CC BY
44Information for citation:
Vinnitskiy, D. V. (2020) Taxation of incomes derived from immovable property in cross-border situations: issues and solutions. European and Asian Law Review. 3 (2), 68-82.
UDC 336.227
LAW086000 LAW / Taxation
DOI: 10.34076/27821668_2020_3_2_68
Research Article
TAXATION OF INCOMES DERIVED FROM IMMOVABLE PROPERTY IN CROSS-BORDER SITUATIONS: ISSUES AND SOLUTIONS
DANIL V. VINNITSKIY
Ural State Law University ORCID: 0000-0002-8150-4109
This article is focused on the issue of the taxation of incomes derived from immovable property. The taxation of such kind of income is regulated both in the OECD Model and in the UN Model. The author thoroughly analyzes peculiarities of taxation regulation in the framework of the OECD/ the UN Model. The scope of application of Article 6 of the OECD / UN Model demands the proper understanding of the definition of immovable property which depends on civil law and common law conceptions, and, what is more, on domestic tax law and tax treaties. The paper also describes principles of cross-border taxation of income of derived from immovable property (the situs principle, origin (source) principle etc.), methods of taxation, income taxable base, various exceptions and taxing rights of countries. Moreover, it is important to highlight that in the global tax network the issue of taxation of incomes derived from immovable property is solved differently in accordance with bilateral tax treaties and domestic legislation of countries.
Keywords: immovable property, income, taxation, tax treaty, double taxation, situs principle, cross-border taxation
Introduction
Article 6 of the OECD Model deals with the incomes from immovable property derived by a resident of a contracting state from this property situated in the other contracting state.
According to Article 6 (1) of the OECD Model (as well as the UN Model), income derived by a resident of one contracting state from immovable property situated in the other contracting state may be taxed in the latter state. The respective rule is known as situs principle which secures attribution of the primary taxing right to the situs state (Reimer, 2010). Depending on the method for the avoidance of double taxation (see: Article 23 of the OECD Model / UN Model), the state of residence has either to exempt the respective income or grant a credit for the tax paid in the situs state.
Since the amendments of the OECD Model and Commentary in 1977, the allocation rule of Article 6 has been restricted to bilateral scenarios and is currently inapplicable to those situations where an immovable property is located in a third or in the residence state1. The same approach is reflected in the UN Model and Commentary2.
The subject matter of Article 6 of the OECD Model has a complex relationship with the subject matter of Articles 5 and 7 (and Article 14 in the UN Model), 13, 21 and 22 (Papotti & Saccardo, 2002; Arnold, 2006). In particular, the definition of immovable property in Article 6 is also adopted by Articles 13 (1) and 22 (1).
1 Paragraph 1 of the Commentary to Article 6 of the OECD Model.
2 Paragraph 1 of the Commentary to Article 6 of the UN Model.
Copyright© 2020. The Authors. Published by Ural State Law University. This is an open access article distributed under the CC BY-NC 4.0. license http://creativecommons.Org//license/by-nc/4.0/
In the practical sense, the question of the relationship between Articles 6 and 7 is one of the most relevant. In particular, one could suppose that the absolute priority of the situs principle (reflected in Article 6), in case of broad interpretation, may lead to unrestricted application of Article 6 in place of other tax treaty provisions (Arnold, 2006). However, the current wording of Article 6 of the OECD/ UN Model is more aimed at securing the taxing right of the situs state than intends to wholly separate income from immovable property from the rules of Article 7 and other provisions of the OECD / UN Model. As we can see further, such approach may also be confirmed by the analysis of history of the development of the Model conventions.
Materials and methods
The author used general scientific (analysis, comparison, synthesis) and specific scientific (statistical analysis) methods.
Results
The results of the author's research are stated in conclusions.
Discussion
Summary of the article
Paragraph 1 gives the right to tax income from immovable property to the state of source (i.e. situs state), that is, the state in which the property producing such income is situated1. This is due to the fact that there is always a very close economic connection between the source of this income and the state of source.
Although income from agriculture or forestry is included in Article 6, contracting states are free to agree in their tax treaty to treat such income under Article 7.
Article 6 deals only with income which a resident of a contracting state derives from immovable property situated in the other contracting state. It does not therefore apply to income from immovable property situated in the contracting state of which the recipient is a resident within the meaning of Article 4 or situated in a third state; the provisions of paragraph 1 of Article 21 shall apply to such income2.
Paragraph 2 provides for that the term 'immovable property'3 shall have the meaning which it has under the law of the contracting state in which the property in question is situated. Evidently, the first sentence of paragraph 2 should be interpreted in connection with Article 3 (2). Though the latter covers the opposite situations connected with terms not directly defined in the convention, it refers to the 'context' of the convention; and the 'context' in the light of the VCLT may require to establish some limits in 'immovable property' definition by domestic law of situs state.
The second sentence of Paragraph 2 aims to avoid some risks of possible collisions between domestic law and a tax treaty and clarifies that the term 'immovable property' shall in any case include:
property accessory to immovable property,
livestock and equipment used in agriculture and forestry,
rights to which the provisions of general law respecting landed property apply,
usufruct of immovable property and rights to variable or fixed payments as consideration for the working of or the right to work, mineral deposits, sources and other natural resources.
On the contrary, in accordance with Paragraph 2, ships, boats and aircraft shall not be regarded as immovable property (see also commentary to Article 8).
Paragraph 3 specifies that the provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property. As we will show later, the terms 'derived from' and 'direct use' require a careful interpretation as their meaning may essentially influence the scope of application of Article 6 and its interaction with other Articles of a respective tax treaty.
Paragraph 4 provides for that provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise. The OECD Models since 1977 until 2000, as well as the UN Model
1 The wording of Article 6(1) of the OECD Model convention and UN Model convention is identical.
2 Commentary on Article 6 of the OECD Model Tax Convention (para. 1).
3 Whereas the US Model convention uses the term 'real property', this is not intended to imply any changes in substance.
also mention in paragraph 4 'Income from immovable property used for the performance of independent1 personal services'. This means that income from immovable business property used for the exercise of a business or the performance of independent personal services is taxed in the state of situs (and the same applies to so-called mineral royalties paid in respect of the right to work immovable property) (Vogel, 1997: 370, 386-387, 773)2.
Article 6 of the OECD / UN Model does not provide for any special rules for tax base determination in regard to incomes derived from immovable property. However, contracting states may specify in their domestic law a procedure of net or gross at-source taxation. In contrast to the OECD / UN Model Paragraph 5 of the US Model contains a special rule which allows taxpayers to elect to be taxed either on a gross basis or on a net basis (Vogel, 1997: 370).
Policy of the article
Everyone seems to agree that income from immovable property in a state is taxable there. As E. Reimer argues, the assignment of primary taxation to the state of situs is as old as wealth, income and inheritance tax treaties themselves. More than any other distributive principles in tax treaty law, it has always been taken for granted that the state of situs has the 'best right' to control the land and to tax both itself and all incomes derived therefrom (Reimer, 2010: 3). The same approach may be see in the very 'early' international tax law literature (Garelli, 1899; Torres Campos, 1906: 89-100; Lippert, 1912: Salvioli, 1914l; Isay, 1934).
In particular, K. Neumeyer (1914: 186-187) in 1914 mentioned situs principle in cross-border taxation as the oldest one and made a reference to the book of XII century of Bologna professor Jacobus who examined this issue in regard to taxation of immovable property in Bologna and Ferrara owned by foreigners.
Taking into account that principles of cross-border taxation (as well as provisions of the OECD Model) have a long history and many of them were elaborated at the time when research and technology were considerably less developed comparing to nowadays, one could suppose that situs principle3 may imply, first of all, a physical presence in the territory of a contracting state(Torres Campos, 1906: 89-100)4. At the same time, during the recent years it is possible to identify an evident development in concept of situs principle in Articles 5 and 8. In particular, some authors argue that in the context of the permanent establishment rule the territorial link has weakened over time (Schaffner, 2013: 20). This trend is closely connected with the development of telecommunication activities, Internet and space technologies and E-commerce (see: Action Plan on Base Erosion and Profit Shifting, 2013).
Indeed, the hallmark of a global economy is greater mobility of economic transactions and economic agents (Kobrin, 2001; Tanzi, 1996). Traditionally, the economists disentangled the idea of situs (or residence) from the idea of origin. Origin (source) is the specific place where income is produced (Mukherji, 2002). However, under contemporary conditions, at a fundamental level, one can always argue that it makes little sense to attempt to fine-tune a definition of PE, rooted in concepts of physical presence, for a universe of transactions in which physical presence is often irrelevant (Basu, 2007: 126). This led to the development of the worldwide discussion on the concept of 'virtual-PE'. In particular, many scholars argue that it is possible that a server would satisfy the general rule of Article 5(1) of the OECD Model and thus constitute a PE. However, the location of the server is easy to manipulate. There is nothing to prevent it from being located in a low tax jurisdiction or a tax haven and not in the source country (Basu, 2007: 126).
The above-mentioned difficulties with the transformation of the traditional concept of PE in the conditions of modern technologies let us suppose that the traditional concept of 'immovable property' (originated from property and civil law) may also be an object of development in international tax law. For instance, may the income derived from the use of information (in particular, e-databases) expressed in some regional language receive a tax treatment comparable with Article 6 if database is linguistically linked with a jurisdiction where the respective language is spoken and thus oriented to a particular market of a respective state?
1 In the OECD Model 1963 the term 'independent' was omitted.
2 It is important to note that the OECD Model 1963 extended its definition of 'royalties' (Article 12 (2)) to include income from letting tangible assets, such as industrial equipment; however, the OECD Model 1992 cancelled this practice.
3 In taxation of income derived from immovable property.
4 Historically situs principle was considered as manifestation of principle of territoriality in international taxation of immovable property and incomes derived from this property.
Notwithstanding the said above, it seems that in the case of Article 6 the territorial link between income and respective property was and remains highly important. Consequently, Article 6 of the OECD/ UN Model remains the most unchanged and stable part of the Models and bilateral tax treaties.
Residence country taxing rights
Taxing rights
Article 6 (1) of the OECD / UN Model provides for that income derived by a resident of a contracting state from immovable property, including income from agriculture or forestry, situated in the other contracting state may be taxed in that other state. Thus, this article, in general, does not grant an exclusive taxing right to the situs state; the situs state is merely given the primary right to tax. The article does not impose any limitation in terms of rate or form of tax on the situs state.
Exceptions
However, in some tax treaties and old Models (see section 1) we can see exclusive tax rights of the situs state. Consequently, in these treaties clauses on taxation of incomes derived from immovable / real property may use the wording 'may tax only...' / 'shall be taxable only...', but not 'may be taxed'. This is generally equivalent to giving double tax relief by exemption in the residence country under Article 23A, but the text of the treaties is nonetheless drafted as exclusive source taxation. Besides, even now it is possible to find examples of such approach in the tax treaty network of different states. For instance, Indian tax treaties with Bangladesh, Egypt, Greece and the United Arab Republic provided for that 'Income from immovable property shall be taxable only in the Contracting State in which such property is situated'1. The same approach sometimes can be seen in old tax treaties concluded even by OECD member countries, e.g. Swedish tax treaties with Israel (1959) and the USSR/Turkmenistan (1981) also provide for the exclusive taxation at source of income from immovable property2. Three tax treaties in the Russian tax treaty network (with Tajikistan, Vietnam and South Africa3) also give exclusive taxing rights to the state of situs.
Similarly, limitation of residence country taxing right in regard to income derived from immovable property situated abroad and owned by residents of that country may be established in its domestic legislation.
However, all these examples represent cases of limitation of residence country taxing rights. An opposite approach based on proclamation of exclusive residence country taxing rights in prejudice of source country rights would contradict the situs principle which is quite well established in international tax law4.
Source country taxing rights
The situs principle in international taxation is directly associated with source country taxing rights; these are the focus of Article 6 of the OECD/ UN Model convention. E. Reimer has proposed three theoretical arguments in order to justify this traditional approach based on at-source taxation of incomes derived from immovable property: (1) the first is a historical and pragmatic one: modern personal taxes which embrace the taxpayer's overall (net) wealth or (net) income follow older concepts of fractional, object-based taxes including a tax on land (real estate). Lawmakers and treaty negotiators have probably extended these patriarchal concepts to personal taxes... (2) the second is normative: state sovereignty is based on territorial sovereignty... (3) the third is based on administrative needs: unlike a person's personal or entrepreneurial activity and unlike income from mobile assets tax administration can relatively easily assess both the value of the immovable property and of income therefrom (Reimer, 2010: 3).
In addition, it is possible to argue that immovable property income including income from agriculture or forestry is taxable in the contracting state in which it is situated because of the state's ownership of natural resources of that country (Garg & Beenu Yadav, 2015: 366). However, the OECD / UN Commentaries observe: 'Although income from agriculture or forestry is included in Article 6, Contracting States are free to agree in their bilateral conventions to treat such income under Article 7'. Meanwhile, for some countries such a limitation of their rights to tax at-source would be unconstitutional in the light of their domestic
1 India - Bangladesh, India - Egypt, India - Greece tax treaties, IBFD tax treaty database.
2 IBFD Global tax treaty database.
3 IBFD Global tax treaty database.
4 Case law: Cour Administrative d'Appel (Administrative Court of Appeal) Marseille (2005), case 02-237; Gerechtshof (Court of Appeal)'s-Hertogenbosch, the Netherlands (2008), case 07/00088, etc.
EUROPEAN AND ASIAN LAW REVIEW
legislation and general principles of the legal system. For other countries the above limitation (following from the application of Articles 5 and 7 instead of 6) would be unacceptable for purely economic and social reasons (loss of revenues).
In the light of this tendency, one could suppose that Article 6 is regarded by contracting states as the most reliable guarantee of maintaining their taxing rights as source countries in quite economically sensitive areas.
Taking into account these reasons some countries in their tax treaties extended the scope of application of Article 6 to other incomes from natural resources, even when these incomes are not directly mentioned in the OECD/UN Model and Commentaries. Perhaps, the Australian tax treaty policy is one of the most consistent in that sense; nearly all Australian tax treaties contain the respective deviation from the OECD/ UN Models. In particular, Article 6 (2) of Australian treaties differs from the OECD/ UN Model as this country reserves the right to include rights relating to all natural resources under this Article in its treaties1.
At the same time, Article 6 (1) of Australia's treaties does not usually include income from agriculture or forestry as such profits are generally covered by Article 7 of Australian treaties2. Thus, this country does not consider agricultural and forestry resources as a part of its natural resources, at least, for tax treaty purposes. On the contrary, the Russian Federation, for instance, traditionally treats forestry resources as a part of its natural resources income from which should, consequently, fall under the scope of Article 6 (Shupletsova, 2007: 53-62, 90-114).
Thus, source country taxing rights under Article 6 are not treated uniformly in the global tax treaty network mainly because the notion of 'income from immovable property' as such may be defined differently taking into account the priority of tax treaty policy of a respective country. The latter, in its turn depends on the scale and specificity of national economy, geographical and infrastructural factors and etc.
In accordance with Article 6 of the OECD / UN Model convention taxing rights of the source state are considered as unlimited. In these circumstances, these rights could be limited only indirectly by the principles of proportionality and prohibition of discrimination (Article 24) and confiscation of the property. In particular, prohibition of the confiscatory and discriminatory taxation in regard to the incomes derived from immovable property (as well as from other investments) may be provided for by a respective bilateral investment treaty (Farrell, 2013).
However, there are some quite rare exceptions from this general approach in the global network of tax treaties; in some tax treaties taxing rights of a source state may be directly limited by Article 6 of a respective tax treaty.
The number of the above-mentioned exceptions is quite limited. For instance, it makes sense to mention the tax treaty between the USA and Bulgaria3. Its Article 6 (5) provides for:
'However, as long as a resident of the United States is not entitled under Bulgarian law to make an election to compute the tax on income from immovable property (real property) situated in Bulgaria on a net basis as if such income were business profits attributable to a permanent establishment in Bulgaria, the Bulgarian tax permitted to be charged under paragraph 1 shall not exceed 10 percent of the gross amount of the income'.
From the wording of the Article, we can see that it was constructed as an additional guarantee which is applicable only in the case where a source state does not provide for in its domestic legislation the right of a taxpayer to be taxed on the net basis. Consequently, only in the situations of a gross basis taxation the contracting states consider the excess of the 10 percent limitation in regard to at-source tax as unacceptable.
Sourcing / arising rule
Arising rule reflected in Article 6 of the OECD/ UN Model is closely connected with the issue of location of immovable property. Indeed, in order to become applicable the allocation rule of
1 OECD Commentary 2010 on Article 6, Reservations, para 11.
2 Commonwealth of Australia, Explanatory Memorandum: International Tax Agreements Amendment Bill (No 2) 2009, paragraph 2.137. Consistent with this approach Australia generally adds agricultural, pastoral or forestry property as examples of PE's in Article 5 (2) of its treaties (e.g., Article 5 (2) of the tax treaty with Finland).
3 The USA - Bulgaria tax treaty, IBFD database.
Taxing rights
Exceptions
Article 6 requires immovable property from which income is derived to be situated in the other contracting state.
The term 'situated' is defined neither in Article 6 nor in Article 3 of the OECD / UN Model. In general, it may be found in several other articles of the Models and Commentaries, for example, in Article 4 (resident), Article 7 (business profits), Article 8 (shipping, inland waterways transport and air transport), Article 11 (interest), Article 12 (royalties), Article 13 (capital gains), Article 15 (income from employment), Article 21 (other income), Article 22 (capital). Taking into account the frequency with which the respective expression is used in the OECD / UN Model, it may be suggested that an autonomous interpretation (based on the context of the treaty as it is provided for by Article 3 (2) of the OECD/UN Model) would be preferable. In particular, it is reasonable to suppose that the rationale behind the term should be the same for the purpose of the entire Model/ a particular bilateral treaty.
Moreover, due to the characteristics of the definition of 'immovable property' contained in Article 6 it is important whether the term 'situated' implies a corporeal location of the property within the territory of a contracting state, as well as a physical connection between the soil and the respective property. This question can practically be important in those cases where domestic law of a contracting state provides for a very broad definition of immovable property. In addition, this question is also relevant for property accessory to immovable property and for rights connected to immovable property (Simontacchi, 2007: 299) (see: Article 6 (2) of the OECD / UN Model), as well as for a complex object of immovable property (for instance, in some jurisdictions an enterprise as such may be considered as a complex object of immovable property (Stepanov, 2002: 12-27, 135-143).
Perhaps, in such difficult cases the most justified approach might be based on the following presumption: where a link exists between the property included in the positive list (Article 6 (2)) and physically immovable property, the context might indicate that such movable property, as well as intangible property, should be considered to be situated where the physically immovable property to which these are related is situated (Simontacchi, 2007: 302).
Method of taxation
At residence
Tax treaty rules assume that both contracting states tax according to their own law. However, treaty rules, to secure the avoidance of double taxation, limit the content of the tax law of both contracting states; in other words, the legal consequences derived from them alter domestic law, either by excluding application of provisions of domestic tax law where it otherwise would apply, or by obliging one or both states to allow a credit against their domestic tax for taxes paid in other state (Vogel, 1997: 20).
From the point of view of the method of at residence taxation of income from immovable property, it is obvious that Article 6 is not able to add anything to the above-mentioned general rule. The method of taxation at residence in regard to income derived from the immovable property situated abroad (in the other contracting state) should be provided for by domestic tax law of the residence country. At the same time, as it was mentioned in section 2.2 of this chapter residence taxation may be abolished by some treaties if they guarantee an exclusive at-source taxation in the framework of the scope of Article 6.
Meanwhile, in most cases tax treaties just indirectly influence the method of taxation at residence, as the residence country should credit a foreign tax or exempt1 the foreign income from immovable property in accordance with Article 23 of the respective treaty (See: Article 23 of the OECD / UN Model).
At source
Net vs. gross taxation. The OECD and UN Models do not contain any rules concerning methods of at source taxation in regard to incomes from immovable property. However, it is obvious that in principle Article 6 does not exclude gross basis withholding or net basis taxation, either. However, the US Model and some bilateral tax treaties explicitly provide for a right of taxpayer to elect net basis taxation.
Thus, Article 6 (5) of the US Model establishes:
'A resident of a Contracting State who is liable to tax in the other Contracting State on income from real property situated in the other Contracting State may elect for any taxable year to compute the tax on such
1 For instance, since Switzerland generally follows the exemption method, income derived from immovable property situated abroad is exempt from Swiss taxation. Moreover, an exemption of income from immovable property situated abroad is not only granted based on an applicable tax treaty, but yet based on a domestic exemption provision. Nevertheless, the exempted income is taken into account for calculating the applicable tax rate on the remaining income (exemption with progression).
income on a net basis as if such income were business profits attributable to a permanent establishment in such other State. Any such election shall be binding for the taxable year of the election and all subsequent taxable years unless the competent authority of the Contracting State in which the property is situated agrees to terminate the election'.
Consequently, many of the US tax treaties contain the same or comparable provisions, see, in particular, Article 6 (5) of the USA tax treaties with Bulgaria, Denmark, Mexico, Estonia, Luxembourg, the Netherlands, the Czech Republic, the Slovak Republic, Switzerland, Venezuela, Article 6 (4) of the USA tax treaties with Finland and Russia and Article 6 (6) of the tax treaties with France and Latvia1.
One can see the same approach in para. 10 of the US reservations to Article 6 of the OECD Model: the United States reserves the right to add a paragraph to Article 6 allowing a resident of a contracting state to elect to be taxed by the other Contracting State on a net basis on income from real property (2000 addition)2.
An interesting issue may arise if according to a tax treaty taxpayer has a right to elect the net taxation, while domestic law of the contracting state does not provide for a procedure to such election. For instance, domestic case law of Japan proposed the following answer to the question. The Supreme Court of Japan in Decision of 9 June 19673 dealt with the interpretation of Article 8 of the Japan - US tax treaty (1954). According to the facts of the case, a US resident argued that the treaty provision meant that a taxpayer may elect whether or not to be subject to Japan's taxation on income from real property situated in Japan. The court turned down this argument: according to the court, the treaty provision permitted the US resident to elect a net basis taxation, even when the applicable Japan's domestic law (of that period) did not have a withholding tax and the only available taxation method was a net basis taxation by way of filing a tax return.
Deductibility of losses. In the doctrine it was rightly stressed that the US approach was elaborated to ensure that the items of income concerned may be taxed on a net basis, however, it contains no indication regarding the deductibility or not of losses (Vogel, 1997: 374). Thus, the solution of the issue mainly depends on the domestic law of the contracting states.
In the above-mentioned context, it is interesting to look at the Swiss approach: as a consequence of the exemption of income derived from immovable property situated abroad, negative income / losses derived from that property cannot be deducted from Swiss income tax, however, the negative income is taken into account for calculating the applicable tax rate on the remaining income4.
Solutions based on simultaneous application of Articles 6 and 7. In general, in the global tax treaty network only quite a limited number of the treaties (in the framework of the global tax network) explicitly provide that if the income is derived as a part of a business it will be computed on a net basis according to the arm's length principle in Article 7. However, some authors seek to get to a similar result by systematic interpretation of the OECD/ UN Model, in particular, E. Reimer argues that the priority of the situs principle reflected in Article 6 does not necessarily mean that Article 7 of the OECD / UN Model does not apply at all. At least, neither Article 6 (4) nor Article 7 (7) contains such a negative order. Indeed, both rules are phrased in a positive manner: Article 6 (4) confirms that the provisions of Article 6 (1) and (3) shall also apply to the income from immovable property of an enterprise, and Article 7 (7) provides for that the provisions of certain other Articles shall not be affected by provisions of Article 7. From this reasoning the conclusion follows that both Article 6 and Article 7 should be applied simultaneously, and that Article 6 takes precedence only where both rules contradict (Reimer, 2010: 5; Yu-Hui Hsu, 2011: 308).
It is important that such an interpretation does not limited the taxing right of source state in general, but may be used as an argument that a taxpayer has a right to be taxed on the net basis also in regard to the income from immovable property, even if a respective tax treaty does not directly provide for a mechanism of election. In addition, simultaneous application of Articles 6 and 7 provokes complementary questions concerning the scope of applicability of Article 9 of the OECD / UN Model in these cross-border situations.
1 IBFD tax treaty database.
2 OECD Commentary 2010 on Article 6, Reservations, para 10.
3 Decision of the Supreme Court of Japan of June 9, 1967 Shomu Geppo Vol. 13, No. 9, 1131.
4 CH: Decisions of the Federal Supreme Court of January 23, 2014: 2C_960/2012, 2C_961/2012, BGE 140 II 141 (excess of interest expenses); March 6, 2014: 2C_585/2012, 2C_586/2012, BGE 140 II 157 (excess of maintenance cost); August 21, 2007: 2A.36/2007, StE 2009 B 11.3 No. 18 (principle of taking into account negative income in calculating the amount of tax).
Income covered
Definition of immovable property
Definition of the immovable property reflected in Article 6 (2) of the OECD / UN model draws on domestic law but also has a treaty exclusive part. According to the common understanding the treaty exclusive part follows civil law conception of immovable property rather than common law concepts, e.g. by the inclusion of farm equipment and livestock as immovable property1. Common law countries often substitute the term real property in their treaties (e.g. the USA) but still usually include the treaty exclusive part from the Model definition. Countries with extensive natural resources, e.g. Australia, often expand the treaty definition to make sure all income from ownership of natural resources is covered, including a rule for the location of intangible rights related to minerals in the country. Many countries also reserve the right to tax in accordance with Article 6 income of shareholders in resident companies from the direct use, letting, or use in any other form of the right to enjoyment of immovable property situated in its territory (see: position of Finland, France, Mexico, Spain reflected in their reservation to the Article)2. There are also many other issues connected with the definition of immovable property which are quite relevant for the correct understanding of the scope of application of Article 6 of the OECD / UN Model.
The OECD / UN Commentary to Article 6 (2) is quite short and deals only with some important issues which could be discussed. In particular, it states:
'Defining the concept of immovable property by reference to the law of the State in which the property is situated, as is provided in paragraph 2 of Article 6, will help to avoid difficulties of interpretation over the question whether an asset or a right is to be regarded as immovable property or not. The paragraph, however, specifically mentions the assets and rights which must always be regarded as immovable property. In fact, such assets and rights are already treated as immovable property according to the laws or the taxation rules of most OECD Member countries. Conversely, the paragraph stipulates that ships, boats, and aircraft shall never be considered as immovable property. No special provision has been included as regards income from indebtedness secured by immovable property, as this question is settled by Article 113'.
Let us analyze further in detail some practical aspects of the immovable property definition for tax treaty purposes.
Reference to national law of contracting states vs. tax treaty definition
The reference of Article 6 (2) of the OECD / UN Model to national law makes it necessary for each jurisdiction to take into account the peculiarities of the provisions of domestic law concerning the immovable property definition. Consequently, sometimes Article 6 (2) of the respective bilateral tax treaties reflects these peculiarities, as wording of the Article is a result of the efforts of the competent authorities to ensure a coherence between domestic law and the Model. E.g., there is a minor trend in the way Article 6 (2) has been drafted in Swedish tax treaties; the trend is the inclusion of the term 'buildings' in the examples provided in the above-mentioned Article of certain recent treaties, e.g. the treaties with the Netherlands (1991), with Philippines (1998), with Mauritius (2011)4. This approach is fully based on the initiative of Sweden, since certain buildings are not considered as immovable property according to Swedish domestic law. According to Swedish tax administration, including buildings explicitly in the wording of Article 6 ensures their inclusion in the scope of the treaty.
However, there are many tax treaties which demonstrate significant deviations from Article 6 (2) of the OECD / UN Model:
Some of them do not contain at all any tax treaty definition of immovable property or contain but a very short and incomplete one. For instance, the Switzerland - Belarus tax treaty does not contain the traditional enumeration of the kinds of immovable property at all5;
Others, on the contrary, do not contain the reference to national law of contracting states. E.g., the Sweden - Belarus tax treaty (1994) does not include in Article 6 (2) a reference to the domestic law of the contracting state where the property is situated6.
1 For instance India and Indonesia made reservations that they wish to address the issue of the inclusion of the words 'including income from agriculture or forestry' through bilateral negotiation. OECD Commentary 2010 on Article 6 (1), Reservations, para 1, India (2008 addition) and Indonesia (2010 addition).
2 OECD Commentary 2010 on Article 6, Reservations, para 5, 6, 7 and 12.
3 Commentary on Article 6 of the OECD Model Tax Convention (para. 2).
4 IBFD Global tax treaty database.
5 IBFD Global tax treaty database.
6 Instead, Article 6 (2) of the Sweden - Belarus tax treaty provides for that the term immovable property means 'land and buildings'; IBFD Global tax treaty database.
Immovable property and real property
The major terminology differences between civil law and common law country arise, as the term 'immovable property' is relatively unknown in some common law countries. If we take Australia as an example, it is possible to observe that until the tax treaty with Switzerland (2013), all Australian tax treaties used the words 'real property', either solely instead of 'immovable property' (e.g. Article 6 of the treaty with France) or in conjunction with the word 'immovable' in Article 61. As a consequence, there is a definition of 'real property' in article 6 (2) rather than an 'immovable property' definition. At the moment, the tax treaty with Switzerland (2013) is the first Australian treaty to use the words 'immovable property'2. Legislation was introduced into the Australian Parliament on 17 July 2014 to clarify that any reference, in an international agreement, to the concept of 'immovable property' having its Australian domestic law meaning, includes a reference to real property3. The amendment will apply to the reference to 'immovable property' in Article 6 of the Switzerland treaty and '...is also intended that the amendment will apply to any future agreements that use the same concept'4.
Transport means as immovable property
There are many tax treaties in the global tax treaty network which do not include the last sentence of Article 6 (2) of the OECD / UN Model according to which ships, boats and aircraft shall not be regarded as immovable property. See, for instance, the Swedish - Barbados (2011) tax treaty5. On the contrary, some treaties not only exclude ships / boats and aircraft, but also road vehicles form the article, such as the tax treaties of Switzerland concluded with Armenia, Kyrgyzstan, Serbia, Ukraine, Uzbekistan6. However, it seems there is no noticeable number of cases where the issue of applicability of Article 6 to incomes from transport means constitute a practical problem.
Income from immovable property
Income from 'direct use of immovable property'. The OECD / UN Model and the Commentaries do not provide a clarification with regard to term 'direct use of immovable property'; thus, a reference to the domestic law could seem justifiable. However, from the systematic point of view the existence of the expression 'direct use' implies that the OECD / UN Model distinguishes between direct and indirect use of immovable property. Therefore, if a particular activity qualifies as indirect use, it cannot be regarded as direct as well. Consequently, there are reasons to suppose that letting of the immovable property (including any type of rent) and mineral royalties are opposed to the 'direct use' and therefore, for the tax treaty purposes should be regarded as 'indirect use'7. Even if we agree with subtraction of the above-mentioned cases of the 'indirect use', it is still not fully clear what situations should be covered under the 'direct use' of immovable property. It seems that the scope of the respective expression, in principle, should be quite limited. According to the prevailing position in international tax law doctrine, it comprises income from occupation of immovable property (imputed income), as well as income from agriculture, forestry and similar businesses (Vogel, 1997).
Some specific issues may also be connected with the fact that the wording 'Income derived from the direct use, letting, or uses in any other form of immovable property' may also include granting the free use of immovable property8.
1 In some cases reference was made to immovable property in the title in treaties with Argentina, Chile, Czech Republic, India, Mexico, the Slovak Republic and South Africa.
2 International Tax Agreements Amendment Bill 2014, Schedule 1, Part 1.
3 International Tax Agreements Amendment Bill 2014, Schedule 1, Part 2.
4 Commonwealth of Australia, Explanatory Memorandum: International Tax Agreements Amendment Bill 2014, para 2.9.
5 IBFD Global tax treaty database.
6 IBFD Global tax treaty database.
7 Article 3 of the Protocol to the Convention of 16 October 1948 between Sweden and Switzerland (terminated) quoted in the Report of WP 9 on Taxation of Income from Immovable Property, FC/WP9(57) 1, October 28, 1957.
8 Decision of the Administrative Court of Appeal Marseille of May 3, 2005 on the interpretation of France - Cyprus Income and Capital Tax Treaty (1981) (case 02-237). In particular, the Court of Appeals also examined the France-Cyprus tax treaty and concluded that such a tax treaty allowed France to tax the income derived from immovable property by the application of Art. 6(1), which states that 'income derived by a resident of a State from immovable property ... situated in the other State may be taxed in that other State', and Art. 6(3), which states that 'the provisions of paragraph 1 (of Art. 6) shall apply to income derived from the direct use, letting, or uses in any other form of immovable property'. Accordingly, the free attribution of the use of housing was considered by the Court of Appeals to be a modality of use of the immovable
I
Agricultural, forestry and similar activities as 'direct use' of immovable property
Standard approach. In accordance with Article 6 (1) of the OECD / UN Model, income from agriculture or forestry is normally included in the scope of Article 6 of the tax treaties concluded by OECD member and non-OECD member countries as well (there are, however, some exceptions and many of them are connected with tax treaties concluded by Australia1). As a result of the above-mentioned approach, Article 6 is applicable to income from agriculture and forestry, not Article 7 (Tiozzo, 1995: 24)2. (However, it should be acknowledged that in practice there is little difference, if taxes are in both cases levied on a net basis, that is determined according to the same tax accounting rules).
In many countries the interpretation that Article 6 prevails over Article 7 in regard to taxation of income from agriculture and forestry is supported by domestic administrative rulings or judicial practice. For instance, the Indian Authority for Advance Rulings in the case of Cyril Eugene Pereira (1999)3, while not adjudicating on Article 6, observed that income from immovable property including income from agriculture and forestry is to be taxed in the country where such immovable property is situated according to the domestic law of that country. It was also stated that since Article 6 does not provide for the computation mechanism and only allocates the taxing right to the contracting state in which the immovable property is situated, it can be said that the tax is leviable in such contracting state according to its domestic law.
Standard approach and domestic special tax treatment regimes. In domestic law of many countries, the tax on income from farming is calculated in the same manner as other incomes (on the net basis); however, it could be subject to special provisions4. In most countries the same system is applied to residents and nonresidents (South Africa, Sweden, Switzerland, etc.). However, for some kinds of agricultural or forestry activities a domestic special tax treatment regime may be established. E.g., in Japan domestic tax law, with respect to income from forestry, those individuals who earn income from growing and selling timber may benefit from an averaging mechanism that mitigates the effect of progressive tax rate structure5. Under Italian domestic law, agricultural income is generally computed on the basis of schedules of estimated values that vary according to the type and quality of the land (Tiozzo, 1995: 24). Though, such kind of a rule applies regardless of the residence of an individual, it should not influence the application of relevant tax treaties in cross-border situations.
Evident differentiation of incomes received by residents and non-residents from agriculture or forestry activities is provided for by Brazilin domestic tax legislation. Moreover, this approach is combined with the possibility (both for residents and non-residents) to apply a simplified system of taxation. In particular, for non-resident individuals, income derived from agriculture activities in Brazil may be offset against necessary expenses for the maintenance of such activity (this regime is generally applicable to agriculture and livestock activities). The taxpayers may also resort to a deemed profit regime, in which 20 percent of the income derived from agriculture activities are regarded as profits. In this simplified system, the taxpayer is not obliged to keep and demonstrate records of the expenses for tax purposes. The same system is also applied to residents. However, while the resident individual is subject to progressive rates ranging up to 27.5 percent, the non-resident is subject to a 15 percent withholding.
In addition, in some countries (e. g., Switzerland) special rules may exist for capital gains on immovable agriculture and forestry property6, thus, for tax treaty purposes, they are relevant to the scope of Article 13 (but not 6) of the OECD / UN Model.
property that enabled France to tax such an operation by virtue of the combined provisions of Arts. 206 I and 209 I of the CGI and the tax treaty.
1 As it was mentioned, in Article 6 (1) Australia's treaties do not generally include income from agriculture or forestry as such profits are generally dealt with under Article 7 of Australian treaties. See, e.g., Australia - Sweden tax treaty (1981), etc. This exclusion has been achieved in 26 of Australia's treaties. Where such profits are included under Article 6 (due to the treaty partner's preferred treaty position), the determination of those profits is usually prescribed to be determined in accordance with the principles in Article 7 (e.g., Article 6 (5) of the treaty with New Zealand).
2 In many jurisdictions domestic law provides for additional criteria for the delimitation of the scopes of application of Article 6 and Article 7. E. g., under Italian tax treaties, income from agriculture and forestry generally falls within the scope of application of Article 6, but if certain quantitative and qualitative thresholds are met, such income qualifies as business profits and, as such, falls within the scope of application of Article 7.
3 Cyril Eugene Pereira (1999) 239 ITR 650 (AAR).
4 For instance: Act 58 of 1962 (South Africa).
5 IBFD database.
6 Article 18 (para. 4) of the Federal Direct Tax Act (Switzerland).
EUROPEAN AND ASIAN LAW REVIEW
Exceptions. Besides the above-mentioned exceptions connected with Australian tax treaty law practice, it should be mentioned that sometimes deviations from standard wording of Article 6 (1) of the OECD / UN Model may be explained by the fact that contracting states used once or prefer to use at the time of the concluding of the treaty an old version of the Model.
For instance, Swiss older tax treaties still follow the wording of Article 6 (1) of the 1963 OECD Model and, in particular, do not include 'income from agricultures or forestry', such as, for example, the treaties with Austria, Denmark, Germany, India, Ireland, Portugal, Singapore, Spain, Sweden1; Brazilian tax treaties concluded prior 1977 (namely those with Austria, Belgium, France, Japan, Sweden and Denmark) also do not include the expression 'including income from agriculture or forestry' in para. 1 of Article 6, as it reads in all versions of the OECD Model since 19772. Accordingly, Article 10 of the Japan - Soviet Union / Russian Federation tax treaty (1986)3, which is still in force, does not refer to income from agriculture and forestry either. The same may be seen in Indian tax treaties with Germany, Singapore and Denmark4.
In some tax treaties there are special indications that income from fishing should be considered in connection with the scope of Article 6. In particular, New Zealand even made a special reservation to the OECD Commentary to Article 6: 'New Zealand reserves the right to include fishing and rights relating to all natural resources under this Article' (2000 addition). The same approach may be seen in some tax treaties concluded by other countries (e.g. Turkey)5.
Income from natural resources. Not so many tax treaties in the global tax treaty network include explicitly in the scope of Article 6 income from natural resources (as it was mentioned, most of the examples are connected with Australian tax treaty model). However, even when such income is explicitly included in the scope of Article 6, respective treaties usually do not include particular rules for the taxation of income from natural resources, as those should be provided for by domestic law of contracting states.
As the comparative analysis of domestic case law of different countries shows, the usual approach is that a mine will qualify for a permanent establishment under Article 5, thereby resulting in applying Article 7 for the taxation of the permanent establishment6. However, taxes are levied on a similar (net) basis in either case, as taxable income is determined on the basis of the same tax accounting rules for Articles 6 and 7. Thus, the problem may only arise if a jurisdiction attributes income from natural resources to the scope of Article 6 and applies gross basis taxation. In addition, hypothetically the conflict of qualification (Article 6 - Articles 5 & 7) between two contracting states may lead to difficulties in crediting tax paid in a source state; however, there is no explicit indication that such a problem exists in practice.
Australia in the Commentary to Article 6 of the OECD Model reserved the right to include rights relating to all natural resources under this Article (2005 addition)7. Thus, Article 6 (2) of 'old' and quite 'new' Australian treaties differs from the OECD / UN Model8. The definition includes income from the leasing of land and any other interests in land, and any other use of mineral, oil or gas deposits or other natural resources (including rights to explore for or to exploit mineral, oil or gas deposits or other natural resources) and any payments in consideration for using those rights9.
As is mentioned above, there is an additional paragraph added in all but 8 of Australia treaties which seeks to resolve doubts about the source of income by deeming the situs to be where the underlying real
1 IBFD Global tax treaty database.
2 The only exception is the Brazilian treaty with Spain, signed in 1976 and already including the expression via protocol. From 1977 on, Brazil followed the OECD / UN Model with respect to para. 1.
3 IBFD Global tax treaty database.
4 BFD Global tax treaty database.
5 Article 6 (2) of the USA - Turkey tax treaty (the words 'fishing places of every kind' have been added to Article 6 (2)), the same is in Article 6 (2) of Turkey - Singapore, Turkey - the Netherlands treaties, etc.; Article 6 (2) of the Turkey - South Africa treaty (the words 'and equipment used in agriculture including the breeding of cultivation of fish' have been added to the Article), IBFD Global tax treaty database.
6 Though there are not many practical cases on the issue, this approach is doctrinally supported in Sweden, Japan, Switzerland, etc.
7 OECD Commentary 2010 on Art 6, Reservations, para 11.
8 OECD Commentary 2010on Art 6, Reservations, para 11.
9 Meanwhile, the peculiarity of the Australian approach to the scope of Article 6 does not preclude the qualification of the 'operation of mine' as a permanent establishment. Thus, as the operation of a mine will always constitute a permanent establishment and be taxed on a net basis under Australian domestic tax law, it will generally be dealt with under Article 7 of the OECD / UN Model. Commonwealth of Australia, Explanatory Memorandum: International Tax Agreements Amendment Bill (No 2) 2009, para. 2.136 to 2.145.
property over which the lease or right is granted, situated or where any exploration may take place1. Doubt arises under Australian domestic law, as the place where an interest in land, natural resources or standing timber (such as a lease) is situated (situs) is not necessarily the place where the underlying property is situated (Dirkis & Burch, 2014)2. This clause is added in either Article 6 (3) or Article 6 (4) (e.g. art. 6 (4) of the treaty with Japan).
Income from shares or rights, which are treated therein as income from immovable property / occupation as 'direct use' of immovable property
UN Model Commentary para. 4 variation to include cases where a person owns shares in a company which entitles them to the occupation of particular immovable property owned by the company and they 'rent' that use to another person (timeshares, condominiums etc.) is relevant for many bilateral treaties. Several countries additionally made respective reservation to the OECD Commentary to Article 6, in particular:
Finland reserves the right to tax income of shareholders in Finish companies from the direct use, letting, or use in any other form of the right to enjoyment of immovable property situated in Finland and held (changed in 1992 from wording 'owned' (1977)) by the company, where such right is based on the ownership of shares or other corporate rights in the company3;
Spain reserves its right to tax income from any form of use of a right to enjoyment of immovable property situated in Spain when such right derives from the holding of shares or other corporate rights in the company owning the property (1992 addition)4;
Mexico reserves the right to treat as immovable property any right that allows the use or enjoyment of immovable property situated in a Contracting State where that use or enjoyment relates to time sharing since under its domestic law such right is not considered to constitute immovable property (2005 addition)5;
France wishes to retain the possibility of applying the provisions in its domestic laws relative to the taxation of income from shares or rights, which are treated therein as income from immovable property6.
Consequently, e. g., in most of the French tax treaties we may see different forms of implementation of this approach. E.g. the tax treaty with Switzerland in Article 6 (2) extends the scope of the provision to the owner or usufructuary of shares in a company, trusteeship or similar entity that holds immovable property (i.e. real estate company) provided that the owner or usufructuary has an exclusive right of use of the immovable property or the law of the contracting state equates the shares with the immovable property and directly taxes the owner or usufructuary of the share as the owner or usufructuary of the immovable property7. In many other tax treaties the wording is different and is not based on the use of the term 'usufructuary'. See, for instance, Article 6 (5) of tax treaties of France with Canada, China, Croatia, Czech, Gabon, Egypt, Estonia, Russia, Italy8, and Spain9 or with Sweden10, etc.
1 Article 6(3) of the New Zealand treaty. This source rule is absent only in the older treaties with Austria, Belgium, Denmark, Germany, Korea, Malaysia, Netherlands and Sweden.
2 Commonwealth of Australia, Explanatory Memorandum: International Tax Agreements Amendment Bill (No 2) 2009, paragraph 2.141.
3 OECD Commentary 2010 on Article 6, Reservations, para 5. E. g., Article 6 (4) of the Finland - Switzerland tax treaty refers to shares in a company or similar entity that owns immovable property whereby the shareholder has a sound and permanent right to use the immovable property of the company; see also: Article 6 (3) of Finland - Brazil tax treaty, Article 6 (4) Finland - Italy treaty (1981), etc.
4 OECD 2010 Commentary on Article 6, Reservations, para 7.
5 OECD 2010 Commentary on Article 6, Reservations, para 12.
6 OECD 2010 Commentary on Article 6, Reservations, para 6.
7 Article 6 (2) of the France - Switzerland tax treaty, IBFD Global tax treaty database.
8 See: point 3 of the 1989 Protocol to France - Italy tax treaty, IBFD Global tax treaty database.
9 In particular, Article 6 (5) of the tax treaties with Canada, China, Croatia, Czech, Gabon, Egypt, Estonia, Russia, Spain states: 'Where the ownership of shares or other rights in a company or other legal entity entitles the owner of such shares or rights to the enjoyment of immovable property situated in a Contracting State and held by that company or that other legal entity, then the income derived by the owner from the direct use, letting, or use in any other form of his right of enjoyment may be taxed in that State. The provisions of this paragraph shall apply notwithstanding the provisions of Articles 7 and 14', IBFD Global tax treaty database.
10 Article 6 (5) of the treaty with Sweden provides for a slightly different wording: 'Where the ownership of stocks, shares or other rights in a legal entity entitles the owner to use the immovable property situated in a Contracting State which is held by that legal entity, income derived by the owner from the direct use, rental or use in any other form of his right to use the property shall be taxable in that State', IBFD Global tax treaty database.
EUROPEAN AND ASIAN LAW REVIEW
The deviations from Article 6 of the OECD / UN Model connected with incomes from shares or rights (which are treated as income from immovable property) could be seen in many tax treaties in the framework of the global tax treaty network. Even OECD countries which have not made any reservations in this respect sometimes include such a provision in their tax treaties. E. g. a few Swedish treaties include in the scope of Article 6 income earned thanks to the ownership of shares or other corporate rights in a company the principal object of which is to own immovable property - see Article 6 (3) of the Nordic Multilateral Convention1. Other examples are some Italian tax treaties, e. g., with Estonia (1997)2 and with Lithuania3 (1996), etc.
Sometimes we can see the provisions similar to the above-mentioned also in the tax treaties concluded between countries which have not made any reservations in connection with the content of Article 6. For instance, in Article 6 (3) of the Brazil - Peru tax treaty it was established that Articles remain applicable in case 'ownership of shares or other corporate rights in a company entitles the owner of such shares or corporate rights to the enjoyment of immovable property held by the company'.
A comparable solution in principle may be reached without modification of a tax treaty but on the basis of interpretation and substance over form approach. In particular, the Supreme Court (Hoge Raad) in decision of 11 November 2011, № 10/01367 established the facts according to which the taxpayer was a Dutch resident and he indirectly owned a substantial shareholding in a French company; in that capacity a holiday home located in France was put at his disposal. Consequently, the discussion was focused on the issue whether the use of the dwelling constituted a hidden profit distribution or income from immovable property. Finally, due to the fact that the holiday home was put at the disposal of the taxpayer in his capacity as a substantial shareholder, the Court classified it as a hidden profit distribution and not as income from immovable property4.
Income from movable property that is treated as income derived from immovable property
One of the issues connected with the scope of Article 6 of the OECD / UN is whether income from movable property may be treated as income derived from immovable property. For instance, the Supreme Administrative Court of France (Conseil d'Etat) in its Decision of 27 May 2002 № 125959 on Superseal Corporation case5 held that the concept of 'immovable property' is defined by reference to the domestic laws of the contracting state where the property is situated, tax treaties sometimes specifying that it is the state tax laws. Thus, the Conseil d'Etat considered that, for the purposes of the tax treaty concluded by France with Canada, this formulation was necessarily referring to immovable property 'by nature' and not to immovable property 'by destination'. Therefore, even assuming that the furniture, equipment and tools are leased immovable properties by destination, such goods are not within the scope of Article 6 (they are treated according to the provisions of the article concerning 'royalties' as it includes income derived from equipment rentals).
However, the approach to the issue could not be the same if a tax treaty and / or domestic law explicitly attribute incomes from some kinds of movable property connected with immovable property to the scope of Article 6. In particular, it is possible to see a special attention to this problem in Portuguese tax treaties. E. g., the Portugal - Switzerland tax treaty6 states in Article 6 (3) that any income derived from movable property that is treated as income derived from immovable property according to the laws of the contracting state where the property is situated is included in Article 6. Comparable provisions may be found in other Portuguese tax treaties. E. g., Article 6 (5) of the Portugal - Brazil treaty7 provides for Article 6 'shall also apply to income from movable property or from services performed in connection with immovable property which, under the tax law of the Contracting State in which such property is situated or the services are performed, is assimilated to income from immovable property'. The comparable provisions may be also found in other Portuguese tax treaties concluded with its partners (see: for instance, Article 6 (5) of the Portugal - Luxembourg tax treaty8).
1 IBFD Global tax treaty database.
2 Article 6 (4) of the treaty, IBFD Global tax treaty database.
3 Article 6 (4) of the treaty, IBFD Global tax treaty database.
4 Decision of the Supreme Court (Hoge Raad) of November 11, 2011, No. 10/01367.
5 FR: Superseal Corporation (2002) No. 125959 Council of the State [Conseil d'Etat].
6 See: IBFD Global tax treaty database.
7 IBFD Global tax treaty database.
8 IBFD Global tax treaty database.
Income from immovable property and income from alienation of immovable property
An issue arises if income from alienation of immovable property is covered as well as payments for the use of the immovable property (rent etc.). This is not important if Article 13 is seen as covering such income but some countries, e.g. Canada, regard Article 13 as limited to 'capital gains' as distinct from 'income' from alienation of immovable property and therefore include a special provision in article 6 covering income from alienation of immovable property. This position of Canada is directly reflected in para. 8 of the reservations to Article 6 of the OECD Model: Canada reserves the right to include in paragraph 3 a reference to income from the alienation of immovable property (2000 addition)1.
Besides, some old tax treaties of other countries may use the same approach as well. For instance, Article 10 (3) of the Sweden - Greece tax treaty (1961) mentions that the Article applies also to profits from the alienation of immovable property (however, Swedish tax treaty policy is now to tax income from capital gains under Article 13)2.
In the global tax treaty network we can also find other examples when relatively 'new' tax treaties extend their provisions on income from sale of immovable property (see, e. g., Article 6 (3) of the Russian tax treaties with Israel and Ireland3).
In most of other countries alienation of immovable property is covered by Article 13 or, if it is a business connected, for instance, with trading in land, it is covered by Article 7 of the OECD Model (for instance, such an approach is common for the South Africa). Other countries tend to adopt the approach that Article 13 in the part concerning immovable property should prevail over Article 7 almost in all cases of alienation of immovable property by a taxpayer (see: tax treaty network and the approach to interpretation of China, Sweden, Switzerland, etc.). In particular, the opposite approach would be quite reasonable for common law countries to the extent they treat Article 13 of the OECD/ UN Model as aimed exclusively at taxation of 'capital gains'. Thus, the opposite conclusion might be the following: given that the land dealer receives income from selling, not owning and exploiting land, so, probably, Article 7 rather than Article 6 should be applicable. Besides, taking into account the specificity of Canadian tax treaties (in the part of Article 6), the approach based on the respective treaties might be different4.
Conclusions
The Article 6 of the OECD / UN Model concerning the taxation of incomes derived from immovable property is the most sustainable provision of the Models and bilateral tax treaties.
However, the way of application of the article 6 varies in accordance with bilateral tax treaties of countries and domestic legislation of them. In the global tax treaty network the notion of 'income from immovable property' are defined differently taking into account the priority of tax treaty policy of each country. Due to the specificity of national economy, geographical and infrastructural factors of countries and other reasons they (countries) extend the scope of application of Article 6 to other incomes, not only to income derived from immovable property, but also to incomes from natural resources, income from shares or rights or income from agriculture and forestry and so on.
Therefore, the taxation of incomes derived from immovable property in cross-border situations is always a complicated issue which is solved on the basis of provisions of the Models, bilateral tax treaties and domestic legislation.
References
Arnold, B. (2006) At Sixes and Sevens: The Relationship between the Taxation of Business Profits and Income from Immovable Property under Tax Treaties. Bulletin of International Fiscal Documentation. 60 (1), 5-18.
1 OECD Commentary 2010 on Article 6, Reservations, para 8.
2 IBFD Global tax treaty database.
3 However, in all other cases Article 6 (3) of Russian tax treaties follows the OECD / UN Model, See: IBFD Global tax treaty database.
4 In particular, assuming the taxpayer is in the business of trading land, the income should be covered by Article 7; if the taxpayer is in the business of leasing land, the income is more likely covered by Article 6; and finally, if the land is capital property (i.e., not inventory), the gains from sale of land are covered by Article 13.
Basu, S. (2007) Global Perspectives on E-Commerce Taxation Law. India, Ashgate. Dirkis, M. J. & Burch, M. (2014) Australia. In: Sasseville, J. et al. (eds.), Departures from the OECD Model and Commentaries. Online Books IBFD.
Farrell, J. E. (2013) The Interface of International Trade Law and Taxation. Amsterdam, IBFD. Garelli, A. (1899) International Tax Law. [Il Diritto Internazionale Tributario].Torino, Roux Frassati e Co. Garg, R. P. & Beenu Yadav (2015) Law and Practice of Tax Treaties. New Delhi, Taxmann Publications. Isay, E. (1934) International financial law [Internationales Finanzrecht]. Stuttgart - Berlin, Verlag W. Kohlhamme.
Kobrin, S. (2001) Territoriality and Governance of Cyberspace. Journal of International Business Studies. 32 (4), 687-704. https://doi.Borg/10.1057/palgrave.jibs.8490990
Lippert, G. (1912) International finance law. A systematic presentation of international financial law norms [Das Internationale Finanzrecht. Eine systematische Darstellung der internationalen Finanzrechtsnormen]. Triest - Wien - Leipzig, Verlag M.
Neumeyer, K. (1914) Internationales Finanzrecht. Zeitschrift für Internationales Recht. (24), 186-187. (In German).
Papotti, R. & Saccardo, N. (2002) Interaction of Articles 6, 7 and 21 of the 2000 OECD Model Convention. Bulletin of International Fiscal Documentation. 56 (10), 516-521.
Reimer, E. (2010) Income from Immovable Property (Article 6 OECD Model Convention). In Lang, M., Pistone, P., Schuch, J., Staringer, C. (eds). Source versus Residence: Problems Arising from the Allocation of Taxing Rights in Tax Treaty Law and Possible Alternatives. Taxmann Publications.
Salvioli, G. (1914) Double taxes in international law [Le doppie imposte in diritto internazionale]. Napoli, Stab. Tip. Luigi Pierro & Figlio.
Schaffner, J. (2013) How fixed is a permanent establishment? Kluwer L. Intl
Simontacchi, S. (2007) Taxation of Capital Gains under OECD Model Convention: With Special Regard to Immovable Property. Alphen aan den Rijn: Kluwer law international.
Shupletsova, Y. (2007) Property Rights on Natural Resources: Public and Private Interests [Veshchnye prava na prirodnye resursy: publichnye i chastnye interesy]. Moscow, Jurisprudentsia. (In Russian).
Stepanov, S. A. (2002) Complex Objects of Property in Russian Civil Law [Imushchestvennye kompleksy v rossiiskom grazhdanskom prave]. Moscow, Norma. (In Russian).
Tanzi, V. (1996) Globalization, Tax Competition and the Future of Tax. International Monetary Fund. Working Paper No. 96/141. Available from: https://ssrn.com/abstract=883038 [Accessed 14 September 2020].
Tiozzo, F. (1995) Osservazioni sulla tassazione della proprieta immobiliare nel diritto tributario pattizio. La Tribuna dei Dottori Commercialist, (5). (In Italian).
Torres Campos, M. (1906) Elements of private international law. Vol. I.[Elementos de derecho internacional privado]. Madrid, Librería de Fernando Fe.
Vogel, K. (1997) Klaus Vogel on Double Taxation Conventions.(3rd ed.). Deventer, Kluwer Law International.
Yu-Hui Hsu, J. (2011) Article 6 Income from Immovable Property. In: Ecker, T., Ressler, G. (eds). History of Tax Treaties: The Relevance of the OECD Documents for the Interpretation of Tax Treaties, Vienna, Linde.
Information about the author
Danil V. Vinnitskiy - doctor of juridical sciences, professor, head of the Financial law chair, director of the BRICS Law Institute, Ural State Law University, Yekaterinburg, Russia (54 Kolmogorova St., Yekaterinburg, 620034, Russia; e-mail: vinnitskydv@soeka.ru).
© D. V. Vinnitskiy, 2020
Date of Paper Receipt: September 9, 2020
Date of Paper Approval: November 10, 2020
Date of Paper Acceptance for Publishing: December 1, 2020
