Limits to Tax Planning

S. 359 1. Introduction

Tax planning often takes advantage of double non-taxation that can occur as a result of the application of tax treaties. While the OECD report on the application of the OECD Model to partnerships (1999) introduced the concept of the prevention of double non-taxation as a basic purpose of the convention, others argue that where the exemption method is adopted in a DTC, one can only assume that the avoidance of double non-taxation is a purpose of that treaty, where it is combined with a “subject-to-tax clause”. In any case the MC (2010) includes various provisions in the Commentary to address double non-taxation.

The term “subject-to-tax” clause was first used by the German BFH in a decision in 1993 and has since been adopted by the OECD and discussed in the literature, although there has been less focus on it in more recent years. Specific definitions for subject-to-tax clauses vary, as do the specific forms of such clauses. Practically, subject-to-tax clauses make the exemption method (of either the residence or source state) dependent on the income actually being taxed in the other contracting state. Their purpose is the avoidance of – treaty-induced – double non-ta...