Tag: Double tax treaty

Tax Treaty, Tax Convention or Agreement. A tax treaty, which is usually concluded between two or more countries, prescribes which country has the right to tax the income of an entity or individual that operates in more than one country, so that the income will either not be subject to tax in both countries or, if it is, relief is granted to eliminate double taxation to the extent possible.

Preface paragraph 9

The main mechanisms for resolving issues that arise in the application of international tax principles to MNEs are contained in these bilateral treaties. The Articles that chiefly affect the taxation of MNEs are: Article 4, which defines residence; Articles 5 and 7, which determine the taxation of permanent establishments; Article 9, which relates to the taxation of the profits of associated enterprises and applies the arm’s length principle; Articles 10, 11, and 12, which determine the taxation of dividends, interest, and royalties, respectively; and Articles 24, 25, and 26, which contain special provisions relating to non-discrimination, the resolution of disputes, and exchange of information ...

Poland vs CP Corp, September 2016, Supreme Administrative Court, Case No. II FSK 2299/14

A Polish company were planning to enter into a inter-group cash pooling agreement. The cash pooling operation were to be managed by a foreign bank, which would open a group account as a basic account for Norwegien parent company, the pool leader. The question was whether the taxation of interest payments made from the Polish company to the pool leader will apply art. 21 par. 3 of the Corporate Income Tax Act, as a result of which interest should be exempt from withholding tax, and if not – whether the taxation of the interest will apply art. 11 of the tax treaty between Norway and Poland. In this judgement the Court stated that the cash pool leader cannot be regarded as the owner of all receivables paid to the group account, because it is not entitled to dispose of the interest in its sole discretion. The judgement in this case is aligned with prior rulings of 11 June 2015, file ref. No. II FSK 1518/13, and of 2 March 2016, file ref. No. II FSK 3666/13. Click here for translation Poland Cash Pool 2016-09-16 II FSK 2299-14 ...

Poland vs Cash Pool Corp, March 2016, Supreme administrative Court, Case No. II FSK 3666/13

In a request for a binding ruling, a Polish Company indicated that it was joining an inter-group Cash Pooling Agreement (“Agreement”) in which the leader was based in Luxembourg. Under the Agreement, the pool leader acts as a regional financial center and consolidates the balances of current accounts of all the cash pool participants. The banking platform used by the Group for the purposes of Cash Pooling is operated by D. Bank (“DB”) based in Germany. The actual operation of the Cash pooling system will consist in automated transfers of positive balances existing on the accounts of participants of Cash pooling, including the applicant’s account at the end of the settlement day into the superior account of Leader. The Minister of Finance found that the role of Cash pool leader boils down to the management of cash that will flow from participants in the cash pooling system. It is the companies participating in this cash pool that can actually enjoy the privileges of ownership. Furthermore, an entity that does not have the right to decide fully who and to what extent it uses or has the right to dispose of the property can not be considered a beneficial owner, as defined in the Convention, and in relation to the purposes for which the contract was concluded. The cash pool leader does not receive taxable interest income within the meaning of art. 12 and art. 21 par. The Polish company appealed the ruling. The Administrative Court in Warsaw found that in circumstances where the payment is made to a Cash Pool Leader resident in a particular country, which then transfers the payment to the final recipient, the country in which the payment is made is not obliged to that intermediary to apply the provisions of the double taxation agreement. In the opinion of the court of first instance, the fact raised by the Company – that it is difficult to identify entities that ultimately receive interest paid by it – cannot prejudge the method of taxation. The appeal was therefore dismissed. See Case No. II FSK 1518-13 The company then filed an appeal to the Supreme administrative Court which was also dismissed. Click here for translation II FSK 3666-13 ...

Germany vs Capital GmbH, June 2015, Bundesfinanzhof, Case No I R 29/14

The German subsidiary of a Canadian group lent significant sums to its under-capitalised UK subsidiary. The debt proved irrecoverable and was written off in 2002 when the UK company ceased trading. At the time, such write-offs were permitted subject to adherence to the principle of dealing at arm’s length. In its determination of profits on October 31, 2002, the German GmbH made a partial write-off of the repayment claim against J Ltd. in the amount of 717.700 €. The tax authorities objected that the unsecured loans were not at arm’s length. The tax authorities subjected the write-down of the claims from the loan, which the authorities considered to be equity-replacing, to the deduction prohibition of the Corporation Tax Act. The authorities further argued that if this was not the case, then, due to the lack of loan collateral, there would be a profit adjustment pursuant to § 1 of the Foreign Taxation Act. Irrespective of this, the unsecured loans had not been seriously intended from the outset and should therefore be considered as deposits. In general, the so-called partial depreciation is not justified because of the so-called back-up within the group. The Supreme Tax Court has held that a write-off of an irrecoverable related-party loan is not subject to income adjustment under the arm’s length rules, although the interest rate should reflect the bad debt risk. The Supreme Tax Court has now held that the lack of security does not invalidate the write-off. The lender was entitled to rely on the solidarity of the group, rather than demanding specific security from its subsidiary as debtor. In any case the arm’s length income adjustment provision of the Foreign Tax Act applied to trading transactions and relationships, but not to those entered into as a shareholder. The loans in question substituted share capital and their write-off was not subject to income adjustment on the grounds that a third party would not have suffered the loss. However, the interest rate charged should reflect the credit risk actually borne. In the meantime, there have been several changes to the relevant statutes. In particular, related-party loan losses can only be deducted if a third party creditor would have granted the finance (or allowed it to remain outstanding) under otherwise similar conditions. Also the Foreign Tax Act definition of “trading” has changed somewhat to bring certain aspects of intercompany finance into the scope of arm’s length adjustments. However, the general conclusion of the court that an arm’s length interest rate must reflect the degree of risk borne by the creditor remains valid In its judgment of 24 June 2015, the Supreme Tax Court made reference to this case-law in relation to Article IV of the DTC United Kingdom 1964, which corresponds in substance to Article 9 (1) of the OECD MA. Accordingly, the reversal of a write-down of an unsecured loan by a domestic parent company to its foreign subsidiary in accordance with Section 1 (1) of the AStG is not lawful. For the fact that § 1 exp. 1 AStG would be overriding agreement, nothing is evident. The wording of the law and also the will of the contracting parties of the DBA do not permit the interpretation on which the BFH bases its judgments. Thus, according to Article 9 (1) of the DBA-USA 1989 and Article IV of the DBA-UK 1964, which correspond in substance to Article 9 (1) of the OECD-MA, according to their wording as a prerequisite for the correction of “profits” of affiliated companies, that “Are bound in their commercial or financial relations to agreed or imposed conditions other than those which would be mutually agreed by independent companies”. In this case, “the profits which one of the undertakings without these conditions has made, but has not achieved because of these conditions, must be attributed to the profits of that undertaking and taxed accordingly.” On 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment instead. According to the decree the principles of these two decisions are not to be applied beyond the decided individual cases insofar as the BFH has a blocking effect of DBA standards, which correspond in substance to Art. 9 (1) OECD-MA. The exclusive limitation of the correction on prices or transfer prices postulated by the BFH can not be inferred either from the wording of Article 9 DBA-USA 1989, Article IV DBA-UK 1964 or Article 9 (1) OECD-MA. The OECD Commentary on the OECD MA explicitly refers to the arm’s length terms and states that Article 9 (1) of the OECD-MA is concerned with adjustments to profits and not precisely a price adjustment. If in the audit practice a situation is to be examined which corresponds to the facts of the cases of judgment, it must first be ascertained whether the loan relationship is to be recognized for tax purposes (eg no hidden deposit) and whether the conditions are met pursuant to Section 6 (1) 2 sentence 2 EStG for recognizing a write-down on the loan receivable. If there is a loan relationship to be recognized and a partial depreciation should be carried out on the loan receivable pursuant to § 6 (1) (2) sentence 2 EStG , it must be examined whether the application of § 1 AStG in accordance with the BMF letter of 29 March 2011 (BStBl I S 277) means that the taxable person’s income is to be increased by the amount of the depreciation. Click here for translation Bundesfinanzhof I R 29-14 ...

Poland vs Cash Pool Corp, Warsaw Administrative Court, Case no II-FSK-1518-13

In a request for a binding ruling, a Polish Company indicated that it was joining an inter-group Cash Pooling Agreement (“Agreement”) in which the leader was based in Luxembourg. Under the Agreement, the pool leader acts as a regional financial center and consolidates the balances of current accounts of all the cash pool participants. The banking platform used by the Group for the purposes of Cash Pooling is operated by D. Bank (“DB”) based in Germany. The actual operation of the Cash pooling system will consist in automated transfers of positive balances existing on the accounts of participants of Cash pooling, including the applicant’s account at the end of the settlement day into the superior account of Leader. The Minister of Finance found that the role of Cash pool leader boils down to the management of cash that will flow from participants in the cash pooling system. It is the companies participating in this cash pool that can actually enjoy the privileges of ownership. Furthermore, an entity that does not have the right to decide fully who and to what extent it uses or has the right to dispose of the property can not be considered a beneficial owner, as defined in the Convention, and in relation to the purposes for which the contract was concluded. The cash pool leader does not receive taxable interest income within the meaning of art. 12 and art. 21 par. The Polish company appealed the ruling. The Administrative Court in Warsaw found that in circumstances where the payment is made to a Cash Pool Leader resident in a particular country, which then transfers the payment to the final recipient, the country in which the payment is made is not obliged to that intermediary to apply the provisions of the double taxation agreement. In the opinion of the court of first instance, the fact raised by the Company – that it is difficult to identify entities that ultimately receive interest paid by it – cannot prejudge the method of taxation. The appeal was therefore dismissed. Click here for translation 11-06-15 II FSK 1518-13 - Wyrok ...

Switzerland vs DK Bank, May 2015, Federal Supreme Court, Case No BGE 141 II 447)

The Federal Supreme Court denied the refund of withholding taxes claimed by a Danish bank on the basis of the double tax treaty between Denmark and Switzerland due to the lack of beneficial ownership. The Danish bank entered into total return swap agreements with different clients. For hedging purposes, the Danish bank purchased a certain amount of the underlying assets (companies listed in the Swiss stock exchange) and received dividend distributions from these Swiss companies. The Federal Supreme Court was of the opinion that the Danish bank lost the right for refund of the withholding taxes on the dividends received based on the DTT-DK/CH. According to the Federal Supreme Court, the Danish Bank could not be qualified as the beneficial owner of these shares. The Federal Supreme Court denied the beneficial ownership on the grounds that the Danish bank was, in fact, obliged to transfer the dividends to the respective parties of the total return swap agreements. Click here for translation Swiss vs D Bank vom 5 Mai 2015 ...

Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab. According to the Supreme Administrative Court interest on the loan was tax deductible. The Supreme Administrative Court stated that a reclassification of the loan into equity was not possible under the domestic transfer pricing provision alone. Further, the Supreme Administrative Court noted that it had not been demonstrated or even alleged by the tax authorities that the case was to regarded as tax avoidance. The fact that the OECD Transfer Pricing Guidelines (Sections 1.65, 1.66 and 1.68) could in theory have allowed a reclassification of the legal form of the loan into equity was not relevant because a tax treaty cannot broaden the tax base from that determined under the domestic tax provisions. Consequently, the arm’s length principle included in Article 9 of the tax treaty between Finland and Luxembourg only regarded the arm’s length pricing of the instrument, not the classification of the instrument. Click here for translation Finland-2014-July-Supreme-Administrative-Court-HFD-2014-119 ...

Germany vs. US taxpayer. October 2013, Supreme Tax Court judgment IX R 25/12

The Supreme Tax Court has held that the costs incurred by a taxpayer in connection with a tax treaty mutual agreement proceeding are not costs of earning the relevant income, but has left open a possible deduction as “unusual expenses”. A US resident realised a gain on the sale of a share in a GmbH. The German tax office sought to tax the gain, but the taxpayer objected on the grounds that it was taxable in the US under the double tax treaty. This tax office did not accept this objection, so a mutual agreement proceeding was requested in an effort to clear the issue. Ultimately, the two governments agreed to split the taxing right in the ratio 60:40 in favour of Germany. However, the taxpayer had incurred various consultancy and legal costs in the course of the process and these should, he claimed, be deducted from the taxable gain, as they would not have arisen without it. The tax office refused this, too. The Supreme Tax Court has now held that the costs at issue were not direct costs of making the gain. They were incurred in the course of resolving a dispute over the right to tax it and thus did not arise until after it had been made. Admittedly, without the gain, they would not have been incurred at all, although this connection was too remote to allow classification as direct costs. The court explicitly left the question open as to whether they might have been allowable against total income as “unusual expenses”, as that deduction is only available to German residents. Click here for translation Germany-vs-Corp-October-2013-BUNDESFINANZHOF-Urteil-vom-9-IX-r-25-12 ...