Tutorial 4 – The subject in International Tax Law

By Palin Sansuttavijit

Case study 1
Duncan BV is a company that was incorporated in 2005 under Netherlands law and that has its
place of effective management in Ireland since 2015.
All shares in Duncan BV are held by Xavier Duncan.
Xavier is considered to be a tax resident of France both by the Netherlands and the French tax
authorities.
In 2018, Duncan BV distributes a dividend to Xavier of € 100,000.
A tax treaty applies both between the Netherlands and France and between the Netherlands
and Ireland which in both cases is deemed to be similar to the (former) OECD MC 2014.
Based on domestic tax law, Ireland does not tax the dividend payment by Duncan BV.
Based on domestic tax law of the Netherlands, the Netherlands can tax the dividend payment
against a tax rate of 15%.

Before to answer the question, I will provide the process how to solve the case first,
What is the item of income we are speaking about? >> dividend payment and the first question
to ask yourself is whether the dividend payment is taxable under the Dutch domestic law or not
and this case it states in the statement that the Netherlands can tax the dividend payment
against a tax rate of 15%.
The distributive rule concern dividend is article 10 para.1 ; Dividends paid by a company which is
a resident of a Contracting State (NL) to a resident of the other Contracting State (France) may
be taxed in that other State (France).

Questions:
a. Please explain whether or not the Netherlands is allowed to tax the dividend payment on the
basis of the tax treaty between the Netherlands and France.
In this case, do we know for sure where Duncan BV is tax residence?
See Article 10 Para 1. This is dual residency case because according to the Dutch domestic law,
the incorporation regime apply which mean if the company incorporate in the Netherlands
 Tutorial 4 – The subject in International Tax Law
By Palin Sansuttavijit

therefore it deemed to be tax residence of the Netherlands. However, the place of effective
management in this case is in Ireland (therefore this case Duncan BV is also the residence of
Ireland = dual residency)
Therefore, we need to look at the article 4 OECD 2014 para.3 (tie break rule) states that if the
company is the residence of both Contracting States, it shall deem to be residence only where
the place of effective management is situated > in this case Duncan BV is resident in IRELAND.
But in this case Ireland does not tax dividend payment so in this case we do not have double
taxation issue (CAN question), therefore we do not need to apply distributive rule (article 10).
In conclusion, in this case the NL is not allowed to tax the dividend payment because
according to article 10(3) OECD 2014 the tax residence of Duncan BV is Ireland.

Generally speaking, how article 10(2) apply; if in this case Ireland taxes the dividend payment at
the rate of 15 percent and the beneficial owner of the dividend is Xavier. Therefore, Ireland has
the rights to tax the dividend by dividend withholding taxes but it is limited at the rate of 5
percent. France shall grant (juridical) double taxation relief for dividend which paid in the state
of source according to article 23 (exemption or credit).

b. To what extent is the answer given under a) different if the case is analysed under the
current 2017 OECD MTC (i.e., a tax treaty applies both between the Netherlands and France
and between the Netherlands and Ireland which in both cases is deemed to be similar to the
(current) 2017 OECD MTC)?
Under article 4(3) has been changed. Mutual Agreement is required in order to decide where is
the tax residence of double residence case. (In 2014 use the place of effective management as
tie breaker rules but in 2017 MAP is required to decide where) However, it is also possible that
there is no agreement between states. Therefore in Article 4(3) OECD 2017 states that
In the absence of such agreement, such person shall not be entitled to any relief or exemption
from tax provided by this Convention except to the extent and in such manner as may be agreed
upon by the competent authorities of the Contracting States. So, there will be no treaty benefits
if the dual residency issue is not solved.

So in this case if we apply 2017 OECD, then it is up to the tax authorities on their MAP whether
where is the tax residence of Duncan BV (Ireland or the Netherlands).

c. What are the policy reasons underlying the 2017 changes? Do you agree with the position of
the OECD?
Because normally the dual residency case is not common and there is an increasing of tax
avoidance cases resulting from dual residence therefore it is better to analyze on case by case
basis (Commentary Article 4 Paragraph 3(23) OECD 2017). The criteria (Commentary Article 4
Paragraph 3(24) OECD 2017) could take for tax authorities to determine whether where should
be the place of tax residence.
 Tutorial 4 – The subject in International Tax Law
By Palin Sansuttavijit

Case study 2
TD Holdings Inc., is a company which has its place of effective management in the United States.
It is assumed that it participates as a sole partner in a Limited Liability Company ("LLC"),
which has been incorporated under the laws of the United States. The LLC has also its place of
effective management in the United States and conducts an active business in the financial
area.
In 2018, the LLC receives a dividend payment from Canada. Based on the tax laws of Canada,
the LLC is treated as an opaque entity. As a result, the dividend income is attributed to the LLC
for Canadian tax purposes. Assume that based on the domestic tax law of Canada, the dividend
payment is subject to a withholding tax of 25%. Based on the tax laws of United States, by
contrast, the LLC is treated as a transparent entity. As a result, the dividend income is attributed
to TD Holdings Inc. US tax purposes.
Assume that there is a tax treaty concluded between the US and Canada that is in conformity
with the (former) 2014 OECD MTC 2014 and which allocates to Canada a 5% taxation right for
dividends paid by a Canadian company (cf. Article 10 OECD MTC).
LLC claims in Canada a reduction of the Canadian withholding tax to 5% on the basis of the
US/Canadian tax treaty.

Questions:
a. Please give an informed opinion about the claim made by the LLC entailing that it is entitled
to the tax treaty benefits provided by the US/Canadian tax treaty.
We will begin with OECD 2017 first,
Because of the difference classification of LLC between US and Canada, therefore in Canada tax
perspective, the dividend is taxed at the level of LLC whereas in the US tax perspective it will be
taxed at the level of TD Holdings Inc. In light of this situation, we need to look how article 10
apply.
Article 10(1) ; Dividends paid by a company which is a resident of a Contracting State to a
resident of the other Contracting State may be taxed in that other State.
 Tutorial 4 – The subject in International Tax Law
By Palin Sansuttavijit

Because LLC is considered as transparent from US tax’s point of view, therefore is it consider as
tax residence under US national law? According to article 4 para.1 “resident of a Contracting
State” means any person who, under the laws of that State, is liable to tax, but in this case LLC
is transparent therefore it is not liable to tax so it cannot be tax residence under US tax laws.
So now, if LLC is neither tax residence in the US nor in Canada, therefore article 1 para 1 is not
met (This Convention shall apply to persons who are residents of one or both of the Contracting
States). So the treaty cannot apply because article 1 para 1 is not met.
But in Article 1 para 2; For the purposes of this Convention, income derived by or through an
entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law
of either Contracting State shall be considered to be income of a resident of a Contracting State
but only to the extent that the income is treated, for purposes of taxation by that State, as the
income of a resident of that State. >>> This means the treaty shall apply to the extend that the
income are included in taxable base of resident of that state (in this case TD Holding Inc) so in
this case the dividend can be considered as a dividend in the US.
So in this case, the treaty benefits will apply at the level of the partner. Withholding taxes in
Canada and taxation at the level of the partner (exemption or credit will be granted at the
level of the partner) So the article 10 is met because now it pays to the residence in another
contracting states (article 1 para 2) . If TD Holding Inc is the beneficial owner, therefore there is
an reduction at the source state (Canada) at the rate of 5 percent (Article 10 para 2 (a)).
In conclusion in this case we apply article 1 para 2 with article 10 together

Under the 2014, there is no article according to hybrid entities therefore Canada has to follow
the approach of the US. So the treaty benefits still can apply. Taxation at the level of partner
(TD) also credit or exemption will be granted at the level of the partner.

b. To what extent is the answer given under a) different if the case is analysed under the
current 2017 OECD MTC (i.e., assume that there is a tax treaty concluded between the US and
Canada that is in conformity with the (current) 2017 OECD MTC)?
Answered in previous question already.
 Tutorial 4 – The subject in International Tax Law
By Palin Sansuttavijit

Case study 3
Company S (opaque entity) is tax resident of State S(source).
The shares in Company S are held by Partnership P, which is established in State P.
Partnership P has its place of effective management in State P.
The partners of Partnership P are X and Y, who are both tax residents of State R(residence).
Both partners have a 50% entitlement to the profits made by the Partnership.
State S qualifies Partnership P as a non-transparent entity for tax purposes while State P and
State R qualify Partnership P as a transparent entity.
In 2018, Company S distributes a dividend of € 50.000.
Based on the national tax law of State S, the dividend payment can be taxed with dividend
withholding tax against a rate of 25%.
Based on the tax treaty between State S and State P, State S is allowed to tax the dividend
payment against a rate of 15%, provided that all requirement for treaty application are met.
Similar provisions are included in the tax treaties between State S and State R and between
State P and State R. All 3 tax treaties are identical to the 2017 OECD MTC 2017 and in all
3 tax treaties the credit method is provided for dividend payments (cf. Article 23 B 2017 OECD
MTC).
The corporate income tax rate in State P is 20%. The personal income tax rate in State R is 35%.

a. Please give your informed opinion on the question how the dividend payment by Company S
is treated under the 3 different tax treaties.
In this case we have an issue because State S considers Partnership P as opaque therefore the
dividend will be taxed at the level of partnership. However from State P and State R perspective,
partnership P is transparent, therefore the dividend will be taxed at the level of Partner X and Y
in State R.
 Tutorial 4 – The subject in International Tax Law
By Palin Sansuttavijit

According to article 1 para.2 does not applied because Partnership P is not met the requirement
of article 1 para.2. Therefore, Partnership P cannot considered as tax residence in the State P
(because all the income will fly to Partner X and Y in State R and no income is taxable in state P).

Therefore in this case the tax treaty between State S and P does not applied because there is no
income included anywhere in state P and because Partnership P is transparent, therefore it does
not consider as tax residence in state P. Partnership P is neither tax residence in State P or State
S. Thus, the treaty between S and P shall not applied (article 1 para1)

For the tax treaty between S and R; From the perspective of State S, this is Economic double
taxation because the income taxed at the level of state P and also at the hand of the partner in
state R which is not covered by the treaty of State S and R. (Tax treaty only covered Juridical
double taxation)

For the treaty between P and R, the issue is Partnership P is not the one who pays dividend but
it is Company S. Article 10 cannot apply because it is not Partnership P who pays the dividend.
So we have to see the qualification of the income. If the income receives by the partner qualify
as business profit under article 7 therefore state P would have the rights to tax (if there is PE in
State P), otherwise the income will be taxed at State R.
So, in this case we need to see whether how State R qualify certain income, therefore look which
distributive rules shall apply.

b. Please give your informed opinion on the policy issues raised by hybrid mismatch
arrangements.