Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.3.11
3.3.3.11 Art. 21 OECD MTC: Other income
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659401:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
For the sake of completeness, the provision does not broaden the scope of the Convention with regard to the types of tax mentioned in art. 2 OECD MTC (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1753).
Art. 13, par. 5, OECD MTC contains its own ‘residual provision’. Thus, capital gains will not be covered by art. 21 OECD MTC.
The provision has a multilateral scope and hence also covers income from third states (Commentary on art. 21 OECD MTC, par. 1).
The provision does not apply to immovable property; for immovable property, the main rule of art. 6 OECD MTC remains relevant (art. 21, par. 2, OECD MTC). Application of art. 21, par. 2, OECD MTC has quite a strange effect from a tax policy perspective if state A applies the exemption method in the example shown in figure 3.5. If the dividend was paid to a resident of a third state, the source state would have obtained limited taxing rights under art. 10 OECD MTC. Since the dividend is paid to a resident of the same state as the dividend paying entity, there is no limited taxing right for the state of the dividend paying entity because of the allocation to the permanent establishment state. After all, art. 7 OECD MTC is applicable. This also applies to states that apply a credit method if the tax burden in the state of the permanent establishment is equal to or higher than the tax burden in the state of residence (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1772). See the Commentary on art. 23 A and 23 B OECD MTC, par. 9.1 for a potential solution if the exemption method is applied. The states may agree that the state of the entity paying (and also receiving) the dividends may still tax the dividends in accordance with art. 10 OECD MTC. It is then up to the state of the permanent establishment to provide for the avoidance of double taxation. The issue described above also apply to interest payments.
E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1752.
Art. 21 OECD MTC only solves possible double taxation situations that have their origin in the person of the recipient. Double taxation conflicts that have their origin in the person of the payor (e.g., art. 11, par. 5, OECD MTC) are not within its scope (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1753).
Commentary on art. 21 OECD MTC, par. 2.
Commentary on art. 21 OECD MTC, par. 3.
Art. 21 OECD MTC is a residual provision for other income. The main rule is that taxing rights are allocated to the state of residence. The provision comes into play if the other, more specific provisions have not provided for the allocation of the taxing rights.1 This may be the case because the type of income is not included in the other distributive rules.2 The provision may also come into play if the income arises in the state of residence or in a third state.3
The second paragraph of art. 21 OECD MTC limits the scope of the first paragraph. The provision allocates taxing rights to the permanent establishment state if the head office receives income from a third state or from the same state in which the head office is situated through a permanent establishment in the other state. The provision applies, for instance, in situations where a parent company holds shares in a subsidiary in the same country, which are attributable to a permanent establishment in another country (see figure 3.5). The provision may thus be relevant in group situations. Contrary to the rule in art. 21 OECD MTC, the taxing rights are allocated to the state of the permanent establishment in such a case.4
The residual provision of art. 21 OECD MTC prevents potential double taxation situations as much as possible.5 After all, the main rule is that income not covered by one of the previous provisions is allocated to the state of residence only. Double taxation hence does not seem to occur, and the provision therefore seems to meet the objectives of tax treaties.6 However, it does not contain a subject-to-tax requirement.7 The provision applies irrespective of whether the state of residence effectively exercises the right to tax from a domestic perspective.8 The provision may therefore create a situation of double non-taxation. As discussed several times above, such a ‘problem’ does not only occur in relation to art. 21 OECD MTC. This potential effect results from the way in which the OECD MTC is constructed in general.