An Ukrainian company, Slobozhanshchyna Agro, paid dividends to a Cypriot company, Unigrain Holding Limited, which held 25% of the shares in Slobozhanshchyna Agro. Withholding tax on the dividend paid was declared by Slobozhanshchyna Agro at a reduced rate of 5 % in accordance with Art. 10(2)(a) of the Ukraine-Cyprus Double Tax Treaty (see the relevant article below). Following an audit, the tax authorities concluded that the conditions for the application of the reduced rate of 5% under Art. 10(2)(a) were not met. Accordingly, Slobozhanshchyna Agro should have applied a withholding tax rate of 10% under Art. 10(2)(b) of the Tax Treaty. Slobozhanshchyna Agro disagreed with this conclusion and appealed to the Administrative Court. In December 2022, the Administrative Court ruled in favour of the tax authorities. According to the court, entitlement to the benefits under Art. 10(2)(a) of the Ukraine-Cyprus Double Tax Treaty was subject to the condition that the invested amount of not less than EUR 100,000.00 had been received by the Ukrainian taxpayer. The Cypriot company had purchased its shares in Slobozhanshchyna Agro from another Cypriot company for USD 2,600,000.00 and this amount was received by the non-resident. The conditions for the application of Art. 10(2)(a) of the Ukraine-Cyprus Tax Treaty were not met. In May 2023, the Administrative Court of Appeal upheld the decision of the Administrative Court. Slobozhanshchyna Agro appealed to the Supreme Court of Ukraine. Judgement of the Supreme Court The Supreme Court set aside the decision of the Administrative Court and Administrative Court of Appeal and ruled in favor of Slobozhanshchyna Agro. Excerpts (in English) “…A literal interpretation of the content of this provision of the Convention indicates that the actual owner of the dividends (a company that is not a partnership) must invest in the acquisition (i.e. purchase) of shares or other rights of the company in the equivalent of at least EUR 100,000. Article 10(2)(a) of the Convention does not contain a provision stating that the investment must be made in the company by way of a contribution in the form of funds or property to its charter capital.” “…In order for a taxpayer to apply the reduced corporate income tax rate of 5% of the amount of dividends paid, as provided for in subparagraph “a” of paragraph 2 of Article 10 of the Convention between the Government of Ukraine and the Government of the Republic of Cyprus for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income dated 8 December 2012, a combination of two conditions must be met. The beneficial owner of dividends – a company that is not a partnership – must: (1) directly own at least 20 per cent of the capital of the company paying the dividends and (2) invest in the acquisition of shares or other rights in the company in the equivalent of at least EUR 100,000. For the purposes of this rule, an investment includes the acquisition of corporate rights of a company in exchange for funds or property in the equivalent of at least EUR 100,000. At the same time, whether the charter capital of the company whose corporate rights were acquired was increased by the said amount does not affect the applicability of this rule”. Cyprus – Ukraine Double Tax Treaty Dividends (Article 10) Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state may taxed in that other state. However, such dividends may also be taxed in the state of which the company paying the dividends is a resident and according to the laws of that state, but if the beneficial owner of the dividends is a resident of the other state, the tax so charged shall not exceed: a. 5% of the gross amount of the dividends if the beneficial owner holds at least 20% of the capital of the company paying the dividends or has invested in the acquisition of shares or other rights of the company equivalent of at least €100.000 b. 15% of the gross amount of the dividends in all other cases. New Protocol (applicable from 1 January 2020) ... a. 5% of the gross amount of the dividends if the beneficial owner holds at least 20% of the capital of the company paying the dividends AND has invested in the acquisition of shares or other rights of the company equivalent of at least €100.000 b. 10% of the gross amount of the dividends in all other cases. Click here for English translation Click here for other translation Ukraine vs Slobozhanshchyna Agro September 2023 Supreme Court Case no 480-5366-22 ...

The Portuguese tax authority requested the Swiss tax authority in a letter dated May 28, 2020 based on Article 25 of the DTT CH-PT to provide information regarding “A Furnishing SA” (hereinafter the Portuguese company) for the tax periods from September 1, 2015 to August 31, 2018. X Furnishing AG (hereinafter the Swiss company) was the holder of the information. The Portuguese tax authority states that it is carrying out a tax audit of the Portuguese company for the tax years 2015-2017, or the period between September 1, 2015 and August 31, 2018. The Portuguese company mainly produces wood-based furnishings in accordance with supply contracts with the Swiss company, which takes over all products. The Portuguese and Swiss companies are affiliated companies and are currently part of the C. group, from which they were taken over by the D. group on August 31, 2016. The Swiss company is the global buyer of Furnishing products. In the transfer pricing documentation submitted by the Portuguese company, the transactions with the Swiss company were determined by applying the transactional net margin method (TNMM) as it was stated there that other methods were either not applicable or could not be used with sufficient reliability. The documentation also states that the Swiss company is responsible for the storage and distribution of products and that this company also provides related, highly qualified services, such as monitoring quality control. However, the documentation does not explain how the price for these services were determined , nor does it show how some of the functions supposedly developed by the Swiss company for products manufactured by the Portuguese company were carried out. During the ongoing tax audit, the Portuguese tax authority wants to identify the overall picture of these transactions, namely the functions carried out by the Portuguese company, the Swiss company and other entities, the means used and the risks assumed by these companies. A request for administrative assistance was therefore considered necessary in order to understand the pricing mechanisms used and to determine whether the transactions comply with the arm’s length principle. After examining the request, the Swiss tax authority came to the conclusion that it should be acted upon, whereupon it requested the Swiss company to provide it with further information and to inform the Portuguese company about the ongoing administrative assistance procedure X Furnishing AG objected and called the request of the Portuguese tax authority a “fishing expedition” and the case ended up in the Federal Administrative Court. Decision of the Court The appeal of X Furnishing AG was largely dismissed by the Federal Administrative Court. However in regards of the request for transfer pricing documentation from the Swiss company the court states that none is available and, under Swiss law, does not have to be produced. See also the previous decision A-742/2022. Click here for English translation Click here for other translation A-744-2022_2023-08-18 ...

Based on Article 28 of the DTT CH-FR the French tax authority requested the Swiss tax authorities to answer several questions regarding A. SAS and B. GmbH. and to submit various documents to verify the “economic reality” or “real” existence and substance of G. Switzerland and to the modalities of their taxation in Switzerland and the “bond subscription agreement” between G. Switzerland and G. Belgium). After examining the request, the Swiss tax authority came to the conclusion that it should be acted upon, whereupon it requested the company to provide it with the information. The Swiss company objected to parts of the request and called it a “fishing expedition” and the case ended up in the Federal Administrative Court. Decision of the Court The appeal of the Swiss company was partly upheld by the Federal Administrative Court. Click here for English translation Click here for other translation A-2453-2021_2023-05-03 ...

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 Chile vs INVERSIONES CAPITAL GLOBAL SA April 2023 ...

The Portuguese tax authority requested the Swiss tax authority in a letter dated May 28, 2020 based on Article 25 of the DTT CH-PT to provide information regarding “A Furnishing SA” (hereinafter the Portuguese company) for the tax periods from September 1, 2015 to August 31, 2018. X Furnishing AG (hereinafter the Swiss company) was the holder of the information. The Portuguese tax authority states that it is carrying out a tax audit of the Portuguese company for the tax years 2015-2017, or the period between September 1, 2015 and August 31, 2018. The Portuguese company mainly produces wood-based furnishings in accordance with supply contracts with the Swiss company, which takes over all products. The Portuguese and Swiss companies are affiliated companies and are currently part of the C. group, from which they were taken over by the D. group on August 31, 2016. The Swiss company is the global buyer of Furnishing products. In the transfer pricing documentation submitted by the Portuguese company, the transactions with the Swiss company were determined by applying the transactional net margin method (TNMM) as it was stated there that other methods were either not applicable or could not be used with sufficient reliability. The documentation also states that the Swiss company is responsible for the storage and distribution of products and that this company also provides related, highly qualified services, such as monitoring quality control. However, the documentation does not explain how the price for these services were determined , nor does it show how some of the functions supposedly developed by the Swiss company for products manufactured by the Portuguese company were carried out. During the ongoing tax audit, the Portuguese tax authority wants to identify the overall picture of these transactions, namely the functions carried out by the Portuguese company, the Swiss company and other entities, the means used and the risks assumed by these companies. A request for administrative assistance was therefore considered necessary in order to understand the pricing mechanisms used and to determine whether the transactions comply with the arm’s length principle. After examining the request, the Swiss tax authority came to the conclusion that it should be acted upon, whereupon it requested the Swiss company to provide it with further information and to inform the Portuguese company about the ongoing administrative assistance procedure X Furnishing AG objected and called the request of the Portuguese tax authority a “fishing expedition” and the case ended up in the Federal Administrative Court. Decision of the Court The appeal of X Furnishing AG was largely dismissed by the Federal Administrative Court. However in regards of the request for transfer pricing documentation from the Swiss company the court states that none is available and, under Swiss law, does not have to be produced. Click here for English translation Click here for other translation A-742-2022_2023-04-03 ...

In 2022 the Federal Court of Canada ruled in favour of the Revenue Agency and dismissed Dow Chemicals’ appeal regarding the Tax Court’s jurisdiction to make a downward adjustment. The Federal Court held that the Tax Court could not overturn the Revenue Agency’s (Minister’s) opinion that a requested downward adjustment was inappropriate because the Tax Court’s jurisdiction is only to set aside, vary or remit an assessment to the Minister, whereas an opinion is not an assessment. According to the Federal Court, the jurisdiction to judicially review an opinion lies with the Federal Court. Following the Federal Court’s decision, Dow Chemicals filed an application for leave to appeal to the Supreme Court. Appellant DCC.pdf Respondent HMTK.pdf Appellant DCC.pdf Judgement of the Supreme Court In a judgment of 23 February 2023, the application for leave to appeal was granted and the question of jurisdiction will now be considered by the Supreme Court. Dow_Chemical_v_HMTK_Judgment_on_leave-Jugement SCC 230223 ...

This case concerns the application of the beneficial ownership rule to dividends paid by a French corporation to its Luxembourg parent. The Luxembourg parent company was not considered to be the beneficial owner of the dividends because it did not carry out any activity other than the receipt and further distribution of dividends, and it distributed the full amount of the dividend to its Luxembourg parent one day after receipt; all entities in the chain of ownership were wholly owned; and the two Luxembourg entities had common directors. Click here for English translation Click here for other translation CAA de PARIS 2ème chambre, 07-12-2022 No 21PA05986 ...

It is disputed between the parties whether the A Corp. resident in the USA – a so-called S corporation – or its shareholders are entitled to full exemption and reimbursement of the capital gains tax with regard to a profit distribution by a domestic subsidiary of A Corp. (S-Corporation). A Corp. (S-Corporation) is a corporation under US law with its registered office in the United States of America (USA). It has opted for taxation as an “S corporation” under US tax law and is therefore not subject to corporate income tax in the USA; instead, its income is taxed directly to the shareholders resident in the USA (Subchapter S, §§ 1361 to 1378 of the Internal Revenue Code (IRC)). The shareholders of A Corp. (S-Corporation) are exclusively natural persons resident in the USA as well as trusts established under US law and resident in the USA, the beneficiaries of which are in turn exclusively natural persons resident in the USA. For several years, the A Corp. (S-Corporation) has held a 100% share in A Deutschland Holding GmbH. On the basis of a resolution on the appropriation of profits dated November 2013, A Deutschland Holding GmbH distributed a dividend in the amount of € (gross) to A Corp. (S-Corporation) on … December 2013. Of this, after deduction of the share for which amounts from the tax contribution account are deemed to have been used within the meaning of section 27 KStG (section 20 (1) no. 1 sentence 3 EStG), an amount of € …. € to the income from capital assets. A Deutschland Holding GmbH retained capital gains tax on this amount in the amount of 25% plus solidarity surcharge and thus a total of € … (capital gains tax in the amount of € … plus solidarity surcharge in the amount of €) and paid this to the tax office B. In a letter dated 14 March 2014, A Corp. (S-Corporation) informally applied for a full refund of the withheld capital gains tax plus solidarity surcharge. By letter of 21 May 2014, referring to this application, the company submitted, among other things, a completed application form “Application for refund of German withholding tax on investment income”, in which it had entered “A Corp. (S-Corporation) for its shareholders” as the person entitled to a refund . The shareholders were identified from an attached document. By decision of 4 September 2014, the tax authorites set the amount to be refunded to A Corp. (S-Corporation) as the person entitled to a refund at … (capital gains tax in the amount of … € as well as solidarity surcharge in the amount of €). This corresponds to a withholding tax reduction to 15 %. The tax authorities refused a further refund on the grounds that, due to the introduction of § 50d, para. 1, sentence 11 EStG in the version applicable at the time (EStG old version), the concession under Article 10, para. 2, letter a) DTT-USA could not be claimed. The residual tax was 15%, since the eligibility of the partners of A Corp. (S-Corporation) for the agreement had to be taken into account. This decision also took into account a further profit distribution by the A Deutschland Holding GmbH to the A Corp. (S-Corporation) from … December 2012 in the amount of …. €, for which a refund of capital gains tax in the amount of …. € and solidarity surcharge in the amount of …. € was granted. In this respect, the tax authorities already granted the request during the complaint proceedings by means of a (partial) remedy notice of 8 May 2015 and increased the capital gains tax to be refunded from € … to € … as requested. (cf. p. 70 ff. VA). The tax treatment of the 2012 profit distribution is therefore not a matter of dispute. Judgement of the Tax Court The Court decided in favour of A Corp. (S-Corporation) and its shareholders. Excerpt “125 An application to this effect has been made in favour of plaintiffs 2) to 17). The defendant correctly interpreted the application received by it on 22 May 2014, which expressly identifies the first plaintiff on behalf of its partners as being entitled to reimbursement, as such. Similar to a litigation status in the proceedings before the fiscal court, the discerning senate considers the filing of an application by a company “on behalf of its shareholders” to be effective, especially since the second to seventeenth plaintiffs promptly confirmed that the claim (of the first plaintiff) for a reduction of the withholding taxes to zero had been asserted by them or in their interest via the first plaintiff (cf. letter of 15 June 2015 as well as the attached confirmations of all shareholders, pp. 85 et seq. VA). The fact that the first plaintiff did not explicitly refer to this in the first informal application letter of 14 March 2014 (see file, pp. 1 f. VA) as well as in the letter of 21 May 2014 (see file, pp. 6 f. VA) is irrelevant. This is because the addition of the application “for its shareholders” can be found on the formal application both under point I “person entitled to reimbursement” and in the heading of the second page of the application, which is the relevant point. The fact that item IV of the application for the granting of the nesting privilege provides for an American corporation as the person entitled to a refund is harmless in this context. As a result of the provision of § 50d, para. 1, sentence 11 EStG, old version, which had only been introduced shortly before, there was not yet a different application form. In addition, the application of this provision was associated with considerable uncertainties, as its effect was disputed from the beginning. Finally, point IV of the application also states that the intercompany privilege under treaty law (in this case Article 10, para. 3 DTT-USA) is to be claimed on the merits. Moreover, the letter of 14 ...

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore not applicable. Judgement of the Tax Court The Tax Court ruled in favour of the tax authorities. The Court held that the treaty benefits did not apply. The Court agreed with the findings of the tax authorities that the Spanish companies had been set up for the sole purpose of benefiting from the Spain-Argentina DTC and therefore violated Argentina’s general anti-avoidance rule. Excerpt “According to the administrative proceedings, based on the background information requested from the International Taxation Directorate of the Spanish Tax Agency and other elements collected by the audit, it appears that: a) the company Inversora AES Americas Holding S.L., is made up as partners by AES Argentina Holdings S.C.A. and AES Platense Investrnents Uruguay S.C.A., both Uruguayan companies; b) the company Zargas Participaciones S.L., has as its sole partner ISKARY S.A., also a Uruguayan company. The purpose of the former is the management and administration of securities representing the equity of companies and other entities, whether or not they are resident in Spanish territory, investment in companies and other entities, whether or not they are resident in Spanish territory, and it has only three employees (one administrative and two in charge of technical areas) and has opted for the Foreign Securities Holding Entities Regime (ETVE). The second company, whose purpose is the management and administration of securities representing the equity of non-resident entities in Spanish territory, has had no employees on its payroll since its incorporation, and has also opted for the ETVE regime. Neither of the two companies is subject to taxation in their own country similar to that in the present case. According to the information provided by the Spanish Tax Agency (see fs. 34 of the Background Zargas Participaciones SL), there is no record that it has any shareholdings in the share capital of other companies. The evidence and circumstances of the case show that the Spanish companies lack genuine economic substance, with the companies AES Argentina Holdings S.C.A. and AES Platense Investments Uruguay S.C.A. (both Uruguayan) holding the shares of Inversora AES Americas Holding S.L. and the company ISKARY S.A. (also Uruguayan) holding 100% of the shares of Zargas Participaciones S.L. Thus, it is reasonable to conclude that the main purpose of their incorporation was to obtain the benefits granted by the Convention by foreign companies from a third country outside the scope of application of the treaty, without the plaintiff having been able to prove with the evidence produced in the proceedings that the Spanish companies carried out a genuine economic activity and that, therefore, they were not mere legal structures without economic substance (in the same sense CNCAF, Chamber I, in re “FIRST DATA CONO SUR S.R.L.” judgement of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation Argentina-vs-Empresa-Distribuidora-La-Plata ...

The French Accor hotel group was the subject of an tax audit related to FY 2010, during which the tax authorities found that Accor had not invoiced a fee for the use of its trademarks by its Brazilian subsidiary, Hotelaria Accor Brasil, in an amount of 8,839,047. The amount not invoiced was considered a deemed distribution of profits and the tax authorities applied a withholding tax rate of 25% to the amount which resulted in withholding taxes in an amount of EUR 2.815.153. An appeal was filed by Accor with the Administrative Court. In a judgment of 7 July 2020, the Administrative Court partially discharged Accor from the withholding tax up to the amount of the application of the conventional reduced rate of 15% (related to dividends), and rejected the remainder of the claim. The Administrative Court considered that income deemed to be distributed did not fall within the definition of dividends under article 10 of the tax treaty with Brazil and could not, in principle, benefit from the reduced rate. However in comments of an administrative instruction from 1972 (BOI 14-B-17-73, reproduced in BOI-INT-CVB-BRA, 12 August 2015) relating to the Franco-Brazilian tax treaty, it was stated, that the definition of dividends used by the agreement covers “on the French side, all products considered as distributed income within the meaning of the CGI”. The Administrative Court noted that such a definition would necessarily include distributed income within the meaning of the provisions of Article 109 of the CGI”. The tax authorities appealed against this judgment. Judgement of the Administrative Court of Appeal The Court allowed the appeal of the tax authorities and set aside the judgment in which the Administrative Court had partially discharged Accor from the withholding tax to which it was subject in respect of the year 2010. “Under the terms of Article 10 of the tax treaty concluded between the French Republic and the Federative Republic of Brazil on 10 September 1971: “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, dividends may be taxed in the State in which the company paying the dividends has its tax domicile and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the dividends / (…) 5. (a) The term “dividend” as used in this Article means income from shares, “jouissance” shares or “jouissance” warrants, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate units which is assimilated to income from shares by the taxation law of the State of which the company making the distribution is resident. (…) “. It follows from these stipulations that the dividends mentioned in Article 10 of the Franco-Brazilian Convention must be defined as the income distributed by a company to its members by virtue of a decision taken by the general meeting of its shareholders or unit holders under the conditions provided for by the law of 24 July 1966, as amended, on commercial companies, which does not include income deemed to be distributed within the meaning of Article 109(1) of the French General Tax Code. Neither these stipulations, nor any other clause of the Franco-Brazilian agreement, prevent the taxation in France of income considered as distributed to Hotelaria Accor Brasil by Accor, according to French tax law, at the common law rate set, at the date of the taxation in dispute, at 25% of this income by Article 187 of the General Tax Code.” “The Accor company claims, on the basis of Article L. 80 A of the Book of Tax Procedures, of the instruction of 8 December 1972 referenced BOI n° 14-B-17-72 relating to the tax treaty concluded between France and Brazil on 10 September 1971, which provides that: “According to paragraph 5 of Article 10, the term dividends means income from shares, jouissance shares or warrants, mining shares, founders’ shares or other profit shares with the exception of debt claims and, in general, income assimilated to income from shares by the tax legislation of the State of which the distributing company is resident. / This definition covers, on the French side, all income considered as distributed income within the meaning of the Code général des Impôts (art. 10, paragraph 5b). “However, this interpretation was brought back by an instruction referenced 4 J-2-91 of July 2, 1991, published in the Bulletin officiel des impôts n° 133 of July 11, 1991, relating to the impact of international treaties on the withholding tax applicable to income distributed outside France, according to which: “the advantages which benefit [the partners and the persons having close links with the partners] and which are considered as distributed income in domestic law retain this character in treaty law when the applicable treaty refers to dividends and gives a definition similar to that of the OECD model. On the other hand, when they benefit persons other than the partners, these benefits are subject to the treaty provisions relating to “undesignated” income, i.e. income that does not fall into any of the categories expressly defined by the applicable treaty”. Annex 1 to this instruction specifically states, with regard to Brazil, that income paid to a beneficiary who is not a shareholder of the distributing company is subject to withholding tax at the ordinary law rate of 25%. These statements must be regarded as having reported, on this particular point, the administrative interpretation contained in paragraph 2351 of the instruction of 8 December 1972. In this respect, it is irrelevant that the instruction of 8 December 1972 was fully reproduced and published by the BOFIP on 12 September 2012 under the reference BOI-INT-CVB-BRA, after the tax year in question. It follows that Accor cannot claim the benefit of the reduced conventional tax rate.” Click here for English translation Click here for other translation ...

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to reminders of withholding tax in respect of sums described as royalties paid to the companies Les Mills Belgium SPRL and Les Mills Euromed Limited, established in Belgium and Malta respectively, in respect of the financial years 2011 to 2014 in consideration of the sub-distribution of collective fitness programmes developed by the company Les Mills International LTD, established in New Zealand. The Planet company is appealing to the Court of Cassation against the judgment of 15 July 2020 by which the Marseille Administrative Court of Appeal, on appeal by the Minister for Public Action and Accounts, annulled the judgment of 18 May 2018 of the Marseille Administrative Court insofar as it had discharged it from these reminders and reinstated these taxes. 2. If a bilateral agreement concluded with a view to avoiding double taxation can, by virtue of Article 55 of the Constitution, lead to the setting aside, on such and such a point, of national tax law, it cannot, by itself, directly serve as a legal basis for a decision relating to taxation. Consequently, it is up to the tax judge, when he is seized of a challenge relating to such a convention, to look first at the national tax law in order to determine whether, on this basis, the challenged taxation has been validly established and, if so, on the basis of what qualification. It is then up to the court, if necessary, by comparing this classification with the provisions of the convention, to determine – on the basis of the arguments put forward before it or even, if it is a question of determining the scope of the law, of its own motion – whether or not this convention is an obstacle to the application of the tax law. 3. Under Article 12 of the Convention of 30 November 1979 between France and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income: “1. Royalties arising in a State and paid to a resident of the other State may be taxed in that other State / 2. However, such royalties may also be taxed in the State in which they arise and according to the laws of that State, but if the person receiving the royalties is the beneficial owner the tax so charged shall not exceed 10 per cent of the gross amount of the royalties / 3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and works recorded for radio or television broadcasting, any patent a trademark, a design or model, a secret plan, formula or process, as well as for the use of or the right to use industrial, commercial or scientific equipment and for information concerning industrial, commercial or scientific experience. In view of their purpose, and as clarified by the comments of the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 12 of the Model Convention drawn up by that organisation, published on 11 April 1977, and as is also clear from the same comments published on 23 October 1997, 28 January 2003 and 15 July 2014 and most recently on 21 November 2017, the provisions of Article 12(2) of the Franco-New Zealand tax treaty are applicable to French source royalties whose beneficial owner resides in New Zealand, even if they have been paid to an intermediary established in a third country. 4. It is clear from the statements in the judgment under appeal that, in order to determine whether the sums in question constituted royalties, the court examined the classification of the sums paid by the company Planet to the Belgian company Les Mills Belgium SPRL in 2011 and to the Maltese company Les Mills Euromed Limited from 2012 to 2014, in the light of the stipulations of the Franco-New Zealand tax convention of 30 November 1979 alone. In limiting itself, in holding that this agreement was applicable to the dispute, to noting that the tax authorities maintained that the New Zealand company Les Mills International LTD should, pursuant to an agency agreement signed on 2 December 1998 between that company and the company Planet, be regarded as the actual beneficiary of the sums in dispute paid by the French company to the Belgian and Maltese companies, without itself ruling on its status as the actual beneficiary of the said sums for the four years in dispute, the court erred in law.” Click here for English translation Click here for other translation France vs Planet - Conseil d'État, 20_05_2022, 444451 ...

This appeal and cross-appeal arise as a result of the response provided by the Tax Court of Canada to a question submitted under Rule 58 of the Tax Court of Canada Rules (General Procedure), SOR/90-688a. The question was: Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ITA”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under section 12 of the Tax Court of Canada Act and section 171 of the ITA? This question arose in the context of the appeal commenced by Dow Chemical Canada ULC (Dow) in relation to the reassessment of its 2006 taxation year. The Tax Court (2020 TCC 139) provided the following answer to this question: The Court has determined that where the Minister has decided, pursuant to subsection 247(10) of the Income Tax Act (Canada) [the ITA], to deny a taxpayer’s request for a downward transfer pricing adjustment, that decision is not outside the exclusive original jurisdiction granted to the Court under section 12 of the Tax Court of Canada Act and section 171 of the ITA provided that the assessment resulting from that decision has been properly appealed to the Court… The Crown, in its appeal to this Court, is asking that the question as posed by the parties be answered in the affirmative. In its cross-appeal, Dow is seeking an amended response. In Dow’s view, the decision of the Minister of National Revenue (the Minister) under subsection 247(10) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the ITA) is within the exclusive jurisdiction of the Tax Court of Canada, regardless of whether an assessment has been issued. The Revenue Agency, in its appeal to the Federal Court of Appeal, is asking that the question as posed by the parties be answered in the affirmative – that the decision is outside the jurisdiction of the tax court. In its cross-appeal, Dow is seeking an amended response – that such a decision is within the exclusive jurisdiction of the Tax Court of Canada, regardless of whether an assessment has been issued. Judgement of the Federal Court of Appeal The Federal Court ruled in favour of the Revenue Agency and dismissed the cross appeal of Dow Chemicals. The court found  that the Tax Court could not reverse the revenue agency’s (Ministers) opinion that a requested downward adjustment is inappropriate. The jurisdiction accorded to the Tax Court is only to vacate or vary an assessment or refer it back to the Minister, whereas an opinion is not an assessment. The jurisdiction to judicially review an opinion was with the Federal Court. Canada vs Dow Chemical April 2022 FC 2022 FCA 70 ...

In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered in Korea resulted in double taxation. The Trail court issued a decision in favour of Microsoft. The decision of the Trail court was brought before the Court of Appeal by the tax authorities. The authorities argued that royalties paid by Samsung also included payments for Microsoft technologies whose legal status was not clear and thus subject to withholding tax. In 2019 the appellate court rejected the tax authorities appeal. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court allowed the appeal and remanded the case to the appeals court, ordering additional proceedings to re-calculate the tax refund amount. According to the court royalties paid by Samsung for patent rights not registered in Korea by Microsoft do not correspond to domestic source income subject to withholding tax. However, the calculations should have been revised in accordance with facts of the case. Excerpts “Tax Office argued in the lower court that ‘the royalties in this case include consideration for the use of copyright, know-how, and trade secrets, which are subject to withholding tax as domestic source income’. Since it can be considered that they have been added or changed, the trial court should have considered and judged these claims.” “Considering the context of the Korea-US tax treaty and the ordinary meaning of its words, Articles 6 (3) and 14 (4) of the Korea-U.S. Tax Convention According to the principle of territoriality, the patentee’s right to use the patent exclusively for the production, use, transfer, rental, import, or display of the patented product is only effective in the territory of the country in which the patent right is registered. In the case of obtaining a patent license in Korea by registering a patent right, only the income paid in exchange for the use of the patent license is defined as domestic sourced income, and the patent right cannot be infringed outside the country where the patent right is registered, so the use or consideration for the use of the patent right cannot occur. “Therefore, if a US corporation has registered a patent right abroad but not in Korea, the income received by the US corporation in connection with it cannot be considered for its use, so It cannot be viewed as source income.” “On a different premise, in the lower court’s judgment that the claim of the Dongsuwon Tax Office was not subject to the court’s examination, there was an error that affected the judgment by misunderstanding the jurisprudence regarding the subject of the court’s examination”. Click here for translation 1645083335247_163535 ...

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 ...

In 2003 Molinos Argentina had incorporated Molinos Chile under the modality of an “investment platform company” regulated by Article 41 D of the Chilean Income Tax Law. Molinos Argentina owned 99.99% of the shares issued by Molinos Chile, and had integrated the share capital of the latter through the transfer of the majority shareholdings of three Uruguayan companies and one Peruvian company. Molinos Argentina declared the dividends originating from the shares of the three Uruguayan companies and the Peruvian company controlled by Molinos Chile as non-taxable income by application of article 11 of the DTA between Argentina and Chile. On that factual basis, the tax authorities applied the principle of economic reality established in article 2 of Law 11.683 (t.o. 1998 and its amendments) and considered that Molinos Argentina had abused the DTA by using the Chilean holding company as a “conduit company” to divert the collection of dividends from the shares of the Uruguayan and Peruvian companies to Chilean jurisdiction, in order to avoid paying income tax in Argentina and similar income tax in Chile at the same time. The non-taxation in Argentina was due to the application of article 11 in the DTA which established that dividends were only taxed by the country in which the company distributing them was domiciled (in the case of Chile, because Molinos Chile was domiciled in Chile) and the non-taxation in Chile was verified – in turn – because the dividends originated in the Uruguayan and Peruvian companies did not pay income tax in that country because they were profits from investment platform companies which “will not be considered domiciled in Chile, so they will be taxed in the country only for Chilean source income”. The tax authorities considered that the incorporation of the holding company in Chile by Molinos Argentina was not justified from the point of view of the corporate structure, since it had no real economic link with the Uruguayan and Peruvian companies and lacked economic substance or business purpose, since the dividends distributed by those companies did not remain in Molinos Chile but was used as an intermediary to remit those profits almost immediately to Molinos Argentina. It was constituted with the sole purpose of eliminating the taxation and to conduct the income obtained in states that are not party to the DTA -Uruguay and Peru- through the State with which the double taxation treaty has been concluded and using the benefits offered by the latter. Judgement of the Supreme Court The Supreme Court’s ruled in favor of the tax authorities. Molinos’s conduct was not protected by the rules of the DTA. International standards must be interpreted in accordance with the principle of good faith. The conclusions reached by the National Tax Court and the National Chamber of Appeals in Federal Administrative Litigation was not seen as unreasonable or devoid of Foundation according to the doctrine of arbitrariness. Click here for English Translation Argentina FALLO CAF 001351_2014_CS001 ...

The Platform for Collaboration on Tax (IMF, OECD, UN and the WBG) has published a toolkit on Tax Treaty Negotiations. The Toolkit represents a joint effort to provide capacity-building support to developing countries on tax treaty negotiation, building on previous contributions and reducing duplication and inconsistencies. It provides tax officials who have little or no experience in tax treaty negotiation with the tools they need to implement some of the guidance in the UN Manual. It does so by building on Section II of the UN Manual, which sets out how to conduct a tax treaty negotiation in all its phases (preparation, conduct and follow-up), complementing it with a set of tools and resources. The Toolkit on Tax Treaty Negotiations Toolkit_Updated 052021 ...

In August 2020, the competent authority of the Belgian tax administration sent a request for information to the Luxembourg tax administration concerning “Lux Service SA” under the tax convention between Luxembourg and Belgium. The requested information regarding “Lux Service SA” was documentation related to the basis for service payments from a related party in Belgium. The tax administration in Luxembourg contacted “Lux Service SA” and requested submission of the information and documents. Lux Service SA did not want to accommodate the request and brought the case to the High Administrative court for an annulment. The tax authorities argued that the appeal should be dismissed as unfounded. The Court dismissed the appeal of “Lux Services SA” and upheld the information injunction issued by the tax administration. The argument that the tax administration had failed to state the reasons for the information injunction was rejected by the Court as unfounded. According to the Court, the information injunction was based on a sufficiently reasoned request from the Belgian tax administration. Click here for English translation Click here for other translation Lux Case No 45072 ...

Two Swiss companies, A GmbH und B GmbH, belonged to a multinational group under a Dutch parent. The group provided food and fuel to military troops and civilian in areas of crises and armed conflicts. A group company located in the United Arab Emirates provided services to the Swiss companies primarily in relation to activities in Afghanistan. A GmbH und B GmbH had a permanent establishment in Afghanistan. As there are no tax treaties between Switzerland and Afghanistan, for Swiss tax purposes the allocation of income between the two companies and the permanent establishment in Afghanistan was governed by Swiss domestic law. A tax assessment was issued by the authorities which was brought to the Swiss courts by the companies. In 2018 the case ended up in the Swiss Supreme Court. The Supreme Court ruled that according to Swiss law, the profit allocation has to start from the total global income of the companies. Hence, the assessment was partially incorrect, as taxable profit in Switzerland had been calculated without taking into account foreign profit or losses. The the case was remanded to the lower court for further consideration. Click here for English translation Click here for other translation Swiss 2020 ...

The Administrative Court of Appeal (CAA) set aside a judgement of the administrative court and upheld the tax authorities claims of withholding taxes on royalties paid by Société Planet to companies in Belgium and Malta irrespective of the beneficial owner of those royalties being a company in New Zealand. Hence, Article 12(2) of the Franco-New Zealand tax treaty was not considered applicable to French source royalties whose beneficial owner resided in New Zealand, where they had been paid to an intermediary company established in a third country. Click here for English translation Click here for other translation France vs Planet July 2020 CAA 18MA04302 ...

Coffee Machine Ltd. was founded in Ireland and responsible for the trademark and patent administration as well as the management of the research and development activities of the A group, the world’s largest manufacturer of coffee machines. A Swiss subsidiary of the A group reported payments of dividend to the the Irish company and the group claimed that the payments were exempt from withholding tax under the DTA and issued a claim for a refund. Tax authorities found that the Irish company was not the beneficial owner of the dividend and on that basis denied the companies claim for refund. The lower Swiss court upheld the decision of the tax authorities. Judgement of the Supreme Court The Supreme Court upheld the decision of the lower court and supplemented its findings with the argument, that the arrangement was also abusive because of the connection between the share transfer in 2006 and the distribution of pre-acquisition reserves in 2007 and the total lack of substance in the Irish company. “…the circumstantial evidence suggests with a probability bordering on certainty that the complainant and the other companies involved wanted to secure a tax saving for themselves with the transfer of the shareholding in the subsidiary and the subsequent distribution of a dividend to the complainant, which they would not have been entitled to under the previous group structure. The economic objective asserted by the complainant – locating the research and development function, including the shareholding in the subsidiary, under the Irish grandparent company responsible for overseeing the licensing agreements – does not explain why the complainant went heavily into debt in order to ultimately use this borrowed capital to buy the subsidiary’s liquid funds, which were subject to latent withholding tax. It would have been much simpler for all parties involved and would have led to the same economic result if the subsidiary had instead distributed these funds to the sister company immediately before the transfer of the shareholding and the sister company had thus recorded an inflow of liquidity in the form of a dividend instead of a purchase price payment. Against this background, the chosen procedure appears to be outlandish and the legal arrangement artificial. Since the arrangement chosen by the complainant mainly served to obtain advantages from the DTA CH-IE and the AEOI-A CH-EU and the three characteristics of tax avoidance are met, the complainant must be accused of abuse of law both from the perspective of international law and from the perspective of internal law. “ “A person who, like the complainant, fulfils the criteria of abuse of the agreement and tax avoidance as defined by the practice cannot invoke the advantage pursuant to Art. 15 para. 1 aAIA-A CH-EU. As a result, the lower court did not violate either federal or international law by completely refusing to refund the withholding tax to the complainant on the basis of Art. 15 para. 1 aAIA-A CH-EU.” Click here for English translation Click here for other translation Swiss BO 2c_354-2018 ...

In this case the Korean Supreme Court held that Luxembourg SICAV and SICAF are entitled to reduced withholding tax rate on interest and dividend income under the Korea–Luxembourg Tax Treaty. Meaning of “residents of Luxembourg,” which is subject to the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” (held: any person who, under the laws of Luxembourg, is liable to pay tax therein), and in a case where tax is not imposed in accordance with the benefit of tax exemption, etc. for which legal requirements has been fulfilled, whether it may be considered that the tax liability does not exist (negative). Standard for determining whether one qualifies as the “beneficial owner” as prescribed in Article 10(2) Item (b) or 11(2) of the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital”. Meaning of “holding companies within the meaning of any similar law enacted by Luxembourg after the signature of the Convention” as stated in Article 28 of the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital,” and whether a person who acquires securities such as stocks, etc. simply for the purpose of getting his/her investment returns constitutes such holding companies (negative in principle). Apart from appealing against the disposition imposing a corporate tax, whether it is possible to seek the revocation of disposition imposing a corporate tax on the grounds that the determination on the pertinent corporate tax amount, which becomes the standard of assessment, is illegal (affirmative). In a case where: (a) investing in listed domestic stocks or claims, Investment Company A and others, collective investment schemes that are included in the types of company established in Luxembourg in accordance with laws and regulations regarding Undertakings for Collective Investment in Transferable Securities (UCITS), appointed Bank B and others to storing agencies and received dividends and interest relevant to the above stocks and claims from Bank B and others; (b) paying the said dividends, etc. to Investment Company A and others for six years, Bank B and others have paid the withheld corporate tax by applying 15 per cent limited tax rate stipulated in Article 10(2) Item (b), and 10 percent limited tax rate prescribed in Article 11(2), of the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” each; and (c) the competent taxation authorities and others imposed corporate tax, deducted at source in the year shown, which is taxed at 20 percent in accordance with Article 98(1) Subparagraph 3 of the former Corporate Tax Act with respect to the dividends, etc., and local income tax, which is a special collection corporate tax, pursuant to Article 96 of the former Local Tax Act, each upon Bank B and others on the grounds that Investment Company A and others are not subject to the aforementioned Convention, the Court held that: (a) Investment Company A and others correspond to residents of Luxembourg who are liable to tax in Luxembourg in light of the overall circumstances; and (b) the aforementioned dividends, etc. were paid to Investment Company A and others who are residents of Luxembourg as the beneficial owner, and thus 15 per cent limited tax rate prescribed in Article 10(2) Item (b), and 10 per cent limited tax rate stated in Article 11(2), of the above Convention ought to be applied. Click here for English Translation 2016두35854 ...

A refund of withholding tax on dividend payments from an Italien subsidiary, CDC srl, was claimed by the parent company in Luxembourg, CDC Net SA. The parent company had been subject to income tax in Luxembourg as required by the EU Directive, but in Luxembourg there were no actual taxation of the dividends. The refund was denied as, according to the authorities, the Luxembourg company did not meet the requirements of the EU Directive due to lack of actual taxation of the dividends in Luxembourg. The Court ruled in favor of the tax authorities and denied the refund of withholding taxes under the European Parent Subsidiary Directive (Directive 90/435/EEC, Article 5, paragraph 1, ) as no double taxation existed due to the dividend exemption regime in Luxembourg. Click here for English translation Click here for other translation Italy Dividend Supreme Court 2018 ...

The issue in this case was the meaning of and standard for determining what constitutes “beneficial owner” as prescribed by Article 10(2)(a) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. Whether a tax treaty may be deemed inapplicable in the event that treaty abuse is acknowledged according to the principle of substantial taxation under the Framework Act on National Taxes even if constituting a beneficial owner of dividend income (affirmative) In a case where: (a) Company A, in paying dividends on six occasions to Hungary-based Company B that owns 50% of its shares, paid the withheld corporate tax based on the limited tax rate of 5% as prescribed by Article 10(2)(a) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income; and (b) the competent taxing authority deemed the U.S.-based Company C, the ultimate parent company of the multinational business group to which Company B is affiliated with, to be the beneficial owner of dividend income and, subsequently, issued a notice of correction to the amount of corporate tax withheld against Company A by applying a limited tax rate of 15% pursuant to Article 12(2)(a) of the Convention between the Government of the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, the Court holding that the application of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income cannot be denied with respect to dividend income even if based on the principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes; (g) nevertheless, the lower court held that the taxing authority’s disposition as above was lawful by deeming Company C to be the beneficial owner of dividend income solely from a tax saving perspective; and (h) in so doing, the lower court erred by misapprehending the legal doctrine. 10-2018Du38376 ...

In 2011, a Korean company, CJ E&M Co., Ltd concluded a license agreement relating to the domestic distribution of Paramount films, etc. with Hungary-based entity Viacom International Hungary Kft (hereinafter “VIH”), which is affiliated with the global entertainment content group Viacom that owns the film producing company Paramount and music channel MTV. From around that time to December 2013, the Plaintiff paid VIH royalties amounting to roughly KRW 13.5 billion (hereinafter “pertinent royalty income”). CJ E&M Co., Ltd did not withhold the corporate tax regarding the pertinent royalty income according to Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treaty”). The Hungarian company was interposed between the Korean entertainment company and a Dutch company which previously licensed the rights to the Korean entertainment company. The Korean Tax Authorities (a) deemed that VIH was merely a conduit company established for the purpose of tax avoidance and that the de facto beneficial owner of the pertinent royalty income was Viacom Global Netherlands BV (hereinafter “VGN”), the parent company of VIH based in the Netherlands; (b) applied the Convention between the Government of the Republic of Korea and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea- Netherlands Tax Treaty”), rather than the Korea-Hungary Tax Treaty; and (c) imposed the corporate tax withheld totaling KRW 2,391 million (including penalty tax) against the Plaintiff on May 2, 2014 and July 1, 2014, respectively (hereinafter “instant disposition”). The High Court ruled in favor of the tax authorities and held that the Hungarian company was a mere conduit used for treaty shopping purposes. The Korean Supreme Court reversed the High Court’s decision on the grounds that beneficial ownership should not be denied by the mere fact that tax benefits were derived from the relevant tax treaty if the foreign entity was otherwise engaged in genuine business activities in line with the entity’s business purpose. The Supreme Court decided that the Hungarian entity should be entitled to the treaty benefits because it did not bear any legal or contractual obligation to transfer the royalty income and thus should be regarded as the beneficial owner; and  it had the ability to manage and control the license rights that gave rise to the royalty income, and therefore the GAAR should not apply. 8-2017Du33008 ...

A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was subject to the participation exemption or (2) whether the Netherlands was required to provide relief from double taxation for the Russian dividend tax and, if so, to what amount. The Tax court found it to be a loan and the payments therefor qualified as interest and not dividend. The participation exemption does not apply to interest. In addition, the court ruled that the Russian thin-capitalization rules did not have an effect on the Netherlands through Article 9 of the Convention for the avoidance of double taxation between the Netherlands and Russia. Application of the participation exemption was not an issue. In the opinion of the court, a (re) qualification of interest as a dividend on the basis of the thin capitalization rules in Russia cannot be based on Article 10 of the Treaty. This has not been explicitly included in the text of the treaty and, in the opinion of the court, could not have been the intention of the countries in the absence of a concrete substantiation with facts and / or circumstances. Since the income on the basis of Article 11 of the Treaty cannot be taxed in Russia, the Netherlands is not required to provide relief from double taxation for the Russian dividend tax deducted therefrom. The appeal is unfounded. Click here for other translation NL vs Loan BV19 ...

The question in this case was whether payments received by Satyam Computer Services Limited (now Tech Mahindra Ltd) from its Australian clients – that were royalties for the purposes of Article 12 of the tax treaty with India, but not otherwise royalties under Australian tax law – were deemed to be Australian source income by reason of Article 23 of the tax treaty and ss 4 and 5 of the International Tax Agreements Act 1953 and therefore included in the company’s assessable income for Australian tax purposes. The answer provided by the Federal Court confirmed this to be the case. Click here for other translation 2018FCAFC0172 ...

Company X B.V. held all the shares in the Irish company A. The Tax Agency in the Netherlands claimed that the Irish company A qualified as a “low-taxed investment participation”. The court agreed, as company A was not subject to a taxation of 10 per cent or more in Ireland. The Tax Agency also claimed that X B.V.’s profit should include a hidden dividend due to company A’s providing an interest-free loan to another associated Irish company E. The court agreed. Irish company E had benefited from the interest-free loan and this benefit should be regarded as a dividend distribution. It was then claimed by company X B.V, that the tax treaty between the Netherlands and Ireland did not permit including hidden dividends in X’s profit. The Supreme Court disagreed and found that the hidden dividend falls within the scope of the term “dividends” in article 8 of the tax treaty. Click here for other translation Nederland July 2018 ECLI NL PHR 2018 737 ...

In cases where a domestic corporation that operates a financial business (including a domestic place of business of a foreign corporation) borrowed money from a foreign controlling shareholder and such borrowed amount exceeds six times the amount invested in shares or equity interests by the foreign controlling shareholder, a certain amount of the interest paid in relation to the exceeding amount shall be excluded from deductible expenses of the domestic corporation and subsequently deemed to have been disposed of as a dividend of the domestic corporation pursuant to Article 67 of the Corporate Tax Act. In that sense, the interest paid in relation to the exceeding amount borrowed is regarded as a domestic source income of a foreign corporation, which is a foreign controlling shareholder. The Convention between the Republic of Korea and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which allows dividend income and interest income to be taxed by both a residence country and a source country, defines the meaning of dividend income in Article 10(4) and the meaning of interest income in Article 11(5). Moreover, Article 28 of the former Adjustment of International Taxes Act stipulates that the relevant tax treaty preferentially applies to the classification of a domestic source income of a foreign corporation, notwithstanding Article 93 of the Corporate Tax Act. In view of the contents, structure, etc. of the pertinent statutory provisions, where a domestic corporation, including a domestic place of business of a foreign corporation, borrowed money from a foreign controlling shareholder, the interest paid in relation to the exceeding amount borrowed is regarded as a dividend and consequentially deemed a domestic source income of a foreign controlling shareholder, thereby falling under a dividend income in principle. However, the matter of whether to acknowledge a source country’s right to tax, as dividend income, the interest paid in relation to the exceeding amount borrowed under the applicable tax treaty ought to be determined depending on the tax treaty that the Republic of Korea concluded with the country where the relevant foreign corporation (foreign controlling shareholder) is a residence. In such a case where the interest paid constitutes another type of income (e.g., interest income), rather than dividend income, under the relevant tax treaty, then that classification should be the basis for either acknowledging the source country’s right to tax or setting the applicable limited tax rate. Click here for translation TP-cases-Korea-2015Du2710-1520228264005_143744 ...

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 ...

In 2013, the French tax authorities (DGFP) submitted several requests for administrative assistance to the Swiss Federal Tax Administration (FTA) based on Art. 28 of the Agreement of 9 September 1966 between Switzerland and France. In the applications, the legal entities concerned in France are B. GmbH and C. GmbH. The legal entities concerned in Switzerland are A. GmbH, B. GmbH, C. GmbH and D. GmbH. The French tax authorities requested the administrative assistance to monitor the financial situation of the French companies in the X. Group. In 2009, the group’s activities were reorganised, particularly in France. The change in the transfer pricing policy of the X. Group led to a change in the allocation of profits within the group. The provisions of French tax law stipulate that transactions between companies in the same group must be carried out under the same conditions as if they had been carried out between independent companies. In the case of cross-border transactions between companies in the same group, it is also necessary to have information about these companies and the distribution of profits. This information was essential for the French tax authorities to determine the amount of profits derived from activities in France and to determine the taxes due in France. The Swiss tax authorities requested A. GmbH, B. GmbH, C. GmbH and D. GmbH to submit the information and documents it had specified and subsequently informed the companies that it intended to provide the DGFP with administrative assistance and informed them of the wording of the intended responses and the enclosures. A complaint was filed by the companies with the The Federal Administrative Court which set aside the request of the tax authorities and decided that the tax returns and income statements should not to be submitted to the French tax authorities. The tax authorities then lodged an appeal with the Federal Supreme Court. Decision of the Court The Federal Supreme Court essentially decided in favour of the tax authorities and (essentially) dismissed the cross appeals of the companies. Excerpt in English “…the companies argue that the information requested is not likely to be relevant because it could not provide the French tax authorities with any information to clarify the tax affairs of the companies concerned in France. This is not a tax purpose, but rather the collection of general information about the companies themselves. Insofar as the amount of profits resulting from an activity in France is to be determined, the question arises as to whether the French tax authorities are not even using the request as an opportunity to find out, in the sense of a “fishing expedition”, whether the companies concerned have any links to taxation in France or whether the information could be useful in any other way. The French tax authorities had been provided with detailed transfer price documentation, from which it could be deduced that the transfer prices stood up to a third-party comparison. In order to determine the prices, however, the tax authorities do not require a balance sheet or other business information from the recipient, but rather information on the financial and cost structure of the company or branch providing the service as an independent economic unit and independent taxable entity. This would be available in the form of the taxpayer’s financial figures and the transfer price documentation. The total profit or the respective annual result of the companies, which is a result of their entire (in some cases worldwide) business, cannot be relevant for determining transfer prices in line with third-party prices for individual companies, even less so where no transactions have taken place. The same applies to the balance sheet and the separation of permanent establishment profits. A transfer of the information in question would therefore violate the principles of administrative assistance in tax matters as well as the principle of the protection of privacy under Art. 13 BV and Art. 8 ECHR and the principle of proportionality under Art. 5 para. 2 BV. 2.4 It must therefore be examined whether – as the FTA claims – all of the information requested by the French tax authorities proves to be relevant for tax purposes or – as the companies argue – is not likely to be significant within the meaning of the DTA CH-FR. The only disputed issues are the answers to questions d) et seq. of the administrative assistance requests (see facts under A.d). (…) 4.6 In summary, the judgements of the lower court cannot be upheld for the most part. The balance sheets, the information on the annual results, the information on the existing permanent establishments and their international profit and loss distribution (company 3), the permanent establishment profit distributions (companies 2 and 3) as well as the income statements of the companies must be submitted to the DGFP. At the same time, the tax information must also be submitted, as the probable materiality with regard to the transfer pricing review is also to be affirmed in this respect. Since there is a connection between the information to be transmitted and the tax purpose and there is also a public interest in its transmission, the principle of proportionality is also satisfied in this case. Only the question of the DGFP just discussed (E. 4.5) as to whether Company 2 has taken on staff from the French branch cannot be answered. It should be noted that, as the FTA points out, the transmission of the tax returns (concerning companies 3 and 4) – contrary to the dispositive of the judgement of the lower court – was not planned at any time and would not be carried out. 5 As explained above (E. 3.2), the question of whether the request for administrative assistance affects the taxpayer depends to a large extent on the concept of probable materiality. 5.1 As far as companies 1 and 4 are concerned, they do not dispute that the transmission of certain information, such as a list of persons who have received monetary benefits, details of account transactions, ...

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 ...

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 ...

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 DTT 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 DTTA 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 DTT-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. 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 DTT 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 DTT-USA 1989, Article IV DTT-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 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 distribution of profits) 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 English translation Click here for other translation Bundesfinanzhof I R 29-14 ...

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 ...

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 ...

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 other translation Finland-2014-July-Supreme-Administrative-Court-HFD-2014-119 ...

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 initiated in an effort to clear the issue. Ultimately, the two competent authorities 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 held that the costs at issue were not direct costs of making the capital 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 English translation Click here for other translation Germany-vs-Corp-October-2013-BUNDESFINANZHOF-Urteil-vom-9-IX-r-25-12 ...