Treaty Entitlement Specific Issues

CA Ganesh Rajgopalan

CTC Study Circle on International Taxation 4th September 2013

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Article 1
This Convention shall apply to persons who are residents of one or both of the Contracting States.
Restricted scope OECD & UN MC identical, while US MC different Heading changed to Persons Covered from Personal Scope Earlier treaties applied to Citizens or taxpayers Exceptions Non discrimination, Exchange of Information
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Article 3(1)(a) Person

OECD Model: The term person includes an individual, a company and any other body of persons. Indian Judicial Precedents on person

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Abdul Razak Meman*

Issue
o Whether NRI residing in UAE entitled to Treaty in respect of dividends, interest and capital gains

Assessees contentions Ruling

o Residence certificates of UAE authorities proof of residence under Treaty

o Individual not a taxable unit under the UAE Decree o expressions "resident of the other contracting State" not defined o Means a person residing, dwelling or having an abode in UAE or a person staying regularly in UAE o For dividends/interest lower rate, residential status of the recipient not relevant o For capital gains, assessee not a Treaty Subject, not entitled to Treaty

*[2005] 146 TAXMAN 115 (AAR - NEW DELHI)

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UAE Treaty
Article 3(1) Person
(e) the term "person" includes an individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2.However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed..

Article 10 - Dividends

Article 13 Capital Gains

3. Gains from the alienation of any property other than that mentioned in paragraphs 1 and 2 shall be taxable only in the Contracting State of which the alienator is a resident.
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India-Germany DTAA
ARTICLE 1 - Personal scope - This Agreement shall apply to persons who are residents of one or both of the Contracting States. ARTICLE 3(d)- General definitions - the term person includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States. ARTICLE 4 - Resident - 1. For the purposes of this Agreement, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. ARTICLE 2 - Taxes covered - 3. The existing taxes to which this Agreement shall apply are in particular- in Germany:
o o o o the Einkommensteuer (income-tax), the Korperschaftsteuer (corporation-tax), the Vermogensteuer (capital tax), and the Gewerbesteuer (trade tax)

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Person as per different DTAAs

India USA :the term person includes an individual, an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity India UK: the term person includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, but, subject to paragraph 2 of this Article, does not include a partnership;

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Article 3(1)(a) Which States law to apply?

Taxable Unit under the taxation laws of respective Contracting States Klaus Vogel on Person
o Source State to classify a foreign entity as per its own tax laws regardless of classification in its Home State. o Source State will force foreign entity into one or the other category of taxpayers based on the foreign laws legal characteristics of the entity in order the similarity of civil and commercial laws of the states concerned

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Person - Case Study

A Singapore Company establishes a branch in Philippines as a Regional Headquarters (RHQ) to serve its Group in APAC region under the Omnibus Investment Code of 1987. A RHQ can be established under the Code by a foreign company or a group of foreign companies. The RHQ is allowed to derive income in the Philippines by performing some qualifying services for its affiliates, subsidiaries or branches in the Philippines, the Asia Pacific region and other foreign markets. The RHQ is treated as a Resident Foreign Corporation in Philippines and is taxed @ 10% on its income. RHQ derives income in the nature of fees for technical services from India. Is the RHQ entitled to protection under India-Philippines Treaty?

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Schellenberg Wittmer* (1/2)

Facts
o Switzerland based law firm, all partners Swiss residents. o Under Swiss law, partnership not separate entity o Partnership income assessed in the hands of the partners

Taxpayers arguments

o A partnership a 'company' or 'body of persons'. o Actual taxation in Switzerland is not necessary; Switzerland has the right to tax partnership. o All partners resident in Switzerland, entire income taxed in Switzerland o Fiscal domicile of the partnership lay in Switzerland . o OECD Comm Art 4 para 8.7 relied upon
Where partnership denied treaty, partners to be entitled

*[2012] 24 taxmann.com 299 (AAR - New Delhi)

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Schellenberg Wittmer (2/2)

Art. 3(1)(d) Person in India-Swiss Treaty
includes an individual, a company, a body of persons, or any other entity which is a taxable unit under the laws in force in either Contracting State

Ruling

o receiver of income & person taxed not the same o no definition of person in Swiss law o If a body of individuals or any other entity is not a taxable entity in the concerned state, it will not be a person. o India not accepted OECD Commentary that partnerships will be considered as persons either as company or body of persons. o Necessary that body of individuals is taxable in Switzerland

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Linklaters LLP
Partnership Example: UK LLP established in UK. A & B, partners of UK LLP, are residents of UK. UK LLP earns royalties from India. Can UK LLP access the India-UK Tax Treaty?
UK India

UK LLP

FTS

Held Fact of taxation in the UK rather than its modality, relevant The entire income is liable to tax in the UK Hence the recipient of income is treaty resident

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Chiron Behring GmbH & Co.* (1/2)

Facts
o Assessee a limited partnership in Germany o Partners taxed on income in Germany o Assessee liable for trade tax

Revenues arguments
o Trade tax a turnover tax not tax on income o Assessee not liable to tax in Germany o Assessee not entitled to Treaty

Assessees contentions
o Assessee liable to trade tax in Germany o Trade tax covered under Art. 2 o Assessee entitled to Treaty

*[2008] 24 SOT 278 (MUM.)

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Chiron Behring GmbH & Co. (2/2)

Ruling To be entitled to Treatyo Assessee should be a person in terms of Article 3(d) o Such person should be Resident of a Contracting State ; o It should be liable to pay tax in the Contracting State by reason of his domicile or residence etc.

Assessee is entitled to Treaty aso Assessee is a person falling under the limb any other entity o Assessee is a partnership established under German Law, hence resident of Germany o Assessee is liable for trade tax o Trade tax is not a tax on turnover but a tax on income o Assessee filed its return of trade tax in its own name

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Crown Forest Industries*

Ruling
Norsk, Bahamas

US Branch

Canadian Income
Norsk s claimed to be entitled to Canada- US Treaty for concessional tax *(1995) 2 SCR 802

The basis of Norsks liability for taxation in the United States emanates from the fact that it conducts a trade or business which is effectively connected with the US and has income arising from that business. Although the fact that its "place of management" is located in the United States is one factor contributing to the finding that its trade or business is connected with the United States, it does not constitute the basis for Norsks tax liability in the first place. A factual proposition which merely informs domestic tax liability cannot constitute a residency criterion.
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Art. 4(1) Resident 1st Sentence

For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. Literal meaning
o Non-source taxation o by reason of connecting factors

OECD MC Comm.
o Comprehensive (full-tax) liability to tax [Para 8 , Comm on Art. 4]
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Article 4(1) First Sentence

Liable to tax - Indian judicial precedents
M A Rafik
NR paid tax in India, and hence he is an Indian Resident

Green Emirates
UAE Residents can avail DTAA as there is a potential liability to tax

Linklaters LLP
Income of the firm is taxed in UK. Firm has fiscal domicile in UK thus resident

TVM Ltd.
Mauritian Co. Entitled to DTAA if it has paid tax in Mauritius

Abdul Razak Memon

UAE individual cannot access the DTAA, but are entitled to lower tax for dividends/interest

Meera Bhatia
UAE Individuals can access the DTAA as there is a potential liability to tax

Cyril Pereira
As no income-tax law on Individuals in UAE, they cannot access DTAA

ABA
Liability to tax is legal situation, Payment of tax is fiscal situation

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Article 4(1) Liable to tax

Can the following access their States tax treaty?
An Indian Resident, earning only agricultural income.
An Indian Charitable Organisation, paying no tax on its income. An NRI, not liable to tax within India.

Exempt Income

Exempt Entity
Potentially taxable Limited taxation

A RNOR, taxed only on sources within India.

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Article 4(1) Liable to tax

non-taxability througho o o o o o o loss adjustments personal allowances deduction/exemption specific item of income exempted certain types of activity exempted certain types of person exempted complete exclusion of a person Absence of tax legislation

Non-taxability through which method depends on domestic law but determines treaty entitlement At which point the liable to tax not satisfied?

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Article 4(1) 2nd Sentence

This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein Absent in MC 63, introduced in MC 77 Aimed at diplomats and consular officials
o To prevent diplomats from treaty benefits from both Home and Host State

Extended to conduit companies

o [Para 8.2 (1st sent.) MC Comm. through 1992 Update]

Extended to apply for effect of other treaties

o [Para 8.2 (2nd sent.) MC Comm 2008 Update]

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Cumulative effect of treaties

State R1 State R2

State S Income

State S1

State S2 Income

Income

State S to limit its taxation as per both R1-S and R2-S treaties.

State R to limit its taxation/grant relief as per both R-S1 and R-S2 treaties.
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Effect of other treaties

State R1 State R2

Can R2-S Treaty apply?

A Winner

A Loser

A ceases to be fully liable to tax in State R2 by application of R1-R2 Treaty

A may continue to be resident under State R2s domestic law (exceptions e.g. UK, Canada) Under R2-S Treaty, A not liable to comprehensive taxation in State R2 (effect of application of R1-R2 Treaty)

State S Income

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Article 4(1), Second Sentence

A mere clarifying statement? [Klaus Vogel m.no. 31,
Art.4]
o Treaty residence does not apply to non-residents with limited-tax liability o Aimed at diplomats & consular officials [para 8.2 MC Comm.(1977) Who are considered residents of Receiving State though they do not live there permanently

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Art. 4(1), Second Sentence

As an exception to 1st sent.
o Diplomats exemption from all taxes, except taxes on private income having its source in the receiving State [Art 34(d) Vienna Convention on Diplomatic Relations]

Under the laws of that State

o laws vs. law o Monist/Dualist States - different results?

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Art. 4(1), Second Sentence

Sources in that State - Undefined
o Ordinary meaning Point of origin o Treaty meaning Income arising in the other State according to distributive rules has its source in that state o Domestic meaning Domestic source (for taxation of non-residents) Foreign source (for providing relief to residents)

Para 8.1 Comm. uses Treaty meaning

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Meaning of Source
State R1 A A State R2

A is resident of R1 after tiebreaker under R1-R2 Treaty Income sourced in State S but taxed in State R2.

PE Winner Loser

State S

Income

For example, shipping profits earned by enterprise of R2 (having its POEM in R1) may be sourced from outside State R2. State R2 taxes A (say, since A is incorporated there) on income sourced in State S Application of R2-S Treaty?

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Fragmented Treaty Entitlement

UK UKCo Swiss Federation A

Aznavour case* - Source State taxation in France UK Co earns income from As performance in France and is taxed in the UK. A is not taxed in Switzerland on performance income as it accrues to UK Co. France taxes performance income in the hands of A and not UKCo. Both UKCo and A are tax residents of UK and Switzerland respectively.
*Conseil

France Concert performance

dEtat, 28th Mar, 2008, No. 271366, IBFD

Held: A taxed on income under domestic law Swiss-France Treaty examined, Art. 17(1) allowed France to tax the income UK Co.s entitlement to access Treaty considered irrelevant Whether Switzerland taxed A also not found relevant
Where one persons owns the income and liability to tax is imposed on another person; a potential claim for treaty entitlement is fragmented between two persons
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Thank you!

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