1.5 Structure

Chapter 2 discusses the preconditions for a group concept for treaty application. The starting point is the theory that is at the basis of the existence of groups of companies, the theory of the firm. Then the elements are addressed that are important to conclude, from an economic perspective, whether or not there is a group. This chapter also reviews existing group concepts, which may offer relevant insights for a group concept to be developed for treaty purposes. The purpose of the analysis in chapter 2 is to gain a better understanding of the concept of group in order to capture it in a treaty definition.

Chapter 3 describes and evaluates the current rules in tax treaties that allocate taxing rights to legal entities, whether or not taking into account the group situation of the respective legal entity. The chapter first describes the status quo in terms of treaty application for companies in a group. For instance, the OECD Commentary contains several examples that underline the need to take into account that entities may be part of a group. In addition to the OECD MTC, attention is paid to specific group provisions in bilateral tax treaties. Next, the existing treaty rules are tested against the objectives of tax treaties.

Chapter 4 focuses on EU law. The direct influence of EU law on the application of tax treaties is limited. After all, in the absence of unification or harmonization measures aimed at the elimination of double taxation at EU level, Member States remain competent to determine the criteria for allocating taxing rights with a view to eliminate double taxation.1 However, such powers must be exercised in accordance with EU law.2 Despite its relatively limited influence, EU law may provide potentially valuable insights for alternative approaches. The chapter first reviews primary EU law. In that context, various Court of Justice of the European Union (CJEU) judgments concerning group companies are analysed. Then secondary EU law is discussed. The directives in the field of direct taxation are addressed: the Parent Subsidiary Directive (PSD), the Interest and Royalty Directive (IRD), the Merger Directive (MD) and the Anti-Tax Avoidance Directive (ATAD). The description focuses on specific parts of the directives that may provide guidance on the treaty application for companies that are part of a group. The most far-reaching draft Directive in this respect is the Common Consolidated Corporate Tax Base (CCCTB). This Directive is discussed in chapter 5. The aim of the analysis in chapter 4 is to provide insight into the extent to which parts of EU law take account of the fact that an entity is not a stand-alone entity. Then an answer is given to the question whether such an approach would be in line with the objectives of the OECD MTC.

Chapter 5 puts the taxation of group companies under tax treaties in a broader perspective, focusing on the application of a group approach under national tax law. The question that is answered is to what extent an economic/group approach is applied at the national level and whether such an approach would be in line with the objectives of the OECD MTC. In this context, the existence of group taxation regimes and their relationship with tax treaties is discussed. What’s more, chapter 5 reviews ‘group taxation 2.0’ variants which apply or can apply in a cross-border context. These systems apply a different method to allocate profits: formulary apportionment. The discussion includes existing formulary apportionment systems as well as the proposal for a CCCTB. The draft Directive for a CCCTB treats groups as a single enterprise. The EC will replace the CCCTB with Business in Europe: Framework for Income Taxation (BEFIT).3 BEFIT will also consolidate the profits of the EU members of a multinational group into one single tax base and subsequently apply formulary apportionment. As BEFIT will be presented in 2023, it is not possible to include it in this research. The two proposals are based on the same idea, seem to have a similar approach and are aimed at achieving the same goals. Therefore, the CCCTB is included in this research, even though it will be replaced. Additionally, a combined review of formulary apportionment systems and the CCCTB is obvious given their similarities. The treaty aspects of existing formulary apportionment systems worldwide and the CCCTB are explained. The fact that these systems are based on a group approach means that this review may lead to relevant issues for treaty application for entities within a group.

Chapter 6 sets out the advantages and disadvantages of a group approach over the separate entity approach. The conclusions drawn in chapters 2 through 5 are the building blocks for the recommendations in chapter 6 to bring the OECD MTC more in line with the objectives of tax treaties through a more economic approach towards treaty persons. The chapter also deals with the changes to national law that should accompany the changes to the OECD MTC described in this chapter. The taxing rights granted under a tax treaty can only be enforced if a country has the possibility at the national level to tax the same income or assets. The corresponding changes required at the national level are outlined. In addition to a fundamental change to the OECD MTC, a somewhat more realistic solution to make the OECD MTC more suitable for companies in a group is elaborated upon. Alternative and additional provisions for treaty application for group entities are described and evaluated, taking into account the objectives of the OECD MTC.

The last chapter, chapter 7, contains the conclusions.