The 2014 update to OECD Model Tax Convention (hereinafter also referred to as 'the 2014 Update') has brought about a number of changes to the OECD Model with the aim of facilitating the practical application of tax treaties.
Beneficial owner
One significant update concerns the notion of 'beneficial owner'. The concept of beneficial owner is crucial to ascertain whether the recipient of dividends, interest or royalties is eligible for treaty benefits. Whereas previously the definition of "beneficial owner" was determined in accordance with domestic legislation, the 2014 Update makes it clear that the term ‘beneficial owner’ is to be given an autonomous interpretation, independent of the meaning under domestic law, so as to avoid double taxation or non-taxation resulting from different interpretations. The 2014 Update favours a substance over form approach, and it has been clarified that the recipient of a payment is only regarded as the ‘beneficial owner’ when he or she has the right to use and enjoy such income without being bound to pass on such payment to another person in virtue of any contractual or legal obligation, or as a matter of fact and circumstances. Thus the legal owner of the property which generates income, such as shares, could be different from owner of the income who in this context would be deemed to be the beneficial owner thereof.
Employment Termination Payments
Another aspect which has been tackled by the 2014 Update concerns employment termination payments. Double taxation issues often arise with respect to payments for unused vacation or sick days, compensation in respect of unlawful termination as well as non-compete clause payments, when received by cross-border employees or employees who have worked in different jurisdictions. Remuneration received for work performed prior to the termination of the employment would be deemed to arise in the State in which such work was carried out, whilst payments for unused vacation or sick leave entitlement accrued during the final year of employment would be treated as remuneration in respect of that period. As regards remuneration for obligations not to work with a competitor of the former employer, very often this is not considered as remuneration for work performed prior to the termination of the employment, thus it is usually only taxed in the State of residence of the recipient at the time of payment.
Exchange of Information
The exchange of information between the relevant tax authorities is another area which the 2014 Update has sought to amend considerably. It has been clarified that information which is not principally required for the purposes of a tax treaty may still be exchanged between different states either because such exchange is legal in terms of their domestic laws, or else due to mutual agreement between the relevant competent authorities. A request for information is valid where there is a reasonable possibility that the requested information will be relevant to an ongoing investigation, even if eventually turns out to be immaterial.
Other Changes by the 2014 Update to OECD Model Tax Convention
The title of Article 17 has been changed to read ‘Entertainers and Sportspersons’. Entertainers and sportspersons often perform activities in different states, thus a number of general principles have been laid down to establish the portion of their income derived from each State, having regard in particular to the timing of the income-generating event. It has also been clarified that a Contracting State which is entitled to tax a capital gain may do so in respect of the whole gain, irrespective of the fact that only a fraction of such gain may have accrued following the entry into force or replacement of the applicable treaty. Finally, it has been established that gains from the transfer of shares which derive the majority of their value from immovable property situated in the source state may be taxed in such state without any limitation.
