Article 15: Income from Employment Flashcards
(46 cards)
1
Q
Generally: what is article 15?
A
- Most complex article: drafted in a weird way with a lot of interpretation = lots of case law: mostly in smaller countries because a lot of people working cross-border.
- Article 15 is lex generalis to 16-19 (except 17 is not mentioned).
- General rule: article 15, §1: taxation in residence State of employee = Belgian resident with employment contract with Belgian company working there for 3 months: Belgium may tax.
2
Q
What is the exception to article 15, §1?
A
- If employment is exercised in other State (Working State, W) –> taxation in Working state but only if strong connection with work state:
- Employee present in work state: work for +183 days fiscal year: sufficiently long stay: fiscal year = calendar year
- Employer resident of work state or
- Salary is borne by employer’s PE in work state
- Confusing because 3 cumulative negations: “notwithstanding + 3x not) = you need to test 3 criteria separately = only if 3 criteria to apply: resident state.
3
Q
What is salary?
A
- Salaries, wages and other similar remuneration in respect of employment: all benefits in cash/non cash made avalable because of employment relationship needed:
- Causal link needed: remuneration & employment.
- Broad interpretation:
- Cash salary
- Benefits in kind: free housing, private use company car, stock options = remuneration for services rendered by employee to employer: reason of payment is employment relationship.
- Severance payments, stand by fees, signing bonus = if there is a causal link with employment
- OECD generally favors “salary”: characterization on basis of autonomous treaty interpretation of terms in art. 15 = not on basis of domestic law.
4
Q
Are payments under covenants not to compete salary?
A
- Payments under covenants not to compete = non-competition fee
- Link with former employment and refraining from employment = performance of the contract
- Exception: punitive damages, damages for discriminatory termination of employment = art. 21
5
Q
What is the autonomous interpretation of the notion “salary”?
A
- OECD has to specify in commentary: what kind of payments = salary –> OECD prefers an autonomous interpretation and is thus not reltaed to domestic law.
- Causal link: regardless if payment is made because employment relationship is terminated.
- Examples of salary:
- Stand-by fees: eg. firefighter on call
- Signing bonus = salary
- Non-competition payments: payed to people with knowledge who are not allowed to work for competitor: ok legally if limited geographically = limited period and payment.
- If link with former employment: art. 15 = salary.
- What is not salary?
- Illicit breach of contract or damages by employer = indemnity.
6
Q
What determines the employment/employer relationship?
A
- Important for independent service providers because it defines whether it has become an employment relationship.
- Workstate determines employment relationship and employer
- 2 options:
-
Formal approach:
- Formal labour agreement respected for tax purpose.
- Exception: abuse
-
Substance over form
- Disregarding the the formal label
- Consider: (1) nature of the services (2) integration into the business of the recipient
- Abuse is not a condition to apply substance over form.
-
Formal approach:
- Resident state must in principle accept the work state’s determination to give relief
7
Q
What is the criteria to be used if there is a disagreement between the work state and residence state when it comes to employment relationship?
A
-
Integration test = nature of services:
- Does service form integral part of business of service provider or of service recipient? (“it is logical to assume that employee provides services which are integral part of the business activities carried on by his employer
- Who bears enterpreneurial risk for individual’s work?
-
Control test
- If conclusion of test #1 is employment relationship, next question with whom?
8
Q
What is the control test?
A
“Control test” (Comm. §8.14) = checks & balance
- Who has authority to instruct?
- Who determines number and qualifications of workers?
- Who selects individuals?
- Who terminates agreement?
- Who determines work schedule and holidays?
- Who imposes disciplinary sanctions?
- Who controls and has responsibility for work place?
- Who puts tools and materials at disposal?
- To whom does worker report? (not in Comm)
9
Q
What is of secondary importance when there’s a disagreement between WS and RS?
A
- Secondary importance: Relevance of financial arrangements between enterprises (OECD Comm Art. 15 § 8.15)
- Fee charged by employer to user includes all remuneration and related costs plus margin as %, or
- What will the feel look like
- Fee bears no relationship with remuneration (e.g. hourly rate for time spent supposed to cover all costs plus profit margin)
- Fee charged by employer to user includes all remuneration and related costs plus margin as %, or
- Cross charge = only of secondary relevance to the economic employer = the one beneffiting from services assigned employee.
10
Q
What is the condition for “employment exercised”?
A
- Employment is exercised where the employee is physically present when performing employment services = old fashioned criteria.
- No taxing rights for a State merely because results of work are exploited in that State
- No taxing rights for a State merely because payment is made from sources in that State
11
Q
Where is employment exercised in case of severance payments, payments under non-compete covenants, stand by fees?
A
- Diverging case law:
-
Substitute reasoning: termination payment = substitute for salary which he would have earned if employment had continued:
- Bit speculative.
- Other criterion: so closely connected to work performed: taxing rights to work state.
- Severance payment: salary for last 12 months of employment to be allocated pro rata-basis where work was exercised during that period(unless other evidence is present)
- Non-compete payments = state of residence
- Same question in case of deferred compensation: Belgian Supr Court 5/2/09: taxing rights to the State that had taxing rights over the services that are at the origin of the deferred compensation
- OECD changed the commentary!
12
Q
What does the OECD Commentary say about termination payments?
A
- Termination payments allocated on a pro rata basis where work was exercised last 12 months = a bit arbitrary but it is a clear rule.
- Unfortunately only in the commentary and not in the treaty so unclear if the courts will apply.
13
Q
What is the exception to the general rule that resident state has the taxing rights?
A
- Workstate may not tax if all 3 conditions are met:
- Employee present in work state for period(s) not exceeding in aggregate 183 days in any 12 month-period commencing/ending in fiscal year concerned
- Remuneration paid by, or on behalf of, an employer who is not resident of work state
- Remuneration not borne by PE which the employer has in work state
- Weirdly phrased: if at least one of these conditions is fulfilled –> work state has the taxing rights: based on the principle of coherence because the deduction probably happened in the work state.
14
Q
What is the 183-day rule and how is it implemented?
A
- In any 12 month period (…)
- Pre 1992: different wording “in the fiscal year concerned”
- Planning opportunities/Abuse (OECD MC Comm Art. 15 §4)
- How to apply:
- Start from taxable year in W
- Work in W?
- If yes, compute 12 month-window starting in Y1 etc. and include any period during the 12 month-window because minimum time need not to be completed in one uninterrupted period
15
Q
What counts as a day for the 183 rule?
A
- OECD MC Comm Art. 15 §5 (as of 1992): any day of physical presence in work state for whatever reason (employment, pleasure, sickness etc.), incl. parts of a day, day of arrival/departure etc. Exc.: days in transit in work state on journey between two points outside work state
16
Q
What is the second negative test?
A
- “Remuneration paid by, or on behalf of, an employer who is not resident of work state” (Art. 15 (2) (b))
- If paid by employer who is a resident of the working state = working state has taxing rights
- Purpose of rule: matching/coherence principle:
- Deduction of salary in work state -> taxing rights on salary to work state (not always full correlation)
- Paid by = formal & economic test or paid on behalf of = economic test
17
Q
What is salary splitting?
A
- Advantageous tax planning because of splitting income over various state in lower tax brackets provided that R avoids double taxation by way of exemption
18
Q
Can an employee have more than 1 employer?
A
- Yes: an employee may have more than 1 employer
19
Q
How are abusive cases handled wrt employment?
A
- To be tackled under domestic substance over form-approach. Even if no such approach available “it is possible for that State to deny the application of the exception of §2 in abusive cases”
- Abuse through “international hiring out of labour”
- Local company in work state (Wco) wants to avoid that employee resident of R becomes taxable in work state for short term work (less 183 days)
- Wco hires employee from company in R (Rco) that has entered into labour agreement with employee
- Employee not taxable in W (W considers Wco ≠ employer)
- If R considers Wco to be employer on behalf of whom Rco paid salary > double non taxation: abuse?
20
Q
What was the Casino Copenhagen Case?
A
- Hired waiters from Austria for 5 months -> salary paid by Danish employer = taxable there but Austria has very low taxes
- Employees were employed by Austrian company = international hiring out of labour; often in temporary assignements
- Paid salary and deducted in Austry = fully charge to Danish company + 10% margin
- Employees: paid by Austrian so not taxable in Denmark but when filing their taxes, they claimed the opposite = salary should be taxable only in Denmark.
- Same thing as Kodak Case: did not declare income in work state but they do in state of residence
- Solution: apply employment & employer test: integration test & control test
21
Q
What is the 3rd negative test?
A
- Remuneration not borne by PE which the employer has in work state
- Same purpose as second test: matching principle
- Must be interpreted in the context of art. 7: decisive is whether remuneration is expense attributable to PE, regardless whether it is accounted for in PE books or whether deduction is actually claimed
- Residence of employer does not matter, may even be a 3rd state resident.
- Transfer pricing test: functional analysis test = does that person work to the benefit of that PE (deductible then in state PE) or to benefit HQ?
22
Q
How are the taxing rights of the work state enforced?
A
- Typically through withholding tax = retained at the source as an obligation employer resident of work state or PE of non-resident employer
- As a rule no withholding possible if work state’s taxing rights stem from physical presence of employee only: +183 days:
- Enforcement through filing of tax return by non-resident employee (risk of non-payment of tax in W)
- Importance of international coopoeration & exchange of information
23
Q
How are the crew of ships taxed in international traffic before change in 2017?
A
- Article 15(3)
- Employment exercised aboard a ship or aircraft in international traffic or inland waterways transport
- Which treaty applies? one between Residence State of employee and POEM of company
- Definition of international traffic: Art. 3 (1) (e) prior to 2017 change
- No international traffic if work is performed in Residence State of employee only
- Taxing rights with state of place of effective management of company operating ship/ aircraft (Art. 15 (3))
- Ratio: avoid complexity and extensive salary split and related administrative burdens
24
Q
What is the new article 15(3)?
A
- Purpose: resolving the many cases of unresolved double taxation and double non-taxation, resolving qualifying employee-disputes
- New rule: exclusive residence State taxation
- Except if ship/aircraft is operated only in the other CS, then art. 15 (1) and (2) apply
25
What is the bilateral component under art. 15(3)?
* Employee resident of one State (R)
* Working aboard ship/aircraft operated in international traffic
* Aboard ship/aircraft in international traffic operated solely within other CS (W)
26
Who are the qualifying employees for art. 15(3)?
* Qualifying employee = Employment exercised aboard ship/aircraft
* Regular complement of ship/aircraft = any employment performed in course of usual operation of ship/aircraft (Comm. 15/9.2)
* Includes restaurant staff, maintenance personnel aboard ship; flight attendants on aircraft
* But not a person renting cars on cruise line (activity unrelated to ship operation)
* Artists? Casino manager? Probably no: special provision for artists = unclear for now because no tax law yet.
27
What is article 16?
* Article 16: *lex specialis* of art. 15
* Taxation only in the state of residence of the company paying the director’s fees
* No possibility of splitting between 2 countries (R-W)
* Ratio: hard to determine where directors work – simplification rule
* It is simpler but same thing applies to employees: certainly when working from home
* Director fees include monthly salary, tantièmes (remuneration linked to company’s profit), attendance fees (fixed fee for being present at board meeting)
28
What is the effect of corporate laws on art. 16?
* “Derived in his capacity as a member of the board of directors”: undefined term \> left to domestic law (Art. 3 (2). There may be significant differences amongst the corporate laws of the countries.
* One tier board v. two tier board structures
* E.g. in France = two tier: conseil d’administration and conseil de surveillance, both are covered: see French version of Model,
* In Germany also two tier: management board + Aufsichtsrat/Verwaltungsrat: only member of the Aufsichtsrat/Verwaltungsrat is covered by Art. 16, a director is an ordinary employee coming under Art. 15
* Many countries prefer to list which board of directors under national company law come within Art.. 16 of their bilateral treaties
* Important Belgian reservation (OECD MC Comm Art. 16 §6): remuneration paid to a person mentioned in Art. 16 in respect of daily management activities or paid to a partner of a company other than a company by shares in respect of personal activities (“werkende vennoten”) is taxable under Art. 15
* Active partner = excluded from article 16 and included in art. 15 (Freens case)
29
What is art. 17?
* Art. 17 (1): main rule: artistes and sportsmen who are residents of a CS may be taxed in the CS in which their personal activities as such are performed = **public performance**
* Applies to employees and independent service providers
* So not: musician in orchestra because not independent
* Same with cyclists = employees
* Article 17 overrides art. 15 and 7(4): independent service providers = entrepreneurs: not be concerned with PE or not = irrelevant
30
What is the interaction with other treaty provisions of art. 17?
* Art. 15: Art. 15 does not make a reservation on Art. 17, but Art. 17 does in other direction and thus overrides Art. 15 or better 15 (2) (for artistes and athletes/employees) (OECD MC Comm Art. 17 §1)
* Art. 7 (4): Art. 17 sets aside Art. 7 (artistes and athletes/independent service providers): no PE to be taxable in State of performance
* Art. 12: royalties for intellectual property = exploitation of artistic/sporting performance (sale DVDs, books etc). Art. 12 (3) “copyright of literary, artistic (…) work, including cinematographic films”
31
What is the ratio of art. 17(1)?
* Primary taxing right to State of performance
* Ratio: unorganized taxpayers, •State of residence may be tax haven, high mobility difficult to keep track of them (see also OECD MC Comm Art. 17 §2)
32
What is an "artiste" under art. 17?
* “Artiste”: not defined in OECD MC. But examples in §1 (entertainers such as theatre, motion picture, radio/TV artiste, musician). OECD MC Comm Art. 17 §3: direct/indirect appearance in public performances.
* Not: cameramen, producers, film directors, technical staff, agents and impressarios, conference speakers, live sportsreporters, professors...
* Yes: political, social, religious or charitable activities if entertaining (but not “a visiting conference speaker like a former politician”)
* Rule because of Bill Clinton: visiting conferences are not under art. 17
* Not a fashion model (new Comm. Art. 17 §3) but case law is not unanimous on this
33
What is a "sportsman" under art. 17?
* No definition, but no examples in Art. 17 either. Domestic law (Art. 3 (2))? But also Comm Art. 17 §5-6: “not restricted to participants in traditional athletic events (...) but also activities usually regarded as of an entertainment character (...) billiard and snooker, chess and bridge tournaments” in so far there is a public performance
* But not: coaches, medical/technical staff of sportsteams etc.
* Art. 17 (1) deals with income derived by artiste/sportsmen from individual performance as such. But also covers indirect payments to agent, managers and impresarios (OECD MC Comm Art. 17 §5-6)
34
How do we determine the place of performance?
* Physical test like under Art. 15 (Comm. Art. 17 §9.2)
* Quid non visual performance (audio, film)?
* Place of recording? (German/Austrian tax authorities). But recordings are not public?
* Place where shown to an audience? (impractical)
* Or exclude artist from Art. 17? This would not be contrary to text of Art. 17 as poem, writers etc. are also not in scope of Art. 17 because they do not perform in public
* According to OECD: movie star performs in public
* Showing of movie = indirect public appearance = makes the test completely unusable
35
What is needed for art. 17?
* Comm. Art. 17 §9: Art. 17 applies to income for which there is “a **close connection between the income and the performance** in the country concerned”, such a connection will be found to exist “where it cannot be reasonably considered that the income would have been derived in the absence of the performance” = **causal relationship** between payment and performance. Irrelevant if made by event organizer, employer, third party (sponsor, national federation) etc.
36
What are the special cases under art. 17?
* Inducements payments = signing bonus:
* US and Canadian case law: causal link established (play for new club) = Art. 17
* Transfer fee to player
* Dutch case law = disguised signing bonus paid by new club = Art. 17
* Training (summer and winter preseason camps); rehearsals
* Comm. Art. 17 §9.1.: fees are included in Art. 17
* But no public appearance?
* Dutch Supreme Court: if training is connected to public performance: Art. 17 applies also to training
37
Do live recordings fall under art. 17?
* **Live recordings**: fee for show = Art. 17, royalty from the sale of CD, DVD = Art. 12
* Correct analysis of IP-rights is crucial (US tax court 1984, P. Boulez-case: royalties from sales of studio recordings paid to conductor are not royalties under Art. 12 if he has relinquished IP rights to editor)
* Boulez Case: conductor and composer of modern classical music = independent service provider:
* Studio recordering are no public performance so no art. 17.
* He transferred IP
* Royalties? That would mean under art. 12: only Germany could tax = state of residence so US had no taxing rights even though it was recorded in NYC
* **But:** IP was transferred = clear terms of contract so not royalties for tax purposes.
* Result: US has special provision: a way to tax independent service providers in US even if no fixed base if he earns more than 20.000 = taxable in the US
38
Do sponsorships, advertising and merchandising fees fall under art. 17?
* Sponsorship, advertising, merchandising fees: not under Art. 17 if no close connection with public performance. Then Art. 7 or 15 depending upon status of entertainer/sportsperson:
* Comm Art. 17 §9: close connection = would person have derived income in the absence of performance?; timing of event; nature of the consideration for the payment (wearing clothes, watches, sunglasses during/after tournament, autograph sessions before/after show)
* The 2004/2005 decisions of Belgian Court in Jean-Michel Saive;
* Dutch Supreme Court on sponsorship of soccer teams
39
Do payments for the right to use image rights fall under art. 17?
* Not covered by art. 17 if no close connection to performance: but where covered?
* Not art. 12 = royalties = follows main rule ISP art. 17, employee: art. 15
* Royalties under art. 12 US/CH = different case law US
40
What was the case Jean-Michelle Saive?
* Belgian table tennis player: sponsorship agreement Adidas = Germany under the condition that he transferred his image rights to Adidas.
* Variable fee = received fee = had to wear all Adidas.
* Terms of agreement: in return of public sports performance
* Deliberately written to squeeze income sponsorship into art. 17
* Aim: Saive claiming he's taxable in Germany on sponsorship
* German tax authorities: not closely connected to public performances in Germany = applied worldwide: art. 17 not applicable.
* Belgian tax authorities: art. 12 applies: but Germany had declined taxing rights
* Belgian court: cannot court under art. 12: Belgians derive no taxing rights so not owner of copyright
* Decided: Saive = independent service provider
* So: taxable in belgium unless PE in Germany, no stay was too short to trigger PE = taxable in Belgium.
41
How does the taxes get exercised in the state of performance?
* Practical difficulties of taxing non-resident entertainers and sportspersons: immediate taxation on fee by performance State. Withholding tax on gross fee but at low rate
* Impact of EC-law: discrimination between resident and non-resident performers: ECJ, 12/6/2003 C-234/01, Gerritse
* OECD suggests optional clause to overcome discrimination: election to be taxed on net in State of performance (Comm Art. 17 §10)
* Or not taxing if fee does not exceed a certain threshold (Comm. Art. 17 §10.1)
* US Model: less than USD 20.000
* Potential double non-taxation (Comm. Art. 17 §12)
* Residence State relieving double taxation by way of exemption, performance State not exercising allocated taxing rights
* If undesired, Residence State switch over to credit system (infra Art. 23)
42
What was the Gerritse case?
* ECJ case: based on non-discrimination in Euroopean treaty to provide services
* Dutch resident: drummer in Hamburg = taxed in Germany via low-rate tax; unable to deduce costs
* Won his case = discrimination
* OECD: non-residents should get option to be taxed like residents
* Provided tax payer is honest: rifhts to tax granted to a state = Belgium should exempt = reports all of his income: does not happen often with eg. cyclists
* The Netherlands does not tax sportsmen because too much of a nuisance = state of residence if they live in a tax haven.
43
What is the "rent a star company"?
* Added to OECD MC in 1977
* Look through-approach, although income accrues to legal entity performance State allowed to tax as if it accrued to entertainer/sportsperson, even if no PE there. Overrides Art. 7
* Allows look through approach, if there is no such domestic rule (Comm. Art. 17 §11).
* Is this correct: a DTC can no create taxing rights independent from domestic law.
* Treaty between residence State of entertainer and performance State should include Art. 17 (2), residence State of interposed company is not relevant
* According to Belgian Supreme Court, a treaty with no Art. 17 (2) provision (B/Ireland) does not allow the application of Belgian domestic look through-rule (which is a copy of Art. 17 (2) OECD Model)
* Art. 7 applies in that case and if no Belgian PE, no taxation in Belgium
* Treaty prevails over conflicting national law
* OECD commentary disagrees (see Comm. Art. 17 §11 c) domestic look through rule deems income to be that of entertainer and thus taxing rights in performance State under Art. 17 (1))
44
What is the case Charles Aznavour?
* Armenian, moved to France, singer-songwriter who emigrated to Geneva
* Advisor: set up company in Jersey: be became director = contracts not signed with him but with company. Salary earned in Switserland; profit in Jersey
* Only taxable company income if PE but singers = mobile + singer does not dispose concert hall
* By setting up a company: no taxation in state of performance = "rent-a-star company"
* Reaction OECD: anti-abuse provision = art. 17(2) = look-through provision
* Looks through company: payment = as if made directly to artist-shareholder: back into scope art. 17(1) = tax in state of performance
* **Important**: irrelevant where companies are set up
45
Is art. 17(2) applicable only in abuse cases or wider?
* OECD commentary: suggest both:
* 1999 Canada Tax Court, Summer & Roxanne Inc. includes both, but other Swedish and Finnish Supreme Court case law
* Also issue of retroactive application of Commentary (scope of Comm. widened in 1993)
* Difficult application in practice: two layers of taxation in performance State (fee to entity (17 (2) & salary of employee (17 (1), see supra).
* Reasonable application allowed by Comm. Art. 17 §11.5 and 14.1 (avoiding double taxation by the performance State)
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