Greek Guidance on Controlled Foreign Corporations

By Emmanouela Kolovetsiou-Baliafa, Associate, KG Law Firm, Greece

By virtue of Law 4607/2019 (published in the Greek Government Gazette Α’ 65/24-04-2019), certain provisions of the Council Directive 2016/1164/EU of July 12, 2016, have been embedded in the Greek legislation and namely in the Greek Income Tax Code (ITC) (article 66 of L.4172/2013). These provisions lay down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD I). Said article introduced a special anti-abuse rule for the prevention of tax avoidance attempted by Greek companies through the transfer of income to their subsidiaries that are established in jurisdictions with low taxation. Specifically, the abovementioned provisions impose the inclusion within a Greek company’s taxable income of the non-distributed income of another legal person or entity, which is tax resident in another state, provided that certain conditions are cumulatively met.

The Greek Independent Authority for Public Revenues (IAPR) issued the Circular E.2018/2022, providing detailed guidance on the implementation of article 66 of the ITC regarding the controlled foreign corporations (CFCs). According to the Circular’s clarifications the provisions of article 66 ITC refer to legal persons/legal entities as well as to individuals that hold controlled foreign companies. More specifically, the Guidance addresses the following topics (including several examples):

• Definition of a CFC, including the participation requirement, the requirement that corporate income tax is actually paid, and the income requirement
• Definition of “related” companies
• Income categories covered by said article
• Calculation rules of CFC’s taxable income
• Distribution of profits by the CFC and sale of participation in the CFC
• Reduction of the taxpayer’s tax liability (CFC tax credit)
• Tax return of individuals
• Cases when the CFC provisions do not apply, such as companies with substantial economic activity and shipping companies of L. 27/1975 and L.D. 2687/1953

One of the most important issues covered by the Guidance concerns the type of taxpayers that are not subject to the CFC rules, which includes shipping companies as well as companies whose funds either arising from shipping activities or constitute investments from shipping funds. In addition, the exemption from the CFC rules also applies in case a CFC carries on a substantial economic activity supported by staff, equipment, assets, and premises, as evidenced by relevant facts and circumstances. The Guidance clarifies that the exemption from the CFC rules on the substantial economic activity applies only for CFCs or permanent establishments in an EU/EEA Member State and the tax authorities bear the burden of proof that the CFC does not carry on substantial economic activity. On the contrary, in case of CFCs or permanent establishments located in a third jurisdiction that is not a party to the EEA agreement (i.e., not an EU/EEA country), the provisions of article 66 ITC are applicable even if the CFC exercises substantial economic activity.