Hot topics in Finance Nordic Tax Conference 2012

1. Hot topics in Finance Nordic Tax Conference 2012

2. Agenda • Overview of international tendencies on interest limitation rules (from thin cap to EBIT tests etc.), ACE-regimes and anti arbitrage rules. • Introduction to Danish interest limitation and anti arbitrage rules on financing. • Swedish rules on interest limitation and the Swedish view on arbitrage etc. • Proposed Finnish interest limitation regime (apparently postponed). • Reflections on international issues and wider impact.

3. Overview of International Tendencies in Corporate finance

4. Global overview • Increasing use of interest limitation legislation • EBIT type legislation - Italy, Spain, Germany, Denmark • UK Arm’s length test and World Wide Debt Cap • Finland, Sweden, France • France (proposal 2012) • Global cap on finance charges • Interest on loans generally is deductible for French corporate income tax purposes. • Thin capitalization rules. • Deduction for interest on a loan obtained to acquire a participation in another company also may be disallowed in certain circumstances. • Proposal: Interest deductibility capped to 85% of their net amount as from fiscal year 2012. • De minimis of EUR 3 million.

5. Global overview • Development in Allowance for Corporate Equity (ACE) regimes • Brazil (1996) - ”Jurossobre o Capital Próprio” (JCP). • Belgium (2005) – Notional Interest Deduction • Latvia (2009) • Italy (2011) (see next slide) • Presently considered in other jurisdictions

6. Overview Italian NID regime (2011) • Italy also (re-)introduced a Notional Interest Deduction regime on 22 December 2011. • “AiutoallaCrescitaEconomica”. • The deduction aims to encourage equity financing and create neutrality between Italian companies funded with equity and those funded with debt. • ACE rules entitle Italian entities to a tax deduction computed by applying a notional yield to the increase in their net equity (the “ACE base”). • The notional yield is fixed at 3% for fiscal years 2011, 2012 and 2013. • After 2013, the notional yield will be determined annually by a Ministerial decree based on the yields on Italian treasury bonds and could be increased by an additional 3% to compensate for higher business risk. • Ministerial decree provides specific anti-avoidance rules.

7. Global overview • Increasingfocus on mismatch arrangements • OECD and EU reports in 2012 • EU: Public consultation on the double non-taxation of cross-border companies • Public consultation • The public consultation covers cross-border double non-taxation of companies, i.e. cases where divergent national rules and/or inadequate national tax measures in two countries lead to non-taxation • Aim of the Consultation is to understand the full scale of the problem in order to develop the most appropriate policy response by end of 2012

8. Global overview • Staff working paper: The internal market: factual examples of double non-taxation cases • The working group have identified a number of issues where double on-taxation could occur. List is not to be considered exhaustive. • Hybrid Entities • Hybrid Instruments • Use of Double Tax Treaties leading to double non-taxation • TP and Unilateral APAs • Transactions with associated enterprises in countries with no or extremely low taxation • Debt financing of tax exempt income • Disclosure

9. Global overview • OECD: Hybrid Mismatch Arrangements - Tax Policy and Compliance Issues • PublishedMarch 5, 2012 • No comprehensive data exists on the collectivetaxrevenuelosscaused by hybrid mismatch arrangements, anecdotal ”evidence” shows thatamount at stakesarehigh • The reportdescribes the most common types of hybrid mismatch arrangements, the effectstheyaim to achieve, the tax policy issuesraised and the policy options to addressthem (focus on domesticlaw) • The reportdoes not address the taxtreatyimplications of hybrid mismatch arrangements (addressed by working party no. 1)

10. Global overview • Conclusions • Hybrid mismatch arrangements thatmightcomply with the letter of the law but achieve double non-taxation generate significant policy issues in terms of revenue, competition, efficiency, fairness and transparency. • The same concernwhichexists in relation to double taxationexists in cases of unintended double non-taxation. • Specific and targetedrules hold significant potential to addresscertain hybrid mismatch arrangements and have recentlybeenintroduced by a limitednumber of countries. • Country experience with respect to the design, application and effects of suchrules is positive. However, the application of the rulesneedsconstantmonitoring to ensure the rulesare not circumvented. • Recommendations • OECD recommendscountries to: • Considerintroducing/revising specific and targetedrulesdenyingbenefits in case of hybrid mismatch arrangements. • Continuesharing relevant intelligence on sucharrangements. • Considerintroducing/revising disclosure initiativestargeted at hybrid mismatch arrangements.

11. Brief introduction to Danish interest limitation and Anti Arbitrage Rules on Financing

12. Interestlimitationrules Comprehensive Legislation • Thin capitalization (sec. 11 of the CIT) • 1998 • Classic regulation • Asset rule (sec. 11 B of the CIT) • 2007 • One of a kind • EBIT rule (sec. 11 C of the CIT) • 2007 • Similar to the approach in Germany and Italy

13. The ThinCapitalisation Test • A corporation is thinlycapitalizedif the debt-to-equity ratio exceeds 4:1 at the end of an incomeyear, providedthat the controlleddebtexceeds 10 MDKK. • Interestexpenses and capital losses regarding the controlleddebtthatshouldbeconverted to equity so the dept-to equity ratio is not exceeded, are not deductible. • The thincapitalisationonlyapplies to controlleddebt to companies. • The rulesalsoincludethird party debtwhich is secured by a groupcompany. • If the company is able to substantiatethat the financing is at arm’slength terms, the companywillbeallowed to deductinterestexpenseseventhough the 4:1 ratio is exceeded. • The thincapitalisation test shallbeapplied on a consolidated basis for Danish companiesbelonging to the same group.

14. The Asset Test • Under the asset test net financingexpensesmaybedeductedonlyif the expenses do not exceed a standard rate of presently3.5 per cent (2012) of the value of the tax base of certainqualifying assets. • The value of the tax base consists of the depreciatedvalue of the company’s assets. Assets, whichare not depreciable, areincluded at the acquisitioncosts plus improvements. • As a mainrule, shares and claimsare not part of the tax base according to the asset test. • Special rulesapplies to foreignshareholdings. • The deductibility of net financingexpenses up to DKK 21.3 million (2012) is not restricted by the asset test. • The assets and the net financingexpensesareconsidered on a consolidated basis for groupcompanies.

15. The EBIT Test • Remaininginterestpaymentswhicharedeductibleafter the application of the thincapitalisationrules and the asset test mayberestricted under an EBIT test. • According to the EBIT-test, the deductible net financingexpensescannotexceed 80 % of the earningsbeforeinterest and tax. • I.e. interestabove 80% of EBIT arerestricted. • As with the asset test, the EBIT test onlyappliesif net financingexpensesexceed DKK 21.3 million (2011). • The net financingexpenses and the EBIT shouldbeconsidered on a consolidated basis for groupcompanies.

16. EBIT rule Comparative overview

17. Danish Anti Arbitrage Provisions • Interestpaymentsbetweengroupcompanies • Limitation on interestdeductibility in Denmark if the debt instrument is treated as equity in anotherjurisdiction(§ 2 B CIT). • Inbound dividends • Participation exemptiondoes not applyif dividends aredeductible for the payor (§ 13 CIT). • Unless EU Parent Sub Directive applies.

18. Reflections on International issues and wider impact of Interest Deduction limitation Rules

19. Reflections….. • EU lawimplications • Widerimplications • Uncertainty • Investment climate • Group financing vs. Third party financing • Harmonization

20. JAKOB BUNDGAARD MANAGING DIRECTOR HONORARY PROFESSOR, M.SC., PH.D. CORIT ADVISORY P/S LYNGBY HOVEDGADE 17, 2. SAL 2800 KONGENS LYNGBY DENMARK P: +45 40 42 22 84 E: JB@CORIT.DK WWW.CORIT-ADVISORY.COM