3.5.2 Group approach contributes to realizing the OECD MTC objectives

Although the starting point of the OECD MTC is the separate entity approach, in various places an impetus is given towards a group approach. For several provisions, this group approach contributes to realizing the objectives of the OECD MTC.

The OECD sees possibilities for taking group relations into account when determining residence status under national law (and thus likewise for treaty residence) with a view to preventing tax avoidance. The substantive group approach when applying the tiebreaker provision also helps to prevent tax avoidance.

Since the 2017 update of the OECD MTC, the group situation of a person is more often relevant for the application of tax treaties. For instance, the concept of closely related enterprise was added to the permanent establishment provision. This provision has a threefold effect. Firstly, the provision plays a role in the application of the anti-fragmentation rule for preparatory and auxiliary activities. The close relationship criterion is also included in the independent agent rule. Moreover, the provision may be relevant in the context of building or construction permanent establishments. The aforementioned changes take into account that entities can be part of a group. All three changes aim at preventing that a permanent establishment status can be artificially avoided and are thus aimed at preventing tax avoidance. The changes are therefore in line with one of the OECD MTC objectives.

By applying art. 10, par. 2, OECD MTC, excessive taxation is prevented in group relations (if one company holds at least 25% of the shares in another company). The provision thus contributes to the prevention of double taxation.

The variant of a group approach that is included in art. 11, par. 6, OECD MTC as well as in art. 12, par. 4, OECD MTC ensures that for excessive interest or royalty payments in the context of a group, the treaty benefits in the said articles cannot be claimed for the excessive part. The provisions are aimed at preventing treaty abuse. These provisions in principle contribute to achieving the objectives of the OECD MTC. However, whether this objective is effectively met depends on how the income is requalified.

Art. 13, par. 4, OECD MTC prevents tax avoidance with property companies. In this context, directly and indirectly held immovable property is taken into account. The provision with group approach thus seems to meet one of the OECD MTC objectives. Still, there are ambiguities relating to the scope of application of the provision. Also, the provision can be influenced – especially in group relationships. As a result, the provision does not fully contribute to the prevention of tax avoidance.

The group approach in the anti-abuse provisions in art. 29 of the OECD MTC can have both positive and negative consequences for a taxpayer. In respect of the application of the LOB provision, the group situation may result in treaty benefits being granted in more cases. In this way the provision contributes to the objectives of the OECD MTC, as double taxation is avoided in more situations. In addition, the LOB provision applies a group approach to prevent abuse. The PPT also prescribes a group approach in order to achieve a broad scope of application of the provision, thus combatting tax avoidance.