Substance Over Form

Written by Prof. Robert Anthony, Anthony & Cie
GGI Insider(#54), May 2011

It was a pleasure to see all the members again from the ITPG in Munich. I was happy to chair a lively debate on “Substance over Form”. Today, ascertaining what defines a permanent establishment is not as easy as it once was. Yes we have the OECD model, which is a standard for many countries with minor modifications but is this really workable as a document today? Certain countries are concerned about the applicability of their tax treaties. Consequently, countries have been tightening these to counter the abuse by tax planners, which results in amendments by way of agreed modifications to existing treaties. An example is the latest amendment between Singapore and France which has just been completed.

In our discussions it became apparent that proper corporate governance is necessary to justify certain holding entities. These need to have real substance. In Luxembourg, this was indicated as a real presence on behalf of the company by its office with staff. Certain countries considered that there current treaties enabled meetings in the country concerned but enforce the necessity of permanence there. Italy is litigating where it can but the results are far from clear. A real activity today needs a clearer definition applied through a tax treaty. The issue of a permanent establishment can also be interpreted differently in countries like Germany even without a contract being signed in the country.

It was interesting to see that while the G20 are putting pressure to eliminate the abuse of low tax jurisdictions new opportunities are being created. This was illustrated in the meeting by the taxation changes in Hungary, where the corporation tax rate was lowered to 10% in competition with Ireland and Cyprus. The UK is still seen as an interesting place to establish a holding entity.

In summary, the issue seems to be whether domestic countries will accept holding companie’ tax treaties when there is only a letter box presence. As mentioned previously, some countries are now negotiating to amend their treaties to ensure they do not apply, and others have simply decided that they do not need to or do not care. Case law is obviously important when looking at this. When is a company a resident or non-resident company? Treaties do not normally apply to non-resident companies.

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