2.4.2.6 Art. 29 OECD MTC: Entitlement to benefits

The provision on the limitation of treaty benefits (art. 29 OECD MTC) twice contains a description of the group concept. Art. 29 OECD MTC is included in the Model Tax Convention in order to prevent abuse of the Convention. The provision reflects the intention of the Contracting States as stated in the preamble of the OECD MTC. This intention is to prevent double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping. Art. 29 OECD MTC includes three variants of anti-abuse provisions: a Limitation On Benefits (LOB) provision, a provision relating to permanent establishments in third countries, and a general anti-abuse provision.

The first variant of the anti-abuse provisions, the LOB provision, provides for a form of a group approach. The basic principle of this provision is that a resident of one of the Contracting States is not entitled to treaty benefits, unless there is a qualified person.1 Various provisions subsequently extend the scope of the provision. For instance, an entity that is not considered a qualified person can still receive treaty benefits if the headquarters company test is met. In the context of the LOB provision, the Commentary elaborates on when there is a headquarters company. The scope of a multinational group of a headquarters company includes the entity itself and its direct and indirect subsidiaries. Any parent companies of the entity are not included in the definition.2 To qualify for treaty benefits as a headquarters company, six specific requirements must be met.3 These requirements are dictated by the anti-abuse nature of the LOB provision.4 Due to the very specific nature of the requirements and the fact that the concept of a headquarters company is not used as a group concept, they will not be discussed here.

In the context of the LOB provision, the Commentary elaborates on when a connected person exists. This concept is relevant when applying the active business test. This test aims to grant treaty benefits to persons who are not to be considered qualified persons and also functions as an anti-abuse provision.5 A connected person is deemed to exist if one entity directly or indirectly holds at least 50% of the votes and the value of the shares in another entity. In cases where a third party holds at least 50% of the votes and the value of the shares in two entities, a connected person is also deemed to exist. For both situations the concept of person is used, so that the provision covers natural persons, legal entities and unincorporated legal entities. Finally, a connected person exists in any case if, based on all the facts and circumstances, one entity has control over the other entity, or if both entities are under the control of a third entity. The concept of connected person shows similarities with the definition of closely related enterprise. A difference between the two terms is that the former requires ownership of at least 50% of the shares, whereas for the latter a connected person could be concluded to exist if exactly 50% of the shares are held.6 It is not clear why the two concepts are not interpreted in exactly the same way. In essence, both concepts have the same objective: to prevent tax avoidance.