2.4.2.5 Art. 13 OECD MTC: Capital gains

The provision in the OECD MTC relating to capital gains also includes an implicit group definition. In order to determine whether there is a property company within the meaning of art. 13, par. 4, OECD MTC, it must be verified whether 50% of the value of the shares directly or indirectly consists of property located in the other Contracting State. This provision allows the source state to tax the gain realized on the sale of the shares in a property company. In such a case, the source state obtains the right to tax the entire capital gain. The provision applies not only to shares but also to comparable rights1 in a property company.

Art. 13, par. 4, OECD MTC contains a retrospective assessment period of 365 days to assess whether the shareholding percentage is met.2 The provision applies if at any time during the 365-day period preceding the disposal of shares in a property company, more than 50% of the value is derived from immovable property in the source state. This test period is intended to prevent abuse. For instance, if a large amount of cash had been contributed into the company as equity just before the disposal of the shares, without a retrospective assessment period of 365 days this could lead to the conclusion that there is no property company.

The provision applies to transferors who are residents of a Contracting State. Therefore, the provision is relevant for natural persons, legal entities and unincorporated legal entities. All direct and indirect subsidiaries of the transferor are relevant to the provision. No minimum shareholding in a subsidiary is required to fall within the scope of the provision. As a result, the provision provides for a very broad group concept.