Int’l & EU Tax Law 2007/2008

Exam Discussion (first sit)

Question 1.1

• Explain the role and relevance of domestic law for the interpretation and application of double tax conventions which follow the OECD Model Convention 2005.

• Motivate your answer with reference to applicable law, but be as concise as possible. [max. 1 page; max. 4 points]

Question 1.1

• Domestic law creates taxing rights, DTCs limit and allocate those rights;

• Domestic law is relevant for definitions in DTC’s– Explicit: art. 4(1) & 6(2) OECD MC 2005– General interpretation: recourse to dom.law if terms not defined in

DTC, normal interpretation (VCLT) does not provide answer and context does not otherwise require (art. 3(2)OECD MC 2005)

• OECD MC terms and definitions originate historically from domestic law and have in turn impacted domestic law (Cf. Avery Jones et al. (2006) IBFD Bull. 220 ff.)

• Monistic v Dualistic constitutional order and possibility to tax treaty override

Question 1.2

• Within the EU, Directive 2003/48/EC (Savings Directive) is in force that governs the taxation of interest payments between certain residents of EU Member States.

A. Explain the goal, purpose and tax policy objectives of Directive 2003/48/EC (Savings Directive). Be as concise as possible in your answer. [max. ½ page; max. 2 points]

B. Assume that the double tax convention in force between Italy and Austria follows the OECD Model Convention 2005 . How much tax should Austria withhold on interest paid by an Austrian bank to an individual resident in Italy, considering both the double tax convention and the Savings Directive? Motivate your answer with reference to applicable law, but be as concise as possible. [max. 1 page; max. 2 points]

Question 1.2 A

• See preamble and art. 1 Dir.:– Anti-tax avoidance/evasion

• Information sharing

– Final System envisaged is exclusive resident state taxation

– Relieve distortions in Internal Market regarding interest payments on savings.

Question 1.2 B

• The Directive overrides the DTC;• Austria is allowed a WHT in Directive• Austria is state of source (DTC) and also

paying state (Dir.)• Italy is state of residence beneficial owner

(DTC & Dir.)• DTC allows 10% WHT (art. 11 OECD MC

2005);• Directive imposes 15% WHT.

Question 2 - Case

• The German company Roland GmbH produces chocolate angels. Roland GmBH has a distribution centre with offices and a warehouse facility located in Breda/Netherlands. The distribution centre serves the West-European market. Roland GmbH also holds a 10% participation of shares in Fase BV, a Dutch resident company. Fase BV produces similar merchandise and the participation was acquired in the current year (Y1) with the final goal in mind to take over the Dutch competitor in the future. Roland GmbH received €60,000 Euro as dividend in Y1.

Question 2

Roland GmbH

Fase BV

Germany

NL10%

PE

Question 2.1

• Fase BV withheld a dividend withholding tax at a rate of 25% on the gross dividend income. Roland GmbH turns to you for advice how much of the tax would be refunded by the Netherlands if Roland applies for it? Motivate your answer with reference to applicable law, but be as concise as possible. Note: You are not expected to know Dutch tax law. [max. 1 page; max. 3 points]

Question 2.1 – Model Answer

• How much tax will be refunded by the Dutch fiscal authorities?

• Domestic Law: dividend tax of 25%• Article 10(2): The NL are allowed to levy a WHT of

15% (not 5% as minimum holding requirement of 25%)

Question 2.1 (cont.)

• PSD does not apply: minimum holding requirement 20%

• However Art. 10(4): if applicable, Art. 10(2) would not be applicable (but Article 7)

• Conditions: – Receiving company has a PE in the state of the

paying company– Holding should be attributed to the PE (and not to

the receiving company)

Question 2.1 (cont.)• Application to the case

– A distribution centre is a PE if it not only provides storage but also sells the goods (here there are offices next to the warehouse facility, what indicates that there are business activities that are not only of auxiliary nature)

– Is the holding attributable to the PE?• This depends on the activities of the PE and whether the holding

serves the activities of the PE or of the head office• Yes, if the products of Fase BV are distributed in future by the PE• No, if the production will be distributed by the head office using

other group members

• Legal consequences: – If yes: Article 7 applies, no WHT may be levied by the NL, refund

of the whole WHT– If no: Article 10(2) applies, the NL may levy 15%, refund of 10%

of the WHT

Question 2.2

• Has Germany the right to tax the dividend income based on European law and/or the treaty applicable (=OECD Model Convention 2005)? (this is a theoretical question as Germany will not tax because they will apply the participation exemption on basis of domestic law!) (max. 3 points)

Question 2.2

• Has Germany the right to tax?• Article 10(1) provides right to tax, however according to Article

23 Germany has to provide a credit for the WHT paid in the NL• PSD – even if applicable – would urge Germany to apply

– Indirect tax credit: Germany would have the right to tax but has to allow a credit for the underlying corporation tax, or

– Exemption: Germany would not be allowed to tax (Germany has opted for the participation exemption)

• If Article 10(4) applies:– Article 7 applies: Germany is allowed to tax the income according

to Article 7(1), but also the NL may tax the same income as it is attributable to the PE

– Germany has to avoid double taxation and uses normally the exemption method: consequently Germany is not allowed to tax the dividends

Question 2.3

• Roland GmbH financed the purchase of the shares by a loan and has in this respect yearly financing costs of interest payments in the amount of € 50,000. Roland GmBH turns to you for advice whether it is allowed, on basis of EU law or the double tax convention, to deduct those expenses in the Netherlands either in respect of the dividend tax or the tax on the income of the PE? Motivate your answer with reference to applicable law, but be as concise as possible. [max. 4 points]

Question 2.3

• Deduction of financing costs in the Netherlands?• If Art. 10(4) applies: The participation is attributable

to the PE; the NL have to allow the deduction of costs that are effectively connected with the asset (Article 7(3))

• If Art. 10(2) applies: The WHT is levied on gross income, thus no deduction of related costs possible; Germany has to allow the deduction (at least in cases where shares are hold in a company being resident of a EU member state: Case „Bosal“), however the PSD allows a non-deduction of 5% of the dividend income (cf. Article 4(2))

Question 3 - Question

• Consider the case of XCo, a company resident of State R, which has a permanent establishment as defined in art. 5(1) OECD Model Convention 2005 in State S. State R taxes resident companies on a worldwide income basis. The corporate income tax rate in State R is 30%, but State S applies a general tax rate of 20% on all income that falls within its tax jurisdiction. The company as a whole, and the head office and permanent establishment separately earn profits in Y1 of respectively €500,000, €200,000 and €300,000. Between States R and S is a double tax convention in force that generally follows the OECD Model Convention 2005.

• Analyze the above case in the context of avoidance of double taxation if;A. the R-S double tax convention includes a provision that follows art. 23A

OECD MC 2005.B. the R-S double tax convention includes a provision that follows art. 23B

OECD MC 2005. Motivate your answer with reference to applicable law, but be as concise as possible. [max. 1 page]

Question 3 – Model Answer

• A & B graded together• Art. 7(1)

– Both R & S have a right to tax (“may be taxed”) of the 300 of income that is attributable to the PE. [1p]

• R as state of residence should provide for avoidance of double taxation– 23A: R exempts the PE income [1p]– 23B: R grants an ordinary credit for taxes in State S related

to the PE income. [1p]

• State S will tax 20% of 300.000= 60.000 [1p]

Question 3 – Model Answer (cont.) [5p]

State R (*000) 23A 23B

Worldwide Y 500 500

exemption 300

Taxable Y 200 500

Income tax (30%) 60 150

Tax credit 60

R tax payable 60 90

Worldwide tax 120 150

• Conclusion: exemption (23A) more favorable [1p]

Question 4 - Case

• Vimeta BV has established a permanent establishment in Belgium. During Y1, the PE suffered a net loss of €50,000 while Vimeta BV earned a net profit of € 500,000 from Dutch sources. In Y2, the PE earned a profit of €70,000, and Vimeta BV earned a profit of €350,000 from Dutch sources. The Netherlands apply the Dutch exemption method under the double tax convention with Belgium. This convention follows in all other aspects the OECD Model Convention 1963.

Question 4.1

• Belgian tax law requires that the books of accounts and other accounting material that can proof that losses are economically connected with the PE are kept in Belgium. Is Belgium entitled to require this? Motivate your answer with reference to applicable law, but be as concise as possible. [max. ½ page]

Question 4.1

• Cf. Case „Futura“• Belgium is allowed to require that losses are

effectively connected with PE income• Belgium may not require that accounts are kept on

Belgium territory, otherwise this would constitue a violation of the freedom of establishment, in particular the proportionality principle

Queston 4.2

• Will the losses be deductible in year Y1? In which country or countries? Please assume that Belgian tax law provides an unlimited loss carry-forward. Motivate your answer with reference to applicable law, but be as concise as possible. [max. ½ page]

Question 4.2

• In Belgium deductible because losses are effectively connected with the activities of the PE; as there is no income in Y1, losses can be carried forward

• In the NL deductible because exemption of PE income takes worldwide income into account– Tax base is 450.000,-- Euro

Question 4.3

• How will the tax treatment be in respect of year Y2 in both countries involved? If there is double taxation, will there be a violation of the tax treaty? Motivate your answer with reference to applicable law, but be as concise as possible. [max. 1 page]

Question 4.3

• Belgium: taxable income 70.000, tax base 20.000 because of carry forward

• NL: foreign income of 70.000 should be exempted; however, recapture of losses deducted in Y2; tax base is 400.000

• This leads in Y2 to double taxation of 50.000; according to the (correct opinion of the) OECD Model commentary this is no violation of the treaty (cf. Paragraph 44 of Article 23)

Question 4.4

• If the PE was a wholly owned subsidiary of Vimeta, would the tax treatment be different? Motivate your answer with reference to applicable law, but be as concise as possible. [max. ½ page]

Question 4.4

• If the PE was a subsidiary• The treatment in Belgium would have been the

same (non-discrimination clause of treaty)• The treatment in the NL would have been different:

seperation principle of Article 7: both legal persons are treated separately; no EU law obligation to extend group taxation scheme to foreign subidiaries; only in case, that foreign losses cannot be deducted anymore in the country of the subsidiary, the country of the parent has to allow the deduction of foreign losses (cf. Case Marks & Spencer)