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Summary class notes international and european taxation
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Summary of 180 pages for the course International And European Taxation at UGent (update lesnota)
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International and EuropeanTaxation
Praktisch: Op het examen zijn de Directives, OECD Model Treaty en de Commentary
hierop toegelaten. Je mag
dit allemaal meenemen op het examen, dus deze materie moet niet vanbuiten
geleerd worden. Het examen is in het Engels, maar je mag eventueel ook in het
Nederlands antwoorden op de vragen. Beide delen staan op evenveel punten. Simpel
rekenmachine zal toegelaten worden.
Introduction to international tax law
A. Importance of international tax
National tax law is organized per country. Each country has its own autonomy
for taxes, and it’s a sovereignty of the states, because tax is income for
governments. Residents of a country are often subject to tax on worldwide income,
but each state tends to tax all income linked with their own territory or its
residents. The non-residents of a country are subject to tax on income generated
in the country which is the source of the income.
However, worldwide application of these two general national principles results in
double taxation. Due to increased globalization of economies and mobility (e.g.
cross border investments, transactions, employment of individuals etc…), the
importance of international tax has increased as well.
Example: Where does the profit of the factory have to be taxed? In country A or country B?
Country A will want to tax the profit of the company because it is located in country A, but
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, country B will want to tax the profit as well as worldwide income.
International tax law is defined as “all rules determining where and how the income
of a taxpayer arising in a cross-border context, may be taxed and how this tax must
be assessed and recovered/reduced”. In other words, international tax law is
created in order to prevent double taxation. So the essence is to determine
whether there is a cross-border income, and if so where it should be taxed with the
purpose of eliminating or reducing double taxation.
The rules are established to have a fair balance in taxation between the source
country and the country of residence. What makes international tax
complicated, is the fact that there is no separate set of rules/code. It is rather a
complex combination of:
International legislation
EU legislation implemented via internal legislation
Bilateral tax treaties based on OECD Model Convention
International guidelines OECD Comments/OECD Transfer Pricing Guidelines (soft
law)
General principles of international tax law (with some relevant Case law)
General principles on international and European
taxation
A. Types of double taxation
1. International legal (“juridische”) double taxation
This means that the same income is taxed in two (or more) different states in the
hands of one and the same and single taxpayer. The same income is taxed twice or
more in the hands of the same taxpayer. In other words, the same taxpayer is
subject to tax on the same income in different jurisdictions.
Example: A Belgian resident has invested in a holiday home in Spain. When the Belgian
resident isn’t in Spain, they rent their holiday home which gives them a rental income of €
100. This is paid to the Belgian resident for real estate. On their worldwide income, the
Belgian resident is taxed in Belgium and this includes the rental income. But, that same
rental income is also taxable in Spain because the holiday home for which the resident
receives real estate income, is located in Spain.
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,2. Economic (“economische”) double taxation
This type of double taxation means that the (economically same) income is taxed in
the hands of different taxpayers (in different jurisdictions in the case of
international economic double taxation). In other words, the same income is taxed in
the hands of different taxpayers, in different jurisdictions.
Example 1: A French company has a subsidiary in Germany. This subsidiary realises a profit
of € 100. This income will be taxed under corporate income tax in Germany (25%). So, the
German subsidiary has an after-tax profit of € 75 left, which is distributed as a dividend to the
French parent company As per the local rules In France, this dividend will also be taxed as
income.
Example 2: Another example is when a German company pays a fee of € 100 to its Dutch
parent company for services this parent has rendered. The German tax authorities do not
accept that the fee is deductible – then the German income tax will be subject to 25% tax on €
100, and the Dutch company has also received € 100 and thus will also be taxed on this full
amount of € 100. The one who receives the payment is taxed and the one who pays cannot
deduct, so double taxed but in the hands of multiple tax payers.
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, QUIZ: Is this an example of economic or legal double taxation?
A Belgian company gave a loan to a US company, and the US company pays
interests for that loan to the Belgian company. The US company is subject to
witholding tax of € 30 – this € 30 will be paid to the US tax authorities, and € 70 will
be paid as interest to the Belgian company.
Economic or legal? (cause A will still be subject to the 70 income which they have
received) is the 30 economic or legal double taxation?
This € 30 witholding tax is an example of legal double taxation, because it is
technically paid by company B, but it is paid on the behalf of company A, because
typically if you pay an interest, you’re obliged to withhold the tax. Company B pays,
but they pay it on behalf of A. although the 30 is paid by B, it is a tax of A. It reduces
the gross interest of € 100 of company A, they only receive € 70. Company A is thus
confronted with a case of legal double taxation.
IMPORTANT: in case of withholding taxes, you don’t have to look solely at who
pays the tax, but more so who incurs the tax! You have to think these cases
through.
B. Reasons for international double taxation
There are also some other possible reasons for international double taxation,
for example the
difference in qualification of the type of income in two countries. Examples of this
are:
Interest vs. Dividend
Permanent establishment definition (‘vaste inrichting’)
Management and control test
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