European and International Tax Law - Key Concepts: Worldwide vs Territorial Taxation; Double Taxation and OECD MC (Dividends/Interest/Royalties)

Vocabulary flashcards covering core concepts from the lecture notes on worldwide vs territorial taxation, double taxation, residence vs source states, and key articles of the OECD Model Convention (dividends, interest, royalties).

Worldwide principle (unlimited tax liability)

Residents are taxed on their domestic and foreign income; non-residents are taxed only on income sourced in the country.

Territoriality principle (limited tax liability)

Non-residents are taxed only on income sourced within the country.

Residence State (Home State)

The state of a person’s residence that taxes on worldwide income under the worldwide principle.

Source State (Host State)

The state where income arises; taxes income sourced within its borders, often affecting non-residents.

Juridical double taxation

Same income taxed by two or more states for the same taxpayer and period.

Economic double taxation

Same income taxed in two states but to different taxpayers (same period, different recipients).

Beneficial owner

The person who can enjoy the income (not merely an intermediary); controls the right to use and enjoy the payment and helps prevent treaty-shopping.

Dividend

Income distributed by a company to shareholders; governed by Article 10 of the OECD Model Convention (MC) for cross-border taxation.

Article 10 OECD MC

Dividends article; allocates taxing rights between source and residence states and allows taxation in both, with withholding tax limits under para 2.

Article 10(2) – Dividend

Limitation on source-state tax when the beneficial owner resides in the other state; rates often 5% or 15% depending on ownership, with mutual agreement for application.

Article 10(4) – Dividend

If a resident of the other state has a PE-connected holding, taxation follows Article 7; source-state tax may apply to PE profits.

Permanent Establishment (PE)

A fixed place through which the business of an enterprise is carried on; affects taxation of profits under Article 7.

Article 7

Business profits that may be taxed in a state where a PE is located, attributable to that PE.

Interest

Interest arising in a state may be taxed there; Article 11 MC includes a 10% cap on tax for beneficial owners who are residents of the other state.

Article 11

Interest article; establishes concurrent taxation and the 10% limit on tax when the beneficial owner is resident in the other state.

Royalties

Income from use of, or the right to use, IP, software, equipment, etc.; generally taxed in the residence state under Article 12 MC.

Article 12

Royalties article; generally exclusive taxation in the State of residence, with specific exceptions and PE-related clarifications.

Article 12(3) – Royalties (PE exception)

If royalties relate to a PE and are connected to it, Article 7 applies rather than the royalties article.

Distributive rules

Rules that determine how taxing rights are distributed between contracting states for dividends, interest, and royalties.

DTT (Double Taxation Treaty)

Bilateral treaty to avoid double taxation; outlines specific articles for dividends, interest, royalties and other reliefs.

Relief methods (exemption vs credit)

Residence-state relief: exemption (exclude foreign income) or credit (credit foreign tax paid against domestic tax).