International taxation
Full summary: powerpoint + class notes
Academic year: 2024-2025
Grade obtained: 17/20
Table of content
1.1 Definition and sources .................................................................................................... 6
1.1.1 Definition .................................................................................................................... 6
1.1.2 States’ power to tax .................................................................................................... 6
1.1.3 The influence of EU law .............................................................................................. 8
1.1.4 International guidelines/recommendations (soft law) ................................................ 9
1.1.5 Bilateral treaties ........................................................................................................ 10
1.2 Basic problems of international taxation law................................................................ 11
1.2.1 Power (or jurisdiction) to tax derived from sovereignty ............................................. 11
1.2.2 Limited and unlimited tax liability ............................................................................. 11
1.2.3 Double non taxation .................................................................................................. 12
1.2.4 Double taxation......................................................................................................... 14
1.2.5 Economic double taxation ........................................................................................ 16
1.3 The international tax system and general characteristics of tax treaties ...................... 18
1.3.1 Purpose of tax treaties .............................................................................................. 18
1.3.2 The importance of the OECD MC ............................................................................. 18
1.3.3 Other models? .......................................................................................................... 19
1.3.4 History ...................................................................................................................... 20
1.3.5 Recent developments: BEPS Action Plans 2015 ...................................................... 21
1.3.6 United Nations: terms of reference (ToR) ................................................................. 22
1.3.7 General characteristics of tax treaties (6 cardinal rules) .......................................... 23
2.1 Scope of the convention ..................................................................................................... 25
2.1.1 Article 1: persons covered ............................................................................................... 25
2.1.2 Important distinction between subsidiary and branch .................................................... 29
2.1.3 Article 2: taxes covered ................................................................................................... 33
Implications ...................................................................................................................... 34
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,2.2 Definitions and interpretation ............................................................................................. 35
2.2.1 Definitions: article 3 ......................................................................................................... 35
2.2.2 Interpretation ................................................................................................................... 35
2.3Residence and PE ................................................................................................................ 41
2.3.1 Definitions ....................................................................................................................... 41
2.4 Digital economy .................................................................................................................. 70
2.4.1. How to tax profits in state of consumer? ........................................................................ 70
2.4.2 E trading ........................................................................................................................... 70
2.4.3 Digital platforms .............................................................................................................. 77
2.4.4. Ways forward .................................................................................................................. 81
2.4.5 Latest developments? ..................................................................................................... 84
2.5 Immovable income and TP ................................................................................................. 86
2.5.1 Immovable property (article 6) ........................................................................................ 86
2.5.2 Transfer pricing ................................................................................................................ 88
2.5.2.1The CUP method ........................................................................................................... 95
2.5.2.2 Resale price method ..................................................................................................... 98
2.5.2.3 Cost plus method ....................................................................................................... 104
2.5.2.4 Transactional net profit methods ................................................................................ 107
2.5.2.5 Conclusion ................................................................................................................. 109
2.5.2.6 Country by Country Reporting (CbCR)........................................................................ 109
2.5.2.7 Avoidance of double taxation ..................................................................................... 112
2.6 Business income .............................................................................................................. 120
2.6.1 Summary ....................................................................................................................... 120
2.6.2 Old approach ................................................................................................................. 122
2.6.3 New approach ............................................................................................................... 128
2.6.3.1 General features ......................................................................................................... 128
2.6.3.2 Calculating the profits of the PE under the AOA ......................................................... 129
2.6.4 Overview : difference old and new approach................................................................. 136
2.7 International transportation income ................................................................................. 137
2.8 Dividends .......................................................................................................................... 139
2.8.1 Definition ....................................................................................................................... 139
2.8.2 Taxability ........................................................................................................................ 139
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,2.8.3 BEPS Action 6 ................................................................................................................ 140
2.8.4 Taxability II ..................................................................................................................... 141
2.8.5 Parent/subsidiary directive ............................................................................................ 144
2.9 Interest and royalties ........................................................................................................ 149
2.9.1 Interests ......................................................................................................................... 149
2.9.1.1 Definitions .................................................................................................................. 149
2.9.1.2 Taxability of interests .................................................................................................. 152
2.9.2 Royalties (art 12)............................................................................................................ 158
2.9.2.1 Definition .................................................................................................................... 158
2.9.2.2 Taxability ..................................................................................................................... 160
2.9.2.3 New article 12B UN Model Convention ...................................................................... 163
2.9.3 Interest and royalty directive .......................................................................................... 165
2.9.4 Capital gains (article 13) ................................................................................................ 167
2.9.5 Income from independent professional services (former art 14) .................................. 173
2.10 Employment income (article 15) ................................................................................ 176
2.10.1 General remarks .......................................................................................................... 176
2.10.2 Basic rule ..................................................................................................................... 176
2.10.2 Exceptions .............................................................................................................. 185
2.10.2.1 Condition 1 ............................................................................................................... 186
2.10.2.2 Condition 2 ............................................................................................................... 189
2.10.2.3 Condition 3 ......................................................................................................... 193
2.10.3 Enforcement of taxing rights ................................................................................... 194
2.10.4 Employment aboard ship or aircraft ....................................................................... 194
2.11 Director’s fees, entertainers and sportspersons......................................................... 200
2.11.2 Director’s fees ......................................................................................................... 200
2.11.3 Entertainers and sportspersons ............................................................................. 201
2.11.3.1 Main rule: primary taxing right to state of performance ............................................ 201
2.11.2.2 Anti abuse provision ................................................................................................. 213
2.12 Pensions, government, other income and capital ....................................................... 216
2.12.2 Pensions (article 18) ............................................................................................... 216
2.12.3 Government services .............................................................................................. 219
2.12.3.3 Salaries ............................................................................................................... 219
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,2.12.3.4 Pensions ............................................................................................................. 220
2.12.3.5 State owned enterprises ..................................................................................... 220
2.12.4 Students ................................................................................................................. 221
2.12.5 Other income .......................................................................................................... 222
2.12.6 Taxation of capital ................................................................................................... 222
2.13 Elimination of double taxation and principle of non-discrimination & final provisions225
2.13.2 Overview ................................................................................................................. 225
2.13.3 Exemption method ................................................................................................. 225
2.13.3.1 Policy considerations ............................................................................................... 228
2.13.4 Credit method ......................................................................................................... 229
2.12.1Application to interest and dividend ............................................................................. 236
2.12.2 Policy considerations................................................................................................... 237
2.13.5 Relief for economic double taxation ....................................................................... 240
2.13.6 Principle of non discrimination ............................................................................... 245
2.13.6.3 Structure ............................................................................................................. 245
2.13.6.4 Scope.................................................................................................................. 245
2.13.6.5 Discrimination on the basis of nationality ........................................................... 246
2.13.6.2 Discrimination of permanent establishment ............................................................ 253
2.13.6.3 Deductibility ............................................................................................................. 254
2.13.6.4 Discrimination of foreign owned enterprises ...................................................... 256
2.13.7 Mutual agreement procedure (art 25) ..................................................................... 259
2.13.7.4 Taxation not in accordance with the provisions of the Convention ..................... 259
2.13.7.5 Difficulties in interpretation or application .......................................................... 260
2.13.8 Binding arbitration ................................................................................................... 260
2.13.9 Exchange of information (art 27) ............................................................................. 261
2.13.10 Assistance in the collection of taxes (art 27) ...................................................... 262
2.13.11 Members of diplomatic missions and consular posts (art 28)............................ 262
2.13.12 Territorial extension (art 30) ................................................................................ 262
2.13.13 Entry into force and termination (art 31 & 32) ..................................................... 263
2.14 Prevention of abuse .................................................................................................... 263
2.14.1 Beneficial ownership ................................................................................................... 263
2.14.2 Principal Purpose Test ................................................................................................. 265
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,2.14.2.1 First test .................................................................................................................... 265
2.14.2.2 Second test .............................................................................................................. 275
2.14.3 LOB: Limitation On Benefits Test ................................................................................. 278
3.1 Brief overview of legislative history ................................................................................... 279
3.2 Implementation of global minimum tax ............................................................................ 280
3.3 Content of Pillar Two ......................................................................................................... 280
3.3.1 Rules of Pillar Two ......................................................................................................... 280
3.3.2 GloBE : 5 steps .............................................................................................................. 282
3.3.2.1 Scope of application ................................................................................................... 282
3.3.2.2Determination of GloBE Income or Loss ..................................................................... 283
3.3.2.3 Determination of adjusted covered taxes ................................................................... 284
3.3.2.4 Calculating the effective tax rate and top up tax ......................................................... 285
3.3.2.5Collecting the tax based on the IRR, UTPR and QDMTT .............................................. 287
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, 1. Introduction and general concepts
1.1 Definition and sources
1.1.1 Definition
▪ Definition: “all rules that determine where and how, in a cross-border
context, specific income of a taxpayer may be taxed and how this tax
must be assessed and recovered”
▪ ❑ national tax laws (PM)
❑ (mostly unwritten) general principles of international tax law
❑ EU law
❑ bilateral treaties
❑ international guidelines (in particular OECD material
1.1.2 States’ power to tax
▪ States’ power to tax
o Derived from their sovereignty = the right for a state
to regulate its affairs through its governmental
institutions
o Why does the government need taxes?
▪ Budgetary reasons
▪ Redistribution of wealth
▪ Economic stability and growth
▪ Providing national defense and security
▪ Paying off national debt
o Not an unlimited power: requires a nexus or connecion
▪ States can tax based on a “genuine link”
= customary international law.
▪ The Case of the S.S. Lotus, France v. Turkey, Judgment, 7 September 1927, Permanent
Court of International Justice (PCIJ)
▪ The S.S. Lotus case (France v. Turkey), decided by the Permanent Court of International
Justice (PCIJ) in 1927, is a landmark case in international law. It revolves around an
incident involving a collision on the high seas between a French steamship, the S.S. Lotus,
and a Turkish vessel, which resulted in the death of several Turkish nationals. The case is
important because it addressed the principle of jurisdiction and the ability of states to
assert legal authority over individuals or incidents occurring outside their territory.
▪ When the French ship arrived in Istanbul, Turkish authorities arrested the French officer,
Lieutenant Demons, and sought to try him for manslaughter.
▪ France objected, arguing that Turkey had no right to prosecute a French national for an
incident that occurred on the high seas involving a French ship. France claimed that, under
international law, only the flag state (France, in this case) had jurisdiction over incidents on
its own vessel on the high seas.
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,▪ The two countries submitted the dispute to the Permanent Court of International Justice
(PCIJ) to decide whether Turkey had the jurisdiction to prosecute the French officer.
▪ Key issues
o Jurisdiction on the High Seas: Does Turkey have the right to prosecute a French
national for an incident occurring on the high seas, outside Turkish territory?
o Principle of State Sovereignty: Does international law permit states to exercise
jurisdiction over foreign nationals for acts committed outside their territory?
▪ Ruling
o The PCIJ ruled in favor of Turkey, stating that international law does not prohibit a
state from exercising jurisdiction over foreign nationals for acts committed
outside its territory, provided there is a genuine link between the state and the
incident. The court reasoned that:
▪ Turkey had a "genuine link" to the incident because Turkish citizens were
killed and a Turkish vessel was involved in the collision.*
▪ Customary international law at the time did not explicitly restrict Turkey
from asserting jurisdiction in such cases.
▪ Key principles established
o Jurisdiction is not restricted to the flag state: The court rejected the notion that
only the state of the ship’s flag (France) had jurisdiction in cases of incidents on the
high seas. Instead, other states with a genuine interest (in this case, Turkey) could
also assert jurisdiction.
o "Genuine Link" Doctrine: This case is an early affirmation of the principle that a
state can assert jurisdiction if it has a genuine link to the matter, such as the
nationality of the victims or the involvement of its vessels or citizens.
o Absence of a prohibitive rule in international law: The court noted that
international law operates on a permissive basis—what is not expressly
prohibited by international law is allowed. Since there was no rule explicitly
barring Turkey from prosecuting, the prosecution was deemed lawful.
▪ Importance of this caselaw for the field of international taxation
o S.S. Lotus is significant for its broad interpretation of state sovereignty and
jurisdiction. It established that states have considerable freedom to assert
jurisdiction, so long as no specific rule of international law prohibits them from
doing so.
o In the context of international taxation, the S.S. Lotus case underscores the
flexibility of states to assert tax jurisdiction based on a genuine link, supporting
the idea that taxation can be justified where there is a real economic
connection, even in cross-border situations. This principle has gained
increasing importance with the challenges of taxing the digital economy,
transfer pricing, and addressing base erosion and profit shifting. It provides a
legal foundation for modern tax systems to adapt to global business models
while ensuring fair allocation of taxing rights.
▪ Taxation is not permissible without any connection between the taxpayer/transaction
and the state’s territory
o Determined by national tax law
▪ USA: nationality principle
▪ Belgium: residence principle
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, ▪ Hong Kong: territoriality principle: only income
that is sourced on HK territory - also for resident
taxpayers – is taxed in HK
▪ Now the first and foremost restriction
imposed by international law upon a State is
that – failing the existence of a permissive
rule to the contrary – it may not exercise its
power in any form in the territory of another
State. In this sense jurisdiction is certainly
territorial; it cannot be exercised by a State
outside its territory except by virtue of a
permissive rule derived from international
custom or from a convention.” (para 45)
o This statement refers to the principle of territorial sovereignty in international
law, which asserts that a state cannot exercise its power or jurisdiction within
the territory of another state unless there is an established exception, such as
through international agreements or customary international law.
▪ In international tax law, countries generally apply their tax laws based
on territorial or residence-based principles. A state has the sovereign
right to tax entities or individuals within its own borders (territoriality) or
its residents, regardless of where they earn their income (residence-
based taxation). However, a state cannot impose taxes on income or
entities located within another state unless there is a permissive rule,
such as a tax treaty, that allows this.
▪ Exceptions to this territorial principle arise from tax treaties
(conventions) or international tax norms (customary international
law), which allow for cross-border cooperation. For example, double
tax treaties between countries can allocate taxing rights in cases where
two states both claim the right to tax the same income. These treaties
prevent double taxation and set rules for when a state can tax income
generated in the territory of another state, thereby creating the
necessary permissive rule that allows one state to tax certain cross-
border transactions or income.
1.1.3 The influence of EU law
1. Relevant provisions in TFEU
o General non-discrimination principle (Art. 18)
o Fundamental freedoms: free movement within internal market (Art. 26
§2): goods (Art. 28 et seq), persons (Art. 21) employment (Art. 45 et
seq), establishment (Art. 49 et seq), services (Art. 56 et seq), capital
(Art. 63 et seq))
o Prohibition on (fiscal) state aid (Art. 107-108)
2. Increasing impact of European Court of Justice case law
o Avoir Fiscal case
▪ The CJEU ruled that France’s tax credit system was discriminatory
because it treated resident and non-resident shareholders differently.
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, Non-residents could not benefit from the avoir fiscal, which resulted in
higher tax burdens for them compared to French residents.
▪ The Avoir Fiscal decision reinforced the principle of non-discrimination
in tax matters within the European Union. It established that national tax
systems must respect EU law, particularly the principles of free
movement of capital and freedom of establishment.
• The case paved the way for further rulings ensuring that tax
advantages, such as credits or exemptions, are equally available
to both residents and non-residents across Member States,
preventing national systems from unfairly penalizing cross-
border investments.
▪ The Avoir Fiscal case is significant for its ruling against discriminatory
tax practices that infringe on the principles of free movement of capital
and freedom of establishment, affirming that Member States cannot
create tax rules that disadvantage non-residents or foreign companies
compared to residents or domestic companies.
▪ This ruling set an important precedent for harmonizing tax systems
within the EU, contributing to the development of a more integrated and
fair internal market.
▪ It emphasized the need for national tax systems to comply with EU law
and not to discriminate against nationals or residents of other Member
States.
3. Income tax directives
o Directive on Mutual assistance between tax authorities (1977) replaced by new
Directive (DAC) adopted 15 Feb 2011 + (many recent amendments to allow (i)
automatic exchange of bank info on investment income (ii) rulings), (iii) critical
information on multinationals; (iv) disclosure obligations of tax consultants on
planning structures etc..
o Parent-Subsidiary Directive (1990, recast 2011 with later amendments)
o Merger Directive (1990 recast 2009 with later amendments)
o Savings Directive (2003 with later amendments, now repealed)
o Interest & Royalty Directive (2003)
o Anti Tax Avoidance Directive I and II (“ATAD”, 2016/2017)
o Tax Dispute Resolution Mechanisms Directive (2017 + Arbitration Convention)
o Global Minimum Taxation of Multinationals (2022)
1.1.4 International guidelines/recommendations (soft law)
▪ OECD Guidelines: a few examples (see also infra)
o Reports on Taxation of Electronic Commerce
o Transfer Pricing Guidelines
o Report on Harmful Tax Competition
o Report on Attribution of profits to permanent establishments
o Base Erosion & Profit Shifting (“BEPS”) of October 2015: 15 Reports
▪ EU Commission: a few examples
o Code of conduct against harmful tax competition (1997) (reform)
o Recommendation on Fair & Efficient corporate tax system (2015)
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, 1.1.5 Bilateral treaties
▪ This course focuses on (bilateral) tax treaties
o 2 main types of model treaties: OECD and UN (see also infra)
▪ (In addition many national Model tax treaties: the U.S. Model, the Dutch
Model,the Belgian Model, etc.)
o Main focus : OECD Model Tax Convention 2017 + Commentary
▪ Impact of investment treaties
o Database of treaties in force (bilateral investment treaties ‘BITS’ and
treaties with investment provisions ‘TIPS’) and model agreements
o Contain safeguards for investors (national treatment, most favoured nation
treatment, fair and equitable treatment and protection against expropriation)
o Investment treaties, particularly BITs and TIPS have a significant impact on
international taxation by influencing how foreign investments are taxed and
ensuring protections for investors from arbitrary or discrimination tax policies
▪ These treaties can limit how and when host countries impose taxes on
foreign investors, providing certainty around tax policies.
▪ Investors can challenge tax measures in international arbitration if they
believe the tax treatment violates the treaty’s protections, offering a way
to resolve disputes outside of domestic courts, which may be biased.
▪ BITs often include provisions that directly or indirectly affect tax
policies. These treaties may prevent host countries from imposing
discriminatory taxes or tax measures that amount to indirect
expropriation of foreign investments.
▪ Many investment treaties include specific provisions designed to
protect foreign investors from harmful tax policies. These provisions
ensure that tax laws are applied fairly and equitably to foreign investors,
avoiding discriminatory taxation practices. Key safeguards include:
• National Treatment in Taxation: This clause ensures that
foreign investors are taxed no less favorably than domestic
investors.
• Most-Favored-Nation (MFN) Treatment in Taxation
• Fair and Equitable Treatment (FET) in Tax Matters
o Several tax cases, notably Yukos v. Russia (2014 Permanent Court of
Arbitration under Energy Charter Treaty) and Lone Star v. Korea (2022
BIT Belgium-Luxembourg-Korea)
▪ Yukos v. Russia: The Permanent Court of Arbitration ruled that the
Russian government’s actions violated the Energy Charter Treaty by
using taxation as a tool for expropriation. The tribunal awarded $50
billion in damages to the shareholders, emphasizing that tax policies
must not be used to unfairly seize foreign-owned assets. This case set a
precedent for investors to challenge abusive tax measures under
investment treaties. The Yukos case is one of the largest arbitration
cases related to taxation under an investment treaty. Yukos, a major
Russian oil company, faced massive backdated tax bills that led to the
seizure and sale of its assets by the Russian government. Yukos'
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