Introduction to the Law of Double Taxation Conventions
2. Aufl. 2013
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S. 645 Treaty abuse
5.1 Denial of treaty benefits
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Great controversy exists among tax scholars with respect to whether tax authorities may prevent the improper use of DTCs. The discussion focuses, on the one hand, on what constitutes abuse and is thus undesirable and, on the other, on the rules empowering tax authorities not to grant treaty benefits.
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A company incorporated in Israel decided to move its registered office to Belgium. When its Israeli subsidiary distributed a dividend to the parent company, which was at that point in time already resident in Belgium, the company claimed a reduced withholding tax rate under the Belgium-Israel DTC. The Israeli tax authorities, however, disregarded the change in residence arguing that the registration in Belgium was a sham and was only driven by motives of tax avoidance. Under Israeli domestic law, tax officers are entitled to disregard a transaction if it is artificial or fictitious. Consequently, the company was not granted the benefits from the treaty and appealed to the Israeli District Court. The court, however, confirmed the tax authorities’ position and allowed them to counter treaty abuse by not applying the tax treaty (IL, DC 30 ...