Read an initial report of the OECD tax treaty update in TaxNewsFlash-Europe.
Revised Commentary on the meaning of “beneficial owner”
The “beneficial owner” concept is essentially an anti-abuse rule designed to prevent treaty shopping by agents, nominees or conduit companies for the benefit of a resident of a third country in relation to dividends (Article 10), interest (Article 11) and royalty income (Article 12).
The new guidance in the Commentary to the OECD Model Tax Convention points to an “autonomous treaty meaning” of the notion of “beneficial owner” and is intended to clarify the concept within the framework of the OECD Model Tax Convention.
The effectiveness of this additional guidance in specific cases—in particular, in situations involving company groups—remains to be seen, and it is anticipated that some uncertainty as to the exact meaning of the term “beneficial ownership” will undoubtedly remain.
Changes to Article 26 (Exchange of Information) and its Commentary
The OECD Council also approved an update to Article 26 concerning the international standard on the exchange of information.
The standard provides for information exchange on request when the information has “foreseeable relevance” for the administration of taxes of the country making the request. Interpretations of the standard of “foreseeable relevance” and the term “fishing expedition,” as well as an optional default standard of time limits within which the information is required to be provided, are included.
Issues related to Article 17
Under Article 17 (Artists and Sportsmen), the country where the activities of a non-resident entertainer or sportsman are performed is allowed to tax the income derived from these activities.
This regime differs from the one that applies to income derived from other types of activities, making it necessary to determine:
- What is an entertainer or sportsman?
- What are the personal activities of an entertainer or sportsman?
- What are the source and allocation rules for activities performed in various countries?
The update includes a number of changes to Article 17, and in fact, the title of this article has been changed to “Entertainers and Sportspersons.”
Tax treaty issues related to emissions permits / credits
The typical tax treaty issue that would be associated with the trading of emissions permits / credits is the treatment of the income from the alienation of such permits / credits by a resident of a contracting state.
Any income or gain from the alienation of property, which would include emissions permits / credits, is generally covered by either Article 7 (Business Profits), Article 8 (Shipping, Inland Waterways Transport and Air Transport), Article 13 (Capital Gains) or Article 21 (Income). In addition, concerning agriculture and forestry enterprises, such income may fall within the scope of Article 6 (Income from Immovable Property). The update clarifies the classification of such income.
Tax treaty treatment of termination payments
Payments made following the termination of employment include a number of different payments such as non-competition payments, severance payments or payments made with respect to unused holidays.
In a tax treaty context, such payments may generally be covered by Article 15 (Income from Employment) or Article 18 (Pensions). The update adds significant guidance (in particular in the Commentary to Article 15) regarding the characterization of termination payments in order to ensure a consistent treatment of such payments for tax treaty purposes.
Read a July 2014 report(PDF 159KB) prepared by the KPMG member firm in Luxembourg: The 2014 Update to the OECD Model Tax Convention