“[19] … The objects included: (1) the objects, at (A), “to carry on business as a general commercial company and to carry on any trade or business whatsoever”; (2) the object, at (B), to hold “directly or indirectly financial receivables and other assets including (but not limited to) shares or stock in any company carrying on a financial trade”; (3) the objects, at (D), “to advance, deposit or lend money”; (4) the object, at (E), “to carry on any other trade or business whatever”; and (5) the objects, at (L), to “lend and advance money or give credit … and to receive money on deposit or loan …”. [20] The articles of association also provided at Article 8.3A that: “no Ordinary Dollar Shares in the capital of the Company shall be transferred unless there are transferred to the transferee at the same time all of such Ordinary Dollar Shares for the time being in issue and all of the Common Stock in [GEFI Inc] for the time being outstanding”.”
“… to (i) hold directly or indirectly financial receivables and other assets, and companies carrying on a financial trade, and engage in activities related or incidental thereto, and (ii) engage in any and all lawful activities to which the General Partner and the Limited Partner agree.”
“1. … the term “resident of a Contracting State” means, for the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State. … 5. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the mode of application of this Convention to that person. If the competent authorities do not reach such an agreement, that person shall not be entitled to claim any benefit provided by this Convention, except those provided by paragraph 4 of Article 24 (Relief from Double Taxation), Article 25 (Non-discrimination) and Article 26 (Mutual Agreement Procedure).”
“1. Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. … 3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated therein, and the interest is attributable to such permanent establishment. In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply.”
“The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment.”
“2. As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires … have the meaning which it has at that time under the law of that State for the purposes of the taxes to which this Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.”
“The Convention does not contain an exhaustive definition of the term “business”, which, under paragraph 2, should generally have the meaning which it has under the domestic law of the State that applies the Convention.”
“[24] On the basis of this expert evidence it is clear that US federal income tax law distinguishes between “domestic” and “foreign” corporations. Under s 7701(a)(4) of the US Internal Revenue Code of 1986, as amended (the “Code”), a “domestic” corporation is a corporation “created or organized under the laws of the United States” or in any one of the fifty states or the District of Columbia. A “foreign” corporation is defined by s 7701(a)(5) of the Code as any corporation that is not a domestic corporation. [25] Unlike a domestic corporation, which is liable to tax on its worldwide income under s 11 of the Code, a foreign corporation is generally subject to US federal income tax on two classes of income, first in the case of a foreign corporation that is engaged in the conduct of a trade or business within the US at some point during the taxable year, income that is considered to be “effectively connected” with such US trade or business; and secondly interest, dividends, rents, salaries, wages, premiums, annuities and various other types of income from US sources that are considered to be “fixed or determinable annual or periodical” and that are not effectively connected income. [26] However, s 269B of the Code (“s 269B”) provides: “(a) General rule.— Except as otherwise provided by regulations, for purposes of this title— (1) if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation shall be treated as a domestic corporation. … (c) Definitions.— For purposes of this section— (1) Entity.— The term “entity” means any corporation, partnership, trust, association, estate, or other form of carrying on a business or activity. (2) Stapled entities.— The term “stapled entities” means any group of 2 or more entities if more than 50 percent in value of the beneficial ownership in each of such entities consists of stapled interests. (3) Stapled interests.—Two or more interests are stapled interests if, by reason of form of ownership, restrictions on transfer, or other terms or conditions, in connection with the transfer of 1 of such interests the other such interests are also transferred or required to be transferred. (d) Special rule for treaties.— Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section. (e) Subsection (a)(1) not to apply in certain cases.— (1) In general.— Subsection (a)(1) shall not apply if it is established to the satisfaction of the Secretary that the domestic corporation and the foreign corporation referred to in such subsection are foreign owned. (2) Foreign owned.—For purposes of paragraph (1), a corporation is foreign owned if less than 50 percent of— (A) the total combined voting power of all classes of stock of such corporation entitled to vote, and (B) the total value of the stock of the corporation, is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).” [27] As a result of the amendment by GEFI Inc to its Certificate of Incorporation … and the adoption by GEFI of Article 8.3A to its amended Articles of Association…, the shares of GEFI were “stapled” to the stock of GEFI Inc. As such, GEFI and GEFI Inc were stapled entities throughout the relevant period and, as the exceptions in s 269B(e) do not apply, GEFI was treated by s 269B(a)(1) as a domestic corporation for the purposes of US federal income tax law and therefore liable to US federal income tax on its worldwide income. [28] In his report Mr Shashy [GEFI’s expert] stated that: “… there is no material difference between a corporation that is actually domestic (and viewed as a resident in the US, that is, subject to taxation on worldwide income) and one that is deemed to be domestic for purposes of US tax law (and similarly viewed as a resident of the US, in the sense that it is subject to taxation on worldwide income).”
“[30] Additionally, although he was not asked to do so, Mr Miller considered it “appropriate” for him, “to point out” that the US Treasury Department “appears to take the view” that a stapled Dutch corporation is a resident of the US within the meaning of Article 4(1) of the income tax treaty in effect between the US and the Netherlands that was signed on18 December 1992 .”
“[23] … Article 31(1) of the Vienna Convention on the Law of Treaties (1969) (the “Vienna Convention”) requires a treaty to be: “… interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” [24] Article 31 also provides that the context extends beyond the treaty itself to certain other sources, including subsequent agreements between the parties in respect of the interpretation of the treaty, subsequent practice that establishes such an agreement and any relevant rules of international law. [25] Article 32 permits recourse to further supplementary means of interpretation in order to confirm the meaning resulting from the application of Article 31, or to determine that meaning when it would otherwise be ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. [26] As Lord Reed explained in Anson v HMRC[2015] UKSC 44 ,[2015] STC 1777 : “[56] Put shortly, the aim of interpretation of a treaty is therefore to establish, by objective and rational means, the common intention which can be ascribed to the parties. That intention is ascertained by considering the ordinary meaning of the terms of the treaty in their context and in the light of the treaty’s object and purpose. Subsequent agreement as to the interpretation of the treaty, and subsequent practice which establishes agreement between the parties, are also to be taken into account, together with any relevant rules of international law which apply in the relations between the parties. Recourse may also be had to a broader range of references in order to confirm the meaning arrived at on that approach, or if that approach leaves the meaning ambiguous or obscure, or leads to a result which is manifestly absurd or unreasonable.” [27] Later in his judgment Lord Reed commented on the fact that the process of interpretation must take account of the fact that what is being interpreted is an international convention, not a UK statute. He said this: “[110] Article 31(1) of the Vienna Convention requires a treaty to be interpreted “in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”
“The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament that deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd. v. Babco Forwarding & Shipping (U.K.) Ltd.[1978] AC 141 , 152, ‘unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation’.” [29] The Treaty we are concerned with here, like most bilateral double tax treaties, is based on the OECD Model Tax Convention (“MTC”). As explained by Lord Briggs in Fowler v HMRC[2020] UKSC 22 ,[2021] 1 All ER 97 , guidance as to how such a treaty is to be interpreted can also be found in OECD Commentaries on the MTC, which (even where they post-date the treaty in question) should be “given such persuasive force as aids to interpretation as the cogency of their reasoning deserves” (see at [16] and [18], citing Patten LJ’s judgment in Smallwood v HMRC[2010] EWCA Civ 778 ,[2010] STC 2045 at [26(5)]; see also Irish Bank, where the 2008 version of the Commentary was considered in interpreting a treaty entered into in 1976).”
“To a court interpreting the Convention subsequent commentaries can have persuasive value only ... The persuasive effect of learned commentaries, like the arguments of counsel in an English court, will depend upon the cogency of their reasoning… As respects decisions of foreign courts, the persuasive value of a particular court’s decision must depend upon its reputation and its status, the extent to which its decisions are binding upon courts of co-ordinate and inferior jurisdiction in its own country and the coverage of the national law reporting system…”
“The same considerations apply to the international case law and the writings of jurists. The decision of a supreme court, or the opinion of a court of cassation, will carry great weight: the decision of an inferior court will not ordinarily do so. The eminence, the experience and the reputation of a jurist will be of importance in determining whether, and, if so, to what extent, the court should rely on his opinion. Nevertheless the decision whether to resort to these aids, and the weight to be attached to them, is for the court. However, the court's discretion has an unusual feature. It is applied not to a factual situation but to a choice of sources for help in interpreting an enactment. It operates in a purely legal field. An appellate court is not, therefore, bound by the lower court’s selection of aids, but must make its own choice, if it thinks recourse to aids is necessary. This legal process is not unlike the use made by our courts of antecedent case law, though it lacks the inhibitions of any doctrine of precedent.”
“Among those principles is the general principle of international law, now embodied in art 31(1) of the Vienna Convention on the Law of Treaties, that ‘a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. A similar principle is expressed in slightly different terms in McNair's The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is ‘the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances’. It is also stated in that work (p 366) that references to the primary necessity of giving effect to ‘the plain terms’ of a treaty or construing words according to their ‘general and ordinary meaning’ or their ‘natural signification’ are to be a starting point or prima facie guide and ‘cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them’.”
“It must be remembered that the text also plays an important role in ascertaining the purpose of a provision. The proper approach is one that unifies the text, context, and purpose, not a purposive one in search of a vague policy objective disconnected from the text.”
“[83] Although there can be little doubt that the activities of the LP fit the description of a “serious undertaking” it remains necessary to consider the other factors identified by Judge Berner at [64] in Ramsay, namely whether these were actively pursued with reasonable or recognisable continuity, whether they had a certain amount of substance in terms of turnover, whether they were was conducted in a regular manner and on sound and recognised business principles, and whether the activities were of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them. [84] While the loans were conducted on sound and recognised business principles and the sums involved clearly substantial, holding five affiliate loans over the course of approximately six years, especially as only three of these originated with the LP is, in my judgment, more of a passive, sporadic or isolated activity than a regular and continuous series of activities. In this I agree with Ms McCarthy [for HMRC] who submits that there is nothing to suggest that personnel or agents acting on behalf of the LP made or conducted continuous and regular commercial activities in the US. All that appears to have happened was that monies were directed straight to GELCO without negotiating terms or the consideration at a director level as would have been expected from a company carrying on commercial activities on sound business principles.”
“[88] Turning then to the chronology of the LP’s activities summarised at paragraph 8, above, it would seem that the only “activities” of the LP in 2003 were its formation and the capital contributions of the partners which fall within Lord Sumner’s “domestic operations” [South Behar Railway Company Ltd v Inland Revenue Comrs[1925] AC 476 , 487] rather than business activities. [89] In subsequent years the “activities” described in the chronology includes “payment instructions” which occur throughout the relevant period. It explains that these were “typically” signed by management personnel from GE’s Treasury, Finance and/or tax departments who were responsible for the transaction concerned. Although subsequently approved by the directors of GEFI Inc who gave their unanimous written consent these payment instructions do not appear represent any management involvement or decision taken by the general partner at the time of the transactions and, as such, cannot be regarded as business activities. [90] Similarly it would seem that the purpose of the board meetings of GEFI Inc was, as can be seen from the minutes of the short meeting held on25 June 2008 … to review, approve and ratify the company’s past activity rather than make strategic decisions in relation to its current and subsequent dealings. It would appear from those minutes, in the light of the “background information” provided by Mr Tomasetti to the board and his answer to [a GEFI board member’s] question that the board had a very limited involvement in the activities of the company, the role of which as lender under the Loan Agreements was not properly recorded until the ‘Memorandum of Acknowledgement’ of29 December 2009 . [The ‘Memorandum of Acknowledgement’ confirmed that the LP was to be regarded as the lender to GELCO, rather than GECC which was listed as the lending party: see the FTT’s decision at [20]. This document in fact related to Loans 1 and 2, the two promissory notes.] [91] Therefore, notwithstanding its objects, and having regard to the degree of activity as a whole, particularly the lack of participation in the strategic direction of the LP by the directors of GEFI Inc, I have come to the conclusion that GEFI was not carrying on a business in the US through its participation in the LP.”
“…there is no material difference in tax treatment between a ‘real’ domestic corporation and a stapled foreign one and, in particular, stapled foreign corporations are treated, despite what the FTT thought, in the same way as ‘real’ domestic corporations for treaty purposes.”
“1. … the term “resident of a Contracting State” means, for the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State.” (Emphasis supplied.)
“It is clear that it was not a purpose of the deeming provision in s15(2) to resolve some legal or factual uncertainty about whether such divers were genuinely employed or self-employed. On the contrary, s15 applies only to employed divers.”
“This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.”
“[73] Broadly speaking, the apportionment of taxing rights between the residence and source states under the OECD Model Treaty, which serves as a model for the Treaty, is centred on the distinction between active and passive income (Li and Cockfield, at p. 12; Avi-Yonah, Sartori and Marian, at p. 155). The source state has the primary right to tax active income (e.g. business profits and employment income), and the residence state has only residual rights. Pursuant to the theory of economic allegiance, the source state has a greater claim to tax active income because its economic environment has the closest connection with the origin of wealth (Malherbe, at p. 56; Li and Cockfield, at pp. 66 and 151). Non-residents owe allegiance to the source state as a result, and they are expected to pay tax for the public services from which they benefit in carrying on their active economic activities in the source state. [74] Conversely, the residence state has the primary right to tax passive income (e.g. interest, dividends, and capital gains), and the source state has only residual rights. The source state’s claim to tax passive income is considered weaker in comparison to that of the residence state because generating such income is assumed to require few public services from the source state. Moreover, the economic environment of the source state is considered less material to the earning prospect of passive investments, as such passive activities may be conducted in various jurisdictions without either improving or negatively affecting their earning prospect. Therefore, non-residents earning passive income owe little allegiance to the source state.”
“4. Conventions for the avoidance of double taxation do not normally concern themselves with the domestic laws of the Contracting States laying down the conditions under which a person is to be treated fiscally as “resident” and, consequently, is fully liable to tax in that State. They do not lay down standards which the provisions of the domestic laws on “residence” have to fulfil in order that claims for full tax liability can be accepted between the Contracting States. In this respect the States take their stand entirely on the domestic laws.”
“[40] I agree with the appellant that the most similar element among the enumerated criteria is that, standing alone, they would each constitute a basis on which states generally impose full tax liability on world-wide income… In this respect, the criteria for determining residence in Article IV, paragraph 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state. In the United States and Canada, such comprehensive taxation is taxation on world-wide income.”
“The parties to the Convention intended only that persons who were resident in one of the contracting states and liable to tax in one of the contracting states on their “world-wide income” be considered “residents” for purposes of the Convention.” (Emphasis supplied.)
“In the context of corporations, the “liable to tax” requirement is met under the Treaty where the domestic law of a contracting state exposes the corporation to full tax liability on its worldwide income because it has its residence in that state (see Crown Forest, at paras. 40 and 45). Liability to full taxation is established by the nexus between that State and the corporation’s resident status.”
“[67] In sum, the object, spirit, and purpose of arts. 1 and 4(1) are to allow all persons who are residents under the laws of one or both of the contracting states to claim benefits under the Treaty so long as their resident status could expose them to full tax liability (regardless of whether there is actual taxation). They are broadly consistent with international norms.”
“61. There are two possibilities for interpreting the term ‘of a similar nature’: Under a (broader) functional interpretation, any domestic feature triggering unlimited tax liability is sufficient. In contrast, a (narrower) territorial understanding requires both unlimited liability to tax and a territorial connection between the taxpayer and the State concerned. In our view, the territorial interpretation is preferable. All other connecting factors listed in Article 4(1)…contain a territorial link between the taxpayer and the State taxing his worldwide income. Furthermore, the functional interpretation would reduce the listed connecting factors to mere examples of ‘liable to tax’ without any additional merit. Not requiring a territorial connection of any kind between the taxpayer and the State would also blur the line between the source State and the residence State.” (Emphasis in original.)
“Provisions of domestic law that deem a person to be fully liable to tax generally do not qualify as a similar criterion.”
“The connecting criteria ‘domicile, residence, place of management or any criterion of a similar nature’ in the OECD MC ensure that only companies that have unlimited liability to tax based on sufficient local connection are entitled to double tax treaty benefits.”
“Article 4(1) refers not to tax liability in the abstract, but liability “by reason of” one of the listed criteria. On a plain reading of the article, it is not sufficient that a corporation be both resident in a contracting state and liable to tax in that state in order to be a resident of the state for purposes of the convention. There must also be a causal link between the liability to tax and one of the prescribed connecting factors: residence, place of management or any other criterion of a similar nature.”
“If every nexus for taxation is a “criterion of a similar nature”, i.e. if the requisite similarity is nothing more than the fact that the criterion serves as a basis for taxation, then the full expression “liable to tax by reason of domicile, residence, place of management or any other criterion of a similar nature” collapses to “liable to tax”… The test in Article 4(1) becomes a prolix tautology.”
“… Article 4(1) residents are meant to be persons whose liability is premised on a personal or locative attachment rather than a connecting factor based on the source of income. To adopt the accepted but regrettably imprecise term, Article 4(1) is meant to refer to those who are subject to “residence taxation”
“Their Lordships would not endorse the view that every isolated act of a kind that is authorised by its memorandum if done by a company necessarily constitutes the carrying on of a business.”
“The carrying on of “business”, no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between. In the instant case, however, there was evidence before the special commissioners of activity in and about the letting of its premises by the company during each of the five years that had elapsed since it closed down its former tobacco business. There were three successive lettings of the warehouse negotiated with different tenants; there was the removal of the machinery from the factory area which made it available for use for storage and a separate letting of that area to a fresh tenant; and as recently as October 1968 there was the negotiation of a letting to a single tenant of both the factory area and the warehouse.”
“This is an expert tribunal charged with administering a complex area of law in challenging circumstances. To paraphrase a view I have expressed about such expert tribunals in another context, the ordinary courts should approach appeals from them with an appropriate degree of caution; it is probable that in understanding and applying the law in their specialised field the tribunal will have got it right: see Cooke v Secretary of State for Social Security[2002] 3 All ER 279 , para 16. They and they alone are the judges of the facts.”
“[84] While the loans were conducted on sound and recognised business principles and the sums involved clearly substantial, holding five affiliate loans over the course of approximately six years, especially as only three of these originated with the LP is, in my judgment, more of a passive, sporadic or isolated activity than a regular and continuous series of activities. In this I agree with Ms McCarthy who submits that there is nothing to suggest that personnel or agents acting on behalf of the LP made or conducted continuous and regular commercial activities in the US. All that appears to have happened was that monies were directed straight to GELCO without negotiating terms or the consideration at a director level as would have been expected from a company carrying on commercial activities on sound business principles.”