The New Greek Income Tax Code for the first time introduces provisions pertinent to Controlled Foreign Companies (“CFCs”). Controlled Foreign Companies are interrelated companies located in different countries with shareholder or other links leading to effective control of one or more companies (“Foreign Companies”) over the others (“Controlled Companies”). The CFC rules’ main goal is to track down income that should be taxed in Greece, due to the company’s effective action in this country, and to unveil complex tax planning schemes that facilitate taxation in the country of origin of the Foreign Company. Therefore, the undistributed earnings of the Foreign Company shall be taxed with the relevant tax rate that is imposed on income from business activity. The criteria for this provision to apply are the following:
(a) The taxpayer owns directly or indirectly, individually or jointly, 50% of the shares of the Foreign Company or effectively controls this company , by participating or receiving half of the earnings generated by the Foreign Company.
(b) The Foreign Company is taxed in its country of origin with a tax rate of less than half of the correspondent tax rate in Greece - that is less than 13% (preferential tax regime) - or the aforementioned country is listed as a non-cooperative country.
(c) The net revenue of the Foreign Company is generated from interest or any other financial assets, dividends or income from transfer of shares, royalties or any other income arising from intellectual property, income from inventory or other assets, income from real estate, income from insurance, banking or other financial activities, under the condition that over 50% of each revenue category is generated from transactions with the controlled company, even if this threshold is met for at least one of the aforementioned revenue categories.
(d) The Foreign Company is not listed.
The following rules apply for the calculation of the exact tax rate imposed on the undistributed earnings:
1. The undistributed earnings are deemed to be earnings from business activity and are taxed as such, but the tax rate per se depends on the nature of the taxable person; that means that the undistributed earnings might be taxed either according to the scale applicable for entrepreneurs or as income from business activity.
2. The amount of the undistributed earnings subject to taxation is calculated on the basis of the percentage of shareholding of the Foreign Company to the Controlled Company.
3. In case the year’s end of the Foreign Company is different than that of the Controlled Company, then the first date should be taken into account while calculating the amount of the undistributed earnings.
Finally, it should be noted that the taxpayer may benefit from a tax discount equal to the amount of the income tax that has been imposed in the country of origin of the Foreign Company. Additionally, if any earnings are distributed, they shall benefit from a tax exemption amounting to the sum of the dividend tax imposed in the country of the Foreign Company (avoidance of double-taxation principle).
Athens, May 7, 2014
Avramopoulos & Partners
For further information please contact:
Vassilis D. Avramopoulos
Avramopoulos & Partners Law Firm
Tel.: + 30 210 6912200
Fax: + 30 210 6911211
Important Note: The information contained in this newsletter is provided for your information only and should not be regarded as a legal advice.