The Milestone EU-Mercosur Trade Deal

9 12 月 2024

  • 阿根廷
  • 巴西
  • 意大利
  • 乌拉圭
  • 分销协议
  • 外国投资
  • 税务

“This agreement is not just an economic opportunity. It is a political necessity.” In the current geopolitical context of growing protectionism and significant regional conflicts, Ursula von der Leyen’s statement says a lot.

Even though there is still a long way to go before the agreement is approved internally in each bloc and comes into force, the milestone is highly significant. It took 25 years from the start of negotiations between Mercosur and the European Union to reach a consensus text. The impacts will be considerable. Together, the blocs represent a GDP of over 22 trillion dollars, and are home to over 700 million people.

Our aim here is to highlight, in a simplified manner, the most important information about the agreement’s content and its progress, which we will update here at each stage.

What is it?

The agreement was signed as a trade treaty, with the main goal of reducing import and export tariffs, eliminating bureaucratic barriers, and facilitating trade between Mercosur countries and European Union members. Additionally, the pact includes commitments in areas such as sustainability, labor rights, technological cooperation, and environmental protection.

Mercosur (Southern Common Market) is an economic bloc created in 1991 by Brazil, Argentina, Paraguay, and Uruguay. Now, Bolivia and Chile participate as associated members, accessing some trade agreements, but not fully integrated into the common market. On the other hand, the European Union, with its 27 members (20 of which have adopted the common currency), is a broader union with greater economic and social integration compared to Mercosur.

What does the EU Mercosur agreement include?

Trade in goods:

  • Reduction or elimination of tariffs on products traded between the blocs, such as meat, grains, fruits, automobiles, wines, and dairy products (the expected reduction will affect over 90% of the traded goods between the blocks).
  • Easier access to European high-tech and industrialized products.

Trade in services:

  • Expands access to financial services, telecommunications, transportation, and consulting for businesses in both blocs.

Movement of people:

  • Provides facilities for temporary visas for qualified workers, such as technology professionals and engineers, promoting talent exchange.
  • Encourages educational and cultural cooperation programs.

Sustainability and environment:

  • Includes commitments to combat deforestation and meet the goals of the Paris Agreement on climate change.
  • Provides penalties for violations of environmental standards.

Intellectual property and regulations:

  • Protects geographical indications for European cheese, wines, and South American coffee and cachaça.
  • Harmonizes regulatory standards to reduce bureaucracy and avoid technical barriers.

Labor rights:

  • Commitment to decent working conditions and compliance with International Labor Organization (ILO) standards.

Which benefits to expect?

  • Access to new markets: Mercosur companies will have easier access to the European market, which has more than 450 million consumers, while European products will become more competitive in South America.
  • Costs reduction: The elimination or reduction of tariffs could lower the prices of products such as wines, cheese, and automobiles and boost South American exports of meat, grains, and fruits.
  • Strengthened diplomatic relations: The agreement symbolizes a bridge of cooperation between two regions historically connected by cultural and economic ties.

What’s next?

The signing is only the first step. For the agreement to come into force, it must be ratified by both blocs, and the approval process is quite distinct between them, since Mercosur does not have a common Council or Parliament.

In the European Union, the ratification process involves multiple institutional steps:

  • Council of the European Union: Ministers from the member states will discuss and approve the text of the agreement. This step is crucial, as each country has representation and may raise specific national concerns.
  • European Parliament: After approval by the Council, the European Parliament, composed of elected deputies, votes to ratify the agreement. The debate at this stage may include environmental, social, and economic impacts.
  • National Parliaments: In cases where the agreement affects shared competencies between the bloc and member states (such as environmental regulations), it must also be approved by the parliaments of each member country. This can be challenging, given that countries like France and Ireland have already expressed specific concerns about agricultural and environmental issues.

In Mercosur, the approval depends on each member country:

  • National Congresses: The agreement text is submitted to the parliaments of Brazil, Argentina, Paraguay, and Uruguay. Each congress evaluates independently, and approval depends on the political majority in each country.
  • Political Context: Mercosur countries have diverse political realities. In Brazil, for example, environmental issues can spark heated debates, while in Argentina, the impact on agricultural competitiveness may be the focus of discussion.
  • Regional Coordination: Even after national approval, it is necessary to ensure that all Mercosur members ratify the agreement, as the bloc acts as a single negotiating entity.

Stay tuned: you will find the update here as the processes advance.

On 20th February 2024, the European Union (EU) issued an update regarding the classification of non-cooperative tax jurisdictions. Hong Kong was removed from the EU’s tax cooperation watchlist and placed on the “white” list. This removal indicates that Hong Kong has taken significant measures to tackle the EU’s apprehensions and enhance its tax cooperation framework to adhere to international tax standards.

In 2021, the EU included Hong Kong in its tax cooperation watchlist due to concerns about potential instances of “double non-taxation” stemming from certain foreign-sourced passive income (FSIE) not being taxed in Hong Kong. In response to these concerns, Hong Kong introduced a new FSIE regime in January 2023. Under this regime, multinational enterprise entities receiving foreign-sourced dividends, interest, income from intellectual property usage, and gains from the disposal of shares or equity interests in Hong Kong must meet economic substance requirements to qualify for tax exemption.

On 1st January 2024, Hong Kong made further adjustments to its FSIE regime, broadening the range of assets related to foreign-sourced disposal gains to encompass assets beyond shares or equity interests. Subsequent to implementing these refinements, the EU conducted an assessment and concluded that Hong Kong had honored its commitment by amending the tax regime.

Acknowledging Hong Kong’s efforts and progress in addressing the concerns raised, the EU transferred Hong Kong from its tax cooperation watchlist to the “white” list on 20th February 2024.This signifies a significant step forward for Hong Kong, demonstrating its commitment to addressing concerns raised by the EU and its dedication to aligning with international tax standards.

Addressing EU Concerns and Implementing Change

In 2021, the EU expressed concerns regarding potential “double non-taxation” arising from certain foreign-sourced passive income (FSIE) not being subject to taxation in Hong Kong. In response, Hong Kong proactively implemented a new FSIE regime in January 2023. This regime requires multinational enterprises receiving qualifying foreign-sourced income, including dividends, interest, intellectual property income, and gains from the disposal of shares or equity interests in Hong Kong, to meet specific economic substance requirements to benefit from tax exemption.

Further demonstrating its commitment, Hong Kong expanded the scope of its FSIE regime on 1st January 2024 to encompass foreign-sourced disposal gains from assets beyond shares or equity interests. Following these improvements, the EU acknowledged Hong Kong’s efforts and reclassified its status, signifying its satisfaction with the implemented changes.

Looking Ahead: Navigating Complexities

Although the EU’s removal of Hong Kong from the watchlist is a positive development, challenges remain. Hong Kong needs to navigate a complex landscape to fully regain its position as a premier financial and business hub. Reassuring international investors and markets of its long-term stability will be crucial in this endeavor.

Balancing Priorities and Building Confidence

While Hong Kong enjoys a strong reputation for rule of law in the business sphere and maintains independence from mainland China, concerns regarding political freedoms persist. Addressing these concerns transparently and effectively will be essential in building international confidence and fostering a thriving business environment.

Ultimately, Hong Kong’s success lies in its ability to strike a balance between its unique position and the evolving global landscape. By demonstrating its commitment to international tax standards, upholding the rule of law, and addressing all areas of international concern, Hong Kong can solidify its position as a leading financial and business center.

Vietnam has embraced the global minimum tax (GMT) to harmonize its tax policies with global standards. While this new tax regime is anticipated to have certain adverse effects on foreign direct investment (FDI), the Vietnamese government is devising proactive measures to mitigate these repercussions and maintain the country’s appeal as an investment haven.

Key Ramifications of the GMT for Vietnam

The GMT mandates multinational corporations (MNCs) with consolidated revenue surpassing €750 million to pay a minimum tax rate of 15%, irrespective of the tax rate in the country where they operate. In Vietnam, this translates to the concept of a qualified domestic minimum top-up tax (QDMTT).

The QDMTT places an extra tax burden on foreign-invested enterprises (FIEs) that are part of an MNC, potentially deterring them from investing or expanding in Vietnam. This is particularly concerning for industries that heavily rely on tax incentives to attract FDI.

Vietnam’s Response: Investment Support Fund and Proactive Measures

In response to the anticipated negative impacts of the GMT, the Vietnamese government has established an investment support fund (Fund) to incentivize investments in targeted sectors. The Fund is primarily funded by proceeds from the State Budget generated by the GMT.

Eligible enterprises for the Fund are those engaged in high-tech product manufacturing, high-tech enterprises, high-tech application projects, and enterprises with investment projects in research and development centers. Eligibility is based on capital size, annual revenue, industry, or technology utilized.

Eligible taxpayers can receive cash subsidies for five specific expense categories:

  1. Human resource training and development
  2. Research and development expenses
  3. Fixed asset investments
  4. High-tech manufacturing expenses
  5. Social infrastructure systems

To qualify for Fund benefits, eligible taxpayers must submit an application dossier to the Fund Office in Hanoi between August 15th and 30th of the year following the incurred Supported Expenses. Each Supported Expense category will have a distinct reimbursement ratio, and support payments will be contingent on the actual expenses incurred by eligible taxpayers.

In addition to the Fund, the Vietnamese government is also implementing proactive measures to address the concerns of foreign investors. These measures include:

  1. Focusing on targeted industries with high growth potential that align with Vietnam’s strategic development goals
  2. Utilizing the additional revenue collected from top-up tax to enhance infrastructure and labor quality
  3. Considering cash grants for long-term qualified investments in high-tech industries

Conclusion

The introduction of the GMT poses challenges for Vietnam in attracting FDI. However, the government’s establishment of the investment support fund and proactive measures demonstrates its commitment to safeguarding the country’s competitiveness as an investment destination. By combining targeted support with infrastructure improvements and incentives for specific industries, Vietnam can mitigate the negative impacts of the GMT and continue to attract foreign investors.

Artists (actors, singers) and sportsmen, non-residents in Spanish territory, who occasionally carry out their artistic or sporting activities in Spain, are usually unaware of their tax obligations before the Spanish Tax Authorities.

In this respect, we would like to point out that, in the last year, the inspection activity of the Spanish Tax Administration has increased considerably in relation to these taxpayers. This is a consequence of the fact that the Annual Tax and Customs Control Plan of the State Agency issued by the Spanish Tax Administration (AEAT) expressly included the intensification of the control of the income obtained by non-resident artists and sportsmen who act or develop an activity in Spain within the year 2020.

Spanish legislation, which regulates the Non-Resident Income Tax (IRNR), establishes literally that: it is considered income obtained in Spanish territory, among others, that which derives, directly or indirectly, from the personal performance in Spanish territory of artists and sportsmen, and that which derives from any other activity related to such performance, even if it is received by a person or entity other than the artist or sportsman.

This means that the artist or sportsman who performs an activity in Spain for which he or she obtains income, is subject to tax obligations and to the payment of taxes in Spain and must declare not only the income directly related to his or her performance but also other income linked to his or her professional performance, such as sponsorships, image rights, etc…

The above is understood regardless of whether the actual recipient of the income derived from the athlete’s or artist’s performance is the artist or athlete himself or herself, a company in which he or she has any interest, or a third individual or legal entity with no apparent connection to the athlete or artist.

Therefore, even if the company that pays such income is a non-resident in Spanish territory and the payment takes place physically outside such territory, any income obtained in Spain will be considered subject to tax (19% for EU residents and 24% for non-EU residents) when it is obtained on account of the artistic or sporting activity carried out in the Spanish territory.

Most of the double taxation international treaties that Spain has signed with other countries allow the country in which the activity of the artist or athlete takes place to tax the income generated from such activity. All these agreements also establish mechanisms to avoid double taxation, but this possibility is considerably complicated when, as in many cases, the artist or sportsman receives his income through a company incorporated in his country of residence or in a third country instead of receiving it directly as an individual.

Often the contracts signed by artists and sportsmen are signed by companies related to them -usually domiciled in their country of residence-, this situation is giving rise to serious difficulties for them to deduct in their country of residence (and within the scope of Corporate Income Tax) the tax paid in Spain as an individual.

We therefore want to highlight (i) the existence of important tax obligations that affects artists and sportsmen who are not resident in Spanish territory for the activities they carry out in Spain and, furthermore, (ii) the need for them to receive adequate prior advice on the tax consequences of their activity and, consequently, on the best vehicle to formalize their contracting.

Belgian residents working abroad, e.g. in Luxembourg, may have a company car registered in their country of employment. The Belgian regional tax administrations exercise checks to verify whether the user of the company car complies with regional vehicle tax rules allowing an exemption from registration of the car in Belgium and from Belgian vehicle taxes. Especially in the Walloon Region this has given rise to a lot of litigation in recent years, especially regarding Luxembourg workers residing in Belgium.

Belgian vehicle registration rules stipulate that the user of the car must have on board of the car a copy of his employment contract as well as a document drawn up by the foreign employer showing that the latter had put the vehicle at the employee’s disposal. If the driver cannot produce these documents, he is supposed by the Walloon tax administration to have violated the legal obligation to register the car in Belgium and to pay Belgian vehicle taxes.

The consequences are severe. In addition to the vehicle taxes, the driver must pay a hefty fine. Failing to pay these large amounts (often more than EUR 3,000.-) on site at the time of the road check, the authorities withhold the on-board documents of the car, which results in the immobilization of the car.

The Walloon tax administration, initially, did not pay back the vehicle taxes even if it was proven afterwards that the conditions of the exemptions of registration in Belgium and Belgian vehicle taxes were met. At first, the tax administration claimed that the vehicle taxes remained due if the employee showed the required documents only afterwards to the competent authorities. The position of the Walloon tax administration was that the employee must be able to produce the required documents on the spot during the check to be exempted from registration and vehicle taxes in Belgium.

In a recent reasoned order, the European Court of Justice (‘ECJ’) confirmed that this harsh position by the Walloon tax administration was in violation of the freedom of movement for workers. A reasoned order is issued by the ECJ a.o. where a question referred to the ECJ for a preliminary ruling is identical to a question on which the ECJ has previously ruled or where the answer to the question referred for a preliminary ruling admits of no reasonable doubt.

In other words, the ECJ confirms that the requirement to have the abovementioned documents permanently on board of the vehicle to be exempted from Belgian registration and Belgian vehicle taxes is manifestly disproportionate and thus a violation of the freedom of movement for workers.

From a practical perspective, this ruling confirms that an employee resident in Belgium but working in another member state does not have to pay the Belgian vehicle taxes (or is entitled to be paid back) if he demonstrates after the check that he met the conditions to be exempted from registration and vehicle taxes in Belgium.

Climate change has become part of our everyday lives. This includes tax lawyers on the lookout of tax incentives for their clients. Below you will find an outline of green tax incentives for industrial or commercial buildings in Belgium. Indeed, such tax incentives may help you achieve your companies’ sustainability goals. Other green tax incentives exist in Belgium but the focus here is on industrial and commercial buildings.

Reduction of Machinery and equipment tax (MET)

Fixed assets, such as machinery & equipment in industrial or commercial companies are considered immovables (buildings), subject to property tax (the MET). In Belgium this is a regional tax. The Brussels Capital Region and the Walloon Region abolished the MET.

The Flemish Region adopted a different policy by reducing (possibly to nothing) the MET and by incentivizing companies to invest in new machinery and equipment or to replace older machinery and equipment.

How is this achieved?

  • No indexation of the taxable base
  • A (full) reduction of the portion of the Flemish treasury in the MET (the local authority where the company is situated receives the proceeds of the MET)
  • Exemption for new investments or the replacement of machinery & equipment: the exemption depends on an energy policy agreement between the company and the Flemish government (on the basis of the Flemish Energy Code). The purpose is to reduce CO2-emissions and to enhance energy efficiency.

However, companies with a historical presence in the Flemish region (brownfield companies) felt that they had a competitive disadvantage compared to greenfield companies: their older machinery was taxed as before. It must be noted that some of these companies employ a lot of people.

The Flemish government therefore adopted legislation that for investments in machinery and equipment between 01/2014 and 12/2019 a reduction of the taxable base of older machinery and equipment is granted on the basis of the taxable base of the new (exempted) investments. It is not yet confirmed that this tax exemption will be prolonged or made permanent beyond 2019, however it is expected that the above tax policy in the Flemish Region will be continued, thus reducing (possibly to nothing) the MET.

120% cost deduction for investments in bicycle infrastructure for employees

Personal and corporate income tax is mainly a national matter in Belgium. A 120% cost deduction has been put in place for investments in bicycle infrastructure for employees, such as a bicycle parking and other infrastructure for cyclists (shower, …).

Exemption of taxable profits for investments in new fixed assets

Another (national) income tax incentive is the exemption of taxable profits (‘investeringsaftrek’ – ‘déduction pour investissement’) of 13,5% of the investments in new fixed assets in energy efficient technology.

A tax credit for investments in sustainable fixed assets

In corporate income tax (as I said before a national matter) there is a tax credit for research and development (’belastingkrediet’ – ‘crédit d’impôt’) calculated on the basis of the corporate income tax rate (currently 29,58%) for investments in sustainable fixed assets.

Please note that Belgian corporate income tax for SME’s is 20% on the first 100.000,00 EURO turnover (subject to conditions). For all companies the corporate income tax rate will decrease to 25% as from 2020.

Hopes are that both at the national level and at the respective regional levels new green tax incentives will be adopted in order to encourage sustainable investments in Belgium.

As of January 01, 2019, the VAT rate will be increased in Russia from 18% to 20%.

Additional changes recently introduced to the Russian tax legislation require that foreign companies that render IT services in Russia shall register with the tax authorities in Russia; file VAT tax returns and pay VAT in Russia.

As from January 01, 2019 such obligation will be imposed on all foreign companies that render IT services in Russia independent of the fact who is the buyer of such IT services – a natural person, an individual entrepreneur or a legal entity.

Earlier the obligation to pay VAT was imposed only on customers of IT companies in Russia. As a rule, in case of sale of goods, works, services where the territory of Russia is recognized as a place of supply, the obligation to calculate and pay VAT is generally imposed on buyers of such services (legal entities or individual entrepreneurs registered with the tax authorities in Russia) recognized in such cases as tax agents.

In accordance with new tax requirements the foreign companies that render IT services where the territory of Russia is recognized as a place of supply of such IT services shall calculate and pay VAT themselves unless such obligation is imposed on a tax agent.

As from January 01, 2019 the tax agents in such cases will be considered only intermediaries (legal entities or individual entrepreneurs registered with the tax authorities in Russia) engaged in settlements directly with buyers of IT services on the basis of mandate, agency or commission agreements or similar contracts concluded with foreign companies that render such IT services (if there are several intermediaries involved, the intermediary who is involved in settlement directly with buyers will be recognized as the tax agent independent of the existence of the contract concluded with foreign IT company that renders such IT services).

Thus, as from January 01, 2019 the buyers of IT services from foreign companies are no longer considered as tax agents and respectively no longer obliged to calculate and pay VAT for foreign IT companies. Such obligation will be imposed on foreign IT companies themselves with some exceptions specified above.

As a result, all foreign companies that render IT services in Russia shall be registered with tax authorities in Russia in order to fulfil its tax obligations, file VAT tax returns in electronic form and pay taxes respectively.

The buyers of IT services (legal entities or individual entrepreneurs registered with the tax authorities in Russia) will have the right to deduct VAT paid to foreign IT companies provided that such foreign IT companies are duly registered with the tax authorities in Russia.

The registration of foreign IT companies in Russia will require submission of application and a set of documents. Such application can be filed by the representative of such foreign company, by mail or in electronic form through official Internet page of Russian tax authorities.

As an example, Facebook has already announced officially that all its clients in Russia both natural persons and legal entities will pay VAT in the amount of 20% from January 01, 2019. This will be applied to all advertisement accounts where Russia is specified as a country of the company.

The Italian Budget Law for 2017 (Law No. 232 of 11 December 2016), with the specific purpose of attracting high net worth individuals to Italy, introduced the new article 24-bis in the Italian Income Tax Code (“ITC”) which regulates an elective tax regime for individuals who transfer their tax residence to Italy.

The special tax regime provides for the payment of an annual substitutive tax of EUR 100.000,00 and the exemption from:

  • any foreign income (except specific capital gains);
  • tax on foreign real estate properties (IVIE ) and tax on foreign financial assets (IVAFE);
  • the obligation to report foreign assets in the tax return;
  • inheritance and gift tax on foreign assets.

Eligibility

Persons entitled to opt for the special tax regime are individuals transferring their tax residence to Italy pursuant to the Italian law and who have not been resident in Italy for tax purposes for at least nine out of the ten years preceding the year in which the regime becomes effective.

According to art. 2 of the ITC, residents of Italy for income tax purposes are those persons who, for the greater part of the year, are registered within the Civil Registry of the Resident Population or have the residence or the domicile in Italy under the Italian Civil Code. About this, it is worth noting that persons who have moved to a black listed jurisdiction are considered to have their tax residence in Italy unless proof to the contrary is provided.

According to the Italian Civil Code, the residence is the place where a person has his/her habitual abode, whilst the domicile is the place where the person has the principal center of his businesses and interests.

Exemptions

The special tax regime exempts any foreign income from the Italian individual income tax (IRPEF).

In particular the exemption applies to:

  • income from self-employment generated from activities carried out abroad;
  • income from business activities carried out abroad through a permanent establishment;
  • income from employment carried out abroad;
  • income from a property owned abroad;
  • interests from foreign bank accounts;
  • capital gains from the sale of shares in foreign companies;

However, according to an anti-avoidance provision, the exemption does not apply to capital gains deriving from the sale of “substantial” participations that occur within the first five tax years of the validity of the special tax regime. “Substantial” participations are, in particular, those representing more than 2% of the voting rights or 5% of the capital of listed companies or 20% of the voting rights or 25% of the capital of non-listed companies.

Any Italian source income shall be subject to regular income taxation.

It must be underlined that, under the special tax regime no foreign tax credit will be granted for taxes paid abroad. However, the taxpayer is allowed to exclude income arising in one or more foreign jurisdictions from the application of the special regime. This income will then be subject to the ordinary tax rule and the foreign tax credit will be granted.

The special tax regime exempts the taxpayer also from the obligation to report foreign assets in the annual tax return and from the payment of the IVIE and the IVAFE.

Finally, the special tax regime provides for the exemption from the inheritance and gift tax with regard to transfers by inheritance or donations made during the period of validity of the regime. The exemption is limited to assets and rights existing in the Italian territory at the time of the donation or the inheritance.

Substitutive Tax and Family Members

The taxpayer must pay an annual substitutive tax of EUR 100,000 regardless of the amount of foreign income realised.

The special tax regime can be extended to family members by paying an additional EUR 25,000 substitutive tax for each person included in the regime, provided that the same conditions, applicable to the qualifying taxpayer, are met.

In particular, the extension is applicable to

  • spouses;
  • children and, in their absence, the direct relative in the descending line;
  • parents and, in their absence, the direct relative in the ascending line;
  • adopters;
  • sons–in-law and daughters-in-law;
  • fathers-in-law and mothers-in-law;
  • brothers and sisters.

How to apply

The option shall be made either in the tax return regarding the year in which the taxpayer becomes resident in Italy, or in the tax return of the following year.

Qualifying taxpayer may also submit a non-binding ruling request to the Italian Revenue Agency, in order to prove that all requirements to access the special regime are met. The ruling can be filed before the transfer of the tax residence to Italy.

The Revenue Agency shall respond within 120 days as from the receipt of the request. The reply is not binding for the taxpayer, but it is binding for the Revenue Agency.

If no ruling request is filed, the same information provided in the request must be provided together with the tax return where the election is made.

Termination

The option for the special tax regime is automatically renewed each year and it ends, in any case, after fifteen years from the first tax year of validity. However, the option can be revoked by the taxpayer at any time.

In case of termination or revocation, family members included in the election are also automatically excluded from the regime.

After the ordinary termination or revocation, it is no longer possible to apply for the special tax regime.

The author of this post is Valerio Cirimbilla.

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    Hong Kong removed from EU’s Tax Cooperation Watchlist

    6 3 月 2024

    • 香港
    • 税务

    “This agreement is not just an economic opportunity. It is a political necessity.” In the current geopolitical context of growing protectionism and significant regional conflicts, Ursula von der Leyen’s statement says a lot.

    Even though there is still a long way to go before the agreement is approved internally in each bloc and comes into force, the milestone is highly significant. It took 25 years from the start of negotiations between Mercosur and the European Union to reach a consensus text. The impacts will be considerable. Together, the blocs represent a GDP of over 22 trillion dollars, and are home to over 700 million people.

    Our aim here is to highlight, in a simplified manner, the most important information about the agreement’s content and its progress, which we will update here at each stage.

    What is it?

    The agreement was signed as a trade treaty, with the main goal of reducing import and export tariffs, eliminating bureaucratic barriers, and facilitating trade between Mercosur countries and European Union members. Additionally, the pact includes commitments in areas such as sustainability, labor rights, technological cooperation, and environmental protection.

    Mercosur (Southern Common Market) is an economic bloc created in 1991 by Brazil, Argentina, Paraguay, and Uruguay. Now, Bolivia and Chile participate as associated members, accessing some trade agreements, but not fully integrated into the common market. On the other hand, the European Union, with its 27 members (20 of which have adopted the common currency), is a broader union with greater economic and social integration compared to Mercosur.

    What does the EU Mercosur agreement include?

    Trade in goods:

    • Reduction or elimination of tariffs on products traded between the blocs, such as meat, grains, fruits, automobiles, wines, and dairy products (the expected reduction will affect over 90% of the traded goods between the blocks).
    • Easier access to European high-tech and industrialized products.

    Trade in services:

    • Expands access to financial services, telecommunications, transportation, and consulting for businesses in both blocs.

    Movement of people:

    • Provides facilities for temporary visas for qualified workers, such as technology professionals and engineers, promoting talent exchange.
    • Encourages educational and cultural cooperation programs.

    Sustainability and environment:

    • Includes commitments to combat deforestation and meet the goals of the Paris Agreement on climate change.
    • Provides penalties for violations of environmental standards.

    Intellectual property and regulations:

    • Protects geographical indications for European cheese, wines, and South American coffee and cachaça.
    • Harmonizes regulatory standards to reduce bureaucracy and avoid technical barriers.

    Labor rights:

    • Commitment to decent working conditions and compliance with International Labor Organization (ILO) standards.

    Which benefits to expect?

    • Access to new markets: Mercosur companies will have easier access to the European market, which has more than 450 million consumers, while European products will become more competitive in South America.
    • Costs reduction: The elimination or reduction of tariffs could lower the prices of products such as wines, cheese, and automobiles and boost South American exports of meat, grains, and fruits.
    • Strengthened diplomatic relations: The agreement symbolizes a bridge of cooperation between two regions historically connected by cultural and economic ties.

    What’s next?

    The signing is only the first step. For the agreement to come into force, it must be ratified by both blocs, and the approval process is quite distinct between them, since Mercosur does not have a common Council or Parliament.

    In the European Union, the ratification process involves multiple institutional steps:

    • Council of the European Union: Ministers from the member states will discuss and approve the text of the agreement. This step is crucial, as each country has representation and may raise specific national concerns.
    • European Parliament: After approval by the Council, the European Parliament, composed of elected deputies, votes to ratify the agreement. The debate at this stage may include environmental, social, and economic impacts.
    • National Parliaments: In cases where the agreement affects shared competencies between the bloc and member states (such as environmental regulations), it must also be approved by the parliaments of each member country. This can be challenging, given that countries like France and Ireland have already expressed specific concerns about agricultural and environmental issues.

    In Mercosur, the approval depends on each member country:

    • National Congresses: The agreement text is submitted to the parliaments of Brazil, Argentina, Paraguay, and Uruguay. Each congress evaluates independently, and approval depends on the political majority in each country.
    • Political Context: Mercosur countries have diverse political realities. In Brazil, for example, environmental issues can spark heated debates, while in Argentina, the impact on agricultural competitiveness may be the focus of discussion.
    • Regional Coordination: Even after national approval, it is necessary to ensure that all Mercosur members ratify the agreement, as the bloc acts as a single negotiating entity.

    Stay tuned: you will find the update here as the processes advance.

    On 20th February 2024, the European Union (EU) issued an update regarding the classification of non-cooperative tax jurisdictions. Hong Kong was removed from the EU’s tax cooperation watchlist and placed on the “white” list. This removal indicates that Hong Kong has taken significant measures to tackle the EU’s apprehensions and enhance its tax cooperation framework to adhere to international tax standards.

    In 2021, the EU included Hong Kong in its tax cooperation watchlist due to concerns about potential instances of “double non-taxation” stemming from certain foreign-sourced passive income (FSIE) not being taxed in Hong Kong. In response to these concerns, Hong Kong introduced a new FSIE regime in January 2023. Under this regime, multinational enterprise entities receiving foreign-sourced dividends, interest, income from intellectual property usage, and gains from the disposal of shares or equity interests in Hong Kong must meet economic substance requirements to qualify for tax exemption.

    On 1st January 2024, Hong Kong made further adjustments to its FSIE regime, broadening the range of assets related to foreign-sourced disposal gains to encompass assets beyond shares or equity interests. Subsequent to implementing these refinements, the EU conducted an assessment and concluded that Hong Kong had honored its commitment by amending the tax regime.

    Acknowledging Hong Kong’s efforts and progress in addressing the concerns raised, the EU transferred Hong Kong from its tax cooperation watchlist to the “white” list on 20th February 2024.This signifies a significant step forward for Hong Kong, demonstrating its commitment to addressing concerns raised by the EU and its dedication to aligning with international tax standards.

    Addressing EU Concerns and Implementing Change

    In 2021, the EU expressed concerns regarding potential “double non-taxation” arising from certain foreign-sourced passive income (FSIE) not being subject to taxation in Hong Kong. In response, Hong Kong proactively implemented a new FSIE regime in January 2023. This regime requires multinational enterprises receiving qualifying foreign-sourced income, including dividends, interest, intellectual property income, and gains from the disposal of shares or equity interests in Hong Kong, to meet specific economic substance requirements to benefit from tax exemption.

    Further demonstrating its commitment, Hong Kong expanded the scope of its FSIE regime on 1st January 2024 to encompass foreign-sourced disposal gains from assets beyond shares or equity interests. Following these improvements, the EU acknowledged Hong Kong’s efforts and reclassified its status, signifying its satisfaction with the implemented changes.

    Looking Ahead: Navigating Complexities

    Although the EU’s removal of Hong Kong from the watchlist is a positive development, challenges remain. Hong Kong needs to navigate a complex landscape to fully regain its position as a premier financial and business hub. Reassuring international investors and markets of its long-term stability will be crucial in this endeavor.

    Balancing Priorities and Building Confidence

    While Hong Kong enjoys a strong reputation for rule of law in the business sphere and maintains independence from mainland China, concerns regarding political freedoms persist. Addressing these concerns transparently and effectively will be essential in building international confidence and fostering a thriving business environment.

    Ultimately, Hong Kong’s success lies in its ability to strike a balance between its unique position and the evolving global landscape. By demonstrating its commitment to international tax standards, upholding the rule of law, and addressing all areas of international concern, Hong Kong can solidify its position as a leading financial and business center.

    Vietnam has embraced the global minimum tax (GMT) to harmonize its tax policies with global standards. While this new tax regime is anticipated to have certain adverse effects on foreign direct investment (FDI), the Vietnamese government is devising proactive measures to mitigate these repercussions and maintain the country’s appeal as an investment haven.

    Key Ramifications of the GMT for Vietnam

    The GMT mandates multinational corporations (MNCs) with consolidated revenue surpassing €750 million to pay a minimum tax rate of 15%, irrespective of the tax rate in the country where they operate. In Vietnam, this translates to the concept of a qualified domestic minimum top-up tax (QDMTT).

    The QDMTT places an extra tax burden on foreign-invested enterprises (FIEs) that are part of an MNC, potentially deterring them from investing or expanding in Vietnam. This is particularly concerning for industries that heavily rely on tax incentives to attract FDI.

    Vietnam’s Response: Investment Support Fund and Proactive Measures

    In response to the anticipated negative impacts of the GMT, the Vietnamese government has established an investment support fund (Fund) to incentivize investments in targeted sectors. The Fund is primarily funded by proceeds from the State Budget generated by the GMT.

    Eligible enterprises for the Fund are those engaged in high-tech product manufacturing, high-tech enterprises, high-tech application projects, and enterprises with investment projects in research and development centers. Eligibility is based on capital size, annual revenue, industry, or technology utilized.

    Eligible taxpayers can receive cash subsidies for five specific expense categories:

    1. Human resource training and development
    2. Research and development expenses
    3. Fixed asset investments
    4. High-tech manufacturing expenses
    5. Social infrastructure systems

    To qualify for Fund benefits, eligible taxpayers must submit an application dossier to the Fund Office in Hanoi between August 15th and 30th of the year following the incurred Supported Expenses. Each Supported Expense category will have a distinct reimbursement ratio, and support payments will be contingent on the actual expenses incurred by eligible taxpayers.

    In addition to the Fund, the Vietnamese government is also implementing proactive measures to address the concerns of foreign investors. These measures include:

    1. Focusing on targeted industries with high growth potential that align with Vietnam’s strategic development goals
    2. Utilizing the additional revenue collected from top-up tax to enhance infrastructure and labor quality
    3. Considering cash grants for long-term qualified investments in high-tech industries

    Conclusion

    The introduction of the GMT poses challenges for Vietnam in attracting FDI. However, the government’s establishment of the investment support fund and proactive measures demonstrates its commitment to safeguarding the country’s competitiveness as an investment destination. By combining targeted support with infrastructure improvements and incentives for specific industries, Vietnam can mitigate the negative impacts of the GMT and continue to attract foreign investors.

    Artists (actors, singers) and sportsmen, non-residents in Spanish territory, who occasionally carry out their artistic or sporting activities in Spain, are usually unaware of their tax obligations before the Spanish Tax Authorities.

    In this respect, we would like to point out that, in the last year, the inspection activity of the Spanish Tax Administration has increased considerably in relation to these taxpayers. This is a consequence of the fact that the Annual Tax and Customs Control Plan of the State Agency issued by the Spanish Tax Administration (AEAT) expressly included the intensification of the control of the income obtained by non-resident artists and sportsmen who act or develop an activity in Spain within the year 2020.

    Spanish legislation, which regulates the Non-Resident Income Tax (IRNR), establishes literally that: it is considered income obtained in Spanish territory, among others, that which derives, directly or indirectly, from the personal performance in Spanish territory of artists and sportsmen, and that which derives from any other activity related to such performance, even if it is received by a person or entity other than the artist or sportsman.

    This means that the artist or sportsman who performs an activity in Spain for which he or she obtains income, is subject to tax obligations and to the payment of taxes in Spain and must declare not only the income directly related to his or her performance but also other income linked to his or her professional performance, such as sponsorships, image rights, etc…

    The above is understood regardless of whether the actual recipient of the income derived from the athlete’s or artist’s performance is the artist or athlete himself or herself, a company in which he or she has any interest, or a third individual or legal entity with no apparent connection to the athlete or artist.

    Therefore, even if the company that pays such income is a non-resident in Spanish territory and the payment takes place physically outside such territory, any income obtained in Spain will be considered subject to tax (19% for EU residents and 24% for non-EU residents) when it is obtained on account of the artistic or sporting activity carried out in the Spanish territory.

    Most of the double taxation international treaties that Spain has signed with other countries allow the country in which the activity of the artist or athlete takes place to tax the income generated from such activity. All these agreements also establish mechanisms to avoid double taxation, but this possibility is considerably complicated when, as in many cases, the artist or sportsman receives his income through a company incorporated in his country of residence or in a third country instead of receiving it directly as an individual.

    Often the contracts signed by artists and sportsmen are signed by companies related to them -usually domiciled in their country of residence-, this situation is giving rise to serious difficulties for them to deduct in their country of residence (and within the scope of Corporate Income Tax) the tax paid in Spain as an individual.

    We therefore want to highlight (i) the existence of important tax obligations that affects artists and sportsmen who are not resident in Spanish territory for the activities they carry out in Spain and, furthermore, (ii) the need for them to receive adequate prior advice on the tax consequences of their activity and, consequently, on the best vehicle to formalize their contracting.

    Belgian residents working abroad, e.g. in Luxembourg, may have a company car registered in their country of employment. The Belgian regional tax administrations exercise checks to verify whether the user of the company car complies with regional vehicle tax rules allowing an exemption from registration of the car in Belgium and from Belgian vehicle taxes. Especially in the Walloon Region this has given rise to a lot of litigation in recent years, especially regarding Luxembourg workers residing in Belgium.

    Belgian vehicle registration rules stipulate that the user of the car must have on board of the car a copy of his employment contract as well as a document drawn up by the foreign employer showing that the latter had put the vehicle at the employee’s disposal. If the driver cannot produce these documents, he is supposed by the Walloon tax administration to have violated the legal obligation to register the car in Belgium and to pay Belgian vehicle taxes.

    The consequences are severe. In addition to the vehicle taxes, the driver must pay a hefty fine. Failing to pay these large amounts (often more than EUR 3,000.-) on site at the time of the road check, the authorities withhold the on-board documents of the car, which results in the immobilization of the car.

    The Walloon tax administration, initially, did not pay back the vehicle taxes even if it was proven afterwards that the conditions of the exemptions of registration in Belgium and Belgian vehicle taxes were met. At first, the tax administration claimed that the vehicle taxes remained due if the employee showed the required documents only afterwards to the competent authorities. The position of the Walloon tax administration was that the employee must be able to produce the required documents on the spot during the check to be exempted from registration and vehicle taxes in Belgium.

    In a recent reasoned order, the European Court of Justice (‘ECJ’) confirmed that this harsh position by the Walloon tax administration was in violation of the freedom of movement for workers. A reasoned order is issued by the ECJ a.o. where a question referred to the ECJ for a preliminary ruling is identical to a question on which the ECJ has previously ruled or where the answer to the question referred for a preliminary ruling admits of no reasonable doubt.

    In other words, the ECJ confirms that the requirement to have the abovementioned documents permanently on board of the vehicle to be exempted from Belgian registration and Belgian vehicle taxes is manifestly disproportionate and thus a violation of the freedom of movement for workers.

    From a practical perspective, this ruling confirms that an employee resident in Belgium but working in another member state does not have to pay the Belgian vehicle taxes (or is entitled to be paid back) if he demonstrates after the check that he met the conditions to be exempted from registration and vehicle taxes in Belgium.

    Climate change has become part of our everyday lives. This includes tax lawyers on the lookout of tax incentives for their clients. Below you will find an outline of green tax incentives for industrial or commercial buildings in Belgium. Indeed, such tax incentives may help you achieve your companies’ sustainability goals. Other green tax incentives exist in Belgium but the focus here is on industrial and commercial buildings.

    Reduction of Machinery and equipment tax (MET)

    Fixed assets, such as machinery & equipment in industrial or commercial companies are considered immovables (buildings), subject to property tax (the MET). In Belgium this is a regional tax. The Brussels Capital Region and the Walloon Region abolished the MET.

    The Flemish Region adopted a different policy by reducing (possibly to nothing) the MET and by incentivizing companies to invest in new machinery and equipment or to replace older machinery and equipment.

    How is this achieved?

    • No indexation of the taxable base
    • A (full) reduction of the portion of the Flemish treasury in the MET (the local authority where the company is situated receives the proceeds of the MET)
    • Exemption for new investments or the replacement of machinery & equipment: the exemption depends on an energy policy agreement between the company and the Flemish government (on the basis of the Flemish Energy Code). The purpose is to reduce CO2-emissions and to enhance energy efficiency.

    However, companies with a historical presence in the Flemish region (brownfield companies) felt that they had a competitive disadvantage compared to greenfield companies: their older machinery was taxed as before. It must be noted that some of these companies employ a lot of people.

    The Flemish government therefore adopted legislation that for investments in machinery and equipment between 01/2014 and 12/2019 a reduction of the taxable base of older machinery and equipment is granted on the basis of the taxable base of the new (exempted) investments. It is not yet confirmed that this tax exemption will be prolonged or made permanent beyond 2019, however it is expected that the above tax policy in the Flemish Region will be continued, thus reducing (possibly to nothing) the MET.

    120% cost deduction for investments in bicycle infrastructure for employees

    Personal and corporate income tax is mainly a national matter in Belgium. A 120% cost deduction has been put in place for investments in bicycle infrastructure for employees, such as a bicycle parking and other infrastructure for cyclists (shower, …).

    Exemption of taxable profits for investments in new fixed assets

    Another (national) income tax incentive is the exemption of taxable profits (‘investeringsaftrek’ – ‘déduction pour investissement’) of 13,5% of the investments in new fixed assets in energy efficient technology.

    A tax credit for investments in sustainable fixed assets

    In corporate income tax (as I said before a national matter) there is a tax credit for research and development (’belastingkrediet’ – ‘crédit d’impôt’) calculated on the basis of the corporate income tax rate (currently 29,58%) for investments in sustainable fixed assets.

    Please note that Belgian corporate income tax for SME’s is 20% on the first 100.000,00 EURO turnover (subject to conditions). For all companies the corporate income tax rate will decrease to 25% as from 2020.

    Hopes are that both at the national level and at the respective regional levels new green tax incentives will be adopted in order to encourage sustainable investments in Belgium.

    As of January 01, 2019, the VAT rate will be increased in Russia from 18% to 20%.

    Additional changes recently introduced to the Russian tax legislation require that foreign companies that render IT services in Russia shall register with the tax authorities in Russia; file VAT tax returns and pay VAT in Russia.

    As from January 01, 2019 such obligation will be imposed on all foreign companies that render IT services in Russia independent of the fact who is the buyer of such IT services – a natural person, an individual entrepreneur or a legal entity.

    Earlier the obligation to pay VAT was imposed only on customers of IT companies in Russia. As a rule, in case of sale of goods, works, services where the territory of Russia is recognized as a place of supply, the obligation to calculate and pay VAT is generally imposed on buyers of such services (legal entities or individual entrepreneurs registered with the tax authorities in Russia) recognized in such cases as tax agents.

    In accordance with new tax requirements the foreign companies that render IT services where the territory of Russia is recognized as a place of supply of such IT services shall calculate and pay VAT themselves unless such obligation is imposed on a tax agent.

    As from January 01, 2019 the tax agents in such cases will be considered only intermediaries (legal entities or individual entrepreneurs registered with the tax authorities in Russia) engaged in settlements directly with buyers of IT services on the basis of mandate, agency or commission agreements or similar contracts concluded with foreign companies that render such IT services (if there are several intermediaries involved, the intermediary who is involved in settlement directly with buyers will be recognized as the tax agent independent of the existence of the contract concluded with foreign IT company that renders such IT services).

    Thus, as from January 01, 2019 the buyers of IT services from foreign companies are no longer considered as tax agents and respectively no longer obliged to calculate and pay VAT for foreign IT companies. Such obligation will be imposed on foreign IT companies themselves with some exceptions specified above.

    As a result, all foreign companies that render IT services in Russia shall be registered with tax authorities in Russia in order to fulfil its tax obligations, file VAT tax returns in electronic form and pay taxes respectively.

    The buyers of IT services (legal entities or individual entrepreneurs registered with the tax authorities in Russia) will have the right to deduct VAT paid to foreign IT companies provided that such foreign IT companies are duly registered with the tax authorities in Russia.

    The registration of foreign IT companies in Russia will require submission of application and a set of documents. Such application can be filed by the representative of such foreign company, by mail or in electronic form through official Internet page of Russian tax authorities.

    As an example, Facebook has already announced officially that all its clients in Russia both natural persons and legal entities will pay VAT in the amount of 20% from January 01, 2019. This will be applied to all advertisement accounts where Russia is specified as a country of the company.

    The Italian Budget Law for 2017 (Law No. 232 of 11 December 2016), with the specific purpose of attracting high net worth individuals to Italy, introduced the new article 24-bis in the Italian Income Tax Code (“ITC”) which regulates an elective tax regime for individuals who transfer their tax residence to Italy.

    The special tax regime provides for the payment of an annual substitutive tax of EUR 100.000,00 and the exemption from:

    • any foreign income (except specific capital gains);
    • tax on foreign real estate properties (IVIE ) and tax on foreign financial assets (IVAFE);
    • the obligation to report foreign assets in the tax return;
    • inheritance and gift tax on foreign assets.

    Eligibility

    Persons entitled to opt for the special tax regime are individuals transferring their tax residence to Italy pursuant to the Italian law and who have not been resident in Italy for tax purposes for at least nine out of the ten years preceding the year in which the regime becomes effective.

    According to art. 2 of the ITC, residents of Italy for income tax purposes are those persons who, for the greater part of the year, are registered within the Civil Registry of the Resident Population or have the residence or the domicile in Italy under the Italian Civil Code. About this, it is worth noting that persons who have moved to a black listed jurisdiction are considered to have their tax residence in Italy unless proof to the contrary is provided.

    According to the Italian Civil Code, the residence is the place where a person has his/her habitual abode, whilst the domicile is the place where the person has the principal center of his businesses and interests.

    Exemptions

    The special tax regime exempts any foreign income from the Italian individual income tax (IRPEF).

    In particular the exemption applies to:

    • income from self-employment generated from activities carried out abroad;
    • income from business activities carried out abroad through a permanent establishment;
    • income from employment carried out abroad;
    • income from a property owned abroad;
    • interests from foreign bank accounts;
    • capital gains from the sale of shares in foreign companies;

    However, according to an anti-avoidance provision, the exemption does not apply to capital gains deriving from the sale of “substantial” participations that occur within the first five tax years of the validity of the special tax regime. “Substantial” participations are, in particular, those representing more than 2% of the voting rights or 5% of the capital of listed companies or 20% of the voting rights or 25% of the capital of non-listed companies.

    Any Italian source income shall be subject to regular income taxation.

    It must be underlined that, under the special tax regime no foreign tax credit will be granted for taxes paid abroad. However, the taxpayer is allowed to exclude income arising in one or more foreign jurisdictions from the application of the special regime. This income will then be subject to the ordinary tax rule and the foreign tax credit will be granted.

    The special tax regime exempts the taxpayer also from the obligation to report foreign assets in the annual tax return and from the payment of the IVIE and the IVAFE.

    Finally, the special tax regime provides for the exemption from the inheritance and gift tax with regard to transfers by inheritance or donations made during the period of validity of the regime. The exemption is limited to assets and rights existing in the Italian territory at the time of the donation or the inheritance.

    Substitutive Tax and Family Members

    The taxpayer must pay an annual substitutive tax of EUR 100,000 regardless of the amount of foreign income realised.

    The special tax regime can be extended to family members by paying an additional EUR 25,000 substitutive tax for each person included in the regime, provided that the same conditions, applicable to the qualifying taxpayer, are met.

    In particular, the extension is applicable to

    • spouses;
    • children and, in their absence, the direct relative in the descending line;
    • parents and, in their absence, the direct relative in the ascending line;
    • adopters;
    • sons–in-law and daughters-in-law;
    • fathers-in-law and mothers-in-law;
    • brothers and sisters.

    How to apply

    The option shall be made either in the tax return regarding the year in which the taxpayer becomes resident in Italy, or in the tax return of the following year.

    Qualifying taxpayer may also submit a non-binding ruling request to the Italian Revenue Agency, in order to prove that all requirements to access the special regime are met. The ruling can be filed before the transfer of the tax residence to Italy.

    The Revenue Agency shall respond within 120 days as from the receipt of the request. The reply is not binding for the taxpayer, but it is binding for the Revenue Agency.

    If no ruling request is filed, the same information provided in the request must be provided together with the tax return where the election is made.

    Termination

    The option for the special tax regime is automatically renewed each year and it ends, in any case, after fifteen years from the first tax year of validity. However, the option can be revoked by the taxpayer at any time.

    In case of termination or revocation, family members included in the election are also automatically excluded from the regime.

    After the ordinary termination or revocation, it is no longer possible to apply for the special tax regime.

    The author of this post is Valerio Cirimbilla.

    Federico Vasoli

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