International aspects of fiscal transparency:
-classification of foreign entities
-application of double tax conventions
Prof. dr. Bart Peeters
[email protected]
Structure of the presentation
I. General context of classification
II. Conflicts with (reverse) hybrid entities
III. Solution for P/R –conflict ?
IV. Conclusions
Bart Peeters (UGent, ULg, Uantwerpen)
I. General context of classification
Entity
Taxable
income
General purpose
Entrepreneurial
risk
Tax payer
Financial
support
Tax payer
Bart Peeters (UGent, ULg, Uantwerpen)
Classification of an entity
Entity
Taxable
income
General purpose
Entrepreneurial
risk
Tax payer
Tax payer
Classification: -Fiscally transparent: 1 flow of income
-Fiscally non-transparent: 2 separate taxable
flows of income
Bart Peeters (UGent, ULg, Uantwerpen)
3 classifications to be fulfilled
Entity
Taxable
income
State S:
source of
the income
General purpose
Entrepreneurial
risk
State P:
state of the location
of the entity
Bart Peeters (UGent, ULg, Uantwerpen)
State R:
residence state
of the partner
Classification from the point of view of S
S
Taxable
income
P
R
Entity
State S: -Taxing the entity or its partners ?
-Which treaty limitations have to be respected ?
(analysis for ‘inbound operations’ ?)
Bart Peeters (UGent, ULg, Uantwerpen)
Classification from the point of view of P
S
P
Taxable
income
R
Entity
State P: -Taxing the entity and distribution to the partners
or immediately the partners (entity as PE?) ?
-Unilateral remedies for foreign income ?
-Which conventions should be applied ?
Bart Peeters (UGent, ULg, Uantwerpen)
Classification from the point of view of R
S
Taxable
income
P
R
Entity
State R: -When can the partners be taxed and how to
qualify their income?
-Unilateral remedies for foreign income ?
-Which conventions should be applied ?
(analysis for ‘outbound operations’ ?)
Bart Peeters (UGent, ULg, Uantwerpen)
Classification from the point of view of P
S
P
R
Entity
Taxable
income
If S = R: simultaneously inbound and outbound ?
E.g. Dutch lawyers working for an English firm, earning
domestic income
Bart Peeters (UGent, ULg, Uantwerpen)
Classification of an entity
=> Domestic tax legislation has to be applied on
-a domestic entity (State P)
-a foreign entity (States S – R)
 Classification NEEDS to be in line with
domestic tax law
 Dealing with conflicts is a SECOND STEP
Bart Peeters (UGent, ULg, Uantwerpen)
II. Conflicts with (reverse) hybrid entities
Two different classification topics:
-Which treaty limitations does a source state
has to apply ? (State S vs … )
-How to attribute income between conflicting
residence states ? (P vs R)
Bart Peeters (UGent, ULg, Uantwerpen)
Source vs residence state(s)
S
vs
P/R
Entity
Taxable
income
Partner
Suppremacy of a residence state compared to a clear
source state: Treaty is applicable for the source state
- if a residence state attributes income to its own residents
Bart Peeters (UGent, ULg, Uantwerpen)
State S has to respect
S
P
R
T/NT
T
T
Treaty S-R
T/NT
T
NT
No treaty
T/NT
NT
T
S-P and S-R
T/NT
NT
NT
Treaty S-P
-Implicit solution in Partnership report
-Explicitly in art. 1, 6 Belgian – US treaty (2006)
-Explicit in art. 1, 2 Belgian Model convention (2007)
-No longer in Belgian Model convention (2010)
-New art. 1, 2 OECD Model ?
Bart Peeters (UGent, ULg, Uantwerpen)
Conflict between residence state(s)
P
Entity
Taxable
income
vs
R
Partner
NT
T
Bart Peeters (UGent, ULg, Uantwerpen)
T
NT
HYBRID
REVERSE
HYBRID
-A conflict between two residence states cannot be
solved by way of a predominating classification
=> Partnership report: state R recognizes the correct
autonomous application of the treaty by state P,
based on its own classification
-if P considers it may tax, state R has to grant an exemption
-if P considers himself obliged to exempt, state R does not have
to grant any exemption anymore
Bart Peeters (UGent, ULg, Uantwerpen)
S
P
R
Entity
Taxable
income
If state P: NT and state R: T  Hybrid entity
=> state P taxes income at the level of the entity
=> state R has to avoid double taxation through the correct application of
the treaty P-R, because state P taxes the income in accordance with
the terms of the convention P-R (as interpreted by state P)
Bart Peeters (UGent, ULg, Uantwerpen)
S
P
R
Entity
Taxable
income
If state P: T and state R: NT  Reverse hybrid entity
=> state P immediately attributes the income to the partners and considers
not being able to tax according to the treaty (unless PE)
=> state R does no longer have to exempt the income, as it would do based
on its autonomous interpretation of the treaty P-R
Bart Peeters (UGent, ULg, Uantwerpen)
Treaty P-R cannot solve the problem !!
*solution only looks at the initial acquiring of income at the
level of the entity
=> no particular treatment for the subsequent
distribution from the entity to its partners
*in case of a reverse hybrid entity (P:T and R: NT) state R
does not have to exempt under the treaty
=> But there will be no taxation under internal
income tax regulations
Bart Peeters (UGent, ULg, Uantwerpen)
III. Solution for P/R-conflict ?
=> needs to consider all potential taxable events in
both states
How to deal with the acquisition of the income ?
How to deal with distribution of the income to the
partners ?
Bart Peeters (UGent, ULg, Uantwerpen)
Hybrid entity
State P (NT)
Acquiring income
at the entity level
Taxes the entity
Distribution to the
partners
Taxes each
individual partner
Bart Peeters (UGent, ULg, Uantwerpen)
State R (T)
Taxes each
individual partner
/
Reverse hybrid entity
Acquiring income
at the entity level
Distribution to the
partners
State P (T)
Possible taxation of
the partners
No separate
taxation,
unless potential
branch profits tax
State R (NT)
/
Taxation of the
partners
Particular clause in Belgian Model convention
Exemption of the distribution because the initial acquiring of the
income has been taxed in P (art. 22, 2, b) )
Bart Peeters (UGent, ULg, Uantwerpen)
IV. Conclusions
-Necessary to clearly distinguish the topic of classification of an
entity (internal tax law) from application of tax treaties
(with possibly contrasting classifications)
-Any search for a solution needs to accept the fundamental
triangular character of the topic
(solutions are possible in bilateral double tax treaties, but need to
take in mind possible taxations in a third country)
-Recent treaties do admit the problem of conflicting classifications,
but actual clauses do not solve all the problems.
Bart Peeters (UGent, ULg, Uantwerpen)
Any questions / commentaries ?
Bart Peeters (UGent, ULg, Uantwerpen)