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Understanding Double Tax Treaties

Updated: 31 Jul 2021

The purpose of this article is to review double tax treaties with a view to gaining an understanding of what they are, how they operate, how they are interpreted and concentrate on the rationale behind them.

In order to meet these objectives it has been necessary to review in detail the standard treaty format found in the OECD Model Convention and this has been done by breaking the Convention into separate and distinct parts which have functions of their own.  In addition treaty shopping and limitation of benefits provisions together with a review of some recent cases involving the interpretation of double tax treaties has been included.

1. The purpose of double tax treaties

Double tax treaties are viewed as beneficial by most states because they allow business to transact with a degree of certainty both on the part of the individuals, partnerships or corporate entities and the government of that state in which that business entity operates. The perceived benefits of double tax treaties can be identified as:

i. Clarification of taxing rights of each State
Double tax treaties allow elucidation of taxation rights between states. The taxing rights under the treaty only apply to residents of a particular country (and some e.g. partnerships may not be covered), and only in respect of taxes stated within the treaty. There may also be some items of income or capital which are not covered by the treaty in which case, without a general article, one falls back again to local law. Once the taxpayer is satisfied that the treaty covers them and the taxes for which clarification is sought, then the particular article is referred to in order to ascertain tax exemption or applicable reductions or exemptions.

ii. Avoidance of double international juridical taxation
International juridical double taxation is where the same profits are taxed in two or more States on the same person (corporate or individual); this compares with economic double taxation where the same State may tax the same profits to two or more persons (eg dividends representing taxed corporate profits are taxed again in the individual's hands, ie the classical system of taxation as compared to the imputation system).

iii. Prevention of fiscal evasion with anti-avoidance provision
The exchange of information provision (see Article 26 below) should enable countries to obtain information in order to ensure its taxing rights are preserved, although the effectiveness of such provisions for tax avoidance as opposed to tax fraud may be limited at present. The various articles then individually legislate wherever possible to prevent tax avoidance in clarifying what would be considered business profits, acceptable interest deductions, etc., and the views of each State may differ significantly in practice on such subjective issues. The Mutual Agreement article attempts to provide for such eventualities, but the willingness of the competent authorities to agree these issues are currently left to discussion as opposed to specifically legislated for.

iv. Countries which are parties to double tax treaties
High tax countries have no reason to enter into double tax treaties with tax havens such as Bermuda, British Virgin Islands, Anguilla etc., which do not levy tax on profits. Indeed certain countries such as Hong Kong, with a source system of taxation, were not accustomed to worry about international juridical double taxation since non-local source profits are exempt from tax in any event. However, in view of the emergence of China as a global investor, as well as a country which attracts foreign investment, Hong Kong has taken the role of an intermediary jurisdiction for such investments and has concluded 28 double tax treaties in the last few years.

Clearly, high tax countries need the widest range of double tax treaties to limit international juridical double taxation; their residents require clarification of what profits will be taxed where, and countries will often permit certain activities to be either exempt from tax or suffer a reduced rate of local tax in an effort to stimulate their international trade. Equally, such countries will desire the anti-avoidance provisions to enable them to secure their tax revenue.

Over the years since the first treaties were negotiated at the beginning of the century, double tax treaties have become more standardised pursuant to the work of the OECD which prepared its first draft standard convention on income and capital in 1963, leading to a new version in 1977, and as from 1992 a loose-leaf one capable of being updated to take account of new developments (eg the Internet). Although the Model Convention and its Commentaries are an invaluable starting point in negotiating and subsequently interpreting double tax treaties, they are only guidelines and the provisions of the individual treaties as they are implemented in local law are the only relevant determining factors.

2. Arrangement of the OECD Model Convention

The OECD Model Convention is commonly adopted in full or in part by most tax treaties. This section of the paper gives consideration to the Articles of the Model Convention and gives clarification where necessary. The section groups the Articles into appropriate sets and considers the Articles.

A. Articles to clarify application of the treaty

Article 1 - Personal Scope
The treaty is limited in application to persons who are residents so it is necessary to define persons (Article 3) and residence (Article 4)

Article 2 - Taxes Covered
These are limited to direct taxes on income and capital of the relevant persons, so direct taxes based on, say, turnover may not be covered. Generally taxes of a similar nature subsequently introduced should be covered, but indirect taxes (VAT, registration taxes, net worth taxes) are not covered, and certain local taxes not imposed by a State or a political subdivision may not be covered. Direct taxes subsequently introduced which are not similar to those covered (e.g. UK petroleum revenue tax), may not be covered.

Article 3 - General Definitions
This general provision defines person, company, and enterprise of a contracting State, international traffic, competent authority and national. Many treaties may extend this general definition clause to other items. And the definition of terms is not limited to this article; Article 4 defines Residence, Article 5 defines a permanent establishment, Article 6 defines immovable property, Article 10 defines dividends, Article 11 interest, Article 12 royalties.

When defining persons, transparent entities such as partnerships may not be included, but semi-transparent entities such as the French GIE may be considered a person and therefore its foreign members may be subject to local tax under the treaty (see Societe Kingroup court case before the French Conseil d'Etat dated 4 April 1997).

Article 4 – Residence
The first part of the Article states that just because an individual/corporate entity has a source of income in a given State, does not mean the person is a resident of that State. Therefore the treaty applies to the person only as far as local source income is concerned. The second part accepts that two States may each consider a person resident therein, and seeks to establish by a 'tie-breaker' arrangement which country can claim supremacy over the other - but only for the purposes of the treaty. The rights of either State to levy say inheritance tax on an individual is unaffected, since he may still be considered resident therein for all other purposes; and again if any item of income or capital is not covered by the treaty, domestic law applies to the individual as if the treaty did not exist.

The tie-breaker clause starts by considering the place where the person has his permanent home; if in both places the deciding factor is where his centre of personal and economic interests is (the personal connection generally being considered the more important of the two). If this cannot be determined, or there are no permanent homes in either State, the next deciding factor is where he spends the major part of his year. If he spends very little time in either country, then the place where he is a national can claim he is resident there, and if he is a national of neither State, the competent authorities have to come to a decision. For companies, the deciding factor in the case of dual residence is where the place of effective management is situated.

Article 5 - Permanent Establishment
If a company is trading in the other State, then domestic law of that State will probably legislate for the taxation of profits derived from that trade. This could be a negative factor for a company undertaking occasional transactions in that State, and since the objective of a treaty is to encourage international trade, such circumstances must be covered by the treaty. Thus Article 7 taxes profits from a trade only where there is a permanent establishment, and then only such profits that can be attributed to the permanent establishment.

Article 5 defines a permanent establishment but also stipulates that certain fixed bases will not be considered a permanent establishment since their function is either limited in time or in their material affect on the company's trade itself. Thus building sites or installation projects of less than 12 months (sometimes as little as six months in some treaties) are not considered permanent establishments, nor are fixed bases used only to store or display or deliver goods where the trade is effected abroad.

Additionally, a fixed base merely used to purchase goods locally will not be considered a permanent establishment (again to encourage international trade). And local agents used by foreign companies should not create a permanent establishment if they are acting in the ordinary course of their business in an independent capacity. Neither will the fact that a foreign company has a local subsidiary mean that the foreign company has a local permanent establishment of its own; the local permanent establishment belongs to the subsidiary not the parent.

Article 29 - Entry into Force
The stages of a treaty are:

(a) signature

(b) ratification by each State

(c) exchange of the ratification instruments and

(d) implementation into domestic law.

The provisions of the treaty enter into force within a stated time according to this Article of the exchange of ratification instruments, but not all provisions may be effective as from the same date; transitional reliefs are often allowed.

Article 30 – Termination
This provision allows the treaty to be terminated by either State giving the appropriate notice, generally six months before the end of a calendar year although there may be a minimum period of years duration of the treaty. It would be normal for any changes to be reflected either in a Protocol or in a new treaty to come into effect on expiry of the old one, but there have been several instances in recent years where in the absence of an agreement to amend the treaty or negotiate a new one, one State has unilaterally terminated the treaty under the provisions of this Article (e.g. Denmark/Malta, US/British Virgin Islands).

B. Articles to avoid double international juridical taxation

Article 6 - Income from Immovable Property
This Article covers income from immovable property (real estate although the definition given to immovable property under domestic law is the relevant definition). Capital gains derived from real estate are covered under Article 13, the Capital Gains Tax article, and generally capital gains on direct interests in real estate (and often on indirect interests through real estate owning companies) are subject to tax where the real estate is situated.

The Lamesa case in Australia determined that indirect interests in real estate through a chain of companies did not constitute immovable property, even if this means that capital gains derived thereon may escape taxation at all, which is not the objective of a double tax treaty. Paragraph 21 of the Commentary to Article 13 suggests that if a particular country is concerned about such tax avoidance, it should incorporate within the relevant article look-through provisions for such indirect interests in immovable property.

Article 7 - Business Profits
This Article is an extension of the Permanent Establishment article which clarifies the profits on which local taxes may be levied.

Article 8 - Shipping, Inland Waterways Transport And Air Transport
Since it is difficult to assess how much of a company's profits should be allocated to the various permanent establishments engaged in the operation of ships or aircraft in international traffic, and so as to encourage companies in the transport industry to open local terminals without fear of heavy tax liabilities, the criterion for assessing such an enterprise is shifted to its place of effective management of the enterprise. If this is actually aboard a ship (and there are several treaties which the UK has concluded concerning this point), then the home harbour of the ship or, if none, the country where the ship's operator is resident shall determine which country has the right to impose taxation on profits.

Article 10 – Dividends
Many countries levy a withholding tax on dividend distributions, but there are some very notable exceptions where profits have been subject to primary tax, such as Australia, Singapore, UK. Also, capital distributions may not attract withholding tax, as for example liquidation distributions in the US.

Article 10 generally limits the withholding tax that may be charged provided that the recipient is beneficially entitled to the dividends (ie nominees or agents cannot benefit from this Article). Such limitation is often to a nil or 5% rate where a substantial interest of say 10% or 25% is held in the payor company, and in other cases the withholding tax rate is limited to 15%. But each treaty may be different depending upon the effect of local primary tax coupled with this secondary tax.

If countries have entered into a double tax treaty, but then have subsequently entered into a multilateral treaty which has supremacy over the double tax treaty, such as the EC Parent/Subsidiaries Directive which eliminates withholding taxes on dividends to recipient companies owning more than 25% of the payor, then the provisions of the double tax treaty may still be relevant if the Directive's provisions have not been implemented.

As with all Articles, the purpose of a double tax treaty is never to create a tax liability where none exists under domestic law. Thus whatever the treaty rate permitted, if a lower rate exists under domestic law, it is the lower rate which is adopted. There may be anti-avoidance provisions to prevent treaty abuse, such as in the Swiss/Netherlands treaty discussed below.

Article 11 – Interest
Interest payments to non-residents may also attract a local withholding tax, which is generally reduced according to treaties to 10% under the Model Treaty, but often to nil. Again, the requirement for the recipient to be the beneficial owner is relevant sometimes for its absence under certain treaties, especially the older ones.

There are anti-avoidance provisions in the interest and royalty articles where excessive payments are made which the payor's country of residence may treat instead as constructive dividends; however, if they do not fall within the definition of dividends under the dividend article, they may not be subject to the dividend withholding tax permitted under the treaty.

Article 12 – Royalties
Royalty payments are often exempt from withholding tax, as they are under the OECD Model. Again excessive royalties may be treated as constructive dividends, and there may also be anti-avoidance provisions where licences have been created merely for the purpose of obtaining withholding tax exemption, such as Article 12(5) of the UK/Netherlands treaty. Each treaty contains the definition of royalties covered under the article, and there may be different rates or exemptions applicable to patent royalties as compared for example to copyright royalties or film royalties.

It is also necessary to understand the distinction between licensing activities, which may be covered under this Article and trading activities covered under Article 7 even if they are items which may also be licensed under different contractual arrangements eg software packages. Also, lease rentals of say containers or other equipment need to be differentiated from licensing agreements for such equipment.

Article 13 - Capital Gains
Generally this Article permits the imposition of local tax on real estate, and this may also include companies owning real estate. Gains on any other property which may be similar to having business interests locally, such as movable property attached to a permanent establishment, as well as the permanent establishment itself, may be subject to local tax, but the Article generally grants the right to tax all other gains only to the State where the alienator is resident.

Nevertheless, there may be a period of say 5 years during which the State where an individual was previously resident continues to have the right to tax such gains which are not specifically covered under this Article; this is an anti-avoidance article to prevent individuals moving from one country to another to obtain treaty exemption against the local tax that would otherwise be payable.

Article 14 - Independent Personal Services
This Article was deleted from the OECD Model Convention on 29 April 2000 but still appears in many current double tax treaties. It is the parallel article to Articles 5 and 7, but for individuals who provide professional services or other similar activities in another State; only if they have a fixed base regularly available there (and even hotel rooms have been held to create that fixed base if regularly available) will they incur a local tax liability, and then only in respect of those profits which can be allocated to that fixed base. Article 14 was deleted from the Model Tax Convention on 29 April 2000 pursuant to a report entitled "Issues Related to Article 14 of the OECD Model Tax Convention" which was adopted by the Committee on Fiscal Affairs on 27 January 2000. The reason for this was because there were no intended differences between the concepts of permanent establishment (Article 7), and fixed base (Article 14), or between how profits were computed and tax was calculated according to which of Article 7 or 14 applied. Furthermore, confusion was caused by the fact that it was not always clear which activities fell within Article 14 as opposed to Article 7. The effect of the deletion of Article 14 is that income derived from professional services or other activities of an independent character is now dealt with under Article 7 as business profits.

Article 15 - Dependent Personal Services
Unless personal service income is independently earned and therefore covered under Article 14, or the income comprises directors' fees, pensions or income from government services, Article 15 dictates which country has the right to tax employment income. However, exceptionally, artistes and sportsmen are treated separately under Article 17.

Generally employment income is taxed only where the individual is resident in the relevant country. If the individual exercises his employment in two countries, the right to tax will remain in the State of the individual's residence unless the employee is physically present in the other State for more than 183 days in any twelve month period, and the remuneration is paid by an employer resident there or re-charged to a permanent establishment there of a foreign employer.

Article 16 - Directors' Fees
Directors' fees are subject to tax where the company is resident, unless it can be shown that the fees are not for services as a director but in another capacity eg a consultant to the company.

Article 17 - Artistes and Sportsmen
Article 17(1) states that income derived by a resident of one state as an entertainer (such as a theatre, motion picture, radio or television artiste, or a musician) or as a sportsman (which will include for example footballers, golfers, jockeys, cricketers, tennis players, racing car drivers) as well as any participant in public entertainment (such as snooker, chess or bridge players), from his personal activities as such exercised in the other state may be taxed in the other state. The words 'as such' are important to understand in relation to income from non-performing activities contracted by the entertainers and sportsmen, such as endorsement and merchandising contracts referred to below.

Article 17(2) extends the right of the local tax administration not only to tax income paid direct to the above individuals, but also to tax such income even if it is received by companies or indeed any other entity. Very few treaties still exist which afford protection to loan out companies from local taxation.

Article 18 – Pensions
Usually, pension payments for a past employment are subject to local tax where the employment was exercised, even if the individual leaves that country. However, double tax treaties normally confer the taxing rights to the State where the individual has now taken up tax residence.

Article 19 - Government Service
If an individual works for a State or political sub-division in that particular country, he is subject to tax there notwithstanding other Articles even if he is not considered a tax resident there; this includes pension payments notwithstanding the provisions of Article 18. However, if he resides in the treaty country and is a national of that country, then he will not be subject to such tax if he doesn't physically perform duties in that country.

Article 20 – Students
Payments received by a student from outside of a country for his maintenance, education or training shall not be subject to tax, provided that the student was resident in the other country immediately prior to his arrival.

Article 21 - Other Income
This is one of the most important articles of any treaty, yet is often omitted from even more recent treaties. It establishes the overriding provision that in the absence of specific provision, income is only taxed where the person receiving it is resident, unless he has a permanent establishment or fixed base in the other country.

Article 23 - Methods for Elimination of Double Taxation
Where a State is allowed to impose even a reduced level of local withholding or direct taxation under the various articles of a double tax treaty, if double taxation is to be avoided, there must be a mechanism whereby such tax is either credited against domestic taxation on such income, or the income itself is exempt from domestic tax. If the exemption method applies, the income may be aggregated with other income to determine the domestic tax rate that should apply to other income, before it is exempted; this is termed exemption with progression.

C. Articles to prevent tax avoidance/evasion

Article 9 - Associated Enterprises
Where related parties in two countries contract with each other and one State considers that profits have been effectively shifted out of its jurisdiction to the other, then the State may make adjustments to the taxable profits reported to reflect this. The 1977 revision to the OECD Model Treaty introduced a clause requiring the other State to make a corresponding downward adjustment in such an event, and required the two competent authorities to reach agreement on this point. However, older treaties have no such requirement so that in effect double taxation may be permitted.

The sub-provisions of Articles 11 and 12 as they relate to interest and royalties give additional similar powers to authorities to re-classify excessive interest and royalties paid between parties with whom a special relationship exists, although the requirement to give corresponding reliefs falls within this Article.

Article 26 - Exchange of Information
Controlled information exchange between the tax administrations of the two contracting States is one of the most important ant-avoidance weapons available, although it is cumbersome and time-consuming to introduce unless information is regularly exchanged automatically, something which is starting to happen more frequently. If not, then either one State may voluntarily provide information to the other if it thinks it would be of interest to the other, but this would only usually be in cases of significant tax fraud. Otherwise, it is up to the potentially aggrieved tax administration to request information from the other, and there is a strong reluctance to assist other tax administrations in 'fishing expeditions' when the tax administration itself is under time pressures to implement its own legislation and counter tax avoidance of its own laws.

In any event, information can only be given in respect of taxes covered by the Agreement, and only to secure the correct application of the provisions of the Agreement or the domestic laws of the other contracting State.

D. Miscellaneous Provisions

Article 24 - Non-discrimination
This Article prevents nationals of a contracting State (as opposed to residents as for all other treaty provisions) from being treated in a more unfair way in the other State than nationals of that State. Moreover, the typical non-discrimination clause applies to taxes of every kind imposed by the other State, not just those mentioned in the treaty. The Article is becoming more and more used by taxpayers in litigation against assessments which would not have been raised against domestic taxpayers eg a taxpayer subject to the 3% Special Tax on real estate in France applicable at the time only to non-residents, applied the Swiss treaty with France successfully in defeating the assessment.

Article 25 - Mutual Agreement Procedure
This Article provides the basis on which disputes between taxpayer and Revenue authorities may be settled by agreement between the competent authorities of each State, generally either the Ministry of Finance or the Tax Administration. If a case is presented within the required three year period of the first date of notification of the action leading to taxation, there is a duty to consult with each other, but no duty to agree. Thus many cases are unresolved even after several years (note that the Statute of Limitations is not overridden by double tax treaties unless specifically provided).

Not all taxes are covered by the mutual agreement clause, and the taxpayer should ensure that on repatriation of any adjusted revenue, there is no subsequent tax charge. Currency fluctuations between the original transaction and the final date of agreement of adjusted profits and their repatriation may have a significant impact on the benefits afforded under this Article. If possible, the taxpayer should be included in discussions with the competent authorities, especially since during the course of the competent authority investigation, other issues may be raised. If interest is payable on outstanding tax due in respect of one adjustment whilst no tax is receivable on overstated assessments in another country, the taxpayer can be significantly penalised.

Article 27 - Members of Diplomatic Missions and Consular Posts
The privileges of diplomats are preserved, notwithstanding any other provisions of the treaty.

Article 28 - Territorial Extension
Territories of either State may be included under the double tax treaty if the State has responsibility for its international relations. Thus the original treaties of the United Kingdom were extended to its dependencies, and the Dutch treaties were extended to the Netherlands Antilles. Because of the fact that many dependencies have a different tax system than their parent companies, which is one of the requirements of this Article, the territorial extension is not designed to create a back-door to tax evasion.

3. Treaty Shopping and Limitation of Benefits Provisions

Treaty Shopping involves the use of the protection offered under a particular treaty by interposing a person who can claim treaty protection, which would have otherwise been unavailable. In this section specific consideration is given to examples of treaty shopping as well as focusing on solutions to this provided by individual states.

Remittance Provision in UK, Singapore and other treaties
Since the basic function of a double tax treaty is to avoid double taxation, rather than create an opportunity for income and capital gains to be exempt from tax, countries which provide certain concessions permitting this to happen may include in their treaties a limitation clause restricting the treaty benefits only to those persons who do not enjoy such concessions. UK treaties would generally include a limitation of relief provision restricting treaty benefits only to amounts remitted to the UK. This is because UK law relating to non-domiciled individuals only subjects remittances of non-UK source income and capital gains to be UK tax, so there should be no relieving provisions relevant if such income is not remitted. This generally relates to the reductions in withholding taxes on dividends, interest and royalties, and to the absence of capital gains tax charges.

US Limitation of Benefits provision
The US has brought in its own version of a Model US Tax Treaty (as compared to the Model OECD Convention) to which the Government adheres in future tax treaties or renegotiations of existing ones. The relevant article of this model treaty is Article 16 which limits treaty benefits to corporations that are owned by ‘qualified’ local residents. Thus, recent treaties state that the recipient of income must be the beneficial owner if the treaty benefits are to apply, or at least the recipient may enjoy the benefits only if the ultimate beneficial owners would also have been able to enjoy the same benefits if income had been paid direct to them. It is also generally required that resident corporations should not be able to obtain special treatment in respect of foreign source dividends, interest and royalties.

Amendments have been made which provide for two tests in terms of which a foreign entity may be treated as a qualified resident as a prerequisite for claiming benefits under any US double tax treaty.

Thus a foreign entity will only be deemed to be ‘a qualified resident’ of a treaty country if:

(i) under a Stock Ownership Test, at least 50% of the value of the foreign entity is directly or indirectly owned by individuals who are residents of that country, or by US citizens or US residents;

(ii) under a so called ‘Base Erosion’ test, 50% or more of the foreign entity’s income is not either directly or indirectly utilised to meet obligations to non residents of that country.

The Stock Ownership and Base Erosion Tests are to a great extent based upon the 1986 treaty shopping provisions introduced with regards to branch profits tax. However, if interests in the entity are primarily and regularly traded on an established securities market based in the other country, or if the Base Erosion Test is met and the entity is wholly owned by another entity who would be a qualified resident under these rules, then no treaty shopping would be deemed to have occurred.

In the event of the income of an entity resident in a treaty partner state being subject to a tax which is significantly lower than that which is imposed on similar types of income derived by residents of the country from domestic sources, then such entities shall not be entitled to take advantage of the benefits granted by the US under a relevant double tax treaty.

1994 Anti-Treaty shopping Law in Germany
The 1994 Anti Abuse and Technical Amendment Act has extended the provisions applicable to the abuse of law doctrine in order to deny treaty benefits if shareholders would not be entitled to those benefits if such income were received directly by them. As with most anti avoidance provisions, there is an exception where a foreign corporation has been set up for bona fide commercial purposes; the provisions deny treaty benefits to foreign companies which

(a) do not engage in a business activity of their own, and

(b) their interposition has no commercial or non tax validity, and

(c) their shareholders would not be entitled to treaty benefits if the income were received direct.

However, since this is a threefold test, engaging in business activities would thwart treaty denial, and there may therefore be an argument that a conduit company is engaging in business activities. Subsequent to these provisions, several important issues have been clarified by the Bundesamt:

i) Holding companies do not qualify for treaty benefits unless they exercise some degree of management and control over their subsidiaries, which denotes the holding company having several employees and its own business premises (although at present only extreme cases are pursued).

ii) The provisions apply not only to withholding taxes, but also to any other kind of treaty benefits or provisions under the EC Parent/Subsidiaries Directive.

iii) The Bundesamt may look through a chain of tiered companies to the ultimate individual shareholder in order to determine whether he would be entitled to similar benefits if he received the income directly.

iv) The Bundesamt will not entertain requests for advance rulings on structures.

Indeed, the German Federal Tax Court ruled in favour of a withholding tax being levied on income which is exempt from tax under the German/Poland treaty of 18 December 1972, as amended by the protocol of 24 October 1979. Under Article 16(2) income derived from German sources by professional artistes and athletes who reside in Poland is taxed only in Poland; the Court held, however, that Germany may levy withholding taxes on such income pursuant to s 50d(1) of the Income Tax Law which is in effect an anti-treaty shopping article under which a foreign corporation is not entitled to take relief under an applicable double tax treaty if its (foreign) shareholder would not be entitled to such reduction. The argument that would be put forward by the German tax administration would be similar to those put forward by the French tax administration that double tax treaties are not designed to create abusive structures, and therefore the new provisions are in accordance with the intentions behind the treaties.

The more persuasive argument, however, is that, if this is the case, there should be provisions in the treaties themselves acknowledging the possibility of introducing such laws, or including specific anti treaty shopping provisions. It must therefore be argued that the appropriate remedy is to renegotiate existing treaties, adding Protocols or negotiating entirely new treaties, rather than passing internal laws which seem to conflict with other national laws or the Constitution itself.

Moreover, international law in the form of the Vienna Convention on the Law of Treaties suggests that the text of double tax treaties must be presumed to be the definitive intentions of the contracting parties, so that although unwritten intentions of the parties should be considered, the meaning of the text itself coupled with the customary interpretation already exercised by the contracting parties, should be of paramount importance. Despite this, Article 31(1) of the Vienna Convention requires a treaty to be interpreted in good faith in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose. It is here that the French and German tax administrations may suggest that literal interpretations are at variance with the purposes of the treaty as a whole, although having accepted certain provisions hitherto, they would find it difficult to deny their validity because of new interpretations they may wish to put on the intentions behind the treaty provisions.

5. Summary

Double tax treaties are of tremendous importance to businesses with an international dimension. Without them trade would be stifled and economies would likewise be affected. It is because of this that treaties often assume huge importance when developing tax strategies; however, the introduction of anti-treaty shopping articles (pioneered by the US) in double tax treaties and the exchange of information between member states is forcing substance into structure where perhaps a decade ago this would not have been an issue. Because of the importance of treaties it is not only necessary to understand how they operate but also how they are interpreted.

Much is likely to change in the field of double tax treaties, both in terms of interpretation and anti-avoidance; however, it is the exchange of information which, as noted above, is seen as the key to preventing the growth in money laundering (and by extension tax evasion) which is likely to become more heavily relied upon than in recent years.

Prepared July 2014

This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer or professional advisor.