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In tax treaties, the aim of removing these obstacles is realized by allocating tax jurisdiction to states. The general pattern is that the state of residence of a person is allocated unlimited tax jurisdiction and that the other state does not have any tax jurisdiction or a limited tax jurisdiction. If the other contracting state has limited tax jurisdiction, the state of residence of a person must provide a reduction to eliminate or to mitigate double taxation and under circumstances to prevent double non-taxation. Considering the aims, the structure and the application of tax treaties, it is, therefore, essential that a person has only one state of residence for tax treaty purposes. That is the reason why a tax treaty generally includes a rule to establish that in the case of dual residence of a person, that person only has one state of residence for tax treaty purposes. This rule is frequently called the tie-breaker rule. If one of the contracting states is considered to be the state of residence of the dual resident, the other contracting state will lose its right to tax the worldwide income of that person. That person may have a huge interest in one of the contracting states being determined as his state of residence if the effective tax burdens in both states differ substantially. The motivation will be to shift the residence to the state with the lowest effective tax burden. Therefore, shifting a person’s tax residence can be an effective instrument to shift the taxation of income, which includes (artificial) profit shifting as in the OECD’s Base Erosion and Profit Shifting (BEPS) project. On the other hand, tax administrations have a budgetary interest in claiming that a person is a resident of the state they represent and to prevent (artificial) profit shifting.
The case that is reviewed in this chapter deals with the interpretation of such a rule for non-individuals, more specifically with the tie-breaker rule in the Neth.-Sing. Tax Treaty. However, the decision will be put in a wider context. The relevant tie-breaker rule is included in article 3(4) of the treaty. The key question for the court was: How must the words “managed and controlled” be interpreted? The research questions considered in this chapter are:
1. Did the Dutch Hoge Raad interpret the tie-breaker rule under the Neth.-Sing. Tax Treaty in an appropriate way taking into account the purpose of this rule?
2. Does the court’s interpretation contribute to tackling artificial profit shifting?
3. Should judges or lawmakers in other states treat this decision as providing guidance?”
In order to answer these questions, this contribution adheres to a traditional legal methodology. In the context of interpreting and applying tax treaties, the principle of good faith is a main principle of international taxation. In this framework, interpretation in line with the object and purpose of the rule plays an important role. This methodology makes it possible to acquire a more complete understanding of the possible impact of the interpretation and application of tax treaties decided on by the Dutch Supreme Court. For the descriptions, analyses, and evaluations, the author has used sources of law, including national tax law, (tax) treaties (including the VCLT and the respective OECD Models and Commentaries), global issues (e.g. global principles in redistributive justice), legislative history, technical explanations, case law, statements of practice, public rulings, private rulings, and literature.
Firstly, the facts of the case are briefly be outlined. Secondly, the relevant national laws and (tax) treaty law are described. Subsequently, the decision of the Dutch Supreme Court is presented. Thereafter, the decision is analysed and evaluated. In this respect, the author addresses the Supreme Court’s reasoning in respect of tax treaty interpretation. Furthermore, he identifies the purpose of the tie-breaker provision and assesses whether the decision appropriately realizes this purpose. The author also assesses whether the decision contributes to realizing the principle of origin, i.e. allocation of tax jurisdiction on income to a state if the income has been created through a substantial income-producing activity within the territory of that state. Additionally, he assesses whether the decision contributes to tackling artificial profit shifting. In this context, the author also addresses what impact the decision should have on judges and lawmakers in other states in order to better realize the purpose of tie-breaker rules and to better tackle artificial profit shifting. The author closes with some main conclusions through which the research questions will be answered.
|Title of host publication||Tax Treaty Case Law around the Globe 2019|
|Place of Publication||Vienna|
|Publisher||Linde Verlag Wien/IBFD Publications|
|ISBN (Electronic)||978-3-7094-1101-8 , 978-3-7094-1100-1|
|Publication status||Published - 2020|
|Event||Tax Treaty Case Law around the Globe 2019 - WU (Vienna University of Economics and Business), Vienna, Austria|
Duration: 23 May 2019 → 25 May 2019
|Name||Series on International Tax Law|
|Publisher||Linde Verlag Wien/IBFD Publications|
|Conference||Tax Treaty Case Law around the Globe 2019|
|Period||23/05/19 → 25/05/19|
- tax treaty residence, tax planning, tax avoidance, base erosion and profit shifting (BEPS), principle of origin
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Bekker, S., Bomer, A., Borghouts-van de Pas, I., De Pietro, C., Dusarduijn, S., Elsweier, F., Essers, P., Garcia Anton, R., Gribnau, H., Gubbels, N., Hoogeveen, M., Houwerzijl, M., Kaufmann, W., Kemmeren, E., Lafarre, A., Lejour, A., Li, J., Loth, M., Mc Cahery, J., Montebovi, S., Peters, C., Rombouts, B., Russo, R., Staats, G., Starink, B., Steegmans, M., Stevens, S., Stevens, T., Sumner, I., Tjong Tjin Tai, E., Tzankova, I., Verbruggen, P., Vermeulen, E., Westerhout, E., Weterings, W., Wibier, R., Xu, D., Zegveld, C., Zekić, N., van Gulijk, S., van Hout, D., van Hulten, M., van Kempen, T., van Kesteren, H., van Vijfeijken, I., van der Elst, C., van der Sangen, G., Öner, C., Kryla-Cudna, K., Mak, V. & Smit, D.
1/01/19 → 31/12/24
Project: Research project