Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.2.3.2
6.2.3.2 Definition of the unitary business and the residence definition (art. 1, 3 and 4 OECD MTC)
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659513:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
Viewing foreign subsidiaries as permanent establishments seems in conflict with art. 5, par. 7, OECD MTC. This article in short states that the fact that a resident company controls another company, shall not of itselfconstitute either company a permanent establishment of the other. However, the fact that it ‘shall not of itself’ lead to the conclusion that one company is a permanent establishment of the other, leaves the possibility to conclude otherwise. It could be argued that the subsidiary should be seen as a dependent agent of the parent in the sense of art. 5, par. 5, OECD MTC, as the parent exercises legal and economic control over the agent (R.S. Avi-Yonah & Z. Pouga Tinhaga, ‘Unitary Taxation and International Tax Rules’, ICTD Working Paper 2014, no. 26, par. 2. The term person as used in art. 5, par. 5, OECD MTC includes ‘an individual, a company and any other body of persons’ (art. 3, par. 1, sub a, OECD MTC)).
If the entities would be seen as transparent entities, they would likely fall within the scope of art. 1, par. 2, OECD MTC in the current tax treaty framework.
M.F. de Wilde, ‘Sharing the Pie’; Taxing Multinationals in a global market, Amsterdam: IBFD 2017, par. 4.5.2.1.
The 1927 version of the draft model of the League of nations included the following article for business profits: ‘Income from any industrial, commercial or agricultural undertaking and from any trades or professions shall be taxable in the State in which the persons controlling the undertaking or engaged in the trade or profession possess permanent establishments …’ (first paragraph of art. 5, League of Nations Document no. C.216.M.85.1927.II (1927)).
The League of Nations did the preparatory research to develop a system for the avoidance of double taxation (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 22).
Art. 5, which read as follows: ‘When an enterprise of one contracting State has a dominant participation in the management or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and as the result of such situation there exists, in their commercial or financial relations, conditions different from those which would have been made between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise, subject to the rights of appeal allowed under the law of the State of such enterprise.’ (League of Nations Document no. C.399.M.204.1933.II.A (1933)) This article is the predecessor of the current art. 9 OECD MTC.
If a subsidiary would be treated as a permanent establishment of its non-resident parent company, in the current framework this would mean that income derived from the services provided by the parent company would be taxable in the source state. If a subsidiary would not be treated as a permanent establishment, those services would not be taxable in that state, if the parent has no permanent establishment in the source country. If a parent company uses the business facilities of a subsidiary company, this might lead to the conclusion that a permanent establishment exists (B.J. Arnold, ‘Threshold Requirements for Taxing Business Profits under Tax Treaties’, Bulletin for International Taxation 2003, vol. 57, no. 10, par. 7).
It is important to explicitly make the unitary business as such a tax treaty person, as otherwise the various subsidiaries would fall within the scope of art. 1, par. 2, OECD MTC (transparent entities). If the unitary business as such is seen as any other body of persons from a national perspective and taxed accordingly, a change in definitions does not seem strictly necessary.
See for this definition par. 6.2.2.2.
If a unitary business exists, corporate entities would be disregarded for tax purposes: the corporate veil would be pierced. In a cross-border context this would mean that the ultimate parent company of the unitary business would fulfil the function of head office, while the group companies could be seen as part of the ultimate parent. In the currently used terminology this would mean they would be seen as permanent establishments.1 The state of the parent company would in essence view the various group companies as transparent entities.2 Therefore, the domestic and foreign subsidiaries of the parent company would essentially be permanent establishments of the ultimate parent company.3 It should be noted that, initially, the term permanent establishment was meant to also include separate entities (subsidiaries).4 In 1933 the League of Nations5 introduced a specific article6 for associated enterprises. After this amendment, subsidiaries were no longer seen as permanent establishments but as independent legal entities.7
Art. 1 OECD MTC determines that the Convention applies to persons who are resident of one or both of the Contracting States. Therefore, to be able to benefit from treaties, the unitary business as such should be seen as a person for tax treaty purposes.8 In this regard a definition of the concept of unitary business should be included in tax treaties. This definition should be aligned with the definition used for national tax purposes.9 As art. 3 OECD MTC contains general definitions, this would be a logical article to include the definition, if the current format would be followed. This also requires the introduction of the definition of ultimate parent company. As the unitary business as such would be considered a resident for tax treaty purposes, the entities and any other body of persons that are part of the unitary business should no longer be seen as separate entities that can benefit from tax treaties. This would have to be included in art. 3 OECD MTC as well. Additionally, the unitary business should be seen as a resident in the sense of art. 4 OECD MTC in order to be able to benefit from the Convention.