Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/5.2.4.5
5.2.4.5 Cross-border group taxation regimes
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659361:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.2.
Commentary on art. 1 OECD MTC, par. 81.
See also par. 4.3.5.5. For completeness sake, a similar reasoning seems to apply with respect to the Pillar Two proposal of the OECD. It seems far from evident that those rules can be upheld under tax treaties (P. Pistone et al., ‘The OECD Public Consultation Document “Global Anti-Base Erosion (GloBE) Proposal – Pillar Two”: An Assessment’, Bulletin for International Taxation 2020, vol. 74, no. 2, par. 3.2.5 and M.F. de Wilde, ‘Uitkomsten Inclusive Framework over de herziening van het internationale belastingsysteem’, Nederlands Tijdschrift voor Fiscaal Recht 2021/3793).
See also par. 4.2.2.2.
B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.2.
Art. 3, par. 2, OECD MTC.
R.J.S. Tavares, ‘Multinational Firm Theory and International Tax Law: Seeking Coherence’, World Tax Journal 2016, vol. 8, no. 2, par. 2.
Opinion of Advocate General Wattel Dutch Supreme Court 11 July 2008, ECLI:NL:PHR:2008:BB3444, par. 5.12.
In the Dutch Supreme Court decision of 13 November 1996 about het Dutch fiscal unity regime – as it was in force up to 1 January 2003 – the tax treaty prescribed a full exemption, but in line with domestic law an exemption with progression was applied. The Dutch Supreme Court did not see this as an issue (Dutch Supreme Court 13 November 1996, ECLI:NL:HR:1996:AA1784). For a critical discussion of this case see C. van Raad, ‘Fiscale eenheid met in Ierland werkzame BV’, Beslissingen in Belastingzaken 1998/47 and P. van der Vegt, ‘Country Reports: Netherlands’, par. 16.2.5.4.1, in G. Maisto (ed.), International and EC Tax Aspects of Groups of Companies, Amsterdam: IBFD 2008.
C. Staringer, ‘Chapter 8: Business income of tax groups in tax treaty law’, par. 8.6, in G. Maisto (ed.), International and EC Tax Aspects of Groups of Companies, Amsterdam: IBFD 2008.
Commentary on art. 23 A and 23 B OECD MTC, par. 20.
In contrast, in a Dutch Supreme Court case (which ultimately led to the CJEU X Holding Judgment) it was claimed by the taxpayer, who requested to extend the Dutch fiscal unity regime to foreign entities, that a cross-border group regime is not in conflict with tax treaties (Dutch Supreme Court 11 July 2008, ECLI:NL:HR:2008:BB3444).
C. Staringer, ‘Chapter 8: Business income of tax groups in tax treaty law’, par. 8.6, in G. Maisto (ed.), International and EC Tax Aspects of Groups of Companies, Amsterdam: IBFD 2008. Compare also the method chosen in Austria: if the applicable tax treaty includes the exemption method, the foreign income is not part of the consolidated income of the tax group (R. Schneider, ‘Group Taxation Regime: A Landmark Model’, Finance and Capital Markets 2006, vol. 8, no. 3, par. 6.1.6).
In tax treaties that are based on the OECD MTC whether or not ‘own losses’ are taken into account at the level of the head office, and thus whether there might be a dual recognition of losses, depends on the national law and the method chosen to avoid double taxation.
Losses are considered negative income and are therefore in some countries exempted (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1834). If the losses can be carried-over, the taxpayer has – according to the OECD – no disadvantage. In that case the exemption method prevents a double deduction of the loss (Commentary on art. 23 A and 23 B OECD MTC, par. 44). The OECD does not mention the loss in liquidity, that will also be a result of this.
Some states, as residence state, allow the deduction of foreign permanent establishment losses at the head office level. For countries that take this position, a cross-border group taxation regime in which the group entities are seen as permanent establishments seems in concurrence with their tax treaties. In such a situation it should be possible for the residence state to restrict the exemption for profits that are subsequently made in the permanent establishment state by deducting the earlier losses. A solution for this is not included in the OECD MTC. It is up to the Contracting States to solve this issue bilaterally if desired (Commentary on art. 23 A and 23 B OECD MTC, par. 44). Such a provision is for example included in the treaty between Belgium and Spain (Belgium - Spain Income and Capital Tax Treaty 1995, as amended through 2014), art. 23, par. 2, sub d: ‘When, in accordance with the legislation of Belgium, the losses suffered by a company operated by a resident of Belgium in a permanent establishment situated in Spain have been actually deducted from the profits of that company for tax purposes in Belgium, the exemption provided for in subparagraph a) shall not apply in Belgium to the profits of other tax periods attributable to that establishment, to the extent that such profits have also been exempt from taxes in Spain by setting them off against such losses.’ A loss recapture rule to avoid that losses can be utilized in both treaty states is not in conflict with a tax treaty. The recapture rule should concern retrospective taxation of domestic profits that in the previous year were reduced by the foreign losses (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1844). As it concerns domestic profits, this is not hindered by the application of a tax treaty. No special provision in a tax treaty is required in this respect (Dutch Supreme Court 5 September 1979, ECLI:NL:HR:1979:AX2718).
Commentary on art. 23 A and 23 B OECD MTC, par. 62 and par. 65. For completeness sake, similar difficulties like under the exemption method can arise which can be solved by states bilaterally.
OECD, Corporate Loss Utilisation through Aggressive Tax Planning, Paris: OECD Publishing 2011, p. 38.
Additionally, art. 10 OECD MTC could be applicable to cross-border group taxation regimes. However, as this article requires a payment, application seems not logical. Also, intra-group profit transfers can take place between sister companies and could concern losses, which are both arguments that art. 10 OECD MTC is not the correct distributive article for cross-border group taxation regimes (B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.2).
Commentary on art. 7 OECD MTC, par. 71.
B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.2.
B.F.A. da Silva, The Impact of Tax Treaties and EU Law on Group Taxation Regimes, Alphen aan den Rijn: Kluwer Law International 2016, par. 7.4.5.2.
An argument to claim that there is no conflict between cross-border group taxation and tax treaties is that the income that is taxed at the level of the parent company has no source in the state of residence of the subsidiary.1 This income can be seen as income of the parent company itself from a domestic perspective. In line with this reasoning it can be claimed that, as tax treaties do not deal with the attribution of income, taking into account the income of the subsidiary at the level of the parent company is something that is solely governed by domestic law. A similar reasoning is applied for the application of CFC rules. The OECD is of the opinion that these rules do not conflict with tax treaties as such legislation results in a state taxing its own residents.2 This reasoning does not seem viable in respect of cross-border group taxation regimes. Tax treaties are based on the separate entity principle. Consolidating income at the level of the parent company, to take the group relationship of an entity into account, is in conflict with this principle. So, if there is an intra-group cross-border transfer of profits or losses, this could give rise to a tax treaty issue. The comparison with CFC legislation cannot be upheld, as those measurements are specifically designed to combat tax avoidance and to protect against erosion of the domestic tax base.3
The question arises whether cross-border transfers of profits or losses due to consolidation could be seen as income for tax treaty purposes.4 It could be argued that tax treaties do not apply to the income aggregation within a group, as it does not lead to an effective flow of income.5 However, as income is not defined in a tax treaty, it should be defined in line with domestic law.6 From a domestic law perspective, the intra-group transfer of profits or losses is considered income. Therefore, tax treaties seem to apply to the income aggregation within a group.
The next question is, which of the distributive rules applies to the income flows in a cross-border group taxation regime? It could be argued that art. 7 OECD MTC is applicable. This would mean that foreign subsidiaries are seen as permanent establishments of the group parent. Please note that this view is not necessarily 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 itself’constitute either company a permanent establishment of the other. Other facts and activities of the parties will determine whether a unified firm should be recognized via a permanent establishment.7 If a subsidiary is dependent upon its parent company, it could be redefined as a permanent establishment.8 For the country in which the subsidiary is located, the subsidiary will not be seen as a permanent establishment. This could be at odds with good faith in treaty interpretation.9
Under a consolidation regime, the profit of the foreign subsidiary is aggregated at the level of the parent company of the group. Art. 7 in combination with art. 23 A or 23 B of the OECD MTC requires the parent company to provide relief for the double taxation of foreign income. Under the full exemption method, the income of a permanent establishment should be excluded fully from the tax base of the head office.10 It could be claimed that this would mean that the application of a cross-border group taxation regime would not be in line with tax treaties, as the income of the foreign subsidiaries would be included in the tax basis.11
Under the exemption with progression method, a similar issue exists. For this method the permanent establishment income is taken into consideration to determine the amount of tax to be imposed on the rest of the income. However, this is generally solely done to calculate the amount of taxes payable: the initial tax base is limited to the total income to which the state has the right to tax, in accordance with the tax treaty.12 Under a cross-border consolidation regime the foreign income would be included in the tax base, which could lead to non-compliance with the exemption with progression method.13 To avoid any issues, countries that apply a cross-border taxation regime should therefore choose the credit method as their treaty policy.14
What does application of art. 7 OECD MTC for cross-border group taxation regimes mean for taking into account losses? As the foreign subsidiaries are in this view seen as permanent establishments of the parent company, the losses are ‘own losses’ of the entity.15 As losses incurred by a permanent establishment may be treated similar as profits for application of the exemption method,16 the issues as described above apply. In that case, taking into account the cross-border losses for the application of its group taxation regime seems not in line with tax treaties.17
Under the credit method the first step is also to determine whether a permanent establishment loss would be deductible from profits in the residence state under domestic law.18 Permanent establishment losses are generally taken into account when determining the taxable income in the state of the head office for application of the credit method.19 In this situation, art. 7 OECD MTC does not seem to restrict cross-border loss compensation for cross-border group taxation regimes. All in all, if cross-border group taxation regimes are governed by art. 7 OECD MTC, mainly under a credit regime there would be no conflict with tax treaties.
In literature it has been argued that, rather than art. 7 OECD MTC, art. 21 OECD MTC governs the application of cross-border group taxation regimes.20 This is mainly based on a different interpretation of art. 5, par. 7, OECD MTC. In this view art. 7 OECD MTC does not seem to apply to the mere holding of participations in subsidiary companies. Additionally, profits are defined in the OECD Commentary as ‘all income derived in carrying on an enterprise’.21 The consolidation of profits under a cross-border group taxation regime cannot be seen as income derived in carrying on an enterprise, as it does not concern any actual earnings.22
Art. 21 OECD MTC applies if the category of income is not dealt with in one of the preceding articles. As the income of a tax group is not an actual advantage derived by a group entity, it does not fulfil the ordinary definitions of ‘paid to’ or ‘derived by’ as used in the OECD MTC. Application of art. 21 OECD MTC primarily allocates the taxing rights to the residence state of a company. If the company has a permanent establishment in the other state, the rules as included in art. 7 OECD MTC apply. In this view the parent company has no right to tax subsidiaries that are group members, except if they have a permanent establishment located in that state. In this view, cross-border group taxation contravenes tax treaties. To ensure application of cross-border group taxation, a specific provision should be included in tax treaties.23
All in all, cross-border group taxation can lead to conflicts with tax treaties. If subsidiaries are to be viewed as permanent establishments and art. 7 OECD MTC should be applied, it depends on the chosen method to avoid double taxation whether there is an issue. If art. 21 OECD MTC should be applied, meaning the subsidiaries are not seen as permanent establishments, this leads to a conflict with tax treaties.