Tax collection has ever been the basis of many a diplomatic or administrative or military battle over the past two centuries. The basis of determination of tax has been invariably linked to the residence and source concepts of many fiscal regimes. For corporates, especially MNE’s the primary taxing jurisdiction has always been the seat of incorporation of the MNE, although complex arrangements like POEM and source based taxation are steadily taking root. And for individuals barring a few cases, taxation has almost always been linked to residence of the individual. The importance of the term “resident” can be gauged from the fact that the term itself has a reference to in about 45+ times in both the OECD and UN Model Conventions.
Even the Indian treaty network comprising of about 90 countries, most of them, are structured around the framework of the OECD/UN model treaty, thus references are more or less congruent quantitatively. Thus, the importance of the term cannot be underscored enough.
The existing tax treaty network all through the world has about 3000 treaties in existence, comprising of both bilateral and multilateral tax treaties. A discussion on conflicts of residence factors of all the treaties would require a treatise on its own. For the sake of simplification this study will deal with residence aspects of non- individuals of only bilateral tax treaties of Germany, France, Netherlands, United States, United Kingdom and India. The reason for choosing the above jurisdictions is manifold
- All the jurisdictions have well defined network of tax treaties
- All the jurisdictions have a well developed domestic tax jurisprudence.
- All are in some way connected to both the OECD and the United nations
As for the approach this paper is divided into two parts. Firstly we shall deal with the background and theoretical framework behind the interplay, with a particular reference to the renvoi clause of the OECD and the United Nations Frameworks. For the second part of the study, the residence issues along with domestic law excerpts and possible conflicts of all the states as per domestic law and treaty with India is discussed.
The term “resident” is of prime importance with respect to tax liability determination with respect to the international tax treaty network. It is very important in any taxing framework to determine who is liable or what is liable for tax and in the event of any conflict the true determination thereof. In fact, the EATLP (European Association of Tax Law Professors) had at the 2017 congress dedicated an entire feature on Corporate Tax Residency.
Article 4 of the OECD and UN frameworks’ address as to what a resident should be defined as, as a guideline in tax treaties.
An important exception is provided in Article 4(1) wherein there is a leeway provided for any person who by way of residence is liable to tax under that state only.
By way of the renvoi clause of the Model Treaties1, both the Model treaties, have provided for primacy for the domestic laws to override in matters of residence2. Having said that, the interpretation should be gauged with reference to Article 31 and 32 of the Vienna Convention, inter alia, implying that
- In case domestic law meaning is assigned to residence in primacy, then such application must in good faith be considered in consonance with treaty Ideally speaking, the domestic law (which can be unilaterally amended) should not render the treaty meaning as absurd.
- In case the domestic law is inconclusive with respect to residence, then recourse should be had to the treaty provisions, and supplementary means of interpretation in accordance with the provisions of the VCLT. Even the OECD model commentary would serve as a supplementary means of But, having said that, it would be a fallacy to treat the OECD model commentary as a blanket landmark, without having regards to the facts and circumstances of each case under consideration.
- Resort to MAP although is suggested and is a part of all the treaties under consideration but having said that, it seems a better option that solutions might be arrived at with interpretation. As it is highly unlikely that the case of resolution by an assessee would not go into domestic litigation after MAP. In fact, approaching the judiciary in matters of interpretation not clearly defined seems to be a good As is prevalent in all common law jurisdictions, guidance from judiciary generally trumps over guidance from administration.
Although the materials that are to be considered for such a study are exhaustive, but considering the efficacy limits, the author has tried to adhere to the restrictions, which could not happen without cutting down on the content.
DOMESTIC TAX CODE
Article 209 of the French Tax code allocates taxing powers of the companies mentioned in Article 206. Under Article 206, non-individual entities like
- Public limited companies (sociétés anonymes, SA),
- Partnerships limited by shares (sociétés en commandite par actions, SCA)
- Simplified limited companies (sociétés par actions simplifiées, SAS)
- Private limited companies (sociétés à responsabilité limitée, SARL)
- Private limited companies with a single shareholder (entreprises unipersonnellesà responsabilité limitée)
- Professional corporations (sociétés d’exercice libéral),
- Civil Law Entities,
- Partnerships and partners, and Banking Institutions are liable to tax under the territoriality
Since France uses a territorial taxing system therefore it follows that in normal jurisdictional parlance, there is no distinction between resident
- OECD Model Convention on Income and On Capital 2017/ UN Model Double Taxation Convention 2017
- Article 3(2) of both the OECD and UN Model conventions
and non-resident taxpayers. Furthermore, since it’s a territorial taxation system, all income within the territorial jurisdiction of the country are subject to tax. It also implies that all companies having their seat of incorporation in France are subject to French tax. However, if there are profits from foreign activities and those are attributable to a PE which is taxed in a foreign country, then the profits as are attributable to the PE are not liable to tax in France. POEM provisions are also applicable in France3 and this is an important distinction with the territorial system. Any profits in entities who are although incorporated in France but have their POEM outside France are not liable to tax in France.
However, the above are defined in accordance with administrative notifications and not a part of the domestic law in France itself as defined in the French Tax Code. Interestingly, the French Tax Code also doesn’t have reference to the expression Liable to Tax.
The India France Tax treaty has a renvoi clause in article 4(3),and refers to the POEM of the corporate entity, and thus is in congruence with the administrative notification earlier. Article 4(1) of the treaty however, refers, to a person “liable to tax”, which concept although is well defined in Indian jurisprudence, it doesn’t carry any value in the Civil Law of France. Furthermore, the treaty has been updated under the BEPS MLI to deny treaty benefits for abusive tax practices.
This could essentially lead to a situation wherein the term “liable to tax” might lead to confusions or essential disagreements in the application of the MAP, in case of any dispute resolution.
Also it could also mean that resort to the non- discrimination clause under the treaty would be open to wide interpretation.
Also to be borne in mind that tax being an exact law in both the states, India has detailed POEM rules quantifying on what and how an entity can be subject to POEM rules, however, the same detailed scope is not available in the case of its French counterparts. This could again lead to some issues of application as the tax treaty explicitly uses the nondiscrimination clause in details.
DOMESTIC TAX CODE
Under the domestic tax code in Germany the definition of residence is defined as an entity who either has their Registered Office or Place of Effective Management in Germany. Non- individual entities are liable to tax on their worldwide income, if the criteria set out in either section 10 or section 11 are satisfied.
The Tax code of Germany in section 10 describes a Registered office as “Business management” shall mean the centre of commercial executive management.”4
Section 11 describes Place of Mangement as “Corporations, associations or pools of assets shall have their registered office at the place which is determined by law, articles of partnership, statutes, acts of foundation or similar provisions.”5
The term business management is defined under common law of Germany as well as codified under fiscal code. However, the terms “liable to tax” and “residence” and “domicile” are still not clearly defined in the German Tax Code.
- Translated from German
- Translated from German
The following are the non-individual types in Germany
- Simple Partnership
- Un-Incorporated Association; Non- Commercial/Idealistic Purposes Only
- General Partnership
- Limited Partnership
- Partnership Company; Only For Professional Services
- Incorporated Association; Non- Commercial/Idealistic Purposes Only
- Publicly Traded Partnership
- Company With Limited Liability (Minimum Equity 25000 Euros)
- Entrepreneurship Company (With Limited Liability)
- Corporation (Minimum Equity 50000 Euros)
- Public Law Corporation With No Commercial Objectives
- Trusts Under Public Law
- Foundations Under Public Law
Since Germany uses a worldwide taxation system, it follows that all companies having either their POEM in Germany, or their seat of residence in Germany would be taxed on their worldwide Income.
The treaty law on residence almost functionally mirrors the position as stated in Article 4(1) of the OECD model convention, barring political and statutory bodies. Article 4(1) also carries reference to “liable to tax” and “domicile” and “residence”, terms which have not been defined in the German Fiscal Code. Article 4(1) also makes reference to income from capital explicitly. The treaty does not make the explicit definition of capital, despite making an explicit definition of “immoveable property”.
Since the term “capital” is not defined in the German Tax Code, therefore, the general meaning of the term would be ascribed to as per VCLT. Furthermore, as with the French case, the lack of definitions and common law on the terms “liable to tax”, “domicile”, “resident” would be an issue in case things come to MAP. Although, resort to the VCLT and supplementary aid in terms of the Commentary to the OECD model is a viable way. It could also pave way to resort to Non-Discrimination enshrined in Article 24 of the Double Tax Treaty, since the terms “liable to tax” and “resident” and “domicile” are well enshrined in the Indian law by way of jurisprudence as well as codification. Furthermore, the German Supreme Court had held the case of preference to later legislation, either treaty or domestic law, in the matters of tax conflict.
In case a legislation is enacted subsequent to entering into a treaty, the later legislation will have legal supremacy6.
NETHERLANDS DOMESTIC TAX CODE
Netherlands operates a worldwide taxation system. So effectively, if the entity is a resident in the Netherlands the it will be taxed on it’s worldwide income. The corporate tax code is enshrined in the CITA7 (Wet op de
6. German Federal Constitution Court Order of 15 December 2015 – 2 BvL 1/12
7. Corporate Income Tax Act
vennootschapsbelasting 1969). Under Article 2 of the CITA the following types of entities are explicitly considered to be resident in Netherlands if, they are “established” in Netherlands
- Public Limited Liability Companies, Private Limited Liability Companies, Open Limited Partnerships and other companies whose capital is wholly or partly divided into shares
- Cooperatives And Associations on a cooperative basis
- Mutual Insurance Associations And Associations acting on a mutual basis as an insurer or bank
- Associations And Foundations that are admitted by Royal Decree under the Housing Act as institutions that operate in the interest of public housing
- Associations And Foundations not mentioned above, as well as legal entities other than public law, if and insofar as they conduct a business
- Mutual Funds
- Legal Entities Under Public Law, not being the State, that are not already liable for tax under subparagraphs a, b, c, d and e, insofar as they conduct an
Reverse hybrid entities are defined under the CITA Article 2(12). An important clause under 2(11) of the CITA which is more of a clarificatory nature states that “ For the purposes of this Act, a legal person under public law is understood to mean a Dutch legal entity under public law as well as a comparable foreign legal entity.”8 It is important to note that reverse hybrid entities are not recognized in India. Permanent establishment is defined under article 3(4) of the CITA.
What could constitute the POEM for a company has been defined to have a multitude of positions to be considered, before arriving on9
- Where the principal management of the company performs it tasks.
- The principal management is generally equated to be the Board of Directors or its
- The determination shall be company specific, having regard to its
- Characteristics like type of business, geographical spread, organization of business, nature and size, et
- Also to consider whether, the company’s main tasks are actually carried by people other than the board, and also to consider other relevant
The India-Netherlands treaty as modified by the Multilateral Instrument, defines a resident under article 4(1) as a person who is “liable to tax” in either one of the contracting states, by virtue of “residence” or “domicile”. Article 4(3) of the India- Netherlands tax convention, has been modified by the MLI to specify the application of MAP in case of any conflict in determination of Residential Status. An in case of no agreement between the competent officials of the two jurisdictions, tax benefits would be denied to the entity claiming such.
There is no explicit mention of immoveable property, or capital in either the definitions or the Resident clause 4(1).
Again, the expressions “liable to tax”, “residence” “domicile” are not defined in the Dutch Corporate tax code, this thus presents a
8. Translated from Dutch, Article 2(11) of the CITA
9. 23 September 1992, BNB 1993/193, Hoge Raad
point of contention. However, the same has been attended to by the common law interpretation by the Adjudicating Courts in Netherlands. However, it might be take into consideration that the Netherlands uses the VCLT, and OECD model and commentary as a significant tool for interpretation on Tax treaties. POEM has also been defined and detailed under common law in Netherlands and that provides specific guidance as discussed supra. However, as has been witnessed, Netherlands, has been the home to a lot of hybrid and reverse hybrid corporate entities and that has been a bone of contention amongst its treaty partners. Although Netherlands has gone to a long extent to address the issues of residence and thus allocation of taxing rights for the income streams associated with the hybrids, the issue of also having tax havens as its dependent colonies (Dutch Antilles), has been a vexed issue with its treaty partners. India has on its part in the first quarter of 2017, issued a number of circulars and notifications regarding determination of POEM, which are more or less congruent with the guidelines as provided by the Supreme Court of Netherlands (Hoge Raad). The issue of denial of benefits in case of non- allocation of taxing rights on the case of jurisdiction by residence has more or less been dealt with by the amendments brought by the Multilateral Instruments (MLI). In this context it is to be noted that the issue of hybrids and reverse hybrids is a contentious issue which has been dealt exhaustively by the Hoge Raad, and there are multiple judgements issued which might be of interest to the reader.10
The United Kingdom has an exhaustive domestic common and civil law centred around the concept of residence for corporations and treaty purposes11. In fact it was as early as later part of the 19th century that the Court of the Exchequer had decided on the Central Management and Control aspect of residence of corporate seat12. It was held that the seat of residence of a company for tax purpose where the CMC was situated. Pursuant to the enactment of the Corporation Tax Act, as a general rule companies whose seat of incorporation is in the United Kingdom are treated as tax resident companies in the United Kingdom.
The exception being if the company, in accordance with the DTAA, is treated as a tax resident in the other jurisdiction. This concept flows probably from the concept of Central Management and Control, as discussed supra. The United Kingdom, taxes Permanent Establishments as a corporation by general rules. The PE rules are based largely on Article 5 of the OECD model convention. However, there are exceptions again, being, if the profits are generated from dealing and construction and rental from land and immoveable properties. In any of those cases, the profits of the corporation are taxable in the United Kingdom.
However, having said the above, the United Kingdom domestic corporate law again lacks the
10. Hoge Raad 15 October 2005, BNB 2006/79 , Hoge Raad 17 December 2004, BNB 2005/105 and 106
11. De Beers Consolidated Mines, Limited v Howe, Court of Appeal, 6 June 1905, Unit Construction Co Ltd v. Bullock  AC 351 (HL), Laerstate BV v. HMRC  UKFTT 209 (TC) , Untelrab v. McGregor  STC (SCD) 1., Wood v Holden ,  STC (SCD) 416
12. Calcutta Jute Mills Company Nicholson 1 TC83, (1876)
definitions of the terms “domicile”, “residence” and POEM. Although at this juncture, it might be noted that due to the exhaustive, common law commentary, and decisions of higher courts at the United Kingdom, the concept of POEM is more or less concrete in the United Kingdom.
There are various other adjustments allowed under the Corporation tax Act like, Group Relief, A separate condensed set of requirements for application by Small Companies, which are available separately.
The treaty law for residence under the India UK DTAA is more or less centered around the OECD model Article 4, subject to the renvoi clause in Article 3(2). This treaty was amended by the MLI protocol pursuant to the OECD BEPS project, for particularly abusive practices, and hybrid and reverse hybrid mismatches. Furthermore there is a distinction under Article 4(1)(b) of the treaty whereby non corporate non individual entities are to be subject to tax by way of residence of their ultimate beneficiaries. This was also possibly done as to a conflicting judgement by the Calcutta High Court13.
Article 4(3) as amended by the MLI in the synthesised text seeks to counter tax abuse and aggressive tax planning practices, and denies tax treaty benefits to entities whose residence cannot be established in either jurisdiction even after application of MAP under Article 25.
The United Kingdom treats partnerships as transparent entities under tax law. As was held by the Calcutta High Court in the case above supra, the assessee escaped tax liability, since the partnership was entitled to tax treaty definitions under the renvoi clause under 3(2). This was a possible source of conflict, however, post the development of Article 4(1)(b) it seems that the same has been resolved. It also seems that post the MLI anti abuse measures for hybrid mismatches the same has been effectively countered, since if the corporation has no clear residence even after MAP under Article 25, treaty benefits would be denied.
UNITED STATES OF AMERICA
The United States stands on a different footing as it uses neither the UN or the OECD models as bases for negotiating tax treaties. It has its own United States model which it uses while negotiating treaties. And lets face the facts, the United States can rule by brute force when it comes to matters including tax treaties. It might be put forward that the United States has not ratified the Vienna Convention also.
The United States corporation tax laws operated on a worldwide income basis, before the Tax Cuts and Jobs Act 2017, whereby then thereafter it moved to a territorial system. The TCJA itself moved into radical changes into the IRS Code.
The residence of a corporation in the United States is defined under IRS Code 7701. It defines domestic companies as any company which is created or organized in the United States, and any foreign company as not being incorporated in the United States. Therefore, all companies which are not created or organized in the United States are regarded as foreign.
Again, there is no definition of liable to tax, residence and domicile in the IRS Code for corporations.
13. P&O Nedlloyd & Others vs ADIT WP 457 of 2005
However, there is the concept of Effectively Connected Income 864(c) in the IRS code which effectively taxes income which is generated on American soil by way of trade or services or manufacturing activities.
This tax is available for setoff till the extent it has been paid in the United States.
Witholding tax rules apply.
Income from real estate situated in the United States is taxed in the United States, and the United States also imposes a branch profits tax of 30% in order to counter hybrid mismatches. The Dividends Article or the Interest Articles under the DTAA might be available to reduce withholding taxes to 5% or Nil%.
There are also specific anti abuse rules with relation to US Trusts and Partnerships, whereby any Trust being transferred to foreign lands would have to pay taxes on the appreciation value of the property inherent in the taxes (IRC 721(c)).
The United States India DTAA has a comprehensive arrangement, when it comes to determination of residence, and anti-abuse measure regarding determination of residence, it also has a specific clause with regards to non-availability of credit on account of any penalties or the like under Article 2(1). The treaty uses the terms “place of management” in consonance with the Indian Law and “place of incorporation” in consonance with the US law in Article 4(1).
Article 4(3) of the DTAA stands on a different footing from others in that it states that in case of corporations who have a dual residency in accordance with Treaty laws (either in terms of the renvoi clause Article 3(2) or otherwise), then the entire treaty won’t be applicable except for certain exceptions like Dividends, MAP, Non- Discrimination,
Information Exchange, or Administrative Assistance provided in the Treaty.
As might be visible the domestic tax law requirement of the United States is neither used in and “or” concept or an “and” concept in article 4(1). Whether that would constitute a conflict to be allocated to the MAP is possibly an open question. Then also treaty override of the United States is a common phenomenon. IRS code 7852 (d) specifically provides for primacy of neither treaty law or domestic law, thereby leaving the question of treaty override open for discussion.
Furthermore, Tax courts in the United States have been generally inclined to follow the later legislation in question14, thereby providing fuel to the fire of treaty override. Thus any reference to residency in the domestic laws of the United States, if the assessee at all decides to approach the courts, if changed subsequently, leaves open the question of interpretation of the Courts, who in general have had a superior hand in dealing with matters related to subjects than the administration.
14. Watt Alaska Radzanower v. Touche,Ross & Co., 426 U.S. 148 (1976);United States v. United Cont’l Tuna Corp, 451 U.S. 259 (1981);., 425 U.S. 164