Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.3.2
3.3.3.2 Art. 6 OECD MTC: Income from immovable property
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659476:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
Since this is a ‘may be taxed’ provision, the taxing right of the state of residence is in principle not limited by this distributive rule. However, the state of residence must provide for the avoidance of double taxation (by application of art. 23 A or 23 B OECD MTC). This can cause confusion. See C. van Raad, ‘A Blueprint for Restructuring the OECD Model’s Distributive Rules’, Bulletin for International Taxation 2021, vol. 75, no. 10 for a blueprint to change the distributive rules to end confusion in this regard.
Commentary on art. 6 OECD MTC, par. 1.
Art. 21 OECD MTC (or art. 7 OECD MTC) is relevant for such income.
Art. 6, par. 2, OECD MTC.
Art. 6, par. 4, OECD MTC and Commentary on art. 6 OECD MTC, par. 3. In certain circumstances, art. 6 instead of art. 7 OECD MTC is therefore applicable to business profits from immovable property. The situs principle complements, as it were, the permanent establishment concept in situations where a treaty resident of one state has immovable property in the other state, while there is no permanent establishment in the latter state (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 490).
For the sake of completeness, for associated enterprises within the meaning of art. 9, par. 1, OECD MTC, the arm's length standard must be met – also for income from immovable property.
That will depend on the national legislation of the Contracting States.
Art. 6 OECD MTC deals with the allocation of taxing rights in respect of income from immovable property. The income from immovable property may be taxed in the Contracting State in which the immovable property is situated, i.e., the source state.1 According to the OECD Commentary, the background to this allocation to the source state is that there is a strong economic link between the income and the state where the property is located.2 Art. 6 OECD MTC has a bilateral scope of application. The provision only covers income derived by a resident of one state from immovable property in the other state. Income from immovable property in the state of residence of the owner of the immovable property and income from immovable property located in third countries therefore do not fall within the scope of the provision.3 Art. 6 OECD MTC further specifies when there is immovable property.4 The provision applies to any form of operation of the property, such as renting, leasing, etc. The provision also applies to industrial, commercial and other enterprises.5
The text of art. 6 OECD MTC and the Commentary on it does not refer to the existence of companies that are part of a group. So also in the case of, for instance, immovable property rented to a group company, the state in which the property is situated must be taken into account.6
How does the rule of art. 6 OECD MTC on the allocation of taxing rights in respect of immovable property relate to the aim and purpose of OECD MTC based tax treaties? In a simple case, with an entity in country A owning a property and leasing it to a group company in country B, the rental income is allocated to country A in terms of taxing rights. Assuming that the rental costs are deductible as business expenses7 in country B, the allocation of taxing rights to country A creates a balanced situation without double taxation or double non-taxation.
Can application of art. 6 OECD MTC lead to tax avoidance? Since the country in which the immovable property is situated must always be used as a basis, art. 6 OECD MTC is pre-eminently a provision that is difficult or impossible to plan around. The operation of art. 6 OECD MTC thus seems to be in line with the objectives of the OECD MTC. However, the article does not include a subject-to-tax requirement and is not in line with the objectives of the OECD MTC on this point. Depending on the national legislation of the Contracting States, this may lead to situations of double non-taxation. Since this also applies to the other provisions in the OECD MTC, this is a more general concern.