How a Company’s Expenses are Recognized in Non-Cooperative Countries or Countries with Preferential Tax Status

It is a general rule in all countries of the world, where all the costs paid by an undertaking are deducted from its taxable income, given that these costs are in the best interests of the undertaking and correspond to actual transactions entered in the accounts of the corresponding management period in which they are carried out and any transactions are accompanied by appropriate accounting documents and documents.

by Thanos S. Chonthrogiannis

©The law of intellectual property is prohibited in any way unlawful use/appropriation of this article, with heavy civil and criminal penalties for the infringer.

For in-group transactions the transaction to be recognised must have a value equal but not less or above to the market value.

But what about expenses paid to a natural or legal person respectively, who is a tax resident in a non-cooperating country or in a country subject to a preferential tax regime.

Do these expenses deduct from the company’s tax revenue?

Such costs shall be deductible if the undertaking proves that:

1. These costs relate to actual and ordinary transactions.

2. Such expenditure shall not have the effect of transferring profits or income or capital for the purpose of tax avoidance or tax evasion.

For EU member countries where there is a legal basis for the exchange of information between one member country and that member country, costs shall be deducted.

The data required should demonstrate that these costs were incurred in practice and that they have brought a real economic benefit to the controlled undertaking which incurred the costs in question (purchases of goods, provision of services, etc.).

Such evidence is e.g., the existence of a commercial agreement with the foreign company, the payment of the price to the beneficiary’s bank account, the actual transport and receipt of goods, etc.

It should also be demonstrated that the foreign company, the payment of the price to the beneficiary’s bank account, the actual transport and receipt of the goods, etc. It should also be demonstrated that the foreign company must carry out a substantial business.

In other words, to have a proven physical status in the country of establishment, permanently employed personnel, active VAT/VIES, to be taxed in the foreign country in which it is established and not simply to exist as a tax entity in that country.

How the real economic benefit is assessed

The actual economic benefit shall be assessed when the following elements are examined:

1. The purchase prices of products or services as they result from comparative economic analysis of similar products of other undertakings, tax persons in countries cooperating with the country in which the undertaking which incurred the expenditure is established.

2. Purchase of products or raw materials from non-cooperative or preferential tax regime country due to their non-production in a country considered cooperative or without preferential tax regime, etc.

Non-cooperative countries and preferential tax regime

Non-cooperative countries are considered by the OECD not to comply significantly regarding transparency and exchange of information on tax matters, have not concluded and do not apply administrative assistance contracts in the tax field, etc.

A natural or legal person shall be deemed to be subject to a preferential tax regime where his tax office is in any country, even in an EU member country, provided that in that country:

1. It is not subject to taxation or, if it is subject to, is not taxed in practice, or

2. It shall be subject to tax on profits or income or capital, the rate is equal to or less than 60% of the corporate tax rate that would be due under tax legislation.

 

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