Participation Exemption for Taxation in Various Countries

Many jurisdictions define the term “participation exemption” widely to include any method used to avoid economic double taxation on inter-corporate dividends from shareholdings or participations.

Therefore, it includes both the relief on dividend income under the special rules of “participation exemption” (also called “affiliation privilege”), and “dividend- received deduction.” Under the domestic participation exemption rules, the dividend income is exempt and not liable to corporate tax in the hands of the receiving company.

The dividend-received deduction provides a deduction of the dividend income for tax purposes. Both methods partly or fully avoid the taxation of domestic dividends that are received by qualifying companies.

Several jurisdictions have extended the domestic participation exemption rules to distributions received by resident companies from foreign qualifying subsidiaries. Some of them grant the same tax-exemption to dividends received by qualifying permanent establishments of nonresident companies, if the shares are part of their assets (Examples: Belgium, France, Italy, Luxembourg, and Netherlands).

A few countries extend the tax- exemption to the net worth or capital tax (Examples: Austria, Luxembourg). There are also countries that allow a dividend-received deduction for foreign dividends (Examples: Belgium, Canada, Italy, and Spain).

Certain countries have extended the participation exemption rules to the capital gains on the disposal of qualifying shares. Some jurisdictions allow the deduction of participation expenses against other taxable income, even when the related dividends are tax-exempt.Generally, foreign tax credits are not given for foreign taxes paid on exempt dividend income.

The participation exemption is normally given on dividends from direct (e.g. non- portfolio) investment and is conditional on a minimum percentage or amount of share ownership or voting rights.

It may also require the qualifying shareholding to be held for a minimum period. Some countries require that the dividend paying country must have a similar tax system, or it must not be a tax-privileged jurisdiction. Others impose additional requirements.

For example, there are anti-abuse provisions that restrict exemption for passive income dividends. With few exceptions, the participation exemption is usually restricted to direct shareholdings, and excludes lower-tier subsidiary companies.

Country Examples:

Austria:

The participation exemption is given to resident companies and Austrian branches of EU companies on the dividend income derived from domestic and foreign shareholdings. Under the national affiliation privilege, domestic inter-company dividends are tax-exempt but the capital gains are taxable as ordinary income.

The international affiliation privilege applies to both foreign dividends and capital gains. The dividends are tax-exempt if the Austrian company holds a minimum 10% equity in the foreign subsidiary for at least one year.

For capital gains exemption, the qualifying shares must be owned on the day of the sale. The capital loss on a write-down or sale of a qualifying participation is allowed over a seven-year period. As from 2005, the rules allow deduction of financing expenses.

As an anti-abuse measure, the international participation exemption does not apply if the following conditions exist:

(i) The main business of the nonresident subsidiary is to derive passive income, such as interest income (not more than 25% of foreign earnings must be from interest-bearing securities), rental income other than from land and buildings, royalty income or capital gains from the disposal of investments; and

(ii) The foreign income is not subject to a tax system comparable to the Austrian system; an average tax liability in the source country in excess of 15% of the income as computed under the Austrian tax rules qualifies.

If both the above conditions are met, they are granted direct and indirect tax credit only. As from 2004, the anti-abuse rule is applicable to resident companies wholly controlled by resident and nonresident individuals.

Belgium:

A dividend-received deduction is granted for 95% of the dividends received from resident and nonresident subsidiaries by qualifying Belgian resident companies and by Belgian branches of foreign companies. The financial or other expenses incurred as participation costs are usually deductible. Tax rulings are given for the eligibility of the participation exemption.

To qualify it must satisfy two tests:

“Ownership test” – The Company must own at least 10% equity or hold shares with an acquisition value of at least EUR 1.2 million for a minimum of one year. Moreover, the shares must be in the nature of “financial fixed assets”. Financial fixed assets refer to shares that provide either controlling or substantial (e.g. 10% or more) equity interests or are held to ensure a long-term business relationship.

“Subject to tax” test – The dividends must be received from fully taxed Belgian companies or from nonresident financial fixed assets that are subject either to a foreign tax of a similar nature or based in countries whose general tax regime is not “considerably more beneficial” than the tax regime in Belgium.

Belgium denies the participation exemption for dividends received from foreign companies in “blacklisted” tax havens under its “tax haven exclusion” rule. A Royal Decree dated February 13, 2003 provides a list of countries where the general tax regime is considered more beneficial. Tax systems in EU Member States are not considered as more beneficial than the Belgium tax system.

Moreover dividends from foreign subsidiaries realised through their foreign permanent establishments with considerably more favourable tax regimes do not qualify under the “low-taxed foreign branch exclusion”. This exception does not apply if both the distributing company and its foreign branch are located in an EU country or subject to an effective global tax rate of at least 15%.

For domestic dividends, the dividend-received deduction applies to the amount grossed up by the withholding tax. For foreign dividends, the amount is taken net of the foreign taxes suffered on the dividends received.

The deduction is limited to the extent of the taxable income, and cannot be deducted usually from disallowed expenses or net loss situations. The unused deductions are not available for carry-forward.

The participation exemption applies to receipts from dividends, which also include any repayment of share capital, liquidation payment and share redemption, to the extent the distribution exceeds paid-up capital. In the case of foreign shares, the relief is given only if the liquidation or redemption proceeds are also similarly taxed in the host country.

There is no capital gains tax on the disposal of qualifying shares. Unlike the dividend deduction, there is no requirement to meet the equity ownership or holding criteria. Only the taxation test has to be met. Capital losses on shares are not tax-deductible, except as a qualifying liquidation loss.

Canada:

Domestic inter-company dividends are tax-free, as they are tax-deductible in full. Canada gives full dividend deduction for qualifying foreign dividends paid to a Canadian corporation received from a treaty country as “exempt surplus”. To qualify, it must be received from a foreign affiliate and derived from an active business in a listed treaty country.

Similar dividends from an affiliate in a non-designated treaty country or if derived from passive income are entitled to direct and indirect foreign tax deduction as “taxable surplus”. A foreign affiliate is a nonresident company, in which the Canadian taxpayer owns at least 1% equity alone and at least 10% of any class of shares with related persons.

Chile:

Chile introduced a special tax regime to promote regional headquarters and holding corporations in 2002. A Chilean holding company (CHC) is treated as a nonresident company for tax purposes. A CHC is taxed only on Chilean source income.

It is not taxed in Chile on income derived as profits or dividend income, management fees or capital gains from its foreign subsidiaries. Moreover, no withholding tax is levied on subsequent distributions to foreign shareholders out of its profits from non-Chilean sources.

The CHC regime is subject to several restrictions to prevent it from being regarded as a tax-haven regime. For example;

i. The holding company must be incorporated in Chile with the sole business purpose to make investments in Chile and overseas.

ii. Shareholders of the CHC, or shareholders of a shareholder of the CHC having more than 10% of its capital, must not be resident in an OECD-listed tax haven or preferential tax regime. Their capital contributions must be in a foreign currency or in shares of foreign corporations.

iii. Local investors may not hold shares that exceed 75% of the capital of the CHC.

iv. The CHC may be financed by debt; however, the debt amount must not exceed the foreign capital contributions and three times the amount contributed by Chilean investors.

The CHC may also invest in local corporations; however, related dividends are subject to withholding tax when paid to nonresidents.

Denmark:

The Danish domestic law provides for full tax-exemption on dividends from participations of at least 15% (2009: 10%) in a domestic or foreign subsidiary, if held for one year. There is no “subject to tax” requirement for the host country.

All financing costs (e.g. interest costs, currency losses and other financing costs) of the qualifying participations are deductible against other taxable income, subject to thin capitalization rules. No foreign tax credit is given on exempt dividends.

Denmark permits the deduction of capital losses against taxable gains if the shareholding has been held for less than three years at the time of disposal. After the first three years of ownership of the shares, their disposal is also exempt from capital gains tax (and capital losses are disallowed.

Liquidation proceeds are treated as dividends if they are paid before the year of final liquidation; otherwise, they are regarded as capital gains. There are no minimum ownership or holding requirements.

Finland:

In January 2005, Finland shifted from a full imputation system to a classical system with partial shareholder relief for dividends. Under the new system, corporate income is first taxed in the hands of the company and then dividends are taxed again in the hands of the shareholders. However, several tax concessions are given to relieve the economic double taxation on shareholders.

Inter-corporate domestic dividends are usually tax exempt (partly of fully) under the Finnish participation exemption. Full exemption is given to qualifying foreign dividends under the EU P-S Directive or under tax treaties. If not exempt, only 75% of the dividend received from tax treaty countries is taxable. Dividends received by Finnish corporate entities from non-treaty countries are fully taxable.

France:

As from 2004, France follows a shareholder relief system.

The dividend income is taxable as follows:

i. A parent company with more than 5% shareholding is 95% tax-exempt on its dividend receipts from its domestic and foreign subsidiaries under the participation exemption rules.

ii. Non-parent companies that hold less than 5% of the shares are taxed fully on their dividends under the classical system.

iii. Individual shareholders are taxable on 60% of the dividend income from French companies and foreign companies based either in an EU or in a treaty country.

France provides for participation exemption on the gross dividends received from qualifying domestic or foreign subsidiaries. The corporate taxpayer elects to apply the French participation exemption provisions.

The election may be made for each subsidiary annually. Besides French resident companies, the dividend exemption is also given to French branches of foreign companies. To qualify, the French company or nonresident branch must directly own at least 5% of the issued capital. The shares must be held either for at least two years or since the formation of the subsidiary, and must have voting rights.

There is no “subject to tax” requirement for foreign dividends. Under the participation rules, the gross dividends and long-term capital gains on the disposal of the shares received from qualifying subsidiaries are 95% exempt. Up to 5% of the exempt dividends and capital gains are taxable for charges and expenses.

France grants full deduction for the participation expenses on qualifying shareholdings against other taxable income. Therefore, interest payments incurred for financing share acquisitions are tax-deductible.

Any related exchange gains and losses on financing loans for share acquisitions are also taxable or deductible currently as revenue items. The liquidation proceeds paid to shareholders are taxed as dividends and also eligible for the participation exemption.

This exemption is also given to a controlled foreign company on the dividends received from its subsidiaries, if the affiliation privilege rules are met.

Germany:

In 2001, the imputation system was replaced by a shareholder relief system under the so- called “half-income system”. Under this system, the overall tax burden is shared between the corporation and shareholders. The profits are taxed first at the corporate level, and then on distribution one-half of the dividends (domestic and foreign) are taxed again in the hands of the individual shareholders.

The tax-exempt portion is not added back for rate purposes, and full credit is given for the dividend withholding tax. The “half-income system” also applies to capital gains of individuals on the sale of shares.

For corporate shareholders, both domestic and foreign dividends are generally tax- free, subject to a 5% disallowance for expenses under the German participation exemption. Certain exceptions apply if the shares qualify as a trading asset in the hands of the investor.

There is no minimum ownership or holding period requirement. However, if the parent company (or a German permanent establishment of a nonresident company) holds less than 10% equity at the beginning of the tax year in a subsidiary or receives dividends from foreign non-EU companies where passive income accounts for more than 10% of its income, it is subject to trade tax.

The domestic dividend withholding tax (Kapitalertragsteuer or KESt) is either credited against the tax liability or refunded to the shareholder. No credit or refund is available for withholding tax on foreign dividends.

The participation expenses for foreign and domestic dividends are fully deductible unless they are considered as interest on “tainted” debt. “Tainted” debt is related party debt incurred on an inter-company acquisition of shares in a corporation. The capital gains on the disposal of shares held in domestic and foreign companies are also effectively 95% tax-exempt.

Capital losses are not deductible. Similar exemption also applies to dividends received and gains realised by a German permanent establishment of a nonresident corporate taxpayer and partnerships to the extent they are owned by corporate partners.

Israel:

Israel provides a special participation exemption regime for a qualifying holding company with foreign subsidiaries.

To qualify, a holding company must be:

(a) Incorporated and managed and controlled wholly in Israel;

(b) It must not be a public company or a financial institution or formed in a tax-deferred reorganization; and

(c) At least NIS 50 million must be invested for at least 300 days as equity or loans in the subsidiaries and comprise at least 75% of its assets.

The subsidiary must also meet the following conditions:

i. It must be resident in a treaty country or in a country with a corporate tax rate of at least 15%.

ii. At least 75% of its income must be accrued or derived from a business or one-time venture abroad.

iii. The holding company must own an “entitlement shareholding” of at least 10% of its profits for at least 12 months including the date when the income is received.

The holding company is exempt from tax on:

(a) Its dividend income and capital gains from its subsidiaries;

(b) Interest, dividends and capital gains from shares listed on the Tel-Aviv Stock Exchange, and

(c) Interest and indexation amounts received from Israeli financial institutions. Any dividends redistributed to foreign shareholders by the holding company are taxed at a reduced 5% withholding rate.

Italy:

Under the EC P-S Directive, 95% of the foreign dividends received from other EU countries are tax-exempt, if at least 15% (2009: 10%) of the capital of the distributing company is held continuously for one year.

This tax benefit was first extended to qualifying dividends from non-EU countries under a white list in 2002 and is now applicable to all dividends (both domestic and foreign), without any minimum ownership or holding period requirement. The domestic law also gives unilateral relief for withholding tax paid on foreign dividends on a per-country limitation basis.

The dividends paid by companies in certain tax-privileged jurisdictions outside the European Union, listed under a January 2002 Decree, are not eligible for the participation exemption regime and are fully taxable.

The tax havens include countries outside the European Union that either do not levy any income tax or apply an effective tax rate less than 30% of the rate applicable on similar income in Italy.

The new tax regime in 2004 also provided participation exemption for capital gains for qualifying shareholdings and interest in partnerships.

To qualify:

(a) The shares must have been held for at least 18 months;

(b) The shares must be classified as financial assets in the first accounts prepared after their acquisition;

(c) The subsidiary must not be resident in a listed tax haven; and

(d) The subsidiary must carry on a commercial activity other than real estate business.

Where the disposal relates to shares of a holding company, the last two conditions need to be satisfied by the majority of its subsidiaries. There is no minimum holding required for the parent company to benefit from the capital gain exemption. As from 2007, capital gains are only 84% exempt.

Capital losses on disposal of assets that qualify for participation exemption are not deductible if they have not been continuously held for a period of 12 months. For disposal between 12 and 18 months, capital losses are not deductible but capital gains are taxed.

Luxembourg:

Inter-company dividends from resident and nonresident subsidiaries are free from all corporate and municipal taxes if they qualify for the participation exemption.

To qualify:

i. The receiving company must be

ii. (a) A fully taxable Luxembourg company or

(b) A Luxembourg permanent establishment of an eligible company resident in an EU Member State or

(c) A Luxembourg permanent establishment of a company resident in a treaty country.

iii. The company must hold or commit to hold for at least 12 months either 10% or more of the capital of the distributing company or shares with an acquisition price of at least EUR 1.2 million.

iv. The distributing company must be either a fully taxable Luxembourg company or a nonresident company taxable at a rate corresponding to Luxembourg corporate income tax, or be an eligible company resident in an EU Member State. The participation exemption rules satisfy the requirements under the EC P-S Directive for inbound dividends.

This exemption applies to cash dividends, dividends in kind, hidden profit distributions and liquidation distributions. Related operating expenses and any subsequent write-down on the participation are not deductible up to the amount of the exempt dividend income.

The capital gains (including currency exchange gains) on the qualifying shares are also tax-free under the participation exemption rules. To qualify, the disposing company or permanent establishment must also hold the shareholding for an uninterrupted period of at least 12 months and during the whole period, the shareholding should not fall under 10% or an acquisition price of EUR 6 million.

The capital gain exemption is reduced by related expenses previously booked and deducted by the company.

Netherlands:

The participation exemption (“deelnemingsvrijstelling”) is given to resident mutual funds (not being tax-free fiscal investment funds), co-operative societies and companies, and Dutch branches of foreign entities. Both domestic and foreign dividends and related capital gains (including exchange gains or losses on foreign loans) are tax-exempt and excluded from the tax base.

The participation exemption includes cash dividends, dividend- in-kind, bonus shares, hidden profit distributions, liquidation proceeds and capital gains. The payment of a liquidation surplus in excess of the paid-up capital is treated as a dividend.

The participation exemption rules were changed significantly in January 2007. Under the previous regime, benefits from a qualifying participation were fully exempt from corporate income tax.

To qualify, the Dutch parent company had to hold at least 5% of the nominal paid-up share capital, other than as an inventory for resale. If the subsidiary was a nonresident company, the “subject to tax” and “non-portfolio” requirements had also to be met.

Under the new rules any shareholding of 5% or more is considered an eligible participation. There are no additional requirements, as under the old rules, with one exception. If the participation can be considered a so-called “low-taxed portfolio participation”, dividends and capital gains are not fully exempt but qualify for a tax credit only.

A participation is a low-taxed portfolio participation if:

(i) More than 50% of its assets, directly or indirectly, are portfolio investments and

(ii) It is not subject to tax at an effective rate of at least 10% on its taxable profits, calculated under the Dutch tax principles.

Under the asset test, the portfolio investments could be bank deposits, loan receivables, securities and bonds, real property etc. that are not used in the course of the business. The assets of the subsidiary should be considered on a “consolidated” basis and the value of the assets must be determined on fair market value.

Moreover, intra-group receivables should not be eliminated on consolidation. There is an exception for foreign real property that is held through a local subsidiary. If at least 90% of the assets consist of real estate, they will be excluded from portfolio investments and thus qualify for the exemption. The asset test must be applied on a continuous basis.

Since capital gains are exempt under the participation exemption, capital losses on disposal are disallowed, unless the subsidiary is liquidated or dissolved and its activities are discontinued. The liquidation losses on qualifying participations are deductible under certain conditions. The dividends paid out of liquidation proceeds of qualifying subsidiaries are exempt if they qualify under the participation exemption.

Withholding tax on foreign dividends is not creditable for Dutch corporate tax, if the participation exemption is applicable. The company may, however, claim a partial tax credit against the Dutch withholding tax payable when the foreign dividends are redistributed to nonresidents.

Up to 3% of the gross amount of the qualifying dividends is deductible from the Dutch withholding tax and can be retained tax-free by the Dutch company.

To qualify:

(a) The foreign income dividends must be exempt under the participation exemption and at least 25% participation (not 5%) must be held in the foreign subsidiary;

(b) The dividend redistribution must be made within the current or next two years after receipt. The partial tax credit applies only if the foreign dividends have suffered at least 5% withholding tax in a tax treaty country.

Prior to 2004, the participation expenses of foreign shareholdings were not deductible against other income unless they contributed directly or indirectly to the taxable income in the Netherlands. Therefore, management costs, interest and exchange losses on the debt to acquire foreign companies could not be deducted against other taxable income.

For this purpose, the financing expenses on loans taken within six months before the acquisition were treated as participation expenses. These rules were changed subsequent to the Bosal decision of September 18, 2003 in the European Court of Justice.

As from 2004, costs (including currency differences) relating to shareholdings of qualifying participations are deductible; however, the acquisition and selling costs of a participation are not allowed, regardless of whether that participation is a Dutch or a foreign participation.

It is possible to negotiate advance tax rulings on the applicability of the participation exemption (e.g. to ensure that it is not a “low taxed portfolio participation”). However, the participations should be in active companies and have substance before advance tax rulings are given.

Norway:

Prior to 2004, Norway followed a full imputation system for inter-company dividends. The Norwegian imputation system was amended subsequent to the EFTA Court’s decision in the Fokus Bank Case.

Norway introduced a tax-free regime for domestic inter-company dividends and capital gains and losses on shares as from 2004. Dividends received from foreign companies also qualify if they have limited liability comparable to Norwegian entities. There is no minimum share ownership or holding requirement if they are resident in the European Economic Area (EEA).

For investment outside the EEA, inbound dividends and gains are exempt if:

(a) At least 10% shareholding by value and voting rights is held for more than two years, and

(b) The paying company is effectively subject to tax at the rate of at least two-thirds of the Norwegian rate. Financing costs (e.g. interest expense) incurred for share acquisitions are fully deductible.

For individual shareholders, Norway applies a modified classical system as from January 2006. Under this system, taxpayers are allowed a basic tax-free amount equal to the risk- free return on the invested capital as shareholder relief.

Portugal:

Portugal grants participation exemption only on domestic dividends received by a resident company. To qualify for the 100% dividend-received deduction, it must own either a minimum of 10% equity of the entity distributing the dividends, or have an acquisition value of at least EUR 20 million, for a minimum of one year.

Under this affiliation privilege, 100% of the dividend income is deductible and the payer does not withhold tax. The financing expenses on domestic participation are also deductible.

The participation exemption is extended to Portuguese holding companies (“SGPS”), regardless of the equity and holding period. The interest received by the SGPS on the loans given to qualifying subsidiaries is exempt from withholding tax, if a SGPS owns a minimum 10% equity for one year in the interest paying entity.

A SGPS is also exempt from capital gains if the participations to be sold are held for a period of at least one year. A SGPS is exempt from the 5% substitute inheritance tax.

The participation exemption does not apply to foreign dividend income, except under the EC P-S Directive. They are taxable, subject to ordinary credit, for the foreign taxes paid. Excess foreign tax credits may be carried forward for five years. The exemption is also denied as an anti-avoidance measure if the dividends received have not been effectively taxed or have been paid out of income that does not qualify.

Singapore:

Singapore shifted from the imputation system to a one-tier system of taxation of dividends in 2003. Under the new system, companies are subject to tax only once as a final tax. Dividends received by shareholders are tax-exempt. There is no minimum shareholding requirements or holding period.

The flow-through of exempt dividends applies to unlimited tiers of shareholders. Under a transitional provision, the imputation system may be used by existing companies until the end of 2007, or earlier if they elect to do so.

South Africa:

South Africa has a participation exemption rule. Any resident shareholder with at least 20% equity in a foreign company is exempt from tax on its dividends. Moreover, if the shares are held for at least 18 months and sold to a nonresident, no capital gains is levied, provided at least 20% equity is held during the period.

If the holding is less than 20%, dividend is fully taxable with credit given for the foreign withholding tax but not for other taxes. A shareholder holding between 10% and 20% may elect for the company to be deemed to be a CFC and for the relevant CFC exemption not to apply. The profits are then taxed on a pro rata basis, with credit given for the related foreign tax, and the dividends are exempt.

Spain:

The participation exemption is given for both domestic and foreign dividends, as follows:

(a) Domestic:

Under the domestic participation rules, Spain grants a 50% tax credit on inter-company dividends. The credit is increased to a 100% dividend tax credit on dividends and related capital gains if the receiving company owns a minimum 5% direct or indirect shareholding in the paying company for at least one year.

(b) International:

For non-qualifying foreign dividends, Spain normally grants direct and indirect foreign tax credit relief (“credit method”). To qualify for this indirect credit relief, at least 5% equity must be held for a minimum of 12 months. Unused tax credits may be carried forward for ten years. The tax relief is given on a per-country limitation basis.

Under the international participation rules, a 100% tax-exemption is given for foreign dividends and related capital gains, provided the paying and receiving companies meet the following additional conditions:

(a) The receiving company must hold at least 5% of the foreign equity for a continuous period of at least one year; and

(b) The paying company:

(i) Must be subject to, and not exempt from, a tax identical or similar in nature (not necessarily tax rate) to Spanish corporate tax;

(ii) Must not be resident in a listed tax haven; and

(iii) At least 85% of the profits must be derived from business activities in countries other than tax havens.

For capital gains, the holding period test must be met on the transfer date; the other tests must be met during the entire ownership period and the transaction must be with an unrelated foreign buyer not resident in a tax haven jurisdiction. Restrictions apply if the foreign subsidiary’s assets are located in Spain.

The 100% tax-exemption is also given to Spanish resident corporate taxpayers on the income derived from qualifying foreign permanent establishments. The exemption requires that the foreign permanent establishment is engaged in a business activity and it is subject to a similar tax as in Spain. Their losses are deductible with claw-back provisions.

As from 2003, Spanish companies with qualifying foreign holdings (same requirements as those for the international participation exemption) are entitled to an annual tax deductible write-down equal to 5% of the excess of the purchase price over the net book value of the foreign shares.

The financing costs of the participations are deductible from other taxable profits, subject to thin capitalization rules. Liquidation proceeds are taxed as dividend distributions. Capital losses and write-downs in portfolio values are tax-deductible. Advance rulings are given. The company and the resident shareholders cannot claim any credit for the foreign taxes paid, if the dividends are tax-exempt.

Switzerland:

The federal participation exemption (“substantial holding privilege”) provides relief from corporate tax on domestic and foreign dividend income. It reduces the Swiss federal tax on qualifying participations by a proportion of net earnings on participations to total net income.

Net earnings on participation refer to earnings from dividends less administrative expenses (usually 5% flat rate deduction) and less financing costs. Under a fixed corporate rate, the proportional deduction effectively exempts the participation income.

To qualify, the investment in the subsidiary must be at least 20% of the equity capital, or have a minimum value of CHF 2 million (book value or fair market value, whichever is higher). There is no requirement for a minimum holding period or that the foreign subsidiary be subject to any tax in the host country.

It can also be a portfolio investment company. In 1998, these rules were extended to capital gains on qualifying participations, provided at least 20% of the shares are held for one year.

The participation exemption rules also apply to cantonal/communal taxes. Every canton grants a pure holding company full exemption from cantonal taxes and a reduced annual net worth or capital tax. To qualify, its investments must represent more than two-thirds of the total assets or provide more than two-thirds of the total income of the company.

Moreover, the company’s main objective should be the long-term management of the investments and have no commercial activity in Switzerland. Capital taxes for holding companies vary according to canton from 0.0675% and 0.9675% of the taxable capital.

Financing costs and administrative expenses of participations are allowed as tax deductions. The foreign tax credits are not given on exempt dividends. Liquidation surpluses may be taxed either as dividends or capital gains. The liquidation losses and write-downs of participations are tax-deductible. The tax authorities give advance tax rulings.

Turkey:

Turkey provides international participation exemption for foreign dividends and income from foreign permanent establishments and permanent representatives of resident companies abroad.

To qualify for full tax exemption, all the following conditions must be satisfied:

(a) The resident holding company must own at least 10% of the shares for at least two years;

(b) The foreign subsidiary must be a limited or joint stock company, and be subject to effective tax of at least 15% (not less than Turkish tax rate if it is a finance or insurance company); and

(c) The income from the foreign subsidiary must be received in Turkey before the filing date of the annual tax return.

Capital gains from the sales of shares of a foreign subsidiary are also exempt if:

(a) At least 75% of the total balance sheet assets, other than cash, consist of participations in qualifying foreign subsidiaries continuously for at least one year;

(b) The participation in each of these companies is at least 10%, and

(c) The shares sold are held for a minimum period of two years.

United Kingdom:

In 2002, the United Kingdom amended its legislation to exempt the capital gains on the sale of a substantial shareholding (at least 10%) held in a qualifying subsidiary held for at least 12 months out of a previous two-year period prior to disposal.

To qualify, the subsidiary must be a trading company or a holding company of a trading company group both before and after its sale. In addition, the UK holding company itself must be a trading entity or a member of a trading group both before and after the sale of the subsidiary.

The above participation exemption makes the United Kingdom a favourable holding company location.

For example:

(a) Dividends received suffer a low or nil withholding tax under double tax treaties or EC P-S Directive;

(b) UK domestic law provides direct credit relief for the withholding tax paid and also the underlying tax credit for unlimited tiers for participations of 10% or more, and

(c) Capital gains tax on qualifying substantial shareholdings are exempt. There is no withholding tax on dividends paid out of the United Kingdom.

United States:

The United States grants a 70% deduction on inter-corporate dividends from domestic sources, if the equity ownership is less than 20%. This dividend-received deduction is increased to 80% on shareholdings of at least 20% in the paying company.

Moreover, it is fully exempt if the parent company directly or indirectly owns at least 80% of the total voting rights and the value of all classes of shares (excluding non-voting preferred shares) of the paying company.

This dividend-received deduction is not normally given for foreign source dividends, except in certain circumstances. For example, it is granted for foreign dividends received by a US corporation that are paid out of profits effectively connected with a US trade or business and taxable as US source income.

The deduction is given pro rata to the underlying US source income to total income on a proportion of the dividend depending on the level of shareholding. The deduction may be denied under anti-avoidance rules in certain circumstances.

The United States grants indirect tax credit on foreign dividends to U.S. corporations for up to six tiers of qualifying subsidiaries. The ordinary credit is subject to several limitations. There is no withholding tax on liquidation proceeds, which are paid as capital gains to a nonresident shareholder.

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