This paper examines four key questions in EU and OECD international tax law. It explains how the European Union addresses interest and royalty payments between associated companies in different member states, with a focus on avoiding double taxation. It outlines the main principles of the EU Interest and Royalties Directive, including the abolition of withholding taxes. The paper then defines the concept of a "beneficial owner" under OECD Articles 10, 11, and 12, clarifying who bears tax responsibility for dividend and interest income. Finally, it describes triangular transactions and explains how EU tax exemptions apply — and remain ambiguous — in such multi-party cross-border scenarios.
One of the critical aims of EU statutes regarding interest and royalty payments is to avoid potentially crippling double taxation. To ensure this, a resident of one member state (State A) who receives interest income from a source based in another state (State B) is exempt from taxation by State B. In general, "interest will be deemed to arise in the country of residence of the payer unless the debt on which the interest arises was incurred in connection with a permanent establishment in the other country."
The stated purpose of Article 11 is to prevent excessive interest payments and facilitate the free flow of capital between member states, unless "special relationship provisions expressly limit the factors to be taken into account in determining whether the interest is excessive by requiring the amount of excess to be determined with regard to the size of the debt on which the interest is paid." All member states are specifically prohibited from withholding taxes on royalty payments and interest payments arising within a member state (Taxation of cross-border royalty payments, 2013, EU).
The purpose of creating the EU was to facilitate commerce between member states and reduce trade barriers, including high tax rates and tariffs that inhibited business agreements and other transactions between member states. Setting clear terms for when interest can and must be paid and taxed clarifies the business arrangements between states and encourages interstate commerce by reducing the risk that a taxation policy within one state will result in excessive or double taxation upon an entity located in another state.
The EU Directive provides guidelines for resolving disputes between states or entities located in different states, minimizing potential points of contention and reducing fears that interstate transactions will fall foul of administrative red tape. Specifically, the directive "abolishes withholding tax on interest and royalty payments made between associated companies of different member states." It is further noted that "since the objective of the proposed action, namely setting up a common system of taxation applicable to interest and royalty payments of associated companies of different Member States cannot be sufficiently achieved by the Member States and can therefore be better achieved at Community level, the Community may adopt measures" to do so (Council Directive, 2003, EU).
According to the OECD, a beneficial owner of a dividend is one who has "the full right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass the payment received to another person" (DuMoulin, Dayan, & Steeves, 2012). In other words, the beneficial owner is the primary, end recipient of the dividend paid. The OECD Articles also note that while "such an obligation will normally derive from the relevant legal documentation, the facts and circumstances may also be relevant in showing that the recipient clearly does not have the full right to use and enjoy the income" (DuMoulin, Dayan, & Steeves, 2012).
A person is not a beneficial owner when he or she is "constrained by a contractual or legal obligation to pass on the payment received to another person," and will therefore not bear full tax responsibility for that payment (DuMoulin, Dayan, & Steeves, 2012). However, this "contractual or legal obligation to pass the payment received to another person must be related to the payment received" and does not apply to unrelated obligations the recipient may have regarding income as a debtor or as a participant in a collective payment arrangement (DuMoulin, Dayan, & Steeves, 2012). For example, if someone were required to pay a portion of all income to creditors, this would not negate his or her obligations as a beneficial owner.
"Multi-party cross-border deals and applicable EU exemptions"
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