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– 1 –
International and European Tax Moot Court Competition 2017-2018
Memorandum of the
Applicant
K
– 1 –
International and European Tax Moot Court Competition 2017-2018
Memorandum of the
Applicant
K
2
I TABLE OF CONTENTS
I TABLE OF CONTENTS ....................................................................................................................... 2
II LIST OF SOURCES ............................................................................................................................... 5
Books ......................................................................................................................................................... 5
Commentaries ........................................................................................................................................... 9
Journals & Articles ................................................................................................................................. 10
Judgements ............................................................................................................................................. 14
OECD Documents................................................................................................................................... 18
International Documents ........................................................................................................................ 18
Fiscal Authorities .................................................................................................................................... 18
III STATEMENT OF FACTS ................................................................................................................... 19
FACTS OF THE CASE .................................................................................................................................... 19
Entities Involved ..................................................................................................................................... 19
Economic Activities of the Entities Involved ........................................................................................... 20
RELEVANT ASPECTS OF INTERNATIONAL LAW .......................................................................................... 22
Memberships in International Organisations ......................................................................................... 22
Tax Treaties ............................................................................................................................................ 22
Bilateral Investment Treaties .................................................................................................................. 23
Other Treaties ......................................................................................................................................... 23
DOMESTIC LAW ...................................................................................................................................... 23
Tralaland ................................................................................................................................................ 23
Waltzabia ................................................................................................................................................ 25
COMMON DOMESTIC LAW RULES ...................................................................................................... 25
IV ISSUES ................................................................................................................................................... 26
TAX AUTHORITIES - DEFENDANT ...................................................................................................... 26
MUSICALIA - APPLICANT ...................................................................................................................... 27
V ARGUMENTS ...................................................................................................................................... 28
MUSICALIA IS ENTITLED TO THE TREATY BENEFITS AS IT IS A RESIDENT OF TRALALAND PURSUANT TO
ART. 4(1) DTC-JT ....................................................................................................................................... 28
APPLICATION OF THE 2014 OECD-COMMENTARY ..................................................................................... 28
MILESTONE IS A RESIDENT OF JAZZTERRA ................................................................................................. 29
Milestone’s POEM is situated in Jazzterra ............................................................................................ 29
Interim Conclusion ................................................................................................................................. 31
3
MILESTONE IS ENTITLED TO THE BENEFITS OF THE TAX TREATY BETWEEN JAZZTERRA
AND TRALALAND ........................................................................................................................................ 31
THE MLI IS NOT APPLICABLE ..................................................................................................................... 32
MLI entered in force according to Art. 34 .............................................................................................. 32
MLI has not entered into effect according to Art. 35 .............................................................................. 33
MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN JAZZTERRA ........................................ 34
Requirements to constitute a PE ............................................................................................................. 34
Server does not constitute a PE because disposal not given .................................................................. 35
Yohoho does not constitute a PE ............................................................................................................ 35
Warehouse does not constitute a PE because of the exemption in Art. 5(4)(c) DTC-JT ........................ 36
Interim conclusion .................................................................................................................................. 37
MUSICALIA IS THE BENEFICIAL OWNER OF THE DIVIDENDS ........................................................................ 37
Definition of “Beneficial Ownership” .................................................................................................... 37
Musicalia meets the criteria to be the beneficial owner ......................................................................... 38
Substantive business activity test ............................................................................................................ 38
Control over profits and entrepreneurial risk ........................................................................................ 40
Interim conclusion .................................................................................................................................. 41
Solely Art. 10 DTC-JT should apply ....................................................................................................... 41
NO ABUSE OF THE DTC-JT .......................................................................................................................... 42
“Beneficial Ownership” concept as an anti-avoidance rule? ................................................................ 42
Musicalia is not a conduit company ....................................................................................................... 43
No treaty shopping by musicalia............................................................................................................. 43
Interim conclusion .................................................................................................................................. 44
MUSICALIA’S INCOME FROM RENTING OUT MUSICIANS TO CLUBS AND THEATRES IS ONLY TAXABLE IN
TRALALAND ................................................................................................................................................ 45
Musicalia does not have a Permanent Establishment in Jazzterra ........................................................ 46
Interim Conclusion ................................................................................................................................. 48
Subsidiary Argument: even in an Apportionment under Art. 17(2) DTC-JT is made, Tralaland still
retains the majority of its Taxation Rights over the Clients’ payments .................................................. 48
MUSICALIA’S INCOME FROM THE JAZZ FESTIVAL IS ONLY TAXABLE IN TRALALAND ............................... 50
The “Sponsorship-Income” is Business Income according to Art. 7 DTC-JT ....................................... 50
The “Sponsorship-Income” is not a Royalty covered by Art. 12 DTC-JT .............................................. 51
Art. 17(2) DTC-JT does not apply to Musicalia’s Income from the “Sponsorship Agreement” with La
Cervecita ................................................................................................................................................. 52
Musicalia’s Income from the Ticket sale is not covered by Art. 17(2) DTC-JT ..................................... 53
4
Musicalia does not have a PE in Jazzterra ............................................................................................. 54
Interim Conclusion ................................................................................................................................. 55
SUBSIDIARY ARGUMENT: JAZZTERRA IS NOT ALLOWED TO LEVY TAX ACCORDING TO THE BILATERL
INVESTMENT TREATY .................................................................................................................................. 56
BIT is applicable ..................................................................................................................................... 56
Indirect expropriation is given ............................................................................................................... 57
Interim conclusion .................................................................................................................................. 57
VI OVERALL CONCLUSION ................................................................................................................. 59
VII REQUESTS ....................................................................................................................................... 60
VIII ANNEXES ......................................................................................................................................... 61
IX ABBREVIATIONS ............................................................................................................................... 64
5
II LIST OF SOURCES
BOOKS
Achatz, M., Die Besteuerung der Non-Profit-Organisationen 3 Vereinsgesetz - Vereinsrichtlinien -
Rechnungslegung und Rechnungswesen – Spendenbegünstigung, (2002).
Aigner, D. J., Sponsoring wirtschaftliche, rechtliche, steuerliche und kommunikative Aspekte,
(2012).
Alpert, H. H./Roberts, S. I., Essays on international taxation, (1993).
Aust, A., Modern treaty law and practice 2nd ed., (2009).
Baker, P. Double taxation conventions a manual on the OECD model tax convention on income and
on capital, (2001).
Bendlinger, S., Die Betriebsstätte in der Praxis des internationalen Steuerrechts inkl. Glossar &
Checkliste zum „Betriebsstätten-Risiko“, (2009).
Bernasconi-Osterwalder, N., Johnson, L., Commentary to the Austrian Model Investment Treaty,
(2011).
Brugger, F., Permanent Establishments in international and EU tax law, (2011).
De Broe, L., International tax planning and prevention of abuse, (2008).
Endres, D., Spengel, C., International company taxation and tax planning, (2015).
Engelen, F. A., Interpretation of Tax Treaties under international law a study of articles 31, 32 and
33 of the Vienna Convention on the Law of Treaties and their application to tax treaties, (2004).
Fisher, A. S., Restatement of the law, (1965).
Gassner, W., Aktuelle Entwicklungen im internationalen Steuerrecht das neue Musterabkommen der
OECD, (1994).
Görl, M., Die freien Berufe im internationalen Steuerrecht der Bundesrepublik Deutschland, (1983).
6
Grossmann, M., Die Besteuerung des Künstlers und Sportlers im internationalen Verhältnis, (1992).
Hahn-Joecks, G., Zur Problematik der Besteuerung ausländischer Künstler und Sportler, (1999).
Helminen, M., The Dividend Concept in International Tax Law: Dividend Payments Between
Corporate Entities, (1999).
Helminen, M., The international tax law concept of dividend, 2nd ed. (2017).
Hisrich, R. D., Ramadani, V., Effective Entrepreneurial Management Strategy, Planning, Risk
Management, and Organization, (2017).
Hollis, D. B., The Oxford guide to treaties 1st ed., (2012).
Karundia, A., Taxmann's Law practice relating to permanent establishment, (2015).
Kluge, V., Das internationale Steuerrecht, Gemeinschaftsrecht, Außensteuerrecht, Abkommensrecht
4th ed. (2000).
Kobetsky, M., International taxation of permanent establishments principles and policy, (2011).
Lang, M., Pistone, P. et al, Beneficial Ownership Recent Trends, (2013).
Lang, M., Tax Treaties: Building Bridges between Law and Economics, (2010).
Lang, M., The OECD-Model-Convention and its update 2014, (2015).
López Escarcena, S., Indirect expropriation in international law, (2014).
Maisto, G., Taxation of Intercompany Dividends Under Tax Treaties and EU Law, (2012).
Meindl-Ringler, A., Beneficial Ownership in International Tax Law, (2016).
Miller, A., Oats, L., Mulligan, E., Principles of international taxation 6th ed. (2017).
Molenaar, D., Taxation of international performing artistes the problem with article 17 OECD and
how to correct him, (2006).
7
Reimer, E./Schmid, S./Orell, M., Permanent Establishments: A Domestic Taxation, Bilateral Tax
Treaty and OECD Perspective 5th ed., (2016).
Salacuse, J. W., The law of investment treaties, (2010).
Sasse, J. P., An Economic Analysis of Bilateral Investment Treaties, (2011).
Schaffer, E., Income allocation for entertainers and sportspersons in a tax treaty context the
application of Art. 17 (1) and Art. 17 (2) of the OECD Model Convention, (2016).
Schaffner, J., How fixed is a permanent establishment?, (2013).
Seiler, M., GAARs and judicial anti-avoidance in Germany, the UK and the EU, (2016).
Simader, K./Titz, E., Limits to tax planning, (2013).
Sinclair, I., The Vienna convention on the law of treaties 2nd ed., (1984).
Skaar, A. A., Permanent establishment erosion of a tax treaty principle, (1991).
Westin, R. A., International taxation of electronic commerce 2nd ed., (2007).
Contributions in Books
Canete, B./Staringer, C. ,Missbrauchserfassung im DBA-Recht durch Anwendung von Beneficial-
ownership-Konzepten, In: Lang/Schuch/Staringer, Die Grenzen der Gestaltungsmöglichkeiten im
Internationalen Steuerrecht, (2009), p. 169.
Cordewener, A., Tax Treaty issues Related to Qualification, Allocation and Apportionment of Income
Derived by Entertainers and Sportspersons, In: Maisto, G., Taxation of Entertainers and
Sportspersons Performing Abroad, (2016).
Daxkobler, K., Authority to Conclude Contracts in the Name of the Enterprise, In: Lang, M.,
Dependent Agents as Permanent Establishments, 85, (2014).
De Broe, L., Tax Residence of Companies under Domestic Tax Laws, In: Maisto, G., Residence of
companies under tax treaties and EC Law, (2009).
8
Engelen, F., How "Acquiescence" and "Estoppel" Can Operate to the Effect that the States Parties to
a Tax Treaty are Legally Bound to Interpret the Treaty in Accordance with the Commentaries on the
OECD Model Tax Convention, In: Douma, S., Engelen, F., The legal status of the OECD
commentaries (2008).
Felderer, D., Taxation of Artistic and Athletic Performance under Art. 17(2) OECD Model, In:
Loukota, W., Taxation of Artistes and Sportsmen in International Tax Law, (2007).
Hansen, S. F., Denmark: Beneficial Owner – Article 10(2) of the Denmark-Luxembourg Income Tax
Treaty of 1980, In: Kemmeren, Tax Treaty Case Law around the globe 2012, (2013).
Haslinger, K., Der Ort der tatsächlichen Geschäftsleitung als Tie-Breaker nach Art. 4 Abs 3 OECD-
MA und seine in Diskussion befindlichen Reformen, In: Lang, M., Die Ansässigkeit im Recht der
Doppelbesteuerungsabkommen, 193, (2008).
Juarez, A., The Application of Article 17(2) of the OECD Model Convention, In: Maisto, G., Taxation
of Entertainers and Sportspersons Performing Abroad, (2016).
Lang, M., The Application of Article 17 of the OECD MC in a Tax Treaty Context – Income
Allocation and its Relevance for the Application of Article 17(1) and Article 17(2), In: Schaffer,
Domestic Attribution of Income and Taxation of International Entertainers and Sportspersons,
(2017a).
Loukota, Unselbständige Künstler und Sportler, In: Gassner, W., Arbeitnehmer im Recht der
Doppelbesteuerungsabkommen, (2003).
Malin, A., Employed Artists and Sportsmen according to the OECD Model, In: Loukota, W.,
Taxation of Artistes and Sportsmen in International Tax Law, (2007).
Plakhin, Y., The place of effective management as a tie-breaker criterion, In: Hofstätter, M., Dual
residence in tax treaty law and EC law, (2009).
Sengputa, D.P., India: Is a Competent Authority Determination on the Existence of a PE in the Source
State Determinative? In: Lang, M./Rust, A./Owens, J./Pistone, P./Schuch, J./Staringer, C., et al., Tax
Treaty Case Law Around the Globe 2015, (2016).
9
Toifl, G., Vrignaud, P., Einkünfte von Künstlern und Sportlern im internationalen Steuerrecht, In:
Ehrke-Rabel, T., Künstler und Sportler im nationalen und internationalen Steuerrecht
Einkommensteuer, Umsatzsteuer, Sozialversicherung, 3th ed., (2011).
Vallada, F./Rust, A., Beneficial Ownership According to Articles 10, 11 and 12 of the 2014 OECD
Model Convention, In: Lang/Pistone/Rust/Schuch/Staringer/Storck, The OECD-Model-Convention
and its Update 2014, (2015).
Van Weeghel, S., The Tie-Breaker revisited: Towards a formal criterion?, In: Hinnekens, L.,
Vanistendael, F., A vision of taxes within and outside European borders Festschrift in honor of Prof.
Dr. Frans Vanistendael, (2008).
COMMENTARIES
Aigner, D. J., Kofler, G. W., Tumpel, M. DBA OECD-Musterabkommen mit den Besonderheiten der
österreichischen DBA, (2016).
Dorr, O., Vienna Convention on the Law of Treaties a commentary, (2012).
Gosch, D./Baranowski, K.-H./Becker, H., DBA-Kommentar: Doppelbesteuerungsabkommen auf
dem Gebiet der Steuern vom Einkommen und vom Vermögen, auf dem Gebiet der Erbschaftsteuer,
(2008).
Haase, F., Becker, K. Außensteuergesetz, Doppelbesteuerungsabkommen 2nd ed., (2012).
IBFD, Global Tax Treaty Commentaries, (2014).
Strunk, G. Aussensteuergesetz, Doppelbesteuerungsabkommen Kommentar, (2017.)
Vogel, K., Klaus Vogel on double taxation conventions a commentary to the OECD-, UN- and US
model conventions for the avoidance of double taxation on income and capital, with particular
reference to German treaty practice 3rd ed., (1997).
Vogel, K., Lehner, M., Doppelbesteuerungsabkommen, 6th ed., (2015).
Vogel, K., Reimer, E., Rust, A., Becker, J., Klaus Vogel on double taxation conventions 1, (2015a).
10
Vogel, K., Reimer, E., Rust, A., Becker, J., Klaus Vogel on double taxation conventions 2, (2015b).
Wassermeyer, F., Doppelbesteuerung OECD-Musterabkommen 3rd ed., (2015).
JOURNALS & ARTICLES
Alvarrenga, C. A., Preventing Tax Avoidance: Is There Convergence in the Way Countries Counter
Tax Avoidance?," In: Bulletin, 67, (2013).
Ault, H. The Role of the OECD Commentaries in the Interpretation of Tax Treaties, In: Intertax, 144,
(1994).
Avery Jones, J. The Effect of changes on the OECD Commentaries after a Treaty is concluded, In:
Bulletin, 102, (2002).
Avery Jones, J., Article 3(2) of the OECD Model Convention and the Commentary to it: Treaty
Interpretation, In: European Taxation, 33, (1993).
Avery Jones, J., Place of Effective Management as a Residence Tie-Breaker, In: Bulletin, 20, (2005).
Bakker, A. J., Transfer Pricing and Intra-Group Financing: Low-Hanging Fruit?, In: Derivatives
Financial Instruments, 15, (2013).
Banfi, L./Mantegazza, F., An Update on the Concept of Beneficial Ownership from an Italian
Perspective, In: European Taxation, 52, (2012).
Barret, E., The Changes Introduced by the 2014 Update to the OECD Model Tax Convention, In:
Bulletin, 68, (2014).
Bendlinger, S., New interpretation of the concept of permanent establishment in tax treaty law, In:
SWI, 358, (2006)
Beretta, G., The Notions of “Beneficial Ownership” and “Place of Effective Management” in Respect
of a Passive Holding Company, In: European Taxation, 57, (2017).
Blessing, P. H., The Debt-Equity Conundrum - A Prequel, In: Bulletin, 66, (2012).
BMF, Zirkusähnliche Events in Österreich, In: SWI, 35, (2007).
11
Burgstaller, E./Haslinger, K., Place of Effective Management as a Tie-Breaker-Rule- Concept,
Developments and Prospects, In: Intertax, 32, (2004).
Chew, V. T., The Application of Tax Treaties to Collective Investment Vehicles: Beneficial Owner
Requirement Explained?, In: Derivatives Financial Instruments, 17, (2015).
Collier, R., Clarity, Opacity and Beneficial Ownership, In: British Tax Review, 6, (2011).
De Broe, L./Goyette, N./Martin, P. P./Rohatgi, R./Van Weeghel, S./West, P., International - Tax
Treaties and Tax Avoidance: Application of Anti-Avoidance Provisions, In: Bulletin, 65, (2015).
Du Toit, C., The Evolution of the term "Beneficial Ownership" in Relation to International Taxation
over the Past 45 Years, In: Bulletin, 64, (2010).
Felderer, D., DBA-Schutz fur ausländische Kunstler- und Sportlergesellschaften?, In: SWI, 456,
(2007).
Garcia Prats, F. A., Qualification of Hybrid Financial Instruments in Tax Treaties, In: Diritto e
Pratica Tributaria Internazionale, 977, (2011).
Gooijer, J., Beneficial Owner: Judicial Variety in Interpretation Counteracted by the 2012 OECD
Proposals?, In: Intertax, 42, (2014).
Grams, Molenaar, Zum Regelungsinhalt des Art. 17 Abs. 2 OECD-Musterabkommen, In: IStR, 378,
(2002).
H.M. Simonis, P., BITs and Taxes, In: Intertax, 42, (2014).
Helminen, M., Classification of Cross-Border Payments on Hybrid Instruments, In: Bulletin, 56,
(2004).
Hinnekens, L., Tax avoidance concepts and European tax education, In: European Taxation, 95,
(1999).
Hoor, O., The Concept of Permanent Establishments, In: European Taxation, 54, (2014).
12
Jain, S./ Prebble, J./ Bunting, K., Conduit companies, beneficial ownership, and the test of substantive
business activity in claims for relief under double tax treaties, In: WU International Taxation
Research Paper, 386, (2014).
Jiménez, A. M., Beneficial Ownership: Current Trends, In: World Tax Journal, 35, (2010).
Lang, M., Brugger, F., The role of the OECD Commentary in tax treaty interpretation, In: ATF, 95
(2008).
Lang, M., The Interpretation of the Multilateral Instrument, In: SWI, 11, (2017b).
Larking, B., The Importance of Being Permanent," In: Bulletin, 266, (1998).
Lopes Dias V.S., G., The Concept of Debt-Claim as the Key Distinguishing Factor between Dividend
and Interest Income in the OECD Model, In: Derivatives Financial Instruments, 17, (2015).
Metzler, V./Stieglitz, A., Der de Beers Fall: A Role Model for the Determination of Corporate
Residence in Tax Treaties? In: SWI, 456, (2004).
Oliver, J. D. B., Libin, J. B., van Weeghel, S., du Toit, C., Beneficial Ownership, In: Bulletin, 54
(2002).
Owens, J., Progress Report: Taxation and Electronic Commerce, In: European Taxation, 39, (1999).
Panayi, C. H., Treaty Shopping and Other Tax Arbitrage Opportunities in the European Union: A
Reassessment – Part 2, In: European Taxation, 46, (2006).
Piantavigna, P., Tax Abuse and Aggressive Tax Planning in the BEPS Era: How EU Law and the
OECD Are Establishing a Unifying Conceptual Framework in International Tax Law, despite
Linguistic Discrepancies, In: World Tax Journal, 47, (2017).
Pijl, H., Agency Permanent Establishments: in the name of and the Relationship between Article 5(5)
and (6) – Part 2, In: Bulletin, 62, (2013).
Poiret, C., Beneficial Ownership: Concept, History and Perspective, In: European Taxation, 56,
(2016).
13
Portner, R., Steuerliche Aspekte des E-Commerce, In: Datenverarbeitung – Steuern - Wirtschaft -
Recht,118, (2000).
Pötgens, F. P. G., Independent Professional Diver Residing in the Netherlands Did Not Have a Fixed
Base in India, In: European Taxation, 436, (2016).
Reimer, E., Interpretation of Tax Treaty, In: European Taxation, 458, (1999).
Rotondaro, C., The Right to Redemption as a Key Characterization Factor in the OECD Model
Convention Passive Income Taxation System: The Case of Reverse Convertibles, In: Derivatives
Financial Instruments, 258, (2000).
Silberztein, C., Granel, B. t., Tristram, J.-B., OECD Multilateral Convention to Prevent BEPS:
Implementation Guide and Initial Thoughts, In: International Transfer Pricing Journal, 24, (2017).
Tetlak, K., Tax Treatment of Team Performances under Art. 17 of the OECD Model Convention, In:
World Tax Journal, 262, (2010).
Tolstrup, B., Bjørnholm, N., Beneficial Ownership - Withholding Tax on Dividends and Interest from
the Danish Perspective, In: Bulletin, 65, (2011).
van Gelder, G., Niels, B., Recent Developments in Hybrid Financial Instruments, In: Derivatives
Financial Instruments, 16, (2014).
Vitko, V., The Use of Tax Treaties and Treaty Shopping: Determining the Dividing Line, In: Bulletin,
67, (2013).
Wheeler, J., The Attribution of Income to a Person for Tax Treaty Purposes, In: Bulletin, 59, (2005).
Wheeler, J., The Missing Keystone of Income Tax Treaties, In: World Tax Journal, 247, (2011).
14
JUDGEMENTS
Austria
UFS, no. RV/2727-W/02, (27.03.2003).
VwGH, no. 2000/14/0165, (11.12.2003).
VwGH, no. 2000/15/0033, (27.11.2003).
VwGH, no. 93/15/0094, (17.12.1993).
VwGH, no. 96/124/0084, (12.05.1997).
Australia
ATO, no. 2005/2, (09.03.2005).
Federal Court of Australia, no. NG 225 of 1997, (20.08.1997), Lamesa Holdings BV.
High Court of Australia, 21 A.T.R. 531, (22.08.1990), Thiel.
Belgium
Court of Appeal, Ghent, no. 2002/AR/1211, (13.06.2006).
Court of Cassation, no. I 1082, (06.06.1961) Brepols.
Canada
Federal Court of Appeal, no. A-252-08, (26.02.2009), Prévost.
Federal Court of Appeal, no. DTC 6169, (24.02.2000), The Queen v. William A. Dudney.
Supreme Court of Canada, no. 23940 (22.06.1995), Crown Forest Industries Ltd.
Tax Court of Canada, 2004-4226(IT)G, (22.04.2008), Prévost.
Tax Court of Canada, 2005-170(IT)G (16.05.2008).
15
Tax Court of Canada, 2012 TCC 57, (24.02.2012) Velcro.
Tax Court of Canada, 98-1222(IT)G (07.12.1999).
Czech Republic
Supreme Administrative Court, 2 Afs 86/2010-14, (10.06.2011).
Denmark
Landsskatteretten (Danish National Tax Tribunal), no. 11-00210, SKM2012.409LSR, (31.01.2012).
LSR, Eastern High Court, SKM 2010.268, (20.12.2011).
Finland
Supreme Administrative Court KHo, no. 14 ITLR 990, (12.12.2011).
Supreme Administrative Court KHo, no. 139/2001, (29.01.2001).
France
Conseil d'Etat, no. 233894, (30.12.2003).
Conseil d'État, nos. 304715 and 308525 (31.03.2010), Société Zimmer Ltd.
Tribunal administratif, no. 1505165/1-1, (12.07.2017), Google Ireland Ltd.
Germany
BFH, no. I R 130/84, (27.07.1988).
BFH, no. I R 30/07, (04.06.2008).
BFH, no. I R 6/07, (04.03.2009).
BFH, no. I R 77/88, (11.10.1989).
BFH, no. I R 77/91, (2.12.1992).
16
BFH, no. I R 80-81/91, (03.02.1993).
BFH, no. I R 80/92, (19.5.1993).
FG Münster, no. 2 K 40000/03 E, (03.02.2006).
India
AAR (Authority for Advanced Rulings), NO. 661 OF 2005, (13.02.2006).
Delhi ITAT (Income Tax Appellate Tribunal), no. 96 TTJ Delhi 1, (22.06.2005).
Mumbai ITAT (Income Tax Appellate Tribunal), no. 3208/Mum/2003, (19.11.2010).
Italy
Provincial Tax Court of Turin, no. 93/13, (20.03.2013).
Regional Tax Court of Abruzzo, no. 958/12, (30.08.2012).
Regional Tax Court of Lombardy, no. 3183/15, (10.07.2015).
Regional Tax Court of Piedmont, no. 616/14, (07.05.2014).
Supreme Court, no. 27113/16, (28.12.2016).
Japan
Tokyo District Court, 2015 (Gyo-Ko) 222, (28.01.2016).
Netherlands
Hoge Raad, no. 32.709, (09.12.1998).
Hoge Raad, NJ 1990, 106, (29.06.1990), Gabrielle Wehr.
Hoge Raad, no. 28.638, (06.04.1998).
Hoge Raad, no. 35.415, (21.02.2001).
17
Norway
Supreme Administrative Court Norway, no. HR-2011-02245-A, (02.12.2011), Dell Products v. The
State.
Spain
Audiencia Nacional, no. 1110/2003, (18.07.2006), Real Madrid.
Audiencia Nacional, no. 281/2012, (10.07.2015).
Sweden
Supreme Administrative Court (HDF), no. 4890-13, (06.12.2013).
Regeringsrätten, no. RÅ 2002 ref. 89, (30.10.2002), Holiday on Ice.
Switzerland
SFTA, A-6537-2010, (07.03.2012), Bank A (swap transaction).
Supreme Court, 2A.239/2005, (28.11.2005).
United Kingdom
Court of Appeal, no. A3/2005/2497, (02.03.2006), Indofood International Finance.
United States
Court of Appeal, no. 157 F.3d 231, (13.10.1998), ACM Partnership v. Commissioner.
Court of Appeal, no. 254 F. 3d. 1014, (20.06.2001), United Parcel Service of America.
US Tax Court, nos. 14296-92, 14297-92, 14298-92,14299-92, (02.05.1995), Marine Insurance.
18
OECD DOCUMENTS
OECD Report, Double Taxation Conventions and the use of Conduit Companies, (1987).
OECD-Model Commentary 2014, (2014b).
OECD-Model Convention 2014, (2014a).
OECD, Multilateral Instrument, (2016b).
OECD, Explanatory Statement of the Multilateral Instrument, (2016a).
INTERNATIONAL DOCUMENTS
Shome, P./Committee, E., Final Report on General Anti Avoidance Rules (GAAR) in Income-tax
Act, (1961).
UN, Economics and social council, Committee of Experts on International Cooperation in Tax
Matters, E/C.18/2006/2., A report on Treaty Abuse and Treaty Shopping, (2006).
US Model Bilateral Investment Treaty (2012).
VCLT, Vienna Convention on the Law of Treaties (1980).
ICJ Report 1991, ICJ, (31.07.1989), Arbitral Award.
FISCAL AUTHORITIES
Austria
BMF, EAS nos. 350, 501, 750, 754, 900, 740, 1234, 1543, 1973, 2921, 3045.
BMF, EAS no. 1536 (27.09.1999).
Germany
BMF, Betriebstätten-Verwaltungsgrundätze, (25.08.2009).
19
III STATEMENT OF FACTS
FACTS OF THE CASE
ENTITIES INVOLVED
1 Intermezzo Productions (hereinafter referred to as Intermezzo) is a company incorporated under
the law of and resident in Waltzabia.
2 Musicalia is a limited liability subsidiary of Intermezzo incorporated under the law of Tralaland
and registered into the Companies House of the city of Allegro in the state of Tralaland on 2
January 2017. Musicalia operates under the corporate object “recording and producing music
albums, selling souvenirs, merchandising/promoting/selling tickets to concerts, organizing
music festivals and representing musicians”. In the year 2018 Musicalia did not have any
employees.
3 Milestone is a limited liability subsidiary of Musicalia incorporated on 28 February 2017 into
the Companies House of Bebop City in the state of Jazzterra. The corporate objects of Milestone
and Musicalia are congruent, namely: “recording and producing music albums, selling
souvenirs, merchandising/promoting/selling tickets to concerts, organizing music festivals and
representing musicians”. The 2018 annual shareholder meeting of Milestone took place on the
25th of April 2018 in the state of Tralaland. The board of directors of Milestone is constituted
of four members, all of whom live in Tralaland. The board of directors met five times in the
year of 2018 in their capacity to supervise the activities of Milestone. Three of those meetings
took place in the VIP Lounge of the airport of Beat City in Waltzabia, another two were held at
the premises of Musicalia in the state of Tralaland. In these meetings, each of which did not
exceed three hours in length, the board of directors analysed Milestone’s performance and
compared the economic results with the results published in the industry. Moreover the board
of directors determines the long-term commercial strategy, usually basing their decision on the
proposals of the CEO and senior executives of Milestone.
20
ECONOMIC ACTIVITIES OF THE ENTITIES INVOLVED
4 Musicalia acquired a recording studio in the city of Allegro in the state of Tralaland on the
31 March 2017. Even though the recording studio including the equipment therein was fully
functioning at the time of completion of the purchase, Musicalia did not start recording. The
sole director Ms Corchea postponed the recording activities arguing that despite the excellent
artists available in Tralaland, the lack of adequate technicians precludes Musicalia from
recording at the acquired recording studio.
5 In order for Musicalia to finance this purchase, Intermezzo had granted a loan of USD 2 million
to Musicalia on 1 March 2017. On 15 December 2018 Musicalia allocated USD 150,000 as a
repayment of the loan to Intermezzo, even though the payment calendar only obliged Musicalia
to repay USD 50,000 in 2018. The funds for such repayment were covered by a dividend of
USD 200,000 that Musicalia received from its subsidiary Milestone. The dividend payment in
turn was derived from an enormous profit of USD 300,000 that Milestone obtained from
organising the jazz festival “Blue Train” in April 2018.
6 In 2018 Musicalia decided to sell souvenirs with jazz motives in Jazzterra from February 2018
onwards. For storage purposes, Musicalia concluded a warehousing contract with its subsidiary
Milestone, as Milestone had rented an office including a 100-square-metre garage in Jazzterra.
The agreement stipulated that Musicalia was responsible for dispatching the merchandise, such
as white t-shirts, cups, balls and dishes (hereinafter referred to as “the stock”), which were
stored at Milestone’s premises. Milestone was in charge of cleaning, unloading and correctly
placing the stock provided by Musicalia into the garage, where the stock was stored for 36 days.
Furthermore, Milestone concluded a contract with the third party company Yohoho, a resident
of Jazzterra. Yohoho was responsible for printing and branding the products with jazz motives
and has a key to the garage. To safeguard the required quality standards of Musicalia, the sole
director of Musicalia regularly visits the factory of Yohoho. After completion of the printing
and branding process, the merchandise was sent directly from Yohoho’s factory to the
distributors in Jazzterra. The corresponding sales contracts with the distributors were signed by
Musicalia. Whereas the web page promoting the products and transmitting the sales orders of
the distributors was hosted on a server in Jazzterra, the maintenance of the website was
performed in Tralaland.
21
7 On 20 January 2018 Intermezzo hired ten Tri-Bob musicians to pursue the opportunity to hire
out musicians to big concert halls, clubs and theatres1 in Jazzterra. For this purpose the
musicians signed a one-year labour contract with Intermezzo. Subsequently Musicalia hired out
the ten musicians of Intermezzo for a one-year period.
8 Milestone provided information on a monthly basis to Musicalia regarding potential clients who
may be interested in hiring Musicalia’s musicians in Jazzterra. This information was intended
to enable Musicalia to predict the short-term behaviour and preferences of jazz enthusiasts in
Jazzterra and accordingly allow Musicalia to select the best musicians for any particular time
and location out of the ten musicians Musicalia already hired out. Whereas the contracts with
the clients were negotiated by the sales director of Milestone, for which Milestone only received
a small commission, the prices of the concert, the terms and conditions of the performance were
exclusively determined by Intermezzo. If any doubts arose regarding the negotiation process
Milestone was obliged to consult Intermezzo. The contracts were then concluded between
Musicalia and the clients in Jazzterra and subsequently all payments resulting thereof were
made to Musicalia.
9 On 3 June 2018 Musicalia organised a small jazz festival with the ten musicians hired out from
Intermezzo. This festival took place in the famous Apollo Theatre in Bebop City in the state of
Jazzterra. From March onwards, Milestone was involved in the organising activities. Firstly
Milestone was in charge of promoting and advertising the festival in 15-minutes slots on
Jazzterra national television on Sundays. Moreover Milestone aided with the logistics of the
festival such as selling tickets, bringing the instruments of the musicians to the theatre,
arranging the final programme, organising a cleaning service for the theatre, etc. – and in
exchange for these services provided, Milestone received remuneration from Musicalia.
10 On 20 May 2018, Musicalia and La Cervecita – a third party company which is one of the most
popular beer companies in Jazzterra – signed a three-year sponsorship agreement for concerts
organised by Musicalia in Jazzterra. Accordingly La Cervecita paid annual sponsorship fees of
USD 1 million to Musicalia, under the exclusivity clause that no other alcoholic beverages
1 Hereinafter referred to as clients
22
would be sold at events organised by Musicalia. On 20 December 2018, La Cervecita disbursed
its first sponsorship payment of USD 1 million to Musicalia.
RELEVANT ASPECTS OF INTERNATIONAL LAW
MEMBERSHIPS IN INTERNATIONAL ORGANISATIONS
11 All of the states are OECD member countries as well as members of the UN.
TAX TREATIES
12 A tax treaty is in force since 2007 between Tralaland and Jazzterra (hereinafter DTC-TJ). It is
based on the 2005 OECD-MC. The exemption method was chosen as the method to eliminate
double taxation. There are two deviations from the OECD-MC. Firstly, Art. 10(2) reduces
source taxation to 0% if the beneficial owner is a company that holds at least 25% of the
company paying the dividends for at least six months. Secondly, Art. 21 grants taxing rights to
both the residence state and the source state.
13 The deviation in Art. 10(2) DTC-JT is formulated in the following way: “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 beneficial owner of the dividends
is a resident of the other Contracting State the tax so charged shall not exceed:
14 (a) 0% of the gross amount of the dividends if the beneficial owner is a company (other than a
partnership) which holds directly at least 25% of the capital of the company paying the
dividends where such holding is being possessed for an uninterrupted period of no less than six
months.
15 (b) 15% of the gross amount of the dividends in all other cases.”
16 Both Tralaland and Jazzterra deposited the instrument of ratification of the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting (MLI). The MLI has entered into force on 1 August 2017 and was ratified by Tralaland
on 25 September 2017 and by Jazzterra on 30 November 2017. Both states list this DTC as a
23
covered tax agreement. Tralaland and Jazzterra reserved the right not to apply Art. 4 on dual
resident entities and withdrew from the application of the “Simplified Limitation on Benefits
Provision” in Art. 7. Additionally, both states have notified Art. 12 on the artificial avoidance
of PE status through commissionaire arrangements. Also, they have chosen to apply Option A
in Art. 13 on the artificial avoidance of PE status through the specific activity exemptions.
17 Waltzabia has neither concluded a tax treaty with Jazzterra nor Tralaland.
BILATERAL INVESTMENT TREATIES
18 Furthermore, there are bilateral investment treaties in force between Tralaland and Jazzterra.
The latest version of these treaties is in force since 2012 and is based on the 2012 version of the
US Model Bilateral Investment Treaty.
OTHER TREATIES
19 Finally, the Vienna Convention on the Law of Treaties has been in force in all of the three states
since 2000.
DOMESTIC LAW
TRALALAND
General rules
20 In Tralaland, personal income is taxed at 12.5%.
21 Furthermore, no unilateral relief for juridical double taxation exists in Tralaland.
22 Tralaland is a dualist state.
Rules concerning dividends
23 No withholding tax is levied on payments of dividends, royalties and interest made by resident
companies to foreign recipients.
24
Residence Rules
24 According to the domestic law of Tralaland, a company is resident in this state provided that
either
it is registered in Companies House of Tralaland or
its place of effective management is situated in Tralaland.
General rules
25 In Jazzterra, personal income is taxed at 30%.
26 Furthermore, no unilateral relief for juridical double taxation exists in Jazzterra.
27 Jazzterra is a dualist state.
Rules concerning dividends
28 In the domestic law of Jazzterra, a withholding tax at a rate of 15% is levied on dividend
payments.
29 Furthermore, in February 2018, a GAAR was introduced in the legislation of Jazzterra which
stipulates that acts constituting an abuse of rights could be disregarded by the tax administration
if
those acts have a fictitious character or
they seek the benefit of a literal application of texts or decisions contrary to the
objectives sought by their authors
provided that such acts are definitely inspired by the purpose of avoiding or reducing the tax
liability that the taxpayer would normally have borne in case such instrument had not been
concluded.
Residence rules
30 Contrary to Tralaland, a company is deemed to be resident in Jazzterra only if its place of
effective management is situated there.
25
WALTZABIA
Residence rules
31 The domestic law of Waltzabia stipulates that only a company incorporated in Waltzabia is
deemed to be a resident of this state.
COMMON DOMESTIC LAW RULES
32 The legal systems of the two countries do not correspond specifically to the “civil law” or
“common law” models, but rather combine elements of the two systems.
33 In all countries concerned, the tax year runs from 1 January until 31 December.
34 None of the domestic laws provides a definition of the terms “permanent establishment”,
“dividend” or “beneficial owner”.
35 All countries involved are members of the UN as well as the OECD.
36 None of the countries involved are EU or EEA/EFTA Member States.
26
IV ISSUES
TAX AUTHORITIES - DEFENDANT
37 The tax authorities of Jazzterra carried out an audit regarding the income of Musicalia. They
concluded that Musicalia is not the beneficial owner of the dividends distributed by Milestone.
Therefore, the DTC-JT is not applicable and domestic law applies. Consequently, a WHT at a
rate of 15% must be levied.
38 Milestone is a resident of both Jazzterra and Tralaland which requires the application of the tie-
breaker rule of Art. 4(3) DTC-JT. Since Musicalia is also a resident of Tralaland, the DTC-JT
is generally applicable, but only some of the distributive rules are applicable as both companies
are located in the same country. Therefore, Art. 10 DTC-JT is not applicable and the dividend
payments to Musicalia constitute other income covered by Art. 21 DTC-JT.
39 Moreover, Musicalia makes use of several abusive practices such as treaty shopping, which do
not entitle Musicalia to treaty benefits according to a national GAAR and the MLI. Even if the
DTC was applicable, Jazzterra would still have the taxing right regarding Musicalia’s income,
since the activities performed by Musicalia constitute a PE in Jazzterra according to Art. 5
DTC-JT.
40 Furthermore, the income Musicalia receives for the performance of the musicians is covered by
Art. 17 DTC-JT, thereby granting the exclusive taxing right to Jazzterra. Even if Art. 7 is to be
applied instead, Musicalia still has a PE in Jazzterra and Jazzterra therefore would retain most
of its taxing rights.
41 The sponsorship payments received from La Cervecita must be attributed to the musicians
directly and are therefore covered by Art. 17(2) DTC-JT due to the direct link between the
payments and the musicians’ performance. Therefore, Jazzterra retains the taxing right of the
sponsorship income. Even if the income resulting from the sponsorship agreement should be
covered by Art. 12 DTC-JT, the taxation right is allocated to Jazzterra since Musicalia’s
activities give rise to a PE therein. If Art. 7 DTC-JT should be applicable to the sponsorship
payments, Jazzterra would nevertheless be entitled to tax the income attributed to the PE.
27
MUSICALIA - APPLICANT
42 Firstly, it will be demonstrated that Milestone is a resident of Jazzterra under Art. 4(3), since
its POEM is situated therein.
43 Secondly, it will be shown that the MLI has not yet entered into effect in the meaning of Art.
35. Under Art. 34, the MLI must first enter into force before it can enter into effect. Both states
ratified the MLI in 2017. In both states it entered into force at the beginning of 2018. However,
the MLI enters into effect in Jazzterra on 1 January 2019 as regards withholding taxes and all
other taxes.
44 Next, it will be proven that Musicalia does not have a PE in Jazzterra. The PE status fails in the
absence of the right of disposal. Accordingly, the server cannot qualify as a PE in this case.
Lastly, although the warehouse fulfils the criteria to constitute a PE under Art. 5(1), it is used
only for preparatory/auxiliary activities and therefore falls under the exception in Art. 5(4)(c).
45 As will be explained in the next section, the tax authority is not allowed to levy any WHT on
the dividend payments. To show that Musicalia is the beneficial owner of the dividends, the
following criteria will be used: the substantive business activity test and control over profits as
well as the entrepreneurial risk. Because all criteria are met, it is clear that Musicalia is the
beneficial owner. In addition, Musicalia pursues different business purposes and does not have
the aim to obtain any tax advantages. As a result, the general anti-avoidance rule is not
applicable.
46 The income from agency services to clients in Jazzterra is business income generated without
constituting a PE in Jazzterra. Musicalia has no fixed place of business at its disposal and the
agent Milestone does not have authority to conclude contracts in the name of or on behalf of
Musicalia. Even if the court holds the view that parts of this income are attributable to the artists,
Tralaland retains most of the taxing right, since Art. 17 only covers the part of the payment
actually paid for the performance of the entertainers.
47 Musicalia’s income from the festival is business income which is not earned through a PE in
Jazzterra. Both the “sponsorship” and the ticket sales are business profits, since Art. 17 and Art.
12 do not apply.
28
V ARGUMENTS
MUSICALIA IS ENTITLED TO THE TREATY BENEFITS AS IT IS A
RESIDENT OF TRALALAND PURSUANT TO ART. 4(1) DTC-JT
48 Musicalia is entitled to the benefits of the DTC since it is applicable to the current case.2 The
case falls within the personal and material scope, since Musicalia is a person who is a resident
subject to unlimited tax liability in Tralaland, and the CIT is a covered tax.3
49 As a result, the DTC-JT is applicable in the case at hand. In the following, we will give an
overview of the interpretation of the DTC-JT based on the relevant OECD-Commentary and
secondly, we will demonstrate that Milestone is a resident of Jazzterra under the respective
domestic laws.
APPLICATION OF THE 2014 OECD-COMMENTARY
50 It is generally accepted, that Arts. 31 to 33 VCLT are merely a codification of customary
international law.4 Hence, the general interpretation principles set out therein have to be applied.
Art. 31(1) VCLT stipulates that the context must be considered when interpreting treaties. The
clarifications provided by the OECD-Commentary are to be seen as such context, to indicate a
special meaning within Art. 31(4) VCLT.5 The relevance of the OECD-Commentary is further
induced from the fact that both contracting states were aware of these documents at the time of
conclusion of the treaty in 2007, when they adopted the majority of the OECD-MC word by
word.6
51 Furthermore it is crucial to determine which version of the OECD-Commentary has to be used
for interpretation. According to the introduction of the OECD-Model, countries should favour
2 (OECD, 2014a: Arts. 1-4). 3 (see m.nos. 48, 49). 4 (Dörr in Dörr, 2012: Art. 31 m.no. 7); (Sinclair, 1984: 19); (Engelen, 2004: 54 et seq.); (Pötgens, 2016: 439); (Aust,
2009: 232); (Hollis, 2012: 493); (ICJ, 31.07.1989); NL: (Hoge Raad, 29.06.1990) 5 (Avery Jones, 1993: 255); (Ault, 1994: 144-148); (Douma/Engelen, 2008: 2.1); AUS: (High Court of Australia,
22.08.1990); CA: (Supreme Court of Canada, 22.06.1995). 6 (see m.nos. 12 et seq.).
29
the dynamic interpretation of an existing DTC by giving precedence to the newest revised
OECD-Commentaries.7 Accordingly, changes and amendments in the Commentary that are not
of a substantial nature are to be considered as being consensual amongst and therefore deserving
great weight in the interpretative process.8 Hence such clarifications provided by the updated
OECD-Commentaries should be taken into account.9 What is more, a dynamic approach
ensures the congruent interpretation of identical wordings in tax treaties that were concluded at
different times.10 Tax authorities and courts worldwide follow the dynamic interpretation.11
Thus, the 2014 OECD-Commentary should be taken into account when interpreting the DTC.
MILESTONE IS A RESIDENT OF JAZZTERRA
MILESTONE’S POEM IS SITUATED IN JAZZTERRA
52 According to Art. 4(1) Milestone is a resident of a contracting state, if it is liable to tax therein
by reason of place of management. Both countries’ domestic laws stipulate the POEM as a
residency criterion.12 In the respective domestic laws, the definition of POEM makes a direct
reference to the OECD standard, therefore the meaning of POEM according to Art. 4(3) has to
be applied to determine Milestone’s residence state.13 In case that, Tralaland as well as Jazzterra
apply different POEM criteria14 to establish unlimited tax liability in their state, the tie-breaker
rule of Art. 4(3) needs to be applied, as Milestone would be qualified as a dual resident under
the DTC-JT. If Tralaland and Jazzterra share a uniform understanding of the term “POEM”,
Jazzterra should be regarded as the only residence state according to their national law without
the application of Art. 4(3) as there can only be one decisive criterion for establishing the POEM
in a jurisdiction which we show in the following argumentation.
7 (OECD, 2014b Introduction m.nos. 33-36). 8 (Reimer, 1999: 468-469). 9 (Alpert/Roberts, 1993: 68). 10 (Avery Jones, 2002: 103); (Baker, 2001: E.12). 11 US: (US Tax Court, 02.05.1995); CA: (Tax Court of Canada, 07.12.1999); AUS: (Federal Court of Australia,
20.08.1997); DK: (Landsskatteretten, 31.01.2012); NL: (Hoge Raad, 09.12.1998); (Conseil d'Etat, 30.12.2003);
FIN: (Finnish Supreme Administrative Court KHo, 12.12.2011); ES: (Audiencia Nacional, 10.07.2015). 12 (Statement of Facts, H.3.1. Residence). 13 (see Clarifications m.no. 31). 14 (see m.nos. 53 et seq.).
30
53 The place of effective management as referred to in Art. 4(3) is located where the company is
actually managed.15 This criterion alone still does not guarantee a unique POEM.16 Therefore
the POEM is to be considered the most important place of management, prevailing over all
other places where management decisions are made.17 The wording effective management
suggests that a substance over form approach has to be taken, formalities have to be disregarded
and the place where the management function is substantially performed is to be considered as
the decisive criterion.18 Therefore, determining where the POEM is situated is a question of
fact. The formal decisions made or supervision performed by the board of directors does not
determine the POEM but rather it is the place where these decisions are implemented and where
the day-to-day management is in essence performed.19
54 Furthermore, the place where shareholders meetings are held is not a criterion determining the
POEM if the shareholders do not perform managing functions.20
55 In the case at hand the POEM according to Art. 4(3) DTC-JT is situated in Jazzterra since the
management functions are materially performed by the CEO and the senior executives therein.
The CEO, Ms Coda, is responsible for day-to-day management as well as implementing the
long-term commercial strategy. The board of directors, however, meets five times a year “[f]or
the purpose of supervising the activities of Milestone” and these meetings never exceed three
hours.21
56 Even though decisions regarding long-term strategy are formally made by the board of
directors, they cannot be used to determine the POEM, since it is factually impossible to validly
discuss and vote upon detailed commercial strategies in only five meetings a year, each not
exceeding three hours, especially when considering the fact that in those meetings the directors
also analysed the overall performance and compared results with competitors’ results. In this
light however, the decisions made are only to be considered as guidelines regulating company
15 (OECD, 2014b: Art. 4 m.no. 22). 16 (Plakhin in Hofstätter, 2009: 84 et seq.); (Van Weeghel in Hinnekens/Vanistendael, 2008: 961 et seq.); (Avery Jones,
2005: 20 et seq.) 17 (De Broe in Maisto, 2009: 11). 18 (Wassermeyer et al. in Wassermeyer, 2015 Art. 4 m. no. 100) 19 (Burgstaller/Haslinger, 2004: 380); (Metzler/Stieglitz, 2004: 461); (Tumpel in Aigner et al., 2016: Art. 4 m.no. 42);
(Lehner in Vogel/Lehner, 2015: Art. 4 m.nos. 265, 268); (Plakhin in Hofstätter, 2009: 91). 20 (Wassermeyer et al. in Wassermeyer, 2015: Art. 4 m.nos. 96, 98). 21 (Statement of Facts, C. Residence of Milestone in 2018).
31
policy, which is not a criterion for determining the POEM.22 Additionally, even these decisions
are usually based on the proposals of Ms Coda and the senior executives, awarding even less
relevance to the place where the decisions are formally made by the board of directors.
57 In essence, the CEO and the senior executives in Jazzterra perform all vital commercial
decisions on a day-to-day level, as well as they provide the long-term commercial strategy for
the board of directors to decide upon. This means that the POEM is undoubtedly situated in
Jazzterra and therefore Milestone is exclusively resident in Jazzterra for the treaty purposes.
INTERIM CONCLUSION
58 To conclude, in any case applicable, Milestone is a resident of Jazzterra for national and tax
treaty purposes. As shown above, the application of Art. 4(3) leads to the unquestionable result
that Milestone is resident in Jazzterra. All management activities are in substance made by the
CEO in Jazzterra, whereas the decisions of the board are only of a formal nature, thus not
constituting effective management.
MILESTONE IS ENTITLED TO THE BENEFITS OF THE TAX TREATY
BETWEEN JAZZTERRA AND TRALALAND
59 Milestone is entitled to the benefits of the DTC-JT since the present case falls within its personal
and material scope.23 Pursuant to Art. 1, the DTC shall apply to a person which is resident of
one or both Contracting States. The term resident is defined in Art. 4 DTC-JT.24 According to
Art. 4(1), a resident of a contracting state is any person who is subject to unlimited tax liability
under the laws of that state.25 Milestone is a person pursuant to Art. 1 icw Art. 3 DTC-JT.
Furthermore, Milestone is a resident of Jazzterra, since the requirements for unlimited tax
liability in Jazzterra are met.26 Therefore, the personal scope of the DTC-JT is fulfilled. The
22 (Haslinger in Lang, 2008: 197). 23 (OECD, 2014a: Arts. 1-4). 24 (OECD, 2014a: Art. 4). 25 (OECD, 2014a: Art. 4 para. 1). 26 (see m.no. 52 et seqq.).
32
material scope is also fulfilled, as the corporate income taxes being levied in the case at hand
are covered by Art. 2 DTC-JT.
THE MLI IS NOT APPLICABLE
60 The MLI is an international agreement under international law. Consequently, the rules and
principles that must be used to interpret the MLI are those found in the VCLT. 27
61 Art. 31(1) VCLT provides the “general rule of interpretation”, which states that the treaty has
to be “interpreted in accordance with the ordinary meaning to be given to the terms of the treaty
in their context and in the light of its object and purpose”.28 Pursuant to Arts. 31 and 32 VCLT,
the materials of the OECD-MC, especially the OECD-Commentary, can be considered for the
interpretation of a DTC to ascertain the intention of the contracting states.29 Equally, the MLI
itself and the explanatory statement have to be considered when interpreting the DTC.30
62 Pursuant to Art. 24(1) VCLT, which establishes that ”a treaty enters into force in such manner
and upon such date as it may provide or as the negotiating States may agree.“31, the MLI
explicitly determines the date from which it is applicable in Art. 34 and Art. 35.
63 The ratification process of Art. 27(2) is the requirement for implementation of the MLI.32
Tralaland and Jazzterra deposited the instrument of ratification in September and November
2017.33
MLI ENTERED IN FORCE ACCORDING TO ART. 34
64 When interpreting Art. 34 of the MLI, it has to be considered that already five jurisdictions
have deposited the instrument of ratification. Therefore, Art. 34(2) will apply which clarifies
that the MLI “shall enter into force on the first day of the month following the expiration of a
period of three calendar months beginning on the date of the deposit by such Signatory of its
27 (Lang, 2017b: 11). 28 (VCLT, 1980: Art. 31 para. 1). 29 (Lang/Brugger, 2008: 98). 30 (VCLT, 1980: Art. 32); (Zöhrer/Jirousek, 2017: 217 et seq.); (Lang, 2017b: 11 et seq.). 31 (VCLT, 1980: Art. 24 para. 1). 32 (OECD, 2016b: Art. 27). 33 (Statement of Facts, G.1: At the conventional level: tax treaties).
33
instrument of ratification, acceptance or approval”.34 Following that rule, the MLI enters into
force on 1 January 2018 in Jazzterra because of the ratification on 25 September 2017 and on
1 March 2018 in Tralaland because of the ratification on 30 November 2017.
MLI HAS NOT ENTERED INTO EFFECT ACCORDING TO ART. 35
65 As explained above, the MLI entered in force but it has certainly not entered into effect. The
terms “force” and “effect” have a different meaning as the following statement will show.
According to Art. 35(1)(a) which applies to taxes withheld at source, the MLI is in effect “where
the event giving rise to such taxes occurs on or after the first day of the next calendar year”.35
66 For all other taxes, the MLI is in effect at the “beginning on or after the expiration of a period
of six calendar months from the latest of the dates on which this Convention enters into force
for each of the Contracting Jurisdictions to the Covered Tax Agreement”36 according to Art.
35(1)(b) the MLI.
67 When applying this article to the facts of the case, the effectiveness of the MLI depends on “the
latest of the dates on which the Convention enters into force”. The latest of the dates on which
the MLI enters into force is 1 March 2018 in Tralaland.37 Subsequently, the regulation is in
effect for taxes withheld at source “after the first day of the next calendar year”, i.e. on 1
January 2019.
68 Accordingly, the “entry into effect” provision that governs all other taxes also depends on the
latest date on which the MLI enters into force. As previously mentioned the latest date is 1
March 2018. Therefore, the MLI enters into effect “after the expiration of a period of six
calendar months” starting on 1 March 2018. That would lead to an effectiveness date of 1
September 2018.38
69 If the MLI entered into effect on 1 September 2018 this would result in a change of the legal
system of Jazzterra during a current tax year. In such a case, point 327 of the explanatory
34 (OECD, 2016b: Art. 34 para. 2). 35 (OECD, 2016b: Art. 35). 36 (emphasis added).
37 (OECD, 2016a: m.no. 327). 38 (Silberztein et al., 2017: 328).
34
statement regulates in detail that “in the case of a taxable year that follows the calendar year,
the provisions of the Convention would have effect with respect to the taxable period”
beginning on 1 January 2019. As described in the case, the tax year follows the calendar year.39
70 In sum and in accordance with the law, the MLI of Jazzterra enters into effect on 1 January
2019 related to withholding taxes as well as all other taxes.
MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN
JAZZTERRA
REQUIREMENTS TO CONSTITUTE A PE
71 Art. 5(1) defines a PE as a “fixed place of business through which the business of an
enterprise is wholly or partly carried on.” In addition, Art. 5(7) states that a sole shareholding
does not constitute a PE in the source state. Therefore, Milestone itself clearly does not
constitute a PE in Jazzterra. Economic activity alone in a foreign country does not automatically
constitute a PE either.40 In order to understand the concept of a PE, we will give a short
introduction of the necessary requirements. Firstly, the term “fixed place” means a mandatory
link to a specific amount of space which is connected to the soil. Connected with the term
“establishment” it is understandable that not the soil itself can qualify as the PE but instead the
tangible facility on the soil. Consequently, a website (which is undoubtedly intangible property)
cannot establish a PE.41
72 Secondly, the “place of business” and “the business of an enterprise” requires a business
activity which is carried out actively through the PE. This notion was integrated to exclude
passive investments when applying Art. 5, but considers that if the “passive income is
effectively connected to the PE and its activities”42 then the income should be attributed it.
Those exceptions can be found in e.g. Art. 10(4) or Art. 12(3).43
39 (Statement of facts, I.12 Other clarifications). 40 GER: (BFH, 04.06.2008). 41 (Reimer in Vogel et al., 2015a: Art. 5 m.nos. 13 et seqq.); (OECD, 2014b: Art. 5 m.no. 42.42); (Schaffner, 2013:
10); (Kobetsky, 2011: 118 et seq.); (Skaar, 1991: 121 et seq.). 42 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 25). 43 (Brugger, 2011: 67 f).
35
73 Lastly, the term “through which” relates to the last requirement. It has “to apply to any situations
where business activities are carried on at a particular location that is at the disposal of the
enterprise for that purpose.”44 Vogel et al. state that: “[…] disposal is the power to use the POB
[place of business] directly.”45
SERVER DOES NOT CONSTITUTE A PE BECAUSE DISPOSAL NOT GIVEN
74 The server belongs to Jazz-Telecom, an internet-service provider46 located in Jazzterra.
According to literature and the OECD-Commentary, a website, which is hosted within a disk
space of a server, cannot constitute a PE by itself.47 Firstly, it is necessary to note that the server
is owned by the ISP. The ISP provides a specific space on its server to store the company’s data
or software. Therefore, the server itself is at the only disposal of the ISP.48 Consequently, in
this case Musicalia merely rented a specific amount of virtual space on the server of Jazz-
Telecom. Musicalia has no right of disposal over the server and, thus, the third requirement
is not fulfilled.
YOHOHO DOES NOT CONSTITUTE A PE
75 Milestone does not have control over Yohoho and, therefore, Yohoho cannot constitute a PE.
In the case at hand, the question could be whether Musicalia has the right of disposal over
Yohoho. The other criteria are met because Yohoho has a factory through which business
activities (printing and branding souvenirs) are carried out. According to Vogel/Lehner, the
mere right to control or supervise activities does not mean that the disposal criterion is
fulfilled.49 In casu, Musicalia has no right of disposal over Yohoho. Moreover, it is settled case
law that the right of disposal will be measured on the criterion if the right has solidified in such
a factual or legal way that without any participation of the exercising company (in our case
44 (OECD, 2014b: Art. 5 m.no. 4.1); (Karundia, 2015: 18). 45 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 103). 46 (hereinafter ISP) 47 SWE: (HFD, 06.12.2013); AUS: (ATO, 09.03.2005); (Westin, 2007: 413 et seq.); (OECD, 2014b: Art. 5 m.no. 42
et seq.). 48 (Arnold in IBFD, 2014: Art. 5 m.no. 5.5.2.1); (OECD, 2014b: Art. 5 m.no. 42.43); (Owens, 1999: 426); (Portner,
2000: 120 et seq.). 49 (Görl in Vogel/Lehner, 2015: Art. 5 m.no. 17); see also: (Reimer in Reimer/Schmid et al., 2016: 59 et seq.).
36
Musicalia) a change or withdrawal of the right is not possible.50 Since Yohoho is a third
party company, it is clear that Yohoho is in the position to restrict the controlling activities of
Musicalia. Therefore, Yohoho does not constitute a PE for Musicalia and, thus, Jazzterra has
no taxation right regarding the income generated.
76 Yohoho cannot be deemed a dependent agent. As clearly explained51, the dependent agent must
be able to conclude contracts on behalf of the principal. In addition, he has to exercise this
authority on a regular basis.52 Yohoho does not fulfill those criteria. As a consequence, it is
absolutely clear that Yohoho is not a dependent agent.
WAREHOUSE DOES NOT CONSTITUTE A PE BECAUSE OF THE EXEMPTION IN ART.
5(4)(C) DTC-JT
77 Lastly, the warehouse cannot be deemed a PE because it falls under an exception according to
Art. 5(4)(c). As in the case of Yohoho, the first criterion of a fixed place (a warehouse is a
tangible asset) is met. The second criterion, the “place of business” is subordinated and,
therefore, excluded from the PE status based on the following arguments.53 “Art. 5(4) OECD
[…] excludes a number of POBs [places of business] from the status as a PE if the facility is
merely of a preparatory or auxiliary character.”54 Musicalia stores the souvenirs for a mere
period of 36 days and does not create any value during this time. Furthermore, it is clear that
storing the goods does not constitute the core business of Musicalia. The printing process
creates the value of the goods and makes them sellable. As a conclusion, the aim of Musicalia
is to sell the printed souvenirs to customers and, therefore, storing the goods before the
printing process starts is necessary and can qualified as a preparatory activity.55
78 The main business object is organizing events, providing agency services as well as
recording CDs and selling them. For this reason, Musicalia took a loan of USD 2 million.
Additionally, Musicalia does not have any employees to manage the stock. This is Milestone’s
50 (Rehfeld in Gosch et al., 2008: Art. 5 m.no. 50); (Sengupta in Lang et al., 2016: 362); GER: (BFH, 03.02.1993);
(BFH, 11.10.1989); AT: (UFS, 27.03.2003); CA: (FCA, 24.02.2000); IND: (Delhi ITAT, 22.06.2005). 51 (see m.nos. 111 et seqq.). 52 CA: (Tax Court of Canada, 16.05.2008). 53 (Reimer in Reimer/Schmid et al., 2016: 87) 54 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 247); see also: (OECD, 2014b: Art. 5 no. 21). 55 JP: (Tokyo District Court, 28.01.2016).
37
obligation: its employees clean, unload and correctly place the goods. As a result, the warehouse
is excepted from the PE status according to Art. 5(4)(c).
INTERIM CONCLUSION
79 The arguments above show that the server cannot constitute a PE because it is not at
Musicalia’s disposal. Further, Yohoho cannot be qualified as a PE because it is a third party
company and has the factual ability to withdraw from or to limit the right of Musicalia to
supervise and control its activities at the factory at any time. Lastly, the warehouse is excepted
from the status as a PE according to Art. 5(4)(c) because Musicalia solely stores the
souvenirs, which can be qualified as a preparatory activity and thus does not create any value
there.
MUSICALIA IS THE BENEFICIAL OWNER OF THE DIVIDENDS
DEFINITION OF “BENEFICIAL OWNERSHIP”
80 “Beneficial ownership” is not defined in the OECD-MC.56 However, the OECD-Commentary
provides a negative definition which states that the “direct recipient of the dividends is not the
beneficial owner” 57 if the recipient does not have the right of usage over the dividends.
81 The international literature and jurisprudence do not agree on a uniform definition, but agree
that an autonomous international meaning should be preferred. This is also confirmed by
relevant court decisions and literature.58 Collier states: “Unfortunately, almost the only thing
on which there is widespread agreement is that the concept (of beneficial ownership) is not
particularly well defined and could benefit from greater clarity”.59 Since the 2014 OECD-MC,
a few questions concerning beneficial ownership are answered, but nonetheless, “the
56 (OECD, 2014a: Art. 10). 57 (OECD, 2014b: Art. 10 m.no. 12.4). 58 (Du Toit, 2010: 502); (Vallada/Rust, 2015: 6); (Kemmeren in Vogel et al., 2015a: pre Arts. 10-12 m.no. 15 et seq.);
(Endres/Spengel, 2015: 255 et seq.); (Helminen, 2017: 104); UK: (Court of Appeal, 02.03.2006). 59 (Collier, 2011: 684).
38
application of the facts-and-circumstances test is still not completely clear”.60 In summary, it
can be stated that a comprehensive analysis must be carried out for each individual case.
MUSICALIA MEETS THE CRITERIA TO BE THE BENEFICIAL OWNER
82 The Canadian Tax Court in Prévost and many other courts all over the world demonstrated that
the status of beneficial ownership must be decided by reference to certain criteria.61 “Commonly
cited ownership attributes are possession, use, control and risk.”62 To have a conceptional
framework to determine beneficial ownership, the following criteria will be used: the (i)
substantive business activity test, the (ii) entrepreneurial risk and the (iii) control over the
profits.63 In general, the mere fact that dividends are transferred to a parent company does not
automatically mean that the subsidiary company is not the beneficial owner.64
83 In the following sections we will show, according to the criteria explained above, that all
requirements are met and Musicalia can be considered as the beneficial owner. As a result,
no WHT may be levied in Jazzterra.
SUBSTANTIVE BUSINESS ACTIVITY TEST
84 This test seeks to establish the substantive business activities of a company. To show that
Musicalia is not a mere conduit company, some principles are considered. Firstly, it must be
noted that the term “conduit company” is unclear.65 A conduit company is defined as “[…] a
company situated in a treaty country […] acting as a conduit for channelling income
economically accruing to a person in another State who is thereby able to take advantage
‘improperly’ of the benefits provided by a tax treaty.”66 In the debate over the possible
connection between beneficial ownership and business activities, some of the literature shares
60 (Meindl-Ringler, 2016: 74). 61 CA: (FCA, 26.02.2009); (Tax Court of Canada, 22.04.2008); (Tax Court of Canada, 24.02.2012); CH: (SFTA,
07.03.2012); (Arnold in Lang, 2013: 3.4). 62 (Meindl-Ringler, 2016: 78). 63 (Beretta, 2017: 2.2 et seq.); (Tolstrup/Bjørnholm, 2011: 504); (Poiret, 2016: 279); (Wheeler, 2005: 482);
(Banfi/Mantegazza, 2012: 59). 64 (Hansen in Kemmeren, 2013: 17.4); DK: (LSR, 20.12.2011). 65 (Haslehner in Vogel et al., 2015a: Art. 10 m.nos. 43 et seqq.). 66 (OECD Report, 1987: 2); see also: (Poiret, 2016); (Chew, 2015); (De Broe, 2008: 665); DK: (LSR, 20.12.2011).
39
the opinion that “there is no necessary link between substantive business activity and beneficial
ownership”.67 Instead, the focus should be on the “ownership” principle.68
85 Although there is no necessary link between the business activities of a given entity and its
status as a beneficial owner, we will nevertheless prove that Musicalia carries out such business
activities, in order to eliminate all possible doubts about Musicalia’s status as beneficial owner.
Firstly, Musicalia sells souvenirs to non-related parties in accordance with its business object,
which can be considered a regular activity.69
86 Secondly, Musicalia organizes different jazz festivals with its own musicians in Jazzterra. The
activity of planning events is also intended to last for a longer period which shows that
Musicalia has a high commitment to its business. The contract for the sponsorship payments
lends further support to this, as it was concluded for a period of free years. Thus, it can be
reasonably assumed that the festivals are also intended to be regularly organised over this whole
period. Otherwise, in the absence of music festivals, Musicalia would not be able to grant rights
to La Cervecita.
87 As a last argument, the amount of the sponsorship payments can also serve as a clear indicator
of business activities. The payments reach an amount of USD 1 million each year, which leads
to a sum of USD 3 million over three years.70 Therefore, the loan of USD 2 million which is
granted from Intermezzo can easily be repaid. This is possible even without the help of any
other income, e.g. selling souvenirs or profits from the events.
88 Because Musicalia has business activities which furnish it with sufficient profits to function
on its own independently is an indication that is has substantial business activity, and it does
not have to pass on all of its profits to its parent.
67 (Jain/Prebble et al., 2014: 390); see also: (Canete/Staringer, 2009: 185 et seq.); (Baker in Maisto, 2012: 6.6); IT:
(Regional Tax Court of Piedmont, 07.05.2014); (Provincial Tax Court of Turin, 20.03.2013). 68 (Haslehner in Vogel et al., 2015a: Art. 10 m.nos. 43 et seq.); IT: (SC, 28.12.2016); (Regional Tax Court of Abruzzo,
30.08.2012); (Regional Tax Court of Lombardy, 10.07.2015); CZ: (Supreme Administrative Court, 10.06.2011). 69 (Statement of Facts, B. Economic activities 2017-2018). 70 (Statement of Facts, B. Economic activities 2017-2018).
40
CONTROL OVER PROFITS AND ENTREPRENEURIAL RISK
89 As an introductory remark, risk can be defined as the possibility of a loss or gain of something
in a specific situation.71 In general, it can be stated that entrepreneurial risk has to be
determined in each individual case based on a careful consideration of all circumstances.72 It
will be shown that Musicalia takes the full entrepreneurial risk and, consequently, has an
economic interest in ensuring that the business runs well.73 In addition, it will be demonstrated
that Musicalia has control over all profits generated.
90 The main criteria to show that Musicalia has the control over profits and bears the
entrepreneurial risk are (i) whether there is a “share in any profits of the company”, (ii)
whether other obligations take priority over the distribution of dividends, (iii) whether
“the level of payment of interest would depend on the profits of the company” and (iv) the
arm’s length principle.74
91 The theory above can be applied to the current case. It can be supposed that Intermezzo does
not have any right to the profits of Musicalia. Neither the case nor the clarifications give any
such indication.
92 Moreover, from the standpoint of Musicalia, the repayment of the loan is an obligation which
restricts the possible distribution to shareholders. Firstly, Musicalia has to repay the loan before
it can allocate any dividends to shareholders. Therefore, Musicalia can freely decide which
share of its profit (this will be the remaining amount of the revenue minus the repayment of the
loan) to forward to its shareholders. For this reason, it is logical to assume that shareholders
are subordinated over and Musicalia has the full right over the profits.
71 (Hisrich/Ramadani, 2017: 58). 72 (Helminen, 2004: 59).
73 (Lang in Gassner, 1994: 143 et seq.); (De Broe, 2008: 681 et seq.). 74 (OECD, 2014b: Art. 10 m.no. 25); (Van Gelder/Niels, 2014: 219 et seq.); (Bakker, 2013: 29 et seq.); (Blessing,
2012: 200 et seq.); (Rotondaro, 2000: 264); (Lopes Dias V.S., 2015: 2.3); (Sabins in Massoner, 2012: 275 et seqq.);
(Kemmeren in Vogel et al., 2015a: pre Arts. 10-12 m.no. 27 et seq., 35); NL: (Hoge Raad, 06.04.1998); (Hoge Raad,
21.02.2001).
41
93 Thirdly, the payment of interest does not depend on Musicalia’s profit. According to the
clarifications, Intermezzo concluded a six-year contract with a stable annual interest rate of
three percent.75
94 Lastly, the arm’s length principle must always be considered. The arm’s length criterion has
also been confirmed in the Spanish Real Madrid case where the court decided that beneficial
owner should be determined by using the arm’s length test.76 This means, if the payment is line
with the arm’s length principle, this supports the argument that Musicalia is the beneficial
owner of the dividends.77 In the case at hand, all transactions are at arm’s length.78
INTERIM CONCLUSION
95 In sum and based on the consideration of all available material, it is incontestable that Musicalia
is the beneficial owner of the dividends paid by Milestone. As already mentioned, business
activities are carried out by Musicalia which indicates that Musicalia is not a mere pass-through
entity. Even if the tax authority should adopt the view that Musicalia does not conduct business
activities, it can be argued that there is no necessary link between the business activities of a
given entity and its status as the beneficial owner of certain items of income. Furthermore,
Musicalia assumes the entrepreneurial risk and, therefore, an economic interest is given. In
addition, Musicalia can freely decide over the use of its profit.
SOLELY ART. 10 DTC-JT SHOULD APPLY
96 Firstly, as was clearly established above79, the DTC-JT applies because the personal scope of
Art. 1 and the material scope of Art. 2 are fulfilled. In addition, Milestone is a resident of
Jazzterra80 where it generates taxable income. Because the DTC-JT applies, the next question
concerns the most appropriate distributive rule. Concerning taxes on income the Arts. 6
75 (Clarifications, m.no. 35). 76 ES: (Audiencia Nacional, 18.07.2006). 77 (Gooijer, 2014: 211). 78 (Clarifications, m.no. 35). 79 (see m.no. 58). 80 (see m.nos. 51 et seqq.).
42
through 21 are relevant. It should be stated that only one distributive rule can apply. To
ensure this, the distributive rules contain priority rules. 81
97 As the facts state, Milestone distributes dividends to Musicalia.82 Neither of the parties contest
whether this item of income is considered a dividend. This is a given fact of the case. Therefore,
Art. 10 for dividends is clearly the only relevant distributive rule. The bilateral scope of
Art. 10 is fulfilled – i.e. dividends are paid by a company (Milestone) resident of Jazzterra to a
company (Musicalia) resident of Tralaland – and the consequence is a 0% WHT. The tax
authorities cannot levy any WHT because Muscalia is the 100% shareholder of Milestone,
clearly surpassing the 25% participation threshold. Moreover, as was clearly proved above,
Musicalia is undoubtedly the beneficial owner. 83
98 Since dividends could be seen as a form of business income to which Art. 7 applies, the priority
rule contained in Art. 7(7) states that Art. 10 takes priority, as it is the more special rule
(incorporating a lex specialis principle). Following this rule, it is clear that Art. 10 should
take precedence over Art. 7 as well as Art. 21. 84
NO ABUSE OF THE DTC-JT
“BENEFICIAL OWNERSHIP” CONCEPT AS AN ANTI-AVOIDANCE RULE?
99 In practice, but also in literature, there are different approaches to the interpretation of beneficial
ownership. On the one hand, it can be understood as an attribution-of-income rule and, on the
other hand, as a general anti-avoidance rule.85 In literature, the opinion that the beneficial
ownership concept should be understood in a narrow sense, only in specific cases of abuse,
can be found. This implies that the beneficial ownership concept should be interpreted in a
formal, legal way. When applying the economic view, the beneficial ownership concept is
81 (Kasaizi in Schilcher, 2008: 362). 82 (Statement of Facts, B. Economic activities 2017-2018). 83 (see m.no. 94). 84 (OECD, 2014b: Art. 21 m.no. 1); (Schütte in Haase/Becker, 2016: 1359 et seq.); (Rust in Vogel et al., 2015b: Art.
21 m.nos. 7 et seqq.). 85 (Meindl-Ringler, 2016: 321); (Vallada/Rust, 2015: 33); (Du Toit, 2010: 502).
43
treated as a general anti-avoidance rule, which does not correspond with the original approach
of the OECD MC.86
100 The relevant cases for applying an anti-avoidance rule are (i) when someone gains a benefit
because of treaty shopping and/or (ii) when an enterprise can be qualified as a conduit
company.87 In the following, it will be shown that the incorporation of Musicalia in the case
at hand is not a form of treaty shopping and Musicalia is not a conduit company. Hence, the
treaty benefits of the DTC-JT have to be granted to the applicant.
MUSICALIA IS NOT A CONDUIT COMPANY
101 Taking into consideration the definition of a conduit company88, it must be pointed out that
Musicalia was founded ten years after the conclusion of the DTC. Moreover, the enterprise was
founded with an equity capital of USD 50,000. The reduction of the WHT has been available
since the DTC entered in force. Therefore, it is clear that Musicalia was not established to
gain any treaty benefits.89
102 Secondly, Musicalia carries out different activities90 and also invested in a recording studio,
which cost USD 2 million. As already stated above91, La Cervita pays a high amount of
sponsorship payments under an agreement which has been concluded for a period of three
years. Therefore, there is obviously an intention to operate the business for a longer time.
NO TREATY SHOPPING BY MUSICALIA
103 Next, we will clearly demonstrate that the aim of Musicalia is not and has never been treaty
shopping. For this purpose, it is necessary to define treaty shopping. “Numerous transactions
aim at obtaining the benefits of a tax treaty which would not be applicable to a taxpayer
otherwise because he is not a resident of a contracting state; […].”92 Vogel defines treaty
86 (Meindl-Ringler, 2016: 80 et seq., 341); (Oliver et al.,2000: 310); (Du Toit, 1999: 149 et seq., 210 et seq.); (Sabins
in Massoner, 2012: 267); (De Broe, 2008: 664 et seq.). 87 (Zuk in Simader, 2013: 331); (Jiménez, 2010: 62 et seq); (Sabins in Massoner, 2012: 275 et seqq.); CH: (Supreme
Court, 28.11.2005). 88 (see m.no. 83). 89 (Statements of facts, G.1 At the convention level: tax treaties); see also: (Vitko, 2013: 12). 90 (see m.nos. 83 et seq.). 91 (see m.no. 85). 92 (Bonschak in Simader/Titz, 2013: 37); (emphasis added); see also: (Bammens/De Broe in Lang, 2010: 56 et seq.).
44
shopping as: “transactions are entered, or entities are established, in other states, solely for the
purpose of enjoying the benefit of particular treaty rules existing between the state involved and
a third state which otherwise would not be applicable“.93 “Solely” should be understood as
implying that the key purpose is to obtain a tax benefit by abusing the treaty.94
104 In order to prove that there is economic substance in the case at hand and that the tax benefits
are only a subsidiary factor, an objective and subjective prong have to be passed. The
objective test criterion relates to the question as to whether the transactions made by the
company has any economic substance (a key figure to consider is the profit before tax). When
assessing the subjective factor, “it should be determined whether transactions were justified by
(commercial) motives other than tax motives”.95
105 From the facts above, it can be concluded that Musicalia fulfils both criteria. Firstly, the
objective factor is fulfilled because Musicalia carries out a variety of business activities96. Those
activities will be carried out for a substantial period of at least minimum three years. Secondly,
the subjective factor is fulfilled because Musicalia has the sole motive to carry out its defined
business purpose.97 Nota bene: an accidental tax advantage from a transaction does not imply
a motive of tax avoidance.98 Musicalia does not have any motive to avoid tax and consequently
the GAAR is not applicable.
INTERIM CONCLUSION
106 In casu, it becomes evidently clear that Musicalia is neither a conduit company nor engages in
treaty shopping. Business activities are carried out and therefore no abusive practice whatsoever
is conducted. In addition, treaty shopping criteria are not fulfilled either, since Musicalia passes
both the subjective and objective tests. Therefore, Musicalia’s incorporation was not aimed at
saving tax. Thus the GAAR is not applicable.
93 (Vogel, 1997: Art. 1 m.no. 77); (emphasis added); see also: (UN, 2006: 8 et seq.); (Shome/Committee, 1961: 17). 94 (Meindl-Ringler, 2016: 348 et seq.); (Seiler, 2016: 213); (Panayi, 2006: 147). 95 (Piantavigna, 2017: 2.2); see also: (Bammens/De Broe in Lang, 2010: 56 et seq.); (Seiler, 2016: 155 et seq.); (De
Broe et al., 2015: 375); (Alvarrenga, 2013: 3.2); US: (CA, 13.10.1998); (CA, 20.06.2001). 96 (see also m.nos. 83 et seqq.). 97 (Statements of facts, A. Tax subjects/entities). 98 (Piantavigna, 2017: 2.2); (Hinnekens, 1999: 95); (Wheeler, 2011: 264); BEL: (Cour de Cassation, 06.06.1961).
45
MUSICALIA’S INCOME FROM RENTING OUT MUSICIANS TO CLUBS
AND THEATRES IS ONLY TAXABLE IN TRALALAND
107 The income earned by Musicalia from the payments made by clients for renting out musicians
is without doubt business income according to Art. 7 DTC-JT. Firstly, it will be shown that, in
regards to Art. 7(7), no other provision of the DTC is applicable, and secondly it will be
demonstrated that Musicalia does not have a PE within Jazzterra through which this income is
generated. As a consequence, the entirety of income resulting from the clients’ payments in
Jazzterra is taxable only in Tralaland.
108 Art. 17(2) DTC-JT is not applicable if another type of income is predominant and the
performance element of the income is negligible.99 Analogous to royalty payments, it can be
concluded that no apportionment is necessary if it seems impracticable.100 Moreover, the
2014 OECD-Commentary101 explicitly states this is the case if an individual earns income
deriving from other activities, which do not fall within the scope of Art. 17. As Art. 17(1) and
Art. 17(2) have the same scope, this equally applies for the intermediary company.102 Thus,
Art. 17(2) does not cover income which includes remuneration in consideration of an artistic
performance to a small part but is predominantly generated by other activities, such as
agency services and supply of personnel.103
109 Musicalia’s income is without doubt predominantly attributable to the agency service provided,
namely the selection of the most suitable musician for each event and venue and the subsequent
supply of personnel. Such impresario or agency income falls outside the scope of Art. 17.104
The musicians themselves do not participate in any income generated by Musicalia, they merely
receive a steady salary from Intermezzo. Also, the clients do not choose or select the musicians
themselves, they mainly benefit from the impresario service provided by Musicalia. In this
respect, the overwhelming majority of the payment to Musicalia is in consideration of the
99 (Juarez in Maisto, 2016: 163 et seq.); (Felderer, 2007: 457). 100 (Toifl in Ehrke-Rabel, 2011: 118); (Cordewener in Maisto, 2016: 123); GER: (FG Münster, 03.02.2006). 101 (OECD, 2014b: Art. 17 m.no. 4). 102 (Lang, 2017a: 12). 103 (Mody in Strunk, 2017: Art. 17 m.no. 45); (Schaffer, 2016: 63 et seq.); (Grossmann, 1992: 166); (Görl, 1983: 170
et seq.). 104 IND: (Mubai ITAT, 19.11.2010); FIN: (Finnish Supreme Administrative Court KHo, 29.01.2001); AT: (VwGH,
11.12.2003); (OECD, 2014b: Art. 7 m.no. 7).
46
service provided procuring a suitable artist to the respective client. Accordingly, all income
generated through this activity is only taxable under Art. 7.
MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN JAZZTERRA
110 The income, which clearly is business profit as shown above, is undoubtedly earned without
constituting a PE in Jazzterra. In the following it will be demonstrated that this income is not
earned through a PE in Jazzterra, as firstly, Musicalia does not have a fixed place of business
in Jazzterra,105 and secondly Milestone’s services provided to Musicalia do not constitute a PE
for Musicalia in Jazzterra.
111 Musicalia does not have a fixed place of business in Jazzterra and no permanent place through
which Musicalia performs its course of business is at Musicalia’s disposal. As mentioned above,
the mere fact of owning shares does not constitute a PE.106 Therefore, it is incontestable that
Musicalia’s shareholding alone does not constitute a PE in Jazzterra.
112 Any agency services that do not result in a contract on behalf of the principal, unequivocally,
cannot constitute a PE in Jazzterra.107 This holds true even if an agent is found to be dependent.
The shareholding does not influence the classification as a dependent or independent agent
pursuant to Art. 5(5) and (6).108 The fact that a person performs such services to only one
principal and that the agent is bound by detailed instructions109 is a clear indication of
dependency rather than being independent. Nevertheless, regardless of the dependency status,
a PE is only constituted if the agent has the authority to conclude contracts on the behalf
of the principal.110
105 (see m.no. 70 et seq.) 106 (see m.no. 70). 107 (Reimer in Vogel et al., 2015a: Art. 5 m.nos. 329 et seq.); (Fresch/Strunk in Strunk, 2017: Art. 5 m.nos. 111 et seq.);
(Haase in Haase/Becker, 2012: Art. 5 m.nos. 148 et seq.); (Feuerstein in Brugger, 2011: 111); IND: (AAR,
13.02.2006). 108 (OECD, 2014b: Art. 5 m.nos. 38.1, 41). 109 AT: (VwGH, 17.12.1993). 110 FRA: (Tribunal administratif, 12.07.2017).
47
113 In order to constitute a PE, the criterion of permanence needs to be fulfilled111 and, most
importantly, the agent must be able to conclude contracts on behalf of the principal and has
to exercise this authority regularly to fall within the scope of Art. 5(5).112
114 The authority to conclude contracts is determined by the fact whether or not the agent can
legally bind the principal.113 Therefore, a formal power of attorney is necessary.114
Accordingly, if the dependent agent cannot legally bind the principal, no PE can be constituted
by the services the agent provides to the principal.115 Arguing a maiori ad minus, if the
intermediary does not even have any authority to conclude contracts in the name of the
principal, no PE can be constituted.116 Then, even though the intermediary is a dependent agent,
it is only regarded as a messenger.117
115 The agent activity of Milestone undoubtedly does not constitute a PE on behalf of Musicalia.
Even though Milestone is a dependent agent according to Art. 5(5) on the grounds that it only
performs intermediary services to Musicalia and receives very detailed instructions, Milestone
does not have the authority to conclude contracts on behalf of Musicalia. All contracts are
concluded by Musicalia.
116 Milestone’s activity, carried out by its Sales Director, is limited to a courier function, as its
entire contribution to the conclusion of the contracts is initiating contact and communicating
the strict specifications on prices and terms and conditions determined. Whenever there is
uncertainty regarding a contract Musicalia has to be consulted, hence relegating Milestone to
the role of a messenger rather than an agent that majorly contributes to the conclusion of a
contract. To conclude, not only does Milestone have no authority to legally bind the principal
Musicalia, but what is more it has virtually nothing to do with the negotiation and the
contract being concluded, other than familiarizing the client with the strict contract details
111 (Wassermeyer/Kaeser in Wassermeyer, 2015: Art. 5 m.nos. 195 et seq.); (Larking, 1998: 266). 112 CA: (Tax Court of Canada, 16.05.2008). 113 (Lang, 2014: 104). 114 (Bendlinger, 2009: 109); FRA: (Conseil d'État, 31.03.2010). 115 NO: (Supreme Administative Court Norway, 02.12.2011); (Lang, 2014: 95 et seq); (Pijl, 2013: 77 et seq.). 116 (Fresch/Strunk in Strunk, 2017: Art. 5 m.no. 112). 117 (Skaar, 1991: 497).
48
that Milestone was instructed with.118 Therefore Milestone has no authority to conclude
contracts on behalf of Musicalia and thus no PE is constituted.
INTERIM CONCLUSION
117 For all these reasons, the income received by Musicalia from clients’ payments is taxable
only in Tralaland, since it earns business profits under Art. 7 which are generated without
constituting a PE in Jazzterra. There is no permanent establishment under Art. 5, since
Musicalia has no fixed place of business in Jazzterra and Milestone’s services do not
constitute a PE, as Musicalia has no right of disposal of Milestone’s office and Milestone
cannot conclude contracts on behalf of Musicalia. Thus, the entirety of income is exclusively
taxable in Tralaland.
SUBSIDIARY ARGUMENT: EVEN IN AN APPORTIONMENT UNDER ART. 17(2)
DTC-JT IS MADE, TRALALAND STILL RETAINS THE MAJORITY OF ITS
TAXATION RIGHTS OVER THE CLIENTS’ PAYMENTS
118 If the court should not follow the previous arguments and an apportionment under Art. 17(2) is
necessary, Tralaland will retain the taxation right over the majority of the income, since
Art. 17(2) only applies to a small part of the clients’ payments.
119 In the case of mixed payments, i.e. lump-sum payments including remuneration for the
performance of an entertainer as well as agency services, an apportionment between Art. 17
and Art. 7 becomes necessary, since Art. 17(2) only covers the income which would have
been covered by Art. 17(1) if paid to the entertainer himself.119 For the purpose of
apportionment, firstly the scope of Art. 17(2) has to be determined and, in a second step, the
income attributable to the musician has to be calculated.
120 Art. 17(2) DCT-JT is an exception to the PE principle and thus has to be interpreted in a
very narrow fashion.120 This limited approach to Art. 17 is not only corroborated by
118 similar to FRA: (Tribunal administratif, 12.07.2017). 119 (Felderer, 2007: 457). 120 (Loukota in Gassner, 2003: 220 et seq.).
49
literature121 and case law122, but also by the 2014 OECD-Commentary in various contexts
stating explicitly that income of impresarios for arranging the performers’ appearance is
not covered by Art. 17 and, also, that all income of an enterprise involved in the production
of an event is outside the scope of Art. 17.123 Art. 17(2) can subsequently only be applied to
the small part of the remuneration which is paid in respect of the personal performance of the
entertainer.124 Attributing income to the entertainer means that income, firstly, has to be
subjectively attributable to the person performing and, secondly, has to be objectively
attributable to the performance of the entertainer.125
121 In the case at hand, substantial parts of the income are neither attributable to the person nor
to the performance. The main activity for which the payments are made is the selection of the
most suitable musician and, correspondingly, the payments are substantially made with
respect to the impresario service that Musicalia provides. This agency service does not fall
within the scope of Art. 17 and, therefore, this major part of the payment cannot be taxed in
Jazzterra.
122 If a contract does not explicitly stipulate a certain portion of remuneration to be paid in respect
of the artist’s performance, the amount attributable has to be estimated,126 leaving the sum
actually paid or forwarded from the agent company to the employed artist.127 Correspondingly,
Malin reaches the same conclusion, by calculating the attributable amount through the cost plus
method, subtracting all connected costs and the profit margin of the company from the gross
payment.128
123 Musicalia’s income has to be split up using the cost plus method and Art. 17(2) only applies
to the payments for the musicians’ activities. Therefore, the commission fee for the information
provided by Milestone, the hiring out payment to Intermezzo and a profit margin for the agent
activities of Musicalia all have to be deducted from the overall payments from the clients to
121 (Molenaar, 2006: 64). 122 GER: (BFH, 04.03.2009); AT: (VwGH, 27.11.2003); (VwGH, 11.12.2003); FIN: (Finnish Supreme Administrative
Court KHo, 29.01.2001). 123 (OECD, 2014b: Art. 17 m.nos. 7, 11.4). 124 BEL: (Court of Appeal, 13.06.2006). 125 (Lang, 2017a: 12). 126 (Felderer in Loukota, 2007: 271). 127 (Hahn-Joecks, 1999: 130 et seq.); (Maßbaum in Gosch et al., 2008: Art. 17 m.no. 259). 128 (Malin in Loukota, 2007: 239).
50
calculate the portion of income attributable to the musicians. Moreover, in conformity with
Jazzterra’s domestic law, which allows generous deductions for newly formed
businesses129, this approach becomes indispensable. Therefore, only this small portion of that
income is taxable in Jazzterra. The remaining income is exclusively taxable in Tralaland.
Interim Conclusion
124 As has been conclusively shown, even if the income had to be split between Art. 17(2) and
Art. 7, Tralaland as the state of residence retains its taxation right over the majority of the
income. The income must be apportioned using the cost plus method and leaving only a small
portion that can be considered the salary forwarded to the musicians under Art. 17(2).
Therefore, the predominant part of Musicalia’s income from the clients is exclusively taxable
in Tralaland.
MUSICALIA’S INCOME FROM THE JAZZ FESTIVAL IS ONLY TAXABLE
IN TRALALAND
THE “SPONSORSHIP-INCOME” IS BUSINESS INCOME ACCORDING TO ART. 7
DTC-JT
125 The sponsorship income is clearly a business profit within the scope of Art. 7. Art. 7(1) covers
all items of income earned by an enterprise,130 which in accordance with Art. 7(7) are not dealt
with in separate provisions of the treaty. The payments are in fact not sponsorship payments
but rather payments to obtain the right to exclusively sell alcoholic beverages at
Musicalia’s events. In the following it will, firstly, be shown that the income deriving from the
jazz festival is not covered by any other provision than Art. 7(1) and, secondly, it will be
demonstrated that this income is not earned through a PE.
129 (OECD, 2014b: Art. 17 m.no. 52). 130 (OECD, 2014b: Art. 7 m.no. 4).
51
THE “SPONSORSHIP-INCOME” IS NOT A ROYALTY COVERED BY ART. 12
DTC-JT
126 Musicalia’s income from the sponsorship agreement is clearly not covered by Art. 12. Royalties
are defined by Art. 12(2) as payments for the use of or the right to use protected intellectual
property131 or know-how.132 Accordingly income must be for the use of or the right to use
such IP for a certain, restricted period of time to constitute royalties.133 Although payments for
exclusive distribution rights for (trademarked) products are payments for the use of a right, they
are nevertheless not covered by Art. 12 , since such right which the payment is made for is
not a right mentioned in the exhaustive definition of Art. 12(2). 134
127 Admittedly, some authors deem sponsorship income to be comparable to royalties, since
sponsors pay money in exchange for an advertisement opportunity.135 However, this view
cannot be applied in the case discussed, since the payments are not actually sponsorship
payments, but payments made to acquire the exclusive right to sell alcoholic beverages at
the festival. Even if a small part of the income is considered to be in exchange for advertising
contingency, Art. 12 is not applicable for mixed contracts, if the predominant part of the
income is outside the scope of Art. 12(2).136 What is more, the fact that the contract is merely
titled a “sponsorship agreement” does not make them sponsorship payments in substance.
128 In the case at hand the payments are merely made to exclude other beverage suppliers of
alcoholic beverages from selling at Musicalia’s events. The payment was made for the use of
a right, namely to be the only seller of alcoholic beverages at the events. However, such right
is not covered by the definition of Art. 12(2) as an IP, and therefore such payment does not
constitute a royalty. Furthermore, it must be considered that, if payments for exclusive
distribution rights of products trademarked by someone else are not covered by Art. 12, then it
follows that payments to exclusively sell a company’s own (trademarked) products at a
131 (herinafter IP). 132 (OECD, 2014b: Art. 12 m.no. 11); (Pöllath/Lohbeck in Gosch et al., 2008: Art. 12 m.no. 106). 133 (Kluge, 2000: 233 et seq.); (Pöllath/Lohbeck in Vogel/Lehner, 2015: Art. 12 m.no. 47). 134 (OECD, 2014b: Art. 12 m.no. 10.1); (Valta in Vogel et al., 2015a: Art. 12 m.no. 142); GER: (BFH, 27.07.1988);
AT: (BMF, 27.09.1999). 135 (Aigner, 2012: 169); (Achatz, 2002: 133). 136 (OECD, 2014b: Art. 12 m.no. 11.6).
52
certain location can evidently not be considered a royalty. To conclude, Musicalia’s income
from La Cervecita is not royalties according to Art. 12.
ART. 17(2) DTC-JT DOES NOT APPLY TO MUSICALIA’S INCOME FROM THE
“SPONSORSHIP AGREEMENT” WITH LA CERVECITA
129 Art. 17(2) is not applicable to the sponsorship payments since the provision only covers income
which is generated in respect of the personal performance of an entertainer but accrued
to another person. As highlighted above,137 Musicalia is a person according to Art. 3.
Furthermore, Musicalia is the agent of several musicians whose income could fall under Art.
17(1). Nevertheless, the sponsorship income does not arise in connection with the
performance of the entertainers.
130 The income deriving from the sponsorship agreement between Musicalia and La Cervecita is
clearly not covered by Art. 17(2). Income within the scope of Art. 17(2) has to be attributable
to the entertainer.138
131 The sponsorship payment can clearly not be attributed to the person(s) performing, since there
is no personal connection. This personal relation requires a connection to the personality and
famousness of the specific entertainer.139 The OECD-Commentary even demands a
connection to the name, signature or personal image of the entertainer to establish a
personal connection with a given sponsorship or advertisement.140
132 Additionally, the income can certainly not be attributed to the performance itself since it is not
a sponsorship payment per se but rather a payment for the exclusive distribution right of
alcoholic beverages at a festival. Therefore, the income generated therefrom does not fall
within the scope of Art. 17(2). Although income being directly or indirectly performance-
related is a main criterion for determining the application of Art. 17(2)141, a company dealing
137 (see m.no. 47). 138 (see m.no. 120) 139 (Molenaar, 2006: 104 et seq). 140 (OECD, 2014b: Art. 17 m.no. 9.5). 141 (Cordewener in Vogel et al., 2015b: Art. 17 m.no. 160).
53
with artists can also earn other income, i.e. broadcasting income, which cannot be
considered performance-related income, but rather business or even technical income.142
133 In the case at hand, thus the payment in light of the sponsorship agreement made to Musicalia
does not fall within the scope of Art. 17(2), as it is in no possible way, objectively or
subjectively, attributable to the performances of the specific entertainers.143 This becomes
especially evident if it is considered that the musicians performing at the festival are hired
for one year, whereas the sponsorship agreement is concluded for a three-year period. To
conclude, this income cannot be taxed in Jazzterra through Art. 17(2), as the sponsorship
payment is not income in respect of a performance of an entertainer accrued to another person,
but is the business income of Musicalia.
MUSICALIA’S INCOME FROM THE TICKET SALE IS NOT COVERED BY ART. 17(2)
DTC-JT
134 Equally, the income derived from the ticket sales is undoubtedly outside the scope of Art. 17(2).
The Swedish supreme administrative court explicitly deems the income earned by merely
making the performance of an artist public to be outside the scope of Art. 17(2),144
therefore taking its original object and purpose into account. Hence only income attributable to
the artist but accrued to another person is covered, excluding additional income derived by
their employer through making the activity public.145 Furthermore, income of an independent
promoter of a concert from the sale of tickets is not covered by Art. 17(2).146 Musicalia is clearly
an independent promoter, since the artists are merely employees, not shareholders of the
company. Such income is also not within the scope of Art. 17 if it is earned by a sports team or
orchestra.147 If it is not even covered by Art. 17 when earned by the actual group of artists, then
it cannot be covered when earned by an agency.
135 Accordingly, Musicalia’s income from the sales of tickets for the jazz concert does not fall
within Art. 17(2), but is rather covered by Art. 7. The tickets sold are to be considered as
142 (Maßbaum in Gosch et al., 2008: Art. 17 m.no. 254, 259); (Grams/Molenaar, 2002: 379); GER: (BFH, 04.03.2009). 143 (Foddanu in Haase/Becker, 2012: Art. 17 m.no. 4). 144 SWE: (Regeringsrätten, 30.10.2002). 145 (Molenaar, 2006: 61). 146 (OECD, 2014b: Art. 17 m.no. 11.4); (Barret, 2014: 532). 147 (Tetlak, 2010: 277).
54
income derived by the company managing the musicians and therefore cannot be
attributed to the artists themselves. In this regard, the income earned is, for the lack of a PE,
exclusively taxable in Tralaland.
MUSICALIA DOES NOT HAVE A PE IN JAZZTERRA
136 The income is undoubtedly earned without constituting a PE in Jazzterra. In the following it
will be conclusively show that neither the festival itself nor the services provided by
Milestone constitute a PE in Jazzterra on two grounds. Firstly, the festival only lasts for one
day and does not therefore exceed the necessary threshold of permanency and, secondly,
Milestone merely provides services to Musicalia.
137 The festival itself clearly does not constitute a PE in Jazzterra. Even though the place where the
festival is hosted is a fixed place of business, since it is connected to the ground and Musicalia
carries on its business through it, there must be a certain degree of permanency to constitute
such a PE. The OECD-Commentary extrapolated that in practice a threshold of six months is
considered a suitable timeframe for determining permanence.148 Such permanency can also be
achieved through recurring activity at the same place or by a shorter activity which is solely
performed in that country, but literature149, case law150 and administrative practice151
strongly indicate otherwise. Furthermore, this permanent place of business must be at the
disposal of the enterprise.152
138 Musicalia hosts this festival for one day, clearly indicating that no permanent fixed place of
business is at its disposal. Even though the place where the festival is hosted is a fixed place
which is at the disposal of Musicalia for the time of the festival and Musicalia carries on its
business through this place by holding the festival there, the criterion of permanency is not
fulfilled. Neither the exceptions of the recurring activity nor the exception for the short
event wholly carried on in the source state can be met, since there is no indication of
Musicalia hosting another festival at that place of business in the future and further such a short
148 (OECD, 2014b: Art. 5 m.no. 6); (Miller et al., 2017: 9.6). 149 (Bendlinger, 2006: 358 et seq.); (Hoor, 2014: 119 et seq.). 150 GER: (BFH, 19.05.1993); (BFH, 02.12.1992); AT: (VwGH, 12.05.1997). 151 (BMF, 2007: 35); AT: (EAS: 350, 501, 750, 754, 900, 740, 1234, 1543, 1973, 2921, 3045); GER: (BMF,
25.08.2009). 152 (see m.no. 72).
55
event must at least show some permanency. A one-day event cannot be considered
permanent. Accordingly, the festival does not constitute a PE in Jazzterra.
139 The activities of a service provider do not constitute a PE if the service provider carries
out its own business. If it carries out the business of the initiator, the same criteria as above
have to be met to constitute a PE for the initiator. The contractor must have a fixed place of
business which is at the disposal of the initiator and through which the business of the initiator
is permanently carried on.153 If the initiator does not have the right of disposal of the
premises, or the contractor carries out his own business, no PE is constituted for the
initiator.
140 Milestone does certainly not constitute a PE for Musicalia in Jazzterra. Admittedly, Milestone
has a fixed place of business in Jazzterra, as they have rented an office which they use for the
entire year in 2018. But even though Musicalia concluded a warehousing contract with
Milestone earlier, Musicalia has no right of disposal over the office itself, as Musicalia has
no key and therefore cannot actually use the office itself.154 Furthermore, Milestone only
carries out its own business through the office in Jazzterra, since
“merchandising/promoting/selling tickets and organizing music festivals” is Milestone’s
corporate object. These services provided are to be regarded as within the realm of their
expertise for which they were hired and for which they are paid remuneration by the initiator
Musicalia. Thus, these activities do not constitute a PE for Musicalia in Jazzterra.
INTERIM CONCLUSION
141 As conclusively shown, Musicalia’s income from the festival is without doubt exclusively
taxable in Tralaland, since the income earned is a business profit generated without a PE in
Jazzterra. Art. 17(2) is neither applicable to the sponsorship payment nor to the sale of
tickets to the festival. Hence, the entire income earned therefrom is solely taxable in
Tralaland.
153 (Karundia, 2015: 19 et seq.). 154 (Statement of Facts, B.1 Economic activities in 2017-2018).
56
SUBSIDIARY ARGUMENT: JAZZTERRA IS NOT ALLOWED TO LEVY
TAX ACCORDING TO THE BILATERL INVESTMENT TREATY155
142 A BIT based on the US Model is in force between Jazzterra and Tralaland since 2012. The aim
of such a treaty is to protect foreign investment. The BIT is primarily addressed to the host
state but a restriction can be also executed by the residence state. Therefore, the scope of
application covers both states.156
143 Additionally, such treaties protect investors and investments. An investor can be defined as
“a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to
make, is making, or has made an investment in the territory of the other Party; provided,
however, that a natural person who is a dual national shall be deemed to be exclusively a
national of the State of his or her dominant and effective nationality”.157
144 The term investment “means every asset that an investor owns or controls, directly or
indirectly, that has the characteristics of an investment, including such characteristics as the
commitment of capital or other resources, the expectation of gain or profit, or the assumption
of risk. Forms that an investment may take include […].”158
BIT IS APPLICABLE
145 Musicalia holds 100% of Milestone and so the subsidiary can clearly be qualified as an
investment under Art. 1. Milestone carried out different activities according to its business
object and has the intention to gain profits. This profit (dividend paid out) can be seen as the
return on investment which Musicalia earns. As a result, the BIT is applicable.
146 Many BITs, also the BIT-JT, include a taxation provision which leads to the fact that taxation
matters are not within the scope of a BIT. However, in Art. 21(2), an exception to this general
rule has been implemented. In cases of expropriation, in the meaning of Art. 6, the BIT should
also apply to all taxation measures.
155 (hereinafter: BIT) 156 (H.M. Simonis, 2014: 264 et seq.); (Bernasconi-Osterwalder/Johnson, 2011: 6); 157 (US Model BIT, 2012: Art. 1) 158 (US Model BIT, 2012: Art. 1); (emphasis added).
57
147 Art. 6 BIT notes that an expropriation is not allowed neither directly nor indirectly. In the
case at hand, indirect expropriation occurs if Jazzterra taxes the income, as Jazzterra enacts
measures where the benefit of the investment decreases. In addition, the sole doctrine will
apply here which states that the criterion of depriving the expected economic benefit of the
investment owner is decisive.159 Therefore, the treaty prevents Jazzterra from levying tax on
the Applicant’s income because this would lead to an indirect expropriation in the sense of Art.
6. The determination of expropriation has to be made in each individual case.160
INDIRECT EXPROPRIATION IS GIVEN
148 Firstly, the tax authority levying taxes on the income of Musicalia would lead to double
taxation. The effective tax rate amounts 38.75%.161 The additional taxes in the amount of
8.75% has a considerable impact on the economic value of the investment of Musicalia.
149 Because of the additional tax levied by the tax authority, Musicalia, as an investor from a
foreign country, is treated differently than a domestic company. Foreign investors are therefore
in a worse economic situation. This is not in line with the principal of equality. This unequal
treatment and the higher taxation is detrimental to Musicalia´s investment, as it reduced the
expected profits. Therefore, Art. 6 BIT in connection with Art. 21 BIT is violated if Jazzterra
would tax the business income.
150 Finally, there was no form of compensation granted for this expropriation. Compensation is not
only required by the BIT, but is also a general principle of international law.162 Thus, it can be
concluded that if Jazzterra were to tax Musicalia excessively without compensation, not only
the BIT, but also international law would be violated.
INTERIM CONCLUSION
151 To sum up, the tax authority is not allowed levy taxes on the income from Musicalia because
of Art. 6 BIT. The additional amount of tax leads to an expropriation and must be avoided,
or compensated, according to the BIT. In addition, Musicalia as an investor is treated
159 (López Escarcena, 2014: 230); (Salacuse, 2010: 296); (Sasse, 2011: 55) 160 (US Model BIT, 2012: Annex B Art. 4) 161 (Specific amount minus 30% tax in Jazzterra and the residue would be taxed with 12,5% = 38,75%). 162 (Fisher, 1965: 554 et seqq.)
58
differently (because of the higher tax rate) as compared to domestic companies and this violates
the principal of equality.
59
VI OVERALL CONCLUSION
152 To sum up, Milestone is a resident of Jazzterra under Art. 4(3), since its POEM is situated
therein. The board of directors only meets twice in Tralaland and only makes formal decisions
on matters prepared and managed in Jazzterra. Correspondingly, the place of effective
management is in Jazzterra.
153 The MLI has been ratified in both states. It has entered into force but not into effect. As a result,
the MLI applies only to transactions which take place after the 1 January 2019. In summary, all
transactions in 2018 are not affected by the MLI.
154 Furthermore, the income earned by Musicalia from selling souvenirs falls solely under Art. 7.
The warehouse, the server and Yohoho do not constitute PEs and, thus, the state of Jazzterra is
not entitled to levy taxes on those business profits.
155 Musicalia is the beneficial owner of the dividends received by Milestone. As was proven above,
different criteria all support this conclusion. Musicalia does not have the motive to obtain any
tax advantage and, therefore, the anti-avoidance rule is not applicable.
156 The income earned from the agency services are business profits generated without constituting
a PE, since Milestone does not have the authority to conclude contracts on behalf of Musicalia.
Even if the court holds that Art. 17 is applicable, Tralaland retains the majority of its taxation
right, as only the part paid for the performance falls under Art. 17.
157 Musicalia’s income from the festival falls within Art. 7. This income cannot be deemed to be
generated through a PE, since Milestone is a service provider carrying out its own business
activity. Moreover, Musicalia has no right of disposal over Milestone’s office. The festival itself
lasts for one day, which is not sufficient for fulfilling the “permanence" criterion, and therefore
cannot be considered a PE.
60
VII REQUESTS
158 For the above-mentioned reasons, the court is requested to rule that Musicalia’s entire income
is taxable only in Tralaland.
159 Accordingly, the tribunal is requested to nullify the tax assessment.
160 Alternatively, the court is requested to rule that the majority of income will be taxed in
Tralaland.
61
VIII ANNEXES
62
63
64
IX ABBREVIATIONS
Art. Article
AT Austria
AUS: Australia
BFH Bundesfinanzhof (German Supreme Tax Court)
BIT bilateral investment treaty
BRA Brazil
Bulletin Bulletin for international taxation; Bulletin for international fiscal documentation,
Bulletin – Tax Treaty Monitor
CA Canada
CEO Chief Executive Officer
CH Switzerland
CIT corporate income tax
DK Denmark
DTC double taxation convention
DTC-JT double taxation convention between Jazzterra and Tralaland
e.g. exempli gratia (for example)
ed. Edition
et seq(q) et sequens (and the following)
FG Finanzgericht (German Tax Court)
FIN Finland
FRA France
GAAR General Anti-Avoidance Rule
GER Germany
i.e. id est (that is)
ICJ International Court of Justice
65
icw in connection with
IND India
IP intellectual property
ISP internet-service-provider
IStR Internationales Steuerrecht
IT Italy
JP Japan
m.no. marginal number
MC Model Convention
MLI Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting
NL Netherlands
NO Norway
no. number
OECD Organisation for Economic Co-operation and Development
OECD Organization for Economic Co-operation and Development
para. Paragraph
PE permanent establishment
POB place of business
POEM place of effective management
SWE Sweden
SWI Steuer- und Wirtschaft International
SWK Steuer- und Wirtschaftskartei
UN United Nations
US United States
USD US-Dollar
66
VCLT Vienna Convention on the Law of Treaties
WHT withholding tax
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