Central and Eastern Europe (CEE) – Are You Ready for New Challenges?
In recent years CEE has been a driving force behind European economic growth and tax policy a powerful weapon of the region’s economic policy makers. CEE has certainly borne its fallout from the global downturn (including the previously booming private equity and real estate sectors). But amid the gloom spark some new prospects (think distressed assets, reducing valuations, lower levels of corporate indebtedness, mezzanine opportunities, reduced competition for the ‘winners’) and sound on the ground expertise is now more important than ever.
CEE tax regimes are similar to those of Old Europe: the types of taxes, incidence of taxation and composition of the tax base are comparable. But they frequently lack features typically present in well developed tax regimes e.g. group tax consolidation, tax-neutral asset or share transfers within a group and targeted EU-compliant (as opposed to blanket) anti-avoidance rules. (e.g. Bulgaria introduced in 2011 a 10% withholding tax on all service fee etc payments to tax haven companies although with the right of rebuttal for the taxpayer.)
The Region has in the last decade witnessed tough tax competition championed by CEE governments aimed at attracting foreign investment. This has manifested in the reduction of headline tax rates, introduction of flat rate tax regimes or termination of taxes that may deter foreign investment. The introduction of sophisticated tax ‘features’ in response to business demands (group tax consolidation, rollover relief), or increase in market sophistication (guidance for specialist money and capital market transactions) is however well overdue. (But there are developments: e.g. Hungary just introduced a REIT regime.) CEE tax policies have had to change due to the current state of economic affairs. Governments are under pressure to plug budgetary holes by cutting public expenditure and increasing tax revenue (including more efficient tax collection), without harming the competitiveness of national economies.
In most CEE countries the turn in policy has resulted in tax reform packages. (e.g. In Hungary low flat income and progressive corporate tax rates have been introduced, coupled with excessive and retrospective special taxes on the banking, pharma, energy, retail and telecom sectors along with a new product charge, ‘chips or snacks’ tax, levied on certain ready-made foods and beverages high in sugar, salt or caffeine. In its new 2011 tax code Ukraine is reducing its corporation tax to 16% by 2014, but introducing ‘blanket’ limits (non-resident providers) and prohibitions (offshore providers) on the deduction of certain expenses (consultancy, marketing, royalties, interest) and an advance tax on distributions that can cause cash-flow headaches.)
Harmonisation with the acquis communautaire is another driver for changes. This also resulted in some CEE countries having to give up measures considered to aid harmful tax competition (e.g. Hungarian offshore company and group financing regimes). The ECJ and the Commission has come to the rescue of CEE taxpayers in a number of cases. e.g. Most recently the ECJ ruled (against Hungary) that the payment of consideration for the supply giving rise to VAT cannot constitute a condition for VAT refund.
CEE tax authorities are gaining experience, training (from dedicated EU counter parties) and will to challenge highly complex transactions. The CEE taxman is no longer only busy with scrutinising formalities of invoices and other aspects of VAT reclaims trying to reduce payouts by struggling budgets. (Whilst in 2011 Ukraine introduced an automatic cash refund primarily for exporters, it has huge government debts from yet unpaid reclaimed VAT, which were converted into ‘VAT bonds’ in 2010). Russia first introduced transfer pricing rules and Ukraine and Bulgaria the concept (requirement) of ‘beneficial ownership’ in domestic law in 2011. Poland is removing the widely exploited ‘loophole’ in its treaty with Cyprus allowing fees of Polish resident directors of Cypriot companies to be ‘double untaxed’ and for Cypriot source dividends to be taxed at only 9% (instead of 19%) in Poland.
Anna Burchner – CMS CEE Tax Group coordinator
T +44 20 7367 3077
E [email protected]
CMS in Central and Eastern Europe
CMS is present in 12 CEE countries* and is very well placed to assist your business in managing the new tax and legal challenges it is facing in the region. Do not hesitate to contact Anna Burchner, our CMS CEE Tax Group coordinator or your usual CMS contact should you wish to discuss any new challenges your business is facing.
* Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Ukraine