1. Introduction

On 21 March 2015, Law No. 4321/2015 was enacted in Greece, which includes, among other tax provisions, the introduction of 26% withholding tax on payments to specified categories in order to allow deductibility of corporate expenses to the payor. The new provision leaves a lot of issues open to interpretation, however it can create significant practical implications at the level of the enterprises. A Ministerial Decision is expected to be issued, which should resolve all the open issues and possibly abolish the obligation for the withholding of 26% tax in clear cases of “ordinary” transactions.

2. Who is affected?

The new provision states that corporate expenses paid to individuals or entities, shall not be recognized as deductible, in case those individuals or legal persons (entities), are:

(a) tax residents in a “non – cooperative state”, (as stipulated in article 65 of the corporate income tax code)

(b) tax residents in a “country with beneficial tax regime” (as stipulated in article 65 of the corporate income tax code)

(c) are “de facto” associated companies, without the taxpayer being compliant with the transfer pricing documentation rules at the time of the transaction or the issuance of the respective invoice

(d) do not have the required organization and substance (either on their registered seat or to an affiliated entity) to perform the business activity for which the invoice was issued

An important issue to be considered and clarified is whether these expenses include purchases of products, raw materials fixed assets, etc.

3. What article 65 of the Greek corporate income tax code provides?

The introduction of article 65 was made in connection with the introduction of article 66, which deals with the Controlled Foreign Corporation (“CFC”) rules in Greece.

Article 65 defines which countries are considered “non – cooperative states” and which are “states with a preferential tax regime”

(a) “non – cooperative states”  are non – EU countries that have not concluded an agreement with Greece on administrative assistance in tax matters

(b) “a state with a preferential tax regime” is defined as a state in which the tax on profits or income or capital is equal to or lower than a percentage of 50% of the corporate income tax rate that would be due according to the provisions of the Greek tax legislation (currently 26%), if the beneficiary of said income was tax resident or maintained a permanent establishment in Greece.

A list of states with a “preferential tax regime” by a decision of the Minister of Finance is published in the Government Gazette in January of each year. The latest list of countries issued includes EU countries Bulgaria, Cyprus and Ireland. In addition the list includes European countries like Albania, FYROM and Montenegro, as well as all the offshore jurisdictions and tax havens.

4. Is the 26% deduction a withholding tax?

The deductibility of the corporate expense is subject to the payment of a 26% “withholding” tax. As commented by the Special Scientific Committee of the Greek Parliament in its report, the term “withholding” is not accurate, since the tax paid does not appear to be, in essence, a tax that burdens the income received by the foreign company. On the contrary, it is a type of “guarantee” that the taxpayers will demonstrate that the requirements for the deductibility of the expenses are met.

5. When is the 26% withholding tax refunded?

In case the taxpayer, within three months from the time that the transaction took place, demonstrates that the transaction is an ordinary transaction effected at market prices, the withholding tax is refunded by the Greek state. It is not yet clear whether the tax will be refunded within three months or whether the three months threshold is set for the demonstration by the taxpayer that the aforementioned conditions are met.

It is expected that the procedure of the implementation of the aforementioned provisions will be defined by the Ministerial Decision to be issued in this respect.