Tax Treaty Series

ITQ T-

036

March 20, 2020

Question

ACo, a company resident in country A, is a provider of professional legal services.

ACo enters into a contract to provide legal advice to BCo (a company resident in country B) on a possible investment in country C. The contract states that ACo will engage CCo (a company resident in C and a provider of professional legal services) to provide it with advice on C law.

ACo's advice (which includes the advice provided by CCo) is transmitted to BCo via the internet. None of ACo's employees, and none of CCo's employees, visit B.

ACo issues an invoice to BCo in the amount of $100,000. CCo issues an invoice to ACo in the amount of $60,000.

The A/B and B/C treaties are identical to the 2017 UN model treaty (the MLI does not apply).

Q1: Under the A/B treaty, is B permitted to levy tax on ACo? If so, does the treaty permit the tax to be levied on $100,000 or $40,000 or another amount?

Q2: Under the B/C treaty, is B permitted to levy tax on CCo?

Answer

Q1 (A/B treaty):

Art. 12 is not relevant – ACo's fee should not fall within the definition of "royalties" in Art. 12(3).
ACo's fee falls within the definition of "fees for technical services" (FTS) in Art. 12A(3), and it arises in B: Art.12A(5).
Thus, B is permitted to levy tax on the fee: Art. 12A(2).
It appears that ACo has a contract with BCo, and ACo also has a contract with CCo, but that there is no contract between BCo and CCo.
It is possible that, in the ACo/CCo contract, ACo's obligation to pay $60,000 to CCo is dependent on ACo receiving at least $60,000 from BCo. If so, then ACo is likely the beneficial owner (B/O) of only $40,000 (UN Comm., para. 56): on $40,000, B tax would be limited to x%; but on $60,000, it would be unlimited!
If that is not the case, ACo should be the B/O of $100,000: B tax would be limited to x% of $100,000.
Characterising $60,000 of ACo's fee as a reimbursement should not change the analysis: UN Comm., paras. 74-82.

Q2 (B/C treaty):

CCo's fee satisfies the definition of FTS in Art. 12A(3), but it does not arise in B: Art. 12A(5). Even if ACo is not the B/O of $60,000 of its fee (see above), the person paying the fee to CCo is ACo, not BCo.
Thus, Art. 12A(1) & (2) do not apply – CCo is exempt under Art. 7(1).

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