Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.3.5
6.3.5 Economic double taxation as a result of profit distributions
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659342:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
R. Couzin, ‘Relief of Double Taxation’, par. 8, appendix to B. Arnold, J. Sasseville & E. Zolt, ‘Summary of the Proceedings of an Invitational Seminar on Tax Treaties in the 21st Century’, Bulletin for International Taxation 2002, vol. 56, no. 6
OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, Paris: OECD Publishing 2015, par. 442.
For a discussion of the disadvantages of the credit method see par. 6.3.8.2.
Austria - Brazil Income and Capital Tax Treaty 1975, art. 23. Also the 2011 CCCTB proposal included an exemption with progression for intercompany dividends from EU and non-EU subsidiaries outside the group (Proposal for a Council Directive on a Common Consolidated Corporate Tax Base, COM(2011)121, art. 72)
United States Model Income Tax Convention 2016, art. 23, par. 2, sub b.
Even though preventing economic double taxation as a result of profit distributions is not an explicit objective of the OECD MTC, it seems logical to include a provision to eliminate this form of double taxation as it negatively influences the overall objective of the OECD MTC: stimulating cross-border activities.1 To counteract the harmful consequences of the separate entity approach at a tax treaty level, a provision could be added to the OECD MTC to eliminate the economic double taxation that results if a subsidiary distributes profits to its parent company. As described in par. 4.3.2.3, the OECD Commentary gives an overview of the three principles that are most frequently followed in practice: an exemption with progression, granting a credit for underlying taxes, and assimilation to a holding in a domestic subsidiary. Only the first two options provide a solution at a tax treaty level and therefore seem to be desirable options.
The benefit of an exemption with progression is that it provides a level playing field in the foreign market. However, the exemption method can lead to a hybrid mismatch: a dividend payment which is deductible at the level of the payer, while it is exempted at the level of the recipient.2 Granting a credit for underlying taxes ensures that there will be no tax avoidance opportunities. Therefore, this method seems more in line with the objectives of tax treaties, even though it can also apply if the double non-taxation is intended.3 Additionally, it should be kept in mind that, as the profits are generally already taxed before the profit distribution, there will not be any actual double non-taxation.
An example of the exemption with progression method can be found in the tax treaty between Austria and Brazil:4
‘3. Where a resident of Austria derives income which, in accordance with the provisions of this Convention, may be taxed in Brazil, Austria shall, subject to the provisions of paragraphs 4 to 7, exempt such income from tax, but may, in calculating the tax on the remaining income of that person, apply the rate of tax which would have been applicable if such income had not been exempted.
…
6. Dividends paid by a company which is a resident of Brazil to a company which is a resident of Austria which owns at least 25% of the share capital of the company paying the dividends shall be exempt from the corporation tax and from the business tax in Austria.’
In existing tax treaties, e.g., the following provision – which is included in the United States Model Income Tax Convention 2016 – is used to avoid economic double taxation as a result of profit distributions via application of the credit method:5
‘In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens:
a) …; and
b) in the case of a United States company owning at least 10 percent of the voting stock of a company that is a resident of __________ and from which the United States company receives dividends, the income tax paid or accrued to __________ by or on behalf of the payor with respect to the profits out of which the dividends are paid.’
The aforementioned provisions could, in a slightly amended manner, be used to insert in the existing art. 23 A and 23 B OECD MTC. Additionally, for application of the OECD MTC it would be logical to align with the wording used in art. 10 OECD MTC. The introduction of such a provision requires answering the question: when is the shareholding ‘sufficient’ to provide for relief of economic double taxation. In art. 10, par. 2, sub a, OECD MTC, a relatively high shareholding of 25% is required. As described in par. 6.3.2, I am in favour of reducing this shareholding requirement. This should then also be the case for the provision to eliminate economic double taxation as a result of profit distributions.