Treaty Application for Companies in a Group

Preface / V
List of abbreviations / XV

CHAPTER 1 Introduction and problem statement / 1
1.1 Grounds for the research / 1
1.2 Problem statement / 5
1.3 Assessment framework / 6
1.4 Relevance / 21
1.5 Structure / 23
1.6 Methodology / 24
1.7 Scope and limitations / 26

CHAPTER 2 Framework conditions for a group concept for tax treaty purposes / 29
2.1 Introduction / 29
2.2 Theory of the firm / 32
2.2.1 Introduction / 32
2.2.2 General aspects of the theory of the firm / 32
2.2.3 Theory of the firm & taxation / 34
2.2.4 The rationale behind a worldwide unitary taxation approach / 37
2.2.5 Interim conclusion: theory of the firm / 42
2.3 The group concept: one entity from an economic perspective / 42
2.3.1 Introduction / 42
2.3.2 Control as a first element of the group concept / 44
2.3.2.1 Introduction / 44
2.3.2.2 Forms of control / 44
2.3.2.3 Level of control / 53
2.3.2.4 Interim conclusion: control as a first element of a group concept / 56
2.3.3 Integration as a second element of the group concept / 56
2.3.3.1 Introduction / 56
2.3.3.2 Integration / 57
2.3.3.3 Current floating assets vs. capital assets / 59
2.3.3.4 Interim conclusion: integration as a second element of the group concept / 59
2.3.4 Interim conclusion: control & integration / 59
2.4 Existing group concepts in tax law / 60
2.4.1 Introduction / 60
2.4.2 The group concept in the OECD MTC / 60
2.4.2.1 Introduction / 60
2.4.2.2 Closely related enterprise / 61
2.4.2.3 Associated enterprise / 62
2.4.2.4 Art. 10 OECD MTC: Dividends / 63
2.4.2.5 Art. 13 OECD MTC: Capital gains / 64
2.4.2.6 Art. 29 OECD MTC: Entitlement to benefits / 64
2.4.2.7 Interim conclusion: the group concept in the OECD MTC / 65
2.4.3 The group concept in European directives and draft directives / 68
2.4.3.1 Introduction / 68
2.4.3.2 Parent Subsidiary Directive / 69
2.4.3.3 Interest and Royalty Directive / 71
2.4.3.4 Anti-Tax Avoidance Directive / 73
2.4.3.5 Draft CCCTB Directive / 78
2.4.3.6 Draft Pillar Two Directive / 79
2.4.3.7 Interim conclusion: the group concept in European directives and draft directives / 80
2.4.4 The group concept in national tax law / 83
2.4.4.1 Introduction / 83
2.4.4.2 Group taxation regimes / 83
2.4.4.3 The unitary business approach / 86
2.4.4.4 Interim conclusion: the group concept in national tax law / 91
2.4.5 Some observations / 92
2.4.6 Interim conclusion: existing group concepts / 94
2.5 Conclusion / 95

CHAPTER 3 A group approach in the OECD MTC / 97
3.1 Introduction / 97
3.2 Background / 97
3.2.1 Drafting of the OECD MTC / 97
3.2.2 Influence OECD MTC and OECD Commentary / 98
3.2.3 Legal framework of tax treaties / 100
3.3 OECD MTC and group companies / 101
3.3.1 Introduction / 101
3.3.2 Chapters I and II OECD MTC: Scope of the Convention and definition of terms / 101
3.3.2.1 Introduction / 101
3.3.2.2 Art. 1, 3 and 4 OECD MTC: Persons covered, General definitions and Resident / 102
3.3.2.3 Art. 5 OECD MTC: Permanent establishment / 114
3.3.3 Chapter III OECD MTC: Taxation of income / 121
3.3.3.1 Introduction / 121
3.3.3.2 Art. 6 OECD MTC: Income from immovable property / 121
3.3.3.3 Art. 7 OECD MTC: Business profits / 122
3.3.3.4 Art. 8 OECD MTC: International shipping and air transport / 125
3.3.3.5 Art. 9 OECD MTC: Associated enterprises / 126
3.3.3.6 Art. 10 OECD MTC: Dividends / 129
3.3.3.7 Art. 11 OECD MTC: Interest / 135
3.3.3.8 Art. 12 OECD MTC: Royalties / 138
3.3.3.9 Art. 13 OECD MTC: Capital gains / 139
3.3.3.10 Art. 16 OECD MTC: Directors’ fees / 141
3.3.3.11 Art. 21 OECD MTC: Other income / 142
3.3.4 Chapter V OECD MTC: Methods for elimination of double taxation / 144
3.3.4.1 Introduction / 144
3.3.4.2 Qualification differences resulting from differences in national law / 146
3.3.4.3 Qualification differences resulting from a different interpretation
of the facts or the treaty provisions / 147
3.3.5 Chapter VI OECD MTC: Special provisions / 149
3.3.5.1 Introduction / 149
3.3.5.2 Art. 24 OECD MTC: Non-discrimination / 149
3.3.5.3 Art. 25 OECD MTC: Mutual Agreement Procedure / 151
3.3.5.4 Art. 29 OECD MTC: Entitlement to benefits / 152
3.4 Bilateral tax treaties and group companies / 163
3.4.1 Introduction / 163
3.4.2 Convention provisions that address the issues associated with reorganizations / 164
3.4.3 Convention provisions with group situation affecting withholding tax / 166
3.4.4 Convention provisions aimed at avoiding economic double taxation with dividend distributions / 168
3.4.5 Interim conclusion: bilateral tax treaties and group companies / 168
3.5 Some observations / 169
3.5.1 Introduction / 169
3.5.2 Group approach contributes to realizing the OECD MTC objectives / 169
3.5.3 Lack of a group approach or a clear group approach is negative for achieving the OECD MTC objectives / 170
3.5.4 Other points of attention and criticism / 171
3.5.5 Overview / 172
3.6 Conclusion / 177

CHAPTER 4 A group approach in EU tax law / 179
4.1 Introduction / 179
4.2 A group approach in primary EU law? / 181
4.2.1 Introduction / 181
4.2.2 A group approach for cross-border groups and tax groups? / 183
4.2.2.1 Introduction / 183
4.2.2.2 Loss compensation / 184
4.2.2.3 Other elements of group taxation regimes? / 195
4.2.3 A group approach for EU anti-abuse provisions? / 198
4.2.3.1 Introduction / 198
4.2.3.2 Deister Holding and Juhler Holding / 199
4.2.3.3 T Danmark / 201
4.2.3.4 A group approach for EU anti-abuse provisions? / 202
4.2.3.5 Anti-abuse provisions & the OECD MTC / 202
4.2.4 Interim conclusion: a group approach in primary EU law / 205
4.3 A group approach in EU directives? / 206
4.3.1 Introduction / 206
4.3.2 Parent Subsidiary Directive / 208
4.3.2.1 Introduction cross-border dividend taxation / 208
4.3.2.2 Cross-border dividend taxation in the EU / 208
4.3.2.3 PSD benefits & the OECD MTC / 213
4.3.3 Interest and Royalty Directive / 218
4.3.3.1 Introduction / 218
4.3.3.2 Cross-border interest and royalty payments in the EU / 219
4.3.3.3 IRD benefits & the OECD MTC / 221
4.3.4 Merger Directive / 224
4.3.4.1 Introduction / 224
4.3.4.2 Cross-border restructurings in the EU / 224
4.3.4.3 MD benefits & the OECD MTC / 225
4.3.5 Anti-tax Avoidance Directive / 229
4.3.5.1 Introduction / 229
4.3.5.2 Earnings stripping rule / 229
4.3.5.3 Exit tax rule / 232
4.3.5.4 General Anti-Abuse Rule / 235
4.3.5.5 CFC rule / 237
4.3.5.6 Measures to counter hybrid mismatch arrangements / 240
4.3.6 Interim conclusion: a group approach in EU directives / 243
4.4 Conclusion / 247

CHAPTER 5 A group approach in national tax law / 249
5.1 Introduction / 249
5.2 Existing group taxation regimes / 251
5.2.1 Introduction / 251
5.2.2 Profit or loss transfer system / 253
5.2.2.1 Introduction / 253
5.2.2.2 Group contribution system / 253
5.2.2.3 Group relief system / 254
5.2.3 Consolidation systems (partial consolidation and full consolidation) / 254
5.2.3.1 Introduction / 254
5.2.3.2 Partial consolidation system / 255
5.2.3.3 Full consolidation system / 255
5.2.4 Group taxation regimes & the OECD MTC / 257
5.2.4.1 Introduction / 257
5.2.4.2 Consolidated subsidiary: not liable to tax/transparent? / 257
5.2.4.3 Consolidation regimes & dual residents / 259
5.2.4.4 Group taxation regimes that apply on a domestic level / 260
5.2.4.5 Cross-border group taxation regimes / 260
5.2.4.6 Group approach & the OECD MTC / 264
5.2.5 Interim conclusion: existing group taxation regimes / 265
5.3 Group taxation 2.0 / 266
5.3.1 Introduction / 266
5.3.2 Allocation methods / 266
5.3.2.1 Introduction / 266
5.3.2.2 The arm’s length principle / 269
5.3.2.3 Formulary apportionment / 275
5.3.3 Water’s edge formulary apportionment / 284
5.3.3.1 Introduction / 284
5.3.3.2 Formulary allocation in Canada: highlights of the system / 285
5.3.3.3 Pros and cons of the Canadian system / 287
5.3.3.4 Concurrence of the Canadian system with tax treaties / 287
5.3.4 CCCTB / 288
5.3.4.1 Introduction / 288
5.3.4.2 Highlights of the CCCTB / 289
5.3.4.3 Pros and cons of the CCCTB system / 294
5.3.4.4 The CCCTB & tax treaties / 295
5.3.5 Worldwide formulary apportionment / 297
5.3.5.1 Introduction / 297
5.3.5.2 Formulary apportionment in the United States: highlights of the system / 297
5.3.5.3 The Californian system / 300
5.3.5.4 Pros and cons of the system in the United States / 301
5.3.5.5 Concurrence of the system in the United States with taxtreaties / 302
5.3.6 Interim conclusion: group taxation 2.0 / 303
5.4 Conclusion / 305

CHAPTER 6 Towards a group approach for tax treaty purposes: what would be the implications for the OECD MTC? / 307
6.1 Introduction / 307
6.2 Fundamental change to the OECD MTC (a group approach) / 309
6.2.1 Introduction / 309
6.2.2 A group approach (unitary taxation) from a domestic perspective / 310
6.2.2.1 Introduction / 310
6.2.2.2 Defining the unitary business (‘who to tax’) / 311
6.2.2.3 Defining the tax base (‘what to tax’) / 312
6.2.2.4 Defining jurisdiction to tax (‘where to tax’ – part 1) / 314
6.2.2.5 Profit allocation mechanism (‘where to tax’ – part 2) / 317
6.2.2.6 Tax rate (‘how much tax’) / 319
6.2.3 A group approach (unitary taxation) & the OECD MTC / 319
6.2.3.1 Introduction / 319
6.2.3.2 Definition of the unitary business and the residence definition (art. 1, 3 and 4 OECD MTC) / 320
6.2.3.3 Defining jurisdiction to tax (art. 5 OECD MTC) / 322
6.2.3.4 Business profits (art. 7 and art. 9 OECD MTC) / 322
6.2.3.5 Passive income (art. 10, 11 and 12 OECD MTC) / 325
6.2.3.6 Capital gains (art. 13 OECD MTC) / 328
6.2.3.7 Elimination of double taxation (art. 23 A and 23 B OECD MTC) / 328
6.2.4 Implementation: multilateral tax treaty / 330
6.2.5 Evaluation / 332
6.2.5.1 Elimination of double taxation without creating tax avoidance opportunities / 332
6.2.5.2 Concurrence with EU law / 333
6.2.5.3 Concurrence with current national law / 335
6.2.5.4 Practicability / 336
6.2.6 Interim conclusion: fundamental change to the OECD MTC (a group approach) / 336
6.3 Somewhat more realistic changes to the OECD MTC to become more suitable for companies in a group / 337
6.3.1 Introduction / 337
6.3.2 An aligned group definition? / 339
6.3.3 The residence definition / 341
6.3.4 Dividends, interest and royalties / 343
6.3.5 Economic double taxation as a result of profit distributions / 345
6.3.6 Reorganization clauses / 346
6.3.7 Exit taxation / 349
6.3.8 Double non-taxation in the case of tax avoidance / 350
6.3.8.1 Introduction / 350
6.3.8.2 The credit mechanism / 352
6.3.8.3 A subject-to-tax clause / 353
6.3.8.4 A switch-over clause / 355
6.3.8.5 More fundamental solution: making the treaty rule the domestic rule / 356
6.3.8.6 The application of the PPT / 357
6.3.8.7 Interim conclusion: double non-taxation in the case of tax avoidance / 358
6.3.9 Implementation: second multilateral instrument / 359
6.3.10 Evaluation / 359
6.3.10.1 Elimination of double taxation without creating tax avoidance opportunities / 359
6.3.10.2 Concurrence with EU law / 363
6.3.10.3 Concurrence with current national law / 363
6.3.10.4 Practicability / 364
6.3.11 Interim conclusion: somewhat more realistic changes to the OECD MTC to become more suitable for companies in a group / 364
6.4 Conclusion / 364

CHAPTER 7 Conclusions / 367
7.1 The issue / 367
7.2 Towards a group approach for tax treaty purposes: fundamental change to the OECD MTC / 368
7.2.1 The rationale behind a group approach (unitary taxation) / 368
7.2.2 Defining the unitary business (‘who to tax’) / 369
7.2.3 Defining the tax base (‘what to tax’) / 370
7.2.4 Defining jurisdiction to tax (‘where to tax – part 1’) / 370
7.2.5 Profit allocation mechanism (‘where to tax – part 2’) / 370
7.2.6 Tax rate (‘how much tax’) / 372
7.3 Towards a group approach for tax treaty purposes: somewhat more realistic changes to the OECD MTC to become more suitable for companies in a group / 372
7.3.1 Changes to reflect the OECD MTC objectives / 372
7.3.2 The residence definition / 373
7.3.3 Dividend, interest and royalties / 373
7.3.4 Economic double taxation as a result of profit distributions / 373
7.3.5 Reorganization clauses / 373
7.3.6 Exit taxation / 374
7.3.7 Double non-taxation in the case of tax avoidance / 374
7.4 Final remarks / 374

SAMENVATTING:
Verdragstoepassing voor vennootschappen in een groep / 377
References / 381
Curriculum Vitae L.C. van Hulten / 411
Portfolio L.C. van Hulten (in Dutch) / 413