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
Germany
Roland GmbH
10%
NL
PE
Fase BV
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 carryforward. 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)