Erika is the CEO of Swedish accounting firm, Finhammars, and a qualified CPA with a background in team sports and travel, with a strong professional passion for cooperation and teamwork. Erika is goal-oriented and solution-focused, excelling in progressing, particularly in English-speaking environments. Erika’s expertise includes working with owner-managed companies, addressing auditing, tax matters, K10’s, 3:12 rules, dividends, and group structures, with a focus on future planning.
Investing in Sweden
January 12, 2024
Investing in Sweden, home to two banks ranked in the top 20 of the global top 100 safest banks by Global Finance Magazine in 2023, is often seen as a progressive choice. This perception stems from the nation’s high social equality and growing emphasis on sustainability.
As we round the corner into 2024, Erika Larsdotter Hed, the CEO of Finnhammars in Stockholm, offers an understanding of why Sweden’s economy is considered such a safe pair of hands and whether she considers that might change in 2024 under a turbulent few years across the global economy. Hed has held the CEO position for just over a year, but has worked at Finnhammars for over 12 years.
The shift to digital
Digital businesses could consider Sweden as a useful European base. Often cited as one of the happiest countries in the world, Sweden offers a preferential tax regime for investors, a well-educated workforce and remote-working friendly infrastructure. Hed points out this significant trend that has reshaped the Swedish business landscape,
“The COVID-19 pandemic has expedited the transition to the digital economy in Sweden.” This shift has opened new avenues for foreign companies to enter the market, especially through online and digital channels. It’s a change that’s likely to stay and continue shaping how businesses operate in Sweden.
Investor confidence amid currency changes
Despite the Swedish Krona’s recent decline in value, Hed notes that investors are still looking towards Sweden with confidence.
“The Swedish Krona has experienced a significant depreciation against major currencies in recent months. Surprisingly, a recent survey by the Swedish Trade & Investment Council indicates that foreign investors remain optimistic about Sweden. The country’s robust economic fundamentals continue to attract foreign investment.”
Sustainability hub
Sweden has set ambitious sustainability goals, ranking 5th in the global environmental performance index, with a core objective to be fossil-fuel free by 2045. Hed recognises this as an attractive proposition for forward-thinking businesses,
“Sweden is dedicated to innovation and sustainability, making it appealing to businesses striving for responsible growth. In addition, Swedish consumers are increasingly demanding sustainable products and services. Companies demonstrating a commitment to sustainability have a competitive advantage.”
Challenges and opportunities
Expanding into Sweden does not come without its set of challenges and opportunities. Hed acknowledges issues like a shortage of skilled workers in certain sectors, technology, healthcare, and engineering, posing recruitment challenges for some industries. Hed recognises that other workforce challenges may cause investors to take another look at the numbers,
“Sweden is relatively expensive, which can be a hurdle for companies aiming to attract and retain employees.” It seems that such favourable environmental and social conditions have a more challenging set of governance, “Sweden has a comprehensive regulatory framework to protect consumers and employees. Companies need to be well-versed in these regulations before entering the market.”
Making the move to Sweden
Hed suggests that companies should do their homework before expanding to Sweden.
“Before making any expansion decisions, conduct comprehensive research.” She stresses the importance of understanding the local market, regulatory environment, and cultural norms.
Building connections through Swedish business networks can also be a crucial step in establishing a presence in the market. “Sweden offers numerous business organisations and networks that facilitate connections with other companies and provide insights into the local market. Engaging in the Swedish business community can help in building relationships and establishing a presence in the market.”
João Lopes da Silva, the Vice President of Kreston Iberaudit and a Partner at the Porto and Lisbon offices of Kreston Iberaudit, is a graduate in Administration and Finance from the Instituto Superior de Gestão (1984 – 1989). He is also a Certified Accountant accredited by the Order of Auditors. João had an impressive 29-year journey that started at KPMG and later flourished at Moore Stephens as a partner for 13 years.
Investing in Portugal
January 11, 2024
Investing in Portugal is on the rise, particularly in Lisbon. Outperforming cities like Budapest and Rio in the Cities of Economic Influence Index, Lisbon offers a mix of economic promise and a conducive regulatory landscape. Kreston Iberaudit in Portugal, guided by João Lopes da Silva’s leadership, provides essential services from financial consulting to tax advisories for expatriates. We asked Lopes da Silva to walk us through the essentials of setting up a business in Portugal.
Expanding into Portugal
Silva’s expertise and Kreston’s guidance are invaluable for businesses aiming to thrive in Portugal’s promising market, where understanding the economic, regulatory, and tax environments is crucial for successful expansion. Silva expands,
“Portugal appears among the best countries to invest in. Lisbon is one of the most influential cities in economic terms. It is the only Portuguese destination present in the Cities of Economic Influence Index, ahead of Budapest and Rio de Janeiro. Portugal’s capital city scored 72,4 points in the Economic Power category and 78,86 points in the People and Politics indicator, according to CEOWorld’s magazine. In short, all these reasons make Portugal well placed for the future growth of its economy”
Business structuring in Portugal
However, venturing into the Portuguese market requires careful navigation through various business considerations. Kreston Iberaudit stands at the forefront of this journey, offering expertise in areas ranging from administrative services, and financial consulting, to tax regime advisories for expatriate personnel. Silva warns that the regulatory landscape can be tricky for new businesses to navigate,
“For entrepreneurs, understanding the investment landscape is crucial. Incorporating a Limited Liability Company (Lda.) in Portugal can start with as little as 1 Euro, whereas a Limited Company (S.A.) demands a minimum capital of 50,000 Euros. The process, ranging from 15 to 45 days, is streamlined, but demands adherence to local regulations including obtaining a tax identification number for foreign investors and directors.”
Business structure selection is pivotal, balancing between Limited Companies, which offer limited liability and local business perception, and Establishments, serving as extensions of overseas parent companies without separate legal identities. Each structure bears its unique tax and audit obligations, influencing the decision-making process. Silva recommends following advice from a tax expert before entering the country, where possible,
“The intricacies of tax and regulatory frameworks are equally important. Portugal’s tax landscape encompasses Corporate Income Tax, Personal Income Tax, and Value Added Tax (VAT), with varying rates across the mainland and autonomous regions. The country’s tax regime is nuanced, with specific considerations for social security payments, VAT registrations, and compliance requirements.”
Incentives
Silva is keen to emphasise that it is not just red tape waiting for investors,
“Beyond taxation, Portugal offers enticing incentives, including the SIFID II for I&D expenses, DLRR and RFAI for technological and industrial investments.” These incentives, coupled with the favourable conditions for setting up holding companies, make Portugal an interesting destination for international businesses.
Certified tax advisor and dedicated tax expert with a focus on and experience in multinational group tax, transfer pricing, VAT and tax technology. Background in business, law and IT and keen to combine those fields.
Nearshoring in Europe: Protecting value chains
Nearshoring in Europe has become a trend since COVID, as companies grapple with strategic shifts and challenges in the global business landscape and bring operations closer to home. Amidst the complexities of international trade, transfer pricing emerges as a critical aspect that demands careful consideration. Martin Bonner, partner at AREA Bollenberger in Austria, shares his insights into the trends, challenges, and recommendations shaping the world of transfer pricing and cross-border operations.
Supply chains and a shift towards Europe
In recent years, a notable trend has emerged among multinational corporations seeking to safeguard their value chains. Martin Bonner sheds light on this shift, “Companies are increasingly practising nearshoring where feasible. Reasons include ensuring supply chain security, compliance, and cultural aspects.”
The motivation for this move is multifaceted. Supply chain security, compliance considerations, and cultural compatibility are key drivers. However, the shift is challenging. Bonner acknowledges challenges such as the availability of European suppliers and the persistent need to source from regions like Asia due to cost considerations. “If sourcing from the Far East proves significantly cheaper, it remains a viable option,” notes Bonner, pointing to regulatory measures like the Carbon Border Adjustment Mechanism (CBAM), prompting a shift towards EU sourcing to sidestep compliance and import costs.
Transfer pricing dynamics
The relocation of production from Asia to Eastern Europe brings new opportunities and challenges in transfer pricing. Bonner explains, “Transfer pricing setups generally simplify when production shifts from Asia to Eastern Europe.”
However, the simplicity comes with a caveat. Tax audits in the Far East often deviate from understanding European transfer pricing regulations, raising the spectre of double taxation. Bonner emphasises the importance of assessing transfer pricing setups locally in all regions involved.
Bonner highlights the value of leveraging the Kreston network to mitigate this risk. “Our Kreston network is beneficial, with local transfer pricing experts reducing the risk of double taxation,” he states, underlining the significance of a global support system in navigating the intricacies of cross-border operations.
The evolving business landscape in Austria
Reflecting on the past 12 months, Bonner observes a shift in the dynamics for international clients doing business in Austria. “Compliance work has increased, and economic, geopolitical, and global political risks have led to a decreased willingness to invest,” he notes. Investments, when made, are now more strategically focused on domestic or closer markets, mirroring a trend of risk aversion and heightened scrutiny in the current geopolitical climate.
Proactive measures for international businesses: Advice for 2024
As businesses contemplate expansion into Austria in 2024, Bonner offers a comprehensive set of recommendations. “Our experience shows that even smaller companies are increasingly subject to transfer pricing audits,” he warns. Bonner stresses the importance of proactive engagement with tax aspects from day one, encompassing transfer pricing and withholding tax, VAT, customs, and the implications of regulatory measures like CBAM.
“With the extensive resources and expertise of the Kreston network at our disposal, we are well-equipped to provide top-tier services addressing all these aspects,” assures Bonner. His advice underscores the necessity for a holistic approach and strategic foresight to navigate the intricate web of cross-border business operations. As businesses chart their course through the challenges and opportunities of international trade, insights from experts like Martin Bonner offer a valuable compass, guiding enterprises towards success in an increasingly complex global landscape.
Elena Ramírez Marín currently oversees the Tax and Outsourcing areas at Kreston’s office in Catalonia, representing Kreston International in Spain, Andorra, and Portugal. With a 30-year background in the tax and auditing sector, her career has been particularly focused on outsourcing and tax services. She holds the position of Manager at the Kreston Iberaudit International Office and is a member of the Kreston Board.
Investing in Spain
We recently spoke to Elena Ramírez Marín, partner at Kreston Iberaudit about the surging interest in investing in Spain during 2023 and the outlook for 2024. Spain attracts international businesses from the USA, UK and Germany, a trend underscored by striking figures: a gross foreign investment exceeding €34,178 million in 2022, marking the second highest since records began in 1993. With record FDI coming in, exports going out also hit a record €319.86 billion. This good news is underlined by the European Commission’s prediction that Spain will continue to outperform the German economy almost 2:1 for the next 2 years.
“In the first three months of 2023, Spain saw an 8.1% increase in gross foreign investment compared to the same period in 2022, with non-ETVE (holding) investment growing by 20.3% to reach 9,912 million euros. This marks a 50.8% rise from the five-year average. Industry emerged as a key sector, attracting 48.8% of total foreign investment, almost equal to the 48.5% garnered by the services sector, while construction received 2.6%.”
Strategic location
Marín highlights Spain’s unique geographical position: “at the crossroads of Europe, Africa, and Latin America.” This strategic placement not only facilitates entry into diverse markets but also enables companies to establish robust international business connections. The time zone advantage is a cherry on top, allowing for efficient global coordination, which is vital in today’s interconnected business world.
Talent pool and quality of life
The availability of a skilled workforce is a crucial asset for any country aiming to attract business. Marín emphasises Spain’s strength in this regard, citing its “internationally renowned universities and specialised training centres.” This, coupled with Spain’s high quality of life, positions it as an attractive destination for both businesses and talented professionals from around the globe.
Economic stability predictions
Spain’s economic resilience, particularly in overcoming recent challenges, cannot be overstated. Marín points out that this stability creates “an enabling environment for companies seeking to grow and expand in a climate of certainty.” In an era marked by global economic volatility, this stability is a beacon for companies seeking a secure environment for their investments.
“Despite a challenging international environment, Spain’s foreign trade remains robust, particularly in exports, which have grown faster than those in neighbouring countries. In 2022, Spain ranked as the fourth largest exporter of agri-food and fisheries products in the European Union, trailing only the Netherlands, Germany, and France. Globally, it stood as the eighth largest exporter in this sector, with the top three being the United States, Brazil, and the Netherlands.”
Financial incentives available for investing in Spain
The country’s fiscal policies are strategically designed to attract investment. Marín notes the “various tax incentives and benefits to companies, including patent box, digital nomad incentives, holding companies and tax exemption on digital innovation” within the Spanish tax system. These incentives, along with accessible financing and attractive banking conditions, lower the barriers to entry for businesses and stimulate job creation, vital for any thriving economy.
Robust infrastructure and connectivity
Spain’s infrastructure plays a significant role in its business appeal. Marín underscores this, pointing to the country’s “modern infrastructure and efficient transport network.” From extensive road and motorway networks to advanced rail systems and strategic seaports, Spain offers seamless connectivity essential for business operations and logistics.
Spain in the European and global context
As a member of the European Union, Spain offers businesses key access to the single market and a network of international trade agreements. This access is invaluable for companies looking to expand within the EU or establish global operations. The significant foreign investment and dynamic foreign trade, particularly in the agri-food sector, underline Spain’s role as a pivotal player in the global economy.
Famatel: A family success
Famatel is one such success story of the rapidly growing Spanish economy. A Spanish multinational with a global presence experienced a rapid expansion. As a family business, Famatel needed flexible and adaptive support.
Kreston Iberaudit’s supported restructuring the group for optimal taxation, along with providing expert advice on Transfer Pricing and compliance with Spain’s tax obligations, underlines the critical support local expertise can offer in the complex arena of international business expansion.
Famatel’s satisfaction with Kreston Iberaudit, led to subsequent collaborations in other countries. Montse Duran, CFO at Famatel, attests to Kreston Iberaudit’s ability to “quickly detect and satisfy the needs” of Famatel in areas like accounting, tax, and finance, highlighting the importance of close attention and customised solutions in international business.’
David Olivares Martínez has been Managing Partner at Kreston Iberaudit in Madrid for almost 2 years. With over 20 years in the legal profession, working in networks such as Crowe and BDO, Martínez recently was included in the 16th edition of Best Lawyer in Spain™ 2024 in the Corporate and M&A category.
Successful M&A strategies in Spain
David Olivares Martínez Managing Partner at Kreston Iberaudit shares insight from 20 years of developing successful M&A strategies in Spain. David was recently included in the 16th edition of Best Lawyer in Spain™ 2024 in the Corporate and M&A category, making him well-placed to understand the nuances of buying and selling companies is more than just a business necessity – it’s an art form, particularly with a volatile M&A market in Spain.
“Corporate professional services in purchase and sale transactions are not just obligations but essential for our clients, especially given the growth in corporate transactions in recent years,” says David Olivares Martínez.
When to sell
Understanding when and why to sell a company is a decision layered with complexities. As David notes, “It could be due to a new competitor altering industry norms, the retirement of an owner, or the challenges of generational replacement.” These factors underscore the need for expert guidance in timing and strategy.
The process is far from formulaic. “Not all companies hold the same value or are sold in the same manner,” David remarks. Each transaction is unique, and influenced by internal dynamics, management styles, sector specifics, and market conditions. This demands a tailored approach, considering factors like speed, confidentiality, and price.
Investment groups
Investment groups, too, face their challenges. “Buying a company at the right time and price, understanding market synergies and strengths, these are strategic issues that require in-depth analysis,” David adds. This highlights the importance of expertise in guiding acquisition decisions. Bringing all elements of M&A transactions under one roof offers value for money to the client, with the role of the legal team particularly crucial.
“They ensure compliance in various areas like commercial, labour, tax, and financial regulations, while also identifying potential contingencies that could impact a transaction. Our goal is to offer legal coverage in all areas, ensuring our clients always operate within the legal framework,” David emphasises.
Ongoing relationships
“Once a transaction is closed, our involvement doesn’t end. We continue providing services based on the client’s ongoing needs, be it legal, tax, or outsourcing,” says David, “This coordinated effort across all business areas ensures that we provide an optimal service focused on our client’s best interests.”
A member of the team at Kreston Iberaudit Andorra and a partner at Valgianni, she possesses extensive experience in business strategy, a field she has been immersed in since 1997.
Her educational credentials include a Bachelor’s in Business Administration from the Instituto Tecnologico Autonomo de Mexico, complemented by an MBA from ESADE. She further honed her expertise with a specialisation in International Finance from Cornell University. In acknowledgement of her distinguished contributions, several Iberian universities have conferred upon her Doctorate Honoris Causa degrees. Moreover, she has obtained diplomas from IESE in Negotiation and the Blue Ocean Institute in diversification strategies.
Foreign investment opportunities in Andorra
Kreston Iberaudit, Spain, works with clients looking for foreign investment opportunities in Andorra. This small principality located between France and Spain has emerged as a preferred destination for business investments due to its low tax system and strategic geographical position. The local firm is run by Giannina Tacca Soriano, who has worked with large global telecom brands such as Orange and Vodafone, and household name brands such as Aguas de Portugal, Credit Lyonnais and Nestlé.
With such diverse global experience in the region, Giannina helps us understand what brings wealthy investors to Andorra.
Tax benefits in Andorra
“It offers significant tax benefits for companies, helping them reduce their tax burden and enhance competitiveness. The country is within convenient reach of major European cities and ports, such as Barcelona, Madrid, and Marseille.”
The allure of Andorra for investors is significantly rooted in its tax system, concludes Giannina, “a series of tax benefits that make it an interesting option for companies seeking to optimise their tax burden.” This approach to taxation is not about creating a tax haven but about establishing a low-tax regime that aligns with the guidelines of the OECD.
The government tax on business profits (I.S. Impuesto de Sociedades), as well as the tax on personal income (IRPF Impuesto sobre la Renta de Personas Físicas), are capped at a maximum 10% tax on EBITDA and on Personal income, making it an economically viable option for businesses and professionals. Additionally, the cost of labour and social security contributions are competitive, providing further financial incentives for businesses.”
2012 Foreign Investment Law
Giannina believes a pivotal moment for Andorra’s economic trajectory was the introduction of the Foreign Investment Law in 2012.
“This legislation opened doors for global investors, allowing any foreigner to invest in Andorra. This move, coupled with Andorra’s adherence to international tax standards, has positioned it as a reliable and attractive destination for global capital.”
Geographically, Andorra’s proximity to major European cities is a significant advantage, just 200 km by car from the Port of Barcelona or the French city of Toulouse, 5 hours by train from the city of Madrid, and 500 km from the Port of Marseille. This strategic location provides convenient access to key European markets, adding to Andorra’s appeal as a business hub.
Personal tax laws in Andorra
Individuals seeking fiscal residence in Andorra are also drawn by the tax benefits, explains Giannina,
“The personal income tax system is simple, with a maximum rate of 10% for personal income above €40.000 and rates as low as 5% for any annual personal income lower than €40,000 or 0% tax if the income is lower than 24.000€. This tax structure is attractive compared to many other countries, offering significant savings for residents.”
Housing crisis
Andorra’s economy has seen growth, particularly in the real estate sector, reflecting its increasing attractiveness as a business and residential destination. The demand for real estate has “had a 25% yearly increase” in recent years, and prices have risen “from an average purchase price of €2,100/m^2 in 2018 to €4,500 /m^2 in 2023, expected to be €5.300/m^2 in 2024.”
Andorra’s urban development has been responsive to its growing population, which has “increased from 70,000 inhabitants in 2012 to 82,000 in 2022, with an expected 100,000 by 2027.” This population growth, driven by new residents, is creating opportunities in the construction, services, and real estate sectors.
These new inhabitants are mainly investors who are attracted by lifestyle benefits such as a low tax crime rate and a territory made of 468 km^2 of nature with lakes and, probably the highest concentration of protected areas in the world since it has 3 nature-protected spaces, where several winter and summer sports are practised. The largest protected nature area is the Madriu-Perafita-Claror which covers 10% of the surface area of Andorra and its landscape is spectacularly beautiful, which is why it was declared a UNESCO cultural landscape world heritage site, notes Giannina.
Recently, Spanish or French YouTubers moving into the area have been blamed for a housing price increase, causing the government to instigate a temporary ban on new investment from wealthy foreign investors buying property.
“The digital sector finds Andorra promising due to its commitment to technological infrastructure and favourable tax rates for digital enterprises. In case of being a Youtuber, Influencer, or digital content supplier, your income will be taxed in Andorra at 10% EBITDA and 10% Personal Income.”
Although this newest move to restrict the sale of the property to foreign investors is a temporary measure, it is set to be replaced by a tax on all foreign residents property purchases. The revenue generated from this tax will be allocated to constructing more affordable rental housing, addressing the needs of local Andorrans.
Passive residence in Andorra
However, Giannina cautions that there are still ways to by-pass this move;
“The ban applies to non-residents, suggesting that wealthy foreigners might simply respond by applying for residency permits to be treated as residents. A residency option called “passive residence” requires living in Andorra for just 90 days per year. It is an attractive option for affluent individuals, particularly digital nomads, who earn their income abroad.
Passive residents are typically obliged to invest at least €600,000 in the country, with a substantial portion of investors deciding to directly invest in real estate. This aspect of the residency program underscores the complexity of addressing housing affordability in a nation where attracting wealthy foreign investors and residents has long been a cornerstone of the economic strategy.”
Wealth management
After a housing market stagnation that began in 2008 and started to see changes in 2016, Andorra sees itself in an unusual predicament, a victim of the success of its taxing policies. However, due to its transformation from a quaint mountain principality to a bustling centre of international business, the country is still keen not to be considered a tax haven.
“Andorra is recognised and accepted by International Tax Institutions of the OECD as not being a tax haven but a low taxes country that applies the OECD procedures. Its low tax policies can still appeal to wealthy investors. Almost 70% of the Moto Grand Prix Teams (competitors and technicians) live in Andorra; as well as cyclist runners who enjoy cycling up and down the different hills of Andorra. In addition, Andorra offers great security with almost nonexistent street robbery.
With a low VAT tax on Capital Sell such as 2.5% tax and 0% tax on capital gains, Andorra has also attracted professional art collectors that live and make businesses in the principality, including Gorgeov, Philippe Shangti and the Thyssen Baroness Carmen Cervera ”
With a high quality of life and a favourable tax regime, investors will continue to find Andorra attractive for some time.
“Andorra must carefully manage its growth to ensure it remains an idyllic haven without compromising its core values. In doing so, it seeks to maintain its status not as a tax haven, but as a calm Principality surrounded by the Pyrénées mountains with a low-tax policy aligned to OECD standards, offering a unique blend of economic opportunity and high-quality living to both investors and locals.”
European Commission SME relief package impact in France
January 10, 2024
In September 2023, the European Commission announced an SME relief package to support the 24 million SMEs that represent 99% of all businesses in Europe. The package, a mix of streamlining administration processes and a support fund, has been created to support the cornerstone sector, which has felt the turbulence of the last few years. We spoke to Virginie Lopes in France, Directrice Marketing & Communication du réseau Exco, Exco SAS, to get an understanding of how this investment might support business in France.
SME relief package: Opportunities in France
Lopes believes the critical development on the horizon is the European Commission’s September announcement of a relief package for SMEs that offers tangible benefits for their clients, stating, “Reduced administrative hurdles streamline procedures, saving time and costs. This allows for smoother cross-border activities and better resource utilisation.”
These improvements are not to be overlooked. Administration costs can eat into cash flow, essential for riding out tough economic times, “Streamlining administrative procedures and facilitating cross-border activities through platforms like “Your Europe” can enable our clients to expand their market reach, tap into new opportunities, and foster international growth.”
Funding
In addition, Lopes highlights the access to financing, stating, “The availability of €200 billion in funding until 2027 offers a unique opportunity for our clients to fuel growth, innovation, and resilience within their businesses.”
Beyond finances, Lopes shares the significance of addressing skills shortages, saying, “Recognising qualifications from third-country nationals provides our clients with a more skilled workforce, aiding in tackling operational challenges and fostering innovation.”
The emphasis on sustainable finance aligns with evolving market demands. As Lopes notes, “Support for SMEs in adopting sustainable practices helps our clients align with consumer expectations and regulatory requirements.” Essentially, these measures create an ecosystem fostering growth and sustainability for French clients.
Trends and challenges
Reflecting on the past year, Lopes acknowledges France’s continued success in attracting foreign investment, particularly in industrial and R&D projects. However, Lopes cautions that internal and external challenges, such as inflation and geopolitical uncertainties, could impact the nation’s competitive standing. “France’s capability to attract businesses in innovative sectors is commendable, but challenges like inflation and geopolitical uncertainties add a layer of complexity.”
Market knowledge
Lopes offers strategic insights for international businesses eyeing France in 2024, “Understanding the business environment is key. Familiarise yourself with French culture, regulations, and legal frameworks. Consult with local experts to navigate the market effectively.”
She also highlights the importance of local partnerships: “Establish collaborations with local entities. This enhances your understanding of the market and builds a foundation for successful operations.”
Adaptation to regulations is a key to success, “Ensure compliance with French business regulations, labour laws, and industry standards. This might involve adapting products, services, or processes to align with local requirements.”
Turning to talent acquisition, she advises, “Leverage France’s skilled workforce. Explore local talent pools and take advantage of incentives for hiring and training employees.”
Localisation strategy
“Market localisation is important to break into the market in France. Tailor your strategies to suit the French audience. Localisation enhances your market penetration and resonates with local consumers.”
Highlighting the rising importance of sustainability, Lopes encourages businesses to “Align practices with environmentally friendly approaches. This resonates well with the French market, which values eco-conscious initiatives.”
Lopes concludes with a nod to the power of networking, stating, “Engage in local networks, attend industry events, and participate in community initiatives. Building relationships within the French business community opens doors for opportunities.”
If you would like to know more about the SME packages available in France, please get in touch.
News
Investing in Germany
Andreas Katz, Senior Associate Partner at Kreston Bansbach shares his view of the market and key insights on investing in Germany in 2024.
Germany is regarded as the European powerhouse of innovation and industrial strength. The first half of the decade has challenged that long-held accolade, with sluggish growth over the last 3 years caused by a struggling manufacturing industry. However, as we step into 2024, the dynamics of doing business in Germany are shifting, marked by new challenges and opportunities.
From China to Europe
One of the key questions facing businesses today is whether to pivot away from China towards European suppliers to protect their value chain. Katz notes, “Our clients at Bansbach, mostly medium-sized groups…often contract with third-party suppliers within Europe to save on logistics costs. Subsidiaries of these medium-sized groups in Asian countries like China are often focused on sales activities and limited assembly work and not on production. While certain clients have pivoted away from certain countries like China within their supplier base now that political risks are more heavily weighted, this is not a major trend within our client base at Bansbach.”
This trend underscores a strategic shift towards localisation, leveraging the proximity and cost advantages within the European Union. However, Katz also clarifies, “While certain clients have pivoted away from countries like China…this is not a major trend within our client base at Bansbach.” This suggests that while some businesses are diversifying their supplier base, the shift isn’t widespread, emphasising a more nuanced approach to supply chain management.
Transfer pricing in Germany
A significant aspect of doing business across borders, Katz points out an increase in transfer pricing-related tax audit issues, stating, “We expect this trend to continue and that transfer pricing issues will often be the main focus in tax audits.” He warns of the financial risks associated with non-compliance, “In case the transfer pricing set-up of a group is not compliant with the applicable international and national standards and a group does not actively monitor its transfer pricing, findings in these tax audits can quickly amount to very significant amounts.”
Katz underscores the need for businesses to “actively monitor its transfer pricing.” His advice is clear – ensure compliance with international and national standards to mitigate the risk of significant financial repercussions.
Energy crisis
The energy landscape has always been a cornerstone of industrial activity, and recent geopolitical events have brought this into sharp focus. Katz highlights the impact of the Russia-Ukraine war on energy prices, a challenge particularly for energy-intensive industries. He notes, “The loss of [cheap energy from Russian gas] is a major challenge that may very well be one of the defining issues for German industrial development for years to come.” This situation demands strategic foresight from businesses, particularly in planning for energy cost fluctuations and exploring sustainable alternatives.
Advice for investing in Germany in 2024
For businesses looking to expand into Germany, Katz offers a word of caution and guidance. “Ensure that they are compliant with transfer pricing regulations and actively manage their transfer prices,” he advises, “Given that it is not always possible to resolve resulting double taxation with all countries this may lead to final double taxation and therefore is a significant financial risk.”
Luc works as a VAT expert at Kreston MDS in Beersel at Kreston VDN. He began his career as an inspector with the Belgian VAT Authorities. He provides VAT expertise and advice for the mid-market and SMEs. Luc has also worked within a large big 4 company as VAT director. He is specialised in EU VAT matters, cross-border trade and real estate issues.
2024 EU VAT Regulations January update: What is the real impact on gig economy digital platforms?
The impact of 2024 EU VAT Regulations on the gig economy hit the headlines this week as consumers reacted to the 1 January update, only partially rolled out across the EU. Despite the coverage across social media, the new update does not seek to target casual sellers, but has been created to fill the VAT shortfall, after a recent ruling in the UK court against Uber redefining Uber as an employer and therefore liable for VAT.
We spoke to Luc Heylens, Kreston Global’s Indirect Tax Group Technical Director and Director of VAT at Kreston VDN in Belgium to explain the wider context of this court ruling and new VAT update and what it means for businesses with operations in Europe.
VAT in the Digital Age (ViDA)
The digital economy has long been stress-testing antiquated tax systems, set up well before the onset of the Internet. The EU VAT gap has been a focus of the European Commission, with lost revenue in Member States reaching €99 billion in VAT revenues in 2020. ViDA (VAT in the Digital Age) has been part of the response, with the new legislation adopted across the region from 1 January 2024. In regards to the introduction of ViDA. Heylens is resolute about the change,
“Conservative estimates suggest that one-quarter of the missing revenues can be attributed directly to VAT fraud linked to intra-EU trade. The new system introduces real-time digital reporting for VAT purposes based on e-invoicing that will give Member States valuable information they need to step up the fight against VAT fraud, especially carousel fraud.”
Shortening the €99 billion VAT gap
The European Commission has already seen impressive reductions in the VAT gap, reducing to €61 billion in 2021. This has been attributed to several different environmental factors, not least an improvement in compliance during COVID so businesses could access support. Heylens believes that businesses will welcome ViDA,
“VAT arrangements in the EU can still be burdensome for businesses, especially for SMEs, scale-ups and other companies that operate cross-border. There is already a great deal of cost involved when starting the business. ViDA allows businesses to pay VAT in just one member country. The administrative burden is then on that country to share the VAT correctly to other member countries.”
The introduction of a single VAT registration across the EU
Building on the already existing ‘VAT One Stop Shop’ model for online shopping companies, the proposals would allow businesses selling to consumers in another Member State to register only once for VAT purposes for the entire EU, and to fulfil their VAT obligations via a single online portal in one single language. Further measures to improve the collection of VAT include making the ‘Import One Stop Shop’ mandatory for certain platforms facilitating sales to consumers in the EU.
VAT changes tackling the gig economy: Uber and Airbnb
New digital economy businesses have also brought in the gig economy, a challenge in terms of understanding what a business is before VAT can be applied. Recent court cases against two global platforms, Airbnb and Uber, have established drivers and home-owners as workers and not contractors, meaning the individuals are now subject to VAT. Uber was ordered to pay the UK HMRC £615 million in outstanding VAT in 2022, opening the door for the European Commission to insist that platform businesses correctly declare their VAT in member states. Heylens feels the tightening of regulations was inevitable,
“In this digital age, the EU recognises the complexity of identifying who exactly provides services such as accommodation rentals or transport. The crux of the issue lies in distinguishing whether the service provider is an individual, like a driver, or a company, such as Uber. This becomes particularly challenging when individual service providers, who are physical persons, must register for VAT in their respective countries. This requirement can lead to a burdensome amount of formalities, often for minimal gain. Therefore, if VAT payments were to be centralised through these platforms, it would streamline the process, reducing the administrative workload for individual service providers and ensuring a simpler method of VAT collection.”
Impact on SME businesses
Heylens is hopeful the SME sector will take heed of these developments and prioritise paying the correct VAT, “Under the new rules, platform economy operators, in particular the short-term rental of tourist accommodation and passenger transport will become responsible for collecting and remitting VAT to tax authorities when their users do not, for example because they are a small business or individual provider (deemed suppliers). From 2025, these platforms will be made responsible for VAT payments in certain situations (C2C and C2B transactions). The implementing regulation stipulates that the platform is subject to VAT in all cases where the provider has not provided a valid VAT number.”
E-invoicing
These proposals and possible changes will probably have a significant impact on companies’ systems and processes. Businesses operating in the EU should consider their readiness for the changes should they come into force, particularly regarding the systems changes that would be required for standardised e-invoicing. If implemented, the simplification regime (OSS) offers businesses opportunities to streamline their reporting obligations.
Heylens is resolute about the changes, but warns businesses should be considering these updates in their financial planning,
“Of course, individuals and businesses often seek ways to circumvent paying VAT, which is a typical practice in taxable transactions, such as the Uber case in the UK. It foreshadows the likely penalties for smaller businesses, and the magnitude of unpaid taxes and ensuing settlements highlights the significant financial stakes involved. We must guide our clients, especially those in the gig economy or utilising various platforms, towards adhering to VAT regulations. Given the severe financial implications of non-compliance and the impending enforcement of new regulations within a few months to a few years, we must inform and prepare our clients promptly.”
If you would like advice on the new 2024 EU VAT Regulations and how it might affect your business, please get in touch.
News
Innovation incentives in The Netherlands
January 9, 2024
Innovation incentives in The Netherlands, with its strategic approach to economic development, offer an attractive marketplace for businesses seeking innovation and growth. The Dutch government has implemented an array of incentives to attract and nurture investment across various sectors. These initiatives not only underscore the country’s commitment to fostering a competitive business environment but also reflect its commitment to sustainability and technological advancement.
Top sectors and innovation policy
Central to the Dutch strategy is the focus on 10 Top Sectors, areas where the Netherlands boasts significant global relevance. These sectors include AgroFood, Horticulture, High Tech, Energy, and more. The government, through Public Private Partnerships (PPPs), offers substantial support to these sectors. Each sector has an innovation contract that outlines specific goals and strategies, paving the way for enhanced research and development, particularly in tackling societal challenges like climate change.
Dutch Research and Development Act (WBSO)
The WBSO (Dutch Research and Development Act) is a scheme designed to encourage technological innovation by offering tax benefits for R&D expenditure. It provides tax relief for wage costs and other R&D expenses by offsetting a percentage of these costs against wage tax. Initially, the WBSO only covered wage costs, while other R&D expenses, like equipment purchases, were subsidized by the Research & Development Allowance (RDA).
However, since 2016, both the WBSO and RDA have been merged under the WBSO name, with tax benefits now available as a wage tax rebate. The rebate amount depends on total qualifying costs and is applied to different types of R&D projects, including technical-scientific research, product development, and new software development. Specific R&D work in pharmacy also qualifies for the WBSO. The rebate rate is 32% for the first €350,000 and 16% beyond that, with start-up entrepreneurs receiving a 40% rebate on the first €350,000. Applications for the rebate must be submitted online, with varying deadlines depending on the type of enterprise.
Innovation Box
In the Netherlands, companies engaging in qualifying R&D activities can benefit from a reduced 9% effective corporate tax rate under the Innovation Box regime. This incentive is aimed at stimulating innovative research and development.
To qualify, companies must meet certain conditions. For small taxpayers, an R&D statement is sufficient to enter the Innovation Box, which may include unprotected intellectual property (IP). Larger taxpayers require both an R&D statement and a “legal ticket,” which could be a patent, software registration, or similar legal acknowledgment.
Small taxpayers are defined as those with gross benefits from all intangible assets under €37.5 million over five fiscal years and a net turnover of no more than €250 million. Benefits from innovation or technology are eligible for the Innovation Box if they exceed the total production costs of those assets, known as the box threshold. This threshold includes manufacturing costs but excludes fundamental research costs.
Benefits that can be allocated to the Innovation Box include royalties, sales profits, or part of the proceeds from a product, but they can be reduced if part of the R&D is carried out by an affiliated party. The effective 9% tax rate applies only to qualifying R&D benefits that exceed the production costs.
Taxpayers can annually opt to place qualifying intangible assets in the Innovation Box. However, assets still under development are ineligible. Innovation losses are deductible at the standard tax rate and can be offset against taxable profits from other years.
For small R&D benefits, a lumpsum option allows taxpayers to apply a fixed percentage of the profit (up to 25%, maximum €25,000) for the Innovation Box, simplifying the process for businesses with smaller-scale R&D activities. The lump sum applies to the year of asset production and the following two years.
Regional Subsidies
In alignment with the European Fund for Regional Development (EFRD), the Netherlands provides regional subsidies focusing on innovation, research, digital agenda, SME support, and the transition to a low-carbon economy. These subsidies are tailored to address the unique needs and opportunities within different regions of the country.
Investments
The Dutch government’s investment incentives encompass a wide range of areas. Three notable schemes are the Environmental Investment Deduction (MIA), the Energy Investment Deduction (EIA) and the Kleinschaligheidsinvesteringsaftrek (Small-Scale Investment Deduction)
MIA (Milieu Investerings Aftrek) (Environmental Investment Deduction Scheme)
The MIA encourages investments in environmentally friendly equipment and technologies. It allows companies to claim additional tax deductions based on a percentage of their investment costs in sustainable technologies, supporting the transition to a greener economy.
Parallel to the MIA, the EIA incentivizes investments in energy-efficient technologies and sustainable energy. Companies investing in energy-saving equipment can avail themselves of tax deductions, underscoring the government’s commitment to energy conservation and sustainability.
The Small-scale Investment Deduction allows entrepreneurs to deduct investments in capital equipment ranging from €2,600 to €353,973 in 2023. Deductions are applicable in the year the investment is made, coinciding with the purchase and payment obligation for the capital equipment. If the equipment is not intended for use within the year of investment, a portion of the deduction can be deferred to the following year.
Finance
The Netherlands offers various financing incentives, notably the BMKB (Credit Guarantee Scheme for SMEs) and the GO (Corporate Credit Guarantee).
BMKB (Borgstelling MKB Kredieten) (Credit Guarantee Scheme for SMEs)
The BMKB aims to facilitate credit provision to SMEs, enhancing their ability to secure loans by providing government guarantees for a portion of the credit amount, thereby reducing the risk for banks.
GO (Garantie Ondernemingsfinanciering) (Corporate Credit Guarantee)
The GO assists larger companies in borrowing significant amounts by offering a government guarantee on a portion of the capital, thereby easing access to financing.
Other Financial Schemes
In addition to the above, the Dutch government provides a range of financial instruments to support the transformation of ideas into profitable new products, services, and processes. These schemes cater to both SMEs and larger companies, facilitating innovation and growth.
If you would like to speak to an expert on innovation incentives available in The Netherlands, please get in touch.
News
Christina Tsiarta
Advisory services on sustainability, ESG & climate change, reston Global ESG Committee member
Christina is an experienced consultant specialising in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organisations, including local municipalities, national government agencies, the Directorates-General of the European Commission, and the private sector across different industries.
Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
The Next Generation EU (NGEU) fund impact
January 8, 2024
The Next Generation EU (NGEU) fund could be the key to a more sustainable Europe for small to medium enterprises. We asked Kreston Global ESG Committee members Laurent Le Pajolec from Exco Poland and Christina Tsiarta from Kreston ITH in Cyprus to unpack some of the recent incentives given to countries by the NGEU fund, and how it impacts European businesses.
The Next Generation EU (NGEU) fund recovery package
The Next Generation EU (NGEU) fund is a €750 billion recovery package that aims to help the European Union recover from the COVID-19 pandemic and build a more sustainable and resilient future. The fund includes several incentives, tax credits, and grants that are designed to help small and medium-sized enterprises (SMEs) adopt sustainable business practices.
The Next Generation EU (NGEU) fund mission
One of the primary objectives of the NGEU Fund incentives is to propel Europe toward achieving a net-zero carbon emissions status by 2050, effectively ensuring that the continent emits no more greenhouse gases than it can sequester. Given the considerable cost of financing in Europe, partly due to inflation, it is imperative for companies to access affordable financing options to facilitate their transition toward sustainable and eco-friendly practices, including new investments. Additionally, governments must extend support to facilitate significant investments, particularly in energy infrastructure, to reduce emissions by optimising their energy mix. The urgency surrounding the energy mix transformation was further accentuated by the sharp energy price spikes resulting from the Russia-Ukraine conflict.
According to a Deloitte report from July 2023, 62% of European companies expressed their willingness to embrace mechanisms akin to the NGEU in the face of potential systemic instabilities stemming from geopolitical tensions or energy and environmental crises. The same report indicates that 54% of respondents exhibit optimism about the NGEU’s capacity to steer member states’ economies toward a growth trajectory, enhance their competitiveness, and foster modernization within their nations.
Some venture capitalists and investors have made strategic decisions to fund the Greentech sector. Nevertheless, funding startups, especially at their inception, remains a challenging endeavour. Introducing specialised grants for startups would represent a valuable addition. Given the increasing focus on sustainability and energy mix optimisation, fostering innovation is crucial to ensure compliance with the European Union’s environmental commitments.
As noted by the European Central Bank (ECB), the NGEU mobilises up to €807 billion in current prices in funding, the equivalent of 6% of 2020 EU GDP. €581 billion from this total amount has been requested by EU Member States. Of the seven NGEU programmes, the Recovery and Resilience Facility (RRF) accounts for 90% of the total amount. About half of the RRF funds are made available in the form of non-repayable grants to Member States, while the other half is in the form of loans. More funding was also made available for countries that have been hit hardest by the pandemic crisis, with lower GDP per capita and/or relatively higher debt-to-GDP levels.
RRF (Recovery and Resilience Facility) funding
RRF funding was made available to Member States conditional on the implementation of national recovery and resilience plans (RRPs), which set out concrete investments and reforms aligned with EU guidance for each member state. Each RRP was assessed by the European Commission and approved by the Council of the EU.
The structural reforms in the RRPs focused on the public sector, framework conditions for the green and digital transitions, and “soft” labour market policies. Therefore via the RRPs, theNGEU fund incentives, tax credits and grants are shaping sustainable business practices in Europe for nations and companies of all sizes, including SMEs.
Green/digital framework conditions, such as eco-friendly revisions of building codes, account for 24% of the reforms. Public sector reforms also support the green and digital transitions, for example by promoting e-governance. Furthermore, the reform plans have the potential to reduce public sector inefficiencies, including resource use (e.g. energy, materials, waste, water, etc.) and improve the framework conditions for private investments into green and digital projects, with trickle-down effects on various areas.
Figure 1 shows the breakdown of RRP reforms in the EU area by policy area.
Figure 1: Breakdown of RRP reforms in euro area countries by policy area (percentage of total)
Source: ECB staff.
Notes: (A) Pensions; (B) Employment protection legislation, framework for labour contracts; (C) Insolvency frameworks. The classification is based on an ECB staff assessment. It has been applied at the level of individual milestones and targets.
Post-COVID, European businesses are decoupling supply chains away from China, searching for an alternative closer to home. With that, the EU legislation driving ESG reporting has larger businesses looking for good green credentials.
Many companies have chosen to relocate their production to Central and Eastern Europe in recent years given increasing operating costs in the rest of Europe. Many benefits exist for this nearshoring, such as a skilled talent pool, increasingly more fluent in English, growing labour market which means companies do not face a shortage of skilled labour and a lower cost of living, including operating, energy and labour costs, while these regions can boast strict privacy and data security laws for businesses relocating.
Green energy transition
Many Eastern and Central European countries are currently in the midst of an energy transition, with a significant portion of their energy production still reliant on fossil fuels.
According to the Environment Directorate at the OECD, at the ninth Environment for Europe ministerial conference in October 2022, it was noted that even though all the countries in Eastern Europe, the Caucasus and Central Asia (EECCA) have adopted the 2030 Agenda for Sustainable Development and the Paris Agreement and translated them into national strategies and policies, the pace of progress towards a green economy has not been fast enough. The region’s CO2 and energy productivity are much lower than the EU averages. Exposure of the population to fine particulate matter (PM2.5) remains high with associated premature deaths due to PM2.5 pollution. Lack of progress has often been due to political instability or ongoing conflicts, which stifle policy reforms and implementation. So this nearshoring of businesses could affect the ESG landscape across the EU.
Some Eastern European countries, like Poland, which currently rely on a coal-gas energy mix, are actively engaged in ecological transition efforts, including the development of solar, hydro, biogas, and offshore wind projects. Additionally, plans for constructing nuclear power stations are underway to better manage energy resources.
Obstacles to achieving an ecological transition include outdated energy infrastructure and challenges related to obtaining energy agreements and quotas for renewable energy projects, meaning funds like the NGEU are essential to create the infrastructure for change. The energy mix in the region is characterised by a delay in ecological transition. You can view the current energy mix here:
However, Russia’s war in Ukraine provides an additional reason for accelerating the transition to a green and net-zero economy in these regions, which could benefit all businesses relocating there. Countries are looking into shifting from the reliance on fossil fuel from Russia to renewables due to high and unpredictable prices and supply issues. This will translate into incentives for companies to invest in operating efficiencies and in renewable energy sourcing and production. The green economy transition requires greater co-operation between different sectors and stakeholders, and across levels of governance.
Businesses will benefit from improved relationships with all their stakeholders and enhanced transparency, which could positively impact their brand value. Furthermore, EECCA countries are improving legislation and policy instruments that provide enough incentives for companies to comply with environmental legislation or even go beyond compliance. Part of the financing for this transition will come from public funds and the rest, from the private sector, domestic and international. Businesses will have an opportunity to use these incentives to transition to more sustainable operating practices and to build long-term resilience. All these actions have a positive impact on the ESG landscape across Europe.
Cheap labour; ethical quandry or business necessity?
European Union (EU) countries are grappling with an ageing population and a significant shift from industrialisation to a service-based economy in Western Europe, which has already led to a notable uptick in salary inflation.
Traditionally Eastern Europe, with lower variable costs, has been much more competitive, but with labour shortages, particularly in emerging industries, and stringent labour codes, wages have started to creep up. An illustrative example is the substantial increase in Poland’s minimum wage, which has surged from 500 EUR in 2017 to approximately 1,000 EUR starting from January 1, 2024.
Resource efficiency
In the context of the EU Taxonomy, which is indispensable for advancing ecological transition and aligning with the EU’s climate-related commitments, the primary determinants of a successful nearshoring process are the composition of the energy mix and a focus on resource efficiency. This approach is vital to meeting CO2 reduction targets and ensuring that the local population benefits from such initiatives.
To an extent, cheaper labour costs are the result of doing business in a country with a lower cost of living and lower operating costs. While this can also be the result of lax legislation, this does not appear to be the case in Central and Eastern Europe.
Eastern Europe national ESG targets
According to the OECD and Green Action Task Force, many countries of Eastern Europe, the Caucasus and Central Asia (EECCA) have set and updated national targets to guide their transition towards a green economy, including on environmental protection, climate change and natural resource management.
All EECCA countries have adopted their national targets of climate action through their Nationally Determined Contributions (NDCs). There has been progress on the development of national-level environmental policy frameworks in the region, accompanied by the creation of several inter-ministerial co-ordination mechanisms.
Furthermore, environmental ministries and agencies in some EECCA countries have been strengthened in terms of their remits and responsibilities. EECCA countries have integrated green stimulus measures into their response to the COVID-19 pandemic and their broader recovery packages. Finally, while capital markets in EECCA countries are not yet contributing significantly to financing green investments, green bonds are also becoming an asset class in their own right. In line with those policy reforms, several indicators have shown signs of progress in resource productivity and environmental quality in the EECCA region.
Mutual benefit
So while significant improvement is still needed, the cheaper labour costs do not appear to be the result of lax legislation or unethical operating practices. Quite to the contrary, it appears that in the EECCA region, businesses will be able to benefit from cheaper labour costs while moving to greener and ethical production practices.
Kreston tax expert and regional tax director in the Kreston Global Tax Group, Jelle Bakker has accomplished many contributions in the area of international taxation over the past 35 years, including 10 years as Senior Tax Counsel with Global Network Bank.
Anti-Tax Avoidance Directive 3 (ATAD 3) – Understanding the Unshell Directive in the EU
Anti-Tax Avoidance Directive 3 (ATAD 3), also referred to as the Unshell Directive, is a pivotal proposal by the EU Commission aimed at curbing the misuse of shell entities for tax purposes.
The legislation was slated to come into effect from 1 January 2024, but implementation of the directive could be delayed until January 2026.
It’s worth noting that shell entities located outside the EU, particularly in Switzerland, the UK, Dubai, Singapore and Hong Kong, will be covered under ATAD 4.
In a recent interview, Jelle R Bakker, Kreston Global Regional Tax Group Director, sheds light on the intricacies of the ATAD 3.
The shell company conundrum
Shell companies have long been a cause for concern, often serving as vehicles for aggressive tax planning or tax evasion. The European Commission’s proposal aims to address this issue by ensuring that shell companies within the EU are unable to benefit from tax advantages.
A shell company is a corporation exhibiting little to no economic activity. The EU estimates that 75,000 companies, comprising less than 0.3% of the overall number of active enterprises within the EU, fall within this classification.
The Unshell Directive: A step-by-step guide
Step 1: Gateways
According to Jelle, any entity that is engaged in economic activity, considered a tax resident and eligible to receive a tax residency certificate in a member state falls within the scope of the Unshell Directive.
The entity must meet three cumulative gateways:
Passive income: Over 65% of revenues in the preceding two tax years must qualify as ‘relevant income’ under ATAD 3.
Cross-border activity: At least 55% of relevant income must be earned or paid out via cross-border transactions.
Outsourced administration: The administration of day-to-day operations and decision-making on significant functions have been outsourced to a third party in the last two tax years.
Step 2: Minimum substance indicators
Entities meeting the gateways without carveouts or temporary exemptions are considered ‘at risk.’ Reporting obligations determine if the entity has minimal or no substance, automatically exchanged with other member states.
The entity must declare three cumulative ‘minimum substance indicators’ in its annual tax return:
The entity has its own premises (or exclusive use thereof) in its member state.
The entity owns at least one active bank account or e-money account within the EU.
The entity has either a qualified and authorised director, or the majority of full-time equivalent employees are tax residents in the entity’s member state.
Step 3: Presumption of lack of minimum substance
Entities that do not meet the above minimum substance indicators are presumed to be shell companies. Documentary evidence, including business activities, outsourced activities, resident directors or employees, bank account details, and evidence of bank account activity, must be provided with the tax return.
Step 4: Rebuttal of presumption
An entity can rebut this presumption by providing the following:
● additional supporting evidence of the commercial rationale behind using the entity ● information about employees ● concrete evidence of decision-making in the member state.
The rebuttal, if accepted, may be valid for five years if circumstances remain unchanged.
Step 5: Carve-outs and exemption
The following entities are exempt from reporting requirements under the Unshell Directive:
● specific regulated (financial) entities ● alternative investment fund managers ● listed entities ● entities with shareholders and operational businesses in the same member state ● holding companies with shareholders ● parent entities in the same member state
Step 6: Shell company tax consequences
Entities satisfying the three gateways, deemed not to meet minimum substance indicators and unable to rebut the presumption of being a shell company face several tax consequences.
These include denial of a certificate of tax residence, denial of tax benefits under tax treaties and EU tax directives, treatment as a disregarded entity by member states where shareholders are located, and imposition of withholding taxes on payments to the shell entity.
Step 7: Exchange of info and tax audits
Member states gain automatic access to information on shell entities through the automatic exchange of information under the Unshell Directive. Additionally, member states may request tax audits when there is suspicion of non-compliance.
The Unshell Directive imposes non-compliance penalties, with the European Commission proposing an administrative pecuniary sanction of at least 5% of the entity’s turnover in the relevant tax year.
ATAD 3 – The EU’s approach and recent developments
Jelle provides a critical perspective on the EU’s approach, stating that “the EU is using a sledgehammer to crack a nut.” With only 0.3% of companies falling within the classification of a shell company, Jelle suggests that the EU’s existing anti-abuse rules, including substance concepts and various domestic and treaty provisions, already address tax avoidance concerns.
Recent developments, including a compromise proposal from the EU Council’s Spanish presidency, aim to ensure that the Unshell Directive does not undermine existing member states’ anti-abuse rules. On 5 September 2023, concerns were raised during a meeting of the EU working party on tax questions. Some countries expressed worries that entities not considered shell companies under the Unshell criteria could be deemed legitimate, thus evading national anti-abuse rules.
The compromise proposal emphasises that the Unshell Directive does not introduce new standards but adds value by identifying “manifest” shell entity cases through a risk-based process and presumption.
Entities not considered manifest shell entities won’t be subject to additional obligations and consequences under the Unshell Directive. However, the member state where such an entity is located retains the right to conclude otherwise after an audit under its national rules.
Further clarifications ensure that the administration of another member state could consider such an entity as lacking sufficient economic substance under national provisions, even if not under the directive. The compromise proposal aims to prevent Unshell from undermining national anti-abuse or anti-tax-avoidance rules.
Member states are encouraged not to be precluded from applying further consequences to entities considered shells under Unshell or parties not subject to consequences under Unshell.
The proposal also suggests adjustments to the revenue threshold and book value for entities excluded from the directive’s scope. Governmental entities fully owned by governments of member states or not considered high-risk entities are excluded from Unshell.
Significant update
In conclusion, the Unshell Directive is a step change in the EU’s approach to combatting tax avoidance through shell entities. Businesses must navigate these steps to ensure compliance and strategic tax planning in this evolving European tax landscape.
As the directive undergoes further discussions and potential amendments, staying informed and agile will be crucial for businesses operating within the EU.
To speak to one of our experienced EU tax experts, please get in touch.
As the Managing Partner at Kreston Ukraine, Sergey Atamas brings over 20 years of experience in Management Consulting, Corporate Finance, and Business Transformation. He drives business strategy, leads investment, and consultancy practices. Sergey’s expertise spans Equity and Project Financing, IT Strategy, Business Planning, and Customer Analytics. He has notable industry experience in IT, telecommunications, manufacturing, energy, consumer products, and logistics, contributing significantly to Ukraine’s evolving business landscape.
Ukraine’s road to economic recovery
January 4, 2024
Signs of Ukraine’s economic recovery may come as a surprise to some. Since February 2022, the global economy has felt the impact of the Russia-Ukraine war. From oil prices to the lack of grain, many countries have been grappling with supply chain issues.
Unsurprisingly, it has been Ukraine’s economy that has felt the keenest impact, as articulated in a recent interview with Sergey Atamas from Kreston Ukraine. Atamas presents a narrative of resilience and strategic redirection. “Initially, we lost about 50% of our clients almost overnight,” Atamas reveals, highlighting the immediate impact of the conflict on Ukrainian businesses. However, the global response was swift and transformative. Kreston Ukraine, for instance, reclaimed 90% of its pre-war income within one and a half years.
Allies support Ukraine’s economic recovery
Contrary to the grim forecast of a 50% GDP plummet, Ukraine managed a more modest decline to 29% in 2022, with projections of a 4.7% growth in 2023. This surprising resilience, Atamas notes, is credited to “unprecedented financial assistance from allies, increased government spending, and the liberation of territories.” Domestic borrowing and international support have played crucial roles, with the former surpassing $11 billion and the latter reaching $33.8 billion in 2023.
Ukrainian businesses redesigned their models almost overnight, Atamas explains,
“To stay afloat, Ukrainian businesses had to reconfigure internal processes and resort to crisis management. Some popular measures include adapting business strategies and focus to current market needs, expanding the customer base and target audience, going to international markets and seeking financing/investments or new partners.”
Atamas also highlights the role of technology in Ukraine’s adaptive strategies. Significant resources are being funnelled into military technologies and security projects. He has even launched his own new business recently, “Growexa is a SaaS platform oriented towards sourcing projects globally, providing investors with a detailed search system and in-depth AI-based analytics.”
Industry-specific impacts
Despite the intervention, certain sectors have borne the brunt of the conflict more than others, Atamas explains, “The metallurgical industry, a cornerstone of Ukraine’s economy, saw a 70% reduction in 2022. The energy sector, targeted heavily since late 2022, experienced a 90% drop in electricity exports. Agriculture, another key sector, faced losses exceeding $40 billion.” Atamas points out the necessity of “adapting business strategies and expanding the customer base” as vital survival tactics for businesses.”
Foreign investment
Aside from the challenge of keeping the Ukraine economy moving in order to not adversely affect citizens already dealing with the challenges of living with war, Atamas explains, international investors paused activity, but did not stop entirely, “In 2022, foreign direct investment inflows were 5.8 times lower than in 2021, amounting to $1.1 billion, with an outflow of $529 million. In 2023, the situation significantly improved, with inflows reaching $2.4 billion in six months and outflows totalling only $19 million.
Despite the wartime risks, investors are willing to invest in new Ukrainian projects. Polish logistics operator Laude relocated assets worth €100 million to Ukraine after closing its business in Russia and plans to increase investments. German company Pfeifer & Langen will acquire its sixth sugar plant in Ukraine and German company Bayer is investing €60 million to expand its facilities in the Zhytomyr region.
Allies have also been particularly supportive in encouraging Foreign Direct Investment, “Bpifrance Assurance Export will provide insurance for French businesses investing in Ukraine, covering up to 95% of investor asset losses or debtor obligations. The main condition is active participation in Ukraine’s reconstruction before the end of the full-scale war.”
Advice for foreign businesses in Ukraine
Atamas advises leveraging the country’s investment incentives for foreign entities looking to invest in Ukraine, including substantial state support and tax exemptions.
“Investing in Ukraine can still be pragmatic even during wartime,” he asserts. The recovery process, he suggests, will be bolstered by international efforts like the European Commission’s Ukraine Assistance Fund and collaborations with firms like BlackRock and JPMorgan Chase in establishing a reconstruction bank to attract $400 billion.
Atamas believes that the government is also being assertive with incentives to tempt investors back into Ukraine, with “up to 30% state support for capital investment, infrastructure development, and corporate income tax exemptions for up to 10 years.”
Ukraine’s 10-year economic recovery plan
Despite the encouraging first signs, Atamas is clear that the road to recovery for Ukraine is still in its infancy. “In early 2023, the World Bank estimated Ukraine’s reconstruction and recovery needs at around $411 billion for the next decade. Ukrainian and international private companies are expected to contribute to infrastructure development and economic revival in Ukraine.
The European Parliament has supported the European Commission’s initiative to create a special Ukraine Assistance Fund of up to €50 billion. This fund is intended to provide stable and predictable financial support to Ukraine from 2024 to 2027, including direct grants, credits, mobilisation of private investments through guarantees and blended financing.”
Anticipated boom
There has been sobering scenario planning to shore up the economy whilst there is still active combat, Atamas describes the most likely as, “Active combat with Russia until 2025 with minimal front-line changes. In this scenario, Ukraine’s economy will continue to recover over the next two years, with modest GDP growth. However, the approaches to transforming the economy and creating conditions for foreign private capital to drive Ukrainian investment projects are currently being developed. An economic boom is expected from 2026 onwards.”
If you already doing business in Ukraine, or would like to expand into the region and would like to talk to one of our experts, please get in touch.
Global vacancies
Domagoj Bakran
VAT Specialist
Croatia
January 3, 2024
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Guillermo Narvaez
Tax Partner at Kreston Mexico City Office, Kreston FLS
Guillermo Narvaez is a Tax Partner at Kreston FLS Mexico City Office and the Technical Tax Director, Global Tax Group, Kreston Global and member of the International Fiscal Association (IFA). Guillermo is a tax expert on international taxation, corporate taxes, transfer pricing, mergers and acquisitions, corporate reorganisations and litigation.
Within international taxation, Guillermo specialises in the analysis and interpretation of treaties to avoid double taxation applied to international transactions.
Economic substance exemption
December 20, 2023
Economic substance exemption rules ensure that companies conducting business in a particular jurisdiction have a genuine economic presence and conduct real economic activities, rather than simply establishing shell companies for tax avoidance purposes.
A Controlled Foreign Company (CFC)
A Controlled Foreign Company (CFC) is a term used in international taxation to describe a company that is controlled by a resident of another State and is subject to certain anti-tax avoidance rules. The primary purpose of CFC rules is to prevent taxpayers from shifting their income to low-tax or no-tax jurisdictions by controlling foreign companies.
Under these rules, certain companies must meet economic substance tests, and failure to do so may result in penalties and consequences.
Finland: Case study
A company in Finland mostly owned a private limited liability company (“SARL”) in Luxembourg. SARL was established to manage family assets. The balance sheet’s assets exceeded the company’s liabilities. The company received current income from its strategic investment to finance its active investment activities.
SARL has an office, employees, and sufficient office equipment to perform the necessary activities to manage the assets. There were only a few employees however they effectively managed the operation of SARL including an investment director who was responsible for the investments of the business but always following the investment policy of SARL.
Economic substance exemption
The tax Agency of Finland, after considering the background of SARL, its investment activity, and being located in a State of the EEA, granted a ruling to the Finish owner of SARL disregarding the latter as a CFC (Controlled-Foreign Company) for tax purposes in Finland based on the economic substance exemption. The tax administration regarded SARL as an investment company based on the nature of its operations, which partly had characteristics of a holding company. In short, in the view of the tax authority, SARL was an active business with activity of economic substance, thus should not be taxed by the CFC regime in force in Finland.
Accruing in resident state
Broadly, the impact of the CFC rules is that a taxpayer must accrue in its residence State the income generated by a wholly or partially owned business located in a different State. On the contrary, if the foreign business does not meet the features to be regarded as a CFC, its financial results shall not be recognized in the residence State of the equity’s owner. Huge difference.
In the Finish case, the ruling was granted based on a specific exemption local rule – the economic substance exemption. The taxpayer proved SARL had sufficient business activity (ie investment operation) carried out in Luxembourg mainly with its own resources – employees, assets, and direction.
Why did the Finish taxpayer successfully prove that SARL shall not be regarded as a controlled foreign company? Because the taxpayer provided assets and other elements to SARL to give it an independent status with an active operation and, most importantly, with real business activity.
It is most likely to avoid a CFC regime when the business unit effectively carries out an active and substantial activity.
If you would like to talk about your tax needs, please get in touch.
News
Guillermo Narvaez
Tax Partner at Kreston Mexico City Office, Kreston FLS
Guillermo Narvaez is a Tax Partner at Kreston FLS Mexico City Office and the Technical Tax Director, Global Tax Group, Kreston Global and member of the International Fiscal Association (IFA). Guillermo is a tax expert on international taxation, corporate taxes, transfer pricing, mergers and acquisitions, corporate reorganisations and litigation.
Within international taxation, Guillermo specialises in the analysis and interpretation of treaties to avoid double taxation applied to international transactions.
New rules on tax residency in Italy
December 19, 2023
As of 2024, new rules on tax residency in Italy will change. The amendments may generate new implications when the tiebreaker of a DTA signed by Italy is intended to apply.
It corresponds to the States to set out the rules to determine when an individual should be deemed as a tax resident in that State. Accordingly, domestic tax legislation determines who will be subject to tax in a specific jurisdiction.
Tax treaties
Tax treaties do not address this matter nonetheless they state the rules to define where an individual should be considered a tax resident when such an individual eventually is resident in two different jurisdictions at the same time. This regulation is known as ‘tiebreaker rules’ and generally is part of the residence article of double tax agreements (DTA) to define which jurisdiction has powers to tax a person and accordingly to avoid double taxation when such a person is subject to tax in two states at the same time.
Domicile
One of the relevant changes in the domestic statute of Italy is in the definition of ‘domicile’. Domicile is one of the key elements to define if a person should be considered as a resident in Italy. So far (2023), an individual has their domicile in Italy when therein is their principal place of business or interests. In consequence, that person is deemed a tax resident of that country.
Familial relationships
However, things will change in 2024. The new rules set out that domicile will be in Italy if an individual undertakes most of their personal and family relationships therein and not their business and interests. This means that the law will change from an objective criterion to a subjective one to define the residence of a person by domicile.
A first point to keep in mind is that an individual can be a resident of Italy as of 2024 without having changed their way of life at all. In other words, a change in the activity or performance of an individual is not necessarily the driver of generating new liabilities in Italy for being considered a resident of that country as of 2024 but for a legal amendment.
OECD tiebreakers
Tiebreakers based on the OECD Model Convention (MC) provide a hierarchy to outline the criterion to apply to define the residence of an individual. The latter will be defined in the following order – where a permanent home is available, where the centre of vital interests is located, where the habitual abode is, or according to their citizenship.
Virtual interests
The ‘vital interests’ notion is a mixed concept comprised of objective and subjective elements interlinked. Fulfil one of the elements meaning having only personal and family ties in Italy may create residence according to the domestic framework of Italy in force as of 2024, however, when applying the tiebreaker of a DTA based on the MC it could drive to a different outcome given the lack of one of the elements of the centre of vital interests: the economic relations.
The key question to solve is, if that would be the situation, could the individual in such circumstances be deemed as a tax resident in Italy after applying the tiebreaker of a DTA based on the MC and having only in that jurisdiction personal relations? The response to that question is likely to be in a negative sense.
If you would like to discuss your tax needs with a Kreston Global expert, please get in touch.
News
Guillermo Narvaez
Tax Partner at Kreston Mexico City Office, Kreston FLS
Guillermo Narvaez is a Tax Partner at Kreston FLS Mexico City Office and the Technical Tax Director, Global Tax Group, Kreston Global and member of the International Fiscal Association (IFA). Guillermo is a tax expert on international taxation, corporate taxes, transfer pricing, mergers and acquisitions, corporate reorganisations and litigation.
Within international taxation, Guillermo specialises in the analysis and interpretation of treaties to avoid double taxation applied to international transactions.
Proof of residence: Acceptable evidence for a double tax agreement
December 18, 2023
A certificate issued by a competent tax authority confirming residence for tax purposes is broadly accepted as proof of residence of an individual. However, a recent ruling in the Spanish courts casts doubt on that.
Double tax agreement
One of the main uses of these certificates is when a person has a double residence and needs to define in which State should be considered a tax resident. To achieve this, double tax agreements (DTA) include a tiebreaker in their residence provision commonly identified in Article 4 of DTAs. But before going to the tiebreaker must be clear that the same individual is deemed a tax resident of two different States and evidently such States has in force a DTA.
Demonstrating residence
The tax administration of Spain disregarded a tax certificate issued by the US under the argument that “Americans can get one just for being US citizens”. Accordingly, the position of the authority was that the individual did not demonstrate his double tax residence in both countries, US and Spain, thus it was not necessary to apply the tiebreaker of the DTA given that the tax residence of that person was already defined.
Tribunal outcome
The highest tribunal of Spain (“Tribunal Supremo”) overturned the ruling of the tax authority to conclude that a domestic authority does not have the power to disregard the effects of a tax certificate issued for international taxation by another government if such certificate was prepared to be applied in a double tax agreement.
Fabio Mazzini is an Associate Partner at Studio TDL, with a solid background in corporate and tax consultancy for multinational operations. Registered with the Vigevano (PV) Register of Chartered Accountants since April 7, 2004, and as a Statutory Auditor from March 3, 2008, he offers knowledgeable assistance in both national and international taxation. His areas of expertise include direct and indirect taxes, tax litigation, financial and tax due diligence. Mazzini is skilled in conducting company appraisals and evaluations, particularly in the contexts of corporate reorganisations and acquisitions. He serves as an auditor and Statutory Auditor for notable Italian and international companies. Fluent in English and Spanish, his professional focus encompasses Accounting and Financial Statements, Management Control, and Corporate and Contractual consultancy, as well as guiding Extraordinary Operations.
Italy’s new Delegation Law to launch tax reform
November 16, 2023
Italy’s new tax Delegation Law is set to create a significant overhaul of the tax system following the introduction of the Delegation Law, Law no. 111, effective from 29 August 2023. The legislation, published on 14 August in the Official Gazette, outlines the framework for a comprehensive tax reform to be implemented by August 2025.
The law is structured across five titles encompassing 23 articles. It outlines the general principles and implementation schedule, delves into various tax categories including income tax, VAT, and IRAP, and addresses regional and local taxes as well as gaming.
Italy’s new tax Delegation Law – Article 7
Article 7 of the law brings VAT into sharp focus, signalling a shift towards greater alignment with European Union standards. Key amendments include redefining VAT bases to reflect EU terminology, particularly in the classification of goods and services. This realignment is expected to clarify definitions surrounding contracts, share transfers, and leasing arrangements.
VAT implications
In a move to modernise the VAT system, the law also revises exemptions, potentially expanding VAT liability in the real estate and financial sectors. VAT rates are set for a rationalisation process, aligning with EU criteria and potentially easing the burden on socially essential goods and services. A notable change in the VAT landscape is the introduction of more flexible deduction mechanisms. This aligns Italy with EU VAT guidelines and offers businesses a tailored approach to deductions, depending on the usage of goods and services in taxable transactions.
Customs updates
The law doesn’t overlook customs procedures. Article 11 proposes a digital and streamlined future for customs, enhancing efficiency in coordination, checks, and procedural aspects. This includes a comprehensive reorganisation of liquidation, assessment, and collection processes. While the Delegation Law sets out the blueprint for reform, its full impact will unfold as specific regulations and measures are introduced. At present, no new VAT rules have come into effect, but the stage is set for significant changes.
Tax efficiencies
As Italy embarks on this ambitious reform, the business community and individuals alike await the practical implications. The reform promises a more integrated and efficient tax system, in line with EU standards, but it also brings a period of adjustment and adaptation.
Read the full analysis in Italian and English here.
If you would like to get in touch with one of our tax experts in Italy, please get in touch, or contact Studio TDL directly.
Len leads the VAT team and brings a wealth of experience and a practical approach to provide user-friendly VAT advice and get the best solutions for his clients.
Len helps his clients navigate UK and global VAT systems to ensure they know what to expect, get it right, and above all know they are in good hands so they can focus on their priorities and achieve their goals.
Over many years’ experience, first as a VAT inspector at HMRC, and leading VAT teams at large accounting firms in Scotland and the South West, he has advised clients in most sectors, with specialisms including Education, particularly FE Colleges, International Trade, Cross-border transactions, Group Structures, Property, Partial Exemption, and of course dealing with HMRC.
Understanding VAT implications on UK residential property
November 14, 2023
Understanding the VAT implications on UK residential property and the impact of interim rental for new residential properties, including strategies for VAT recovery, HMRC’s adjustment policy, and alternative approaches, is essential for investors with portfolios in the UK.
Recovering VAT on UK residential property development
When housing developers construct or convert properties for sale, they can generally recover VAT incurred on development costs. This includes VAT on land or property purchases and associated legal and professional fees, which can represent significant amounts.
VAT implications on UK residential properties carrying out interim rental
Interim rental of these properties, prior to sale, can change their VAT status from zero-rated sales to exempt rentals. This shift can potentially lead to a clawback of recovered VAT to HM Revenue and Customs (HMRC).
HMRC’s Fair Adjustment Policy
In response to market slowdowns, like in 2008, HMRC introduced a policy allowing a fair and reasonable VAT adjustment. This policy, aimed at reflecting both the temporary exempt use and intended sale, can lead to reduced VAT clawbacks or no adjustment, depending on specific factors such as the rental period and projected sales value.
Alternative strategies: Sales to group companies
Another strategy is selling new residential properties to a group company before renting them out. This approach can secure VAT recovery on development costs by ensuring a zero-rated first sale, though it must be weighed against other commercial, legal, and tax considerations, including Stamp Duty Land Tax (SDLT) and Corporation Tax.
This guide is an overview of the UA’s Value Added Tax (“VAT”) system, focusing on how it affects foreign businesses trading with the UA. It is general in nature and unlikely to cover the specifics of your scenario. It should be read as such and not be construed as advice. For advice as to how your business is affected by UA VAT, please contact a Kreston UA VAT specialist.
Ukraine
November 3, 2023
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