The Corporate Tax Planning Law Review: Greece

Introduction

Greece was forced to modernise its tax system at the request of its international lenders through the introduction of a new Greek income tax code effective from 1 January 2014.

The income tax code follows OECD principles with regard to cross-border aspects. Income sourcing rules, concepts such as permanent establishment (PE) and even the domestic definition of the various types of income are modelled after the OECD Model Tax Convention. A participation exemption originally covering dividends and then expanded to also cover capital gains from domestic and EU subsidiaries is in place, making Greece a relatively attractive holding jurisdiction.

From a purely domestic perspective, things were kept simple. All types of income and losses of a corporation are put in a single basket. The notion of tax transparency does not exist and there is no group taxation, thereby limiting the scope of available corporate tax planning techniques.

The Greek tax authorities do not commit to a binding ruling and they do not provide guidance on specific transactions. Taxpayers should always obtain expert advice.

Local developments

i Entity forms

All legal entities are subject to corporate income tax (CIT). There are no transparent entity forms except for limited types of funds.

The following entity forms have corporate features, such as the limited liability of shareholders up to the amount of their contribution and the transferability of interests in the company: société anonymes (SAs); limited liability companies; and private companies. It is also possible to form a societas Europaea, although this has not proven popular in practice.

Large businesses usually operate as an SA. The tax advantage of an SA compared with other corporate forms is that it can issue bonds. Bonds are debt instruments that are exempt from stamp duty, otherwise levied at 2.4 per cent on loans on the principal amount and on interest payments. SAs are per se corporations for US tax purposes. Consequently, for US groups, there is a trade-off between having to use a per se corporation to optimise indirect taxation on debt financing. Bonds issued by Greek SAs do not need to be listed and they can be held by a single bondholder. An SA may accommodate all sizes of businesses and can be either private or public. The minimum share capital for an SA is €25,000.

Limited liability companies can sometimes be found in US multinational groups to allow a 'check-the-box' election (as it is not a per se corporation). Entity forms are becoming obsolete after the introduction of private companies. Shareholder resolutions in a limited liability company require both capital and headcount majority. In addition, a limited liability company cannot be wholly owned by another single member limited liability company (whether Greek or foreign). Notary public involvement is required to transfer parts (i.e., the equivalent of shares) in the limited liability company and to amend the articles of association, thereby increasing running costs.

Private companies are the newest corporate form and are becoming increasingly popular. They have none of the inflexibilities of limited liability companies and provide for some novel features, such as non-capital or guarantee contributions. Limited liability companies and private companies have no minimum share capital requirement.

General and limited partnerships are used mostly for small businesses. General partners have unlimited liability. The tax advantage of using a partnership for a small business (revenue of less than €1.5 million) is that taxation is levied at the partnership level alone, whereas dividends are not subject to personal income tax.

Foreign entities may operate in Greece via a subsidiary established under one of the local legal forms or via a branch. A branch does not have a separate legal personality from its head office, and this often has an impact on tax matters.

ii Taxation of corporate income

CIT is levied on a legal entity's total annual profits before the distribution of dividends at 22 per cent as from 1 January 2021 onwards. Credit institutions are generally subject to CIT at 29 per cent. The tax basis is determined based on the profit and loss account drafted under Greek generally accepted accounting principles. Certain adjustments are necessary to comply with specific tax provisions.

Business expenses are deductible for tax purposes, provided that:

  1. they are not included on a list of non-deductible expenses: notable non-deductible expenses include, indicatively, administrative and contractual penalties and fines, entertainment expenses, personal expenses of the owners of the business, expenses exceeding €500 unless paid through banking means, and expenses paid to entities resident in an annually published list of low-tax or non-cooperative jurisdictions. The latter expenses are presumed non-deductible with the taxpayer carrying an arduous burden of proof that they are actual and ordinary to claim a deduction;
  2. they are incurred for the benefit of the company: on this basis, tax audits have challenged, for example, the deductibility of interest paid on loans that finance dividends or other payments made to the shareholders of the company;
  3. they are real: valuation gains are not taxable and valuation losses or provisions (except for certain bad debt provisions) are non-deductible; and
  4. they are recorded in the books in the year incurred and are supported by tax records or sufficient documentation.

Expenses that relate to the acquisition of qualifying subsidiaries yielding tax-exempt dividend and capital gains under the Greek participation exemption are also non-deductible. Such expenses may include interest on acquisition loans as well as due diligence and other share deal costs and fees. This rule has been interpreted by the Greek tax authority strictly and applies regardless of the actual distribution of dividends from the subsidiary.

Finally, depreciation and amortisation are deductible on a straight-line basis. Depreciation follows statutory rates based on the nature of the fixed asset. The amortisation rate follows the useful life of the intangible where it can be ascertained; otherwise, it is 10 per cent.

iii Taxation of dividends and capital gains

Dividends received from domestic or EU tax-resident subsidiaries qualifying for the participation exemption (i.e., where a 10 per cent minimum participation is held for an uninterrupted period of at least 24 months) are exempt from CIT. Dividends received from non-qualifying EU participations are taxable as normal business income at the prevailing CIT rate with a right to credit withholding tax (WHT) (if any) as well as the underlying CIT. In all other cases, only a credit against the WHT is available.

Capital gains derived by corporations are, in principle, taxed as ordinary business profits at the prevailing CIT rate. An exemption is available for capital gains derived from the transfer of shares in domestic or EU subsidiaries under the same terms and conditions that apply for the dividend participation exemption (10 per cent holding, 24 months).

iv Tax losses

Tax losses of any kind (whether trade losses or capital losses) may be carried forward for five consecutive tax years and can be offset against all types of income. Tax losses carried forward may be forfeited where there is a direct or indirect change in ownership of more than 33 per cent, if the entity also changes its business activity within the same or the following fiscal year, and if the new business activity represents more than 50 per cent of the annual turnover compared with the fiscal year before the change in ownership took place. No change of activity should be deemed to exist if the entity continues its traditional business using the same assets and infrastructure, or if the new activities fall under the same NACE (Nomenclature of Economic Activities) Code as the traditional business. The carry-back of losses is not permitted.

v Patent box

Under the Greek patent box regime, profits from the sale of products manufactured by an enterprise using a self-developed internationally recognised patent or profits from the licensing or the sale of these patents are provisionally exempt for three consecutive years. This is merely a tax deferral because these profits are taxable upon subsequent distribution or capitalisation. The Greek patent box regime was recently amended to comply with the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) Action 5 on harmful tax practices, ensuring that there is a 'nexus' between the research and development costs incurred by an enterprise to develop the patent and the profits generated from its exploitation. In addition, a super-deduction of 200 per cent is granted to taxpayers for eligible expenses incurred in scientific and technological research activities.

vi Other exemptions

Regulated real estate investment companies (REICs) are exempt from CIT. Achieving REIC status requires a licence from the Hellenic Capital Market Commission. There is a minimum share capital requirement of €25 million and detailed rules as regards the eligible investments and the funding sources of a REIC. REICs must go public within a specified period.

REICs pay wealth tax, which amounts to 10 per cent of the European Central Bank interest rate in force (reference interest rate) plus 1 per cent. The tax rate is applied to the average of the REIC's investments plus any available funds (cash and securities), at their current value, as shown in their six-month investment tables (it is a legal requirement that these are produced). The wealth tax is final for the REIC as well as its shareholders. Consequently, dividend distributions from REICs are exempt from Greek WHT.

Profits from the operations of ships flying Greek as well as foreign flags are generally exempt from CIT, being subject instead to tax based on the tonnage of the vessels. Tonnage tax is generally a final tax for the company and its shareholders. The CIT exemption extends, on condition, to companies providing closely connected services, such as ship management and chartering, etc.

vii International tax

Greek tax-resident entities

Greek tax-resident entities are taxed on worldwide income. An entity is considered resident in Greece if it is incorporated under Greek law, has its registered seat in Greece or is effectively managed from Greece. Foreign branch profits are included in the taxable base of the Greek head office with an ordinary tax credit available for foreign income tax. Very few double tax treaties provide for a branch profits exemption.

In principle, losses arising abroad from the business activities of a foreign PE may not be utilised in the calculation of the company's taxable profits (of the same fiscal year) or be set off against future profits, except in the case of losses arising from business activities of a PE in an EU or European Economic Area (EEA) country. To that end, foreign losses of EU and EEA PEs may be used in Greece, provided that they are monitored separately for each country and their origin is easily traceable.

Non-resident entities

Non-resident entities are taxed on Greek-source income only. The Greek sourcing rules are modelled after the OECD Model Tax Convention. Business income and capital gains are considered sourced in Greece only if they are attributable to a local PE. This applies also to the capital gain from the transfer of shares in real estate-rich companies.

Rentals as well as capital gains from the direct transfer of Greek real estate assets are taxed locally as business income at 22 per cent. Non-resident entities owning rights in rem over Greek real estate assets must register for tax and file CIT returns in Greece regardless of whether or not their local operation gives rise to a PE.

The domestic PE definition follows the OECD Model Tax Convention and includes the fixed place of business test and the dependent agency test. A fixed place PE might arise where a non-resident entity has a place at its disposal within the Greek territory through which it carries on its business (usually through personnel) for a sufficiently long period. The OECD Commentary foresees a six-month rule of thumb. For technical projects, the PE threshold is three months, although it is usually set higher in double tax treaties. Pursuant to recently issued guidance on the impact of the covid-19 pandemic, it was clarified that a home office may constitute a PE if working remotely becomes the new norm of the employment relationship. This is often the case when the employer fails to provide office space to the employee outside Greece. The most important feature of the covid-19 guidance is that it clearly showcases that the Greek tax administration follows the OECD Commentary as an authoritative source of interpretation for the domestic PE definition. A dependent agency PE might arise where a person habitually exercises the authority to conclude contracts on behalf of a non-resident entity unless such person is an agent of independent status. The domestic definition also includes the pre-2017 version of the OECD Model Tax Convention's list of specific activity exemptions that do not give rise to a PE even if carried out through a fixed place or a dependent agent.

Finally, although Greece is a signatory to the Multilateral Convention to Implement Treaty Related Measures to Prevent BEPS (the MLI), it has made a reservation in respect of all of the changes brought about by the MLI to the PE definition.

Withholding taxes

Interest and royalties are considered sourced in Greece when the payer is a Greek tax-resident entity or a PE of a non-resident entity. Tax is levied by way of WHT at 15 per cent for interest and 20 per cent for royalties subject to double tax treaty relief. The WHT is a final tax when the beneficial owner is a non-resident entity without a Greek PE.

The definition of 'interest and royalties' follows the OECD Model Tax Convention. Exceptionally for royalties, the domestic definition adopts a more expansive approach in line with Greece's observations to the OECD Commentary. Notably, Greece considers payments for the right to use software even for personal or business use as royalties and levies WHT on most software-related payments.

Exemption from WHT on interest and royalties may be available under the EU Interest and Royalties Directive, provided that the beneficial owner of these payments is a domestic or EU entity subject to CIT and has a direct affiliation with the Greek payer of at least 25 per cent for an uninterrupted 24-month holding period. Double tax treaty relief is available in the form of lower WHT rates with few treaties (notably the treaties with the US and the UK) providing for a zero per cent WHT rate. Interest on bank loans is exempt from WHT. However, bond loans subscribed by banks are not considered bank loans and are subject to WHT.

Payments for management, consulting, professional and technical services ('service fees') are also subject to WHT at 20 per cent. In practice, the WHT applies to payments made to individuals. Domestic entities are exempt from WHT on service fees as well as royalties. Non-resident entities are outside the scope of WHT on service fees as the relevant income is not considered sourced in Greece unless it is attributable to a PE.

Dividends are subject to a low WHT rate at 5 per cent. Exemption may apply under the EU Parent–Subsidiary Directive if the beneficial owner of the dividend is a domestic or EU-resident company subject to CIT and holds at least 10 per cent in the distributing entity for an uninterrupted period of more than 24 months. A targeted anti-abuse rule applies to deny the WHT exemption in cases of wholly artificial arrangements, such as when an EU holding company that lacks substance is interposed between the Greek subsidiary and a non-EU ultimate parent. Substance is understood to include premises, personnel, assets and operations. The Greek tax authority has not issued detailed substance requirements or challenged the award of treaty or directives benefits on these grounds to date. In addition, the repatriation of profits from a branch to its head office does not qualify as a dividend and is not subject to dividend WHT.

In all cases, treaty relief as well as WHT exemption under EU directives are available at source and require no prior clearance. The payer may apply the treaty rate or make the payment gross under the directives upon being furnished with the required tax forms and tax residence certificates instead of applying the headline rate for the beneficiary to request a refund.

Capitalisation requirements

There are no thin capitalisation provisions in Greek corporate law. Thin capitalisation may be examined from a transfer pricing perspective. Both the quantum of related-party debt and the pricing thereof must comply with the arm's-length principle and be documented in line with Greek transfer pricing practice. Consequently, interest on debt that could not have been borrowed by a third-party lender may be disallowed for deduction. There are no 'safe harbour' rules either for the pricing of the debt or in respect of thin capitalisation. A transfer pricing exercise is required in each case to substantiate compliance with the arm's-length principle.

In line with the EU Anti Tax Avoidance Directive (ATAD), the interest limitation rules disallow a deduction for interest paid on all categories of debt (i.e., both related and third-party debt). A company's exceeding borrowing costs are tax deductible in the tax year in which they are incurred, only up to 30 per cent of the company's earnings before interest, taxes, depreciation and amortisation (EBITDA) (as adjusted for tax purposes). However, this limitation does not apply to exceeding borrowing cost up to the amount of €3 million (de minimis rule). Note that excess borrowing cost can be carried forward without any limitation. Unused EBITDA capacity cannot carry forward. The interest limitation rule (including the de minimis exception) applies on an entity-by-entity basis only.

Business acquisitions

A business acquisition can be structured as an asset deal or a share deal. There is often a misconception that an asset deal limits the buyer's exposure to the target company's historical tax liabilities. In an asset deal, however, the buyer may become jointly liable for the historical liabilities of the target (including tax liabilities) if the acquisition involves a business as a going concern or even the most significant assets in the target's balance sheet, with such liability capped at the amount of the purchase price.

Asset deals are generally taxable transactions with the seller's capital gain taxable at the prevailing CIT rate. On the other hand, the buyer benefits from tax deductible depreciation on the step-up of the assets. If the purchase price cannot be allocated to specific assets, it may qualify as goodwill amortisable at 10 per cent. Stamp duty or VAT as well as real estate transfer tax may apply depending on the composition of the transaction perimeter.

From a legal perspective, an asset deal does not guarantee the continuity of the contractual relationships of the target to the same extent that a share deal does. Based on the foregoing, asset deals are generally less common in practice.

If the target company has assets that the parties want to place outside the transaction perimeter, it might be possible to perform a tax-neutral corporate reorganisation to carve out the unwanted assets or, alternatively, carve out the transaction perimeter. Thereafter, the parties can structure the deal as a sale of shares. The delineation of the transaction perimeter is generally a bona fide reason for undertaking a tax-neutral corporate reorganisation prior to the sale pursuant to guidance issued by the Greek tax administration.

Corporate reorganisations

Reorganisations such as, indicatively, mergers, demergers, spin-offs and conversions can be done tax neutrally from a direct and an indirect tax perspective. There are three tax neutrality regimes governed by different laws, namely (1) Law 2166/1993, (2) Law 1297/1972 and (3) Law 4172/2013 (the Income Tax Code).

Law 2166/1993 provides for a book value transfer. Consequently, no step-up or capital gain arises. After the introduction of a new law on corporate reorganisations, there is some uncertainty as to whether a book value transfer is still permissible in practice.

Law 1297/1972 requires a valuation. The step-up is partially recognised for tax purposes. On the other hand, the valuation gain is not exempt from tax but rather deferred until the dissolution of the acquiring company.

Finally, the tax neutrality regime of the income tax code is modelled after EU Merger Directive 2009/133. The step-up is not recognised for tax purposes and the valuation gains are exempt. It is the only tax neutrality regime that allows for the tax losses of the transferor to carry over to the transferee.

The tax neutrality regimes have different conditions – for example in terms of minimum share capital of the acquiring company or in terms of the restrictions they impose on the transferability of shares or the transferred assets. In the case of a partial demerger or a spin-off, the assets and liabilities carved out must constitute an autonomous business sector.

In any event, the selection of a tax neutrality regime requires careful consideration and coordination between legal, accounting and tax departments.

Indirect taxes

The transfer of non-listed shares is exempt from stamp duty and VAT and outside the scope of real estate transfer tax. The sale of listed shares is subject to a sales tax at 0.2 per cent, burdening the seller. The tax is withheld and paid to the Greek tax authority by the Greek central securities depository (ATHEXCSD) except when the sale takes place between clients within the same omnibus account (internalised trades). In that case, the sales tax is collected, reported and paid to the ATHEXCSD by the relevant intermediary who maintains the omnibus account.

Capital duty applies at a rate of 0.5 per cent on nominal share capital increases with an additional 0.1 per cent duty in favour of the Hellenic Competition Committee (HCC) applicable to share capital increases in SAs in particular. The share capital introduced on incorporation of a company is exempt from capital duty (albeit subject to the 0.1 per cent duty in favour of the HCC in case of SAs).

Loans are, in principle, subject to stamp duty at 2.4 per cent on the principal amount and on interest payments. According to recent case law, loans provided by entities that are subject to VAT, may on condition, be exempt from stamp duty. This case law has not been explicitly accepted by the Greek tax authority. Bank loans are exempt from stamp duty, subject instead to a levy of 0.6 per cent (annual rate) on the unpaid principal balance of the loan. As discussed, bond loans issued by SAs are exempt from indirect taxes.

Real estate transfer tax is levied on the transfer of rights in rem over immovable property. The transfer tax rate is 3.09 per cent and is imposed on the higher of the objective (or tax) value of the property and the agreed sales price. The objective value is calculated depending on the attributes of the property (location, façade, size) based on statutory zone prices or comparable transactions where zone prices are not available. The sale of new buildings is generally subject to VAT instead of real estate transfer tax, although there is provisionally the possibility to opt out of VAT on condition as a measure to stimulate real estate transactional activity.

VAT is levied on the provision of goods and services when Greece is the place of taxation. The standard VAT rate is 24 per cent, the reduced rate is 13 per cent and the super-reduced rate is 6 per cent. Special reduced rates apply to certain islands. Specific supplies are exempt, with or without the right to deduct input VAT. Newly incorporated entities obtain a VAT number on incorporation in the context of a single tax registration for all tax purposes (CIT, VAT and WHT, etc.).

Another peculiarity of the Greek tax system is the special real estate tax (SRET). SRET is a 15 per cent annual tax that applies where non-natural persons hold ownership or rights in rem over property located in Greece. In essence, it is an anti-abuse measure, rather than a tax, which makes it undesirable to hold passive real estate assets through structures safeguarding anonymity. The tax is levied on the tax value of any property held by the non-natural person as at 1 January of each year.

Companies (irrespective of the country of their establishment) exercising commercial, manufacturing or industrial activity in Greece property are exempt from SRET, provided that, in a given tax year, the gross revenue from this activity is higher than the gross revenue from the real estate. As such, this exemption would typically apply to operating businesses such as hotels.

However, foreign companies investing in passive real estate assets fall within the scope of SRET. In order to claim exemption from SRET, a foreign investor would need to disclose the ownership chain of all the shares in the real estate owning company up to the level the individual who must have obtained a Greek tax identification number before 1 January of the reference year. The disclosure is subject to detailed documentation requirements, usually scrutinised in tax audits. Certain entities are exempt from further disclosure, such as listed entities or funds receiving advice from regulated advisers.

International developments and local responses

Recent OECD work on BEPS has infiltrated the Greek tax landscape through the adoption of relevant EU legislation. Anti-hybrid rules as well as exit taxes are now part of the Greek tax system, and the old general anti-abuse, controlled foreign company and interest limitation rules have been amended to be in line with ATAD. As noted above, Action 5 of the BEPS Action Plan on harmful tax practices has informed Greece's patent box regime. BEPS Action 12 (mandatory disclosure rules) has been implemented through the transposition of the sixth amendment to Directive 2011/16/EU (DAC 6). In addition, there are targeted anti-abuse rules to combat EU directive shopping or tax-neutral corporate reorganisations that lack bona fide commercial justification.

There are no legislative initiatives for a digital tax or the taxation of non-resident entities with a significant digital presence. Greek tax authorities already levy WHT on online advertising services owing to the domestic definition of the term 'royalty'. The tax eventually burdens local businesses because the relevant agreement usually includes gross-up clauses.

Outlook and conclusions

Greece is expected to adhere to all international developments in respect of combating BEPS and certainly proceed with incorporation in the Greek tax rules of all upcoming EU directives.

From a tax audit perspective, it is expected that tax authorities will continue to focus more on transfer pricing challenges because the competent department is becoming more and more sophisticated.

On the other hand, multinational groups consider using advance pricing arrangements to limit their transfer pricing exposure. In addition, the Greek market is expected to deal with an increased number of acquisitions from international private equity and institutional investors as well as increased appetite for local mergers and other consolidation transactions. Furthermore, placements made in the past five to six years are now mature and disposals expect to increase investor awareness. Finally, the new Greek tax rules on participation exemption on dividends and capital gains increase local high net worth individuals' interest in incorporating Greek holding companies for their EU investments.

Footnotes

1 Michael Stefanakis is a senior manager in the international tax team of Deloitte Business Solutions SA.

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