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Greece: Uncertain application of Greece’s network of double tax treaties

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The history of Greek tax laws, as well as precedents established by tax disputes, have impacted the country's underlying financial crisis. Adding to the issues, the tax administration has once again begun imposing a special solidarity tax (mentioned in the relevant special tax law as a "contribution") on the foreign income of Greek tax resident individuals (initially, via Law 3986/2011). Under perhaps different names, the same may also be true for other countries, such as Cyprus.

The nature of such solidarity taxes or contributions has been widely disputed domestically, mainly because the literature and jurisprudence is rather poor. The Council of State has ruled (Case 2563/2015) that the special solidarity contribution is a tax in its nature and on the grounds of its conceptual characteristics, but the Greek tax administration has been keen to adopt its own stance that the agreements for the avoidance of double taxation (DTAs) signed by Greece with partner countries do not cover such special solidarity taxes, somehow disregarding their apparent similarity to regular income tax.

This has led to potential challenges when it comes to Greek tax resident individuals declaring foreign sourced income, for which a foreign special solidarity tax has already been paid in the foreign country. Paradoxically, in practice there have been cases where the risk was better managed by deducting the foreign solidarity tax from the taxable base of the foreign sourced income, rather than by claiming it as a foreign tax credit in Greece, since the tax auditors would not be willing to provide such relief in line with an effective DTA. Thus, it appears that the effectiveness of any tax assessment of a taxpayer would eventually be decided in each specific case on a rather arbitrary and ad hoc basis, taking into account all actual circumstances.

Based on the above, it appears that the protection of Greece's DTA network can be severely hampered in cases where the tax administration fails to take a clear position on the definitions of what consists an income tax.

However, the above approach could be reversed in the 2016 tax year and onwards, since the Greek solidarity tax has now been incorporated into the Greek Income Tax Code and, thus, could be defined as an income tax. On reflection, this could enable a foreign special solidarity tax to be easily recognised by the Greek tax administration as eligible for a foreign tax credit.

Separately, similar issues concerning the application of a DTA could be raised with regard to other tax burdens, such as the Greek special charge of Law 128/1975. This charge is levied on outstanding credit balances of banking loan contracts. The person liable to remit this tax to the Greek tax administration is the lender. The tax is also imposed when such contracts are transferred to foreign collection agencies purchasing non-performing loan portfolios under the Greek Securitisation Law 3156/2003. In such a case, the foreign tax administration may be in doubt of the nature of this tax and more specifically of whether or not this tax could be covered by the DTA. If not covered, the foreign state could recognise a unilateral foreign tax credit, eventually provided for by its domestic tax provisions.

Konstantinos Mavraganis (konstantinos.mavraganis@gr.ey.com)

Website: www.ey.com

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