Category: Tax Treaty Interpretation

Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes.

Besides bilateral treaties, multilateral treaties are also in place. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Co-operation and Development (OECD) is open to all countries.

Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.

Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

On 3 May 2021, the Danish High Court ruled in two “beneficial owner” cases concerning the question of whether withholding tax must be paid on dividends distributed by Danish subsidiaries to foreign parent companies. The first case – NETAPP Denmark ApS – concerned two dividend distributions of approx. 566 million DKK and approx. 92 million made in 2005 and 2006 by a Danish company to its parent company in Cyprus. The National Tax Court had upheld the Danish company in that the dividends were exempt from withholding tax pursuant to the Corporation Tax Act, section 2, subsection. 1, letter c, so that the company was not obliged to pay withholding tax. The Ministry of Taxation brought the case before the courts, claiming that the Danish company should include – and thus pay – withholding tax of a total of approx. 184 million kr. The second ... Continue to full case
India vs Concentrix Services & Optum Global Solutions Netherlands B.V., March 2021, High Court, Case No 9051/2020 and 2302/2021

India vs Concentrix Services & Optum Global Solutions Netherlands B.V., March 2021, High Court, Case No 9051/2020 and 2302/2021

The controversy in the case of India vs Concentrix Services Netherlands B.V. & Optum Global Solutions International Netherlands B.V., was the rate of withholding tax to be applied on dividends paid by the Indian subsidiaries (Concentrix Services India Private Limited & Optum Global Solutions India Private Limited) to its participating (more than 10% ownership) shareholders in the Netherlands. The shareholders in the Netherlands held that withholding tax on dividends should be applied by a rate of only 5%, whereas the Indian tax authorities applied a rate of 10%. The difference in opinions relates to interpretation of a protocol to the tax treaty between India and the Netherlands containing an most favoured nation clause (MFN clause). MFN clauses provides that the parties to the treaty (here India and the Netherlands) are obliged to provide each other with a treatment no less favourable than the treatment they ... Continue to full case
Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors ... Continue to full case
Philippines vs Snowy Owl Energy Inc, March 2021, Tax Court, CTA CASE No. 9618

Philippines vs Snowy Owl Energy Inc, March 2021, Tax Court, CTA CASE No. 9618

In 2013, Snowy Owl Energy Inc entered into a Consultancy Agreement (Subconsultant Services Agreement) with Rolenergy Inc. – a Hong Kong-based corporation organized and registered in the British Virgin Islands. Based on the Agreement, Rolenergy would serve as Snowy Owl Energy Inc’s sub-consultant. The tax authorities issued an assessment for deficiency income tax (IT), final withholding tax (FWT) and compromise penalty in relation to the sub-consultant fees it paid for taxable year 2013. Judgement of the Tax Court The Court decided in favour of Snowy Owl Energy Inc. Section 23(F)36 in relation to Section 42(C)(3)37 of the NIRC of 1997, as amended, provides that a non-resident foreign corporation is taxable only for income from sources within the Philippines, and does not include income for services performed outside the Philippines. Excerpts: “Indubitably, the payments made in exchange for the services rendered in Hong Kong are income ... Continue to full case
South Africa vs ABSA bank, March 2021, High Court, Case No 2019/21825

South Africa vs ABSA bank, March 2021, High Court, Case No 2019/21825

During FY 2014 – 2018 a South African company, ABSA, on four occasions bought tranches of preference shares in another South African company, PSIC 3. This entitled ABSA to dividends. The dividends received from PSIC 3 by ABSA were declared as tax free. The income in PSIC 3 was based on dividend payments on preference shares it owned in another South African company, PSIC 4. The income in PSIC 4 was from a capital outlay to an off shore trust, D1 Trust. The trust then lent money to MSSA, a South African subsidiary of the Macquarie Group, by means of subscribing for floating rate notes. The D1 Trust made investments by way of the purchase of Brazilian Government bonds. It then derived interest thereon. In turn, PSIC 4 received interest on its capital investment in D1 Trust. The South African Revenue Service held that ABSA ... Continue to full case
India vs Engineering Analysis Centre of Excellence Private Limited, March 2021, Supreme Court, Case No 8733-8734 OF 2018

India vs Engineering Analysis Centre of Excellence Private Limited, March 2021, Supreme Court, Case No 8733-8734 OF 2018

At issue in the case of India vs. Engineering Analysis Centre of Excellence Private Limited, was whether payments for purchase of computer software to foreign suppliers or manufacturers could be characterised as royalty payments. The Supreme Court held that such payments could not be considered payments for use of the underlying copyrights/intangibles. Hence, no withholding tax would apply to these payments for the years prior to the 2012. Furthermore, the 2012 amendment to the royalty definition in the Indian tax law could not be applied retroactively, and even after 2012, the definition of royalty in Double Tax Treaties would still override the definition in Indian tax law. Excerpt from the conclusion of the Supreme Court “Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment , it is clear that there is no obligation on the ... Continue to full case
France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the ... Continue to full case
France vs Société Générale S.A., Feb 2021, Administrative Court of Appeal, Case No 16VE00352

France vs Société Générale S.A., Feb 2021, Administrative Court of Appeal, Case No 16VE00352

Société Générale S.A. had paid for costs from which its subsidiaries had benefited. The costs in question was not deducted by Société Générale in its tax return, but nor had they been considered distribution of profits subject to withholding tax. Following an audit for FY 2008 – 2011 a tax assessment was issued by the tax authorities according to which the hidden distribution of profits from which the subsidiaries benefited should have been subject to withholding tax in France Société Générale held that the advantage granted by the parent company in not recharging costs to the subsidiaries resulted in an increase in the valuation of the subsidiaries. It also argued that the advantages in question were not “hidden” since they were explicitly mentioned in the documents annexed to the tax return By judgment of 11 October 2018, the court of first instance discharged the withholding ... Continue to full case
Luxembourg vs "Lux Service SA", December 2020, Higher Administrative Court, Case No 45072

Luxembourg vs “Lux Service SA”, December 2020, Higher Administrative Court, Case No 45072

In August 2020, the competent authority of the Belgian tax administration sent a request for information to the Luxembourg tax administration concerning “Lux Service SA” under the tax convention between Luxembourg and Belgium. The requested information regarding “Lux Service SA” was documentation related to the basis for service payments from a related party in Belgium. The tax administration in Luxembourg contacted “Lux Service SA” and requested submission of the information and documents. Lux Service SA did not want to accommodate the request and brought the case to the High Administrative court for an annulment. The tax authorities argued that the appeal should be dismissed as unfounded. The Court dismissed the appeal of “Lux Services SA” and upheld the information injunction issued by the tax administration. The argument that the tax administration had failed to state the reasons for the information injunction was rejected by the ... Continue to full case
Italy vs Gulf Shipping & Trading Corporation Ltd Inc, October 2020, Supreme Court, Case No 21693/2020

Italy vs Gulf Shipping & Trading Corporation Ltd Inc, October 2020, Supreme Court, Case No 21693/2020

The Italian Revenue Agency had notified to Gulf Shipping & Trading Corporation Ltd Inc. several notices of assessment, relating to the tax years 1999 to 2006, contesting undeclared taxable income, having ascertained that the aforesaid company had a permanent establishment in Italy through which it traded in construction materials. The company had lodged separate appeals against the above tax assessments, which were partially upheld by the Tax Commission, which, in particular, had partially recalculated the taxable income in relation solely to transactions involving the sale of stone materials to Italian clients The tax authorities appealed the sentence of the court of first instance. According to the Revenue Agency in regards to “permanent establishment”, what needs to be verified is the fact that, through the fixed place of business, the company based abroad carries out its activity in the Italian territory, i.e. an economically relevant activity ... Continue to full case
Switzerland vs A GmbH und B GmbH, August 2020, Federal Supreme Court, Case No 2C_1116/2018

Switzerland vs A GmbH und B GmbH, August 2020, Federal Supreme Court, Case No 2C_1116/2018

Two Swiss companies, A GmbH und B GmbH, belonged to a multinational group under a Dutch parent. The group provided food and fuel to military troops and civilian in areas of crises and armed conflicts. A group company located in the United Arab Emirates provided services to the Swiss companies primarily in relation to activities in Afghanistan. A GmbH und B GmbH had a permanent establishment in Afghanistan. As there are no tax treaties between Switzerland and Afghanistan, for Swiss tax purposes the allocation of income between the two companies and the permanent establishment in Afghanistan was governed by Swiss domestic law. A tax assessment was issued by the authorities which was brought to the Swiss courts by the companies. In 2018 the case ended up in the Swiss Supreme Court. The Supreme Court ruled that according to Swiss law, the profit allocation has to ... Continue to full case
France vs. Piaggio, July 2020, Administrative Court of Appeal, Case No. 19VE03376-19VE03377

France vs. Piaggio, July 2020, Administrative Court of Appeal, Case No. 19VE03376-19VE03377

Following a restructuring of the Italien Piaggio group, SAS Piaggio France by a contract dated January 2 2007, was changed from an exclusive distributor of vehicles of the “Piaggio” brand in France to a commercial agent for its Italian parent company. The tax authorities held that this change had resulted in a transfer without payment for the customers and applied the provisions of article 57 of the general tax code (the arm’s length principle). A tax assessment was issued whereby the taxable income of SAS Piaggio France was added a profit of 7.969.529 euros on the grounds that the change in the contractual relations between the parties had resultet in a transfer of customers for which an independent party would have been paid. In a judgement of October 2019, Conseil dÉtat, helt in favor of the tax authorities and added an additional profit of 7.969.529 ... Continue to full case
Korea vs "Lux corp", 16 January 2020, Supreme Court Case no. 2016두35854

Korea vs “Lux corp”, 16 January 2020, Supreme Court Case no. 2016두35854

In this case the Korean Supreme Court held that Luxembourg SICAV and SICAF are entitled to reduced withholding tax rate on interest and dividend income under the Korea–Luxembourg Tax Treaty. Meaning of “residents of Luxembourg,” which is subject to the “Convention between the Government of the Republic of Korea and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” (held: any person who, under the laws of Luxembourg, is liable to pay tax therein), and in a case where tax is not imposed in accordance with the benefit of tax exemption, etc. for which legal requirements has been fulfilled, whether it may be considered that the tax liability does not exist (negative). Standard for determining whether one qualifies as the “beneficial owner” as prescribed in ... Continue to full case
UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, October 2019, UK Upper Tribunal, UKUT 0277 (TCC)

UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, October 2019, UK Upper Tribunal, UKUT 0277 (TCC)

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the ... Continue to full case
India vs TMW, August 2019, Income Tax Tribunal, Case No ITA No 879

India vs TMW, August 2019, Income Tax Tribunal, Case No ITA No 879

The facts in brief are that TMW ASPF CYPRUS (hereinafter referred to as ‘assessee’) is a private limited company incorporated in Cyprus and is engaged in the business of making investments in the real estate sector. The company in the year 2008 had made investments in independent third-party companies in India (hereinafter collectively known as ‘investee companies’) engaged in real estate development vide fully convertible debentures (FCCDs). It was these investments that made the investee companies an associated enterprise of the assessee as per TP provisions. The assessee had also entered agreements, according to which the assessee was entitled to a coupon rate of 4%. Further, after the conversion of the FCCDs into equity shares, the promoter of Indian Companies would buy back at an agreed option price. The option price would be such that the investor gets the original investment paid on subscription to ... Continue to full case
Italy vs Agusta Holding BV, May 2019, Supreme Court, Case No 14527/2019

Italy vs Agusta Holding BV, May 2019, Supreme Court, Case No 14527/2019

A Dutch company, Agusta Holding BV, submitted a request regarding the reimbursement of withholding tax paid in Italy by its Italian subsidiary on dividends distributed for the fiscal year 2001. The request was initially accepted and the withholding tax paid back. But after an audit, the reimbursement was then challenged. The tax authorities found that Agusta Holding BV had been incorporated in the Netherlands only to benefit from the favourable fiscal dividend regime provided by the Italian-Netherland double tax treaty and from the Dutch tax regime concerning the exemption of dividends from taxable income. Agusta Holding BV appealed the decision of the tax office before the Provincial Tax Court which ruled in favor of Augusta Holding BV as the deadline to ask for the reimbursement of the withholding tax back had expired at the time of the audit conducted by local tax office. The local ... Continue to full case
Denmark vs T and Y Denmark, February 2019, European Court of Justice, Cases C-116/16 and C-117/16

Denmark vs T and Y Denmark, February 2019, European Court of Justice, Cases C-116/16 and C-117/16

The cases of T Danmark (C-116/16) and Y Denmark Aps (C-117/16) adresses questions related to interpretation of the EU-Parent-Subsidary-Directive The issue is withholding taxes levied by the Danish tax authorities in situations where dividend payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on dividend payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Parent-Subsidiary Directive can be denied where fraudulent or abusive tax avoidance is involved. Quotations from cases C-116/16 and C-117/16: “The general principle of EU law that EU law cannot ... Continue to full case
Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

The cases of N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark ApS (C-299/16), adresses questions related to the interpretation of the EU Interest and Royalty Directive. The issue in these cases is withholding taxes levied by the Danish tax authorities in situations where interest payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on interest payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Interest and Royalty Directive can be denied where fraudulent or abusive tax ... Continue to full case
Italy vs Dolce & Gabbana, December 2018, Supreme Court, Case no 33234/2018

Italy vs Dolce & Gabbana, December 2018, Supreme Court, Case no 33234/2018

Italien fashion group, Dolce & Gabbana, had moved ownership of valuable intangibles to a subsidiary established for that purpose in Luxembourg. The Italian Revenue Agency found the arrangement to be wholly artificial and set up only to avoid Italien taxes and to benefit from the privileged tax treatment in Luxembourg. The Revenue Agency argued that all decision related to the intangibles was in fact taken at the Italian headquarters of Dolce & Gabbana in Milan, and not in Luxembourg, where there were no administrative structure and only one employee with mere secretarial duties. Dolce & Gabbana disagreed with these findings and brought the case to court. In the first and second instance the courts ruled in favor of the Italian Revenue Agency, but the Italian Supreme Court ruled in favor of Dolce & Gabbana. According to the Supreme Court, the fact that a company is ... Continue to full case
European Commission vs McDonald, December 2018, European Commission Case no. SA.38945

European Commission vs McDonald, December 2018, European Commission Case no. SA.38945

The European Commission found that Luxembourg did not grant illegal State aid to McDonald’s as a consequence of the exemption of income attributed to a US branch. ...it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty ... Continue to full case
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