Tax Treaty Series

ITQ T-

011

August 30, 2019

Question

BCO is a limited partnership formed under country B law. It has a general partner (XCO) which is a company incorporated and resident in country B. It also has 100 limited partners, who are individuals resident in country A. BCO owns 100% of the shares of CCO, which is a company resident in country C. CCO’s assets do not consist of land in country C. The A/C double tax treaty is identical to the 2014 OECD model treaty. The MLI does not apply to that treaty. Country B has not entered into any double tax treaties. BCO does not have a PE in country C. Under the country A and country B tax laws, BCO is treated as a transparent partnership. Under the country C tax law, BCO is treated as a non-resident company. BCO sells all of the shares in CCO for a significant profit. Under the country C tax law, BCO is taxable on that profit.

What impact (if any) does the A/C treaty have on the country C tax position?

Answer

According to the OECD Commentary on Art. 1, each of the limited partners will be entitled to claim exemption under Art. 13(5) of the A/C treaty in regard to that partner's proportionate share of the gain derived on the sale of the shares in CCO:

Para. 6.5: "Where a partner is a resident of one State [A], the partnership is established in another State [B] and the partner shares in partnership income arising in a third State [C] then the partner may claim the benefits of the Convention between his State of residence [A] and the State of source of the income [C] to the extent that the partnership's income is allocated to him for the purposes of taxation in his State of residence [A]."
The Commentary also says that the character of the income does not change, even though it is derived by the partner through the partnership (see para. 6.4, 3rd sentence; and para. 6.6, 2nd sentence), thus allowing Art. 13(5) to apply.
The fact that country C treats BCO as a company (a taxable entity) is irrelevant: see para. 6.3.
Example 10 in the OECD's 1999 Partnerships Report is similar to this case study.

However, those paragraphs in the OECD Commentary on Art. 1 are not accepted by 5 OECD members (Chile, Netherlands, France, Portugal, and Mexico), absent an express provision to that effect. A similar view is taken by 6 non-members (Gabon, India, Ivory Coast, Morocco, Tunisia, and Argentina). If country C does not accept those paragraphs, then it will presumably deny treaty benefits to the limited partners.

Even if country C accepts those paragraphs in the OECD Commentary on Art. 1, the issue remains as to how to give effect to those treaty benefits, having regard to the fact that, under the country C tax law, the relevant taxpayer is BCO, not the limited partners. This issue was briefly discussed by the Australian Federal Court in the RCF IV case (April, 2019). The court expressed the view that the treaty claims could not be made in proceedings to challenge an assessment against BCO, but it could possibly be made (1) in recovery proceedings against the limited partners, and (2) in proceedings for a court declaration confirming the treaty benefits.

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