Anyone considering an inbound investment into another country or jurisdiction must give serious thought to taxation. Issues such as privacy, accurate asset valuation and liability protection are important, but it is the tax efficiency of a foreign investment that will most likely measure its long-term success.
There are, of course, many different types and methods of investment, whether that be via direct acquisition of a capital asset, the purchase of shares in an existing business or a real estate transaction. A smart investor will study the rules and regulations that apply to each scenario in their jurisdiction of choice, and adhere to them while minimising tax liability.
Investment by cross-border merger or acquisition is one area that has received much publicity recently, as the Organisation for Economic Co-operation and Development (OECD) works to redress certain tax-efficient structures legitimately used by smart corporates. It’s Base Erosion and Profit Shifting (BEPS) legislation is designed to address the practice of shifting profits and assets across borders to minimise overall global taxation. This drive to halt BEPS has affected various tax reduction techniques, including patent box regimes, interest deductibility and offshore structures (via business substance tests). Buyers may also have contingent tax liabilities due to BEPS exposure under the seller’s aegis.
Where smaller investments are concerned, the rules are no less complex, as we will learn in the following discussion. For countries like the USA, which receives significant inward investment, there are withholding taxes for foreign investors on the sale of assets and the receipt of ‘soft’ income, as well as death taxes and individual state taxes to consider.
In Italy, on top of corporation tax of 24 per cent, there is a regional tax on productive activities of 4.82 per cent, which many investors will not be aware of.
Employing an experienced tax advisor in the jurisdiction to be invested in, is crucial before any other decisions are made. They will help investors to decide which vehicles are best to hold assets and which jurisdictions have the most favourable tax treaties to eradicate or reduce withholding tax. The advisor will also be able to ‘read between the lines’ of complex tax legislation, structuring transactions that are tax-efficient and also tax compliant.
Examples include the concept of Fiscal Unity discussed here by Friggo Kraaijeveld in The Netherlands, the use of the European Union’s Parent-Subsidiary Directive (PSD) to reduce withholding tax, as explained by Tommaso Fonti in Italy, or the Portfolio Interest Exemption, employed in the USA by Jacob Stein.
They will also have details of any tax incentives offered by various governments to attract inbound investment and be able to guide investors in the customs and culture of tax authorities that may be very different from those they are used to.
The following pages contain advice and guidance from five of IR Global’s tax experts and should provide an interesting insight into the many and varied tax-orientated challenges faced in pursuit of profitable foreign investment.