In the present case, the tax authorities had concluded that Article 13(4) of the Double Taxation Convention with Spain did not prevent the Chilean State from taxing indirect transfers. On this basis, the tax authorities determined that capital gains resulting from an indirect transfer were fully taxable in Chile. An action brought by Inversiones Capital Global S.A. was dismissed by the Tax Court and subsequently appealed to the Court of Appeals. Judgement of the Court The Court ruled in favour of Inversiones Capital Global S.A. The Court concluded that, under the terms of the DTC between Chile and Spain, Chile had no right to tax when a Spanish resident made an indirect transfer to a Chilean company. According to the Court, Article 13(4) of the DTC applies only to direct transfers. Indirect transfers are covered by Article 13(5) and can only be taxed in the State of residence – Spain. Excerpt “(…) The first conclusion that can be drawn is that, given that the rules of the OECD Model Convention do not grant jurisdiction to the country of the source of the income to tax the direct sale of shares, it is clear that indirect sales cannot be considered as taxable either. Notwithstanding the above, and as mentioned above, in all the treaties signed, the Chilean State has requested structural modifications to the model and, in view of the above, “the effect of the Conventions on the application of the indirect sale rules must necessarily be analysed in the light of the context”, scope and purpose of the modifications to the OECD Model Convention that Chile has negotiated” (Juan Pablo Navarrete Poblete, “Normas de Ventas Indirectas y Convenios para evitar la Doble Tributación”, in Anuario de Derecho Tributario, No. 9, November 2017, Facultad de Derecho Universidad Diego Portales, page 71). Sixth: That specifically in relation to the rule on capital gains contained in articles 13 of the treaties, there is a common element that lies in the fact that in all cases Chile has negotiated changes to the OECD model that clearly establish Chile’s tax jurisdiction to tax the direct sale of shares of companies incorporated in the country and this is precisely what happens in the treaty with the Kingdom of Spain, in paragraph 4. Indeed, this international instrument provides in this part that the gains that a resident of a Contracting State obtains from the alienation of shares or other rights representing the capital of a company resident in the other Contracting State may be subject to taxation in that other Contracting State if the recipient of the gain has held, at any time within the twelve-month period preceding the alienation, directly or indirectly, shares or other rights consisting of 20 per cent or more of the capital of that company. Gains derived from the disposal of any property other than those referred to in the preceding paragraphs of this Article may be taxed only in the Contracting State in which the disposer is resident. As it is easy to see from the literal wording, the factual assumption of the rule is that a resident in Chile obtains gains from the alienation of shares of a company resident in Spain or that a resident in Spain obtains gains from the alienation of shares of a company resident in Chile, but not that the gains obtained by the resident in Spain are from the alienation of shares of a Spanish company and the same with the resident in Chile and the Chilean company. In the first of the latter cases – a resident in Spain who obtains gains from the disposal of shares of a Spanish company – that operation cannot be taxed in Chile with additional tax even if the underlying assets of the Spanish company whose shares are sold and which generate the gain are shares of a company resident in Chile, since the provision does not regulate that situation and, as stated above, neither was it regulated in the domestic legislation at the time of conclusion of the agreement, so as to justify arguing that the modification to the OECD Model was made to be in harmony with that domestic legislation. The latter justification cannot be sustained. Seventh: In view of the foregoing and following the doctrine invoked above, it should be borne in mind that, given the origin of their enactment and their content, the Chilean indirect sales rules can be classified as specific control rules on direct sales established at the level of domestic law. These control rules, because of their precise nature, must necessarily be interpreted in a restrictive sense and, in this line, in the framework of the Conventions, the OECD guidelines have been that the control rules of domestic laws not explicitly stated in the Conventions cannot affect them and the same is true of the UN guidelines (Juan Pablo Navarrete Poblete, op.cit., pages 67 and 75). Finally, it will also be said as an argument -even if the cited doctrine does not state it firmly- that in other cases in which Chile has signed treaties to eliminate double taxation, as is the case with Argentina in 2016 and Uruguay in 2019 -more than a decade after the agreement with Spain and in both cases the text of article 10 of the Income Tax Law of Law No. 20. 630-, it has been expressly agreed that the source State may tax indirect transfers, which shows that a taxable event of this nature must necessarily be explicitly agreed between the parties that sign an agreement. Eighth: For the reasons set out in the foregoing grounds, the judgment of the Court of First Instance should be amended. (…)” Click here for English translation Click here for other translation ...

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. An appeal was then filed with the Administrative Court of Appeal Decision of the Administrative Court of Appeal The Court upheld the decision of the Administrative Court and the assessment issued and the penalty added by the tax authorities. The Administrative Court of Appeal found that when assessing the amount of credit to be given for notional tax on a transfer of business, the tax treaty with the other country must also be taken into account. In the case at hand, assets were transferred to the company’s Belgian branch shortly before the assets were disposed of through the transfer of business. The tax treaty limited Belgium’s taxing rights to the increase in value accrued in Belgium after the allocation and a credit could be given up to an amount equal to that tax. In the case at hand, the company had claimed a notional credit for tax on the increase in value that had taken place in Sweden before the assets were transferred to Belgium, while the transferee company in Belgium was not taxed on the corresponding increase in value when the assets were subsequently disposed of, as the Belgian tax authority considered that the tax treaty prevented such taxation. The Court of Appeal held that there were grounds for back-taxation and the imposition of a tax surcharge on the basis of incorrect information. The information provided by the company was not considered sufficient to trigger the Tax Agency’s special investigation obligation and the tax fine was not considered unreasonable even though it amounted to a very large sum. Click here for English Translation Click here for translation ...