies a company listed on any stock exchange in Pakistan
or one in which not less than 50% of the shares are held by the federal government or a
public trust.
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In the case of a modaraba (see the Income determination section for a definition), income,
except relating to trading activities, is exempt from tax, provided that 90% of its profit is
distributed to the certificate holders as cash dividends.
The final tax regime (FTR) for resident taxpayers, a presumptive tax scheme where taxes
are withheld at the source on the sale of goods and execution of contracts or collected
at the time of import (for other than industrial raw materials), is considered a final tax
liability in respect of income arising from the sale, contract, or import.
In the case of exports, tax collected at the time of realisation of foreign-exchange
proceeds is treated as final tax for that income.
The FTR is also applicable to non-resident taxpayers, at their option. However, it is only
applicable in cases of receipts on account of the execution of a contract for construction,
assembly, or installation, including a contract for the supply of management activities
in relation to such project as well as certain contracts for services and contract for
advertisement services rendered by television satellite channels.
Taxation of a permanent establishment (PE) of a non-resident
The following principles shall apply in computing taxable income of a PE:

It is a distinct and separate entity dealing independently with the non-resident of
which it is a PE.
In addition to business expenditure, executive and administrative expenditure,
whether incurred in Pakistan or elsewhere, will be allowed as deductions.
Head office expenditure, including rent, salaries, travelling, and any other
expenditure that may be prescribed, shall be allowed as a deduction in proportion to
the turnover of the PE in the same proportion as the non-residents total head office
expenditure bears to its worldwide turnover.
Royalties, compensation for services (including management services), and interest
on loans (except in banking business) payable or receivable to or from PEs head
office shall be considered in computing taxable income of PE.
No deduction will be allowed for any interest paid on loans acquired by a nonresident to finance the operations of a PE (or for the insurance premium in respect of
such loans).
Minimum tax
Where the tax payable by a company is less than 1% of the turnover, except where
the company is in a loss position before charging depreciation and other inadmissible
expenses, the company is required to pay a minimum tax equivalent to 0.5% of the
turnover. Tax paid in excess of normal tax liability can be carried forward for adjustment
against tax liability of a subsequent tax year. However, such tax can only be adjusted
against tax liability of the five tax years immediately succeeding the tax year for which
the amount was paid.
Local taxes on income
No local taxes are payable in respect of income of companies.
Corporate residence
A company is resident in Pakistan if it is incorporated or formed by or under the law of
Pakistan or if the control and management of its affairs is situated wholly in Pakistan in
that year.
The term company includes a trust, a cooperative society, a finance society, or any other
society established or constituted by or under any law; a corporate body incorporated
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outside Pakistan; and any foreign association, incorporated or unincorporated, that the
Central Revenue authorities may declare to be a company.
A PE is a place of business through which the business of a non-resident is wholly or

partly carried out, including:
A place of management, branch, office, factory or workshop, premises for soliciting
orders, warehouse, permanent sales exhibition, or sales outlet, except a liaison office.
An agriculture, pastoral, or forestry property.
A mine, oil or gas well, quarry, or any other place of extraction of natural resources.
A building site; a construction, assembly, or installation project; or supervisory
activities connected with such site or project if such activity continued for more than
90 days within any 12-month period.
The furnishing of services, including consultancy services, by any person through
employees or other personnel engaged by the person for that purpose.
A person acting in Pakistan on behalf of the person, other than an agent of
independent status acting in the ordinary course of business.
Any substantial equipment installed, or other asset or property capable of activity
giving rise to income.
The definition of a PE provided in a double taxation treaty (DTT) will prevail in cases
where a DTT is executed by Pakistan with the related country of origin of the PE.
Other taxes
VAT (locally termed as sales tax) is ordinarily levied at 17% on the value of goods,
unless specifically exempt, after allowing related input credits.
Telecommunication services are levied VAT at the rate of 19.5%. VAT on services,
including telecommunication services, is a provincial levy.
Significant zero-rated goods are as follows:

Supplies and repair and maintenance of certain ships and aircraft.

Supplies to diplomatic missions and diplomats.
Supplies of raw materials, components, and goods for export processing zones.
Supplies of locally manufactured plant and machinery to export processing zones and
supplies of certain specified machinery to the exploration and production sector.
Supplies to exporters.
Significant exemptions are as follows:
Live animals and live poultry.
Live plants.
Vegetables, pulses, edible fruits (excluding imported fruits), certain spices, sugar
cane, edible oils, etc.
Milk preparations.
Newsprints, newspapers, journals, periodicals, and books.
Agricultural produce not subjected to any process.
Customs and import duties
Customs and certain other duties are collected at the import stage at varying rates
classified under the Harmonized System (HS) Code.
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Excise duty
Federal excise duty (FED) is levied at the rate of 17% on certain types of manufacturing,
import of goods, and rendering of services, except telecommunications services, which
are charged at the rate of 19.5%. FED, under the constitution, is to be levied and
collected by the provinces. Sindh, Punjab, and Khyber Pakhtunkhwa provinces have
promulgated their statute, and others are expected to follow.
Property taxes
Property owners are required to pay property tax levied and collected by provincial
governments through municipal governments at varying rates.
Stamp duty
In the case of sale or transfer of immovable property, stamp duty is payable (with
varying rates on the basis of location of the property) on the value of the property.
Branch income
The rates of tax for a branch of a company incorporated outside Pakistan are the same as
those applicable on resident companies, other than public and banking companies (i.e.
35%, except for tax year 2014 where 34% is applicable). Tax at the rate of 10% is levied
on the transfer of profits to the head office, with an exception for companies engaged in
the oil and gas exploration and production business.
Payments to a branch in Pakistan of a non-resident are subject to deduction of tax
at source on the same basis as a resident in the case of sale of goods, rendering of
professional services, and execution of contracts. In other circumstances, a reduced/0%
withholding tax (WHT) certificate can be obtained from the Commissioner of Income
Tax.
Pakistan has signed agreements for avoidance of double taxation with over 60 countries.
Inventory valuation
Inventories are to be stated at the lower of cost or market. The first in first out (FIFO)
and average methods are accepted. Conformity of methods used for book and tax
reporting is desirable, and the method used should be consistently applied.
Capital gains
Capital gain on the sale of immovable property, on which depreciation is not allowed, is
taxed at the rate of 10% if disposed of within one year and 5% if disposed of within two
years. However, if the retention period is more than two years, the gain is not taxable.
Gain on the disposal of shares of a resident company or a non-resident company, whose
assets wholly or principally consist of immovable property situated in Pakistan or rights
to explore/exploit natural resources in Pakistan, shall be Pakistan-source income.
Capital gains on the sale of shares of public companies or modaraba (profit sharing)
certificates are exempt from tax if held for a period of more than 12 months. Capital
gains on shares and modaraba, if held for less than 12 months, are taxable under two
categories, (i) held for less than six months and (ii) held for more than six months but
less than 12 months at 7.5% and 10%, respectively, to be gradually enhanced to 17.5%
and 10%, respectively, by 2015.
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Capital gain, other than on statutory depreciable assets, realised within one year of
acquisition is fully taxed; after one year, 75% of such gains are taxed and 25% are
exempt.
Capital gains on statutory depreciable assets (other than immovable property) are
chargeable to tax as normal business income in the year of sale. They are measured as
the difference between the sale proceeds and the tax written-down value of the relevant
asset sold.
In the case of an asset disposal transaction that is on a non-arms-length basis, fair
market value of the asset shall be taken to be the consideration received by the seller, as
well as the cost for the buyer.
Where assets are transferred outside Pakistan, the original cost is treated as the sale
price, which means that the entire depreciation is recaptured at the time of export,
except if the assets are used in oil or gas exploration, in which case only the initial
depreciation is recaptured.
No gain or loss shall be taken to arise on disposal of an asset by a resident company to
another resident company, provided certain conditions are met. The required conditions
include, inter alia, that the transferor is 100% owned by the transferee or vice versa or
both companies are 100% owned by a third company, and the transferee income is not
exempt in the year of transfer. The scheme of arrangement is approved by the Securities
and Exchange Commission of Pakistan or State Bank of Pakistan.
Any distribution to the shareholders of a company, to the extent that it relates to
undistributed profits, is treated as a dividend.
Capital loss can be offset only against capital gains. Unabsorbed capital loss can be
carried forward for adjustment against capital gains for six years.
Dividend income
Dividend income is subject to WHT of 10% or a lower tax treaty rate.

The deduction at source shall be the full and final discharge of tax liability on dividend
income.
Stock dividends
Stock dividends declared by resident companies are exempt from tax.
Interest income
Interest earned by a company is taxed as its income from other sources. Interest earned
by a non-resident company without a PE in Pakistan attracts WHT at the rate of 10%,
except where a lower rate is provided in the related DTT, which is also the final tax on
such income.
Income from royalties and fees for technical services (FTS)
Royalties received by non-residents are deemed to accrue or arise in Pakistan and are
taxable if paid by a resident in Pakistan or borne by a PE of a non-resident in Pakistan.
Income from fees for technical services (FTS) is deemed to accrue or arise in Pakistan if
paid by a resident in Pakistan or borne by a PE of a non-resident in Pakistan. FTS means
any consideration for the rendering of any managerial, technical, or consultancy services
(including the provision of the services of technical or other personnel), but does not
include consideration for any construction, assembly, or like project undertaken by the
recipient or consideration that would be income of the recipient chargeable under the
head salary.
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Liabilities allowed as a tax deduction in a tax year and remaining unpaid for three
subsequent years are deemed to be income in the first tax year following the said three
years. Such items are then allowed as a deduction in the year the liability is discharged.
Agricultural income is exempt from income tax.
Foreign income
A resident company is taxed on its worldwide income and on its foreign income as
earned. Double taxation of foreign income is avoided by means of foreign tax credits;
this relief is allowed to the resident company on the doubly taxed income at the lower of
the Pakistan or foreign tax rate. Undistributed income of a non-resident subsidiary is not
subject to tax.
Foreign loss can only be offset against foreign income and can be carried forward for six
years.
Modaraba
Modaraba (profit sharing) is a financing vehicle that enables a management company to

control and manage the business of a modaraba company with a minimum of 10% equity
participation. The management company is entitled to remuneration based on an agreed
percentage (but not exceeding 10%) of annual profits of the modaraba business. A
modaraba can be for a specific purpose or many purposes and for a limited or unlimited
period. The income of a modaraba not relating to trading activity is free from tax if 90%
of its profits are distributed as cash dividend.
Deductions
Depreciation
Normal depreciation is allowed at the following prescribed rates by applying the

reducing-balance method.
Assets
Buildings
Furniture
Machinery and equipment, including motor vehicles and ships
Computer hardware, including monitors and printers
Aircraft and aero engines
Below-ground installations in mineral oil concerns
Offshore platform

10
15
15
30
30
100
20
All depreciable assets put into service for the first time in Pakistan during a tax year,
other than road transport vehicles not plying for hire, furniture (including fixtures),
plant and machinery used previously in Pakistan, or plant and machinery for which
a deduction has been allowed under another section of this ordinance, for the entire
cost of the asset, shall be entitled to an initial allowance at 50% of the cost of the asset,
except for buildings, for which the rate is 25%.
Book depreciation need not conform to tax depreciation. Unabsorbed tax depreciation
not set off against the income of the year is carried forward and added to depreciation
of the assets of the same business in the following year. Tax depreciation can be carried
forward without limit until fully absorbed.
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Pakistan
Pakistan
Amortisation of intangibles
The cost incurred on acquisition of a patent, invention, design or model, secret formula
or process, copyright, software, quota, licence, intellectual property or other like
property or right and any expenditure that provides an advantage or benefit for a period
of more than one year is allowed as a deduction on a straight-line basis over the useful
life of the asset, but not exceeding a period of ten years.
Any payment made against acquisition of goodwill will also be amortised under these
provisions.
Expenditure incurred before the commencement of a business wholly and exclusively to

derive income chargeable to tax can be deducted over a period of five years.
Interest expense
Interest expense is allowed as an expense if required WHT is deducted and deposited in

the government treasury.
Bad debt
Bad debts are allowed as deductible expenditure if the following conditions are satisfied:
Debts are included previously in the income chargeable to tax.
Debts are written off in the financial statements.
There are reasonable grounds for believing that the debt is irrecoverable.
See Charitable donations credit in the Tax credits and incentives section.
Fines and penalties
Fines or penalties that are not paid or payable for the violation of any law, rule, or
regulation are allowable as tax deductible expenses.
Taxes
Taxes on income are not deductible. Sales tax and excise tax are tax deductible
where these are to be absorbed by the business; otherwise, these are passed on to the
consumer.
Expenditure on scientific research incurred in Pakistan wholly and exclusively for the
purpose of deriving income chargeable to tax is an allowable expenditure.
Exchange gains and loss on foreign currency loans specifically obtained for acquiring an
asset are adjusted against the depreciable cost of the asset.
Any lease rental incurred by a person in the tax year to a scheduled bank, financial
institution, approved modaraba, or approved leasing company shall be a deductible
expense. However, financial charges paid for the above-mentioned leases are added back
into the taxable income of the company.
Operating losses may be carried forward and set off against the profits of the succeeding
six years of the same business in which the losses were incurred. Unabsorbed
depreciation can be carried forward indefinitely.
Carried forward losses of an entity in the case of group relief cannot be utilised if the
ownership of the holding company is reduced to less than 55% and 75% if one of the
companies is a listed company or none of the companies is a listed company, respectively.
Pakistan
1505
Pakistan
Business losses can be carried forward up to a period of six years in the case of the
amalgamation of two companies, with the condition that the same business is continued
for a minimum period of five years.
The carrying back of losses is not permitted.
The deductibility of a head office expenditure of a non-resident taxpayer is limited to the

same proportion of total head office expenditure as the Pakistan turnover has with the
total world turnover. However, such domestic rules are overridden if the branch is a tax
resident of a country having an agreement for avoidance of double taxation (treaty) and
that treaty provides a different basis.
Group taxation
A locally incorporated holding company and subsidiary of a 100% owned group may be
taxed as one group by giving an irrevocable option for taxation as one fiscal unit. The
relief is not available for losses prior to formation of the group. The group is available
if the companies are designated as entitled to avail group relief by the Securities and
Exchange Commission of Pakistan.
Any company that is the subsidiary of a holding company may surrender its loss for
the year to its holding company or its subsidiary, or between another subsidiary of the
holding company, provided that the holding company directly holds 55% or more capital
of the subsidiary if one of the companies is a listed company. However, if none of the
companies is a listed company, the holding requirement is 75% or more. The loss can be
surrendered for a maximum of three years, and the required holding is for at least five
years.
Transfer pricing
The tax authorities have the power in respect of a transaction between associates to
distribute, apportion, or allocate income, deductions, or tax credits between such
associates to reflect the income that would have been realised in an arms-length
transaction.
Thin capitalisation
Where a foreign-controlled resident company (other than a financial institution or a

banking company) or a branch of a foreign company operating in Pakistan has a foreign
debt to foreign equity ratio in excess of 3:1 at any time during a year, a deduction shall
be disallowed for the profit on debt (interest) paid by the company in that year on that
part of the debt that exceeds the 3:1 ratio.

Any relief from Pakistani income tax that is provided in any other law and not provided
for in the Income Tax Ordinance or a treaty is not valid.
Tax exemptions
Profits and gains derived from an electric power generation project set up in Pakistan are
exempt from tax.
Profits and gains derived by a company from the export of computer software,
information technology (IT) services, or IT enabled services are exempt from tax
through 30 June 2016.
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Pakistan
Small companies
Activities of small companies are encouraged with a reduced income tax rate of 25%.
A small company has been defined to mean a company that:
is registered on or after 1 July 2005 under the Companies Ordinance, 1984
has a paid-up capital plus undistributed reserves not exceeding25 million Pakistani
rupees (PKR)
has an annual turnover not exceeding PKR 250 million, and
is not formed by splitting up or the reconstitution of business already in existence.
Charitable donations credit
Companies are allowed a tax credit equivalent to 20% of their taxable income in respect
of donations to:
any board of education or university in Pakistan, established by or under federal or
provincial law
any educational institution, hospital, or relief fund established or run in Pakistan by
federal government, provincial government, or local government, and
any non-profit organisation.
Foreign tax credit
Where a resident taxpayer derives foreign-source income on which foreign income tax
is paid within two years from the year in which it is derived, the taxpayer is allowed a
tax credit equal to the lower of (i) the foreign income tax paid or (ii) the Pakistan tax
payable in respect of that income. However, foreign tax paid is not refundable.
Withholding taxes
WHT on payments of royalty and FTS, when royalty or FTS is not attributable to a PE in
Pakistan, is 15% or a lower treaty rate of royalty or gross fees. The tax withheld would
be deemed to be the final tax liability of the non-resident. In the case of a non-resident
where royalty or FTS is attributable to a PE in Pakistan, the amount of royalty/FTS shall
be chargeable to tax as normal income, and withholding on payments can be avoided,
subject to approval of the commissioner. If a reduced rate is available in a tax treaty,
such rate would be applicable.
Resident corporations making certain types of payments must withhold tax as follows:
Recipient (1, 2, 3)
Non-resident individuals:
Non-treaty
Treaty
Non-treaty
Treaty:
Austria
Azerbaijan
Bahrain
Bangladesh
Dividends (%)
10
10
Interest (%)
10
10
Royalties (%)
N/A
0
10 (9)
10 (9)
10
(4)
15
(4)
10
(5)
10/15 (10)
10
10
15
10
(6)
15
10
10
15
15
10
10
10
15
Pakistan
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Pakistan
Recipient (1, 2, 3)
Belarus
Belgium
Canada
China
Denmark
Egypt
Finland
France
Germany
Hungary
Indonesia
Iran
Italy
Japan
Jordan
Kazakhstan
Korea, Republic of
Kuwait
Lebanon
Libya
Malaysia
Malta
Mauritius
Morocco
Netherlands
Nigeria
Norway
Oman
Philippines
Poland
Portugal
Qatar
Romania
Saudi Arabia
Singapore
South Africa
Sri Lanka
Sweden
Switzerland
Syria
Tajikistan
Thailand
Tunisia
Turkey
Turkmenistan
United Kingdom
United States
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Pakistan
Dividends (%)
10/15 (10)
10 (11)/15
10
10/15 (11)/20 (10)
10
10/15 (10)
10/15 (13)/30 (10)
12/15 (13)/20 (10)
10/15 (10)
10/15 (10)
10/15/20 (10)
10/15 (10)
5
10
15/25 (10)
5/7.5/10 (10)
10
10/12.5/15 (10)
10/12.5 (10)
10
10
(7)
10/15 (11)/20 (10)
10/15 (10)
10
10
10/20 (10)
10/12.5/15 (10)
10/15 (10)
10/12.5 (10)
10/15/25 (10)
15
10/15 (10)
5/10 (10)
10
5 (16)/10
10 (11)/12.5 (13)/15
10/15 (10)
10/15 (10)
10/15 (10)
10/20 (10)
10
5/10 (10)
10/15/25 (10)
10
10/15 (10)
10
10/15 (10)
10/15 (13)/20 (10)
8.75
Interest (%)
10
15
20
25
10
15
15
10 (14)/15
10
10 (14)/20
15
15
10
(7)
30
10
10
12.5
12.5
0/10
10
(7)
15
10
10
10
10 (14)/15/20 (10)
15
10
10
15
(7)
10
10
10
10
12.5
10
10
15
10
10
10
10 (14)/25
13
10
10
10
15
(7)
Royalties (%)
15
15/20 (12)
15
15/20 (12)
12.5
12
15
10
10
10
15
15
10
(8)
30
10
10
15
10
10
7.5
(7)
15
10
12.5
10
5/15
15
12
12.5
15 (15)/25
15/20 (12)
10
10
12.5
10
10
10
20
10
10
10/15/18
10
10/20
10
10
10
12
12.5
(8)
Pakistan
Recipient (1, 2, 3)
Uzbekistan
Vietnam
Yemen
Dividends (%)
10
10/15 (10)
10
Interest (%)
10
15
10
Royalties (%)
15
15
10
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
This table is a summary only and does not reproduce all the provisions that may be relevant in
determining the application of WHT in each tax treaty.
Resident and non-resident imply tax status.
Individuals and companies are required to render annual returns of income and pay tax at the
applicable rates. Credit is given for WHT deducted.
WHT rates for interest and royalties given to non-resident corporations (treaty countries) also apply to
non-resident individuals.
The following remarks for dividends should be noted:
The inter-corporate rate of tax on dividends received by a foreign corporation is 10%;
corresponding treaty WHT rates in excess of 10% have been specified.
The rates given in the table for treaty countries relate to recipient corporations. The maximum
rate, as stated above, in respect of inter-corporate dividends is 10%. The lower rates are
expressly provided in respect of dividends paid to a parent/associated corporation that has a
certain minimum holding in a Pakistan industrial undertaking. The level of holding are noted:
Japan: 25% and 50%.
United States: 50%.
Certain treaties provide for tax exemption of interest paid to the government or the central bank of
the contracting state and on foreign loans specifically approved by the federal government.
No concession is provided under the treaty.
Royalties are exempt from tax, provided the recipient does not have a PE in Pakistan.
Inter-corporate dividend where companies are entitled to group relief is exempt.
WHT rate depends on percentage of holding in the company.
This rate applies if the paying company is engaged in the industrial undertaking.
Consideration for technical know-how or information concerning industrial, commercial, or scientific
experience.
This rate applies if the beneficial owner is a company.
This rate applies if the beneficial owner is a bank.
This rate applies if the paying company operates in preferred areas.
This rate applies if the company is owned by the government.
Tax administration
Taxable period
The tax year is 1 July through 30 June. However, tax authorities are empowered to
approve a special year end.
Tax returns
All companies are required to file an income tax return each year by 31 December for the
preceding financial year (1 July through 30 June) by accounting for business income on
an accrual basis. If the special year granted by the tax authorities ends on 31 December,
then the tax return is required to be filed by 30 Septemberfollowing the year-end.
An across-the-board self-assessment scheme is in place whereby assessment is taken
to be finalised upon filing of the return. The Commissioner, however, has powers to
amend the assessment if it is believed that the ordinance has been incorrectly applied
or there is definite information that the assessment made is incorrect. These powers
are to be exercised within a prescribed time frame. In the case of transactions between
associates, the Commissioner can substitute the transaction value with the fair market
consideration. The Commissioner is also empowered to determine tax liability according
to the substance of the transaction, disregarding formal arrangements between the
parties.
Payment of tax
Companies are required to pay advance tax on the basis of tax liability of the
immediately preceding tax year in respect of their income (excluding capital gains and
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Pakistan
presumptive income). The advance tax is to be paid after adjusting the taxes withheld at
source (other than the tax withheld relating to final tax regime).
Advance tax is required to be paid in four quarterly instalments on or before 25
September, 25 December, 25 March, and 15 June in each financial year. Credit for tax
paid in a tax year shall be allowed against tax liability of that year.
The total tax liability is to be discharged at the time of filing the return of income.
Advance taxes and taxes withheld are adjustable against the tax payable with the return
of income.
Tax audit process
The Federal Board of Revenue is authorised to prescribe criteria for selection of audit
of taxpayers who has filed their returns for a tax year. Based on such criteria, cases
are selected through computer ballot separately for income tax, sales tax, and federal
excise duty. The returns are examined by tax authorities, and related documents and
information are requisitioned. Show cause notices are then raised and, on receipt of
explanations from taxpayers, income or loss is assessed. In case of disagreement with
assessments, the taxpayer has the right to agitate the issues before appellate forums.
An audit of the tax return filed by a taxpayer can be conducted by the tax authorities
within five years of the end of the financial year in which the return is filed.
Advance rulings
A non-resident not operating in Pakistan through a PE can apply to the Federal Board
of Revenue to issue an advance ruling setting out the Boards position regarding
application of the provisions of the Income Tax Ordinance to a transaction proposed or
entered into by the taxpayer. The tax ruling, once issued, is binding on tax authorities.
Topics of focus of tax authorities
Tax authorities focus on the following issues:

WHT.
Transfer pricing.
Relationship of expenditure with the business of the taxpayer.
Advance tax.
Payment of tax dues within the time prescribed.
Audit of returns filed.
Compliance by taxpayers.
Collection of arrears.
Other issues
Special rules are applicable for computation of income from exploration and production
of petroleum, mineral deposits, insurance business, and banking business.
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Panama
PwC contact
Francisco A. Barrios G.
PricewaterhouseCoopers Panam
Ave. Samuel Lewis y calle 55 E
Panam, Rep. de Panam
Tel: +507 206 9217
The President approved Executive Decree No. 958 of 2013 Regulating Chapter IX, Title
I, Book IV of the Tax Code on Adapting the national rules to the Treaties or Agreements
to Avoid International Double Taxation. It is important to note that by means of this
Executive Decree the rules and procedures relating to transfer pricing are implemented.
This Executive Decree regulates the manner in which the operations of the taxpayers
should be analysed, regulates the use of prior information for comparability analysis,
regulates the use of local comparables, and requires the documentation to be in Spanish.
This Executive Decree also regulates the allocation of income to a permanent
establishment (PE), stating that the income attributable to a PE or fixed place is that
which the PE or fixed place could have obtained if it were a distinct and independent
enterprise, taking into account the activities performed, assets used, and risks assumed.
As of 1 January 2014, telecommunication companies in which the government has a
participation of greater than 40% will pay income tax at the rate of 25%.

Panamanian income tax is levied based on the territoriality principle. Panamaniansource income is subject to taxation whether it is received by a resident or non-resident
entity. Residency is only relevant to determine if the entity is subject to withholding tax
(WHT) or not.
Corporations are subject to income tax at a fixed rate of 25%.
The tax base (i.e. amount to which the tax rate will apply) for companies whose taxable
income is greater than 1.5 million United States dollars (USD) is the greater of:
net taxable income calculated on the normal basis or
4.67% of the gross taxable income (excluding exempted and non-taxable income and
foreign-source income); this is called the alternate calculation of income tax (Calculo
Alternativo del Impuesto sobre la Renta or CAIR).
If the entitys tax year results in a loss due to the alternative calculation, the taxpayer
may request to the tax administration (the National Administration of Public Income, i.e.
Administracin Nacional de Ingresos Pblicos or ANIP) not to be subject to the CAIR.
The taxpayer may also request not to apply the CAIR if its effective income tax rate is
higher than the applicable income tax rate (i.e. 25%). Here is an example of such an
instance:
Panama
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Net taxable income
a
Total revenues
b
Deductible costs and expenses
c
Net taxable income
USD
2,000.00
1,950.00
50.00
CAIR
d
Presumptive net taxable income (4.67% x a)
e
Income tax (25% x d)
CAIR effective tax rate
f
Presumptive income tax (e)
g
Net taxable income (c)
h
Effective tax rate (f/g)
USD
93.40
23.35
USD 23.35
USD 50.00
46.70%
The ANIP has a six-month period within which to reach a decision on such requests;
otherwise, the petition will be considered as granted.
Corporate residence
A company is considered as a tax resident when it has been incorporated in Panama and
if Panama is regarded as the place where the central management is located. Entities
incorporated abroad may also be registered with the tax administration in order to avoid
WHT.
Panamafollows the Organisation for Economic Co-operation and Development (OECD)

PE rules.
Other taxes
Movable goods and services transfer tax (ITBMS)
The movable goods and services transfer tax (Impuesto de Transferencia de Bienes Muebles
y Prestacin de Servicios or ITBMS) is the Panamanian value-added tax (VAT).
The general tax rate is currently 7%.
Alcoholic beverages and hotel accommodation are taxed at 10%, and tobacco and
tobacco-derived products are taxed at 15%.
ITBMS is calculated on the value-added through a method of tax credits (i.e. ITBMS paid
on transactions to produce taxable transactions) and tax debits (i.e. ITBMS collected on
transactions).
Exports are not taxed, and the ITBMS paid to generate the exports may be refunded. The
sale of goods such as medicines, foods, and certain products for babies are not taxed and
may allow the supplier to recover the ITBMS as an exporter if certain criteria is met.
Medical services and transportation among other services are not taxed but do not
produce ITBMS credit for the supplier.
The statute of limitations isfive years.
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Panama
Customs duties
All goods introduced into the Panamanian territory from another country are subject
to customs duties. The duty rates are provided by the Panamanian Customs and Tariffs
Office.
Customs duties may only be assessed by authorised customs brokers.
Excise tax (selective consumption tax)
The selective consumption tax is applied to goods (e.g. jewellery, expensive automobiles,
guns, tobacco, alcoholic beverages) and services (e.g. mobile, cable TV, satellite TV) that
are considered as non-essential. The tax base is the cost, insurance, and freight (CIF)
price plus import duties for imported items and sales price for all other activities. The
tax is levied at only one stage: on the importation of the taxed products; the sale of taxed
goods produced in Panama; and for services, when the service is invoiced, the service is
completely rendered, or upon receipt of advance payments, whichever occurs first.
Different tax rates apply depending on the type of service or good, with a minimum of
5% on sodas and 100% on tobacco products.
Immovable Property Tax
In Panama, all owners of real estate should pay Immovable Property Tax at a rate
between 0% and 2.10%, depending on the value of the property.
Stamp duty
Stamp duty is charged at a rate of USD 0.10 per USD 100 (or fraction thereof) only on
certain commercial contracts.
Capital gains tax
The transfer of real estate property and securities is subject to WHT on the gross
transactions amount, but the taxpayer may make a special income tax assessment to pay
the capital gain and may request a rebate of the difference between the WHT and the
capital gain.
In the case of the transfer of real estate property, a 2% real estate transfer tax plus a 3%
income tax advance payment must be remitted (calculated over the gross transaction
amount or the cadastral value, whichever is greater). The 3% may be deemed definitive;
contrariwise, the tax will be assessed at 10% of the gain and the 3% of the advance
payment will be credited. Any amount in excess may be subject to rebate.
The rates as described in the table below will be applicable to the transfer of real estate
if:
the transferors core business is the sale of real estate with new constructions
it is the first transfer of the real estate after the new construction is built, and
the construction permit was issued after 1 January 2010.
New housing construction
Up to USD 35,000
From USD 35,000 up to USD 80,000
Greater than USD 80,000
New commercial construction
Rate (%)
0.5
1.5
2.5
4.5
When transferring new housing real estate, the real estate transfer tax (2%) does not
apply if the transfer occurs within the next two years after an Occupancy Permit is
issued.
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The transfer of securities is subject to a 5% WHT, and the tax rate on capital gain is 10%.
The law establishes the application of a 5% WHT that will be applied by the buyer. The
seller may accept the WHT as definitive or perform the calculation of the gain, apply the
rate of 10%, and deduce the applied WHT. In case the WHT is superior, the taxpayer can
choose to claim the return of payments made in excess.
Example:
Sales price (a)
Cost (b)
Benefit (c)
WHT at 5% of (a)
Tax at 10% of (c)
Payment in excess
1,000
900
100
50
10
40
The sale of fixed assets is subject to 10% on the capital gain, and there is no WHT.
Franchise tax
Franchise income tax must be paid by all corporations on an annual basis (USD 300 per
year). The deadline for payment depends on the date of incorporation of the company.
If the company was incorporated on any date during the first six months of the year, the
due date for payment will be on 15 July of each year. If it was incorporated in the last six
months, the due date will be 15 January of each year.
Non-profit organisations, cooperatives, and civil partnerships are not subject to franchise
tax.
Operations notice tax
The notice of operations is an annual tax on equity at a rate of 2%, with a minimum tax
amount of USD 100 and a maximum tax amount of USD 60,000. In the case of free zones
or special trade areas, the tax will be calculated at a rate of 1% up to a maximum tax
amount of USD 50,000.
The tax base is the outcome from total assets less total liabilities (excluding liabilities
with related parties abroad).Special considerations apply under certaindouble tax
treaties (DTTs).
Local municipal tax
Local municipal tax is charged based on the gross income generated by the business
through the corresponding accounting period; it also depends on the type of activity
being conducted by the corporation. In most cases, it cannot exceed USD 2,000 per
month for each activity performed.
According to Municipal Agreement No. 40 of 2011, the monthly tax return was replaced
by an Annual Municipal Tax Return for the District of Panama. This return must be filed
before the Municipal Authorities in the first 90 calendar days after the ending of the
fiscal year. In case the taxpayer does not file the return before the deadline, a USD 500
penalty will be applicable.
Branch income
For tax purposes, branches are considered separate entities from the head office and
must therefore keep accounts separately and will have separate tax liability.
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Panama
Branches located within the Panamanian territory must pay dividend tax through
definitive WHT of 10% of net taxable income generated by the Panamanian branch,
less all income taxes paid by the same corporation in Panama. This amount will be paid
jointly on filing the corresponding income tax return.
Under the territoriality principle, the following will not be considered as taxable income:
All income produced outside Panama.
All income generated from operations or services performed outside the Panamanian
territory.
Inventory valuation
Inventory should be valued at the start of any business and, subsequently, at least once
every accounting period. All assets must be grouped, depending on their nature, with
certain characteristics indicated (e.g. the unit of measurement, the name of the asset,
the price of the unit, the total value of units). Reference to the accounting records should
also be included.
Inventories are generally stated at cost and can be valued using the compound average
cost method, first in first out (FIFO) method, retailer method, or specific identification
method. Since all entities must keep legal records, any adjustment resulting from using
different methods of inventory valuation for tax purposes and financial purposes should
be recorded and must be reported to the proper authorities. Once a taxpayer adopts a
method, they must maintain it for at least five years.
Capital gains
See Capital gains tax in the Other taxes section for a description of how capital gains are
taxed in Panama.
Dividend income
Panamanian legislation establishes that distribution of dividends is subject to definitive

WHT, applied at the moment of distribution. Generally, dividends are subject to income
tax at a rate of 10% without taking into consideration the form of payment, types of
stock, assets, or money.
Dividend tax applies at a 5% rate on dividends paid from foreign-source income, from
income derived from exports, as well as exempt income from banking account interests
and interests and earnings derived from securities issued by the government.
Free zone users are taxed at a 5% rate as well for local-source income.
Loans to shareholders are deemed as dividend distribution, subject to a 10%
withholding even in the cases where the 5% tax rate applies.
Notwithstanding the aforementioned, if the entitys shares are issued to bearer, they will
be subject to dividend tax at a rate of 20%.
Dividend tax is levied if the entity meets one of the following criteria: (i) requires an
operation permit to operate in Panama, (ii) requires an operation key to operate at the
Colon Free Zone, (iii) is established in a Fuel Free Zone, (iv) is established in a free zone
or special zone, (v) produces Panamanian-source taxable income. Dividend tax also does
not apply to dividends paid on income received as a dividend if the entity is not required
to withhold dividend tax or if the entity withheld the tax.
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A complementary tax applies each tax year that the entity distributes less than 40% of
the net profits after income tax. The complementary tax is an advance payment of the
dividend tax, calculated on the difference of the distributed dividends and 40% of the
net profits after income tax and applies the corresponding tax rate. If complementary
tax is paid, then the entity may offset the paid complementary tax with the dividend tax
when the corresponding dividend is decreed.
The distribution of dividends derived from income received as dividends from other
entities is not subject to income tax or dividend tax as long as the entity that paid the
dividend in the first instance was exempt from withholding any dividend tax, or if it was
required to, made the corresponding withholding.
Interest income
Interest income is subject to income tax.
Foreign income
Panamanian resident companies are taxed on their income generated within the
Panamanian territory. Any other income generated abroad will be exempt from income
tax payment but may be subject to dividend tax (see above).
Deductions
Taxable income is determined by deducting from the Panamanian-source income
all costs, expenses, and non-taxable income applicable and permitted by law. The
deductibility of costs and expenses depend on the relation of such costs and expenses
with the generation or preservation of income source. Special restrictions apply to the
following:
Depreciation.
Bad debt.
Charitable contributions.
Costs and expenses related to non-taxable income are not considered as deductible.
Thus, the taxpayer must split the expenses and costs related to taxable transactions from
those related to non-taxable transactions. The expenses and costs allocated to taxed
transactions may not exceed the amount from multiplying the portion of taxable income
from the total income by the total costs and expenses.
Example:
Income
Costs and expenses
Taxable
100
67%
83.75
Non-taxable
50
34%
41.25
Total
150
100%
125
The straight-line and sum-of-the-years-digits methods of depreciation are allowed, as

well as any other method.
Assets
Buildings
Vehicles
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Straight-line (%)
31/3 as maximum
33 as maximum
33 as maximum
33 as maximum
Panama
In the case of mines, depletion will be deductible during the useful life or depending on
the state contract methodology.
Goodwill
Goodwill expenses are deductible only when the transferring agent declares them as
income.
Start-up expenses
Start-up expenses are deductible through the amortisation process, over a maximum
term of five years.
Interest expenses
Interest expenses are deductible only in cases where the interest relates to the
generation or conservation of taxable income from a Panamanian source. No thin
capitalisation rules are in force.
Bad debt
A taxpayer may deduct bad debts by opting for one of the following options:
Loading gains and losses annually to the value of such accounts in the fiscal year.
Charging an annual profit and loss figure for the establishment of a reserve to meet
contingencies of this nature.
Donations made in cash or in kind to the government, charitable or educational

institutions, activities to promote HIV disease awareness, or political parties are
deductible, with certain restrictions and limited to 1% of taxable income.
Fines and penalties
Taxes
The national and municipal taxes that affect capital, sales, and other operations related
to taxable income producing activity are deductible.
Losses incurred by common taxpayers may be carried forward and deducted from
taxable profits for the following five years, at a rate of 20% each year, but limited to
50% of taxable income. Loss carrybacks are not allowed, and losses are not allowed for
estimated income tax purposes.
A payment to a foreign entity (including affiliates) in a foreign country will be subject to

WHT anytime it represents a deductible cost or expense for the payer. The tax base will
be 50% of the remittance, and the income tax rate applicable is 25%.
Group taxation
In Panama, there are no group taxation rules.
Transfer pricing
Transfer pricing rules are applicablefor all transactions with non-domiciled related
parties.
Panama
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An informative return must be filed within six months after the end of the taxable year.
An additional arms length economic study must be kept and made available for tax
authority inspection upon request.
Thin capitalisation
There are currently no thin capitalisation rules in Panama.

Foreign tax credit
Foreign tax credits are not applicable in Panama.
Free zones
Entities established in free zones may enjoy exemption from import duties on goods,
income tax, sales tax, export tax, and selective consumption tax derived from royalties
on exportation and re-exportation activities. Aside from trading activities, the following
businesses may also apply for the regime: higher education centres, scientific research
centres, specialised centres for health services, high technology businesses, assembling
businesses, semi processed or finished products processing businesses, services
businesses, environmental service businesses, general services, logistics services
businesses, and manufacturing businesses.
Tourism, industry, and agriculture allowances
The Incentive Law for Tourism Development grants several tax benefits (e.g. exemption
from import duties on certain tourism services and related goods, exemption from
property tax for companies dedicated to tourism), but only for those corporations with
a signed tourism agreement with the government. Income tax exemptions may apply in
special cases.
In general, income from individuals or corporations that engage in agricultural
production activities will be exempted from income tax if annual gross income is lower
than USD 250,000.
Forestry plantations are totally exempted from income tax payment until 2018 if the lot
planted has been duly registered at the Forestry Registry of the Environmental National
Authority and resolution with approval from this authority has been issued.
Special laws
The Panamanian government has enacted special laws regarding tax exemptions for
certain activities performed in Panama, such as call centres (Law No. 54 of 2001), and
tax exemptions for certain appointed areas such as the Panama Pacific Economic Zone
(Law No. 41 of 2004) and Law No. 41 of 2007, which creates a special regime for the
establishment and operation of regional headquarters in Panama.
By means of Law No. 8 of 2010, Real Estate Investment Societies may deduct the profits
distributed to their shareholders, provided that these Real Estate Investment Societies:

raise long-term funds in a securities market

are registered in the National Securities Commission
distribute no less than 90% of their free cash flow
register in the General Direction of Revenues, and
withhold 20% of the profits distributed as an income tax advance payment on
behalf of the shareholder, which may be deemed the definitive tax to be paid by the
shareholder.
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Panama
Withholding taxes
Royalties and commissions on services paid to foreign entities are taxed through the
application of the corresponding tax rate (i.e. 25%) over 50% of remittance under the
concept of WHT (effective tax rate is 12.5%). The taxpayer may decide not to withhold
taxes and consequently not deduct the expense.
Payment of interest is also subject to income tax on 50% of the interest paid to a
beneficiary abroad on loans invested in Panama, but the payer must proceed with the
WHT even if one does not deduct the interest.
If the beneficiary is registered as a taxpayer in Panama before the tax administration, no
WHT may be required.
Recipient
Foreign corporations
Dividends (%)
5/10/20
Interest (%)
12.5
Royalties (%)
12.5
In case of treaties, special rules are applicable in order to avoid double taxation.
Recipient
Barbados
Czech Republic
France
Ireland
Korea
Luxembourg
Mexico
The Netherlands
Portugal
Qatar
Singapore
Spain
United Kingdom
Dividends
5/7.5 (1)
10
5/15 (6)
5
5/15 (1)
5/15 (6)
5/7.5 (1)
0/15 (9)
10/15 (10)
6
4/5 (12)
0/5/10 (13)
5
0/15 (15)
WHT (%)
Interest
0/5/7.5 (2)
0/5/10 (18)
0/5 (4)
0/5 (4)
0/5 (4)
0/5 (4)
0/5/10 (7)
0/5 (4)
0/10 (4)
0/6 (4)
0/5 (4)
0/5 (4)
0/5 (4)
0/5 (16)
Royalties
7.5
10
5
5
3/10 (5)
5
10
5
10
6
5
5
5
5
Fees
0/7.5 (3)
0
N/A
N/A
0
5
0/12.5 (8)
0
0/10 (11)
0
0
7.5 (14)
0/12.5 (17)
N/A
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
Depending on the percentage of ownership held by the beneficial owner (at least 25% to apply the
5% rate).
Depending on the person or entity receiving the payment. If the beneficial owner is a bank, the 5%
rate will apply; if the beneficial owner is the Central Bank of either state, the 0% rate will apply; in all
other cases, the 7.5% rate will apply.
If the services are not rendered in any of the states, the income will only be taxed in the state where
such income arose.
If paid to government financial institutions, the 0% rate will apply.
3% for the use or right to use industrial, commercial, or scientific equipment.
5% rate).
Depending on the person or entity receiving the payment. If the beneficial owner is a bank, the 5%
rate will apply; if the beneficial owner is the Central Bank of either state, the 0% rate will apply; in all
other cases, the 10% rate will apply.
The 12.5% rate applies if the person rendering the services is in the other state for more than 60
days.
No WHT is levied if the foreign company (beneficial owner) receiving the dividends directly holds at
least 15% of the shares of the company paying the dividends, provided that the shares of the foreign
company are regularly traded on a recognised stock exchange or at least 50% of the shares of the
foreign company is owned by residents of either contracting state or by companies the shares of
which are regularly traded on a recognised stock exchange. Also, no WHT is levied if the foreign
Panama
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10.
11.
12.
13.
14.
15.
16.
17.
18.
company is a bank or insurance company, a state or political subdivision, a headquarter owning at

least 10% of the shares of the Dutch company, or a pension fund.
10% rate).
If the services are rendered in Panama, then the 10% rate will apply.
4% rate).
5% WHT rate is levied if the recipient (excluding partnerships) is a shareholder with at least a 40%
direct interest in the paying company; otherwise, a 10% rate is levied. No WHT is levied if the
recipient is a shareholder with at least an 80% direct interest in the paying company, and (i) its shares
are listed on a stock exchange, (ii) the recipient is at least 50% owned by residents from either of the
two countries, (iii) the recipient is owned by shareholders resident for tax purposes in third countries
by a proportion of less than 25%, and (iv) the recipient is owned (an interest of more than 25%) by
residents in third countries, provided that a tax treaty for the avoidance of double taxation has been
signed with the country of the company paying the dividends and that this tax treaty establishes the
same or more favourable conditions. No WHT is levied for dividends paid to pension funds.
If the services are rendered in Panama, then the 7.5% rate will be applicable.
No WHT is levied if the foreign company (beneficial owner) receiving the dividends directly holds at
least 15% of the shares of the company paying the dividends, provided that the shares of the foreign
company are regularly traded on a recognised stock exchange or at least 50% of the shares of the
foreign company is owned by residents of either contracting state or by companies the shares of
which are regularly traded on a recognised stock exchange.
5% but only if: (I) the interest is beneficially owned by: (i) an individual, (ii) a company with shares
regularly traded on a recognised stock exchange, (iii) a financial institution or (II) the interest is paid
by: (i) a state, political subdivision, or local authority, (ii) a bank, or (iii) on a quoted eurobond. The 0%
rate would apply if it is paid to the central bank of either state.
If the person is more than 90 days in Panama, the 12.5% rate would apply.
0% applies for sales on credit andpayments to the central bank; 5% for payments to banks in
general; and 10% for all other cases.
Tax administration
Taxable period
The accounting period is the period for which the company makes its accounts. Returns
shall be made upon completion of the accounting period and may not exceed 12 months.
For most companies, it is usually from 1 January to 31 December.
Tax returns
The due date for filing is three months after the end of the fiscal year, with the possibility
for an extension of up to one additional month.
Payment of tax
Income tax payment shall be made depending on the income tax return and shall be
made no longer than three months after closing of the corresponding accountingperiod.
Taxpayers must pay estimated taxes (usually the same amount as generated income)
at the end of the sixth, ninth, and 12th month after the end of the corresponding
accounting period.
Tax audit process
Tax authorities select the taxpayers subject to audit based on internal criterion.
The tax administration may audit the income tax returns filed within the last three years
from the last day of the year on which the tax return was filed.
Among the topics of focus are non-deductible expenses, withholdings, and VAT.
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Papua New Guinea

PwC contact
David Caradus
Credit House
Cuthbertson Street
Port Moresby, NCD 121
Papua New Guinea
Tel: +675 321 1500
The 2014 National Budget handed down on 19 November 2013 announced a handful of
amendments to the existing tax law. These changes are effective as of 1 January 2014.
The major taxation changes are summarised as follows:
The tax concession relating to an additional 50% deduction for expenditure incurred
on approved research and development (R&D) projects was repealed.
Amendments were made to the circumstances in which a certificate of compliance is
required. The amendments increased the threshold for the certificate of compliance
requirement to 5,000 Papua New Guinea kina (PGK) for one contract and removed
the aggregating provision. Additionally, a number of industries have been removed
from these provisions, including surveyors, engineers, architects, cleaning firms,
advertising firms, entertainers, and professional services providers, such as
accountants, lawyers, doctors, and consultants.
The National Budget also announced the establishment of a new Tax Review Committee
set up to undertake a National Tax Review on the current tax system. The committee is
expected to produce a report about its findings by March 2015, in time for any changes
to be implemented in the 2015 National Budget.

Papua New Guinea (PNG) resident companies are liable for income tax on their
worldwide income. Companies that are not resident in Papua New Guinea are only
required to remit tax on income sourced in Papua New Guinea. A non-residents PNGsourced passive income, including dividends, interest, and royalties, is generally only
subject to withholding tax (WHT). It is ordinarily the case that the payer of the dividend,
interest, or royalty must withhold the relevant amount of the tax and remit this to PNGs
Internal Revenue Commission (IRC).
Papua New Guinea levies corporate income tax (CIT) on companies on a flat rate basis.
The operations of a company, rather than the companys taxable income level, will
dictate the rate applied to the companys taxable income.
Generally, trading profits and other income (except income that is specifically exempt)
of resident companies in Papua New Guinea are assessed tax at a rate of 30%, whereas
non-resident companies operating in Papua New Guinea are assessed tax at a rate of
48%. There are, however, different tax rates for income derived from mining, petroleum,
and gas operations.
Specifically, trading profits and other income from operations in Papua New Guinea are
liable for CIT at the following rates:
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Source of income
Income other than income from mining, petroleum, or gas operations:
Resident company
Income from petroleum operations: *
Existing projects
New projects
Incentive rate projects
Income from mining operations:
Resident company
Income from gas operations *
CIT rate (%)

30
48
50
45
30
30
40
30
* The same rates of CIT apply to income from the petroleum operations listed above or gas
operationsderived by a resident or non-resident company.
Overseas shippers
Income derived by overseas shippers or charterers carrying passengers, livestock, mail,

or goods out of Papua New Guinea is taxable in Papua New Guinea. The tax is calculated
on a deemed taxable income equal to 5% of the gross income, which is taxable at the
non-resident rate of 48% in the case of companies. The IRC may exempt the overseas
shipper from tax if the shippers home country exempts PNG shippers from a similar tax.
Local income taxes
There are no local income taxes in Papua New Guinea.
Corporate residence
A company will be deemed a resident for CIT purposes if it meets either the (i)
incorporation test or (ii) the management and control test.
Incorporation test
A company incorporated in Papua New Guinea is automatically regarded as a PNG tax

resident. However, the operation of the law of another country and a relevant double
taxation treaty (DTT) may result in a company also being treated as resident in another
country.
Management and control test
A company is a PNG tax resident if it is managed and controlled in Papua New Guinea,
regardless of where it is incorporated. Generally, a company is managed and controlled
in Papua New Guinea if key decisions affecting the company are made at directors
meetings held in Papua New Guinea. This also includes a company incorporated outside
Papua New Guinea that trades in Papua New Guinea and has its voting power controlled
by resident shareholders.
Dual residence
An entity may be a tax resident of both Papua New Guinea and another country by
application of domestic legislation. A DTT entered into between Papua New Guinea and
another country may contain a tiebreaker test to determine the country of residence for
the purposes of the DTT.
The concept of permanent establishment has limited significance in the domestic

taxation law of Papua New Guinea and is defined to mean a place at or through which
a person carries on any business. Under domestic taxation law, Papua New Guinea will
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seek to tax the PNG-sourced income of a non-resident irrespective of whether or not that
income is derived at or through a PE in Papua New Guinea.
Where PNG has entered into a DTT, the concept of PE becomes more important as it will
then be one of the factors determining Papua New Guineas taxing rights over income
sourced in Papua New Guinea, particularly with respect to the business profits of a nonresident company. In general terms, Papua New Guineas DTTs:
define a PE to be a fixed place at or through which the business of an enterprise is
wholly or partly carried on, and
deem a PE to exist in various circumstances, including those relating to the presence
of substantial equipment in the contracting state and the time spent by personnel of
an enterprise furnishing services in a contracting state.
Other taxes
The GST rate is 10% and applies to most goods and services supplied in Papua New
Guinea. Exported goods and services attract a zero rate of GST. Goods and services,
other than motor cars, supplied to mining, petroleum, or gas companies are also
zero-rated. Some goods and services are exempt, including medical, educational, and
financial services. Land is excluded from GST, but buildings and other improvements are
subject to the tax.
Customs duties
The majority of manufacturing inputs (including plant and machinery) attract no

custom duties, and other custom duty rates are being progressively reduced. The
remaining rates for custom duties vary depending on the nature of the good being
imported and are assessed on the total value of the goods imported, including
cost, insurance, and freight (CIF). Customs bonds may be issued for the temporary
importation of goods that are to be re-exported within 12 months.
Excise taxes
Although customs duties are now minimal in many cases, some goods, most notably
motor vehicles, now attract excise tax. Private motor vehicles generally attract excise at
the rate of 60%, whereas work vehicles attract excise tax of 10%. Excise taxes can also
apply to some domestically produced goods, including refined fuel products, alcohol,
and tobacco.
Land tax
Land tax is imposed annually by provincial governments on the unimproved value

of the land, and the power to levy land tax is vested exclusively with the provincial
governments. In Papua New Guinea, land tax is difficult to implement and faces major
geographical and socialproblems.
Stamp duties
Stamp duty applies at varying rates on documents and certain transactions. Of particular
note is duty charged on the conveyance of property, which rises to a maximum of 5%
where the value of the property being transferred exceedsPGK 100,000. The duty is
payable by the purchaser, and a 5% duty on the unencumbered value of land may also
be payable where there is a transfer of shares in certain landholding companies.
Other dutiable transactions include share transfers (including some share buy-backs),
which are subject to a rate of 1%. The Collector of Stamp Duties has the power to amend
assessments and refund overpayments of stamp duty.
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Stamp duty is payable on documents executed outside Papua New Guinea that relate to
property or matters done or to be done in Papua New Guinea.
Export duties
Timber
Export duty on timber logs (not sawn timber or plantation logs) is calculated with
reference to the freight on board (FOB) value per cubic meter of exported logs and rates
that increase as the value of the exported logs increase.
Spices
Levies are imposed from time to time on the export of specified spices (e.g. vanilla).
Contributions to employee superannuation funds
Contributions to employee superannuation funds are compulsory for entities with 15 or

more permanent employees. The employers compulsory contribution is 8.4% of each
employees gross basic salary. The employees minimum contribution is 6.0%.
Membership is generally compulsory for citizens. Non-citizens are currently exempt;
however, this is under continuingreview.
Contributions must be paid to an authorised superannuation fund. Contributions paid
to an authorised fund are tax-deductible to the extent that they do not exceed 15% of
the relevant employees gross taxable salary. Contributions to non-resident funds are not
tax-deductible.
Training levy
All businesses whose annual payroll exceeds PGK 200,000 are subject to a 2% training
levy, calculated on the sum of the taxable salaries, including benefits, of all personnel.
Qualifying expenses incurred in training PNG citizen employees are creditable up to the
actual amount of the levy. The training levy, if payable, is not tax-deductible.
Departure tax
A departure tax is collected by airlines issuing tickets for persons departing Papua New
Guinea.
Gaming machine tax
Papua New Guinea imposes a 74% tax on gross revenue from gaming machines.
Resource project production levies
Production royalties of 2% are payable to the national government on the net smelter
return from mining operations. These royalties are tax-deductible. A royalty, at the
rate of 2% of the wellhead value, is also payable from the production of petroleum and
gas operations. Holders of new petroleum development licences are entitled to treat
royalties as income tax paid. However, new petroleum projects will also pay a taxdeductible development levy calculated at the same rate of 2% of the wellhead value.
Mining projects are also required to pay a production levy to the Mineral Resources
Authority calculated at a rate between 0.25% and 0.5% of the assessable income
fromproduction.
Branch income
Income derived by a non-resident contractor for services in Papua New Guinea is
usually subject to a WHT at the rate of 12% of gross income. This amount is calculated
on deemed taxable income of 25% of the gross contract income, which is taxed at the
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foreign contractor tax rate of 48% (subject to tax treaties). The provisions extend to
payments for the following:
The installation, maintenance, and use in Papua New Guinea of substantial
equipment ormachinery.
Construction projects.
For the lease or charter of any industrial, commercial, or scientific equipment or any
machinery or vehicle.
Consultancy or management services.
Where the non-resident contractor rules do not apply, the non-resident company will
be subject to income tax at the foreign contractor tax rate of 48% on its PNG-sourced
taxable income (see the Income determination section for a definition of taxable income).
PNG branch remittances are not liable for dividends WHT or any branch profits or
similar tax.
Taxable income is defined as the sum of assessable income minus allowable deductions.
In practice, profits are calculated for tax purposes by reference to the profits reported in
the financial accounts. Accounts must be prepared in accordance with PNG accounting
principles, which follow the International Financial ReportingStandards (IFRS).
Inventory valuation
There is no form of stock relief or trading stock valuation adjustment to recognise

the effects of inflation in Papua New Guinea. There is a once-only option to adopt the
lowest of the cost amount, the market selling value, or the replacement value (which,
in practice, may mean that book and tax valuations for trading stock are not aligned).
Where the option is not exercised, the value of the stock is deemed to be the cost price;
however, neither the income tax law nor the associated regulations provide detailed
guidance on what constitutes cost price (the Commissioner General of Internal
Revenue has not produced any related guidance to date). It will generally be the case
that where a taxpayer has determined a cost price in accordance with IFRS that cost
price will also be accepted for income tax purposes.
In special circumstances, the Commissioner General of Internal Revenue may accept a
lowervaluation.
Capital gains
There is no general capital gains tax in Papua New Guinea. However, profits arising on
the sale of property acquired for the purpose of resale at a profit, or from the carrying
out of a profit-making scheme, are taxable as ordinary income.
Dividend income
Unless otherwise exempt from CIT, dividends are included in the assessable income of a
shareholder.
Dividends received by a resident company from other companies, whether resident or

non-resident, while being assessable to tax, are generally subject to a full tax rebate
and are effectively received tax-free. However, where a company has losses on other
activities or losses carried over from earlier years, those losses are applied against
dividend income before the calculation of the dividend rebate.
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Stock dividends
In most cases, the payment of a dividend by way of the issue of shares is subject to the
same taxation treatment as the payment of a dividend by way of cash or the distribution
of other property. However, dividends paid by the issue of shares wholly and exclusively
out of profits arising from the sale or revaluation of assets not acquired for the purpose
of resale at a profit are exempt from income tax and dividends WHT.
Interest income
Unless exempt under specific provisions, interest paid or credited by a financial

institution, the Central Bank, or a company to a person resident in Papua New Guinea is
includable in income, and the person making the payment of or crediting interest in the
account is liable to withhold and pay tax upon the amount.
Partnership income
A partners share of the assessable income of the partnership less all allowable
deductions to the partnership is includable in the partners assessable income for the
year of income. Likewise, the partners individual interest in a partnership loss incurred
in the year of income is an allowable deduction. Further, if income is exempt income to
the partnership, this income will be exempt income to the individual partner relative to
their individual interest.
Generally, foreign exchange gains realised and derived from debts made on or after 11
November 1986 or denominated in a currency other than the Papua New Guinea kina
are included in assessable income.
Foreign income
PNG resident companies are liable for CIT on their income from all sources (i.e.
including foreign-sourced income). A foreign tax credit may be available to offset foreign
tax paid against PNG tax payable (see the Tax credits and incentives section for more
information).
There are no provisions in Papua New Guinea that permit the deferral of the taxation of
income derived outside Papua New Guinea. Subject to the operation of a DTT, foreignsourced income derived by a resident of Papua New Guinea is subject to tax in Papua
New Guinea in the year in which it is derived irrespective of whether or not that income
is repatriated to Papua New Guinea.
Deductions
General deduction provisions provide that all losses and expenditures, to the extent
incurred in gaining or producing the assessable income or are necessarily incurred
in carrying on a business for the purpose of gaining or producing that income, are
allowable deductions. However, the general deduction provisions do not allow a
deduction to the extent a loss or expenditure is an outgoing of capital, or of a capital,
private, or domestic nature, or incurred in relation to the gaining or production of
exempt income.
Depreciation
Depreciation is allowed for equipment and other assets at prescribed rates. A taxpayer
must use the diminishing-value method unless an election is made to use the prime-cost
method. The applicable diminishing-value rates are 150% of the prime-cost rates.
Plant, machinery, and equipment
Plant, machinery, and equipment (including buildings) are depreciable at rates

according to their estimated lives. A taxpayer other than a taxpayer who derives income
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from mining, petroleum, or gas operations may elect to claim special accelerated
depreciation rates for certain capital items. For example, flexible depreciation rates (up
to 100%) may be claimed on new industrial plant with a life exceeding five years that is
used for manufacturing purposes. Other new plant and articles used in manufacturing,
construction, transport, storage, communication, and agricultural production are
eligible for an accelerated deduction equal to 20% of cost in the year of purchase. New
plant and articles used for tourism are eligible for an accelerated deduction equal to 55%
of cost in the year of purchase.
Motor vehicles
Motor vehicles are generally depreciable at 20% of prime cost. There is no upper limit in
value for depreciation purposes.
Buildings
Buildings forming an integral part of plant, machinery, and equipment are depreciable
at a prime-cost rate of up to 7.5%, depending on the construction materials. Buildings
housing plants eligible for the one-year write-off deduction (see comments on new
industrial plant under Plant, machinery, and equipment above) can be written off in the
year of construction. Other income producing buildings may qualify for the accelerated
deduction of 20% in the year ofpurchase.
Agricultural and fishing plants
Most items of new agricultural and commercial fishing plants qualify for 100%
depreciation, as do boats and ships, including ancillary equipment, used solely as dive
boats or for scuba diving by accredited tour operators. Other new items having a life
exceeding five years used by a person carrying on agricultural operations are eligible for
accelerated depreciation in the initial year of use.
Goodwill
A deduction is not available for goodwill or the amortisation of goodwill in Papua New
Guinea (this being an amount not deductible under ordinary concepts and an item for
which there is no specific deduction provision).
Start-up expenses
It will generally be the case that start-up expenses will not be deductible in Papua New
Guinea. Such expenses are generally either capital, or of a capital nature, or incurred
prior to the derivation of assessable income. There is no specific deduction provision for
the deductibility of start-up expenses.
Interest expenses
A deduction is generally available for interest incurred on an arms-length basis, subject

to meeting the general principles fordeductibility and the requirements under the thin
capitalisation rules (see Thin capitalisation in the Group taxation section). Where interest
is incurred in connection with the construction or acquisition of an item of plant or
capital asset, that interest is not immediately deductible. Rather, such interest is deemed
to form part of the cost of that asset (and in the case of plant will then form part of the
base from which future depreciation deductions may be claimed).
Bad debt
Bad debts are deductible if they have previously been included in assessable income and
written off by year end or if the bad debt was in respect of money lent in the ordinary
course of the taxpayers business of money lending.
Double deductions
An additional amount equal to the actual amount of expenditure incurred is deductible

in respect of certain expenditures (e.g. export market development costs, some staff
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training costs, and certain donations). In other words, a double deduction is available
with respect to these items.
Donations
It is considered that donations made by a corporate taxpayer meet the general principles
for deductibility and hence will generally be deductible (notwithstanding the specific
provision dealing with gifts to charitable bodies has no current effect as there are no
charitable bodies approved by the Commissioner General of Internal Revenue for this
purpose). There are specific provisions in Papua New Guineas taxation law dealing
with the deductibility of certain donations, some of which provide a deduction for up to
200% of the value of the amount donated.
Pension expenses
Contributions paid to an authorised superannuation fund are tax-deductible to the

extent that they do not exceed 15% of the relevant employees gross taxable salary.
Contributions to non-resident funds are not tax-deductible. See the Other taxes section for
more information.
Fines and penalties
There are no specific provisions denying a deduction for fines or penalties in Papua New
Guinea taxation law; however, arguably, fines and penalties may not meet the general
principles for deductibility, and their deductibility needs to be considered on a case-bycase basis.
Taxes
A deduction is not allowable in respect of payments of income tax or training levy. Other
taxes may be deductible, subject to meeting the general principles fordeductibility.

Domestic
Trading losses may be offset against all income received in the same accounting period
or carried forward and offset against future trading profits. The limitation period on
the carryforward of losses is generally 20 years. Losses may not be carried back against
prior years profits. Primary production losses and resource project losses may be carried
forward without a time limitation, although, again, they may not be carried back (see the
Tax credits and incentives section for more information).
Note that the carryforward of losses is subject to a 50% or more continuity of
shareholding and control test, or a continuity of business test where there is a breach of
the ownershiptest.
Foreign
Losses incurred by a resident taxpayer from a source outside Papua New Guinea (other
than in relation to export market development) are not deductible against assessable
income derived within Papua New Guinea. In practice, overseas losses can be carried
forward and offset against overseas income for up to 20 years.
The deduction available to a taxpayer for management fees paid to an associated person
is limited to the greater of:
2% of assessable income derived from PNG sources by the taxpayer or
2% of the total allowable deductions, excluding management fees incurred by the
taxpayer in Papua New Guinea.
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The limitation applies to both resident and non-resident taxpayers. Special rules apply to
mining, petroleum, and gas companies. These limits may not apply where the recipient
of the management fee is resident in a country with which Papua New Guinea has a DTT
or where it can be demonstrated that the management fee arrangements do not have the
purposes or effect of avoiding or altering the income tax payable in Papua New Guinea.
Group taxation
Companies are assessed for CIT separately, regardless of whether they are part of a
group of associated or related companies. Losses of one company within a group cannot
be offset for tax purposes against the profits of another company within thatgroup.
The Companies Act allows two or more companies to amalgamate and continue as one,
and provisions are in place to allow this to occur without any adverse CITconsequences.
Transfer pricing
Papua New Guinea has transfer pricing provisions that require transactions with foreign
affiliates to be conducted on an arms-length basis.
Thin capitalisation
Thin capitalisation rules apply to prevent taxpayers from incurring excessive levels of
debt.By excessively gearing their investments, companies are able to claim greater tax
deductions through the interest expense charged on such debt.Thin capitalisation rules
typically feature a debt-to-equity ratiothat governs the ratio by which companies can
borrow from related parties relative to their equity.Any interest charged on debtthat
exceeds this ratio will not be deductible for CIT purposes.
Papua New Guineas thin capitalisation rules apply a debt-to-equity ratio of 3:1 to PNG
resource companies and 2:1 to all other PNG companies.
These rules do not apply to licensed financial institutions and do not apply to interest
paid under domestic debt.If the ratio is breached, a proportion of the interest on foreign
debt will be denied as a tax deduction.

In this section, we comment on the more significant tax credits and incentives available
in Papua New Guinea, followed by a summary of those with more limited application.
Foreign tax credit
A foreign tax credit may be available to offset foreign tax paid against PNG tax payable.
The foreign tax credit is limited to either the foreign tax paid or the average PNG tax
payable on that foreign income, whichever is less. There is no mechanism to carry
forward excess foreign tax credits for utilisation in a subsequent year.
Research and development (R&D) deduction
A 150% deduction was available to all sectors of the economy for expenditures on R&D
incurred prior to 1 January 2014. Broadly, R&D expenditures are defined as systematic,
investigative, and experimental activities that involve innovation or a high degree of
technical risk carried out for the purpose of acquiring new knowledge, or creating new
or improved materials, products, devices, processes, or services. This incentive was
removed on a prospective basis in the 2014 National Budget.
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Primary production incentives
Key incentives that are available with specific application to primary production
activities include:
Outright deductions for certain capital expenditures, including clearing, preparing,
or conserving land for agriculture; eradicating pests; providing labourers
accommodation; and for the conservation and conveyance of water.
A 100% deduction is available for a new plant used directly for the purposes of
agricultural production, and an initial 20% accelerated depreciation deduction is
allowed for a new plant with a life exceeding five years.
Losses incurred in carrying on a primary production business can be carried forward
indefinitely; they are not restricted to the 20-year limit that generally applies to
company tax losses.
Agricultural companies may transfer to their shareholders the benefit of the outright
tax deduction available for many types of capital expenditures. The total deduction
available to shareholders may not exceed the amounts paid on their shares.
As part of promoting investment in primary production, a 20% tax rate is prescribed
in respect of incentive rate primary production income derived by a company (as
opposed to the normal 30% tax rate for a resident company or 48% for a non-resident
company) for up to ten years.
Agricultural production extension services deduction
A 150% deduction is available for expenditure on services provided free of charge

to smallholder growers, including the provision of advice, training, and technical
assistance in relation to primary production to assist growers with production,
processing, packaging, and marketing issues.
Incentive rate for large scale tourist accommodation facilities
A 20% tax rate applies to income derived by a taxpayer from the operation of a large
scale tourist accommodation facility or a substantially improved large scale tourist
accommodation facility. The concession applies where construction of such facilities
commenced between 1 January 2007 and 31 December 2011, expenditure is 7 million
United States dollars (USD) or more, and the taxpayer is registered with the IRC. The
rate applies for 14 years after the end of the year of income in which the taxpayer first
derives income from the facility.
Double deduction for staff training costs
Certain staff training costs, including the cost of full-time training officers and tourism
training, are eligible for a double deduction. The total tax saving is limited to 75% of the
expenditure incurred.
Double deduction for export market development costs
Expenditure incurred in the promotion for sale outside Papua New Guinea of goods
manufactured in Papua New Guinea or tourism promotion is eligible for double
deduction. The total tax saving cannot exceed 75% of the expenditure incurred.
Export incentives
The net export income from the export sale of certain types of goods is exempt for the
first four years of income, with a partial exemption in the following three years. This
exemption will cease to apply from 1 January 2015 (except in respect of goods that
qualified for the exemption prior to that date).
Tax credit for infrastructure development by agricultural, mining,

petroleum, and gas companies
A tax credit is available to agricultural, mining, petroleum, gas, and certain tourism
companies that incur expenditure on a prescribed infrastructure development. In the
case of taxpayers engaged in mining, petroleum, and gas operations, the credit is limited
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to 0.75% of the assessable income or the amount of tax payable for the year (in respect
of that mining, petroleum, or gas project), whichever is less. Excess expenditure over the
0.75% or tax payable may be included in the following years rebate claim.
Unutilised credits or excess expenditure can generally only be carried forward for two
years. In the case of taxpayers engaged in agricultural production, the credit is limited
to 1.5% of the assessable income or the amount of tax payable for the year, whichever is
less.
A prescribed infrastructure development includes a school, aid post, hospital road, and
other capital assets that have been approved as such by the Department of National
Planning and the IRC. It cannot be an expenditure required under the Mining Act or the
Oil and Gas Act.
A 1.25% tax credit scheme also exists in respect of expenditure incurred in connection
with the emergency repair of the Highlands Highway.
Other tax incentives in Papua New Guinea
Other tax incentives available in Papua New Guinea include:

Manufacturers wage subsidy.
Immediate deduction for the costs of acquiring and installing solar heating plant.
A ten year tax exemption for qualifying new business located in prescribed remote
areas of Papua New Guinea.
A specific deduction for environmental protection and clean-up costs.
Incentives for petroleum, mining, and gas operations
Special incentives and rules apply to mining, petroleum, and gas exploration, extraction,
and production activities. The main aspects are as follows:
Project basis of assessment
A project basis of assessment (ring-fencing) is adopted for all resource projects. This
means losses from other operations, regardless of whether or not they are resource
related, cannot generally be offset against resource project income from a particular
ring-fenced project. However, there are some concessions to the ring-fencing principle in
respect of exploration expenditure and expenditure in respect of discontinued projects
and losses arising from site restoration costs.
In general, all costs incurred in the exploration and development phases of the project
are accumulated and amortised over the life of the project. Once production starts, an
immediate deduction is allowed for normal operating and administration expenses.
Capital expenditure incurred after the start of production are capitalised and amortised
over the life of the project.
Rate of tax
The rates of tax in respect of income from a resource project are:
Source of income
Mining
Petroleum:
Existing projects
New projects
Incentive rate
Gas
CIT rate (%)

30
Resident companies
40
50
45
30
30
50
45
30
30
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Interest deductions
Interest is not deductible prior to the commencement of a resource project. Following

the issue of a resource development licence, a person carrying on a resource project
or exploration in relation to a resource project may claim a deduction against resource
income for interest on money borrowed for carrying on the relevant operations or
exploration. This is subject to a number of conditions, including the resource company
maintaining a debt-to-equity ratio of 3:1 (see Thin capitalisation in the Group taxation
section).
Capital allowances
Allowable exploration expenditures (AEE) are amortised over the life of the resource
project. The deduction is calculated by dividing the unamortised balance by either the
remaining life of the project or four, whichever is less. The amount of the deduction is
limited to the amount of income remaining after deducting all other deductions, other
than deductions for allowable capital expenditure. In other words, the deduction cannot
create a tax loss.
Allowable capital expenditures (ACE) are amortised over the life of the resource project.
The ACE is split into two categories: capital expenditures with an estimated effective
life of more than ten years (long-life ACE) and capital expenditures with an estimated
effective life of less than ten years (short-life ACE).
The annual deduction for long-life ACE is claimed on a straight-line basis over ten years.
Where the remaining life of the project is less than ten years, the rate at which the
deduction is allowed is calculated by referring to the remaining life of the project. For
short-life ACE, the annual deduction is calculated by dividing the unamortised balance
by either the remaining life of the project or four, whichever is less. For new mining
projects, the deductions for both long-life ACE and short-life ACE are calculated by
dividing the unamortised balance by either the remaining life of the project or four,
whichever is less.
The amount of the deduction for ACE is limited to the amount of income remaining after
deducting all other deductions. In other words, the deduction cannot create a tax loss.
Off licence exploration expenditure
A major easing of the ring-fencing principle applies to taxpayers that are involved in a
producing project, where the taxpayer or a related party incurs exploration expenditure
outside the area of the productive project. In this situation, the taxpayer can elect
(whether or not it is currently involved in a producing project) to add such exploration
expenditure to an exploration pool that can be amortised against income from the
producing project.
The amount allowable as a deduction from this exploration pool in respect of resource
operations carried on by the taxpayer or a related corporation is the lesser of:
25% of the total undeducted balance of expenditure in the exploration pool or
such amount as reduces CIT (other than additional profits tax [see below]) that
would, but for this deduction, be payable by the taxpayer and its related corporations
in respect of those resource operations for that year of income, by 10% (or 25% for
mining projects).
Management fees
Once a resource project derives assessable income, the deduction for management
fees is restricted to 2% of operating expenses other than management fees. During the
exploration phase of a project, the amount of management fees that can be treated as
allowable exploration expenditure is limited to 2% of the exploration expenditure other
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than management fees. Furthermore, during the development phase, the amount of
management fees that can be treated as allowable capital expenditure is limited to 2% of
the allowable capital expenditure other than management fees.
Transfer of expenditure
When interests are transferred from one taxpayer to another, the vendor and purchaser
can agree to transfer deduction entitlements for the unamortised balances of allowable
exploration expenditure and allowable capital expenditure to the purchaser.
Liquefied natural gas (LNG) project
A number of provisions with specific application to the PNG LNG project have been
included in the Income Tax Act, Stamp Duties Act, Goods and Services Tax Act, Customs
Act, and Excise Act.
Other provisions were added or amended at the same time as the PNG LNG projectspecific provisions, the most notable being the re-introduction of additional profits tax
for all designated gas projects.
Additional profits tax
Designated gas projects are potentially subject to additional profits tax (this tax does not
currently have application to mining or petroleum projects). This is essentially a tax on
positive cash flows arising from a gas project in excess of a hurdle rate of return. There
are two calculations required, and, in summary, they operate as follows:
Under Calculation X, once the cash flows become positive, after exceeding a 17.5%
accumulation rate, the positive cash flow is subject to tax at a 7.5% rate.
Under Calculation Y, once the cash flows become positive, after exceeding a 20.0%
accumulation rate and any additional profits tax paid under Calculation X, the
positive cash flow is subject to tax at a 10.0% rate.
Withholding taxes
Dividends, interest, royalties, and technical/management fees
The following WHT rates apply to dividends, interest, royalties, andtechnical fees under
PNG domestic law and tax treaties. PNG domestic legislation provides an exemption
from WHT for dividends and interest in certain circumstances. The higher rates quoted
are the maximum rates allowable under the treaties.
Recipient
Resident
and individuals
Treaty:
Australia
Canada
China
Fiji
Germany (4)
Korea, Republic of
Malaysia
New Zealand (5)
Singapore
United Kingdom
Dividends (1)
17
17
17
17
15
17
15
15
15
17
15
17
WHT rate (%)

Interest (2)
Royalties Technical fees
15
0
0
15
10/30 (3)
17
10
10
10
10
10
10
15
10
10
10
10
10
10
15
10
10
10
10
10
10
Papua New Guinea
0
0
0
15
10
0
10
0
0
10
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Papua New Guinea has also negotiated a DTT with Indonesia, which has not yet been
ratified in Papua New Guinea.
Notes
1.
The rate of WHT on dividends paid by mining companies is 10%. Dividends paid to a resident or a
non-resident out of income from petroleum or gas operations are exempt from income tax and are
not subject to WHT. There are also some other specific exemptions from WHT on dividends.
There is no WHT on interest when:
interest is paid or credited toa licensed financial institution in Papua New Guinea, the Bank of
Papua New Guinea, or the state
interest is paid or credited by a resource company to a non-resident lender, or
the interest income is otherwise exempt income in the hands of the recipient.
A royalty paid to a non-resident associate of the payee will suffer a 30% WHT. Where the nonresident is not an associate of the payee, the WHT rate will be10% (or 48% of the taxable income
derived from the royalty if the non-resident chooses to lodge an income tax return in Papua New
Guinea).
The treaty with Germany has not yet been ratified by Germany.
Under the terms of Papua New Guineas DTT with New Zealand, the treaty was to come into effect
for WHTs on 1 March 2014, and the remaining provisions from 1 January 2015, for both countries.
However, at the time of writing, only New Zealand has ratified the treaty, meaning the reduced WHT
rates apply from 1 March 2014 for payments made from a New Zealand resident to Papua New
Guinea. The WHT rates from a PNG perspective will not apply until the treaty is ratified in Papua New
Guinea, which is expected to occur sometime during 2014.
2.
3.
4.
5.
Business income WHT
Income derived by local contractors in certain industries is covered by the business

income WHT regime. The industries affected include:

Building and construction

Road transport
Motor vehicle repairs
Joinery and cabinet making
Security
Equipment hire
Businesses affected are required to have a certificate of compliance and to produce it

when entering into contracts with their customers. Payers are required to file an annual
income reporting statement where they make either an eligible payment of PGK 500 or
more in relation to one contract or eligible payments for several contracts exceeding PGK
3,000 in the year of income in relation to a single payee. Payers are required to deduct a
10% WHT if payees do not produce a certificate of compliance.
Non-resident insurer WHT
Premiums paid to non-resident insurers in respect of insurance contracts on property

situated in Papua New Guinea or insured events that can only occur in Papua New
Guinea are subject to tax in Papua New Guinea. The tax is calculated on a deemed
taxable income equal to 10% of the gross premium, which is taxed at the non-resident
tax rates of 48% (companies) or 30% (unincorporated associations). Tax treaties may
limit the rate of tax applied.
Tax administration
Taxable period
The tax year is generally the period 1 January to 31 December; however, application
may be made for a substituted tax year-end. These will normally be granted where the
substituted tax year-end coincides with the accounting year-end of an overseas holding
company. A companys tax year does not need to be the same as its accounting period.
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Tax returns
Papua New Guinea operates on a full assessment basis, and companies are required to
lodge an annual CIT return showing the calculation of taxable income for the year. In
addition, the return must provide detailed disclosures in relation to income derived and
expenses incurred during the year of income.
A company must file a tax return by 28 February in the year following the year of income
to which the return relates. However, the following automatic extensions apply where
the company lodges its return through a registered tax agent:
To 30 June for taxable returns and partnership returns.
To 31 August for resource company returns.
To 31 October for non-taxable returns.
Payment of tax
CIT is collected under a provisional tax system. Under this system, tax is paid in respect
of a companys current year profits (i.e. payments made in the year of income are in
respect of income derived in the same year as the payment isdue).
Provisional tax is assessed by the IRC based on the last return lodged. In the event that
no tax was payable on the previous years return, the Commissioner General has the
right to estimate the amount of tax based on any other information available.
Provisional tax is payable in three equal instalments by 30 April, 31 July, and 31October.
Applications may be made to reduce provisional tax assessed if the tax due for the year
in question is expected to be lower than the provisional tax assessed. Where estimated
provisional tax is less than 75% of the income tax ultimately assessed, additional tax
may be levied. Additional tax at a rate of 20% will be assessed, based on the difference
between the estimate lodged and the provisional tax originally determined, or the actual
tax payable, whichever is less. The Commissioner General has the discretion to require
payment of additional tax.
Mining, petroleum, and gas companies are subject to advance payments tax, a system
that broadly mirrors the provisional tax system in place for non-resource companies.
The main difference for resource companies is they have the option to lodge an estimate
of their taxable income for the year prior to 30 April, 31 July, and 31 October each year,
which the IRC uses to assess each advance payments tax instalment.
Following the lodgement of the CIT return, the IRC will serve a notice of assessment on
the company. The balance of tax payable for a year of income, after the application of
provisional tax (or advance payments tax in the case of a resource company) and other
tax credits or rebates, is due to be paid within 30 days of the date of service of the notice
of assessment.
Tax audit process
There is no prescribed tax audit process in Papua New Guinea, and resource constraints
have limited the IRCs audit activities.
Period for amendment of assessments
Where the IRC considers that a taxpayer made a full and true disclosure of all the
material facts necessary for assessing their returns as originally assessed, the IRC may
only amend an assessment that increases the tax liability of the taxpayer within three
years from the date that tax became due and payable under the original assessment.
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Where the IRC considers that a taxpayer did not make a full and true disclosure of all
the material facts necessary for the assessment of their returns, and there has been an
avoidance of tax, then:
the IRC may amend any assessments previously issued to the participants if the IRC is
of the opinion that the avoidance of tax was due to fraud or evasion (i.e. no time limit
applies), or
in cases of tax avoidance due to reasons other than fraud or evasion, the IRC may
amend an assessment within six years from the date that tax became due and payable
under the original assessment.
Topics of focus for the Internal Revenue Commission (IRC)
In late 2011, the IRC issued Taxation Circular No 2011/2, which provided guidance on
transfer pricing matters in Papua New Guinea. The IRC continues to consider transfer
pricing as an area of focus.
The IRC has indicated an increased focus on the effective collection of taxes and tax
compliance through the implementation of a new Standard Integrated Tax Accounting
System (SIGTAS).
The IRC has not otherwise publicly announced areas of focus for audit programs.
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Paraguay
PwC contact
Edgar Rubn Taboada
General Daz 521, 6th. floor
Edificio Internacional Faro
Asuncin
Paraguay
Tel: +595 21 418 8000
There have been no significant corporate tax developments in Paraguay during the past
year.

Income is taxed in Paraguay according to the resource principle (i.e. the territorial
system of taxation).
There are three tax systems in Paraguay, depending on the type of taxpayer, as follows:
Commercial income tax (CIT): For income from commercial, industrial, and service
activities, the general income tax rate of 10% applies. See Capital gains and Dividend
income in the Income determination section for a description of how such income is
taxed. Note that dividend distributions require an additional 5% tax that must be paid
on the amount of dividend approved for distribution at the shareholder meeting.
Agriculture income tax (AIT): For income from agricultural and cattle activities, the
tax rate is10% (determined by annualincome). Recently, the Congress introduced
some changes to theAIT (Law N 5061/13).
Little taxpayer income tax (LTIT): For those taxpayers with annual income of less
than 100 million Paraguayan guaranes (PYG), a single tax at a rate of 10% applies.
Local income taxes
There are no local taxes on income in Paraguay.
Corporate residence
Corporate legal residence is determined as the place where direction or central
management takes place, unless the corporations charter states otherwise.
The Paraguayan Tax Law establishes the definition of a PE.

The following activities may be considered as a PE in the country:

Branches or agencies.
A factory, industrial plant, or cattle ranch entity.
Mine activities, or any other natural resources extraction activities.
Civil construction or assemble activities that exceed 12 months.
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If a person provides instructions related to the agreement of certain operations on behalf
of a foreign entity, this operation may be considered as a PE in the country, except in
cases where the mentioned instructions are related to the purchase of goods.
Other taxes
VAT applies to all corporations and to individuals or associations of individuals

rendering personal services.
The general VAT rate is 10%, but a special VAT rate of 5% applies for selling real estate,
basic groceries, farming products, and pharmaceutical products.
Customs taxes
As products are introduced into Paraguay directly by the local importer, the importer is
responsible for payment of the related taxes (VAT on imports) before clearing the goods
from Paraguayan customs, apart from customs tariffs. The other expenses involved in
the import of products are the following:
Port rates (between 0.65% and 1.50% of customs valuation).
Customs valuation service (0.5% of customs valuation).
Consular fee (15 United States dollars [USD] for each commercial document
receiving a visa from the Paraguayan consulate at the originating country and USD
30 for each document not subject to visa).
Indian contribution fee (7% on consular fee).
IT system utilisation fee (between USD 15 and USD 25 according to importation
value).
Other expenses should be added to the above, such as photocopying, handling fees,
customs agent fees, etc.
Excise taxes
The excise tax, called the selective tax on consumption, is assessed on local goods
and imported products listed, either specifically or generically, in the legislation. The
importation of goods listed and the first sale of goods produced in Paraguay are taxed.
The selective tax on consumption is collected independently of customs duty.
Some goods subject to this tax include whiskey and other alcoholic beverages, beer,
tobacco products, etc.
Real estate tax
Real estate tax is levied annually at 1% of the fiscal value of the property, which is
generally less than actual value (or market value). A tax rate of 0.5% applies if the
area of rural property is smaller than five hectares and is used for agricultural or cattle
ranching. In certain areas, an additional tax is levied on the fiscal value of vacant and
semi-vacant land when the area of the built-up portion falls within certain determined
percentage limits. Large tracts of land in rural areas are subject to an additional tax
determined on a percentage basis and to a proportional tax of 0.5% to 1% on the fiscal
value of tracts with areas ranging from 10,000 to 60,000 or more hectares.
The 1992 Paraguayan Constitution established that municipalities and departments are
entitled to the tax revenues directly related to real estate. Collection of these taxes is the
responsibility of municipal governments.
Stamp taxes
There are no taxes on acts and documents in Paraguay.

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Branch income
Branches are taxed at the same rate as domestic corporations. Profits transferred or
credited to the head office are subject to a 15% withholding tax (WHT) when remitted to
the head office abroad.
Additionally, the payment of dividends (by the head offices instructions) is subject to
a tax rate of 5%, whichhasto be paid at the time of the remittance and charged to the
local entity.
Inventory valuation
Taxpayers may adopt any method of inventory valuation, provided it is technically

acceptable according to tax administration criteria (e.g. first in first out [FIFO], average
cost). The valuation must be applied consistently and may be changed only with the
prior approval of the Treasury Ministry.
Damaged, deteriorated, and obsolete inventories may be written down to fixed values by
the taxpayer. The tax administration can reject valuations that are not realistic.
Capital gains
Gains on all assets, tangible and intangible, are taxable as part of profits and subject to
income tax at a rate of 10%.
Dividend income
Dividends are taxable income when the recipient (or shareholder) is a non-resident, in
which case a 15% WHT applies. An additional 5% tax is charged to local entities when
the income or dividend is distributed to a local (resident) or foreign (non-resident)
shareholder.
Stock dividends
Stock dividends are not taxable income, except when dividends represent more than
30% of the taxable income of an investor.
The mentioned exemption is not applicable in relation to the 15% WHT (in case of
foreign shareholders) and 5% additional tax for dividend distribution (charged to the
local entity that made the distribution).
Interest income
Interest income of a Paraguayan resident from capital abroad is subject to income tax.
This case is the only exception to the resource principle rules enacted under Paraguay
Tax Law.
Foreign income
Foreign-source income is not taxable. Interest, commissions, and capital gains are
considered Paraguayan-source income when the investor is resident in Paraguay.
Deductions
The maximum allowable depreciation rates range from 2.5% for urban buildings to
25% for computer equipment. Depreciation is calculated using the straight-line method
based on the useful life of assets as determined by the Treasurer. The Treasurer may
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also authorise the use of other depreciation or depletion methods that are deemed to be
technically justified and generally accepted.
Fixed assets must be revalued annually based on the increase of the price index. Capital
gains derived from the revaluation of fixed assets are not taxable income.
Goodwill
Amortisation of goodwill is not deductible.
Start-up expenses
Amortisation of start-up expenses may occur over three to five years, depending on the
taxpayers decision.
Interest expenses
The interest expenses on loans taken for Paraguayan residents or Paraguayan taxpayers
may be considered as deductible expenses.
Additionally, it is important to mention that certain investment projects may be subject
to a special exemption of the taxes on the interest, commission, and other expenses for
loans taken for banking entities abroad (see Investment incentives in the Tax credits and
Extraordinary losses/bad debts
The deduction of extraordinary losses and bad debts require the meeting of certain
conditions (e.g. communication to the tax authority, evaluation of the actual loss in
monetary terms, audit review).
The deduction of a donation is subject to formal registration of the beneficiary entity as a

public benefactor before the Treasury Ministry.
Executive remuneration
The deduction of executive remuneration is limited to a percentage defined according to

the enterprises profits. However, in the event that the executive employees are subject to
personal income tax (PIT), the deduction of their salariesis not limited for CIT purpose.
Fines and penalties
Fines and penalties are considered as non-deductible expenses for income tax purposes.
Taxes
In general, all taxes mentioned in the Other taxes section are deductible. Income tax and
any fiscal surcharges or fines are not deductible.
General provisions for expenses or other potential losses are not deductible.
Other specific non-deductible items include:
Interest on capital, loans, or any other investment by an owner, partner, or
shareholder in a business.
Personal expenses of an owner, partner, or shareholder, except when they are subject
to PIT.
Money drawn on account of future earnings.
Direct expenses incurred in earning non-taxable income.
Earnings from any fiscal period that are retained in the business as capital increases
or reserve accounts.
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Paraguay
Net operating losses are not permitted to be carried forward and applied against future
years.
Losses may not be carried back in Paraguay. However, a taxpayer may modify ones tax
returns at a later date.
There are no limits on the deductibility of payments to foreign affiliates, including

management fees, royalties, research and development (R&D), and general and
administrative expenses, provided that the taxpayer maintains corresponding legal
documentation that includes the country of origin and applies appropriate WHT. See the
Withholding taxes section for the applicable WHT rates.
Group taxation
Group taxation is not permitted in Paraguay.
Transfer pricing
There are no transfer pricing rules in current Paraguayan legislation requiring

compliance with certain conditions or minimum prices for the purpose of fiscal
deductions, except for the following regulation applicable to importations and
exportations:
In the case of importers, it will be assumed that, in the absence of proof to the contrary,
the cost of goods introduced to the country may not exceed the wholesalers price ruling
in their place of origin plus freight and insurance costs and expenses to Paraguayan
territory, and therefore, the excess of such value will constitute taxable income for the
importers.
In the case of exporters, where a price has been fixed or the price declared is lower than
the wholesalers price in Paraguay plus the freight and insurance costs and expenses
to point of destination, this latter aggregate value shall be taken as the basis for
determining the exporters taxable income.
To this effect, the nature of the goods and the transaction mode adopted will be taken
into account. (Section 16 of Law No. 2421/04).
Thin capitalisation
There are no thin capitalisation rules in Paraguay.

Foreign tax credit
Foreign tax credits are not applied to local tax payments in Paraguay.
The framework of economic investment was established in the Law No. 60/90, which
offers some special tax exemption benefits to foreign and local investors.
The benefits of the Law No. 60/90 may be available for the following investments:
Cash, financing, provision of credit, or other financial instruments, under the
conditions established by the administration of the President of Paraguay and the
corresponding ministries.
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Capital goods, raw materials, and inputs for local industry for the fabrication of
capital goods.
Transfers of licensing rights with respect to trademarks, industrial processes and
models, and other technologies.
Technically specialised services.
Capital leases.
Other forms that the administration of the President of Paraguay and the
corresponding ministries determined by law.
The investment incentives included in Law 60/90 that remain enacted after tax law
modification (Law No. 2421/04) are the exemptions from certain fiscal, municipal, and
customs duties taxes.
When the amount of financing for an investment is equal or greater than USD 5 million,
it will be exempt from WHTs on interest, commissions, and capital that have to be paid
to financial or banking entities abroad. This benefit is for five years.
If the investment is at least USD 5 million and the project is approved by the tax
authorities, the dividends and profits derived from the project are tax exempt. The
mentioned exemption is granted for five years and may beextended to ten years.
Maquila tax exemptions (Law No. 1064/97)
Under the Maquila Regime, investors may import goods or products to be assembled,
repaired, improved, worked on, or processed with the purpose of exporting such goods
or products, prior to the addition of value or the Paraguayan component. This regime
is subject to a special tax treatment: a 1% tax rate applies to the value added within
Paraguayan territory.
Innovative regulations allow for virtual commerce between maquila factories, which
improve the utilisation of goods imported under the temporary regime (called virtual
maquila).
This regime also establishes the service maquila, which enjoys the same tax benefits, and
its main purpose is to provide support to entities abroad (currently, there are call centres
that benefit from this regime).
Paraguayan legislation does not impose restrictions in terms of the types of products and
services that the maquila industry may comprise. The maquila activitys national policy
is regulated and supervised by the National Council of the Maquila Industry for Export
(CNIME). Both individuals and legal entities domiciled in Paraguay, whether national or
foreign, may take advantage of these regulatory benefits.
This industry has been receiving broad government support, given that it is considered
an element of social interest in the strive to combat unemployment. There are currently
over 57 maquila companies in the country.
Duty and tax-free zones (called zona franca Law No. 523/95)
Duty and tax-free zones, where all types of commercial, industrial, and service activities
may be carried out, constitute a relevant incentive for business.
The legal framework governing such zones offer several advantages in terms of tax
exemptions, as well as a special tax regime with an income tax rate of 0.5%.
The main purpose of free trade zones is the development of activities in connection with
foreign markets; however, operations within the country are also allowed.
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Act 523/95, which authorises and establishes the Free Trade Zone Regime, and its
regulatory decree 15.554/96, which regulates the Free Trade Zone Act, among others,
establish the guidelines related to activities within free trade zones.
The aforementioned regulation establishes two main entities, the concessionaire,
responsible for providing the necessary infrastructure for freight operational
management, and the user, responsible for carrying out the commercial, industrial, or
service activity. The regulation therefore establishes the administrative measures that
enable operations in free trade zones and its supervision, control, and development.
There are currently two free trade zones located in the Alto Paran region (northeastern
region, in close proximity to the border with Brazil and Argentina), in which national
and international companies actively operate.
Other incentives
Exports are exempt from certain customs duties and from VAT.
A Capital Market Law (No. 1284/98) established incentives for issuance of bonds
abroad.
Under the Export Incentives Regime, exports are VAT exempt. The legislation
recognises a tax credit for pre-production stages. A Temporary or Provisional
Admission Regime is also in place, which exempts imports from import tariffs and
VAT.
Withholding taxes
In accordance with the regulations in force, foreign entities may be subject to income
tax withholdings in respect of services rendered to them deemed to be of Paraguayan
source, including payments made by the branch or affiliate of a foreign home office.
Business income tax regulations consider that branches, agencies, or PEs of foreign
entities are taxpayers, independently from the foreign home office status.
The withholdings are to be made from the payments made by local entities for such
services.
WHT on payments made by a domestic corporation

WHT (%)
Recipient
Tax treaty with Chile:
Dividends (1)
Substantial
Portfolio
holdings
15
15
10
10
10
10
10
10
Interest
(2, 3)
30
30
Royalties
(3, 4)
30
10
Fees
(3, 5, 6)
30
10
10/15 (7)
Notes
1.
2.
3.
Local entities are required to pay an additional 5% WHT when the income or dividend is distributed.
The WHT on interest is based on 100% of the amount paid when remitted to the head office abroad.
In other cases, when the payment is not directly made to the head office or shareholders that have
control of the local subsidiary, the WHT is based on 50% of the amount paid. The tax rate is 30%.
For financing loans, the WHT effective taxrate is 6%.
In the case of financing operations (loans), VAT is withheld at a rate of 9.09% from 1 January
2014 (previously 4.76%). VAT is withheld on royalties and other services provided for non-resident
corporations or individuals at a rate of 9.09%.
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4.
5.
6.
The WHT on royalties is based on 100% of the amount paid when remitted to the head office abroad.
The tax rate is 30%. In other cases, when the payment is not directly made to the head office or
shareholders that have control of the local subsidiary, the WHT is based on 50% of the amount paid.
The tax rate is 15%.
The WHT on fees is based on 100% of the amount paid when remitted to the head office abroad. The
tax rate is 30%. In other cases, it is based on 50% of the amount paid. The tax rate is15%.
Fees for technical assistanceservices rendered by non-resident corporations are subject to WHT at a
rate of 15% on the amount paid. In case the mentioned services are rendered by the head offices or
direct shareholder, the tax rate is increased to30%.
Fees for personal services rendered by non-resident individuals are subject to PIT. Thewithholding of
PIT has to be made on 50% of the amount paid. The tax rate is 20% (effective tax rate of 10%).
7. In case of a loan to Chile, the WHT on the interest is 15% if the loan is provided by a bank or
insurance company. On the other hand, if the loan is provided by an associated company or head
office, the tax rate is 10%. Regarding VAT WHT, see Note 3.
Tax administration
Taxable period
For the CIT, AIT, and LTIT, the taxable period is the calendar year.
Tax returns
Income tax returns are submitted on a fiscal-year basis as a self-assessment and must be
filed by the fourth month following the end of the fiscal year.
Payment of tax
Income tax is due on varying days in the fourth month following the end of the fiscal
year, depending on the taxpayer ID number, according to a calendar established by
the Treasury Ministry. Four equal advance payments are made throughout the year,
calculated based on 100% of the tax due in the previous year. Payments must be made
in May, July, September, and November of each year after the due date for filing the
income tax return, according to the calendar established by the tax authorities.
Penalties
Tax legislation provides the following penalties:

Late payment of income tax is penalised by a fine varying from 4% to a maximum of
14%, plus interest at 0.116 per day.
Tax fraud is punished by a charge of from one to three times the value of the tax in
default.
Tax law infringements are penalised through fines varying from the equivalent of
USD 10 to USD 250.
Omission of payment incurs a fine of 50% of the tax pending.
Tax audit process
The auditing process is performed by the tax authorities when there is a certainty or
suspicion of tax evasion. Additionally, the taxpayer may be audited according to a draw
process that is made by the tax authority.
The tax law also establishes an obligatory tax audit, which has to be made by external
auditors, when the taxpayer obtains PYG 6 billion of gross income during the year. An
annual audit report on tax compliance rules is presented to and reviewed by the tax
authorities. When a tax issue is identified, the tax authority may apply a penalty to the
taxpayer.
The tax authority may audit the last five fiscal years.
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Peru
PwC contact
Orlando Marchesi
PricewaterhouseCoopers Sociedad Civil de Responsabilidad Limitada
Av. Santo Toribio No. 143
Piso 8
Lima 27
Peru
Tel: +51 1 211 6500
The following changes to the Peruvian tax legislation were incorporated during the past
year.
Double taxation treaties (DTTs)
DTTs with Korea, Mexico, Portugal, and Switzerland will have effect from 1 January
2015.
Energy and Mining Investment Regulatory Agency (OSINERGMIN) and

Environmental Regulatory Agency (OEFA) contributions
Two new contributions are levied against mining companies: the OSINERGMIN
contribution, which is enacted and in force, and the OEFA contribution, which is
proposed but not yet enacted.
OSINERGMIN contribution
In December 2013, Supreme Decree No.128-2013-OSINERGMIN created a contribution

for the regulation of mining companies to be paid to the OSINERGMIN.
The basis for calculating the OSINERGMIN contribution is the monthly invoicing of
activities directly related to OSINERGMINs regulatory scope (mining activities), after
deducting the value-added tax (VAT). The applicable rates are 0.21% in 2014, 0.19% in
2015, and 0.16% in 2016.
OEFA contribution
The OEFA contribution will be payable by mining companies to the OEFA in order to
finance its activities.
Pursuant to the bill proposing the creation of the OEFA contribution, the calculation
basis is the monthly invoicing of activities directly related to OEFAs regulatory scope
(mining activities), after deducting the VAT. The applicable rates would be 0.15% in
2014 and 2015 and 0.13% in 2016.
Note that mining companies with Mining Stability Agreements in force will also
be required to pay these contributions since they will not be exempted under such
agreements. Indeed, Mining Stability Agreements only exempt mining companies from
taxes (e.g. income tax, special mining tax) and not contributions, which are payments to
Public Agencies.

Companies incorporated in Peru are considered resident in Peru for tax purposes and
thus subject to a corporate income tax rate of 30% on worldwide net income.
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For purpose of determining taxable income, such entities are allowed to deduct expenses
to the extent that they are necessary to generate or maintain the source of taxable
income. Requirements, limitations, and/or caps may apply to the deduction of certain
expenses (thin capitalisation rules), bad debt provisions, salaries, travel expenses, gifts,
donations, penalties, etc.
The Peruvian Income Tax Law (PITL) allows crediting for various payments against
income tax, including income taxes paid in advance, amounts paid for certain other
taxes, and income taxes paid in foreign tax jurisdictions, provided that the foreign
countrys tax rate is not higher than the Peruvian corporate tax rate and the taxable
income qualifies as foreign-source income for Peruvian income tax purposes.
Dividends and any other type of profit distributions are taxed at a 4.1% rate, upon
distribution, when the distribution is made to a non-resident entity (either individuals
or legal entities) and, when the distribution is agreed to by the shareholders, if this
happens first, to resident individuals (resident legal entities are not subject to 4.1%
withholding tax [WHT] over dividends received from other Peruvian corporations). The
entity distributing dividends or profits is liable for WHT at a rate of 4.1%.
Nevertheless, enterprises are subject to an additional tax rate of 4.1% on every amount
or payment in kind that, as result of a tax audit, is construed as taxable income to the
extent that it is an indirect distribution of such income that escapes further control from
the tax administration, including income that has not been declared.
On the other hand, companies incorporated abroad are considered as non-domiciled in
Peru for tax purposes and thus subject, in most cases, to an income tax rate of 30% over
the gross Peruvian-source income. As a general rule, foreign companies are not allowed
to deduct expenses and are taxed on gross income.
Local income taxes
There are no local or provincial taxes on income in Peru.
Corporate residence
For income tax purposes, the following entities, among others, are considered as
resident entities in Peru:
Corporations duly incorporated in Peru.
Branches, agencies, and permanent establishments (PEs) in Peru of non-resident
individuals or entities.
Partnerships and limited liability companies.
According to the PITL, a foreign company is considered to have a PE (i) if it has a fixed
place of business through which it carries out business activities in whole or in part; (ii)
if an individual has a power of attorney of a foreign entity and uses it on a regular basis
to sign agreements on behalf of the foreign entity; and (iii) if the person with powers of
attorney of the foreign entity keeps in Peru inventory and/or goods to be negotiated in
Peru on behalf of the foreign entity.
The consequence of a PE presence in Peru is that the PE will be obligated to comply with
all the formal and substantial tax obligations of any domiciled taxpayer, meaning that
it will have to be registered before with the tax administration (get a tax identification
[RUC] number), keep full accounting books, file monthly and yearly tax returns,
withhold taxes, allocate a reasonable income for its Peruvian source activities, etc. If
a PE presence is determined, then the tax contingency will have to be quantified by
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calculating the taxes, fines, and interest accrued as from the moment in which the PE
presence can be deemed, except for the period barred by statute of limitations.
Other taxes
The general rate of VAT is 18% and is applicable to the following operations:

Sale of goods within the country.

Rendering or first use of services within the country.
Construction contracts.
The first sale of real estate made by construction firms.
Import of goods.
For all transactions, the vendor is subject to VAT, except in the case of importation of
goods or services rendered abroad, but economically used within Peru, for which VAT is
self-assessed by the importers and users, respectively.
The VAT law follows a debit/credit system, and input VAT may be offset by output VAT.
Should excess input VAT be obtained in a particular month, it shall offset output VAT
obtained during the following months, until it is exhausted.
The export of movable goods (including the sale of goods in the international zone
of ports and airports) is not subject to VAT, nor is the exportation of certain services.
Thus, VAT paid upon the acquisition of goods, performance of services, construction
agreements, and the importation of goods related to exported goods or services creates a
positive VAT export balance.
The positive balance may offset output VAT, income tax, or any other outstanding tax
debt in favour of the central government. If the positive balance is not completely offset,
as the amount of the aforementioned tax obligations is insufficient, the taxpayer may
apply for a refund.
Tax Obligatory Payment System (SPOT)
The SPOT is applicable to the sale of certain goods and the rendering of services subject
to Peruvian VAT. The main purpose of the SPOT is to generate funds to enable the
payment of tax obligations by the VAT payer.
According to the SPOT, all the sales of goods and services listed in the appendices of the
Resolution that are levied with VAT will be subject to withholding, applying the rates
established for each kind of good and service (1.5%, 4%, 9%, 12%, or 15%).
Any service subject to VAT, except expressly excluded, will be subject to the SPOT with a
withholding rate of 12%.
The purchaser or service recipient must withhold a percentage of the transaction price
and deposit such amount within the sellers or service providers State Bank (Banco de
la Nacin) account. It is important to note that the right of the purchaser or user of the
service to offset input VAT related to such goods and services may be exercised only after
the deposit with the State Bank has been executed.
The amount deposited is applied towards the payment of the sellers or service providers
Peruvian tax obligations (not just VAT). If after four consecutive months such amount
is not utilised, the seller or service provider may apply for a refund or use the amount to
pay withholding applicable to purchasers or services recipients.
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Customs duties
Customs duties applied to imports are linked to their classification under the Customs
Tariff, given by NANDINA subheading that is determined by the information provided by
the importer (through the invoice and other complementary information), as well as the
physical recognition by the Customs Officer at the time of customs clearance.
As such, the taxes required are:
Ad valorem customs duty (rates of 0%, 6%, and 11%, as the case may be).
VAT (16%).
Municipal promotion tax (2%).
Other taxes that may apply, depending on the equipment, include the following:

Selective consumption tax.

Specific duties.
Antidumping and compensatory.
VAT perception.
There are no restrictions on imports and exports, although there is a limited list of
products that cannot be imported or exported. Exports are not subject to any taxes. The
importation of most capital goods is subject to the 0% rate.
The government is empowered to grant duty exemptions under certain circumstances
and also to temporarily suspend the assessment of duties on certain products. Customs
duties are imposed on an ad valorem basis (the carriage, insurance, and freight [CIF]
value of the imported goods). Goods are classified for customs duty purposes under the
Harmonized System.
Pursuant to the drawback regimen, an exporter may apply for a refund of the customs
duties that it paid upon: (i) the importation of goods contained in the exported goods or
(ii) the importation of goods that are consumed during the production of the exported
goods.
The refund rate is currently 5% of the freight on board (FOB) value of the exported
good, provided such amount does not exceed 50% of the goods production cost. The
refund will proceed for each type of good exported by the exporter and for the first 20
million United States dollars (USD) worth of goods exported per year (the excess will
not be subject to refund).
For such purpose, the beneficiaries of the drawback regime are the manufacturer/
exporter companies whose cost of production has been increased by the customs duties
paid upon the importation of: (i) raw material, (ii) intermediate products, or (iii) pieces
incorporated or consumed in the production of the exported good. Note that fuel or
any other energy source used to generate heat or energy for purposes of obtaining the
exported good is not considered as raw material.
Excise tax
The sale of specific goods, including fuel, cigarettes, beer, liquor, and vehicles, is subject
to excise tax.
Excise tax rates, and the manner on which the tax is applied, depend on the type of
goods or services.
Real estate property tax
The real estate property tax is levied on the value of urban and rural real estate property.
Individuals and legal entities owning the referred real estate properties are considered
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taxpayers for such purposes. The taxable base is calculated taking into account the value
of all the properties owned in a specific local district, as reflected in the internal records
of the corresponding local authorities.
The tax is calculated and paid on an annual basis applying the following progressive
cumulative scale:
Real estates value
Up to 15 tax units
For the excess of 15 tax units and up to 60 tax units
Over 60 tax units
Real estate property tax rate (%)

0.2
0.6
1.0
The real estate transfer tax is levied on all transfers of urban and rural real estate
property. The taxpayer is the purchaser of the property. The taxable base is equivalent
to the consideration agreed upon by the parties to the transaction, provided it is higher
than the propertys value (in the relevant year for purposes of the real estate property
tax) as reflected in the internal records of the corresponding local authorities.
The tax rate is 3% and must be borne exclusively by the buyer, regardless of whatever
the parties agree. The first ten tax units (approximately USD 13,500) of the taxable base
are exempt from this tax.
Stamp taxes
There are no stamp taxes in Peru.
Financial transactions tax (FTT)
FTT is applied at a rate of 0.005%on all debits and/or credits on bank accounts held by
the taxpayers.
The following operations, among others, are exempted from the FTT:
Operations made between accounts of the same holder.
Credits to bank accounts for payment of salaries.
Credits and debits to bank accounts of diplomatic representations and international
organisations recognised in Peru.
Payments of FTT are deductible as expenses for income tax purposes.
Temporary net assets tax (TNAT)
Companies subject to income tax are obligated to pay TNAT, except for companies that
are in preoperative stages or that commenced business on 1 January of the fiscal year in
which TNAT must be paid.
The taxable basis is the value of the assets set forth in the taxpayers balance sheet as of
31 December of the year prior to that of the tax payment, adjusted for deductions and
amortisations accepted by the Peruvian law.
The amount of TNAT is determined by applying the following rates on the taxable basis:
Up to 1 million Peruvian nuevos soles (PEN): 0%.
Excess of PEN 1 million: 0.4%.
The amount paid for TNAT may be credited against the taxpayers income tax. If not
totally utilised, the remaining TNAT may be refunded by the tax administration.
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Special taxation on mining industry
The new mining royalty (NMR) regime, special mining tax (SMT), and special mining
contribution (SMC) are economic considerations paid to the Peruvian government for
the exploitation of mineral resources. The NMR applies tometallic and non-metallic
mineral resources, while the SMT and SMC onlyapply tometallic mineral resources.
TheSMC is only applicable to mining companies with projects with tax stability
agreements in force. Such companies have voluntarily entered into agreements with
the Peruvian government with the purpose of paying this contribution. This special
contribution is determined for each stability agreement entered into.
In all three cases, the tax basis is the operating profit of the company, and the special
rates and considerations are explained below:
Concept
Regime
Cumulative progressive scale
based on operating margin
Minimum payment
New mining royalty

(NMR)
No tax stability
Previous mining
royalty modified
1% to 12%
Special mining tax

(SMT)
No tax stability
New
Special mining
contribution (SMC)
With tax stability
New
2% to 8.4%
4% to 13.2%
1% of the sales
revenue
N/A
N/A
The amounts paid will be deductible for income tax purposes as long as they are actually
paid during the fiscal year.
Payroll taxes
Health contributions
Employers shall make monthly health contribution payments equal to 9% of the

compensation paid to employees.
Employees shall be affiliated either to the National Health System (EsSalud) or the
Private Health System (EPS), according to what option they choose. In the latter, a
portion (25%) of the amount paid to the EPS may be used by the employer as a credit to
be offset against EsSalud contributions.
Pension funds contributions
Employers shall apply monthly withholdings for pension funds contributions equal
to 13% of the remuneration received by the employee in cases where the employee is
affiliated with the National Pension System (ONP) or approximately 12.4% in cases
where the employee is affiliated with the Private Pension System (AFP). In this last case,
10% corresponds to the personal pension account and almost 2.4% to insurance and
commissions for managing the fund.
Should a foreign individuals labour contract end and the individual leave Peru, their
pension funds deposited in AFP may be wired to an account of the employee in a foreign
bank (the aforementioned 10%).
Branch income
Branches, agencies, and PEs of non-resident companies or entities incorporated in Peru
are subject to income tax at a 30% rate on their Peruvian-source income.
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For tax purposes, branches or subsidiaries are subject to the same obligations applicable
to all companies in Peru, including income tax, VAT, FTT, filing of the corresponding
income tax and VAT returns, issuance of invoices, etc.
Nevertheless, the following important differences between subsidiaries and branches
resident in Peru must be taken into account:
Branches are subject to income tax only for their Peruvian-source income, while
subsidiaries are subject to income tax on their global-source income (both Peruvian
and foreign income).
For branches, the 4.1% WHT on profit for distribution is applied on the date the
annual income tax return is submitted. Subsidiaries are subject to the 4.1% WHT
on the earlier of the date in which the corresponding shareholders agreement took
place or the date when the beneficiary receives the dividends. For non-domiciled
shareholders, the withholding will be applied whenever the dividend is actually
paid, without taking into account the moment in which the shareholder agreement is
executed.
Inventory valuation
The first in first out (FIFO), average, specific-identification, retail, and normal or basestock methods are allowed for inventory valuation. The last in first out (LIFO) method is
not permitted.
Capital gains
Capital gains are taxed as ordinary income. However, capital gains derived from the sale
of stock issued by a Peruvian company through the Lima Stock Exchange are taxed at a
5% rate.
Dividend income
Cash dividends distributed to resident corporations are not subject to any taxes.
Interest income
The PITL establishes that the WHT rate on interest arising from loans is 4.99%, provided
the following requirements are met:
In case of cash loans, the entrance into Peru of the foreign currency must be duly
accredited.
The credit must not accrue an effective interest that surpasses that of the London
Interbank Offered Rate (LIBOR) plus 7 points (for loans proceeding from Europe or
the United States).
The loan must be destined to finance business or taxable activities.
The parties involved must not qualify as related parties for tax purposes.
If any of the above mentioned conditions are not met, or to the extent they are not
fulfilled, a withholding rate of 30% over the gross interest will be applied. A 30%
withholding rate will also apply whenever the debtor and creditor are related parties or
when the participation of the creditor only aims to conceal a transaction between related
parties.
Foreign income
A Peruvian corporation is taxed on foreign-source income. Foreign-source income

is recognised upon accrual. No tax deferral is allowed on this type of income (see
Controlled foreign companies in the Group taxation section). Double taxation may be
avoided by means of foreign tax credits.
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Deductions
Acceptable payment methods
Obligations that are fulfilled through cash payments exceeding PEN 3,500 must be made
via bank account deposits, wire transfers, payment orders, credit cards, non-negotiable
cheques, or other means of payment provided by entities of the Peruvian financial
system. Failure to use one of these payment methods when such an obligation exists
will result in the disallowance of deductions for any expenses or costs for income tax
purposes and the disallowance of a credit for the corresponding VAT.
Expenses derived from transactions entered into with entities resident

in tax havens
Certain expenses are not tax-deductible, including expenses incurred with respect
to transactions with (i) entities resident in tax havens on the list attached to the PITL
regulations, (ii) PEs located in tax havens, or (iii) entities that generate revenues or
income through tax havens.
Nonetheless, expenses incurred from the following transactions are excluded from the
above mentioned limitations, provided the consideration paid falls within market value:

Interest on loans.
Insurance premiums.
Leases of aircraft or ships.
Maritime freight.
Fees for passing through the Panama Canal.
Depreciation
Assets may be depreciated for tax purposes via the straight-line method, capped at the
following rates, but without exceeding the amount of the financial depreciation:
Assets
Cattle (both labour and reproduction) and fishing nets
Vehicles (except trains) and any kind of ovens
Machines and equipment used for mining, oil and construction activities,
excluding furniture, household, and office goods
Equipment for data processing
Machines and equipment acquired as of 1 January 1991
Other fixed assets

25
20
20
25
10
10
Buildings must be subject to a flat 5% depreciation rate, regardless of the financial

depreciation.
The amortisation of property rights, trademarks, patents, and manufacturing

procedures, as well as other similar intangible assets, are not deductible for income
tax purposes. However, the price paid for intangible assets of a limited duration, at the
taxpayers choice, may be considered as an expense and applied to the results in a single
year or amortised proportionally in a ten-year term.
The Peruvian tax administration, prior to an opinion from the corresponding technical
organisms, is permitted to determine the real value of those intangible assets for tax
purposes, when the price does not reflects the real one.
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Organisation expenses, pre-operating expenses (including initial operations and further

expansion of operations), and interest accrued during the pre-operating period may be
expensed in the first period of operation or amortised using the straight-line method
over a maximum of ten years. However, once a company has elected to recover startup costs via the straight-line method, it may revoke such election only upon receiving
approval of the tax authorities.
Interest expenses
In general terms, interest on loans and related expenses are deductible, provided they
are related to the acquisition of goods or services incurred, or to be incurred, in order to
obtain or produce taxable income or to maintain the source of such income.
In the case of loans entered into between related parties, the amount of interest to be
deducted is limited to interest from indebtedness not exceeding three times the net
equity of the debtor as of the end of the previous fiscal year (see Thin capitalisation in the
Group taxation section).
Bad debts
Write-offs of bad debts and equitable provisions are deductible, provided that the
accounts to which they belong are determined. For the provisions of bad debts, it is
necessary that:
there is a debt due and the taxpayer can provide evidence of the financial difficulties
of the debtor that could foresee a risk in the collection of the debt and
the provision is registered separately in the inventory and balance book at the fiscal
year closing. In this sense, generic bad debt provision will not be deductible in the
assessment of the net taxable income, nor will bad debts whose terms have not yet
elapsed.
Bear in mind that the following debts are not considered bad debts:
Debts incurred between related parties.
Debts guaranteed by banks or financial companies by means of rights over real
property, money deposits, or purchase-sale agreements with reservation of right of
legal ownership.
Debts that have been subject to renewal or express extension.
Donations made to entities of the public sector, except companies, and to non-profit
associations with certain purposes are deductible, provided that the receiver of the
donation is duly qualified by the tax administration.
The deduction will be limited to 10% of the net income of the donor and only during
the fiscal year in which it is granted (carryforward of the donation is disallowed). This
means that if the donor does not obtain taxable income in the fiscal year in which the
donation is made, no deduction will be available.
Profit sharing
Entities with more than 20 employees, provided they obtain taxable income during the
fiscal year, must distribute a percentage (5%, 8%, or 10% depending on the industry)
of their profits (the basis is the tax profit of the fiscal year) among their employees. The
amount of distribution for each employee depends on the effective working days during
the year and annual remuneration.
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Employees retributions and health insurance premiums
Employees retributions paid during a fiscal year may be deducted in such year, provided
the payments are made by the employer before the term to file its annual income tax
return expires. Likewise, health insurance premiums for employees, their spouses, and
children are deductible.
Vehicle expenses deductions
Vehicle expenses may be deducted, provided the vehicles are essential to a companys
business activities and are continually used for such purpose. There is a limitation on
the tax deductibility of car expenses used for administrative of representation purposes,
depending on the amount of income generated by the company. The number of company
cars assigned to directors, managers, and representatives of a company may not exceed
five under any circumstances.
Fines and penalties
Fines and penalties are not deductible for income tax purposes.
Taxes
Other taxes assessable on properties and activities generating taxable income are
deductible for income tax purposes.
Tax losses may be offset according to either of the following systems:

Against net income generated within the following four fiscal years after the year in
which the loss is incurred. Any losses that are not offset within such period may not
be carried forward to any future year.
Against 50% of the net income generated in the following fiscal years after the year
in which the loss was generated. Under this system, there is no time limitation for
carrying forward the losses.
After choosing one of the aforementioned systems, the taxpayers may not change the
system until the accumulated tax losses from prior fiscal years are exhausted. Losses may
not be carried back to years prior to the year in which the loss is generated.
Payment of royalties to non-resident affiliates is permitted and deductible from gross

income.
Group taxation
Group taxation is not permitted in Peru.
Transfer pricing
The rules related to market value and transfer pricing establish that, in any kind of
transaction, the value assigned to the goods and services must be the market value for
tax purposes. If such value differs from the market value, either by overvaluation or subvaluation, the tax administration will proceed to adjust it for both the purchaser and the
seller, even when one of them is a non-domiciled entity, provided that the value agreed
to results in a lower tax than the one that would have applied if transfer pricing rules
had been applied. The adjustment will be imputed in the taxable period in which the
operations with related parties were performed.
In case of transactions between related parties or those entered with tax havens, the
market value will be equivalent to the value agreed with independent parties in similar
transactions, being mandatory to support such value with a transfer pricing study.
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The law states that transfer pricing rules will not apply for VAT purposes.
Tax price adjustments
Adjustments to prices are only required whenever the price paid generates a higher tax
deduction or a lower income tax in Peru; consequently, the existence of a tax prejudice
will be required for an adjustment to be requested.
Adjustments are performed individually (on each operation) and not in an overall or
global manner.
The adjustment of the value assigned by the Superintendencia Nacional de
Administracin Tributaria (SUNAT) or the taxpayer will be effective for both the
transferor and the purchaser or transferee, without any constraints. Previously, such
bilateral adjustment was conditioned to both parties being domiciled or incorporated in
Peru, a condition that has now been rejected. In the case of non-domiciled parties, the
bilateral adjustment will only proceed on transactions that could trigger taxable income
in Peru and/or deductions for determining the income tax in Peru.
The adjustments are attributed to the corresponding tax period, according to the
attribution rules depicted in the PITL (accrual regime for corporate taxpayers).
However, when, under such rules, the adjustment cannot be attributed to a particular
period, the adjustment will be allocated among all tax periods where income or expense
has been allocated, in proportion.
Operations where no consideration has been paid are subject to transfer pricing rules.
In this kind of transaction, the adjustment shall be allocated to the period or periods in
which revenue would have accrued if consideration had been paid and the income was
to be acknowledged by a domiciled taxpayer. On the other hand, if the income was to be
recognised by a non-domiciled taxpayer, it would be attributed to the period or periods
where the expenses accrued, even if it was a non-deductible expense.
Commodities
A new methodology has been added for determining prices in the sales of internationally
traded commodities to tax havens or intermediaries.
In this methodology, it is required to determine the price of the specified operation
based on the international price without taking into account the particularities of
each case. Such method will not be applied as long as the taxpayer has entered into
futures contracts for hedging purposes in respect of imported or exported goods, or
irrefutably accredit that the international intermediary has real presence in the territory
of residence and their core business does not consist of obtaining passive incomes, or
brokering in the sale of goods to members of the same economic group.
Thin capitalisation
In the case of loans entered into between related parties, the amount of interest to be
deducted is limited to interest from indebtedness not exceeding three times the entities
net equity as of the end of the previous fiscal year. In this connection, even though
Peruvian corporate law has no requirements as to a minimum amount of share capital
to incorporate a legal entity, it should be noted that having a small share capital may
jeopardise the deductibility of interest payable for loans granted by related entities since,
in case of newly incorporated entities, the share capital (equity) to be considered for
calculating the thin capitalisation limit is the original one (this is, the one with which
the entity was incorporated). In any case, this will only trigger a deductibility problem
for the fiscal year in which the entity is incorporated, since for the following fiscal year
the thin capitalisation rule will be calculated on the basis of the net equity at the end of
the prior fiscal year (which, at that moment, may have already been increased through
new contributions or capitalisations).
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CFC rules are in force in order to avoid the deferral of income tax on passive income
obtained from CFCs (defined as at least 50% of ownership, voting rights or gains) by
domiciled taxpayers, provided such companies are situated in tax havens or jurisdictions
with nil or reduced tax rates.
Taxation of indirect disposal of shares in Peruvian entities
The indirect transfer of Peruvian shares of a foreign entity that, in turn, owns (directly or
indirectly through other entities) shares of a Peruvian entity is levied with income tax,
provided that both of the following conditions are met:
During the 12 months prior to the transfer, the market value of the Peruvian entitys
shares owned by the foreign entity equals 50% or more of the market value of the
foreign entitys shares.
During any given 12-month period, shares representing 10% or more of the foreign
entitys share capital are transferred.

Foreign tax credit
Pursuant to the PITL, taxpayers may deduct the foreign income taxes paid due to their
foreign-source income levied by the PITL, provided that it doesnt exceed the amount
that results from applying the average rate of the taxpayer to the incomes obtained
abroad, or the tax paid abroad. The amount that, for any circumstance, is not used in the
corresponding fiscal year cannot be set off (or compensated) in others fiscal years or be
refunded.
Also, the following will be taken into account:
Tax credit will be granted for the entire tax paid abroad that falls upon income taxed
by the PITL.
Taxes paid abroad, whatever its denomination, shall bear the characteristics of
income taxes.
Tax credit will only be granted when the payment of the foreign income tax is
supported by reliable documentation.
Early recovery of VAT
Companies in a preoperative stage with large projects in process may apply for early
recovery of VAT prior to commencing operations. An investment agreement with the
government (the Ministry of its sector) is required.
Stability agreement
Investors may enter into stability agreements with the government, either under the
general regime or specific regimes (i.e. mining and petroleum).
Under the general regime, investors may enter into Juridical Stability Agreements that
guarantee the following advantages for a ten-year period:
Stability of the income tax regime in force at the time the agreement is entered into
with respect to dividends and profit distribution.
Stability of the Peruvian government monetary policy, according to which there is a
complete absence of exchange controls, foreign currency can be freely acquired or
sold at whatever exchange rate the market offers, and funds can be remitted abroad
without any previous authorisation.
Right of non-discrimination between foreign and local investors.
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Under the mining regime, local mining companies may enter into stability agreements of
guarantees and investment promotion measures that guarantee the following for ten or
15 years:

Stability of the overall tax regime.

Stability of the overall administrative regime.
Free disposition of funds (foreign currency) arising from export operations.
No exchange rate discrimination.
Free trade of products.
Stability of special regimes for tax refunds, temporary importation, etc.
Oil companies may enter into stability agreements that guarantee the following for the
term of the contract:

Stability of the overall tax regime.

Free disposition of funds (foreign currency) arising from export operations.
Free convertibility of its funds.
Free trade of products.
Investment promotion in the Amazon
Certain tax benefits with regard to VAT and income tax have been established for
taxpayers located in the area designated by the law as the Amazon and that are engaged
in the following activities:

Agriculture and livestock enterprises.

Aquaculture.
Fishing.
Tourism.
Manufacturing activities linked to the processing, transformation, and
commercialisation of primary products originating in the activities listed above and
in forest transformation, provided these products are produced in the area.
Special zones - Centres of Export, Transformation, Industry,

Commercialisation, and Services (CETICOS)
CETICOS are geographical areas duly delimited with customs primary zone status and
special treatment, destined to generate development poles through industrial, maquila,
assembling, or storage activities. CETICOS are located in Paita, Ilo, and Matarani cities.
Agribusiness and agro-exporting activities may be performed within a CETICOS.
Agribusiness activity is primarily the transformation of agro-farming products produced
in the country. Such transformation must be carried out at CETICOS.
Companies engaged in industrial, maquila, or assembling activities, established or set up
in the CETICOS, until 31 December 2022, are exempt from income tax, VAT, excise tax,
municipal promotion tax, as well as from any other taxes, fees, contributions levied by
the Central Administration, and even taxes that require express exempt regulation.
Withholding taxes
Domestic corporations are required to withhold income tax with respect to income paid
to non-resident entities at the following rates:
Type of payment
Interest on non-related party loans, provided certain requirements are fulfilled
Interest on related party loans
WHT (%)
4.99
30
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Type of payment
Interest paid by Peruvian financial entities or banks to foreign beneficiaries for credit
lines used in Peru
Royalties
Digital services
Technical assistance
Lease of vessels or aircraft
Dividends or profit distributions
Other income
Sale of securities within Peru (Lima Stock Exchange)
Sale of securities outside Peru
WHT (%)
4.99
30
30
15
10
4.1
30
5
30
Note that resident taxpayers may not deduct the WHT of a third party, except in the
case of loans provided by non-resident creditors, to the extent that the debtor has
contractually assumed the obligation of bearing the WHT cost.
If the retribution for technical assistance exceeds 140 tax units, a report issued by an
audit firm will be required, in which is stated that the technical assistance has been
effectively rendered.
Capital gains derived from the sale of stocks issued by a Peruvian company through the
Lima Stock Exchange are taxed at a 5% rate.
In the case of the services mentioned below that entail the execution of activities both
in Peru and abroad, non-resident entities are subject to a 30% WHT on deemed Perusource income determined by applying the following percentages to gross income:
Type of payment
Insurance
Lease of vessels
Lease of aircraft
Air transport
Maritime transport
Telecom services
International news services
Distribution of movies, records, and similar products
Supply of containers
Demurrage of containers
Rights for broadcasting live foreign TV shows within Peru
Deemed Peruvian-source income (%)

7
80
60
1
2
5
10
20
15
80
20
Tax treaties
Peru has entered into treaties with Brazil, Canada, and Chile regarding double taxation
on income tax under the Organisation for Economic Co-operation and Development
(OECD) Model. Recently, Peru has entered into DTTs with Korea, Mexico, Portugal,
and Switzerland, and they will have effect from 1 January 2015. DTTs with Spain and
Thailand are not in force, as ratification by the Peruvian Congress is still pending. In
addition, Peru, as a member of the Andean Community of Nations (ACN), which also
includes Bolivia, Colombia, and Ecuador, is subject to a double-taxation standard (based
in source income and not on the OECD Model).
Please see the chart below for the reduced WHT rates that apply under DTTs in force.
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Recipient
Non-treaty
Treaty:
Brazil
Canada
Chile
Korea
Mexico
Portugal
Switzerland
Dividends (%) Interest (%) Royalties (%)

4.1
4.99/30
30
10/15
10/15
10/15
10
10/15
10/15
10/15
15
15
15
15
15
10/15 (1)
10/15 (3)
15
15
15
15
15
15
15
Technical
Digital
assistance (%) services (%)
15
30
15
N/A
N/A
10
N/A
10 (2)
10
15
N/A
N/A
N/A
N/A
N/A
10
Notes
1.
2.
3.
The lower rate applies to loans from banks.

The treaty rate applies to technical assistance in connection with copyrights, goods, or rights that
generate royalties.
The lower rate applies to loans from banks and sale on credit of industrial, commercial, and scientific
equipment.
Tax administration
Taxable period
According to law, the fiscal year is the calendar year.
Tax returns
The filing deadline for the income tax return is generally the first week of April. The
system is one of self-assessment, but the tax return filed with the tax authorities is
subject to review.
Payment of tax
Income tax payments are due in 12 monthly instalments. The due date for the final
income tax payment for a year is generally the first week of April.
The estimated payment calculation system has been established, and the amount of
the estimated payment will be the greater of the result of multiplying the net revenue
of the month by (i) 1.5% or (ii) the applicable coefficient. The coefficient is calculated
by dividing the income generated in the previous fiscal year by the income tax that was
determined.
Tax authority
The SUNAT is responsible for administering all of the aforementioned taxes (income tax,
VAT, etc.). Companies resident in Peru must be registered with the tax administration
(Taxpayers Registry).
The Tax Court (Tribunal Fiscal) is a specialised administrative tribunal, which depends
on the Ministry of Economy and Finance, but is otherwise autonomous regarding its
specific functions. Its mission is to rule over tax controversies that may arise between the
tax administration and the taxpayers, by interpreting and applying the corresponding
tax legislation, issuing mandatory observance jurisprudence, and establishing
homogenous criteria that continue to support the progress of the tax system.
Finally, taxpayers are entitled to file an appeal before the Judiciary (Court) against
resolutions issued by the Tax Court, but payment of the tax debt must be performed or
guarantees must be provided.
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Tax audit process
The tax audit performed by the SUNAT includes all the aspects of the tax and period
being subject to review. The tax audit is formal and the process is fully regulated.
The SUNAT is also able to conduct partial audits of limited scope.
Pursuant to the Peruvian tax legislation, the SUNAT is entitled to audit taxpayers in
order to assess their tax liabilities, request the payment of any due tax, and assess any
applicable penalty for up to (i) four years from 1 January of the year following the
date the corresponding tax return had to be filed, (ii) six years to the extent that the
corresponding tax return was not filed, and (iii) ten years when the tax withheld by the
taxpayer has not been paid to the SUNAT.
The SUNAT mainly focuses on the following topics:

Deduction of expenses, including cost share expenses.

Market value of transactions between related parties.
Peruvian source income WHT.
Income tax advance payments.
General Anti-avoidance Rule (GAAR)
The GAAR (Rule XVI of the Tax Code) allows the SUNAT to consider the acts, situations,
and economic activities performed, established, or desired by the taxpayers in order to
determine the real nature of the taxable event. To this extent, Rule XVI establishes that
when tax evasion is detected, the SUNAT is entitled to collect the tax debt and fines;
reduce the amount of balances due, NOLs, or tax credits; or eliminate any tax advantage,
without prejudice, to recover any amount that was wrongfully reimbursed.
While interpreting the tax legislation, substance should be selected over a legal form.
The fact that a taxpayers transactions are legal does not imply that they are acceptable
with reference to the underlying meaning embedded in the tax rules. Thus, where there
is no business purpose except to obtain a tax benefit, the SUNAT should challenge such
transactions as artificial and apply the corresponding tax rules.
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PwC contact
Malou P. Lim
Isla Lipana & Co., PwC member firm
29th Floor Philamlife Tower
8767 Paseo de Roxas
Makati City 1226
Philippines
Tel: +63 2 459 2016
Beginning in the taxable year ended 31 December 2013, corporate taxpayers must file
their income tax returns using one of three different forms, depending on their tax
regime (i.e. those subject to the regular income tax rate, tax-exempt taxpayers, or those
with mixed income subject to multiple tax rates or special/preferential rates).
From a tax treaty network perspective, the double taxation agreement (DTA) signed
by the Philippine government with the Federal Republic of Nigeria in September
1997 entered into force on 18 August 2013 and applies on income derived or accrued
beginning 1 January 2014.

A domestic corporation is subject to tax on its worldwide income. On the other hand, a
foreign corporation is subject to tax only on income from Philippine sources (see the subsections on Resident foreign corporations and Non-resident foreign corporations below).
Domestic corporations
The following corporate income tax (CIT) rates apply to domestic corporations:
Income
In general, on net income from all sources.
Minimum corporate income tax (MCIT) on gross income, beginning in the fourth
taxable year following the year of commencement of business operations. MCIT is
imposed where the CIT at 30% is less than 2% MCIT on gross income.
Proprietary educational institutions and non-profit hospitals, on net income if gross
income from unrelated trade, business, and other activities does not exceed 50%
of the total gross income from all sources.
Non-stock, non-profit educational institutions (all assets and revenues used
actually, directly, and exclusively for educational purposes) and other non-profit
organisations.
CITrate(%)
30
2
10
Exempt
Certain passive income from domestic sources is subject to final tax rather than ordinary
income tax (see the Income determination section).
Improperly accumulated earnings tax
An improperly accumulated earnings tax of 10% is imposed on improperly accumulated

income. The tax applies to every corporation formed or used for the purpose of
avoiding income tax with respect to its shareholders, or the shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed. Exceptions are made for publicly held corporations, banks and non-bank
financial intermediaries, and insurance companies.
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Resident foreign corporations
Resident foreign corporations (i.e. foreign corporations engaged in trade or business

in the Philippines through a branch office) are taxed in the same manner as domestic
corporations (except on capital gains on the sale of buildings not used in business, which
are taxable as ordinary income), but only on Philippine-source income.
International carriers are subject to an income tax of 2.5% on their gross Philippine
billings unless a lower rate is available under an existing tax treaty. Exemption from
this tax is also available under international agreements to which the Philippines
is a signatory or on the basis of reciprocity in cases where the home country of the
international carrier grants income tax exemption to Philippine carriers.
Income of offshore banking units (OBUs) and foreign currency deposit units (FCDUs) of
depository banks from foreign currency transactions with non-residents, other OBUs, or
FCDUs and local commercial banks (including branches of foreign banks) authorised by
the Bangko Sentral ng Pilipinas (central bank) to transact business with OBUs and FCDUs
are exempt from all taxes except net income specified by the Secretary of Finance upon
recommendation of the Monetary Board. Interest income from foreign currency loans
granted to residents other than OBUs or local commercial banks shall be subject to a
10% final income tax.
Regional or area headquarters of multinational corporations that do not earn or
derive income from the Philippines, and that act as supervisory, communications, and
coordinating centres for their affiliates, subsidiaries, or branches in the Asia-Pacific
region and other foreign markets are not subject to CIT.
Regional operating headquarters (ROHQ) pay a tax of 10% on their taxable income.
An ROHQ is a branch established in the Philippines by a multinational company that
is engaged in any of the following services: general administration and planning,
business planning and coordination, sourcing and procurement of raw materials
and components, corporate finance advisory services, marketing control and sales
promotion, training and personnel management, logistic services, research and
development services and product development, technical support and maintenance,
data processing and communication, or business development.
Non-resident foreign corporations
In general, non-resident foreign corporations are taxed on gross income received

from sources within the Philippines at 30%, except for reinsurance premiums, which
are exempt. Interest on foreign loans is taxed at 20%. Dividends from domestic
corporations, however, are subject to a final withholding tax (WHT) at the rate of 15%
if the country in which the corporation is domiciled does not impose income tax on such
dividends or allows a tax deemed paid credit of 15%.
Lower rates or exemption on the above income may be available under an applicable tax
treaty.
Rentals and charter fees payable to non-resident owners of vessels chartered by
Philippine nationals are subject to a final tax of 4.5%. Rentals, charters, and other fees
derived by non-resident lessors of aircraft, machinery, and other equipment are subject
to a final tax of7.5%.
Local income taxes
See Local government taxes in the Other taxes section for a description of local taxes on sales
or receipts.
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Corporate residence
A domestic corporation is a corporation that is created or organised under Philippine
laws. A foreign corporation that is duly licensed to engage in trade or business within the
Philippines is referred to as a resident foreign corporation.
The business profits provision in most Philippine treaties permits the Philippines to tax
only those profits attributable to a PE. While Philippine treaties adopt the United Nations
(UN) Model Convention, Organisation for Economic Co-operation and Development
(OECD) commentaries have often been cited by tax authorities to support their
interpretation of treaty provisions. The main implication is that most Philippine treaties
contain a rule deeming a PE to arise when services are performed in the Philippines for a
specified period of time.
Other taxes
VAT applies to practically all sales of services and imports, as well as to sales, barter,
exchange, or lease of goods or properties (tangible or intangible). The tax is equivalent
to a uniform rate of 12%, based on the gross selling price of goods or properties sold, or
gross receipts from the sale of services. On importation of goods, the basis of the tax is
the value used by the Bureau of Customs in determining tariff and customs duties plus
customs duties, excise taxes, if any, and other charges. Where the valuation used by the
Bureau of Customs is by volume or quantity, the VAT basis is the landed cost plus excise
taxes, if any.
Certain transactions are zero-rated or exempt from VAT. Export sales by VAT-registered
persons are zero-rated.
Certain sales of services exempt from VAT, including services provided by financial
intermediaries, are subject to percentage taxes based on gross sales, receipts, or income.
A 3% percentage tax also applies to persons who are not VAT-registered because their
annual sales or receipts do not exceed 1,919,500 Philippine pesos (PHP).
Customs duties
Applicable customs duties are determined based on the tariff classification of the import
product. As with the rest of the Association of South East Asian Nations (ASEAN)
countries, tariff classification in the Philippines is based on the ASEAN Harmonised
Tariff Nomenclature (AHTN), which is patterned after the Harmonised Commodity
Classification and Coding System (HS) Convention and its 2002 revisions. The latest
edition, HS Code 2012, entered into force on 1 January 2012. With HS Code 2012,
the overall AHTN tariff lines were reduced by 247, or an approximately 4% cut in the
number of AHTN tariff lines in 2010. Although 267 classification rulings were issued
to address commonly raised valuation and tariff classification, it is still advisable that
tariff classification rulings from the Philippine Tariff Commission be secured prior to
importation into the Philippines in case of uncertainty as to the correct classification of
a product. Note that while the tariff classification rulings issued by the Philippine Tariff
Commission do not prevent the Bureau of Customs from conducting its own verification,
these rulings carry persuasive reference in support of the classification and duty rate
used by an importer.
The Philippines adopts the World Trade Organization (WTO) Valuation Agreement,
where the declared invoice price is used as the basis for determining customs duties.
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As a protective measure, the Philippines retains higher tariff rates (20% to 50%) on
sensitive agricultural products, such as grains, livestock and meat products, sugar,
certain vegetables, and coffee. A few agricultural commodities are subject to minimum
access volumes, but these represent less than 1% of all tariff lines.
In view of the existing free trade agreements in the region, such as the ASEAN Free
Trade Area (AFTA), ASEAN-China Free Trade Area (ACFTA), ASEAN-Korea Free Trade
Area (AKFTA), the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), the
ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEPA), and the
ASEAN-INDIA Free Trade Area (AIFTA), the Philippines has taken steps to progressively
eliminate tariffs. Tariff reductions for the Philippines range from 10% to 35% for most
products included in the Normal Track list.
Excise taxes
Excise tax is payable at varying rates on alcohol products, tobacco products, petroleum
products, mineral products, and automobiles. Excise tax is also payable on all goods
commonly or commercially known as jewellery, whether real or imitation; perfumes
and toilet waters; and yachts and other vessels intended for pleasure or sport at 20%
of the wholesale price or value of the importation used by the Bureau of Customs in
determining tariff and customs duties.
Documentary stamp tax (DST)
DST is payable at varying rates on various documents and transactions. The following
table contains selected examples:
Taxable document/transaction(taxbase)
Original issue of shares
Sale, barter or exchange of shares of stock
listed and traded through the local stock
exchange
Other sales agreement, agreement to sell,
memoranda of sales, delivery or transfer of
shares or certificates of stock
Certificate of profits, interest in property or
accumulations
Non-exempt debt instruments
Bank check, draft, certificate of deposit not
bearing interest, other instruments
Life insurance policy
Lease/hiring agreement
Mortgage, pledge, deed of trust
Deed of sale, conveyance of real property
DST rate
PHP 1 for every PHP 200 or fractional part of par
value
Exempt
PHP 0.75 for every PHP 200 or fractional part of

par value
PHP 0.50 for every PHP 200 or fractional part of
face value
PHP 1 for every PHP 200 or fractional value of
the issue price
PHP 1.50 for each instrument
PHP 10 to PHP 100 depending upon the amount
of insurance
PHP 3 for the first PHP 2,000 or fractional part
of amount stipulated in contract, and PHP 1 for
every PHP 1,000 or fractional part in excess of
PHP 2,000 for each year of contract term
PHP 20 for the first PHP 5,000 of amount
secured, and PHP 10 for every PHP 5,000 or
fractional part in excess of PHP 5,000
PHP 15 for each PHP 1,000 of consideration/
value or fractional part thereof
Capital gains tax
Capital gains arise from the sale or exchange of capital assets. Capital assets are
property held by the taxpayer (whether or not connected with its trade), other than
thefollowing:
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Inventories or property held primarily for sale to customers in the ordinary course of
business.
Real property or depreciable property used in trade or business.
Property of a kind that would be included in the inventory of the taxpayer if on hand
at the close of the taxable year.
Capital losses are deductible only to the extent of capital gains.
There are no holding period requirements for capital assets of corporations.
A 6% final tax is imposed on the higher of the gross selling price or fair market value
upon the sale, exchange, or disposition of land or buildings not actually used in the
business of a corporation. The tax is withheld by the buyer at the time of sale.
Net capital gains derived from the sale, exchange, transfer, or similar transactions of
shares of stock not traded through a local stock exchange are taxed at 5% on the first
PHP 100,000 of gains, and 10% on gains in excess of PHP 100,000. Sales of shares of
stock listed and traded on a local stock exchange, other than the sale by a dealer in
securities, are subject to a stock transaction tax of 0.5% based on the gross selling price,
provided the listed corporation observes a minimum public ownership of at least 10%
based on the companys issued and outstanding shares, exclusive of any treasury shares
or such percentage as may be prescribed by the Securities and Exchange Commission
(SEC) or Philippine Stock Exchange (PSE), whichever is higher; otherwise, the 5%/10%
tax shall apply.
Capital gains from the sale of bonds, debentures, or other certificates of indebtedness
with a maturity of more than five years are exempt from tax.
A tax is levied on every sale, barter, exchange, or other disposition through an initial
public offering (IPO) of shares of stock in closely held corporations. A closely held
corporation is any corporation of which at least 50% in value of the total outstanding
capital stock, or at least 50% of the total combined voting power of all classes of stock
entitled to vote, is owned directly or indirectly by, or for, not more than 20 individuals.
The tax rates provided hereunder are based on the proportion of the gross selling
price, or gross value in money, of the shares of stock sold, bartered, exchanged, or
otherwise disposed of to the total outstanding shares of stock after listing on the local
stockexchange.
Proportion of sale to total shares
25% or less
Over 25% but not over 33.33%
Over 33.33%
Tax rate (%)

4
2
1
Fringe benefits tax
A final tax of 32%, payable by the employer, is imposed on the grossed-up monetary
value of fringe benefits (e.g. housing, expense accounts, vehicles of any kind, household
personnel, interest on loans at lower than market rates [the current benchmark rate is
12%], membership dues for social and athletic clubs, foreign travel expenses, holiday
and vacation expenses, educational assistance, insurance) furnished or granted to
managerial or supervisory personnel by the employer. An exception is for fringe
benefits required by the nature of or necessary to the trade, business, or profession of
the employer, or when the fringe benefit is for the convenience or advantage of the
employer.
The following fringe benefits are not subject to the tax:
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Those authorised and exempted from tax under special laws.
Contributions of the employer for the benefit of the employee to retirement,
insurance, and hospitalisation benefit plans.
Those granted to rank-and-file employees (however, the employees may be subject to
WHT on compensation).
Those of relatively small value or de minimis benefits.
The fringe benefits tax is payable on a calendar quarter basis and is an additional
deductible expense for the employer. Fringe benefits already subjected to fringe benefits
tax will no longer form part of the employees taxable income.
The grossed-up monetary value of the fringe benefit is generally computed by dividing
the actual monetary value of the benefit by 68%.
Corporations doing business in the Philippines must be registered with social

institutions, such as the Social Security System (SSS), Home Development Mutual Fund
(HDMF), and Philippine Health Corporation (PHIC), upon employment of any employee
and prior to the due date of the remittance of any social contributions.
Employee contributions for social security are deducted from the employees salary
payments. For 2014, the maximum monthly deductions are PHP 581.30 for SSS, PHP
100 for HDMF, and PHP 437.50 for PHIC.
Employers are also required to make contributions. Employers maximum contribution
for each employee is PHP 1,090 per month. Employer contributions for HDMF and PHIC
are generally of the same amount as the employee contributions.
Local government taxes
Local government units impose local business taxes, which are generally based on the
gross sales or gross receipts of the prior year, and real property taxes, which are levied
annually on the basis of a fixed proportion of the value of the real property (taxable
value). The local business tax rate varies depending on the location of the business, but
generally shall not exceed 3%. Real property located in a province may be subject to real
property tax of not more than 1% of its taxable value, while real property in a city (or
municipality in Metro Manila) may be subject to real property tax of not more 2% of its
taxable value.
Branch income
The income tax rate on branch profits is the same as on corporate profits. In general,
profits remitted abroad by a branch office are subject to a 15% tax rate, based on the
total profits applied or earmarked for remittance, without any deduction for the tax
component thereof. A lower rate may apply under certain tax treaties. Profits from
qualified activities remitted by a branch registered with the Philippine Economic Zone
Authority (PEZA) are tax exempt.
Inventory valuation
Inventories are generally stated at cost or at the lower of cost or market. Last in first out
(LIFO) is not allowed for tax purposes. Generally, the inventory valuation method for tax
purposes must conform to that used for financial reporting purposes.
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Capital gains
Dividend income
Dividends received by a domestic or resident foreign corporation from another domestic

corporation are not subject to tax. These dividends are excluded from the taxable
income of the recipient.
Dividends received by a non-resident foreign corporation from a domestic corporation
are subject to a general final WHT at the rate of 30%. A lower rate of 15% applies if the
country in which the corporation is domiciled either does not impose income tax on
such dividends or allows a tax deemed paid credit of 15%. Treaty rates ranging from
10% to 25% may also apply if the recipient is a resident of a country with which the
Philippines has a tax treaty.
Stock dividends
A Philippine corporation can distribute stock dividends tax-free, proportionately to

allshareholders.
Interest income
Interest on bank savings, time deposits, deposit substitutes,and money market

placements received by domestic or resident foreign corporations from a domestic
corporation are subject to a final tax of 20%, while interest income derived from FCDU
deposits is subject to a final tax of 7.5%. Such income is excluded from gross income
reportable in CIT returns.
Interest income of OBUs and FCDUs from foreign currency loans granted to residents
other than OBUs or local commercial banks shall be subject to 10% tax.
Royalty income
Royalties received by domestic or resident foreign corporations from a domestic

corporation are subject to a final tax of 20%.
Other items exempt from CIT include the following:

Proceeds of life insurance policies.

Return of policy premium.
Gifts, bequests, and devises.
Interest on certain government securities.
Income exempt under a treaty.
Gains from sale, exchange, or retirement of bonds.
Gains from redemption of shares of stock in mutual fund companies.
Foreign income
A Philippine (domestic) corporation is taxed on its worldwide income. A domestic

corporation is taxed on income from foreign sources when earned or received,
depending on the accounting method used by the taxpayer.
Income earned through a foreign subsidiary is taxed only when paid to a Philippine
resident shareholder as a dividend. Meanwhile, income earned through a foreign branch
is taxed as it accrues. The losses incurred by the foreign branch are deductible against
other income earned by the Philippine corporation.
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Double taxation is generally relieved through a credit for foreign taxes. However, a
taxpayer can take a deduction for foreign taxes instead, if that leads to a more favourable
outcome.
Deductions
Corporate taxpayers can avail themselves of the optional standard deduction computed
at 40% of gross income. The optional standard deduction is in lieu of the itemised
operating expenses.
Depreciation is generally computed on a straight-line basis, although any reasonable

method may be elected if the aggregate amount of depreciation, plus salvage value at
the end of the useful life of the property, will equal the cost of the property. Gain on the
sale of depreciated property is taxable as ordinary income. Generally, tax depreciation
should conform to book depreciation, unless the former includes incentives.
Properties used in petroleum operations may be depreciated over a period of ten
years using the straight-line or declining-balance method, at the option of the service
contractor. Properties used in mining operations with expected life of more than
ten years may be depreciated over any number of years between five years and their
expected life.
A cost depletion allowance is available as follows:
For oil and gas wells, depletion is based on actual reduction in flow and production
ascertained, not by flush flow, but by the settled production or regular flow.
For mines, depletion is allowable up to an amount not to exceed the market value,
as used for purposes of imposing the mining ad valorem taxes, of the products mined
and sold during theyear.
Goodwill
Goodwill is not deductible for tax purposes.
Start-up expenses
Start-up expenses are deductible when incurred.
Interest expenses
The allowable deduction for interest expense is reduced by an amount equal to 33% of
interest income that is subject to final tax.
Bad debts
Bad debts are deductible expenses when written-off, subject to certain requirements.
The deduction for charitable contributions ordinarily may not exceed 5% of taxable
income. However, contributions to certain institutions are 100% deductible, subject to
certain conditions.
Entertainment, amusement, and recreation expenses should not exceed 0.5% of net
sales for taxpayers engaged in the sale of goods or properties, or 1% of net revenue
for taxpayers engaged in the sale of services, including professionals and lessors of
properties.
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Special deductions
Special deductions are allowed for certain businesses (e.g. insurance, mining,
petroleum, and real estate investment trust).
Fines and penalties
Fines and penalties are deductible as necessary and ordinary business expenses.
Surcharge and compromise penalty imposed for non-payment or late payment of taxes is
not deductible for tax purposes.
Taxes
Corporate taxpayers can claim a deduction for all taxes paid or accrued within the
taxable year in connection with their trade or business, except for the following:
Philippine CIT.
Income taxes imposed by authority of any foreign country, unless the taxpayer elects
to take a deduction in lieu of a foreign tax credit.
Estate and donors taxes.
Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
In the case of a foreign corporation, deductions for taxes are allowed only if they are
connected with income from sources within the Philippines.
A net operating loss for any taxable year immediately preceding the current taxable
year, which had not been previously offset as a deduction from gross income, may be
carried over as a deduction from gross income for the next three consecutive taxable
years immediately following the year of this loss (except losses during the period when
the taxpayer was tax-exempt), provided there has been no substantial change in the
ownership of the business or enterprise.
For mines, other than oil and gas wells, a net operating loss calculated without the
benefit of incentives provided for under Executive Order (EO) No. 226, or the Omnibus
Investments Code of 1987, as amended, incurred in any of the first ten years of
operation may be carried over as a deduction from taxable income for the next five years
immediately following the year of such loss.
Loss carrybacks are not allowed.
A Philippine corporation can claim a deduction for royalties, management service fees,
and interest charges paid to foreign affiliates, provided such amounts are equal to what
it would pay an unrelated entity, and the appropriate WHTs are withheld and remitted.
The registration of licensing and management agreements, now known as technology
transfer arrangements (TTAs), has been liberalised. Only TTAs not conforming to certain
provisions of the Intellectual Property Code require approval by, and registration with,
the Documentation, Information, and Technology Transfer Bureau of the Intellectual
Property Office (formerly Bureau of Patents, Trademarks, and Technology Transfer) to
render the contracts enforceable.
Head office expense allocations
A resident foreign corporation is allowed to claim allocated head office expenses as a

deduction, subject to certain requirements.
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Group taxation
Group taxation is not permitted in the Philippines.
Transfer pricing
Transfer Pricing Regulations govern the cross-border and domestic transactions

between associated enterprises. The Regulations state that the arms-length principle
shall be adopted in determining the transfer price in related party transactions. The
application of the arms-length principle may follow a three-step approach prescribed
by the Philippine tax authority (i.e. the Bureau of Internal Revenue, or BIR) under the
Regulations, to wit: (i) the conduct of a comparability analysis, (ii) the identification of
the tested party and the appropriate transfer pricing method, and (iii) the determination
of the arms-length results.
Taxpayers must keep adequate documentation supporting their transfer prices so that
they can defend their transfer pricing analysis, mitigate the risk of transfer pricing
adjustments arising from tax examinations, and support their applications for Mutual
Agreement Procedure (MAP). There is also a contemporaneous requirement that
transfer pricing documents must exist or be brought into existence at the time the
taxpayers develop or implement any arrangements that may raise transfer pricing issues.
This can generally mean that while transfer pricing documentation is not required to
be submitted together with the tax returns, such documents should be retained and
submitted to the BIR when required or requested. There is no prescribed period within
which such documentation may be made available, but it should be available in cases of
audit/investigation.
An Advance Pricing Arrangement (APA) is an agreement entered into between the
taxpayer and the BIR to determine in advance an appropriate set of criteria (e.g.
method, comparables, and appropriate adjustments thereto) to ascertain the transfer
prices of controlled transactions over a fixed period of time. It is currently available to
taxpayers, but the BIR is still in the process of drafting more detailed guidelines. The
APA is not mandatory, but may be advisable since the purpose of the APA is to reduce the
risk of transfer pricing re-examination and double taxation.
Transactions entered into prior to the Transfer Pricing Regulations becoming effective
in February 2013 shall be governed by the laws and other administrative issuances
prevailing at the time the controlled transactions were entered into.
Thin capitalisation
There are generally no thin capitalisation rules in the Philippines.

There are no CFC rules in the Philippines.

Foreign tax credit
Domestic corporations are allowed to claim a credit for any income taxes paid to
a foreign country, provided that the taxes are not claimed as deductions. Foreign
corporations are not allowed foreign tax credits.
Credits for foreign taxes are determined on a country-by-country basis. The amount
of foreign tax credit in respect of the tax paid in a country shall not exceed the same
proportion of the tax against which the tax credit is taken, which the taxpayers income
from the country bears to its entire taxable income. There is, however, a further
limitation based on the total amount of foreign-sourced income that the taxpayer earns.
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The total amount of foreign tax credits shall not exceed the same proportion of the tax
against which the tax credit is taken, which the taxpayers foreign-sourced income bears
to its entire taxable income.
Export incentives
Tax incentives available to export enterprises registered with the Board of Investments
(BOI) are as follows:
Income tax holiday (ITH) giving full exemption from CIT for six years for pioneer
firms and those locating in less-developed areas and four years for non-pioneer firms.
The ITH period starts to run from the date of commercial operation, or target date of
operation, whichever is earlier. If prescribed conditions are met, the ITH period may
be extended by up to three years. In no case, however, can the total ITH period exceed
eight years. Expanding export-oriented firms are also allowed a three-year ITH on
the incremental income. Subject to certain exceptions, new and expansion projects
located in the National Capital Region (NCR) or Metro Manila are no longer entitled
to ITH.
Tax and duty exemption on imported spare parts and supplies for export producers
with a customs bonded manufacturing warehouse exporting at least 70% of annual
production, if foreign-owned, or 50%, if Filipino-owned.
Full deduction of the cost of major infrastructure undertaken by enterprises in lessdeveloped areas.
Additional deduction of 50% of the incremental labour expense if the prescribed ratio
of capital assets to annual labour is met and 100% of the incremental labour if located
in less-developed areas within five years from date of registration (this incentive
cannot be availed of simultaneously with the income tax holiday).
Ten-year exemption from taxes and duties on importation of breeding stock and
genetic materials.
Tax credit on domestic breeding stocks and genetic materials (ten years).
Exemption from wharfage, any export tax, duty, impost, or fees.
Tax credits equivalent to taxes and duties paid on purchases of raw materials,
supplies, and semi-manufactured products forming part of the products for export.
Other incentives
Export and free-trade enterprises, information technology (IT) enterprises, and special
economic zone developers/operators (including IT buildings located in Metro Manila
and IT parks) registered with PEZA are entitled to an ITH of six years for pioneer firms
and four years for non-pioneer firms. Foreign articles brought into the zones will be
exempt from import duties and taxes. Local purchases of goods from VAT-registered
suppliers outside the economic zones are zero-rated. After the lapse of the ITH period,
enterprises registered and operating within special economic zones/export processing
zones (EPZs) will pay only 5% special tax on gross income earned from registered
activities, in lieu of all local and national taxes.
A regional or area headquarters established in the country as a supervisory,
communications, and coordination centre for a corporations subsidiaries, affiliates, and
branches in the Asia-Pacific region, and whose headquarters do not derive income from
the Philippines, are not subject to any CIT nor VAT and are entitled to certain non-tax
incentives.
An ROHQ that is allowed to derive income in the Philippines by performing qualifying
business services to its affiliates, subsidiaries, or branches in the Philippines, in the AsiaPacific Region, and other foreign markets may avail itself of the following incentives:
Income tax at the preferential rate of 10% of its taxable income.
Exemption from all kinds of local taxes, fees, or charges imposed by a local
government unit, except real property tax on land improvements and equipment.
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Tax and duty-free importation of equipment and materials for training and
conferences that are needed and used solely for its functions as an ROHQ and are not
locally available, subject to the prior approval of the BOI.
Importation of new motor vehicles, subject to the payment of corresponding duties
and taxes.
Exemption from travel tax, specific immigration fees, and requirements, subject to
certain conditions.
The following are the incentives granted to exporters under the Export Development Act
(Republic Act No. 7844):
Exemption from Presidential Decree No. 1853 (requiring 100% of Letter of Credit),
provided that the importation shall be used for the production of goods and services
for export.
Tax credit for incremental export performance. The tax credit for increase in current
export revenues shall be computed as a percentage to be applied on the incremental
export revenue converted to pesos at the current rate. The percentages or rates are
asfollows:
For the first 5% increase in annual export revenues over the previous year: 2.5%.
For the next 5% increase: 5.0%.
For the next 5% increase: 7.5%.
In excess: 10%.
Note that this incentive is not available for exporters enjoying ITH or VAT exemption or
whose local VAT is below 10%.
In addition to the above incentives, all existing incentives being enjoyed by the
enterprise if registered with the BOI, PEZA, Subic Bay Metropolitan Authority (SBMA),
Clark Development Corporation (CDC), or other ecozone regulatingagencies.
Withholding taxes
Corporations and individuals engaged in business are required to withhold the
appropriate tax on income payments to non-residents, generally at the rate of 30% in the
case of payments to non-resident foreign corporations or 25% for non-resident aliens not
engaged in trade or business. For WHT on resident corporations, see the discussions in the
Income determination section.
Tax treaty rates
For countries with which the Philippines has concluded tax treaties, the maximum rates
of taxes to be withheld are as follows:
As of March 2014:
Recipient
Australia
Austria
Bahrain
Bangladesh
Belgium
Brazil
Canada
Czech Republic
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Dividends (%) (1)

15/25 (3, 4)
10/25 (3, 7)
10/15 (7)
10/15 (11)
10/15 (7)
15/30
15/25 (3, 7)
10/15 (7)
10/15 (7)
Interest (%) (2)

10/15 (5)
10/15 (5, 8)
10
15
10
10/15 (5)
10/15 (5)
10
10
Royalties (%)
15/25 (6)
10/15 (6, 9)
10/15 (10)
15
15
15/25 (12)
25 (9)
10/15 (13)
10/15 (14)
Philippines
Recipient
Denmark
Finland
France
Germany
Hungary
India
Indonesia
Israel
Italy
Japan
Korea, Republic of
Malaysia
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Poland
Romania
Russia
Singapore
Spain
Sweden
Switzerland
Thailand
United Kingdom
United States
Vietnam
Dividends (%) (1)

10/15 (11)
15/30 (3, 7)
10/15 (3, 7)
10/15 (11)
15/20 (3, 11)
15/20 (3, 7)
15/20 (3, 11)
10/15 (7)
15
10/15 (3, 7)
10/25 (3, 11)
15/25
10/15 (7)
15/25
12.5/15 (7)
15/25 (3, 7)
15/25 (3, 11)
10/15 (11)
10/15 (11)
15
15/25 (3, 22)
10/15 (7)
10/15 (11)
10/15 (7)
15/30
10/15 (7)
15/25 (3, 7)
20/25 (3, 7)
10/15 (11)
Interest (%) (2)

10
10/15 (5)
10/15 (5)
10/15 (5, 16, 17)
15
10/15 (5, 17)
10/15 (5)
10
10/15 (5)
10
10/15 (5)
15
10/15 (5, 16, 17)
10
15
15
10/15 (5)
10
10/15 (5, 16, 17)
15
10/15 (5)
10/15 (5, 16)
10
10
10/15 (5)
10
10/15 (5)
10/15 (5)
15
Royalties (%)
15
15/25 (15)
15
10/15 (13)
15 (9)
15/30 (6)
15/25 (6)
15 (9)
15/25 (6, 18)
10/15 (19)
10/15 (6)
15/25 (6, 18)
10/15 (6)
15/25 (6)
20
7.5/10/25 (9, 20)
15/25 (6)
15
10/15/25 (21)
15
15/25 (6, 18)
10/15/20 (23)
15
15
15/25 (6, 18)
10
15/25 (6, 19)
15/25 (6, 9)
15
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
The lower rate generally applies if the beneficial owner of the dividends is a company with a
substantial ownership in the dividend paying company.
Interest derived by a foreign government or its agencies is typically exempt from Philippine tax. Many
treaties also contain special rules for both Philippine and home country taxation of interest paid on
instruments secured by a government agency of one of the countries. Such provisions have been
excluded from the analysis.
A 15% rate applies under domestic law if the home country exempts the dividend from tax or permits
a 15% or greater credit for corporate taxes paid by the company paying thedividend.
Entitlement to the lower rate depends on how the dividend will be taxed in Australia.
The 10% rate applies to interest paid in respect of the public issues of bonds, debentures, or similar
obligations.
The lower rate applies to royalties paid by an enterprise registered with the Philippine BOI and
engaged in preferred areas of activity.
The threshold for substantial ownership is 10%.
The 10% rate also applies to interest paid by a company registered with the BOI and engaged in
preferred pioneer areas of investment in the Philippines.
The treaty also contains a most-favoured-nation rule, limiting the Philippine tax on royalties to
the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid in similar
circumstances to a resident of a third state.
The 15% rate applies to royalties arising from the use of, or the right to use, any copyright of literary,
artistic, or scientific work including cinematograph films or tapes for television or broadcasting.
The 25% rate applies to royalties arising from the use or the right to use trademarks and
cinematographic films, films or tapes for television or radio broadcasting. The 15% applies to any
other royalties.
The 10% rate applies to the use of, or the right to use, any patent, trademark, design or model, plan,
secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial, or scientific experience. Strictly,
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1573
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14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
application of the rate is generally at the discretion of the Philippine Competent Authorities, but the
BIR has never raised this as an issue.
The 10% rate applies to royalties arising from the use of, or the right to use, any copyright of literary,
artistic, or scientific work (other than copyright of cinematograph films), any patent, trademark,
design or model, plan, secret formula or process, or from the use of, or the right to use, industrial,
commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific
experience.
The 15% rate applies to royalties paid by an enterprise registered and engaged in preferred areas of
activities, and to royalties in respect of cinematographic films or tapes for television or broadcasting,
and for the use of, or the right to use, any copyright. The 25% rate applies to other royalties.
The 10% rate also applies to interest paid in connection with the sale on credit of any industrial,
The 10% rate also applies to interest paid on any loans granted by a bank.
The 15% rate also applies to royalties in respect of cinematographic films or tapes for television or
broadcasting.
The 15% rate applies to royalties paid for the use of, or the right to use, cinematographic films and
films or tapes for radio or television broadcasting.
The 7.5% rate applies to the lease of containers. The 10% rate applies to royalties paid by an
enterprise registered with the BOI. The 25% rate applies to otherroyalties.
The 10% rate applies to royalties paid by an enterprise registered with the BOI and engaged in
preferred pioneer areas of activity. The 15% rate applies to rentals from cinematographic films and
tapes for television or broadcasting. The 25% rate applies to all other royalties.
The 10% rate applies to royalties paid by an enterprise registered with the BOI and engaged in
preferred pioneer areas of activity. The 20% rate applies to rentals from cinematographic films and
tapes for television or broadcasting. The 15% rate applies to all other royalties.
Tax administration
Taxable period
The accounting period must follow a 12-month fiscal period but may or may not follow
the calendar year. Most Philippine companies have a fiscal year that ends in December or
March.
Tax returns
Corporations should file their returns and compute their income on the basis of an
accounting period of 12 months.
Corporate taxpayers file self-assessed returns. Electronic filing and payment of taxes are
available under the Electronic Filing and Payment System (eFPS) of the BIR.
A domestic or resident foreign corporation is required to file income tax returns on a
quarterly basis. Within 60 days from the close of the first three quarters of its taxable
year, the corporation must file a return summarising its gross income and deductions for
the year to date. A final annual income tax return must be filed on or before the 15th day
of the fourth month following the close of the taxable year.
Beginning in the taxable year ended 31 December 2013, corporate taxpayers must file
their income tax returns using one of three different forms, depending on their tax
regime (i.e. subject only to the regular income tax, tax exempt, or with mixed income
subject to multiple tax rates or special/preferential rates).
Payment of tax
Every corporation files cumulative quarterly income tax returns for the first three
quarters and pays the tax due within 60 days after each quarter. A final adjustment
return covering the total taxable income of the preceding taxable year must be filed on
the 15th day of the fourth month following the close of the taxable year. The balance
of the tax due after deducting the quarterly payments must be paid, while the excess
may be claimed as a refund or tax credit. Excess estimated quarterly income taxes paid
may be carried over and credited against estimated quarterly income tax liabilities for
succeeding taxable years. Once the option to carry over has been made, such option is
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irrevocable, and no cash refund or tax credit certificate (TCC) is allowed, except upon
liquidation of the company.
Annual statutory audit
An annual statutory audit is required for all corporations with authorised capital stock
or paid-up capital exceeding PHP 50,000, including branches of foreign corporations. It
is also required for any corporation whose gross sales or earnings exceed PHP 150,000 in
any quarter.
There is no statutory obligation on the Tax Commissioner to make an assessment

for internal revenue taxes, and most taxes are collected based on the taxpayers selfcalculation. If an assessment is to be issued, however, it must be done within three
years from the deadline or the date of actual filing of the return, whichever is later. The
taxpayer and the Commissioner can, however, agree in writing to extend this period.
In the case of a false or fraudulent return or of failure to file a return, the tax may be
assessed or a proceeding in court for collection may be commenced without assessment
at any time within ten years from the discovery of the falsity, fraud, or omission.
Any internal revenue tax that has been assessed within the period of limitation may be
collected by distraint or levy or by a proceeding in court within five years following the
assessment of the tax.
The prescription periods are suspended in certain circumstances, such as when the
offender is absent from the Philippines, when the Commissioner grants a taxpayers
request for a reinvestigation, or when the taxpayer and the BIR agree to extend the
prescriptive period for assessment through a written waiver.
In the case of overpayment of tax, a claim for refund or credit may be filed with the BIR
within two years from the date of erroneous payment of the tax. If the claim is denied or
no decision is received from the BIR, a petition for review may be filed with the Court of
Tax Appeals (CTA). This must be filed before the two-year period expires, and in the case
of a denied claim, within 30 days from the receipt of the denial.
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PwC contact
Tomasz Baraczyk
International Business Centre
Aleja Armii Ludowej 14
00-638 Warszawa, Poland
Tel: +48 22 523 4000
As of 1 January 2014, joint-stock partnerships became CIT payers. This kind of structure
was frequently use for broadly understood optimising purposes.

Tax point
As of 1 January 2014, the tax point (moment of reporting a transaction on a VAT return)
arises upon execution of the delivery of goods or provisions of services. In practice, this
means that the tax point arises at the moment of the delivery or goods or provision of
services regardless of the date of the invoice.
Invoice issuance
There were also significant changes in the scope of provisions concerning the date of
invoice issuance. As of 1 January 2014, according to the general rule, the deadline of
issuing invoices documenting delivery of goods or provision of services is the 15th day of
the month following the month in which the particular delivery of goods or provision of
services took place.
Moreover, there is a possibility to issue a VAT invoice 30 days before the delivery or
provision of services (as according to the new VAT rules, the moment of issue of the
invoice will not be taken into consideration to determine the tax point). The above rules
also apply in the case of advance payments.
Right to deduct
As of 1 January 2014, the taxpayer has the right to deduct the input VAT in the VAT
return for the month/quarter in which, on the seller [supplier] side, the tax point arose
with regard to the transaction documented by the VAT invoice document. However,
the input VAT cannot be deducted before the VAT invoice document is received by the
purchaser.
In practice, taxpayers should know when the delivery of goods/provision of services
took place to correctly determine the tax point (as it has an impact on the moment of
reporting the input VAT resulting from the VAT invoice documenting such delivery or
provision of services).
VAT on cars
As of 1 April 2014, the VAT amendment introduced a general rule under which the right
to deduct input VAT on the purchase (including leasing), usage, and operation of cars
with a gross vehicle weight of 3.5 tonnes is limited to 50%.
As an exception to the above general rule, until 30 June 2015, input VAT related with the
purchase of fuel for, among others, passenger vehicles, will not be deductible.
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The amendment allows, under certain conditions, to fully deduct input VAT in case of
cars used solely for business purposes.

The corporate income tax (CIT) is the only tax levied on corporate income. The standard
CIT rate is 19%.
Polish tax residents are subject to tax on their worldwide income. Non-residents are
taxed only on their Polish-sourced income. The tax authorities right to tax a nonresident is further limited if the non-residents country of residence concluded a doubletax treaty (DTT) with Poland. In this case, the Polish tax authorities are, as a rule,
entitled to tax only the portion of the non-residents income that may be attributed to a
permanent establishment (PE) located in Poland if such income has arisen in Poland for
the foreign tax resident. Exceptions relate to specific types of income, such as royalties,
interest, dividends, and capital gains, that may be in Poland even if no PE exists.
Polish companies with foreign participation may be set up as either limited liability
companies or joint-stock companies. There is no limitation on the percentage of foreign
participation. Both types are subject to the general CIT rules, including the standard
19% tax rate (and other rates, depending on the type of revenue sourced in Poland). The
same rate applies to branches of foreign companies (see the Branch income section for
more information).
From the group of taxpayers, certain entities are explicitly excluded in the CIT law
(e.g. Treasury, National Bank of Poland). Polish and European Union (EU)/European
Economic Area (EEA) based investment funds are also exempted on the grounds of such
provision.
Local income taxes
There are no local income taxes in Poland.
Corporate residence
A company is considered to be a resident in Poland if its registered office or management
is located in Poland.

PE under Polish CIT law
According to Polish CIT law, the following are understood to be a PE:

A permanent place of business through which a non-Polish tax resident conducts its
business activities, in whole or in part, within the territory of Poland; in particular, a
branch, agency, office, factory, workshop, or place of extraction of natural resources.
A construction site, construction, assembly, or installation works carried on within
the territory of Poland by a non-Polish tax resident.
A person who, on behalf and for the benefit of a non-Polish tax resident, operates
in Poland, if such person holds and exercises a power of attorney to enter into
agreements on ones behalf.
We note that Polish CIT law:
does not encompass any provisions concerning the period required for construction
works to create a PE
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does not include provisions indicating that an independent agent does not create a
PE, and
does not include provisions indicating that actions of an auxiliary or preparatory
character do not lead to creation of a PE in Poland.
PE from a DTT perspective
In general, the provisions of DTTs concluded by Poland are based on the Organisation
for Economic Co-operation and Development (OECD) Model Tax Convention on Income
and on Capital (OECD Model), except for provisions related to taxation of royalties,
which are based on the United Nations (UN) Model Double Taxation Convention.
As a principle, treaties based on the OECD Model provide for the following concepts,
which determine whether activities of a foreign entrepreneur constitute a PE (usually in
Article 5):
Fixed place of business concept.
Dependent agent concept.
Construction PE concept.
Note that some DTTs concluded by Poland also encompass other PE concepts (e.g.
service PE concept or offshore PE concept).
Other taxes
Polish VAT applies to the following activities:

Supplies of goods and services within the territory of Poland.

Exports of goods outside the territory of the European Union.
Imports of goods from countries that do not belong to the European Union.
Intra-Community acquisitions of goods (imports from countries belonging to the
European Union).
Intra-Community supplies of goods (exports to the countries belonging to the
European Union).
VAT rates
The VAT rates are 23% (standard rate), 8%, 5%, 0%, and exemption.
The standard 23% VAT rate generally applies to the supply of all goods and services,
except for those that are covered by special VAT provisions that provide other rates or
treatments.
Supplies covered by a reduced rate of 8% include, among others, supplies of
pharmaceutical products and passenger transport services and also supply of goods for
the Social Housing Programme (no greater than 150 square metres).
Supplies covered by a reduced rate of 5% include books and journals, unprocessed food,
and basic food.
Zero-rated activities include, among others, exports of goods to countries outside the
European Union.
VAT-exempt supplies include, among others, certain financial, insurance, and
educational services.
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Basic calculation rules
In general, the VAT due equals the VAT on outputs decreased by the VAT on inputs (in
other words, input VAT is deducted from output VAT). Input VAT may be deducted from
output VAT when a business (with a VAT payer status) receives an invoice for goods or
services purchased. Input VAT may not be deducted unless a purchased supply is linked
to the VATable activities. Furthermore, the deductibility of input VAT is restricted by the
VAT law with respect to the purchase of certain goods and services. In addition, subject
to numerous conditions, output VAT may be reduced when receivables, resulting from
VATable sales, become uncollectible.
A VAT payer has a possibility to correct the output tax on the supply of goods or the
provision of services, in addition to bad debts whose uncollectability was made
plausible. To do so, a few conditions must be met. They mainly concern the debtors and
creditors VAT status, lapse of the time limit for payment (specified in an invoice), and
proper notifications made by the taxpayer.
As of 1 January 2013, VAT changes entered into force with the scope of simplifying the
procedure of correcting the output connected with bad debts relief and reducing (from
180 to 150 days from the term of payment invoice overdue) the term when the taxpayer
can benefit from the relief.
VAT refunds
The Polish VAT law allows direct refunds when input VAT (available for deduction)
exceeds output VAT.
A Polish business may also be entitled to the VAT refund owed by another country
under certain circumstances. Likewise, a foreign business having seat or fixed place of
business for VAT purposes outside of Poland may be, in most cases, entitled to the refund
of Polish VAT. If the respective countries belong to the European Union, the procedure
is substantially simplified due to the EU Directive, which provides favourable rules for
businesses based in EU countries that are seeking VAT refunds in other EU countries (i.e.
electronic VAT refunds are possible).
Reporting rules
Generally, the VAT reporting period is one month. VAT returns should be submitted by
the 25th day of the month following the VAT reporting period. All taxpayers may opt for
a quarterly, instead of monthly, reporting period. Note that businesses involved in intraCommunity acquisitions or supplies of goods are obligated to submit additional VAT
returns with respect to these particular transactions.
The taxpayer has the right to deduct the input VAT in the VAT return for the month/
quarter in which, on the seller [supplier] side, the tax point arose with regard to the
transaction documented by the VAT invoice document. However, the input VAT cannot
be deducted before the VAT invoice document is received by the purchaser.
In practice, taxpayers should know when the delivery of goods/provision of services
took place, to correctly determine the tax point (as it has an impact on the moment
of reporting input VAT resulting from the VAT invoice documenting such delivery or
provision of services). However, taxpayers should still also know the moment of receipt
of the VAT invoice document.
International services
The treatment of international services largely depends on the place of supply, since it
is determinative of whether particular services are subject to the Polish VAT. The Polish
VAT applies only to those services that are supplied within Poland.
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Generally, the place of supply depends on the recipient of services. If the recipient is
a business entity, the place of supply is determined to be the recipients country; if
the recipient is a private person, the place of supply is determined to be the service
providers country. Thus, according to general rules, if a Polish entity supplies services
to a foreign business entity, the place of supply is outside Poland (these services are not
subject to Polish VAT); if a foreign company supplies services to a Polish business entity,
the place of supply (taxation) is in Poland. However, these general rules are subject to
several exceptions.
If services are supplied by a taxpayer without seat or fixed place of business in Poland
and the place of supply (taxation) is Poland, the purchaser who is the Polish VAT payer
has to apply the reverse-charge mechanism. The reverse charge is mandatory (i.e. the
foreign supplier cannot voluntarily register and settle the Polish VAT).
The reverse-charge mechanism also applies to a domestic supply of goods performed by
a taxpayer not having a seat or fixed place of business in Poland to a purchaser who is a
taxpayer and has a seat or fixed place of business in Poland or is a legal entity (and is not
taxpayer) and has a seat in Poland. Note that the use of the obligatory reverse-charge
mechanism relating to such supplies of goods is only applicable with respect to deliveries
performed by taxpayers established abroad and not registered for VAT purposes in
Poland.
From a practical point of view, this mean that for all sale of goods transactions for which
VAT was reconciled by the purchaser (registered for VAT with fixed place of business in
Poland) and was neutral for the foreign company from a VAT point of view, the company
will be obligated to pay the output VAT.
Customs duties
As a member of the European Union, Poland belongs to a customs union, thus only
goods imported from non-EU countries or exported from Poland to non-EU countries
are subject to customs duties and formalities. Moreover, all the Community customs
regulations are directly applicable in Poland. The most important act is the Community
Customs Code and its implementing provisions, as well as the Community Customs
Tariff.
These regulations are supplemented with certain Polish national rules, especially in
respect to procedures and specific areas that are not defined in the Community customs
law (e.g. strict regulations concerning the export of works of art and animals, limits on
the amount of cash that may be brought from Poland to non-EU countries).
Excise duties
Excise duties are levied on the production, sale, import, and intra-Community
acquisition of excise goods, which are listed in the excise duty law and include (among
others) alcohol, cigarettes, energy products (e.g. petrol, oils, gas), passenger cars, and
electricity.
Depending on the excise goods in question, one of four methods of calculating excise tax
may be applicable:

A percentage of the taxable base.

An amount per unit.
A percentage of the maximum retail price.
An amount per unit and a percentage of the maximum retail price.
The excise rate for car petrol is 1,565 Polish zoty (PLN) per 1,000 litres.
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Passenger cars are subject to the following excise rates:
3.1% for cars with engine cubic capacity that does not exceed 2,000 cc.
18.6% for cars with engine cubic capacity that exceeds 2,000 cc.
Notwithstanding the above, Polish excise duty law provides for a wide system of
excise duty exemptions as well as 0% taxation. Under specified circumstances, such
preferential treatment may apply to specified goods that are otherwise taxed based
on general rules. This concerns, for example, specific energy products used for other
purposes than as a fuel or for heating.
There is also an excise duty placed on coal. Depending on the type of coal product, the
excise rates are PLN 30.5 per 1,000 kg of coal, PLN 11 per 1,000 kg of lignite, and PLN
35.2 per 1,000 kg of coke. In practice, there are a wide range of excise duty exemptions
(practically, Poland has used all the exemption options provided in the EU directive);
nevertheless, many new administrative obligations have been set for entities producing,
distributing, and using coal. The fulfilment of those obligations is necessary in order to
apply an excise duty exemption.
Property taxes
Property tax rates are fixed by municipalities within limits set in the Law on Local Taxes
and Fees. In 2013, land used for business purposes is subject to a rate limit of PLN 0.89
per square metre. Buildings used for business purposes are subject to a rate limit of PLN
23.03 per square metre.
Transfer taxes
A transfer tax may apply to certain civil law transactions, determined as a percentage
of the transaction (i.e. such as sale, loan, donation). A tax obligation on civil law
transactions does not arise when one of the parties of the transaction is a VAT payer.
Stamp duty
In Poland, some activities are charged a stamp duty. Payment is required, for example,
in connection with the submission of a power of attorney, after completion of an official
act, or the issue of a certificate or permit.
Capital tax
A share capital increase (in case of corporations) and contribution/contribution

increase (in case of partnerships) is subject to a 0.5% capital tax, payable by a
company or partnership that receives a capital contribution. This tax applies equally
to limited liability companies as well as joint-stock companies. A merger, division, or
transformation of a corporation into another corporation is not subject to capital tax,
even if the transaction results in a share capital increase. A similar exemption applies
to a capital increase resulting from (i) an in-kind contribution of an enterprise or its
organised part or (ii) contribution of shares of the other corporation giving the majority
of votes in this corporation or contribution of additional shares in case the corporation
to which the shares are contributed already has the majority of votes.
Both the employer and the employee are obligated to contribute to the Polish social
security system. Apart from paying its own share, the employer is obligated to withhold
the employees share of the social security contributions and remit them to the Social
Security Authorities (ZUS). In both cases, the relevant payments shall be made monthly.
The employer pays total contributions in a range of 19.48% to 22.14% of the employees
gross salary (the employers contribution rate includes an accident insurance element
that varies according to the number of employees insured and the business sector). The
contribution rate for the employee is 13.71% of gross salary. The social security shares
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payable by the employer and the employee are tax-deductible items in their respective
income tax settlements.
The rates apply to salaries below the cap of PLN 112,380 in 2014 (approximately 25,000
euros [EUR]). The cap changes every year. After exceeding this cap, the salary is subject
to a contribution rate of 3.22% to 6.41% payable by the employer and 2.45% payable by
the employee.
Branch income
Foreign businesses are allowed, under certain conditions, to establish their branch
offices (exclusively within the scope of their foreign business activity) and
representative offices (exclusively with regard to promotion and advertising) inPoland.
A branch office almost always has PE status in Poland. Once a branch is established, the
foreign company pays CIT at the standard rate of 19%, based on the income attributable
to the operations of the Polish branch. For this purpose, as well as for accounting
purposes, a branch is obligated to keep accounting books that include all the data
necessary to establish the taxable base. In this respect, general income determination
rules relevant to Polish companies apply to branches as well. In the few cases in which a
branch can demonstrate, based on a DTT, that its business presence in Poland does not
constitute a PE, its profits are not subject to Polish CIT.
The tax base for CIT purposes is the overall income, which is the difference between
aggregated taxable revenue and aggregated tax-deductible costs. A tax-deductible cost
is defined as a cost incurred for the purposes of deriving revenues, as well as for the
purpose of securing or preserving a source of revenue.
Subject to numerous exemptions, the tax base includes all sources of income.
Consequently, there is no special treatment for income such as capital gains or interest.
In practice, taxable income is calculated by adjusting the profit reported for accounting
purposes. The relevant adjustments are necessary due to differences between tax and
accounting treatment of numerous revenue and cost items. As a result, the taxable base
is usually higher than the accounting profit.
Inventory valuation
Generally, the value of inventory shortagesmay be included as a tax-deductible cost.

Other write-offs in the value of inventory are not recognised for tax purposes until the
inventory in question is sold.
When inventory is lost or sold, a tax deduction is allowed for the costs incurred when the
inventory was purchased. The methods acceptable for inventory valuation for tax (and
accounting) purposes are standard cost, average (weighted) cost, first in first out (FIFO),
and last in first out (LIFO).
Capital gains
There is no separate capital gains tax. Capital gains or losses are aggregated with an
entitys other taxable income or losses. Capital losses are tax-deductible.
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Dividend income
Domestic dividend income
Dividends received from Polish residents (domestic dividends) are excluded from
overall income. Instead, such dividends are subject to a 19% withholding tax (WHT),
which is withheld and remitted to the tax office by the payer of dividends. Based on a
participation exemption, however, domestic dividends are not subject to the 19% WHT
if the Polish beneficiary holds at least a 10% share in the paying company for at least two
years.
The revenue arising from voluntary redemption of shares is not treated as a dividend
for tax purposes and does not enjoy the benefits of the participation exemption (i.e. the
method of redemption, whether voluntary or automatic, will matter).
Dividend income from abroad
Generally, dividends collected by a Polish corporate tax resident, if paid by a nonresident, are treated as regular income and taxed at the standard CIT rate. CIT on such
dividends paid in other countries may be credited proportionately against Polish CIT.
Additionally, dividends received from entities seated in the European Union (including
Poland),EEA member states, or Switzerland can benefit from CIT exemption if the
Polish company owns, respectively, at least 10% (in respect to companies seated in the
EU/EEA member states) or 25% (in respect to companies seated in Switzerland) in the
share capital of the payer for two consecutive years (and certain other conditions are
met).
Dividends received from non-EU/non-EEA member states may benefit from underlying
tax credit.If a Polish company or a PE of a company from an EU/EEA member state
located in Poland receives a dividend from a company seated in a non-EU/non-EEA
country, it may deduct the tax paid by the payer on profits out of which the dividend
was paid. The deduction is only possible if the Polish company/company from EU/
EEA, which PE is located in Poland, holds (for two consecutive works) at least 75% of
shares of the dividend payer. The tax may be deducted in an appropriate proportion.
Furthermore, the deduction is possible if there is a DTT. Based on the provisions of the
relevant DTT or other agreement concluded by Poland, the Polish tax authority may
exchange tax information with its counterparty.
Interest income
Interest income is aggregated with an entitys other taxable income.
Foreign income
Resident corporations are taxed on their worldwide income unless there is an applicable
DTT in place between Poland and the relevant country that provides that the foreign
income shall be exempt from taxation in Poland (see Foreign tax credit in the Tax credits
and incentives section).
Deductions
Generally, a tax-deductible cost is defined as a cost incurred for the purposes of deriving
revenues, as well as for the purpose of securing or preserving a source of revenue. The
last element of the definition of a tax-deductible cost was added a few years ago to
reduce uncertainties surrounding the deductibility of business expenses that do not
directly generate revenue.
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The CIT law provides a list of items that are not deductible for tax purposes, even if
the items meet the general conditions described above. This list contains over 60 items
including, among others, the following:

Written-off, lapsed accounts receivable.

Entertainment costs.
Accrued but unpaid interest.
Accounting and comparable provisions.
Tax penalties and penalty interest.
A portion of the insurance premium paid on a passenger car (i.e. the portion
calculated on the excess of the car value over EUR 20,000).
A portion of the depreciation write-offs made on a passenger car (i.e. the portion
calculated on the excess of the car value over EUR 20,000).
Furthermore, expenses incurred in connection with the acquisition of fixed and
intangible assets (e.g. licences, trademarks, know-how) are not directly deductible.
Instead, the acquired assets are subject to depreciation. If such assets are sold, a business
is entitled to deduct the net value (cost of acquisition reduced by the overall value of the
tax depreciation allowances made). Similar treatment relates to the acquisition of shares
or land, except that these particular assets are not depreciable. Therefore, the full cost of
an acquisition of shares or land may be deducted when such assets are sold.
Obligatory correction of tax deductible costs resulting from invoices that are overdue
by more than 30 days is required. Obligation to correct tax deductible costs arises
in cases of lack of payment of the amount stated in the invoice/bill/other document
within 30 days after the payment was due. In cases when the term of payment is longer
than 60 days, costs correction should be performed within 90 days from including the
amount resulting from invoice/bill/other document in its CIT deductible costs. When
the unpaid amount exceeds the value of costs incurred that could be corrected, the
difference should be recognised as the tax revenue. When the overdue invoice is paid by
the taxpayer, one will be entitled to recognise the tax deductible costs in the period of
performing the payment.
Depreciation
Depreciation write-offs are treated as a tax-deductible cost. Generally, depreciation

allowances are calculated based on the straight-line method and the maximum rates
provided in the CIT law. If this is the case, a taxpayer deducts equal annual write-offs,
calculated by multiplying the maximum rate of depreciation by the assets initial value
until the total value of write-offs equals the initial value (typically, the initial value
equals the purchase price).
For certain categories of machinery and vehicles (but not passenger cars), the reducingbalance depreciation method may be applied. Under this method, the tax depreciation
may be accelerated during the initial period of the assets use by multiplying the
statutory maximum rate by two. The rate is then applied to the net value of fixed assets
(i.e. initial value reduced by earlier annual write-offs). The reducing-balance method
is applied until the annual depreciation write-off equals the hypothetical write-off
that would be made under the straight-line method. From this point, the depreciation
allowance is taken based on the straight-line method for its remaining useful life.
The main categories of assets and the related statutory annual tax depreciation rate are
as follows:
Assets
Various buildings and constructions
Machinery and equipment (general)
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1.5 to 10
7 to 20
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Assets
Machinery for road building and construction
Machinery for paper industry
Office equipment
Computers

18 to 20
14
20
30
Apart from the above, the Polish CIT law includes provisions for accelerated depreciation
(within specified limits) for assets used in deteriorated conditions and for second-hand
assets.
Goodwill
Under the provisions of CIT law, goodwill is subject to tax amortisation if it is created
as a result of acquisition of an enterprise, or its organised part, made in one of the
following ways: (i) purchase; (ii) payable use, provided that the user of such enterprise/
organised part of an enterprise makes the depreciation write-offs; or (iii) contribution
to a company based on commercialisation and privatisation regulations. The goodwill is
amortised for tax purposes for a minimum period of five years.
Start-up expenses
There are no specific provisions in the Polish CIT law relating to start-up expenses; the
general rules of tax deductibility described above apply.
Interest expenses
Accrued interest on loans and credit that were paid or capitalised are deductible for CIT
purposes. Polish CIT law provides some exceptions, such as instances where costs are
not associated with earning revenue.
In Poland, there are also some limitations of interest tax deductibility connected with
thin capitalisation regulations. See Thin capitalisation in the Group taxation section for
more information.
Bad debt
As a general rule, debts written off as uncollectable cannot be considered as tax

deductible. However, in certain situations, the provisions of Polish CIT law provide
some exceptions. According to these provisions, only strictly defined uncollectable debts
(which based on the CIT law were booked as taxable revenues) may be considered by
the taxpayer as a tax-deductible cost, provided that their uncollectability was properly
documented (e.g. by a court decision). In some cases, uncollectability may be considered
probable (e.g. debtors death).
Companies are entitled to deduct donations for the purposes of public benefit and to
volunteer activity organisations up to the total amount not exceeding 10% of income;
however, deductions may not be made for donations to:
natural persons or
legal persons or organisational units having no legal personality who carry on
economic activity consisting in the production of electronic goods; fuel; tobacco;
spirits, wines, beers, and other alcohol beverages containing over 1.5% alcohol;
products made of noble metals or containing such metals; or incomes received from
trading in such goods.
Donations for religious practice purposes can be deducted up to the total amount not
exceeding 10% of income.
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Additionally, the donations of food products made for the purposes of so-called public
benefit constitute tax deductible costs in the amount of production costs or purchase
price.
Fines and penalties
Fines and penalties can be recognised as tax deductible items if they meet the general
conditions. However, the Polish CIT law provides some exceptions, which include
contractual penalties and indemnities for defects in supplied goods, works, and services
performed; delayed supply of non-defective goods; and delay in the elimination of
defects in goods, works, and services performed.
Taxes
Income tax and, in most cases, VAT incurred on purchasesare not deductible. However,
as a rule, VAT is deductible for CIT purposes if it cannot be offset against the companys
output VAT. Other taxes, if paid in the course of business activities, are generally
deductible in full.
A tax loss reported in a tax year may be carried forward over the next five consecutive
tax years; however, in any particular tax year, the taxpayer may not deduct more than
50% of the loss incurred in the year for which it was reported. For example, a taxpayer
that incurred PLN 100 annual loss in 2014 may carry it forward to 2015 through 2019.
However, the maximum loss deduction in any of these years may not exceed PLN 50
(assuming that there are no other losses available for deduction).
Currently, there is no possibility to carry back tax losses in Poland.
Deductions may be claimed for royalties, management services, and interest charges
paid to foreign affiliates. However, note that interest expenses are subject to the thin
capitalisation restrictions (see Thin capitalisation in the Group taxation section for more
information). Furthermore, note that transactions with related companies should be
made according to the market conditions. Where a company shifts income to another
entity (especially a foreign entity), the tax authorities may adjust the taxable base
upward (see Transfer pricingin theGroup taxation section for more information).
Group taxation
The CIT law includes provisions on group taxation (i.e. in theory, a group of companies)
if it meets certain conditions and can be treated as a single taxpayer. However, the
required conditions are extremely demanding and very few taxpayers of this type exist.
Transfer pricing
Transactions between related parties should be conducted in accordance with the

arms-length principle. The tax authorities may increase the taxable base if the pricing
used between related parties differs from what would have been used between
unrelated parties in a similar business transaction and the difference results in income
being shifted from a Polish taxpayer to another entity (whether a Polish resident or
not). Similar rules apply to transactions between Polish residents and the residents
of tax haven countries. These transactions may be subject to the transfer pricing
principles even if the parties thereto are not related. The CIT law also contains detailed
requirements for transfer pricing documentation.
Taxpayers can reduce the transfer pricing risk by applying for an advance pricing
arrangement (APA). An APA decision shall be issued by the Minister of Finance in
response to a taxpayers application. An APA will obligate a taxpayer to follow a
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specified methodology when calculating the transfer prices applicable to transactions
between related entities. In exchange, the tax authorities may not challenge the agreed
uponmethodology.
Thin capitalisation
A portion of the interest paid by a Polish company on a loan granted by a qualified lender
(a qualified shareholder or a qualified sister company) will not be considered a taxdeductible cost if the value of the Polish companys overall debt from the shareholders
and other affiliates mentioned in the tax law exceeds three times the value of the
Polish companys share capital (3:1 debt-to-equity ratio). A qualified shareholder is
defined as a holder of 25% or more of the voting power of a Polish company. A qualified
sister company is a company of which a shareholder holds at least 25% of the value of
theshares.
Legislative processes concerning CFCs are in progress. According to the relevant

project, an additional income tax would be imposed on direct and indirect shareholders
of companies deriving their income mainly (more than 50%) from so-called passive
sources (i.e. dividends, income from alienation of shares and liabilities, interest,
guarantees, intellectual property [IP] or industrial property rights [including the sale of
these rights]). The new regulation would also apply to the income from business carried
on through a PE situated abroad (additional tax will not be levied on taxpayers who
already take into account profits of their PEs in determining the taxable basis for CIT in
Poland).
The new tax regime would affect taxpayers that are owners of foreign PEs, direct and
indirect shareholders with the right to a minimum of 25% participation in foreign
companies income (in certain cases, the threshold will be calculated based on number
of votes at shareholders meetings or shareholding in the companys registered capital),
as well as shareholders of companies registered in countries recognised as applying
harmful tax competition.
Income of CFC companies/PEs derived from the sources listed above would be taxable
in Poland only if such companies/PEs are taxable at tax rates lower than 14.25% or the
income is exempt from taxation in their jurisdictions (the CFC regulation would not
affect the income derived from dividends that are tax exempt based on the EU ParentSubsidiary Directive).
Under the envisaged regime, income earned by CFC subsidiaries or PEs should be
subject to 19% CIT. As a general rule, taxpayers are allowed to decrease the tax due
in Poland by the amount of tax already paid abroad by the CFC companies/PEs. The
tax base is to cover the whole amount of income earned by the CFC companies/PE
(including the passive income and the income earned on the actual business) that can
be allocated to the Polish shareholders. The tax base will be calculated proportionally
to the period in which particular taxpayers were foreign entity shareholders. If CFC
companies are located in tax havens, the shareholders are to pay the tax on the whole
amount of income earned by the CFC companies (independently of their actual share in
the income).
According to the project, tax on gains from CFCs will not be levied only if the controlled
corporation will perform actual economic activity, i.e.:
Incorporation must correspond with an actual establishment intended to carry
on genuine economic activities. In particular, the controlled corporation should
physically exist in terms of premises, staff, and equipment.
CFC does not create an artificial arrangement without a link with economic reality.
Poland
1587
Poland
There is proportionality between the actual economic activities carried out by the
controlled corporation and the extent to which a corporation exists in terms of
premises, staff, and equipment.
At present, the regulations are solely a draft proposition. According to the draft, CFC
rules shall become effective as of January 2015.

Foreign tax credit
Resident corporations are taxed on their worldwide income unless there is an applicable
DTT in place between Poland and the relevant country that provides that the foreign
income shall be exempt from taxation in Poland. In all other cases (in particular, when
the income is not covered by any treaty), Poland uses the ordinary credit method to
avoid double taxation. Therefore, a Polish resident is liable for income tax imposed
on its worldwide income, but the tax is proportionately reduced by the income tax
paidabroad.
Special Economic Zones (SEZs)
Polish legislation provides investment incentives related to business activities carried out
in 14 zones defined as SEZs. A business entity can benefit from tax incentives, provided
that the entity obtains a permit from the Ministry of the Economy to conduct business
activities there and meets other legal requirements. Note that a CIT credit applies only to
income earned on activity conducted within the territory of SEZs and covered by permit.
In general, the amount of the tax incentive depends on project location and size of the
enterprise. For large enterprises, it can be 30%, 40%, or 50% of eligible expenditures
(i.e. investment expenditures or two-year labour costs). In other words, the CIT credit
allows the investor to avoid paying income tax up to the limit calculated on the basis of
eligible expenditures and state aid intensity (percentage as above). In case of investment
valued PLN 20 million and intensity aid of 40%, the investor would be entitled not to
pay tax due up to PLN 8 million. If the available limit of the tax credit exceeds the annual
tax due generated on SEZ activity, the excess may be utilised in the following tax years.
Consequently, in the case of significant investments, it is possible for businesses that
run activities in the SEZs to enjoy exemption from income tax for a considerable period.
According to current regulations, the deadline for utilising the available tax credit is the
end of 2026 (previously2020).
Note that in the case of small enterprises, the limit of the tax credit may be increased
by 20%. In the case of medium-sized enterprises, the limit of the tax credit may be
increased by 10%.
Withholding taxes
Domestic provisions: General rules
The general domestic WHT rate for dividends is 19%. Dividends also encompass income
from liquidation of a company and the income from the redemption of shares (with the
exception of gain from voluntary redemption, which is treated as a capital gain subject to
19% CIT rate in Poland if the gain is realised by a taxpayer from a non-treaty country or
the treaty includes a so-called real estate clause).
The general WHT rate on interest and royalties paid to non-residents is 20% (10%
regarding services of sea or air transportation). These WHT rates may be reduced by
DTTs.
1588
Poland
Poland
There is also a 20% WHT on payments made to non-residents for intangible services
(such as consulting services). However, if a payment is made to a country that has
a DTT with Poland, this tax may be avoided with the completion of certain minimal
administrative formalities. Few treaties treat payments for technical services as royalties
(e.g. India).
Special treatment: EU directives
The CIT law provisions and certain EU directives provide special treatment for
dividends, royalties, and interest paid to numerous European countries.
In general, the transitional rules on interest and royalty payments paid by Polish
corporate residents to associated EU or EEA companies, as well as the full exemption
after 1 July 2013, only apply to interest and royalty payments between associated
companies (parent-subsidiary relationships or sister-sister relationships) in which capital
involvements are significant, i.e. the paying company owns or is owned at least 25% by
the company receiving interest or the company that pays interest and the company that
receives interest are owned at least 25% by the same parent company. Shareholding
should be kept for a minimum of two consecutive years.
In relation to all given payments (i.e. interest, royalties, dividends), the condition
regarding holding shares is also fulfilled if two years passes after the day of the interest/
royalty/dividend payment. If the period is interrupted afterwards, the company is
obligated to pay the tax at the standard rate with interest.
Dividends paid to corporate residents of EU and EEA countries are exempt from WHT,
subject to certain conditions specified in the CIT law. The basic requirement is that the
foreign beneficiary holds at least 10% of the shares in the Polish company for a minimum
of two consecutive years. In relation to all given payments (i.e. interest, royalties,
dividends), the condition regarding holding shares is also fulfilled if two years passes
after the day of the interest/royalty/dividend payment. If the period is interrupted
afterwards, the company is obligated to pay the tax at the standard rate with interest.
Note that several additional conditions have to be met for the reduced rate/exemption
from the WHT based on the Directive to be applied (e.g. the company receiving the
dividend/interest/royalty cannot be exempt from tax on all its income, regardless of its
source; the recipient has to have ownership title to the shares in the Polish company).
Additionally, the CIT law states that in order to enjoy the exemption from WHT on
dividends and decreased WHT rate on interest and royalties, based on the Directives
provisions, the relevant DTT or other agreement concluded by Poland should allow
exchange of tax information between the tax authorities of Poland and the country of
the payment recipient.
Given the fact that Poland did not conclude a DTT with Liechtenstein, payments made to
tax residents of Liechtenstein should not benefit from the Directive.
Treaty rates
If EU special rules do not apply, the domestic WHT rates can be decreased by a DTT
concluded between Poland and the payment recipients country of residence if certain
administrative conditions are met (i.e. the payer obtains a valid certificate of a fiscal
residence of the payment recipient/beneficial owner).
The following table lists the WHT rates as provided in the treaties concluded by Poland.
Notably, the following table shows only rates that result from general treaty provisions;
the treaties themselves occasionally include special provisions (applicable in special
circumstances or to special entities) that provide lower WHT rates than the ones listed.
Poland
1589
Poland
Furthermore, if a treaty rate is higher than a domestic one, the latter should apply.
Recipient
Non-Treaty
Treaty:
Albania
Armenia
Australia
Austria
Azerbaijan
Bangladesh
Belarus
Belgium
Bosnia & Herzegovina (Yugoslavian Treaty)
Bulgaria
Canada
Chile
Dividends (%)
19
Interest (%)
20
Royalties (%)
20
5 (1)/10
10
15
5 (3)/15
10
10 (5)/15
10 (7)/15
5 (8)/15
5 (1)/15
10
0/15
5 (13)/15
10
10
5
10
0 (4)/5
0 (2)/10
0 (6)/10
10
0 (9)/5
10
0 (10)/10
0 (11)/15
5/15 (86)
0 (15)/10
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India
Indonesia
Iran
Israel
Italy
Japan
Jordan
Kazakhstan
Korea, Republic of
Kyrgyzstan
Kuwait
Latvia
Lebanon
Lithuania
Luxembourg
Macedonia
Malaysia
Malta
5 (1)/15
0 (17)/5
5
0(19)/5(20)/15
12
5 (23)/15
5 (23)/15
5 (3)/15
10
5 (3)/15
19 (73)
10
5 (23)/15
15
10 (13)/15
7
0 (30)/15
5 (32)/10
10
10
10
10 (36)/15
5 (3)/10
10
0 (40)/5
5 (23)/15
5
5 (23)/15
0 (89)/15
5 (23)/15
0 (44)
0 (77)/10 (76)
0 (15)/10
0 (79)/5
0 (80)/5
0 (21)/5
0 (22)/12
0 (24)/10
5
0
0 (26)/8
0 (27)/5
10
0 (10)/10
0 (10)/10 (74)
0 (28)/15
0 (10)/10
0 (29)/10
0 (31)/10
5
0 (33)/10
0 (34)/10
0 (10)/10
0 (37)/10
0 (38)/10
0 (39)/10
0 (41)/5
0 (42)/10
0 (37)/5
0 (10)/10
0 (43)/5
0 (10)/10
0 (45)/15
0 (2)/5
5
10
10
5
10
10
0
5
10
5
0 (12)/10
5 (14)/10/15 (87)
10 (16)/10 of 70
(14)
10
5 (88)
10 (81)
5
12
10
5
0 (25)/10
8
5
10
10
10
22.5
15
10
0 (82)/10
5 (14)/10
10
0 (35)/10
10
10
10
10
15
10
5
10
5
10
0 (46)/15
5 (78)
1590
Poland
Poland
Recipient
Mexico
Moldova
Mongolia
Montenegro (Yugoslavian Treaty)
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Portugal
Qatar
Romania
Russia
Saudi Arabia
Serbia (Yugoslavian treaty)
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Syria
Tajikistan
Thailand
Tunisia
Turkey
Ukraine
United Kingdom
United States
Uzbekistan
Vietnam
Zimbabwe
Dividends (%)
5 (23)/15
5 (23)/15
10
5 (23)/15
7 (18)/15
5 (3)/15
15
0 (49)/15
15
10 (23)/15
10 (54)/15
5
5 (23)/15
10
5
5 (23)/15
0 (57)/10
5 (18)/10
5 (23)/15
5 (23)/15
5 (1)/15
15
5 (23)/15
0 (20, 49)/15
10
15
20
5 (1)/10
10 (23)/15
5 (23)/15
0 (66)/5
0 (67)/10
5 (69)/15
5 (70)/15
10 (23)/15
10 (23)/15
Interest (%)
0(47)/5(48)/15
0 (37)/10
0 (10)/10
10
10
0 (75)/5
10
0 (4)/5
0 (50)/20
0 (53)/10
0 (55)/10
0 (85)/5
0 (42)/10
0 (56)/10
0 (83)/5
10
0 (58)/10
0 (42)/10
0 (59)/10
0 (10)/10
0
0 (60)/10
0
10 (84)
0 (63)/10
0 (39)/10
0 (58)/10
12
0 (10)/10
0 (37)/10
0 (10)/5
0 (68)/5
0
0 (71)/10
10
10
Royalties (%)
10
10
5
10
10
5
10
5
15 (51)/20 (52)
15
10
5
10
10
10
10
10
5
10
10
0 (35)/10
0 (61)/10
5
0 (62)/5 (84)
18
10
0 (64)/5 (65)/15
12
10
10
5
5
10
10
10 (72)/15
10
Notes
1.
2.
3.
4.
5.
6.
When the beneficial owner is a company that directly holds at least 25% of the capital of the
When interest is paid to the government, the central bank of the state, including local authorities or
other government bodies.
When the beneficial owner is a company (other than a partnership) that directly holds at least 10% of
When interest is paid to the government, a political subdivision, or a local authority in connection
with:
a loan granted, insured, or guaranteed by a governmental institution for the purposes of
promoting exports
a sale on credit of any industrial, commercial, or scientific equipment, or
any loan granted by a bank.
When the interest is paid:
to the Central Bank of Poland
to the Central Bank of Bangladesh
to the government of the Republic of Poland or the government of the Republic of Bangladesh, or
Poland
1591
Poland
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
1592
in respect of a loan made or guaranteed or insured by the government of the other state, or any
agency including a financial institution owned or controlled by the government.
When the beneficial owner is a company (other than a partnership):
that directly holds at least 25% of the capital of the company paying the dividends or
that directly holds at least 10% of the capital of the company paying the dividends, and the value
of investments in the company is at least EUR 500,000 or is equal to the amount in the other
currency.
When interest is paid:
on loan granted, guaranteed, or insured, or a credit granted, guaranteed, or insured, by a general
system organised by the state, including political subdivisions or local authorities for purposes of
promoting exports
on loan of whatever kind, except in the form of bearer securities, granted by a banking company,
or
to other states, including political subdivisions and local authorities.
When interest is paid to the government, including local authorities, to the central bank or any
financial institution controlled by that government, or on loans guaranteed by that government.
When interest is paid in respect of a loan made, guaranteed, or insured by the state or agreed public
body.
Copyright royalties and othersimilar payments in respect of the production or reproduction of any
literary, dramatic, musical, or artistic work (not including royalties in respect of motion picture films
and works on film or videotape for use in connection with television).
When the beneficial owner is a company that directly controls 20% of the voting stock of the
For the use of, or the right to use any industrial, commercial, or scientific equipment.
to the government, a local authority, and the central bank or any financial institution wholly owned
by that government or
to the other resident of the other state with respect to debt-claims indirectly financed by the
government of the other state, a local authority, and the central bank or any financial institution
wholly owned by the government.
For the use of, or the right to use, any copyright of literary, artistic, or scientific work, including
cinematograph films, and films or tapes for radio or television broadcasting, or any patent, know-how,
trademark, design or model, plan, secret formula, or process.
The Protocol of 22 March 2012 has entered into force. The Protocol introduces a maximum 5% rate
of WHT on dividends and exempts dividends paid to an immediate parent company (other than
partnership) that owns at least 10% of the capital of the company paying the dividend.
When the beneficial owner is a company (other than a partnership) that directly holds at least 25%
of the capital of the company paying the dividends, where such holding is being possessed for an
uninterrupted period of no less than one year and the dividends are declared within that period.
When the beneficial owner is a pension fund or other similar institution providing pension schemes in
which individuals may participate in order to secure retirement benefits, when such pension fund or
other similar institution is established, recognised for tax purposes and controlled in accordance with
the laws of the other state.
on loan whatever kind granted, insured, or guaranteed by a financial institution owned or
controlled by the state
in connection with the sale on credit of any industrial, commercial, or scientific equipment
in respect of a bond, debenture, or other similar obligations of the government of the state, or of a
political subdivision or local authority, or
to the other state, or to a political subdivision or local authority.
When interest is paid to the government of the other state, including local authorities and the central
bank.
When interest is paid to the government of the other state, including political subdivisions and
local authorities, the central bank, or any financial institution owned by the government or on loans
guaranteed by the government.
From copyright of literary, artistic, or scientific work.
When the beneficial owner is the government of the other state or central bank.
When the interest, subject to certain exceptions related to silent shareholders, is paid:
to the government of Poland or Germany on a loan of whatever kind granted, insured, or
guaranteed by a public institution for purposes of promoting exports
in connection with the sale on credit goods between companies, or
on any loan of whatever kind granted by a bank.
If the following conditions are met:
Interests paid to:
the government, a political sub-division, or a local authority of the other contracting state or
the central bank of other contracting state.
When the beneficial owner is a resident of the other contracting state and is derived in connection
with a loan or credit extended or endorsed by:
Bank Handlowy (in scope of financing export and import) - for Poland
Poland
Poland
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
the Export-Import Bank of India (in scope of financing export and import) - for India
any institution in the other contracting state in charge of public financing of external trade, or
any other person, provided that the loan or credit is approved by the government of the first
mentioned contracting state.
When the beneficial owner is the government, ministry, other governmental institution, municipality,
central bank, or any other bank wholly owned by the government of the other contracting state.
When the beneficial owner is a resident of the other contracting state and directly holds at least 25%
of the voting power of the company paying the dividends.
Interest paid in connection with:
the sale on credit of any industrial, commercial, or scientific equipment
the sale on credit of any merchandise by one enterprise to another, or
on any loan of whatever kind granted by the bank.
When the payer of interests is the government or contracting state or a local authority of thereof.
Interest is paid to the government of other contracting state or local authority thereof (including
financing institutions) wholly owned by other contracting state or local authority thereof.
Interest is paid to any other entity, including financial institutions, in relation to loans made in
application of an agreement concluded between governments of contracting states.
When beneficial owner is the government of other contracting state, including local authorities
thereof, the central bank, any financial institutions controlled by that government or any resident
of the other contracting state with respect to debt-claims, guaranteed or indirectly financed by
institutions mentioned above.
For payments connected with copyrights, literary, artistic, and scientific activity, including payments
connected with films for cinemas and films and tapes for TV.
When the beneficial owner is a company that directly or indirectly holds, at least 20% of the capital of
When interest is paid to the government or local authorities.
When interest:
arising in contracting state and received by the government of the other contracting state,
including political subdivision or a local authority thereof or the central bank of that other
contracting state
arising in contracting state is paid in respect of loans and credits made or guaranteed:
by the Bank Handlowy- for Poland
by the Export-Import Bank of Korea and Korea Development Bank - for Korea
is paid in connection with the sale on credit of any industrial, commercial, or scientific equipment,
or
is paid in connection with the sale on credit of any merchandise by one enterprise to another.
Interest paid to government or central bank.
When the beneficial owner is:
the government of the other contracting state, entity, or any governmental institution or
a company that is a resident of the other contracting state and at least 25% of its capital is
directly or indirectly owned by the entities mentioned above.
the government of the other contracting state, entity, or governmental institution or
a company that is a resident of the other contracting state and at least 25% of its capital is
owned directly or indirectly by the entities mentioned above.
When interest is paid in connection with loans guaranteed by the entities mentioned above.
to the government, including the local authorities, to the central bank or any financial institution
controlled by that government, or on loans guaranteed by that government or
to the resident in the other contracting state.
When the beneficial owner is other contracting state.
When interest is paid in connection with loans and credits granted by bank.
Dividends paid by:
a resident of Poland to a resident of Malaysia who is subject to Malaysian tax in respect thereof or
a resident of Malaysia to a resident of Poland who is subject to Polish tax in respect thereof.
Interest paid to resident of Poland on an approved loan or a long-term loan.
Royalties paid to resident of Poland by resident of Malaysia and approved by the competent authority
of Malaysia.
a contracting state, a political subdivision, or a local authority, or The National Bank of Poland
or Banco de Mexico or
a recognised pension or retirement fund provided that its income is generally exempt from tax
in this state.
When interest:
is paid by any of entities mentioned above
arises in Poland and is paid in respect of a loan for a period not less than three years granted,
guaranteed, or insured by Banco de Comercio Exterior, S.N.C., Nacional Financiera, S.N.C. or
Banco National de Obras y Servicios Publicos S.N.C., or
Poland
1593
Poland
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
1594
arises in Mexico and is paid in respect of a loan for a period not less than three years granted,
guaranteed, or insured by PKO S.A., Corporation of Credit Insurance, and Bank Handlowy in
Warsaw.
When the beneficial owner is a bank or insurance company.
When interest is derived from bonds and securities that are regularly and substantially traded on a
recognised securities market.
When dividends are paid to the company that directly holds at least 10% of the capital paying the
dividends on the day they are paid and has done (or will do) so for an interrupted 24-month period
from which that date falls.
by a resident of Pakistan to a Polish company or enterprise on loans approved by the Ministry of
Finance of the government of Pakistan
to the State Bank of Pakistan from sources in Poland, or
to Bank Handlowy in Poland from the sources in Pakistan.
For payments of any kind received in consideration for the use of, or the right to use:
any copyright, patent, trademark, design or model, plan, secret formula, or process
an industrial, commercial, or scientific equipment, or
motion picture films, and works on films and videotapes for use in connection with television.
For payments received in consideration of technical know-how concerning industrial, commercial, or
scientific experience.
Interests paid in respect of:
a bond, debenture, or other similar obligations of the government,state, political subdivision, or
local authority thereof or
a loan or credit extended, guaranteed, insured, or refinanced by:
Central Bank of Philippines - for Philippines
Central Bank of Poland - for Poland, or
other lending institutions as specified and agreed in letters of exchange between competent
authorities of the contracting states.
When dividends are paid to the company that directly holds at least 25% of the capital stock of the
company paying the dividends for an uninterrupted 24-month period prior to the payment.
When the debtor of such interests is the government, a political subdivision, or local authority.
When the interest is paid to the government of other contracting state, a political subdivision, or
local authority thereof, or an institution or body in connection with any financing granted by them
under an agreement between the governments of the contracting states.
Loans or credit made on central banks of contracting states and any other financial institution
controlled by the state and financing external business that may be agreed upon between the
competent authorities of the contracting states.
Interests paid to government, administrative, territorial, or the central bank.
Dividends paid by:
the company that is a resident of Singapore to a resident of Poland (as long as Singapore does
not impose a tax on dividends in addition to the tax chargeable on the profits or income of a
company) or
to government of either contracting state with respect to shares in joint stock companies of that
other state.
Interest paid to government.
Interests paid to government, local authorities, or the central bank.
Interests:
received by any banking institution that is a resident of contracting state
derived from contracting state of the other contracting state either directly or through any agency,
or
accruing to any company, partnership, or other body of persons resident in the contracting
state for any loans in money, goods, and services or in any other form, granted by them to the
government of the other contracting state, or to a state corporation, or to any state institution,
or to any other institution, to the capital of which, the other contracting state has made any
contribution, or to a credit agency, or an undertaking in that other contracting state with the
approval of the government of the same state.
For payment in consideration, for the use of, or the right to use, any copyrights or cinematograph
films.
As long as Switzerland will not tax royalties paid to foreign recipients, the payments are taxed only in
the country of residence of the recipient (currently there is no WHT in Switzerland).
When recipient is a contracting state, or one of its local authorities, or the statutory body of either,
including the central bank; or when interests are paid by a contracting state, or one of its local
authorities, or the statutory body of either.
Such interest is paid in respect of any debt-claim or loan guaranteed, insured, or supported by a
contracting state or another person acting on states behalf.
Payments payable to contracting state or a state owned company in respect of tape or films.
Royalties made as consideration, for the alienation, or the use of, or the right to use, any copyright
of literary, artistic, or scientific work, excluding cinematographic films or tapes for television or
broadcasting.
When the beneficial owner is the government or a government institution.
When dividends are paid to a company that is the resident of the other contracting state and that
directly holds at least 10% of the capital, paying the dividends on the day they are paid and has done
(or will do so) for an uninterrupted 24-month period from which that date falls.
Poland
Poland
68. When interests are paid to the government, a political subdivision, or a local authority in connection
with:
promoting exports
the sale on credit of any industrial, commercial, or scientific equipment, or
any loan granted by a bank.
69. When the beneficial owner is a company that directly holds at least 10% of the outstanding shares of
the voting stock of the company paying the dividends.
70. When the beneficial owner is a company that directly holds at least 20% of the capital of the
71. When the beneficial owner is:
the government or a local authority or
the National Bank of Poland or the Central Bank of Uzbekistan Republic.
72. For payment of any kind, received in consideration, for the use of, or the right to use:
any patent, design or model, plan, secret formula, or process or
any information concerning industrial or scientific experience.
73. Treaty allows application of the domestic tax rate.
74. As long as Iceland does not levy tax at source of income, interest is taxable only in the contracting
state of which the beneficial owner of the interest is a resident.
75. When interest is paid to the government, a political subdivision, or a local authority in connection
with:
promoting exports
a sale on credit of any industrial, commercial, or scientific equipment
any loan granted by a bank
in respect of a bond, debenture, or other similar obligations of the government of a contracting
state, or of a political subdivision or local authority thereof, or
to the other contracting state, or to a political subdivision or local authority thereof.
76. When the tax is charged by Poland.
77. When the dividends are paid by a company resident of Poland to a resident of Malta that directly
holds at least 10% of the capital company paying the dividends on the date they are paid and has
done so or will havedone sofor an uninterrupted 24-month period in which that date falls.
78. When the recipient is the beneficial owner.
79. According to the Protocol of 22 March 2012, which has entered into force, the maximum WHT
rate on interest paid is 5%. However, when interest is paid to the government, including political
sub-divisions and local authorities, the central bank, or any statutory body of the state with respect
to loans or credits made or guaranteed by the government of the other state, including political subdivisions and local authorities, the central bank, or any statutory body of the other state, it shall be
exempt from tax in the first mentioned contracting state.
80. There is a WHT exemption on interest payable: (i) on any loan or credit granted by a bank; (ii) to
the government of the other contracting state, including any political subdivision or local authority
thereof, the central bank, or any financial institution owned or controlled by that government; or (iii)
to a resident of the other state in connection with any loan or credit guaranteed by the government of
the other state, including any political subdivision or local authority thereof, the central bank, or any
financial institution owned or controlled by that government. The maximum rate of WHT on interest is
5%.
81. The maximum WHT rate on royalties is 10%.
82. The lower rate applies to fees for technical services.
83. When interest is paid: (i) by the government of a contracting state, administrative subdivision, or local
authority thereof; (ii) to the government of the other contracting state, administrative subdivision,
or a local authority thereof; or (iii) to the central bank of the other contracting state or a corporate
body (including financial institution) controlled or owned by that state, a political or administrative
subdivision, or local authority thereof.
84. As of 1 July 2013, the rateis reduced to 5%.
85. If the recipient of the interest is the beneficial owner and interest is paid: (i) to the Republic of
Poland or the State of Qatar; (ii) on a loan of whatever kind granted, insured, or guaranteed by a
public institution for purposes of promoting exports; (iii) in connection with the sale on credit of any
industrial, commercial, of scientific equipment; or (iv) on any loan of whatever kind granted by a bank.
86. The treaty rate is 15% for all types of interest. However, by virtue of a most-favoured-nation clause of
the protocol (and since the Chile-Spain treaty provides a reduced rate), the rate is reduced to 5% in
respect of interest (i) paid to a bank or insurance company or (ii) derived from bonds or securities that
are regularly and substantially traded on a recognised securities market.
87. The general treaty rate is 15%. However, by virtue of a most-favoured-nation clause of the protocol
(and since the Chile-Spain treaty provides a reduced rate), the rate is reduced to 10%.
88. The Protocol of 22 March 2012 has not changed the WHT rate in relation to royalties; however,
the beneficial owner clause was introduced. Additionally, the new DTT amends the definition of
royalties.
89. When the beneficial owner is a company (other than a partnership) that directly holds at least 10%
of the capital of the company paying the dividends, where such holding is being possessed for an
uninterrupted period of no less than two years and the dividends are declared within that period.
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Tax administration
Taxable period
The taxable period is the calendar year (between 1 January and 31 December).
Companies are entitled to choose another (than calendar) fiscal year (e.g. between 1
April and 31 March).
Tax returns
The annual CIT return should be submitted to the tax office within three months
following the end of the tax year.
Payment of tax
The same deadline as the CIT return applies to the settlement of the annual CIT liability.
In financial terms, the final settlement is not significant since most of the annual liability
is paid by CIT advances throughout the tax year.
The CIT advances should be paid for each month by the 20th day of the following
month. Entities that started business activities (except for companies organised as a
result of certain transformations) and entities whose gross sales revenue (including
VAT) in the prior tax year did not exceed EUR 1.2 million are entitled to opt to make
advance settlements on a quarterly basis (instead of a monthly basis).
Tax audit process
The tax authorities generally shall notify its intention to initiate a tax audit. The
inspection shall be initiated not earlier than after seven days and not later than 30 days
from the receipt of the notice.
The duration of all audits in one calendar year may not exceed the following:

For micro entrepreneurs: 12 working days.

For small entrepreneurs: 18 working days.
For medium entrepreneurs: 24 working days.
For large entrepreneurs: 48 working days.
Tax liability expires five years after the end of the calendar year in which the tax
payment deadline passed. There are also situations when the statute of limitations can
be suspended or interrupted (e.g. litigation).
The Ministry of Finance publishes tasks for audit authorities every year. It is not an
official document but rather an internal ordinance.
The topics of focus for tax authorities include the following:
Excise duty, especially connected with liquid fuels trade.
VAT on intra-Community transactions.
Tax frauds in VAT on domestic transactions.
In practice, the main fields of control held by audit authorities are as follows:

Validity of the VAT refund.

Possibility to correct excise duty resulting from post-transaction rebate.
Correctness of VAT returns concerning scrap sales.
Correctness of settlements concerning the use of a trademark.
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PwC contact
Jaime Esteves
PricewaterhouseCoopers & Associados - SROC, Lda.
Palcio Sottomayor
Rua Sousa Martins 1 - 4
1069-316 Lisboa
Portugal
Tel: +351 213 599 601
May 2014: Prorogation of the deadline for the issuance of licences to
operate under the Madeira International Business Centre (MIBC)
The European Union (EU) Commission has authorised the prorogation, until 31
December 2014, of the issuance of licences to operate under the MIBC special tax
regime. The regime provides for several tax benefits until 31 December 2020, including,
among others, a reduced corporate income tax (CIT) rate of 5% applicable on income
derived from transactions with non-residents, in case of companies licensed to operate
in the international service centre.
January 2014: Developments in the tax law
The law that reformed the CIT was published on 16 January 2014 and applies to tax
years or taxable events respectively starting or occurring on or after 1 January 2014.
Among others, the following measures are enacted:
CIT rate
The standard CIT rate was reduced from 25% to 23%. A further reduction to 21% in
2015 and to 19%/17% in 2016 shall be subject to analysis, also depending on the reform
of the personal income tax (PIT) and value-added tax (VAT).
A reduced CIT rate of 17% applies to small and medium-sized companies on the first
15,000 euros (EUR) of taxable income (the standard CIT rate shall apply on the excess).
State surtax
State surtax applies at the following rates on the taxable profits (prior to the use of tax
losses carried forward) related with tax years starting on or after 1 January 2014:
3% on the taxable income above EUR 1.5 million and up to EUR 7.5 million.
5% on the taxable income above EUR 7.5 million and up to EUR 35 million.
7% on the taxable income above EUR 35 million.
Carry forward of tax losses
The period to carry forward tax losses is extended from five to 12 years. The offset of tax
losses carried forward is capped at 70% of the taxable profit (previously 75%). These
measures apply to tax losses generated in the tax years starting on or after 1 January
2014.
Tax deductibility of financial expenses
The deduction of net financial expenses is capped at the higher of EUR 1 million
(previously EUR 3 million) or 30% of the earnings before depreciation, amortisation, net
financing expenses, and taxes (a transitional regime applies, being 60% in 2014, 50% in
2015, and 40% in 2016, until reaching 30% in 2017 and following years).
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Special regime of group taxation
The minimum percentage of ownership under the special regime of group taxation is
lowered from 90% to 75%. Additionally, tax resident Portuguese subsidiaries indirectly
owned through an EU or European Economic Area (EEA) tax resident company are
now eligible for this regime. Regarding the tax deductibility of financial expenses, the
dominant company of a group taxed under the special tax regime can opt to apply the
limitation (EUR 1 million or 30% of earnings before depreciation, amortisation, net
financing expenses, and taxes) on the groups total net financial expenses (previously,
the limitation was assessed on an individual basis).
Participation exemption regime for dividends and capital gains
A participation exemption regime applies on dividends received and capital gains

realised by Portuguese tax resident companies. Dividends and capital gains are exempt
from CIT in case of direct or indirect ownership of at least 5% of the share capital or of
the voting rights of the subsidiary, which is held for at least 24 months (or maintained
for that period). The regime also applies to capital gains and capital losses related to
other equity instruments, such as additional capital contributions. Capital losses on the
sale of participation are disallowed as tax deductible expenses.
The regime shall not apply in the following situations:
The subsidiary is resident for tax purposes in a black-listed jurisdiction.
The subsidiary is subject to tax at a rate lower than 60% of the standard CIT rate
(meaning 13.8% in 2014).
The capital gains are realised on the sale of participation in an entity whose assets are
comprised of more than 50% immovable property (acquired on or after 1 January
2014).
Exemption from taxation of profits and losses of a foreign permanent

establishment (PE)
Profits and losses of a foreign PE can be excluded from taxation in Portugal, provided
that (i) the profit allocated to that PE is subject to and not exempt from a tax foreseen in
Article 2 of the EU Parent/Subsidiary Directive (Council Directive 2011/96/EU, dated 30
November), or a tax similar to the Portuguese CIT where the legal rate is not lower than
60% of the standard CIT rate, and (ii) the PE is not located in a black-listed jurisdiction.
The regime is not applicable to the profit allocated to the foreign PE up to the amount
of the losses allocated to that PE that have been taken into account by the Portuguese
taxpayer when computing the respective taxable income of the previous 12 tax years.
This optional regime must cover, at least, all the PEs located in the same jurisdiction, and
is mandatory for a minimum three-year period.
Exemption from withholding tax (WHT) on dividends paid to foreign

shareholders
An exemption from WHT applies to dividends distributed by Portuguese tax resident

subsidiaries to their foreign parent company, provided that the foreign parent company
meets the following requirements:
It is resident in a member state of the European Union, the European Economic Area
(bounded to tax cooperation equivalent to the European Unions), or a state with
which Portugal has concluded a tax treaty (that foresees tax cooperation equivalent
to the European Unions).
It is subject to and not exempt from a tax as foreseen in the Council Directive
2011/96, dated 30 November 2011 (EU Parent/Subsidiary Directive), or a tax similar
to the Portuguese CIT.
In the case of a tax treaty resident, the CIT rate cannot be lower than 60% of the
standard Portuguese CIT rate (i.e. 13.8% in 2014).
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It directly or indirectly owns at least 5% of the share capital or voting rights of the
Portuguese subsidiary in the 24 preceding months.
The cost of acquisition of certain intangibles with unlimited life (i.e. trademarks,
permits, production processes, models, and other industrial property rights) can be
amortised for tax purposes over a period of 20 years.
Goodwill acquired as a result of a corporate restructuring can also be amortised for tax
purposes over a 20-year period, except if related with shareholdings.
These rules do not apply to intangibles acquired under a tax-neutral corporate
restructure (merger, split, or asset contribution) or from an entity in a black-listed
jurisdiction.
Patent box regime
Income derived from the sale or granting of the temporary use of industrial property
rights (i.e. patents and industrial drawings and models) is 50% exempt. The regime
applies to industrial property rights derived from research and development (R&D)
developed internally or contracted from third parties. Transactions with associated
enterprises, including entities resident in black-listed jurisdictions, are excluded. The
regime applies to the above-mentioned industrial property rights registered on or after 1
January 2014.
Draft legislation
Please note this information is current as of 1 June 2014. Typically, draft legislation is
announced around mid-October. Please visit the Worldwide Tax Summaries website
at www.pwc.com/taxsummaries to see any significant corporate tax developments that
occurred after October 2014.

Resident companies in Portugal are taxed on their worldwide income.
As of 1 January 2014, there is an optional regime to exclude from taxation the profits
and losses allocated to a foreign PE of a Portuguese company. The regime applies
provided that (i) the profit allocated to that PE is subject to and not exempt from a tax
foreseen in Article 2 of the EU Parent/Subsidiary Directive (Council Directive 2011/96/
EU, dated 30 November), or a tax similar to the Portuguese CIT where the legal rate is
not lower than 60% of the standard CIT rate, and (ii) the PE is not located in a blacklisted jurisdiction. The regime is not applicable to the profit allocated to the foreign PE
up to the amount of the losses allocated to that PE that have been taken into account by
the Portuguese taxpayer when computing the respective taxable income of the previous
12 tax years. This is an optional regime that must cover, at least, all the PEs located in
the same jurisdiction, and is mandatory for a minimum three-year period.
CIT is also applicable to Portugal-source income attributable to a PE of a non-resident
company in Portugal. Special WHT rates apply to income generated in Portugal that is
attributable to non-residents without a PE in Portugal (see the Withholding taxes section
for more information).
A flat CIT rate of 23% applies on the global amount of taxable income realised by
companies resident for tax purposes in Portugal mainland or in the Autonomous Region
of Madeira (also applicable to Portuguese PEs of foreign entities).
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A reduced CIT rate of 17% applies to small and medium-sized companies on the first
EUR 15,000 of taxable income (the standard CIT rate shall apply on the excess).
Reference is made to the concept of micro, small, and medium-sized companies as
foreseen in the EU Commission Recommendation 2003/361, dated 6 May, concerning
the definition of micro, small, and medium-sized enterprises.
Entities that do not carry out a commercial, industrial, or agricultural activity as their
main activity are subject to a 21.5% CIT rate on the global amount of their taxable
income.
A lower CIT rate of 18.4% applies to companies that are tax resident in the Autonomous
Region of Azores, including PEs of foreign entities registered therein.
Surtaxes
The following surtaxes may also apply:

A local surtax (Derrama) of up to 1.5% of taxable income, prior to the deduction of
any available carryforward tax losses, is levied in certain municipalities. The local
surcharge is assessed and paid when filing the CIT return.
A state surtax (Derrama Estadual) applies (prior to the deduction of any available
carryforward tax losses) at the following rates:
3% applicable to the taxable profit exceeding EUR 1.5 million and up to EUR 7.5
million.
5% applicable to the taxable profit exceeding EUR 7.5 million and up to EUR 35
million.
7% applicable to the taxable profit exceeding EUR 35 million.
The state surtax is levied on resident taxpayers carrying on commercial, industrial, or
agricultural activity and by non-residents with a PE in Portugal. The state surtax is paid
in three instalments.
A regional surtax (Derrama Regional) applies in the Autonomous Region of Madeira on
the same terms as the state surtax. Companies licensed to operate in the MIBC are not
subject to regional surtax.
Autonomous taxation
Autonomous taxation applies at different rates on certain expenses incurred by entities

subject to CIT. It is self-assessed in addition to CIT (even if no CIT is due) at the following
rates:

Representation and entertainment expenses: 10%.

Mileage allowance: 5%.
Per diem allowance: 5%.
Non-documented expenses: 50% (70% for partially or fully exempted taxpayers).
Company car expenses (including depreciation, rentals, leasing, insurance,
maintenance, repairs, fuel, and taxes), except full electric cars, vehicles allocated
to public transport, or vehicles that are taxed as income in kind for PIT purposes,
depending on the acquisition cost and regardless of the year of acquisition:
Acquisition cost lower than EUR 25,000: 10%.
Acquisition cost between EUR 25,000 and EUR 35,000: 27.5%.
Acquisition cost of EUR 35,000 or more: 35%.
Dividends distributed to wholly or partially exempt taxpayers regarding
participations held for less than one year: 23%.
The total amount of the expenses incurred with any compensation paid as a result
of the termination of functions of managers or board members if not related to the
productivity targets previously established under the existing labour relation; or the
amount that exceeds the remuneration that would be received by the manager or the
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board member until the term of the labour agreement, in case of redundancy prior to
that term; or, in all cases, if the liability for the payment is shifted to another entity:
35%.
The total amount of the expenses incurred with bonuses paid to managers or board
members if the respective amount corresponds to more than 25% of the annual
salary and exceeds EUR 27,500: 35%.
All of the above-mentioned rates of autonomous taxation are increased by 10% if the
taxpayer has tax losses in the tax year in which the expenses are incurred.
Corporate residence
A resident company is one whose head office or effective management is located in
Portugal.
Under Portuguese tax law, any fixed place of business in Portugal through which the
business of an enterprise is wholly or partly carried on is deemed to constitute a PE in
Portugal.
A fixed place of business comprises, among others, a place of management, a branch,
an office, a factory, a workshop, a mine, an oil or gas well, a quarry, or any other
place of extraction of natural resources, and also a building site or a construction or
installation project if it lasts more than six months (time period may differ considering
the applicable tax treaty).
A PE may also be deemed to exist in case of a person (a dependent agent), which is not
an independent agent, acting, in the Portuguese territory on behalf of a company, with
powers to intermediate and conclude binding contracts for that company, within the
scope of its business activity.
No PE should exist where a fixed place of business in Portugal is used solely for carrying
out ancillary or preparatory activities, or, in the case of a company, carries out its
activities in Portugal through a broker, general commission agent, or other agent of
an independent status, acting in the normal course of its business, bearing all related
business risks.
Additionally, the term PE shall be deemed not to include the following actions:
Use of facilities solely for the purpose of storage, display, or delivery of goods or
merchandise belonging to the enterprise.
Maintenance of a stock of goods or merchandise belonging to the enterprise solely for
the purpose of storage, display, or delivery.
Maintenance of a stock of goods or merchandise belonging to the enterprise solely for
the purpose of processing by another enterprise.
Maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or of collecting information, for the enterprise.
Maintenance of a fixed place of business solely for the purpose of carrying on, for the
enterprise, any other activity of a preparatory or auxiliary character.
Maintenance of a fixed place of business solely for any combination of activities
mentioned above, provided that the overall activity of the fixed place of business
resulting from this combination is of a preparatory or auxiliary character.
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Other taxes
VAT rates
There are three VAT rates: the standard rate of 23% (22% in the Autonomous Region of
Madeira; 18% in the Autonomous Region of the Azores), the intermediate rate of 13%
(12% in Madeira; 10% in the Azores), and the reduced rate of 6% (5% in Madeira and
Azores).
The intermediate rate applies to supplies of some foodstuffs and to admissions to
concerts, shows, theatre, cinemas, circus, and bullfighting. The reduced rate applies to
the supplies of some basic foodstuffs, periodical publications, books, pharmaceutical
products, hotel accommodation, agricultural goods, and passenger transport.
Exports and intra-EU supplies of goods are zero-rated.
Supplies of goods
Supplies of goods are subject to VAT in Portugal if the goods are located in Portugal at
the moment their transport or dispatch to the customer begins. If the goods are located
in Portugal and there is no transport or dispatch, then supplies of the goods are subject
to VAT at the moment they are put at the disposal of the customer.
Supplies of services
Supplies of services are subject to VAT in Portugal whenever: (i) acquired by taxable
persons that have their business, a fixed establishment, domicile, or residence in
Portugal to which the services are provided (B2B rule) or (ii) supplied to non-taxable
persons if the provider has established its business, a fixed establishment, domicile, or
residence in Portugal from where these services are provided (B2C rule).
Regardless of the place where the service provider and the acquirer are established, and
independent of the acquirer being a taxable person or not, the supply of the following
services is subject to VAT in Portugal if physically carried out in Portugal:
Services connected with immovable property.
Passenger transport for the distances covered in Portugal.
Admission to cultural, artistic, scientific, sporting, educational, entertainment, or
similar events.
Restaurant and catering services.
Short-term hiring of a means of transport (up to 30 days, for boats up to 90 days) if
the means of transport are put at the disposal of the customer in Portugal.
The supply of the following services is subject to VAT in Portugal if physically carried out
in Portugal and if the acquirer is a non-taxable person:
Transport of goods, other than intra-Community transport of goods, for the distances
covered in Portugal.
Intra-Community transport of goods, if the place of departure is Portugal.
Valuations of and work on movable property.
Services and ancillary services relating to cultural, artistic, sporting, scientific,
educational, entertainment, or similar activities, such as fairs and exhibitions,
including the supply of services of the organisers; and hiring of a means of transport,
other than short-term hiring, when the acquirer is established, has ones permanent
address, or usually resides in Portugal.
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Customs duties
Customs duties are regulated by the Community Customs Code. Therefore, the
rules foreseen for the import and export of goods in Portugal are similar to the rules
applicable in other EU member states.
The customs duties rates applied in Portugal vary according to the origin of the goods.
There are several origin agreements that exempt from customs duties the importation of
goods from certain countries or that determine reduced rates.
Excise duties
There are different types of excise duties, such as petroleum and energy products tax,
alcohol and alcoholic beverages tax, tobacco tax, and vehicle tax.
The tax applicable to petroleum and energetic products depends on the goods supplied,
and it varies between EUR 650 per 1,000 litres for leaded petrol and EUR 2.84/gJ for
natural gas used as fuel.
As of 1 January 2014, the excise duty applies on the supply of natural gas to final
consumers at the rate of EUR 0.30/gJ.
The tax applicable to alcohol and alcoholic beverages also depends on the type of good
supplied, varying between EUR 7.53 per hectolitre for a certain type of beer and EUR
1,251.72 per hectolitre for spirits.
The tax applicable to tobacco also varies in accordance with the type of product
supplied, namely it varies between 20% of the sale price for fine-cut tobacco for the
rolling, 25% of the sale price for cigarettes, cigars, and cigarillos, and 50% of the sale
price for tobacco used in a water pipe.
The tax applicable to vehicles varies in accordance with the type of vehicle, the fuel
used, and the cylinder of the vehicle. The higher taxation is applicable for cars used for
the transport of passengers using petrol as fuel and the lower taxation is applicable for
motorcycles.
An excise duty on consumption of electricity is due by producers, traders, self-producers,
and consumers that buy electricity in organised markets. The tax applicable to electricity
varies between EUR 1/kw to EUR 1.1/kw.
Property tax (Imposto Municipal sobre Imveis or IMI)
IMI is a municipal property tax upon which the taxable basis is calculated by reference
to a formula based on objective criteria, such as the construction cost per square metre,
area, age, construction quality, and comfort indexes. It is due by the real estate owner,
the usufructuary, or the holder of the surface right of a real estate unit with reference to
31 December of the year that it concerns.
IMI is levied at the following rates, in addition to corporate or individual tax assessed on
actual income generated by real estate:
Real estate type
Urban real estate
Rural real estate
Real estate owned by residents in a black-listed jurisdiction (except individuals)
IMI (%)
0.3 to 0.5
0.8
7.5
Note that the tax rate of IMI on properties owned by entities resident for tax purposes in
a black-listed jurisdiction is 7.5%.
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The list of countries, territories, and regions that provide a more favourable tax regime
(black-listed jurisdictions) is presented below:
American
Samoa
Andorra (1)
Anguilla (1)
Antigua and
Barbuda (1)
Aruba
Ascension Island
Bahamas
Bahrain
Barbados
Belize (1)
Bermuda (1)
Bolivia
British Virgin
Islands (1)
Brunei
Cayman Islands
(1)
Channel Islands
(1, 2)
Christmas Island
Cocos (Keeling)
Cook Islands
Costa Rica
Djibouti
Dominica (1)
Falkland Islands
or Malvinas
Fiji Islands
French
Polynesia
Gambia
Gibraltar (1)
Grenada
Guam
Guyana
Honduras
Hong Kong
Isle of Man (1)
Jamaica
Jordan
Kingdom of
Tonga
Kiribati
Kuwait
Labuan
Lebanon
Liberia (1)
Liechtenstein
Marianas
Marshall Islands
Mauritius
Monaco
Montserrat
Nauru
Netherlands
Antilles
Niue Island
Norfolk Island
Pacific Islands
Palau Islands
Panama
Pitcairn Island
Puerto Rico
Qatar
Queshm Island
Saint Helena
Saint Kitts and
Nevis (1)
Saint Lucia (1)
Saint Pierre and
Miquelon
San Marino
Seychelles
Solomon Islands
St. Vicente and
the Grenadines
Sultanate of
Oman
Svalbard
Swaziland
The Maldives
Tokelau
Trinidad and
Tobago
Tristan da
Cunha
Turks and Caicos
(1)
Tuvalu
United Arab
Emirates
United States
Virgin Islands
Uruguay
Vanuatu
Western Samoa
Yemen Arab
Republic
Notes
1.
2.
The Portuguese authorities have signed tax information exchange agreements (TIEAs) with these
jurisdictions (in case of the Channel Islands, only with Guernsey and Jersey). The following TIEAs are
in force: Andorra, Bermuda, Cayman Islands, Gibraltar, Isle of Man, Jersey, and Saint Lucia.
Alderney, Brechou, Great Sark, Guernsey, Herm, Jersey, Jethou, Lihou, and Little Sark.
IMI rates are annually increased three times when urban real estate is vacant or in ruins
for a period of over one year.
Property transfer tax (Imposto Municipal sobre as Transmisses

Onerosas de Imveis or IMT)
IMT is a municipal tax payable in Portugal on the onerous transfer of local real estate.
The tax is levied on the purchaser at the rates shown below, and the taxable basis is
the same as for IMI or the price agreed upon by the contracting parties, whichever is
higher. Note that the acquisition of more than 75% of the share capital of a company
incorporated as a limited liability company (Sociedade por quotas), which owns real
estate located in Portugal, is subject to IMT.
Real estate type
Rural real estate
Urban real estate (for residential purposes)
Other urban real estate and other acquisitions for consideration
The acquirer is a tax resident in a black-listed jurisdiction (except individuals)
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IMT (%)
5
up to 6
6.5
10
Portugal
Stamp duty
Stamp duty is payable on a wide variety of transactions and documents, at rates that
may be set in specific amounts or on a percentage basis. Important examples include the
following:
Item
Loans (on the principal):
With determined term, over one year
Current account/overdraft/credit with undetermined term or determined
term under one year
Credit to consumers:
With a term up to one year/current account, overdraft, or other form of
credit with undetermined term
With a term equal to or higher than one year
With a term equal to or higher than five years
Guarantees (1):
Undetermined/five or more years
Over one year
Under one year or with undetermined term
Bank interest and fees
Insurance premiums
Real estate purchases and sales
Donations and inheritances
Sale of business as a going concern
Social game prizes (on the amount exceeding EUR 5,000)
Ownership, usufruct, or surface right of urban housing buildings whose tax
registration value is equal to or higher than EUR 1 million (2)
Stamp duty (%)

0.5 to 0.6
0.04 per month or
fraction
0.07 per month or
fraction
0.9
1
0.6
0.5
0.04 per month or
fraction
4
3 to 9
0.8
10
5
20
0.5/0.8/7.5
Notes
1.
2.
Guarantees provided in favour of the state or social security institutions upon the payment of debt
by instalments under enforcement procedures or relating to the recovery of tax and social security
credits are exempt from stamp duty in 2014.
The rates apply as follows:
0.5% for buildings already evaluated according to the current rules of the IMI Code.
0.8% for buildings that are not evaluated according to the current rules of the IMI Code.
1% for urban housing buildings or building plots wherein house construction is authorised or
intended, according to the current rules of the IMI Code.
7.5% for buildings, regardless of their use, owned by companies resident in black-listed
jurisdictions.
Financial sector contribution
Portuguese headquartered credit institutions, Portuguese subsidiaries of foreign credit

institutions, as well as branches in Portugal of foreign credit institutions, except EU
residents, are subject to a financial sector contribution, applicable on a taxable base
composed as follows:
Base I: Liabilities, defined as the set of elements accounted for in the balance sheet
representing liabilities towards third parties, irrespective of their form or nature
(excluding, amongst others, items accounted for as equity, liabilities for defined
benefit retirement plans; provisions, liabilities concerning the revaluation of financial
derivatives).
Base II: The notional amount of off-balance sheet financial derivatives, excluding
hedging derivatives and back-to-back derivatives.
The financial sector contribution is applicable at 0.05% on Base I and at 0.00015% on
Base II.
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Note that the 2014 State Budget foresees an amendment, which has not yet passed, that
allows the maximum rate of the financial sector contribution to increase to 0.07% on
Base I and 0.00030% on Base II.
Employers are required to make monthly social security contributions at the standard
rate of 23.75% on the monthly gross remuneration of their employees.
Social security contributions are deductible for CIT purposes.
Branch income
The profits of a Portuguese branch are taxed on the same basis as corporate profits.
Income remitted by a Portuguese branch to the foreign head office is not subject to
taxation in Portugal.
Taxable profit is based on accounting income adjusted according to specific provisions of
the tax legislation, when applicable.
Inventory valuation
Inventories are valued at the lower of the following values: cost or net realisable value.
The first in first out (FIFO) and average-cost methods of valuation are accepted. The last
in first out (LIFO) method is not allowed.
Inventory adjustments are deductible for tax purposes on the amount accounted for in
the tax year, capped at the difference between the acquisition or production value and, if
lower, the net realisable value (duly documented) with reference to the balance sheet.
Capital gains
Under the new participation exemption regime introduced in 2014, capital gains and
capital losses realised on the transfer of shares can be exempt from taxation. This rule
applies to all types of Portuguese companies (holdings and operational companies)
and includes capital gains on the transfer of shares derived from a non-tax neutral
merger, division, transfer of assets, or exchange of shares, and also in case of a transfer
of supplementary capital entries. The regime applies provided that, at the date of the
transaction, the following requirements are met:
The shares are held for a consecutive period of at least 24 months.
The taxpayer directly or indirectly holds at least 5% of the share capital or voting
rights in the entity from which the shares are transferred.
The taxpayer is not covered by the tax transparency regime (i.e. imputation of profits
to individual or corporate shareholders, regardless of effective distribution).
The entity from which shares are transferred is not resident in a black-listed
jurisdiction.
The assets of the entity from which shares are transferred are directly or indirectly
comprised of more than 50% of real estate located in Portugal and acquired on or
after 1 January 2014 (except real estate allocated to an agricultural, industrial, or
commercial activity that does not consist of buying and selling real estate).
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This regime also applies to capital gains and capital losses realised by a Portuguese PE
of:
An EU resident entity, which complies with the requirements foreseen in Article 2 of
the EU Parent/Subsidiary Directive.
An EEA resident entity, subject to tax cooperation obligations similar to the ones
established within the European Union, provided that the entity complies with
requirements that are comparable to those foreseen in Article 2 of the EU Parent/
Subsidiary Directive.
An entity resident in a state with which Portugal has concluded a double tax treaty
(DTT) (except if resident in a black-listed jurisdiction) that foresees tax cooperation
obligations similar to the ones established within the European Union and is subject
and not exempt in its state of residence from an income tax similar to the Portuguese
CIT.
Where the participation exemption regime on the transfer of shares does not apply,
the positive net difference between capital gains and capital losses arising from the
transfer of shares is taxed as part of normal income. The same applies on the disposal of
tangible fixed assets, intangibles, biological assets, and investment properties. In certain
circumstances, only 50% of the net gains on disposal of tangible fixed assets, intangibles,
and biological assets is taxed as part of normal income, provided the sales proceeds are
reinvested.
Capital gains and capital losses are determined by the difference between the sales
proceeds, net of related costs, and the acquisition value, net of impairment losses and
tax deductible depreciation or amortisation, adjusted by the inflation index (in the case
of at least two years of ownership).
Dividend income
Under the new participation exemption regime introduced in 2014, profits distributed
to a Portuguese parent company are exempt from taxation, provided that the following
requirements are met:
The taxpayer directly or indirectly holds at least 5% of the share capital or voting
rights in the subsidiary.
The shares are held for a consecutive period of at least 24 months (or maintained for
that period).
The taxpayer is not covered by the tax transparency regime.
The subsidiary is subject to and not exempt from CIT, an income tax mentioned in
Article 2 of the EU Parent/Subsidiary Directive (Council Directive 2011/96/EU, dated
30 November), or a tax similar to CIT with a legal rate that is not lower than 60% of
the standard CIT rate.
The subsidiary is not resident in a black-listed jurisdiction.
This regime also applies to profits distributed to a Portuguese PE of:
An EU resident entity, which complies with the requirements foreseen in Article 2 of
the EU Parent/Subsidiary Directive.
An EEA resident entity, subject to tax cooperation obligations similar to the ones
established within the European Union, provided that the entity complies with
requirements that are comparable to those foreseen in Article 2 of the EU Parent/
Subsidiary Directive.
An entity resident in a state with which Portugal has concluded a DTT (except if
resident in a black-listed jurisdiction) that foresees tax cooperation obligations
similar to the ones established within the European Union and is subject and not
exempt in its state of residence from an income tax similar to the Portuguese CIT.
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Interest income
Interest income obtained by Portuguese taxpayers is taxed as part of normal income and
taxed at the standard CIT rate. Any WHT incurred in interest income received is treated
as a payment on account of the final CIT liability, refundable even if no CIT is due.
Foreign income
A Portuguese company is taxed on all its foreign income; however, there is an optional
regime to exclude from taxation the profits and losses allocated to a foreign PE (see the
Taxes on corporate income section for more information).
Taxes paid abroad can be offset against corresponding Portuguese tax (see Foreign tax
credit in the Tax credits and incentives section for more information).
There are no provisions concerning tax deferral of income earned abroad.
Deductions
The qualifying cost of an asset for tax purposes is the acquisition or production cost.
Depreciation must be computed by using the straight-line method or the decliningbalance method. The latter cannot be applied to buildings, passenger vehicles, furniture,
social welfare equipment, or second-hand assets.
Straight-line rates of depreciation are normally consistent with rates privately used by
business and industry and are increased, for the purposes of applying the decliningbalance method, by coefficients of:
1.5 if assets have a useful life of less than five years.
2 if useful life is five or six years.
2.5 for useful lives in excess of six years.
Different depreciation methods may be applied without previous approval from the
Portuguese Tax Authority (PTA) (annual depreciation cannot, however, exceed the
depreciation resulting from using either the straight-line or declining-balance methods).
Some examples relating to the maximum straight-line depreciation rate are as follows:
Type of asset
Office building
Industrial building
Electronic equipment
Computers
Ordinary tooland paintings
Enginesand machine tools
Office equipment
Furniture
Software
Light passenger vehicles

2
5
20
33.33
25
12.5
20
12.5
33.33
25
Rates can be reduced by 50% in any one year at the taxpayers option. If the reduction
is more than 50%, the difference is allowed for tax purposes at a future date. Any
depreciation in excess of the maximum allowed must be subsequently adjusted in the
accounting records to be allowed for tax purposes in future years. A total of 60% of
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additional depreciation on revaluation of fixed assets, as permitted by law from time to
time, is allowed for tax purposes.
Depreciation rates of tangible assets may be increased by 25% in the case of companies
with a schedule of two shifts (for three shifts, 50%), given the faster deterioration of
those assets.
Assets with an acquisition value lower than EUR 1,000 can be depreciated in the
acquisition year, unless the assets are part of a set of elements that should be depreciated
as a whole.
Depreciation of yachts and airplanes that are not essential for business activities is not
allowed as a cost for tax purposes.
Depreciation of passenger cars and certain other vehicles on the part of their cost of
acquisition that exceeds certain amounts (as defined by law), with reference to their
acquisition value, is also disallowed as a cost for tax purposes. The following caps apply
(i.e. disallowed cost above the values below):
EUR 29,927.87 of acquisition cost, in the case of vehicles acquired until 31 December
2009.
EUR 40,000 of acquisition cost, in the case of vehicles acquired between 1 January
2010 and 31 December 2010.
EUR 30,000 of acquisition cost, in the case of vehicles acquired between 1 January
2011 and 31 December 2011 (EUR 45,000 in case of electric vehicles).
EUR 25,000 of acquisition cost, in the case of vehicles acquired from 1 January 2012
onwards (EUR 50,000 in case of electric vehicles).
Development expenses, patents, trademarks, licences, and similar rights may be
amortised for tax purposes if acquired for a limited period of time.
The cost of acquisition of certain intangibles with unlimited life (i.e. trademarks,
permits, production processes, models, and other industrial property rights) can be
amortised for tax purposes over a period of 20 years.
Depreciation of non-consumable biological assets is tax deductible.

Expenses relating to assets generated internally are deductible for tax purposes in the
tax year in which the cost is incurred.
Goodwill
Goodwill acquired as a result of a corporate restructure or business combination can be

amortised for tax purposes over a 20-year period, except if related with shareholdings.
Start-up expenses
Start-up and research expenses are deductible for tax purposes in the respective tax year.
Transitional adjustments of remaining start-up expenses incurred prior to the adoption
of the new accounting system in 2010 (Sistema de Normalizao Contabilstica or SNC)
should be written off the balance sheet against equity and are deductible over a five-year
period (ending in 2014).
Limitation on the deductibility of financing expenses
As of 1 January 2014, companies may only deduct net financing expenses up to the
higher of the following limits:
EUR 1 million or
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30% of the earnings before depreciations, amortisation, taxes, and net financing
expenses.
Under the transitional period foreseen, a 60% cap applies in 2014, 50% in 2015, and
40% in 2016, until reaching 30% in 2017 and following years. In the cases where
the taxable year is less than a calendar year, the EUR 1 million limit is reduced
proportionally to the duration of the taxable year.
Besides Portuguese tax resident entities, PEs of non-resident entities are also covered
by the scope of this rule. Entities subject to the supervision of the Portuguese Central
Bank (Banco de Portugal) and the Portuguese Insurance and Pension Fund Supervisory
Authority (Instituto de Seguros de Portugal), as well as Portuguese branches of financial
entities or insurance companies resident for tax purposes in the European Union, are
excluded from this rule.
No distinction is made between bank and intra-group financing, domestic or foreign
financing (EU or non-EU).
Financing expenses considered as excessive (not deductible) in a certain fiscal year
may be deductible in the following five fiscal years, provided that, together with the net
financing expenses of that year, the above-mentioned limits are not exceeded.
Additionally, where financing expenses do not exceed 30% (or the applicable
percentage) of the earnings before depreciations, net financing expenses, and taxes, the
unused difference is added to the maximum deductible amount in the following five tax
years, until its total deduction.
For the purposes of the regime, net financing expenses consist of, among others, any
amounts due in connection to the remuneration of financing, including interest on
overdraft facilities, short-term loans, bonds, financial expenses related to financial
leases, or exchange losses, deducted from the profits or gains of the same nature.
Where the special regime of group taxation applies, there is the option to make the
calculation considering the net financial expenses of the group.
Interest on shareholder loans
If the rate applicable to interest and other compensation regarding loans provided
by the shareholders to the company is higher than the Euro Interbank Offered Rate
(EURIBOR) 12-month rate rounded up with a spread of 1.5% (at the date the loan was
granted), the amount paid in excess is not tax deductible. This rule does not apply when
the shareholder is a resident of a tax treaty country or when the interest rate is at arms
length under the transfer pricing provisions.
In the case of small and medium-sized companies, shareholders loans with an interest
rate of the EURIBOR 12-month rate plus a spread up to 6% are tax deductible.
Bad debt
Impairment losses on doubtful debts are deductible for tax purposes when an insolvency
or recovery has been requested or the credits have been claimed in court.
The annual amount of accumulated impairment losses on doubtful debts due for more
than six months, with evidence that measures towards its perception were taken, is
capped at the following percentages of the debts:
More than 6 and less than 12 months: 25%.
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More than 24 months: 100%.
Amounts guaranteed by insurance or mortgage, or due or secured by the state,
autonomous regions, or municipalities, or due by related parties (e.g. 10%
shareholding) are not considered as doubtful debts, and the respective impairment loss
is disallowed for tax purposes.
The ageing of bills of exchange is calculated from the date when the respective payment
is due.
Uncollectable debts are allowed as tax deductible costs if supported under insolvency,
recovery enforcement, or in an out-of-court conciliation procedure for the viability of
insolvent companies or companies in a difficult economic situation (mediated by the
Institute for the Support of Small and Medium-Sized Enterprises or IAPMEI). This rule
applies to the amount of the uncollectable debts that were not deducted for tax purposes
as impairment losses (or for which the amount was insufficient).
Donations to authorised charitable institutions are allowable at up to 0.8% of turnover,

with the possibility of the cost being raised up to 150%. Donations to authorised cultural
institutions are allowable at up to 0.6% of turnover, with the possibility of the cost being
raised up to 130%.
Donations to the state, municipalities, and foundations where the state or municipalities
participate in the initial capital are fully deductible, with the possibility of the cost being
raised up to 140%. Special application may be made by certain entities in order to be
included under the referred regime.
Donations of computers, software equipment, training, and consultancy in the area
of computers granted to the state, municipalities, foundations, museums as well as to
authorised charitable and cultural institutions are allowable at up to 0.8% of turnover,
with the possibility of the cost being raised up to 140%.
Vacation accrual
Vacation allowance is tax deductible in the year in which the benefit accrues, regardless
of the year in which payment is made.
Pension expenses
Pension, invalidity, and health schemes are tax deductible up to a rate of 15% of annual
staff expenses, provided they are available to all employees and the management and
disposition of the benefits are outside the control of the taxpayer, such as under an
insured scheme with vested benefits.
Fines and penalties
Fines and penalties for infractions that do not have a contractual nature, including late
assessment interest, are disallowed for CIT purposes.
Taxes
All taxes other than CIT, autonomous taxation, state surtax (Derrama Estadual), and
local surtax (Derrama) constitute a normal business expense.
The costs borne from the acquisition of social passes are regarded as tax-deductible costs
to the extent the employer attributes them on a general basis.
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Uninsured losses, including indemnities to third parties, are disallowed unless the risk
could not be insured.
Non-documented expenses are not tax deductible and are subject to a 50% autonomous
taxation for fully taxable entities.
Tax losses generated in tax years starting on or after 1 January 2014 can be carried
forward for 12 years. The deduction of carried forward tax losses is capped at 70% of the
taxable income.
The tax losses carried forward are lost in case of a change in direct ownership of the
company of at least 50% shareholding or voting rights (not applicable in case of changes
within the same group of companies, under certain conditions).
In special cases of economical merits, the Ministry of Finance may authorise the use of
tax losses upon a request filed by the taxpayer before those changes occur.
A Portuguese corporation is allowed to deduct royalties, interest, and other costs

paid to foreign affiliates, provided the amounts are at arms length. Service fees paid
are allowed if there is adequate proof that the service was effectively rendered, has
economic substance, and qualifies as indispensable for the generation of taxable
revenue, as well as if the amount is at arms length.
Payments to non-residents in a black-listed jurisdiction
Payments made or due, indirectly, to non-resident entities in a black-listed jurisdiction,

when the taxable person has or should have had knowledge of the final purpose given
to such payments, will be non-deductible for tax purposes, except if the taxpayer
demonstrates that such charges relate to genuine transactions and are not of an
abnormal or exaggerated amount. Such knowledge is presumed whenever there are
special relations between the taxpayer and the entities in a black-listed jurisdiction or
between the taxpayer and the legal representative, fiduciary, or intermediary.
Group taxation
Special regime for group taxation
Taxation under the special tax regime for groups of companies is available, upon
the filing of a special form with the PTA, to companies with head office and effective
management in Portugal.
The group taxation regime may apply, provided one of the companies directly or
indirectly holds 75% or more of the statutory capital of the others and more than 50% of
the voting rights.
Tax grouping generally enables the group companies to offset losses incurred by one
company against profits of another company.
Tax losses obtained prior to the beginning of the tax grouping can be carried forward
only against the particular companys taxable income (for the carryforward of tax losses
regime, see Net operating losses in the Deductions section).
To be taxed under this regime, the group companies must meet the following conditions:
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Must be tax resident in Portugal (even if held through an EU or EEA group company).
Must be subject to the normal regime of taxation at the highest corporate tax rate.
Must maintain a minimum holding participation of 75%.
All companies must be held by the parent company for more than one year (excluding
newly incorporated companies).
Cannot be dormant for more than one year.
Cannot be dissolved or insolvent.
Cannot have tax losses in the three years prior to the regime application, unless the
companies have been held by the parent company for more than two years.
Cannot have a tax period different from that of the parent company.
Additionally, the parent company:

should not be controlled by any other Portuguese-resident company that fulfils the
requirements to be the parent company and
should not have renounced to the application of this regime in the three previous
years.
When the regime comes to an end or when one company ceases to qualify for this
regime, the tax losses obtained during the regime cannot be carried forward and
deducted against future individual taxable income of the companies. The parent
company is responsible for demonstrating that the requirements for the application of
the group taxation regime are met.
Transfer pricing
The PTA is entitled to adjust taxable income if the taxpayer and another individual
or entity, due to their special relationship, have established particular conditions that
diverge from the conditions normally agreed upon between independent entities and
distort the results that would arise if those relations were at arms length. Portugals
transfer pricing legislation broadly follows the Organisation for Economic Cooperation
and Development (OECD) guidelines.
Companies with sales and other profits higher than EUR 3 million are required to
prepare transfer pricing documentation, which should be filed with the PTA if requested.
Penalties arise from non-compliance with this obligation.
An advance pricing agreement (APA) mechanism allows taxpayers and the PTA
to establish agreements on a taxpayers future transfer pricing policy. This aims
to guarantee compliance with the arms-length principle. This regime applies to
transactions carried out with related parties and between a PE and the respective head
office.
The conclusion of an APA implies the payment of a charge calculated with reference to
the taxpayers turnover, capped at EUR 35,000. This charge is reduced by 50% in the
case of a renewal or revision of an existing APA.
The assessment of an APA procedure takes 180 days for unilateral APAs, and 360 days
for bilateral or multilateral APAs. This period is reduced to 100 business days for APAs
concluded in connection with a relevant investment project in Portugal, as foreseen in
the Tax Investment Code (Cdigo Fiscal do Investimento).
For the PTA to confirm compliance of the transfer pricing method(s) with the terms
and conditions set out in the APA, the taxpayer must prepare an annual report. The
report must be made available to the PTA before the last business day of May in the year
following that in which the transactions took place (i.e. when the tax year corresponds
to the calendar year). Failure to comply invalidates the APA.
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Thin capitalisation
Thin capitalisation rules have been revoked following the adoption of rules for the
limitation on the deductibility of financing expenses. See Limitation on the deductibility of
financing expenses in the Deductions section for more information.
Profits or income derived by an entity resident in a black-listed jurisdiction, or in a

jurisdiction where it is subject to an effective tax rate equal to or lower than 60% of
the Portuguese standard CIT rate, are imputed to the Portuguese taxpayer, provided it
holds, directly or indirectly, at least 25% of the share capital (10% if more than 50% of
the capital is held by Portuguese taxpayers), voting rights, or rights on income or assets
of that entity. Upon distribution of the profits, a deduction is available for previously
imputed income.
CFC rules also apply if the controlled entity (as defined above) is held by a Portuguese
entity through a legal representative, fiduciary, or intermediary.
CFC rules do not apply if the CFC is resident in another EU country or in an EEA member
state (bound to administrative cooperation on tax matters), provided that there are valid
economic reasons underlying the incorporation and running of such company and it
carries out agricultural, commercial, industrial, or services activities.
Upon a dividend distribution by the CFC, the tax credit of the tax paid abroad, which is
not used, cannot be carried forward to subsequent tax years.

Foreign tax credit
International juridical double taxation
Taxes paid abroad can be offset against corresponding Portuguese tax, capped at the
lower of (i) the tax liability corresponding to the foreign income, net of costs directly or
indirectly incurred, or (ii) the foreign tax paid. In both cases, it is limited to the foreign
tax as foreseen in the applicable DTT. This foreign tax credit can be carried forward
for five years. The computation of the amount of the tax credit is now determined per
jurisdiction, considering the total amount of the respective income, except in relation to
income obtained by foreign PEs (the deduction in this case is assessed individually).
International economic double taxation
Taxpayers may opt to apply a tax credit (underlying tax credit) for international
economic double taxation regarding profits or reserves received, to which the
participation exemption regime on dividends does not apply, and provided that the
taxpayer holds, (or becomes the holder of) at least 5% of the share capital of the
subsidiary for a period of 24 months.
When choosing the abovementioned option, the taxpayer shall add to the taxable
income the amount of the income tax related to the distributed profits or reserves that
has been effectively paid abroad by the subsidiary.
General tax benefits and incentives

Contractual tax incentives
Relevant investment projects up to 2020 (minimum investment of EUR 3 million) that

qualify for strategic economic interest and promote the creation of jobs are eligible
for tax incentives, as foreseen in the Tax Benefits Code and the Investment Tax Code.
These are granted on a case-by-case basis under a government contract for a period
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not exceeding ten years and include a tax credit of 10% to 20% of the investment and
exemptions or reductions from property transfer tax, property tax, and stamp duty.
Patent box regime
Income derived from the sale or granting of the temporary use of industrial property
rights (i.e. patents and industrial drawings and models) is 50% exempt. The regime
applies to industrial property rights derived from R&D developed internally or
contracted from third parties. Transactions with associated enterprises, including
entities resident in black-listed jurisdictions, are excluded. The regime applies to the
above-mentioned industrial property rights registered on or after 1 January 2014.
Investment funds
Portfolio investment funds
Portfolio investment funds are taxable at the following final rates:

Portfolio investment fund activity
Capital gains (net of capital losses) on shares held less than 12 months, realised by
closed or mixed investment funds
Capital gains (net of capital losses) on shares held greater than 12 months, realised
by open investment funds
Other income:
Earned in Portugal
Earned abroad
CIT rate (%)

25
25
20/25
20/25
Real estate investment funds
Real estate investment funds are subject to corporate tax at the following rates:
Real estate investment fund activity
CIT rate (%)
Rents (net of expenses)
25
Real estate capital gains (net of capital losses)
12.5
Capital gains (net of capital losses) on shares held less than 12 months, realised by
20
closed or mixed real estate investment funds
Capital gains (net of capital losses) on shares held greater than 12 months, realised by
0
open real estate investment funds
Other income:
Earned in Portugal
20/25
Earned abroad
20/25
Income paid by portfolio and real estate investment funds to individuals is not subject
to taxation. Income paid to companies is taxed as normal income, and taxes paid by the
fund are considered as payment on account against the final CIT due.
Funds of funds
Income paid by investment funds of funds is exempt from CIT. Other income is subject to
the same taxation as investment funds. Income received by individuals is not subject to
further taxation. Income received by companies is taxed at the standard CIT rate on 40%
of the respective amount as normal income.
Pension funds
Pension funds are exempt from CIT and IMT.

The CIT exemption is applicable to pension funds incorporated under the Portuguese
law as well as to pension funds established in another EU country or in an EEA member
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state (bound to administrative cooperation on tax matters) that cumulatively fulfil the
following requirements:
Exclusively assure the payment of retirement pensions granted from elderly,
handicapped, surviving, pre-retired, health, and post-employment benefits, as well as
death benefits when complementary and ancillary to the previously mentioned.
Are managed by pension funds professional institutions to which Directive 2003/41/
EC, of the European Parliament and Council, dated 3 June 2003, applies.
Are the effective beneficiaries of the income.
In the case of dividend distributions, the related shareholding should have been held
for a consecutive one-year period.
Contractors for North Atlantic Treaty Organization (NATO) infrastructures

Contractors for NATO infrastructures are exempt from CIT.
Net young employment creation
150% of the costs related to net increase job creation, under labour contracts without
term, for employees up to 35 years (including) of age and for long-term unemployed
individuals may be deducted from taxable income. For this purpose, the fixed
remunerations paid and the contributions made by the employer to social security
should be considered. The maximum amount of annual increase on deductible costs for
each eligible employee is 14 times the national minimum retribution (EUR 485 in 2014).
The increase in 50% of the expenses incurred with the same employer is applicable to
more than one employee, provided that there are no special relations.
This tax benefit is not cumulative with any tax benefits or other incentives (e.g. social
security) concerning the same employee.
This deduction applies for a period of five years for each employee.
Research and development (R&D) (Sistema de Incentivos Fiscais em

Investigao e Desenvolvimento Empresarial or SIFIDE II)
Portuguese tax resident companies carrying out commercial, industrial, or agricultural

activities, and non-resident companies with a PE in the Portuguese territory, are allowed
to deduct from the CIT due, up to the respective amount, the value of eligible expenses
incurred with R&D, in a double percentage as follows:
Base rate: 32.5% of the R&D expenses incurred; this rate is increased by 15% in case
of small and medium-sized companies that do not benefit from the incremental rate
of 50% (applicable to entities that had completed two years of activity).
Incremental rate: 50% of the difference between the R&D expenses made in the tax
year and the average amount of the R&D expenses made in the previous two years,
up to the limit of EUR 1.5 million.
Expenses that, due to insufficient tax due, cannot be deducted in the tax year they were
incurred can be carried forward for eight years.
Eligible expenses related to allowances paid to personnel directly involved with R&D
tasks are capped at 55% of the operational expenses incurred.
Expenses incurred in connection with projects that include, exclusively, third parties,
including contracts and R&D services, are not considered.
Expenses relating to staff with a minimum academic qualification of level 8 of the
National Qualifications Framework are considered at 120% of their amount.
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Expenses related to demonstrations are eligible for the SIFIDE II regime, provided they
are notified up front.
Expenses incurred with the acquisition, registration, and maintenance of patents,
essential for the performance of R&D activities and audits, are accepted only for micro,
small, or medium-sized companies.
The deduction of R&D expenses requires that the entity develops agricultural, industrial,
or commercial activities or services as its main business activity.
The applications should be submitted by the end of July of the year following the year
in which the investment was made, and applications referring to years previous to that
fiscal year will not be accepted.
The regime applies until 2020.
Incentives for the acquisition of companies in a difficult economic situation
The regime of incentives applicable to the acquisition of companies in a difficult

economic situation may also apply to cases approved by IAPMEI within the scope of
the Incentive System for the Revitalization and Modernization of Companies (SIRME).
Under this regime, the acquiring company may deduct tax losses assessed but not yet
used by the acquired company for a period of five years in proportion of its participation
in the share capital of the acquired company, capped at 60% of the taxable income.
Tax regime for investment support (Regime Fiscal de Apoio Ao Investimento

or RFAI)
RFAI, which establishes several tax incentives to investment realised within specific
business sectors, is applicable until 2017.
Among other incentives, companies will benefit from a deduction against CIT otherwise
payable (capped at 50% of the CIT due) of 20% (for qualified investments lower than
EUR 5 million) or 10% (for qualified investments higher than EUR 5 million) of the
qualified investment. Companies are also able to carry forward any unused credit for
four years and may benefit from exemptions from property transfer tax (IMT), property
tax (IMI), and stamp duty on the acquisition of real estate for investment purposes.
IMT exemptions are subject to the approval of the municipality where the real estate is
located and where the investment is made.
Loan interest and lease rentals on imported equipment
When paid by the state, regional authorities, and public services, loan interest and lease
rentals on imported equipment can qualify for partial or full exemption from tax upon an
appropriate application.
Real Estate Investment Fund for Residential Lease (REIFRL)
A regime is applicable: (i) both to REIFRL and to Real Estate Investment Companies for
Residential Lease (REICRL) incorporated in accordance with the Portuguese law within
a term of five years following the entering into force of the State Budget for 2009; and
(ii) to the real estate properties acquired by those entities during that same term, i.e.
from 1 January 2009 until 31 December 2014.
Incorporation of the REIFRL is in accordance with the provisions applicable to the Real
Estate Investment Funds (REIFs) laid down in the Portuguese law. The REIFRL portfolio
is required to be comprised of at least 75% real estate properties located in Portugal
destined for the lease of permanent residences.
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The following benefits are established for this tax regime:
CIT exemption on income obtained by REIFRLs.
CIT exemption for the income obtained by participation unit holders, except for the
capital gains arising from the sale of such participation units.
Local property tax exemption established for the real estate properties destined for
the lease of permanent residences that integrate the REIFRL.
Municipal property transfer tax exemption on real estate property acquisition
made within this regime by the REIFRL, as well as the acquisitions arising from the
option for the acquisition by the lessees, until 2020, of the real estate properties that
integrate the assets of the REIFRL.
Stamp duty exemption is established for the acts arising from the transfer of the
real estate properties by means of the conversion of holdings rights in real estate
properties into a lease right with the option of acquisition in respect of the same real
estate property by the lessee.
The above-referred tax regime and respective exemptions are not applicable to entities
resident in a black-listed jurisdiction.
Incentives to urban rehabilitation
Incentives are applicable to real estate property covered by rehabilitation projects

undertaken between 1 January 2008 and 2020.
Real estate investment funds incorporated between 2008 and 31 December 2013 may
benefit from:
CIT: the income obtained by real estate investment funds is tax exempt when the
funds are incorporated in accordance with the Portuguese law, and respective
assets are comprised of at least 75% real estate subject to rehabilitation projects in
qualifying areas.
Property transfer tax: urban property (buildings or autonomous units) destined
for permanent residence and located in a rehabilitation area may benefit from an
IMT exemption on the first transfer of such urban property upon undertaking of
rehabilitation works. The granting of this exemption depends on a decision in this
respect of the municipality of the area of the real estate property.
Property tax: the IMI exemption granted in respect of urban properties subject to
rehabilitation works is extended from eight to ten years (it is granted for a five years
term and renewable for an additional five-year period). Again, the granting of this
exemption depends on a decision in this respect of the municipality of the area of the
real estate property.
Tax benefits and incentives for non-resident corporate entities

Capital gains
Capital gains on the sale of shares and quotas held in a Portuguese company by a nonresident company may be tax exempt. However, there are some important exceptions,
such as:
Where the non-resident shareholder is owned more than 25%, directly or indirectly,
by a Portuguese resident company.
Where the non-resident shareholder is located in a black-listed jurisdiction.
Where the assets of the company sold consist mainly of immovable property.
Government and corporate bonds
Interest and capital gains on government and corporate bonds are tax exempt (where
held by entities not located in black-listed jurisdictions) under certain conditions.
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Portugal
Interest paid by resident credit institutions
Interest paid by resident credit institutions to non-resident financial companies deriving

from loans as well as gains arising from swap transactions are tax exempt.
Tax regime applicable to external loans
Interest derived from Schuldscheindarlehen loan agreements signed by the Public

Treasury Institute (IGCP), on behalf of the Portuguese Republic, is tax exempt, provided
the creditor is not resident in Portugal and has no PE herein to which the loan can be
allocated to.
Special tax regime applicable to debt securities issued by non-resident entities
Income from debt securities representing public and non-public debt issued by nonresident entities is tax exempt, provided that the income is considered to be obtained in
Portugal, under Portuguese tax rules, and paid by the Portuguese state as a guarantor of
the obligations undertaken by the entities in which it owns a participation, together with
other EU member states.
Repo operations
Gains obtained by non-resident financial institutions on securities repo operations

undertaken with resident credit institution are exempt from CIT, provided that such
gains are not attributable to Portuguese PEs of non-resident financial institutions.
Securities repos or similar rights exchanged in stock markets, as well as the repo and
fiduciary sales in guarantee, performed by financial institutions intermediated by central
counterparties, are also exempt from stamp duty.
Madeira International Business Centre (MIBC)
Entities licensed to operate in the MIBC benefit from a special tax regime, which is
applicable until 31 December 2020. The European Commission (EC) has approved
the prorogation of the deadline to issue licences until 31 December 2014. The MIBC is
not available to entities pursuing financial/brokerage/insurance and/or intra-group
activities (coordination, treasury, and distribution centres).
The MIBC special tax regime provides, besides full exemptions from taxation to nonresident shareholders (except for dividends and interest) and service providers, for a
reduced CIT rate of 5% for these entities on their qualifying foreign-source income,
based on thresholds of income and subject to job creation requirements.
MIBC-based companies generally benefit from Portugals network of DTTs. EU laws and
regulations apply to Madeira.
Withholding taxes
General WHT rates
Recipient
Dividends
Interest
Royalties
Banks deposits
Property income
Service charges
Remuneration of board members
Other
Residents (%) (1)

25 (2)
25
25
25 (6)
25
0
21.5
25
Non-residents (%) (1)

25 (3, 4)
0 (5)/25 (4)
0 (5)/25
25 (4, 6)
25
25 (7)
21.5
25
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Notes
1.
2.
3.
4.
5.
6.
7.
For residents, tax withheld constitutes a payment on account of final corporate or individual income
tax due. For non-residents, tax withheld is the final tax, except for property income, in which case it is
a payment on account.
Not subject to WHT in the case of holdings of at least 10% owned for at least one year.
Not subject to WHT if the EU Parent/Subsidiary Directive 2011/96/EU applies.
WHT rate is increased to 35% when the income is paid or due to entities resident in black-listed
jurisdictions.
Not subject to WHT if the EU Interest & Royalty Directive 2003/49 applies.
WHT rate is increased to 35% when the income is paid in bank accounts open in the name of one or
more account holders but on behalf of non-identified third parties.
Not subject to WHT if a tax treaty is applicable.
Tax treaty rates
Tax treaties reduce the above-mentioned rates as follows:

Recipient
Algeria (3)
Austria (1, 2)
Barbados (3, 12)
Belgium (2)
Brazil (3)
Bulgaria (3)
Canada (3)
Cape Verde
Chile (3, 9, 10)
Colombia (12)
Cuba (3)
Cyprus
Czech Republic (3)
Denmark (2)
East Timor (3, 12)
Estonia
Finland (2, 3)
France (2, 4, 5)
Germany (2, 6)
Greece (2)
Guinea Bissau
Hong Kong (13)
Hungary (3)
Iceland (3)
India (3)
Indonesia
Ireland, Republic of (2)
Israel (11)
Italy (2)
Japan (6, 13)
Korea, Republic of (3)
Kuwait (13)
Latvia
Lithuania
Luxembourg (2, 6)
Macau
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Dividends (%)
10/15
15
5/15
15
10/15
10/15
10/15
10
10/15
10
10
5/10
10
10/15
10
5/10
10
10/15
15
15
15
10
5/10
10/15
10/15
10/15
10
15
5/10/15
15
5/10
10/15
5/10
10
10
15
10
Interest (%)
15
10
10
15
15
10
10
10
5/10/15
10
10
10
10
10
10
10
10
15
10/12
10/15
15
10
10
10
10
10
10
15
10
15
5/10
15
10
10
10
10/15
10
Royalties (%)
10
5/10
5
10
15
10
10
10
5/10
10
10
5
10
10
10
10
10
10
5
10
10
10
5
10
10
10
10
10
10
12
5
10
10
10
10
10
10
Portugal
Recipient
Malta (3)
Mexico
Moldova
Morocco (3)
Mozambique
Netherlands (2)
Norway (3)
Norway (14)
Pakistan
Panama (13)
Peru (12, 16, 17, 18)
Poland (3)
Qatar (12, 13)
Romania (3)
Russia (3)
Singapore
Slovakia (3)
Slovenia (3)
South Africa (3)
Spain (2, 3)
Sweden
Switzerland (3, 15)
Tunisia
Turkey (3, 8)
Ukraine (3)
United States (3)
Uruguay (3)
Venezuela (7)
Dividends (%)
10/15
10
5/10
10/15
10
10
10/15
5/15
10/15
10/15
10/15
10/15
5/10
10/15
10/15
10
10/15
5/15
10/15
10/15
10
5/15
15
5/15
10/15
5/15
10/15
5/15
5/10
10
Interest (%)
10
10
10
12
10
10
15
10
10
10
10/15
10
10
10
10
10
10
10
10
15
10
10
15
10/15
10
10
10
10
10
10
Royalties (%)
10
10
8
10
10
10
10
10
10
10
10/15
10
10
10
10
10
10
5
10
5
10
5
10
10
10
5
5
10
10
10/12
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
The lower of the listed rates applies to royalties when the beneficiary holds 50% or less of the paying
companys share capital.
There is no WHT on dividends if the EU Parent/Subsidiary Directive applies.
The lower of the listed rates applies to dividends when the beneficiary directly holds 25% or more of
share capital. Depending on each DTT, a two year holding period may be required.
The higher rate applies to interest on debentures raised in France after 1 January 1965 or on
significant loans or debentures raised in Portugal or abroad under major development projects listed
in the treaty annex.
The lower of the listed rates applies to bank loans, but if interest is payable from Portugal, the bank
loans must qualify as being of economic or social interest or fall under an approved development
plan.
The lower of the listed rates applies to interest received by financial institutions.
The lower of the listed rates applies to technical assistance.
The lower of the listed rates applies on interest related to loans with a minimum maturity of two years.
The rate of 5% regarding interest applies to bonds interest or other securities transacted in the stock
market. The rate of 10% applies to loans from banks or insurance companies or credit selling of
equipment.
The rate of 5% regarding royalties applies to equipment lease.
The rate of 10% applies if the company that is paying the dividends is a resident of Israel and the
dividends derive from profits that are subject to tax in Israel at a rate that is lower than the normal
rate of Israel company tax. The rate of 5% applies if the beneficial owner is a company that directly
The treaty is signed but not yet in force.
The lower of the listed rates on dividends applies if the beneficial owner is a company (other than
a partnership) that directly holds at least 10% of the capital of the company paying the dividends.
Depending on each DTT, a one year holding period may be required.
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14. Treaty signed in 2011 that will replace the treaty currently in force. The rate of 5% on dividends
applies if the beneficial owner is a company (other than a partnership) that for an uninterrupted period
of at least 12 months prior to the payment of the dividends or if the company paying the dividends
has existed for less than 12 months, during the lifetime of the company, directly holds at least 10%
of the capital of the company paying the dividends, or if the beneficial owner of the dividends is: (i)
in the case of Portugal, the state, a political or administrative subdivision, or a local authority thereof,
or the Bank of Portugal; and, (ii) in the case of Norway, the government of Norway, a political or
administrative subdivision, or a local authority thereof, or the Central Bank of Norway.
15. A WHT rate of 5% on dividends applies in case of shareholdings of at least 25% on the company
distributing the dividends, as well as for an exemption on dividends, in case of shareholdings of at
least 25% held for at least two years. An exemption from WHT is also foreseen regarding interest
and royalties, when paid between associated companies (shareholdings of at least 25% held for
at least two years), in line with the Agreement between the European Community and the Swiss
Confederation.
16. The lower of the listed rates applies to dividends if the beneficial owner is a company (other than a
partnership) that (i) directly holds at least 10% of the capital of the Portuguese company paying the
dividends or (ii) directly controls at least 10% of the voting rights of the Peruvian company paying the
dividends.
17. The lower of the listed rates applies to interest related to credits of any nature granted by a financial
institution.
18. The lower of the listed rates applies to royalties paid for technical assistance provided in connection
with the use of, or the right to use of authors rights, or information concerning industrial, commercial,
Tax administration
Taxable period
The tax year is, as a general rule, the calendar year. A different tax year is allowed in
the case of companies obligated to accounting consolidation and of PEs of non-resident
entities, which can adopt the tax period of the non-resident company. If this option is
taken, the new tax period must be maintained for a minimum of five years. The five year
minimum period is not applicable if the taxpayer is transferred to a group of companies
that are subject to consolidation of financial statements and the holding company has a
fiscal year different from the one that was being adopted by the taxpayer.
Tax returns
The annual CIT return must be submitted by electronic data transmission by the last day
of May of the year following the year of income. Whenever the tax year ends on a date
other than 31 December, the annual CIT return shall be submitted by electronic data
transmission by the last day of the fifth month following the year end. The system is one
of self-assessment.
Payment of tax
Tax is paid in instalments. Three payments on account due in July, September, and
up to 15 December of the year in which taxable income arises corresponding to 95%
of the previous years corporate tax assessment (for taxpayers with a turnover above
EUR 500,000; 80% if below this amount). Payments on account are not required if the
previous years corporate tax assessment is less than EUR 200. The third payment may
be suspended upon declaring that no further tax is due in respect of the current year.
However, interest is assessed at a rate of 4% if this results in postponing more than 20%
of the tax that would otherwise have been paid.
A last instalment is paid (or received) through self-assessment upon filing the annual
tax return in May of the following year. If the tax year ends on a date other than 31
December, interim payments take place in the seventh, ninth, and up to the 15th of the
12th month of the tax year.
Filing of the annual tax return together with the final payment is in the fifth month
following the close of the tax year.
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Portugal
Given the introduction of a state surtax (Derrama Estadual) three additional payments
on account are due on the same dates as the interim payments mentioned above. The
additional payments on account correspond to 2.5% of the taxable profit above EUR 1.5
million and up to EUR 7.5 million, 4.5% of the taxable profit above EUR 7.5 million and
up to EUR 35 million, and 6.5% of the taxable profit above EUR 35 million, assessed in
the previous year.
In particular situations, a special payment on account is due of a minimum of EUR 1,000
up to EUR 70,000, paid in March, or in March and October (the third or the third and
tenth month of the tax year if it ends on a date other than 31 December).
Interest and penalties
Late assessment interest is due in case of delay on the assessment of taxes due. Late
assessment interest is computed on a daily basis. The current rate of late assessment
interest is 4% (year).
Late penalty interest is due in case of delay in the payment of the tax assessed. The
current rate is 5.525%. Late penalty interest is computed on a daily basis. Tax penalties
for companies are capped at EUR 165,000 in the case of intention and EUR 45,000 in the
case of negligence. In general, in case of failure or late payment of CIT, companies are
liable to a penalty varying between 30% and 100% of the tax due, capped at EUR 45,000
(in case of negligence).
Specific tax penalties apply regarding transfer pricing documentation and the CFC
regime (between EUR 1,000 and EUR 10,000 for companies) and regarding omissions
or inaccuracies regarding ruling requests (between EUR 750 and EUR 22,500 for
companies in the case of urgent rulings or 25% of the previous amounts in the case of
non-urgent rulings).
There is the possibility of applying for penalty reduction, provided certain requirements
are met (e.g. regularisation of the tax situation/payment of the tax due; situation where
there was no damage to the Revenue).
Tax audit process
Taxpayers are audited by the PTA based on several criteria, as detailed in a specific
document prepared by the PTA.
The PTA must notify the taxpayers of the preliminary conclusions reached in cases
where these may lead to tax assessment acts unfavourable to the taxpayers, further to
which taxpayers may present their argumentation.
The PTA must then prepare a final report of the tax audit performed, identifying the
facts detected.
Tax audits may be initiated within the statute of limitation (see below).
Tax audits must be concluded within six months. A prorogation of the deadline to one
year may apply under certain conditions (e.g. complexity of the facts involved, necessity
to make use of mechanisms of mutual assistance on tax matters).
The PTA releases, on a periodical basis, a list of taxpayers that, due to the nature of their
activities, their turnover, or other criteria, are subject to regular monitorisation. Very
recently, a specific department for major taxpayers has been created.
The statute of limitation period is four years, but can be extended in case of tax losses.
Regarding facts involving black-listed jurisdictions, the statute of limitation for the right
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to assess taxes is extended to 12 years while the time period allowed to collect taxes is
extended to 15 years. The statute of limitation period is also increased from four to 12
years in case of facts related to deposit and securities accounts in financial institutions
outside the European Union.
Currently and mainly further to the Memorandum of Understanding between the

Portuguese Republic, the European Commission, the European Central Bank, and the
International Monetary Fund (IMF), the PTA has been exhibiting a more aggressive
approach, especially with regards to the fight against tax fraud and evasion, mainly
by aggravating taxation in fields where tax avoidance is significant and by introducing
additional compliance and reporting obligations.
Increased focus has also been verified on transfer pricing matters, mainly on the
transfer pricing policies in transactions with non-resident entities and especially in
case of payments made to entities that are resident in black-listed jurisdictions. In this
regard, cooperation on transfer pricing matters with other tax administrations has been
strengthened.
Situations of recognition of PEs in Portugal, usually triggered by inspections to VAT
registers, are now recurrent.
Anti-avoidance
A general anti-avoidance provision is in force, pursuant to which contracts and other acts
are ineffective whenever it is demonstrated that they were tax driven to reduce taxation
that would be due under contracts bearing a similar economic effect, in which case
taxation would be based on the latter.
The anti-avoidance procedure is initiated within the general term foreseen (statute of
limitation) and is now more flexible in terms of proof by the PTA.
Anti-avoidance rules are not applicable in cases where a request for obtaining binding
information is not answered by the PTA within 150 days.
Binding rulings
Binding rulings can be:

Urgent: A decision should be taken in 90 days; these are subject to the payment of
a fee ranging between EUR 2,500 and EUR 25,500, depending on the complexity
of the matter; if no decision is taken within the deadline established, there is a tacit
approval of the taxpayers understanding of the tax matter.
Non-urgent: A decision should be taken in 150 days; no fees are charged; a decision is
required (no tacit approval, as in case of an urgent ruling).
Fight against tax fraud and evasion
It is mandatory that payments above EUR 1,000 are made by a means that allows the
identification of the recipient of the income (e.g. bank transfer, nominative cheque, or
direct debit).
Council Directive 2011/16/EU, dated 15 February 2011, on matter of administrative
cooperation in the field of taxation, has been transposed to the Portuguese legislation,
reviewing the exchange information mechanisms between tax authorities and aiming at
a more effective action against tax evasion and fraud at an international level.
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Puerto Rico
PwC contact
Victor Rodrguez
254 Munoz Rivera Avenue
BBVA Building
Suite 900
San Juan, Puerto Rico 00918
Puerto Rico
Tel: +1 787 772 7958
On 15 April 2014, the Municipal Revenue Collection Center (MRCC) issued
Administrative Order 14-01 to implement an electronic filing requirement for the
2013 Puerto Rico (PR) Personal Property Tax return. This requirement is applicable
to businesses with volume of business over 3 million United States dollars (USD) and
specialists who had prepared more than five returns for the taxable year 2012.
The Act for the Effective Mechanisms for Tax Fiscalization, Act 163, was enacted on 25
December 2013 with the purpose of modifying the content of the financial statements
required to be filed for income, personal property, and volume of business tax purposes,
among other amendments to the Puerto Rico Internal Revenue Code of 2011. The
provisions related to the new supplemental information required for the audited
financial statements to be filed with the income tax return are effective for taxable
years commencing after 31 December 2012. Nonetheless, on 27 December 2013, the
Puerto Rico Treasury Department (PRTD) issued Administrative Determination 13-22
with the purpose of postponing, for taxable years commencing after 31 March 2013,
the requirement to submit certain information from the supplemental information
established for income tax purposes.
Act 136 was enacted on December 2013 to amend certain provisions of the Municipal
Property Tax Act of 1991, as amended, with respect to personal property taxes. With the
enactment of this Act, taxpayers will be required to prepay the personal property tax
through estimated quarterly payments beginning on 15August 2014.
On 30 June 2013, Act 40, known as the Tax Burden and Redistribution Act, was enacted
to amend the Puerto Rico Internal Revenue Code of 2011, as amended, providing
significant changes to the income tax and sales and use tax provisions. Among those
changes are the increase of the corporate surtax rates to those established by the
1994 Puerto Rico Internal Revenue Code (i.e. maximum 39%) and the creation of a
new National Gross Receipts Tax (see the Taxes on corporate income section). These
changes are effective for taxable years commencing after 31 December 2012. On 14
October 2013, Act 117, Technical Amendments to Act 40, was signed into law, providing
additional changes and transitory provisions in connection with Act 40. One of the
changes provided by Act 117 was the change in the rules for determining estimated tax
payment responsibility.

A domestic corporation is taxable in Puerto Rico on its worldwide income. A foreign
corporation engaged in trade or business in Puerto Rico is taxed at the regular corporate
tax rates on income from Puerto Rico sources that is effectively connected income
Puerto Rico
1625
Puerto Rico
and at a 29% withholding tax (WHT) rate on its Puerto Rico-source gross income not
effectively connected with that business.
The current corporate income tax (CIT) rate is comprised of a 20% normal tax and a
graduated surtax (computed on the surtax net income).
For taxable years commencing after 31 December 2012, the surtax net income is
basically the net taxable income subject to regular tax less a surtax deduction in the
amount of USD 25,000. The graduated surtax rates are as follows:

5% for surtax net income up to USD 75,000.

USD 3,750 plus 15% of surtax net income from USD 75,001 to USD 125,000.
USD 36,750 plus 19% of surtax net income in excess of USD 275,000 for a maximum
nominal tax rate of nearly 39%.
For taxable years commenced before 31 December 2012, the surtax net income was
basically the net taxable income subject to regular tax less a surtax deduction in the
amount of USD 750,000. The graduated surtax rates were as follows:
5% for surtax net income up to USD 1,750,000.
USD 87,500 plus 10% of surtax net income in excess of USD 1,750,000 for a
maximum nominal tax rate of nearly 30%.
The determination of the applicable surtax rate is made on a consolidated basis for
controlled groups and related companies, whereas the net taxable income of all the
entities subject to tax in Puerto Rico within said groups has to be combined for the
determination of the applicable surtax rate.
Alternative minimum tax (AMT)
For taxable years commencing after 31 December 2012, the AMT includes various
components in order to calculate the tentative minimum tax. Such tentative minimum
tax is the higher of the following:
30% of the alternative minimum net income (previously 20%), plus the National
Gross Receipts Tax (as defined below, except for financial institutions).
20% of the expenses paid or incurred by a related party, including those expenses
allocated from a home office to its Puerto Rico branch, as long as these expense or
cost allocations are not subject to income taxes in Puerto Rico, plus 2% (previously
1%) on the value of personal property purchases from related parties, including those
transfers of personal property from the home office to the Puerto Rico branch, plus
the National Gross Receipts Tax (except for financial institutions).
For taxable years that commenced before 31 December 2012, the AMT tax rate was
20%. For certain companies purchasing personal property from related parties, the
tentative AMT was the greatest of the abovementioned 20% or 1% of said purchases of
personal property. For AMT purposes, expenses paid or incurred for services performed
by a related party outside Puerto Rico are considered a permanent adjustment in the
determination of the alternative minimum net income (i.e. non-deductible for AMT
purposes).
National Gross Receipts Tax
The National Gross Receipts Tax is a new tax, effective for taxable years commencing
after 31 December 2012, imposed on entities doing business in Puerto Rico, with some
exceptions, based on their gross income, which will form part of the AMT calculation,
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Puerto Rico
except for financial institutions and those entities that elected to be taxed under the
provisions of the 1994 Puerto Rico Internal Revenue Code (Option 94).
The National Gross Receipts Tax rates are as follows:

0.2% for gross income from USD 1 million to USD 3 million.

0.5% for gross income from USD 3,000,001 to USD 300 million.
0.7% for gross income from USD 300,000,001 to USD 600 million.
0.8% for gross income from USD 600,000,001 to USD 1.5 billion.
0.85% for gross income in excess of USD 1.5 billion.
In the case of financial institutions, this tax will be a flat rate of 1% and is not part of the
AMT calculation. In addition, subject to certain limitations, these entities will be able to
claim 0.5% of gross income as a credit against regular income tax or AMT.
For taxpayers who elected Option 94, this tax will also be applicable, not as part of the
AMT, but as an additional tax (subject to estimated income tax payments).
Tax on improper accumulation of income
A surtax of 50% is imposed on corporations that improperly accumulate earnings

to prevent the imposition of tax on shareholders or partners rather than paying the
earnings out as dividends. The tax is not imposed on accumulated earnings and
profits but is imposed on the net income for the year computed without taking capital
loss carryover or net operating loss (NOL) carryover deductions, and reduced by the
following items: Puerto Rico income taxes paid or accrued, disallowed net capital losses,
and charitable contributions in excess of the deductible amount. The net income does
not include industrial income exempted from income taxes under Industrial Incentives
Acts. However, an exempt business can be subject to the penalty tax on non-exempt
income.
Corporate residence
A corporation organised or created under the laws of Puerto Rico is a domestic
corporation. A domestic corporation is a resident corporation even if it does not conduct
business operations in Puerto Rico. A corporation created elsewhere is considered a
foreign corporation.
The Puerto Rico Tax Code does not provide specific guidance on PE. Facts and
circumstances need to be analysed in order to determine if a corporation has created a
PE in Puerto Rico or not. However, having an office or fixed place of business in Puerto
Rico may deem the corporation to be engaged in a trade or business in Puerto Rico (i.e.
having a PE).
Sourcing rules pursuant to Act 154
Act 154s source rules are segregated into two parts. The first part treats a non-Puerto
Rico resident manufacturing entity as having an office or fixed place of business in
Puerto Rico merely as a result of engaging in transactions above a certain threshold with
a related Puerto Rico entity. The second part treats a portion of the income earned by a
non-Puerto Rico resident entity as Puerto Rico-source income.
Act 154s source rule applies where a non-Puerto Rico resident purchases goods and
services from a related company that manufactures personal property or performs
services in Puerto Rico that account for 10% or more of the total gross receipts of the
seller from sales of such property or services in Puerto Rico, or at least 10% of the
Puerto Rico
1627
Puerto Rico
purchase cost of personal property and services acquired by the purchaser, for the
taxable year or any of the three prior taxable years.
Where Act 154s source rule applies, a portion of the income of the non-Puerto
Rico resident purchaser from the sale outside of Puerto Rico of personal property
manufactured or produced in whole or part in Puerto Rico by the related Puerto Rico
seller will be treated as Puerto Rico-source income that is effectively connected with the
conduct of a Puerto Rico trade or business.The portion of the non-Puerto Rico residents
income that is treated as Puerto Rico source is determined under an equally weighted,
four-factor (i.e. purchases, sales, property, and payroll) formulary apportionment
method. Where the purchaser fails to provide adequate documentation regarding the
formulary apportionment factors, 50% of the income of the non-Puerto Rico resident
purchaser from the sale outside of Puerto Rico of personal property manufactured or
produced in whole or part in Puerto Rico by the related Puerto Rico seller will be treated
as sourced where the property is manufactured or produced (i.e. Puerto Rico). The
source rule also will apply to agency and commissionaire arrangements, in addition to
buy-sell transactions involving related parties. In addition, the source rule contains an
anti-abuse provision that disregards a transaction, for purposes of the source rule, where
one of the principal purposes of the transaction is avoidance of the source rule.
Other taxes
Sales and use tax (SUT)
As a general rule, the SUT shall be applied, collected, and paid on all transactions of
taxable items in Puerto Rico. Taxable items consist of tangible personal property, taxable
services, admissions, and what is known as bundled transactions. Excluded from this
definition are professional associations and certain membership fees; stamps issued by
professional associations, the Commonwealth of Puerto Rico, or the federal government;
human blood, tissue, and organs; maintenance fees paid to resident associations; air
and maritime tickets; real property; and bingos, raffles, and lottery. Other transactions
that are exempt from SUT include export transactions; duty-free stores located at airport
or maritime ports; prescription medicines; insulin; taxable items acquired for certain
manufacturing operations (e.g. raw materials); and food and ingredients for food
(except for prepared food, diet supplements, sweets, and carbonated beverages).
SUT is imposed at 5.5% at the state level and an additional 1.5% at the municipal
level, for an aggregate tax of 7%. The 7% tax should be remitted to the Puerto Rico
government as follows: 6% to the PRTD and the remaining 1% to the corresponding
municipality. However, there are some municipalities that have entered into an
administration agreement with the PRTD by which the PRTD will collect the entire 7%
of the sales and use tax from merchants and remit the 1% to the municipality (collected
on the municipalitys behalf).
Every natural or juridical person who does or wishes to do business of any kind in Puerto
Rico shall request registration in the Merchants Registry of the PRTD at least 30 days
before starting operations. Once the registration application is filled out and approved,
the Secretary of Treasury will grant a Merchants Registration Certificate. This certificate
constitutes the merchants authorisation to do business in Puerto Rico and confirms the
merchants obligation as a withholding agent. The Merchants Registration Certificate
shall be displayed, at all times, in a visible place for the general public in the commercial
establishment for which it was issued. Please note that if a merchant is doing business in
one or more of the 78 municipalities in Puerto Rico, the merchant only needs to register
with the PRTD.
Unless specifically exempted, all persons selling taxable items are required to file a
monthly tax return. This return shall be delivered to the PRTD no later than the tenth
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day of the calendar month following the month during which the sales occurred. If the
merchant wishes to claim any exemption corresponding to taxable items, the merchant
needs to file the monthly return and claim the exemption in it.
Merchants whose SUT deposits exceeded USD 12,000 are required to file the monthly
SUT return and remit the payment electronically. As of 1 July 2013, merchants with
volume of business equal to or higher than USD 100,000 are required to remit the SUT
by electronic means.
There is a credit for purchases of products manufactured in Puerto Rico for purposes of
SUT. In general, the credit will be 10% of the excess of the purchases of eligible products
over the average of the purchases of eligible products for three out of ten prior taxable
years. This credit can be carried forward until exhausted. It is important to note that the
credit used will be considered taxable income for income tax purposes of the year the
credit is taken.
Customs duties and import tariffs
Puerto Rico does not have customs duty and import tariff provisions. Since Puerto Rico
is a Commonwealth of the United States, it follows the United States customs duties and
import tariffs.
Excise taxes
There are certain articles subject to a special excise tax, such as cigarettes, fuels, crude
oils, vehicles, alcoholic beverages, cement, sugar, and plastic products, among others.
Act 154s excise tax
Companies with manufacturing operations in Puerto Rico may be subject to an excise

tax on goods or services provided to offshore-related entities under Act 154 of 2010,
as amended. This Act created an excise tax that works in tandem with Act 154s source
rules. Where the excise tax applies, it is in lieu of the tax that otherwise would arise
from the application of Act 154s source rules. Under this excise tax rule, offshore
purchasers that acquire goods from Puerto Rico sellers with gross receipts in excess of
USD 75 million for any of the three preceding taxable years and that otherwise meet the
source-of-income rule thresholds (set forth above) are subject to this excise tax equal to
the applicable percentage of the value of such personal property or services, which is
essentially a scaled-back percentage. The excise tax rate phases out as follows:
3.75% between 1 January 2012 and 31 December 2012.
2.75% between 1 January 2013 and 30 June 2013.
4.00% between 1 July 2013 and 31 December 2017.
Various tax credits are provided to offset the excise tax mentioned above.
The excise tax is collected by the Puerto Rico seller on receipts from the sale of personal
property or services rendered to a related offshore purchaser. The tax has to be
deposited with the Secretary of the Treasury on or before the 13th day of the month
following the sale. Each person required to collect the excise tax must file a quarterly
excise tax return on 30 April, 31 July, 31 October, and 1 January and pay any remaining
tax liability not deposited on a monthly basis, as outlined above.
Act 154 sets forth the process for which a credit may be claimed for (i) taxes paid to any
of the states of the United States on the acquisition of personal property and services and
(ii) taxes paid to Puerto Rico by another member of the taxpayers controlled group on a
series of purchases.
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Personal property taxes
Every corporation engaged in a trade or business in Puerto Rico that on 1 January of

each year owns personal property used in its trade or business within Puerto Rico,
whether it is leased to another entity, is subject to tax on such property. The tax is selfassessed by the corporation and it is paid together with the filing of an annual return.
The tax ranges between 5.08% and 8.23%, depending on the municipality.
The 2013 tax return, and future years returns, will need to be filed electronically
through the MRCC website (www.crimpr.net). In order to file the return, every taxpayer
with over USD 3 million in volume of business and specialist who had prepared more
than five returns for the prior taxable year need to register using this website. The
signature and certification of the return will be satisfied by virtue of the electronic
filing. Also, all returns filed electronically should be accompanied by the corresponding
payment due on or before 15 May 2014.
Beginning on 15 August 2014, every corporation must substantially satisfy its personal
property tax liability, if any, through estimated tax payments. The amount of estimated
taxes should be paid in equal instalments on the 15th day of August, November,
February, and May of the taxable year of the corporation. The estimated payments
should equal or exceed 90% of the actual personal property tax for the year or 100%
of the personal property tax as reflected in the personal property tax return for the
preceding taxable year, whichever is less. Any tax not coveredby the estimated tax
payments should be paid along with the personal property tax return. Failure to pay the
tax by the due dates indicated above may result in a penalty of 5% of the instalment due.
A 5% statutory discount is available if 100% of the personal property tax, as reflected
in the personal property tax return for the preceding taxable year, is made by the first
instalment date(15 August).
In general, all personal property not specifically exempted, including cash, finished
goods inventory, supplies, and depreciable property, is subject to the tax. The personal
property tax is generally based on the book value of the asset as of 1 January. Finished
goods inventory, however, is assessed on the average of the monthly balances for the
12-month period preceding 1 January of each year.
The valuation of the personal property subject to tax is determined by multiplying the
book value of such property by the applicable tax rate determined by the municipality
in which the property is located. If the book value of depreciable property is below its
estimated residual value, the property should be assessed at its estimated residual value.
Real property taxes
The property tax system is administered by the MRCC. The tax on real property is
directly assessed by the MRCC and may be paid in two instalments. The tax, (which
varies from a minimum of 7.80% to a maximum of 10.23%, depending on the
municipality) is applied to an amount based on the hypothetical fair market value
(FMV) of the relevant property in the year 1957. In general terms, this hypothetical FMV
normally ranges between 40% and 50% of the cost of the property.
Transfer taxes
Puerto Rico does not have transfer tax provisions.
Stamp taxes
Puerto Rico does not have stamp tax provisions. However, recordation fees are imposed
at the time of officially recording a real estate transaction with the Puerto Rico Property
Registry.
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Payroll taxes
Withholding taxes on salaries and wages
All employers are required to withhold Puerto Rico income tax from all wages paid to its
employees.
Federal Social Security and Medicare (FICA)
The Federal Social Security and Medicare Law applies in full in Puerto Rico. The tax
rate is imposed on both the employer and the employee. For 2014, the tax rate is 7.45%,
which consists of 6.2% of Social Security and 1.45% of Medicare Tax. The Social
Security Tax is calculated on the first USD 117,000 (year 2014) of wages received, and
the Medicare Tax is calculated on the total wages, without ceiling.
In addition, an employer must withhold a 0.9% Additional Medicare Tax from wages
paid to an employee in excess of USD 200,000 in a calendar year. The employer is
required to begin withholding Additional Medicare Tax in the pay period in which wages
are paid in excess of USD 200,000 to an employee and continue to withhold it each pay
period until the end of the calendar year. Additional Medicare Tax is only imposed on
the employee. There is no employer share of Additional Medicare Tax. All wages that
are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in
excess of the USD 200,000 withholding threshold.
State (PR) Unemployment Tax (SUTA)
The unemployment tax is paid only by the employer and is paid on the first USD 7,000
of total wages paid to each employee during the calendar year, based on an experience
rating system. In addition, the employer must also pay a special tax equal to 1% of
the wages subject to unemployment tax. However, the special tax together with the
experience-based tax cannot exceed 5.4%.
Federal Unemployment Tax (FUTA)
Similar to the FICA, FUTA also applies in Puerto Rico. All persons who employ at least
one individual during any 20 week period or pay USD 1,500 or more in salaries during
any trimester of the calendar year are subject to the FUTA tax.
The employer is solely responsible for payment of the tax. The rate is 6.0% on the first
USD 7,000 of total wages paid during the calendar year to each employee. However, a
credit of 5.4% is granted for the PR unemployment tax paid. Therefore, the effective tax
rate is 0.6% (6.0% less 5.4%).
Disability insurance
The Puerto Rico Department of Labor and Human Resources Bureau of Employment
Security also administers the disability insurance. This program is funded principally
through the imposition of a tax, in equal amounts, on the employer and employee.
A contributory tax of .6% is imposed on the first USD 9,000 of the total wages paid in
the year. From the total tax, half (.003) is paid by the employer and the other half by the
employee.
Employers may establish private insurance plans if approved by the Puerto Rico
Department of Labor and Human Resources.
Workmens Accident Compensation Insurance
The Workmens Accident Compensation Insurance Act (WACA) establishes a compulsory

insurance program that covers employees who suffer injury, become disabled, or lose
their lives due to a job related accident. The insurance premium is based on total wages
paid during the governments fiscal year, which runs from 1 July to 30 June. The actual
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rates vary among industry types. The employer is solely responsible for payment of the
assessed premium.
Chauffeurs Social Security
Every employer having one or more drivers is subject to Chauffeurs Social Security
tax. It also applies to an employer whose employees are usually or regularly required or
allowed to operate a motor vehicle as an inherent part of their work.
The tax is imposed on both the employer and the employee as follows:
Every employer must pay USD 0.30 per week or fraction for each covered employee.
Every employee must pay USD 0.50 per week or fraction.
Municipal license tax
Every corporation is required to file an annual volume-of-business declaration with

each of the municipalities in which it establishes or conducts business operations during
the year. The declaration must indicate the actual volume of business (i.e. net sales,
gross income from any service rendered, and other gross receipts) attributable to each
municipality. When a business operates in more than one municipality but does not
receive income in all of them, the license tax shall be computed based on a distribution
of sales apportioned to each municipality by square feet of the building used in each
municipality.
For a non-financial business, the license tax payment varies from a minimum of 0.20%
to a maximum of 0.50%, depending on each municipality. The payment must be
made in two equal instalments on or before 15 July and 15 January on the basis of the
volume of business generated by the entity during its accounting year ended within
the immediately preceding calendar year before the due date of the declaration. A 5%
discount is available when the tax is fully paid on the declaration due date (on or before
five working days after 15 April of each year).
For the first six months after a new business is established, the new company is
generally exempt from the municipal license tax, provided that the business informs
the municipality that it has established a new business in the municipality within the
first 30 days of operations and request the provisional license tax as established in each
municipality. A copy of the municipal licence is generally requested as a perquisite for
obtaining other licences and permits in Puerto Rico.
Branch income
Corporations operating in Puerto Rico as a branch may be subject to a 10% tax on the
dividend equivalent amount (commonly known as the branch profit tax or BPT). The
BPT should be determined and paid along with the CIT return. There will not be an
income tax withholding at source at the time cash transfers are made by the Puerto Rico
branch to its home office outside of Puerto Rico.
The gross income of a corporation generally includes business income, profits from
the sale of property, interest, dividends, and income derived from any source, unless
specifically exempted by law.
A corporations net income is generally calculated in accordance with the method used
for financial statement purposes, except for various items of income and expenses,
which are treated differently. For example, the cash method of accounting may not be
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used by a corporation with inventory or with an average annual gross income in excess
of USD 1 million. Long-term contract methods and the instalment method can be used
for regular tax calculations.
Inventory valuation
In general, inventory is valued at the lower of cost or market. Retail merchants can use
the retail method of accounting.
Capital gains
Tax-advantaged treatment is provided for net long-term gains (holding period of

more than six months) from the sale of capital assets. For corporations, net long-term
capital gains, reduced by any short-term capital losses, are subject to an alternative
(preferential) tax of 15% in lieu of the regular CIT rates.
Dividend income
Dividends from a corporation that derives 20% or more of its profits from sources within
Puerto Rico are taxable in Puerto Rico. However, a dividend-received deduction may
apply.
Dividends-received deduction
All corporations engaged in trade or business in Puerto Rico are entitled to an 85%
deduction on dividends received from a domestic corporation but not in excess of 85%
of the net income of the corporation. A 100% dividend-received deduction applies for
dividends received from taxable controlled domestic corporations (if ownership in a
corporation is 80% or more).
Interest income
Interest income is generally taxable, except interest from obligations of the federal
government or any state, or territory, or political subdivisions; the District of
Columbia; and the Commonwealth of Puerto Rico or any of its instrumentalities or
politicalsubdivisions.
Royalty income
Royalties from property located in Puerto Rico or from any interest in such property are
included in gross income.
Partnership income
The income (loss) of a partnership passes through to its partners so that the partnership
itself is not subject to tax. Thus, each partner generally accounts for their distributive
share of the partnerships taxable income (loss).
Other income
Service fees are generally taxable as ordinary income.
Foreign income
Generally, a Puerto Rico domestic corporation is taxed on its worldwide income,

including foreign income earned and foreign dividends when received. Double taxation
is avoided by means of foreign tax credit or deduction. In the case of resident foreign
corporations, these are only taxed on their Puerto Rico-source income and on their
effectively connected Puerto Rico income (i.e. foreign income wont be taxable for
Puerto Rico purposes).
Deductions
All ordinary and necessary expenses paid or incurred during the taxable year in carrying
on any trade or business are deductible by corporations operating in Puerto Rico.
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Depreciation
A reasonable depreciation allowance is deductible for the exhaustion, wear and tear,
and obsolescence of property used in business. The most common depreciation method
used by corporations is the straight-line method. Nevertheless, any other consistent
method may be used in lieu of the straight-line method as long as it is in accordance with
the recognised trade practice. In addition, a corporation (other than one that is exempt
under an Industrial Incentives Act) can elect an accelerated depreciation method for
new or used tangible property acquired by purchase in taxable years commencing after
30 June 1995.
For property acquired after 31 December 2009, when using the straight-line
depreciation method, the useful life has to be determined based on the same rules of
accelerated depreciation.
Assets
Useful life (years)
3 year property (e.g. computers, electronic equipment)
3
5 year property (e.g. automobiles, transportation equipment)
5
7 year property (e.g. certain furniture and fixtures, air transportation equipment)
7
10 year property (e.g. furniture and fixtures, printing equipment, other machinery
10
and equipment)
15 year property (e.g. certain air transportation equipment, natural gas plants)
15
20 year property (e.g. vessels, land improvements)
20
Real property leased for residential purposes
30
Other real property
35
For intangibles (other than goodwill) acquired or created after 1 September 2010, the
deduction is calculated using the straight-line method over the lower of a useful life of
15 years or the intangible useful life.
Goodwill
The cost of goodwill is generally capitalised and amortised ratably over 15 years.
Start-up expenses
Generally, start-up expenditures may be deducted in the tax year in which the trade or
business begins or they may be ratably amortised over five years.
Interest expenses
In general, interest expense is deductible without limitation. However, interest expenses

related to exempt income are not deductible. If interest is paid to a non-Puerto Rico
resident related party, a 29% withholding at source would apply. If the interest is
not paid to the related party (thus, the 29% is not withheld), no deduction would be
available.
Bad debt
Bad debt resulting from a trade or business may be deducted in the year the debt
becomes worthless (i.e. uncollectible). The reserve method is not admissible for Puerto
Rico purposes.
Deductions for allowed charitable contributions are limited to 10% of net income,
computed regardless of the contributions.
Rent expense
Corporations are entitled to a rent expense deduction if the rented property is used in
the business.
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Employee remuneration
Corporations may deduct payments of reasonable salaries or other compensation for

services actually rendered.
Insurance premiums
Insurance premiums paid or accrued on risks related to a trade or business are

deductible, as well as premiums on group life policies covering employees where the
beneficiary is not the corporation. No deduction is allowed for premiums paid to an
insurance company not authorised to provide insurance in Puerto Rico or through an
agent or broker not authorised to operate in Puerto Rico.
Meals and entertainment expenses are deductible, subject to a 50% limitation.

Travelling expenses are fully deductible if the trip is for business purposes.
Automobiles expenses
A corporation is allowed to depreciate non-cargo automobiles used in trade or business

over a five year useful life (three years in the case of sales persons) up to a maximum
base of USD 30,000 for a maximum annual depreciation of USD 6,000.
On the other hand, for non-cargo automobile maintenance expenses (e.g. gas, repairs,
insurance), a deduction based on USD 0.60 per mileage is allowed.
Fines and penalties
Penalty payments, such as with respect to Commonwealth taxes, whether on account of

negligence, delinquency, or fraud, are not deductible from gross income.
Taxes
A corporation is allowed a deduction for taxes paid (except for Puerto Rico CIT and the
National Gross Receipts Tax), including income tax paid to the United States, its other
possessions, and any foreign country. The deduction is in lieu of claiming a foreign tax
credit.
The cost of incidental repairs (not adding value to the property) is deductible as a
business expense.
Subject to certain limitations, savings and retirement plans for the benefit of the
employees are deductible if qualified by the Secretary of the Treasury.
All corporations are generally entitled to the NOL deduction in computing their tax.
NOLs created prior to 31 December 2004 may be carried over for seven years (there
are no carryback provisions). The NOL carryforward period was increased from ten
taxable years to 12 taxable years for NOLs generated from taxable years beginning after
31 December 2004 and before 31 December 2012. For taxable years beginning after 31
December 2012, the NOL carryforward period will be ten years.
Also, losses from sales or exchanges of capital assets are allowed only to the extent of
gains from such sales or exchanges. The carryforward period in this instance, however,
is five years.
51% of expenses attributable to payments made to a related party that is not engaged in
a trade or business in Puerto Rico or to the home office located outside of Puerto Rico
(i.e. foreign affiliate) will not be deductible for purposes of computing the net taxable
income, as long as these payments are not subject to income taxes in Puerto Rico.
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Group taxation
Puerto Rico does not have group taxation rules. In other words, corporations cannot file
a consolidated return for Puerto Rico CIT purposes.
Transfer pricing
There are no specific transfer pricing rules in Puerto Rico.
Thin capitalisation
There are no specific thin capitalisation rules in Puerto Rico.

A corporation engaged in specific eligible activities may apply for a reduced CIT rate,
among other incentives, through the request of a Tax Exemption Grant to the Puerto
Rico Office of Industrial Tax Exemption (OITE) under Act 73 of 28 May 2008 (Act 73).
A corporation engaged in eligible activities related to the exportation of services may
apply for a reduced CIT rate, among other incentives, through the request of a Tax
Exemption Grant to OITE under Act 20 of 17 January 2012 (Act 20), instead of through
Act 73.
Tax rate incentives

Under Act 73
Exempt entities may elect one of the following two scenarios:

General scenario: 4% CIT rate with a WHT rate on royalty payments of 12%. Under
this scenario, the amount of WHT on the royalty payments is creditable against the
4% CIT.
Alternate scenario: 8% CIT rate with a WHT rate on royalty payments of 2%. Under
this scenario, the WHT on royalty payments is creditable against the 8% CIT.
Companies may elect one of these scenarios at the time of applying for the benefits
under the act. However, there are other possibilities:
4% fixed income tax rate on Incentive Development Income (IDI), excluding income
from certain investments provided by Section 2(j).
Pioneer industries are eligible for a 1% CIT rate.
Activities for the development in Puerto Rico of intangible property are eligible for a
0% CIT rate.
Any exempt business having operations at a municipality located in a low or
intermediate development zone may reduce its CIT rate by an additional5%.
Any exempt business having operations in Vieques and Culebra may be totally exempt
from income taxes during the first ten years of operations as established in the act.
The remaining years covered by its tax decree may qualify for a 2% CIT rate.
Under Act 20
4% CIT on export services income or

3% CIT when more than 90% of the eligible businesss gross income is derived from
export services and such services are considered strategic services, according to the
criteria established in Act 20.
Special deductions
Special deductions under Act 73 are available for capital investment in buildings,
structure, machinery and equipment, and the NOL carryforwards.
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There are no special deductions allowed under Act 20.
Credits
The following credits are only available under Act 73. Please note that no credits are
allowed under Act 20.
Credit for purchases of Puerto Rico manufactured product
Subject to certain limitations, the credit for purchases of products manufactured in

Puerto Rico is 25% (35% in the case of recycled products).
Job creation credit
There is a credit for every incremental job applicable to exempt business starting
operations after 1 July 2008. The amount of the credit (maximum of USD 5,000 per
each employment) depends upon the location of the industrial development zone.
Research and development (R&D)investment credit
A 50% credit is granted for the eligible investment in R&D activities, including
operational expenditures, clinical trials, infrastructure, renewable energy, or
intellectualproperty.
Energy investment credit
A 50% credit is granted for the eligible investment in the acquisition of machinery and
equipment for the creation of energy.
Energy cost credit
There is also a 3% credit (which could be increased up to 10% if certain employment

requirements are met) for payments made to the Puerto Rico Power Authority during
the corresponding taxable year. This credit is available for a ten-year period starting as
of 1 July 2008. Additional credits (for the purpose of reducing the cost of energy) may
be available to industrial units subject to certainlimitations.
Technology transfer credit
A 12% credit (2% in the case of exempt businesses that opted for the alternate tax)
is available for payments made to resident entities for the use or privilege of using
intangible property in Puerto Rico.
Strategic projects investment credit
There is a 50% credit for eligible investment in strategic projects, including activities for
the design, development, and construction ofdams.
Industrial investment credit
There is a 50% credit, up to a maximum of USD 8 million, for cash invested in the
purchase of 50% or more of the stock or operating assets of an exempt business that is
in the process of shutting down operations, amount used to start-up small or mediumexempt business, or amounts used for a substantial expansion of an exempt business.
Property tax incentives
Similar to the previous incentives laws, Act 73 allows for a 90% property tax exemption
on personal and real property. However, Act 73 introduced a methodology for the
classification and assessment of real property owned by the exempt businesses. Under
the provisions of Act 73, a taxpayer can self-assess ones real property tax responsibility
(similar to the current personal property tax system) and remit the related tax liability
due along with a real property tax return (to be issued by the MRCC) by 15 May of each
year. The self-appraisal method is only applicable to real property that has not been
appraised by the MRCC and is mainly limited to machinery and equipment classified as
real property. Note that this method is not available for assets such as land, building, and
building equipment.
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For purposes of Act 20, there is a 100% exemption from property taxes during the first
five years of operations in the case of eligible services as call centres, management
services, and shared services. After said five year period, a 90% exemption will apply
during the term remaining under the Tax Exemption Grant.
Municipal license tax and other municipal tax incentives
Under Act 73, the municipal license tax exemption continues at 60% for exempted
businesses. Exempt businesses operating in Vieques or Culebra are 90% exempt; small
or medium-exempt businesses are 75% exempt; and central or regional corporate
headquarters providing managerial services to affiliated companies are 100% exempt
during the first five years after becoming eligible for the exemption.
There are no municipal tax exemptions under Act 20.
Employment creation incentives
Act 1 of 10 February 2013, known as the Employment Now Act (Act 1), introduced
significant incentives (mostly tax and payroll related) for eligible businesses that create
new employments after 31 December 2012. Most of Act 1s incentives are available for
new businesses, expanding businesses, and developing businesses that enter into an
agreement with the Puerto Rico government (the Agreement) within nine months after
March 2013. In the Agreement, the eligible business will commit to the creation of new
employments, among other conditions, in order to avail to the benefits of Act 1. Among
the incentives provided by Act 1 are the following:
CIT: The first taxable year of operations under the Agreement, the new business
will be subject to a fixed tax rate of 10%, or the lower rate applicable under the 2011
Internal Revenue Code, as amended (the Tax Code). The following taxable year after
the signing of the Agreement, the new business will be subject to a fixed tax rate of
15% or the lower rate applicable under the Tax Code.
NOL deduction: New businesses operating under an Agreement will be able to carry
forward the NOL incurred during the first two years under the Agreement against
the income derived from the operation covered by the Agreement for a period of ten
years.
Municipal license tax: New businesses operating under an Agreement will be exempt
from the payment of municipal licenses tax during the two economic years following
the signing of the Agreement.
Personal property tax: A total exemption on personal property tax will be available
during the two economic years following the signing of the Agreement.
Real property tax: A total exemption will apply on real property tax of property used
by the eligible business on its operations and that, prior to its acquisition by the
eligible business, was not in use. The exemption will apply on real property taxes
payable during the first two government fiscal years (i.e. 1 July to 30 June) after the
acquisition of the real property.
Act 1 also provides for payroll incentives and energy credits.
Foreign tax credit
Generally, in any year, a taxpayer can choose whether to take as a credit (subject to
limitation) or as a deduction the foreign income and excess profit taxes paid or accrued
during the taxable year to any foreign country. A foreign tax credit reduces the Puerto
Rico income tax liability dollar for dollar, while a deduction reduces the Puerto Rico
income tax liability at the marginal rate of the taxpayer. There are no carryforward
provisions for foreign tax credit purposes.
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Withholding taxes
Corporations not engaged in a trade or business in Puerto Rico are subject to a 29%
WHT at source on certain gross income items (considered fixed or determinable, annual
or periodical [FDAP]) from Puerto Rico sources.
FDAP income may include interest received from a related person, rents, royalties,
salaries, annuities, compensation, remuneration, and net capital gains. However, if the
payment received is from dividends, a 10% WHT should apply.
The payer, as a withholding agent, is responsible for the withholding and remittance
of the 29% (10% in the case of dividends) to the PRTD. Such tax is due on or before
the 15th day of the month following the receipt of the income by the non-resident
corporation. An annual informative return is also required to be filed no later than 15
April of the following year.
Tax treaties
There are no tax treaties between foreign countries and Puerto Rico. However, the
Puerto Rico Supreme Court has recognised that, although Puerto Rico is generally
not a signatory party to a treaty entered into by the United States, if an international
treaty with the United States does not explicitly exclude Puerto Rico, the treaty will be
applicable to Puerto Rico.
Tax administration
Taxable period
The annual accounting period may be on the basis of the calendar year, a fiscal year
ending on the last day of a month, or a 52/53 week year.
Tax returns
The Puerto Rico tax system is based on the principle of self-assessment. A corporate
taxpayer is required to file an annual income tax return by the 15th day of the fourth
month following the close of its tax year. In general terms, a taxpayer can obtain an
automatic extension of three months to file its income tax return. Failure to timely file
can result in penalties.
A corporate taxpayer may also be subject to file a personal property tax return by 15 May
and/or a volume of business declaration by the 5th business day after 15 April.
Payment of tax
A corporation must substantially satisfy its annual income tax liability, if any, through
estimated income tax payments. The amount of estimated income taxes should be paid
on equal instalments on the 15th day of the fourth, sixth, ninth, and 12th month of the
taxable year of the corporation. The estimated payments should equal or exceed 90% of
the actual tax for the year (including AMT) or, in the case a CIT return was filed by the
corporation in the preceding year, 100% of such tax liability. Any tax not covered with
the estimated tax payments should be paid along with the CIT return. Failure to pay the
tax by the due dates indicated above may result in a penalty of 10% of the instalment
due.
Annual report
Every corporation is required to file an annual corporation report with the Puerto Rico
Department of State. This annual report must be filed by the 15th day of April along
with a USD 150 annual fee and a balance sheet as of the close of operations of the prior
year. The report should be filed through the Puerto Rico Department of States website.
In the case of for-profit corporations, if the volume of business exceeds USD 3 million,
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the annual report must be accompanied by a balance sheet certified by a certified public
accountant (CPA) licensed in Puerto Rico. In the event that the volume of business
does not exceed USD 3 million, a balance sheet prepared under generally accepted
accounting principles (GAAP) by a person with a general knowledge in accounting has
to be submitted along with the corporate annual report. An extension of 60 days, an
additional 30 day period may be requested, for filing the annual report can be obtained
if timely requested. The Secretary of State is authorised to impose a penalty for failure
to timely or accurately file the annual corporate report that would be between USD 75
and USD 2,000 if a non-profit corporation, and between USD 750 and USD 2,000 if a
for-profit corporation.
Audited financial statements
Accounting records must be prepared in accordance with the GAAP followed in the
United States. Domestic (i.e. incorporated in Puerto Rico) or foreign corporations with
volume of business of more than USD 3 million must include, with their CIT return,
audited financial statements of the Puerto Rico operations for the accounting year ended
on or before the preceding 31 December. The financial statements should be submitted
with an audit report issued by a CPA licensed in Puerto Rico.
Also, qualified and disclaimer opinions are now allowed to the extent that the
qualification or disclaimer does not result from a restriction in scope. However,
no adverse opinions are allowed. All groups of related entities engaged in a trade
or business in Puerto Rico are required to file consolidated or combined financial
statements (CFS), which should contain a consolidating schedule and general
information of the related parties. The determination of the gross income threshold for
purposes of the audited financial statement requirement should be made taking into
consideration the volume of business of all the entities within a controlled group. In the
case of foreign entities, these will be able to submit audited financial statements with
their Puerto Rico operations on a stand-alone basis; in other words, the CFS will not be
required. The requirement for audited financial statements will not apply to non-profit
organisations. There is a waiver for the taxable year commencing after 31 December
2011 and before 1 January 2014. This waiver provided for the submission of stand-alone
audited financial statements for all entities within a consolidated group with volume of
business of more than USD 1 million, instead of the consolidated or combined audited
financial statements.
With respect to the municipal license and personal property tax filings, the threshold
amount for the audited financial statements requirement is gross revenues of more than
USD 3 million, regardless of the corporate residency (i.e. foreign or domestic).
Beginning with taxable years commencing after 31 December 2012, new supplemental
information is required to be included as part of the audited financial statements to
be filed with the income tax return, volume of business declaration, and personal
property tax return. The due date for the supplemental information is the last day of
the month following the CIT due date, including extensions (i.e. 31 August 2014). The
new supplemental information will be submitted electronically and separately from the
audited financial statements.
Tax audit process
Many taxpayers are under audit by the PRTD. The audits may include income, payroll,
withholding, and sales and use taxes.
The PRTD generally has four years after an original return is filed to assess income,
payroll, and sales and use taxes. A return will be deemed to have been filed on the later
of (i) its due date or (ii) the date the return was actually filed.
1640
Puerto Rico
Puerto Rico
Currently, the PRTD is focused on sales and use tax, intercompany loans, withholding at
source, and payments to foreign affiliates, among others.
Puerto Rico
1641
Qatar
PwC contact
Declan Mordaunt
41st Floor Tornado Tower
West Bay
Doha, Qatar
Tel: +974 4419 2801
There were no significant tax developments during the course of the year in Qatar. A law
is being drafted that will exempt non-Qataris from taxation on their investment in Qatar
funds that are invested in share and securities.

An entity that is wholly or partially foreign owned and that derives income from sources
in Qatar is taxable in Qatar. In the case of a joint venture, the tax liability of the joint
venture is dependent upon the foreign partners share of the joint ventures profit.
Currently, no corporate income tax (CIT) is levied on a corporate entity that is wholly
owned by Qatari nationals and Gulf Cooperation Council (GCC)nationals.
Unless specifically exempt from tax, an entity will be taxable in Qatar if it has generated
Qatar-source income, regardless of the place of its incorporation.
Taxable income generally is subject to a flat (CIT) rate of 10%, with certain exceptions
available.
The following tax rates apply in the specific circumstances noted:
If a special agreement was reached with the government of Qatar prior to 1 January
2010, the rate specified in the agreement continues to apply. If no rate is specified in
the agreement, a rate of 35% will be used.
The rate applied with respect to oil operations, as defined in Law No. 3 of 2007, may
not be less than 35%.
Payments made to non-residents with respect to certain service activities not
connected with a permanent establishment (PE) in Qatar are subject to withholding
taxes (WHTs) (see the Withholding taxessection).
The amount of tax payable is reduced for companies that are partly foreign owned,
depending on the extent of local ownership.
Qatar Financial Centre (QFC)
The QFC was established in 2005 to attract companies in the financial services sector.
It should be noted that this summary is directed towards non-Qatar Financial Centre
(QFC) entities with Qatar-source income. The QFC has its own tax regulations and
rules, and the State of Qatar tax laws do not apply to the licensed activities of entities
established in the QFC. QFC entities are subject to CIT in respect of activities undertaken
pursuant to their QFC licence at the rate of 10%.
Local income taxes
There are no local, state, or provincial government taxes on income in Qatar.

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Qatar
Qatar
Corporate residence
It is important to recognise that residence is not the basis used to determine whether
an entity is taxable for CIT purposes in Qatar. Accordingly, a CIT exposure in Qatar may
arise even if a company is not resident in Qatar. Residence is, however, relevant when
considering whether WHT will apply on payments received rather than CIT.
A company is resident in Qatar if it is incorporated in accordance with Qatari laws,
its head office is situated in Qatar, or its place of effective management and control is
inQatar.
A PE is defined as a fixed place of business through which the business of a taxpayer

is wholly or partly carried on. A PE is deemed to include a branch, office, factory,
workshop, mine, oil or gas well, quarry, a building site, an assembly project, or a place of
exploration, extraction, or exploitation of natural resources. A PE also includes activity
carried on by the taxpayer through a person acting on behalf of the taxpayer or in the
taxpayers interest, other than an agent of an independent status.
Other taxes
Qatar imposes no VAT or sales tax on operations in Qatar. However, the introduction of
VAT in the GCC remains under discussion.
Customs duties
Customs duties are applied to goods with an origin outside the GCC countries, normally
at a rate of 5%. Higher rates sometimes apply for specific types of goods, such as tobacco
products. Temporary import exemptions are sometimesavailable.
Excise taxes
There are no excise taxes in Qatar.
Property taxes
There are no property taxes in Qatar. However, fees may be payable to the government
by the owner on the registration of property and by the landlord on the registration of
leases.
Transfer taxes
There are no transfer taxes in Qatar.
Stamp taxes
There are no stamp taxes in Qatar.
Branch income
The profits of a branch owned by a foreign parent entity are subject to the same tax rules
as apply to other forms of taxable entities.
CIT is levied on a companys Qatar-source income. Some examples of Qatar-source
income include:
Qatar
1643
Qatar
Income derived from an activity carried on in Qatar.
Income derived from contracts wholly or partially performed in Qatar.
Income from real estate situated in Qatar, including income from the sale of shares of
companies with assets consisting of mainly real estate situated in Qatar.
Income from shares in companies resident in Qatar or listed on Qatars stock market.
Inventory valuation
Inventory must be valued in accordance with International Financial Reporting

Standards (IFRS).
Capital gains
Any chargeable gains on the sale of capital assets are taxed as ordinary income. Specific
rules exist in respect of gains realised on the disposal of real estate.
Dividend income
Dividends are not taxable in Qatar if received from profits that have been subject to
Qatar tax or from companies that are exempt from Qatar tax.
Interest income
Interest arising in Qatar and bank interest realised outside Qatar, if it results from the
taxpayers activity in Qatar, are taxed as ordinary income.
Foreign income
Non-Qatar-sourced income is not subject to tax in Qatar.
Deductions
Taxable income is determined after deducting all expenditures, costs, and losses
incurred to generate gross income. A deduction is usually available for expenses that
are not considered to be capital in nature and are incurred in generating Qatar-source
revenue.
Depreciation
Depreciation should be calculated in accordance with rates specified by the Qatar tax
law and the related regulations. In practice, however, the deduction for depreciation is
restricted to the amount of the accounting depreciation.
For certain assets, depreciation is calculated on the cost on a straight-line basis. The
rates of depreciation are as follows:
Assets
Buildings and constructions, including roads, bridges, pipelines,
storage tanks, and port ducks inside the establishment and
excluding ready-made light constructions
Ships and boats
Airplanes and helicopters
Drilling instruments
Intangible assets:
Pre-establishment expenses
Trademarks, patents, and the like
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Qatar
Depreciation rate (% per

annum)
5
10
20
15
50
Amortisedover the expected
lifetime of the asset, provided
that the amortisation
allowance shall not exceed
15% per annum.
Qatar
Other assets will be divided into groups and depreciated on a reducing-balance basis.
The rates of depreciation are as follows:
Group
I
II
III
Asset
Computer hardware and software accessories
Machinery, plant, equipment, electrical devices, means of
transportation of goods and persons, including cars, vehicles,
trucks, and cranes
Furniture, fixtures and fittings, and other fixed assets
Depreciation rate
(% per annum)
33.33
20
15
Goodwill
There are no specific provisions dealing with the taxation of goodwill. Accordingly, the
accounting tax treatment should be followed from a tax perspective.
Interest expenses
Interest on loans used for the purpose of the taxpayers activity is tax deductible, except
where the loan is between a Qatar branch and its head office or a party related to the
head office.
Bad debt
Bad debts approved by the tax authorities in accordance with the criteria set out in the
tax law are deductible.
Donations, gift aid, and subscriptions to charitable, humanitarian, scientific, cultural,

or sporting activities paid in Qatar to government authorities or public bodies are
deductible, provided the value does not exceed 5% of net profit in the year in which the
deduction is claimed.
Fines and penalties
Fines and penalties are not deductible for Qatar tax purposes.
Taxes
Taxes and duties, other than the income tax, provided for in the law are deductible.
Other deductible expenditures include the following:

Employee costs (including salaries, wages, gratuities, and other end of service
benefits).
Losses resulting from the sale of assets.
Rents.
Insurance premiums.
Losses may be deducted from net income during the year. Losses can be carried forward
for three years after the year in which they were incurred. Losses cannot be carried back.
Allocations of overhead costs to branches
The branchs share of head office expenses (i.e. indirect or allocated overhead) generally
is deductible only up to a certain limit. The deduction is capped at 3% (1% for banks) of
the total revenue less certain other costs.
Qatar
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Qatar
Group taxation
There is no definition of a group for Qatar tax purposes; consequently, there is no
concept of group taxation.
Anti-avoidance provision
The Qatar tax law contains an anti-avoidance provision that gives the Qatar tax
authorities wide powers to counteract transactions that have been carried out with a
tax avoidance purpose. These powers include substituting an arms-length value or
recharacterising transactions.
Transfer pricing
The executive regulations, which supplement Qatars tax law, have made it clear that the
anti-avoidance provision will be applied to related-party transactions. In determining
the arms-length value, the Unrelated Comparable Price Method should be used (i.e.
the price of services or goods that would have been applied should the transaction
be between unrelated parties). It is possible to make an application to the Qatar tax
authorities to use another method approved by the Organisation for Economic Cooperation and Development (OECD).
Thin capitalisation
There are no specific thin capitalisation rules in Qatar, although consideration should be
given to the anti-avoidance provision noted above.

Foreign tax credit
Unless double tax relief is available under a double tax treaty (DTT), there is no tax relief
available underthe Qatar tax law for tax suffered by Qatari companies overseas.
Qatar Science and Technology Park (QSTP)
Qatar has established the QSTP, which is aimed at entities with research and
development (R&D) activities. QSTP entities can be fully exempt from Qatar tax;
however, tax exempt entities are required to file tax returns.
Other tax exemptions
An application for a tax exemption may be made for certain projects that are considered
to be strategically significant to the Qatar economy. The exemptions are generally
granted for a period of three or six years. Applications for an exemption are assessed
based on certain criteria set out in the Qatar tax law.
Notwithstanding the fact that an exemption is granted, an entity that is exempt is still
required to file a tax return under the Qatar tax law.
Withholding taxes
WHT is levied on certain payments made to non-residents in relation to royalties and
technical services (the applicable rate is 5%) and on interest, commissions, brokerage
fees, directors fees, attendance fees, and any other payments for services carried out
wholly or partly in Qatar (the applicable rate is 7%). The executive regulations have
excluded certain payments from the scope of WHT.
The company that makes the payment to its foreign supplier is required to withhold the
tax and remit to the tax department the funds that were withheld by the 16th day of the
following month. In the event that the company does not make a payment to the tax
1646
Qatar
Qatar
department, the company will be liable for a penalty equal to the amount of unpaid tax
due, in addition to the WHT.
Retention system
Pursuant to circulars issued by the tax department, a retention system is in place

whereby certain final contract amounts are required to be retained from payments made
to Qatari resident entities and non-resident entities with a PE in Qatar in connection
with services performed in Qatar. All ministries; government departments; public,
semi-public, and private establishments; and Qatar taxpayers are required to retain.
Companies resident in Qatar and permanent branches can secure a release of the
final payment by presenting a tax card. A retention equivalent to the higher of 3% of
the contract value (less the value of supply and work carried out abroad) or the final
contractual payment will apply to temporary branches registered for activities of at least
one year until they produce a no objection letter from the Qatar tax authorities. All other
non-residents are expected to be subject to WHT in respect of payments that fall within
the scope of WHT.
Tax treaties
Qatar has a growing DTT network with over 50 DTTs currently in force. The WHT rates
under these treaties in respect of dividends, interest, and royalties are as follows:
Recipient
Algeria
Armenia
Austria
Azerbaijan
Belarus
Bulgaria (11)
China (PRC)
Croatia
Cuba
Cyprus
France
Georgia
Greece
Guernsey
Hong Kong
Hungary
India
Indonesia
Iran
Isle of Man
Italy
Jersey
Jordan
Korea, Republic of
Lebanon
Luxembourg
Macedonia
Malaysia
Malta
Mauritius
Dividends
0
5/10 (1)
0
7
0/5/10 (2)
WHT (%)
Interest
0
5
0
7
5
Royalties
0/5 (12)
5
5
5
5
10
0
5/10 (3)
0
0
0
5
0
0
0/5 (13)
5/10 (4)
10
5/7.5 (15)
0
5/10 (3)
0
10
10
0
0/5/10 (2)
0
5/10 (4)
0
0
10
0
10
0
0
0
5
0
0
0
10
10
10
0
5
0
5
0/10 (10)
0
0
0
5
0
0
10
10
5
5
0
0
5
5
5
5
10
5
5
5
5
5
10
5
0
5
5
8
5
5
Effective date
1 Jan 2012
1 Jan 2008
1 Jan 2012
1 Jan 2009
1 Jan 2008
1 Jan 2011
1 Jan 2009
1 Jan 2010
1 Jan 2009
1 Jan 2010
1 Jan 2007
1 Jan 2012
1 Jan 2011
1 Jan 2014
1 Jan 2014
1 Jan 2013
1 Jan 2001
1 Jan 2008
1 Jan 2011
1 Jan 2013
1 Jan 2010
1 Jan 2013
1 Jan 2009
1 Jan 2010
1 Jan 2010
1 Jan 2011
1 Jan 2009
1 Jan 2010
1 Jan 2010
1 Jan 2010
Qatar
1647
Qatar
Recipient
Mexico
Monaco
Morocco
Nepal
Netherlands
Norway
Pakistan
Panama
Poland
Romania
Russia
Senegal (11)
Serbia
Seychelles
Singapore
Slovenia
South Korea (11)
Sri Lanka
Sudan (11)
Switzerland
Syria (11)
Tunisia (11)
Turkey
United Kingdom
Venezuela
Vietnam
Yemen (11)
Dividends
0
0
5/10 (4)
10
0/10 (5)
5/15 (6)
5/10 (4)
5
5
3
5
WHT (%)
Interest
5/10 (14)
0
0/10 (16)
10
0
0
10
5
0/5 (9)
3
5
Royalties
10
5
10
15
5
5
10
5
5
5
0
5/10 (4)
0
0
5
10
0
5
5
10
5
10
5
10
10
10
5/10/15 (7)
10/15 (8)
0
5/10 (4)
5/12.5 (17)
10
0
5
0
10
5
5
5/10 (18)
Effective date
1 Jan 2014
1 Jan 2011
1 Jan 2010
1 Jan 2010
1 Jan 2010
1 Jan 2010
1 Jan 2001
1 Jan 2012
1 Jan 2010
1 Jan 2004
1 Jan 2001
1 Jan 2001
1 Jan 2011
1 Jan 2008
1 Jan 2008
1 Jan 2011
15 April 2009
1 Jan 2008
1 Jan 2004
1 Jan 2011
1 Jan 2007
1 Jan 1999
1 Jan 2009
1 Jan 2011
1 Jan 2008
1 Jan 2012
1 Jan 2004
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
1648
5% if capital exceeds100,000 United States dollars (USD), and 10% in all other cases.
0% if the beneficial owner is a company that owns at least 10%, 5% if 10% direct participation is
held by an individual who has resided in the relevant state for a period of at least 48 months, and
5% if the beneficial owner is a company that has owned, directly or indirectly, at least 25%, and 10%
if participation is less than 25%.
5% if the beneficial owner is a company that owns at least 10%, and 10% in all other cases (i.e. less
than 10% shareholding).
0% if the beneficial owner is a company that owns at least 7.5%, and 10% in all other cases (i.e. less
than 7.5% shareholding).
5% if the beneficial owner is a company that owns at least 10%, and 15% in all other cases (i.e. less
than 10% shareholding).
5% if the beneficial owner is a company that directly holds at least 10%, 10% if the beneficial owner
is an individual that directly holds at least 10%, and 15% in all other cases.
10% if the beneficial owner is a company that has owned at least 25%, and 15% in all other cases
(i.e. less than 25% shareholding).
0% where the beneficial owner of the interest carries on business in the other contracting state where
the interest arises (i.e. through a PE therein), and 5% if the contracting company does not have a PE.
0% if interest arising in contracting state is derived from government debt, and 10% if the contracting
company does not have a PE.
It should be noted that there is limited information available in respect of the treaty with this country,
and the date provided above may be the date on which the treaty was signed or entered into force
rather than its effective date.
Reduced to zero if the beneficial owner has a PE in the contracting state.
0% if the beneficial owner is a company, and 5% in all other cases.
5% if the beneficial owner is a bank, and 10% in all other cases.
partnership)that directly holds at least 20% of the capital of the company paying the dividends. 7.5%
in all other cases.
Qatar
Qatar
16. 0% if the interest derived from a contracting state and paid for the government or the central bank in
the other state. 10% in all other cases.
17. 5% of the gross amount of the dividends if the beneficial owner is a companythat holds, directly or
indirectly, at least 50% of the capital of the company paying the dividends or has invested more than
USD 10 million in the capital of the company paying the dividends. 12.5% in all other cases.
18. 5% of the gross amount of the royalties in respect of payments of any kind received as a
consideration for the use of, or the right to use, any patent, design or model, plan, secret formula or
process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial, or scientific experience. 10% in all other cases.
Tax administration
Taxable period
The tax year is generally the same as the calendar year, although advance approval may
be sought from the Qatar tax authorities to use a companys accounting year-end.
Tax returns
The tax return is due within four months from the end ofa companys accounting
period.
Payment of tax
The tax payable is based on the tax declaration and should be paid on the same day that
the tax return is due.
Late filing penalties
The Qatar tax law contains a penalty regime, which imposes a penalty for the late filing
of a tax return. In addition, a penalty applies where there is a late payment of tax.
Objection and appeals process
It is possible for a taxpayer to initially object directly to the tax department regarding a
decision related to a tax position. If the objection is unsuccessful with respect to altering
the tax departments decision, an appeal may be made by the taxpayer to the Tax
Appeals Committee. Based on the Tax Appeals Committees decision with respect to the
appeal, a final appeal may be made by either the tax department or the taxpayer to the
administrative chamber of the court. The law prescribes time limits for each stage of the
appeal process.
Accounting and audit requirements
A companys CIT return is required to be accompanied by audited financial statements

if the companys capital or profit exceeds 100,000 riyals (QAR) or the head office is
situated outside Qatar.
The audit report must be signed by a Qatar registered auditor.
Qatar tax law requires accounts to be prepared in accordance with IFRS.
Accounting record retention
All accounting books, registers, and documents relating to activity in Qatar are required
to be retained in Qatar for a ten-year period.
The following areas appear to be the focus of the Qatar tax authorities from a tax
compliance perspective:
Representative offices of non-residents are being required to file tax returns,
notwithstanding the fact that they may only be promoting their business.
Qatar
1649
Qatar
The Qatar tax authorities are closely examining the taxpayers activities to establish
whether or not a PE exists.
Related party transactions and large and unusual items of expenditure are being
scrutinised by the Qatar tax authorities.
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Qatar
Romania
PwC contact
Mihaela Mitroi
Lakeview Office
301-311 Barbu Vacarescu Street
RO-020276, Bucharest
Romania
Tel: +40 21 225 3500
Corporate taxation
As of 1 January 2014, taxpayers with a financial year different from the calendar year
now have the option to align the tax year to the financial year. The first amended tax
year will start on 1 January and will end on the last day of the amended tax year.
As of 1 January 2014, a participation exemption applies for dividends, capital gains,
and liquidation proceeds derived by a Romanian legal entity from participations of
at least 10%, held for a minimum period of one year, in a subsidiary established in a
state with which Romania has a double tax treaty (DTT).
As of 28 February 2014, a participation exemption applies for capital gains derived
by foreign companies resident in countries with which Romania has a DTT from the
transfer of shares in Romanian companies held for at least 10% and for a minimum
period of one year. However, capital gains derived from the transfer of shares in
companies whose assets directly or indirectly consist of more than 50% real estate
located in Romania are subject to tax at 16% (unless treaty protection is available).
The minimum holding period for the application of the Parent-Subsidiary Directive
(2011/96) transposed into the domestic fiscal legislation changes from two years to
one year.
Taxpayersthat do not benefit from fiscal credit in the year when they grant
sponsorship according to the law may carry forward the fiscal credit for the next
seven consecutive years.
A Romanian permanent establishment (PE)of a legal entity resident in the European
Union (EU) or the European Economic Area (EEA)that obtains revenues from
another EU or EEA member state, taxed both in Romania and in that member state,
may claim a tax credit in Romania under the applicable tax law provisions.
As of 1 January 2014, for taxpayers going through a restructuring process, the right
to carry forward non-deductible interest expenses and net foreign exchange losses
is split between the beneficiary and the assignor in proportion to the assets and
liabilities transferred.
With effect from 1 July 2013, foreign companies that carry on activity in Romania
through several PEs must appoint one of the PEs as liable for the profit tax declaration
and payment obligations for the activity of all the PEs.
Starting from 1 January 2014, a new India-Romania DTT has entered into force,
replacing the agreement signed on 10 March 1987.

The simplification measures for domestic supplies of cereals and industrial plants are
extended until 31 December 2018.
As of January 2014, taxpayers with a turnover lower than 500,000 euros (EUR) and
newly founded companies have the option to apply the cash accounting VAT scheme
(CAVS).
Romania
1651
Romania
Companies registered for VAT purposes in Romania may request late payment interest
from the Romanian tax authorities for their delays in granting VAT refunds.
As of November 2013, the VAT deferment certificate can also be granted to companies
with the status of Approved Economic Operators (AEO) and to those authorised to
perform in-house customs clearance formalities.
Excise duties
As of 1 September 2013, the excise duty level for ethyl alcohol increased to EUR
1,000/hectolitre of pure alcohol.
As of 1 September 2013, new products were included in the excise dutys scope of
application.
As of 22 November 2013, the excise duty level for still fermented beverages other
than beer and wines was diminished to EUR 10/hectolitre of product. Furthermore,
the excise duty level for apple and pear cider and for mead is nil.

The standard profit tax rate is 16% for Romanian companies and foreign companies
operating through aPE in Romania. Resident companies are taxed on their worldwide
income, unless aDTT stipulates otherwise. Non-resident companies are taxed on all
income derived from Romanian taxpayers, regardless of whether the services are
rendered in Romania or abroad.
The profit tax due for nightclubs and gambling operations is either 5% of the revenue
obtained from such activities or 16% of the taxable profit, whichever is higher.
Micro-company tax regime
Micro-companies are subject to a mandatory revenue tax rate of 3%, provided they meet
all the following criteria at the end of the previous year:
Derive income from activities other than banking, capital markets, insurance and
reinsurance, gambling, consultancy, and management.
Their annual turnover is lower than the Romanian leu equivalent of EUR 65,000.
Their shares are held by entities other than the state or local authorities.
Must not be involved in a registered procedure of dissolution with liquidation.
The tax rate applicable to micro-company revenue is 3%. Payment of the tax and filing
of the returns is made quarterly, by the 25th day of the month following the end of the
quarter for which the tax is calculated.
Newly established companies are required to follow the micro-company tax regime
starting with the first fiscal year. Newly incorporated Romanian legal entities that,
upon registration with the Trade Registry, are due to perform banking, insurance and
reinsurance, consultancy and management, or gambling activities are excepted from
this rule. If, during a fiscal year, a micro-company registers a turnover above EUR
65,000, that company will pay profit tax starting with the quarter in which the limit was
exceeded. Companies that, at the moment of incorporation, have a share capital of at
least EUR 25,000 may opt to apply the profit tax rules during the first fiscal year.
Micro-companies have the obligation to communicate to the tax authorities the change
in their tax system by 31 January of the year in which the tax is due.
As of 1 January 2014, if revenues derived from management and consultancy activities
exceed 20% of its total revenues, a micro-company becomes a profit taxpayer.
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Romania
Local income taxes
There are no local taxes on corporate income.
Corporate residence
A company is considered tax resident in Romania if it was set-up under Romanian law or
has its place of effective management in Romania.
A PE is generally defined as being the place through which the activity of a non-resident
company is conducted, fully or partially, directly or through a dependent agent.
Once a PE is created, Romania has the right to tax the profits of the non-resident parent
company derived from the activities performed through the PE.
The Romanian legislation explicitly states the conditions that trigger a PE:
Fixed base PE is created through a place of business with a certain degree of
permanency through which business is conducted in Romania (with some
exceptions).
Agency PE is created through agents with a dependent status that operate in Romania
on behalf of the foreign company.
The registration, reporting, and tax payment requirements for a PE are similar to those
for a Romanian company.
As of 1 July 2013, consolidation of PE revenues and expenses belonging to the same
foreign legal entity is possible. For further information, please see the Group taxation
section.
Other taxes
The standard rate of VAT is 24% and is applied to all supplies of goods and services
(including imports) that do not qualify for an exemption (with or without credit) or for
the VAT reduced rate.
The reduced VAT rate of 9% is levied on admission fees at museums, historical
monuments, architecture and archaeological monuments, zoos and botanical gardens,
fairs and exhibitions, cinema tickets, supply of school manuals, books, newspapers
and periodicals, supply of prostheses and orthopaedic products (except for dentures),
medicine for human and veterinarian use, and accommodation in hotels or in areas with
a similar function.
As of1 September 2013, the reduced VATrate of 9% was also introduced for sales of
certain type of bread and bakery products, including wheat and rye flour.
VAT exemption without credit applies to a range of activities, including the supply of
services in relation to banking, finance, and insurance. However, some financial services
are subject to 24% VAT (e.g. factoring, debt collection, managing, and depositing certain
equity papers).
There are also operations exempt with credit (i.e. deduction right for the related input
VAT), such as the following:
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Supply of goods shipped or transported outside the European Union, and related
services.
Intra-Community supply of goods.
International transport of passengers.
Goods placed into free trade zones and free warehouses.
Supply of goods to a bonded warehouse, a VAT warehouse, and related services.
Supply of goods that are placed under suspensive customs regimes.
Supply of services in connection with goods placed under suspensive customs
regimes or goods placed into free trade zones.
Supply of goods and services to diplomatic missions, international organisations, and
North Atlantic Treaty Organization (NATO) forces.
VAT on imported goods will continue to be paid at customs until 31 December 2016,
except for taxable persons registered for VAT purposes that obtain an import VAT
deferment certificate from the customs authorities. For these taxpayers, the VAT is not
paid in customs but shown in the VAT return as both input and output VAT. The import
VAT deferment is available only to companies for which the value of imports performed
in the previous year/previous 12 consecutive months has exceeded the threshold of 100
million Romanian lei (RON), to companies with AEO status, and to those authorised to
perform in-house customs clearance formalities. As of 1 January 2017, this incentive will
be applicable to all the taxable persons registered for VAT purposes, irrespective of the
aforementioned threshold.
The rules for establishing the place of VAT taxation for supply of goods and services
are determined based on the same rules as those presented in the EI 112/2006 and EU
2008/8 Directives. Services provided by non-resident entities to Romanian companies
with deemed place of supply in Romania are subject to Romanian VAT.
VAT consolidation
Companies that are legally independent but are closely related in terms of financial,
economic, and organisational purposes may choose to form a tax group as long as they
are administered by the same competent fiscal body. However, transactions between the
members of the group fall within the scope of VAT.
Reverse-charge mechanism
Under the VAT reverse-charge mechanism, VAT is not actually paid, but only shown in
the VAT return as both input and output tax, provided both beneficiary and supplier are
registered for VAT purposes.
The reverse-charge mechanism applies for services performed by non-resident entities
that are not established, nor have a fixed establishment, in Romania. The place of supply
is where the beneficiary is established or has a fixed establishment (e.g. consultancy,
marketing services, telecommunications, and electronically supplied services).
Domestic supplies of cereals and industrial plants performed between companies
registered for VAT purposes will be subject to the reverse-charge mechanism. The
measure applies until 31 December 2018.
Limited VAT deduction right
The VAT deduction right related to the acquisition of road vehicles used for the transport
of passengers andvehiclesthat meet certain characteristics, as well as the acquisition of
fuel and all related services used for the respective vehicles, is limited to 50%.
VAT compliance
The annual turnover threshold for VAT registration in Romania is the Romanian leu
equivalent of EUR 65,000.
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As a general rule, the fiscal period is the calendar month. For taxable persons registered
for VAT purposes whose previous year-end turnover did not exceed EUR 100,000, the
fiscal period is the calendar quarter.
Taxable persons must keep complete and detailed records for calculation of VAT
liabilities.
VAT returns should be submitted to the tax authorities by the 25th day of the month
following the end of the fiscal period; the VAT payment is due by the same date. The VAT
return is submitted by electronic means.
Taxable persons not registered for VAT purposes in Romania andnot required to register
are obligated to pay VAT and to submit a special VAT return on services rendered by nonresidents with a deemed place of supply in Romania. These obligations must be fulfilled
by the 25th day of the month following that when the services are supplied.
Taxable persons are required to file VAT statements related to acquisitions/supplies of
goods/services performed on Romanian territory on a monthly/quarterly basis, based
on invoices issued/received to/from taxable persons registered for VAT purposes in
Romania.
A taxable person registered for VAT purposes who does not exceed the exemption
threshold of EUR 65,000 during the course of a calendar year may request deregistration
from the VAT registered persons record between the first and tenth day of each month
following the fiscal period used (month or quarter).
The cash accounting VAT scheme (CAVS)
As of 1 January 2014, the CAVS is optional for taxpayers with a turnover lower than EUR
500,000 registered in the previous year and for the newly founded companies. The right
to deduct the input VAT for the acquisitions of goods/services from companies applying
the CAVS is deferred until the date the payment is performed.
Possible adjustments of the VATable base
Romanian legislation contains provisions in respect of possible adjustments of the

taxable base for VAT purposes based on the market value of a supply of goods/provision
of services between related parties.
Customs and international trade
Customs duties
The customs duties are those specified in the EU Common Customs Tariff and are
expressed as a percentage applied to the customs value (i.e. ad valorem taxes), as a fixed
amount applied to a specific quantity (i.e. specific taxes), or as a combination of the
above.
Agricultural products (i.e. products from chapters 1 to 24 of the EU Common Customs
Tariff) are subject to specific taxation.
In certain cases (e.g. meat), the customs duty rate is established with regard to the
cost, insurance, and freight (CIF) or the entry price of the products. In other cases,
the customs duty rate is established by adding additional duties, such as agricultural
components, to the ad valorem tax.
Customs value
The customs value is determined and declared by importers in accordance with the
provisions of the Community Customs Code and its Implementing Provisions, which
took over the rules set up by the World Trade Organization (WTO) Customs Valuation
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Agreement (i.e. the Agreement pertaining to the implementation of Article VII of the
General Agreement on Trade and Tariffs [GATT]).
Authorised Economic Operator (AEO) status
Operators that obtainAEO status benefit from simplifications regarding customs

inspection, obtaining customs authorisations, and performing customs formalities.
Moreover, through the AEO certificate, the holder is recognised by the customs
authorities as a reliable person, giving comfort as regards observance of the safety and
security standards.
In addition, as of 25 November 2013, companies certified as AEO may apply for the
benefit of not paying the VAT in customs upon importation.
Binding Tariff Information (BTI)/Binding Origin Information (BOI)
Companies can obtain rulings (BTI)from the Romanian customs authorities on the tariff
classification of imported goods that are binding for the customs authorities for a sixyear period, whenever goods identical to those described in the BTI are imported.
A similar type of ruling can also be obtained regarding the origin of goods (BOI). The
BOI is valid for a three-year period.
Trade measures
For some agricultural products, the European Uniongenerally imposes specific measures
(e.g. values or quantitative allowances) on imports from other countries. It is mandatory
to obtain an import licence before importing such products.
Moreover, import/export licences from relevant authorities are also required for
commodities regarded as potentially hazardous to human health or to the environment
(e.g. some chemical products, certain types of waste and scrap), for commodities
the end-use of which is controlled (e.g. explosives) or for dual use (i.e. both civil and
military) products.
Excise duties
Harmonised excise goods
The following products are subject to harmonised excise duties: alcohol and alcoholic
beverages, manufactured tobacco products, energy products (e.g. unleaded petrol,
diesel oil, gas, coal), and electricity.
Excise duties are due when excise goods are released for consumption (e.g. imported
into Romania, taken out of an excise duty suspension arrangement).
Ethyl alcohol and other alcoholic products are exempt from the payment of excise
duties if they are denatured and used in the nutritional, pharmaceuticals, or cosmetics
industry.
Some energy products subject to movement control are excepted from excise duty,
provided that an end-user authorisation is obtained and the payment of excise duties is
secured.
Manufactured tobacco is also exempt from excise duties when exclusively intended for
scientific and quality testing.
In some cases, traders can claim a refund of the excise duties paid (e.g. excise duty paid
for goods released for consumption in Romania, but intended for consumption in other
EU member states; excise duties paid for goods released for consumption and then
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returned to the production tax warehouse for recycling, reprocessing, or destruction;
excise duties paid for goods acquired from the European Union or imported and then
returned to the suppliers; excise duties paid for goods released for consumption in
Romania and then exported).
For cigarettes, the excise duty due is equal to the sum of the specific excise duty and
thead valorem excise duty. The specific excise duty expressed in EUR/1,000 cigarettes
is annually determined based on the weighted average retail price, the legal percentage
related to thead valoremexcise duty and the total excise duty. The total level of excise
duty on cigarettes for the period 1 April 2013 to 1 April 2014 is set at EUR 81.78/1,000
cigarettes.
Excise duty rates for ethyl alcohol were increased to EUR 1,000/hectolitre of pure
alcohol starting with 1 September 2013.
Excise duty level for fermented still beverages, other than beer and wines, was set at
EUR 10/hectolitre of product, while the excise duty level for apple and pear cider and
mead is nil.
Excise duty level for intermediary products is set at EUR 165/hectolitre of product and
the level for beer is set at EUR 0.8228/hectolitre/1 Plato degree.
The current levels of excise duties on gasoline and diesel are EUR 429.59/1,000 litres
and EUR 400.359/1,000 litres, respectively.
Companies selling fuel in gas stations have to register with the tax authorities. The same
obligation applies for companiesthat market wholesale fuel, alcoholic drinks, or tobacco
products.
Other excise goods
Other excise goods are coffee (green coffee, roasted coffee, including coffee with
substitutes, and soluble coffee, including blends with soluble coffee), gold and platinum
jewelleries, natural fur garments, yachts and other vessels for recreation with or without
engine, engines for yachts and for other vessels for recreation with a power of more than
100 horsepower, passenger cars and SUVs whose displacement is greater than or equal
to 3,000 cm3, and hunting guns and weapons for personal use and their ammunition.
Excise duties are to be paid until the 25th day inclusive of the month following the one
when the actual receipt takes place for products received from EU countries or on the
date of the import for the products received from non-EU countries.
Traders purchasing these goods are entitled to a refund of the excise duties paid if the
products are exported, supplied to another EU member state, or returned unchanged to
the supplier.
For intra-Community acquisitions of these types of products, prior authorisation is
needed.
Property taxes
Building tax
For buildings owned by companies, the building tax rate is set by the Local Council at
between 0.25% and 1.5% of the entry value of the building, adjusted by the value of
reconstruction, consolidation, modification and extension works, and the revaluation,
if applicable. From a tax perspective, a reconstruction, consolidation, modernisation,
modification, or enlargement will be considered only if it led to at least a 25% increase
in the value of the building. If a building has not been revalued in the last three years,
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the rate will be increased by 10%to 20%, while if it has not been revalued in the last five
years, the rate will be increased by 30%to 40%. The taxable value of fully depreciated
buildings is reduced by 15%.
Building tax is paid annually, in two equal instalments, by 31 March and 30 September.
For the payment of the entire annual tax by 31 March, a reduction of up to 10% is
granted by the Local Council.
Land tax
Owners of land are subject to land tax established at a fixed amount per square metre,
depending on the rank of the area where the land is located and the area or category of
land use, in accordance with the classification made by the Local Council.
Companies are not subject to tax on land where buildings are sited.
Similar to building tax, land tax is paid annually, in two equal instalments, by 31 March
and 30 September. A 10% reduction is granted for full advance payment of this tax by 31
March.
Construction tax
As of 1 January 2014, a new tax has been introduced for constructions included in the
first group of the catalogue for classification and normal useful life of fixed assets, which
are not subject to building tax. The tax on constructions is calculated by applying a 1.5%
rate to the value of the constructions recorded in the taxpayers books as at 31 December
of the previous year.
Transfer taxes
There are no transfer taxes for companies for the transfer of property. The income
derived from such a transfer will be included into the taxable profits of the company and
subject to the flat tax rate.
Stamp duty
For judicial claims, issue of licences and certificates, and documentary transactionsthat
require authentication, stamp duty (in the form of notary fee) has to be paid.
Environmental taxes
For certain activities (e.g. selling ferrous and non-ferrous waste, activities involving the
use of dangerous substances, activities that generate polluting air emissions, placement
of packaging materials/tyres on the market), companies have to pay contributions and
taxes to the Romanian Environmental Fund.
All producers/importers/exporters of electric and electronic equipment (EEE) and
of batteries and accumulators are required to register with the National Agency
for Environmental Protection as EEE producers and as producers of batteries and
accumulators, respectively.
Importers and producers of packed goods are liable to contribute to the Environmental
Fund. The contribution amounts toRON 2 per kilogram of packaging introduced on
the market and is due for the difference between the quantities of packaging wastethat
have to be recovered/recycled according to the law and the quantity actually recovered/
recycled.
A tax of RON 0.3/kg is levied on industrial oils and lubricants placed on the market.
Companies conducting activities that result in the discharge of air-pollutant emissions
from fixed sources (e.g. nitrogen oxides, sulphur oxides, persistent organic pollutants,
heavy metal emissions, such as lead, cadmium, mercury) have to pay contributions
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to the Environmental Fundthat range between RON 0.02/kg and RON 20/kg. For air
pollutants, the computation is based on the CORINAIR/AP-42 methodology, and the tax
is applied based on the nature of the air pollutants.
The environmental tax contribution for tyres placed on the market amounts toRON 2/
kg.
The contribution for plastic bags placed on the national market amounts toRON 0.1/
piece, which is due for bags and shopping bagsthat have integrated or applied handle
andthat are manufactured from non-renewable resources.
In order to improve the regulatory system with respect to the Environmental Fund
contributions, the modification and completion of the current regulations is likely to
occur in the near future.
Employers must pay social security contributions, calculated on the gross salary costs,
as follows: 20.8%, 25.8%, or 30.8%, depending on labour conditions. The monthly
contribution is capped at five average gross salaries multiplied by the number of insured
individuals employed under employment contract. For 2014, the national average gross
salary is set at RON 2,298.
Other mandatory contributions on labour paid by employers for employees, calculated
on gross salary costs, are:
Contribution for medical leaves: 0.85%; the monthly contribution is capped at 12
gross minimum wages multiplied by the number of insured individuals. The gross
minimum wage is RON 850 and will increase to RON 900 starting 1 July 2014.
Health insurance fund: 5.2%.
Unemployment fund: 0.5%.
Guarantee fund: 0.25%.
Labour accidents insurance fund: 0.15% to 0.85%.
Branch income
Branch
A foreign company can set up a branch in Romania, as long as the branch only operates
in the same field of activity as the parent company. A branch is considered to have the
same legal personality as the parent company and is not a separate legal entity (no own
share capital, no separate name, etc.).
Profits derived by the branch are taxed at the standard profit tax rate of 16%.
Representative offices are often established as a first step to operating in Romania. A

representative office can undertake only auxiliary or preparatory activities, cannot trade
in its own name, and cannot engage in any commercial activities. A representative office
can perform only a limited range of activities without being considered a PE for profit
tax purposes.
Representative offices are subject to a flat annual tax of EUR 4,000 (payable in local
currency, i.e. Romanian leu). The tax is paid in two equal instalments, by 25 June and 25
December. If a representative office is set up or closed down during a year, the tax due
for that year is pro-rated for the months that the representative office was operational in
that fiscal year.
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The taxable profit of a company is calculated as the difference between the revenue
derived from any source and the expenses incurred in obtaining the taxable revenue
throughout the tax year, adjusted for fiscal purposes by deducting non-taxable revenue
and adding non-deductible expenses. Other elements similar to revenue and expenses
are also to be taken into account when calculating the taxable profit.
For taxpayers that apply International Financial Reporting Standards (IFRS) (i.e.
financial institutions and listed companies), there are specific rules in relation to the
fiscal value assessment, profit tax computation, adjustments for step-down in value,
amortisation, and fiscal treatment of deferred profit tax.
Inventory valuation
The methods permitted for inventory valuation under Romanian law are standard cost,
detailed sale price, average (weighted) cost, first in first out (FIFO), and last in first out
(LIFO). The accounting method is also recognised for tax purposes.
Assets are generally valued at their acquisition cost, production cost, or market value.
Fixed assets may be re-valued at certain points in time for various purposes.
Capital gains
Capital gains earned by a Romanian resident company are included in their ordinary
profits and are taxed at 16%. Capital gains obtained by non-residents from real estate
property located in Romania or from the sale of shares held in a Romanian company are
also taxable in Romania. However, the income may be subject to treaty protection.
As of 1 January 2014, participation exemption applies for capital gains derived by a
Romanian legal entity from participations of at least 10%, held for a minimum period of
one year, in a subsidiary established in a state with which Romania has aDTT.
Dividend income
Dividends distributed by a company resident in another EU member state to a Romanian

company are tax exempt if the Romanian company has held, prior to the time of
distribution, a minimum of 10% of the shares in the respective non-resident company for
an uninterrupted period of at least one year.
As of 1 January 2014, participation exemption applies for dividends derived by a
Romanian legal entity from participations of at least 10%, held for a minimum period of
one year, in a subsidiary established in a state with which Romania has a DTT.
Dividends received by a Romanian company from another Romanian company are not
subject to profit tax, but are subject to a final withholding tax (WHT) of 16%. Those
payments are non-taxable if the shareholder held, at the time of distribution, a minimum
of 10% of the shares in the other company for an uninterrupted period of at least two
years.
Dividends received by a Romanian company from a non-qualifying foreign subsidiary
are taxed in Romania at the normal profit tax rate of 16%. Credit is available for tax paid
abroad.
Interest and royalty payments made by Romanian companies to other Romanian

companies are taxable income in the hands of the beneficiary.
Romanian-sourced interest and royalty payments of an affiliated company, resident in an
EU member state, are exempt from WHT, provided that certain conditions are met, e.g.:
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25% minimum direct holding of the share capital (i.e. one company has a direct
minimum holding of 25% in the share capital of the other company or a third
company has a direct minimum holding of 25% in the share capital of both companies
involved in the payment of the interest and royalties).
The holding period must be maintained for an uninterrupted period of at least two
years prior to the payment of the interest and royalties.
The company receiving the interest or royalty payments must be the beneficial owner
of these payments.
Fiduciary contracts
If the settlor of a fiduciary contract is also the beneficiary, then:

the transfer of the patrimony from the settlor to the fiduciary is not considered a
taxable transfer, and
the fiduciary will keep separate bookkeeping entry for the fiduciary patrimony
and will communicate to the settlor, on a quarterly basis, the income and expenses
resulting from the administration of the patrimony.
If the beneficiary is the fiduciary or a third party, the expenses recorded from the
transfer of the patrimony from the settlor to the fiduciary is considered non-deductible.
The other most relevant types of non-taxable revenue stipulated by the Romanian Fiscal
Code are:
Favourable fluctuations in the price of shares and long-term bonds registered
by the company in which the shares and long-term bonds are held, as a result of
capitalisation of reserves, benefits, or share premiums.
Revenue from reversal or cancellation of provisions/expenses that were previously
non-deductible, recovery of expenses that were previously non-deductible, and
revenue from reversal or cancellation of interest and late payment penalties that were
previously non-deductible.
Revenue from the annulment of a reserve registered as a result of a participation in
nature to the capital of other legal entities.
Revenue from deferred income tax.
Revenue resulting from the change in the fair value of real estate investments/
biological assets owned by the taxpayers applying IFRS.
Non-taxable revenue expressly provided for under agreements and memoranda
enforced by regulatory documents.
Foreign income
Resident companies are taxed on their worldwide income unless a DTT provides
otherwise. However, in case of foreign subsidiaries of Romanian companies, income is
not taxed in Romania until remitted back. Otherwise, there is no specific tax deferral
regime in place.
Deductions
Expenses fall into three categories: deductible expenses, limited deductibility expenses,
and non-deductible expenses.
Deductible expenses
As a general rule, expenses are deductible only if incurred for the purpose of generating
taxable income.
Some of the deductible expenses specifically mentioned by the Fiscal Code include:
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Marketing and advertising expenses.
Research and development (R&D) expenses that are not recognised as intangible
assets for accounting purposes.
Expenses incurred for environmental protection and resource conservation.
Expenses incurred for management improvement; updating information technology
(IT) systems;introducing maintaining, and developing quality management systems;
and obtaining quality compliance confirmation.
Losses incurred when writing off client receivables in any of the following cases:
The bankruptcy procedure of the debtor was closed due to a court ruling.
The debtor is deceased and the receivable cannot be recovered from the heirs.
The debtor is dissolved or liquidated.
The debtor has major financial difficulties affecting its entire patrimony.
Expenses related to losses from the valuation of shares and long-term bonds.
Travel and accommodation expenses related to business; this also includes
transportation of personnel to and from the workplace.
Daily allowances for expenses incurred by employees in connection to travels in
Romania and abroad.
Expenses incurred from professional training and development of employees.
Expenses related to benefits granted to employees as equity instruments settled with
cash, at the moment of the effective granting, if the benefits are subject to personal
income tax (PIT).
Expenses incurred in connection to work safety, prevention of work accidents and
occupational diseases, the related insurance contributions, and professional risk
insurance premiums.
Expenses incurred in connection to the acquisition of packaging materials, during the
useful life set by the taxpayer.
Fines, interest, penalties, and other increased payments due under commercial
contracts.
Note that credit institutions apply IFRS rules, and certain deductibility rules are
provided for this category of taxpayers.
Limited deductibility expenses
The deductibility of the following expenses is limited:

Interest expenses and foreign exchange losses under thin capitalisation rules (see
theGroup taxationsection for more information).
Provision and reserve expenses (see details below).
Depreciation and reduction in value of fixed assets under fiscal depreciation rules (see
details below).
Perishable goods capped by the relevant specialist bodies.
Protocol expenses are deductible at up to 2% of the difference between the total
taxable revenue and the total related expenses, except for protocol and profit tax
expenses.
Social expenses are deductible at up to 2% of salary expenses and include, among
other items, maternity allowances, expenses for nursery tickets, funeral benefits, and
allowances for serious or incurable diseases and prostheses, as well as expenses for
the proper operation of certain activities or units under taxpayers administration (i.e.
kindergartens, nurseries, health services supplied for occupational diseases and work
accidents prior to admission to health establishments, canteens, sports clubs, clubs,
etc.). Expenses incurred for benefits granted under a collective labour agreement are
also deductible within the same limits.
Health insurance premiums are deductible for employers up to the limit of EUR 250
per employee per year; private pension insurance premiums are deductible up to the
limit of EUR 400 per employee per year.
Taxes and fees paid to non-government organisations or professional associations
related to the taxpayers activity are deductible up to the limit of EUR 4,000 per year.
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All direct expenses attributable to vehicles with up to nine seats that are not used
exclusively for business purposes are 50% deductible for profit tax purposes, under
certain conditions provided by law. These expenses are fully deductible for vehicles
used for the following activities:
Emergency, safety and security, courier services,cars used by sales and
acquisitions agents.
Paid transportation services and taxi activities.
Rental.
Driving schools.
Vehicles used as commodities.
For vehicles with up to nine seats, tax depreciation is limited to a maximum of RON
1,500 per month for each vehicle starting from 1 February 2013.
Expenses deemed non-deductible include, among other items, the following:

Domestic profit tax and profit tax paid in foreign countries.
Expenses related to non-resident income tax borne by Romanian taxpayers on behalf
of non-residents.
Interest, fines, and penalties due to Romanian or foreign authorities.
Expenses incurred for management, consultancy, assistance, or other supply of
services if no written contracts or any other lawful agreements are entered into and
the beneficiary cannot justify the supply of such services for the activities performed
and their necessity.
Sponsorship and patronage expenses and expenses for private scholarships.
Taxpayers are, however, granted a fiscal credit of up to 0.3% of turnover and 20% of
the profit tax due, whichever is lower. As of 1 January 2014, taxpayersthat do not
benefit from fiscal credit in the year when they grant sponsorship according to the
law may carry forward the fiscal credit for the next seven consecutive years.
Other salary and/or assimilated expenses (if not taxed at the level of the individual),
except for those specifically exempted from individual income taxation.
Expenses resulted from benefits granted to employees as equity instruments settled
with shares, unless subjected to PIT.
Expenses incurred from insurance premiums unrelated to company assets or
business, save for those regarding goods that are bank collateral on loans used in the
business or those used under rental or leasing contracts.
Expenses recorded without justifying documents.
Expenses in favour of shareholders, other than those related to goods or services
provided by the shareholders at market value.
Expenses representing fixed assets impairments when, as a result of a revaluation, a
step-down in value is recorded.
Expenses registered in the accounting records based on documents issued by an
inactive taxpayer whose fiscal registration certificate was suspended.
Expenses relating to missing or damaged non-imputable inventories or tangible
assets, for which no insurance contracts have been concluded.
Losses incurred from writing off doubtful or unsettled liabilities, for the part which is
not covered by a bad debt provision.
Expenses reflected in accounting records, irrespective of their nature, that later prove
to be related to acts of corruption as defined under the law.
Note that credit institutions apply IFRS rules, and certain non-deductibility rules are
provided for this category of taxpayers.
Depreciation
Romanian law makes an explicit distinction between fiscal and accounting depreciation.
Fiscal depreciation is treated as an expense deductible from the tax base, while
accounting depreciation is treated as a non-deductible expense. Companies should
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maintain a separate record to reflect the separate computation of the fiscal and
accounting depreciation. Any accounting revaluations of fixed assets are not taken into
account in computing the tax depreciation.
Assets are generally depreciated using the straight-line method. However, accelerated or
degressive depreciation methods may be used to determine fiscal depreciation, while the
accounting depreciation method may be different.
The useful lives to be used for tax purposes are the ones stated in the Official Fixed
Assets Catalogue, published under government decision. Ranges are provided for classes
of fixed assets, from which the taxpayers can choose the useful life (e.g. office and
housing buildings: 40 to 60 years, commercial buildings: 32 to 48 years, commercial
furnishings: 9 to 15 years, automobiles: 4 to 6 years).
For vehicles with up to nine seats, the fiscal depreciation is limited to a maximum of
RON 1,500 per month for each vehicle. Certain categories of vehicles are exempt from
this monthly deduction limitation (e.g. used exclusively for emergency, security, or
delivery service; used for paid passenger transport; or used for paid supply of services).
Land cannot be depreciated.
Under the Fiscal Code, machinery and technical equipment, computers and their
peripherals, as well as patents, may be depreciated by using the accelerated method,
under which a maximum of 50% of the assets fiscal value may be deducted during
the first year of usage, while the rest of the assets value can be depreciated using the
straight-line method over the remaining useful life.
Goodwill
As a rule, goodwill is deemed non-depreciable from a Romanian fiscal perspective.
Start-up expenses
According to accounting rules, start-up expenses may be capitalised and depreciated

over a maximumperiod of five years. However, according to the fiscal rules, start-up
expenses should not be depreciated for tax purposes.
Provisions and reserves
As a general rule, provisions and reserves are non-deductible for profit tax purposes.
However, there are certain provisions and reserves that are deductible, such as:
Setting up or increasing the legal reserve fund up to 5% of the adjusted annual
accounting gross profit before tax (before profit tax) and until it reaches 20% of the
share capital.
Provisions related to guarantees for proper execution granted to the clients.
Provisions for doubtful debts recorded after 1 January 2006 are deductible at up to
30% if the related receivables meet the following conditions simultaneously:
Booked after 1 January 2004.
Not collected for a period exceeding 270 days from the due date.
Not guaranteed by another person.
Due by a person not affiliated with the taxpayer.
Included in the taxable income of the taxpayer.
Bad debt provisions are fully deductible if all the following conditions are met:
Receivables are booked after 1 January 2007.
The debtor is a company declared bankrupt by a court ruling.
Receivables are not guaranteed by another person.
The debtor is not a related party.
Receivables were included in the taxable income of the taxpayer.
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Specific provisions established by credit institutions, non-banking financial
institutions, and other similar entities.
Technical reserves set up by insurance and reinsurance companies, in accordance
with their regulatory legal framework, except for the equalisation reserve.
Risk provisions for transactions carried out on financial markets, in accordance with
the rules issued by the Romanian National Securities Commission.
The reduction or cancellation of any provision or reserve deducted from the taxable
profit, due to changing the destination of the provision or reserve, distribution towards
shareholders in any form, liquidation, spin-off, merger, or any other reason, is included
in the taxable revenue and taxed accordingly.
Note that special rules are applicable to credit institutions that are required to apply
IFRS rules.
Fiscal losses
Companies are allowed to carry forward fiscal losses declared in the annual profit tax
returns for a period of up to five years (for losses incurred prior to 2009) or seven years
(for losses incurred after 2009), based on the FIFO method. No related adjustment for
inflation is allowed.
Any loss incurred by a PE of a Romanian company located in a non-EU/European Free
Trade Association (EFTA) member state or in a country that has a DTT in place with
Romania is only deductible for tax purposes from the revenue derived by that PE, and
losses can be carried forward only for a period of five years.
For foreign legal persons, carryforward of losses applies only to revenue and expenses
attributable to their PE in Romania.
Losses incurred by a company can be transferred within a merger/spin-off operation and
can be recovered by the successors, in proportion to the assets and liabilities transferred.
The successors of these restructuring operations are able to use such losses during the
remaining period.
Carryback of losses is not available in Romania.
Transactions with Romanian-affiliated companies and with non-resident related parties

fall within the scope of the investigations regarding compliance with transfer pricing
legislation (see Transfer pricing in the Group taxation section).
Group taxation
There is no tax consolidation or group taxation in Romania, except for PE consolidation.
Members of a group must file separate returns and are taxed separately. Losses incurred
by group members cannot be offset against profits made by other members of the group.
Consolidation of PEs
As of 1 July 2013, foreign legal entitiesthat perform economic activities in Romania

through severalPEs must register one of them as theirPE designated to fulfil the fiscal
obligations for all thePEs owned.
The revenues and expenses of all thePEs belonging to the same foreign legal entity will
be cumulated at the level of the designated PE.
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Transfer pricing
Transfer pricing requirements are applicable to transactions between Romanian related

parties as well as foreign related parties.
Transactions between related parties should observe the arms-length principle. If
transfer prices are not set at arms length, the Romanian tax authorities have the right to
adjust the taxpayers revenue or expenses so as to reflect the market value.
Traditional transfer pricing methods (i.e. comparable uncontrolled prices, cost plus,
and resale price methods), as well as any other methods that are in line with the
Organisation for Economic Cooperation and Development (OECD) Transfer Pricing
Guidelines (i.e. transactional net margin and profit split methods), may be used for
setting transfer prices.
Taxpayers engaged in related party transactions have to prepare and make their transfer
pricing documentation file available upon the written request of the Romanian tax
authorities.
Transfer pricing audit activity has significantly increased during the past few years, and
requests for presenting the transfer pricing documentation file have started to become
common practice. We are aware of recent cases where the Romanian tax authorities
adjusted the taxable result of local taxpayers in accordance with the applicable
regulations.
The content of the transfer pricing documentation file has been approved by order of the
president of the National Agency for Tax Administration. The Order is supplemented by
the Transfer Pricing Guidelines issued by the OECD and the Code of Conduct on transfer
pricing documentation for associated enterprises in the European Union Transfer Pricing
Document (EUTPD).
The deadline for presenting the transfer pricing documentation file will not exceed three
calendar months, with the possibility of a single extension equal to the period initially
established.
Failure to present the transfer pricing documentation file or presenting an incomplete
file following two consecutive requests may trigger estimation of transfer prices by the
tax authorities on the basis of generally available information.
Advance pricing agreement (APA)
Taxpayers engaged in transactions with related parties have the possibility to apply for
an APA. These taxpayers can also schedule a pre-filing meeting to discuss the feasibility
of the APA.
The request for an APA is filed together with the relevant documentation and payment
evidence of the fee (ranging between EUR 10,000 and EUR 20,000). The required
documentation is based on the EUTPD and suggests up-front the content of the APA.
The term provided by the Fiscal Procedural Code for issuance of an APA is 12 months for
unilateral APAs and 18 months for bilateral and multilateral APAs. The APA is issued for
a period of up to five years. In exceptional cases, such as long-term agreements, it may
be issued for a longer period.
APAs are opposable and binding on the tax authorities as long as there are no material
changes in the critical assumptions. In this view, the beneficiaries are obligated to submit
an annual report on compliance with the terms and conditions of the agreement.
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If taxpayers do not agree with the content of the APA, they can notify the National
Agency for Tax Administration within 15 days. In this case, the agreement does not
produce any legal effects.
Thin capitalisation
If the companys equity is negative or the debt-to-equity ratio is higher than 3:1,
expenses incurred from interest charges and net losses related to foreign exchange
differences on long-term loans are fully non-deductible. However, these expenses may
be carried forward to the following fiscal years and become fully tax deductible in the
year the debt-to-equity ratio becomes lower than or equal to 3:1.
The deductibility of interest expenses and net foreign exchange losses related to
long-term loans (with a maturity period of over one year) is further subject to the
debt-to-equity ratio test. Debt included in the calculation of the debt-to-equity ratio is
represented by all such (non-financial institution) loans with a maturity period of over
one year.
The equity includes share capital, share/merger premiums, reserves, retained earnings,
current year earnings, and other equity elements. Both debt and equity are calculated
as the average of values existing at the beginning and at the end of the period for which
profit tax is calculated.

Foreign tax credits
Tax credits for taxes paid to a foreign state may be obtained in Romania only if the
DTT concluded between Romania and the foreign state applies and only if proper
documentation confirming the tax was paid is available.
As of 1 January 2014, a RomanianPE of a legal entity resident in the European
Unionor the European Economic Areathat obtains revenues from another EU or
EEA member state, taxed both in Romania and in that member state, may claim a tax
credit in Romania under the applicable tax law provisions.
Companies can benefit from an additional deduction of 50% of the eligible expenses for
their R&D activities. Moreover, accelerated depreciation may be applied for devices and
equipment used in the R&D activity.
In order to benefit from this supplementary deduction, the eligible R&D activities must
be applicative research and/or technological development relevant to the taxpayers
activity and must be performed in Romania or in the EU/EEA member states.
Local tax exemptions for business located in industrial parks
No property tax is due for buildings and constructions located in an industrial park. Also,
land within industrial parks is exempt from land tax.
The incentives granted for the set up and development of industrial parks include:
Local tax exemptions/reductions for immovable assets and land related to the
industrial park.
Other incentives that may be granted by the local tax authorities.
Development programmes for infrastructure, investments, and equipment
endowments granted by local and central public administration, companies, and
foreign financial assistance.
Concessions and structural funds for development.
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The companies operating within the industrial park benefit from:
Various services offered by the park administrator free of charge or with reduced fees.
Advantageous conditions with regard to location, use of the infrastructure, and
communications of the park, with payment in instalments.
As of 1 January 2014, local councils may grant land tax exemptions for owners of land
situated in degraded or polluted areas, but not included in the area of improvement,
at taxpayers request and with the approval of the Ministry of Agriculture and Rural
Development and the Ministry of Environment.
Land tax exemptions apply from the first day of the month following approval being
obtained.
Employment incentives for special categories
For employment of recent graduates, employers can apply for a monthly grant of 1 to 1.5
(depending on the level of educational background) multiplied by the reference social
indicator (currently set at RON 500) for each new graduate of a recognised institution
for a period of 12 months. Employers benefiting from this incentive are obligated to keep
this employment relationship for a time period of at least three years.
Moreover, employers may also be exempt for these 12 months from paying the
unemployment contribution due for these graduates. In addition, grants amounting to
the social security contributions for two years for recent graduates are available if they
are still employed by the company for two additional years after the first three years
pass.
The same incentives apply for the employment of recent graduates with disabilities,
except that the period for which the exemption from contributions to the unemployment
fund and the monthly grants apply is extended to 18 months.
Employers can also apply for exemption from unemployment fund contributions and for
a monthly grant equal to the reference social indicator for each unemployed person with
an age exceeding 45 years, or for each such person who is the sole family supporter. This
monthly grant is available for a period of 12 months. Employers benefiting from this
incentive have the obligation to keep this employment relationship for at least two years.
Employers running professional training programmes for their employees may apply for
a refund of 50% of their expenses for up to 20% of their workforce, subject to certain
conditions and limitations.
Other incentives granted to taxpayers
For justified claims of the taxpayers, the tax authorities may grant incentives for the
payment of taxes, such as the rescheduling of tax payments due.
Rescheduling of tax payment obligations may be granted by the tax authorities to
individuals and legal entities upon request. The time-frame for the rescheduling is a
maximum of five years for taxpayers with tax liabilities below or equal to RON 300
million and up to seven years for taxpayers with liabilities higher than RON 300 million.
The time-frame is set after taking into consideration the taxpayers financial situation
and the total tax burden.
In order to benefit from the rescheduling of tax payment obligations, taxpayers must
meet certain conditions and also provide a guaranteethat covers the rescheduled
liabilities, interest, and also a supplementary percentage of the rescheduled liabilities,
depending on the duration of the rescheduling time-frame.
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Withholding taxes
Domestic dividend tax
Dividends paid by a Romanian company to another Romanian company are subject

to 16% tax. The payments are non-taxable if the shareholder held, at the time of
distribution, a minimum of 10% of the Romanian companys shares for an uninterrupted
period of at least one year.
WHT for non-residents
As of 1 January 2014, the provisions of the Parent-Subsidiary Directive (2011/96) and

of the Interest and Royalties Directive (2003/49) as transposed into the domestic fiscal
legislation apply only to EU member states, with the member states of theEuropean Free
Trade Association(Iceland, Norway, and Lichtenstein) being excluded.
All income obtained by non-residents from Romanian taxpayers for the provision of
services rendered in Romania or abroad will be subject to 16% WHT rate in Romania.
Non-resident companies not operating through a PE are subject to a 16% WHT on
revenue sourced in Romania, such as interest, royalties, revenue from services,
dividends, commissions, and revenue derived from liquidation of a Romanian legal
entity.
Certain specific provisions and exceptions apply to non-resident WHT, as follows:
A 50% WHT applies to payments made by Romanian residents (e.g. dividends,
interest, royalties, commissions, services) to non-residents in countries that do not
have an exchange of information agreement concluded with Romania, regardless
of whether the beneficiary of the income is resident of a state with which Romania
has concluded a DTT or not. However, this WHT is applicable only to the extent such
payments result from artificial transactions.
As Romania is an EU member state, the provisions of the Parent-Subsidiary
Directive apply. Consequently, dividends paid by Romanian companies to companies
resident in one of the EU/EEA member states are exempt from WHT if the dividend
beneficiary has held, at the time of distribution, a minimum of 10% of the shares of
the Romanian company for an uninterrupted period of at least one year.
Dividend and interest income obtained from Romania by EEA registered pension
funds is exempt from WHT.
Romania has implemented the Interest and Royalties Directive.Payments of interest
and royalties made by a Romanian company to another company resident in an EU
member state are tax exempt from WHT if the non-resident company held, for an
uninterrupted period of at least two years, at least 25% of the share capital of the
Romanian company prior to the time of payment.
In order to apply EU legislation, non-resident recipients of the income are required to
present a certificate of tax residence and a declaration attesting to compliance with the
necessary requirements provided by the European Directives.
The following categories of income derived by non-residents from Romania are exempt
from WHT:
Interest income and income derived from the sale of debt instruments issued by the
Romanian authorities (e.g. government bonds).
Revenue from international transportation and accessory services.
Prizes obtained by individual non-residents from artistic, cultural, or sport festivals/
competitions paid from public funds.
Income obtained from a partnership constituted in Romania by a non-resident
company (the related profits are subject to corporate profit tax).
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WHT rates for companies, and rates under some DTTs
Recipient
Non-treaty
EU- Parent-Subsidiary Directive
EU- Interest and Royalties Directive
Treaty:
Albania
Algeria
Armenia
Australia
Austria
Azerbaijan
Bangladesh
Belarus
Belgium
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Ecuador
Egypt
Estonia
Ethiopia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India (14)
Indonesia
Iran
Ireland
Israel
Italy
Japan
Jordan
Kazakhstan
Korea, Democratic Peoples Republic
Korea, Republic of
Kuwait
Latvia
Lebanon
Lithuania
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Dividends
16
0 (54)
N/A
10/15 (1)
15
5/10 (1)
5/15 (2)
0/5 (1)
5/10 (1)
10/15 (4)
10
5/15 (1)
5
10/15 (1)
5/15 (4)
10
5
10
10
10/15 (1)
15
10
10
10
5
10
8
5/15 (4)
20
5/15 (12)
5/10 (13)
10
12.5/15 (15)
10
3
15
10
10
15
10
10
7/10 (13)
0/1 (24)
10
5
10
WHT (%)
Interest
Royalties Commissions
16
16
16
N/A
N/A
N/A
0 (54)
0 (54)
N/A
10
15
10
10
0/3 (3)
8
10
10
10
7.5
15
0/10 (6)
10
10
10
7
10
10
15
10
15
5
10
10
0/3 (10)
10
15
3
10
12.5
8
0/3 (17)
5/10 (19)
0/10 (20)
10
12.5
10
10
0/10 (22)
0/1 (25)
10
5
10
15
15
10
10
3
10
10
15
5
10
15
5/10 (7)
7
10
5
10
10
10
15
10
15
2.5/5 (9)
10
5
3
5/7 (11)
10
5
10
12.5/15 (16)
10
0/3 (18)
10
10
10/15 (21)
15
10
10
7/10 (23)
20
10
5
10
15
N/A
15
N/A
N/A
N/A
N/A
N/A
5
10
N/A
N/A
N/A
N/A
5
N/A
4
10
15 (8)
2
N/A
N/A
N/A
5
N/A
5
5
N/A
N/A
10
N/A
N/A
N/A
5
N/A
15
10
N/A
10
N/A
2
N/A
2
Romania
Recipient
Luxembourg
Macedonia
Malaysia
Malta
Mexico
Moldova
Morocco
Namibia
Netherlands
Nigeria
Norway
Pakistan
Philippines
Poland
Portugal
Qatar
Russia
San Marino
Saudi Arabia
Serbia (38)
Singapore
Slovakia
Slovenia
South Africa
Spain
Sri Lanka
Sudan
Sweden
Switzerland
Syria
Tajikistan
Thailand
Tunisia
Turkey
Turkmenistan
Ukraine
United Kingdom
United States
Uzbekistan
Vietnam
Zambia
WHT (%)
Dividends
Interest
Royalties Commissions
5/15 (13)
0/10 (26)
10
5
5
10
10
N/A
10
0/15 (27)
12
N/A
5
5
5
10
10
15
15
N/A
10
10
10/15 (28)
N/A
10
10
10
10
15
15
15
N/A
0/5/15 (29)
0/3 (30)
0/3 (31)
N/A
12.5
12.5
12.5
N/A
10
10
10
4
10
10
12.5
10
10/15 (32)
10/15 (33) 10/15/25 (34)
N/A
5/15 (1)
10
10
0/10 (35)
10/15 (36)
0/10 (20)
10
N/A
3
3
5
3
15
15
10
N/A
0/5/10 (37)
3
3
N/A
5
5
10
N/A
10
10
10
10
5
5
5
N/A
10
10
10/15 (39)
N/A
5
5
5
N/A
15
15
15
N/A
10/15 (40)
10
10
5
15
15
15
N/A
5/10 (1)
5
5
N/A
10
10
10
10
0/15 (41)
0/5 (42)
0/10 (43)
N/A
5/15 (40)
10
12
N/A
5/10 (40)
10
10
N/A
15/20 (44) 10/20/25 (45)
15
10
12
10
12
4
15
0/10 (46)
10
N/A
10
10
15
N/A
10/15 (13)
0/10 (47)
10/15 (48)
N/A
0/3 (49)
0/3 (50)
0/3 (51)
3
10/15 (52)
10
10/15 (53)
12.5
10
10
10/15 (21)
N/A
10
10
10
N/A
15
10
15
N/A
10
10
15
N/A
Notes
1.
2.
3.
The lower rate applies to a participation of at least 25%.

The lower rate applies to a participation of at least 10% where the dividends are paid out of profits
that have been subject to a normal rate of company tax.
The lower interest rate applies if one of the following requirements is fulfilled:
The payer or the recipient of the interest is the government of a contracting state itself, a local
authority or an administrative-territorial unit thereof, or the Central Bank of a contracting state.
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4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
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The interest is paid in respect of a loan granted, approved, guaranteed, of insured by the
government of a contracting state, the Central Bank of a contracting state, or any financial
institution owned or controlled by the government of a contracting state.
The interest is paid in respect of a loan granted by a bank or any other financial institution
(including an insurance company).
The interest is paid on a loan made for a period of more than two years.
The interest is paid in connection with the sale on credit of any industrial, commercial, or scientific
equipment.
The treaty concluded with the former Socialist Republic of Yugoslavia (Socialist republic) signed in
1986.
The zero rate applies to interest paid by public bodies.
The lower rate applies to copyright royalties (excluding films), computer software, patents, and knowhow.
The 15% withheld at source in Romania on the commission paid to an Egyptian resident shall be
given as a credit to be deducted from the income tax charged in Egypt.
The lower rate applies to royalties for computer software and industrial, commercial, or scientific
equipment.
The lower rate applies if and as long as Germany, under its domestic law, does not levy WHT on
interest paid to a resident of Romania.
The higher rate applies to industrial royalties.
New treaty was adopted and is applying from 1 January 2014 in Romania and from 1 April 2014 in
India.
The lower rate applies if the recipient is a company that directly owns at least 25% of the capital of
The lower rate applies for royalties that consist of payments of any kind received as a consideration
for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial, or scientific experience, or for the use
of, or the right to use, industrial, commercial, or scientific equipment, cinematograph films, or tapes
for television or broadcasting. The higher rate applies if the royalties consist of payments of any kind
received as a consideration for the use of, or the right to use, any copyright of literary, artistic, or
scientific work.
The lower rate applies if such recipient is the beneficial owner and if such interest is paid:
on any loan of whatever kind granted by a bank or other financial institution (including an
insurance company)
on any loan of whatever kind made for a period of more than two years, or
on any debt-claim of whatever kind guaranteed, insured, or directly or indirectly financed by or on
behalf of the government of either contracting state.
The lower interest rate applies if the royalties are beneficially owned by a resident of a contracting
state and refer to the right to use any copyright of literary, artistic, or scientific work, including motion
pictures or films, recordings on tape or other media used for radio or television broadcasting, or other
means of reproduction or transmission.
The lower rate applies to interest paid in connection with the sale on credit of any industrial or
scientific equipment, of any merchandise by one enterprise to another enterprise, or on a loan
granted by banks.
The lower rate applies to interest paid by public bodies.
The lower rate applies for cultural royalties; the higher rate applies for industrial royalties.
The lower rate applies for interest arising in a contracting state and derived by the government of the
other contracting state, including local authorities thereof and administrative-territorial units thereof,
the Central Bank of that other contracting state or any financial institution performing functions
of a governmental nature, or by any resident of the other Contracting State with respect to debt
claims guaranteed or indirectly financed by the government of that other contracting state, including
local authorities thereof and administrative-territorial units thereof, the Central Bank of that other
contracting state or any financial institution performing functions of a governmental nature.
The lower rate applies for royalties related to the right to use any patent, trademark, design or model
plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial, or scientific experience.
The lower rate applies if the beneficial owner of the dividends is the government of Kuwait or a
company in whose capital the government directly or indirectly owns at least 51% and the remaining
capital of such company is owned by residents of Kuwait.
The lower rate applies if the beneficial owner of the interest is a company, including a bank or a
financial institution, that is a resident of Kuwait and in whose capital the government directly or
indirectly owns at least 25% and the remaining capital of such company is owned by residents of
Kuwait.
Interest shall not be taxed in the state where it arises if the indebtedness on which such interest is
paid, guaranteed, insured, or financed by the other state or by a financial institution that is a resident
of that other state.
The lower rate applies for interest to which a resident of Romania is beneficially entitled if the loan or
other indebtedness in respect of which the interest is paid is an approved loan or a long-term loan.
The lower rate applies for royalties for the use of, or the right to use, any copyright, trademark, design
or model, plan, secret formula or process, or for the use of, or the right to use, information concerning
industrial, commercial, or scientific experience.
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29. 0% of the gross amount of the dividends if the beneficial owner is a company (other than a
of the gross amount of the dividends if the beneficial owner is a company (other than a partnership)
that directly holds at least 10% of the capital of the company paying the dividends; 15% of the gross
amount of the dividends in all other cases.
30. The lower rate applies if, and as long as, the Netherlands does not levy a WHT on interest/royalties
paid to a resident of Romania. Interest paid to a bank or financial institution (including an insurance
company) and interest paid on a loan made for a period of more than two years are exempt.
31. The lower rate applies if, and as long as, the Netherlands does not levy a WHT on interest/royalties
paid to a resident of Romania.
32. The lower rate applies if the recipient is a company (excluding partnership) and during the part of the
paying corporations taxable year that precedes the date of payment of the dividends and during the
whole of its prior taxable year (if any) at least 25% of the outstanding shares of the voting stock of the
paying corporation was owned by the recipient corporation.
33. The lower rate applies if such interest is paid:
in connection with the sale on credit of any industrial, commercial, or scientific machine or
equipment, or similar installation
on any loan of whatever kind granted by a bank, or
in respect of public issues of bonds, debentures, or similar obligations.
34. 10% of the gross amount of the royalties, where the royalties are paid by an enterprise registered with
the Romanian Agency for Development, in the case of Romania and with the Board of Investments,
in the case of the Philippines and engaged in preferred pioneer areas of activities; 15% of the gross
amount of the royalties, in respect of cinematographic films and tapes for television or broadcasting;
25% of the gross amount of the royalties, in all other cases.
35. As long as Poland does not introduce in its domestic legislation the WHT of commissions paid to
non-residents, the provisions of paragraph 2 of Article 13 are not applying and the commissions are
taxable only in the residence country of the beneficial owner of the commission.
36. The lower rate applies if the beneficial owner of the dividends is a company that, for an uninterrupted
period of two years prior to the payment of the dividends, directly owns at least 25% of the capital
stock (capital social) of the company paying the dividends.
37. The lower rate applies to participations of at least 50%; the 5% rate applies to participations of at
least 10%.
38. According to the treaty concluded between Romania and the former Yugoslavia (Federal Republic of).
39. The lower rate applies to royalties for the use of, or the right to use, any patent, trademark, design
or model, plan, secret formula or process, or industrial, commercial, or scientific equipment, or for
information concerning, industrial, commercial, or scientific experience.
40. The lower rate applies if the beneficial owner is a company that directly holds at least 25% of the
capital of the company paying the dividends.
41. The lower rate applies if the dividends are beneficially owned by a resident of the other contracting
state that is:
a company (other than a partnership) that directly holds at least 25% of the capital of the
company paying the dividends
a pension fund or other similar institution providing pension schemes, or
the government of that other state, a political subdivision, local authority, or administrativeterritorial unit thereof, or the Central Bank of that other state.
42. The lower rate applies to the extent that such interest is paid:
in respect of a loan, debt-claim, or credit that is owed to, or made, provided, guaranteed, or
insured by that state or a political subdivision, local authority, administrative-territorial unit, or
export financing institution thereof, or
by a company to a company of the other contracting state where such company is affiliated with
the company paying the interest by a direct minimum holding of 25% in the capital or where both
companies are held by a third company that has directly a minimum holding of 25%, both in the
capital of the first company and in the capital of the second company.
43. The lower rate applies as long as the Swiss Confederation, in accordance with its domestic
legislation, does not levy a WHT on royalties paid to non-residents.
44. The lower rate applies if the company paying the dividends engages in an industrial undertaking and
the recipient company, excluding partnership, directly holds at least 25% of the capital of the former
company.
45. 10% of the gross amount of the interest if it is received by any financial institution (including an
insurance company); 20% of the gross amount of the interest in the case of interest on credit sale;
25% of the gross amount of the interest in other cases.
46. Interest arising in Romania and paid to government of Turkey or to the Central Bank of Turkey shall
be exempt from Romanian tax.
47. Interest arising in a contracting state shall be exempt from tax in that state if it is derived and
beneficially owned by the government of the other contracting state, a local authority or an
administrative-territorial unit thereof, or any agency or bank unit or institution of that government,
a local authority or an administrative-territorial unit, or if the debt-claims of a resident of the other
contracting state are warranted, insured, or directly or indirectly financed by a financial institution
wholly owned by the government of the other contracting state.
48. The lower rate applies for use or lease of any patent, trademark, design or model, plan, secret
formula or process, or for information concerning industrial, commercial, or scientific equipment.
49. 0% if the beneficial owner of the dividends is (i) the government of any contracting state or any
governmental institutions or entity thereof or (ii) a company that is a resident of either contracting
state and the capital of which is directly or indirectly owned (at least 25%) by the government or
governmental institutions of either contracting states.
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50. Interest arising in Romania and paid to the government of the United Arab Emirates or its financial
institutions shall be exempted from Romanian taxes.
51. The lower rate applies for approved industrial royalties.
52. The lower rate applies if the beneficial owner is a company that directly or indirectly controls at least
25% of the voting power in the company paying the dividends.
53. The lower rate applies in the case of royalties received as consideration for the use of, or the right to
use, any copyright of literary, dramatic, musical, artistic, or scientific work (including cinematograph
films and films or tapes for radio or television broadcasting).
54. If certain conditions are met.
In order to apply the provisions of the relevant DTT, the non-resident recipient of the
income should provide to the Romanian paying company a tax residency certificate
attesting its tax residency for the purpose of the DTT.
If the tax rates prescribed by domestic legislation differ from those prescribed by
the DTT, then the most favourable rate will apply. The tax rate applicable to income
obtained by a resident of an EU member state in Romania is the most favourable rate
provided under either domestic legislation, the EU Directives transposed into domestic
legislation, or the DTT.
Tax administration
Taxable period
The fiscal year is the calendar year or the period during which the entity existed if it was
set up or ceased to exist during that calendar year.
As of 1 January 2014, taxpayers with a financial year different from the calendar year
now have the option to align the tax year to the financial year. The first amended tax
year will start on 1 January and will end on the last day of the amended tax year.
The accounting year is usually the calendar year. Certain categories of entities (i.e.
Romanian branches of foreign companies, Romanian consolidated subsidiaries and
subsidiaries of the subsidiaries of foreign companies) are allowed to set an accounting
year other than the calendar year if the financial year of the parent company is different
from the calendar year. However, establishing a financial reporting period different from
the calendar year does not modify the period for which profit tax is calculated, namely
the calendar year.
Tax returns
Taxpayers (except for non-profit organisations and taxpayers deriving most of their
income from agriculture) must submit the profit tax returns by the 25th day of the first
month following the first, second, and third quarters. The annual profit tax return is due
by 25 March of the following year.
Non-profit organisations and taxpayers that obtain income mainly from agricultural
activities have to declare and pay annual profit tax by 25 February of the year following
the reporting period.
Taxpayers (except those specifically mentioned by law) may opt to declare and pay the
annual profit tax by making quarterly advance payments (see Payment of tax below). The
decision to take this option has to be communicated by 31 January of the fiscal year in
which the taxpayer wants to apply the option and it has to be maintained for at least two
consecutive years.
Large and medium-sized taxpayers have the obligation to submit fiscal forms online,
using the www.e-guvernare.ro portal. The electronic signature of the tax returns can only
be made using a qualified certificate issued by a legally accredited certification services
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provider. Other categories of taxpayers may file their tax return electronically as an
alternative way of compliance.
Taxpayers required to withhold tax, with the exception of salary payers, are required to
submit a statement to the tax authorities regarding the tax withheld for each beneficiary
of income. This statement must be submitted for the previous year by the last day of
February of the current fiscal year and refers to the tax withheld and paid by Romanian
residents on income obtained in Romania by non-resident beneficiaries.
If taxpayers have failed to submit their tax returns, the tax authorities will assess, by way
of default, all the tax obligations found in the taxpayers fiscal liability records for each
fiscal period in which tax returns were not submitted.
Payment of tax
Taxpayers (except for banks, non-profit organisations, taxpayers deriving most of their
income from agriculture) must pay the quarterly profit tax by the 25th day of the first
month following the first, second, and third quarters. The annual profit tax has to be
paid by 25 March of the following year.
Banks and branches of foreign banks in Romania are required to apply the system
of advance quarterly profit tax payments. Other taxpayers, with some exceptions
mentioned by law, may use this system as an alternative reporting and payment
procedure.
The anticipated quarterly payments are calculated as a quarter of the previous years
profit tax increased by the consumer price index (CPI) inflation rate, with the payments
due by the 25th day of the month following the end of the quarter. The CPI inflation
rate is published by Order of the Ministry of Finance by 15 April of the year for which
the advance payments are made. For 2014, the CPI inflation rate is 102.4%. If taxpayers
incur fiscal losses in the first year of the application of the option, the advance profit tax
payments are calculated by applying the profit tax rate to the accounting profit for the
period in which tax payments are made in advance.
Non-profit organisations and taxpayers that obtain income mainly from crop production
have to pay annual profit tax by 25 February of the following year.
Newly established banks and branches of foreign banks in Romania (i.e. without a
previous year history) or those that incurred fiscal losses in the previous year make
quarterly advance payments at the level of the amount resulted from applying the profit
tax rate on the accounting profit for the period for which the advance payment is made.
Late-payment penalty
The late-payment interest rate is 0.04% for each day of delay. Subsequent late-payment
penalties also apply.
The penalty calculation method has been changed. Instead of the previous fixed
thresholds of 5% and 15%, the penalty is now set at 0.02% per day of delay.
These new late-payment penalties apply to tax liabilities due as of 1 July 2013.
Non-resident companies deriving income from the sale of real estate located in
Romania or from the sale of shares held in a Romanian company (except if participation
exemption applies) are subject to a 16% profit tax in Romania and are liable to declare
and pay such tax. Non-residents may appoint a tax agent/representative to fulfil this
requirement. However, if the buyer is a Romanian company or a Romanian PE of a nonwww.pwc.com/taxsummaries
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resident company, the obligation to declare and pay the annual profit tax rests with the
buyer.
For capital gains tax declaration and payment, the Romanian legislation requires the
following tax returns to be submitted:
Quarterly statements, starting the 25th day of the month following the quarter in
which the non-resident first earned capital gains taxable in Romania.
An annual profit tax return.
The quarterly statements and annual return must be submitted during the entire period
in which the non-resident is registered with the Romanian tax authorities, even if,
throughout that period, it no longer carries out transactions generating taxable revenue
in Romania.
Tax audit process
Tax inspections can be carried out in respect of all legal persons, irrespective of their
organisational structure, that are bound to determine, withhold, and pay taxes, duties,
contributions, and other amounts owed to the general consolidated budget.
The tax authorities may not inspect the same taxes for a period previously inspected,
unless additional data is obtained of which the tax inspectors were unaware when
carrying the first inspection or calculation errors were made.
Prior to the tax inspection commencing, the tax authorities must notify the taxpayer in
writing, by sending a tax inspection notice, except in the cases explicitly laid down in the
Fiscal Procedural Code.
Tax inspections are generally carried out at the taxpayers business premises and may
not exceed a six-month period in the case of large taxpayers or three months for other
taxpayers. For taxpayers that have secondary offices, the tax inspections may not exceed
six months. The tax authorities may suspend the tax inspection if they deem it necessary
for the clarification of the taxpayers tax status.
Before finalisation of the tax inspection, the tax authorities are required to inform the
taxpayer of their findings and the tax consequences and allow the taxpayer to express its
point of view, within three days from the ending of the tax inspection. Upon completion
of the tax inspection, the authorities conclude a tax inspection report, based on which
the tax assessment is made, which in turn is to be communicated to the taxpayer within
30 days from the ending of the tax inspection.
As a general rule, the statute of limitation is five years and begins to run on 1 January
of the year following the one in which the taxable event occurred. However, the statute
can be suspended for the duration of a tax inspection but will recommence after the
inspection has been completed.

Areas of focus during tax audits include:

VAT reimbursable positions.

Deductibility of service expenses.
Transfer pricing.
Transactions with tax havens.
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Other issues
Mergers, spin-offs, transfers of assets, and exchanges of shares between two Romanian
companies should not trigger capital gains tax.
In the case of a relocation of the registered office of a European Company (SE) and a
European Cooperative Society (SCE) from Romania to another EU member state, no
tax will apply on the difference between the market value of the transferred assets and
liabilities and their fiscal value, if certain conditions are met. There will also be no tax on
such movements at the shareholder level. Therefore, a tax basis step-up may be achieved
in the case of Romanian shareholders.
If a Romanian company has a PE in another EU member state, and the Romanian
company is dissolved as a result of a cross-border reorganisation, the Romanian tax
authorities will not have the right to tax the PE.
There are provisions for the recovery of fiscal losses in the case of restructuring
operations carried out by Romanian legal entities and those involving Romanian legal
entities and residents of other EU member states. Herewith, the right to recover fiscal
losses by legal entities that are successors of merger or spin-off operations is regulated.
The recovery is correlated with the assets and liabilities transferred according to the
merger/spin-off project.
Also, some amendments are provided to the Romanian Company Law, simplifying and,
in some cases, reducing the time-frame for performing the legal steps that have to be
followed in case of mergers and spin-offs.
As of 1 January 2014, for taxpayers going through a restructuring process, the right
to carry forward non-deductible interest expenses and net foreign exchange losses is
split between the beneficiary and the assignor in proportion to the assets and liabilities
transferred.
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PwC contact
Ekaterina Lazorina
White Square Office Center
10 Butyrsky Val
Moscow, Russia 125047
Tel: +7 495 967 60 00
Recent significant changes in tax legislation
Tax breaks in the Russian Far East have been introduced
Tax breaks for investment projects in several Far Eastern and Siberian regions have
been effective since 1 January 2014. The new law establishes a zero rate for profits tax
payable to the federal budget and allows investors in the 13 eligible regions to use lower
regional tax rates.
In addition, reduced rates have been introduced with respect to the Mineral Resources
Extraction Tax (MRET) payable by participants in regional investment projects. They
apply to a whole range of mineral resources, including gold, coal, ferrous and nonferrous mineral ores, etc.
Please see Regional incentives in the Tax credits and incentives section for more information.
Property tax on offices and shopping centres
Starting from 2014, certain real estate objects are taxed in accordance with their
cadastral value and not their book value. As a result, property tax on offices and
shopping centres will increase significantly. Please see Property tax in the Other taxes
section for more details.
Taxation of dividends - penalty tax of 30%
Starting from 1 January 2014, amendments to the Russian Tax Code related to the
transparency of financial operations are in place. Here are the key provisions:
New rules for determining tax agents are introduced. The role of a tax agent moves
from the issuer to a depository in a number of cases.
The disclosure procedure is extended to cover those cases when dividends are
paid out on shares held in special accounts for depositary programmes, foreign
nominee, and authorised holders accounts. A penalty tax of 30% for nondisclosure
is introduced (it applies where information about the entities exercising rights to
securities was not disclosed to the tax agent, or where it was not disclosed in a timely
manner, or was incomplete or inaccurate).
Options for directly applying treaty benefits (reduced tax rates) are limited. Tax
refunds are allowed. The rule will be applicable to situations when income is paid to
foreign entities acting on behalf of third parties.
Significant changes expected in 2015 - 2017
The Russian government regularly publishes the Key Guidelines on Russian tax policy for
the three-year period. The following changes were announced in the most recent draft
version:
Introduction of controlled foreign company (CFC) rules.
Introduction of the beneficial owner concept.
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Introduction of tax residency concept for legal entities.

Introduction of a real estate tax.
Convergence of tax and accounting rules.
Introduction of Fast-track Development Zones in the Far East.
Modification of consolidated taxpayer regime in respect to utilisation of losses within
a group.

Profits tax
The maximum profits tax rate for all taxpayers in the Russian Federation is set at 20%
(2% is paid to the federal budget and 18% is paid to the budgets of constituent regions).
The amount payable to the budgets of constituent regions may be reduced by such
regions, so the total minimum tax rate may come to 15.5% (e.g. the rate of 15.5% is
established for certain categories of taxpayers in Moscow, St. Petersburg, the Samara
region, the Kaluga region, and several other regions).
Russian legal entities pay tax on their worldwide income (credit relief is available for
foreign tax paid up to the amount of the Russian tax liability that would have been due
on the same amount under Russian rules).
Foreign legal entities pay tax on Russia-source income derived through a PE (at 20%)
and are also subject to withholding tax (WHT) on income from Russian sources not
related to a PE (at rates varying from 10% to 20%, depending on the type of income and
the method used to calculate it).
Local income taxes
There are no local taxes on income in the Russian Federation.
Corporate residence
Effective Russian tax legislation does not contain terminology regarding corporate
residence. The tax system in Russia distinguishes between Russian and foreign legal
entities in regards to their respective incorporation. It is expected that the concept of tax
residence of legal entities will be introduced soon.
A permanent establishment is broadly defined as a branch, division, office, bureau,

agency, or any other place through which a foreign legal entity regularly carries out its
business activities in Russia.
Other taxes
VAT is a federal tax in Russia, payable to the federal budget.

There is no separate VAT registration in Russia. The established general tax registration
requirements are applicable to all taxes, including VAT.
Taxpayers follow a classical input-output VAT system, whereby a VAT payer generally
accounts for VAT on the full sales price of the transaction and is entitled to recover
input VAT incurred on inventory costs and other related business expenses. The Russian
VAT system, although not originally based on the European Union (EU) model has
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nonetheless moved towards it. However, it still currently differs from the EU VAT system
in various ways.
Output VAT
VAT usually applies to the value of goods, works, services, or property rights supplied
in Russia. The standard VAT rate is 18% in Russia (with a lower rate of 10% applicable
for certain basic foodstuff, childrens clothing, medicines and medical products, certain
printed publications, etc.). The same VAT rates apply for imports of goods into Russia.
Exports of goods, international transportation and other services related to the export
of goods from Russia, international passenger transportation, and certain other supplies
are zero-rated with an input VAT recovery right. The application of the 0% VAT rate
and recovery of the respective input VAT should be confirmed by submitting a number
of documents to the tax authorities within certain time limits. Special rules are in place
regarding the documentary confirmation of the right to tax export supplies to Customs
Union member countries with a 0% VAT rate, including an input VAT recovery right.
The list of VAT-exempt goods and services includes basic banking and insurance services,
services provided by financial companies (depositaries, brokers, and some others),
educational services by certified establishments, sale of certain essential medical
equipment, passenger transportation, and certain other socially important services.
Most accredited offices of foreign legal entities (as well as the accredited employees
of these offices) may be exempt from VAT on property rental payments. Performance
of VAT-exempt supplies does not provide the right for the recovery of the attributable
input VAT. Instead, costs associated with non-recoverable input VAT are, in most cases,
deductible for profits tax purposes.
Withholding VAT
Russian VAT law provides rules for determining where services are supplied in terms of
VAT. These rules divide all services into different categories in order to determine where
they are deemed to be supplied for VAT purposes. For example, certain services are
deemed to be supplied where they are performed, some where the buyer of the services
carries out the activity, and others where the immovable property is located.
Under the reverse-charge mechanism, a Russian company must account for VAT on any
payment it makes to a non-tax registered foreign company, if the payment is connected
to a supply of goods or services considered to be supplied in Russia, based on the VAT
place of supply rules and not falling under any VAT exemption based on the domestic
VAT law. In such circumstances, under the law, the Russian buyer shall act as a tax
agent for Russian VAT purposes by withholding Russian VAT at the rate of 18/118 from
payments to the foreign supplier and remit such withheld VAT to the Russian budget.
The withheld VAT may be recovered by the Russian payers in accordance with the
standard input VAT recovery rules provided by law.
Input VAT recovery
Taxpayers are usually eligible to recover input VAT associated with the purchase of
goods, works, services, or property rights, provided a set of rules established by the
VAT legislation is met. Input VAT could potentially be recovered by the taxpayer in the
following cases:
VAT related to goods, services, or works acquired for the purpose of conducting
VATable transactions.
VAT related to the purchased goods, works, or services used in non-VATable
transactions if the portion of expenses related to non-VATable operations does not
exceed 5% of total amount of expenses.
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Input VAT related to advance payments performed to Russian suppliers of goods
(works, services), provided such acquired goods (works, services) are aimed at being
used in VATable activities. Please note that application of this rule is the right of
taxpayers (rather than an obligation), and taxpayers may choose whether to enjoy
this right or not.
VAT compliance requirements
Each taxpayer performing supplies of goods, works, services, or property rights is liable
to issue VAT invoices and provide them to customers. VAT invoices shall be issued within
five days after the supply has occurred. The VAT invoice is a standard form as established
by the government. Compliance with invoicing requirements is critical to the buyers
ability to recover input VAT.
Incoming and outgoing VAT invoices should usually be registered by taxpayers in special
purchases and sales VAT ledgers.
VAT returns shall be submitted to the tax authorities on a quarterly basis. Starting
from 2014, only electronic VAT returns may be filed. VAT must be paid to the Russian
budget after the end of each quarter in three instalments not later than the 20th day of
each of the three consecutive months following the quarter, except for the remittal of
VAT withheld by Russian buyers under the reverse charge mechanism, which is to be
transferred to the Russian budget at the date of the external payment.
Import VAT
Import VAT is payable in customs upon importation of goods. The tax base for import
VAT is generally the customs value of the imported goods, including excise payments.
Either the 18% or 10% VAT rate may apply upon import of goods in Russia, depending
on the specifics of the goods.
A limited scope of goods is eligible for exemption from import VAT. The list of such goods
includes, for example, certain medical products and goods designated for diplomatic
corps. Relief from import VAT is available on certain technological equipment (including
their components and spare parts), which is not produced in Russia. The list of such
equipment has been established by the Russian government.
Import duties
In addition to VAT, customs duties are levied on assets imported into the Russian
Federation. The rate varies according to the tariff code of the goods imported and the
country of origin (generally, the rate varies from 0% to 20% of the customs value of
imported goods). The rates have been reduced for a number of goods due to Russias
accession to the World Trade Organization (WTO). There is special relief from customs
duties for qualifying goods contributed to the charter capital of Russian companies with
foreign investments.
The foundation of the Customs Union and deeper integration processes amongst Russia,
Belarus, and Kazakhstan (hereinafter, the CU) has resulted in unification of the customs
legislation of the CU members, as well as the creation of a single customs territory,
within which goods in mutual trade between the member states are moved without any
customs clearance formalities. Members of the CU should apply unified customs tariffs
and customs valuation methodology, general rules of non-tariff regulation, uniform
technical regulations, etc.
Customs processing fee
Goods transported across the Russian Federations customs border are subject to
a customs processing fee with a flat rate. The fee depends on a customs value of
transported goods. The fee is usually small.
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Excise duty
Excise taxes apply to the production and import of cars, tobacco, alcohol, petrol, and
lubricants. Special excise rates for each type of excisable goods are established in the Tax
Code. The rates are widely variable and are based on various factors.
Property tax
The maximum property tax rate is 2.2%, and regional legislative bodies have the
right to reduce this rate. The property tax base includes only the annual book value of
fixed assets recorded on the taxpayers balance sheet (including leased out property).
Intangible assets, inventories, work-in-progress, and financial assets are not subject to
property tax in Russia.
Movable property recorded into books as fixed assets is not taxed.
At the same time, the property of natural monopolies, which was exempted earlier, is
now taxed. The tax rates applicable under the laws of Russias constituent regions to
public rail roads, trunk pipelines, power lines, and facilities constituting an integral
technical component of the above objects cannot exceed 0.4% in 2013, 0.7% in 2014, 1%
in 2015, 1.3% in 2016, 1.6% in 2017, and 1.9% in 2018.
Effective 2014, the tax base of certain real estate objects is their cadastral value rather
than their book value. As a result, property tax will increase significantly for the
following:

Administrative and business centres.

Shopping centres and premises therein.
Offices, retail outlets, public eateries, and consumer facilities.
Immovable property of foreign entities with no permanent establishment (PE) in
Russia or not related to their operations through a PE in Russia.
The law introduces the following maximum tax rates for real estate subject to the new
rules: 1% in 2014, 1.5% in 2015, and 2% in 2016 and following periods. The Moscow tax
rate is established as 0.9% in 2014, 1.2% in 2015, 1.5% in 2016, 1.8% in 2017, and 2% in
2018 and the following periods.
Tax rates within these limits, as well as the particularities for determining the tax bases
for certain objects, are being set by constituent regions.
Transfer taxes
There are no transfer taxes in Russia.
Transport tax
A transport tax is imposed on certain types of land, water, and air transport registered in
Russia. Fixed rates apply (per unit of horsepower, gross tonnage, or unit of transport),
which differ based on engine capacity, gross tonnage, and type of transport. The actual
rates in the regions may be subject to a maximum ten-fold increase/reduction by the
legislative bodies of Russian Federation constituent subjects. Reporting and payment
rules have been established by regional legislative authorities.
The transport tax on luxury cars has been increased in 2014. A multiplier (up to three)
depends on the age and cost of a car. For example, in Moscow, the tax may reach
200,000 Russian rubles (RUB) per year for the most high-end class of vehicle.
Annual salary under RUB 624,000 per employee is subject to contributions at a

consolidated rate of 30%. An additional 10% charge is imposed on salary that exceeds
RUB 624,000 per annum per one employee. Remuneration of foreign nationals
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temporarily staying in Russia is covered by pension insurance contributions at a rate of
22% within the threshold of RUB 624,000 and 10% top up charge on remuneration paid
in excess of the threshold. The only exception is made for highly qualified specialists
(with the respective work permit) and employees who have entered into a labour
contract for a term of less than six months.
Mineral Resources Extraction Tax (MRET)
MRET calculation depends on the type of mineral resource.

MRET for coal, oil, gas, and gas condensate is calculated using the extracted volume of
the respective resource. The tax rate is established as a fixed rate multiplied by various
coefficients linked to world prices and field characteristics. A zero MRET rate applies to
oil extracted from green fields in certain regions of Russia (e.g. East Siberia, internal and
territorial waters located in the northern polar zone, the Azov and Caspian Seas, and the
Nenets and Yamal regions) during the initial stage of production.
MRET on other natural resources depends on the value of resources extracted. The tax
rate varies from 3.8% to 8%. For instance, 3.8% for potassium salt, 4.8% for ferrous
metals, 6% for products containing gold, and 8% for non-ferrous metals and diamonds.
Starting from 2014, reduced MRET rates apply to investors in Russias Far East (please see
Regional incentives in the Tax credits and incentives section for more details).
Branch income
Foreign legal entities pay tax on profits attributable to a PE. A PEs profits are computed
on primarily the same basis as Russian legal entities, including the composition of taxdeductible expenses. The Tax Code does not specifically mention the deductibility of
expenses incurred abroad by a head office with respect to its PE in Russia (including a
reasonable allocation of administration costs), although most double taxation treaties
(DTTs) provide for such an option.
A provision on taxable income of a PE has been introduced in Russian tax law. Taxable
income of a PE in Russia should be determined taking into account the PEs functions,
assets, and economic/commercial risks. This provision does not contain any guidance on
specific transfer pricing methods that taxpayers should follow.
If a foreign legal entity conducts free-of-charge preparatory and/or auxiliary services
for the benefit of third parties, then a PE is considered to have been formed, and the tax
base is calculated as 20% of its expenses relating to such activities.
Foreign legal entities operating in Russia through a PE must follow the filing and
payment schedules established for Russian legal entities. Although they do not make
monthly advance payments, they should pay profits tax on a quarterly and annual basis
only.
The accounting period in Russia is a calendar year. Different periods are not permitted.
The taxable base is calculated on an accrual basis (only small-scale taxpayers are still
allowed to use a cash basis).
Taxable income is to be computed following the rules and principles established in the
Tax Code. Taxpayers must maintain tax accounting registers. Statutory accounts may be
used for computing tax items for which accounting methods are the same. In practice,
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most taxpayers use statutory accounts as a basis and apply adjustments to arrive at the
taxable income.
Inventory valuation
Currently, inventory can be valued using one of the following methods: first in first out
(FIFO), last in first out (LIFO), average cost, and individual unit cost. The LIFO method
is abolished starting from 1 January 2015.
Capital gains
Capital gains are subject to the same 20% profits tax rate and are added to ordinary
income to arrive at the taxable income.
Four separate tax baskets are calculated for tax purposes: (i) results from general
operations, (ii) results from operations with listed securities, (iii) results from operations
with non-listed securities, and (iv) results from operations with non-listed derivatives.
A loss in one basket cannot be offset with income in another basket. Results from
operations with listed derivatives are included into the general tax basket. Starting from
2015, only two tax baskets will remain: (i) general and (ii) results from operations with
non-listed securities and non-listed derivatives.
Gains from the sale of fixed assets and other property equal the difference between the
sale price and their net book value for tax purposes. Losses resulting from the sale of
fixed assets should be deducted in equal monthly instalments during the period, defined
as the difference between their normative useful life and the actual time of use.
A significant exemption was introduced for capital gains from the sale or other disposal
(including redemption) of shares in Russian entities (interests in Russian entities
charter capital), provided that, as of the date of sale, they have been continuously held
by the taxpayer on the basis of right of ownership or another proprietary right for more
than five years. One of the following conditions must be met in order to apply a 0% tax:
The shares have been non-listed securities over the entire period of the taxpayers
ownership of such shares.
The shares are listed securities, and the company issuing shares has belonged to the
technology/innovative sector of the economy over the entire period of the taxpayers
ownership of such shares.
As of the date of acquisition by the taxpayer, the shares qualified as non-listed
securities and, as of the date of their sale by this taxpayer or of another disposal
(including redemption) by this taxpayer, they are listed securities of the high
technology/innovative sector of the economy.
The beneficial tax treatment will only apply to shares and interests in charter capital
acquired by taxpayers after 1 January 2011 (which means that the exemption may be
first used in 2016).
Dividend income
Dividends received by Russian legal entities from Russian or foreign legal entities are
taxed in Russia at a 9% flat rate.
Dividends received from strategic investments are exempt from Russian income tax. An
investment is considered strategic when:
the owner (recipient of dividends) owns at least 50% of the capital of the payer of
dividends or owns depository receipts entitling it to receive at least 50% of the total
amount of paid dividends and
the share or depository receipts have been owned for at least 365 calendar days on
the day dividends are declared.
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Dividends from companies residing in offshore zones with preferential tax regimes
are not eligible for the tax exemption. The list of offshore zones is established by the
Ministry of Finance.
Tax on dividends from abroad withheld in the source country may be credited against
Russian tax.
The standard 15% tax rate is applicable to dividends paid by Russian legal entities to
foreign legal entities. The tax should be withheld by the Russian legal entity paying
dividends. The tax may be reduced based on a relevant DTT, usually to 10% or 5%
(please see the Withholding taxes section for more details).
Please note that, starting from 1 January 2014, penalty tax of 30% on dividends paid
out on securities recorded on certain accounts (i.e. on the accounts of depositary
programmes and the accounts of foreign nominees and authorised holders) is applicable
if information about the entities exercising rights to such securities was not disclosed to
the tax agent, or was not disclosed in a timely manner, or was incomplete or inaccurate.
Interest income
Interest income is taxed on the accrual basis. A standard tax rate of 20% is applied to
interest income, except for interest on state and municipal securities, which is taxed at
0%, 9%, or 15%, depending on the type of security. The rate may be reduced (typically
to zero) based on a relevant tax treaty.
Foreign exchange gains and losses are recognised for tax purposes on the accrual
basis. However, currently, gains and losses from settlements in a local currency of
amounts denominated in (tied to) a foreign currency are taxable (deductible) on
payment. Starting from 2015, the rules will be the same, and all such differences will be
recognised on the accrual basis only.
Foreign income
Russian legal entities pay tax on their worldwide income. Credit relief is available for
foreign taxes paid up to the amount of the Russian tax liability that would have been due
on the same amount under Russian rules.
The effective tax legislation does not contain provisions that allow tax deferral in respect
to foreign income.
Deductions
Expenses are deducted on an accrual basis. The main criteria for deductibility of
expenses is that the expense is (i) incurred in the course of an income-generating
activity, (ii) properly documented, and (iii) not mentioned in the Tax Code as nondeductible for tax purposes.
Two methods of depreciation are allowed: the straight-line method and the decliningbalance method. The ranges of useful life of assets for tax purposes are established in the
Classification of Fixed Assets adopted by the Russian government, for example:
Fixed asset
Personal computer
Motor-car
Truck (more than five tonnes capacity)
Useful life (years)

2 to 3
3 to 5
7 to 10
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Fixed asset
Aircraft
Blast furnace
Useful life (years)

10 to 15
20 to 25
Accelerated depreciation is permitted for leased property, where a special ratio of up to

three may be applied (with some exceptions).
Accelerated depreciation in a harsh environment and/or increased turnover conditions
has been abolished for assets recorded on balance sheets after 1 January 2014.
It is prohibited to apply several special coefficients to the normal rate of deprecation.
An upfront premium is allowed, which means that a taxpayer has the right to deduct
10% (or 30% for certain categories of fixed assets) of the cost of fixed assets purchased
(or constructed) in the month when the depreciation started. The balance is depreciated
over the useful life of the asset. A premium must be recaptured if a relevant asset is sold
within five years of its acquisition (the requirement to recapture does not apply to sales
to unrelated parties starting from 2013).
Intangible assets are amortised over their useful life or over ten years (two years for
certain types of intangible assets) if their useful life cannot be determined.
Goodwill
Under tax law, a mark-up (difference between the acquisition value and net assets of
the business [property complex] purchased) should be recognised as goodwill for tax
purposes and may be amortised by a buyer over five years. However, this tax regime
often does not apply since a business (subject of a deal) needs to be registered as a
property complex with the state authorities, which sellers almost never do.
Start-up expenses
Russian tax law does not contain specific provisions on the deductibility of start-up
expenses. In some cases, they may not be deducted by either the parent company or by a
subsidiary for tax purposes.
Interest expenses
Interest expenses are deductible within the following limits:

The average interest rate on similar loans obtained during a quarter from Russian
lenders multiplied by 1.2.
If there are no similar loans, or at the taxpayers discretion, the following limits are
applied:
For loans denominated in a foreign currency: the refinancing rate of the Central
Bank of Russia multiplied by 0.8 (6.6% as of February 2014).
For loans denominated in rubles: the refinancing rate of the Central Bank of
Russia multiplied by 1.8 (14.85% as of February 2014).
Starting from 2015, the rules will change significantly. The tax authorities will be able
to audit interest expenses only for transactions that are controlled under the Russian
transfer pricing rules and only in accordance with these rules. Safe harbour for bank
loans will apply.
Bad debt
Losses in the form of bad debts written off are usually deductible. Companies may create
a bad debt reserve. The method of accrual for a bad debt reserve for tax purposes may
differ from that in financial accounting because it is based only on the overdue payment
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period (i.e. if the delay exceeds 90 days, the full amount of the account receivable is
included in the reserve).
Russian tax legislation does not foresee any benefits in respect to charitable
contributions. Such expenses are not deductible for tax purposes.
R&D expenses (including R&D with a negative result) are currently deductible within
one year after completion. Certain R&D expenses may be deducted using a coefficient of
1.5. The list of R&D categories is established by the Russian government. A provision for
future R&D expenses may be accrued for tax purposes.
Insurance premiums
Expenses related to all types of obligatory insurance are deductible and are subject to
state tariff limitations, where established. Voluntary insurance expenses are deductible
to the extent that they relate to the insurance of damage and losses related to certain
classes of assets, and the insurance of construction activity risks. Contract liability
insurance expenses are deductible to the extent that such insurance is required by an
international treaty to which Russia is a party or a generally accepted international trade
custom.
Long-term life and pension insurance is deductible within a limit of 12% of the payroll
fund. Voluntary medical insurance is deductible within a limit of 6% of the payroll fund.
Fines and penalties
Fines and penalties paid to contractors for the violation of contractual terms may be
deducted for tax purposes.
Fines and penalties paid to a budget are not deductible.
Taxes
Taxes paid by a taxpayer, as well as social contributions of employers, are deductible for
tax purposes.
Tax losses may be carried forward for up to ten years without limitation (i.e. they can be
used to offset the entire taxable profit before a loss carryforward deduction). Carryback
of losses, however, is not allowed.
Losses from the sale of fixed assets are recognised evenly during the remaining useful
life.
Losses and income from different tax baskets cannot be offset (please see Capital gains in
the Income determination section for more details).
There are no special tax provisions regarding deducibility of payments to foreign

affiliates for services provided. They may be deducted in full if general deductibility
criteria are met. Charges with respect to administrative support provided by foreign
affiliates may be deductible. However, due care should be taken with regard to
documents used to support the nature and actual receipt of the service.
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Group taxation
Consolidated taxpayer regime
The consolidated taxpayer regime is available to large Russian groups. A group can
comprise two or more Russian organisations where the direct or indirect equity interest
of one member in the charter/share capital of the other members equals at least 90%. In
order to establish and apply this regime, all group members should meet the following
requirements:
At least RUB 10 billion in total profits tax, VAT, excise tax, and MRET paid during the
year preceding the year of registration of a group taxpayer.
At least RUB 100 billion in sales proceeds and other income.
Total cost of assets of at least RUB 300 billion.
The advantages from applying this regime are the following. Firstly, transactions among
members will not be controllable under the new transfer pricing legislation (with one
exception: transactions with mineral resources subject to MRET with a percentage
rate are still subject to control). Secondly, for the purposes of calculating profits tax, it
will be possible to consolidate members profits and losses. According to the draft Key
Guidelines on Russian Tax Policy for the three-year period recently published by the
Finance Ministry, the method of utilisation of losses within a group may be changed
significantly. The issue is still under discussion.
Transfer pricing
New transfer pricing legislation that is essentially based on Organisation for Economic
Co-operation and Development (OECD) principles came into effect on 1 January 2012.
This legislation establishes the list of related parties, the list of controlled transactions,
five transfer pricing methods for determining arms-length prices, the list of information
sources, compliance requirements, and rules for conclusion of advanced pricing
agreements (APAs) for Russian companies registered as largest taxpayers.
Thin capitalisation
Under the Russian Tax Code, interest on loans received from foreign shareholders (as
well as their Russian affiliates, or loans guaranteed by foreign shareholders or their
Russian affiliates) owning more than 20% of capital is deductible, provided the loans
do not exceed by three times the amount of equity (12.5 times for banks and leasing
companies). If the loans exceed this limit, excess interest on the loans will be reclassified
for taxation purposes as dividends paid to foreign shareholders. Such dividends are not
deductible for profits tax purposes and are subject to WHT at the rate of 15% (treaty
benefits may apply to reduce the rate).
The Russian Federation does not currently have a CFC regime.

The Finance Ministry has developed draft CFC legislation that may be introduced
starting from 2015. According to the bill, the Russian CFC rules mean that a Russian
tax resident (either an individual or legal entity) must pay tax in Russia on the retained
earnings of any offshore entities and structures controlled by the given entity or
individual if such entity has not paid out dividends. Any profits of a CFC, according to
the lawmakers intent, is calculated under the rules set out in Chapter 25 of the Russian
Tax Code after deducting the amount of any dividends paid out.
Meanwhile, offshore jurisdictions are understood to be those that are included in the
relevant black list of the Finance Ministry. Control means exercising a determining
influence (or the relevant ability to do so) on decisions made by a CFC regarding profit
distribution (in particular, when over 10% of the shares or interest in a CFC is owned
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directly or indirectly by a Russian tax resident, factoring in any interest owned jointly
with a spouse, minor children, or others).

At present, the following types of incentives exist in Russia:
Regional incentives granted by regional or local authorities with respect to taxes paid
to their budgets.
Special tax regimes in special economic zones (SEZs).
Incentives related to certain activities (e.g. activities related to R&D, information
technology).
Incentives related to particular projects (e.g. Skolkovo, the Olympic Winter Games in
Sochi).
The incentives are briefly described below.
It is also worth mentioning that the Russian tax law provides for special tax regimes to
support small and medium-size businesses. Such regimes include a unified tax regime,
simplified tax regime, and unified agricultural tax.
Regional incentives
Regional incentives in the form of reduced tax rates for taxes payable to regional budgets
(primarily profits tax and property tax) are granted to certain classes of taxpayers
(typically large investors or entities operating in specific industries). The extent of
regional incentives and the willingness of regional authorities to grant them have
declined over time.
Russian Far East
Tax breaks for investment projects in several Far Eastern and Siberian regions have
been effective since 1 January 2014. The new law establishes a zero rate for profits tax
payable to the federal budget and allows investors in the 13 eligible regions to use lower
regional tax rates. So, in contrast to the regular 20% rate, the beneficial tax rate adopted
by most of these regions usually comes to 0% during the first five years from the date the
first income from the sales of goods under an investment project is generated, and then
10% over the following five-year period.
In addition, reduced rates have been introduced with respect to the MRET payable by
participants in regional investment projects. They apply to a whole range of mineral
resources, including gold, coal, ferrous and non-ferrous mineral ores, etc.
The law sets thresholds for capital investments and timeframes for their implementation
according to the specifics of a given investment project of:
at least RUB 50 million within three years or
at least RUB 500 million within five years.
An investment project must be focused on producing goods exclusively within one of the
eligible Russian constituent regions.
In addition, Fast-track Development Zones (FDZs) will be created in the Russian Fast
East (the respective bill that allows one to create such zones has been published on
the unified web portal for legal information). FDZs will offer special terms for doing
business for start-up companies, including tax holidays and simplified rules for hiring
foreign employees.
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The following types of SEZ are established in Russia:

Technical research and implementation zones for scientific projects.
Industrial production zones to develop industrial production.
Tourism-recreation zones for the development and effective use of Russian tourist
resources.
Port zones.
SEZ residents may take advantage of different combinations of benefits, such as reduced
profits tax, exemption from property tax and land tax, and, in some cases, exemption
from customs duty and VAT.
Activities incentives
The following activities incentives are available to taxpayers in Russia:

Certain R&D services are exempt from VAT.
Certain R&D service-related expenses, as listed by the government, are deductible
using a coefficient of 1.5.
Fixed assets used in science and technology may be amortised with an accelerated
coefficient up to 3.
Reduced rates for contribution payments to social funds are established for
information technology (IT) companies.
Special project incentives
The following special project incentives are established in Russia:

Participants in the Skolkovo Innovation Centre enjoy a number of benefits, the
primary of which are the following: exemption from profits and property taxes,
exemption from VAT obligations, and reduced rates for mandatory contributions to
social funds.
Olympic Winter Games (Sochi 2014). The Russian tax law prescribes certain tax
exemptions for foreign and Russian organisers of the Games, marketing partners of
the International Olympic Committee, and official broadcasting companies in relation
to their activity on the Games, as well as exemption from personal income tax for
income received by sportsmen for their participation in the Games.
Foreign tax credit
Credit relief is available for foreign taxes paid up to the amount of the Russian tax
liability that would have been due on the same amount under Russian rules.
Withholding taxes
Under the general provisions of the Tax Code, income received by a foreign legal entity
and not attributed to a PE in Russia is subject to WHT in Russia (to be withheld at
source). WHT rates are as follows:
15% on dividends and income from participation in Russian enterprises with foreign
investments.
10% on freight income.
20% on certain other income from Russian sources, including royalties and interest.
20% of revenue or 20% of the margin on capital gains (from the sale of immovable
property located in Russia or non-listed shares in Russian subsidiaries where the
immovable property located in Russia represents more than 50% of assets).
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Taxation of the margin (rather than gross income received from the above sales) may be
applied only if proper documentary support of expenses is available.
Income of foreign organisations (not performing activity in Russia through a PE) from
the sale of certain listed securities of Russian entities (and their derivatives) is not
regarded as income derived from sources in Russia subject to WHT.
The list of exempt income (not subject to WHT) also includes: (i) interest payments on
Russian state securities; (ii) interest payments on tradable bonds, issued in accordance
with the laws of foreign states; and (iii) payments made by Russian companies to finance
coupons on Eurobonds issued by special purpose vehicles (SPVs)incorporated outside of
Russia.
Tax should be withheld by the tax agent and paid to the Russian budget. WHT rates
may be reduced under a relevant DTT, provisions of which may be applied based on
confirmation of tax residence, which is to be provided by a foreign company to the
Russian tax agent prior to the payment date (no advance permission from the Russian
tax authorities is required) and also as long as general conditions are fulfilled (proof of
beneficial ownership, etc.).
The Russian tax authorities recognise the terms of former Union of Soviet Socialist
Republics (USSR) treaties until they are renegotiated by the Russian government.
Furthermore, the list of effective tax treaties is continuously updated.
The list below indicates the WHT rates mentioned in treaties.
WHT (%)
Recipient
Albania/Russia
Algeria/Russia
Treaty benefits
available from
1 January 1998
1 January 2009
Dividends Interest (1)

10
10
5 (2)/15
0/15
Argentina/Russia
Armenia/Russia
Australia/Russia
Austria/Russia
Azerbaijan/Russia
Belarus/Russia
1 January 2013
1 January 1999
1 January 2004
1 January 2003
1 January 1999
1 January 1998
10 (60)/15
5 (3)/10
5 (4)/15
5 (5)/15
10
15
15
0
10
0
0/10
0/10
Belgium/Russia
Botswana
Brazil
Bulgaria/Russia
Canada/Russia
Chile/Russia
China/Russia
Croatia/Russia
Cuba/Russia
1 January 2001
1 January 2010
1 January 2010
1 January 1996
1 January 1998
1 January 2013
1 January 1998
1 January 1998
1 January 2011
10
5 (6)/10
10 (7)/15
15
10 (8)/15
5 (61)/10
10
5 (10)/10
5 (11)/15
0/10
0/10
0/15
0/15
0/10
15
0/10
10
10
Construction site
duration before
creation of PE
Royalties
(months)
10
12
15
6 months and an
aggregated period of
more than 3 months
in any 12-month
period for furnishing
services
15
6
0
18
10
12
0
12
10
12
10No special provisions
in the relevant DTT;
provisions should
apply
0
12
10
6
15
9
15
12
0 (9)/10
12
5 (62)/10
6
10
18
10
12
5
12
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WHT (%)
Recipient
Cyprus/Russia
Czech Republic/
Russia
Treaty benefits
available from
1 January 2000
(12)
1 January 1998

5 (13)/10
0
10
Denmark/Russia
1 January 1998
10
Egypt
1 January 2001
10
0/15
Finland/Russia
1 January 2003
5 (14)/12
France/Russia
1 January 2000
Germany/Russia
Greece/Russia
Hungary/Russia
Iceland/Russia
India/Russia
1 January 1997
1 January 2008
1 January 1998
1 January 2004
1 January 1999
5 (15)/10
(16)/15
5 (17)/15
5 (18)/10
10
5 (19)/15
10
0
7
0
0
0/10
Indonesia/Russia
Iran/Russia
Ireland/Russia
Israel/Russia
Italy/Russia
Japan/USSR
Kazakhstan/Russia
North Korea/Russia
1 January 2003
1 January 2003
1 January 1996
1 January 2001
1 January 1999
1 January 1987
1 January 1998
1 January 2001
15
5 (20)/10
10
10
5 (21)/10
15
10
10
0/15
0 or 7.5
0
0/10
10
0/10
0/10
0
South Korea/Russia 1 January 1996
5 (23)/10
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Royalties
0
Construction site
duration before
creation of PE
(months)
12
10
12 months and an
more than 6 months
in any 12-month
services
0
12 months and an
more than 365 days
in any 18-month
period for a drilling
rig
15
6 months and an
more than 6 months
in any 12-month
services
0
12 months and an
18-month period for
particular types of
construction work
0
12
0
12
7
9
0
12
0
12
10 12 (may be extended
on agreement with
the competent
authorities)
15
3
5
12
0
12
10
12
0
12
0 (22)/10
12
10
12
0
12 months and an
more than 6 months
in any 12-month
services
up to 24 months
upon agreement
with the competent
authorities)
Russian Federation
WHT (%)
Recipient
Kuwait/Russia
Treaty benefits
available from
1 January 2004
Kyrgyzstan/Russia
Latvia
Lebanon/Russia
Lithuania/Russia
Luxembourg/Russia
Macedonia/Russia
Malaysia/USSR
1 January 2001
1 January 2013
1 January 2001
1 January 2006
1 January 1998
1 January 2001
1 January 1989
10
5 (58)/10
10
5 (25)/10
5 (27)/15
10
0/15 (28)
0/10
5 (59)/10
0/5
0/10
0
10
0/15
Mali/Russia
1 January 2000
10 (31)/15
0/15
Malta/Russia
Mexico/Russia
Moldova/Russia
Mongolia/Russia
1 January 2015
1 January 2009
1 January 1998
1 January 1998
5/10
10
10
10
5
0/10
0
0/10
Montenegro/Russia 1 January 1998

Morocco/Russia
1 January 2000
Namibia/Russia
1 January 2001
5 (32)/15
5 (33)/10
5 (34)/10
10
0/10
0/10
Netherlands/Russia 1 January 1999

New Zealand/Russia 1 January 2004
Norway/Russia
1 January 2003
Philippines/Russia 1 January 1998
5 (35)/15
15
10
15
0
10
0/10
0/15

0 (24)/5
0
Poland/Russia
1 January 1994
10
0/10
Portugal/Russia
Qatar/Russia
Romania/Russia
1 January 2003
1 January 2001
1 January 1996
10 (36)/15
5
15
0/10
0/5
0/15
Construction site
duration before
creation of PE
Royalties
(months)
10
6 months and an
more than 3 months
in any 12-month
services
10
12
5
5
12
5 (26)/10
9
0
12
10
12
10 (29)/15 12 months and more
(30)
than a 6-month
period for installation
or assembly projects
0No special provisions
in the relevant DTT;
provisions should
apply
5
12
10
6
10
12
rates in
24
accordance
with local
legislation
10
18
10
8
5 9 months and more
than a 6-month
services and
installation projects
0
12
10
12
0
12
15
183 days and an
aggregate period of
more than 183 days
in any 12-month
services
up to 24 months
upon agreement
with the competent
authorities)
10
12
0
6
10
12
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WHT (%)
Recipient
Saudi Arabia
Treaty benefits
available from
1 January 2011
Serbia/Russia
Singapore/Russia
1 January 1998
1 January 2010
5 (38)/15
5 (39)/10
10
0/7.5
Slovakia/Russia
Slovenia/Russia
South Africa/Russia
Spain/Russia
1 January 1998
1 January 1998
1 January 2001
1 January 2001
0
10
0/10
0/5
Sri Lanka/Russia
1 January 2003
10
10
10 (40)/15
5 (41)/10(42)
/15
10 (43)/15
Sweden/Russia
1 January 1996
Switzerland/Russia 1 January 1998
Syria/Russia
1 January 2004
5 (44)/15
5 (45)/15
15
0
0
0/10
Tajikistan/Russia
1 January 2004
5 (51)/10
0/10
Thailand/Russia
1 January 2010
15
0/10
Turkey/Russia
1 January 2000
Turkmenistan/Russia 1 January 2000
Ukraine/Russia
1 January 2000
United Kingdom/
1 January 1998
Russia
United States/Russia1 January 1994
Uzbekistan/Russia 1 January 1996
Venezuela
1 January 2010
Vietnam/Russia
1 January 1997
10
10
5 (52)/15
10
0/10
5
0/10
0
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0 (37)/5
0/5
0/10
5 (53)/10
0
10
0/10
10 (54)/15 0/5 (55)/10
10 (57)/15
10
Construction site
duration before
creation of PE
Royalties
(months)
10
6 months and an
more than 6 months
in any 12-month
services
10
18
7.5
6 months and an
more than 3 months
in any 12-month
services
10
12
10
12
0
12
5
12
10
6 months and an
more than 183 days
in any 12-month
services
0
12
0
12
4.5 (48)
6
/13.5 (
49)/18 (50)
on agreement with
the competent
authorities)
15
6 months and an
more than 3 months
in any 12-month
services
10
18
5
12
10
12
0
12
0
18
0
12
10 (56)/15
9
15 6 months and more
than a 12-month
services
Russian Federation
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
In most cases, a 0% tax rate applies to interest payments to the governments of contracting states
and to payments guaranteed by the government.
If the resident of the other contracting state directly holds at least 25% of the capital of the company
paying the dividends.
If the resident of the other contracting state contributed at least 40,000 United States dollars
(USD) (or an equivalent amount in the domestic currency of either of the contracting states) to the
authorised capital of the enterprise paying the dividends.
a. Dividends are paid to a company (other than a partnership) that directly holds at least 10% of the
b. The resident of the other contracting state has invested a minimum of 700,000 Australian dollars
(AUD), or an equivalent amount in Russian rubles, in the capital of that company.
c. If the dividends are paid by a company that is resident in Russia, the dividends are exempt from
Australian tax.
If the beneficial owner of the dividends is a company (other than a partnership) that directly holds at
least 10% of the capital of the company paying the dividends and the participation exceeds USD
100,000 or an equivalent amount in any other currency.
If the resident of the other contracting state directly holds at least 25% of the capital of the company
If the beneficial owner of the dividends directly holds at least 20% of the total capital of the company
If the beneficial owner of the dividends is a company that owns at least 10% of the voting stock (or
in the case of Russia, if there is no voting stock, at least 10% of the statutory capital) of the company
0% WHT is applied to the following types of Royalties:
a. Royalties for the production or reproduction of any literary, dramatic, musical, or other artistic
work (but not including royalties for motion picture films or works on film or videotape or other
means of reproduction for use in connection with television broadcasting).
b. Royalties for the use of, or the right to use, computer software.
c. Royalties paid to an unrelated party for the use of, or the right to use, any patent or any
If the beneficial owner of the dividends is a company that directly holds at least 25% of the capital
of the company paying the dividends (this share should be at least USD 100,000 or its equivalent in
another currency).
If the beneficial owner of the dividends is a company (excluding partnerships) that directly holds at
least 25% of the capital of the company paying the dividends.
The Protocol to the Russia-Cyprus DTT introduces some new provisions that came into effect from
2013.
If the beneficial owner of the dividends has directly invested in the capital of the company not less
than EUR 100,000 or its equivalent in another currency.
If the beneficial owner of the dividends is a company (other than a partnership) that directly holds
at least 30% of the capital of the company paying the dividends, and the foreign capital invested
exceeds USD 100,000 or its equivalent in the national currencies of the contracting states at the
moment when the dividends become due and payable.
a. Where the beneficial owner of the dividends has invested in the company paying the dividends,
irrespective of the form or the nature of such investments, a total value of at least 500,000 French
francs (FF) or the equivalent in another currency; as the value of each investment is appreciated
as of the date it is made.
b. Where that beneficial owner is a company that is liable to tax on profits under the general tax laws
of the contracting state of which it is a resident and which is exempt from such tax in respect of
such dividends.
If only one of the conditions of 15 (a) or 15 (b) are met.
If the beneficial owner of the dividends is a company that directly holds at least 10% of the basic or
common stock of the company paying the dividends and such capital share amounts to at least EUR
80,000 or the equivalent value in rubles.
If the beneficial owner of the dividends is a company (other than partnership) that directly holds at
at least 25% of the capital of the company paying the dividends and the foreign capital invested
exceeds USD 100,000 or its equivalent in the national currency of the contracting state.
If the recipient of the dividends is a company (excluding partnership) that directly holds at least 25%
of the capital of the company paying the dividends.
If the beneficial owner of the dividends is a company that directly holds at least 10% of the capital
of the company paying the dividends (this share should be at least USD 100,000 or its equivalent in
another currency).
Literary, artistic, or scientific work including cinematograph films and films or tapes for radio or
least 30% of the capital of the company paying the dividends and invests not less than USD 100,000
or the equivalent in local currencies to the company paying the dividends.
The 0% rate applies to dividends paid to governmental agencies, financial institutions or companies
controlled by the government, or companies where the government holds at least 25% of the capital
Russian Federation
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25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
1696
of the company paying the dividends and the capital directly invested by this beneficial owner is not
less than USD 100,000 or the equivalent in the national currency of the contracting state.
least 25% of the capital of the company paying the dividends and the capital directly invested by this
beneficial owner is not less than USD 100,000 or the equivalent amount in the national currency of a
contracting state.
For the use of industrial, commercial, or scientific equipment.
If the beneficial owner of the dividends directly holds at least 10% of the capital in the company
paying the dividends and the investment exceeds EUR 80,000.
The 15% rate applies to profits received from a joint venture by a resident of Malaysia.
Any patent, trademark, design or model, plan, secret formula or process, or any copyright of scientific
work, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for
Cinematograph films or tapes for radio or television broadcasting, any copyright of literary or artistic
work.
If the invested amount equals or exceeds FF 1 million.
at least 25% of the capital of the company paying the dividends and has invested in it at least USD
100,000 or the equivalent in the national currencies of the contracting states.
If the beneficial owner of the dividends has invested in the capital of the company paying dividends
of more than USD 500,000.
least 25% of the share capital of the company paying the dividends and has directly invested in the
equity share capital of that company not less than USD 100,000 or its equivalent in another currency.
least 25% of the capital of the company paying the dividends and has invested in it at least 75,000
European Currency Units (ECU) or its equivalent in the national currencies.
If the beneficial owner of the dividends is a company that, for an uninterrupted period of two years
prior to the payment of the dividends, directly owned at least 25% of the capital of the company
The 0% rate applies to dividends paid to governmental agencies or financial institutions.
at least 25% of the capital of the company paying the dividends and has invested in it at least USD
100,000 or its equivalent in the national currencies of the contracting states.
If the beneficial owner of the dividends is the government of the other contracting state or if the
beneficial owner of the dividends is a company that directly holds at least 15% of the capital of the
company paying the dividends and has invested in it at least USD 100,000 or its equivalent in other
currencies.
If residents of the other contracting state hold at least 30% of the capital of the company paying the
dividends and have directly invested in the equity share capital (authorised fund) of that company an
amount of not less than USD 100,000 or its equivalent in the currency of the first state.
a. The beneficial owner of the dividends is a company (other than a partnership) that has invested at
least ECU 100,000 or its equivalent in any other currency in the capital of the company paying the
dividends.
b. Those dividends are exempt from tax in the other contracting state.
If only one of the conditions of 41 (a) or 41 (b) are met.
100% of the capital of the company paying the dividends; or, in the case of a joint venture, not less
than 30% of the capital of the joint venture; and, in either case, the foreign capital invested exceeds
USD 100,000 or its equivalent in the national currencies of the contracting states at the moment of
the actual distribution of the dividends.
at least 20% of the capital of the company paying the dividends and the foreign capital invested
exceeds 200,000 Swiss francs (CHF) or its equivalent in any other currency at the moment when the
dividends become due.
N/A
N/A
Cinematography films, programmes, and recordings for radio or television broadcasting.
Any copyright of literary, artistic, or scientific work.
Any patent, trademark, design or model, plan, secret formula or process, any computer software
programme, or for information concerning industrial, commercial, or scientific experience.
If the beneficial owner of the dividends directly holds at least 25% of the capital of the company
If a resident of the other contracting state has invested in its joint-stock capital (registered fund) at
least USD 50,000 or its equivalent in the national currencies of the contracting states.
If the beneficial owner of the dividends is a company that owns at least 10% of the voting stock (or,
in the case of Russia, if there is no voting stock, at least 10% of the statutory capital) of the company
least 10% of the capital of the company paying the dividends and has invested in this company not
less than the equivalent of USD 100,000.
In the case of banks.
In the case of fees for technical assistance.
Russian Federation
Russian Federation
57. If the residents of the other contracting state have directly invested in the equity share capital of that
company not less than USD 10 million.
58. If the beneficial owner of the dividend income owns more than 25% of the capital of a company
paying dividends, and it contributed more than USD 75,000.
59. 5% is applicable to interbank loans only.
60. If the recipient of dividends directly holds at least 25% of the capital of the company paying the
dividends.
61. If the recipient of dividends directly holds at least 25% of the capital of the company paying the
dividends.
62. 5% with respect to intellectual property (IP) rights for use of any industrial, commercial, or scientific
equipment.
Tax administration
All taxpayers are required to obtain tax registration and be assigned a taxpayer
identification number, irrespective of whether their activities are subject to Russian
taxation.
Taxable period
The taxable period runs from 1 January to 31 December.
Tax returns
An annual profits tax return must be filed by 28 March of the year following the end of
the reporting year.
Payment of tax
Companies pay advance profits tax payments on a monthly basis. The final payment for
the year is due by 28 March of the following year.
Tax audit process

Tax dispute resolution at pre-trial (administrative) stage
Tax disputes happen quite frequently in Russia. Most taxpayers have to go through the
tax litigation process at least once while doing business in Russia.
If taxpayers wish to challenge decisions and other documents/actions (or failure to
act) of the tax authorities in court, they must first contest those decision/actions with a
higher tax office.
Recently, more tax disputes are now being resolved at the pre-trial (administrative,
superior tax office) stage. However, taxpayers cannot formally negotiate tax audit results
or enter into settlement agreements with the tax authorities and, in many cases, still
must protect their rights in court.
Tax dispute resolution in court
Taxpayers can submit claims against the tax authorities through arbitrazh courts
(i.e. courts that review and resolve economic disputes mainly between legal entities/
entrepreneurs or legal entities/entrepreneurs and state authorities, including the tax
authorities). Claims may be filed with a court within three months after a decision
comes into force or after a taxpayer discovers that ones rights were violated (provided
that the taxpayer has gone through the pre-trial stage mentioned above).
Courts of the first instance initially review disputes and issue decisions. Decisions of
a first instance court can be appealed in appellate courts (second level) and cassional
courts (third level). The average litigation process (all three instances [levels]) usually
takes from 9 to 12 months.
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On very rare occasions, resolutions/decisions by these courts can be appealed in the
Russian Supreme Arbitrazh Court (a supervisory authority). By June 2014, the Russian
Supreme Arbitrazh Court will be reorganised and merged with the Russian Higher Court
(which is currently a supervisory authority for disputes involving individuals, including
criminal cases).
The statute of limitations is established for three years. In 2014, the tax authorities may
examine 2013, 2012, and 2011 profits tax returns by conducting a site tax audit.
The recent court practice demonstrates that tax authorities concentrate on (i) tax
evasion schemes and relationships with one-day contractors, and (ii) financing
structures and thin capitalisation rules.
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Rwanda
PwC contact
Bernice Kimacia
PricewaterhouseCoopers Rwanda Limited
5th Floor, Blue Star House, Kacyiru
PO Box 1495
Kigali
Rwanda
Tel: +250 252 5882 03/04/05/06
The government of Rwanda terminated the Double Tax Treaty (DTT) Agreement with
Mauritius at the beginning of 2013. The DTT has now been ratified with effect from 31
March 2014.

Rwanda operates both a source and residence-based taxation system. This means that
any income that is deemed to be from sources within Rwanda will be liable to tax in
Rwanda. In addition, resident entities are taxed on their worldwide income. However,
where such income is taxed in another country, a tax credit is allowed, which does not
exceed the tax that would have been payable on the same income in Rwanda.
Non-resident entities are taxed on income sourced in Rwanda through a permanent
establishment (PE).
The standard corporate income tax (CIT) rate is 30%; however, small businesses and
individuals (whose business has a turnover of less than 20 million Rwanda francs [RWF]
in a tax period) pay profit tax at the rate of 4% of turnover.
Special CIT regimes
There are special CIT rates for certain industries or sectors of the economy.
Newly listed companies on capital markets are taxed as follows for a period of five years:
If a company sells at least 20% of their shares to the public, the CIT rate is 28%.
Venture capital companies registered with the Capital Markets Authority in Rwanda
enjoy a CIT rate of 0% for a period of five years. This is also the same rate applicable to
companies that carry out microfinance activities.
Investment entities that operate in a Free Trade Zone or foreign companies that have
their headquarters in Rwanda pay CIT at 0%.
Local income taxes
Rwandan legislation does not provide for any local taxes on income.
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Corporate residence
Rwanda incorporated companies or associations are treated as Rwanda resident entities.
In addition, companies incorporated overseas are also treated as Rwandan resident
companies if they have a place of effective management in Rwanda at any time during
the tax period. The term effective management is not defined in the tax law.
Rwandan government companies are also considered to be residents in Rwanda.
The definition of a PE for Rwanda is largely based on the Organisation for Economic
Co-operation and Development (OECD) Model Tax Convention definition. According to
Rwandan tax law, a PE means a fixed place of business through which the business of a
person is wholly or partially carried on.
For non-resident companies, CIT liability will arise if they have a PE in Rwanda through
which a trade is carried on. The profits attributable to the PE will be taxed in Rwanda.
However, there are no rules or guidance on how the PEs profit should be evaluated for
Rwanda tax purposes. The general understanding is that entities are required to use
transfer pricing methods to determine the level of profits that should be attributable to
the PE based on the functions it performs.
In particular, the existence of the following triggers a PE: an administrative branch; a
factory; a workshop; a mine, quarry, or any other place for the exploitation of natural
resources; a building site; or a place where construction or assembly works are carried
out.
There are a number of specific exceptions from the definition of a PE. A person is
deemed not to have a PE if that person:
a. uses facilities solely for the purpose of storage or display of goods or merchandise
b. maintains a stock of goods or merchandise solely for the purpose storage or display
c. maintains a stock of goods or merchandise solely for the purpose of processing by
another person
d. has a place of operation aimed purposely at purchasing goods or merchandise or at
collecting information related to ones business, or
e. has a place of operation solely for the purpose of carrying on preparations of ones
activities and performing any other activities that make them more effective.
Where an agent, except an independent person concerned with (e) above, acts on behalf
of a company (or person) and the agent has capacity to conclude contracts in the name
of that company, the company is considered as having a PE in respect of activities ones
agent undertakes except if such activities of the agent are limited to those mentioned in
(b) above.
However, a person is not considered as having a PE if it carries out activities through
a broker, general commission agent, or any other private agent in accordance with
procedures of the ordinary course of the activities of such an agent.
A company that controls or is controlled by another company does not, of itself,
constitute either company to be a PE of the other.
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Rwanda
Other taxes
VAT is levied on the supply of taxable goods and services in Rwanda as well as on the
importation of taxable goods and services into Rwanda.
The threshold for VAT registration is taxable turnover of RWF 20 million in any relevant
year or RWF 5 million in a calendar quarter.
The standard VAT rate is 18% and applies to goods and services that are neither exempt
from VAT nor zero-rated.
Export of goods and services are subject to VAT at 0%. Supplies to privileged persons,
such as goods imported for official purposes of diplomatic missions, supplies made
under special arrangements between the government of Rwanda and donors, and
supplies or importation made under special technical aid agreements, are subject to VAT
at 0%. Persons entitled to zero rating of goods or supplies received by them are required
to pay VAT at the time of receiving the supply and then apply for a refund of the VAT
paid.
Some supplies are exempt from VAT, the main categories being supply of water service,
goods and services for health purposes, educational materials and services, transport
services, books and newspapers, financial and insurance services, lending or leasing
interests in land or building for residential purposes, funeral services, energy supplies,
all unprocessed agricultural and livestock products, mobile handsets, and equipment for
information, communication, and technology.
Suppliers who provide zero-rated services or goods are entitled to recover input VAT
incurred in making the supply. This is unlike exempt supplies, where input VAT recovery
is not allowed. Therefore, zero rating is preferable to exemption.
The VAT returns and relevant payment are due to the Rwanda Revenue Authority (RRA)
on a monthly basis by the 15th day of the following month. However, VAT payers with
annual turnover of RWF 200 million or below may elect to file VAT returns or make
payments on a quarterly or monthly basis.
Customs duties
Rwanda is a member of the East African Community, which uses the East African
Community Customs Act (EACMA) for levying import duty. The EACMA prescribes
Common External Tariffs (CET) for goods originating outside the Customs Union. Goods
are generally subject to import duty of 0% for raw materials and capital goods, 10% for
intermediate goods, and 25% for finished goods.
Goods will only enjoy the preferential community tariffs if they meet the EAC Customs
Union Rules of Origin.
Certain industries and items are also entitled to exemptions under the customs law (e.g.
assemblers of bicycles and motor cycle kits, importers of gas cylinders, certain hotel
equipment, solar equipment, and energy saving bulbs).
Enterprises established in Free Trade Zones are exempt from customs duty on machinery
and inputs for exported products. There also exists an import duty remission scheme,
where import duty may be remitted for raw materials used to manufacture goods for
export. This is subject to a requirement for proof of export and execution of the bond.
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Excise taxes
Excise tax is imposed on the manufacturer or importation of certain commodities,

mainly soft drinks, bottled water, cigarettes, alcohol, fuels, and lubricants.
The following rates apply in respect of products and services for which excise duty is
applied:

Juice from fruits: 5%.

Soda and lemonade: 39%.
Mineral water: 10%.
Beer: 60%.
Brandies, liquors, and whisky: 70%.
Cigarettes: 150%.
Telephone communication: 8%.
Fuel (excluding benzene), gas oil, and lubricants: 76%.
Powdered milk: 10%.
Vehicles with an engine capacity of above 2500cc: 15%.
Vehicles with an engine capacity of between 1500cc and 2500cc: 10%.
Vehicles with an engine capacity of less than 1500cc: 5%.
Property taxes/fixed asset tax
Local government levies fixed asset tax on:

the market value of parcels of land
the market value of buildings and all improvements thereto registered with the land
registration centre and for which the owner has obtained a title deed from the time
the building is inhabited or used for other activities
the value of land exploited for quarry purposes, and
the market value of usufruct with a title deed.
The tax rate is fixed at a thousandth (1/1000) of the taxable value per year. The tax
payment must be paid not later than 31 March of the year.
Transfer taxes
There is a fixed fee of RWF 20,000 on transfer of property. However, no transfer of

ownership of a fixed asset can be effected without a tax clearance certificate issued by
the concerned decentralised entity.
Stamp taxes
There are no stamp duties in Rwanda.
Trading licence fee
Districts charge a trading licence fee, which is paid by any person who commences a
profit-oriented activity in Rwanda. The tax year starts on 1 January, and the trading
licence fee must be paid for a whole year. If such activity starts after January, the
taxpayer must pay a trading licence fee equivalent to the remaining months, including
the one in which the activities started.
The tax declaration is done not later than 31 March of the tax year. The trading licence
fee is calculated on the basis of turnover, and the amount of the fee varies between RWF
60,000 (for turnover of RWF 40 million) and RWF 250,000 (for turnover of over RWF
150 million).
The turnover applied is as per the amount approved in the previous year by the RRA.
Every year, not later than 31 January, the RRA submits the necessary data to the
concerned decentralised entity.
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Rwanda
There are also different rates for trading licence fee for other small traders, such as
small- scale technicians, transport activities by boat, traders, and technicians.
All people working in Rwanda, both nationals and foreigners, are required to contribute
to a national social security contribution fund managed by the Rwanda Social Security
Fund. The employer is required to contribute 5% of the employees gross salary to the
scheme, while the employees contribution is 3%.
Gross salary means total remuneration received by the employee, including allowances,
bonuses, commissions, and all other cash benefits, as well as any fringe benefits, but
excludes reimbursement of business expenses and transport allowances.
Branch income
The tax law does not prescribe special provisions for taxation of branches; consequently,
tax rates on the profits of PEs are the same as for domestic corporations. PEs are subject
to tax at a rate of 30% and treated as domestic companies.
A branch is considered a PE for the parent company; therefore, it is taxed on the income
that is sourced from Rwanda only.
Inventory valuation
Trading stock is valued at a lower of cost price or market price on the last day of the tax
period. Work in progress is valued at cost.
Capital gains
There is a general capital gains tax law in Rwanda that provides that capital gains arising
from the sale of commercial immovable property are subject to tax at the rate of 30%.
However, capital gains arising from secondary market transactions on listed securities
are exempt from taxation.
In addition, capital gains and losses arising on reorganisation are exempt from tax in
respect of the transferring company. Reorganisation is defined to include the following:
a merger of two or more resident companies
the acquisition or a takeover of 50% or more of shares or voting rights by number or
value in a resident company in exchange for shares of the purchasing company
the acquisition of 50% or more of the assets and liabilities of a resident company by
another resident company solely in exchange of shares in the purchasing company, or
splitting of a resident company into two or more resident companies.
Dividend income
Dividend income includes income from shares and similar income distributed by
companies, cooperative societies, public business enterprise, and partnerships. Dividend
income is subject to withholding tax (WHT) at flat rate of 15%.
If dividend distribution has been subjected to WHT, this becomes the final tax.
In determination of taxable business profit of a resident company or partnership,
dividends and other profit-shares received from a resident entity are therefore excluded.
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Interest income
Interest income includes income from loans, deposits, guarantees, and current
accounts. It also includes income from government securities and bonds, as well as from
negotiable securities issued by public and private companies.
Interest income is subject to WHT at flat rate of 15%.
Foreign income
Resident companies and enterprises are taxed on their worldwide income. However, a
foreign tax credit is granted in respect of taxes paid on the foreign income, subject to the
limit of the tax that would have been paid in Rwanda on the same income.
There are no provisions in Rwanda for tax deferral of income earned abroad.
Deductions
A trading company is generally permitted to deduct expenses that are incurred wholly
and exclusively for purposes of the companys trade, provided these costs are not capital
in nature and are charged to the profit and loss account.
The Rwandan tax law stipulates that deductible expenses should fulfil the following
conditions:

Used for direct purpose of and in normal course of business.

Actual expenses substantiated by proper documents.
Result in a decrease in net assets.
Used for activities related to the tax period in which they are incurred.
Accounting depreciation of fixed assets is not allowable as a deduction for tax purposes.
The same applies in the case of amortisation of assets. However, businesses are allowed
specified deductions, referred to as tax depreciation in respect of specified classes of
assets. This is deducted in arriving at taxable income.
Tax depreciation allowance is granted to persons who own depreciable assets at the end
of the tax period and use such assets in the production of income.
Land, fine arts, antiquities, jewellery, and any other assets that are not subject to
wear and tear or obsolescence are not granted tax depreciation. Cost of refining or
reconstruction of building, equipment, and heavy machinery fixed to the walls attract
tax depreciation at the rate of 5%.
Intangible assets, including goodwill that is purchased from third party, enjoy tax
depreciation at the rate of 10%, while computers and accessories, information and
communication systems, software products, and data equipment are granted tax
depreciation at 50%.
Tax depreciation allowance is also available on all other classes at the rate of 25%.
There is also an enhanced allowance in the form of an investment allowance that is
granted to investors where they incur an investment of at least RWF 30 million. The
rate is 40% where the investment is within Kigali city or 50% where the investment is
within priority sectors defined by the Rwandan Investment Code or a registered business
located outside Kigali. Businesses are required to hold the investment for at least three
years in order to benefit from the investment allowance.
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Goodwill
As mentioned above, purchased goodwill will attract tax depreciation at the rate of
10%, which is an allowable deduction. However, amortisation of goodwill is not tax
deductible.
Start-up expenses
There is no clear guidance on the tax treatment of start-up expenses. However, in

practice, start-up expenses of a capital nature are not deductible for tax purposes.
Where they relate to purchase of assets, respective tax depreciation is claimed. Start-up
expenses of a revenue nature are tax deductible.
Interest expenses
Interest on borrowed money used for earning business profit or interest in respect of
an amount payable for property acquired to earn income is deductible, provided the
interest paid is pursuant to a legal obligation and is reasonable under the circumstances.
Thin capitalisation rules can limit interest deductions when debt owed to related entities
exceeds four times the amount of the corporations equity. Thin capitalisation does not
apply to banks and insurance companies.
Bad debt
A bad debt provision will be deductible for tax purposes if it fulfils the following
conditions:
The amount was previously included in the income of the taxpayer.
Debt is written off in the books of accounts.
All possible steps have been pursued by the taxpayer, and there is concrete proof that
the debtor is insolvent.
It is the last condition that makes the criteria difficult to satisfy, and local taxpayers
rarely obtain bad debt relief in practice.
However, licensed commercial banks and leasing entities duly licensed as such are
allowed to deduct, in determining business profit, any increase of the mandatory reserve
for non-performing loans as required by the directives related to management of bank
loans and similar institutions of the National Bank of Rwanda. Similarly, the business
profit is increased by the entire amount recovered from bad debts deducted from such
reserves.
Donations and gifts to charitable organisations and other non-profit making

organisations are tax deductible where the amounts are less than 1% of turnover.
However, donations to profit making organisations are not allowed for tax, irrespective
of the amount.
Fines and penalties
Fines and penalties imposed for breaking the law or for statutory offences, such as
payment of taxes late, are not tax deductible.
The law does not specify which type of non-statutory fines or penalties are not allowed
for tax. For example, there is no guidance on whether fines or penalties paid for breach
of contract are deductible or not.
Taxes
Income tax paid on business profit and recoverable VAT are not deductible for tax
purposes. This includes any back taxes paid by the business.
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Tax losses can be carried forward for the next five tax periods, earlier losses being
deducted before later losses.
If the direct or indirect ownership of the share capital or the voting rights of an unlisted
company changes more than 25% by value or by number during a tax period, such a
company is restricted from carrying forward losses incurred during the tax period and
previous tax periods.
There are no provisions for carryback of tax losses.
Royalties, management fees, and similar payments to affiliated non-residents are

deductible expenses to the extent that they are incurred to earn income of the Rwandan
company and the payments adhere to the arms-length principle and comply with
transfer pricing requirements.
Group taxation
There is no provision for group taxation in Rwanda. Each individual corporate group
member is required to submit their own tax return on a stand-alone basis.
Transfer pricing
Rwandan transfer pricing legislation and the prescribed transfer pricing methods are
generally consistent with the OECD guidelines. The law requires that transactions
between related parties be carried out under the arms-length principle.
The tax law empowers the Commissioner General to adjust profits earned between
related parties if he considers that the trading arrangements between related parties
do not adhere to the arms-length principle. The arms-length principle requires that
transfer prices charged between related parties are equivalent to those that would be
charged between independent parties in the same circumstances.
Rwanda operates a self-assessment system; therefore, taxpayers are obligated to selfassess their compliance to the tax legislation, which includes transfer pricing policy.
However, there are no specific transfer pricing documentation requirements currently in
place.
Rwandas transfer pricing legislation provides an opportunity for advance pricing
agreements (APAs) with the RRA, a progressive development giving businesses
operating in Rwanda a greater degree of certainty. Taxpayers can discuss and negotiate
their transfer pricing arrangements with the RRA and obtain an advance ruling
confirming that their transfer pricing arrangement is appropriate. This is intended to
minimise the potential for future disputes.
Thin capitalisation
The interest paid on loans and advances from related entities is not tax deductible to the
extent that the total amount of loans/advances exceeds four times the amount of equity
during the tax period. For purposes of determining the above, equity excludes provisions
and reserves. This provision does not apply to commercial banks and insurance
companies.
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Rwanda
A variety of tax incentives are given in the form of enhanced tax depreciation allowances
(known as capital allowances). The incentives are granted based on the type of assets
purchased and used for business and the amount of investment made (see Depreciation
and amortisation in the Deductions section).
There are also tax incentives in the form of lower CIT rates (see Special CIT regimes in
the Taxes on corporate income section). These are provided for certain sectors, such as
microfinance companies, venture capital companies registered with Capital Markets
Authority, and newly listed companies.
Rwanda also grants tax incentives in the form of profit tax discounts. This is based on
the number of Rwandans employed and maintained during a six-month period. The rate
of profit tax discount ranges between 2% (for employees between 100 to 200 Rwandans)
to 7% (where a company employs more than 900 Rwandans).
Companies that export commodities and services that bring into the country export
revenue are also entitled to profit discount at 3% (between 3 million United States
dollars [USD] and USD 5 million) or 5% (over USD 5 million).
Foreign tax credit
Rwanda allows a foreign tax credit on income generated from business activities
performed abroad by a tax resident. The income tax payable is offset by the foreign tax
paid on that income. However, the foreign credit is limited to the amount of tax that
would have been applicable on that income in Rwanda.
The credit is allowed where it is supported by appropriate evidence, such as a tax
declaration, a WHT certificate, or any other similar acceptable document.
Withholding taxes
A resident individual or resident entity is required to deduct a WHT of 15% when
making the following payments:

Interest.
Dividends.
Royalties.
Service fees, including management and technical service fees, with the exclusion of
international transport.
Performance payments made to artists, a musician, or a sports person.
Lottery and other gambling proceeds.
Goods supplied by companies or physical persons not registered with the tax
administration.
There is also a WHT of 5% that is applicable on goods imported for commercial use.
Public institutions are required to retain 3% on payments to winners of public tenders.
However, businesses that possess a tax clearance certificate are exempted from
deduction of the above WHT.
The WHT deducted should be remitted to the RRA within 15 days following the month
of deduction.
Tax treaties
Rwanda has DTTs with Belgium, Mauritius, and South Africa.

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The DTT between Rwanda and Belgium provides for a lower rate of 10% on interest and
royalties, but 0% on dividends.
The DTT between Rwanda and Mauritius has been ratified and provides for a lower rate
of 10% on royalties, dividends, and interest and 12% on management fees.
The DTT between Rwanda and South Africa provides for a lower WHT rate of 10%.
The DTT agreements contain conditions to be complied with for the preferential rates
to apply; consequently, it is recommended that professional advice is sought before
application.
Tax administration
Taxable period
The normal taxable period is between January and December. However, a different tax
period can be allowed on approval by the Minister of Finance.
Tax returns
Companies are assessed with reference to accounting periods. This refers to the period
for which a company prepares its accounts. However, an accounting period for CIT
purposes cannot exceed 12 months, so companies preparing statutory accounts for
longer than 12 months need to prepare more than one CIT return.
Rwanda operates a self-assessment regime. Quarterly tax returns are due on 30 June,
30 September, and 31 December (or by the sixth, ninth, and 12th month of the tax
period). The annual tax return/declaration must be filed within three months after the
tax period. The tax declaration must include audited financial statements as well as any
other documents that may be requested by the tax administration.
Payment of tax
Advance CIT is payable in three instalments. Tax payments are due on 30 June, 30
September, and 31 December (or by the sixth, ninth, and 12th month of the tax period).
Each instalment is 25% of the tax liability as calculated in the tax return/declaration of
the previous tax period. This amount can be reduced by WHT paid during the tax period.
The final payment of CIT for taxpayers with a December year-end is 31 March of the
following year. In the case of other accounting year-ends, the final CIT payment is due
on the last day of the third month following the accounting year-end.
Tax audit process
Large taxpayers are selected for audit by the RRA on a regular basis. The RRA tends to
audit two tax periods, but this can be extended on request by the taxpayer. Most audits
are carried out onsite. The RRA may conduct a desk audit of taxpayers tax affairs where
they note discrepancies on tax returns filed by the taxpayer, anomalies with turnover, or
any other situations that justify an audit.
Under normal in-depth audits, the RRA is required to issue a taxpayer with a draft
notice of assessment following the completion of the field audit. The draft assessment
is referred to as a rectification note. The taxpayer is granted 30 days within which to
respond. In case the tax issues are not resolved, a final notice of assessment is issued.
The taxpayer is allowed 30 days within which to appeal. Once an appeal is submitted
to the Commissioner General, the RRA has 30 days within which to respond to the
objection. This can be extended by another 30 days but not beyond this period. At
this stage, the appeal is handled by the appeal committee, and the taxpayer and the
taxpayers agent are invited for a meeting to provide explanations.
1708
Rwanda
Rwanda
Once the final assessment is issued, the tax due is payable, although the Commissioner
has powers to suspend the payment pending the determination of the appeal.
There is a provision for resolving the dispute through an amicable settlement process.
Taxpayers can opt for this approach while at the same time exploring the next stage of
the appeal process.
A taxpayer that disagrees with the response on the final assessment can appeal to the
high court within 30 days.
The RRA has powers to audit a taxpayer for a period going back ten years. Taxpayers are
now required to keep their records for a period of ten years.

Topics of interest for the RRA include:
Deduction of WHT on payments to non-resident persons and reverse VAT.

Treatment of capital gains on disposal of assets.
Recovery of reverse VAT on services that are regarded as being available in the local
market.
Reconciliation of turnover per financial statements to receipts as per taxpayer bank
statements.
Rwanda
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PwC contact
Gloria Eduardo
Bishops Court Hill
PO Box 111
Tel: +1 246 626 6700
The rate of corporate income tax (CIT) has been reduced from 35% to 33% as of 1
January 2013.
The deduction allowed for expenses paid to related persons in respect of administration
fees, management fees or expenses, head office charges and allocations, technical
services, shared costs, and other similar charges is limited to 5% of the gross sales or
revenues of the taxpayer.
There have also been changes to the taxation of life and non-life insurance businesses.

Companies incorporated in Saint Kitts and Nevis (St. Kitts-Nevis) pay CIT on their
worldwide income with relief available under existing double taxation agreements
(DTAs). Non-resident companies deriving income from St. Kitts-Nevis are liable for CIT
and should be registered if they have a physical presence in St. Kitts-Nevis.
St. Kitts-Nevis imposes CIT at a flat rate of 33%.
Taxable income or assessable income is ascertained by deducting from income all
expenses that are wholly and exclusively incurred during the year in the production of
the income. Assessable income is normally arrived at by adjusting the net profit per the
financial statements for non-taxable income, non-deductible expenses, and prior-period
losses of up to 50% of chargeable income.
Where a person resident in St. Kitts-Nevis makes a payment to another person not
resident in St. Kitts-Nevis, as noted in the Withholding taxes section, thenwithholding tax
(WHT) at a rate of 10% must be deducted and remitted to the Inland Revenue within 15
days.
A company that carries on business exclusively with persons who are not resident in St.
Kitts-Nevis is exempt from all income, capital gains, and WHTs.
Companies registered under the Condominium Act are governed by that act and are not
required to pay CIT.
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Corporate residence
A corporation is deemed to be resident if it is incorporated in St. Kitts-Nevis or if
it is registered as an external company doing business in St. Kitts-Nevis under the
CompaniesAct.
A PE is not defined in the Income Tax Act; however, any company that would meet the
general definition of a PE must be registered.
Other taxes
The standard VAT rate is 17%, whilehotel accommodation, tour operators, and
restaurants carry a reduced rate of 10%.
Persons who have made or are likely to make taxable supplies in excess of 96,000 East
Caribbean dollars (XCD) for certain professional services andXCD 150,000 for other
business activities in a continuous period of 12 calendar months are required to register
for VAT.
Customs duties
All imports are subject to import duties, VAT, and customs service tax (CST). In all
instances, certain exemptions will apply.
Customs duty is levied on a wide range of imported goods at rates from 0% to 70% as
specified in the Custom Duties Act. VAT is applied at a rate of 17%, and CST at a rate
of 6%. Customs duty is levied on goods based on the cost, insurance, and freight (CIF)
values and rates determined by the Caribbean Community (CARICOM) Common
External Tariff.
Excise tax
The excise tax applies to a small range of goods, such as alcoholic beverages, tobacco
products, petroleum products, motor cycles, aerated beverages, and firearms. The excise
tax rate ranges between 5% and 25%.
Property tax
Saint Kitts
Property tax in Saint Kitts is levied at varied rates on the basis of the market value of the
real property (including land and building as assessed by the Chief Valuation Officer)
and its class.
Property classes and rates of tax are as follows:
Residential use property: 0.2%.
Commercial use property: 0.3%.
Annual allowances and tax rebates are available as follows:
Residential use property and condominiumallowance ofXCD 80,000 from the
taxable value.
No property taxis assessed on any buildings, condominiums, etc. that are under
construction.
New residential use properties and condominiums are exempt from tax for one year
from the date certified by the valuation officer.
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Note that residential use properties located in the South East Peninsula are assigned
values based on fixed rates for land (XCD 20 per square foot) and building (XCD 300 per
square foot). Property tax is then applied at a rate of 0.2%.
Where property situated in the South East Peninsula area is not developed within five
years, a surcharge can be assessed at the rate of 1% of the assessed market value per
annum, and increased annually at the rate of 1% thereafter until it reaches a maximum
rate of 5% of the assessed market value while the property remains undeveloped. If
property is less than one acre, undeveloped, and owned by a resident for the purpose
of erecting a house, such propertyis exempt from the surcharge upon application in
writing to the Comptroller of Inland Revenue.
Property tax is payable on or before 30 June of each year and is deemed to be in default
if not paid within 30 days of becoming due. Interest is charged at a rate of 12% per
annum on the unpaid taxes.
Nevis
Property tax in Nevis is levied at varied rates on the basis of the market value of the real
property (including land and building as assessed by the Chief Valuation Officer) and its
class.
Property class and rates are as follows:
Property class
Residential
Commercial
Accommodation
Certified farming
Institutional
Building tax rate (%)

0.156
0.3
0.3
0
0.2
Land tax rate (%)

0.075
0.2
0.2
0.01
0.15
Commercial use property is defined as property that does not include accommodation
use property or property used for certified farming operations.
Accommodation use property is defined as property for short term accommodation and
includes a guest house.
Annual allowances and tax rebates are available as follows:
Residential use property and condominium allowance ofXCD 80,000 from the
taxable value.
No property taxis assessed on any buildings, condominiums, etc. that are under
construction.
Property tax is payable on or before 30 June of each year and is deemed to be in default
if not paid within 30 days of becoming due. Interest is charged at a rate of 12% per
annum on the unpaid taxes.
Alien land holding licences
To hold land as an owner, a non-citizen must first obtain an alien land holding licence
and pay 10% of the market value of property orXCD 750, whichever is greater.
A non-citizen is required to obtain a licence to hold shares in a company that owns land,
to vote at shareholders meetings of the company, and to be a director of the company.
Each licence costsXCD 250.
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If a non-citizen purchases land in the Frigate Bay area, then there is no requirement to
obtain a licence and only a minimal fee ofXCD 50 is payable.
If a non-citizen wishes to purchase land in the South East Peninsula, the non-citizen is
required to obtain a licence prior to purchasing the property; however, the payment of
the 10% licence fee will be waived.
Stamp duty
Stamp duty applies to a very wide range of transactions (e.g. bill of sale, leases,
mortgages, contract, bill of lading). Stamp duty on transfer of real property, transfer of
shares, mortgages, and bank loans to aliens is specifically covered below.
Transfer of real property
Stamp duty is levied on the consideration for the sale or the value of property as assessed
by theProperty Valuation Officer, whichever is higher.
The vendor is responsible for the payment of all stamp duty on property transfers on the
following basis:
Type of property transfer
Rate
a. Transfer of property for consideration in money or value in kind of not less than the
12%
value of the property
b. Transfer of property for consideration in money or value in kind of less than the value
12%
of the property
c. Transfer of property without consideration in money or value in kind
6%
d. Transfer of property in any Special Development Area other than the South East
14%
Peninsula
e. Transfer of property situated in the South East Peninsula
18.50%
f. Transfer of property other than stock or debenture stock or funded debt or land
2%
g. Transfer of property between husband and wife and between parents and children
XCD 100
and vice versa
h. Transfer of land by will or by similar instrument
XCD 100
i. Transfer of registered condominium units
5%
Where a developer has obtained concessions in connection with a house or building

constructed on the land being transferred, the developer is required to pay stamp duty
on the same basis as noted in a, b, and c above.
Where a developer has obtained concessions in connection with a house or building to
be constructed on the land being transferred, then the developer will be required to pay
stamp duty initially on the land on the same basis as noted in a, b, and c above. However,
when the house or building is subsequently constructed on the land with the aid of the
concession, the owner of the building shall pay stamp duty on the house or building
as provided in a, b, and c above as if the concessions or any part thereof had not been
utilised.
Where a developer has not obtained concessions in connection with a house or building
constructed on the land being transferred, the developer will be required to pay stamp
duty on the same basis as noted in a, b, and c in respect of the land only.
Transfer of shares
Stamp duty is levied on the value of the consideration for the sale of shares or
debentures issued by or on behalf of a company or at the value assessed by theProperty
Valuation Officer, whichever is higher. The stamp duty is levied at a rate of 2%. If
the company owns property and its value exceeds 50% of the value of the companys
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assets, then the stamp duty is calculated using the applicable rate on the transfer of real
property (see above).
Mortgages
Stamp duty is levied on the total amount secured and is applicable to both the
registration and discharge of the mortgage. The standard rate is 1%. For amounts
secured in relation to a Special Development Area, the rate is 2%.
Bank loans to aliens
Stamp duty is levied on the total amount of a bank loan to aliens. The standard rate is
2.5%. For loans to finance development in a Special Development Area, the rate is 5%.
A premium tax of 5% is levied on the premium income of all life insurance companies,
whether resident or non-resident. In addition, a registration fee ofXCD 2 perXCD
1,000 of income orXCD 30, whichever is less, must be paid to the Comptroller of Inland
Revenue.
A premium tax of 5% is levied on the premium income (net of agents commission) of all
general insurance companies, whether resident or non-resident.
Statutory payroll deductions

Social Security
The employers portionof Social Security is 5% of chargeable income (on income of up

to XCD 6,500 per month).
Housing and Social Development Levy (Social Services Levy)
The employers portionof the Social Services Levy is 3% of chargeable income.
Employment Injury Benefit
The employers portionof Employment Injury Benefit is 1% of chargeable income (on

income of up toXCD 6,500 per month).
Severance Payment Fund
The employers portion of the contribution to the Severance Payment Fund is 1% of

chargeable income.
Branch income
Branch income is taxed on the same basis and at the same rate as the income of a
corporation. A resident branch of a foreign company shall be regarded as a separate
company and shall be taxed on the same basis as that of a locally registered corporation.
Recharges of expenses from head office to the branch will be subject to WHT at a rate of
10%; however, the recharges have to be justified and cannot be based on a percentage
allocation.
Inventory valuation
Inventories are generally stated at the lower of cost or net realisable value. The first
in first out (FIFO) and average cost methods of valuation are generally used for book
and tax purposes. However, the Comptroller of Inland Revenue will normally accept
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a method of valuation that conforms to standard accounting practice in the trade
concerned. The last in first out (LIFO) method is not permitted for tax or bookpurposes.
Capital gains
Capital gains tax will be imposed if an asset is sold within one year of the date of
acquisition. The maximum rate of tax will be16.5% (one halfthe 33% CIT rate). Assets
sold after one year will not attract capital gains tax.
Dividend income
Dividends received by a company resident in St. Kitts-Nevis from another company

resident in St. Kitts-Nevis are taxed at source at the CIT rate of 33%. Credit is given to
the recipient for the tax on the dividend in computing the tax liability.
Interest income
Interest income received by a company registered in St. Kitts-Nevis is taxed at the CIT
rate of 33%. Interest earned on local and other CARICOM government securities are
normally exempt from the payment of CIT.
Foreign income
A St. Kitts-Nevis corporation is taxed on foreign branch income when earned and on
foreign dividends when received. Double taxation is avoided by means of foreign tax
credits wheretax treaties exist and through deduction of foreign income taxes in other
cases (the United Kingdom [UK] and CARICOM). There is also relief from British
Commonwealth taxes. See Foreign tax credit in the Tax credits and incentives section for
more information.
Deductions
Depreciation
Depreciation allowed for tax purposes is computed by the diminishing-balance method

at prescribed rates. An initial allowance of 20% is granted on industrial buildings or
structures and in respect of capital expenditure incurred on plant and machinery by a
person carrying on a trade or undertaking, as defined. In addition, an annual allowance
of between 2% and 5% is allowed on all buildings constructed after 1 March 1994.
Concrete buildings are depreciated at a rate of 2%, while the rate varies for other
buildings depending on the type of material used in construction. Conformity between
book and tax depreciation is not required.
Any gain on the sale of depreciated assets is taxable as ordinary income up to the
amount of tax depreciation recaptured.
Initial allowances and annual allowances cannot reduce the tax that would have been
otherwise payable by more than 50%. Any initial allowance or annual allowance not
utilised may be carried forward indefinitely.
Goodwill
Goodwill and trademarks are not depreciating assets, and amortisation is not allowed.
Start-up expenses
There are no specific provisions in relation to deductions for start-up expenses.

However, the policy is that certain start-up expenses, such as costs of incorporation and
other initial start-up costs, may qualify for a three to five year straight-line write-off,
depending on the total dollar value.
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Interest expenses
No specific restrictions will apply to interest paid on loans owing to shareholders,

directors, their spouses, children or relatives, or to any related parties. Interest is only
deductible to the extent that it was incurred in producing chargeable income.
Restriction on bad debts
Specific bad or doubtful debts in excess of 5% of total trade receivables will not be
allowed as a deduction.
Charitable donations are not deductible for tax purposes.
Contributions to a pension fund
Contributions made by an employer to a pension fund (approved by the Comptroller)

on behalf of its employees are deductible, up to a maximum of 5% of annual earnings of
the employee orXCD 2,000 per annum. Application should be made to the Ministry of
Finance or to the Pension Fund Committee.
Restriction on compensation expenses
Salaries, wages, leave pay, fees, commissions, bonuses, gratuities, or any other
perquisites or such other payments that an employee of a company receives in the
courseof theiremployment or the value of any benefit to such employee or to any
member of an employees family in excess ofXCD 75,000 per annum will not be allowed
as a deduction from chargeable profit.
Where an employee or shareholder receives remuneration in a tax year from two or
more associated companies, the amount deductible in relation to the employee or
shareholderin the tax year by all of the associated companies shall not exceedXCD
75,000. If the remuneration received by the employee or shareholder exceedsXCD
75,000, the amount deductible by each associated company will be equal to the
allowable deduction ofXCD 75,000 times the remuneration received from the associated
company divided by the total remuneration paid to the employee or shareholder by all of
theassociated companies.
Fines and penalties
Fines and penalties imposed under tax laws of St. Kitts-Nevis are not deductible
expenses.
Taxes
There are no provisions in the Income Tax Act in relation to the deductibility of taxes
paid by a company. However, in general, VAT, VAT input tax, and adjustments under the
VAT Act are disregarded for income tax purposes. Other taxes, including property tax,
transfer taxes, payroll taxes, and insurance premium taxes, except income tax and share
transfer tax, are deductible to the extent they are incurred in producing chargeable
income.
Income tax losses may be carried forward for five years following the year in which the
loss was incurred. However, the chargeable income of a company after deducting initial
and annual capital allowances in any one income year may not be reduced by more than
50% by losses brought forward. No carryback of losses is permitted.
A company incorporated in St. Kitts-Nevis may claim a deduction for royalties,

management fees, and interest charges paid to foreign affiliates, provided the payments
are equal to or less than what the corporation would pay to an unrelated entity. The
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deductibility of any payments to a foreign affiliate will be subject to an arms-length test,
and WHT will be payable at a rate of 10%.
Restriction on related party expenses
Amounts paid or payable to related or associated persons for administration fees,

management fees or expenses, head office charges and allocations, technical services,
shared costs, and other similar charges is restricted to 5% of the taxpayers gross sales or
revenues.
Group taxation
Group taxation is not permitted in St. Kitts-Nevis.
Transfer pricing
There are no provisions for transfer pricing in the tax laws of St. Kitts-Nevis.
Thin capitalisation
There are no provisions for thin capitalisation in the tax laws of St. Kitts-Nevis.

Tax incentives are currently available under the following legislation.
Income Tax Act, No. 17 of 1966
The Income Tax Act provides that if a company is licensed under the Hotel Aids
Ordinance and constructs a hotel with more than 30 rooms, the hotel will receive an
exemption from CIT for a period of ten years beginning on the day it is first open for
business. If the hotel has less than 30 rooms, then it will be entitled to a five-year tax
holiday. During the tax holiday period, no initial deductions or annual capital allowance
deductions shall be allowed. Thereafter, only the annual allowance will be allowed and
will be computed on the total capital expenditure incurred during the holiday period
less any assets sold. The net losses arising during the tax holiday period (i.e. the excess
of accumulated tax losses over total profits) may be carried forward andset-off against
profits following the expiration of the tax holiday in accordance with the normal rules
for set-off of losses.
The Income Tax Act also provides that if a licence is granted to a pioneer manufacturer
under the Pioneer Industries Act, the manufacturer is entitled to a five-year tax holiday
(or up to ten years, at the discretion of the government) as provided in the licence.
Hotel Aids Act
The Hotel Aids Act provides that a licence may be granted to any person who desires to
construct or extend an existing hotel to import building material and equipment free
from import duties, as specified in the licence, for use in the construction of the hotel
and to furnish and equip the hotel. The holder of a licence may not dispose of any hotel
equipment within three years of being imported free of duties and taxes. Permission
must be received from the Comptroller of Customs to dispose of any building material
and hotel equipment within the three-year period.
Fiscal Incentives Act
The Fiscal Incentives Act provides that if a company is declared to be an approved

enterprise to manufacture certain approved products, then the manufacturer is entitled
to a tax holiday period of between ten and15 years depending on the classification of
the approved enterprise. The net losses arising during the tax holiday period (i.e. excess
1717

of all losses over all profits) may be carried forward and set-off against profits of the
approved enterprise for the five-year period following the tax holiday period.
Small Business Development Act, 2009
The Small Business Development Act provides the framework for the promotion of
investment opportunities in St. Kitts-Nevis by introducing a system of registration of
small businesses and a range of incentives that are available to locals. Theincentives and
concessions available to any small business that would be entitled for consideration are
as follows:
Concession on consumption tax applicable to professionals (e.g. engineers, doctors).
Reduction in CIT for a minimum of three years to a maximum of five years.
Relieffrom CIT by way of an allowable deduction on any monies borrowed from any
financial institution, including any bank, non-bank, or credit union.
Export incentives.
Rebate of CIT.
Exemption from or reduction in customs duty on inputs imported for use in the small
business.
Exemption from or reduction in customs duty on any plant, machinery, equipment, or
motor vehicle imported for use in the small business.
Reduction of property taxby up to 75%.
A small business to which this Act applies must meet all of the following criteria:

No more than 25 employees.

Net assets or paid up capitalnot exceedingXCD 1 million.
Annual salesnot exceedingXCD 2 million.
Owned by citizens of St. Kitts-Nevis.
Not more than 25% owned or controlled by a company whose annual turnover or net
assets exceed the limits noted above or by a subsidiary of a larger company.
The composition of the board of directors is not controlled by a company whose
annual turnover exceeds the criteria above.
Has no agreement for managerial or other services to persons who are not citizens of
St. Kitts-Nevis or other CARICOM territories.
The registration fee for an approved small businessisXCD 100. Each approved small
business must, within six months after the end of its financial year, submit to the
Registrar (person designated by the Minister to perform the functions of Registrar
of Small Businesses)financial statementsaudited by an auditor in accordance with
generally accepted international auditing standards.
Other incentives
Approved manufacturing, agricultural, and tourist ventures are permitted to import

building material and equipment free of customs duties.
A Memorandum of Understanding (MOU) between the government and small hotel
operators provides for certain conditions under which small hotel operators will be
eligible for duty free concessions on the refurbishment of their facilities every seven
years, and on food and wine for their restaurant facilities where applicable. For purposes
of thisincentive package, a small hotel is defined as a hotel consisting of at least ten
rooms and not exceeding 99 rooms.
Foreign tax credit
Double taxation is avoided by means of foreign tax credits wheretax treaties exist
and through deduction of foreign income taxes in other cases (the United Kingdom
and CARICOM). A foreign tax credit is also available to persons in St. Kitts-Nevis who
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have paid or are liable to pay income tax in a country which is a member of the British
Commonwealth (other than the United Kingdom).
Commonwealth relief - residents
The relief availablefor a person resident in St. Kitts-Nevis from tax payable in St. KittsNevis is the income tax rate in theBritish Commonwealth countryif that rate does not
exceed one half ofthe tax rate in St. Kitts-Nevis. If the income tax rate in theBritish
Commonwealthcountry exceeds the St. Kitts-Nevis tax rate, then the relief will be
limited toone halfthe tax rate in St. Kitts-Nevis.
Commonwealth relief - non-residents
The relief availablein St. Kitts-Nevis for a person not resident in St. Kitts-Nevis from tax
payable in St. Kitts-Nevis isone halfof the income tax rate in theBritish Commonwealth
country if that rate does not exceed the tax rate in St. Kitts-Nevis. In any other case, the
relief will be limited to the amount by which the St. Kitts-Nevis tax rate exceededone
halfof the rate of incometax in theBritish Commonwealth country.
Withholding taxes
WHT at the rate of 10% should be withheld from payments made to non-residents in
respect of the following:

Dividends.
Interest, annuities, premiums, and discounts.
Rent, leases, contracts, and royalty payments.
Natural resources.
Commissions, remuneration, fees, and licences.
Charges for the provision of personal services, commercial advice, and
managerialskills.
Administration, management, or head office expenses.
Profits.
Technical, professional, vocational, and any other service fees.
Accounting, actuarial, legal, and audit expenses.
Non-life insurance premiums.
Any other annual or periodic payments or distributions.
Tax treaties
Thereare tax treaties in existence with the United Kingdom andbetween themember
states of CARICOM.
Tax administration
Taxable period
Taxes are assessed on a fiscal-year basis.
Tax returns
The taxpayer must file an information return on Form CIT-01 by the 15th day of
the fourth month after the fiscal-year end along with the financial statements. The
authorities either accept the self-assessment or issue a revised assessment. If a
return is not filed on a timely basis, the authorities have the power to issue estimated
assessments. There is a 5% penalty for late filing.
The taxpayer can object to assessments raised within one month and ask the Comptroller
of Inland Revenue to review and revise. In the event that the objection is unsuccessful,
the taxpayer may appeal to the Commissioners of Income Tax. Assessments may be
1719

reviewed and revised by the Comptroller within the year of assessment or within six
years of the expiration of the assessment year.
Payment of tax
Advance tax is payable in quarterly instalments on 15 March, 15 June, 15 September,

and 15 December of each year and is ordinarily based on the tax chargeable and assessed
in the previous fiscal year. The standard amount of each instalment is determined asone
quarterof the tax chargeable in the previous fiscal year. If the assessment for the prior
year has not been finalised, the Comptroller of Inland Revenue can raise an assessment
based on best judgment.
The balance of tax due after the final assessment is issued, as notified in the assessment,
is payable on or before the 15th day of the fourth month after the fiscal-year end. If the
Comptroller of Inland Revenue revises the assessment, then payment of the balance of
taxes due is due one month after the date of issue of the revisedassessment.
Tax is deemed to be in default if not paid by the 15th day of the fourth month after the
fiscal-year end or within one month of the date of the notice of assessment, whichever is
later. Interest of 1% per month or 12% per annum is charged on unpaid taxes indefault.
Anti-avoidance provisions
The Comptroller on Inland Revenue can,by notice in writing:

distribute, apportion, or allocate amounts to be deducted in calculating income tax
paid between related persons as is necessary to reflect the chargeable income or tax
payable as if the arrangement had been done at arms length
re-characterise the source and type of income, loss, or payments made under an
arrangement, the form of which does not reflect its substance or is classified as an
avoidance arrangement, and
disregard an arrangement, transaction, or part of an arrangement or transaction
that does not have substantial economic effect or is classified as an avoidance
arrangement.
Tax audit process
The St. Kitts-Nevis tax system for companies is based on self-assessment; however, the
Inland Revenue Department (IRD) undertakes ongoing compliance activities to ensure
that corporations are meeting their tax obligations. There is no specific approach used
by the IRD in relation to compliance and audit activities. Compliance activities generally
take the form of reviews of specific issues and audits.
Assessments may be reviewed and revised by the Comptroller of Inland Revenue within
the year of assessment or within six years of the expiration of the assessment year.
The IRD does not have any specific compliance program; however, when an audit is
done, the focus is mainly on the detection of basic non-compliance, such as omission
of income, inclusion of non-deductible expenses, and classification of items between
expenses and capital items. In recent years, the IRDhas been payingspecial attention to
the application of WHT on payments made to non-resident persons and VAT on services
imported into St. Kitts-Nevis, mainly between related parties.
1720
Saint Lucia
PwC contact
Louisa Lewis-Ward
Bishops Court Hill
PO Box 111
Tel: +1 246 626 6756
In the Budget Statement for 2014 delivered by the Prime Minister and Minister for
Finance on 13 May 2014, it was proposed to reduce the corporate tax rate from 30% to
25% over the next two years, commencing in the current fiscal year with a reduction to
28% followed by a further reduction to 25% in the subsequent fiscal year.
A deduction of 10,000 East Caribbean dollars (XCD) was also proposed for small and
medium sized incorporated entities, with this to be deducted from chargeable income
before computing the income tax liability.

Resident companies are taxed on gains or profits accrued directly or indirectly from all
sources, whether in or out of Saint Lucia, and are subject to tax at a flat rate of 30%. The
30% tax rate is only applicable to companies that prior to income year 2003 have no tax
arrears and have complied with the requirements of any enactment administered by the
Inland Revenue Department. The tax rate of 33.33% will still apply to those companies
that have tax arrears and have not complied with the requirement.
Non-resident companies are taxed on Saint Lucia-source income. The gross amount
of such income is liable to 25% withholding tax (WHT), while WHT of 15% applies to
interest.
Associations of underwriters are taxed at 30% on 10% of the gross premium arising
in Saint Lucia, and life insurance companies are taxed at 30% on 10% of the gross
investment income arising in SaintLucia.
Corporate residence
Companies are regarded as resident if they are incorporated in Saint Lucia or managed
and controlled through a permanent establishment (PE) in Saint Lucia.
A PE is defined in Saint Lucia as a fixed place or premises through which the business is
wholly or partly carried on.
Saint Lucia
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Saint Lucia
Other taxes
The standard VAT rate is 15%. There is alsoa0% ratecharged on certain goods and
services. In respect of the hotel sector and related services, a reduced rate of 10% came
into force on 1 April 2014 via Statutory Instrument.
The threshold for registered taxpayershas been set atXCD 180,000 per annum. This
means that it is not mandatory for businesses earning less than the threshold to register
for VAT. The threshold is based on the annual sales turnover of the taxpayer.
TheVAT rate of 0% has been legislated on certain supplies, which include, but are not

Goods to be exported.
Goods for sale at duty-free shops.
Fuel.
Water.
Electricity.
The following goods and services are exempted from payment of VAT, but this list is not
exhaustive:

Domestic residential rental.

Financial services.
Insurance services.
Medical services.
Local transportation services.
Certain food items (e.g. chicken, rice, milk, flour, bread).
The government has secured the Caribbean Community and Common Markets
(CARICOMs) approval to remove the import duty on medical supplies for a period
of four years from 1 May 2012 to 30 April 2016. In the 2014 Budget Statement, it was
proposed to zero-rate prescription medicates. These items are currently subject to VAT at
the standard rate of 15%.
The government has also agreed to the establishment of a special VAT Refund Account
in accordance with the provisions of the Financial Administration Act. This is to facilitate
the timely processing and payment of refunds to taxpayers.
Customs duties
Customs duties are charged on a wide range of imported goods. Exemptions are granted
for raw materials and plant and machinery used in manufacturing and for certain items
imported by hotels under construction, extension, or refurbishing projects.
Excise taxes
Excise taxes are imposed on home-produced goods, mainly liquor, beer, and cigarettes.
XCD 1.44 per litre of liquid applies to beer in glass bottles and XCD 3.50 per liquid gallon
applies to beers in metal cans.
There is also an excise tax on fuel when fuel is imported by a wholesaler. Tax is included
on the price of fuel paid at the gas pump. The tax rate formula is based on the current
price provided by the supplier and regulated price at the gas pump.
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Commercial property tax
Commercial property tax is assessed annually at 0.4% of the open market value of the
property. The owner is required to obtain a commercial valuation assessing the open
market value of the property. All new commercial properties completed after 1 April
2001 can benefit from a three-year tax exemption from commercial property tax.
Residential property tax
The property tax rate for residential property is 0.25% of the open market value.
Stamp tax
Stamp tax is charged on any document that evidences a legal or contractual relationship
between two or more parties. Additionally, many types of commercial and legal
documents must be stamped, denoting the payment of taxes, which may be either at a
fixed rate or at an ad valorem rate, depending, for example, on the value of the property
transferred.
The current rate of stamp tax under the stamp duty regulations for the conveyance or
transfer on sale of the debenture, stock, debt, or shares of a company and the release,
renunciation, or reassignment of any shares or interest in any shares of a company or
corporation is the greatest of the following:
0.5% of the net value of the assets of the company or corporation.
XCD 10.
Provided that at least 75% of the open market value of the assets of the company or
corporation is comprised of immovable property, the stamp duty (including vendors
tax) based on the stamp duty on the sale of immovable property that would be
payable on a conveyance or transfer on sale of such immovable property, as indicated
below:
Conveyance or transfer on sale of any immovable property such duty to be paid by
the purchaser: 2% ad valorem.
Conveyance or transfer on sale of any immovable property such duty to be paid by
the vendor:
where the vendor is not a citizen of Saint Lucia or is a foreign company: 10% ad
valorem.
where the vendor is a citizen of Saint Lucia or is a local company: 2.5% ad
valorem from XCD 50,000 to XCD 75,000; 3.5% ad valorem from XCD 75,001 to
XCD 150,000; 5% ad valorem from XCD 150,001 and over.
Branch income
The tax rate on branch income is the same as that on income earned by resident
companies. No additional tax is withheld on transfers of profits to the head office.
Inventory valuation
Stocks generally are valued at the lower of cost or market value. Obsolescence is
permitted where it occurs, but there are no provisions to account for monetary inflation
on inventory valuation.
Capital gains
There is no tax on capital gains except in instances where such gains comprise a portion
of the income-earning activities of the business. In such instances, the corporate tax
rateapplies.
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Dividend income
Dividends are tax exempt in Saint Lucia.
Inter-company dividends are not subject to tax in Saint Lucia.
Interest income
The corporate tax rate applies to interest income. However, income earned on securities
issued by member governments of the Eastern Caribbean Central Bank and income
accruing from trading in securities under the Securities Act to any citizen or resident of
any member state of the Organisation of Eastern Caribbean States or to any company
incorporated in and registered in any member state of the Organisation of Eastern
Caribbean States is tax exempt.
Any expenditure incurred for the purpose of producing exempt income is not deductible.
Royalty and rental income
The corporate tax rate applies to royalty and rental income. However, rental income
from a residential accommodation shall be exempt from tax if certain requirements, as
defined by regulations, are met.
Foreign exchange gains or losses arising from foreign exchange transactions on trading
items are assessable or deductible as realised gains or losses, if settled within normal
credit terms. Gains or losses on other instruments, including inter-company loans, are
recognised only when actually realised.
Unrealised exchange gains/losses are not taxable/deductible.
Bribes, kickbacks, illegal payments
Bribes, kickbacks, and illegal payments received by a company are includible in

taxableincome.
Foreign income
Resident companies are taxed in Saint Lucia on income earned outside Saint Lucia.
Reciprocal understandings exist with some countries for the avoidance of double
taxation, and foreign tax is allowed as a credit against tax charged in Saint Lucia. Saint
Lucia has no tax treaties with other countries, except for the member states that make
up CARICOM. There is an agreement among the governments of CARICOM for the
avoidance of double taxation. Where no agreement exists, the foreign tax offset is the
lesser of the foreign tax paid or the tax payable on that income in Saint Lucia.
Tax deferral is not permitted in Saint Lucia.
Deductions
Accrued expenses are deductible as long as they are business related. Contingent
liabilities are deductible expenses once they are recognised in the book ofaccounts.
Depreciation
The following capital allowances are available in Saint Lucia:

An initial allowance of 20% is granted on the acquisition of industrial, agricultural,
and commercial buildings (except for hotels and rental properties); on plant and
machinery, including motor vehicles and furniture; and on fixtures and equipment.
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Thereafter, annual allowances for wear and tear, ranging from 10% to 33.33%, are
granted on the reducing-balance method, except for industrial and agricultural
buildings, which are allowed an annual rate of 5%, and commercial buildings (except
for hotels and rental properties), which are allowed an annual rate of 2.5%.
The Comptroller of Inland Revenue may also grant, on application, a higher rate for
annual allowance for assets that have higher or abnormal wear and tear.
Gains on disposal are taxable as ordinary income to the extent of depreciation recovered,
and any proceeds in excess of the cost of the asset are treated as a capital gain, which is
not subject to tax. Where the proceeds on disposal are lower than the tax written-down
value of the asset, a balancing allowance is granted for the shortfall.
Goodwill
Neither the amortisation of impaired goodwill nor the related write-off of it is an

allowable deduction.
All expenditures incurred in connection with incorporation costs for the establishment
of a new small business enterprise are allowable deductions. A small business enterprise
is an enterprise incorporated during the year of income that:
is wholly owned by citizens of Saint Lucia who have not been owners of previously
incorporated businesses in Saint Lucia
employs not more than 50 persons
has gross income that does not exceed XCD 1 million
engages in an activity on the listing of preferred business activities as approved by the
Minister of Finance, and
satisfies the provision of any law in force with respect to micro or small scale business.
Interest expenses
Interest on any loan, including interest payable on debentures, is an allowable deduction

to the extent that the amount of such loan was used for the purpose of producing
assessable income.
Bad debt
Bad debt expense is deductible provided it has been brought to account in generating
the companys assessable income for any income year and that the company has taken all
reasonable steps to establish that the collection of such debt is unlikely.
Charitable contributions are an allowable deduction when the contributions are made
under a deed of covenant for a period of not less than three years to any religious,
charitable, medical, or educational institution; sporting body; or fund of a public
character, approved by Cabinet, if such contributions are made to the Saint Lucia
National Trust. However, the deduction with respect to such contributions shall not
exceed 25% of the assessable income of the company for that income year.
Pension expenses
Current annual contributions to an approved pension fund are deductible expenses.

However, where a special payment is made to an approved pension fund, in relation to
a period of service by an employee prior to the setting up of the approved pension fund,
or to meet any actuarially ascertained insufficiency in the resources of the approved
pension fund to meet its obligations to its employees, such amount shall be deductible as
follows:
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i
Where the special payment does not exceed the current annual contribution, such
amount is wholly deductible.
ii Where the special payment exceeds the current annual contribution, the special
payment is an allowable deduction in such years of income, not exceeding five in
number, as in the opinion of the Comptroller is reasonable under the circumstances.
iii Where under (ii) above, annual deductions are allowable over a number of years
of income, the first such deduction is allowable for the income year for which the
special payment is made.
Taxes
VAT paid on goods imported or purchased, and sold in the ordinary course of business,
are deductible for tax purposes. Property taxes are deductible where the property is used
in producing assessable income. Income taxes, penalties, and interest on tax in arrears
are not deductible.
Meals and entertainment, officers compensation/life insurance, and payment

to directors are deductible expenses, provided they are wholly and exclusively
incurred by a company during that year of income for the purpose of producing its
assessableincome.
Net operating losses may be carried forward for up to six years if the losses have not
been fully absorbed earlier. In carrying losses forward, the amount that can be claimed
in any subsequent year is restricted to of the assessable income of that year. Losses
may not be carried back.
There are no restrictions on the deductibility of interest paid to foreign affiliates if the
transaction is carried out at arms length and at commercial rates. However, deductions
for management charges, allocations of head office expenses, royalties, and other
charges that are subject to 25% WHT are restricted to the lesser of the aggregate of those
charges or 10% of all allowable business deductions, excluding cost of sales and capital
allowances.
Group taxation
Group tax filing is not allowed in Saint Lucia; however, group tax relief is available
under certain circumstances to allow the trading losses, excluding the current loss, of
a resident company within a group to offset the profits of another resident company
within the same group. A claim for group relief requires the consent of the Comptroller
of the Inland Revenue Department and is only available to resident companies.
Transfer pricing
Related party transactions are accepted if they are made on an arms-length basis.
The Inland Revenue has the power under the Income Tax Act to make any adjustment
deemed necessary to place such transactions at arms length.
Thin capitalisation
No provision exists for thin capitalisation in Saint Lucia.
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Foreign tax credit
Where income has accrued to a resident and has been taxed in a foreign country with
which there is no double tax agreement (DTA), or is income to which a DTA, if there
is one, does not relate, credit for tax on such income is allowed for the lesser of the tax
payable in the foreign country or the tax charged under Saint Lucia tax law.
Tax holidays
Tax holidays are available for manufacturing companies. The incentives are aimed at
increasing the manufacturing base of Saint Lucia, the level of exports, and the use of
local materials and labour in production. An approved manufacturing enterprise will be
granted a tax holiday up to a maximum of 15 years. In determining the length of the tax
holiday, the extent of the local value added to approved products is taken into account.
Income tax incentives and other fiscal concessions are provided under the Fiscal
Incentives Act, the Tourism Incentives Act, the Special Development Areas Act, and
other concessions granted by the Cabinet of Ministers. The extent of the incentives and
concessions granted are specific to the legislation or Cabinet conclusions and depend
on the impact that the investment would have on local employment, exports, and the
generation of foreign exchange earnings. The incentives granted include the following:
Duty-free importation of raw materials, machinery, components, and spare parts and
other inputs used in manufacturing, and the duty-free importation of construction
materials, equipment, and other inputs used in the construction and operation of
hotels and other hospitality products.
Income tax waivers of up to 100% of the taxable income of companies engaged in
manufacturing, tourism, and agriculture and other employment generating activities,
for periods of up to 15 years.
Whole or partial waivers of property tax, stamp duties, Alien Landholding Licence
fees, WHT, and VAT with respect to investments in specific areas, or in specific
industries and activities.
Guaranteed repatriation of capital and dividends. Remittance of profits and dividends
are tax-free as they are not subject to WHT.
Export allowances for goods manufactured in Saint Lucia and exported. Companies
that engage in such activity are given tax exemption on the export of such goods, up
to a maximum of ten to 15 years.
Employment incentives are available in the Income Tax Act for the following:
Hiring university graduates. An additional deduction of 25% of salaries is provided
for a maximum period of three years.
Hiring persons in the offshore financial services industry with skills not available in
Saint Lucia. A special tax concession is given to such persons that allows a prescribed
percentage of an employees or contractors salary or fees to be exempt from income
tax.
Other incentives
Complete or partial waivers of income tax are available on the taxable profits of
companies engaged in providing services to the offshore financial services industry.
Special tax concessions are also available for capital construction in the hotel industry.
Capital expenditures on the construction of a hotel may offset profits for up to 15 years.
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Withholding taxes
Resident corporations and persons that make certain payments of an income nature to
residents or non-residents are required to withhold tax on these payments as follows:
Recipient
Resident corporations:
Payments to contractors
Equipment hire
Interest
Royalties
Management fees
Commissions or fees (not by way of employment)
Income of a trust
Premiums, including insurance premiums
Any other payment of an income nature
WHT (%)
10
10
15/15 CARICOM
25/15 CARICOM
25/15 CARICOM
25
25
25
25
Saint Lucia has only one DTA. This treaty, between the Caribbean territories, is referred
to as the CARICOM Double Taxation Agreement. CARICOM is comprised of the
following states:

Antigua and Barbuda

The Bahamas
Barbados
Belize
Dominica
Grenada
Guyana
Haiti
Jamaica
Montserrat
St. Kitts and Nevis
St. Vincent and the Grenadines
Suriname
Trinidad and Tobago
Tax administration
Taxable period
Returns must cover a 12-month period, which may be changed only with the
Comptrollers permission.
Tax returns
Tax returns must be filed within three months of the companys fiscal year-end. An
extension of the filing date may be obtained.
Financial statements must be submitted with the returns, together with a schedule
reconciling taxable income with book income and various other schedules of additional
information.
The system is one of self-assessment. Upon receipt of the returns, the Inland Revenue
Department examines the information provided and issues a notice of assessment at
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any time, subject to the statute of limitations. The Revenue Department may also issue
assessments in the absence of returns.
Payment of tax
Tax is payable in instalments on 25 March, 25 June, and 25 September in each year of

income, based on the preceding years income. Any remainder is payable within three
months of the end of the fiscal year.
Penalties and interest
The following civil penalties and interest, which are non-deductible, are imposed:

For late filing or for failure to file: 5% of the tax charge at filing date.
For late payment: 10% of the unpaid tax at the due date.
On tax and penalties unpaid: monthly interest at a rate of 1.04%.
Tax knowingly evaded or sought to be evaded: 100% of the tax.
Appeals
Within 30 days after the date of service of a notice of assessment or reassessment, the
taxpayer may submit a written objection to the Revenue Department on any matters in
such assessment or reassessment. If the Revenue Department confirms its assessment,
the taxpayer may file an appeal with the Appeal Commission, which comprises seven
persons appointed by the Minister of Finance. A decision by that body may be further
appealed to the Saint Lucia High Court within 30 days. An appeal against an order from
this Court may be made to the Court of Appeal.
Tax audit process
The Inland Revenue Department carries out audits of a selection of tax returns, usually
at the taxpayers place of business. Audits may be carried out at any time prior to the
expiration of the statute of limitations, whether or not notices of assessment have been
issued. The Revenue Department has wide powers in determining the information it
requires for these audits.
Assessments are not final until six years after the end of the income year, within which
period assessments may be made at any time. In cases of misrepresentation or failure to
disclose any material fact, a reassessment can be made at any time.
The Front End Tax Electronic Filing (E-Filing) System allows taxpayers to file their
personal income tax and VAT returns online. The current target for full functionality
is 2016, when it is expected that registration, declaration, and payment of all tax types
administered by the Inland Revenue Department will be supported by the Tax E-Filing
System.
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Saudi Arabia
PwC contact
Mohammed Yaghmour
Jameel Square, Al Tahliah Street
PO Box 16415
Jeddah 21464
Kingdom of Saudi Arabia
Tel: +966 2 610 4400 Ext. 2228
New circulation of the Department of Zakat and Income Tax (DZIT)
relates to double tax treaty (DTT) implementation
On 9 June 2013, the DZIT issued a new Circular (#5068/16/1434). This Circular offers a
choice of automatic application of relevant tax treaty without going through the refund
procedure. The choice is given to Saudi Arabia residents or permanent establishments
(PEs) of non-residents that make payments subject to withholding tax (WHT) in Saudi
Arabia (referred to as taxpayers in the Circular).
They now can apply reduced rates or full relief upon making the payment. The new
Circular imposes the following conditions on taxpayers that choose to apply DTT
automatically:
Report, via monthly WHT returns, the full details of each payment made to nonresident parties (beneficiaries).
File a request form for application of a DTT together with tax residence certificate of
the beneficiary (the Circular contains a form of certificate).
Undertake full responsibility for any understatement of tax, including penalties.
As mentioned above, the new Circular provides a choice; taxpayers can still use the old
system, i.e. withhold tax and comply with the refund procedure.
Zakat return e-filing
The DZITs branches introduced an electronic service in December 2013. The system will
offer submission of Zakat estimates and calculate Zakat electronically for companies and
establishments. As a first step, the DZIT is aiming at filing the Zakat returns for the year
2013 electronically.
The DZIT is sending requests by email and courier to Zakat payers to complete the online
registration process to obtain a user name and password that will allow each company to
log in to the DZIT website and submit the returns on line.
The DZIT will be working on transferring all other reporting forms to the e-filing system,
and it is expected that within the coming months, corporate tax and WHT filings will
have to be online too.
Social insurance contributions on Saudis to rise
On 7 January 2014, the Council of Ministers approved the Unemployment Insurance

Scheme. The scheme is a programme introduced by the General Organisation for Social
Insurance (GOSI).
The programme, which is designed for Saudi employees who work in the private and
public sectors, aims at creating a stream of income for employees who lost their jobs due
to reasons beyond their control.
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Saudi Arabia
The Director General of Insurance Information, who is also the GOSI Official
Spokesman, said in a statement that the Unemployment Insurance Scheme will be
implemented in cooperation with the Ministry of Labour and Human Resources
Development Fund 1 September 2014.
Regarding the contribution rate, he said that The rate of contributions is fixed at 2% of
the contributory wage to be paid equally by the employer and the employee. This means
that business entities will be responsible for an additional contribution of 1% of their
Saudi employees contributory income. Hence, the gross amount of GOSI contributions
made by employers for their Saudi employees will be 12% (currently 11%). Accordingly,
the share of Saudi employees will also increase from the current 9% rate to 10%.
GOSI modifies the annual contributory wage
GOSI introduced a new, updated contributors annual wage definition. This policy
became effective 1 January 2014.
In general, the maximum contributory wage will not change, but from the effective date
onwards, employers will have to include all items of income related to their employees
in the system, even if they exceeded 45,000 Saudi riyals (SAR), and the new system
will automatically calculate the contributory wage, which shall not exceed SAR 45,000
per month. Items of income that shall be reported are: (i) basic wage, (ii) cash or inkind housing allowance, (iii) commissions, and (iv) other allowances, such as annual
bonus, overtime, transportation, risk, nature of work, etc. However, items that will
be considered in calculating the contributory wage are only the basic wage, housing
allowance, and commissions.
Amendment to Articles of the Saudi Tax Implementing Regulations
The Minister of Finance issued a Ministerial Resolution (No. 1776) on 19 March 2014 to
amend certain paragraphs of a number of Articles of the Tax Implementing Regulations.
It should be noted that this resolution shall be applied from the date of issuance,
including the appeals cases that have not been finalised. The following is the summary
of the changes:
Loans proceeds derived from interbank deposits are not viewed as Saudi-source
income for a non-resident bank if such deposits remain with a resident borrower bank
for a period that does not exceed 90 days, under certain conditions.
Loan charges paid by branches of foreign banks in Saudi Arabia to their non-resident
head offices are considered as a tax-deductible expense.
The DZIT is to issue guidelines/regulations on transfer pricing of transactions
between related parties in accordance with the internationally accepted standards.
The deemed (estimated) profit rate for branches of foreign air, sea, or land
transportation companies working in the Kingdom is calculated at 5% of the gross
income derived in the Kingdom. Income derived in the Kingdom means the gross
revenues from ticket sales, tickets, passengers excess baggage, freight, courier, and
any other income generated from trips started from the Kingdom regardless of the
place of issuing the ticket.
Small activities with limited income, which do not require bookkeeping, may be
taxed on a deemed profit basis according to the nature of their activities rather than a
fixed rate of 15%.
The disposing (or selling) partner is liable to notify the DZIT of the sale/disposal and
pay the due taxes within 60 days from the selling date, and the purchaser is jointly
responsible with the disposing (or selling) partner to pay any capital gain tax due
to the DZIT as a result of such sale. Accordingly, a company whose shares are being
disposed of is no longer responsible for the settlement of capital gains tax.
The DZIT has the right to request the information from a natural or corporate person,
whether a taxpayer or not. It is also added that persons are required to provide the
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Saudi Arabia
DZIT with requested information related to applying the tax law and for applying the
tax treaties to which the Kingdom is a party.
A more aggressive approach may be used in collecting information, by using the
help of the competent executive bodies in order to obligate natural or corporate
persons to submit the required information. Also, one who does not comply with the
obligation stated will be jointly liable with the taxpayer to pay due taxes along with
any penalties due.
A more aggressive approach may be used in assessments and field audits, and the
DZIT shall coordinate with the competent executive bodies to enforce the taxpayer
to cooperate with them and to submit the required documents. Also, the DZIT has
the right to retain such documents if it believes that the taxpayer is trying to hide,
damage, or manipulate such documents.
Royalties, payments against technical and consulting services, or international
telecommunication services paid to the head office or to related parties are subject to
15% WHT.
Payments against technical and consulting services or international
telecommunication services, other than payments to the head office or to related
parties; rent; air tickets or air freight and maritime freight; dividends; loan charges;
and insurance or reinsurance premiums are subject to 5% WHT.

The rate of income tax is 20% of the net adjusted profits. WHT rates are between 5%
and 20%. Zakat, an Islamic assessment, is charged on the companys Zakat base at 2.5%.
Zakat base represents the net worth of the entity as calculated for Zakat purposes.
Only non-Saudi investors are liable for income tax in Saudi Arabia. In most cases, Saudi
citizen investors (and citizens of the Gulf Cooperation Council [GCC] countries, who
are considered to be Saudi citizens for Saudi tax purposes) are liable for Zakat. Where a
company is owned by both Saudi and non-Saudi interests, the portion of taxable income
attributable to the non-Saudi interest is subject to income tax, and the Saudi share goes
into the basis on which Zakat is assessed.
According to the income tax law, the following persons are subject to income tax:

A resident capital company to the extent of its non-Saudi shareholding.

A resident non-Saudi natural person who carries on activities in Saudi Arabia.
A non-resident person who carries out activities in Saudi Arabia through aPE.
A non-resident person who has other income subject to tax from sources within Saudi
Arabia.
A person engaged in natural gas investment fields.
A person engaged in oil and other hydrocarbon production.
It should be noted that although the income tax rate is 20%, income from the following
two activities is subject to different rates:
Natural Gas Investment Tax (NGIT) shall be determined on the basis of the internal
rate of return (IRR) on the cumulative annual cash flows of the taxpayer derived from
natural gas investment activities. The rate applicable will be 30% if the IRR is 8% or
less. The rate increases progressively up to 85% if the IRR equals or exceeds 20%.
Income from oil and hydrocarbon production is subject to tax at the rate of 85%.
Local income taxes
There are no local, state, or provincial government taxes on income other than the
regular income tax or Zakat as mentioned above.
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Corporate residence
A company is considered a resident company if it is formed under the Saudi Arabian
Regulations for Companies or if its central management is located in Saudi Arabia.
According to the Saudi tax regulations, the following are the requirements for
considering a non-resident party to have a PE:
A PE of a non-resident in Saudi Arabia, unless otherwise provided below, consists of
the permanent place of activity of the non-resident through which one carries out
business, in full or in part, including business carried out through an agent.
The following are considered a PE:
Construction sites, assembly facilities, and the exercise of its related supervisory
activities.
Installations or sites used for surveying for natural resources, drilling equipment,
or ships used for surveying for natural resources, and the exercise of its related
supervisory activities.
A fixed location where a non-resident natural person carries out business.
A branch of a non-resident company that is licensed to carry out business in Saudi
Arabia.
A place is not considered a PE of a non-resident in Saudi Arabia if it is used in Saudi
Arabia only to do the following:
Store, display, or deliver goods or products belonging to the non-resident.
Keep an inventory of goods or products belonging to the non-resident only for the
purposes of processing by another person.
Purchase of goods or products only for the collection of information for the nonresident.
Perform any other activities that are preparatory or auxiliary in nature for the
interests of the non-resident.
Prepare contracts relating to loans, supply of products, or perform technical
services for signature.
Executing any group of the activities mentioned above.
A non-resident partner in a resident personal company is considered an owner to a PE
in Saudi Arabia in the form of a share in a personal company.
Furthermore, the agent mentioned in the above article is identified as a dependent agent
who has any of the following authorities:
Negotiate on behalf of a non-resident.
Conclude contracts on behalf of a non-resident.
Has a stock of goods, owned by a non-resident, on hand in Saudi Arabia to supply the
clients demands regularly on behalf of the non-resident.
A place from which a non-resident carries out insurance and/or reinsurance activity
in Saudi Arabia through an agent is considered a PE of the non-resident even though
the agent is not authorised to negotiate and conclude contracts on behalf of the nonresident.
Other taxes
There is currently no VAT system in Saudi Arabia.
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Customs duties
Customs duties are imposed on imports according to tariffs rates that are effective on
the payment date in accordance with the Saudi Customs regulations. Customs duties are
imposed on the price of the imported goods. This price is assessed based on the actual
cost paid or on the agreed upon cost denominated in the currency of the exporting
country. The price consists of the price of the imported goods as packed for shipping
from the port of export plus freight and insurance cost to the Saudi port, which is
converted to Saudi riyals at the exchange rates published by Saudi Arabian Monetary
Agency (SAMA) on the date of the declaration. In case this procedure is not achievable,
the imported goods will be priced based on the most proximate comparable value that
could be ascertained. Imported goods that are subject to customs duties based on weight
are assessed based on the gross weight or the net weight as shown in the tariff schedules.
The gross weight of the goods includes the goods weight including all internal and
external packing materials. Net weight of the goods excludes all internal and external
packing materials, including the items used for separating and arranging the goods.
To encourage joint ventures in manufacturing, the government grants tariff protection
from competing imports to locally produced, quality goods. Rates can be as high as 20%.
Penalties on smuggling goods vary from confiscation, to collections of customs duties
and penalties, to imprisonment.
Social insurance tax
Social insurance tax is paid monthly based on (i) basic wage, (ii) cash or in-kind housing
allowance, and (iii) commissions, with an upper limit of SAR 45,000, is computed at 2%
for non-Saudi employees, and is paid by the employer. For Saudi employees, the rate is
22% and is paid by both the employee (10%) and the employer (12%).
Based on Saudisation requirements, companies having a workforce of less than 50% of
Saudi Nationals have to pay SAR 200 monthly to the Labour Office for each expatriate
employee.
Other taxes
There is no form of stamp duty, transfer, excise, sales, turnover, production, real estate,
or property taxation except in so far as they may fall within the scope of Zakat, which is
applicable only to Saudi nationals.
Branch income
Taxable income from a branch of a non-Saudi based corporation is taxed at 20%. Certain
charges incurred by the headquarters are not deductible on the branch tax return.
Inventory valuation
The weighted average-cost method is used for valuing inventory under Saudi tax law.
Capital gains
Capital gains are subject to income tax or Zakat, as appropriate, at the normal income
tax or Zakat rate. However, capital gains realised from the disposal of shares in Saudi
stock companies listed in the Saudi market are tax exempt, subject to certain conditions.
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Saudi Arabia
Dividend income
Dividend income that is received by a resident party is subject to income tax at the
normal income tax rate. However, dividends paid to a non-resident party are subject to
WHT at 5%.
Interest income
Interest income is subject to income tax at the normal income tax rate.
Imports and supply contracts
Saudi tax law provides that no profit will be considered to arise from a contract for the
supply of goods to Saudi Arabia, provided delivery of the goods is either free on board
(FOB) or cost, insurance, and freight (CIF) to a Saudi port. However, should the contract
provide for the delivery and/or installation of materials at a point inside Saudi Arabia,
the supplier may be considered to be carrying on business within Saudi Arabia, and, as a
consequence, the contract may be subject to Saudi income taxation as follows:
If the material cost was identified in the supply contract separately from the cost of
work performed in Saudi Arabia, then, in the absence of a PE, a WHT on the work
that will be performed in Saudi Arabia may be assessed, based on the type of services.
However, if the contract qualifies the supplier to have a PE in Saudi Arabia, then
income tax will be applied according to the Saudi tax regulations as for a normal
taxpayer.
If the supply contract indicates a total cost without segregation in the value of supply
and the value of the other activities in Saudi Arabia, then the work performed in
Saudi Arabia will be assigned a value equal to 10% of the contract value for each type
of activity.
Foreign income
The gross income derived by a capital company resident in Saudi Arabia from its
operations and of its branches inside and outside Saudi Arabia is subject to tax in Saudi
Arabia. However, in order to avoid double taxation on the same income, the following
exceptions and clarifications are to be considered:
With respect to the income realised from investments in other resident capital
companies and in order to avoid double taxation, such income is to be excluded from
being subject to tax under the following conditions:
That such income was subjected to tax in Saudi Arabia.
The percentage of ownership in the company invested in is not less than 10%.
The period of ownership of shares is not less than one year.
With respect to the income realised from investments and operations outside Saudi
Arabia, it will be subject to tax in Saudi Arabia unless an effective DTT between Saudi
Arabia and the country invested in stipulates different provisions.
There are no restrictions on repatriation of profits, fees, capital, salaries, or other
monies.
Deductions
All expenses that are necessary and normal to the business, paid or accrued, are
allowable deductions, provided the expense meets the following conditions:
It is an actual expense, supported by a verifiable document or other
qualifyingevidence.
It is related to the generation of taxable income.
It is related to the subject tax year.
It is of a non-capital nature.
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Depreciation
A depreciation deduction is allowed under the following limitations as stipulated by the

law:
The asset is not intended for resale and is to be used, in full or in part, for the entitys
purposes.
The asset is of a depreciable nature that loses value because of use or because of wear and
tear and obsolescence and has a value extending beyond the end of the taxable year.
The asset is owned by the business, as per the ownership document for buildings and
contracts and invoices for other assets.
The asset depreciation is allowed even if the asset becomes inactive during the tax year.
Depreciation for tax purposes is calculated as follows, based on the following five
categories of depreciable tangible or intangible assets, other than land:
Asset category
Fixed buildings
Industrial and agricultural movable buildings
Factories, machines and equipment, computer application programs,
passenger cars, and cargo vehicles
Expenditures for geological surveying, drilling, exploration, and other
preliminary work to exploit and develop natural resources and their fields
All other tangible or intangible assets not included in previous categories,
such as furniture, planes, ships and trains, and goodwill

5
10
25
20
10
The declining-balance method of depreciation, according to the above rates, should

be followed for tax purposes. However, straight-line depreciation is allowed for Zakat
payers as of 7 April 2013.
There are also rules for depreciation relating to assets either acquired or disposed.
Essentially, 50% of the allowable acquisition price or disposal proceeds is added
to or subtracted from the asset pool in the first year, and the remaining 50% in the
followingyear.
Assets under build, own, and transfer (BOT) and build, own, operate, and transfer
(BOOT) are allowed to be depreciated over the contract period. This presumes, although
it is not clear, that assets under the BOT and BOOT schemes actually will have a separate
grouping in addition to the above prescribed groups.
Start-up expenses
Tax treatment of start-up expenses depend on how they were treated under Saudi
generally accepted accounting principles (GAAP). Generally, they can be fully expensed
at the first financial year or can be amortised.
Loan charges (interest expenses)
An interest deduction is limited to the lower of the loan charge incurred during the tax
year, if related to income that is subject to tax, or the result of the following formula,
whichever is less.
The taxpayers total income from loan charges, plus 50% of (A minus B) as below:
A = income subject to tax other than income from loan charges.
B = expenses allowed under the law other than loan charge expenses.
Note that banks are not subject to this formula.
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Bad debt
Bad debts are deductible, provided they meet all of the following conditions:
The bad debt was previously declared in the appropriate years income.
The debt resulted from sale of goods or services.
The company holds a certificate from the taxpayers certified public accountant (CPA)
certifying that the debt has been written off in the taxpayers books and records,
based on a decision by the taxpayer at the appropriate management level.
Serious efforts have been exerted by the taxpayer to collect the debt with no success
and the inability of the debtor to pay has been proved based on a judicial ruling or
bankruptcy.
The debt is not from a related party.
There is a commitment by the taxpayer to reinstate, as income, any written-off debt
whenever collected.
In determining the tax base of each taxpayer, a deduction is allowed for donations paid
during the taxable year to public agencies or philanthropic societies licensed in Saudi
Arabia, which are non-profit organisations and are allowed to receive donations.
Allocations and reserves
Allocations and reserves formed during the year are deductible as follows:
Bank allocations to a reserve fund for doubtful debts are allowable deductions.
However, a bank must submit a certificate from the SAMA stating the amount of
doubtful debts and the amount of doubtful debts collected during the year, which
should be reinstated in the tax base of the year of collection.
Insurance/reinsurance companies may deduct, based on industry standards, a
reserve for unearned premiums and for unexpired risks, provided that it is reported
in the tax base of the following year.
A reserve for unearned premiums means a part of premium amounts collected
or stated in books that covers risks related to the future tax year(s). A reserve for
unexpired risks mean the amount of compensation claimed or reported, but for
which the payment process falls short of completion during the tax year.
A taxpayer may reduce its book profit by the amount of reserves used during the year
that had been readjusted when made, to increase income or decrease expenses in
the year of formation. Examples of such reserves are end-of-service awards, doubtful
debt, and drops in prices. Such amounts are deductible, provided the following
conditions are met:
The used amount was paid or accrued during the year, and it is supported by
documentation.
The reserve had been adjusted in the year of formation to increase the tax base.
School fees
School fees paid by taxpayers for their employees children are deductible expenses,
provided they meet the following conditions:
They are paid to a local licensed school.
This benefit is stated in the employment contract.
Pension fund
Employers contributions to employees pension funds or savings funds established under

Saudi Arabias rules and regulations are deductible, provided that such contribution,
one payment or in aggregate, is not in excess of 25% of the employees income before the
employers contributions and that the fund meets the following criteria:
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The fund is established according to special provisions that clearly stipulate
conditions of subscription and rights of subscribers.
Such obligation is stated in the employment contract or in the Articles of Association
of the establishment.
The fund has a character independent of the establishment and has separate accounts
audited by an independent CPA.
A deduction is allowed for R&D expenditure incurred during the tax year in connection
with the generation of income that is subject to tax. Such expenditure relates to
technical, scientific, and engineering experiments; computer systems; or similar
research. This provision does not apply to the acquisition of land and facilities, or to
equipment used for research. Such facilities and equipment are subject to depreciation
under the law.
Fines and penalties
Fines and penalties related to income tax, paid or payable in Saudi Arabia or to other
countries, are not deductible.
Financial fines or penalties paid or payable to any party in Saudi Arabia, such as traffic
fines or fines for causing damage to public utilities, are also not deductible.
Fines or penalties paid for breach of contractual obligations, such as fines on delayed or
defaulted completion of contracts, are deductible, provided they are documented by the
contracting party and the income from such penalties is reported in the year of recovery.
Taxes
The following expenses are non-deductible:

Wages, salaries, and whatever is so deemed, in cash or in kind, paid to an owner,
partner, or shareholder, or to a member of their families, being a parent, spouse,
sons/daughters, and siblings (this provision does not apply to stockholders in a stock
company).
Compensation in cash or in kind paid to a partner, shareholder, or to a family
member, including a parent, spouse, sons/daughters, and siblings, for a property or
service to the extent that the compensation is higher than the fair market value of
such property or service at time of transaction.
Entertainment expenses incurred for events such as parties, sports competitions,
entertainment trips and activities, etc.
Expenses of a natural person for personal consumption, such as personal
withdrawals, dependants cost of living, or education.
Any bribe or similar payment, which is considered an illegal practice in Saudi Arabia,
even if paid abroad.
Insurance commission in excess of 3% of total premiums collected in Saudi Arabia
through an agent or others and regardless of whether or not the agent is a partner.
A taxpayer may carry forward operational losses, as adjusted, to the years following the
loss year until the cumulative loss is fully offset. The maximum profit percentage of any
year that could be used to offset cumulative losses should not exceed 25% of the years
profit as reported in the taxpayers return. Carryback of losses is not allowed.
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Saudi Arabia
Payments made to headquarter offices located abroad by wholly owned local

subsidiaries or branches are not deductible.Such payments include:
royalties or commissions
loan charges (interest expense) or any other financial fees (except loan charges paid
by branches of foreign banks in Saudi Arabia to their non-resident head offices, which
are considered as tax deductible expenses), and
indirect administrative and general expenses allocated on an estimated basis.
The value of goods or services delivered to the taxpayer by related parties is not
deductible to the extent that it is in excess of an arms-length value.
Group taxation
Double taxation on the income of foreign investors realised from theirinvestments in
other resident companies is eliminated under the following conditions:
Such income was subjected to tax in Saudi Arabia.
The percentage of ownership in the company invested in is not less than 10%.
The period of ownership of shares is not less than one year.
With respect to the income realised by a resident capital company from its investments
and operations outside Saudi Arabia, it will be subject to tax in Saudi Arabia (unless
an effective DTT between Saudi Arabia and the country invested in stipulates different
provisions).
However, for Zakat purposes, the concept of consolidation is acceptable and relief may
be obtained forwholly owned subsidiaries by Saudi/GCC companies that are subject to
Zakat.
Note that an entity operating in Saudi Arabia that has undertaken more than one project
under the same commercial registration is required to consolidate the results of such
projects into the financial statements of that entity and subject them to taxation as a
singleoperation.
Transfer pricing
There are no specific transfer pricing rules in Saudi Arabia that impose or deem a charge
to arise where the DZIT has reason to believe that a transaction has taken place at a
value other than on an arms-length basis. However, there is a generic provision that
allows the DZIT to re-characterise or re-allocate income or expenses arising from a
transaction if it is undertaken for the purposes of avoiding or reducing a tax liability in
Saudi Arabia.
In addition to the above and based on the Ministerial Resolution (No. 1776) dated
19 March 2014, the DZIT is to issue guidelines/regulations on transfer pricing of
transactions between related parties in accordance with the internationally accepted
standards.
Thin capitalisation
There is no special legislation governing thin capitalisation for tax purposes. A Saudi
company may deduct interest payments to affiliates, but not the head office, provided
that the amount of debt and rate of interest are at arms length and that the interest
deductibility formula is met. A Saudi company may be financed with minimum capital,
and there is no limit to the amount of debt that may be used.
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Foreign tax credit
Income tax and related fines and penalties paid or payable to the Kingdom or to other
countries are non-deductible expenses.
Incentives for investment in less-developed regions
The government of Saudi Arabia has granted tax concessions to the following six lessdeveloped regions in Saudi Arabia, with the intention of attracting more investment:

Hail.
Jazan.
Najran.
Al-Baha.
Al-Jouf.
Northern territory.
These tax privileges are granted for a period of ten years from the start of any project.
The qualifying investing companys annual tax bill may be reduced by:
Half the annual training expenditure on Saudis.
Half the annual salaries paid to Saudis.
15% of the non-Saudi capital share, subject to certain conditions.
More deductions are granted if investment capital for any project exceeds SAR 1
million and if more than five employees of Saudi nationality have jobs of a technical or
administrative nature with contracts of at least one year.
Customs incentives
An exemption from customs duties is available on machinery and raw materials that are
required for approved projects, provided that they are not available in the local market.
Such exemptions should be applied for prior to their importation and are subject to
certain terms.
Withholding taxes
Payments made from a resident party or a PE to a non-resident party for services
performed are subject to WHT. The rates vary between 5%, 15%, and 20% based on the
type of service and whether the beneficiary is a related party.
The WHT should be paid within the first ten days of the month following the month
during which the payment was made.
The domestic rate for WHT is 5% on dividends, 5% oninterest, and 15% on royalties.
Tax treaties
Saudi Arabia has entered into tax treaties with several countries. Treaties currently or
about to be in force are listed below. A number of other treaties are at various stages of
negotiation.
DTTs have not yet been effectively tested in Saudi Arabia. However, they generally follow
the Organisation for Economic Co-operation and Development (OECD) Model Treaty
and may provide certain relief, including WHT on dividends, interest, and royalties.
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The following are the treaty WHT rates for payments made from Saudi Arabia to treaty
country recipients. Each tax treaty should be studied carefully because there could be
exceptions to the general rules:
Recipient
Non-treaty
Treaty:
Austria
Bangladesh
Belarus
France
Greece
India
Ireland
Italy
Japan
Luxembourg
Malaysia
Malta
Netherlands
Pakistan
Poland
Romania
Russia
Singapore
South Africa
South Korea (Republic of Korea)
Spain
Syria
Tunisia
Turkey
Ukraine
United Kingdom
Uzbekistan
Vietnam
Dividends (%)
5
Interest (%)
5
Royalties (%)
15
5
10
5
5
0
5
5
0/5 (13)
5/10 (1)
5/10 (9)
5
5
5
5/10 (2)
5/10 (3)
5
5
5
5
5/10 (2)
5/10 (4)
0/5 (5)
0
5
5/10 (6)
5/15 (15)
5/15 (7)
7
5/12.5 (8)
5
7.5
5
10
0
5
10
0
5
10
0
5
0
5
10
5
5
5
5
5
5
5
7.5
2.5/5 (16)
10
10
0
7
10
10
10
10
10
0
10
10
5/8 (11)
10
5/10 (10)
5/7 (14)
8
5/7 (14)
7
10
10
10
10
8
10
5/10 (10)
8
15
5
10
10
5/8 (11)
10
7.5/10 (12)
Notes
1.
2.
3.
4.
Shall not exceed:

partnership) that has owned, directly or indirectly, at least 25% of the capital of the company
paying the dividends for a period of at least 12 months preceding the date the dividends were
declared.
Shall not exceed:
partnership) that directly holds at least 10% of the capital of the company paying the dividends.
Shall not exceed:
5% of the gross amount of dividends if the beneficial owner is (i) a company or (ii) an entity wholly
owned by the government.
Shall not exceed:
partnership) that directly holds at least 25% of the capital of the company paying the dividends.
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5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Shall not exceed:

5% of the gross amount of the dividends.
The contracting state of which the company paying the dividends is a resident shall exempt
from tax the dividends paid by that company to a company (other than a partnership) that is a
resident of the other contracting state, as long as it directly holds at least 25% of the capital of
Shall not exceed:
5% of the gross amount of the dividends:
if the beneficial owner is a company (other than a partnership) that directly holds at least 20%
of the capital of the company paying the dividends or
if the beneficial owner is central bank or an entity that is wholly owned by the government.
Shall not exceed:
15% of the gross amount of the dividends where qualifying dividends are paid by a property
investment vehicle.
Shall not exceed:
partnership) that directly holds at least 50% of the capital of the company paying the dividends,
or has invested 20 million United States dollars (USD) or more, or any equivalent currency, in the
12.5% of the gross amount of the dividends in all other cases.
Shall not exceed:
5% of the gross amount of the dividends if the beneficial owner is a company that holds, directly
or indirectly, during the period of 183 days ending on the date on which entitlement to the
dividends is determined, at least 10% of the voting shares or of the total issued shares of the
Shall not exceed:
5% of the gross amount of the royalties that are paid for the use of, or the right to use, industrial,
10% of the gross amount of the royalties in all other cases.
Shall not exceed:
Shall not exceed:
7.5% of the gross amount of such royalties that are paid for rendering of any services or
assistance of a technical or managerial nature.
10% of the gross amount of such royalties in all other cases.
Shall not exceed:
5% of the gross amount of the dividends.
The contracting state of which the company paying the dividends is a resident shall exempt
from tax the dividends paid by that company to a company (other than a partnership) that is a
resident of the other contracting state, as long as it directly holds at least 25% of the capital of
the company paying the dividends or when paid to the government, the central bank, or any
institution, agency, or fund wholly owned by the government of Ireland.
Shall not exceed:
Shall not exceed:
5% of the gross amount of the dividends if the beneficial owner directly holds at least 20% of the
Shall not exceed:
2.5% of the gross amount of income from debt-claims for banking institutions.
5% of the gross amount of income from debt-claims in all other cases.
The DZIT issued a new Circular (#5068/16/1434) on 9 June 2013 that offers a choice
of automatic application of relevant tax treaty without going through the refund
procedure. The choice is given to Saudi Arabia residents or PEs of non-residents
that make payments subject to WHT in Saudi Arabia (referred to as taxpayers in the
Circular).
They now can apply reduced rates or full relief upon making the payment. The new
Circular imposes the following conditions on taxpayers that choose to apply DTT
automatically:
Report, via monthly WHT returns, thefull details of each payment made to nonresident parties (beneficiaries).
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Saudi Arabia
Still file a request form for application of DTT together with tax residence certificate
of the beneficiary (the Circular contains a form of certificate).
Undertake full responsibility for any understatement of tax, including penalties.
As mentioned above, the new Circular provides a choice; taxpayers can still use the old
system, i.e. withhold tax and comply with the refund procedure.
Tax administration
Taxable period
Tax filings are based on the companys fiscal year.
Tax returns
Returns are due to be filed with the DZIT within 120 days after the taxpayers year-end.
The system is one of self-assessment.
According to the tax authority, companies that are owned by Saudis only, or by Saudis
and non-Saudis, must file audited financial statements along with the tax return.
However,this requirement is not applicable for companies that are 100% owned by nonSaudis.
The DZITs branches introduced an electronic service in December 2013. The system will
offer submission of Zakat estimates and calculate Zakat electronically for companies and
establishments. As a first step, the DZIT is aiming at filing the Zakat returns for the year
2013 electronically.
The DZIT is sending requests by email and courier to Zakat payers to complete the online
registration process to obtain a user name and password that will allow each company to
log in to the DZIT website and submit the returns on line.
The DZIT will be working on transferring all other reporting forms to the e-filing system,
and it is expected that within the coming months, corporate tax and WHT filings will
have to be online too.
Payment of tax
Final tax due must be paid within 120 days after the taxpayers year-end.
Three equal advance tax payments are required to be made on the last day of the sixth,
ninth, and 12th months for a current tax year, provided that the taxpayer has earned
income during the year. Each advance payment is equal to 25% of the amount resulting
from the taxpayers tax liability based on the previous year return minus the withheld
tax on reported income, if any. The taxpayer is not required to make advance tax
payments if the result of the said formula is less than SAR 500,000. Late payment of an
advance payment is subject to a delay penalty of 1% of the amount due for every 30 days
of delay.
Tax audit process
There is no specific audit process followed by the DZIT; however, the most common
ways for the DZIT to select companies for tax audits are the size of the company, the
companies shareholders nationality (totally owned by foreigner and branches of foreign
companies), and certain risk assessment measures.
The DZIT may, with a reasoned notification, make or amend a tax assessment within five
years from the end of the deadline specified for filing the tax declaration for the taxable
year, or, at any time, upon a written consent of the taxpayer.
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The DZIT may make or amend an assessment within ten years of the deadline specified
for filing the tax declaration for the taxable year if a taxpayer does not file its tax
declaration or it is found that the declaration is incomplete or incorrect with the intent
of tax evasion.
A taxpayer may request a refund of overpaid amounts at any time within five years from
the end of the overpaid taxable year.
It was noted recently that the DZIT is emphasising the submission of a certificate from
the General Organisation for Social Insurance (GOSI) along with a reconciliation
statement between salaries and wages subject to GOSI and salaries and wages charged
to the taxpayers accounts duly certified by a Saudi licensed CPA.
The DZIT recently started to focus on the payments made to non-resident parties to
verify compliance with the WHT regulations by requesting a reconciliation statement for
such payments with the annual WHT form.
The DZIT has also recently been requesting import value lists from the Customs
Authority in order to confirm the value of goods imported and declared by taxpayers in
their annual declarations during the financial period.
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Senegal
PwC contact
Matthias Hubert
3 Place de lIndpendance - BP 6454
Immeuble SDIH
Dakar
Senegal
Tel: +221 33 849 05 00
There have been no significant corporate tax developments in Senegal during the past
year.

Branches and companies are liable for corporate income tax (CIT) at the rate of 30%.
Residents are taxed upon their worldwide income. Non-residents are generally taxed
via the existence of a permanent establishment (PE) on Senegal-source income.
Withholding taxes (WHTs) may also apply to non-residents, as per the services delivered
to Senegalese taxpayers, subject to the application of a double tax treaty (DTT).
Minimum CIT
A minimum CIT is due, in case of lack of profits, at the rate of 0.5% applied on the
annual turnover. The minimumamount cannot be less than 500,000Communaut
financire dAfrique (Financial Community of Africa or CFA) francs (XOF)and the
maximum amount cannot bemore thanXOF 5 million.
Local income taxes
See the Other taxes section for a description of local taxes based on turnover and property.
Corporate residence
Companies are considered as Senegalese residents if they have a registered fixed
establishment. Nonetheless, foreign companies that are not registered locally may be
deemed to have a PE in Senegal in relation to their local activity and will then be subject
to tax liabilities.
The criteria for a PE were derived from the former General Tax Code (GTC) and are close
to the Organisation for Economic Co-operation and Development (OECD) standards.
The new GTC does not include a PE provision, but the former one should be applicable.
DTTs can be applicable and can provide specific definitions. These DTTs are based on the
OECD model in most cases. See the Withholding taxes section for a list of countries with
which Senegal has concluded DTTs.
Other taxes
Subject to certain exclusions, most commercial operations are subject to an 18% VAT.
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VAT on tourism activities is 10%.
A 17% special tax on financial activities (mainly banking, money transfers, and change
operations) is applicable instead of VAT.
VAT returns must be filed monthly.
Customs duties/Import tariffs
In the case of import of goods, the following tariffs apply:

Customs duties: 0%, 5%, 10%, or 20%, depending on the nature of the goods.
Statistical import charge: 1%.
Community solidarity levy: 1%.
Economic Community of West African States (ECOWAS) levy: 0.5% (only applicable
among ECOWAS countries).
Senegalese Shippers Council (COSEC) royalty: 0.2% (only applicable on importation
by sea).
Excise taxes
The products on which the Senegalese authorities levy excise tax, and the relevant
excise tax rates, are as follows:
Beverages: 40% for beverages containing alcohol, plus an additional tax ranging from
XOF 800 to XOF 3,000 per litre; 3% for sparkling beverages.
Tobacco: rate varies from 40% to 45%.
Coffee: 5%.
Tea: 5%.
Fat: rate varies from 5% to 12%.
Private cars with a horsepower (tax engine rating) superior to 13CV: 10%.
Cosmetic products: 10% (increased to 15% for depigmentation products).
Oil products: rates per nature and per hectolitre: XOF 21,665 for super-petrol, XOF
19,847 for conventional petrol, XOF 3,856 for petrol for the use of pirogues, XOF
10,395 for diesel.
Tax on built real estate
The tax on built real estate applies annually to owners of buildings, factories, industrial
premises, or equipment fixed on the land. The tax rate is 5% for common buildings and
7.5% for factories and industrial premises. It is applied on the basis of the rental value of
the lands, buildings, etc.
Tax on non-built real estate
The tax on non-built real estate applies annually to owners of land without buildings,
factories, industrial premises, or equipment fixed on the land. The tax rate is fixed at 5%.
It is applied on the basis of the rental value of the land.
Stamp/registration duties
There are many stamp and/or registration duties, depending on the operations, such as
the following:
Operation
Commercial, house, or equipment lease
Transfer of real estate
Transfer of debt
Pledge
Increase of the capital in cash
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Stamp and/or registration duty

2% applicable on the basis of the annual rent
10% on the sales price
1% on the debt value
1% on the guarantee value
1% of the increase where the share capital is greater
than XOF 100 million
Senegal
Operation
Transfer of business
Transfer of shares
Stamp and/or registration duty

10% on the sales price
1% on the sales price (or the market value if higher)
Business licence tax is an annual duty consisting of a fixed annual payment (fixed duty)
and a proportional duty, calculated in most cases on the basis of the rental value of the
premises used. The amounts and rates of these taxes are fixed according to the type and
size of the activity carried out.
There is a table that includes several categories of business. For each category, a fixed
tax is provided as well as the percentage that is applied on the assets at their fair value.
In cases where the business does not fit any category, the closest business or the most
similar one is considered by the tax administration in order to calculate the business
licence tax for the taxpayer.
As an example, the merchant business licence tax fixed duty classification rates are
provided below. As per this classification, a merchant will be liable for business licence
tax depending on its annual turnover. Indeed, it will have to pay a tax determined as
follows:
Merchant turnover (XOF)
Over 10 billion
Between 5 billion and 10 billion
Between 1 billion and 5 billion
Between 500 million and 1 billion
Fixed amount of tax (XOF)

10 million
5 million
3 million
1.5 million
1 million
700,000
400,000
300,000
The general rate of proportional tax is 19%, and it is levied on the annual rental value of
the offices, stores, warehouses, yards, workshops, stations, wharfs, sites, other premises,
and installations considered as constructions used for the activities of the company.
In addition to that, the basis of the proportional tax also includes the assets or rented
materials at their fair value.
Tax on telecommunication
The tax rate is 5% on telecommunication use and access. To offset the tax, the purchase
of mobile telephones (and other types of telephones) remains exempt from VAT and
customs duty.
Company tax on vehicles
In addition to the tax on vehicles, companies owning or renting vehicles (more than 15
days a year) must pay a specific annual tax on them. Rates range from XOF 50,000 to
XOF 200,000, depending on the type and horsepower of the vehicle.
Payroll taxes
PAYEE
All compensation (including salary, cash allowances, and benefit in kind) paid to
employees is generally taxable. For the calculation of the personal income tax (PIT) to be
withheld by the employer, the tax administration provides a tax table determined on a
monthly basis so that no calculation is necessary.
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Employer tax
Employers are subject to a 3% tax based on the total gross salaries paid to employees.
Social Security contributions
Social Security contributions are borne exclusively by the employer.

The rate for the industrial accident/occupational disease branch has to be confirmed by
the authority when registering the entity with the Social Security Office (applicable rate
to be stated within the related certificate).
Rate of contributions (only payable
by employers) (%)
7
5
Sector
Family
Industrial accident /
Occupational disease
Maximum monthly basis

of calculation (XOF)
63,000
63,000
Retirement contributions
Retirement contributions are payable both by the employer and the employees:
Rates of contributions (%)
Payable by
Payable by employees
employers (withheld on the salary)
8.4
5.6
3.6
2.4
Regime
General
Executive
Maximum monthly basis of

calculation (XOF)
256,000
768,000
Employment medical coverage
The employer shall subscribe for all employees a medical coverage. The level of coverage
depends on the type of agreement concluded with the dedicated organism. Usually, the
employee is reimbursed for 80% of medical expenses, even though the law provides a
range between 50% and 80%.
The monthly rate is 6% to be levied on a contribution rate between XOF 60,000 and XOF
250,000, for both the employee and the employer.
Branch income
In general, the tax on branch income is similar to that of corporate income. Nonetheless,
a 10% duty is automatically applied to profits generated after CIT. It corresponds to an
automatic application of the 10% tax on payment on dividends applicable to a company.
Headquarter expenses, which are a proration of the worldwide office expenses, may
be allocated to the Senegal branch. This proration is based upon a ratio of the local
turnover of the branch and the worldwide turnover of the parent company. It applies to
the total amount of headquarters expenses incurred by the company. In addition, the
deductibility of headquarters expenses is limited to 20% of the accounting profits before
the deduction. This limitation does not apply to other types of services provided by
headquarters, such as technical assistance.
Inventory valuation
Inventory is generally stated at the lower of cost or market value. Last in first out (LIFO)
and first in first out (FIFO) are permitted. Book and tax conformity is required.
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Capital gains
Capital gains derived from the transfer of assets are subject to the 30% CIT. There is
no basket system. The taxable base will be reduced to one-third if the transfer of assets
arises due to a cessation of activity. However, if the transfer of assets is made less than
five years after the start of the business, a one-half reduction of the taxable base will be
applicable.
Sales of stocks by a non-resident are liable to the 30% CIT, subject to the application of a
DTT.
Dividend income
If a parent company domiciled in Senegal owns 10% of the subsidiary (main condition
for the application of the parent-subsidiary corporation special taxation status), a 95%
reduction on the dividends received is applicable for CIT purposes.
If these conditions are not met, dividends received by a company are subject to CIT as
follows:
40% of the dividends are added back to the taxable profit.
The company benefits from a tax credit upon the CIT equal to 40% of the tax on
distributions withheld (10%).
Stock dividends
Stock dividends are unusual in Senegal. However, this kind of distribution would be
taxable at the general WHT rate of 10% on the basis of its real value.
Interest income
Article 105 of the General Tax Code provides a list of interests that are not subject to CIT.
For instance, the following are not subject to CIT:
Interest on sovereign debt.
Interest on deposit accounts opened at the Housing Bank of Senegal (i.e. Banque de
lHabitat du Senegal).
Interest on loans granted by the Central Bank.
Foreign income
In general, profits generated in Senegal are taxed under Senegals income tax law. Profits
generated outside Senegal and constituting a PE in the relevant country are not taxed in
Senegal. A DTT can provide different rules.
Deductions
The rates of depreciation are not provided by the law. The rate is determined on the
normal and predictable duration of use of the asset by taking into account normal
wear and tear. In practice, there are standard rates for common assets. Accelerated
depreciation can be applicable, subject to conditions.
Goodwill
There are no provisions in Senegal for goodwill.
Start-up expenses
Start-up expenses are deductible if justified and approved by the shareholders.
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Interest expenses
Interests on current account advances or loans from a shareholder (directly or

indirectly) are subject to restrictions as to their deduction from taxable income:
The share capital of the company receiving the loan or advance shall be, beforehand,
fully paid.
The amount of the loan or advance shall not exceed the share capital of the company
receiving it. It is not an individual but an overall ceiling on the total amount of loans
and advances of all shareholders and seniors.
The rate of interest shall not exceed the rate of advance of the Institute of Emissions
plus 3 points. However, a problem exists on the reference rate because until now the
tax administration seems to refer to the discount rate of the Central Bank, which last
known rate was 6.75% and published in 2010. The Central Bank has not published
a discount rate since this period and has established a legal interest rate of 4.11%.
In all logic, this rate should be the reference, but the tax administration seems to
ignore this rate. Therefore, one should be cautious about using the reference rate,
and it would be advisable to apply the rate of 4.11% plus 3 points as the limit of a rate
allowing the total interest deduction.
Bad debt
There are no provisions in Senegal for bad debt.
Only payments made to specific chartered organisations are deductible, at a rate of up

to 0.5/100 of turnover. On the contrary, payments made to non-chartered organisations
are not deductible.
Fines and penalties
Taxes
CIT and the company tax on vehicles are not deductible.
Provisions are deductible if they correspond to a risk or a probable cost that is more than
possible and leads to a decrease in the assets. Provisions for paid holidays and retirement
compensation are not deductible.
Tax losses may be carried forward to the next three years. The carryback of losses does
not exist. Losses corresponding to the depreciation of assets can be carried forward
indefinitely.
Reasonable royalties, interest, and management service fees paid to foreign parent
companies are deductible. Supporting documents (e.g. invoices, contracts) will be
necessary to prove that these expenses are justified.
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Group taxation
Group taxation is not permitted in Senegal.
Transfer pricing
The transfer pricing regulations globally correspond to the OECD requirements

standards (i.e. identifying related party transactions, choosing the suitable transfer
pricing method, and preparing documentation to support the selection of such method).
Thin capitalisation
There are no specific rules regarding thin capitalisation in Senegal. Nonetheless, the
following tax and legal rules should be known:
From a legal point of view (corporate law), the net assets must be equal at least
half of the share capital of the company. In case the net assets are lower than this
threshold, the situation should be regularised by any lawful means within a period
of two years following the financial year it appears. Otherwise, any third party can
request the closing of the entity before the courts.
The deductibility of interest paid to a shareholder upon a loan or an advance in
general is limited to a maximum rate calculated on the Central Bank legal interest
rate (currently fixed at 4.11%) plus 3 points, calculated on the amount of the share
capital (see Interest expenses in the Deductions section for more information). Portions
exceeding this limit are not deductible for CIT purpose.

Foreign tax credit
Usually, DTTs may provide some tax credit on the basis of the relationship between
Senegalese entities and their partners located abroad. For each DTT, the specific process
to enforce those tax credits either in Senegal or abroad (depending on the payments
directions) are stipulated within that DTT. Nonetheless, as far Senegal is concerned, the
practice consisting of enforcing foreign tax credits locally is very rare.
The Investment Code
The Investment Code applies to investments over XOF 100 million (mainly production,
processing, industrial, tourism, agricultural, and complex trade). The benefits of the
Investment Code include exemption from customs duties, suspension of VAT payment
for three years, CIT limitation, etc. The tax benefits are directly integrated in the GTC
and do not require administrative authorisation (i.e. as long the requirements are met,
the taxpayers may benefit from those tax benefits).
Free export company status
Agriculture, industry, and telecommunications companies that have an exporting

potential amounting to at least 80% of their turnover may qualify for the free export
company status. There are several advantages for companies that qualify, including
a CIT rate of 15%, exemption from dividend WHT, exemption from business licence
tax, exemption from taxes on real estate, and exemption from registration duty for
incorporation or bylaws change purposes.
Miscellaneous incentives
There are a wide range of investment laws (i.e. negotiations with the government to set
up a specific tax regime different from common rules) for investments greater than XOF
250 billion, including the mining code and the petroleum code, among others. All of
these tax benefits are now directly included in the GTC.
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Withholding taxes
Senegal has various WHTs. The primary ones are as follows:
20% WHT on remuneration paid for services (including royalties) rendered by a
foreign individual or foreign company.
10% WHT on dividends distributed.
13% WHT on bond interest.
8% WHT on deposits or guaranteed interest on accounts with a bank.
16% WHT on other revenues, notably interest on loans.
These WHTs may be limited by DTTs.
The DTTs concluded by Senegal are based on the OECD model in most cases. Senegal
has concluded such treaties with the countries listed in the table below.
Treaty WHT rates are as follows:
Recipient
Belgium
Canada
France
Italy
Mauritania
Mauritius
Morocco
Norway
Qatar
Tunisia
WAEMU *
Dividends (%)
10
10
10
10
10
N/A
10
10
N/A
10
10
Interest (%)
16
16
15
15
16
N/A
10
16
N/A
16
15
Royalties (%)
10
15
15
15
N/A
N/A
10
16
N/A
N/A
15
* West African Economic and Monetary Union (member states are Benin, Burkina-Faso, Cte dIvoire,
Guinea-Bissau, Mali, Niger, and Togo).
Tax administration
Taxable period
The tax year in Senegal is the calendar year.
Tax returns
Companies must file CIT returns by 30 April of the year following the tax year.
Also, in addition to the miscellaneous annual returns (business licence tax, company car
tax, etc.) and other monthly tax returns (VAT, payroll taxes, WHT, etc.), taxpayers must
file by 31 January for the prior financial year:
An annual recapitulative payroll tax return.
An annual recapitulative return on payment for services.
Payment of tax
CIT must be paid in two instalments (each equal to one-third of the previous years tax)
by 15 February and 30 April. The outstanding balance payment amount of the tax due
must be paid by 15 June.
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Senegal
For the first financial year of a newly incorporated company, no instalment is due; the
new company pays the whole CIT before 15 June of the following year.
Penalties
In case of late payment, a 5% interest of delay on the amount due plus an additional
0.5% duty per month of delay or portion of month of delay are applicable. This late
payment is due when the taxpayers regularisation is spontaneous.
On the other hand, if such payment is triggered by a tax audit from the authority itself
after the deadline is crossed, the following penalties apply:
50% for any WHT and VAT.
25% for other taxes (CIT, business licence tax, taxes on real estate, registration
duties, company car tax).
Also, the late filling of tax returns triggers a XOF 200,000 penalty per return.
Tax audit process
The tax authorities may request information, clarifications, or justification to the

taxpayers. The taxpayers have 20 days to answer to those requests.
The tax authorities may also implement an inspection of the accounting documents
at the premises of the taxpayer or at any place the taxpayer would consider more
appropriate for material reasons upon a specific request. In such cases, a prior notice is
sent to the taxpayer.
The tax authorities are not allowed to process a new tax inspection on a period already
inspected by their services unless a new element or document is revealed after the first
inspection was processed.
Where the tax authorities estimate that the taxpayer has not fulfilled all of ones tax
obligation, a tax reassessment shall be transmitted to the taxpayer, who has 30 days in
order to answer or comment on the findings.
After the tax authorities have received those comments, they can confirm partially or
totally the reassessment within a statutory delay of 60 days.
The statute of limitations is, generally speaking, four years.
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Serbia
PwC contact
Branka Rajii
PricewaterhouseCoopers Consulting d.o.o.
Omladinskih brigada 88a 11070 Belgrade
Republic of Serbia
Tel: +381 11 3302 100
The latest amendments to the tax laws were enacted in December 2013 and included:
Abolishment of the 20% tax credit for investments in fixed assets.
Increase of the reduced value-added tax (VAT) rate from 8% to 10% (the standard
VAT rate was increased from 18% to 20% in September 2012).

Residents are taxed on their income generated in Serbia, as well as on their worldwide
income. Non-residents are taxed only on their income sourced through a permanent
establishment (PE) in Serbian territory.
The corporate income tax (CIT) rate is 15%.
Local income taxes
There are no local taxes on income in Serbia.
Corporate residence
A legal entity is considered to be a resident of Serbia if it is established or has its place of
effective management and control in Serbia.
A PE is any permanent place of business through which a non-resident conducts its

business.
Other taxes
The VAT was introduced on 1 January 2005 and generally follows the European Unions
(EUs) SixthDirective.
The standard VAT rate is 20% for most taxable supplies. A reduced VAT rate of
10% applies for basic food stuffs, daily newspapers, medicines, publications, public
transportation services, utilities, etc.
In addition to these tax rates, there is a 0% tax rate with the right of deduction of the
input VAT that applies to the export of goods, transport and other services directly
related to exports, international air transport, etc.
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Serbia
A 0% tax rate without the right of deduction of the input VAT applies to trading in shares
and other securities, insurance and reinsurance, and the lease of apartments, business
premises, etc.
A taxpayer for VAT purposes is a person who independently, and in the course of its
business activities, undertakes the supply of goods and services or import of goods.
Business activity is defined as the permanent activity of a manufacturer, salesperson, or
service provider for the purpose of gaining income. A branch or other operating unit can
be a taxpayer.
A non-resident without a head office or PE within Serbia cannot register for
VATpurposes.
The tax period for taxpayers whose turnover for the last 12 months exceeds 50 million
Serbian dinars (RSD), or is forecast for the next 12 months to do so, is a calendar month.
Suchtaxpayers have to filetax returns and pay VAT liability 15 days after the end of each
month. The tax period for other taxpayers is a quarter (three months), and tax returns
have to be filed and VAT paid within 20 days after the end of each tax period.
Customs duties
Goods imported into Serbia are subject to customs duty rates provided in the Law
on Customs Tariff. These rates are ad valorem (the only exception is related to the
importation of other cigarettes containing tobacco, where a combined ad valorem and
specific customs duty rate is prescribed) and applies to goods originating in countries
that have a most favoured nation (MFN) status in trading with Serbia. Goods originating
in other countries are subject to MFN duty rates increased by 70%.
At the moment, the only trading partner with Serbia that does not have MFN status is
Taiwan.
Customs duty rates in Serbia range from 0% to 57.6%, with most being under 30%. At
the moment, the 57.6% rate only applies to cigarettes containing tobacco.
Excise duties
Excise duties are levied on producers and importers of the following goods:

Oil derivatives.
Tobacco products.
Alcoholic beverages.
Coffee (green, roasted, ground, and coffee extracts).
Excise duty in Serbia is specific (for oil derivatives, alcoholic beverages, cigars, cigarillos,
and coffee), ad valorem (for pipe tobacco), and combined (specific + ad valorem on
retail price for cigarettes).
Excise duties stated in Serbian currency are adjusted on a half-year basis according to
variations of the consumer price index (CPI) declared by relevant government bodies
in charge of statistics. For oil derivatives, the government can modify the specific excise
duty amounts during the year according to changes in prices of crude oil on the market.
Property tax
Property tax is payable annually in Serbia by all legal entities and individuals who own
or have rights over real estate located in Serbia, such as:
Ownership rights.
Right of occupancy.
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Tenancy rights over an apartment or a building for a period longer than one year or
for an indefinite period.
Urban land usage right (municipal, public, and other state-owned land) larger than
ten acres in area.
Where the taxpayer keeps books, the property tax on real estate is levied at a flat rate
that cannot exceed 0.40%.
Transfer tax
Transfer tax is levied on the transfer for a consideration of rights over real estate when
VAT is not payable on such a transfer; intellectual property rights; ownership over used
vehicles, vessels, and aircrafts (unless owned by the state); right to use urban and/or
public building land; as well as rights relating to expropriated real estate.
The contract price is used as a tax base; however, the tax authorities have the right to
adjust the tax base in case they estimate that the price agreed to in the contract is lower
than under market conditions. The tax is payable at a 2.5% rate.
Stamp taxes
There are no stamp taxes in Serbia.
Capital gains tax of non-residents
Capital gains realised by non-residents from both residents or other non-residents are
subject to 20% capital gain tax. Non-residents should appoint a fiscal representative in
Serbia who should submit a tax return within30 days from the realisation of capital
gain. Based on the tax return, tax authorities will issue a decision assessing tax liability
(if any).
In order to benefit from application of a relevant double tax treaty (DTT), the same rules
are applicable as for withholding tax (WHT). Non-residents (i.e. the income recipient)
must provide a tax residency certificate (on the form prescribed by the Serbian Ministry
of Finance stamped by the relevant body from the non-residents country of residence
or official translation of certificate issued by foreign tax authorities), and the income
recipient must be the beneficial owner of the income.
Payroll taxes
The employer is liable to withhold personal income tax (PIT) and social security
contributions on payment of salaries to employees, at the following rates:
10% PIT.
19.9% social security contributions payable by the employee.
17.9% social security contributions payable by the employer.
The tax and contributions base is gross salary. The social security contributions base is
limited to five average monthly salaries in Serbia.
Branch income
Non-residents carrying on business in Serbia through a branch are taxed on their
Serbian-sourced income at the CIT rate of 15%. A branch is considered to be a PE.
Taxable profit is determined by adjusting the accounting profit as stated in the profit
and loss statement (determined in accordance with International Financial Reporting
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Serbia
Standards [IFRS] and local accounting and audit legislation) and in accordance with the
provisions of the CIT Law.
For taxpayers who, according to local legislation, are not obligated to apply IFRS,
taxable profit is determined according to the special guidelines prescribed by the
Ministry of Finance.
Inventory valuation
Cost of materials and the purchase value of merchandise are tax-deductible up to an

amount calculated by applying the average weighted cost method or the first in first out
(FIFO) method. If another method is used, an adjustment for tax purposes should be
made.
Capital gains
Capital gains are generated by the sale or other transfer of real estate, rights related to
industrial property, as well as shares, stocks, securities, certain bonds, and investment
units. A capital gain is determined as the difference between the sale and purchase price
of the asset concerned, determined in accordance with the provisions of the Law. If the
amount is negative, a capital loss is realised.
Capital gains and operational profit are disclosed in the same tax return, but they are
taxed separately. Consequently, capital gains/losses cannot be used to offset business
losses/gains.
However, capital gains can be offset with capital losses occurring in the same period. A
capital loss can be carried forward for five years.
The capital gains tax rate is 15%.
However, the rate applicable for capital gains incurred by non-residents is 20%, unless
envisaged otherwise by a relevant DTT (see the Other taxes section for more information).
Dividend income
Dividends received by a Serbian company from another Serbian company are not subject
to CIT.
Dividends received from a non-resident will be treated as taxable income of a Serbian
company and subject to 15% CIT. However, a Serbian entity will have the right to
decrease its tax liability by taking a tax credit for the WHT and underlying CIT paid in a
subsidiarys country, provided that the taxpayer holds at least 10% of the shares in the
subsidiary. If the taxpayer holds less than 10% of the shares in the subsidiary, the tax
credit should not exceed the amount of tax that would be paid in Serbia on that income,
where the tax basis represents 40% of the received gross income (see the Tax credits and
incentives section for more information).
Interest income
Interest income will be included in accounting profit determined in accordance with

IFRS and will be taxable at the CIT rate of 15%. A Serbian resident has the right to
decrease its CIT liability for WHT on interest paid abroad. The amount of the tax credit
should not exceed the amount ofCIT that would be paid in Serbia on that income, where
the tax basis represents 40% of the received gross income.
Royalty income
Royalty income will be treated as business income and subject to the general CIT rate.
A resident taxpayer also has the right to decrease its CIT liability for WHT on royalties
paid abroad. The amount of the tax credit should not exceed the amount ofCIT that
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would be paid in Serbia on that income, where the tax basis represents 40% of the
received grossincome.
Unrealised currency exchange gains
Unrealised currency exchange gains will be included in accounting profits under IFRS
rules. Serbian legislation does not provide any exception of taxation of this income.
Foreign income
Companies resident in Serbia are taxed on their worldwide income.

When profit generated in another country is taxed in the foreign country, a company has
the right to decrease its tax liability by claiming a tax credit from the tax authorities in
Serbia (see the Tax credits and incentives section for more information).
There are no provisions that provide for the possibility that taxation of income earned
abroad may be deferred.
Deductions
Fixed and intangible assets are divided into five groups, with depreciation and
amortisation rates prescribed for each (Group I: 2.5%; II: 10%; III: 15%; IV: 20%; and
V: 30%). A straight-line depreciation method is prescribed for the first group, which
includes real estate, while a declining-balance method is applicable for assets in the
other groups.
Assets subject to tax depreciation and amortisation are all tangible and intangible
(except goodwill and renewable resources) assets with a useful life longer than one year
that are recognised as non-current assets under IFRS.
Goodwill
Goodwill is not subject to tax amortisation.
Start-up expenses
Generally, start-up expenses are tax deductible for CIT purposes.
Interest expenses
Interest on related party loans exceeding thin capitalisation and transfer pricing
thresholds are not deductible (see the Group taxation section).
Bad debts
Bad debt provisions are generally tax deductible if they are at least 60 days overdue.
Provisions have to be made individually for each receivable.
Write-off of individual debts, except for those from debtors who are at the same time
creditors, is recognised as an expense under the following conditions:
They were written off as uncollectable.
The taxpayer has initiated a court procedure to collect debt or duly reported the
receivables in case of liquidation or bankruptcy procedure over the debtor.
Taxable income should be increased for receivables that are written-off and do not meet
the above requirements and for which tax deductible provisions were previously made.
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Expenses for health care, scientific, educational, humanitarian, religious, ecological,

cultural, and sport related purposes are deductible, up to 5% of total revenues.
Fines and penalties
Fines and penalties (both commercial and those charged by the authorities) are not
deductible.
Taxes
All taxes, duties, and contributions that do not depend on the profitability of the
company are deductible in the tax period that the liability in this respect was settled.
The following other expenses are not recognised for CIT purposes:
Non-documented expenses.
Provisions for receivables from entities that are creditors at the same time, up to the
amount of the liability due to that entity.
Presents provided to political organisations.
Presents provided to related parties.
Penalty interest for late payment of taxes, contributions, and other charges.
Expenses related to forced collection of taxes and other liabilities.
Non-business related expense.
Share in the profit paid to employees or other individuals.
Calculated but unpaid redundancy payments (deductible when paid).
Impairment of assets (deductible in tax period in which asset is disposed of or used).
Direct write-off of receivables (under certain conditions).
Long-term provisions (except those for renewal of natural resources, expenses within
warranty period, and other mandatory long-term provisions).
The following other expenses are recognised for CIT purposes only up to a certain limit:
Advertising and promotional expenses, up to 10% of total revenues.
Business entertainmentexpenses, up to 0.5% of total revenues.
Membership fees paid to chambers of commerce and other associations (except
political parties), up to 0.1% of gross revenue.
The taxpayer has the right to carry forward and utilise tax losses incurred over the
following five years.
Carryback rules do not exist in Serbia.
Generally, there are no restrictions on the deductibility of royalties and service fees paid
to foreign affiliates, provided they are at arms length, appropriately documented (by
agreements, contracts, calculation sheets, etc.), and incurred for business purposes only.
Payment of interest to foreign affiliates is restricted and regulated by thin capitalisation
rules and transfer pricing rules (see the Group taxation section).
Group taxation
Tax grouping/consolidation is allowed to a group of companies where all members are
Serbian residents and one company directly or indirectly controls at least 75% of the
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shares in another company. Each company files its own tax balance sheet, and the parent
company files a consolidated tax balance sheet for the whole group.
In the consolidated tax balance sheet, losses of one or more companies are offset by
the profits of other related companies. Each company is liable for the portion of tax
attributable to its share of the groups taxable profit.
Once approved by the Ministry of Finance, tax grouping/consolidation applies for at
least five years.
Transfer pricing
A transfer price is the price of transactions between related parties. Related parties exist
if there is a possibility of control or influence over business decisions between them.
Ownership of 25% or more, or a majority of shares, is considered as potential control.
Influence over business decisions exists when an associated party holds 25% or more, or
individually holds the greatest portion, of votes in the taxpayers management bodies. If
the same persons participate in management or control of both companies, a connection
between them will be deemed to exist.
Close family members are also regarded as related parties. Non-resident entities from
tax havens are considered as related parties of resident entities. The Serbian Ministry of
Finance prescribed the list of countries that are to be considered as tax havens for the
application of relevant CIT Law provisions.
A company should disclose transactions with related parties separately at transfer prices
and at arms-length prices in its CIT calculation. Positive difference between these prices
(adjustments of expenses) and negative difference (adjustments of revenues) is included
in taxable profit.
Serbian CIT Law recognises the following methods for determining arms-length prices:

Comparable uncontrolled price (CUP).

Cost plus.
Resale minus.
Transactional net margin (TNMM).
Profit split.
Any other method that allows determination of arms-length prices if none of the
above methods can be applied.
It is mandatory to prepare and submit transfer pricing documentation together with the
CIT return for periods starting from 1 January 2013.
Transfer pricing rules for intra-group loans
Any interest incurred on related party loans exceeding the arms-length interest rate is
not tax deductible. Arms-length interest is deemed to be the:
weighted average key policy rate for the tax period, for loans denominated in dinars,
and
weighted average interest rate at which domestic banks borrowed from foreign
lenders in related tax period, for foreign currency loans.
These indicators are determined by the National Bank of Serbia and published by the
Ministry of Finance. However, taxpayers are entitled to determine market interest rates
by using all general methods for determining arms-length interest rates. In case the
taxpayer decides to determine interest rates by applying general methods, it will be
obligated to apply such interest rates for assessment of all related party loans.
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Transfer pricing rules in this respect are applied up to the amount of tax deductible
interest determined in accordance with the thin capitalisation threshold.
Thin capitalisation
The interest and related costs will be fully deductible if the loans from related parties
do not exceed four times the taxpayers net equity (ten times for banks and leasing
companies). The amount of a taxpayers net equity for this purpose is calculated as the
average of the total assets less total liabilities at the beginning and the end of the year,
while the amount of loan from related parties is calculated as a daily average for the
year.
In cases where the loans from related parties exceed the prescribed threshold, the
amount of non-deductible interest will be calculated as proportional to the amount of
loans exceeding the 4:1 (10:1) threshold.

Foreign tax credit
A Serbian entity is entitled to a tax credit for the WHT paid on foreign-sourced dividends
and underlying CIT paid abroad (by its non-resident subsidiary), provided that the
taxpayer holds at least 10% of the shares in the subsidiary for at least one year before
filing a return. If the taxpayer holds less than 10% of the shares in the subsidiary, the tax
credit should not exceed the amount of tax that would be paid in Serbia on that income,
where the tax basis represents 40% of the received gross income. Non-utilised tax credit
can be carried forward by the parent company for five years.
A resident taxpayer also has the right to decrease its tax liability for WHT paid abroad
on interest and authorship fees. The tax credit should not exceed the amount of tax
that would be paid in Serbia on that income, where the tax basis represents 40% of the
received gross income. Carryforward of unused tax credits is not allowed.
Tax holiday
A ten-year tax holiday is available for companies with a minimum investment in

property, plant, and equipment (PPE) of RSD 1 billion. To qualify for the credit, a
taxpayer must employ at least 100 new workers for an indefinite period. The tax holiday
is available for the ten-year period in proportion to the investment made. The number of
employees employed in the tax period in which the taxpayer qualified for the tax holiday
must be retained throughout the whole tax holiday period.
Withholding taxes
WHT is calculated and paid at the rate of 20% on payments such as dividends/share in
profit, royalties (including neighbouring authorship rights, intellectual property rights,
and related rights), interest income, income from distributed surplus of a company in
bankruptcy, revenues derived from the liquidation surplus of a company in liquidation,
and lease payments for real estate and other assets made to a non-resident, unless a DTT
applies to provide a reduced rate.
WHT is also payable on a non-residents income realised on the basis of performing
entertaining, artistic, sports, and similar programs in Serbia, which is not taxed as
income of an individual (performer, musician, sportsman etc.).
In order to benefit from application of a relevant DTT, non-residents (i.e. the income
recipient) must provide a tax residency certificate on the form prescribed by the Serbian
Serbia
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Ministry of Finance stamped by the relevant body from the non-residents country of
residence.
Special WHT rules apply in case of non-resident entities from tax havens. WHT is
payable at the rate of 25% on royalties, interest, income from lease of immovable
property and other assets, and service fees paid to non-resident entities from tax havens.
Dividend payments to non-residents from tax havens are subject to WHT at 20%.
Serbian Ministry of Finance publishes a list of jurisdictions that are regarded as tax
havens.
WHT rates envisaged by applicable DTTs are provided in the following table.
Recipient
Albania
Austria
Azerbaijan
Belgium
Belorussia
Bulgaria
Canada (3)
China
Croatia
Cyprus
Czech Republic
Denmark (2)
Egypt
Estonia
Finland
France
Georgia (3)
Germany
Ghana (3)
Greece
Hungary
India
Indonesia (3)
Iran (3)
Ireland
Italy
Kuwait
Latvia
Libya
Lithuania
Macedonia
Malaysia
Malta
Moldova
Montenegro
Netherlands
North Korea
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Dividends (1)
5/15
5/15
10
10/15
5/15
5/10
5/15
5/15
5
5/10
10
10
5/15
5/15
5/10
5/15
5/15
5/10
15
5/15
5/15
5/15
5/15
15
10
5/10
10
5/10
5/10
5/10
5/10
5/15
0 (5)
5/10 (7)
5/15
10
5/15
10
WHT (%)
Interest
10
10
10
15
8
10
10
0/10 (6)
10
10
10
10
0/10 (6)
15
0/10 (6)
0
0
0/10 (6)
0
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
10
0
10
Royalties (4) Applicable from

10
2006
5/10
2011
10
2011
10
1982
10
1999
10
2006
10
2001
10
N/A
10
1998
10
2005
10
1987
5/10
2006
10
2010
15
2007
5/10
2011
10
1988
0
1976
10
N/A
10
1989
10
N/A
10
2011
10
2003
10
2009
15
N/A
10
2012
5/10
2011
10
1986
10
2004
5/10
2007
10
2011
10
2010
10
1998
10
1991
5/10
2011
10
2007
5/10
2012
10
1983
10
2002
Serbia
Recipient
Norway
Pakistan
Palestine (3)
Poland
Qatar
Romania
Russia
Slovak Republic
Slovenia
Spain
Sri Lanka
Sweden
Switzerland
Tunisia (3)
Turkey
Ukraine
United Kingdom
Vietnam (3)
Zimbabwe (3)
Dividends (1)
15
10
10
5/15
5/10
10
5/15
5/15
5/10
5/10
12.5
5/15
5/15
10
5/15
5/10
5/10
5/15
10/15
5/15
WHT (%)
Interest
0
10
0/10 (6)
10
10
10
10
10
10
10
10
0
10
10
10
0/10 (6)
10
10
10
10
Royalties (4) Applicable from

10
1986
10
2011
10
N/A
10
1999
10
2011
10
1998
10
1998
10
2002
5/10
2004
5/10
2011
10
1987
0
1982
10
2007
10
N/A
10
2008
10
2002
10
N/A
10
1983
10
N/A
10
N/A
Notes
1.
2.
3.
4.
5.
6.
7.
If the recipient company owns/controls at least 25% of the equity of the paying company, the lower
of the two rates applies.
A new DTT was signed with Denmark in 2009 and is applicable from 2010.
The treaty has not been ratified by one of the parties.
A tax rate of 5% will be applicable to literary, scientific, and work of art; films and works created like
films; or other source of reproduction tone or picture. A tax rate of 10% will be applicable to patents,
petty patents, brands, models and samples, technical innovations, secret formulas, or technical
procedures.
Only in cases when dividends are to be paid to Serbian residents. If paid to Malaysian residents, they
are taxable at 20% in Serbia.
A 0% rate is applicable in cases when the income recipient is the government or government owned
banks.
WHT rate refers solely to dividends distributed from Serbia. In Malta, WHT cannot be higher than CIT
on profit before dividend distribution.
Tax administration
Taxable period
The tax period in Serbia is the calendar year. However, entities have a possibility to opt
for a different tax period other than the calendar year (subject to the approval of the
Ministry of Finance), but still 12 months long. Once approved, such tax period must be
applied for at least five years.
Tax returns
CIT returns, together with all supporting documents (e.g. tax depreciation and tax credit
forms), must be filed with the tax authorities not later than 180 days after expiration of
the tax year.
A newly established company needs to register with the tax authorities within 15 days of
registration with the Serbian Business Registry.
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Payment of tax
CIT is payable monthly in advance instalments by the 15th day of the following month
for the prior calendar month. The amount of payable advances is determined on the
basis of a companys CIT calculation for the previous year.
The due date for final settlement of CIT liability is the date of filing the annual tax
return.
Tax audit process
The tax authorities may undertake an unlimited number of tax audits in respect of the
same taxes within a reviewed period. In principle, re-performing of an audit of the same
tax within a reviewed period is based on existence of new facts that were previously
unavailable to the tax authorities.
The statute of limitations period for assessment of tax liabilities is five years from the
year in which tax should have been assessed. The statute of limitations for collection of
tax liabilities is five years from the year in which tax was due for payment. This is with
the exception of pension insurance contributions, which do not become statute barred.
The statute of limitations commences from 1 January of the year following the year in
which the tax return/liability was due.
Historically, audits by the tax authority have been focused primarily on VAT, personal
income tax, and social security contributions assessment.
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Singapore
PwC contact
Alan Ross
PricewaterhouseCoopers Services LLP
8 Cross Street, # 17-00
PwC Building
Singapore 048424
Tel: +65 6236 3388
The 2014 Budget was announced on 21 February 2014. Corporate tax changes include
the following:
Enhancements to the Productivity and Innovation Credit (PIC) scheme.
Extension to the tax incentives for research and development (R&D) and acquisition
of intellectual property (IP).
Changes to the incentives for the financial sector.
Withdrawal of certain tax incentives.
Othertax changes include the following:
Streamlining the stamp duties rate structure.
Changes to the excise duties for certain tobacco and liquor products.
For details of the 2014 Budget proposals, refer to our 2014 Budget Commentary at www.
pwc.com/sg/en/budget-commentary.

Companies (resident and non-resident) that carry on a business in Singapore are taxed
on their Singapore-sourced income when it arises and on foreign-sourced income when
it is remitted or deemed remitted to Singapore. Non-residents are subject to withholding
tax (WHT) on certain types of income (e.g. interest, royalties, technical service fees,
rental of movable property) where these are deemed to arise in Singapore (for details,
see the Withholding taxes section).
Tax on corporate income is imposed at a flat rate of 17%. There is an exemption of up to
152,500 Singapore dollars (SGD) out of the first SGD 300,000 of taxable income.
Athree-year tax exemption on the first SGD 100,000 and a further exemption of up to
SGD 100,000 on the next SGD 200,000 of taxable income are available for qualifying
start-up companies. This exemption is not available to property development and
investment holding companies incorporated on or after 26 February 2013.
In addition, for the years of assessment 2013 to 2015 (i.e. income years 2012 to 2014),
there is a 30% corporate tax rebate, capped at SGD 30,000 for each year of assessment.
Singapore adopts a one-tier taxation system, under which all Singapore dividends are
tax-exempt in the shareholders hands.
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Corporate residence
In Singapore, the tax residence of a corporation is determined by the place where the
central management and control of its business is exercised. This is taken generally to
mean the place where the directors meet to exercise de facto control, although the Inland
Revenue Authority of Singapore (IRAS) has set out further guidance.
The presence of a PE is largely irrelevant, except for treaty purposes, as Singapore taxes
with reference to the source of income rather than the presence of a PE.
However, a PE is a clear indication of source.
The definition of a PE in Singapores double taxation agreements (DTAs) is largely based
on the Organisation for Economic Co-operation and Development (OECD) Model Tax
Convention definition.
It is generally taken to be a fixed place through which the business of an enterprise is
wholly or partly carried on, and normally includes a place of management, a branch, an
office, a factory, a workshop, and a place of extraction of natural resources, etc.
In addition, and subject to the terms of the relevant agreements, a non-resident may also
have a PE in Singapore if one:
has a building site or a construction, assembly, or installation project that lasts longer
than a specified number of months, or supervisory activities connected with the
building site or construction project
furnishes services (including consultancy services) through employees in Singapore
for more than a specified number of days or months, or
has an agent in Singapore who has, and habitually exercises, a general authority to
negotiate and conclude contracts on behalf of the enterprise.
The Singapore tax legislation defines a PE more broadly than most of the DTAs; however,
as mentioned above, this is largely irrelevant where a treaty can take precedence.
Other taxes
GST is charged at 7% on the supply of goods and services made in Singapore by a

taxable person in the course or furtherance of ones business.
The only exemptions from GST are prescribed financial services (including life
insurance) and the sale or rental of residential properties. Zero-rating only applies to the
export of goods and international services.
GST is also levied on imports of goods, at the time of importation. However, there are
reliefs available to ease the cash-flow burden of import-export traders by suspending
GST at the time of importation. GST is not currently charged on imports of services.
A taxable person is one who is, or is required to be, registered for GST. GST registration
is required if ones taxable turnover exceeds SGD 1 million per year. Voluntary
registration is permitted if the taxable turnover is below the registration limit, subject to
conditions.
A supply of goods is made in Singapore if the goods are in Singapore at the time
of supply, and a supply of services is made in Singapore if the supplier belongs in
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Singapore. Generally, a person belongs in Singapore if ones business (including carrying
on a business through a branch or agency) or fixed establishment is inSingapore.
A taxable person is allowed to offset the input GST paid on taxable purchases against the
output GST chargeable on supplies made. However, certain purchases are specifically
denied an input GST deduction. These include supplies of goods and services such as
non-business expenses, club subscription fees, family benefits, car rental expenses,
motor vehicle expenses, medical expenses, and transactions involving betting,
sweepstakes, lotteries, fruit machines, or games of chance.
A non-resident is not entitled to GST refunds except by appointing a resident tax agent to
act on ones behalf. The resident tax agent can then recover import GST paid on behalf
of the non-resident business but will be required to account for output GST on any
subsequent supply of the non-residents goods in Singapore.
Singapore is essentially a free port with minimal import restrictions. Customs and
excise duties are imposed on intoxicating liquors, tobacco products, motor vehicles, and
petroleum products.
Property tax
Property tax is levied annually at the following rates on the annual value of houses, land,
buildings, or tenements.
Property
Residential property (excluding residential land)
Owner-occupied residential property (excluding
residential land)
Land and non-residential properties
From 1 January 2014 From 1 January 2015

Graduated rates from Graduated rates from
10% to 19%
10% to 20%
Graduated rates from Graduated rates from
0% to 15%
0% to 16%
10%
10%
Stamp duties
Stamp duties are levied on written documents relating to stocks and shares and
immovable property.
Stamp duties are typically payable by the buyer (i.e. buyers stamp duty or BSD);
however, sellers stamp duty (SSD) and additional buyers stamp duty (ABSD) have
been introduced as measures to cool the residential property market. Stamp duty rates
on immovable property therefore vary, depending on the date of purchase, the holding
period, the number of properties already owned, and whether the buyer is a foreigner,
Singaporean, or permanent resident.
Foreigners of certain nationalities who fall within the scope of the respective free trade
agreements will be accorded the same treatment as Singaporeans.
Documents relating to the transfer of stocks and shares are subject to stamp duty of 0.2%
on the purchase price or market value of the shares transferred, whichever is higher.
For conveyance of immovable property, there is BSD of up to 3% on the purchase price
or market value, whichever is the higher. There is an ABSD of up to 15% and an SSD
of up to 16% on the price or market value of the property, whichever is the higher,
depending on the type of property (residential or industrial), the residency status of the
buyer, the holding period of the property, and the number of properties owned.
Leases executed from 22 February 2014 attract duty at 0.4% of the total rent (for leases
of up to four years) or 0.4% of four times the average annual rent for the period of
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the lease (for leases longer than four years), but leases with average annual rents not
exceeding SGD 1,000 are exempt from stamp duty.
Foreign Workers Levy (FWL)
The FWL is a monthly levy of up to SGD750 that employers are liable to pay for each
foreign employee (Work Permit or S Pass holders) hired. The levy rate depends on
the employees qualifications, the employers industry, and the ratio of foreigners to
Singaporeans and permanent residents employed in the company. The government has
announced that the FWL will be increased further from 1 July 2014.

Central Provident Fund (CPF)
The CPF is Singapores national pension scheme. Contributions are payable by Singapore
citizens and permanent residents only. Generally, employers and employees contribute
16% (17% with effect from 1 January 2015) and 20%, respectively, of ordinary monthly
wages up to an income ceiling of SGD 5,000. Their respective maximum contributions
are therefore SGD 800 (SGD 850 with effect from 1 January 2015) and SGD 1,000. The
rates are applicable to employees aged 50 years and below.
These rates also apply to additional wages (e.g. year-end bonus), up to a maximum
contribution of:
the actual additional wages if the annual ordinary wages are not more than the
ordinary wage ceiling of SGD 60,000 and the total wages are not more than the
maximum contribution of SGD 85,000
the difference between the maximum contribution of SGD 85,000 and annual
ordinary wages if the total wages exceed the maximum contribution of SGD 85,000
but the annual ordinary wages are not more than the ordinary wage ceiling of SGD
60,000, or
the lower of the difference between the maximum contribution and the ordinary
wage ceiling [SGD 85,000- SGD 60,000] or the actual additional wages if annual
ordinary wages exceed the ordinary wage ceiling of SGD 60,000.
Reduced rates apply for employees above the age of 35 who are earning less than
SGD 1,500 per month, and those above 50, although these rates are being gradually
increased. The employer CPF contribution rates for workers above 50 years to 65 years
have also been increased with effect from 1 January 2015.
Foreign nationals and their employers are precluded from making CPF contributions.
Foreign employees who become Singapore permanent residents, and their employers,
may contribute at reduced rates for the first two years.
Supplementary Retirement Scheme (SRS)
The SRS is a voluntary scheme to encourage employees and the self-employed to save for
retirement over and above their CPF savings. The maximum amount to be contributed
is subject to an income cap of SGD 85,000. Employers are allowed to contribute to their
employees SRS accounts. This is subject to a 15% contribution limit for Singapore
citizens and permanent residents, and a 35% cap for foreigners. Employees will be
taxable on these contributions, but will be allowed corresponding tax relief.
Branch income
Tax rates on branch profits are the same as on corporate profits. There is no branch
profits remittance tax on the repatriation of profits to the head office.
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Inventory valuation
There are no special rules as to which valuation basis should be adopted for inventories
(stock-in-trade) in the case of a continuing business, as long as the basis is consistent
from one year to another. However, a last in first out (LIFO) basis of valuation is not
permitted for tax purposes. Generally, tax reporting conforms to book reporting.
Capital gains
There is no tax on capital gains. Where there is a series of transactions or where the
holding period of an asset is relatively short, the tax authorities may take the view that
a business is being carried on and attempt to assess the gains as trading profits of the
corporation. The United Kingdom (UK) Badges of Trade, which are used in judicial
decisions to distinguish capital and revenue transactions, are generally applied in
determining this issue. They include the existence of a profit-seeking motive, the number
of transactions, the nature of the asset, the existence of similar trading transactions or
interests, changes to the asset, the way the sale was carried out, the source of finance,
the interval of time between purchase and sale, and the method ofacquisition.
Gains from the disposal of equity investments that take place between 1 June 2012
and 31 May 2017 will not be taxed if at least 20% of the ordinary shares in the investee
company have been held for a continuous period of at least 24 months prior to the
disposal. This protection does not apply to gains derived by an insurance company.
Dividend income
Singapore dividends are exempt in the hands of the recipient.
Stock dividends
Stock dividends generally are not taxable. However, certain distributions may be treated
as deemed dividends in certain circumstances.
Deemed dividends
Certain distributions to shareholders under a capital-reduction scheme, a share buyback, or a share redemption exercise may be treated as dividends paid by the company.
Under the one-tier taxation system, this is not a significant issue unless the transaction is
not correspondingly treated as a dividend in the hands of the shareholder. In which case,
the gain may be taxable if it is in respect of a trade orbusiness.
Interest income
Singapore-sourced interest income is taxable when it arises, and foreign-sourced interest

is taxable when it is remitted or deemed to be remitted to Singapore. For further details
on foreign-sourced interest income and the availability of foreign tax credit, refer to Foreign
income below.
Foreign income
A corporation, whether resident in Singapore or not, is taxed on foreign income when

it is received in Singapore. Legislative provisions govern the basis of treating foreign
income as received in Singapore. There are no special rules for taxing the undistributed
income of foreign subsidiaries.
Where income is earned from treaty countries, double taxation is avoided by means of
foreign tax credit granted under those treaties. For non-treaty countries, unilateral tax
credit is given in respect of foreign tax on all foreign-sourced income. These foreign tax
credits may be pooled, subject to certain conditions.
Foreign dividends, foreign branch profits, and foreign service fee income remitted to
Singapore may be exempt from tax if they fulfil certain conditions.
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Deductions
Depreciation
Tax depreciation is allowable at specified rates on buildings used in qualifying industry

sectors, subject to conditions. However, in 2010, industrial building allowances were
replaced by a Land Intensification Allowance. The latter provides for faster depreciation
but is subject to approval as it is allowed as a tax incentive. Transitional provisions for
industrial building allowances are available for taxpayers who committed to qualifying
capital expenditure before 22 February 2010.
Tax depreciation is available on machinery and equipment on a straight-line basis
over their specified working life for all types of business. In lieu of the straight-line
basis, accelerated tax depreciation allowances can be claimed by all businesses on all
machinery and equipment in equal instalments over three years.
A 100% depreciation allowance is available on capital expenditure incurred on
computers, robots, standby generators, pollution control and energy-efficient
equipment, certain diesel-driven vehicles, and prescribed automation equipment.
Writing down allowances on a straight-line basis over five years are allowable on the cost
of acquisition of IP, subject to certain conditions.
In addition, enhanced allowances may be available for the acquisition ofautomation
equipment and IP(see Productivity and Innovation Credit [PIC] in the Tax credits and
Gains on tax depreciable property (i.e. the excess of proceeds over tax base) are taxed as
ordinary income to the extent that tax depreciation has been allowed; that is, there is a
clawback of tax depreciation on the disposal of the asset.
Goodwill
Payments for the acquisition of goodwill are generally capital in nature and not
deductible.
Start-up expenses
Generally, expenses incurred prior to the commencement of business are not tax
deductible. However, most businesses are allowed to deduct expenses incurred in the 12
months immediately preceding the accounting year in which the business earned its first
dollar of trading income. Deductible expenses are those that would have been allowed a
deduction had they been incurred after the business commenced operations.
In addition, deductions and writing down allowances are available for certain types
of pre-commencement expenditure (acquisition of plant and machinery, R&D, etc.)
that are deemed to be incurred on the first day on which the taxpayer carries on ones
business.
Interest expenses
Interest incurred on capital employed in the production of income, and borrowing costs
that are incurred as a substitute for interest or to reduce interest costs, will be allowed as
a tax deduction.
Expenses incurred in respect of R&D carried out in Singapore qualify for a tax deduction
of 150% of the expenses incurred. If the R&D is carried out overseas, the expenses
incurred can be deductible if they meet certain conditions.
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Expenditure incurred in relation to R&D cost-sharing arrangements are accorded the
same tax treatment as R&D expenses.
Enhanced deductions may also be available under the PIC scheme (see Productivity and
Innovation Credit [PIC] in the Tax credits andincentives section).
Bad debts
Bad trade debts and provisions for trade debts are deductible to the extent that they are
incurred in the business. Doubtful debts are deductible if they are properly estimated
and specific. General provisions for bad debts are not deductible.
Businesses that have elected to align their tax treatment of financial instruments with
the accounting treatment prescribed by SFRS 39 (Financial Instruments: Recognition
and Measurement) will be allowed a tax deduction for impairment losses on trade debts
when they are incurred (regardless of whether they are general or specific provisions).
Correspondingly, any reversal will be taxed.
Donations are deductible only if they are made in cash or another prescribed form and
to an approved recipient. The deduction allowed for qualifying donations is generally
250% of the value of the donation.
Fines and penalties
Fines and penalties imposed for violations of the law are not deductible.
Taxes
Income taxes are generally not deductible in determining corporate income. However,
irrecoverable GST is deductible under certain circumstances. The FWL and property
taxes are deductible to the extent they are incurred wholly and exclusively in the
production of income.
Private automobile expenses are not deductible.

The tax deduction for medical expenses is limited to 2% of total payroll if the employer
implements certain portable medical insurance or benefit schemes. Otherwise, the
amount deductible will be limited to 1% of total payroll. Where the company is exempt
or taxed at a reduced rate, the expenses disallowed are effectively taxed at the prevailing
corporate rate.
A tax deduction for employee share-based remuneration (stock awards or stock option
schemes) is allowed only if treasury shares in the company or its holding company are
purchased to fulfil such obligations.A company may also claim a tax deduction when the
share-based remuneration scheme is administered by a special purpose vehicle (SPV).
The deduction is restricted generally to the lowest of the actual outlay incurred by the
company, its holding company, or the SPV.
Loss carryover, including unutilised tax depreciation allowance, is unlimited, provided

shareholdings in the loss-making corporation have not changed beyond 50% of the
total number of issued shares. Additionally, for tax depreciation allowances to be
carried forward, the same trade needs to be continued. The tax authorities may exercise
discretion to allow carryover of tax losses and unutilised tax depreciation even when
there has been a change in shareholding beyond 50%, absent any tax avoidance motives.
Losses of up to SGD 100,000 incurred by the company in the current year can be carried
back for one year.
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Payments to non-residents, including foreign affiliates, are deductible, provided they are
fair and reasonable, are revenue in nature, and can be seen to be relevant to earning the
payers income.
Group taxation
A company is allowed to transfer excess current year trade losses, current year tax
depreciation, and current year approved donations to another company within the same
group if certain conditions are satisfied.
Broadly, to qualify for group relief, companies must be incorporated in Singapore,
belong to the same 75% group of companies such that there must be at least a 75%
ownership relationship between claimant and transferor, and have the same accounting
year-end. In addition, a group must comply with certain prescribed offset and
apportionmentrules.
Transfer pricing
The Income Tax Act contains provisions that may be used in a transfer pricing context
to effectively allow the IRAS to challenge and revise inter-company transactions.
Additionally, specific transfer pricing provisions define the arms-length principle and
provide the IRAS with a right to make transfer pricing adjustments in cases where
taxpayers do not comply with the arms-length principle.
The IRAS has also issued transfer pricing guidelines to supplement the provisions in the
Income Tax Act and the various treaties signed by Singapore. The guidelines cover the
application of the arms-length principle and documentation requirements relating to
all related party transactions, including local related party transactions. The intention
of the guidelines is to help taxpayers substantiate their transfer prices with their related
entities by maintaining adequate documentation to mitigate the risk of tax adjustment
by the IRAS and to safeguard them from potential double taxation. The IRAS has also
provided guidance on matters relating to mutual agreement procedures (MAPs) and
advance pricing arrangements (APAs).
The IRAS has also issued guidance on the application of the arms-length principle to
related party loans and services.
Although Singapores income tax rates are traditionally lower than the majority of its
trading partners, the IRAS is increasing its focus on transfer pricing issues.
Thin capitalisation
There are no formal thin capitalisation rules in Singapore. However, general antiavoidance and transfer pricing provisions may operate in cases of abuse.

There are various tax incentives available to taxpayers involved in specified activities or
industries identified as being beneficial to Singapores economic development.
Pioneer tax incentive
Corporations manufacturing approved products with high technological content,

providing qualifying services, or engaging in countertrade activities may apply for tax
exemption for five to 15 years under the pioneer tax incentive. Corporations may apply
for their post-pioneer profits to be taxed at a reduced rate under the Development and
Expansion Incentive, as discussed below.
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Development and Expansion Incentive
Under the Development and Expansion Incentive, corporations engaging in new

high-value-added projects, expanding or upgrading their operations, or undertaking
incremental activities after their pioneer or post-pioneer period may apply for their
profits to be taxed at a reduced rate of not less than 5% for an initial period of up to ten
years. The total tax relief period is subject to a maximum of40 years (inclusive of the
post-pioneer relief period previously granted, if applicable).
Under the investment allowance, a tax exemption is granted on an amount of profits

based on a specified percentage (of up to 100%) of the capital expenditure incurred
for qualifying projects or activities within a period of up to five years (up to eight years
for assets acquired on hire-purchase). Capital expenditure incurred for productive
equipment placed overseas on approved projects may likewise be granted integrated
investment allowances.
Productivity and Innovation Credit (PIC)
The PIC scheme provides for an enhanced 400% deduction for qualifying expenditure
incurred in respect of six qualifying activities during the accounting periods that end
between 2010 and 2017 (i.e. years of assessment 2011 to 2018).The six qualifying
activities are:

The acquisition or leasing of prescribed IT and automation equipment.

Staff training.
The acquisition of IP.
The registration of IP rights.
R&D.
Design.
The enhanced deductionis available only on the first SGD 400,000 of qualifying
expenditure incurred each year on each of the qualifying activities, although, for the
years of assessment 2015 to 2018, qualifying small and medium enterprises may claim
PIC benefits on up to SGD 600,000 of such expenditure for each qualifying activity a
year. The cap may be combined for certain years of assessment.Certain activities are
subject to approval or minimum ownership requirements.
For the years of assessment 2013 to 2018, the acquisition of IP rights includes licensing
of those rights, other than trademarks.
Merger and acquisition allowance
The merger and acquisition allowance allows a write-off, over five years, of 5% of the
value of qualifying merger or acquisition deals executed between 1 April 2010 and 31
March 2015, subject to a cap of SGD 5 million per year of assessment. This incentive
is available only to companies that are incorporated, tax resident, and carrying on a
business in Singapore. A 200% tax allowance will also be granted on transaction costs
(capped at SGD 100,000 per year of assessment) incurred on qualifying deals from 17
February 2012 to 31 March 2015.
Financial services incentives

Financial sector incentive (FSI) scheme
The FSI scheme covers a broad range of financial institutions, including bond
intermediaries, Asian currency units, derivative traders, fund managers, equity capital
market intermediaries, operational headquarters, providers of high-value-added
processing services supporting financial activities, futures members of the Singapore
Exchange Limited, and members of the Singapore Commodity Exchange Limited.
Singapore
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Financial institutions that plan to expand their Singapore operations and are prepared to
meet various strict qualifying conditions may apply for this incentive.
Under the FSI scheme, income from certain high growth, high-value-added activities,
such as services and transactions relating to the bond market, derivatives market, equity
market, and credit facilities syndication, may be taxed at 5%, while a broader range of
financial activities will only qualify for a 12% tax rate. The tax incentive period may last
for five, seven, or ten years, subject to certain conditions being met.
Finance and treasury centre (FTC)
Income derived by an FTC from approved finance and treasury centre activities is
taxed at a reduced rate of 10%. Approved activities include international treasury and
fund management activities, corporate finance and advisory services, economic and
investment research and analysis, and credit control and administration.
Interest payments to overseas banks and approved network companies are also exempt
from WHT where the funds borrowed are used for approved activities.
Debt securities incentives
A package of tax concessions is available to various players in the Singapore bond

market, including those involved in certain Islamic financing arrangements.
Offshore insurance incentives
Approved insurance companies engaged in the business of insuring and reinsuring

offshore risks are taxed at a rate of 10% on qualifying income arising from offshore risks
business. Tax exemption is available to approved insurance companies for qualifying
income from the writing of marine hull and liability risk insurance and offshore
specialised risk insurance, and for qualifying income of approved offshore captive
insurance companies.
Approved insurance and reinsurance brokers are taxed at a rate of 10% on commission
income from broking activities if the risks being insured or reinsured are offshore risks
and on fee income from advisory services provided to non-Singapore based clients.
The concessionary tax rate is further reduced to 5% on qualifying income for approved
insurance and reinsurance brokers in respect of the offshore specialty insurance broking
business.
Real Estate Investment Trusts (REITs)
Distributions made to foreign non-individual investors by a listed REIT out of rental

income from Singapore real estate are subject to a reduced tax rate of 10%, subject
to certain conditions. Listed REITs investing in foreign properties can apply for tax
exemption for certain foreign income received in Singapore. Distributions out of
this income similarly are exempt. Stamp duty relief is available upon the transfer of
immovable Singapore property to a REIT, and GST concessions are availablein respect
of overseas non-residential properties and SPVs or sub-trusts.
Islamic financing arrangements
The income tax, stamp duty, and GST treatment of prescribed Islamic financing
arrangements and Islamic debt securities (Sukuk) are aligned with that of the
conventional financing contracts to which they are economically equivalent, subject to
certain conditions.
Infrastructure project finance incentives
Tax exemption is available for interest income earned from qualifying investments in
qualifying infrastructure projects/assets. FSI companies that provide project finance
advisory services related to qualifying projects/assets pay tax at 5% or 12% on their
qualifying income, and companies that provide management services to qualifying
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Singapore
business trusts and funds pay tax at 10% on their qualifying income. Stamp duty relief is
also available on the transfer of such projects/assets to listed entities.
Sovereign wealth funds
Tax exemption is available for income derived by a sovereign fund entity and an
approved foreign government-owned entity from funds managed in Singapore.
Headquarters (HQ) schemes
Approved regional headquarters in Singapore are taxed at a concessionary rate of tax of

15% on qualifying overseas income. Depending on their level of economic commitments
to Singapore, international headquarters can apply for various tax incentives, including
tax exemption or concessionary tax rates on qualifying income.
Maritime Sector Incentive (MSI) scheme
The MSI scheme is the umbrella incentive for the maritime sector. Incentives offered
include tax exemption for shipping companies and a 10% concessionary tax rate for
international freight and logistics operators. Approved ship investment managers
are also taxed at 10% on qualifying management-related income.The scheme also
includesapproved ship investment vehicles, which are tax exempt on their qualifying
vessel lease income; approved container investment enterprises, which are taxed at 5%
or 10% on qualifying income from container-leasing; and approved container investment
management companies, which are taxed at 10% on qualifying management fees.
Qualifying ship operators and lessors under the MSI scheme also enjoy automatic tax
exemption on gains from the disposal of vessels, vessels under construction, and new
building contracts.
Other incentives
Incentives for not-for-profit organisations, international arbitration, oil traders,

international traders, leasing companies, trust companies, and the provision of
international legal services include tax exemptions or concessionary tax rates of 10% for
qualifying income. The concessionary tax rate for liquefied natural gas (LNG) trading,
aircraft leasing, qualifying oil traders, and international traders is further reduced to
5%.
Foreign tax credit
credit regime.
Withholding taxes
Domestic corporations paying certain types of income to non-residents are required to
withhold tax.
Unless a lower treaty rate applies, interest on loans and rentals from movable property
are subject to WHT at the rate of 15%. Royalty payments are subject to WHT at the rate
of 10%. The tax withheld represents a final tax and applies only to non-residents who are
not carrying on any business in Singapore and who have no PE in Singapore. Technical
assistance and management fees for services rendered in Singapore are taxed at the
prevailing corporate rate. However, this is not a final tax. Royalties, interest, rental of
movable property, technical assistance, and management fees can be exempt from WHT
in certain situations or subject to a reduction in tax rates, usually under fiscal incentives
or DTAs.
Payments made to public entertainers and non-resident professionals who perform
services in Singapore are also subject to a final tax of 15% on their gross income. For
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public entertainers, this appears to be a final tax unless they qualify to be taxed as
Singapore tax residents. However, non-resident professionals may elect to be taxed at
the prevailing tax rate for non-resident individuals of 20% on net income if this results
in a lower tax cost. The WHT rate on payments to non-resident entertainers is reduced to
10% from 22 February 2010 to 31 March 2015.
Ship charter fee payments are not subject to WHT.
The WHT rates are shown in the following table.
Recipient
and individuals:
Non-treaty
Treaty:
Albania
Australia
Austria
Bahrain
Bangladesh
Barbados (5d)
Belarus
Belgium
Bermuda (5a)
Brazil (5c)
Brunei
Bulgaria
Canada
Chile (5b)
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Fiji Islands, Republic of
Finland
France
Georgia
Germany
Guernsey
Hong Kong (5c)
Hungary
India
Indonesia
Ireland
Isle of Man
Israel
Italy
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Dividends (%) (1)

0
0
Interest (%) (2)

0
0
Royalties (%) (2)

0
0
15
10
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
5 (3b)
10
5 (3b, d)
5 (3b)
10
12 (3b)
5 (3b)
5 (3b, d)
15
15
5/10 (3a, b)
5 (3b)
15 (3e)
15
7/10 (3a, b)
7/10 (3a, b)
0
10 (3b)
15 (3b)
10 (3b)
10 (3b)
5 (3b)
0/10 (3b, c)
0
8 (3b)
12 (3b)
15
5 (3b, d)
10/15 (3a)
10 (3b, e)
5 (3b)
12 (3b)
7 (3b)
12.5 (3b)
5
10 (4a)
5
5
10 (4a)
8
5
3/5 (4b)
10
10
10
5
10
10
6/10 (4b)
10
10
10
10
7.5
10
5
0 (4a)
0
8
8
10
5
10
10
5
8
5
10
Singapore
Recipient
Japan
Jersey
Kazakhstan
Korea, Republic of
Kuwait
Latvia
Libya
Lithuania
Luxembourg
Malaysia
Malta
Mauritius
Mexico
Mongolia
Morocco (5d)
Myanmar
Netherlands
New Zealand
Norway
Oman
Pakistan
Panama
Papua New Guinea
Philippines
Poland
Portugal
Qatar
Romania
Russian Federation
Saudi Arabia
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Thailand
Turkey
Ukraine
United Kingdom
United States (5c)
Uzbekistan
Vietnam
Dividends (%) (1)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Interest (%) (2)

10 (3b)
12 (3b)
10 (3b)
10 (3b)
7 (3b)
10 (3b)
5 (3b)
10 (3b)
10 (3b)
10 (3b, f)
7/10 (3a, b)
0
5/15 (3a, b)
5/10 (3a, b)
10 (3b)
8/10 (3a, b)
10 (3b)
10 (3b)
7 (3b)
7 (3b)
12.5 (3b)
5 (3b, d)
10
15 (3e)
5 (3b, 5d)/10 (3b)
10 (3b, f)
5 (3b)
5 (3b)
7.5 (3b)
5
0
5 (3b)
0
5 (3b, d, f, g)
10 (3a, b)
10/15 (3b, c)
5 (3b, d)
15
10/15 (3a, b)
7.5/10 (3a, b)
10 (3b)
7 (3b)
5 (3a, b, h)
15
5
10 (3b)
Royalties (%) (2)

10
8
10
10
10
7.5
5
7.5
10
8
10
0
10
5
10
10
0 (4a)
5
7
8
10 (4a)
5
10
10
2/5 (4b, 5d)/10
10
10
5
7.5
8
10
5
5
5
10 (4a)
0 (4a)
5
10
10
10
7.5
5
8
10
8
5/10 (4c)
Notes
1.
Singapore has no WHT on dividends over and above the tax on the profits out of which the dividends
are declared. However, some treaties provide for a maximum WHT on dividends should Singapore
impose such a WHT in the future.
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2.
3.
4.
5.
The non-treaty rates (a final tax) apply only to non-residents who do not carry on business in
Singapore and who do not have a PE in Singapore. This rate may be further reduced by tax
incentives.
Interest:
a. Lower rate or exemption if received by a financial institution.
b. Exempt if paid to the government.
c. Lower rate or exemption if paid by an approved industrial undertaking.
d. Exempt if paid by a bank and received by a bank.
e. Exempt if paid to a bank but linked to a government loan agreement or paid to specific financial
institutions/banks.
f. Exempt if paid in respect of an approved loan or indebtedness.
g. Exempt if paid to an approved pension fund.
h. Exempt if paid by a financial institution.
Royalties:
a. Royalties on literary or artistic copyrights, including film royalties, are taxed at the non-treaty rate.
b. Lower rate for payments in connection with industrial, commercial, or scientific equipment.
c. Lower rate for payments in connection with patents, designs, secret formulas/processes, or
Treaties:
a. Treaty with Bermuda covers only the exchange of information.
b. Treaty with Chile covers only international ship operations.
c. Treaties with Hong Kong and the United States cover only shipping and air transport activities.
d. Treaty or lower rate applies from 1 January 2015.
Tax administration
Taxable period
The tax basis period is the calendar year; however, for business profits, the accounting
period will generally be adopted.
Tax returns
Tax is computed for each tax year based on the income earned in the preceding year (the
tax basis period). The corporation files an estimate of its income within three months of
the end of the accounting period followed by a return of income by 30 November of the
tax year, and the tax is assessed by the Comptroller of Income Tax. There is no fixed date
for the issue of assessments.
Payment of tax
Assessed tax is payable within one month after the service of the notice of assessment,
whether or not a notice of objection to the assessment has been lodged with the tax
authorities. Application may be made to the Comptroller to pay estimated tax liabilities
on a monthly basis. However, the Comptroller is under no obligation to grant such
anapplication.
Late payment of tax will attract penalties, up to a maximum of 17% of the outstanding
tax.
Tax audit process
The IRAS adopts a risk-based approach to identifying compliance risk, with a focus on
improving the behaviour of taxpayers who pose a higher risk of non-compliance. It also
prioritises and tailors specific compliance programmes that aim to identify taxpayers
who have made mistakes in their tax returns, create an audit presence in the community
to deter non-compliance by other taxpayers, educate taxpayers on their tax obligations
and how to comply with these, and identify areas of tax law, policies, and processes
where the tax system can be simplified.
The statute of limitations is four years from the year of assessment, but does not apply
where there has been fraud or wilful default by the taxpayer.
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In the past, the IRAS has focussed its compliance efforts on:

the timely filing of corporate tax returns

abuse of the tax exemption scheme for new companies
PIC claims
the classification of income and expenses by companies that enjoy tax incentives, and
related-party transactions.
The IRAS has announced that, in addition to the above, it will be focussing on:
group relief claims
the recognition of income from construction contracts and provisions claimed by
construction companies, and
WHT obligations on payments made to non-residents.
Other issues
Exchange of information (EOI)
The Singapore government has introduced the following key measures intended to
strengthen Singapores EOI framework:
Singapore amended its laws such that, with effect from 28 November 2013, it is able
to extend EOI assistance to all existing tax treaty partner jurisdictions without having
to update the terms of those treaties.
Singapore signed the Convention on Mutual Administrative Assistance in Tax
Matters on 29 May 2013. This expanded Singapores network of EOI partners by 11
jurisdictions (including the United States).
Singapore amended its laws, with effect from 28 November 2013, to allow the IRAS
to obtain bank and trust information from financial institutions without the need for
a court order.
Singapore initialled a Model 1 Foreign Account Tax Compliance Act (FATCA)
intergovernmental agreement (IGA) with the United States on 6 May 2014.
Singapore also endorsed the OECDs Declaration on Automatic Exchange of
Information in Tax Matters on 6 May 2014.
These changes are part of the progressive steps Singapore is taking to enhance its EOI
framework since it endorsed the Standard in 2009. They also come after measures
introduced by the Monetary Authority of Singapore since 2011 to ensure that
Singapores financial system is not used to harbour illegitimate funds or as a conduit for
the flow of undeclared assets. In addition, from 1 July 2013, Singapore has criminalised
the laundering of proceeds from serious tax offences.
Adoption of International Financial Reporting Standards (IFRS)
Companies incorporated in Singapore and Singapore branches of foreign companies are

required by the Companies Act to prepare and present financial statements that comply
with the Singapore Financial Reporting Standards (SFRS). In Singapore, the Accounting
Standards Council (ASC) has the statutory authority to issue SFRS foradoption.
The SFRS is principally based on and substantially similar to the International Financial
Reporting Standards (IFRS) that are issued by the International Accounting Standards
Board (IASB). Full convergence of the SFRS with IFRS for Singapore-listed companies
was the strategic direction of the ASC set in 2009, and, on 29 May 2014, the ASC and
Singapore Exchange jointly announced that Singapore-listed companies will have to
apply a new financial reporting framework identical to the IFRS for annual periods
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beginning on or after 1 January 2018. Non-listed companies may voluntarily apply the
new framework.
Companies are required to submit financial statements as part of their tax return filing.
The IRAS generally accepts financial statements prepared for statutory filing, although
companies that have been allowed to prepare their financial statements using standards
other than SFRS, such as IFRS or the Generally Accepted Accounting Principles (GAAP)
adopted by the United States, may be required to explain and/or account for any
differences and make the necessary tax adjustments, if any.
In relation to financial instruments, the Income Tax Act was amended to align the tax
treatment with the accounting treatment prescribed by SFRS 39 (Financial Instruments:
Recognition and Measurement). As a concession, the IRAS allows taxpayers to elect to
align their tax reporting of lease income to the accounting treatment prescribed by SFRS
17 (Leases), which requires operating lease income to be recognised using the effective
rent method.
Sample corporate tax calculation
Accounting periodended 31 December 2013 (year of assessment 2014).

SGD
Net profit before tax per accounts
Less:
Singapore dividend (exempt)
Foreign-sourced dividend (exempt)
Foreign-sourced interest (unremitted)
Profit on sale of fixed assets
Capital exchange gain
SGD
5,857,500
1,500
2,200
1,600
34,000
6,750
(46,050)
5,811,450
Add:
Depreciation
Foreign pension contribution
Medical expenses (non-deductible)
Legal fees (capital in nature)
Automobile expenses
Donations
Penalties and fines
650,485
100,000
500
15,500
33,500
9,000
2,000
Adjusted profit before capital allowances

Less:
Unutilised capital allowances brought forward
Capital allowances (current year)
Balancing charge
810,985
6,622,435
1,152,000
3,000,000
(7,700)
(4,144,300)
Adjusted profit after capital allowances
2,478,135
Less: Unutilised losses brought forward
(67,500)
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Singapore
SGD
SGD
2,410,635
Adjusted profit after capital allowances and unutilised losses

brought forward
Less: Approved donations (250% deduction)
(22,500)
Chargeable income before partial exemption
2,388,135
Less: Partial exemption

75% of first SGD 10,000
50% of the next SGD 290,000
7,500
145,000
(152,500)
Chargeable income after partial exemption
2,235,635
Tax thereon at 17%
380,057.95
Corporate tax rebate(capped at SGD 30,000)
(30,000.00)
Tax payable after tax rebate
350,057.95
Singapore
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Sint Maarten
PwC contact
Steve Vanenburg
Julianaplein 38
Willemstad, Curaao
Tel: +599 9 4300 000
With regard to social security, the government is preparing the introduction of general
health care insurance and to raise the age for old age pension (AOV) from 60 to 62, and
maybe later on to 65.
Transitional legislation
While the offshore tax regime was abolished in 2001, qualifying offshore companies
incorporated before 1 January 2002 may continue to apply the old regime until 2019,
provided that certain conditions are met under transitional legislation.

Resident corporations are taxed on worldwide income. Non-resident companies are
taxed on the following Sint Maarten (St. Maarten)-source income:
Income attributable to a permanent establishment (PE).
Income from real property situated in St. Maarten.
Interest on loans secured by a mortgage on property situated in St. Maarten.
Capital gains are not differentiated from operating income and are subject to the same
applicable rates. Corporations are taxed on their income as reflected in their profit and
loss account, less certain deductible items.
Companies are generally taxed at a flat rate of 34.5%. Special minimum rates apply to
the taxable income of certain companies:
Type of company
Rate (%)
2
2
Shipping business
Shipping companies are subject to the general profit tax rate of 34.5% but may apply for
the tonnage regime. If applicable, their profit is calculated based on the rates in the table
below. If a shipping company applies the tonnage regime, the actual profits or losses are
not taken into account, regardless of whether they are regular profits or capital gains.
The calculated profit based on the table below is subject to the general tax rate of 34.5%.
Over (tons)
0
10,000
25,000
Not over (tons)

10,000
25,000
Profit per net ton (ANG*)

2.00
1.35
0.60
* Antilles guilders
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Exempt companies
Please see the Tax credits and incentives section for more information on tax exempt
companies.
Companies under transitional offshore rules
Transitional rules distinguish three types of offshore companies.

Offshore companies that, on the last day of the financial year that ended before
1 January 2002, had all (or almost all) investments in or revenues from portfolio
investments, royalties, holding companies, finance companies, or technical support
subject to tax rates of 2.4% to 3% (while capital gains and losses were not taken
into account) will be grandfathered through the last day of the financial year of the
company that starts before 1 July 2019.
January 2002, had all (or almost all) their profit subject to tax rates of 4.8% to 6%
or, under certain circumstances, 2.4% to 3% and that had a valid ruling with the tax
inspector (e.g. trading companies, banks, captives commissions, and fee-earning
companies) on the aforementioned date or for which a request for (extension of) such
a ruling had been filed on that date will be grandfathered through the last day of the
financial year of the company that starts before 1 July 2019.
January 2002, had invested all (or almost all) investments in or revenues from real
estate property or rights connected thereto, located outside the Netherlands Antilles.
These revenues were, under the old offshore regime, exempt from tax. For profit tax
purposes, these companies will be grandfathered through the last day of the financial
year of the company that starts before 1 July 2019.
Specific rules are applicable to companies that were incorporated after 30 June 1999
but before 31 December 2001. These companies may also qualify for the aforementioned
transitional rules, provided that these companies have been active in a meaningful
way. In principle, a company will not be considered to have been active in a meaningful
way if the assets of the companies consist predominantly of deposits or receivables on
shareholders or affiliated parties.
The grandfathering period continues until 2019.
Corporate residence
effective management in St. Maarten is considered to be a resident. A company that has
been established in St. Maarten will always be considered a resident of St. Maarten.
Offshore entities in St. Maarten must have a local managing director. This function is
easily provided by one of the many trust companies established in St. Maarten.
The definition of a PE in St. Maarten is generally in line with the Organisation for
Economic Co-operation and Development (OECD) model.
Transfer of legal seat
Legislation has been enacted under which a St. Maarten company is allowed to
transfer its legal seat to another jurisdiction (if permitted under the laws of the outside
jurisdiction) and a foreign company is allowed to migrate to St. Maarten.
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Other taxes
Turnover tax
A 5% turnover/sales tax is levied on the revenue derived from services and deliveries
rendered by an entrepreneur or company in St. Maarten. Note that non-resident service
providers are also subject to this tax.
A limited number of services and deliveries are exempt, such as:

Exports.
Certain basic food and other products.
Electricity and water.
Medical services.
Services at the airport or in the harbour regarding imported or exported goods or
goods in transit.
Advisory and management services provided to or by offshore companies and
offshore banks.
An entrepreneur liable to turnover/sales tax must file a declaration, with the Tax
Inspectorate before the 16th day of the month following the month concerned, at the
Tax Collectors office.
Import tariffs
In general, there are no customs duties or import tariffs in St. Maarten, except for a
special import tariff on gasoline. The rate is ANG 29 per hectolitre.
Excise duties
There are no excise duties in St. Maarten.
Property taxes
There is no property tax in St. Maarten.
Transfer tax
The transfer of immovable property located in St. Maarten is subject to a 4% transfer

duty.
Stamp taxes
A stamp tax is levied in two ways, in the form of stamps and as stamped paper.
Stamp tax applies to documents such as government licences, leases, agreements, and
court documents. The rate depends on the type of document. As an example, the stamp
tax for bank checks is ANG 0.25. The general rate for each page of a legal document is
ANG 5.

Health and accident insurance
Employees with an income of ANG 65,764 or less are insured against health care costs
and loss of income in case of illness. The premium is 8.3% to be paid by the employer
and 2.1% by the employee.
Employees are also insured against loss of income as a result of an accident that occurs
at work. The premium varies from 0.5% to 5%, depending on the class of risk, to be paid
fully by the employer. Maximum premium income is ANG 65,764.
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Old age insurance (AOV) and widows and orphans insurance (AWW)
The collective premium for AOV and AWW amounts to 14% up to an income of ANG
92,856, of which 7.5% is to be paid by the employer.
Withholding obligation
Employers must not only withhold wage tax but also the employee part of social security
premiums from their employees and pay the amount withheld, together with the
amount payable by the employer, to the tax collector.
Branch income
Tax rates on the profits of PEs are the same as for resident corporations.
There are specific rules for the PE of an insurance company. In that case, the company
may elect to declare profit based on a percentage of premiums received by the PE, as
well as premiums the company has received from insured residents and from insured
risks in St. Maarten. The insurance company may also elect to declare a profit that is in
the same proportion to total profit of the company as the aforementioned premiums to
total premiums.
No tax is withheld on transfers of profits to the head office.
Inventory valuation
Both the last in first out (LIFO) and first in first out (FIFO) methods of inventory
valuation are permitted, provided the chosen method conforms to sound commercial
practice. Conformity of book and tax reporting is not required. However, occasions or
situations for differences are very rare.
Capital gains
Capital gains or losses are, in principle, considered ordinary income and subject to
standard corporate rates. An exemption from profit tax is granted for advantages
(dividends and capital gains) from a qualifying participation (see Dividend income
below).
acquired asset. The reserve may be maintained for a maximum of four years. If the
reserve has not been fully applied, the remainder will be liable to taxation in the fourth
year.
Under the transitional regime for offshore companies (investment, holding, finance, and
patent holding companies), capital gains and losses are tax exempt.
Dividend income
In general, a full participation exemption applies to all local as well as foreign

participations for dividends as well as for capital gains. However, it is required that
dividends be derived from an active participation (non-portfolio investment) or a
participation that is subject to tax.
Expenses incurred in connection with a qualifying participation (including capital
losses) are not deductible, unless it can be demonstrated that these are indirectly
incurred to realise profits that are subject to tax in St. Maarten.
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Non-portfolio investment clause
A participation is deemed to be active if the gross income of that participation consists

of not more than 50% of dividends, interest, or royalties received other than from an
enterprise of that participation.
Subject-to-tax clause
A participation is deemed to be subject to tax if it is subject to a tax rate of at least 10%.

If at least one of these clauses has been met, the 100% participation exemption will
apply. If none of these clauses are met, the participation exemption is limited to 70%
of dividends. Consequently, the dividends would be subject to an effective tax rate of
10.35% (30% x 34.5% regular tax rate).
The 100% exemption also applies to income other than dividends, such as capital gains
derived from qualifying participations.
Immovable property
The aforementioned clauses do not apply to dividends from a participation that (almost)
exclusively (directly or indirectly) holds immovable property. The 100% participation
exemption applies to these dividends.
Definition of dividend
A dividend is defined as a distribution of profits on shares or profit-sharing notes, paid

from statutory profits or profit reserves. Dividends shall not be considered payments
for the purchase of own shares or profit-sharing notes, distributions on shares upon
liquidation, repayment of paid-up capital, or the distribution of bonus shares.
Minimum cost-price threshold for participations
The minimum cost-price threshold for shareholdings, profit-sharing notes, or voting

rights of less than 5% is ANG 890,000.
Interest income
There is no specific regime for interest received. Interest income is therefore taxed at the
same rate as other income.
Foreign income
A St. Maarten corporation is taxed on foreign interest and other income as earned, and
on foreign dividends when received. Undistributed income of foreign subsidiaries is not
taxable.
St. Maarten has adopted a definition of a branch (permanent establishment/permanent
representatives) that is in line with the definition in the OECD Model Double Taxation
The profits of a PE on Aruba, Curaao, or the Netherlands, including the Caribbean
Netherlands, are tax exempt in St. Maarten based on the tax arrangement with the
Kingdom of the Netherlands. In the case of a PE outside the Kingdom of the Netherlands
(i.e. the Netherlands, Aruba, Curaao, and St. Maarten), the income realised through
the PE, after deduction of foreign taxes, is tax exempt. In the case of a foreign loss, this is
not deductible.
Foreign real estate is always deemed to be part of a PE and, as such, is fully tax exempt.
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Deductions
Depreciation of tangible fixed assets, excluding land, is taken over the estimated
useful life of the asset. The depreciable base includes purchase price, customs
duties, shipping costs, and installation costs, less residual value, if any. The straightline method is customary, but the declining-balance method is also acceptable. In
addition, an accelerated deduction ofone-third of the assets depreciable basis may
be taken. The assets remaining cost basis (two-thirds) is depreciated using one of the
acceptablemethods.
The cost basis of certain intangible assets, such as patents, trademarks, and copyrights,
can be amortised over their expected useful lives. Goodwill and other intangibles
resulting from the excess of purchase price over the cost basis of assets purchased are
amortised over three to five years.
The tax department has issued the following estimated depreciation table:
Asset
Buildings
Renovation
Inventory
Computer:
Hardware
Mainframe
Transportation:
Cars
Rental cars
Trucks and buses
Start-up costs
Goodwill
Rate (%)
2/2.5
10
10/20
Residual value (%)

10
0
10
33/50
10/12.5
10
0
0
10
20
33
10
20
20
10
15
15
0
0
Start-up expenses
Start-up expenses should be capitalised and may be depreciated, comparable to

goodwill, over five years.
evidence of overriding commercial reasons for the transaction, or in case the interest in
the hands of the recipient is taxed at an effective tax rate that is considered adequate by
St. Maarten standards, the interest may be deductible.
In case of intra-group financing, for profit tax purposes the amount of interest paid or
received should be based on arms-length principles.
In case of profit participating loans, the interest will be qualified as a dividend and
will not be deductible. Interest received on such loans may meet the definitions of the
participation exemption if the creditor also holds a qualifying participation in the debtor.
A write-down of an intra-group loan may be denied in case of a profit-participating loan,
or if at the time of issuance it was foreseeable that the loan would never be fully repaid.
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Charitable donations to qualifying entities within the Kingdom of the Netherlands

may be deducted to the extent that they exceed 1% of net income and ANG 100 after
utilisation of tax loss carryforwards. The maximum deduction is 3% of net income.
Expenses that are connected to a criminal offence for which a taxpayer has been
convicted are not deductible. Bribes paid to public servants and politicians are not
deductible.
Fines and penalties
Fines and penalties are not deductible in cases where they have been imposed by a
criminal court in St. Maarten, or have been paid to avoid prosecution, and in cases of
administrative fines imposed by a government agency in St. Maarten.
Taxes
Taxes, other than the corporate tax itself, incurred in the course of doing business are
deductible.
Deduction of certain expenses (e.g. costs for food, drink, and entertainment) are only
allowed in part. These costs are often referred to as mixed costs. The non-deductible
portion is 10% of the total of these expenses.
Losses may be carried forward for a period of ten years. Start-up losses during the
first four years for companies having tax holidays may be carried forward indefinitely.
Carrybacks are not permitted.
The Corporate Tax Act provides for specific limitations for deduction of interest in
certain cases of restructuring and refinancing involving the creation of artificial
flows of interest payments to persons who are tax exempt or subject to lower taxes in
theirjurisdiction.
Group taxation
Fiscal unity
The Corporate Tax Act provides for fiscal unity treatment for corporate profit tax
purposes. Resident companies with wholly owned resident subsidiaries can qualify
for this regime. The parent company is entitled to submit one consolidated income tax
return on behalf of the entire fiscal unity group. As a result, only the parent company is
assessed.
Within certain limitations, losses of one company can be offset against the profits made
by another company in the fiscal unity group. No profits need to be recognised on intercompany transactions, as these are disregarded for tax purposes. The fiscal unity applies
for profit tax purposes only; the participating entities remain separate and identifiable
under civil law.
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Fiscal unity relief is confined to companies organised under the laws of St. Maarten, the
Netherlands, Aruba, or Curaao. The companies that invoke this relief must have their
place of management in St. Maarten.
On the basis of the non-discrimination provision of a relevant tax treaty, entities
established under the laws of a tax treaty party may also be admitted to the fiscal unity
regime provided that they are resident in St. Maarten.
Transfer pricing
There are no specific regulations with regard to transfer pricing. However, based on case
law, businesses can be required to show that in case of intra-company transactions, these
transactions have been made at arms length.
Thin capitalisation
In cases where a company receives a loan from an associated exempt private limited
liability company (Besloten Vennootschap or BV), and the amount of the loan is more
than three times the net equity of the company, the interest on the loan is not deductible
for the part that is more than three times the net equity.

Foreign tax credit
shall not exceed the St. Maarten profit tax that is attributable to that foreign income.
Inward investment and capital investment
There are tax incentives or holidays for the establishment of new economic enterprises
and hotels with a predetermined minimum employment and capital investment. Special
provisions relate to the taxation of shipping and insurance companies.
For a minimum investment of ANG 5,000, an 8% investment allowance on acquisitions

and improvements (for new buildings, 12%) is permitted as a deduction from taxable
profit in the year of investment and in the subsequent year for businesses operating in St.
Maarten.
Accelerated depreciation and tax rollover reserve
An accelerated deduction ofone-third of the assets depreciable basis may be taken. If a

profit results at the time of sale of capital assets with the intention to replace that asset,
the profit may be placed in a tax rollover account.
Tax exempt company
It is possible to elect tax-exempt status for a BV. To qualify for the exemption, a number
of conditions must be met, including (but not limited to) the disclosure of beneficiaries,
management, financials, and the activities (only investment and financing activities)
of the company. Recently, the licensing of intellectual and industrial property rights,
and other comparable property and usage rights, have been added to the list of allowed
activities.
Another condition has been added that requires that no more than 5% of the revenues of
the exempt company consist of dividends from subsidiaries that are not subject to a tax
regime comparable to that of St. Maarten. A profit tax regime is comparable to that of St.
Maarten if the foreign tax regime provides for a profit tax rate of at least 15% (50% of
the old Netherlands Antillean rate, excluding island surcharges).
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The subject-to-tax requirement is also met if the foreign tax regime appears on a list
of comparable tax regimes. The list that has been issued includes all European Union
(EU) and OECD member states and all jurisdictions with which St. Maarten has a tax
treaty. According to the list, the subject-to-tax requirement is also met in the case of
a jurisdiction that is included in the white list issued by the OECD, provided that no
special tax regime is applicable.
Independent expert
Currently, an independent expert is required to certify that the exempt company meets
the requirements for exempt status. If more than 5% of the revenues of the exempt
company consist of dividends from subsidiaries that are not subject to a tax comparable
to that of St. Maarten, the independent expert must inform the Inspectorate of Taxes.
The inspector notifies the company that it no longer meets the requirements for exempt
status. The exempt status is then terminated starting the first day of the year following
the year in which the notification becomes final.
Ocean shipping companies
Ocean shipping companies are taxed on a fixed profit per net ton of ANG 0.60 up to
ANG 2.00 (or per 10 net ton in case of management and control). International aviation
companies may apply a reduced tax rate against 80% of their profit, as their profits are
deemed to be gained outside of St. Maarten. As a result, the overall effective tax rate is
9.66%.
New industries and hotels are granted partial exemption from profit tax and a minimum
2% tax rate for a period of five to 11 years. A minimum investment is required. Losses
incurred during the first four years of operations may be used to offset taxable income
for an indefinite period of time.
Land development companies are granted a tax holiday. They are exempt from tax on
profits realised on the sale of the developed land. A minimum investment of ANG 1
million is required. Activities should be expected to enhance the economic development
of St. Maarten.
Private foundations
Private foundations are exempt from St. Maarten profit tax, and their distributions are
exempt from St. Maarten gift tax, as are contributions of assets to the foundation by a
non-resident. Gift tax in the contributors country may be applicable.
The private foundation is a variant of the long-existing common foundation. The most
important difference is that the purposes of a common foundation may not include
making distributions (other than distributions of an idealistic or social nature). This
restriction does not apply to private foundations, whose purpose may include making
distributions to the founders and others. A private foundation may not run a business
or enterprise for profit. Acting as a holding company or investment company is not
considered running a business. The private foundation is intended to be an alternative to
the Anglo-Saxon trust, especially in civil law jurisdictions.
Withholding taxes
Although a dividend withholding tax (WHT) was approved in 1999, it has been decided
that for the foreseeable future this tax will not enter into force. If it is decided that the
tax will enter into force, there is a mandatory transitional period during which the tax
will not be applicable to legal entities resident at that time in St. Maarten.
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Tax treaties
St. Maarten currently has tax treaties in effect with the Netherlands, Aruba, Curaao,
and Norway. A double tax agreement (DTA) has been negotiated with Jamaica, but
this has not entered into force yet. See the Other issues section for a description of tax
information exchange agreements (TIEAs).
As part of the Kingdom of the Netherlands, St. Maarten is party to a federal tax
agreement with the Netherlands, Aruba, and St. Maarten (TAK). Subject to this treaty,
dividends, interest, and royalties paid out to a St. Maarten company may qualify for
reduced rates of WHT in the subject countries.
Dutch dividend WHT is 15% if the St. Maarten company owns less than 25% of the
Dutch company. If the St. Maarten companys interest is 25% or more, Dutch WHT can
be reduced to 8.3%.
The WHT regime in the TAK also applies to the old St. Maarten offshore companies.
Following the dissolution of the Netherlands Antilles, it will be necessary to revise the
TAK. Negotiations have already started between Aruba and the Netherlands. Curaao
and the Netherlands have already signed an agreement that is expected to come into
force on 1 January 2015. There is no indication when the TAK will be revised with
regard to St. Maarten. In the end, the existing TAK will be replaced by separate bilateral
tax agreements. However, as long as such agreements have not been signed, the old TAK
will remain in force.
Tax administration
Taxable period
Profit tax is levied by way of a self-assessment system. Returns are to be filed on a

calendar-year basis. Non-resident corporations may file their returns based on a calendar
year basis or on a different book year. On request, this may also apply, for example,
when a resident company is the subsidiary of a foreign parent company (i.e. only a local
company must request for a different tax year-end).
Tax returns
A provisional return must be filed within three months after the end of the book year.
Afinal return must be filed within six months after the end of the book year.
For the provisional return, no extensions are granted. For the final return, an extension
may be requested. In general, no extensions will be granted for more than 12 months
after the book year.
Payment of tax
Payment is to be made at the time of filing and in a lump sum on the basis of the selfassessment. This means that if the book year equals the calendar year, the provisional
return is due before 1 April of the following year, and the final return before 1 July of the
following year.
In general, at the time of filing the provisional return, an amount equal to the profit tax
of the previous year must be paid; the remaining balance due for the year for which the
return is filed must be paid at the time of filing the final return.
For example, if the tax due for the year 2013 was 100, then at the time of filing the
provisional return for 2014, which is due before 1 April 2015, that same amount must
be declared and paid. If there is reason to believe that the amount for the year 2014 will
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be lower than for 2013, the estimated lower amount may be paid at the time of filing the
provisionalreturn, upon request.
At the time of filing the final return for the year 2014, which is due before 1 July 2015,
the balance due must be paid; or if the total amount is less than the amount already paid
up, a repayment will follow.
Tax audit process
As the profit tax is levied based on self-assessment, the tax department does not issue a
final tax assessment. There is no specific cycle for audits. Depending on a desk review of
the tax returns of the last couple of years, an audit may follow.
A reassessment can be imposed until five years after the tax year. In cases where the
taxpayer is considered to be in bad faith, a reassessment can be imposed until ten years
after the tax year.
investigated. Often the audit will not only focus on the profit tax, but also the other tax
obligations, such as sales tax, wage tax, and social security premiums.
Other issues
Exchange controls
In general, exchange control regulations are very liberal for offshore companies.
Offshore companies established in St. Maarten can obtain non-resident status for
exchange control purposes, which basically provides for total exemption from exchange
controls. Onshore companies are subject to slightly stricter rules. These companies are
subject to a licence fee of 1%.
The Corporate Tax Act provides for a tax facility for business mergers. In a business
merger, a company acquires all or a substantial part of the trade or business of another
company with a view towards combining the business operations of the two companies
into a permanent financial and economic organisation. If the business is transferred as
part of a business merger, the gains realised by the transferor are not subject to profit tax
Although there is no specific provision in the Corporate Tax Act with regard to legal
mergers, legal split-ups, and re-incorporations, the Tax Inspectorate has announced that
when certain conditions are met, a tax facility also applies in these cases.
TIEAs have been signed with several countries, including Australia, Canada, Denmark,
Mexico, Spain, Sweden, New Zealand, and the United States. As a result, St. Maarten,
as part of the former Netherlands Antilles, has been moved to the white list of the OECD
Global Forum.
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Slovak Republic
PwC contact
Todd Bradshaw
PricewaterhouseCoopers Tax, k.s.
Nmestie 1. mja 18
815 32 Bratislava
Slovak Republic
Tel: +421 2 59 350 600
The tax legislation in the Slovak Republic (Slovakia) has been amended recently. The
primary change, effective as of 1 January 2014, is a decrease of the corporate income tax
(CIT) rate from 23% to 22%.
The tax law amendment also introduced a new tax licence (minimum tax) for companies
in a range from 480 euros (EUR) to EUR 2,880.
Note that the legislation is expected to be subject to frequent amendments and new
official interpretations; consequently, it is advisable to contact PwC Bratislava for up-todate information.

As a member state of the Organisation for Economic Co-operation and Development
(OECD), the Slovak Republics system of corporate taxation generally follows OECD
guidelines and principles.
CIT applies to the profits generated by all companies, including branches of foreign
companies.
Slovak tax residents are taxed on their worldwide income. Slovak tax residents may
utilise a method of elimination of double taxation if their income is taxed abroad. The
exemption or credit method can be used to eliminate the double taxation, depending on
the relevant double tax treaty (DTT) and the type of income.
Slovak tax non-residents are taxable in Slovakia on their Slovak-source income only.
Slovak-source income is defined by local tax law and includes, inter alia, the business
income of permanent establishments (PEs) and passive types of income, such as
royalties, interest, and income from disposal of assets.
As of 1 January 2014, Slovakia has a flat CIT rate of 22%. Prior to 1 January 2014, the
CIT rate was 23%. Some income may still be subject to a 19% withholding tax (WHT)
rate. A new specific 35% WHT has been introduced for payments to taxpayers from nontreaty countries from 1 March 2014. Companies that have a financial year different from
the calendar year will apply the lower rate in the financial year thatbegins in 2014.
Tax licence (minimum tax)
A new tax licence for companies has been introduced, which represents a minimum
lump sum tax after deduction of tax relief and credit of taxes paid abroad. The respective
amounts will range from EUR 480 to EUR 2,880, depending on the entitys turnover
and whether the entity is a value-added tax (VAT) payer. The tax licence should be paid
regardless of the value of the reported tax base or the tax loss incurred; however, it
should be possible to deduct it from future tax liability in the subsequent three years. An
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entity may not be liable to pay the tax licence only in exceptional cases (e.g. in the first
year of its existence, during its liquidation, during bankruptcy, if it operates a subsidised
workshop).
Local income taxes
Slovakia does not have local, state, or provincial CIT.
Corporate residence
A company is a tax resident in the Slovak Republic if it has its registered seat or effective
place of management in the Slovak Republic.
A foreign company may create a PE if (i) its employees (or persons working for it) are
present and providing services in the Slovak Republic on behalf of the foreign company
where this activity is carried out through a permanent place of business, (ii) the
employees conclude and negotiate agreements on the foreign entitys behalf, or (iii) the
foreign entity establishes a building site within the territory of the Slovak Republic.
As of 2014, an activity performed in the Slovak Republic in the form of providing
services for more than six months may also be considered a PE, irrespective of the
existence of the fixed place.
Other taxes
A basic VAT rate of 20% applies to all taxable supplies, with certain exceptions. Certain
medical products and printed materials have a VAT rate of 10%. Exempt supplies
without credit entitlement include postal services, financial and insurance services,
education, public radio and TV broadcasting services, health and social services, the
transfer and leasing of real estate (with exceptions), and lottery services. There are also
other VAT-exempt transactions without credit entitlement, as well as exempt taxable
supplies with credit entitlement.
VAT grouping is possible if certain conditions are met.
Customs duties
Goods imported from non-European Union (EU) countries are subject to import customs
clearance. Goods exported from the EU customs territory have to be declared for export
customs clearance.
To communicate with the customs offices, each person must have an Economic Operator
Registration and Identification Number (EORI), which is registered by the customs
authorities on request. EORI registration is mandatory for customs clearance.
The European customs rate, customs nomenclature, and customs tariffs are set by EU
legislation.
Excise taxes
Excise tax is charged on the release to tax-free circulation or import of tobacco products,
wine, spirits, beer, mineral oil, electric energy, coal, and natural gas.
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Immovable property tax, which is divided into land tax, building tax, and tax on
apartments, is governed by the Act on Local Taxes. Immovable property tax is calculated
based on the area of the real estate, its location, and its type, as well as the tax rate of
each self-governing region.
The immovable property tax rate may vary significantly. Please find below the spread of
the tax charges per square metre.
Tax rates (EUR)
Immovable property tax per square
metre
Four floor office building in

centre of city of Bratislava
8.30 *
One floor hall rural area

0.73 - 1.012
* For each additional floor, add an additional tax of EUR 0.33.
Transfer taxes
There are no transfer taxes in the Slovak Republic.
Stamp taxes
There are no stamp duties or similar taxes on share or other property transfers in
the Slovak Republic, although small administrative fees are payable to register such
transactions.
Turnover taxes
There are no turnover taxes in the Slovak Republic.
Special tax on regulated industries
There is a special tax from activities of entities in regulated industries (e.g. energy,
insurance and re-insurance, public healthcare insurance, electronic communications,
pharmaceuticals, postal services, railway transport, public water distribution and
sewerage, air transport), which applies, based on the recent amendment, for the period
from September 2012 to December 2016. The tax is calculated as a multiple of the tax
base (accounting result before tax) that exceeds EUR 3 million a year and the tax rate.
The monthly tax rate is 0.00363. The annual rate can be up to 4.35%.
Special tax on banks
A special tax on banks is charged at a rate of up to 0.4%, up to the amount of EUR 750
million for a given year. The special tax on banks is calculated from the banks liabilities
recognised on the balance sheet net of deductions (e.g. the amount of the banks equity,
provided that its value is positive), the amount of the subordinated debt under a special
regulation, and the amount of funds provided to the branch of a foreign bank.
Motor vehicle tax
Vehicle tax applies to vehicles that are registered in the Slovak Republic and used for
business purposes. The taxpayer is the entity that uses the vehicle for business purposes.
The tax rate depends on engine capacity, vehicle size, and the decision of each selfgoverning region.
Payroll taxes
Taxable remuneration from employment includes all remuneration, whether monetary

or non-monetary, including in-kind benefits provided to an employee. Statutory health
insurance and social security contributions paid by the employee reduce taxable income.
Obligatory employers health insurance and social security contributions paid by the
employer are not part of the employees taxable income.
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Employers must keep Slovak payroll records for employees and members of their
statutory bodies.
The tax base until EUR 35,022.31 (EUR 34,401.75 in 2013) should be taxed at 19%. The
exceeding part of the tax base should be taxed at 25%.
Income of constitutional authorities from dependent activity is, in addition to the tax
calculated as listed above, subject to a special tax rate of 5%.
Employers health insurance and social security contributions total 34.4% of

remuneration; however, due to caps on the amounts on which these contributions are
levied, the total contribution does not exceed EUR 1,384.60 (EUR 1,351.91 in 2013) per
month for the period from 1 January 2014 to 31 December 2014. Employers also pay
injury insurance contributions of 0.8% of employees total salary costs per month, which
are not capped.
The rate of health insurance contributions for individuals who receive dividends is 14%
of the assessment base. An amendment of the health insurance act re-introduced one
common maximum assessment base of 60 times the average monthly salary reported
two years ago for all types of income that are subject to health insurance (including
dividend income). This should also apply to dividends paid from the company profits
reported for the period after 1 January 2011. The obligation to pay the health insurance
contribution is on the payer of the dividend, and the contribution is paid in advance.
These advances are payable on the eighth day after the end of the calendar month in
which the dividends are paid.
Branch income
A foreign company may trade through a Slovak branch, which must be registered in the
Slovak Commercial Register. The taxable income of the branch must not be lower than
that which an independent entity (e.g. a Slovak company) would achieve from carrying
out similar activities under similar conditions. If the branchs taxable income cannot
be assessed based on its income less costs, as adjusted for tax purposes, certain other
methods may be used. A taxpayer may ask the tax authorities in writing to approve such
a method.
The tax base is generally the accounting result as determined under Slovak statutory
accounting rules, adjusted for tax purposes.
Inventory valuation
Stock (i.e. inventory) is valuated at cost. Slovak legislation specifically provides for
the use of the arithmetical average cost and first in first out (FIFO) methods to value
stock. Last in first out (LIFO) may not be used. The tax treatment follows the accounting
treatment.
Capital gains
Capital gains from the disposal of assets are included in the CIT base. The tax treatment
of capital losses depends on the type of asset on which they arose.
Capital gains on the alienation of shares and participation interest in Slovak companies
may be taxed in Slovakia, predominately if sold to a buyer who is a Slovak tax resident or
has a PE to which the purchase is attributable.
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From 1 January 2014, a regime is introduced under which the income from the sale of
shares or participation interest of a company where the value of immovable property is
more than 50% of the equity has its source in Slovakia.
Dividend income
Dividends paid out of profits earned on or after 1 January 2004, and liquidation
surpluses and settlement amounts to which shareholders became entitled on or after
1 January 2004, are not subject to tax. A specific tax regime applies for dividends
generated before 1 January 2004 and declared after 31 December 2012 (see the
Withholding taxes section). Income from acquiring new shares due to an increase in share
capital from retained profits or mergers and demergers within the Slovak Republic or
the European Union is also not subject to tax.
Slovak-source interest income earned by taxpayers with limited, as well as unlimited,

tax liability is subject to withholding at a flat tax rate of 19% (for states without a DTT,
please refer to the Withholding taxes section), except where the recipient of the deposit
interest or the yield is a Slovak investment fund, Slovak supplementary pension fund,
Slovak bank or the branch of a foreign bank, or the Slovak Export-Import Bank.
Royalty income is subject to the 19% corporate flat tax rate (for states without a DTT,
please refer to the Withholding taxes section).
Interest and royalty income is exempt if it is paid by a Slovak payer to a recipient who is
a tax resident in the European Union and is a beneficial owner of this income, provided
that for 24 months before the payment:
the payer owns at least 25% direct shareholding of the recipient of the income
the recipient owns at least 25% direct shareholding of the payer of the income, or
a third entity resident in European Union owns at least 25% direct shareholding on
both the payer and the recipient of the income.
Unrealised foreign exchange gains/losses
The taxpayer may decide whether to include unrealised foreign exchange differences
relating to unsettled payables and receivables in the tax base in the tax period when they
are accounted for or in the tax period when they are realised. However, the decision to
include/stop including these differences when they are realised must be made on the
CIT return.
Foreign income
Companies resident in the Slovak Republic are taxed on their worldwide income,
including income of its foreign branches. A Slovak tax resident entity is able to deduct
from its tax base a tax loss made by its taxable PE (e.g. branch) outside the Slovak
Republic, adjusted for Slovak tax purposes.
Credit relief is available for foreign tax paid under most of Slovakias DTTs. Alternatively,
exemption of foreign income taxed abroad from taxation in Slovakia may apply.
Slovakia does not have provisions related to deferral.
Deductions
Tax depreciation is calculated on an asset-by-asset basis using a straight-line or reducingbalance method at statutory rates, and is generally available for expenditure incurred
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on tangible fixed assets. Some types of assets are excluded from depreciation (i.e. land,
artwork, and national monuments).
Tangible fixed assets (acquisition value over EUR 1,700) are classified into tax
depreciation groups to which different depreciation periods apply, as follows:
Depreciation
group
1
2
3
4
Assets
Motor vehicles, office machines and computers,
and tools and implements
Engines, most production line equipment, furniture
Buildings made of metal, turbines, air-conditioning systems,
and ships
Buildings of a permanent nature
Depreciation
(years)
4
6
12
20
Taxpayers do not have to depreciate an asset every year. Tax depreciation may be
interrupted in any year and continued in a later year without a loss of the total tax
depreciation available.
A lessee can depreciate a tangible fixed asset held under a financial lease. For tax
purposes, the depreciation period equals the leasing period, and the tax depreciation
base equals the acquisition value of the leased asset without VAT and financing costs
plus expenses related to acquisition of the leased asset that the lessee incurred before
the asset was put into use.
The value to be used as the basis for tax depreciation depends on how the asset is
acquired and is usually based on one of the following:
Acquisition costs (i.e. the price for which the asset was acquired).
The taxpayers own costs incurred, if the asset is acquired or produced internally.
Intangibles and low value assets (acquisition value of EUR 1,700 or less) are amortised
for tax purposes in line with their accounting amortisation (i.e. over the useful life of the
asset).
Goodwill
Amortisation of purchase goodwill, including the goodwill on purchase of a business as a

going concern, if it represents an identifiable intangible asset, is tax deductible.
For goodwill created at the contribution of business as a going concern or goodwill
created at a merger, the tax deductibility of the goodwill depends on the method of tax
treatment of this reorganisation. If the reorganisation is performed for tax purposes in
fair market values, the goodwill created will be tax effective. On the other hand, if the
reorganisations are made in original values, the goodwill created is not tax effective.
Start-up expenses
Start-up expenses are tax deductible in the period when incurred.
Interest expenses
Interest expenses incurred in order to generate taxable income can be treated as tax
deductible.
However, since dividends are tax exempt, the costs of interest on loan incurred to
acquire the shares should be treated for tax purposes as costs incurred to generate nontaxable income, i.e. as not tax deductible.
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Bad debt provisions
Provisions for unsecured receivables from loans created by banks, and bad debts of
regular commercial companies, are fully tax deductible (subject to certain conditions)
once the debt has been overdue for more than 1,080 days (20% of the bad debt is tax
deductible when it has been overdue for more than 360 days, and 50% after 720 days),
provided certain conditions are met.
Charitable contributions are treated as gifts, which are not tax deductible.
Pension expenses
Contributions to supplementary pension savings made by the Slovak employer on behalf

of the employee, up to 6% of the gross salary of the employee participating in these
plans, are tax deductible.
Fines and penalties
Statutory penalties and fines are not tax deductible. Contractual penalties and late
payment interests are generally tax deductible on a cash basis.
Taxes
Road tax, real estate tax, and most of other taxes are tax deductible. Social security
contributions paid by an employer with respect to employees are also tax deductible.
Income tax is not tax deductible.
Other non-deductible expenses
Expenses are generally tax deductible if incurred to generate, secure, and maintain the
entitys taxable income. However, certain other costs are specifically not tax deductible.
These include entertainment costs, various provisions (e.g. provisions to tangible
and intangible assets, certain bad debt provisions), and certain expenses in excess of
statutory limits (e.g. employee travel expenses and meal allowances).
A company or branch may carry forward and utilise a tax loss for a period of up to five
years following the year in which the loss arose, and for up to seven years for tax losses
reported after 31 December 2009. Each years tax loss should be considered separately,
and can be utilised over its own five or seven-year period.
As of financial year 2014, the tax loss utilisation period shortens from seven to four years
with 25% utilisation each year. For issues related to interim provision regarding tax
losses carried forward from years 2010 to 2013, please contact the local PwC Tax office.
Carryback of losses is not available in the Slovak Republic.
Generally, deductions may be claimed for royalties, management service fees, and
Group taxation
There is no concept of group CIT in the Slovak Republic. Each company in a group is
taxed individually.
Transfer pricing
Under the transfer pricing rules, prices in transactions between a Slovak company and
its foreign-related parties should be at arms length, which means the prices should be at
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rates similar to those that would be charged between unrelated parties for the same or
similar transactions under comparable conditions. Although the OECD Transfer Pricing
Guidelines were not formally implemented, these are usually followed for determination
of arms-length prices.
If transactions between the related parties are not made at arms length, and this results
in a reduction in the Slovak entitys corporate tax base, then the tax authorities can
adjust the corporate tax base to that which it would have been if arms-length prices had
been used.
All Slovak taxpayers must keep sufficient transfer pricing documentation to justify prices
charged by or to their foreign related parties. The Slovak Ministry of Finance has issued
a guideline setting out detailed requirements for transfer pricing documentation (the
Guideline) for entities that are obligated to prepare their financial statements under
International Financial Reporting Standards (IFRS).
The EU code of conduct was not formally implemented. However, the Guideline requires
maintaining transfer pricing documentation in a form generally in line with the EU
standards.
Slovak tax inspectors may require transfer pricing documentation. As of 2014, the
deadline to provide transfer pricing documentation for taxpayers has been significantly
reduced from the previous 60 days to 15 days, and the tax authority may request
transfer pricing documentation without the formal opening of a tax audit. Without
such documentation, transfer pricing adjustments (increased tax base) are much more
likely to be imposed. In addition, entities reporting under IFRS may be specifically
penalised for not keeping transfer pricing documentation or for non-compliance of their
documentation within the Guideline requirements.
Thin capitalisation
There are no thin capitalisation rules in the Slovak Republic.
There is no CFC regime in place in the Slovak Republic.
Treatment of inter-company items
Dividends are not treated as taxable costs if they are paid out of the profit after tax
earned since 2004.
Royalties, commissions, and other payments paid to foreign related parties are taxdeductible, provided they would be taxable if paid to a third party and if the charges are
in line with transfer pricing rules.

There are several types of investment incentives potentially available, including
corporate tax credits, discounts on the price of publicly owned real estate, and financial
support for creating jobs or for the acquisition of long-term assets. All of these are
treated as state aid.
Various conditions must be met in order for a company to qualify for state aid. These
include a minimum amount of investment in fixed assets, where the amount depends
mainly on the type of project and where it is located, or a minimum number of newly
created jobs.
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Investment incentives (including tax credits) are potentially available for projects in the
following areas:

Industry.
Technology centres.
Shared services centres.
Tourism.
The granting of a tax relief is subject to approval of the Slovak authorities. If certain
conditions are met, a taxpayer may apply tax relief in the ten subsequent years following
the tax period in which the relief was granted.
Foreign tax credit
Foreign tax credits are available only if allotted under an applicable DTT. If credit is not
available under a tax treaty, CIT paid abroad may be deducted as an expense, provided it
is imposed on the income included in Slovak taxable income.
Withholding taxes
Mainly, the following payments are subject to WHT when made by Slovak companies to
foreign parties. However, a DTT may reduce or eliminate the rate:
Payments
Fees for services
Royalties *
Interest on loans and deposits *
WHT (%)
19/35
19/35
19/35
* Royalties and interest paid to related EU-resident companies are not subject to WHT if certain conditions
are met.
A new 35% WHT rate has been introduced for payments to taxpayers from noncontracting states (i.e. states that did not conclude eitheraDTT or tax information
exchange agreement (TIEA) with the Slovak Republic). This new amendment should be
applied from 1 March 2014.
Dividends paid out of profits arising in 2004 and later years are not subject to Slovak
WHT.
The dividends generated for the tax periods until 31 December 2003 and paid out after
1 January 2014 are subject to a 19% WHT. These dividends are not subject to WHT if
paid to an EU tax resident having at least a 25% direct share in the paying company at
the time of the payment.
Based on an amendment to the Income Tax Act, income from any bonds arising
to a foreign taxpayer will not be subject to taxation in Slovakia. The income from
government and non-government bonds and treasury bills will not be subject to WHT
from 1 July 2013, provided that it is not income that arises to taxpayers not established
or founded for business purposes, the National Property Fund, and the National Bank of
Slovakia. This amendment was adopted in order to increase the attractiveness of issuing
domestic bonds on foreign markets and to gain credit for Slovak businesses.
WHT should be paid to the Tax Office no later than 15 days from the end of the calendar
month following that in which the payment was made. The withholding obligation lies
with the Slovak resident taxpayer. The taxpayer must also notify the tax administrator
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of the tax withheld and transferred. If the tax is not properly withheld, the unpaid tax
becomes the Slovak tax residents tax liability, and a penalty may be assessed.
This table highlights countries with which Slovakia has entered into a DTT.
Recipient
Australia
Austria
Belarus
Belgium
Brazil
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Egypt (17)
Estonia
Finland
France
Germany
Georgia
Greece
Hungary
Iceland
India
Indonesia
Ireland
Israel
Italy
Japan
Kazakhstan
Korea
Kuwait (17)
Latvia
Libya (18)
Lithuania
Luxembourg
Macedonia
Malta
Mexico
Moldava
Mongolia
Montenegro
Netherlands
Nigeria
Norway
Poland
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Interest (%)
10
0
0/10 (3)
0/10 (2a)
0
0/10/15 (2, 3)
0/10 (3)
0/10 (14)
0/10 (4)
10
0/10 (3)
0
0
N/A
0/10 (15)
0
0
0
5
0/10 (3)
0
0
0/15 (4)
0/10 (3)
0
2/5/10 (9)
0
0/10 (4)
0/10 (3)
0/10 (4, 11)
0/10 (17)
0/10 (4)
0/10 (3)
0/10 (4)
0
10
0
0/10 (3)
10
0
10
0
0/15 (3)
0
0/10 (4)
Royalties (%)
10
0/5 (1)
5/10 (1)
5
10
15/25 (1b)
10 (6)
0/10 (1)
10
10
0/5 (1)
0/10 (1)
0/5 (1)
N/A
10
0/1/5/10 (8)
0/5 (1)
5
5
0/10 (1)
10
10
30
10/15 (5)
0/10 (1)
5
0/5 (1)
0/10 (1)
10
0/10 (1)
10
10
0/5
10
0/10 (1)
10
5
10
10
0
10
5
10
0/5 (1)
5
Slovak Republic
Recipient
Portugal
Romania
Russia
Serbia
Singapore
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland (19)
Syria
Taiwan
Tunisia
Turkey
Turkmenistan
Ukraine
United Kingdom & North Ireland
United States
Uzbekistan
Vietnam
Interest (%)
10
0/10 (4)
0
10
0
10
0
0
0/10 (12)
0
0/10 (7, 11)
0/10 (3)
0/10 (4)
0/12 (3)
0/10 (3)
0/10 (3)
10
0
0
10
0/10 (3)
Royalties (%)
10
10/15 (1a)
10
10
10
10
10
0/5 (13)
0/10 (1)
0/5 (13)
0/5/10 (1, 10)
12
10
5/15 (1)
10
10
10
0/10 (1)
0/10 (1)
10
5/10/15 (16)
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
The lower rate applies to cultural royalties.

a. In the case of Romania, the rate of 10% applies to royalties in respect of the use of trademarks,
patents, or know-how. The higher rate applies in any other cases.
b. In the case of Brazil, the rate of 25% applies to royalties for the use of trademarks. The lower
applies in other cases.
The lower rate applies to interest on loans and credits granted by a bank for at least ten years in
connection with the sale of industrial equipment; with the study, installation, or furnishing of industrial
or scientific units; or with public works.
a. The zero rate applies to interest on certain commercial debt-claims, loans guaranteed by public
entities for export promotion, accounts/loans between banks/public institutions of the two states,
and interest paid to another state or political subdivision of a local authority.
The zero rate applies if the interest is received by the government/the central bank/other state
institutions (see the respective treaty for exact wording).
The zero rate applies if the interest is received by the government or the central bank or other state
institutions, or if the receivables on which the interest is paid are guaranteed/financed/indirectly
financed by the government/governmental institutions (see treaty for exact wording).
The rate of 10% applies to royalties for cinematography, TV broadcasting, and radio broadcasting,
and to giving up rights related to royalties. The higher rate applies in other cases.
This rate also applies to payment for services.
WHT is 0% on bank loans.
The zero rate applies to copyrights; 1% applies to finance lease of equipment; 5% applies to
equipment rental and royalties for software, cinematography, and TV and radio broadcasting; and
10% applies to payments for the use of trademarks and know-how.
The rate of 2% applies to state bonds, obligations, and loans insured or guaranteed by the National
Bank of Slovakia/Israel, Slovak Society for Insurance of Foreign Credits and Loans, or Israel Society
for Insurance of Foreign Trade; 5% applies if interest is received by a financial institution; and 10%
applies in all other cases.
Slovakia can apply the rate of 5% to royalties for the use of trademarks, patents, or know-how paid
from Switzerland to Slovakia, if Switzerland does not apply the 10% rate.
The zero-rate applies to interest on loans and credits in connection with the sale of industrial,
business, or scientific equipment, or the sale of goods.
The zero-rate applies if the interest received is related to loans (monetary or non-monetary) provided
to the government of the other contracting state corporation or any other institution with state
shareholding or to loans provided to a bank institution under a governmental approval.
The zero-rate applies to copyrights.
The zero-rate applies to interest received by a resident of one state in respect of indebtedness of
the other state government or political subdivision/local authority, or in respect of a loan made/
guaranteed by the other state government in respect of imports/exports.
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15. The zero-rate applies if the interest is received by the government, the central bank, or other state
institutions, or if the receivables on which the interest is paid are guaranteed/financed/indirectly
financed by the government/governmental institutions (see treaty for exact wording).
16. The rate of 5% applies to royalties for the use or the right to use of patent, draft or model, plan,
confidential formula or procedure, for information related to industrial or scientific experience and for
the use or the right to use of an industrial, business, or scientific device. The rate of 10% applies to
royalties for the use or the right to use of trademark or for information related to business experience.
The rate of 15% applies to royalties, other than those stated above.
17. Slovakia is waiting for Egypt to announce approval of the DTT. The DTT between Slovakia and
Kuwait was ratified and will be effective as of 1 January 2015. Interest will be exempt if paid by
a government/public law agency and other agencies specified in the DTT between Slovakia and
Kuwait.
18. DTT between Slovakia and Libya is effective as of 21 June 2010.
19. Slovakia and Switzerland signed the Protocol to a DTT on 8 February 2011, which is not ratified yet.
Based on this Protocol, the interest rate will be a maximum of 5%. Industrial royalties are subject to
10%, but the potential reduction of the rate is in case the royalties are paid within European Union,
and entities are considered to be related companies with direct share exceeding 25% for more than
24 months, which is in accordance with the EU Directive on interest and royalty payments made
between associated companies.
Tax administration
Taxable period
The standard fiscal year is a calendar year, but a Slovak entity may opt to change this to a
different 12-month period.
Tax returns
A corporate tax return must be filed together with the entitys financial statements
within three months following the fiscal year-end. The taxpayer may extend the filing
deadline by up to three months. To extend the filing deadline, the taxpayer must notify
the Tax Office before the normal filing deadline. After notification, the deadline is
automatically extended. Further extension of up to six months is available upon Tax
Office approval.
Payment of tax
The balance of tax due for a fiscal year is payable by the filing deadline.
Advance payments of corporate tax must be paid monthly or quarterly during the
current tax period. Instalments are usually based on the last known tax liability of the
entity. It is not necessary to pay tax advances if the last tax liability did not exceed EUR
2,500 (EUR 1,659.70 in 2013).
Tax audit process
Generally, the tax authority selects the taxpayers subject to tax audit based on certain
criteria that are not communicated to the public.
The taxpayers that utilise state aid in the form of tax relief are subject to specific tax
audit in the year of utilisation of the tax relief.
The tax audit has to be finalised within one year.
A tax may not normally be assessed or additionally assessed more than five years (ten
years when DTT treaty was applied, including transactions with foreign related parties)
after the end of the year during which the obligation to file a tax return arose, or during
which the taxpayer was obligated to pay the tax. If a tax inspection is undertaken within
this five-year period, another five-year period commences from the end of the year in
which the taxpayer was notified of this action.
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If a taxpayer utilises a tax loss, a tax or additional tax cannot be assessed more than
seven years after the end of the year in which the obligation to file a tax return in which
a taxpayer reported the tax loss arose.
However, tax may be assessed, or additionally assessed, no later than ten years after the
end of the year during which the obligation to file a tax return arose, or during which
the taxpayer was obligated to pay the tax.
The tax authorities, within a tax inspection, generally focus on transfer pricing, VAT,
limited tax deductibility of special types of costs (e.g. entertainment, promotion costs),
and tax incentives.
Other issues
Reserve fund
When a joint-stock company is incorporated, it must create a reserve fund of at least 10%
of its share capital. The statutory reserve fund must be increased annually by an amount
set out in the companys Articles of Association, but not less than 10% of its net profit, up
to a total of 20% of the share capital.
A limited liability company must create a reserve fund following the first year in which it
reports a profit, at the latest. The minimum contribution is then 5% of the net profit each
year (or more if specified in the companys Articles of Association) up to a total of at least
10% of the companys share capital.
A branch of a foreign company is not required to set up a reserve fund.
A reserve fund may be used to cover prior year losses of the company, and in certain
other limited situations, but it is not distributable.
Two alternative tax treatments may be used for business combinations, including in-kind
contributions to a companys share capital, mergers, and demergers.
Under the first alternative, the taxpayer should value assets for tax purposes using
their current market values, and the revaluation difference must be reflected in the
appropriate companys tax returns within seven years of the transaction.
Under the second alternative, the taxpayer should continue to use the original tax book
values of the assets, and revaluation difference is not taxable/tax deductible.
When selling a business, the purchaser must include goodwill or negative goodwill,
acquired as part of the purchase, in its tax base within seven tax periods.
Adoption of International Financial Reporting Standards (IFRS)
Slovakia has adopted most of the principles of IFRS in its accounting law. However, there
are still some differences between IFRS and Slovak accounting standards.
Obligation to prepare statutory financial statements according to IFRS
Financial institutions (banks, insurance companies, etc.) must prepare their statutory
financial statements according to IFRS. In addition, a company that fulfils two or more
of the following conditions, in two consecutive accounting periods, must prepare its
statutory financial statements according to IFRS:
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The total value of assets is more than EUR 170 million.
Net turnover exceeds EUR 170 million.
The average number of employees in the individual accounting period exceeds 2,000.
Anentity may decide to prepare its financial statements under IFRS if certain conditions
are met.
If the Slovak taxpayer is obligated to prepare its financial statements under IFRS, the tax
base is derived from either:
the profit before tax under IFRS, adjusted for tax purposes using the IFRS Tax Bridge
issued by the Slovak Ministry of Finance, or
the profit before tax under Slovak statutory accounting standards.
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Slovenia
PwC contact
Lana Brlek
PwC SVETOVANJE d.o.o.
Cesta v Klee 15
SI-1000 Ljubljana, Slovenia
Tel: +386 1 583 6058
Amendments to corporate taxation
The Slovene Corporate Income Tax (CIT) Act was last amended in October 2013. The
changes are effective as of 1 January 2014.
Current CIT rate
The Slovene government set the CIT rate at 17% for financial years 2014, 2015, and
future years (most likely).
Thin capitalisation
As of 1 January 2014, there is an extension of the definition of related persons that fall
under the thin capitalisation rules, mainly entities with the same shareholder, so-called
sister entities.
In addition, calculation of average capital for purposes of thin capitalisation was
simplified and harmonised with the accounting standards and the Slovene Companies
Act. The average of capital is calculated from the amount of capital at the beginning and
capital at the end of the tax year. Net profit or net loss of the tax year is exempt from
calculation of the average capital because such calculation is available only after the
calculation of the tax.
The definition of capital is harmonised with the definition of capital as stipulated by
the Slovenian accounting standards, which are in line with the International Financial
Amendments to value-added tax (VAT)
The Slovene regular VAT rate is 22% and the reduced VAT rate is 9.5%.

Slovenian tax residents are liable to pay CIT on their worldwide income. Slovenian tax
non-residents are taxed only on income from sources in Slovenia, including income
earned through permanent establishments (PEs) in Slovenia.
The CIT rate is a flat rate of 17%.
A special tax regime is granted for certain economic zones where additional tax
allowances for investment and employment may be available (see the Tax credits and
Non-profit taxpayers and charitable organisations, associations, foundations, etc. are
exempt from CIT on their non-profit-making activities.
Investment funds, as well as pension funds, pension insurance companies, and venture
capital companies, may be taxed at a rate of 0% if certain conditions are met.
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Tonnage tax
A company may request to be subject to tonnage tax instead of CIT if it meets certain
conditions (i.e. it operates in maritime transport in international shipping) and notifies
the tax authorities in advance.
The tax base for tonnage tax is the sum of the tax bases for each of an entitys ships that
are included in the tonnage tax regime. The tax base for a particular ship is calculated
by multiplying the number of ship operating days by the daily tax base shown in the
following table:
Net tonnage (NT)
For the first 1,000 tonnes
For the next 1,001 to 10,000 tonnes
For the next 10,001 to 25,000 tonnes
Above 25,001 tonnes
EUR*/day for 100 net tonnes

0.90
0.67
0.40
0.20
* euros
Local income taxes
There are no state or local taxes on income in Slovenia.
Corporate residence
A legal entity is considered to be a Slovenian tax resident if the entity has its statutory
(registered) seat or place of effective management located in Slovenia. These conditions,
however, do not exclude a society or any association of persons, including an association
under civil or foreign law that does not have legal identity, from also being considered to
be a Slovene tax resident.
The Slovene definition of a PE is generally in line with the definition set out in the
Organisation for Economic Co-operation and Development (OECD) model tax treaty.
Thus, it is a place of business in Slovenia in or through which the non-residents
activities are conducted in whole or in part. The following, in particular, are considered
to constitute a PE:
An office, branch, factory, workshop, mine, quarry, or other place where natural
resources are obtained or exploited.
A building site; construction, assembly, or installation site; or the supervision thereof,
if the duration of the activities concerned exceeds 12 months.
A place of business is not considered a non-residents PE if the non-resident:
only uses the premises in question for storage, display, or delivery of goods belonging
to oneself
only maintains inventories of goods belonging to oneself for the purpose of storage,
display, or delivery
only maintains inventories of goods belonging to oneself for the purpose of
processing by third parties
only maintains the place of business in question for the purpose of purchasing goods
or collecting information for oneself
only maintains the place of business for the purpose of engaging in any other
preparatory or auxiliary activity for oneself, or
only maintains the place of business in question for the purpose of any combination
of activities referred to above, provided that the overall activity of the fixed place of
business resulting from this combination is of a preparatory or auxiliary character.
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Other taxes
A basic VAT rate of 22% applies to all taxable supplies.

A lower VAT rate of 9.5% generally applies to foodstuffs, live animals, seeds, plants,
water supplies, medicines, medical equipment, transport of passengers, books,
admission fees, royalties for writers and performers, certain works of art, certain
residential properties, hotel accommodation, use of sport facilities, burial and cremation
services, public hygiene services, minor repairs of bicycles, shoes and clothing, domestic
care services, and hairdressing services.
Exempt supplies without credit entitlement include financial and insurance/reinsurance
services, rent and lease of immovable goods (with exceptions), tax and court stamps,
lottery services, trade of land, health and social services, etc. There are also other VATexempt transactions without a credit entitlement as well as exempt taxable supplies with
a credit entitlement.
VAT grouping is not possible within Slovenia.
The threshold for VAT registration is EUR 50,000.
Customs duties
Goods imported from non-European Union (EU) countries are subject to import customs
clearance, and goods being exported from the EU customs territory must be declared
for export customs clearance. The person responsible for paying the customs debt is the
declarant. The declarant is the person making the customs declaration in its own name
or the person in whose name the customs declaration is made. The customs declaration
should be made in the prescribed form and manner (in writing or by another action
specified by law). Import or export duties are customs duties and other charges payable
on the import or export of goods (import VAT, excise duties, environmental tax, and
motor vehicle tax).
For purposes of communication with the customs offices, each person has to be
identified by an Economic Operator Registration and Identification (EORI) Number,
which is registered by the customs authorities on request. EORI registration is
mandatory for customs clearance.
Excise tax
Excise tax is charged on the release into free tax circulation or import of tobacco
products, alcohol and alcoholic drinks, fuel and mineral oils, and electricity. The table
below is in effect as of 1 January 2014.
Product
Cigarettes
Beer
Alcohol drinks (except wine)
Ethyl alcohol
Unleaded petrol
Natural gas
Heating oil
Electricity
Excise tax rate

EUR 97 per 1,000 pieces
EUR 11 per 1 vol. % alcohol in 1 hl
EUR 120 per 1 hl
EUR 1,200 per 100 vol. % alcohol in 1 hl
EUR 514.16 per 1,000 l
EUR 0.0180 per m3
EUR 15.02 per 1,000 kg
EUR 3.05 per 1 MWh
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Property tax
Property tax in Slovenia applies annually to immovable property (i.e. buildings, facilities
for rest and recreation, and business facilities) at rates ranging from 0.1% to 1.5% of the
(administratively calculated) value of immovable property. The tax base may be reduced
Real estate tax
Anti-crisis tax on immovable property of high value was recently introduced in Slovenia.
The tax is calculated on the (administratively calculated) value of immovable property
at:
0.5% (0.25% for residential property) per year for property of EUR 500,000 up to
EUR 2 million, and
1% (0.5% for residential property) per year for property over EUR 2 million.
In addition, real estate transfer tax of 2% is charged on real estate transfers and financial
leases of real estate, unless VAT has been charged on the transaction.
Stamp tax
There is no stamp duty in Slovenia.
Financial services tax
Slovenia levies tax on financial services provided by banks and other financial
institutions. The tax rate is 6.5% and is applied to the fee of the financial service.
Environmental tax
Environmental tax is charged on carbon dioxide (CO2) emissions, waste disposal,

lubricating oils and fluids, used tyres, and used motor vehicles.
Motor vehicle tax
Motor vehicle tax applies to all vehicles that are registered for the first time in Slovenia.
The taxpayer is the entity that imports the vehicle from EU or non-EU countries. The tax
rate depends on fuel range, engine power, and emission of CO2 and ranges from 0.5% to
46%.
In addition to the motor vehicle tax described above, the government imposes an
additional tax on motor vehicles with engine displacement above 2,500 ccm that ranges
from 0% to 16%, depending on the engine size.
Water vessel tax
The existing water vessel tax is imposed on:

vessels exceeding five metres in length that are entered in vessel registers, with the
exception of vessels under construction
vessels exceeding five metres in length whose owners are residents of the Republic
of Slovenia and that comply with the technical conditions required for entry into the
vessel registers referred to in the first bullet but have not yet been entered into these
registers, and
vessels exceeding five metres in length whose owners are residents of the Republic
of Slovenia and that comply with the technical conditions required for entry into
the vessel registers referred to in the first bullet but have not been entered into these
registers because they are registered abroad.
In addition to the water vessel tax described above, the government levies an additional
tax on water vessels, depending on the length of the vessel:
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Class of vessel length (in metres) General part of
tax liability
Above
To
(in EUR)
5
8
2.00
8
12
10.00
12
20.00
The liability per

metre of length
(in EUR)
0.50
2.00
3.50
The liability per

kilowatt propulsion
power (in EUR)
0.10
1.00
2.00
The tax liability decreases by 5% per each year of age of the vessel. The tax cannot,
however, be lower than 50% of the tax liability calculated for a new vessel.
Insurance premium tax is levied on insurance premiums at the rate of 6.5% and paid by
insurance companies, unless the insurance lasts for at least ten years.
Branch income
If a branch meets the conditions, as set out in the tax legislation and relevant DTT, to be
treated as a PE, then it will be liable to pay tax in Slovenia on profits that are attributable
to the PE.
The profit that is attributed to a PE is determined broadly in line with OECD principles.
Generally, the attributable profit is the profit that would be expected to be earned by the
PE if it were an independent taxpayer performing the same or similar activities and/or
business.
A branch whose activities do not create a PE is not subject to CIT in Slovenia.
Taxable profits are assessed in accordance with Slovenian Accounting Standards 2006 or
IFRS and modified for certain revenues and certain expenses, which are partly or wholly
tax non-deductible.
Inventory valuation
Slovenian law allows the application of all the most commonly used inventory valuation
methods, including the first in first out (FIFO), weighted average cost, and floating
average prices methods.
Capital gains
Under certain circumstances, the gains made by a Slovenian taxpayer on the disposal of
an equity shareholding are effectively 47.5% exempt from taxation. Similarly, 50% of a
loss arising on the disposal of such a shareholding would not be deductible for CIT. This
treatment applies to the disposal of shareholdings of at least 8% that have been held for
at least six months and where the taxpayer disposing of the holding employed at least
one person during the six-month holding period.
The above treatment is not available for the disposal of a shareholding of a company that
is resident in a country that:
is outside the European Union
has a corporate tax rate less than 12.5%, and
is included in a list published by the Ministry of Finance.
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Dividend income
Dividends and similar income received by a Slovenian taxpayer are generally 95%
exempt from taxation as long as the distributor was subject to Slovenian CIT or to a
comparable profits tax. The exceptions to this are where dividends represent untaxed
reserves of the distributor or where the distributor is tax resident in a countrythat:
is outside the European Union
has a corporate tax rate less than 12.5%, and
is included in a list published by the Ministry of Finance.
Interest income
Interest and similar income received by a Slovenian taxpayer is included in the taxable
base and can be reduced in the amount of a tax liability paid abroad. Interest between
related parties needs to be calculated in accordance with the arms-length principle.
Foreign income
Foreign income, except dividends, received by a Slovenian entity from foreign sources is
included in taxable income for CIT purposes in the same tax year as it arises unless the
applicable DTT provides for an exemption.
Deductions
In general, business expenses that are necessary to generate taxable revenues are fully
tax deductible.
Depreciation of tangible fixed assets, amortisation of intangible assets, and

depreciation of investment property are recognised as expenditures in line with the
accounting treatment, up to a maximum of the amount calculated using the straightline depreciation method and the maximum tax depreciation rates listed below. Any
accounting depreciation in excess of these rates is not tax deductible in the period
concerned, but may be deductible in subsequent tax periods until the asset is fully
depreciated or disposed of.
The maximum annual depreciation rates are as follows:
Depreciation
category
1
2
3
4
5
6
7
8
Types of assets
Buildings, including investment property
Parts of buildings, including investment property
Equipment, vehicles, and machinery
Parts of equipment, and equipment for research activities
Computer equipment, hardware, and software
Crops lasting several years
Breeding animals
Other fixed assets
Annual depreciation
rate (%)
3
6
20
33.3
50
10
20
10
Goodwill
In general, if goodwill is impaired for accounting purposes, then the impairment cost
may be treated as tax deductible. The amount that may be treated as tax deductible in
any one tax period is limited to 20% of the initial value of the goodwill.
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Start-up expenses
In accordance with Slovene legislation, costs that occur prior to the entry of a legal
entity into court register may not be treated as tax deductible. Such a principle
arises from a common legal principle whereby an entity may be subject to rights and
obligations only after its establishment date. The date of entry into the court register is
deemed to be the date of the establishment.
Related-party interest
Companies may deduct interest expense on loans from their owners or other associated
parties up to a maximum of the amount calculated by using the prescribed interest
rate published by the Ministry of Finance. Taxpayers must increase taxable profits by
the amount of any excess interest expense, unless they can prove that they could have
received the loan on comparable terms from an unrelated party.
Provisions
Certain provisions are only 50% tax deductible when accrued, with the remaining 50%
being treated as tax deductible when the provision is utilised. The provisions that are
subject to this treatment are provisions for warranties granted when selling products
or providing services, reorganisations/redundancies, anticipated losses from onerous
contracts, pensions, long-service bonuses, and severance payments on retirement.
Bad debt
Bad debt provisions are only tax deductible if the amount does not exceed the lower of:
the arithmetic mean of the bad debts written-off in the past three tax periods, under
certain conditions specified in the tax law, and
the amount corresponding to 1% of taxable revenues of the tax period.
In order to take advantage of this deduction, a company must be able to calculate
amounts for both tests and then take the lower of the two amounts so calculated. If
the company is not able to determine the amount for either, the cost of the bad debt
provision is not tax deductible until the provision is utilised.
Costs of bad debts are tax deductible when the debt is finally written-off, provided there
is a finalised court procedure, the creditor can demonstrate that it would cost more to
pursue the debtor than the debt is worth, or the creditor can demonstrate that it has
done everything required by good business practice to try to recover the debt.
A taxpayer may claim a reduction of its taxable profits for donations made for
humanitarian, disabled, charitable, scientific, educational, medical, sports, cultural,
ecological, and religious purposes to residents of Slovenia or of EU or European
Economic Area (EEA) member states, up to 0.3% of the taxable persons taxable
revenues. An additional allowance of 0.2% of the taxpayers taxable revenues is
available for payments made for cultural purposes and to voluntary organisations that
work for the public interest to protect the public from natural and other disasters.
A taxpayer may decrease its taxable base for payments made to political parties and
representative trade unions, up to an amount equal to three times the average monthly
salary per employee of the taxpayer.
Compensation
Salaries and other payments relating to employment (e.g. wage compensation, holiday
allowances, employers social security contributions, long-service awards, severance
benefits paid upon retirement, solidarity assistance, and reimbursement of business
related expenses) are generally fully tax deductible.
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The costs of benefits in kind are also tax deductible if such benefits are taxed for the
individual under the Personal Income Tax Act.
Pension allowances
Under certain conditions, a tax-deductible allowance for voluntary supplementary

pension insurance may apply, of up to 24% of compulsory contributions for pension and
disability insurance for insured employees, but may not exceed EUR 2,819.09 annually
per employee.
Fines and penalties
Costs relating to compulsory collection of taxes and other levies are, in accordance with
Slovene legislation, not tax deductible.
Taxes
Taxes paid by a shareholder as a natural person and VAT that was not deducted as an
input VAT, even though there was a right to deduct, are not tax deductible. In addition,
interests on late payment of taxes are not tax deductible.
The following expenses are considered unnecessary for the generation of taxable
revenues and are not deductible for tax purposes:
Expenses that are not directly necessary for performing business activities or are not
incurred as a consequence of a business activity.
Expenses of a private character.
Expenses that do not correspond to standard business practice.
Some of the most common non-deductible expenses include:

Penalties and the cost of bribes.

Input VAT that could have been reclaimed in accordance with the VAT Act.
Entertainment costs, which are only 50% tax deductible.
Costs relating to the supervisory board, which are only 50% tax deductible.
Legal and other costs of incorporation, which may be deductible for the parent
company but not for the entity being incorporated.
The use of retained tax losses is limited to a maximum of 50% of the actual tax base.
Despite this limitation, tax losses may still be carried forward to subsequent years
without a limitation, but loss carrybacks are not permitted. Loss relief may not exceed
the amount of current taxable income. Generally, losses that are generated in multiple
tax years are absorbed chronologically. The right to carry losses forward may be
forfeited if the ownership of the capital or voting power of the taxpayer claiming the loss
carryforward changes by more than 50% within the tax period and the taxpayer either
has not performed business activities for two years prior to the change of ownership
or substantially changes its business activity two years prior to or after the change in
ownership.
Treatment of tax losses mentioned in the preceding paragraph does not apply for those
losses that are generated in the year of the change of ownership or prior tax periods.
Payment to foreign affiliates
Payments to foreign affiliates are normally subject to withholding tax (WHT) if there
is no right to apply exemptions in accordance with Slovenian legislation or DTT.
Payments similar to dividends, including disguised distribution of profit, are not tax
deductible. Any other payments to foreign affiliates are tax deductible if they are made
in accordance with the arms-length principle.
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Group taxation
Group tax returns were abolished with the introduction of the CIT Act on 1 January
2007.
Transfer pricing
Prices between a Slovenian entity and its related parties must be set, for tax purposes,
at fair market value using the arms-length principle. Broadly speaking, taxpayers
are related by direct, indirect, or common shareholdings of over 25%; through a
participation in management; or by control through other means, including through
contractual terms.
For transactions between two related Slovenian tax residents, provided neither is in an
advantaged position (advantaged usually means having unutilised tax losses), there is
no actual requirement for the companies to adjust their tax returns to reflect an armslength price.
Taxable persons must prepare transfer pricing documentation. The Slovenian rules
regarding such documentation follow the EU Code of Conduct on transfer pricing
documentation for associated enterprises in the EU (EU TPD).
Thin capitalisation
Interest payments on loans granted, or guaranteed, by a related party (a party that

directly or indirectly owns at least 25% of the shares or voting rights in the taxpayer)
are not tax deductible to the extent that the loan amount exceeds the thin capitalisation
threshold specified in law. This does not apply to loan recipients who are banks or
insurance companies.
Notwithstanding the above, effective as of 1 January 2014, the thin capitalisation rules
have been amended as follows. Firstly, the definition of related parties that fall under the
above rules has been extendedto so-called sister entities. Secondly, the definition of the
capital used for the purposes of the debt-to-equity ratio has been harmonised with the
definition of the capital as stipulated by the Slovenian accounting standards, which are
in line with IFRS.
Generally speaking, the thin capitalisation threshold is exceeded if the debt-to-equity
ratio exceeds 4:1.
Foreign tax credit
Tax paid abroad can be credited against tax liability in Slovenia. The amount of tax that
can be credited is the amount of final and actually paid tax. If there is a double tax treaty
(DTT) made between countries in question, the amount of tax that can be credited is the
amount calculated at the rate determined in the DTT. A taxpayer needs to provide proof
of the amount of foreign tax, the basis for calculation of the tax, and the amount of the
tax paid.
Investment allowances
A tax allowance for investment in equipment and intangible assets is available for
investments made after 1 January 2008. The tax allowance is limited to 40% of the value
of the assets acquired.
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Research and development (R&D) allowances
A 100% investment allowance is granted for investments in R&D within the tax period,
regardless of the location of establishment of the company within Slovenia. Such an
investment tax allowance may be obtained for expenditures on:
internal R&D activities within the company and
the purchase of R&D equipment from related or unrelated parties or from a private
research institution.
Allowances for employing certain individuals
A taxpayer that employs trainees or students to undertake practical work may reduce
its taxable profits by an additional 20% of the average monthly payment paid to such
persons, for every month the person carries out the work.
A taxpayer that employs disabled persons may decrease its taxable profits by an
additional 50% of the salary paid to such persons (in addition to the deduction for their
actual salary cost). A taxpayer that employs a severely disabled person or a person with a
combination of total hearing loss and speech impairment may reduce its taxable base by
an additional 70% of the salary paid to such a person (in addition to the deduction for
their actual salary cost).
Tax relief for investments in the Pomurje region
Entities based in the Pomurje region of Slovenia may claim additional employment
incentives and additional tax relief for investments. These extra benefits are available
from 2010 to 2015. As a result, provided certain conditions are met, entities with their
seat in Pomurje are entitled to a 70% tax allowance for investments in equipment and
intangible assets as well as to certain employment allowances.
Tax relief for employment of hard-to-place workers
A taxpayer who employs a hard-to-place worker may be able to benefit from a tax
allowance for both CIT and tax on activity. A hard-to-place worker is a person younger
than 26 or older than 55 who has been registered as unemployed for at least six months
and who has not been employed by the taxpayer or a related party in the past 24 months.
The tax allowance equates to 45% of the salary paid to the person during the first 24
months of their employment, up to the amount of the tax base.
Withholding taxes
In Slovenia, tax must be calculated and withheld on the payments made by residents and
non-residents on Slovenian-sourced income to recipients outside Slovenia.
Payments to which the WHT rules apply include payments for dividends, interest,
copyrights, patents, licences, leases on real estate situated in Slovenia, services of
performing artists, and services charged from low-tax jurisdictions.
The WHT rate is 15%.
If a DTT exists, the WHT rate may be reduced in line with the provisions of the treaty.
Similarly for payments of interest, royalties, and dividends within Europe, the Interest
and Royalties Directive and the Parent Subsidiary Directive, respectively, may also
reduce this WHT rate to zero.
Furthermore, WHT is not deducted on dividends paid to a parent company in another
EU member state if those dividends are subject to an exemption from tax in the hands of
the recipient, provided certain conditions are met.
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Subject to certain conditions, tax is notrequired to be withheld on interest on nonexchangeable debt securities issued outside Slovenia by a Slovenian tax resident
corporation through a public placement on an international clearing system (i.e.
Euroclear).
As of 1 January 2013, WHT is applicable only for explicitly determined types of services
(i.e. consulting, marketing, staffing, administration, information, and legal services),
provided they were made to countries with an average CIT rate not exceeding 12.5%,
where such a country was also stated on a separate list published by the Ministry of
Finance.
Treaties in force
Recipient
Albania
Armenia
Austria
Azerbaijan
Belarus
Belgium
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India
Ireland
Israel
Italy (3)
Korea
Kuwait
Latvia
Lithuania
Luxembourg
Macedonia
Malta
Moldova
Netherlands
Norway
Poland
Portugal
Qatar
Dividends (%) (1)

5/10
5/10
5/15
8
5
5/15
5/10
5/10
5/15
5
5
10
5/15
5/15
5/15
5/15
0/15
5
5/15
10
5/15
5
5/15
5/15
5/10/15 (5)
5/15
5/15
5
5/15
5/15
5/15
5/15
5/15
5/10
5/15
0/15
5/15
5/15
5
Interest (%) (2)

7
10
5
8
5
10
7
5
10
10
5
10
5
5
10
5
5
5
5
10
5
5
10
5
5
10
5
5
10
10
5
10
5
5
5
5
10
10
5
Royalties (%)
7
5
5
5/10 (9)
5
5
5
5/10 (6)
10
10
5
10
10
5
10
5
5
5
5
10
5
5
10
5
5
5
5
10
10
10
5
10
5
5
5
5
10
5
5
Slovenia
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Recipient
Romania
Russian Federation
Serbia/Montenegro
Singapore
Slovakia
Spain
Sweden
Switzerland
Thailand
Turkey
Ukraine
United Kingdom and
Northern Ireland
United States
Uzbekistan
Dividends (%) (1)

5
10
5/10
5
5/15
5/15
5/15
5/15
10
10
5/15
0/15
Interest (%) (2)

5
10
10
5
10
5
0
5
10/15 (10)
10
5
5
Royalties (%)
5
10
5/10 (7)
5
10
5
0
5
10/15 (8)
10
5/10 (7)
5
5/15
8
5
8
5
10
Dividends (%) (1)

8/13
5/10
Interest (%) (2)

13
5
Royalties (%)
15
5
Treaties not yet in force (4)

Recipient
Egypt
Kosovo
Notes
1.
Under certain treaties, the WHT rate depends on whether, and to what extent, the recipient
participates in the capital of the distributor. Generally, if the recipient holds a participation of more
than 25% in the distributing company, the dividends are subject to a lower 5% WHT rate. The higher
WHT rate is, however, normally due when the participation is less than 25%.
2. Some DTTs include specific provisions whereby interest payments are subject to a 0% WHT rate if
certain conditions are met.
3. The rates shown apply from 1 January 2011, when the new treaty with Italy came into effect.
4. Ratified international treaties that are not yet in force and are not used in Slovenia.
5. 5% rate if the beneficial owner is a company (other than a partnership) that directly holds at least
10% of the capital of the company paying the dividend; 10% rate if the beneficial owner is a
company that directly holds at least 10% of the capital of the company paying the dividends and the
dividends are paid out of profits which by virtue of the law of the state in which the payer is a resident
are exempt from company tax or subject to company tax at a rate that is lower than the normal rate in
that state; 15% rate applicable in all other cases.
6. 5% rate applicable to the gross amount of: (i) royalties paid for the use of, or the right to use, any
copyright of literary, artistic, or scientific work (but not including cinematograph films) and (ii) royalties
paid for the use of, or the right to use, industrial, commercial, or scientific equipment, 10% rate
applicable in all other cases.
7. 5% rate applicable to royalties for the use of, or the right to use, any copyright of literary, artistic,
or scientific work, including cinematograph films or films or tapes used for radio or television
broadcasting; 10% rate applicable to royalties for the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, or for the use of, or the right to use,
industrial, commercial, or scientific equipment, or for information concerning industrial, commercial,
8. 10% rate applicable to royalties for the use of, or the right to use, any copyright of literary or
artistic work including motion pictures, live broadcasting, film, tape, or other means of the use or
reproduction in connection with radio and television broadcasting, and for the use of, or the right to
use industrial, commercial, or scientific equipment; 15% rate applicable to royalties in all other cases.
9. 5% rate applicable to copyright, as defined by the Copyright and Related Rights Act; 10% rate
applicable to other property rights.
10. 10% rate applicable to the gross amount of interest, if received by a financial institution (including an
insurance company); 15% rate applicable to the gross amount of interest in all other situations.
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Tax administration
Taxable period
The tax period should be the calendar year. However, a tax period may differ from the
calendar year but may not exceed a period of 12 months. In this case, the tax authorities
must be informed about the chosen tax period, and the taxable entity will not be allowed
to change its tax period for the following three years.
Tax returns
A tax return must be submitted to the tax authorities by the end of the third month
following the end of the tax year.
Payment of tax
CIT is paid in advance in monthly instalments (if the amount of prepayment exceeds
EUR 400 per month) or in quarterly instalments (if the amount of prepayment is less
than EUR 400 per month) determined on the basis of the previous years assessment.
The final CIT payment must be made within 30 days of the tax return submission.
Tax audit process
Slovene legislation does not define an audit cycle. However, we understand that the
Slovene tax administration has its own criteria for how to determine audit targets, which
is in accordance with their annual tax plan.
Under Slovene legislation, a tax inspection may be initiated within five years from the
date when a tax return was due for submission to the tax authorities. However, the five
year period runs following each interrupting act (generally, certain actions by the Tax
Office or the taxpayer within the tax period may be considered as interrupting acts), but
may not surpass a maximum of ten years counting from the date when the tax return
is due. A concluded tax inspection will foreclose any further tax authorities inspection
only for the period and the items that were subject of the concluded tax inspection.
Any issue not examined remains open for a future tax inspection. The right of the tax
authorities to assess and collect tax permanently expires after ten years counted from
the date when the tax return is due.
Recently, we have noticed that tax authorities focus on appropriateness of transfer

pricing for multinational companies.
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South Africa
PwC contact
Paul De Chalain
PricewaterhouseCoopers Inc
2 Eglin Road
Sunninghill 2157
South Africa
Tel: +27 11 797 4260
After the switch from the source-based taxation to the worldwide taxation of South
African (SA) residents in 2000, and the introduction of capital gains tax in 2001, the SA
tax system has not undergone fundamental changes. Smaller reforms, however, are ongoing. The most significant recent changes are:
Withholding tax (WHT) on interest to be introduced at 15% is postponed to January
2015 from March 2014.
WHT on royalties increase to 15% is postponed to January 2015 from March 2014.
Introduction of a 15% WHT on cross-border service fees (January 2016).
Introduction of tax incentives for Special Economic Zones (SEZs).
Introduction of an exemption for international shipping companies (1 April 2014).
Further avoidance measures for interest deductions.

An SA-resident company is subject to corporate income tax (CIT) on its worldwide
income, irrespective of source. Non-residents are taxable on SA-source income.
In South Africa, the CIT rate applicable for corporate income of both resident and nonresident companies for tax years ending between 1 April 2014 and 31 March 2015 is a
flat 28%.
Close corporations, which are essentially a simplified form of company, are taxed at the
same rate as companies and are subject to the same taxation rules.
Small business corporations (i.e. companies with only natural persons as members/
owners and with gross income of not more than 20 million South African rand [ZAR])
are taxed at 0% on the first ZAR 70,700 of taxable income earned, 7% on the amount
above ZAR 70,700 but not exceeding ZAR 365,000, 21% on the amount above ZAR
365,000 but not exceeding ZAR 550,000, and 28% on the amount exceeding ZAR
550,000.
Special CIT rates apply in certain industries, such as mining and insurance (see below).
Alternative turnover-based tax for very small companies
To reduce the compliance costs for very small companies, a turnover-based presumptive
tax is available. Companies with a turnover of less than ZAR 1 million per year can elect
to pay this tax instead of normal CIT, at a rate ranging from 0% to 6%, depending on the
turnover. This election for the tax year commencing on or after 1 March 2014 must have
been made before 28 February 2014.
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Dividends tax
Dividends tax is imposed at 15% on dividends declared and paid by resident companies
and by non-resident companies in respect of shares listed on the Johannesburg Stock
Exchange (JSE) paid to SA residents.
Dividends are tax exempt if the beneficial owner of the dividend is an SA resident
company, SA retirement fund, or other prescribed exempt person.
The tax is to be withheld by companies paying the taxable dividends or by regulated
intermediaries in the case of dividends paid through a regulated intermediary. In the
case of in specie dividends, the company declaring the in specie dividend is liable for the
dividends tax and not the beneficial owner of the dividends.
Exemptions from dividends tax and treaty imposed reduced rates only apply if the
beneficial owner of the dividend has made the required declaration to the declaring
company or regulated intermediary.
The balance of Secondary Tax on Companies (STC) credits as on 31 March 2012 that
a resident company had prior to dividends tax remain available to that company to be
set-off against dividends declared to reduce the amount subject to dividends tax. All STC
credits must, however, be utilised before 31 March 2015, or they will be forfeited.
CIT for mining companies
Previously, there were two formulae for determining CIT for gold-mining companies:
one for gold-mining companies that were subject to STC and the other for such
companies that had elected to be exempt from STC. However, with the implementation
of the dividends tax, STC was repealed and all gold mining companies must now use the
standard formula to calculate the tax rate from years of assessment ending during the
12-month period before 31 March 2013 and onwards.
The maximum tax rate that applies to companies income from oil and gas activities is
capped at 28%.
CIT for long-term insurance companies
Life insurance companies are obligated to follow the four-funds approach, with
policies divided into four funds, depending on the nature of the beneficiary. Each fund
is then allocated assets according to the risk carried by the fund. Funds are treated as
separate taxpayers and taxed at four separate rates. These rates are 30% for individual
policyholder funds, 0% for untaxed policyholder funds, 28% for company policyholder
funds, and 28% for corporate funds (the company itself).
Local income taxes
No local government taxes on income apply to either SA-resident or non-resident

companies.
Corporate residence
A company is resident in South Africa if it is incorporated, established, or formed in
South Africa or has its place of effective management in South Africa. However, a
company that is deemed to be exclusively resident in another country by the terms of
a double taxation agreement (DTA) is excluded from SA residency. Also excluded as a
resident is any company that is incorporated, established, or formed in a country other
than South Africa, has its place of effective management in South Africa, is a controlled
foreign company (CFC) with a foreign business establishment as a result of being a nonresident, and the foreign taxes payable by the company are at least 75% of the South
African CIT that would have been payable had it been a resident.
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The place of effective management is, in terms of an Interpretation Note issued by the
South African Revenue Service (SARS), interpreted as the place where the strategic
decisions of the directors are implemented. However, this approach has not yet been
tested by the South African courts. Where international precedent applies a different
meaning to the term, it is expected that the South African courts would interpret the
term in accordance with international precedent for both domestic law and treaty
purposes.SARS has indicated that it intends to amend the Interpretation Note in the
near future to align it with internationally accepted principles.
South Africa does not, as a general rule, tax non-residents on the basis of having a PE in
South Africa. Rather, non-residents are subject to income tax in South Africa on income
derived from a South African source. The primary exception to this rule is in relation
to capital gains, where non-residents are subject to tax on assets attributable to a PE in
South Africa. A PE is defined by reference to the definition thereof in the Organisation
for Economic Co-operation and Development (OECD) Model Tax Convention.
Other taxes
VAT is an indirect tax that is largely directed at the domestic consumption of goods and
services and at goods imported into South Africa. The tax is designed to be paid mainly
by the ultimate consumer or purchaser in South Africa. It is levied at two rates, namely a
standard 14% rate and a zero rate (0%).
Very few business transactions carried out in South Africa are not subject to VAT. The
tax is collected by businesses that are registered as vendors with the SARS on all taxable
supplies throughout the production and distribution chain. Sales or supplies by nonvendors are not subject to VAT.
VAT registration and administration
All suppliers of goods and services having an annual turnover currently exceeding ZAR 1
million are obligated to register as VAT vendors and to charge output VAT. Other vendors
may elect to register as VAT vendors, provided their annual turnover exceeds ZAR
50,000. Two exceptions apply. Firstly, non-resident suppliers of electronic services will
be obligated to register from 1 June 2014 after aggregate supplies of ZAR 50,000 have
been made. Secondly, persons likely to make taxable supplies only after a period of time
may register if the activities are of a nature set out in regulations to be issued. If they do
not register, they are prohibited from charging VAT on goods or services they supply and
claiming an input tax (rebate of VAT paid) on goods and services that they acquire.
Under the VAT system, vendors normally pay VAT on expenses (input tax) and charge
VAT on supplies made (output tax). This mechanism, therefore, ensures that only the
so-called added-value is taxed. Due to VAT being a self-assessment system, the output
tax collected may be reduced by input tax paid. Thereafter, the net amount is payable
to, or refundable by, the SARS. The self-assessment returns are due regularly within
prescribed periods (tax periods).
Taxable supplies
Standard rated and zero-rated supplies are known as taxable supplies. Other supplies
are known as exempt and non-supplies.
Goods and services
For a liability for VAT to exist, there must be a supply or importation of goods or services.
Goods are corporeal movable things, fixed property, and real rights in such things and
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property. The meaning of services is very broad and includes the granting, assignment,
cession, or surrender of any right or the making available of any facility or advantage.
Electronic services (1 June 2014)
Non-resident suppliers of electronic services will be compelled to register for VAT on the
payments basis and account for VAT on supplies of electronic services to SA residents
from 1 June 2014.
Imports
Services imported by a vendor and utilised or consumed by the vendor for the making of
taxable supplies are not subject to VAT. In addition, the VAT Act has a schedule that lists
goods that are exempt from VAT on importation, whether by a vendor or an unregistered
person.
Zero-rated supplies
The VAT Act contains a list of the supplies of goods or services that are taxed at the zero
rate. Most of the items refer to exports and international transport, but other specified
goods utilised for farming purposes, the sale of an enterprise as a going concern, fuel
subject to the fuel levy, and deemed supplies by welfare organisations are also zerorated.
A zero-rated supply made by a vendor is subject to VAT but at a rate of 0%. Under a
zero-rated supply, a vendor does not charge VAT on the consideration for the supply and
obtains a refund or credit for the VAT paid on taxable supplies utilised in the making of
the zero-rated supplies.
Exempt supplies
In addition to zero-rated supplies, the VAT Act contains a list of the supplies of goods
or services that are exempt from VAT. While all fee-based financial services are subject
to VAT, the charging of interest is exempt. Other exempt supplies include residential
rentals, basic foodstuffs, non-international passenger transport by road or rail, and
educational services.
Under exempt supplies by vendors, the vendors do not charge VAT on the supply, and
they are not entitled to a deduction or credit for the VAT paid by them on goods and
services supplied to them for the making of the exempt supply. Accordingly, vendors
treat the VAT paid by them, and for which they do not obtain a deduction or credit,
as another cost and recover it in the consideration they charge for the making of the
exempt supply.
Customs duties
Customs duties are charged on importation of goods into South Africa at rates ranging
between 3% and 20%, except for clothing and apparel, which may have rates as high as
45%. The import duties may also include anti-dumping and countervailing duties of up
to 150%. No customs duties are charged on trade between South Africa and Botswana,
Lesotho, Namibia, and Swaziland, as these five countries constitute a Southern African
Customs Union.
Excise duties
Excise duty is levied on certain locally manufactured goods as well as their imported
equivalents. A specific duty at a pre-determined amount is levied on tobacco (52%
including excise and VAT) and liquor (23% to 43%), and an ad valorem duty (calculated
as a percentage of price) on monitors (7%), cosmetics, televisions, audio equipment,
and luxury automobiles (marginal rate of 25%). Relief from excise duty is available for
exported products and for certain products produced in the course of specified farming,
forestry, and (limited) manufacturing activities.
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Property taxes
Local municipalities levy rates on land. These rates are based on a percentage of
the municipal valuation of land and improvements and vary from municipality to
municipality. Generally, a higher rate is levied on properties zoned for business use.
Transfer duty
Transfer duty levied on the sale of immovable property is payable by the person
acquiring the property within six months from the date of acquisition at the following
rates:
Purchase price (ZAR)
Not exceeding 600,000
600,000 to 1 million
1 million to 1.5 million
Exceeding 1.5 million
Transfer duty rate (%)

0
3
5
8
Transfers of immovable property subject to VAT are exempt from transfer duty.
Securities transfer tax (STT)
STT is levied at a rate of 0.25% of the taxable amount in respect of the transfer of a
security. The taxable amount is usually the consideration for which the security is
purchased or the market value of the security, if the consideration declared is less than
the market value or if no consideration was paid. STT is payable by the company that
issued the securities in question. However, the company can recover the tax from the
person acquiring the shares. Slightly different rules apply in the case of listed securities.
Skills Development Levy (SDL)
SDL is a compulsory levy to fund the education and training as envisaged by the Skills
Development Act. It is payable by an employer and cannot be deducted from the
remuneration payable to an employee. Small employers with an annual payroll of less
than ZAR 500,000 are exempt from the levy. SDL is levied at the rate of 1% of payroll.
It is payable monthly, together with income tax that the employer has withheld on its
employees salaries.
Unemployment Insurance Fund (UIF) contributions
Employers are required to contribute on behalf of their employees on a personalised

basis to the UIF. The rate of contributions is 1% of gross remuneration payable to an
employee; however, the monthly cap of ZAR 148.72 applies. Another 1%, subject to the
same cap, is payable by the employee and withheld by the employer.
Compensation for Occupational Injuries and Diseases Act (COIDA) fund
Employers are liable for making annual contributions to the COIDA fund. COIDA
contributions are a payroll cost that cannot be deducted from the employees salary, with
a maximum salary cap of ZAR 312,480 per annum applying from 1 April 2013. The rates
vary depending on the employers industry (e.g. a rate of 1.62% is applied to the salaries
of employees involved in the manufacture of pottery up to a maximum salary band of
ZAR 312,480 per annum).
Donations tax
Disposals of assets below their market value are a deemed donation and, at least
theoretically, subject to donations tax. Donations tax is payable by resident companies at
a flat rate of 20% on donations made. An annual exemption of ZAR 10,000 is available.
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Public companies, comprised of mostly listed companies, are exempt from donations tax.
An exemption is also available for donations made to certain charities and other nonprofit organisations.
Vehicle emissions tax
An environmental levy is levied on new motor vehicles based on gram per kilometre of
CO2 emissions of the vehicle over a stated level. The levy is currently ZAR 90 to ZAR 125
per gram per kilometre over the CO2 threshold level.
Fuel levy
A fuel levy is included in the price of petroleum fuel sold. The general fuel levy for
2014/15 is 224.5 cents per litre of petrol and 209.5 cents per litre of diesel. A refund of
the diesel fuel levy may be claimed in certain industries, such as agriculture, fishing, and
mining.
Electricity levy
To support energy efficiency, the government has implemented a levy on electricity

generated from non-renewable sources at 3.5 cents/kWh. The levy is paid at source by
the electricity producer and recovered in the price to the consumer.
Air passenger tax
Passengers departing on international flights must pay air passenger tax at the rate of
ZAR 100 on flights to Botswana, Lesotho, Namibia, and Swaziland, and ZAR 190 on
other flights. The tax is added to the price of the ticket.
Branch income
SA branches of foreign companies are not considered to be separate legal entities for tax
purposes, and no tax is withheld on transfers of profits to the head office. Branches of
foreign companies are taxed at a rate of 28% and are not liable for dividends tax or any
branch profits repatriation tax.
Note that a branch must register as a taxpayer and submit tax returns. Separate financial
statements must be drawn up for the SA-trading operations. For all practical purposes,
the SARS will treat the branch as a separate entity. For example, inter-branch cost
recoveries levied by the head office incurred in the production of SA income normally
will be allowed as a deduction by the branch, although this treatment is not extended to
interest on inter-branch loans.
In terms of DTAs, the taxation of branches is limited to cases where the branch
constitutes a PE.
Inventory valuation
Inventories generally are stated at the lower of cost or net realisable value. Writedowns of inventory for slow-moving and obsolete items must be justified, and a general
policy on a percentage basis is not permitted. Last in first out (LIFO) is not accepted for
taxpurposes.
Capital gains
Although the capital gains tax forms part of income tax, the two taxes are not fully
integrated. Gains realised by companies are taxed at the normal CIT rate; however, only
66.6% of gains are included in taxable income.
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Dividend income
Dividends are generally taxed in the hands of the beneficial owner at a rate of 15%. The
amount is withheld by the company declaring the dividend on behalf of the shareholder
receiving it. In specie dividends are subject to tax in the hands of the company and not
the beneficial owner.
Foreign dividends received by or accrued to an SA-resident taxpayer are included
in income based on a formula and taxed at the normal CIT rate, which results in an
effective tax rate of 15%. Qualifying foreign dividends are also generallynot subject
to tax where they are received by resident shareholders holding in excess of 10% of
the equity shares and voting rights of the company declaring the dividend. Dividends
received by residents holding less than 10% of such shares will generally be taxable
in South Africa, subject to a tax credit for foreign taxes payable by the recipient
shareholder.
Stock dividends
Stock dividends (capitalisation issues of shares) are not subject to CIT or dividends tax.
Interest income
Interest income for resident companies is taxed at the normal CIT rate. Interest received
by non-resident companies is only subject to CIT if it is from a source in South Africa and
the company carried on business through a PE in South Africa during the tax year.
As of 1January 2015, a 15% WHT on interest will apply to interest paid on certain debt
instruments to non-resident companies.
Foreign income
Foreign income of an SA-resident company is subject to tax in South Africa on an earliest

of receipt or accrual basis. However, income that may not be remitted to South Africa
in terms of the laws of the country where the amount arose is deferred until the income
can be remitted. Double taxation may be avoided under certain DTAs or by way of
unilateral credit or deduction for foreign tax payable on foreign income (see Foreign tax
credit in the Tax credits and incentives section).
Deductions
A depreciation (wear and tear) allowance may be deducted on movable assets used for
the purpose of trade. There are no statutory provisions relating to rates of wear and tear,
but the SARS has published a table of periods over which the assets may be written off.
The rates of wear and tear, based on the cash cost, are calculated either according to the
straight-line or diminishing-balance method.
New and unused machinery used in the process of manufacture or in a similar process
is depreciable at the rate of 40% in the first year of use and 20% in the three following
years. If the machinery is not new and unused, an allowance of 20% per year over five
years is available.
An accelerated depreciation allowance (50% in the first year of use, 30% in the second,
and 20% in the third year) applies to the machinery and articles used in farming,
production of biodiesel or bioethanol, and production of energy from certain renewable
sources.
Specific allowances are also provided for pipelines, transmission lines, railway lines,
airport property, ships, mining operations, and other qualifying industrial assets.
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Buildings and other permanent structures may not be depreciated, apart from an annual
allowance for each of the following:
Buildings used in a process of manufacture or a process similar to a process of
manufacture: For buildings erected before 1 January 1989, a 2% rate applies per year.
For buildings erected after 1 January 1989, a 5% rate applies.
Hotel buildings: For buildings built prior to 4 June 1988, a 2% rate applies per year.
For hotel buildings erected after 4 June 1988, a 5% rate applies. Improvements within
the existing building framework that commenced on or after 17 March 1993 are
depreciated at the rate of 20%.
Agricultural cooperative storage buildings: For buildings built prior to 1 January
1989, a 2% rate applies per year. For buildings erected on or after 1 January 1989, a
5% rate applies.
Housing projects of not less than five units: Housing projects of not less than five
units of residential accommodation, which consist of more than one room and the
erection of which commenced on or after 1 April 1982 and before 21 October 2008,
are subject to a 2% rate of depreciation. After 21 October 2008, an allowance of
5% is available on this type of property. The 5% depreciation rate is available to the
taxpayer provided that the unit is used by the taxpayer solely for trade purposes, the
unit is situated in South Africa, and the taxpayer owns at least five units in South
Africa used for the purposes of trade. An additional allowance is available for a lowcost residential unit. Additionally, from 21 October 2008, taxpayers are granted relief
for the transfer of ownership on a contract for deed basis of employer provided low
cost residential units to employees.
Buildings in urban development zones: Improvements to an existing building in
an urban development zone, where the existing structural or exterior framework
is preserved and brought into before 31 March 2014, qualify for an accelerated
allowance of 20% per year. Buildings that are erected, extended, or added to in an
urban development zone on or after 21 October 2008 and which are not covered by
the first mentioned allowance qualify for a 20% allowance in the first year and an
8% allowance in the following ten years. As of 21 October 2008, new and unused
low-income residential units located in urban development zone demarcations are
subject to an additional annual depreciation allowance. The rate is 25% in the first
year, 13% in the succeeding five years, and 10% in the year following the last year.
Improvements are subject to a depreciation allowance of 25% over a period of four
years.
Commercial buildings: The cost to the taxpayer of any new and unused building
owned by the taxpayer, or any new and unused improvement to any building owned
by the taxpayer, if that building or improvement wholly or mainly is used by the
taxpayer for trade purposes, other than the provision of residential accommodation,
is subject to a 5% rate of depreciation. This allowance is applicable to any building or
improvement contracted for on or after 1 April 2007 and the construction of which
commenced on or after 1 April 2007.
An allowance for assets disposed of or scrapped during a year of assessment is
determined by reference to the cost less allowances already granted and the proceeds
on disposal (if any). Recoupments of allowances granted are taxable where disposal
proceeds exceed the tax basis at the time of sale. Such recoupments cannot exceed the
cost of the asset. Proceeds above cost will be taxed as a capital gain.
Book depreciation does not need to be consistent with tax depreciation.
No cost or percentage depletion is available for natural resources.
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Goodwill
The sale and purchase of goodwill is generally a transaction on capital account, and the
person paying for the goodwill will usually be unable to claim a deduction. No capital
allowances are available for goodwill.
Start-up expenses
Special relief is provided for start-up (or pre-trade) expenditure to allow for a deduction
in the year that trade commences. The expenses are only deductible if they would
have been deductible had they been incurred after the commencement of trade. These
expenses and any loss they create are ring-fenced and may only be deducted against
income from the trade to which the start-up costs relate.
Interest expenses
Generally, interest expenditure incurred in the production of non-exempt income and

for the purposes of trade is deductible. However, interest that is incurred to produce
income that is exempt from tax will not be allowed as a tax deduction. A special
dispensation applies to the deduction of interest on debt used to acquire shares in a
company, provided certain requirements are met.
Special rules apply to determine the amount of interest and timing of any deductions
taking into account all payments and receipts in respect of debt instruments with
interest being determined on the basis of an internal rate of return.
Certain debt instruments that are convertible to shares or may be settled in shares
are treated as hybrid debt instruments and no interest deduction is allowed in respect
thereof. These hybrid debt rules are significantly expanded from 1 April 2014 with both
the nature of the instrument and the manner in which the yield is calculated being
considerations in applying these debt rules.
In addition, rules are introduced that will limit the interest deduction for interest
paid between related parties from 1 January 2015 where such interest is not subject
to income tax or WHT on interest. In terms of these rules, interest deductions will
be limited to an amount determined with reference to 40% of taxable income before
interest and depreciation. Any excess interest may be carried forward to the following
year for deduction. The transfer pricing and thin capitalisation rules will continue to
apply to such interest.
Further interest deduction limitations also apply to interest paid on debt used to fund
acquisitions of shares or businesses under certain of the corporate rollover relief
provisions (see the Group taxation section). In terms of rules that apply from 1 April 2014,
interest deductions on such transactions will be limited to an amount determined with
reference to 40% of taxable income before interest and depreciation for the first six
years.
The deduction of cross-border interest paid to connected persons is subject to limitation
under transfer pricing rules (see Transfer pricing and thin capitalisation in the Group
taxation section).
Bad debt
Bad debts are tax deductible if the debt relates to an amount that has been included
in the taxpayers taxable income in any tax year if it is due at the end of the year of
assessment. A tax allowance is also provided for in respect of specifically identified
doubtful debts.
Any bad debts arising on loaned money is deductible if it was lent in the course of a
money-lending business.
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Donations to certain charitable organisations approved as public benefit organisations

are tax deductible, up to a maximum of 10% of taxable income.
Cost of inventory
The cost of inventory is, in principle, deductible as soon as the inventory is acquired.
However, at the end of each year, the cost of the inventory still on hand has to be added
to the companys income. Then in the next year, it can be deducted again. This has the
effect of timing the deduction of the cost of inventory to match the time of its realisation.
Assets acquired for shares issued
When assets are acquired by a company in return for shares issued to the seller, the
purchaser of the assets is deemed to have incurred expenditure equal to the market
value of the shares immediately after acquisition. Special rules apply in the case of crossissues of shares or where there is a mismatch in the value of the shares and assets.
Fines and penalties
Any fine or penalty imposed in respect of an unlawful activity carried out in South
Africa, or in any other country where it would be unlawful in South Africa, is not
Taxes
Most taxes (other than income taxes, donations tax, and dividends tax) are deductible
from taxable income for the corporation, provided they qualify for deduction under
general rules.
Losses may be carried forward indefinitely, provided an active trade or business of a

similar nature is carried on without interruption. There is no loss carryback in South
Africa.
Deductions may be claimed for royalties, managerial service fees, and interest charges
paid to foreign affiliates, provided such amounts approximate those that would be paid
to an unrelated party in an arms-length transaction.
Interest deductions may be limited in certain circumstances (see Interest expenses above
and Transfer pricing and thin capitalisation in the Group taxation section).
Group taxation
Group taxation is generally not permitted in South Africa. However, relief is given for
transactions between group companies to allow for reorganisations, provided certain
In general, the relief will only apply to transactions between companies within the
same group. A group of companies is defined as a controlling company and one or more
controlled companies in relation to that controlling company. A controlling company
means a company holding, directly or indirectly, at least 70% of the equity shares of
any other company. Foreign-incorporated companies do not form part of a group of
companies for the purposes of this relief unless effectively managed in South Africa,
although relief is extended to CFCs in certain circumstances.
Corporate rollover relief is available forasset-for-share transactions, amalgamation
transactions, intra-group transactions, unbundling transactions, and transactions
relating to liquidation, winding-up, and deregistration.
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The relief may cover the capital gains tax arising from the disposal of capital assets,
income tax arising from the disposal of a depreciable asset, income tax arising from the
disposal of trading stock, donations tax arising from the disposal of an asset, dividends
tax, VAT, securities transfer tax, and transfer duty.
Companies that financed intra-group transactions and liquidation transactions with debt
had to apply for approval to be able to claim the interest on the debt as a tax deduction
prior to 1 April 2014. This requirement fell away when the new rules for excessive debt
were introduced from 1 April 2014 (see Interest expenses in the Deductions section).
Transfer pricing and thin capitalisation
The provisions no longer separately addresses transfer pricing and thin capitalisation.
Rather, thin capitalisation is treated as simply a breach of the general arms-length
standard.
Where a transfer pricing adjustment is required to be made, that adjustment is subject to
a secondary adjustment where it is deemed to be a loan that is itself subject to transfer
pricing.
If one or more residents together, directly or indirectly, hold more than 50% of the
voting or participation rights in a foreign company, then it is a CFC in relation to
those residents. The income of a CFC is imputed to the residents in proportion to their
holdings, subject to certain exclusions and tax credits, where applicable. The most
notable exclusions are for high-tax CFCs and income attributable to foreign business
establishments.

Foreign tax credit
The South African Income Tax Act makes provision for a rebate against CIT in respect
of foreign taxes paid on foreign-sourced income or a deduction against income of
foreign taxes paid on SA-sourced income. In both instances, the taxpayer must be an SA
resident, the income must be included in taxable income and is not exempt, and that
income was subject to a foreign tax that is not recoverable. The rebate is limited to the
total normal tax payable calculated by applying the ratio of the total taxable income
attributable to the foreign tax to the total taxable income. The deduction, however, may
not exceed the income on which the foreign tax was levied.
A foreign tax rebate also applies to grant relief to amounts relating to services rendered
in South Africa that are subject to tax in a foreign jurisdiction where the general foreign
tax rebate does not apply.
The current costs related to certain R&D activities carried on in South Africa are 150%
deductible, with 100% of the cost automatically deductible and the remaining 50%
subject to pre-approval by a government-appointed approval committee. The cost of
machinery and other capital assets acquired for the purposes of R&D may be depreciated
40% in the first year of use, 20% in the second, 20% in the third year, and 20% in the
fourth year. Buildings used in the process of R&D may be written-off over a 20-year
period.
Headquarter company regime
A headquarter company regime encourages the use of South Africa as a location for
intermediate holding companies.
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The main benefits offered to a headquarter company are:

Exemption from South Africas CFC rules.

Exemptions on the headquarter companys dividend distributions.
Exemption from the WHT on interest in certain circumstances.
Exemption from South Africas transfer pricing rules on back-to-back loans, outbound
loans, back-to-back intellectual property (IP) licensing arrangements, and outbound
IP licensing arrangements.
Capital gains tax exemption upon the disposal of shares by the headquarter company.
The requirements for a headquarter company are as follows:
The headquarter company must be SA resident.
Each shareholder in the headquarter company must hold at least 10% of the
headquarter companys equity shares and voting rights. This means that a
headquarter company can never have more than ten shareholders.
At least 80% of the headquarter companys assets (measured on a cost basis and
excluding cash and certain bank deposits) must be comprised of certain assets related
to the foreign companies in which the headquarter company holds at least 10% of the
equity shares and voting rights. Specifically, these assets must be:
the equity shares in those companies
loans to those companies, and
IP licensed to those companies.
At least 50% of the headquarter companys gross income must be comprised of
dividends, interest, royalties, rentals, service fees, or proceeds from the sale of equity
shares or IP from its 10%-plus holdings, where the gross income exceeds ZAR 5
million.
Industrial policy projects
In 2008, a ZAR 20 billion incentive package for investors in energy efficient projects
was announced. The incentive is available for industrial projects participating in the
manufacturing sector (other than alcohol or alcohol related products, tobacco or tobacco
related products, arms and ammunition, and biofuels, which have a negative impact on
food security). Companies are divided into those with a qualifying status and those with
a preferred status. The status is determined in terms of a point system.
The proposed project must either be a brownfield project (expansion or upgrade of
an existing industrial project) or a greenfield project (a wholly new industrial project,
which uses new and unused manufacturing assets). Approved projects may be granted
a tax allowance known as an additional investment allowance equal to 55% (100%
if located in an industrial development zone) of the cost of any manufacturing asset
used in an industrial policy project with preferred status or 35% (75% if located in an
industrial development zone) of the cost of any manufacturing asset used in any other
approved industrial policy project.
Note that the additional investment allowance may not exceed ZAR 900 million in the
case of any greenfield project with a preferred status, ZAR 550 million in the case of any
other greenfield project, ZAR 550 million in the case of any brownfield project with a
preferred status, or ZAR 350 million in the case of any other brownfield project.
In addition to the above, a company may also claim a deduction known as an additional
training allowance.
Special Economic Zones (SEZs)
An SEZ incentive has been introduced for companies carrying on business in an SEZ
comprising of a reduced corporate tax rate of 15% as well as a 10% allowance in respect
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of the cost of new and unused buildings owned by a qualifying company or any new or
unused improvements to any building owned by a qualifying company.
In addition, employment incentives have also been introduced for employers carrying
on a trade in the SEZ that will allow for an employees tax reduction for the employer in
respect of qualifying employees, up to a prescribed monthly amount.
Energy efficiency savings
The energy efficiency savings incentive provides an income tax deduction to qualifying
taxpayers. The deduction equates to ZAR 0.45 for each kilowatt hour (or equivalent)
saved by the taxpayer during the relevant year of assessment against a baseline from the
beginning of the year.
International shipping incentive
Income from international shipping of a resident company that holds a share in a South
African flagged ship is exempt from income tax with effect from 1 April 2014. Qualifying
shipping companies can also use a currency other than the rand as their functional
currency.
Venture capital companies
In order to assist small and medium-sized businesses to raise capital to finance

businesses, a tax incentive for investors in small and medium-sized enterprises through
venture capital companies was introduced.
A deduction is allowed from the income of a taxpayer in respect of expenditures actually
incurred by that person in respect of shares issued to that person by a venture capital
company.
Withholding taxes
Payments to residents
The only payments to residents that are subject to WHT are in respect of dividends,
although resident companies are exempt from the dividend WHT.
Royalties payable to non-residents
Royalties and know-how payments made to non-residents for the use of or right to use
IP rights in South Africa are deemed to be from an SA source. The payer of the royalty
or know-how payment is obligated to deduct a WHT of 12% (increased to 15% from
1 January 2015) of this payment, which is a final tax payable by the recipient of such
income.
Dividends payable to non-residents
A dividend WHT of 15% applies to any dividend paid by a resident company or nonresident company in respect of shares listed on an SA exchange to SA residents. The tax
is imposed on the beneficial owner of the dividend and not on the company, with the
exception of in specie dividends. The payer of the dividend or regulated intermediary
is obligated to deduct the 15% WHT from the payment. The treaty rate is only the
maximum allowable rate to be charged by the treaty countries; where this rate is higher
than the domestic tax rate, the latter will apply.
Interest payable to non-residents (as of 1 January 2015)
A 15% WHT on interest will apply to interest payable from an SA source to non-residents
on certain debt instruments from 1 January 2015. The resident payer of the interest is
obligated to deduct the 15% WHT from the payment.
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Cross-border service fees payable to non-residents (1 January 2016)
A 15% WHT on cross-border service fees will apply to service fees payable to nonresidents from 1 January 2016 and will be a final tax. The WHT applies to service fees for
technical, management, or consultancy services from an SA source.
The WHT will not apply if the person rendering the service is in South Africa for more
than 183 days in the 12-month period before the service fee is paid or the service fee
is connected to a PE of the foreign person in South Africa or the amount constitutes
remuneration paid to an employee.
Treaty rates for dividends, interest, and royalties
The WHT may be reduced by the terms of the relevant tax treaty, as follows:
Recipient
Non-treaty
Treaty:
Algeria (1, 11)
Australia (1, 2, 12D)
Austria (11D)
Belarus (1, 2, 6, 11D, 27)
Belgium (1, 11)
Botswana (1, 2, 11)
Brazil (1, 2, 7, 11)
Bulgaria (1, 2, 6, 8, 11D)
Canada (1, 4, 12D, 33)
China, Peoples Republic of (1, 5, 35, 39, 40, 41)
Croatia (11, 26)
Cyprus (1, 10, 26)
Czech Republic (1, 11D, 26)
Democratic Republic of Congo (1, 11, 35)
Denmark (1, 11, 26)
Egypt (1)
Ethiopia (1, 2)
Finland (1, 12, 26)
France (1, 2, 12D, 28)
Germany (2, 13D)
Ghana (1, 2, 12, 32)
Greece (1, 2, 9, 11D)
Grenada (29, 36, 37, 38)
Hungary (1, 11D, 26)
India (1)
Indonesia (1, 12)
Iran (1)
Ireland (1, 12D, 26)
Israel (2, 3)
Italy (1, 14)
Japan (1, 15)
Korea, Republic of (1, 11D)
Kuwait (1, 2, 10, 26)
Lesotho (1)
Dividends
15
WHT (%)
Interest
(1 January 2015)
15
Royalties
12
10/15
5/15
5/15
5/15
5/15
10/15
10/15
5/15
5/15
5
5/10
0
5/15
5/15
5/15
15
10
5/15
5/15
7.5/15
5/10
5/15
0
5/15
10
10/15
10
5/10
25
5/15
5/15
5/15
0
15
10
10
0
5/10
10
10
15
5
10
10
0
0
0
10
0
12
8
0
0
10
5/10
8
15
0
10
10
5
0
25
10
10
10
0
10
10
10
0
5/10
0
10
10/15
5/7/10
6/10
7/10
5
0
10
10
0
15
20
0
0
0
10
5/7
15
0
10
10
10
0
0/15
6
10
10
10
10
South Africa
1833
South Africa
Recipient
Luxembourg (1, 11D, 26)
Malawi (2, 22, 29)
Malaysia (1, 2, 11)
Malta (1, 12, 16, 35)
Mauritius (1, 12, 26)
Mexico (1, 2, 12)
Mozambique (1, 2, 11)
Namibia (1, 11)
The Netherlands (1, 2, 12, 25, 26)
New Zealand (1, 11, 34)
Nigeria (1, 2, 12)
Norway (1, 2, 11D, 26)
Oman (1, 10, 12, 26)
Pakistan (1, 12)
Poland (1, 11D)
Portugal (1, 2, 17D)
Romania (1)
Russia (2, 18)
Rwanda (1, 11)
Saudi Arabia (1, 2, 12D)
Seychelles (1, 2, 12, 26)
Sierra Leone (29, 36, 37, 38)
Singapore (1, 12, 26)
Slovak Republic (1, 11D, 26)
Spain (1, 2, 11D)
Swaziland (1, 11)
Sweden (1, 2, 19, 28)
Switzerland (1, 2, 20D)
Taiwan (1, 12D)
Tanzania (1, 21)
Thailand (1, 11, 30)
Tunisia (1, 31)
Turkey (1, 11D)
Uganda (1, 11)
Ukraine (1, 20)
United Kingdom (2, 22, 26)
United States (1, 2, 23)
Zambia (2, 24, 26)
Zimbabwe (2, 24, 29)
Dividends
5/15
15
5/10
5/10
5/15
5/10
8/15
5/15
5/10
5/15
7.5/10
5/15
5/10
10/15
5/15
10/15
15
10/15
10/20
5/10
5/10
0
5/15
5/15
5/15
10/15
5/15
5/15
5/15
10/20
10/15
10
10/15
10/15
5/15
5/10/15
5/15
15
15
WHT (%)
Interest
(1 January 2015)
0
10
10
10
0
10
8
10
0
10
7.5
0
0
10
10
10
15
10
10
5
0
15
0
0
5
10
0
5
10
10
10/15
5/12
10
10
10
0
0
0
15
Royalties
0
0
5
10
0
10
5
10
0
10
7.5
0
8
10
10
10
15
0
10
10
0
15
5
10
5
10
0
0
10
10
15
10
10
10
10
0
0
0
0
Notes
D refers to direct capital holding.
1.
2.
3.
4.
5.
1834
Recipient is the beneficial owner of the royalty.

Royalty is subject to tax in recipient country.
15% is levied on royalties for cinematographic or television films.
The maximum rate for copyright royalties, royalties for use of computer software, and patents
concerning industrial, commercial, and scientific experience is 6% of the royalties paid; otherwise,
10%.
Maximum rate of 10% on royalty of the adjusted amount (being 70% of the gross royalties) for use of
industrial, commercial, or scientific equipment.
South Africa
South Africa
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
The 5% rate applies to royalties for the use of a copyright. A 7% rate applies to royalties for the use
of patents, trademarks, designs, models, etc.
In respect of right to use industrial, commercial, or scientific equipment and transport vehicles, a 10%
rate applies.
The lower rate of 5% applies to any cultural dramatic musical, or other artistic work (but not
including royalties in respect of motion picture films) as well as industrial, commercial, or scientific
works. The rate of 10% applies in all other cases.
The 5% lower rate applies to use of literary, artistic, and scientific works. The 7% lower rate applies
to right of use of patents, trademarks, designs, and models.
No right to tax dividends in payor state if the beneficial owner of the dividend is resident in the payee
state.
Lower rate applies to a beneficial owner that is a company and has a minimum holding of 25% of
capital, and the higher rate applies in other cases.
voting shares, and the higher rate applies in other cases.
capital and a minimum 12-month holding period prior to the end of the accounting period prior to the
dividend payment, and the higher rate applies in other cases.
voting shares and a minimum six-month holding period prior to the end of the accounting period prior
to the dividend payment, and the higher rate applies in other cases.
SA resident payor to Maltese resident beneficial owner (Maltese resident payor to SA resident
beneficial owner is limited to tax on profits).
capital and a minimum two-year uninterrupted holding period prior to the dividend payment, and the
higher rate applies in other cases.
Lower rate applies to a beneficial owner who has a minimum holding of 30% of capital and a
minimum direct investment of 100,000 United States dollars (USD) in the company declaring the
dividend, and the higher rate applies in other cases.
capital, and the higher rate applies in other cases. However, a most favoured nations clause applies,
which will limit the above rates to the lowest treaty rate in terms of any other treaty.
Lower rate of 5% applies to a beneficial owner that is a company and has a minimum holding of
10% of capital. Lower rate of 10% applies in all other cases. 15% rate applies to all dividends from
property investment companies.
voting power (directly), and the higher rate applies in other cases.
The treaty contains no provisions regarding dividends WHT, thus the domestic rate will apply.
The Netherlands Protocol has a most favoured nations provision whereby the rate most favourable
in any other treaty will apply over the default treaty rate. This, however, only applies to treaties
concluded after this treaty.
No right to tax interest in payor state if the beneficial owner of the interest is resident in the payee
state.
The 5% rate applies to interest derived by a bank or any other financial institution, and the 10% rate
applies in other cases.
No right to tax interest in payor state if the beneficial owner of the interest is resident in the payee
state and provided interest is taxable in that other state.
No specific provision is made for interest in the DTA.
The 10% rate applies to interest received by a financial institution (including an insurance company),
and the 15% rate applies in other cases.
The 5% rate applies to interest on loans made by banks, and the 12% rate applies in other cases.
The 5% rate applies if the interest is paid to a bank; the 10% rate applies in other cases.
In Canada, a beneficial owner that is a company controls a minimum of 10% of the voting power
(directly/indirectly), but excludes non-resident owned investment corporation resident in Canada.
In New Zealand, dividends are taxed at a flat rate of 15%.
No right to tax interest in payor state if the beneficial owner is the government of the other state or a
government entity.
No specific provision is made for royalties in the DTA.
No right to tax interest on stocks and securities issued by any government other than South Africa,
even if business is carried on in South Africa, if taxed in residence state.
No right to tax dividend in payor state if recipient is resident in payee state.
Lower rates for royalties do not apply if attributable to a PE in the payor state or the right or property
on which royalty is paid is attributable to PE in payor state.
The 10% rate applies if the beneficial owner is resident in the payee state.
Lower rate of 5% applies to the dividend if beneficial owner is resident in payee state.
South Africa
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South Africa
Non-resident entertainers and sportspersons
A WHT at the rate of 15% applies to all payments made to non-resident entertainers and
sports persons in respect of their activities exercised in South Africa.
Disposal of immovable property by non-residents
Any person who pays an amount to a non-resident in respect of the sale of immovable
property in South Africa must withhold from the amount payable an amount equal to:
5% if the non-resident seller is an individual
7.5% if the non-resident seller is a company, or
10% if the non-resident seller is a trust.
The amount so withheld is not a final tax for the non-resident seller. Instead, this
amount is regarded as an advance payment of the non-resident sellers normal tax
liability for the year of assessment during which the property is disposed of. The nonresident seller is still obligated to submit an income tax return for that year.
Tax administration
Taxable period
The corporate tax year is the same as the companys financial year. It may be changed
upon application showing reasonable cause.
Tax returns
Annual income tax returns must be submitted within one year from the end of the
companys tax year. The annual tax return includes a supplementary reconciling return
where requested. Furthermore, schedules apply for CFCs, short-term insurers, mining
companies, headquarter companies, and learnership allowances.
Signed off financial statements are required to be submitted with the annual tax return.
Payment of tax
Payments are made with provisional returns filed at six-month intervals from the tax
year-end based on an estimate of taxable income for the year. Interest is charged on any
underpayment outstanding for more than six months after the tax year-end, except in
the case of February year-ends, in which case it is seven months. Any balance (together
with interest) is then paid following assessment.
Tax audit process
There is no prescribed audit process, and an audit can be initiated by any factor as
determined by the SARS. The audit or inspection will commence with a request from
the SARS for the taxpayer to make available any such records or information as may be
required.
Tax debts to the state prescribe after a period of 15 years. Tax returns submitted that
have been assessed may not be reopened after a period of three years from date of
assessment by the SARS or five years if it is a self-assessment by the taxpayer, unless
there has been fraud, misrepresentation, or non-disclosure by the taxpayer.
The SARS, in their 2013/14 to 2017/18 Strategic Plan, stated that they will focus on the
following areas:
Large business and transfer pricing.
The construction industry.
1836
South Africa
South Africa
Illicit cigarettes.
Undervaluation of imports in the clothing and textile industry.
Small business and cost of compliance.
South Africa
1837
Spain
PwC contact
Mario Lara
PwC Tax & Legal services
Torre PwC, P de la Castellana, 259 B
28046 Madrid
Spain
Tel: +34 915 684 400
Over the past year, the following significant amendments have been made to Spanish
law on the taxation of companies:
Royal Decree-Law 4/2014, establishing urgent measures on refinancing and business
debt restructuring, was passed on 7 March 2014. The main measures laid down in this
law that affect the taxation of companies are:
As a general rule, corporate income tax (CIT) is not levied on debt capitalisations.
For the capitalisation of a credit granted by the original creditor, the company or
entity that increases its capital will not include any income in its taxable income,
regardless of how the operation is treated for accounting purposes. However, if
the debt has been acquired by the creditor at a discount, the difference between
the nominal value of the credit and its cost should be included in the contributors
taxable income. This reform changes the regulations in force up to the date of the
reform, as previously it was the beneficiary company/entity that was taxed on the
income obtained as a result of the contribution.
Taxation of income obtained by a debtor as a result of an approval of a debt remission
or deferral is deferred. The income is included in the debtors taxable income as
and when the financial expenses incurred for the debt are recorded. If the income
obtained is higher than the financial expenses, the income will be included in taxable
income in proportion to the financial expenses recorded in the year for this concept
with respect to the total amount of expenses.
These reforms take effect for tax years starting on or after 1 January 2014.
With effect from 9 March 2014, notarial instruments that contain remissions from
or reductions of sums of loans, credits or other obligations of debtors included in
refinancing agreements, or out-of-court settlements of payments as established in the
Spanish Insolvency Act are exempt from transfer tax and stamp duty when the taxpayer
is the debtor.
Law 22/2013, approving the State Budget for 2014, was passed on 23 December 2013.
The main measures laid down in this lawthat affect the taxation of companies are:
The reduced tax scale for micro companies remains unchanged for 2014.
The staff training tax credit is maintained in 2014 for expenses and investments
incurred in the year to train staff in the use of new communication and information
technologies.
The two traditional methods to calculate advance tax payments (taxable income and
tax liability methods) are maintained for tax periods starting on or after 1 January
2014.
See Payment of tax in the Tax administration section for further information.
1838
Spain
Spain
The obligation of Spanish tax resident companiesthat change their residence to
another country to include the difference between the accounting value and market
value of their assets in their CIT taxable income unless such assets are allocated to a
permanent establishment (PE) in Spain and the obligation to include assets of a PE in
Spainthat are transferred abroad in their CIT taxable income (exit tax) is amended
as a result of a judgment of the European Union (EU) Court of Justice, which will take
effect for tax periods starting on or after 1 January 2013.
With this reform, when assets are transferred to other EU member states, exit tax may
be deferred until the assets are transferred to a third party. Late payment interest will
accrue in this case, and guarantees should be furnished in accordance with Spanish
General Tax Act. The obligation to include in the PE located in Spain the difference
between the accounting value and the market value of the assets generated from
restructuring transactions taxed under a special tax neutrality system and which lose
the link with Spain may also be delayed for the reasons and with the requirements
established for the case referred to above.
Law 16/2013, which establishes some environmental tax measures and adopts other
financial and tax measures, was passed on 29 October 2013. The main measures
contained in this reform that affect the taxation of companies are:
The tax deductibility of impairment allowances of share capital or equity investments
in companies has been eliminated for tax periods starting from 1 January 2013.
See Equity investments in companies in the Income determination section for further
information.
Taking effect for tax periods starting from 1 January 2013, the tax deductibility of
losses obtained abroad by means of a PE has been eliminated.
See Permanent establishments and interests in joint ventures in the Income
determination section for further information.
The base of the tax credit for Spanish film productions has changed, and the
progressive reduction of this tax relief up to its elimination has been removed. The
tax credit will be maintained indefinitely.
See Other CIT relief in the Tax credits and incentives section for further information.
For disposals of fixed assets and non-current assets held for sale, which are real
property under the Spanish CIT Act, monetary depreciation can be deducted from the
income obtained so that the real capital gain adjusted for inflation is taxed. Taking
effect for tax periods starting from 1 January 2013, this adjustment will be reduced
by the amount of the balance sheet review regulated in Law 16/2012, which will
greatly diminish the positive effects intended with this measure.
See Balance sheet restatement and special tax in the Deductions section for further
information.
The levying of higher rates for advance tax payments of companies that apply the
taxable base method established in Section 45.3 of the Spanish CIT Act is extended to
2014.
See Payment of tax in the Tax administration section for further information.
For companies that should calculate advance tax using the tax base method, the
obligation to include in the taxable income of the advance tax payment 25%
Spain
1839
Spain
of the amount of dividends and income regarding which the tax exemption for
foreign-source dividends and capital gains is applicable is extended to tax periods
commencing in 2014 and 2015.
The application of the minimum advance tax payment for taxpayers whose turnover
of the prior year for accounting purposes is not under 20 million euros (EUR) is
extended to tax periods commencing in 2014 and 2015.
See Minimum advance payment for tax periods commencing during the period 2012 to
2015 in the Tax administration section for further information.
The limits for application of pending amounts generated from unrestricted
amortisation/depreciation are maintained for tax periods commencing in 2014 and
2015. This tax relief was eliminated with effect from 31 March 2012, but pending
amounts corresponding to investments made before this date may continue applying
this tax incentive, although with certain limits, which was initially applicable only to
tax periods commending in 2012 and 2013.
The rules limiting the offsetting of tax-loss carryforwards will also be applicable
in 2014 and 2015. These limits will not apply to any income corresponding to debt
relief resulting from an agreement with unrelated creditors approved in a tax period
starting from 1 January 2013.
See Net operating losses in the Deductions section for further information.
The application of the 1% limit for tax deductibility of goodwill acquired from third
parties, merger goodwill, and international goodwill (as opposed to the general 5%)
is extended to tax periods starting in 2014 and 2015.
The application of the 2% limit for the annual maximum tax deductibility of
intangible assets with an undefined useful life (as opposed to the general 10%) is
extended to tax periods starting in 2014 and 2015.
For tax periods starting in 2014 and 2015, the limit of tax relief applied on tax liability
is maintained at 25% of the tax liability after internal and international double tax
deductions and tax allowances for income obtained in Ceuta and Melilla, for export
activities, and for local public services (as opposed to the 35% limit that is generally
applicable). This limit will be 50% (60% generally) when the tax relief for research
and development (R&D) and technological innovation corresponding to the expenses
and investments made in the tax period exceeds 10% of the tax liability after internal
and international double tax deductions and the aforementioned tax allowances.
These limits will also apply to tax relief for reinvestments in extraordinary profits.
Law 14/2013, providing support to entrepreneurs and their internationalisation, was
passed on 27 September 2013. The main measures contained in this reform that affect
the taxation of companies are:
The reduction of income generated from certain intangible assets, also known as
patent box, has significantly changed. The change is effective for transfers of the
right to use or trade on intangible assets made from 29 September 2013 onwards.
See Amortisation of intangibles in the Deductions section for further information.
Tax relief for R&D and technological innovation can be excluded from the limits
on tax relief applied on tax liabilities, which will have a cost of 20% of the tax
relief applied, meaning that, if certain requirements are met, 80% of the tax relief
for R&D and technological innovation may reduce tax liability after double tax
deductions and tax allowances to zero and any excess tax relief may be refundable
by the tax authorities. This exclusion is only applicable for tax relief generated in tax
1840
Spain
Spain
periods commencing in 2013 and following years. The tax relief applied or paid for
technological innovation in accordance with the foregoing comments may not exceed
a total of EUR 1 million per year, and the sum of this tax relief applied or paid for
R&D and technological innovation in accordance with the foregoing comments may
not exceed a total of EUR 3 million per year.
See R&D and technological innovation in the Tax credits and incentives section for further
information.
Tax relief has been introduced for small companies for invested profits, which
consists of a reduction of 10% of taxable profits for small companies and 5% for micro
companies. The tax relief may be applied for profits generated in tax periods starting
See Tax relief for invested profits in the Tax credits and incentives section for further
information.
The tax relief for increases in the number of disabled workers contracted per year
has been modified. Under the new regulations, which are applicable for tax periods
starting from 1 January 2013, this tax credit can be applied for increases in the
number of disabled workers contracted per year on a permanent and full-time basis.
The tax credit is EUR 9,000 per worker contracted whose level of disability is 33%
or more, but less than 65%, and EUR 12,000 per worker contracted whose level of
disability is 65% or more.
See Other CIT relief in the Tax credits and incentives section for further information.
To mitigate companies cash problems, a special tax system for value-added tax (VAT)
(cash criteria system) has been established, which came into effect on 1 January
2014. With this system, taxpayers whose turnover for tax purposes does not exceed
EUR 2 million can opt to apply a system that delays the accrual and deposit of output
VAT for most of their sales operations until payment is fully or partially collected
from their customers and, at the latest, by 31 December of the year following that in
which the operations were carried out. The right to deduct input VAT may also be
delayed to such moment by taxpayers who apply this special tax system. The option
to apply this tax system will also take effect for the persons for whom the operations
are carried out, irrespective of whether they opt to apply the tax system or not, as
their entitlement to the deduction of input VAT will be delayed until its accrual (when
payment is made or on 31 December of the following year).
Finally, a cash criteria tax system, which is almost identical to that of VAT, has been
introduced for the Canary Island Indirect Tax.

The general CIT rate in Spain is currently 30%. Other tax rates (ranging from 25%
to 35%) may apply, depending on the type of company that is taxed and the type of
business carried out.
For PEs in Spain of foreign companies, non-resident income tax (NRIT) is chargeable on
incomethat may be allocated to the PE at a 30% tax rate.
NRIT is also chargeable on non-established foreign companies/individuals that obtain
income in Spain (see the Withholding taxes section).
Spain
1841
Spain
Small companies
Companies with a turnover under EUR 10 million in the preceding tax year are
considered small companies for CIT purposes and are taxed at the following rates:
Taxable income up to EUR 300,000 is taxed at a 25% tax rate.
The part of the taxable income that exceeds this threshold is taxed at the general tax
rate of 30%.
The tax rate levied on companies forming part of a group depends on the total amount
of the group companies turnovers. The general 30% tax rate is levied when the sum of
the group companies turnovers exceeds EUR 10 million.
Micro companies
Lower tax rates are established for companies that maintain or increase their staff levels
in the tax years 2009 through 2014.
The rates for tax years 2011 through 2014 are as follows:
Taxable income up to EUR 300,000 is taxed at a 20% tax rate.
The part of the taxable income that exceeds this threshold is taxed at a 25% tax rate.
These lower rates of 20% and 25% are applicable subject to compliance with, amongst
others, the following requirements:
The income generated by all of the companys business activities does not exceed EUR
5 million.
The companys total staff does not exceed 25 employees.
The companys average number of employees during the 12-month period following
the commencement of the tax year in question is not less than one employee and not
less than the companys average number of employees during the 12-month period
prior to the first tax year commencing as of 1 January 2009.
Newly created companies
Companies that are incorporated on or after 1 January 2013, carry on a business activity,
and comply with certain requirements are taxed at a reduced rate of 15% for the first
EUR 300,000 of income and 20% on the remaining amount for the first tax period when
they generate positive taxable income and during the following tax period.
Business and professional activities tax
The business and professional activities tax is a local direct tax levied annually on
the performance in Spain of business, professional, or artistic activities, regardless of
whether or not they are carried out in a particular premises. The tax payable depends on
different factors, such as the type of activity carried out and the location and size of the
premises where the activity is carried out. As regards limits, it may not exceed 15% of
the presumed average profits of the professional/economic activity.
CIT payers and non-resident companies carrying on an activity in Spain through a PE
are exempt from this tax if their net turnover for the tax year of the last CIT/NRIT return
filed prior to the date of accrual of the local tax (1 January) was less than EUR 1 million.
Corporate residence
A company is resident in Spain and subject to CIT on its worldwide income when:
it has been incorporated in accordance with Spanish law
its registered office is in Spain, and/or
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Spain
its effective head office is in Spain.
Under Spanish law, a companys effective head office is in Spain when its business
activities are managed and controlled from Spain.
Companies established in a country or territory where no tax is levied or that is a tax
haven are deemed to be tax resident in Spain in the following cases:
When the companys main assets consist, directly or indirectly, of property located or
rights fulfilled or exercised in Spain.
When the companys core business activity is carried on in Spain.
This presumption may be refuted by the company if it can prove that it is effectively
administered and managed in the country or territory in which it is established and
that it was incorporated and operates for valid economic and business reasons and not
merely for the purpose of managing securities or other assets.
Taxpayers operating in Spain through a PE are subject to NRIT.

Most Spanish tax conventions for the avoidance of double taxation contain a definition
of PE in line with Organisation for Economic Co-operation and Development (OECD)
criteria.
In the absence of a tax convention, internal law states that an individual or company is
considered to operate through a PE when, by any legal means, one has continuous or
habitual work facilities in Spain or a place to do any kind of work where one performs all
or part of ones activity, or when one acts in Spain through an agent with powers to enter
into an agreement in the name and on behalf of the non-resident individual or company,
provided said powers are exercised on a regular basis.
In particular, management offices, branches, offices, factories, workshops, warehouses,
shops or other establishments; mines, oil or gas wells, quarries, farms, forestry
facilities, livestock farms, or any other site where natural resources are collected; and
construction, installation, or assembly sites whose duration lasts more than six months
will be considered PEs.
Other taxes
Spanish VAT is payable on supplies of goods and services carried out in Spanish VAT
territory and on imports/intra-EU acquisitions of goods and services. There are three
rates for the different types of goods and services, which are as follows:
Ordinary rate of 21%, applied on regular supplies of goods and services.
Reduced rate of 10%, applied on basic necessities (e.g. food and agricultural products
not included in the super reduced 4% rate, dwellings, and other qualifying services).
Super reduced rate of 4%, applied on basic necessities other than those classified
under the reduced rate (e.g. bread, milk, books, medicine).
In the Canary Islands, a specific tax is applied instead of VAT, called the Canary Island
General Indirect Tax (IGIC). The ordinary IGIC rate is 7%, and the other IGIC rates are
0%, 2.75%, 3%, 9.5%, and 13.5% (20% for tobacco). IGIC is similar to VAT, but it has
some significant differences, such as the exemption established for telecommunications
services. Imports of tangible goods into the Canary Islands are subject to this tax.
Spain
1843
Spain
In Ceuta and Melilla, sales tax is applied instead of VAT.
Customs duties
Many goods imported into Spain from outside the European Union are subject to
customs duties. The rates of duty are provided by the EUs Common Customs Tariff and
vary widely.
Excise duties
Excise duties are chargeable on most hydrocarbon oil products, alcoholic drinks, and
tobacco products imported into or produced in Spain. Purely as examples, most road
fuels carry a duty of about EUR 0.33 per litre, cigarettes carry a duty of about EUR 24.1
per thousand (plus 51% of the maximum retail sale price), tobacco of about EUR 22 per
kg (plus 41.5% of the maximum retail sale price), most wines of EUR 0 per litre, and
spirits of about EUR 9.13 per litre of pure alcohol included.
Tax on tax-haven-resident companies owning real estate in Spain
Companies resident in a tax haven for tax purposes that own real estate or hold real
property rights in Spain are subject to a special levy accrued on 31 December and
declared and paid in January of the following year in the place and manner established
by law. The tax is equal to 3% of the assessed value of the real estate.
Transfer tax
A transfer tax, which is usually 5% to 10%, depending upon the region, is generally
levied on inter vivos transfers, including real estate transfers and real estate leases that
are exempt from VAT.
Second and ulterior transfers of buildings are exempt from VAT and thus, they are in
principle, subject to transfer tax.
Residential leases are exempt from VAT and therefore subject to transfer tax.
Transfers of quoted or unquoted (listed or unlisted) securities are, in principle, exempt
from both transfer tax and VAT. This exemption will not apply for transfers of unlisted
securities of a company in the secondary market that tries to evade the tax that is
payable on a direct transfer of real estate that it owns. For this purpose, Spanish law
establishes certain cases where it is understood that there is an intention to evade tax.
This exception will not apply to transfers of securities received as a result of the
incorporation by banks of asset management companies and to transfers of securities
of banks affected by the integration plans regulated by Royal Decree-Law 9/2009,
which will therefore be exempt from transfer tax. In addition, acquisitions of assets
in the Canary Islands may be exempt from transfer tax (and from IGIC) when certain
requirements are complied with.
Restructuring transactions are also exempt from transfer tax. For these purposes,
mergers, spin-offs, exchanges of shares, and certain in-kind contributions are considered
to be restructuring transactions.
Stamp duty
A stamp duty is mostly levied on notarial instruments and records documenting

transactions that have an economic value and need to be registered in public registries
(e.g. company, land, and industrial property registries). Stamp duty is incompatible
with transfer tax and capital duty, but compatible with VAT. The general rate is between
0.75% and 1.5%, depending on the region of Spain and the taxable event.
Stamp duty is also levied on certain commercial (e.g. bills of exchange, promissory
notes), court, and administrative documents.
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Capital duty
1% capital duty is levied on capital reductions and company dissolution, to be paid by

the shareholders.
Capital duty is incompatible with transfer tax and stamp duty in certain cases, but it is
compatible with VAT.
Payroll taxes
Employers are required to withhold a percentage of their employees salaries and

benefits as a payment on account of their personal income tax (PIT). The rate of
withholding is a progressive rate of between 24.75% and 52%, depending on the
employees personal circumstances and income.
Employers are required to pay social security contributions. The rate of the contributions
under the general social security contribution regime is the fixed rate of 29.9% plus a
variable rate for occupational accidents (e.g. 1% for office work).
Employees are also required to pay social security contributions. Under the general
social security contribution regime, the rate of social security contributions is 6.35%.
Employers should deduct this amount from the amounts that they pay to employees.
The rates of social security contributions stated above should be applied on the
employees total monthly gross employment income, whether in cash or in kind, with
a minimum monthly contribution base of between EUR 753 and EUR 1,051.50 (the
same as in 2013), depending on the employees professional category, and a maximum
monthly contribution base of EUR 3,597 (EUR 3,425.75 in 2013).
Both parts of the social security contributions (employer and employee) should be paid
by the employer to the Social Security Treasury.
Other local taxes
In addition to the taxes stated above, the following other local taxes may be charged on
companies:
Real estate tax, levied annually by local authorities on the ownership of real estate.
Local tax levied on the increase in the value of urban land, chargeable when urban
real estate is sold.
Motor vehicle tax, charged on the ownership of vehicles.
Tax on constructions, installations, and building works, charged on the cost of certain
works that require town planning licences.
Waste collection fees.
Branch income
Income obtained by a branch in Spain of a non-resident company is taxed at the
standard CIT rate of 30% and, in most cases, the regulations established by tax law for
resident companies are applicable.
Payments made by a branch to its head office or a PE of its head office for royalties,
interest, commissions, or technical assistance fees are not tax deductible. Management
and general administrative expenses incurred by the foreign head office that can be
allocated to the branch are tax deductible if the payments for these expenses are made
following a criteria of continuity and rationality and provided that certain documentary
requirements and other formalities are fulfilled.
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Under Spanish law, income obtained by a branch that is repatriated to its head office
is taxed at source at the general withholding tax (WHT) rate of 21% (applicable rate
from 1 January 2011 to 31 December 2014). This tax is not chargeable in the case of
a PE of a company resident in the European Union (unless the company is resident in
a tax haven). Most tax treaties signed by Spain do not establish any provisions on this
matter, and, in such cases, no tax is chargeable on income repatriated by branches.
Some tax treaties, such as the treaties with Canada, Indonesia, and the United States
(US), expressly establish a tax on income repatriated by branches. For example, US head
offices are taxed at a 10% rate on the repatriated profits of a Spanish branch under the
US/Spanish tax treaty.
The general rule for determining income for CIT purposes is that accounting rules must
be followed unless tax law establishes otherwise. In order to maintain this consistency,
CIT/PE NRIT returns include pages in which the companys accounting/commercial
balance sheet and profit and loss account figures must be entered.
In Spain, the tax authorities are authorised to modify accounting results exclusively
for the purpose of determining tax results if they observe that a companys accounting
results have not been calculated in accordance with Spanish Generally Accepted
Accounting Principles (GAAP).
Inventory valuation
Inventory is valued at acquisition price or production cost under the average and first in
first out (FIFO) valuation methods (the replacement and base stock valuation methods
may only be used in exceptional cases). Again, since there are no specific tax rules
for determining taxable income, accounting rules are also applicable for calculating
valuation and obsolescence provisions for inventory.
Capital gains and losses
Capital gains are taxable in the tax year in which they arise. They are treated as normal
income and taxed at the standard CIT rate of 30% (in the case of gains from real estate
after taking into consideration an increase in the cost base for tax indexation purposes).
On meeting certain requirements, companies may be eligible for a tax credit for
reinvesting the proceeds obtained on the transfer of the assets from which the capital
gain arises.
Please see the Tax credits and incentives section for a description of a tax credit for
reinvestment.
For operations where payment is deferred or paid in instalments, the income is obtained
proportionally as the corresponding payments are made, unless the taxpayer opts to be
taxed in accordance with the accrual criteria.
For tax periods commencing on or after 1 January 2013, special rules apply to capital
losses arising from transfers of shares, which may reduce the amount of the loss by
the amount of the dividends that have been received from the company whose shares
are transferred during the holding period on which a double tax deduction has been
applied.
Dividend income
The amount of dividends included in the calculation of taxable income must be the gross
amount.
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Upon meeting certain requirements, companies may be eligible for a tax credit for
dividends equal to the tax rate applied by the company on the dividends received. This
tax credit is generally allowed for the total dividends received from taxable domestic
companies when the interest of the company receiving the dividend in the other
company is 5% or more and such interest has been held for at least one year. This oneyear holding period is deemed to be complied with if it is completed after the dividend is
distributed.
This tax regime is, to some extent, the same as a tax exemption regime. When an interest
in a company is less than 5% or is held for less than one year, the tax credit is 30% of half
of the amount of the dividends received.
In addition, taxation on capital gains arising from the sale of shares in domestic
companies by a company with at least a 5% interest in the subsidiary held for at least one
year prior to the sale can be reduced by means of a tax credit at the tax rate applicable
on the undistributed part of the subsidiarys profits generated during the companys
holding period. The reason for this tax relief is that this capital gain is understood to be
an underlying dividend.
Internal tax credits for the avoidance of double taxation may be carried forward for up
to seven years.
The elimination of the tax deductibility of portfolio provisions for tax periods starting
from January 2013 has introduced complex limitations to the rules on the avoidance of
double taxation for distributions of dividends generated both inside and outside Spain.
Please see Foreign income below for a description of the taxation of dividends received from
foreign companies.
Stock dividends
CIT is not levied on bonus shares (i.e. shares partially or totally given to shareholders in
a capital increase charged against distributable reserves), although they must be taken
into account when calculating the average cost of shares held for the levying of tax when
the shares are sold.
Interest income
Interest income is treated as normal income and taxed at the standard CIT rate of 30%.
The following items, amongst others, are excluded or deferred from taxable income:
Distributed dividends corresponding to profits obtained by companies in tax years in
which the flow-through tax regime (internal and international) has been applied.
Assets written up in accordance with revaluation laws and tax-protected
restructuring transactions involving accounting capital gains.
Foreign income
Tax relief on foreign income
Resident companies are taxed on their worldwide income. For foreign-source income,
total or partial tax relief in the form of tax credits or exemptions is given if tax is levied
on the income in both Spain and the foreign country where the income has been
generated.
This tax relief may be available for the following:
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Economic double taxation, which is when the same income is taxed in the hands of
two different taxpayers. For example, another government taxes a foreign company
on the income earned in that country and a Spanish resident shareholder is taxed
on the dividends that it receives from the foreign company or the capital gains from
transfers of its shares.
Juridical double taxation, which is when the same income is taxed in two countries
in the hands of the same taxpayer. For example, the income is taxed (via a WHT) in
the country where the income is generated and again in the other country where the
recipient is resident.
The main characteristics of double tax relief are discussed below.
Dividends or profit-sharing income received by a Spanish company from a foreign
company are tax exempt, subject to compliance with the following requirements:
The Spanish company has at least a 5% interest in the foreign company during the
entire tax year prior to the tax year in which the dividend is paid. This one-year
holding period is deemed to be complied with if it is completed after the dividend is
distributed.
The foreign company is subject to a similar tax to Spanish CIT and is not resident
in a tax haven. The foreign tax is deemed to be similar to Spanish CIT if the foreign
company is resident in a country with which Spain has signed a tax treaty containing
an exchange-of-information provision.
The income out of which the dividend is paid is generated from the business activities
of the foreign company carried out abroad stipulated in CIT law.
Capital gains arising from the sale of shares in foreign companies also qualify for a tax
exemption if the requirements stated above are complied with during the holding period
and the acquiring company is not resident in a tax haven. Tax exemption is limited in
certain cases.
As an alternative to this tax exemption regime and applicable to dividend distributions
only, a tax credit based on imputation is established. This tax credit allows the crediting
of the foreign tax paid abroad on the income from which the dividends are paid and
the foreign WHT paid on the profit distribution, up to the limit of the tax that would
have been paid on the gross amount in Spain. The only requirement for the application
of this tax imputation regime is that the Spanish company has at least a 5% interest
in the foreign company during the 12 months prior to the date on which the dividend
is due and payable. This one-year holding period is deemed to be complied with if it is
completed after the dividend is distributed. This tax relief may be carried forward for up
to ten years.
Spanish international legislation provides for CIT relief on juridical double taxation by
applying the tax imputation regime. Under this regime, gross foreign income (including
foreign WHT paid) is included for Spanish tax calculation purposes, and a tax credit for
the foreign WHT paid is applicable up to the amount of the CIT that the company would
have paid if such gross income had been obtained in Spain. The tax credit can be carried
forward for up to ten years, but the rate will be the rate applicable at the moment when
the tax credit is applied.
Under Spanish tax treaties and implemented EU tax directives, several methods have
been established to avoid double taxation. The main one is the traditional deduction of a
tax credit from tax effectively paid. However, some treaties establish a tax exemption or
the exclusive right to tax. Also, a tax-sparing clause is included in some treaties, which
allows for the deduction of not only the tax actually paid but a higher amount of tax.
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Deductions
All assets, except land, are depreciable/amortisable for tax purposes. Guideline tables
of tax depreciation/amortisation rates are established that state maximum per annum
rates and maximum years of useful life for each asset type, classified by business
sector. Please see the table below as an example of the maximum per annum rates and
maximum years of useful life of some assets that are typically depreciated/amortised:
Asset
Industrial buildings and warehouses
Administrative and commercial buildings
Passenger cars
Furniture and office equipment (excluded computers)
Computers
Software
Tools
Maximum per annum

depreciation/amortisation
rate (%)
3
2
16
10
25
33
30
Maximum
useful life
(years)
68
100
14
20
8
6
8
The straight-line depreciation/amortisation method is normally used, calculated

over the assets useful life and applied on the assets cost or written-up value (if such
a write-up is acceptable for tax purposes). Off-book adjustments must be included in
tax assessments if accounting depreciation/amortisation exceeds tax depreciation/
amortisation.
Qualifying assets with a useful life of more than one year can also be depreciated/
amortised using declining-balance methods. Buildings, furniture, and fittings cannot be
depreciated using the declining-balance methods.
For tax periods commencing in 2013 and 2014, the tax deduction of recorded
depreciation of tangible fixed assets and investment property is limited to 70% of the
maximum depreciation permitted by the regulations implemented under Spanish CIT
law. This limitation does not apply to small or medium-sized companies. Recorded
depreciation that is not deducted as a result of this limitation can be carried forward
and is deductible either on a straight-line basis over ten years or, alternatively, over the
assets useful life, from the first tax period commencing in 2015.
Mining assets and assets used for R&D, amongst others, but not including buildings, can
be freely depreciated/amortised for tax purposes.
Free depreciation
Unrestricted depreciation of investments in new tangible fixed assets and investment

property was regulated for investments made by taxpayers in tax periods commencing
in 2011, 2012, 2013, 2014, and 2015. This tax relief was also available for tax periods
commencing in 2009 and 2010, but it could only be availed of if the requirement that the
taxpayers staff levels were maintained or increased was met.
Due to the tax reform carried out by Royal Decree Law (RDL) 12/2012, this tax incentive
has been repealed effective 31 March 2012.
A transitional regime is provided for investments made prior to that date. Under
this transitional regime, unrestricted depreciation tax relief may be applied to these
investments, although with certain limits, during the tax periods commencing in 2012 to
2015.
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A 60% reduction may be applied on the net income obtained from licensing certain
intangible assets if certain requirements are met (the effective tax on this net income
would generally be 12%).
Goodwill cannot be amortised under Spanish GAAP. However, it can be amortised for
tax purposes at a maximum annual rate of 5% (1% for tax periods commencing during
the years 2012 to 2015), subject to compliance with certain requirements (e.g. it is
acquired for consideration from an unrelated party in accordance with the provisions of
Article 42 of the Spanish Commercial Code and an obligatory non-distributable reserve
is established).
Intangible assets with a specific useful life may be amortised and such amortisation is
tax deductible when the company complies with the following requirements:
The assets are acquired for consideration.
The acquirer and the transferor companies do not form part of the same group as
defined in Article 42 of the Spanish Commercial Code.
The tax deduction of the amortisation is up to 10% per annum, unless a lower useful life
can be evidenced.
For tax periods commencing in 2013 and 2014, the tax deduction of recorded
amortisation of intangible fixed assets with a specific useful life is limited to 70% of the
maximum amortisation permitted by the regulations implemented under CIT law (i.e.
to 7% per annum). This limitation does not apply to small or medium-sized companies.
Recorded amortisation that is not deducted as a result of this limitation can be carried
forward and is deductible either on a straight-line basis over ten years or, alternatively,
over the assets useful life, from the first tax period commencing in 2015.
If the two requirements stated above are complied with, the amount of intangible assets
that do not have a specific useful life is also tax deductible, with an annual limit of 10%
of its value (2% for tax periods commencing during the years 2012 to 2015), regardless
of whether they are amortised under Spanish GAAP or not.
Depletion
Depletion is allowed for mining companies and companies involved in exploring/

investigating natural oil resources as established in applicable legislation.
Financial goodwill
To promote the internationalisation of Spanish companies, in 2002 a rule was

introduced that financial goodwill arising from the acquisition of an interest in a nonresident company (financial goodwill being, in this case, the excess price paid for the
acquisition of the business over its net book value at the date of the acquisition that
cannot be allocated to the non-resident companys assets in Spain) could be amortised
up to a maximum of 5% per year.
To apply this tax relief, the following requirements had to be met:
A minimum 5% interest had to be held in the non-resident company.
The non-resident company had to be subject to a similar tax to Spanish CIT.
The income obtained by the non-resident company had to be generated from business
activities carried out abroad in accordance with Spanish CIT law.
Decisions of the European Commission dated 28 October 2009 (regarding interest in
non-resident EU companies) and 12 January 2011 (regarding interest in non-resident
non-EU companies) considered that this tax relief was unlawful state aid.
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According to the Commissions decisions, only acquisitions of interests in non-resident
companies carried out before 21 December 2007 (or before 21 May 2011 for majority
interests in non-resident companies established in countries with explicit obstacles to
cross-border business combination transactions) can continue applying this tax relief
until the financial goodwill is wholly amortised.
For companies that, in accordance with the above, can continue applying financial
goodwill tax relief, the maximum 5% annual amortisation is temporally reduced to 1%
for tax periods commencing during the years 2011 to 2015.
In its decision of 17 July 2013, the Commission has asked the Spanish tax authorities
to suspend their rule that allowed the tax deduction of financial goodwill arising from
second or bottom-tier non-resident companies.
Start-up expenses
According to Spanish GAAP, start-up expenses are considered to be expenses in the

financial year in which they are incurred. As no special rule is provided for tax purposes,
they are deductible for CIT purposes in the year in which they are incurred.
Financial expenses
General limits on the deduction of financial expenses
The amount of net deductible financial expenses in the tax period is generally reduced
to 30% of operating profit (similar to earnings before interest, taxes, depreciations, and
amortisation [EBITDA], applying certain adjustments) for the year, financial expenses
of less than EUR 1 million (or the proportional part for tax periods of less than one year)
being deductible regardless of the 30% limit. For such purposes, net financial expenses
will be considered to be the excess of financial expenses (excluding the non-deductible
expenses mentioned below) with respect to income deriving from the assignment of
capital to third parties accrued in the tax period.
For companies taxed under the tax consolidation regime, the deduction limit will refer to
the tax group. Nonetheless, the companys net financial expenses available for deduction
at the time of its inclusion in the group will be deducted, up to the limit of 30% of
its operating profit. When a company stops forming part of the group or the group is
extinguished and there are net financial expenses available for deduction, the rule will
be similar to that for assigning tax losses to the companies that formed part of the group.
Limits on the deduction of financial expenses will not be applicable for dissolved
companies for the tax period in which they are dissolved, with exceptions for
restructuring operations carried out under the tax neutrality regime and for companies
that were previously taxed under the tax grouping regime.
Finally, limits on the deduction of financial expenses will not apply to (i) insurance
companies or to (ii) credit institutions.
Specific limit on the deduction of financial expenses on acquisitions of intragroup ownership interests
Over the past few years, a large number of tax inspections have adjusted the tax effects
of acquisitions of shares from group companies with intra-group debt. Many of these
operations were acquisitions of shares in non-resident companies, so that the dividends
and capital gains arising from the acquisition of the shares were covered by the
exemption for the avoidance of double taxation established in Article 21 of the Spanish
CIT Act. In addition, the lenders of these operations were usually located in low-tax
territories.
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In the absence of specific limitation rules on the tax deductibility of financial expenses in
previous years, the reaction of the tax authorities to these kinds of operations has been
to apply general anti-abuse rules.
With this scenario, RDL 12/2012 introduced a limitation rule for the deduction of intragroup financial expenses that is applicable for tax periods commencing on or after 1
January 2012. In accordance with this rule, financial expenses arising from debts with
group companies generated from acquisitions of interests in other group companies or
contributions to capital or equity of other group companies will not be deductible unless
there is evidence that there are valid economic reasons for such expenses.
Bad debt provisions
Provisions for covering the risk derived from possible bad debts are tax deductible when,
at the time the tax accrues, any of the following circumstances exists:

Six months have elapsed since the obligation became due.

The debtor is declared bankrupt.
The debtor is prosecuted for an offence of embezzlement.
The obligations have been claimed judicially or are the subject of a legal dispute or
arbitration proceedings, and collection depends on the solution thereof.
Provisions for the credits listed below are not tax deductible unless they are the subject
of arbitration or legal proceedings concerning their existence or the amount thereof:
Credits owed or guaranteed by Public Law entities.
Credits guaranteed by credit entities or mutual guarantee societies.
Credits guaranteed by pledges (real property rights), ownership reservation
agreements, or liens, except in the event of loss or degradation of the guarantee.
Credits guaranteed by a credit or guarantee insurance contract.
Credits that have been expressly extended or renewed.
Provisions to cover the risk derived from possible bad debts of persons or companies
related to the creditor will not be deductible, except in the case of legally declared
insolvency, and neither will provisions made on the basis of overall estimates of the risk
of bad debts of clients and debtors.
Special rules apply to bank entities.
Equity investments in companies
The tax deductibility of impairment allowances of share capital or equity investments in

companies has been eliminated for tax periods starting on or after 1 January 2013.
The elimination of this tax deductibility will be temporary as potential impairment
losses will be tax deductible under normal conditions if the shares are transferred or the
subsidiary is dissolved.
A complicated transitory system has been established in the Spanish CIT Act to regulate
the effects of reversals of impairment allowances deducted in prior years.
With this new regulation, the rules on the avoidance of double taxation for distributions
of dividends inside or outside Spain have also changed.
Severance pay
Severance pay is tax deductible for CIT purposes when it does not exceed, for each
recipient, EUR 1 million or, if it exceeds this amount, up to the amount that is exempt
under Spanish PIT law.
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Donations are considered to be non-deductible expenses for CIT purposes.

This notwithstanding, a tax credit may be availed for donations to non-profit
organisations that comply with certain requirements. The tax credit in this case is 35%
of the donation.
In addition, the tax credit is not limited to 35% (or to 25% between 2012 and 2015)
of the donating companys gross tax payable less the tax credits for internal and
international double taxation and tax relief for income obtained in Ceuta and Melilla, for
export activities, and for local public services that is applicable for other tax credits.
The tax credit base cannot exceed 10% of the taxable income of the financial year. Any
excess may be carried forward for a period of ten years.
For donations to listed priority sponsorship activities, the tax credit may be increased by
5% (up to 40%) and the tax credit base 10% limit can be increased to 15%.
Fines and penalties
Penalties imposed due to the failure to pay taxes and surcharges for late filing/payment
or for other tax infringements are not tax deductible.
The Spanish tax authorities usually consider that late payment interest recorded as
an expense is tax deductible; however, some case law in Spain questions whether this
interest is a taxable expense.
Taxes
Taxes, other than CIT, that are recorded as an expense due to their nature (e.g. business
and professional activities tax, but not withholdings) are tax-deductible expenses. In
some cases, indirect taxes, such as non-deductible VAT or transfer tax, can be added to
the value of assets for depreciation purposes.
Tax losses may be carried forward for 18 years, but they cannot be carried back. There
are no tax loss baskets (operating/capital) under Spanish law.
The amount of tax-loss carryforwards that may be offset in tax periods beginning
during the years 2011 to 2015 is limited for large companies. The limits for tax periods
beginning during the years 2012 to 2015 are as follows:
For companies whose turnover in the 12 months preceding the beginning of the
tax period was between EUR 20 million and EUR 60 million, the amount of tax-loss
carryforwards that may be offset is limited to 50% of their previous taxable income.
For companies whose turnover in the 12 months preceding the beginning of the tax
period was EUR 60 million or more, the amount of tax-loss carryforwards that may
be offset is limited to 25% of their previous taxable income.
Effectivefor tax periods commencing in 2014 and 2015, these limits will not apply to
any income corresponding to debt relief resulting from an agreement with unrelated
creditors approved in a tax period starting from 1 January 2013.
Complex rules may limit the use of tax losses of a company dissolved as a result of
a restructuring operation and, in certain circumstances, when it has a change of
shareholders.
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Supplies of goods or services by a company not established in Spain to a Spanish group

company must be valued at arms length. If recorded expenses for such goods/services
exceed the arms-length price, the tax deductibility of the excess amounts could be
challenged in a tax inspection. The tax deductibility of expense charges received from
tax havens is fully disallowed unless proper evidence of an actual service valued at arms
length can be provided.
Management services received from outside Spain and recorded as distributions of costs
of a group centre do not have to be documented in a written agreement entered into
before the commencement of the services to ensure the tax deductibility of the expenses
(as previously was the case), although it would be recommendable to have such an
agreement. For any other types of services, an agreement recorded before a notary
public is not obligatory under Spanish law, but it is advisable.
As regards the taxation in Spain of the foreign company that supplies services, the WHT
rate to be applied on the gross income obtained by the company is 24.75%. Dividends,
interest, and capital gains generated as a result of a transfer of assets are taxed at a 21%
WHT rate. If management services, technical assistance, or the performance of studies
are solely used outside Spain and are linked to business carried on abroad, then no WHT
is applicable. In addition, under most tax treaties signed by Spain, business profits
obtained in Spain by non-residents are exempt from WHT. However, business profits
is a miscellaneous residual category. For instance, if the amount obtained qualifies
as a royalty payment, WHT is applicable at the reduced tax treaty rates if the foreign
company can obtain a document from the tax authorities of its country of residence
certifying its tax residence. If no tax treaty applies, then the above 24.75% WHT rate is
applicable (see the Withholding taxes section for more information).
Permanent establishments and interests in joint ventures
Taking effect for tax periods starting on or after 1 January 2013, the tax deductibility of
losses obtained outside Spain by means of a PE has been eliminated. Losses generated
from interests in joint ventures that carry on a business activity outside Spain are not tax
deductible either.
As an exception to this general rule, income generated by a PE or joint venture is tax
deductible if the PE or joint venture is transferred or their business activity is terminated.
Group taxation
Tax groupings for CIT purposes
Under Spanish tax law, companies can form a group and apply a special tax
consolidation regime for CIT purposes. Companies forming a tax group must formally
pass a resolution agreeing to do so before the beginning of the first tax year in which the
tax consolidation regime will be applied.
To apply the tax consolidation regime, the controlling company of the tax group must
hold a 75% or higher interest, either directly or indirectly, in the companies forming the
tax group at the beginning of the first tax year in which the tax consolidation regime
is applied, and this interest must be maintained during the year unless thedependent
company is dissolved. The interest requirement is 70% for companies listed on a stock
exchange.
The main characteristics of the tax consolidation regime are as follows:
The taxable income of the tax group is the sum of the taxable incomes of each of the
companies forming the group.
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The tax losses of any of the companies forming the group can be offset against the tax
profits of any of the other group companies.
For the calculation of consolidated taxable income, the tax profits (losses) generated
from transactions carried out between group companies are eliminated and only
included in consolidated taxable income when:
they are carried out with third parties
a group company participating in the internal operation ceases to form part of the
tax group, and
the tax consolidation regime is no longer applied by the group for whatever
reason.
Specific limitations apply regarding the offsetting of tax losses or the application
of tax credits generated by the group companies before they formed part of the tax
group. Such tax losses/credits may be offset (applied) by the tax group up to the limit
of the tax profits/tax liability of the company that generated the losses/credits.
No WHT is chargeable on payments made between companies of the tax group (e.g.
interest, dividends).
Tax groupings for VAT purposes
Groups of companies may also choose to be taxed under a special tax consolidation
regime for VAT purposes. This special regime is optional, but once it has been opted for,
it must be applied for a minimum of three years, which is extendible unless it is expressly
waived by the companies.
The VAT consolidation regime may only be applied by companies resident in Spanish
VAT territory that do not form part of any other VAT grouping.
The controlling company of the group must be a legal entity or PE that is not dependent
on any other entity established in Spanish VAT territory, and it must hold at least a 50%
interest in the subsidiary companies of the group for the entire calendaryear.
With the application of the VAT consolidation regime, there are two different options for
taxation:
The aggregation system, where the balances of the VAT returns of the individual
companies of the group are totalled. The right to a tax deduction is exercised by the
individual companies.
The consolidation system, where an individual company can opt to reduce VAT
taxable income for inter-company operations, which is limited to the external cost.
Transfer pricing
All related-party transactions must be valued at market price, following the arms-length
standard (e.g. the value that in normal market conditions would have been established
between unrelated parties).
For this purpose, related persons or entities shall be:
A company and its shareholders or members.
A company and its board members or directors.
A company and the spouses of or persons related to its shareholders or members,
board members, or directors, either in a direct line or collaterally, by consanguinity or
affinity up to the third degree.
Two companies of a group.
A company and the shareholders or members of another company, when both
companies form part of a group.
A company and the board members or directors of another company, when both
companies form part of a group.
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A company and the spouses of or persons related to the shareholders or members of
another company, either in a direct line or collaterally, by consanguinity or affinity up
to the third degree, when both companies form part of a group.
A company and another company in which the former company has at least a 25%
holding, held indirectly, in its share capital or shareholders equity.
Two companies in which the same shareholders or members or their spouses, or
persons related to them either in a direct line or collaterally, by consanguinity or
affinity up to the third degree, have at least a 25% holding, whether directly or
indirectly, in their share capital or shareholders equity.
A company resident in Spanish territory and its PEs abroad.
A company not resident in Spanish territory and its PEs in Spanish territory.
Two companies forming part of a group taxed under the tax regime for groups of
cooperative companies.
For cases where association exists as a result of a shareholder/member-company
relationship, the shareholding must be 5% or more, or 1% if the shares are quoted on
a regulated stock exchange. The reference to directors shall include de facto and de jure
directors.
The determination of the market value by taxpayers must be done through the
application of one of the following transfer pricing methodologies, in order of preference
as follows: comparable uncontrolled price (CUP) method, cost plus (CP) method, or
resale price method (RPM), usually referred to as traditional transaction methods.
If the application of any of the above methods is not possible, the profit split method
(PSM) or transactional net margin method (TNMM) can be applied, usually referred to
as transactional profit methods.
Documentation is also a requirement, with taxpayers required to produce group-level
and taxpayer-specific documentation for each tax year. Related persons or entities
must keep such documentation available for the tax authorities as from the end of the
voluntary return or assessment period in question. Some exceptions are established for
these documentation requirements.
Documentation is always required for transactions with entities, whether related parties
or otherwise, that are resident in tax havens.
Please note that specific penalties may be imposed in the event of the absence of
documentation or where data are omitted, inaccurate, or false.
Thin capitalisation
Thin capitalisation rules have been repealed.
Spanish CFC rules seek to avoid the effects produced when Spanish tax resident entities
or individuals place their capital in low-taxed foreign entities to avoid including passive
income generated by such capital in their taxable bases.
Under this regime, Spanish tax resident entities are subject to Spanish CIT on certain
kinds of positive passive income obtained by non-resident entities in which they own,
individually or together with related entities or persons, more than 50% of the share
capital, equity, profits, or voting rights, provided that the CIT due by the non-resident
entity is below 75% of the tax that would be due in Spain.
CFC rules are not applicable to EU resident entities if they are incorporated for economic
reasons and carry on a business activity.
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The types of passive income to which CFC rules apply are as follows: (i) income from
immovable property not used for business activities; (ii) income derived from equity
in other entities or from capital assigned to third parties (interest and dividends);
(iii) transfer of the above mentioned immovable property and financial assets; and
(iv) income arising from credit, financial, insurance, and service activities carried out
directly or indirectly with related Spanish tax resident entities in which a tax deductible
expense is generated.
Passive income mentioned in numbers (i) to (iii) above obtained by the non-resident
entity will not be considered taxable income of the Spanish tax resident entity when
it arises from entities in which the latter holds a direct or indirect interest of over
5%, provided that the non-resident entity controls and manages the interest using
the relevant human and material resources and provided at least 85% of the income
obtained from such participated entities comes from business activities.
Moreover, the passive income mentioned in numbers (i) to (iii) above will not be
included in the Spanish entitys taxable base when it amounts in total to less than 15% of
the total profits obtained by the CFC or less than 4% of its total turnover.

Foreign tax credit
See Foreign income in the Income determination section for a description of double tax relief.
CIT relief
No specific tax relief is established in Spanish law for foreign investors. Relief may be
availed of by Spanish and foreign-owned companies alike. The tax relief available under
CIT law in Spain is as follows.
Most of the tax credits that have been established to promote certain investments
have been eliminated. However, the largest tax credits are maintained (tax credit to
prevent internal and international double taxation, tax credit for the reinvestment of
extraordinary profits, tax credit for R&D, and tax credit for technological innovation).
Tax relief for business activity/place of business activity

50% tax credit on CIT levied on income obtained in Ceuta and Melilla through
companies established and carrying on activities during a full business cycle in these
enclaves because of their specific geographic location.
99% tax credit on the CIT levied on income obtained from the supply of local public
services, except when the state company in question is owned, partially or wholly, by
a quoted/non-quoted company or individual.
R&D and technological innovation credits
A 25% tax credit can be availed of for expenses incurred from R&D activities. If the
expenses are higher than the average R&D expenses incurred by the company during the
previous two years, the tax credit is 42% for the excess amount.
An additional tax credit of 17% can be availed of for staff expenses incurred for staff
exclusively carrying out and qualified to carry out R&D activities.
An 8% tax credit can be availed of for investments made in tangible fixed assets
(excluding buildings) and intangible assets that are exclusively assigned to R&D
activities.
A 12% tax credit can be availed of for technological innovation activities.
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Tax relief for R&D and technological innovation can be excluded from the limits on
tax relief applied on tax liabilities (see below for Limits on the amount of tax credit
applied), which will have a cost of 20% of the tax relief applied, meaning that, if certain
requirements are met, 80% of the tax relief forR&D and technological innovation may
reduce tax liability after double tax deductions and tax allowances to zero, and any
excess tax relief may be refunded by the tax authorities.
This exclusion is only applicable for tax relief generated in tax periods commencing in
2013 and following years.
The requirements for the exclusion of the R&D and technological innovation tax reliefs
from the tax relief limits are as follows:
One tax period has passed since the tax relief was generated and the tax relief has not
been applied.
An amount equal to the tax relief applied or paid has been allocated to R&D and
technological innovation expenses or to investments in tangible fixed assets or
intangible assets used exclusively for R&D and technological innovation activities,
excluding real property, within 24 months of the end of the tax period when the tax
relief was applied or paid.
The taxpayers average number of staff (staff in general or staff assigned to R&D and
technological innovation activities) has not decreased between the end of the tax
period when the tax relief was generated and the end of the reinvestment period.
The taxpayer has a report that certifies that the activities are R&D and technological
innovation activities or it has made an advance agreement with the Spanish tax
authorities regarding the valuation of the expenses and investments of the project.
The following should also be taken into consideration:
The tax relief applied or paid for technological innovation in accordance with the
foregoing comments may not exceed a total of EUR 1 million per year.
The sum of the tax relief applied or paid for technological innovation and the tax
relief applied or paid for R&D innovation in accordance with the foregoing comments
may not exceed a total of EUR 3 million per year.
Tax relief for invested profits
Tax relief has been introduced in Spain for invested taxable profits generated by small
companies (a reduction of 10% of invested taxable profits of small companies and 5% of
invested taxable profits of micro companies).
The tax relief can be applied for pre-tax profits of the year that are invested in new
tangible fixed assets or real property investments used for business activities. The period
for the investment is the tax period in which the profits are obtained and the following
two tax periods. The assets in which the investment is made should be kept in the
companys assets for five years or during their useful life, if less. Companies that apply
this tax relief should allocate an amount equal to the tax relief base to a reserve that will
not be available for distribution during the period when the assets should be kept by the
company.
The tax relief may be applied for profits generated in tax periods starting from 1 January
2013.
Tax credit for environmental investments
The tax credit for environmental investments in installations is 8%.
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The tax credit for environmental investments in vehicles and the tax credit for
environmental investments in assets to promote the exploitation of renewable energies
have been eliminated.
Reinvestment of extraordinary income
A 12% tax credit can be availed of for sales of assets that are used for the companys
business activities when the amount obtained from the sale is reinvested in similar
types of assets during a four-year period (as from one year prior to the sale up to three
years after the sale). This tax credit therefore reduces the effective tax levied on sales of
certain assets to 18%.
In the case of a sale of company shares, to be eligible for this tax credit, the interest in
the company must be a minimum of 5% and must have been held for more than one year
prior to the sale.
The asset in which the reinvestment is made must be maintained for five years (three in
the case of moveable assets) unless its useful life is shorter.
Other CIT relief
A tax credit may be obtained for film productions (18% of qualifying production costs for
film producers, 5% for financial co-producers).
A tax credit of 1% may be obtained on expenses incurred by companies to familiarise
staff in the use of new technologies. These expenses are not a benefit in kind for the
staff. This tax credit is expected to be eliminated in 2015.
A tax credit can be applied for increases in the number of disabled workers contracted
per year on a permanent and full-time basis. The tax credit is EUR 9,000 per worker
contracted whose level of disability is 33% or more, but less than 65%, and EUR
12,000 per worker contracted whose level of disability is 65% or more. This increase is
calculated by taking the average number of company workers of each of these categories
in the tax year in question that meet the established requirements and comparing it with
the companys average number of staff in the same category in the previous tax year.
Limits on the amount of tax credit applied
The combined sum of all investment tax credits may not exceed 35% of the companys
gross tax payable less any tax credits for internal and international double taxation and
tax relief for income obtained in Ceuta and Melilla, for export activities, and for local
public services. This percentage is reduced to 25% for tax periods commencing during
the years 2012 to 2015.
When R&D and technological innovation tax credits for expenses and investments
in the year exceed 10% of the companys gross tax payable, less tax credits and relief
mentioned above, the limit will be 50% (60% for tax periods commencing on or after 1
January 2016).
For tax periods commencing during the years 2012 to 2015, these limits will also apply
for the tax credit for reinvestments of extraordinary profits.
Time limits for the application of tax credits
Tax credits that are not applied in the tax period owing to insufficient tax payable may
be applied in tax periods ending in the 15 years immediately thereafter (ten years for
the tax periods commencing before 1 January 2012). However, R&D and technological
innovation tax credits may be applied in tax periods ending in the 18 years immediately
thereafter.
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Special tax regimes
Special tax regimes are applicable, among others, in the following cases:
Spanish and European Economic Interest Groupings and Temporary

Consortia of Entities
Spanish Economic Interest Groupings (SEIGs) that meet certain requirements will
not be subject to Spanish CIT on the part of the taxable income that corresponds to
members resident in Spain for tax purposes. Such part of the positive or negative
taxable income shall be deemed to be the profits/losses of the SEIG members. The
proportional part of tax credits and payments in advance will also be assigned to
the Spanish tax resident members of the SEIG where they are subject to CIT or PIT.
Dividends distributed to SEIG members that have been subject to imputation will not
be taxed under CIT or PIT on distributions. Dividends distributed to

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www.pwc.

Welcome to the latest edition of Worldwide Tax Summaries

If you have any questions, or need more

Our online version of the summaries is

I hope you will find these summaries

PwC Worldwide Tax Summaries

Taxes on corporate income

Local income taxes

Local taxes on income depend on a number of factors, such as type of activity,

Permanent establishment (PE)

Determination of VAT payers

VAT obligations for non-resident entities

Zero-rated goods and services

The following goods and services are subject to 0% VAT in Albania:

VAT-exempt goods and services

The following are considered VAT exempt:

PwC Worldwide Tax Summaries

Albania uses the Harmonized Code System for tariff classification.

Real estate tax

Real estate tax on buildings

Tax rate (Area1/Area2/

PwC Worldwide Tax Summaries

Stamp duties and notary taxes

The fee for the registration of a business entity is ALL 100.

Capital gains are taxed at the rate of 15%.

Interest income is taxed at the rate of 10%.

Land, fine art, antiques, and jewelleries are non-depreciable assets.

There are no provisions in Albania regarding the tax treatment of charitable

Fines and penalties

Fines and other tax-related sanctions are non-deductible expenses.

Income taxes, VAT, and excise duties are non-deductible expenses.

Other significant items

PwC Worldwide Tax Summaries

Expenses not supported with fiscal invoices.

Net operating fiscal losses

Payments to foreign affiliates

Transfer pricing adjustments may be made if the conditions set in a transaction

Controlled foreign companies (CFCs)

Tax credits and incentives

Foreign tax credit

Double tax treaties (DTTs)

Albania has signed 39 DTTs, of which 35 are in force.

PwC Worldwide Tax Summaries

The tax year is the calendar year.

Period from January to April

Period from May to December

Tax audit process

Generally, the Albanian tax system is based on self-assessment, which is under

Topics of focus for tax authorities

PwC Worldwide Tax Summaries

Taxes on corporate income

Stamp duty is imposed at varying rates on transactions, including the execution of

Social security contributions

PwC Worldwide Tax Summaries

Taxable income is determined by adding back non-deductible expenses and deducting

Dividends to non-resident shareholders are subject to WHT at source of 15%. For

Interest income is taxed along with company income at 25%.

Rental income is taxed along with company income at 25%.

Unrealised gains are taxed as dividends.

Foreign currency exchange gains/losses