Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.3.7
3.3.3.7 Art. 11 OECD MTC: Interest
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659477:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
From the maximum withholding tax rate of 10% in art. 11, par. 2, OECD MTC, and the possible options for changes to the provision given in the OECD Commentary, it can be concluded that the OECD prefers to grant the taxing rights to the state of residence (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1035).
Commentary on art. 11 OECD MTC, par. 1. Many countries have extensive interest deduction restrictions.
The additional costs thus incurred are usually passed on to the debtor in the source state.
Commentary on art. 11 OECD MTC, par. 7.1.
OECD, Limiting base erosion involving interest deductions and other financial payments, Action 4 - 2015 Final Report, Paris: OECD Publishing 2015, p. 20.
Commentary on art. 11 OECD MTC, par. 7.2.
The question can be raised whether it makes any sense at all to consider group financing structures. After all, no value is added in such situations. It could be argued that group financing structures should not be considered at all. See in this context M.F. de Wilde, ‘Sharing the Pie’; Taxing Multinationals in a global market, Amsterdam: IBFD 2017, par. 4.5.1.3.
For additional information on the interpretation of the concept of beneficial owner, see the introduction to art. 10 OECD MTC above.
Countries may agree to this as a result of treaty negotiations, if they so wish (Commentary on art. 11 OECD MTC, par. 13).
Art. 11, par. 4, OECD MTC.
Art. 11, par. 5, OECD MTC. The provision contains a legal (debtor’s state of residence) and an economic (permanent establishment state) source concept. Under certain circumstances, the same interest payment may be deemed to originate in two states. Such a triangular situation may result in multiple taxation, which is not resolved by the OECD MTC (see also the Commentary on art. 11 OECD MTC, par. 28 and par. 29).
The provision does not cover the situation where the interest paid is less than that which would have been paid between independent parties (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1087).
It could be that the withholding tax limitation contained in art. 10, par. 1, sub a, OECD MTC (i.e., 5%) applies instead of the limitation contained in art. 11, par. 2, OECD MTC (i.e., 10%). It should be kept in mind that the requalified part will likely be non-deductible for corporate income tax purposes (as interest is generally deductible whereas for dividends this is not the case), which would be disadvantageous for the dividend/interest paying entity.
Art. 11, par. 6, OECD MTC covers, for instance, a relationship by blood or marriage between natural persons (Commentary on art. 11 OECD MTC, par. 34).
Commentary on art. 11 OECD MTC, par. 33. As art. 11, par. 6, OECD MTC may also apply to situations falling within the scope of art. 9 OECD MTC, the question arises whether this concurrence gives rise to problems. This is not the case, as art. 9 OECD MTC allows the source state to adjust the payer's profits for domestic purposes, while art. 11, par. 6, OECD MTC concerns the treaty qualification for the taxation of interest in the hands of the recipient (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1087).
The Commentary on the OECD MTC does not explicitly mention that this provision aims at preventing tax avoidance. Art. 1, par. 73 of the Commentary on the United Nations Model Double Taxation Convention 2021 indicates that the special relationship rule which – in line with the OECD MTC – is included in the interest article is aimed at preventing treaty abuse.
Art. 11 OECD MTC regulates the allocation of taxing rights on interest payments. This provision allocates the primary taxing right to the lender’s state of residence. It also provides for limited taxation for the source state of up to 10%. The background to this shared taxing right is the fact that no unanimous agreement could be reached on allocating exclusive taxing rights to the state of residence or to the source state.1
Unlike dividends, interest payments are usually deductible from the tax base. Thus, economic double taxation is less likely to occur in respect of interest payments.2 If the withholding tax is taken into account as an advance tax on the tax payable by the recipient, in principle no double taxation arises with regard to interest payments. As this is not by definition regulated in bilateral relations, the OECD MTC aims to solve this variant of double taxation. Art. 11 OECD MTC and the provisions for the elimination of double taxation try to prevent juridical double taxation with respect to interest payments. Therefore, the provision contributes to realizing the objectives of the OECD MTC. Yet juridical double taxation is not entirely eliminated since withholding tax is deducted as a percentage of the gross amount, whereas the net amount is used to calculate the double taxation relief.3 There can also be remaining juridical double taxation if a loan is taken out, which is then on-lent to another company, leaving only a taxable spread for the company that took out the first loan. In this situation, too, there will be no full settlement.4 This can lead to significant costs for groups of companies, also for groups that are not engaged in base erosion and profit shifting.5 In its Commentary the OECD states that an exemption from withholding tax may be opted for in certain situations, in order to avoid the abovementioned problems.6
No minimum share percentage is required for the limited withholding tax allowed under art. 11, par. 2, OECD MTC. The provision is thus not dependent on the group structure of a group of companies.7 The provision has a bilateral scope of application, just like art. 10 OECD MTC. In addition, the limited withholding tax similarly only applies if the recipient of the interest is the beneficial owner of the interest.8 The provision also does not include a subject-to-tax requirement.9
Art. 7 instead of art. 11 OECD MTC applies to interest payments that form part of the assets of a permanent establishment carrying on business in the country of the paying company.10 In addition, the interest article contains a rule that determines from which country an interest payment is deemed to originate. As a general rule, interest is deemed to originate in the state of residence of the payer. An exception applies if the interest is paid on a debt incurred for the benefit of a permanent establishment. In such a situation the interest is deemed to originate in the permanent establishment state.11
A provision that takes into account the possibility of a relationship between two companies is art. 11, par. 6, OECD MTC. If the interest paid between entities with a special relationship exceeds12 the amount which would have been paid between two entirely independent parties, art. 11 OECD MTC does not apply to the excess. The provision, and thus the limitation imposed on the source state, therefore only applies to interest that would be paid at arm’s length. The non-arm’s length part of the interest is treated according to the domestic law of the Contracting States, unless another treaty article applies to the excess. This could for instance be art. 10 or 21 OECD MTC depending on the qualification of the excess under the domestic law of the Contracting States or under the treaty as such. Under certain circumstances, the outcome in respect of the applicable maximum withholding tax percentage may be more advantageous to the taxpayer.13
The concept of special relationship has a broad scope. It concerns special relationships14 between the payer and the beneficial owner, or between both of the aforementioned and a third person. Moreover, it includes both situations of direct and indirect control. According to the OECD Commentary, the situations covered by art. 9 OECD MTC are in any case understood to be such a special relationship.15 The provision, which applies a form of a group approach, aims to prevent tax avoidance.16 It depends on how the excess part is qualified if the provision is in line with the objectives of the OECD MTC.
Because of the great similarity between art. 10 and art. 11 OECD MTC, I refer to the comments included in the section on art. 10 OECD MTC for the comments on the beneficial owner requirement and income recharacterization.