Treaty Application for Companies in a Group (FM nr. 178) 2022/5.2.4.2:5.2.4.2 Consolidated subsidiary: not liable to tax/transparent?

Treaty Application for Companies in a Group (FM nr. 178) 2022/5.2.4.2

5.2.4.2 Consolidated subsidiary: not liable to tax/transparent?

Documentgegevens:

L.C. van Hulten, datum 06-07-2022

Datum: 06-07-2022
Auteur: L.C. van Hulten
JCDI: JCDI:ADS659441:1
Vakgebied(en): Omzetbelasting / Plaats van levering en dienst

The tax liability of a consolidated group is often imposed on the parent company. Hence, the subsidiary may not be seen as liable to tax. This could lead to the conclusion that an entity is not eligible for tax treaty benefits.1 A person must be liable to tax for domestic tax law purposes in order to be considered a treaty resident.2 Additionally, there is a risk that subsidiaries in a group consolidation regime are treated as being transparent. This follows from the similarities between a consolidation regime and fiscal transparency. Under a tax consolidation regime, the parent company becomes the taxpayer on behalf of the subsidiaries. This shows resemblances with the features of a hybrid entity: in that case – depending on the facts – the entity’s income may be treated as if it were the entity’s shareholder’s income.3

Under a pooling approach, each entity still files a separate tax return. Therefore, there is a very limited risk that the entities are considered to be not liable to tax or transparent from a tax treaty perspective.4

Under an attribution system, there should generally not be an issue from a tax treaty perspective.5 For application of the attribution approach the subsidiaries are normally treated as a distinct taxpayer and remain subject to taxation.

Subsidiaries that benefit from a group taxation regime based on full consolidation via the absorption method, might not be seen as liable to tax or transparent from a tax treaty perspective.6 This would not necessarily mean they would not be able to benefit from tax treaties based on the OECD MTC. Art. 1, par. 2, OECD MTC might in that case enable the entities to obtain treaty access.7

A discussion about whether or not subsidiaries remain eligible for treaty benefits under the absorption method arose for the Dutch fiscal unity regime as it was in force up to 1 January 2003.8 Under this former regime – which was based on the absorption method – corporate income tax was levied as if the subsidiaries were fully integrated into the parent company. Therefore, the subsidiaries ceased to exist for corporate income tax purposes. The Dutch Supreme Court9 indicated that even though the subsidiaries were deemed to be merged into the parent company, the parent and its subsidiaries were not considered to constitute a single legal entity.10 Therefore, the fiscal unity is not seen as a person for treaty purposes. Moreover, the Dutch Supreme Court mentioned that it was not the intention of the Contracting States to view a fiscal unity as a person for tax treaty purposes. Subsequently, the question is whether each separate entity can be seen as a resident (i.e., is the entity liable to tax). Whether this was the case for the application of the former Dutch fiscal unity regime was not answered by the Dutch Supreme Court.11

An entity should be considered to derive the income in question in order to benefit from treaty application. If a group entity is not considered to be a tax resident because of the application of the group taxation regime, this can also lead to problems with respect to the application of the distributive rules in the tax treaty. If the parent company of the tax group would be seen as the tax resident, it might not be able to claim treaty benefits, as the parent company is not the recipient12 of the income from a civil law perspective.13

All in all, if an entity falls within the scope of a group taxation regime, this normally does not affect the treatment of the group member as a taxable entity. This could be different under the absorption system in a full consolidation regime. The risk of losing treaty benefits can be minimized by ensuring that a subsidiary remains liable to tax from a domestic perspective, even though the parent company is the principal taxpayer.14

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A. Ting, The Taxation of Corporate Groups under Consolidation: An International Comparison, Cambridge: Cambridge University Press2013, par. 9.4.

Art. 4, par. 1, OECD MTC.

K. Jain, ‘The OECD Model (2017) and Hybrid Entities: Some Opaque Issues and Their Transparent Solutions’, Bulletin for International Taxation 2019, vol. 73, no. 3, par. 2.3.1.1.

K. Jain, ‘The OECD Model (2017) and Hybrid Entities: Some Opaque Issues and Their Transparent Solutions’, Bulletin for International Taxation 2019, vol. 73, no. 3, par. 2.3.1.2.

K. Jain, ‘The OECD Model (2017) and Hybrid Entities: Some Opaque Issues and Their Transparent Solutions’, Bulletin for International Taxation 2019, vol. 73, no. 3, par. 2.3.1.3. The author mentions that it would be interesting to see if the 2017 change in the OECD MTC, which includes the introduction of a definition of fiscally transparent in the OECD Commentary, would change the analysis. Fiscally transparent is defined as follows:‘The concept of “fiscally transparent” used in the paragraph refers to situations where, under the domestic law of a Contracting State, the income (or part thereof) of the entity or arrangement is not taxed at the level of the entity or the arrangement but at the level of the persons who have an interest in that entity or arrangement. This will normally be the case where the amount of tax payable on a share of the income of an entity or arrangement is determined separately in relation to the personal characteristics of the person who is entitled to that share so that the tax will depend on whether that person is taxable or not, on the other income that the person has, on the personal allowances to which the person is entitled and on the tax rate applicable to that person; also, the character and source, as well as the timing of the realization, of the income for tax purposes will not be affected by the fact that it has been earned through the entity or arrangement. The fact that the income is computed at the level of the entity or arrangement before the share is allocated to the person will not affect that result.’ (Commentary on art. 1 OECD MTC, par. 9). If subsidiaries in an attribution system would be seen as transparent because of this definition, they would be able to benefit from the tax treaty due to the application of art. 1, par. 2, OECD MTC.

In this regard, Australia changed their residence definition to make sure that consolidated entities can still benefit from tax treaties. In various tax treaties ‘resident of Australia’ is defined as ‘a resident of Australia for the purposes of Australian tax’(A. Ting, The Taxation of Corporate Groups under Consolidation: An International Comparison, Cambridge: Cambridge University Press2013, par. 9.5).

K. Jain, ‘The OECD Model (2017) and Hybrid Entities: Some Opaque Issues and Their Transparent Solutions’, Bulletin for International Taxation 2019, vol. 73, no. 3, par. 2.3.1.4.

Under the ‘new’ Dutch fiscal unity regime each consolidated subsidiary remains liable to tax (even though the consolidated tax liability is levied on the parent company) to ensure that these subsidiaries remain eligible to tax treaty benefits.

Dutch Supreme Court 3 February 2012, ECLI:NL:HR:2012:BT2199.

10.

See also C. van Raad, ‘Fiscale eenheid: Verdragswoonplaats moet voor moeder en dochtermaatschappij afzonderlijk worden beoordeeld’, Beslissingen in Belastingzaken 2012/126 and F.P.G. Pötgens & W.E.J. Dijkstra, ‘Cross-border fiscal unities and tax treaties: nothing new under the sun?’, Intertax 2014, vol. 42, no. 2.

11.

C. van Raad, ‘Fiscale eenheid: Verdragswoonplaats moet voor moeder en dochtermaatschappij afzonderlijk worden beoordeeld’, Beslissingen in Belastingzaken 2012/126, par. 5.

12.

Because, e.g., its domestic subsidiary which is included in the group consolidation is considered the recipient.

13.

B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.1. E.g., art. 10 OECD MTC applies to dividends paid by a resident of a Contracting State to a resident of the other Contracting State.

14.

A. Ting, The taxation of corporate groups under the enterprise doctrine: a comparative study of eight consolidation regimes (PhD Doctorate), Sydney: University of Sydney 2011, par. 9.3.1.