memorandum of the applicant - faculteit rechtsgeleerdheid · memorandum of the applicant k. 2 ......

– 1 –

International and European Tax Moot Court Competition 2017-2018

Memorandum of the

Applicant

K

2

I TABLE OF CONTENTS

I TABLE OF CONTENTS ....................................................................................................................... 2

II LIST OF SOURCES ............................................................................................................................... 5

Books ......................................................................................................................................................... 5

Commentaries ........................................................................................................................................... 9

Journals & Articles ................................................................................................................................. 10

Judgements ............................................................................................................................................. 14

OECD Documents................................................................................................................................... 18

International Documents ........................................................................................................................ 18

Fiscal Authorities .................................................................................................................................... 18

III STATEMENT OF FACTS ................................................................................................................... 19

FACTS OF THE CASE .................................................................................................................................... 19

Entities Involved ..................................................................................................................................... 19

Economic Activities of the Entities Involved ........................................................................................... 20

RELEVANT ASPECTS OF INTERNATIONAL LAW .......................................................................................... 22

Memberships in International Organisations ......................................................................................... 22

Tax Treaties ............................................................................................................................................ 22

Bilateral Investment Treaties .................................................................................................................. 23

Other Treaties ......................................................................................................................................... 23

DOMESTIC LAW ...................................................................................................................................... 23

Tralaland ................................................................................................................................................ 23

Waltzabia ................................................................................................................................................ 25

COMMON DOMESTIC LAW RULES ...................................................................................................... 25

IV ISSUES ................................................................................................................................................... 26

TAX AUTHORITIES - DEFENDANT ...................................................................................................... 26

MUSICALIA - APPLICANT ...................................................................................................................... 27

V ARGUMENTS ...................................................................................................................................... 28

MUSICALIA IS ENTITLED TO THE TREATY BENEFITS AS IT IS A RESIDENT OF TRALALAND PURSUANT TO

ART. 4(1) DTC-JT ....................................................................................................................................... 28

APPLICATION OF THE 2014 OECD-COMMENTARY ..................................................................................... 28

MILESTONE IS A RESIDENT OF JAZZTERRA ................................................................................................. 29

Milestone’s POEM is situated in Jazzterra ............................................................................................ 29

Interim Conclusion ................................................................................................................................. 31

3

MILESTONE IS ENTITLED TO THE BENEFITS OF THE TAX TREATY BETWEEN JAZZTERRA

AND TRALALAND ........................................................................................................................................ 31

THE MLI IS NOT APPLICABLE ..................................................................................................................... 32

MLI entered in force according to Art. 34 .............................................................................................. 32

MLI has not entered into effect according to Art. 35 .............................................................................. 33

MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN JAZZTERRA ........................................ 34

Requirements to constitute a PE ............................................................................................................. 34

Server does not constitute a PE because disposal not given .................................................................. 35

Yohoho does not constitute a PE ............................................................................................................ 35

Warehouse does not constitute a PE because of the exemption in Art. 5(4)(c) DTC-JT ........................ 36

Interim conclusion .................................................................................................................................. 37

MUSICALIA IS THE BENEFICIAL OWNER OF THE DIVIDENDS ........................................................................ 37

Definition of “Beneficial Ownership” .................................................................................................... 37

Musicalia meets the criteria to be the beneficial owner ......................................................................... 38

Substantive business activity test ............................................................................................................ 38

Control over profits and entrepreneurial risk ........................................................................................ 40


Solely Art. 10 DTC-JT should apply ....................................................................................................... 41

NO ABUSE OF THE DTC-JT .......................................................................................................................... 42

“Beneficial Ownership” concept as an anti-avoidance rule? ................................................................ 42

Musicalia is not a conduit company ....................................................................................................... 43

No treaty shopping by musicalia............................................................................................................. 43


MUSICALIA’S INCOME FROM RENTING OUT MUSICIANS TO CLUBS AND THEATRES IS ONLY TAXABLE IN

TRALALAND ................................................................................................................................................ 45

Musicalia does not have a Permanent Establishment in Jazzterra ........................................................ 46


Subsidiary Argument: even in an Apportionment under Art. 17(2) DTC-JT is made, Tralaland still

retains the majority of its Taxation Rights over the Clients’ payments .................................................. 48

MUSICALIA’S INCOME FROM THE JAZZ FESTIVAL IS ONLY TAXABLE IN TRALALAND ............................... 50

The “Sponsorship-Income” is Business Income according to Art. 7 DTC-JT ....................................... 50

The “Sponsorship-Income” is not a Royalty covered by Art. 12 DTC-JT .............................................. 51

Art. 17(2) DTC-JT does not apply to Musicalia’s Income from the “Sponsorship Agreement” with La

Cervecita ................................................................................................................................................. 52

Musicalia’s Income from the Ticket sale is not covered by Art. 17(2) DTC-JT ..................................... 53

4

Musicalia does not have a PE in Jazzterra ............................................................................................. 54


SUBSIDIARY ARGUMENT: JAZZTERRA IS NOT ALLOWED TO LEVY TAX ACCORDING TO THE BILATERL

INVESTMENT TREATY .................................................................................................................................. 56

BIT is applicable ..................................................................................................................................... 56

Indirect expropriation is given ............................................................................................................... 57


VI OVERALL CONCLUSION ................................................................................................................. 59

VII REQUESTS ....................................................................................................................................... 60

VIII ANNEXES ......................................................................................................................................... 61

IX ABBREVIATIONS ............................................................................................................................... 64

5

II LIST OF SOURCES

BOOKS

Achatz, M., Die Besteuerung der Non-Profit-Organisationen 3 Vereinsgesetz - Vereinsrichtlinien -

Rechnungslegung und Rechnungswesen – Spendenbegünstigung, (2002).

Aigner, D. J., Sponsoring wirtschaftliche, rechtliche, steuerliche und kommunikative Aspekte,

(2012).

Alpert, H. H./Roberts, S. I., Essays on international taxation, (1993).

Aust, A., Modern treaty law and practice 2nd ed., (2009).

Baker, P. Double taxation conventions a manual on the OECD model tax convention on income and

on capital, (2001).

Bendlinger, S., Die Betriebsstätte in der Praxis des internationalen Steuerrechts inkl. Glossar &

Checkliste zum „Betriebsstätten-Risiko“, (2009).

Bernasconi-Osterwalder, N., Johnson, L., Commentary to the Austrian Model Investment Treaty,

(2011).

Brugger, F., Permanent Establishments in international and EU tax law, (2011).

De Broe, L., International tax planning and prevention of abuse, (2008).

Endres, D., Spengel, C., International company taxation and tax planning, (2015).

Engelen, F. A., Interpretation of Tax Treaties under international law a study of articles 31, 32 and

33 of the Vienna Convention on the Law of Treaties and their application to tax treaties, (2004).

Fisher, A. S., Restatement of the law, (1965).

Gassner, W., Aktuelle Entwicklungen im internationalen Steuerrecht das neue Musterabkommen der

OECD, (1994).

Görl, M., Die freien Berufe im internationalen Steuerrecht der Bundesrepublik Deutschland, (1983).

6

Grossmann, M., Die Besteuerung des Künstlers und Sportlers im internationalen Verhältnis, (1992).

Hahn-Joecks, G., Zur Problematik der Besteuerung ausländischer Künstler und Sportler, (1999).

Helminen, M., The Dividend Concept in International Tax Law: Dividend Payments Between

Corporate Entities, (1999).

Helminen, M., The international tax law concept of dividend, 2nd ed. (2017).

Hisrich, R. D., Ramadani, V., Effective Entrepreneurial Management Strategy, Planning, Risk

Management, and Organization, (2017).

Hollis, D. B., The Oxford guide to treaties 1st ed., (2012).

Karundia, A., Taxmann's Law practice relating to permanent establishment, (2015).

Kluge, V., Das internationale Steuerrecht, Gemeinschaftsrecht, Außensteuerrecht, Abkommensrecht

4th ed. (2000).

Kobetsky, M., International taxation of permanent establishments principles and policy, (2011).

Lang, M., Pistone, P. et al, Beneficial Ownership Recent Trends, (2013).

Lang, M., Tax Treaties: Building Bridges between Law and Economics, (2010).

Lang, M., The OECD-Model-Convention and its update 2014, (2015).

López Escarcena, S., Indirect expropriation in international law, (2014).

Maisto, G., Taxation of Intercompany Dividends Under Tax Treaties and EU Law, (2012).

Meindl-Ringler, A., Beneficial Ownership in International Tax Law, (2016).

Miller, A., Oats, L., Mulligan, E., Principles of international taxation 6th ed. (2017).

Molenaar, D., Taxation of international performing artistes the problem with article 17 OECD and

how to correct him, (2006).

7

Reimer, E./Schmid, S./Orell, M., Permanent Establishments: A Domestic Taxation, Bilateral Tax

Treaty and OECD Perspective 5th ed., (2016).

Salacuse, J. W., The law of investment treaties, (2010).

Sasse, J. P., An Economic Analysis of Bilateral Investment Treaties, (2011).

Schaffer, E., Income allocation for entertainers and sportspersons in a tax treaty context the

application of Art. 17 (1) and Art. 17 (2) of the OECD Model Convention, (2016).

Schaffner, J., How fixed is a permanent establishment?, (2013).

Seiler, M., GAARs and judicial anti-avoidance in Germany, the UK and the EU, (2016).

Simader, K./Titz, E., Limits to tax planning, (2013).

Sinclair, I., The Vienna convention on the law of treaties 2nd ed., (1984).

Skaar, A. A., Permanent establishment erosion of a tax treaty principle, (1991).

Westin, R. A., International taxation of electronic commerce 2nd ed., (2007).

Contributions in Books

Canete, B./Staringer, C. ,Missbrauchserfassung im DBA-Recht durch Anwendung von Beneficial-

ownership-Konzepten, In: Lang/Schuch/Staringer, Die Grenzen der Gestaltungsmöglichkeiten im

Internationalen Steuerrecht, (2009), p. 169.

Cordewener, A., Tax Treaty issues Related to Qualification, Allocation and Apportionment of Income

Derived by Entertainers and Sportspersons, In: Maisto, G., Taxation of Entertainers and

Sportspersons Performing Abroad, (2016).

Daxkobler, K., Authority to Conclude Contracts in the Name of the Enterprise, In: Lang, M.,

Dependent Agents as Permanent Establishments, 85, (2014).

De Broe, L., Tax Residence of Companies under Domestic Tax Laws, In: Maisto, G., Residence of

companies under tax treaties and EC Law, (2009).

8

Engelen, F., How "Acquiescence" and "Estoppel" Can Operate to the Effect that the States Parties to

a Tax Treaty are Legally Bound to Interpret the Treaty in Accordance with the Commentaries on the

OECD Model Tax Convention, In: Douma, S., Engelen, F., The legal status of the OECD

commentaries (2008).

Felderer, D., Taxation of Artistic and Athletic Performance under Art. 17(2) OECD Model, In:

Loukota, W., Taxation of Artistes and Sportsmen in International Tax Law, (2007).

Hansen, S. F., Denmark: Beneficial Owner – Article 10(2) of the Denmark-Luxembourg Income Tax

Treaty of 1980, In: Kemmeren, Tax Treaty Case Law around the globe 2012, (2013).

Haslinger, K., Der Ort der tatsächlichen Geschäftsleitung als Tie-Breaker nach Art. 4 Abs 3 OECD-

MA und seine in Diskussion befindlichen Reformen, In: Lang, M., Die Ansässigkeit im Recht der

Doppelbesteuerungsabkommen, 193, (2008).

Juarez, A., The Application of Article 17(2) of the OECD Model Convention, In: Maisto, G., Taxation

of Entertainers and Sportspersons Performing Abroad, (2016).

Lang, M., The Application of Article 17 of the OECD MC in a Tax Treaty Context – Income

Allocation and its Relevance for the Application of Article 17(1) and Article 17(2), In: Schaffer,

Domestic Attribution of Income and Taxation of International Entertainers and Sportspersons,

(2017a).

Loukota, Unselbständige Künstler und Sportler, In: Gassner, W., Arbeitnehmer im Recht der

Doppelbesteuerungsabkommen, (2003).

Malin, A., Employed Artists and Sportsmen according to the OECD Model, In: Loukota, W.,

Taxation of Artistes and Sportsmen in International Tax Law, (2007).

Plakhin, Y., The place of effective management as a tie-breaker criterion, In: Hofstätter, M., Dual

residence in tax treaty law and EC law, (2009).

Sengputa, D.P., India: Is a Competent Authority Determination on the Existence of a PE in the Source

State Determinative? In: Lang, M./Rust, A./Owens, J./Pistone, P./Schuch, J./Staringer, C., et al., Tax

Treaty Case Law Around the Globe 2015, (2016).

9

Toifl, G., Vrignaud, P., Einkünfte von Künstlern und Sportlern im internationalen Steuerrecht, In:

Ehrke-Rabel, T., Künstler und Sportler im nationalen und internationalen Steuerrecht

Einkommensteuer, Umsatzsteuer, Sozialversicherung, 3th ed., (2011).

Vallada, F./Rust, A., Beneficial Ownership According to Articles 10, 11 and 12 of the 2014 OECD

Model Convention, In: Lang/Pistone/Rust/Schuch/Staringer/Storck, The OECD-Model-Convention

and its Update 2014, (2015).

Van Weeghel, S., The Tie-Breaker revisited: Towards a formal criterion?, In: Hinnekens, L.,

Vanistendael, F., A vision of taxes within and outside European borders Festschrift in honor of Prof.

Dr. Frans Vanistendael, (2008).

COMMENTARIES

Aigner, D. J., Kofler, G. W., Tumpel, M. DBA OECD-Musterabkommen mit den Besonderheiten der

österreichischen DBA, (2016).

Dorr, O., Vienna Convention on the Law of Treaties a commentary, (2012).

Gosch, D./Baranowski, K.-H./Becker, H., DBA-Kommentar: Doppelbesteuerungsabkommen auf

dem Gebiet der Steuern vom Einkommen und vom Vermögen, auf dem Gebiet der Erbschaftsteuer,

(2008).

Haase, F., Becker, K. Außensteuergesetz, Doppelbesteuerungsabkommen 2nd ed., (2012).

IBFD, Global Tax Treaty Commentaries, (2014).

Strunk, G. Aussensteuergesetz, Doppelbesteuerungsabkommen Kommentar, (2017.)

Vogel, K., Klaus Vogel on double taxation conventions a commentary to the OECD-, UN- and US

model conventions for the avoidance of double taxation on income and capital, with particular

reference to German treaty practice 3rd ed., (1997).

Vogel, K., Lehner, M., Doppelbesteuerungsabkommen, 6th ed., (2015).

Vogel, K., Reimer, E., Rust, A., Becker, J., Klaus Vogel on double taxation conventions 1, (2015a).

10

Vogel, K., Reimer, E., Rust, A., Becker, J., Klaus Vogel on double taxation conventions 2, (2015b).

Wassermeyer, F., Doppelbesteuerung OECD-Musterabkommen 3rd ed., (2015).

JOURNALS & ARTICLES

Alvarrenga, C. A., Preventing Tax Avoidance: Is There Convergence in the Way Countries Counter

Tax Avoidance?," In: Bulletin, 67, (2013).

Ault, H. The Role of the OECD Commentaries in the Interpretation of Tax Treaties, In: Intertax, 144,

(1994).

Avery Jones, J. The Effect of changes on the OECD Commentaries after a Treaty is concluded, In:

Bulletin, 102, (2002).

Avery Jones, J., Article 3(2) of the OECD Model Convention and the Commentary to it: Treaty

Interpretation, In: European Taxation, 33, (1993).

Avery Jones, J., Place of Effective Management as a Residence Tie-Breaker, In: Bulletin, 20, (2005).

Bakker, A. J., Transfer Pricing and Intra-Group Financing: Low-Hanging Fruit?, In: Derivatives

Financial Instruments, 15, (2013).

Banfi, L./Mantegazza, F., An Update on the Concept of Beneficial Ownership from an Italian

Perspective, In: European Taxation, 52, (2012).

Barret, E., The Changes Introduced by the 2014 Update to the OECD Model Tax Convention, In:

Bulletin, 68, (2014).

Bendlinger, S., New interpretation of the concept of permanent establishment in tax treaty law, In:

SWI, 358, (2006)

Beretta, G., The Notions of “Beneficial Ownership” and “Place of Effective Management” in Respect

of a Passive Holding Company, In: European Taxation, 57, (2017).

Blessing, P. H., The Debt-Equity Conundrum - A Prequel, In: Bulletin, 66, (2012).

BMF, Zirkusähnliche Events in Österreich, In: SWI, 35, (2007).

11

Burgstaller, E./Haslinger, K., Place of Effective Management as a Tie-Breaker-Rule- Concept,

Developments and Prospects, In: Intertax, 32, (2004).

Chew, V. T., The Application of Tax Treaties to Collective Investment Vehicles: Beneficial Owner

Requirement Explained?, In: Derivatives Financial Instruments, 17, (2015).

Collier, R., Clarity, Opacity and Beneficial Ownership, In: British Tax Review, 6, (2011).

De Broe, L./Goyette, N./Martin, P. P./Rohatgi, R./Van Weeghel, S./West, P., International - Tax

Treaties and Tax Avoidance: Application of Anti-Avoidance Provisions, In: Bulletin, 65, (2015).

Du Toit, C., The Evolution of the term "Beneficial Ownership" in Relation to International Taxation

over the Past 45 Years, In: Bulletin, 64, (2010).

Felderer, D., DBA-Schutz fur ausländische Kunstler- und Sportlergesellschaften?, In: SWI, 456,

(2007).

Garcia Prats, F. A., Qualification of Hybrid Financial Instruments in Tax Treaties, In: Diritto e

Pratica Tributaria Internazionale, 977, (2011).

Gooijer, J., Beneficial Owner: Judicial Variety in Interpretation Counteracted by the 2012 OECD

Proposals?, In: Intertax, 42, (2014).

Grams, Molenaar, Zum Regelungsinhalt des Art. 17 Abs. 2 OECD-Musterabkommen, In: IStR, 378,

(2002).

H.M. Simonis, P., BITs and Taxes, In: Intertax, 42, (2014).

Helminen, M., Classification of Cross-Border Payments on Hybrid Instruments, In: Bulletin, 56,

(2004).

Hinnekens, L., Tax avoidance concepts and European tax education, In: European Taxation, 95,

(1999).

Hoor, O., The Concept of Permanent Establishments, In: European Taxation, 54, (2014).

12

Jain, S./ Prebble, J./ Bunting, K., Conduit companies, beneficial ownership, and the test of substantive

business activity in claims for relief under double tax treaties, In: WU International Taxation

Research Paper, 386, (2014).

Jiménez, A. M., Beneficial Ownership: Current Trends, In: World Tax Journal, 35, (2010).

Lang, M., Brugger, F., The role of the OECD Commentary in tax treaty interpretation, In: ATF, 95

(2008).

Lang, M., The Interpretation of the Multilateral Instrument, In: SWI, 11, (2017b).

Larking, B., The Importance of Being Permanent," In: Bulletin, 266, (1998).

Lopes Dias V.S., G., The Concept of Debt-Claim as the Key Distinguishing Factor between Dividend

and Interest Income in the OECD Model, In: Derivatives Financial Instruments, 17, (2015).

Metzler, V./Stieglitz, A., Der de Beers Fall: A Role Model for the Determination of Corporate

Residence in Tax Treaties? In: SWI, 456, (2004).

Oliver, J. D. B., Libin, J. B., van Weeghel, S., du Toit, C., Beneficial Ownership, In: Bulletin, 54

(2002).

Owens, J., Progress Report: Taxation and Electronic Commerce, In: European Taxation, 39, (1999).

Panayi, C. H., Treaty Shopping and Other Tax Arbitrage Opportunities in the European Union: A

Reassessment – Part 2, In: European Taxation, 46, (2006).

Piantavigna, P., Tax Abuse and Aggressive Tax Planning in the BEPS Era: How EU Law and the

OECD Are Establishing a Unifying Conceptual Framework in International Tax Law, despite

Linguistic Discrepancies, In: World Tax Journal, 47, (2017).

Pijl, H., Agency Permanent Establishments: in the name of and the Relationship between Article 5(5)

and (6) – Part 2, In: Bulletin, 62, (2013).

Poiret, C., Beneficial Ownership: Concept, History and Perspective, In: European Taxation, 56,

(2016).

13

Portner, R., Steuerliche Aspekte des E-Commerce, In: Datenverarbeitung – Steuern - Wirtschaft -

Recht,118, (2000).

Pötgens, F. P. G., Independent Professional Diver Residing in the Netherlands Did Not Have a Fixed

Base in India, In: European Taxation, 436, (2016).

Reimer, E., Interpretation of Tax Treaty, In: European Taxation, 458, (1999).

Rotondaro, C., The Right to Redemption as a Key Characterization Factor in the OECD Model

Convention Passive Income Taxation System: The Case of Reverse Convertibles, In: Derivatives


Silberztein, C., Granel, B. t., Tristram, J.-B., OECD Multilateral Convention to Prevent BEPS:

Implementation Guide and Initial Thoughts, In: International Transfer Pricing Journal, 24, (2017).

Tetlak, K., Tax Treatment of Team Performances under Art. 17 of the OECD Model Convention, In:

World Tax Journal, 262, (2010).

Tolstrup, B., Bjørnholm, N., Beneficial Ownership - Withholding Tax on Dividends and Interest from

the Danish Perspective, In: Bulletin, 65, (2011).

van Gelder, G., Niels, B., Recent Developments in Hybrid Financial Instruments, In: Derivatives


Vitko, V., The Use of Tax Treaties and Treaty Shopping: Determining the Dividing Line, In: Bulletin,

67, (2013).

Wheeler, J., The Attribution of Income to a Person for Tax Treaty Purposes, In: Bulletin, 59, (2005).

Wheeler, J., The Missing Keystone of Income Tax Treaties, In: World Tax Journal, 247, (2011).

14

JUDGEMENTS

Austria

UFS, no. RV/2727-W/02, (27.03.2003).

VwGH, no. 2000/14/0165, (11.12.2003).

VwGH, no. 2000/15/0033, (27.11.2003).

VwGH, no. 93/15/0094, (17.12.1993).

VwGH, no. 96/124/0084, (12.05.1997).

Australia

ATO, no. 2005/2, (09.03.2005).

Federal Court of Australia, no. NG 225 of 1997, (20.08.1997), Lamesa Holdings BV.

High Court of Australia, 21 A.T.R. 531, (22.08.1990), Thiel.

Belgium

Court of Appeal, Ghent, no. 2002/AR/1211, (13.06.2006).

Court of Cassation, no. I 1082, (06.06.1961) Brepols.

Canada

Federal Court of Appeal, no. A-252-08, (26.02.2009), Prévost.

Federal Court of Appeal, no. DTC 6169, (24.02.2000), The Queen v. William A. Dudney.

Supreme Court of Canada, no. 23940 (22.06.1995), Crown Forest Industries Ltd.

Tax Court of Canada, 2004-4226(IT)G, (22.04.2008), Prévost.

Tax Court of Canada, 2005-170(IT)G (16.05.2008).

15

Tax Court of Canada, 2012 TCC 57, (24.02.2012) Velcro.

Tax Court of Canada, 98-1222(IT)G (07.12.1999).

Czech Republic

Supreme Administrative Court, 2 Afs 86/2010-14, (10.06.2011).

Denmark

Landsskatteretten (Danish National Tax Tribunal), no. 11-00210, SKM2012.409LSR, (31.01.2012).

LSR, Eastern High Court, SKM 2010.268, (20.12.2011).

Finland

Supreme Administrative Court KHo, no. 14 ITLR 990, (12.12.2011).

Supreme Administrative Court KHo, no. 139/2001, (29.01.2001).

France

Conseil d'Etat, no. 233894, (30.12.2003).

Conseil d'État, nos. 304715 and 308525 (31.03.2010), Société Zimmer Ltd.

Tribunal administratif, no. 1505165/1-1, (12.07.2017), Google Ireland Ltd.

Germany

BFH, no. I R 130/84, (27.07.1988).

BFH, no. I R 30/07, (04.06.2008).

BFH, no. I R 6/07, (04.03.2009).

BFH, no. I R 77/88, (11.10.1989).

BFH, no. I R 77/91, (2.12.1992).

16

BFH, no. I R 80-81/91, (03.02.1993).

BFH, no. I R 80/92, (19.5.1993).

FG Münster, no. 2 K 40000/03 E, (03.02.2006).

India

AAR (Authority for Advanced Rulings), NO. 661 OF 2005, (13.02.2006).

Delhi ITAT (Income Tax Appellate Tribunal), no. 96 TTJ Delhi 1, (22.06.2005).

Mumbai ITAT (Income Tax Appellate Tribunal), no. 3208/Mum/2003, (19.11.2010).

Italy

Provincial Tax Court of Turin, no. 93/13, (20.03.2013).

Regional Tax Court of Abruzzo, no. 958/12, (30.08.2012).

Regional Tax Court of Lombardy, no. 3183/15, (10.07.2015).

Regional Tax Court of Piedmont, no. 616/14, (07.05.2014).

Supreme Court, no. 27113/16, (28.12.2016).

Japan

Tokyo District Court, 2015 (Gyo-Ko) 222, (28.01.2016).

Netherlands

Hoge Raad, no. 32.709, (09.12.1998).

Hoge Raad, NJ 1990, 106, (29.06.1990), Gabrielle Wehr.

Hoge Raad, no. 28.638, (06.04.1998).

Hoge Raad, no. 35.415, (21.02.2001).

17

Norway

Supreme Administrative Court Norway, no. HR-2011-02245-A, (02.12.2011), Dell Products v. The

State.

Spain

Audiencia Nacional, no. 1110/2003, (18.07.2006), Real Madrid.

Audiencia Nacional, no. 281/2012, (10.07.2015).

Sweden

Supreme Administrative Court (HDF), no. 4890-13, (06.12.2013).

Regeringsrätten, no. RÅ 2002 ref. 89, (30.10.2002), Holiday on Ice.

Switzerland

SFTA, A-6537-2010, (07.03.2012), Bank A (swap transaction).

Supreme Court, 2A.239/2005, (28.11.2005).

United Kingdom

Court of Appeal, no. A3/2005/2497, (02.03.2006), Indofood International Finance.

United States

Court of Appeal, no. 157 F.3d 231, (13.10.1998), ACM Partnership v. Commissioner.

Court of Appeal, no. 254 F. 3d. 1014, (20.06.2001), United Parcel Service of America.

US Tax Court, nos. 14296-92, 14297-92, 14298-92,14299-92, (02.05.1995), Marine Insurance.

18

OECD DOCUMENTS

OECD Report, Double Taxation Conventions and the use of Conduit Companies, (1987).

OECD-Model Commentary 2014, (2014b).

OECD-Model Convention 2014, (2014a).

OECD, Multilateral Instrument, (2016b).

OECD, Explanatory Statement of the Multilateral Instrument, (2016a).

INTERNATIONAL DOCUMENTS

Shome, P./Committee, E., Final Report on General Anti Avoidance Rules (GAAR) in Income-tax

Act, (1961).

UN, Economics and social council, Committee of Experts on International Cooperation in Tax

Matters, E/C.18/2006/2., A report on Treaty Abuse and Treaty Shopping, (2006).

US Model Bilateral Investment Treaty (2012).

VCLT, Vienna Convention on the Law of Treaties (1980).

ICJ Report 1991, ICJ, (31.07.1989), Arbitral Award.

FISCAL AUTHORITIES

Austria

BMF, EAS nos. 350, 501, 750, 754, 900, 740, 1234, 1543, 1973, 2921, 3045.

BMF, EAS no. 1536 (27.09.1999).

Germany

BMF, Betriebstätten-Verwaltungsgrundätze, (25.08.2009).

19

III STATEMENT OF FACTS

FACTS OF THE CASE

ENTITIES INVOLVED

1 Intermezzo Productions (hereinafter referred to as Intermezzo) is a company incorporated under

the law of and resident in Waltzabia.

2 Musicalia is a limited liability subsidiary of Intermezzo incorporated under the law of Tralaland

and registered into the Companies House of the city of Allegro in the state of Tralaland on 2

January 2017. Musicalia operates under the corporate object “recording and producing music

albums, selling souvenirs, merchandising/promoting/selling tickets to concerts, organizing

music festivals and representing musicians”. In the year 2018 Musicalia did not have any

employees.

3 Milestone is a limited liability subsidiary of Musicalia incorporated on 28 February 2017 into

the Companies House of Bebop City in the state of Jazzterra. The corporate objects of Milestone

and Musicalia are congruent, namely: “recording and producing music albums, selling

souvenirs, merchandising/promoting/selling tickets to concerts, organizing music festivals and

representing musicians”. The 2018 annual shareholder meeting of Milestone took place on the

25th of April 2018 in the state of Tralaland. The board of directors of Milestone is constituted

of four members, all of whom live in Tralaland. The board of directors met five times in the

year of 2018 in their capacity to supervise the activities of Milestone. Three of those meetings

took place in the VIP Lounge of the airport of Beat City in Waltzabia, another two were held at

the premises of Musicalia in the state of Tralaland. In these meetings, each of which did not

exceed three hours in length, the board of directors analysed Milestone’s performance and

compared the economic results with the results published in the industry. Moreover the board

of directors determines the long-term commercial strategy, usually basing their decision on the

proposals of the CEO and senior executives of Milestone.

20

ECONOMIC ACTIVITIES OF THE ENTITIES INVOLVED

4 Musicalia acquired a recording studio in the city of Allegro in the state of Tralaland on the

31 March 2017. Even though the recording studio including the equipment therein was fully

functioning at the time of completion of the purchase, Musicalia did not start recording. The

sole director Ms Corchea postponed the recording activities arguing that despite the excellent

artists available in Tralaland, the lack of adequate technicians precludes Musicalia from

recording at the acquired recording studio.

5 In order for Musicalia to finance this purchase, Intermezzo had granted a loan of USD 2 million

to Musicalia on 1 March 2017. On 15 December 2018 Musicalia allocated USD 150,000 as a

repayment of the loan to Intermezzo, even though the payment calendar only obliged Musicalia

to repay USD 50,000 in 2018. The funds for such repayment were covered by a dividend of

USD 200,000 that Musicalia received from its subsidiary Milestone. The dividend payment in

turn was derived from an enormous profit of USD 300,000 that Milestone obtained from

organising the jazz festival “Blue Train” in April 2018.

6 In 2018 Musicalia decided to sell souvenirs with jazz motives in Jazzterra from February 2018

onwards. For storage purposes, Musicalia concluded a warehousing contract with its subsidiary

Milestone, as Milestone had rented an office including a 100-square-metre garage in Jazzterra.

The agreement stipulated that Musicalia was responsible for dispatching the merchandise, such

as white t-shirts, cups, balls and dishes (hereinafter referred to as “the stock”), which were

stored at Milestone’s premises. Milestone was in charge of cleaning, unloading and correctly

placing the stock provided by Musicalia into the garage, where the stock was stored for 36 days.

Furthermore, Milestone concluded a contract with the third party company Yohoho, a resident

of Jazzterra. Yohoho was responsible for printing and branding the products with jazz motives

and has a key to the garage. To safeguard the required quality standards of Musicalia, the sole

director of Musicalia regularly visits the factory of Yohoho. After completion of the printing

and branding process, the merchandise was sent directly from Yohoho’s factory to the

distributors in Jazzterra. The corresponding sales contracts with the distributors were signed by

Musicalia. Whereas the web page promoting the products and transmitting the sales orders of

the distributors was hosted on a server in Jazzterra, the maintenance of the website was

performed in Tralaland.

21

7 On 20 January 2018 Intermezzo hired ten Tri-Bob musicians to pursue the opportunity to hire

out musicians to big concert halls, clubs and theatres1 in Jazzterra. For this purpose the

musicians signed a one-year labour contract with Intermezzo. Subsequently Musicalia hired out

the ten musicians of Intermezzo for a one-year period.

8 Milestone provided information on a monthly basis to Musicalia regarding potential clients who

may be interested in hiring Musicalia’s musicians in Jazzterra. This information was intended

to enable Musicalia to predict the short-term behaviour and preferences of jazz enthusiasts in

Jazzterra and accordingly allow Musicalia to select the best musicians for any particular time

and location out of the ten musicians Musicalia already hired out. Whereas the contracts with

the clients were negotiated by the sales director of Milestone, for which Milestone only received

a small commission, the prices of the concert, the terms and conditions of the performance were

exclusively determined by Intermezzo. If any doubts arose regarding the negotiation process

Milestone was obliged to consult Intermezzo. The contracts were then concluded between

Musicalia and the clients in Jazzterra and subsequently all payments resulting thereof were

made to Musicalia.

9 On 3 June 2018 Musicalia organised a small jazz festival with the ten musicians hired out from

Intermezzo. This festival took place in the famous Apollo Theatre in Bebop City in the state of

Jazzterra. From March onwards, Milestone was involved in the organising activities. Firstly

Milestone was in charge of promoting and advertising the festival in 15-minutes slots on

Jazzterra national television on Sundays. Moreover Milestone aided with the logistics of the

festival such as selling tickets, bringing the instruments of the musicians to the theatre,

arranging the final programme, organising a cleaning service for the theatre, etc. – and in

exchange for these services provided, Milestone received remuneration from Musicalia.

10 On 20 May 2018, Musicalia and La Cervecita – a third party company which is one of the most

popular beer companies in Jazzterra – signed a three-year sponsorship agreement for concerts

organised by Musicalia in Jazzterra. Accordingly La Cervecita paid annual sponsorship fees of

USD 1 million to Musicalia, under the exclusivity clause that no other alcoholic beverages

1 Hereinafter referred to as clients

22

would be sold at events organised by Musicalia. On 20 December 2018, La Cervecita disbursed

its first sponsorship payment of USD 1 million to Musicalia.

RELEVANT ASPECTS OF INTERNATIONAL LAW

MEMBERSHIPS IN INTERNATIONAL ORGANISATIONS

11 All of the states are OECD member countries as well as members of the UN.

TAX TREATIES

12 A tax treaty is in force since 2007 between Tralaland and Jazzterra (hereinafter DTC-TJ). It is

based on the 2005 OECD-MC. The exemption method was chosen as the method to eliminate

double taxation. There are two deviations from the OECD-MC. Firstly, Art. 10(2) reduces

source taxation to 0% if the beneficial owner is a company that holds at least 25% of the

company paying the dividends for at least six months. Secondly, Art. 21 grants taxing rights to

both the residence state and the source state.

13 The deviation in Art. 10(2) DTC-JT is formulated in the following way: “However, such

dividends may also be taxed in the Contracting State of which the company paying the dividends

is a resident and according to the laws of that State, but if the beneficial owner of the dividends

is a resident of the other Contracting State the tax so charged shall not exceed:

14 (a) 0% of the gross amount of the dividends if the beneficial owner is a company (other than a

partnership) which holds directly at least 25% of the capital of the company paying the

dividends where such holding is being possessed for an uninterrupted period of no less than six

months.

15 (b) 15% of the gross amount of the dividends in all other cases.”

16 Both Tralaland and Jazzterra deposited the instrument of ratification of the Multilateral

Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit

Shifting (MLI). The MLI has entered into force on 1 August 2017 and was ratified by Tralaland

on 25 September 2017 and by Jazzterra on 30 November 2017. Both states list this DTC as a

23

covered tax agreement. Tralaland and Jazzterra reserved the right not to apply Art. 4 on dual

resident entities and withdrew from the application of the “Simplified Limitation on Benefits

Provision” in Art. 7. Additionally, both states have notified Art. 12 on the artificial avoidance

of PE status through commissionaire arrangements. Also, they have chosen to apply Option A

in Art. 13 on the artificial avoidance of PE status through the specific activity exemptions.

17 Waltzabia has neither concluded a tax treaty with Jazzterra nor Tralaland.

BILATERAL INVESTMENT TREATIES

18 Furthermore, there are bilateral investment treaties in force between Tralaland and Jazzterra.

The latest version of these treaties is in force since 2012 and is based on the 2012 version of the

US Model Bilateral Investment Treaty.

OTHER TREATIES

19 Finally, the Vienna Convention on the Law of Treaties has been in force in all of the three states

since 2000.

DOMESTIC LAW

TRALALAND

General rules

20 In Tralaland, personal income is taxed at 12.5%.

21 Furthermore, no unilateral relief for juridical double taxation exists in Tralaland.

22 Tralaland is a dualist state.

Rules concerning dividends

23 No withholding tax is levied on payments of dividends, royalties and interest made by resident

companies to foreign recipients.

24

Residence Rules

24 According to the domestic law of Tralaland, a company is resident in this state provided that

either

it is registered in Companies House of Tralaland or

its place of effective management is situated in Tralaland.

General rules

25 In Jazzterra, personal income is taxed at 30%.

26 Furthermore, no unilateral relief for juridical double taxation exists in Jazzterra.

27 Jazzterra is a dualist state.

Rules concerning dividends

28 In the domestic law of Jazzterra, a withholding tax at a rate of 15% is levied on dividend

payments.

29 Furthermore, in February 2018, a GAAR was introduced in the legislation of Jazzterra which

stipulates that acts constituting an abuse of rights could be disregarded by the tax administration

if

those acts have a fictitious character or

they seek the benefit of a literal application of texts or decisions contrary to the

objectives sought by their authors

provided that such acts are definitely inspired by the purpose of avoiding or reducing the tax

liability that the taxpayer would normally have borne in case such instrument had not been

concluded.

Residence rules

30 Contrary to Tralaland, a company is deemed to be resident in Jazzterra only if its place of

effective management is situated there.

25

WALTZABIA

Residence rules

31 The domestic law of Waltzabia stipulates that only a company incorporated in Waltzabia is

deemed to be a resident of this state.

COMMON DOMESTIC LAW RULES

32 The legal systems of the two countries do not correspond specifically to the “civil law” or

“common law” models, but rather combine elements of the two systems.

33 In all countries concerned, the tax year runs from 1 January until 31 December.

34 None of the domestic laws provides a definition of the terms “permanent establishment”,

“dividend” or “beneficial owner”.

35 All countries involved are members of the UN as well as the OECD.

36 None of the countries involved are EU or EEA/EFTA Member States.

26

IV ISSUES

TAX AUTHORITIES - DEFENDANT

37 The tax authorities of Jazzterra carried out an audit regarding the income of Musicalia. They

concluded that Musicalia is not the beneficial owner of the dividends distributed by Milestone.

Therefore, the DTC-JT is not applicable and domestic law applies. Consequently, a WHT at a

rate of 15% must be levied.

38 Milestone is a resident of both Jazzterra and Tralaland which requires the application of the tie-

breaker rule of Art. 4(3) DTC-JT. Since Musicalia is also a resident of Tralaland, the DTC-JT

is generally applicable, but only some of the distributive rules are applicable as both companies

are located in the same country. Therefore, Art. 10 DTC-JT is not applicable and the dividend

payments to Musicalia constitute other income covered by Art. 21 DTC-JT.

39 Moreover, Musicalia makes use of several abusive practices such as treaty shopping, which do

not entitle Musicalia to treaty benefits according to a national GAAR and the MLI. Even if the

DTC was applicable, Jazzterra would still have the taxing right regarding Musicalia’s income,

since the activities performed by Musicalia constitute a PE in Jazzterra according to Art. 5

DTC-JT.

40 Furthermore, the income Musicalia receives for the performance of the musicians is covered by

Art. 17 DTC-JT, thereby granting the exclusive taxing right to Jazzterra. Even if Art. 7 is to be

applied instead, Musicalia still has a PE in Jazzterra and Jazzterra therefore would retain most

of its taxing rights.

41 The sponsorship payments received from La Cervecita must be attributed to the musicians

directly and are therefore covered by Art. 17(2) DTC-JT due to the direct link between the

payments and the musicians’ performance. Therefore, Jazzterra retains the taxing right of the

sponsorship income. Even if the income resulting from the sponsorship agreement should be

covered by Art. 12 DTC-JT, the taxation right is allocated to Jazzterra since Musicalia’s

activities give rise to a PE therein. If Art. 7 DTC-JT should be applicable to the sponsorship

payments, Jazzterra would nevertheless be entitled to tax the income attributed to the PE.

27

MUSICALIA - APPLICANT

42 Firstly, it will be demonstrated that Milestone is a resident of Jazzterra under Art. 4(3), since

its POEM is situated therein.

43 Secondly, it will be shown that the MLI has not yet entered into effect in the meaning of Art.

35. Under Art. 34, the MLI must first enter into force before it can enter into effect. Both states

ratified the MLI in 2017. In both states it entered into force at the beginning of 2018. However,

the MLI enters into effect in Jazzterra on 1 January 2019 as regards withholding taxes and all

other taxes.

44 Next, it will be proven that Musicalia does not have a PE in Jazzterra. The PE status fails in the

absence of the right of disposal. Accordingly, the server cannot qualify as a PE in this case.

Lastly, although the warehouse fulfils the criteria to constitute a PE under Art. 5(1), it is used

only for preparatory/auxiliary activities and therefore falls under the exception in Art. 5(4)(c).

45 As will be explained in the next section, the tax authority is not allowed to levy any WHT on

the dividend payments. To show that Musicalia is the beneficial owner of the dividends, the

following criteria will be used: the substantive business activity test and control over profits as

well as the entrepreneurial risk. Because all criteria are met, it is clear that Musicalia is the

beneficial owner. In addition, Musicalia pursues different business purposes and does not have

the aim to obtain any tax advantages. As a result, the general anti-avoidance rule is not

applicable.

46 The income from agency services to clients in Jazzterra is business income generated without

constituting a PE in Jazzterra. Musicalia has no fixed place of business at its disposal and the

agent Milestone does not have authority to conclude contracts in the name of or on behalf of

Musicalia. Even if the court holds the view that parts of this income are attributable to the artists,

Tralaland retains most of the taxing right, since Art. 17 only covers the part of the payment

actually paid for the performance of the entertainers.

47 Musicalia’s income from the festival is business income which is not earned through a PE in

Jazzterra. Both the “sponsorship” and the ticket sales are business profits, since Art. 17 and Art.

12 do not apply.

28

V ARGUMENTS

MUSICALIA IS ENTITLED TO THE TREATY BENEFITS AS IT IS A

RESIDENT OF TRALALAND PURSUANT TO ART. 4(1) DTC-JT

48 Musicalia is entitled to the benefits of the DTC since it is applicable to the current case.2 The

case falls within the personal and material scope, since Musicalia is a person who is a resident

subject to unlimited tax liability in Tralaland, and the CIT is a covered tax.3

49 As a result, the DTC-JT is applicable in the case at hand. In the following, we will give an

overview of the interpretation of the DTC-JT based on the relevant OECD-Commentary and

secondly, we will demonstrate that Milestone is a resident of Jazzterra under the respective

domestic laws.

APPLICATION OF THE 2014 OECD-COMMENTARY

50 It is generally accepted, that Arts. 31 to 33 VCLT are merely a codification of customary

international law.4 Hence, the general interpretation principles set out therein have to be applied.

Art. 31(1) VCLT stipulates that the context must be considered when interpreting treaties. The

clarifications provided by the OECD-Commentary are to be seen as such context, to indicate a

special meaning within Art. 31(4) VCLT.5 The relevance of the OECD-Commentary is further

induced from the fact that both contracting states were aware of these documents at the time of

conclusion of the treaty in 2007, when they adopted the majority of the OECD-MC word by

word.6

51 Furthermore it is crucial to determine which version of the OECD-Commentary has to be used

for interpretation. According to the introduction of the OECD-Model, countries should favour

2 (OECD, 2014a: Arts. 1-4). 3 (see m.nos. 48, 49). 4 (Dörr in Dörr, 2012: Art. 31 m.no. 7); (Sinclair, 1984: 19); (Engelen, 2004: 54 et seq.); (Pötgens, 2016: 439); (Aust,

2009: 232); (Hollis, 2012: 493); (ICJ, 31.07.1989); NL: (Hoge Raad, 29.06.1990) 5 (Avery Jones, 1993: 255); (Ault, 1994: 144-148); (Douma/Engelen, 2008: 2.1); AUS: (High Court of Australia,

22.08.1990); CA: (Supreme Court of Canada, 22.06.1995). 6 (see m.nos. 12 et seq.).

29

the dynamic interpretation of an existing DTC by giving precedence to the newest revised

OECD-Commentaries.7 Accordingly, changes and amendments in the Commentary that are not

of a substantial nature are to be considered as being consensual amongst and therefore deserving

great weight in the interpretative process.8 Hence such clarifications provided by the updated

OECD-Commentaries should be taken into account.9 What is more, a dynamic approach

ensures the congruent interpretation of identical wordings in tax treaties that were concluded at

different times.10 Tax authorities and courts worldwide follow the dynamic interpretation.11

Thus, the 2014 OECD-Commentary should be taken into account when interpreting the DTC.

MILESTONE IS A RESIDENT OF JAZZTERRA

MILESTONE’S POEM IS SITUATED IN JAZZTERRA

52 According to Art. 4(1) Milestone is a resident of a contracting state, if it is liable to tax therein

by reason of place of management. Both countries’ domestic laws stipulate the POEM as a

residency criterion.12 In the respective domestic laws, the definition of POEM makes a direct

reference to the OECD standard, therefore the meaning of POEM according to Art. 4(3) has to

be applied to determine Milestone’s residence state.13 In case that, Tralaland as well as Jazzterra

apply different POEM criteria14 to establish unlimited tax liability in their state, the tie-breaker

rule of Art. 4(3) needs to be applied, as Milestone would be qualified as a dual resident under

the DTC-JT. If Tralaland and Jazzterra share a uniform understanding of the term “POEM”,

Jazzterra should be regarded as the only residence state according to their national law without

the application of Art. 4(3) as there can only be one decisive criterion for establishing the POEM

in a jurisdiction which we show in the following argumentation.

7 (OECD, 2014b Introduction m.nos. 33-36). 8 (Reimer, 1999: 468-469). 9 (Alpert/Roberts, 1993: 68). 10 (Avery Jones, 2002: 103); (Baker, 2001: E.12). 11 US: (US Tax Court, 02.05.1995); CA: (Tax Court of Canada, 07.12.1999); AUS: (Federal Court of Australia,

20.08.1997); DK: (Landsskatteretten, 31.01.2012); NL: (Hoge Raad, 09.12.1998); (Conseil d'Etat, 30.12.2003);

FIN: (Finnish Supreme Administrative Court KHo, 12.12.2011); ES: (Audiencia Nacional, 10.07.2015). 12 (Statement of Facts, H.3.1. Residence). 13 (see Clarifications m.no. 31). 14 (see m.nos. 53 et seq.).

30

53 The place of effective management as referred to in Art. 4(3) is located where the company is

actually managed.15 This criterion alone still does not guarantee a unique POEM.16 Therefore

the POEM is to be considered the most important place of management, prevailing over all

other places where management decisions are made.17 The wording effective management

suggests that a substance over form approach has to be taken, formalities have to be disregarded

and the place where the management function is substantially performed is to be considered as

the decisive criterion.18 Therefore, determining where the POEM is situated is a question of

fact. The formal decisions made or supervision performed by the board of directors does not

determine the POEM but rather it is the place where these decisions are implemented and where

the day-to-day management is in essence performed.19

54 Furthermore, the place where shareholders meetings are held is not a criterion determining the

POEM if the shareholders do not perform managing functions.20

55 In the case at hand the POEM according to Art. 4(3) DTC-JT is situated in Jazzterra since the

management functions are materially performed by the CEO and the senior executives therein.

The CEO, Ms Coda, is responsible for day-to-day management as well as implementing the

long-term commercial strategy. The board of directors, however, meets five times a year “[f]or

the purpose of supervising the activities of Milestone” and these meetings never exceed three

hours.21

56 Even though decisions regarding long-term strategy are formally made by the board of

directors, they cannot be used to determine the POEM, since it is factually impossible to validly

discuss and vote upon detailed commercial strategies in only five meetings a year, each not

exceeding three hours, especially when considering the fact that in those meetings the directors

also analysed the overall performance and compared results with competitors’ results. In this

light however, the decisions made are only to be considered as guidelines regulating company

15 (OECD, 2014b: Art. 4 m.no. 22). 16 (Plakhin in Hofstätter, 2009: 84 et seq.); (Van Weeghel in Hinnekens/Vanistendael, 2008: 961 et seq.); (Avery Jones,

2005: 20 et seq.) 17 (De Broe in Maisto, 2009: 11). 18 (Wassermeyer et al. in Wassermeyer, 2015 Art. 4 m. no. 100) 19 (Burgstaller/Haslinger, 2004: 380); (Metzler/Stieglitz, 2004: 461); (Tumpel in Aigner et al., 2016: Art. 4 m.no. 42);

(Lehner in Vogel/Lehner, 2015: Art. 4 m.nos. 265, 268); (Plakhin in Hofstätter, 2009: 91). 20 (Wassermeyer et al. in Wassermeyer, 2015: Art. 4 m.nos. 96, 98). 21 (Statement of Facts, C. Residence of Milestone in 2018).

31

policy, which is not a criterion for determining the POEM.22 Additionally, even these decisions

are usually based on the proposals of Ms Coda and the senior executives, awarding even less

relevance to the place where the decisions are formally made by the board of directors.

57 In essence, the CEO and the senior executives in Jazzterra perform all vital commercial

decisions on a day-to-day level, as well as they provide the long-term commercial strategy for

the board of directors to decide upon. This means that the POEM is undoubtedly situated in

Jazzterra and therefore Milestone is exclusively resident in Jazzterra for the treaty purposes.

INTERIM CONCLUSION

58 To conclude, in any case applicable, Milestone is a resident of Jazzterra for national and tax

treaty purposes. As shown above, the application of Art. 4(3) leads to the unquestionable result

that Milestone is resident in Jazzterra. All management activities are in substance made by the

CEO in Jazzterra, whereas the decisions of the board are only of a formal nature, thus not

constituting effective management.

MILESTONE IS ENTITLED TO THE BENEFITS OF THE TAX TREATY

BETWEEN JAZZTERRA AND TRALALAND

59 Milestone is entitled to the benefits of the DTC-JT since the present case falls within its personal

and material scope.23 Pursuant to Art. 1, the DTC shall apply to a person which is resident of

one or both Contracting States. The term resident is defined in Art. 4 DTC-JT.24 According to

Art. 4(1), a resident of a contracting state is any person who is subject to unlimited tax liability

under the laws of that state.25 Milestone is a person pursuant to Art. 1 icw Art. 3 DTC-JT.

Furthermore, Milestone is a resident of Jazzterra, since the requirements for unlimited tax

liability in Jazzterra are met.26 Therefore, the personal scope of the DTC-JT is fulfilled. The

22 (Haslinger in Lang, 2008: 197). 23 (OECD, 2014a: Arts. 1-4). 24 (OECD, 2014a: Art. 4). 25 (OECD, 2014a: Art. 4 para. 1). 26 (see m.no. 52 et seqq.).

32

material scope is also fulfilled, as the corporate income taxes being levied in the case at hand

are covered by Art. 2 DTC-JT.

THE MLI IS NOT APPLICABLE

60 The MLI is an international agreement under international law. Consequently, the rules and

principles that must be used to interpret the MLI are those found in the VCLT. 27

61 Art. 31(1) VCLT provides the “general rule of interpretation”, which states that the treaty has

to be “interpreted in accordance with the ordinary meaning to be given to the terms of the treaty

in their context and in the light of its object and purpose”.28 Pursuant to Arts. 31 and 32 VCLT,

the materials of the OECD-MC, especially the OECD-Commentary, can be considered for the

interpretation of a DTC to ascertain the intention of the contracting states.29 Equally, the MLI

itself and the explanatory statement have to be considered when interpreting the DTC.30

62 Pursuant to Art. 24(1) VCLT, which establishes that ”a treaty enters into force in such manner

and upon such date as it may provide or as the negotiating States may agree.“31, the MLI

explicitly determines the date from which it is applicable in Art. 34 and Art. 35.

63 The ratification process of Art. 27(2) is the requirement for implementation of the MLI.32

Tralaland and Jazzterra deposited the instrument of ratification in September and November

2017.33

MLI ENTERED IN FORCE ACCORDING TO ART. 34

64 When interpreting Art. 34 of the MLI, it has to be considered that already five jurisdictions

have deposited the instrument of ratification. Therefore, Art. 34(2) will apply which clarifies

that the MLI “shall enter into force on the first day of the month following the expiration of a

period of three calendar months beginning on the date of the deposit by such Signatory of its

27 (Lang, 2017b: 11). 28 (VCLT, 1980: Art. 31 para. 1). 29 (Lang/Brugger, 2008: 98). 30 (VCLT, 1980: Art. 32); (Zöhrer/Jirousek, 2017: 217 et seq.); (Lang, 2017b: 11 et seq.). 31 (VCLT, 1980: Art. 24 para. 1). 32 (OECD, 2016b: Art. 27). 33 (Statement of Facts, G.1: At the conventional level: tax treaties).

33

instrument of ratification, acceptance or approval”.34 Following that rule, the MLI enters into

force on 1 January 2018 in Jazzterra because of the ratification on 25 September 2017 and on

1 March 2018 in Tralaland because of the ratification on 30 November 2017.

MLI HAS NOT ENTERED INTO EFFECT ACCORDING TO ART. 35

65 As explained above, the MLI entered in force but it has certainly not entered into effect. The

terms “force” and “effect” have a different meaning as the following statement will show.

According to Art. 35(1)(a) which applies to taxes withheld at source, the MLI is in effect “where

the event giving rise to such taxes occurs on or after the first day of the next calendar year”.35

66 For all other taxes, the MLI is in effect at the “beginning on or after the expiration of a period

of six calendar months from the latest of the dates on which this Convention enters into force

for each of the Contracting Jurisdictions to the Covered Tax Agreement”36 according to Art.

35(1)(b) the MLI.

67 When applying this article to the facts of the case, the effectiveness of the MLI depends on “the

latest of the dates on which the Convention enters into force”. The latest of the dates on which

the MLI enters into force is 1 March 2018 in Tralaland.37 Subsequently, the regulation is in

effect for taxes withheld at source “after the first day of the next calendar year”, i.e. on 1

January 2019.

68 Accordingly, the “entry into effect” provision that governs all other taxes also depends on the

latest date on which the MLI enters into force. As previously mentioned the latest date is 1

March 2018. Therefore, the MLI enters into effect “after the expiration of a period of six

calendar months” starting on 1 March 2018. That would lead to an effectiveness date of 1

September 2018.38

69 If the MLI entered into effect on 1 September 2018 this would result in a change of the legal

system of Jazzterra during a current tax year. In such a case, point 327 of the explanatory

34 (OECD, 2016b: Art. 34 para. 2). 35 (OECD, 2016b: Art. 35). 36 (emphasis added).

37 (OECD, 2016a: m.no. 327). 38 (Silberztein et al., 2017: 328).

34

statement regulates in detail that “in the case of a taxable year that follows the calendar year,

the provisions of the Convention would have effect with respect to the taxable period”

beginning on 1 January 2019. As described in the case, the tax year follows the calendar year.39

70 In sum and in accordance with the law, the MLI of Jazzterra enters into effect on 1 January

2019 related to withholding taxes as well as all other taxes.

MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN

JAZZTERRA

REQUIREMENTS TO CONSTITUTE A PE

71 Art. 5(1) defines a PE as a “fixed place of business through which the business of an

enterprise is wholly or partly carried on.” In addition, Art. 5(7) states that a sole shareholding

does not constitute a PE in the source state. Therefore, Milestone itself clearly does not

constitute a PE in Jazzterra. Economic activity alone in a foreign country does not automatically

constitute a PE either.40 In order to understand the concept of a PE, we will give a short

introduction of the necessary requirements. Firstly, the term “fixed place” means a mandatory

link to a specific amount of space which is connected to the soil. Connected with the term

“establishment” it is understandable that not the soil itself can qualify as the PE but instead the

tangible facility on the soil. Consequently, a website (which is undoubtedly intangible property)

cannot establish a PE.41

72 Secondly, the “place of business” and “the business of an enterprise” requires a business

activity which is carried out actively through the PE. This notion was integrated to exclude

passive investments when applying Art. 5, but considers that if the “passive income is

effectively connected to the PE and its activities”42 then the income should be attributed it.

Those exceptions can be found in e.g. Art. 10(4) or Art. 12(3).43

39 (Statement of facts, I.12 Other clarifications). 40 GER: (BFH, 04.06.2008). 41 (Reimer in Vogel et al., 2015a: Art. 5 m.nos. 13 et seqq.); (OECD, 2014b: Art. 5 m.no. 42.42); (Schaffner, 2013:

10); (Kobetsky, 2011: 118 et seq.); (Skaar, 1991: 121 et seq.). 42 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 25). 43 (Brugger, 2011: 67 f).

35

73 Lastly, the term “through which” relates to the last requirement. It has “to apply to any situations

where business activities are carried on at a particular location that is at the disposal of the

enterprise for that purpose.”44 Vogel et al. state that: “[…] disposal is the power to use the POB

[place of business] directly.”45

SERVER DOES NOT CONSTITUTE A PE BECAUSE DISPOSAL NOT GIVEN

74 The server belongs to Jazz-Telecom, an internet-service provider46 located in Jazzterra.

According to literature and the OECD-Commentary, a website, which is hosted within a disk

space of a server, cannot constitute a PE by itself.47 Firstly, it is necessary to note that the server

is owned by the ISP. The ISP provides a specific space on its server to store the company’s data

or software. Therefore, the server itself is at the only disposal of the ISP.48 Consequently, in

this case Musicalia merely rented a specific amount of virtual space on the server of Jazz-

Telecom. Musicalia has no right of disposal over the server and, thus, the third requirement

is not fulfilled.

YOHOHO DOES NOT CONSTITUTE A PE

75 Milestone does not have control over Yohoho and, therefore, Yohoho cannot constitute a PE.

In the case at hand, the question could be whether Musicalia has the right of disposal over

Yohoho. The other criteria are met because Yohoho has a factory through which business

activities (printing and branding souvenirs) are carried out. According to Vogel/Lehner, the

mere right to control or supervise activities does not mean that the disposal criterion is

fulfilled.49 In casu, Musicalia has no right of disposal over Yohoho. Moreover, it is settled case

law that the right of disposal will be measured on the criterion if the right has solidified in such

a factual or legal way that without any participation of the exercising company (in our case

44 (OECD, 2014b: Art. 5 m.no. 4.1); (Karundia, 2015: 18). 45 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 103). 46 (hereinafter ISP) 47 SWE: (HFD, 06.12.2013); AUS: (ATO, 09.03.2005); (Westin, 2007: 413 et seq.); (OECD, 2014b: Art. 5 m.no. 42

et seq.). 48 (Arnold in IBFD, 2014: Art. 5 m.no. 5.5.2.1); (OECD, 2014b: Art. 5 m.no. 42.43); (Owens, 1999: 426); (Portner,

2000: 120 et seq.). 49 (Görl in Vogel/Lehner, 2015: Art. 5 m.no. 17); see also: (Reimer in Reimer/Schmid et al., 2016: 59 et seq.).

36

Musicalia) a change or withdrawal of the right is not possible.50 Since Yohoho is a third

party company, it is clear that Yohoho is in the position to restrict the controlling activities of

Musicalia. Therefore, Yohoho does not constitute a PE for Musicalia and, thus, Jazzterra has

no taxation right regarding the income generated.

76 Yohoho cannot be deemed a dependent agent. As clearly explained51, the dependent agent must

be able to conclude contracts on behalf of the principal. In addition, he has to exercise this

authority on a regular basis.52 Yohoho does not fulfill those criteria. As a consequence, it is

absolutely clear that Yohoho is not a dependent agent.

WAREHOUSE DOES NOT CONSTITUTE A PE BECAUSE OF THE EXEMPTION IN ART.

5(4)(C) DTC-JT

77 Lastly, the warehouse cannot be deemed a PE because it falls under an exception according to

Art. 5(4)(c). As in the case of Yohoho, the first criterion of a fixed place (a warehouse is a

tangible asset) is met. The second criterion, the “place of business” is subordinated and,

therefore, excluded from the PE status based on the following arguments.53 “Art. 5(4) OECD

[…] excludes a number of POBs [places of business] from the status as a PE if the facility is

merely of a preparatory or auxiliary character.”54 Musicalia stores the souvenirs for a mere

period of 36 days and does not create any value during this time. Furthermore, it is clear that

storing the goods does not constitute the core business of Musicalia. The printing process

creates the value of the goods and makes them sellable. As a conclusion, the aim of Musicalia

is to sell the printed souvenirs to customers and, therefore, storing the goods before the

printing process starts is necessary and can qualified as a preparatory activity.55

78 The main business object is organizing events, providing agency services as well as

recording CDs and selling them. For this reason, Musicalia took a loan of USD 2 million.

Additionally, Musicalia does not have any employees to manage the stock. This is Milestone’s

50 (Rehfeld in Gosch et al., 2008: Art. 5 m.no. 50); (Sengupta in Lang et al., 2016: 362); GER: (BFH, 03.02.1993);

(BFH, 11.10.1989); AT: (UFS, 27.03.2003); CA: (FCA, 24.02.2000); IND: (Delhi ITAT, 22.06.2005). 51 (see m.nos. 111 et seqq.). 52 CA: (Tax Court of Canada, 16.05.2008). 53 (Reimer in Reimer/Schmid et al., 2016: 87) 54 (Reimer in Vogel et al., 2015a: Art. 5 m.no. 247); see also: (OECD, 2014b: Art. 5 no. 21). 55 JP: (Tokyo District Court, 28.01.2016).

37

obligation: its employees clean, unload and correctly place the goods. As a result, the warehouse

is excepted from the PE status according to Art. 5(4)(c).

INTERIM CONCLUSION

79 The arguments above show that the server cannot constitute a PE because it is not at

Musicalia’s disposal. Further, Yohoho cannot be qualified as a PE because it is a third party

company and has the factual ability to withdraw from or to limit the right of Musicalia to

supervise and control its activities at the factory at any time. Lastly, the warehouse is excepted

from the status as a PE according to Art. 5(4)(c) because Musicalia solely stores the

souvenirs, which can be qualified as a preparatory activity and thus does not create any value

there.

MUSICALIA IS THE BENEFICIAL OWNER OF THE DIVIDENDS

DEFINITION OF “BENEFICIAL OWNERSHIP”

80 “Beneficial ownership” is not defined in the OECD-MC.56 However, the OECD-Commentary

provides a negative definition which states that the “direct recipient of the dividends is not the

beneficial owner” 57 if the recipient does not have the right of usage over the dividends.

81 The international literature and jurisprudence do not agree on a uniform definition, but agree

that an autonomous international meaning should be preferred. This is also confirmed by

relevant court decisions and literature.58 Collier states: “Unfortunately, almost the only thing

on which there is widespread agreement is that the concept (of beneficial ownership) is not

particularly well defined and could benefit from greater clarity”.59 Since the 2014 OECD-MC,

a few questions concerning beneficial ownership are answered, but nonetheless, “the

56 (OECD, 2014a: Art. 10). 57 (OECD, 2014b: Art. 10 m.no. 12.4). 58 (Du Toit, 2010: 502); (Vallada/Rust, 2015: 6); (Kemmeren in Vogel et al., 2015a: pre Arts. 10-12 m.no. 15 et seq.);

(Endres/Spengel, 2015: 255 et seq.); (Helminen, 2017: 104); UK: (Court of Appeal, 02.03.2006). 59 (Collier, 2011: 684).

38

application of the facts-and-circumstances test is still not completely clear”.60 In summary, it

can be stated that a comprehensive analysis must be carried out for each individual case.

MUSICALIA MEETS THE CRITERIA TO BE THE BENEFICIAL OWNER

82 The Canadian Tax Court in Prévost and many other courts all over the world demonstrated that

the status of beneficial ownership must be decided by reference to certain criteria.61 “Commonly

cited ownership attributes are possession, use, control and risk.”62 To have a conceptional

framework to determine beneficial ownership, the following criteria will be used: the (i)

substantive business activity test, the (ii) entrepreneurial risk and the (iii) control over the

profits.63 In general, the mere fact that dividends are transferred to a parent company does not

automatically mean that the subsidiary company is not the beneficial owner.64

83 In the following sections we will show, according to the criteria explained above, that all

requirements are met and Musicalia can be considered as the beneficial owner. As a result,

no WHT may be levied in Jazzterra.

SUBSTANTIVE BUSINESS ACTIVITY TEST

84 This test seeks to establish the substantive business activities of a company. To show that

Musicalia is not a mere conduit company, some principles are considered. Firstly, it must be

noted that the term “conduit company” is unclear.65 A conduit company is defined as “[…] a

company situated in a treaty country […] acting as a conduit for channelling income

economically accruing to a person in another State who is thereby able to take advantage

‘improperly’ of the benefits provided by a tax treaty.”66 In the debate over the possible

connection between beneficial ownership and business activities, some of the literature shares

60 (Meindl-Ringler, 2016: 74). 61 CA: (FCA, 26.02.2009); (Tax Court of Canada, 22.04.2008); (Tax Court of Canada, 24.02.2012); CH: (SFTA,

07.03.2012); (Arnold in Lang, 2013: 3.4). 62 (Meindl-Ringler, 2016: 78). 63 (Beretta, 2017: 2.2 et seq.); (Tolstrup/Bjørnholm, 2011: 504); (Poiret, 2016: 279); (Wheeler, 2005: 482);

(Banfi/Mantegazza, 2012: 59). 64 (Hansen in Kemmeren, 2013: 17.4); DK: (LSR, 20.12.2011). 65 (Haslehner in Vogel et al., 2015a: Art. 10 m.nos. 43 et seqq.). 66 (OECD Report, 1987: 2); see also: (Poiret, 2016); (Chew, 2015); (De Broe, 2008: 665); DK: (LSR, 20.12.2011).

39

the opinion that “there is no necessary link between substantive business activity and beneficial

ownership”.67 Instead, the focus should be on the “ownership” principle.68

85 Although there is no necessary link between the business activities of a given entity and its

status as a beneficial owner, we will nevertheless prove that Musicalia carries out such business

activities, in order to eliminate all possible doubts about Musicalia’s status as beneficial owner.

Firstly, Musicalia sells souvenirs to non-related parties in accordance with its business object,

which can be considered a regular activity.69

86 Secondly, Musicalia organizes different jazz festivals with its own musicians in Jazzterra. The

activity of planning events is also intended to last for a longer period which shows that

Musicalia has a high commitment to its business. The contract for the sponsorship payments

lends further support to this, as it was concluded for a period of free years. Thus, it can be

reasonably assumed that the festivals are also intended to be regularly organised over this whole

period. Otherwise, in the absence of music festivals, Musicalia would not be able to grant rights

to La Cervecita.

87 As a last argument, the amount of the sponsorship payments can also serve as a clear indicator

of business activities. The payments reach an amount of USD 1 million each year, which leads

to a sum of USD 3 million over three years.70 Therefore, the loan of USD 2 million which is

granted from Intermezzo can easily be repaid. This is possible even without the help of any

other income, e.g. selling souvenirs or profits from the events.

88 Because Musicalia has business activities which furnish it with sufficient profits to function

on its own independently is an indication that is has substantial business activity, and it does

not have to pass on all of its profits to its parent.

67 (Jain/Prebble et al., 2014: 390); see also: (Canete/Staringer, 2009: 185 et seq.); (Baker in Maisto, 2012: 6.6); IT:

(Regional Tax Court of Piedmont, 07.05.2014); (Provincial Tax Court of Turin, 20.03.2013). 68 (Haslehner in Vogel et al., 2015a: Art. 10 m.nos. 43 et seq.); IT: (SC, 28.12.2016); (Regional Tax Court of Abruzzo,

30.08.2012); (Regional Tax Court of Lombardy, 10.07.2015); CZ: (Supreme Administrative Court, 10.06.2011). 69 (Statement of Facts, B. Economic activities 2017-2018). 70 (Statement of Facts, B. Economic activities 2017-2018).

40

CONTROL OVER PROFITS AND ENTREPRENEURIAL RISK

89 As an introductory remark, risk can be defined as the possibility of a loss or gain of something

in a specific situation.71 In general, it can be stated that entrepreneurial risk has to be

determined in each individual case based on a careful consideration of all circumstances.72 It

will be shown that Musicalia takes the full entrepreneurial risk and, consequently, has an

economic interest in ensuring that the business runs well.73 In addition, it will be demonstrated

that Musicalia has control over all profits generated.

90 The main criteria to show that Musicalia has the control over profits and bears the

entrepreneurial risk are (i) whether there is a “share in any profits of the company”, (ii)

whether other obligations take priority over the distribution of dividends, (iii) whether

“the level of payment of interest would depend on the profits of the company” and (iv) the

arm’s length principle.74

91 The theory above can be applied to the current case. It can be supposed that Intermezzo does

not have any right to the profits of Musicalia. Neither the case nor the clarifications give any

such indication.

92 Moreover, from the standpoint of Musicalia, the repayment of the loan is an obligation which

restricts the possible distribution to shareholders. Firstly, Musicalia has to repay the loan before

it can allocate any dividends to shareholders. Therefore, Musicalia can freely decide which

share of its profit (this will be the remaining amount of the revenue minus the repayment of the

loan) to forward to its shareholders. For this reason, it is logical to assume that shareholders

are subordinated over and Musicalia has the full right over the profits.

71 (Hisrich/Ramadani, 2017: 58). 72 (Helminen, 2004: 59).

73 (Lang in Gassner, 1994: 143 et seq.); (De Broe, 2008: 681 et seq.). 74 (OECD, 2014b: Art. 10 m.no. 25); (Van Gelder/Niels, 2014: 219 et seq.); (Bakker, 2013: 29 et seq.); (Blessing,

2012: 200 et seq.); (Rotondaro, 2000: 264); (Lopes Dias V.S., 2015: 2.3); (Sabins in Massoner, 2012: 275 et seqq.);

(Kemmeren in Vogel et al., 2015a: pre Arts. 10-12 m.no. 27 et seq., 35); NL: (Hoge Raad, 06.04.1998); (Hoge Raad,

21.02.2001).

41

93 Thirdly, the payment of interest does not depend on Musicalia’s profit. According to the

clarifications, Intermezzo concluded a six-year contract with a stable annual interest rate of

three percent.75

94 Lastly, the arm’s length principle must always be considered. The arm’s length criterion has

also been confirmed in the Spanish Real Madrid case where the court decided that beneficial

owner should be determined by using the arm’s length test.76 This means, if the payment is line

with the arm’s length principle, this supports the argument that Musicalia is the beneficial

owner of the dividends.77 In the case at hand, all transactions are at arm’s length.78

INTERIM CONCLUSION

95 In sum and based on the consideration of all available material, it is incontestable that Musicalia

is the beneficial owner of the dividends paid by Milestone. As already mentioned, business

activities are carried out by Musicalia which indicates that Musicalia is not a mere pass-through

entity. Even if the tax authority should adopt the view that Musicalia does not conduct business

activities, it can be argued that there is no necessary link between the business activities of a

given entity and its status as the beneficial owner of certain items of income. Furthermore,

Musicalia assumes the entrepreneurial risk and, therefore, an economic interest is given. In

addition, Musicalia can freely decide over the use of its profit.

SOLELY ART. 10 DTC-JT SHOULD APPLY

96 Firstly, as was clearly established above79, the DTC-JT applies because the personal scope of

Art. 1 and the material scope of Art. 2 are fulfilled. In addition, Milestone is a resident of

Jazzterra80 where it generates taxable income. Because the DTC-JT applies, the next question

concerns the most appropriate distributive rule. Concerning taxes on income the Arts. 6

75 (Clarifications, m.no. 35). 76 ES: (Audiencia Nacional, 18.07.2006). 77 (Gooijer, 2014: 211). 78 (Clarifications, m.no. 35). 79 (see m.no. 58). 80 (see m.nos. 51 et seqq.).

42

through 21 are relevant. It should be stated that only one distributive rule can apply. To

ensure this, the distributive rules contain priority rules. 81

97 As the facts state, Milestone distributes dividends to Musicalia.82 Neither of the parties contest

whether this item of income is considered a dividend. This is a given fact of the case. Therefore,

Art. 10 for dividends is clearly the only relevant distributive rule. The bilateral scope of

Art. 10 is fulfilled – i.e. dividends are paid by a company (Milestone) resident of Jazzterra to a

company (Musicalia) resident of Tralaland – and the consequence is a 0% WHT. The tax

authorities cannot levy any WHT because Muscalia is the 100% shareholder of Milestone,

clearly surpassing the 25% participation threshold. Moreover, as was clearly proved above,

Musicalia is undoubtedly the beneficial owner. 83

98 Since dividends could be seen as a form of business income to which Art. 7 applies, the priority

rule contained in Art. 7(7) states that Art. 10 takes priority, as it is the more special rule

(incorporating a lex specialis principle). Following this rule, it is clear that Art. 10 should

take precedence over Art. 7 as well as Art. 21. 84

NO ABUSE OF THE DTC-JT

“BENEFICIAL OWNERSHIP” CONCEPT AS AN ANTI-AVOIDANCE RULE?

99 In practice, but also in literature, there are different approaches to the interpretation of beneficial

ownership. On the one hand, it can be understood as an attribution-of-income rule and, on the

other hand, as a general anti-avoidance rule.85 In literature, the opinion that the beneficial

ownership concept should be understood in a narrow sense, only in specific cases of abuse,

can be found. This implies that the beneficial ownership concept should be interpreted in a

formal, legal way. When applying the economic view, the beneficial ownership concept is

81 (Kasaizi in Schilcher, 2008: 362). 82 (Statement of Facts, B. Economic activities 2017-2018). 83 (see m.no. 94). 84 (OECD, 2014b: Art. 21 m.no. 1); (Schütte in Haase/Becker, 2016: 1359 et seq.); (Rust in Vogel et al., 2015b: Art.

21 m.nos. 7 et seqq.). 85 (Meindl-Ringler, 2016: 321); (Vallada/Rust, 2015: 33); (Du Toit, 2010: 502).

43

treated as a general anti-avoidance rule, which does not correspond with the original approach

of the OECD MC.86

100 The relevant cases for applying an anti-avoidance rule are (i) when someone gains a benefit

because of treaty shopping and/or (ii) when an enterprise can be qualified as a conduit

company.87 In the following, it will be shown that the incorporation of Musicalia in the case

at hand is not a form of treaty shopping and Musicalia is not a conduit company. Hence, the

treaty benefits of the DTC-JT have to be granted to the applicant.

MUSICALIA IS NOT A CONDUIT COMPANY

101 Taking into consideration the definition of a conduit company88, it must be pointed out that

Musicalia was founded ten years after the conclusion of the DTC. Moreover, the enterprise was

founded with an equity capital of USD 50,000. The reduction of the WHT has been available

since the DTC entered in force. Therefore, it is clear that Musicalia was not established to

gain any treaty benefits.89

102 Secondly, Musicalia carries out different activities90 and also invested in a recording studio,

which cost USD 2 million. As already stated above91, La Cervita pays a high amount of

sponsorship payments under an agreement which has been concluded for a period of three

years. Therefore, there is obviously an intention to operate the business for a longer time.

NO TREATY SHOPPING BY MUSICALIA

103 Next, we will clearly demonstrate that the aim of Musicalia is not and has never been treaty

shopping. For this purpose, it is necessary to define treaty shopping. “Numerous transactions

aim at obtaining the benefits of a tax treaty which would not be applicable to a taxpayer

otherwise because he is not a resident of a contracting state; […].”92 Vogel defines treaty

86 (Meindl-Ringler, 2016: 80 et seq., 341); (Oliver et al.,2000: 310); (Du Toit, 1999: 149 et seq., 210 et seq.); (Sabins

in Massoner, 2012: 267); (De Broe, 2008: 664 et seq.). 87 (Zuk in Simader, 2013: 331); (Jiménez, 2010: 62 et seq); (Sabins in Massoner, 2012: 275 et seqq.); CH: (Supreme

Court, 28.11.2005). 88 (see m.no. 83). 89 (Statements of facts, G.1 At the convention level: tax treaties); see also: (Vitko, 2013: 12). 90 (see m.nos. 83 et seq.). 91 (see m.no. 85). 92 (Bonschak in Simader/Titz, 2013: 37); (emphasis added); see also: (Bammens/De Broe in Lang, 2010: 56 et seq.).

44

shopping as: “transactions are entered, or entities are established, in other states, solely for the

purpose of enjoying the benefit of particular treaty rules existing between the state involved and

a third state which otherwise would not be applicable“.93 “Solely” should be understood as

implying that the key purpose is to obtain a tax benefit by abusing the treaty.94

104 In order to prove that there is economic substance in the case at hand and that the tax benefits

are only a subsidiary factor, an objective and subjective prong have to be passed. The

objective test criterion relates to the question as to whether the transactions made by the

company has any economic substance (a key figure to consider is the profit before tax). When

assessing the subjective factor, “it should be determined whether transactions were justified by

(commercial) motives other than tax motives”.95

105 From the facts above, it can be concluded that Musicalia fulfils both criteria. Firstly, the

objective factor is fulfilled because Musicalia carries out a variety of business activities96. Those

activities will be carried out for a substantial period of at least minimum three years. Secondly,

the subjective factor is fulfilled because Musicalia has the sole motive to carry out its defined

business purpose.97 Nota bene: an accidental tax advantage from a transaction does not imply

a motive of tax avoidance.98 Musicalia does not have any motive to avoid tax and consequently

the GAAR is not applicable.

INTERIM CONCLUSION

106 In casu, it becomes evidently clear that Musicalia is neither a conduit company nor engages in

treaty shopping. Business activities are carried out and therefore no abusive practice whatsoever

is conducted. In addition, treaty shopping criteria are not fulfilled either, since Musicalia passes

both the subjective and objective tests. Therefore, Musicalia’s incorporation was not aimed at

saving tax. Thus the GAAR is not applicable.

93 (Vogel, 1997: Art. 1 m.no. 77); (emphasis added); see also: (UN, 2006: 8 et seq.); (Shome/Committee, 1961: 17). 94 (Meindl-Ringler, 2016: 348 et seq.); (Seiler, 2016: 213); (Panayi, 2006: 147). 95 (Piantavigna, 2017: 2.2); see also: (Bammens/De Broe in Lang, 2010: 56 et seq.); (Seiler, 2016: 155 et seq.); (De

Broe et al., 2015: 375); (Alvarrenga, 2013: 3.2); US: (CA, 13.10.1998); (CA, 20.06.2001). 96 (see also m.nos. 83 et seqq.). 97 (Statements of facts, A. Tax subjects/entities). 98 (Piantavigna, 2017: 2.2); (Hinnekens, 1999: 95); (Wheeler, 2011: 264); BEL: (Cour de Cassation, 06.06.1961).

45

MUSICALIA’S INCOME FROM RENTING OUT MUSICIANS TO CLUBS

AND THEATRES IS ONLY TAXABLE IN TRALALAND

107 The income earned by Musicalia from the payments made by clients for renting out musicians

is without doubt business income according to Art. 7 DTC-JT. Firstly, it will be shown that, in

regards to Art. 7(7), no other provision of the DTC is applicable, and secondly it will be

demonstrated that Musicalia does not have a PE within Jazzterra through which this income is

generated. As a consequence, the entirety of income resulting from the clients’ payments in

Jazzterra is taxable only in Tralaland.

108 Art. 17(2) DTC-JT is not applicable if another type of income is predominant and the

performance element of the income is negligible.99 Analogous to royalty payments, it can be

concluded that no apportionment is necessary if it seems impracticable.100 Moreover, the

2014 OECD-Commentary101 explicitly states this is the case if an individual earns income

deriving from other activities, which do not fall within the scope of Art. 17. As Art. 17(1) and

Art. 17(2) have the same scope, this equally applies for the intermediary company.102 Thus,

Art. 17(2) does not cover income which includes remuneration in consideration of an artistic

performance to a small part but is predominantly generated by other activities, such as

agency services and supply of personnel.103

109 Musicalia’s income is without doubt predominantly attributable to the agency service provided,

namely the selection of the most suitable musician for each event and venue and the subsequent

supply of personnel. Such impresario or agency income falls outside the scope of Art. 17.104

The musicians themselves do not participate in any income generated by Musicalia, they merely

receive a steady salary from Intermezzo. Also, the clients do not choose or select the musicians

themselves, they mainly benefit from the impresario service provided by Musicalia. In this

respect, the overwhelming majority of the payment to Musicalia is in consideration of the

99 (Juarez in Maisto, 2016: 163 et seq.); (Felderer, 2007: 457). 100 (Toifl in Ehrke-Rabel, 2011: 118); (Cordewener in Maisto, 2016: 123); GER: (FG Münster, 03.02.2006). 101 (OECD, 2014b: Art. 17 m.no. 4). 102 (Lang, 2017a: 12). 103 (Mody in Strunk, 2017: Art. 17 m.no. 45); (Schaffer, 2016: 63 et seq.); (Grossmann, 1992: 166); (Görl, 1983: 170

et seq.). 104 IND: (Mubai ITAT, 19.11.2010); FIN: (Finnish Supreme Administrative Court KHo, 29.01.2001); AT: (VwGH,

11.12.2003); (OECD, 2014b: Art. 7 m.no. 7).

46

service provided procuring a suitable artist to the respective client. Accordingly, all income

generated through this activity is only taxable under Art. 7.

MUSICALIA DOES NOT HAVE A PERMANENT ESTABLISHMENT IN JAZZTERRA

110 The income, which clearly is business profit as shown above, is undoubtedly earned without

constituting a PE in Jazzterra. In the following it will be demonstrated that this income is not

earned through a PE in Jazzterra, as firstly, Musicalia does not have a fixed place of business

in Jazzterra,105 and secondly Milestone’s services provided to Musicalia do not constitute a PE

for Musicalia in Jazzterra.

111 Musicalia does not have a fixed place of business in Jazzterra and no permanent place through

which Musicalia performs its course of business is at Musicalia’s disposal. As mentioned above,

the mere fact of owning shares does not constitute a PE.106 Therefore, it is incontestable that

Musicalia’s shareholding alone does not constitute a PE in Jazzterra.

112 Any agency services that do not result in a contract on behalf of the principal, unequivocally,

cannot constitute a PE in Jazzterra.107 This holds true even if an agent is found to be dependent.

The shareholding does not influence the classification as a dependent or independent agent

pursuant to Art. 5(5) and (6).108 The fact that a person performs such services to only one

principal and that the agent is bound by detailed instructions109 is a clear indication of

dependency rather than being independent. Nevertheless, regardless of the dependency status,

a PE is only constituted if the agent has the authority to conclude contracts on the behalf

of the principal.110

105 (see m.no. 70 et seq.) 106 (see m.no. 70). 107 (Reimer in Vogel et al., 2015a: Art. 5 m.nos. 329 et seq.); (Fresch/Strunk in Strunk, 2017: Art. 5 m.nos. 111 et seq.);

(Haase in Haase/Becker, 2012: Art. 5 m.nos. 148 et seq.); (Feuerstein in Brugger, 2011: 111); IND: (AAR,

13.02.2006). 108 (OECD, 2014b: Art. 5 m.nos. 38.1, 41). 109 AT: (VwGH, 17.12.1993). 110 FRA: (Tribunal administratif, 12.07.2017).

47

113 In order to constitute a PE, the criterion of permanence needs to be fulfilled111 and, most

importantly, the agent must be able to conclude contracts on behalf of the principal and has

to exercise this authority regularly to fall within the scope of Art. 5(5).112

114 The authority to conclude contracts is determined by the fact whether or not the agent can

legally bind the principal.113 Therefore, a formal power of attorney is necessary.114

Accordingly, if the dependent agent cannot legally bind the principal, no PE can be constituted

by the services the agent provides to the principal.115 Arguing a maiori ad minus, if the

intermediary does not even have any authority to conclude contracts in the name of the

principal, no PE can be constituted.116 Then, even though the intermediary is a dependent agent,

it is only regarded as a messenger.117

115 The agent activity of Milestone undoubtedly does not constitute a PE on behalf of Musicalia.

Even though Milestone is a dependent agent according to Art. 5(5) on the grounds that it only

performs intermediary services to Musicalia and receives very detailed instructions, Milestone

does not have the authority to conclude contracts on behalf of Musicalia. All contracts are

concluded by Musicalia.

116 Milestone’s activity, carried out by its Sales Director, is limited to a courier function, as its

entire contribution to the conclusion of the contracts is initiating contact and communicating

the strict specifications on prices and terms and conditions determined. Whenever there is

uncertainty regarding a contract Musicalia has to be consulted, hence relegating Milestone to

the role of a messenger rather than an agent that majorly contributes to the conclusion of a

contract. To conclude, not only does Milestone have no authority to legally bind the principal

Musicalia, but what is more it has virtually nothing to do with the negotiation and the

contract being concluded, other than familiarizing the client with the strict contract details

111 (Wassermeyer/Kaeser in Wassermeyer, 2015: Art. 5 m.nos. 195 et seq.); (Larking, 1998: 266). 112 CA: (Tax Court of Canada, 16.05.2008). 113 (Lang, 2014: 104). 114 (Bendlinger, 2009: 109); FRA: (Conseil d'État, 31.03.2010). 115 NO: (Supreme Administative Court Norway, 02.12.2011); (Lang, 2014: 95 et seq); (Pijl, 2013: 77 et seq.). 116 (Fresch/Strunk in Strunk, 2017: Art. 5 m.no. 112). 117 (Skaar, 1991: 497).

48

that Milestone was instructed with.118 Therefore Milestone has no authority to conclude

contracts on behalf of Musicalia and thus no PE is constituted.

INTERIM CONCLUSION

117 For all these reasons, the income received by Musicalia from clients’ payments is taxable

only in Tralaland, since it earns business profits under Art. 7 which are generated without

constituting a PE in Jazzterra. There is no permanent establishment under Art. 5, since

Musicalia has no fixed place of business in Jazzterra and Milestone’s services do not

constitute a PE, as Musicalia has no right of disposal of Milestone’s office and Milestone

cannot conclude contracts on behalf of Musicalia. Thus, the entirety of income is exclusively

taxable in Tralaland.

SUBSIDIARY ARGUMENT: EVEN IN AN APPORTIONMENT UNDER ART. 17(2)

DTC-JT IS MADE, TRALALAND STILL RETAINS THE MAJORITY OF ITS

TAXATION RIGHTS OVER THE CLIENTS’ PAYMENTS

118 If the court should not follow the previous arguments and an apportionment under Art. 17(2) is

necessary, Tralaland will retain the taxation right over the majority of the income, since

Art. 17(2) only applies to a small part of the clients’ payments.

119 In the case of mixed payments, i.e. lump-sum payments including remuneration for the

performance of an entertainer as well as agency services, an apportionment between Art. 17

and Art. 7 becomes necessary, since Art. 17(2) only covers the income which would have

been covered by Art. 17(1) if paid to the entertainer himself.119 For the purpose of

apportionment, firstly the scope of Art. 17(2) has to be determined and, in a second step, the

income attributable to the musician has to be calculated.

120 Art. 17(2) DCT-JT is an exception to the PE principle and thus has to be interpreted in a

very narrow fashion.120 This limited approach to Art. 17 is not only corroborated by

118 similar to FRA: (Tribunal administratif, 12.07.2017). 119 (Felderer, 2007: 457). 120 (Loukota in Gassner, 2003: 220 et seq.).

49

literature121 and case law122, but also by the 2014 OECD-Commentary in various contexts

stating explicitly that income of impresarios for arranging the performers’ appearance is

not covered by Art. 17 and, also, that all income of an enterprise involved in the production

of an event is outside the scope of Art. 17.123 Art. 17(2) can subsequently only be applied to

the small part of the remuneration which is paid in respect of the personal performance of the

entertainer.124 Attributing income to the entertainer means that income, firstly, has to be

subjectively attributable to the person performing and, secondly, has to be objectively

attributable to the performance of the entertainer.125

121 In the case at hand, substantial parts of the income are neither attributable to the person nor

to the performance. The main activity for which the payments are made is the selection of the

most suitable musician and, correspondingly, the payments are substantially made with

respect to the impresario service that Musicalia provides. This agency service does not fall

within the scope of Art. 17 and, therefore, this major part of the payment cannot be taxed in

Jazzterra.

122 If a contract does not explicitly stipulate a certain portion of remuneration to be paid in respect

of the artist’s performance, the amount attributable has to be estimated,126 leaving the sum

actually paid or forwarded from the agent company to the employed artist.127 Correspondingly,

Malin reaches the same conclusion, by calculating the attributable amount through the cost plus

method, subtracting all connected costs and the profit margin of the company from the gross

payment.128

123 Musicalia’s income has to be split up using the cost plus method and Art. 17(2) only applies

to the payments for the musicians’ activities. Therefore, the commission fee for the information

provided by Milestone, the hiring out payment to Intermezzo and a profit margin for the agent

activities of Musicalia all have to be deducted from the overall payments from the clients to

121 (Molenaar, 2006: 64). 122 GER: (BFH, 04.03.2009); AT: (VwGH, 27.11.2003); (VwGH, 11.12.2003); FIN: (Finnish Supreme Administrative

Court KHo, 29.01.2001). 123 (OECD, 2014b: Art. 17 m.nos. 7, 11.4). 124 BEL: (Court of Appeal, 13.06.2006). 125 (Lang, 2017a: 12). 126 (Felderer in Loukota, 2007: 271). 127 (Hahn-Joecks, 1999: 130 et seq.); (Maßbaum in Gosch et al., 2008: Art. 17 m.no. 259). 128 (Malin in Loukota, 2007: 239).

50

calculate the portion of income attributable to the musicians. Moreover, in conformity with

Jazzterra’s domestic law, which allows generous deductions for newly formed

businesses129, this approach becomes indispensable. Therefore, only this small portion of that

income is taxable in Jazzterra. The remaining income is exclusively taxable in Tralaland.

Interim Conclusion

124 As has been conclusively shown, even if the income had to be split between Art. 17(2) and

Art. 7, Tralaland as the state of residence retains its taxation right over the majority of the

income. The income must be apportioned using the cost plus method and leaving only a small

portion that can be considered the salary forwarded to the musicians under Art. 17(2).

Therefore, the predominant part of Musicalia’s income from the clients is exclusively taxable

in Tralaland.

MUSICALIA’S INCOME FROM THE JAZZ FESTIVAL IS ONLY TAXABLE

IN TRALALAND

THE “SPONSORSHIP-INCOME” IS BUSINESS INCOME ACCORDING TO ART. 7

DTC-JT

125 The sponsorship income is clearly a business profit within the scope of Art. 7. Art. 7(1) covers

all items of income earned by an enterprise,130 which in accordance with Art. 7(7) are not dealt

with in separate provisions of the treaty. The payments are in fact not sponsorship payments

but rather payments to obtain the right to exclusively sell alcoholic beverages at

Musicalia’s events. In the following it will, firstly, be shown that the income deriving from the

jazz festival is not covered by any other provision than Art. 7(1) and, secondly, it will be

demonstrated that this income is not earned through a PE.

129 (OECD, 2014b: Art. 17 m.no. 52). 130 (OECD, 2014b: Art. 7 m.no. 4).

51

THE “SPONSORSHIP-INCOME” IS NOT A ROYALTY COVERED BY ART. 12

DTC-JT

126 Musicalia’s income from the sponsorship agreement is clearly not covered by Art. 12. Royalties

are defined by Art. 12(2) as payments for the use of or the right to use protected intellectual

property131 or know-how.132 Accordingly income must be for the use of or the right to use

such IP for a certain, restricted period of time to constitute royalties.133 Although payments for

exclusive distribution rights for (trademarked) products are payments for the use of a right, they

are nevertheless not covered by Art. 12 , since such right which the payment is made for is

not a right mentioned in the exhaustive definition of Art. 12(2). 134

127 Admittedly, some authors deem sponsorship income to be comparable to royalties, since

sponsors pay money in exchange for an advertisement opportunity.135 However, this view

cannot be applied in the case discussed, since the payments are not actually sponsorship

payments, but payments made to acquire the exclusive right to sell alcoholic beverages at

the festival. Even if a small part of the income is considered to be in exchange for advertising

contingency, Art. 12 is not applicable for mixed contracts, if the predominant part of the

income is outside the scope of Art. 12(2).136 What is more, the fact that the contract is merely

titled a “sponsorship agreement” does not make them sponsorship payments in substance.

128 In the case at hand the payments are merely made to exclude other beverage suppliers of

alcoholic beverages from selling at Musicalia’s events. The payment was made for the use of

a right, namely to be the only seller of alcoholic beverages at the events. However, such right

is not covered by the definition of Art. 12(2) as an IP, and therefore such payment does not

constitute a royalty. Furthermore, it must be considered that, if payments for exclusive

distribution rights of products trademarked by someone else are not covered by Art. 12, then it

follows that payments to exclusively sell a company’s own (trademarked) products at a

131 (herinafter IP). 132 (OECD, 2014b: Art. 12 m.no. 11); (Pöllath/Lohbeck in Gosch et al., 2008: Art. 12 m.no. 106). 133 (Kluge, 2000: 233 et seq.); (Pöllath/Lohbeck in Vogel/Lehner, 2015: Art. 12 m.no. 47). 134 (OECD, 2014b: Art. 12 m.no. 10.1); (Valta in Vogel et al., 2015a: Art. 12 m.no. 142); GER: (BFH, 27.07.1988);

AT: (BMF, 27.09.1999). 135 (Aigner, 2012: 169); (Achatz, 2002: 133). 136 (OECD, 2014b: Art. 12 m.no. 11.6).

52

certain location can evidently not be considered a royalty. To conclude, Musicalia’s income

from La Cervecita is not royalties according to Art. 12.

ART. 17(2) DTC-JT DOES NOT APPLY TO MUSICALIA’S INCOME FROM THE

“SPONSORSHIP AGREEMENT” WITH LA CERVECITA

129 Art. 17(2) is not applicable to the sponsorship payments since the provision only covers income

which is generated in respect of the personal performance of an entertainer but accrued

to another person. As highlighted above,137 Musicalia is a person according to Art. 3.

Furthermore, Musicalia is the agent of several musicians whose income could fall under Art.

17(1). Nevertheless, the sponsorship income does not arise in connection with the

performance of the entertainers.

130 The income deriving from the sponsorship agreement between Musicalia and La Cervecita is

clearly not covered by Art. 17(2). Income within the scope of Art. 17(2) has to be attributable

to the entertainer.138

131 The sponsorship payment can clearly not be attributed to the person(s) performing, since there

is no personal connection. This personal relation requires a connection to the personality and

famousness of the specific entertainer.139 The OECD-Commentary even demands a

connection to the name, signature or personal image of the entertainer to establish a

personal connection with a given sponsorship or advertisement.140

132 Additionally, the income can certainly not be attributed to the performance itself since it is not

a sponsorship payment per se but rather a payment for the exclusive distribution right of

alcoholic beverages at a festival. Therefore, the income generated therefrom does not fall

within the scope of Art. 17(2). Although income being directly or indirectly performance-

related is a main criterion for determining the application of Art. 17(2)141, a company dealing

137 (see m.no. 47). 138 (see m.no. 120) 139 (Molenaar, 2006: 104 et seq). 140 (OECD, 2014b: Art. 17 m.no. 9.5). 141 (Cordewener in Vogel et al., 2015b: Art. 17 m.no. 160).

53

with artists can also earn other income, i.e. broadcasting income, which cannot be

considered performance-related income, but rather business or even technical income.142

133 In the case at hand, thus the payment in light of the sponsorship agreement made to Musicalia

does not fall within the scope of Art. 17(2), as it is in no possible way, objectively or

subjectively, attributable to the performances of the specific entertainers.143 This becomes

especially evident if it is considered that the musicians performing at the festival are hired

for one year, whereas the sponsorship agreement is concluded for a three-year period. To

conclude, this income cannot be taxed in Jazzterra through Art. 17(2), as the sponsorship

payment is not income in respect of a performance of an entertainer accrued to another person,

but is the business income of Musicalia.

MUSICALIA’S INCOME FROM THE TICKET SALE IS NOT COVERED BY ART. 17(2)

DTC-JT

134 Equally, the income derived from the ticket sales is undoubtedly outside the scope of Art. 17(2).

The Swedish supreme administrative court explicitly deems the income earned by merely

making the performance of an artist public to be outside the scope of Art. 17(2),144

therefore taking its original object and purpose into account. Hence only income attributable to

the artist but accrued to another person is covered, excluding additional income derived by

their employer through making the activity public.145 Furthermore, income of an independent

promoter of a concert from the sale of tickets is not covered by Art. 17(2).146 Musicalia is clearly

an independent promoter, since the artists are merely employees, not shareholders of the

company. Such income is also not within the scope of Art. 17 if it is earned by a sports team or

orchestra.147 If it is not even covered by Art. 17 when earned by the actual group of artists, then

it cannot be covered when earned by an agency.

135 Accordingly, Musicalia’s income from the sales of tickets for the jazz concert does not fall

within Art. 17(2), but is rather covered by Art. 7. The tickets sold are to be considered as

142 (Maßbaum in Gosch et al., 2008: Art. 17 m.no. 254, 259); (Grams/Molenaar, 2002: 379); GER: (BFH, 04.03.2009). 143 (Foddanu in Haase/Becker, 2012: Art. 17 m.no. 4). 144 SWE: (Regeringsrätten, 30.10.2002). 145 (Molenaar, 2006: 61). 146 (OECD, 2014b: Art. 17 m.no. 11.4); (Barret, 2014: 532). 147 (Tetlak, 2010: 277).

54

income derived by the company managing the musicians and therefore cannot be

attributed to the artists themselves. In this regard, the income earned is, for the lack of a PE,

exclusively taxable in Tralaland.

MUSICALIA DOES NOT HAVE A PE IN JAZZTERRA

136 The income is undoubtedly earned without constituting a PE in Jazzterra. In the following it

will be conclusively show that neither the festival itself nor the services provided by

Milestone constitute a PE in Jazzterra on two grounds. Firstly, the festival only lasts for one

day and does not therefore exceed the necessary threshold of permanency and, secondly,

Milestone merely provides services to Musicalia.

137 The festival itself clearly does not constitute a PE in Jazzterra. Even though the place where the

festival is hosted is a fixed place of business, since it is connected to the ground and Musicalia

carries on its business through it, there must be a certain degree of permanency to constitute

such a PE. The OECD-Commentary extrapolated that in practice a threshold of six months is

considered a suitable timeframe for determining permanence.148 Such permanency can also be

achieved through recurring activity at the same place or by a shorter activity which is solely

performed in that country, but literature149, case law150 and administrative practice151

strongly indicate otherwise. Furthermore, this permanent place of business must be at the

disposal of the enterprise.152

138 Musicalia hosts this festival for one day, clearly indicating that no permanent fixed place of

business is at its disposal. Even though the place where the festival is hosted is a fixed place

which is at the disposal of Musicalia for the time of the festival and Musicalia carries on its

business through this place by holding the festival there, the criterion of permanency is not

fulfilled. Neither the exceptions of the recurring activity nor the exception for the short

event wholly carried on in the source state can be met, since there is no indication of

Musicalia hosting another festival at that place of business in the future and further such a short

148 (OECD, 2014b: Art. 5 m.no. 6); (Miller et al., 2017: 9.6). 149 (Bendlinger, 2006: 358 et seq.); (Hoor, 2014: 119 et seq.). 150 GER: (BFH, 19.05.1993); (BFH, 02.12.1992); AT: (VwGH, 12.05.1997). 151 (BMF, 2007: 35); AT: (EAS: 350, 501, 750, 754, 900, 740, 1234, 1543, 1973, 2921, 3045); GER: (BMF,

25.08.2009). 152 (see m.no. 72).

55

event must at least show some permanency. A one-day event cannot be considered

permanent. Accordingly, the festival does not constitute a PE in Jazzterra.

139 The activities of a service provider do not constitute a PE if the service provider carries

out its own business. If it carries out the business of the initiator, the same criteria as above

have to be met to constitute a PE for the initiator. The contractor must have a fixed place of

business which is at the disposal of the initiator and through which the business of the initiator

is permanently carried on.153 If the initiator does not have the right of disposal of the

premises, or the contractor carries out his own business, no PE is constituted for the

initiator.

140 Milestone does certainly not constitute a PE for Musicalia in Jazzterra. Admittedly, Milestone

has a fixed place of business in Jazzterra, as they have rented an office which they use for the

entire year in 2018. But even though Musicalia concluded a warehousing contract with

Milestone earlier, Musicalia has no right of disposal over the office itself, as Musicalia has

no key and therefore cannot actually use the office itself.154 Furthermore, Milestone only

carries out its own business through the office in Jazzterra, since

“merchandising/promoting/selling tickets and organizing music festivals” is Milestone’s

corporate object. These services provided are to be regarded as within the realm of their

expertise for which they were hired and for which they are paid remuneration by the initiator

Musicalia. Thus, these activities do not constitute a PE for Musicalia in Jazzterra.

INTERIM CONCLUSION

141 As conclusively shown, Musicalia’s income from the festival is without doubt exclusively

taxable in Tralaland, since the income earned is a business profit generated without a PE in

Jazzterra. Art. 17(2) is neither applicable to the sponsorship payment nor to the sale of

tickets to the festival. Hence, the entire income earned therefrom is solely taxable in

Tralaland.

153 (Karundia, 2015: 19 et seq.). 154 (Statement of Facts, B.1 Economic activities in 2017-2018).

56

SUBSIDIARY ARGUMENT: JAZZTERRA IS NOT ALLOWED TO LEVY

TAX ACCORDING TO THE BILATERL INVESTMENT TREATY155

142 A BIT based on the US Model is in force between Jazzterra and Tralaland since 2012. The aim

of such a treaty is to protect foreign investment. The BIT is primarily addressed to the host

state but a restriction can be also executed by the residence state. Therefore, the scope of

application covers both states.156

143 Additionally, such treaties protect investors and investments. An investor can be defined as

“a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to

make, is making, or has made an investment in the territory of the other Party; provided,

however, that a natural person who is a dual national shall be deemed to be exclusively a

national of the State of his or her dominant and effective nationality”.157

144 The term investment “means every asset that an investor owns or controls, directly or

indirectly, that has the characteristics of an investment, including such characteristics as the

commitment of capital or other resources, the expectation of gain or profit, or the assumption

of risk. Forms that an investment may take include […].”158

BIT IS APPLICABLE

145 Musicalia holds 100% of Milestone and so the subsidiary can clearly be qualified as an

investment under Art. 1. Milestone carried out different activities according to its business

object and has the intention to gain profits. This profit (dividend paid out) can be seen as the

return on investment which Musicalia earns. As a result, the BIT is applicable.

146 Many BITs, also the BIT-JT, include a taxation provision which leads to the fact that taxation

matters are not within the scope of a BIT. However, in Art. 21(2), an exception to this general

rule has been implemented. In cases of expropriation, in the meaning of Art. 6, the BIT should

also apply to all taxation measures.

155 (hereinafter: BIT) 156 (H.M. Simonis, 2014: 264 et seq.); (Bernasconi-Osterwalder/Johnson, 2011: 6); 157 (US Model BIT, 2012: Art. 1) 158 (US Model BIT, 2012: Art. 1); (emphasis added).

57

147 Art. 6 BIT notes that an expropriation is not allowed neither directly nor indirectly. In the

case at hand, indirect expropriation occurs if Jazzterra taxes the income, as Jazzterra enacts

measures where the benefit of the investment decreases. In addition, the sole doctrine will

apply here which states that the criterion of depriving the expected economic benefit of the

investment owner is decisive.159 Therefore, the treaty prevents Jazzterra from levying tax on

the Applicant’s income because this would lead to an indirect expropriation in the sense of Art.

6. The determination of expropriation has to be made in each individual case.160

INDIRECT EXPROPRIATION IS GIVEN

148 Firstly, the tax authority levying taxes on the income of Musicalia would lead to double

taxation. The effective tax rate amounts 38.75%.161 The additional taxes in the amount of

8.75% has a considerable impact on the economic value of the investment of Musicalia.

149 Because of the additional tax levied by the tax authority, Musicalia, as an investor from a

foreign country, is treated differently than a domestic company. Foreign investors are therefore

in a worse economic situation. This is not in line with the principal of equality. This unequal

treatment and the higher taxation is detrimental to Musicalia´s investment, as it reduced the

expected profits. Therefore, Art. 6 BIT in connection with Art. 21 BIT is violated if Jazzterra

would tax the business income.

150 Finally, there was no form of compensation granted for this expropriation. Compensation is not

only required by the BIT, but is also a general principle of international law.162 Thus, it can be

concluded that if Jazzterra were to tax Musicalia excessively without compensation, not only

the BIT, but also international law would be violated.

INTERIM CONCLUSION

151 To sum up, the tax authority is not allowed levy taxes on the income from Musicalia because

of Art. 6 BIT. The additional amount of tax leads to an expropriation and must be avoided,

or compensated, according to the BIT. In addition, Musicalia as an investor is treated

159 (López Escarcena, 2014: 230); (Salacuse, 2010: 296); (Sasse, 2011: 55) 160 (US Model BIT, 2012: Annex B Art. 4) 161 (Specific amount minus 30% tax in Jazzterra and the residue would be taxed with 12,5% = 38,75%). 162 (Fisher, 1965: 554 et seqq.)

58

differently (because of the higher tax rate) as compared to domestic companies and this violates

the principal of equality.

59

VI OVERALL CONCLUSION

152 To sum up, Milestone is a resident of Jazzterra under Art. 4(3), since its POEM is situated

therein. The board of directors only meets twice in Tralaland and only makes formal decisions

on matters prepared and managed in Jazzterra. Correspondingly, the place of effective

management is in Jazzterra.

153 The MLI has been ratified in both states. It has entered into force but not into effect. As a result,

the MLI applies only to transactions which take place after the 1 January 2019. In summary, all

transactions in 2018 are not affected by the MLI.

154 Furthermore, the income earned by Musicalia from selling souvenirs falls solely under Art. 7.

The warehouse, the server and Yohoho do not constitute PEs and, thus, the state of Jazzterra is

not entitled to levy taxes on those business profits.

155 Musicalia is the beneficial owner of the dividends received by Milestone. As was proven above,

different criteria all support this conclusion. Musicalia does not have the motive to obtain any

tax advantage and, therefore, the anti-avoidance rule is not applicable.

156 The income earned from the agency services are business profits generated without constituting

a PE, since Milestone does not have the authority to conclude contracts on behalf of Musicalia.

Even if the court holds that Art. 17 is applicable, Tralaland retains the majority of its taxation

right, as only the part paid for the performance falls under Art. 17.

157 Musicalia’s income from the festival falls within Art. 7. This income cannot be deemed to be

generated through a PE, since Milestone is a service provider carrying out its own business

activity. Moreover, Musicalia has no right of disposal over Milestone’s office. The festival itself

lasts for one day, which is not sufficient for fulfilling the “permanence" criterion, and therefore

cannot be considered a PE.

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VII REQUESTS

158 For the above-mentioned reasons, the court is requested to rule that Musicalia’s entire income

is taxable only in Tralaland.

159 Accordingly, the tribunal is requested to nullify the tax assessment.

160 Alternatively, the court is requested to rule that the majority of income will be taxed in

Tralaland.

61

VIII ANNEXES

64

IX ABBREVIATIONS

Art. Article

AT Austria

AUS: Australia

BFH Bundesfinanzhof (German Supreme Tax Court)

BIT bilateral investment treaty

BRA Brazil

Bulletin Bulletin for international taxation; Bulletin for international fiscal documentation,

Bulletin – Tax Treaty Monitor

CA Canada

CEO Chief Executive Officer

CH Switzerland

CIT corporate income tax

DK Denmark

DTC double taxation convention

DTC-JT double taxation convention between Jazzterra and Tralaland

e.g. exempli gratia (for example)

ed. Edition

et seq(q) et sequens (and the following)

FG Finanzgericht (German Tax Court)

FIN Finland

FRA France

GAAR General Anti-Avoidance Rule

GER Germany

i.e. id est (that is)

ICJ International Court of Justice

65

icw in connection with

IND India

IP intellectual property

ISP internet-service-provider

IStR Internationales Steuerrecht

IT Italy

JP Japan

m.no. marginal number

MC Model Convention

MLI Multilateral Convention to Implement Tax Treaty Related Measures to Prevent

Base Erosion and Profit Shifting

NL Netherlands

NO Norway

no. number

OECD Organisation for Economic Co-operation and Development

OECD Organization for Economic Co-operation and Development

para. Paragraph

PE permanent establishment

POB place of business

POEM place of effective management

SWE Sweden

SWI Steuer- und Wirtschaft International

SWK Steuer- und Wirtschaftskartei

UN United Nations

US United States

USD US-Dollar

66

VCLT Vienna Convention on the Law of Treaties

WHT withholding tax