sign in sign up
<<
Home , Denmark, Spain

Volume 51, Number 1 July 7, 2008 C a nlss20.Alrgt eevd a nlssde o li oyih naypbi oano hr at content. party third or domain public any in copyright claim not does Analysts reserved. rights All 2008. Analysts Tax (C)

News Analysis: Why Is Terminating Tax Treaties? by Wendy Singer and Jérôme Delaurière

Reprinted from Tax Notes Int’l, July 7, 2008, p. 13 Reprinted from Tax Notes Int’l, July 7, 2008, p. 13 C a nlss20.Alrgt eevd a nlssde o li oyih naypbi oano hr at content. party third or domain public any in copyright claim not does Analysts Tax reserved. rights All 2008. Analysts Tax (C)

News Analysis: Why Is Denmark tate investments will have to consider reorganizing their existing structures before 1, 2009. Failing Terminating Tax Treaties? that, capital gains realized by the investors’ Danish companies on the sale of French real estate will be subject to French tax at the rate of 33-1/3 percent or by Wendy Singer and Jérôme Delaurière even, in the case of transactions by a dealer, to 50 After thinly veiled warnings by Denmark’s govern- percent. ment, followed by the Danish ’s enactment While the loss of the opportunity afforded by the of a law authorizing the government to terminate Den- Danish structure for French real estate investors mark’s tax treaties with and , the Danish be the most visible effect of the treaty’s termination for Ministry of Finance on 10 announced that the international investors ultimately situated outside Den- two treaties will be terminated effective , mark, other treaty provisions will also be missed, and 2009. (For prior coverage, see Doc 2008-12962 or 2008 risks of double taxation will arise as a result. WTD 115-3.) Because of the lack of an operative bilateral PE The principal bone of contention that led to this definition, a Danish company could be exposed to relatively radical measure was Denmark’s insistence on French corporate as a result of having ac- the right to tax Danish private paid to retirees tivities in France that would not rise to the of a who have taken up residence in the Riviera or the PE under most OECD treaties. For example, del Sol. But this news would be of little interest under French domestic law, if a foreign company sim- other than for the retirees concerned if the only conse- ply carries out a ‘‘complete commercial cycle’’ in quence were a risk of double taxation of Danish pri- France, that is sufficient nexus to trigger French corpo- vate pensions paid to those taxpayers. rate income tax liability. Terminating the treaty with France may have serious While in principle Denmark does not tax its resident collateral effects on international investors who have corporations on their income from foreign establish- structured their French real estate investments using ments as defined under Danish domestic law, Danish Danish companies — a possible consequence that has tax rules may not construe the ‘‘complete commercial not displeased the French tax authorities. When the cycle’’ in France as amounting to such an establish- protocol to the France- tax treaty came ment. into effect on January 1, the Denmark-France treaty probably became the last treaty that allowed investors Regarding dividends paid between France and Den- in French real estate a double exemption — both in mark, the treaty generously provided for a zero with- France and in Denmark — for capital gains realized on holding tax rate without any minimum threshold re- the sale of French real estate held directly by a foreign quirement, and the EU parent-subsidiary directive will company (provided the company has no permanent often provide similar protection from withholding tax. establishment in France to which the gain is effectively However, France’s implementation of the directive con- connected). tains an antiabuse requirement that may be strin- gent than its interpretation of its tax treaties that do It is generally believed that it is still possible to not contain a specific treaty-shopping provision. These achieve tax-free capital gains on the sale of shares of types of issues might be resolved when a new treaty is French companies owning real estate under the Lux- negotiated between France and Denmark. embourg treaty (as amended) and others, such as the Belgian treaty, but because that does not normally pro- However, the window of opportunity for direct real vide a buyer with a step-up in basis, that exit approach estate investment by a foreign company will likely not is less attractive than the structure that was possible be reopened. using a Danish company — until the repudiation of The termination of the Denmark-France treaty is an the treaty. unusual event — and hopefully will remain so — in Accordingly, international investors who took advan- international tax policy and . Some observers tage of the opportunity afforded by the Danish treaty will remember the ’ termination in 1987 to secure an optimal exit strategy from French real es- of its tax treaty with the Antilles; 10 days

TAX NOTES INTERNATIONAL JULY 7, 2008 • 1 HIGHLIGHTS Reprinted from Tax Notes Int’l, July 7, 2008, p. 13 later, the U.S. Department found it necessary doubtful that the termination could be withdrawn fol- to reinstate a section on the withholding tax exemption lowing negotiation between the parties. At the least, it for interest in to stabilize the eurobond market. raises some nice questions of constitutional law. also terminated a tax treaty with content. party third or domain public any in copyright claim not does Analysts Tax reserved. rights All 2008. Analysts Tax (C) It remains to be seen whether this strategy will be in 1973. To the authors’ knowledge, however, in the ◆ case of France, this is the first time that the threat of effective in helping Denmark achieve its aims. termination of a treaty with another OECD member has failed to result in a negotiated amendment ♦ Wendy Singer and Jérôme Delaurière are with Gibson of the treaty. And the treaty is terminated, it is Dunn & Crutcher in .

2 • JULY 7, 2008 TAX NOTES INTERNATIONAL