TAX NEWS - DECEMber 2009

Greece Tax: Greece Tax developments in 2009

A number of changes were made during 2009 to Greece's income tax and VAT rules.

Income Tax

Tax Rates – The income tax rate for Greek permanent establishments of foreign partnerships was reduced to 20% on net profits, after the deduction of the "entrepreneurial remuneration," which will be taxable in the hands of the individual partner, whether Greek or foreign. The rate change applies for income derived as from 1 January 2009.

As from 1 July 2009, Greece entered into the second phase of the transition period (ending on 30 June 2013), during which the withholding tax rate on interest and royalties paid to associated enterprises of another EU Member State is set at 5% (subject to lower rates in a tax treaty). Recently issued procedural guidance on the application of the EC Interest and Royalties Directive sets out the documentation required for the lower rate and the type of return to be filed.

Deductible expenses – The preapproval procedure for the deduction of royalties and management fees paid to foreign entities was formally abolished at the beginning of 2009.

Capital gains – Application of the 10% capital gains tax (subject to a lower rate in an applicable tax treaty) that was due to take effect on the sale of listed shares acquired on or after 1 January 2009 was postponed until 1 January 2010. In conjunction with the introduction of the 10% capital gains tax, the 0.15% transaction tax on the transfer of listed shares will be abolished as from 1 January 2010.

Transfer pricing – New tax rules were introduced for the attribution of profits between associated enterprises where the transaction is not made on arm's length terms. The new provisions include a requirement that documentation be retained to justify the application of the arm's length standard. The new provisions define the concept of "associated enterprises" and set penalties to be imposed for failure to comply with the arm's length principle or the documentation requirements. The rules apply to fiscal years for which the income tax return will be filed after 1 January 2011.

Thin capitalization – Thin capitalization rules were introduced for the first time. The rules disallow a deduction for interest paid to affiliated entities if the ratio of loans and other credit facility agreements to equity exceeds a 3:1 ratio on average per accounting period. The new rules apply to loans concluded after 21 July 2009.

Social Responsibility Contribution – The Ministry of Finance issued a preliminary draft for a one-time charge called the "Social Responsibility Contribution." Enterprises with reported profits exceeding EUR 5 million in tax year 2009 (i.e. periods with financial year that ended between 1 August 2008, and 31 July 2009) will be subject to the contribution, which amounts to 5% on profits from EUR 5 million to EUR 10 million, 7% for profits from EUR 10 million to EUR 25 million and 10% for profits exceeding EUR 25 million. Companies applying IFRS will use IFRS profits if those are greater than the tax profits.


Value Added Tax

Greece implemented the EU VAT Package directive that modifies the rules regarding the place of taxation for services. Under the new rules, VAT generally will be due at the location where the recipient of the service is established. Exceptions will apply for services related to real property, transportation, cultural services, food services and the short-term lease of means of transport. Services that are taxable in a non-EU country in the first place will be taxable in Greece if the services are performed in Greece.