On 15 July 2014, the OECD Council approved the 2014 Update to the OECD Model Tax Convention and the related Commentary (the “2014 Update”). The most relevant changes provided in the 2014 Update concern the following topics:
Revised Commentary on the meaning of “beneficial owner”
The “beneficial owner” concept is essentially an anti-abuse rule designed to prevent treaty shopping by agents, nominees or conduit companies for the benefit of a resident of a third state in relation to dividends (Article 10), interest (Article 11) and royalty income (Article 12). The new guidance in the Commentary to the OECD Model Tax Convention points to an “autonomous treaty meaning” of the notion of “beneficial owner” and is intended to clarify the concept within the framework of the OECD Model Tax Convention. However, the effectiveness of this additional guidance in specific cases (in particular, in situations involving company groups) remains to be seen and some uncertainty as to the exact meaning of the term “beneficial ownership” will undoubtedly remain.
Changes to Article 26 (Exchange of Information) and its Commentary
On 17 July 2012, the OECD Council approved an update to Article 26 of the OECD Model Tax Convention and its Commentary which set the international standard on exchange of information. This standard provides for information exchange on request where the information is “foreseeable relevant” for the administration of taxes of the requesting State and is relevant for the interpretation of those tax treaties concluded by Luxembourg that follow this standard. The updated Commentary has been expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expedition”. Moreover, the updated Commentary provides for an optional default standard of time limits within which the information is required to be provided.
Issues related to Article 17 of the OECD Model Tax Convention
Under Article 17 (Artists and Sportsmen) of the OECD Model Tax Convention, the State in which the activities of a non-resident entertainer or sportsman are performed is allowed to tax the income derived from these activities. This regime differs from that applicable to the income derived from other types of activities making it necessary to determine questions such as what is an entertainer or sportsman, what are the personal activities of an entertainer or sportsman as such and what are the source and allocation rules for activities performed in various countries. Here, the 2014 Update includes a number of changes to Article 17 (the title of this article has been changed to “Entertainers and Sportspersons”) and its Commentary. These changes follow a previous OECD report entitled “Issues related to Article 17 of the OECD Model Tax Convention”.
Tax treaty issues related to emissions permits/credits
The typical tax treaty issue that would be associated with the trading of emissions permits/credits is the treatment of the income from the alienation of such permits/credits by a resident of a Contracting State. Any income or gain from the alienation of property, which would include emissions permits/credits, is generally covered by either Article 7 (Business Profits), Article 8 (Shipping, Inland Waterways Transport and Air Transport), Article 13 (Capital Gains) or Article 21 (Income) of the OECD Model Tax Convention. In addition, in the case of agriculture and forestry enterprises, such income may fall within the scope of Article 6 (Income from Immovable Property). The classification of such income is clarified through additions to the Commentaries to the OECD Model Tax Convention.
Tax treaty treatment of termination payments
Payments made following the termination of an employment include a number of different payments such as non-competition payments, severance payments or payments made with respect to unused holidays. In a tax treaty context, such payments may generally be covered by Article 15 (Income from Employment) or Article 18 (Pensions) of the OECD Model Tax Convention. The 2014 Update adds significant guidance (in particular in the Commentary to Article 15) regarding the characterization of termination payments in order to ensure a consistent treatment of such payments for tax treaty purposes.
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