Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.5.2:3.3.5.2 Art. 24 OECD MTC: Non-discrimination

Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.5.2

3.3.5.2 Art. 24 OECD MTC: Non-discrimination

Documentgegevens:

L.C. van Hulten, datum 06-07-2022

Datum: 06-07-2022
Auteur: L.C. van Hulten
JCDI: JCDI:ADS659428:1
Vakgebied(en): Omzetbelasting / Plaats van levering en dienst

Art. 24 OECD MTC prohibits discriminatory treatment.1 Discrimination occurs if the tax is not imposed in the same form, on the same basis, at the same rate and subject to the same formal obligations in similar cases.2 The article includes discrimination by nationality and place of residence.3 In this context, it is explicitly not the intention to give foreign nationals, non-residents, enterprises of other states or domestic enterprises owned or controlled by non-residents a more favourable treatment than that given to nationals, residents or domestic enterprises owned or controlled by residents.4 The provision is not limited to the types of tax to which the treaty applies according to art. 2 OECD MTC.5

Art. 24 OECD MTC prohibits the following forms of discrimination:6

–: discrimination based on nationality;7
–: discrimination against a permanent establishment in relation to a resident; 8
–: discrimination in relation to fees paid across the border;9 and
–: discrimination against a foreign-controlled company.10

For the purposes of the present analysis, the prohibition of discrimination against foreign-owned entities is particularly relevant, as it concerns group situations.

Art. 24, par. 5, OECD MTC refers to enterprises whose capital is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State. Hence, under paragraph 5 of art. 24 OECD MTC, an entity with a shareholder in another Contracting State may not be taxed more heavily than an entity with a shareholder in the same country.11 The provision prohibits any taxation or related obligation that is different or more burdensome for enterprises controlled by a local entity. Whether the party entitled to the capital or the capital remunerations paid by the enterprise are discriminated against is irrelevant for the purposes of art. 24, par. 5, OECD MTC. The provision cannot, accordingly, result in certain benefits having to be granted to a foreign shareholder, such as rules requiring consolidation or the transfer of losses.12 The background to this exclusion is that the OECD wants to avoid double non-taxation.13

Since art. 24 OECD MTC aims to create a barrier against discrimination, the provision has a different objective than other provisions in the OECD MTC. By creating a barrier against discrimination, the provision may indirectly contribute to the avoidance of double taxation, which meets the objectives of the OECD MTC. The fact that, according to the OECD, the non-discrimination provision does not extend to group regimes contributes to reducing opportunities for tax avoidance. This may lead to economic double taxation though, as one of the consequences is that cross‑border loss relief is not possible. There may also be juridical double taxation, as certain benefits that apply under national group regimes do not apply to cross-border situations.14

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The prevention of discrimination has a strong link to the pursuit of equality of rights.

Commentary on art. 24 OECD MTC, par. 15

Paragraph one deals with nationality and paragraphs three, four and five deal with residence.

Commentary on art. 24 OECD MTC, par. 3.

Art. 24, par. 6, OECD MTC. Such a conclusion also seems to follow from the words chosen in the rest of the article, for instance: ‘any taxation or any requirement connected therewith’(art. 24, par. 1, OECD MTC).

The underlying purpose of art. 24, par. 3, to par. 5, OECD MTC is essentially CIN. The provisions are intended to ensure that the country in which an investment is made applies the same treatment to residents and non-residents (H.J. Ault & J. Sasseville, ‘Taxation and Non-Discrimination: A Reconsideration’, World Tax Journal 2010, vol. 2, no. 2, par. 1).

Art. 24, par. 1, and par. 2, OECD MTC. The prohibition contained in art. 24, par. 1, OECD MTC stipulates that nationals of one of the states may not be subjected in the other state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation or requirement to which nationals of the other state are or may be subjected in the same circumstances. The term national includes ‘any legal entity, partnership or association deriving its status as such from the laws in force in that Contracting State.’ (art. 3, par. 1, sub g, OECD MTC). The provision thus also affects legal entities. For the application of art. 24, par. 1, OECD MTC it is not required that the legal person is considered a resident of the treaty concerned. This is, for instance, the case if the legal person is considered a treaty resident of a third country. The provision in paragraph one does not prohibit a more favourable treatment of foreign persons in comparison with domestic persons (Commentary on art. 24 OECD MTC, par. 14).

Art. 24, par. 3, OECD MTC. This provision stipulates the non-discrimination of permanent establishments operated by a treaty resident of the other state. The provision prescribes that the taxation of a permanent establishment of an enterprise of one of the states in the other state may not be less favourably levied than the taxation levied on enterprises of that other state carrying on the same activities.

Art. 24, par. 4, OECD MTC. The prohibition of discrimination with respect to cross-border payments is particularly relevant for countries where national tax law sets limits on the deductibility of such payments to foreign entities.

10.

Art. 24, par. 5, OECD MTC.

11.

The provision refers to shareholders of companies and other providers of capital such as partners of partnerships.

12.

Commentary on art. 24 OECD MTC, par. 77. According to the OECD, the application of art. 24, par. 5, of the OECD MTC therefore does not constitute an obligatory extension of national group regimes to international situations. Likewise, a difference in the levy of withholding tax relating to national or international shareholders is beyond the scope of the provision (Commentary on art. 24 OECD MTC, par. 78). Avery Jones et al. argue that under certain circumstances the scope of art. 24, par. 5, OECD MTC extends to include group regimes (J.F. Avery Jones et al., ‘Art. 24(5) of the OECD Model in Relation to Intra-Group Transfers of Assets and Profits and Losses’, World Tax Journal 2011, vol. 3, no. 2 and 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. 9.5.1.4). However, note that in some tax treaties the application of the ownership non-discrimination provision to group consolidation regimes is explicitly excluded, e.g., Germany - Luxembourg Income and Capital Tax Treaty 2012, Protocol, art. 4, which states the following: ‘Paragraph 5 of art. 23 shall not be construed as preventing a Contracting State from limiting income taxation on a consolidated basis (Organschaft) to residents of that Contracting State.’

13.

E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1953.

14.