Tax Treaty Series

ITQ T-

083

April 16, 2021

Question

Ms X, a resident of X, is a partner is a major law firm in X. The law firm is in the form of a general partnership. Ms X specialises in estate planning, and she has a growing number of clients in X and some nearby countries, including Y.

Ms X's clients in Y are wealthy individuals, many of whom have built large businesses in Y.

During the 2019 income year, Ms X spent a total of 180 days in Y, which comprised 5 separate visits. On all but 20 of those days, she had meetings with clients and prospective clients – the other 20 days were for rest. During her 5 visits, Ms X stayed at different hotels, and did not use any office facilities. The meetings with clients and prospective clients occurred in their homes or at restaurants.

During those meetings, Ms X signed engagement letters with 10 clients.

The X/Y treaty is identical to the 2017 UN model treaty, with a 10% rate specified in Art. 12A(2).

Ms X's firm receives significant fees from her clients in Y. Does the X/Y treaty permit Y to levy income tax on those fees?

Answer

This question requires a decision as to which of 3 articles applies: Art. 7, Art. 12A, or Art. 14.

Art. 12A will not apply if "the payment is made…by an individual for services for the personal use of an individual": Art. 12A(3). As Ms X's services involve estate planning for wealthy individuals, it is likely that Art. 12A would be excluded. If this is not the case, Art. 12A would allow Y tax, limited to 10% on gross (Art. 12A has priority over Arts. 7 & 14).

Assuming Art. 12A does not apply…

Ms X's activities cause a contract-concluding agency PE to exist in Y. However, Art. 7 will not apply if the income is dealt with in Art. 14: Art. 7(6).

Art. 14 applies to income in respect of "professional services", the definition of which would cover Ms X's services. Ms X does not have a "fixed base" in Y. Also, her time in Y does not satisfy the 183 days / 12 months test. Thus, Art. 14(1) should provide an exemption from Y tax.

Thus, if Art. 12A does not apply, the treaty should not allow any Y tax.

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