Subsidiary
Introduction to
International
Establishments
Parent company establishes (or purchases) a
subsidiary in another country
◦ Two different tax subjects
◦ Subsidiary’s worldwide profits taxed in its Home
State
A AB
X
Y
B Ltd
SUBSIDIARIES AND PERMANENT ESTABLISHMENTS
Pause question
Permanent Establishments
Unlimited tax liability for companies is solely
based on place of registration in both states X
and Y.
Non-resident companies can carry on
businesses in another state through a
permanent establishment
A AB
◦ Business profits of the P.E. are taxed in the
Source State (State Y)
A AB owns 100 percent of the shares in B Ltd.
B Ltd has no foreign sourced income.
A AB
X
Y
What State(s) taxes the business profits of B
Ltd?
B Ltd
X
Y
P.E.
Permanent Establishments
Permanent Establishments
A fixed place of business outside the state of
residence, for example:
P.E. = Tax on business profits in the Source
State
◦
◦
◦
◦
◦
◦
Place of management
Branch
Office
Factory
Workshop
Mine, oil or gas well, a quarry or any other place
of extraction of natural resources
◦ A person acting on behalf of an enterprise and
concludes contracts
No P.E. = No tax on business profits in the
Source State
A AB
A AB
X
Y
X
Y
P.E.
International Juridical Double Taxation
Resident companies are taxed on their
worldwide income
Non-resident companies are taxed on their
sourced income
A AB
Results in double taxation of business income
in the Source State (State Y)
X
Y
P.E.
International Juridical
Double Taxation
FIRST THEME
First Theme
Double Taxation: Disambiguation
International Juridical Double Taxation
Economic double taxation
◦ When does it occur?
◦ How is it relieved?
◦ The same economic activity is taxed twice
◦ Corporation tax (company) and dividend taxation (owner)
A Ltd
A Ltd
◦ Different taxpayers
International juridical double taxation
◦ The same income is taxed in two different
jurisdictions in the hands of the same person
◦ The same taxpayer
Two main ways of relieving double taxation
◦ Foreign income can be exempt in the Home
State
◦ Home State can provide for a foreign tax credit
X
Y
B Ltd
P.E.
Source taxation
Taxation of worldwide income meets source
taxation
Source taxation
Principle Solutions
Tax exemption
Corporate Income Tax
A Ltd
◦ Home State exempts foreign source income
◦ May require that income has actually been taxed in another
state
A Ltd
◦ Withholding taxes on dividends, royalties,
interests etc.
◦ Corporate income tax on P.E. profits
Corporate Income Tax
A Ltd
A Ltd
◦ Different versions
X
Y
WHT
B Ltd
◦ Exemption and exemption with progression
X
Y
Tax credit
WHT
◦ Home State provides for a tax credit equal to
paid foreign taxes
◦ Different versions
P.E.
Corporate
Income
Tax
◦ May or may not exceed tax levied in the Home State
◦ Overall principle, per type (baskets), per country or per item
B Ltd
P.E.
Corporate
Income
Tax
Tax Exemption
Home State exempts foreign source income
Tax Credit
Home State provides for a tax credit
Corporate Income Tax
Exemption with progression
A Ltd
A Ltd
◦ Income is included in the Home State’s tax base
◦ Exemption for foreign income’s part of total tax
WHT
B Ltd
P.E.
Corporate
Income
Tax
Overall Principle
Overall principle
◦ Different types and items of income from
different countries blended together when
calculating the maximum credit
A Ltd
◦ Home State tax minus Source State tax
◦ More credit than Home State tax possible
X
Y
WHT
Ordinary Credit
◦ Only purposeful if Home State has a progressive
tax rate
◦ Commonly only used for taxation of individuals
A Ltd
Full credit
X
Y
◦ (Foreign income / Total Income) x Home State tax on total
income
Corporate Income Tax
◦ Simplest form: Home State tax minus Source
State tax
Full exemption
◦ No more credit than Home State tax possible
◦ Maximum credit = (Foreign income / Total
income) x Home State tax on total income
◦ Different approaches/versions
B Ltd
P.E.
Corporate
Income
Tax
Per Country
Maximum credit calculated for each source
country
Corporate Income Tax
A Ltd
A Ltd
X
Y
◦ Income from State X, State Y etc.
◦ Mixing of different types of income possible, as
long as income is sourced from the same
country
Corporate Income Tax
A Ltd
X
Y
X
Z
WHT
WHT
B Ltd
P.E.
Corporate
Income
Tax
B Ltd
P.E.
Corporate
Income
Tax
Per Income Type
Maximum credit calculated for each type of
income
Per Item
Maximum credit calculated for each item of
income
Corporate Income Tax
◦ Dividends, interest, royalties, business profits
etc.
◦ Sometimes divided into only two categories,
active and passive income
◦ Sometimes referred to as income baskets
A Ltd
X
Y
Corporate Income Tax
◦ Interest from Company X in State X, Interest
from Company Y in State Y and Royalties from
Company Z in State Z etc.
◦ Does not allow for mixing of items of income
associated with different levels of taxation in the
Source State
A Ltd
X
Y
WHT
B Ltd
WHT
P.E.
B Ltd
Corporate
Income
Tax
P.E.
Corporate
Income
Tax
Pause Question
Overwhelming?
Let’s do some exercises!
During a given year, you have worked in
Sweden (your Home State), as well as in State
X and State Y.
You have earned salaries of 30 000 EUR
(Sweden), 30 000 EUR (State X) and 40 000 in
State Y, resulting in taxes of 6 000 EUR in State
X and 20 000 EUR in State Y.
Swedish law stipulates a progressive tax rate
for salaries, with a tax rate of 30 percent up to
50 000 EUR and 50 percent on the exceeding
amount.
Calculate the amount of tax you will pay if:
A) Sweden provides for a full exemption of
your foreign income(s)
B) Sweden provides for an exemption with
progression
C) Sweden provides for a full credit
D) Sweden provides for an ordinary credit,
using the overall principle
E) Sweden provides for an ordinary credit,
using the per country approach
Pause Question
During a given year, A Ltd has made total
business profits of 20 MEUR, with 10 MEUR
from its operation in State X (its Home State),
and 5 MEUR each from its P.E. operations in
State Y and State Z.
Corporate income tax rates are 20 percent in
State X, 10 in State Y and 30 in State Y.
Pros and Cons
Calculate both the amount of taxes A Ltd will
pay in State X (its Home State) and in total (all
three states), given that State X provides for:
A) Exemption of foreign sourced business
income
B) Ordinary credit using the overall principle
C) Ordinary credit using the per country
approach
EXEMPTION
CREDIT
Full exemption (without progression)
Administratively burdensome
◦ Administratively easy and provides for capital
import neutrality
Exemption with progression
◦ More in line with the ability to pay (“fair”)
◦ Only makes sense when there is a progressive
tax in the Home State
Usually no deduction of foreign business
losses in the Home State
◦ Symmetry between tax treatment of profits and
losses
Can be favourable or unfavourable
◦ Depending on version (full or ordinary, overall
or per country/item etc.
◦ Also depending on circumstances
Usually combined with the possibility to
deduct foreign business losses in the Home
State