Skattenytt nr 3 2006 s. 153
Anmälare: Mattias Dahlberg
Review of Jesper Barenfeld, Taxation of Cross-Border Partnerships. Double-Tax Relief in Hybrid and Reverse Hybrid Situations.
Jönköping International Business School (JIBS) Dissertation Series No. 25, Jönköping, 2005, 339 pages.
Jesper Barenfeld defended his doctoral thesis ”Taxation of Cross-Border Partnerships. Double-Tax Relief in Hybrid and Reverse Hybrid Situations” on 4 March 2005 at the Department of Law, Jönköping International Business School.1 I was the official faculty opponent. In this review there will be a presentation and an evaluation of the doctoral thesis.
The review has the following outline. In Section 2 there is general discussion on the subject of the thesis. Section 3 deals with the outline. Purpose, approach and delimitations are the subjects of Section 4. In Section 5 there are some remarks on language and formalities. Questions on methodology are the subject of section 6. Some specific issues are discussed further in Section 7. Final comments are given in section 8.
The book is now published by IBFD, Doctoral Series No. 9, Amsterdam, 2005.
2 The subject
The main title of the thesis is ”Taxation of Cross-Border Partnerships” and the sub-title is ”Double-Tax Relief in Hybrid and Reverse Hybrid Situations”. The thesis deals with the taxation of partnerships in an international environment. The classic problem in international tax law is international juridical double taxation. The effect of such double taxation is a severe impediment to international trade. International juridical double taxation can be described as a situation where:
the same person is liable to taxation
for the same income
in more than one state
for (almost) the same period of time.2
International juridical double taxation must of course be distinguished from economic double taxation, which refers to the double taxation of corporate profits: once at the corporate level (company taxation), and once at the shareholder level (typically as dividend taxation). Economic double taxation may also occur at an international level, with the company resident in one country and the shareholder resident in another country.
In his thesis, the author deals, at least at first glance, with international juridical double taxation, relating to the taxation of income from partnerships in an international context.
More specifically, the problem studied that gives rise to international juridical double taxation is the different tax treatment of partnerships in different countries. In some jurisdictions, partnerships are not treated as separate tax subjects: the profits of the partnership are taxed in the hands of its partners (”transparent”). In some jurisdictions, the partnerships are treated as separate tax subjects (”opaque”).
When a partnership is treated as transparent in one jurisdiction and as opaque in another, the author refers to that situation as being ”asymmetrical”. According to the author, asymmetrical taxation can be understood both in a broad sense and in a narrower sense.3 In a broad sense it can include every situation where the same income is taxed according to different tax systems in two (or more) countries. For the purposes of the author’s study, however, the expression refers to situations where a partnership is treated as transparent following the single-tax pattern in one country but as opaque following a double-tax pattern in the other state.
In principle, the author deals with two different forms of asymmetrical taxation: hybrid and reverse hybrid situations.
a) The hybrid situation
The basic problem of the hybrid situation is that both countries consider that the person liable to tax is a resident of that country. The earnings of the partnership will be taxed in country P in year one because it is a taxable entity in that state. The same earnings will be taxed in state R because the partnership in that state is regarded as transparent, and accordingly the partner is liable to tax on the profits in that state (R). There will also be taxation in year two of the profits distributed to partner A. In country P there will be a withholding tax on distributed dividends. This later distribution will in state R be treated as transferred funds that were already taxed in year one. As regards the taxation in year one, there will be double taxation, but not international juridical double taxation because it concerns the taxation of two different tax subjects: the resident partner in state R and the partnership in state P. Instead, it will be a case of (international) economic double taxation.
b) The reverse hybrid situation
The problem of the reverse hybrid situation relates to the fact that both countries consider the person liable to tax to be a resident of the other country.
Country P’s perspective: The partnership is transparent and taxation will follow the single tax pattern.4 Partner A will be taxed in year one on his part of the income of the partnership. There will (probably) not be any taxation on the distributions in year two.
Country R’s perspective: The partnership is opaque and taxation will follow the double-tax pattern.5 Country R will therefore tax the earnings of the partner in year two (dividend taxation).
The aggregate taxation of the partnership in a reverse hybrid situation may at first glance seem to follow the per se acceptable double-tax pattern. According to the author that is, however, not true on closer scrutiny. The taxation in the partnership country P follows the single tax pattern, and the income is therefore subject to full taxation in that state in year one. However, the taxation is (i) not for identical periods, (ii) the taxation may concern different subject matters (for example business profits for country P and dividend income for country R), and (iii) taxes may be different (tax on business income in country P and tax on dividends in country R).
In conclusion the hybrid and reverse hybrid situations may fail to comply with the generally accepted description of international juridical double taxation in the following respects.6
Different taxpayers: the partnership is liable to tax in one state, whereas the partner is liable to tax in the other state.
Timing mismatches: one country taxes upon earnings (year one), whereas the other country taxes upon distribution (year two).
Different income: business profits in one country and dividends in the other country.
Non-comparable taxes: taxes upon business profits in one country and dividend taxation in the other country, or perhaps personal income tax in one country.
All in all, in my view the hybrid and reverse hybrid situations give rise to excessive taxation if compared with a situation that is purely national. The resulting excessive taxation does not fall under the traditional description of international juridical double taxation. The problem of taxation in asymmetrical situations has been studied by the OECD in a report from 1999 – The Partnership Report (contained in Volume II of the loose-leaf edition of the OECD Model Tax Convention). That report has been important to the author and subject to a thorough analysis.
Tax treaties are the traditional way of solving or mitigating the problem of international juridical double taxation. The author covers how the OECD has dealt with partnership taxation in the OECD MTC, primarily in the commentary. The only substantial change of the OECD MTC itself is the inclusion of Article 23A para. 4 that deals with the avoidance of double non-taxation in asymmetrical situations. In Chapter 5 the author describes and comments the applicability of the OECD MTC in asymmetrical situations. Chapter 6 deals with the Swedish approach, or rather lack of such, in asymmetrical situations. The author deals with the Swedish case RÅ 2001 ref. 46 (”the Alecta case”) where he expresses criticism. The author also deals with Swedish tax treaty policy regarding partnerships and notes that in about 20 Swedish treaties the term resident of a contrac ting state is extended to partnerships where income is derived by such entities. The author rightly observes that this, however, is no general solution to all problems relating to hybrid and reverse hybrid situations.
The author also deals with approaches to preventing double taxation in asymmetrical situations, which will be discussed later.
Cf. para. 1 of the Introduction of the OECD Model Tax Convention (OECD MTC).
Barenfeld, Taxation of Cross-Border Partnerships. Double-Tax Relief in Hybrid and Reverse Hybrid Situations, Jönköping, 2005, pp. 119–120.
The expression ”single tax pattern” refers to a situation where the income is taxed only once, typically in the hands of the owners (Barenfeld, op.cit., p. 95 et seq.).
The expression ”double tax pattern” refers to a situation where the income is taxed partly in the hands of the entity and partly in the hands of the owners (Barenfeld, op.cit., p. 91 et seq.).
Barenfeld, op.cit., p. 131.
The book contains nine chapters and covers 339 pages (including lists of contents and abbreviations). Let me begin with a brief remark on the section levels. The author never goes further than section-level four, such as 126.96.36.199. In my view, the author’s choice in this respect is recommendable. An author using levels five (such as 188.8.131.52.3) or six definitively confuses the reader and very likely also himself.
Chapter 1 is the introduction and covers general issues such as background, purpose, delimitations and methodology. Section 1.7 deals with the subject of tax treaty interpretation. This is a relevant subject because the treatment of partnerships in tax treaties is dealt with in the book. Moreover as already mentioned the OECD has published important material on the general subject of the book, and the legal status of this public material has to be evaluated before embarking on a further study.
Chapters 2, 3 and 4 serve as a fundament for the forthcoming analysis. Chapter 2 deals with the legal nature of partnerships. It includes the history of partnerships and notes on the private law regarding partnerships in some jurisdictions. Taxation of cross-border structures is the subject of Chapter 3. For example, the author deals with the concept of double taxation and principles of double-tax relief. Section 3.4 covers principles of business taxation. The author illustrates double-tax patterns and single tax patterns. Section 3.5 deals with the classification of business vehicles for tax purposes. Chapter 4 deals with the author’s view on the meaning of asymmetrical taxation, and it is vital for the understanding of the forthcoming analysis of the book.
The applicability of the OECD MTC in asymmetrical situations is the subject of Chapter 5. This chapter contains both a description and a critical analysis of the OECD MTC. In this chapter the author mainly deals with entitlement to convention benefits, double-tax relief in hybrid situations and double-tax relief in reverse hybrid situations.
Chapter 6 deals with the Swedish approach to double-tax relief in asymmetrical situations. There is a thorough discussion on the case RÅ 2001 ref. 46, the ”Alecta case”. One of the questions in that case dealt with the right of a Swedish company to be granted a tax credit for income earned by transparent US companies. The Swedish Supreme Administrative Court (Regeringsrätten) decided that the Swedish owner was not entitled to the credit, the reason being that the income was not earned by the Swedish owner of the US transparent entities. A relatively small section of Chapter 6 deals with the treatment of partnerships in Swedish tax treaty law (Section 6.4). In my view, this interesting topic could have been further developed.
Chapter 7 deals with approaches to preventing double taxation in asymmetrical situations. The chapter is very short, only ten pages. Although an important part of the study, one could rightly ask whether it could not have been integrated into another chapter. The author presents different approaches and largely bases the discussion on studies by van Raad and Avery Jones et al.7
Chapter 8 is an extensive chapter (51 pages) dealing with the Swedish similarity approach. This is a highly interesting chapter and the author deals for example with the definitions in the Swedish Income Tax Act of a ”foreign legal entity” (utländsk juridisk person) and ”foreign corporation” (utländskt bolag). A final analysis is presented in Chapter 9. Here the author further discusses the two feasible ways, according to him, to resolve the problem with missing double tax relief in asymmetrical taxation.
Van Raad, Kees, General report in International Fiscal Association, Recognition of foreign enterprises as taxable entities, International Tax Congress of 1988, Volume LXXXIIIa, Kluwer Law and Taxation Publishers, Deventer, 1988, pp. 19 – 66, and Avery Jones, John F., et al. (including Bertil Wiman), Characterization of Other States’ Partnerships for Income Tax Purposes, Bulletin, 2002, pp. 288–320.
4 Purpose, approach and delimitations
The purpose of the study is ”... to identify and analyse problems related to double taxation of income attributable to cross-border partnerships in so-called asymmetrical situations de lege lata”.8 That means, according to the author, a reference to cases where the same partnership, in a cross-border owner/entity or source/ entity situation, is recognized as a taxable person in one country, but as transparent for tax purposes in another. According to the author ”transparent” refers to an entity that is not ”subject”9 to tax as such: instead the tax liability flows through to its owners. An asymmetric situation arises when countries have different views on who the taxpayer is.10
The purpose declaration of the thesis is clear and easy to grasp. Still, I would not say that it is the tax liability as such that flows through a transparent entity to its owners, as the author claims. Rather, it is the income that flows through the transparent entity to its owners, which are liable to tax on the received income.
The author deals with delimitations in Section 1.3. One delimitation will be discussed here. It deals with Community law (EC law). The author recognizes that Community law is of great importance in a large number of issues in the area of international tax law.11 However, he has chosen not to look at the problems from a Community perspective. In addition, the Community law perspective consists of several aspects. The author explicitly mentions a few of those perspectives. One of them is the development of the European Economic Interest Groupings (EEIG) and the European Company (Societas Europaea or SE). The establishment of such entities might eliminate risks for asymmetric taxation, according to the author. Another Community aspect relates to the fundamental freedoms, and perhaps especially the freedom of establishment. It is possible that some of the situations that the author deals with in his thesis may constitute an infringement of that fundamental freedom. I do not think it was necessary to completely leave this aspect out of the thesis. For example, when dealing with the different type situations at least a few of them could have been analysed from the perspective of non-discrimination. What is a bit more serious is that the author decided not to consider the classification issues relating to Community directives in the field of direct taxation. The Merger directive, the Parent/Subsidiary directive and the Interest/Royalty directive all deal with the problem of classifying juridical entities, including transparent entities. All of these directives are implemented in Swedish law, and the two first-mentioned directives have been so for quite some time. The author could for example have decided to deal with one of the directives in this respect as an illustration of the matter: why not the Merger directive?
It could be mentioned that the author in Section 1.2 on purpose and approach12 mentions three potential sources of law that can have an impact on the taxation of the income: (i) the legislation of the partner country, (ii) the legislation of the partnership country, and (iii) if there is another jurisdiction than the two just mentioned, the legislation of the source country. In addition, according to the author, bilateral tax treaties may have an impact. One could of course argue that Community law is part of the national law of the Member states.
Barenfeld, op.cit., p. 20.
In my view, the term ”liable” to tax should have been used instead of ”subject” to tax, which refers to the taxable income.
Barenfeld, op.cit., p. 20.
Barenfeld, op.cit., p. 24 et seq.
Barenfeld, op.cit., p. 22.
5 Remarks on language and formalities
The author has chosen to write his thesis in English. This is a good choice. An obvious reason is that the subject has major international implications. The questions that he deals with are also of interest to an international audience. Moreover, he deals with sources of law that are genuinely international, such as the OECD MTC. To some extent he also deals with national Swedish tax law. No doubt, it is difficult to analyse law provisions in Swedish using another language. Translating legal provisions into another language is difficult and time-consuming. When dealing with the provisions of Swedish law, the author has chosen to include the Swedish language version in footnotes.
There are mistakes and misprints, but they are in general not of the kind that make it difficult to understand the author. On page 130 the author in an example refers to country P (partnership) where the reference obviously should be to country R (residence). On page 24 he states that ”[m] issing double-tax relief, however, merely constitutes one side of the ’asymetri coin’”. A symmetric coin no doubt has two sides, but how many does an ”asymetri coin” have?!
In conclusion, it is no doubt a considerable achievement that the author has written his thesis in English.
6 Methodology and other research and materials
The author’s view on methodological issues is clear and well-presented in Section 1.6. Sub-section 1.6.3 deals with the interpretation of Swedish tax law, and for Swedish readers the well-known discussion on the relevance of public inquiries, which is perhaps a bit superfluous. Still, the author lets the reader know that he has knowledge also of this area, and this part of the thesis is relatively short.
In recent years there have been several major studies in the field about which the author has written his thesis, at least in an international perspective. Among those studies a mention should be made about the 1999 OECD Partnership report, the extensive article by John F. Avery Jones et al. (Bertil Wiman is the Swedish co-author) and Michael Lang’s critical analysis of the 1999 OECD report. The author has made good use of all this material.
The author has made use of extensive material dealing with his subject. I have no major remarks on his list of references. He has obviously made good use of the excellent tax law library at the Jönköping International Business School. It could be noted that he has used the third edition of the English language version of the Vogel Commentary on double tax conventions.13 However, there is a fourth edition of this important commentary in German, dating from 2003.14 It shows from the bibliography of the thesis that the author is capable of reading German, and he could therefore have used the latest version.
Vogel et al., Klaus Vogel on Double Tax Conventions: a Commentary to the OECD-, UN-, and US Model Conventions for the Avoidance of Double Taxation on Income and on Capital: with Particular Reference to German Treaty Practice, 3. ed., London, Kluwer Law International, 1997.
Vogel/Lehner et al., Doppelbesteuerungsabkommen der Bundesrepublik Deutschland auf dem Gebiet der Steuern vom Einkommen und Vermögen: Kommentar auf der Grundlage der Musterabkommen, 4. völlig neubearb. Aufl., München, Beck, 2003.
7 Specific issues
7.1 The scope and title
The main title of the book is ”Taxation of Cross-Border Partnerships” and the sub-title is ”Double Tax Relief in Hybrid and Reverse Hybrid Situations”. Regarding the main title one could ask if there is such an entity as a ”cross-border partnership”. I must admit that I am a bit sceptical. If there is a partnership, that entity must be recognized in at least one sovereign jurisdiction. Rather, the author deals with the taxation of partnerships and their owners in cross-border situations, for example, where the partnership is treated as a tax subject in one state and the owners, resident in another state, also are treated as tax subjects regarding the profits of the partnership.
One could argue whether the sub-title is adequate. Is the author really dealing with matters of double taxation? In Section 3.2 he deals with the meaning of double taxation, primarily international juridical double taxation but also economic double taxation. Several of the tax situations that the author deals with later on in his study clearly do not deal with international juridical double taxation, at least not according to the classic description that it concerns the same tax subject. Rather, the author deals with the general problem of excessive taxation, albeit sometimes in the guise of double taxation.
7.2 The applicability of the OECD Model Tax Convention in Asymmetrical Situations
Chapter 5 deals with the applicability of the OECD Model Tax Convention in asymmetrical situations. As previously mentioned, the OECD in 1999 published the report ”The Application of the OECD Model Tax Convention to Partnerships”. This report is subject to both description and analysis in Chapter 5. The 1999 report has been subject to criticism by Michael Lang in a publication from 2000, which the author also discusses. The author notes that the 1999 report resulted in several substantial changes to the Commentary, most notably to Article 1 and Articles 23A and 23B. The only amendment to the actual treaty text was the introduction of Article 23A para. 4.
One problem, which the author deals with is the entitlement to convention benefits. Article 1 of the OECD MTC states that the convention shall only apply to persons who are residents of one or both of the Contracting States. For a partnership to be covered it has accordingly to constitute a ”person” (according to Article 3) and a ”resident” (according to Article 4). It now follows from the Commentary to Article 3 that partnerships are covered by the term ”person”. However, what is meant by the term ”partnership” is not spelled out. Of course in view of different approaches in different countries it is understandable that the OECD cannot provide a definition. Still, some essential features of partnerships could have been discussed, for example in the Commentary.
Article 4 of the OECD MTC stipulates that the term ”resident of a Contracting State” covers any person, who under the laws of a state is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This definition is problematic in relation to national law where a partnership is not treated as a taxable entity and where it is the partners that are liable to tax on behalf of the income of the partnership.15 The author notes that according to national law in Germany and in Sweden, partnerships are not tax subjects. In his view it is indisputable that such a situation does not comply with the conditions of Article 4 of the OECD MTC. In this case it is logical to turn to the characteristics of the owners of the partnership. A core objective of a tax treaty, according to the author, is to ensure treaty protection for the person liable to tax in the two states. Provided that they are liable to tax as such, the partners are the persons liable to double taxation. In such a case the partner is covered by Article 4 and should therefore be entitled to treaty benefits. This is also explicitly stated in the Commentary to Article 4, but the author finds that this followed already from the treaty article. A more problematic situation appears where partnerships in one or more jurisdictions are treated partly as transparent and partly as opaque. The author advocates the approach to recognise the partnership as a resident to the extent that it is liable to tax.
Barenfeld, op.cit., p. 139 et seq.
7.3 The Swedish Approach to Double-Tax Relief in Asymmetrical Situations
In Chapter 6 the author deals with the Swedish approach to double-tax relief in asymmetrical situations. This chapter will no doubt constitute interesting reading for many Swedish tax practitioners. The Alecta case, RÅ 2001 ref. 46, is thoroughly discussed, and rightly so. A Swedish company (X AB) owned real estate in the United States through limited companies registered in the United States. The ownership of the real estate in the United States was reorganized. X AB would own United States real estate, firstly, through a Swedish limited partnership that was transparent for tax purposes in Sweden, and secondly through US limited partnerships (LPS) or US single-member limited liability companies (SMLLC). Regarding the SMLLC, the owners could do so, according to the check-the-box regime. Barenfeld’s analysis is well-developed and he supports the view that Swedish national law, the Foreign Tax Credit Act, is in need of amendment. One can only support this view.16
Amendments to the Foreign Tax Credit Act (avräkningslagen) have now been implemented. Cf. Government bill prop. 2005/06:17 Avräkning av utländsk skatt.
8 Final comments
The subject of the thesis is a good choice. It is interesting and the part dealing with Swedish law has not been subject to previous scholarly analysis in this format. The reasoning is generally clear and easy to follow. Some introductory parts of the book are perhaps a bit superfluous, but may still be justified because they serve to put the specific problems discussed in their wider context. Some of the terminology and other analytical tools follow from previous research, such as the 1999 OECD Partnership report. However, the author also makes a critical analysis of such previous research, and he also examines fields of law, such as Swedish law on the subject, that has never been subject to such deep scholarly analysis. The author has decided not to deal with matters of Community law, for example how partnerships are treated in directives on direct taxation, such as the Merger directive. In my view, the author should have elaborated somewhat further on that subject.
In conclusion, this is an interesting and well-written book which I strongly recommend.
Mattias Dahlberg är docent och universitetslektor i skatterätt vid Juridiska institutionen, Uppsala universitet.