2_session viii_recent... · 2016. 7. 15. · functional similarities between a pe and a fixed base;...
TRANSCRIPT
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This presentation covers international tax judicial developments (outside India).
Introduction
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BusinessProfits (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
Categories:
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France
Belgium
Italy Israel
US
UK Switzerland
The Netherlands
South Africa
www.indiainternationaltax.comwww.dramarmehta.comJurisdictions:
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Treaty entitlement
(Art. 1)
Carrefour Korea(Supreme Court of Korea)(10 July 2014)
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F Co. France
H Co.Netherlands
100%
Background Facts:
K Co. Korea
80% equity capital
20% equity capital
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Subsequently, H Co. and F Co. divested their holdings in the K Co.
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Capital gain derived by F Co. were taxable in Korea in accordance with Art. 13.
Background Facts: www.indiainternationaltax.comwww.dramarmehta.com
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Its (H Co.’s) capital gains were exempt in Korea in accordance with the Korea-NL tax treaty.
Per Taxpayer Company: www.indiainternationaltax.comwww.dramarmehta.com
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H Co. was merely a conduit company & F Co. was the ‘real owner’ of the equity shares of the Korean Co.;
Korean Tax Authorities: www.indiainternationaltax.comwww.dramarmehta.com
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12
F Co. was the ‘real owner’ of the equity shares of the Korean Co.;
Korean Tax Authorities: www.indiainternationaltax.comwww.dramarmehta.com
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13
The capital gains derived by H Co. were de facto income of F Co., and were taxable in Korea.
Korean Tax Authorities: www.indiainternationaltax.comwww.dramarmehta.com
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14
The Korean substance over form rules: ‘nominal owner’ of a property, without ability to manage or control the property, had to be disregarded;
Supreme Court’s Observations:
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In such situations, the ‘real owner’ had to be taken into account;
www.indiainternationaltax.comwww.dramarmehta.comSupreme Court’s
Observations:
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H Co. was well-equipped with employees and offices, and carried on substantive activities;
www.indiainternationaltax.comwww.dramarmehta.comSupreme Court’s
Observations:
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Therefore, the substance over form rules did not lead to adverse implications for H Co.
www.indiainternationaltax.comwww.dramarmehta.comSupreme Court’s
Observations:
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H Co. was the beneficial recipient of the capital gains and therefore, they were not taxable in Korea.
Supreme Court’s Conclusion:
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Resident and dual residence
(Art. 4)
Belgian Citizen(Belgian Court of Appeals)(29 April 2014)
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Background Facts:
Taxpayer was an Individual;
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He was citizen of Belgium;
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2
Background Facts:
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He was dual resident of Belgium and France.
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3
Background Facts:
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Per Taxpayer:
Tax resident of France.
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Per Belgian Tax Authorities:
Tax resident of Belgium.
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The taxpayer had a home – permanently available to him – in France;
He owned an apartment in Belgium;
Belgian Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
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The taxpayer had ‘moved’ from Belgium to France;
The taxpayer had rented out the Belgian apartment;
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Belgian Court’s Observations:
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Aggregate rental duration < 40% of time p.a.
Rental duration < 15 days at a time;
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Belgian Court’s Observations:
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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).
Belgian Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
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It was not possible to determine the situs of centre of vital interests;
Belgian Court’s Views:
It was also not possible to determine the jurisdiction of the taxpayer’s habitual abode.
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Belgian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
1 Nationality was the determining factor;
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Belgian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
Accordingly, the taxpayer was tax resident of Belgium.
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2
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The taxpayer’s worldwide income was taxable in Belgium.
Belgian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Cornard Black(Tax Court of Canada)(14 January 2014)
Background Facts:
Taxpayer was an Individual;
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Tax resident of Canada;
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Background Facts:
Resident of the UK by virtue of Art.4(2);
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Background Facts:
Not domiciled in the UK.
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Background Facts:
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Issue:
Whether Art. 4(2) of the Canada-UK tax treaty prevailed over the Canadian tax law?
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Adopted purposive interpretation approach;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Residence allocation by a tax treaty is merely for purpose of distributive rules;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Domestic tax law of the other contracting state applied (subject to elimination of double taxation);
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Only income remitted to the UK was taxable in the UK;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Income was not remitted to the UK;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Hence it was not taxable in the UK;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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No double taxation;
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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Hence, Canadian taxation did not violate the tax treaty.
Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com
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The taxpayer’s income was taxable in Canada, as ‘resident of Canada’.
Tax Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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French Citizen(French Supreme Administrative Court)(26 March 2014)
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Background Facts:
France
Earned income from both jurisdictions
Taxpayer SwitzerlandResident Resident
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Per Taxpayer:
Tax resident of Switzerland.
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Per French Tax Authorities:
Tax resident of France.
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The taxpayer’s income from Switzerland was 10 times compared to his income from France.
French Supreme Admin. Court’s View:
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The centre of vital interests was situated in Switzerland;
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court’s View:
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By virtue of Art. 4(2) of the tax treaty, the taxpayer had to be regarded as resident of Switzerland.
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court’s View:
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The French Supreme Administrative Court held in favor of the taxpayer – he was tax resident of Switzerland.
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Landesärztekammer Hessen Versorgungswerk(the French Supreme Administrative Court)(9 November 2015)
Background Facts:
LHV was a German Pension Fund;
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Background Facts:
Received dividend from France;
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Background Facts:
Under the French tax law: 25% withholding tax on dividend;
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Background Facts:
Under the France-Germany tax treaty: 15% withholding tax on dividend;
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Background Facts:
LHV’s Income was exempt in Germany.
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As per LHV:
The dividend income was subject to 15% withholding tax.
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As Per French Tax Authorities:
LHV was not resident of Germany for the tax treaty purposes.
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Because LHV’s income was tax-exempt in Germany.
www.indiainternationaltax.comwww.dramarmehta.comAs Per French Tax
Authorities:
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‘Resident’ article had to be interpreted in a ‘plain and textual manner’;
French Supreme Admin.Court:
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Context and object of treaty terms were important;
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court:
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Avoidance of double taxation was the primary object of the treaty;
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court:
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Hence, a person, whose income was tax-exempt in a Contracting State, could not be regarded as ‘resident’ of that State; and
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court:
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LHV could not be regarded as resident of Germany for tax treaty purposes.
www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.
Court:
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LHV’s dividend income was subject to French withholding tax @ 25%.
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Yanko Weis Holdings(District Court of Tel Aviv, Israel)(18 December 2013)
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Background Facts:
Israel Company
Capital gains from sale of shares of Israeli subsidiary
Regd. Office in Belgium
Directors tax resident of Belgium
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Per Taxpayer Company:
Tax resident of Belgium;
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Per Taxpayer Company:
As per Art. 13(3), the capital gains were not taxable in Israel.
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Per Israeli Tax Authorities:
Tax resident of Israel.
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The capital gains were taxable in Israel.
www.indiainternationaltax.comwww.dramarmehta.comPer Israeli Tax Authorities:
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Israeli resident shareholders took management decisions in Israel;
Subsequently, the directors ‘ratified’ those decisions in Belgium;
District Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
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A Company’s control and management was situated in the jurisdiction of ‘day-to-day management’;
Hence, the taxpayer company was tax resident of Israel.
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The taxpayer company was tax resident of Israel by virtue of Art. 4(3);
District Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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The capital gains were taxable in Israel.
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District Court’s Conclusion:
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Permanent Establishment
(Art. 5)
Mr. N.(The Netherlands Supreme Court)(15 January 2016)
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Professional Diver
Netherlands
Project in India
Stayed 89 days in India
Background Facts: www.indiainternationaltax.comwww.dramarmehta.com
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As Per Taxpayer:
Art. 14 (Independent personal services) applies;
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As Per Taxpayer:
Fixed base in India;
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As Per Taxpayer:
Income taxable in India.
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Netherlands Tax Authorities:
No fixed base in India;
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Netherlands Tax Authorities:
Income was taxable in the Netherlands.
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90
Functional similarities between a PE and a fixed base;
Duration Test for determination of existence of PE applied even for fixed base;
Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
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Since the tax treaty was based on the OECD/ UN MC, the Commentaries on those models were relevant;
That conformed to VCLT Art. 31 and Art. 32;
Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
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The taxpayer did not have fixed base in India and the income was not exempt in the Netherlands.
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Company X(Tax Court, South Africa)(15 May 2015)
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Background Facts:
Company XUSA
South African Company
Provided Advisory services
Employees stayed for >183 days
Provided board room to Co. X’s employees
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South African Tax Authorities:
Company X had service PE in South Africa.
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Per Taxpayer Company:
Did not have a PE in South Africa ;
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Per Taxpayer Company:
Income from the project was not taxable in South Africa;
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Per Taxpayer Company:
Art. 5(2) contains mere illustrative list of PE ;
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Per Taxpayer Company:
Prerequisites for PE under Art. 5(1) had to be satisfied.
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Tax treaty had to be interpreted in a congruent manner;
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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101
Expression “includes especially” in Art. 5(2) was a term of extension;
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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102
Hence, Art. 5(2) extended scope of Art. 5(1);
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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103
Requirements of Art. 5(2)(k) were satisfied;
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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104
Hence, no need to refer to Art. 5(1);
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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105
Art. 5(2)(a) to Art. 5(2)(f) referred to place of business;
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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Art. 5(2)(k) referred to type of activities (services);
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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Company X had a PE under Art. 5(1) as well because disposal test was satisfied.
Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
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Company X’s income was taxable in South Africa.
Tax Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Business profits (Art. 7)
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Mr. A(Supreme Administrative Court of Austria)(4 September 2014)
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Background Facts:
Mr. A was self-employed writer;
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Background Facts:
Tax resident of Austria;
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Background Facts:
Provided PR services in Liechtenstein;
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Fixed base in Liechtenstein;
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Background Facts:
Nature of activities:
1. PR consulting (business activities);
2. Writing text for advertisements (Professional activities)
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
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Income from independent personal services (Art. 14) was tax exempt in Austria [Residence State Art. 23(1)];
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
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Double taxation of business profits was relieved in Austria by way of credit method [Art. 23(2)].
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
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The entire income was from independent personal services;
Per Taxpayer:
Was tax-exempt in Austria.
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2
The entire income was ‘business profits’ taxable in Austria;
Per Austrian Tax Authorities:
Double taxation was to be relieved by way of foreign tax credit.
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Income from coherent activities was indivisible;
Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
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Hence, the total income could not be split between business profits and income from independent personal services;
Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
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Mr. A had offered a composite product to his clients;
Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
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Hence professional services lost independence;
Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
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Hence, Mr. A’s entire income was ‘business profits’.
Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
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Mr. A’s entire income was taxable in Austria, subject to foreign tax credit.
Austrian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Alpex(Supreme Administrative Court of the Czech Republic)(2 July 2014)
127
AlpexPoland PE
Czech Republic
Background Facts: www.indiainternationaltax.comwww.dramarmehta.com
128
Background Facts:
Under the Czech Republic tax law, directors’ remuneration was not deductible.
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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…”
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The Czech Tax Authorities:
Disallowed expense deduction for remuneration payable to the Directors of Alpex;
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Expense deduction was subject to the restrictions, if any, under the Source State’s domestic tax law;
The Czech Supreme Admin Court:
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Even in absence of express stipulation in the treaty that expense deduction was subject to restrictions under the Source State’s tax law.
The Czech Supreme Admin Court:
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Director’s remuneration was not deductible for determining income attributable to PE.
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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Mercurio SPA(The French Supreme Administrative Court)(5 April 2013)
PE
135
Background Facts:
Italian Company PE
France
Real estate and investment business
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The PE had derived rental income from certain real estate;
Background Facts: www.indiainternationaltax.comwww.dramarmehta.com
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137
Had incurred operating expenses w.r.t. other real estate assets and investments.
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
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138
The operating expenses were deductible from the rental income.
Per Taxpayer Company: www.indiainternationaltax.comwww.dramarmehta.com
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139
Art. 7 (Business profits) of the tax treaty applied.
Per Taxpayer Company: www.indiainternationaltax.comwww.dramarmehta.com
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140
The French tax law treated the above-mentioned rental income as ‘business profits’;
Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
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141
The French tax law did not contain specific provisions for tax treatment for income from immovable property;
Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
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142
Art. 6* contained distributive rule – so that the Source State could tax the subject income;
Court’s Observations:
*Income from immovable property
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143
Art. 6 did not preclude applicability of Art. 7.
Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
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Art. 7 applied;
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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145
The expenses were deductible from the rental income.
www.indiainternationaltax.comwww.dramarmehta.comCourt’s Conclusion:
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Veracel Cellulose (Brazilian Court)(2010)
Service
Fees
Background Facts:
FinnishCompany
BrazilianCompany
Veracel Cellulose (Brazilian Court)
www.indiainternationaltax.comwww.dramarmehta.com
Was the income taxable in Brazil?
Issue:Veracel Cellulose (Brazilian Court)
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Finnish Co.'s income was not taxable in Brazil in accordance with Art. 7(1).
Brazilian Company's View:
It was not obliged to withhold tax.
Veracel Cellulose (Brazilian Court)
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The Brazilian company’s claim was invalid.
Tax Authority's View:
The Brazilian company was obliged to withhold tax.
Veracel Cellulose (Brazilian Court)
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2
Fees from the Brazilian co amounted to ‘revenue’ under Brazilian tax law.
Brazilian Court’s Observations:
But that did not negate applicability of Art. 7.
Veracel Cellulose (Brazilian Court)
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Administrative ruling could not impose tax in respect of income that was exempt under treaty.
Brazilian Court’s Observations:Veracel Cellulose (Brazilian Court)
www.indiainternationaltax.comwww.dramarmehta.com
The Finnish Co.’s income was exempt fromtax.
Brazilian Court’s Verdict:
The Brazilian company was not obliged to withhold tax.
Veracel Cellulose (Brazilian Court)
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2
Copesul (Brazilian Federal Regional Court)(4 June 2009)
Service
Fees
Background Facts:
Canadian & German Company
BrazilianCompany
Copesul (Brazilian Court)
www.indiainternationaltax.comwww.dramarmehta.com
Was the income taxable in Brazil?
Issue: www.indiainternationaltax.comwww.dramarmehta.com
Copesul (Brazilian Court)
Both the companies’ incomes were not taxable in Brazil in accordance with Art. 7(1).
Brazilian Company's View:
It was not obliged to withhold tax.
www.indiainternationaltax.comwww.dramarmehta.com
Copesul (Brazilian Court)
1
2
Both the companies’ incomes were taxable in Brazil.
Brazilian Tax Authorities’ View:
Payments were characterized as ‘revenue’ rather than ‘business profits’, (i.e. Art. 7 did not apply).
The Brazilian company was obliged to withhold tax.
www.indiainternationaltax.comwww.dramarmehta.com
Copesul (Brazilian Court)
Art. 7 of the respective tax treaties applied.
Brazilian Court’s Observations:
The incomes of the Canadian and German companies were not attributable to a PE in Brazil.
www.indiainternationaltax.comwww.dramarmehta.com
Copesul (Brazilian Court)
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2
The said incomes were not taxable in Brazil. The Brazilian company was not obliged to withhold tax.
Brazilian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
Copesul (Brazilian Court)
Superior Court of Justice’sVerdict:
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Copesul (Brazilian Court)
The expression “business profits” appearing in Art. 7(1) could not be restricted to ‘net profit’ as understood under the Brazilian tax law.
1
Superior Court of Justice’sVerdict:
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Copesul (Brazilian Court)
The incomes of the Canadian and German companies were within the scope of Art. 7(1) of the relevant tax treaties.
2
Superior Court of Justice’sVerdict:
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Copesul (Brazilian Court)
Upheld the decision of the Federal regional Court.3
164
Royalties (Art. 12)
Sergio Garcia(Supreme Court of Korea)(10 July 2014)
166
Background Facts:
Taxpayer was a world-famous golfer;
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1
167
Tax resident of Switzerland;
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
2
168
Taxpayer had executed endorsement agreement with TaylorMade, a US company;
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
3
169
TaylorMade was entitled to use the taxpayer’s image rights;
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
4
The taxpayer had also committed to play/ appear in at least 20 events per year;
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
5
The endorsement agreement split the total consideration: 85% for endorsements; 15% for personal services.
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
6
Sold his entitlements w.r.t. the image rights to a Swiss company (99% owned by the taxpayer)
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
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Per Taxpayer:
Income w.r.t. image rights was not taxable in the United States
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1
Per Taxpayer:
A part of income w.r.t. personal services was taxable in the United States
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2
Income w.r.t. image rights amounted to ‘royalty’;
65% of the total income amounted to royalty and 35% was for personal services;
US Tax Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
1
2
The income was split on the best estimate basis;
The royalty income was not taxable in the United States (Source State) as per Art. 12(1).
US Tax Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
3
4
Rejected US tax authorities’ argument that Art. 17 (Artists and sportsmen) applied even to income in respect of image rights;
US Tax Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
1
Income w.r.t. image rights was not attributable to the taxpayer’s personal performance as a professional golfer;
US Tax Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
2
Hence, Art. 17 did not apply to that income.
US Tax Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com
3
The taxpayer’s income w.r.t. image rights was tax exempt in the United States as per Art. 12(1).
Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
181
Artists and Sportsmen(Art. 17)
182
Town B(Belgian Court of Appeals)(18 February 2014)
183
Town BBelgium
Artists(Netherlands)
Performed at cultural centre
Paid fees without withholding tax to artists’ Co.
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Artists’ Companies
1
184
The OECD MC Commentary on Art. 17(2) was relevant;
Per Belgian Tax Authorities:
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.
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2
185
As per Art. 17 of the Belgium-NL tax treaty: public entertainers’ incomes from personal activities were taxable in the Source State;
Belgian Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
1
186
During the relevant tax years, the tax treaty did not include a provisions similar to Art. 17(2) of the OECD MC.
Belgian Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com
2
187
The Belgian tax authorities relies on OECD MC Comm.;
The OECD Comm. Edition was subsequent to the conclusion of the Belgium-Netherlands tax treaty;
Belgian Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
1
2
188
The OECD MC Comm. could not enlarge the scope of a tax treaty;
Belgian Court’s Views:
The OECD MC Comm. did not have binding effect;
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3
4
189
Therefore, Art. 17 of the Belgium-NL tax treaty did not apply;
Art. 7 (Business profits) applied.
Belgian Court’s Views: www.indiainternationaltax.comwww.dramarmehta.com
5
6
190
Artists companies’ incomes were not attributable to PE in Belgium;
Belgian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
1
191
Hence, not taxable in Belgium.
Belgian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
2
192
Aggressive transactions
and avoidance situations
193
Pirelli Neumaticos SAIC(Federal Court of Appeal)(23 May 2013)
194
A Co.(Argentina)
I Co. (Italy)
Technical Assistance
Payment made before approval by authorities
Background Facts:
Related Entities
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195
Technology transfer agreements between related parties required approval under Argentinian law;
Background Facts: www.indiainternationaltax.comwww.dramarmehta.com
1
196
Lack of approval did not affect the agreement’s validity;
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
2
197
But attracted expense disallowance.
www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:
3
198
Non-discrimination provision of Art. 25(3) of the treaty negated disallowance provision.
Per Taxpayer Company: www.indiainternationaltax.comwww.dramarmehta.com
199
Disallowed expense deduction for royalty payments to I Co.
Per Tax Authorities: www.indiainternationaltax.comwww.dramarmehta.com
1
200
Art. 12(2) required approval by Argentinian authorities;
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2
Per Tax Authorities:
201
Art. 25(3) did not apply.
www.indiainternationaltax.comwww.dramarmehta.comPer Tax Authorities:
3
Art. 12(2) of the Argentina-I taly 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.
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203
Art. 12(2) of the Argentina-I taly 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].
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204
Art. 25(3) of the Argentina-I taly 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 first-mentioned State…..
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205
Art. 25(3) of the Argentina-I taly 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.]
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206
Art. 25(3) of the tax treaty applied;
Art. 12(2) was only concerned with tax treatment in the hands of the recipient;
Argentinian Court’s View: www.indiainternationaltax.comwww.dramarmehta.com
12
207
Art. 12(2) was not concerned with tax deduction.
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3
Argentinian Court’s View:
208
A Co. was entitled to deduct royalty payments to I Co.
Argentinian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com
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 specifiedservice on which equalization levy is deductible under the provisions ofChapter VIII of the Finance Act, 2016, and such levy has not been deductedor after deduction, has not been paid on or before the due date specified insub-section (1) of section 139 Provided that where in respect of any suchconsideration, the equalization levy has been deducted in any subsequentyear or has been deducted during the previous year but paid after the duedate specified in sub-section (1) of section 139, such sum shall be allowed asa deduction in computing the income of the previous year in which such levyhas been paid”;
Significance in Indian Context: www.indiainternationaltax.comwww.dramarmehta.com
1
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;
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2
Significance in Indian Context:
Pirelli have significant persuasive in litigation w.r.t. expense disallowance on a/c of non-deduction of equalization levy.
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3
Significance in Indian Context:
212
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