Tax update: Egypt, India, Italy, Mexico, Russia and the United States

At a glance:
 

Egypt: Tax reform package

India: SEBI mandates rules for FPIs carrying out secondary market trades in corporate bonds

Italy: Supreme Court rules on participation exemption for cross-border capital gains

Mexico: Decree formalising adoption of MLI

Russia: Suspension of tax treaty provisions

United States: proposal to provide relief from double taxation between the US and Taiwan

United States: New fast-track processing program for certain letter ruling requests introduced

A closer look

Egypt: Tax reform package

Effective 16 June 2023, the President of Egypt approved a tax reform package, which includes several changes impacting multi-national groups.

Of particular note for the investment management industry, the changes include the following with respect to interest on cross-border loans:

• the previous exemption from 20% withholding tax on Egyptian source interest income on loans with terms of three years or more granted to non-residents has been removed (excluding interest on loans granted before).
• As previously, tax treaty benefits on any interest arising in Egypt may only be claimed by foreign taxpayers indirectly, whereby the domestic 20% rate is initially applied and a reclaim application made following receipt.

The government is expected to issue executive regulations to provide further clarity on these changes in due course. Read more here.

India: SEBI mandates rules for FPIs carrying out secondary market trades in corporate bonds

On 7 August 2023, the Securities and Exchange Board of India (“SEBI”) issued a circular mandating Foreign Portfolio Investors (“FPIs”) to undertake at least 10% of their total secondary market trades in corporate bonds, by value and on a quarterly basis, through placing or seeking quotes on the Request for Quote (“RFQ”) platform of stock exchanges.

By way of background, the RFQ platform is a dedicated electronic platform for debt securities enabling sophisticated, multilateral negotiations to take place on a centralised online trading platform. By acting as a single interface for price givers and takers in the debt market, the RFQ platform helps in enhancing the price discovery and brings pre-trade transparency.

Currently, FPIs are allowed to invest in any debt securities or other instrument as permitted by the Reserve Bank of India (“RBI”). The RBI permits FPIs to invest in corporate bonds subject to the fulfilment of investment limits and other conditions specified by the RBI.

The change introduced by the circular are in-line with similar thresholds for mutual funds, alternative investment funds, portfolio management services and other participants, encouraging the use of the RFQ platform to enhance liquidity.

The change shall come into effect from 1 October 2023.

Italy: Supreme Court rules on participation exemption for cross-border capital gains

On 19 July 2023, the Italian Supreme Court issued a decision in which it ruled that a non-Italian company could benefit from the Italian participation exemption regime for Italian-source capital gains derived from a sale of shares, based on the EU fundamental freedoms.

The case involved a French company which realised capital gains from the sale of a substantial holding in an Italian company and was subject to Italian-source taxation. It subsequently filed a refund request with the Italian tax authorities stating that the non-applicability of the Italian participation exemption regime to non-Italian companies without a permanent establishment (“PE”) in Italy constitutes non-justified discrimination against non-Italian investors.

The Italian Supreme Court ruled in favour of the French company. Hence, non-resident companies that do not have an Italian PE and that have been subject to tax in Italy on capital gains derived from the sale of an Italian participation may wish to consider filing a refund request, provided they meet the relevant conditions for the application of the Italian participation exemption regime and the statute of limitations has not yet expired.

Read more here.

Mexico: Decree formalising adoption of MLI

On 19 June 2023, a decree formalising Mexico’s adoption of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) was published in the official gazette. The publication in Spanish can be found here.

The MLI entered into force for Mexico on 1 July 2023 and will modify the application of most of the bilateral tax treaties signed by Mexico as from 1 January 2024.

Read more here.

Russia: Suspension of tax treaty provisions

On 8 August 2023, the President of the Russian Federation signed a decree that suspends certain provisions in its double taxation treaties with 38 countries, including Luxembourg. The suspended provisions include those relating to dividends, interest, and royalties, as well as other general tax relief provisions.

Those countries whose double taxation treaties with Russia have also been impacted are:

United States: Proposal to provide relief from double taxation between the US and Taiwan

On 12 July 2023, the two US congressional tax-writing committees jointly announced a bipartisan discussion draft of a proposal to provide relief from double taxation for workers and businesses engaged in cross-border investment between the US and Taiwan.

The new section of Internal Revenue Code (“IRC”) would provide benefits to “qualified residents of Taiwan”, similar to those that are available under the 2016 United States Model Income Tax Convention. Broadly, the benefits are categorised between:

• reduction of withholding taxes;
• application of permanent establishment rules;
• treatment of employment income; and
• determination of qualified residents of Taiwan, including rules for dual residents.

Read more here.

United States: New fast-track processing program for certain letter ruling requests introduced

On 26 July 2023, the US Internal Revenue Service (“IRS”) published Revenue Procedure (Rev. Proc.) 2023-26, a new program that allows taxpayers to request “fast-track” processing for letter ruling requests which are solely or primarily under the jurisdiction of the Associate Chief Counsel (Corporate). Rev. Proc. 2023-26 replaces the fast-track processing pilot program that was introduced by Rev. Proc. 2022-10, which expired on 14 July 2023.

In the context of funds, the types of issues that fall within the Associate Chief Counsel (Corporate)’s jurisdiction and that would arise to the level of requesting a letter ruling would likely be corporate tax matters at the investment / portfolio company level.

The fast-track processing is intended to provide taxpayers with a ruling within 12 weeks of submission and will apply to all letter ruling requests postmarked or, if not mailed, received by the IRS after 26 July 2023.

For more details, please see here.