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DOING BUSINESS IN GREECE

FORMS OF BUSINESS ORGANISATION

Principal forms of doing business

Companies may choose one of the following four corporate forms: the corporation (anonymos eteria); the limited-liability company (eteria periorismenis efthinis); the general partnership (omorrythimi etairia); or the limited partnership (eterorrythmi etairia). A company may also organise as a branch. An individual can form a single-partner limited-liability company (monoprosopi eteria periorismenis efthinis), in line with the EU’s 12th company-law directive, but may not participate in more than one company of this type. From January 1st 2004 the articles of association of such companies have had to be filed with the Register of Limited Companies.

Requirements of a Greek anonymos eteria (AE)
Capital. The minimum share-capital requirement of an AE, or corporation, is €60,000, which must be fully paid in cash, in kind or in any combination thereof within two months of approving the company’s articles of incorporation. Capital contributions in kind are allowed when payment is full and evaluated by a special committee of the Ministry of Development (General Secretariat of Commerce). The law allows partial payment of the share capital, which is payable upon incorporation or upon increase in the subscribed capital of part of the nominal value, with a simultaneous commitment to pay the balance of the value according to the articles of incorporation. Partial payment of the share capital is prohibited for contributions in kind.

The law provides strict conditions on shares issued as consideration:

* Full payment must be completed in ten years.

* The part of each share paid up may not be less than one-quarter of its nominal value.

* Until full payment, the shares must be registered.

* The transferor of the partially paid shares is held jointly liable with the transferee for payment of the remainder for a two-year period from the date when the transfer was entered in the company’s records.

* Shares not paid within the time limits become null and void, and the company must reissue new shares equal to the number of voided shares.

* The relevant provisions of the law and the articles must be inscribed on the reverse side of the certificate.

* Any increase of capital must be subsequent to the payment of the last due instalment except where it relates to an increase imposed by a provision of law.

Founders, shareholders. No limitations on nationality or residence. Minimum of two shareholders, either physical persons and/or legal entities.

Directors. Minimum of three; no nationality or residence requirements.

Management. Except as specified in the byelaws, the board of directors represents the company in all matters. Directors’ powers may be delegated to company officials. Every member of the board is liable to the company for any fault (fraud or negligence) committed in the management of the company or arising from breach of duties imposed by the law, or the articles or a resolution of the shareholders, unless it is proved that the member managed the company’s affairs with the diligence of a pater familias (sic). This does not apply to the managing director, who must exercise utmost due diligence.

Disclosure. Balance sheets and income statements must be published at least 20 days before the sessions of the General Assembly’s Meeting in the Companies Bulletin of the government gazette, in one daily financial newspaper and in one general political newspaper issued in Athens. For companies that have their seat outside the municipality of Athens, they must also be published in one general newspaper issued in the municipality or district where it is situated. Companies meeting two of the three following criteria in two previous accounting years—assets of more than €1.5m, gross revenues of more than €3m or more than 50 employees—must have their annual accounts audited by certified chartered accountants. Companies listed on the Athens Exchange must publish quarterly and half-yearly accounts and report any change in a qualifying holding exceeding the limit of 10%.

Taxes and fees. Costs of incorporation include the following:

* Tax of 1% related to “the concentration of capital”—that is, €600 on a minimum share capital of €60,000.

* A levy of 0.1% in favour of the Competition Commission—that is, €60 on a minimum share capital of €60,000.

* Notarial fees (fixed), of €735–1,027 (of which €191 is payable to the Lawyers Welfare Fund), depending on the size of the document and the number of copies involved (minimum five).

* Lawyers’ fees (negotiable).

* A fee of €508 for publishing the summary of the articles of incorporation in the government gazette, and €563 for publishing the minutes of the board meeting that constituted the company and that confirmed payment of its initial share capital in the government gazette.

* A pre-registration fee of €30 with the Athens Chamber of Commerce. Annual subscription fees depend on the size and type of company. If the company is registered during the second half of the year, the annual fee is reduced to half.

* Excluding lawyers’ fees, which are negotiable, costs associated with incorporation generally amount to 5% of the minimum capital of €60,000. The higher the capital, the lower the percentage.

Types of shares. Registered and bearer shares are permitted, although shares of banks, health and education companies, insurance companies and leasing companies, telecommunications companies, utilities and companies engaged in manufacturing defence equipment must be registered. (Companies intending to tender for government contracts worth more than €2.9m must also have registered shares.) Preferred shares without voting rights may be issued, as may privileged shares. The nominal value of shares may range from €0.30 to €100.

Control. In general meetings, shareholders holding at least 50% of the paid-in capital usually constitute a quorum, and resolutions are adopted by an absolute majority of shareholders present or represented at the meeting. In special cases (such as increases in capital or issues of debenture), the quorum requirement is two-thirds of paid-in capital, and resolutions are adopted by a majority of two-thirds of the votes represented at the meeting. (A firm’s byelaws may fix different quorum and majority requirements.) Shareholders representing 5% of capital (individually or collectively) may request an extraordinary general meeting to be held; the adjournment of a general meeting; the disclosure of the amounts paid during the last two-year period to members of the board of directors or other employees; the adoption of a resolution on any item of the agenda to be made by roll-call vote; and the inspection of the company and its books.

Establishing a branch

A branch may be established if it meets the minimum capital requirements applicable to Greek companies—that is, if the branch’s parent company is a limited-liability company, the branch must meet the requirements of a Greek limited-liability company. The procedures are the same as those to establish a corporation, but the company must also have an approval of establishment/installation, which is issued by the directorate of commerce of the relevant prefecture. Representatives must be named who will be responsible before the Greek courts (a plenipotentiary representative and an attorney resident in the region). The registration and the names of the representatives must be published in the government gazette. This might not be necessary if the establishment is for a limited period (as for a construction project) or is regulated by a special intergovernmental accord. A branch must also register with the local chamber of commerce.

Foreign companies used to be entitled to establish offshore companies that were exempt from tax on all income earned in trading activities outside Greece. But since January 2002 it is no longer permitted to establish such firms, with the exception of shipping companies. All benefits afforded to such companies will be discontinued on December 31st 2005.

Setting up a company

The basic legislation covering the formation of companies is more than 80 years old. It has been amended repeatedly, and the amendments are incorporated into the text as they pass parliament. The most recent amendments, related to corporate governance, aim to protect minority shareholders. The Ministry of Development website (http://www.ypan.gr) includes the updated text in Greek.

Foreign firms almost invariably choose the corporation, or anonymos eteria (AE). Minimum capitalisation since January 2002 is €60,000, and the nominal value of the shares may not be fixed at an amount less than €0.30 or more than €100. Companies wishing to list on the main board of the Athens Exchange must have equity of at least €12m and on the parallel board for smaller-cap stocks of €3m. The establishment of a bank requires minimum capital of €18m (€9m for non-EU companies that seek to establish four or fewer branches).

An insurance company requires €1.6m for life insurance or €1.2m for non-life insurance. A presidential decree has been drafted (but had not yet entered into force in mid-November 2004) that would require an increase in the minimum share capital for a firm seeking to provide both life and non-life insurance. EU rules required insurance companies to double their reserves beginning in January 2004, but this is not being enforced.

AEs must distribute at least 35% of net annual profits as a first dividend unless the general assembly decides otherwise. An amendment to this provision allows for the amount of the dividend to be paid into a reserve account, which must be capitalised within four years through the allocation of free shares to shareholders. There are special terms for other firms in the financial sector (such as securities firms, mutual-fund management companies, leasing, factoring and venture-capital operations) and companies involved in maritime business.

Articles of incorporation for an AE must be executed before a notary public and approved and registered by the relevant prefecture, which issues a registration number (known as an armae in Greek). The corporation must be registered with the local chamber of commerce, which transmits the articles for publication in the government gazette. For an EPE, the clerk of the local court of first instance must register the articles of association, with a summary published in the government gazette. Only after these procedures are completed will the tax authorities hole-stamp the company’s invoice and account books (the registration number is punched through the entire book, and only such documents are accepted by auditors as legitimate records of income and expenses).

An eteria periorismenis efthinis (EPE), or limited-liability company, has lower minimum capital requirements of €18,000 to be paid fully at the time of establishment, at least half in cash with the capital divided into shares (owned by the investors) of an amount not less than €30 per share. The EPE does not declare dividends but is taxed on its entire net profit at the company level whether the net profit is distributed or retained. EPEs may not issue bonds.

The omorrythimi etairia (general partnership) and eterorrythmi etairia (limited partnership) are permissible under Greek law. In a limited partnership, one or more partners may be limited in their liabilities to the extent of their paid-in capital. They lose their limited-liability status, however, if they join the management, if their names appear in the title of the firm or if they represent it in business transactions.

A written deed attesting to formation of the partnership must be filed with the clerk of the court of first instance in the district where the partnership has its registered office. The deed must detail names and addresses of the partners, the firm’s name, its objectives, each partner’s capital contribution and profit/loss shares, duration of the partnership, its management, and terms and conditions under which business is to be conducted.

Joint ventures must file a written agreement with the Greek tax authorities before beginning operations. Each of the members must be either a legal person or entity, and the joint venture must have an address. It must have been formed for a specific transaction, unless its purpose is to sell Greek goods and services outside Greek territory or to promote sales of Greek products. Joint ventures do not constitute legal entities but do constitute fiscal entities for the purpose of income tax and taxation in general.

A new type of pan-EU company registration became effective in October 2004, the Societas Europaea (SE). Under the statute, a European corporation can be established by the creation of a holding company or a joint subsidiary, or by the merger of companies located in at least two EU member states or the conversion of an existing company set up under national law. With headquarters in a country of its choosing, an SE will be able to operate throughout the EU under laws applicable in all 25 countries. However, many details on harmonisation of national tax laws remained pending in November 2004.

BUSINESS TAXATION

Overview

Greek tax law is complicated, with many elements introduced to promote short-term policies or alleviate specific economic problems. Law is framework, supplemented by ministerial decisions and interpretive circulars from the Ministry of Economy and Finance. These latter elements assume the force of law, although lawyers claim that they sometimes contradict the legislation that they are supposed to clarify and they are frequently challenged in the courts. Auditing procedures afford extensive leeway to tax inspectors, which can lead to charges of arbitrariness and corruption.

Tax evasion has long been a major problem; the unrecorded economy has been variously estimated at 25–40% of GDP. This is partly the result of extensive self-employment in Greece (farmers, entrepreneurs, shopkeepers, tradesmen and professionals), which the OECD estimates at just over 40% of all taxpayers. Regulation of the self-employed is difficult. In 1994 the authorities introduced the notion of imputed income for the self-employed and established “objective criteria”—such as location, size and number of employees. Each was assigned a presumed level of income. If this imputed income proved to be higher than the income shown in the books, tax was assessed on the imputed earnings. The methodology was contentious and has now been abandoned for many, but not all, businesses.

The application of the 25% tax rate to general partnerships and limited partnerships was designed to entice more small business to adopt their formal practices that would make tax controls easier.

Law 3052/02 limited inspectors to consideration of three years of accounts; if they are deemed “sincere”, then the business is taxed according to books. There are residual powers to impute income if the accounts are deemed inaccurate or insufficient. (The law has greatly simplified procedures for recording and authenticating receipts.) Should the examination of the three years of books reveal inaccuracies or material violations of tax law in one of the years, then another two years are audited and penalties assessed on infractions discovered for the whole five years. The selection of cases for inspection is based on an automated system developed within the TAXIS (computerised tax information) framework.

The then Pasok government introduced a point system in early 2004 to create a priority scale for inspections for firms or professionals with gross annual revenue of less than €30m. Instead of fines, an offender’s taxable income was to be increased incrementally according to the number of points. The New Democracy (ND) government rescinded the point system in August and in November published a draft tax law that will establish a system for conducting obligatory audits within three years of an income tax return.

A concerted effort was made to improve revenue collection as part of the fiscal consolidation process to achieve convergence for the EU’s European economic and monetary union (EMU). Starting in 1994, the socialists introduced a wide range of institutional changes, including the following: a Council of Fiscal Studies, which submits proposals on fiscal policy; a tax databank to aid in tax auditing; a special legal office of taxation to provide legal support to the tax authorities in litigation; a price-inspection office to gather data on prices of goods and services to control transfer-pricing practices; and national and regional audit centres. In 1997 the then government created the Financial Crimes Investigation Office (SDOE). The SDOE, an armed force with powers of arrest, concentrated on contraband, money-laundering, drug-trafficking and illegal lending but it also investigated tax fraud.

The ND’s new tax law 3296/2004 creates the Special Controls Service (YPEE) to replace the SDOE. Once it is operational, the YPEE will have powers of search, arrest and interrogation. The YPEE will be able to confiscate accounts and electronic means of data storage (including computers), goods and means of transport. It will also be able to freeze bank accounts.

TAXIS, the computerised tax information system, has helped improve revenue collection since its introduction in 1997. TAXIS automatically cross-checks tax returns using 18 applications. It is multi-tiered with a primary focus on higher-income returns and random audits of lower-income returns. The Ministry of Economy and Finance has prepared, with the assistance of the US Internal Revenue Service, company financial profiles that have been incorporated and are regularly updated to facilitate audit procedures. Manuals contain checklists on inspection and collection procedures. A School of Training (SEYYO) has been established for the personnel of the Ministry of Economy and Finance and the local tax-collection authorities (DOY) that has turned out some 15,000 graduates. TAXIS is connected to another software system, CUSTOM, which has ten applications and is designed to ensure compliance with value-added tax regulations.

According to Eurostat in a report published in September 2003, general government receipts rose to 47.8% of GDP in 2000 before falling back to 45.4% in 2002. The Ministry of Economy and Finance estimates total resources for 2004 at 43.2% of GDP, of which 39.1% was expected to be in the form of direct and indirect taxes and social security contributions; for 2005, it forecast an increase to 43.7% and 39.6%, respectively.

Law 2238/94 codified, in one document, legislation and amendments to laws governing corporate and personal income tax to that date. However, there have been new tax bills almost annually, frequently to accompany the budget: 2214/94, 2187/94, 2459/97, 2579/98, 2753/99, 2836/00, 2873/00, 2992/02, 3052/02, 3091/02, 3220/04, 3259/04, 3296/04 and 3301/04.

The former Pasok government made several attempts, starting in 2000, to reform the tax system. Law 2873/2000 harmonised the corporate tax rate at 35% and reduced the rate for general partnerships (omorrythimi etairia) and limited partnerships (eterorrythmi etairia) to 30% on profits in 2000 and to 25% for profits arising in 2001. It eliminated a wide range of stamp duties on numerous types of official documents and a 0.6% payroll tax paid by both employers and employees.

The government convened a committee of experts, which produced a comprehensive report on further reforms covering business, personal and property taxes. The committee findings, reported in April 2002, generated a political debate, particularly within the Pasok party. Nevertheless, the government pressed ahead with three reform bills later that year:

* Law 2992/02 introduced some limited changes in corporate taxation, including concessions of up to 10 percentage points for firms that merge and 2.5 percentage points for firms that increase employment by up to 12.5% (benefits apply until the end of 2004).

* Law 3052/02 simplified bookkeeping requirements and value-added tax compliance.

* Law 3091/02 introduced many changes in personal income, capital income and property transaction taxes.

Pursuant to l. 3296/2004, a corporate tax rate reduction was stipulated and will be applied over three years. For corporations (AE) and limited companies (EPE) the rates will be 32% in 2005, 29% in 2006 and 25% in 2007. (This will also apply to foreign companies and entities with non-profit status.) Rates are also to be reduced for smaller companies, which are now taxed at 25%. For general partnerships (OE) and limited partnerships (EE) the rates will be 24% in 2005, 22% in 2006 and 20% in 2007. Law firms and notaries are to be taxed at a flat rate of 25%. Stamp duty payable on the net profits of EPE, OE, EE, joint ventures and co-operatives was abolished from January 1st 2005.

To make up for revenue shortfalls that will result from these cuts, the administration has already offered steep reductions in payments to individuals and small firms that have taxes outstanding because of disputed audits and assessments. This “amnesty” covers outstanding accounts from 1998 to 2002. Debtors who agreed to settle within one month of the legislation taking effect could pay just 20% of imputed disputed amounts, 23% if they settled within six months and 25% if they settled within ten months. An extended schedule offered a further range of reductions, culminating with a 50% reduction for a commitment to pay within five years.

Law 3259/04 also offers a tax amnesty for income held abroad. The law allows individuals to repatriate any capital held abroad by April 2005 and eliminate all tax obligations by paying a flat rate 3% levy.

Taxable income and rates

Law 2873/2000 harmonised the tax rate on corporations at 32%. Foreign company branches also pay the 32% rate.

Construction companies, which had been deemed to make a 12% profit on the contract price of their projects (10% on public works) regardless of whether they actually realised a profit, have since 2003 been taxed solely on their books/accounting profits. The same provisions apply to joint ventures in which the construction firms participate. Firms pre-selling new homes and commercial properties are taxed according to their projected budgets. But differences between budgeted and actual costs have to be reported in extraordinary income accounts.

Law 2367/95, which aimed to promote sources of investment capital for small and medium-sized enterprises, reduced the general rate of corporate tax for qualifying venture-capital companies to 15% on distributed earnings and eliminated all direct and indirect taxes on undistributed profits. Mutual funds pay a 0.3% tax on the average value of their investments and disposable funds. Their management companies pay normal corporate tax rates on their income.

Foreign investors covered by Legislative Decree 2687/53 continue to qualify for special approvals freezing their tax rates for up to ten years, with automatic upgrading to any more-favourable provisions made in future legislation.

Taxable income defined
Corporations (anonymos eteria—AE) and limited companies (eteria periorismenis efthinis—EPE) are taxed on total annual profits before distribution of dividends, profits, fees to directors and profits to employees. There is no further tax on dividends or profits when distributed. Dividends or profits from participations in other companies are deducted from a corporation’s taxable income.

Resident corporations (Greek and foreign corporations operating and managed in Greece) and limited companies are taxed on net income earned in Greece and abroad. Greece unilaterally grants residents credit for foreign income tax paid up to the amount of Greek tax payable on the foreign income. This may be modified under a double-taxation treaty between Greece and the foreign company’s home country.

Net income is calculated by deducting expenses from gross income (net income per books). This is adjusted for non-deductible expenses, tax-free income and other income subject to special regulations with termination of tax liability (such as interest income subject to withholding tax).

Non-resident companies are taxed on income arising from Greek sources only. A resident or permanent establishment is defined as one that maintains stores, offices, warehouses or manufacturing facilities in Greece; transacts business or offers services through a representative in the country; renders technical or research services there, even without a representative; or conducts other common business activities. According to domestic tax legislation, mere participation in the capital of a Greek limited-liability company or a partnership confers permanent-establishment status (that is, residence), but mere ownership of publicly traded shares does not constitute residence.

A 1997 ruling requires all individuals, legal entities and associations of persons with residence or professional premises in Greece or who conduct transactions of “tax interest” within Greek territory to acquire a tax registration number.

AEs and EPEs must produce annual financial statements, including a balance sheet, a profit-and-loss account, a statement of appropriation of profits and notes to the financial statements. There are detailed rules about filing and publication.

Foreign branches must file annual financial statements and summaries of their activities in Greece with the Ministry of Development’s Trade and Commerce Secretariat; they do not have to publish profit-and-loss accounts since their income is consolidated in head office accounts. Foreign credit and financial institutions must publish audited financial information.

Auditing. Broadly speaking, businesses must keep one of three categories of books—A, B or C—which are defined by turnover. Law 3091/02 increased the turnover thresholds: companies with turnover up to €100,000 keep A-class books; up to €1m, B-class; and over €1m, C-class. C-class books are double-entry and must be kept by all corporations and limited-liability companies and partnerships regardless of turnover. Typically, C-class encompasses small enterprises, such as carpenters and grocers. Firms with gross revenues exceeding €9m per year and with more than 25 employees must also produce audited quarterly profit-and-loss statements. Law 3052/02 simplified many practices on authentication of receipts for sales of goods and services, the keeping of warehouse and inventory records, and electronic storage of data. A licensed accountant or tax consultant must now sign off on all company accounts and must assume co-responsibility for their accuracy if they are found to be inadequate, inaccurate or fictitious. Investors are urged to seek professional advice in this regard.

To promote transparency in tax matters, companies in the following fields must have registered shares: banks, insurance, leasing, venture capital, factoring and forfaiting, utilities, telecommunications, defence, health and education. In addition, any company having procurement contracts with the state worth more than €2.9m, such as construction and information-technology companies, must also have registered shares. Foreign firms that own shares in Greek companies may tender alone or in consortia with Greek firms for government contracts without identifying individual holders of their shares.

In 2000 the Capital Market Commission required all listed companies to publish an annual cashflow statement showing all sources and uses of funds. These must be kept in accordance with International Accounting Standards (IAS), and the firms must establish an internal audit department to ensure the veracity of the statements. An EU directive requires all listed companies to keep consolidated accounts in accordance with IAS as from 2005.

Following the accounting scandals in the US in 2002, the Greek authorities passed Law 3148/03, which provides that resident companies have to change auditors every two years. The first changes will take place in the second half of 2005. The government has established a watchdog body (ELTE) employing certified public auditors as well as Ministry of Economy and Finance personnel to conduct random checks each year on the audits done on 10% of listed companies and 1% of unlisted companies. If accounting breaches are discovered, ELTE will have powers to impose fines of up to €50,000 on individuals and up to €1m on firms. In certain circumstances, the body will be able temporarily to suspend an accounting firm’s operations; its ultimate sanction will be to recommend that an errant firm be struck from the Organisation of Chartered Accountants List.

Deductions. Allowable deductions usually include ordinary business expenses such as directors’ fees, bonuses to managers and directors, interest payments, repair and maintenance of leasehold properties, and management fees, like franchise and royalty payments.

Pursuant to l. 3296/2004, the tax deductibility of royalty payments made by Greek enterprises is subject to pre-approval by a special committee that will be established in the Ministry of Finance for this purpose by virtue of a ministerial decision. Namely, pursuant to new wording of article 31 par. i of law 2238/1994 (which implemented the changes introduced by law 3296/14.12.2004), when royalty fees are paid to foreign companies, other than offshore companies, for the usage of technical assistance, patents, tradenames, logos, designs, secret industrial methods and formulae, intellectual property and other relevant rights, they are treated as tax-deductible on the following conditions:

* The payment obligation arises from a written agreement and a respective invoice of the other contracting party.

* The respective withholding tax provided for by the respective local legislation (reference to article 13 par. 6 of law 2238/1994) or the provisions of the respective double-tax treaty has been remitted to the relevant tax office.

* If the entire royalty fee amount is not paid to the supplier within the respective accounting period, a credit in the name of the overseas beneficiary until the date of the closing of the balance sheet of the payer entity will suffice.

* A pre-approval is required by the special committee to be established in the Ministry of Finance, as follows:

* If the said fees are paid by trade companies with regard to tradenames, trade and distribution methods and other relevant rights, irrespective of their amount and on the condition that they have not been embodied in the sales’ price of the goods that are sold; the same shall apply in the case of payment of such fees from companies that have a mixed objective with regard to royalties referring to the trade sector.

* If the said amounts are paid by a company with a different objective to its parent company, as well as to companies that belong to the same group of companies, and provided that the amount of the royalties paid exceeds 4% of the gross income of the former that arises from the usage of the respective right and up to €500,000 annually.

Law 3091/02 disallowed the deduction of such expenses (and payments for patents, trademarks, designs, secret formulae and intellectual property) if these are provided via an offshore company registered in a country offering “especially favourable” tax treatment. This was in line with the OECD’s efforts to crack down on the use of tax havens. Donations of real estate to the state and other public authorities have been eliminated as an allowable expense.

Advertising expenditure is deductible, although it is liable for a 2% tax payable to the municipality where the firm is established. There is also a levy on behalf of press workers’ supplementary social insurance funds on all print (20%) and media (21.5%) advertising. Law 2753/99 provides for the deduction of the cost of computer hardware and software provided by companies to employees.

Start-up expenses and the cost of acquiring real estate may be written off in one year or in equal instalments over five years. Leasehold additions and improvements may be amortised over the term of the lease. Leased real estate may be deducted up to the value of the buildings but not the value of the underlying and surrounding land. Leasing companies may depreciate expenses incurred in acquiring real estate over the period of the leasing contract. Sale and leaseback has become increasingly popular following the abolition of property-transfer tax on properties covered by such contracts.

A deduction is permitted from gross income for premiums paid for private employee group-life insurance schemes (with cover against death or accidental injury) that include return of premiums at retirement—as a lump sum or in instalments—up to 10% of salary to a limit of €1,500. A 3.6% stamp duty on pay-outs has been abolished. Leaving bonuses and redundancy payments form part of a pensioner’s taxable income. Such payments are awarded a €20,000 tax-free threshold and the remainder is added to the taxpayer’s total income.

It should be emphasised that the expenditure incurred by an enterprise for the provision of services or the purchase of goods from an “offshore company” is not tax deductible.

The term “offshore company” is defined in Greek tax legislation through the use of the following three concurrent criteria:

* The offshore company should be seated in a foreign country.

* The offshore company should be obliged by the legislation of the state where it is seated to carry out its activities exclusively in third countries.

* The offshore company should enjoy an overtly beneficial tax treatment.

Law 3296/2004 eliminated provisions for bad debts for all businesses except banks and allowed write-offs only of debts actually written off after securing a formal court order.

Group taxation is not permitted: each company in a group must be taxed on its own accounts. However, groups of listed companies with a balance-sheet value of €3.7m, turnover of €7.4m and 50 employees must report consolidated earnings, including those from companies abroad in which they have a controlling interest.

Tax deferrals. A provision of the incentives law permitted industrial and tourist companies making “productive” investments to defer tax by forming investment reserves. The provision was extended in two-yearly increments and re-incorporated in Law 2601/98. The last Pasok government renewed it yet again, increasing the proportion of profits that could be consigned to the reserve to 35% and extending the termination date by five years (instead of the usual two) to the end of 2008. Investments must made within three years from the time of the reserve’s creation and at least one-third of the reserve must be used in the first year.

Greek enterprises may also shelter the crystallisation of taxable capital gains from the sale of quoted or non-quoted stock if they use these gains to form a special tax-free reserve (Article 38 of l. 2238/1994). This tax-free reserve may be solely set off against losses incurred from the sale of shares and other securities and is subject to corporate income tax at the standard tax rate if it is distributed or capitalised.

Tax incentives. Pursuant to the provisions of Article 2 of Law 3220/2004, all enterprises mentioned in Article 3 of former Investment Law 2601/1998, regardless of their legal form (eg corporations, partnerships, etc), location or investment zone in which they wish to invest, are entitled to a tax allowance via the formation of a special tax-free reserve out of their retained tax earnings (profits) of accounting periods 2004-08 up to the threshold of 35% of such profits, as they emerge from the prompt corporate tax return of the relevant accounting period. The most important characteristic of this law is that the formation of the special tax-free reserve precedes the making of a productive investment (contrary to what is prescribed for similar tax-free reserves provided by the former Investment Law 2601/1998 and the current Investment Law 3299/2004). In particular, an enterprise that forms a special tax-free reserve out of the retained profits of a given accounting period is obliged to use it for the making of productive investments of, at least, equal value to that of the reserve within a timeframe of three years from the reserve’s formation, and one-third of this reserve will be employed for the making of productive investments within the next accounting period from the reserve’s formation. Thus, for example, enterprises that have an accounting year-end of December 31st 2004, 2005, 2006, 2007, 2008 and 2009 may form this special tax-free reserve out of their retained profits and then proceed to the making of productive investments of equal value up to December 31st 2007, 2008, 2009, 2010, 2011 and 2012, respectively.

In terms of qualification of an investment as productive within the meaning and context of that law, the list of qualifying investments found in the former Investment Law 2601/1998 is, generally, borrowed and therefore productive investments include, inter alia, the construction of buildings used for the enterprise’s premises provided the land is owned by the enterprise and is not leased, the supply of new mechanical equipment, PC devices, software and all related information and network systems.

The reference to the enterprise’s retained profits essentially means those profits recorded in the accounting books of the enterprise and appearing in its balance sheet, as they come up after the deduction of the amount prescribed by law for the formation of the statutory reserve and the distribution of dividends to the company’s shareholders.

On the procedural side, an enterprise making use of the option to form a special tax-free reserve, pursuant to the aforementioned provisions, is obliged to file the competent authorities with a statement (together with the filing of its corporate tax return of the financial year that follows that of the reserve’s formation) that will contain all relevant details as to the cost for investments made within that year as well as an affidavit declaring that such figures are in accordance with the entity’s accounting books and records. The aforementioned statement may be crucial for the authorities so as to decide whether the one-third requirement has been met. Similarly, the enterprise ought to file with the authorities similar statements for the upcoming accounting periods as proof that the required investments have been made. If the size of investments does not exceed the amount of the formed tax-free reserve, the part of the latter not covered by the former should be declared by the enterprise in a complementary tax return as regular corporate income in order to be taxed accordingly.

In 2002 the Pasok government introduced legislation designed to promote mergers. Firms that merged between January 1st 2002 and December 31st 2004 were granted a 10-percentage-point reduction in corporate tax for the first year of the merger and a 5-percentage-point reduction for the second.

Depreciation
Depreciation is based on acquisition value (plus any improvements but minus incentive grants). Depreciation has been compulsory since 1997. Firms may choose the straight-line or declining-balance method; the rates for the latter are three times those of the former.

Fixed assets of the same category can be depreciated by using either the higher or the lower rate set for that category but the rate chosen must thereafter be applied consistently. Law 3091/02 provided for a dual rate of depreciation on certain types of equipment, letting firms depreciate it at a faster or slower pace depending upon use. If a business does not charge depreciation in a given period, it loses its right to deduct the corresponding amount in the future. In accordance with Presidential Decree 299/03, issued in late 2003, assets may be written down at 1–35% over 5–20 years. The draft tax bill proposes to allow firms to select “any steady rate” between the maximum and the minimum. (Any fixed asset worth less than €1,200, including tools and spare parts, can be depreciated in the year of acquisition.)

Leasing of equipment and machinery (which the lessee acquires at the end of the contract) is popular among small and medium-sized enterprises because items may be depreciated over the contract’s duration. The minimum term is three years; the average is four. The investment-incentives law subsidises such leasing contracts, treating them as equipment purchases. (The authorities in 2003 put conditions on purchases of specialist mechanical equipment because of problems in the past with fictitious pricing.) Leasing of buildings is also becoming popular because legislation allows depreciation over as few as 12 years, compared with the standard 20 years. The 12-year regime is exceptional, and leasing companies more often write contracts for 15 years. Only the buildings may be depreciated, not the land.

Depreciation of original installation costs may not exceed ten years. There are no provisions for depletion. Start-up costs, including interest charges, are written off in the year incurred or amortised over five years. Computer hardware and software may be amortised in the year they begin to be used.

Taxes on interest
Tax on interest has been harmonised at 10% for bank deposits, repos, corporate bonds and Treasury paper. There is an exemption for the foreign-exchange deposits of non-Greek residents. Deposits made by non-residents of the currencies of the three EU states that are not members of the European economic and monetary union (Denmark, Sweden and the UK) escape the tax since they are considered foreign-currency deposits.

If a bank is the recipient of the interest, tax is not withheld since the payments are considered business income. Double-tax treaties might change these rates.

The withholding tax on interest payments, other than bank deposits, to foreign enterprises without a permanent establishment in Greece is 35%, unless otherwise provided by a double-tax treaty.

The withholding tax on the coupons on corporate bonds exhausts the tax obligation of Greek tax residents. For Greek tax-resident legal entities, however, the proceeds are also taxed as investment income. For non-Greek resident individuals or legal entities, the interest income is tax-free.

Withholding tax is levied on financial market derivative contracts (swaps and futures). For synthetic swaps, the underlying money contract escapes tax but the contract itself is taxed. Rates vary: individuals are taxed at 15%; banks at 32%; and mutual funds and portfolio investment firms at 0.3%.

Treasury bills of up to one year and two-year zero coupon bonds are purchased net of the yield, which is subject to tax. Treasury bonds with a maturity of two years or more are tax-free if the initial owner (a private individual or legal entity) holds them to term. The initial holder is defined as the legal person (individual or entity) who holds the security from the tenth day of issue. (Designated Greek and foreign banks act as primary dealers for bond sales.) All back tax is payable if the bond is disposed of before maturity.

A 0.15% tax, which is borne by the seller, is paid on the sale value (as stated by the broker) of shares listed on the Athens Exchange. (Market makers are exempt from this levy.)

Taxes on dividends
There is no withholding tax on dividends, since taxes are paid on income prior to distribution. Dividends received by domestic corporations from foreign sources are subject to corporation tax, with a credit available for foreign tax levied. The parent-subsidiary directive provisions have been successfully incorporated.

Taxes on royalties and fees
Royalties and service fees payable to resident companies are not subject to withholding tax. Royalties to foreign licensers are taxed at a flat rate of 20% of the gross amount, including stamp duty and all other charges. There is a 20% withholding tax on fees to foreign companies for rental or lease of movable assets, repair or maintenance of machinery, the organisation of a business or the training of personnel in the country. Taxes on royalties and fees may be reduced or eliminated under double-tax treaties.

Law 3091/02 harmonised at 20% the rate for tax on the following: film royalties (formerly 10%); the profit realised on contracts for studies, designs, research, scientific advice and consulting services (formerly 17.5%); the profits realised in the supervision and co-ordination of technical projects or the provision of consulting services for such projects (formerly 17.5%, depending on the project type).

Franchise income is taxable at 20%. The income is also considered a service and subject to value-added tax at 18%. When the company acquiring such revenue is a corporation or limited company, the distributed part of the profit is subject to the general 32% rate.

Withholding taxes apply to the following:

* Directors’ fees, founders’ shares, preferential shares and salaries of board members, at 32%;

* Fees paid by legal entities to commission agents, at 15%;

* Fees of independent professionals (such as lawyers, doctors or engineers), at 20%; and

* Indemnity payments for early termination of a business lease, at 20%.

Capital gains taxation

Law 2065/92 makes capital gains from the sale of tangible assets taxable as regular business income. Unrealised gains from the revaluation of assets are taxed to the extent that they are reflected in the company’s books, although there are ways to offset this. There are provisions to offset capital gains on the sale of machinery and equipment as additional depreciation.

There is no capital gains tax on profits from the sale of securities listed on the Athens Exchange by legal entities if the gains are credited to a special reserve that can be used to offset future losses from the sale of other listed or unlisted shares. The gains are taxed at distribution or liquidation. Private individuals are not liable for tax on gains on listed securities.

Corporate sales of Treasury paper are similarly treated. There is no tax for individuals on the profits realised from the sale of Treasury bills and bonds.

The International Accounting Standards (IAS) entered into effect on January 1st 2005 pursuant to Law 3148/2004 and 3301/2004. The IAS affects the treatment of capital gains for banks. Previously, total unrealised capital losses were recognised in equity but unrealised capital gains did not affect either equity or the profit-and-loss account. Under the IAS, all holdings will be marked-to-market, and unrealised gains or losses in the trading portfolio will be recognised in equity and reported in the profit-and-loss account under net trading income.

There is a 5% tax payable on the sale price of an unlisted company, which is described as a special tax on business income. In cases in which non-listed shares are sold to the spouse, the children or the parents of the transferor, the tax charge is lowered to 1.2% on the sale proceeds. If the transferees are the brother(s), grandchildren or grandparents of the seller, the shares sale proceeds will be subject to a 2.4% tax charge. Determination of the actual sale price is governed by ministerial decision. This exhausts the tax liability of individuals; companies are also taxed on the profit recorded in their books on distribution or capitalisation.

The transfer of a business (if carried out by individuals) or a participation in a partnership to children or a spouse following retirement is now tax-free (it used to be taxed at 20%). The taxation of capital gains realised from the sale of a participation in a joint venture has been eliminated.

Profits arising from the sale of mutual funds are taxed as investment income for corporations; losses can be debited to the special reserve account. Profits for individuals are tax-free whether the mutual funds are Greek or established in another EU country.

Venture-capital companies do not pay capital gains if the sums realised are not distributed.

Tax treatment for gains from the sale of intangible assets is set as follows: a 20% tax rate applies to gains from the sale of an entire business or its goodwill or from the transfer of a participation in a limited-liability company or a partnership. Gains from transfers of rights, including industrial property, but excluding mining rights, are taxed at 20%.

Transfer pricing

Transfer-pricing matters are regulated in Greece by Article 39 of l. 2238/1994, the Greek Income Tax Code. The said article provides that if two domestic enterprises or a domestic and a foreign enterprise enter into contracts or transactions for the supply of services (or the sale-purchase of goods) and the consideration agreed is unjustifiably lower or greater to the price that would have been agreed if the said contract or agreement was concluded with a third party on an open-market basis at that time (ie the arm’s-length price), then the difference between the agreed price and the arm’s-length price would be added to the gross profits of the company that has charged the lower price or has paid the greater price. Apart from that, the enterprise whose gross profits are increased through the addition of this difference could be subject to a special one-off penalty amounting to 10% on the above difference, irrespective of any fines or additional taxes to be imposed on the reassessed taxable income.

Pursuant to Article 39 par. 2 (a) of law 2238/1994, the above provisions are applicable to transactions concluded between a foreign and a domestic company on the condition that the foreign company controls the latter one. This control criterion is satisfied either by the fact that the foreign company owns—either directly or indirectly—a significant shareholding interest in the domestic company or that it actively participates in its administration and management.

Businesses may deduct expenses for services that are provided by other companies in the same group for administrative support, organisation and reorganisation but not if provided via an offshore company, provided and to the extent that their performance is conducive to generating income for the recipient enterprise and that in the case where the expenses exceed 5% of the payer company’s relevant expenses and up to €100,000, a preapproval of a special committee, that will be formed in the Ministry of Economy and Finance, is secured.

Machinery and equipment rents paid by a local subsidiary of a non-resident corporation face a withholding tax of 20% unless covered by a double-taxation treaty.

Turnover and other indirect taxes and duties

Value-added tax (VAT) is payable at a rate of 18%. There is an 8% rate for certain essentials (such as fresh food, pharmaceuticals, energy and some services) and a 4% rate for “cultural goods” (such as books, newspapers, magazines and theatre tickets). The fees of lawyers, notaries, land registrars and bailiffs are exempt from VAT. Deliveries to duty-free stores are not VAT-exempt. A plan to introduce VAT in January 2003 at 18% on the sale of all new buildings has been postponed until January 2006. One of the factors that has delayed implementation is that if VAT were applied at the standard rate, it would create an inequality since the transfer tax paid on second-hand buildings is lower. The draft tax bill does not tackle the contentious issue of property taxes. However, the New Democracy administration has indicated that it will not grant a further postponement to the VAT introduction since that would be in breach of EU rules.

VAT returns are filed either on a monthly, bi-monthly or quarterly basis and small traders and professionals are encouraged to pay online via TAXISnet.

Special consumption taxes affect sales of cars, tobacco products, alcoholic beverages and liquid petroleum fuels. A unified stamp duty continues to be charged on the transfer of vehicles (based on engine capacity) and on renewal or replacement of vehicle registration licences. The rates change frequently.

Other taxes

Businesses that maintain double-entry account books must revalue their land and buildings every four years. The increase in value may be set off against any outstanding losses, but any surplus of more than €880 arising from this process is taxed at 2% for land and 8% for buildings. (The tax is halved for hotels and campgrounds.) The revaluation depends on the building’s age multiplied by coefficients that consider the building’s depreciated value. The tax may not be offset against income tax. The increased value must be treated as a capital increase. For corporations and limited companies, this must be accompanied by the issue of new shares distributed among the shareholders within two years of the revaluation. The new capital is considered paid-in capital and is thus not subject to income tax on distribution unless the company is dissolved or its capital decreased with a view to distribution within five years of the revaluation. This provision does not apply if a firm is dissolved for the purposes of a merger. Enterprises participating in corporations that revalue their assets must show the value of the new shares in their accounts, but gains are not taxed if they are consigned to a special reserve account.

A real-estate transfer tax is payable (by the buyer) each time a property changes hands. The rate was reduced in March 2001 to 9% (from 11%) on the first €15,000 and to 11% (from 13%) on the balance. (These rates are 2 percentage points lower if the property is in an area not covered by a fire department.) The committee of experts on tax reform have suggested that all existing forms of property tax (FMAP, TAP, large-property tax, transfer tax and the tax on imputed income from owner occupation for individuals) be consolidated into a single property-ownership tax.

Legislation introduced in 1999 allowed the creation of real-estate investment trusts and mutual funds, but the imposition of the real-estate transfer tax on their purchases and mandatory depreciation of the properties in their portfolio were considered to make them unprofitable. Law 2992/02 rescinded the transfer tax on acquisition and made depreciation optional.

Rents from non-industrial properties are subject to a 3% surtax. Foreign corporations that have no permanent establishment in Greece and that earn rental income are subject to tax at the corporate rate of 32%.

A special annual real property tax is levied on domestic or foreign corporations that own immovable property situated within the Greek territory, at a 3% rate. The tax is assessed on the value of the real property.

The following enterprises are exempt from this tax:

* Corporations, irrespective of their state of seat, in the cases that they

* are listed in a duly organised share market;

* have a gross income in Greece from other sources that is greater than their gross receipts from the real property in question;

* maintain Law 89/1967 offices in Greece;

* are owned by the Greek state; and

* are Greek and EU corporations whose shares are directly owned by individuals. The exemption is also afforded to Greek or EU companies that declare to tax authorities the actual individuals that own their shareholding interests.

Tax compliance and administration

The accounting year must generally end on December 31st or June 30th, although there may be exceptions in the first and last year of operation. (Provisions in Law 2753/99 permit Greek subsidiaries of foreign firms to harmonise their tax years with those of the parents.) A corporation (anonymos eteria—AE) or limited-liability company (eteria periorismenis efthinis—EPE) must file a tax return within five months plus ten days of the close of its fiscal year.

Advance payments must be made during the tax year, equal to 55% (60% for banks) of the tax due for the preceding year (that is, a company filing a return on April 15th 2004 covering 2003 income must at the same time pay a sum equal to 55% of the 2003 tax against potential 2004 tax liabilities). The annual tax liability is computed by netting advance payments and any foreign tax paid provided it does not exceed the amount of Greek tax payable on the foreign-source income. After accounting for the 55% pre-payment, the tax balance is payable in eight equal instalments, the first due when the return is filed. Distributed or capitalised reserves must be reported in a separate return. There is a 1.5% discount for cash payment, yielding a potential effective corporate rate of 31.5% instead of the 32% rate. The November 2004 draft tax reform would reduce advance payments to 27.5% (30% for banks) of the corporate tax due for enterprises operating for three years or less.

Taxes withheld from employees’ pay or professional fees are payable on the 20th day of every second month, commencing in March. There is a penalty of 1% per month for late returns, 2% for inaccurate returns and 2.5% for failure to file. For value-added and other indirect taxes, the penalty is 1.5% for late returns, 3% for inaccurate returns and 3.5% for failure to file. There is a ceiling of 100% on the penalties for late returns and 200% on those for inaccurate returns or failure to file. When tax evasion is determined on sums in excess of €150,000, the validity of all official papers and licences regarding transfer and/or sale of assets is suspended and 50% of all assets are frozen. This is lifted if a tribunal overturns the decision or after the tax-evader has paid 70% of the outstanding debt including penalties.

The net taxable profit is increased by 50% if accounting books are found to be inaccurate; it is increased by 100% if the books are falsified or not supported by the requisite documentation. Nearly 50% of a transgressor’s bank deposits may be frozen until the case is settled. Penal sanctions for tax evasion have been reinforced. Evasion is committed when no return, or a knowingly inaccurate return, is filed. If the tax corresponding to the undisclosed revenue is €15,000–150,000, the law provides for imprisonment of at least one year; if the tax involved exceeds €150,000, imprisonment is for at least ten years. (The court can convert prison terms of up to five years to a pecuniary payment.) Fines are doubled for recurring offences, and the licence to trade can be revoked. There are stiffer penalties for non-remittance of withholding tax, primarily value-added tax (VAT). Fines for not remitting VAT can be up to five times the tax due. The law distinguishes between fraudulent violations, negligence and erroneous interpretation.

PERSONAL TAXATION

Taxable income and rates

Successive governments have tried to create a public tax consciousness, but evasion persists. Many elements of the Greek tax system are designed to ensure that the state garners at least some of the tax that it is due. For example, the objective values assigned to property are designed to compensate for under-declaration of sale prices or evaluations for transfers. Fees for incorporating a company are paid to the Bar Association, which passes them on to the lawyer net of tax. Bureaucratic rigidities do not help in the fight against evasion. For example, since public-sector workers may not take outside employment, they cannot legally declare fees earned from second jobs. A study has found that members of the armed forces were the most likely to have second jobs in the unrecorded economy.

There have been efforts to reduce the paperwork associated with filing a tax return, particularly for supporting documentation, and the target is ultimately to eliminate all paper certification. Meanwhile, the authorities have introduced multi-purpose tax-compliance certificates to replace a plethora of individual documents. An Internet network has been overlaid on the TAXIS system, known as TAXISnet, and the Ministry of Economy and Finance now provides its tax forms and guides electronically to those who have access. It is now mandatory for merchants and the self-employed to use the system to file value-added tax returns. The ministry offers a modest reduction in the amount of tax due for individuals who file electronically.

Tax rates are progressive and cumulative. Law 3091/02 substantially increased the allowable tax-free income to €8,400 for all taxpayers and to €10,000 for wage and salary earners and pensioners (before allowances for children). These amounts are increased by €1,000 for one dependent child, €2,000 for two, €10,000 for three and by €1,000 for each child above three. This replaced a system of tax credits for children. (The authorities calculate that the effective tax relief is €150 for one child, €210–300 for two and €3,510 for three.) Tax rates have been adjusted to 15% on the first €5,000 of taxable income, 30% on the next €10,000 and 40% on taxable income exceeding €23,400. (For wage earners and pensioners, who have the zero-rate applied on €10,000, the 15% rate applies on the first €3,400 of taxable income. Hence both categories of taxpayer pay equal rates on amounts exceeding €13,400.)

Pursuant to l. 3296/2004, the thresholds of allowable tax-free income for wage earners were increased to €11,000 as from 2005 and for the self-employed to €9,500 as from 2006. These were increased by increments of €1,000 for one child, €2,000 for two children and €10,000 for three or more children. Individuals who relocate from main urban centres to the regions and residents of islands with less than 3,100 inhabitants are entitled to a tax-free allowance of €16,500, a measure designed to increase mobility and bolster regional development. The 15% rate applies to the first €2,000 of taxable income for wage earners and pensioners and to the first €3,500 for the self-employed. Thereafter the bands will be harmonised. Homeowners are also permitted to deduct 20% of mortgage repayments from taxable income (up from 15%). Tax bands are not indexed to inflation because of the increase in the basic allowable deduction and because there will be a gradual reduction in tax rates between now and 2007.

A married couple files joint returns, but tax is calculated separately on the income of each spouse. A net loss of one may not be offset against the net income of the other. The husband is responsible for filing the form and declaring the income of his wife. The income of a child younger than age 18 is treated as the income of the parent having the higher income or custody of the child. The child must file his or her own return if there is sufficient taxable income from employment, inherited assets or a pension.


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