Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/6.2.3.5
6.2.3.5 Passive income (art. 10, 11 and 12 OECD MTC)
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659340:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
J. Sasseville, ‘The Role of Tax Treaties in the 21st Century’, par. 3, 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. 57, no. 2.
A. Fantozzi et al., ‘Chapter 21: Round Table: The summing up’, par. 21.3.2, in G. Maisto (ed.), International and EC Tax Aspects of Groups of Companies, Amsterdam: IBFD 2008.
Art. 8, sub d, CCTB.
Please note that still a variant of economic double taxation would remain.
Art. 55 CCTB and art. 25 CCCTB.
Art. 25, par. 2, CCCTB.
Art. 26 CCCTB.
See par. 2.4.2.2.
For outbound dividends I am in favour of lowering or even abolishing the withholding taxes if a certain shareholding requirement is met. See also par. 6.3.2 and par. 6.3.4.
Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB), COM(2016)683, p. 9.
For completeness, if the permanent establishment concept would not be abolished from these provisions and a subsidiary would be viewed as a permanent establishment of its non-resident parent corporation, art. 10, par. 4, OECD MTC would apply to dividend payments. This provision applies to dividends paid in respect of a shareholding that is effectively connected with a permanent establishment in the source state. In that case application of art. 10, par. 1, and par. 2 OECD MTC is precluded. The general allocation rule of art. 7 OECD MTC applies instead. Therefore, a source country would be permitted to tax the dividends without any restriction, irrespective of the fact that it already taxed the profits of the dividend paying entity. This outcome would not be logical. Considering a subsidiary as a permanent establishment of its non-resident parent company, would also influence the treaty application of interest and royalty payments. In that situation art. 11, par. 4, OECD MTC or art. 12, par. 3, OECD MTC would be applicable as the loan or intangible property would be effectively connected with a permanent establishment in the source state. Similar to the outcome for dividends, the source state would get the taxing rights without the usual limitation as provided for in art. 11 and art. 12 OECD MTC. As interest and royalty payments are, in contrast to dividends, deductible, this could limit the possibilities of taxpayers from using interest and royalty payments that are not arm’s length with a view to erode the tax base in the source country (B.J. Arnold, ‘Threshold Requirements for Taxing Business Profits under Tax Treaties’, Bulletin for International Taxation 2003, vol. 57, no. 10, par. 7).
The articles 10, 11 and 12 OECD MTC allocate the right to tax dividends, interest and royalties to the residence state of the recipient, giving the source state the possibility to withhold tax on dividends and interest. However, in a true unitary approach, there would be no intra-group dividends, interest and royalties. Therefore, the articles on dividend, interest and royalties would no longer be relevant for transactions within the unitary business. This is positive, as the schedular approach taken in tax treaties, with a different set of rules for each category of income, creates arbitrage opportunities.1 Moreover, juridical double taxation is not fully solved since withholding taxes are deducted as a percentage of the gross amount, whereas the net amount is used to calculate the relief for double taxation. This can negatively influence cross-border investments. Being able to fully ignore these income flows would thus positively contribute to reaching the objectives of the OECD MTC.
If a unitary business approach is taken, the question is what happens to relations with associated entities and to third party relations? E.g., how to treat the dividends received by a unitary business from associated non-unitary business entities.2 Under the CCTB/CCCTB dividends would generally be exempted via a participation exemption,3 so that it would not be necessary to provide for relief of double taxation.4 In short, the participation exemption applies if at least 10% of the shares are held in a company outside the group.
For inbound interest and royalty payments the tax credit (a deduction from the tax liability) would be shared among the members of the CCCTB group in line with the apportionment formula.5 In the CCCTB proposal this tax credit should be calculated separately for each Member State or third country as well as for each type of income.6 For a worldwide unitary taxation system it seems theoretically most sound to calculate the maximum credit for passive income flows for the group as a whole. It will depend on the facts and circumstances whether this will be advantageous or disadvantageous for taxpayers.
Additionally, withholding taxes on outbound interest and royalties would be shared among the CCCTB group members similarly.7 It is logical that, as the deduction of interest and royalties is shared, the benefit of the withholding tax is shared as well. For outbound dividends in investments structures,8 the withholding taxes would not be shared as dividends are distributed after-tax.9 Therefore, there would be no previous deduction that is borne by the various group companies.10 A similar approach could be used for a worldwide unitary tax system. This would have to be reflected in art. 10, 11 and 12 of the OECD MTC. A difference between the CCTB/CCCTB proposal and the OECD MTC is that art. 12 OECD MTC does not provide the possibility to levy withholding taxes.
Example 2
The aforementioned can be elaborated upon best by a simplified example. The facts of the example are as follows:
the facts as indicated in par. 6.2.3.4 remain unchanged;
the following passive income flows take place (see figure 6.3):
intra-unitary business dividends, interest and royalties;
a dividend distributed by the unitary business to a non-unitary business entity;
a dividend distributed by a non-unitary business entity to the unitary business;
interest and royalties received by the unitary business from a third party or associated non-unitary business entity;
interest and royalties paid by the unitary business to a third party or associated non-unitary business entity.
Ad 1. Intra-unitary business dividends, interest and royalties
The income flows would not be visible from a tax perspective and would thus not lead to any taxation.
Ad 2. A dividend distributed by the unitary business to a non-unitary business entity
Dividends distributed to a non-unitary business entity would have to be in scope of art. 10 OECD MTC. In this regard, the article should be amended to make sure that dividends distributed by a company or a unitary business would be included in the scope. Any taxes withheld would not have to be shared amongst the unitary business entities. No changes seem required in this regard, as the taxes would be withheld by the ultimate parent company of the unitary business.
Ad 3. A dividend distributed by a non-unitary business entity to the unitary business
As the unitary business as such would be considered a resident, this would automatically mean that a dividend payment by a non-unitary business entity to a unitary business would be in scope of art. 10 OECD MTC. However, if the dividend is exempted from taxation, no elimination of double taxation would have to be given. This would have to be reflected in the model. The article with respect to the elimination of double taxation seems the most logical article to include this provision in.
Ad 4. Interest and royalties received by the unitary business from a third party or associated non-unitary business entity
Interest and royalties received by the unitary business would be taxable in the country of the unitary business in line with art. 11 and art. 12 OECD MTC. The aforementioned would apply to interest and royalties received from an associated non-unitary business entity and to third party payments. The tax credit for inbound interest payments would be shared amongst the members of the unitary business. This would have to be arranged in the model, for example via the articles on the elimination of double taxation.
Ad 5. Interest and royalties paid by the unitary business to a third party or associated non-unitary business entity
Interest payments by members of the unitary business to third parties or associated non-unitary business entities would in principle be subject to withholding taxes. To make sure these payments are in line with art. 11 OECD MTC, the article should be amended to make sure that interest arising in a Contracting State or in a unitary business would be in scope of the article. These withholding taxes would be shared by the group members. This would have to be reflected in the model, for example in the articles that deal with the elimination of double taxation. As art. 12 OECD MTC assigns the taxing right on royalties solely to the Contracting State of the beneficial owner, no changes would be required.
The introduction a full unitary business approach would require some additional small amendments to art. 10, 11 and 12 OECD MTC. The references to permanent establishments should be abolished, as the proposal applies a unitary business approach and uses sufficient economic nexus as a criterion to allocate tax jurisdiction.11 This requires deleting art. 10, par. 4, art. 11, par. 4 and art. 12, par. 3, OECD MTC. Additionally, the reference to the permanent establishment concept in art. 10, par. 5 and art. 11, par. 5 should be removed.