Limits to Tax Planning

S. 37 1. The definition of „rule shopping“

1.1. General

„Rule shopping“ concerns a person who generally is entitled to the benefits of a certain tax treaty and who employs that treaty in the most favourable manner. “Rule shopping” is usually directed towards making a certain – more favourable – distributive rule of a tax treaty applicable rather than another one. In a nutshell, the term “rule shopping” refers to the reclassification of certain income under that more favourable provision of a tax treaty.

For example, an individual resident in State A is a shareholder in an Austrian company that has important retained earnings. In order to avoid the payment of dividends and the withholding tax in Austria upon distribution of the company’s earnings, the shareholder sells the shares at their market value to his wholly owned Austrian personal holding company. The treaty follows Art. 13 of the OECD Model, but State A, for example, does not impose capital gains tax. Subsequently, the holding company has its subsidiary distribute a dividend in an amount equal to its retained earnings. No withholding tax is due on the dividend and it benefits from the participation exemption in the hands of the pa...