Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/3.3.3.9
3.3.3.9 Art. 13 OECD MTC: Capital gains
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659375:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
It is not entirely clear whether the provision also covers capital losses. This is probably not the case. Furthermore, the provision does not concern the quantification and computation of capital gains; the only treaty provisions that affect that are art. 7, par. 2, OECD MTC and art. 9 OECD MTC(E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1222).
The categories are: capital gains on immovable property, capital gains on a permanent establishment or part thereof, capital gains on assets in connection with an enterprise in international traffic and capital gains on property entities.
Capital gains do not fall under the generic residual provision of art. 21 OECD MTC because of the residual provision in art. 13, par. 5, OECD MTC.
I.e., transformation of a company to a partnership and the other way around (E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 1248).
Commentary on art. 13 OECD MTC, par. 1-3.
Commentary on art. 13 OECD MTC, par. 21.
Art. 13, par. 5, OECD MTC.
In line with the ratio of the participation exemption.
Since art. 13, par. 4, OECD MTC does not stipulate a volume of the shareholding, any shareholding qualifies.
Or similar interests.
Commentary on art. 13 OECD MTC, par. 28.4.
This article also plays an important role for offshore indirect transfers. See The Platform for Collaboration on Tax, The Taxation of Offshore Indirect Transfers - A Toolkit, 2020. The United Nations Model Double Taxation Convention contains a specific article to deal with these type of transfers (art. 13, par. 7, United Nations Model Double Taxation Convention 2021).
S. Hebous, ‘Chapter 4: Global Firms, National Corporate Taxes: An Evolution of Incompatibility’, p. 49, in R.A. de Mooij, A. Klemm & V. Perry (eds.), Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed, Washington, DC: International Monetary Fund 2021.
Three possibilities seem to exist. The first is a proportional or full consolidation of the various interests, in which all financial relations between group entities are cancelled out. The second is an accrual balance sheet. A difference with the consolidation is that the accrual balance sheet shows mutual receivables and debts. Finally, an approach can be applied that assesses for each subsidiary whether it is an immovable property entity according to the principal rule. These immovable property entities are then (notionally) taken into account as immovable property in the entity to be investigated (P.L.J.A. van Rosmalen, ‘Belastingverdragen bekeken en vergeleken: vervreemdingswinsten op belangen in onroerendezaakentiteiten’, Maandblad Belasting Beschouwingen 2016/12, par. 6.1).
Art. 13 OECD MTC divides taxing rights in respect of capital gains.1 The provision consists of a number of allocation rules for specific categories of assets.2 On top of that, the fifth paragraph of the provision includes a residual provision of its own.3 Under that residual provision, capital gains may only be taxed in the state of residence of the transferor. The scope of the fifth paragraph includes cases of mergers, the exchange of shares or division of enterprises, the contribution of an enterprise or part of an enterprise to a different enterprise, and change of the legal form.4
The Commentary on art. 13 OECD MTC states that the national treatment of capital gains varies widely.5 Whether or not a capital gain is taxed is not relevant for the application of the article. In order to avoid only actual double taxation, the addition of a subject-to-tax requirement to the provision in the treaty negotiations could be considered.6
For any disposal of shares, the taxing right will be allocated to the state of residence of the disposer of the shares.7 The rules of art. 13 OECD MTC thus provide for the prevention of juridical double taxation and so, in principle, they meet the objectives of the OECD MTC.
In the event of a disposal of shares in a group, the prevention of economic double taxation is not provided for by art. 13 OECD MTC. So, in the case of a transfer in a group relationship, tax on the capital gain realized on the transfer should – depending on the domestic legislation of the Contracting States – be settled directly. Economic double taxation arises since the value of the shares increases as a result of profits being realized. This approach is logical in view of the objectives of the OECD MTC but does not contribute to the more general objective of the OECD MTC, i.e., to encourage cross-border economic activities. It can be argued that the capital gains on shares in a group relationship should not be taxed at all.8 As an alternative, a deferral mechanism seems an option.
Of the specific allocation rules in art. 13 OECD MTC, only the fourth paragraph recognises the existence of group companies.9 To determine whether a property company exists, it must be considered whether – at any time in the period of 365 days prior to the disposal – 50% of the value of the shares10 consists directly or indirectly of immovable property situated in the other Contracting State. In order to determine whether the 50% percentage is met, the value of the company’s immovable property must be compared with the value of the totality of the company’s assets, without taking into account the company’s debts.11
Art. 13, par. 4, OECD MTC aims at preventing abuse. The provision assigns capital gains on shares in property entities to the state in which the immovable property is situated.12 This prevents circumventing the application of art. 13, par. 1, OECD MTC by transferring the immovable property into an entity and then selling the shares in the immovable property entity, instead of selling the immovable property as such. Via such an offshore indirect transfer of assets, capital gains taxes in the country where the asset is located can be avoided.13 For the effectiveness of art. 13, par. 4, OECD MTC, it is very important that directly and indirectly held immovable property should be considered to determine whether there is an immovable property entity. If only the direct relationship were to be considered, an intermediate holding in the structure, for instance, could result in the provision being inapplicable. How the indirect assets should be taken into account is not clear from the OECD MTC and its Commentary.14 This leads to ambiguities regarding the scope of application of the provision.
Through the ‘365 days’-requirement, the OECD aims to prevent assets being contributed to an entity shortly before the disposal of the shares in order to influence the percentage of the value of the shares consisting of immovable property. Without this requirement, it is possible to ensure that the 50% percentage is no longer met just before the disposal. This possibility will especially play a role in group relationships. For example, the value of the assets of a real estate company could be increased by claims on group companies or liquid assets. These possibilities for abuse have been reduced by the ‘365 days’-requirement, but they still play a role.
All in all, the provision in art. 13, par. 4, OECD MTC, for which the group situation of an entity is of importance, largely meets the objective of the OECD MTC that tax avoidance should be prevented. However, there are ambiguities with regard to the scope of the provision, because it is not clear how the concept of indirect interest should be interpreted. Furthermore, the ‘365 days’-requirement has made influencing the provision more difficult but has not solved the problem in its entirety.