Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/3.4.2
3.4.2 Convention provisions that address the issues associated with reorganizations
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659430:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
Canada - United States Income and Capital Tax Treaty 1980, as amended through 2007, art. XIII, par. 8.
H.J. Ault & J. Sasseville, ‘Taxation and Non-Discrimination: A Reconsideration’, World Tax Journal 2010, vol. 2, no. 2, par. 2.3.2.2.
J. Li & F. Avella, ‘Article 13: Capital Gains - Global Tax Treaty Commentaries - Global Topics - 2. Residence State Taxing Rights (Last Reviewed: 30 May 2020)’, IBFD, par. 2.2.2.3. Li & Avella distinguish two types of treaty provisions: rules that automatically remove the taxing rights of the source state and rules that operate together with a MAP (the provision included in the treaty between Canada and the United States is an example of that type of provisions).
Netherlands - Nigeria Income Tax Treaty 1991, art. 13, par. 4.
The Protocol also includes the following explanation (art. VI): ‘It is understood that the terms corporate organization, reorganization, amalgamation, division or similar transaction refer to a transfer of shares within a group of associated enterprises. In that case the shares will be evaluated for the transferee at the bookvalue of the transferor.’
Mexico - United States Income and Capital Tax Treaty 1992, as amended through 2002, art. 13, par. 4. The Protocol to the Israel - United States Income Tax Treaty 1975 and the Protocol to the Spain - United States Income Tax Treaty 1990, as amended through 2013 contain similar provisions.
Probably capital gains tax.
C. Staringer, ‘Chapter 8: Business income of tax groups in tax treaty law’, par. 8.1, in G. Maisto (ed.), International and EC Tax Aspects of Groups of Companies, Amsterdam: IBFD 2008.
Art. 13, par. 4, of the Netherlands-Mexico Tax Treaty provides that gains from the alienation of shares in an entity which is a resident of one of the states may be taxed in that state to a maximum of 10% of the taxable gains.
Mexico - Netherlands Income and Capital Tax Treaty 1993, as amended through 2008, Protocol, art. XIV.
Dutch Parliamentary Documents I/II 2009/10, 32160, A and 1, p. 5.
The Canada - United States tax treaty contains a treaty provision aimed at reorganizations. This provision reads as follows:1
‘8. Where a resident of a Contracting State alienates property in the course of a corporate or other organization, reorganization, amalgamation, division or similar transaction and profit, gain or income with respect to such alienation is not recognized for the purpose of taxation in that state, if requested to do so by the person who acquires the property, the competent authority of the other Contracting State may agree, in order to avoid double taxation and subject to terms and conditions satisfactory to such competent authority, to defer the recognition of the profit, gain or income with respect to such property for the purpose of taxation in that other state until such time and in such manner as may be stipulated in the agreement.’
Although the text suggests otherwise, the scope of the provision is relatively limited. The provision is specifically aimed at providing a solution in the event of timing mismatches relating to taking into account a taxable capital gain. Effectively, the provision only applies if the initial alienation of the property is potentially taxable in both Contracting States, while only one of the states would provide for deferral of taxation on the basis of its domestic law.2 In essence, the provision merely indicates that the Contracting States have the option of providing for deferral of taxation under certain circumstances. Hence, as the solution must be determined according to the facts and circumstances of the case, there is no clear rule offering certainty to taxpayers.
Other types of treaty provisions dealing with corporate reorganization automatically remove the taxing rights of the source state. This means that the alienation is only covered by the residence state.3 An example is the provision in the treaty between Nigeria and the Netherlands. The provision reads as follows:4
‘Gains from the alienation of any property other than that referred to in paragraphs 1, 2 and 3, shall be taxable only in the state of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in the other state may be taxed in that other state except if such gains are realised in the course of a corporate organisation, reorganisation, amalgamation, division or similar transaction.’5
The Protocol to the Mexico - United States tax treaty provides for a deferral of taxation of capital gains on the transfer of foreign property within tax groups in exchange for shares.6 One of the conditions for such a deferral is a transfer between companies filing a consolidated tax return. If a United States resident tax group transfers a shareholding in a foreign subsidiary from one group member to another in exchange for shares, the source state has no right to levy tax7 on the transfer. If the same transfer would have occurred between two unrelated entities, the source state would have been able to levy a tax. This actually extends benefits that apply within a national tax group to treaty partners.8
Furthermore, the Protocol to the treaty between Mexico and the Netherlands also contains a provision which, under certain conditions, provides for an exemption from withholding tax9 in respect of capital gains on the disposal of shares between members of the same group of entities, if the consideration is in shares.10 This provision is aimed at tax deferral in the event of mergers, demergers and reorganizations.11