Preventing Treaty Abuse

I. S. 465Introduction: Passive Income and Time-Sensitive Factors in the Tax Rights Allocation Process

The OECD Model and the UN Model articles on passive income have varying effects on the source state, now allowing the latter an unlimited taxing right, now allowing it a limited one. Clearly, the factors that determine the applicability of these rules may vary for both the OECD and the UN Models. As regard dividend distributions, the main factors in the allocation of taxing rights – under Art. 10 OECD Model and UN Model – can be alternately identified with the residence of the paying company in the source state or, as regards the maximum rate of tax, with the size of the shareholding in the paying company and finally, as regards limitations on (or prohibition of) source state taxation, with the residence of the beneficial owner in the residence state.

Any of these factors might be sensitive with respect to time, certainly with regard to the possibility of abuse. Therefore, as regards passive income, it is a fact that among the most time-sensitive factors we may mention the beneficial ownership requirement and the minimum shareholding for the lower rate of withholding tax on dividends. With...