Transcription

1

2 Introduction This presentation covers international tax judicial developments (outside India). 2

3 Categories: Business Profits (Art.7) PE (Art.5) Resident and dual residence (Art.4) Treaty Entitlement (Art.1) Artists and Sportsmen (Art.17) Royalties (Art.12) Aggressive transactions and avoidance situations 3

4 Jurisdictions: France UK Switzerland Belgium US The Netherlands Italy Israel South Africa 4

5 Treaty entitlement (Art. 1) 5

6 Carrefour Korea (Supreme Court of Korea)(10 July 2014)

7 Background Facts: F Co. France 20% equity capital 100% K Co. Korea H Co. Netherlands 80% equity capital 7

8 Background Facts: 1 Subsequently, H Co. and F Co. divested their holdings in the K Co. 8

9 Background Facts: 2 Capital gain derived by F Co. were taxable in Korea in accordance with Art

10 Per Taxpayer Company: Its (H Co. s) capital gains were exempt in Korea in accordance with the Korea-NL tax treaty. 10

11 Korean Tax Authorities: 1 H Co. was merely a conduit company & F Co. was the real owner of the equity shares of the Korean Co.; 11

12 Korean Tax Authorities: 2 F Co. was the real owner of the equity shares of the Korean Co.; 12

13 Korean Tax Authorities: 3 The capital gains derived by H Co. were de facto income of F Co., and were taxable in Korea. 13

14 Supreme Court s Observations: 1 The Korean substance over form rules: nominal owner of a property, without ability to manage or control the property, had to be disregarded; 14

15 Supreme Court s Observations: 2 In such situations, the real owner had to be taken into account; 15

16 Supreme Court s Observations: 3 H Co. was well-equipped with employees and offices, and carried on substantive activities; 16

17 Supreme Court s Observations: 4 Therefore, the substance over form rules did not lead to adverse implications for H Co. 17

18 Supreme Court s Conclusion: H Co. was the beneficial recipient of the capital gains and therefore, they were not taxable in Korea. 18

19 Resident and dual residence (Art. 4) 19

20 Belgian Citizen (Belgian Court of Appeals)(29 April 2014)

21 Background Facts: 1 Taxpayer was an Individual; 21

22 Background Facts: 2 He was citizen of Belgium; 22

23 Background Facts: 3 He was dual resident of Belgium and France. 23

24 Per Taxpayer: Tax resident of France. 24

25 Per Belgian Tax Authorities: Tax resident of Belgium. 25

26 Belgian Court s Observations: 1 The taxpayer had a home permanently available to him in France; 2 He owned an apartment in Belgium; 26

27 Belgian Court s Observations: 3 The taxpayer had moved from Belgium to France; 4 The taxpayer had rented out the Belgian apartment; 27

28 Belgian Court s Observations: 5 Rental duration < 15 days at a time; 6 Aggregate rental duration < 40% of time p.a. 28

29 Belgian Court s Views: 1 The Belgian apartment was available to the taxpayer as permanent home because: It was let out for only short durations; and The taxpayer had the freedom to use the apartment for himself (instead of letting it out). 29

30 Belgian Court s Views: 2 It was not possible to determine the situs of centre of vital interests; 3 It was also not possible to determine the jurisdiction of the taxpayer s habitual abode. 30

31 Belgian Court s Verdict: 1 Nationality was the determining factor; 31

32 Belgian Court s Verdict: 2 Accordingly, the taxpayer was tax resident of Belgium. 32

33 Belgian Court s Conclusion: The taxpayer s worldwide income was taxable in Belgium. 33

34 Cornard Black (Tax Court of Canada)(14 January 2014)

35 Background Facts: 1 Taxpayer was an Individual;

36 Background Facts: 2 Tax resident of Canada;

37 Background Facts: 3 Resident of the UK by virtue of Art.4(2);

38 Background Facts: 4 Not domiciled in the UK.

39 Issue: Whether Art. 4(2) of the Canada-UK tax treaty prevailed over the Canadian tax law? 39

40 Tax Court of Canada: 1 Adopted purposive interpretation approach; 40

41 Tax Court of Canada: 2 Residence allocation by a tax treaty is merely for purpose of distributive rules; 41

42 Tax Court of Canada: 3 Domestic tax law of the other contracting state applied (subject to elimination of double taxation); 42

43 Tax Court of Canada: 4 Only income remitted to the UK was taxable in the UK; 43

44 Tax Court of Canada: 5 Income was not remitted to the UK; 44

45 Tax Court of Canada: 6 Hence it was not taxable in the UK; 45

46 Tax Court of Canada: 77 No double taxation; 46

47 Tax Court of Canada: 8 Hence, Canadian taxation did not violate the tax treaty. 47

48 Tax Court s Conclusion: The taxpayer s income was taxable in Canada, as resident of Canada. 48

49 French Citizen (French Supreme Administrative Court)(26 March 2014) 49

50 Background Facts: France Resident Taxpayer Resident Switzerland Earned income from both jurisdictions 50

51 Per Taxpayer: Tax resident of Switzerland.

52 Per French Tax Authorities: Tax resident of France.

53 French Supreme Admin. Court s View: 1 The taxpayer s income from Switzerland was 10 times compared to his income from France. 53

54 French Supreme Admin. Court s View: 2 The centre of vital interests was situated in Switzerland;

55 French Supreme Admin. Court s View: 3 By virtue of Art. 4(2) of the tax treaty, the taxpayer had to be regarded as resident of Switzerland. 55

56 Court s Conclusion: The French Supreme Administrative Court held in favor of the taxpayer he was tax resident of Switzerland. 56

57 Landesärztekammer Hessen Versorgungswerk (the French Supreme Administrative Court)(9 November 2015) 57

58 Background Facts: 1 LHV was a German Pension Fund;

59 Background Facts: 2 Received dividend from France;

60 Background Facts: 3 Under the French tax law: 25% withholding tax on dividend;

61 Background Facts: 4 Under the France-Germany tax treaty: 15% withholding tax on dividend;

62 Background Facts: 5 LHV s Income was exempt in Germany.

63 As per LHV: The dividend income was subject to 15% withholding tax. 63

64 As Per French Tax Authorities: 1 LHV was not resident of Germany for the tax treaty purposes. 64

65 As Per French Tax Authorities: 2 Because LHV s income was tax-exempt in Germany. 65

66 French Supreme Admin. Court: 1 Resident article had to be interpreted in a plain and textual manner ; 66

67 French Supreme Admin. Court: 2 Context and object of treaty terms were important; 67

68 French Supreme Admin. Court: 3 Avoidance of double taxation was the primary object of the treaty; 68

69 French Supreme Admin. Court: 4 Hence, a person, whose income was tax-exempt in a Contracting State, could not be regarded as resident of that State; and 69

70 French Supreme Admin. Court: 5 LHV could not be regarded as resident of Germany for tax treaty purposes. 70

71 Court s Conclusion: LHV s dividend income was subject to French withholding 25%. 71

72 Yanko Weis Holdings (District Court of Tel Aviv, Israel)(18 December 2013) 72

73 Background Facts: Israel Company Regd. Office in Belgium Directors tax resident of Belgium Capital gains from sale of shares of Israeli subsidiary 73

74 Per Taxpayer Company: 1 Tax resident of Belgium; 74

75 Per Taxpayer Company: 2 As per Art. 13(3), the capital gains were not taxable in Israel. 75

76 Per Israeli Tax Authorities: 1 Tax resident of Israel. 76

77 Per Israeli Tax Authorities: 2 The capital gains were taxable in Israel. 77

78 District Court s Observations: 1 2 Israeli resident shareholders took management decisions in Israel; Subsequently, the directors ratified those decisions in Belgium; 78

79 District Court s Observations: 3 A Company s control and management was situated in the jurisdiction of day-to-day management ; 4 Hence, the taxpayer company was tax resident of Israel. 79

80 District Court s Conclusion: 1 The taxpayer company was tax resident of Israel by virtue of Art. 4(3); 80

81 District Court s Conclusion: 2 The capital gains were taxable in Israel. 81

82 Permanent Establishment (Art. 5) 82

83 Mr. N. (The Netherlands Supreme Court)(15 January 2016)

84 Background Facts: Professional Diver Netherlands Stayed 89 days in India Project in India 84

85 As Per Taxpayer: 1 Art. 14 (Independent personal services) applies; 85

86 As Per Taxpayer: 2 Fixed base in India; 86

87 As Per Taxpayer: 3 Income taxable in India. 87

88 Netherlands Tax Authorities: 1 No fixed base in India; 88

89 Netherlands Tax Authorities: 2 Income was taxable in the Netherlands. 89

90 Court s Views: 1 Functional similarities between a PE and a fixed base; 2 Duration Test for determination of existence of PE applied even for fixed base; 90

91 Court s Views: 3 Since the tax treaty was based on the OECD/ UN MC, the Commentaries on those models were relevant; 4 That conformed to VCLT Art. 31 and Art. 32; 91

92 Court s Conclusion: The taxpayer did not have fixed base in India and the income was not exempt in the Netherlands. 92

93 Company X (Tax Court, South Africa)(15 May 2015) 93

94 Background Facts: Company X USA Employees stayed for >183 days South African Company Provided Advisory services Provided board room to Co. X s employees 94

95 South African Tax Authorities: Company X had service PE in South Africa.

96 Per Taxpayer Company: 1 Did not have a PE in South Africa ;

97 Per Taxpayer Company: 2 Income from the project was not taxable in South Africa;

98 Per Taxpayer Company: 3 Art. 5(2) contains mere illustrative list of PE ;

99 Per Taxpayer Company: 4 Prerequisites for PE under Art. 5(1) had to be satisfied.

100 Tax Court s View: 1 Tax treaty had to be interpreted in a congruent manner;

101 Tax Court s View: 2 Expression includes especially in Art. 5(2) was a term of extension; 101

102 Tax Court s View: 3 Hence, Art. 5(2) extended scope of Art. 5(1); 102

103 Tax Court s View: 4 Requirements of Art. 5(2)(k) were satisfied; 103

104 Tax Court s View: 5 Hence, no need to refer to Art. 5(1); 104

105 Tax Court s View: 6 Art. 5(2)(a) to Art. 5(2)(f) referred to place of business; 105

106 Tax Court s View: 7 Art. 5(2)(k) referred to type of activities (services); 106

107 Tax Court s View: 8 Company X had a PE under Art. 5(1) as well because disposal test was satisfied. 107

108 Tax Court s Conclusion: Company X s income was taxable in South Africa. 108

109 Business profits (Art. 7) 109

110 Mr. A (Supreme Administrative Court of Austria)(4 September 2014) 110

111 Background Facts: 1 Mr. A was self-employed writer;

112 Background Facts: 2 Tax resident of Austria;

113 Background Facts: 3 Provided PR services in Liechtenstein;

114 Background Facts: 4 Fixed base in Liechtenstein;

115 Background Facts: 5 Nature of activities: 1. PR consulting (business activities); 2. Writing text for advertisements (Professional activities)

116 Background Facts: 6 Income from independent personal services (Art. 14) was tax exempt in Austria [Residence State Art. 23(1)];

117 Background Facts: 7 Double taxation of business profits was relieved in Austria by way of credit method [Art. 23(2)].

118 Per Taxpayer: 1 The entire income was from independent personal services; 2 Was tax-exempt in Austria.

119 Per Austrian Tax Authorities: 1 The entire income was business profits taxable in Austria; 2 Double taxation was to be relieved by way of foreign tax credit.

120 Austrian Court s Verdict: 1 Income from coherent activities was indivisible;

121 Austrian Court s Verdict: 2 Hence, the total income could not be split between business profits and income from independent personal services;

122 Austrian Court s Verdict: 3 Mr. A had offered a composite product to his clients;

123 Austrian Court s Verdict: 4 Hence professional services lost independence;

124 Austrian Court s Verdict: 5 Hence, Mr. A s entire income was business profits.

125 Austrian Court s Conclusion: Mr. A s entire income was taxable in Austria, subject to foreign tax credit.

126 Alpex (Supreme Administrative Court of the Czech Republic)(2 July 2014) 126

127 Background Facts: Czech Republic Alpex Poland PE 127

128 Background Facts: Under the Czech Republic tax law, directors remuneration was not deductible. 128

129 Background Facts: Art. 7(3) of the tax treaty: there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses 129

130 The Czech Tax Authorities: Disallowed expense deduction for remuneration payable to the Directors of Alpex; 130

131 The Czech Supreme Admin Court: 1 Expense deduction was subject to the restrictions, if any, under the Source State s domestic tax law;

132 The Czech Supreme Admin Court: 2 Even in absence of express stipulation in the treaty that expense deduction was subject to restrictions under the Source State s tax law.

133 Court s Conclusion: Director s remuneration was not deductible for determining income attributable to PE.

134 Mercurio SPA (The French Supreme Administrative Court)(5 April 2013) 134

135 Background Facts: France Italian Company PE Real estate and investment business 135

136 Background Facts: 1 The PE had derived rental income from certain real estate; 136

137 Background Facts: 2 Had incurred operating expenses w.r.t. other real estate assets and investments. 137

138 Per Taxpayer Company: 1 The operating expenses were deductible from the rental income. 138

139 Per Taxpayer Company: 2 Art. 7 (Business profits) of the tax treaty applied. 139

140 Court s Observations: 1 The French tax law treated the above-mentioned rental income as business profits ; 140

141 Court s Observations: 2 The French tax law did not contain specific provisions for tax treatment for income from immovable property; 141

142 Court s Observations: 3 Art. 6* contained distributive rule so that the Source State could tax the subject income; *Income from immovable property 142

143 Court s Observations: 4 Art. 6 did not preclude applicability of Art

144 Court s Conclusion: 1 Art. 7 applied; 144

145 Court s Conclusion: 2 The expenses were deductible from the rental income. 145

146 Veracel Cellulose (Brazilian Court)(2010)

147 Background Facts: Veracel Cellulose (Brazilian Court) Finnish Company Fees Service Brazilian Company

148 Issue: Veracel Cellulose (Brazilian Court) Was the income taxable in Brazil?

149 Brazilian Company's View: Veracel Cellulose (Brazilian Court) 1 Finnish Co.'s income was not taxable in Brazil in accordance with Art. 7(1). 2 It was not obliged to withhold tax.

150 Tax Authority's View: Veracel Cellulose (Brazilian Court) 1 The Brazilian company s claim was invalid. 2 The Brazilian company was obliged to withhold tax.

151 Brazilian Court s Observations: Veracel Cellulose (Brazilian Court) Fees from the Brazilian co amounted to revenue under Brazilian tax law. But that did not negate applicability of Art. 7.

152 Brazilian Court s Observations: Veracel Cellulose (Brazilian Court) Administrative ruling could not impose tax in respect of income that was exempt under treaty.

153 Brazilian Court s Verdict: Veracel Cellulose (Brazilian Court) 1 2 The Finnish Co. s income was exempt from tax. The Brazilian company was not obliged to withhold tax.

154 Copesul (Brazilian Federal Regional Court)(4 June 2009)

155 Background Facts: Copesul (Brazilian Court) Canadian & German Company Fees Service Brazilian Company

156 Issue: Copesul (Brazilian Court) Was the income taxable in Brazil?

157 Brazilian Company's View: Copesul (Brazilian Court) 1 Both the companies incomes were not taxable in Brazil in accordance with Art. 7(1). 2 It was not obliged to withhold tax.

158 Brazilian Tax Authorities View: Copesul (Brazilian Court) Both the companies incomes were taxable in Brazil. Payments were characterized as revenue rather than business profits, (i.e. Art. 7 did not apply). The Brazilian company was obliged to withhold tax.

159 Brazilian Court s Observations: Copesul (Brazilian Court) 1 Art. 7 of the respective tax treaties applied. 2 The incomes of the Canadian and German companies were not attributable to a PE in Brazil.

160 Brazilian Court s Verdict: Copesul (Brazilian Court) The said incomes were not taxable in Brazil. The Brazilian company was not obliged to withhold tax.

161 Superior Court of Justice s Verdict: Copesul (Brazilian Court) 1 The expression business profits appearing in Art. 7(1) could not be restricted to net profit as understood under the Brazilian tax law.

162 Superior Court of Justice s Verdict: Copesul (Brazilian Court) 2 The incomes of the Canadian and German companies were within the scope of Art. 7(1) of the relevant tax treaties.

163 Superior Court of Justice s Verdict: Copesul (Brazilian Court) 3 Upheld the decision of the Federal regional Court.

164 Royalties (Art. 12) 164

165 Sergio Garcia (Supreme Court of Korea)(10 July 2014)

166 Background Facts: 1 Taxpayer was a world-famous golfer; 166

167 Background Facts: 2 Tax resident of Switzerland; 167

168 Background Facts: 3 Taxpayer had executed endorsement agreement with TaylorMade, a US company; 168

169 Background Facts: 4 TaylorMade was entitled to use the taxpayer s image rights; 169

170 Background Facts: 5 The taxpayer had also committed to play/ appear in at least 20 events per year;

171 Background Facts: 6 The endorsement agreement split the total consideration: 85% for endorsements; 15% for personal services.

172 Background Facts: 7 Sold his entitlements w.r.t. the image rights to a Swiss company (99% owned by the taxpayer)

173 Per Taxpayer: 1 Income w.r.t. image rights was not taxable in the United States

174 Per Taxpayer: 2 A part of income w.r.t. personal services was taxable in the United States

175 US Tax Court s Views: 1 Income w.r.t. image rights amounted to royalty ; 2 65% of the total income amounted to royalty and 35% was for personal services;

176 US Tax Court s Views: 3 The income was split on the best estimate basis; 4 The royalty income was not taxable in the United States (Source State) as per Art. 12(1).

177 US Tax Court s Verdict: 1 Rejected US tax authorities argument that Art. 17 (Artists and sportsmen) applied even to income in respect of image rights;

178 US Tax Court s Verdict: 2 Income w.r.t. image rights was not attributable to the taxpayer s personal performance as a professional golfer;

179 US Tax Court s Verdict: 3 Hence, Art. 17 did not apply to that income.

180 Court s Conclusion: The taxpayer s income w.r.t. image rights was tax exempt in the United States as per Art. 12(1).

181 Artists and Sportsmen (Art. 17) 181

182 Town B (Belgian Court of Appeals)(18 February 2014) 182

183 Background Facts: Town B Belgium Performed at cultural centre Paid fees without withholding tax to artists Co. Artists (Netherlands) Artists Companies 183

184 Per Belgian Tax Authorities: 1 The OECD MC Commentary on Art. 17(2) was relevant; 2 The artists companies could be disregarded even if a tax treaty did not include a provision similar to Art. 17(2) of the OECD MC. 184

185 Belgian Court s Observations: 1 As per Art. 17 of the Belgium-NL tax treaty: public entertainers incomes from personal activities were taxable in the Source State; 185

186 Belgian Court s Observations: 2 During the relevant tax years, the tax treaty did not include a provisions similar to Art. 17(2) of the OECD MC. 186

187 Belgian Court s Views: 1 The Belgian tax authorities relies on OECD MC Comm.; 2 The OECD Comm. Edition was subsequent to the conclusion of the Belgium-Netherlands tax treaty; 187

188 Belgian Court s Views: 3 The OECD MC Comm. did not have binding effect; 4 The OECD MC Comm. could not enlarge the scope of a tax treaty; 188

189 Belgian Court s Views: 5 Therefore, Art. 17 of the Belgium-NL tax treaty did not apply; 6 Art. 7 (Business profits) applied. 189

190 Belgian Court s Conclusion: 1 Artists companies incomes were not attributable to PE in Belgium; 190

191 Belgian Court s Conclusion: 2 Hence, not taxable in Belgium. 191

192 Aggressive transactions and avoidance situations 192

193 Pirelli Neumaticos SAIC (Federal Court of Appeal)(23 May 2013) 193

194 Background Facts: A Co. (Argentina) Technical Assistance Related Entities Payment made before approval by authorities I Co. (Italy) 194

195 Background Facts: 1 Technology transfer agreements between related parties required approval under Argentinian law; 195

196 Background Facts: 2 Lack of approval did not affect the agreement s validity; 196

197 Background Facts: 3 But attracted expense disallowance. 197

198 Per Taxpayer Company: Non-discrimination provision of Art. 25(3) of the treaty negated disallowance provision. 198

199 Per Tax Authorities: 1 Disallowed expense deduction for royalty payments to I Co. 199

200 Per Tax Authorities: 2 Art. 12(2) required approval by Argentinian authorities; 200

201 Per Tax Authorities: 3 Art. 25(3) did not apply. 201

202 Art. 12(2) of the Argentina-Italy tax treaty: 2.However, such royalties shall also be taxable in the Contracting State in which they arise, and in accordance with the legislation of that Contracting State, provided the recipient of the royalties is the beneficial owner thereof; the tax so charged shall not exceed: a. 10% of the gross amount of the royalties arising from the use of or the right to use any copyright of literary, artistic or scientific work; b. 18% of the gross amount of the royalties in all other cases.

203 Art. 12(2) of the Argentina-Italy tax treaty:. In any case, the reduction of the tax rate shall only apply for Argentina to the extent that the contracts from which those payments arise have been approved by the competent authorities of Argentina in accordance with the law on the transfer of technology. [Emphasis supplied]. 203

204 Art. 25(3) of the Argentina-Italy tax treaty: 3.Except where the provisions of Article 9, paragraph 7 of Article 11 or paragraph 6 of Article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the firstmentioned State.. 204

205 Art. 25(3) of the Argentina-Italy tax treaty:.similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State. [Emphasis supplied.] 205

206 Argentinian Court s View: 1 Art. 25(3) of the tax treaty applied; 2 Art. 12(2) was only concerned with tax treatment in the hands of the recipient; 206

207 Argentinian Court s View: 3 Art. 12(2) was not concerned with tax deduction. 207

208 Argentinian Court s Conclusion: A Co. was entitled to deduct royalty payments to I Co. 208

209 Significance in Indian Context: 1 Sec. 40(a)(ib) of the Income Tax Act, 1961 disallows expense deduction in respect of: (ib)any consideration paid or payable to a non-resident for a specified service on which equalization levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 Provided that where in respect of any such consideration, the equalization levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid ;

210 Significance in Indian Context: 2 Many Indian tax treaties contain provisions [e.g. Art. 26(3) of the India-US treaty] similar to Art. 25(3) of the Argentina-Italy tax treaty;

211 Significance in Indian Context: 3 Pirelli have significant persuasive in litigation w.r.t. expense disallowance on a/c of non-deduction of equalization levy.

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