1. Australia: Taxation in Australia of non-resident investment manager of acting for non-resident shareholders:
Federal Court holds non-resident manager of portfolio of Australian shares for non-resident companies liable to tax in Australia:
The Federal Court on 8th September 2010 handed down a decision in Leighton v. FCT, (2010) FCA 1086 that dealt with taxation in Australia of a non-resident manager who was managing a portfolio of Australian shares for two non-resident companies.
Briefly, Mr. Leighton was, during the relevant period, a resident of Monaco and was not a resident of Australia. He was engaged by two companies, who were not tax resident in Australia and were incorporated in the British Virgin Islands and the Bahamas, to manage a portfolio of Australian shares for them and to provide other services incidental to the management services. Mr. Leighton opened a bank account in Australia and engaged a number of Australian brokers and an Australian custodian. The trading instructions were given by Mr. Leighton, on behalf of the two companies, from Monaco. The trading activities generated taxable income during the relevant period.
Non-residents are subject to tax in Australia only on income sourced in Australia. The judgment does not discuss whether the relevant income has a source in Australia and, presumably, assumes that it does.
After considering the facts, the judgment concludes that Mr. Leighton, in acting as a manager, was, during the relevant period, a trustee of a trust for the non-resident companies as beneficiaries. As such, he is liable for tax for the taxable profits under former section 98(3) of the Income Tax Assessment Act, 1936.
2. France: Foreign Tax Credit:
Limitation or denial of FTC following repo transactions on shares — Administrative Supreme Court opinion:
The Administrative Supreme Court has recently disclosed in its annual report an opinion rendered on 31 March 2009 (No. 382545), in answer to a prejudicial question from the French Tax Authorities (FTA). It dealt with the treatment of foreign-sourced dividends, where the distribution is made in between a sale-repurchase transaction on shares (i.e., dividend stripping). The FTA asked the Court to clarify the legal basis on which, for corporate income tax purposes, the use by resident companies of FTC attached to such dividend coupons could be denied or limited. Key elements of the opinion are summarised below.
(a) Clarification on the limitation applicable to the use of foreign tax credits (FTC), the so-called ‘règle du butoir’. Under Art. 220 of the General Tax Code, the use of a FTC by a resident company is limited to the ‘amount of French corporate income tax assessed on the corresponding income’, i.e., the FTC may only be deducted from that portion of French tax which corresponds to the income sourced in that particular foreign country. No provision, however, specifies whether the foreignsource income, used for the computation of the above-mentioned limitation, should be assessed on a net or gross basis.
In respect of foreign-source dividends, the Court’s opinion is that the income should be assessed on a net basis. This rule covers only expenses that (i) are directly related to the foreign-source income, and (ii) do not increase the value of any asset of the resident company. As a result, foreign withholding taxes and collection expenses directly related to the dividend coupon are deductible. Conversely, loan interest related to the purchase of the foreign shares are not. As a result, such expense will not reduce the portion of ‘corresponding income’ which limits the resident company’s entitlement to FTC.
In addition, the Court rejected the FTA’s position that the capital loss incurred on the resale of the shares should be deducted from any related dividend derived in between the purchase-resale transactions. Such capital losses are not expenses directly related to the foreign-sourced income (i.e., the dividend coupon).
(b) Clarification on the application of the ‘beneficial ownership’ clause. The Court opined that the beneficial ownership clause under a tax treaty (i) enables the FTA to deny the application of the reduced withholding tax rates on outbound payments under certain conditions (see TNS:2007-01-30:FR-1), but (ii) does not allow the FTA to deny (or limit) the use of FTC attached to foreign-sourced dividend coupons. Only the domestic general anti-avoidance rule (GAAR) set forth by Art. L 64 of the Tax Procedure Code (abus de droit) may authorise, where the related buy-sell transaction is ‘artificial’ and/or ‘seek to benefit from a literal application of legal provisions or decisions in contradiction with the objective set forth by the author of such provisions’, such a denial.
Note: Recently, the Administrative Supreme Court rejected the application of the GAAR to tax motivated buy-sell transactions on shares, insofar as the dividend accrues to a taxpayer who actually bears the risk attached to the status of a shareholder (see Administrative Supreme Court, 7 September 2009, No. 305586 and No. 305596, Axa and Sté Henri Golfard, respectively).
3. Belgium: Fixed base under Article 14:
Treaty between Belgium and Luxembourg — Court of Appeal Ghent decides Belgian-rented dwelling of Luxembourg resident self-employed business trainer constitutes fixed base:
On 20th October 2009, the Court of Appeal Ghent decided a case (recently published) X. v. Tax Administration concerning whether a rented dwelling in Belgium of a Luxembourg resident self-employed business trainer constitutes a fixed base under Art. 14(1) of the Belgium-Luxembourg tax treaty on income and capital of 17 September 1970 (the ‘Treaty’). Details of the case are summarised below.
(a) Facts:
The taxpayer was a resident of Luxembourg, who carried out activities as a self-employed business trainer in Belgium, where he visited Belgian companies. He stayed in a rented dwelling in Brugge, which he used as his contact address. The Belgian Tax Administration regarded the dwelling as a fixed base, but the taxpayer took the opposite view.
(b) Legal background:
Art. 14(1) of the Treaty provides that income derived by a resident of one of the contracting states in respect of professional services or other independent activities of a similar character shall be taxable only in that state, unless he has a fixed base regularly available to him in the other state for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other state, but only so much of it as is attributable to that fixed base.
(c) Decision:
The Court followed the view of the Belgian Tax Administration.
The Court observed that the term ‘fixed base’ is neither defined in the Treaty, nor under Belgian domestic law. In addition, the Court considered that the term cannot be interpreted by means of the Commentary to Art. 7 (business profits) of the OECD Model Convention, because under the Treaty more detailed requirements apply for the existence of a permanent establishment than for a fixed base. Therefore, the term ‘fixed base’ has a wider scope.
The Court based its decision that the rented dwelling constitutes a fixed base on the presumption that the taxpayer does a substantial part of his study and preparation work in that dwelling. In this context, the Court held as decisive that the taxpayer has no other place to do his preparatory work and he used the dwelling as his contract address for his clients; moreover:
— the taxpayer receives specialist journals and documentation at, and had purchased office equipment for, that dwelling;
— the Belgian address was stated on his invoices, as a result of which the Court presumed that the administrative formalities wer
