Memorandum of the Defendant · Hohenwarter/Metzler (eds.), Taxation of Employment Income in...
Transcript of Memorandum of the Defendant · Hohenwarter/Metzler (eds.), Taxation of Employment Income in...
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International and European Tax Moot Court Competition 2018-2019
Memorandum of the
Defendant
T
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International and European Tax Moot Court Competition 2018-2019
Memorandum of the
Defendant
T
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I TABLE OF CONTENTS
I Table of Contents ...................................................................................................................................... 2
II List of Sources ........................................................................................................................................... 5
III Statement of Facts ................................................................................................................................... 16
Facts of the Case .......................................................................................................................................... 16
Entities Involved ...................................................................................................................................... 16
Economic Activities ................................................................................................................................ 18
Relevant Aspects of International Law ....................................................................................................... 21
Memberships in International Organisations ........................................................................................... 21
Tax Treaties ............................................................................................................................................. 21
Bilateral Investment Treaties ................................................................................................................... 34
Other Treaties .......................................................................................................................................... 34
Domestic Law .............................................................................................................................................. 34
Terrabrake ................................................................................................................................................ 34
Tyreland ................................................................................................................................................... 35
Crocodile Islands ..................................................................................................................................... 36
Common Domestic Law Rules .................................................................................................................... 36
IV Issues ....................................................................................................................................................... 38
V Arguments ............................................................................................................................................... 39
Interpretation of DTC-TT ............................................................................................................................ 39
Relevance of the 2017 OECD-Commentary and the 2017 UN-Commentary ......................................... 39
Interpretation of the DTC-TT .................................................................................................................. 39
The DTC-TT Is Not Applicable for Ladar .................................................................................................. 40
Ladar’s POEM Is Situated in Crocodile Island ....................................................................................... 40
Interim Conclusion .................................................................................................................................. 43
The DTC-TT Is Not Applicable Since Ladar Is Resident of Crocodile Island ........................................ 44
Ladar’s PE May Not Invoke Treaty Benefits .......................................................................................... 44
Withholding Agents May Not Invoke Treaty Benefits ............................................................................ 45
Interim Conclusion .................................................................................................................................. 46
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Subsidiary Argument: Ladar Is a Resident of Terrabrake ........................................................................... 46
The Payment for the Knowledge-Transfer-Agreement Regarding the Crankshaft ..................................... 47
The Payment Constitutes Royalties According to Art.12 DTC-TT......................................................... 47
The Payment Does Not Fall Under Art.13 DTC-TT ............................................................................... 51
Interim Conclusion .................................................................................................................................. 53
The Payment for the “BYC”-Database and Training of Ladar’s Employees .............................................. 54
The Payment for the “BYC”-Database .................................................................................................... 54
The Payment for the Training of Ladar’s Employees ............................................................................. 55
Interim Conclusion .................................................................................................................................. 59
The Payments with Respect to the Salamander’s App ................................................................................ 61
Renolo Is Not the Beneficial Owner of the Royalties ............................................................................. 61
Abuse of the DTC-TT as RenoloApps Is the Beneficial Owner of the Royalties ................................... 62
Interim Conclusion .................................................................................................................................. 63
The Payments with Respect to the Salamander’s App Are Covered by Art.12 DTC-TT ....................... 63
Interim Conclusion .................................................................................................................................. 66
The Payment for the Use of the Server and the Reports .......................................................................... 66
Subsidiary Argument: The Payments Pertaining to the Salamander’s App Are to Be Regarded
Separately ................................................................................................................................................ 68
Interim Conclusion .................................................................................................................................. 70
The Payment to Mr. Fixer ........................................................................................................................... 71
Art.12A DTC-TT Applies ....................................................................................................................... 71
Art.12A(3)(a) DTC-TT Does Not Apply................................................................................................. 72
The Payment to Mr. Fixer Is Not Covered by Art.12A(7) DTC-TT ....................................................... 73
Interim Conclusion .................................................................................................................................. 75
Subsidiary Argument: Art.21(3) DTC-TT Applies ................................................................................. 75
Interim Conclusion .................................................................................................................................. 75
The BIT-TT Is Not Applicable .................................................................................................................... 77
Taxes “Carved-Out” from the Scope of the BIT-TT ............................................................................... 77
Double Taxation Does Not Constitute Expropriation ............................................................................. 77
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VI Overall Conclusion .................................................................................................................................. 79
VII Request ................................................................................................................................................ 80
VIII Annexes ............................................................................................................................................... 81
Table 1 – Overview of the Facts .................................................................................................................. 81
Table 2 – POEM of Ladar ........................................................................................................................... 82
Table 3 – Crankshaft and “BYC”-Database ................................................................................................ 83
Table 4 – Salamander’s App and Mr. Fixer ................................................................................................ 84
Table 5 – Description of Computer Software .............................................................................................. 85
IX Table of Abbreviations ............................................................................................................................ 86
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II LIST OF SOURCES
BOOKS
De Broe, International Tax Planning and Prevention of Abuse (2008).
Doralt, Steuern im Rechtsstaat: Festschrift für Gerold Stoll zum 65. Geburtstag (1990).
Douma/Engelen, The legal status of the OECD commentaries (2008).
Du Toit, Beneficial Ownership of Royalties in Bilateral Tax Treaties (1999).
Gassner/Lang/Lechner, Aktuelle Entwicklungen im internationalen Steuerrecht – Das neue
Musterabkommen der OECD (1994).
Günther/Tüchler (eds.), Exchange of Information for Tax Purposes (2013).
Haarmann (ed.), Auslegung und Anwendung von Doppelbesteuerungsabkommen (2004).
Haccius, Ireland in International Tax Planning (2004).
Hohenwarter/Metzler (eds.), Taxation of Employment Income in International Tax Law (2009).
Lang, Introduction to the Law of Double Taxation Conventions 2nd ed. (2013).
Lang et al (eds.), The UN Model Convention and Its Relevance for the Global Tax Treaty Network
(2017).
Lang et al, The OECD-Model-Convention Update 2014 (2015).
Lang et al (eds.), Tax Treaty Case Law around the Globe 2012 (2013).
Lang et al (eds.), The Impact of the OECD and UN Model Conventions in Bilateral Tax Treaties
(2012).
Lang/Schuch/Staringer (eds.), Die Grenzen der Gestaltungsmöglichkeiten im Internationalen
Steuerrecht (2009).
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Lang/Schuch/Staringer (eds.), Die Ansässigkeit im Recht der Doppelbesteuerungsabkommen (2008).
Lang/Pistone/Schuch/Staringer/Storck (eds.), Beneficial Ownership: Recent Trends (2013).
Li, International Taxation in China: A Contextualized Analysis (2016).
Maisto, Residence of companies under tax treaties and EC law (2009).
Moessner (ed.), Taxation of Workers in Europe (2010).
Pinto, E-Commerce and Source-Based Income Taxation (2002).
Schwarz, Schwarz on Tax Treaties (2013).
CONTRIBUTIONS IN BOOKS
Arnold, The Concept of Beneficial Ownership under Canadian Tax Treaties, In:
Lang/Pistone/Schuch/Staringer/Storck (eds.), Beneficial Ownership: Recent Trends (2013).
Avery Jones, The Binding Nature of the OECD Commentaries from the UK Point of View, In:
Douma/Engelen, The legal status of the OECD commentaries (2008).
Canete/Staringer, Missbrauchserfassung im DBA-Recht im Beneficial-Ownership-Konzepten, In:
Lang/Schuch/Staringer (eds.), Die Grenzen der Gestaltungsmöglichkeiten im Internationalen
Steuerrecht (2009).
Cooper, Australia: The Meaning of Royalty and Software License Agreement, In: Lang et al (eds.),
Tax Treaty Case Law around the Globe 2012 (2013).
Deborah, The Legal Relevance of the OECD Standard, In: Günther/Tüchler (eds.), Exchange of
Information for Tax Purposes (2013).
Duff, Beneficial Ownership: Recent Trends, In: Lang/Pistone/Schuch/Staringer/Storck (eds.),
Beneficial Ownership: Recent Trends (2013).
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Haslinger, Der Ort der tatsächlichen Geschäftsleitung als Tie-Breaker nach Art 4 Abs 3 OECD-MA
und seine in Diskussion befindlichen Reformen, in Lang/Schuch/Staringer (eds.), Die Ansässigkeit
im Recht der Doppelbesteuerungsabkommen (2008).
Jiménez, Beneficial Ownership as a Broad Anti-Avoidance Provision: Decisions by Spanish Courts
and the OECD’s Discussion Draft, In: Lang/Pistone/Schuch/Staringer/Storck (eds.), Beneficial
Ownership: Recent Trends (2013).
Lechner, Ort der Geschäftsleitung von inländisch beherrschten ausländischen Gesellschaften, In:
Doralt, Steuern im Rechtsstaat: Festschrift für Gerold Stoll zum 65. Geburtstag (1990).
Orzechowski, The Relevance of the Commentaries on the OECD and UN Models for the
Interpretation of the UN Model, In: Lang et al (eds.), The UN Model Convention and Its Relevance
for the Global Tax Treaty Network (2017).
Pezzato, The meaning of the term “employment” under article 15 of the OECD Model Convention,
In: Hohenwarter/Metzler (eds.), Taxation of Employment Income in International Tax Law (2009).
Pinto Nogueira, Portugal: The Meaning of Royalties and Payments for Software, In: Lang et al (eds.),
Tax Treaty Case Law around the Globe 2012 (2013).
Pistone, General Report, In: Lang et al (eds.), The Impact of the OECD and UN Model Conventions
in Bilateral Tax Treaties (2012).
Prokisch, Double Taxation Conventions on Taxation on Workers, In: Moessner (ed.), Taxation of
Workers in Europe (2010).
Sasseville, The Meaning of “Place of Effective Management”, In: Maisto, Residence of companies
under tax treaties and EC law (2009).
Sauer, Leasing, In: Gassner/Lang/Lechner, Aktuelle Entwicklungen im internationalen Steuerrecht
– Das neue Musterabkommen der OECD (1994).
Smit, The Concept of Beneficial Ownership and Possible Alternative Remedies in Netherlands Case
Law, In: Lang/Pistone/Schuch/Staringer/Storck (eds.), Beneficial Ownership: Recent Trends (2013).
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Tumpel, Software, In: Gassner/Lang/Lechner, Aktuelle Entwicklungen im internationalen
Steuerrecht – Das neue Musterabkommen der OECD (1994).
Vallada, Beneficial Ownership under Articles 10, 11 and 12 of the 2014 OECD Model Convention,
In: Lang et al, The OECD-Model-Convention Update 2014 (2015).
Vogel, Auslegung von Doppelbesteuerungsabkommen, In: Haarmann (ed.), Auslegung und
Anwendung von Doppelbesteuerungsabkommen (2004).
COMMENTARIES
Aigner/Kofler/Tumpel (eds.), Doppelbesteuerungsabkommen (DBA) - Kommentar (2016).
Becker/Höppner/Grotherr/Kroppen (eds.), DBA-Kommentar Doppelbesteuerungsabkommen
(2017).
IBFD Global Tax Treaty Commentaries (2017).
Küng/Camp, GmbH-Recht (2006).
Loukota/Jirousek (eds.), Internationales Steuerrecht, 39. Ergänzungslieferung (2016).
Vogel, Klaus Vogel on Double Taxation Conventions, Online edition (Kluwer).
Vogel, Klaus Vogel on Double Taxation Conventions, 4th ed. (2015).
Vogel, Doppelbesteuerungsabkommen – Kommentar, 2nd ed. (1990).
Vogel/Lehner (eds.), Doppelbesteuerungsabkommen – Kommentar, 6th ed. (2015).
Wassermeyer, Doppelbesteuerung (2018).
ARTICLES
Arnold, The Interpretation of Tax Treaties: Myth and Reality, BIT 2010.
Ault, The Role of the OECD Commentaries in the Interpretation of Tax Treaties, Intertax 1994, 144.
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Ault, Treatment of Computer Software, ET 1993, 330.
Avery Jones, Place of Effective Management as a Residence Tie-Breaker, BIT 2005, 20.
Bal, The Sky’s the Limit – the Cloud-Based Services in an International Perspective, BIT 2014, 515.
Bendlinger, Steuerabzug bei Software-Überlassung aus dem Ausland (Teil 1), VWT 2017, 241.
Bendlinger, The “Place of Effective Management” in Tax Treaty Law, SWI 2004, 167.
Burgstaller/Haslinger, Place of Effective Management as a Tie-Breaker-Rule – Concept,
Developments and Prospects, Intertax 2004, 376.
Daurer/Jann, Withholding tax in the era of BEPS, CIVs and digital economy, IFA Cahiers 2018,
Volume 103B, Report Austria, 5.
Desai, Tax Aspects of the Transfer of Technology (Including Software), APTB 1999, 40.
Engelen/Pötgens, Report on “Application of the OECD Model Tax Convention to Partnerships” and
the Interpretation of Tax Treaties, ET 2000, 250.
Falcão/Michel, Scope and Interpretation of Article 12A: Assessing the Impact of the New Fees for
Technical Services Article, BTR 2018, 422.
Formenti/Trouw, Withholding tax in the era of BEPS, CIVs and digital economy, IFA Cahiers 2018,
Volume 103B, Report Brasil, 5.
Gooijer, Beneficial Owner: Judicial Variety in Interpretation Counteracted by the 2012 OECD
Proposals?, Intertax 2014, 204.
Hansen/Christensen/Pedersen, Danish “Beneficial Owner” Cases – A Status Report, BIT 2013, 192.
Heredia, Copyright and Software and Spanish Tax Treaties: An Issue of Balance between
Technology-Importing and Technology-Exporting Countries, ET 2006, 36.
Heredia, Who Knows the Riddle of Know-How? Spain Becomes Entangled in the Web of
Intangibles, ET 2005, 103.
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Heredia, Software Royalties in Tax Treaties: Should Copyright Rights be Reconsidered in the OECD
Commentary on Article 12?, BIT 2005, 227.
Jain/Prebble, Beneficial Ownership and the Contractual Obligation of an Interposed Company to
Pass On Income, BIT 2018.
Jaya, Administrative Requirements for Claiming Treaty Entitlement: Problems and Solutions, BIT
2016.
Jirousek/Loukota, Die DBA-Entlastungsverordnung, ÖStZ 2005, 335.
Kalss, Ausgewählte Fragen zum Informationsrecht des GmbH-Gesellschafters, GesRZ 2017, 15.
Kessler, Qualifikation der Einkünfte aus dem Online-Vertrieb von Standardsoftware nach nationalem
und DBA-Recht (Teil II), IStR 2000, 98.
Kessler/Müller, Ort der Geschäftsleitung einer Kapitalgesellschaft nach nationalem und DBA-Recht
– Bestandsaufnahme und aktuelle Entwicklungen, IStR 2003, 361.
Kofler/Kuschil, Abkommensrechtliche Entlastung von österreichischen Quellensteuern auf
Dividenden, Zinsen und Lizenzgebühren, ÖStZ 2003, 225.
Lan, A comparative study of the “Royalties” Provisions in the tax treaties concluded by China, BIT
2018, 142.
Lang, Art. 3 Abs. 2 OECD-MA und die Auslegung von Doppelbesteuerungsabkommen, IWB 2011,
281.
Lang/Brugger, The role of the OECD Commentary in tax treaty interpretation, ATF 2008, 95.
Ledesma/González-Cotera, The Tax Treatment of Software, ET 2000, 276.
Machfudz, Withholding tax in the era of BEPS, CIVs and digital economy, IFA Cahiers 2018, Volume
103B, Report Indonesia, 5.
Metzler/Stieglitz, Der De Beers-Fall: Vorbild für die Bestimmung der Ansässigkeit von
Kapitalgesellschaften im Recht der Doppelbesteuerungsabkommen?, SWI 2004, 456.
11
Mitterlehner, UN-Musterabkommen – neue Bestimmung zur Besteuerung technischer
Dienstleistungen geplant, SWI 2017, 180.
Pamperl, Auswirkungen einer Verpflichtung zur Weiterleitung passiver Einkünfte auf eine DBA-
rechtliche Quellensteuerreduktion, SWI 2013, 406.
Patel/Visharia, Final Guidance on Place of Effective Management, ITPJ 2017, 377.
Reimer, Interpretation of Tax Treaties, ET 1999, 458.
Schlossmacher, Tax Issues Affecting Virtual Enterprises, Intertax 2002, 96.
Simonis, BITs and Taxes, Intertax 2014, 234.
Sixdorf/Leitsch, Taxation of Technical Services under the New Article 12A of the UN Model –
Improved Taxation or a Step in the Wrong Direction?, ET 2017, 234.
Van der Bruggen, Source Taxation of Consideration for Technical Services and Know-How, APTB
2001, 42.
Van der Laan, Computer Software in International Tax Law, Intertax 1991, 266.
Waelde/Kolo, Investor-State Disputes: The Interface Between Treaty-Based International Investment
Protection and Fiscal Sovereignty, Intertax 2007, 424.
Ward/Avery Jones/Ellis, The Other Income Article of Income Tax Treaties, BTR 1990, 352.
OECD DOCUMENTS
2017 OECD Model Convention.
2017 OECD Model Commentary.
2014 OECD Model Convention.
2014 OECD Model Commentary.
OECD, Base Erosion and Profit Shifting – Action 6: Final Report, 2015.
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OECD, Clarification of the Meaning of “Beneficial Owner” in the OECD-MC, Discussion Draft,
2011.
OECD, The Impact of the Communications Revolution on the Application of the “Place of Effective
Management” as a Tie Breaker Rule, 2001.
OECD, Tax Treaty Characterisation Issues Arising from E-Commerce, 2001.
UN DOCUMENTS
2017 UN Model Convention.
2017 UN Model Commentary.
UN, Possible Amendments to the Commentary on Article 12 (Royalties), E/C.18/2016/CRP.8,
06.10.2016.
JUDGEMENTS
AUSTRALIA
Australian Federal Court, International Business Machines Corporation and IBM World Trade
Corporation v. Commissioner of Taxation, 12.04.2011.
High Court of Australia, Thiel, 21 A.T.R. 531, 22.08.1990.
AUSTRIA
UFS, RV/0297-W/03, 10.06.2003.
VwGH, 87/14/0001, 24.11.1987.
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CANADA
Canadian Federal Court of Appeal, Prévost Car Inc. v. Her Majesty the Queen, A-252-08,
26.02.2009.
Canadian Federal Court, Vauban v. Her Majesty the Queen, 05.09.1975.
Canadian Federal Court, Minister of National Revenue v. Paris Canada Films Limited, 1962.
CHINA
Higher People’s Court of Beijing, Gaoxingzhongzi No. 24, 20.12.2002.
DENMARK
Østre Landsret (High Court of Eastern Denmark), B-2152-10, 20.12.2011.
Landsskatteretten (National Tax Tribunal), 09-00064 / SKM No. 2011.57, 22.12.2010.
GERMANY
BFH, no. I R 19/06, 19.12.2007.
BFH, no. I R 73/02, 28.01.2004.
BFH, no. IX R 57/99, 23.04.2003.
BFH, no. I R 109/85, 29.01.1986.
PORTUGAL
Supreme Administrative Court, Appeal 0621/09, 02.02.2011.
SPAIN
Tribunal Economico Administrativo Central, RG 1481/2007, 28.09.2009.
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Tribunal Económico Administrativo Central, RG 3730/2004, 15.02.2007.
Tribunal Economico Administrativo Central, RG 6294/1996, 22.09.2000.
Spanish Supreme Court, RJ 2003/1968, 19.12.2002.
Spanish Supreme Court, RJ 2002/4512, 14.05.2002.
Spanish Supreme Court, RJ 2002/3546, 02.04.2002.
SWITZERLAND
Tribunal administratif fédéral (Bundesverwaltungsgericht), A-6537/2010, 07.03.2012.
THE NETHERLANDS
Hoge Raad, no. 16.03321 and 16.05066, 19.01.2018.
Hoge Raad, no. 39.719, 17.12.2004.
Hoge Raad, no. 27.293, 23.09.1992.
Hoge Raad, no. 24.189, 20.04.1988.
UNITED KINGDOM
Court of Appeal, A3/2005/2497, Indofood, 02.03.2006.
HL, De Beers Consolidated Mines Ltd v. Howe, AC 455, 30.07.1906.
USA
Tax Court, 16501-15S, Joanna Klubo-Gwiezdzinska v. Commissioners of Internal Revenue,
28.06.2017.
Tax Court, 56 925, Aiken Industries, Inc. v. Commissioners of Internal Revenue, 05.08.1971.
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ARBITRAL JUDGMENTS
London Court of International Arbitration, Case No. UN3481, EnCana vs. Ecuador, 03.02.2006.
INTERNATIONAL DOCUMENTS
US Model Bilateral Investment Treaty (2012).
VCLT, Vienna Convention on the Law of Treaties (1980).
FISCAL AUTHORITIES
AUS: ATO TR 2008/7, Income Tax: royalty withholding tax and the assignment of copyright,
27.08.2008.
AUT: BMF, EAS, F 606/2-IV/4/03, 30.06.2003.
GER: BMF, Beschränkte Steuerpflicht und Steuerabzug bei grenzüberschreitender Überlassung von
Software und Datenbanken, IV C 5 – S 2300/12/10004:000, 27.10.2017.
ZA: SARS, Resident – Place of Effective Management (Companies), 03.11.2015
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III STATEMENT OF FACTS
FACTS OF THE CASE
ENTITIES INVOLVED
Ladar
1 Ladar is a company incorporated in the Companies House of the city Diesela in the state of
Terrabrake in 2010.
2 Ladar engages in car manufacturing. In particular, Ladar specialises in the production of car-
boats, which are called “Salamanders”. The car-boats are entirely produced in Terrabrake.
3 The “Salamanders” have a good reputation among the residents of Terrabrake. As Terrabrake
consists of an archipelago of 15 islands, the car-boats facilitate mobility. The overall sales
performance of Ladar is stable and doing very well. The market quota of the company in the
period between 2019 and 2022 amounted to 75%.
4 Ladar’s Board of Directors (hereinafter:BOD) consists of 3 members. The areas of
responsibility of the BOD comprise various activities, e.g. decisions on the long-term
commercial strategy of Ladar, analysis of the overall performance of the company and
comparisons with the results of the industry. The members of the BOD are all under 30 years
old and have just graduated from a MBA at the Yuppie Business School in Diesela in the state
of Terrabrake. They all live in Terrabrake. The contracts under which the 3 members of the
BOD are employed are all renewable annually. The shareholders of Ladar assess the contracts
during the Annual General Assembly. However, the General Assembly of shareholders may
remove the current members of the BOD and appoint new ones at any time.
5 The Annual General Assembly is usually held in December and takes place in Terrabrake.1
1 See clarification on question 13.
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6 In 2021, Ladar’s shareholders comprise two members, Mr. Pepponen and his niece Mrs.
Hamilton.
7 Mrs. Hamilton holds a share of 40% in Ladar. She lives in Terrabrake with her husband and
two daughters. Mrs. Hamilton received her degree in business administration in 2018 and
intends to participate in the business.
8 Mr. Pepponen, the founder of the company, holds a share of 60% in Ladar. He graduated as an
engineer and, thus, is very active and knowledgeable in the business. Mr. Pepponen used to be
a resident of Terrabrake. However, due to the fact that he had to pay many taxes there in 2018,
he decided to move his tax residence to the state of Crocodile Island (hereinafter:CI).
9 At the beginning and end of each of the meetings of the BOD, which are held at the premises
of Ladar in Terrabrake, Mr. Pepponen is called via telephone. The documents and reports that
the BOD approves and reviews, must be sent to Mr. Pepponen. He also meets final clients in
Terrabrake, which is why he travels there for two days per month. Mr. Pepponen invites the
BOD to a relaxing weekend at his villa in CI twice per semester. The costs incurred in
connection with this invitation are borne by Mr. Pepponen.
Renolo
10 Renolo is a company incorporated under the laws of the state of Tyreland in 1975 and is
registered in the city of Petroldam in the state of Tyreland. It operates under the corporate object
of “automotive research and development, improvement of the vehicles production process and
training for the automotive industry”.
11 A complex crankshaft (a mechanical part able to translate the energy produced by a car motor
to a circular motion) has been developed by the engineers of Renolo. The innovative crankshaft
has the power to increase the final speed of car-boats, while simultaneously reducing the total
consumption of gas.
12 Besides its research activities, Renolo provides specialised training and courses to vehicle
engineers. The company’s research and training activities have been acknowledged by the
Ministry of Industry of Tyreland. Therefore, from 2015 onwards, Renolo has been entitled to
issue the “Official Certificate of Expert in Motors” to the courses’ participants.
18
13 The registered losses of Renolo in the year 2021 amount to $ 300,000 and increased by $ 35,000
in the following year, to a total of $ 335,000 of accumulated losses.
RenoloApps
14 RenoloApps, a wholly-owned subsidiary of Renolo, is a company incorporated under the laws
of CI in 2015 and registered in the House of CI.
15 The corporate object of RenoloApps comprises application software for automotive companies.
Almost all employees and the directors of RenoloApps are residents of CI. The CEO and some
freelancers, however, are residents of Tyreland.
16 Renolo and RenoloApps entered into a general agreement in 2017, allowing Renolo to
negotiate, licence or even sell RenoloApps’ products. In exchange, Renolo withholds a total fee
of 10% on all revenues received and immediately transfers 90% of the payments to
RenoloApps.2
ECONOMIC ACTIVITIES
17 In 2021, Ladar and Renolo entered into a 5-year commercial agreement that comprises various
terms and conditions described hereinafter.
18 Firstly, Renolo provides Ladar all the necessary information and technical documents
pertaining to the production of the crankshaft. The sales of car-boats might increase in the
period 2023 – 2030. In order to constantly update the crankshaft and prevent it from becoming
obsolete, Ladar is allowed to perform research on its own. Any activity regarding the research
on the crankshaft must be communicated to Renolo. Ladar is also entitled to commission a third
party to carry out research in order to update the crankshaft. However, Renolo must be informed
in advance and issue an authorisation. In exchange for the information and technical documents
provided by Renolo, Ladar obliges itself to pay 7% of the net selling price of the “Salamanders”
for each year during the agreement, which results in a payment of $300,000 in 2021.
2 See clarification on question no. 7.
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19 Secondly, Ladar is granted access to a database, “Building Your Car”3 (hereinafter:BYC),
developed by Renolo. It has to pay a subscription fee of $50,000 for each year of the contract
period. The database provides technical solutions to the main problems that may occur in the
production of cars. However, it does not provide tailored solutions for problems in the
production of car-boats. Nevertheless, the BOD of Ladar is convinced that the solutions can
also be applied to the benefit of their own production process in some cases. The database is
regularly updated with practical problems and potential solutions that Renolo’s engineers come
across in their daily research and courses they offer.
20 In addition to the database access, several employees of Ladar took part in a two-day training
event held by two of Renolo’s employees in the state of Terrabrake in February 2021. The focus
of the training was the functioning of the database. However, some sessions were also dedicated
to the explanation of the most common problems in connection with the production of car-
boats. After passing an exam at the end of the course, the attendees received the “Official
Certificate of Expert in Motors”.
21 In the year 2021, Ladar paid a lump sum of $100,000 to Renolo for both of the abovementioned
services. Since no further trainings will be held in the remaining years of the contract period,
solely the annual subscription fee for the database of $50,000 will be charged for the years 2022
– 2025.
22 Thirdly, Renolo provides Ladar with a mobile application software (“Salamander’s App”)
which was entirely developed by RenoloApps. In addition, a server located in CI is provided to
ensure the proper functioning of the app during the 5-year contract period. This server can be
accessed by Ladar remotely.4 Ladar is entitled to distribute the app to its customers but is
prohibited from copying, de-compiling, de-assembling, or reverse engineering the software.
The primary functions of the “Salamander’s App” are described as follows:
1. Keeping the users informed about their consumption of gas, providing graphics and
comparisons to other vehicles sold by rival companies;
3 The “BYC”-Database is located in Tyreland, see clarification on question no. 50. 4 See clarification on question 22.
20
2. Creating a community of users (so-called “Salamander Lovers”). Salamanders’ owners
are enabled to exchange information and experiences, share pictures or even organise
special events with their car-boats;
3. Implementing a communication channel between Ladar and the Salamander’s owners.
By using the app, the users are enabled to talk to Ladar’s employees online in order to
solve technical doubts or even to schedule an appointment at one of the mechanical
workshops;
4. Collecting information about the crankshaft.
23 In reality, only the fourth function is of importance for Ladar and was the crucial reason for
launching the app. The inclusion of the other three functions has the mere purpose of attracting
potential customers. At the very moment when a user downloads the app and connects their
phone via Bluetooth to the car-boats, the collection of data begins. The relevant information
about each crankshaft is immediately sent to the server of RenoloApps located in the state of
CI and subsequently is forwarded to engineers of Renolo in Tyreland.
24 Once a month the engineers have to elaborate a descriptive report and a technical opinion about
the received information. These reports are then stored on the server and can be accessed by
Ladar as well. The information from the app, the reports and the technical opinions is essential
for keeping the crankshaft updated. According to the commercial agreement, Ladar is allowed
to transfer the data received to a third party for research purposes if this is communicated to
Renolo in advance.
25 In the year 2021, Ladar paid a lump sum of $50,000 to Renolo as a compensation for all services
in connection with the app. Furthermore, Ladar agrees to pay $1,000 per month over the entire
contract period for the use of the server located in the state of CI resulting in an additional
payment of $12,000 in 2021.
26 Lastly, on 15 September 2021, an incident occurred where the crankshaft in a car-boat caught
fire. The Salamander’s App was not in use at the time and therefore was of no help in diagnosing
the cause. As the crankshaft was produced using the technology of Renolo, the Chief Engineer
in Ladar called Renolo asking for an explanation. Thereupon, Renolo sent the engineer Mr.
Fixer, who has been employed at Renolo for the past 20 years, to Ladar to investigate the cause
21
of the fire. After being at Ladar’s site for one week, Mr. Fixer returned home to Tyreland. The
results of his investigations were sent to Ladar in form of an extensive report outlining that the
likely cause of the fire was a chain reaction related to the use of copper in the cables. Ladar was
not obliged to pay for the elaborated report but instead granted full reimbursement of all Mr.
Fixer’s incurred expenses in Terrabrake. Due to his luxurious lifestyle, this payment amounts
to $10,000 and contains reimbursements for a first-class flight, accommodation at a five-star
hotel and various forms of entertainment.
27 The contract between Ladar and Renolo does not include any exclusivity clauses for Renolo
rendering services solely to Ladar.5
RELEVANT ASPECTS OF INTERNATIONAL LAW
MEMBERSHIPS IN INTERNATIONAL ORGANISATIONS
28 All of the states are OECD member countries as well as members of the UN.
TAX TREATIES
29 A tax treaty between Terrabrake and Tyreland (hereinafter:DTC-TT) has been in force since
2019. It is based on the 2017 OECD-MC. The treaty implements the credit method as the
method to eliminate double taxation. There are some deviations from the OECD-MC. Firstly,
Art.4(3) defines the residence of a company as the state where its place of effective management
(hereinafter: POEM) is situated and, thus, is based on the 2014 OECD-MC. Secondly, the
Articles stated in the table below have been concluded according to the 2017 UN-MC. They
deviate from the OECD-MC as the text in bold shows:
5 See clarification on question 73 lit b.
22
UN-MC OECD-MC
Article 7 UN-MC Article 7 OECD-MC
1. The profits of an enterprise of a
Contracting State shall be taxable only in
that State unless the enterprise carries on
business in the other Contracting State
through a permanent establishment
situated therein. If the enterprise carries
on business as aforesaid, the profits of
the enterprise may be taxed in the
other State but only so much of them
as is attributable to (a) that permanent
establishment; (b) sales in that other
State of goods or merchandise of the
same or similar kind as those sold
through that permanent
establishment; or (c) other business
activities carried on in that other State
of the same or similar kind as those
effected through that permanent
establishment.
1. Profits of an enterprise of a Contracting
State shall be taxable only in that State
unless the enterprise carries on business
in the other Contracting State through a
permanent establishment situated
therein. If the enterprise carries on
business as aforesaid, the profits that are
attributable to the permanent
establishment in accordance with the
provisions of paragraph 2 may be taxed
in that other State.
2. Subject to the provisions of paragraph 3,
where an enterprise of a Contracting
State carries on business in the other
Contracting State through a permanent
establishment situated therein, there shall
in each Contracting State be attributed to
that permanent establishment the profits
which it might be expected to make if it
were a distinct and separate enterprise
2. For the purposes of this Article and
Article [23 A] [23 B], the profits that are
attributable in each Contracting State to
the permanent establishment referred to
in paragraph 1 are the profits it might be
expected to make, in particular in its
dealings with other parts of the
enterprise, if it were a separate and
independent enterprise engaged in the
23
engaged in the same or similar activities
under the same or similar conditions and
dealing wholly independently with the
enterprise of which it is a permanent
establishment.
same or similar activities under the same
or similar conditions, taking into account
the functions performed, assets used and
risks assumed by the enterprise through
the permanent establishment and through
the other parts of the enterprise.
3. In the determination of the profits of a
permanent establishment, there shall be
allowed as deductions expenses which
are incurred for the purposes of the
business of the permanent establishment
including executive and general
administrative expenses so incurred,
whether in the State in which the
permanent establishment is situated or
elsewhere. However, no such deduction
shall be allowed in respect of amounts, if
any, paid (otherwise than towards
reimbursement of actual expenses) by the
permanent establishment to the head
office of the enterprise or any of its other
offices, by way of royalties, fees or other
similar payments in return for the use of
patents or other rights, or by way of
commission, for specific services
performed or for management, or, except
in the case of a banking enterprise, by
way of interest on moneys lent to the
permanent establishment. Likewise, no
account shall be taken, in the
determination of the profits of a
3. Where, in accordance with paragraph 2,
a Contracting State adjusts the profits
that are attributable to a permanent
establishment of an enterprise of one of
the Contracting States and taxes
accordingly profits of the enterprise that
have been charged to tax in the other
State, the other State shall, to the extent
necessary to eliminate double taxation on
these profits, make an appropriate
adjustment to the amount of the tax
charged on those profits. In determining
such adjustment, the competent
authorities of the Contracting States shall
if necessary consult each other.
24
permanent establishment, for amounts
charged (otherwise than towards
reimbursement of actual expenses), by
the permanent establishment to the head
office of the enterprise or any of its other
offices, by way of royalties, fees or other
similar payments in return for the use of
patents or other rights, or by way of
commission for specific services
performed or for management, or, except
in the case of a banking enterprise, by
way of interest on moneys lent to the
head office of the enterprise or any of its
other offices.
4. In so far as it has been customary in a
Contracting State to determine the profits
to be attributed to a permanent
establishment on the basis of an
apportionment of the total profits of the
enterprise to its various parts, nothing in
paragraph 2 shall preclude that
Contracting State from determining the
profits to be taxed by such an
apportionment as may be customary; the
method of apportionment adopted shall,
however, be such that the result shall be
in accordance with the principles
contained in this Article.
5. For the purposes of the preceding
paragraphs, the profits to be attributed to
the permanent establishment shall be
25
determined by the same method year by
year unless there is good and sufficient
reason to the contrary.
6. Where profits include items of income
which are dealt with separately in other
Articles of this Convention, then the
provisions of those Articles shall not be
affected by the provisions of this Article.
4. Where profits include items of income
which are dealt with separately in other
Articles of this Convention, then the
provisions of those Articles shall not be
affected by the provisions of this Article.
Article 12 UN-MC Article 12 OECD-MC
1. Royalties arising in a Contracting State
and paid to a resident of the other
Contracting State may be taxed in that
other State.
1. Royalties arising in a Contracting State
and beneficially owned by a resident of
the other Contracting State shall be
taxable only in that other State.
2. However, such royalties may also be
taxed in the Contracting State in which
they arise and according to the laws of
that State, but if the beneficial owner of
the royalties is a resident of the other
Contracting State, the tax so charged
shall not exceed 15% of the gross amount
of the royalties. The competent
authorities of the Contracting States shall
by mutual agreement settle the mode of
application of this limitation.
3. The term “royalties” as used in this
Article means payments of any kind
received as a consideration for the use of,
or the right to use, any copyright of
literary, artistic or scientific work
2. The term “royalties” as used in this
Article means payments of any kind
received as a consideration for the use of,
or the right to use, any copyright of
literary, artistic or scientific work
26
including cinematograph films, or films
or tapes used for radio or television
broadcasting, any patent, trade mark,
design or model, plan, secret formula or
process, or for the use of, or the right
to use, industrial, commercial or
scientific equipment or for information
concerning industrial, commercial or
scientific experience.
including cinematograph films, any
patent, trade mark, design or model, plan,
secret formula or process, or for
information concerning industrial,
commercial or scientific experience.
4. The provisions of paragraphs 1 and 2
shall not apply if the beneficial owner of
the royalties, being a resident of a
Contracting State, carries on business in
the other Contracting State in which the
royalties arise, through a permanent
establishment situated therein, or
performs in that other State
independent personal services from a
fixed base situated therein, and the
right or property in respect of which the
royalties are paid is effectively connected
with (a) such permanent establishment
or fixed base, or with (b) business
activities referred to in (c) of
paragraph 1 of Article 7. In such cases
the provisions of Article 7 or Article 14,
as the case may be, shall apply.
3. The provisions of paragraph 1 shall not
apply if the beneficial owner of the
royalties, being a resident of a
Contracting State, carries on business in
the other Contracting State in which the
royalties arise through a permanent
establishment situated therein and the
right or property in respect of which the
royalties are paid is effectively connected
with such permanent establishment. In
such case the provisions of Article 7 shall
apply.
5. Royalties shall be deemed to arise in a
Contracting State when the payer is a
resident of that State. Where,
however, the person paying the
27
royalties, whether he is a resident of a
Contracting State or not, has in a
Contracting State a permanent
establishment or a fixed base in
connection with which the liability to
pay the royalties was incurred, and
such royalties are borne by such
permanent establishment or fixed
base, then such royalties shall be
deemed to arise in the State in which
the permanent establishment or fixed
base is situated.
6. Where by reason of a special relationship
between the payer and the beneficial
owner or between both of them and some
other person, the amount of the royalties,
having regard to the use, right or
information for which they are paid,
exceeds the amount which would have
been agreed upon by the payer and the
beneficial owner in the absence of such
relationship, the provisions of this
Article shall apply only to the last-
mentioned amount. In such case, the
excess part of the payments shall remain
taxable according to the laws of each
Contracting State, due regard being had
to the other provisions of this
Convention.
4. Where, by reason of a special relationship
between the payer and the beneficial
owner or between both of them and some
other person, the amount of the royalties,
having regard to the use, right or
information for which they are paid,
exceeds the amount which would have
been agreed upon by the payer and the
beneficial owner in the absence of such
relationship, the provisions of this
Article shall apply only to the last-
mentioned amount. In such case, the
excess part of the payments shall remain
taxable according to the laws of each
Contracting State, due regard being had
to the other provisions of this
Convention.
28
Article 12A UN-MC
There is no similar provision in the 2017
OECD-MC.
1. Fees for technical services arising in a
Contracting State and paid to a resident
of the other Contracting State may be
taxed in that other State.
2. However, notwithstanding the provisions
of Article 14 and subject to the
provisions of Articles 8, 16 and 17, fees
for technical services arising in a
Contracting State may also be taxed in
the Contracting State in which they arise
and according to the laws of that State,
but if the beneficial owner of the fees is
a resident of the other Contracting State,
the tax so charged shall not exceed 15%
of the gross amount of the fees.
3. The term “fees for technical services” as
used in this Article means any payment
in consideration for any service of a
managerial, technical or consultancy
nature, unless the payment is made: (a) to
an employee of the person making the
payment; (b) for teaching in an
educational institution or for teaching by
an educational institution; or (c) by an
individual for services for the personal
use of an individual.
4. The provisions of paragraphs 1 and 2
shall not apply if the beneficial owner of
29
fees for technical services, being a
resident of a Contracting State, carries on
business in the other Contracting State in
which the fees for technical services arise
through a permanent establishment
situated in that other State, or performs in
the other Contracting State independent
personal services from a fixed base
situated in that other State, and the fees
for technical services are effectively
connected with a) such permanent
establishment or fixed base, or b)
business activities referred to in (c) of
paragraph 1 of Article 7. In such cases
the provisions of Article 7 or Article 14,
as the case may be, shall apply.
5. For the purposes of this Article, subject
to paragraph 6, fees for technical services
shall be deemed to arise in a Contracting
State if the payer is a resident of that
State or if the person paying the fees,
whether that person is a resident of a
Contracting State or not, has in a
Contracting State a permanent
establishment or a fixed base in
connection with which the obligation to
pay the fees was incurred, and such fees
are borne by the permanent
establishment or fixed base.
6. For the purposes of this Article, fees for
technical services shall be deemed not to
30
arise in a Contracting State if the payer is
a resident of that State and carries on
business in the other Contracting State or
a third State through a permanent
establishment situated in that other State
or the third State, or performs
independent personal services through a
fixed base situated in that other State or
the third State and such fees are borne by
that permanent establishment or fixed
base.
7. Where, by reason of a special
relationship between the payer and the
beneficial owner of the fees for technical
services or between both of them and
some other person, the amount of the
fees, having regard to the services for
which they are paid, exceeds the amount
which would have been agreed upon by
the payer and the beneficial owner in the
absence of such relationship, the
provisions of this Article shall apply only
to the last-mentioned amount. In such
case, the excess part of the fees shall
remain taxable according to the laws of
each Contracting State, due regard being
had to the other provisions of this
Convention.
31
Article 14 UN-MC There is no similar provision in the 2017
OECD-MC.
1. Income derived by a resident of a
Contracting State in respect of
professional services or other activities
of an independent character shall be
taxable only in that State except in the
following circumstances, when such
income may also be taxed in the other
Contracting State:
(a) If he has a fixed base regularly
available to him in the other
Contracting State for the purpose of
performing his activities; in that
case, only so much of the income as
is attributable to that fixed base may
be taxed in that other Contracting
State; or
(b) If his stay in the other Contracting
State is for a period or periods
amounting to or exceeding in the
aggregate 183 days in any twelve-
month period commencing or
ending in the fiscal year concerned;
in that case, only so much of the
income as is derived from his
activities performed in that other
State may be taxed in that other
State.
2. The term “professional services”
includes especially independent
32
scientific, literary, artistic, educational or
teaching activities as well as the
independent activities of physicians,
lawyers, engineers, architects, dentists
and accountants.
Article 21 UN-MC Article 21 OECD-MC
1. Items of income of a resident of a
Contracting State, wherever arising, not
dealt with in the foregoing Articles of
this Convention shall be taxable only in
that State.
1. Items of income of a resident of a
Contracting State, wherever arising, not
dealt with in the foregoing Articles of
this Convention shall be taxable only in
that State.
2. The provisions of paragraph 1 shall not
apply to income other than income from
immovable property as defined in
paragraph 2 of Article 6, if the recipient
of such income, being a resident of a
Contracting State, carries on business in
the other Contracting State through a
permanent establishment situated
therein, or performs in that other State
independent personal services from a
fixed base situated therein, and the
right or property in respect of which the
income is paid is effectively connected
with such permanent establishment or
fixed base. In such case the provisions of
Article 7 or Article 14, as the case may
be, shall apply.
2. The provisions of paragraph 1 shall not
apply to income, other than income from
immovable property as defined in
paragraph 2 of Article 6, if the recipient
of such income, being a resident of a
Contracting State, carries on business in
the other Contracting State through a
permanent establishment situated therein
and the right or property in respect of
which the income is paid is effectively
connected with such permanent
establishment. In such case the
provisions of Article 7 shall apply.
3. Notwithstanding the provisions of
paragraphs 1 and 2, items of income of
33
a resident of a Contracting State not
dealt with in the foregoing Articles of
this Convention and arising in the
other Contracting State may also be
taxed in that other State.
30 Finally, Art.29 DTC-TT constitutes a general anti-abuse rule which is similar to Art.6 ATAD
(EU Anti Tax Avoidance Directive):
Article 29 DTC-TT Article 6 ATAD
1. Notwithstanding the other provisions
of this Convention, a Contracting
State shall ignore an arrangement or a
series of arrangements which, having
been put into place for the main purpose
or one of the main purposes of obtaining
a tax advantage that defeats the object or
purpose of the relevant provisions of
this Convention, are not genuine having
regard to all relevant facts and
circumstances. An arrangement may
comprise more than one step or part.
1. For the purposes of calculating the
corporate tax liability, a Member State
shall ignore an arrangement or a series of
arrangements which, having been put
into place for the main purpose or one of
the main purposes of obtaining a tax
advantage that defeats the object or
purpose of the applicable tax law, are not
genuine having regard to all relevant
facts and circumstances. An arrangement
may comprise more than one step or part.
2. For the purposes of paragraph 1, an
arrangement or a series thereof shall be
regarded as non-genuine to the extent
that they are not put into place for valid
commercial reasons which reflect
economic reality.
2. For the purposes of paragraph 1, an
arrangement or a series thereof shall be
regarded as non-genuine to the extent
that they are not put into place for valid
commercial reasons which reflect
economic reality.
34
3. Where arrangement or series thereof are
ignored in accordance with paragraph 1,
the tax liability shall be calculated in
accordance with national law.
3. Where arrangements or a series thereof
are ignored in accordance with paragraph
1, the tax liability shall be calculated in
accordance with national law.
31 Neither Tyreland nor Terrabrake are signatories of the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). However,
both states are members of the OECD BEPS Inclusive Framework.
32 CI has not concluded a tax treaty with Terrabrake.
BILATERAL INVESTMENT TREATIES
33 There are bilateral investment treaties in force between Terrabrake and Tyreland. The latest
version of these treaties has been in force since 2012 and is based on the 2012 version of the
US Model Bilateral Investment Treaty.
OTHER TREATIES
34 Finally, the Vienna Convention on the Law of Treaties has been in force in all of the three states
since 2000.
DOMESTIC LAW
TERRABRAKE
General Rules
35 In Terrabrake, corporate income is taxed at 30%.
36 Furthermore, no unilateral relief for juridical double taxation exists in Terrabrake.
37 Terrabrake is a monist state.
35
Rules Concerning Royalties and Technical Services
38 A withholding tax of 20% is levied on payments of dividends, interest and royalties made by
resident companies to foreign recipients.
39 A withholding tax of 20% is imposed on payments for technical services made by resident
companies to foreign recipients.
40 Payments for technical services provided by non-resident companies paid by companies
resident in Terrabrake as well as by permanent establishments located in Terrabrake are subject
to withholding tax.6 It is a common understanding of domestic legislation that both resident
companies and permanent establishments should be subject to the same withholding tax
obligations.7
Residence Rules
41 According to the domestic laws of Terrabrake, a company is resident in Terrabrake provided
that its POEM is there.
TYRELAND
General Rules
42 In Tyreland, corporate income is taxed at 20%.
43 Furthermore, no unilateral relief for juridical double taxation exists in Tyreland.
44 No carry-forward of the tax credit derived from taxes paid abroad is possible.
45 Tyreland is a dualist state.
6 See clarification on question no. 1. 7 Ibid.
36
Residence Rules
46 According to the domestic law of Tyreland, a company with its POEM situated in Tyreland is
deemed to be a resident.
CROCODILE ISLANDS
General Rules
47 In CI, corporate income is taxed at 5%.
Rules Concerning Royalties and Technical Services
48 No withholding tax is levied on payments of dividends, interest and royalties made by resident
companies to foreign recipients.
49 No tax provision exists for payments for technical services.
Residence Rules
50 Contrary to Terrabrake and Tyreland, a company is deemed to be resident in CI if
• it is incorporated in the Companies House of CI or
• its POEM is situated there.
COMMON DOMESTIC LAW RULES
51 The legal systems of these countries do not correspond specifically to the “civil law” or
“common law” models, but rather combine elements of the two systems.
52 In all countries concerned, the tax year runs from 1 January until 31 December.
37
53 None of the domestic laws provides a definition of the terms “place of effective management”
or “software”.8
54 There are no domestic General Anti-Abuse Rules (hereinafter:GAARs) in any of the states,
apart from the GAAR that was included in the DTC-TT.9
55 All countries involved are members of the UN as well as the OECD.
56 None of the countries involved are EU or EEA/EFTA Member States.
8 See clarification on questions 72 and 73 lit. a. 9 See clarification on question 27.
38
IV ISSUES
57 In early 2022, Terrabrake’s tax authorities noticed that Ladar did not levy any withholding taxes
on the payments made to Renolo in the period 2021. At the end of the tax audit, the tax
authorities of Terrabrake issued an assessment of tax. They took the view that all the payments
were subject to withholding tax.
58 The applicant is the taxpayer (Ladar), and the defendant is the tax authorities of Terrabrake.
The taxpayer does not agree with the notice of assessment made by the tax authorities (in the
sequence of a random audit) and has appealed to the Court.
59 The tax authorities consider that the income should be taxed in their state (and this was the
reason why they made an assessment accordingly), as:
a) The DTC between Tyreland and Terrabrake does not apply since Ladar is a company
resident in the Crocodile Islands.
b) Even if Ladar is considered resident in Terrabrake, and therefore the DTC applies, all
payments paid to Renolo, included the expense reimbursement to Mr. Fixer, are subject to
withholding tax.
39
V ARGUMENTS
INTERPRETATION OF DTC-TT
RELEVANCE OF THE 2017 OECD-COMMENTARY AND THE 2017
UN-COMMENTARY
60 The DTC-TT is based on the 2017 OECD-MC. However, there are some deviations from the
OECD-MC (m.no.29). Therefore, the 2017 OECD-MC and its corresponding OECD-
Commentary have to be consulted for interpretation purposes.10
61 Art.4(3) DTC-TT, which deviates from the 2017 OECD-MC, is based on the 2014 OECD-MC.
As the Contracting States (hereinafter:CS) obviously intended the provision of the treaty to be
understood in the same way as the 2014 OECD-MC, the 2014 OECD-Commentary needs to be
taken into account for the interpretation of this provision.11 Arts. 12, 12A, 14 and 21 DTC-TT
have been concluded according to the 2017 UN-MC. The relevance of the 2017 UN-
Commentary is induced as the CS intended the provisions should have the same meaning as
under the 2017 UN-MC.12 Where the UN-Commentary adopted the identical provisions of the
OECD-Commentary, the OECD-Commentary also needs to be taken into account for
interpretation purposes.13 Therefore, the 2017 OECD-Commentary as well as the 2017 UN-
Commentary must be considered when interpreting the DTC-TT.14
INTERPRETATION OF THE DTC-TT
62 Since most terms in DTCs following the OECD-MC are undefined, the interpretation rule in
Art.3(2) OECD-MC needs to be applied. This rule states that undefined terms have to be
10 AUS:High Court of Australia(22.08.1990); Ault, Intertax(1994),145 et seqq.; Vogel in Haarmann(2004),13 et seq.;
Avery Jones in Douma/Engelen(2008),161; Lang/Brugger, ATF(2008),105; Deborah in Günther/Tüchler(2013),58
et seqq.; Lang(2013),48; Vallada in Lang et al(2015),35; Vogel/Rust in Vogel(2017),Introduction(para.99);
Art.31(1)-(4) VCLT. 11 Ibid. 12 Ibid. 13 Orzechowski in Lang et al(2017),15 et seqq. 14 Pistone in Lang et al(2012),4; Orzechowski in Lang et al(2017),22 et seq.
40
interpreted with reference to the domestic tax legislation in force when the Convention is being
applied “unless the context otherwise requires”.15
63 As a consequence, the context of a DTC, meaning its object and purpose, is determinant when
interpreting specific provisions.16 As the general purpose of a DTC (avoidance of double
taxation) can only be achieved if tax authorities of both CS interpret terms stipulated in the tax
treaty uniformly, an autonomous interpretation is preferred.17 Only if an autonomous
interpretation scarcely leads to satisfying results, domestic law can be taken into consideration
for interpretation purposes.18
THE DTC-TT IS NOT APPLICABLE FOR LADAR
LADAR’S POEM IS SITUATED IN CROCODILE ISLAND
64 Ladar is neither a resident of Terrabrake nor Tyreland. Since its POEM is located in CI, it is a
resident thereof. For this reason, the DTC-TT is not applicable and Terrabrake may tax all
payments pursuant to its domestic law.
65 Pursuant to the domestic laws of Terrabrake and CI, Ladar is a resident of CI. A company is
a resident of CI if it is either incorporated under its laws or if it has its POEM therein. A
company is a resident of Terrabrake if its POEM is situated therein.
66 Regarding the interpretation of the POEM, both countries rely on the treaty criteria. This stems
from the fact that neither of the two CS explicitly define the term “POEM” in their domestic
law.19 However, the term is contained in Art.4(3) DTC-TT and the use of the wording “POEM”
in each CS’s domestic law implies a reference to the OECD-definition. Any deviation thereupon
15 Lang(2013),56 et seq.; Dürrschmidt in Vogel/Lehner(2015),Art.3(para.116a); 2017 OECD-
Commentary,Art.3(para.11). 16 Engelen/Pötgens, ET(2000),257; Lang/Brugger, ATF(2008),99; Lang, IWB(2011),282; Deborah in
Günther/Tüchler(2013),59 et seq. 17 Arnold, BIT(2010),10; Dürrschmidt in Vogel/Lehner(2015),Art.3(para.99); Reimer, ET(1999),462. 18 Reimer, ET(1999),463 et seq.; Lang, IWB(2011),288; Lang(2013),56 et seq; Dürrschmidt in
Vogel/Lehner(2015),Art.3(para.116b-117a). 19 See clarification on question 73 lit a.
41
could be implemented by either CS if they insisted. However, the case states nothing about such
deviations.
67 The POEM is defined as “the place where key management and commercial decisions that are
necessary for the conduct of the entity’s business as a whole are in substance made.”20 All
relevant facts and circumstances have to be taken into account. The criteria include e.g. the
place where the BOD meets, the place where the company has its head office or the place of
residence of the shareholders.21
68 There are two common approaches for determining the POEM: The POEM is either the place
where the most senior executives exercise their control determining the long-term strategy or
the place where day-to-day affairs for the ordinary course of business are overseen.22 However,
the prevailing opinion follows the former approach.23
69 Thus, a two-step approach has to be followed:
• Firstly, the persons which actually make the key management decisions
(hereinafter:KMD) have to be identified.
• Secondly, the place where those decisions are effectively taken has to be determined.24
70 KMD are decisions that fundamentally affect the company. These decisions can only be made
by the most senior persons that exercise the top-level management functions.25 Older versions
of the OECD-Commentary state the BOD as an explicit example. However, if the decision-
making authority is de facto delegated to any other person, e.g. a shareholder, and the decisions
therefrom are routinely approved by the BOD, the place of such actual decision-making is the
POEM.26
20 2014 OECD-Commentary,Art.4(para.24). 21 Meijeren in Maisto(2009),9 et seq.; NL:Hoge Raad(23.09.1992); 2014 OECD-Commentary,Art.4(para.24). 22 Schlossmacher, Intertax(2002),98; Kessler/Müller, IStR(2003),363; Burgstaller/Haslinger, Intertax(2004),378;
Lechner in Doralt(1990),397. 23 UK:HL(30.07.1906); Burgstaller/Haslinger, Intertax(2004),378; Metzler/Stieglitz, SWI(2004),461 et seqq; Sasseville
in Maisto(2009),293 et seq; NL:Hoge Raad(19.01.2018). 24 Patel/Visharia, ITPJ(2017),380. 25 Avery Jones, BIT(2005),21; Haslinger in Lang/Schuch/Staringer(2008),196 et seq. 26 NL:Hoge Raad(23.09.1992),(17.12.2004); Patel/Visharia, ITPJ(2017),380 et seq.
42
71 Regarding the importance of the principal shareholder’s (hereinafter:PS) involvement for
the determination of the POEM, one has to make a distinction between two different types of
actions performed.27 On the one hand, matters with respect to decisions reserved for
shareholders under company law. These decisions either affect the company’s existence or the
rights attributable to the shareholders as such and should be disregarded in determining the
POEM.28 On the other hand, the shareholder’s contribution by way of a formal arrangement or
actual conduct. If the authority to conclude decisions is taken from the BOD or senior
management for the shareholder’s benefit, his participation is to be deemed as usurpation. This
is, in particular, the case if the BOD solely implements the shareholder’s decisions or does not
decide independently. Therefore, the exerted influence results in effective management
exercised by the PS meaning that the company’s POEM will be where those decision are
effectively taken.29
72 The place where KMD are taken depends on the organisation of the company.30 The
determination may, however, be very difficult due to the increasing use of advanced
communications technology.31
73 In the underlying case Mr. Pepponen, the PS, materially performs management functions and
takes KD. Ladar’s BOD is responsible for decisions on the long-term strategy of Ladar, the
analysis of the overall performance of the company and the comparison with the results of the
industry. Nevertheless, Mr. Pepponen’s possible and factual influence on the decision-making
process of the BOD is material:
a) Firstly, shareholders are usually entitled to receive documents and reports only upon
request.32 In casu, the BOD is obliged to send all documents and reports to Mr. Pepponen.
As he receives those documents automatically, this allows him to examine the work and
decisions of the BOD and provides him with the opportunity to scrutinise the overall
performance of the BOD. In addition, he has to be informed when each BOD-meeting
commences and ends.
27 Bendlinger, SWI(2004),169 et seq. 28 SARS(03.11.2015),9 et seq.; Patel/Visharia, ITPJ(2017),381 et seq. 29 Ibid; Haslinger in Lang/Schuch/Staringer(2008),200. 30 OECD,POEM,2001(para.33). 31 Ibid(para.37 et seq). 32 Kalss, GesRZ(2017),15 et seqq.; Küng/Camp(2006),§802(para.3).
43
b) Secondly, Mr. Pepponen is the PS. It is possible for the General Assembly to remove all
members and appoint new ones at any time. Since Mr. Pepponen has a share of 60%, he
is entitled to vote accordingly, should he be discontent with the BOD decisions. If the other
shareholder, Mrs. Hamilton, voted otherwise, his vote would still prevail. Therefore, it is
factually his consent that determines the outcome of any decision made by the BOD.
c) Another important fact to consider is who materially contributes the relevant know-how
regarding the conduct of business.33 All three members of the BOD are still young and have
just graduated. Hence, none of them possesses sufficient working experience regarding the
business operations of Ladar. Additionally, Mrs. Hamilton does not possess much
experience. Mr. Pepponen, however, is the founder of the company and works in this field
of business since the incorporation of Ladar in 2010. Furthermore, he graduated as an
engineer and is very active in the business.
d) Regarding the place where the decisions are taken, Mr. Pepponen communicates with the
BOD via telephone. The POEM is located where the person making KD is situated.34
Physical presence is becoming rather obsolete due to modern communication technology.
Hence, there is no need for any physical presence of Mr. Pepponen in Terrabrake. The fact
that he has the possibility to factually intervene in any decision-making process is
illustrated by the obligatory phone calls at the beginning and at the end of any BOD-
meeting.
Independent decisions can, thus, not be concluded by the BOD. The role of Mr. Pepponen
within Ladar is too significant to disregard it for the determination of who is actually taking
KD. He is a resident in CI and, thus, all KD are taken there.
INTERIM CONCLUSION
74 To sum up, Ladar is a resident of CI for domestic law and treaty purposes, because its POEM
is located there.
33 NL:Hoge Raad(20.04.1988). 34 Patel/Visharia, ITPJ(2017),380.
44
THE DTC-TT IS NOT APPLICABLE SINCE LADAR IS RESIDENT OF
CROCODILE ISLAND
75 As has been established, Ladar is a resident of CI pursuant to domestic law and therefore the
DTC-TT is not applicable for the reasons stated hereinafter.
76 According to the Vogel-Commentary35 and Prokisch36 “it follows from the context of Articles
1, 2 and 4 OECD and UN-MC that a treaty only applies if the person invoking the treaty is a
resident of one of the Contracting States”. Therefore, it can be concluded that the withholding
agent (hereinafter:WHA) also has to fulfil the requirements contained in Art.1, 2 and 4 in order
to be entitled to treaty benefits.
77 Pursuant to Art.1, the DTC shall apply to a person that is resident of one or both CS. According
to Art.4(1), a resident of a CS is any person who is subject to unlimited tax liability under the
laws of that state.37 The residency criterion is fulfilled if the company is a resident in at least
one of the CS.
78 Ladar is not entitled to the benefits of the DTC-TT since it does not fall within its personal
scope.38 The company undoubtedly fulfils the requirements of Art.1 icw Art.3 DTC-TT, as
Ladar is a company. However, Ladar has its POEM in CI by virtue of Terrabrake’s domestic
law. Therefore, the residence criterion of Art.4 is not fulfilled. Since Ladar is neither resident
in Tyreland nor in Terrabrake, the DTC-TT is not applicable.
LADAR’S PE MAY NOT INVOKE TREATY BENEFITS
79 Ladar consequently has a PE in Terrabrake pursuant to Art.5(1) DTC-TT since it has “a fixed
place of business through which the business is wholly carried on”. However, it still may not
invoke treaty benefits.
35 De Broe in Vogel(2017),Art.15(para.28). 36 Prokisch in Moessner(2010),56. 37 2017 OECD-Commentary,Art.4(para.1). 38 2017 OECD-Commentary,Arts.1-4.
45
80 Wassermeyer39 and other academics40 state that the PE of a resident of a third country may not
invoke treaty benefits because PEs do not fulfill the requirements of a person pursuant to
Art.3(1)(a) DTC-TT.
81 Ladar’s PE may not invoke the treaty benefits provided by the DTC-TT since it is not a “person”
under Art.3(1)(a) DTC-TT. Only the company Ladar is considered a “person”.
WITHHOLDING AGENTS MAY NOT INVOKE TREATY BENEFITS
82 Should the Court hold the opinion that Ladar is a resident of Terrabrake, we will show that
Ladar is then not entitled to treaty benefits because of its status as WHA. The purpose of the
DTC-TT is not to go beyond what is stated therein: the avoidance of double taxation through
the reduction or elimination of the tax liability of the taxpayer in either CS.41
83 Procedural aspects regarding the application of the provisions in the DTC-TT are not regulated.
Therefore, domestic rules pertaining to procedural issues have to be enacted by each CS if rules
regarding the application of the treaty provisions are not already implemented.42
84 A mechanism for procedural issues is in particular needed. Two methods are provided by the
OECD-Commentary: the direct method or the refund method. The direct method results in
an automated application of e.g. reduced treaty rates. The refund method, however, entitles the
Source State to levy its domestic rate regardless of any potential reduction provided by the tax
treaty. The Source State must, as a consequence, provide a refund for the excess part of taxes
levied above the applicable treaty rates.43
85 It is ultimately the Source State’s domestic law that determines whether or not the tax liability
is reduced at source or eliminated.44 Connected therewith is also the obligation of the WHA to
withhold any taxes on payments made to a resident of the other CS. Should a relief at source be
39 Wassermeyer in Wassermeyer(2014),Art.1(para.38); Wassermeyer/Kaeser in Wassermeyer(2014),Art.3(para.11). 40 GER:BFH(29.01.1986); Wilke in Becker/Höppner/Grotherr/Kroppen(1997),Art.1(para.8); Tumpel in
Aigner/Kofler/Tumpel(2016),Art.1(para.7). 41 Lang(2013),30 and 35 et seqq. 42 Jaya, BIT(2016),1. 43 Pinto(2002),220 et seqq.; Kofler/Kuschil, ÖStZ(2003),225 et seq.; Jirousek/Loukota, ÖStZ(2005),335; Jaya,
BIT(2016),3. 44 2017 OECD-Commentary,Art.1(para.109).
46
provided domestically, then the WHA has no or a reduced withholding obligation. If, however,
a refund system is implemented in the domestic law of the Source State and taxation irrespective
of any limitations provided by tax treaties applies, then the WHA has to withhold taxes by virtue
of the Source State’s domestic law. Hence, the WHA may not rely on the treaty benefits of the
payee in order to be relieved of its duty of levying WHT.45
86 Ladar only faces the obligation to withhold taxes on payments effected to a resident of the other
CS. The DTC-TT only contains allocation rules. However, it does not eliminate the duty of
levying a WHT. Hence, only the domestic rules of Terrabrake could relieve Ladar of its duty
to levy WHT at a domestic rate. In Terrabrake’s domestic law, however, there is a duty to
withhold taxes on payments effected by residents or PE’s of non-residents to residents of other
states. Since no other domestic rule derogates from this withholding duty, the refund method
has to be applied. Thus, Ladar may not invoke treaty benefits directly, since its withholding
duty could only be eliminated by domestic law.
INTERIM CONCLUSION
87 The arguments above show that Ladar neither fulfills the personal scope of the DTC-TT nor is
entitled to invoke treaty benefits as a WHA. Therefore, the DTC-TT cannot be applied, which
results in taxation by virtue of domestic rules.
88 Consequently, a 20% WHT on outbound payments of royalties and fees for technical services
(hereinafter:FTS) to non-resident companies may be levied by Terrabrake.
SUBSIDIARY ARGUMENT: LADAR IS A RESIDENT OF
TERRABRAKE
89 Should the court consider Ladar resident in Terrabrake and the DTC-TT to be applied, it will
be demonstrated that Ladar is still obliged to withhold taxes pursuant to the interpretation of
the allocation rules stated hereinafter.
45 Jaya, BIT(2016),2 et seqq.
47
THE PAYMENT FOR THE KNOWLEDGE-TRANSFER-
AGREEMENT REGARDING THE CRANKSHAFT
THE PAYMENT CONSTITUTES ROYALTIES ACCORDING TO ART.12
DTC-TT
90 The payments made to Renolo for transferring information and technical documents on the
production of the crankshaft qualify as royalties according to Art.12 DTC-TT. It will be
demonstrated that this payment is not for the sale of IP rights, which is why Art.13 DTC-TT is
inapplicable. Consequently, Terrabrake is allowed to levy a WHT of 15% on these payments.
Definition of “Royalties”
91 Art.12 DTC-TT covers payments for royalties arising in a CS paid to a resident of the other
state. Whereas the Residence State of the recipient has the taxing right, the Source State is also
entitled to tax a certain amount. If the payee, however, is the beneficial owner (hereinafter:BO),
this WHT is restricted to 15%. A detailed examination of the term “beneficial ownership” will
be provided below (m.nos.95 et seq.).
92 Pursuant to Art.12(3) DTC-TT royalties are payments for the use of, or the right to use protected
IP, e.g. literary, artistic as well as scientific work or know-how.46 This enumeration is
exhaustive.47 As there is an autonomous definition of know-how in the treaty itself, domestic
law cannot be applied.48 However, domestic law is used for interpreting the different terms
listed in the paragraph, as those do not have a (full) autonomous definition in the DTC.49
However, in applying the domestic law, the interpretation must also take into consideration the
treaty context and, thus, the respective Commentary.50
46 2017 OECD-Commentary,Art.12(para.8). 47 Valta in Vogel(2017),Art.12(para.113). 48 Jiménez in IBFD(2017),Art.12(para.5.1.1.2.1.); Valta in Vogel(2017),Art.12(para.64). 49 Valta in Vogel(2017),Art.12(para.65). 50 Jiménez in IBFD(2017),Art.12(para.5.1.1.2.4).
48
93 The term “information concerning industrial, commercial or scientific (hereinafter:ICS)
experience” in Art.12(3) DTC-TT refers to the concept of know-how. Know-how can be
defined as information that is neither patented nor published to the general or professional
public, arises from previous experience and can be used for the operations of an enterprise in
a way that could result in commercial success.51 Therefore, payments for services designed to
bring new information into existence do not represent past experience and, thus, do not qualify
as know-how.52 Know-how is specific expertise, which means it is gained by persons in the
course of their activities.53 In order to use this know-how for one’s own business purposes, ICS
experience needs to be disclosed to the transferee.54 Another characteristic of a know-how
contract is that the grantor neither takes part in the application of the transferred know-how nor
guarantees the result thereof.55
94 Royalties could be seen as a form of business income to which Art.7 DTC-TT applies. However,
Art.7(6) DTC-TT includes a priority rule stating that Art.12 DTC-TT takes priority as the more
special rule.
Definition of “Beneficial Ownership”
95 Even though the term “beneficial ownership” (hereinafter:BOS) is not defined in the
UN-/OECD-MC, the OECD-Commentary provides a negative definition stating that the direct
recipient of the royalties is not the BO if he does not have the right of usage over the royalties.56
The term should have an autonomous treaty interpretation.57 Moreover, the concept of BOS
“should be understood in its context and in light of the object and purpose of the Convention,
including avoiding double taxation and the prevention of fiscal evasion and avoidance.”58
51 Loukota/Jirousek in Internationales Steuerrecht,I/1(29. Lfg),Art.12(para.83); 2017 OECD-
Commentary,Art.12(para.11); Valta in Vogel(2017),Art.12(para.160); Lan, BIT(2018),146 et seq. 52 Schwarz on Tax Treaties(2013),273; 2017 OECD-Commentary,Art.12(para.11). 53 Aigner D./Aigner H.-J/Buzanich in Aigner/Kofler/Tumpel(2016),Art.12(para.66); Valta in
Vogel(2017),Art.12(para.160). 54 2017 OECD-Commentary,Art.12(para.11.1); Valta in Vogel(2017),Art.12(para.160). 55 Heredia, ET(2005),106; 2017 OECD-Commentary,Art.12(para.11.1). 56 2017 OECD-Commentary,Art.12(para.4.3). 57 Du Toit(1999),236; UK:Court of Appeal(02.03.2006); DK:Landsskatteretten(22.12.2010); Tischbirek in
Vogel/Lehner(2015),Art.10-12(para.15); Vallada in Lang et al(2015),32. 58 Duff in Lang/Pistone/Schuch/Staringer/Storck(2013),1; 2017 OECD-Commentary,Art.10(para.12), Art.11(para.9),
Art.12(para.4).
49
96 The concept of BOS addresses constructions where entities in third countries try to benefit from
the treaty by interposing an intermediate company.59 The purpose of a treaty is not to grant
treaty benefits to agents, nominees or companies that merely act as conduit companies obtaining
income on behalf of another company.60 In this regard, various Courts held that BOS should be
determined from a substantive economic perspective based on the substance of the matter.61
97 For determining the BOS, it is necessary to assess who factually has the “full privilege” to
benefit from the income.62 This is, inter alia, the case when there is no obligation to pass on the
income received.63 This is why in most court decisions the key factor was whether there was
any (contractual) obligation to pass on the income.64 If such an obligation includes a direct
link between the income received and the amount forwarded, the intermediary is not the BO.65
98 Another factor concerns the amount of income received and passed on.66 In cases where the
exact amount of income received is forwarded, the intermediary does not have the “full
privilege” to benefit from the income and is not the BO.67 Even if the intermediary keeps a
small margin, the qualification as BO is not granted.68 The Spanish TEAC held that even if the
intermediary retains almost 20% of the income received, this will not necessarily lead to BO
status.69
99 Moreover, the predetermination and automatism of the flow of funds is regarded as another
indicator for denying BOS.70 In such cases, the intermediary is not the BO because it has no
free use and enjoyment of this income.71 What is more, the period between the receipt and the
59 OECD-Report,Beneficial Owner,2011. 60 Canete in Lang/Schuch/Staringer(2009),185; 2017 OECD-Commentary,Art.10(para.12.2.), Art.11(para.10),
Art.12(para.4.1). 61 UK:Court of Appeal(02.03.2006); CA:FCOA(26.02.2009); DK:Østre Landsret(20.12.2011); CH:TAF(07.03.2012). 62 UK:Court of Appeal(02.03.2006).
63 De Broe(2008),687. 64 US:Tax Court(05.08.1971); UK:Court of Appeal(02.03.2006); DK:Østre Landsret(20.12.2011);
DK:Landsskatteretten(22.12.2010); Gooijer, Intertax(2014),216; Jain/Prebble, BIT(2018),7. 65 Smit in Lang et al(2013),64 et seq. 66 UK:Court of Appeal(02.03.2006); Canete/Staringer in Lang/Schuch/Staringer(2009),188 et seqq. 67 UK:Court of Appeal(02.03.2006); Pamperl, SWI(2013),407. 68 Jiménez in Lang et al(2013),128 et seq. 69 ES:TEAC(28.09.2009). 70 CA:FCOA(26.02.2009); Arnold in Lang et al(2013),42; Hansen/Christensen/Pedersen, BIT(2013),196. 71 Canete/Staringer in Lang/Schuch/Staringer(2009),191 et seq; Pamperl, SWI(2013),408.
50
forwarding is crucial. The UK Court of Appeal denied the BOS of an intermediary because it
only held the income received for one day.72
Art.12 DTC-TT Is Applicable
100 The scope of Art.12 DTC-TT is fulfilled since the payments
• are made by a company (Ladar) resident in Terrabrake;
• to a company (Renolo) resident in Tyreland which is the BO, because Renolo
undoubtedly has the full privilege to directly benefit from the income (m.nos.95 et
seqq.);
• are to be considered as royalty payments.
This payment has to be subsumed under “information concerning ICS experience” according
to Art.12(3) DTC-TT for the reasons stated below.
101 Renolo’s business is “automotive research” and “development and improvement of the vehicle
production process”. Renolo has conducted this business since 1975 and therefore built up
significant know-how. All of this experience of Renolo’s engineers is contained in the
information, which is disclosed to Ladar. Furthermore, there is no indication that this know-
how is patented or divulged to the public. In addition, this know-how has practical application
in the operation of Ladar for improving the crankshaft. Consequently, this may lead to an
economic benefit for Ladar. Renolo, however, is neither required to contribute to the
application of the know-how nor does it guarantee the results thereof. According to the OECD,
if a customer is provided with undivulged technical information concerning a product, the
payments constitute royalties as they are made for the supply of know-how.73 For all these
reasons, the transfer of information and technical documents on the production of the crankshaft
is to be qualified as know-how.
102 Consequently, the payment for the crankshaft constitutes a royalty pursuant to Art.12 DTC-
TT.
72 UK:Court of Appeal(02.03.2006). 73 OECD-Report,E-Commerce,2001,Annex 2(para.33).
51
THE PAYMENT DOES NOT FALL UNDER ART.13 DTC-TT
103 The knowledge-transfer-agreement is not a transfer of full ownership of the IP and, therefore,
the payments are clearly not covered by Art.13 DTC-TT. The transfer of full ownership
inherently consists of a transfer of the exclusive ownership rights.
104 The Spanish Supreme Court explicitly deems know-how to be only within the scope of Art.12
in numerous decisions. The transferor cannot grant any exclusive right to know-how, as he still
retains and remembers the information even in the case of a “sale”.74 Thus, the transfer of know-
how can never result in alienation since there is no transfer of full ownership thereto.
105 Furthermore, the OECD-Commentary does not refer to “information concerning ICS
experience” when it comes to the distinctions drawn between alienation under Art.13 DTC-TT
and the “use-of/right to use” criterion for constituting royalties under Art.12 DTC-TT either.75
This is why know-how is just transferred and not sold.76
106 Should the Court not follow the previous argument, it will be shown that the payment for the
knowledge transfer does not fall under the definition of alienation.
Definition of “Alienation”
107 The term “alienation” is neither defined in the OECD-MC nor in the UN-MC. However, the
OECD-MC distinguishes between “the full ownership of an element” and “the use of, or the
right to use”.77 If e.g. all rights to an IP are granted exclusively to another party, this could be
seen as alienation.78 Despite making this distinction, the Commentary overall leaves much room
to manoeuvre on this point as it suggests that the classification of a transaction as an “alienation”
should be made on a case-by-case basis and relies to some extent on national law.79
74 ES:Spanish Supreme Court(02.04.2002),(14.05.2002),(19.12.2002); Heredia, ET(2005),107 et seq. 75 2017 OECD-Commentary,Art.12(para.8.2). 76 Heredia, ET(2005),108; Pöllath/Lohbeck in Vogel/Lehner(2015),Art.12(para.10a); Aigner D./Aigner H.-J/Buzanich
in Aigner/Kofler/Tumpel(2016),Art.12(para.71). 77 2017 OECD-Commentary, Art. 12 para. 8.2. 78 Ibid. 79 Ibid.
52
108 Since “alienation“ is not defined in the DTC-TT and no autonomous interpretation leads to a
satisfying result, reference has to be made to domestic law (m.nos.62 et seq.). Generally
speaking, there are certain common features that definitions of “alienation” have in common.
One characteristic of alienation is that a full permanent and exclusive transfer of ownership
rights is made.80 Another indicator for alienation is that there is no temporal limitation.81
Moreover, an alienation implies that the alienator has no right of disposition or right of use
anymore.82 A licence agreement, on the other hand, is characterised by the fact that the licensor
remains the owner of the property and retains important rights in respect of the property, while
the licensee is entitled to only a part of these rights.83
Art. 13 DTC-TT Is Not Applicable
109 The first indicator pointing towards treating the payments as a royalty is that the assigned rights
are limited by time, as the contract between Ladar and Renolo refers to a limited period of five
years. The Canadian Tax Court highlighted the importance of time limitations when
characterising royalties.84 Hence, a transfer limited by time is not an alienation.
110 Secondly, Ladar is allowed to use the know-how subject to a certain condition. Renolo only
authorises Ladar (or third parties entrusted by Ladar) to conduct research itself; however, in
this case, Ladar has to report those activities to Renolo. This indicates that Renolo can
terminate the contract unilaterally if Ladar does not respect these conditions. Obviously,
relevant property rights are retained by Renolo. As a result, Ladar has only a limited, not a full
right of disposal over the IP.
111 Consequently Art.13 DTC-TT is not applicable.
112 Therefore, this transfer of know-how can only be classified as royalties and, thus, fall under
Art.12 DTC-TT.
80 Valta in Vogel(2017),Art.12(para.88). 81 AUT:VwGH(24.11.1987); GER:BFH(23.04.2003); Wassermeyer in Wassermeyer(2011),Art. 12(para.11); Valta in
Vogel(2017),Art. 12(para.90). 82 AUT:VwGH(24.11.1987); Heredia, ET(2005),108. 83 Heredia, ET(2005),108. 84 CA:Canadian Federal Court(1962),(05.09.1975); ATO(27.08.2008),para.129 et seq.
53
INTERIM CONCLUSION
113 For all these reasons, the payment made by Ladar to Renolo with respect to the crankshaft is
taxed at source in Terrabrake, since it constitutes royalties under Art.12 DTC-TT. As a
consequence, Terrabrake is entitled to levy a WHT of 15%.
54
THE PAYMENT FOR THE “BYC”-DATABASE AND TRAINING
OF LADAR’S EMPLOYEES
114 Ladar’s payment for the “BYC”-Database and the training of its employees has to be considered
uniformly and, thus, is as a whole royalty income under Art.12 DTC-TT. As such, it is subject
to WHT in Terrabrake. Should the Court not follow this view, the payments will be split. The
payment for the “BYC”-Database would still fall under Art.12 DTC-TT and the payment for
the training under Art.12A DTC-TT. Thus, Terrabrake retains the right to levy a WHT of 15%
on the whole payment.
THE PAYMENT FOR THE “BYC”-DATABASE
Art.12 DTC-TT Applies
115 The payment for the database fulfils the requirements of Art.12 DTC-TT, since the payments
• arise in Terrabrake because the payor (Ladar) is a resident therein;
• are paid to Renolo, a resident company of Tyreland, which is the BO, because it
undoubtedly has the full privilege to directly benefit from the income (m.nos.95 et
seqq.);
• are to be considered royalty payments.
116 Upon closer examination of the term “royalties” (m.nos.91 et seqq.), the database has to be
subsumed under one of the IP listed in the catalogue under Art.12(3) DTC-TT.85 According to
the Vogel-Commentary, a “compilation of databases” falls under “related rights”. This type of
rights falls under the ambit of “Copyright of Literary, Artistic or Scientific work”.86
117 The database is ultimately regarded as copyright if the data contained therein and its cross-
linking fulfil a minimum threshold of creativity.87 The “BYC”-Database’s purpose is to provide
technical solutions to problems regarding the production of cars. Practical problems and
85 Valta in Vogel(2017),Art.12(para.113 et seqq.); Falcão/Michel, BTR(2018),432. 86 Ibid. 87 ES:TEAC(15.02.2007); Valta in Vogel(2017),Art.12(para.129).
55
potential solutions are continuously fed into the database. This database goes beyond simply
providing data – it prepares and structures complex data pertaining to the production of cars
and provides the user with information on potential solutions. Therefore, the database is to be
regarded as copyright and, hence, the payments for access as royalties.
118 In addition, the payments are received for the use of information concerning ICS experience.88
The question arises whether know-how is involved in this particular transaction regarding the
“BYC”-Database.
119 The definition of “know-how” (m.no.93) is fulfilled. The information that is fed into the “BYC”-
Database by Renolo is not divulged to the general or professional public, since only selected
clients have access. Furthermore, there is no indication that the information contained in the
database has already been published.
120 Another important fact is whether the information transmitted was specifically generated
(m.no.93). The information provided to Ladar is not new information resulting from performing
services at the request of the payer. Rather, it is information based on experience and
expertise. The database is constantly updated and fed with new information. However, those
updates are not a result of any request made by Ladar.
Interim Conclusion
121 To sum up, Art.12 DTC-TT is the only article applicable to the payments regarding the
“BYC”-Database. Consequently, Terrabrake may levy a 15% WHT on this payment.
THE PAYMENT FOR THE TRAINING OF LADAR’S EMPLOYEES
122 Our following argumentation is built on the assumption that the payments for the database-
access and for the training are not separable. Should the Court deem both payments to be
separable and to fall under the ambit of different distributive rules, the payment for the training
falls only under the ambit of Art.12A DTC-TT.
88 ES:TEAC(15.02.2007); 2017 UN-Commentary,Art.12A(para.12); Lan, BIT(2018),146.
56
Art.12 DTC-TT Applies
123 The question of a possible categorization as a “mixed contract” arises when it comes to the
training. According to Vogel,89 elements of an IP can be mixed with other elements, e.g. related
complementary services. Each element of the contract has to be analysed individually and
characterised according to its object and function. Accordingly, each element is taxed based on
this characterisation. Should, however, one element predominate by “constituting by far the
principal purpose of the contract” while the other is “of ancillary and largely unimportant
character”, then only what is considered to be the principal purpose of the contract is taken into
consideration for the classification.90
124 Since the database is not accessible to everyone, the training is necessary as user knowledge is
otherwise not available to Ladar. The purpose of this training is to convey know-how in order
to access and use the database in the best and most efficient way possible. The accessibility and
the usability are therefore dependent on the user-skills of Ladar’s employees. If the employees
did not have this specific knowledge, they would not be able to use the database efficiently.
125 The provision of the access to the database constitutes “one of the principal purposes of the
contract”, since the know-how contained therein has to be made accessible to Ladar. The
payment for the training is of “ancillary character”, as the training would be useless without
access to the database. Therefore, the payment for the training falls under the same distributive
rules as the payment for the “principal purpose of the contract”. Since the payment for the
database-access falls under Art.12 DTC-TT, the same must apply for the payment for the
training.
Subsidiary Argument: Art.12A DTC-TT Applies
126 Should the Court consider that the payments have to be separated, we will show that the
payment for the training falls under the ambit of Art.12A DTC-TT. The application of Art.12A
DTC-TT results in a taxing right of Terrabrake of 15% WHT on this payment.
89 Valta in Vogel(2017),Art.12(para.163 et seqq.). 90 Valta in Vogel(2017),Art.12(para.164 et seq.); Falcão/Michel, BTR(2018),431, AT:UFS(10.06.2003).
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The Payment for the Training Is Covered by Art.12A DTC-TT
127 With respect to both Art.7 and Art.14, Art.12A DTC-TT prevails unless the payee either has a
PE or a fixed base in the Source State. Neither is the case.
128 Moreover, the scope of Art.12A DTC-TT is different from that of Art.12 DTC-TT, because
performing TS does not include the transfer of the use of, or the right to use property.
129 The requirements for FTS pursuant to Art.12A(1) DTC-TT are that
• the payment must stem from FTS,
• arise in one CS, and
• is made to a resident of the other CS.
130 A definition of the term FTS is contained in Art.12A(3) DTC-TT according to which it covers
“any payment in consideration for any service of a managerial, technical or consultancy
(hereinafter:MTC) nature”.91 According to the ordinary meaning of the terms MTC, the
services have to include the application of specialised knowledge, skill or expertise on behalf
of the client, or the transfer thereof to the client, whereas the transfer of information is covered
by Art.12(3) DTC-TT.92
131 The term “technical” includes any application of specialised knowledge, skill or expertise with
respect to a particular art, science, profession or occupation. Thus, services provided by
regulated professions (e.g. engineering) fall under the definition of FTS.93
132 The ordinary meaning of “consultancy” comprises the provision of advice or services of a
specialised nature. In some cases, consultancy services may also be considered activities that
are of a “managerial or technical nature”.94 There is an overlap between all three terms.
However, as long as a service falls under one of these three terms, the result remains the same,
namely that the service in question falls within the ambit of Art.12A(3) DTC-TT.95
91 Falcão/Michel, BTR(2018),427 et seq.; 2017 UN-Commentary,Art.12A(para.62). 92 Ibid. 93 Falcão/Michel, BTR(2018),428. 94 Ibid. 95 2017 UN-Commentary,Art.12A(para.67 et seq.).
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133 The term “services” is neither defined in Art.12A DTC-TT nor in any other distributive rule.
In this case an autonomous interpretation is required, as it is required by the context (m.nos.62
et seq.). A broad interpretation of this term is necessary. It should include activities that are
carried on by one person in order to benefit another person paying a fee in consideration. What
is more, the character of the payments as FTS is not altered by the variety of possibilities and
the manner in which the services are provided.96
134 Art.12A(2) DTC-TT explicitly states that FTS apply “notwithstanding the provisions of Article
14”. Therefore, if a payment fulfils the ambit of both Art.12A and Art.14, then Art.12A DTC-
TT takes precedence over Art.14 DTC-TT.97
135 Art.12A(3) DTC-TT limits the above-mentioned definition of FTS by listing payments which
do not fall within its ambit. If the payment is made “(a) to an employee of the person making
the payment; (b) for teaching in an educational institution or for teaching by an educational
institution; or (c) by an individual for services for the personal use of an individual”, Art.12A
DTC-TT is inapplicable.98
136 Art.12A(3)(b) DTC-TT expressly states the irrelevance of payments for teaching in an
educational institution. The provision, however, gives no definition of “educational
institution”. According to the UN-Commentary the meaning comprises universities, colleges,
and other post-secondary educational institutions. 99 The US Tax Court100 ruled that the purpose
of an “educational organisation” is to provide educational activities. Should the institution also
conduct other activities, so-called “non-educational activities”, then the latter should be merely
incidental. Any payments conducted to those aforementioned institutions are not FTS.
137 The payments for the training services are FTS. The trainers sent by Renolo are experts on the
database sharing and thus, making available, their specialised expertise. The training
concentrates on how to make the most of the database for the car-boats, although the “BYC”-
Database contains information regarding the production of cars more generally. As a result,
96 Sixdorf/Leitsch, ET(2017),236; Falcão/Michel, BTR(2018),429. 97 2017 UN-Commentary,Art.12A(para.64). 98 Falcão/Michel, BTR(2018),429. 99 2017 UN-Commentary,Art.12A(para.70). 100 US:Tax Court(28.06.2017).
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Ladar’s employees will be able to determine the information needed for the production of car-
boats and make efficient use of the database.
138 Renolo provides training courses and is entitled to issue an “Official Certificate of Expert in
Motors”. Nevertheless, Renolo cannot be deemed a university, a college or any other post-
secondary educational institution. Such institutions have a broader educational goal, offer
several classes on a broad range of subjects over a longer period of time and equip students
with general knowledge. In contrast, Renolo offers specialised technical trainings over a short
period of time. This is not altered by the fact that Renolo issues certificates. Even though
Renolo is entitled to do this, the conclusion does not change because these are truly targeted,
specialised certificates unlike degrees from universities and similar institutions. As a result,
Renolo cannot constitute a “post-secondary education institution” since no substantial
educational activities are provided.
139 Moreover, Renolos non-educational activities far exceed its training activities and, thus, cannot
be considered “incidental to” the educational activities. After all, education is not the
company’s primary corporate object. This is also indicated by the amount of money Renolo
receives for the training which is merely $50,000, whereas the payment for the transfer of know-
how regarding the crankshaft is $300,000. Thus, the non-educational activities obviously are
not incidental to the educational activities and Renolo cannot be regarded as an educational
institution for tax treaty purposes. The fact that Tyreland acknowledges Renolo’s activities and
entitles them to issue a Certificate for courses held cannot change this view.
140 From the above, it can be concluded that, if the payments for the training services were to be
regarded separately from the payments for access to the database, the payments for the training
would unquestionably fall under Art.12A DTC-TT.
INTERIM CONCLUSION
141 In conclusion, the payments for the database and for the training provided to Renolo’s
employees are royalty payments under Art.12 DTC-TT. The training services are only of
ancillary character. Should the Court disagree on this point, then the payments for the training
fall within the ambit of Art.12A DTC-TT.
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142 In either case, by applying Art.12 or Art.12A DTC-TT, a source taxing right is allocated to
Terrabrake. This source taxing right entitles Terrabrake to levy a 15% WHT.
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THE PAYMENTS WITH RESPECT TO THE SALAMANDER’S
APP
143 The payments for the Salamander’s App are not covered by the DTC-TT, because RenoloApps,
which is a resident of CI, is the BO of the payments. Moreover, those payments are royalties
which are inseparable and, thus, must be considered as one uniform whole. Therefore, the
payments are subject to a 20% domestic WHT in Terrabrake.
144 Should, the Court consider Renolo to be the BO of the payments, these fall within the scope of
Art.12 DTC-TT and Terrabrake may levy a 15% WHT.
RENOLO IS NOT THE BENEFICIAL OWNER OF THE ROYALTIES
145 According to the criteria explained above (m.nos.95 et seqq.), Renolo cannot be considered the
BO because the requirements for BOS are not fulfilled.
146 In casu, RenoloApps is a wholly-owned subsidiary of Renolo incorporated in CI. Renolo
receives the payment from Ladar and transfers 90% of the payment to RenoloApps. Hence,
Renolo acts as an interposed company that passes on passive income under a contractual
obligation. Renolo has only narrow powers in respect of this passive income, meaning it is not
free to decide how to use that income as it must pass it on to RenoloApps.
147 What is more, RenoloApps is specialised in programming application software while Renolo is
not involved in this business at all. Therefore, RenoloApps is the owner of the copyrights of
the software, whereas Renolo’s only task is to collect royalties and deliver them to the owner
of the copyright. The Spanish TEAC stated that companies merely managing copyrights are not
the BOs of the royalty and, thus, not entitled to the treaty benefits.101
148 Considering the amount forwarded, it is obvious that Renolo cannot be the BO of the royalty
income. Firstly, the amount forwarded to RenoloApps is 90% of the payment. Thus, Renolo
keeps only a small margin and does not have the full privilege to directly benefit from the
income it receives. Moreover, the amount payable is fixed by agreement at 10% on all proceeds
101 ES:TEAC(22.09.2000).
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obtained, stipulating a predetermined and automatic flow of funds. Regarding the holding
period, Renolo immediately transfers 90% of the income to RenoloApps and, thus, has no
control over the income.
149 As a consequence, Renolo does not have the right to use and enjoy the royalty income received
from Ladar and is therefore not the BO of the income.
ABUSE OF THE DTC-TT AS RENOLOAPPS IS THE BENEFICIAL
OWNER OF THE ROYALTIES
150 Even if the Court comes to the conclusion that Renolo is the BO, it cannot be denied that the
structure as such is abusive and was created only to avoid the 20% WHT in Terrabrake.
151 The clear goal of the concept of BOS is its function as anti-treaty shopping device.102 It is also
essential to consider the GAAR in Art.29 DTC-TT for counteracting treaty shopping.
152 According to Art.29 DTC-TT, an arrangement or a series of arrangements “having been put
into place for the main purpose or one of the main purposes of obtaining a tax advantage that
defeats the object or purpose of the relevant provisions of this Convention, are not genuine
having regard to all relevant facts and circumstances.” The following terms have to be
interpreted in order to construe Art.29 DTC-TT:
• Firstly, the term “arrangement” needs to be interpreted broadly and, thus, could be any
kind of agreement, understanding, or transaction, regardless whether they are legally
binding or not.103
• Secondly, the “main purpose” or “one of the main purposes” is gaining a “tax
advantage”.
• Lastly, this tax advantage, or benefit, needs to be achieved through the arrangement.
153 In the case at hand, the arrangement is the general agreement between Renolo and RenoloApps
icw the contract between Renolo and Ladar. Although Renolo has economic substance and
business functions, the inclusion of Renolo in this particular transaction has the same effect as
102 Jiménez in Lang et al(2013),130. 103 OECD-Report, Action 6,57.
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setting up a conduit company in Tyreland. It would have been economically sensible to directly
conclude a contract between Ladar and RenoloApps. This would have even resulted in a saving
of the 10% fee paid to Renolo. This indicates that this transaction has no valid economic or
business purpose.
154 In order to illustrate the tax advantage obtained by RenoloApps, one must consider the
differences in the tax burden. Without this structure, the royalty payment from Ladar to
RenoloApps would be taxed at a 20% WHT in Terrabrake. With this structure, the application
of the DTC-TT results in a reduced WHT rate of 15%.
155 As a consequence, even if the Court is of the opinion that Renolo is the BO of the royalties, the
transactional structure as a whole is abusive and was set up with the sole purpose of allowing
RenoloApps to reduce taxes through unduly obtaining benefits under the DTC-TT.
INTERIM CONCLUSION
156 To conclude, since RenoloApps is the BO of the payment and resident in CI, the benefits of
the DTC-TT must be denied. Renolo only serves as an intermediary for RenoloApps to benefit
from Art.12 DTC-TT. As the main purpose of the BOS concept as well as the GAAR is to
prevent treaty shopping and one of the main purposes of this arrangement is to obtain a tax
advantage, the Court must deny the entitlement to treaty benefits regarding this payment.
THE PAYMENTS WITH RESPECT TO THE SALAMANDER’S APP ARE
COVERED BY ART.12 DTC-TT
157 Should the Court deem Renolo to be the BO, we will show that the payment regarding the
Salamander’s App is covered by Art.12 DTC-TT.
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The Definition of “Software”
158 The question arises whether software falls under the ambit of Art.12 DTC-TT. The OECD-
Commentary deals with the term “software” in detail104 stating, inter alia, that rights in
computer programs are a form of IP.105 According to literature and the OECD-Commentary,
the suggested treatment for software is under the category of “scientific” work.106 García points
out that even if software would not fall under the three categories (literary, artistic, scientific)
cited in Art.12, it is still protected by copyright law in another way because it falls within the
ambit of the royalty concept.107
159 Software can be defined as the result of mental human labour developed into a program legible
to computers.108 As such, software is “a program, or series of programs, containing
instructions for a computer” and can either be classified as operational software or as
application software.109 Application software, as compared to operational software, is aimed
at performing a specific function dictated by the user.110 Application software can be sub-
divided into standardised software with a wide range of applications and tailor-made
software.111
160 In order to characterise the payments for the software, one must look at the nature of rights
transferred, in particular considering the use and exploitation of the software.112 As most
software needs to be copied onto a hard drive for its use, the right of copy is, thus, essential for
its operation.113 As those rights merely allow to operate the software, such payments would still
be covered under Art.7 DTC-TT.114 Consequently, the mere right of use does not fall within the
ambit of Art.12.115
104 2017 OECD-Commentary,Art.12(para.12-17.4). 105 2017 OECD-Commentary,Art.12(para.12.2). 106 Ault, ET(1993),331; Tumpel in Gassner/Lang/Lechner(1994),163; Kessler, IStR(2000),99; 2017 OECD-
Commentary,Art.12(para.13.1). 107 Heredia, BIT(2005),227 et seq. 108 Van der Laan, Intertax(1991),267. 109 Ibid; 2017 OECD-Commentary,Art.12(para.12.1). 110 Van der Laan, Intertax(1991),267. 111 2017 OECD-Commentary,Art.12(para.12.1). 112 2017 OECD-Commentary,Art.12(para.12.2). 113 Kessel, IStR(2000),102; Valta in Vogel(2017),Art.12(para.167). 114 2017 OECD-Commentary,Art.12(para.14). 115 Van der Laan, Intertax(1991),268; Pinto Nogueria in Lang et al(2013),204; Bal, BIT(2014),518.
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161 On the other hand, if additional rights beyond those necessary for the basic operation of the
software are granted, e.g. the rights of reproduction, distribution, modification or public
displaying, such payments fall under Art.12.116
162 Payments for a tailor-made software are often considered royalties because the client is more
likely to receive an extended copyright for e.g. individualising or modifying the software.117
Wassermeyer even states that the assignment of tailor-made software always falls under the
ambit of Art.12.118
Art.12 DTC-TT Applies
163 The scope of Art.12 DTC-TT is fulfilled since the payments
• are made by a company (Ladar) resident in Terrabrake;
• to a company (Renolo) resident in Tyreland which is the BO, because it undoubtedly
has the full privilege to directly benefit from the income (m.nos.95 et seq.);
• are to be considered as royalty payments.
The payment for the Salamander’s App has to be subsumed under “copyright of literary, artistic
or scientific work” according to Art.12(3) DTC-TT for the following reasons.
164 The Salamander’s App is an application software and its use is limited to the car-boats
produced by Ladar. It is nearly impossible for any other producer of car-boats to use the
software because the app is tailored to Ladar’s systems. The use for other car-boat producers
would entail amendments to the app. Moreover, the fact that the name of the app contains the
name of Ladar’s products (Salamander’s App) leads to the conclusion that the app was
specifically tailored according to Ladar’s wishes. Obviously, not only the functions of the app
(collection of crankshaft data), but also the interface thereof (especially its name and the
integrated customer relations option) are customised to the specific needs of Ladar’s car-boats.
These facts indicate that the app was designed to meet Ladar’s needs.
116 Heredia, ET(2006),37; 2017 OECD-Commentary,Art.12(para.13.1). 117 Bendlinger, VWT(2017),242; Valta in Vogel(2017),Art.12(para.172). 118 Wassermeyer in Wassermeyer(2011),Art.12(para.63).
66
165 What is more, Ladar is granted copyrighted rights in addition to the rights necessary for the
basic operation of the software, namely the right to distribute the app. This transfer of IP rights
even has the aim of a commercial exploitation of the program.119 Salamander’s App provides
data to Ladar’s customers regarding technical information, in addition to providing a
community platform and communication channel, which enables Ladar to use the app
commercially. Moreover, the ability to communicate with customers and the creation of a
community fosters a strong emotional connection between the consumers and the brand, thus
enhancing the value of Ladar’s brand. The contract between Ladar and Renolo enables Ladar
to distribute and market the underlying IP of Renolo. Ladar necessarily has rights to Renolo’s
copyrights, otherwise its use and in particular the distribution of the app would constitute an
infringement of copyright. This view is supported by the Australian Federal Court in a case
regarding a software license agreement in the computer industry. The Court held that “the use,
distribution and marketing of programs […] require that the rights granted […] include […]
copyrights [...].”120 The above-mentioned indicators undoubtedly imply that payments for
Salamander’s App are royalty payments.
INTERIM CONCLUSION
166 As has been conclusively shown, the payment regarding Salamander’s App is a royalty
payment falling within the scope of Art.12 DTC-TT. Hence, a 15% WHT may be levied in
Terrabrake.
THE PAYMENT FOR THE USE OF THE SERVER AND THE REPORTS
167 The payments for the Salamander’s App, the monthly reports and using the server are one unit
and, thus, the whole consideration falls under the ambit of Art.12 DTC-TT.
119 Ledesma/González-Cotera, ET(2000),277; AUT:EAS(30.06.2003); Heredia, BIT(2005),230; PT:Supreme
Administrative Court(02.02.2011); Pinto Nogueria in Lang et al(2013),195. 120 AUS:Australian Federal Court(12.04.2011); Cooper in Lang et al(2013),218 et seqq.
67
168 In general, mixed contracts consisting of e.g. hardware and software components as well as
services, have to be split up and qualified differently.121 The methods set out above (m.no.123)
are equally applicable to mixed computer software contracts.
169 Pursuant to the facts of the case, a server is provided in order to keep the Salamander’s App
working properly. The purpose of the server is of ancillary character as it is needed merely for
the proper operation of the software. The reason for entering the contract was clearly the
transfer of copyrights to the app. The German Federal Fiscal Court deems the consideration in
mixed software contracts as royalties if the transfer of copyrights is the dominant contractual
element.122 The only exception to this rule is where the consideration for the transfer of the
copyright is less than 10% of the total compensation.123 As in casu the object of the transaction
is the acquisition of rights to use the digital content rather than rights to use the tangible
medium and additionally the consideration for the app constitutes 45% of the total
compensation, the whole payment needs to be classified as a royalty payment. As a result, the
server is an integral part of the software and obtains the same legal treatment as the software.
170 With respect to the monthly reports, it is important to note that a characteristic feature of an
app is the collection and processing of user-generated personal data. Thus, the data generated
by the app is undoubtedly of greater value to Ladar than the reports compiling and evaluating
it. Therefore, these reports are only of an ancillary character, despite being closely linked to
the Salamander’s App. Another very important indicator is both the level and the nature of the
expenditure.124 The majority of contracts regarding services involve a great level of
expenditure and often require the contractor to pay for expenses such as the salaries of the
employees involved. In casu, the contract regarding the Salamander’s App neither includes a
great level of expenditure for the reports nor involves paying salaries for Renolo’s employees.
The reports are already comprised in the lump sum payment for the Salamander’s App and not
priced separately. As a consequence, the monthly reports written by Renolo’s engineers only
constitute an ancillary element. Thus, the treatment that applies to the principal part applies to
the whole amount of the consideration.
121 Valta in Vogel(2017),Art.12(para.173). 122 GER:BFH(19.12.2007); GER:BMF(27.10.2017),8. 123 GER:BFH(28.01.2004). 124 OECD-Report,E-Commerce,2001(para.21).
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SUBSIDIARY ARGUMENT: THE PAYMENTS PERTAINING TO THE
SALAMANDER’S APP ARE TO BE REGARDED SEPARATELY
171 Should the Court consider all three elements of the contract separately, it will be argued that
the payment for the Salamander’s App as well as the payment for the server fall within Art.12
while the payment for the reports falls under the ambit of Art.12A DTC-TT.
The Payment for the Use of the Server Is Covered by Art.12 DTC-TT
172 According to Vogel125 “contracts that include specific servers, storage mediums or other
equipment that can be physically accessed and individually and exclusively controlled by the
customer, typically qualify as a lease of equipment”. Hence, such payments fall within the
meaning of royalties because Art.12(3) DTC-TT includes payments “for the use of, or the right
to use, industrial, commercial, or scientific equipment”. Since the 1992 OECD-MC, income
from the leasing of ICS equipment falls under Art.7 OECD-MC. 126 However, ICS equipment
is still explicitly included in Art.12 UN-MC.
173 Art.12(3) UN-MC applies to situations in which the owner of the equipment leases it to another
party which uses it for its own purposes.127 The UN-Commentary states that it is in the nature
of equipment to be used in the performance of a task.128 However, IP and immovable property
are not covered by the term “equipment”.129 Consequently, tangible assets which can be used
industrially, commercially or scientifically can constitute ICS equipment.130
174 The OECD- and UN-Commentary indicate that a leasing contract maintains its “leasing”-
character even if “the lessor supplies personnel after installation to operate the equipment,
provided that their responsibility is limited solely to the operation or maintenance of the ICS
125 Valta in Vogel(2017),Art.12(para.107). 126 Wassermeyer in Wassermeyer(2011),Art.12(para.84); Jiménez in IBFD(2017),Art.12(para.5.1.6.1). 127 2017 UN-Commentary,Art.12(para.13.1). 128 Ibid. 129 Wassermeyer in Wassermeyer(2011),Art.12(para.84); 2017 UN-Commentary,Art.12(para.13.1). 130 Sauer in Gassner/Lang/Lechner(1994),181 et seq.
69
equipment under the direction, responsibility and control of the lessee”.131 Pursuant to the
OECD, the crucial factors that indicate “leasing” are, inter alia, the following:132
a) the customer is in physical possession of the property,
b) the customer controls the property,
c) the customer has a significant economic or possessory interest in the property.
Howbeit the OECD also states that the list is non-exclusive and some factors may not be
relevant in certain cases.133
175 However, a UN-Report states that the requirement of physical possession of the equipment
for “using the equipment” is not necessary because the ability to control the equipment is often
sufficient.134 Thus, this means that even if the payer is not the one physically operating the
equipment, such payments are royalties under Art.12 UN-MC as long as the payer uses the
capacity of the equipment in some way (e.g. cloud computing with servers controlled by another
company).135 Also Chinese Courts took this approach.136
176 Renolo provides one server dedicated for Ladar. A server is tangible computer equipment
(hardware). It is used for the performance of the software, namely by supplying storage for the
data regarding the car-boats and, thus, providing a seamless circuit for the use of the software.
Therefore, the server can be considered as ICS equipment. Ladar can operate the software
remotely via the server. The server space can be utilised from anywhere and no physical access
or control is required. What is more, it is clear that Ladar has the exclusive right to use all the
facilities of that server. Hence, in essence, the consideration is for granting the right to use the
server.
177 Consequently, the payments made by Ladar to Renolo are for the use of the server and
therefore are royalty payments. Hence, these payments fall within the ambit of Art.12 DTC-
TT.
131 2017 OECD-Commentary,Art.5(para.36). 132 OECD-Report,E-Commerce,2001,Annex 2(para.28). 133 Ibid. 134 UN-Report,2016,Annex I(paras.23-38); Jiménez in IBFD(2017),Art.12(para.5.1.6.2.3). 135 Jiménez in IBFD(2017),Art.12(para.5.1.6.2.3). 136 CN:Higher People’s Court of Beijing(20.12.2002).
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Art.12A DTC-TT Applies to the Contractual Element Regarding the Monthly Reports
178 The monthly reports elaborated by Renolo’s employees are TS and, thus, fall under the ambit
of Art.12A DTC-TT due to the following reasons.
179 Pursuant to the facts of the case, the service provided by Renolo is to create reports out of the
data generated through the app. TS have to include the application of specialised knowledge,
skill or expertise by the service provider on behalf of the client.137 Providing descriptive
technical reports elaborated by engineers involves the exercise of special skill or knowledge.
Renolo’s engineers are experts and add significant value in terms of content. They have
specialised IT know-how, which they apply on behalf of Ladar. Hence, Renolo uses its
employees’ skills to generate the reports.138
180 Under the given facts, it is clear that the monthly reports provided by Renolo fall under
Art.12A DTC-TT, if they were to be regarded separately.
INTERIM CONCLUSION
181 The payments for the Salamander’s App (including the monthly reports) and for the use of
the server must be considered inseparable and, therefore, are uniformly regarded as royalty
payments pursuant to Art.12 DTC-TT. Should the Court regard the elements of the contract
separately, the payment regarding the use of the server falls within the ambit of Art.12(3) DTC-
TT, whereas the monthly reports are covered by Art.12A DTC-TT. In either constellation, a
15% WHT may be levied by Terrabrake.
137 2017 UN-Commentary,Art.12A(para.62). 138 Van der Bruggen, APTB(2001),51.
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THE PAYMENT TO MR. FIXER
182 The service provided by Mr. Fixer falls under the purview of Art.12A DTC-TT. The payment
does not fall under Art.12A(3)(a) DTC-TT. What is more, Art.12A(7) DTC-TT is not
applicable, and, thus, the payment is still covered by Art.12A DTC-TT. Should the Court not
follow our argument on the inapplicability of Art.12A(7) DTC-TT, we will demonstrate that
Art.21(3) DTC-TT applies and Terrabrake may levy a WHT on the payment.
ART.12A DTC-TT APPLIES
183 The payment to Mr. Fixer is FTS pursuant to Art.12A DTC-TT, since the payment
• arises in Terrabrake because the payor (Ladar) is a resident therein;
• is paid to Mr. Fixer, resident in Tyreland who is the BO because he has the full privilege
to directly benefit from the income;
• is to be regarded as FTS.
184 It can be concluded that Mr. Fixer provides services of a technical and/or consultancy nature.
He uses specialised knowledge, skill or expertise with respect to his profession. He has been an
engineer for many years and is trained in the construction of crankshafts and provides
suggestions to improve the construction of the crankshaft. For the reasons above, the services
that are provided by Mr. Fixer regarding the incident are of a technical and/or a consultancy
nature.
185 The payments are made “in consideration for any service of a MTC nature”. As is stated in the
definition of FTS in Art.12A(3) DTC-TT, the payments have to be “in consideration” for the
services rendered by Mr. Fixer. The purpose of the payment made by Ladar is to reimburse Mr.
Fixer’s costs incurred for the travel to Terrabrake to perform his services. Moreover, it cannot
be assumed that Ladar would have remunerated the costs for any other reason. Hence, the
payment made by Ladar is “in consideration” for the services generated.
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186 Regarding the qualification of “reimbursements” as “fees”, it has to be stated that the term
“reimbursement” is dealt with in the UN-Commentary139. The UN-Commentary states that
“unless reimbursements are explicitly excluded from the definition of “fees for technical
services”, paragraph 2 would permit the State in which the fees arise to impose withholding
tax on the reimbursement …”.140 Therefore, in absence of an explicit declaration that the States
exclude reimbursements from the scope of FTS, the CS are permitted to take reimbursements
into consideration.141 Under the current DTC-TT, there is no such explicit exclusion to
Art.12A(3). Accordingly, reimbursements fall under the definition of FTS in Art.12A(3) DTC-
TT.
187 It has to be noted that Mr. Fixer not only receives a reimbursement of travel costs, but in
addition is reimbursed for various forms of entertainment. Hence, those expenses are in no
way related to the work performed and therefore clearly represent private spending. A
reimbursement of private spending can be compared to monetary considerations. This implies
that the payments are not mere reimbursements, but are consideration for the services rendered.
ART.12A(3)(A) DTC-TT DOES NOT APPLY
188 Pursuant to Art.12A(3)(a) DTC-TT “the term ‘fees for technical services’ … means any
payment in consideration for any service …, unless the payment is made to any employee of the
person making the payment”. As soon as an employment relationship between the payer and
the person performing the services can be constituted Art.12A DTC-TT is not applicable.142
189 The DTC-TT and the OECD-MC contain no definition of “employment” – but it clearly has to
be distinguished from “independent personal services” and “business profits”.143 Therefore, an
autonomous interpretation, instead of referring to domestic law, has to be carried out since the
context requires otherwise (m.nos.62 et seq.).
139 2017 UN-Commentary,Art.12A(para.74 et seqq). 140 2017 UN-Commentary,Art.12A(para.76). 141 Ibid. 142 2017 UN-Commentary,Art.12A(para.69). 143 De Broe in Vogel(2017),Art.15(para.84 et seqq.).
73
190 The term “employment” can be defined as services rendered by an employee for an employer
by making available his ability to work and submitting himself to the authority and direction of
the employer for the purposes of performing the services.144 Therefore, the degree of economic
and personal independence with respect to the accomplishment of the employee’s task is
essential.145 Accordingly, if a relationship involves the subordination of the employee to the
employer, this is clearly a dependent relationship and, thus, points towards employment.146
191 Mr. Fixer is an engineer working for 20 years for Renolo as an employee (m.no.26). He was
sent to Ladar’s production plant for one week. Obviously, the only employment relationship
that exists is the one between Mr. Fixer and Renolo. An employment relationship with Ladar
cannot be assumed as there is no economic and personal dependence of Mr. Fixer on Ladar.
192 Under the facts of the case, it is evident that Art.12A(3)(a) DTC-TT does not apply, since the
payment effected by Ladar is not made “to any employee”.
THE PAYMENT TO MR. FIXER IS NOT COVERED BY ART.12A(7)
DTC-TT
193 What is more, Art.12A(7) DTC-TT does not apply since there is no special relationship between
Ladar and Mr. Fixer.
194 Art.12A(7) DTC-TT applies when two conditions are fulfilled. The first is a special
relationship between the payer and the BO or between both of them and some other
person. The second is that the payment is excessive compared to a situation where such a
relationship does not exist. 147 If those conditions are fulfilled, Art.12A(7) DTC-TT applies to
the excessive part. Therefore, any excess over the “arm’s-length-payment” is taxed “according
to the laws of each Contracting State, due regard being had to the other provisions of this
144 Pezzato in Hohenwarter/Metzler(2009),55 et seqq. 145 Ibid. 146 Ibid. 147 2017 UN-Commentary,Art.12(para.128); Jiménez in IBFD(2017),Art.12A(para.3.2.2.3.2. et seq.).
74
Convention”. Furthermore, the exact nature of the excessive part needs to be ascertained in
order to recharacterise the payment to place it under another category of income.148
195 The concept of “special relationship” is based on the concept of “affiliated companies” in
Art.9 DTC-TT. Therefore, the UN-Commentary cites examples such as “legal persons” or
“individuals” who directly or indirectly control the payer.149 Often such relationships are
established by a participation in the capital, control or management of a company.150 However,
according to opinions in literature the concept of “special relationship” has a broader meaning
and even important commercial relationships fall within its ambit.151
196 When examining the relationship between the payer (Ladar) and the BO (Mr. Fixer), it first has
to be pointed out that he does not participate in the capital, control or management of Ladar and
does not control the payer. Therefore, such a special relationship mentioned in Art.12A(7)
DTC-TT does not exist between Ladar and Mr. Fixer.
197 According to Art.12A(7) DTC-TT, a further scenario needs to be examined, namely cases
where three parties are involved.
198 Pursuant to the facts of the case, Mr. Fixer is sent to Ladar. In this triangular case, it has to be
examined whether a special relationship between Ladar and Renolo, as well as between Renolo
and Mr. Fixer, exists. Ladar and Renolo are not associated companies. Although Ladar and
Renolo entered into a general agreement of five years, this does not form a commercial
relationship which is so important as to constitute a “special relationship” as both companies
are still able to operate their business independently.
199 The agreement between Ladar and Renolo is a standard that would be concluded between
independent business parties. If this constituted a “special relationship”, any and all contracts
would amount to special relationships, which clearly cannot be the intention of Art.12A(7)
DTC-TT.
148 Mitterlehner, SWI(2017),186; 2017 UN-Commentary,Art.12A(para.131). 149 2017 UN-Commentary,Art.12A(para.129). 150 De Broe(2008),538. 151 Ibid; Jiménez in IBFD(2017),Art.12A(para.3.2.2.3.2.).
75
INTERIM CONCLUSION
200 To conclude, the payment falls under the ambit of Art.12A DTC-TT. Art.12A(3)(a) DTC-TT
does not apply because the payment is not made to an employee of the payer. However, should
the Court hold that all conditions under Art.12A(7) DTC-TT are fulfilled, it will be shown that
Art.21(3) DTC-TT is the only provision applicable on the excessive part of the payment.
SUBSIDIARY ARGUMENT: ART.21(3) DTC-TT APPLIES
201 If the court considers that the reimbursement payment falls under Art.12A(7) DTC-TT and,
therefore, the excessive part of the payment has to be recharacterised, no other provision than
Art.21(3) DTC-TT applies.
202 Art.21 DTC-TT is an “umbrella provision” providing a distributive rule for items of income
not dealt with in the foregoing articles.152 As there is no provision apart from Art.12A DTC-TT
that deals specifically with the type of income Mr. Fixer receives, the reimbursement payment
conceivably constitutes “other income”. Neither the UN/OECD-MC nor the Commentaries
thereon provide an explicit classification on reimbursement payments.
203 The UN-Commentary offers no definition for the term “arising” in Art.21 DTC-TT. Pursuant
to Ward/Avery Jones/Ellis the term needs to be interpreted in the light of Art.10, 11 and 12
OECD-MC and UN-MC respectively.153 Taking into account these arguments based on the
context of the DTC-TT, the term “arising” in Art.21 DTC-TT has to be interpreted in the light
of Art.12A(5) DTC-TT. According to this provision the payment arises in the Residence State
of the payer (Ladar). As a consequence, Terrabrake is entitled to tax this payment.
INTERIM CONCLUSION
204 To sum up, the reimbursement payment falls under Art.12A DTC-TT. Should the Court hold
that the payment is excessive, thus, falling under Art.12A(7) DTC-TT, a recharacterisation of
the excessive part results in the application of Art.21(3) DTC-TT. Terrabrake may tax the
152 Lang(2013),124; Wassermeyer/Kaeser in Wassermeyer(2013),Art.21(para.17). 153 Ward/Avery Jones/Ellis, BTR(1990),358 et seq.
76
amount that corresponds to the “arm’s-length-principle” under Art.12A and the excessive
amount under Art.21(3) and, thus, in both cases, retains its taxing rights – ultimately over the
full amount of the payment.
77
THE BIT-TT IS NOT APPLICABLE
TAXES “CARVED-OUT” FROM THE SCOPE OF THE BIT-TT
205 In the case at hand, Art.21 of the BIT-TT contains a carve-out clause, stating that “Except as
provided in this Article, nothing in Section A shall impose obligations with respect to taxation
matters.”154 Hence, any possible double taxation in Terrabrake and Tyreland does not fall
within the scope of the protective provisions of the BIT-TT.
DOUBLE TAXATION DOES NOT CONSTITUTE EXPROPRIATION
206 Still, the applicant might invoke the protective provision against expropriation in Art 6 BIT-JT,
which does not carve out taxation matters. However, double taxation resulting from the refusal
of treaty benefits does not constitute expropriation.
207 Taxation is normally not deemed expropriation, since otherwise the BIT would render this core
function of a state impossible,155 since every tax has some degree of an expropriatory impact.156
208 As a basic principle in this context, the LCIA stated that “only if a tax law is extraordinary,
punitive in amount or arbitrary in its incidence would issues of indirect expropriation be
raised”.157 Therefore, only extreme cases of taxation are within the protective scope of a
BIT.158
209 When applying the aforementioned requirements for – indirect – expropriation to the case at
hand, none of them are fulfilled:
• the possible double taxation is not extraordinary, especially when considering that
Tyreland is obliged by virtue of Art.23B DTC-TT to credit any taxes paid in Terrabrake;
154 2012 US Model BIT Art.21(1). 155 Simonis, Intertax(2014),241. 156 Waelde/Kolo, Intertax(2007),441. 157 UK:LCIA(03.02.2006). 158 Waelde/Kolo, Intertax(2007),424.
78
• the double taxation is not punitive in its amount as levying a 15%-20% WHT on the
gross amount is within the bounds of internationally recognised tax policies159 and
• double taxation is not even arbitrary in its incidence considering that “taxation
measures aimed at preventing the avoidance or evasion of taxes should not generally be
considered to be expropriatory”.160
210 Therefore, no expropriation is occurring and, thus, Art.6 BIT-TT cannot be applied. Renolo’s
ability to conduct its business is not inhibited in any way. The fact that Renolo has losses is not
a result of taxation in Terrabrake, but is a normal occurrence when companies undertake
enormous R&D expenses. The claim that Renolo faces “overtaxation” by virtue of the gross
taxation of the royalty payments and FTS does not deprive the investments of their profitability.
The losses are unrelated to the taxation in Terrabrake and, in this industry, arguably only
temporary. Renolo invests in IP and, naturally, faces losses since the production of know-how
entails high costs in the initial years. One indicator for the inevitable future profitability of
Renolo is the substantial revenue received from Ladar for the crankshaft.
211 Finally, investors must always take into consideration that a change in the law of the host state
may occur and that particularly fiscal legislation regularly changes. Such amendments of law
are part of the regular investment risk.161 In any case, the facts do not state any changes in the
laws in Terrabrake. In fact, all parties in this case were fully aware of the taxation laws and
nevertheless launched their business ventures and service agreements.
212 To conclude, tax matters are not covered by investor protection provisions of the BIT-TT.
Moreover, double taxation does not constitute an indirect expropriation.
159 e.g.Desai, APTB(1999),42 - Indian WHT rates varying between 10%-20%; Haccius(2004),477 et seq. - Irish WHT
rates varying between 3%-10%; Li(2016),251 et seq. – Chinese WHT rates varying between 5%-25%; Daurer/Jann,
IFA Cahiers(2018),17 - Austrian WHT rates varying between 3%-15%; Formenti/Trouw, IFA Cahiers(2018),17 -
Brasilian WHT rates varying between 10%-25%; Machfudz, IFA Cahiers(2018),12 – Indonesian WHT rates varying
between 5%-15%. 160 Waelde/Kolo, Intertax(2007),442. 161 Simonis, Intertax(2014),249.
79
VI OVERALL CONCLUSION
213 To sum up, Ladar is a resident of CI by virtue of Terrabrakian domestic law. Consequently, the
DTC-TT does not apply, because the residence criterion for the personal scope is not fulfilled.
Furthermore, Ladar as WHA is obliged by domestic law to levy a WHT of 20% since no
exception from this obligation is provided under domestic law.
214 Even assuming that the DTC-TT applies, the application of the DTC-TT entails a source taxing
right of at least 15% on all payments.
215 Firstly, the payments for crankshafts fall under the ambit of Art.12 DTC-TT. Art.13 DTC-TT
is not applicable.
216 Secondly, the payments for the database and for the training are royalty payments under Art.12
DTC-TT. The trainings are of an ancillary character. Should the Court decide that the payments
for the training are not ancillary, those payments fall under Art.12A DTC-TT.
217 Thirdly, the payments for the app are in principle regarded as royalties pursuant to Art.12 DTC-
TT. However, RenoloApps is the BO, resident of CI. Renolo is used as a conduit to gain treaty
benefits. Therefore, Terrabrake may tax the royalties according to its domestic law. Even if the
court holds that Renolo is the BO, all payments regarding the Salamander’s App fall uniformly
within Art.12 DTC-TT. If the court assumes the payments should be separated, the server
payments for the server constitute royalties under Art.12 DTC-TT, while the reports fall under
Art.12A DTC-TT.
218 Lastly, the reimbursement of the costs for Mr. Fixer’s services falls under Art.12A DTC-TT.
Should the court consider Art.12A(7) DTC-TT to be applicable, the excessive part of the
payment is other income pursuant to Art.21(3) DTC-TT.
219 The BIT-TT does not affect the DTC-TT since tax issues do not fall within the BIT’s scope.
Additionally, double taxation is not expropriation.
80
VII REQUEST
220 Firstly, the court is requested to rule that the residence of Ladar is CI.
221 Secondly, the court is requested to rule that Ladar’s payments to Renolo are subject to domestic
WHT.
222 Finally, if the court holds that Ladar is resident in Terrabrake and therefore the DTC-TT applies,
then the court is requested to rule that all of Ladar’s payments to Renolo are subject to WHT
pursuant to the DTC-TT.
81
Lad
ar
Ren
olo
Ap
ps
BO D
Ter
rab
rak
e
CIT
: 30%
WH
T 2
0%
: div
iden
ds
inte
rest
s, r
oyal
ties
, F
TS
Res
iden
ce:
PO
EM
Tyre
lan
d
CIT
: 20%
Res
iden
ce:
PO
EM
No c
arry
forw
ard o
f ta
x c
redit
der
ived
ab
road
Cro
cod
ile
Isla
nd
s
CIT
: 5%
No W
HT
No t
axat
ion
of
tech
nic
al s
ervic
es
Res
iden
ce:
inco
rpo
rate
d i
n C
I, P
OE
M
Ren
olo
AG A
Shar
ehold
er o
f L
adar
(40
%)
Shar
ehold
er o
f L
adar
(60
%)
Mr.
Pep
ponen
Ser
ver
DTC
-TT
VIII ANNEXES
TABLE 1 – OVERVIEW OF THE FACTS
100
%
$
$
$
82
TABLE 2 – POEM OF LADAR
60
%
Lad
ar
Ter
rab
rak
e
Cro
cod
ile
Isla
nd
s
Gen
eral
Ass
embly
(Lad
ar)
Shar
ehold
er a
nd F
ound
er o
f
Lad
ar
Mr.
Pep
pon
en
Shar
ehold
er o
f L
adar
Mrs
. H
am
ilto
n
Lad
ar B
oard
of
Dir
ecto
rs
40
%
83
TABLE 3 – CRANKSHAFT AND “BYC”-DATABASE
Terrabrake Tyreland
Ladar Renolo
Know-How
on Crankshaft
$ 7 % of net
selling price
2021: $300,000
Third Party
Commission of third party
allowed (Authorisation by
Renolo)
Ladar Renolo
BYC
Tyreland Terrabrake
Access
to the BYC
Database
$50,000 p.a.
2021: $50,000 $
$
Official Certificate
of Experts in Motors
Training of
Ladar’s
Employees
2021: $50,000
84
TABLE 4 – SALAMANDER’S APP AND MR. FIXER
Terrabrake Tyreland
Ladar Renolo
Third Party
Ladar Renolo
Tyreland Terrabrake
$
Provision of
an expert
2021: $10,000
Crocodile Island
RenoloApps
Server
Distribution
rights of
Salamander’s
App
Use of Server
$ 2021: $50,000
+ $12,000
($1,000 monthly)
Mr. Fixer
Renolo’s
employee
Transmission
of problems
regarding the
crankshaft Elaboration
of reports
Transfer of
90 % of the
payment by
Ladar
85
TABLE 5 – DESCRIPTION OF COMPUTER SOFTWARE
Source: Van der Laan, Intertax(1991),267.
SE
RV
ICE
AP
PL
ICA
TIO
N S
OF
TW
AR
E
HA
RD
WA
RE
- -
- -
- -
- -
- -
- -
SY
ST
EM
S S
OF
TW
AR
E
Form
of
tran
sfer
?
What
is
bei
ng t
ransf
erre
d?
Form
of
pay
men
t?
86
IX TABLE OF ABBREVIATIONS
Art(s). ............................... article(s)
APTB ............................... Asia-Pacific Tax Bulletin
ATF .................................. Australian Tax Forum
ATO ................................. Australian Tax Office
AUT ................................. Austria
AUS .................................. Australia
BEPS ................................ Base Erosion Profit Shifting
BFH .................................. Bundesfinanzhof
BIT ................................... Bulletin for International Taxation
BIT-TT ............................. Bilateral Investment Treaty/-ies – Terrabrake/Tyreland
BMF ................................. Bundesministerium für Finanzen
BO .................................... Beneficial Owner
BOD ................................. Board of Directors
BOS .................................. Beneficial Ownership
BTR .................................. British Tax Review
BYC ................................. Building Your Car (database)
CA .................................... Canada
CH .................................... Switzerland
CI ...................................... Crocodile Island
CN .................................... China
CS ..................................... Contracting State
DK .................................... Denmark
DTC(s) ............................. Double Taxation Convention(s)
DTC-TT ........................... Double Taxation Convention – Terrabrake/Tyreland
EAS .................................. Express Antwort Service
ed(s). ................................ editor(s)
e.g. .................................... for example
ES ..................................... Spain
ET ..................................... European Taxation
et al ................................... et alia
87
et seq./et seqq. .................. and that which follows/and those which follow
FCOA ............................... Federal Court of Appeal (Canada)
(F)TS ................................ (Fees for) Technical services
GAAR .............................. General Anti-Avoidance Rule
GER .................................. Germany
GesRZ .............................. Zeitschrift für Gesellschafts- und Unternehmensrecht
GmbH ............................... Gesellschaft mit beschränkter Haftung
HL .................................... House of Lords
IBFD................................. International Bureau of Fiscal Documentation
Ibid ................................... in the same place
ICS ................................... industrial, commercial or scientific
icw .................................... in connection with
IFA ................................... International Fiscal Association
IStR .................................. Internationales Steuerrecht
ITPJ .................................. International Transfer Pricing Journal
IWB .................................. Internationales Steuer- und Wirtschaftsrecht
K(M)D .............................. Key (Management) Decisions
LCIA ................................ London Court of International Arbitration (UK)
m.no(s). ............................ marginal number(s)
MTC ................................. managerial, technical or consultancy
NL .................................... The Netherlands
OECD ............................... Organisation for Economic Co-operation and Development
ÖStZ ................................. Österreichische Steuerzeitung
Para(s). ............................. Paragraph(s)
POEM............................... Place of Effective Management
PS ..................................... Principal Shareholder
PT ..................................... Portugal
R&D ................................. Research and Development
SARS ................................ South African Revenue Service
SWI ................................. Steuer und Wirtschaft International
TAF .................................. Tribunal administratif fédéral (Switzerland)
88
TEAC ............................... Tribunal Económico Administrativo Central (Central Economic-
Administrative Court)
UFS .................................. Unabhängiger Finanzsenat
UK .................................... United Kingdom
UN .................................... United Nations
US..................................... United States
VCLT ............................... Vienna Convention on the Law of Treaties
VwGH .............................. Verwaltungsgerichtshof (Austrian Supreme Administrative Court)
VWT................................. Vereinigung Österreichischer Wirtschaftstreuhänder
WHT................................. Withholding Tax
ZA .................................... South Africa
89
90