6.3.2 An aligned group definition?

It seems that ideally an unambiguous group definition that applies to all relevant treaty provisions should be introduced.1 As indicated, an economic group approach – the unitary business – should be based on de facto control and integration. If there is only one group definition for purposes of the OECD MTC this would lead to a less complex system. This could create clarity and provide legal certainty. Therefore, it could positively contribute to international trade.

Aligning the group concept throughout the OECD MTC requires an amendment of the group concepts that are already included in the model. As elaborated upon in chapter 2 and chapter 3, the group concept currently mainly2 plays a role in the following articles:

First, the question arises whether a group concept should be introduced in more articles of the OECD MTC. This could be the case for art. 11 OECD MTC, which currently does not apply a variant of a group approach.3 The approach as applied for art. 10 OECD MTC, which prescribes a lower withholding tax for a certain shareholding percentage, could perhaps be used for art. 11 OECD MTC. It should be kept in mind, however, that withholding taxes on dividends and withholding taxes on deductible expenses raise different challenges. The risk of double or multiple taxation is more significant within a multinational group for the former.4 Therefore, a lower withholding tax rate for interest payments – specifically within group situations – requires balancing the advantages of less double taxation against the additional tax avoidance opportunities that would be created. As a result, it does not seem possible to introduce a group approach in the article on interest payments that fully contributes to achieving the OECD MTC objectives.

Secondly, the question is whether a suitable general group definition for the abovementioned articles can be found. Could the worldwide unitary business approach as described in par. 6.2.2 be used for the application of bilateral tax treaties? This does not seem to be the case, as it would require a multilateral approach. Establishing one group definition for the abovementioned articles requires a balancing of interests. In most of the mentioned articles the group concept mainly serves as a tool to combat tax avoidance, while in art. 10 OECD MTC the implicit group concept is aimed at preventing juridical double taxation. It is difficult to reconcile these objectives.

Even for the articles that serve as a tool to combat tax avoidance the exact goals are different. For example, the term associated enterprise could be given a wider scope of application and could therefore be used for art. 5 OECD MTC. This would lead to the conclusion that in many more cases there would be a permanent establishment risk, while the permanent establishment status is not necessarily artificially avoided.5 In fact, the initial proposal was to use the term associated enterprise for the anti-fragmentation provision.6 However, after critical comments received the proposal was adapted. First, the term connected enterprise7 and subsequently the term closely related enterprise was introduced.8 A change in this provision therefore does not seem logical.

It could also be considered to change the group definition for art. 9 OECD MTC. However, the broad scope that is given to this concept seems to contribute to reaching its objectives: already if there is a relatively limited connection between entities it is important to make sure that transactions between the entities are remunerated on an arm’s length-basis.

As indicated, the shareholding requirement for application of art. 10 OECD MTC seems rather high as this provision is aimed at preventing juridical double taxation of dividend payments. A lower shareholding requirement, perhaps in line with the requirement of the PSD, could be considered. This would contribute to fully or partially eliminating juridical double taxation in more situations and would thus contribute to the OECD MTC objectives.9

Furthermore, two amendments to make the model simpler could be considered. First, the implicit group concept that is used in art. 13 OECD MTC for property companies does not require any minimum threshold. For this group concept a very broad definition is used. It does not seem necessary to count each small equity interest to determine whether an immovable property company exists to combat tax avoidance. Therefore, a certain minimum shareholding percentage could be added to the provision. This could contribute to the practicability of the provision and therefore be positive for cross-border trade.

Second, two treaty terms could be ‘merged’. The term closely related enterprise and the term connected person as applied for the LOB provision specifically show a large resemblance.10 The main difference between the two terms is that the former requires ownership of at least 50% of the shares, whereas for the latter an exact shareholding of 50% could lead to the conclusion that a connected person exists.11 One of these two could easily be used in both the permanent establishment article as well as the LOB provision. As the term closely related enterprise applies a substantive approach, using that term seems the most desirable option to prevent tax avoidance.

All in all, it seems difficult to reconcile the various group definitions while still achieving the OECD MTC objectives. As reaching the objectives is more important than maintaining the simplicity of the system, an overarching change to the group definitions does not seem desirable. For art. 10 OECD MTC a lowered shareholding requirement seems a good addition. This would eliminate double taxation in more group situations and as a result positively stimulate cross-border activities. To make the system somewhat simpler, the scope of art. 13, par. 4, OECD MTC could be made narrower. Additionally, the term closely related enterprise could be used to replace the term connected person. The latter two are both merely ‘cosmetic changes’.