[Summaryofresults:]DasBetriebsstättendiskriminierungsverbotimInternationalen

Steuerrecht

[Non‐discriminationofPermanentEstablishmentsinInternationalTaxLaw]

ChapterI:Problemandresearchquestions

Non‐discriminationprovisionsaslaiddowninallbilateraltaxtreatiesaswellastheEC

treaty are increasingly important for cross‐border activities and thus international

businessandtrade.Althoughtheprovisionsarenotnewatall(datingbacktotheearly

20thcenturyintaxtreaties(Austria‐Prussia)andthe1957treatyofRome),thereisstill

much inconsistency and number of unanswered questions in respect of their general

applicabilityandscope.

Asthelatestcomprehensiveworkonthetopicdatesbackto1986,itisnecessarytolook

intotheissuetodiscussnewerdevelopmentsaswellastryingtofindsolutionsforyet

unsolvedquestions.

Thethesisfocusesonthenon‐discriminationprovisionofarticle24paragraph3ofthe

OECD‐model as the practically most important provision regarding cross‐border

activitiesandthe„respective“provisionintheECtreaty,whichisidentifiedasarticle43

EC in accordance with the European Court of Justice’s judicature, the „freedom of

establishment“.

Besides, the thesis is concernedwith a thorough examination of the relationship and

interdependencesamongnon‐discriminationprovisionsintheOECD‐modelitselfandto

theECtreatynon‐discriminationprovisions.Themainobjectiveinthelattercontextis

todeterminethesimilaritiesanddifferencesregardingthescopeofthedifferentrules,

possibilities to justify identifieddiscriminationsandhowthe legalsystemsofbilateral

treatiesandthemultilateralECtreaty interact incontextofnon‐discriminationofPEs.

As a result of the analysis, the consequences of being subject to both legal systems is

shown for the taxpayer and member states of the EU, taking several Austrian tax

provisionsasanexampletoshowpotentialproblemsunderoneorbothsetsofrules.

ChapterII:Thenon­discriminationarticleintheOECD­MC

TheOECD‐MC,theCommentaryandTreatyInterpretation

The OECD‐MC forms the basis of the analysis as most of the roughly 3000 bilateral

treaties in force follow thismodel in oneway or the other, while the other available

models,especiallytheUNmodelconvention,isdirectlybasedupontheOECD‐modelas

well. As the analysis aims at the general understanding of non‐discrimination in

internationaltaxlawandtriestodiscussseveraldogmaticquestionsinthisrespect,itis

unnecessary to focus ononly a numberof specificDTCs.A couple of general remarks

have tobemadeon thepurposeandroleof theOECD‐MC in the international tax law

contextaswellastheprinciplesofinterpretationoftaxtreaties.

In the firstplace,DTCsarepartof the internationalpublic lawregimeandhave tobe

interpretedaccordingly.Forastart,theprinciplesoftreatyinterpretationaslaiddown

in theViennaConventionon theLawofTreaties (VCLT)are tobeheeded.Aside from

these principles, article 3 paragraph 2 OECD‐MC is amost important interpretational

clause inherent in the model itself (and treaties based upon it). The meaning of this

clauseis,however,disputedinacademicliterature:oneschoolderivesfromittheidea

of supremacy of interpretation based ondomestic law in order to determine the true

meaning of undefined terms in a treaty, while the other claims that there is no such

supremacy, but a subordinate right to use domesticmeaning only in cases where no

other solution can be derived from the context of the treaty provisions. Despite the

seemingly diametrically opposed views, it can be shown that the actual practical

differences are comparably little, as there is no disagreement about the fact that a

meaning following fromthe treatycontext issuperiorand, if itcanbe found,doesnot

allowtakingdomesticmeaningintoaccount.Themaindifferencethenbecomeshowthe

applicable “context” of the treaty is to be understood: if one draws the line of treaty

contextratherwide,thereis littleroomfor lookingintodomestic law; it isshownthat

this view is to be preferred in order to achieve the aim of the treaty and minimize

conflictsofinterpretationbetweenthepartiestoaDTC.Thismeansthatthe“contextof

atreaty”article3paragraph2refersto is tobeunderstoodasbeingmuchwiderthan

theterm“context” inarticle31VCLT,whichisverynarrow,but innowaydetermines

themeaningoftherespectivetermintheOECD‐MC,whichatleastcomprisesallmeans

ofinterpretationincludedinarticle31andarticle32VCLT.Thisalsosolvestheissueof

whether the OECD‐commentary is to be regarded as part of the “context” of a treaty

withinthemeaningof theVCLT:therecanbenodoubtaboutthe fact thatthealready

existingversionoftheCommentaryatthetimeoftheconclusionofatreatyformsapart

of the context of the treatywithin themeaning of article 3 paragraph 2. A “dynamic”

referral to the latest commentary at the time of any application of the treaty (as

promotedbytheCommentaryitself),however,cannotbeinferredfromanyprovision.

Thenon‐discriminationprovisionintheOECD‐MC

Preventionofdiscrimination isan importantgoalofanydoubletaxtreaty.Thewayof

the OECD‐MC to deal with this issue, however, is not to introduce one general non‐

discriminationprovisiontocoverallitspossibleforms,buttodefinequiteaccuratelya

handfulofspecialcriteriawhichmustnotleadtodifferentorlessfavourabletreatment

with regard to taxation. This system of non‐discrimination clauses importantly goes

beyond the mere objective of prevention of double taxation, and indeed also goes

beyondthescopeofthedistributiverulesincludedinDTCs.Formally,itworksthesame

wayastheprovisionsagainstdoubletaxationthatarelaidoverdomestictaxrulesasa

“stencil”anddisallowsapplicationoftherespectivedomestictaxprovision;materially,

however, it is important tobear inmind that thenon‐discriminationprovisionsapply

“after”applyingthedistributionandmethodarticlesofatreaty.Therefore,anapparent

discrimination inherent in domestic tax law, which must not be applied in a specific

situationasitwouldbeagainstthedistributiverulesofanapplicableDTC,cannotlead

toapplicationof thenon‐discriminationarticle,as the issue isalreadysolvedby those

rules.Obviouslythisdoesnot,however,meanthatwheneveronecountryexercises its

taxing rights in accordance with the distributive rules of a tax treaty, discrimination

cannot occur. Quite on the contrary, the non‐discrimination provisions can only be

applied in this situation. This issue is examined further and more deeply when

discussing the relationshipbetweenarticle7andarticle24paragraph3of theOECD‐

MC:thisrelationshipleadstoproblems(especiallyaftertheadoptionoftheAOAbythe

OECD),whichshouldbestbedealtwithonthelevelofcomparabilitytest.

Inorder tocome toadeepunderstandingof thenon‐discriminationclauseonPEs,all

non‐discrimination clauses of article 24 OECD‐MC are examined and analysed with

regard to the scope of their application, the question of comparability based on the

respectivelydefinedcriteriaandthelegalconsequencesaswellassomespecialissuesof

each provision, before discussing in some detail the relationship and interconnection

betweenthedifferentparagraphs.

As regards the non‐discrimination based on nationality, especially the question of

applicability tocompanies is raised:companiesderive their “nationality” fromthe law

according to whose rules they are created and are thus nationals of the respective

country.This implies thata company’snationality cannotbechanged:e.g. a changeof

the place of effective management neither affects the legal personality (unless the

residence countrydoesnotallowsuchchange),nor thenationalityof a company.The

more difficult question is, whether there is a concept of “covert” discrimination,

meaningthatalessfavourabletreatmentbecauseofacompaniesresidenceisheldtobe

effectivelythesameasonebasedonitsnationality.Thisideaisclearlytoberejectedfor

DTC based on the OECD‐MC after 1992, where the comparability “with respect to

residence”wasexplicitlyincludedinarticle24paragraph1.Thesameapplies,however,

for DTCs not including this expression: Firstly, there is no concept of “covert”

discrimination in article 24: quite on the contrary, it very clearly states the

circumstances which must not be the reason for different treatment. Secondly,

discriminationbasedonaperson’sresidenceisdealtwithinarticle24paragraph3and

thuscannotbe includedinthenon‐discriminationprovisionsregardingnationals,as it

wouldunderminetheeffectivenessoftheformerruleandrenderitwidelymeaningless.

There isalso thequestionof thescopeof thenationality‐non‐discriminationprovision

withregardtothe“quality”ofthedifferenttreatment:unlikearticle24paragraph3,it

prohibitsboth“other”and“moreburdensome” treatmentofnon‐nationals.Aseriesof

different solutions to this riddle has been proposed to date, but I think yet another

shouldbepreferred.Tomymind, ithas tobesolvedby lookingat thedifferentscope

withregardto thesourceofadifferent treatment:article24paragraph1 includesnot

only different taxation, but also “any requirement connected therewith”. Thus the

provision is triggered by either “more burdensome taxation” or alternatively “other”

treatment as regards “administrative” measures (i.e. requirements connected with

taxation).

Relationshipbetweentheparticularnon‐discriminationclausesinarticle24

It is submitted that theparagraphsofarticle24are inprinciplemutuallyexclusiveas

regards their scope of application, due to the detailed set of facts they each apply to.

Nonetheless, situations where two or more paragraphs may be applicable are not

completely unthinkable. In these cases, as a consequence of the provisions’ mutual

exclusivityandtheapparentlackofpriorityrulesincludedinarticle24,theapplicable

non‐discriminationclausescanbeappliedinparallel.Applicabilityoftwodifferentnon‐

discriminationclausescanoccurasaconsequenceoftwodifferenttypesofsituations:in

thefirstcase,nationaltaxlawsmayconnectacertaintaxdisadvantagetotheoccurrence

of two ormore factors alternatively, e.g. treating foreign taxpayers less favourably if

they arenon‐nationals or non‐residents; in this case, both article 24paragraph1 and

paragraph 3 can bring the taxpayer relief from the discrimination (as long as he also

upholdsapermanentestablishment in the taxingState). In the secondcase, a country

may tie a certain disadvantage to the cumulative existence (or lack) of certain

circumstances: this appears to be most common for thin‐capitalisation rules, which

apply if both the creditor and the shareholder are non‐residents and are indeed the

sameperson.Inthiscase,adisadvantageisnotincurredonthetaxpayermerelybecause

of one incriminated factor, but two of them, which are part of two different non‐

discriminationnorms:itisclear,however,thatinprinciple,botharticle24paragraph4

and paragraph 5 are applicable under these circumstances. Until recently the OECD‐

commentary had argued in this situation that article 24 paragraph 4 would take

precedence over article 24 paragraph 5. This has rightly been criticized and thus

changed,however.Similartothissituation, it isalsopossiblethatacountrymakesthe

application of certain benefits conditional on two or more factors, thus treating

taxpayers less favourably who do not meet both requirements, e.g. residence and

nationality.Inthiscase,itisalsoclearthatthemaintestforexistenceofdiscrimination

undertheruleofoneparagraphofarticle24cannotbefulfilled–ifonementallyadds

residencetothesituation,thebenefitwouldstillnotbeobtainable–itcouldbedifficult

toclaimthereforethatadiscriminationisbasedonnationality.However,itisveryclear

thatinthiscasetheproblemisnotthatitwasnotbasedonnationality,butthatitwas

notonly based on nationality. There can be no doubt therefore that the provision is

applicable,eventhougharticle24paragraph3may–e.g.becausethere isnoPE–not

coverthelessfavourabletreatmentoftheforeigntaxpayer.Afterall,itisveryclearthat

the different non‐discrimination‐norms forming article 24 are not exclusive but

complementingeachother.Thisbecomesobviousundercertainconditions,whilethey

aremutually exclusive inmost situations as they cover discrimination resulting from

clearlydistinctfactors.

ChapterIII:Non­discriminationofPEsunderEClaw

In comparison to the non‐discrimination clause in the OECD‐MC, non‐discrimination

underEClawhasseveraldistinctfeatures:forastart,mattersoftaxationingenerallie

withinthesoleauthorityofthememberStates,andnotregulatedspecificallybytheEC

treaty. However, the European Court of Justice (ECJ) has set boundaries for member

States,mostnotablybasedon the fundamental freedomsof the treaty,which are – in

their core – non‐discrimination provisions not completely unlike article 24OECD‐MC.

Unlike the tax treatyprovision, the fundamental freedomsarenotwritten toprecisely

cover only very specific situations, but ratherwide. Itwas therefore left to theECJ to

determinetheirfundamentalscope.Amongotherthings,thefundamental freedomsgo

beyond the tax treaty provisions in that they cover “covert” discrimination and even

“non‐discriminatory” restrictions under certain circumstances and that they are

addressing both the home and the source country. The basic problemof applying the

freedoms inmattersof taxation canbe seen in the issueof comparabilityof residents

andnon‐residents.Inthisrespect,theECJdistinguishesonthebasisoftheobjectiveof

the restrictive domestic provision: if it aims to take “personal circumstances” into

account,residentsandnon‐residentsareingeneralnotcomparablesituations.If,onthe

other hand, a provision applies irrespective of personal circumstances and results in

differenttreatmentfornon‐residentsascomparedtoresidents(allotherfactorsbeing

equal for the pair of comparison), they are generally accepted to be in a comparable

situationwithregardtothisprovision,renderingitdiscriminatory.Ithastobeadmitted

that theECJ is not always very clear about this distinction and sometimes appears to

applydifferent standards.Also, indetermining comparability, theECJ sometimesdoes

take factors in two affected countries into account, while it applies a “single country

approach”todeterminecomparabilityinmostcases.

Traditionally, the ECJ applies a “vertical” comparison, i.e. comparing a certain cross‐

bordersituationwith thesame,butmerelydomesticsituationand lookingatwhether

thecross‐bordersituationistreateddifferentlyunderthetaxingcountry’sdomesticlaw.

However, theCourthasalsouseda “horizontal” comparisonseveral times, inwhich it

comparesonecross‐bordersituationwithanotherone.WithregardtoPEs,thereisan

additional peculiarity: the idea of comparability between PEs and subsidiaries in the

Stateof source.Thishasbeendiscussed inacademic literaturealreadysince theavoir

fiscalcaseandwasfinallyratherclearlyexpressedbytheCourtinCLT­UFAwithregard

to the inbound‐situation. In theoutbound‐situation,however, theECJhasnotyetused

this concept and indeed appears unlikely to do so in future cases, as it has (at least

implicitly) rejected theapproachonseveraloccasions.This isespecially important for

themostprominentcross‐borderPEcases inEuroperegarding losses. Inanumberof

cases, the ECJ had to dealwith the question,whether losses incurred by a foreignPE

havetobetakenintoaccountinthehomeStateofthemultinationalenterprise.TheECJ

seemingly applied the principles established in itsMarks& Spencer judgement to PEs

with virtually no difference, concluding that only such losses have to be allowed for

deductioninthehomeState,whicharenotavailableforanyreliefinthememberState

wherethePEisestablished–socalled“final”or“permanent”losses(see,especially,Lidl

Belgium). Taking a closer look and critically examining the decisions, it becomes

obvious,however,thatthiscannotbetherightthresholdfordeterminingforbiddenor

acceptable discriminations. It is submitted that the idea of distinguishing between

“temporal”and“final”lossesisthewrongway,ifnotamythaltogether:therightwayof

distinguishing would be to look at whether the home State applies discriminatory

measuresinthefirstplace,regardlessoftheoutcomeinsynopsiswiththesourceState

rules(unlessthetwoaresystematicallytiedtoeachother inordertoreallydealwith

theissueofdoublelossreliefandnon‐relief,whichisnormallynotthecase;ingeneral,

taxtreatiesdonotregulatetheissueoflossesspecifically, leavingittoeachcontractor

to interpret the provisions on their own – especially in case of application of the

exemption method: it is open to each country to use “income exemption” or a “tax

exemption”). Thus, it was right of the ECJ to dismiss the claim of forbidden

discriminationintheKankenheim‐judgementdespitethefactthatthetaxpayerendedup

with no loss‐relief in either country. At the same time, it is submitted that the ECJ’s

decisioninLidlBelgiumtodismisstheclaimofthetaxpayerwaswrong,eventhoughhe

couldactuallyattainedreliefinthesourceState.Arguably,theonlycorrectwaytodeal

with foreign PE losses is to give relief in the home State and establish a recapture

mechanismtotaxatthetimereliefisalsoobtainedinthesourceState.

Theinbound‐casesinvolvingtaxationofPEsthattheECJhadtosolvewerecomparably

clear,thelatestbeingtheabovementionedjudgementinCLT­UFAregardingtaxationof

“dividends”distributedbyaPEtoitsheadoffice.Itcanbeseenfromthatlineofcaselaw

that the scopeof applicationof article43, the freedomofestablishment, isverymuch

congruentwitharticle24OECD‐MC,althoughtheformerincludesasophisticatedsetof

written and judgement rules regarding justification of prima facie discriminations. In

general terms, the EC non‐discrimination provisions go far beyond the scope of

applicationofthetaxtreatyprovision,butthiswidescopeisthenreducedbytheability

ofmemberStatestojustifytheirdiscriminatorymeasures,leadingtoasimilaroutcome

inmanycases.However,bothpersonalandobjectivescopeofthetwocirclesof lawis

different.

Therelationshipbetweenfundamentalfreedomsandtreatynon‐discrimination

In principle, the EC treaty and tax treaties are part of public international law (or an

alleged “international tax system”) and exist as two separate legal circles, which

independentlyputboundariesonthememberStates/contractingpartieslegalabilityto

drawtheirdomestic(tax)laws.However,fromthememberStatespointofview,EClaw

assumespriorityoverbilateraltreatiesasaconsequenceofitsdirecteffectondomestic

law, which also renders domestically binding treaty provisions ineffective insofar as

theydonotcomplywithEClawrequirements.Asaconsequence,memberStatesofthe

EU have to take their obligations from the EC treaty into account in drafting and

concludingbilateraltreatiesbothwithothermemberStatesandthirdStates.Thisistrue

forallbilateral treaties. In thespecial caseof tax treaties,however, thisappears tobe

lessofaproblem,asDTCsworkasstencilstobelaidoverdomestictaxrules,thusonly

abletorestrict,butnottoexpandtaxation,whiletheECtreatyequallyonlyputslimits

ondomestictaxationanddoesnotrequireittobeextended.Therefore,complyingwith

EClawcannotaffectamemberState’sobligationsfollowingfromataxtreaty.

However,thereareinterestingpossibleinterdependenciestobefoundwheretaxtreaty

non‐discriminationrulesapplybutforonereasonortheother,EClawdoesnot:article

24 appears to increase the scope of application of the fundamental freedoms under

certaincircumstances.Ofcourse,bilateraltreatiesareunabletochangetheECtreatyor

toindeedwidenitsscopeonasupranationallevel.However,taxlawsarealwaysapplied

on national (domestic) level. The same is true for the fundamental freedoms: despite

being European‐wide and interpreted by the supranational ECJ (which is beyond

bilateralagreementsmadebycertainmemberStates intheirowncapacity), theyhave

tobeappliedbynationalauthoritiesandcourts,whicharealsoboundbybilateraltreaty

provisions.Thusdomestictaxrules,whicharefoundtobediscriminatoryunderEClaw

(but not under tax treaty law by itself, e.g. in case of covert discrimination), despite

being only barred from being applied to EC nationals initially,may not be applied to

certainnon‐EU‐nationalseither,astheyarecoveredbyataxtreatynon‐discrimination

provision.Asanexample,considerthecaseofGermany’s§8aKStG(oldversion),which

establishes its thin capitalisation rule: the rule was held to be against article 43 EC

treatyandthusinapplicableasfarasEU‐nationalswereconcerned.Accordingly,itcould

not be applied to German nationals either, regardless of their residence. However,

although article 24 OECD‐MC did not disallow this specific thin capitalisation rule, it

forbidsdifferenttreatmentbasedonnationality:thus,athirdcountrynational(covered

byaDTCwithGermany includinganon‐discriminationprovision following theOECD‐

model, but not by article 43 EC treaty) who is a resident in the same country as his

Germancounterpart(whocouldavoidbeingtackledby§8abyrelyingontheECtreaty)

could argue that he was being treated differently as he could not claim the benefit

following from the EC treaty in the same way the German national could. As a

consequence of that, Germany arguably would have to grant him the same rights

unilaterallyandcouldnotapply§8aKStG.Thisdoesnotactuallymean that the third

countrynationalwouldbecoveredbyECtreaty,butineffectgiveshimthesamerightto

notbeing coveredbyaprovision thathasbeen found tobeagainstEC law.The same

works in different situation with the PE‐non‐discrimination provision: Where a US‐

company operates through a PE in Austria and receives dividends distributed by a

subsidiary,where theparticipation is attributable to thisPE, thequestionof relief for

dividendsarises.Inameredomesticcase,dividendswouldbeexempt;asaconsequence

of the freedom of establishment, the same applies (in principle) if the distributing

companyisresidentinamemberState.TheUSparentcannot,however,invokethisrule

directly; thus, article 24paragraph3 of theUS‐AUT treaty comes intoplay: as theUS

companyistreatedlessfavourablybynotreceivingdividendexemptionfromdividends

distributedbyaforeignsubsidiaryasaconsequenceofitslackofresidenceinAustria(if

itwere resident, itwould arguably be covered by the EC treaty) despite having a PE

there, article 24 paragraph 3 grants it the same benefits that an Austrian company

enjoys,eventhoughanAustriancompanyonlyenjoysthesebenefitsasaconsequenceof

theECtreaty.Astheseexamplesshow,thereisasofaronlycursorystudiedpossibility

of interactionbetween theEC treaty and tax treaty provisions, in effect resulting in a

widening of the scope of application of the fundamental freedoms. This effect is not,

however, generally available under all circumstances, but always depends on the

conditionslaiddowninnon‐discriminationclausesapplicableunderconcreteDTC,thus

remainingrestrictedtoratherspecialcases.

It has been frequently argued in academic literature as well as by practitioners that

treatynon‐discriminationprovisionsoughttobeinterpretedaccordingtotheECJ’scase

lawonthefundamentalfreedoms,expandingtheirscopetocovertdiscriminationandso

forth. This notion is clearly to be rejected, evenwith regard to tax treaties concluded

between member States of the EU: there is no good argument to do so. Neither the

wordingnor theobjectivesofbilateral tax treatiessuggestsuch interpretation; indeed

both are heavily opposing it. Nor do the fundamental freedoms require it: they are

effective without the need to influence tax treaties in order to indirectly change

domestictaxation;theychangeitdirectlywhereneeded.

ChapterIV:Criteriaofthenon­discriminationprovisionregarding

permanentestablishmentsintheOECD­MC

Partfourofthethesisisconcernedwithanindepthanalysisofthefeaturesofthemost

important non‐discrimination provision in the OECD‐model in practice. Article 24

paragraph 3 OECD‐MC states that “taxation on a permanent establishment which an

enterprise of contracting State has in the other contracting State shall not be less

favourablyleviedinthatotherStatethanthetaxationleviedonenterprisesofthatother

Statecarryingonthesameactivities”,followedbythesecondsentencewhichworksas

an exception from the scope of the article as regards personal allowances, reliefs and

reductions on account of civil status or family responsibilities. The structure of the

article isbasicallymirroredby thestructureof theanalysis,which firstdealswith the

personal and objective scope of application, followed by an inquiry into the

comparability test to be used when testing provisions for discrimination under the

provision.Followingthis,thegeneralscopeofprotectiveeffectandthemeaningofthe

exceptionlaiddowninthesecondsentenceofarticle24paragraph3areexaminedand

a lengthy discussion of the possibility to apply the principles and several specific

grounds of justification establishedby theECJ to article 24paragraph3 of theOECD‐

model,withanadditionalviewonhowjustificationworksinconstitutionallaw.Chapter

IV is concluded by an analysis of the consequences of application of the non‐

discrimination clause to domestic tax rules, looking atways to replace the prohibited

rule, especially taking constitutional issues regarding the authority of national courts

andadministrationtoformsuchreplacementruleswithoutparliamentintoaccount.

Onallstagesof thischapter, theEC lawperspective isalsobrought intothepicture in

order to recognize fundamental differences aswell as similarities between tax treaty

lawprovisionsandEClawprovisionsondiscrimination.

Personalscopeofapplication:“enterprise”and“permanentestablishment”

As regards the term “enterprise”,much has already been said in academic literature.

Someofthediscussionsappeartoberathermeaningless,however;as,e.g.thequestion

whetherarticle3paragraph1 letter cOECD‐MCconstitutesa “definition”of the term.

This is generally and rightly understood as not being the case; however, autonomous

interpretationof the term isnot rendered impossibleby that finding.Rather, thevery

cleargeneraloutlineofwhatisregardedtobeanenterpriseputsstrongboundarieson

which national meaning could possibly applied to the term, if no autonomous

interpretationcanbefound.Iwouldadvocateawidelyautonomousinterpretation(with

an exception only for very peculiar cases,where no solution can be found thatway),

whichtakesitsbasisfromthewordingofthe“explanation”(i.e.“thecarryingonofany

business”), identifying as the very core of the term to be an “active operation” rather

thanmere passive operation as propertymanagement. This explains that the term is

also independent of distributive rules in a DTC, e.g. dividends can be received as a

consequence of the carrying on of a business, even though it is difficult to see how a

mere holding company is actually carrying on a business unless one regards their

subsidiaries activities as its business. Therefore, an enterprise may also come into

existence despite the application of the distributive rule of article 6 OECD‐MC rather

thanarticle7,asarticle6isalexspecialis,covering(amongothers)situationswherean

activeoperationisindependentlycarriedoutonamarket,eventhoughitisconnectedto

immovable property. The attribution of an enterprise to “one contracting State”

normally does not result in any difficulties: this is determined by looking at the

residenceofthepersoncarryingonthebusiness;incaseofapartnership,eachpartner

iscarryingonhisownbusiness,whichisthus“attributed”tohishomeState.

The term“permanentestablishment”hasbeendefined inaverydetailed,yet far from

flawless way in article 5 of the OECD‐model. It is thus undisputed that domestic

interpretationsofthesameorsimilartermswhichcanbefoundinnational legislation

cannot affect the interpretation of the treaty term. The same has to be true for those

termsusedinparagraph2ofarticle5toillustrateitsmeaning.Thus,domesticmeanings

of terms as “branch”, “place of management” or “office” cannot be used to find a PE

existinginaconcretesituation.Theydonotaddanythingnewtothegeneraldefinition

incorporated in paragraph 1, being simply examples for better understanding of it.

Normally,domestictaxlawscontainsimilarterms,which,ingeneral,aredraftedwitha

widerscopeofapplicationsoastoguaranteethatthecountrywilltaxincomewhenever

it is allowed to do so under an applicableDTC. Certain terms, like branch or place of

management, may serve additional functions and have specific legal consequences

under domestic law; all thismust not affect the examination of the existence of a PE

undertaxtreatyrules.Ingeneral,aPEconsistsofafixedplaceofbusiness,where“fixed”

istobeunderstoodasbothcontainingalinkacertaingeographicalplaceandacertain

degree of permanency. The former is to be understood as not requiring the place of

business tobeactuallyphysically fixed toone specificplace,but rather tobe strongly

linkedtothegeographicterritoryofoneState.Thus,ashipoperatingonaninlandlake

may be regarded a PE of that country, despite a lack of physical fixation to a certain

geographicpoint.Asregardsthedegreeofpermanency,noclearrulecanbeestablished.

The better view is to regard this as a quite flexible criterion, which has to be seen

differently for certain activities. The main objective always has to be to determine a

sufficientlycloselinktooneStateinordertojustifyrestrictingthehomeState’srightto

taxandliftingthesamerestrictionfromthesourceState.Thisconceptisthreatenedto

beunderminedbyacceptingawebservertoconstituteaPEundercertainconditionsas

donebytheOECD‐commentary.

The personal scope of the freedom of establishment is different and arguably a lot

wider:themainfactorinordertobecoveredpersonallybyarticle43isthenationality

ofanEUmemberState.Inrespectofcompanies,thatmeansthattheyhavetobeformed

in accordance with a member State’s corporate law and that they also have their

registeredoffice, their centraladministrationorprincipalplaceofbusinesswithin the

EU. A question of special interest in this context is the application of the freedom of

establishment to charitiesandcompanies createdbypublic law.Article48apparently

excludes “non‐profit‐making” companies from its personal scope. This is not to be

regardedasmeaningthatonlycompaniespursuingtheiractivitiesprimarilywithaview

to profit are covered by the non‐discrimination rule. Despite some claims to the

contrary,itistobeunderstoodthatitissufficientforacompanytoactivelyparticipate

ontheEuropeanmarket,regardlessofthepursuedgoalofacompany.Insofar,sentence

2ofarticle48doesnotaddanythingnewtothesamerestrictionalreadyimplemented

in article 43, which demands activities with the purpose of gain, but no profit in a

strictersense.Therefore,charitablecompaniescaninvokethefreedomofestablishment

insofar as they do pursue economic activities (compare to article 24: establish an

enterprise/abusiness,whichdoesnotrequireaprofitgoaleither).

Furthermore, the tax treaty term“permanentestablishment”hassome importance for

theapplicationofthefreedomofestablishmentaswell.Article43doesnotusetheterm,

but rathermentions agencies, branches and subsidiaries as examples of cross‐border

activitieswhichmaynotresultinlessfavourabletreatment.“Agencies”and“branches”

arenotdefinedanywhere in thetreaty,norare theyclearlyexplained inECJcase law.

There can be no doubt, however, that every PE within the meaning of article 5

paragraph 1 OECD‐MC forms either a branch or an agency. The same cannot be said

about special cases of PEs, especially agency PEs within the meaning of article 5

paragraph 5 OECD‐MC and potentially some construction PEs, as both “branch” and

“agency” as forms of establishmentwithin the scope of article 43 EC treaty require a

fixedplaceofbusinessaccordingtothecaselaw.Thebiggerinfluenceofthetreatyterm

PEontheapplicationofthefundamentalfreedomcanbefoundinthecomparabilitytest

(Seebelow).

Substantivescopeofapplication:“taxesofeverykindanddescription”

The substantive scope of application of article 24OECD‐MC iswider than the general

scopeofapplicationoftherestofataxtreaty.Thisclearlyfollowsfromparagraph6of

article24,statingthatthenon‐discriminationrulesshallapplytotaxesof“verykindand

description”, notwithstanding the general scope laid down in article 2, according to

whichthetreatyonlycoverscertaintaxesonincomeandcapital.Thebiggestproblemin

this context is to understand the meaning of the term “taxes” in article 24, as quite

obviouslyitcannotbederivedfromthedefinitionofarticle2.Neithershoulditbeleftto

each contractingState todefineon itsownwhatkindof taxpayerpayments are tobe

regarded as within the scope of the non‐discrimination provision. The OECD‐

commentaryclarifiesinthisrespectthatitdoesnotmatterwhetherataxisleviedbythe

State itself or a political subdivision or merely on behalf of one of them. What is

necessary, however, is that payment is obligatory and not a matter of choice of the

individual. The real difficulty is, however, to determine themeaningof “requirements

connectedtherewith”(i.e.withtaxation);atfirstsight,thisappearstocoverallfinesfor

belated payments and other penalties, which are imposed for failure to fulfil certain

accessory duties to tax payment. It is not completely clear though, whether

“requirementsconnectedtherewith”isactuallydraftedtocovermonetarydemandsby

the State rather than actual accessory administrative duties (e.g. filing a tax return).

Penalty paymentswould then only be connectedwith those requirements, which are

connected with taxation. It is likely to see these covered in the same way as the

requirementstheyareconnectedwith.Underthisassumption,certainpenaltieswould

not be covered by paragraph 3 of article 24, which only condemns less favourable

taxation, but unlike other paragraphs is not extended to requirements connected

therewith. It issubmitted thatonlypenalties thataredirectlyconnectedwith taxation

maybe covered as resulting in “less favourable taxation”,while penalties imposed on

taxpayers for failure to meet administrative requirements cannot result in “less

favourable taxation” at all. This interpretation also requires understanding article 24

paragraph6 to be of expansive rather than restrictive nature: itworks to expand the

narrowscopeofapplicationoftaxtreatiesinarticle2,but,otherthanthat,doesnotset

actual limits to the scopeof article24: if it did, therewould alsobe a clearmismatch

betweenparagraph6settingthescopefor“taxes”only,whileseveralparagraphsclearly

covermerely administrative requirements,which cannot themselvesbe considered to

fallunderthedefinitionofa“tax”.

Theclearest,whileobvious,differencebetweenthesubstantivescopeofapplicationof

taxtreatiesandthefreedomofestablishmentisthatthelatterisnotconfinedtotaxation

(andconnectedrequirements),butapplies toallofficialactsofmemberStates.Article

43 EC treaty only requires, as already mentioned under the latest header, the

establishment of a branch, agency or subsidiary in another member State to be

applicable.Goingbeyondthescopeofasimplenon‐discriminatoryprovision,article43

also prohibits non‐discriminatory restrictions imposed on such cross‐border

establishment.Asfarastaxationisconcerned,however,thereisalmostalwaysanissue

ofdiscriminationtobefoundinanycase(or,assomescholarsclaimonbasisofawide

understandingof“discrimination”,withnoexceptionatall).

Thecomparabilitytestandtherelationshipofarticle24toarticle7OECD‐MC

Atthecoreofeverydiscrimination‐testisthesearchforcomparables.Inthecaseofthe

PEnon‐discriminationclausethefirstquestioninthisrespectiswhetherthePEitselfis

the carrier of the respective right or the non‐resident taxpayer carrying on business

through the PE. Article 24 paragraph 3 OECD‐MC clearly answers this question

accordingtothesecondoption,givingthenon‐residenttaxpayercarryingonabusiness

therighttoequaltreatmentinrespectofhistaxliabilityasitcomesaboutthroughthe

PE activities. This is affirmed by the wording of both the first (referring to the

“enterpriseofaContractingState”)andthesecondsentence(referringtothe“resident

of a Contracting State”) of the provision and indeed appears to be the only sensible

solution:asthePEitselfisnolegalperson,itisneithercapableofcarryingnorenforcing

aright.

Inordertoestablishcomparabilitybetweentwodistincttaxpayers,theOECDdemands

themtobedifferentonlyintheonefactorthatispenalizedinacertainparagraph(e.g.

nationality,residence)regardlessofthewordingofeachparagraph(wheresomerefer

to“thesamecircumstances”,anotherto“thesameactivities”).Allotherrelevantfactors

mustbe the same.This,however,maybedifficult toapplyunder somecircumstances

andstillleavestodeterminewhatthese“relevantfactors”are.

Forparagraph3, these are concluded tobe “comparable activities”, “comparable legal

form”and“comparableincome”.

The first of these three factors can be derived directly from thewording of the rule,

demanding the comparable resident taxpayer to carry on “the same activities” as the

non‐residenttaxpayerwithhisPE.Fromthewordingitisnotclear,however,whetherit

is the activities of the PE alone or the activities of the whole enterprise of the non‐

resident,whicharetobecompared.Ithasbeenargued(e.g.bytheCourtofAppealsin

NewYork)thatthecomparableresidententerprisehastocarryonthesameactivitiesas

thenon‐residententerprisedoescarryallovertheworld.FromthebasicideaofthePE

non‐discriminationclause,thiscannotbeupheld,though.Asitisthe“taxationonaPE”

that istobecompared,and,especially, it isonlythePEState’streatmentthat isunder

scrutiny, the activities of other, foreign parts of the enterprise cannot be of any

relevancetothecomparisontest.Justhowmuchtheactivitieshavetobe“thesame”or

simply “comparable”, depends on the tax rules of the PE State: if there is no legal

distinctionregardingtaxationbetweenenterprisescarryingononeortheotheractivity,

theycanbeconsideredcomparableoreven“thesame” fromtheviewpointof tax law.

However, if tax rules to distinguish between, e.g. legally regulated and non‐regulated

activities (e.g.banking), anon‐residentbankwithaPE ina contractingState canonly

demandtobetreatedthesameasresidentbanksifitsactivitiesareregulatedthesame

wayasthoseofaresidentbank.

Asfarasthecomparablelegalformisconcerned,itmaydifficulttofindanon‐resident

enterprisebeingcarriedonin“thesame”legalform,asitwillusuallybeestablishedin

another country and have a different corporate structure. However, if the PE State

accepts foreign companies to become resident companies for tax purposeswithout a

changeoflegalform,suchforeign,butresidentcompanycanactasobjectofcomparison

forthenon‐resident.IfthePEStatedoesnotallowthisgenerally,itisnecessarytorefer

to the way the foreign enterprise are treated in domestic tax law: some may be

recharacterised as partnerships while they are companies under their home State’s

rules or the other way around. In that case, the object of comparison for a foreign

companywith a PE in a certain Statemay be a domestic partnership carrying on the

sameactivitiesinthatState.

Thethirdfactor,comparable(better:thesame)incomeisacuriousone.Generally,this

should be covered already by the same activities, as amount and type of income are

basicallyderivedfromtheactivitiesleadingtoincome.Thebackgroundtoitistheidea

that the non‐discrimination clause only come into play where the source state has a

right to tax certain income at all. If it does not, taxation is already forbidden by the

distributiverulesandnonon‐discriminationruleshouldapply.Asthedistributiverules

areprecedingarticle24 inthatway, it isregularlyunderstoodthatanydistributionof

income between the Contracting States following these rules cannot lead to

discrimination.Thisnotioncannotbesupported ingeneral.There isnodoubtthat the

distributive rules only set minimum standards in cutting back the taxation of each

Contracting State. The non‐discrimination rules do add another limit on domestic

taxation,which isobjectively independentof the firstone insofaras itdirectlyaimsto

compareactualdomestictaxationofanon‐residentwiththetaxationofaresidentunder

the same circumstances. There is no link between the distributive rules and the non‐

discriminationrulesinrespectofwhattheydoandtrytoachieve.Thisisplainfromthe

factthatthelattercanonlycomeintoplaywhentheformeraresatisfied.However,the

distributiverules,especiallyarticle7OECD‐MC,areveryimportantasitisnecessaryto

attributeincometothePEofanon‐residentinordertoknowthebasisforcomparison:

withoutattributionofincometothePE,itisimpossibletomakeacomparisoninrespect

oftaxation;itcanonlyworkifthepairoftaxpayerscomparedhavethesameincome.

AtrickyquestioninthisregardiswhethertheattributionofprofitstoaPEasitfollows

fromarticle7canresultindiscrimination.TheOECDclaimsthatthiscannotbethecase

forthereasonsmentionedabove,namelytheprecedenceofthedistributiverulesover

the non‐discrimination clause. As this claimhas beendiscovered to be amyth, a new

viewhas tobedeveloped.The realproblemarises,where thenewOECDapproach to

attributionof income to aPE (theAOA) is applied, in effect applying theprinciplesof

arm’slengthtreatmentasderivedfromarticle9OECD‐MCtotheattributionofincome.

Undertheseprinciples,elementsofprofitcan(or:oughtto)beattributedtoaPEwhere,

under domestic rules, no such profit will emerge – as a result of “internal dealings”

between a PE and its head office. The attribution of such profit can clearly result in

higher taxationof thePEas compared toadomestic enterprisewhichonly carrieson

thePE’sactivities.Thus,discriminationcanbefound,barringthePEStatefromadding

suchprofittoaPE’sincome(article7OECD‐MCdoes,afterall,onlyallowthePEStateto

tax this profit, but does not require it to do so!). This outcome would quite

unsatisfactory,asthePEStatewould,ontheotherhand,havetoacceptexpensesofthe

PEfollowingfromdealingswithitsheadofficetobedeductibleasadirectconsequence

of article 7 OECD‐MC. The solution for this issue can be found in an adaption to the

standardpairofcomparison(i.e.anon‐residententerprisewiththePEcomparedwitha

comparable resident enterprise carrying on the same activities as the PE in the same

country leading to the same income): In respect of internal dealings between PE and

headoffice–andonlyinrespectofthesekindof(feigned)“transactions”–theobjectof

comparison has to be a subsidiary of the enterprise in order to make sure that the

attributionofprofittothePEdoesnotexceedtheprofitattributedtoasubsidiaryunder

thesamecircumstances. Ineffect, thispairofcomparisonmirrorstheoneacceptedby

theECJintheCLT‐UFAcaseregardingdeemeddividendpayments.However,becauseof

the differences between the freedom of establishment and the PE non‐discrimination

clauseintheOECD‐model,thissolutionisnotasstraightforwardasitappearsinEClaw.

Quiteonthecontrary,this“cross‐legal‐form‐comparison”issomethingnewtotaxtreaty

lawinrespectofadiscriminationtest,whichcanonlybeexplainedinasatisfyingway

byreferringtotheAOA,whichafterallaimsatequalisationofPEswithsubsidiaries.

Thequestionofcomparabilityisalsoahotissueinrespectofcharitableenterprisesand

public corporations. The OECD commentary takes the position that the non‐

discrimination rules cannot apply to these corporations at all because of their special

nature. This appears to be rather simplistic. It is true, that the requirement of “same

activities” to findacomparablecorporationdrawsnarrowlimits for theapplicationof

article24paragraph3toforeigncharities,astheyarguablyhavetopursueacharitable

causeintheStatewheretheyhaveaPE(whileatthesametimetheyhavetocarryona

businessthereinordertobeeligibleforcoverbytheclause).Ifaforeigncharitydoesdo

so,however,itcanbenefitfromthenon‐discriminationruleinrespectoftheincomeit

draws from the activities in the PE, i.e. itmight be tax exemptwith these profits if a

comparableresidentcharityenjoysthisprivilegeinrespectofsuchactivities(whichis

oftengranted forauxiliaryplants togeneratemeans tosubsidize itscharitablecause).

Mutatismutandisthesameappliestoforeignpubliccorporations:asfarasthesehavea

PE in another country (which is quite easily thinkable), there is no convincing reason

nottograntthemthesameprivilegesadomesticpubliccorporationenjoysinrespectof

itsbusinessactivities.

Thescopeofprotectiveeffect:“lessfavourabletaxation”

The PE non‐discrimination rule only prohibits “less favourable taxation” of PEs as

compared to resident enterprises.This term isunclearonat least two levels: it isnot

entirelyclearwhat“taxation”issupposedtoinclude;anditisequallymysteriouswhatis

toberegardedas“lessfavourable”ascomparedtosimply“other”taxation.TheOECD‐

commentaryclaimsthat“different”taxation“forpracticalreasons”isnotcoveredbythe

clause. This does not explain much, though; the commentary fails to both to give a

cogent reason for this result and to clarify what exactly this irrelevant “mode of

taxation”comprises.Itisundertakentoclosethisgap.

Taking thewordingof theprovisionas the logicalstartingpoint toany interpretation,

the correctmeaning for “less favourable taxation” is found to be anydifferentway to

imposeorlevytaxeswhereasaresultthetaxpayablebythePEishigherthanthetax

payablebyacomparableresidententerprise.Thisisnottoofarawayfromtheposition

takeninthecommentary,butitworkstoclarifythatanydifferenttaxation,eventhough

it only appears tobean issueof the “modeof taxation”, canbeprohibitedas far as it

does affect the end result negatively. However, not all accessory burdens on non‐

residenttaxpayersdoqualifyasbeingpartof“taxation”inthesensethattheyarepartof

theimpositionorlevyoftaxes,e.g.thekeepingofbooksordisclosureofrelevantfacts.

EventhoughthesemaybemoreburdensomeforPEs,thenon‐discriminationprovision

cannot relieve the non‐resident taxpayer. One striking example of how a seemingly

irrelevant “mode” of taxation can result in higher taxes may be made: special

withholding taxes. It is settled that the imposition of withholding taxes (without

deductions) tonon‐resident taxpayers(withorwithoutaPE), isnotprohibitedwhere

resident taxpayers pay taxes after formal assessment on income after deductions, as

longasthe(lower)withholdingtaxratedoesnotleadtohighertaxliability.However,it

is necessary in this respect to calculate the negative side effect of having to pay

withholding tax, which may be imposed earlier than the tax paid after a formal

assessment, i.e. therehas tobemadeadaption for thenegative interest‐or cash flow‐

effect (or, as the casemay be, positive effect,where resident taxpayers have to pay a

higheramountof taxes inadvancebefore formalassessment,whilewithholding tax is

onlydeductedwheneverincomeflowsintothePE).Whathastobecalculatedisthereal

ratherthanthenominaltaxliabilityasbasisofcomparison.

AnotheraspectofwhatIcall“scopeofprotectiveeffect” istheinclusionoftaxtreaties

with third countries to the comparison of a non‐resident: it has been questioned

whetheranon‐residentcaninvoketreatyprotectionfromaDTCconcludedbetweenthe

PEStateandathirdStateinrespectofhisPE.Thishastobeansweredintheaffirmative

asfarastaxationofthePEStateisconcerned.It isequallyclear,though,thatthenon‐

resident cannot invoke the treaty against the third State. Interestingly, the non‐

discrimination clause is capable of avoiding double taxation in these cases, as double

taxationwould result from taxation by the PE Statewhere it would not appear for a

residentofthePEState(asaconsequenceofhisdirectprotectionunderthetreaty).The

PEStatehastograntthenon‐resident“virtualresidence”inrespectofhisPEincomeas

farasitflowsfromsourceslocatedinthethirdState.However,highertaxationmaystill

be in place which cannot be relieved by article 24: the PE State is only required to

relieveasmuchtaxasisleviedbythethirdStateasaresultofitstreatyrights.Thethird

State levies tax on the basis of its treaty with the home State of the cross‐border

enterprise,whichmayallowahigherwithholdingtaxthanitstreatywiththePEState.In

that case, the PE Statewill only be required to give relief up to the amount itwould

grantaresident,eventhoughthatmaynotrelievethenon‐residentofthefullamountof

taxwithheld.

Athirdaspectofthispartregardsthesecondsentenceofarticle24paragraph3OECD‐

MC,excludingpersonalallowancesandreliefsfromthescopeofprotectiveactionofthe

non‐discriminationclause.Accordingtothisrule,theprincipleofequaltreatmentdoes

not apply as far as personal circumstances are the ground for different treatment in

ordertoavoidgivingthenon‐residenttaxpayergreateradvantagesthantheresident.It

isundisputed that thisrestrictiononlyapplies to individualsandnot tocompanies,as

the latter do not have “personal circumstances”. However, it is not entirely clear

whetherthesecondsentenceistobeunderstoodasconstitutiveormerelydeclarative.

Inthelightofthescopeofthefirstsentence,therightconclusionshouldbethatithas

indeed constitutive effect, i.e. thatwithout the second sentence, the clausewould also

require the application of beneficial tax rules as a consequence of personal

circumstancestonon‐residentindividuals.However,theexceptiondoesnotgobeyond

thewordsofthesecondsentenceeither.

Interestingly, the scope of protection under the fundamental freedoms is similarly

restrictedanddoesnotcoverpersonalallowancesand the likebutunderveryspecial

circumstances (cf. Schumacker), despite the fact that there is no similar exception

explicitlymentionedintheECtreaty.ThesimilarityisadirectconsequenceoftheECJ’s

reference to the PE non‐discrimination provision of the OECD‐MC, which, however,

appearstohavebeenusedwithoutanydogmaticreasoningoftheCourt.Ingeneral,the

scopeofprotectiveeffectofthefreedomofestablishmentisconsiderablyhigherwider

thanthatofthetaxtreatyprovisionduetothelegalconceptsof“covertdiscrimination”,

the “passive effect” of the fundamental freedoms and the fact that “potential

disadvantages”maybeprohibitedinadditionto“actualdisadvantages”.

Theconceptofjustificationforunequaltreatment

According to the prevailing view among international tax lawyers, contracting States

cannot justifyunequal treatment if it is found to result indiscriminationunderanyof

the paragraphs of article 24 OECD‐MC. However, recently several scholars have been

arguingaboutthisprinciple,tryingtoapplytheconceptofjustificationascreatedbythe

ECJ in respectof the fundamental freedoms.Theseattemptsare rejected in respectof

eachgroundofjustificationbroughtforwardinliterature;mostofthetime,itappearsto

be a matter of misconception as the existing limits to the scope of application or

protective effect of the non‐discrimination clauses are misunderstood as being

convertible intoa justification.However, theprinciplesof justificationcannotapply to

the strict wording of the OECD‐MC as is confirmed by a comparative analysis of the

wordingandtheobjectivesofarticle24ascomparedtothefundamentalfreedoms.Nor

should they be understood the same way the fundamental freedoms are: certain

characteristics,whichmaketheconceptworkableinEClawarelackingintaxtreatylaw.

Amongothers,thereisnocentralcourtwithauthoritytointerprettaxtreatiesfollowing

theOECD‐MC,whichwasalso theprerequisite to create theconcept justification (it is

shownbyacomparisontoEClawandconstitutionallawthatitappearstobeanatural

consequence of widening the scope of application of non‐discrimination rules, which

then leads to the oppositemovement in order to restrict the all towide coverage. As

article24 isstronglyrestricted in itsscopealreadyby itsrather(inthisrespect)clear

wording,thereisnoneedforaconceptofjustificationeither).

Consequencesofviolationofthenon‐discriminationrule

The legal remedy of a violation of article 24 appears to be straightforward: the

provisions leading to less favourable taxationmustnotbeapplied to thenon‐resident

taxpayer. This does not explain what provisions are to be applied instead, however.

Normally, it will be the general rules applicable to resident taxpayers in the same

circumstances.However, this is not always the case, as the non‐application of certain

aspects of a special regime for non‐residents may be sufficient. Finally, the

reinterpretation of existing rules or introduction of new rules by administration or

courtsmay be a viable solution, but can be highly problematic from the viewpoint of

constitutional law and the “principle of legality” (according to which tax laws as any

otherlawshavetobepassedbyparliamentandtheexecutiveandjudicativepowerhave

toapplytheselaws).Inanyevent,constitutionalruleshavetobeheededastheyimpose

asecondrestrictionontheactionsoftaxauthorities–asthereisalwaysmorethanone

waytoremedyaviolationofnon‐discriminationclauses,theyhavetochooseonewhich

complieswithtaxtreatylaw,EClawandconstitutionallaw.

ChapterVandVI–CasesofApplicationofarticle24paragraph3andconclusions

In the last chapter of the thesis, several practical examples are used to illuminate the

way non‐discrimination rules interact with domestic tax laws, taking a number of

Austrianprovisionsasstartingpoint.Theanalysisisdividedinexamplesofapplication

inbilateralandtriangularcasesandeachstructuredtoshowhowdifferentrulesontax

base,taxrateandtaxassessmentmayviolatenon‐discriminationrules.Itisshownthat

thereaquiteafew,althoughnotmany,provisionsinAustriantaxlawthatmayviolate

existing treaty obligations in respect of residents of countries where a PE non‐

discriminationclauseisinforce.Whatcanalsobeclearlyseenisthetendencytocomply

with EC law requirements following decisions of the ECJ very quickly,while it seems

thattreatyobligationsareoftenforgotteneventhoughtheymayoftendemandthesame

or similar treatment for non‐EU‐nationals. It is also clearly seen that very often

obligations fromDTCsandEC lawaredifferentand inseveralrespectsonemaygrant

relief from discrimination where the other does not as a consequence of different

concepts and understanding of what “discrimination” is. Although in general, the

fundamentalfreedomshaveamuchwiderscopeofapplication,especiallytheconceptof

justification sometimes works to the disadvantage of the taxpayer as compared to

article 24. The fundamental freedoms go beyond the non‐discrimination rule in the

OECD‐MCinthefollowingrespects:

• Both inbound and outbound cases are covered, i.e. the home State is under

scrutinyaswellastheStateofsource

• Anydifferenttreatmentisprohibitedinprinciple,notonlydifferenttaxation

• Different treatment is prohibited both as a consequence of nationality and

residenceingeneralwithoutaclearPE‐requirement

• The fundamental freedomsalsohavea“passivecomponent”, i.e.protectingthe

taxpayer’sbusinesspartneraswell

• Thefundamentalfreedomsgiveremedyforisolateddifferenttreatmentwithout

necessarilylookingatthefinaloutcome,whetherthereishighertaxation,while

inapplyingarticle24paragraph3,onehasto lookatthefinaloutcome(which

allowstheconsiderationofcompensatingpositivediscrimination!)

• Theyalsocovermererestrictions.

Ontheotherhand,article24goesbeyondtheprotectionprovidedbytheECtreatyinat

leasttorespects:

• It gives absolute protection to the taxpayer without giving the PE State the

possibilitytojustifyadifferenttreatmentwithgroundsofoverridinginterest.

• Asarticle24paragraph3 isonlydirectedatthePEState, taxationinthehome

Stateofthetaxpayeriscompletelyleftoutofthepicture,ineffectdisallowingthe

PEStatetoargueagainsttheexistenceofdiscriminationonthebasisthatthere

is no less favourable treatment of the taxpayer in the overall view (as, on the

contrary,allowedbytheECJinAmurtaandDenkavit).

ClearparallelsoftaxtreatyandEClawcanbefoundinrespectofthecomparabilitytest,

wheretheECJ’sapproachtoallowacross‐legal‐formcomparisonmayhelptosolvethe

issueotherwisearising for tax treatypurposesby implementationof theOECD’sAOA.

While normally – both in EC law and tax treaty law – the non‐resident taxpayer is

comparedwithregardtohisPEwitharesidenttaxpayercarryingonthesameactivities

asthePE,undercertainconditionsitmakesmoresensetoactuallycomparethePEtoa

subsidiaryofthenon‐residenttaxpayer.

Linz,31/12/2009 WernerC.Haslehner