Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.8.4
6.3.8.4 A switch-over clause
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659471:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
Art. 53 of the CCTB contains a switch-over clause that targets specific types of income originating in a third country. Under this provision the participation exemption is denied if shares are held in a low-taxed third country entity. The idea behind the provision in the CCTB is that there is no or very limited economic double taxation in that situation. The clause aims to make sure that income is taxable within the EU if it is taxed below a certain level outside the EU (J. van de Streek, ‘Chapter 11: A Common (Consolidated) Corporate Tax Base (CC(C)TB)’, par. 11.6.2, inP.J. Wattel, O.C.R. Marres & H. Vermeulen (eds.), European Tax Law. Volume 1 - General Topics and Direct Taxation (Fiscale Handboeken nr. 10), Deventer: Wolters Kluwer 2018). Also, the original text of ATAD1 included a switch-over clause. This clause aimed to discourage companies to shift profits from high-tax jurisdictions to low-tax jurisdictions if there is no sufficient business justification for the transfer. In the end, the clause was eliminated from the adopted text of the Directive. It appeared to be ‘one bridge too far, even after its proposed scope was heavily reduced’ (D.S. Smit, ‘Chapter 12: The Anti-Tax-Avoidance Directive (ATAD)’, par. 12.2.1, inP.J. Wattel, O.C.R. Marres & H. Vermeulen (eds.), European Tax Law. Volume 1 - General Topics and Direct Taxation (Fiscale Handboeken nr. 10), Deventer: Wolters Kluwer 2018). See also I.M. de Groot, ‘The Switch-Over-Provision in the Proposal for an Anti-tax Avoidance Directive and Its Compatibility with the EU Treaty Freedoms’, EC Tax Review 2016, vol. 25, no. 3.
B.J. Arnold, ‘Tax Treaties and Tax Avoidance: The 2003 Revisions to the Commentary to the OECD Model’, Bulletin for International Taxation 2004, vol. 58, no. 6, par. 8.6. This approach is, e.g., included in the OECD Commentary as a possible solution to deal with preferential regimes (Commentary on art. 23 A and 23 B OECD MTC, par. 31.1).
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 4.2.2.
For completeness, option B aims to provide a solution specifically for hybrid dividends (this is essentially a narrow switch-over clause), while option C entails a full replacement of the exemption method by the credit method.
E.g., if two countries have a different view on whether or not a permanent establishment exists. If the state of residence considers certain activities to constitute a permanent establishment, it will exempt the income. If the source state is not of the view that the activities constitute a permanent establishment, it will not tax the income. This will lead to double non-taxation.
See also par. 3.3.4.3. Additionally, it should be mentioned that art. 23 A, par. 4, OECD MTC only provides a partial solution for hybrid mismatches in relation to dividends that are deductible in the payer state, as solely interpretation conflicts are included in its scope (OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, Paris: OECD Publishing 2015, par. 444). Art. 23 A, par. 4, OECD MTC is generally understood to solely cover interpretation conflicts (for a dissenting opinion see C. Marchgraber, ‘Conflicts of Qualification and Interpretation: How Should Developing Countries React?’, Intertax 2016, vol. 44, no. 4, par. 2.1), while art. 5, par. 2, MLI (option A) could be attached a broader scope, i.e., also qualification conflicts (I.M. Geerse & F.P.G. Pötgens, ‘De impact van het MLI/BEPS op de Notitie Fiscaal Verdragsbeleid 2020’, Maandblad Belasting Beschouwingen 2020/37, par. 3.7). For an overview of all the differences between the two provisions see also F.D. Martínez Laguna, Hybrid Financial Instruments, Double Non-taxation and Linking Rules, Alphen aan den Rijn: Kluwer Law International 2019, par. 3.02B.
L. Parada, Double Non-taxation and the Use of Hybrid Entities An Alternative Approach in the New Era of BEPS, Alphen aan den Rijn: Kluwer Law International 2018, par. 3.4.
Commentary on art. 23 A and 23 B OECD MTC, par. 56.2.
Would a switch-over clause1 be a desirable solution? Under a switch-over clause a state that generally applies the exemption method switches to the credit method in certain situations.2 The aim of such a provision is thus to avoid that income remains untaxed as a result of the application of the exemption method to provide relief for double taxation.3
Art. 23 A, par. 4 and art. 5, par. 2 MLI (option A)4 entail similar switch-over clauses. However, both provisions are not intended to function as a subject-to-tax requirement. The provisions only eliminate double non-taxation that is caused by a different interpretation of the facts of the case5 or by a different interpretation of the application of treaty provisions (i.e., conflicts of interpretation). They do not cover double non-taxation resulting from the fact that the source state does not take into account the income in line with its domestic law.6 The provisions thus do not solve all cases of double non-taxation.7 If a source country is of the view that it may tax an item of income or capital in line with the OECD MTC, but no tax is actually payable on that item of income in line with domestic law, double non-taxation will be the result.8 As double non-taxation as a result of differences between domestic law can be seen as intended double non-taxation, a switch-over clause seems to be recommendable from the perspective of the objectives of the OECD MTC. However, a switch-over clause would not be a ‘perfect’ solution, as various of the disadvantages that have been mentioned with respect to the credit mechanism also apply for a switch-over clause.