An Analysis of Article 21 of the OECD Model Convention. Alexander Bosman

Transcription

1 Other Income under Tax Treaties An Analysis of Article 21 of the OECD Model Convention Alexander Bosman Wolters Kluwer

2 Preface and Acknowledgments List of Abbreviations List of Figures xxi xxiii xxv PART I General 1 CHARTER 1 Introduction Introductory Remarks Scope and Purpose of This Study Approach and Structure 7 CHARTER 2 Historical Development Introduction League of Nations Introduction Draft Convention Draft Conventions Draft No. Ia Draft No. Ib Draft No. Ic Examples of "Other Income" Articles in Bilateral Tax Treaties Concluded in the Period Work of the Fiscal Committee London and Mexico Draft Conventions OEEC 29 vii

3 2.4 OECD OECD Model OECD Model OECD Model Summary League of Nations OEEC and OECD 41 CHARTER 3 Tax Treaty Interpretation Introduction Vienna Convention on the Law of Treaties General Good Faith Object and Purpose of Tax Treaties Principle of Effectiveness Ordinary Meaning Context Other Authentic Elements of Interpretation Special Meaning Supplementary Means of Interpretation Article 3(2) of the OECD Model General Reference to Domestic Law Unless the Context Otherwise Requires Application of the Treaty by a Contracting State Static or Ambulatory Interpretation Conflicts of Qualification Significance of the OECD Commentaries General Relation to VCLT Significance of Later OECD Commentaries Relevance of Reservations and Observations Summary VCLT Article 3(2) of the OECD Model Conflicts of Qualification Significance of OECD Commentaries 76 CHARTER 4 General Framework of Article Introduction Article 21(1) General Item of Income 7g viii

4 4.2.3 Not Dealt with in the Foregoing Articles General Income Not within the Objective Scope of Other Distributive Rules The Terms "Paid" and "Derived" Causality Income Not within the Geographica! Scope of Other Distributive Rules Wherever Arising Resident No Subject-to-Tax Clause Function and Relevance of Article 21(1) within the System of the OECD Model General Höge Raad 7 December 2001, BNB 2002/42 (Hungarian Annuity) Facts and Decision of BNB 2002/ Characterisation of Deducted Premiums Arguments of the Höge Raad and the Advocate General Role of the "Other Income" Article Taxation of Surrender of Annuity in Gase of Emigration (Höge Raad 19 June 2009, BNB 2009/264) Triangular Cases Involving Dual Residence Examples of Items of Income Falling under Article 21(1) Article 21(2) General PE Right or Property Effectively Connected Optional Third Paragraph Other Model Conventions Introduction UN Model General Source State Taxation of Other Income Source Rules US Model General Article 21(1) Article 21(2) Limitation on Benefits Belgian Model 132 ix

5 4.6 Deviations from the OECD Model General No "Other Income" Article Source State Taxation Both Contracting States May Tax Income Not Expressly Mentioned or Not Expressly Dealt With Income from Estates and Trusts Source State Taxation Limited to Certain Types of Income Subject-to-Tax Clause Anti-abuse Provisions Dual Residence Provision 145 PART II Demarcation between Article 21 and Other Distributive Rules of the OECD Model 147 CHARTER 5 Income from Immovable Property Introduction Some General Remarks on Article Demarcation between Article 6 and Article Income Not within the Objective Scope of Article Interpretation of Article Definition of Immovable Property Income from Immovable Property Article 6(3) Article 6(4) Application of Article Examples Insurance Payments Damages Expropriation Compensations Notional (Rental) Income Income from Inactive Use Components of Rent Concerning Movable Property Immovable Property Certificates Income from Shares Income from a Right to Use Immovable Property Embodied in Shares Distributions from REITs Capital Gains/Changes in Value Recapture of Depreciation Annuity Payments 173 x

6 Mortgage Loans WaiverofDebt Option Rights Lease Payments Total Return Swaps Income from Immovable Property Not within the Geographica! Scope of Article Income from Immovable Property Attributable to a PE Introduction Immovable Property in a Contracting State, PE in the Same State Immovable Property in the Residence State, PE in the Other Contracting State Treaty Application by the PE State Proposed Approach Other Views Avoidance of Double Taxation Immovable Property in a Third State, PE in the Other Contracting State Treaty Application by the PE State Proposed Approach Proposed Amendment of Article Other Views Avoidance of Double Taxation 201 CHARTER 6 Business Profits Introduction Some General Remarks on Article Demarcation between Article 7 and Article 21(1) Income Not within the Objective Scope of Article Interpretation of Article Application of Article Examples Remunerations derived by Partners of Belgian Companies Income from (Silent) Partnerships CFC Legislation Technical Service Fees Limited Scope of Article Income from Former Activities Profit Share in Dutch Limited Partnership Foreign Exchange Results 218 xi

7 Pension Contributions Enjoyed by Members of European Parliament Emissions Rights Income Not within the Geographica! Scope of Article Income Attributable to a PE Introduction Income Arising in the PE State Income Arising in the Residence State or in a Third State, while Maintaining a PE in the Other Contracting State Treaty Application by the PE State Avoidance of Double Taxation 229 CHARTER 7 Profits from Shipping, Inland Waterways and Air Transport Introduction Some General Remarks on Article Demarcation between Article 8 and Article 21(1) Income Not within the Objective Scope of Article Interpretation of Article Application of Article Examples Limited Scope of Business Profits Article Partnership, No Enterprise/Business Profits No Independent Enterprise in Addition to "Shipping or Air Transport Enterprise" Income Not within the Geographica! Scope of Article Income Attributable to a PE 241 CHARTER 8 Dividends Introduction Some General Remarks on Article Demarcation between Article 10 and Article Income Not within the Objective Scope of Article Interpretation of Article Dividends Paid Company Resident Beneficial Owner Application of Article Examples Notional Income from Shares Deemed or Constructive Dividends 263 xii

8 CFC Legislation Income from Shares in a Company That Is Not a Treaty Resident Tax on Dividends Cashed in a Contracting State Income Not Treated as Income from Shares under the Source State's Tax Laws Dividend Replacing Payments under Stock Lending and Repo Transactions Cash Compensation in Respect of Dividends Benefits in Kind (Right of Use) Repurchase of Shares Liquidation Proceeds Distributions by Co-operatives Income from Share Option Rights Distributions from REITs Bonus Shares Repayment of Non-recognised Share Capital Dividends Not within the Geographica! Scope of Article General Höge Raad 28 February 2001, BNB 2001/295 (Dual Resident) Facts and Decision of BNB 2001/ Residence Positive Attribution of the Right to Tax Role of the "Other Income" Article An Earlier a Fortiori Reasoning: Höge Raad 2 September 1992, BNB 1992/ Residual Character of Article Höge Raad 6 December 2002, BNB 2003/285 (International Holding Company Structure) Facts and Decision of BNB 2003/ Role of the "Other Income" Article Positive Attribution of the Right to Tax Good Faith? Residual Character of Article Dividends Attributable to a PE Introduction Dividends Paid by Company Residing in the PE State Dividends Paid by a Company Residing in the Residence State of the Recipient of the Income or in a Third State, while Maintaining a PE in the Other Contracting State Treaty Application by the PE State Avoidance of Double Taxation Dividend Paid by Company in State R Dividend Paid by Company in State T 307 xiii

9 CHAPTER 9 Interest Introduction Some General Remarks on Article Demarcation between Article 11 and Article Income Not within the Objective Scope of Article Interpretation of Article Interest Faid Resident Beneficial Owner Arising Application of Article Höge Raad 18 June 2004, BNB 2004/314 (Fictitious Interest) Facts and Decision of BNB 2004/ Treaty Interpretation Shift in Right to Tax Positive Attribution of the Right to Tax? GoodFaith Role of the "Other Income" Article; Subject-to-Tax Requirement Other Domestic Law Fictions Reverse Case Comparison to Höge Raad 27 August 1997, BNB 1998/ Comparison to Höge Raad 7 December 2001, BNB 2002/42 (Hungarian Annuity) Examples Penalty Charges Profit or Loss on Debt Instrument Excessive Interest Payments Derivatives Securities Lending; Repo Transactions Lease Payments Benefits in Kind (Right of Use) Indemnity Payment for Withholding Tax Interest Income Not within the Geographica! Scope of Article General Residual Character of Article 11? Interest Income Attributable to a PE Introduction Interest Arising in the PE State 342 xiv

10 9.6.3 Interest Arising in the Residence State of the Recipient of the Income or in a Third State, while Maintaining a PE in the Other Contracting State Treaty Application by the PE State Avoidance of Double Taxation Interest Arising in State R Interest Arising in State T 344 CHAPTER 10 Royalties Introduction Some General Remarks on Article Demarcation between Article 12 and Article Income Not within the Objective Scope of Article Interpretation of Article Royalties Payment Resident Beneficial Owner Arising Application of Article Examples Notional Income Leasing Sale of Assets Annuity Payments Technical Service Fees Fees for Consultancy Services Payment to Non-owner Immovable Property Interest on Damages Excessive Royalty Payments Consideration for Use of Right or Property Not within Article 12(2) Royalty Income Not within the Geographica! Scope of Article General Residual Character of Article 12? Royalty Income Attributable to a PE Introduction Royalties Arising in the PE State Royalties Arising in the Residence State of the Recipient of the Income or in a Third State, while Maintaining a PE in the Other Contracting State Treaty Application by the PE State 368 xv

11 Avoidance of Double Taxation Royalties Arising in State R Royalties Arising in State T 370 CHARTER 11 Capital Gains Introduction Some General Remarks on Article Demarcation between Article 13 and Article Income or Gains Not within the Objective Scope of Article Interpretation of Article (Capital) Gains Property Alienation Application of Article Examples Annuity Payments Changes in Value of Property Deemed Alienation of Shares in Connection with Emigration Gain or Loss from Sale of Debt Instrument Write-Down of Loan Receivable Foreign Exchange Results Liquidation Proceeds, Repurchases of Shares, Capital Reductions Options Income from Inactivity Emissions Rights Insurance Payments and Damages Gains from the Alienation of Property Not within the Geographica! Scope of Article Introduction Immovable Property Situated in the Residence State or in a Third State Gains Attributable to a PE Introduction Gains from Alienation of Immovable Property Attributable to a PE Introduction Immovable Property in a Contracting State, PE in the Same State Immovable Property in the Residence State, PE in the Other Contracting State 402 xvi

12 Immovable Property in a Third State, PE in the Other Contracting State ,6.3 Gains from Alienation of Movable Property Attributable to a PE 408 CHAPTER 12 Income from Employment Introduction Some General Remarks on Articles 15 Et Seq Article 15 (Income from Employment) Article 16 (Director's Fees) Article 17 (Entertainers and Sportspersons) Article 18 (Pensions) Article 19 (Government Service) Article 20 (Students) Demarcation between Articles 15 Et Seq. and Article 21(1) General Dutch Gase Law on Residual Character of Article 15 of the OECD Model Income Not within the Objective Scope of Articles 15 Et Seq Interpretation of Article Application of Article Höge Raad 5 September 2003, BNB 2003/379 (Fictitious Wage) Facts and Decision of BNB 2003/ Role of the "Other Income" Article Relation to Höge Raad Gase Law regarding the "Closed System" of Articles 15 Et Seq Examples Social Security Benefits General Sickness Benefits Disability Allowances (WAO/AAW or WIA Allowances) Supplementary Disability Allowances WAO-Compliant Allowance Policy in Response to Case Law Reasons for Exclusion of Dutch Disability Allowance from the "Closed System" of Articles 15 Et Seq Pensions General Redemption of Pension Rights Transfer of Pension Capital Transfer of Private Pension Company after Emigration of Shareholder 455 XVll

13 Taxation of Pension Rights in Case of Emigration Various Decisions Child Benefits Company Car Benefits Severance Payments Compensation Paid in Respect of Loss of Income Following Injury or Disability Strike Benefits Non-competition Agreements Stock Options Employee Stock Ownership Plan EU Scholarship Payments Resembling Directors' Pees Government Service Entertainers and Sportspersons Income Not within the Geographica! Scope of Articles 15 Et Seq. 484 PART III Summary and Conclusions 485 CHAPTER 13 Summary and Conclusions Introduction General Observations on Article Demarcation Function and Relevance of Article 21 of the OECD Model Article 21(1) of the OECD Model Article 21(2) of the OECD Model Optional Third Paragraph of Article 21 of the OECD Model Article 21 of the UN Model Deviations from Article 21 of the OECD Model Effectiveness of Article 21 of the OECD Model Article 21(1) of the OECD Model Article 21(2) of the OECD Model Demarcation Based on Objective Scope General Income from Immovable Property Residual Function of Article Findings/Recommendations Business Profits Residual Function of Article Findings/Recommendations 506 xviii

14 Profits from Shipping, Inland Waterways and Air Transport Residual Function of Article Findings Dividends Residual Function of Article Findings Interest Residual Function of Article Findings/Recommendations Royalties Residual Function of Article Findings Capital Gains Residual Function of Article Findings/Recommendations Income from Employment Residual Function of Article Findings Demarcation Based on Geographica! Scope General Dividends, Interest and Royalties Capital Gains Income Attributable to a PE Immovable Property Immovable Property Situated in State R Immovable Property Situated in State T Proposed Amendment of Article Dividends, Interest and Royalties Capital Gains Immovable Property Situated in State R Immovable Property Situated in State T Proposed Amendment of Article Final Remarks 534 APPENDIX Suggested Amendments to the OECD Model and Commentaries 535 Bibliography 545 Table of Cases 559 Statements of Various Authorities and Official Documents 569 xix