Limits to Tax Planning

S. 431 1. Introduction

1.1. Art. 13(4) OECD Model and its Purpose

The fifth (2003) version of the OECD Model Tax Convention on Income and Capital (the “OECD Model”) added a new Para. 4 to Art. 13 (Capital Gains) . The original Para. 4 was renamed Para. 5 of Article 13. The new paragraph gave the source state the right to tax the (capital) gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the source state, i.e. from the sale of shares of “real estate company(ies)” . The wording of the new article remained unchanged in later versions of the OECD Model Tax Convention on Income and on Capital. If not stated otherwise, further references are made to the eighth edition (2010) of the OECD Model, which provides that:

“Capital gains derived by a resident of a Contracting State (R) from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State (S) may be taxed in that other State (S).”

Art. 13(4) is clearly targeted at preventing tax planning strategies and practice focused on the sale of shares in companies owning real e...