Tax Treaty Series

ITQ T-

092

June 25, 2021

Question

ACo, a company resident in A, owns 100% of the shares in BCo, a company resident in B.

ACo formed BCo many years ago to hold real estate in a number of countries.

BCo now owns real estate in B and C. The relative market value of the real estate is currently 40% in B, and 60% in C.

BCo owns no other assets and it has no liabilities.

ACo is planning to sell 20% of its shares in BCo. ACo will derive a profit of $10 million on the sale.

The A/B, A/C and B/C treaties are all identical to the 2017 UN model treaty, with Art. 23B

Questions:

(1) Do the treaties permit B and/or C to levy income tax on ACo's profit?
(2) If so, is the tax permitted to be on the whole, or only part, of the profit?
(3) Is A required to provide a credit for the tax in B and/or C?

Answer

1. The A/C treaty (Art. 13(4)) permits C to levy income tax on ACo's profit. Also, the A/B treaty (Art. 13(5)) permits B to levy income tax on ACo's profit. Although I did not specify the percentage in Art. 13(5) of the A/B treaty, as ACo owns 100% of the shares in BCo, any percentage in Art. 13(5) would be satisfied.

2. For each treaty, the tax is permitted to be on the whole of the profit – i.e., $10 million.

3. Under the A/C treaty (Art. 23B(1)), A is required to provide a credit to ACo for the tax paid to C on the profit.

Also, under the A/B treaty (Art. 23B(1)), A is required to provide a credit to ACo for the tax paid to B on the profit.

For each treaty, the credit is limited to the amount of A tax on ACo's profit, as computed before the relevant credit. As ACo would be entitled to 2 credits, in practice this would mean that the aggregate of the 2 credits cannot exceed the A tax on ACo's profit.

4. The B/C treaty is irrelevant, because ACo is not a resident of either B or C (Art. 1(1)).

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