tax notes international - Tuck School of Business - Dartmouth College

OECD
OECD
OECD Group Addresses CIVs,
Cross-Border Investors
An informal consultative group (ICG) organized by
the OECD has released two reports that address the
application of treaty benefits to collective investment
vehicles and cross-border investors
Issued on January 12, the reports — ‘‘Granting of
Treaty Benefits With Respect to the Income of Collective
Investment Vehicles’’ (the CIV report) and ‘‘Possible
Improvements to Procedures for Tax Relief for
Cross-Border Investor’’ (the procedures report) — were
commissioned by the OECD in December 2006 when
the informal consultative group was established.
The CIV report deals with conceptual and practical
issues relating to income tax treaty benefits when investors
in one country invest, through a fund organized in
a second country, in investments in a third country.
The procedures report deals more generally with the
practical problems of making claims for treaty relief
when investors hold investments through intermediary
institutions, such as banks and brokerages, and are not
the owners of record of the investments.
Fund managers with cross-border investments or
investors, banks, and brokerages should be aware of
this development, since it might be a harbinger of future
developments in international tax treaty practice.
It must be emphasized that at this stage, the reports
contain only the views of the ICG. The OECD’s Committee
for Fiscal Affairs has not adopted the ICG’s
conclusions as a statement of the OECD’s official
views, although it may do so in the future.
The CIV Report
It is very common for an investment fund organized
in one country (the fund country) owned by investors
in a second country (the investor country) to invest in
securities issued by residents of a third country (the
source country). Most source countries impose withholding
taxes on payments of interest, dividends, or
both to foreign investors, and some (such as Canada,
Spain, and Australia) impose tax on some capital gains
realized by foreign investors.
Thus, investors are often very interested in whether
relief from source-country tax is available under an
applicable income tax treaty. There may be a treaty
between the source country and the fund country, a
treaty between the source country and the investor
country, or both. Unfortunately, even if the source
country has tax treaties with both the fund country and
the investor country, it is often very difficult for investments
made by such a fund to qualify for benefits un-
der either treaty. There are conceptual and practical
reasons for this. (The practical reasons are discussed in
the procedures report.)
Source-Country/Fund-Country Treaty
A fund typically will be able to claim treaty benefits
in its own right under the source-country/fund-country
treaty only if it is a resident of the treaty country. Article
4(1) of the 2008 OECD model income tax treaty
defines a resident of a treaty country as ‘‘any person
who, under the laws of that State, is liable to tax
therein by reason of his domicile, residence, place of
management or any other criterion of a similar nature.’’
There are three common reasons why a source
country might not treat a fund as a resident of the
fund country for treaty purposes, thereby denying
treaty benefits.
First, the source country might not view the fund as
a ‘‘person’’ for treaty purposes. Some types of vehicles
commonly used for investment funds are treated as
contractual relationships, and not legal entities, as a
matter of domestic law. One very common example is
the Luxembourg fond commun de placement (mutual
fund). Also, funds organized as trusts create problems
because the concept of a trust frequently does not exist
under the laws of non-English-speaking countries.
Second, a fund most likely is not subject to tax in
the fund country at the full statutory rate. It might be
exempt from tax or taxable at a special low rate, it
might be fiscally transparent, or it might get a deduction
for dividends paid (like U.S. mutual funds of the
usual type). The source country might not view such a
fund as subject to tax in the fund country.
The view of the United States is that an entity is
subject to tax in the fund country if the fund country
has taxing jurisdiction over the entity, so under general
principles of fund-country law, the entity could be subject
to fund-country tax, even if the entity is subject to
a special tax exemption. Other countries are not as lenient.
Third, although limitation on benefits clauses historically
were unique to U.S. income tax treaties, sometimes
a source country will want some assurance that
the fund is not being misused by investors resident in
countries that do not have an income tax treaty with
the source country. There are several situations in
which a source country will not grant treaty relief to a
fund without knowing something about who owns the
fund.
Source-Country/Investor-Country Treaty
The problem with a claim by an investor for relief
under the source-country/investor-country treaty is that
the fund is in the middle. Treaties based on the OECD
model provide relief to a beneficial owner of income.
But the OECD model treaty does not purport to define
what a beneficial owner is, and this issue is the subject
of much debate.
402 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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