2_Session VIII_Recent... · 2016. 7. 15. · Functional similarities between a PE and a fixed base; Duration Test for determination of existence of PE applied even for fixed base;

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2

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

Introduction

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3

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:

4

France

Belgium

Italy Israel

US

UK Switzerland

The Netherlands

South Africa

www.indiainternationaltax.comwww.dramarmehta.comJurisdictions:

5

Treaty entitlement

(Art. 1)

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

7

F Co. France

H Co.Netherlands

100%

Background Facts:

K Co. Korea

80% equity capital

20% equity capital


8

Subsequently, H Co. and F Co. divested their holdings in the K Co.

Background Facts: www.indiainternationaltax.comwww.dramarmehta.com

1

9

Capital gain derived by F Co. were taxable in Korea in accordance with Art. 13.


2

10

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

11

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

1

12

F Co. was the ‘real owner’ of the equity shares of the Korean Co.;


2

13

The capital gains derived by H Co. were de facto income of F Co., and were taxable in Korea.


3

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:


1

15

In such situations, the ‘real owner’ had to be taken into account;

www.indiainternationaltax.comwww.dramarmehta.comSupreme Court’s

Observations:

2

16

H Co. was well-equipped with employees and offices, and carried on substantive activities;


Observations:

3

17

Therefore, the substance over form rules did not lead to adverse implications for H Co.


Observations:

4

18

H Co. was the beneficial recipient of the capital gains and therefore, they were not taxable in Korea.

Supreme Court’s Conclusion:


19

Resident and dual residence

(Art. 4)

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

21

Background Facts:

Taxpayer was an Individual;


1

He was citizen of Belgium;


22

2

Background Facts:

23

He was dual resident of Belgium and France.


23

3

Background Facts:

24

Per Taxpayer:

Tax resident of France.


24

25

Per Belgian Tax Authorities:

Tax resident of Belgium.


25

26

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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1

2

27

The taxpayer had ‘moved’ from Belgium to France;

The taxpayer had rented out the Belgian apartment;


27

Belgian Court’s Observations:

3

4

28

Aggregate rental duration < 40% of time p.a.

Rental duration < 15 days at a time;


28

5

6

Belgian Court’s Observations:

29

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

1

29

30

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.


30

2

3

Belgian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com

1 Nationality was the determining factor;

31

Belgian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com

Accordingly, the taxpayer was tax resident of Belgium.

32

2

33

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;


1

Tax resident of Canada;


2

Background Facts:

Resident of the UK by virtue of Art.4(2);


3

Background Facts:

Not domiciled in the UK.


4

Background Facts:

39

Issue:

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


40

Adopted purposive interpretation approach;

Tax Court of Canada: www.indiainternationaltax.comwww.dramarmehta.com

1

41

Residence allocation by a tax treaty is merely for purpose of distributive rules;


2

42

Domestic tax law of the other contracting state applied (subject to elimination of double taxation);


3

43

Only income remitted to the UK was taxable in the UK;


4

44

Income was not remitted to the UK;


5

45

Hence it was not taxable in the UK;


6

46

No double taxation;


77

47

Hence, Canadian taxation did not violate the tax treaty.


8

48

The taxpayer’s income was taxable in Canada, as ‘resident of Canada’.

Tax Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com

49

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

50

Background Facts:

France

Earned income from both jurisdictions

Taxpayer SwitzerlandResident Resident


Per Taxpayer:

Tax resident of Switzerland.


Per French Tax Authorities:

Tax resident of France.


53

The taxpayer’s income from Switzerland was 10 times compared to his income from France.

French Supreme Admin. Court’s View:


1

The centre of vital interests was situated in Switzerland;

www.indiainternationaltax.comwww.dramarmehta.comFrench Supreme Admin.

Court’s View:

2

55

By virtue of Art. 4(2) of the tax treaty, the taxpayer had to be regarded as resident of Switzerland.


Court’s View:

3

56

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

57

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

Background Facts:

LHV was a German Pension Fund;


1

Background Facts:

Received dividend from France;


2

Background Facts:

Under the French tax law: 25% withholding tax on dividend;


3

Background Facts:

Under the France-Germany tax treaty: 15% withholding tax on dividend;


4

Background Facts:

LHV’s Income was exempt in Germany.


5

63

As per LHV:

The dividend income was subject to 15% withholding tax.


64

As Per French Tax Authorities:

LHV was not resident of Germany for the tax treaty purposes.


1

65

Because LHV’s income was tax-exempt in Germany.

www.indiainternationaltax.comwww.dramarmehta.comAs Per French Tax

Authorities:

2

66

‘Resident’ article had to be interpreted in a ‘plain and textual manner’;

French Supreme Admin.Court:


1

67

Context and object of treaty terms were important;


Court:

2

68

Avoidance of double taxation was the primary object of the treaty;


Court:

3

69

Hence, a person, whose income was tax-exempt in a Contracting State, could not be regarded as ‘resident’ of that State; and


Court:

4

70

LHV could not be regarded as resident of Germany for tax treaty purposes.


Court:

5

71

LHV’s dividend income was subject to French withholding tax @ 25%.


72

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

73

Background Facts:

Israel Company

Capital gains from sale of shares of Israeli subsidiary

Regd. Office in Belgium

Directors tax resident of Belgium


74

Per Taxpayer Company:

Tax resident of Belgium;


1

75


As per Art. 13(3), the capital gains were not taxable in Israel.


2

76

Per Israeli Tax Authorities:

Tax resident of Israel.


1

77

The capital gains were taxable in Israel.

www.indiainternationaltax.comwww.dramarmehta.comPer Israeli Tax Authorities:

2

78

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

1

2

79

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.

www.indiainternationaltax.comwww.dramarmehta.comDistrict Court’s Observations:

3

4

80

The taxpayer company was tax resident of Israel by virtue of Art. 4(3);

District Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com

1

81

The capital gains were taxable in Israel.


2

District Court’s Conclusion:

82

Permanent Establishment

(Art. 5)

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

84

Professional Diver

Netherlands

Project in India

Stayed 89 days in India


85

As Per Taxpayer:

Art. 14 (Independent personal services) applies;


1

86

As Per Taxpayer:

Fixed base in India;


2

87

As Per Taxpayer:

Income taxable in India.


3

88

Netherlands Tax Authorities:

No fixed base in India;


1

89

Netherlands Tax Authorities:

Income was taxable in the Netherlands.


2

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

1

2

91

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

3

4

92

The taxpayer did not have fixed base in India and the income was not exempt in the Netherlands.


93

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

94

Background Facts:

Company XUSA

South African Company

Provided Advisory services

Employees stayed for >183 days

Provided board room to Co. X’s employees


South African Tax Authorities:

Company X had service PE in South Africa.



Did not have a PE in South Africa ;


1


Income from the project was not taxable in South Africa;


2


Art. 5(2) contains mere illustrative list of PE ;


3


Prerequisites for PE under Art. 5(1) had to be satisfied.


4

Tax treaty had to be interpreted in a congruent manner;

Tax Court’s View: www.indiainternationaltax.comwww.dramarmehta.com

1

101

Expression “includes especially” in Art. 5(2) was a term of extension;


2

102

Hence, Art. 5(2) extended scope of Art. 5(1);


3

103

Requirements of Art. 5(2)(k) were satisfied;


4

104

Hence, no need to refer to Art. 5(1);


5

105

Art. 5(2)(a) to Art. 5(2)(f) referred to place of business;


6

106

Art. 5(2)(k) referred to type of activities (services);


7

107

Company X had a PE under Art. 5(1) as well because disposal test was satisfied.


8

108

Company X’s income was taxable in South Africa.

Tax Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com

109

Business profits (Art. 7)

110

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

1

Background Facts:

Mr. A was self-employed writer;


2

Background Facts:

Tax resident of Austria;


Background Facts:

Provided PR services in Liechtenstein;


3

Fixed base in Liechtenstein;


4

Background Facts:

Nature of activities:

1. PR consulting (business activities);

2. Writing text for advertisements (Professional activities)

www.indiainternationaltax.comwww.dramarmehta.comBackground Facts:

5

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


6

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


7

The entire income was from independent personal services;

Per Taxpayer:

Was tax-exempt in Austria.


1

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.


1

2

Income from coherent activities was indivisible;

Austrian Court’s Verdict: www.indiainternationaltax.comwww.dramarmehta.com

1

Hence, the total income could not be split between business profits and income from independent personal services;


2

Mr. A had offered a composite product to his clients;


3

Hence professional services lost independence;


4

Hence, Mr. A’s entire income was ‘business profits’.


5

Mr. A’s entire income was taxable in Austria, subject to foreign tax credit.

Austrian Court’s Conclusion: www.indiainternationaltax.comwww.dramarmehta.com

126

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

127

AlpexPoland PE

Czech Republic


128

Background Facts:

Under the Czech Republic tax law, directors’ remuneration was not deductible.


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…”


130

The Czech Tax Authorities:

Disallowed expense deduction for remuneration payable to the Directors of Alpex;


Expense deduction was subject to the restrictions, if any, under the Source State’s domestic tax law;

The Czech Supreme Admin Court:


1

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:


2

Director’s remuneration was not deductible for determining income attributable to PE.


134

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

PE

135

Background Facts:

Italian Company PE

France

Real estate and investment business


136

The PE had derived rental income from certain real estate;


1

137

Had incurred operating expenses w.r.t. other real estate assets and investments.


2

138

The operating expenses were deductible from the rental income.


1

139

Art. 7 (Business profits) of the tax treaty applied.


2

140

The French tax law treated the above-mentioned rental income as ‘business profits’;

Court’s Observations: www.indiainternationaltax.comwww.dramarmehta.com

1

141

The French tax law did not contain specific provisions for tax treatment for income from immovable property;


2

142

Art. 6* contained distributive rule – so that the Source State could tax the subject income;

Court’s Observations:

*Income from immovable property


3

143

Art. 6 did not preclude applicability of Art. 7.


4

144

Art. 7 applied;


1

145

The expenses were deductible from the rental income.

www.indiainternationaltax.comwww.dramarmehta.comCourt’s Conclusion:

2

Veracel Cellulose (Brazilian Court)(2010)

Service

Fees

Background Facts:

FinnishCompany

BrazilianCompany

Veracel Cellulose (Brazilian Court)


Was the income taxable in Brazil?

Issue:Veracel Cellulose (Brazilian Court)


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.



21

Presenter

Presentation Notes

The Brazilian company’s claim was invalid.

Tax Authority's View:

The Brazilian company was obliged to withhold tax.



1

2

Presenter

Presentation Notes

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.



Presenter

Presentation Notes

The ITAT accepted the submission of the taxpayer company that since the income of the UK Co. was not attributable to PE in India, the said income is not taxable in accordance with Art. 7(1) of the India-UK tax treaty. The ITAT also accepted taxpayer company’s submission, inter alia, that the taxpayer company was not obliged to withhold tax on the above – mentioned payment in view of the SC’s decision in the case of GE Indian Technology Center (P.) Ltd. v. CIT.

Administrative ruling could not impose tax in respect of income that was exempt under treaty.

Brazilian Court’s Observations:Veracel Cellulose (Brazilian Court)


Presenter

Presentation Notes


The Finnish Co.’s income was exempt fromtax.

Brazilian Court’s Verdict:

The Brazilian company was not obliged to withhold tax.



1

2

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

Service

Fees

Background Facts:

Canadian & German Company

BrazilianCompany

Copesul (Brazilian Court)


Was the income taxable in Brazil?

Issue: www.indiainternationaltax.comwww.dramarmehta.com


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.



1

2

Presenter

Presentation Notes

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.



Presenter

Presentation Notes

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.



1

2

Presenter

Presentation Notes


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


Superior Court of Justice’sVerdict:



The expression “business profits” appearing in Art. 7(1) could not be restricted to ‘net profit’ as understood under the Brazilian tax law.

1

Presenter

Presentation Notes





The incomes of the Canadian and German companies were within the scope of Art. 7(1) of the relevant tax treaties.

2

Presenter

Presentation Notes





Upheld the decision of the Federal regional Court.3

Presenter

Presentation Notes


164

Royalties (Art. 12)

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

166

Background Facts:

Taxpayer was a world-famous golfer;


1

167

Tax resident of Switzerland;


2

168

Taxpayer had executed endorsement agreement with TaylorMade, a US company;


3

169

TaylorMade was entitled to use the taxpayer’s image rights;


4

The taxpayer had also committed to play/ appear in at least 20 events per year;


5

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


6

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


7

Per Taxpayer:

Income w.r.t. image rights was not taxable in the United States


1

Per Taxpayer:

A part of income w.r.t. personal services was taxable in the United States


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;


2

Hence, Art. 17 did not apply to that income.


3

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)

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.


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.


2

185

As per Art. 17 of the Belgium-NL tax treaty: public entertainers’ incomes from personal activities were taxable in the Source State;


1

186

During the relevant tax years, the tax treaty did not include a provisions similar to Art. 17(2) of the OECD MC.


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;


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;


3

4

189

Therefore, Art. 17 of the Belgium-NL tax treaty did not apply;

Art. 7 (Business profits) applied.


5

6

190

Artists companies’ incomes were not attributable to PE in Belgium;


1

191

Hence, not taxable in Belgium.


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


195

Technology transfer agreements between related parties required approval under Argentinian law;


1

196

Lack of approval did not affect the agreement’s validity;


2

197

But attracted expense disallowance.


3

198

Non-discrimination provision of Art. 25(3) of the treaty negated disallowance provision.


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;


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.


203


…. 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].


204


“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…..


205


….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.]


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.


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;


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.


3

Significance in Indian Context:

212

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2_Session VIII_Recent... · 2016. 7. 15. · Functional similarities between a PE and a fixed base; Duration Test for determination of existence of PE applied even for fixed base;