Contents
List of abbreviations About the authors Preface 1
General 1.1 Introduction 1 1.1.1 What kind of tax agreements (also known as treaties or conventions) are there? 1 1.1.2 What are double tax agreements (DTAs)? 1 1.1.3 How are DTAs designed and structured? 2 1.1.4 Wha t are the key functions of DTAs? 3 1.1.5 What is international double taxation? 3 1.1.6 What is the history and relevance of the OECD Model DTA? 4 1.1.7 What DTAs have Australia, China, France, Germany, the UK and the US entered into? 5 1.1.8 What are most favoured nation clauses and what happens if they are triggered? 5 1.1.9 What rules apply to the interpretation of DTAs? 6 1.1.10 How do DTAs deal with undefined terms? 6 1.1.11 Can DTAs be used by taxing authorities to avoid an outcome of double taxation? 8 1.1.12 Can a DTA create a tax liability in circumstances where no such liability exists under domestic non-DTA law? 9 1.1.13 Can DTAs override the application of international attribution measures such as the CFC and FIF rules? 1.1.14 How, if at all, are DTAs incorporated into domestic tax law? 13 1.1.15 How do DTAs work? 14
XIV
xv XVlI
1
10
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Contents
3.1.8
1.1.16 In broad terms what types of Allocation Articles are to be found in DTAs? 15 How is priority between the Allocation Articles 1.1.17 determined? 16 1.1.18 Is there a practical approach to the application of DTAs that creates a coherent conceptual framework? 16 The Broad Principles applied under the Allocation 1.2 Articles 16 Division of taxing rights 16 1.2.1 1.2.2 Income taxed by the residence jurisdiction only 17 1.2.3 Income may be taxed by both the residence and source jurisdictions 18
2
2.1.3 2.2 2.2.1 2.2.2 2.3 2.3.1 2.3.2 2.3.3 2.3.4
3
Taxpayers covered 21 What taxpayers are covered by the DTA? 21 How do DTAs generally and the sample DTAs in particular resolve cases involving dual residency? What about other "entities" such as partnerships and trusts? 24 Taxes covered 24 What are the "taxes covered" by the DTA? 24 How do the sample DTAs in particular define "taxes covered"? 25 Timing matters 27 What are the start dates and termination arrangements in relation to the DTA? 27 When does a DTA start to operate? 27 When is a DTA terminated? 29 The sample DTAs 30
3.1.6 3.1. 7
3.1.11
3.2 3.2.1 3.2.2 3.2.3
3.3 3.3.1 3.3.2
3.3.3 3.4 3.4.1 3.4.2 3.5 3.6
21
The allocation rules 3.1 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5
3.1.10
21
The three qualifying questions 2.1 2.1.1 2.1.2
3.1.9
Active income: business profits 31 What is the allocation rule? 31 What are business profits? 33 What is an enterprise? 34 What is a "permanent establishment"? 35 How are permanent establishments dealt with in the context of electronic commerce? 38 What sort of presence can a taxpayer have without creating aPE? 40 May the definition of a PE differ between developing and developed countries? 41
3.6.1 3.6.2 3.6.3 3.6.4
3.6.5
31
3.6.6 3.6.7
3.6.8 3.6.9
3.6.10
3.6.11
How have the OECD and UN Models influenced PE articles in DTAs? 44 If there is a PE in the form of a branch, how are the profits attributable to the PE calculated? 45 If there is a PE in the form of an agency, how are the profits attributable to the PE calculated? 48 What about joint venture operations? 50 Active income: associated enterprises profits 51 What is the allocation rule? 51 Are compensating adjustments provided for? 52 What if there is inadequate information available to determine profits? 53 Active income: dependent personal services 53 Background 53 What is the allocation rule - DTAs? 54 How do the sample DTAs deal with these issues? 55 Active income: independent personal services 56 Background 56 How do the sample DTAs deal with these issues? 56 Active income: fringe benefits 58 Passive income articles 60 What types of income are dealt with by the passive income articles? 60 Under what general circumstances are these articles relevant? 60 Why do countries operate a system of withholding taxes on passive income? 61 Does the payment necessarily need to have a source in the country of source? 61 Do passive income articles generally allocate the taxing rights to one country? 62 Can the articles apply even where there is no taxation in the country of residence? 62 What if there is no DTA in place between the country of source and the country of residence? 63 !'low is tax relief given for amounts still subject to mternational double taxation? 63 What if the DTA and domestic provisions of the count.ry of residence do not provide for any method of unilateral double tax relief? 63 How does a credit method of unilateral double tax relief generally operate? 63 Can .relief for underlying tax be available for royalty and mterest payments? 64
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3.8.3 3.8.4
4
4.4 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.4.6 4.4.7 4.5 4.6 4.7 4.8
5.2 5.2.1 5.2.2 5.2.3 5.2.4
8
81
What is treaty shopping? 81 How can treaty shopping be prevented? 82 How effectively has the concept of beneficial ownership been used to prevent the practice of treaty shopping? 82 How do the comprehensive Limitation on Benefits (LOB) provisions work to prevent treaty shopping? 88 What is a qualified person? 89 What is a regional headquarters company ("RHC" ) 90 What is the active business test? 92 What is the anti-avoidance test? 92 What is the Equivalent Beneficiary test? 92 What are deductible payments? 93 Who are Equivalent Beneficiaries? 93 How do limited LOB provisions work? 94 How do the anti-conduit provisions work? 94 Is there room for the application of GAAR to treaty shopping arrangements? 96 What is the difference between treaty shopping and basket shopping? 96
What is the purpose and effect of non-discrimination clauses in DTAs?
97
7.1.1 7.1.2 7.1.3
Article Article Article Article Article Article Article Article
1 2 2.1 2.2 3 3.1 3.2 3.3
Article Article Article Article Article Article Article Article Article Article Article Article Article
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13
Article 4.14 Article 4.15 Article 4.16 Article 4.17
103
What procedures are in place to assist in the effective administration of cross-border taxation? Mutual agreement procedure ("MAP") 105 Binding arbitration procedure ("BAP" ) 105 Exchange of information 106
105 105
Article Article Article Article
4.18 4.19 4.20 5
Article 5.1 Article 5.2 Article 5.3
xi
107
The reconstructed alternative AustraliaJUK DTA
103
Procedures 7.1
Collection procedures
Article 4
What methods are there in place to avoid double taxation? 97 What is tax sparing and how does it work? 99 Illustration 99 Solutions 99 Example 1: Tax sparing vs. no tax sparing 100 Example 2: Interposing intermediary company 100
Non-discrimination 6.1
7
7.1.4
Avoiding double tax 5.1
6
How does the "other income" article allocate the taxing rights? 79 What if there is no "other income" article? 80
Restrictions on the availability of DTA benefits 4.1 4.2 4.3
5
Contents
Is the person covered? 109 Is the tax covered? 110 Existing taxes 110 Identical and substantially similar taxes 110 Is the convention in force? 110 Entry into force 110 Termination 111 Special termination arrangements for entertainers and sports persons 112 Is the item of income or gain covered and, if so, how is the item dealt with? 112 Business profits 112 Shipping and air transport profits 114 Associated entities profits 115 Income from employment 116 Income from independent personal services 117 Fringe benefits 118 Government Service 118 Dividends 119 Interest 122 Royalties 124 Pensions and Annuities 126 Income from real property 127 Income or gains from the alienation of property 128 Income or gains from the alienation of ships or aircraft, etc. 129 Deferred property income or gains 129 Entertainers and sports persons - income earned 130 Entertainers and sportspersons - income accrued in a third person 130 Students 131 Professors and teachers 13 1 Other income 131 How is the operation of the Convention excluded or limited? 133 Remittance based taxing states 133 Temporary residents based taxing states 133 Partnerships 134
109
Article 5.4 Article 6 Article 6.1 Article 6.2
Article 6.3 Article 6.4
Article 6.5 Article 7 Article 8
Article 8.1 Article 8.2 Article 9 Article Article Article Article
9
9.1 9.2 9.3 9.4
Members of diplomatic missions or permanent missions and consular posts 134 How is double taxation eliminated? 135 Credit for United Kingdom tax against Australian tax 135 Credit for United Kingdom tax on profits out of which a dividend is paid against Australian tax 135 Credit for Australian tax against United Kingdom tax 135 Credit for Australian tax on profits out of which a dividend is paid against United Kingdom tax 136 Source 136 I low is non-discrimination dealt with? 136 What procedures are there in the Convention to allow for mutual agreement and exchange of information? 138 Mutual agreement procedures 138 Exchange of information procedures 139 What are the Convention definitions and deernings? 140 General 140 Residence 142 Permanent establishment 143 Deemed source for Australian domestic tax purposes 145
Some leading DTA cases 9.1 9.1.1
9.1.2 9.1.3 9.1.4
9.1.5
9.2 9.2.1 9.2.2 9.2.3
Australian cases 147 Federal Commissioner of Taxation v. Lamesa Holdings BV 147 Max Factor & Co. v. Federal Commissioner of Taxation 149 McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation 150 Thiel v. Federal Commissioner of Taxation 152 Unisys Corporation v. Federal Commissioner of Taxation 154 US cases 156 Cudd Pressure Control Inc. v. The Queen [1998] 156 The North West Life Assurance Company of Canada v. Commissioner of Internal Revenue 157 Qantas Airways Limited v. United States 159
9.2.4 9.2.5 9.3 9.3.1 9.3.2 9.3.3 9.3.4 9.3.5 9.3.6
9.3.7 9.3.8 9.3.9
9.4
147
Podd et at. v. Commissioner 160 Terry Haggerty Tire Co. Inc. u. United States 161 Other cases 163 The QlIeen (I. Crown Forest Industries Limited 163 Association of Mouth and Foot Painting Artists Pty Ltd v. Commissioner of Taxation 164 The Queen u. Dudney 165 Gulf Offshore N.S. Limited u. The Queen 167 Specialty Manufactllring Ltd v. The Queen 168 Sumner u. The Queen 169 M and Mme Robert Gilly 1'. Directeur des Seruices Fiscallx dl{ Bas-Rhin 171 "Pipeline" decision 174 Re Sti Schneider Electric 175 Additional cases involving DTAs 178
10 Double taxation agreements table
181
Appendix: Sample DTAs
191
AustralialUK Convention 193 AustralialUK Exchange of Notes 221 ChinalUK DTA 231 ChinalUK protocol 253 France/China DTA 257 France/China protocol 276 Germany/China DTA 277 Germany/China protocol 298 UKIUSA DTA 301 UKlUSA Exchange of Notes 344 US/Australia DTA 365
Bibliography
Index
399 401
Abbreviations
ATO BAP BFH CFC CGT DTA EB FBT FIF GAAR GST GTC ITAA ]V LOB MFN PE
QP RHC
Australian Tax Office binding arbitration procedure Bundesfinanzhof controlled foreign corporation capital gains tax double taxation agreement equivalent beneficiary fringe benefits tax foreign investment fund general anti-avoidance rules goods and services tax General Taxation Code (France) Income Tax Assessment Act (Australia) joint venture limitation on benefits most favoured nation permanent establishment qualified person regional headquarters company
A bout the authors
Robert L. Deutsch BEe LLB (Hons) Syd LLM (Hons) Cantab, FTIA Bob Deutsch is one of Australia's leading tax lawyers, with extensive experience as a tax practitioner both with professional bodies and tax authorities and some 14 years in academe. His research fields include international taxation, superannuation, GST and CGT. Bob is currently a Director with KPMG in an advisory capacity and was appointed inaugural KPMG Professor of Taxation at ATAX (the Australian Taxation Studies programme in the Faculty of Law at the University of New South Wales) in May 2007. Previously he was a tax partner with Mallesons Stephen Jaques. Before that, he was a Senior Lecturer in Law at the University of Sydney. He was a private sector representative on the Tax Law Improvement Project and a member of the Australian Tax Office's Part IVA and Public Rulings Panels. Bob is a past Chairman of the Australian branch of the International Fiscal Association and a former Governor on the Board of the Australian Tax Research Foundation. He has acted as a consultant to the Thin Capitalisation Project Team and an external referee for the Dividend Taxation and Globalisation in Australia Project (Bureau of Industry Economics). Bob has published widely, with articles and books in the area of international tax and derivatives. He is co-author of the standard reference Guidebook to Australian International Tax (Legal Books, 2002), Australian Tax Handbook (2008) and Fundamental Tax Legislation (2008) and The Income Tax and GST Strategies Manual. He has presented extensively at seminars and conferences over a number of years and is on the Editorial Board of eJournal of Tax Research.
R~is~n M. Arkwright BA (Hons), MSc, CTA, MCIPD, FTIA ROlS m has 16 years' experience in UK and Australian taxation with approximately ten years spent in a tax technical training environment. She is a qualified Chartered Tax Adviser (CTA) from the UK, but has spent the last eight years in the ongomg tax reform environment in Australia.
Raisin is a member of the Taxation Module Advisory Committee for the Chartered Accountants Programme of the Institute of Chartered Accountants in Australia (ICAA) and a member of the Education, Examinations and Quality Assurance Board of the Taxation Institute of Australia (TIA). Raisin is also a Fellow of the TIA and a full member of the UK Chartered Institute of Personnel and Development (MCIPD). Raisin is currently the National Director of KPMG's Tax Business School® in Australia responsible for the development and delivery of tax technical training programmes to KPMG staff across Australia. Before joining KPMG in Australia, Raisin developed and delivered tax training for the Association of Taxation Technicians (ATT) and the Chartered Tax Adviser (CTA) exams for staff of KPMG in the UK. Daniela Chiew BComm UNSW MTax Syd Daniela Chiew is a Partner in the Corporate Taxation Services group at KPMG. Daniela has 17 years' experience providing corporate and international tax advice to a range of Australian based and multinational organisations particularly in the information technology, media and services industries. Daniela has experience with the co-ordination of tax services in the Asia Pacific region for global clients and is regularly involved in advising on tax structuring issues and conducting tax due diligence for acquisitions. Daniela is a member of the Taxation Institute of Australia and is an adjunct lecturer in the University of NSW ATAX programme.
Preface
This book is the culmination of many years of work in analysing, researching and teaching in relation to double taxation agreements (DTAs). While there have been numerous books written on this topic (see in particular the bibliography) we have taken a different perspective in this book, looking more at the conceptual underpinnings of DTAs and the way in which we believe they operate in practice. We have also sought to bring into the analysis actual DTAs rather than referring continuously to the OECD or UN Model Conventions. In addition, we have included a number of critical DTA cases decided throughout the world, particularly where those cases have an important principle which can be applied more generally to DTAs. We have dealt with a wide geographic spread of countries but inevitably in an initial edition of such a book, our focus has been restricted to a number of specific countries at this early stage. In this book, while our focus is worldwide, at times our key initial observations are in respect of Australia, China, France, Germany, the United Kingdom and the United States. In future editions our analysis and discussion will include a number of other countries and we are particularly mindful of the need to include further developing countries such as India and Brazil and key financial centres such as the Netherlands and Singapore. These countries, in particular, will be in sharper focus in the next edition of this book. A creative aspect of this book is the inclusion in Chapter 8 of a reconstructed version of the AustralialUK DTA, which is designed to bring into sharper relief the conceptual underpinnings of DTAs as we see it. In particular, we have re-arranged the terms of that DTA so as to more directly reveal the critical elements of the DTA as being: Art~cles 1,2 and 3 - an analysis of the three key preliminary questions; ArtIcle 4 - a detailed series of various allocation rules each dealt with in a separate sub-article. Each sub-article deals with a different type of income basket such as business profits, dividends, interest, royalties, income from
---......--. services, etc. These various allocation sub-articles are schematically structured in an identical fashion so as to more immediately reveal the likely benefits and flaws in each of them; . Article 5 - exclusions and limits that operate in the application of this particular DTA; and a Article 6 - the method for eliminating double taxation. In our view this more properly reflects the way in which the DTAs should be approached - both in teaching and in practice. Naturally a production of this breadth requires a collaboration of minds and we would particularly like to thank all those who have assisted in enabling us to reach this stage. While there are many people who have been involved in this process we would specifically like to mention Dave Corbin, Michael Moldrich and Elizabeth Scott of KPMG and Cindy Chan from ATAX at the University of New South Wales. All these individuals provided input to various aspects of the book. Invaluable administrative assistance was also provided by Narelle Robinson (KPMG), in the preparation and finalisation of the manuscript. In addition we would also like to thank the key personnel at BNA International in the production of this book, in particular Deborah Hicks, for all her efforts in bringing this into existence in a timely fashion and for her faith in the project. We trust that readers will find both the content of the book and the conceptual approach adopted of interest and we look forward to receiving feedback so that we can improve future editions. Professor Robert Deutsch, ATAX UNSW, Director KPMG R6isfn Arkwright, Director KPMG Daniela Chiew, Partner KPMG
General
1.1
Introduction
1.1.1
What types of tax agreement (also known as treaties or conventions) are there?
There are over twenty different types of tax agreements, including agreements on income and capital, agreements on estates and gifts, agreements on administrative assistance on tax matters, agreements on shipping and airline profits. Many countries have also entered into multilateral agreements to coordinate their tax policies and promote regional economic development. The focus in this book is on the comprehensive double tax agreements (DTAs) that have been entered into in respect of income and capitaL All of these agreements, which exist throughout the world, follow an internationally accepted format which is prescribed by the Organisation for Economic Co-operation and Development (OECD model) or the version as modified by the United Nations (UN model). There is also a US Model Income Tax Convention, which was finalised in 1996 and which forms the basis of all US bilateral DTAs. This Model is quite different from the other models, as it more cogently reflects the position of the United States as a capital-exporting country. Taxation rights in respect of residents are more strongly defended in this Model, sometimes at the expense of the source country. It is the thesis of this book that the format currently adopted globally is in need of.refinement, and the structure put forward in Chapter 8 in respect of the AustraltalUK DTA is a possible way forward. 1.1.2
What are double tax agreements (OTAs)?
A double taxation agreement - a term often used interchangeably with "double tax . "-.IS an agreement entere d mto . b y two countnes, . d . treaty" 0 r " conventiOn eSlgned primarily to control the way in which income is taxed by the two countne~ where both countries claim the right to tax the same income. This is usually achieved by a series of articles (also known as "provisions") which clarify the
way in which the domestic tax rules of the two treaty partners apply in relation to a specific item of income or specific type of taxpayer (see Article 4 in the reconstructed AustraliafUK DTA in Chapter 8). In this book the term used will be "double tax agreements" or the abbreviation DTA unless quoting from a specific source where a different term is used . ~ost DTAs are "comprehensive" in the sense that they deal with all types of mcome. However, some are limited in their application, e.g. there is an agreement between Australia and Greece that deals only with airline profits. Some DTAs also extend beyond "income", e.g. the UKJUS DTA extends to cover certain excise taxes and the AustralialNZ DTA covers fringe benefits (being benefits received as an employee otherwise than in cash) as well as cash. The structure of DTAs is, broadly speaking, the same but the content is often different. Even though two DTAs may look identical, the wording of specific articles will often differ in a material way. Thus, caution should be exercised in assuming that the same conclusions can be derived about the application of different DTAs. 1. 1.3
How are DTAs designed and structured?
The comprehensive DTAs that currently exist throughout the world are designed and structured in broadly similar ways. Sequentially, the DTAs are simply ordered from Article 1 through to the final article, usually somewhere around 28. Whilst this numerical sequencing covers the field in a logical sequential order, the ordering (in the authors' respectful opinion) fails to reflect adequately the true conceptual nature of DTAs. In particular, DTAs are constructed around a series of conceptual steps primarily consisting of the following: 1. 2. 3. 4.
5. 6. 7.
Rules dealing with the time covered by the DT A - i.e. commencement and termination dates. (Chapter 2) Rules dealing with the taxes covered by the DTA. (Chapter 2) Rules dealing with the taxpayers covered by the DTA. (Chapter 2) Rules applicable to different types of income, etc., allocating tax capacity to one or other of the two jurisdictions which are parties to the DTA or sharing tax capacity between them. (Chapter 3) Rules excluding the operation of the beneficial aspects of the DT A in certain circumstances. (Chapter 4) Rules providing for double tax relief. (Chapter 5) Rules providing for procedural measures to assist in the resolution of disputes and in the collection of taxes. (Chapter 6)
The first three matters are preliminary issues to the application of a DTA and should be grouped together for that reason. The other four aspects are standalone matters that should be dealt with separately.
This book is largely structured a.ro~nd the framework given above, with ling with the three prellIrunary matters and Chapters 3, 4, 5 and 6 C hapter 2 dea . wI·th each of the remaining matters sequenttally. · 1 eamg . . . h 8fl d s· ·1 ly the reconstructed verSIOn of the AustraliafUK DTA m C apter 0 lo:rh:rs ame framework, with Articles 1,2 and 3 dealing with the t~ee p~e.. matters Article 4 dealmg with allocatIOn rules, ArtIcle 5 dealmg with hmmary, . .. . . . exclusions and limitations on t~e availab~Ity of DTA benefits, ArtIcle 6 dealmg . h double tax relief, and ArtIcle 7 dealmg with procedural matters. WI~n the view of the authors it would be sounder if DTAs were designed and structured around these six broad steps to enable readers to more Immediately comprehend the operation of DTA~. . . In the drafting of DTAs, harmoOlsatton of the deSIgn and structure would be of enormous benefit. It would be most helpful if the same ordering of articles was adopted and, where a particular DTA does not cover a particular aspect, this should be highlighted by retaining the sub-article but without any content. Thus, for example, in the AustraliafUK DTA there is no allocation article dealing with professors and teachers. Nonetheless, Art~cle 4.19 has been retained albeit with no content, so that thIS becomes an explicit exclUSIOn m the context of that treaty. It would be helpful if this style were adopted across treaties generally, so that one could be compared with the other with much greater ease than is currently the case. 1.1.4
What are the key functions of DTAs?
The key functions of a DTA are to • alleviate international double taxation; • eliminate international tax avoidance by prescribing rules for the allocation of income and deductions between related parties, for the exchange of information and for assistance in collection; and • provide procedural rules for the resolution of tax objections and inconsistencies (the "mutual agreement procedure"), which are considered later. 1. 1.5
Wh at is international double taxation?
International double taxation in a legal sense occurs where comparable taxes (typically taxes on income or gains) are levied by more than one country on the same taxpayer in respect of the same subject matter for identical periods. This can happen where a taxpayer who is treated as a resident of Country A under Country A tax law derives income which is treated by Country B as having a SOurce in Country B, and any of the following applies: (a)
Country A imposes tax on its residents on their worldwide income and Country B imposes tax on non-residents on income sourced in Country B;
(b) (c)
both countries impose tax by reference 10 source, but each country considers the income derived as having a "source" within its jurisdiction; both countries impose tax by reference to residence, but A and B both consider the taxpayer to be "resident" within its jurisdiction for the same period.
For example, an Australian incorporated company with income arising from activities carried out in Singapore would be subject to tax in Australia as it is taxresident in Australia by virtue of its place of incorporation, and would be subject to tax in Singapore by virtue of its Singapore-sourced income (point (a) above). Similarly, a company incorporated in Singapore might carryon limited activities in Australia; Australia and Singapore might both argue that the income produced from such activities is sourced in Singapore and Australia under their respective source rules, thus giving rise to tax in both jurisdictions (point (b) above ). Finally, a US-incorporated company which is centrally managed and controlled in Australia would be tax-resident in the Uni ted States for US tax purposes by virtue of the US incorporation, and tax-resident in Australia for Australian tax purposes by virtue of its central management and control in Australia (point (c) above). Australia's DTAs seek to resolve such conflicts by a llocating rights to tax and providing relief from double taxation in accordance with the rules contained in the agreement. 1. 1.6
What is the history and relevance DTA?
of t he O E CD Model
To encourage a uniform approach, a draft model do uble taxation convention was presented to the Council of the OECD in 1963; rev isions of the Model Convention were released in 1977 and 1992. An official O ECD commentary on the articles in the 1977 Model has been published, and tile OECD itself has published an official commentary on the 1992 Model Co n vention and revisions of that convention. Members of the OECD are expected, when entering into new agreements or revising existing ones, to conform to the Model Conve ntion, subject to any formal reservations made. Although it is necessary to care fully examine the precise wording of each DTA, the Model Conventions have been influential and, for example, Australia's recent DTAs adopt the general format of the Model Convention. Because of the increase in the volume of electronic commerce, the OECD has reviewed its Model Convention to ensure that: it can adequately deal with changes in business transactions. It has concluded that no major reforms are necessary at this stage, but it will continue t:o monitor e-commerce developments.
Wh
DTAs have been entered into by Australia, China, at G nnanv the United Kingdom and the United States? France, e " . 42) China (85), France (115), Germany (85), the United Kingdom Australia ( U' . d St tes (66) have entered into a broad range of DTAs, as set a (116) and the rute . or ble 10.1 in Chapter 10. out 10 .1a f the comprehenslve . DTAs between COples 0 the United Kingdom and the United States, the United States and Australia, . United Kingdom and Austraha, t he . d K· d China (PRCl and the Urute mg om, China (PRC) and France, and China (PRC) and Germany 1.1.7
· the Appendix. These DTAs are referred to extensively in the discan be foun d m cussions that follow in this book. . . In addition the reconstructed version of the AustrahaIUK DTA IS to be found in Chapter 8. 1. 1. 8
What are most favoured nation clauses and what happens if they are t riggered?
Some DTAs contain "most favoured nation" (MFN) clauses that require the DTA partner to renegotiate the terms of a DTA if that country subsequently enters into a DTA with another country on more favourable terms. This article can take one of two forms, as follows: • The first is an article in which there is an agreement between the DTA partners (Countries A and B) that if specified rates in respect of specif~ed types of income are negotiated between one of the DTA partners and a third country that are lower than those applicable in the DTA between A and B, those lower rates in respect of those items of income shall apply in respect of A and B. II The second is a more common article, which provides that If elther Country A or Country B enters into a DTA with a third country on terms that are more favourable in some respects than the terms specified in the Country AlB DTA, Country A and Country B are required to enter into immedi~te negotiations to amend the relevant articles of the Country AlB DTA to brmg it into line with the more favourable terms of that third country DTA. Thus, for example, the reduction in withholding tax rates in the revi~ed AustraliafUS DTA triggered MFN obligations for Australia with the followmg countries: France, Italy, Switzerland, Finland, Norway, The Netherlands and South Korea. In the November 2005 Protocol to the AustralialNZ DTA, New Zealand agreed to an MFN clause in relation to Australia.
6
Double Taxation Agreements
, . 1.9
What rules apply to the interpretation of DTAs?
Although DTAs are incorporated into the domestic law of the DTA partner countries, typically with broad overriding effect subject only to particular exceptions, they retain their status as international treaties. As a result they are subject to the general international law on DTAs as codified in the Vienna Convention on the Law of Treaties. Some general rules of construction may be identified. • DTAs for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and gains should be construed liberally. In this context, Article 25 of the Vienna Convention provides that the treaties are binding and should be performed in good faith. T he principle of good faith would seem to imply that the literalist or narrow interpretation should not be adopted where it would overcome the intended effect of a treaty. Article 27 of the Vienna Convention provides that a treaty party may not invoke the provisions of its internal law as justification for failure to perform a treaty. How this sits with the legislative amendments to Australia n domestic law post the decision in Lamesa v. FCT (see section 1.1.11 below and Chapter 9) is an open question. • Each bilateral agreement must be construed individually (although it might adopt many of the common principles and terms laid down in the OECD Model Convention). • The effectiveness of the DTAs is enhanced if the judicial decisions of a country concerning its provisions are recognised as persuasive authority by the courts of the other country, or of other countries, when construing comparable provisions: Canadian Pacific v. The Queen (1976) CCT 221. Ill ustrations of a failure to implement this policy may be found in ES & A Bank v. FCT (1969) 1 ATR 104 and Ostime v. AMP Society [1960] AC 459 . • Uniformity is increased to the extent the DECD commentaries on the articles to the Model Conventions are accepted as aids to construction. 1. 1. 10
How do DTAs deal with undefined terms?
DTAs, almost without exception, include an article that specifically deals with undefined terms. Thus, for example, in the UKlUS DTA, Article 3(2) provides as follows: As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, or the competent authorities agree on a common meaning pursuant to the provisions of Article 26 (Mutual Agreement Procedure) of this Convention, have the meaning which it has at that time under the law of that State for the purposes of the taxes to which this Convention applies, any
. under the applicable tax laws of that State prevailing over a meaning given to the meaning der other laws of that State term un
The result of the application of ~he unde~ined terms subparagraph is that an undefined term will normally take ItS meamng from the relevant tax l~ws of the state applying the DTA subject only to the context requmng otherWise. 1. 1. 10. 1 Issue 1 - Context otherwise requires When the "context would so otherwise require" is an open question, but clearly whether or not the context is strong enough to dictate a different conclusion from that which might be gained from a domestic law definition is a matter which can only be decided on the facts of each individual case. Rather than focusing on the word "context", it might be appropriate to consider the word "requires". "Requires" is a word of some force. Non-English language versions of DTAs may be instructive in understanding the true force of the word "requires" in this context. Thus, in the French language the word used is demander and in the German erfordern. These words are all words of considerable force, so it would seem that the context must be reasonably strong for the internal law meaning to be ousted by the context. Otherwise the phrase tha t might have been adopted might have been "unless the context otherwise suggests" or possibly "unless the context otherwise implies". These are words of less force and would easily accommodate other meanings merely suggested or implied rather than required by the context. The only place where this issue has been ventilated in Australia is in the High Court. In Thiel v. FCT (1990) 21 ATR 531 the High Court held that the terms and expressions "enterprise", "enterprise of one of the Contracting States" and "enterprise carried on by" in the Swiss DTA have no particubr or settled meanings in Australian income tax law. The meanings of those terms and expressions must therefore be ascertained from the Swiss agreement itself. The court held that the Swiss DTA is to be interpreted in accordance with the r~es of interpretation recognised by international lawyers, now codified by the Vienna Convention on the Law of Treaties. As that DTA reflects those custom~ry rules, the court considered it proper to have regard to its terms in interpretmg the Swiss Agreement, even though Switzerland is not a party to that convention. Since the expression "enterprise" in the Swiss agreement is ambiguous, the court believed it was proper to have regard to any supplementary means of interpretation. In this case, the supplementary means of interpretation were the OECD Model Convention and commentaries thereon.
1. 1. 10.2 Issue 2 - Static v. ambulatory
There is a further and subsidiary issue which needs to be considered in the context of the undefined terms clause, and that is whether DTAs have a static or an
ambulatory operation. A static approach would take the meaning of the term from the time at which the DTA is entered into, as opposed to an ambulatory approach where the meaning of the term would vary depending on changes in domestic law meaning from time to time. Interestingly, in Australia the Asprey Committee Full Report of 1995 assumed an ambulatory approach, since it raised the concern that a "country applying the agreement may in effect re-write the Agreement unilaterally by changing a definition of source in its own law". This would only be possible if an ambulatory approach were taken to the interpretation of DTAs. In Australia, DTAs appear to have specifically adopted an ambulatory approach since the signing of the Austrian Treaty on July 8, 1986. The undefined terms article since that time has provided that the meaning of the relevant term is to be taken from its meaning "at any time" when the DTA is applied. Clearly, this gives an ambulatory interpretation to the definition.
1.1.11
Can DTAs be used by taxing authorities to avoid an outcome of double taxation?
Courts throughout the world have recognised from time to time the importance of the object and purpose in interpreting tax treaties. In particular there seems to be a general acceptance that Article 31 of the Vienna Convention requires a holistic approach to treaty interpretation. Notwithstanding this general position, it is readily apparent that it is the text of the DTA that matters and not some presumed or anticipated intent. This is not to say that the object and purpose of the DTA is not relevant quite the contrary, it is highly relevant as it may throw light upon the meaning of the text of a DTA. However, critically, it does not replace the fundamental proposition that it is the text that counts and the text needs to be determined and interpreted in an independent manner. These comments are particularly apposite in regard to the issue expressed in the question proposed. The issue arose directly in an Australian case, namely Commissioner of Taxation v. Lamesa Holdings BV (1997) 785 FCA (August 20,1997). In this case the Federal Court of Australia in a decision on appeal from a single judge expressed hesitancy towards accepting the direct relevance of the object and purpose of a DTA in ensuring that tax would be paid in at least one jurisdiction. In that particular case the fact that no tax would be paid in the Netherlands because of a unilateral exception available in that country could not of itself affect the interpretation of Australia's taxing rights, which were arguably restricted by virtue of the AustralialNetherlands DTA. The first instance judge in Lamesa more explicitly rejected the proposition that the object and purpose of a DTA "is not only to avoid double taxation, but also to ensure that tax is paid somewhere". Neither Court accepted the proposition that the object and purpose of
. d ble taxation was to be extended to include an object and purpose . eff l pre ventlllgh ou ld be paid somewhere, so as to gIve ect at east on · one VIew to hat taX s ou I . t . d purpose of preventing fisca evaSIOn. . I. I . th e obJect an Courts recognised that double non-taxatIOn may u tImate yanse The Lamesa . . . h of the DTA parties chooses not to exerCIse ItS ng ts to tax . ly because one . . SImp h DTA and it is accepted that countries need not exerCIse theIr full taxunder t e , . . . ri hts under a DTA. g lllgT h us It - see ms that the only appropriate conclusIOn IS _that _ DTAs do not and -11 not endorse the view that tax must be paId III at least one of the - I seemlllg y WI two taxing jurisdictions. _. _ If there is concern on the part of the DTA cou~tne~ that thIS wIll be an outthis will need to be explicitly recognIsed eIther III the terms of the treaty come, h bsence 0 f suc h exp I-IClt - recognItIon, -- domestic laws of the countries. In tea ~~rI~xample see section 23AG ITAA 1936 (in the Australi~n co~te_xt), there will be no requirement that tax be paid in at least one of the JUrISdICtIOns.
1.1.12
Can a DTA create a tax liability in circumstances where no such liability exists under domestic non-DTA law?
Although occasionally questioned, the guiding principle that underpins the application of DTAs is that they should not and cannot give rise to a higher liability to taxation than that which would arise by application of the domestic law alone. This accords with the broad principle that the DTA does not of itself impose taxation. If one accepts that general proposition, the imposition of taxation should always be left to the individual Contracting State and, if the individual Contracting State does not wish to impose tax in respect of a particular trans1ction, the DTA should not be used so as to achieve an outcome where tax is impJsed. Thus, if the domestic law of a DTA country does not seek to impose tax because the income in question is derived by a person· not resident in that DTA country and is income not sourced in that DTA country, that should be the end of the matter, with no tax being imposed by that DTA country. Some confusion can arise on this point, as some DTAs have subparagraphs that suggest that, if income may be taxed in a country under the DTA, such income is deemed to have a source in the DTA country. By parity of reasoning, this would seem to imply that in such a case the DTA, by permitting taxation, is requiring it by changing the character of the income to income sourced in the DTA country. Usually this can be explained away on the basis that the DTA deeming of ~ource in the DTA country is only for the purposes of allowing foreign tax credIts under the DTA provision. In other words, as foreign tax credits can only be gIVen in respect of tax paid on income sourced in the DTA country, it is necessary to make this deeming to achieve the correct outcome. A good example of such a provision is to be found in the UKJUS DTA Article
24(5), where it is made explicitly clear that the deeming of source prescribed in that subparagraph is only "For the purposes of paragraph 4 of this Article ... " In other words the deeming is only for DTA foreign tax credit purposes. That i~ the usual construction provided for in DTAs. More problematic is Article 27(1)(a) in the AustralialUS DTA, which provides that: Income derived by a resident of the United States which , under this Convention, may be taxed in Australia shall for the purposes of the income tax law of Australia and of this Convention be deemed to be income from sources in Au stralia.
The reference to "for the purposes of the income tax law of Australia " is problematic, as it seems to suggest that the source deeming transcends the DTA and effectively deems source in Australia, such that Australia's right to tax is conferred by the DTA even though no such right exists under the domestic Australian law in the absence of Australian-sourced income. An alternative reading may well be that even this article should be read narrowly, such that it is interpreted as merely deeming Australian source in such a case for Australian domestic foreign tax credit purposes and not more generally for the purposes of Australian jurisdiction to tax. This interpretation can only be accepted if one accepts that the DTA principle that DTAs can limit, but not confer, taxing rights is a broad overarching concept. If that is not the case, this article may well be a rare but important case where a DTA has conferred taxing rights in circumstances where no such right may otherwise exist under domestic Australian law. 1.1. 13
Can 0 TAs override the application of international attribution measures such as the CFC and FIF rules?
There are two cases in particular dealing with this issue, one a 2002 decision of the French Conseil d'Etat and the other a 2007 decision of the Tokyo High Court. The French case, known as Schneider Electric (Re Ste Schneider Electric French Supreme Tax Court, 28 June 2002, No. 232276), is discussed in section 9.3.9 and is to the effect that Article 7(1) of the France/Switzerland DTA prevented the operation of Article 209B of the French General Taxation Code ("GTC"). That article in the GTC was to the effect that where a French enterprise (such as Schneider Electric) holds at least 25 percent of the shares in a foreign company that is subject to favourable tax treatment in the foreign country (such as the Swiss resident entity known as Paramer), the French enterprise is subject to tax on the profits of the foreign company in proportion to the interests that it holds. Article 7(1) of the relevant DTA provided that the profits of an enterprise can only be taxed in another country when the enterprise carries on business through a permanent establishment (PE) in that other country.
if ·vely the court concluded after an extensive analysis of the relevant proviE ectl nd their purposes that it was the profits of Paramer that were being taxed 5~O;:a:ce and, as it did not have a permanent establishment in France, this was I ermiss ible under the terms of the relevant DTA. nO~~imi1ar issue arose in the Tokyo High Court in 2007 (Tokyo High Court 7007 (Gyoko), No. 148) where the court ruled against a taxpayer's claim that -h Japanese-controlled foreign corporation rules in Articles 66-6 to 66-9 of ~h: Special Taxation Measures Law violated Article 7(1) of the Japan! SingapOre DTA. . .. .. . Under the Japanese CFC legislatIOn, If the und1stnbuted lOCO me of a foreignresident Japanese-controlled company attracts a tax burden that is significantly less than the tax burden on corporate income in Japan, the undistributed income is attributed to and taxed in the hands of the Japanese-resident controlling shareholders in proportion to each shareholder's direct and indirect interest in the foreign company. More specifically, attribution to a resident corporation occurs where three conditions are met: A Japanese resident owns at least 5 percent of the stock of the foreign company; • More than 50 percent of the total stock of the foreign company is owned by Japanese residents; and The tax burden on taxable income of the foreign company is 25 percent or less than the corresponding Japanese tax burden. There is in addition a series of requirements which, if satisfied, preclude Ihe application of the Japanese attributions rules. These requirements, which are cumulative in nature, are as follows: • the foreign company has a fixed facility such as an office, shop or factory that is deemed necessary to conduct its business in the country or area where its head office is situated (i.e. Singapore in this case); and the foreign company conducts the management, control and operation of 1ts business by itself in the country or area where its head office is situated; and when the main business of the foreign company is wholesaling, banking, t~ust management, securities, insurance, shipping or air transport, the fore1gn company conducts its business mainly with persons other than related persons; and ~hen the main business of the foreign company does not involve the activi~~: described above, the foreign com~an~ c~nducts its business mainly in COuntry or area where itS malO offlCe 1S situated· and the main business of the foreign company is not holding stocks, exploiting patents Or copyrights, or leasing vessels or aircraft.
In the usual parlance of international tax, what this essentially is highlighting
is that the foreign company, in this case a Singapore company, should be COnducting a real active business rather than merely holding passive assets and/or dealing with related parties. The taxpayer in this case argued that Articles 66-6 to 9 of the Special Taxation Measures Law (known colloquially as the japanese CFC measures) imposed japanese tax on the profits of a Singapore-resident company. However, the taxpayer observed that the Singapore company did not carryon activities through a PE in japan, and accordingly Article 7(1) of the japan/Singapore DTA, which in all material respects is identical to Article 7( 1) of the OECD Model Tax Convention, would prevent the taxation of the profits of the Singapore-resident company unless that company had a PE in Japan. In ruling against the taxpayer in this case, the Tokyo High Court observed that it was obvious from the provisions that the CFC meas ures did not directly impose japanese tax on the profits of the foreign company. Rather they adopted a form of deeming in which the undistributed income of a foreign company will, after it meets certain detailed criteria (see above), be attributed to certain j apanese-resident shareholders. In particular, the High Court noted that this deeming was subject to a number of constraints, not least of which was meeting the requirements referred to above. In addition, it was not a general deeming but merely one in which the scope of the foreign company's activities which were subject to the CFC rules was directly proportional to the amount of stock held in the Singapore-resident company. In this way, the Tokyo High Court concluded that all that the CFC rules sought to do was to tax an amount which in substance would ordinarily have been an amount repatriated by way of dividends to the Japanese-resident controllers if a dividend had been properly declared. Merely imposing a japanese tax on the Japanese shareholders by deeming those profits to have been repatriated for the purpose of preventing international tax evasion and a voidance was not considered by the Court to conflict with Article 7(1) of the japan/Singapore DTA. The Tokyo High Court also dismissed reliance upon the French Conseil d'Etat decision in Schneider, noting in particular that, under the French r ules, taxation was directly imposed as a separate tax on the undistributed profits of the foreign company if it was regarded as being situated in a tax haven country. It al~o noted that the French system could not cope with a deemed dividend concept in this regard since the French tax system uses a territorial basis and would thus exclude most foreign dividends from taxation. Clearly in those circumstances a deemed dividend regime of the kind that was said to operate in Japan could not be influenced by the decision of a French court operating in the context of a fundamentally different taxing regime. Thus, it was considered that the French CFC rules were materially different from those that applied in Japan and were distinguishable on that basis. The Tokyo High Court also noted the existence of a Finnish decision of the Supreme Administrative Court of Finland regarding the same issue under the
. rnJFlllI nd DTA, which indicated that Schneider may not be a wellBelglU. h d aternauonal view on this question (see in particular 20.03.02/596; abhs e In est .2002: 26 , Supreme Administrative Court, March 20, 2002 ). KHO. ly the OECD Model Tax Convention commentary takes a someInterestlllg , h off nt tack to that which was adopted III the Tokyo Hlg Court. Rather ~tl~ d W n focusing on the deemed dividend nature of the rules, It focuses on the fact tha based on CFC principles which IS leVied by a State on itS reSidents that a tax . t actually reduce the profItS of the enterpnse of the other State. It may 0 d 0 0 I does no b re be said to have een IeVle on suc h pro fOItS ( see III partlcu ar not t herefo 01 of the Commentary on Article 7 of the OECD Model Tax paragra ph 1 . con vention). 0 0 0 With respect, that would seem to be a highly techmcal argument, particularly o ce in a genuine controlled case the profits in the foreign-resident-contro lled ~:mpany would ordinarily be used sp~cifically to pay the referrable tax by ca using a dividend to be paid by that foreign CFC so as to put the shareholder III a position to pay the relevant ta~. To suggest that this IS not taxlllg the profits of the CFC IS arguably a matter of semantics and nothing more. The position obviously remains somewhat unclear, but there is no doubt that revenue authorities throughout the world will prefer the position of the Tokyo High Court and the Finnish Special Administrative Court; however, as a mattd of strict technical analysis it is not certain that view is entirely correct. 0
0
0
0
0
0
0
1. 1.14
0
How, if at all, are DTAs incorporated into domestic tax law?
In most cases, one way or another, DTAs are read into and read as one with the domestic law of the DTA partner country. Broadly there seem to be two methods by which DTAs become part of domestic law: • the direct adoption method; or • the indirect adoption method. Under the direct adoption method DTAs are self-executing, automatically becoming part of domestic law upon ratification. Thus, such DTAs are enforceable ~nder the domestic law without requiring further legislation, although in some lllstances parliamentary approval (but with no legislative enactment) may be required. Country examples where such a direct adoption method is used lllclude France, Germany, Japan and the United States. . Under the indirect adoption method a specific domestic legislative enactment IS reqUired to bring the DTA into and make it part of the domestic law. Country ~xamples where such an indirect adoption method is used include Australia, :n~da, India and the United Kingdom. Unless and until a DTA is made part o t e domestic law, it remains merely an international agreement between
sovereign states. Sovereign states may be bound morally to comply with such international agreements. Further, they may be pursued legally in an interna_ tional forum by the other sovereign state (being the other party to the interna_ tional agreement) but, in practice, this is unlikely to happen in relation to a DTA. Beyond all that there is little that an aggrieved private citizen could do to force a sovereign state to comply with its obligations. In other words, private citizens have no capacity to enforce such international agreements until they are incorporated into domestic law. From that point on they are enforceable by the courts of the domestic jurisdiction at the behest of a private citizen. AUSTRALIA
In Australia, section 4( 1) of the Agreements Act ensures that the Income Tax Assessment Acts 1936 and 1997 are incorporated into and read as one with the Agreements Act including its Schedules of DTAs. Most importantly, provisions of the Agreements Act declare that the DTAs, which are set out as schedules to the Agreements Act, have the force of law in Australia from their respective commencement dates. However, except for Part IVA of the ITAA 1936 and the ITAA 1936 statutory limit on foreign tax credits (currently being re-written into the ITAA 1997 in a modified form), section 4(2) of the Agreements Act declares that the provisions of the Agreements Act override any inconsistent provisions of ITAA 1936.
to be found in Articles 6 to 22; in the reconstructed version . I II atlon ru es are ~ DC ter 8 they are all to be found in Article 4. '" ' ' tn Chap " designated by DTAs (e.g. business profits, dividends, InterT es ot iI1Come , YP I' ) hould not be confused with those types of Income under domesest, roya tles s tic la w· , ' t'on of its domestic law by a contracting state may consist of the The IIIIllta I ' I ' state (app ymg an " tax claim in favour of the other contractmg waiver ,0 t Its thod) or the grant of a cre d it agamst " f Its tax or taxes pal'd'm t h e , method). If an AII ocatton ' A' exemptlon me lying a credIt rtIC Ie provl'd es t hat a , "h h h other state (a pp 'ul type of income "shall be taxable only m... t en t e ot er state may partI c ar , not tax that mcome. If on the other hand, the rule provides that the income "may be taxed in ... " "h ou t the word "only") - this formula" always refers to the state of source (Wit are not determmed by the rule hen the consequences in the state ,of residence titself ' , but may depend on the operation 0 f ot h er provISIons suc h as t h ose d ea I'mg with methods of elimination of double tax. The requirement to apply the Allocation Articles is an additional requirement for establishing tax liability over and above the rules in the domestic law of each Contracting State. To use an analogy, the DTA acts like a stencil placed over the pattern of domestic law and covers over certain parts of that domestic law. The taxpayer's liability is then determined by reference to the new, more limited, version of the domestic law.
UNITED KINGDOM
Similarly in the United Kingdom, section 788 of the Income and Corporation Taxes Act 1998 gives legislative effect to any arrangements made with other countries that provide for relief from double taxation, which will include DTAs negotiated by the United Kingdom. This section also invokes the United Kingdom provisions dealing with unilateral double tax relief where a DTA anticipates relief for foreign taxes by way of credit against tax payable in the UK. 1.1.15
1.1. 16
In essence, there are normally four different types of Allocation Article:
Active income articles This classification can cover business profits, shipping and air transport profits, associated entity profits, income from independent personal services, income from dependent personal services, fringe benefits and government service. Passive income articles This classification can cover income from certain assets such as dividends, interest, royalties, income from immovable property, capital gains, pensions, annuities and related payments. Articles relating to the nature of the taxpayer ~his classification could cover artistes and sportsmen, students, and protessors and teachers. "Other income" article This article deals with income not dealt with in the foregoing categories.
How do DTAs work?
DTA rules do not allocate jurisdiction to tax between the contracting states even less so do they attribute the right to tax. States have original jurisdiction to tax and this is recognised by public international law. By concluding DTAs the states agree to restrict their substantive tax law reciprocally. In those situations where substantive tax law is expected to overlap, the contracting states decide which of them will be bound to withdraw or limit its tax claim. A DTA neither generates a tax claim that does not otherwise exist under domestic law nor expands the scope or alters the type of an existing claim. The method adopted by DTAs to avoid double taxation is the classification of items of income and their assignment to one or other of the contracting states. The treaty rules that perform this particular function may be referred to as the" Allocation Articles". In the six DTAs examined later in this book, the
In broad terms what types of Allocation Article are to be found in DTAs?
, This format is reflected both in Chapter 3, dealing with the Allocation Articles DTAs, and in Article 4 of the AustralialUK DTA to be found in Chapter 8.
10
I0
\Jeneral
LJOUDle I axatlon Agreements
t. t. t 7
How is priority between the Allocation Articles determined?
Sometimes there are explicitly stated priority rules declaring that one article applies in priority to another. This priority or lack of it, however, is not always explicit. In the reconstructed version of the AustralialUK DTA (see Chapter 8) these priority articles are made explicit by the inclusion in each Allocation Article of a separate heading "Priority Among Classes". Where no priority rule exists, the lack of such a rule is made explicit. If a given item of income meets the requirements of more than one Allocation Article, those referring to passive income take priority over those referring to active income. Thus, if the business assets of an enterprise include shares in a company, dividends derived from those shares will be treated in general under the dividend article rather than the business profits article. The same would apply if an enterprise grants a loan or a patent licence to a person in the other Contracting State or if it holds immovable property in the Contracting State. In each case the relevant passive income article rather than the active income article would apply. There is, however, an important exception to this principle. Where dividends, interest or royalties are received via a permanent establishment or fixed base in the source jurisdiction and if the right in respect of which such payments are received is an asset of the permanent establishment or fixed base, then their taxation is determined under the active income article rather than the relevant passive income article. 1. 1. 18
Is there a practical approach to the application of DTAs that creates a coherent conceptual framework?
From a practical perspective the steps shown in Table 1.1 are recommended to assist in determining how a relevant DTA might apply in a given situation.
-
Table 1.1
The broad principles applied under t he allocation articles
1.2.1
Division
Step 2: Step 3:
Step 4:
law in the absence of the DTA Determine how the situation would be dealt with under the relevant foreign law in the absence of the DTA Examine the DTA start date and termination arrangements to see whether the situation is covered. If yes, go to Step 4. If no, DTA does not apply; apply domestic laws only. Examine the DTA to see whether the tax under consideration is covered. If yes, go to Step 5. If no, DTA does not apply; apply domestic laws only.
Step 5:
Examine the DTA to see whether the taxpayer is covered. (This usually entails an analysis of the DTA residence rules to see if the taxpayer is a resident of either Contracting State.) If yes, go to Step 6. If no, DTA does not apply; apply domestic laws only.
Step 6:
Examine the DTA to see whether the taxpayer or the type of income concerned is dealt with in any of the allocation articles of the DTA If yes, go to Step 7. If no, DTA does not apply; apply domestic laws only.
Step 7:
Apply the DTA article to determine the allocation of taxing rights.
Step 8:
Examine the DTA to see if any Article or benefit conferred by an Article is excluded or limited.
Step 9
Apply the DTA double tax relief mechanism.
Step 10:
If double tax is not avoided, consider whether the Mutual Agreement Procedure could be invoked.
1.2.2
Income taxed by the residence jurisdiction only
A number of income classes are usually taxed solely by the country of residence of the recipient. In broad terms these are:
III
of taxing rights
DTAs adopt certain broad rules whereby the rights to tax may be either exclusively allocated to one of the countries or divided between the countries with provision for relief from double taxation. Where an exclusive right to tax is conferred, it is generally given to the country of the taxpayer's residence. Where both the country of residence and the country of source of the income are given a right to tax, generally the country of residence is required to grant relief against double taxation, by way of either the credit or exemption method.
Steps to test relevance of a DTA
------------------------------------Determine how the situation would be dealt with under the relevant domestic
Step 1:
iii
1.2
1/
Ii
Profits of an enterprise carried on in one country, unless those profits are derived in part from a business in the other country which is conducted through aPE. Profits derived from the operation of ships or aircraft, unless the profits are derived from the operation of ships or aircraft solely within the confines of the other country. Remuneration derived by an employee who is present in the other country for a period not exceeding in aggregate 183 days in a year of income. In some cases, this exclusion is subject to the proviso that the employer is resident in the country in which the employee is normally resident and the remuneration is not an allowable deduction in determining the taxable profits of a PE or fixed base of the employer deduction in determining the taxable profits of a PE or fixed base of the employer in the country in which the employee rendered the services.
.. Income from professional services or independent activities of a similar nature except public entertainers, unless the person concerned has a fixed base regularly available in the country in which the person is not normally resident (see, for example, Australian Tax Office ID 2006/140). a Pensions and annuities. Remuneration received in rendering services to government bodies (including both country and local government authorities) unless the person concerned is a citizen or national of the other country or, alternatively, did not become a resident of that country solely for the purpose of performing the serVICes . • Remuneration of professors and teachers present in the country in which they are not normally resident for the purpose of teaching or carrying Out advanced study or research, unless their presence in that other country exceeds two years. • Payments made to students for their maintenance or education where they are temporarily present in the country other than that in which they are normally resident only for the purpose of their education. Income derived by a resident of a country from sources outside both COuntries. In the case of persons who are dual residents, the provisions relating to such persons, which are present in many of the agreements, should be considered to determine the country in which they are deemed to be resident for the purpose of the DTA. That country is the country authorised to treat income derived from third countries as taxable income. The items listed above are not included in all DTAs. In particular, the remuneration of professors, teachers and students is often omitted from a number of the agreements. Where there is no article specifically dealing with professors and teachers, such income is governed by the dependent personal services (employment) article. In any particular case, reference should be made to the particular agreement that is applicable. f .2.3
Income may be taxed by both the residence and source jurisdictions
DTAs commonly provide for some classes of income to be taxed by both the source country and the residence country, with relief to be granted, where required, by the country of residence by the allowance of a credit in respect of taxation suffered in the country of source. Types of income treated this way include: income derived from real property, which includes royalties and other payments from the operation of mines or quarries or the exploitation of any natural resources (some of the more recent agreements provide that income derived from debts secured by mortgage of real property or from any other direct or indirect interest in or over land is also to be taxed on this basis);
. • lOCO ness
me derived by an enterprise of one of the countries that carries on busi. t hat ot h er in another country through a permanent esta bl·IS hm ent m
country; . . . .. . . • certain income of public entertamers (mcludmg entities WIth which the entertainer or aSSOCIates are connected);. ... . . • income derived from rendering of personal serVIces where It has ItS ongm m fixed base used by the person concerned; ~come derived from salary or wages where the person concerned is present • ·n the other country for more than 183 days, the remuneration received is ~aid by a resident of the other country and the remuneration is deductible in determining the profIts of a permanent establIshment of the employer m that other country; and • fees and remuneration of directors and persons holding similar appointments .
/
The three qualifying questions
2.1
Taxpayers covered
2.1.1
What taxpayers are covered by the DTA?
Whether a taxpayer is covered by the terms of a DTA is not always an easy question to resolve. The starting point is usually Article 1 of a DTA, which almost always states that the agreement "shall apply to persons who are resident of one or both of the Contracting States". However, each Allocation Article covering a basket of income will usually refer back to a particular party. For example, the business profits article will normally make reference to an enterprise of one of the Contracting States. The way in which "an enterprise of one of the Contracting States" is defined will be critical to the issue of what taxpayers are covered by the DTA. In most cases the definition will restrict the availability of the Allocation Article to a taxpayer who is a resident of one but not both Contracting States. In that way dual-resident entities will be excluded from the DTA benefits unless the DTA itself eliminates the dual residency for the purposes of the DTA. In most instances DTAs do attempt to eliminate such dual residency through a tie-breaker article. However, if there is no such article or there is such an article but it fails to break the dual residency, the DTA Allocation Article will not apply. 2.1.2
How do DTAs generally and the sample DTAs in particular resolve cases involving dual residency?
DTAs generally contain "tie-breaker" rules for resolving conflicts caused by taxpayers having dual residence status. It is clear that dual residency can arise in many and varied circumstances. 2.1.2.1
China/France DTA
~or ~xample, an individual who has their centre of economic interests in France Ut IS actually physically present in China for more than a year is most likely to
be treated as a resident of both jurisdictions under the respective domeStIc tax laws. Such a person will need to rely on Article 4(2) of the China/France DTA t break the dual residency. This is a very simple and clumsy tie-breaker, simplo calling on the competent authorities in the two jurisdictions to settle by mutu~ agreement the state where such person is a resident. For companies there is no reference to the competent authorities, but a mOre straightforward allocation of residence to that Contracting State in which the head office is situated. 2.1.2.2
US/UK OTA
This more modern DTA provides a more robust solution to this problem for individuals (Article 4(4) by providing a detailed list of tie-breakers on the basis that: if the person has a permanent home in one but not both Contracting States he is a resident of that Contracting State where he has his permanent home; (b) otherwise he is a resident of that Contracting State to which he has closer personal and economic relations (his centre of vital interests) if that can be established; (c) otherwise he is a resident of the Contracting State in which he has an habitual abode if he has one in one but not both Contracting States; (d) otherwise he is a resident of the Contracting State of which he is a national if he is a national of one but not both Contracting States; (e) otherwise he is a resident of the Contracting State agreed by the competent authorities of the two Contracting States if such agreement can be reached. (a)
As can be seen, this provides an order for determination that is more definitive than is the case with the China/France DTA but can still lead to no resolution if one reaches the final stage under the USIUK DTA and the competent authorities are unable to agree. For companies, Article 4(5) refers resolution to the competent authority to resolve the residence issue. Interestingly failure to resolve the matter is specifically contemplated, such that the benefits of the DTA will not apply with certain limited but important exceptions. 2.1.2.3
China/Germany OTA
For individuals (Article 4(2)) the regime is adopted as for the USIUK DTA with the final paragraph (e) above not applying. For companies (Article 4(3)) the tie-breaker is in favour of that Contracting State in which its place of head office is situated.
t.2.4 China/UK OTA . ' 2. . dividuals (Article 4(2)) the sa~e regIme ~pphes as for the USIUK DT~. For tn p nies (Article 4(3)) the ue-breaker IS III favour of that Contractlllg a the place of effective management IS . SItuate . d unI ess t h For. comhich at p i ace'IS W State tnC tracting State but the place of the head office is in the other Con. one .. nee d to d etermllle . t h e mat1ll . Son te In that case the competent aut h orltles tracung ta . ter by mutual agreement. . . 2. 1.2. 5 Australia/US OTA . d 'vt'duals (Article 4(2)) the ordenng IS as follows: For In I (a) He is a resident only of that Contracting State where the person maintains his permanent home if that is in one but not both Contracting States; otherwise; (b) He is a resident only in that Contracting State in which he has a habitual abode if that is in one but not both Contracting States; otherwise (c) He is a resident only in that Contracting State with which his personal and economic relations are closer. It is expressly provided in this DTA that, in determining the permanent home, regard shall be had to the place where the individual dwells with his family, and, in determining personal and economic relations, regard shall be gIven to citizenship. Interestingly in this DTA there is no tie-breaker for companies. Thus, a company incorporated in the US state of Delaware but which is centrally managed and controlled in Australia and carries on business in Australia is a dualresident company which cannot obtain the benefit of any DTA concessions. 2.1.2.6 Australia/UK OTA For individuals (Article 4(3)) this DTA follows the permanent home, then the centre of vital interests and then immediately shifts to mutual agreement between the competent authorities. For companies (Article 4(4)) this DTA allocates residence purely on the basis of where the place of effective management is situated. There is a special rule dealing with participants in a dual-listed company arrangement. 2.1.2.7
General comment
As can be seen from the above, there are many possible ways of dealing with dual-resident individuals and companies. Usually both are dealt with in the DTAs, but there are occasional exceptions such as the AustralialUS DTA, where ~ual-~esident companies are not mentioned. The consequence is critical, as DTA enefas are denied in such cases. b The Structures of the dual-residency tie-breakers bear some common features ~t each DTA seems to be different and requires careful analysis. Assumptions a out what they provide as tie-breaker provisions are dangerous.
2. 1.3
What about other " entities" such as partnerships and trusts?
Interestingly there are no tie-breaker provisions in DTAs de
2.2
Taxes covered
2.2. 1
What are the "taxes covered" by the DTA?
Every D~A ~ill generally have an article stating what taxes are covered by the DTA. This wIll usually be found as Article 2 of the DTA. The first provision of the DTA will usually apply to taxes exi~ting at the time the DTA is signed. The list is usually structured on the basis; that the list is exhaustive in the sense that the DTA would not apply to taxe~ existing at the date of signature that are not expressly included. A second provision will extend the coverage to new taxes intro duced after the DTA has been signed, provided that the new tax is "identical ~r substantially similar to the existing taxes" to which the DTA applies. Whether a tax can be said to be "identical or substantially- similar" to an existing tax can be a complex question, but it should be read in he proper context. These would not only be taxes that replace existing taxes;;; but those that add to them, as the phrase "in addition to or in place of, the . existing taxes" makes clear. Clearly there needs to be a link to taxes that existed at the dalte of signature, but that link could be fairly tenuous. To raise some problem are;;as without providing solutions: !II
II
What if one country introduced a new inheritance tax whiclh sought to tax all capital gains earned by a deceased person in the hands 01£ the beneficiaries, even when those capital gains were not yet realised? CO lUld this be said to be a tax in addition to an existing tax being a tax on calX'ital gains? What if one jurisdiction sought to impose tax on the privatt"e use of motor vehicles which was not previously taxed in that jurisdiction e? Could this be said to be a tax in addition to ordinary income tax since iit is taxing the "ordinary income" of the taxpayer albeit being income that is not received in a cash form?
is a third provision requiring the competent authorities of the often th . 'f'lCant c h anges In . t h' . ere States to notify each other 0 f any Slgm elr taxad I' h' . . . Iy c Iear ntracong Co Th exact intent that un er Ies t IS reqUIrement IS not entIre cion la w s.. e appear that if there is a significant change of which a Con' . . , h It w ould al t houg tin State is notified, questions can ImmedIately be raIsed as to whether the tra c . g an existing tax that existed at the tIme the DTA was SIgned or w taX th IS no negotiations need to be entered into in relation to that DTA. whe er new How do the sample DTAs in particular define "taxes
2.2.2
covered"?
2.2.2.1
Australia IUS DTA
Article 2 of the AustraliafUS DTA deals with existing taxes in subparagraph (1 l. It should be noted in this context that both in respect of Australia and the United States only taxes imposed under Federal Law are covered. Thus US State taxes and Australian State and Territory taxes are not covered by this DTA. Further, in relation to Australia it covers all income tax imposed under the Federal Law of Australia including tax on capital gains. This latter reference is important as it makes entirely clear that Australian tax on capital gains, which was introduced only in 1985, is covered by this DTA. In the case of Australia the resource rent tax is also covered. Although not expressly limited to taxes that exist at the time the DTA is signed, there is an implication from the terms of the article and from the next subparagraph, which refers to taxes imposed after the date of signature of the DTA, that the first subparagraph is limited only to taxes which existed at the time of the signature of the DTA. Finally in the context of this DTA there is a requirement at the end of each calendar year for the competent authorities of each Contracting State to notify the competent authority of the other Contracting State of any substantial changes that have been made during the year in the laws of the notifying state relating to the taxes to which this convention applies or in the official interpretation of those laws or of this convention. It is worth noting that this is to be done at the end of each calendar year, which places a heavy onus on both competent authorities. In particular they must notIfy each other of changes in official interpretation of laws. When one considers the number of changes in official interpretation that might arise in relation to all aspects of income tax in both the United States and Australia and resource re~~ tax in Australia, this is a very substantial obligation, and one in respect of w lCh both competent authorities are likely to be failing in at least some way.
2.2.2.2 Australia/UK DTA In an~hi s ~TA th~ United Kingdom specifically covers income tax, corporation tax capItal gams tax and Australia specifically covers income tax and resource
rent tax. The issues arising under the AustralialUS DTA would appear to be s· . t h'IS DTA • lIlJ I'1 ar In There is also an obligation under this DTA for the competent authorities notify each other of substantial changes, but in this instance it need not be do to ne each calendar year but only within a reasonable period of time after tho se changes occur. This would seem to be a more reasonable approach, but one th might lead to even more failures on the part of competent authorities to ma~t the appropriate notifications. e
2.2.2.3
UK/US OTA
Article 2 of this DTA provides somewhat more detail than the previous two DT~s ~xamined.ln the con~ext of existing taxes these are covered in Article 2(3),
which 10 the case of the Umted States refers to FederallOcome taxes imposed by the Internal Revenue Code (but excluding social security taxes) and the Federal excise taxes imposed on insurance policies issued by foreign insurers and with respect to private foundations. In the case of the United Kingdom it covers income tax, capital gains tax, corporation tax and petroleum revenue tax. Interestingly the petroleum revenue tax is not covered in the AustraliaIUK DTA, and the Federal excise tax imposed on insurance policies issued by foreign insurers and with respect to private foundations is covered in the UKIUS DTA but not in the AustralialUS DTA. Furthermore, the exclusion for social security taxes is expressly provided for in the USIUK DTA but not in the AustralialUS DTA. It is unlikely, notwithstanding this seeming oversight, that US social security taxes would be embraced by the AustralialUS DTA since it is difficult to see an interpretation in which "Federal income taxes imposed by the Internal Revenue Code" would cover social security taxes. Article 2( 4) covers identical or substantially similar taxes and this provision is very similar to those previously examined. In this DTA there again is an obligation on the competent authorities to notify each other of any changes that have been made in their respective taxation or other laws that significantly affect their obligations under this convention. It should be noted that there is no time frame provided at all in relation to this obligation, and this may lead to a lax approach in complying with the obligation on an ongoing basis. Finally in this context there are two early provisions in the USIUK DTA (Article 2(1 ),(2)) that make clear that the convention applies irrespective of the manner in which a tax is levied and that taxes on income and on capital gains include taxes on gains from the alienation of property. This would seem to make clear that even if a tax is imposed by withholding, as opposed to assessment, the tax would nonetheless be covered.
2.2.2.4
China/France OTA
The French taxes covered are the tax on income (imp6t sur Ie revenue) and the tax on companies (imp6t sur les societes).
. d the German DTA the existing Chinese taxes covered are the indiIn this . lomt . . ventures WIt . h Ch mese ' . anme tax the income tax concernmg an d . d al lllCO , . ' . . d h I VI U. . tment the income tax concernmg foreign enterprises an t e oca 1 foreign lllves , lllCOme taX.
China/Germany OTA 2.2.2.5 . d"IVI d ua l IOcome ' ' E In ' k ommenG an taxes covered are th e ill tax (d Ie The )erhm corporate income tax (die Korperschaftsteuer) the capital tax (die -teller t e ~ .- nsteuer) and the trade tax (die Gewerbesteuer). Vermog e 2.2. 2-6 China/UK OTA As a result of the 1996 protocol varying this DTA, the Chinese taxes covered are the individual income tax, the mcome tax tor enterprises With foreign mvestent and foreign enterpnses and the local mcome tax. m The UK taxes covered are income tax, corporation tax and capital gains tax. Each of the China DTAs mentioned contains articles dealing with postsignature identical or substantially similar taxes with minor differences. The French and German DTAs but not the United Kingdom have additional provisions making clear that the specified taxes are covered irrespective of the way in which they are levied. Further they specify that all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, as well as taxes on capital appreciation, are to be regarded as taxes on income or capital. The French DTA but neither the United Kingdom nor German DTAs expressly include as taxes covered any withholding taxes and any prepayments with respect to the listed existing taxes covered.
2.3
Timing matters
2.3.1
What are the start dates and termination arrangements in relation to the DTA?
Each DTA will contain its own designated start date and specify termination These can be quite complicated, and it is worth carefully checkmg the dates as they can vary depending on which country's tax is being applied and even which tax. ~rrangements.
2.3.2
When does a DTA start to operate? . d ate " and not before then, even though some terms suggest From the" . effectlve herWlse D'ff Ot . use d'ltierent -. tec h mques to d eve Iop DTAs, b ut b . I erem countnes roadly speaking they develop in a series of six stages, with some stages being :~eTnded Or curtailed in different jurisdictions. The stages in the development of A cover:
28
Double Taxation Agreements
1.
2.
3.
4.
5.
6.
Negotiation. Representatives from the relevant Department or Ministry of each of the two states concerned will engage m Hut1al dIsc~sslOns designed to develop thinking in regard to the major components ot a proposed DTA. Initialling. After the general terms of the DT A have been agreed by the two negotiating teams, the DTA will be initialled and subm.med for approval at the political level in each Contracting State. In some mstances this can be a straightforward application to a smgle MInIster of Fmance or Treasury. In other cases a more complicated process may apply, where the submission is made to a broader Council of Members. Signature. After the DTA has received the - usually formal - en?orsement by both Governments, it is formally signed by the relevant MInIster of Finance, Treasury or other appointed officer. Ratification. Tllis is the key step that completes the formal process of approval and involves embodiment of the DT ~ into each country's domestic law by way of Parliamentary or CongressIOnal, etc., approval or the passing of an empowering regulation, usually with the endorsement of the Parliamentary or Congressional body. Once this step has been taken by one state, it is required that the other state be informed. Once the DTA has been endorsed by the relevant Parliamentary or Congressional bodies in both Contracting States, there is a formal exchange of ratification instruments. . . Entry into force. A DT A comes into force on the date on whICh It becomes a legal obligation, binding on both Contracting States. The act of ratification referred to in stage 4 above does not normally bring a DTA into force immediately. A DTA can be brought into force in a number of different ways - for example it is often expressed to come automatical?y into for~e at the end of a specified number of days after the last NotICe of RatIfIcatIon has been received by a Contracting State. Alternatively, the DTA itself may contemplate a more rapid entry into force by including a clause, for example, that is to the effect that "this DTA shall enter into force upon the exchange of instruments of ratification". Effective date. This is the key step to look for. It is only from this date onwards, and no earlier, that taxpayers can rely on the DTA to gIve them legally enforceable tax outcomes provided by the rele:ant DTA. E~en after the DTA comes into force, it may not yet be effectIve. The effectIve date of a DT A is the date on which it takes effect, which is often the beginning of a Contracting State's tax year imme?i~tely following the date of entry into force of the DT A. AlternatIvely It IS pOSSIble that the effective date can be before the date of entry into force of the DTA. The effective date is usually specified in the DT A itself.
The three qualifying questions
29
Thus, for example, the 1994 Hungary/Russia DTA was concluded on 1 April 1994, entered into force on 3 Noven~ber 1997 but only took effect on ,1 January 1998. The date on which it took eHect arose from ArtICle 28(2) ot the DTA itself, which stated that: The provisions of this DTA shall have effect: a) in respect of taxes withheld at source - to amounts derived on or after 1 January in the calendar year follOWing the year in which the convention enters into force; b) in respect of other taxes on income and taxes on capital- to taxes chargeable for any taxable year beginning on or after 1 January in the calendar year next follow ing the year in which the convention enters into force.
2.3.3
When is a DTA t erminated?
A DTA also makes provision for its own termination. Termination of a DTA is a formal act whereby one or both states decide to end a DTA. This should not be confused with more informal ways in which DTAs can effectively be terminated either in whole or in part but without a formal declaration of termination. Thus, for example, a DTA may be effectively terminated at least in part because one state has unilaterally introduced measures in its domestic law that override a specific provision of a DTA without the agreement of the other state, and quite likely to the detriment of the other state's residents. The United States has inserted numerous treaty override provisions in its domestic laws which have had this effect over many years. Alternatively ternlination may also occur in a more general and informal manner where one state simply does not apply the provisions of the DTA as the other state intended, again usually to the consequential detriment of the other state's residents. An example of this latter occurrence was in 1972 in relation to the Denmark! Portugal DTA, where Denmark effectively refused to endorse the DTA in accordance with the manner in which Portugal had intended. It was not until 1994 that Denmark formally ternlinated the agreement. Where a formal termination is intended, the Contracting State ternlinating the DTA must give notice to the other Contracting State of a certain period in advance of the ternlination date. The date from which a DTA no longer has any effect is also specified in the DTA. Thus, a common provision to be found in DTAs is along the following lines: This DTA shall remain in force until terminated by a contracting State. Either Contracting State may terminate the DTA, through diplomatic channels, by giving Notice of Termination at least six months before the end of any calendar year.
30
Double Taxation Agreements
3
In such event the DTA shall cease to have effect as follows: a) (In State A) b) (In State B).
The allocation rules
2.3.4
The sample DTAs
Each of the sample DTAs has provisions dealing with Entry into force and Termination along the following lines: UKlUS: Articles 29 and 30 UK! Australia: Articles 29 and 30 US/Australia: Articles 28 and 29 ChinalUK: Articles 29 and 30 ChinalFrance: Articles 28 and 29 China/Germany: Articles 30 and 31
The allocation rules presented in any given DTA are schedular in nature. In other words, each DTA divides income into a number of different categories. Each category may then have subcategories. Each category or subcategory will have a specific rule relating to income covered by that category or subcategory. This process has the potential to lead to inequities where different taxpayers earning similar amounts are exposed to different tax outcomes because of the nature of the income they derive. It may also lead to tax planning opportunities, as artificial characterisations created by taxpayers can lead to substantial tax savmgs. Examples where borderline issues may arise include the distinction between royalties and business income, royalties and personal service income, royalties and the sale of property, interest and dividends, capital gains and ordinary income gains. Sometimes DTAs are unable to overcome such artificial characterisations (see, for example, Thiel's case in Australia, focusing on the distinction between business profits and other income). We will now examine each category of income, looking at four broad headings: Active income articles: sections 3.1-3.5 Passive income articles: section 3.6 "Nature of the taxpayer" articles: section 3.7 "Other income" articles: section 3.8
3.1
Active income: business profits
3.1.1
What is the allocation rule?
One of the most important baskets of income that can lead to double taxation :~ a result of a source-residence conflict is the business profits (also known as
mdustnal or commercial profits" in some early DTAs) of an enterprise earned by a resident of one Contracting State which is sourced in the other Contracting State.
DTAs include as an allocation rule a business profits article (usually Article 7) wlllch will dictate the ability of a source country to tax the business profits arismg there. Generally, where a taxpayer sources business profits in a country, and IS not a r~sldent of that country, a DTA will allow the source country to r,IX those busmess profIts only If the taxpayer is carrying on an "enterprise" through a "permanent establishment" (PE) there. Thus, if a taxpayer is carrying on an enterprise via a PE, the source country may tax those business profits attributable to that PE without limitation and the taxpayer may need to seek double taxation relief from the residence co~nrry by way of exemption or foreign tax credits. However, if there is no enterprise being carried on via a PE, the source country cannot tax those business profits arising. To establish whether a PE exists, a DTA will also contain a PE definition article (usually Article 5). This will exhaustively define whether the activities of a taxpayer are sufficient to constitute a PE for the purposes of that particUlar DTA. The contents and definition of a PE within a certain article are therefore critical in determining whether or not the activities of a taxpayer constitute a PE, and will be a significant factor in determining whether business profits of a non-resident can escape the liability to tax within a source country. Once decided that there is a PE in the source country, the profits that are exclusively taxable in the country of source are the business profits that are "attributable to" a PE. Under this rule of attribution, the profits that are attrihutable to a PE are the profits that it might be expected to make in the countl1' in which it is located if it were a separate enterprise engaged in similar acti,·itieS under similar conditions ·dealing independently or at arm's length with the parent enterprise of which it is a PE. Generally, amounts may be attributed whether they are from sources within or outside the country in which the PE is situated. The significance of the application of the attribution rule is that the business profits are calculated on a net basis. That is expenses, wherever incurred, tihllt are reasonably connected to those profits are deductible provided they are incurred for the purposes of the PE and pass the independent entity test. If there is no PE in the country of source, there can be no taxation of busimss profits in that country. This is precisely what transpired in the High Court decision in Thiel v. FeT 21 ATR 531. Each DTA needs to be separately considered, as they do not always confmlll to this model (see, for example, the Australia/Papua New Guinea DTA). In the application of the business profits allocation rule, a series of questions become critical: I!Il lIII III lIII
What are business profits? What is an enterprise? What is a permanent establishment? How do you calculate the profits attributable?
Each of these questions will now be considered, with the third question bro . to subsidiary questIons. ken 111 What are business profits? 12 3.. The business profits of a PE will generally include
• profits of a PE situated in the country; • gains from the ahenatlon of such a PE (e.g. sale of branch assets); and .. rental income or capital represented by movable property formlllg part of the business property of such aPE. Business profits of a PE do not include • profits of a PE if that PE is maintained f.or the purposes of international shipping, inland waterways, transport or lllternatlonal air transport. The term "alienation of property" includes • gains arising from sale; . gains arising from exchange, expropriation, transfer to a company III exchange for stock, the granting of a right, transfer by gift, and even the passing of property on death; and .. gains arising on partial disposal in similar situations. Specifically, unlike the OECD model, some DTAs may have quite specific definitions of the types of income covered by the business profits articles, and may exclude certain types of business income. Depending on the definition, the income concerned may not, in fact, represent business profits but instead rentals, capital gains, or management fees. If so, both the taxing rights and basis of taxation may be modified. For example, certain treaties define the concept of profits by reference to industrial or commercial (or business) profits, and this may restrict the scope of the application of the article to such types of income. Some points to look for in business profits articles of DTAs: Early DTAs may refer to "industrial or commercial profits" rather than business profits. The OECD Model does not provide any further guidance as to what constitutes the conduct of a business or commercial activity. • Sometimes it is necessary to resolve whether or not investment income is income effectively connected with a PE, since this is the critical exception where the passive income articles do not take precedence. • Some DTAs require that a trade or business be carried on before this article applies, and some do not. More items could potentially fall within this category where there is no requirement for a business or trade to be carried on. • The normal criteria for carrying on a business must be satisfied where the article refers to the enterprise" carrying on a business". Remember in some
l1li
cases that an enterprise or business may be carried on even though only one transaction has occurred. In Australia, the Thiel case determined that an isolated transaction can constitute such. It is important to note that it is generally only the business profits effectively connected with or attributed to the PE that are subject to tax in the host Or source jurisdiction. Profits linked to operations not effectively connected or attributable to a PE should not be subject to tax in that jurisdiction. There have been significant OECD public discussion drafts and reports in 2007 on this Issue. 3. 1.3
What is an enterprise?
The DTAs speak of the business profits of an enterprise of a Contracting State and this immediately raises the question as to what constitutes an "enterprise". Perhaps curiously, no definitions are contained in the OECD Model Convention of the term "enterprise", and the Commentary merely states, perhaps somewhat unhelpfully, that the question whether an activity performed within the framework of an enterprise was deemed to constitute in itself an enterprise has always been interpreted according to provisions of the domestic law of the Contracting State, and therefore no definition of the term has been attempted (see paragraph 3 point 4). The term is not a term of legal art used in the Anglo-Saxon tradition, and generally speaking there seems to be little to be gained from its contextual use in DTAs. The Concise Oxford Dictionary (1987 edition) defines "enterprise" as "an undertaking, especially a bold or difficult one". In the context in which it appears, the Concise Oxford Dictionary definition seems, at least superficially, to be inappropriate in the circumstances since, if an enterprise means an undertaking, the DTAs are contemplating an undertaking having a PE and an undertaking earning profits. In a legal sense an undertaking, even if bold and difficult, cannot itself have a PE or earn profits. Ordinarily one would think of an entity as having a PE or of an entity earning profits. Notwithstanding all that, logic would suggest that DTAs clearly recognise that an activity, as well as the framework within which the activities were engaged, constitute an enterprise for the purposes of the DTAs. Certainly this is the view taken by the High Court in Australia in Thiel, where the court noted that, as far as the Australia/Switzerland DTA (which was in question in that case) was concerned, the term "enterprise" can cover both an activity itself and the means by which an activity was engaged in. Thus, when Article 7( 1) of that DTA spoke of "an enterprise of one of the Contracting States", it was not necessarily referring to anything more than an activity, and the reference to an enterprise being "carried on" was not a reference to anything in the nature of a business that required continuity or repetition. The concept of an "enterprise
" strued as including both an isolated activity and the frame. . . .. d . d on was con caroe k' d carrying out decisions w relatlon to actlvlties an for rna wg an wo r k projectS. h fence to enterprise in DTAs is more in the nature of a connect. .. . I I Clearly, t ere er one to be given a defwltlon of a stnct ega nature. .JOg term an d no t
3.1.
4
What ;s a "permanent establishment"?
t establishment" (PE) is usually defined in DTAs as "a fixed place A "pe~manetnhrough which the business of an enterprise is wholly or partly carof busmess
rie~~~';~ the same definition as in Article 5 of the OECD Model Conv.ention. f the Commentary on Article 5 of the OECD Model explams that Paragrap h 2 0 . . . this definition provides three condltlons necessary for a PE to eXist: There must be a place of business; . . . ' The place of business must be fixed so that there is a distlnct location with a certain degree of geographical and temporal permanence; and. • The business of the enterprise must be conducted through that fixed place. There are a number of important principles that have emerged from the decided cases. An important element of the definition of :'permanent establishment" (i) and the related specific inclusions and exclUSIOns is that it IS the actlvJties of persons who are "dependent agents", e.g. employees, that are i~uen tial in determining whether a PE exists, not merely the phYSical eXistence of an office. (ii) Revenue authorities will usually accept that a PE does not exist if a place of business has been maintained for a brief time only (e.g. less than six months unless the connection is otherwise very strong. (iii) The ac;ivities of employees with authority to conclude contracts will . normally lead to the existence of aPE. (iv) Although the definitions in DT As correspond closely With one another, they are not identical and each must be considered in its own context. (v) Most DT A PE definitions specifically include: a place of management; a branch· an office; a factory; a workshop; a mine site or hydrocarbon field; a~d an agricultural, pastoral or forestry property. A building site or construction or installation project, or a supervisory or consultancy activity connected with such a site or project, may also constitute a PE but usually only if that site, project or activity has lasted more than a designated period of time, e.g. 12 months. Although not usually ~tated expressly, these specific inclusions are usually considered to be subject to the overriding requirement of a fixed place of business. . (vi) The agreements usually declare that certain activity will not of Itself
amount to ~ ~E: this would include, for example, a storage, display Or delIvery. faCilIty for merchandise, including the use of that facility, a purchasmg or mformaoon office and a business place devoted to a preparatory or auxiliary activity. (vii) The use of an independent agent in the ordinary COurse of the agent's business generally will not give rise to a PE; but there will be a PE if the agent has concluded, and habitually exercises authority to conclude contracts in the name of the enterprise unless the preparatory activitie~ rule applies. (viii ) It is also commonly declared that there will not be a PE merely because there is a resident company in the source country that is a subsidiary of a company resident or carrying on a business in the other country. However, other positive attributes may cause it to be considered a PE of its parent company. (ix ) These rules relating to the PE concept are usually also relevant in their application to the provisions relating to dividends, interest and royalties. Normally, the rate of tax on these classes of income is capped under the relevant DTA, but not if the income is effectively connected with a PE in the SOurce country. In that case, the relevant domestic law rate will apply. 3. 1.4.1 Case law
Worldwide there are a number of cases dealing with whether or not a PE exists in a given situation. Here are but three instructive examples. InMT Case 8775 (1993) 26 ATR 1056, New Zealand-residenttaxpayers were engaged in a business of buying and selling shares in Australia. Their business was conducted through a dealer employed by a Sydney stockbroking firm. The question at issue was whether the dealer represented a PE of the New Zealand taxpayers. If so, the income would be taxed under the DTA as the business profits of the enterprise rather than under the lower tax rates applicable to dividends and interest. The Tribunal found that the arrangement came within that part of the definition of a PE under the New Zealand DTA which covers a person who habitually exercises in Australia an authority to conclude contracts on behalf of the New Zealand taxpayers (in relation to their share trading activities). They failed to establish that they came with the excluding words of the PE definition applicable where an enterprise is carried on in Australia through a broker or general commission agent or other agent of independent status. This was because: (a) the dealer was merely an employee of a broker; (b) the dealer was not a general commission agent, as he worked only for the New Zealand taxpayers and not more generally for clients at large; and (c) he was not an agent of independent status, as he worked for a principal alone and there was close consultation between the dealer and one of the New Zealand taxpayers regarding trading.
7
In any event, the Tribunal also concluded that, if the dealer did fall . dwithin the f broker general commission agent or agent of any other m ependent category 0 , . . f h f· , b . s activities were not m the ordmary course 0 t e urn s usmess as a hi statuS, . . . . 1 1· d h· ·d h 1 broker. The firm serVICed mStltutlOna c lents, an t lSI wadS OUtSI e t, e usu a line of business. Further, the depositing of the Newf~ea and. taxPbaye~s surp lus h in cash management accounts was not part 0 ItS or mary usmess, as It ~~~ not offer cash management facilities to its clients ordinarily. The Fiji case of c/R v. Cor:rmonwealth Deve/o~ment Corporatron [~995] FlCA 8 has conSI·derable significance tor the IllterpretatlOn of PE clauses III DTAs. . The case endorses the use of the 1969 Vienna Convention on the Law ot Treaties and the official commentaries on the OECD Model Tax Convention as xternal aids to DTA interpretation. e More significantly, although each DTA needs to be considered separately, the broad approach is that a provision that deems certain business activities not to be a permanent establishment overrides earlier provisions stating that a permanent establishment includes an activity carried on in a fixed place of busmess. This second point can be particularly significant in DTAs where it is not clear whether a negative provision overrides a positive one, and the reasoning in the Fijian case will be needed to ensure the desired result that there is no PE in such a case. In McDermott Industries (Aust) Pty Ltd v FCT (2005) 59 ATR 358, an Australian company chartered vessels from a Singapore company to conduct its marine construction and engineering activities in Australia. Over a number of years, it paid more than $45M in charter fees to the Singapore company. It did not treat the bareboat charter fees as "royalties" from which it should deduct withholding tax, but it did claim the fees as deductions. It considered that it did not have an obligation to withhold tax because the Singapore company had a PE in Australia and that the charter fees would be taken into account when Australia taxed the Singapore company under the business profits article of the Australia/Singapore DTA. The Commissioner did not regard the Singapore company as having a PE and disallowed the deductions because of the company's failure to withhold tax. The company relied on Article 4(3)(b) of the DTA, which provides that there will be a PE where "substantial equipment" (the ships) were "used" in Australia "by, for or under contract with" the Singapore company. At first instance, however, the Federal Court concluded that there was no PE, as it could not be said that the ships were used in Australia "under a contract" and there was no "nexus with [Australia] and no foundation at all akin to the foundation needed to consistently satisfy the concept of permanent establishment": see McDermott Industries (Aust) Pty Ltd v. FCT (2004) 56 ATR 592. This decision was overturned on appeal. The Full Federal Court held that PE Was deemed to arise because the ships in question, which were substantial equipment, were being used in Australia either by the Singapore company or by the taxpayer under contract with the Singapore company. (See also section 9.1.3.)
3. 1.5
How o re permanent establishments dealt w ith in the context of electronic commerce?
With the increasing interactive commercial use of the Internet in recent years, the concept of a PE as a relevant basis for determining source taxing rights has become more questionable. This raises a number of issues which have been considered in detail by Professor Kevin Holmes (see Double Tax Agreements, ATAX Materials, 2008) . The discussion in this section 3.1.5 has been developed from the excellent analysis in the module dealing with permanent establishments in those materials. 3. 1.5. 1
" "fixed place of bu~iness " within the meaning cation that constitutes a has nO lo of Article 5(1 }. HOSTING ARRANGEMENT
ite of an enterprise is hosted on the server of an Interne"t se~If however a webs Uy aid for the use of th Internet serVlCe proVider s vice provider, fees are nordma P h OECD view) the server and its iocation is " Arguably (an t hi SIS t e , i disk space. d" i f the enterprise" under the t}picai contractua arrange"at the Isposa 0 Th £ th"s view a , not h vice provider and its customen. ere ore, on I ts between t e ser fb " men" ent does not give rise to a place 0 usmess. hostlllg arrangem USE Of SE RVE R -
Is human intervention required before a PE can exist?
3.1 .5.2
Does the use of the Internet create a PE abroad for an enterprise?
INTE RNET WEBSITE
If all that exists in the source country is a website, there is no " facility such as premises or, in certain circumstances, machinery or equipment" . The website
~~t:: :i!:V:a~
a server at its own disposal, whether leased or Pd operates the server where the website is stored, thiS can outright Y ow~e i::issue then becomes, where the server is "fixed": To de~er constitute a p. . t be made to the permanence criterion behmd Artlcle " " that rderence mus mille . CD uld sa that the establishment IS permanent. 5(1). Clearly, the OE wo d Y tOt te a "fixed place" the question then Assumi~g that the se~ve: oe~:~:sc~:ried on through the server? This is a -by-case basis. All of what business becomes: IS the enterpnse s blus " which must be reso ve d on a case 1 " f h erver) questiOn functions a~e per~ormed at the ocatIO~r °th~te ~e ending on the nature of the In resolvmg thiS questiOn, rememb , P il "d An interactive f personnel IS not necessar Y reqUIre . h business, t e pres~nche 0 ."" d cted through it include the conclusion of site might be a PE If t e activIties con u " " d i" " f d automatlC on-hne e Ivery. contracts, processmg 0 payments, an " " d out through the Th "U be no PE if the e-commerce operatiOllS carne "d " auxiliary activitie~ of the types mentiOne m ere WI ~;~~~ea;f4~(~~l.yr:::~;r;~:~~~icating with customers, advertising, supplying
USE Of SE RVER
Under Article 5(1) of the OECD Model Tax Convention, a PE will exist if there is a fixed place of business through which the business of an enterprise is carried on. Does this mean that human intervention is required before a PE can exist? The OECD Commentary suggests that the answer is "no". Automatic equipment, such as gaming and vending machines and pumping equipment, can constitute PEs - see OECD commentary on Article 5, paras 10 and 42.6. This view was originally propounded in the German Pipeline decision (Bundes(inanzho{ (BFH) II R 12/92, Betriebs-Berater 52 (1997), 138). In that case, a Dutch company transported crude oil and crude oil products through an underground pipeline network located partly in the Netherlands and partly in Germany. The pipeline network was operated by remote control through a computer located in the Netherlands. Technical functions and business administration were exercised exclusively by personnel located in the Netherlands. Independent firms were hired to maintain and repair that part of the pipeline network that was situated in Germany. The question addressed by the German Federal Tax Court was whether the pipeline of the non-resident (Netherlands) company constituted a PE for the purposes of German domestic law and under the GermanylNetherlands DTA. The court held that a PE did exist under German domestic law and the Germany/ Netherlands DTA because the pipeline was a fixed place of business in Germany. It was firmly connected and attached to German territory. Considering the special nature of the Dutch company's business, the pipeline network served as a basis for the company's main business activity (i.e. transportation services to third-party clients in Germany).
If howe~er an d
infTohrmatioln, gatheriZt~~~a5(~\c~iu not apply if the activities carried out via the1 e exc USiOns III "i" (" h e an essentIa server are more than merely preparatory or auxllary I.e. t eyar " "f"lCan t part of the business of the enterpnse). an d slgm " "d 's own business There A server is an essential part of an Internet ser~lCe pr~vI e~ hr h the p'lace at is little doubt that the provider's busIlless IS con ucte t oug "d which the server is located. It appears difficult for andi~fnfternetfsermvlCI"tespcroo~~tryer ~~ " h" 1 d" a country erent ro argue that its server, w h lc IS ocate I~ h" h" " I d Furthermore the " " PE" h ntry III w lc It IS ocate . , reSidence, IS not a III t e cou th "" erely a dependent Internet service provider could not normaUy argue at It"lds m d t have the " 11 I t net serVlCe provi ers 0 no agent of its customers - typlCa y, n er " d they· " h me of their customers nor 0 autho rity to conclude contracts III t e na habitually do so.
INTE RNET SERVICE PRO VlDERS
3.1.5.3
Is there likely to be any reform in this area?
Clearly electronic commerce challenges the concept of aPE. In December 2005, the OECD completed its review of e-commerce issues challenging the PE concept (Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce?). The report concluded: "[I]t would not be appropriate to embark on [fundamental] changes at this time. Indeed, at this stage, e-commerce and other business models resulting from new communication technologies would not, by themselves, justify a dramatic departure from the current rules." The kind of changes considered in the review included • modifying the definition to exclude activities that do not involve human intervention by personnel (to deal with the German case cited above); • modifying the definition to provide that a server cannot, in itself, constitute aPE; • modifying the definition to exclude functions attributable to software when applying the preparatory or auxiliary exception; • tr~ating profits derived from sales through an enterprise's website of goods ot the same kind as those sold through the enterprise's PE as being attributable to the PE; and III extending the definition to cover a so-called "virtual fixed place of business" through which the enterprise carries on business (i.e. an electronic equivalent of the traditional PE). The Australian Tax Office position is that a foreign-resident enterprise does not have a PE in Australia solely by virtue of making sales of trading stock through a website hosted by an Australian-resident Internet service provider: see Determination TD 2005/2.
3.1.6
What sort of presence can a taxpayer have without creating aPE?
Many enterprises may form a representative (or liaison) office as a starting pomt to prOVide themselves with a commercial identity in a foreign jurisdiction. This may be a preliminary step prior to a full business presence or it may simply be used as a base to gather or collect information. . Care must be taken to ensure that the representatives only carry out the limIted func.tions permitted by the exclusions in the PE article; otherwise, any profIts effectively connected to that office might be subject to local taxation. Generally, if it is not intended to create a PE offshore, employees visiting the offshore country should not: • have the power to enter into legally binding obligations on behalf of their employing company or have the power to conclude negotiations without reference to the parent organisation; • be based offshore for significant periods without carefully considering the
taxation implications - whether a presence constitutes a PE can be affected by the length of time the employees stay in the country as well as the type of activity they carryon. For example, a contract lastmg less than SIX months will generally not give rise to a PE (but this needs to be checked in particular cases). To be safe, contracts over three months should not be undertaken without considering whether a PE will arise; • sign contracts or other agreements in respect of offshore activity inside the offshore country; use business cards which show an address in the offshore country; enter into any negotiations to acquire office premises or any other form of accommodation; appoint any agents with authority to conclude contracts on behalf of the company. It is easy to create a taxable PE without meaning to, and this can lead to unexpected tax charges and significantly reduce the profit on foreign contracts. Sometimes a PE can be avoided by planning ahead and monitoring the situation. In other cases, the PE cannot be avoided but needs to be monitored so that foreign tax suffered can be factored into contract prices. Any changes to the activity or the way in which it is carried out should be checked for tax purposes before the changes are made. Changes to the type of activity carried on in the country, or the way in which it is carried out, can have significant effects. Even seemingly minor changes to the activity, or the way in which the activity is carried out, can fundamentally change the tax position. There are often commercial problems associated with the conduct of representative offices (e.g. in having the entity recognised by bankers, suppliers, and customers in the absence of any formal registrations or legal status). Where the effective rate of tax in the foreign jurisdiction is not greater than in the home jurisdiction and full double tax relief is available in the home jurisdiction, there may be little additional tax cost from establishing a taxable presence in the foreign country. However this will bring compliance costs, as returns have to be filed, and will lead to other major issues such as transfer pricing. The OECD Commentary to Article 5 also adds guidance as to what may constitute an independent agent and what issues will create aPE.
3.1.7
May the definition of a PE differ between developing and developed countries?
Although the OECD Model has become the worldwide standard for negotiating tax treaties between developed countries, the UN Model Bilateral Convention for the Prevention of the Double Taxation of Income was developed and first published in 1980, in recognition that the OECD Model is not entirely appropriate for negotiating treaties between developed and developing countries.
The Introduction to the UN Model Convention acknowledges that: Conclusion of a DTA between two developed countries is facilitated by their approximately similar levels of development, so that the reciprocal flows of trade and investment - and hence the respective gain or loss of revenue to the parties from reducing taxes on those flows - have been relatively equal in magnitude. The presumption of equal reciprocal advantages ... is not valid when the negotiating parties are at vastly different stages of economic development. ... Consequently, developing countries have, generally speaking, been reluctant to enter into tax treaties ... unless they can reasonably assume that the treaties will ensure that those detriments are likely to be offset by benefits flowing from the DTA.
Generally therefore, the UN Model seeks to provide more taxation rights to capital-importing or source countries than the OECD Model by placing greater emphasis on source taxation, and by providing greater scope for imposing higher tax rates on outbound dividends, interest and royalties. Once the first UN Model was published in 1980, it was quickly embraced by mostly developing nations, including those countries entering into DTAs with Australia, the United Kingdom and the United States. In specifically considering how to define a PE, the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries confirms that the PE definition, as defined by the OECD without adaptation, may favour developed countries since: Enterprises in developing countries do not engage in Significant business activity in industralised countries
The UN Model Convention further asserts that [T1here is a place for the permanent establishment principle in tax conventions with developing countries, although it may be necessary to adapt it to a certain extent to the differing relations between developing and industrialised countries .... Developing countries need to adopt rules which will maximise the income subject to their tax in view of their need for revenue and their limited resources, and this may well be a major source of double taxation.
The UN Model therefore accepts the concept of a PE but seeks to adapt the OECD Model to the requirements of relations between developed and developing countries. As such, the UN Model definition of a PE incorporates several of the provisions of the OECD Model Convention, but also both substantially amends some of the OECD provisions, and adds some new provisions, all of
WhlC h serv e
to
ensure an increased number of situations under which a PE may
'ng the definition of a PE within the two Models, it becomes eviarise. On compan UN Model Convention expands upon or amends the OECD dent t h at t h e . . >.4' del in the tollowmg wa ys: .v~o The UN Model expands upon paragraph 3 of the OECD Model, which vers building and construction sites, by both: . 00 . d . I reducing the period of time, or term, reqwre to tngger t he cause to SIX nths or three months in special cases (rather than 12 months); and mO , d . I ubstantially broadening the scope by including s . the broa . . .er . termlOO ogy . of "assembly or installation project or supervisory activIties m connection with ... ". Consequently, assembly projects and supervisory activities may be able to create a PE - situations which are not specified under the OECD Model. • The UN Model includes a new subparagraph in paragraph 3 of the O~CD Model whereby the furnishing of services, including consultancy serVICes, for a period of time may trigger the presence of a PE. The UN Model Convention acknowledges that there is no general agreement between developing countries as to the appropriate time limit or whether separate projects should in fact be aggregated together. • The UN Model substantially amends the PE exclusions in subparagraphs (a) and (b) of paragraph 4 of the OECD Model by eliminating the term "delivery". Consequently, the use of facilities or the maintenance of stock for the purpose of delivering goods will create a PE and any income properly attributable will beoome taxable. The UN Model does not include the provision contained in subparagraph 4(f) of the OECD Model, which excludes a combination of activities from constituting aPE. The UN Model augments paragraph 5 of the OECD Model by including another situation where a dependent agent can create a PE - other than one having the authority to conclude contracts. That is, a dependent agent who habitually maintains a stock of goods from which goods are regularly delivered on behalf of the enterprise will be sufficient to constitute aPE. The UN Model includes a new paragraph whereby the collection of insurance premiums can constitute a PE. This appears to be an unpopular provision internationally, and none of Australia's tax treaties, for example, have adopted this provision. The UN Model strengthens paragraph 6 of the OECD Model, which deals with independent agents and ensures that agents cannot be considered as independent where the activities of the agent are devoted wholly or almost wholly to an enterprise, or, as refined in 1999, where conditions re imposed that do not reflect a relationship between independent enterprises.
3.1.8
How have the OECD and UN Models influenced PE articles in DTAs?
Clearly the influence has been substantial and is briefly tested below in the Context of the Australian experience. A detailed consideration of the PE articles within Australia's 42 DTAs reveals that they have been heavily influenced by the OECD Model, particularly those which Australia has negotiated with other developed countries. Some key points to note include: All 42 DTAs incorporate the OECD clause whereby dependent agents who have the authority to conclude contracts will create aPE. • All 42 DTAs include the OECD clause under which the presence of a building or construction site may create a PE with the passing of time. Additionally, 20 of the 42 treaties so negotiated still prescribe the minimum period of 12 months as recommended by the OECD Model. ill Of the 42 DTAs, 36 have not sought to adopt the UN Model recommendation to extend the scope of the PE concept by treating an agent who acts wholly or almost wholly for one enterprise as a dependent agent. 1'/1 Of the 42 DTAs, 29 have not sought to adopt the UN Model recommendation to include the furnishing of services as constituting aPE. I\! Of the 42 DTAs, 32 have not sought to adopt the UN Model recommendation to amend the delivery clauses in the PE articles. III
However, it is also clear that, since its publication in 1980, the UN Model Convention has had significant influence on the PE articles negotiated by Australia, particularly on those concluded with developing countries. Some key points to note include: III
!III
III
D
11
Of the 42 Australian DTAs, 22 prescribe a shorter period of time for the minimum period before construction sites will constitute a PE, including all of the treaties that Australia has negotiated with low developing countries; although the bulk of these are with developing countries, there are still treaties which have been negotiated with developed countries which provide for a shorter period than recommended by the OECD Model. Without exception, all of Australia's 42 DTAs have explicitly included supervisory activities connected with building and construction sites as recommended by the UN Model. All but two of Australia's DTAs have also broadened the scope of the building site clause by including the broader UN definition allowing assembly projects to create a PE with the mere passing of time. Of the 42 DTAs, 40 have adopted the UN Model approach and removed the combination of activities exclusion which can be found in subparagraph 4(e) of the OECD Model. Although the furnishing of services and the amendment to the delivery
clusion were not as widespread, the increasing adoption of those clauses by low developing countries is particularly eVI'dem.
eX
Therefore, the widespread inclusion of UN Model clauses in each of Austra . , PE clauses does demonstrate that the impact of the UN Model on the PE jja ~ les of Australia's DTAs has been significant, particularly in considering artlC eaties AustralIa . has negotiate . d WIt . how i deveI ' countnes. . opmg t hose tr . These findings corroborate a paper prepared by the InternatlOnal Bureau of F cal Documentation for the United Nations in the late 1990s which examined ~: impact that the UN Model had on 811 international tax treaties concluded ~etween 1980 and 1997, including consideration of a number of the PE clauses . The study also concluded that the OECD Model would have to acknowledge the influence of the UN Model and adopt some of its recommendations. Although the OECD Model has made some changes to its own Model Convention and Commentary in recent years as a result of the UN Model influence, including some amendments to its commentary to Article 5, the recent release of the 2005 version of the OECD Model Convention with no change to the PE article itself suggests that no such explicit acknowledgment is likely to be forthcoming in respect of the PE concept in the near future. It is also evident that one of the critical factors that will affect the outcome of any future negotiations in concluding tax treaties is the stage of development of the other contracting states. It is to be expected that low developing countries will be increasingly more likely to seek to adopt the UN Model approach when negotiating tax treaties in the future, with the aim of maximising the benefits that will flow from the DTA for the developing country. 3.1.9
If there is a PE in the form of a branch, how are t he profits attributable to the PE calculate d?
The first point to note in this regard is that, certainly in Anglo-Saxon jurisprudence, an entity in the form of a company (or corporation) which has a branch in another country only constitutes one taxpayer. In other words, even though for accounting purposes a branch is often treated as a separate entity from the head office of the entity, in a legal sense, a branch and its head office are part and parcel of the one entity. It follows therefore that it is not possible for the head office and a branch to enter into a proper legal relationship for goods to be sold or money to be lent by the company to its branch, or patents or know-how to be licensed in some way by the company to its branch. It is axiomatic that the person cannot enter into contractual or other legal relations with itself. Notwithstanding that, DTAs generally contain the key central directive on which the allocation of profits of a PE is intended to be based. That directive is clearly to the effect that the profits to be attributed to a PE are those which that PE would have made if, instead of dealing with its head office, it had been
dealing with an entity entirely separate from the head office under conditions and prices prevailing in the ordinary market. Although this seems a simple application of good accounting practice, there are many problems that tlow from the idea that a branch is for this purpose to be treated as a separate legal entity. Even though there can be no transactions in a strict legal sense between head office and branch, it is nevertheless necessary to establish the costs to the branch of goods supplied to it by the head office of the enterprise in order to ascertain how much profit of the enterprise is attributable to the branch. The question here becomes whether, in referring to the profits of the PE of an enterprise, the DTAs are merely referring to the proportion of the overall profit made by the enterprise as a whole out of the relevant activities that should be attributed to the branch in question, or whether they are endeavouring to esta blish an independent profit for the branch, which profit will exist whether or not the activities concerned will overall have resulted in profits to the enterprise. The first approach (i.e. the overall profits approach) requires it to be established if the enterprise has made an overall profit out of the relevant activities (some of which have been carried out by the branch) before any profit can be attributed to the branch. By contrast, the second approach (i.e. the independent entity approach) enables the relevant revenue authority to levy tax on the profits of the branch notwithstanding that the enterprise has, overall, made a loss in respect of the relevant activities. To illustrate the distinction, assume the case of a company (China Inc.) which is a resident of China for the purposes of the ChinalFrance DTA. China Inc. manufactures computers which it sells worldwide. China Inc. sells its computers in France through a sales organisation made up of its own employees which operates from leased accommodation in France. The French sales organisation (i.e. the French branch) holds a stock of computers at all times and makes sales on the French retail market which it fulfils from the stock of computers held. Sales in France are always made for the best price that can be obtained on the market. Assume further that China Inc. is experiencing considerable difficulties with its manufacturing operations in China as a result of experimenting with fully automated production techniques, which have been found to be less than satisfactory. As a result, China Inc. 's manufacturing costs are much higher than the average across the industry and indeed are higher than the normal arm's length wholesale price for similar computers manufactured by other Chinese companies. Nevertheless China Inc. invoices the computers shipped to its French sales organisation. The invoice price is equal to the costs of manufacture to China Inc. plus an agreed 20 percent mark-up. The best price for which the computers can be sold on the French retail market is $95, which is less than the invoiced price of the computers to the French sa les organisation ($120) and less than the manufactured costs of the computers to China Inc. ($ 100). However, the price is above the wholesale price for which the French sales organisation might be expected to purchase the
'f I't were a distinctive and separate enterprise engaged in the same mputers I . . . . . cO "1 ctivities under the same Or slmJiar conditions and dealmg wholly or Simi ar a $ ' . . . . . I I . de endently with C.hina Inc. ( 90.). The dlstortlo.n m pncmg IS c ear y In Pd bv the difficulties Chma Inc. IS expenencmg 10 ItS productIOn tech" cause .'th the consequence t hat th e Frenchsai es organIsation cou Id have pur. . h l' h . . ruques, WI e product more cheaply troln an arm's lengt supp ler t an trom Its chase d th head office. '. . If the overall approach is ad?pted then, since no ?verall protlt has ansen to h terprise conducted by Chllla Inc. from the sale III France of the computers, ~h:re:will be no profit to be apportioned or allocated between the head office in China and the French sales organisation. . . On the other hand, if the independent entity approach IS adopted, t~e. POSItion would be quite different, since the arm's length whole.sale pnc.e ot Similar computers sold in the open market was less than the pnce obtam~d by the French sales organisation on the sale of the computers m the retaIl market. Thus, a profit on the sale was made by the French sales organisation, which profit would be attributable to that organisation (PE) and thus taxable In France. The fact that China Inc. experienced a loss overall on sale of the computers would be irrelevant. The preferred view is clearly the overall profits approach, at least where the analysis is based on the strict wording of the relevant DTA. More specifically, the China/France DTA stipulates that "if the enterprise carries on business in the other Contracting State through a PE situated therein, the profits of the enterprise may be taxed in the State of the PE". This clearly has a quantitative element embedded within it, namely that the profits attributable to the PE must at the same time be profits made by the enterprise. This understanding of the situation leads to the conclusion that, as a matter of principle, profits from intra-enterprise sales should not be attributed to a PE unless such sales also generate benefit for the enterprise as a whole. Or, to put it another way, the first and foremost guideline for a division of profits in accordance with Article 7 (of the OECD Model Convention) must be the principle that all that can be apportioned and attributed to the PE of a multi-national enterprise must come out of the "profits of the enterprise" as a whole. It is only within this framework that the arm's length principle may be applied. The aim of this principle is to ensure that the element of profits of a multi-national enterprise is attributed to its PE in a manner taking into account who generated the profits. Accordingly, Article 7 does not base the apportionment of the profits between head office and PE on an absolute, unrestricted arm's length principle. Attribu tions of profits under Article 7 can, consequently, be made under the arm's length rule only to the extent that this is compatible with the fact that the enterprise is one single legal and economic entity
(see Vogel para 68, p. 342) which must in that unified sense have an overall profit.
3.1.10
, len th price equal to an independent dealer's price and the resale by the ar!l1 s d in the source jurisdiction of the relevant goods to the customer m the , ' ' dee!l1 e ur junsdJCnon" ' SO cehi way in calculating the profit attributable to the sale of the goods m the s ' f h In t 'urisdictio n through the agent (the deemed PE 0 the company), t e mansource l'ng costs of the goods, any manufacturing profit and any selling profit ufacturl ' State would be exclude d . 'b table to activities in the other Contractmg attn u b ' ' ' 1 scertaining the expenses that may e ta k en mto account ' md etermmmg h n ;ofitS of the company one would only be concerned with expenses incurred ~ye ~e company and not wit~ expenses incurred by the dependent agent on the t'S own behalf in carrymg on Its busmess. The expenses of the company en of course, inc1u d e t h e comrrusSlOn ag " " agent m would, pal'd by t h at company to ItS
pi
If there is a PE in the form of an agency, how are the profits attributable to the PE calculated?
The previous question addressed the issue as to the potential attributio tpr~fIts t~ a PE where that PE is a branch of a parent company in nho JunsdlCtlon_ anot er part of entl-ty for all intents and purposes,ism h-Clearly h" a branch, b r the es p-e c t f w IC ,It IS a ranch_ In another words, a branch is merely a segment of all entlty_ an Over-
°
By w~y of contrast, where an agent is deemed under the terms of the DTA to be a PE m the other Contr,actmg State of an enterprise of the other Contractin Sta~e, the agent IS, for all mtents and purposes, a separate legal entity from th~ entity conductmg the enterpnse_ In particular, the agent will in these c' sta nc_es b~ con d ' t h e agent's own business with a view to profit. Ircumuctmg This will ?e the case whether the agent is an agent of dependent or independent,status, smce m legal t~rms eve~ an agent of a dependent status is a separate en~lt~, unless of course his work IS so intricately interwoven with that of the p~I,nClpal that the,agent in fact becomes an employee. Excluding that last possibility, an agent m all other circumstances (whether of an independe t dependent nature) will be treated as a separate entity from the princi;al respect of whom the agency IS operating. An ,agent (again wh~ther dependent or independent) would ordinarily be c~argmg a commiSSIOn m respect of the sale of the company's goods or the proVISIOns of the company's servICes. That commission would be the inflow which the agent would se,cure for the provision of his services and would be designed to meet the agent s own expenses m conducting that agency activity. These expenses would extend, for example, to salaries and wages which the agent would pay to ItS employees, rent, and other expenses associated with the conduct of the agency business. E,ve~ ~hough the agent is intending to operate the agency on a profitable basIs, It IS clear that none of the profits made by the agent in carrying on that busI~ess could be ~een as the profit of the company attributable to the company ~ deemed PE I,n t,he ,so,urce jurisdiction and therefore taxable to the company m the source Junsd,lctlOn. Rather, the idea that underpins the DTA in the context of an agency PE IS that ,:"e are seeking to tax profits arising to the company from the sale of the goods m the source jurisdiction. This is not the profits den:ed by the agent but rather the profits derived by the company th t seek mg t 0 tax. Th'IS WI'11'mc 1u d e an amount that is determined as the a we are selling profit whICh should be taxed ill the source J' uris diction . Of course , th e commis' _ _d h sIOn pa~ to t e, agent should b~ deducted from that profit so as to ascertain the net sellmg profit to be taxable m the source jurisdiction. Thus, in order to arrive at the relevant figure, one must treat a sale by the company, through an agent, to a customer m the source jurisdiction as if it h d been a sale by the company to its deemed PE in the source jurisdiction at :n
~~
the source jurisdiction. This approach has the advantage of producing much the same result whether the goods of the company are sold in the source jurisdiction through a branch organisation or a dependent agent contracting on behalf of the company. The above may well be illustrated by way of an example. A company which is a resident of the United Kingdom markets its goods in China through an agent that carries on its own business but has and habitually exercises in China an authority to conclude contracts for the sale of the company's goods on behalf of the company. The agent acts for no other principal, and it would seem that as a result the agent is an agent of dependent status and therefore is likely to constitute a deemed PE in China within the meaning of Article 5(5) of the China/UK DTA. However, although the agent is a dependent agent, it would still be carrying on its own agency business. The agent's business does not, it is submitted, necessarily become part of the business of the company merely because the agent is an agent of dependent status. If the UK company derived a profit in relation to the manufacture and ultimate sale of the product in China of $1M and paid the Chinese agent $100,000, the question is whether any of the $900,000 net profit is attributable to the PE. Of course, the fact that the Chinese agent has been paid $100,000 may well be the end of the matter, since this may represent an arm's length full consideration for the activities carried out in China and consequently China would have no additional claim in relation to any of the net profits. However, it may well be the case that the profits of the UK company that are derived from the activities in China are not adequately reflected in the commission paid to the Chinese agent, and some amount other than the $100,000 commission should be taxed in China. This would be determined by considering what would have been paid on an independent dealer basis to the deemed PE in China on an arm's length calculation. If this amount differs from the $100,000 amount, then that additional amount will need to be taxed in China as if it were the profit attributable to the PE. In other words, while the payment of a commission to the Chinese agency is
1\50
The allocation rules
Double Taxation Agreements
51
relevant, it is not conclusive in determining whether profits are attributable to the Chinese PE. This can only be determined by making a proper calculation on <1n independent dealer basis of the profits which could be attributed to that PE and, if that amount is in excess of the amount paid to the agency, the additional amount may be taxed as profits attributable to the PE in China as a result of the application of the ChinalUK DTA.
Of course, having regard to the analysis in section 3.1.9 above, if the overall fits approach outlined there is correct, there would need to be an overall ~~~fit (on the sale of the ultimate product) to the enterprise as a whole, before anything could be attnbuted to the PE.
3. 1. 1 1
Wh at is the allocation rule? 3.2.1 DTAs generally contain a provision headed" Associated Enterprises". Such articles are usually based on the standard clause to be found in the Model Convention Article 9 (see for example Article 9 of the UKfUS DTA and Article 8 of the China/France DTA). The design and structure of the "associated enterprises" Article in most treaties camouflages the fundamental point that, for the relevant article to apply, three basic conditions must be satisfied:
What about joint venture operations?
The principles outlined above apply equally in the context of a joint venture ("]V") operation. A joint venture in this context is essentially an agreement between two Or more parties under which the parties agree to each commit certain product, goods, services or other assets to a designated project. Under the agreement the parties agree to share output from the venture in certain predetermined proportions. Critically, in most jurisdictions such a venture should not be viewed as a partnership for tax purposes as the parties are not in receipt of income jointly. Most commonly such ventures arise in the context of mining activities where, for example, one party commits hard assets such as mining tenements and the other commits know-how and technology to enable development and exploitation of the mining tenements. The output from the development and exploitation of the tenements is then shared between the parties in proportion to an agreed formula. That agreed formula would be based on an agreed assessment of the value each party has brought to the table at the outset. A]V may be incorporated, in the sense that the parties form a separate legal entity to conduct the ]V operations, or it can be unincorporated, with the parties merely acting together (possibly through an appointed manager) to carry out the ]V operations effectively. These days incorporated]Vs appear to be more popular. In determining the tax outcome of a mining]V, it would first need to be determined whether the]V operation in the local jurisdiction constitutes a deemed PE in the source jurisdiction of the members of the ]V. So, for example, if the members of the ]V set up an incorporated entity in the source jurisdiction, it would be most likely that the]V company would be treated as a deemed PE of the members in that source jurisdiction. In that situation, it would be necessary to ascertain the profit arising to the non-resident members of the ]V company as a result of the activities of the ]V company. Depending on the nature of the ]V company's activities, the market value of the product subject of the]V immediately before the activities carried out by the]V company would be subtracted from the market value of the product derived from the]V activity in order to ascertain the gross value added by the]V company. From that amount, one would subtract the cost to the]V company of carrying out the ]V activity, and this would determine the net value added by the]V activity. That amount would then be subject to tax in the source
3. 2
Active income: associated enterprises profits
• There has to be the involvement of an enterprise in one Contracting State directly or indirectly in the management, control or capital of an enterprise in the other Contracting State; and • certain conditions (called "related party conditions") must exist between the two enterprises which differ from those that might be expected to operate between independent enterprises dealing wholly independently from one another; and • profits might have been expected to accrue to one of the enterprises, but by reason of the related party conditions have not so accrued.
If all three conditions are met, then a reallocation of profits is authorised by the terms. of the article such that profits which might have so accrued to an enterprise but have not so accrued because of those related-party conditions maybe included in the profits of that enterprise and taxed accordingly. This article to this point raises a number of interesting issues. The article in its terms applies only to separate enterprises, and clearly is fOcusing on the possibility of a parent/subsidiary dealing or of dealings between two subsidiaries of the one parent. It does not seem to address the possibility of dealings between a company and its foreign branch unless the term "enterprise" IS sufficiently broad to cover a mere branch. . There is an argument that this provision in its terms is a mere enabling proviSion and that there can be no reconstruction of profits under its provisions alone. . According to this argument, all that the "associated enterprises" article does IS to entitle a Contracting State to apply its own domestic provisions (for example~ the domestic transfer pricing laws of any given Contracting States) without ~ctlllg in any way contrary to the provisions of the relevant DTA. On this basis, III the absence of domestic legislation entitling a Contracting State to reconStruct nrnfitc
rhp
n
.. ,::.C" .a> n ..... .o
,...{.
...,. ............
+-: . . . 1. . . : ........
rVT'A
....1 .... .... 1: ............ . : ... 1...
..... .................... : ........ ..... ....1
52
The allocation rules
Double Taxation Agreements
enterprises as outlined above would not 'Confer power on that Contracti ' ng St ate ' ar~smg , , as a ~esu. It 0 f dealings between two as ociated to reconstruct pro f Its enterpnses. Arguably, thIs posltlon IS mo t sound so far at least as juris~l'ct ' , , IOns are concerned where as soon as a DTA h;as effect, its provIsiOns have the I fo rc f law in that Contracting State. In those s: tuations, the DTA becomes paJ{):t of ~~e domestic law, and arguably enabling leg. slation would ~ot ?e req~r~d tOo imp lemen,~ pr,ovlsiOn~ of the artlcl,e as the artl Ie is quite SPO:lflC 10 provldmg Uthat the profits 10 question may be IOcluded m he profits of the enterprise an d taxed accordmgly. The argument referred to in the im ediately prectding paragraph raises further issue as to what happens in circ41mstances whue the Associated:ti Enter~ prises provision in a DTA is narrower in ocus than the-provisions of the ,. domestic law of a Contracting State. An exa mple would a situation whflere the domestic law of a Contracting State provitdes for a recon ruction of profit:lts in circumstances where parties are not deali1ng at arm's Imgth but the Ass~ociated Enterprises article specifically requires patrticipation in the management, control or capital of one of the enterprises by the · other or partJOpation by a thir d enterprise in the management, control or capittal of both. Insuch a case, the doomestic law of the Contracting State would be bnroader than thHerms of the DT~A. On one view the greater breadth of th~ domestic lav is to apply on duhe basis that the DTA provision is not an exclusi"*Ve or exhaust! code. The other view would be to the effect dhat the DTA J1fovision is an exh,n a ustive or exclusive code which displaces the ap plication of d domestic law. Clearly, the view adopted in internatiOtn al tax adminslfations is to givrne effect to the domestic law in such cases but, as . a matter of subitantive interpretttation, the argument that the "associated enterrprises" articl~ m the DTA covreers the field and provides an exhaustive code wl"hich completely displaces the do mestic law has more cogency.
3.2.2
Are compensating adjustments . provided for?
T he application of the "associated enterl prises" articlt ll such a fashioIJIn as to reconstruct profits of one enterprise coul clJ in the abseme f any adjustmeIJ!nt give rise to taxation of the same income in the hands of diffllrmt persons, a phtJ>lenomenon known generally as economic doubl4.e taxation. T li could arise, for t11 example, where an enterprise of one Contracti nng State (Stat Al has its profits roJ"evised upwards as a result of the "associated entQerprises" artiJrand is therefore '.e liable for tax on an amount of profit that has anlready been med in the hands t of its Associated Enterprise in the other Contr ~acting State 6ute B). In such a la case, State B is in some DTAs required to maloce an appropLa:e adjustment so (0 a s to relieve that double taxation. This is usual lly provided rin a second pro vision in the "associated enterprises" article - - see for exarrrJe Article 9(2) dl o f the US/UK DTA, Article 9(3) of the AustraliaAIUK DTA an( icle 9(2) of the'le AustralialUS DTA.
53
of these sub-articles requires State B to make an appropriate adjustment Each t of the tax charged therein on those profits. In each case, the pro[ 0 the ~mounh effect that in determining the adjustment, due regard shall be , IS to t e , viSIon h ther provisions of each DTA and the competent authorities of the , necessary consu It eac h ot h er. ha d to teo ting States shall if tW~ ~~:tr~~ina!France, China/Germany and ChinaIUK DTAs, there is no , t procedure provided for. In such cases, the affected taxpayer may tmen ' Ie 25 0 f adJus d Iy upon the mutual agreement procedure (for examp I e Artlc nee to re k I' f . I ' . ' Agreement) to see re Ie 10 re ation to secunng an appropnate [he China!UK adjustment. ... . . . Even where an adjustment proVISiOn IS proVIded, the adJust~ent IS not.auto. nd will only be made if State B conSIders the ftgure of adjusted proftt cormatlC a " recdy reflects what the profits would have been If the transactiOn had been at arm's length. 3.2.3
W hat if there is inadequate information available to determine profits?
In some DTAs there is further provision (see for example Article 9(2) of the AustralialUK DTA and Article 9(3) of the AustraliaJUS DTA) which deals with a situation where inadequate information is available to the competent authority of the Contracting State to determine the profits accruing to an enterprise. In that situation, that Contracting State can apply its laws to determine the tax liability of the person concerned without being affected by the "associated enterprises" article, and that law shall be applied having regard to the information that is available consistently with the principles contained in the "associated enterprises" article. In the reconstructed AustralialUK DTA, the authors have included the "associated enterprises" article as an allocation article in its own right and have recast its structure and design more in accordance with the analysis provided above.
3.3
Active income: depe ndent personal services
3.3. 1
Background
Where a taxpayer derives income from personal services through employment, the domestic tax law of the jurisdiction where the services are performed will ~r~ally seek to impose tax. This will invariably be based on the premise that t e tncome generated from services is sourced where the services are performed. Where such personal services income is derived from services performed in o~e country by a person who is a resident of another country, double taxation o the personal services income could arise if the residence jurisdiction imposes ~ tax on worldwide income in respect of residents and the source jurisdiction IInpOses tax on the same income by reference to the source of the income.
54
Double Taxation Agreements The allocation rules
In order to avoid this double taxation, a number of possibilities arise: • The r~sidence country might unilaterally provide double tax relief, through a foreIgn tax credit mechamsm (e.g. United Kingdom); • The do.mestIC tax law of the residence jurisdiction could provide unilateral tax relIef by exempting certain types of foreign personal service income (e.g. Australian section 23AG ITAA 1936); • A double tax agreement may exist between the two Countries under which the Source ~ou~try is not permitted to tax the personal services income unless certaIll mIllImum requirements are met (e.g. USfUK DTA article)· or • There is a ~ouble tax agreement between the two Countries under which bot~ countr~es may tax but the residence country must give relief through a fOfelgn credIt tax mecharusm (e.g. Article 23 of the OECD Model DTA). 3.3.2
What is the allocation rule - DTAs?
The mechanism chosen under most model double taxation agreements is similar structure.
III
Under most model DTAs the residence country is given the sole right to tax unless the employment is exercised in the source country. However, thIS genera! rule is overrid?en by a subsequent provision which preserves the sole taxIllg nghts of the resIdence jurisdiction unless a certain minimum atta~hment to the source state prevails. Essentially, this is achieved by an artIcle whICh reads along the following lines: ':Notwithstanding ~he provisions of paragraph 1, remuneration derived by a resIdent of co.untry X III respect of an employment exercise in country Y shall be taxable only III country X if: a.
b. c.
The.recipient is present in country Y for a period or periods not exceedIllg III the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned; and The remuneration is paid by, or on behalf of, an employer who is not a resIdent of country Y; and The remuneration is not borne by a permanent establishment ("PE") which the taxpayer has in Country Y."
It is worth noting in particular that these are cumulative conditions which must all be satisfied if the employee's personal services income is not to be taxed III country Y in the paragraph referred to above. 3.3.2.1
Paragraph a
In analysing the three con~itions referred to above, it is worth noting that paragraph a IS a purely objective test which hinges upon the length of presence in count~y Y. The terms of this paragraph require careful consideration. Sometimes It. refers to "any 12-month period", sometimes to a specific year of income - the dIfference can be critical.
3.3.2.2
55
Paragraph b
Paragraph b can be more problematic in practice since commonly the remuneration is paid in a formal sense by a local employer, and arguments will often be put that it was made on behalf of a non-resident employer so as to fall within the terms of the seco nd condition. The veracity of such claims will need to be tested more fully by an examination of the precise factual circumstances. In particular, if paid by a local employer, there will need to be tangible evidence that there has been an on-charging to the non-resident employer or a reimbursement of the expenses by the non-resident employer to the local employer. 3.3.2.3
Paragraph c
Paragraph c is also problematic in that, as drafted in the paragraph above, the question arises as to whether the remuneration is "not borne by a PE which the employer has in country Y'·. The exact meaning of "borne by" has been questioned, and differing views appear to exist. In Commissioner or Inland Revenue v. JFP Energy (1990) 12 NZTC 71 76, the New Zealand Court of Appeal held that, in order for a New Zealand PE to have borne the remuneration, it must have actually allocated the remuneration expense to the New Zealand PEin the books of account. It was not sufficient to interpret the concept "borne by" simply as "attributable to" the PE. The same approach has also been adopted by the Supreme Court of the Netherlands: December 9, 1998, No. 32700, bI999/267. That view has not received unanimous endorsement. In an article published in 2000, De Broe et al. argued that if "the salary cost is correctly attributable to the PE, we believe that the country where the PE is situated can impose tax on the salaries by virtue of (condition C) whether or not the salaries were actually charged to the PE ... and regardless of whether the PE chooses to claim the deduction to which it is entitled," see De Broe et al., "Interpretation of Article IS(2)(b) of the OECD Model Convention", 54 Bulletin for International Fiscal Documentation (10) October 2000,383,392-3. It would seem from a review of the provisions that De Broe et al. failed to recognise the words used in the relevant DTAs are "borne by" and not "attributable to". Each phrase has a quite different meaning from the other, and it does not seem unreasonable for courts in arriving at their conclusion to adopt the well-founded principle of statutory interpretation of placing the ordinary natural meaning upon words which are not otherwise statutorily defined. 3.3.3
How do the sample DTAs deal with these issues?
In the AustraliafUS DTA the equivalent provision is Article 15 and it is worth noting that the equivalent to condirion c discussed above says "the remuneration is
56
The allocation rules
Double Taxation Agreements
not deductible in determining taxable profits of a PE, a fixed base or a tradeable business which the employer or company has in that other state". The distinction between "not borne by" and "not deductible" should not be overlooked. The AustralialUS DTA sets a higher benchmark since it is conceivable that an amount would not be borne by a PE but could be deductible to it in a conceptual sense. This would apply even if it were not in actuality deducted in determining the taxable profits of the PE. In that situation, source country taxation is permissible under the AustralialUS DTA but not under the provision discussed above. In the AustralialUK DTA the broad equivalent article in this DTA is Article 14 and it is drafted in broadly similar terms to the AustralialUS DTA. In the UKlUSA DTA the equivalent article in this DTA is to be found in Article 14, and the relevant paragraph c says "the remuneration is not borne by a PE which the employer has in the other state".
personal services. Each DTA also defines "business" in the nlore expansive manner as in the OECD Model (see AustrahalUK DTA Article 3(1)(m) and UKIUSA DTA Article 3(1 )(d)) Thus in these DTAs such activities will be covered by the "business profits" article of the respective DTA (Article 7 in both cases). Interestingly, the AustralialUS DTA, which was negotiated and concluded after the change to the OECD Model Tax Convention, includes within its terms a specific independent personal services article in the form of Article 14. This article follows the conventional format whereby only the residence state can tax income that is derived by an individual from the performance of personal services in an independent capacity unless such services are performed in the other Contracting State and either: a)
b)
3.4
Active income: independent personal services
3.4.1
Background
Dependent personal services are usually distinguished in DTAs from independent personal services. The "independent personal services" article has been deleted from the OECD Model Convention as from 29 April 2000. The rationale for this deletion arose from a report entitled "Issues related to Article 14 of the OECD Model Tax Convention". The decision was based on the view tha t there were no intended differences between the concept of PE as used in the "business profits" article and fixed base as used in the "independent persona l services" article or between how profits were computed and tax was calculated according to which of the business profits or independent personal services articles applied. In addition, it was not always clear which activities would fa ll within the business profits article as opposed to the independent personal services article. In addition, in order to reflect this change, the definition of business in Article 3(1)(h) of the OECD Model Convention (i.e. the general definitions article) was amended to include "the performance of professional services and other activities of an independent character". Thus, the effect of the deletion of the "independent personal services" article is that, in such cases, income derived from professional services or other activities of an independent character is now dealt with under the "business profits" article. 3.4.2
How do t he sample DTAs deal with these issues?
Both the AustralialUK and the UKIUS DTA have adopted the OECD Model Tax Convention methodology, and they have no provision dealing with independent
57
the individual is present in that other State for a period or periods aggregating more than 183 days in the taxable year or year of income of that other State; or the individual has a fixed base regularly available to him in that other State for the purpose of performing his activities, in which case so much of the income as is attributable to that fixed base may be taxed in such other State.
It should be noted that the article only deals with individuals as opposed to companies or other artificial entities. The title to the article is "Independent Personal Services" but the actual text refers to "personal services in an independent capacity". Either way, it would seem that the type of services covered would be professional services or other activities of an independent character. Clearly this would not cover professional services which are performed in an employment capacity. For example, a physician working as an employee of a hospital would provide what one would view traditionally as professional services but, in view of the employment relationship, Article 15 dealing with dependent personal services is the more applicable provision. This also raises overlap issues as to the relationship between the "business profits" Article (Article 7) and the "independent personal services" Article (Article 14). It would seem that Article 14 would override Article 7, particularly having regard to the provision in Article 7( 6) to the effect where business profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article. The concept of a "fixed base" has given rise to much debate in the past. Thus, for example, where a US resident being a professional person goes to Australia to perform certain professional work in an independent capacity, that person might rent a self-contained service apartment from which he or she regularly Works while in Australia. Whether it can be said that the person has a "fixed base regularly available to him in Australia" would depend on the circumstances. However, where the person only visited Australia on one occasion and only
58
Double Taxation Agreements
rented the apartment for the length of that stay, it would seem that there is unlikely to be a fixed base regularly availa ble even if the stay lasted for a considerable period of time, such as four months. It ~s worth noting i~ this context that where, for example, a US-resident person IS benefICially entitled to dividend interest or royalties having a source in Australia and that person performs professional services from a fixed base in Australia and the holding is in respect of which the dividend is paid, the indebted~ess III respect of which interest is paid or the property or right in respect of whICh the royalties are paid or credited, is effectively connected with the fixed base, Articles 10, 11 and 12 of the US/Australia DTA dealing with dividends interest or royalties respectively do not apply. In such a case Article 14 (inde~ pen~ent p~rson.al services~ (or Article 7, business profits) will apply to give Aus~ralIa taxlllg nghts. As It is Article 14 that is appropriate in view of the Illdependent personal services that are being performed and in relation to which there is a relevant connection, Australia will be entitled to tax so much of the income as is attributable to that fixed base without restrictions imposed by Articles 10, 11 and 12. These outcomes are dictated by Articles 10(5) 11(6) and 12(3) respectively. ' .With respect, ~t would seem that the OECD Model Convention approach of elImlllating the Ill~ependent personal services article and leaving the taxing nghts to be determilled solely by reference to the business profits article is eminently more practical and significantly less complicated.
3.S
Act ive income: fringe benefits
"Fringe benefits", generally speaking, refers to benefits, provided in the context of an employment relationship, that are provided otherwise than in cash. This would cover items such as cars used at least partially for private p urposes, low- or nO-lllterest loans and the like. Most countries that tax such "income" do so broadly on the basis that the cash equivalent or deemed cash equivalent amount is included as wages and taxed as such. Some of these countries often fail to capture the full value of the benefit, as it can be difficult to quantify precisely and apply ordinary income tax. However, where that process is followed, the international tax consequences are relatively straightforward, since the dependent personal services (I.e. employment) income allocation article should normally apply. The general effect Isthat, If the employee is a resident of one of the Contracting States and the servICes to whICh the benefit relates are performed in the other Contracting State, that latter state may tax the benefit unless: the employee is present in that other State for less than 183 days in any consecutive 12-month period; and • the remuneration derived by the employee is paid by a party who is not a resident of the Contracting State in which the services are performed; and
The allocation rules
59
the fee associated with the performance of the services is not deductible to a permanent estab lishment ("PE") of the payer of the fee in the Contracting State in which the services are performed. However, for some years a number of jurisdictions (most notably Australia and New Zealand) have applied a formalised fringe benefits tax (FBT) to the derivation of fringe benefits. Under this relatively unusual tax arrangement, the FBT is levied directly on the employer at a Hat rate broadly equal to the top marginal tax rate applicable in the relevant country. The benefit is then exempted in the hands of the employee. This process is somewhat counter-intuitive since the person who receives the benefit of the FBT, being the employee, is not the person who is being directly taxed in respect of the receipt. Nonetheless, this process has a huge administrative advantage at the domestic level since an employer with, say, 1,000 employees lodges only one FBT return. The responsible revenue authority would be required to deal with one return not 1,000 returns in respect of the FBT provided. Of course there may be cross-checking against other returns, but the primary information required is contained in one document alone . In the international context, dealing with fringe benefits through a separately articulated FBT raises multiple issues. This would cover, for example, certain jurisdictional issues such as: Does it matter if the employer or the employee or both are not resident in the jurisdiction? Is the only relevant consideration the fact that the services are performed in the local jurisdiction? Without answering these questions, the response has been to incorporate a special allocation rule in DTAs where countries that have adopted FBT in this manner are involved. Thus the AustralialUK DTA specifically provides in Article 15 that where. except for the application of this Article. a fringe benefit is taxable in both Contracting States. the benefit will be taxable only in the Contracting State which would have the primary taxing right over that benefit if the value of the benefit were paid to the employee as ordinary employment income
. Effectively this means that Australia can impose its FBT on benefits if AustralIa ha s t h · .. . respect 0 f the associated salary or wages. e pnmary taxlllg ng h ts III Under the terms of the DTA, Australia would have that primary taxing right if AustralIa has taxing rights under the DTA in respect of the remuneration for the relevant employment, and the United Kingdom is required under this DTA to allow relief for any taxes imposed in respect of sllch remuneration by Australia. Thus,1I1 a case where a UK resident performs services in Australia where the
60
The allocation rules
Double Taxation Agreements
person is in Australia for a period in excess of un days, Australia can tax the lI1come generated from the performa nce of those services under Article 14. Therefore for FBT purposes, under Article 15 Australia has the primary taxing right and is then entitled to tax fringe benefits connected with those services. In such a case the United Kingdom cannot tax those benefits either to the employer or to the employee. Australia's FBT has also been tackled in the DTA with New Zealand, but no other. Thus, with no FBT provision in the AustralialUS DTA, leaving it completely outside that agreement, FBT does not appear to be a tax covered by that DTA. Therefore a US resident deriving Australian-source fringe benefits may find himself subject to US income tax and his employer may be subject to Australian FBT without any relief for the resulting double taxation. This may be the outcome for aU DTAs between, on the one hand, countries that impose "employer level" FBT and, on the other hand, countries that impose "employee level" income tax on fringe benefits.
3.6
Passive income articles
3.6.1
What types of income are dealt with by the passive income articles?
The remaining "basket of income" articles immediately following the active income articles generally deal with specific types of passive income received by a taxpayer from a foreign source. These passive income articles generally deal with dividends, interest and royalty amounts that are received by a non-resident of a source country, and that are not effectively connected to a PE in the source country; annuities and pensions; and various types of income from the holding and alienation of real property. These are discussed further below.
3.6.2
Under what general circumstances are these articles relevant?
A recipient taxpayer will generaUy wish to access DTA relief contained within the passive income articles where dividends, royalties or interest have been paid to a non-resident of a source country; the domestic law of the source country imposes withholding taxes on payments of such passive income paid by a resident to a non-resident; and the income is not exempt or excluded from taxation in the hands of the
61
recipient taxpayer in the country of residence (e.g. the country of residence operates a worldwide jurisdictional nexus for residents, and no relevant exemption exists). Consequently, withholding taxes will have been suffered in the country of source, and the gross amount of the income will also be included in the assessable income of the taxpayer in the country of residence. This is an example of the incidence of international double taxation where the same income has been taxed twice in the hands of the same person: once by way of withholding taxes on a payment to a non-resident entity from an entity resident in the other country; and once on the worldwide basis of taxation in the country of residence.
3.6.3
Why do countries operate a system of withholding taxes on passive income?
Payments of passive income to non-residents often attract tax by deduction at source. The practical reason for this treatment is that, if coUection were effected on an assessment basis, the revenue authorities in the source country would be seeking to collect tax from a non-resident over whom the authority would have little or no effective coUection capability. For that reason the tax charged at source usually constitutes a payment of final tax paid in advance. Many DTAs were negotiated before the more sophisticated "exchange of information " and "assistance with collection" articles were anticipated and included in DTAs. These measures may now provide greater assistance to detect and collect unpaid taxes, but there is no doubt that a final withholding tax at source remains the most tax-efficient and effective way of imposing and collecting tax in circumstances where the recipient is non-resident. 3.6.4
Does the payment necessarily need to have a source in the country of source?
Not always, although the OEeD Model does, for example, anticipate that the lOterest article will apply only to interest arising in the country of residence of the paying entity. .Although non-residents generally are often taxed on a source basis, most Withholding tax regimes are not dependent on source, and a payment by a resident in the country where the payment originates to a non-resident may be a Sufficient requirement for the withholding tax rules to operate. For example, the withholding tax regime in Australia is not dependent on an ~ust~alian source, with some exceptions for royalties. Withholding tax must e .wIthheld merely where a resident makes a relevant payment to a nonreslde~t in circumstances where there are no applicable specific exceptions or exclUSions.
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Double Taxation Agreements
3.6.5
Do passive income articles generally allocate the taxing rights to one country?
~o.
Most bilaterally negotiated passive income articles generally adopt special DTA revenue-sharing rules as accepted by the OECD Model. That is, these passive income articles will generally • allow the country of residence taxing rights over the income; and limit or reduce the rates of withholding tax that would otherwise be imposed by the domestic laws of the source country.
These rules therefore generally still permit the country of source to impose withholding tax, albeit at a limited or reduced rate, on passive income paid to non-residents. The recipient will receive the passive income net of the tax withheld after applying the (potentially reduced) relevant DTA rate. These DTA rules do not prevent the country of residence also subjecting the gross amount of the income to taxation in the hands of the recipient, but may result in a lower incidence of international double taxation (before any other credit or exemption relief). Of course where withholding tax in the country where the payment originates is reduced to 0 percent, sole taxing rights are effectively conferred on the residence jurisdiction. This has become somewhat of a trend in recent times in relation to dividends paid by a DTA country company to a DTA partner company that owns 80 percent or more of the paying company. Some restrictions apply (for example, the recipient may be required to be owned predominantly by residents of the two DTA countries), but this is effectively a ceding of taxing rights to the residence country. 3.6.6
Can the articles apply even where there is no taxation in the country of residence?
Yes. The articles do not specifically require the country of residence actually to impose taxation on the income received. For example, under the Australian domestic taxing provisions, dividends received by companies in respect of a foreign shareholding of 10 percent or greater (non-portfolio dividends) are currently excluded from taxation in Australia. This, however, does not prevent the reduced DTA rate of withholding taX being applied by the country where the dividend originates, since DTAs are usually read as one with the domestic taxing laws of a country. This represents a case where there may be recourse to a DTA without the incidence of international double tax.
The allocation rules
3.6.7
63
What if there is no DTA in place between the country of source and the country of residence?
The withholding rates of tax in the domestic tax law of the country of source must be applied to the payment to the non-resident without restriction. 3.6.8
How is tax relief given for amounts still subject to international double taxation?
Where there is no DTA relief at all, or the reduced DTA withholding rate is greater than nil, an incidence of international double taxation remains. In such circumstances, the recipient taxpayer must rely on the "elimination of double taxation" article in the DTA, which generally requires the country of residence to provide a form of relief against international double taxation. The OECD Model DTA anticipates that the two countries involved will conduct bilateral negotiations to establish whether either a credit method or an exemption method is accepta ble or appropriate to provide international double tax relief. These DTA provisions are generally negotiated to be read in conjunction with the unilateral double taxation relief provisions (if any) that exist in the domestic tax law of the country of residence. As such, the DTA relief will generally allow access to the double tax relief anticipated within the domestic laws of the country of residence. 3.6.9
What if the DTA and domestic provisions of the country of residence do not provide for any method of unilateral double tax relief?
If there is no elimination of double taxation by way of a credit or exemption method, the taxpayer must resort to an application to the competent authority of the country of residence under the procedures available under the mutual agreement procedure article. 3.6.10
How does a credit method of unilateral double tax relief generally operate?
A cr~dit method of unilateral double tax relief generally allows a credit for the
for~ign withholding taxes paid in the source country against the tax paid in the
reSidence COuntry on the same amount of income. This form of credit relief is often restricted to the lower of the foreign tax paid Or the domestic tax attributable to the foreign income. For example, where the Withholding tax rate is 10 percent but the tax payable in the country of residence amounts to 8 percent, the foreign tax credit will be restricted to the lower amount with an "excess foreign tax credit" of 2 percent.
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Double Taxation Agreements
The domestic provisions of some countries may allow such "excess foreign tax credits" to be carried forward to set against future foreign income, but not all countries allow this. The provisions adopted by different countries may differ substantially. For example: • In the United Kingdom, foreign tax credits are generally available equal to the lower of the foreign tax paid and the UK tax attributable to the foreig n income. Excess foreign tax credits may be carried forward. In the case of dividends, where a taxpayer has a greater than 10 percent shareholding, foreign tax credit relief may also be available for the "underlying tax" paid on the profits out of which the dividends were paid. • In France, the application of credit relief will either be the adjustment of the effective rate of tax or the calculation of a tax credit amounting to the tax paid outside France. • In Australia, revised foreign tax offset rules took effect from July 1, 2008 and allow a foreign tax offset for foreign tax paid in an income year up to a certain limit. Excess foreign tax credits arising that are not used in the income year may no longer be carried forward. 3.6. 11
Can relief for underlying tax be available for royalty and interest payments?
No. Unlike dividends, interest and royalty payments do not suffer from economic double taxation. That is, they are not taxed in both the hands of the payer and in the hands of the recipient. It is only dividends which are paid from distributable profits upon which income tax or corporate tax has already been paid. 3.6. 12
How does an exemption method of unilateral double tax relief generally operate?
The exemption method, which is generally more unusual within DTAs, exempts the income from taxation in the country of residence. However the OECD Model does anticipate the country of residence taking into account the exempted amount for the purposes of calculating the tax payable on all other remaining income subject to tax in the country of residence - a concept known as "exemption with progression". 3.6.13
Under what sort of circumstances may DTA relief be unavailable?
The incidence of international double taxation may only be dealt with under a relevant DTA article where the following conditions are also satisfied:
The allocation rules
65
the source country and residence country have negotiated a relevant bilateral OTA which is in force at the time of the payment; the taxpayer IS covered by the DTA; and the tax is covered by the OTA. Where each of these conditions is satisfied, the taxpayer may generally apply the provisions of the relevant article (unless specific exclusions apply). 3.6.14
May there also be specific provisions within the articles precluding DTA relief?
Yes. There may also be specific provisions within the relevant DTA itself that limit or preclude the application of the DTA relief otherwise available. For example: The royalties article within the UK/France DTA contains an anti-abuse clause precluding the application of the other provisions of the article if the right or property giving rise to the royalties was not created for bona fide commercial reasons. The royalty and interest articles within the UK/Australia DTA preclude the application of the DTA benefits if the main purpose of the creation or assignment of the debt claim, or the rights on which the royalties are paid, was to take advantage of the articles. The interest and royalties articles within the UK/Australia and the US/ Australia DTAs contain clauses which restrict DTA relief where there is a "special relationship" between the payer and beneficial payee only to the amount that would be expected to be paid in the absence of the special relationship. Tlus type of provision is anticipated in Article 12(4} of the OECD Model Tax Convention. 3.6.15
How can all t hese steps be summarised?
The following steps summarise the approach to be adopted: Establish the application of the domestic laws of both countries to the amount of income received, without considering any modifications that the relevant DTA may apply (and determine the appropriate domestic rates of withholding tax of the country of source). • Establish whether a relevant bilateral DTA is in force between the country of Source and the country of residence, and if so: whether the DTA covers the tax; whether the DTA covers the recipient taxpayer (usually a resident of one country but not both); and under what article the income should properly be dealt with (discussed further below);
66
Double Taxation Agreements
The allocation rules
whether the relevant article or any other DTA provision Limits or excludes the application of the DTA relief. Apply the provisions of the article, with the passive income articles generally reducing the rate of withholding tax. Where still required, apply the DTA provision for the elimination of double tax in conjunction with the domestic unilateral foreign tax relief provisions of the country of residence (if any) to any remaining amount subject to international double taxation. Where double taxation has not been fully addressed by the application of DTA and unilateral double tax relief (if any), resort may need to be made to the mutual agreement procedure article.
3.6.18
What are the general rates
of withholding taxes?
The rates of withholding tax within the domestic taxing provisions of the country of source will differ. For example: • In the United Kingdom, a payee making a payment to a non-resident is obliged to withhold at the appropriate rate contained in the UK taxation laws, depending on the type of payment. Australia's income tax laws contain a specific withholding tax regime for payments to non-residents which subjects dividends and royalties to a withholding tax of 30 percent and interest to a withholding tax of 10 percent. Traditionally the reduced DTA rates are 15 percent for dividends and royalties and 10 percent for interest. However the DTA withholding rates are likely to differ between and within DTAs according to: \I
whether the payment is a dividend, interest or royalty as defined in the relevant DTA article; for interest, the type of security and the nature of the lender; and for dividends, the level of shareholding.
Specific examples of these passive articles, DTA rates and such variations are discussed further below. 3.6.17
Can related deductions be set against the passive income before applying the rate of domestic or DTA withholding tax?
No. Generally the rate of Withholding tax is set against the gross amount of passive income with no deduction for any related expenses.
What happens if the passive income could also be classified as a business profit?
A royalty receipt, for example, could properly be classed as either a royalty or a business profit. Although not specifically anticipated by the OECD Model Tax Convention, the business profits article of a DTA may contain a clause which gives priority to the passive income articles by stating that the provisions of those articles remain unaffected by the provisions of the business profits article (for example, Article 7(6) of the AustraliaIUK DTA). 3.6.19
3.6. 16
67
What if the passive income is «effectively connected to a PE.'?
Notwithstanding the priority clause above, where the amount of passive income is "effectively connected with a PE" in the source country, the passive income article will generally state that the income is to be properly dealt with under the business profits article. Consequently the amounts will not be subject to withholding taxes but taxable in the country of source free of limitation, often on a net income assessment basis, and the beneficial DTA withholding tax rates will not apply. So, in practical terms, the business profits article may direct the taxpayer to the more specific passive income article in priority. However the passive income articles and revenue-sharing rules will not apply if the income that would otherwise be classed as passive income is "effectively connected" to a PE in the source country. 3.6.20
What does «effectively connected to a PE." really mean?
What is meant by "effectively connected" is not defined in a DTA or in the OECD Model Convention commentary. As guidance, the US domestic rules for the taxation of foreign income, which make use of an "effectively connected" test for US source income, employ: an "asset-use test" where the criterion is whether the income is derived from assets used in, or held for use in, the conduct of a trade or business in the United States; and • a "business activities test" where the criterion is whether the activities of the US trade or business are a material factor in the realisation of the income. 3.6.21
Are there any other DTA circumstances in which the concept of «effectively connected" is relevant?
Yes. The concept of "effectively connected" may also be relevant in establishing
68
Double Taxation Agreements
whether certain amounts of income are effectively connected to a fixed base of an individual performing independent personal services. As such, it may be taxed by the country of source on a net basis as income from the performance of such services. 3.6.22
Are there any situations where it would be more beneficial for passive income to be "effectively connected" to aPE?
Yes. Where there are significant deductions connected to the derivation of the passive income which can be set against the passive income before applying the rate of business taxation, the incidence of tax may be less if the income is treated as effectively connected income. Even though lower DTA rates of withholding tax are applied against gross passive income, as there is no ability to deduct expenses when withholding tax is imposed, the effectively connected rule may be preferable for tax purposes. For example, suppose a non-resident derived a gross amount of income of $100,000 and associated deductions of $70,000. The rate of withholding in the source country is 30 percent reduced to 15 percent by the relevant DTA. T he rate of business taxation in the source country is 30 percent. Under a withholding tax regime, the final tax assessable would be $15,000 (reduced from $30,000). Alternatively, if the income was effectively connected to a PE, the tax assessable would be $9,000. 3.6.23
What is the general tax treatment fo r dividends not effectively connected to a PE?
Traditionally the typical DTA withholding tax rate for dividends has been 15 percent. However, a recent trend towards the negotiation of lesser rates is apparent and been embraced by the United Kingdom, the United States and Australia. These include: a zero rate of dividend withholding tax applicable where the recipient is a company that holds directly at least 80 percent of voting power in the paying company; and a 5 percent rate applicable where there is control of at least 10 percent in voting power. The detailed provisions of each bilateral DTA must be carefully perused to establish the correct treatment. A general source rule may apply such that dividends are deemed to have a source in the country of residence of the paying entity in circumstances where a right to tax is given both to the country of residence of the person who beneficially derives the dividends and the country of residence of the paying entity.
The allocation rules
3.6.24
69
How is interest generally treated when not effectively connected to aPE?
The majority of bilaterally negotiated DTAs set the rate of interest withholding taX at 10 percent. However, a number of interest w ithholding exemptions may also exist in the domestic law of the country of source, or otherwise within each bilaterally negotiated DTA. Notable exceptions within many modern DTAs are that tax is often not chargeable on interest derived by a government body of the other country, or an unrelated financial institution resident in the other country. Many modern DTAs will also include an anti-avoidance provision targeted at arrangements involving back-to-back loans to take advantage of the above exceptions. Again, a general source rule may apply, such that interest will be deemed to have a source in the country of residence of the paying entity in circumstances where a right to tax is given both to the country of residence of the person who beneficially derives the interest and th e country of residence of the paying entity. 3.6.25
What if a DTA states a rate of interest withholding tax higher than the domestic rate of the source country?
The rate of withholding tax cannot be greater than that specified under the domestic law. Thus the domestic law rate would apply in such a case. A DTA can only moderate or allocate taxing rights, and cannot impose a higher rate of taxation (see however the general discussion on this point in section 1.1.12). 3.6.26
What if the domestic provisions of the country of origin of the payment treat an amount of interest as a distribution?
There may be provisions within the domestic laws of a country under which the payment of an amount that would otherwise be treated as interest is reclassified as a distribution. Examples include the United Kingdom, Australia, France and Canada. Under many DTA articles, such amounts may be excluded from being dealt with under the interest article by virtue of being treated as a dividend in the domestic laws of the DTA country in which the payment originates. In such circumstances the payment would be properly dealt with under the dividend article of the applicable DTA. The definitions of interest and dividends and the provisions of each interest and dividends article in the relevant DTA must be carefully traced to ensure that the correct provisions are applied.
The allocation rules 70
71
Double Taxation Agreements
Interestingly, the ~rance .DTA interest article provides an override of any domestic reclasSIfIcation pr~vlSlon. This provision, however, does not apply where there IS a dIrect or llldirect holding of more than 50 percent of the vot" power. mg 3.6.27
What amounts are royalties for the purposes of a DTA?
It is critical to ensure when dealing with royalties that the amount is in fact a royalty for the purposes of the relevant DTA. Many countries reserve the right to amend the definition of royalty to include certalll . payments or c~edits .th~t are treated either as royalties under their domestic laws (Austraha) or m ItS conventional definitions (Spain). As suc~, the conc~pt of a "royalty" is specifically defined in each DTA. Royalties, as speCIftcally defined in each DTA must then be dealt 'th d h 'f ' I. , W I un er t e speCI IC roy a tIes articl~ of the DTA unless they are effectively connected to a PE, and therefore dealt with under the business profits article.
3.6.28
How are royalties treated when not effectively connected to a Pf.?
Although the curren~ OECD Model recor.nmends that royalties be taxable only m the .country of re~ldence, .many countnes reserve the right to tax all or some royalties at source m the bIlateral DTAs they negotiate, resulting in the DTA revenue-shanng method discussed above. . For example, Australia rese~ves the ri~ht to tax all royalties at source (includI?g amounts treated ~s royalties under ItS domestic laws). Turkey reserves the n~ht to tax at source mcome from the leasing of industrial, commercial or scientifIc eqUIpment. Whe~e . the roy~lties article does apply to a particular payment and there are no speCIfIC excluslOns, th.e reduced DTA rate of withholding tax is normally 15 percent or 10 percent, WIth some exceptions. The recently revised US/Australia and UKlAustralia DTAs have further reduced the DTA rate for royalties to 5 percent. . The UKIFrance DTA has no provision for royalty withholding tax, since there IS no ~xposure to French mcome tax for non-resident individuals in receipt of royalties. 3.6.29
Does the recipient of passive income subject to withholding tax need to pay addit ional tax?
Generally not. Withholding taxes, both domestic and DTA, in the majority of cases con~tlt~te a fmal tax such that, provided the non-resident in receipt of such paSSIve lllcom~ has no other lllcome derived in the country of source, there IS no need to subrrnt a tax return or pay additional tax.
3.6.30
Can a taxpayer be indemnified against the imposition of foreign withholding taxes?
Yes. It is possible for a clause to be included in an interest or royalty contract such that the payer will indemnify the non-resident recipient against foreign withholding taxes such that they will receive a net amount equal to the gross amo unt intended. This can be achieved either by the payer repaying an amount equal to the withholding tax to the recipient, or the payer paying the withholding tax itself. 3.6.31
Does withholding tax need to be withheld from the indemnification amounts themselves?
The treatment of these additional payments for tax purposes will depend on the type of passive income in question and how this income is defined within the domestic taxing law of the source country. If the indemnification amount in question is itself considered to be an amount paid in the nature of interest or royalty then it must be subjected to the appropriate withholding tax treatment. For example, in Australia, the payment of an amount to indemnify an amount of interest withholding tax was held not to be an amount in the nature of interest as defined under the Australian income tax law. In contrast, the view of the Australian competent authority is that similar royalty indemnification payments are royalties as defined within the domestic law, and therefore the royalty withholding tax rules would apply to the additional payment. 3.6.32
What is the difference between an escalation clause and an indemnification clause?
In practice, great care must be taken to distinguish between the following types of clauses: • Indemnification clauses - these types of clauses include the agreement of the payer to meet the withholding tax costs by repayment or self-payment. The indemnification payment itself must be separately identified and treated correctly for tax purposes. • Escalation clauses - these types of clauses merely increase the amount payable to the recipient to recompense or account for the withholding taxes. The relevant rate of withholding taxes must be applied to the full amount. 3.6.33
How will an indemnification amount be assessed in the hands of the recipient?
The assessability of the indemnity payment in the country of residence may depend on the business of the payer and whether a DTA covers the arrangement.
72
The allocation rules
Double Taxation A greements
Where a DTA is not in place, the taxing righ ts of the country of residence will depend on the nature and source of the payment. W here a DTA does cover the arrangement, the taxation of the amount will depend on whether the amount falls into the business profits, interest, royalty or "other income" article.
73
. d f om the ownership of such property, not any proceeds from sale, the , ' Ies d'ISdenve rwhich are dealt with under the "alIenation . . 0 f property , artlc . gaInS on ssed further below. . ell Under the OECD Model, the right of the cou.rmy of source to tax the mcome o rlOty over the nght of the country of reSIdence, because of the close ecohas pno nomic connection. However, the commentary also stat~s thaot thIS does not prejudge the applIcao f the domestic laws to the taxatIOn nghts of the rental mcome. It IS very ' were h [lon rk I 0 that international double taxation wIIIanse a res I°d ent 0 f a country ley d on a worldwide basis and derives foreign-sourced renta l mcome. IS taxe I h' 1 to d bl Consequently the taxpayer will need to re ~ on t e '0 e Iml~atlOn 0 ou e Oon" articles and unilateral double tax relief proVISIOns (If any) to address t mUI incidence of international double taxation. anY I h h It is notable that France also reserves the right to app y t ese provlslOn~ to t e taxation of shares and rights, which are treated by its domestic laws as mcome from immoveable property. 0
0
3.6.34
How are annuities and pensions generally dealt with under a double tax treaty?
Most treaties have special provisions providing for the taxation of annuities and pensions. As recommended by the OECD Model, annuities and pensions are taxable only in the country in which the recipient is resident, notwithstanding the fact that the conventional source r ules may well deem the income to have had a source in the country in which the recipient is not resident. Examples of exceptions to this genera l rule include: Government pensions paid to citizens of the country of source are exempt from tax in the country of residence under the US/Australia DTA. The Canada/Australia DTA provides for a limited withholding tax on pensions paid. 3.6.35
How is income derived from real property categorised for DTA purposes?
T here are different types of income that can be derived from real property and each may need to be considered under the following categories: • income from real or immoveable property (rental income); • capital gains (on alienation of real property); indirect alienation of real property. Different DTA articles may apply, and care must be taken to esta blish w hether a specific DTA article is dealing only with real property or whether it is dea ling with "property". Certain articles and paragraphs may specifically deal with real property, whereas others may deal with a wider concept of property.
0
0
0
0
0
0
0
0
0
3.6.37
0
When will an "alienation of property" article be relevant?
The taxation of capital gains or income arising on the alienation (disposal or sale) of property may differ substantially from country to country. For example: • Some countries assess capital gains realised by an enterprise but not by an individual. • Some countries impose a separate capital gains tax or impose a separate rate of taxation, whi le others merely add any realised capital gains to other sources of income . • Some countries (for example, New Zealand, Hong Kong and Singapore) have not to date introduced a capital gains regime at all, and capital gains escape the charge to tax. Whether or not there has been a taxable realisation should be determined under the domestic taxing rules of each country and, again, problems only arise when both the country of residence and the country of source seek to tax the gains arising, either as ordinary income or as a capital gain. Depending on the operation of the domestic laws of both the country of resIdence and the country of source, international double taxation is most likely to arise where 0
3.6.36
How is rental income derived from reol property dealt with under a DTA?
Article 6 of the OECD Model Tax Convention deals with the situation where a resident of one country derives rental income from real property or immoveable property in another country. Real property may be defined according to the domestic laws in which the property is situated and may be further specified in the wording of the article itself. It is critical to note that this article deals only with the revenue streams
• a resident of one country has been taxed on their worldwide capital gains in the country of residence; and • the country of source does seek to tax a capital gain on the sale of the property situated in that country.
74
Double Taxation Agreements
Whether the relevant OTA will moderate either of these taxing rights will depend on • whether the income or gain falls to be dealt with under the business profits article or the "alienation of property" article of the specific OTA; • if relevant, whether there is a comprehensive "alienation of real property" article; and • how the provisions in the relevant article have been negotiated bilaterally. 3.6.38
What if a capital gain also falls within the business profits article?
Where the capital gain is part of the taxable income of a business or businesslike activity or enterprise, it may fall within the business profits article rather than the alienation of property article. As with ordinary income, if there is no PE in the source country, the source country will be precluded from taxing the capita l gain. An important Australian tax case, Thiel v. FeT (1990) 21 ATR 531, involved a Swiss resident who derived a profit subject to international double taxation from an isolated transaction and was held to be undertaking activities that were in the nature of trade. It was agreed that the Swiss resident did not have a PE in Australia. The Australian High Court held that the activities constituted an enterprise and were an "enterprise of one of the Contracting States" for the purposes of the relevant business profits article. The protection of the business profits article was thus available to the taxpayer and the relevant activities were not subject to Australian tax. The court held that, for the purpose of the Australia/Switzerland OTA, the term "enterprise" may cover both an activity itself and the means by which or framework within which an activity is engaged. The court noted that, having regard to the nature of the taxpayer's activity, it would have been inappropriate to regard his gain as being by way of income from the alienation of capital assets within the meaning of the OTA. 3.6.39
Can an "alienation of real proper't"f' article override t he business profits article?
Yes. The "alienation of real property" articles in some OTAs may include a "sweep-up" provision, which suggests an intention by the parties to the OTA to eliminate the applicability of the business profits article and deny source country taxation where the relevant capital gain is not covered by the other provisions of the "alienation of real property" article itself. Some recently negotiated OTAs and explanatory materials specifically state
The allocation rules
75
that such gains falling within the "alienation of property" article are not affected by the business profits article. 3.6.40
How does an "alienation of property" article generally operate?
The wording of the OECO Model Tax Convention "alienation of property" article is wide enough to ensure that the article may apply to all kinds of taxes levied by a country on capital gains, regardless of how they are taxed under the domestic rules. The article does not seek to determine how such gains should be taxed by a countrv nor give any right to tax capital gains if such a right does not exist in its domestic law. A comprehensive "alienation of property" article, in line with the OECO Model Tax Convention article, may generally allow the country of origin the right to tax gains derived from the alienation of real or immoveable property located in that country; the alienation of property or moveable property used in a PE in that country; the alienation of shares where more than 50 percent of their value directly or indirectly is derived from immoveable property in that country. There may also be special rules dictating how the alienation of ships and aircraft is dealt with. 3.6.41
When mayan "alienation of property" article not be relevant?
Where the country which generally has a right to tax does not exercise that right, no incidence of international double taxation arises. For example, Australia has a CGT participation exemption rule exempting capital gains arising on the disposal of a greater than 10 percent shareholding in a company which carries on an active foreign business. 3.6.42
When may there not be a comprehensive "alienation of property" article?
When considering the application of any OTA to a capital gain, the "taxes covered" article must be carefully reviewed to establish whether the tax is in fact covered by the OTA. Where a OTA pre-dates the introduction of a capital gains tax regime, the issue may not be dealt with under the OTA. For example, a capital gains tax regime was only introduced in Australia in 1985, so the many Australian bilateral OTAs that pre-date the introduction of this regime generally do not make special provision for capital gains. However, a number do contain limited articles dealing with gains from the
76
The allocation rules
Double Taxation Agreements
alienation of real property and interests in land-owning companies. It is still a controversial issue whether Australia's taxing rights over capital gains can be precluded by the application of some DTAs. 3.6.43
When is the concept of "indirect alienation of property" relevant?
As indicated above, the OECD Model and many treaties in practice incl ude the words "directly or indirectly" to capture the effective disposal of real property situated in the country of source through, for example, a chain of companIes. An example of the importance of this wording was demonstrated in the Australian tax case FCT v. Lamesa Holdings BV (1997) 36 ATR 589 (see section 9.1. 1). A Netherlands company held an Australian subsidiary which was the parent of another Australian company which, in turn, held a 100 percent interest in an Australian-listed mining company. The Netherlands company sold its shares in the Australian holding company, generating a taxable gain in Australia. Initially, the Australian Commissioner of Taxation sought to argue that the relevant alienation of property article did not preclude Australia's taxing rights. However the Australian Full Federal Court held that the "alienation of property" article of the AustralialNetherlands agreement did not apply because it did not permit Australia to tax profits realised indirectly through a share sale. Consequently, the Netherlands had the exclusive right to tax the profits. Australia has subsequently enacted a domestic override to ensure tha t, as from April 27, 1998, profits arising from the indirect alienation of real property situated in Australia by a non-resident are subject to tax in Australia, and now includes an "indirect alienation of property" article that seeks to counter that decision in its new DTAs. 3.6.44
Do withholding taxes apply to capital gains realised by non-residents?
No. The concept of withholding taxes on capital gains realised by non-residents has been raised by a number of competent authorities, but has not yet been implemented by any jurisdiction. Currently the transactional requirements and documentation associated with real property dealings should allow a competent authority to date-match transactions effectively to assist in the assessment and collection of taxes from non-residents. 3.6.45
Do DTAs deal with tax or capital losses?
No. Where a tax loss is in point, or a capital loss has resulted from the alienation
77
of property, there is no incidence of international double taxation and therefore no need to access the relief afforded by a DTA.
3.7
"Nature of the taxpayer" articles
3.7.1
Might a taxpayer fall into a special category depending on their occupation?
Yes. There are a number of occupation categories which may be dealt with separately and provide exceptions to the other articles. Under the OECD Model, these include directors, artistes and sportsmen, government service employees, and • students. Other double tax agreements may also set out specific treatment for professors and teachers. 3.7.2
What if a particular DTA does not deal with the specific occupation or category?
The taxpayer will need to resort to the following articles, depending on the structure and content of each particular DTA: dependent personal services (Article 15 of the OECD Model); • independent personal services (former Article 14 of the OECD Model) or business profits article (Article 7 of the OECD Model); • income from employment (for example, Article 14 of the UK!Australia DTA). 3.7.3
How are directors' fees generally treated by relevant double tax agreements?
The OECD Model provides that where directors' fees and other similar payments are paid to a director of a company, the services are treated as being performed in the country where the company is resident. 3.7.4
How are artistes or sportsmen treated by countries where they perform or tour?
Clearly the source of the income of public entertainers and sportsmen is the ?lace where the activities take place, irrespective of the short period of time tnvolved in carrying out those activities.
The allocation rules 78
79
Double Taxation Agreements
The OECD Model therefore provides that, as an exception to the general rules in the articles covering business profits and independent personal serv ices, artistes and sportsmen may be taxed in the country of source on income of a business or employment nature. Some DTAs (for example, the AustraliafUK DTA Article 16(2)) have a furthe r provision which may tax enterprises that provide the services of an entertainer and to which the income accrues. The United States has reserved the right to limit the taxing rights of the country of source to situations where the taxpayer earns a specified amount. 3.7.5
How are government service employees treated?
The OECD Model generally provides that the paying country or state retains the exclusive right to taxation which is in conformity with accepted international courtesy and the appropriate provisions of the Vienna Convention. Some DTAs will exclude the payment of pensions or annuities from these prOVISiOns.
of the person's teaching and would exclude, for example, any remuneration from publication.
3.8
"O ther income" article
3.8. 1
What amo unts of income fall into the "other income" article?
The "other income" article applies specifically to items of incomed"n°lt dife~lt . " The OECD Mo el car Ies with in the foregoing articles 0 f t h e C onventIon. that the income concerned is both income of a class not expressly dealt with under another article, and income from sources not expressly mentioned. That is, if an amount of income has fallen to be conside~ed under ~nother Jrticle and the provisions of that article have been appropnately appbed, the. "other income" article should never be considered for that particular amount ot income.
3.7.6
How are students generally treated by the relevant double tax agreements?
The OECD Model provides for an exemption in the country of residence of income derived by a student who is temporarily present in the resident country solely for the purpose of her or his education, and who was a resident in the other country to the relevant agreement immediately beforehand. The exemption is restricted to income paid for the purposes of the student's maintenance or education, and the payment must originate from sources o utside the country in which the student is temporarily resident. The exemption does not therefore extend to income derived from sources in the country, including remuneration fro m work experience; income that is unrelated to the student's maintenance or education; or income that exceeds the level of expenses likely to be incurred to ensure the recipient's maintenance, education or training. 3.7. 7
Where present, how do professor and teacher articles generally operate?
DTAs may include an article dealing with professors and teachers - many treaties negotiated with Australia exempt professors and teachers from taxation in the host country if they are present for a period of less than two years and are taxable in the home country. The exemptions generally relate only to the remuneration received in respect
What ;s meant by the phrase "not dealt with"?
3.8.2
For example, if an item of income is classified as a business profit, then the.way in which that business profit is derived will determI.ne whether ~he b~sI~es~ profits article will apply to give rise to a liability to tax m the source JUrIsdIctIon.
If there is a permanent establishment, then t~e .bu~i~ess profits article would ordinarily permit taxation in the source JUrIsdICtIon. . . . . If however there is no permanent establishment m the source Junsd~ctIon, tl~e amoun; will not be subject to tax in the source country. In such Clrcum. proper ly be said that the income has been dealt WIth under the stances, can It business profits article? It is evident that absurd results would arise if thi.s was n,?t t~e case, but i.t is not entirely clear from the phrase used in the "ot~er mcom~ artIcle. In practIc~, it is accepted that if an amount is classed as a busmess p~of1t but there IS. nO PE;:e the source jurisdiction that income has been dealt With and accorddm gly th . deme . d taxmg . ng . h ts. R ecourse cannot then be rna e to t e source country IS "other income" article. 3.8.3
How does the "other income" article allocate the taxing rights?
\formallv the "other income" article allocates the right to tax amounts falling . . under th~ "other income" article to the country of residence. This is consistent with the policy of the OECD Model Convention, which
80
Double Taxation Agreements
favours the country of residence rather than the country of source (unless the lIlcome is derived by way of a PE in the country of source ). Ilowever some countries, for example, Portugal, Australia, Canada and Slovakia, reserve their position in this regard and maintain the right to tax such income where it is derived from sources in their own country. Additionally, Ireland and the United Kingdom both maintain the right to tax income paid by their residents to non-residents in the form of income from a trust or from estates of deceased persons in the course of administration. Once again, as a result of these constructs there will be a likelihood of international double taxation. Such income will be taxed by both the country of residence and the country of source. Again such international double taxation will have to be dealt with under the "elimination of double taxation" article and unilateral double tax provisions contained within the domestic laws of the country of residence (if any). 3.8.4
What if there is no "other income" article?
If an amount of income has not been dealt with under a particular "basket of income" article and the DTA in question does not contain an "other income" article, then the DTA cannot apply to that income amount to allocate or moderate the taxation rights of either country. As in the case where a source country reserves its right to taxation, the taxpayer must resort to the "elimination of double taxation" article and the unilateral domestic provisions of the country of residence to seek relief for any incidence of international double taxation.
4
Restrictions on the availability of DTA benefits
4.1
What is treaty shopping?
An increasingly important issue in the sphere of DTAs is the practice of "tr~aty shopping". In broad terms, the activity involve~ ~eeking out the most benefIcIal provisions of DTAs and conspicuously explOltmg the~ . The most common form of treaty shopping involves the use of DTA prOVISIons by reSIdents. of a third country, whereas the intention of the parties was to limit treaty benefitS to genuine residents of their respective countries. . Here is a simple illustration of how DTAs could be used to achIeve a reduction in tax. The hypothetical case involves Andrew, who is a resident of Country X. Andrew owns industrial property, being a patent, which he WIshes to license to IP Development Co., a company which conducts a business in Country Y. The return to Andrew will be in the form of royalties per unit sold by IP Development Co. There is no DTA between Countries X and Y, so ordinarily Andrew would not be entitled to a reduced rate of withholding tax ordinarily imposed on the outgoing royalties by Country Y. . Andrew could, however, arrange for the incorporation of a company which he controls in, say, the Netherlands to hold the patent and that Netherlands company could then sublicense to IP Development Co .. The newly mcorporated entity would be a resident of the Netherlands. There is a DTA between Country X and the Netherlands and Country Y and the Netherlands. Royalties flowing to the Netherlands from Country Y would be entitled to the benefit of the royalties article of the Netherlands/Country Y DTA, which provides for a maximum rate of 5 percent on the gross royalty imposed by Y. It may then be arranged that the Netherlands company would pay a royalty to the resident of Country X under a head licence arrangement. Only a small profit would be retained in the Netherlands company which would be exposed to Netherlands taxation. In order for this arrangement to work, the DTA between the Netherlands and COuntry X would be similarly utilised to limit Netherlands withholding tax to a low rate such as 5 percent.
82
Double Taxation Agreements
The difference between the arrangement described in the preceding paragraphs and what would have happened in the absence of such treaty shopping arrangements would be that Andrew (a resident of Country X) would license IP Development Co. directly to Country Y, and any royalties flowing to Country X would be taxed at the domestic withholding tax rate imposed by Country Y, which might be as high as 30 percent (in the absence of an applicable DTA).
4.2
How can treaty shopping be prevented?
Tax authorities throughout the world have been focusing on issues related to treaty shopping for over 50 years, with mixed success. The key initiatives that have occupied the minds of administrators have focused essentially on one of four approaches: the insertion of a beneficial ownership requirement in the dividends, interest and royalties articles of DTAs; • the insertion of a comprehensive "limitation on benefits" article in DTAs; • the insertion of a more limited treaty shopping provision, dealing only with dividend interest and royalty treaty benefits and focusing on the purpose of the relevant taxpayer or taxpayers; the insertion of anti-conduit provisions in DTAs.
4.3
How effectively has the concept of beneficial ownership been used to prevent the practice of treaty shopping?
Some attempt to prevent the most blatant abuse of DTA provisions by residents of third countries can be found in the provisions which limit a treaty benefit in respect of certain classes of income to cases where the income is beneficially owned by the resident of the other Contracting State. This applies, for example, in DTA provisions dealing with dividends, interest and royalties. This technique could arguably prevent the use of trustees, agents, nominees or other similar entities in attempts to gain treaty benefits. Although the beneficial ownership concept was introduced into DTAs largely as a mechanism to deal with anti-treaty abuse, there are no relevant references in the dividend, interest and royalties articles to the purpose or the motivation of the taxpayer or taxpayers concerned. Thus, it could be said that there is some disconnect between the purpose of the introduction of the beneficial ownership requirement and the way in which it must be dealt with in practice. In practice, the question of who is the beneficial owner of the underlying asset is a matter of legal interpretation and not a question of subjective or even objective purpose of the relevant taxpayer. The problem with the concept of beneficial ownership is that the concept has its origins in common-law jurisdictions (in particular, the United Kingdom),
Availability of DTA benefits
83
hich has for centuries distinguished between the rights held in the same prop:rty by different persons. Thus, a distinction has traditionall~ been drawn between a legal owner and a benefICial owner of the one asset, With the beneficial owner having the ultimate right or entitlement t~ the property and the legal owner only being the legal holder of property, effectively for documenta~y puroses. The beneficial owner has always been regarded as the person With the ~reatest ownership characteristi~s and it is that person who has the relevant rights to the income and ~he capI~al ?f ~h~ assets. The difficulty is that cIvil law JunsdlctlOns such as France generally do not make this distinction of ownership in the same manner. The problem comes into sharpest relief when dealing with a DTA betwe~n, on the one hand, a common-law jurisdiction, and on the other hand, a CiVil ~aw ·urisdiction. W here this occurs, the difficulty is that one jurisdiction recogmses ~he ownership distinction between legal and beneficial ownership and the other does not. This critical issue can arise in a number of situations. A good example arises as follows: 1.
2. 3.
4.
5. 6. 7.
Dividends flow from Country B Co. to Country A Co. in circumstances where there is no DT A between Country A and B. The level of withholding tax imposed in Country B in the absence of the DTA is 30 percent. There is a DT A between Country B and Country X and a DTA between Country X and Country A. Under both DT As the maximum level of withholding tax that can be imposed by Country B is 0 percent. The domestic laws of Country X and Country A do not tax the receipt of foreign dividends, and there is no withholding tax on the payment of dividends to other non-residents. The parties interpose a company resident in Country X (Country X Co.) to which Country A Co. transfers its shareholding in Country B Co. The net consequence is reduction of withholding tax on the payment from Country B Co. to Country X Co. from 30 percent to 0 percent. Further , there is no tax in Country X on the receipt, no withholding. tax in Country X on the payment and no tax in Country A on the receipt.
If that is the right outcome, a reduction in withholding tax from 30 percent to
o percent has been achieved without any additional costs. This is precisely the type of transaction which will need to be examined in the cold hard light of the beneficial ownership test, and the outcome is not always clear or consistent. The beneficial ownership issue turns on whether Country X Co. as an intermediary is the beneficial owner of the dividends which it receives from Country Y Co. Alternatively, it may well be the case that revenue authorities and courts may seek to look through the intermediary to Country A Co. as the beneficial Owner because Country A Co. controls Country X Co. Does control operate at Such a level that the intermediary - in this case, Country X Co. - must under all
84
Availability of DTA benefits
Double Taxation Agreements
circumstances pay the dividend to Country A Co. and thus deprive the intermediary entity of the ownership attributes which are normally associated with the dividend. It is clearly arguable that, since the intermediary (Country X Co.) does not receive the dividend on behalf of Country A Co. in an agency or other representative capacity, Country A Co. is not the beneficial owner of the dividend. Practically,. it ~ust be asked whether the parent's control of the intermediary subsIdIary IS so overwhelming as to give rise to an agency relationship. The better view would appear to be that in the absence of substantial and compelling evidence to the contrary, a parent does not normally have such COntrol that the relationship with its subsidiary in relation to any dividends which might be paid to the parent is transformed into an agency relationship. More commonly, the position would seem to be that the intermediary (Country X Co.) acts in a capacity as a separate legal entity, and while it is an intermediary III the sense that dividends pass through it, provided that there are no facts to suggest an agency relationship (which would rarely appear to be the case), the dividends would at all times be in the beneficial ownership of the intermediary resident Country X Co. Having said that, there are three interesting tax decisions on this issue where differing conclusions have been reached. The first is a relatively old US case, the second a more recent Canadian case and the third a UK case with very unusual facts. I~ Aiken Industries Inc v. Commissioner of Inland Revenue (1971) 56 TC 925 (US), the Ulllted States Internal Revenue Service was able to prove that a Honduran company was not the beneficial owner of interest which it received from a US company, where a back-to-back promissory note arrangement had been put in place. In return for receiving interest under a promissory note assigned to it by its ultimate parent company, which was resident in the Bahamas, the Honduran company was contractually obliged to pay a corresponding amount of interest back to the Bahaman assignor under separate promissory note commitments that the Honduran company made to it. In the absence of this structure the United States could have levied withholding tax of 30 percent on interest payments made directly to the Bahaman parent company. The arrangement was clearly intended to avoid the withholding tax expense by taking advantage of the zero-rate withholding tax restriction under the now terminated 1956 HonduraslUS DTA. The US tax court held that the Honduran company had no actual beneficial interest in the interest payments which it had received from the US company because it was in turn committed to pay the interest to its ultimate parent company. According to the court, because of its obligation to transmit the interest to a third party, it could not be said that the intermediate entity had complete dominion and control over that interest income. By way of contrast, a Canadian Court in Prevost Car Inc. v. the Queen (Tax Court of Canada) (April 22, 2008) has held that Revenue Canada was not entitled to
Volvo Bussar AB (Sweden)
Henlys Group PLC
(UK)
I
85
J I Provost Holdings BV (Netherlands)
1 Provost Car Inc (Canada)
Fig. 4.1
Prevost Car Inc. ownership
look through a Dutch resident company which held the shares in a Canadian resident company in order to impose a higher rate of withholding tax on the basis that the Dutch company was not the beneficial owner of the dividends for the purposes of Article 10, paragraph 2 of the CanadalNetherlands Double Tax Agreement. . . More specifically, the case involved Prevost Car Inc., a corporatIon reSIdent in Canada, which declared and paid dividends to its shareholder Prevost Holdings BV, a corporation resident in the Netherlands. The Minister of National Revenue issued assessments under Part XIII of the Income Tax Act against Prevost in respect of the dividends. The Minister assessed on the basis that the beneficial owner of the dividends was not Prevost Holdings BV but the shareholders of that company, who were in turn two companies, one resident in the United Kingdom (Henlys Group PLC - "Henlys" as to 49 percent) and the other resident in Sweden (Volvo Bussar AB - "Volvo" as to 51 percent). The facts can be depicted diagrammatically as in Fig. 4.l. When Prevost Car Inc. paid the dividends, it withheld tax by virtue of subsections 212 (1) and 215 (1) of the Act but as a resul t of the a pplication of Article 10 of the DTA, the rate of withholding tax was a reduced rate of 5 percent (6 percent for 1996). Revenue Canada indicated in the relevant notice of appeal that the appellant should have withheld and remitted to the Crown at the statutory non-DTA rate of 25 percent of the dividends paid to the Dutch company. However, as a concessionary measure the Crown sought to apply the reduced rate of taxation of 15 percent and 10 percent under the Canada/Sweden and CanadalUK DTAs respectively. Revenue Canada did this as a concession, since the Canada/Sweden and CanadalUK Treaties would have no application. Quite simply the position in the absence of treaty protection conferred by the CanadalNetherlands DTA is that the ordinary rate of withholding applied by Canada should apply to the dividends in the absence of a treaty, and thus a 25 percent rate should have . been applied.
86
Double Taxation Agreements
In a wide-ranging judgment, the Court looked carefully at the French concept (beneficiaire effectif) and Dutch concept (uiteindelijk gerechtigde) of beneficial ownership and their meaning under French and Dutch law. The survey of these concepts and the related cases led the judge to conclude that as the Dutch company was the registered owner of the shares in Prevost Car Inc. and it paid for the shares, it was the full legal and beneficial owner of the shares. Furthermore, when the dividends were received by the Dutch company in respect of the shares it owned, the dividends became the property of the Dutch company. Until such time as the management board declared an interim dividend and the dividend was approved by the shareholders, the monies represented by the dividend continued to be the property of and to be owned solely by the Dutch company. The dividends were at all times an asset of the Dutch company and they were available to its creditors if any. No person other than the Dutch company had an interest in the clividends received from Prevost Car Inc. The Dutch company could use the dividends as it wished and it was not accountable to its shareholders except by virtue of the laws of the Netherlands. The shareholders only obtained a right to the dividends that were properly declared and paid by the Dutch company itself. This was the case notwithstanding the fact that the payment of dividend had been mandated. The Court added that if any amount had been paid by the Dutch company to its shareholders before a dividend was properly declared and paid, it would have constituted a loan from the Dutch company to its shareholders. The judge noted that this was not an uncommon practice when dealing with corporate funds. Counsel for the Revenue in Prevost sought support for the view that the intermecliate Dutch company was not the beneficial owner of the dividends from an unusual non-tax case that arose in the England and Wales Court of Appeal. In Indofood International Limited v. JP Morgan Chase Bank in a London branch [2006 ] EWCA Civ 158, STC 1195 an Indonesian company by the name of Indofood set up a Mauritian special-purpose company to issue loan notes ("the notes"). A back-to-back loan arrangement was put in place. The notes contained a grossup clause and provided for an early redemption in the event that, because of tax or treaty changes, the Mauritian company had to pay additional tax. The notes also contained a clause requiring the Mauritian company to try to mitigate any additional tax liability by "taking reasonable measures available to it" before seeking to redeem the notes. The financing was structured via Mauritius to take advantage of the beneficial withholding tax rates which prevailed under the Indonesia/Mauritius DTA. In particular, Mauritius had no outbound withholding taxes. As a result of ongoing abuse of the Indonesia/Mauritius DTA, Indonesia terminated its tax treaty with Mauritius effective from January 1,2005. The effect was to increase the withholding on the interest payments made by the Indonesian company to the Mauritian company from 10 percent to 20 percent under domestic Indonesian law. Since the issue of the notes in 2002, both interest and exchange rates had moved against Indofood and in favour of the noteholders.
Availability of DTA benefits
87
Indofood sought to redeem the notes and refinance more cheaply. However, JP Morgan Chase, acting as trustee for the noteholders, was not satisfied that the "best endeavours" clause referred to above had been complied with, and alleged that lndofood could have chosen to interpose a Dutch entity ("NewCo") into their structure and avail itself of the preferential rates that would apply under the NetherlandslIndonesia DTA. On this basis, the defendant, JP Morgan Chase, refused to approve the redemption. Thus, the substantive issue at trial in the case was an unusual hypotheticalnamely, if NewCo had been inserted as a Dutch company and had been paid interest by an Indonesian company in circumstances where it would be obliged to on-pay interest to third parties not resident in the Netherlands, would NewCo be treated as the beneficial owner of the interest payable to it by the Indonesian company for the purposes of obtaining the reduced withholding tax rate that would be applicable under Article 11 of the IndonesialNetherlands DTA? While the issue was hypothetical in one sense, the resolution of that hypothetical issue would determine whether JP Morgan Chase would be in a position to prevent Indofood from redeeming the notes on the basis that the "best endeavours" clause had not been satisfied. In the High Court, Justice Evans-Lombe found largely in favour of JP Morgan Chase, and held that NewCo would be the beneficial owner of the interest received from Indofood. In particular, he noted that NewCo was not a nominee or agent for any other party and, not being any sort of trustee or fiduciary, would have power to clispose of the interest, when received, as it wished. It is true that it would be constrained by its contractual obligation to the issuer to apply the proceeds of the interest payments in performance of its obligations, but that, according to the judge, in itself was not enough to defeat NewCo's beneficial ownership. More specifically the judge added: "It is clear to me that in the absence of any trust or fiduciary relationship between NewCo and the issuer, in an insolvency of NewCo undistributed interest received from the parent company would be an asset of NewCo for distribution amongst its creditors generally, including the Issuer, pari passu." Indofood took its case to the Court of Appeal, which found unanimously in its favour. Their decision was to the effect that, if interposed, NewCo could not be the beneficial owner of the interest received from the parent for the purposes of Article 11(2) of the Indonesia/Mauritius DTA or the IndonesialNetherlands DTA. The Court took the view that the fact that NewCo was not a trustee, agent Or nominee for the noteholders or anyone else in relation to the interest receivable from Indofood is by no means conclusive. Nor is the absence of any entitlement of a noteholder to security over or a right to call for the interest receivable from the parent. The court added that the term "beneficial owner" was to be given an international fiscal meaning not derived from the domestic laws of Contracting States. The concept of beneficial ownership is incompatible with ~hat of the formal owner who did not have the full privilege to benefit directly rom the income.
88
Availability of DTA be nefits
Double Taxation Agreements
The court added that the phrase "beneficial owner" was plainly not to be limited by so technical and legal an approach. Regard had to be given to the substance of the matter. In this case both commercial and practical considerations would suggest that the issuer and NewCo would be bound to pay on to the principal paying agent that which it received from the parent guarantor. In practical terms, it was impossible to conceive of any circumstances in which either of the issuer or NewCo could derive any "direct benefit" from the interest payable by the parent except by funding of its liability to the principal paying agent or issuer respectively. Such an exception can hardly be described as the full privilege needed to qualify as the beneficial owner. Rather the court suggested that the position of the Issuer and NewCo was more akin to that of an Administrator of the income. Clearly, the decisions in Aiken Industries and Indofood on the one hand and Prevost on the other provide a degree of conflict in interpretation of the concept of beneficial owner. Indofood can be too easily dismissed as an unusual case dealing with a hypothetical circumstance which did not relate specifically to English law, but such a dismissive response may well underestimate the importance of the reasoning in the court. The Prevost decision may yet be appealed, and that appeal will be watched with interest. It should be noted that both Aiken and Indofood dealt with interest, whereas Prevost dealt with dividends, and there may be a point of distinction to be drawn between the cases on that basis.
4.4
How do the comprehensive Limitation on Benefits (LOB) provisions work to prevent treaty shopping?
This way of dealing with treaty shopping is more comprehensive than all other methods, but has only been adopted in a comprehensive way by the United States. Other countries are beginning to expand their use of LOBs (see Australia/Japan DTA), but these efforts do not appear to be a coordinated policy as appears to be the case in the United States. Two examples of comprehensive DTA LOB provisions can be found in two of the six DTAs in the Appendix. There is no LOB DTA provision in the Australia/ UKDTA. The effect of Article 16 of the AustralialUS DTA is that a resident of the United States or Australia is only entitled to the benefits of the convention if it is a qualified person, • it passes the active business test, or • it passes the anti-avoidance test. The effect of Article 23 of the UKIUS DTA is that a resident of the United Kingdom or the United States is only entitled to the benefits of the convention if
Table 4.1
89
Qualified persons: limitations on benefits provisions in DTAs
Australia/US DTA
UK/US DTA
A resident of a Contracting State that is:
A resident of a Contracting State that is:
An individual (Article 16(2)(a))
An individual (Article 23(2)(a»
2
A Government entity (as defined) (Article 1 6(2)(b»
A qualified Government entity (Article 23(2)(b»
3
A listed company majority owned by five o r fewer listed companies (Article 16(2)(c»
A listed company majority owned by five or fewer listed companies (Article 23(2)(c»
4
A listed unit trust majority owned by listed companies or unit trusts (Article 16(2)(d»
A listed unit trust majority owned by listed companies or unit trusts (Article 23(2)(d»
5
A pension providing entity majority owned by DTA residents (Article 16(2)(f»
A pension scheme majority owned by OTA residents (Article 23(2)(e» and 4(3)(a»
6
No equivalent
An exempt employee benefits plan etc. majority owned by OTA residents (Article 23(2)(e» and 4(3)(b»
7
An entity for "public benefit" purposes (Article 16(2)(e))
An organisation for "publiC benefit" purposes (Article 23(2)(e» and 4(3)(c»
8
A non-individual person majority owned by QPs and base erosion test met (Article 16(2)(g»
A non -individual person majority owned by QPs or EBs and base erosion test met (Article 23(2)(f))
9
No equivalent
A trust or trustee of a trust majority owned by APs or EBs and base erosion test met (Article 23(2)(g»
A RHC for a multinational group (Article 16(2)(h»
No equivalent
10
it is a qualified person, it passes the active business test, it passes the Equivalent Beneficiaries test, or it passes the anti-avoidance test. Looked at in these stark terms, there is a clear commonality, with three tests broadly overlapping although the detail is quite different in some material respects. The only broad difference is the presence of the Equivalent Beneficiaries test in the UKlUS DTA . 4.4.1
What is a qualified person?
Ta ble 4 .1 highlights the way this concept is defined in the two DTAs.
90
Availability of DTA benefits
Double Taxation Agreements
4.4.2
What is a regional headquarters company (<
Percentages indicate gross Income of group
Under Article 16 of the AustraliafUS DTA, an RHC for a multinational corporate group is a qualified person which then entitles that person to the benefits of the convention. This raises the question of what constitutes an RHC. The DTA is explicit on this point, providing that a RHC for a multinational corporate group is a person who is part of a group of companies where:
1.
2.
3.
4. 5.
6. 7.
That person provides in the state of residence a substantial portion of the overall supervision and administration of a group of companies (which may be part of a larger group of companies), which may include, but cannot be principally, group financing; and That person is a member of a group of companies that consists of corporations resident in, and engaged in an active business in, at least, five countries (or groupings of countries), and the business activities carried on in each of the five countries (or groupings of countries) generate at least 10 percent of the gross income of the company; and The business activities carried on in anyone country other than the Contracting State of residence of the headquarters company generate less than 50 percent of the gross income of the group; and No more than 25 percent of the gross income of the group is derived from the DT A partner country; and That person has, and exercises, independent discretionary authority to carry out the overall supervision and administration functions referred in 1 above; and That person is subject to generally applicable rules of taxation in the country of residence; and The income derived in the DTA partner country either is derived in connection with, or is incidental to the active business referred to in 2 above.
In relation to conditions 2, 3 and 4 above, if they are not fulfilled, they will nonetheless be deemed to be fulfilled if the required percentages are met when averaging the gross income of the preceding four years. The clearest way to gain an understanding of the way in which this provision works, and the complexities which it can give rise to, is through a concrete example based on Fig. 4.2. Based on these facts and analysing the seven conditions in order to achieve RHC status, we can reach the following conclusions in relation to this structure:
1.
2.
US Co. will need to provide in the United States a substantial portion of the overall supervision and administration for the group. This may include group financing but must not be its principal function; and The group clearly consists of corporations resident in at least five countries that are engaged in active business, and the business activities carried on in each of those five countries, namely Australia, Vietnam,
(50%)
Australia Co.
Vietnam Co.
Indonesia Co.
Sri Lanka Co.
~ ~
(10%)
(10%)
(10%)
(10%)
(10%)
Fig.4.2
3.
4. 5. 6. 7.
II
US Co. (RHc?)
91
RHC example
Indonesia, Sri Lanka and India, generate at least 10 percent of the gross income of the group; and Clearly the business activities carried on in each country other than the United States, being the Contracting State of residence of the headquarters company, generate less than 50 percent of the gross income of the group; and No more than 25 percent of the gross income of the group is derived from Australia being the other Contracting State; and US Co. has, and exercises, independent discretionary authority to carry out the functions of supervision and administration; and US Co. is subject to generally applicable rules of taxation in the United States; and The income derived in Australia being the other Contracting State either is derived in connection with, or is incidental to, the active business referred to in subparagraph 2.
Presumably, where the default mechanism is utilised such that an averaging is required of the preceding four years, this is to be done selectively: in other words, if one test is failed - for example, Vietnam Co.'s active business contribution for the test year is 9 percent (rather than the required 10 percent), but its average over the last four years is 10.2 percent - US Co. can qualify as an RHC. In doing so, it would not be necessary to examine the averages in respect of all the other tests, as they have independently been passed. Any other reading would, it is submitted, be a strained and unfortunate reading of the provision. The requirements for an RHC are awkward at best and clumsy at worst, and in practice are difficult to comply with, even with the best of intentions. The very specific nature of the mathematical requirements is unduly pedantic and does not, in the authors' view, achieve any tangible objective in improving the policy underpinnings of the DTA. To constitute an RHC, there appear to be no specific requirements in relation to shareholding percentages that must be maintained in the non-US entities in the example above.
92
Double Taxation Agreements
4.4.3
What is the active business test ?
In order to encourage cross-border transactions involving active business being carried on in the source jurisdiction, a "limitation on benefits" provision of the kind described above usually contains a clause to the effect that, even if a person is not a qualified person as defined above, but the person is a resident of one of the Contracting States engaged in the active conduct of a trade or business in the other state and the income derived from the other state is derived in connection with, or is incidental to, that trade or business, then the resident will nonetheless be entitled to the benefits of the convention with respect to an item of income derived from the other state. This arises in the context of the AustralialUS DTA as a result of Article 16(3)(a) and (b), which applies to the active conduct of a trade or business other than the business of making or managing investments for the resident's own account, unless those activities are banking, insurance or securities activities carried on by a bank, an insurance company or a registered, licensed or authorised securities dealer. Further, that trade or business activity in the source State must be substantial in relation to the trade or business activity in the residence State. This will depend on the facts and circumstances of each case. Special provisions exist in that DTA for partnership situations. A provision to a similar effect can be found in Article 23(4)(a), (b) and (c) of the UKfUS DTA. 4.4.4
What is the anti-avoidance test?
Both the AustralialUS and the UKfUS DTAs contain brief provisions to the effect that, even if the person is not otherwise a qualified person, they shall nonetheless be granted the benefits of the convention if the competent authority of the source jurisdiction determines that the establishment, acquisition and maintenance of the resident in the jurisdiction in the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the convention. In the USIUK DTA there is an obligation imposed upon the source jurisdiction competent authority to consult with the residence jurisdiction competent authority before refusing to grant benefits of the convention under the antiavoidance test. 4.4.5
What is the Equivalent Beneficiary test?
This Equivalent Beneficiary test is found in Article 23(3) of the UK/US DTA and is broadly to the effect that the test is passed if: the resident is a company; the shares in the company are owned (as to at least 95 percent of the
Availability of DTA benefits
93
aggregate voting power and value of the company) by seven or fewer persons who are Equivalent Beneficiaries; and looking only at the company's deductible payments -less than 50 percent of the company's gross income for the taxable or chargeable period in which the item of income or profit arises is paid or accrued directly or indirectly to persons who are not Equivalent Beneficiaries. 4.4.6
What are deductible payments?
Deductible payments are payments that are deductible for the purposes of the taxes covered by the DTA in the state of which the company is a resident, but excluding: arm's length payments made in the ordinary course of business for services or tangible property; payments in respect of financial obligations to a bank resident of a Contracting State; and payments in respect of financial obligations to a bank not a resident of a Contracting State where the payment is attributable to a PE of that bank located in one of the Contracting States. 4.4.7
Who are Equivalent Beneficiaries?
An Equivalent Beneficiary is defined in Article 23(7)(d) of the UKfUS DTA as a resident of a Member State of the European Union or of a European Economic Area state or of a party to the North American Free Trade Agreement, but only if that resident: would be entitled to all the benefits of a comprehensive convention for the avoidance of double taxation between any Member State of the European Union, or of a European Economic Area state, or any party to the North American Free Trade Agreement and the Contracting State from which the benefits of this convention are claimed, provided that if such convention does not contain a comprehensive "limitation on benefits" article, the person would be a qualified person under paragraph 2 of this Article if such person were a resident of one of the Contracting States under Article 4 (dealing with residence) of the convention. To satisfy this category as an Equivalent Beneficiary there is a further requirement that with respect to income referred to in Article 10 (dividends), 11 (interest) or 12 (royalties) of this convention, the person would be entitled under such convention to a rate of tax with respect to the particular class of income for which benefits are being claimed under the convention that is at least as low as the rate applicable under the convention; or is a company resident in a Member State of the European Union which is entitled under the provisions of any Directive of the European Union to
94
Double Taxation Agreements
receive the particular ~ l ass ~f income for which benefits are being claimed under the convention tree ot withholding tax. EXAMPLE OF THE OPERATION OF ARTICLE 16 OF THE US/AUSTRALIA DTA
To illustrate the 0I?eration of Article 16 it is instructive to consider an example. Take the case ot an individual resident in Singapore, a country with which the United States does not have a treaty. The Singapore resident incorporates an Australian company, Aus~ Co., to license a patent to a US resident. In taxing any royalty, the UnIted States IS normally constrained by Article 12 to restrict its tax to 10 percent of the gross outgoing royalty. Article 16 ensures that this COnstraint on US taxing capacity will not apply unless • Aust Co. is controlled as to at least 50 percent of the aggregate vote and value of its shares by Australian residents; • Aust Co. is a company whose shares are regularly traded on the Australian Stock Exchange; or the competent authority of the United States, in accordance with the law of the United States, accepts that the establishment, acquisition or maintenance of Aust Co. and the conduct of its operations did not have as one of its principal purposes, the obtaining of benefits under the DTA (see in particular Article 16(2)(c) and (5).
4.5
95
The country which has been most active in this context is the United States, h.ich has sought to include anti-conduit provisions in a number of its DTA :egotiatiOn~ an~ has su.cceeded in many. The United Kingdom has resisted the ·nelusion ot anti-condUit legislation 10 most DTAs, although most Importantly ~bere are such provisions in the UKIUSA DTA, which will be considered below. Australia has thus far not included anti-conduit provisions in any of its DTAs. The UKIUS DTA contains a specific definition in Article 3(1 )(n) of "conduit arrangement". This is along the following lines: the term "conduit arrangement" means a transaction or series of transactions: (i) which is structured in such a way that a resident of a Contracting State entitled to the benefits of this Convention receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received that item of income direct from the other Contracting State, would not be entitled under a convention for the avoidance of double taxation between the state in which that other person is resident and the Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than, those available under this Convention to a resident of a Contracting State; and (ii) which has as its principal purpose, or one of its main purposes, obtaining such increased benefits as are available under this Convention.
How do limited LOB provisions work?
Some DTAs have more targeted and therefore limited treaty shopping provisions. An example is to be found in Article 4(5) of the Australia/China DTA, which provides that If a company has become a resident of a Contracting State for the principal purpose of enjoying benefits under this agreement, that company shall not be entitled to any of the benefits of Article 10 (dividends), 11, (interest) and 12 (royalties)
Clearly, the potential scope of this provision is significantly narrower than the AustralialUS DTA provision, which applies to all reliefs under the DTA and is not restricted to specific forms of investment income referred to in the Australia/China DTA.
4.6
Availability of DTA benefits
How do the anti-conduit provisions work?
The fourth and final way in which treaty shopping has been tackled is through the specific conclusion in modern treaties of what are loosely referred to as anti-conduit provisions.
This definition is then applied in a number of operational provisions. Article 10 covering dividends states at Article 10(9): "the provisions of this Article shall not apply in respect of any dividend paid under, or as part of, a conduit arrangement". Similar provisions are made in relation to interest (Article 11(7)), royalties (Article 12(5)), other income (Article 22(4)) and insurance excise tax (Article 7(5)).
The breadth and scope of these provisions is yet to be fully tested, although the US Internal Revenue Code has similar provisions and there are numerous Treasury Regulations that have commented upon the operation of those domestic anti-conduit provisions. Interestingly there appears to be some difference of opinion between the UK and US authorities as to whether the interposition of a company for the purpose of flOWing dividends with a more favourable treaty rate than would otherwise apply would give rise to the application of the anti-conduit provisions. The United States appears to take the view that, if ordinary shares are used, there Would be no application of the anti-conduit provisions, whereas the United Kingdom considers that ordinary shares can be part of a conduit arrangement and thereby give rise to a disentitlement to beneficial withholding tax rates (see 1992 Exchange of Letters in Part VII).
96
Double Taxation Agreements
5
Clearly the UK view seems to accord more properly with the language used in the DTA, and it appears that the US view in relation to the application of the DTA is coloured by the terms and interpretation of US domestic law, which takes the view that, as ordinary shares do not amount to a financing arrangement - a condition required under domestic law - the whole arrangement is not one to which the anti-conduit provisions would apply (see in particular US Treasury Regulations Section 1.881-3 and the article by Mohammed Amin in Tax and Accounting Review, September 2003). It may well be that anti-conduit provisions will be looked at more fully as part of the drive to deal with treaty shopping issues. However, one suspects that one or more of the other techniques may be ramped up in order to deal with these issues.
Avoiding double tax
4.7
5.1
Is there room for the application of GAAR to treaty shopping arrangements?
In the context of treaty shopping, the general anti-avoidance rules ("GAAR") provisions of the domestic laws of a DTA partner country, where such provisions exist, may also be of relevance. Where this is considered a viable approach, the DTA partner country should make the priority given to the GAAR clear in the negotiations and in any documented information (e.g. exchange of letters). The domestic law rules should also expressly confirm that the GAAR applies even in the face of the DTA. Even then the application of GAAR to a structure which is properly designed to take advantage of a DTA from the outset is questionable. However, if it is incorrectly structured to begin with and is then re-structured to take advantage of the relevant DTA, then the prospects for the application of the GAAR increase significantly.
4.8
What is the difference between treaty shopping and basket shopping?
There are other forms of exploitation of DTAs involving shopping between various provisions of a DTA. For example, • structuring a particular income flow to be a royalty rather than a business profit or the other way around, • structuring to avoid characterisation as a dependent agent so as to fall into the independent agent category, and • characterising remittances as interest rather than dividends are all examples of what might be termed basket shopping. This is a distinct and different class of treaty abuse and is more a matter of income characterisation than treaty shopping as such.
What m e thods are there in place to avoid double taxatio n?
As the foregoing principles indicate, it is useful to distinguish the rules that allocate exclusive rights to tax from those that permit both countries to tax, albeit with limits particularly in the case of dividends, interest and royalties. Where the right to tax is shared between the countries, the country of residence is required to give relief in order to avoid double taxation. The two main methods are the exemption method and the foreign tax credit method. A third method, the deduction method, is less commonly utilised. As mentioned, these are typically employed where: A resident of Country A derives income through a permanent establishment in Country B: Country A taxes its resident on worldwide income and Country B taxes the income attributable to the PE on an unrestricted net basis; and A resident of Country A derives dividends, interest or royalties from a source in Country B, not effectively connected to any PE in Country B: Country A taxes its resident on worldwide income and Country B imposes a withholding tax (or withholding obligation), limited by the DTA to 0-15 percent of the gross amounts paid. Under the "principle of exemption", Country A may grant a full exemption in respect of the income sourced in Country B, i.e. no tax is payable to Country A and the exempt foreign income is not taken into account in determining the tax imposed by Country A on the remaining income of the resident. Alternatively, Country A may grant "exemption with progression", i.e. no tax is payable to Country A on the foreign income, but that income is taken into account when determining the tax payable in Country A on the resident's other income. Under the "principle of credit", the tax payable to Country A is first calculated on the worldwide income of the resident (including the income sourced in COuntry B). Country A then reduces the gross tax otherwise payable by the tax paid to Country B. Country A may allow a full credit, i.e. a reduction may be
98
AVOiding double tax
Double Taxation Agreements
Table 5.1
Differences between the three primary methods of double tax relief
V1ethod
Foreign source income Foreign tax (30%)
Exemption
Credit
Deduction
$100,000
$100,000
$100,000
$30,000
$30,000
$30,000
Deduction for foreign tax
Nil
Net domestic income
Nil
$100,000
$70,000
Domestic tax before credit (40%)
Nil
$40,000
$28,000
Less: foreign tax credit
Nil
$30,000
Nil
Final domestic tax payable Total tax paid Average tax rate
Nil
99
d duction as an alternative available at the taxpayer's option - such countries i:dude Canada, Germany, lapan, Ireland, Norway, Sweden, Thailand, the Vnited Kingdom and the Ullited States. . Some countries allow, or have at some stage allowed, a deduction generally b treating the foreign tax payment as an ordinary income tax expense some'~es accompanied by a condition that the income must have been taxa ble in ~~e source jurisdiction - such countries include Belgium, France and Switzerland.
($30,000)
Nil
$10,000
$28,000
$30,000
$40,000
$58,000
30%
40%
58%
allowed for the full amount of the tax paid to Country B. More commonly, the reduction permitted by Country A is restricted to the amount of Country A tax referable to the Country B income, termed an "ordinary credit" in the OECD Commentary, If a full credit is granted where the Country B tax is higher than the Country A tax, the credit can have the effect of lowering the Country A tax on Country A income below what it would be if an exemption with progression were granted for the Country B income, The OECD Model convention provides only for exemption with progression and the ordinary credit method, The exemption and credit methods are not mutually exclusive, and both may be used for different categories of income. The example in Table 5,1 illustrates the key differences between the three primary methods: exemption, credit, deduction. It is based on a hypothetical taxpayer who earns $100,000 income and pays tax at 30 percent in the source jurisdiction and 40 percent in the residence jurisdiction. Clearly the exemption method in such a case provides the greatest benefit to taxpayers, with the deduction method the least. This outcome arises because the exemption method relieves the residence taxpayer of all residence country taxation, while the deduction method relieves residence country tax but only by reference to the residence country's marginal tax rate. The credit method provides a better method than the deduction method as it relieves tax on a dollar-fordollar basis (i.e. for each dollar of foreign tax paid there is a one dollar reduction in residence country taxation). However, in some cases a deduction for foreign taxes could be more favourable. For example, if there are overall losses in the residence jurisdiction, an exemption or credit may well provide no relief. A deduction, on the other hand, may at the very least serve to increase the losses which may well be available for carry forward in the residence jurisdiction. For that reason some countries allow, or have at some stage allowed, a
5.2
What is tax sparing and how does it work?
The use of credit or exemption methods may sometimes lea d to differing outcomes in the same circumstances, which may lead to a DTA containing wha t are known as tax-sparing arrangements. For example, in certain cases a country, especially a developing country, may for particular reasons give concessions t? taxpayers (e.g. tax incentive reliefs to encourage mdusrnal output, or tax holidays) to encourage inbound investment. . When such a country concludes a DTA with another country that applies the exemption method, no restriction of the incentive relief given to the taxpayers arises. However, if the other country applies the credit method, the concessions will be nullified to the extent that the other country only allows a credit for the tax paid at source. 5.2.1
Illustration
Suppose Country A (the source country) allows a reduced rate of tax at 10 percent on certain types of income (normally 30 percent) and Country B (the residence country) has a tax rate of 30 percent. Income of $100,000 is subject to tax in both countries, subject to treaty relief. The amounts of tax payable under each method will be as follows: With the exemption method
With the credit method
Country A
$10,000
Country B
$Nil
Country A
$10,000
Country B
$20,000 ($30,000 - $10,000)
The credit relief provided by Country B, the residence country, will only amount to the amount paid in the source country, and the total tax burden will amount to 30 percent despite the concessions available in the source country. 5.2.2
Solutions
The two countries may agree that the benefit of the concessions are not to be nullified - if so agreed, they will need to derogate from the provisions of Article
100
Avoiding double tax
Double Taxation Agreements
101
23A(2) and Article 23B of the OECD Model. Paragraph 75 of the Commentary to Article 23 considers various ways in which Contracting States may agree not to nullify the tax-sparing arrangement. The two options used principally are: tt!I
Ill!
The state of residence allows a credit for the tax that would have been imposed under general legislation, but for the concessions; or The state of residence exempts income benefiting from the tax-sparing arrangements.
Alternatively, if no tax-sparing arrangements exist and investment into a tax incentive country is being considered, care has to be taken to plan how to repatriate funds from the developing company without incurring home country taxation. This may often be achieved by interposing intermediary holding companies under the parent, which are based in countries which have a DTA with a taxsparing relief or which provide an exemption for foreign source income (see Example 2 below).
Net profits
1.000 0
Tax payable
1.000 10%
Tax sparing arrangements
Yes
No
Deemed tax payable @ 24.5%
245
n/ a
Distribution of profits after tax
1.000
900
0
0
Net receipt in Country A
1.000
900
Gross taxable income in A
1.000
1,000
300
300
Withholding tax
Tax at 30% in Country A Tax sparing credit relief lesser of:
5.2.3
Example 1: Tax sparing vs. no tax sparing
Assume Parent Co., in Country A, owns subsidiaries in Singapore and Ireland, and Country A has a corporate tax rate of 30 percent. Singapore and Ireland both have reduced tax rates, but only the treaty between Country A and Singapore has tax-sparing arrangements, which deems the imposition of the tax which would have been payable. See Fig. 5.1.
Deemed Singapore tax
(245)
Country A tax
(300)
(1 00)
Ireland tax at 10%
Example 2: Interposing intermediary company
A US investor making profits from export-related activity through an Irish branch would pay the full rate of US tax on such profits, recomputed as necessary in accordance with US tax rules. However, if the activities had been set up by a Dutch subsidiary of the US parent, the profits of the Irish activity would be taxable in Ireland (usually at 10 percent if manufacturing/software in IFSC or Shannon) and also would not be taxable in the Netherlands because of the relief for foreign-source income in the Netherlands. This preserves the concessionary tax rate available. DTAs as a rule do not contain tax-sparing arrangements. Historically UK, US and Australian DTAs did commonly contain tax-sparing relief arrangements. These have, however, been progressively phased out over time, and such arrangements are now rare in these countries' DTAs. With the exemption system, two key issues commonly tend to arise: • Are deductions allowed in respect of the exempt income? As a general rule, deductions are only available against income which is taxable; and
0
Country A tax attributable
(300)
Home country tax payable
55
200
1,000
1,000
Summary:
5.2.4
(245)
., Profits
100
.. Foreign tax ,. Home country tax
55
200
.. Net of tax income
945
700
,. Effective tax rate Fig. 5.1
II
5.5%
30%
Example 1 : Tax sparing vs. no tax sparing
. exemptlOn . Wit . h out qua l· f · · · · the so-called Is it to be a genume 1 lCatIOn, or is exempt income taken into account for some other purpose, for exa~ple, t~ calculate the marginal tax rate applicable to other non-exempt mcome. This latter methodology is what we have previously referred to as exemption with progression.
Modern domestic trends have tended to resolve the issues by allowingexpe~se deductions against such exempt income and to veer away from exemption with
102
Double Taxation Agreements
progression except where employment income is in ~ed . DTAs are usually silent on deduction issues, and tend to follow foreign I'lII credit methodologies rather than exemption. Rarely do they allow for ded\..l!liDns of foreign taxes as an expense. Foreign tax credit systems also usually need to granfi: with two issues:
6
N on-discrimination
• Are foreign income amounts and their referable ta~ divided into different classes of income, with no ability to offset excessk eign tax credit in one class against income from a different class? and • Can excess foreign tax credits be carried forwallback to offset against future/past tax on foreign income? Modern domestic trends tend to favour limited clalItS and lesser ability to carry back or forward. This is a simpler, more efficiut and hence less costly approach. However, this trend has been fairly recent, (nJ in less contemporary times the rules were far more complicated. For exa~~ the US domestic tax rules have historically adopted a system with over HI. dasses, and Australia until recently allowed carry-forward of excess foreignll.lC credits for up to five years. Both jurisdictions have recently abandoned the!f:wmplexities, reducing classes - in the case of Australia, to just one class WtL no carry-forward of excess credits. The United States is also engaged in almjor drive to simplify its approach, reducing the classes of income for forei~l tax credit purposes to just two. DTAs tend not to get embroiled in these issues of fnign income classification and carry-forwardl-back matters, but would impliJdy recognise the ability of the domestic laws of sovereign nations to restria Doreign tax credits in these ways.
6.1
What are the purpose and effect of non-discrimination clauses in DTAs?
Article 24 of the OECD Model Tax Convention is a non-discrimination article which aims to forbid discrimination in matters of taxation on grounds of nationality. That is, it tries to ensure that foreign nationals taxable in another country shall not be charged any more tax than individuals native to that countryon income received from similar sources. The article has two main objectives. The first, in paragraph (1), is to prevent discrimination of any kind by one state in taxing nationals of the treaty partner state, whether individuals or companies. There is also a similar protection for stateless persons in paragraph (2). The second objective is to prevent discrimination by one state in relation to residents of the other state in three cases, all relating to business income: II
III
II
in paragraph (3), permanent establishments belonging to DTA partner residents; in paragraph (4), the deduction in computing business profits of interest, royalties and other disbursements paid to treaty partner residents; and in paragraph (5), enterprises owned by treaty partner residents.
The OECD Model Tax Convention applies these requirements, in paragraph (6), to all taxes, including those imposed by local authorities. As noted, Article 24( 1) provides that a national of one country will not be subject in the other country to taxation which is more burdensome than that to which a national of the latter country is subject in the same circumstances. The reference to "the same circumstances" has two main effects. First, individuals, partnerships and companies will be placed in the same position as their legal equivalent in the country concerned. Second, a country which gives special tax privileges to any of its public bodies Or services, or to any non-profit-making institution established for the specific benefit of that country, is not, under Article 24(1), required to extend these privileges to similar bodies of the other country.
104
Double Taxation Agreements
On the other hand, the negative form of Article 24( 1) is deliberate and thus does not prevent a country from giving preferential treatment to a national of the other country, if this is part of its taxation and economic policy. Article 24(3) specifically provides that a permanent establishment of an enterprise of the other country shall not be taxed less favourably than an enterprise of the country itself. In the United Kingdom, the Commerzbank case (The Queen v. Inland Revenue Commissioners, ex parte Commerzbank AG [1993] ECR 1-4017) invoked the nondiscrimination article in respect of UK repayment supplements not being payable to non-residents. However, the judge in the High Court accepted that the discrimination was based on residence, not nationality. Article 25 of the UKlAustralia DTA (2003) provides for non-discrimination based on nationality. From an Australian perspective, this includes an Australian permanent resident that is not a citizen of Australia. This article makes it clear that nationals of one state should be treated in the same way as the other state would treat its own nationals. It is worth noting that during 2007, the OECD released public discussion drafts on the application of Article 24 and published comments with a view to providing greater guidance.
1
Procedures
7.1
What procedures are in place to assist in the effective administration of cross-border taxation?
7. 1. 1
Mutual agreement procedure (<<MAP")
"Mutual agreement procedure" is the term given ro the provisions in DTAs that are designed to provide a method of resolving difficulties arising out of the application of a particular DTA, and to provide for consultation with a view to reaching a satisfactory solution where a taxpayer is subject to taxation contrary to the provisions of the DTA. Typical examples of circumstances within the procedure are given in the OECD commentary to Article 25 of both the 1977 and 1992 OECD Model Conventions. A detailed discussion of the mutual agreement procedure appears in Ruling TR 2000/16 (and 2002 addendum) in relation to foreign transfer pricing adjustments. An agreement has been signed, under Article 24 (Mutual agreement procedure) of the AustralialUS DTA, to facilitate the granting, in appropriate cases, of advance pricing arrangements (APAs) for transfer pricing purposes. At the request of a taxpayer in Australia or the United States (or both), the competent authorities of each country will consult with each other to arrive at an agreement to allocate between the countries the taxpayer's income, deductions, credits or allowances. 7.1.2
Binding arbitration procedure (<
Under recent US DTAs, a provision has been included as an extension of the MAP process which provides for a binding arbitration procedure ("BAP") whereby the competent authorities of the two DTA partners can resolve a MAP case that has not been resolved after a designated time by referring it to an arbitration board. There appear to be two different types of BAP.
106
The first type of BAP, which surfaces in the US/Germany and US/Canada DTAs, allows for BAPs for only some issues, most notably business profits and transfer pricing. Under the second type of BAP, exemplified in the US/Belgium DTA, all matters falling under competent authority jurisdiction are eligible for BAPs. There would appear to be no BAPs within any of the DTAs in the Appendix. 7. f.3
Procedures
Double Taxation Agreements
Exchange
of information
Most DTAs contain an article governing the exchange of information to support the application of the provisions of the DTAs or of the domestic revenue laws of the parties (e.g. see Article 26 of the ChinaJUK, Article 27 of the China/Germany, Article 27 of the AustralialUK and Article 25 of the Australia! US DTAs). Most of the articles broadly follow the pattern of Article 26 of the 1992 OECD Model Tax Convention. In Australia, the Commissioner of Taxation has released Practice Statement PS LA 200613, which outlines the types of information that can be exchanged under Article 19 of the Australia/Singapore DTA, and Practice Statement PS LA 2006/4 dealing with the ability of the US Internal Revenue Service to provide to Australia taxpayer-specific information obtained from the US Virgin Islands and several other US territories. Australia is not a signatory to the OECD Model Tax Convention for Mutual Administrative Assistance in the Recovery of Tax Claims (widely referred to as "Interfipol"). Further, in Australia specific statutory measures (section 23 of the International Agreements Act 1953) • allow the Commissioner to utilise existing information-gathering provisions to meet obligations in an international agreement relating to the gathering and exchange of tax information; • ensure that the exchange of information in accordance with the terms of an international agreement will not constitute a breach of a secrecy provision of a taxation law prohibiting the Commissioner or an officer from making a record of, or disclosing, information; and • codify the Commissioner's ability to gather and exchange information regardless of whether such information is required by the Commissioner for domestic tax purposes. In a related initiative in the area of tax havens and bank secrecy laws, Australia has concluded a tax information exchange agreement with Bermuda, and is negotiating similar agreements with Antigua-Barbuda, Jersey, Guernsey, the Isle of Man, the British Virgin Islands, the Cayman Islands, Anguilla, the Netherlands Antilles and Grenada. Preliminary discussions are also underway with Vanuatu.
1. f. 4
107
Collection procedures
the exchange of \ rtI·cle 26 of the OECD Model Tax Convention, concerning f . . .111 t·ornlation , anticipates the disclosure and confidentiality 0 intormatlon con. . .:erned with the collection of taxes, but does not extend beyond that tunctton. However, 2002 amendments to the OECD Model Convention, mtroduce~ m January 2003, also inserted a new Model Article into the conv.entio~ dealmg with the lending of assistance to treaty partners in the collection 0 revenue claims covered by the Convention. .. . . . This article was introduced as Article 27, and the remammg ongmal Arttcles ) 7 to 30 were renumbered Articles 28 to 3l. - Article 27 seeks to provide the rules under which Contracting States may agree to provide assistance to each other ~n the collection of taxes. It IS noted at the outset that the article should only be mcluded where each state can agree .to provide such assistance, having considered any na~ional law, policy or admmIsrrative considerations which may prevent or restnct such aSSIstance. The commentary also provides a list of factors which contracting states would need to consider in negotiations. The article provides for comprehensive collection assistance, bu~ the commentary for Article 27 also provides an alternative article cove.rmg Ilfru~ed collection assistance that contracting states can bilaterally adopt If they WIsh. The article, or the associated commentary, also discusses the following issues: The competent authorities can, by mutual agreement, decide the details of the practical application of the provisions of the article. . The practical details should include consideration~ of do~umentatlOn, translations, the irrecoverable costs by the states, tIme lImIts, exchange rates and the form of remittances. The ability to restrict the scope of the article to certain taxes ~ the tax~s s?, covered should also be included under the "exchange of InformatIOn article. The ability to limit the application of the article by either or both Articles 1 or 2 as the contracting states decide. In the Australian context, consistent with this article, the Australian income tax law was amended with effect from September 14,2006 to ensure that Australia can meet current and future treaty obligations to provide such assistance. The new rules allow the Australian competent authority to collect tax debts from foreign country debtors, or take action to conserve assets, on behalf of the foreign country, if there is an assistance in collection agreement between Australia a nd the foreign country.
8
The reconstructed alternative Australia/UK DTA
A reconstructed version of the DTA between Australia and the United Kingdom follows. This version attempts to maintain the existing wording of the DTA to the extent possible, but to simplify the structure and ordering to make conceptual analysis clearer and easier to follow. The preceding chapters all link carefully to this reconstructed DTA, and the Chapters link to the specific articles in the following way: Preliminary questions
Chapter 2
Articles 1, 2 and 3
The allocation rules
Chapter 3
Article 4
The exclusion and limiting provisions
Chapter 4
Article 5
The elimination of double tax
Chapter 5
Article 6
Non-discrimination
Chapter 6
Article 7
Procedural matters
Chapter 7
Article 8
The discussion in Chapter 4 is concerned mainly with treaty shopping restrictions. There are no such restrictions in this DTA, but there are other carefully targeted restrictions on DTA benefits in this DTA, which are to be found in a reconstructed form in Article 5.
The reconstructed Australia/UK DTA Article 1 - Is the person covered?
This Convention applies to: (a) an individual who is resident of one or both Contracting States; (b) a company which is a resident of one or both Contracting States; and (c) a body of persons (other than a partnership unless it is a partnership which derives its status from Australian law as a limited partnership which is treated as a taxable unit under the law of Australia) which is a resident of one or both Contracting States.
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Double Taxation Agreements
Article 2 - Is the tax covered?
Article 2.1 - Existing taxes
This Convention applies to: (a) in the case of the United Kingdom, the following existing taxes: (i) the income tax; (ii) the corporation tax; and (iii) the capital gains tax; (b) in the case of Australia, the following existing taxes: (i) the income tax; (ii) the reso~rce rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources; and (iii) the fringe benefits tax, imposed under the federal law of Australia', Article 2.2 - Identical and substantially similar taxes
This Convention also applies to any identical or substantially similar taxes that are Imposed under the Federal law of Australia or the law of the United Kingdom after the date of signature of this Convention in addition to or in place of, the existing taxes. The competent authorities of the Contrac;ing States shall notify each other of any substantial changes that have been made 10 the law of their respective States relating to the taxes to which this Convention applies within a reasonable period of time after those changes. Article 3 - Is the convention in force?
Article 3.1 - Entry into force
(1) E.ach of t~e Contracting States shall notify the other in writing through the dIplomatic channel of the .completion of the procedures required by its law for the entry Into force at this Convention. This Convention shall enter into force on the date of the later notification, and shall thereupon have effect: (a) in the case of Australia: (i) in respect of withholding tax on income that is derived by a ~on-resident, in relation to income derived on or after 1 July next tollowlOg the date on which this Convention enters into force-, (ii) in respect of fringe benefits tax, in relation to fringe benefits
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provided on or after 1 April next following the date on which this convention enters into force; (iii) in respect of other Australian tax, in relation to income or gains of any year of income beginning on or after 1 July next following the date on which this convention enters into force; (b) in the case of the United Kingdom: (i) in respect of taxes withheld at source, for amounts paid or credited on or after 1 July next following the date on which this Convention enters into force; (ii) in respect of income tax not described in clause (i) of this subparagraph and capital gains tax, for any year of assessment beginning on or after 6 April next following the date on which this convention enters into force. (iii) in respect of corporation tax, for any financial year beginning on or after 1 April next following the date on which this Convention enters into force. (2) The Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland signed at Canberra on 7 December 1967 (as amended by the Protocol signed at Canberra on 29 January 1980) ("the Agreement") shall be terminated and shall cease to have effect in respect of dividends paid on or after 1 July next following the date on which this Convention enters into force. Article 3.2 - Termination
(I) This Convention shall remain in force until terminated by one of the Contracting States. (2) Either Contracting State may, on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force, give written notice of termination through the diplomatic channel. (3) If paragraph (2) is triggered, the Convention shall cease to have effect: (a) in the case of Australia: (i) in respect of withholding tax on income that is derived by a non-resident, in relation to income derived on or after 1 January in the calendar year next following that in which the notice of termination is given; (ii) in respect of fringe benefits tax, in relation to fringe benefits
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situated in the ~ource State, the attributable profits of the enterprise may be taxed in the Source State.
provided on or after 1 April in the calendar year next followi . w I· h h . . . ng lIC t e notice ot termll1anon is given; t hat In (iii) in respect of other Australian tax, in relation to income or ga of any year of income beginning on or after 1 July in the cale~~s year next following that in which the notice of termination is ar given; (b) In the case of the United Kingdom: (i) in respect of taxes withheld at source, for amounts paid or credited on or after 1 January in the calendar year next follOWing that in which the notice of termination is given; (ii) in respect of income tax not described in clause (i) of this subparagraph and capital gains tax, for any year of assessment beginning on or after 6 April in the calendar year next foll owing that in which the notice of termination is given; (iii) in respect of corporation tax, for any financial year beginning on or after 1 April in the calendar year next following that in which the notice of termination is given. Article 3.3 - Special termination arrangements for entertainers and sportspersons
If this Convention is terminated, an individual who before the termination was entitled to the benefits of Article 4.14 or 4.15 of the Convention shall continue to be entitled to such benefits until such time as the individual would have ceased to be entitled to such benefits if the Convention had remained in force. Article 4 - Is the item of income or gain covered and, if so, how is the item dealt with?
(3) Qualifications to the Allocation Rule (a)
Circumstances in which this subparagraph (3)(a) applies This subparagraph (3)(a) applies if there is inadequate information vailable to the competent authori ty of a Contracting State to ~etermine the profits attributable to a permanent establishment.
Consequences if this subparagraph (3)(a) applies
If this subparagraph (3)(a) applies: (i) that Contracting State can apply its laws to determine the tax liability of the person concerned without being affected by this Article 4.1; and
iii) that law shall be applied, having regard to the information that is available, consistently with the principles of this Article 4 .l. (b) There are no attributable profits by reason of the mere purchase by a permanent establishment of goods or merchandise for the enterprise. (c) Nothing in this Article 4.1 shall affect the operation of any law of a Contracting State relating to tax imposed on profits for insurance with non-residents, provided that, if the relevant law in force in either Contracting State at the date of signature of this Convention is varied (otherwise in minor respects so as not to affect its general character), the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.
(4 ) Definitions in this Article 4.1 "Attributable profits" means the profits attributable to the permanent establishment and are to be calculated on the basis that:
ACTIVE INCOME
Article 4. 1 - Business proftts
(I) Class to which this Article 4.1 applies This Article 4.1 applies Residence State").
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to
profits of an enterprise of a Contracting State (" the
(2) The Allocation Rule (a) Subject to (b) below, such profits shall be taxable only in the Residence State. (b) However, if the enterprise carries on business in the other Contracting State ("the Source State") through a permanent establishment
(a) the attributable profits are the profits which the enterprise might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities of the same or similar conditions and dealing fully independently with the enterprise of which it is a permanent establishment or with other enterprises; and (b) expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere, are deductible.
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"Permanent establishment" is defined for the purposes of this Article in Article 9.3. (5)
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Priority among classes
Where profits include items of income or gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. Article 4.2 - Shipping and air transport proftts
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(ii) the use of a ship or aircraft for haulage, surveyor dredging activities, or for exploration or extraction activities in r~lation to natural resources, where such activities are undertaken 10 a Contracting State; shall be treated as profits from ship or aircraft operations confined solely to places in that State. (5) Priority among classes
(1) Class to which this Article applies
This Article applies to profits of an enterprise of a Contracting State ("the Residence State") from the operation of ships or aircraft in international traffic.
Article 4.3 - Associated entities proftts
(2) The Allocation Rule
This Article a pplies if:
Such profits shall be taxable only in the Residence State unless the profits are derived from ship or aircraft operations confined solely to places in the Other Contracting State ("the Source State"), in which case to that extent they may be taxed in the Source State. This allocation rule shall also apply to profits from the participation in a pool, a joint business or an international operating agency, but only to so much of the profits so derived as attributable to the participant in proportion to its share in the joint operation. (3) Qualifications to the Allocation Rule
(4) Definitions in this Article 4.2 (a) "Profits from the operation of ships or aircraft in international
traffic" include: (i) profits from the rental on a bareboat basis of ships or aircraft; and (ii) profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise; provided such rental or such use, maintenance or rental, as the case may be, is directly connected or ancillary to the operation of ships or aircraft in international traffic. (b) Profits derived from: (i) the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise which are shipped in a Contracting State and are discharged at the same or another place in that State; or
(1) Class to which this Article applies
(a) (i) an enterprise of a Contracting State participates directly or
. indirectly in the management, control or capital of an enterpnse of the Other Contracting State;
(ii) the same persons participate directly or indirectly in the . management, control or capital of an enterprise of a Contract1Og State and an enterprise of the other Contracting State; and (b) in either case conditions operate between the two enterprises in the commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another; and (c) profits which might, but for those conditions, have been expected to accrue to one of the enterprises, but, by reason of the condinons referred to in (b) above, have not so accrued. (2) The Allocation Rule
Profits which might have so accrued to an enterprise bu~ have not so accrued because of those conditions may be included in the profIts of that enterpnse and taxed accordingly. (3) Qualifications to the Allocation Rule (a) Circumstances in which this subparagraph (3)(a) applies
This subparagraph (3)(a) applies if there is inadequate information available to the competent authority of a Contracting State to determine the profits accruing to an enterprise.
Consequences if this subparagraph (3)(a) applies
If this subparagraph (3)(a) applies:
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(i) that Contracting State can apply its laws to determine the tax liability of the person concerned without being affected by this Article 4.3; and (ii) that law shall be applied, having regard to the information that is available, consistently with the principles of this Article 4.3. (b) Circumstances in which this subparagraph (3)(b) applies
This subparagraph (3)(b) applies if: (i) profits on which an enterprise of a Contracting State ("the Secondary Adjusting State") has been charged tax in that State are also included, by virtue of the provisions of paragraph (2) or (3)(a) of this Article 4.3, in the profits of an enterprise of the other Contracting State ("the Primary Adjusting State") and charged tax in that Primary Adjusting State; and (ii) the profits that are included are profits which might have been expected to have accrued to that enterprise of the Primary Adjusting State if the conditions operative between the enterprises had been those which might have been expected to have operated between independent enterprises dealing wholly independently with one another.
Consequences if this subparagraph (3)(b) applies
If this subparagraph (3)(b) applies: (i) the Secondary Adjusting State shall make an appropriate adjustment to the amount of tax it has charged on those profits; and (ii) in determining such adjustment, due regard shall be had to the other provisions of this Convention, and the competent authorities of the Contracting States shall, if necessary, consult each other.
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(2) Th e A llocation Rule
(a) Such remuneration shall be taxable only in the Residence State if the following three conditions are met: (i) the recipient is present in the Source State for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year or year of income of the Source State; and (ii ) the remuneration is paid by, or on behalf of, an employer who is not a resident of the Source State; and (iii ) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the Source State. (b) In all other cases, such remuneration may be taxed in the Source State. (3) Qualifications to the Allocation Rule
(a ) Notwithstanding anything referred to anywhere else in the Article, if the remuneration is derived in respect of an employment exercised a board a ship or aircraft operated in international traffic, such remuneration may be taxed in the Contracting State of which the enterprise operating the ship or aircraft is a resident. (b) Notwithstanding anything said anywhere else in this Article 4.4, if the remuneration is remuneration in respect of a director of a company which is derived from the company, all the preceding provisions of this Article 4.4 shall apply as if the remuneration were remuneration of an employee in respect of an employment and as if the references to an employer were references to the company. (4 ) Definitions in this Article 4.4
(4) Definitions in this Article 4.3 (5) Priority among classes (5) Priority among classes
Where remuneration includes items of income dealt with in Articles 4.11 (Pensions and Annuities) or 4. 7 (Government Service) of this Convention, those Articles shall apply in priority to this Article.
Article 4.4 - Income from employment
Article 4.5 - Income from independent personal services
(1) Class to which this Article applies
This Article applies to salaries, wages and other similar remuneration derived by a resident of a Contracting State ("the Residence State") in respect of an employment exercised in the other Contracting State (" the Source State").
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Article 4.6 - Fringe benefits
(1) Class to which this Article applies
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in that other Contracting State and the recipient is a resident of that other Contracting State and the recipient is a resident of that other State who:
This Article applies to a fringe benefit which, but for the application of this Article 4.6, would be taxable in both Contracting States.
(i) is a national of that State; or
(2) The Allocation Rule
(ii) did not become a resident of that State solely for the purpose of rendering the services.
Such a fringe benefit will be taxable only in the Contracting State which would have the primary taxing right over that benefit if the value of the benefit were paid to the employee as ordinary employment income.
(3) Qualification to the Allocation Rule
(3) Qualifications to the Allocation Rule
(4) Definitions in this Article 4.7
(4) Definitions in this Article 4.6
(5) Priority among classes
(a) "Fringe benefit" means "fringe benefit" as it is defined in Australia's Fringe Benefits Tax Assess~ent Act 1986 (Commonwealth), as it may be amended fr.o~ time to time, but does not include a benefit arising from the acqUISltIOn of an option over shares under an employee share scheme. (b) A Contracting State has a "primary taxing right" to the extent that it has a taxing right under this Convention in respect of the remuneratio? of the relevant employment, and the other Contracting State 1S reqUIred under this convention to allow relief for any taxes imposed in respect of such remuneration by the first-mentioned Contracting State. (5) Priority among classes
Article 4.7 - Government Service
(1) Class to which this Article applies This Article applies to salaries, wages and other similar remuneration other than a pension or annuity, paid by a Contracting State or a political ' subdivision or local authority of that State to an individual in respect of serV1ces rendered in the discharge of governmental functions. (2) The Allocation Rule (a) Subject to (b) below, such salary, wages and remuneration are taxable only in that State. (b) However, such salary, wages or other similar remuneration are taxable only in the other Contracting State if the services are rendered
The provisions of (2) above shall not apply to salary, wages and other similar remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or local authority of that State. In that case, the provisions of Article 4.4 (Income from employment), 4.6 (Fringe benefits), 4.16 (Entertainers and sports persons - income earned) or 4.17 (Entertainers and sportspersonsincome accrued in a third person) as the case may be shall apply. PASSIVE INCOME
Article 4.8 - Dividends (1) Class to which this Article applies
This Article applies to dividends which: (a) are paid by a company which is a resident of a Contracting State ("the Source State"); and (b) are beneficial(y owned by a resident of the other Contracting State ("the Residence State") . (2) The Allocation Rule Such dividends: (a) may be taxed in the Residence State; and (b) may be taxed in the Source State according to the law of that State but only to a maximum rate of: (i) 0 percent if: the beneficial owner of the dividends is a company; and the company owns and has owned shares representing 80 percent
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or more of the voting power of the company paying the dividend for a 12-month period ending on the date the dividend is declar d~ and e , the company that is the beneficial owner of the dividends meets anyone of the three Zero Rate Conditions defined in subparagraph (4) below; or (ii) 5 percent of the gross amount of the dividends if: (i) above does not apply; and the beneficial owner of the dividends is a company; and the company holds directly at least 10 percent of the voting power m the company paymg the dividends; or (iii) 15 percent of the gross amount of the dividends in all other cases. (3) Qualifications to the Allocation Rule (a)
Circumstances in which this subparagraph (3)(a) applies This subparagraph (3)(a) applies if: (i) the ?eneficial owner of the dividends, being a resident of the Residence State, carries on business in the Source State through a permanent establishment in the Source State; and (ii)
t~e
holding in respect of which the dividends are paid is etfectIvely connected with such permanent establishment.
Consequences if this subparagraph (3)(a) applies
If this subpar~graph (3)(a) applies, paragraphs (1) and (2) do not apply and Article 4.1 applies. (b) Circumstances in which this subparagraph (3)(b) applies
This subparagraph (3)(b) applies if: (i) a company being a resident of the Residence State derives profits or mcome from the Source State',
(ii) the company pays a dividend which is beneficially owned by a person who IS not a resident of the Source State', (iii) the holding in respect of which such dividends is paid is not effectively connected with a permanent establishment situated in the Source State; and (iv) the dividends are not paid by a company which is a resident of Australia for the purposes of Australian tax and which is also a resident of the United Kingdom for the purposes of United Kingdom tax.
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Consequences if this subparagraph(3)(b) applies
If this subparagraph (3)(b) applies: (i) the Source State shall not impose any tax on the dividends paid by the company; and (ii) the Source State shall not subject the company's undistributed profits to tax on undistributed profits even if the dividends paid or the undistributed profits consist wholly or partly of profits or income from the Source State. tc) No relief shall be available under this Article 4.8 if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of the dividend is paid to take advantage of this Article 4.8 by means of that creation or assignment. (4 ) Definitions in this Article 4.8
ta) "Dividends" means: (i) income from shares or other rights, not being debt-claims, participating in profits; (ii) income from other corporate rights which is subject to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident; (iii) any other item which, under the laws of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company; (b) "Principal class of shares" means the ordinary or common shares of the company, provided that such class of shares represents a majority of the voting power and value of the company. If no single class of ordinary or comfnon shares represents the majority of the voting power and value of the company, the "principal class of shares" is that class or those classes that in the aggregate represent a majority of the voting power and value of the company. (c) "Zero Rate Conditions" are: (i) the company has its principal class of shares listed on a recognised stock exchange specified in subparagraph (i) or (ii) of paragraph (0) of Article 9.1 and regularly traded on one or more recognised stock exchanges; (ii) the company is directly or indirectly owned by one or more companies whose principal class of shares is listed on a recognised
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interest if the interest is derived by a financial institution which is unrelated to and dealing wholly independently with the payer.
stock exchange specified in subparagraph (i) or (ii) of subparagraph to) of paragraph (I) of Article 9.1 and regularly traded on one or more recognised stock exchanges; or (iii) the company does not meet the requirements of subparagraphs (a) or (b) of this subparagraph but the competent authority of the Source State determines, in accordance with the law of that State, that the establishment, acquisition or maintenance of the company that is the beneficial owner of the dividends and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under this Convention. The competent authority of the Source State shall consult the competent authority of the Residence State before refusing to grant benefits of this Convention under this subparagraph (iii).
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(ii) However. if the interest is paid as part of an arrangement involving back-to-back loans or another arrangement that is economically equivalent and intended to have a similar effect to back-to-back loans, then the interest may be taxed in the Source State at a rate not exceeding 10 percent of the gross amount of the interest. (c)
Circumstances in which this subparagraph (3)(c) applies This subparagraph (3 )(c) applies if:
(5) Priority among classes
(i) the beneficial owner of the interest, being a resident of the Residence State, carries on business in the Source State through a permanent establishment situated in the Source State; and
Article 4.9 - Interest
(ii) the indebtedness in respect of which the interest is paid or credited is effectively connected with such permanent establishment.
(I) Class to which this Article applies This article applies to interest which: (a) arises in a Contracting State ("the Source State"); and (b) is beneficially owned by a resident of the other Contracting State ("the Residence State"). (2) The Allocation Rule
Such interest: (a) may be taxed in the Residence State; and (b) may be taxed in the Source State according to the law of the Source State but only to a maximum rate of 10 percent of the gross amount of the interest. (3) Qualifications to the Allocation Rule
(a) Notwithstanding paragraph (2) above, only the Residence State can tax the interest if the interest is derived by a Contracting State or by a political or administrative subdivision or a local authority thereof, or by any other body exercising governmental functions in the Contracting State, or by a bank performing central banking functions in a Contracting State. (b) (i) Notwithstanding paragraph (2) above, but subject to subparagraph (b)(ii) below, only the Residence State can tax the
Consequences if this subparagraph (3)(c) applies
If this subparagraph (3)(c) applies, this Article 4.9 does not apply and Article 4.1 applies. (d) Circumstances in which this subparagraph 3(d) applies
This subparagraph (3)(d) applies if: (i) there is a special relationship between the payer and the beneficial owner of the interest or between both of them and some other person; and (ii) by reason of that special relationship, the amount of the interest paid or credi,ed exceeds, for whatever reason, the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship (this latter amount being the "reasonable amount").
Consequences if this subparagraph (3)(d) applies
If this subparagraph (3)(d) applies: (i) the provisions of this Article 4.9 apply only to the reasonable amount; and (ii) the excess part of the amount of the interest paid or credited shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this convention.
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ualifications to the Allocation Rule
(e) No relief shall be available under this Article 4.9 if it was the mai purpose or one of the main purposes of any person concerned Wit~ the creation or assignment of the debt claim in respect of which the interest is paid to take advantage of this Article by means of debt creation or assignment.
(3)
Q
(a)
ClrClln1stances ill which this subparagraph (3)(a) applies This subparagraph (3)(a) applies if: (i) the beneficial owner of the royalties, being the resident of a Contracting State, carnes on busmess m the Source State through a permanent establishment situated in that Source State; and
(4) Definitions in this Article 4.9
"Interest" means
(ii) the right or property in respect of which the royalties are paid or credited is effectively connected with that permanent esta blishment.
(a) income from debt-claims of every kind, whether or not secured bv mortgage and whether or not carrying a right to participate in th~ debtor's profits; and
Consequences if this subparagraph (3)(a) applies
(b) income from government securities and income from bonds or debentures ;and
If this subparagraph (3)(a) applies, paragraph (2) above does not
(c) income from any other form of indebtedness; and
apply and in that case the provisions of Article 4.1 of this Convention shall apply.
(d) income which is subject to the same taxation treatment as income for money lent by the Source State. "Financial institution" means a bank or other enterprise substantially deriving its profits by raising debt finance in the finance markets or by taking deposits at interest and using those funds in carrying on a business of providing finance.
This subparagraph (3)(b) applies if: (i) there is a special relationship between the payer and the beneficial owner of the royalties or between both of them and some other person; and (ii) by reason of that special relationship, the amount of the royalties paid or credited exceeds, for whatever reason, the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such a relationship (this latter amount being the "reasonable amount").
(5) Priority among classes Interest does not include any item which is treated as a dividend under the provisions of Article 4.8 of this Convention.
Article 4.10 - Royalties (1) Class to which this Article applies
Consequences if this subparagraph (3)(b) applies
If this subparagraph (3)(b) applies:
This article applies to royalties which:
(i) the provisions of this Article 4.10 shall apply only to the reasonable amount; and
(a) arise in a Contracting State ("the Source State"); and (b) are beneficially owned by a resident of the other Contracting State ("the Residence State").
(ii) the excess paid or credited shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
(2) The Allocation Rule Such royalties: (a) may be taxed in the Residence State; and (b) may be taxed in the Source State according to the law of the Source f
State but only to a maximum rate of 5 percent of the gross amount the royalty.
(b) Circumstances in which this subparagraph (3)(b) applies
0
(c) The provisions of this Article 4.10 shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royal.tIes are paid to take advantage of this Article by means of that creatIOn or assignment.
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(4) Definitions in this Article 4.10 (a) "Royalties" means payments or credits, whether periodical or n and however described or computed, to the extent to which theyOt, · f or: are rna d e as consl·d eratlon (i) the use of, or the right to use, any copyright, patent, design Or model, plan, secret formula or process, trademark or other lik . h e property or ng t; (ii) the supply of scientific, technical, industrial or commercial knowledge or information; (iii) the supply of an ancillary or subsidiary assistance that is furnished as a means of enabling the application or enjoyment of any such item as is mentioned in subparagraph (i) or (il) of this paragraph; (iv) the use of or the right to use: motion picture films; or films or audio tapes or video tapes or discs, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting; or (v) total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph. (b) Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment, then the royalties shall be deemed to arise in the state in which the permanent establishment is situated. (5) Priority among classes
(3)
4)
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·fication to the Allocation Rule Q tla lz /' Definitions in this Article 4.11
.ty" means a stated sum paid periodically to an individual at stated . a speci·f·Ie d or ascertama . bl e peno . d 0 f time . un d er . during life or d unng tunesbligation to make the payments m . return f or adequate and full (he O , h ·deration in money or money s wort . conSI (5) Priority among classes "Atltlttt
Article 4.12 - Income (rom real property
(1) Class to which this Article applies This Article applies to income derived by a resident of a Contracting State ("the Residence State") from real property. (2) The Allocation Rule Such income may be taxed in the Contracting State in which the real property is situated ("the Source State"). (3) Qualification to the Allocation Rule (a) subparagraph (2) of this Article 4.12 shall apply to income derived from the direct use, letting, or use in any other form of real property. (b) subparagraphs (2),(3)(a) and (4)(b) shall also apply to the income from real property of an enterprise. (4) Definitions in this Article 4.12
(a) "Real property" has the same meaning as it has under the law of the
Source State nd in any case includes: (i) a lease of land or any other interest in or over land; (ii) property accessory to real property;
Article 4.11 - Pensions and Annuities
(iii) livestock and equipment used in agriculture and forestry;
(1) Class to which this Article applies
(iv) usufruct of real property;
This Article applies to pensions (including Government pensions) and annuities paid to a resident of a Contracting State (" the Residence State").
(v) a right to explore for mineral oil or gas deposits or other natural resources, and a right to mine those deposits or resources; and
(2) The Allocation Rule
(vi) a right to receive variable or fixed payments either as conSideration for or in respect of the exploitation of, or the right
Such pensions and annuities shall be taxable only in the Residence State.
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(4) Definitions in this Article 4.10 (a) "Royalties" means payments or credits, whether periodical or not and however described or computed, to the extent to which they; ' for: re rna de as const' d erauon (i) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right;
(3)
Qualification to the Allocation Rule
(4)
Definitions in this Article 4.11
y" means a stated sum paid periodically to an ind~vidual at stated Uit . es during life or dunng a speCIfied or ascertamable penod of ume under t~ obligation to make the payments in return for adequate and full ~onsideratiOn in money or money's worth.
"/l.1tn
(ii) the supply of scientific, technical, industrial or commercial knowledge or information;
(5) Priority among classes
(iii) the supply of an ancillary or subsidiary assistance that is furnished as a means of enabling the application or enjoyment of any such item as is mentioned in subparagraph (i) or (ii) of this paragraph;
Article 4.12 - Income (rom real property
(iv) the use of or the right to use: motion picture films; or films or audio tapes or video tapes or discs, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting; or (v) total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph. (b) Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment, then the royalties shall be deemed to arise in the state in which the permanent establishment is situated.
(5) Priority among classes
127
(1) Class to which this Article applies This Article applies to income derived by a resident of a Contracting State ("the Residence State") from real property.
(2) The Allocation Rule Such income may be taxed in the Contracting State in which the real property is situated ("the Source State").
(3) Qualification to the Allocation Rule (a) subparagraph (2) of this Article 4.12 shall apply to income derived from the direct use, letting, or use in any other form of real property. (b) subparagraphs (2),(3)(a) and (4)(b) shall also apply to the income from real property of an enterprise.
(4) Definitions in this Article 4.12 (a) "Real property" has the same meaning as it has under the law of the Source Start and in any case includes: (i) a lease of land or any other interest in or over land; (ii) property accessory to real property;
Article 4.11 - Pensions and Annuities
(iii) livestock and equipment used in agriculture and forestry;
(1) Class to which this Article applies
(iv) usufruct of real property;
This Article applies to pensions (including Government pensions) and annuities paid to a resident of a Contracting State ("the Residence State").
(v) a right to explore for mineral oil or gas deposits or other natural resources, and a right to mine those deposits or resources; and
(2)
The Allocation Rule
Such pensions and annuities shall be taxable only in the Residence State.
(vi) a right to receive variable or fixed payments either as consideration for or in respect of the exploitation of, or the right
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to explore or exploit, mineral, oil or gas deposits, quarries or other places of extraction or exploitation of natural resources.
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(5) Priority among classes
"Real property" does not include ships and aircraft. (b) Any interest or right referred to in subparagraph (a) above shall be regarded as situated where the land, mineral, oil or gas deposits, quarries or natural resources, as the case may be, are situated or where the exploration may take place. (5) Priority among classes
Article 4.14 - Income or gains from the alienation of ships or aircraft, etc. (1) Class to which this Article applies
Income or gains derived by a resident of a Contracting State ("the Residence State") from the alienation of ships or aircraft operated in international traffic, or a property (other than real property) pertaining to the operation of those ships or aircraft. (2) The Allocation Rule
Article 4.13 - Income or gains from the alienation of property (1) Classes to which this Article applies
Such income or gains shall be taxable only in the Residence State. (3) Qualification to the Allocation Rule
This Article applies to: (a) Income or gains derived by a resident of a Contracting State ("the Residence State") from the alienation of real property situated in the other Contracting State ("the Source State"). (b) Income or gains from the alienation of property, other than real property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State ("the Residence State") has in the other Contracting State ("the Source State"), including such income or gains from the alienation of such a permanent establishment (alone or with the whole enterprise); and (c) Income or gains derived by a resident of a Contracting State ("the Residence State") from the alienation of any shares or other investments in a company, or of an interest of any kind in a partnership, trust or other entity, where the value of the assets of such entity, whether they are held directly or indirectly (including through one or more interposed entities, such as, for example, through a chain of companies), is principally attributable to real property situated in the other Contracting State ("the Source State"). (2) The Allocation Rule
In each of (a) (b) and (c) above, such income or gains may be taxed in the Source State. (3) Qualification to the Allocation Rule
(4) Definitions in this Article 4.13
(4) Definitions ill this Article 4.14
(5) Priority among classes
Article 4.15 - Deferred property income or gains (1) Class to which this Article applies
This Article applies where: (a) the income or gains relate to property; (b) an individual elects under the taxation law of a Contracting State to defer taxation on that income or gains in circumstances where that income or gains would otherwise be taxed in that State upon the • individual ceasing to be a resident of that State for the purposes of its tax. (2) The Allocation Rule
Such income or gains shall, if the individual is a resident of the other state, be taxable on income or gains from the subsequent alienation of that property only in that other state. (3) Qualification to the Allocation Rule
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(4) Definitions in this Article 4.15
(4) Definitions in this Article
(5) Priority among classes
(5) Priority among classes
131
This Article 4.17 applies in priority to Article 4.1 (Business profits) and Article 4.4 (Income from employment). NATURE OF THE TAXPAYER ARTICLES
Article 4.18 - Students Article 4.16 - Entertainers and sportspersons - income earned (I) Class to which this Article applies
(l) Class to which this Article applies This Article applies to a student who:
This Article applies to income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that person's personal activities as such exercised in the other Contracting State ("the Source State").
(i) is a resident of a Contracting State ("the Residence State") or who was a resident of the Residence State immediately before visiting the other State ("the Source State"); and
(2) The Allocation Rule
(ii) is temporarily present in the Source State solely for the purpose of the student's education; and
Such income may be taxed in the Source State. (3) Qualification to the A llocation Rule
(iii) receives payments from sources outside the Source State for the purpose of the student's maintenance or education. (2) The Allocation Rule
(4) Definitions in this Article 4.16
Such payments shall be exempt from tax in the Source State. (3) Qualification to the Allocation Rule
(5) Priority among classes
This Article 4.16 applies in priority to Articles 4.1 (Business profits) and Article 4.4 (Income from employment). Article 4.1 7 - Entertainers and sportspersons - income accrued in a third person
(4) Definitions in this Article 4.18
(5) Priority among classes
(I) Class to which this Article applies
This Article applies to income in respect of personal activities exercised by an entertainer or a sportsperson in that person's capacity as such where that income accrues not to that person but to another person.
•
Article 4.19 - Professors and teachers
(2) The Allocation Rule OTHER INCOME ARTICLE
Such income may be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised. (3)
Qualification to the Allocation Rille
Article 4.20 - Other income (I) Classes to which this Article applies
This Article applies to items of income beneficially owned by a resident of a CO~tracting State ("the Residence State") not dealt with in the foregoing ArtlCles of this Convention.
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(2) The Allocation Rule
Such income: (a) may be taxed in the Residence State; (b) may be taxed in the other Contracting State ("the Source State") if the items of income are from sources in the Source State. (3) Qualifications to the Allocation Rule (a)
Circumstances in which this subparagraph (3)(a) applies
133
(ii) the excess shall remain taxable according to the laws of each Contracting State, due regard being had to the other applicable provisions of this Convention. (c) A person may not rely on this Article 4.20 to obtain relief from taxation if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the income is derived to take advantage of this Article 4.20 by means of that creation or assignment. (4) Definitions in this Article 4.20
This subparagraph (3)(a) applies if: (i) income is derived by a resident of a Contracting State ("the Residence State"); and
(5) Priority among classes
(ii) that resident carries on business in the Contracting State through a permanent establishment situated therein; and (iii) the right or property in respect of which the income is paid is effectively connected with that permanent establishment; and
Article 5 - How is the operation of the Convention excluded or limited?
(iv) the income is not income from real property as defined in subparagraph (4)(a) of Article 4.12.
Article 5.1 - Remittance based taxing states
Consequences if this subparagraph (3)(a) applies
This Article 5.] applies if:
If this subparagraph (3)(a) applies: (i) paragraph (2) does not apply; and (ii) the provisions of Article 4.1 of this Convention shall apply. (b) Circumstances in which this subparagraph (3)(b) applies
This subparagraph (3)(b) applies if: (i) there is a special relationship between the person referred to in paragraph (1) and some other person or between both of them and some third person; and
Circumstances in which this Article 5.1 applies
(i) under this Convention any income or gains are relieved from tax in a Contracting State ("the Relieving State"); and (ii) under the law in force in the other Contracting State ("the Remittance-Based Taxing State"), a person in respect of that income or those gains is taxed by reference to the amount thereof which is remitted to or received in the Remittance-Based Taxing State and not by reference to the full amount thereof.
Consequences if this-Article 5.1 applies
If this Article 5.1 applies the relief to be allowed under this Convention in the ~elieving State shall apply only to so much of the income or gains as is taxed In the Remittance-Based Taxing State.
(ii) the amount of the income referred to in paragraph (1) of this Article 4.20 exceeds the amount (if any) which might reasonably have been expected to have been agreed upon between them in the absence of such a relationship ("the reasonable amount").
Article 5.2 - Temporary-residents-based taxing states Circumstances in which this Article 5.2 applies
Consequences if this subparagraph (3)(b) applies
This Article 5.2 applies if:
If this subparagraph (3)(b) applies:
(i) under this Convention any income or gains are relieved from tax in a
(i) the provisions of this Article 4.20 shall apply only to the reasonable amount; and
Contracting State ("the Relieving State"); and (ii) under the law in force in the other Contracting State ("the
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Temporary-Residents-Based Taxing State"), an individual in respect of that income or those gains is exempt from tax by virtue of being a temporary resident of the Temporary-Residents-Based Taxing State within the meaning of the applicable tax laws of the Temporary-Residents-Based Taxing State.
Consequences if this Article 5.2 applies
If this Article 5.2 applies, the relief to be allowed under this Convention in the Relieving State shall not apply to the extent that that income or those gains are exempt from tax in the Temporary-Residents-Based Taxing State. Article 5.3 - Partnerships
Circumstances in which this Article 5.3 applies This Article 5.3 applies if: (i) a partnership is treated as a taxable unit under the law of a Contracting State ("the Residence State"); and (ii) under any provision of this Convention ("the Limiting Provision") the partnership is entitled, as a resident of that State, to relief from tax in the other Contracting State ("the Source State") on any income or gains.
Consequences if this Article 5.3 applies
If this Article 5.3 applies: (i) the Limiting Provision shall not be construed as restricting the right of the Source State to tax any member of the partnership who is a resident of the Source State on that member's share of such income or gains; and (ii) such income or gains shall be treated for the purposes of Article 5 of this Convention as income or gains from sources in the Residence State. Article 5.4 - Members posts
of diplomatic missions or permanent missions and consular
Nothing in this Convention shall affect the fiscal privileges of members of diplomatic missions or permanent missions or consular posts under the general rule of international law or under the provisions of special international agreements.
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Article 6 - How is double taxation eliminated?
Article 6.1 - Credit for United Kingdom tax against Australian tax
ClrClJmstances in which this Article 6.1 applies This Article 6.1 applies if: (i) United Kingdom tax is paid under the laws of the United Kingdom and in accordance with this Convention, whether directly or by deduction; and (ii) the tax so paid is in respect of income or gains derived by a person who is a resident of Australia; and (iii) the tax so paid is in respect of income or gains derived from income or gains that have a source in the United Kingdom.
Consequences if this Article 6.1 applies
If this Article 6.1 applies, United Kingdom tax so paid shall be allowed as a credit against Australian tax payable in respect of that income. Article 6.2 - Credit for United Kingdom tax (on proftts out of which a dividend is paid) against Australian tax
Circumstances in which this Article 6.2 applies This Article 6.2 applies if: (i) a company (the "United Kingdom resident company") is a resident of the United Kingdom and is not a resident of Australia for the purposes of Australian tax; and (ii) the United Kingdom resident company pays a dividend to a company (the "Australian resident company") which is a resident of Australia; and (iii) the Australian resident company controls directly or indirectly at least 10 percent of the voting power of the United Kingdom resident company.
Consequences if this Article 6.2 applies
If this Article 6.2 applies, the credit referred to in Article 6.1 above shall include the United Kingdom tax paid by the United Kingdom company in respect of that portion of its profits out of which the dividend is paid. Article 6.3 - Credit for Australian tax against United Kingdom tax
Circumstances in which this Article 6.3 applies This Article 6.3 applies if:
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(i) Australian tax is payable under the laws of Australia and in accordance with thIs Convention, whether directly or by ded . and uctlOn; (ii) t h.e t~x so pay~bl~ is on income or chargeable gains from sources withIn Australia (I~ the case of a dividend, excluding tax payable' respect of the profits out of which the dividend is paid). ill
Consequences if Article 6.3 applies Art~cle 6.3 app~ies A~stralian tax so payable shall be allowed as a agaInst any UOlted KIngdom tax computed by reference to the sam Income or chargeable gains by reference to which the Australian ta' e computed. x IS
If this ~redlt
Article 6.4 - Credit for Australian tax on profits out of which a dividend is paid against United Kingdom tax
Circumstances in which this Article 6.4 applies This Article 6.4 applies if: (i) a h dividend is paid by a company (the "Aus t ra I'Ian resl'd ent company") i' . w . ch IS a reslden~, of A~stralia to a company ("the United Kingdom resident company ) which IS a resident of the United Kingdom; and
(ii) t h e U nite d Kingdom .resident company controls directly or indirectly at least 10 percent ot the votIng power in the Australian resid t company. en
Consequences if this Article 6.4 applies
If this Article 6.4 a~plies, the credit referred to in Article 6.3 above shall tax payable by the United Kingd om resl'd ent company Include the fAustralian . h In respect 0 t at portion of its profits out of which the dividend is paid. Article 6.5 - Source
For the 6.1 ' 6 .2 , 6 .3 and 6 .4 of thOIS Artlc . Ie, Income . . purposes of paragraphs . C::hga~ns owned by a ~esldent of a Contracting State ("the Residence State") . . IC d may be. taxed h h ' In the other Contracting State the ("the So urce State ") In accor ance Wit t IS Convention shall be deemed to . f . h anse rom sources In t e Source State.
Article 7 - How is non-discrimination dealt with?
137
hi h is other or more burdensome than the taxation and connected c. ern to which nationals of that other State in the same ents reqUif . Iar Wit . h respect to resl'd ence, are or may be circumstances, ill partlcu
W
subjected.
Article 7.2 the taxation on a permanent establishment which an enterprise of a Contractillg State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in similar circumstances. Article 7.3 Except where the provisions of paragra ph (1) and paragraph (2) of Article 4.3, paragraph 3(d) or 3(e) of Article 4.9, paragraph 3(b) or 3(c) of Article 4.10, or paragraph 3(b) or 3{c) of Article 4.20 of this Convention apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Article 7.4 Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled directly or indirectly by one or more residents of the other contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State in similar circumstances are or
may be subjected.
Article 7.5 Nothing contained in this }..rticle shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident. Article 7.6 This Article shall not apply to any provision of the laws of a Contracting State which: (a) is designed to prevent the avoidance or evasion of taxes;
Article 7.1 National~
of a Contracting State shall not be subjected in the other ContractIng State to any taxation or any requirement connected therewith ,
(b) does not permit the deferral of tax arising on the transfer of an asset where the subsequent transfer of the asset by the transferee would be beyond the taxing jurisdiction of the Contracting State under its laws;
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(c) provides for consolidation of group entities for treatment as a single entity for tax purposes, provided that Australian resident companies that are owned directly or indirectly by residents of the United Kingdom can access such consolidation treatment on the same terms and conditions as other Australian resident companies; (d) provides deductions to eligible taxpayers for expenditure on research and development; or (e) is otherwise agreed to be unaffected by this Article in an Exchange of Notes between the Government of Australia and the Government of the United Kingdom.
Article 7.7 The provisions of this Article shall apply to the taxes which are the subject of this Convention. Article 8 - What procedures are there in the Convention to allow for mutual agreement and exchonge of information?
Article 8.1 - Mutual agreement procedures
(1) Circumstances in which this Article 8.1 applies This Article 8.1 applies if: (i) a person is a resident of a Contracting State; and (ii) that person considers that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with this Convention.
Consequences if this Article 8.1 applies If this Article 8.1 applies, that person may, irrespective of the remedies provided by the domestic law of those States concerning taxes to which this Convention applies, present a case to the competent authority of the Contracting State of which that person is a resident or, if the case comes under Article 7.1 of this Convention, to that of the Contracting State of which that person is a national. (2) The competent authority shall endeavour, if the case appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. (3) The competent authorities of the Contracting States shall jointly
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endeavour to resolve by mutual agreement any difficulties or doubts arising JS to the interpretation or application of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. (4 ) The competent authorities of the Contractin~ States may com~unicate with each other directly for the purpose of reach10g an agreement 10 the sense of the preceding paragraphs.
For the purposes of paragraph 3 of Article XXIT (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph (3) of this Article 8.1 or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States. (5 )
Article 8.2 - Exchange of information procedures (1) The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant to the administration or enforcement of the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which this Convention applies, insofar as the taxation under those laws is not contrary to this Convention. The exchange of information is not restricted by Article 1 of this convention. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes to which this Convention applies. Such persons or authorities shall use the intormation only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. (2) If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall obtain that information in the same manner and to the same extent as if the tax of the first-mentioned State were the tax of that other State and were being imposed by that other State, notwithstanding that the other State may not, at that time, need such Information for the purposes of its own tax. 3 ) In no case shall the provisions of paragraphs (1) or (2) of this Article 8.2 be construed so as to impose on a Contracting State the obligation:
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a) to carry out administrative measures at variance with the laws or the administrative practice of that or of the other Contracting State; b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or c)
to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or to supply information the disclosure of which would be contrary to public policy.
141
(cl "Australian tax" means tax imposed by Australia, being tax to which this Convention applies by virtue of Article 2; (d )
"United Kingdom tax" means tax imposed by the United Kingdom, being tax to which this Convention applies by VIrtue of Article 2;
(el "a Contracting State" and "the other Contracting State" mean the United Kingdom or Australia, as the context reqwres; (f) "person" includes an individual, company and any other bod: of persons, but subject to paragraph (2) of this Article does not mclude a
Article 9 - What are the Convention definitions and deemings?
partnership; (g) "company" means any body corporate or anything that is treated as a company or body corporate for tax purposes;
Article 9.1 - General
(h) "enterprise" applies to the carrying on of any business;
(1) For the purposes of this Convention, unless the context otherwise reqwres:
(i) "enterprise of a Contracting State" and "enterprise of the other
(a) "United Kingdom" means Great Britain and Northern Ireland, including any area outside the territorial sea of the United Kingdom which in accordance with international law has been or may hereafter be designated, under the laws of the United Kingdom concerning the Continental Shelf, as an area within which the rights of the United Kingdom with respect to the seabed and subsoil and their natural resources may be exercised; (b) "Australia", when used in a geographical sense, excludes all external territories other than: (i) the Territory of Norfolk Island; (ii) the Territory of Christmas Island; (iii) the Territory of Cocos (Keeling) Islands; (iv) the Territory of Ashmore and Cartier Islands; (v) the Territory of Heard Island and Macdonald Islands; and (vi) the Coral Sea Islands Territory, and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the seabed and subsoil of the Continental Shelf;
Contracting State" mean respectively an enterpnse ca.rned on by a resident of a Contracting State and an enterpnse carned on by a resident of the other Contracting State; (j) "international traffic" means any transport by a shiP.or air~raft by an enterprise of a Contracting State, except when the ShIP or aIrcraft IS operated solely from a place or between places m the other Contracting State; (k) "competent authority" means:
(i) in the case of the United Kingdom, the Commissioners of Inland Revenue or their authorised representative; (ii) in the case of Australia, the Commissione~ of Taxation or an authorised representative of the CommlSSlOner;
(1) "national" means: (i) in relation to th/United Kingdom, any British citizen, or any British subject not possessing the citizensh~p of any ?th~r. Commonwealth country or territory, prOVIded that mdivldual has the right of abode in the United Kingdom; and a.ny company deriving its status as such from the law in force m the Umted Kingdom.; (ii) in the case of Australia, an Australian citizen or an individual not possessing citizenship who has been granted permanent resld~ncy status; and any company deriving its status as such from the aw in force in Australia;
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of the State with which the individual's person and economic relations are closer (centre of vital interests);
(m) "business" includes the performance of professional services and of other activities of an independent character; (n) "tax" means Australian tax or United Kingdom tax as the context requires, ~u~ does not include any penalty or interest imposed under the law ot either Contracting State relating to its tax; (0) "recognised stock exchange" means:
(i) t he Austra Iian Stock Exchange and any other Australian stock
exchange recognised as such under Australian law·, (ii) the London Stock Exchange and any other United Kingdom mvestment exchange recognised under United Kingdom law; or (iii) any other stock exchange agreed upon by the competent authorities. (2) As regards the application of this Convention at any time by a Contractmg State, any term not defined therein shall, unless the context o~herwlse requires, have the meaning that it has at that time under the laws ot that St~te for the purpose.s of the taxes to which this Convention applies, any ~earu~g under the applIcable tax laws of that State prevailing over a meaning given to the term under the laws of that State. Article 9.2 - Residence
(1) For the purposes of this Convention, a person is a resident of a Contracting State:
(b) if the Contracting Sta te in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national; (c) if the individual is a national of both Contracting States or of neither of them, the competent authorities of the contracting States shall endeavour to resolve the question by mutual agreement. (4) Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. (5) Notwithstanding paragraph (4) of this Article 9.2, where by reason of paragraph of (1) of this Article a company, which is a participant in a dual-listed company arrangement, is a resident of both Contracting States then it shall be deemed to be a resident only of the Contracting State in which it is incorporated, provided it has its primary stock exchange listing in that State. (6) The term "dual-listed company arrangement" as used in this Article means an arrangement pursuant to which two publicly listed companies, while maintaining their separate legal entity status, shareholdings and listings, align their strategic directions and the economic interests of their respective shareholders through
(a) in the case of the United Kingdom, if the person is a resident of the United Kingdom for the purposes of United Kingdom tax; and
(a) the appointment of common (or almost identical) boards of directors;
(b) in the case of Australia, if the person is a resident of Australia for the purposes of Australian tax.
(c) equalised distributions to shareholders in accordance with an equalisation ratio applying between the two companies, including in the event of a winding-up of one or both of the companies;
A Contract~ng State or a politi~al subdivision or local authority of that State IS also a resident of that State for the purposes of this Convention. (2) A person is not a resident of a Contracting State for the purposes of this ConventIon If that person is liable to tax in that State in respect only of mcome or gams from sources in that State. (3) An individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows: (a) that individual shall be deemed to be a resident only of the Contractmg State in which a permanent home is available to that individual; but if a permanent home is available in both States or in neither of them, that individual shall be deemed to be a reside~t only
(b) management of the operations of the two companies on a unified basis;
\d) the shareholders ofDoth companies voting in effect as a single decision-making body on substantial issues affecting their combined interests; and (e) cross-guarantees as to, or similar financial support for, each other's material obligations or operations, except where the effect of the relevant regulatory requirements prevents such guarantees or financial support. Article 9.3 - Permanent establishment 11) The term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
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The term "permanent establishment" includes especially (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or other place relating to the exploration for or exploitation of natural resources; and (g) an agricultural, pastoral or forestry property.
(3) An enterprise shall be deemed to have a permanent establishment in a Contractmg St~te and to carryon business through that permanent establishment it (a) it has a b.uilding site or construction or installation project in that State, or It undertakes a supervisory or consultancy activity in that State connected with such a site or project, but only if that site project or activity lasts more than 12 months', ' (b) it maintains substantial equipment for rental or other purposes within that other State (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months; or (c) a person acting in a Contracting State on behalf of an enterprise of the other ~ontractmg State manufactures or processes in the fIrst-mentIOned State for the enterprise goods or merchandise belonging to the enterprise. (4) (a) The durat~on of activities under subparagraph (a) of paragraph 3 will be d.etermmed by aggregatlllg the periods during which activities are carned on III a Contracting State by associated enterprises, provided that ~he aCtiVI.tleS of the enterprise in that State are connected with the aCtivItIes carned on in that State by its associate; (b) The period during which two or more associated enterprises are carrylllg on concurrent activities will be counted only once for the purpose of determining the duration of activities', (c) Under this Article, an enterprise shall be deemed to be associated with another enterprise if: (i) one is controlled directly or indirectly by the other; or (ii) both are controlled directly or indirectly by a third person or persons.
Alternative Australia/UK DTA
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(5) Notwithstanding the preceding provisions of this Article, an enterprise shall not be deemed to have a permanent establishment merely by reason of: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or collecting information, for the enterprise; or (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. (6) Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person - other than an agent of an independent status to whom paragraph 7 of this Article applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for that enterprise unless the activities of such person are limited to those mentioned in paragraph 5 of this Article which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. (7) An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such brokers or agents are acting in the ordinary course of their business as such. (8) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on a business in that other State (whether through a permanent establishment or otherwise), shall not of itself make either company a permanent establishment of the other. Article 9.4 - Deemed source (or Australian domestic tax purposes For the purposes of the laws of Australia relating to its tax, income or gains derived by a resident of the United Kingdom which, under anyone or more of Articles 4.1, 4.2 and 4.4 to 4.15 and 4.17 maybe taxed in Australia, shall be deemed to arise from sources in Australia.
9
Some leading DTA cases
This chapter provides summaries of a number of DTA cases which have been decided in the last 15 years in various jurisdictions throughout the world. aturally the list is somewhat e~lectic, but ,!"e have tried t? select those cases that we consider have a direct and Important Impact in relation to the interpretation or application ofDTAs. We have also included a list of other cases that we have not reviewed on this occasion but feel warrant some mention. In future editions we plan to significantly expand the analysis to cover a broader range of cases in other jurisdictions.
9.1
Australian cases
9. f. f
Federal Commissioner of Taxation v. Lamesa Holdings BV 97 ATC 4752 Full Federal Court of Australia
Facts
The facts can best be discussed in the context of the diagram in Fig. 9.1 . . In 1994 and 1996, Lamesa Holding BV ("Lamesa"), a company incorporated m the Netherlands, sold its shares in Australian Resources Limited ("ARL"), a company incorporated in Australia. The Commissioner initially assessed Lamesa ~n the p rofits of the sale of the shares as income derived from sources in r:stralia under section 25(1){b) of the Income Tax Assessment Act 1936. ~sa objected to the assessment, claiming that the operative provision of the sh:tU ~lands/Au~tralia DTA is Article 7(5), which states that business profits m . e taxable ll1 the state of residence, unless there is a permanent establishent m the .other state. As b ot h parties . agreed that no such permanent establish tax ment its eXIsted' f in A ustrarla, Lamesa contended that Australia had no right to The ~ro ItS.o~ the sale of the shares. 13 whi °hffimlSSlOner argued that the operative provision of the DTA is Article t. h in ,the Stc states . at 'll1come f rom the alienation of real property may be taxed ate ll1 which that property is situated, and that real property includes
148
DTA cases
Double Taxation Agreements
149
• a lease of land or any direct interest in or over land; rights to exploit, or to explore for, natural resources; II shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the states or of rights to exploit, or to explore for, natural resources in one of the states. The Commissioner submitted that ARL had a right to exploit the assets of its subsidiaries through its ability to wind up the subsidiaries, control the boards of the subsidiaries or indirectly control the assets of the subsidiaries. As such, the right to exploit was a direct interest in or over land, so that, when the shares in ARL were sold, a profit arose from the alienation of that direct interest. The Commissioner further submitted that there has also been the sale of a "comparable interest", such that the assets of a subsidiary were a comparable interest to a case where what was exploited were the shares in a company, the assets of which consisted wholly or principally of direct interests. Issue
Owns gold mining leases in Australia
Could the sale of shares in a subsidiary company that owns mining leases by a parent company be the disposal of "real property" by the parent company for the purposes of the DTA?
Fig. 9.1
Decision (Full Federal Court: Burchett, Hill and Emmett 11)
9.1 .2
No. The sale of shares in a subsidiary company that owns mining leases by a parent company did not represent the disposal of "real property" by the parent company for the purposes of the DTA.
Facts
1.
2.
It seems consistent with rational policy that the DT A was intended to include as property only one tier of companies rather than numerous tiers. When legislation speaks of the assets of one company it invariably does not intend to include within the meaning of that expression assets belonging to another company, whether or not held in the same ownership group. "Comparable interests in a company" were not intended to represent shares in subsidiary companies, rather, the phrase was used to avoid the technicality inherent in the word "shares". It was intended for the article to be able to operate in the absence of "shares", for example stocks or warrants, provided the property alienated was comparable to a share. Generally, the article seeks to assimilate, within the category of real estate, shares, stock or other comparable rights, provided that the assets of the company consist wholly or principally of either direct interests in land or rights to exploit or to explore for natural resources.
Structure of Lamesa
Max Factor & Co Inc v. Federal Commissioner of Taxation (1984) 15 ATR 231; 84 ATC 4060
The taxpayer was a cosmetics manufacturing company incorporated in the United States, which operated in Australia through a branch office. The vast majority of the goods sold by the taxpayer were manufactured in Australia from imported raw materials. Invoices for the imported materials were sent from the head office to the branch and were entered in the branch's books in both US currency and the Australian equivalent, based on a fixed rate of exchange set annually by head office. Althoug'h the invoices were sent on 180 days credit, the actual payments of invoices were made at the rate prevailing on the day of payment. This system was likely to give rise to exchange gains or losses, depending on the extent of any variance between the invoice date and the payment date. In its income tax returns for the 1976 and 1977 income years the taxpayer claimed deductions for exchange losses of $92,762 (including $64,884 in unrealised losses) and $94,386 respectively. The Commissioner disallowed these deductions, and the taxpayer subsequently objected to the disallowance, on the grounds that the losses were deductible under section 51(1} of the Income Tax Assessment Act 1936 ("ITAA 1936") or that Article III(4) of the United States Convention ("the Convention") applied to include the losses in the calculation of the profit of the permanent establishment. The Convention states:
150
Where an enterprise of one of the Contracting States is engaged in trade or business in the other Contracting State through a permanent establishment in that other State, there shall be attributed to that permanent establishment the industrial or commercial profits which that enterprise might be expected to derive in that other State if it were an independent enterprise engaged in the same or similar activities and its dealings with the enterprise of which it is a permanent establishment were dealings at arm's length with that enterprise or an independent enterprise; and the profits so attributed shall be deemed to be income of that establishment and shall be taxed accordingly.
It was common ground that the branch represented a permanent establishment. It was also common ground that, if the actual payments made by the Australian branch to the US head office were allowable deductions, then an increase in those payments by means of an exchange fluctuation would be an allowable deduction as well. Issue
Were the payments made by the Australian branch to the US head office made in the discharge of a liability incurred by the Australian branch, and therefore part of the profits to which the Convention referred? Decision (Supreme Court of New South Wales: David Hunt J)
No. The payments made by the Australian branch to the US head office were not made in the discharge of a liability incurred by the Australian branch, and were also not deductible under section 51 (1) of the ITAA 1936. Therefore, the payments were not part of the profits to which the Convention referred. The liability in relation to the raw materials imported by the taxpayer's Australian branch was discharged by payment by the head office in the United States to the supplier, and not by the transfer of funds by the taxpayer's Australian branch to its head office in the United States to cover that payment. As such, there was no expense in Australia in the discharge of a liability incurred in Australia. Furthermore, the Convention does not permit the US head office to claim a tax deduction in the United States, and the Australian branch to claim a tax deduction in Australia, for the same expense. Hence, the provisions of the Convention had no application to this case. 9.1.3
DTA cases
Double Taxation Agreements
McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation 2005 ATC 4398 Full Federal Court of Australia
Facts
During the period from April 1993 to March 1997, Chartering Company Singapore Pte Ltd ("CCS"), a Singapore-resident company, chartered barges to
151
D mott Industries (Aust) Pty Ltd ("MIA"), an Australian-resident company, in Australian territorial waters. In this period, MIA paid $43,251,778 of for US r fees to CCS and claimed deductions in respect of those fees. ch~:~cle 10(3) of the ~inga~ore Ag~;ement dictates that royaltie~ in~l~de payreceived as conSideration for mdustnal, commerCial or SCientIfIc eqUlpmentS" Both parties agreed that the barge charter fees were for the use 0 f suc h ment . equipment. . In 1999 the Commissioner issued amended asses~ments to MIA a~d dlsalI ed the entirety of the charter fee deductIons. This was on the baSIS that a oWalry had been paid to a non-resident (CCS) and that the person paying the roy airy (MIA) had not withheld an amount equal to the withholding tax liabilroy ' hh0 ldi ng tax .IS . a reqUlrement . for roya Ity payments icy of the non-resl'd ent. Wit to be allowed as deductible under sectIOn 221 YRA(lA) of the Income Tax Assessment Act 1936. MIA objected to the amended assessment on the grounds that the royalty taxing provisions of the Singapore Agreement did not apply because CCS had a Permanent Establishment ("PE") in Australia. Were a PE shown to eXist, the payments would be reclassified as business income under Article 5 of the Singapore Agreement. This would mean that MIA would not have been reqUlred to withhold any tax for the chartering fees, and that these fees would therefore be deductible to MIA. The requirements of a PE are contained within Article 4 of the Singapore Agreement. This states that a PE "in relation to an enterprise, means a fixed place of business through which the business of the enterprise is wholly or partly carried on" and some examples of PEs are given in Article 4(2). Article 4(3) deems a PE to exist where "substantial equipment is being used in that other State by, for or under contract with the enterprise". Both parties agreed that the barges represent "substantial equipment".
e;
MC
Issue
Did the chartering of barges in Australian territorial waters represent substantial equipment "being used in that other State by, for or under contract with the enterprise" within the meantng of Article 4 of the Singapore Agreement? DeCiSion (Full Federal Court Hill, Sundberg and Stone jJ)
The chartering of barges did represent substantial equipment being used by, for Or under contract. Therefore, CCS had a permanent establishment in Australia for the purposes of the Singapore Agreement.
1.
Article 4(1) does not operate to govern or constrain the interpretation of each of the sub-articles which follow it. Although it is accepted that Article 4( 1) sets out the general definition of a PE by reference to a fixed place of business, and that Article 4(2) operates to give examples of cases that would fall within Article 4(1), Article 4( 3) takes on a different character.
152
2.
Double Taxation Agreements
[t is a deeming provision and as such "probably operates to deem something to be that wruch otherwise it rrught not be". Were Article 4(3) to be governed by Article 4( 1), then the former would add notrung to the latter. Ultimately, it appears as though Article 4(3) has been included into the Singapore Agreement for a reason, and that reason must be to expand the mea rung of a PE provided in Article 4(1). The phrase "by, for or under contract" does not represent one single, complex idea, but rather three different and alternative occasions of usage. The first occasion would be the use of substantial equipment by the enterprise itself, the second would be the use of substantial eqwpment for the enterprise, and the trurd would be the use of substantial equipment under a contract with the enterprise.
The permanent establishment was deemed to arise because the barges were either being used in Australia by CCS itself, or by MIA under contract with CCS. It is irrelevant which of the two it actually was, as both scenarios involved CCS using substantial equipment in one of the three possible occasions mentioned above, all of which indicated the presence of a permanent esta blishment. Ultimat-ely, the existence of a permanent estab lishment in Australia by CCS meant that the royalty provisions of Article 10 were superseded by the business income provisions of Article 5. The fees were not classified as royalties and, as such, no royalty withholding tax was required to be remitted to the Commissioner by MIA. The chartering fees were an allowable deduction to MIA. 9. f.4
Thiel v. Federal Commissioner of Taxation 90 ATC 4717 High Court of Australia
Facts
The taxpayer, a resident of Switzerland, acquired an interest in trust property in Australia in January 1984, and acquired a further interest in May 1984, for a total outlay of $150,000. In October 1984 Energy Research Group Australia Ltd was incorporated. The taxpayer sold rus interest in the trust property to the company for $300,000, satisfied by allotment to rum of 600,000 fully paid ordinary shares of $0.50 each in the capital of the company. The taxpayer commenced selling rus shares in the company as soon as it was listed on the stock exchange, selling 252,000 shares between 7 February and 6 March 1985 for a total consideration of $566,307. The Commissioner assessed the sales as gains pursuant to former section 26AAA of the Income Tax Assessment Act 1936, wruch states that profits derived from the sale of property within 12 months of acquisition is assessable income. The taxpayer's appeals to the Federal Court, and to the Full Federal Court, were unsuccessful.
DTA cases
153
The basis of the taxpayer's claim was that the profits were exempt from taxation in Australia under the Agreement between Australia and Switzerland f.or the Avoidance of Double Taxation with respect to Taxes on Income ("SWISS Agreement"). It was contended that the profits fell wit~n Article 7( 1) of the Swiss Agreement, which states "the profits of an enterpnse of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein". Were the taxpayer's profits the "profits of an enterprise", then he would not be taxable in Australia, as both parties agreed that no permanent establishment existed in Australia. However, Article 3(1 )(f) of the Swiss Agreement states that the phrase "enterprise of one of the Contracting States" means "an enterprise carried on ... by a resident of Switzerland". The Commissioner contended that no such enterprise had been "carried on", as there was not a sufficient amount of repetition or system to the taxpayer's activities. As such, Article 7(1) would have no application, and the taxpayer would be taxable in Australia.
Issue Did the profits of the taxpayer represent "profits of an enterprise" for the purposes of the Swiss Agreement? Decision (High Court of Australia: Mason Cj, Brennan, Dawson, Gaudron and McHughlJ) The actions of the taxpayer did represent "profits of an enterprise" for the purposes of the Swiss Agreement. Article 3(2) of the Swiss Agreement states "in the application of this Agreement by one of the Contracting States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which trus Agreement applies". However, as Australian tax law provides little assistance in interpreting either "enterprise" or "carried on", their meanings should be determined by reference to the Swiss Agreement itself and any materials wruch may properly be considered. Outside of Article 3(1 )(f), the expressions "carried on" and "carries on" are used only in association with the word "business", which possesses its own connotations and is not used in Article 3(1)(f). As such, the expression should be viewed in the context of the agreement itself. In such a context, the term "carried on" is no more than a linking expression used to explain the connection between an enterprise and a Contracting State. Accordingly, no element of repetition or system should be attributed to that expression by reference to the use of the words "carried on". In interpreting the meaning of "enterprise", it was appropriate to consider the OECD Model Convention and the associated commentaries. Specifically, the commentary on Article 3 states that "the question whether an activity is
154
DTA cases
Double Taxation Agreements UC (United States) licence IP ULP (Australia) sub-licence IP UAL (Australia)
Fig. 9.2
99.5%o( royalties received (rom UAL
50%o( software revenue
Unisys agreements
performed within the framework of an enterprise or is deemed to constitute in itself an enterprise has always been interpreted according to the provisions of the .d?mestlc l.aws of the Contracting States". This commentary reveals that a n mdlvldual aCtlVlty can potentially constitute an enterprise. In this case, the court concluded that isolated transactions of a speculative nature could represent an enterpnse for the purposes of Article 7 of the Swiss Agreement.
9.1.5
conducted business nor had a PE in the United States, and as such, UC was required to pay royalty withholding tax. UC objected to the assessment, and daimed that the royalties paid to it were incurred by ULP in carrying on business in the United States through a PE in that country and were not, therefore royalties to which Section 128B applied. ' Issue
Was ULP conducting a business, and, if so, was the business being conducted at or through a PE in the Un ited States such that the royalty payments were connected with a PE of the partnership in the United States and therefore not subject to Australian royalty withholding tax? Decision (Supreme Court of New South Wales: Gzell J)
Although UPL was conducting a business, no PE could be said to exist in the United States. 1.
Un isys Corporation v. Federal Commissioner of Taxation [2002) NSWSC 1115 New South Wales Supreme Court
Facts (Fig. 9.2)
The Unisys Licensing Partnership ("ULP") was a corporate limited partnership for the ~urposes of the Income Tax Assessment Act 1936 ("ITAA1936"). It sIgned an mtellectual property licence agreement with Unisys Corporation ("UC"), a US company, to use UC's intellectual property in its business. ULP also ente~e? into a sublicence with Unisys Australia Limited ("UAL") for UAL to use thIS mtellectual property in Australia. Royalty payments were set at 50 ~ercent of UAL's software revenue, while the royalty payments under the head lIcence agreement to UC were 99.5 percent of the royalties received from UAL. The decisions relating to the licensing agreements were made and executed in the l!nited States by the general partner of ULP, Unisys Software Inc ("USI"). USI IS a US company. ULP leased office space in the United States from UC in 1994 and leased additional space in 1995. The only functions carried out in the leased rooms were the filing and the retrieval of records. The day-to-day management of.the company was carried out by a related entity that operated as a shared serVlCes centre based in the United States. . Under Section 128B of the ITAA1936, non-residents that derive royalty mcome are hable to pay royalty withholding tax. However, under Section 128(~B)(b), no liabilit~ arises if that royalty was wholly incurred by a person carrymg on a busmess m a foreign country through a permanent establishment ("PE") in that country. The Commissioner contended that ULP neither
155
2.
3.
Regard must be given to the word "business" in double tax agreements, particularly in the "business profits" article, as the language of the withholding tax provisions found in section 128B of the IT AA 1936 is drawn from international tax law. Most of Australia's agreements for the avoidance of double taxation are based on the OECD Model Double Taxation Convention on Income and Capital. The Commentary to the Model states that a wide interl?retation of business profits should be used, and that profits should include all income derived in carrying on an enterprise. It was held that although ULP had no offshore branch, and although the difference between the royalties (0.5 percent) was minimal, the international tax law meaning should be preferred to the domestic law in this area, and as such, ULP had conducted a business in the United States. While each leased room represented a place which was at the disposal of ULP, the storage and retrieval of documents could hardly constitute the carrying on of ULP's business. Hence, these rooms did not constitute aPE. The IT AA 193t allows a PE to exist where a person carries on business through an agent, which in this case was USI, the general partner. However, the OECD formulation stipulates that an agent will only be regarded as a PE if they both possess the authority to conclude contracts and habitually exercise that authority. Although USI opened a bank account and leased some rooms for ULP, the only profit-making activities it conducted were the execution of a licence agreement and a sublicence agreement. As such, there was not a sufficient repetition of contractual activity to be characterised as "habitual", and therefore, no PE existed in the United States.
156
Double Taxation Agreements
DTA cases
157
Issue
Did the wording of the DTA, specifically Articles I and III, permit a deduction tor the notional rent? Provided oil well services and equipment - -
United States
Decision -
-
-
-
-
-
•
Canada Canadian PE Fig. 9.3
Mobil Oil
Cudd relationships
9.2
US cases
9.2.1
Cudd Pressure Control Inc. v. The Queen [1998J F. c.}. No. 1493 Federal Court of Appeal
Facts (Fig. 9.3)
Cudd Pressure Control Inc. ("Cudd"), the appellant, was in the business of providing technical services to the oil industry. Cudd entered into an oral agreement with Mobil Oil to provide heavy oil well services together with specialised equipment for a job being conducted by Mobil in Canada. In calculating the profits to be attributed to Cudd's Canadian permanent establishment ("PE") for the 1985 income year, it claimed deductions of C$2,516,690 for a notional rent charge from its head office for use of the snubbing equipment sent to Mobil. RPC Energy, the parent company, did not include a corresponding income amount for the notional rent in its company tax return. The deduction was denied and the appellant appealed. The case concerned the following two articles of the US/Canada DTA ("the DTA"): Article I states, broadly, that "an enterprise of one of the Contracting States is not subject to taxation by the other Contracting State in respect of its industrial and commercial profits except in respect of such profits allocable ... to its PE in the latter state". Article III states, broadly, that a PE is to be treated as a separate entity for tax purposes and the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise shall be attributed to it. This attribution includes deductions for expenses reasonably allocable to the PE, including general administrative expenses.
No. All three judges agreed the notional rent deduction must be denied on the facts of the case under Canadian law. Judge McDonald JA suggested that notional rent may be deducted in appropriate cases under the Convention. However, in this case, a deduction for notional rent was not considered appropriate. Judge McDonald JA noted that a deduction was not available as the parent did not include any corresponding income amount in its tax return. This is on the basis that one of the p urposes of the Convention, as provided in its preamble, is to prevent tax evasion. Permitting the deduction for the PE without a corresponding assessed income amount for the parent would amount to tax avoidance. Further, Article III of the DTA requires consideration of what a similar PE engaged in the same or similar conditions would do. McDonald JA concluded that it was unlikely the PE or a similar enterprise would have rented the equipment from the parent. Rather, the more likely conclusion was that Mobil would have contacted the parent directly to hire the equipment, as the PE did not have the necessary equipment. 9.2.2
The North West Life Assurance Company of Canada v. Commissioner of Internal Revenue 107 TC No. 19 (1996) United States Tax Court
Facts
North West was a Canadian life insurance company carrying on business in the United States through a permanent establishment ("PE"), as well as in Canada. It calculated its US taxable income for its US PE based on section 842{a) of the Internal Revenue Code, which states that foreign insurance companies are taxed on any net investmen~income that is effectively connected with trade or business within the United States. However, the Commissioner increased North West's reportable income for the 1988, 1989 and 1990 income tax years because of the operation of section 842{b), which stipulated a minimum amount of net investment income that foreign insurance companies were to report, based on a statutory formula containing the firm's specific and industry data . Article VII of the Canadian Convention, on the other hand, provided firstly that PEs carrying on operations in the United States were only taxed insofar as the profits were attributable to that PE (paragraph 1). It also provided that a PE Was to be taxed in the manner in which a similar distinct and separate entity operating in the same or similar environment would be taxed (paragraph 2),
158
Double Taxation Agreements
DTA cases
and that the methods of attribution of profits to a PE should be the same each year unless there was good cause to deviate (paragraph 5).
159
based on domestic industry data meant that such income was not necessarily attributable to the PE.
Issue
Were the terms of the Canadian Convention such as to override the operation of section 842(b), so that North West's taxable US income should not have been increased by the Commissioner?
9.2.3
Qantas Airways Limited v. United States 30 Fed. CI. 851 (1994) United States Court of Federal Claims
Decision
Facts
Yes.
Qantas Airways Limited, a company wholly owned by the Australian government, owned family homes in the United States, which it used to house some of its Australian employees, who did not pay rent. During the 1970s, Qantas decided to employ more US citizens for its US operations, meaning there was no longer a need for these homes, and so decided to gradually start selling these homes, deriving capital gains from their sale as well as rental income from leases of the properties whilst the sale was pending. There was a further issue of whether such activities constituted a "commercial activity" or an "investment activity", the latter enabling Qantas to gain a US income tax exemption due to its status of being a wholly-owned foreign government entity. However, this issue is not considered here.
1.
2.
3.
4.
Mention was made of the US Congress conference report in relation to the introduction of section 842(b), which stated that it did not necessarily intend that section 842(b) override any older legislative provisions. The Court therefore attempted to harmonise the Canadian Convention and section 842(b) to give effect to both, if this was possible, and to interpret the provisions broadly in order to give effect to their intention. The Court, however, ultimately found that the relevant provisions of the two statutes conflicted. The terms of the Convention, as it was conceded by the Commissioner, were to override any conflicting domestic legislative prOVISiOns. Judge Hamblen sought guidance from the OECD Model Double Taxation Convention on Income and Capital. This stated (at paragraph 13) that generally the profits attributed to a PE should be based on that establishment's accounts insofar as accounts are available which represent the real facts of the situation, which supported North West's interpretation of paragraph 2 of Article VII of the Canadian Convention. Section 842(b), however, attributed a fictional amount of income to the PE's US branch by using industry data to calculate a minimum amount of reportable net investment income rather than looking solely at the individual facts and circumstances of the PE. It was held that section 842(b) was in breach of paragraph 5 of Article VII, as section 842(b) could be triggered in some income years (where the calculation of net reportable investment income under section 842(a) was less than the minimum required under section 842(b)), and not in other income years (where the calculation of net reportable investment income under section 842(a) was in fact more than the minimum required under section 842(b)). This meant that different methods of income calculation were being used across different income years, rather than the same method being applied continuously. Judge Halpern was also in agreement with Judge Hamblen, but adopted a line of reasoning. Halpern believed that section 842(b) had no application in the circumstances due to its inconsistency with paragraph 1 of Article VII. Attributing a notional amount of investment income to a PE
Issue
Was the derivation of this r~ntal income and capital gains within the scope of section 883(a)(2) of the US Internal Revenue Code, which reflects the 1982 US/Australia Income Tax Convention, which grants an exemption for international aircraft income. Decision
No. Looking at the plain language of the statute, the Court held that section 883(2)(a) did not exempt rental and capital gains income from tax despite being derived by an international airline business. 1.
2.
3.
4.
The court looked to the history of the legislative provision to reason that only "transp;rtation income" or income with a direct connection to the operation of aircraft was exempt, and that not all income derived by an international airline business was necessarily free from tax. The rental income arose from leases to the general public. The court found nothing in the treaty to suggest that income derived from the leasing of real property to external parties was exempt. Article 8 of the Treaty clearly states that the tax exemption does not apply to airline profits generated from domestic (US) traffic, and therefore the Court rationalised that profits from real property located in the United States would also not be covered by the exemption. While it had previously been held by the US Internal Revenue Service that
l"
160
Double Taxation Agreements
income fro m the sale of surplus aircraft was exempt from tax, the exemption dId not apply to the sale of surplus real property. This was because the surpl~s aircraft had directly generated tax-exempt income during theIr lIfetlmes WIth an IOternatlOnal aIrcraft business, while the residential property had never produced exempt income during its active lifetime.
DTA cases
-
Ca nada Tire's Canadian pre mises (ma nufacturer)
.
US Customs warehouse
I I I I
9.2.4
US
Podd et aJ v. Commissioner 75 TCM (CCH) 2575 United Stotes Tax Court
161
Customs
clearance
.i delivery of tyres to Haggefty
Haggerty's US premises (wholesaler and retailer)
Canada Tire representatives enter into contract for sale of tyres here
Facts
Vi~tor Pod.dJr. was born in Canada and was a Canadian citizen. He was granted resIdent alIen statu by the US Immigration and Naturalization Service in 1987. Dunng 1990, he spent a total of 120 days in Canada, where his family's home was based. He also s pent a total of 245 days in the United States, where his girlfnend bved and from where he conducted his business. Par~g~aph ~ of Article IV of the 1980 US/Canada tax treaty states that where an lOdIvIdualls a resIdent of both the United States and Canada due to factors such as domicile and residency, then the individual will be deemed a resident of the place in which h.e or she has a permanent home available to him.
Fig.9.4
3.
Issue
Did the Tax Court make a substantial error by ruling that Victor Podd Jr. was a US resIdent and not a Canadian resident for the 1990 income tax year? Decision
No. The Court did not make a substantial error by ruling that Mr Podd was a US and not a Canadian resident for tax purposes.
1.
2.
The Court, in the first instance, firstly considered Mr Podd to be a US resident due to h.is resident alien status. Mr Podd failed to provide the court with any Canadian authority to prove his Canadian residency, and therefore the Court at first instance did not make a substantial error in holding that he was not a Canadian citizen. The Court t.he n further strengthened its previous decision by hypothetically acceptmg Mr Podd's assertion that he was a Canadian citizen and then applying the tie-breaker provisions of the 1980 US/Canada tax treaty (paragraph 2 of Article IV). The issue of what constituted a "permanent home" was determined by referring to the 1977 Model OE~D Treaty ("the Model Treaty"), which stated, in the commentary to Artlcle 4, paragraph 13, that such a home is one that is available to the individual at a ll times continuously. The Court considered that Mr Podd had a home continuously available to him in Canada, as he had his own room and office and kept several personal items in his family'S home. The
4.
9.2.5
Terry Haggerty Tire Co.
Court also considered that Mr Podd had a home continuously open to him at his girlfriend's apartment in the United States. He regularly stayed at this apartment when travelling to the United States for work, conducted business on the premises, kept his car and his boat on the premises, and listed this apartment's address on his Florida driver's licence. The Court then looked further to paragraph 5 of Article 4 of the Model Treaty, which stated that if the individual has a permanent home in both countries, then residence will be determined based on the country with which the individual has the closest personal and economic interests, including where he or she has his centre of vital interests. Again, the Court could not make a determination on this issue, due to Mr Podd's Canadian citizenship and Canadian family home favouring a Canadian centre of vital interest contending with the United States, where his girlfriend (and future wife) resided, and where he worked and owned large quantities of shares. In order to determine the issue, the court sought guidance from paragraph 17 of Article 4 of the Model Treaty, which states that the centre of vital interests is likely to be the place where the individual has spent the most time. As Mr Podd had spent more time in the United States in 1990 than he had in Canada, it appeared that Mr Podd would be considered a US resident for tax p,vrposes.
Terry Haggerty Tire Co. Inc. v. United States 899 F.2d 1199,1201 n.2 (Fed. Cir. 1990) United States Court of Appeals for the Federal Circuit
Facts (Fig. 9.4)
Terry Haggerty Tire Co. Inc. was a US· based company that sold and distributed tyres as both wholesalers and retailers. Employees from Canada Tire Company, a Canadian-based tyre manufacturer with no US-based business premises, visited Haggerty in the United States to sell tyres to Haggerty. After directly
162
Double Taxation Agreements
securing an order from Haggerty, Canada Tire delivered the tyres from Canad (or a US-customs warehouse storing tyres originally delivered from Canad a using its own vehicles to Haggerty after processing them through US CUStoma) Haggerty paid to Canada Tire a price which included freight charges, brokera;~ fees and customs duty. Section 4071 of the US Internal Revenue Code imposed excise duty On certain tyres sold by an "importer". Issue
DTA cases
1 63
Fletcher Challenge Lt d
NeW Zealand _ _ _ _ _ - -
- -
; ;ra:s in the United States
Fig. 9 .S
Canada
Norsk (incorporated in the Bahamas)
Crown Forest Industries Ltd
Was Haggerty the importer of the tyres and therefore liable to pay excise duty ? eir own use or sale. As it was Canada Tire who delivered ware h ouse for th d h· res from the US customs warehouse un er t elf own an d remove d ty . b· h· contra,I t his p rovided argument for Canada TIre emg t e Importer.
Decision
Yes. 1.
2.
3.
4.
The majority judgment ultimately resolved the issue on the interpretation of the Internal Revenue Code without reference to any tax treaty. While Haggerty did not physically bring the tyres into the United States, Haggerty was held to be the importer, as it had directed Canada Tires to transport the tyres to the United States, while Canada Tires would not have brought the tyres into the United States without first having a specific sale to fulfil. This was consistent with case law and an IRS Ruling, which deemed the importer to be the party that did the inducing, rather than looking to the place of sale. Circuit Judge Newman, in dissent, made reference to the 1980 US/ Canada tax treaty. Under this treaty at section 3(f}, a "permanent establishment" exists in the place where agents or employees of an enterprise, who have authority to enter into contracts on behalf of the employer, carryon a business. From this definition, Newman reasoned that Can~da Tire was carrying on a permanent establishment ("PE") in the Uruted States through its representatives who solicited orders from Haggerty at Haggerty's business premises in the United States. Because of this PE being carried out, the court should not have relied on a certain Revenue Ruling, which was based on a situation where a foreign company was not carrying on a business in the United States. This Ruling had been used to undermine Haggerty's case. h ewman also made reference to Revenue Ruling 77-45, w hi ch states t at the importer is the party who acts as the principal and not as the agent for . the articles to be imported. Newman belIeved that Cana d a T'lfe wa.s not II . merely an agent for Haggerty, but was the principal, as they physlca >. delivered the tyres, processed them through customs, pal'd a c usto DlS broker and paid the customs duty. he Revenue Ruling 56-409, supported by ewman, also state~ that r _ "importer" of a good, when determining who bears the cost ot manut.lC. . t·rom a US custom" turers' excise duties, is the party w h a removes items
9.3 9.3. 1
Other cases The Queen v. Crown Forest Industries Limited 95 D. T.C 5389
Supreme Court of Canada Focts (Fig. 9.5)
_
orsk is a corporation incorporated in the Bahamas? with it~ office and place of business in the United States. Norsk carries on a busmess of mternatlonal transportation of newsprint. . Crown Forest ("CF") paid rent to Norsk for use of Norsk's barges. CF WIthheld tax on these payments at the rate of 10 percent on the basis that Norsk was a US resident pursuant to the Canada/US DTA ("Canadian Agreement"). In the event that Norsk was not US-resident, CF would have to withhold tax at a rate of 25 percent. orsk was liable to tax under US law for that portion of profits derived that related to its business in the United States; however, it was entitled to an exemption as an internationaloshipping company under US law. Issue
Is orsk a resident for the purposes of the Canadian Agreement pursuant to Anicle IV, which states that a resident under the Canadian Agreement means "a P~rson who, under laws of that State, is liable to tax therein by reason of domiCil e, reSidence, place of management, place of incorporation or any other critenon of a similar nature". DeCiSion
" o ..Firstly, Justice Iacobucci considered the interpretation of the definition of reSident" under the Canadian Agreement. Norsk could only be a resident
164
Double Taxation Agreements
DTA cases
under Article IV if it was liable to tax by reason of its place of management . being engaged in trade or business in the United States falls into "criteria o~ If similar nature". Norsk did not pay tax in the United States by reason of its n ~ a of management. It paid tax because part of its income was sourced in the .ace . " nned States, not because ItS place of management was m the UOIted States. Justicelacob.ucci then sta.te~ ~hat the remaining criteria in the article were all grounds m whICh full tax lIabIlIty would be Imposed, that is, taxed On wo Id wide income. However, engaging in business in the United States would r attract a comprehensive tax liability and, therefore, was not enough for Nono~ to be deemed a resident under the language of the article. rs Secondly, Justice Iacobucci considered the intention of the drafters of th Canadian Agreement. The intention of the drafters was to benefit taxpayers o~ the contracting parties who are bearing full tax liability in one of the states and to a void the instance of double taxation. However, in this instance, Norsk would benefit from the Canadian Agreement without having any tax liability in the United States, which was not the intention of the drafters. Justice Iacobucci then referred to the OECD Model Double Taxation Convention on Income and Capital, which formed the basis of the Canadian Agreement and includes a similar article. However, Justice Iacobucci noted that it is followed by a second sentence which states that a "[resident] does not include any person who is liable to tax in that state in respect only of income from sources in that state or capital situated therein". The fact that the drafters of the Canadian Agreement omitted this sentence does not indicate that their intention was to allow entities like Norsk to gain residency status on the basis that it is liable for source income. Commentaries to the OECD Convention indicate that generally the domestic laws of the Contracting States treat residence to mean full and comprehensive tax liability, that is, not when an entity is only partly subject to tax. Support for this was also found in commentary to the UN Model Convention. Consequently, the intention of the drafters and other commentary suggested that Norsk was not a resident under the Canadian Agreement.
uP
9.3.2
Association of Mouth and Foot Painting Artists Pty Ltd (Australia) v. Commissioner of Taxation [19871 AATA 280 Administrative Appeals Tribunal
Facts
The taxation affairs of the Association of Mouth and Foot Painting Artists pry Ltd ("the Association") were under investigation by the Commissioner of Taxacu tion ("the Commissioner"). The Association requested access to certain do d ments regarding these affairs under the Freedom of Information Act 1982, an the Commissioner subsequently refused to provide the documents. , a Some of the documents had a UK source, and the Association sought accesS r
tS
1 65
from the Commissioner through the authority of the UK DTA
(~ose d~~~~he section under which the Associatio~ sought access was Arti-
( the D f h DTA, which states "the taxatIon authontIes shall exchange such ' h drruOlstratIon .. . 0 f statucIe -710 .t e as is necessary f or carrymg out . .. tea informau?n . ·s· against legal avoidance in relation to taxes which are the subject rOVISIOn . t~ry P's A reement. Any informatIon. so exchanged shall be treated as sec~et but ot thib :- losed to persons (includmg a court or tnbunal) concerned WIth the may e I:C collection, enforcement or prosecution in respect of the taxes which assessmen ,'ect of this Agreement. " Th e AsSOCIatlOn . . contend e d t h at t he second . . I . as t h e Assoare the su bJ uired the CommISSioner to supp y t h e d ocuments to It, sentence req . ould ultimately be required to pay tax, and were therefore concerned ClatlOn w with its collection. Issue
Since the Association is required to pay taxes, is it therefore concerned with the collection of taxes for the purposes of the DTA? Decision (Administrative Appeals Tribunal: McMahon, Stevens, Nicholls j))
No. The Association is not concerned with the collection of taxes for the purposes of the DTA. Both the Shorter Oxford English Dictionary and the Macquarie Dictionary give as the appropriate meaning of the word "concerned" as being "interested or involved". It was held that the Association was not interested or involved with the assessment, collection, enforcement or prosecution of taxes, rather, it was interested with receiving the assessment, paying the tax, being the subject of enforcement and being a defendant in any possible prosecutions. The sentence refers to an active participant in the collection of taxes, not merely a pasSIve recipient. 9.3.3
The Queen v. Dudney [20001 2 CTC 56 Canadian Federal Court of Appeal
Facts
The appella t D d . n, u ney, was a reSIdent of the United States. He was recruited as an . d 10 ependent c '. ontractor by a computer company, which had a contract to Pro'd VI e tralmn t 1 goa petro eum company (PanCan) based in Calgary, Canada on that compan ' . y s.prerruses to their employees. Dudney was contracted to work on PanC' n tennin a s prenuses for a year, with either him or his contracting party able to h ' h 30 d ays' notice. The appellant was provided with rooms ate at Pt e Contract wIt PanCan ~~Can's discretion, was only permitted to do work in relation to and did w st on PanCan's premises, had restricted access to their premises, D not take a f hi . Udney had no ~y 0 s own eqUIpment to PanCan's site. In addition, busmess cards with a Canadian address or made any other
166
indication that he worked in Canada, and had no licence to work in Calgary. During his time at PanCan, he continued to travel now and then to his office in the United States to retrieve voicemail messages and to invoice his contracting party for the time spent at PanCan training its employees. Article XIV of the 1980 US/Canada Tax Convention stated that income derived by non-Canadian residents in Canada from independent services is subject to tax in Canada if the individual has "a fixed base regularly available to him ... ". Issue
Did Dudney have a fixed based regularly available to him through the provision of training services to PanCan so as to be liable to Canadian income tax? Decision
No. The Court found that the appellant did not have a fixed base regularly available to him, and that he was therefore exempt from Canadian tax on his work at Pan Can due to the operation of Article XIV of the Convention.
1.
2.
3.
4.
DTA cases
Double Taxation Agreements
The "fixed base" principle in relation to independent contractors has similarities to the principles behind the taxation of permanent establishments, to which the Court directed its attention. Article 5 of the 1977 OECD Model Convention characterises a permanent establishment as a place of business that is fixed and through which a business is partly or wholly carried on. The commentary to Article 5 noted that "place of business" is any premises, facilities or installations used to carryon a business, and that "fixed" connotes an element of permanency. The Court also looked to the decision of Sunbeam Corporation (Canada) Ltd v. Minister of National Revenue [1963] SCR 45 for guidance on the meaning of a permanent establishment, where the term "permanent" was defined as meaning stable rather than temporary, while "establishment" meant a fixed place of business, which was exclusively that of the corporation running the busniess. The Court, in determining whether a business was carried out, looked at the use of the premises, the ability to control use of the premises, and the extent to which the premises were objectively identified as being connected with the business. In the present case, the Court believed that Mr Dudney did not carryon his business in the offices of PanCan, as he could only perform work in relation to training Pan Can staff whilst on their premises, and was prohibited from performing any of his other business work. Mr Dudney's non-exclusive and limited access to the Pan Can offices also indicated to the Court that he did not have a fixed place of business in Canada. As it would found that Mr Dudney did not carryon a business, the issue of the permanence of his work at PanCan dictated by the length of the contract was not considered.
9.3.4
167
Gulf Offshore N.S.limited v. The Queen [20061 TCJ
No. 182 Tax Court of Canada Facts
Gulf Offshore N.S. Limited ("GO"), a company incorporated in the United Kingdom, was in the business of operating and supplying ships for transportation services from onshore bases to offshore drilling sites for oil and gas operations. GO's business also included supplying crew to man the ships and deliver materials. In 1999 GO entered an agreement with Allseas Canada Limited ("Allseas") to supply a fully-crewed ship for 88 days for transporting pipe-laying material to a site off the coast of Canada. Allseas directed GO in respect of where to pick up and deliver the supplies. The entire crew was supplied by GO, who obtained them through a sister company. GO was assessed for tax in Canada on the basis it was carrying on a business through a permanent establishment in Canada. This was based on Article 27 A of the CanadaIUK DTA, which does not tax non-resident enterprises in Canada unless the non-resident derives income through a permanent establishment ("PE"). The article deems the non-resident enterprise to be carrying on a business through a permanent establishment where the non-resident carries on activities in Canada. When assessed for tax, GO was disallowed deductions for the salary and tra vel expenses of the crew on the ship, as well as interest expense in respect of a loan obtained to build the ship used in the agreement with Allseas. Issue
Was GO carrying on a business through a PE in Canada, pursuant to Article 27 A of the Canada/UK DTA? Decision
Yes. GO was in the business of supplying fully-crewed ships for the purposes of offshore oil and gas 0Rerations. The agreement with Allseas was no exception and not an isolated tra~saction. GO was carrying on a business in Canada as it was GO that operated the ship using its own crew, despite the fact that Allseas directed the pick-up and delivery of the materials. GO argued that its situation was analogous to a chauffeured limousine from Canada to the United States, in the sense that it is the customer who hires and instructs the chauffeur to take him out of Canada and is the one who is carrying On activities in the United States. The analogy was rejected on the basis that it is the limousine service that is in the business of chauffeuring and carrying on activities outside Canada. The judgment reiterated that while GO received directions from Allseas, GO operated, manned and owned the ship, and, as such, it was GO that carried on activities in Canada.
168
DTA cases
Double Taxation Agreements
~ ----- - -- -- - - - - - - -,-;;~-/ " bank loan
\
United States
'.
---------------+--------------_. Canada
I
Specialty Manufacturing Ltd Fig.9.6
/ / loan
Specialty Manufacturing Ltd
The judgment then considered the deductibility of the salary, travel and interest expenses. The judgment considered the approach taken by GO in supporting the break-down of these costs specific to this agreement. It was concluded that the approach used to arrive at travel and salary expenses was reasonable, however the interest expense was not. The interest expense was calculated by reference to revenue generated by the ship compared to total revenues. Therefore, it was held that deductions were permitted for the salary and travel expenses only.
9.3.5
Speciahy Manufacturing Ltd v. The Queen [1999} FCJ No. 744 Supreme Court of Canada
Facts (Fig. 9.6)
Specialty Manufacturing Ltd ("SM") is in the business of distributing novelties and souvenirs at carnivals and fairs. During 1983 and 1984, Ace and World's entered a contract, on behalf of SM, to operate at an Expo in 1986. SM obtained a loan from Ace and World's to fund its operations at the Expo. To fund this loan, Ace and World's obtained a loan from a US bank. Interest charged on the loan to SM was at the same rate as that charged by the US bank. For the tax years ended 1984 to 1987, SM claimed deductions for the interest paid on the loan from Ace and World's. The deductions were denied under the Canadian Income Tax Act's thin capitalisation rules, on the basis that SM was almost entirely funded by debt. SM claimed these rules did not apply on the basis that articles in the USICanada DTA applied to stop the application of the Canadian tax law. Issue
Did the USICanada DTA ("the US Agreement") override the Canadian thin capitalisation rules? However, this issue was not addressed by the Court
169
because, based on the facts of the case, the Canadian domestic law and the US Agreement applied to deny the interest deductions. Decision
Particular articles in the US Agreement state, broadly, that where a US enterprise or person and a Canadian enterprise or person do not transact .at arm's length, each state authority can adjust for thIS III the taxable mcome ot the person or enterprise to reflect an arm's length dealing. SM argued the provisions in the US Agreement prevented the application of the Canadian thin capitalisation rules on the basis that SM and its related parties transacted using an arm's length interest rate and the reverse situation applied, namely the transaction was at arm's length and, therefore, taxable income of SM could not be adjusted. Rather, Justice McDonald stated that the transaction was not at arm's length, as no lender acting at arm's length would have lent SM the money in the first place, given its level of debt. Therefore, the Canadian law and the US Agreement did apply to deny the interest deductions. Based on the facts, therefore, there was no need to discuss the interpretation or application of the treaty over the Canadian law.
9.3.6
Sumner v. The Queen [2000} 2 CTC 2359 (TCe) Tax Court of Canada
Facts
Gordon M. Sumner ("Sting") performed an extensive North American rock music tour during the 1991 taxation year. Concerts were held in the United States, Mexico and Canada. The tour took place through Roxanne Music Inc. ("Roxanne"), a US-resident company which had no permanent establishment in Canada. Roxanne was contractually obliged to pay Sting 95 percent of its net profit. Sting'S salary in 1991 from Roxanne was $1,488,000. Sting calculated the proportion of this salary as taxable in Canada by the number of days spent in Canada (six) as a proportion of the total number of days spent on the tour (240) ("the time method"). On this basis taxable income would be calculated as 6/240 x 1,488,000, as Sting spent six days on tour in Canada out of the 240 days spent on the whole tour. This resulted in taxable income of $42,780. The Minister assessed Sting's proportion of the salary as taxable in Canada by the revenue raised from Canadian concerts as a proportion of the total revenue raised through the tour ("the revenue method"). On this basis, taxable income would be calculated as $543,494/$5,965,599 x $1,488,000, as Roxanne revenue from the Canadian component of the total revenue is $543,494 compared to global revenue of $5,965,599. This resulted in taxable income of $155,890.
17(])
DTA cases
Double Taxation Agreements
ting appealed against the assessment. T he Minister also assessed Roxanne for profits attributable to the Canad' tOllr, and Roxanne subsequently also appealed against this assessment. Ian T he Canada/US DTA provides that the business profits of a US com , III 'C ana d a may only be taxed in the United States unless the com ~m. ope rating , ' ' p any IS opera,tlI~g thr?ugh a permanent establishment in Canada. Were this to be Viewed III IsolatIOn, as Roxanne had no permanent estabhshment in Ca da Ro xanne, being a US resident, would not have been taxable in Canada. na , P aragraph 1 of Article XVI of the CanadalUS DTA ("Article XVI") states: [ I]ncome derived by a resident of a Contracting State as an entertainer", from his pers onal activities as such exercised in the other Contracting State. may be taxed in that other state, except where the amount of the gross receipts derived by such entertainer". from s uch activities do not exceed fifteen thousand dollars, " in the currency of that other state fo r the calendar year concerned
S ting had admitted taxability and was in fact taxed on his earnings from the concerts in Canada. H owever, paragraph 2 of Article XVI states: [W]here income in respect of personal activities exercised by an entertainer", in his c apaCity as such accrues not to the entertainer." but to another person, that income may _" be taxed in the Contracting State in which the activities of the entertainer" , are exercised. For the purposes of the preceding sentence, income of an entertainer., . shall be d eemed not to accrue to another person if it is established that neither the entertainer ." nor persons related thereto, participate directly or indirectly in the profits of such other p erson in any manner
Roxa nne appealed against being taxed in Canada on the basis of the second paragraph, contending that paragraph 2 was merely an anti-avoidance provision.
171
as to the preferred method of apportionment. On this basis the Court nsidered the Minister's assessment to be reasonable. coo. Paragraph 2 is not merely an anti-avoidance provision to be used 2, nlv where an individual entertainer has not been subject to taxation as ;er' parag raph ~.It is to be used in conjunction with paragraph 1 to tax nv remaining mcome not subJect to tax through paragraph 1. a . Th lain words of paragraph 2 do not support the conclusion that all of an e Per's income from personal activities as an entertainer need be diverted entertalller person before the paragraph applies. , ' d 'IS t h at All t h at 'IS reqUIre to ano th ' h "inco me " should accrue not to the entertalller but,to anot er person. Furt h,er"had the contracting parties to the convention mtended that the article . d'Iverte d more, I only if the entertainer's entire income from t he speC!'f'Ie d source IS app y ld h ave b een qUIte . capa bl eo f saylllg . so " . to the other person, they wou The technical explanation to paragraph 2 of Article XVI states: if an entertainer who is a resident of Canada is under contract with a company and the arrangement between the entertainer and the company provides for payments to the entertainer based on the profits of the company, all of the income of the company attributable to the performer's US activities may be taxed in the United States irrespective of whether the company maintains a permanent establishment in the United States
This is identical to the present case, except that the countries are switched around. Clearly Article XVI paragraph 2 takes priority over the business profits article. The OECD Model Convention and Commentary is the basis for virtually all of Canada's international network of tax treaties and can be useful in interpreting such treaties. Paragraph 11 of the commentary states "paragraph 2 provides that the portion of the income which cannot be taxed in the hands of the performer may be taxed in the hands of the person receiving the remuneration". This indicates that paragraphs 1 and 2 are not intended to be applied in an either/or manner. Rather, it suggests that a performer's income may be earned in part by the performer personally and ~n part by the company, and both may be taxed.
Issues
1. 2.
Is the time method a more appropriate apportionment than the revenue method in determining taxable income? Is paragraph 2 of Article XVI of the CanadalUS Tax Convention an anti-avoidance provision to be used only where an individual entertainer has not been subject to taxation as per paragraph I?
Decision
1.
No. Article XVI of the Canada/UK DTA does not provide any guidance
9.3.7
M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin [1998] feR 1-2793
Facts
.\1 h I Y was a German national who also became a French national throug m me' G'll a arrlage, and lived in France (but near the German border). Mme Gilly worked ~ a public school teacher in Germany from 1989 to 1993 whilst commutg every d ay between France and Germany, and was taxed in Germany (as
172
discussed below). She was also taxed on this income in france because of her French residency (Article 20(2)(a) of the France/Germany tax convention). Article 13( 1) state& that income from dependent work, which includes salaries, was to be taxed only in the country where the work is carried out (in M me Gilly's case, Germany). An exception to this under Article 13(5)(a) is where the taxpayer works in one country, but has their permanent home in another COuntry (referred to as "frontier workers"), in which case the country in which they have their permanent home is the country in which they pay tax (in Mme Gilly's case, France). Further, under Article 14( 1), where the taxpayer receives remuneration from administrative or military services in Germany (such as Mme Gilly through her public school service), they are generally liable to tax in Germany, although an exception applies w here the taxpayer is a national of France without being a national of Germany, in which case they are taxed in their resident Country. However, this provision did not apply to Mme Gilly, as she was a national of both Germany and France, and therefore continued to be taxed in Germany. Under Article 16, where a taxpayer receives income from teaching at a school for less than two years, they are liable to pay tax in the country of which they are a resident. Otherwise, Article 13(1) would apply so that the income would be taxed in the country in which the services were performed. Under Article 20(2)(a)(cc), where a taxpayer is subject to tax in Germa ny, they are entitled to a tax credit equal to the amount of French tax on the income. Ordinarily, married couples in Germany are entitled to a 50-50 taxable income apportionment, meaning that a lower marginal tax rate may apply. However, Mme Gilly did not benefit from this provision, as she was a non-resident of Germany, and so was subject to more tax in Germany than she was in France, where she could benefit from income-splitting provisions. It was argued that by Mme Gilly paying more tax in Germany than she would have paid in France, it was restricting her freedom of movement. Issue
Were the provisions of the France/Germany treaty unjustified, discriminatory and excessive in breach of Articles 6 (now Article 7), 48 and 220 of the European Economic Community ("EC") treaty respectively for the following reasons: 1.
2.
DTA cases
Double Taxation Agreements
For breaching the principle of freedom of movement for workers under the Treaty of Rome, given that there are different rules regarding publicand private-sector workers; For discriminating on the basis of nationality and restricting freedom of movement, since a taxpayer not having nationality of the country where administrative services are performed is taxed in their resident country, while a taxpayer having nationality of the country in which the services are performed is taxed in that country.
3.
4.
5.
6.
173
For discriminating on the basis of nationality, since persons of single nationality are taxed differently to taxpayers of dual nationality of the exception under Article 14(1 1. For breaching the principle of freedom of movement for workers, since different tax treatments apply to temporary and long-term teachers. For not effectively eliminating double taxation on the basis that the total tax payable by a taxpayer depends on their nationality and the character of their employer as a public- or private-sector employer. For taxing frontier workers more heavily in the same country than resident workers, and thereby restricting freedom of movement.
Decision FIRST. SECOND AND FOURTH QUESTIONS
No. Firstly, it was noted that Mme Gilly had freely exercised her right to work in a country (Germany) other in that in which she lives (France). She was still afforded the rights under French law as being a French national working in another country, despite the fact that she retained her German nationality. Secondly, the Court did acknowledge that Articles 13(1), 13(5)(a), 14(1) and 16 apply different tax treatments depending on whether the taxpayer is a person who works in a country other in which they reside, whether the taxpayer is a short- or long-term resident, and whether the taxpayer is employed by the public or private sector. Howev.er, the terms of the treaty were not unlawfully discriminatory. Concerning nationality, it was not unreasonable for Member States to base their tax agreements on international practice and the OECD Model Convention. The exception under Article 14( 1) (regarding persons with nationality of the other country without being a national of the first country) mirrors Article 19(1)(b) of the OECD Model Convention on the taxation of income from government services, in that the country where the services are rendered may impose tax where the taxpayer is not a resident of that country and is a national of another country. Using nationality as a basis for allocating taxation between two countries is a legitimate criterion within the power of the Member States to eliminate double taxa'tion. Even if Mme Gilly's nationality was ignored, the tax effect would be the same in that she would continue to be taxed in Germany from her teaching in the German school system, being the place where the services were performed. FIFTH QUESTION
No. The Court looked at Article 220 of the EC treaty, which states that Member States are to enter into negotiations to abolish double taxation. From reading t~e article, such negotiations are only to go as far as necessary, while the abolition of double taxation is an objective rather than a legally-binding requirement.Therefore the terms of the article were not enough to afford the same level of rights to individuals as they could expect under domestic laws.
DTA cases 174
THIRD QUESTION
The Court held that Article 6 of the EC treaty, which prohibits discrimination on the .b~sis of ~ationality, only applies in situations where there is no specific p~ohlblt1on of discrimination. As Article 48 of the EC treaty already prohibits dlscnmmatlon based on nationality regarding employment, remuneration and other worki.ng conditions, Article 6 did not apply in this circumstance, and so the Court did not need to consider the interpretation of the article. SIXTH QUESTION
~o. The Court held that the object of the article was to avoid the same income tram bei~g taxed twice,not to en~ure that th~ income would be taxed identically In two different countries. The situations ot residents and non-residents could not be compared, because the income that a non-resident earns in a foreign country IS usually on.ly part of their total income, whereas residents generally earn a larger proportion of their total income in their home country, and therefore the German tax authority was not obliged to take into account Mme Gilly's personal and family clrcu~stances. Further, Mme Gilly's personal and family clr~umstances were taken mto account by the French tax authority when calculatmg her French tax liability on German-sourced income.
9.3.8
175
Double Taxation Agreements
"Pipeline" decision Ge rman Federal Tax Court (II R 12192, Betriebs-Berater 1997, 138)
Facts
A Dutch company, which had its central management located in the Netherlands, owned a series of underground pipelines, which ran oil between the Netheria.nds and Germany. The present case involved part of the pipeline which ran wnhm Germany, which consisted of inspection openings, cut-off slides and pumpmg stati0n.s. The pumping stations were located on ground level, and ~ompnsed bUlldlOgs, equipment, oil storage facilities and a helicopter landing held. These assets were automatically run, involving no day-to-day human Involvement. The Dutch company sold this part of the pipeline, and was taxed in Germany on the proceeds because of section 121 of the Valuation Act which taxes nonresidents on the proceeds of business assets in Germany. A pr~-requisite to taxation was that the assets sold be part of a German permanent establishment ("PE"), as defined under section 12 of the German General Tax Code. This section defines a PE to mean any fixed place of business or assets which serves the business activities of the taxpayer for more than a temporary period of time. From a previous German Federal Tax Court decision, for a PE to exist some physical part of the business must be in contact with the Earth's surfac~ over ' which the taxpayer has more than just a temporary control.
Issue
Did the underground pipeline (or parts thereof) constitute a PE, such that the Dutch company was liable to German tax on its pipeline sale proceeds? Decision
Yes. The court ultimately noted that for the purposes of Section 121 of the Valuation Act, it is not enough to prove that the asset was used as part of a business In Germany. Rather, the assets must be attributed to a German PE. Firstly, the court examined the local definition of the PE. The court held that the pipeline was a fixed place of business or assets. The pipeline was clearly fixed, and was used to transport oil, which was part of the taxpayer's business. It did not matter that the part of the pipeline sold was part of a series of pipelines, as the part of the pipeline sold was still used as part of the taxpayer's business. Even though the pipeline ran underground, it satisfied the PE definition under section 12 of the German General Tax Code as it has fixed contact with the parts of the Earth's ground. The underground pipeline did not have to be visible for there to be a PE, as the court could not determine such a requirement under section 12. The length of time the pipeline had existed in Germany evidenced temporal permanence. From the nature of the asset, the Court inferred that it was designed to meet the long-term. business requirements of the taxpayer. That the section of the pipeline sold was operated through automated mechanics did not exclude it from the section 12 definition. So long as the taxpayer could be seen as exploiting the equipment (though the use of machinery), this was sufficient. Secondly, the court noted that Germany only has authority to tax Dutch taxpayers on business assets in Germany if in accordance with the Germany/ Netherlands DTA of 1960. It was held that the definition under the DTA was in many ways identical to the German definition, although the DTA listed a number of activities that were specifically not PEs. One such exclusion was where equipment is used for the delivery of one's own goods (Article 2(1) sentence 2 b aa). However, the COUl't believed this exclusion did not apply, as the taxpayer was using the pipeline for delivery of goods to someone else. 9.3.9
Re Ste Schneider Electric French Supreme Tax Court. 28 June 2002, No. 232276
Facts
?chneider Electric was a French-resident company. It owned 100 percent of the Is~ued shares in a Swiss company by the name of Paramer. Under Article 209B(I) of the French domestic law (the General Taxation Code ("GTC")), when an
176
Double Taxation Agreements
enterprise holds at least 25 percent of the shares in a company established in a foreign country (where there is a favourable tax treatment), the enterprise is subject to tax on the profit of the foreign company in proportion to the interests that it holds. Para mer enjoyed privileged tax treatment in Switzerland. Article 209B{I) further provides that a French foreign tax credit is provided for any tax payable in that foreign country. Under Article 7(1) of the double tax agreement between France and Switzerland of 1966 (as modified in 1969), the profits of an enterprise can only be taxed in another country when the enterprise carries on a business through a permanent establishment in that other country. Schneider Electric was taxed on the profits of Paramer based on Article 209B{I), and objected to this decision, arguing that Article 7{ 1) of the France/ Switzerland DTA prevented the operation of Article 209B. Issue
Did Article 7{ 1) prevent the operation of Article 209B? Decision
Yes. The court had to determine whether Articles 7(1) and Articles 209B{I) ("the two articles") were inconsistent with each other, or whether they could operate parallel with each other. Purpose
Firstly, the court examined the purpose and objects of the two articles in order to interpret the text, and found that the two articles had different purposes.
DTA cases
177
PURPOSE OF ARTICLE 209B
The court noted that many articles of the GTC aimed to prevent French taxpayers transferring profits to foreign enterpnses subject to lower rates of tax. However, the philosophy of Article 209B, the court beheved, was not to prevent resident enterprises transferring profits overseas, but to prevent foreign entities, which are held and controlled by French enterprises, from accumulating their earnings in that foreign country where the tax treatment is more favourable. When coming to the conclusion regarding the article's purpose, the court firstly noted that because French companies were taxed on their foreign enterprises' profits, regardless of whethe~ they had been paid out by way of ~ dividend or not, this prevented the aVOidance of tax through the accumulation of such profits in foreign countries. Secondly, because the article does not apply when demonstrated that the foreign subsidiary is not subject to a favourable tax regime, the article specifically targets the retention of earnings in low-tax jurisdictions. Thirdly, as the tax imposed by the article is treated separately from normal French taxes (overseas profits under Article 209B were taxable in France, but overseas losses were not deductible in future income years), meaning the tax was not so much a tax on the profits made by the overseas enterprise, but a tax on distributions it made. Finally, as only a proportion of the profits of the foreign enterprise were taxed)n France, not the entire profits made, this was used in argument that the tax imposed by Article 209B was a tax on distribution profits (i.e. dividends), not a tax on actual profits. Nature of income
PURPOSE OF ARTICLE 7(1)
The court concluded that the main object of article 7(1) was not to combat tax evasion, as was argued by the French tax authorities. Rather, the principal object was to eliminate double taxation. The court looked at the OECD Model Tax Convention for guidance. The principal aim of this convention is to avoid double taxation by attributing the right of countries to impose tax between the two contracting countries, usually on the basis of source. Questions may arise as to the residency of a taxpayer and the source of the income. However, it was clear that the profits to be taxed under Article 209B were foreign-sourced, and so Article 7(1) has the effect of eliminating this foreign-sourced income from being taxed domestically. The court also examined the pre-enactment debates, in which it was noted that the French legislature was concerned with a double exemption from French tax taking place, that is, where a foreign subsidiary enjoys low tax rates, and where the foreign subsidiary fails to distribute its profits by way of an assessable dividend. This gave support to the argument that the object of Article 7(1) was to prevent double taxation.
The court had to examine the nature of the income to determine whether the "profits" referred to in Article 209B were the same as the "profits" referred to in Article 7( 1). If Articles 7{ 1) and 209B were in relation to different types of income, then they may not necessarily be incompatible. The court did not take into account the heading under which Article 209B fell and the part of the code to which the article belongs. The court noted, -from the plain reading of the article, that it is the profits (results) of the foreign enterprise that are subject to tax. The fact that a foreign tax credit is allowed in France for any tax already paid to Switzerland on the amount also indicated that the object of the Article 209B was to tax the profits of the overseas business. As the term "profits" was not defined under Article 7(1), the court looked to the meaning of the word under domestic law in accordance with Article 3(2). Therefore, the Administrative Court of Appeal did not make an error when it determined that the business profits taxed under Article 7(1) were of the same nature as the profits taxed under Article 209B.
178
Double Taxation Agreements
Interpretation of Article 7(1)
The court noted that Article 7(1) was to be read in conjunction with Article S. Under Article 5(4) of the France/Switzerland DTA, a permanent establishment can arise where a foreign entity independent of a French entity acts in the name of or on account of the French entity. However, there was nothing to suggest that Paramer was acting in the name of or on account of Schneider Electric despite it being 100 percent owned by the French company. ' Under Article 7(1), the meaning of "enterprise of a Contracting State" means "an enterprise carried on by a resident of a Contracting State", and so it is only the residency of the taxpayer and not the place where the business is carried OUt that is important. Therefore, all profits of French residents are taxable in France, except when they are realised through a Swiss PE. Interpretation of Article 2098
The court did not believe that Article 209B imposed tax in the name of the Swiss company. It is the French company that is subject to the tax, as deduced from the reading of the text. Therefore, Schneider Electric was subject to double taxation by having the profits of Paramer taxed in its own name when there was no evidence that Schneider Electric was carrying on a business through a PE through Paramer, being a separate legal entity to its parent not having yet distributed profits to its shareholder.
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Double taxation agreements table
This chapter provides a tabular summary of the DTAs that exist in respect of the six countries currently examined - namely Australia, China, France, Germany, the United Kingdom and the United States. Naturally any such list is out of date almost as soon as it is published when so many new DTAs are being negotiated. The list is however current up to July 31, 2008, and will be updated in future editions. Some interesting observations can be made in relation to this network of comprehensive DTAs. First, all six countries have DTAs with each other. Second, all six have DTAs with AusJria, Belgium, Canada, the Czech Republic, Denmark, Finland, Hungary, India, Indonesia, Ireland, Italy, Japan, South Korea, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Portugal, Romania, Russia, Slovakia, South Africa, Spain, Sri Lanka, Sweden, Switzerland and Thailand. Third, there are some important and notable gaps in the US DTA network. Of significance is the absence of a US DTA with each of Malaysia, Malta, Singapore and Vietnam. Of these Singapore is perhaps the most intriguing, as it is recognised as a strong financial centre, especially in the Asia-Pacific basin, and ~ne would have expected that an economic powerhouse such as the United ~ates ~ould have long since ne~otiated such a DTA. It is also worth noting that ~fe y ruted States has few DTAs with its South American neighbours or with ncan cOuntries. h Fourth, Australia's DTA network is broad and expanding rapidly, especially ~v~ng regard to its relatively small economic size. However, the lack of DTAs B~azil and Venezuela in South America and so few DTAs with African Ollntnes is notIcea . bl e. I t IS ' a Iso worth notmg ' that currently AustralIa . has no DTA. Sta d~Ith Greece other than a limited airline profits agreement. This is notwithn Ingm the fac t t h at t h ere IS · conSI.d era bl e cross- border trade, mvestment . an d people Fifth ~vement acr~ss the two ~ountries. cleVe! ,.history SOmetImes has a bIgger part to play in the timing of DTAs than OPIng trade ties. Clearly, for example, France's DTAs with countries such
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182
Double Taxation Agreements
as Benin and the Congo in Africa and the United Kingdom's DTA with Belize (formerly British Honduras) has more to do with their historica l links than modern trade developments. Similarly the lack of a DTA between the United States and Vietnam is probably tied more to historical issues than a lack of trade ties in contemporary times. The timing of South Africa's relatively la te emergence as a country with DTAs with so many trading partners was pro bably more to do with its isolation during the Apartheid years than trade iss ues. Sixth, apart from the Netherlands, the United Kingdom and France probably have the greatest number of DTAs. Finally, China's recent surge in DTA negotiations and finalisations are indicative of an economy opening up to large-scale foreign investment, with new and significant trade ties being developed with the rest of the world. By parallel reasoni ng it is to be expected that, as Africa and South America emerge from years of relatively low economic interaction with the developed world, a surge in the number of new DTAs is likely to be seen in the next 20 years in those areas.
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Canada
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APpendix The sample DTAs
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193
INTERNATIONAL TAX AGREEMENTS ACT 1953 - SCHEDULE 1
20t) United Kingdom convention and notes ~ote: See section 3.
CONVENTION BETWEEN THE GOVERNMENT OF AUSTRALiA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS
The Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland, Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains, IIave agreed as follows:
ARTICLE 1 Persons covered This Convention shall apply to persons who are residents of one or both of the Contracting States.
ARTICLE 2 Taxes covered The existing taxes to which this Convention shall apply are: (a) in the case of the United Kingdom: (i) the income tax; (ii) the corporation tax; and (iii) the capital gains tax; (b) in the case of Australia: the income tax, the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, and the fringe benefits tax, imposed under the federal law of Australia. 2
This Convention shall also apply to any identical or substantially similar
194
Australia/UK
Appendix
taxes which are imposed under the federalla :)f Australia or the law of the United Kingdom after the date of signature t is Convention in addition to, or in place of, the existing taxes. The comperaauthorities of the Contracting States shall notify each other of any substant changes that have been made in the law of their respective States relating t,me taxes to which this Convention applies within a reasonable peridof time after those changes. ARTICLE 3 General definitlls 1 For the purposes of this Convention, un\.. the context otherwise reqUlres: (a) the term "United Kingdom" means (cat Britain and Northern Ireland, including any area outside th erritorial sea of the United Kingdom which in accordance with it~rnationallaw has been or may hereafter be designated, under tHaws of the United Kingdom concerning the Continental Shelf, as narea within which the rights of the United Kingdom with respect Hhe seabed and subsoil and their natural resources may be exerci!J; (b) the term "Australia", when used in a,'w gra phi cal sense, excl udes all external territories other than: (i) the Territory of Norfolk Island; (ii) the Territory of Christmas Island (iii) the Territory of Cocos (Keeling) h nds; (iv) the Territory of Ashmore and Ca llr Islands; (v) the Territory of Heard Island ancMcDonald Islands; and (vi) the Coral Sea Islands Territory, and includes any area adjacent to thetrritoriallimits of Australia (including the Territories specified in l:is subparagraph) in respect of which there is for the time being in fIle, consistently with international law, a law of Australia ling with the exploration for or exploitation of any of the natural '\ources of the seabed and subsoil of the Continental Shelf;
195
(e) the terms "a Contracting State" and "the other Contracting State" mean the United Kingdom or Australia, as the context requires;
(0 the term "person" includes an individual, a company and any other body of persons, but subject to paragraph 2 of this Article does not include a partnership; (g) the term "company" means any body corporate or anything that is treated as a company or body corporate for tax purposes; (h) the term "enterprise" applies to the carrying on of any business; (i) the terms "enterprise of a Contracting State" and "ent.erprise of the other Contracting State" mean respectively an enterpnse carned on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; (j) the term "international traffic" means any transport by a ship or
aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely from a place or between places in the other Contracting State; (k) the term "competent authority" means: (i) in the case of the United Kingdom, the Commissioners of Inland Revenue or their authorised representative; (ii) in the case of Australia, the Comrnissione~ of Taxation or an authorised representative of the ComrrusslOner;
(I) the term "national" means: (i) in relation to the United Kingdom, any British citizen, or any British subject not possessing the citizenship of any ?th~r Commonwealth country or territory, provided that mdlvldual has the right of abode in the United Kingdom; and a.ny comp~ny deriving its status as such from the law m force m the Umted Kingdol}l; (ii) in relation to Australia, an Australian citizen or an individ~al not possessing citizenship who has been granted permanent reSidency status; and any company deriving its status as such from the law in force in Australia;
(c) the term ., Australian tax" means tax"lposed by Australia, being tax to which this Convention applies by Itue of Article 2;
(m) the term "business" includes the performance of professional services and of other activities of an independent character;
(d) the term "United Kingdom tax" mea tax imposed by the United Kingdom, being tax to which this Co ention applies by virtue of Article 2;
(n) the term "tax" means Australian tax or United Kingdom tax
~s the context requires, but does not include any penalty or. interest Impose< under the law of either Contracting State relatmg to ItS tax;
1 96
Australia/UK
Appendix
(0) the term "recognised stock exchange" means:
(i) the Australian Stock Exchange and any other Australian stock exchange recognised as such under Australian law; (ii) the London Stock Exchange and any other United Kingdom investment exchange recognised under United Kingdom law; or (iii) any other stock exchange agreed upon by the competent authorities. 2 A partnership deriving its status from Australian law as a limited partnership which is treated as a taxable unit under the law of Australia shall be treated as a person for the purposes of this Convention. 3 As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the laws of that State for the purposes of the taxes to which this Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State. ARTICLE 4 Residence 1 For the purposes of this Convention, a person is a resident of a Contracting State: (a) in the case of the United Kingdom, if the person is a resident of the United Kingdom for the purposes of United Kingdom tax; and (b) in the case of Australia, if the person is a resident of Australia for the purposes of Australian tax.
197
of the State with which the individual's personal and economic relations are closer (centre of vital interests); (b) if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national; (c) if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement. 4 Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. 5 Notwithstanding paragraph 4 of this Article, where by reason of paragraph 1 of this Article a company, which is a participant in a du~llisted company arrangement, is a resident of both Contractmg States then It shall be deemed to be a resident only of the Contracting State in which it is incorporated, provided it has its primary stock exchange listing in that State. 6 The term "duallisted company arrangement" as used in this Article means an arrangement pursuant to which two publicly listed companies, while maintaining their separate legal entity status, shareholdings and listings, align their strategic"directions and the economic interests of their respective shareholders through: (a) the appointment of common (or almost identical) boards of directors; (b) management of the operations of the two companies on a unified basis;
A Contracting State or a political subdivision or local authority of that State is also a resident of that State for the purposes of this Convention.
(c) equalised distributions to shareholders in accordance with an equalisation ratio applying between the two companies, including in the event of a winding up of one or both of the companies;
2 A person is not a resident of a Contracting State for the purposes of this Convention if that person is liable to tax in that State in respect only of income or gains from sources in that State.
(d) the shareholders of both companies voting in effect as a single decision-making body on substantial issues affecting their combined interests; and '
3 The status of an individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:
(e) cross-guarantees as to, or similar financial support for, each other's material obligations or operations, except where the effect of the relevant regulatory requirements prevents such guarantees or financial support.
(a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only
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ARTICLE 5 Permanent establishment 1 For the purposes of this Convention, the term "permanent establishme >means a fixed place ~f business through which the business of an enterpris~:s wholly or partly carned on. 2
The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place relating to the exploration for or exploitation of natural resources; and (g) an agricultural, pastoral or forestry property. 3 An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carryon business through that permanent establishment if: (a) it has a building site or construction or installation project in that State, or it undertakes a supervisory or consultancy activity in that State connected with such a site or project, but only if that site, project or activity lasts more than 12 months; (b) it maintains substantial equipment for rental or other purposes within that other State (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months; or (c) a person acting in a Contracting State on behalf of an enterprise of the other Contracting State manufactures or processes in the first-mentioned State for the enterprise goods or merchandise belonging to the enterprise.
4
(a) The duration of activities under subparagraph (a) of paragraph 3 will be determined by aggregating the periods during which activitie.s are carried on in a Contracting State by associated enterprises provl.ded he that the activities of the enterprise in that State are connected With t activities carried on in that State by its associate. (b) The period during which two or more associated enterprises are
carrying on concurrent activities will be counted only once for the purpose of determining the duration of activities.
199
(c) Under this Arti~le, .a n enterprise shall be deemed to be associated with another enterpnse If: (i) one is controlled directly or indirectly by the other; or (ii) both are controlled directly or indirectly by a third person or persons. N twithstanding the preceding provisions of this Article, an enterprise ; hall :ot be deemed to have a permanent establishment merely by reason of: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or collecting information, for the enterprise; or (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 6 Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person - other than an agent of an independent status to whom paragraph 7 of this Article applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude Contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that ~er~on undertakes for that enterprise unless the activities of such person are limited to those mentioned in paragraph 5 of this Article which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 7 An . h C enterpnse s all not be deemed to have a permanent establishment in a b onktracting State merely because it carries on business in that State through a ro ter' general . . agent or any ot her agent 0 f an independent sta . COmmiSSion of t~S~ Pbrov~ded that such brokers or agents are acting in the ordinary course elr USllless as such.
8 The fact that hi h . . . Control . a company w c IS a reSident of a Contractlllg State Co nt S?r IS cOntrolled by a company which is a resident of the other ractlllg State, or w h·IC h carnes · on busilless . .III that other State (whether
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through a permanent establishment or otherwise), shall not of itself rna ke either company a permanent establishment of the other.
h r State but only so much of them as is attributable to that edinthe ot e be taX establishment. ermanent p h provisions of paragraph 3 of this ArtiCle, where an bJ ect to t e o bOO h h C 2 Su f C tracting State carnes on usmess m t e ot er ontractmg °se 0 a on h enterpn h a rmanent establishment situated m that other State, t ere State .t hroug C P;racting State be attributed to that permanent establishment h Um each on O f. dO d sao hOch it might be expected to make I It were a Istmct an d h the profits w I °se engaged in the same or SimI ar actlvltles un er t e same or rate enterpn f sep~ dO °ons and dealing wholly independently With the enterpnse 0 inular con JtI S . h whIC It IS a p ermanent establishment or with other enterpnses. 0
ARTICLE 6 Income from real property 1 Income derived by a resident of a ~ontr~c ting State from realprop<:erty may be taxed in the Contractmg State m which the real property IS Situ cated.
(a) a lease of land or any other interest in or over land;
•
0
0
0
0
0
0
2 The term "real property" shall have the meaning which it has unde r the law of the Contracting State in which the property is situated. The terrIl . shall in any case include:
201
0 1
0
0
0
0
0
0
0
0
0
In determining the profits of aopermanent ~stablishment, there s~all be uctions expenses of the enterprise, bemg expenses which are al Io wed as ded bl o h O I dO o d f the purposes of the permanent esta IS ment, mc u mg executive iOcurre or and general administrative expenses so mcurred, whether m the Contractmg State in which the permanent establishment is situated or elsewhere. 3
0
(b) property accessory to real property; (c) livestock and equipment used in agriculture and forestry; (d) usufruct of real property; (e) a right to explore for mineral, oil or gas deposits or other natur;-al resources, and a right to mine those deposits or resources; and (f) a right to receive variable or fixed payments either as considera ntion for or in respect of the exploitation of, or the right to explore om exploit, mineral, od or gas deposits, quarries or other places of extraction or exploitation of natural resources. Ships and aircraft shall not be regarded as real property. 3 Any interest or right referred to in paragraph 2 shall be regarded as situated where the land, mineral, oil or gas deposits, quarries or natural I resources, as the case may be, are situated or where the exploration ma~ take place. 4 The provisions of paragraph 1 of this Article shall apply to income derived from the direct use, letting, or use in any other form of real pro{1>erty. 5 The provisions of paragraphs 1, 3 and 4 of this Article shall also ap, ply to the income from real property of an enterprise.
ARTICLE 7 Business profits . . J nlyin 1 The profits of an enterpnse of a Contractmg State shall be taxable a.. bO O h h C ;-.ng that State un Iess t h e enterpnse carnes on usmess m t e ot er ontract.... h State through a permanent establishment situated in that other State. If ,~_e ay enterprise carries on business in that manner, the profits of the enterprisl e m 0
0
0
0
0
4 Nothing in this Article shall affect the application of a~y la:-v of a Contracting State relating to the determination of the tax hablltty. of a person in cases where the information available to the competent authonty of that State is inadequate to determine the profits to be attributed to a permanent establishment. In such cases that law sha ll be applied, having regard to the information that is available, consistently with the principles of this Article. S No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6 Where profits include items of income or gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 7 Nothing in this Article shall affect the operation of any law of a Contracting State relating to tax imposed on profits from insurance with non-residents provided that if the relevant law in force in either Contracting St~te at the date of signature of this Convention is varied (otherwise than in ~lllor respects so as not to affect i general character) the Contracting States sh ~ll consult with each other with a view to agreeing to any amendment of t IS paragraph that may be appropriate.
ARTICLE 8 Shipping and air transport 1 Profits of hO Or an enterpnse 0 f a C ontractmg State from t h e operation 0 f SIpS alrcraft i I n mternatlona traffiC shall be taxable only in that State. 0
0
0
0
0
0
0
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2 Notwithstanding the provisions of paragraph 1 of this Article, profits of an enterprise of a Contracting State from the operation of ships or aircraft may be taxed in the other Contracting State to the extent that they are profits derived from ship or aircraft operations confined solely to places in that other State. 3 For the purposes of this Article, profits from the operation of ships or aircraft in international traffic include: (a) profits from the rental on a bareboat basis of ships or aircraft; and (b) profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise; provided such rental or such use, maintenance or rental, as the case may be, is directly connected or ancillary to the operation of ships or aircraft in international traffic. 4 The provisions of paragraphs 1 and 2 of this Article shall also apply to profits from the participation in a pool, a joint business or an international operating agency, but only to so much of the profits so derived as is attributable to the participant in proportion to its share in the joint operation.
S
For the purposes of this Article, profits derived from: (a) the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise which are shipped in a Contracting State and are discharged at the same or another place in that State; or (b) the use of a ship or aircraft for haulage, surveyor dredging activities, or for exploration or extraction activities in relation to natural resources, where such activities are undertaken in a Contracting State;
shall be treated as profits from ship or aircraft operations confined solely to places in that State.
ARTICLE 9 Associated enterprises 1
Where: (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management,
203
control or capital of an enterprise of a Contracting State and an enterpnse of the other Contracting State; ,lnd in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which might, but for those conditions, have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. 2 Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits accruing to an enterprise. In such cases that law shall be applied, having regard to the information that is available, consistently with the principles of this Article. 3 Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included, by virtue of the provisions of paragraphs 1 or 2, in the profits of an enterprise of the other Contracting State and charged to tax in that other State, and the profits so included are profits which might have been expected to have accrued to that enterprise of the other State if the conditions operative between the enterprises had been those which might have been expected to have 0p6Cated between independent enterprises dealing wholly independently with one another, then the first-mentioned State shall make an appropriate adjustment to the amount of tax it has charged on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.
ARTICLE 10 Dividends Dividends paid by a company which is a resident of a Contracting State for the purposes of its tax, being diovidends beneficially owned by a resident of the other Contracting State, may be taxed in that other State. 2 However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident for the purposes of its tax , and according to the law of that State, but the tax charged shall not exceed: I a ) S per cent of the gross amount of the dividends, if the beneficial owner of the dividends is a company which holds directly at least 10
204
Appendix
per cent of the voting po and
Au stralia/ UK
wer in the company paying the divid
en
d
S;
(b) 15 per cent of the gross a jGmount of the dividends in all other ca es. 3 Notwithstanding the provisicJl ons ' d ds . of paragraph. 2 of this Article,divI en shall not be taxed in the Contracc;:tI.n? State of which the company payin th dividends is a resident if the bene1,eflCial .owner of the dividends is a comp~n/ that is a resident of the other Co(lQntractmg State that has owned shares representing 80 per cent or more ~ of the voting power of the company pay' the dividends for a 12 month perin .o d en d'mg on t h e d ate the dividend is 109 declared and the company that iSltS the beneficial owner of the dividends: (a) has its principal class of S!i sh~res li~~ed on a recognised stock exchange (1) or (ll) of subparagraph (0) of paragraph specified in subparagrap 1 of Article 3 and regulatlU"ly traded on one or more recognised stock exchanges; (b) is owned directly or indirllrectly by one or more companies whose principal class of shares i +1s listed on a recognised stock exchange specified in subparagraplih (i) or (ii) of subparagraph (0) of paragraph 1 of Article 3 and reguia illriy traded on one or more recognised stock exchanges; or (c) does not meet the requiret,ements of subparagraphs (a) or (bl of this paragraph but the comp&:tent authority of the first-mentioned Contracting State detenn'nines, in accordance with the law of that State, that the establishrrJIlent, acquisition or maintenance of the company that is the ben~ficial owner of the dividends and the conduct of its operations 5 did not have as one of its principal purposes the obtaining of benefits under this Convention. The competent authority of the first-mer:Ptioned Contracting State shall consult the competent authority of ttfue other Contracting State before refusing to grant benefits of this Cortnvention under this subparagraph. 4 The term "dividends" as usetJ d in this Article means income from shares or other rights, not being debt-clairJID s, participating in profits, as well as income . su b'Jecte d to t h e same taxatIOn . t rea tment from other corporate rights whi6 h IS , as income from shares by the laWVs of the State of which the company maklOg the distribution is a resident and I also includes any other item which, .u~der the laws of the Contracting Stat&! of which the company paying the dIVIdend is a resident, is treated as a dividl end or distribution of a company. 5 The provisions of paragraph 1,2 and 3 of this Article shall not .apply if · a reSl'den t 0 f a ContractlOg State, the beneficial owner of the divid..,en d s, belOg carries on business in the other ontracting State of which the company paying the dividends is a residen ~' through a permanent establishment
205
d ' that other Statate and the holding in respect of which the dividends situated tn effectively coniinected with such permanent establishment. In such l .Ire pa ISrovisions of Artn icle 7 of this Convention shall apply. ca~e the p Where a company wb.:hich is a resident ?f a Contracting State derives 6 f r income from th e other Contractmg State, that other State may not pro ItS ~ny tax on the divr; vidends paid by the company, being dividends Ifnpor'ally owned by a pCDerson who is not a resident of the other Contracting bene lC~cept insofar as thD e holding in respect of which such dividends are State, ' d lO ' t h at effectivelyd connecu· te ' WIt h a permanent esta bl'IS h ment SItuate 'd 'se ~:~e: State, nor subject tif e ,compa?y's undistributed profits to a tax on . distributed profits, evelen If the dIvIdends paId or the undlstnbuted profIts unnsist wholly or partly ())()f profits or income arising in such other State. This ~~ragraph shall not applyry in ~elation to dividends paid by ~ny company . which is a resident of AU5&stralIa for the purposes of AustralIan tax and which is also a resident of the U United Kingdom for the purposes of United Kingdom tax. 7 0 relief shall be avamilable under this Article if it was the main purpose or one of the main purpoDses of any person concerned with the creation or assignment of the shares ' or other rights in respect of which the dividend is paid to take advantage ob f this Article by means of that creation or assignment. 8 For the purposes of RParagraph 3 of this Artic~e, the term "principal class of shares" means the ordiflinary or common shares of the company, provided that such class of shares E represents the majority of the voting power and value of the company. If I' no single class of ordinary or common shares represents the majority onf the voting power and value of the company, the "principal class of share 5 " is that class or those classes that in the aggregate represent a majority of di he voting power and value of the company.
ARTICLE 11 Interest ' " . rest ansmg m a () ontracting State and beneficially owned by a reSIdent of th e ot her C ' , O~ l:ltractlOg State may be taxed m that other State.
1 lote
:hi~owev.er, shal~ 3
that inter~st may also be taxed in the Contracting State in anses, and acco rding to the law of that State, but the tax so charged not exceed 10 per G.-cent of the gross amount of the interest. It
Otw '
h
beneficialt standing pa ragraph 2, interest arising in a Contracting State and taxed' hY o~ned by a resident of the other Contracting State may not be In t e flfst-mentio ned State if: (a) the interest is de rived by a Contracting State or by a political or
Australia/UK 206
207
Appendix
administrative subdivision or a local authority thereof, or by any other body exercising governmental functions in a Contracting State, or by a bank performing central banking functions in a Contracting State: or (b) the interest is derived by a financial institution which is unrelated to and dealing wholly independently with the payer. For the purposes of this Article, the term "financial institution" means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance. otwithstanding paragraph 3, interest referred to in subparagraph (b) of 4 that paragraph may be taxed in the State in which it arises at a rate not exceeding 10 per cent of the gross amount of the interest if the interest is paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and intended to have a similar effect to back-to-back loans. 5 The term" interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, and income from any other form of indebtedness. The term "interest" also includes income which is subjected to the same taxation treatment as income from money lent by the law of the Contracting State in which the income arises. The term "interest" shall not include any item which is treated as a dividend under the provisions of Article 10 of this Convention. 6 The provisions of paragraphs 1 and 2, subparagraph (b) of paragraph 3 and paragraph 4 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated in that other State and the indebtedness in respect of which the interest is paid or credited is effectively connected with such permanent establishment. In such case, the provisions of Article 7 of this Convention shall apply. 7 Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the interest, whether the person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment, then the interest shall be deemed to arise in the State in which the permanent establishment is situated.
8 Where, by reason of a special relationship between the payer and the beneficial owner of the interest, or between both of them and some other person, the amount of the interest paid or credited exceeds, for whatever reason, the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the amount of the interest paid or credited shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. 9 No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.
ARTICLE 12 Royalties 1 Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2 However, those royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax s.o charged shall not exceed 5 per cent of the gross amount of the royalties. 3 The term "royalties" in this Article means payments or credits, whethe~ periodical or not, and however described or computed, to the extent to which they are made as consideration for: (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right; (b) the supply of scientific, technical, industrial or commercial knowledge or information; (c) the supply of any ancillary and subsidiary assistance that is furni~hed as a means of enal1ting the application or enjoyment of any such Item as is mentioned in subparagraph (a) or (b) of this paragraph; (d) the use of or the right to use: Ii) motion picture films; or (ii) films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting; or
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(e) total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph. 4 The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated in that other State, and the right or property in respect of which the royalties are paid or credited is effectively connected with that permanent establishment. In that case the provisions of Article 7 of this Convention shall apply.
S Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment, then the royalties shall be deemed to arise in the State in which the permanent establishment is situated. 6 Where, by reason of a special relationship between the payer and the beneficial owner of the royalties, or between both of them and some other person, the amount of the royalties paid or credited exceeds, for whatever reason, the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess paid or credited shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. 7 The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.
ARTICLE 13 Alienation of property 1 Income or gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other State. 2 Income or gains from the alienation of property, other than real property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such income or gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State.
209
3 income or gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international ~raffic, or of property (other than real property) pertaining to the operation ot those ships or aircraft, shall be taxable only m that Contractmg State. 4 Income or gains derived by a resident of a Contracting State from the alienation of any shares or other interests in a company, or of an interest of any kind in a partnership, trust or oth~r entity, ,,:he.re the value of the assets of such entity, whether they are held dlfecdy or mdlrectly (mcluding through one or more interposed entities, such as, for example, through a chain of companies), is principally attributable to real property situated in the other Contracting State, may be taxed in that other State.
S
An individual who elects, under the taxation law of a Contracting State, defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall , if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property only in that other State. to
6 Nothing in this Convention affects the application of a law of a Contracting State relating to the taxation of gains of a capital nature derived from the alienation of any property other than that to which any of the preceding paragraphs of this Article apply. 7 In this Article, the term "real property" has the same meaning as it has in Article 6. 8 The situation of interests or rights referred to in paragraph 2 of Article 6 shall be determined for the purposes of this Article in accordance with paragraph 3 of Article 6. 9 The provisions of this Article shall not affect the right of the United Kingdom to levy according to its laws a tax chargeable in respect of income or gains from the alienation of any property on a person who is a resident of the United Kingdom at any time during the fiscal year in which the property is alienated, or has been so resident at any time during the 6 years immediately preceding that year. ~
ARTICLE 14 Income from employment 1 Subject to the provisions of Articles 17 and 18 of this Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the
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employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State. 2 Notwithstanding the remuneration derived by employment exercised in the first-mentioned State
provisions of paragraph 1 of this Article, a resident of a Contracting State in respect of an the other Contracting State shall be taxable only in if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year or year of income of that other State; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the other State. 3 Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State of which the enterprise operating the ship or aircraft is a resident. 4 In relation to remuneration of a director of a company derived from the company the preceding provisions of this Article shall apply as if the remuneration were remuneration of an employee in respect of an employment and as if the references to an employer were references to the company. ARTICLE 15 Fringe benefits 1 Where, except for the application of this Article, a fringe benefit is taxable in both Contracting States the benefit will be taxable only in the Contracting State which would have the primary taxing right over that benefit if the value of the benefit were paid to the employee as ordinary employment income. 2
For the purposes of this Article: (a) "fringe benefit" has the meaning it has under Australia's Fringe BenefIts Tax Assessment Act 1986 (Commonwealth), as it may be ~mended from time to time, and does not include a benefit arising trom the acquisition of an option over shares under an employee share scheme; (b) a Contracting State has a "primary taxing right" to the extent that it has a taxing right under this Convention in respect of the
211
remuneration for the relevant employment and the other Contracting State is required under this Convention to allow relief for any taxes imposed in respect of such remuneration by the first-mentioned Contracting State. ARTICLE 16 Entertainers and sportspersons 1 Notwithstanding the provisions of Articles 7 and 14 of this Convention, . come derived by a resident of a Contracting State as an enterta1Oer, such as 10 "" theatre motion picture, radio or television artiste, or a muslClan, or as a :portspe;son, from that person's perso~al activities as such exercised in the other Contracting State, may be taxed 10 that other State. 2 Where income in respect of personal activities exercised by an entertainer or a sportsperson in that person's capacity as such accrues not to that person but to another person, that income may, notwithstand1Og the provlSlons of Articles 7 and 14 of this Convention, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised. ARTICLE 17 Pensions and annuities 1 Pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State. 2 The term "annuity" means a stated sum payable periodically to an individual at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth. ARTICLE 18 Government service 1 Salaries, wages and other similar remuneration, other than a pension or annuity, paid by a Contracting State or a political subdivision or local. authority of that State to an individual in respect of services rendered 10 the discharge of governmental functions shall be taxable only in that State. However, such salaries, wages and other similar remuneration shall be " taxable only in the other Contracting State if the services are rendered 10 that other State and the recipient is a resident of that other State who: (a) is a national of that State; or (b) did not become a resident of that State solely for the purpose of rendering the services.
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2 The provision~ of paragraph 1 of this Article shall not apply to salaries, wages and other Similar remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or local authority of that State. In that case, the provisions of Article 14, 15 or 16, as the case may be, shall apply.
ARTICLE 19 Students Where a student, who is a resident of a Contracting State or who was a resident of that State immediately before visiting the other Contracting State and who is temporarily present in that other State solely for the purpose of the student's education, receives payments from sources outside that other State for the purpose of the student's maintenance or education, those payments shall be exempt from tax in that other State.
ARTICLE 20 Other income 1 Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention sha ll be taxable only in that State. 2 The provisions of paragraph 1 of this Article shall not apply to income o~her than income from real property as defined in paragraph 2 of Article ;; ot this Convention, derived by a resident of a Contracting State who carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In that case the provisions of Article 7 of this Convention shall apply. 3 Notwithstanding the provisions of paragraphs 1 and 2 of this Article items of income of a resident of a Contracting State not dealt with in the' foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State. Where, by reason of a special relationship between the person referred to paragraph 1 of this Article and some other person, or between both of them and some third person, the amount of the income referred to in that paragraph exceeds the amount (if any) which might reasonably have been expected to have been agreed upon between them in the absence of such a relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such a case, the excess part of the income shall remain taxable according to the laws of each Contracting State, due regard being had to the other applicable provisions of this Convention. 4
10
213
5 A person may not rely on this Article to obtain relief from taxation if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the income is derived to take advantage of this Article by means of that creation or assignment.
ARTICLE 21 Source of income Income or gains derived by a resident of the United Kingdom which, under anyone or more of Articles 6 to 8 and 10 to 16 and 18, may be taxed in Australia shall for the purposes of the laws of Australia relating to its tax be deemed to arise from sources in Australia.
ARTICLE 22 Elimination of double taxation 1 Subject to the provisions of the laws of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article): (a) United Kingdom tax paid under the laws of the United Kingdom and in accordance with this Convention, whether directly or by deduction, in respect of income or gains derived by a person who is a resident of Australia from sources in the United Kingdom shall be allowed as a credit against Australian tax payable in respect of that IOcome; (b) Where a company which is a resident of the United Kingdom and is not a resident of Australia for the purposes of Australian tax pays a dividend to a company which is a resident of Australia and which controls directly or indirectly at least 10 per cent of the voting power of the first-mentioned company, the credit shall include the United Kingdom tax paid by that first-mentioned company in respect of that portion of its profits out of which the dividend is paid.
,
2 Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof): (a) Australian tax payable under the laws of Australia and in accordance with this Convention, whether directly or by deduction, on income or chargeable gains from sources within Australia (excluding in the case of a dividend, tax payable in respect of the profits out of which the
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dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same income or chargeable gains by reference to which the Australian tax is computed; (b) in the case of a dividend paid by a company which is a resident of Australia to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into account (in addition to any Australian tax for which credit may be allowed under the provisions of subparagraph (a) of this paragraph) the Australian tax payable by the company in respect of the profits out of which such dividend is paid. 3 For the purposes of paragraph 1 and 2 of this Article, income or gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention shall be deemed to arise from sources in that other Contracting State. ARTICLE 23 Limitation of relief 1 Where under this Convention any income or gains are relieved from tax in a Contracting State and, under the law in force in the other Contracting State, a person in respect of that income or those gains is taxed by reference to the amount thereof which is remitted to or received in that other State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned State shall apply only to so much of the income or gains as is taxed in the other State.
2 Where under this Convention any income or gains are relieved from tax in a Contracting State and, under the law in force in the other Contracting State, an individual in respect of that income or those gains is exempt from tax by virtue of being a temporary resident of the other State within the meaning of the applicable tax laws of that other State, then the relief to be allowed under this Convention in the first-mentioned State shall not apply to the extent that that income or those gains are exempt from tax in the other State. ARTICLE 24 Partnerships Where a partnership is treated as a taxable unit under the law of a Contracting State and under any provision of this Convention is entitled, as a resident of that State, to relief from tax in the other Contracting State on any
215
, e or gains, that provision shall not be construed as restricting the right 1ncomt other State to tax any member 0 f t he partners h'1p w h 0 '1S a reS1'd ent 0 f h ota . b ut any suc h bf ther State on that member's share 0 f suc h'lOCO me or galOs; ~ at 0 e or gains shall be treated for the purposes of Article 22 of this m lOco ' d State. , ' from sources 10 ' t he f'lfst-mentlOne convention as IOcome or galOs ARTICLE 25 Non-discrimination 1 Nationals of a Contracting State shall not be subjected in the other, Contracting State to any taxation or any requirement connected therewlth, hich is other or more burdensome than the taxation and connected ~quirements to which nationals of that other ~tate in the same circumstances, in particular with respect to res1dence, are or may be
subjected. 2 The taxation on a permanent establishment which an enterprise of a , Contracting State has in the other Contracting State shall ,not be less favourably levied in that other State than the taxatio~ lev1ed on enterpnses of that other State carrying on the same activities in simllar Clrcumstances. 3 Except where the provisions of paragraph 1 of Article 9, paragraph 8 ?r 9 of Article 11, paragraph 6 or 7 of Article 12, or paragraph 4 or 5 of Arti~le 20 of this Convention apply, interest, royalties and other disbursements p~ld by an enterprise of a Contracting State to a resident of the other ContractlOg , State shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been pald to a resident of the first-mentioned State. 4 Enterprises of a Contracting State, the capital of which is ~holly or partly owned or controlled, directly or indirectly, by one or more resldents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State in similar circumstances are or may be subjected. 5 Nothing contained in thfs Article shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident. 6 This Article shall not apply to any provision of the laws of a Contracting State which: (a) is designed to prevent the avoidance or evasion of taxes;
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(b) does not permit the deferral of tax arising on the transfer of an asset where the subsequent transfer of the asset by the transferee would be beyond the taxing jurisdiction of the Contracting State under its laws; (c) provides for consolidation of group entities for treatment as a single entity for tax purposes provided that Australian resident companies that are owned directly or indirectly by residents of the United Kingdom can access such consolidation treatment on the same terms and conditions as other Australian resident companies; (d) provides deductions to eligible taxpayers for expenditure on research and development; or (e) is otherwise agreed to be unaffected by this Article in an Exchange of Notes between the Government of Australia and the Government of the United Kingdom. 7 The provisions of this Article shall apply to the taxes which are the subject of this Convention. ARTICLE 26 Mutual agreement procedure
1 Where a person who is a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with this Convention, that person may, irrespective of the remedies provided by the domestic law of those States concerning taxes to which this Convention applies, present a case to the competent authority of the Contracting State of which that person is a resident or, if the case comes under paragraph 1 of Article 25 of this Convention, to that of the Contracting State of which that person is a national. 2 The competent authority shall endeavour, if the case appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. 3 The competent authorities of the Contracting States shall jointly endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. 4 The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.
217
5 For the purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 3 of this Article or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States. ARTICLE 27 Exchange of information 1 The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant to the administration or enforcement of the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which this Convention applies insofar as the taxation under those laws is not contrary to this Convention. The exchange of information is not restricted by Article 1 of this Convention. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes to which this Convention applies. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. 2 If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall obtain that information in the same manner and to the same extent as if the tax of the first-mentioned State were the tax of that other State and were being imposed by that other State, notwithstanding that the other State may not, at that time, need such information for the purposes of its own tax. 3 In no case shall the provisions of paragraphs 1 or 2 of this Article be construed so as to impose on a C;ntracting State the obligation: (a) to carry out administrative measures at variance with the laws or the administrative practice of that or of the other Contracting State; (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or (c) to supply information which would disclose any trade, business,
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industr~al,
commercial or. professional secret or trade process, or to supply lOformatlon the dIsclosure of which would be contrary to public policy. ARTICLE 28 Members of diplomatic missions or permanent missions and consular posts ~othing ~n t~is ~onvention shall affect the fiscal privileges of members of
dIplomatIC rrussI.ons or permanent missions or consular posts under the ?eneral ~ules of lOternatlOnallaw or under the provisions of special lOternatlonal agreements. ARTICLE 29 Entry into force
1 Each of the Contracting States shall notify the other in writing through the diplomatI~ channel of th~ completion of the procedures required by its law for the entry lOto force of thIs Convention. This Convention shall enter into force on the date of the later notification, and shall thereupon have effect:
219
2 The Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland signed at Canberra on 7 December 1967 (as amended by the Protocol signed at Canberra on 29 January 1980) ("the Agreement") shall be terminated and shall cease to have effect in respect of the taxes to which this Convention applies in accordance with the provisions of paragraph 1 of this Article. In relation to tax credits in respect of dividends paid by companies which are residents of the United Kingdom, the Agreement shall be terminated and shall cease to have effect in respect of dividends paid on or after 1 July next following the date on which this Convention enters into force. 3 Notwithstanding the entry into force of this Convention, an individual who is entitled to the benefits of Article 16 of the Agreement at the time of the entry into force of this Convention shall continue to be entitled to such benefits until such time as the individual would have ceased to be entitled to such benefits if the Agreement had remained in force.
ARTICLE 30 Termination
(a) in the case of Australia: (i) in respe~t of ,:ithholding tax on income that is derived by a non-re~ldent, 10 relation to income derived on or after 1 July next followlOg the date on which this Convention enters into force', . re~pect 0 f f ringe benefits tax, in relation to fringe benefits (ii) 10 prOVIded on or after 1 April next following the date on which this Convention enters into force', (iii) in respect of other Australian tax, in relation to income or gains of any year of I.ncom~ beginning on or after 1 July next following the date on whICh thIS Convention enters into force', (b) in the case of the United Kingdom: (i) in re.spect of taxes withheld at source, for amounts paid or credited on or after 1 July next following the date on which this Convention enters into force', (ii) in respect of income tax not described in clause (i) of this subparagraph and capital gains tax, for any year of assessment beglOOlng on or after 6 April next following the date on which thIS Convention enters into force', (iii) in respect of c?rporation tax, for any financial year beginning on or after 1 Apnl next following the date on which this Convention enters into force.
This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may, on or before 30 June in any calendar year beginning after the expiration of 5 years from the date of its entry into force, give written notice of termination through the diplomatic channel and, in that event, the Convention shall cease to have effect: (a) in the case of Australia: (i) in respect of withholding tax on income that is derived by a non-resident, in relation to income derived on or after 1 January in the calendar year next following that in which the notice of termination is given; (ii) in respect of fringe benefits tax, in relation to fringe benefits provided on or after 1 April in the calendar year next following that in which the notice of termination is given; #
(iii) in respect of other Australian tax, in relation to income or gains of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given; (b) in the case of the United Kingdom: (i) in respect of taxes withheld at source, for amounts paid or credited on or after 1 January in the calendar year next following that in which the notice of termination is given;
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(ii ) in respect of income tax not described in clause (i) of this subparagraph and capital gains tax, for any year of assessment beginning on or after 6 April in the calendar year next following that in which the notice of termination is given; (iii) in respect of corporation tax, for any financial year beginning on or after 1 April in the calendar year next following that in which the notice of termination is given. IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Convention. DONE in duplicate at Canberra this 21st day of August 2003
FOR THE GOVERNMENT OF
FOR THE GOVERNMENT OF
AUSTRALIA
THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND
PETER COSTELLO
[Signatures omitted]
ALASTAIR GOODLAD
221
2003 UNITED KINGDOM NOTES
1'/0 LG B 0311 70 The Department of Foreign Affairs and Trade presents its compliments to the British High Commission to Australia and has the honour to refer to the Convention between the Government of the United Kingdom of Great Britain an d Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains which has been signed today (the "Convention"). The Department has the honour to make the following proposals on behalf of the Government of Australia:
1. With reference generally to the application of the Convention (including these Notes), the Contracting States agree that: (a) the term " income or gains" includes "profits"; (b) the term "laws" includes the full body of law, and is not limited to statutory law; (c) the terms "paid or credited" and "payments or credits" shall not include the recording of internal transactions between a permanent establishment and another part of the same enterprise; (d ) the expression " any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes" includes: (i ) measures designed to address thin capitalisation, dividend stripping and transfer pricing; (ii) controlled foreign company, transferor trust and foreign investment fund rules; (iii ) measures designed to ensure that taxes can be effectively recovered (conservq,ncy measures); and (e) nothing in the Convention shall be construed as restricting, in any manner, the application of any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes.
2. With reference to Article 5 (Permanent establishment), the Contracting States agree that the term "permanent establishment" fully encompasses the concept of a "fixed base" used in o ther double tax trea ties in the context of independent personal services.
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Appendix
3. With reference to Article 7 (Business profits), the Contracting States agree that:
(b)
nothing in the Convention shall have the effect of subjecting to tax in a Contracting State any interest paid by a resident ot that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment.
(a) nothing in paragraph 3 of the Article shall permit the deduction of an expense which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense; and
7. With reference to Article 12 (Royalties),
(b) where:
the Contracting States agree that:
(i) a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and (ii) in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State, the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business ptofits shall be attributed to that permanent establishment.
4. With reference to Article 9 (Associated enterprises), the Contracting States note that the expression "dealing wholly independently with one another" is included in paragraph 1 of the Article to conform to Australia's consistent treaty practice and to address Australia's concerns that the appropriate benchmark for determining the conditions operating between the associated enterprises should have regard to whether those dealings between the enterprises occurred on a truly independent basis.
5. With reference to Article 10 (Dividends), the Contracting States agree that if the relevant law in either Contracting State at the date of signature of the Convention is varied otherwise than in minor respects so as not to affect its general character, the Contracting States shall consult each other with a view to agreeing to any amendment of paragraph 2 and 3 of the Article as may be appropriate.
6. With reference to Article 11 (Interest), the Contracting States agree that: (a) the term "financial institution" shall not include a corporate treasury or a member of a corporate group periorming financing services for the group; and
223
(a) the term "royalties" shall not include payments for the use of spectrum licences. The provisions of Article 7 of the Convention shall apply to such payments; and (b) nothing in the Convention shall have the effect of subjecting to tax in a Contracting State any royalties paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment.
S. With reference to Article 14 (Income from employment), the Contracting States agree that: (a) income or gains derived by employees in relation to share .option schemes shall be treated as "other similar remuneration" tor the purposes of Article 14; (b) unless the facts otherwise indicate, the period of employment to
which the option relates shall be taken to be the period between the grant of the option and the date on which all the conditions for Its exercise have been satisfied (the vesting of the option); and (c) where a resident of a Contracting State derives such income or gains, and (i) the period of employment to which the share option relates is the period between grant and vesting of the option; (ii) the employee remai~s in that employment at the date of alienation or exercise of the option; and (iii ) that employment has been exercised by the employee in the other Contracting State during all or part of the period between grant and vesting of the option; the proportion of the income or gain which shall be attributable to employment exercised in the other Contracting State shall be
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Appendix
determined in accordance with the ratio of the number of days of employment exercised in that State between grant and vesting of the option to the total number of days of employment exercised between grant and vesting of the option.
9. With reference to Article 25 (Non-discrimination), the Contracting States agree that: (a) in relation to paragraph 4 and subparagraph 6(c) of the Article, the reference to capital being owned or controlled "directly or indirectly" includes cases where the capital is held through a chain of companies or other entities; and (b) nothing in the Article shall be construed as obliging a Contracting State to allow tax rebates and credits in relation to dividends received by a person who is a resident of the other Contracting State.
10. With reference to Article 26 (Mutual agreement procedure) and Article 27 (Exchange of information), the Contracting States agree that the provisions of the Articles shall have effect from the date of entry into force of the Convention, without regard to the date of the relevant transactions or the taxable or chargeable period to which the matter relates.
11. With reference to Article 26 (Mutual agreement procedure), the Contracting States agree that in relation to paragraph 1 of the Article, the applicable time limits in the domestic laws bearing on the time available for presenting a case to the relevant competent authority shall apply, whether or not those applicable time limits specifically refer to the competent authority process.
12. Miscellaneous The Contracting States agree that the two Governments shall consult each other at intervals of not more than five years regarding the terms, operation and application of the Convention with a view to ensuring that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion. The first such consultation shall take place no later than the end of the fifth year after the entry into force of the Convention.
If the foregoing proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland, the Department has the honour to propose that the present Note and the High Commission's confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of
225
Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes nn Income and on Capital Gains, which shall enter into force at the same nme as rhe entry into force of the Convention. The Department of Foreign Affairs and Trade avails itself of this opportunity to renew to the British High Commission to Australia the assurances of its highest consideration. [Seal omitted] CANBERRA 21 August 2003
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227
41103
2. With reference to Article 5 (Permanent establishment),
The British High Commission to Australia presents its compliments to the Department of Foreign Affairs and Trade and has the honour to refer to the Department's ote 0 LGB 031170 of 21 August 2003 which reads as follows:
the Contracting States agree that the term "permanent establishment" fully encompasses the concept of a "fixed base" used in other double tax treaties in the context of independent personal services.
"The Department of Foreign Affairs and Trade presents its compliments to the British High Commission to Australia and has the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains which has been signed today (the "Convention" ). The Department has the honour to make the following proposals on behalf of the Government of Australia:
1. With reference generally to the application of the Convention (including these Notes), the Contracting States agree that: (a) the term "income or gains" includes "profits"; (b) the term "laws" includes the full body of law, and is not limited to statutory law; (c) the terms "paid or credited" and "payments or credits" shall not include the recording of internal transactions between a permanent establishment and another part of the same enterprise; (d) the expression "any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes" includes: (i) measures designed to address thin capitalisation, dividend stripping and transfer pricing; (ii) controlled foreign company, transferor trust and foreign investment ftmd rules; (iii) measures designed to ensure that taxes can be effectively recovered (conservancy measures); and (e) nothing in the Convention shall be construed as restricting, in any manner, the application of any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes.
3. With reference to Article 7 (Business profits), the Contracting States agree that: (a) nothing in paragraph 3 of the Article shall permit the deduction of an expense which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense; and (b) where: (i) a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and (ii) in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State, the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and th~t share of business profits shall be attributed to that permanent establishment.
4. With reference to Article 9 (Associated enterprises), the Contracting States note that the expression" dealing wholly . independently with one another" is included in paragraph 1 of the Artl~l: to conform to Australia's consistent treaty practice and to address Australia s concerns that the appropriate benchmark for determining the conditions operating between the associated enterprises should have r~gard to whethe~ those dealings between the e9terprises occurred on a truly mdependent baSiS.
5. With reference to Article 10 (Dividends), the Contracting States agree that if the relevant law in either Co~tracting. State at the date of signature of the Convention is varied otherWise ~han 10 minor respects so as not to affect its general character, the Contractmg States shall consult each other with a view to agreeing to any amendment of paragraph 2 and 3 of the Article as may be appropriate.
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Appendix
6. With reference to Article 11 (Interest), the Contracting States agree that: (a) the term "financial institution" shall not include a corporate treasury or a member of a corporate group performing financing services for the group; and (b) nothing in the Convention shall have the effect of subjecting to tax in a Contracting State any interest paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment.
7. With reference to Article 12 (Royalties), the Contracting States agree that: (a) the term "royalties" shall not include payments for the use of spectrum licences. The provisions of Article 7 of the Convention shall apply to such payments; and (b) nothing in the Convention shall have the effect of subjecting to tax in a Contracting State any royalties paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment.
8. With reference to Article 14 (Income from employment), the Contracting States agree that: (a) income or gains derived by employees in relation to share option schemes shall be treated as "other similar remuneration" for the purposes of Article 14; (b) unless the facts otherwise indicate, the period of employment to which the option relates shall be taken to be the period between the grant of the option and the date on which all the conditions for its exercise have been satisfied (the vesting of the option); and (c) where a resident of a Contracting State derives such income or gains, and (i) the period of employment to which the share option relates is the period between grant and vesting of the option; (ii) the employee remains in that employment at the date of alienation or exercise of the option; and
229
(iii) that employment has been exercised by the employee in the other Contracting State during all or part of the period between grant and vesting of the option; the proportion of the income or gain which shall be attributable to employment exercised in the other Contracting State shall be determined in accordance with the ratio of the number of days of employment exercised in that State between grant and vesting of the option to the total number of days of employment exercised between grant and vesting of the option.
9. With reference to Article 25 (Non-discrimination), the Contracting States agree that: (a) in relation to paragraph 4 and subparagraph 6(c) of the Article, the reference to capital being owned or controlled "directly or indirectly" includes cases where the capital is held through a chain of companies or other entities; and (b) nothing in the Article shall be construed as obliging a Contracting State to allow tax rebates and credits in relation to dividends received by a person who is a resident of the other Contracting State.
10. With reference to Article 26 (Mutual agreement procedure) and Article 27 (Exchange of information), the Contracting States agree that the provisions of the Articles shall have effect from the date of entry into force of the Convention, without regard to the date of the relevant transactions or the taxable or chargeable period to which the matter relates.
11. With reference to Article 26 (Mutual agreement procedure), the Contracting States agree that in relation to paragraph 1 of the Article, the applicable time limits in the domestic laws bearing on the time available for presenting a case to the relevant competent authority shall apply, whether or not those applicable time limits specifically refer to the competent authority process.
12. Miscellaneous
,
The Contracting States agree that the two Governments shall consult each other at intervals of not more than five years regarding the terms, operation and application of the Convention with a view to ensuring that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion. The first such consultation shall take place no later than the end of the fifth year after the entry into force of the Convention. If the foregoing proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland, the Department has the
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honour to propose that the present Note and the High Commission's confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, which shall enter into force at the same time as the entry into force of the Convention. The Department of Foreign Affairs and Trade avails itself of this opportunity to renew to the British High Commission to Australia the assurances of its highest consideration." The High Commission has the honour to advise that the Department's proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland and that the Department's Note and this confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, which shall enter into force at the same time as the entry into force of the Convention.
AGREEMENTBETWtEN THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS The Government 0 f the Peop le's Republic of China and the Government of the United Kingdom of Great Britain and Northern Ireland; Desiring to conclude an Agreement for the reciprocal avoidance of double taxation and the prevention of fiscal evaSlQn With respect to taxes on mcome and capital gains; Have agreed as follows:
The British High Commission to Australia avails itself of this opportunity to renew to the Department of Foreign Affairs and Trade the assurances of its highest consideration. [Seal omitted] CANBERRA
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ARTICLE 1 PERSONAL SCOPE This Agreement shall apply to persons who are residents of one or both of the Contracting States.
ARTICLE 2 TAXES COVERED
21 August 2003
1. The existing taxes to which this Agreement applies are:
(a) in the People's Republic of China: (i) the individual income tax; (ii) the income tax (including the additional local in~o~e tax) . concerning foint ventures with Chinese and foreign mvestment, and (iii) the income tax (including the local income tax) concerning foreign enterprises; (hereinafter referred to as "Chinese tax"); (b) in the United Kingdom of Great Britain and Northern Ireland: (i) the income tax;
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(ii) the corporation tax; and (iii) the capital gains tax; (hereinafter referred to as "United Kingdom tax" ). 2. This Agreement shall also. apply to any identical or substantially similar t~xes which are Imposed by either Contracting State after the date of signature of this Agre~ment. in addition to, or in place of, the taxes referred to m paragraph (1) of this Article. The competent authorities of the Contract" States shall notify each other of any changes which are made in their mg respective taxation laws.
ARTICLE 3 GENERAL DEFINITIONS 1. In this Agreement, unless the context otherwise requires: (a) the term "China" means the People's Republic of China, including all ~he terntory and the territorial sea of the People's Republic of China, m whICh the laws relatlOg to ChlOese tax are in force and all the are beyond its territorial sea, and the sea bed and sub-soil thereof over a W?IC~ the People's Republic of China has jurisdiction in acco:dance with m.ternationallaw and in which the laws relating to Chinese tax are m torce; (b) the term "United Kingdom" means Great Britain and Northern Ireland, including any area outside the territorial sea of the United KlOgdom ~hich in accordance with international law has been or may hereatter be designated, under the laws of the United Kingdom concernlOg the ~ontmental Shelf, as an area within which the rights of t.he UOIted Kmgdom with respect to the seabed and sub-soil ar.d their natural resources may be exercised; (c) the terms. "a Contracti.n g Sta.te" and "the other Contracting State" mean Chma or the UOIted Kmgdom as the context requires; (d) the term "national" means: (i) in relation to China any individual who under the law in China possesses Chinese nationality; and any legal person, partnership or other body of persons deriving its status as such from the law m force in China; (ii) in relation to the United Kingdom, any individual who has under the law in the .united Kingdom the status of United Kingdom national, proVided he has the right of abode in the United Kingdom; and an y legal person, partnership, association or other
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entity deriving its status as such from the law in force in the United Kingdom; (e) the term "person" means an individual, a company and any other body of persons; (f) the term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes;
(g) the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; (h) the term "international traffic" means any transport by a ship or aircraft operated by an enterprise which has its place of effective management of the business in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State; (i) the term "competent authority" means, in the case of China, the
General Taxation Bureau of the Ministry of Finance or its authorised representatives, and in the case of the United Kingdom, the Board of Inland Revenue or their authorised representatives. 2. As regards the application of this Agreement by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the law of that Contracting State relating to the taxes to which this Agreement applies.
ARTICLE 4 RESIDENT 1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to tax therein by reason of his domicile, residence, place of head office, place of effective management or any other criterion of a similar nature. 2. Where by reason of. the provisions of paragraph (1) of this Article an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
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(b) if the State in which he has hlrCentre of vital interests cannot be determined, or if he has not a[ermanent home available to him in either State, he shall be deemlli. to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode imoth States or in neither of them, he shall be deemed to be a resident of the State of which he is national; (d) if he is a national of both Stalill or of neither of them, the competent authorities of the Contractingltates shall settle the question by mutual agreement. 3. Where by reason of the provisioThJf paragraph (1) of this Article a person other than an individual is a r!ident of both Contracting States, then it shall be deemed to be a resident oHe State in which the place of effective management of its business is situated However, where such a person has the place of effective managemenr of its -iness in one of the Contracting States and the place of head office of its bus~ess in the other Contracting State, then the competent authorities of the ntracting State shall determine by mutual agreement the State of which tile company shall be deemed to be a resident for the purposes of this Agretl1\ent.
LES PERMANENT IMABLISHMENT AR
l. For the purposes of this Agreemelll, the term "permanent establishment" means a fixed place of business throu~ which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishmell" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a qUitry or any other place of extraction of natural resources; and (g) an installation or structure useUor the exploration or exploitation of natural resources. 3. A building site or a construction, illltallation or assembly project constitutes a permanent establishment nly if it lasts more than six months.
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Notwithstanding the provisions of paragraphs (1) to (3) of this Article,
:he term "permanent establishment" shall be deemed not to include:
la) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; \ b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise: \d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting in formation, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or a uxiliary character.
5. Notwithstanding the provisions of paragraphs (1) and (2) of this Article, where a person, other than an agent of an independent stat~s to whom paragraph (6) of this Article applies, is acting in a Contractmg S~ate on behalf of an enterprise of the other Contracting State and has, and ?abltually exercises in the first-mentioned Contracting State an authonty to conclude contract; in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the ~nterp~lse, unless the activities of such a person are limited to those mentlOned m paragra ph (4) of this Article which, if exercised through a fixed place of business would not make that fixed place of business a permanent establishment under the provisions of that paragraph. 6. An enterprise of a Contractin'g State shall not be deemed to have a . permanent establishment in the other Contracting State merely becaus~ It carries on business in that other State through a broker, general commlSSlOn agent or any other agent of an independent status, provided that such a person is acting in the ordinary course of his business. However, when the . activities of such an agent are devoted wholly or almost wholly on behalf ot that enterprise, he shall not be considered an agent of an independent status within the meaning ot this paragraph.
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7. The fact that a company which is a resident of a Contracting ~tate controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
ARTICLE 6 INCOME FROM IMMOVABLE PROPERTY 1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 2. The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property. 3. The provisions of paragraph (1) of this Article shall apply to income derived from the direct use, letting, or use in any other form of immovable property. 4. The provisions of paragraphs (1) and (3) of this Article shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal serVIces.
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which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same .or similar conditions and dealing wholly independently with the enterprise ot which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. !"l0wever,. no such . deduction shall be allowed in respect of amounts, If any, paId (otherWIse than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or by way of fees for technical services, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or by way of fees for technical services, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
5. Where profits include items of income which are dealt with separately in ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. if the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3) of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits
other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
ARTICLE 8 SHIPPING ~D AIR TRANSPORT 1. Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the business of the enterprise is situated. 2. If the place of effective management of the business of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the COntracting State in which the home harbour of the ship is situated, or, if
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there is no such home harbour, in the Contracting State of which the operator of the ship is a resident. 3. The provisions of this Article shall also apply to profits derived from participation in a pool, a joint business or an international operating agency.
ARTICLE 9 ASSOCIATED ENTERPRISES Where: (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State; and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
ARTICLE 10 DIVIDENDS 1. Dividends derived from a company which is a resident of a Contracting State by a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the law of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. 3. The term "dividends" as used in this Article shall have the meaning which it has under the taxation law of the Contracting State of which the company paying the dividend is a resident and shall include any item which is treated under that law as a dividend or distribution. 4. The provisions of paragraph (2) of this Article shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
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5. The provisions of paragraphs (1) and (2) of this Article shall not apply if (he beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is ~ resident, through a per~anent establishment . situated therein, or performs in that other State mdependent personal services trom a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other State.
ARTICLE 11 INTEREST 1. Interest arising in a Contracting State which is derived by a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State; but if the beneficial Owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph (2) of this Article, interest arising in a Contracting State and derived by the Government of the other Contracting State, a political sub-division or local authority thereof, the Central Bank of that other Contracting State or any agency of that Government, or by any other resident of that other Contracting State with respect to debt-claims of that resident which are financed, guaranteed or insured by the Government of that other Contracting State, a political sub-division or local authority thereof, the Central Bank of that other Contracting State or any agency of that Government, shall be exempt from tax in the first-mentioned Contracting State. 4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether Or not carrying a right to participate in the debtor's profits, and in particular, 1I1come from government securities and income from bonds or debentures,
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of this Article, 10 per cent of the adjusted amount of the royalties. For the purpose of this subparagraph "the adjusted amount" means 70 per cent of the gross amount of the royalties.
including premiums and prizes attaching to such securities, bonds or debentures, but shall not include any item which is treated as a distribution under the provisions of Article 10 of this Agreement. The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 5.
6. Interest shall be deemed to arise in a Contracting State when the payer is the Government of that State or a political sub-division thereof or a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by that permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds, for whatever reason, the amount which would have been agreed upon be the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement. ARTICLE 12 ROYALTIES 1. Royalties arising in a Contracting State which are derived by a resident of the other Contracting State may he taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties is a resident of the other Contracting State the tax so charged shall not exceed: (a) in the case of royalties referred to in sub-paragraph (a) of paragraph (3) of this Article, 10 per cent of the gross amount of the royalties; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph
241
(3)
3. The term "royalties" as used in this Article comprises: (a) 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 films or tapes for radio or television broadcasting, or any patent, know-how, trade-mark, design or model, plan, secret formula or process; and (b) payments of any kind received as a consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. 4. The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply.
s.
Royalties shall be deemed to arise in a Contracting State when the payer is the Government of that State or a political subdivision thereof or a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by that permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties paid exceeds, for whatever reason, the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.
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ARTICLE 13 TECHNICAL FEES 1. Technical fees arising in a Contracting State which are derived by a resident of the other Contracting State may be taxed in that other State. 2. However, such technical fees may also be taxed in the Contracting State in which they arise, and according to the law of that State; but if the beneficial owner of the technical fees is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the adjusted amount of the technical fees. For the purpose of this paragraph, "the adjusted amount" means 70 per cent of the gross amount of the technical fees. 3. The term "technical fees" as used in this Article means payments of any kind to any person in consideration for any services of a technical, supervisory or consultancy nature, including the use of, or the right to use, information concerning industrial, commercial or scientific experience, but it does not include payments made to an employee of the person making the payments for dependent personal services mentioned in Article 16. 4. The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the technical fees, being a resident of a Contracting State, carries on business in the other Contracting State in which the technical fees arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the technical fees are effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply.
5. Technical fees shall be deemed to arise in a Contracting State when the payer is the Government of that State or a political subdivision thereof or a local authority or a resident of that State. Where, however, the person paying the technical fees, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the technical fees was incurred, and such technical fees are borne by that permanent establishment or fixed base, then such technical fees shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the technical fees paid exceeds, for whatever reason, the amount which would ha ve been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the
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ments shall remain taxable according to the law of each Contracting pay . . f hi Agreement. 0 t s State, due regard being had to the ot h er provlslOns
ARTICLE 14 CAPITAL GAINS 1. Subject to the provisions of paragraph (2) of this Article, ~apital gains which arise in a Contracting State may be taxed by that State m accordance with the provisions of its domestic law. 2. Gains from t he alienation of ships or aircraft operated in i~ternational traffic and any property, other than immovable proper~, pertammg to ~he eration of such ships or aircraft shall be taxable only m the Contractmg ~~ate in which the place of effective management of the business of the enterprise is situated.
ARTICLE 15 INDEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Article 13, income derived by a ~e~i.dent of a Contracting State in respect of professional services or other act~vltles of independent character shall be taxable only in that State except m the following circumstances, when such income may also be taxed m the other Contracting State: (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if his stay in the other Contracting State is for a period or pe~iods
amounting to or exceeding in the aggregate 183 days 1~ the fiscal y.ear concerned· in that case so much of the income as IS denved from hIS activities ~erformed in that other State may be taxed in that other State.
2. The term "professional services" includes especially independent scientific , literary, artistic , ed1.tcational or teaching activities as well das the . independent activities of physicians, lawyers, engineers, architects, entlsts and accountants.
ARTICLE 16 DEPENDENT PERSONAL SERVICES
1. Subject to the provisions of Articles 17, 19,20,21 and 22 salaries, wage.s and other similar remuneration derived by a resident of a Contractmg State m
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respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph (1) of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
personal activities as such exercised in the other Contracting State, may be taxed in that other State. 2. Where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 7, 15 and 16, be taxed in the Contracting State in which the activities of the entertamer or athlete are exerClsed. 3. Notwithstanding the provisions of paragraphs (1) and (2) of this Article, income derived from such activities as are referred to in paragraph (1) performed under a cultural agreement or arr~ngement betw~en the. . Contracting States shall be exempt from tax III the Contractmg State m winch the activities are exercised if the visit to that State is wholly or substantially supported by public or government funds of either Contracting State.
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. 3. Notwithstanding the provisions of paragraphs (1) and (2) of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State in which the place of effective management of the business of the enterprise is situated. otwithstanding the provisions of paragraphs (1) and (2) of this Article, 4. salaries, wages and other remuneration earned by a national of a Contracting State in respect of services rendered to an enterprise of that Contracting State engaged in the operation of aircraft in international traffic as an officer or employee posted to the other Contracting State shall be taxable only in the first-mentioned Contracting State. ARTICLE 17 DIRECTORS' FEES Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State. ARTICLE 18 ENTERTAINER AND ATHLETES 1. Notwithstanding the provisions of Articles 15 and 16, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his
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ARTICLE 19 PENSIONS Subject to the provisions of paragraph (2) of Article 20, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State. ARTICLE 20 GOVERNMENT SERVICE 1. (a) Remuneration, other than a pension, paid by the Government of a
ontracting State or by a political subdivision or a local authority thereof to an individual in respect of services rendered to the Government of that State or subdivision or local authority shall be taxable only in that State. (b) However such remuneration shall be taxable only in the other
Contracting State if the services are rendered in that other State and the individual is a resident of that State who: (i) is a national of that State; or
,
(ii) did not become a resident of that State solely for the purpose of performing the services. 2. (a) Any pension paid by, or out of funds created by, the Government of a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to the Government of that State or subdivision or authority shall be taxable only in that State.
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(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State. 3. The provisions of Articles 16, 17, 18 and 19 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.
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ornplete the education or training undertaken but in no event shall any cndividual have the benefit of paragraph (1) of this Article for more than 5 ~ears from the commencement of such education or training.
ARTICLE 23 METHODS FOR ELIMINATION OF DOUBLE TAXATION 1. In China double taxation shall be eliminated as follows:
ARTICLE 21 TEACHERS AND RESEARCHERS An individual who, immediately before visiting a Contracting State, was a resident of the other Contracting State and who is present in the first-mentioned State for a period not exceeding three years for the purpose of teaching, giving lectures or conducting research at a university, college, school or other recognised educational or scientific research institution in the first-mentioned State shall be exempt from tax in the first-mentioned State for a period not exceeding three years from the date of his first arrival in that State in respect of remuneration from such teaching, lectures or research.
ARTICLE 22 STUDENTS, APPRENTICES AND TRAINEES 1. A student, business apprentice or trainee who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is present in the first-mentioned State solely for the purpose of his education or training shall be exempt from tax in that State on: (i) all remittances made from abroad for the purpose of his maintenance, education or training; (ii) all scholarships, grants, allowances and awards from governmental, charitable, scientific, literary or educational organisations for the purposes of his maintenance, education or training; and (iii) income from personal services performed in that Contracting State (other than any rendered by a business apprentice to the person or partnership to whom he is apprenticed, or, in the case of a trainee, other than services rendered to the person providing the training) in an amount not in excess of one thousand pounds sterling, or its equivalent in Chinese yuan, for any year of assessment. 2. The exemptions under paragraph (1) of this Article shall only continue for such period of time as may reasonably or customarily be required to
(a) Where a resident of China derives profits, income or capital gains from the United Kingdom, the amount of the United Kingdom tax payable in respect of such profits, income or capital gains in accordance with the provisions of this Agreement shall be allowed as a credit against the Chinese tax imposed on that resident. The amount of credit, however, shall not exceed the amount of the Chinese tax computed with respect to such profits, income or capital gains in accordance with the tax laws and regulations of China. (b) Where the income derived from the United Kingdom is a dividend paid by a company which is a resident of the United Kingdom to a company which is a resident of China and which owns more than 10 per cent of the shares of the company paying the dividend, the credit shall take into account the United Kingdom tax payable by the company paying the dividend in respect of its income. 2. Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof): (a) Chinese tax payable under the law of China and in accordance with this Agreement whether directly or by deduction, on profits, income or capital gains from sources within China (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or capital gains by refere,nce to which the Chinese tax is computed: (b) in the case of a dividend paid by a company which is a resident of China to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into account (in addition to any Chinese tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph) the chinese tax payable by the company in respect of the profits out of which such dividend is paid.
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3. For the purpose of paragraph (2) of this Article, the term "Chinese tax payable" shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of, tax granted for that year or any part thereof under any of the following provisions of Chinese law: (a) (i) Articles 5 and 6 of the Income Tax Law of the People's Republic of China Concerning Joint Ventures with Chinese and Foreign Investment and Article 3 of the Detailed Rules and Regulations for the Implementation of the Income Tax Law of the People's Republic of China Concerning Joint Ventures with Chinese and Foreign Investment; (ii) Articles 4 and 5 of the Income Tax Law of the People's Republic of China Concerning Foreign Enterprises; so far as they were in force on, and have not been modified since, the date of signature of this Agreement, or have been modified only in minor respects so as not to affect their general character; or (b) any other provision which may subsequently be made granting an exemption from or reduction of tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character. Provided that relief from United Kingdom tax shall not be given by virtue of this paragraph in respect of income from any source if the income arises in a period starting more than ten years after the exemption from, or reduction of, Chinese tax was first granted in respect of that source. 4. For the purposes of paragraphs (1) and (2) of this Article profits, income and capital gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Agreement shall be deemed to arise from sources in that other Contracting State.
5. Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included in the profits of an enterprise of the other State and the profits so included are profits which would have accrued to that enterprise of the other State if the conditions made between the enterprises had been those which would have been made between independent enterprises dealing at arm's length, the amount included in the profits of both enterprises shall be treated for the purposes of this Article as income from a source in the other State of the enterprise of the first-mentioned State and relief shall be given accordingly under the provisions of paragraph (1) or paragraph (2) of this Article.
249
ARTICLE 24 NON-DISCRIMINATION 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. 3. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected. 4. Except where the provisions of Article 9, paragraph (7) of Article 11, paragraph (6) of Article 12 or paragraph (6) of Article 13 apply, interest, royalties, technical fees and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.
5. Nothing contained in this Article shall be construed as obliging either Contracting State to grant to individuals not resident in that State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident. ARTICLE 25 MUTUAL AGREEMENT PROCEDURE
•
1. Where a resident of a Contracting State considers that the actions of one Or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic laws of those States, present his case to the competent authority of the Contracting State of which he is a resident. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the
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other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Agreement. 3. The competent authorities of the Contracting States shall endeavour t resolve by mutual agreement any difficulties or doubts arising as to the 0 interpretation or application of this Agreement.
4. The competent a uthorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sens of paragraphs (2) and (3) of this Article. e ART ICLE 26 EXCHANGE O F INFORMATION
1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement or of the domestic laws of the Contracting States concerning taxes covered by this Agreement insofar as the taxation thereunder is not contrary to the provisions of this Agreement, in particular for the prevention of fra ud or fiscal evasion. The exchange of information shall not be restricted by Article 1. Any information so exchanged shall be treated as secret and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. 2. In no case shall the provisions of paragraph (1) of this Article be construed so as to impose on the competent authority of either Contracting State the obligation:
(a) to carry out administrative measures at variance with the law and administrative practice prevailing in either Contracting Sta te; (b) to supply information which is not obtainable under the law or in the normal course of the administration of either Contracting State; or (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, ~r information the disclosure of which would be contrary to p ublic policy.
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ARTICLE 27 DIPLOMATIC AGENTS AND CONSULAR OFFICIALS . . this Agreement shall affect the fiscal privileges of members of 1..Nothing . lfl ermanent missions or consular posts un d er t h e genera I r ul es ot. d' lorn atIC or p . . f . I Ip . II w or under the proVISIOns 0 speCia agreements. 'nternatIona a 1 , h tanding the provisions of paragraph (1) of Article 4, an 1 otWlt s . , ' . . :-'dividual who is a member ot the dlplomatlchodr PSermaneh~th~ss~on or . In I of a Contracting State or any t Ir tate w 1C IS situate d m consu ar post . . ' h h S I tracting State and who IS subject to tax ill t at ot er tate on y the 0 th er Con d b ' it. he denves I'ncome from sources therein, shall not be deeme to e a resident of that other State.
ARTICLE 28 EXISTING AGREEMENT Nothing in this Agreement shall affect the provisions of the Agr.e ement between the Government of the United Kingdom of Great Bntam and. Northern Ireland and the Government of the People's Republtc of China for the Reciprocal Avoidance of Double Taxation on Revenues arising from the Business of Air Transport, signed at Beijing on 10 March 1981, to the extent that they have effect as regards taxes to which this Agreement applies. ., However, where any greater relief for such taxes is afforded by any prOVISiOn of this Agreement, that provision shall apply.
ARTICLE 29 ENTRY INTO FORCE Each of the Contracting States shall notify to the other the completion of the procedures required by its law for the bringing into force of this Agreement. The Agreement shall enter into force on the thirtieth day following the date of the later of these notifications and shall thereupon have effect: (a) in China, in respect of profits, income and capital gains arising in any tax year beginning on or after the first day of January in the calendar year next followfng that in which this Agreement enters into force; (h) in the United Kingdom: (i) in respect of income tax and capital gains tax, for any year of ~ssessment beginning on or after 6 April in the calendar year next tollowing that in which this Agreement enters into force; (ii) in respect of corporation tax, for any financial year beginning on
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or after 1 April in the calendar year next following that in which this Agreement enters into force. ARTICLE 30 TERMINATION This Agreement shall continue in effect indefinitely but either of the Contracting States may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of its entry into force, give to the other Contracting State, through the diplomatic channel, written notice of termination. In such event this Agreement shall cease to ha ve effect: (a) in China, as regards profits, income and capital gains derived during the tax year beginning on or after 1 January in the calendar year next following that in which the notice is given; (b) in the United Kingdom: (i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6 April in the calendar year next following that in which the notice is given; (ii) in respect of corporation tax, for any financial year beginning on or after 1 April in the calendar year next following that in which the notice is gi ven. IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Agreement. DONE in duplicate at Beijing this 26th day of July 1984 in the Chinese and English languages, both texts being equally authoritative. For the Government of the People's Republic of China
For the Government of the United Kingdom of Great Britain and Northern Ireland
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PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CI-llNA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE RECIPROCAL AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS The Government of the People's Republic of China and the Government of the United Kingdom of Great Britain and Northern Ireland; Desiring to conclude a Protocol to amend the Agreement between the Contracting Governments for the reciprocal avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, signed at Beijing on 26 July 1984 (hereinafter referred to as "the Agreement"); Have agreed as follows: Article 1 Sub-paragraph (a) of paragraph (1) of Article 2 of the Agreement shall be deleted and replaced by the following: "(a) in the People's Republic of China: (i) the individual income tax; (ii) the income tax for enterprises with foreign investment and foreign enterprises; and (iii) the local income tax; (hereinafter
refer~ed to
as 'Chinese tax');" Article 2
Sub-paragraph (i) of paragraph (1) of Article 3 of the Agreement shall be deleted and replaced by the following: "(i) the term 'competent authority' means, in the case of China, the State Administration of Taxation or its authorised representatives, and in
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the case of the United Kingdom, the Commissioners of Inland Revenue or their authorised representatives." Article 3 Paragraph (1) of Article 4 of the Agreement shall be deleted and replaced by the following: ., ( 1) For the purposes of this Agreement, the term 'resident of a Contracting State' means any person who, under the law of that State, is liable to tax therein by reason of his domicile, residence, place of head office or effective management, place of incorporation or any other criterion of a similar nature." Article 4 (1) Sub-paragraph (a) of paragraph (3) of Article 12 of the Agreement shall be deleted and replaced by the following: "(a) 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 films or tapes for radio or television broadcasting, or any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience (know-how); and". (2) In paragraph (3) of Article 13 of the Agreement, the following words shall be deleted: "including the use of, or the right to use, information concerning industrial, commercial or scientific experience," Article 5 (1) Paragraphs (3), (4) and (5) of Article 23 of the Agreement shall be deleted and replaced by the following: "(3) Subject to paragraph (4) of this Article, for the purpose of paragraph
(2) of this Article, the term 'Chinese tax payable' shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of, tax granted for that year or any part thereof under any of the following provisions of Chinese law: (a) Articles 7, 8, 9, 10, 19 (1), 19 (3) and 19 (4) of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises and Articles 73, 75 and 81 of the Detailed Rules and Regulations for the Implementation of the Income Tax Law of the People's Republic
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of China for Enterprises with Foreign Investment and Foreign Enterprises where the exemption from or reduction of tax so granted is for the purpose of promoting new industrial, commercial, scientific, educational or other development in China, so far as they were in force on, and have not been modified since, the date of signature of the Protocol amending this Agreement signed at Beijing on 4 September 1996, or have been modified only in minor respects so as not to affect their general character; or (b) any other provision which may subsequently be made granting an exemption from or reduction of tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character. (4) Relief from United Kingdom tax by virtue of paragraph (3) shall not be given: (a) where income or profits in respect of which tax would have been payable but for the exemption or reduction of tax granted under the provisions referred to in that paragraph arise or accrue more than ten years after the date on which the Protocol to this Agreement referred to in that paragraph enters into force; (b) in respect of income or profits from any source if that income or those profits arise in a period beginning more than ten years, or more than thirteen years if the income or profits arise from an infrastructure project, agricultural, forestry or animal husbandry projects or projects in remote underdeveloped areas, after the exemption or reduction referred to in that paragraph was first granted in respect of that source whether that period began before or after the entry into force of that Protocol (5) The period referred to in paragraph (4) (i) may be extended by agreement between the competent authorities of the Contracting States (6) For the purposes of paragraphS (1) and (2) of this Article profits, income and capital gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Agreement shall be deemed to arise from sources in that other Contracting State. (7) Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included in the profits of an enterprise of the other State and the profits so included are profits which would have accrued to that enterprise of the other State if the conditions made between
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the enterprises had been those which would have been made between independent enterprises dealing at arm 's length, the amount included in the profits of both enterprises shall be treated for the purposes of this Article as income from a source in the other State of the enterprise of the first-mentioned State and relief shall be given accordingly under the provisions of paragraph (1) or paragraph (2) of this Article."
AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA AND THE GOVERNMENT OF THE FRENCH REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
(2) Where Article 23 (3) of the Agreement as it was before its amendment by this Protocol would have afforded greater relief from tax than is due under that provision as so amended, it shall continue to have effect in relation to dividends paid to a company which is a resident of the United Kingdom by a compa~y which is a ~esident of China out of income or profits arising during any penod before this Protocol entered into force.
The Government of the People's Republic of China and the Government of the French Republic; Desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income; Have agreed as follows:
Article 6 (1) Each of the Contracting Sta tes shall notify through the diplomatic channel to the other the completion of the procedures required by its law for the bringing into force of this Protocol. The Protocol shall enter into force on the date of the later of these notifications and shall thereupon have effect in both Contracting States in respect of profits, income and capital gains arising on or after 1 January 1995. (2) This Protocol shall cease to be effective at such a time as the Agreement ceases to be effective in accordance with Article 30 of the Agreement. IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Protocol. Done in duplicate at Beijing this 2 September, 1996, in the Chinese and English languages, both texts being equally authoritative.
For the Government
For the Government
of the People's Republic of China
of the United Kingdom of Great Britain and Northern Ireland
ARTICLE 1 PERSONAL SCOPE This Agreement shall apply to persons who are residents of one or both of the Contracting States. ARTICLE 2 TAXES COVERED 1. This Agreement shall apply to taxes on income imposed on behalf of a Contracting State or of its local authorities, irrespective of the manner 10 which they are levied.
2. There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property, as well as taxes on capital appreClatlOn. 3. The existing taxes to which the Agreement shall apply are: (a) In the People's Republic of China: (i) the individual i'ilCome tax; (ii) the income tax concerning joint ventures with Chinese and foreign investment; (iii) the income tax concerning foreign enterprises; (iv) the local income tax; including any withholding taxes and any prepayments with respect to the aforesaid taxes
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(hereinafter referred to as "Chinese tax"). (b) In the French Republic: (i) the tax on income (impot sur Ie revenu); (ii) the tax on companies (impot sur les societes), including any withholding taxes and any prepayments with respect to the aforesaid taxes (hereinafter referred to as "French tax"). 4. The Agreement shall apply also to any taxes which are identical or substantially similar to the taxes mentioned in paragraph 3 of this Article and which are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. If opportune, the competent authorities of the Contracting States shall notify each other of changes which have been made in their respective taxation laws.
ARTICLE 3 GENERAL DEFINITIONS 1. For the purposes of this Agreement, unless the context otherwise requires: (a) the term "a Contracting State" and "the other Contracting State" mean the People's Republic of China or the French Republic, as the context requires;
(i) in the case of the People's Republic of China, the Ministry of Finance or its authorized representative; (ii) in the case of the French Republic, the Minister of the Budget or his authorized representative. 2. As regards the application of the Agreement by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.
ARTICLE 4 RESIDENT 1. For the purposes of this Agreement, the term" resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of head office or any other criterion of a similar nature. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall settle by mutual agreement the State where such person is a resident. 3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of head office is situated.
(b) the term "tax" means Chinese tax or French tax, as the context reqUires; (c) the term "person" includes an individual, a company and any other body of persons; (d) the term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes; (e) the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;
ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishm~nt': means a fixed place of business through which the business of an enterpnse IS wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management;
,
(b) a branch;
(f) the term "nationals" means all individuals possessing the nationality
(c) an office;
of a Contracting State and all legal entities constituted in accordance with the law in force in a Contracting State, as well as any body of persons which is not a body corporate but which is treated as a body corporate under the laws of that Contracting State for tax purposes;
(d) a factory;
(g) the term "competent authority" means:
259
(e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
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3. The term "permanent establishment shall also include: (a) a building site or installation or assembly project, but only if it lasts for more than 6 months; (b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve-month period. otwithstanding the provisions of paragraphs 1 to 3, the term 4. "permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or a uxiliary character.
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person, other than an agent of an independent status to whom paragraph 6 applies, is acting in a Contracting State on behalf of an enterprise of the other Contracting State and has, and habitually exercises, in the first-mentioned Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such a person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business a permanent establishment under the provisions of that paragraph. 6. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such a person is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of
261
that enterprise, he shall not be considered an agent of an independent status within the meaning of this paragraph. 7. The fact that a company which is a res~de~t of a ~ontracting State ntrols or is controlled by a company whIch IS a reSIdent of the other ~Oontracting State, or which carries on business in that other St~te (wheth~r through a permanent establishment or otherWIse), shall not of Itself constitute either company a permanent establishment of the other.
ARTICLE 6 INCOME FROM IMMOVABLE PROPERTY 1. Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. 2. The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.
3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property. 4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immo~able property used for the performance of independent personal servICes.
ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable ~nly in that State unless the ent~prise carries on business in the other Contractmg State through a permanent establishment situated therein. If the enterpnse . carries on business as aforesaid, the profits of the enterprise may be taxed m the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State t~ough a permanent establishment situated therein, there shall in each Contractmg
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State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. 4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of paragraphs 1 to 5, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
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ARTICLE 8 ASSOCIATED ENTERPRISES Where (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterpnse of the other Contracting State, or (b) the same persons participate directly or indirect~y in the management, control or capital of an enterprise of a Contra~tln? State and an enterprise of the other Contracting State, and m eIther case the. commercial or financial relations between the two enterpnses differ from those which would be made between independent enterpnses, then any profits which would, but for those co.nditions, have accrued to one of the enterprises, but, by reason of those condltlons, have not so .accrued, may be included in the profits of that enterprise and taxed accordmgly. ARTICLE 9 DMDENDS
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 m that other State. 2. However, such dividends may also be taxed in the Contractin? State of which the company paying the dividends is a reside.nt and accordmg ~o. the laws of that State, but if the recipient is the benefiCial owner of the dIVIdends the tax so charged shall in any case not exceed 10 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paId. 3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits as. well as other income which is subjected to the same taxation treatment as mcome from shares by the laws of the Contracting State of which the company makmg the distribution is a resident. 4. The provisions of par~graphs 1 and 2 shall not ap~ly if the bene~cial owner of the dividends, being a resident of a Contractmg State, ca.rnes on business in the other Contracting State of which the company paymg the. dividends is a resident, through. a permanent establishme~t situated th.ere~n, or performs in that other State mdependent personal serViCes f~o.m a fIxe base situated therein and the holding in respect of whiCh the diVIdends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 13, as the case may be, shall apply.
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5. A resident of China who receives dividends paid by a company which is a resident of France may claim a refund of the prepayment (precompte) relating to those French dividends. Such refund may be taxed in France in accordance with the provisions of paragraph 2. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that otherState, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. ARTICLE 10 INTEREST
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest derived from a Contracting State is exempt from tax in that State, if it is paid: (a) in the case of the People's Republic of China: (i) to the Government of the People's Republic of China; (ii) to the People's Bank of China; (iii) on a loan directly or indirectly financed or guaranteed by the Bank of China or the Chinese International Trust and Investment Company (CITIC); (iv) to a financial establishment appointed by the Government of the People's Republic of China and mutually agreed upon by the competent authorities of the two Contracting States; (b) in the case of the French Republic: (i) to the Government of the French Republic; (ii) to the Bank of France; (iii) on a loan, directly or indirectly financed or guaranteed by the
265
French Bank for Foreign Trade or by the French Foreign Trade Insurance Company; (iv) to a financial establishment appointed by the Government of the French Republic and mutually agreed upon by the competent authorities of the two Contracting States. 4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particul.ar, inc.ome from government securities and income from bonds or debentures, LOcludmg premiums and prizes attaching to such securities, bonds or debentures. 5. The provisions of paragraphs 1,2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or perf?rms in that other State independent personal services from a fixed base situated therem, and the . debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 13, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contractmg State or not has in a Contracting State a permanent establishment or a fixed base in con~ection with which the indebtedness on which the interest is paid was incurred and such interest is borne by such permanent establishment or fixed base th:n such interest shall be deemed to arise in the Contracting State in whi~h the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shan remain taxable according to the laws of ea.ch Contracting State, due regard being had to the other provisions of thiS Agreement. ARTICLE 11 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State.
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2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, 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 films and tapes recorded for broadcasting or television, any patent, know-how, trade mark, design or model plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 13, as the case may be, shall apply. 5. Royalties shall be deemed to arise in a Contracting State when the payer is the Government of that State itself, a local authority or a resident of that Contracting State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a State a permanent establishment or a fixed base in connection with which the obligation to pay the royalties was incurred, and those royalties are borne by that permanent establishment or fixed base, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
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ARTICLE 12 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other Contracting State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such a fixed base, may be taxed in that other Contracting State. 3. Gains from the alienation of ships or aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft which are received by a resident of a Contracting State may only be taxed in that State. 4. Gains from the alienation of shares in the capital of a company, the assets of which consist mainly, directly or indirectly, of immovable property situated in a Contracting State, may be taxed in that Contracting State. 5. Gains derived from the alienation of shares, other than those mentioned in paragraph 4 and which represent a participation of 25 per cent in a company which is a resident of a Contracting State, may be taxed in that Contracting State. 6. Gains which a resident of a Contracting State derives from the alienation of any property other than that mentioned in paragraphs 1 to 5 above, may be taxed in the other Contracting State, if those gains are derived therefrom. ARTICLE 13 INDEPENDENT PERSONAL SERVICES
1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State; however, such income may also be taxed in the other Contracting State in the following circumstances: (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in such case so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or
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(b) if his stay in the other Contracting ~tate is for a period or periods exceeding in the aggregate 183 days in the calendar year concerned; in such case only so much of the income as IS derived from the activities performed in that other Contracting State may be taxed in that other State. 2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. ARTICLE 14 DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Articles 15, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State: if the three following conditions are simultaneously met: (a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other Contracting State. 3. Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that Contracting State. ARTICLE 15 DIRECTORS' FEES Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a
269
company which is a resident of the other Contracting ~tate may be taxed in (h at other State. ARTICLE 16 ARTISTES AND ATHLETES 1. Notwithstanding the provisions of Articles 13 and 14, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other Contracting State. 2. Where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 7, 13 and 14, be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. 3. Notwithstanding the provisions of paragraphs 1 and 2, income derived from activities of an entertainer or an athlete who is a resident of a Contracting State, exercised in the other Contracting State within the framework of a cultural exchange program between the Governments of both Contracting States, shall not be taxed in that other Contracting State. ARTICLE 17 PENSIONS 1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that Contracting State. 2. Notwithstanding the provisions of paragraph 1, pensions and other payments made by a Contracting State or a local authority thereof under its social security legislation shall be taxable only in that Contracting State. ARTICLE 18 , GOVERNMENT SERVICE 1. (a) Remuneration, other than a pension, paid by the Government of a Contracting State or a local authority thereof to any individual in respect of services rendered to that State or authority shall be taxable only in that State. (b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that Contracting State and the individual is a resident of that Contracting State who:
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(i) is a national of that other Contracting State; or (ii) did not become a resident of that other State solely for the purpose of performing the services. 2.
(a)
Any pension paid by, or out of funds created by the Government of Contracting State or a local authority thereof to an individual in a respe~t of services rendered to that State or authority shall be taxable only 10 that Contracting State.
(b) How~ver, suchp~nsion shall ?e taxable only in the other Contracting
State If the IndlVldualls a resIdent of, and a national of, that other Contracting State. 3. The provi~ions of Articles 14, 15,16 and 17 shall apply to remuneration and penSlOns In respect of services rendered in connection with a business carried on by the Government of a Contracting State or a local authority thereof. ARTICLE 19 PROFESSORS AND RESEARCHERS Remuneration which an individ~al who is or was immediately before visiting a Contract1Og State a resIdent ot the other Contracting State, and who is present 10 the tir~t-mentioned State solely for the purpose of teaching, giving lecture~ or engag10g 10 .res~arch 10 a university, institute, school, or teaching 1Ostttutlon or research Institution recognized by the Government of that State receives for such services shall be exempt from tax in that State for a period no~ exceed1Og, 10 total, three years, as from the date of his first arrival in that State. ARTICLE 20 STUDENTS AND TRAINEES Payments which a student, a business apprentice or a trainee who is or was immediately before visiting a Contracting State a resident of the other Contracting State, and who is. present in the first-mentioned Contracting State solel~ for the purpose ot his education or training, receives for the ~urpose ot his maintenance, education or training, shall be exempt from tax 10 that State. ARTICLE 21 OTHER INCOME ~. Items of income of a resident of a Contracting State not dealt with in the toregoing Articles of this Agreement and arising in the other Contracting State may be taxed in that other Contracting State.
271
2. However, items of income of a resident of a Contracting State, wherever arising, other than those mentioned in paragraph 1, which are not dealt with in the foregoing Articles of this Agreement, shall be taxable only in that Contracting State. 3. The provisions of paragraphs 1 and 2 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 13, as the case may be, shall apply. ARTICLE 22 METHODS FOR ELIMINATION OF DOUBLE TAXATION Double taxation shall be avoided in the two Contracting States as follows: 1. In the case of the People's Republic of China: (a) where a resident of China derives income from France, the tax levied in accordance with this Agreement in France on income, may be deducted from the Chinese tax payable by that resident of China, but the amount of the deduction shall not exceed the amount of Chinese tax on that income, calculated in accordance with the tax laws and regulations in the People's Republic of China; (b) where the income consists of dividends paid by a company that is a resident of France to a company which is a resident of China and which owns more than 10% of the shares of the company paying the dividends, then, for the deduction from Chinese tax, the French tax paid by the company paying the dividends which corresponds to those dividends must be taken into account. 2. In the case of the French Republic: (a) income other than that referred to in sub-paragraph (b) below shall be exempt from the French taxes mentioned in sub-paragraph (b) of paragraph 3 of Article 2, when such income is taxable in China under this Agreement; (b) income referred to in Articles 9, 10, 11, 12, 15 and 16 derived from China shall be taxable in France, in accordance with the provisions of those Articles, on their gross amount. Residents of France will be entitled to a tax credit in France corresponding to the amount of
France/China 272
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Appendix
Chinese tax levied on suc h income, but which sha .nb all not exceed the amount of French tax pertainmg on such income;;!>le; (c ) for the purposes of sub-paragraph (b) and in the W i': case of the items of income referred to in Articles 9, 10 and 11, the arncamount of Chinese tax levied shall be deemed to be equal to: (i) 10 per cent of the gros amount of the divideIIJi:.ends paid by Chinese companies with mixed capital, 20 per cent of ·1M other dividends., (ii) 10 per cent of the gros amount of the interesb:est; (iii) 20 per cent of the gros amount of the royaltili:.ilties. (d) notwithstanding the provisions of sub-paragraph hs (a) and (b), French tax is computable on income taxable in France bYUb y virtue of this Agreement, at rates appropriate to the total of ineuncome taxable in accordance with French law. ARTICLE 23
NON-D]SCRIMINATION 1. Nationals of a Contracting State shall not be subjectewted in the other Contracting State to any taxation or any requirement co rn nnected therewith, which is other or more burdensome than the taxation an nd connected requirements to which nationals of that other State in the ~ae same circumstances are or may be subjected. This provision shall notwithstannmding the provisions of Article 1, also apply to persons who are not residents 0 1>1. of one or both of the Contracting States.
2. The taxation on a permanent establishment which an .00 enterprise of a Contracting State has in the other Contracting State shall J1ll not be less favourably levied in that other State than the taxation levIN
. ~ shall not be subjected in tbe first-mentioned . er Contracting tate, . any requirement connected therewith ot h . State to any taxation or . d ntracting 'b d some than tbe taxatton and connecte Co ' dS h or more ur en hich other similar enterprises of that first-mentione tate which is ot er jrements to w aY be subjected. requ e or m , , ' ' f ar , ' f this Article shall notwithstandll1g the provIsiOns 0 Th prOVIsiOns 0 ' . ' 5., e I to taxes of every kind and descnptiOn. }\rucie 2, app Y
ARTICLE 24 MUTUAL AGREEMENT PROCEDURE n considers that the actions of one or both o,f the I 'II It for him in taxation not In accordance Contracting S~ates resfuhtorAwl res~t he may irrespective of the remedies , h h rOV1SIO ns 0 t IS greeme, , . h Wit t e P 'I f those States present hiS case to t e 'd d b the domestic aw 0 , 'd 'f 'State of which he is a res I ent or, ProVI e y h 't of t h e C ontracnng , I competent aut on y h 1 o f Article 23, to that of the Contractll1g his case co~es under paragra P Th case must be presented within three years S f which he IS a natlona I. e " f;~: ~he first notificatian of the action resulting in taxatiOn not ll1 accordance with the provisions of the Agreement. , etent authority shall endeavour, if the objection appe~rs to it to
1. Where a perso
~~ i~:r~fi~~~~d if it is not itself able to ar~:~:~;~~~:!~~t~~~h~~~~I~~~~~
resolve the cas~ by mutual ,agreement w~~e avoidance of taxation not in other Contractll1g State, With a view to h d h II be , h A t Any agreement reac e s a , r· ' the domestic laws of the accordance With t e greemen. implemented notwithstandll1g any time Imlts ll1 Contracting States. 3 The com etent authorities of the Contracting States sh~ll endeavour to r~solve by m~tual agreement any difficulties or dTohubts anSall11s~ a;o~~?te . . I·· f the Agreement. ey may " " rovided for in ll1terpretation or app !CatiOn 0 together for the elimination of double taxation ll1 cases not p the Agreement. y 4. The competent authorities of the twO Contracting Stfates mha 1.0 d" I f the purpose 0 reac ll1g an communic~te with each Otll~..r \fect y ~rnd 3. To facilitate an agreement, the "S y endeavour to reach agreement ll1 the sense of paragraphs 2 competent authorities of the two Contractll1g, tates rna an agreement through an oral exchange of oplOlons.
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France/China
ARTICLE 25 EXCHANGE OF INFORMATION L. The ~ompe~ent authoriti.es of the Contracting States shall exchange such mtormatIon as IS necessary tor carrying Out the provisions of this Agreem or of the domestic laws of the Contracting States concerning taxes covere~~y the Agreement I~sofar ~s the t~xatIon thereunder is not contrary to the Ag~eement and~ m partICu~ar, tor the prevention of tax evasion. The exchange of mfor~atlOn IS not restricted by Article 1. Any information received by a Contractlllg State shall.be treated as secret and shall be disclosed only to ~ersons or authOrities, lllcludlllg courts and administrative bodies, involved 10 the assessment or collection of, or the determination of appeals in relation to, t.he taxes covered by the Agreement. Such persons or authorities shall use the llliormatlOn only for such purposes. But they may disclose the lOiormation in public court proceedings or in judicial decisions. 2. In no case shall the provisions of paragraph 1 be construed so as to Impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws or the admlllistrative practice of that or of the other Contracting State; (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; (c) to supp.ly information which would disclose any trade, business, llldustnal, commercial or professional secret or trade process, or lllf~rmation, the disclosure of which would be contrary to public polICY (ordre public).
ARTICLE 26 DIPLOMATS Nothing in this Agre~ment shall affect the fiscal privileges of diplomatic agents or consular otficers under the general rules of international law or under the provisions of special agreements.
ARTICLE 27 SCOPE OF TERRITORIAL APPLICATION This Agreement shall apply: (aJ in the case, of the People's Republic of China, to the entire territory of the People s RepublIC of Chilla m which the Chinese tax legislation is effectIvely applied, including the territorial sea and the areas adjacent
275
thereto, over which the People's Republic of China may, in accordance with international law, exercise sovereign rights for the purpose of exploration and exploitation of the natural resources of the sea bed and sub-soil, and of the waters above the sea bed and sub-soil; (b) in the case of the French Republic, to all departments and territories of the French Republic in which the French tax legislation with respect to the taxes referred to in this Agreement effectively applies, including the territorial sea and areas adjacent thereto, over which the French Republic may, in accordance with international law, exercise sovereign rights for the purpose of exploration and exploitation of the natural resources of the sea bed and sub-soil, and of the waters above the sea bed and sub-soil.
ARTICLE 28 ENTRY INTO FORCE The two Contracting States shall notify each other in writing through diplomatic channels that the procedures required by their respective laws for the bringing into force of this Agreement have been completed. This Agreement shall enter into force on the 30th day after the date of the later of the notifications. It shall have effect on income arising as from 1 january or on income pertaining to accounting periods beginning in the course of the year following that in which the Agreement enters into force.
ARTICLE 29 TERMINATION This Agreement shall continue in effect indefinitely. However, five years after the date of entry into force, each of the Contracting States may give notice through diplomatic channels, before 1 july, of termination of this Agreement at the end of that calendar year. In such event, the Agreement shall apply for the last time to income arising as from 1 january, or on income pertaining to accounting periods ending during the year following that in which such notice is given. IN WITNESS WHEREOF the undersigned, duly authorized thereto, have signed this Agreement. DONE in duplicate in Paris on 30 May 1984, in the Chinese and French languages, both texts being equally authentic.
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Germany / China
Appendix
For the Government of
For the Government of
the People's Republic of China
the French Republic
PROTOCOL
1. With respect to paragraph 3 of Article 5 of the Agreement, the supervision of the assembly or installation of equipment or of industrial or commercial plant by the enterprise which has sold such equipment or plant shall not constitute a permanent establishment for that enterprise if the costs for such supervision represent less than 5 per cent of the total amount of the sale, and if considered to be auxiliary to the sale.
2. With respect to paragraph 3 of Article 11 of the Agreement, royalties paid for the use of or the right to use industrial, commercial or scientific equipment shall be subject to tax on 60 per cent of the gross amount of such royalties. 3 Nothing in this Agreement shall affect the ptovisions of the Agreement on maritime shipping of 28 September 1975 and the Exchange of Letters, and of the Agreement of 23 January, 1979 on the reciprocal exemption from taxes and charges on air transport enterprises, concluded by the Government of the People's Republic of China and the Government of the French Republic. DONE in duplicate in Paris, on 30 May 1984 in the Chinese and French languages, both texts being equally authentic.
the People's Republic of China
AGREEMENT BETWEEN THE PEOPLE'S REPUBLIC OF CillNA AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND CAPITAL The People's Republic of China and the Federal Republic of Germany;
At the signature of the Agreement between the Government of the People's Republic of China and the Government of the French Republic for the a voidance of double taxation and the prevention of tax evasion with respect to taxes on income, both parties have agreed upon the following provisions which will form an integral part of the Agreement:
For the Government of
277
For the Government of the French Republic
Desiring to further their economic relations and to avoid double taxation of inco me as well as to eliminate tax evasion; Have, following amicable negotiations by the representatives of each Government, agreed as follows: ARTICLE 1 PERSONAL SCOPE This Agreement shall apply to persons who are residents of one or both of the Contracting States. ARTICLE 2 TAXES COVERED 1. T his Agreement shall apply to taxes on income and on capital imposed on behalf of a Contracting State, irrespective of the manner in which they are levied.
2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, as well as taxes on capital appreciation. 3. The existing taxes to which the Agreement shall apply are: (a ) in the People's Republic of China: (i) the individual income tax;
,
(ii) the income tax concerning joint ventures with Chinese and foreign investment; (iii) the income tax concerning foreign enterprises; and (iv) the local income tax (hereinafter referred to as "Chinese tax " ); (b) in the Federal Republic of Germany:
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(i) the individual income tax (die Einkommensteuer); (ii) the corporate income tax (die Korperschaftsteuer); (iii) the capital tax (die Vermogensteuer); and (iv) the trade tax (die Gewerbesteuer) (hereinafter referred to as "German tax"). 4. The Agreement shall apply also to any identical or substantially similar taxes whiCh are imposed after the date of signature of the Agreement in addmon to, or m place of, the existing taxes. Within reasonable periods of time, the competent .authorities of the Contracting States shall notify each other of changes which have been made in their respective taxation laws. ARTICLE 3 GENERAL DEFINITIONS 1. For the purposes of this Agreement, unless the context otherwise requires: (a) the terms "a Contracting State" and "the other Contracting State" mean, as the context requires, the People's Republic of China or the Federal .Republic of Germany, and when used in a geographical sense, the ~erntory m whi.ch the tax laws of the relevant Contracting State are m force, mcludmg the territorial sea and areas beyond the territorial sea wit.hin which the relevant Contracting State may, in accordance with mternationallaw, exercise the right of exploration for and exploitation of the natural resources of the seabed and its subsoil; (b) the term "person" includes an individual, a company and any other body of persons; (c) the term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes; (d) the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by .a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; (e) the term "national" means an individual who under the laws of a Contracting State possesses the nationality of that Contracting State, as well as a legal person, partnership and association deriving its status as such from the laws in force in a Contracting State; (f) the term "international traffic" means any transport by a ship or aircraft operated by an enterprise which has its place of head office in
279
a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State; (g) the term "competent authority" means in the case of the People's Republic of China the Ministry of Finance or its authorised representative and in the case of the Federal Republic of Germany the Federal Ministry of Finance. 2. As regards the application of the Agreement by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Agreement applies. ARTICLE 4 RESIDENT 1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of head office or any other criterion of a similar nature. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States; he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
,
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 3. Where by reason of the provisions of paragraph 1 a person other than an mdividual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of head office is situated.
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ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fIxed place of busllless through which the business of an enterpris . e IS wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term "permanent establishment" shall also include: (a) a building site or ~ssembly project or any supervising activities conne~ted therewith, If the construction, assembly or supervising actIVItIes last for more than 6 months', (b) the fur~ishi~g of services, including consultancy services, by an enterpnse at a Contractlllg State through its employees or other personnel, when the activities in the other Contracting State (for the same or ~ connected project) continue for a period or periods aggregatmg more than 6 months within any 12-month period. 4. N?twithst,~nding paragraphs 1 to 3 of this Article, the term "permanent establIshment shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delIvery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterpnse solely for the purpose of storage, display or delivery; (c) the mai.ntenance of a stock of goods or merchandise belonging to the enterpnse solely for the purpose of processing by another enterprise; (d) the mai~tenance of a fixed place of business solely for the purpose of purcha~lllg goods or merchandise or of collecting information, for the enterpnse; (e) the maintenance of a fixed place of business solely for the purpose of
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carrying on, for the enterprise, any other activity of a preparatory or a uxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 applies-is acting on behalf of an enterprise and has, and habitualy exercises in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterpise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. 7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
ARTICLE 6 INCOME FROM IMMOVABLE PROPERTY 1. Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. '
2. The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agricultural and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other
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natural resources; ships and aircraft shall not be regarded as immovable property. 3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, leasing, or use in any other form of immovable property. 4. The provisions of paragraphs 1 and 3 shall also apply to the income fro m immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. 4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
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6. For the purposes of paragraphs 1 to 5, the profits to be attributed to the erma nent establishment shall be determined by the same method year by ~ear unless there is good and sufficient reason to the contrary. ~ . Where profits include items of income which are dealt with in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
ARTICLE 8 SHlPPING AND AIR TRANSPORT 1. Profits from the operation of ships or aircraft in international traff~c shall be taxable only in the Contracting State in which the place of head offtce of the enterprise is situated. 2. If the place of head office of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident. 3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.
ARTICLE 9 ASSOCIATED ENTERPRISES Where (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State; and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
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ARTICLE 10 DIVIDENDS
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
3. The term "dividends" as used in this Article means income from shares mining shares, founders' shares or other rights, not being debt-claims, ' participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. ARTICLE 11 INTEREST
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State. But if the recipient is
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he beneficial owner of the interest the tax so charged shall not exceed 10 per . h . cent of the gross amount ot t e ll1tereSL t
3. Notwithstanding the provisions of paragraph 2, interest (a) derived from the Federal Republic of Germany is exempt from German tax, if paid: (i) to the Government of the People's Republic of China; (ii) to the People's Bank of China, the Agricultural Bank of China, the People's Construction Bank of China, the Investment Bank of China or the Industrial and Comnercial Bank of China; (iii) on a loan directly guaranteed or financed by the Bank of China or the Chinese International Trust and Investment Company; or (iv) to public credit institution of the Government of the People's Republic of China, if the competent authorities of both States have mutually agreed thereto; (b) derived from the People's Republic of China is exempt from Chinese tax, if paid: (i) to the Government of the Federal Republic of Germany; (ii) to the Deutsche Bundesbank, the Kredietanstalt fur Wiederaufbau or the Deutsche Finanzierungsgesellschaft fill Beteiligungen in Entwicklungslndern (the German Federal Bank, the Credit Institure for Reconstruction, or the German Finance Company for Investment in Developing Countries); (iii) on a loan, directly guaranteed or financed by Hermes; or (iv) to a public credit institution of the Federal Government, if the competent authorities of both States have agreed thereto. 4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. The provisions of paragraphs 1 to 3 shall not apply if the beneficial OWner of the interest being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the
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debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. ill such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a local authority or a resident of that State. Where, however the person paying the interest, whether he is a resident of a Contracting Stat~ or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence or such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
ARTICLE 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, 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 films or tapes for broadcasting or television, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State
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independent personal se~vic~s from a fixed base situated ~herein, and the right erty in respect ot whICh the royalties are paid IS etfectlvely connected Of p rop " h h ' ' with such permanent establishment or fixed base. In suc case t e proVISions of Article 7 or Article 14, as the case may be, shall apply. _
Rovalties shall be deemed to arise in a Contracting State when the payer
~s' the Government of that State itself, a local authority or a resident of that
Contracting State. Where, however, the person paymg the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a ermanent establishment or a fixed base in connection With whICh the ~bligation to pay the royalties was incurred, and those royal~les are borne by that permanent establishment or fixed base, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of sU,ch relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of sllch ships, aircraft Or boats, shall be taxable only in the Contracting State in which the place of head office of the enterprise is situated.
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4. Gains derived by a resident .of a Contracting ~tate from the alienation of any property other than that reterred to in paragraphs 1 to 3 and which is situated in the other Contracting State, may be taxed in that other State.
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(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. ,
Notwithstanding the preceding provisions of this Article, remuneration
~~rived in respect of an employment exercised aboard a ship or aircraft ARTICLE 14 INDEPENDENT PERSONAL SERVICES 1. Inc?me derived by a resident of a Contracting State in respect of professIOnal serVIces or other activities of an independent character shall be taxable only in that State. However, such income may also be taxed in the other Contracting State:
(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities but only so much of the lOcome as IS attnbutable to that fixed base', or (b) if his stay in the other Contracting State is for a period or periods, in the aggregate, more than 183 days in the calendar year concerned only so much of the income as is derived from the activities in tha~ other State. 2 .. T~e rer.m "professional services" includes especially independent sCientifIC, lIterary, artistic, educational or teaching activities as well as the lOdependent activities of physicians, lawyers, engineers, architects, dentists and accountants.
ARTICLE 15 DEPENDENT PERSO NAL SERVICES 1. SUbject.to.the provisions of Articles 16, 18, 19,20 and 21, salaries, wages and other sirrular remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employ~ent is exercised in the other Contracting State. If the employment is so exercIsed, such remuneration as is derived therefrom may be taxed in that other State.
2. ~otwithstanding the provisions of paragraph 1, remuneration derived by a reSident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
operated in international traffic, may be taxed in the Contracting State in which the place of head office of the enterprise is situated.
ARTICLE 16 DIRECT ORS' FEES Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.
ARTICLE 17 ARTISTES AND ATHLETES 1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State.
2. Where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. 3. Notwithstanding the provisions of paragraphs 1 and 2, income derived by an entertainer or athlete who is resident in a Contracting State from activities exercised in the other Contracting State within the framework of a cultural exchange program agreed upon by the Governments of both Contracting States shall not be taxed in that other State.
• ARTICLE 18 PENSIONS Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.
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ARTICLE 19 GOVERNMENT SERVICE 1.
(a)
Remuneration, other than a pension, paid by a Contracting State Ioca I aut homy ' to an individual in respect of services Or a · or organ th ereof rendered to that State, authority or organ shall be taxable only in that State.
(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that other State who: (i) is a national of that other State; or (ii) did not become a resident of that other State solely for the purpose of rendering the services. 2.
(a) Any p~nsion paid by a Contracting State or a local authority or organ thereot to an individual in respect of services rendered to that Sta te Or authority or organ shall be taxable only in that State. (b)
How~ver, s~ch. p.ensio~ shall be taxable only in the other Contracting State If the mdIvldualis a resident of, and a national of, that other State.
3. The provisions of Articles 15, 16, 17 and 18 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a local authority or organ thereof. ARTICLE 20 PROFESSORS AND RESEARHERS 1. A professor or researcher who is, or was immediately before visiting the other a Contracting State, a resident of a Contracting State and who is present in the first-mentioned Contracting State for a period not exceeding three ye~rs for the purpose of advanced study to research or for the purpose of teachmg at a university, college, school or any other eductional or research in.stitution shall be exempt from tax in the other Contracting State in respect of remuneration derived from such activities. 2. The provisions of paragraph 1 shall not apply to income from research, if t~is research is not in the public interest but primarily for the private benefit ot a certain person or persons.
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ARTICLE 21 STUDENTS AND TRAINEES t business apprentice or trainee who is a resident of a Contracting A stU d en , . .. h h C . S s immediately before VISitIng t e ot er ontractIng tate, a . . h h S State or wa , f the first-mentioned State and who IS present In t e ot er tate 'd res I ent 0 . . . h 11 b f e exempt rom tax solely for the purpose of his educatIOn or traInIng, s a in that other State on: (a) all payments made by per~ons outside the other State for the purpose of his maintenance, or traInIng; and (b) all scholarships, allowances or maintenance payments 'paid by governmental, charitable, scientific, cul~ural or educational organizations for the purpose of his maIntenance, education or training; and (c) income from personal services performed in the other C~ntracting State during in the aggregate not more than 5 years and In an amount not exceeding 6,000 OM or its equivalent in Chinese currency RMB. per calendar year, for the purpose of supplementing his income for his maintenance, education or training. ARTICLE 22 O T H ER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than . income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, c~rries on business in the other Contracting State through a premanent estabhsh~ent situated therein, or performs in that other State independent personal serVices from a fixed base situated therein, and the right or property In respect of which the income is paid is effectively connected with such permanent . establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2, items of income . of a resident of a Contracting State which are not covered under the preceding Articles of this Agreement may be taxed in the other ContractIng State, if they are arising in that other State.
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ARTICLE 23 CAPITAL 1. Capital represented by immovable property referred to in Article 6, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State. 2. Capital represented by movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting St~te has in the other Contracting State or by movable property pertaining to a tixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, may be taxed in that other State.
3. Capital represented by ships or aircraft operated in international traffic, and by movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of head office of the enterprise is situated. 4. All other elements of capital of a resident of a Contracting State shall be taxable only in that State.
ARTICLE 24 METHODS FOR ELIMINATION OF DOUBLE TAXATION 1. For a resident of the People's Republic of China double taxation shall be eliminated as follows:
(a) the German tax levied in accordance with the provisions of this Agreement on income derived from the Federal Republic of Germany shall be allowed as a credit against the Chinese tax to be paid by that resident in the People's Republic of China. The amount of German tax to be credited, however, shall not exceed the amount of Chinese tax computed with respect to such income in accordance with the tax regulations of the People's Republic of China; (b) where the income consists of dividends paid by a company which is a resident of the Federal Republic of Germany to a company which is a resident of the People's Republic of China and which owns at least 10 per cent of the capital of the first-mentioned company the tax paid by the first-mentioned company may be credited against the tax imposed by the People's Republic of China, to the extent it can be attributed to such 2. For a resident of the Federal Republic of Germany double taxation shall be eliminated as follows:
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(a) Unless the provisions of subparagraph (b) apply, there shall be excluded from the basis upon which German tax is imposed any item of income arising in the People's Republic of China and any item of capital situated within the People's Republic of China which, according to this Agreement, may be taxed in the People's Republic of China. The Federal Republic of Germany, however, retains the right to take into account in the determination of its rate of tax the items of income and capital so excluded. In the case of dividends the foregoing provisions shall apply only to such dividends as are paid to a company (not including partnerships) being a resident of the Federal Republic of Germany by a company being a resident of the People's Republic of China at least 10 per cent of the capital of which is owned directly by the German company. For the purposes of taxes on capital there shall also be excluded from the basis upon which German tax is imposed any shareholding, the dividends from which, if paid, would be excluded according to the immediately foregoing sentence from the basis upon which German tax is imposed. (b) Subject to the provisions of German tax law regarding credit for foreign tax, a credit shall be allowed against German individual income and corporate income tax payable in respect of the following items of income arising in the People's Republic of China, the Chinese tax paid under Chinese laws and in accordance with this Agreement on: (i) dividends not dealt with in subparagraph (a); (ii) interest; (ii) royalties; (iv) income to which paragraph 4 of Article 13 applies; (v) remuneration to which Article 16 applies; (vi) income to which Article 17 applies; (vii) income to which paragraph 3 of Article 22 applies.
'" (c) For the purpose of subparagraph (b) the Chinese tax to be credited shall be deemed to be: (i) in the case of dividends referred to in sub-paragraph (b) under (i): 10 per cent of the gross amount of dividends; (ii) in the case of interest and royalties referred to in sub-paragraph (b) under (ii) and (iii): 15 per cent of the gross amount of such payments.
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ARTICLE 25 NON-DISCRIMINATION
1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of a Contracting State. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants exclusively to its own residents. 3. Except where the provisions of Article 9, paragraph 7 of Article 11 or paragraph 6 of Article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected. 5. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description. ARTICLE 26 MUTUAL AGREEMENT PROCEDURE
1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance
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with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 25, to that of the Contracting State of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation not in accordance with the Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Agreement. 4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. ARTICLE 27 EXCHANGE OF INFORMATION 1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Agreement. Such persons or authorities shall use the information only fOr such purposes. They may disclose the information in public court proceedings or in judicial decisions.
2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; (b) to supply information which is not obtainable under the laws or in
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the normal course of the administration of that or of the other Contracting State; (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public). ARTICLE 28 DIPLOMATIC AGENTS AND CONSUNLAR OFFICERS Nothing in this Agreement shall affect the fiscal privileges of diplomatic Agents or consular officers under the general rules of international law or under the provisions of special agreements. ARTICLE 29 BERLIN CLAUSE This Agreement shall also apply to Berlin (West) in accordance with the procedure agreed upon. ARTICLE 30 ENTRY INTO FORCE This Agreement shall enter into force on the thirtieth day following the date on which each of the two Governments has notified the other that the procedures required by its law for the bringing into force of this Agreement have been completed. The Agreement shall have effect: (a) on taxes withheld at the source on dividends paid on or after 1 January 1985; (b) on taxes withheld at source on interest or royalties paid on or after 1 July 1985; (c) on other taxes, for any tax year beginning on or after 1 January 1985. ARTICLE 31 TERMINATION This Agreement shall continue in effect indefinitely but either Contracting State may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of its entry into force, give to the other Contracting State, through diplomatic
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channels, written notice of termination; in such case the Agreement shall cease to have effect: (a) on taxes withheld at source on dividends, interest and royalties paid on or after 1 January of the year following that in which the notice is glven; (b ) on other taxes, for any tax year beginning on or after 1 January of the year following that in which the notice is given. DONE in duplicate at Bonn this 10th day of June 1985, in the Chinese and German languages, both texts being equally authentic.
For the People's Republic
For the Federal Republic
of China
of Germany
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PROTOCOL
3. With respect to Article 10: Ia)
Have agreed, at the signing of the Agreement between the two States for the avoidance of double taxation with respect to taxes on income and capital, upon the following provisions, which shall form a part of the Agreement:
1. With reference to Article 7: (a) Only that part of the profits of a building site or assembly project may be allocated to the Contracting State in which the permanent establishment is situated, as is derived from the carrying out of such activities. Where in connection with these activities or independently thereof, machmery or equipment is supplied by the head office or another permanent establishment of the enterprise or by unrelated persons, then the value of such supply shall not be attributed to the profits of the building site or assembly project. (b) Income which is attributable to the drawing of plans, projects or construction or research activities, as well as engineering services, which a resident of a Contracting State prepares or carries out in that Contracting State and which are connected with a permanent establishment maintained in the other Contracting State, shall not be allocated to that permanent establishment. (c) Notwithstanding the provisions of paragraph 3, no deduction shall be allowed in respect of amounts paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office or any other permanent establishment of the enterprise by way of: (i) royalties, fees or other similar payments in return for the use of patents or other rights; (ii) commissions for specific services performed or for management; and (iii) interest on moneys lent to the permanent establishment, except in the case of a banking institute. 2. With respect to Article 8: This Agreement shall not affect the provisions of Article 8 of the Agreement on shipping enterprises concluded between the two Contracting States on 31 October 1975 and the Exchange of Notes with respect to the taxation of air transport enterprises of both parties between the two Contracting States of 27 Februaryl14 March 1980.
299
As long as in a Contracting State the rate of corporate income tax on distributed profits is lower than the rate on undistributed profits and the difference between the two rates is 15 percentage points or more, then the tax on dividends paid by a company which is a resident of that State to a resident of the other Contracting State may, notwithstanding the provisions of paragraph 2, not exceed 15 per cent of the gross amount of the dividend.
(b) The term "dividends" referred to in paragraph 3 shall also include income of a silent partner from his participation in a silent partnership and distributions on participations in an investment fund. 4. With respect to Articles 10 and 11: Notwithstanding the provisions of Articles 10 and 11, dividends and interest may be taxed in the Contracting State in which they arise, and according to the law of that State, if they (a) are derived from rights or debt-claims carrying a right to participate in profits (including income derived by a silent partner from his participation as such, from a "partiarisches Darlehen" and from "Gewinnobligationen" within the meaning of the tax law of the Federal Republic of Germany); and (b) are deductible in the determination of profits of the debtor of such dividends or interest. 5. With respect to Article 12: For the application of the percentage rate referred to in paragraph 2 there shall be taken as the taxable base of the royalties paid for the use of or the right to use any industrial, commercial or scientific equipment, 70 per cent of the gross amount of these payments. 6. With respect to Article 24, paragraph 2: (a ) Where a company being a resident of the Federal Republic of Germany distributes income derived from sources within the People's Republic of China, parag~ph 2 shall not preclude the compensatory imposition of corporation tax in accordance with the provisions of German tax la w. (b) The provisions of paragraph 2, sub-paragraphs (a) and (c), shall only a ppl y to profits of a permanent establishment and to the capital represented by movable and immovable property forming part of the business property of a permanent establishment, and to the gains from the alienation of such property, to dividends paid by a company
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and to the participation in a company, if the resident of the Federal Republic of Germany concerned proves that the receipts of the permanent establishment or company are derived exclusively or almost exclusively (i) from one of the following activities carried on in the People's Republic of China: producing or selling goods or merchandise, giving technical advice or rendering engineering services, or doing banking or insurance business, or (ii) from dividends paid by one or more companies, being residents of the People's Republic of China, more than 25 per cent of the capital of which is owned by the first-mentioned company, which themselves derive their receipts exclusively or almost exclusively from one of the following activities carried on in the People's Republic of China: producing or selling goods or merchandise, giving technical advice or rendering engineering services, or doing banking or insurance business.
If the provisions of paragraph 2, sub-paragraphs (a) and (c) are not applicable, then the Chinese tax which is payable under the laws of the People's Republic of China and in accordance with this Agreement on the above-mentioned items of income and capital shall, subject to the provisions of German tax law regarding credit for foreign tax against the German individual income tax or corporate income tax, be allowed as a credit against German individual income tax or corporate income tax payable on such items of income or against German capital tax payable on such items of capital. 7. With respect to Article 27: It is understood that German tax law for the prevention of tax evasion
provides under certain conditions, that, upon request, information may be supplied and that it is possible in accordance with these provisions, notwithstanding this Article, to supply information to the competent authorities of the People's Republic of China. DONE at Bonn, on 10 June 1985, in duplicate, in the Chinese and German languages, both texts being equally authentic.
For the People's Republic of China
For the Federal Republic of Germany
301
UK/USA DOUBLE TAXATION CONVENTION SIGNED 24 JULY 2001
AMENDING PROTOCOL SIGNED 19 JULY 2002 (Consolidated version)
Entered into force 31 MARCH 2003 Effective in United Kingdom from 1 April 2003 for corporation tax, from 6 April 2003 for income tax and capital gains tax, from 1 May 2003 for taxes withheld at source and from 1 January 2004 for UK petroleum revenue tax. Effective in the US from 1 May 2003 for taxes withheld at source and from 1 January 2004 for all other US taxes. Double Taxation Agreements are reproduced under the terms of Crown Copyright Policy Guidance issued by HMSO.
-----------------------,....~--------------------------------------------------'O~A CONVENTION BETWEE'N THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America ,
II
Desiring to conclude a new Convention for the avoidance of double taxatio and the prevention of fiscal evasion with respect to taxes on income and on n capital gains, Have agreed as follows: ARTICLE 1 General scope
1. Except as specifica~ly provi.ded herein, this Convention is applicable only to persons who are resIdents ot one or both of the Contracting States. 2. This Convention shall not restrict in any manner any benefit now or hereafter accorded: (a) by the laws of either Contracting State; or (b) by any other agreement between the Contracting States. 3.
(a) Notwithstanding the provisions of sub-paragraph b) of paragraph 2 of this Article: (i) any question arising as to the interpretation or application of this Convention and, in particular, whether a taxation measure is within the scope of this Convention, shall be determined exclusively in accordance with the provisions of Article 26 (Mutual Agreement Procedure) of this Convention', and (ii) the provisions of Article II and Article XVII of the General Agreement on Trade in Services shall not apply to a taxation measure unless the competent authorities agree that the measure is not within the scope of Article 25 (Non-discrimination) of thiS Convention. (b) For the purposes of this paragraph, a "measure" is a law, regulation. rule, procedure, decision, administrative action, or any similar provIsion or action.
~o
4. Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. 5. The provisions of paragraph 4 of this Article shall not affect: a)
the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Nondiscrimination), and 26 (Mutual Agreement Procedure) of this Convention; and
b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State. " 6. A former citizen or long-term resident whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax (as defined under the laws of the Contracting State of which the person was a citizen or long-term resident) shall be treated for the purposes of paragraph 4 of this Article as a citizen of that Contracting State but only for a period of 10 years following the loss of such status. This paragraph shall apply only in respect of income from sources within that Contracting State (including income deemed under the domestic law of that State to arise from such sources). Paragraph 4 of this Article shall not apply in the case of any former citizen or long-term resident of a Contracting State who ceased to be a citizen or long-term resident of that State at any time before February 6th, 1995. 7. Where under any provision of this Convention income or gains arising in one of the Contracting States are relieved from tax in that Contracting State and, under the law in force in the other Contracting State, a person, in respect of the said income or gains, is subject to tax by reference to the amOUnt thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting State shall apply only to so much of the income or gains as is taxed in the other COntracting State. 8. An item of income, profit or gain derived through a person that is fiscally transparent under the laws of either Contracting State shall be considered to
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be derived by a resident of a Contracting State to the extent that the item is treated for the purposes of the taxation law of such Contracting State as the income, profit or gain of a resident.
ARTICLE 2 Taxes covered
(b) the term "company" means any bod v corporate or any entity that is treated as a body corporate for tax purposes; (c) the term "enterprise" applies to the carrying on of any business; (d) the term "business" includes the performance of professional services and of other activities of an independent character;
1. This Convention shall apply to taxes on income and on capital gains imposed on behalf of a Contracting State irrespective of the manner in which they are levied.
(e) the terms "enterprise of a Contracting State" and "ent.erprise of the other Contracting State" mean respectively an enterpnse carned on by a resident of a Contracting State, and an enterpnse carned on by a resident of the other Contracting State;
2. There shall be regarded as taxes on income and on capital gains all taxes imposed on total income, or on elements of income, including taxes on gains from the alienation of property.
(f) the term "international traffic" means any transport by a ship or aircraft, except when the ship or aircraft is operated solely between places in the other Contracting State;
3. The existing taxes to which this Convention shall apply are:
(g) the term "competent authority" means:
(a) in the case of the United States: (i) the Federal income taxes imposed by the Internal Revenue Code (but excluding social security taxes); and (ii) the Federal excise taxes imposed on insurance policies issued by foreign insurers and with respect to private foundations;
(i) in the United States: the Secretary of the Treasury or his delegate; and (ii) in the United Kingdom: the Commissioners of Inland Revenue or their authorised representative; (h) the term "United States" means the United States of America, and
(iii) the corporation tax; and
includes the states thereof and the District of Columbia; such term. also includes the territorial sea thereof and the sea bed and ~ub-sOlI of the submarine areas adjacent to that territorial sea, over. which the United States exercises sovereign rights in accordance With . international law; the term, however, does not include Puert? Rico, the Virgin Islands, Guam or any other United States possesslOn or
(iv) the petroleum revenue tax.
territory;
(b) in the case of the United Kingdom: (i) the income tax; (ii) the capital gains tax;
4. This Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any changes that have been made in their respective taxation or other laws that significantly affect their obligations under this Convention.
ARTICLE 3 General definitions 1. For the purposes of this Convention, unless the context otherwise reqUlres: (a) the term "person" includes an individual, an estate, a trust, a partnership, a company, and any other body of persons;
(i) the term "United Kingdom" means Great Britain and Norther~ Ireland including any area outside the territorial sea of the Uruted Kingd;m which in accordance with international law has be~n or may hereafter be designated, under the laws of th~ Uru~ed Kmg?om concerning the Continental Shelf, as an area withm which the .nghts of the United Kingdom with respect to the sea bed and sub-SOli and their natural resources may be exercised; (i) the term "national" of a Contracting State, means:
(i) in relation to the United States, (A) any individual possessing the citizenship of the United States; and (B) any legal person, partnership, association or other entity
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deriving its status as such from the laws in force in the United States; (ii) in relation to the United Kingdom, (A) any British citizen, or any British subject not possessing the citizenship of any other Commonwealth country or territory, provided he has the right of abode in the United Kingdom; dnd (B) any legal person, partnership, association or other entity deriving its status as such from the laws in force in the United Kingdom; (k) the term "qualified governmental entity" means: (i) a Contracting State, or a political subdivision or local authority of a Contracting State; (ii) a person that is wholly owned, directly or indirectly, by a Contracting State or a political subdivision or local authority of a Contracting State, provided (A) it is organized under the laws of the Contracting State; (B) its earnings are credited to its own account with no portion of its income inuring to the benefit of any private person; (C) its assets vest in the Contracting State, political subdivision or local authority upon dissolution; and (D) it does not carryon a business; (1) the term "Contracting State" means the United States or the United Kingdom, as the context requires; ,
(m) the term "real property" means any interest (other than an interest solely as a creditor) in land, crops or timber growing on land, mines, wells and other places of extraction of natural resources, as well as any fixture built on land (buildings, structures, etc.) and other property considered real or immovable property under the law of the Contracting State in which the property in question is situated. The term shall in any case include livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respectmg landed property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits and other natural resources; ships, boats and aircraft shall not be regarded as real property.
307
(n) the term "conduit arrangement" means a transaction or series of transactions: (i) which is structured in such a way that a resident of a Contracting State entitled to the benefits of this Convention receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of ~hat income (at any time or in any form) to another person who 1S not a resident of either Contracting State and who, if it received that item of income direct from the other Contracting State, would not be entitled under a convention for the avoidance of double taxation between the state in which that other person is resident and the Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than, those available under this Convention to a resident of a Contracting State; and (ii) which has as its main purpose, or one of its main purposes, obtaining such increased benefits as are available under this Convention. 0) the term "pension scheme" means any plan, scheme, fun?, t~ust or
other arrangement established in a Contracting State which 1S: (i) generally exempt from income taxation in that State; and (ii) operated principally to administer or provide pensi.on or retirement benefits or to earn income for the benef1t of one or more such arrangements. 2. As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context . otherwise requires, or the competent authorities agree on a common meamng pursuant to the provisions of Article 26 (Mutual Agreement Procedure) of this Convention have the meaning which it has at that tlme under the law of that State for th~ purposes of the taxes to which this Conv~ntion applies, a~y meaning under the applicable tax laws of that State prevatlmg over a meamng given to the term under other laws of that State.
ARTICLE 4 Residence
1. Except as provided in paragraphs 2 and 3 of this Article, th.e term . "resident of a Contracting State" means, for the purposes of this ~onventlOn, any person who, under the laws of that State, is liable to tax therem by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. This term, however,
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does not include any person who is liable to tax in that State in respect only of Income from sources in that State or of profits attributable to a permanent establishment in that State.
309
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.
(a) a pension scheme;
5. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the mode of application of this Convention to that person. If the competent authorities do not rea.ch sUC? an agree.ment, that. person shall not be entitled to claim any benefit provided by this ConventIOn, except those provided by paragraph 4 of Article 24 (Relief from Double Taxation), Article 25 (Non-discrimination) and Article 26 (Mutual Agreement Procedure).
(b) a plan, scheme, fund, trust, company or other arrangement established in a Contracting State that is operated exclusively to administer or provide employee benefits and that, by reason of its nature as such, is generally exempt from income taxation in that State;
6. A marriage before January 1st, 1974 between a woman who is a United States national and a man domiciled within the United Kingdom shall be deemed to have taken place on January 1st, 1974 for the purpose of determining her domicile for United Kingdom tax purposes, on or after the date on which this Convention first has effect in relation to her.
2. An individual who is a United States citizen or an alien admitted to the United States for permanent residence (a "green card" holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States and if that individual is not a resident of a State other than the United Kingdom for the purposes of a double taxation convention between that State and the United Kingdom. 3. The term "resident of a Contracting State" includes:
(c) an organization that is established exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes and that is a resident of a Contracting State according to its laws, notwithstanding that all or part of its income or gains may be exempt trom tax under the domestic law of that State; and (d) a qualified governmental entity that is, is a part of, or is established in, that State. 4. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then his status sh~ll be , determined as follows: (a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them he shall be deemed to be a resident only of the State of which he i~ a national;
ARTICLE 5 Permanent establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources. 3. A building site or construction or installation project constitutes a permanent establishment only if it lasts for more than twelve months. 4. Notwithstanding the preceding provisions of this Article, the term " permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
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(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of the activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person - other than an agent of an independent status to whom paragraph 6 of this Article applies - is acting on behalf of an enterprise and has and habitually exercises in a Contracting State an authority to conclude contracts that are binding on the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities that the person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 of this Article that, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisio~s of that paragraph.
6. An enterprise shall not be deemed to have a permanent est;blishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of an independent status, provided that such person is acting in the ordinary course of his business as an independent agent. 7. The fact that a company that is a resident of a Contracting State controls or is controlled by a company that is a resident of the other Contracting State, or that carries on business in that other State (whether through a permanent establishment or otherwise), shall not constitute either company a permanent establishment of the other.
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ARTICLE 6 Income from real property 1. Income derived by a resident of a Contracting State from real property, including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State. 2. The provisions of paragraph 1 of this Article shall apply to income derived from the direct use, letting, or use in any other form of real property. 3. The provisions of paragraphs 1 and 2 of this Article shall also apply to the income from real property of an enterpnse. ARTICLE 7 Business profits 1. The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries o~ busmess m the other Contracting State through a permanent establishment situat~d therem. If the enterprise carries on business as aforesaid, the busmess profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3 of .this ~ticle, where an . enterprise of a Contracting State carries on busmess m ~he other Cont.ractmg State through a permanent establishment situated therell~, there shallm ~ach Contracting State be attributed to that permanent estabhshment the busmess profits that it might be expected to make if i~ ~~re a distmct and separ~te. enterprise engaged in the same or similar activltles under the same or s~mil~r conditions and dealing wholly independently With the enterpn~e of which it is a permanent establishment. For this purpose, th~ business profits to ~e attributed to the permanent establishment shallmcl.u~e only the profits derived from the assets used, risks assumed and actiVities performed by the permanent establishment. 3. In determining the business profits of a permanent establishment, there shall be allowed as deductions expenses that are incurred for the p~poses of the permanent establishment, including ex~cutiv~ and general adrmOlstratiVe expenses so incurred, whether in the State 10 whiCh the permanent establishment is situated or elsewhere. 4. For the purposes of the preceding paragraphs, the profits to be attri?uted to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 5. The United States excise tax on insurance policies issued ~Y foreign insurers shall not be imposed on insurance or reinsurance poitCles, the
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premiums on which ar~ the receipts of a business of insurance carried on by an enterpnse of the UOlted Kmgdom. However, if such policies are entered into as part of a conduit arrangement, the United States may impose excise tax on those policies, unless the premiums in respect of those policies are or are part of, the income of a permanent establishment that the enterprise ~f the United Kingdom has in the United States. 6. Where business profits include items of income that are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 7. In a~plying this Article, paragraph 5 of Article 10 (Dividends), paragraph 3 of Article 11 (Interest), paragraph 3 of Article 12 (Royalties), and paragraph 2 of Article 22 (Other Income) of this Convention, income or profits anributable to a permanent establishment may, notwithstanding that the permanent establishment has ceased to exist, be taxed in the Contracting State in which it was situated.
ARTICLE 8 Shipping and air transport
1. ~rofits .of an ente~prise of a Contracting State from the operation of ships or aircraft 10 mternational traffic shall be taxable only in that State. L For ~he purposes of this Article, profits from the operation of ships or aircraft mclude profits derived from the rental of ships or aircraft on a full (~ime or voyage) basis. They also include profits from the rental of ships or aircraft on a bareboat basis if the rental income is incidental to profits from the operation of ships or aircraft in international traffic. Profits derived by an enterpnse from the mland transport of property or passengers within either Contrac~ing State shall be treated as profits from the operation of ships or aircraft ~ international traffic if such transport is undertaken as part of mternatlonal traffic conducted by such enterprise. 3. Profits of an enterprise of a Contracting State from the use, maintenance, or rental of containers (including trailers, barges and related equipment for the transport of containers) used in international traffic shall be taxable only in that State. 4. The provisions of paragraphs 1 and 3 of this Article shall also apply to profits from participation in a pool, a joint business, or an international operating agency.
313
ARTICLE 9 Associated enterprises 1. Where: (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management, control, or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations that differ from those that would be made between independent enterprises, then any profits that, but for those conditions, would have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly. L Where a Contracting State includes in the profits of an enterprise of that State, and taxes accordingly, profits on which an enterprise of the other Contracting State has been charged to tax in that other State, and the other Contracting State agrees that the profits so included are profits that would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those that would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be paid to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.
ARTICLE 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the dividends are beneficially owned by a resident of the other Contracting State, the tax so charged shall not exceed, except as otherwise provided, (a) 5 per cent. of the gross amount of the dividends if the beneficial owner is a company that owns shares representing directly or
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indirectly at least 10 per cent. of the voting power of the company paying the dividends; (b) 15 per cent. of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. Notwithstanding the provisions of paragraph 2 of this Article, dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends is a resident of the other Contracting State and either: (a) a company that has owned shares representing 80 per cent. or more of the voting power of the company paying the dividends for a 12-month period ending on the date the dividend is declared, and that: (i) owned shares representing, directly or indirectly, at least 80 per cent. of the voting power of the company paying the dividends prior to October 1st, 1998; or (ii) is a qualified person by reason of sub-paragraph c) of paragraph 2 of Article 23 (Limitation on Benefits) of this Convention; or (iii) is entitled to benefits with respect to the dividends under paragraph 3 or paragraph 6 of that Article; or (b) a pension scheme, provided that such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension scheme. 4. Sub-paragraph a) of paragraph 2 and sub-paragraph a) of paragraph 3 of this Article shall not apply in the case of dividends paid by a pooled investment vehicle which is a resident of a Contracting State. Sub-p;ragraph b) of paragraph 2 and sub-paragraph b) of paragraph 3 of this Article shall apply in the case of dividends paid by a pooled investment vehicle, the assets of which consist wholly or mainly of shares, securities or currencies or derivative contracts relating to shares, securities or currencies. In the case of dividends paid by a pooled investment vehicle not described in the preceding sentence, sub-paragraph b) of paragraph 2 and sub-paragraph b) of paragraph 3 of this Article shall apply only if a) the beneficial owner of the dividends is an individual or pension scheme, in either case holding an interest of not more than 10 per cent. in the pooled investment vehicle; b) the dividends are paid with respect to a class of stock that is publicly traded and the beneficial owner of the dividends is a person holding
315
an interest of not more than 5 per cent. of any class of the stock of the pooled investment vehicle; or c)
the beneficial owner of the dividends is a person holding an interest of not more than 10 per cent. in the pooled investment vehicle and that vehicle is diversified.
5. The previous provisions of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State, of which the payer is a resident, through a permanent establishment situated therein, and the dividends are attributable to such permanent establishment. In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply. 6. A Contracting State may not impose any tax on dividends paid by a company which is a resident of the other Contracting State, except insofar as the dividends are paid to a resident of the first-mentioned State or the dividends are attributable to a permanent establishment situated in that State, nor may it impose tax on a company's undistributed profits, except as provided in paragraph 7 of this Article, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that State. 7. A company that is a resident of a Contracting State and that has a permanent establishment in the other Contracting State, or that is subject to tax in that other State on a net basis on its income or gains that may be taxed in that other State under Article 6 (Income from Real Property) or under paragraph 1 of Article 13 (Gains) of this Convention, may be subject in that other State to a tax in addition to any tax that may be imposed by that other State in accordance with the other provisions of this Convention. Such tax, however, may be imposed on only the portion of the business profits of the company attributable to the permanent establishment, and the portion of the income or gains referred to in the preceding sentence that is subject to tax under Article 6 or under paragraph 1 of Article 13, that, in the case of the United States, represents the dividend equivalent amount of such profits, income or gains and, in the case of the United Kingdom, is an amount that is analogous to the dividend equivalent amount. This paragraph shall not apply in the case of a company which: (a) prior to October 1st, 1998 was engaged in activities giving rise to profits attributable to that permanent establishment or to income or gains to which the provisions of Article 6 or, as the case may be, paragraph 1 of Article 13 apply; (b) is a qualified person by reason of sub-paragraph c) of paragraph 2 of Article 23 (Limitation on Benefits) of this Convention; or
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(c) is e?titled to benefits under paragraph 3 or paragraph 6 of that ArtICle with respect to an Hem of LOcome profit or g ' d . this paragraph. , a m escnbed in 8. . Thed additional. tax referred to in paragraph 7 of this Art"IC Ie may not b e Impose at a rate 10 excess of the rate specified in sub-paragraph ) f paragraph 2 of this Article. a a 9. The provisions of this Article shall not apply in respect of a di'd 'd d f ny VI end pal un er, or as part a , a conduit arrangement.
10. For the purposes of this Article: . h a) the term "dividends" means income from shares or oth b' d b ' .... er ng ts, not eIng e t-clalms.' participatIng In profits, as well as income from other corpor~te nghts and a.ny other item which, under the laws of the Cont~actlI1g State of ~hICh the company paying the dividend is a resident, IS treated as a dividend or a distribution of a company; (b) the term "pooled investment vehicle" means a person: (i) whose assets.c.onsist wholly or mainly of real property, or of shares, secuntJes or currencies, or of derivative contracts relating to shares, secuntJes or currencies or real property; (ii) ~hose gros.s income consists wholly or mainly of dividends, Interest, gaInS from the alienation of assets and rents and other income and gains from the holding and alienation of real property; and (iii) which, in respect of its income, profits or gains, is exempt from, or IS not chargeable to, tax in the State of which it is a resident, or is subject to tax at a special rate in that State, or which is entitled to a deduction for dividends paid to its sha~eholders in computing the amount of its income, profits or gains; (c) a pooled investment vehicle is "diversified" if the value of no single interest in real property exceeds 10 per cent. of the pooled investment vehicle's total interests in real property. For the purposes of this rule, foreclosure property shall not be considered an interest in real property. Where a pooled investment vehicle holds an interest in a partnership, it shall be treated as owning directly a proportion of the partnership's interests in real property corresponding to the proportion of its interest in the partnership.
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ART1CLE 11 Interest Interest arising in a Contracting State and beneficially owned by a . 'dent of the other Contracting State shall be taxable only in that other rest . State. 2. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and, in particular, income from government securities and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds or debentures, and all other income that is subjected to the same taxation treatment as income from money lent by the taxation law of the Contracting State in which the income arises. Income dealt with in Article 10 (Dividends) of this Convention and penalty charges for late payment shall not be regarded as interest for the purposes of this Article. 1
3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated therein, and the interest is attributable to such permanent establishment. In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply. 4. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest exceeds, for whatever reason, the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the l~st-mentioned amount. In such case the excess part of the payments shall remalI1 taxable according to the laws of each State, due regard being had to the other provisions of this Convention. 5. (a) ~otwithstanding the provisions of paragraph 1 of this Article, II1terest paid by a resident of a Contracting State and determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property o~ th~ debtor or a related person or to any dividend, partnership dlstnbution or similar payment made by the debtor to a related person, may also be taxed in the Contracting State in which it arises, and ~ccording to the laws of that State, but if the beneficial owner is ~ reSident of the other Contracting State the gross amount of the 10terest may be taxed at a rate not exceeding the rate prescribed in sCubparagraph b) of paragraph 2 of Article 10 (Dividends) of this onvention.
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(b) Sub-paragraph a) of this paragraph shall not apply to any interest solely by reason of the fact that it is paid under an arrangement the terms of which provide: (i) that the amount of interest payable shall be reduced in the event of an improvement in the factors by reference to which the amount of interest payable is determined; or (ii) that the amount of interest payable shall be increased in the event of a deterioration in the factors by reference to which the amount of interest payable is determined. 6. Notwithstanding the provisions of paragraph 1 of this Article, a Contracting State may tax, in accordance with its domestic law, interest paid with respect to the ownership interests in a vehicle used for the securitisation of real estate mortgages or other assets, to the extent that the amount of interest paid exceeds the return on comparable debt instruments as specified by the domestic law of that State. 7. The provisions of this Article shall not apply in respect of any interest paid under, or as part of, a conduit arrangement. ARTICLE 12 Royalties
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attributable to such permanent establishment. In such case, the provisions of .\rticle 7 (Business Profits) of this Convention shall apply. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the .1010unt of the royalties paid exceeds, for whatever reason, the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
4.
5. The provisions of this Article shall not apply in respect of any royalty paid under, or as part of, a conduit arrangement. ARTICLE 13 Gains 1. Gains derived by a resident of a Contracting State that are attributable to the alienation of real property situated in the other Contracting State may be taxed in that other State.
2. For the purposes of this Article the term "real property situated in the other Contracting State" shall include:
1. Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
(a) rights to assets to be produced by the exploration or exploitation of the sea bed and sub-soil of that other State and their natural resources, including rights to interests in or the benefit of such assets;
2. The term "royalties" as used in this Article means:
(b) where that other State is the United States, a United States real property interest; and
(a) any consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including comptlter software and cinematographic films) including works reproduced on audio or video tapes or disks or any other means of image or sound reproduction, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience; and (b) any gain derived from the alienation of any right or ptoperty described in sub-paragraph a) of this paragraph, to the extent that the amount of such gain is contingent on the productivity, use, or disposition of the right or property. 3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, and the royalties are
(c) where that other State is the United Kingdom: (i) shares, including rights to acquire shares, other than shares in which there is regular trading on a stock exchange, deriving their value or the greater part of their value directly or indirectly from real property situated in the United Kingdom; and Iii) an interest in a partnership or trust to the extent that the assets of the partnership or trust consist of real property situated in the United Kingdom, or of shares referred to in clause (i) of this subparagraph. 3. Gains from the alienation of property (other than real property) forming part of the business property of a permanent establishment that an enterprise of a Contracting State has or had in the other Contracting State, including gains from the alienation of such a permanent establishment (alone or with
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the whole enterprise), may be taxed in that other ~tate, whether or not that permanent establishment exists at the time of the alienation. 4. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic by the enterprise, or of containers used in international traffic, or of property (other than real property) pertaining to the operation or use of such ships, aircraft or containers, shall be taxable only in that State.
5. Gains from the alienation of any property other than property referred to m the precedmg paragraphs of this Article shall be taxable only in the Contracting State of which the alienator is a resident. 6. The provisions of paragraph 5 of this Article shall not affect the right of a Contractmg State to levy according to its law a tax on gains from the alienation of any property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the six years immediately preceding the alienation of the property. ARTICLE 14 Income from employment
1. Subject to the provisions of Articles 15 (Directors' Fees), 17 (Pensions Social Security, Annuities, Alimony, and Child Support) and 19 (Governrn'ent Service) of this Convention, salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such femuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1 of this Article, ' remuneration derived by a resident of a Contracting State in respect of an empl.oyment ~xercised in the other Contracting State shall be taxable only in the first-mentIOned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable year or year of assessment concerned; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not borne by a permanent establishment which the employer has in the other State. 3. Notwithstanding the preceding provisions of this Article, remuneration
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described in paragraph 1 of this Article that is derived by a resident of a Contracting State in respect of an employment as a member of the regular complement of a ship or aircraft operated in international traffic shall be taxable only in that State. ARTICLE 15 Directors' fees Directors' fees and other similar payments derived by a resident of a Contracting State for services rendered in the other Contracting State in his capacity as a member of the board of directors of a company that is a resident of the other Contracting State may be taxed in that other State. ARTICLE 16 Entertainers and sportsmen 1. Income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio, or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, which income would be exempt from tax in that other State under the provisions of Article 7 (Business Profits) or 14 (Income from Employment) of this Convention, may be taxed in that other State, except where the amount of the gross receipts derived by that resident, including expenses reimbursed to him or borne on his behalf, from such activities does not exceed twenty thousand United States dollars ($20,000) or its equivalent in pounds sterling for the taxable year or year of assessment concerned.
2. Income in respect of activities exercised by an entertainer or a sportsman in his capacity as such which accrues not to the entertainer or sportsman himself but to another person may, notwithstanding the provisions of Article 7 (Business Profits) or 14 (Income from Employment) of this Convention, be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised, unless that other person establishes that neither the entertainer or sportsman nor persons related thereto participate directly or indirectly in the profits of that other person in any manner, including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions, or other distributions. ARTICLE 17 Pensions, social security, annuities, alimony, and child support
1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State. (b) Notwithstanding sub-paragraph a) of this paragraph, the amount of
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any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the firstmentioned State. • otwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.
2.
3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State. 4. Any annuity derived and beneficially owned by an individual ("the annuitant") who is a resident of a Contracting State shall be taxable only in that State. The term "annuity" as used in this paragraph means a stated sum paid periodically at stated times during the life of the annuitant, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than in return for services rendered). 5. Periodic payments, made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contracting States, except that, if the payer is entitled to relief from tax for such payments in the first-mentioned State, such payments shall be taxable only in the other State.
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(a) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises an employment or self-employment in the other State shall be deductible (or excludable) in computing his taxable income in that other State; and (b) any benefits accrued under the pension scheme, or contributions
made to the pension scheme by or on behalf of the individual's employer, during that period shall not be treated as part of the employee's taxable income and any such contributions shall be allowed as a deduction in computing the business profits of his employer in that other State. The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension scheme established in that State. 3. The provisions of paragraph 2 of this Article shall not apply unless: (a) contributions by or on behalf of the individual, or by or on behalf of the individual's employer, to the pension scheme (or to another similar pension scheme for which the first-mentioned pension sc~eme was substituted) were made before the individual began to exerCIse an employment or self-employment in the other State; and (b) the competent authority of the other State has agreed that the pension
scheme generally corresponds to a pension scheme established in that other State.
1. Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).
4. Where, under sub-paragraph a) of paragraph 2 of this Article, contributions to a pension scheme are deductible (or excludable) in computing an individual's taxable income in a Contracting St~te and, under the laws in force in that State the individual is subject to tax m that State, m respect of income, profits or ~ains, by reference to the amount thereof which is remitted to or received in that State and not by reference to the full amount thereof then the relief that would otherwise be available to that individual under that sub-paragraph in respect of such contributions shall be reduced to an amount that bears the same proportion to that relief as the amount of the income, profits or gains in respect of which the individual is s~bject to tax m that State bears to the amount of the income, profits or gains m respect of which he would be subject to tax if he were so subject in respect of the fu~l amount thereof and not only in respect of the amount remitted to or receIved in that State.
2. Where an individual who is a member or beneficiary of, or participant in, a pension scheme established in a Contracting State exercises an employment or self-employment in the other Contracting State:
5. (a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the mcome from which is taxable in the United Kingdom and is borne by an
, ARTICLE 18 Pension schemes
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employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom, (i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and (ii) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual's employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee's taxable income in computing his taxable income in the United States. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the United Kingdom. (b) The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United States. (c) For purposes of determining an individual's eligibility to participate in and receive tax benefits with respect to a pension scheme established in the United States, contributions made to, or benefits accrued under, a pension scheme established in the United Kingdom shall be treated as contributions or benefits under a generally corresponding pension scheme established in the United States to the extent reliefs are available to the individual under this paragraph. ' (d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension scheme generally corresponds to a pension scheme established in the United States. ARTICLE 19 Government service 1. Notwithstanding the provisions of Articles 14 (Income from Employment), 15 (Directors' Fees) and 16 (Entertainers and Sportsmen) of this Convention: (a) salaries, wages and other similar remuneration, other than a pension, paid from the public funds of a Contracting State or a political subdivision or a local authority thereof to an individual in respect of
325
services rendered to that State or subdivision or authority shall, subject to the provisions of sub-paragraph b) of this paragraph, be taxable only in that State; (b) such salaries, wages and other similar remuneration, however, shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who: (i) is a national of that State; or (ii) did not become a resident of that State solely for the purpose of rendering the services. 2. Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention: (a) any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall, subject to the provisions of sub-paragraph b) of this paragraph, be taxable only in that State; (b) such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State. 3. The provisions of Articles 14 (Income from Employment), 15 (Directors' Fees), 16 (Entertainers and Sportsmen) and 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention shall apply to salaries, wages and other similar remuneration, and to pensions, in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof. ARTICLE 20 Students Payments received by a student or business apprentice who is, or was immediately before visiting a Contracting State, a resident of the other Contracting State, and who is present in the first-mentioned State for the. purpose of his full-time education at a university, college or other recogrused educational institution of a similar nature, or for his full-time training, shall not be taxed in that State, provided that such payments arise outside that State, and are for the purpose of his maintenance, education or training. ~he exemption from tax provided by this Article shall apply to a business ~ppren~ce only for a period of time not exceeding one year from the date he flfst arnves in the first-mentioned Contracting State for the purpose of his training.
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Article 20A Teachers 1. A professor or teacher who visits one of the Contracting States for a period not exceeding two years for the purpose of teaching or engaging in research at a university, college or other recognised educational institution in that Contracting State and who was immediately before that visit a resident of the other Contracting State, shall be exempted from tax by the first-mentioned Contracting State on any remuneration for such teaching or research for a period not exceeding two years from the date he first visits that State for such purpose. 2. The exemption provided in this Article may be applied by the Contracting State in which the teaching or research is performed to current payments to such professor or teacher in anticipation or fulfilment of the requirements of paragraph 1 or by way of withholding and refund, but in either case exemption shall be conditional upon fulfilment of the requirements of paragraph l.
enterprise carrying on substantially similar exploration activities there, the former enterprise shall be deemed to be carrying on all such activities of the latter enterprise, except to the extent that those activities are carried on at the same time as its own activities; (b) an enterprise shall be regarded as associated with another enterprise if one participates directly or indirectly in the management, control or capital of the other or if the same persons participate directly or indirectly in the management, control or capital of both enterprises. 4. Salaries, wages and other similar remuneration derived by a resident of a Contracting State from an employment in respect of exploration activities or exploitation activities carried on in the other Contracting State may be taxed in that other State, to the extent that the duties are performed offshore in that other State. However, income derived by a resident of a Contracting State in respect of such employment performed in the other Contracting State shall not be taxable in that other State if the employment is performed in that other State for a period or periods not exceeding in the aggregate 30 days within any period of twelve months.
3. This Article shall apply to income from research only if such research is undertaken by the professor or teacher in the public interest and not primarily for the benefit of some other private person or persons. ARTICLE 21 Offshore exploration and exploitation activities 1. The provisions of this Article shall apply notwithstanding any other provision of this Convention where activities are carried on offshore in a Contracting State in connection with the exploration (hereinafter called "exploration activities") or exploitation (hereinafter called "~xploitation activities") of the sea bed and sub-soil and their natural resources situated in that State. 2. An enterprise of a Contracting State which carries on exploration activities or exploitation activities in the other Contracting State shall, subject to paragraph 3 of this Article, be deemed to be carrying on business in that other State through a permanent establishment situated therein. 3. Exploration activities which are carried on by an enterprise of a Contracting State in the other Contracting State for a period or periods not exceeding in the aggregate 30 days within any period of twelve months shall not constitute the carrying on of business through a permanent establishment situated therein. For the purposes of determining such period or periods: (a) where an enterprise of a Contracting State carrying on exploration activities in the other Contracting State is associated with another
ARTICLE 22 Other income 1. Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention (other than income paid out of trusts or the estates of deceased persons in the course of administration) shall be taxable only in that State. 2. The provisions of paragraph 1 of this Article shall not apply to income, other than income from real property, if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, and the income is attributable to such permanent establishment. In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply. 3. Where, by reason of a special relationship between the resident referred to in paragraph 1 of this Article and some other person, or between both of them and some third person, the amount of the income referred to in that paragraph exceeds the amount (if any) which would have been agreed upon between them in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such a case, the excess part of the income shall remain taxable according to the laws of each Contracting State, due regard being had to the other applicable provisions of this Convention.
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4. The provisions of this Article shall not apply in respect of any income paid under, or as part of, a conduit arrangement.
ARTICLE 23 Limitation on benefits 1. Except as otherwise provided in this Article, a resident of a Contracting State that derives income, profits or gains from the other Contracting State shall be entitled to all the benefits of this Convention otherwise accorded to residents of a Contracting State only if such resident is a "qualified person" as defined in paragraph 2 of this Article and satisfies any other specified conditions for the obtaining of such benefits. 2. A resident of a Contracting State is a qualified person for a taxable or chargeable period only if such resident is either: (a) an individual; (b) a qualified governmental entity; (c) a company, if (i) the principal class of its shares is listed or admitted to dealings on a recognized stock exchange specified in clauses (i) or (ii) of sub-paragraph a) of paragraph 7 of this Article and is regularly traded on one or more recognized stock exchanges, or (ii) shares representing at least 50 per cent. of the aggregate voting power and value of the company are owned directly or indirectly by five or fewer companies entitled to benefits under clause (i) of this sub-paragraph, provided that, in the case of indirect ownership, each intermediate owner is a resident at either Contracting State; (d) a person other than an individual or a company, if: (i) the principal class of units in that person is listed or admitted to dealings on a recognized stock exchange specified in clauses (i) or (ii) of sub-paragraph a) of paragraph 7 of this Article and is regularly traded on one or more recognized stock exchanges, or (ii) the direct or indirect owners of at least 50 per cent. of the beneficial interests in that person are qualified persons by reason of clause (i) of sub-paragraph c) or clause (i) of this sub-paragraph; (e) a person described in sub-paragraph a), b) or c) of paragraph 3 of Article 4 (Residence) of this Convention, provided that, in the case of a person described in sub-paragraph a) or b) of that paragraph, more
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than 50 per cent. of the person's beneficiaries, members or participants are individuals who are residents of either Contracting State; (f) a person other than an individual, if: (i) on at least half the days of the taxable or chargeable period persons that are qualified persons by reason of sub-paragraphs a), b), clause (i) of sub-paragraph c), clause (i) of sub-paragraph d), or subparagraph e) of this paragraph own, directly or indirectly, shares or other beneficial interests representing at least 50 per cent. of the aggregate voting power and value of the person, and (ii) less than 50 per cent. of the person's gross income for that taxable or chargeable period is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting State in the form of payments that are deductible for the purposes of the taxes covered by this Convention in the State of which the person is a resident (but not including arm's length payments in the ordinary course of business for services or tangible property and payments in respect of financial obligations to a bank, provided that where such a bank is not a resident of a Contracting State such payment is attributable to a permanent establishment of that bank located in one of the Contracting States); or (g) a trust or trustee of a trust in their capacity as such if at least 50 per cent. of the beneficial interest in the trust is held by persons who are either: (i) qualified persons by reason of sub-paragraphs a), b), clause (i) of sub-paragraph c), clause (i) of sub-paragraph d), or subparagraph e) of this paragraph; or (ii) equivalent beneficiaries, provided that less than 50 per cent. of the gross income arising to such trust or trustee in their capacity as such for the taxable or chargeable period is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting State in the form of payments that are deductible for the purposes ~f the taxes covered by this Convention in the Contracting State of whIch that trust or trustee is a resident (but not including arm's length payments in the ordinary course of business for services or tangible property and payments III respect of financial obligations to a bank, provided that wh~re such a bank is not a resident of a Contracting State such payment IS . attributable to a permanent establishment of that bank located III one of the Contracting States).
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3. Notwithstanding that a company that is a resident of a Contracting State may not be a qualified person, it shall be entitled to the benefits of this Convention otherwise accorded to residents of a Contracting State with respect to an item of income, profit or gain if it satisfies any other specified conditions for the obtaining of such benefits and: (a) shares representing at least 95 per cent. of the aggregate voting power and value of the company are owned, directly or indirectly, by seven or fewer persons who are equivalent beneficiaries; and (b) less than 50 per cent. of the company's gross income for the taxable or chargeable period in which the item of income, profit or gain arises is paid or accrued, directly or indirectly, to persons who are not equivalent beneficiaries, in the form of payments that are deductible for the purposes of the taxes covered by this Convention in the State of which the company is a resident (but not including arm's length payments in the ordinary course of business for services or tangible property and payments in respect of financial obligations to a bank, provided that where such a bank is not a resident of a Contracting State such payment is attributable to a permanent establishment of that bank located in one of the Contracting States). 4.
(a) Notwithstanding that a resident of a Contracting State may not be a qualified person, it shall be entitled to the benefits of this Convention with respect to an item of income, profit or gain derived from the other Contracting State, if the resident is engaged in the active conduct of a trade or business in the first-mentioned State (other than the business of making or managing investments for the resident's own account, unless these activities are banking, insurance or securities activiti~s carried on by a bank, insurance comJZany or registered seCUflues dealer), the mcome, profit or gain derived from the other Contracting State is derived in connection with, or is incidental to, that trade or business and that resident satisfies any other specified conditions for the obtaining of such benefits. (b) If a resident of a Contracting State or any of its associated enterprises carries on a trade or business activity in the other Contracting State which gives rise to an item of income, profit or gain, sub-paragraph a) of this paragraph shall apply to such item only if the trade or business activity in the first-mentioned State is substantial in relation to the trade or business activity in the other State. Whether a trade or business activity is substantial for the purposes of this paragraph shall be determined on the basis of all the facts and circumstances. (c) In determining whether a person is engaged in the active conduct of a trade or business in a Contracting State under sub-paragraph a) of
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this paragraph, activities conducted by a partnership in which that person is a partner and activities conducted by persons connected to such person shall be deemed to be conducted by such person. A person shall be connected to another if one possesses at least 50 per ..:ent. of the beneficial interest in the other (or, in the case of a company, shares representing at least 50 per cent. of the aggregate voting power and value of the company or of the beneficial equity interest in the company) or another person possesses, directly or indirectly, at least 50 per cent. of the beneficial interest (or, in the case of a company, shares representing at least 50 per cent. of the aggregate voting power and value of the company or of the beneficial equity interest in the company) in each person. In any case, a person shall be considered to be connected to another if, on the basis of all the facts and circumstances, one has control of the other or both are under the control of the same person or persons. 5. Notwithstanding the preceding provisions of this Article, if a company that is a resident of a Contracting State, or a company that controls such a company, has outstanding a class of shares: (a) which is subject to terms or other arrangements which entitle its holders to a portion of the income, profit or gain of the company derived from the other Contracting State that is larger than the portion such holders would receive in the absence of such terms or arrangements; and (b) 50 per cent. or more of the voting power and value of which is owned by persons who are not equivalent beneficiaries, the benefits of this Convention shall apply only to that proportion of the income which those holders would have received in the absence of those terms or arrangements. 6. A resident of a Contracting State that is neither a qualified person nor entitled to benefits with respect to an item of income, profit or gain under paragraph 3 or 4 of this Article shall, nevertheless, be granted benefits of this Convention with respect to such item if the competent authority of the other Contracting State determines that the establishment, acquisition or maintenance of such resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under this Convention. The competent authority of the other Contracting State shall consult with the competent autho rity of th e first-mentioned State before refusing to grant benefits of thi s Conve ntion under this paragraph.
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7. For the purposes of this Article the following rules and definitions sh lJ appl\': a (a) the term "recognized stock excha nge" mea ns: (i) the NASDAQ System and any stock exchange registered with h U.S. Securities and Exchange Commission as a national secur' t e HIes exchange under the U.S. Securities Exchange Act of 1934; (ii) the London Stock Exchange and any other recognised investm . em h . h' h exc ange WIt m t e meanmg of the Financial Services Act 1986 or, as the case may be, the Financial Services and Markets Act 2000; (iii) the Irish Stock Exchange, the Swiss Stock Exchange and the stock exchanges of Amsterdam, Brussels, Frankfurt, Hamburg, Johannesburg, Madrid, Milan, Paris, Stockholm, Sydney, Tokyo, Toronto and Vienna; and (iv) any other. stock exchange which the competent authorities agree to recognIse for the purposes of this Article; (b) (i) the term "principal class of shares" means the ordinary or common shares of the company, provided that such class of shares represents the majority of the voting power and value of the company. If no single class of ordinary or common shares represents the majority of the aggregate voting power and value of the company, the "principal class of shares" is that class or those classes that in the aggregate represent a majority of the aggregate voting power and value of the company; (ii) the term "shares" shall include depository receipts thereof or trust certificates thereof; ..
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(il Al would be entitled to all the benefits of a comprehensive
convention for the avoidance of double taxation between any \1ember State of the European Community or a European Economic Area state or any party to the orth American Free Trade Agreement and the Contracting State from which the benefits of tllls Convention are claimed, provided that if such convention does not contain a comprehensive linlitation on benefits article, the person would be a qualified person under paragraph 2 of this Article (or for the purposes of sub-paragraph g) of paragraph 2, under the provisions specified in clause (i) of that sub-paragraph) if such person were a resident of one of the Contracting States under Article 4 (Residence) of this Convention; and
B) with respect to income referred to in Article 10 (Dividends), 11 (Interest) or 12 (Royalties) of this Convention, would be entitled under such convention to a rate of tax with respect to the particular class of income for which benefits are being claimed under this Convention that is at least as low as the rate applicable under this Convention; or (ii) is a qualified person by reason of sub-paragraphs a), b), clause (i) of sub-paragraph c), clause (i) of sub-paragraph d), or sub-paragraph e) of paragraph 2 of this Article. For the purposes of applying paragraph 3 of Article 10. (Dividends) in order to deternline whether a person, owning shares, directly or indirectly, in the company claiming the benefits of this Convention, is an equivalent beneficiary, such person shall be deemed to hold the same voting power in the company paying the dividend as the company claiming the benefits holds in such company.
(c) the .terr~ "units" as used in sub-paragraph d) of paragraph 2 of this ArtIcle mcludes shares and any other instrument, not being a debt-claIm, grantmg an entitlement to share in the assets or income of, or receive a distribution from, the person. The term "principal class of units" means the class of units which represents the majority of ~he .value of the person. If no single class of units represents the maJonty of the value of the person, the "principal class of units" is those classes that in the aggregate represent the majority of the value of the person;
(e) For the purposes of paragraph 2 of this Article, the shares in a class of shares or the units in a class of units are considered to be regularly traded on one or more recognized stock exchanges in a chargeable or taxable period if the aggregate number of shares or units of that class traded on such stock exchange or exchanges during the twelve months ending on the day before the beginning of that taxable or chargeable period is at least six per cent. of the average number of shares or units outstanding in that class during that twelvemonth period.
d) an equivalent beneficiary is a resident of a Member State of the European Community or of a European Economic Area state or of a party to the North American Free Trade Agreement but only if that resident:
(f) A body corporate or unincorporated association shall be consi~ered to be an insurance company if its gross income consists pnmanly of insurance or reinsurance premiums and investment income attributable to such premiums.
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ARTICLE 24 Relief from double taxation 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income (a) the income tax paid or accrued to the United Kingdom by or on behalf of such citizen or resident; and (b) in the case of a United States company owning at least 10 per cent. of the voting stock of a company that is a resident of the United Kingdom and from which the United States company receives dividends, the income tax paid or accrued to the United Kingdom by or on behalf of the payer with respect to the profits out of which the dividends are paid. For the purposes of this paragraph, the taxes referred to in sub-paragraph b) of paragraph 3 and in paragraph 4 of Article 2 (Taxes Covered) of this Convention shall be considered income taxes. 2. For the purposes of applying paragraph 1 of this Article, (a) subject to sub-paragraph (b) of this paragraph, an item of gross income, as determined under the laws of the United States, derived by a resident of the United States that, under this Convention, may be taxed in the United Kingdom shall be deemed to be income from sources in the United Kingdom; (b) however, gains derived by an individual while that indi'4idual was a resident of the United States, that are taxed in the United States in accordance with this Convention, and that may also be taxed in the United Kingdom by reason only of paragraph 6 of Article 13 (Gains) of this Convention, shall be deemed to be gains from sources in the United States. 3. Notwithstanding the provisions of paragraph 1 of this Article, the amount of United Kingdom petroleum revenue tax allowable as a credit against United States tax shall be limited to the amount attributable to the United Kingdom source taxable income in the following way, namely: (a) the amount of United Kingdom petroleum revenue tax on income from the extraction of minerals from oil or gas wells in the United Kingdom to be allowed as a credit for a taxable year shall not exceed the amount, if any, by which the product of the maximum statutory United States tax rate applicable to a corporation for such taxable
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year and the amamt of such income exceeds the amount of other United Kingdom ,ax on such income; (b) the amount of Uored Kingdom petroleum revenue tax on income from the extractim of minerals from oil or gas wells in the United Kingdom that is ~or allowable as a credit under sub-paragraph a) of this paragraph, s&aU be deemed to be income taxes paid or accrued in the two precedi n~ or five succeeding taxable years, to the extent not deemed paid or accrued in a prior taxable year, and shall be allowable as a credit in the \'ear in which it is deemed paid or accrued subject to the lirnitation in ~ub-paragraph a) of this paragraph; (c) the provisions olsub-paragraphs a) and b) of this paragraph s~all apply separately,mutatis mutandis, to the amount of Uru~ed ~I~g.dom petroleum reven.e tax on income from initial tr~nsportauon, ~mual treatment and intial storage of minerals from oLl or gas wells m the United Kingdom 4. Subject to the proviSions of the law of the United Kingdom regarding the allowance as a credit ag!inst United Kingdom tax of tax payable m a territory outside the Unied Kingdom (which shall not affect the general principle hereof): (a) United States tal payable under the laws of the United States and in accordance withthis Convention, whether directly or by deduction, on profits, incooe or chargeable gains from sources within th~ United States (excludin~, in the case of a dividend, United States tax m respect of the profirs out of which the dividend is paid) shall be allowed as a credir against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Urited States tax is computed; (b) in the case of a .dividend paid by a company which is a resident of the United States t a company which is a resident of the United Kingdom and v.hich controls directly or indir~ctly at least 10 per cent. of the votflg power in the company paymg the dIVIdend, the . credit shall tak into account (in addition to any United States tax tor which credit may be allowed under the provisions of sub-paragraph. a) of this paragraph) the United States tax payabl~ by the company m respect of the profits out of which such dividend IS paId; (c) United States t shall not be taken into account under subparagraph b) of this paragraph for the purpose of allowing credit agains~ U~ited Kingdom tax il rhe case of a dividend paid by a company whIch IS a resident of the United States if and to the extent that
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I'"
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(i)
th e U. nite d Kingdom treats the dividend as benefic' 11 a resIdent of the United Kingdom; and la y oWned by
(ii) the United States treats the dividend as beneficiall resident of the United States; and y owned by a . (iii) the United States has allowed a ded t' U . d' uc Ion to a resident f h nne States m respect of an amount determi d b O t e that dividend; ne y reference to
~e Prov~sions of paragraph 2 of Article 1 (General Scope) of
hi t s s paragraph For the purposes of this paragraph, the income taxes ref . . of sub-paragraph a) of paragraph 3 and in ara ra h 4 erred ~o m clause (i) P Covered) of this Convention shall be cons'd dgU P d °Sf Article 2 (Taxes I ere mte tates tax. (d)
onventlOn shall not apply to sub-paragraph c) of thi
~h
For ~~le purposes of paragraph 4 of this Article, profits income a d . n taxed m the United States in accordance with th' C g ~m which may be deemed to arise from Sources within the United ~Stat~s~VentlOn shall be arg~a e gams owned by a resident of the United Kin d '
6. Where the United States t a ' d . 1 (General Scope) of this Conv:~~i~: ac~r. a~c; wIth paragraph 4 of Article ? a nIte tates cltlzen, or a former United States citizen or Ion t Kingdom: g- erm resIdent, who IS a resident of the United (a) the United Kingdom sh 11 b b d . for Un't d S a nO.t e oun to gIVe credit to such resident I e ~ates tax on profIts, mcome or chargeable gains from ~urtcdesKo.utsdlde the United States as determined under the laws of the m e mg om; (b) in the case of profits inco h bl . tl U· d S ' . me or c argea e gams from sources within le nne tates, t~e Umted Kingdom shall take into account for the es PhurpZ lof computmg the credit to be allowed under paragraph 4 of t IS tIc e only the amount of tax, if any, that the United States may ~J?o~e under the provisions of this Convention on a resident of the nIte Kmgdom who IS not a United States citizen', (c) for the purposes of computing United States tax on the profits bl . , mcome or h c argea e gams referred to in sub-paragraph (b) of this ~aragraph, the United States shall allow as a credit against United Kt.ates tax the income t~x and capital gains tax paid to the United mgdom after the credIt referred to in sub-paragraph (b) of this baragraph; the credit s.o allo~ed shall not reduce the portion of the mted States tax that IS credItable against the United Kingdom tax in accordance with sub-paragraph b) of this paragraph; and (d) for the exclusive purpose of relieving double taxation in the United
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States under sub-paragraph (c) of this paragraph, profits, income and chargeable gains referred to in sub-paragraph (b) of this paragraph shall be deemed to arise in the United Kingdom to the extent necessary to avoid double taxation of such profits, income or chargeable gains under sub-paragraph (c) of this paragraph.
ARTICLE 25 Non-discrimination 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.
2. The taxation on a permanent establishment that an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. 3. Except where the provisions of the second sentence of paragraph 5 of Article 7 (Business Profits), paragraph 1 of Article 9 (Associated Enterprises), paragraph 9 of Article 10 (Dividends), paragraphs 4 and 7 of Article 11 (Interest), paragraphs 4 and 5 of Article 12 (Royalties), or paragraphs 3 and 4 of Article 22 (Other Income) of this Convention apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected. 5. Nothing in this Article shall be construed as obliging either Contracting State to grant to individuals not resident in that State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident or to its nationals. 6. Nothing in this Article shall be construed as preventing either Contracting State from imposing a tax as described in paragraph 7 of Article 10 (Dividends) of this Convention.
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7. The provisions of this Article shall, notwithstanding the provisions of Article 2 (Taxes Covered) of this Convention, also apply to taxes of every kind and description imposed by each Contracting State or by its political sub-divisions or local authorities. ARTICLE 26 Mutual agreement procedure 1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of this Convention or, if later, within six years from the end of the taxable year or chargeable period in respect of which that taxation is imposed or proposed. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States, except such limitations as apply for the purposes of giving effect to such an agreement. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. In particular the c~mpetent authorities of the Contracting States may agree: (a) to the same attribution of income, deductions, credits, or allowances of an enterprise of a Contracting State to its permanent establishment situated in the other Contracting State; (b) to the same allocation of income, deductions, credits, or allowances between persons; Ic) to the same characterization of particular items of income, including the same characterization of income that is assimilated to income from shares by the taxation law of one of the Contracting States and that is treated as a different class of income in the other Contracting State; (d) to the same characterization of persons;
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(e) to the same application of source rules with respect to particular items of income; (f) to a common meaning of a term; (g) that the conditions for the application of the second sentence of paragraph 5 of Article 7 (Business Profits), paragraph 9 of Article 10 (Dividends), paragraph 7 of Article 11 (Interest), paragraph 5 of Article 12 (Royalties), or paragraph 4 of Article 22 (Other Income) of this Convention are met; and (h) to the application of the provisions of domestic law regarding penalties, fines, and interest in a manner consistent with the purposes of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. 4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement m the sense of the preceding paragraphs. ARTICLE 27 Exchange of information and administrative assistance
1. The competent authorities of the Contracting States shall exchange su~h information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by this Convention insofar as the taxation thereunder is not contrary to this Convention, including for the purposes of preventing fraud and facilit~ting the administration of statutory provisions against legal avoidance. ThIS includes information relating to the assessment or collection of, the . enforcement or prosecution in respect of, or the determination of appeals m relation to, the taxes covered by this Convention. The exchange of information is not restricted by paragraph 1 of Article 1 (General Scope) of this Convention. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State but may be disclosed to and only to persons or authorities (including courts and administrative bodies) involved in the . assessment, collection, or administration of, the enforcement or prosecutlon in respect of, or the determination of appeals in relation to, the taxes cov~red by this Convention or the oversight of the above. Such persons or authonties shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. 2. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall obtain that information in the same
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manner and to the same extent as if the tax of the first-mentioned State were the tax of that other State and were being imposed by that other State, notwithstanding that the other State may not, at that time, need such information for the purposes of its own tax. 3. In no case shall the provisions of paragraphs 1 and 2 of this Article be construed so as to impose on a Contracting State the obligation:
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ARTICLE 28 Diplomatic agents and consular officers Nothing in this Convention shall affect the fiscal privileges of diplomatic agents or consular officers under the general rules of international law or under the provisions of special agreements.
(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
ARTICLE 29 Entry into force
(b) to supply information that is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
1. This Convention shall be subject to ratification in accordance with the applicable procedures of each Contracting State and instruments of ratification shall be exchanged as soon as possible.
(c) to supply information that would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of which would be contrary to public policy.
2. This Convention shall enter into force upon the exchange of instruments of ratification and its provisions shall have effect:
4. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings), to the same.extent such documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes. 5. Each of the Contracting States shall endeavour to collect on behalf of the other Contracting State such amounts as may be necessary to ensure that relief granted by this Convention from taxation imposed by that other State does not inure to the benefit of persons not entitled thereto. This pa.ragraph shall not impose upon either of the Contracting States the obligation to carry out administrative measures that would be contrary to its sovereignty, security, or public policy. 6. The competent authority of a Contracting State intending to send officials of that State to the other Contracting State to interview individuals and examine books and records with the consent of the persons subject to examination shall notify the competent authority of the other Contracting State of that intention. 7. The competent authorities of the Contracting States shall consult with each other for the purpose of co-operating and advising in respect of any action to be taken in implementing this Article.
(a) in the United States: (i) in respect of taxes withheld at source, for amounts paid or credited on or after the first day of the second month next following the date on which this Convention enters into force; (ii) in respect of other taxes, for taxable periods beginning on or after the first day of January next following the date on which this Convention enters into force; and (b) in the United Kingdom: (i) in respect of taxes withheld at source, for amounts paid or credited on or after the first day of the second month next following the date on which this Convention enters into force; (ii) in respect of income tax not described in clause (i) of this sub-paragraph and capital gains tax, for any year of assessment beginning on or after the sixth day of April next following the date on which this Convention enters into force; (iii) in respect of corporation tax, for any financial year beginning on or after the first day of April next following the date on which this Convention enters into force; (iv) in respect of petroleum revenue tax, for chargeable periods beginning on or after the first day of January next following the date on which this Convention enters into force. 3. a) The Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the
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Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed at London on December 31st, 1975, as modified by subsequent notes and protocols ("the prior Convention") shall cease to have effect in relation to any tax with effect from the date on which this Convention has effect in relation to that tax in accordance with paragraph 2 of this Article. In relation to tax credits in respect of dividends paid by companies which are residents of the United Kingdom, the prior Convention shall terminate and cease to be effective in respect of dividends paid on or after the first day of the second month next following the date on which this Convention enters into force. b) Notwithstanding sub-paragraph a) of this paragraph, where any person entitled to benefits under the prior Convention would have been entitled to greater benefits thereunder than under this Convention, the prior Convention shall, at the election of such person, continue to have effect in its entirety with respect to that person for a twelve-month period from the date on which the provisions of this Convention otherwise would have effect under paragraph 2 of this Article. The prior Convention shall terminate on the last date on which it has effect in relation to any tax or to any entitlement to tax credits in accordance with the foregoing provisions of this sub-paragraph. 4. Notwithstanding the entry into force of this Convention, an individual who is entitled to the benefits of Article 21 (Students and Trainees) of the prior Convention at the time of entry into force of this Convention shall continue to be entitled to such benefits as if the prior Convention had remained in force.
,
ARTICLE 30 Termination This Convention shall remain in force until terminated by a Contracting State. Either Contracting State may terminate this Convention by giving notice of termination to the other Contracting State through diplomatic channels. In such event, this Convention shall cease to have effect: (a) in the United States: (i) in respect of taxes withheld at source, for amounts paid or credited after the date that is six months after the date on which notice of termination was given; and (ii) in respect of other taxes, for taxable periods beginning on or after
343
the date that is six months after the date on which notice of termination was given. (b) in the United Kingdom: (i) in respect of taxes withheld at source, for amounts paid or credited after the date that is six months after the date on which notice of termination was given; (ii ) in respect of income tax not described in clause (i) of this sub-paragraph and capital gains tax, for any year of assessment beginning on or after the date that is six months after the date on which notice of termination was given;
(iii) in respect of corporation tax, for any financial year beginning on or after the date that is six months after the date on which notice of termination was given; and (iv) in respect of petroleum revenue tax, for chargeable periods beginning on or after the date that is six months after the date on which notice of termination was given. IN WITNESS WHEREOF, the undersigned, being duly authorised thereto by their respective Governments, have signed this Convention. DONE at London in duplicate, this 24th day of July, 2001.
FOR THE GOVERNMENT OF THE UNITED KINGDOM OF
FOR THE GOVERNMENT OF THE UNITED STATES OF
GREAT BRITAIN AND NORTHERN IRELAND:
AMERICA
Gordon Brown
Paul H O'Neill
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EXCHANGE OF NOTES London, 24 July 2001 Excellency: I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and On Capital Gains which has been signed today and to make on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland the following proposals: With reference to paragraph 3 of Article 1 (General Scope): it is understood that, at the time of the signing of the Convention, the only agreements in force as between the two Contracting States that may impose national treatment or most-favoured nation obligations are the General Agreement on Trade in Services, the General Agreement on Tariffs and Trade, A Convention to Regulate the Commerce between the Territories of the United States and of His Britannic Majesty, signed in London on July 3rd, 1815, and the Treaty of Amity, Commerce, and Navigation, between His Britannic Majesty and the United States of America, signed at London, on November 19th, 1794. If it is determined that there were, at the date of the signing of the Convention, additional agreements in force between the Contracting States that create such obligations, the Contracting States will consider whether amendments to the Convention are necessary to ensure the proper interaction of the Convention and such other agreement with respect to tax measures. With reference to paragraph 6 of Article 1 (General Scope): (1) it is understood that an individual shall be regarded as a former long-term resident of a Contracting State only if that individual (not being a citizen of that Contracting State) was a lawful permanent resident of that Contracting State in at least eight of the fifteen fiscal years ending with the fiscal year in which the individual ceased to be a long-term resident of that Contracting State; (2) it is further understood that, in the case of an individual who is a former citizen of a Contracting State, the following factors shall be considered favourably in determining whether or not one of the principal purposes of that individual's loss of citizenship of that Contracting State wa!> the avoidance of tax, (a) at the time of the individual's ceasing to be a citizen of that
Contracting State or within a reasonable period t?ereafter, th~ individual is or becomes a resident fully liable to mcome tax m the other Contracting State, and (b) (i) the individual was a ci~izen of both Contracting ~tates at .birth and has remained a cltlzen of the other Contractmg State, (ii) at the time of the loss of such citizenship (or within.a reasonable period thereafter), the individual was or became a cItizen of the other Contracting State, and that other Contractmg ~tate was that individual's country of birth, or the country of birth of that individual's spouse or of either of that individual's parents; (iii) in the 10 years preceding the loss of such citizenship the individual was present in that Contractmg State for no more than 30 days in any taxable year or year of assessment; or (iv) the loss of citizenship occurred before the individual attained the age of 18% years; (3) it is further understood that, in the case of an in?ividual who is a former longterm resident of a Contracting State, the followmg factors shall b~ considered favourably in deterrrunmg whether or not one of the pnnClpal purposes of that individual's ceasing to be a long-term resident of that Contracting State was the avoidance of tax, (a) at the time of the individual's ceasing to be a long-term resident of that Contracting State or within a reasonable period thereaft~r, the individual is or becomes a resident fully liable to income tax m the other Contracting State, and that other Contracting State is (i) the country in which the individual was born; (ii) the country in which the individual's spouse was born; or (iii) the country where either of the individual's parents was born; (b) in the 10 years preceding the individual's ceasing to be a long-.term resident of that Contracting State, the individual was present m that Contracting State for no more than 30 days in each taxable year or year of assessment; or (c) the individual ceases to be a long-term resident of that Contracting State before reaching the age of 181/2 years; and (4) it is understood that, for the purposes of sub-paragraph a) of paragraph (2) and sub-paragraph a) of paragraph (3) above, an individ~al is n?t ~o.be regarded as fully liable to income tax in a Contracting State If that mdlvldual is subject to tax in that State, in respect of income arising in the o.the~ Contracting State, by reference to the amount of such income whICh IS
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remitted to or received in the first-mentioned State and not by reference to the full amount thereof.
With reference to sub-paragraph (o) of paragraph 1 of Article 3 (General Definitions):
With reference to paragraph 8 of Article 1 (General Scope):
it is understood that pension schemes shall include the following and any 'dentical or substantially similar schemes which are established pursuant to 1 , - ' legislation introduced after the date at signature at the ConventIon:
it is understood that where an item of income, profit or gain is derived through a person which is a resident of a Contracting State the provisions of the paragraph shall not prevent that Contracting State from taxing the item as the income, profit or gain of that person. It is further understood that, where, by virtue of the paragraph, an item of income, profit or gain is considered by a Contracting State to be derived by a person who is a resident of that Contracting State, and the same item is considered by the other Contracting State to be derived by that person or by a person who is a resident of that other Contracting State, the paragraph shall not prevent either Contracting State from taxing the item as the income, profit or gain of the person considered by that State to have derived the item of income, profit or gain. It is further understood that, in applying the paragraph, the United Kingdom shall, exceptionally, regard an item of income, profit or gain arising to a person as falling within the paragraph where another person is charged to United Kingdom tax in respect of that item of income, profit or gain
(a) under section 660A or 739, Income and Corporation Taxes Act 1988; or (b) under section 77 or 86, Taxation of Chargeable Gains Act 1992. It is further understood that, in applying the paragraph, a person shall be regarded as fiscally transparent under the laws of the United Kingdom in relation to an item of income, profit or gain where a charge is made on another person on that item either: '
(a) by virtue of section 13, Taxation of Chargeable Gains Act 1992; or (b) because that other person has (or, under section 118, Finance Act 1993, is treated as having) an equitable right in possession in a trust. With reference to Article 2 (Taxes Covered): it is understood that, if a political sub-division or local authority of the United States seeks to impose tax on the profits of any enterprise of the United Kingdom from the operation of ships or aircraft in international traffic, in circumstances where the Convention would preclude the imposition of a Federal income tax on those profits, the United States Government will use its best endeavours to persuade that political sub-division or local authority to refrain from imposing tax.
(a) under the law of the United Kingdom, employment-related arrangements (other than a social security scheme) approved as retirement benefit schemes for the purposes of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and personal pension schemes approved under Chapter IV of Part XIV of that Act; and (b) under the law of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans. With reference to Article 7 (Business Profits): it is understood that the OECD Transfer Pricing Guidelines will apply, by analogy, for the purposes of determining the profits attributable to a permanent establishment. Accordingly, any of the methods described therein _ including profits methods - may be used to determine the income of a permanent establishment so long as those methods are applied in accordance with the Guidelines. In particular, in determining the amount of attributable profits, the permanent establishment shall be treated as having the same amount of capital that it would need to support its activities if it were a distinct and separate enterprise engaged in the same or similar activities. With respect to financial institutions other than insurance companies, a Contracting State may determine the amount of capital to be attributed to a permanent establishment by allocating the institution's total equity between its various offices on the basis of the proportion of the financial institution's risk-weighted assets attributable to each of them. With reference to paragraph 2 of Article 8 (Shipping and Air Transport): it is understoOd that income earned by an enterprise from the inland transport of property or passengers within either Contracting State falls within Article 8 if the transport is undertaken as part of the international transport of property or passengers by the enterprise. Thus, if an enterprise of a Contracting State contracts to carry property from the other State to the first-mentioned State and, as part of that contract, it transports the property by truck from its point of origin to an airport in the other State (or it
348
UK/USA Notes
Appendix
contracts with a trucking company to carry the property to the airport) the income earned by the enterprise from the overland leg of the journey would be taxable only in the first-mentioned State. Similarly, it is understood that Article 8 also would apply to income from lighterage undertaken as part of the international transport of goods. With reference to Article 9 (Associated Enterprises), paragraph 4 of Article 11 (Interest) and paragraph 4 of Article 12 (Royalties):
349
(d l under the domestic law of the Contracting ~tates, would be taxable by both Contracting States in respect of the option gain, th en, in order to avoid double taxation, a Contracting State of which, at the time of the exercise of the option, the employee is not a resident will tax only that proportion of the option gain which relates to the period or periods between the grant and the exercise of the option during which the individual has exercised the employment in that Contracting State.
it is understood that, if the amount of interest or royalties paid exceeds the amount that would have been paid in the absence of a special relationship, a Contracting State generally will adjust the amount of deductible interest or royalties paid under the authority of Article 9 and make such other adjustments as are appropriate. If such an adjustment is made, the Contracting State making such adjustment will not also impose its domestic rate of withholding tax with respect to such excess amount.
With the aim of ensuring that no unrelieved double taxation arises the competent authorities of the Contracting States will endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of Article 14 and Article 24 (Relief from Double Taxation) in relation to employee share/stock option plans.
With reference to paragraph 7 of Article 10 (Dividends):
it is understood that a payment shall be treated as a pension or other similar remuneration under paragraph 1 of Article 17 if it is a payment under a pension scheme as defined in sub-paragraph 0) of paragraph 1 of Article 3 (General Definitions) of the Convention.
it is understood that the general principle of the "dividend equivalent amount", as used in United States law, is to approximate that portion of the income mentioned in paragraph 7 of Article 10 that is comparable to the amount that would be distributed as a dividend if such income were earned by a subsidiary incorporated in the United States. For any year, a foreign corporation's dividend equivalent amount is equal to the after-tax earnings attributable to the foreign corporation's (i) income attributable to a permanent establishment in the United States, (ii) income from real propert), in the United States that is taxed on a net basis under Article 6 (Income from Real Property), and (iii) gain from a real property interest taxable by the United States under paragraph 1 of Article 13 (Gains), reduced by any increase in the foreign corporation's net investment in U. S. assets 010 increased by any reduction in the foreign corporation's net investment in U. S. assets. With reference to Article 14 (Income from Employment): it is understood that any benefits, income or gains enjoyed by employees under share/stock option plans are regarded as "other similar remuneration" for the purposes of Article 14.
It is further understood that where an employee: (a) has been granted a share/stock option in the course of an employment in one of the Contracting States; (b) has exercised that employment in both States during the period between grant and exercise of the option; (c) remains in that employment at the date of the exercise; and
With reference to paragraph 1 of Article 17 (Pensions, Social Security, A nnuities, Alimony, and Child Support):
With reference to sub-paragraph (b) of paragraph 3 and sub-paragraph (d) of paragraph 5 of Article 18 (Pension Schemes): it is understood that the pension schemes listed with respect to a Contracting State in this exchange of notes in connection with sub-paragraph 0) of paragraph 1 of Article 3 (General Definitions) shall generally correspond to the pension schemes listed in this exchange of notes with respect to the other Contracting State. With reference to paragraph 1 of Article 22 (Other Income): it is understood that the purpose of the exclusion from the paragraph for income paid out of trusts or the estates of deceased persons in the course of administration is to allow a recipient of such income the relief that would have been available to him under the provisions of the Convention had he received the income direct instead of through the trust or estate. With reference to Article 23 (Limitation on Benefits): it is understood that the term "gross income" means the total revenues derived by a resident of a Contracting State from its principal operations, less the direct costs of obtaining such revenues. With reference to paragraph 4 of Article 23 (Limitation on Benefits): it is understood that an item of income, profit or gain is to be considered as derived "in connection" with an active trade or business in a Contracting
350
Appendix
State if the activity generating the item in the other Contracting State is a line of business which forms a part of, or is complementary to, the trade or business conducted in the first-mentioned State. The line of business in the first-mentioned State may be 'upstream' to that going on in the other State (e.g., providing inputs to a manufacturing process that occurs in that other State), 'downstream' (e.g., selling the output of a manufacturer which is a resident of the other State) or 'parallel' (e.g., selling in one Contracting State the same sorts of products that are being sold by the trade or business carried on in the other Contracting State). It is understood that an item of income, profit or gain derived from a Contracting State would be considered "incidental" to the trade or business carried on in the other Contracting State if the item is not produced by a line of business which forms a part of, or is complementary to, the trade or business conducted in that other Contracting State by the recipient of the item, but the production of such item facilitates the conduct of the trade or business in that other Contracting State. An example of such "incidental" item of income, profit or gain is interest income earned from the shortterm investment of working capital of a resident of a Contracting State in securities issued by persons in the other Contracting State.
With reference to paragraph 6 of Article 23 (Limitation on Benefits): it is understood that in applying paragraph 6 of Article 23, the competent authorities will consider the obligations imposed upon the United Kingdom by its membership of the European Community and by its being a party to the European Economic Area Agreement, and on the United States by its being a party to the North American Free Trade Agreement. In particular, they will have regard to any legal requirements for the facilitation of the free movement of capital and persons, the differing internal tax systems, tax incentive regimes and existing tax treaty policies among Member States of the European Community or European Economic Area states, or, as the case may be, parties to the North American Free Trade Agreement. Paragraph 6 of Article 23 requires the competent authority of the State from which benefits are claimed to consider whether the establishment, acquisition or maintenance of a resident and the conduct of its operations had as one of its principal purposes the obtaining of benefits under the Convention. That competent authority may determine under a given set of facts that a change in circumstances that would cause a qualified person to cease to qualify for treaty benefits under paragraph 2 of Article 23 need not result in a denial of benefits. Such changes in circumstances may include: (a ) a change in the state of residence of a major participator in a company; (b) the sale of part of the ownership interests in a company to a resident
UK/USA Notes
351
of another Member State of the European Community or another European Economic Area state or, as the case may be, another party to the North American Free Trade Agreement; or c) an expansion of a company's activities in other Member States of the European Community or other European Economic Area states or, as the case may be, other parties to the North American Free Trade Agreement, all under ordinary business conditions.
If the competent authority is satisfied that these changed circumstances are not attributable to tax avoidance motives, this will be a factor weighing in fa vour of granting benefits in accordance with paragraph 6 of Article 23.
With reference to sub-paragraph (e) of paragraph 7 of Article 23 (Limitation on Benefits): it is understood that, if a class of shares was not listed on a recognised stock exchange in the twelve months referred to in the sub-paragraph, that class of shares will be treated as regularly traded only if that class meets the aggregate trading requirements of the sub-paragraph for the taxable or chargeable period in which the income arises.
With reference to Article 24 (Relief from Double Taxation): it is understood that, under paragraph 4 or 8 of Article 1 (General Scope), the provisions of the Convention may permit the Contracting State of which a person is a resident (or, in the case of the United States, a citizen), to tax an item of income, profit or gain derived through another person (the entity) which is fiscally transparent under the laws of either Contracting State, and may permit the other Contracting State to tax (a) the same person; (b) the entity; or (c) a third person with respect to that item. Under such circumstances, the tax paid or accrued by the entity shall be treated as if it were paid or accrued by the first-mentioned person for the purposes of determining the relief from double taxation to be allowed by the State of which that first-mentioned person is a resident (or, in the case of the United States, a citizen), except that, in the case of an item of income from real property to which paragraph 1 of Article 6 (Income from Real Property) of the Convention applies, or a gain from the aliena tion of real property to which paragraph 1 of Article 13 (Gains ) applies, the tax paid or accrued by the person who is a resident of the Contracting State in which the real property is situated shall be treated as if it
352
UK/USA Notes
Appendix
were paid or accrued by the person who is a resident of the other Contractln State. g
11ent berween the competent authorities shall be published bv both agree 1 .. c~mpetent authOrIties.
In the case where the same item of income, profit or gain derived through a trust IS treated by each Contracting State as derived by different persons resident in either State, and
With reference to Article 27 (Exchange of Information and Administratiue
(a) the person taxed by one State is the settlor or grantor of a trust; and (b) the person taxed by the other State is a beneficiary of that trust, the tax paid or accrued by the beneficiary shall be treated as if it were paid Or accrued by the settlor or grantor for the purposes of determining the relief from double taxation to be allowed by the State of which that settlor or grantor is a resident (or, in the case of the United States, a citizen), except that, in the case of an item of income from real property to which paragraph 1 of Article 6 (Income from Real Property) of the Convention applies, or a gain from the alienation of real property to which paragraph 1 of Article 13 (Gains) applies, the tax paid or accrued by the person who is a resident of the Contracting State in which the real property is situated shall be treated as if it were paid or accrued by the person who is a resident of the other Contracting State. It is further understood that paragraphs 2 and 5 of Article 24 shall apply to such an item of income, profit or gain to the extent necessary to provide relief from double taxation. With reference to paragraphs 1 and 4 of Article 24 (Relief from Double Taxation):
it is understood that, if a resident of a Contracting State receives a dividend that is described in .sub-paragraph b) of pa~agraph 1 or sub-paragrafh b) of paragraph 4 of Article 24, such diVidend Will be deemed to be income from sources in the other Contracting State, even if it may be taxed only in the first-mentioned Contracting State because of sub-paragraph a) of paragraph 3 of Article 10 (Dividends). With reference to paragraph 2 of Article 26 (Mutual Agreement Procedure) :
it is understood that where the competent authorities are endeavouring to resolve a case pursuant to the Article, neither Contracting State shall seek to collect the tax which is in dispute until the mutual agreement procedure has been completed. Any tax which is payable following the completion of the mutual agreement procedure shall, however, be subject to interest charges, and, if appropriate, surcharges or penalties, as long as it remains unpaid. With reference to paragraph 3 of Article 26 (Mutual Agreement Procedure):
it is understood that any principle of general application established by an
353
AssistallCe): . . understood that the powers of each Contracting State's competent It I:horities to obtain information include powers to obtain information held aU . . b financial institutions, nominees, or persons actIng In an agency or fi~uciary capacity (not including information that wo~l? reveal confidential mmunications berween a client and an attorney, soliCitor or other legal ~~presentative, where the client seeks legal advice), and informatio~ relating to the ownership of legal persons, and that each ContractIng State s competent authorities are able to exchange such information in accordance with the Article. With reference to Article 29 (Entry into Force):
it is understood that the provisions of Article 26 (Mutual Agreement Procedure) and Article 27 (Exchange of Information and Administrative Assistance) of the Convention shall have effect from the date of entry into force of the Convention, without regard to the taxable or chargeable period to which the matter relates. In General:
it is understood that the two Governments shall consult together at regular intervals regarding the terms, operation and application of the Convention to ensure that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion and shall, where they consider it appropriate, conclude Protocols to amend the Convention. The first such consultation shall take place no later than December 31 st in the fifth year following the date on which the Convention enters into force in accordance with the provisions of Article 29 (Entry into Force). Further consultations shall take place thereafter at intervals of no more than five years. Notwithstanding the preceding paragraph, either Government may at any time request consultations with the other Government on matters relating to the terms, operation and application of the Convention which it considers require urgent resolution.
If the foregoing proposals are acceptable to the Government of the United States of America, I have the honour to suggest that the present note and Your Excellency'S reply to that effect should be regarded as constituting an agreement berween the rwo Governments in this matter, which shall enter into force at the same time as the Convention.
354
Appendix UK/USA Notes
I avail myself of this opportunity to extend to Your Excellency the assurance of my highest consideration. R D Wilkinson Director Americas Foreign and Commonwealth Office
London Embassy of the United States of America London July 24th, 2001 Note No. 074 Sir: I have the honour to acknowledge receipt of your note of today which reads as follows: "I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains which has been signed today and to make on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland the following proposals:
With reference to paragraph 3 of Article 1 (General Scope): it is understood that, at the time of the signing of the Convention, the only agreements in force as between the two Contracting States that may impose natIOnal treatment or most-favoured nation obligations are the General Agreement on Trade in Services, the General Agreement on Tariffs and Trade, A Convention to Regulate the Commerce between the Territories of the United States and of His Britannic Majesty, signed in London on July 3rd, 1815, and the Treaty of Amity, Commerce, and Navigation, between His Britannic Majesty and the United States of America, signed at London, on November 19th, 1794. If it is determined that there were, at the date of the signing of the Convention, additional agreements in force between the Contracting States that create such obligations, the Contracting States will consider whether amendments to the Convention are necessary to ensure the proper interaction of the Convention and such other agreement with respect to tax measures.
355
Contracting State in at least eight of the fifteen fiscal years en~ing with the fiscal year in which the individual ceased to be a long-term reSIdent of that Contracting State; (2) it is further understood that, in the case of an individual who is a former 'tizen of a Contracting State, the followmg factors shall be conSIdered ~~vourablY in determining whether or not one of th~ principal purposes of that individual's loss of citizenship of that Contractmg State was the avoidance of tax, (a) at the time of the individual's ceasing to be a citizen of that Contracting State or within a reasonable period thereafter, th: individual is or becomes a resident fully liable to income tax m the other Contracting State, and (b) (i) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State; (ii) at the time of the loss of such citizenship (or within a reasonable period thereafter), the individual was or became ~ citizen of the other Contracting State, and that other Contractmg State was that individual's country of birth, or the country of birth of that individual's spouse or of either of that individual's parents; (iii) in the 10 years preceding the loss of such citizenship the individual was present in that Contracting State for no more than 30 days in any taxable year or year of assessment; or (iv) the loss of citizenship occurred before the individual attained the age of 18 V2 years; (3) it is further understood that, in the case of an individual who is a former longterm resident of a Contracting State, the following factors shal.l be considered favourably in determining whether or not one of the pnncipal purposes of that individual's ceasing to be a long-term resident of that Contracting State was the avoidance of tax, (a) at the time of the individual's ceasing to be a long-term resident of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and that other Contracting State is (i) the country in which the individual was born;
With reference to paragraph 6 of Article 1 (General Scope):
(ii) the country in which the individual's spouse was born; or
( 1 ) it is understood that an individual shall be regarded as a former long-term resident of a Contracting State only if that individual (not being a citizen of that Contracting State) was a lawful permanent resident of that
(iii) the country where either of the individual's parents was born; (b) in the 10 years preceding the individual's ceasing to be a long~term
resident of that Contracting State, the individual was present m that
356
UK/USA Notes
Appendix
Contracting State for no more than 30 days in each taxable year Or year of assessment; or (c) the individual ceases to be a long-term resident of that Contracting State before reaching the age of 18Ih years; and (4) it is understood that, for the purposes of sub-paragraph a) of paragraph (2) and sub-paragraph a) of paragraph (3) above, an individual is not to be regarded as fully liable to income tax in a Contracting State if that individual is subject to tax in that State, in respect of income arising in the other Contracting State, by reference to the amount of such income which is remitted to or received in the first-mentioned State and not by reference to the full amount thereof. With reference to paragraph 8 of Article 1 (General Scope):
it is understood that where an item of income, profit or gain is derived through a person which is a resident of a Contracting State the provisions of the paragraph shall not prevent that Contracting State from taxing the item as the income, profit or gain of that person. It is further understood that, where, by virtue of the paragraph, an item of income, profit or gain is considered by a Contracting State to be derived by a person who is a resident of that Contracting State, and the same item is considered by the other Contracting State to be derived by that person or by a person who is a resident of that other Contracting State, the paragraph shall not prevent either Contracting State from taxing the item as the income, profit or gain of the person considered by that State to have derived the item of income, profit or gain. It is further understood that, in applying the paragraph, the United Kingdom shall, exceptionally, regard an item of income, profit or gain arising (0 a person as falling within the paragraph where another person is charged to United Kingdom tax in respect of that item of income, profit or gain
(a) under section 660A or 739, Income and Corporation Taxes Act 1988; or (b) under section 77 or 86, Taxation of Chargeable Gains Act 1992. It is further understood that, in applying the paragraph, a person shall be regarded as fiscally transparent under the laws of the United Kingdom in relation to an item of income, profit or gain where a charge is made on another person on that item either:
(a) by virtue of section 13, Taxation of Chargeable Gains Act 1992; or (b) because that other person has (or, under section 118, Finance Act 1993, is treated as having) an equitable right in possession in a trust.
357
With reference to Article 2 (Taxes Covered):
°t is understood that, if a political sub-division or local authority of the
~nited States seeks to impose tax on the profits of any enterp rise of the United Kingdom from the operation of ships or aircraft in international traffic, in circumstances where the Convention would preclude the imposition of a Federal income tax on those profits, the United States Government will use its best endeavours to persuade that political sub-division or local autho rity to refrain from imposing tax. With reference to sub-paragraph (o) of paragraph 1 of Article 3 (General Definitions) :
it is understood that pension schemes shall include the following and any identical or substantially similar schemes which are established pursuant to legislation introduced after the date of signature of the Con ention: (a ) under the law of the United Kingdom, employment-r elated arrangements (other than a social security scheme) approved as retirement benefit schemes for the purposes of Chapt er I of Part XIV of the Income and Corporation Taxes Act 1988, and personal pension schemes approved under Chapter IV of Part XIV of that Act; and (b) under the law of the United States, qualified plans under section 401 (a) of the Internal Revenue Code, individual retir ement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans. With reference to Article 7 (Business Profits):
it is understood that the OECD Transfer Pricing Guidelines will apply, by analogy, for the purposes of determining the profits attribut able to a permanent establishment. Accordingly, any of the methods described therein - including profits methods - may be used to determine the income of a permanent establishment so long as those methods are applied in accordance with the Guidelines. In particular, in determining the amoun t of attributable profits, the permanent establishment shall be treated as having the same amount of capital that it would need to support its activities if it were a distinct and separate enterprise engaged in the same or simi lar activities. With respect to financial institutions other than insurance compa nies, a Contracting State may determine the amount of capital to be attributed to a permanent establishment by allocating the institution's total equity between its various offices on the basis of the proportion of the financial institution's risk-weighted assets attributable to each of them.
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Appendix
With reference to paragraph 2 of Article 8 (Shipping and Air Transport):
it is understood that income earned by an enterprise from the inland transport of property or passengers within either Contracting State falls within Article 8 if the transport is undertaken as part of the international transport of property or passengers by the enterprise. Thus, if an enterprise of a Contracting State contracts to carry property from the other State to the first-mentioned State and, as part of that contract, it transports the property by truck from its point of origin to an airport in the other State (or it contracts with a trucking company to carry the property to the airport) the income earned by the enterprise from the overland leg of the journey would be taxable only in the first-mentioned State. Similarly, it is understood that Article 8 also would apply to income from lighterage undertaken as part of the international transport of goods. With reference to Article 9 (Associated Elzterprises), paragraph 4 of Article 11 (Interest) and paragraph 4 of Article 12 (Royalties):
it is understood that, if the amount of interest or royalties paid exceeds the amount that would have been paid in the absence of a special relationship, a Contracting State generally will adjust the amount of deductible interest or royalties paid under the authority of Article 9 and make such other adjustments as are appropriate. If such an adjustment is made, the Contracting State making such adjustment will not also impose its domestic rate of withholding tax with respect to such excess amount. With reference to paragraph 7 of Article 10 (Dividends):
it is understood that the general principle of the "dividend equivalent amount", as used in United States law, is to approximate that portion of the income mentioned in paragraph 7 of Article 10 that is comparable to the amount that would be distributed as a dividend if such income wer~ earned by a subsidiary incorporated in the United States. For any year, a foreign corporation's dividend equivalent amount is equal to the after-tax earnings attributable to the foreign corporation's (i) income attributable to a permanent establishment in the United States, (ii) income from real property in the United States that is taxed on a net basis under Article 6 (Income from Real Property), and (iii) gain from a real property interest taxable by the United States under paragraph 1 of Article 13 (Gains), reduced by any increase in the foreign corporation's net investment in U.s. assets or increased by any reduction in the foreign corporation's net investment in U.S. assets. With reference to Article 14 (Income from Employment):
it is understood that any benefits, income or gains enjoyed by employees under share/stock option plans are regarded as "other similar remuneration" for the purposes of Article 14.
UK/USA Notes
359
It is further understood that where an employee: (a) has been granted a share/stock option in the course of an employment in one of the Contracting States; (b) has exercised that employment in both States during the period between grant and exercise of the option; (c) remains in that employment at the date of the exercise; and (d) under the domestic law of the Contracting States, would be taxable by both Contracting States in respect of the option gain, then, in order to avoid double taxation, a Contracting State of which, at the time of the exercise of the option, the employee is not a resident will tax only that proportion of the option gain which relates to the period or periods between the grant and the exercise of the option during which the individual has exercised the employment in that Contracting State. With the aim of ensuring that no unrelieved double taxation arises the competent authorities of the Contracting States will endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of Article 14 and Article 24 (Relief from Double Taxation) in relation to employee share/stock option plans. With reference to paragraph 1 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support):
it is understood that a payment shall be treated as a pension or other similar remuneration under paragraph 1 of Article 17 if it is a payment under a pension scheme as defined in sub-paragraph 0) of paragraph 1 of Article 3 (General Definitions) of the Convention. With reference to sub-paragraph (b) of paragraph 3 and sub-paragraph (d) of paragraph 5 of Article 18 (Pension Schemes):
it is understood that the pension schemes listed with respect to a Contracting State in this exchange of notes in connection with sub-paragraph 0) of paragraph 1 of Article 3 (General Definitions) shall generally correspond to the pension schemes listed in this exchange of notes with respect to the other Contracting State. With reference to paragraph 1 of Article 22 (Other Income):
it is understood that the purpose of the exclusion from the paragraph for income paid out of trusts or the estates of deceased persons in the course of administration is to allow a recipient of such income the relief that would have been available to him under the provisions of the Convention had he received the income direct instead of through the trust or estate.
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Appendix
With reference to Article 23 (Limitation on Benefits): it is understood that the term "gross income" means the total revenues derived by a resident of a Contracting State from its principal operations, less the dIrect costs of obtaining such revenues.
With reference to paragraph 4 of Article 23 (Limitation on Benefits): it is understood that an item of income, profit or gain is to be considered as deriv~~ "in con~ection" w~th an active trade or business in a Contracting St.ate If the actIvIty generatmg the item in the other Contracting State is a line of business which forms a part of, or is complementary to, the trade or business conducted in the first-mentioned State. The line ot business in the first-mentioned State may be 'upstream' to that going on in the other State (e.g., providing inputs to a manufacturing process that occurs in that other State), 'downstream' (e.g., selling the output of a manufacturer which is a resident of the o~her State) or 'parallel' (e.g., selling in one Contracting State the same sorts ot products that are being sold by the trade or business carried on in the other Contracting State).
It is understood that an item of income, profit or gain derived from a Contracting State would be considered "incidental" to the trade or business c~rrie~ on in t~e other Contracting State if the item is not produced by a line ot ~usmess whICh forms a part of, or is complementary to, the trade or ?usmess conducted in that other Contracting State by the recipient of the Item, but the production of such item facilitates the conduct of the trade or business in that other Contracting State. An example of such "incidental" item of income, profit or gain is interest income earned from the shortterm investment of working capital of a resident of a Contracting State in securities issued by persons in the other Contracting State. With reference to paragraph 6 of Article 23 (Limitation on Benefits)! it is understood that in applying paragraph 6 of Article 23, the competent authorities will consider the obligations imposed upon the United Kingdom by Its membership of the European Community and by its being a party to the European Economic Area Agreement, and on the United States by its bemg a party to the North American Free Trade Agreement. In particular, they will have regard to any legal requirements for the facilitation of the free movement of capital and persons, the differing internal tax systems tax incentive regimes and existing tax treaty policies among Member S:ates of the European Community or European Economic Area states, or, as the case may be, parties to the North American Free Trade Agreement. Paragraph 6 of Article 23 requires the competent authority of the State from which benefits are claimed to consider whether the establishment, acquisition or maintenance of a resident and the conduct of its operations had as one of
UK/USA Notes
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irs principal purposes the obtaining of benefits under the Convention. That competent authority may determine under a given set of facts that a change in circumstances that would cause a qualified person to cease to qualify for treaty benefits under paragraph 2 of Article 23 need not result in a denial of benefits. Such changes in circumstances may include: (a) a change in the state of residence of a major participator in a company; (b) the sale of part of the ownership interests in a company to a resident of another Member State of the European Community or another European Economic Area state or, as the case may be, another party to the North American Free Trade Agreement; or (c) an expansion of a company's activities in other Member States of the European Community or other European Economic Area states or, as the case may be, other parties to the North American Free Trade Agreement, all under ordinary business conditions.
If the competent authority is satisfied that these changed circumstances are not attributable to tax avoidance motives, this will be a factor weighing in favour of granting benefits in accordance with paragraph 6 of Article 23. With reference to sub-paragraph (e) of paragraph 7 of Article 23 (Limitation on Benefits): it is understood that, if a class of shares was not listed on a recognised stock exchange in the twelve months referred to in the sub-paragraph, that class of shares will be treated as regularly traded only if that class meets the aggregate trading requirements of the sub-paragraph for the taxable or chargeable period in which the income arises.
With reference to Article 24 (Relief from Double Taxation): it is understood that, under paragraph 4 or 8 of Article 1 (General Scope), the provisions of the Convention may permit the Contracting State of which a person is a resident (or, in the case of the United States, a citizen), to tax an item of income, profit or gain derived through another person (the entity) which is fiscally transparent under the laws of either Contracting State, and may permit the other Contracting State to tax (a) the same person; (b) the entity; or (c) a third person with respect to that item. Under such circumstances, the tax paid or accrued
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by the entity shall be treated as if it were paid or accrued by the first-mentioned person for the purposes of determining the relief from do uble taxation to be allowed by the State of which that first-mentioned person is a resident (or, in the case of the United States, a citizen), except that, in the case of an item of income from real property to which paragraph 1 of Article 6 (Income from Real Property) of the Convention applies, or a gain from the alienation of real property to which paragraph 1 of Article 13 (Gains) applies, the tax paid or accrued by the person who is a resident of the Contracting State in which the real property is situated shall be treated as if it were paid or accrued by the person who is a resident of the other Contracting State. In the case where the same item of income, profit or gain derived through a trust is treated by each Contracting State as derived by different persons resident in either State, and (a) the person taxed by one State is the settlor or grantor of a trust; a nd (b) the person taxed by the other State is a beneficiary of that trust, the tax paid or accrued by the beneficiary shall be treated as if it were paid or accrued by the settlor or grantor for the purposes of determining the relief from double taxation to be allowed by the State of which that settlor or grantor is a resident (or, in the case of the United States, a citizen), except that, in the case of an item of income from real property to which paragraph 1 of Article 6 (Income from Real Property) of the Convention applies, or a gain from the alienation of real property to which paragraph 1 of Article 13 (Gains) applies, the tax paid or accrued by the person who is a resident of the Contracting State in which the real property is situated shall be treated as if it were paid or accrued by the person who is a resident of the other Contracting State.
.
It is further understood that paragraphs 2 and 5 of Article 24 shall apply to
such an item of income, profit or gain to the extent necessary to provide relief from double taxation. With reference to paragraphs 1 and 4 of Article 24 (Relief from Double Taxation):
it is understood that, if a resident of a Contracting State receives a dividend that is described in sub-paragraph b) of paragraph 1 or sub-paragraph b) of paragraph 4 of Article 24, such dividend will be deemed to be income from sources in the other Contracting State, even if it may be taxed only in the first-mentioned Contracting State because of sub-paragraph a) of paragraph 3 of Article 10 (Dividends).
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With reference to paragraph 2 of Article 26 (Mutual Agreement Procedure):
it is understood that where the competent authorities are endeavouring to resolve a case pursuant to the Article, neither Contracting State shall seek to -ollect the tax which is in dispute until the mutual agreement procedure has ~een completed. Any tax which is payable following the completion of the mutual agreement procedure shall, however, be subject to interest charges, and, if appropriate, surcharges or penalties, as long as it remains unpaid. With reference to paragraph 3 of Article 2fi (Mutual Agreement Procedure):
it is understood that any principle of general application established by an agreement between the competent authorities shall be published by both competent authorities. With reference to Article 27 (Exchange of Information and Administrative Assistance) :
it is understood that the powers of each Contracting State's competent authorities to obtain information include powers to obtain information held by financial institutions, nominees, or persons acting in an agency or fiduciary capacity (not including information that would reveal confidential communications between a client and an attorney, solicitor or other legal representative, where the client seeks legal advice), and information relating to the ownership of legal persons, and that each Contracting State's competent authorities are able to exchange such information in accordance with the Article. With reference to Article 29 (Entry into Force):
it is understood that the provisions of Article 26 (Mutual Agreement Procedure) and Article 27 (Exchange of Information and Administrative Assistance) of the Convention shall have effect from the date of entry into force of the Convention, without regard to the taxable or chargeable period to which the matter relates. In General:
it is understood that the two Governments shall consult together at regular intervals regarding the terms, operation and application of the Convention to ensure that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion and shall, where they consider it appropriate, conclude Protocols to amend the Convention. The first such consultation shall take place no later than December 31st in the fifth year following the date on which the Convention enters into force in accordance with the provisions of Article 29 (Entry into Force). Further consultations shall take place thereafter at intervals of no more than five years. Notwithstanding the preceding paragraph, either Government may at any
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time request consultations with the other Government on matters relating to the terms, operation and application of the Convention which it considers require urgent resolution.
If the foregoing proposals are acceptable to the Government of the United States of America, I have the honour to suggest that the present note and Your Excellency'S reply to that effect should be regarded as constituting an agreement between the two Governments in this matter, which shall enter into force at the same time as the Convention." The foregoing proposals being acceptable to the Government of the United States of America, I have the honor to confirm that your note and this reply shall be regarded as constituting an agreement between the two Governments in this matter which shall enter into force at the same time as the Convention. Please accept the renewed assurance of my highest consideration.
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CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF AUSTRALIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME [Consolidated version incorporating Protocol signed September 27, 2001] The Government of the United States of America and the Government of the Australia, Desiring to conclude a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Have agreed as follows:
Sincerely, W S Farish Ambassador The Honourable William S. Farish The American Ambassador of St. James London
Article 1 Personal Scope (1) Except as otherwise provided in this Convention, this Convention shall apply to persons who are residents of one or both of the Contracting States. (2) This Convention shall not restrict in any manner any exclusion, exemption, deduction, rebate, credit or other allowance accorded from time to time:
(a) by the laws of either Contracting State; or (b) by any other agreement between the Contracting States.
..
(3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that State, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term "citizen" shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen or long-term resident whose loss of such status had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss. (4) The provisions of paragraph (3) shall not affect: (a) the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support, Article 22 (Relief from Double Taxation, 23 (Non- Discrimination), 24 (Mutual
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Agreement Procedure) or paragraph (1) of Article 27 (Miscella
m
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(b) the benefits conferred by a Contracting State under Article 19 Governmental Remuneration), 20 (Students) or 26 (Diplomatic d Consular Privileges) upon individuals who are neither citizens of an h . . . ,nOr ave ururugrant status m, that State (in the case of benefits conferred ~y the Umted States), or who are not ordinarily resident in that State (m the case of benefIts conferred by Australia).
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(c) the terms "enterprise of one of the Contracting State" and "enterprise of the other Contracting State" mean an enterprise carried on by a resident of Australia or an enterprise carried on by a resident of the United States, as the context requires; (d) the term "international traffic" means any transport by a ship or aircraft, except where such transport is solely between places within a Contracting State; (e) the term "competent authority" means:
Article 2 Taxes Covered (1) The existing taxes to which this Convention shall apply are:
(a) in the United States: the Federal income taxes imposed by the Internal Revenue Code; and (b) in Australia: (i) t h e Austra Iian income tax, including tax on capital gains; and
(ii) t h e resource rent tax in respect of offshore projects relating to exploratIOn for or exploitation of petroleum resources, imposed under the federal law of Australia. (2) This Convention shall als? apply to any identical or substantially similar taxes whICh are Imposed by eIther Contracting State after the date of signature of this Convention in addition to, or in place of, the existing taxes. At the end of each calendar year, the competent authority of each Contracting State shall noufy the comp~tent authority of the other Contracting State of a~y substantI~1 changes whICh have been .made during that year in lJle laws of hlsState relatmg t? the ~axes to whICh thIs Convention applies or in the offICial mterpretatIOn of those laws or of this Convention. Article 3 General Definitions (1) For the purposes of this Convention, unless the context otherwise reqUIres:
(a) the term "person" includes an individual, an estate of a deceased IOdividual, a trust, a partnership, a company and any other body of persons; (b) the term "company" means any body corporate or any entity which is treated as a company or body corporate for tax purposes;
(i) in the case of the United States: the Secretary of the Treasury or his delegate; and (ii) in the case of Australia: the Commissioner of Taxation or his authorized representative; (f) the terms "Contracting State", "one of the Contracting States" and "the other Contracting State" mean the United States or Australia, as the context requires; (g) (i) the term "United States corporation" means a corporation which, under United States law relating to United States tax, is a domestic corporation or an unincorporated entity treated as a domestic corporation, and which is not, under the law of Australia relating to Australian tax, a resident of Australia; and (ii) the term "Australian corporation" means a company, as defined under the law of Australia relating to Australian tax, which, under that law, is a resident of Australia, and which is not, under United States law relating to United States tax, a domestic corporation or an unincorporated entity treated as a domestic corporation; (h) the term "State" means any National State, whether or not one of the Contracting States; (i) the term "United States tax" means tax imposed by the United States to which this Convention applies by virtue of Article 2 (Taxes Covered) and the term "Australian tax" means tax imposed by Australia to which this Convention applies by virtue of Article 2 (Taxes Covered), but neither term includes any amount which represents a penalty or interest imposed under the law of either Contracting State relating to United States tax or Australian tax; (j) (i) the term "United States" means the United States of America; and (ii) when used in a geographical sense, the term "United States"
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means the states thereof and the District of Columbia and also includes: (A) the territorial waters thereof; and (B) the sea-bed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial waters, over which the United States exercises rights, in accordance with international law, for the purposes of exploration for, or exploitation of, the natural resources of those areas; (k) the term "Australia" means the Commonwealth of Australia and, when used in a geographical sense, includes: (i) the Territory of Norfolk Island; (ii) the Territory of Christmas Island; (iii) the Territory of Cocos (Keeling) Islands; (iv) the Territory of Ashmore and Cartier Islands; (v) the Coral Sea Islands Territory; and (vi) any area adjacent to the territorial limits of Australia or of the said Territories in respect of which there is for the time being in force, consistently with international law, a law of Australia or of a State or part of Australia or of a Territory aforesaid dealing with the exploitation of any of the natural resources of the sea-bed and subsoil of the continental shelf; (I) the terms "resident of one of the Contracting States" and "resident of the other Contracting State" mean a resident of Australia or a , resident of the United States, as the context requires. (2) As regards the application of this Convention by one of the Contracting State, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Convention applies. Article 4 Residence (1) For the purposes of this Convention: (a) a person is a resident of Australia if the person is:
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resident of Australia, provided that, in relation to any income, a person who: (iii) is subject to Australian tax on income which is from sources in Australia; or (iv) is a partnership, an estate of a deceased individual or a trust (other than a trust that is a provident, benefit, superannuation or retirement fund, or that is established for public charitable purposes or for the purpose of enabling scientific research to be conducted by or in conjunction with a public university or public hospital, the income of which is exempt from tax under the law of Australia relating to Australia relating to Australian tax), shall not be treated as a resident of Australia except to the extent that the income is subject to Australian tax as the income of a resident, either in the hands of that person or in the hands of a partner or beneficiary, or, if that income is exempt from Australian tax, is so exempt solely because it is subject to United States tax; and (b) a person is a resident of the United States if the person is: (i) a United States corporation; (ii) a United States citizen, other than a United States citizen who is a resident of a State other than Australia for the purposes of a double tax agreement between that State and Australia; or (iii) any other person (except a corporation or unincorporated entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax, provided that, in relation to any income derived by a partnership, an estate of a deceased individual or a trust, such person shall not be treated as a resident of the United States except to the extent that the income is subject to United States tax as the income of a resident, either in its hands or in the hands of a partner or beneficiary, or, if that income is exempt from United States tax, is exempt other than because such person, partner or beneficiary is not a United States person according to United States law relating to United States tax. (2) Where by application of paragraph (1) an individual is a resident of both Contracting States, he shall be deemed to be a resident of the State:
(i) an Australian corporation; or
(a) in which he maintains his permanent home;
(ii) any other person (except a company as defined under the law of Australia relating to Australian tax) who, under that law, is a
(b) in the provisions of sub-paragraph (a) do not apply, in which he has
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an habitual abode if he has his permanent home in both Contracting States or in neither of the Contracting States; or (c) if the provisions of sub-paragraphs (a) and (b) do not apply, with which his personal and economic relations are closer if he has an habitual abode in both Contracting States or in neither of the Contracting States. For the purposes of this paragraph, in determining an individual's permanent home, regard shall be given to the place where the individual dwells with his family, and in determining the Contracting State with which an individual's personal and economic relations are closer, regard shall be given to his citizenship (if he is a citizen of one of the Contracting States). (3) An individual who is deemed to be a resident of one of the Contracting States for any year of income, or taxable year, as the case may be by reason of the provisions of paragraph (2) shall, for all purposes of this Convention, be deemed to be a resident only of that State for such year. Article 5 Permanent Establishment (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise in wholly or partly carried on. (2) The term "permanent establishment" shall include especially: (a) a place of management; (b) a branch; (c) an office;
,
(d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) an agricultural, pastoral or forestry property; (h) a building site or construction, assembly or installation project which exists for more than 9 months; and (i) an installation, drilling rig or ship that, for an aggregate period of at least 6 months in any 24 month period, is used by an enterprise of one of the Contracting States in the other Contracting State for dredging or for or in connection with the exploration or exploitation of natural resources of the sea-bed and subsoil.
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(5) Notwithstanding paragraphs (1) and (2), an enterprise of one of the Contracting States shall not be regarded as havmg a permanent estabhshment solely as a result of one or more of the following: (a) the use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of storage, display, or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business for the purpose of activities which have a preparatory or auxiliary character, such as advertising or scientific research, for the enterprise; (f) the maintenance of a building site or construction, assembly or installation project which does not exist for more than 9 months; or (g) the use by that enterprise in the other Contracting State, of an installation, drilling rig or ship for dredging, or for or in connection with the exploration or exploitation of natural resources of the sea-bed and subsoil, provided that such use is not for an aggregate period of at least 6 months in any 24 month period. (4) Notwithstanding paragraphs (1) and (2), an enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if: (a) it carries on business in that other State through a person, other than an agent of independent status to whom paragraph (5) applies, who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in that other State, unless the activities of such person are limited to those mentioned in paragraph (3) which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) it maintains substantial equipment for rental or other purposes within
that other State (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months; (c) it engages in supervisory activities in that other State for more than 9
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months in any 24 month period in connection with a building site Or construction, assembly or installation project in that other State; or (d) it has goods or merchandise belonging to it that: (i) were purchased by it in that other State, and not subjected to prior substantial processing outside that other State; or (ii) were produced by it or on its behalf in that other State, and are, after such purchase or production, subjected to substantial processing in that other State by an enterprise where either enterprise participates directly or indirectly in the management, control or capital of the other enterprise, or where the same persons participate directly or indirectly in the management, control or capital of both enterprises. (5) An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other State through a broker, general commission agent, or any other agent of independent status, where such broker or agent is acting in the ordinary course of his business as a broker, general commission agent or other agent of independent status. (6) The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. (7) The principles set forth in the preceding paragraphs of this Article shall be applied in determining for purposes of this Convention whether tlIere is a permanent establishment in a State other than one of the Contracting States and whether an enterprise other than an enterprise of one of the Contracting States has a permanent establishment in one of the Contracting States. Article 6 Income From Real Property (1) Income from real property may be taxed by the Contracting State in which such real property is situated. (2) For the purposes of this Convention: (i) a leasehold interest in land, whether or not improved, shall be regarded as real property situated where the land to which the interest relates is situated; and (ii) rights to exploit or to explore for natural resources shall be regarded
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as real property situated where the natural resources are situated or sought. Article 7 Business Profits (1) The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. (2) Subject to the provisions of paragraph (3), where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals. (3) In the determination of the business profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with the profits (including executive and general administrative expenses) and which would be deductible if the permanent establishment were an independent entity which paid those expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere. (4) No business profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. (5) For the purposes of the preceding paragraphs of this Article, the business profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. (6) Where business profits include items of income which are dealt with separately in other Articles of the Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. (7) Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person LD cases where the information available to the competent authority of that
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State is inadequate to determine the profits to be attributed to a permanent establishment, provided that, on the basis of the available information, the determination of the profits of the permanent establishment is consistent with the principles stated in this Article. (8) Nothing in this Article shall in a Contracting State prevent the operation in that State of its law relating specifically to the taxation of any person who carries on the business of any form of insurance (as long as that law as in effect on the date of signature of this Convention is not varied otherwise than in minor respects so as not to affect its general character). (9) Where: (a) a resident of one of the Contracting States is beneficially entitled, whether directly or through one or more interposed fiscally transparent entities, to a share of the business profits of an enterprise carried on in the other Contracting State by the fiscally transparent entity (or, in the case of a trust, by the trustee of the trust estate); and (b) in relation to that enterprise, that fiscally transparent entity (or trustee) would, in accordance with the principles of Article 5 (Permanent Establishment), have a permanent establishment in that other State, that enterprise carried on by that fiscally transparent entity (or trustee) shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment. Article 8 Shipping and Air Transport (1) Profits derived by a resident of one of the Contracting States from the operation in international traffic of ships or aircraft shall be taxable only in that State. For the purposes of this Article, profits from the operation in international traffic of ships or aircraft include:
(a) profits from the lease on a full basis of ships or aircraft operated in international traffic by the lessee, provided that the lessor either operates ships or aircraft otherwise than solely between places in the other Contracting State or regularly leases ships or aircraft on a full basis; and (b) profits from the lease of ships or aircraft on a bare boat basis, provided that such lease is merely incidental to the operation in international traffic of ships or aircraft by the lessor. (2) Profits of an enterprise of one of the Contracting States from the use,
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maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in international traffic shall be taxable only in that State. (3) The profits to which the provisions of paragraphs (1) and (2) apply include profits from the participation in a pool service or other profit sharing arrangement. (4) For the purposes of this Article, profits derived from the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise taken on board in a Contracting State for discharge in that State shall not be treated as profits from the operation in international traffic of ships or aircraft and may be taxed in that State. Article 9 Associated Enterprises (1) Where (a) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management, control, or capital of an enterprise of one of the Contracting States and an enterprise of the other Contracting State, and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. (2) Where profits on which an enterprise of one of the Contracting States has been charged to tax in that State are also included, by virtue of paragraph (1), in the profits of an enterprise of the other Contracting State and taxed accordingly, and the profits so included are profits which might have been expected to have accrued to that enterprise of the other State if the conditions operative between the enterprises had been those which might have been expected to have operated between independent enterprises dealing wholly independently with one another, then the first- mentioned State shall make an appropriate adjustment to the amount of tax charged on those profits in the first-mentioned State. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.
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(3) Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person, including determinations in cases where the information available to the competent authority of that State is inadequate to determine the income to be attributed to an enterprise, provided that, on the basis of available information, the determination of that tax liability is consistent with the principles stated in this Article.
Article 10 Dividends (1) Dividends paid by a company which is a resident of one of the
Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) However, those dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident for the purposes of its tax, and according to the law of that State, but: (a) the tax charged shall not exceed 5 percent of the gross amount of the dividends, if the person beneficially entitled to those dividends is a company which holds directly at least 10 percent of the voting power in the company paying the dividends; and (b) the tax charged shall not exceed 15 percent of the gross amount of the dividends to the extent to which those dividends are not within sub-paragraph (a), provided that if the relevant law in either Contracting State is varied after the effective date of this provision otherwise than in minor respects so as not to affect its general character, the Contracting States shall consult each other with a view to agreeing to any amendment of this paragraph that may be appropriate. (3) Notwithstanding the provisions of paragraph (2), dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the person who is beneficially entitled to the dividends is a company that is a resident of the other Contracting State that has owned shares representing 80 percent or more of the voting power of the company paying the dividends for a 12-month period ending on the date the dividend is declared and: (a) is a qualified person by reason of sub-paragraph (c) of paragraph (2) of Article 16 (Limitation on Benefits); or (b) is entitled to benefits with respect to the dividends under paragraph (5) of that Article.
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(4 ) (a) Sub-paragraph (a) of paragraph (2) and paragraph (3) shall not apply in the case of dividends paid by a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT). (b) In the case of dividends paid by a RIC, sub-paragraph (b) of paragraph (2) shall apply. (c) In the case of dividends paid by a REIT, sub-paragraph (b) of paragraph (2) shall apply only if: (i) the person beneficially entitled to the dividends is an individual holding an interest of not more than 10 percent in the REIT; (ii) the dividends are paid with respect to a class of stock that is publicly traded and the person beneficially entitled to the dividends holds an interest of not more than 5 percent of any class of the REITs stock; or (iii) the person beneficially entitled to the dividends holds an interest of not more than 10 percent in the REIT and the gross value of no single interest in real property held by the REIT exceeds 10 percent of the gross value of the REITs total interest in real property. (d) Notwithstanding sub-paragraph (c), sub-paragraph (b) of paragraph (2) shall apply with respect to dividends paid by a REIT to a listed Australian property trust ("LAPT"). However, if the responsible entity for the LAPT knows or has reason to know th~.t ?n~ or more. unitholders each owns 5 percent or more of the benehClalmterests m the LAPT, each of such 5 percent or more unitholders shall, ~or purposes of this paragraph, be deemed to hold such proportIOn of the LAPTs direct interest in the REIT as equals that persons proportionate interest in the LAPT and shall be deemed to be beneficially entitled to the REIT dividends paid wlth respect thereto, and the provisions of sub-paragraph (c) shall apply to that person. For purposes of this paragraph, dividends paid with respect to REIT shares held by an LAPT shall be deemed to be paid with respect to a class of stock that is publicly traded. For these purposes, a "listed Australian property trust" means an Australian unit trust registered as a "Managed Investment Scheme" under the Australian Corporations Act in which the principal class of units is listed on a recognized stock exchange in Australia and regularly traded on one or more recognized stock exchanges (as defined in Article 16 (Limitation on Benefits)). (5) The above provisions of this Article shall not apply if the person beneficially entitled to the dividends, being a resident of one of the
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Contracting States, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated in that other State, or performs in that other State independent personal services from a fixed base situated in that other State and the holding in respect of which the dividends are paid is effectively , connected with that permanent establishment or fixed base. In that case the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. (6) The term "dividends" as used in this Article means income from shares as well as other amounts which are subjected to the same taxation treatme~t as in~o~e from ~hares ?y the law of the State of which the company making the dIstnbutIOn IS a resIdent for the purposes of its tax. (7) Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company-being dividends to which a person who is not a resident of the other Contracting State is beneficially entitled-except insofar as the holding in respect of which such dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor may it impose tax on a companys undistributed profits, except as provided in paragraph (8), even if the dividends paid consist wholly or partly of profits or income arising in such other State. (8) A company which is a resident of one of the Contracting States and that has a permanent establishment in the other State or that is subject to tax in the other State on a net basis on its income or gains that may be taxed in the other State under Article 6 (Income from Real Property) or under paragraph (1) or (3) of Article 13 (Alienation of Property) may be subject in that other State to a tax in addition to the tax allowable under the other prov~sions of this Convention. Such tax, however, may be imposed on only the portion of the business profits of the company attributable to the permanent establishment and the portion of the income or gains referred to in the preceding sentence that is subject to tax under Article 6 (Income from Real Property) or under paragraph (1) or (3) of Article 13 (Alienation of Property) that, in the case of the United States, represents the dividend equivalent amount of such profits, income or gains and, in the case of Australia, is an amount that is analogous to the dividend equivalent amount. This paragraph shall not apply in the case of a company which: (a) is a qualified person by reason of sub-paragraph (c) of paragraph (2) of Article 16 (Limitation on Benefits) of this Convention; or (b) is entitled to benefits with respect to the dividends under paragraph (5) of that Article.
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(9) The tax referred to in paragraph (8) may not be imposed at a rate in excess of the rate specified in sub-paragraph (a) of paragraph (2). Article 11 Interest (1) Intertest arising in one of the Contracting States, being interest to which a resident of the other Contracting State is beneficially entitled, may be taxed in that ot her State.
Howcever, that interest may also be taxed in the Contracting State in which it ;arises, and according to the law of that State, but the tax so charged shall not exceed 10 percent of the gross amount of the interest.
(2)
(3) Notvtlithstanding paragraph (2), interest arising in one of the Contracting States to which a resident of the other Contracting State is beneficially entitled IIlay not be taxed in the first-mentioned State if: (a) t ile interest is derived by one of the Contracting States or by a {>Olitical or administrative sub-division or a local authority thereof, or I:.y any other body exercising governmental functions in a Contracting S ate, or by a bank performing central banking functions in a Contracting State; (b) tile interest is derived by a financial institution which is unrelated to and dealing wholly independently with the payer. For the purposes of this Article, the term "financial institution" means a bank or other e n terprise substantially deriving its profits by raising debt finance in tile financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance. (4) (a) Notwithstanding paragraph (3), interest referred to in sub-paragraph (IJ) of that paragraph may be taxed in the State in which it arises at a r;ate not exceeding 10 percent of the gross amount of the interest if the interest is paid as part of an arrangement involving back-to-back lo ans or other arrangement that is economically equivalent and in tended to have a similar effect to back-to-back loans. (b) Nothing in this Article shall be construed as restricting, in any m anner, the right of a Contracting State to apply any anti-avoidance provisions of its taxation law. (5) The t:erm "interest" in this Article means interest from government securities or from bonds or debentures (including premiums attaching to such securities , bonds or debentures), whether or not secured by mortgage and Whether o r not carrying a right to participate in profits, interest from any other form of indebtedness , as well as income which is subjected to the same
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taxation treatment as income from money lent b~ th.e law of the Co~ltracting State In whiCh the Income anses. Income dealt With In Article 10 (DIvidends) and penaltv charges for late payment shall not be regarded as interest for the purposes of this Article. (6) The provisions of paragraphs (1), (2), (3) and (4) shall not apply if the person beneficially entitled to the interest, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated in that other State, or performs in that other State independent personal services from a fixed base situated in that other State, and the indebtedness in respect of which the interest is paid is effectively connected with that permanent establishment or fixed base. In that case the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. (7) Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the interest, whether the person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment or fixed base, then the interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. (8) Where, by reason of a special relationship between the payer and the person beneficially entitled to the interest, or between both of them and some other person, the amount of the interest paid, having regard to the indebtedness for which it is paid, exceeds the amount which might reasonably have been expected to have been agreed upon by the payer and the person so entitled in the absence of that relationship, the provisions of this Ahicle shall apply only to the last-mentioned amount. In that case the excess part of the amount of the interest paid shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. (9) Notwithstanding the provisions of paragraphs (1), (2), (3) and (4): (a) interest that is paid by a resident of one of the Contracting States and that is determined with reference to the profits of the issuer or of one of its associated enterprises, as defined in sub-paragraph (a) or (b) of paragraph (1) of Article 9 (Associated Enterprises), being interest to which a resident of the other State is beneficially entitled, also may be taxed in the Contracting State in which it arises, and according to the laws of that State, at a rate not exceeding 15 percent of the gross amount of the interest; and
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(b) interest that is paid with respect to the ownership interests in a person used for the securitization of real estate mortgages or other assets, to the extent that rhe amount of interest paid exceeds the normal rare of return on publicly-traded debt instruments with a similar risk profile, may be taxed by each State in accordance with its domestic law. (10) Where interest expense is deductible in determining the profits, incom~ or gains of a company resident in one of the Contracting States, bemg profits, income or gains which: (a) are attributable to a permanent establishment of that company in the other Contracting State; or (b) may be taxed in the other Contracting State under Article 6 (Income from Real Property) or paragraph (1) or (3) of Article 13 (Alienation of Property), and that interest expense exceeds the interest paid by that permanent establishment or paid with respect to the debt secured by real property located in the other Contracting State, the amount of that excess shall be deemed to be interest arising in that other Contracting State to which a resident of the first-mentioned Contracting State is beneficially entitled. Article 12 Royalties (I) Royalties from sources in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2l Such royalties may be taxed in the Contracting State in which they have their source, and according to the law of that State, but the tax so charged shall not exceed 5 percent of the gross amount of the royalties. (3) Paragraph (2) shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State or performs independent personal services in that other State from a fixed base situated therein, and the property or rights giving rise to the royalties are effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. (4) The term "royalties" in this Article means: (a) payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any:
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(i) copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right; (ii) motion picture films; or (iii) films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting; (b) payments or credits of any kind to the extent to which they are consideration for: (i) the supply of scientific, technical, industrial or commercial knowledge or information owned by any person; (ii) the supply of any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of knowledge or information referred to in sub-paragraph (b) (i) Or of any other property or right to which this Article applies; or (iii) a total or partial forbearance in respect of the use of supply of any property or right described in this paragraph; or (c) income derived from the sale, exchange or other disposition of any property or rights described in this paragraph to the extent to which the amounts realized on such sale, exchange or other disposition are contingent on the productivity, use or further disposition of such property or right. (5) Where, owing to a special relationship between the payer and the person beneficially entitled to the royalties or between both of them and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the amount which might havti. been expected to have been agreed upon by the payer and the person so entitled in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the amount of the royalties paid or credited shall remain taxable according to the law of each Contracting State, but subject to the other provisions of this Convention. (6) (a) Royalties shall be treated as income from sources in a Contracting State when the payer is that State itself or a political subdivision or local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether he is a resident of one of the Contracting States or not has in one of the Contracting States or outside both Contracnng Sta~es a permanent establishment or fixed base in connection with. which the liability to pay the royalties was incurred, and the royalnes
383
are borne by the permanent establishment or fixed base, then the rovalties shall be deemed to have their source in the State in which th~ permanent establishment or fixed base is situated. Where subparagraph (a) does not operate to treat royalties as being from sources in one of the Contracting States, and the royalties relate to use or the right to use in one of the Contracting States of any property or right described in paragra ph (4), the royalties shall be treated as income from sources in that State. Article 13 Alienation of Property (1) Income or gains derived by a resident of one of the Con.tracting States from the alienation or disposition of real property sItuated III the other Contracting State may be taxed in that other State. (2) For the purposes of this Article: (a) the term "real property situated in the other Contracting State", where the United States is that other Contracting State, includes a United States real property interest, and real property referred to in Article 6 which is situated in the United States; and (b) the term "real property", in the case of Australia, shall have the meaning which it has under the laws in force from time to time in Australia and, without limiting the foregoing, includes: (i) real property referred to in Article 6; (ii) shares or comparable interests in a company, the assets of which consist wholly or principally of real property situated in Australia; and (iii) an interest in a partnership, trust or estate of a deceased individual, the assets of which consist wholly or principally of real property situated in Australia. (3) Income or gains from the alienation of property, other than real property, that forms part of the business property of a permanent establishment which an enterprise of one of the Contracting States has in the other Contracting State or pertains to a fixed base available in that other State to a resident of the first-mentioned State for the purpose of performing independent personal services, including income or gains from the alienation of that permanent establishment (alone or with the whole enterprise) or of that fixed base, may be taxed in that other State. (4) Income or gains derived by an enterprise of one of the Contracting States
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from the alienation of ships, aircraft or containers operated or used in international traffi~ or property, othe~ than real property, pertaining to the operatIOn or use ot such shIps, alrcratr, or containers shall be taxable onl . that State. y In
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Article 15 Dependent Personal Services
(5) Where an individual who, upon ceasing to be a resident of one of the Contracting States, is treated under the taxation law of that State as hav' d lUg · a1lenate any property and is taxed in that State by reason thereof, the individual may elect to be treated for the purposes of taxation in the other Contracting State as if the individual had, immediately before ceasing to be a resIdent of the first-mentioned State, alienated and re-acquired the propert ' for an amount equal to its fair market value at that time. )'
(1) Subject to the provisions of Articles 18 (Pensions, Annuities, Alimony and Child Support) and 19 (Governmental Remuneration), salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment or in respect of services performed as a director of a company shall be taxable only in that State unless the employment is exercised or the services performed in the other Contracting State. If the employment is so exercised or the services so performed, such remuneration as is derived from that exercise or performance may be taxed in that other State.
(6) An individual who elects, under the taxation law of a Contracting State to defer taxation on income or gains relating to property which would ' otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property only in that other State.
(2) Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State or in respect of services performed in the other Contracting State as a director of a company shall be taxable only in the first-mentioned State if:
(7) Except as provided in the preceding paragraphs of this Article, each Contracting State may tax capital gains in accordance with the prQvisions of its domestic law.
(a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in the taxable year or year of income of that other State;
(8) For the purposes of this Article, real property consisting of shares in a company referred to in sub-paragraph (2)(b)(ii), and interests in a partnership, trust or estate referred to in sub- paragraph (2)(b)(iii), shall be deemed to be situated in Australia.
(b) the remuneration is paid by, or on behalf of, an employer or company who is not a resident of that other State; and
Article 14 Independent Personal Services Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity shall be taxable only in that State unless such services are performed in the other Contracting State and: (a) the individual is present in that other State for a period or periods aggregating more than 183 days in the taxable year or year of income of that other State; or (b) the individual has a fixed base regularly available to him in that other State for the purpose of performing his activities, in which case so much of the income as is attributable to that fixed base may be taxed in such other State.
(c) the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in that other State. (3) Notwithstanding the preceding provisions of this Article, remuneration in of an employment exercised aboard a ship or aircraft operated in lUternational traffic by a resident of one of the Contracting States may be taxed in that State. ~espect
Article 16 Limitation on Benefits (1) Except as otherwise provided in this Article, a resident of one of the Contracting States that derives income from the other Contracting State shall no~ be entitled to the benefits of this Convention otherwise accorded to reSIdents of one of the Contracting States unless such resident is a "qualified person" as defined in paragraph (2).
(2) A resident ?f one of the Contracting States shall be a qualified person for a taxable year If the resident is:
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(a) an individual; (b) that State, any political subdivision or local authority thereof or any agency or instrumentality of such State; (c) a company, if: (i) the principal class of its shares is listed on a recognized stock exchange specified in sub-paragraph (a) or (b) of paragraph (6) of this Article and is regularly traded on one or more recognized stock exchanges; or (ii) at least 50 percent of the aggregate vote and value of the shares in the company is owned directly or indirectly by five or fewer companies entitled to benefits under clause (i) of this sub-paragraph, provided that, in the case of indirect ownership, each intermediate owner is a resident of either Contracting State; (d) a person other than an individual or a company, if: (i) the principal class of units in that person is listed or admitted to dealings on a recognized stock exchange specified in sub-paragraph (a) or (b) of paragraph (6) of this Article and is regularly traded on one or more of the recognized stock exchanges; or
(ii) the direct or indirect owners of at least 50 percent of the beneficial interests in that person are qualified persons by reason of clause (i) of sub-paragraph (c) or clause (i) of this sub-paragraph; (e) an entity organized under the laws of one of the Contracting States and established and maintained in that State exclusively for a religious, charitable, educational, scientific, or other similar purpose, even if the entity is generally exempt from tax in that State;, (f) an entity organized under the laws of one of the Contracting States and established and maintained in that State to provide, pursuant to a plan, pensions or other similar benefits to employed and self-employed persons, even if the entity is generally exempt from tax in that State, provided that more than 50 percent of the entitys beneficiaries, members or participants are individuals resident in either Contracting State; (g) a person other than an individual, if: (i) on at least half the days of the taxable year persons that are qualified persons by reason of sub-paragraph (a), (b), (c)(i), or (d)(i ) of this paragraph own, directly or indirectly, at least 50 percent of the aggregate vote and value of the shares or other beneficial interests in the person; and
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(ii) less than 50 percent of the person's gross income for the taxable year is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting State in the form of payments that are deductible for purposes of the taxes covered by this Convention in the persons State of residence (but not including arms length payments in the ordinary course of business for services or tangible property and payments in respect of financial obligations to a bank, provided that where such a bank is not a resident of one of the Contracting States such payment is attributable to a permanent establishment of that bank located in one of the Contracting States); or (h) a recognized headquarters company for a multinational corp~rate
group. For purposes of this paragraph, a person shall be cons1dered a recognized headquarters company if: (i) it provides in its State of residence a subs~antial portion of the overall supervision and administration ot a group of compames (which may be part of a larger group of companies), which may include, but cannot be principally, group financing; (ii) the group of companies consists of corporations resident in, and engaged in an active business in, at least five countries (or , groupings of countries), and the business activities carried on m each of the five countries (or groupings of countries) generate at least 10 percent of the gross income of the group; (iii) the business activities carried on in anyone country other than the Contracting State of residence of the headquarters company generate less than 50 percent of the gross income of the group; (iv) no more than 25 percent of its gross income is derived from the other Contracting State; (v) it has, and exercises, independent discretionary ~uthority to carry out the functions referred to in sub-paragraph (1); (vi) it is subject to generally applicable rules of taxation in its country of residence; and (vii) the income derived in the other Contracting State eit~er is , " .' "1nCI ' den t a I to , the active busmess denved m connection W1th ,or 1S referred to in sub-paragraph (ii). , ' for b' If the mcome reqwrements emg consl'dered a recognized , ") (iii) or (IV)) are not headquarters company (su b-paragrap h s (11, , , fulfilled, they will be deemed to be fulfilled if the reqw~ed percentages ' f the preceding four years. are met when averaging t h e gross mcome 0
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(3) (a) A resident of one of the Contracting States will be entitled to the benefits of the Convention with respect to an item of income derived from the other State, regardless of whether the resident is a qualified person, if the resident is engaged in the active conduct of a trade Or business in the first-mentioned State (other than the business of making or managing investments for the residents own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance company or a registered, licensed or authorized securities dealer), and the income derived from the other Contracting State is derived in connection with, or is incidental to, that trade or business. (b) If the resident or any of its associated enterprises carries on a trade or business activity-in the other Contracting State which gives rise to an item of income, sub-paragraph (a) of this paragraph shall apply to such item only if the trade or business activity in the first-mentioned State is substantial in relation to the trade or business activity in the other State. Whether a trade or business activity is substantial for purposes of this paragraph will be determined based on all the facts and circumstances. (c) In determining whether a person is "engaged in the active conduct of a trade or business" in a Contracting State under sub-paragraph (a) of this paragraph, activities conducted by a partnership in which that person is a partner and activities conducted by persons connected to such person shall be deemed to be conducted by such person. A person shall be connected to another if one possesses at least 50 percent of the beneficial interest in the other (or, in the case of a company, at least 50 percent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company) or another person possesses, directly or indirectly, at least 50 percent of the beneficial interest (or, in the case of a company, at least 50 percent of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company) in each person. In any case, a person shall be considered to be connected to another if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same person or persons. (4) Notwithstanding the preceding provisions of this Article, if a company that is a resident of one of the Contracting States, or a company that owns at least 50 percent of the aggregate vote or value of such a company, has outstanding a class of shares: (a) which is subject to terms or other arrangements which entitle its holders to a portion of the income of the company derived from the other Contracting State that is larger than the portion such holders
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would receive absent such terms or arrangements ("the disproportionate part of the income"); and (b) 50 percent or more of the voting power and value of which is owned by persons who are not qualified persons, the benefits of this Convention shall not apply to the disproportionate part of the Income. (5 ) A resident of one of the Contracting States that is not a qualified person pursuant to the provisions of paragraph (2) of this Article shall, nevertheless, be granted benefits of the Convention if the competent authority of the other Contracting State determines, in accordance with the law of that other State, that the establishment, acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the Convention. (6 )
For purposes of this Article the term "recognized stock exchange" means: (a) the NASDAQ System owned by the National Association of Securities Dealers, Inc., and any stock exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under the U.S. Securities Exchange Act of 1934; (b) the Australian Stock Exchange and any other Australian stock exchange recognized as such under Australian law; and (c) any other stock exchange agreed upon by the competent authorities.
(7 ) Nothing in this Article shall be construed as restricting, in any manner, the right of a Contracting State to apply any anti-avoidance provisions of its taxation law. Article 17 Entertainers (1) Notwithstanding the provisions of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services), income derived by entertainers (such as theatrical, motion picture, radio or television artistes, musicians and athletes) from their personal activities as such may be taxed in the Contracting State in which these activities are exercised, except where the amount of the gross receipts derived by any such entertainer, including expenses reimbursed to him or borne on his behalf, from such activities does not exceed ten thousand United States dollars ($ 10,000) or its equivalent in Australian dollars for the taxable year or year of income concerned. (2 ) Where income in respect of activities exercised by an entertainer in his capacity as such accrues not to the entertainer but to another person, that InCome may, notwithstanding the provisions of Articles 7 (Business Profits),
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14 (Independent Personal Services) and 15 (Dependent Personal Services), be taxed in the Contracting State in which the activities of the entertainer are exercised, unless it is established that neither the entertainer nor person related to him participates directly or indirectly in any profits of such other person in any manner, including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions or other distributions. Article 18 Pensions, Annuities, Alimony and Child Support (1) Subject to the provisions of Article 19 (Governmental Remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State. (2) Social security payments and other public pensions paid by one of the Contracting States to an individual who is resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State. (3) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State. (4) The term "pensions and other similar remuneration", as used in this Article, means periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment. (5) The term "annuities", as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in retuw for adequate and full consideration (other than services rendered or to be rendered). (6) Any alimony or other maintenance payments, including payments for the support of a minor child, arising in one of the Contracting States and paid to a resident of the other Contracting State, shall be taxable only in the first-mentioned State. Article 19 Governmental Remuneration Wages, salaries, and similar remuneration, including pensions, paid from funds of one of the Contracting States, of a state or other political subdivision thereof or of an agency or authority of any of the foregoing for labor or personal services performed as an employee of any of the above in
391
the discharge of governmental functions to a citizen of that State shall be exempt from tax by the other Contracting State. Article 20 Students Where a student, who is a resident of one of the Contracting States or who was a resident of that State immediately before visiting the other Contracting State and who is temporarily present in that other State for the purpose of his full-time education, receives payments from sources outside that other State for the purpose of his maintenance or education, those payments shall be exempt from tax in that other State. Article 21 Other Income (1) Items of income of a resident of one of the Contracting States, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. (2) The provisions of paragraph (1) shall not apply to income, other than income from real property as defined in paragraph (2) of Article 6 (Income from Real Property), derived by a resident of one of the Contracting States where that income is effectively connected with a permanent establishment or fixed base situated in the other Contracting State. In that case the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. (3) Notwithstanding the provisions of paragraphs (1) and (2), items of income of a resident of one of the Contracting States not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State. Article 22 Relief From Double Taxation (1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), in the case of the United States, double taxation shall be avoided as follows:
(a) the United States shall allow to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; and (b) in the case of a United States corporation owning at least 10 percent
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of the voting stock of a company which is a resident of Australia from which it receives dividends in any taxable year, the United States shall also allow as a credit against United States tax the appropriate amount of income tax paid to Australia by that company with respect to the profits out of which the dividends are paid. Such appropriate amount shall be based upon the amount of income tax paid to Australia. For purposes of applying the United States credit in relation to income tax paid to Australia the taxes referred to in sub-paragraph (l)(b)(i) and paragraph (2) of Article 2 (Taxes Covered) shall be considered to be income taxes. No provision of this Convention relating to source of income shall apply in determining credits against United States tax for foreign taxes other than those referred to in sub-paragraph (1)(b)(i) and paragraph (2) of Article 2 (Taxes Covered). (2) Subject to paragraph (4), United States tax paid under the law of the United States and in accordance with this Convention, other than United States tax imposed in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. The credit shall not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time. (3) An Australian corporation that owns at least 10 percent of the voting power in a United States corporation is, in accordance with the law,of Australia as in force at the date of signature of this Convention, entitled to a rebate in its assessment, at the average rate of tax payable by it, in respect of dividends paid by the United States corporation that are included in the taxable income of the Australian corporation. However, should the law as so in force be amended so that the rebate in relation to the dividends ceases to be allowable under that law, Australia shall allow credit under paragraph (2) for the United States tax paid on the profits out of which the dividends are paid as well as for the United States tax paid on the dividends. (4) For the purposes of computing United States tax, where a United States citizen is a resident of Australia, the United States shall allow as a credit against United States tax the income tax paid to Australia after the credit referred to in paragraph (2). The credit so allowed against United States tax shall not reduce that portion of the United States tax that is creditable against Australian tax in accordance with paragraph (2).
393
Article 23 Non-Discrimination (1) Each Contracting State in enacting tax measures shall ensure that: (a) citizens of a Contracting State who are residents of the Contracting State shall not be subjected in the other State to any taxation or any requirement connected therewith which is more burdensome than the taxation or connected requirements to which citizens of that other State who are residents of that other State in the same circumstances are may be subjected; (b) except where the provisions of paragraph (1) of Article 9 (Associated Enterprises), paragraph (4) of Article 11 (Interest) or paragraph (5) of Article 12 (Royalties) apply, interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of the resident of the first-mentioned State, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State; (c) a corporation of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is more burdensome than the taxation or connected requirements to which other similar corporations of the first-mentioned State in the same circumstances are or may be subjected; and (d) the taxation on a permanent establishment which a resident of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on residents of that other State that carryon the same activities in the same circumstances. (2) Nothing in this Article relates to any provision of the taxation laws of a Contracting State: (a) in force on the date of signature of this Convention; (b) adopted after the date of signature of this Convention but which is substantially similar in general purpose or intent to a provision covered by sub-paragraph (a); or (c) reasonably designed to prevent the avoidance or evasion of taxes; provided that, with respect to provisions covered by sub-paragraphs (b) or
394
Appendix
US/ Australia
(c), such provisions (other than provisions in international agreements) do not discriminate between citizens or residents of the other Contracting State and those of any third State. (3) Without limiting by implication the interpretation of this Article, it is hereby declared that, except to the extent expressly so provided, nothing in the Article prevents a Contracting State from distinguishing in its taxation laws between residents and non- residents solely on the ground of their residence. (4) Where one of the Contracting States considers that the taxation measures of the other Contracting State infringe the principles set forth in this Article the Contracting States shall consult together in an endeavor to resolve the matter. Article 24 Mutual Agreement Procedure (1) (a) Where a resident of one of the Contracting States considers that the action of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the domestic laws of those States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. This case must be presented within three years from the first notification of that action. (b) Should the claim be considered to have merit by the competent authority of the Contracting State to which the claim is made, that competent authority shall seek to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation contrary to the provisions of this Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. (2) The competent authorities of the Contracting States shall seek to resolve by agreement any difficulties or doubts arising as to the application or interpretation of this Convention. In particular the competent authorities of the Contracting States may agree: (a) to the same attribution of income, deductions, credits, or allowances of an enterprise of one of the Contracting States to its permanent establishment situated in the other Contracting State; (b) to the same allocation of income, deductions, credits, or allowances between persons; (c) to the same determination of the source of particular items of income;
395
(d) to the same meaning of any term used in this Convention; or (e) to which of the Contracting States an individual described in sub-paragraph (2)(c) of Article 4 (Residence) has closer personal and economic relations. (3) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of this Article. Article 25 Exchange of Information (1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this Convention for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.
(2) Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those (including a Court or administrative body) concerned with the assessment, collection, administration or enforcement of, or with litigation with respect to, the taxes to which this Convention applies. (3) No information shall be exchanged which would be contrary to public policy. (4) If specifically requested by the competent authority of one of the Contracting States, the competent authority of the other Contracting State shall provide information under this Article in the form of copies of unedited original documents (including books, papers, statements, records, accounts or writings) to the same extent such documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes. (5) Each of the Contracting States shall endeavor to collect on behalf of the other Contracting State amounts equal to such taxes imposed by the other State as will ensure that any exemption or reduction in rate of tax granted under this Convention by that other State shall not be enjoyed by persons not entitled to such benefits. Article 26 Diplomatic and Consular Privileges Nothing in this Convention shall affect diplomatic and consular privileges
396
US/Australia
Appendix
under the general rules of international law or under the provisions of special agreements. Article 27 Miscellaneous (1) (a) Income derived by a resident of the United States which, under this
Convention, may be taxed in Australia shall for the purposes of the income tax law of Australia and of this Convention be deemed to be income from sources in Australia. (b) Income derived by a resident of Australia which, under this Convention, may be taxed in the United States, other than income taxed by the United States in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, shall for the purposes of paragraph (2) of Article 22 (Relief from Double Taxation) and of the income tax law of Australia be deemed to be income from sources in the United States. (c) Where paragraph (4) of Article 22 (Relief from Double Taxation) applies, income referred to in that paragraph shall be deemed to have its source in Australia to the extent necessary to give effect to the provisions of that paragraph. (2) Any exemption from tax by one of the Contracting States provided for in Article 14 (Independent Personal Services), 15 (Dependent Personal Services), 17 (Entertainers) or 19 (Governmental Remuneration) shall be inapplicable to the extent that the income to which the exemption relates is not or, upon the application of the relevant Article of this Convention (prior to application of this paragraph), will not be subject to tax by the other Contracting State. Article 28 Entry Into Force (1) This Convention shall be subject to ratification in accordance with the applicable procedures of each Contracting State, and instruments of ratification shall be exchanged at Washington, D.C., as soon as possible. (2) The Convention shall enter into force upon the exchange of instruments of ratification n1and its provisions shall have effect: (a) with respect to those dividends, interest and royalties to which Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), respectively apply and which are paid, credited or otherwise derived on or after
397
the first day of the second month following the date on which the Convention enters into force; and (bl with respect to all other income of a taxpayer, for the taxpayer's years of income or taxable years, as the case may be, commencing on or after the first day of the second month following the date on which the Convention enters into force. (3) Subject to paragraph (4), the Convention between the Government of the United States of America and the Government of the Commonwealth of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed at Washington on May 14, 1953 (in this Article referred to as the 1953 Convention) shall cease to have effect with respect to taxes to which this Convention applies under paragraph (2). (4) The 1953 Convention shall terminate on the expiration of the last date on which it has effect in accordance with the foregoing provisions of this Article. Article 29 Termination ( I) This Convention shall remain in force until terminated by a Contracting State. Either Contracting State may terminate the Convention at any time after 5 years from the date on which the Convention enters into force, provided that at least 6 months prior notice of termination has been given through diplomatic channel. In such event, the Convention shall cease to have effect: (a) with respect to those dividends, interest and royalties to which Articles 10 (Dividends), 11 (Interest) and 12 (Royalties), respectively, apply, and which are paid, credited or otherwise derived on or after the first day of January following the expiration of the 6 month period; and (b) with respect to all other income of a taxpayer, for the taxpayer's years of income or taxable years, as the case may be, commencing on or after the first day January following the expiration of the 6 month period. (2) Notwithstanding the provisions of paragraph (1), upon prior notice to be given through the diplomatic channel, the provisions of paragraph (2) of Article 18 (Pensions, Annuities, Alimony and Child Support) may be terminated by either Contracting State at any time after this Convention enters into force.
398
Appendix
Done in duplicate at Sydney this sixth day of August 1982.
FOR THE GOVERNMENT OF THE UNITED STATES OF
Bibliography
FOR GOVERNMENT OF AUSTRALIA:
AMERICA:
Books
•
Philip Baker, Double Taxation Conventions and International Tax Law, Sweet and Maxwell, (2nd edn) 1994 Cahiers de Droit Fiscal International, Vol. LXXVIIla, "Interpretation of Double Tax Conventions", 1993 Florence Congress Cahiers de Droit Fiscal International, Vol. LXXXIIIb, "Practical Issues in the Application of Double Tax Conventions", 1998 London Congress Richard L. Doernberg and Kees van Raad, 1996 United States Model Income Tax Convention, Kluwer Law International, 1997 R. L. Deutsch, Mark L. Friezer, Ian G. Fullerton, Peter J. Hanley and Trevor J. Snape, Australian Tax Handbook 2008, Thomson Reuters, 2008 R. L. Hamilton, R. L. Deutsch and J. c. Raneri, Guidebook to Australian International Taxation, Legal Books, 2002 Professor Kevin Holmes, ATAX Course Notes, Double Tax Agreements, 2008. (Kevin Holmes, the principal author, is a Professor in the School of Accounting and Commercial Law at the Victoria University, Wellington, New Zealand) John Avery Jones, "The Interpretation of Tax Treaties with particular reference to Article 3 (2) of the OECD Model", British Tax Review 14/54 and 901108, 1984 Ernest R. Larkins, International Applications of us Income Tax Law; Inbound and Outbound Transactions, John Wiley & Sons Inc, 2004 Susan M. Lyons, International Tax Glossary, IBFD Publications BV, (3rd edn) 1996 Professor T. W. Magney, "Australia's Double Taxation Agreements: A Critical Appraisal of Key Issues", Legal Books Intelligence Report, 1994 Professor Roy Rohatgi, Basic International Taxation, 2 vols, BNA International, (2nd edn) 2007 Roy Saunders, International Tax Systems and Planning Techniques, FT Law and Tax, 1997
400
Double Taxation Agreements
Professor Dr A. A. Skaar, Taxation issues relating to Captive insurance Companies, IBFD Publications, 1998 Barry Spitz, International Tax Havens Guide, Harcourt Professional Publishing,
Index
2000 Victor Thuronyi (ed.), Tax Law Design and Drafting, International Monetarv ' Fund, 1998 Klaus Vogel, Double Taxation Conventions, Kluwer Law International, (3rd edn) 1997
Major references are printed in bold
active income 15 see also associa ted enterprises; business profits; dependent personal services; fringe benefits allocation rules 31 - 60 permanent establishments 16 priority of allocation rules 16 agency business attribution of profits where PE in form of an agent 48-50 agricultural property see real propert)" a ir transport profits AustraliafUK Convention 201-2 AustraliafUK DTA (reconstructed version )
114
,
ChinaIUK DTA 237-8, 251 Germany/China DTA 283, 298 Qantas Airways Limited v. United States case 159-60 UK/US DTA 312, 347-8 US/Australia DTA 374-5 aircraft, income or gains from alienation of 75 AustraliafUK Convention 209 AustraliafUK DTA (reconstructed version) 129 UK/US DTA 320 US/Australia DTA 384 alienation of property 73-6 AustraliafUK Convention 208-9 AustralialUK DTA (reconstructed version) 128-9 Commissioner of Taxation v. Lamesa Holdings BV case 8-9, 76, 147-9 indirect alienation of property 76 scope of term 33 UK/US DTA 319- 20 US/Australia DTA 383-4 alimony UK/US DTA 321-2,349
US/Australia DTA 390 allocation articles 14-19 principles 16- 19 types 15 allocation rules 31-80 active income 31- 60 associated enterprises 51-3 business profits 31-51 dependent personal services 53-6 fringe benefits 58- 60 independent personal services 56- 8, 67- 8 priority rules 16 annuities 72 AustraliaIUK Convention 211 AustraliaIUK DTA (reconstructed version ) 126-7 UK/US DTA 321- 2, 349 US/Australia DTA 390 apprentices ChinaIUK DTA 246-7 France/China DTA 270 Germany/China DTA 291 arbitration binding arbitration procedure 105- 6 arm's length principle 32,47 artistes see entertainers assistance with collection articles 61, 107 Association of Mouth and Foot Painting Artists Pty Ltd and Commissioner of Taxation case 164-5 UK/US DTA 339-40, 353 associated enterprises allocation rules 51- 3 AustraliafUK Convention 202-3, 222 AustraliaIUK DTA (reconstructed version) 115-16 ChinaIUK DTA 238 economic double taxation 52- 3 France/China DTA 263 Germany/China DTA 283 UK/US DTA 313, 348
402
Index
assOCIated enterprises (cont.) US/Australia OTA 375-6 where intormation inadequate to determine protits 53 .Hhlete, see sports persons ~rtrlbution rules 32, 34 ~gent, permanent establishment In form of -\8-50 branch, permanent establishment in form of -\5-7 Joint venture, permanent establishment in form of 50-1 Re Ste SchneIder Electric case 10-11, 12-13, 175-8 whether OTAs can override application of CFC and FIF rules 10-13 .-\ustralia see also Australia/China OTA; AustralialNetheriands OTA; .-\ustralia/Singapore OTA; .-\ustralialSwitzeriand OTA; AustraliaIUK Convention; AustraliaIUK OTA I reconstructed version); US/Austra lia OTA assistance wIth collection obligations 107 capital gains tax 75 cases 7, 8-9,34-5,37, 76, 147-55, 164-5, 179 OTAs 5, 181-90 exchange of information 106 foreign tax credits 64 incorporation of OTAs into domestic law 14 Intluence of OECO and UN Models on PE articles within OTAs 44-5 rates ot withholding tax 66 tax information exchange 106 undefined terms 8 withholding tax regime 61 Australia/China OTA limitation on benefit provisions 94 AustraliaINetheriands OTA CommiSSIOner of TaxatIon v. Lamesa Holdings BV case 8-9, 76, 147-9 Australia/Singapore OTA permanent establishments 37 McDermott Industries (Aust) Pty Ltd case 37, 150-2 Australia/Switzerland OTA ThIel v. FCT case on interpretation of "enterpm,e~ 7,31,32,34-5,74, 152-4 AustralialUJ( Convention 193-230 see also AustralialUK OTA (reconstructed ver,lonl .llienatlon ot property 208-9 lpplication 221 ~ssoClated enterprises 202-3, 222 business proti£> 200-[, 222
Index
consular posts 218 deemed source of income or gains 213 diplomatic missions, members of 218 dividends 203-5, 222 dua I residency 23 elimination of double taxation 213-14 employment income 209-10, 223-4 entertainers and sportspersons 211 entrv into force 218-19 exchange of information 217-18 Exchange of Notes 221-30 tixed base 221 fringe benefits 59-60, 210-11 general definitions 194-6,221 government service employees 211-12 Independent persona I services covered by business profits article 56-7 interest 65, 205-7, 222-3 limitation of relief 214 mutual agreement procedure 216-17, 224 non-discrimination 104,215-16,224 other income 212-13 partnerships 24, 214-15 pensions and annuities 211 permanent establishments 198-200,221 persons covered 193 real property 200 residence 196-7 royalties 65, 207-8, 223 shipping and air transport profits 201-2 ships or aircraft, income or gains from alienation of 209 special occupation categories 211-12 students 212 taxes covered 25- 6, 193-4 termination 219-20 territorial application 194 text 193-230 AustralialUK OTA (reconstructed ver~on) 109-45 active income 112-19 alienation of property 128-9 allocation rules 112-33 associated entities profits 115-16 business profits 112-14 consular posts 134 deemed source of income or gains 145 deferred property income or gains 129-30 definitions general 140-2 permanent establishments 143-5 residence 142-3 diplomatic missions, members of 134 dividends 119-22 elimination of double taxation 135-6 employment income 116-17 entertainers and sportspersons 112, 130--1 entry into force 11 0-11
exchange of information procedures 139-40 exclusion or limitation on benefit provisions 133-4 fringe benefits 118 government service employees 118-19 independent personal services 117 interest 122-4 mutual agreement procedures 138-9 non-discrimination 136-8 other income 131-3 partnerships 134 passive income 119-30 pensions and annuities 126-7 persons covered 109 priority of allocation rules 16, 112-33 professors and teachers 131 real property 127-9 royalties 124-6 shipping and air transport profits 114 ships or aircraft, income or gains from alienation of 129 special occupation categories 130-1 students 131 taxes covered 110 temporary residents 133-4 termination 111-12 territorial application 140 AustralialUS OTA see US/Australia OTA bank secrecv tax infor~ation exchange 106 basket shopping distinct from treaty shopping 96 beneficial ownership concept cases 84-8 treaty shopping 82-8 Berlin Clause Germanv/China OTA 296 binding arbitration procedure (BAP) 105-6 branches attribution of profits where PE in form of a branch 45-7 business profits allocation rules 31-51 arm's length principle 32, 47 attribution rules 32, 34, 45-51 AustraliaIUK Convention 200-1, 222 AustralialUK OTA (reconstructed version) 112-14 capital gains 74 ChinalUK OTA 236-7 definition in OTAs 33-4, 35 France/China OTA 261-2 Germany/China OTA 282-3, 298 UK/US OTA 311-12, 347 US/Australia OTA 373-4 where passive income could also be classified as business profit 67
403
Canada see also CanadalUK OTA; US/Canada OTA cases 163-4, 165-71, 179 CanadaIUK OTA Gulf Offshore N.S. Limited u. The Queen case 167-8 capital Germany/China OTA 292 capital gains alienation of property 73-5 Australia 75 AustralialUS DTA 25 business profits 74 ChinaIUK DTA 243 France/China OTA 267 Germany/China OTA 287-8 UK/US OTA 319-20 withholding tax on capital gains realised b,· non-residents 76 capital losses 76 cases AATCase 8775 (1993)36- 7 Aiken Industries Inc v. Commissioner o( Inland Reuenue (1971) 84. 88 Association of Mouth and Foot Painting Artists Pty Ltd and Commissioner of Taxation [1987]164-5 Caron v. The Queen (1998) 179 CIR v. Commonwealth Development Corporation [1995] 37 Commerzbank (The Queen v. Inland Revenue Commissioners, ex parte Commerzbank AG (1991)) 104 Commissioner of Inland Revenue v. iFP Energy (1990) 55 Commissioner of Taxation v. Lamesa Holdings BV (1997) 8-9, 76, 147-9 Cudd Pressure Control Inc. v. The Queen [1998]156-7 GE Capital Finance Pty Ltd v. Commissioner of Taxation (2007) 179 Grohn v. The Queen (2002) 179 Gulf Offshore N.S. Limited v. The Queen (2006) 167-8 Indofood International Limited v. iP Morgan Chase Bank in a London branch (2006) 86-8 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin [1998] 171-4 McDermott Industries (Aust) Pty Ltd v. FCT (2005)37,150--2 Max Factor & Co v. Federal Commissioner of Taxatiol1 (1984) 149-50 The North West Life Assurance Company of Canada v. Commissioner of Internal Revenue (1996) 157-9 Pipeline decision (1997) 38, 174-5
404
Index
cases (cont.) Podd et af. v. Commissioner 160--] Prevost Car Inc. v. the Queen (2008) 84--6, 88 Qantas Airways Limited v. United States (1994) 159-60 The Queen v. Crown Forest Industries Limited [1995]163--4 The Queen v. Dudney [2002]165-6 Re Sti Schneider Electric (2002) 10-11, 12-13,175-8 Specialty Manufacturing Ltd v. The Queen [1999]168-9 Sun-mer v. The Queen (2000) 169-71 Terry Haggerty Tire Co. Inc. v. United States 161-3 Thiel v. FCT (1990) 7, 31, 32, 34--5, 74, 152--4 Tokyo High Court 2007 (GyoOKo), No 148 11-13 treaty shopping 84-8 Unisys Corporation v. Federal Commissioner of Taxation (2002) 154-5 CFC see controlled foreign corporations child support UKIUS DTA 321-2, 349 US/Australia DTA 390 China see also China/Australia; DTA; ChinalUK DTA; France/China DTA; Germany/China DTA DTAs 5,181-90 China/Australia DTA limitation on benefit provisions 94 ChinalFrance DTA see France/China DTA China/Germany DTA see Germany/China DTA ChinalUK DTA 231-56 air transport profits 251 associated enterprises 238 business profits 236-7 capital gains 243 consular officials 251 dependent personal services 243--4 diplomatic agents 251 directors' fees 244 dividends 238-9 dual residency 23 elimination of double taxation 247-8, 254--6 entertainers and athletes 244--5 entry into force 251-2 exchange of information 250 general definitions 232-3, 253--4 government service employees 245-6 immoveable property 236 independent personal services 243 interest 239--40 mutual agreement procedure 249-50 nationality 232-3 non-discrimination 249
Index pensions 245 permanent establishments 234--6 persons covered 231 Protocol 253--6 resident 233--4, 254 royalties 240--1, 254 shipping and air transport profits 237-8 special occupation categories 244-7 students, apprentices and trainees 246-7 taxes covered 27, 231-2, 253 teachers and researchers 246 technical fees 242-3 termination 252 territorial application 232 text 231-56 collection procedures 61, 107 Association of Mouth and Foot Painting Artists Pty Ltd and Commissioner of Taxation case 164--5 OECD Model Tax Convention 107 UKlUS DTA 339--40,353 companies dual residency treatment in DTAs 22-3 consular officials AustralialUK Convention 218 AustraliaIUK DTA (reconstructed version) 134 ChinalUK DTA 251 France/China DTA 274 Germany/China DTA 296 UKlUS DTA 341 US/Australia DTA 395-6 controlled foreign corporations (CFCs) France/Switzerland DTA 10--11, 12-13 interaction of CFC rules with DTAs 10--13 Japan/Singapore DTA 11-13 country of residence see residence jurisdictions country of source see source jurisdictions da tes see effective da te; entry into force; termination De Broe, L. et al. 55 definitions AustraliaIUK Convention 194--6,221 AustraliaIUK DTA (reconstructed version) 140--5 ChinaIUK DTA 232-3, 253--4 France/China DTA 258-9 Germany/China DTA 278-9 UKlUS DTA 304--7,347 US/Australia DTA 366-8 dependent personal services . see also fringe benefits; government serVICe employees allocation rules 53-6 AustralialUK Convention 209-10, 223--4 AustraliaIUK DTA (reconstructed version) 116-17
<=ases Commissioner of Inland Revenue v. IFP Energy (1990) 55 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin case 171--4 ChinaIUK DTA 243--4 France/China DTA 268 Germany/China DTA 288-9 UKlUS DTA 320--1, 348-9 US/Australia DTA 385 developing countries UN Model Convention 41-3 diplomatic agents AustraliaIUK Convention 218 AustralialUK DTA (reconstructed version) 134 ChinaIUK DTA 251 France/China DTA 274 Germany/China DTA 296 UKlUS DTA 341 US/Australia DTA 395-6 directors' fees ChinaIUK DTA 244 DTA treatment 77 France/China DTA 268-9 Germany/China DTA 289 UKIUS DTA 321 discrimination 103--4 see also non-discrimination disposal of property see alienation of property distribution see also dividends where interest treated as 69-70 dividends anti-conduit provisions in UK/US DTA 95-6 AustralialUK Convention 203-5, 222 AustralialUK DTA (reconstructed version) 119-22 ChinaIUK DTA 238-9 France/China DTA 263--4 Germany/China DTA 284, 299 treaty shopping 82--4 Prevost Car Inc. v. the Queen case 84--6, 88 UK/US DTA 313-16, 348 US/Australia DTA 376-9 withholding tax rates 66, 68 domestic law incorporation of DTAs 13-14 relationship with DTAs 6 double taxation agreements (DTAs) see also allocation articles; interpretation of DTAs a pplica tion 14--19 basket shopping distinct from trea ty shopping 96 COntent 2 definition 1-2
405
incorporation into domestic tax law 13-14 key functions 3 provisions 1-2 scope 2 stages in development 27-8 structure 2-3 treaty shopping 81-96 double taxation relief 97-102 AustralialUK Convention 213-14 AustralialUK DTA (reconstructed version) 135-6 ChinalUK DTA 247-8, 254--6 conditions for DTA relief to be available 64--5 deduction method 98-9, 102 dependent personal services 53--4 exemption method 64, 97, 100--2 foreign tax credit method 63--4, 97-8, 102 France/China DTA 271-2 Germany/China DTA 292-3, 299-300 passive income 60--1, 63--4 provisions within DTAs precluding relief 65 Re Sti Schneider Electric case 10-11, 12-13, 175-8 tax sparing 99-100 UKlUS DTA 334--7, 351-2 US/Australia DTA 391-2 dual residency DTA treatment 21-3 e-commerce see electronic commerce economic double taxation associated enterprises 52-3 effective date 27-9, 30 HungarylRussia DTA 29 UKIUS DTA 301, 353 "effectively connected" concept 16, 67-8 meaning 67 electronic commerce permanent establishment issues 38--40 employment income see also fringe benefits; government service employees allocation rules 53-6 AustralialUK Convention 209-10, 223--4 AustralialUK DTA (reconstructed version) 116-17 ChinaIUK DTA 243--4 France/China DTA 268 Germany/China DTA 288-9 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin case 171--4 UKIUS DTA 320--1,348-9 US/Australia DTA 385 enterprise meaning 34--5 Thiel v. FCT case on interpretation of "enterprise" 7, 31, 32, 34--5, 74, 152--4
406
Index
entertalOers AustralialUK Convention 211 AustraliaIUK DTA (reconstructed version) 112, 130-1 ChinaIUK DTA 244-5 DTA treatment 77-8 France/China DTA 269 Germany/China DTA 289 Sum11er v. The Queen case 169-71 UKJUS DTA 321 US/Australia DTA 389-90 entry into force 28-9, 30 Austra lialUK Convention 218-19 AustraliaIUK DTA (reconstructed version) 110-11 ChinaIUK DTA 251-2 ChinaIUK Protocol 256 France/China DTA 275 Germany/China DTA 296 HungarylRussia DTA 29 UKJUS DTA 301, 341-2, 353 US/Australia DTA 396-7 exchange of information 61, 106 Association of Mouth and Foot Painting Artists Pty Ltd and Commissioner of Taxation case 164-5 AustraliaIUK Convention 217-18 AustraliaIUK DTA (reconstructed version) 139-40 ChinaIUK DTA 250 France/China DTA 274 Germany/China DTA 295-6, 300 UKJUS DTA 339-40, 353 US/Australia DTA 395 exploration activities UKJUS DTA 326-7 fixed base see also permanent establishments (PE) AustraliaIUK Convention 221 cases Pipeline decision (1997) 38, 174-5 The Queen v. Dudney 165-6 independent personal services 56-8, 68 US/Australia DTA 384 foreign tax credits 63-4, 97-8, 102 AustralialUK Convention 213-14 AustralialUK DTA (reconstructed version) 135-6 ChinaIUK DTA 247 France/China DTA 271-2 Germanv/China DTA 292-3, 299-300 UKIUS rHA 335-6, 352 US/Australia 391-2 forestry see rea I property France see also France/China DTA; France/Germany Tax Convention; France/Switzerland DTA
Index CFC rules and DTA with Switzerland 10-11 12-13 ' DTAs 5, 181-90 foreign tax credits 64 General Taxation Code Article 209B 10, 175-8 France/China DTA 257-76 artistes and athletes 269 associated enterprises 263 business profits 261-2 capital gains 267 consular officers 274 dependent persona I services 268 diplomats 274 directors' fees 268-9 dividends 263-4 dual residency 21-2 elimination of double taxation 271-2 entry into force 275 exchange of information 274 general definitions 258-9 government service employees 269-70 immovable properry 261 independent personal services 267-8 interest 264-5 mutual agreement procedure 273 non-discrimination 272-3 other income 270-1 pensions 269 permanent establishments 259-61, 276 persons covered 257 professors and researchers 270 Protocol 276 resident 259 royalties 265-6, 276 scope of territorial application 274-5 special occupation categories 268-70 students and trainees 270 taxes covered 26-7, 257-8 termination 275 text 257-76 France/Germany Tax Convention M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin case 171-4 France/Switzerland DTA Re Sti Schneider Electric case 10-11, 12-13, 175-8 fringe benefits 58-60 AustraliaIUK Convention 59-60, 210-11 AustraliaIUK DTA (reconstructed version) 118 gains see capital gains general anti-avoidance rules (GAAR) treaty shopping arrangements 96 Germanv see al~o Germany/China DTA; Germany/France Tax Convention; GermanylNetherlands DTA
DTAs 5, 181-90 Germany/China DTA 277-300 artistes and athletes 289 associated enterprises 283 Berlin Clause 296 business profits 282-3, 298 capital 292 capital gains 287-8 consular officials 296 dependent personal services 288-9 diplomatic agents 296 directors' fees 289 dividends 284, 299 dual residencv 22 elimination of double taxation 292-3, 299-300 entry into force 296 exchange of information 295-6,300 general definitions 278-9 government service 290 immovable property 281-2 independent personal services 288 interest 284-6, 299 mutual agreement procedure 294-5 non-discrimination 294 other income 291 pensions 289 permanent establishments (PE) 280-1 persons covered 277 professors and researchers 290 Protocol 298-300 resident 279 royalties 286-7, 299 shipping and air transport profits 283, 298 special occupation categories 289-91 students and trainees 291 tax information exchange 300 taxes covered 27, 277-8 termination 296-7 text 277-300 Germany/France Tax Convention M and Mme Robert Gilly v. Directeur des Services Fiscaux du B~s-Rhin case 171-4 GermanylNetheriands DTA Pipeline decision (1997) 38, 174-5 good faith principle DTAs 6 government service employees AustraliaIUK Convention 211-12 AustraliaIUK DTA (reconstructed version) 118-19 ChinalUK DTA 245-6 DTA treatment 78 France/China DTA 269-70 Germany/China DTA 290 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin case 171-4 UKlUS DTA 324-5 US/Australia DTA 390-1
407
Holmes, Kevin 38 HungarylRussia DTA entry into force and effective date 29 immoveable property see real property imports Terry Haggerty Tire Co. Inc. v. United States case 161-3 income see also active income; business profits; dependent personal services; independent personal services; other income; passive lOCO me types taxed by both source and residence jurisdictions 18-19 types taxed solely by country of residence 17-18 independent personal services allocation rules 56-8, 67-8 article deleted from OECD Model Convention 56-7, 58 AustraliaIUK DTA (reconstructed version) 117 China/UK DTA 243 fixed base 56-8, 68 France/China DTA 267-8 Germany/China DTA 288 The Queen v. Dudney case 165-6 US/Australia DTA 384 individuals dual residency treatment in DTAs 21-3 Indonesia/Mauritius DTA 86 industrial or commercial profits see business profits information exchange see exchange of information insurance excise tax 26 anti-conduit provisions in UKJUS DTA 95 interest 64 AustralialUK Convention 65, 205-7, 222-3 AustralialUK DTA (reconstructed version) 122-4 China/UK DTA 239-40 France/China DTA 264-5 Germany/China DTA 284-6, 299 specific provisions precluding DTA relief 65 treaty shopping 82, 84 Aiken Industries Inc v. Commissioner of Inland Revenue case 84, 88 Indofood International Limited v. JP Morgan Chase Bank in a London branch case 86-8 UKIUS DTA 317-18 US/Australia DrA 379-81 where treated as a distribution 69-70 withholding tax rates 66, 69 interest on loa n Specialty Manufacturing Ltd v. The Queen case 168-9
408
Index
Index
internal law see domestic law international double taxation alienation of property 73-4 conditions for DTA relief to be available 64-5 credit method of unilateral double tax relief 63-4 example 61 exemption method of unilateral double tax relief 64,97, 100-2 meaning 3-4 other income 80 provisions precluding DTA relief 65 relief see double taxation relief rental income 73 Internet permanent establishment issues 38-40 interpretation of DTAs countries need not exercise full taxing rights under a DTA 8-9 interaction with CFC and FlF rules 10-13 permanent establishment clauses 37 rules 6 undefined terms 6-8 whether DTA can of itself impose taxation 9-10 Japan CFC rules and DTA with Singapore 11-13 Japan/Singapore DTA 12 joint venture UV) operations attribution of profits where PE in form of a ]V 50-1 limitation on benefits provisions anti-conduit provisions 94-6 Australia/China DTA 94 AustralialUK Convention 214 AustralialUK DTA (reconstructed version) 133-4 comprehensive provisions to prevent treaty shopping 88-94 UK/US DTA 328-33, 349-51 United States 88-9 US/Australia DTA 88-90, 92, 94, 385-9 MauritiuslIndonesia DTA 86 most favoured nation (MFN) clauses consequences of triggering 5 meaning 5 mutual agreement procedure (MAP) 105 AustralialUK Convention 216-17, 224 AustralialUK DTA (reconstructed version) 138-9 ChinaIUK DTA 249-50 France/China DTA 273 Germany/China DTA 294-5 UK/US DTA 338-9, 352-3 US/Australia DTA 394-5
nationality ChinaIUK DTA 232-3 non-discrimination see non-discrimination Netherlands/Australia DTA Commissioner of Taxation v. Lamesa Holdings BV case 8-9, 76, 147-9 non-discrimination 103-4 AustraliaIUK Convention 104,215-16,224 AustralialUK DTA (reconstructed version) 136-8 cases Commerzbank (1991) 104 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin 171-4 ChinaIUK DTA 249 France/China DTA 272-3 Germany/China DTA 294 OECD Model Tax Convention 103-4 UK/US DTA 337-8 US/Australia DTA 393-4 OECD Model Tax Convention 1, 12, 13,41 alienation of property article 75 annuities 72 assistance with collection article 107 attribution rule 47 historv and relevance 4 indep~ndent personal services article deleted 56-7,58 non-discrimination 103-4 pensions 72 permanent establishments 35, 38, 41-5 rental income 72-3 offshore exploration activities UK/US DTA 326-7 Organisation for Economic Co-operation and Development Model see OECD Model Tax Convention other income anti-conduit provisions in UK/US DTA 95 AustralialUK Convention 212-13 AustraliaIUK DTA (reconstructed version) 131-3 DTA article 79-80 France/China DTA 270-1 Germanv/China DTA 291 UK/US inA 327-8, 349 US/Australia DTA 391 where there is no DTA article 80 parent/subsidiary dealings see associa ted enterprises partnerships AustraliaIUK Convention 24, 214-15 AustraliaIUK DTA (reconstructed version) 134 treatment in DTAs 24 passive income 15
see also annuities; dividends; interest; pensions; royalties articles 60-76 double taxation relief 60-1,63-4 "effectively connected" to a permanent establishment 16, 67-8 priority of allocation rules 16,67 types 60 where passive income could also be classified as business profit 67 WIthholding taxes 60-71 pension schemes UK/US DTA 322-4, 349 pensIOns 72 AustralialUK Convention 211 AustralialUK DTA (reconstructed version) 126-7 ChinalUK DTA 245 France/China DTA 269 Germanv/China DTA 289 UK/US DTA 321-2,349 US/Australia DTA 390 permanent establishments (PEs) dttribution of profits agent, where PE in form of 48-50 branch, where PE in form of 45-7 joint venture, where PE in form of 50-1 Australia/Singapore DTA 37 AustralialUK Convention 198-200,221 Australian DTAs 44-5 business profits issues 33-4 cases AATCase 8775 (1993) 36-7 CIR v. Commonwealth Development Corporation [1995] 37 Gulf Offshore N.S. Limited v. The Queen (2006) 167-8 McDennott Industries (Aust) Pty Ltd v. FCT(2005) 37, 150-2 Pipeline decision (1997) 38, 174-5 Unisys Corporation v. Federal Commissioner of Taxation (2002) 154-5 ChinaIUK DTA 234-6 definition AustraliaIUK DTA (reconstructed version) 143-5 case law 36-7 DTAs generally 32, 35-6 developing vs. developed countries 41-3 electronic commerce 38-40 France/China DTA 259-61,276 Germanv/China DTA 280-1 influenc~ of OECD and UN Models on articles in DTAs 44-5 Internet challenges 38-40 mechanical and automatic installations as 38
409
passive income "effectively connected" to PE 16,67-8 priority of allocation rules 16,67 UK/US DTA 309-10 UN Model vs. OECD Model 41-5 unintentional creation of PE 40-1 US/Australia DTA 370-2 persons covered 21-4 AustralialUK Convention 193 AustraliaIUK DTA (reconstructed version) 109 ChinalUK DTA 231 France/China DTA 257 Germanv/China DTA 277 UK/US DTA 302-4, 344-6 US/Australia DTA 365-6 petroleum revenue tax UK/US DTA 26,301,334-5,341,343 procedures 105-7 see also collection procedure; exchange of information; mutual agreement procedure binding arbitration 105-6 professiona I services performed in an employment relationship see dependent personal services performed in an independent capacity see independent personal services professors AustraliaIUK DTA (reconstructed version) 131 ChinaIUK DTA 246 DTA treatment 18, 78-9 France/China DTA 270 Germany/China DTA 290 UK/US DTA 326 property 72 see also alienation of property; real property deferred income or gains AustraliaIUK DTA (reconstructed version) 129-30 public sector employees AustraliaIUK Convention 211-12 AustralialUK DTA (reconstructed version) 118-19 ChinaIUK DTA 245-6 DTA treatment 78 France/China DTA 269-70 Germanv/China DTA 290 M and Mme Robert Gilly v. Directeur des Services Fiscaux du Bas-Rhin case 171-4 UK/US DTA 324-5 US/Australia DTA 390-1 rates withholding taxes 66, 68-9 rea 1 property 72 alienation of property 73-6 AustralialUK Convention 208-9
410
Index
real property (cont.) AustraliaIUK DTA (reconstructed version) 128-9 Commissioner of Taxation v. Lamesa Holdings BV case 8-9, 76,147-9 UKlUS DTA 319-20 US/Australia DTA 383-4 AustraliaIUK Convention 200 AustraliaIUK DTA (reconstructed version) 127-9 ChinaIUK DTA 236 France/China DTA 261 Germany/China DTA 281-2 rental income 72-3 Qantas Airways Limited v. United States case 159-60 UKIUS DTA 311 US/Australia DTA 372-3 regional headquarters company (RHC) 90-1 remuneration see employment income; fringe benefits; government service employees rental income see under real property researchers ChinaIUK DTA 246 France/China DTA 270 Germany/China DTA 290 UKIUS DTA 326 residence AustralialUK Convention 196-7 cases Podd et al. v. Commissioner 160-1 The Queen v. Crown Forest Industries Limited (1995]163-4 ChinalUK DTA 233-4, 254 definition in AustralialUK DTA (reconstructed version) 142-3 France/China DTA 259 Germany/China DTA 279 UKIUS DTA 307-9 US/Australia DTA 368-70 residence jurisdictions dependent personal services 53-4 division of taxing rights 16 income classes taxed solely by 17-18 income taxed bv both source and residence jurisdictions 18-19 rental income 73 resource rent tax Australia 25-6 royalties 64 anti-conduit provisions in UKIUS DTA 95 AustralialUK Convention 65, 207-8, 223 AustraliaIUK DTA (reconstructed version) 124-6 cases McDermott Industries (Aust) Pry Ltd v. FCT (2005) 37, 150--2 Unisys Corporation v. Federal
Index
Commissioner of Taxation (2002) 154-5 ChinaIUK DTA 240--1,254 definition in DTA 70 France/China DTA 265-6, 276 Germany/China DTA 286-7, 299 specific provisions precluding DTA relief 65 treaty shopping 82 UKlUS DTA 318-19 US/Australia DTA 381-3 withholding tax rates 66, 70 RussialHungary DTA entry into force and effective date 29 sale of property see alienation of property shipping profits AustraliaIUK Convention 201-2 AustraliaIUK DTA (reconstructed version) 114 ChinaIUK DTA 237-8 Germany/China DTA 283, 298 UKIUS DTA 312, 347-8 US/Australia DTA 374-5 ships, income or gains from alienation of 7S AustralialUK Convention 209 AustraliaIUK DTA (reconstructed version) 129 UKlUS DTA 320 US/Australia DTA 384 Singapore/Australia DTA see Australia/Singapore DTA Singapore/Japan DTA 12 social security taxes 26 UKIUS DTA 321-2, 349 source jurisdictions business profits allocation rule 32 dependent personal services 53-4 division of taxing rights 16 income taxed by both residence and source jurisdictions 18-19 .. rental income 73 source of income or gains AustraliaIUK Convention 213 AustraliaIUK DTA (reconstructed version) 145 UKIUS DTA 9-10 US/Australia DTA 10, 396 special occupation categories 77-8 AustraliaIUK Convention 211-12 AustralialUK DTA (reconstructed version) 130-1 ChinaIUK DTA 244-7 France/China DTA 268-70 Germany/China DTA 289-91 UKlUS DTA 321, 324-6 US/Australia DTA 389-91 sportspersons AustraliaIUK Convention 211
AustralialUK DTA (reconstructed version) 112, 130--1 ChinaIUK DTA 244-5 DTA treatment 77-8 France/China DTA 269 Germanv/China DTA 289 UK/US inA 321 ;tudents .\ustralialUK Convention 212 AustralialUK DTA (reconstructed version) 131 ChinaIUK DTA 246-7 DTA treatment 18, 78 France/China DTA 270 Germany/China DTA 291 UKIUS DTA 325 US/Australia DTA 391 subsidiaries see associated enterprises Switzerland! Australia DTA Thiel v. FCT case on interpretation of "enterprise" 7,31,32,34-5,74,152-4 SwitzerlandlFrance DTA Re Ste Schneider Electric case 10--11, 12-13, 175-8 tax havens tax information exchange 106 tax information exchange 106 Association of Mouth and Foot Painting Artists Pty Ltd and Commissioner of Taxation case 164-5 AustralialUK DTA (reconstructed version) 139-40 Germany/China DTA 300 tax losses 76 taxes covered 24-7 AustraliaIUK Convention 25-6, 193-4 AustraliaIUK DTA (reconstructed version) 110 ChinaIUK DTA 27,231-2,253 France/China DTA 26-7, 257-8 Germany/China DTA 277-8 UKIUS DTA 26, 304, 346 US/Australia DTA 25,366 taxpayers see companies; individuals; persons covered; special occupation categories teachers AustralialUK DTA (reconstructed version) 131 ChinaIUK DTA 246 DTA treatment 18, 78-9 France/China DTA 270 Germanv/China DTA 290 UKIUS DTA 326 technical tees ChinaIUK DTA 242-3 temporary residents AustralialUK DTA (reconsrructed version) 133-4
411
termination 27, 29-30 AustralialUK Convention 219-20 .\ustraliaIUK DTA (reconstructed version) 111-12 ChinalUK DTA 252 ChinalUK Protocol 256 France/China DTA 27S Germanv/China DTA 296-7 UKlUS DTA 342-3 US/Australia DTA 397 territorial scope AustraliaIUK Convention 194 AustraliaIUK DTA (reconstructed version) 140 ChinaIUK DTA 232 France/China DTA 274-5 timing see effective date; entry into force; termination trainees ChinaIUK DTA 246-7 France/China DTA 270 Germanv/China DTA 291 treaty shopping anti-conduit provisions to prevent 94-6 beneficial ownership concept 82-8 cases 84-8 comprehensive limitation on benefit provisions 88-94 distinct from basket shopping 96 general anti-avoidance rules (GAAR) 96 meaning 81-2 prevention, approaches to 82-96 trusts treatment in DTAs 24 UK/Australia DTA see AustralialUK Convention UK/Canada DTA Gulf Offshore N.S. Limited v. The Queen case 167-8 UKlUS DTA 301-64 alienation of property 319-20 Amending Protocol 301 anti-conduit provisions 95 associated enterprises 313, 348 business profits 311-12, 347 consular officers 341 deemed source of income 9-10 diplomatic agents 341 directors' fees 321 dividends 313-16, 348 double taxation relief 334-7,351-2 dual residencv 22 effectIve date'301, 353 entertainers and sportsmen 321 entry into force 301, 341-2, 353 EqUIvalent Beneficiaries 88-9, 92-4 exchange of information and administrative as,lstance 339-40, 353
412
Index Index
UKIUS OTA (cont. 1 Exchange of Notes 344-64 gains 319-20 general definitions 304-7, 347 government service 324-5 income from employment 320-1, 348-9 independent personal services covered by business profits article 56-7 interest 317-18 limitation on benefit provisions 328-33,
349-51 mutual agreement procedure 338-9, 352-3 non-discrimination 337-8 offshore exploration and exploitation activities 326 other income 327-8, 349 pension schemes 322-4, 349 pensions, social security, annuities, alimony and child support 321-2,349 permanent establishments 309-10 persons covered 302-4, 344-6 petroleum revenue tax 26,301,334-5,341,
343 professors 326 real property 311 researchers 326 residence 307-9 royalties 318-19 scope 302-4, 344-6 shipping and air transport profits 312,
347-8 ships or aircraft, income or gains from alienation of 320 special occupation categories 321, 324-6 students 325 taxes covered 26, 304, 346 teachers 326 termination 342-3 text 301-64 undefined terms 6-7 UN Model Bilateral Convention for the Prevention of the Double Taxation of Income 1 permanent establishments 41-3 undefined terms Australia 8 dealing with 6-8 context otherwise requires issue 7 static vs. ambulatory issue 7-8 Thiel v. FCT case on interpretation of "enterprise" 7, 31, 32, 34-5,74,152-4 United Kingdom see also AustraliaIUK Convention; AustraliaIUK DTA (reconstructed version); ChinaIUK DTA; UK/Canada DTA; UKIUS DTA anti-conduit provisions 95 DTAs 5, 181-90
toreign tax credits 64 incorporation of OTAs Into domestic law
14 rates of withholding tax 66 United Nations Model see UN Model Bilateral Convention for the Prevention of the Double Taxation of Income United States see also UK/US DTA; US/Australia DTA; US/Canada DTA anti-conduit provisions 95-6 cases 156-63 DTAs 5,181-90 limitation on benefit provisions 88-9 Model Income Tax Convention 1 US/Australia DTA 365-98 alienation of property 383-4 associa ted enterprises 375-6 business profits 373-4 cases Max Factor & Co v. Federal Commissioner of Taxation 149-50 Qantas Airways Limited v. United States 159-60 Unisys Corporation v. Federal Commissioner of Taxation 154-5 consular privileges 395-6 deemed source of income 10,396 dependent personal services 55-6, 385 diplomatic privileges 395-6 dividends 376-9 dual residency 23 entertainers 389-90 entry into force 396-7 exchange of information 395 fixed base 384 general definitions 366-8 governmental remuneration 390-1 independent personal services 5l, 384 interest 379-81 limitation on benefit provisions 88-90, 92, 94,385-9 mutual agreement procedure 105, 394-5 non-discrimination 393-4 pensions, annuities, alimony and child support 390 permanent establishments 370-2 personal scope 365-6 real property 372-3 relief from double taxation 391-2 residence 368-70 royalties 381-3 shipping and air transport 374-5 ships or aircraft, income or gains from alienation of 384 special occupation categories 389-91 students 391 taxes covered 25, 366
termination 397 text 365-98 US/Canada OTA cases Cudd Pressure Control Inc.
413
Vienna Convention on the Law of Treaties 6 8 Vogel. Kia us 47 ' 1'.
The Queen
(1998)156-7 The North West Life Assurance Company of Canada v. Commissioner of Internal Revenue (1996) 157-9 Podd et al. v. Commissioner 160-1 The Queen v. Dudney (2002)165-6 Specialty Manufacturing Ltd v. The Queen (1999)168-9 Sumner v. The Queen (2000) 169-71 Terry Haggerty Tire Co. Inc. v. United States 161-3 US/uK DTA see UK/US DTA
websites permanent establishment issues 38-40 withholding taxes Australia 61 capital gains realised by non-residents 76 dividends 66, 68 escalation clause vs. indemnification clause 71 interest 66, 69 no need to pay additional tax 70 passive income 60-71 rates 66, 68-9 royalties 66, 70 taxpayer indemnified against imposition of
71-2
of Intelle ctual Property
North American Tax Handbook
Taxation
Co-published with the IBFD Ed,tors: John Rienstra and George Farrah
Consultant Editor: Anne FO/rpo
Obtain a complete survey of the tax systems in the USA, Canada and Mexico in an easy-to-use format. Thorough and authoritative, the tax systems are reviewed on both the federal levels and the provinciaVstate levels. The Handbook also covers both Corporate and Individual Taxation. Use the consistent layout to pinpoint the information you need - and compare and contrast different jurisdictions.
Creating IP Exploiting IP Acquisition of IP Disposal of IP Group issues
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Transfer Pricing Manual Technical Editor: Gareth Green
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The BNA International Transfer Pricing Manual gives you an authoritative practical overview from leading practitioners world-wide. Refer to the practical examples and expert guidance on how things are done in the "real" transfer pricing world. Each chapter looks at the OECD guidelines relevant to that area and examines how they are reflected in practice. Obtain essential insight and clarity with the expert solutions provided to typical problems that arise. The BNA International Transfer Pricing Manual is invaluable for its day-to-day practical reference value. Each topic is covered in a comprehensive and seamless manner for ease of reference. This allows you to research specific transfer pricing queries instantly and accurately. Authors are drawn from the key trading areas of Europe, the US and Asia to give a unique global perspective. Practical and comprehensive, the BNA International Transfer Pricing Manual is your essential reference guide to transfer pricing theory and practice. Pages: 480. Price: £95, $195, €145. Publishing: August 2008. ISBN: 978-0-906524-14-5
What incentives and other tax advantages are there in major jurisdictions relating to IP? When exploiting IP, how are royalty flows taxed? What are the tax treaty quirks when receiving or paying royalties? When acquiring IP, what funding structures are available? What group structures are useful for an IP-intensive business? Taxation of Intellectual Property answers these and many more questions. This is your authority on the taxation of IP - giving you an expert examination of the main transactions that an IP or tax professional conducts. Including analysis of significant country differences, areas covered by Taxation of Intellectual Property include:
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