Tax Treaty Series

ITQ T-

102

September 17, 2021

Question

XCo, a company resident in X, carries on a share trading business. For financial accounting purposes, XCo reports the shares it owns as inventory (i.e., trading stock).

As part of its share trading business, XCo purchased shares in YCo, a company resident in Y. YCo's shares are listed on the Y stock exchange. Over 95% of YCo’s assets (by value) are buildings in Y.

Several weeks later, XCo sold all of its shares in YCo for a profit.

The share purchase and sale transactions were undertaken for XCo by ZCo, an independent stockbroker in Y.

XCo has never had any employees or office premises in Y.

Under Y domestic law, XCo’s profit on the sale of the YCo shares is subject to income tax.

The X/Y treaty is identical to the 2017 OECD model treaty. Does the treaty permit Y to levy income tax on XCo’s profit?

Answer

Art. 13

As more than 95% of YCo’s assets (by value) are buildings in Y, the shares in YCo satisfy the "more than 50 per cent" test in Art. 13(4). Therefore, Art. 13(4) permits Y to levy income tax on XCo’s gains derived from the sale of the YCo shares.

Art. 13(2) is not relevant, as XCo does not have a PE in Y (see below).

Art. 5

XCo does not have either a "fixed place of business" PE in Y or an agency PE in Y. In regard to agency PE, ZCo's contract-concluding activities would be excluded from Art. 5(5), by the independent agent exception in Art. 5(6) (provided ZCo is acting in the ordinary course of its business).

Art. 7

As XCo does not have a PE in Y, it would (prima facie) be exempt from Y tax, under Art. 7(1). The conflict between Art. 13(4) (taxable) and Art. 7(1) (exempt) is resolved in favour of Art. 13(4), due to Art. 7(4). Thus, Y would be permitted to levy income tax on XCo's gains derived on the sale of the YCo shares.

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