Taxand comments on the draft changes the OECD model tax convention related to Sovereign Wealth Funds
State-owned entities (“SOEs”), including sovereign wealth funds (“SWFs”), have attracted considerable economic, political and tax policy attention in recent times. One of the major difficulties when dealing with SOEs is the lack of a precise definition of what constitutes a SOE. However, the definition determines how SOEs will fare in any given country when it comes to taxation at source. SOEs may either enjoy full or partial tax exemption based on the principle of sovereign immunity or they may benefit from the exempting provisions of a tax treaty.
In the tax treaty context, SOEs raise the usual three questions that underlie any discussion about treaty benefits, namely: (1) which entities should be eligible for treaty exemptions?; (2) what kinds of income should be exempt?; and (3) what kinds of exemptions should be available?
- In light of the substantial involvement of SOEs in economic activity and the complexity of some of the structures through which SOEs participate in economic activity, it may be desirable at least to reflect in the wording of the Commentary to the Convention that the Convention may apply to entities beyond “States, their subdivisions and their wholly-owned entities.”
- In many cases, entities are totally exempt from tax and the question may arise as to whether they are entitled to the benefits of the tax treaties concluded by the State in which they are set up.
- Some States refrain from levying tax on dividends paid to other States and some of their, directly or indirectly, wholly-owned entities, at least to the extent that such dividends are derived from activities of a governmental and not an industrial or commercial nature. Some States are able to grant such an exemption under their interpretation of the sovereign immunity principle; others may do it pursuant to provisions of their domestic law.
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