Special Features of the UN Model Convention

1. S. 352Introduction

Foreign investments are of great relevance for developing countries as they are an important source of finance to develop their economies and fund their domestic expenditures. Investments can be carried out by incorporating a subsidiary or by establishing a branch of the foreign investor in the developing country. In the case that an interest or a share of a domestic company is alienated within or outside the country, it may produce a so called ‘capital gain’. In this case, tax may be levied upon the gain that is obtained from this alienation under the domestic law of certain developing countries.

In past and recent years, one of the most relevant issues has been determining in which cases a State, i.e., the State of residence of the seller or the source State of the property, has the right to tax the capital gains arising from the transfer of property. Furthermore, it has been a prominent question in treaty policy to what extent a source State could broaden its right to tax these capital gains as it may reduce its attractiveness for foreign investments. Additionally, it would be equally important to determine to what extent developing countries can extend their taxin...