Double Taxation Avoidance

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Double taxation arises when more jurisdictions seek to impose comparable taxes on the same taxpayer in respect of the same subject matter and for identical periods, based on the criterion of (a) residence or (b) nationality or (c) place of the transaction.

Particularly:

• According to the criterion of residence, a State imposes a comprehensive tax liability to its taxpayers based on the taxpayers’ personal bonds to this State irrespective of their nationality. This full tax liability is not imposed only on persons who are domiciled on a State in the sense in which “domicile” is usually taken in the private law, but is extended to comprise also persons, who stay continually or only for a certain period of time in the territory of this State. Specifically, according to the provisions of ITC, an individual who resides in Greece continuously for more than 183 days per year is considered to be a Greek tax resident since the first day of his presence in Greece. As regards legal persons/entities, crucial criterion for the determination of residence is the place of their registered offices and the place of their permanent establishment. As “permanent establishment” is defined a fixed place of business through which the business of a legal person is wholly or partly carried on.
• According to the criterion of nationality, persons are liable to tax in the country of their nationality, irrespective of their residence.
• According to the criterion of the place of the transaction the principle of source State taxation is provided, according to which the income source State proceeds to the taxation of business profits and gain derived from activities conducted within this State.

How double taxation is treated?

Double taxation is treated in national and international level, as following:

• National provisions: A State has the right to provide national legal rules regarding the treatment of double taxation.
• Agreements for the avoidance of double taxation: States proceed to the conclusion of multilateral agreements / bilateral Conventions in order to eliminate the harmful effects of international double taxation, on the exchange of goods and services and movements of capital, technology and persons. For instance, such agreements, known as Double Tax Treaties (DTTs), determine the country which has the right to impose taxes on individuals or legal persons/entities, and, if they both have such rights, which one of the Contracting States takes priority. The DTTs seem to be an appropriate vehicle for the development and promotion of the international economic cooperation.
• EU provisions: EU has adopted various tax rules for the avoidance of double taxation (indicatively, Council Directive 2003/49/EC, 2011/96/EU), including among others, rules as regards the exchange of information in the field of taxation (for instance, Council Directive 2011/16/EU, 2014/107/EU, 2016/881/EU, 2015/2376/EU, 2016/2258/EU and 2018/822/EU).

Which is the general applicable Greek rule for the avoidance of income double taxation?

• In case that more States seek to impose tax on income, the State of residence is obliged to eliminate double taxation. This can be accomplished by one of the following methods:
• exemption method: income that is taxable in the State of source is exempted from tax in the State of residence, but it may be taken into consideration in determining the rate of tax applicable to the taxpayer’s remaining income and
• credit method: income that is taxable in the State of source is subject to tax in the State of residence, but the tax levied in the State of source is credited against the tax levied by the State of residence on such income.

The credit method is incorporated in the Greek I.T.C. (art. 9), according to which, in case that a Greek tax resident receives income from abroad, Greek tax authorities are obliged to reduce the tax payable in Greece, in amount equal to the tax paid in the other State for that income.

Which are the bilateral conventions - Double Tax Treaties concluded by Greece?

Greece has entered into DTTs on income and on capital with the following fifty seven (57) countries: Albania, Armenia, Austria, Azerbaijan, Belgium, Bosnia-Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Hungary, Iceland, India, Ireland, Israel, Italy, Korea, Kuwait, Latvia, Lithuania, Luxembourg, Morocco, Mexico, Malta, Moldavia, Netherlands, Norway, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, San Marino, Serbia, Slovakia, Slovenia, South Africa, Sweden, Spain, Switzerland, Turkey, Tunisia, Ukraine, United Arab Emirates, United Kingdom, United States and Uzbekistan.

Greece has, also, entered into DTTs on estates and inheritances and on gifts with the following four (4) countries: Germany, Italy, Spain and United States.

Which are the applicable rules for the elimination of the income double taxation, in case of concluded DTTs?

Concluded Double Tax Treaties on income and on capital, as well as concluded Double Tax Treaties on estates and inheritances and on gifts constitute bilateral international conventions and supersede the provisions of domestic formal law, as provided by the Constitution (art. 28 par. 1). Therefore, provisions of domestic tax law which contravene international Conventions ratified by Greek law and in force (such as Double Tax Treaties), are powerless and thus not applicable.

Which is the categorization of DTTs according to the taxation objects?

Depending on the object of taxation and thus the taxes covered by the Conventions, DTTs are divided into two categories:

• Double Tax Treaties on income and on capital, which apply on income and on capital that may arise from: immovable property and the alienation of such property; profits of a permanent establishment situated in the State of source/situs; activities of entertainers and sportspersons; dividends; interest; royalties; the alienation of shares or securities; private sector pensions; payments received by a student for the purposes of his education or training; capital represented by shares or securities; profits from the operation of ships or aircraft
• Double Tax Treaties on estates and inheritances and on gifts which apply: on estates of and on gifts made by persons domiciled in one or both Contracting States, disregarding any other criteria which under the domestic law of a Member country, may lead to a comprehensive tax liability; to persons who although not domiciled nor residing in either State, are nevertheless liable to tax in each of them; to property belonging to persons who are either domiciled in, or residents of, one or both of the Contracting States.

Do the DTTs provide special procedures for the elimination of double taxation?

Based on the OECD Model Tax Convention for the avoidance of double taxation, DTTs provide mechanisms for the elimination of double taxation necessary for carrying out the provisions of their context, such as:

• Exchange of Information between the tax authorities of the Contracting States concerning taxes covered by the Convention;
• Mutual Agreement Procedure

What is the mechanism of exchange of information provided by the DTTs?

Tax administrations of the two Contracting States co-operate to ascertain facts in relation to which the rules of the convention (DTTs) are to be applied. Therefore, the competent authorities of the Contracting States shall exchange such information as is “foreseeably relevant” to secure the correct application of the Conventions’ provisions or of the Contracting States’ domestic laws concerning taxes of every kind and description imposed in these States, such as even other sensitive information related to tax administration and compliance improvement, for example risk analysis techniques or tax avoidance or evasion schemes.

This information may be exchanged in three different ways:

• On request. In relation to a special case, the submission of a request for information (available under the internal taxation procedure) before the other state is necessary.
• Automatically. Information having their source in one Contracting State is systematically transmitted of to the other Contracting State.
• Spontaneously. Information acquired through certain investigations by a Contracting State (having information which it supposes to be of interest to the other Contracting State) are exchanged with the other Contracting State.

What is the Mutual Agreement Procedure provided by the DTTs?

Mutual Agreement Procedure is a special procedure provided by the Conventions for the assistance between the competent authorities of the Contracting States to consult each other in order to resolve issues arising from the misapplication and misinterpretation of the DTTs in cases where tax has been charged, or is going to be charged, in disregard of the provisions of the Convention, in cases such as the attribution of profits to a permanent establishment; the taxation in the State of the payer when there is a special relationship between the payer and the beneficial owner and the application of thin capitalization domestic rules when the State of the debtor company has treated interest as dividends.

The above procedure of Mutual Agreement provided by the DTTs for the avoidance of double taxation and the endeavor to regulate the tax rights allocation in relation to profits from cross-border economic activities is incorporated to Greek Law by article 63A Procedure Tax Code (L. 4174/2013, PTC).

Which risks arise from the DTTs’ (on income and on capital) application in contrast with DTTs’ (on income and on capital) principal purpose?

The DTTs’ (on income and on capital) principal purpose is to promote exchanges of goods and services, and the movement of capital and persons, by eliminating international double taxation and to prevent tax avoidance and evasion. However, the risk of abuse is increased by facilitating the use of artificial legal constructions aimed at securing the benefits of both the tax advantages available under certain domestic laws and the reliefs from tax provided for in double taxation conventions. In particular, taxpayers engaged in treaty shopping and other treaty abuse strategies undermine tax sovereignty by claiming treaty benefits in situations where these benefits were not intended to be granted, thereby depriving countries of tax revenues.

What is treaty shopping?

Specifically, “treaty shopping” generally refers to arrangements through which a person who residence in one of the two Contracting States, that concluded a double tax treaty, may attempt to obtain indirectly benefits granted by the bilateral treaty only to residents of these States. These strategies are often implemented by establishing intermediary companies that may be qualified as “shell companies” (companies which typically exist on paper only, with minimal or no substance or activities) in jurisdictions of favourable tax treaties.

Which are the international measures to address treaty abuse and especially treaty shopping?

The proposed separate anti-abuse rules to address situations of treaty abuse (treaty shopping for technical tax avoidance), are provided by Action 6 OECD/ BEPS and the Multilateral Convention to Implement Tax Treaty related measures to prevent BEPS (thereinafter “MLI”), as following:

• A general anti- abuse rule based on the principal purpose of transactions/ arrangements, according to which Contracting States could deny the application of the preferential provisions of a bilateral treaty when transactions or arrangements entered into the application of a treaty in order to (only) obtain the tax benefits of these provisions in inappropriate circumstances (technical arrangements).
• A Principal Purpose Test (thereinafter “PPT”), according to which, having regard to all relevant facts and circumstances, obtaining that tax benefit is one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that tax benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.
• A simplified Limitation on Benefits Provisions (thereinafter “LOB”). The MLI does not include a detailed LOB provision given the substantial customization required by Contracting Jurisdictions. Instead, the MLI allows Parties that prefer to address treaty abuse by adopting a detailed LOB provision to opt out of the PPT and agree to “endeavor to reach a bilateral agreement that satisfies the minimum standard.”

Furthermore, between the two anti-abuse rules provided by the MLI provisions, Greece seems to opt for the PPT rule that will apply after being ratified and incorporated in the domestic legal framework of each jurisdiction. In case that the other jurisdiction chooses LOB although Greece chooses PPT, PPT rule is going to apply if the source country (place of payment) is Greece.

Which are the domestic measures to address treaty abuse and treaty shopping?

Under the provisions of article 38 of the Greek Procedure Tax Code (L. 4174/2013, PTC), a general anti-avoidance clause is incorporated in Greek tax law, according to which the Greek Tax Authorities may not take into consideration for the determination of taxes, any artificial arrangement or series of arrangements (such as any transaction, act, agreement, grant, communication, promise, commitment or event) designed to avoid taxation and results in a tax benefit. For tax purposes, the said arrangements are treated based on the characteristics of their economic status.

A specific anti-avoidance clause is also incorporated by the provisions of article 56 of ITC. In particular, articles 52 to 55 of ITC provide significant benefits (such as deferral of taxation), as regards the tax treatment of: (a) the transfer of assets in exchange of the transfer of securities (article 52 ITC), (b) the exchange of securities (article 53 ITC), (c) mergers and divisions (article 54 ITC) and (d) the transfer of the registered office of an SE or SCE (article 55 ITC). Under the provisions of article 56 ITC, the Greek tax authorities may refuse to apply or withdraw the benefits of all or any part of the provisions of articles 52 to 55, where it appears that the merger, division, transfer of assets, exchange of securities or the transfer of the registered office of an SE or SCE has as its principal objective or as one of its principal objectives tax evasion or tax avoidance; the fact that one of the operations referred to these Articles is not carried out for valid financial reasons such as the restructuring or rationalization of the activities of the companies participating in the operation may constitute a presumption that the operation has tax evasion or tax avoidance as its principal objective or as one of its principal objectives.

Which are the applicable EU rules for the avoidance of double taxation?

Various tax rules are provided for the avoidance of double taxation on income the most important of which are indicatively mentioned as follows: i) the EU Council Directive 2003/49 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, ii) the EU Council Directive 2011/96 on the common system of taxation applicable to dividend payments made between parent companies and subsidiaries of different Member States.

In addition, under the scope of double taxation avoidance, EU tax authorities have therefore agreed to cooperate more closely so as to be able to apply their taxes correctly to their taxpayers and combat tax fraud and tax evasion. The rules of Administrative Cooperation in the field of taxation, and specifically the (automatic) exchange of Information are based upon EU Council Directive 2011/16/EU as amended by EU Council Directives 2014/107/EU, 2016/881/EU, 2015/2376/EU, 2016/2258/EU and 2018/822/EU.

The principle of Mutual Administrative Assistance in the field of taxation, is incorporated in Greek Tax Law, by article 29 of the Procedure Tax Code (L. 4174/2013., PTC) and, specifically, as regards the exchange of information, by articles 1 to 25 of L. 4170/2013, as amended by the provisions of L. 4378/2016, L. 4484/2017 and L.4474/2017.