Special Features of the UN Model Convention

1. S. 215Introduction

Tax systems around the world strive for neutral taxation, so tax law should be neutral in taxing different forms of conducting business, be it through a permanent establishment, branch, subsidiary or company. Thus, business rather than tax considerations should be the main driver to determine the form of business operations. Branch profits tax is an example of a provision whose aim is to promote tax neutrality with respect to the form of conducting business.

Branch profits tax (or Branch tax) is a tax levied on the profits of branches (permanent establishments) of foreign companies in addition to the “normal” corporate income tax on the branch’s profit. The principal aim of a branch profits tax is to mimic the operation of dividend withholding tax, e.g. to be an equivalent to the tax on dividends that would be due if the branch had been a subsidiary of the foreign company and had distributed its profits as dividends.

Debates about implementation of the branch profits tax provision in the United Nations Model Double Taxation Convention between Developed and Developing Countries (hereinafter: UN Model) date back to 1987 when first discussions took place during the meetin...