Abuse of tax treaties

Question 1

What is treaty shopping?

Answer 1

• Practice to avoid “bad treaties” = permit source state to levy withholding tax
• Abuse of tax treaties: interposed company: company set up: tax treaty WHT is reduced to 5% so not 35% = Sourse state loses 30% WHT
• Combatting treaty shopping:
  
  • Notion of “beneficial ownership”: art. 10-12
• Action 6 BEPS:
  
  • Introduction of a general anti-avoidance rule in tax treaties = PPT test = principal purpose test: art. 29(9)
  • Limitation on benefits: test

Question 2

What is the beneficition ownership?

Answer 2

• Concept borrowed from common law = right to use & enjoy the income.
• In order to receive treaty benefits for dividends, interest and royalties, Article 10-12 warrant that the recipient of the income is the beneficial owner (BO)

Question 3

Should the term BO be understood in light of domestic law of the source State – Article 3(2) ? Or Should does the term have an “autonomous treaty meaning””?

Answer 3

• OECD favors an “autonomous treaty meaning – contextual interpretation:
  
  • Com. Art. 10 §12.1.: “The term “beneficial owner” is not used in a narrow technical sense (such as the meaning it has under the trust law of many common law countries “ (…) rather it should be understood in its context, in particular in relation to the words “paid … to a resident” and in light of the object and purpose of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance”.

Question 4

What are the Danish cases?

Answer 4

• Beneficial ownershiop = someething economic so not sometihing you receive 1 day and send back the next.
  
  • Court made clear that you do not need to look at it in a legal way but look at what happens in practice. Letterbox company? Small margins?
  • If no substantial commercial activity = company is not the beneficial owner

Question 5

What is the principal purpose test?

Answer 5

• Since BEPS: all treaties include General anti-avoidance provisions: art. 29(9)
• Divided burden of broof:
  
  • Tax authorities must prove that 1 of principal purposes = structure transaction to claim treeaty benefits → then burden of proof shifts: taxpayer must prove: other motives ⇔ tax motives = high burden of proof
• If you set up a complicated structure: indications: set up for tax avoidance/ claim treaty benefits.
  
  • Mr. X must prove other motives in line with object/purpose treaty: promote international investmens = bona fide industrial/commercial activities

Question 6

What is the conclusion on beneficial ownership?

Answer 6

1. A person who receives income and who is under a legal/contractual obligation to pass on the payment received to another person is NOT the beneficial owner of that income
   
   • But careful not only legal/contractual obligations but also on the basis of facts and circumstances (see Danish-cases)
2. That does not mean that any interposed conduit-structure that is found to be the BO is risk free because the structure may be an abuse of the OECD MC > BEPS Action 6

• Similar 2014 OECD Commentary Art. Art. 11 & 12(int/roy)