International Taxation Provisions in the Greek Income Tax Code
The domestic law rules
1. Taxation of foreign entities in Greece - General overview
According to the Greek Income Tax Code (Article 101 para. 1, letter d) foreign enterprises that carry on business in Greece under any company form as well as any kind of foreign organizations that aim at acquiring economic benefits in Greece are subject to corporate income tax in Greece.
Foreign non-profit organizations are also subject to corporate income tax in Greece, as well as foreign legal persons of public law and foreign legal persons of private law, including institutions of any kind (Article 101 para. 2 ITC).
The tax is levied on the net income or profit acquired by these persons from any source that is situated in Greece and also on the income that is attributed to a permanent establishment (as this concept is defined in Article 100 of the Income Tax Code) in Greece (Article 99 para. 1 letter d).
Special provisions apply for the calculation of the taxable profits of branches of foreign banks and insurance companies that operate in Greece.
Special provisions apply also for the attribution of profits to foreign enterprises, irrespective of whether they are established in Greece or not, that operate ships or aircrafts not bearing the Greek flag that transfer persons or goods from ports or airports situated in Greece.
Foreign non-profit legal persons or organizations are subject in tax in Greece only on their Greek source net income; any income derived by these persons in the course of pursuing their non-profit aim is exempted.
Foreign non-profit organizations are also subject to corporate income tax in Greece, as well as foreign legal persons of public law and foreign legal persons of private law, including institutions of any kind (Article 101 para. 2 ITC).
The tax is levied on the net income or profit acquired by these persons from any source that is situated in Greece and also on the income that is attributed to a permanent establishment (as this concept is defined in Article 100 of the Income Tax Code) in Greece (Article 99 para. 1 letter d).
Special provisions apply for the calculation of the taxable profits of branches of foreign banks and insurance companies that operate in Greece.
Special provisions apply also for the attribution of profits to foreign enterprises, irrespective of whether they are established in Greece or not, that operate ships or aircrafts not bearing the Greek flag that transfer persons or goods from ports or airports situated in Greece.
Foreign non-profit legal persons or organizations are subject in tax in Greece only on their Greek source net income; any income derived by these persons in the course of pursuing their non-profit aim is exempted.
2. The definition of Permanent Establishment
Article 100 of the Greek Income Tax Code provides a detailed definition of the concept of Permanent Establishment of foreign legal entities, for corporate income tax purposes. A foreign legal entity has a permanent establishment in Greece if:
a. it maintains in Greece one or more premises, branches, offices, agencies, warehouses, factories, plants or laboratories/workshops as well as sites for the exploitation of natural resources;
b. it is engaged in the processing of raw materials or agricultural products in Greece by using, for this purpose, either owned facilities or the facilities of a third party that is acting on its behalf;
c. it performs activities or provides services in Greece through a representative, who has the authority to negotiate and conclude contracts on behalf of the foreign entity; a PE is established even in cases the foreign entity does not employ a representative but it provides services of a technical or scientific nature in general or services that involve research, the setting up of studies and the elaboration of designs;
d. it maintains a stock of merchandise out of which it serves orders on its own behalf;
e. it participates in a personal company (partnership) or in a limited liability company that has its seat in Greece.
The enumeration is restrictive. The domestic law definition of the PE differs from the definition of the PE that is found in the OECD Model Tax Convention and that is usually adopted in the DTCs that Greece has signed with other states. The main differences are:
- according to the domestic definition a PE is deemed to exist even in cases where the foreign entity is carrying on preparatory or auxiliary works in Greece;
- the domestic definition does not make the creation of a PE dependent upon any time condition; even a temporary presence of the foreign entity in Greece is deemed to constitute a PE, if it falls within one of the above mentioned categories;
- the nature or the reasons for the presence in Greece of the foreign entity is not relevant; it is sufficient that there exists an office in Greece, for example, irrespective of whether part of the main activity of the foreign entity is carried on through that office or it is only engaged in the collection of information.
a. it maintains in Greece one or more premises, branches, offices, agencies, warehouses, factories, plants or laboratories/workshops as well as sites for the exploitation of natural resources;
b. it is engaged in the processing of raw materials or agricultural products in Greece by using, for this purpose, either owned facilities or the facilities of a third party that is acting on its behalf;
c. it performs activities or provides services in Greece through a representative, who has the authority to negotiate and conclude contracts on behalf of the foreign entity; a PE is established even in cases the foreign entity does not employ a representative but it provides services of a technical or scientific nature in general or services that involve research, the setting up of studies and the elaboration of designs;
d. it maintains a stock of merchandise out of which it serves orders on its own behalf;
e. it participates in a personal company (partnership) or in a limited liability company that has its seat in Greece.
The enumeration is restrictive. The domestic law definition of the PE differs from the definition of the PE that is found in the OECD Model Tax Convention and that is usually adopted in the DTCs that Greece has signed with other states. The main differences are:
- according to the domestic definition a PE is deemed to exist even in cases where the foreign entity is carrying on preparatory or auxiliary works in Greece;
- the domestic definition does not make the creation of a PE dependent upon any time condition; even a temporary presence of the foreign entity in Greece is deemed to constitute a PE, if it falls within one of the above mentioned categories;
- the nature or the reasons for the presence in Greece of the foreign entity is not relevant; it is sufficient that there exists an office in Greece, for example, irrespective of whether part of the main activity of the foreign entity is carried on through that office or it is only engaged in the collection of information.
3. The attribution of profits to a Greek PE
1. The “separate entity” approach.
The profits of the Greek PE are determined by following the separate legal entity approach, even though there is no explicit provision establishing the fiction of a separate entity. The separate legal entity approach finds its statutory ground in article 105 para. 10 of the Greek Income Tax Code that establishes the arm’s length principle in dealings between the foreign head office and its PE in Greece. It appears that the underlying rationale is that the PE and its head office are two separate entities, dealing with each other as if they were separate and independent enterprises.
The rules applicable to domestic corporate taxpayers are also applicable to the determination of the taxable profits of the PE. Article 105 provides for the determination of the gross and the net income of the PE. Gross income is regarded as the income from the sale of goods and the provision of services as well as income from movable and immovable property; income from participations in other companies; agricultural income; income resulting from alienation of items of capital (capital gains) and any other income that does not fall into any of the above mentioned categories. The net income is calculated after deducting certain expenses, as they are defined mainly in article 31 ITC.
The foreign entity that operates in Greece under any form, irrespective of whether this operation creates a PE in Greece, is deemed to be an “entrepreneur” and it has the obligation to keep the books and records that are required by the Greek legislation. In this way all the transactions of the PE, including its dealings with its head office, must appear in its books and be supported by relevant documentation, following the applicable domestic rules. The data contained in the fiscal books are used by the tax authorities for the in order to ascertain the profits that are attributable to the PE. These rules facilitate the application of the direct method for the attribution of profits to the Greek PEs.
2. The deductibility of expenses incurred by the head office.
Article 100 para. 2 ITC contains provisions for the deductibility of the expenses incurred by the foreign head office of a Greek PE. According to this provision, in order to determine the net profit that is accrued by the PE in Greece, the latter can deduct a portion of the general and administrative expenses incurred by the foreign head office outside Greece that cannot exceed 5 per cent of the total administrative and operating expenses incurred in Greece by the PE, as they appear in the annual financial statements. The details for the application of this provision are defined by ministerial decisions.
3. The application of the arm’s length principle.
In cases where there are dealings between the Greek PE and its head office, article 105 para. 10 ITC provides that those dealings are recognized, under the condition, and to the extent that, the arm’s length principle is observed; if this is not the case, the tax authorities have the right to adjust the profits of the Greek PE.
* The information contained in this section is based on K. Perrou, Greek National Report on "The attribution of profits to permanent establishments", Cahiers de droit fiscal international Vol. 91b, IFA 2006 Amsterdam Congress, pp. 365 et seq.
The profits of the Greek PE are determined by following the separate legal entity approach, even though there is no explicit provision establishing the fiction of a separate entity. The separate legal entity approach finds its statutory ground in article 105 para. 10 of the Greek Income Tax Code that establishes the arm’s length principle in dealings between the foreign head office and its PE in Greece. It appears that the underlying rationale is that the PE and its head office are two separate entities, dealing with each other as if they were separate and independent enterprises.
The rules applicable to domestic corporate taxpayers are also applicable to the determination of the taxable profits of the PE. Article 105 provides for the determination of the gross and the net income of the PE. Gross income is regarded as the income from the sale of goods and the provision of services as well as income from movable and immovable property; income from participations in other companies; agricultural income; income resulting from alienation of items of capital (capital gains) and any other income that does not fall into any of the above mentioned categories. The net income is calculated after deducting certain expenses, as they are defined mainly in article 31 ITC.
The foreign entity that operates in Greece under any form, irrespective of whether this operation creates a PE in Greece, is deemed to be an “entrepreneur” and it has the obligation to keep the books and records that are required by the Greek legislation. In this way all the transactions of the PE, including its dealings with its head office, must appear in its books and be supported by relevant documentation, following the applicable domestic rules. The data contained in the fiscal books are used by the tax authorities for the in order to ascertain the profits that are attributable to the PE. These rules facilitate the application of the direct method for the attribution of profits to the Greek PEs.
2. The deductibility of expenses incurred by the head office.
Article 100 para. 2 ITC contains provisions for the deductibility of the expenses incurred by the foreign head office of a Greek PE. According to this provision, in order to determine the net profit that is accrued by the PE in Greece, the latter can deduct a portion of the general and administrative expenses incurred by the foreign head office outside Greece that cannot exceed 5 per cent of the total administrative and operating expenses incurred in Greece by the PE, as they appear in the annual financial statements. The details for the application of this provision are defined by ministerial decisions.
3. The application of the arm’s length principle.
In cases where there are dealings between the Greek PE and its head office, article 105 para. 10 ITC provides that those dealings are recognized, under the condition, and to the extent that, the arm’s length principle is observed; if this is not the case, the tax authorities have the right to adjust the profits of the Greek PE.
* The information contained in this section is based on K. Perrou, Greek National Report on "The attribution of profits to permanent establishments", Cahiers de droit fiscal international Vol. 91b, IFA 2006 Amsterdam Congress, pp. 365 et seq.
4. The avoidance of international double taxation
Greece has adopted the ordinary credit method for the elimination of international double taxation: the tax paid in the foreign country is credited against the tax owed for the income derived in the foreign state only to the amount of the tax that would have been paid in Greece for that same income, had it been derived in Greece.
Greek rules provide for the elimination of double economic taxation on foreign dividends received by Greek entities. In this case the tax that is credited is the tax that is paid in the foreign country by the subsidiary both on its profits and as a withholding tax on the dividends; the credit also applies to the taxes paid by lower tier subsidiaries. For the application of these provisions the Greek Income Tax Code incorporates by reference the provisions of Articles 9 (Definitions) and 11 (Conditions of application) of Law 2578/1998 (national legislation for the implementation of the EU Parent-Subsidiary Directive, 90/435/EEC).
Greek rules provide for the elimination of double economic taxation on foreign dividends received by Greek entities. In this case the tax that is credited is the tax that is paid in the foreign country by the subsidiary both on its profits and as a withholding tax on the dividends; the credit also applies to the taxes paid by lower tier subsidiaries. For the application of these provisions the Greek Income Tax Code incorporates by reference the provisions of Articles 9 (Definitions) and 11 (Conditions of application) of Law 2578/1998 (national legislation for the implementation of the EU Parent-Subsidiary Directive, 90/435/EEC).
