Part 1: Introduction and general concepts
Definition and sources
Definition: “all rules that determine where and how, in a cross-border context, specific income of a
taxpayer may be taxed and how this tax must be assessed and recovered”
- No fixed definition, but this works
- A field of law that involves conflict of rules of law
o Vb. BE wants to tax you -> BE income tax code, there is a rule: a person has to pay
taxes; but in international context, there are limitations to the Belgian rules
o So international rules limit the national rules -> conflict of rules
No separate set of rules (not a list of rules that apply everywhere), but various sources of law (a
selection of rules, from several institutions on several levels)
- national tax laws (PM) -> we will not see this in class
o we will only look at the interaction between the national laws and the international
law in abstracto
o how do they clash with roles of international taxation
- (mostly unwritten) general principles of international tax law
o Customary international law (internationaal gewoonterecht) -> we all agree on these
rules
o A lot of these rules have been codified vb. rules now in the Vienna convention
o A lot of these rule sound simple but are very important
o Vb. BE can tax our residents, but only on income realized on our territory -> more
general: we can only tax a person if he has a link to the Belgian territory
▪ vb. You are a tax payer in Spain, you work in Spain, you never leave Spain ->
Belgium can never tax you
- EU law
o More and more influence of EU law on international law -> this makes it more and
more complex
- international guidelines (in particular OECD material)
o They have issued tons of guidelines, including the OECD convention, which is the
basis for the second part of this court
o This is soft law, non binding, but with a huge influence -> basis for binding double
taxation treaties
- bilateral treaties
o Tax treaties
o Investment treaties (see later also)
1
, This is what international taxation was 20 years ago.
- The person obliged the national tax codes
- But on top of that, you had the international
tax rule set, often in bilateral tax treaties
- Quite easy -> two rule sets
Over the last years, it has gotten more complex and multilayered.
EU law interferes with the basis idea with international and domestic
law.
What is relevant? We will not deal with all these concepts in detail
- We can not divide people for tax based on differences that are
discriminating
- State aid rules: states are free to shape their tax system. But in
some cases, Europe says: you are distorting the market because
you are advantaging a group. So states have less and less power
to shape their systems
- States have the obligation to adopt certain rules. Vb.
ECHR/Charter -> human rights become more and more
applicable also to state law
- Vb. Right to property -> incomers say: when we have to pay
90% tax on our property, this violates the right to property
- Vb. Right to a fair trail -> tax courts take very long, is this fair?
- Vb. Privacy rules -> you have to submit certain details about
yourself for your tax documents, does this violate the privacy
rules?
- MLI -> treaty that was concludes between several states, a lot
of rules there
- STTR -> a treaty based rule that protects the developing
countries
- AMOUNT A -> very complex, also transfer pricing issue
- UN MF -> united nations have started an initiative on
redesigning the entire international tax system. They said:
currently the international taxation is dominated by rich
countries. We want to redevelop the entire international tax
system. Negotiations are now ongoing.
This gives the entire picture of the international tax level
2
,States' Power to Tax
- Derived from their sovereignty = the right for a state to regulate its affairs through its
governmental institutions
o State can do as it pleases = sovereignty
o At one point in time, the earth was a place of chaos, we try to create order in the
chaos. This order is realized by a social contract. We created a sovereign state. This
state has the right and the duty to stay alive. How? With resources. This resources
come from tax money. The state can than offer services to the people.
o These services to people have increased until now: the modern state -> the services
provide a safety net: vb. when you can no longer work (too old or sick) (sociale
zekerheid)
o Sovern entity has jurisdiction over you
- Why does the government need taxes?
o Preventing inequality: The government takes money form the rich and gives it to the
poor
▪ Vb. Inheritance -> tax on that will go to others because the dead person
doesn’t need it anymore
o Financial function of taxes: state needs money to fund schools, policemen
(ambtenaren)
o Influencing tax payer behavior: government uses taxes as an incentive for behavior.
Tax payers don’t like taxes. The government prevents bad behavior by increasing
taxes on that type of behavior (social goal)
▪ Vb. Duties on alcohol or cigarettes (accijnzen)
- Not unlimited: requires a nexus or connection.
o States can tax based on a “genuine link” = customary international law. See also The
Case of the S.S. Lotus (Fr. v. Turk.), 1927 P.C.I.J. (ser. A) No. 10 (Sept. 7)
o Where does double taxation come in to play?
o He will tell it with a very important case: the Lotus Case
o Case: unfortunate day on the sea. There was a ship, the Lotus, a French ship, sailing
the high seas, in the middle of nowhere. By a tragedy, the ship crashed into another
Turkish ship. The Turkish ship sunk, killing some Turkish sailor. Some sailor could
clime on the Lotus. They sailed to Turkey. When arriving there, the captain of the
Lotus was arrested for killing the Turkish sailors. France was not happy: what makes
Turky competent to arrest our captain, why does Turkey have jurisdiction over the
captain? It went to the court of justice. They said: Turkey was competent to arrest
the captain. The court said some interesting things (see paragraph on the slide)
o “Now the first and foremost restriction imposed by international law upon a State is
that – failing the existence of a permissive rule to the contrary – it may not exercise
its power in any form in the territory of another State. In this sense jurisdiction is
certainly territorial; it cannot be exercised by a State outside its territory except by
virtue of a permissive rule derived from international custom or from a convention.”
(para 45)
o = in order for a state to have jurisdiction, there has to be a link to the states territory.
This is international customary law. States have made use of this rule, already before
the Lotus case.
3
, - Taxation is not permissible without any connection between the taxpayer/transaction and
the state’s territory
o States are also free to decide on this connection with your state. This is where the
problems start. States have adopted different connecting factors
o For example: Determined by national tax law
▪ USA: nationality principle
• As soon as you are an citizen of USA, you pay USA taxes, even if you
don’t live in the USA anymore
▪ Belgium: residence principle
• We will tax you on your worldwide income if you are a Belgian tax
resident (belgische rijksinwoner).
▪ Hong-Kong: territoriality principle: only income that is sourced on HK
territory - also for resident taxpayers – is taxed in HK
• Less common – only 3 states: Hong Kong, Singapore and Eritrea
• Only tax on income that is sources on its own territory – very lenient
-> this is why a lot of companies go there. Than they don’t have to
pay taxes on what they sell in other countries, but only on the
income in Hong Kong
▪ Issue between USA and Belgium: X says ‘I live in Belgium, our son was born in
USA, so we decided to give hem the USA nationality, but he lives in Belgium.
Now the son has to pay USA taxes because he has the USA nationality, but
also Belgian taxes because he lives in Belgium’ -> problem
Influence of EU law
Not harmonized: national jurisdictions can choose themselves on direct taxations (personal or
corporate tax). Indirect taxes was more harmonizes. But after a while, EU found a way around this.
They made rules to protect the internal market and in that way, EU interfered with the domestic
rules
Relevant provisions in TFEU
- General non-discrimination principle (Art. 18)
- Fundamental freedoms: free movement within internal market (Art. 26 §2): goods (Art. 28 et
seq), persons (Art. 21) employment (Art. 45 et seq), establishment (Art. 49 et seq), services
(Art. 56 et seq), capital (Art. 63 et seq))
- Prohibition on (fiscal) state aid (Art. 107-108)
Increasing impact of European Court of Justice case law (also in the field of tax treaties), illustration:
CJEU 28.01.1986 “Avoir Fiscal”
- First case dealing with European influence on direct tax measures -> alleged discrimination
- Case: a German insurance company that was active in France. The German company paid
higher taxes than French insurance companies in France. German company said: this is
discriminations and this affects the internal market. The court went with this reason. A lot of
similar cases came after that, all of them with ‘discrimination’ as argument.
Positive measures -> some things are better regulated at the EU level -> very good rules, so good that
they are adopted worldwide.
4
,Income Tax Directives
- Directive on Mutual assistance between tax authorities (1977) replaced by new Directive
(DAC) adopted 15 Feb 2011 + (many recent amendments to allow (i) automatic exchange of
bank info on investment income (ii) rulings), (iii) critical information on multinationals; (iv)
disclosure obligations of tax consultants on planning structures etc..
o Gather information form tax payers. Vb. Belgian taxes you on your worldwide
income, but if you don’t give the fiscus your assets abroad, how can the fiscus know
your abroad income. Now there is a working together between states to report this
to the tax authorities.
- Parent-Subsidiary Directive (1990, recast 2011 with later amendments)
- Merger Directive (1990 recast 2009 with later amendments)
- Savings Directive (2003 with later amendments, now repealed)
- Interest & Royalty Directive (2003)
- Anti Tax Avoidance Directive I and II (“ATAD”, 2016/2017)
- Tax Dispute Resolution Mechanisms Directive (2017 + Arbitration Convention)
- Global Minimum Taxation of Multinationals (2022)
International guidelines / recommendations (soft law)
OECD Guidelines: a few examples (see also infra):
- Reports on Taxation of Electronic Commerce (2000 and following)
- Transfer Pricing Guidelines (1995-1999-2010-2017-2022)
- Report on Harmful Tax Competition (1998)
- Report on Attribution of profits to permanent establishments (2008)
- Base Erosion & Profit Shifting (“BEPS”) of October 2015: 15 Reports (see infra)
o Initiative of the OECD
o No hardcore tax planning anymore
o We will see how this has influenced our taxes
EU Commission: a few examples
- Code of conduct against harmful tax competition (1997) (reform)
- Recommendation on Fair & Efficient corporate tax system (2015)
Bilateral treaties
This course focuses on (bilateral) tax treaties
- 2 main types of model treaties: OECD and UN (see also infra)
- Main focus : OECD Model Tax Convention 2017 + Commentary
o 3000-4000 treaties in force at the moment -> but it is only relevant to discuss one
treaty -> OECD Model Tax Convention
o 95% of all tax treaties worldwide are based on this model treaty -> this treaty is soft
law, non binding, but most states tend to follow this model
o 32 articles that we will discuss. Core of the international tax treaties. Many of the
treaties are a copy paste of this model treaty. This makes things easy for us
o Also the OECD had made a document for the interpretation of the model an how it
should be implemented
- (In addition many national Model tax treaties: the U.S. Model, the Dutch Model, the Belgian
Model, etc.)
o Some countries made an own model, that deviates a little bit
5
,Impact of investment treaties
- Contain provisions that can also apply to tax treaties
o Vb. Provision against expropriations -> investors should not loose the property by a
very high tax rate -> standards of protection
- Database of treaties in force (bilateral investment treaties ‘BITS’ and treaties with investment
provisions ‘TIPS’) and model agreements
- Contain safeguards for investors (national treatment, most favoured nation treatment, fair
and equitable treatment, protection against expropriation)
- Several tax cases, notably Yukos v. Russia (2014 Permanent Court of Arbitration under Energy
Charter Treaty) and Lone Star v. Korea (2022 BIT Belgium-Luxembourg-Korea)
o Yukos -> someone held Russia liable for expropriating Russia’s larges oil producers ->
the tax payer was awarded 60 billion euros -> high stake stuff, big money
o Lone Star -> US private equity firm that had business in South Korea. The South
Korean tax authorities changed their views on the tax payers several times in a few
years. At the end, the company claimed, successfully, that the were expropriated,
because of the high tax and also because of the chronic uncertainty because the tax
authorities changed their mind so much
Basic problems of international tax law
Power (or jurisdiction) to tax derived from sovereignty
Subjective (personal) Nexus: link based on the taxpayer's link to the state.
- Individuals: Physical presence, Domicile (Residence), but also citizenship, official registration
(in population registers) or immigration status
o Some states: Physical presence -> Not a good measure: it is easy to manipulate, you
can manipulate the amount of days that you are in a certain countries
o Some states: domicile, citizenship
o Leads to double taxation
- Legal Entities: Place of Incorporation, Place of Effective Management.
o Some states: Look at the place of incorporation, where is the company active
o Some states: Look at the place of effective management (werkelijke zetelleer).
o This also give rights to double taxation
Objective (territorial) Nexus: based on the transaction or activity.
- Examples: Part of the transaction occurs within the state, or the transaction object is
connected to the state.
- Also lead to double taxation
PM: Functional jurisdiction (continental shelf)
- Not relevant for Belgium
- Involves the continental shelf -> portion of a continent that is submerged under shallow
water (continental sea). There are UN rules dealing with that.
- Relevance -> important for states like Norway of UK -> place in the ocean where you find
minerals or oil -> continental shelf is not part of your territory -> if you want the tax the
income form the oil, but it is not part of your territory, then you can extend you jurisdiction
to also the continental shelf
6
,Limited and unlimited tax liability
24/09
Unlimited: worldwide income (‘full tax liability’) = universality principle
- Subjective nexus
- Residence or nationality criteria -> state taxes residents or nationals on the basis of their
worldwide income
- Vb. BE residents works in the NL, earns a Dutch salary of 50K, he is taxed in BE on all his
income, equally on Dutch income
Limited: part of income link to territory (or functional link) = territoriality principle
- Objective nexus
- State can only tax the income which is linked tot hat territory and nothing more
- Vb. BE residents works in the NL, BE cannot tax that income, because BE has no connection
with that income outside the BE territory
Vb. Belgian resident with an apartment in France that you rent out -> BE will say: I will tax the rental
income, because you are Belgian (subjective nexus). FR will say: you are a foreigner, but you have an
objective nexus in French territory, so French will also tax the rental income => double taxation -> tax
treaties want to solve that.
- Solution here: France can levy tax on the income, because the link is stronger with France
than with BE (see further)
Customary international law
Double (non) taxation
- Multiple applications of sovereignty + different types of tax liability result in international
double (non) taxation
- International Double Taxation: what?
o Not domestic: different layers of taxation within one State (e.g. within federal state)
o = concurring taxing rights exercised by two (or more) states
Situation 1: full tax liability in two (or more) states
- Based on close personal connection
- Concurrence of two different criteria for a
personal connection OR different
interpretation of the same test
There are two states who apply full tax liability – there
can be double taxation if they use a different criteria
for the subjective nexus (vb. nationality vs. residency)
OR if they use a different interpretation for the same
criterium
7
,Situation 2: full tax liability and limited tax
liability
- Concurrence of subjective and objective
nexus
- Full Tax Liability: Taxation of worldwide
income based on personal connection
(e.g., residence).
- Limited Tax Liability: Taxation only on
income earned within the state
(territoriality principle).
One state applies full tax liability and the other
state uses limited tax liability. Also in this
situation, there can be double taxation.
Situation 3: limited tax liability in two (or more)
states
- Concurrence of different criteria to
determine source state of income
(objective nexus) = conflicting source
rules
- Limited Tax Liability: taxation only on
income earned within the state
(territoriality principle).
Both states use limited tax liability;
8
,Special situation: economic double taxation with two (or more) taxpayers
- Example: UK: SCITD, 19.11.2008, Bayfine UK Products v. Revenue and Customs
Commissioners
-
Special situation: economic double taxation with two (or more) taxpayers
- Example: transfer pricing corrections
Issue: International Double Non Taxation
- What ? Neither of two relevant States exercises taxing rights over item of income
- Examples/causes
o Tax havens (the well known tax havens, but also UAE, countries with territorial tax
regimes (HK) etc.)
▪ Vb. Bahama’s, Cayman Islands, Monaco
▪ Vb. UAE – does not tax high because of economic reasons – state is already
rich and gets a lot of money from oil companies and banks
o States intentionally or unintentionally do not tax a certain item of income
▪ Swiss cantons do not levy tax on certain types of companies, Uruguay has a
tax free zone etc.
• Swiss is not a tax heaven, but has some attractive rules – federal tax
is only 10%, but cantons levy an additional tax on that. But some
cantons do not levy tax on certain types of companies
▪ Tax incentives to attract (foreign) investors or favour certain businesses:
within the EU there are socalled patent box regimes taxing very favourably
tax regime for income derived from patents
• Some states want to attract R&D -> vb. giving an exemption for R&D-
revenue (BE does this – exemption for 85% = patent box regime, you
put all the revenues ‘in a box’ and make a favourable tax regime)
9
, ▪ Individuals earning income below a threshold do not pay tax (tax free
bracket, PIT is progressive)
• Personal income tax = progressive
• Corporate income tax = flat
• Vb. NL resident works in BE and earns 9000 euro. Taxing rights are
with BE, but BE has a tax free bracket of 9000 euro, so BE does not
tax the income. Taxing rights are not with NL, so NL has to exempt
the income that ‘may be taxed’ in BE. This does not mean that the
income has been taxed in reality in BE, but that it may be taxed in BE.
So BE and NL both don’t tax – double non taxation
o Domestic laws of States are not harmonized
▪ A lot of tax law is not harmonized -> advisors take advantage from this
▪ Causes hybrid mismatches (financial instruments and entities, see next slide)
• = a tax payer uses the differences between states to have a
deduction in one state, and no taxation in another state
• Vb. BE gives a license to FR to use the invention. FR pays a royalty to
BE. The royalty is deductible in FR (less taxable income in FR) + 85%
of the income is exempted in BE (patent box, see earlier)
• Vb. the profit participating loan between Lux and borrower’s States –
payment from BE to LUX. BE sees it as in interest (deductable), LUX
sees it as a dividend (no taxation on the income)
▪ At the origin of the BEPS action plans (trying to restore coherence of the
international tax system) and the amendment of the EU Parent/Subsidiary
Directive per 1/1/16
o OECD Model: allocates taxing rights, does not impose an obligation to tax
o Domestic laws of States are not harmonized
▪ Problem of hybrid loans: financial instruments which are treated as debt by
one state and as equity by the other state = “(objective) qualification
conflict”
▪ if granted by parent to subsidiary and state of subsidiary treats as debt,
interest payments are (generally) deductible from subsidiary profits = remain
“untaxed” in that state
▪ if at the same time state of parent treats as equity, payments would be
considered as dividend and exempt in that state (= “double dip”)
10
Definition and sources
Definition: “all rules that determine where and how, in a cross-border context, specific income of a
taxpayer may be taxed and how this tax must be assessed and recovered”
- No fixed definition, but this works
- A field of law that involves conflict of rules of law
o Vb. BE wants to tax you -> BE income tax code, there is a rule: a person has to pay
taxes; but in international context, there are limitations to the Belgian rules
o So international rules limit the national rules -> conflict of rules
No separate set of rules (not a list of rules that apply everywhere), but various sources of law (a
selection of rules, from several institutions on several levels)
- national tax laws (PM) -> we will not see this in class
o we will only look at the interaction between the national laws and the international
law in abstracto
o how do they clash with roles of international taxation
- (mostly unwritten) general principles of international tax law
o Customary international law (internationaal gewoonterecht) -> we all agree on these
rules
o A lot of these rules have been codified vb. rules now in the Vienna convention
o A lot of these rule sound simple but are very important
o Vb. BE can tax our residents, but only on income realized on our territory -> more
general: we can only tax a person if he has a link to the Belgian territory
▪ vb. You are a tax payer in Spain, you work in Spain, you never leave Spain ->
Belgium can never tax you
- EU law
o More and more influence of EU law on international law -> this makes it more and
more complex
- international guidelines (in particular OECD material)
o They have issued tons of guidelines, including the OECD convention, which is the
basis for the second part of this court
o This is soft law, non binding, but with a huge influence -> basis for binding double
taxation treaties
- bilateral treaties
o Tax treaties
o Investment treaties (see later also)
1
, This is what international taxation was 20 years ago.
- The person obliged the national tax codes
- But on top of that, you had the international
tax rule set, often in bilateral tax treaties
- Quite easy -> two rule sets
Over the last years, it has gotten more complex and multilayered.
EU law interferes with the basis idea with international and domestic
law.
What is relevant? We will not deal with all these concepts in detail
- We can not divide people for tax based on differences that are
discriminating
- State aid rules: states are free to shape their tax system. But in
some cases, Europe says: you are distorting the market because
you are advantaging a group. So states have less and less power
to shape their systems
- States have the obligation to adopt certain rules. Vb.
ECHR/Charter -> human rights become more and more
applicable also to state law
- Vb. Right to property -> incomers say: when we have to pay
90% tax on our property, this violates the right to property
- Vb. Right to a fair trail -> tax courts take very long, is this fair?
- Vb. Privacy rules -> you have to submit certain details about
yourself for your tax documents, does this violate the privacy
rules?
- MLI -> treaty that was concludes between several states, a lot
of rules there
- STTR -> a treaty based rule that protects the developing
countries
- AMOUNT A -> very complex, also transfer pricing issue
- UN MF -> united nations have started an initiative on
redesigning the entire international tax system. They said:
currently the international taxation is dominated by rich
countries. We want to redevelop the entire international tax
system. Negotiations are now ongoing.
This gives the entire picture of the international tax level
2
,States' Power to Tax
- Derived from their sovereignty = the right for a state to regulate its affairs through its
governmental institutions
o State can do as it pleases = sovereignty
o At one point in time, the earth was a place of chaos, we try to create order in the
chaos. This order is realized by a social contract. We created a sovereign state. This
state has the right and the duty to stay alive. How? With resources. This resources
come from tax money. The state can than offer services to the people.
o These services to people have increased until now: the modern state -> the services
provide a safety net: vb. when you can no longer work (too old or sick) (sociale
zekerheid)
o Sovern entity has jurisdiction over you
- Why does the government need taxes?
o Preventing inequality: The government takes money form the rich and gives it to the
poor
▪ Vb. Inheritance -> tax on that will go to others because the dead person
doesn’t need it anymore
o Financial function of taxes: state needs money to fund schools, policemen
(ambtenaren)
o Influencing tax payer behavior: government uses taxes as an incentive for behavior.
Tax payers don’t like taxes. The government prevents bad behavior by increasing
taxes on that type of behavior (social goal)
▪ Vb. Duties on alcohol or cigarettes (accijnzen)
- Not unlimited: requires a nexus or connection.
o States can tax based on a “genuine link” = customary international law. See also The
Case of the S.S. Lotus (Fr. v. Turk.), 1927 P.C.I.J. (ser. A) No. 10 (Sept. 7)
o Where does double taxation come in to play?
o He will tell it with a very important case: the Lotus Case
o Case: unfortunate day on the sea. There was a ship, the Lotus, a French ship, sailing
the high seas, in the middle of nowhere. By a tragedy, the ship crashed into another
Turkish ship. The Turkish ship sunk, killing some Turkish sailor. Some sailor could
clime on the Lotus. They sailed to Turkey. When arriving there, the captain of the
Lotus was arrested for killing the Turkish sailors. France was not happy: what makes
Turky competent to arrest our captain, why does Turkey have jurisdiction over the
captain? It went to the court of justice. They said: Turkey was competent to arrest
the captain. The court said some interesting things (see paragraph on the slide)
o “Now the first and foremost restriction imposed by international law upon a State is
that – failing the existence of a permissive rule to the contrary – it may not exercise
its power in any form in the territory of another State. In this sense jurisdiction is
certainly territorial; it cannot be exercised by a State outside its territory except by
virtue of a permissive rule derived from international custom or from a convention.”
(para 45)
o = in order for a state to have jurisdiction, there has to be a link to the states territory.
This is international customary law. States have made use of this rule, already before
the Lotus case.
3
, - Taxation is not permissible without any connection between the taxpayer/transaction and
the state’s territory
o States are also free to decide on this connection with your state. This is where the
problems start. States have adopted different connecting factors
o For example: Determined by national tax law
▪ USA: nationality principle
• As soon as you are an citizen of USA, you pay USA taxes, even if you
don’t live in the USA anymore
▪ Belgium: residence principle
• We will tax you on your worldwide income if you are a Belgian tax
resident (belgische rijksinwoner).
▪ Hong-Kong: territoriality principle: only income that is sourced on HK
territory - also for resident taxpayers – is taxed in HK
• Less common – only 3 states: Hong Kong, Singapore and Eritrea
• Only tax on income that is sources on its own territory – very lenient
-> this is why a lot of companies go there. Than they don’t have to
pay taxes on what they sell in other countries, but only on the
income in Hong Kong
▪ Issue between USA and Belgium: X says ‘I live in Belgium, our son was born in
USA, so we decided to give hem the USA nationality, but he lives in Belgium.
Now the son has to pay USA taxes because he has the USA nationality, but
also Belgian taxes because he lives in Belgium’ -> problem
Influence of EU law
Not harmonized: national jurisdictions can choose themselves on direct taxations (personal or
corporate tax). Indirect taxes was more harmonizes. But after a while, EU found a way around this.
They made rules to protect the internal market and in that way, EU interfered with the domestic
rules
Relevant provisions in TFEU
- General non-discrimination principle (Art. 18)
- Fundamental freedoms: free movement within internal market (Art. 26 §2): goods (Art. 28 et
seq), persons (Art. 21) employment (Art. 45 et seq), establishment (Art. 49 et seq), services
(Art. 56 et seq), capital (Art. 63 et seq))
- Prohibition on (fiscal) state aid (Art. 107-108)
Increasing impact of European Court of Justice case law (also in the field of tax treaties), illustration:
CJEU 28.01.1986 “Avoir Fiscal”
- First case dealing with European influence on direct tax measures -> alleged discrimination
- Case: a German insurance company that was active in France. The German company paid
higher taxes than French insurance companies in France. German company said: this is
discriminations and this affects the internal market. The court went with this reason. A lot of
similar cases came after that, all of them with ‘discrimination’ as argument.
Positive measures -> some things are better regulated at the EU level -> very good rules, so good that
they are adopted worldwide.
4
,Income Tax Directives
- Directive on Mutual assistance between tax authorities (1977) replaced by new Directive
(DAC) adopted 15 Feb 2011 + (many recent amendments to allow (i) automatic exchange of
bank info on investment income (ii) rulings), (iii) critical information on multinationals; (iv)
disclosure obligations of tax consultants on planning structures etc..
o Gather information form tax payers. Vb. Belgian taxes you on your worldwide
income, but if you don’t give the fiscus your assets abroad, how can the fiscus know
your abroad income. Now there is a working together between states to report this
to the tax authorities.
- Parent-Subsidiary Directive (1990, recast 2011 with later amendments)
- Merger Directive (1990 recast 2009 with later amendments)
- Savings Directive (2003 with later amendments, now repealed)
- Interest & Royalty Directive (2003)
- Anti Tax Avoidance Directive I and II (“ATAD”, 2016/2017)
- Tax Dispute Resolution Mechanisms Directive (2017 + Arbitration Convention)
- Global Minimum Taxation of Multinationals (2022)
International guidelines / recommendations (soft law)
OECD Guidelines: a few examples (see also infra):
- Reports on Taxation of Electronic Commerce (2000 and following)
- Transfer Pricing Guidelines (1995-1999-2010-2017-2022)
- Report on Harmful Tax Competition (1998)
- Report on Attribution of profits to permanent establishments (2008)
- Base Erosion & Profit Shifting (“BEPS”) of October 2015: 15 Reports (see infra)
o Initiative of the OECD
o No hardcore tax planning anymore
o We will see how this has influenced our taxes
EU Commission: a few examples
- Code of conduct against harmful tax competition (1997) (reform)
- Recommendation on Fair & Efficient corporate tax system (2015)
Bilateral treaties
This course focuses on (bilateral) tax treaties
- 2 main types of model treaties: OECD and UN (see also infra)
- Main focus : OECD Model Tax Convention 2017 + Commentary
o 3000-4000 treaties in force at the moment -> but it is only relevant to discuss one
treaty -> OECD Model Tax Convention
o 95% of all tax treaties worldwide are based on this model treaty -> this treaty is soft
law, non binding, but most states tend to follow this model
o 32 articles that we will discuss. Core of the international tax treaties. Many of the
treaties are a copy paste of this model treaty. This makes things easy for us
o Also the OECD had made a document for the interpretation of the model an how it
should be implemented
- (In addition many national Model tax treaties: the U.S. Model, the Dutch Model, the Belgian
Model, etc.)
o Some countries made an own model, that deviates a little bit
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,Impact of investment treaties
- Contain provisions that can also apply to tax treaties
o Vb. Provision against expropriations -> investors should not loose the property by a
very high tax rate -> standards of protection
- Database of treaties in force (bilateral investment treaties ‘BITS’ and treaties with investment
provisions ‘TIPS’) and model agreements
- Contain safeguards for investors (national treatment, most favoured nation treatment, fair
and equitable treatment, protection against expropriation)
- Several tax cases, notably Yukos v. Russia (2014 Permanent Court of Arbitration under Energy
Charter Treaty) and Lone Star v. Korea (2022 BIT Belgium-Luxembourg-Korea)
o Yukos -> someone held Russia liable for expropriating Russia’s larges oil producers ->
the tax payer was awarded 60 billion euros -> high stake stuff, big money
o Lone Star -> US private equity firm that had business in South Korea. The South
Korean tax authorities changed their views on the tax payers several times in a few
years. At the end, the company claimed, successfully, that the were expropriated,
because of the high tax and also because of the chronic uncertainty because the tax
authorities changed their mind so much
Basic problems of international tax law
Power (or jurisdiction) to tax derived from sovereignty
Subjective (personal) Nexus: link based on the taxpayer's link to the state.
- Individuals: Physical presence, Domicile (Residence), but also citizenship, official registration
(in population registers) or immigration status
o Some states: Physical presence -> Not a good measure: it is easy to manipulate, you
can manipulate the amount of days that you are in a certain countries
o Some states: domicile, citizenship
o Leads to double taxation
- Legal Entities: Place of Incorporation, Place of Effective Management.
o Some states: Look at the place of incorporation, where is the company active
o Some states: Look at the place of effective management (werkelijke zetelleer).
o This also give rights to double taxation
Objective (territorial) Nexus: based on the transaction or activity.
- Examples: Part of the transaction occurs within the state, or the transaction object is
connected to the state.
- Also lead to double taxation
PM: Functional jurisdiction (continental shelf)
- Not relevant for Belgium
- Involves the continental shelf -> portion of a continent that is submerged under shallow
water (continental sea). There are UN rules dealing with that.
- Relevance -> important for states like Norway of UK -> place in the ocean where you find
minerals or oil -> continental shelf is not part of your territory -> if you want the tax the
income form the oil, but it is not part of your territory, then you can extend you jurisdiction
to also the continental shelf
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,Limited and unlimited tax liability
24/09
Unlimited: worldwide income (‘full tax liability’) = universality principle
- Subjective nexus
- Residence or nationality criteria -> state taxes residents or nationals on the basis of their
worldwide income
- Vb. BE residents works in the NL, earns a Dutch salary of 50K, he is taxed in BE on all his
income, equally on Dutch income
Limited: part of income link to territory (or functional link) = territoriality principle
- Objective nexus
- State can only tax the income which is linked tot hat territory and nothing more
- Vb. BE residents works in the NL, BE cannot tax that income, because BE has no connection
with that income outside the BE territory
Vb. Belgian resident with an apartment in France that you rent out -> BE will say: I will tax the rental
income, because you are Belgian (subjective nexus). FR will say: you are a foreigner, but you have an
objective nexus in French territory, so French will also tax the rental income => double taxation -> tax
treaties want to solve that.
- Solution here: France can levy tax on the income, because the link is stronger with France
than with BE (see further)
Customary international law
Double (non) taxation
- Multiple applications of sovereignty + different types of tax liability result in international
double (non) taxation
- International Double Taxation: what?
o Not domestic: different layers of taxation within one State (e.g. within federal state)
o = concurring taxing rights exercised by two (or more) states
Situation 1: full tax liability in two (or more) states
- Based on close personal connection
- Concurrence of two different criteria for a
personal connection OR different
interpretation of the same test
There are two states who apply full tax liability – there
can be double taxation if they use a different criteria
for the subjective nexus (vb. nationality vs. residency)
OR if they use a different interpretation for the same
criterium
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,Situation 2: full tax liability and limited tax
liability
- Concurrence of subjective and objective
nexus
- Full Tax Liability: Taxation of worldwide
income based on personal connection
(e.g., residence).
- Limited Tax Liability: Taxation only on
income earned within the state
(territoriality principle).
One state applies full tax liability and the other
state uses limited tax liability. Also in this
situation, there can be double taxation.
Situation 3: limited tax liability in two (or more)
states
- Concurrence of different criteria to
determine source state of income
(objective nexus) = conflicting source
rules
- Limited Tax Liability: taxation only on
income earned within the state
(territoriality principle).
Both states use limited tax liability;
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,Special situation: economic double taxation with two (or more) taxpayers
- Example: UK: SCITD, 19.11.2008, Bayfine UK Products v. Revenue and Customs
Commissioners
-
Special situation: economic double taxation with two (or more) taxpayers
- Example: transfer pricing corrections
Issue: International Double Non Taxation
- What ? Neither of two relevant States exercises taxing rights over item of income
- Examples/causes
o Tax havens (the well known tax havens, but also UAE, countries with territorial tax
regimes (HK) etc.)
▪ Vb. Bahama’s, Cayman Islands, Monaco
▪ Vb. UAE – does not tax high because of economic reasons – state is already
rich and gets a lot of money from oil companies and banks
o States intentionally or unintentionally do not tax a certain item of income
▪ Swiss cantons do not levy tax on certain types of companies, Uruguay has a
tax free zone etc.
• Swiss is not a tax heaven, but has some attractive rules – federal tax
is only 10%, but cantons levy an additional tax on that. But some
cantons do not levy tax on certain types of companies
▪ Tax incentives to attract (foreign) investors or favour certain businesses:
within the EU there are socalled patent box regimes taxing very favourably
tax regime for income derived from patents
• Some states want to attract R&D -> vb. giving an exemption for R&D-
revenue (BE does this – exemption for 85% = patent box regime, you
put all the revenues ‘in a box’ and make a favourable tax regime)
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, ▪ Individuals earning income below a threshold do not pay tax (tax free
bracket, PIT is progressive)
• Personal income tax = progressive
• Corporate income tax = flat
• Vb. NL resident works in BE and earns 9000 euro. Taxing rights are
with BE, but BE has a tax free bracket of 9000 euro, so BE does not
tax the income. Taxing rights are not with NL, so NL has to exempt
the income that ‘may be taxed’ in BE. This does not mean that the
income has been taxed in reality in BE, but that it may be taxed in BE.
So BE and NL both don’t tax – double non taxation
o Domestic laws of States are not harmonized
▪ A lot of tax law is not harmonized -> advisors take advantage from this
▪ Causes hybrid mismatches (financial instruments and entities, see next slide)
• = a tax payer uses the differences between states to have a
deduction in one state, and no taxation in another state
• Vb. BE gives a license to FR to use the invention. FR pays a royalty to
BE. The royalty is deductible in FR (less taxable income in FR) + 85%
of the income is exempted in BE (patent box, see earlier)
• Vb. the profit participating loan between Lux and borrower’s States –
payment from BE to LUX. BE sees it as in interest (deductable), LUX
sees it as a dividend (no taxation on the income)
▪ At the origin of the BEPS action plans (trying to restore coherence of the
international tax system) and the amendment of the EU Parent/Subsidiary
Directive per 1/1/16
o OECD Model: allocates taxing rights, does not impose an obligation to tax
o Domestic laws of States are not harmonized
▪ Problem of hybrid loans: financial instruments which are treated as debt by
one state and as equity by the other state = “(objective) qualification
conflict”
▪ if granted by parent to subsidiary and state of subsidiary treats as debt,
interest payments are (generally) deductible from subsidiary profits = remain
“untaxed” in that state
▪ if at the same time state of parent treats as equity, payments would be
considered as dividend and exempt in that state (= “double dip”)
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