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WEEK 4 – immovable property, capital gains and capital tax
IMMOVABLE PROPERTY (Art. 6)
Step 1: paragraph 2 – definition of ‘immovable property’
A. Reference to domestic law of the source state
Art. 6(2) -> The term “immovable property” shall have the meaning which it has under the law of
the Contracting State in which the property in question is situated’.
o According to domestic law of the source state:
i) The item of income could be regarded as IMP -> Art. 6 applies.
Unless the item of income is covered by Art. 6 negative list (see below)
Prokish approach -> unless the IMP forms a PE -> Art. 7 (business profit)
ii) The item of income could NOT be regarded as IMP . In this case:
a) Check whether it still fall under the positive list (see below) of Art. 6
b) Assess whether another distributive rule applies
c) Last resort -> Art. 21(1)(2)
B. Positive list – items of income always regarded as IMP
According to Art. 6(2) certain items of income are always treated as IMP:
1) Property accessory to immovable property;
2) Livestock and equipment used in agriculture and forestry;
- Income derived from agriculture or forestry is covered by Art 6 (ph. 2.1)
Broad scope of the term: ‘income from A/F -> covers income that is an integral
part of the carrying on of A/F activities (ph. 2.1)
3) Rights to which the provisions of general law respecting landed property apply
- For example: tenancy rights; leaseholds; hereditary rights to construct etc.
4) Usufruct of immovable property
5) Rights to variable or fixed payments as consideration for the working of, or the right to
work, mineral deposits, sources, and other natural resources
C. Negative list – items of income never regarded as IMP
According to Art. 6(2) certain items of income are never treated as IMP (even if classified/defined
as IMP under domestic law:
1) Ships
2) Boats
3) Aircraft
4) Indebtedness secured by immovable property (covered under Art. 11)
Step 2: paragraph 1 – situs principle
Art. 6(1) -> where Art. 6(2) is met (ie the item of income derives from IMP), the state where the IMP is
located has the right to tax income derived therefrom.
o Exception: Art. 6 does NOT apply where:
a) The IMP is located in the residence state (ph.1)
b) The IMP is located in a 3rd state (ph.1)
Art. 21(1) applies to such income!1
Important: Art. 21(2) does NOT apply to income from IMP. Hence, in cases where the IMP
located in state A (residence state) is attributed to a PE in state B, state A will have the right
to tax under art. 21(1) since the IMP is located therein. 2
1
Art. 21: other income
Para. 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
Under Art. 21(1)(2) -> IMP is taxable only where property is situated and of which the recipient of the
income is a resident. Objective: secures that income from immovable property will be taxed in the State in
, Step 3: paragraph 3 – ‘income derived from direct use, letting, or use in any other form’
Art. 3 -> “The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or
use in any other form of immovable property.”
o Income derived ‘in any other form’ -> in this respect, the treatment of income generated by
‘Real Estate investment Trusts’ (REITs)3 deserves special attention. A distinction is made
between:
1) Small investors4 (ph. 67 on Art. 10)
- Small investors are characterised by the fact that they have:
a) No control and with the IMP acquired by the REIT
b) No connection
- Important: the income generate by small investors through REITs is NOT considered to
be income from IMP. Rather, such an investor will be deemed to have invested in a
company and should be treated as receiving a (portfolio) dividend (ph.67.3). Hence,
Art. 10 will apply to this income!
2) Big investors5 (ph. 67 on Art. 10)
- A big investor is a holding investor with at least 10% participation in the REIT (ph. 67.3)
- The income will be treated as income from IMP
- Art. 6 applies and the source state will be able to tax such distributions (VEDI)
Step 4: paragraph 4 – immovable property of an enterprise
Art. 6(4) -> The provisions of paragraphs 1 and 3 shall also apply to the income from immovable
property of an enterprise.”
o State of source Priority to tax even for income of immovable property of an Enterprise
Indirectly derived -> income from immovable property, when derived through a
permanent establishment, is still treated as income of an enterprise (ph.4)
OVERLAPS:
1. Art. 6 v 7
Arts. 6 & 7 will often overlap. This will be the case when:
1) The IMP forms a PE
2) The PE generates income through an IMP which it economically owns
o Accordingly, the issue will be to determine which distributive rules regulates the taxation
which the property is situated.
3
REIT -> a widely held company, trust or contractual or fiduciary arrangement that derives its income primarily from
long-term investment in IMP, distributes most of that income annually and does not pay income tax on the income
related to IMP that is so distributed
4
the small investor invested in the REIT as an entity. The small investor is looking to the distributions from the REIT
and the appreciation in its REIT interest for its investment returns just as a shareholder in a multinational company is
looking to corporate dividends and share appreciation for its investment return. For these reasons, it was concluded
that an appropriate treaty policy would be to treat a REIT distribution to a small investor in the same way as a
portfolio equity investment.
5
For big investors -> the investment in the REIT may be a substitute for a direct investment in the underlying property
of the REIT. such distributions should be subjected to the full tax rate provided by domestic (source) law.
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