On April 5, 2019, Greece’s Ministry of Finance sent draft legislation to the Hellenic Parliament (a unicameral legislature) that would implement the controlled foreign company (CFC) and interest expense limitation rules in the EU Anti-Tax Avoidance Directive (ATAD I) (2016/1164) of July 12, 2016. The Parliamentary Standing Committee on Economic Affairs will discuss the draft legislation on April 9th, which would enter into force retroactively from January 1, 2019, according to Article 14.
Editor’s Note: The draft legislation does not address the hybrid mismatch measures in Article 9 of the ATAD I. Subject to certain exceptions, EU member states had to implement the ATAD I by December 31, 2018.
This follows the November 13, 2018 speech by Greece’s Director of the Public Revenue Authority regarding the country’s implementation of the ATAD I. At the time, he said that Greece has reviewed other EU member states’ implementation of ATAD I and has created its own proposals, including to amend its CFC rules.
CFC Proposals (BEPS Action 3)
The Greek CFC regime (Article 66 of the Income Tax Code (ITC)) entered into force on January 1, 2014. The regime reaches foreign undistributed income of legal persons or entities held by Greek tax residents when all of the following circumstances are met:
- The Greek taxpayer, alone or with affiliated persons, directly or indirectly owns shares, voting rights, or equity that exceed 50% of the foreign person or entity (or is entitled to receive more than 50% of the profits their profits).
- The foreign person or entity is taxed in a non-cooperative state or in a country with a preferential tax regime, published in the so-called “black list” by Greece (as defined in Article 65 of the ITC).
- More than 30% of the net income before taxes earned by the foreign person or entity derives from passive sources (e.g. interest, dividends, royalties).
- The shares of the foreign person or entity are not publicly traded.
However, the foregoing do not apply to persons or entities resident in the EU or in a country that is a contracting member of the European Economic Community (EEC), unless the establishment or the financial activity of such person or entity is fictitious in order to avoid taxes.
Article 12 of the draft legislation would replace the foregoing CFC rules with Articles 7 and 8 of the ATAD I. According to Article 7 of ATAD 1, the taxpayer’s EU member state must treat an entity or permanent establishment (PE), whose profits are not subject to tax or are exempt from tax in that member state, as a CFC where the following conditions are met:
- In the case of an entity, the taxpayer by itself, or together with its associated enterprises, holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of capital, or is entitled to receive more than 50 percent of the profits of that entity.
- The actual corporate tax paid by the entity or PE on its profits is lower than the difference between the corporate tax that would have been charged under the applicable corporate tax system in the taxpayer’s member state and the actual corporate tax paid.
Where an entity or PE is treated as a CFC, new Article 66(3) of the ITC would require the taxpayer to include the following in their Greek tax base:
- The undistributed income of the entity or PE, which is derived from the following categories:
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- Interest or any other income generated by financial assets.
- Royalties or any other income generated from intellectual property.
- Dividends and income from the disposal of shares.
- Income from financial leasing.
- Income from insurance, banking and other financial activities.
- Income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.
Editor’s Note: Accordingly, Greece would implement Option A in Article 7(2)(a) of the ATAD 1, which would attribute to a Greek taxpayer certain predefined categories of non-distributed (passive) income.
Under Article 8 of ATAD 1, where the member state includes the above income in the tax base, the income must be calculated in accordance with the rules of the corporate tax law of the member state, where the taxpayer is tax resident or situated. The entity’s or PE’s losses cannot be included in the tax base, but may be carried forward and taken into account in subsequent tax periods.
Interest Expense Limitation Proposals (BEPS Action 4)
The Greek thin cap regime (Article 49 of the ITC) limits interest deductions that exceed the taxpayer’s debt-to-equity ratio on earnings before interest, tax, depreciation and amortization (“EBITDA”) of 3:1 (i.e., 30% of EBITDA starting in 2017) each fiscal year, which falls within the range suggested by the final OECD BEPS Action 4 report. On July 23, 2013, Greece amended its thin cap regime as follows:
- The maximum amount of net interest expenses that can be deducted each year was raised from €1 million to €3 million.
- Net interest expenses that are not deductible may now be carried forward indefinitely for use in future years where the EBITDA limit is not reached.
The following entities are exempt from the Greek thin cap regime:
- Leasing and factoring companies.
- Credit and other financial institutions.
- Special purpose vehicles for securitization and covered bonds transactions.
- Companies that offer investment services.
The following thin cap EBITDA ratios apply as part of a transition to an eventual 30% ratio starting in 2017, pursuant to Ministerial Circular No. 1037/2015 (issued on February 2, 2015):
- 60% of EBITDA from January 1, 2014.
- 50% of EBITDA from January 1, 2015.
- 40% of EBITDA from January 1, 2016.
- 30% of EBITDA from January 1, 2017.
Article 11 of the draft legislation would replace the foregoing thin cap rules with Article 4 of the ATAD I, which contains measures that limit interest expense deductions on related-party debts to 30% of the debtor’s EBITDA, or 30% of interest paid (or payable) to related parties in the previous year, whichever is lower. Any excess interest expense could be carried forward, but not carried back.
The EBITDA limitation would apply only to taxpayers with collective interest expenses exceeding €3 million each year. Banks and insurance companies would be excluded from application of the EBITDA limitation, regardless of their level of interest expenses.
The ATAD 1 defines “borrowing costs” as interest expenses on all forms of debt, other costs economically equivalent to interest, as well as expenses incurred in relation with the raising of finance.
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