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Highlights of the Greek participation exemption regime on capital gains

Konstantina Galli of EY Greece discusses the new regime that impacts the taxation of capital gains on share transfers.

In an effort to attract investments through Greek investment vehicles, Greece introduced a new regime into its domestic legislation, regarding the taxation of capital gains on share transfers. 

This regime provides for the tax exemption of capital gains derived by Greek tax resident companies from the sale of shares held in Greek and EU subsidiaries, provided they hold a minimum participation of 10% for a period of at least two years, and subject to the fulfillment of the conditions set under the Parent-Subsidiary Directive (EU PSD).

The so-called ‘participation exemption regime’ (PER), applicable as of July 1 2020, also provides that such income is not further taxed, neither at the distribution nor at the capitalisation of the corresponding profits.

On the other hand, business expenses associated with the participations being disposed of within the context of the PER, including potential tax losses resulting from their transfer are, in principle, not recognised as tax deductible. 

By way of derogation, these losses can be recognised for tax deduction after January 1 2020, under certain conditions. In essence, the above provision applies on share transfers up to December 31 2022, while the transferred participation should exist, be valuated and booked/recorded up to  December 31 2019. 

In case the losses, when realised, are lower than valued, the tax deduction is limited to the lower amount, while, conversely, if the realised losses are higher, the tax deduction is again limited to the lower amount coming from the valuation.

In March 2021, the Independent Authority for Public Revenue (IAPR) issued a circular (E.2057/2021) providing guidelines on the application of the above-mentioned regime. 

The circular clarified that as disposal of shares – falling within the ambit of the PER – is considered any act of transfer, such as the sale, contribution of shares to cover the initial or any subsequent increase of a company’s capital, exchange of shares and transfer of shares within the context of corporate law for capital decrease or dividend distribution in kind.

In addition, it was clarified that the starting point of the minimum holding period is the acquisition date of the (at least) 10% participation being disposed of (regardless of the acquisition method), while any corporate transformation resulting to universal succession does not affect the two-year holding period calculation. 

The last point, specifically, refers to Circular POL. 1185/2018 on the fulfillment of the EU PSD conditions for the application of dividend withholding tax exemption, in the context of corporate transformations. Circular POL. 1185/2018 stipulates that the starting point of the minimum holding is not affected in cases where universal succession takes place at the level of the dividend recipient company. 

It has not yet been clarified what happens in cases of corporate transformations resulting to universal succession at the level of the dividend distributor company (i.e. demergers, spin-offs, etc.), as, in absence of any reference in relevant law provisions or guidelines issued by the Greek tax administration, it is not clear whether the above provisions could interpretively apply in these cases as well.

In addition, no reference is made to corporate transformations, for which the universal succession concept does not apply, such as share-for-share transactions, although, by way of contrast, it seems that the starting point of the minimum holding period for PER application purposes, would be the date of the transaction, by means of which the respective participation was acquired.

Generally, asset transfers carried out through tax-neutral corporate transformations, provide tax deferral until a subsequent transfer that is not protected by such regimes is performed. 

Another point for clarification is whether the deferral would still be protected in case such transformations would be followed by a tax-neutral transfer of the acquired participations, under the PER, especially if effected within a short period from the transformation. As long as respective transactions are carried out for valid commercial and economic reasons, it is expected that the tax deferral should not be affected.

The introduction of the PER was, undoubtedly, a highly anticipated development by the Greek market, considering that the profits from participations (either as dividends or as capital gains from the sale of subsidiaries) are tax-exempt in most EU/EEA countries. 

The PER also constitutes a major breakthrough, not only strengthening Greece’s competitiveness among other EU/EEA countries, but also making Greece a holding jurisdiction worth considering for both domestic and international group structures, especially if seen in conjunction with the recent developments and trends in Greek taxation (e.g. the reduction of the standard CIT rate, enhanced tax incentives for R&D, etc.). 

The next step would be the expansion of the regime to subsidiaries established in non-EU countries.  

Konstantina Galli
Associate partner, EY Greece

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