VAT and tax-deductable expenditure across Europe

VAT and Tax-Deductible Expenditure Across Europe   The EU has supposedly similar tax laws and reciprocal VAT agreements to avoid double taxation, but in practise racehorse trainers are among the many businesses who discover this is not always the case. Invoices incorrectly issued with VAT can lead to problems in reclaiming the tax, if at all, and tax deducted at source from prize money can take up to four years to reclaim. Such is the difficulty involved—many simply don’t bother to try.  The European prize money payment system may not be fully unified but most racing authorities and organisations such as Weatherbys, Horse Racing Ireland (HRI) and France Galop, work together on a reciprocal payment system to make the transfer of prize money as straightforward as possible. The problems arise when additional costs are imposed, not by the racing authority, but by that country’s government.  Withholding tax, which can catch owners and trainers unawares, is out of the hands of racing authorities and beyond the scope of unification. If, for example, a person is deemed to have earned money in Germany—including prize money—they are deemed liable for the income tax on that money. In most cases this can be very simply avoided by completing the necessary forms beforehand, as the EU rules that if you have paid tax in one European country you do not have to pay it in another.  However, some Member States do not consider an EU VAT number as sufficient for withholding tax exemption or VAT-free invoicing, and their racing authorities are obliged by law to charge VAT on their invoices. Which countries these are is not always clear, as treaties to avoid such complications are in place but not complied with. As an example, in December 2017 the European Court of Justice (ECJ) decided that German anti-treaty shopping rules, which denied full or partial relief from withholding tax, was not compatible with EU directives. An amendment to German taxation law is expected to be made as a result but has yet to be introduced.  Weatherbys, France Galop and HRI have a withholding tax exempt form, which can be filled in before a horse races abroad. This is advisable because it is much harder to claim back any tax stopped afterwards. It can be a month later when the prize money arrives into an account, at which point the tax stopped becomes apparent, and it is difficult to apply for a refund. Double taxation conventions and treaties exist between cooperating countries, but stamped certificates from the relevant tax offices are still required in advance. Your racing authority will be able to help you with this.  Withholding tax rates shown in the table are the current statutory domestic rates that apply to payments to non-residents, which may be reduced if an applicable tax treaty is in place. Qualifying payments to EU residents may also be exempt under EU directives for all listed countries, with the exceptions of Hungary, Norway and Turkey.  While withholding tax only applies to prize money won abroad, a more regular taxation issue is VAT, applied to purchased goods and services. The EU has standard rules on VAT, but these rules may be applied differently in each EU country. For EU-based companies, VAT is chargeable on most sales and purchases within the EU. If you are registered for tax, theoretically VAT can be reclaimed, but where it is deducted by another EU country, this can lead to “double taxation” problems.  In an attempt to ensure tax is paid only once on EU services and purchases, double taxation conventions and treaties have been agreed between cooperating EU countries. However, there are growing concerns at cross-border tax problems facing individuals and businesses operating within the EU and, at time of writing, the EU Commission is currently considering closely the possible conflicts between the EC Treaty and the bilateral double taxation treaties that Member States have agreed with each other and with Third Countries.  A study completed by the Commission in 2001 on taxation highlighted a number of problems that have yet to be tackled, including the question of equal treatment of EU residents and the application of bilateral treaties in situations where more than two countries are involved. A possible solution is the creation of an EU version of the Organization for Economic Cooperation and Development (OECD) Model Convention that serves as a guideline for establishing tax agreements, on which Member States' bilateral tax treaties are based, or a multilateral EU tax treaty.  The double taxation agreements of Member States will continue to be subject to review by the EU Commission, particularly in trying to address the problems resulting from a current lack of coordination in this area—most pronounced where more than two EU countries share a treaty or where a Third Country is included.  Belgium has a network of treaties for the prevention of double taxation with 88 countries, including Austria, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the UK.  Germany has treaties with, among many others: Austria, Belgium, Bulgaria, Croatia, Denmark, Finland, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Russia, Sweden, Switzerland, Slovakia, Slovenia, Spain, Turkey and the UK. As identified by the ECJ, those treaties are not always honoured. France likewise has a long list of treaties that includes the EU Member States, and Ireland has signed comprehensive double taxation agreements with 74 countries.  Some racing jurisdictions have very clear guidelines set by government, and the German Federal Central Tax Office has a special procedure for exempting foreign taxpayers from certain taxes deducted at source, requiring a tax certificate and withholding tax exempt form well in advance. Foreign individuals are subject to limited tax liability in respect of the income they derive in Germany, and this tax is otherwise automatically withheld at source.  In 2017, revised guidelines were published by the French tax authorities in order to simplify the procedure of applying for the French withholding tax exemption. Prior to this, specific documentation had been required before any payment was made, but a withholding tax exempt form is now the only upfront document necessary.  The Italian Revenue Agency approved new and revised forms in 2013 to be used to claim for reimbursement of, or exemption from, Italian withholding taxes. The initiative, which is part of a wider simplification process, aims to update the international forms that are presently in force and to make the foreign tax reimbursement and exemption procedures easier. Forms A, B, C and D must be filed by non-Italian residents in order to claim reimbursement of, or exemption from, Italian taxes.  Where a double taxation agreement with a particular country or jurisdiction has not been agreed, or a double taxation agreement does not cover a particular tax, the Taxes Consolidation Act 1997 provides unilateral relief against double taxation in respect of certain types of income and gains, namely dividends from foreign subsidiaries, foreign branch profits, foreign interest and royalties, leasing income and capital gains on foreign assets.  With taxation and VAT for foreign citizens under review, we can only hope the situation will improve and become more transparent, but there are ways to avoid paying unnecessary tax and to claim tax benefits and reimbursements in your own country in the day-to-day running of your business.  Once again, this varies from one Member State to another, and there are few consistent rules across Europe. In general, though there are several exceptions, it is possible to claim many of the tax-deductible expenses trainers regularly incur. Typically, if the personal home and vehicle are used partially for business, some of the costs incurred can be tax-deductible.  For example, if one room of a four-bedroomed house is used as an office, 25% of heating, electricity, telephone usage, etc., may be reclaimed. Similarly, it may be calculated that the family car is used a third of the time for business, and therefore a third of running costs and fuel become tax-deductible. In most cases, newspapers, periodicals and trade magazine subscriptions, and association membership costs, can be classed as tax-deductible.  There are, however, wide variations when it comes to charitable donations, depreciation of assets, entertainment and corporate gifts—the costs of which are often incurred by trainers in their bid to attract new owners and maintain a good morale with staff. Depending on which country a trainer is based, they may or may not be able to put these through as tax-deductible.  Austria is fairly typical of the majority of EU countries, and the deductions allowed include the depreciation of assets, based on a “straight-line” method spreading the cost evenly over the useful life of the asset. Sweden is the only country that allows depreciation (up to 5%) on land. Austria also allows deductions against bad debts and charitable donations. Meals and entertainment are limited to 50% of the actual expenses occurred and only if they have been for the purpose of acquiring new business. Fines and penalties, again in line with the majority of countries, are not tax-deductible.  In Belgium, vehicle costs are deductible at between 50% and 100%, depending upon CO2 emission and fuel type. Sixty-nine percent of restaurant expenses and 50% of business gifts are deductible, as are charitable donations.  The Netherlands, Denmark and Finland do not include meals or entertainment in allowable business costs, while the Czech Republic allows travel expenses and meal allowances paid to staff, but not in relation to clients or third parties. Neither Spain nor Sweden allow charitable donations as tax-deductible.  In France, the depreciation of fixed assets must be evaluated component by component, depreciated separately according to their own lifetime. Norway and Greece set a mandatory depreciation at a fixed rate stipulated in law. Charitable donations are not expressly regulated in Greece and are looked at case-by-case.  In Ireland, expenses incurred wholly and exclusively for business are considered tax-deductible, but costs incurred for third-party entertainment are not tax-deductible. Entertainment here includes accommodation, food, drink and hospitality, including corporate gifts. Expenditure on staff entertainment is, however, allowable and some promotional costs are tax-deductible if exclusively for the purpose of business.  New for Italy in 2019 are tax credits for advertising campaigns and training expenses. Entertainment, and gifts of less than €50 are fully tax-deductible, providing the entertainment meets the requirements of Ministerial Decree.  Any cost defined as an expense incurred for deriving, preserving or securing a source of revenue is considered tax-deductible in Poland, but this does not include entertainment. Fines and penalties, however, can be tax-deductible if they meet the general conditions.  In Switzerland, generally all business expenses are tax-deductible, and depreciation of assets is set by the Swiss Federal Tax Administration. In contrast, although the UK considers all general expenses to be tax-deductible if wholly and exclusively for business, a significant amount of case law surrounds whether or not a cost was actually incurred wholly for business or not. Neither is depreciation of fixed assets an allowable deduction.  We may live in a Common Union, but there are clearly some laws that are not common to all. The simple advice when dealing with foreign suppliers is to research the necessary documentation required and have it completed and made available well in advance of any transaction. It is far easier to avoid paying unnecessary taxes than it is to attempt to reclaim them.

By Lissa Oliver

The EU has supposedly similar tax laws and reciprocal VAT agreements to avoid double taxation, but in practise racehorse trainers are among the many businesses who discover this is not always the case. Invoices incorrectly issued with VAT can lead to problems in reclaiming the tax, if at all, and tax deducted at source from prize money can take up to four years to reclaim. Such is the difficulty involved—many simply don’t bother to try.

The European prize money payment system may not be fully unified but most racing authorities and organisations such as Weatherbys, Horse Racing Ireland (HRI) and France Galop, work together on a reciprocal payment system to make the transfer of prize money as straightforward as possible. The problems arise when additional costs are imposed, not by the racing authority, but by that country’s government.

Withholding tax, which can catch owners and trainers unawares, is out of the hands of racing authorities and beyond the scope of unification. If, for example, a person is deemed to have earned money in Germany—including prize money—they are deemed liable for the income tax on that money. In most cases this can be very simply avoided by completing the necessary forms beforehand, as the EU rules that if you have paid tax in one European country you do not have to pay it in another.

However, some Member States do not consider an EU VAT number as sufficient for withholding tax exemption or VAT-free invoicing, and their racing authorities are obliged by law to charge VAT on their invoices. Which countries these are is not always clear, as treaties to avoid such complications are in place but not complied with. As an example, in December 2017 the European Court of Justice (ECJ) decided that German anti-treaty shopping rules, which denied full or partial relief from withholding tax, was not compatible with EU directives. An amendment to German taxation law is expected to be made as a result but has yet to be introduced.

shutterstock_673304266.jpg

Weatherbys, France Galop and HRI have a withholding tax exempt form, which can be filled in before a horse races abroad. This is advisable because it is much harder to claim back any tax stopped afterwards. It can be a month later when the prize money arrives into an account, at which point the tax stopped becomes apparent, and it is difficult to apply for a refund. Double taxation conventions and treaties exist between cooperating countries, but stamped certificates from the relevant tax offices are still required in advance. Your racing authority will be able to help you with this.

Withholding tax rates shown in the table are the current statutory domestic rates that apply to payments to non-residents, which may be reduced if an applicable tax treaty is in place. Qualifying payments to EU residents may also be exempt under EU directives for all listed countries, with the exceptions of Hungary, Norway and Turkey.

shutterstock_438623419.jpg

While withholding tax only applies to prize money won abroad, a more regular taxation issue is VAT, applied to purchased goods and services. The EU has standard rules on VAT, but these rules may be applied differently in each EU country. For EU-based companies, VAT is chargeable on most sales and purchases within the EU. If you are registered for tax, theoretically VAT can be reclaimed, but where it is deducted by another EU country, this can lead to “double taxation” problems.

In an attempt to ensure tax is paid only once on EU services and purchases, double taxation conventions and treaties have been agreed between cooperating EU countries. However, there are growing concerns at cross-border tax problems facing individuals and businesses operating within the EU and, at time of writing, the EU Commission is currently considering closely the possible conflicts between the EC Treaty and the bilateral double taxation treaties that Member States have agreed with each other and with Third Countries.

A study completed by the Commission in 2001 on taxation highlighted a number of problems that have yet to be tackled, including the question of equal treatment of EU residents and the application of bilateral treaties in situations where more than two countries are involved. A possible solution is the creation of an EU version of the Organization for Economic Cooperation and Development (OECD) Model Convention that serves as a guideline for establishing tax agreements, on which Member States' bilateral tax treaties are based, or a multilateral EU tax treaty.

The double taxation agreements of Member States will continue to be subject to review by the EU Commission, particularly in trying to address the problems resulting from a current lack of coordination in this area—most pronounced where more than two EU countries share a treaty or where a Third Country is included.

Belgium has a network of treaties for the prevention of double taxation with 88 countries, including Austria, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the UK.

Germany has treaties with, among many others: Austria, Belgium, Bulgaria, Croatia, Denmark, Finland, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Russia, Sweden, Switzerland, Slovakia, Slovenia, Spain, Turkey and the UK. As identified by the ECJ, those treaties are not always honoured. France likewise has a long list of treaties that includes the EU Member States, and Ireland has signed comprehensive double taxation agreements with 74 countries.

Some racing jurisdictions have very clear guidelines set by government, and the German Federal Central Tax Office has a special procedure for exempting foreign taxpayers from certain taxes deducted at source, requiring a tax certificate and withholding tax exempt form well in advance. Foreign individuals are subject to limited tax liability in respect of the income they derive in Germany, and this tax is otherwise automatically withheld at source.


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