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PARAGRAPH 1: the scope of the convention – subjective element -> to whom does it apply?
Article 1(1) OECD MC -> defines the personal scope of the convention: it applies ‘to persons
who are residents of one or both of the contracting states’
o Essential characteristics of the convention’s scope
The following concept have to be addressed to determine the applicability of the
convention:
1) The taxpayer must qualify as a ‘person’
2) The taxpayer must be a ‘resident of a contracting state’
A. The notion of ‘persons’
The concept of ‘persons’ relates to the subjective element underlying the question: ‘who may
be taxed’?
In order to determine whether a taxpayer qualifies as a ‘person’ for the purposes of the
convention, SEE PARAGRAPH 1 ARTICLE 3 – dealing with the convention’s general definitions
o If the taxpayer qualifies as a ‘person’ under the definitions therein, continue to the
objective element.
o If not, this means that the taxpayer will not fulfil the scope of application of the
convention and will not have access to it.
This is the case for instance with PEs (they are not deemed to be neither
‘persons’ not ‘resident of a contracting state’ -> hence the scope is not fulfilled)
B. The notion of a ‘resident of a contracting state’
o The concept of a ‘resident of a contracting state’ relates to the question: ‘on what grounds’
can the ‘person’ be taxed? -> objective element -> the answer must be that he may be
taxed based on residence (persons subject to source taxation do NOT have access to the
convention!!)
o In order to determine whether a ‘person’ can be deemed to be a ‘resident of a contracting
state’, SEE ARTICLE 4 – dealing with residency.
o If the ‘person’ can be deemed to be a ‘resident of a contracting state’, the next step
is to determine whether the ‘objective element’ of the convention, dealing with the
taxes covered, is met -> SEE ARTICLE 2 -> only if Article 2 is also met will the
convention apply to the case (since both the subjective and objective elements will
be satisfied)
, o If the ‘person’ is not a ‘resident of one of the contracting states’, the subjective
element will NOT be satisfied and such person will not be entitled to treaty benefits
PARAGRAPH 2: transparent entity clause
In order for the transparent entity clause to apply, an entity must be “treated as wholly or
partly fiscally transparent” in one or other of the contracting states
The paragraph not only ensures that the benefits of the Convention are granted in appropriate
cases, but also ensures that these benefits are not granted where neither Contracting State
treats, under its domestic law, the income of an entity or arrangement as the income of one of
its residents.
o IMPORTANT: if none of the state attributes the income to one of its residents, the
clause is not applicable
The transparent entity clause addresses income derived by or through an transparent entity
o Income -> broad meaning (see commentary)
o fiscally transparent -> under the domestic law of a contracting state, the income (or
part thereof) of the entity or arrangement is not taxed at the level of the entity or the
arrangement but at the level of the persons who have an interest in that entity or
arrangement (para 9)
The clause requires a three-steps approach:
1) the state applying the tax treaty identifies income derived by or through an entity.
2) it ascertains whether either state treats the entity as fiscally transparent.
3) it ascertains the extent (if any) to which either state treats the income as that of a resident.
If one of the states attributes the income to one of its residents, that state will be
considered the residence state.
PARAGRAPH 3: the saving clause
The object of the majority of the provisions of the Convention is to restrict the right to tax the
residents of the other Contracting State.
The general effect of the OECD saving clause is that a source state is not restricted by the
distributive articles of a tax treaty in the taxation of its own residents
o Paragraph 3 confirms the general principle that the Convention does not restrict a
Contracting State’s right to tax its own residents except where this is intended and lists
the provisions with respect to which that principle is not applicable
o Articles 23A and 23B are clearly intended to affect how a Contracting State taxes its
own residents
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