In April 2019, Greece transposed the EU Council Directive 2016/1164, laying down rules against tax avoidance practices that directly affect the functioning of the internal market (Anti-Tax Avoidance Directive I, or ATAD I), into the domestic law through Law 4607/2019.
Tax anti-avoidance rules were first introduced in Greece in 2013, when Greece was undergoing a major tax legislation reform amid financial instability and recession. As a result, a modernised Income Tax Code was introduced, which included thin capitalisation and controlled foreign company (CFC) rules for the first time. Simultaneously, the unprecedented Tax Procedure Code was introduced, implementing the general anti-avoidance rule (GAAR) into Greek tax legislation.
Thin capitalisation rules, CFC rules and GAAR have been in force since January 1 2014. Their late introduction into Greek legislation had the positive effect that the legislator could leverage international trends and practices for tax anti-avoidance rules. That is why the recent amendment to align with the ATAD is not groundbreaking. Yet, implementation in practice may prove a challenge.
Thin capitalisation rules
In essence, the rationale of interest deductibility limitation rules remains the same. Exceeding borrowing costs are tax deductible up to 30% of the taxpayer's earnings before interest, tax, deductions and amortisation (EBITDA), whereas amounts exceeding this threshold can be carried forward to be deducted in the following tax years indefinitely. EBITDA does not take into account any tax-exempt income. As a safe harbour rule, exceeding borrowing costs up to €3 million ($3.4 million), can be fully deductible. No group taxation rules exist in Greece, therefore no group thin capitalisation rules can be provided.
Greece's CFC rules have been significantly amended. The new rules are applicable to both individuals and legal entities and aim to capture CFC income from invoicing companies that earn income from goods and services purchased from and sold to associated enterprises, adding no economic value. Furthermore, listed companies are no longer exempt from CFC rules. More importantly, the criterion for taxation under CFC rules is no longer restricted to foreign companies established in non-cooperative jurisdictions or jurisdictions with preferential tax regimes. Rather, all foreign companies may fall within the CFC rules, whereas companies established in European Economic Area (EEA) countries may not be considered as 'under control' to the extent that the substance criteria are met, i.e. to the extent that the EEA country company carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances (carve-out rule).
The GAAR has been renamed as the general anti-abuse rule to better reflect its purpose. Although the rule has been included in the ATAD I for calculating corporate tax liability, the Greek legislator aims to apply this rule to other taxation areas as well, including personal income taxation, VAT, stamp duty taxation and inheritance taxation.
The reformed GAAR adopts the principal purpose test. In essence, it aims to capture arrangements where the main purpose, or one of the main purposes of which, is to obtain a tax advantage that defeats the object or purpose of the applicable tax law. Such an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons, which reflect economic reality.
The explanatory report of Law 4607/2019 is quite enlightening for the interpretation of the new GAAR. To begin with, it mentions that the 'non-genuine' arrangements should have the same meaning as the 'wholly artificial' arrangements mentioned in the previously applicable GAAR. Secondly, it is stressed that the GAAR should apply in cases that are not dealt with through specifically targeted provisions, either domestic or included in double tax conventions.
Finally, and most importantly, it is highlighted (contrary to the aggressive approach usually adopted by the tax authorities) that the GAAR should be applied in a uniform manner. Aligning with the international practice, it should be applied only in special cases of artificial structures put in place for tax avoidance reasons, with the tax authorities bearing the burden of proof for the existence of such an artificial structure.
As mentioned, the transposition of the ATAD rules has not been perceived as unexpected; yet, how challenging will their implementation be both for the taxpayers and the tax authorities?