Samenvatting International and European
Tax
Praktisch: Op het examen zijn de Directives, OECD Model Treaty en de Commentary hierop toegelaten. Je mag
dit allemaal meenemen op het examen, dus deze materie moet niet vanbuiten geleerd worden. Het examen is
in het Engels, maar je mag eventueel ook in het Nederlands antwoorden op de vragen. Beide delen staan op
evenveel punten. Simpel rekenmachine zal toegelaten worden.
Introduction to international tax law
Importance of international tax
National tax law is organized per country. Each country has its own autonomy for taxes, and it’s a
sovereignty of the states, because tax is income for governments. Residents of a country are often
subject to tax on worldwide income, but each state tends to tax all income linked with their own
territory or its residents. The non-residents of a country are subject to tax on income generated in the
country which is the source of the income.
However, worldwide application of these two general national principles results in double taxation.
Due to increased globalization of economies and mobility (e.g. cross border investments, transactions,
employment of individuals etc…), the importance of international tax has increased as well.
Example: Where does the profit of the factory have to be taxed? In country A or country B? Country A will want
to tax the profit of the company because it is located in country A, but country B will want to tax the profit as
well as worldwide income.
International tax law is defined as “all rules determining where and how the income of a taxpayer
arising in a cross-border context, may be taxed and how this tax must be assessed and
recovered/reduced”. In other words, international tax law is created in order to prevent double
1
,taxation. So the essence is to determine whether there is a cross-border income, and if so where it
should be taxed with the purpose of eliminating or reducing double taxation.
The rules are established to have a fair balance in taxation between the source country and the
country of residence. What makes international tax complicated, is the fact that there is no separate
set of rules/code. It is rather a complex combination of:
International legislation
EU legislation implemented via internal legislation
Bilateral tax treaties based on OECD Model Convention
International guidelines OECD Comments/OECD Transfer Pricing Guidelines (soft law)
General principles of international tax law (with some relevant Case law)
General principles on international and European taxation
Types of double taxation
International legal (“juridische”) double taxation
This means that the same income is taxed in two (or more) different states in the hands of one and the
same and single taxpayer. In other words, the same taxpayer is subject to tax on the same income in
different jurisdictions.
Example: A Belgian resident has invested in a holiday home in Spain. When the Belgian resident isn’t in Spain,
they rent their holiday home which gives them a rental income of € 100. This is paid to the Belgian resident for
real estate. On their worldwide income, the Belgian resident is taxed in Belgium and this includes the rental
income. But, that same rental income is also taxable in Spain because the holiday home for which the resident
receives real estate income, is located in Spain.
2
,Economic (“economische”) double taxation
This type of double taxation means that the (economically same) income is taxed in the hands of
different taxpayers (in different jurisdictions in the case of international economic double taxation). In
other words, the same income is taxed in the hands of different taxpayers, in different jurisdictions.
Example 1: A French company has a subsidiary in Germany. This subsidiary realises a profit of € 100. This income
will be taxed under corporate income tax in Germany (25%). So, the German subsidiary has an after-tax profit of
€ 75 left, which is distributed as a dividend to the French parent company. In France, this dividend will also be
taxed as income.
Example 2: Another example is when a German company pays a fee of € 100 to its Dutch parent company for
services this parent has rendered. The German tax authorities do not accept that the fee is deductible – then the
German income tax will be subject to 25% tax on € 100, and the Dutch company has also received € 100 and thus
will also be taxed on this full amount of € 100.
QUIZ: Is this an example of economic or legal double taxation?
A Belgian company gave a loan to a US company, and the US company pays interests for that loan to the Belgian
company. The US company is subject to witholding tax of € 30 – this € 30 will be paid to the US tax authorities,
and € 70 will be paid as interest to the Belgian company. This € 30 witholding tax is an example of legal double
taxation, because it is technically paid by company B, but it is paid on the behalf of company A. It reduces the
gross interest of € 100 of company A, they only receive € 70. Company A is thus confronted with a case of legal
double taxation.
3
, IMPORTANT: in case of withholding taxes, you don’t have to look solely at who pays the tax, but more
so who incurs the tax! You have to think these cases through.
There are also some other possible reasons for international double taxation, for example the
difference in qualification of the type of income in two countries. Examples of this are:
Interest vs. dividend
Permanent establishment definition (‘vaste inrichting’)
Management and control test
At the same time, the same principles may also result in double non-taxation!
Avoidance of double taxation
In order to reduce or eliminate international double taxation, a number of international technics were
introduced. There is the international tax legislation, which includes provisions to reduce/eliminate
international taxation. Four categories are recognised (dependent on the jurisdiction), of which the
first two methods are proposed by OECD.
Exemption method
This method states that the foreign source income is not taxed in the home country (it is exempt). This
exemption method can be applied with or without progression.
Example 1:
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Tax
Praktisch: Op het examen zijn de Directives, OECD Model Treaty en de Commentary hierop toegelaten. Je mag
dit allemaal meenemen op het examen, dus deze materie moet niet vanbuiten geleerd worden. Het examen is
in het Engels, maar je mag eventueel ook in het Nederlands antwoorden op de vragen. Beide delen staan op
evenveel punten. Simpel rekenmachine zal toegelaten worden.
Introduction to international tax law
Importance of international tax
National tax law is organized per country. Each country has its own autonomy for taxes, and it’s a
sovereignty of the states, because tax is income for governments. Residents of a country are often
subject to tax on worldwide income, but each state tends to tax all income linked with their own
territory or its residents. The non-residents of a country are subject to tax on income generated in the
country which is the source of the income.
However, worldwide application of these two general national principles results in double taxation.
Due to increased globalization of economies and mobility (e.g. cross border investments, transactions,
employment of individuals etc…), the importance of international tax has increased as well.
Example: Where does the profit of the factory have to be taxed? In country A or country B? Country A will want
to tax the profit of the company because it is located in country A, but country B will want to tax the profit as
well as worldwide income.
International tax law is defined as “all rules determining where and how the income of a taxpayer
arising in a cross-border context, may be taxed and how this tax must be assessed and
recovered/reduced”. In other words, international tax law is created in order to prevent double
1
,taxation. So the essence is to determine whether there is a cross-border income, and if so where it
should be taxed with the purpose of eliminating or reducing double taxation.
The rules are established to have a fair balance in taxation between the source country and the
country of residence. What makes international tax complicated, is the fact that there is no separate
set of rules/code. It is rather a complex combination of:
International legislation
EU legislation implemented via internal legislation
Bilateral tax treaties based on OECD Model Convention
International guidelines OECD Comments/OECD Transfer Pricing Guidelines (soft law)
General principles of international tax law (with some relevant Case law)
General principles on international and European taxation
Types of double taxation
International legal (“juridische”) double taxation
This means that the same income is taxed in two (or more) different states in the hands of one and the
same and single taxpayer. In other words, the same taxpayer is subject to tax on the same income in
different jurisdictions.
Example: A Belgian resident has invested in a holiday home in Spain. When the Belgian resident isn’t in Spain,
they rent their holiday home which gives them a rental income of € 100. This is paid to the Belgian resident for
real estate. On their worldwide income, the Belgian resident is taxed in Belgium and this includes the rental
income. But, that same rental income is also taxable in Spain because the holiday home for which the resident
receives real estate income, is located in Spain.
2
,Economic (“economische”) double taxation
This type of double taxation means that the (economically same) income is taxed in the hands of
different taxpayers (in different jurisdictions in the case of international economic double taxation). In
other words, the same income is taxed in the hands of different taxpayers, in different jurisdictions.
Example 1: A French company has a subsidiary in Germany. This subsidiary realises a profit of € 100. This income
will be taxed under corporate income tax in Germany (25%). So, the German subsidiary has an after-tax profit of
€ 75 left, which is distributed as a dividend to the French parent company. In France, this dividend will also be
taxed as income.
Example 2: Another example is when a German company pays a fee of € 100 to its Dutch parent company for
services this parent has rendered. The German tax authorities do not accept that the fee is deductible – then the
German income tax will be subject to 25% tax on € 100, and the Dutch company has also received € 100 and thus
will also be taxed on this full amount of € 100.
QUIZ: Is this an example of economic or legal double taxation?
A Belgian company gave a loan to a US company, and the US company pays interests for that loan to the Belgian
company. The US company is subject to witholding tax of € 30 – this € 30 will be paid to the US tax authorities,
and € 70 will be paid as interest to the Belgian company. This € 30 witholding tax is an example of legal double
taxation, because it is technically paid by company B, but it is paid on the behalf of company A. It reduces the
gross interest of € 100 of company A, they only receive € 70. Company A is thus confronted with a case of legal
double taxation.
3
, IMPORTANT: in case of withholding taxes, you don’t have to look solely at who pays the tax, but more
so who incurs the tax! You have to think these cases through.
There are also some other possible reasons for international double taxation, for example the
difference in qualification of the type of income in two countries. Examples of this are:
Interest vs. dividend
Permanent establishment definition (‘vaste inrichting’)
Management and control test
At the same time, the same principles may also result in double non-taxation!
Avoidance of double taxation
In order to reduce or eliminate international double taxation, a number of international technics were
introduced. There is the international tax legislation, which includes provisions to reduce/eliminate
international taxation. Four categories are recognised (dependent on the jurisdiction), of which the
first two methods are proposed by OECD.
Exemption method
This method states that the foreign source income is not taxed in the home country (it is exempt). This
exemption method can be applied with or without progression.
Example 1:
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