regimes
Adv LLM thesis submitted by
Kseniia Shakhnazarova
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam
supervised by Dr. Joanna Wheeler
co-supervised by Anna Vvedenskaya
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that in case of such a violation professional organizations in my home country and in countries where I may work as a tax professional, are informed of this violation.
2. I hereby authorize the University of Amsterdam and IBFD to place my thesis, of which I retain the copyright, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format.
3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in a footnote to the article’s title or to the author’s name:
“This article is based on the Adv LLM thesis the author submitted in fulfilment of the requirements of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam.”
4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.
signature:
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Kseniia Shakhnazarova date:
24.08.2022
Table of Contents
List of Abbreviations used ... V Executive Summary ... VI Main Findings ... VII
1. PROBLEM STATEMENT ... 1
1.1. INTRODUCTION ... 1
1.2. PROBLEM STATEMENT ... 1
2. CHAPTER 1. EVALUATION OF RELEVANT TREATY PROVISIONS: ENTITLEMENT OF TAX TREATY BENEFITS ... 5
2.1. SECTION 1.1.TRANSPARENT ENTITIES AND PERSONAL SERVICES COMPANIES ... 5
2.2. SECTION 1.2.PERSONAL SERVICES COMPANY REGIME AS A DOMESTIC ANTI-ABUSE RULE 11 3. CHAPTER 2. EVALUATION OF RELEVANT TREATY PROVISIONS: DISTRIBUTIVE RULES ... 14
3.1. SECTION 2.1.THE APPLICATION OF ARTICLE 17OECDMTC AND PERSONAL SERVICES COMPANY REGIME ... 15
3.1.1. Subsection 2.1.1. Article 17 (2) OECD policy ... 15
3.1.2. Subsection 2.1.2. The application of the “look through” approach applicable to companies mentioned in the Article 17... 17
3.1.3. Subsection 2.1.3. Limited personal scope of Article 17 OECD MTC ... 18
3.2. SECTION 2.2.THE APPLICATION OF ARTICLE 14UNMTC,ARTICLE 5OECDMTC, AND PERSONAL SERVICES COMPANY REGIME ... 19
3.2.1. Article 14 UN Model Tax Convention ... 19
3.2.2. Article 5 OECD Model Tax Convention ... 23
3.3. SUB-CONCLUSION ... 23
4. CONCLUSION ... 24
5. BIBLIOGRAPHY ... 27
5.1. ADDITIONAL SOURCES CONSIDERED, NOT CITED ... 29
6. APPENDIX 1. RUSSELL CASE ... 29
6.1. FACTS ... 29
6.2. ISSUE AND APPLICABLE LAW... 30
6.3. COMMISSIONER’S ASSESSMENT AND LOWER COURT ... 30
6.4. HIGH COURT ... 31
7. APPENDIX 2. AZNAVOUR CASE ... 34
7.1. FACTS ... 34
7.2. ISSUE AND APPLICABLE LAW ... 34
7.3. COURT’S DECISION AND AG OPINION ... 35
List of Abbreviations used
PSC Personal Service Companies
Art., Arts. Article, Articles OECD MTC, OECD
Model Tax convention
The Organization for Economic Cooperation and Development Model Tax Convention on Income and on Capital 2017
UN MTC, UN Model Tax convention
United Nations Model Double Taxation Convention between Developed and Developing Countries 2017
AG Advocate General
FCA Financial Counselling Australia
IBFD International Bureau of Fiscal Documentation
Partnership Report The Application of the OECD Model Tax Convention to Partnerships, Issues in International Taxation, No. 6, OECD Publishing, Paris
Russell case The texts of:
Judgement - Russell v Commissioner of Taxation of the Commonwealth of Australia, FCA 1224, 2009
Judgement - Federal Court of Australia Russell v Commissioner of Taxation, FCAFC 10, 2011
Aznavour case The texts of:
Conseil d’État N° 271366, 2008
Executive Summary
This thesis assesses the current state of the law in respect of the application of tax treaties to personal services company regimes and whether the law achieves the policy aims of tax treaties.
The research focuses on the provisions of Model Tax Conventions to find norms and principles which may potentially be extrapolated to the personal services company regime to create a uniform approach to the application of tax treaties to the cases with personal company element in the further research. The research also discusses case law (the Russell case and the Aznavour case) which shows how tax treaties are applied currently.
Chapter One is focused on the provisions which regulate the entitlement of tax treaty benefits, particularly on Article 1 of the OECD Model Tax Convention. In the Chapter, two main issues are discussed: application of the provisions related to fiscally transparent entities, particularly to fiscally transparent partnerships with personal services companies, and recognition of the personal services company regime as a domestic anti-abuse regulation. Firstly, Chapter One provides the evaluation of the applicability of the principles expressed in the OECD Partnership Report. Secondly, the Chapter discusses the possibility to continue regarding the personal services company regime as a domestic anti-abuse regulation as how it is happening now.
Chapter Two proceeds with the analysis and application of norms of Model Tax Conventions providing distributive rules, particularly, Article 17 OECD MTC, Article 14 UN MTC, and Article 5 OECD MTC. In the Chapter, it is analyzed whether there is a possibility to apply provisions of these articles to scope [partially] similar to the Personal Services Companies regimes. The Second Chapter discusses whether the differences between the Personal Services Companies and persons subject to the application of Articles 14 and 17 of the Model Tax Conventions would affect significantly the potential application of these Articles to a broader scope.
Main Findings
The personal services company is an illustration of tax regimes when the individual is taxed for the provision of personal services through a company. Based on the analysis of case law (the Russell case and the Aznavour case) it can be said that there is no consistent approach to the application of tax treaties in cases with personal services company regimes. This thesis assesses different Model Tax Conventions’ provisions and evaluates the possibility of application of the principles expressed in provisions to personal services companies.
The main issue related to personal services companies is the identification of the actual person entitled to tax treaty benefits and the correct attribution of the income received as remuneration for the provision of services.
Analyzed provisions included in the thesis discussed the comparison between fiscally transparent partnerships and personal services companies and the possibility to apply the principles
expressed in the Partnership Report to personal services companies; recognition of the personal services company regime as a domestic anti-abuse rule; 17 OECD MTC, Article 5 OECD MTC and Article 14 UN MTC as norms which may be applicable in the attribution of the income. In some cases, the differences between the regimes were too significant which makes it impossible to extrapolate the same principles to the personal services company regime. Among others, it is possible to say that the least applicable provision is the Partnership Report. Recognition of the personal services company regime as a domestic anti-abuse rule is the rule which applies now.
Article 17 OECD MTC is questionable in the case of the potential application because of the very specific scope and the activity covered by this article. Article 14 of UN MTC may potentially apply to the personal services company regime with certain caveats.
This area of research is not well-developed. Such regimes of taxation need further research and analysis to provide a uniform algorithm of the income attribution to them and guidance on the entitlement of the tax treaty benefits. A potential short-term solution to the absence of a uniform approach to tax treaties application to personal services companies could be following the principles related to the application of one of the mentioned provisions of Model Tax
Conventions to the personal services companies. In the long term, a unique algorithm for the application of tax treaties to personal services companies shall be found and it should take into account all the specific features of such kinds of regimes.
Research questions: What Is the current state of the law in respect of the application of tax treaties to personal services company regimes? Does law achieve the policy aims of treaties?
1. Problem statement 1.1. Introduction
A double tax treaty is an agreement between two States to allocate taxing rights on income and capital. As a result of the application of tax treaties, some persons which comply with all the requirements of the agreement can be entitled to tax treaty benefits. The person (an individual or a company) to whom the income is attributed is the person entitled to tax treaty benefits. Thus, the attribution of the income to a person plays a special role in tax treaty application.
The attribution of the income depends on the domestic legislation. These rules for some regimes may encompass control, the nature of services, and the specific way of interaction between a company and the individual(s) owning it. However, in some cases, mismatches of domestic law in the attribution of the income to a person occur which affects the correct allocation of taxing rights between the Contracting States.
There are some tax regimes that in certain circumstances tax the income that legally belongs to a company in hands of an individual. While civil law prescribes that the income is legally owned by a company, tax law prescribes to attribute the income to related to this company individual who did the work and tax this individual respectively. In the research, the term
“personal service company” will be used to denote these schemes.
1.2. Problem statement
PSC is a company through which an individual provides their services. Typically, this individual is a significant or the only shareholder. The specific factor of this regime that impacts the attribution of the income is the significant individual’s involvement in the company’s activity. Currently, there is a problem with income attribution to such kind of companies in cross-border situations.
For instance, an individual who is a tax resident in State A created a personal services company in State B to provide services. This individual provides services through the company to consumers in State C so the company is the recipient of the income. It is
necessary to highlight that a personal services company cannot be disregarde3d as a taxpayer.
This is a separate company, a separate taxpayer which can be taxed on its other income. State A has a PSC regime because the individual is resident in State A and so State A would want to tax him. This is the moment when a mismatch occurs between States A and C. There is a question about whether State C will apply the A-C treaty because it thinks the income belongs to the company in B. Since the company is a tax resident in State B, State B would want to tax it and as a result apply the B-C double tax treaty. If State C as a source State, treats the
company in State B as a taxable person, the remuneration received for the provision of
services is attributable to the company and is taxed respectively, so a tax treaty between States B and C is applicable. If States A and C agree that the income belongs to the individual, there should be no problem with applying the A-C treaty. But that depends on both states agreeing on the individual being the taxable person. The point is whether it is enough for just State A to recognize the individual is the taxable person.
Application of domestic tax law and tax treaties causes disputes, for example, in Russell and Aznavour cases12 (please refer to Appendixes 1 and 2 for the description of Russell and Aznavour cases respectively). The important problem with the significance of domestic legislation is that it is very different from one State to another. For instance, in the Russell case, Australian domestic legislation is applicable. It encompasses special tax legislation related to personal services companies which evaluates the importance of the individual’s involvement in the company’s activity. Applying it, each case can be deeply analyzed and the decision of the Court about the allocation of income to the individual seems comprehensive.
In contrast, French domestic legislation does not contain special provisions regarding the treatment of personal services companies. The Court applied general anti-abuse norms with a very wide scope because these rules are based on the fact of the ownership of a company by the individual. As a result, the decision of the Court was based on the mere fact of the
ownership which does not take into consideration the unique interaction between the company and the individual in the personal services company regime.
The application of the regime brings various complexities since the OECD and UN Model Tax Conventions and Commentaries3 do not contain guidance (direct interpretation?) on how to apply tax treaties to cases with a personal services company element.
The tax treatment of personal services companies depends on the application of domestic tax law. The allocation of taxing rights depends on the recognition of a personal service company
1 Russell v Commissioner of Taxation (Federal Court of Australia).
2 Conseil d’État N° 271366 (Aznavour case) (Conseil d’État).
3 P. Pistone, ‘IBFD Global Topics - Global Tax Treaty Commentaries [- Model Articles and Issues]’
<http://link.library.ibfd.org/resource/kcAdjYVxsOQ/>.
as an effective taxpayer for the income received for the provision of services by the
individual. If a State has legislation on how to treat a personal services company, the income will be attributed according to this special legislation. In case, if the State does not have special legislation, it may or may not use general anti-avoidance rules to treat a personal services company.
Since domestic law varies depending on a State it is questionable if there is a consistency in the algorithm of the application of tax treaties to these cases with a personal services company element.
However, in the OECD MTC and the UN MTC, there are some concepts that are relevant to personal service company regimes. These provisions can be potentially applied to personal services companies or certain types of them. The most relevant provisions (clusters) of the OECD MTC for further analysis may be/are:
- (1) Entitlement of tax treaty benefits It is important because the application of the personal services company regime may impact directly on who is the person entitled to the tax treaty benefits.
o Article 1 of OECD MTC4 in the part related to transparent entities. PSCs and transparent entities have some similar features. For example, in partnerships, the attribution of the income to partners also depends a lot on domestic law.
However, they have different reasons why the income may be attributed to the individual.
Reasons for partnerships
A transparent partnership is a non-corporate entity. Due to the fact that partnerships do not have corporate tax status tax authorities are not entitled to tax it directly. (it differs tremendously from one state to another) In other words, partnerships are not recognized as separate taxpayers. The taxation of the income coming to partnerships is executed by taxing profits flowing to partners as their personal income.
Reasons for personal services companies.
In the case of the personal services regime, these companies are corporate entities. So they are recognized as a separate taxpayer. However, domestic law that has a PSC regime deems that the income that the company received for the
4 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ <https://www.oecd- ilibrary.org/content/publication/mtc_cond-2017-en>.
provision of services by the individual is attributable to the individual because of his personal involvement in the performing of services. Thus, tax authorities tax it in his hands.
Tax treatment of the income of partnerships as a type of transparent entity is included in the report “The Application of the OECD Model Tax Convention to Partnerships” 5. According to par.3 of the Commentaries to Art 1 of OECD MTC, this report deals exclusively with
partnerships. According to this par., many principles included in the report could also apply to other non-corporate entities. The question is whether these principles can be applied to PSCs.
- (2) Distributive rules: It is important because the allocation of taxing rights to the State depends on the distributive rules. For example, Article 14 UN MTC6 and 17 OECD MTC7 seem relevant. Article 14 UN MTC may be theoretically applicable to personal services companies. However, Par. 9 of the Commentaries brings doubts about the applicability of Article8. It uses the phrase “remuneration paid directly to an individual for the performance of an activity in an independent capacity” which gives the reason to believe that the performer of services can be only an individual. However, in the case when a personal service company is disregarded for tax purposes, and the income received by the company comes to the individual, it seems possible to apply this Article because the income is allocated to the taxpayer who is the individual providing services. Thus, it is not clear whether Article 14 UN MTC applies to personal services companies.
The general rule of the application of Article 17 OECD MTC prescribes the allocation of taxing rights to the State of source. This article also is applicable to personal
services companies. However, the application of art. 17(1) requires the performance activity of an entertainer or a sportsperson. The treatment depends on a certain
performance, which is [may be] connected to a certain individual. Application of 17(2) has the effect of disregarding the company which accrues the income from the
personal activity of an entertainer or a sportsperson. Thus, it is not clear whether the
5 OECD, ‘The Application of the OECD Model Tax Convention to Partnerships’ <https://www.oecd- ilibrary.org/content/publication/9789264173316-en>.
6 ‘United Nations Model Double Taxation Convention between Developed and Developing Countries 2017’
<https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2020- 03/UN%20Model_2017.pdf>.
7 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ (n 3).
8 ibid.
approach of Article 17 OECD MTC may be applicable (extrapolated) to other personal services companies, not only to the companies mentioned in the text of the provision.
o Article 5 (provisions related to service PE) 9; o Article 14 of the UN Model Tax Convention;
o Article 17 of the OECD MTC. the Article contains a norm regarding personal services companies for entertainers and sportspersons (so-called artiste
companies). Commentaries to the Article clarify the application of distributive rules.
In the research, there is a discussion of the possibility to apply the following rules to the regime.
2. Chapter 1. Evaluation of relevant treaty provisions: entitlement of tax treaty benefits
Article 1 OECD MTC is dealing with the entitlement of tax treaty benefits. This Article prescribes that persons are entitled to tax treaty benefits. In turn, Articles 3 and 4 define the person for tax treaty purposes and addresses the way to define the residence. Thus, in order to define is the person in question is a person under the applicable tax treaty the provisions of Articles 3 and 4 should apply. For the purposes of this work, it is assumed that the
individuals, bodies, or companies applying PSCs are persons for the treaty purposes. It is assumed that there are no questions related to the residence of either the company or the individual is assumed and that neither of them is a dual resident. The first issue addressed in is Chapter related to the potential applicability of fiscal transparency partnership provisions to the PSC. The second issue addressed is the interaction between tax treaties and anti-abuse domestic law. The Chapter discusses if the PCS regime is domestic law anti-abuse regime and how and if it affects the entitlement of tax treaty benefits.
2.1. Section 1.1. Transparent entities and personal services companies
As was already mentioned in the problem statement, the Convention does not contain guidance on the attribution of income in cases with personal services companies and
subsequent entitlement of the tax treaty benefits. In this part of the thesis, the opportunity to apply the legislation for fiscally transparent entities will be examined. This research is made to attempt to entitle the tax treaty benefits in cases with personal services company regime
9 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ (n 3).
relying on the rules related to fiscally transparent entities. It would help to bring certainty to the application of tax treaties in cases with personal services company regimes.
What is a fiscally transparent entity?
Article 1(2) OECD MTC clarifies the rule on how the income should be allocated in cases where fully or partially fiscally transparent entities are involved. It prescribes that “income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be the income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State”10. In other words, despite the fact that the income is legally owned by the transparent entity, it follows domestic law and it is attributed to its participants (residents of a Contracting State) and taxed in their hands.
Paragraph 9 of the Commentaries to Article 1 OECD MTC describes the concept of “fiscally transparent” as “an entity or arrangement is fiscally transparent where under the domestic law of a contracting state the income (or part thereof) of the entity or arrangement is not taxed at the level of the entity or the arrangement but at the level of the persons who have an interest in that entity or arrangement”11. This description brings even more details on how to attribute the income for tax purposes in cases where the income is received by or through fiscally transparent entities. The interest in the entity or an arrangement, that participants have, encompasses ownership of a part in the entity (for instance, shares) and receiving an economic benefit from it.
How does it relate to a personal service company regime?
The status of both personal services companies and partnerships for tax treaty purposes is not certain because the model treaties do not provide specific rules of income attribution for personal service company regimes. Domestic law provides this attribution rule. There is a situation when mismatches of attribution of the income occur. One State has the legislation related to the personal services company regime and applies it to a case. Meanwhile, another State of a case does not have this legislation and it applies general anti-abuse domestic legislation which is, in its opinion, applicable to a case. As a result, each State may entitle tax treaty benefits to different persons (to a personal services company or an individual providing services) and even apply different tax treaties.
10 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ (n 3).
11 Pistone (n 8).
The same situation may happen to partnerships. One State treats a partnership as a fiscally transparent entity and applies this treatment to a case. Meanwhile, another State mentioned in the case treats a partnership as an opaque entity. As a result, each State may entitle tax treaty benefits to different persons (to partners or a partnership) and even apply different tax treaties.
In the case of partnerships, the OECD provided detailed rules on how to solve cross-border disputes when the transparency is recognized only by the law of the residence State. Thus, the application of fiscal transparency rules may solve the problem of uncertainty which exists in cross-border disputes related to the personal services company regime.
It is possible to take the same example which was mentioned in the problem statement. An individual in State A created a personal services company in State B to provide services. This individual provides services through the company to consumers in State C. Currently, the following attribution of the remuneration received for the provision of services and
entitlement of tax treaty benefits depends on the domestic legislation in States A, B, and C. If the legislation of these States is different, a mismatch of attribution of the income may occur.
If the treaty principle related to fiscally transparent entities may be applied to personal services company cases, the mechanism of the attribution of income may be the following:
the tax treatment of the individual would depend on the domestic legislation of State A (residence State of the individual). It happens because according to the legislation related to fiscally transparent entities (the Partnership Report) the source State follows the residence State.
So, if State A taxes the individual, the A-C treaty would apply. At the same time, if State B taxes the company, the double tax treaty between States B and C would also apply which also may cause a mismatch of attribution of the income.
Paragraph 2 of the Commentaries to Article 1 OECD MTC prescribes that the treatment of fiscally transparent entities and arrangements shall be aligned with the principles of the 1999 report “The Application of the OECD Model Tax Convention to Partnerships”12 (hereinafter – Partnership Report). The consequence of this provision is that these principles can be applied to any transparent entity. In the research, personal services companies will be compared with partnerships. The purpose of this comparison is to conclude whether it is possible to expand the principles contained in the Partnership Report to personal services companies.
12 OECD, ‘The Application of the OECD Model Tax Convention to Partnerships’ (n 4).
The comparison between a transparent entity (particularly, a partnership) and personal services company
Already at the first sight, there are some similarities between personal services companies and fiscally transparent entities. If despite the legal ownership of a personal services company, the remuneration for provided services is attributed to the individual providing services, it has, de facto, the same effect of considering the company as a transparent entity (in respect of the remuneration for the services provided) for tax purposes because:
• The beneficiary of the income received by the entity is the taxpayer (in the case of a transparent entity the taxpayer may be another entity or an individual/s, in the case of a personal services company this is an individual providing services).
The effects of the application of both regimes are also quite similar in some cases:
• The residence of the individual (beneficiary of the entity) is the one taken into consideration for choosing applicable domestic law and the application of double tax treaties.
Since there are some similarities between these two regimes it is possible to make a deeper analysis and compare partnerships with personal services companies. It is based on section II.3 of the Partnership Report.
Before the beginning of the comparison, it is necessary to highlight the main differences between a partnership and a personal service company some of which were mentioned in the problem statement13.
First, transparent partnerships are not recognized as separate taxpayers due to the absence of corporate tax status. In the attribution of profits, tax authorities disregard partnerships and attribute profits straight to partners.
In personal services company regimes, companies are taxable persons and treated as a separate taxpayer. Different income attribution is expressed in the presumption of deeming the income is attributable to the individual providing services despite the fact that the legal recipient of income is a company.
Consequently, the partnership does not become a tax resident since it is not fully liable to tax while a personal services company is likely a tax resident if it receives some other income (for example, interest on a bank account), and it is liable to tax on any other income it receives.
13 Joanna Wheeler, The Missing Keystone of Income Tax Treaties (2012).
The connection between a partnership and partners is based on the ownership and control of a partnership by partners. The recognition of a partnership as fiscally transparent a priori means that the income is attributed received by a partnership to partners and they are entitled to tax treaty benefits. The connection between the individual providing services and a personal services company is based on the individual’s involvement in the company’s activity. The fact of recognition of a company as a personal services company does not mean the application of a certain mechanism of attribution of the income and entitlement of tax treaty benefits.
The first point of comparison is to determine whether both partnership and personal services company are persons. Article 3(1)(a) OECD MTC prescribes that “the term “person” includes an individual, a company and any other body of persons”14. According to paragraph 30 of the Partnership Report, partnerships can be recognized as persons because they fall into the scope of the term “company” when they do not, the term partnership can be included in the term
“other body of persons”. In par. 23 of the Partnership Report, it was also mentioned that under the domestic law of some States partnership can be recognized as a “person” but not a “legal person”.
A company is a person, it is liable to tax and it is the legal owner of the remuneration, so its treaty claim is quite solid. The point that brings more attention is whether the individual can claim treaty benefits in addition to the company. Since the basis for attribution of profits is the significance of the individual’s involvement, each State provides its own mechanism of analyzing the company and attribution of the income (like in the Russell case). Some States do not have special legislation which may cause the application of general anti-abuse rules, this brings inconsistency. It seems like principles expressed in the Partnership Report may be applied to personal services companies to bring consistency to the application of tax treaties in cases with personal services companies.
Partnership Report principles and their applicability to personal services company regime One of the main principles of the Partnership Report is exposed in paragraph 27and 15. It prescribes that the determination of taxable person and tax consequences of the attribution of the income to this in each case starts with domestic law provisions. The double tax treaty provisions are necessary to balance and limit taxing rights if the taxpayer is entitled to tax treaty benefits under a double tax treaty, solving the mismatches which occur while applying domestic law of several States.
14 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ (n 3).
15 OECD, ‘The Application of the OECD Model Tax Convention to Partnerships’ (n 4).
The application of personal services companies is based on the same principle. The treatment of personal services companies and the consequent recognition of a company as a taxpayer depends on domestic legislation. However, mismatches of the attribution, that may occur in each dispute, are solved differently since there is no mechanism for income attribution and entitlement of tax treaty benefits in cases with personal services company regime.
The Partnership Report provides a mechanism of allocation of taxing rights between States.
“The general recommendation proposed by the Report to resolve conflicts regarding
attribution of income in the context of partnerships is that the state of source should consider that an item of income is “derived by” and/or “paid to” a resident of the other state if the latter state attributes the income to that resident person for tax purposes.”16 In other words, in the determination of the taxable person (taxable unit) the Partnership Report depends on which person has the tax liability in the states where the partnership and the partners are located.
The State of residence applies its domestic law regarding who is taxed on the income received by the partnership, and then the source State treats the partnership and the partners
respectively for tax treaty purposes. While providing double tax relief the State of residence accepts the qualification of the income for tax treaty purposes provided by the source State.
However, this mechanism of accepting another State’s view does not seem always efficient for the application to the personal services company regime. As was mentioned above, the criteria of income attribution in cases with personal services company element is the
significance of the individual’s involvement. The recognition of a personal services company by one State may not help to attribute the income appropriately, and a deeper analysis may be required for correct income allocation.
Furthermore, In the case of income attribution mismatches, the Partnership Report states to determine the taxable person according to the residence State legislation (in case of personal services companies – residence State of the individual or the residence State of the company, if that State treats the company as the taxable person), there may be a situation when both States would insist on accepting their way of attribution of income and deny the possibility of application of another State’s approach. As a result, an unsolved income attribution mismatch occurs. Moreover, the conflicts of attribution of income may lead to the application of
different tax treaties and there is no solution to this mismatch. It seems like for the personal services company regime, the application of principles of the Partnership Report does not provide the solution for this type of income attribution mismatch since the Partnership Report
16 Vikram Chand and Craig Elliffe, ‘The Interaction of Domestic Anti-Avoidance Rules with Tax Treaties in the Post-Beps and Digitalized World’.
accepts that two treaties might apply to the same item of income if the partners are in a state that taxes the partners and the partnership is in a state that taxes the partnership.
It may be difficult to apply these rules to the personal services company regime because for the source State it may be complicated to apply the rules which the residence State
introduced. There are various reasons including the point that it may also be not clear how proportionate the attribution of income between a company and an individual providing services is. The level of the individual’s involvement in the company’s activity may change from time to time which may also cause difficulties with income attribution.
It seems like the Partnership Report is hardly applicable to the cases with personal services companies. Some principles of the Report (for instance, a principle that the domestic law is a starting point for the determination of a taxable person) may be applied, however, the
principle is generic because every tax treaty establishes the application of domestic law as a first step.
Other more specific principles may bring even more complexity to the application of double tax treaties to cases with personal services company regime because the recognition of a company as a personal services company does not mean the application of the same rules in all the States. In case of more complicated mismatches of income attribution, the Report does not answer questions that could be addressed while solving the case.
2.2. Section 1.2. Personal services company regime as a domestic anti-abuse rule In the cases discussed in the research (the Russell case and the Aznavour case) the Courts applied domestic law provisions. The algorithm of the Courts’ reasoning was the following.
In the Russell case, the Court applied Australian tax law17 which contains special norms related to personal services companies. According to the domestic law, the New Zeeland company could not get treaty benefits. The Court decided that application of the domestic law is aligned with the double tax treaty between Australia and New Zealand18 and tax the
individual on the income he received.
In the Aznavour case the Court came to the decision that French tax law19 was applicable.
French law did not contain special norm, so the Court applied general anti-abuse rules.
According to these rules, the tax treaty benefits were allocated to Aznavour (individual
17 ‘Income Tax Assessment Act 1997’ <https://www.legislation.gov.au/Details/C2020C00381>.
18 Agreement between the Government of the Commonwealth of Australia and the Government of New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income 1960.
19 ‘Code Général Des Impôts’ <https://www.legifrance.gouv.fr/codes/texte_lc/LEGITEXT000006069577/2010- 05-13>.
providing services). Then domestic law and double tax treaty between France and Switzerland were compared. There were no conflicts between the tax treaty provisions and French
domestic legislation, so the Court applied the rules about the income attribution expressed in the domestic law and solve the case respectively.
In both cases, applied domestic law provisions were a part of anti-abuse legislation of the States. Currently, this is the approach which is applicable to cases with personal services company regime. Thus, it seems reasonable to analyze the concept in which the personal services company regime is regarded as a part of domestic anti-abuse legislation.
In this part of the research, it is necessary to understand how tax treaty benefits will be granted if the personal services company regime is regarded as a domestic anti-abuse rule.
The next step is to address the question of whether it is possible to use this qualification of the regime to bring coherence to the application of double tax treaties.
There are two different types of anti-avoidance measures: general anti-abuse rules
(hereinafter. – GAAR) and specific anti-abuse rules (hereinafter – SAAR). According to the definition provided by the IBFD.20 GAAR is “an anti-avoidance measure, generally statute based, providing criteria of general application, i.e. not aimed at specific taxpayers or transactions, to combat situations of perceived tax avoidance”. Meanwhile, “contrary to a general anti-avoidance rule (GAAR), a SAAR is an anti-avoidance measure aimed at specific taxpayers or transactions, to combat situations of perceived tax avoidance”21. The situation when the SAAR was used can be observed in the Russell case because the Australian Tax Code contains provisions on how to recognize a personal services company and the rules of the attribution of the income received by a personal services company. In the Aznavour case, the Court applied GAAR to attribute the income received by the personal service company to the individual providing services. In the research, both situations will be discussed.
Since Tax Conventions only restrict the taxation and attribution of the income to persons provided by the legislation of States, the characterization (qualification) of the situation where tax abuse may occur start with the application of domestic tax law.
It is necessary to highlight that according to par. 70 of the OECD Commentaries to Article 1 OECD MTC, both GAAR and SAAR are applicable in cross-border disputes only in those cases when there are no conflicts between domestic law and tax treaties. In case of the possibility of a conflict, all the circumstances of the case are analyzed to decide on how to
20 Graeme Stuart Cooper, Tax Avoidance and the Rule of Law (IBFD Publications 1997).
21 Zoë M Prebble and John Prebble QC, ‘Comparing the General Anti-Avoidance Rule of Income Tax Law with the Civil Law Doctrine of Abuse of Law’ [2008] Bulletin for International Taxation, April.
apply domestic law and tax treaties to a cross-border situation. If there is a conflict, tax treaty provisions will prevail.
If the personal service company regime was a domestic anti-abuse rule, it would be applied in cross-border situations and tax treaty benefits would be granted due to the qualification which domestic law would give a company and an individual. In the Russell and the Aznavour case, domestic law was applied. In the Russell case, Australia was a residence State, while in the Aznavour case France was a source State.
Unfortunately, this approach does not help to prevent inconsistency despite the fact that this is the OECD mechanism of solving disputes which existed from the beginning. Every State provides sufficient measures to prevent tax abuse. However, the domestic legislation differs from one State to another which brings complexity to solving cases in a similar manner. There are several issues that may arise: the necessity to choose domestic law applicable and possible mismatches in domestic law. The decision about choosing one State’s legislation that would prevail would not seem possible.
Since the treatment of personal services regime is different in States, the applicable legislation may be chosen due to the State which is solving the dispute. For example, in the Russell case, Australia was the initiator to reevaluate the taxation of Mr. Russell. It was the residence State of the individual. Since it has special legislation, the concept of the individual’s involvement and the evaluation of its significance for the company’s activity was the base of the Court’s decision. This approach seems reasonable since the significance of the individual’s
involvement is the main criteria for attribution of profits in cases with personal services company regime. However, in the Aznavour case, the basis for the Court’s decision was the ownership of the company by the individual and the existence of commercial or industrial character of the company’s activity. That was the criteria of French domestic GAAR. The Court did not discuss in the proceeding any considerations about the individuality of income and did not discuss the nexus between the individual and the company in detail.
Exactly because of these differences in domestic legislation, the Courts came to different conclusions because in the Russell case Australian court attributed income to the individual based on considerations about the individual’s involvement in the company’s activity, and in the Aznavour case, the French court came to a conclusion about attribution of the income to the individual based on the company’s ownership.
As the result of applying this algorithm when the recognition of the taxpayer and attribution of profits are exercised according to domestic legislation, it is impossible to come to a consistent result because of the following reasons:
- The application of the personal services company rules may change who Is the taxable person, for the double tax treaty, as well as to whom the profits shall be attributed.
- This may imply a change in the double tax treaty that is applied, such as in the Aznavour case, because the person involved in the regime may have their tax residence in a different jurisdiction.
- The application of the regime may lead to changing the taxation to a fully internal situation, because the interaction of other companies may be disregarded in cases where beneficiaries are in the same country as happened in the Russell case.
- Changing the taxpayer for the application of the double tax treaty may also affect the double tax relief for the person that is not recognized as a taxpayer in the application of the double tax treaty since the double tax treaty only covers juridical double
taxation. Therefore, the person who is not recognized as a taxpayer would not have the right to double tax relief in the State of his tax residence.
Introducing measures on the OECD level would probably solve some mismatches of the income attribution. The Partnership Report may be taken as an example when the OECD provides some principles and examples on how to solve cross-border cases based on the principles. It could be relevant to establish the same principles for personal company regimes which would help to bring consistency to the application of double tax treaties and solution of cases.
3. Chapter 2. Evaluation of relevant treaty provisions: distributive rules
OECD MTC contains provisions that mention concepts that have similar features to PSC regimes. These norms could be potentially applicable to the bodies applying the PSC regime.
The Second Chapter addresses the potential application of Articles 17, 14, and 5 of the OECD and UN Model Tax Conventions to the bodies applying the PSC regime.
Article 17 OECD MTC provides interesting from the perspective of extrapolation rule when the income is taxed by the source State even if the remuneration for services provided is paid not directly to the performer but another person. This provision may be potentially applicable to PSCs and in this part of the research, there is a comparison between Article 17(2) OECD MTC and an evaluation of the possibility to apply it.
At the same time, Article 14 UN MTC and Article 5 OECD MTC propose different allocation rules. It remains still questionable if Article 14 UN MTC may be applicable to PSCs. If Article 14 UN MTC may be applicable then whether the differences between the scope of the
Article and the personal services company regime would affect the application.
3.1. Section 2.1. The application of Article 17 OECD MTC and personal services company regime
One of the provisions contained in the OECD MTC which may be potentially applicable to the personal services company regime is Article 17(2) OECD MTC. It introduces rules related to a situation when “income in respect of personal activities exercised by an entertainer or a sportsperson acting as such accrues not to the entertainer or sportsperson but another
person”22. It seems that the mechanism of profits flowing in this situation and in the cases with the personal services company regime is quite similar because the remuneration earned by the individual providing services (an actor or a sportsperson) is received by another person, particularly, a. company. In both regimes, it is emphasized that there is a company that may be taxed (it is not disregarded, how it is happening with fiscally transparent entities).
However, the income received by a company is attributable to the individual and taxed in his hands because of the significance of the individual’s involvement in the activity of the company. In other words, the major part of the remuneration is earned by the application of the individual’s personal skills.
Thus, it may be relevant to attempt to broaden the scope of the Article and apply the same rules of attribution of profits to a personal services company regime. If it is possible to treat personal services companies and companies mentioned in Article 17(2) OECD MTC in a similar manner it may be the solution to the inconsistency of application of tax treaties to cases with personal services company regime.
3.1.1. Subsection 2.1.1. Article 17 (2) OECD policy
Paragraph 11 of the OECD Commentaries on Article 17 OECD MTC provided 3 following situations when the recipient of income earned by entertainers or sportspersons for their professional activity is another person:
• “A management company that receives income for the appearance of e.g. a group of sportspersons (which is not itself constituted as a legal entity).
• A team, troupe, orchestra, etc. is constituted as a legal entity. Income for performances may be paid to the entity. Individual members of the team, orchestra, etc. will be liable
22 OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017’ (n 3).
to tax under paragraph 1[…]. The profit element accruing from performance to the legal entity would be liable to tax under paragraph 2.
• Certain tax avoidance scheme”23.
Attempting to apply these provisions to the personal services company regime, it seems like only the third case is applicable to the regime. The first case is with a managerial company which is a company acting as an agent for the performer, where the agent company receives the performance fee and deducts its management fee before it passes on the performance fee.
If this is so, the company may not be regarded as a taxable person and consequently may not be recognized for tax purposes. The company would usually be a taxable person in respect of its income (the fees it charges for managing), but it would not be the taxable person for the appearance fee paid to the performer because all it does with that is collect it on behalf of the performer.
The second case related to an orchestra or a troupe is also not applicable because another group of professionals working together would be obliged to create a partnership or a
company. Although this is similar to the personal services company regime in one way, as the individual is formally in the position of an employee. The difference is that for a personal services company the individual is usually the only employee, whereas an orchestra might have 100 employees.
Discussing attribution of profits, Article 17(2) OECD MTC provides the rule according to which the income may be taxed in the State where the performance was exercised. This norm grants taxing rights to a source State in which the performance is made, regardless of the State of residence of the persons receiving the income.
There are several reasons why taxing rights are allocated to the source State. The first one is the frequency of entertainers’ or sportspersons’ movements. Performers often have tours, sports events, or other kinds of events that require them to be present in different States for a short time. In this case, there are no reasons to constitute a permanent establishment in every State that a performer visits so it’s not possible to tax it under the general rule for taxing business profits of the enterprise (Article 7 OECD MTC) or under the rule related to employees exercising their work in another State (Article 15 OECD MTC). Thus, taxing rights were distributed to the source State where the performance occurs.
The second reason to assign taxing rights this way is to prevent tax avoidance when the individual establishes a “star company” and the income earned by the performer is not taxed
23 Pistone (n 8).
in the State of performance neither as personal service income nor as profits of an enterprise due to the absence of the permanent establishment. In the OECD Commentaries to this Article, particularly in paragraph 11(c) of the Commentaries24 states that some States apply a
“look through” approach to the situation when star companies received the income earned by performers.
The point of Article 17(2) OECD MTC that attracts attention is the rule which is prescribed in the text of the Article. This rule of allocation to the source State applies even in cases when the remuneration for the provision of services by the performer is paid to another person. the main point that this rule raises is whether this rule may be possible to extrapolate and apply to other kinds of professionals.
3.1.2. Subsection 2.1.2. The application of the “look through” approach applicable to companies mentioned in Article 17
This “look through” approach applies to companies only when they received income earned by entertainers or sportspersons for their performance based on their personal efforts, education, and gained experience. In the situation when the company is involved in the organizing of entertainment or sports events (for, instance promotion activity), this income is covered by the scope of Article 7 OECD MTC and should be taxed appropriately25.
This approach may apply to personal services company regime too. The legislator looks through the company – recipient of the remuneration and tax the individual. The company is treated as a separate taxpayer but not involved in the taxation because of the absence of activity. The “look through” approach was supported by some domestic legislation like it was in Australian tax law in the Russell case. In the case, it was evaluated if the income received by the company was based on the company’s activity or the individual’s involvement in the company’s activity. Then, after determining that this income is purely an individual’s income, an alternative to the “look through” approach was applied because, even though the company was a recipient of the income, the individual was taxed on it.
However, it seems that the “look through” approach is more appropriate to use when it is clear how the income is divided between the individual and a company. If the income flow is complicated there may be problems with the application of the approach because there would be a risk to allocate profits incorrectly. The analysis of proportions of the profits in cases with personal services company regime may be crucial for the attribution profits to the effective
24 ibid.
25 OECD, ‘Issues Related to Article 17 of the OECD Model Tax Convention’ <https://www.oecd- ilibrary.org/content/component/3c9d36c4-en>.
taxpayer and subsequent taxation.
3.1.3. Subsection 2.1.3. Limited personal scope of Article 17 OECD MTC
Since the 1960s the OECD introduced a special rule for the taxation of entertainers and sportspersons. The main reasons for that were already discussed above and this is the high mobility of performers and the prevention of tax avoidance. It is necessary to highlight the reason why there is no need to analyze of the nexus between the company-recipient of the income and the performer. Entertainers and sportspersons are an example of when a company exists because of the performer’s identity. There is no need to provide evidence to define the relationships between the company and the individual because the company bases its activity on the individual’s performance. However, this focus on the performer’s identity may not be that strong in other examples of personal services companies26.
For example, in the Russell case, Mr. Russell was an accountant. Accountancy services are not unique and potentially any specialist could perform them. Since it is possible to have employees in personal services companies, accountancy services could be provided not by Mr. Russell but by another employee in the company. So, allocation of the profits to one individual, because his name is associated with the company, is the wrong approach. To allocate the profits it may be appropriate to assess the involvement of each employee in the company and then tax it respectively.
Furthermore, Article 17 is complicated and raises a lot of disputes. For example, in 2014, the OECD Committee on Fiscal Affairs27 discussed some comments given about the scope of the Article. More questions occur concerning sportspersons because in the text of the Article for entertainers the OECD provided several examples which make the determination clearer. It was discussed if it is necessary to treat sports commentators in this Article because their activity can be treated as a profession related to sportspersons.
From this example, it can be seen that there are disputes about professions closely related to entertainers and sportspersons. It seems that it is precocious to broaden the scope of the Article to other professionals when there are some issues with the determination of scope with closely related professions.
Summarizing all the above, it seems not possible for the scope of Art. 17(2) OECD MTC to
26 K Tetłak, General Rules for the Income Tax Treatment of Sportsmen under Double Tax Treaties in Taxation of International Sportsmen (IBFD Publications 2014).
27 OECD, ‘Issues Related to Article 17 of the OECD Model Tax Convention’ (n 25).
be broadened to other categories of professionals other than entertainers and sportspersons for the following reasons:
• One of the fundamental reasons why these unique distributive rules were implemented is absent. Many other kinds of professionals are not mobile like performers are and there are various methods of tax avoidance prevention that can be applied to other individuals and their personal services companies. The creation of several places of working could cause the risk of a PE constitution and it does not seem possible to expand the scope of the Article in this direction because entertainers and sportspersons are very specific concepts.
• The “look through” approach is unlikely applicable when the income is coming from various sources and as a result, it becomes complicated to count the proportion of profits received by the individual and the company. It increases the risk to allocate profits and then tax incorrectly.
However, the point that gives hope that this provision is possible to apply to personal services companies is the connection between the individual and the company. The idea is that the individual providing personal services can be as important for his personal services company as entertainers and sportspersons are important for the persons, particularly companies mentioned in Article 17(2) OECD MTC.
3.2. Section 2.2. The application of Article 14 UN MTC, Article 5 OECD MTC, and the personal services company regime
3.2.1. Article 14 UN Model Tax Convention
Article 14 is not included in the text of the OECD MTC so in this part of the research Article 14 of the UN Model Tax Convention will be discussed. The Article provides the distributive rules on the income received by the person from the provision of independent personal services.
In this part of the research, it will be discussed if it is possible to extrapolate the rules introduced in Article 14 UN MTC to the personal services company regime.
The UN Model Tax Convention gives examples of the services which may be under the scope of the Article which includes “independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants”28. According to par. 10 of the UN Commentaries to the UN Model
28 ‘United Nations Model Double Taxation Convention between Developed and Developing Countries 2017’ (n 6).
Tax Convention there are several exclusions from what can be recognized as professional personal services. They include “industrial and commercial activities and also professional services performed in employment”.29 The same definition of personal or professional services can be used for the determination of services provided through personal services companies since it can be noticed that in Article 14 UN MTC mentioned services have a
“professional nature”. The same approach is used in the personal services company regime.30 Furthermore, since the list of professional services in the Article is not exhaustive, all the disputes related to the determination of what is professional services are under the scope of domestic law.
Since in the text of the Article it is mentioned that the remuneration for provided services is received by the resident of the Contracting State it may be potentially applicable to personal services companies since as it was discussed before personal services companies fall under the scope of the definition of “resident of a Contracting State”.31
Discussing the distributive rules expressed in the text of the Article, it prescribes that the income received by the resident of the State may be taxed in that State.
There are two exceptions to changing allocation rules:
- “If he (resident) has a fixed base regularly available to him In the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or
- If his stay in the other Contracting State is for a period or periods amounting or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in the other State may be taxed in that other State.”32
The Commentaries to the Article provide more detailed differentiation between distributive
29 Pistone (n 8).
30 ibid.
31 Anghara Miller, ‘Taxing Cross-Border Services: Current Worldwide Practices and the Need for Chang’
(Amsterdam: IBFD 2015)
<https://www.proquest.com/openview/f09f7773c6889a112b5c091860895520/1?pq- origsite=gscholar&cbl=31496>.
32 'United Nations Model Double Taxation Convention between Developed and Developing Countries 2017’
<https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2020- 03/UN%20Model_2017.pdf>.
rules in Article 14 UN MTC and other Articles providing allocation rules. Particularly, in the par. 10.1 of the UN Commentaries to the Article distinguishes the scope of Article 14 from the scope of other Article introducing distributive rules. It is interesting that it said expressly that the scope of Article 14 UN MTC does not include any professional services provided by sportsmen or entertainers. It is connected to the dynamic nature of the activity and
consequently, the provision of services of sportsmen and entertainers will not likely create a possibility of a permanent establishment, because they are not active anywhere for long enough.
Paragraph 10.3 of the Commentaries to the Article discusses the connection between Article 14 UN MTC and Article 7 UN MTC. It prescribes that Article 7 UN MTC sometimes could be used to interpret and apply Article 14 UN MTC correctly.
The attention is attracted to paragraph 9 of the Commentaries. As was mentioned in the problem statement, at first sight it seems that this Article is only applicable to the individual.
While clarifying who can be the performer of personal services in the context of who is receiving the remuneration. It uses the phrase “remuneration paid directly to an individual for the performance of an activity in an independent capacity” which gives the reason to believe that the performer of services can be only an individual.
After the analysis of the norm, it could be said that it may be applicable to personal services companies only in certain cases. It seems possible to apply the same rules which were
expressed in Article 14 UN MTC to personal services companies when it is clear that personal services companies were made as a measure to abuse the law and it is presumed that the performer of the services and the taxable person is the individual. For example, in the Russell case, these rules are applicable and it can be said that the Court’s decision is aligned with the norms in the Article. Based on the evaluation of domestic law, the Court came to the decision that the performer of services was the individual (Mr. Russell). The Court attributed the income to the individual and taxed it from the perspective of Mr. Russell’s residence State (Australia).
However, if the company provides services on its behalf, it should be very carefully evaluated to attribute the income and grant tax treaty benefits correctly. In such cases, the application of Article 14 UN MTC may be limited and be applied only to that promotion of the income which was earned by the provision of services by an individual.33
Thus, it may be possible to apply the rules expressed in Article 14 UN MTC when the fact
33 Michael Lang and others, The UN Model Convention and Its Relevance for the Global Tax Treaty Network (2017) <https://www.ibfd.org/shop/book/un-model-convention-and-its-relevance-global-tax-treaty-network>.
that the services are provided fully by the individual is clear. It may be visible in clear cases, but if it slight complexity is added, the profit attribution will not be that simple. Thus it could make potential application incoherent, give a rise to litigation and add even more complexity.
The second issue which can be raised is the possibility of the establishment of a fixed base since a personal service company may be created in another State as it happened in the Russell case.
Coming back to the discussion of the example given in the problem statement there is an opportunity to apply Article 14 UN MTC even if there is a statement that it is not possible to apply this Article to companies. As was discussed before, State A applies the PSC regime and treats the individual as a taxable person because this is its tax resident and the State would want to tax it. In this case, a double tax treaty between state A and State C would apply. In this case, Article 14 UN MTC would be applicable because the situation is under the scope of the Article. Applying par. 9 of the Commentaries to the Article to this situation there are no conflicts because for the A-C double tax treaty the individual received the remuneration directly from the customer. Furthermore, the application of Article 14 would the threshold for the source State. Under the B-C double tax treaty, the applicable Article would be Article 7 OECD MTC since State B treats the company as a taxable person. Previously it was also mentioned that Article 7 and Article 14 are connected and Article 7 can be used to interpret Article 14.
Article 14 gives these several exceptions which change the rules of allocation which Article 7 does not have unless provisions related to services PE of Article 5 OECD MTC are
applicable.
Paragraph 10.4 of the UN Commentaries to the Article distinguishes the terms “permanent establishment” and “fixed based” expressed in the text of the Commentaries.34 It mentions that despite the fact that both terms are based on the same principle, the term “permanent establishment” is for companies with a commercial or industrial character.
Since a personal services company may include an office and even some employees there is a risk to be taxed in the State where the services are provided while applying rules of this Article to personal services companies which may also bring complexity to the application of tax treaties to disputes with the personal services company regime.
34 Pistone (n 8).
