Internationales und EU -Steuerrecht · ¬ Eliminate the most common forms of juridical and economic...

Mittwoch, 20.1.2010, 15:30 – 18:45 Uhr, RAAB 10Donnerstag, 21. 1. 2010, 15:30 – 18:45 Uhr, MT 226Mittwoch, 27.1.2010, 15:30 – 18:45 Uhr, RAAB 10

Donnerstag, 28. 1. 2010, 15:30 – 18:45 Uhr, MT 226

Teil IIDoppelbesteuerungsabkommen

Univ.-Ass. MMag. Dr. Werner Haslehner LL.M. (LSE)Univ.-Prof. DDr. Georg Kofler, LL.M. (NYU)

Internationales und EU-Steuerrecht

Overview¬ Structure and Terminology¬ Five Rules of Treaty Application¬ Distributive Rules

¬ Business Profits and Permanent Establishments¬ Dividends, Interest and Royalties¬ Capital Gains¬ Employment Income

¬ Methods for Elimination of Double Taxation¬ Special and Final Provisions¬ Special Issues

¬ Beneficial Ownership and Abuse of Treaties¬ Conflicts of Qualification (“Partnership Report”)¬ Collective Investment Vehicles¬ Triangular Situations

Part IStructure and Terminology

Source versus Residence¬ Taxing Jurisdiction

¬ Nationality (citizenship of individuals, incorporation of companies)¬ Territory

¬ Persons – E.g., domicile, residence, place of management¬ Income – Source

¬ Form of Taxation¬ Residence – “Principle of Universality” = Taxation of Worldwide Income

(“Unlimited Tax Liability”)¬ Source – “Principle of Territoriality” (“Limited Tax Liability”)

¬ Exercise of Taxing Rights – “Normal” Taxation (net base, regular progressive rate) versus Withholding Taxation (gross base, flat rate)

¬ Taxing Threshold – Existence of a permanent establishment, duration of stay(183 days) etc

Double Taxation¬ Elimination of Double Taxation

¬ Double Taxation Conventions (DTCs) = Tax Treaties¬ Unilateral Measures

¬ Forms of Double Taxation¬ Juridical (“Real”) Double Taxation

¬ Unlimited tax liability in two countries – “Tie Breaker”-Rules in DTCs¬ Unlimited tax liability in one country, limited tax liability in the other

country – Distributive Rules and Methods in DTCs¬ Limited tax liability in two countries Triangular Situations

¬ Economic Double Taxation – E.g., Transfer Pricing and Art 9 OECD-MC

Subsidiary versus PE

¬ Subsidiary versus Permanent Establishment

Income in State B 100 100./. Tax in State B -30 -30= After-Tax Income in State B 70 70

Dividend - 70./. Tax on Dividend in State B (e.g., 25%) - 17,5= Distributed Income - 52,5./. Tax in State A (40% on 100/70) 40 28= After-Tax Income 30 24,5

Elimination of Double Taxation¬ Elimination of Double Taxation

¬ Distributive Rules¬ Credit of Exemption Method

¬ “CEN” versus “CIN”¬ Capital Export Neutrality (CEN)

¬ Neutrality on the Home Market (eg, USA, UK)¬ Credit Method

¬ Capital Import Neutrality (CIN)¬ Neutrality on the Host Market (eg, Austria, Germany)¬ Exemption Method

¬ “Income Exemption”¬ “Tax Exemption” – Progressivity

Elimination of Double Taxation¬ Credit Method versus Exemption Method

Double TaxationTax in Residence State

Worldwide Income (200 in R + 100 in S =) 300 @ 40% 120Tax in Source State

Source Income 100 @ 30% + 30Tax on Worldwide Income Without Relief = 150

Relief From Double TaxationExemption Credit

Tentative Tax in Residence State (120) 120Exemption of Source State Income + 80 -Credit for Source State Tax - ./. 30Tax in Residence State - = 90Tax in Source State + 30 + 30Tax on Worldwide Income After Relief = 110 = 120

Elimination of Double Taxation¬ Income Exemption versus Tax Exemption

Example 1 Income Exemption Tax ExemptionWorldwide Income (200 in R + 100 in S) 300 300Income Exemption 200 @ 40% 80 -Steuerbefreiung

300 @ 40% - 120 Minus tax attributable to source

State income: (100/300)x120 - ./. 40Tax in Residence State = 80 = 80

Example 2 Income Exemption Tax ExemptionWorldwide Income (200 in R + [-100] in S) 100 100Income Exemption 200 @ 40% 80 -Steuerbefreiung

100 @ 40% - 40 Minus tax attributable to source

State income - ./. 0Tax in Residence State = 80 = 40

Objectives of Tax Treaties

Eliminate Double Taxation and Prevent Tax Avoidance and Evasion

Remove Tax Obstacles and Distortions to Cross-Border Trade and Investment Flows

Maximize Global Wealth by Ensuring an Efficient Allocation of Resources

Objectives of Tax Treaties¬ Main Objectives

¬ Eliminate the most common forms of juridical and economic double taxation¬ Eliminate some forms of tax discrimination¬ Provide a standardized set of rules for dividing tax revenues between countries¬ Address tax evasion and avoidance ¬ Provide a framework for settling tax disputes¬ Provide a stable tax environment to foreign investors¬ And increase the international competitiveness of the economy

Operation of Tax Treaties¬ Restriction of Domestic Taxing Rights (“Stencil”)

¬ Unlimited Taxation in the Source State and Relief in the Residence State (e.g., immovable property)

¬ Limited Taxation in the Source State and Relief in the Residence State (e.g., dividends, interest)

¬ Exclusive Taxation in the Residence State (e.g., buisiness income, pensions, other income)

¬ Exclusive Taxation in the Source State¬ Relationship Between Domestic Law and Tax Treaty Law

¬ Lex Posterior versus Lex Specialis¬ “Treaty Override”¬ “Treaty Underride”

Legal Nature of Tax Treaties¬ There are currently around 3000 bilateral tax treaties

¬ These are part of the infrastructure of our global economy in the same way as the WTO agreements that regulate cross-border trade the bilateral investment agreements that regulate cross-border investment

¬ Contract between Two States¬ Vienna Convention on the Law of Treaties (Art 2)¬ International agreement (in one or more instruments, whatever called)

concluded between States and governed by International Law¬ Only creates rights and obligations for the States, not third parties¬ In some countries tax treaties are also enacted as statutes Once

implemented, they create rights for taxpayers “Treaty Underride”

OECD Model Tax Convention¬ DTCs generally follow the structure of the OECD Model Tax Concentions, with

variations to take account of national (e.g., US Model Tax Convention) and developing country requirements (e.g., UN Model Tax Convention)

¬ OECD Model Convention¬ Chapter I. – Scope Of Convention (Art 1 and 2)¬ Chapter II. – Definitions (Art 3 to 5)¬ Chapter III. – Taxation Of Income (Art 6 to 21)¬ Chapter IV. – Taxation Of Capital (Art 22)¬ Chapter V. – Methods Of Elimination Of Double Taxation (Art 23A and 23B)¬ Chapter VI. – Special Provisions (Art 24 to 29)¬ Chapter VII. – Final Provisions (Art 30 and 31)

Part IIFive Rules of Treaty Application

Rules of Treaty Application¬ Rule 1

¬ Tax Treaties Restrict the Application of Domestic Tax Law (“Stencil”)

¬ Rule 2¬ Tax Terms Can Have a Different Meaning in Domestic Tax Law and

Treaty Law¬ Rule 3

¬ Correct Understanding of the Terms in Distributive Rules – Residence versus Source

¬ Rule 4¬ Correct Understanding of the Scope of Distributive Rules

¬ Rule 5¬ Issues Not Covered by Tax Treaties

Restriction of Domestic Tax Law¬ Tax treaties restrict the application of domestic tax law in the

residence state and in the source state

Residence State Source State

Full Taxation in Both States

Unilateral Relief in Residence State

Application of DTC Restriction of Source State Taxation and Relief in Residence State

Restriction of Domestic Tax Law¬ Distributive Rules – Articles 6-22 allocate taxing rights

¬ Exclusive Taxation – “... shall be taxable only ...” (generally in the residence State), e.g. Art 8.

¬ Concurrent taxation – “... may be taxed in ...” (generally in the source State) -Two types:

¬ Source tax with no limits (e.g. Art 7)¬ Source tax with limits (e.g. Art 11)

¬ Double Tax Relief¬ Art 23 provides obligation to grant double tax relief “... income which, in

accordance with the provisions of the Convention, may be taxed in the other [State] …”.

Restriction of Domestic Tax Law¬ Scope of Restriction – Interplay of Domestic Law and Tax Treaty Law

Domestic Law Tax Treaty

Tax Base 50 100

Tax Rate 40% 15%

50 @ 40% 100 @ 15% 50 @ 15% = 20 = 15 = 7,5

Restriction of Domestic Tax Law

¬ Tax treaties “restrict” domestic taxation¬ The issue is therefore not whether a tax treaty

“permits” taxation, but rather whether it “prohibits” taxation

¬ Nevertheless, tax treaties may result in a higher tax burden


¬ Tax Treaties Restrict the Application of Domestic Tax Law (“Stencil”)¬ Rule 2

¬ Tax Terms Can Have a Different Meaning in Domestic Tax Law and Treaty Law

¬ Rule 3¬ Correct Understanding of the Terms in Distributive Rules – Residence

versus Source¬ Rule 4

¬ Correct Understanding of the Scope of Distributive Rules¬ Rule 5

¬ Issues Not Covered by Tax Treaties

Interpretation¬ Vienna Convention on the Law of Treaties

¬ Signed May 23, 1969; entered into force January 27, 1980¬ Codification of customary international law

¬ Art 26 – Pacta sunt servanda¬ Art 31 – Interpretation

¬ “(1) A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”

¬ Ordinary meaning of terms, subject to Art 31(4) special meaning and subject to Art 3(2) OECD Model

¬ Context (text, contemporaneous agreements, subsequent agreements)¬ Purpose (part of context)

¬ (2) The context for the purpose of the interpretation of a treaty shall comprise in addition to the text, including its preamble and annexes:

¬ (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;

¬ (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.”

Interpretation¬ Art 31 – Interpretation

¬ (3) There shall be taken into account, together with the context:¬ (a) any subsequent agreement between the Parties regarding the

interpretation of the treaty or the application of its provisions;¬ (b) any subsequent practice in the application of the treaty which

establishes the agreement of the parties regarding its interpretation;¬ (c) any relevant rules of international law applicable in the relations between

the parties.¬ (4) A special meaning shall be given to a term if it is established that the parties

so intended.“¬ Art 32 – Supplementary Means of Interpretation

¬ "Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31:

¬ (a) leaves the meaning ambiguous or obscure; or¬ (b) leads to a result which is manifestly absurd or unreasonable“

¬ Includes travaux préparatoires and circumstances of conclusion of treaty¬ Should include any relevant material, but unilateral, unpublished, or subsequent

material should have less weight

Interpretation¬ OECD Model Commentary

¬ Theory – Use of the OECD Commentary as a Tool for Treaty Interpretation?¬ Ordinary meaning under Art 31(1) VCLT?¬ Part of the context of the treaty under Art 31(1) VCLT?¬ Instrument related to the treaty under Art 31(2)(b) VCLT?¬ Special meaning under Art 31(4) VCLT?¬ Supplementary means of interpretation under Art 32 VCLT?

¬ Practice – Courts, negotiators, competent authorities and practitioners use the OECD Model Commentary

Interpretation¬ Relevant Version of the OECD Model Commentary?

¬ Current version? ¬ Intro Paras 3, 33-35 OECD Comm “… tax authorities should follow these

Commentaries, as modified from time to time and subject to their observations thereon, when applying and interpreting the provisions of their bilateral tax conventions that are based on the Model Convention …”.

¬ Version availabe when the tax treaty was concluded?¬ Canada Specialty Manufacturing Ltd. v. Her Majesty the Queen, 97 D.T.C. 1511

(1999); MIL (Investments) S.A. (Appellant) v. Her Majesty the Queen, 2006 DTC 3307¬ Netherlands Hoge Raad der Nederlanden, 11 October 1978, BNB 1978/300, and 2

September 1992, BNB 1992/379¬ UK Fothergill v. Monarch Airlines [1981] AC 251 (HL)¬ US National Westminster Bank v. U.S., 44 Fed. Cl. 120 (1999)¬ But: Later versions may have “persuasive force” Prévost Car Inc. v. The Queen,

2009 DTC 5053), IRC v. Commerzbank AG [1990] STC 285 (Ch); Trevor Smallwood Trust v. Revenue & Customs [2008] UKSPC SPC00669

Interpretation¬ Relevant Version of the OECD Model Commentary?

¬ Differentiate between Commentaries¬ … that fill a gap in the existing commentary by covering matters not

previously mentioned;¬ … those that amplify the existing commentary by adding new examples or

arguments to what is already there; ¬ … those that record what states have been doing in practice; and ¬ … those that contradict the existing commentary.

Interpretation¬ Art 3(2) – Domestic Law Meaning for Undefined Treaty Terms

¬ “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.”

¬ What are undefined terms?¬ What if there are multiple domestic meanings?¬ Undefined terms used in treaty definitions?¬ When does a state apply the treaty?¬ What does “context” mean?

Interpretation¬ Domestic Law Meaning under Art 3(2) – Timing Issues

¬ At the time the treaty was concluded?¬ At the time the treaty is applied?

¬ Since 1995: “… at that time …” ¬ Art 3 Para 11 OECD Comm “However, the question arises which

legislation must be referred to in order to determine the meaning of terms not defined in the Convention, the choice being between the legislation in force when the Convention was signed or that in force when the Convention is being applied, i.e. when the tax is imposed. The Committee on Fiscal Affairs concluded that the latter interpretation should prevail, and in 1995 amended the Model to make this point explicitly.”




¬ Rule 3¬ Correct Understanding of the Terms in Distributive Rules –

Residence versus Source¬ Rule 4



Residence and Source¬ Residence versus Source

¬ Main Principle – DTC applies only to residents of contracting states (Art 1) and definition of “resident of a Contracting State” in Art 4

¬ Residence under Art 4 OECD-MC¬ Para 1 – “Resident of a contracting state” is defined as a “person” (individual

or company) who is liable to comprehensive taxation in the state on the basis of certain criteria

¬ Provides a definition of “resident of a contracting state” for the purposes of applying other provisions of the DTC (e.g., Art 1)

¬ “Full tax liability” – Based on the taxpayers‘ personal attachment to the State concerned

¬ Existence of a “permanent establishment” does not result in residency status (Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802)

¬ Para 2 – Tie-Breaker Rule for Individuals¬ Para 3 – Tie-Breaker Rule for Other Persons

¬ Provides solutions for cases where a person is considered as a resident of both treaty countries (“tie-breaker” rules for “dual residents”)

Residence and Source¬ Residence under Art 4(1) OECD-MC

¬ “For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof.”

¬ Based on domestic law – Person is resident of a country if liable to tax in the country by reason of his domicile, residence, place of management or similar criterion

¬ Exemption under domestic law, e.g. for pension funds, charities and other organisations

¬ “This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.”

¬ Foreign diplomatic and consular staff serving in a State’s territory¬ Not meant to cover countries adopting a territorial principle in their taxation

(Art 4 Para 8.3 OECD Comm)¬ Relevance for Dual Resident Companies? Art 4 Para 8.2 OECD Comm

¬ Art 4(1) OECD-MC – “Residency” of Corporations¬ Fiscal Court Niedersachsen, 29 March 2007, 6 K 514/03

¬ Under FR-GER treaty, GER exempts dividends paid by a company resident in FR to a company resident in GER (10% minimum holding)

¬ SICAV is exempt and hence not subject to tax and no “resident” for treaty purposes, irrespective of how the entity would have been treated in GER, hence no exemption of dividends

SICAV (FR)

DividendCo. (GER)

Residence and Source

¬ Art 4(1) OECD-MC – “Residency” of Corporations¬ Austrian Treaty Practice (EAS 1075, EAS 2415; aligned with Germany and

Switzerland)

Co. (GER)

Dividend

Co. (GER)

“Organschaft”

Co. (AUT)

¬ Isolated treatment of each group company, i.e., group taxation regimes leave treaty residence and entitlement to treaty benefits unaffected

¬ Members of a foreign group will be entitled to claim treaty benefits, including a withholding tax reduction, even though income is attributed “away” from them

Residence and Source

Residence and Source¬ Tie Breaker Rule for Dual Resident Individuals (Art 4(2) OECD-MC)

Permanent Home

Habitual AbodeCentre of Vital Interests

Permanent Homes in both States

No Permanent Home in either State

Centre of Vital Interests cannot be determined

Nationality

Mutual Agreement

Habitual Abode in both States or in neither of them

National of both States or of neither of them

Residence and Source¬ Tie Breaker Rule for Dual Resident Companies

¬ Art 4(3) OECD-MC “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.”

¬ OECD and UN Models adopt Place of Effective Management as Tie Breaker

¬ Where the key management and commercial decisions are in substance made, where the actions to be taken by the entity as a whole are taken –Facts and circumstances!

¬ Common alternatives Place of incorporation or Mutual Agreement Procedure (“MAP”)

¬ 2008 OECD Alternative (Art 4 Para 24.1 OECD Comm)¬ MAP – No treaty benefits until a solution is found!¬ Suggested Criteria Board of directors, where CEO and other senior

executives usually carry on their activities, where the senior day-to-day management of the person is carried on, where the person’s headquarters are located, which country’s laws govern the legal status of the person, where its accounting records are kept, improper use of the Convention

Residence and Source¬ Tie Breaker Rule for Dual Resident Companies

¬ Art 4(3) OECD-MC “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.”

¬ Art 4(1) second sentence OECD-MC “This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.”

¬ Art 4 Para 8.2 OECD Comm (2008)¬ Art 4(1) second sentence “also excludes

companies […] who are not subject to comprehensive liability to tax in a Contracting State because these persons, whilst being residents of that State under that State's tax law, are considered to be residents of another State pursuant to a treaty between these two States.”

Residence and Source¬ “The Other State” – Source State

¬ Art 1 OECD-MC “This Convention shall apply to persons who are residents of one or both of the Contracting States.” Refers to the Recipient of the Income, not to the “Payor” (= Source)!

¬ “Sources” are defined in the DTC – E.g., ¬ Art 6(1) OECD-MC: “Income derived by a resident of a Contracting State

from immovable property […] situated in the other Contracting State may be taxed in that other State.” Relevant is the situs of the property, not the residence of, e.g., the lessee. .

¬ Art 11(1) OECD-MC (“Interest arising in a Contracting State”) Art 11(5) OECD-MC: “Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State.”

Residence and Source¬ “The Other State” – Source State– Different source rules in different tax treaties– Example: A Dutch bank gives a loan to US Co. for use in its Canadian permanent

establishment and enters a mortgage on Israeli real property as a collateral

- NL-US DTC Payor- NL-CAN DTC PE- NL-ISR DTC Real Property






¬ Correct Understanding of the Scope of Distributive Rules¬ Territorial Scope¬ Substantive Scope¬ Scope of Legal Ramifications

¬ Rule 5¬ Issues Not Covered by Tax Treaties

Scope of Distributive Rules¬ Territorial Scope

¬ Bilateral Scope¬ Art 6 – Immovable Property¬ Art 10 – Dividends¬ Art 11 – Interest¬ Art 12 – Royalties¬ Art 16 – Directors' fees¬ Art 17 – Artistes and Sportsmen

¬ Worldwide Scope¬ Art 7 – Business Profits¬ Art 13 – Capital Gains¬ Art 15 – Income from Employment¬ Art 18 – Pensions¬ Art 21 – Other Income

E.g., “The profits of an enterprise of a Contracting State shall be taxable only in that State …” (Art 7), “Items of income of a resident of a Contracting State, wherever arising, […] shall be taxable only in that State” (Art 21)

E.g., “Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State …” (Art 10), “Interest arising in a Contracting State and paid to a resident of the other Contracting State …” (Art 11)

Scope of Distributive Rules¬ Territorial Scope

¬ If items of income are in principle coveredby a distributive rule with bilateral scope and are derived from sources

¬ in a third state or¬ from the recipient‘s residence state,

¬ then such items of income are not coveredby this distributive rule!

¬ Such items of income are covered by Art 7 (for business profits) or by Art 21 (for otherincome) Exclusive taxing right for the taxpayer‘s residence state!

Scope of Distributive Rules¬ Substantive Scope

¬ One Article is completely covered by the scope of another Article – Lex specialis vs lex generalis

¬ Examples: Art 7 vis-á-vis Art 8, Art 15 vis-á-vis Art 18¬ Generally solved by the DTC: Art 8 before Art 7 (Art 7(7)); Art 18 before

Art 15 (Art 15(1))¬ Two Articles overlap without one being clearly narrower or wider in scope

¬ Examples: Art 6 vis-á-vis Art 7, Art 17 vis-á-vis Art 18¬ In some cases solved by the DTC: Art 6 before Art 7 (Art 6(4) and Art 7(7))

Scope of Distributive Rules

¬ Substantive Scope

Solved by OECD-MCNot Solved by OECD-MC

6 8 10 11 12

13

16 18 17 19

157

21

20

Scope of Distributive Rules¬ Scope of Legal Ramifications

¬ “Closed” Distributive Rules Exclusive Taxation¬ “… shall be taxable only in that State …”¬ Exclusive Taxation usually in the Residence State Art 7(1), Art 12(1), Art

13(5), Art 15(1) 1st sentence, Art 18, Art 19(1)(b) and (2)(b), Art 21(1)¬ Sometimes in the Source State: Art 8(1) and (2), Art 13(3), Art 19 (1)(a) and

(2)(a) Income exempt in the other State (but may be included to calculate progressive rate – Art 23A(3))

¬ “Open” Distributive Rules Concurrent Taxation¬ “... may be taxed …” – “... may also be taxed …”

¬ Source tax with limits Art 10(2), Art 11(2)¬ Source tax with no limits Art 7(1) 2nd part, Art 13(1), (2) and (2), Art

15(1) 2nd sentence and (3), Art 16, Art 17(1)¬ Relief via Credit or Exemption in the Residence State (Art 23A or Art

23B) Art 23 provides an obligation to grant double tax relief (“... income which, in accordance with the provisions of the Convention, may be taxed in the other Contracting State …”).

Scope of Distributive Rules¬ Scope of Legal Ramifications

Article 101. Dividends paid by a company which is a resident of a

Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: […]

b) 15 per cent of the gross amount of the dividends in all other cases.

Article 232. Where a resident of a Contracting State derives items of

income which, in accordance with the provisions of Articles 10 and 11, may be taxed in the other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from that other State.

Scope of Distributive Rules¬ Scope of Legal Ramifications — Overview

Article Income Rule ResidenceState

SourceState

6 Immovable Property ALSO Relief – Art 23 Situs

7(1) Business Profits ONLY Residence —

(2) PE in the Source State ALSO Relief – Art 23 PE

8 Shipping, Air Transport ONLY POEM —

10 Dividends ALSO Relief – Art 23 5%/10%

11 Interest ALSO Relief – Art 23 10%

12 Royalties ONLY Residence —

13

(1) Gains – Immovable Property ALSO Relief – Art 23 Situs

(2) Gains – Business Assets ALSO Relief – Art 23 PE

(3) Gains – Ships, Planes ONLY POEM —

(4) Gains – Shares in Real Estate Companies ALSO Relief – Art 23 Situs of Real

Estate

(5) Gains – All Other Property ONLY Residence —



SourceState

15(1) Employment ALSO Relief – Art 23 Exercise

(2) < 183 days employmentwithout sufficient nexus ONLY Residence —

16 Director‘s Fees ALSO Residence Residency of Company

17 Artistes and Sportsmen ALSO Relief – Art 23 Exercise(“look through”)

18 Pensions ONLY Residence —

19

(1)(a) Active Government Service ONLY — Paying State

(1)(b)Active Government Service ifTaxpayer is a Resident and National of Activity State

ONLY Residence —

(2)(a) Government Pensions ONLY — Paying State

(2)(b)Government Pensions ifTaxpayer is a Resident and National of the other State

ONLY Residence —



SourceState

20 Students ONLY Residence[Exception:

Payments from Source State]

21 Other Income ONLY Residence —

Issues Not Covered

¬ To obtain most of the benefits of a tax treaty¬ Taxpayer must be a resident of a Contracting State (Art 1 and 4), …¬ … the tax must be covered by the convention (Art 2) and …¬ … is not excluded by specific provisions (e.g., a Limitation-of-Benefits-Clause)

¬ But: Tax treaties generally do not determine who the taxable subject is¬ “derived” – Art 6(1), Art 13, Art 14, Art 15, Art 16 and Art 17¬ “paid” – Art 10, Art 11, Art 12, Art 18, Art 19 ¬ “receives” – Art 20¬ “profits of an enterprise” or “income of a resident” – Art 7, Art 21

¬ Consequences¬ Domestic rules on the attribution of income¬ Domestic anti-abuse rules (e.g., GAARs, CFC, etc)¬ Beneficial Ownership and Abuse of Treaties

Part IIIDistributive Rules

Overview

¬ Article 6 – Income from immovable property¬ Article 7 – Business profits¬ Article 8 – Shipping, inland waterways transport and air transport¬ Article 9 – Associated enterprises Transfer Pricing¬ Article 10 – Dividends¬ Article 11 – Interest¬ Article 12 – Royalties¬ Article 13 – Capital gains¬ Article 14 – [Deleted]¬ Article 15 – Income from employment¬ Article 16 – Directors’ fees¬ Article 17 – Artistes and sportsmen¬ Article 18 – Pensions¬ Article 19 – Government service¬ Article 20 – Students¬ Article 21 – Other income

Immovable Property – Art 6 OECD-MC

¬ Principle¬ State of source has right to tax income

from immovable property, no rule regarding State of residence (“open distributive rule”)

¬ State of source = the State in which the property is situated

¬ Bilateral scope of application¬ What does the term “immovable

property” contain?¬ What income is “derived from”

immovable property?

Art 6 (1) OECD-MC

„Income derived by a resident of a Contracting State [R] from immovable property (including income from agriculture and forestry) situated in the other Contracting State [S] may be taxed in that other State [S].“


¬ Meaning of immovable property¬ Derived from the law of the source

State binding definition for State R.

¬ Additional treaty “definition”:¬ property accessory to IP¬ livestock and equipment of

agriculture¬ various rights connected to IP¬ Excluded: ships, boats, aircraft.

Art 6 (2) OECD-MC

„The term „immovable property“ shall have the meaning which it has under the law of the Contracting State [S] in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats and aircrafts shall not be regarded as immovable property.“


¬ Income derived from IP¬ Income derived from the use of the

immovable property in any form¬ Renting, leasing, agricultural use of

land, forestry, mining etc.¬ Not included: capital gains on land Art 13 Para 1 OECD-MC

¬ Relationship to Art 7 OECD-MC¬ Priority with regard to legal

consequence: source State taxation regardless of existing PE!

¬ Income may nonetheless be qualified as “business income” within Art 7 OECD-MC may thus create a PE

Art 6 (3) OECD-MC

„The provisions of paragraph 1 shall apply to income derived from the direct use, letting or use in any form of immovable property.“

Art 6 (4) OECD-MC

„The provisions of paragraph 1 and 3 shall also apply to the income from immovable property of an enterprise.“

Business Profits – Art 7 OECD-MC

¬ Principle¬ Source country has a prior unlimited right to tax business profits earned by a non-

resident to the extent that those profits are attributable to a PE situated in the source country

Art 5 OECD-MCDefinition of PE

Head Office

PE

Art 7(2) OECD-MCSource State may only tax profits attributable to PE

Art 7(1) OECD-MCOnly Residence State may tax business profits unless PE in the Source State


¬ Structure of Art 7 OECD-MC ¬ Para 1 – Residence country has exclusive right to tax business profits, unless there

is a PE in the source country. ¬ No force of attraction in OECD-MC, limited force of attraction in UN-MC.

¬ Para 2 – Central directive for attribution of profits to PEs “The Distinct and Separate Entity Principle” AOA

¬ Para 3 – Expenses wherever incurred for the purposes of the PE shall be deductible in computing the profits of that PE

¬ Para 4 – Apportionment of total profits of an enterprise is allowed to attribute profits to a PE in source country provided it is customary (insurance/banking industry).

¬ Para 5 – No profits shall be attributed to a PE by reason of the mere purchases of goods by the PE for the non-resident enterprise.

¬ Para 6 – Unless there is a compelling reason for the contrary, the same method should be used each year for allocating profits to PEs.

¬ Para 7 – Art 7 is lex generalis, other distributive rules take precedence, such as Art 10, 11 and 12


¬ Art 7(1) OECD-MC – Overview¬ “The profits of an enterprise of a Contracting State shall be taxable only in that

State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”

¬ Taxation in residence State only, unless there is a PE If so, so much of the profits attributable to PE taxable in PE State

¬ Two Approaches¬ “Relevant Business Activity” Approach “... so much of them ...”

sometimes interpreted as limiting right to tax of PE State to overall enterprise profits “As paragraph 2 is part of the context in which the sentence must be read, that sentence should not be interpreted in a way that could contradict paragraph 2, e.g. by interpreting it as restricting the amount of profits that can be attributed to a permanent establishment to the amount of profits of the enterprise as a whole.” (Art 7 Para 11 OECD Comm)

¬ “Functionally Separate Entity” Approach Art 7(2) “The Distinct and Separate Entity Principle” AOA


¬ Art 7(1) OECD-MC – “Force of Attraction”¬ OECD MC rejects force of attraction (Art 7 Para 10 Comm and AOA I/A Para 10)¬ UN MC contains limited force of attraction (Art 7(1)(b) and (c))

¬ “Sales in that other State of goods or merchandise of the same or similar kind as those sold through that PE” or

¬ “other business activities carried on in that other State of the same or similar kind as those effected through that PE”


¬ Art 7(2) OECD-MC – General Directive¬ Attribution to PE of “profits which it might be expected to make if it were a distinct

and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.”


¬ Art 7(2) OECD-MC¬ Problem

¬ No consistent application of the attribution of profits under the terms of Art 7 OECD-MTC

¬ Scope of the fiction of a separate enterprise and the autonomy of the PE¬ Result Double taxation or double non-taxation

¬ Solution¬ OECD Report on the attribution of profits to permanent establishments

(“AOA”)¬ Objective: Finding one uniform method for the attribution of profits to PE¬ “Working hypothesis”: Application of the arm‘s length principle of Art 9

OECD-MC and the OECD Transfer Pricing Guidelines to the attribution of profits to PE


¬ Art 7(2) OECD-MC – General Directive¬ “Subject to the provisions of paragraph 3, where an enterprise of a Contracting

State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.”

¬ Profits that can be attributed to a permanent establishment are not limited to the amount of profits of the enterprise as a whole (Art 7 Para 11 OECD Comm)

¬ Trading accounts of the PE are the starting point for profit allocation. If they are prepared symmetrically, they reflect real economic functions, and hey are in accordance with the arm’s length principle “These trading accounts could be accepted by tax authorities” (Art 7 Para 19 OECD Comm)

¬ PE State may tax notional profits when an asset leaves the State, because concept of realization depends on domestic law. Residence State must seek a bilateral solution on a case by case basis (Art 7 Para 21 OECD Comm).


¬ Art 7(3) OECD-MC – Cost Deduction¬ “In determining the profits of a permanent establishment, there shall be allowed

as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.”

¬ Clarifies, in relation to the expenses of a permanent establishment, the general directive laid down in Art 7(2).

¬ The deduction allowable to the permanent establishment for any of the expenses of the enterprise attributed to it does not depend upon the actual reimbursement of such expenses by the permanent establishment (e.g., general administrative expenses; Art 7 Para 27 OECD Comm)

¬ Prices between the permanent establishment and the head office Arm’s length or actual cost?


¬ Art 7(3) OECD-MC – Cost Deduction¬ “Exceptions” to the Arm’s Length Principle

¬ Temporary transfer of assets (Art 7 Para 33 OECD Comm)¬ Intangibles (Art 7 Para 34 OECD Comm)¬ Services (Art 7 Para 35-37 OECD Comm)¬ Good management (Art 7 Para 38-40 Comm)¬ Transfer of funds (Art 7 Para 41-48 Comm)

¬ UN-MC – No deduction for internal royalties, fees, other similar payments, commissions, interest etc (Art 7(3) UN-MC)


¬ The Authorised OECD Approach (AOA)¬ 1994 – Report on “Attribution of Income to Permanent Establishments”

(Issues in International Taxation No. 5, OECD, Paris, 1994) and changes to the Commentary on Art 7

¬ 1995 – “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”

¬ 2008 – Report on “Attribution of Profits to Permanent Establishments”¬ Part I - General (2001 and revised 2004 and 2006)¬ Part II – Banks (2003 and revised 2006)¬ Part III – Global Trading (2003 and revised 2006)¬ Part IV – Insurance (2005 and revised 2008)


¬ The Authorised OECD Approach (AOA)¬ 2008 – Revised Commentary on Art 7

¬ Incorporation of AOA conclusions into the Commentary on existing Art 7 to the extent that they do not conflict with the existing commentary

¬ Conflicts E.g., allocation of economic ownership of certain assets (e.g. intangibles) and explicit recognition of internal dealings (internal services at arm‘s length prices, internal dealings in the form of licenses, internal dealings in the form of loans when there is a treasury function)

¬ 2010 – New Article 7 and related Commentary¬ “Discussion draft on a new Article 7 (Business Profits) of the OECD Model

Tax Convention” (July 2008)


¬ The Authorised OECD Approach (AOA)¬ Principle – Decision of the OECD Member Countries to determine the PE’s

profits as if it were a distinct and separate enterprise Arm’s Length¬ Absence of legally binding contracts between head office and PE

Requirement for an approach to attribute risks, economic ownership of assets and capital to the PE.

¬ Recourse to functional analysis, i.e. significant people functions (formerly: KERT function) as basis for hypothesising the PE as distinct and separate enterprise and determining the profits of the PE

¬ Justification – Art 7(2): “… shall be attributed to that permanent establishment the profits which it might be expected to make if it where a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions…..”

¬ Effect – Attribution of profit generally possible even if enterprise as a whole makes a loss, and vice versa (Art 7 Para 11 OECD Comm)


¬ The Authorised OECD Approach (AOA)¬ Two Step Approach –

¬ Step 1 — “Hypothesising the PE as a Disctinct and Separate Enterprise” (AOA I/B-3 Paras 16-41 and AOA I/D-2 Paras 86-217)

¬ Functional and Factual Analysis (AOA I/B-3 Paras 16-20)¬ Attribution of Assets (AOA I/B-3 Paras 21-23 and AOA D-2 Paras 101-

128)¬ Attribution of Risks (AOA I/B-3 Paras 24-30 and AOA D-2 Paras 97-

100)¬ Attribution of Free Capital (AOA I/B-3 Paras 31-35 and AOA D-2 Paras

130-183)¬ Recognition of Dealings (AOA I/B-3 Paras 36-41 and AOA D-2 Paras

207-217)¬ Step 2 — “Determining the Profits of the Hyothesised Disctinct and

Separate Enterprise Based Upon a Comparability Analysis” (AOA I/B-4 Paras 42-46 and AOA I/D-3 Paras 218-283)

¬ Applying by analogy the transfer pricing methods in the OECD Transfer Pricing Guidelines (TPG)


¬ The Authorised OECD Approach (AOA) – Overview

Determiningthe Profits

of a PE

Functional/ Factual analysisto Determine the

Activities andConditions of

the PE

Step 1: Hypothesising the PE

as a Distinct and Separate Enterprise

Step 2:Determining theProfits of the PE

Functions Performed

Assets Used

Risks Assumed

Capital and Funding

Recognition of Dealings

Comparability Analysis

Applying Transfer PricingMethods to Attribute

Profits


¬ Implementation of the Authorised OECD Approach (AOA) – ExistingTreaties¬ Areas where AOA conflicts with the existing Commentary Royalties

¬ Swiss Co. has a PE in Austria to produce cosmeticproducts. R&D has beendone in Swiss Co.; patents, formulas etc are hence not economically owned by the Austrian PE.

Swiss Co.

PE (AUT)

AOA: Fictitious Royalty

Costs

Current Art 7: Attribution of (part of) the

costs incurred

Permanent Establishment

¬ The “PE Concept”¬ The key test which determines the right to tax business profits in the source

state Art 5 OECD-MC¬ Allocation of taxing rights for business profits (Art 7(1))

¬ Business profits taxed exclusively in the State of residence of the enterprise unless there is a “permanent establishment” in the other State

¬ If a permanent establishment exists, profits attributable to the permanent establishment taxable in the PE State


¬ The “PE Concept” in Art 5 OECD-MC – Overview ¬ Para 1 – Primary Rule “For the purposes of this Convention, the term

“permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on.”

¬ Para 2 – Illustrative (not Exhaustive) List of PEs Examples of typical fixed places of business (requirements of Art 5(1) must be met)

¬ Para 3 – Construction/Installation Projects¬ Para 4 – Activities not PEs E.g., preparatory or auxiliary character¬ Para 5 – Dependent Agents may be a PE¬ Para 6 – Independent Agents not a PE¬ Para 7 – Control of a Subsidiary not a PE of the Parent (and vice versa)


¬ The “PE Concept” – Art 5(1) – Primary Rule¬ “For the purposes of this Convention, the term “permanent establishment” means a

fixed place of business through which the business of the enterprise is wholly or partly carried on.”

¬ Checklist¬ “… place of business …”

¬ Any premises, facilities or installation used for carrying on the business whether or not used exclusively for that purpose

¬ Space is at its disposal Immaterial whether owned, rented or at the disposal of the enterprise

¬ “… fixed …”¬ “Location Test”¬ “Duration Test”

¬ “… carried on …”¬ Any situation where business activities are carried on at a particular

location at the disposal of the enterprise for that purpose¬ “… through which …”

¬ Art 5 Para 4.1 – 4.6 OECD Comm Painter (), paving a road (), regular use of use a delivery dock at a customer’s warehouse (×), office in the headquarters of another company ()


¬ The “PE Concept” – Art 5(1) – “Fixed”¬ A Specific Geographical Spot (the “Location Test”) Link between the place

of business and a specific geographical point¬ Geographical fixedness has to be understood in the context of the business

concerned¬ Mobile and Recurrent Activities “Coherent Whole Commercially and

Geographically”¬ Commercial Coherence E.g., a single contract (plus connected

contracts), complementary functions¬ Geographic Coherence E.g., limited geographic area, distinct

place (mine, offices of a client)¬ Another factor: A place regularly returned to, e.g., a street market

¬ A Certain Degree of Permanence (the “Duration Test”) 6-Months-Test (Art 5 Para 6 OECD Comm)


¬ The “PE Concept” – Art 5(3) – Construction Activities¬ “A building site or construction or installation project constitutes a

permanent establishment only if it lasts more than twelve months.”¬ Building Site – Construction (Renovation) of buildings, roads, bridges or

canals, the laying of pipe-lines and excavating and dredging¬ Installation Project – Includes the installation of new equipment, such as a

complex machine, in an existing building or outdoors¬ The Twelve-Month-Threshold

¬ Applies to each individual site or project, but regarded as single unit if it forms a coherent whole commercially and geographically (even if based on several contracts)

¬ From the date on which the contractor begins his work (including any preparatory work) until the work is completed or permanently abandoned (temporary or seasonal interruptions or discontinuations are included in determining the life of a site)


¬ The “PE Concept” – Art 5(4) – Activities Deemed Not to Be a PE¬ Concept – Remote from profit making and attribution of income would therefore

be problematic and artificial ¬ The term "permanent establishment" shall be deemed not to include:

¬ The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise (Art 5(4)(a))

¬ The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery (Art 5(4)(b))

¬ The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise (Art 5(4)(c))

¬ The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise (Art 5(4)(d))

¬ The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character (Art 5(4)(e))

¬ The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character (Art 5(4)(e))

¬ Subpara (4)(f) added to the OECD.MC in 1977 and is now also in the UN Model Concern that it permits too substantial a business presence without taxation


¬ The “PE Concept” – Art 5(5) and (6) – Agents


¬ The “PE Concept” – Art 5(5) – Dependent Agent¬ “Notwithstanding the provisions of paragraphs 1 and 2, where a person — other

than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, ….”

¬ No requirement for the dependent agent to have a fixed place of business –But: Agent’s place of business not necessarily a permanent establishment of the head office (Knights of Columbus v. Her Majesty The Queen, 2008TCC307, Tax Court of Canada, 16 May 2008)


¬ The “PE Concept” – Art 5(5) – Dependent Agent¬ Criteria

¬ “… habitually exercises …” To be understood in the context of the business concerned, nature of the contracts, presence should be more than merely transitory (Art 5 Para 33.1 OECD Comm)

¬ “… an authority to conclude contracts …”¬ Negotiation of all details of the contract in a manner binding on the

enterprise is sufficient (even if the contract is actually signed by someone else in the other contracting state (Art 5 Para 32.1 - 33 OECD Comm)

¬ Not, e.g., in case of insurance approval by head office (90% approval rate) (Knights of Columbus v. Her Majesty The Queen, 2008TCC307, Tax Court of Canada, 16 May 2008)

¬ “… in the name of the enterprise …” Not only when the contract is concluded literally in the name of the enterprise, but also where contract is binding on the principal (Art 5 Para 32 – 32.1 OECD Comm)


¬ The “PE Concept” – Art 5(6) – Independent Agent¬ “An enterprise shall not be deemed to have a permanent establishment in a

Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.”

¬ Criteria¬ Legally Independent The agent’s commercial activities are not subject

to detailed instructions or comprehensive control¬ Economically Independent Number of clients¬ Acting in the Ordinary Course of his Business Broker, commission

agent


¬ The “PE Concept” – Services PE¬ Fees for technical services are not dealt with separately in neither the OECD nor

UN Model Tax Convention¬ Usually taxed under the Business Profits Article

¬ Taxation in source state to the extent that there is a PE (Art 5) in the source state and the fees are attributable to it

¬ UN-MC deems a PE to exist in respect of services performed for more than 6 months in respect of a single or connected projects (Art 5(3)(b) UN-MC)

¬ OECD Alternative Provision Art 5 Para 42.11 – 42.48 OECD Comm

Dividends – Art 10 OECD-MC

¬ “Dividends” Distribution of profits to the shareholders by companies limited by shares, limited partnerships with share capital, limited liability companies or other joint stock companies Legal entities with a separate juridical personality distinct from all their shareholders (≠ transparent partnerships)

¬ Structure of Art 10 OECD-MC¬ Para 1 – Residence state may tax “Dividends paid by a company which is a

resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.”

¬ Para 2 – Maximum Source State Taxation Rate “Beneficial Ownership”-Requirement Relief in the Residence State (Art 23A or Art 23B OECD-MC)

¬ 5% Corporate Shareholder with a Capital Holding of at least 25% “Capital” under company law, but consideration of domestic tax law (e.g., “thin capitalisation”, or assimilation of a loan to share capital; Art 10 Para 15 OECD Comm)

¬ 15% All other cases¬ No Minimum Holding Period in the OECD-MC, but Alternative Provision in Art 10 Para

17 OECD Comm “… provided that this holding was not acquired primarily for the purpose of taking advantage of this provision”.

¬ Para 3 – Definition of Dividends¬ Para 4 – Art 10 does not apply to dividends from holdings connected with a

permanent establishment in the source country Art 7¬ Para 5 – Extraterritorial Taxation


¬ Art 10(3) OECD-MC – Definition of Dividends¬ The term “dividends” as used in this Article means income from shares,

“jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.”

¬ Not only “open” distributions of profits decided by annual general meetings of shareholders, but also other benefits in money or money’s worth, such as bonus shares, bonuses, profits on a liquidation and disguised distributions of profits (Art 10 Para 28 OECD Comm).

¬ Also: Loans if the lender effectively shares the risks run by the company E.g., repayment of the loan is subordinated to claims of other creditors or to the payment of dividends, the level or payment of interest would depend on the profits of the company, the loan contract contains no fixed provisions for repayment by a definite date (Art 10 Para 25 OECD Model Commentary).

¬ Not included E.g., debt-claims participating in profits (Art 11 Para 19 OECD Comm)


¬ Art 10(4) OECD-MC – Dividends Connected with a PE¬ “The provisions of paragraphs 1 and 2

shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.”


¬ Art 10(5) OECD-MC – Extraterritorial Taxation – Situation 1¬ “Where a company which is a resident of

a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.”




¬ Shareholder’s State may tax under Art 10(1) OECD-MC




¬ PE State may tax under Art 7 OECD-MC (Art 21(2) OECD-MC)

Interest – Art 11 OECD-MC

¬ Structure of Art 11 OECD-MC¬ Para 1 – Residence state may tax “Interest arising in a Contracting State and

paid to a resident of the other Contracting State may be taxed in that other State.”

¬ “… paid …” Fulfillment of the obligation¬ “… arising …” Art 11(5) OECD-MC

¬ Para 2 – Maximum Source State Taxation Rate (10%) “Beneficial Ownership”-Requirement Relief in the Residence State (Art 23A or Art 23B OECD-MC)

¬ Para 3 – Definition of Interest¬ Para 4 – Art 11 does not apply to interest from debt-claims connected to a

permanent establishment in the source country Art 7¬ Para 5 – Sourcing rule Residence of the Payer, State of the PE¬ Para 6 – “Special Relationship Clause” The restriction on the source country

right to tax does not apply to the excess amount which has its basis in a “special relationship” (“Arm’s Length”)


¬ Art 11(3) OECD-MC – Definition of Interest¬ Income from debt-claims of every kind, whether or not secured by mortgage

and whether or not carrying a right to participate in profits¬ E.g., cash deposits and security in the form of money, government

securities, bonds and debentures (including premiums or prizes attaching thereto)

¬ Not covered Penalty charges for late payment¬ Optional Exclusion from Source Taxation, e.g.,

¬ Interest paid to a State, its political subdivisions and to central banks (Art 11 Para 7.4 OECD Comm)

¬ Interest paid by a State or its political subdivisions (Art 11 Para 7.5 OECD Comm)

¬ Interest paid pursuant to export financing programmes (Art 11 Para 7.6 OECD Comm)

¬ Interest paid to financial institutions (Art 11 Para 7.7 OECD Comm)¬ Interest paid to some tax-exempt entities (e.g. pension funds) (Art 11 Para

7.10 OECD Comm)


¬ Art 11(4) OECD-MC – Interest Connected with a PE¬ “The provisions of paragraphs 1 and 2

shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.”


¬ Art 11(5) OECD-MC – Sourcing Rule¬ First Sentence “Interest shall be

deemed to arise in a Contracting State when the payer is a resident of that State.”

¬ Second Sentence “Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated.”

Royalties – Art 12 OECD-MC

¬ Residence versus Source Taxation¬ OECD-MC provides for exclusive residence State taxation of royalties

(Art 12(1))¬ Almost half of OECD countries have reservations on Art 12 Equipment

leasing, source right to tax, source rule equivalent to interest¬ UN-MC (Art 12(2)) and perhaps 75% of tax treaties provide for a limited right

of taxation for the source State


¬ Structure of Art 12 OECD-MC¬ Para 1 – Residence State has exclusive right to tax royalties

¬ “Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.” Source (“arising”) = Residence of the Payor (explicit sourcing rule in Art 12(5) UN-MC)

¬ “… may be taxed …” in Art 12(1) in UN-MC and limited source tax in Art 12(2) in UN-MC

¬ Para 2 – Definition of Royalties (~ Art 12(3) UN-MC)¬ Para 3 – Art 12 does not apply to royalties from property effectively connected to

a permanent establishment in the source country (~ Art 12(4) UN-MC) Art 7¬ Para 4 – “Special Relationship Clause” (~ Art 12(6) UN-MC) The restriction on

the source country right to tax does not apply to the excess amount which has its basis in a “special relationship” (“Arm’s Length”)


¬ Art 12 OECD-MC – Definition of Royalties¬ “Royalties” means payments of any kind received as a consideration for the use

of, or the right to use,¬ … any copyright of literary, artistic or scientific work including

cinematograph films¬ Software Mere purchase of software protected by copyright is not a royalty (Art

12 Para 12 – 17.4 OECD Comm)¬ … any patent, trade mark, design or model, plan, secret formula or

process¬ Payment for the development of a design, model or plan that does not already

exist is not a royalty, even if the designer (e.g. an architect) retains all rights, including the copyright.

¬ … or for information concerning industrial, commercial or scientific experience

¬ Know-How Supply of pre-existing information, remains secret, can be used repetitvely, risk on user, does not require individual skill in each application (Art 12 Para 11.3 OECD Comm)

¬ Distinguish from Services May require use of special knowledge, skill or expertise but not the transfer of that special knowledge, skill or expertise – E.g., after-sales service, services under a guarantee, technical assistance, an opinion, advice provided electronically (Art 12 Para 11.4 OECD Comm)


¬ Art 12 OECD-MC – Definition of Royalties¬ UN-MC

¬ … films or tapes used for radio or television broadcasting,¬ … industrial, commercial or scientific equipment

¬ Removed from Art 12 OECD-MC by the 1992 Update following the report “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” Nature of income is business profits and practice of source State tax on gross income seemed too high.


¬ Art 12(3) OECD-MC – Royalties Connected with a PE¬ “The provisions of paragraph 1 shall

not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise through a permanent establishment situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.”

Capital Gains – Art 13 OECD-MC

¬ “Mini-DTC” for Sales in Art 13 OECD-MC¬ Structure of Art 13 OECD-MC

¬ Para 1 – Alienation of immovable property Art 6¬ Para 2 – Alienation of movable property forming part of the business property of

a permanent establishment (movable property of a permanent establishment or the permanent establishment as such) Art 7

¬ Para 3 – Alienation of ships or aircraft Art 8¬ Para 4 – Alienation of shares deriving more than 50 per cent of their value

directly or indirectly from immovable property in the source State Art 6¬ Para 5 – Alienation of other property (e.g., shares in a company (other than Art

13(4)), securities, bonds, debentures) Art 21

Employment Income – Art 15 OECD-MC

¬ Structure of Art 15 OECD-MC¬ Para 1 – Taxable “only” in the residence State unless exercised in the source

State¬ Subject to Art 16 (Director’s Fees), 17 (Artistes and Sportsmen), 18

(Pensions) and 19 (Government Service)¬ “… salaries, wages and other similar remuneration …” Also benefits

in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships) (Art 15 Para 2.1 OECD Comm).

¬ Para 2 – Restriction of source taxation ¬ Para 3 – Employment exercised aboard a ship or aircraft Art 8


¬ Art 15 OECD-MC – Restriction of Source Taxation ¬ Avoids source taxation of short-term employments to the extent that the

employment income is not allowed as a deductible expense in the State of source (Art 15 Para 6.2 OECD Comm)

¬ Taxation in the source State if …¬ … the recipient is present in the source State for more than 183 days,

or …¬ “Days of Physical Presence” Method (Art 15 Para 5 OECD Comm)

¬ … the remuneration is paid by, or on behalf of, an employer who is a resident of the source State, or …

¬ Problem “International Hiring-Out of Labour” Employer is the person having rights on the work produced and bearing the relative responsibility and risks (“Substance over Form”; Art 15 Para 8 OECD Comm)

¬ Discussion Draft (2004 and revised 2007) – Six examples designed to provide guidance on who is the visiting employee’s “employer” in substance

¬ WP1 agreed in September 2007 to defer inclusion in Model, do further work on clarifying country positions

¬ … the remuneration is borne by a permanent establishment of the employer has in source State.


¬ Art 15 OECD-MC – Dual Resident Employer¬ German Bundesfinanzhof, 18 September 2007, I R 1/96

¬ Employer resident in both States under Art 4(1) OECD-MC (no tie-breaker, but rather MA procedure in the GER-US treaty), residency status for dual resident companies is only denied by Art 4(3) OECD-MC for treaty purposes concerning its own taxation and access to benefits, but not with respect to taxation of other persons

¬ GER has to grant treaty exemption as the remuneration is not “paid by […] an employer who is not a resident if the other State” (Art 15(2)(b) OECD-MC)

Incorporation

US Co. (US)

Management

US Co. (GER)

Remuneration

German resident working in the US for 18, 15, 13, and 5 days, respectively, in 1998 to 2001


¬ Art 15 OECD-MC – Calculation of “Days of Physical Presence”¬ “Days of Physical Presence”

¬ Included Part of a day (however brief; no 8-hour-threshold, no overnight-threshold), day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness and death or sickness in the family (Art 15 Para 5 OECD Comm)

¬ Not Included ¬ Entire days spent outside the State of activity, whether for holidays, business

trips, or any other reason¬ Days of transit in the course of a trip between two points outside the State of

activity¬ Days while taxpayer was a resident of the source State (Art 15 Para 5.1 OECD

Comm)¬ 12-Month-Period

¬ “… in any twelve month period commencing or ending in the fiscal yearconcerned …”

¬ Previously (in 1977 OECD-MC): “… in the fiscal year concerned …” — Problem: Taxpayer is present last 5 ½ months of one year and the first 5 ½ months of the following year OECD considered this “opportunities for tax avoidance”


¬ Art 15 OECD-MC – Calculation of “Days of Physical Presence”¬ 12-Month-Period

¬ “… in any twelve month period commencing [“look-forward-period”] or ending [“look-backward-period”] in the fiscal year concerned …”

¬ Example (Art 15 Para 4 OECD Comm)

1 Apr. 01“Look Forward”:

150 Days 31 Mar. 02

1 Aug. 01 31 Jul. 02“Look Backward”:210 Days

Taxation in Residence State Taxation in Source State


¬ Art 15 OECD-MC – Timing Issues¬ German Bundesfinanzhof, 2 September 2009, I R 111/08

20 Nov. 2004

1 Aug. 01

Agreement until 16 Jan. 2009

23 Dec. 2005Residence in Germany

Sep. 2006Severance Payment4 Nov. 2005

Termination

¬ Limited tax liability in Germany under domestic law (severance payment considered as “wage”)

¬ But German taxation excluded by Art 15 GER-CH since no additional remuneration in respect of an employment (but rather a compensation for the loss of the workplace)

¬ Contrary MA between GER and CH competent authorities not binding on Courts

Residence in Switzerland

Other Income – Art 21 OECD-MC

¬ General Rule Income not dealt with in the foregoing Articles of the Convention¬ … income of a class not expressly dealt with¬ … income from sources not expressly mentioned¬ … income from the residence State and income from third States (e.g., dual-

residency issues)¬ Structure of Art 21 OECD-MC

¬ Para 1 – Exclusive taxing right for the residence State Art 4 allocates the taxation right in respect of third State income (Art 21 Para 2 OECD Comm).

¬ Para 2 – Exception from the provisions of Art 21(1) where the income is associated with the activity of a permanent establishment which a resident of a Contracting State has in the other Contracting State.

Other Income – Art 21 OECD-MC

¬ Art 21(2) OECD-MC – “Permanent Establishment”¬ “The provisions of paragraph 1 shall not

apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.”.

Part IVMethods for Elimination of Double Taxation

Overview

¬ Article 23A – Exemption Method¬ “Exemption with Progression” for “Active Income” (Art 23A(1) and (3))

¬ Treatment of Losses (Art 23 Para 44 OECD Comm)¬ Treatment of “Personal” Deductions (Art 23 Para 39 – 43 OECD Comm)

¬ “Credit” for “Passive Income” (Art 23A(2) Art 10 and 11, in practice also Art 12)

¬ Avoidance of Double-Non-Taxation (Art 23A(4)) Conflicts of Qualification¬ Article 23B – Credit Method

¬ “Ordinary Credit Method” and Credit Limitation (Art 23B(1))¬ “Tax Sparing” Report “Tax Sparing a Reconsideration” (1998) and Art 23

Para 72 – 78.1 OECD Comm)¬ “Progressivity” (Art 23B(2))

¬ Principles applying to both articles¬ Provides relief from double taxation where distributive rules allow taxation

by source and residence State¬ Adressed to State of residence only, no regulation of source taxation.

Exemption Method - Art 23A OECD-MC

¬ Full Exemption:¬ Taxation in State R is limited to that part

of the total income which it has the right to tax under the distributive rules.

¬ The tax is calculated applying the applicable tax rate for that portion of the total income, i.e. the foreign part is disregarded completely for domestic tax.

¬ “Exemption with Progression”:¬ Taxation is limited to the portion of total

income which the distributive rules allow, but at the tax rate applicable to the total income

¬ Negative Progression: Applying a lower tax rate as a consequence of losses from foreign sources may result in zero-taxation where the total income is lower than the tax free amount in State R

¬ OECD leaves choice of method to Member States.

Art 23A (1) OECD-MC

„Where a resident of a Contracting State [R] derives income […] which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State [S], the first-mentioned State [R] shall, subject to the provisions of paragraphs 2 and 3, exempt such income […] from tax.“

Art 23A (3) OECD-MC

„Where in accordance with any provision of the Convention income is derived […] by a resident of a Contracting State [R] is exempt from tax in that State, such State [R] may nevertheless, in calculating the amount of tax on the remaining income […] of such resident, take into account the exempted income […].“


¬ Treatment of Losses¬ Income exemption “symmetric” treatment of profits and losses¬ Tax exemption “asymmetric” treatment of profits and losses¬ OECD does not favor either method

Example Income Exemption Tax ExemptionWorldwide Income (200 in R + [-100] in S) 100 100Income Exemption

Tax: 200 @ 40% 80 -Tax Exemption

Tax: 100 @ 40% - 40 Minus tax attributable to source State income - ./. 0

Tax in Residence State = 80 = 40

¬ Income Exemption combined with negative progression takes source losses into account at least partially

¬ Tax Exemption requires “recapture” of losses in subsequent years to avoid a “double dip” of losses (cf. § 2 Abs 8 Z 3 EStG).


¬ Treatment of “Personal” Deductions¬ Splitting or full deduction of personal

deductions?

¬ Splitting and progressive tax rate(cf. § 33 (10) EStG before AbgSiG 2007) deduction in calculating the average tax rate before applying it to the taxable (domestic) income the portion of the deductible amount attributable to foreign income is lost

¬ Full deduction: disregard personal deductions in calculating average tax and deduct after applying tax rate to domestic income (required by EC Freedoms!)

Example (cf. Art 23 Para 41 OECD Comm)

Foreign Income 100

Domestic Income 100

Total Income 200

Special expenditure -20

Net Income 180

Personal allowance -30

Income subject to tax 150

Amount to be exempt? 100? 90? 75? Other?

OECD leaves choice to Member States.


¬ “Credit” for “Passive Income”¬ State of residence is free to tax or

exempt foreign interest and dividends¬ Has to give deduction (=credit) for

underlying tax up to maximum amount

¬ Maximum deductible amount is the smaller of:

¬ Amount of domestic tax on interest or dividend

¬ Amount of tax actually paid in S

¬ Avoidance of Double-Non-TaxationConflicts of Qualification

Art 23A (2) OECD-MC„Where a resident of a Contracting State [R] derives items of income which, in accordance with the provisions of Articles 10 and 11, may be taxed in the other Contracting State [S], the first mentioned State [R] shall allow as a deduction from tax on the income of that resident an amount equal to the tax paid in that other State [S]. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from that other State [S].“

Art 23A (4) OECD-MC„The provisions of paragraph 1 shall not apply to income derived […] by a resident of a Contracting State [R] where the other Contracting State [S] applies the provisions of this Convention to exempt such income […] from tax or applies the provisions of paragraph 2 of Article 10 or 11 to such income.

Credit Method - Art 23B OECD-MC

¬ Article 23B – Credit Method¬ Credit/deduction given for the

amount of foreign tax, if taxed in accordance with the DTC.

¬ Limitation of Credit (ordinary credit)

¬ Tax actually paid in S¬ Tax due on the income derived

from S (“maximum deduction” –Anrechnungshöchstbetrag)

¬ “Per Country limitation”¬ Sparing Credit

¬ Deduction for tax not actually paid in S, but deemed to be paid – maintaining the incentive to invest in countries that lower their withholding tax (e.g. Brasil: deemed withholding tax of 25% on dividends, interest and royalties).

Art 23B (1) OECD-MC

„Where a resident of a Contracting State [R] derives income […] which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State [S], the first-mentioned State [R] shall allow:

a. As a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State;

b. […]

Such deduction […] shall not, however, exceed that part of the income tax […], as computed before the deduction is given, which is attributable […] to the income […] which may be taxed in that other State [S].

Part VSpecial and Final Provisions

Overview

¬ Special Provisions¬ Article 24 – Non-discrimination¬ Article 25 – Mutual agreement procedure¬ Article 26 – Exchange of information¬ Article 27 – Assistance in the collection of taxes¬ Article 28 – Members of diplomatic missions and consular posts¬ Article 29 – Territorial extension

¬ Final Provisions¬ Article 30 – Entry into force¬ Article 31 – Termination

Non-discrimination – Art 24 OECD-MC

¬ Structure of Art 24 OECD-MC¬ Para 1 – Non-discrimination because of nationality: no other or more

burdensome taxation or requirement connected therewith

¬ Para 2 – Non-discrimination of “stateless” persons

¬ Para 3 – Non-discrimination of PEs: No less favourable taxation for non-residents with a PE in the taxing State

¬ Para 4 – Non-discrimination of debtors: Deductibility of interest and royalties under the same circumstances when made to residents of the other State

¬ Para 5 – Non-discrimination of foreign shareholders: no other or more burdensome taxation levied on companies with non-resident shareholders

¬ Para 6 – Scope of application: discrimination may arise from any tax.

Non-discrimination – Art 24 OECD-MC

¬ Modus operandi of Art 24 OECD-MC¬ Applied after distributive rules the distributive rules themselves cannot lead to

discrimination (special issue: Art 9 OECD-MC?)¬ Directly targeting domestic taxation “second circle of protection” for the

taxpayer covering all kinds of taxes (wider scope than distributive rules!) and residents of neither Contracting State (outside the scope of Art 1 OECD-MC –comp. Art 24 Para 1)

¬ Does not normally prevent double taxation (but see Triangular Situations)¬ Other / more burdensome taxation prohibited alternative non-discriminatory

rules have to be applied by authorities.¬ Art 24 OECD-MC and EU Fundamental Freedoms

¬ Similar substantive scope of application in taxation many issues are covered by both sets of rules, but EU Freedoms cover much wider range of cases

¬ Interrelations EU Freedoms do not overlay Art 24, but provide an additional remedy for taxpayers within the EU; no direct impact of EU Freedoms on treaty non-discrimination; but Art 24 may effectively extend Fundamental Freedoms to third State’s nationals under certain conditions.

¬ Important differences: No concept of justification for Art 24 OECD-MC!

Part VISpecial Issues

Overview

¬ Beneficial Ownership and Abuse of Treaties¬ “Treaty Shopping”¬ Reports on “Double Taxation Conventions and the Use of Base Companies”

(1986), “Double Taxation Conventions and the Use of Conduit Companies” (1986), and “Restricting the Entitlement to Treaty Benefits” (Issues in International Taxation No. 8, Paris 2002)

¬ Art 1 Paras 7 – 26 OECD Comm¬ Conflicts of Qualification

¬ Report on “The Application of the OECD Model Tax Convention to Partnerships”(Issues in International Taxation No. 6, Paris 1999)

¬ Art 1 Paras 2 – 6.7 OECD Comm¬ Art 23 Paras 32.1 – 32.7 OECD Comm

¬ Collective Investment Vehicles¬ Reports on “The Granting of Treaty Benefits with Respect to the Income of

Collective Investment Vehicles” (2009) and on “Possible Improvements to Procedures of Tax Relief for Cross-Border Investors” (2009)

¬ Triangular Situations¬ Report on “Triangular Cases” (1992)¬ Art 24 Paras 62 et seq. OECD Comm

Abuse of Treaties

¬ OECD Comm 2003¬ Report on “Double Taxation Conventions and the Use of Conduit Companies”

(1986) Amendment of Art 10 Para 12.1 and Art 11 Para 10 OECD Comm¬ Report on „Restricting the Entitlement to Treaty Benefits“ (in: Issues in

International Taxation No. 8, Paris 2002) Amendment of Art 1 Para 7 – 26 OECD Comm and OECD Comm on Art 10, 11 and 12

Abuse of Treaties

¬ OECD Comm 2003¬ “Other forms of abuse of tax treaties (e.g. the use of a base company) and

possible ways to deal with them, including "substance-over-form", “economic substance” and general anti-abuse rules have also been analysed, particularly as concerns the question of whether these rules conflict with tax treaties, which is the second question mentioned in paragraph 9.1 above.” (Art 1 Para 22)

¬ “Such rules are part of the basic domestic rules set by domestic tax laws for determining which facts give rise to a tax liability; these rules are not addressed in tax treaties and are therefore not affected by them. Thus, as a general rule and having regard to paragraph 9.5, there will be no conflict. For example, to the extent that the application of the rules referred to in paragraph 22 results in a recharacterisation of income or in a redetermination of the taxpayer who is considered to derive such income, the provisions of the Convention will be applied taking into account these changes.“ (Art 1 Para 22.1)

¬ “Whilst these rules do not conflict with tax conventions, there is agreement that Member countries should carefully observe the specific obligations enshrined in tax treaties to relieve double taxation as long as there is no clear evidence that the treaties are being abused.“(Art 1 Para 22.1)

Abuse of Treaties

¬ Beneficial Ownership and Abuse of Treaties¬ “Treaty Shopping” Structure an international transaction or operation so as to

take advantage of a particular treaty¬ Response Strategies

¬ Specific Anti-Abuse Clauses (LoB, business purpose, etc)¬ Beneficial Ownership¬ Anti-Abuse Principle¬ Domestic Law

Abuse of Treaties

¬ Measures to Consider in Combating Treaty Abuse¬ Specific Anti-Avoidance Rules

¬ Specific Anti-Avoidance Rules of Tax Treaties¬ “Beneficial Ownership”-Requirements Art 10, 11, and 12¬ Conduit Company Cases

¬ “Look-Through” Provisions Art 1 Para 13 and 14 OECD Comm¬ “Subject to Tax”-Clauses Art 1 Para 15 and 16 OECD Comm¬ “Channel Approach” Art 1 Para 17 and 18 OECD Comm

¬ But: “Bona Fide” Exemptions, e.g., general bona fide provision, activity provision, stock exchange provision Art 1 Para 19 OECD Comm

¬ “Limitation on Benefits”-Clauses Art 1 Para 20 OECD Comm¬ Provisions Aimed at Entities Benefiting from Preferential Tax Regimes Art 1 Para 21 – 21.2 OECD Comm

¬ Provisions Aimed at Particular Types of Income Art 1 Para 21.3 OECD Comm

¬ Anti-Abuse Rules Dealing with Source Taxation of Specific Types of Income (“The Purpose Based Test ”) Art 1 Para 21.4 OECD Comm

¬ Treaties and Specific Domestic Law Anti-Avoidance Rules

Abuse of Treaties

¬ Measures to Consider in Combating Treaty Abuse¬ General Anti-Avoidance Rules (GAARs)

¬ Treaties and Legislative GAAR Rules¬ “… to the extent these anti-avoidance rules are part of the basic domestic rules

set by domestic tax laws for determining which facts give rise to a tax liability, they are not addressed in tax treaties and are therefore not affected by them. Thus, as a general rule, there will be no conflict between such rules and the provisions of tax conventions.” Art 1 Para 9.2 OECD Comm

¬ Treaties and Judicial Rules¬ Rules Inherent in Tax Treaties

¬ “… a proper construction of tax conventions allows them to disregard abusive transactions, such as those entered into with the view to obtaining unintended benefits under the provisions of these conventions. This interpretation results from the object and purpose of tax conventions as well as the obligation to interpret them in good faith (see Article 31 of the Vienna Convention on the Law of Treaties).” Art 1 Para 9.3 OECD Comm

¬ “A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.” Art 1 Para 9.5 OECD Comm

Abuse of Treaties

¬ Beneficial Ownership¬ Art. 10, 11 and 12 OECD-MC OECD MC 1977 (“agent or nominee”)¬ “Double Taxation Conventions and the Use of Conduit Companies” (1986)¬ OECD Comm Update 2003¬ Concept of “Beneficial Ownership” not defined in the OECD-MC OECD

Comm (Art 10 Para 12 - 12.1):¬ “The term “beneficial owner” is not used in a narrow technical sense, rather,

it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.” (Art 10 Para 12 OECD Comm)

¬ Agent or Nominee (Art 10 Para 12.1 OECD Comm)¬ “Conduit” for another person who in fact receives the benefit of the income

concerned Report on “Double Taxation Conventions and the Use of Conduit Companies” (1986) Conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties (Art 10 Para 12.1 OECD Comm)

Abuse of Treaties

¬ Beneficial Ownership¬ Art. 3 Abs. 2 OECD-MC — Domestic Law Meaning?¬ International Fiscal Meaning?

¬ Meaning according to Anglo-American Terminology?¬ Narrow Meaning according to OECD Commentary (“agents”, “nominees”,

“conduit companies”)?¬ General principle designed to counter Abuse of Tax Treaties?

Abuse of Treaties

¬ International Case Law¬ Aiken Industries, Inc. v. Commissioner, 56 TC 925 (US Tax Court, 1971)¬ Royal Dutch, BNB1994/217 (Dutch Hoge Raad 1994)¬ SDI Netherlands B.V., 107 TC 10 (US Tax Court, 1996)¬ V. SA, SRK 200-055 (Eidgenössische Steuerrekurskommission 28 February

2001)¬ A Holding ApS, 2A.239/2005 (Swiss Federal Court, 28 November 2005) ¬ Ministre de l’Econcomie, des Finances et de l’Industrie c. Socété Bank of

Scotland, No. 283314 (Conseil d’Etat 29 December 2006), overruling Ministre de l’Econcomie, des Finances et de l’Industrie c. Socété Bank of Scotland, 01PA04068 (Cour Administrative d’Appel de Paris 23 May 2005)

¬ Indofood International Finance Ltd v. JP Morgan Chase Bank N.A. London Branch [2006] EWCA Civ 158 (England and Wales Court of Appeal 2 March 2006), overruling Indofood International Finance Ltd v. JP Morgan Chase Bank N.A. London Branch [2005] EWHC 2103 (Ch) (England and Wales High Court 7 October 2005)

¬ Prévost Car Inc. v. The Queen, 2008 TCC 231 (Tax Court of Canada 22 April 2008), affirmed by The Queen v. Prévost Car Inc. 2009 FCA 57 (Federal Court of Appeal 26 February 2009)

¬ Pending: Velcro Canada Inc. v. Her Majesty the Queen, 2007-1806 (IT)G.

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ Aiken Industries, Inc. v. Commissioner, 56 TC 925 (1971)

• Term “received by” means interest received by a corporation as its own and not with the obligation to transmit it to another

• The words “received by” refer not merely to the obtaining of physical possession on a temporary basis of funds representing interest payments from a company of a contracting state, but contemplate dominion and control over the funds

• Industrias was a “collection agent”, a “conduit for the passage of interest”

• Different: Northern Indiana Public Service Co. v. Commissioner, 105 TC 341 (1995) (affd 115 F.3d 506) —Finance subsidiary engaged in “substantive business activity” that resulted “in significant earnings” (= spread)

ECL (Bahamas)Loan @ 4%

Aiken (US) CCN (Ecuador)

Industrias (Honduras)

Note @ 4%Interest

(DTC: 0%)

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ Royal Dutch, BNB 1994/217 (Dutch Hoge Raad 1994)

• UK Co. had become the owner of the coupons and after the purchase it had the right of free disposal of the coupons and of their proceeds

• UK Co. did not act as an agent or nominee for other persons and therefore UK Co. had to be considered as the beneficial owner of the dividends

• Beneficial ownership only excluded if there is a contractual obligation to pay the largest part of the income to a third party

• The fact that the Dutch refund form required the taxpayer to be also the owner of the underlying shares had no relevance according to the Court because there was nothing stating so in the relevant treaty

UK

Sale of dividend coupon (100) for 80

LUX

Royal Dutch Oil (NL)

Dividend(DTC: 15%

instead of 25%)

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ SDI Netherlands B.V., 107 TC 10 (US Tax Court, 1996)

• No “look-trough”• Licensing activities, schedules of

royalty payments provided for a spread, compensated NL Co. for its efforts

• Royalties have seperate status and hence are not US source income

• Avoids a “cascading royalty problem”, whereby multiple withholding taxes could be paid on the same royalty payment as it is transferred up the chain

SDI Ltd. (Bermuda)

P (NL)

SDI Bermuda

SDI (US)Royalties(DTC: 0%)

Royalties

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ V. SA, SRK 200-055 (Eidgenössische Steuerrekurskommission, 28 February

2001)

UK

I. SA (CH)

Dividends

UK

V. SA (LUX)Interest,

unspecified charges

• V. SA considered to be a conduit and not beneficial owner

• Interest payments and other unspecified charges are exactly in the amount of the dividends received from I. SA

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ A Holding ApS, 2A.239/2005 (Swiss

Federal Court, 28 November 2005)

• DEN Co. Has neither facilities nor personnel, director is shareholder of the structure and works from the Bermudas

• The abuse of rights doctrine is inherent to all treaties – VCTL (even for DTCs concluded before the VCTL entered into force)

• The new OECD Comm apply – Conduit companies should not be entitled to treaty benefits

• Left open whether DEN Co. was the beneficial owner

• The DEN Co. is a letter box company

C Ltd. (Guernsey)

F AG (CH)

Dividend A Holding ApS (DEN)

D Ltd. (Bermudas)

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ Ministre de l’Econcomie, des Finances et de l’Industrie c. Socété Bank of

Scotland, No. 283314 (French Conseil d’Etat, 29 December 2006)

France

DividendAvoir Fiscal

US Co.

Bank (UK)

Usufruct

Compensation• UK Bank received dividends

subject to 25% withholding tax and filed an application for a refund of avoir fiscal and withholding tax under the UK-FR tax treaty

• French Supreme Court denied the FR-UK tax treaty benefits to the UK Bank based on abuse of law principle, considering that UK bank was not the beneficial owner of dividend and the structure was a loangranted by UK Bank to US Co.

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ Indofood International Finance Ltd [2006] EWCA Civ 158 (England and

Wales Court of Appeal, 2 March 2006)

SPV (MU) (Issuer)

Restructuring

Indofood (IND)

SPV (NL)

Debt and Interest

Bond Holders

JP Morgan (Trustee)

Bond Holders

JP Morgan (Trustee)

Debt and Interest

• SPV (NL) was not beneficial owner of interest under the IND-NL treaty (under an international fiscal meaning)

• Although SPV (NL) earned a small spread and satisfied the substance and risk requirements under Dutch tax law, it had only limited powers over the interest income

• It did not derive any direct benefit from interest received and was obliged to use the interest received from note-holders to pay the interest due to the parent within tight payment dates

Abuse of Treaties

¬ Beneficial Ownership – Case Law¬ Prévost Car Inc., 2008 TCC 231 (Tax Court of Canada, 22 April 2008)

Volvo (SE)

Prévost Car Inc. (CAN)

Dividends

Henlys (UK)

Prévost Holding (NL)

• “Beneficial owner” of dividends means the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control over the income

• When corporate entities are concerned, it is the corporation that is the beneficial owner of its assets and the income therefrom unless the corporation is a conduit

• A conduit for another person must have no discretion as to the use or application of funds it receives or acts only on the instructions of another person without any right to do otherwise

• Appellate Court confirmed that the Court correctly based its decision on OECD Conduit Report and the 2003 OECD Comm

Conflicts of Qualification

¬ Conflicts of Qualification and Attribution¬ Application of the OECD MC to Partnerships

¬ Report on “The Application of the OECD Model Tax Convention to Partnerships” (Issues in International Taxation No. 6, Paris 1999)

¬ OECD Comm Update 2003¬ Art 1 Paras 2 – 6.7 OECD Comm¬ Art 4 Para 8.7 OECD Comm¬ Art 23 Paras 69.1 – 69.3 OECD Comm


¬ “Partnership Report”¬ Main Questions

¬ Is a partnership a “person” under Art 3 OECD MC? Yes¬ Is a partnership a “resident of a Contracting State” under Art 4 OECD MC? Depends on whether “liable to tax” ( transparency)

¬ The partner’s entitlement to treaty benefits when the partnership is not a resident? Yes

¬ What if one State treats the partnership as a taxable entity?


¬ “Partnership Report”¬ Three Main Situations

¬ Situation 1 — The entity is considered by both Contracting States as “intransparent” Art 4(1), (3) OECD MC

¬ Situation 2 — The entity is considered by both Contracting States as “transparent”

¬ Partners should be entitled to treaty benefits (under the DRC between their residence State and the source State) to the extent that the partnership’s income is allocated to them for the purposes of taxation in their State of residence (Art 1 Paras 5, 6.4 and Art 4 Para 8.7 OECD Comm)

¬ Situation 3 — The entity is considered by one Contracting State as “intransparent”, by the other Contracting State as “transparent”

¬ Core issue in the Report on “The Application of the OECD Model Tax Convention to Partnerships” (Issues in International Taxation No. 6, Paris 1999)


Main Issues OECD Partnership Report Contrary Position

Relevance of Partnership‘s

State‘sTreatment for

the Source State

Source State is ”bound” by the qualification of the partnership‘s

State as “intransparent”, irrespective of the partners’

residence (Art 1 Para 5, 6.3 OECD Comm)

The State that “applies” the DTC has to determine who “receives”

income, treatment by another State not relevant (“attribution”

versus “treaty entitlement”)

Identity of Taxpayers –Source State

Source State has to take intoaccount to whom income is

attributed by the partnership‘sState (“paid to”, “derived by”) (Art 1

Para 6.4 OECD Comm)

Source State‘s has to determine who “receives” income

Identity of Taxpayers –

Partner‘s State

Partner‘s State has to grant reliefto partners even if the partnership is considered intransparent and is hence taxed by the source State (Art 23 Para 69.2 OECD Comm)

Identity of taxable subjects is necessary, partner‘s State not required to provide relief (i.e., avoid juridical double taxation)


“Partnership Report” – Bilateral Situations – The entity is considered by both Contracting States as “transparent” (PSR Ex 1)¬ Treatment in the partnership’s State = partner’s State

¬ Partners may claim relief¬ Treatment in the source State

¬ Partners will be considered as taxpayers (“paid to”, “derived by”), source State has to grant benefits under the DTC with the partner’s State (Art 1 Para 6.4 OECD Comm; PSR Ex 1)

Income(e.g., interest)

“Partnership”


“Partnership Report” – Bilateral Situations – The entity is considered as “transparent” by the partnership’s State and as “intransparent” by the source State (PSR Ex 4)¬ Treatment in the partnership’s State = partner’s State

¬ Partnership not a resident of the partnership’s State, may not claim treaty benefits (Art 1 Para 5 OECD Comm)

¬ Partners may claim relief, even though the source State has levied the tax on partnership’s income

¬ Treatment in the source State ¬ Partners may claim treaty benefits with respect to their

share of partnership income under the Conventions entered into by their residence States (Art 1 Paras 6.3, 6.4 and Art 4 Para 8.7 OECD Comm; PSR Ex 4)

Income(e.g., royalties)

“Partnership”


“Partnership Report” – Bilateral Situations – The entity is considered as “intransparent” by the partnerships’sState and as “transparent” by the source State (PSR Ex 5)¬ Treatment in the partnership’s State = partner’s State

¬ Partnership is a resident of the partnership’s State, may cleam treaty benefits (Art 1 Para 5 OECD Comm; PSR Ex 5)

¬ Must provide relief, even though taxation was – from the source State’s perspective – on the partner’s income

¬ Treatment in the source State ¬ Partnership may claim treaty benefits (Art 1 Para 5 OECD

Comm; PSR Ex 5)


“Partnership”


“Partnership Report” – Bilateral Situations – The entity is considered as “intransparent” by the partner’s State and as “transparent” by the partnership’s State (PSR Ex 6)¬ Treatment in the partner’s State

¬ Will not tax income earned by the “partnership”, double tax relief for “distributions” if partnership’s State taxes permanent establishment profits (?)

¬ Treatment in the source State = partnership’s State ¬ Source State not required to give treaty benefits for the

royalties (PSR Ex 6 – Implicit “Subject-to-Tax”-Clause!)¬ Alternative Solution: Source State has to grant treaty

benefits to partners Double Non-Taxation


“Partnership”


“Partnership Report” – Bilateral Situations – The entity is considered as “transparent” by the partner’s State and as “intransparent” by the partnership’s State (PSR Ex 17)¬ Treatment in the partner’s State

¬ Partner’s State has taxing rights regarding the earning of the income, but exempts or gives credit (PSR Paras 135, 137)

¬ No credit for tax on distribution (not taxed, no credit; PSR Para 136)

¬ Treatment in the source State = partnership’s State ¬ Partnership is a resident taxpayer, no limitation by, e.g.,

Art 12 (PSR Ex 17), irrespective of how the partner‘sState treats the situation (PSR Para 131)

¬ Alternative Solution: Under general principles, the source State should take into account the treatmentin the partner‘s State and apply, e.g., Art 12 OECD MC (PSR Para 132)

¬ Subsequent distributions usually taxed as dividends (Art 23 Para 69.1 OECD Comm)

Income(e.g., royalties,

business income)

“Partnership”


“Partnership Report” – Bilateral Situations –The entity is considered as “transparent” by one partner’s State and as “intransparent” by the partnership’s State (PSR Ex 6)¬ Treatment in the partnership’s State

¬ Partnership is a resident of the partnership’s State, may, in principle, claim treaty benefits (Art 1 Para 5 OECD Comm)

¬ Double tax relief for source State taxation¬ Treatment in the source State

¬ Source State not required to give treatybenefits for the share of the royaltiesattributed to source State residents (Art 1 Para 6.1; PSR Ex 17), treaty relief only for share of royalties attributed to residents of the other State

¬ Avoidance of double taxation for tax levied in partnership‘s State under Art 23 (PSR Para 129)


“Partnership”


“Partnership Report” – Trilateral Situations – The entity is considered by all Contracting States as “transparent” (PSR Ex 2)¬ Treatment in the partnership’s State

¬ Partnership not a “resident”, may not claim treaty benefits (Art 1 Para 5 OECD Comm)

¬ Treatment in the source State ¬ Partners will be considered as taxpayers (“paid to”), source

State has to grant benefits under the DTC with the partner’s State (PSR Ex 2)

¬ Treatment in the partner’s State¬ Partners may claim relief

Income(e.g., interest)

“Partnership”


“Partnership Report” – Trilateral Situations – The entity is considered by all Contracting States as “intransparent” (PSR Ex 8)¬ Treatment in the partnership’s State

¬ Partnership is a “resident” of the partnership’s State, may cleam treaty benefits (Art 1 Para 5 OECD Comm; PSR Ex 8), distributions will usually be taxed as dividends (Art 23 Para 69.1 OECD Comm)

¬ Treatment in the source State ¬ Partnership may claim treaty benefits, the DTC between

the partnership‘s State and the source State restricts the latter‘s taxing rights (PSR Ex 8), but, e.g., no reduced“company” rate under Art 10 OECD-MC (partnerships excluded!)

¬ Same result, if source State would treat partnership as transparent (PSR Para 72)

¬ Treatment in the partner’s State¬ Partners are not entitled to the benefits of the DTC

between the partner‘s State and the partnership State in respect of the partnership income, as they are not liable to tax on that income (PSR Ex 8)

Income(e.g., dividend)

“Partnership”


“Partnership Report” – Trilateral Situations – The entity is considered by at least one Contracting State as “intransparent”, by the other Contracting State(s) as “transparent” Several Types of Conflicts¬ Type 1 — Entity is “liable to tax” (subject to unlimited tax

liability) in its residence State, but treated as transparent in the partner’s State and the source State

¬ Treatment in the partnership’s State ¬ Partnership is a “resident” of the partnership’s State,

may cleam treaty benefits (Art 1 Para 5 OECD Comm, PSR Ex 8, 9), distributions will usually be taxed as dividends (Art 23 Para 69.1 OECD Comm)

¬ Treatment in the source State ¬ Partnership is entitled to treaty benefits, irrespective

of residence of the partners (Art 1 Para 5 OECD Comm, PSR Para 54 and Ex 5, 8 and 9) – Same result if source State treats the partnership as intransparent (PSR Para 73)

¬ If the source State also has a tax treaty with the partner’s State, it has to apply the more beneficial treaty (Art 1 Para 6.5 OECD Comm; PSR Ex 9)

Income (e.g., dividend)

“Partnership”


“Partnership Report” – Trilateral Situations – The entity is considered by at least one Contracting State as “intransparent”, by the other Contracting State(s) as “transparent” Several Types of Conflicts¬ Type 1 — Entity is “liable to tax” (subject to unlimited tax

liability) in its residence State, but treated as transparent in the partner’s State and the source State

¬ Treatment in the partner’s State¬ Taxation of partner’s share of income is not limited

(Art 1 Para 6.1 OECD Comm), but exemption or credit for partnership’s State’s tax on generated income (Art 23 Para 69.2 OECD Comm), “dividends” irrelevant (not taxed, so no credit; Art 23 Para 69.3 OECD Comm)

Income (e.g., dividend)

“Partnership”


“Partnership Report” – Trilateral Situations – The entity is considered by at least one Contracting State as “intransparent”, by the other Contracting State(s) as “transparent” Several Types of Conflicts¬ Type 2 — Entity is not “liable to tax” (subject to unlimited tax

liability) in its residence State and is treated as transparent by the source State, but treated as intransparent by the partner’s State

¬ Treatment in the partnership’s State ¬ Partnership not a “resident”, may not claim treaty

benefits (Art 1 Para 5 OECD Comm, PSR Ex 7)¬ May tax profits of a permanent establishment, no

double tax relief (but: non-discrimination—Art 24 Para 67 OECD Comm)

¬ Treatment in the source State ¬ Neither the partnership nor the partners may claim

treaty benefits, source State is “entitled to tax the income without restriction” (Art 1 Para 6.2 and 6.5; PSR Ex 3, 6, 7 and Para 70 – Implicit “Subject-to-Tax”-Clause!)

¬ Same result, if source State treats the partnership asintransparent (PSR Ex 7)

Income(e.g., business

profits, dividends)

“Partnership”



liability) in its residence State and is treated as transparent by the source State, but treated as intransparent by the partner’s State

¬ Treatment in the partner’s State¬ Will tax partnership’s “distributions” under Art 21

OECD MC, double tax relief for “distributions” if partnership’s State taxes permanent establishment profits (?)

¬ No double tax relief for source State’s withholding taxes, since there is no taxation of partners in the source State from the partner’s State’s perspective (?) Income

(e.g., business profits, dividends)

“Partnership”



liability) in its residence State and is treated as transparent by the partner’s State, but treated as intransparent by the source State

¬ Treatment in the partnership’s State ¬ Partnership not a “resident”, may not claim treaty

benefits (Art 1 Para 5 OECD Comm)¬ Treatment in the source State

¬ Partners may claim treaty benefits with respect to their share of partnership income under the Conventions entered into by their residence States (Art 1 Paras 6.3, 6.4 and Art 4 Para 8.7 OECD Comm; PSR Ex 4)

¬ Same result, if source State considers partnership as transparent (PSR Ex 2)

¬ Treatment in the partner’s State¬ Partners may claim treaty benefits (Art 1 Paras 5, 6.4,

6.5 and Art 4 Para 8.7 OECD Comm)

Income

“Partnership”


¬ Conflicts of Qualification¬ A conflict of qualification is given, where two treaty countries apply different

provisions of their treaty to one and the same tax case.¬ Three Types

¬ Facts and circumstances are evaluated differently by the two countries¬ Different treaty provisions are applied because of a different interpretation

of the treaty¬ Different treaty provisions are applied as a result of diverging domestic laws

¬ OECD MC and Comm Update 2003¬ Art 23 Paras 32.1 – 32.7 OECD Comm Interpretation of Art 23 OECD

MC — Treaty Relief in cases of Qualification Conflicts based on differences in domestic laws

¬ Insertion of Art 23A(4) OECD MC and Art 23 Paras 56.1 – 56.3 Avoidance of Double-Non Taxation that would result from a disagreement on the facts or the interpretation of the DTC

¬ If no solution: MAP

Conflicts of QualificationArt 23A(1) OECD-MC

“Where a resident of a Contracting State derivesincome or owns capital which, in accordance with theprovisions of this Convention, may be taxed in theother Contracting State, the first-mentioned State shall,subject to the provisions of paragraphs 2 and 3, exemptsuch income or capital from tax.”

¬ Double Taxation – Different Qualification in Domestic Law

¬ State R¬ “Hybrid” = Corporation¬ Art 13(5) OECD-MC Exclusive Taxation in

Residence State (“complete” distributive rule!)¬ State S

¬ “Hybrid” = Transparent¬ Art 13(2) OECD-MC Taxation in PE State

¬ Solution – State R must exempt, since State S has taxed “in accordance with the provisions of this Convention” (Art 23 Para 32.4 OECD Comm; PSR Ex 14)


“Where a resident of a Contracting State derivesincome or owns capital which, in accordance with theprovisions of this Convention, may be taxed in theother Contracting State, the first-mentioned State shall,subject to the provisions of paragraphs 2 and 3, exemptsuch income or capital from tax.”

¬ Double Taxation – Different Interpretation of the Tax Treaty

¬ State R¬ Property is not Part of PE‘s Assets¬ Art 13(5) OECD-MC Exclusive Taxation in

Residence State¬ State S

¬ Property is not Part of PE‘s Assets¬ Art 13(2) OECD-MC Taxation in PE State

¬ Solution – State R need not exempt, since the conflict is based on a diverging treaty interpretation (Art 23 Para 32.5 OECD Comm) MAP


“The provisions of paragraph 1 shall not apply toincome derived or capital owned by a resident of aContracting State where the other Contracting Stateapplies the provisions of this Convention to exemptsuch income or capital from tax or applies theprovisions of paragraph 2 of Article 10 or 11 to suchincome.”

¬ Double Non-Taxation – Domestic Law¬ State S May tax according to Art 13(1), but

exempts under domestic law¬ Solution – State R must nevertheless exempt

Effective Double-Non-Taxation (Art 23 Para 56.2 OECD Comm) E Contrario Art 23A(4) (“this Convention”)


“The provisions of paragraph 1 shall not apply toincome derived or capital owned by a resident of aContracting State where the other Contracting Stateapplies the provisions of this Convention to exemptsuch income or capital from tax or applies theprovisions of paragraph 2 of Article 10 or 11 to suchincome.”

¬ Double Non-Taxation – Different Interpretation of the Tax Treaty

¬ State R¬ “Hybrid” = Transparent¬ Art 13(2) OECD-MC Taxation in PE State

¬ State S ¬ “Hybrid” = Corporation¬ Art 13(5) OECD-MC Exclusive Taxation in

Residence State¬ Solution – State R need not exempt, since State

S applies “the provisions of this Convention” to exempt (Art 23A(4) OECD-MC)


Result:Double Taxation

Result: Double Non-Taxation

Reason for Conflict:

Domestic Law

Art 23A(1) OECD-MCDouble Taxation

Single Taxation ( Residence State must

Exempt)

E contrarioArt 23A(4) OECD-MA

Double Non-Taxation Double Non-Taxation

Reason for Conflict:

Tax Treaty

Art 23A(1) OECD-MADouble Taxation

Double Taxation ( MAP)

Art 23A(4) OECD-MADouble Non-Taxation

Single Taxation ( Residence State need

not Exempt)

Collective Investment Vehicles

¬ Collective Investment Vehicles¬ Reports on “The Granting of Treaty Benefits with Respect to the Income of

Collective Investment Vehicles” (2009) and on “Possible Improvements to Procedures of Tax Relief for Cross-Border Investors” (2009)

¬ Definition of CIV¬ The term “CIV” is limited to funds that are widely-held, hold a diversified

portfolio of securities and are subject to investor-protection regulation in the country in which they are established (Report Para 4) – Not included: Private Equity Funds, Hedge Funds, Trusts!


¬ Collective Investment Vehicles

CIV“Manager”

Securities

Securities

Intermediaries

Paying Agents


¬ Collective Investment Vehicles¬ Issues under Existing Treaties

¬ Is the CIV a person? Depends on legal form (company, joint ownershipvehicles, trusts)

¬ Is the CIV a “resident of a Contracting State”? Depends on whether“liable to tax” ( transparency)

¬ Is the CIV the “beneficial owner” of the income? Majority: Yes, if CIV is a “person” and a “resident”, so long as the managers of the CIV have the discretionary power to mangage the assets on behalf of the holders of interests in the CIV

¬ Investors’ treaty entitlement when CIV does not qualify? ¬ Relief for investors (category of “good investors”)? Administrative

difficulties? ¬ CIV claims on behalf of investors (same-country or third-country

investors)? Treaty rate (CIV-State DTC with source State versus investor-State DTC with source State)?

¬ Double tax relief (mainly for dividend withholding tax in the source State)?


¬ Collective Investment Vehicles¬ Issues under Future Treaties

¬ Inclusion of optional provisions in OECD Comm on Art 1 Proposed Art 1 Paras 6.8 – 6.27 OECD Comm

¬ Treat CIV as a “person”, “resident” and “beneficial owner” (Art 1 Para 6.15 OECD Comm), determined also under MA

¬ Provide treaty relief to the CIV ¬ … to the extent that residents of the CIV’s State are owners of

the beneficial interests in the CIV (Art 1 Para 6.22 OECD Comm)¬ … to the extent that “equivalent beneficiaries” are owners of

the beneficial interests in the CIV (Art 1 Para 6.18 OECD Comm)¬ “Equivalent beneficiaries” include: (a) residents of the CIV’s State

and (b) residents of other States which with the source State has a DTC with comprehensive EOI, under which the resident is entitled to claim benefits which are at least as beneficial as in the DTC between the CIV’s State and the source State

¬ … if a certain threshold of treaty-eligible investors (either residents of the CIV’s State or “equivalent beneficiaries”) is met (Art 1 Para 6.23 OECD Comm)


¬ Collective Investment Vehicles¬ Issues under Future Treaties

¬ Inclusion of optional provisions in OECD Comm on Art 1 Proposed Art 1 Paras 6.8 – 6.27 OECD Comm

¬ Alternatively: Allow CIV to claim benefits on behalf of investors (to ensure lower rates applicable to investors, e.g., pension funds) (Art 1 Para 6.24 OECD Comm)


¬ Collective Investment Vehicles¬ “Possible Improvements to Procedures of Tax Relief for Cross-Border Investors”

(2009) ¬ Recommendations

¬ Countries should provide relief at source (instead of refund procedures —Alternatively: “Quick refund”-procedures at the level of withholding agents)

¬ Authorized intermediaries should be able to make “pooled claims” for benefits on behalf of their customers (rather than provide investor-specific information)

¬ States should improve information reporting and automatic exchange of information

¬ Standardized procedures to be performed by Authorized intermediaries in terms of establishing investor’s eligibility for treaty benefits

¬ Establish compliance with procedures¬ Reduce or eliminate reliance on certificates of residence (replaced by

investor self-declarations)¬ Increased use of electronic transmissions

Triangular Situations

¬ Triangular Situations¬ Report on “Triangular Cases” (1992)¬ Art 24 Pars 62 et seq. OECD Comm

¬ Main Issues¬ PE as “Recipient” of Dividends, Interest and Royalties¬ PE as “Payor” of Interest¬ Dual Resident Company as “Payor” of Dividends, Interest or Royalties¬ Dual Resident Company as “Recipient” of Dividends, Interest or Royalties


¬ PE as “Recipient” of Dividends, Interest and Royalties

¬ PE State (P)¬ Treaty Non-Discrimination

Art 24(3) P-R DTC Art 24 Para 49 et seq. OECD Comm

¬ Amount of Credit?¬ Tax in R-S DTC < P-S DTC Credit in the amount of R-S DTC rate

¬ Tax in R-S DTC > P-S DTC Credit in the amount of P-S-DTC rate (double taxation remains)

¬ Source State (S)¬ Reduction of withholding tax rate

to rate under P-S DTC?¬ Residence State (R)

¬ Exemption vs. Credit



¬ Treatment in the Residence State¬ Credit Method

R

PEInterest (100)

State R: 20%State P: 10%

300

200

State R State P State SIncome in R 300Income in P 200 200

Interest from S 100 100 100Σ 600 300 100

Tax Rate @ 40% @ 30% @ 20%Tax 240 90 20

Credit for S Tax 20 10Credit for P Tax 80 80

Tax 140 80 20



¬ Treatment in the Residence State¬ Exemption Method

R

PEInterest (100)

State R: 20%State P: 10%

300

200

State R State P State SIncome in R 300Income in P 200 200

Interest from S 100 100 100Σ 600 300 100

Tax Rate @ 40% @ 30% @ 20%Tax 240 90 20

Exemption for P Profits 120

Credit for S Tax ??? 10Tax 120/140 80 20

No credit (or matching credit) for S State tax ifincome is part of exempt PE profits — DutchHoge Raad 8 February 2002, Case 3615, and 11 May 2007, Case 42385 and Case 42386


¬ PE as “Payor” of Interest¬ Double Source (R and P) under

Art 11(5) OECD-MC¬ State R Art 11(5) first

sentence of the B-R DTC¬ State P Art 11(5) second

sentence of the B-P DTC¬ Possible Solutions

¬ Art 11(5) P-R DBA as Source Tie-Breaker to the Benefit of P Source Taxation according to the B-P DTC (Art 11 Para 29 OECD Comm)

¬ “Australian Clause” (Art 11 Para 30 OECD Comm) Different Wording of Art 11(5) second sentence of the B-R DTC


¬ Dual Resident Company as “Payor” of Dividends, Interest or Royalties

¬ Double Source and Double Withholding Taxation(W and L)

¬ Possible Solutions¬ Hunter Douglas Approach— Application of

Art 10(5) L-W DBA and Prohibition of “Extraterritorial Taxation” for State L (Hunter Douglas Ltd. v The Queen 79 DTC 5340 (FCTD))

¬ Impact of Tie-Breaker-Rule in W-L DTC on Other Tax Treaties

¬ Art 4(1) second sentence D-L DTC¬ Rev. Rul. 2004-76 (USA)¬ Since 2008: Art 4 Para 8.2 OECD Comm


¬ Dual Resident Company as “Recipient” of Dividends, Interest or Royalties

¬ Double Restriction of State S‘s Taxing Right (DTCs with W and L)?

¬ Possible Solutions¬ Most Beneficial Result for Taxpayer

“Stencil”¬ Impact of Tie-Breaker-Rule in W-L DTC on

Other Tax Treaties¬ Art 4(1) second sentence S-L DTC¬ Since 2008: Art 4 Para 8.2 OECD Comm

Thank You!

¬ Questions?

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