2022: The Year in Review
When it comes to the impact of tax developments in our practice it is key to have a global perspective. This Kore insight aims at highlighting some International and European tax developments of 2022 and, why not, also some local Portuguese tax developments that deserved a mention (as we are in Portugal).
Cold January started with the ripples effects of the release of the first draft of the Unshell Directive that opened a debate within Europe on the need for common approach to minimum substance rules for tax purposes and the use of special purpose vehicles. Still in the European front, highlight to the Court of Justice judgement in the so-called 720 form (where Spanish residents declare certain assets and rights held abroad) that held that the harsh penalties applied were disproportionate and not in line with the free movement of capital. On January, the UAE gained the international spotlight by announcing a new federal corporate income tax system effective June 2023 with a headline tax rate of 9% showing that zero-tax countries may be willing to change tax policy. In Portugal, the year started with the termination of the tax treaty between Portugal and Sweden. This controversial move by Sweden had specific negative impact on non-habitual residents in Portugal receiving pensions from Swedish source, which saw their effective tax rise exponentially. Our Kore insights on this month of January was about pre-immigration planning.
Love-filled February (naturally war issues aside) was marked by the release by the EU Council of the updated but ever-shrinking list of non-cooperative jurisdictions and the so-called “grey list” (then updated further later in October 2022). On the international side, the OECD is busy unravelling the complexities of its two-pillar plan and released draft Model Rules with respect to nexus and revenue sourcing under Amount A of Pillar One. The work on Pilar One was latter reflected in a June progress report. In Portugal, a set of decisions of the Court of Justice (C‑184/18, C‑388/19, C-224/21 and C‑647/20) dealing with the Portuguese more onerous taxation for non-residents on the sale of Portuguese real estate compared with Portuguese residents, were consistently followed by the Portuguese Arbitration Court that held that the differentiated treatment constituted a restriction to the free movement of capital. The Portuguese Budget 2023 eliminated this discrimination by applying as for 2023 onwards the same tax regime to non-residents as for residents, which will result in an effective tax increase for most non-residents disposing of Portuguese real estate in Portugal (not the best outcome as there is no transitory provision).
Windy March brought the news from Europe of the failure to reach political agreement on the revised proposal for an EU Minimum Tax Directive (part of the OECD Pillar Two). It took then 10 months to overcome the deadlock and adopt in December 2022 this ground breaking rules that will come into play for large MNE as of 2024. Read here our Primer on the Minimum Corporate Tax Proposal and another short contribution on the impact of Pillar Two on Portuguese tax incentives. On the US, Biden unveiled a proposal for a billionaire minimum tax but the plans did not go further. Another windy development, but this one for the Portuguese coffers, was the expected European Court decision on the incompatibility of the Portuguese withholding tax applicable to non-resident investment funds with the free movement of capital. There were already 5 Arbitration decisions prior to the EU Court decision favouring the taxpayers. The Arbitration Court has been a flooded with claims, with at least 56 decisions published in 2022 favouring non-resident funds, that is a lot of Euros flying away. Our Kore insights this month was about tax return preparation.
Rainy April started on the international field with public discussion around the OECD Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS) (OECD Report) which seeks to require cryptocurrency exchanges and other service providers to report certain cryptocurrency transactions. The report at the OECD level with the CARF proposal was finalized in October 2022 with the EU issuing a parallel DAC8 proposal in November to cover the exchange of information on crypto-assets, expected to come into play by 2026. On the Portuguese front, the Budget for 2022 which we summarized in a short article finally was approved due to the general election. This Budget included a rather nefarious provision taxing short term capital gains on securities at progressive rates up to 48%. Our Kore insights this month explained the rule and why such policy position is likely wrong and its drawbacks.
Springlike May flourished in Europe with one more legislative proposal with another acronym DEBRA, that stands for Directive on the debt-equity bias reduction allowance aimed at entering into force by 2024. But the idea seems to have subsided quickly with recent December ECOFIN suspending examination until other connected tax initiatives roll further. The news on the other side of the pond are that political tensions in US Congress would derail US implementation of OECD Pillar One and Pillar Two, even a US would the most interested party on eliminating unilateral digital services taxes. July G20 meeting confirmed the delay to 2024 for implementation. In Portugal, interesting decisions continue to be issued by the Arbitration Court and we had the opportunity to comment on a decision dealing with a correction of price by the tax authorities to an individual by application of rather blind rule of adjustment of prices. In Portugal, the news were that US expats discovered Portugal to reside or invest and with this comes tax complications due to the specific nature of taxation on citizenship from the US. Our Kore insights this month dealt with an Arbitration Court case dealing with the interaction of the NHR regime and US Citizens taxation.
Warm June started with a report of the EU institutions need for (new) tax resources to pay the bills (and keep us all warm with tax initiatives). There you find the carbon border adjustment mechanism (CBAM) and a share of Pillar One re-allocated profits. No wonder they were able to deliver a Christmas present when they reach the agreement to put in place the CBAM by October 1, 2023. France works its EU presidency to work around the Hungary veto to Pillar Two showing the willingness of at least 5 large EU countries to use enhanced cooperation and move ahead. In Portugal, Circular 90054 clarified the situations that trigger the mandatory appointment of a tax representative for non-resident entities or individuals. Our Kore insights this month dealt with the key issues on purchasing Portuguese real estate.
Summery July started with a joyful EU initiative to tackle the role of Enablers that facilitate tax evasion and aggressive tax planning in the European Union (Securing the Activity Framework of Enablers – SAFE). We will have to wait for 2023 to see if one more SMART initiative becomes legislation (or Special Measure Addressed to Rattle Tax advisors) . The OECD continues its excursions to far-away places to review 319 tax regimes against the implementation of the BEPS Action 5 on harmful tax practices. The talk in Europe was how to tax unexpectedly high profits from increases in energy prices. Spain, Greece and Italy lead the way with windfall taxes and EU followed with Regulation 2022/1854 which created a temporary solidarity contribution. Portuguese version adopted in December is border and targets excess profits of companies operating in the crude oil, natural gas, coal and refinery sectors, but also food retailers (but that is likely an indirect dietary policy). Our Kore insights this month dealt with a Portuguese ruling potentially indicating a shift by the Portuguese tax authorities on the qualification of income of SICAVs and implications for certain type of investors.
Silly Season August is generally a slow season everywhere and that means no significant developments or insights as we also like to take vacations.
Pleasant September was unpleasant to our Madeira International Business Centre and proved the point that one should not underestimate State Aid rules when legislating. Something that the players realized to late when the EU General Court concluded that the Madeira state aid scheme (Regime III) was not implemented in line with approved conditions and aid has to be recovered for taxpayers. Talking of unpleasant was the UK mini-budget that unveiled a host of tax changes including tax cuts on workers and businesses that helped derail the new UK government and end up being withdrawn in the following weeks. After 15 years at helm of the OECD, the unpleasant international news was the announcement of Pascal Saint-Amans retirement. Our Kore insights this month dealt with how exit taxes levied abroad may raise complex and unpleasant issues for a person moving into Portugal if not dealt or interpreted correctly.
Autumnal October would not be one more month without another proposal from the European Commission (that won definitely 2022 prize for originality). This one on a new framework for income taxation for businesses known as Business in Europe: Framework for Income Taxation (BEFIT). Befits well the confusion. Switzerland initiated draft legislation regarding a central register of ultimate beneficial owners of Swiss legal entities by June 2023, but unlike in the EU registers, the intention is that such register is not accessible to the public. On the US side, FinCEN issued a final rule implementing the beneficial ownership information reporting provisions that take effect 1 January 2024. Hong Kong's unveils significant changes to impose profits tax on MNE foreign-sourced income that is currently exempt (adopted in November). Our Kore insights this month dealt with the Unshell Directive and the importance of substance requirements for foreign entities.
Colder November brought a new EU regulation on foreign subsidies that is a new tool to counter tax subsidies that may distort the internal market, particularly in M&A deals and public procurements. The Court of Justice decided that open public access to the beneficial owner registers of EU member state companies is no longer valid, as it is in contravention of articles 7 and 8 of the Charter of Fundamental Rights of the European Union. November also brought a Revised Code of Conduct for Business Taxation that includes not only preferential tax measures, but also “general tax features” aimed to create opportunities for double non-taxation or that can lead to the double or multiple use of tax benefits. Cold winter arrived to crypto markets and understanding the new proposals on taxation of crypto in Portugal became also critical. Our Kore insights this month dealt with Q&A on the cryptoasset taxation in Portugal.
Festive December was initially all about the agreement on EU Minimum Tax Directive with the EU leading the way to implement Pillar Two. The happy mood continued when the EU Court of Justice ruled that the obligation for lawyers to inform other intermediaries under DAC6 infringes EU law considering the fundamental rights guaranteed by the Charter of Fundamental Rights of the European Union. On December, the OECD released the 2021 peer review reports that provide assessments of individual jurisdictions' progress in spontaneously exchanging information on tax rulings (BEPS action). Whilst Pillar Two is leading, the OECD felt also important to remember all that Pillar One is still alive with a release of a draft Multilateral Convention for withdrawal of Digital Services Taxes or DSTs. Festive reading as usual from the OECD. From Spain, last minute measures are generally not good news and this year was Law 38/2022 of 27 December that amongst others introduces a controversial temporary solidarity tax on large fortunes and wealth tax intended to harmonize by law existing disparities between autonomous community legislation. Portugal likes also to keep suspense and leave legislation to the last days of the year with the publication of the Budget for 2023.
For Kore Partners it was another successful year – the second year on our long road ahead. We contributed with 12 insights plus other external contributions and participations in webinars and conferences. Excellence in client service and knowledge sharing remain our top priority.
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Kore Partners is a boutique law firm centered on the private wealth sector. With almost 40 nationalities within our client pool, we are involved in high value and complex multijurisdictional issues touching all cornerstones of private client business.