TAX NEWS - may 2010
Greece enacts extensive changes to tax law
The most important amendments included in the April law are highlighted below.
Changes affecting companies
Tax treatment of retained and distributed profits - The new law introduces different tax treatment for distributed and retained profits of Greek companies. Retained profits of public companies (SAs), limited liability companies (EPEs) and permanent establishments (PEs) of foreign companies will continue to be subject to a 24% tax rate. This rate will be gradually reduced by 1% per year to finally reach 20% for accounting periods commencing after 1 January 2014. Distributed profits of such entities (including remittances by a PE to its head office abroad), however, will be taxed at a rate of 40%.
Resident corporate recipients of dividends from an SA or EPE will be entitled to a tax credit for the 40% tax already paid in respect of the dividends. Dividends paid to Greek resident individuals will be taxed as ordinary income taxed at marginal rates of up to 45%, with a tax credit available for the 40% tax paid by the legal entity distributing the dividends. It is unclear whether any excess tax paid will be refunded.
The new rules apply to profits reflected in financial statements drafted as from 31 December 2010.
Deductions - Several changes are made to the deductibility of expenses.
- Interest on loans obtained to finance the purchase of shares is not deductible if the shares are transferred within two years from the date of acquisition.
- Donations to sports clubs are no longer deductible in calculating the profits of a company, although a limited deduction is available for cash donations to specified institutions.
- Payroll expenses are deductible only if paid through a business bank account or check cleared through such an account.
- Expenses incurred for the purchase of raw and ancillary materials or other merchandise to be subsequently sold are not deductible if paid to a person or entity whose only role is to invoice the goods, with the goods being delivered by a third party.
Except for the restriction on interest deductions, which is effective for financial statements with a year end dated 31 December 2021 and onwards, these provisions apply in respect of financial statements drafted as from 31 December 2010. Withholding tax - The statutory withholding tax on interest paid to a foreign entity without a PE in Greece is increased from 25% to 40% and the rate on royalties or commissions paid to a foreign company without a PE in Greece is increased from 20% to 25%. The 25% tax rate also applies to fees paid to a foreign entity engaged in the drafting of consultancy studies for technical projects carried out in Greece. The increased rates are, of course, subject to the provisions of an applicable tax treaty and the EC Interest and Royalties Directive. Both rate increases apply to payments made after 23 April 2010.
Additionally, the law requires banks to withhold a 10% tax on any transfer of bonds of the Greek government prior to their maturity date.
Thin capitalization rules - The new law clarifies that loans granted by a third party will be deemed to constitute related party debt if an affiliate grants a guarantee for the loan. The law also extends the thin capitalization rules (which apply a 3:1 debt-to-equity ratio) to cover bonds. These provisions apply for financial statements drafted as from 31 December 2010. Old debt is no longer grandfathered.
Transfer pricing - The new law assimilates the transfer pricing rules to transactions between related domestic enterprises, as well as transactions between Greek entities and related foreign parties. Further, the scope of the transfer pricing rules is expanded to include the leasing of movable and immovable property and it is no longer required that a tax avoidance motive be present for the transfer pricing rules to apply.
The threshold to trigger the documentation requirement for related party transactions is reduced from EUR 200,000 to EUR 100,000 per year. Transfer pricing documentation must be submitted within 30 days (instead of 60) following a request of the tax authorities, and failure to timely produce the documentation will result in a 20% penalty on the amount of any transaction not properly documented (previously EUR 8,800).
The penalty for failure to comply with the arm's length principle increases from 10% to 20%, and the possibility to have a penalty reduced by entering into a settlement agreement is eliminated.
The above changes apply as from 23 April 2010.
Transactions with non-cooperative entities and entities benefiting from "favorable" regimes - Provisions are added to the tax code to regulate transactions with ("targeted") companies established in non-cooperative countries or countries with a favorable tax regime.
Targeted companies are entities resident in jurisdictions included on a list of non-cooperative jurisdictions to be issued annually by the Greek Ministry of Finance (generally non-EU countries that have not concluded an administrative mutual assistance agreement with Greece and 12 other countries) or entities resident in the EU that are not subject to income tax or that are subject to a tax on profits, income or capital that is equal to or lower than 50% of the tax that would be due in Greece.
The following expenses incurred by a Greek company on a payment made to an entity in a non-cooperative jurisdiction are nondeductible: expenses for the purchase of goods or services; interest paid on any kind of claim or interest or other payments on bond issues, deposits or guarantees; royalty, rental or lease payments; and compensation, remuneration or similar payments made to managers or members of the foreign entity's board of directors. If the foreign entity is established in a country with a preferential tax regime, the payments may be deducted if the Greek taxpayer can demonstrate that the expenses reflect actual and usual transactions and do not result in the transfer of profits, income or capital for the purpose of avoiding tax.
These provisions apply to transactions taking place after 1 January 2010. Further, for financial statements drafted as from 31 December 2010, if a Greek company sells goods to a targeted entity and that entity on-sells the goods to another Greek enterprise at a higher price without the goods leaving Greece, the price difference will be added to the gross income of the Greek company. A similar principle applies when goods are sold by a Greek company to a targeted entity at a price lower than the price that the Greek company would have charged when selling the same goods to another Greek or foreign company. The increase in the Greek company's gross income is equal to the difference between the sale price to the targeted entity and the sale price to other companies.
Tax incentives - Two new incentives are included in the law:
- SAs and EPEs experiencing a reduction of turnover for two consecutive accounting periods, compared to the immediately previous accounting period, are eligible for a 3% reduction of their corporate income tax rate for two accounting periods if there is no reduction to the workforce for the two years in question. The reduced rate applies to accounting period 2009 if the entity experienced reduced turnover in the previous two years without a reduction in its workforce, but will be lost if, during the two-year period, the workforce is reduced or turnover increases; additional corporate income tax and penalties will be imposed in such a case.
- Profits arising from the sale of goods or the provision of services under an international patent will be exempt from corporate income tax for three consecutive accounting periods provided the profits are recorded in a tax-free reserve. The incentive applies from the period in which income was generated from the use of the patent. To benefit from the incentive, which applies to sales of goods and the provision of services taking place as from 1 January 2010, approval must be obtained from the Ministry of Education.
Changes affecting individuals
Tax brackets/rates - The law introduces new tax brackets for salaried employees retroactive to 1 January 2010. There are eight brackets, with income up to EUR 12,000 tax exempt and the marginal rates going up to 45% for income over EUR 100,000. The tax-free bracket for taxpayers with dependent children is increased (EUR 1,500 for each of the first two dependent children, EUR 11,500 if the taxpayer has three dependent children and an additional EUR 2,000 per child beyond the third).
Deductions - A number of deductions have been converted to tax credits (to include part of life insurance premiums, interest on home loans, donations to Greece or to churches and attorneys fees) for expenses that arise on or after 1 January 2010.
Taxation of stock options - The calculation of the benefit acquired by a board member, manager, director or personnel of a Greek SA or branch upon the exercise of a stock option right to purchase the shares of the Greek or foreign company listed on a stock exchange has been amended. Under the new rules (effective as from 23 April 2010, the date of official publication), gains arising from the difference between the option price and the share price are taxed as salary income on the day the option is exercised (previously, the day the option was granted). If the option is exercised following termination of the employment, the benefit will be characterized as "professional income" and taxed accordingly.
Sales of listed shares - Capital gains on the sale of shares acquired up until 31 December 2021 will be tax exempt, although such sales will be subject to a 0.15% transaction tax. Capital gains derived by a legal entity with proper books of account from the sale of listed shares acquired after 1 January 2022 will be exempt from corporate income tax provided the shares are held for at least 12 months and the gains are recorded in a tax-free reserve. Capital gains will be subject to a 20% tax if the shares are sold within three months from the date of acquisition (10% if sold in the fourth through the 12th month). The gains must be again recorded in the same tax-free reserve, taxable upon distribution or capitalization at the prevailing rates, with a credit granted for the 20% or 10% tax.
Gains on the sale of shares acquired by individuals as from 1 January 2022 will be exempt from tax if the shares are held for at least 12 months, and no transaction tax will be due. If the shares are sold before the expiration of the 12-month period, the gain will be taxable according to the general rules (added to the annual taxable income of the taxpayer, taxed under the applicable tax bracket, with credit for the tax withheld at source). The above rules are subject to the provisions of an applicable tax treaty.
Real property taxes - The capital gains tax and transfer duty on real property are abolished and replaced by the reinstated Real Property Transfer Tax at a rate of 8% on the first EUR 20,000 of taxable value of real property and 10% on the excess. The new regime and rates apply as from 23 April 2010. The annual real property duty is abolished and a new annual real property tax is introduced on any property right in Greece, levied as at the first of January each year, starting from 1 January 2010. The 3% special annual real property tax levied on the taxable value of property owned by offshore entities is increased to 15% and the tax is extended to all types of legal entities, even those not recognized under Greek law, such as trusts. Several exemptions apply. The latter provision is applicable as from 1 January 2010.
Lump sum payment of tax - A 1.5% discount is granted for the lump sum payment of income tax in addition to the 1.5% and up to EUR 118 lump sum discount for the electronic filing of the tax return. The discount is applicable for fiscal year 2010, i.e. income tax returns of accounting year 2009, and also is applicable for tax returns of partnerships and joint ventures.
Tax amnesty - Legal entities that have not filed an income tax return or that have filed inaccurate income tax returns may file returns for income earned until 31 December 2021 by the end of May without the imposition of penalties or additional taxes. Moreover, with respect to specified taxes (including VAT, turnover tax, stamp duties, withholding taxes, etc.), no additional tax will be imposed if the relevant returns are filed by the end of the month following publication of the law (April 2010) and the tax due is paid in a lump sum. If the tax due is paid in installments, a 10% additional tax will be imposed for tax obligations arising before 31 December 2021 and a 3% additional tax for tax obligations arising after 31 December 2021 until publication of the law.
The corporate income tax due under the tax amnesty is payable in a lump sum at the time the return is filed. For other taxes, the tax due may be paid in a lump sum (with no additional taxes) or in four equal monthly installments (of at least EUR 300), with the first installment to be paid at the time the return is filed. The tax amnesty will be unavailable in certain cases, as specified in the law.
A tax amnesty also is provided for funds (that should have been reported or subject to tax) held abroad by legal entities and individuals. Under the amnesty, a 5% tax is imposed if the funds are repatriated and placed in an annual deposit with a Greek bank. One-half of the 5% tax will be refunded if the funds are invested in Greek government securities, Greek investment funds or real property in Greece. The rate is 8% for funds not repatriated. In either case, payment of the tax extinguishes all tax liabilities related to the funds.