Applicable When?
- when person/company is resident in one of the contracting state
- no definite residency definition within treaty, definition comes from local definitions
Income Types
- different income types have different rules
Rental Income
- Article 6.1-6.21 OECD MC income from immovable property
- primary taxing rate to state where immovable property is located
Business Profit
Dividends, Interest, Royalties
- Art 10, 11, 12 OECD MC
- taxed in residence state
- source state has limited source taxation rights
- Dividends
- 5% WHT for intercompany div, shareholding >25% and holding period > 1 year
- 15% WHT otherwise
- Interest 10% WHT
- Royalties 0%
- developing countries need to pay a lot of royalties to technology held by developed countries
- biased for developed countries
- a lot of individual tax treaties deviate from this standard, they allow the source country some tax rights
Capital Gains
- Art 13 OECD MC
- only taxes effect when capital gains are realized
- location state for sale of immovable property
- residence state normally has exclusive tax rights
- except real estate companies → taxed also in source country
- Art 13.5 catch all provision → any capital gains not covered have exclusive taxing rights in residence state
Employment Income
- Art 15 OECD MC
- residence state of employee
- except taxed by work state
- more than 183 days within 12 months
- cost of salary payed by PE in work country
- frontier worker rule
- worker returns from work country to residence country on daily basis
- residence state has full tax rights
- not in OECD MC
Double Taxation Alleviation Methods
Credit Method
- Art 23A OECD MC
- popular in USA
- tax must be “paid” but the tax is given 1:1 as credit for the next year
- tax deductions only possible in the next fiscal year
- mostly done via Withheld Tax
Exemption Method
- Art 23B OECD MC
- popular in European countries
- taxes simply are exempted, just not paid
- tax deductions take effect immediately / are not even a tax burden in the first place
- Progression Safeguard applies
Mixed Method
- e.g. tax treaty between USA and Germany
- USA might choose Credit Method while Germany chooses Exemption Method to alleviate double taxation, it is up to the individual country