International Tax Planning and Prevention of Abuse. A Study under Domestic Tax Law, Tax Treaties and EC Law in relation to Conduit and Base Companies

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1 International Tax Planning and Prevention of Abuse A Study under Domestic Tax Law, Tax Treaties and EC Law in relation to Conduit and Base Companies Table of Contents PART ONE: THE USE OF CONDUIT & BASE COMPANIES IN INTERNATIONAL TAX PLANNING 1. CONDUIT COMPANIES 1.1. Treaty shopping Description of the term Treaty shopping in relation to conduit companies Basic features of Treaty Shopping in relation to conduit companies Form of the conduit: company or partnership? Tax considerations in setting up the conduit 1.2. Directive shopping Description of the term Directive shopping in relation to conduit companies Basic features of Directive shopping in relation to conduit companies Conditions to be eligible for the benefits of the Directives Tax considerations in setting up the conduit 1.3. Illustration Conduit structures set up to claim tax benefits in the Source State Directive shopping to organize an EU-Exit/Belgium: Source State Treaty shopping/belgium: Source State Directive shopping to organize an EU-Exit/Belgium: Conduit State Directive or Treaty Shopping: Same country holding-structure/ Belgium: Conduit State Treaty shopping/belgium: Residence State Conduit structures set up to claim tax benefits in the Residence State Directive Shopping/Belgium: Conduit State Directive Shopping to organize an EU-Entry/Belgium: residence State Conduit structures set up to claim tax benefits in the Conduit State ( Treaty shopping ) 2. BASE COMPANIES 2.1. Characteristics of a Base company and of a Base State Characteristics of a Base company General Base company: company or partnership? Characteristics of a Base State i

2 2.2. Use of base companies 2.3. Tax advantages aimed at by setting up a base company Sheltering of income in a low tax regime Tax deferral Recharacterization of the income upon repatriation/secondary sheltering 3. ILLUSTRATION 3.1. Belgium: Residence State of the controlling shareholders of the base company 3.2. Belgium: Source State of income flows to the base company PART TWO: PREVENTION OF ABUSE UNDER BELGIAN DOMESTIC LAW INTRODUCTION: SCOPE OF THE STUDY 1. THE (NON)-RECOGNITION OF A BELGIAN OR FOREIGN COMPANY OR OF ITS LEGAL ACTS FOR BELGIAN INCOME TAX PURPOSES 2. APPLICATION OF ANTI-AVOIDANCE PROVISIONS 2.1. Specific anti-avoidance provisions aimed at international tax avoidance Transfer pricing adjustments (Art. 26, Art. 207 and Art. 185 (2) BITC) Article 26 BITC (profit adjustment for abnormal or gratuitous advantages) Art. 185 (2) BITC ( Arm s length -principle) Disallowance of expenses/thin capitalization-rules Disallowance of deduction of certain payments to residents of tax havens or to beneficiaries of foreign preferential tax regimes (Art. 54 BITC) Thin capitalization-rules Art. 198, 11 BITC (interest paid to lenders enjoying a preferential tax regime) Art. 18, 4 BITC (interest paid to certain shareholders and directors) The disregarding of asset transfers to low tax-jurisdictions (Art. 344 (2) BITC) Anti-avoidance provisions relating to the participation exemption (Art. 202 and 203 BITC) Conditions relating to the shareholding in the subsidiary Subject to tax -requirement/anti-avoidance provisions Test one: The basic subject to tax -requirement Test two: A company based in a country whose general tax regime is considerably more favorable than the Belgian tax regime Test three: Financing, treasury and investment companies Test four: Companies with offshore income Test five: Companies with foreign branches Test six: Conduit companies Anti-avoidance provision relating to the interest withholding tax exemption (Art. 107 (2) 10 RDBITC) 2.2. The Belgian General Anti-Avoidance Rule ( the Belgian GAAR ) ii

3 Text and purpose of the Belgian General Anti-Avoidance Rule Scope of application of the Belgian General Anti-Avoidance Rule Interpretation of the Belgian General Anti-Avoidance Rule General: Overview of possible interpretations Textual interpretation Act or separate acts which together realize the same operation The legal characterization given by the parties to an act or to separate acts ( ) The legal characterization ( ) to an act ( ) is not binding on the tax authorities ( ) When that administration determines, by means of presumption or other proof admitted by Art. 340, thas this characterization aims at avoiding taxes Recharacterization of the legal act(s) Burden of proof of the taxpayer: Legitimate needs of a financial or economic nature PART THREE: CONDUIT & BASE COMPANIES PREVENTION OF ABUSE UNDER BELGIAN TAX TREATIES INTRODUCTION: SCOPE OF THE STUDY 1. THE RELATIONSHIP BETWEEN TREATIES AND DOMESTIC LAW IN BELGIUM 1.1. Belgium: a monistic country 1.2. International law prevails over domestic law: effect 2. THE INTERPRETATION OF BELGIAN TAX TREATIES 2.1. International law rules on treaty interpretation The Vienna Convention on the law of treaties: application in Belgium Article 31 VC: The general rule on treaty interpretation Art. 31 VC: Three interpretation principles/one integrated Interpretation method The three principles laid down in Art. 31 VC Interpretation in good faith Textual interpretation in accordance with the ordinary meaning is not a synonym for literal interpretation The requirement to take into consideration the treaty s object and purpose does not justify a teleological interpretation Article 32: Supplementary means of interpretation Art. 31 and 32 VC: No numerus clausus Conclusion 2.2. Application of domestic law to tax treaties Art. 3 (2) OECD MC: A rule on treaty interpretation included in the OECD MC Meaning of some of the expressions used in Art. 3 (2) OECD Any term not defined herein iii

4 The meaning of the undefined treaty term under the law of the State applying the treaty Static v. ambulatory interpretation? Limits to ambulatory interpretation: good faith and unless the context otherwise requires The relationship between Art. 3 (2) OECD MC and domestic anti-avoidance rules 2.3. Relevance of the OECD Commentary for the interpretation of tax treaties Position of the OECD Personal view Current Commentary Later Commentary Case law 3. DO TAX TREATIES AND THE BELGIAN TAX TREATIES IN PARTICULAR INCLUDE AN IMPLIED ANTI-ABUSE RULE OF GENERAL APPLICATION OR AN INTERPRETATION PRINCIPLE ACCORDING TO WHICH TREATY BENEFITS SHOULD NOT BE CONFERRED IN ABUSIVE CASES? 3.1. Art. 26 VC: a legal basis for construing an implied anti-abuse rule? Abuse of rights under international public law Tax treaties 3.2. Anti-abuse rule in tax matters: a general principle of international law? 3.3. An interpretation principle within Art. 31 VC according to which treaty benefits should not be conferred in abusive cases? The Guiding Principle formulated by the OECD The first component of the OECD s guiding principle: a main purpose of the transaction is to secure a tax benefit under a tax treaty The second component of the OECD s guiding principle: obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provision of the treaty The object and purpose of the OECD MC and tax treaties following the OECD MC The prevention of tax evasion and tax avoidance: an object and purpose of tax treaties? Observations and conclusion The stated object and purpose of Belgian tax treaties Object and purpose of the relevant treaty provisions Determination of the policy motives of Contracting States: some issues Each State sets its own policy Reciprocity: a fundamental principle of tax treaties policy Different State policies towards the same issue: the case of treaty shopping Belgium s policy towards treaty shopping Prevention of double non-taxation is, absent specific provisions, not a treaty purpose Analysis of international case law iv

5 Canada Australia The Netherlands & Switzerland Conclusions 4. APPLICATION OF DOMESTIC ANTI-AVOIDANCE RULES TO TAX TREATIES: POSITION OF THE OECD AND ANALYSIS OF CASE LAW 4.1. Position of the OECD OECD Commentary 1977 until OECD Commentary Conclusion 4.2. Analysis of international case law Belgium France The Netherlands Germany United States Canada Switzerland Austria Finland Conclusion 5. APPLICATION OF BELGIAN DOMESTIC ANTI-AVOIDANCE PROVISIONS TO TAX TREATIES: GENERAL OBSERVATIONS 5.1. Belgian tax treaties expressly allowing the application of domestic antiavoidance provisions 5.2. Belgian tax treaties not expressly allowing the application of domestic antiavoidance provisions: Negative implication? 6. APPLICATION OF BELGIAN DOMESTIC ANTI-AVOIDANCE PROVISIONS TO TAX TREATIES: DISCUSSION OF THE PROVISIONS 6.1. The Belgian GAAR Discussion of hypothetical cases Premeditated sale and repurchase of minority shares Earnings stripping and holding structures Conduit company Exemption of low or non-taxed foreign source income Ambulatory and concordant interpretation/subsequent practice 6.2. Thin capitalization -rules Compatibility of thin capitalization -rules with Art. 9 OECD MC The relevance of Art. 9 OECD MC for the issue of thin capitalization The consequences of Art. 9 (1) OECD MC being relevant The relationship between Art. 9 (1) OECD MC and Art. 10 and 11 OECD MC Testing the Belgian provisions against Art. 9 OECD MC Art. 26 BITC v

6 Art. 18, 4 BITC Art. 54 BITC Art. 198, 11 BITC The Belgian GAAR Compatibility of thin capitalization -rules with Art. 10 (3) and 11 (3) OECD MC Analysis of Art. 10 (3) and 11 (3) OECD MC Testing the Belgian thin capitalization -rules against Art. 10 (3) and 11 (3) OECD MC Art. 18, 4 BITC Art. 26, 54 & 198, 11 BITC The Belgian GAAR Compatibility of thin capitalization -rules with Art. 11 (6) OECD MC Object and purpose of Art. 11 (6) OECD MC Testing the Belgian thin capitalization -rules against Art. 11 (6) OECD MC Art. 18, 4 BITC (excessive interest) Art. 26 and 54 BITC Art. 198, 11 BITC Compatibility of thin capitalization -rules with Art. 24 (4) and (5) OECD MC Discussion of Art. 24 (4) and (5) of the OECD MC Art. 24 (4) OECD MC Art. 24 (5) OECD MC Discussion of the Belgian tax treaties Art. 24 (4) and (5) in Belgian tax treaties Testing of the Belgian thin capitalization -provisions against Art. 24 (4) and (5) of the Belgian tax treaties 6.3. CFC-legislation and Art. 344 (2) BITC Arguments for consistency of CFC-legislation with tax treaties The 1987 OECD Base Companies Report The 1992 OECD Commentary The 2003 OECD Commentary Arguments for inconsistency of CFC-legislation with tax treaties Court decisions on the questions of consistency of CFC-legislation with tax treaties United Kingdom France Finland Conclusion Personal view Entity method Fiction of earned income (transparency-approach) Fiction of a dividend distribution (Art. 10 OECD MC) Transactional method Attribution of tainted income (not as a deemed dividend) Attribution of a deemed dividend General conclusion vi

7 Art. 344 (2) BITC General observation Technical discussion Conflict with Art. 9 OECD MC? Conflict with Art. 7, or 21 OECD MC? 6.4. Participation exemption OECD MC Belgian tax treaties 6.5. Art. 107 (2) 10 RD BITC 7. TREATY PROVISIONS PREVENTING ABUSE OF TREATIES 7.1. The Beneficial ownership -Limitation Interpretation of the term paid to OECD Commentary Domestic law meaning under Art. 3 (2) OECD MC Interpretation of the term Beneficial owner History and background Domestic law meaning of beneficial owner? Treaty meaning of beneficial owner? The treaty meaning = the common law meaning The treaty meaning = the meaning emerging from the OECD Commentary The treaty meaning = the person to whom the income is attributed for tax purposes International case law The Netherlands France Switzerland United Kingdom Conclusion Personal view: how should a Belgian Court construe the term beneficial owner? 7.2. Limitation on Benefit -clauses OECD Commentary Look-through -approach Subject to tax -approach Channeling -approach Exclusion -approach Bona fide (safe harbour) provisions Comprehensive Limitation of Benefits -clause Anti-abuse provision dealing with source taxation of specific types of income ( main purpose -test) Belgian tax treaties Belgium/Switzerland treaty Belgium/US tax treaty Belgium/Spain tax treaty Belgium/Estonia; Latvia; Lithuania and Taiwan tax treaties vii

8 Belgium/Canada tax treaty Belgian/Venezuela tax treaty Relationship between the Beneficial ownership -requirement and the Limitation of Benefits -provisions PART FOUR: CONDUIT & BASE COMPANIES PREVENTION OF ABUSE UNDER COMMUNITY LAW INTRODUCTION: SCOPE OF THE STUDY 1. ABUSE OF COMMUNITY LAW IN MATTERS NOT INVOLVING DIRECT TAXATION: ANALYSIS OF THE ECJ CASE LAW 1.1. Summary of the ECJ case law 1.2. Abuse of Community law: content of the concept Discussion of the ECJ s case law leading to Emsland Stärke General discussion The objective element The subjective element Conclusion Beyond Emsland Stärke: the ECJ s judgment in Halifax Testing the objective circumstances of the case against the objectives of the Community law-provision allegedly abused Conclusion 1.3. Prevention of abuse of Community law: Requirements set by ECJ case law to national anti-abuse provisions 2. ABUSE OF COMMUNITY LAW IN RELATION TO TAX AVOIDANCE: ANALYSIS OF THE ECJ S CASE LAW 2.1. Introduction 2.2. Abuse of Community law in relation to tax avoidance and circumvention of national tax rules: scope of the concepts of abuse of Community law and of tax avoidance Discussion of the ECJ s case law The case law up to Marks & Spencer (2005) and Cadbury Schweppes (2006) The Cadbury Schweppes-case (2006) The Marks & Spencer-case (2005) and OYAA-case (2007) Conclusions 2.3. Abuse of Community law: a general principle of Community law to prevent income tax avoidance? 3. THE METHODOLOGY OF THE ECJ IN HANDLING CASES OF ABUSE OF COMMUNITY LAW (IN PARTICULAR IN RELATION TO TAX AVOIDANCE) 3.1. The alleged abuser has access to the EC Treaty provisions on the freedoms 3.2. Examination of the substantive conditions for the application of the relevant Treaty freedom The freedom of establishment (Art EC Treaty) viii

9 Personal scope of the freedom Material scope of the freedom: meaning of the term establishment Actual pursuit of an economic activity Fixed establishment An indefinite period In another Member State Conclusion Passive investment companies, brass-plate and letter-box companies: further observations Free capital movements (Art EC Treaty) 3.3. The domestic anti-avoidance measures is discriminatory or restricts the exercise of the Treaty freedom Discrimination and restriction Discriminatory and restrictive measures: different grounds of justification 3.4. Justification of the restriction to exercise the Treaty freedom because of abuse of Community law and/or the prevention of tax avoidance General observations Does the prevention of abuse (tax avoidance) fall within the express treaty exceptions? Prevention of abuse (tax avoidance): an overriding reason of general interest or an autonomous treaty exception? Overriding reasons of general interest: application in matters of direct taxation The ECJ s abuse-doctrine and the prevention of tax avoidance: an autonomous Treaty exception or an overriding reason of general interest? Discussion of the ECJ s case law The case law in non-income tax matters The case law in income tax matters Position 4. REQUIREMENTS SET BY ECJ CASE LAW TO NATIONAL ANTI-AVOIDANCE MEASURES IN INCOME TAX MATTERS 4.1. Proof of illegitimate tax avoidance 4.2. Anti-avoidance rules applicable in individual cases 4.3. General irrebuttable presumptions of tax avoidance 4.4. Specific irrebuttable presumptions of tax avoidance 4.5. Rebuttable presumptions of tax avoidance 4.6. Compensatory taxation; Filling up of a tax vacuum (prevention of double non taxation) 4.7. Other criteria to be satisfied by national anti-avoidance rules in income tax matters The national tax rule to be protected must comply with Community law No arbitrary criteria to establish tax avoidance Application of the national anti-avoidance rule subject to judicial control 4.8. State aid and Code of Conduct 4.9. Conclusion ix

10 5. TESTING THE BELGIAN ANTI-AVOIDANCE MEASURES AGAINST THE IMPERATIVES OF COMMUNITY LAW 5.1. The Belgian GAAR 5.2. Thin capitalization ECJ case law The Belgian thin capitalization -provisions Art. 18, 4 BITC Indirect discrimination Justifications? Does the fact that the residence State of the lender does not relieve the double taxation affect the discussion on the restriction of the Treaty freedoms and the justification for such restriction? Free movement of capital and third States Compatibility of Art. 18, 4 BITC with secondary Community law Art. 198, 11 BITC Compatibility with primary Community law Compatibility with secondary Community law Art. 26 BITC Indirect discrimination Justification? Compatibility with secondary Community law Art. 54 BITC Restriction of the exercise of the Treaty freedoms Justification? Conclusion 5.3. CFC-Legislation and Art. 344 (2) BITC CFC-Legislation Art. 344 (2) BITC 5.4. Abuse of the Parent/Subsidiary and Interest & Royalty Directives National or treaty based measures to prevent abuse of Directives: General discussion Belgian measures to prevent abuse of the Parent/Subsidiary and Interest & Royalty Directives Belgium : Residence State of the company receiving dividends Belgium : Source State of the company paying dividends, interest or royalties Abuse of the Directives from the perspective of the Source State: General discussion Anti-avoidance provisions included in the Directives Application of Belgian anti-avoidance provisions Application of Belgian treaty based anti-avoidance provisions Can a Member State that has no or inadequate anti-avoidance provisions deny the benefits in case of abuse of the Directives? 5.5. The prevention of treaty shopping by Limitation on Benefits -clauses General discussion/delineation of the subject The Limitation on Benefits -provisions in the Belgian tax treaties with EC Member States x

11 The Belgium/Spain tax treaty Personal view The ECJ s case law (Gilly, D and Class IV ACT) Critical view of the ECJ s case law The Belgian treaties with Estonia; Latvia and Lithuania Conclusion: Limitation on Benefits -clause in treaties between EC Member States xi

GAAR v. SAAR or both?

GAAR v. SAAR or both? Prof. Dr. Stef van Weeghel GAAR and SAAR GAAR: General anti-avoidance rule Statutory Judicial SAAR: Specific anti-avoidance rule Statutory GAAR v SAAR - or both? 2 Overview of the