Hybrid Entities in Tax Treaty Law

S. 3341. Introduction

Article 23A and 23B obligates the residence state to grant double taxation relief when the source state has taxed the income in accordance with the convention. However, in the case of hybrid entities, the difference in the characterisation of entities results in the conflict of the allocation of income to different taxpayers by two states, resulting in economic double taxation as well as double non-taxation. Therefore, it becomes complicated to determine as to whom the double tax relief is to be granted since the two states allocate the income to different taxpayers. Also, the application of different treaty provisions by the contracting state due to differences in their treatment under domestic tax law has resulted in qualification conflicts, giving rise to double taxation as well as double non-taxation.

In the 2017 update to the OECD Model Convention, the Commentary on Article 23A and 23B has now provided a section on double taxation relief in the case of hybrid entities by illustrating through various examples. The OECD has attempted to resolve the economic double taxation caused due to the allocation conflict, however, due to the new parenthetical text added to A...