Tax Treaty Series

ITQ T-

076

February 19, 2021

Question

ACo, a company resident in A, conducts an international goods shipping business.

ACo's ships pick up and deliver goods at the only port in B.

ACo owns an office in B. ACo has numerous employees who are based at the office – some of these employees perform activities such as booking shipments for customers in B, while others conduct maintenance of ACo's ships when they are in B's port.

In addition to its fees for transporting goods, ACo derives 3 types of income / profits from B:

Interest income from the short-term investment of cash balances
Fees for maintenance services performed in regard to other companies' ships when they are in B's port
Profit on sale of ACo's office in B (due to headcount growth, ACo moved into a new office and sold its old office)

The A/B treaty is identical to the 2017 OECD model treaty.

Does the A/B treaty permit the B tax authorities to levy income tax on the 3 types of income / profits derived by ACo?

Answer

Interest: Art. 11(2) would allow 10% B tax. However, according to the OECD Comm., Art. 8(1) (and not other provisions) would apply to interest from the investment of cash required in a Contracting State for the carrying on of a shipping business. This would seem to cover the interest in this case. Thus, the interest should be exempt under Art. 8(1).

Maintenance service fees: According to the OECD Comm., Art. 8(1) would apply to the fees (thus, exempt). Note that Art. 7 would not apply to allow B taxation, despite the fact that ACo's office would be a PE: Art. 7(4).

Profit on sale of ACo's office: Art. 13(1) would allow unlimited B tax (note that Art. 13(2) or (3) will not apply, as the office is immovable property). Is the profit "from the operation of ships…in international traffic" (Art. 8(1))? The OECD Comm. does not address the issue of whether Art. 8(1) covers profits from the sale of fixed assets which are used in an international shipping business. In 2020, the Danish National Tax Board decided that a profit derived by an international shipping company on the sale of a house which was used by an expatriate director, was covered by Art. 13(1), and not Art. 8(1). I agree! Thus, IMHO: the profit should be taxable by B.

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