Introduction to the Law of Double Taxation Conventions
3. Aufl. 2021
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S. 10711. The implementation of treaty benefits in both contracting states
11.1. Source state
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DTCs frequently limit or eliminate the source state’s taxing rights. When the DTC rules are applied, they are equivalent to domestic law. Eliminations or reductions of the taxing rights thus have the same consequences as they do in domestic law: the rules have to be taken into consideration by the taxpayer and the administrative authorities when domestic law is applied. Eliminations or reductions of the taxing rights provided for by a DTC must therefore be applied from the beginning, as if no taxing rights existed.
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Example
A Polish corporation pays royalties to a corporation resident in Lebanon. The Lebanese company is the beneficial owner. Under Polish domestic law, royalties paid to non-resident companies are liable to a 20% final withholding tax. According to Art. 12(2) of the Lebanon–Poland DTC, however, Poland’s right to tax those royalties is limited to 5%. Consequently, only 5% withholding tax is levied.
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Occasionally, a tax limitation contained in a DTC is not applied. For example, the full amount of withholding tax is levied in the source state although the relevant DTC eliminates or reduces ...