Memorandum of the Applicant · OECD Model Tax Convention on Income and Capital, Paris, 1977 and 1992-2000. OECD, The Impact of the Communications Revolution on the Application of

International and European Tax Moot Court Competition 2018-2019

Memorandum of the Applicant

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International and European Tax Moot Court Competition 2018-2019

Memorandum of the Applicant

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I TABLE OF CONTENTS

I TABLE OF CONTENTS 3

II LIST OF SOURCES 7

III STATEMENT OF FACTS 12

1. ENTITIES AND PERSONS INVOLVED 12

2. ECONOMIC ACTIVITIES OF THE ENTITIES INVOLVED 13

IV ISSUES 15

1. TAX AUTHORITIES – DEFENDANT 15

2. LADAR – APPLICANT 15

V ARGUMENTS 17

1. THEORETICAL FRAMEWORK 17

1.1 APPLICABILITY OF DOMESTIC LAW AND INTERNATIONAL LAW 17

1.2 APPLICABILITY OF OECD AND UN COMMENTARIES AND THEIR RELEVANCE

18

1.2.1 LEGAL STATUS OECD COMMENTARIES 18

1.2.2 LEGAL STATUS UN COMMENTARIES 19

1.2.3 APPLICABILITY COMMENTARIES ON DTC TERRABRAKE-TYRELAND 20

1.3 CONCLUSION 20

2. LADAR IS ENTITLED TO THE TREATY BENEFITS AS LADAR IS RESIDENT IN

TERRABRAKE 21

2.1 REQUIREMENTS TO CONSTITUTE PLACE OF EFFECTIVE MANAGEMENT 21

2.2 LADAR ITS PLACE OF EFFECTIVE MANAGEMENT IS SITUATED IN

TERRABRAKE 22

2.3 MR. PEPPONEN IS NOT EFFECTIVELY MANAGING LADAR 23

2.4 CONCLUSION 24

3. INTERPRETATION OF THE AGREEMENT: R&D PARTNERSHIP LADAR –

RENOLO 24

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3.1 NO WITHHOLDING TAX ON CONTRIBUTIONS MADE TO THE R&D

PARTNERSHIP 26

3.2 LADAR AND REONOLO ARE NOT ASSOCIATED ENTITIES AND PRICE IS A

THIRD-PARTY PRICE 27

3.3 CONCLUSION 27

4. NO WITHHOLDING TAX ON $300,000 PAYMENT OF 7% NET SELLING PRICE

SALAMANDERS 27

4.1 PAYMENT IS NOT A ROYALTY SO NO WITHHOLDING TAX APPLIES 28

4.1.1 PAYMENT IS NOT MADE AS CONSIDERATION FOR INDUSTRIAL,

COMMERCIAL OR SCIENTIFIC EQUIPMENT 28

4.1.2 PAYMENT NOT MADE FOR ANY COPYRIGHT 28

4.1.3 PAYMENT NOT MADE FOR THE USE OR RIGHT TO USE INFORMATION

CONCERNING INDUSTRIAL OR SCIENTIFIC EXPERIENCE 29

4.1.4 INTERIM CONCLUSION 29

4.2 PAYMENT IS NOT MADE FOR TECHNICAL SERVICES SO NO WITHHOLDING

TAX APPLIES 29


4.3 $300,000 PAYMENT LADAR – RENOLO IS A BUSINESS PROFIT 30

4.4 CONCLUSION 30

5. NO WITHHOLDING TAX ON $50,000 LUMP SUM PAYMENT FOR THE

SALAMANDER’S APP FROM LADAR TO RENOLO 31

5.1 PAYMENT IS NOT A ROYALTY PAYMENT SO NO WITHHOLDING TAX

APPLIES 31


5.2 PAYMENT IS NOT MADE FOR TECHNICAL SERVICES FEE SO NO WHT

APPLIES 33

5.2.1 MAKING SOFTWARE AVAILABLE IS NOT A TECHNICAL SERVICE 33

5.2.2 ROUTINE SERVICES DO NOT CONSTITUTE TECHNICAL SERVICES 34

5


5.3 $50,000 PAYMENT FOR SALAMANDER’S APP QUALIFIES AS BUSINESS

PROFIT 36

5.4 CONCLUSION 36

6. NO WITHHOLDING TAX ON MONTHLY $1,000 PAYMENTS FOR SERVER USAGE

FROM LADAR TO RENOLO 36

6.1 PAYMENTS FOR SERVER USAGE ARE NOT ROYALTY PAYMENTS SO NO

WITHHOLDING TAX APPLIES 36

6.1.1 THE PAYMENTS FOR SERVER USAGE DO NOT QUALIFY AS PAYMENTS

FOR THE USAGE OF SCIENTIFIC EQUIPMENT 36

6.1.2 THE PAYMENTS ARE NOT MADE FOR COPYRIGHT OR INFORMATION 38

CONCERNING SCIENTIFIC EXPERIENCE 38


6.2 PAYMENTS FOR SERVER USAGE ARE NOT TECHNICAL SERVICE FEES SO NO

WITHHOLDING TAX APPLIES 39

6.2.1 PROVIDING SERVER ACCESS IS NOT A TECHNICAL SERVICE 39

6.2.2 THE SERVER DOES NOT CONTAIN A SPECIALIZED DATABASE

CUSTOMIZED FOR THE USE OF LADAR 39


6.3 MONTHLY $1,000 PAYMENTS FOR SERVER USAGE ARE BUSINESS PROFITS 41

6.4 CONCLUSION 41

7. NO WITHHOLDING TAX ON THE $100,000 LUMP SUM AND ANNUAL $50,000

PAYMENTS FOR THE USE OF “BUILDING YOUR CAR” DATABASE 42

7.1 NO WITHHOLDING TAX ON PAYMENT FOR ACCESS TO DATABASE 42

7.1.1 THE PAYMENT FOR ACCESS TO THE “BUILDING YOUR CAR” DATABASE

DOES NOT CONSTITUTE A ROYALTY PAYMENT 42

7.1.2 THE PAYMENT FOR ACCESS TO THE “BUILDING YOUR CAR” DATABASE

DOES NOT CONSTITUTE A FEE FOR TECHNICAL SERVICES 42

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7.1.3 PAYMENT FOR DATABASE ACCESS QUALIFIES AS BUSINESS PROFIT SO

NO WITHHOLDING TAX APPLIES 43


7.2 NO WITHHOLDING TAX ON PAYMENT FOR TRAINING 44

7.2.1 TRAINING ACTIVITIES FOLLOW QUALIFICATION OF PRINCIPAL PAYMENT

FOR THE DATABASE 44

7.2.2 PAYMENT FOR TRAINING ALONE DOES NOT CONSTITUTE ROYALTY 44

7.2.3 NO WITHHOLDING TAX APPLIES AS THE TRAINING IS OF ROUTINE

NATURE 45

7.2.4 RENOLO IS AN EDUCATIONAL INSTITUTION SO EXEMPTION SHALL

APPLY 45

7.2.5 PAYMENT FOR TRAINING QUALIFIES AS BUSINESS PROFIT OR IS

EXEMPTED UNDER 12A DTC TERRABRAKE-TYRELAND SO NO WHT APPLIES 46


7.3 CONCLUSION 47

8. NO WITHHOLDING TAX ON $10,000 REIMBURSEMENT PAYMENT TO RENOLO

FOR EXPENSES MADE BY MR. FIXER 47

8.1. PAYMENT SHALL NOT BE SUBJECTED TO WITHHOLDING TAX 47

8.3 CONCLUSION 48

9. SUMMARY CONCLUSION 48

10. REQUESTS TO THE COURT 50

VI LIST OF ABBREVIATIONS 51

7

II LIST OF SOURCES

BOOKS

Baker, P. (2001) Double Taxation Conventions, A manual on the OECD Model Tax Convention on

income and on capital, London.

Connolly, T., Begg C. (2014) Database Systems – A Practical Approach to Design, Implementation

and Management.

Fett, E. (2014), Triangular Cases, The Application of Bilateral Income Tax Treaties in Multilateral

Situations, IBFD.

Hagedoorn, J. (2002) Inter-firm R&D partnerships: an overview of major trends and patterns since

1960, Research Policy.

Hladik, K. (1985) International Joint Ventures, Lexington MA: Lexington Books; Nooteboom, B.

(1999) Inter-Firm Alliances—Analysis and Design, London: Routledge.

Lang, M., Pistone, P., Rust, A., Schuch, S., Staringer, C. (2017) The UN Model Convention and Its

Relevance for the Global Tax Treaty Network, IBFD, Amsterdam.

Prokisch, R. (1994) Fragen der Auslegung von Doppelbesteuerungsabkommen, SWI.

Vogel, K (1989) Double Taxation Conventions, 3rd edition, Kluwer Law International.

Vogel, K. (1991) On Double Taxation Conventions, Kluwer.

Wassermeyer, F. (2015) Doppelbesteuerung OECD-Musterabkommen 3rd ed.

CONTRIBUTIONS IN BOOKS

Van Raad, K. (1984) Het nationale recht bij de uitlegging van belastingverdragen, in: Van wet naar

recht: opstellen, aangeboden aan Prof. Mr. J.P. Scheltens.

COMMENTARIES

OECD, (2017) Commentaries on the articles of the Model Tax Convention.

UN, (2017) Commentaries on the Articles of the United Nations Model Double Taxation Convention

between Developed and Developing Countries.

ARTICLES

Ault, H. J. (1994) The role of the OECD Commentaries in the Interpretation of tax Treaties, Intertax

4.

8

Avery Jones, J. F. (2002) The Effect of Changes in the OECD Commentaries after a Treaty is

Concluded, Bulletin for International Fiscal Documentation.

Beretta, G. (2017) The Notions of “Beneficial Ownership” and “Place of Effective Management” in

Respect of a Passive Holding, European Taxation, 57(6).

Butani, M. H., Chawla, A., (2005), Income Characterization of Software Payments – A Contemporary

Tax Perspective, Asia-Pacific Tax Bulletin, 11(4).

Chichester: Wiley; Harrigan, K. R. (1985) Strategies for Joint Ventures, Lexington MA.

Dussauge, P., Garette, B. (1999) Cooperative Strategy—Competing Successfully Through Strategic

Alliances.

Garbarino, C. (2018) The Tax Treaty Implications of the Remuneration as Royalties of Intellectual

Property and Intangibles, European Business Law Review.

Hagedoorn, J. (1993) Understanding the rationale of strategic technology partnering: inter-

organizational modes of cooperation and sectoral differences’, Strategic Management Journal.

Harrigan, K. R. (1988) Joint ventures and competitive strategy, Strategic Management Journal,

9(2).

Lang, M. (1997) Later Commentaries of the OECD Committee on Fiscal Affairs, Not to Affect the

Interpretation of Previously Concluded Tax Treaties, Intertax, 25(1).

Lan, S. (2018) China (People’s Rep.)/OECD/United Nations - A Comparative Study of the

“Royalties” Provisions in the Tax Treaties Concluded by China, Bulletin for International Taxation

72(3).

Long, Y. (2005) Re-considering the PanAmSat Case, 1 Intl. Taxn. China.

Meli, J. (2017) Central Management and Control and the Bywater Case: A Quantum Leap or

Clarification of the Status Quo? Asia-Pacific Tax Bulletin, 23(4).

Palma, R. (2004) Income Taxation of Intellectual Property and Know-How: Conundrums in The

Interpretation of Domestic and Tax Treaty Law’, Eur. Tax. 44.

Pötgens, F. P. G. (2016) Independent Professional Diver Residing in the Netherlands Did Not Have

a Fixed Base in India, European Taxation, 56(10).

Roberts, S. I., Glicklich, P. A. (1986) U.S. Interprets Netherlands-U.S. Treaty by Reference to Later

Treaties with Other Nations,' 34 Can. Tax Journal.

Sachdeva, S. (2013) Tax Treaties Overrides: A Comparative Study of the Monist and the Dualist

Approaches, Intertax, 41(4).

9

Sixdorf F., Leitsch, S. (2017) International - Taxation of Technical Services under the New Article

12A of the UN Model – Improved Taxation or a Step in the Wrong Direction?’, European Taxation

57(6).

Van Raad, K. (1978) Interpretatie van belastingverdragen, MBB 1978/49.

Van Raad, K. (1996) Interpretation and Application of Tax Treaties by Tax Courts, European

Taxation 36(1).

Verhoef, C. (2002) Quantitative IT portfolio management, Science of Computer Programming,

Elsevier, 45(1).

Vogel, K, (2000) The Influence of the OECD Commentaries on Treaty Interpretation, IBFD Bulletin,

54(12).

Young, R. (1999) The Use of Extrinsic Aids in the Interpretation of Tax Treaties, Tax Management

International Journal.

JUDGEMENTS

Australia

High Court of Australia, Thiel v. Federal Commissioner of Taxation, (1990) 171 CLR 338.

Canada

Federal Court of Appeal 19 October 1998, Cudd Pressure Control Inc. v. The Queen, FCA-369-95.

Tax Court of Canada 7 December 2000, Gordon Sumner v. The Queen, TCC 98-1222-IT-G; 98-1410-

IT-G

Federal Court of Appeal, Farmparts Distributing Ltd. v. Her Majesty the Queen, 1980.

Federal Court of Appeal, Vauban Productions v. The Queen CTC 262, 1979.

France

Conseil d'Etat, (2012.), Mr Paupardin v.Ministre du budget, des comptes publics et de la réforme de

l’État, case n. 323592.

India

AAR, (2003), Dun and Bradstreet Espana S.A. v. N/, case n. 615.

AAR, (2009), Factset Research Systems Inc. v. Director of Income Tax, case n. 787.

AAR, (2009), Sri Ramachandra Educational & Health Trust v. Tax Authority, case n. MISC 03/673.

10

Income Tax Appellate Tribunal, (2009), Mahindra & Mahindra v. DCIT, case n. TS-5212-ITAT-

2009.

Income Tax Appellate Tribunal, (2011), case n. IT(TP)A 6.

Income Tax Appellate Tribunal, (2013), C. U. Inspections Pvt Ltd vs DCIT, case n. 142 ITD 761.

Philippines

Supreme Court of Philippines, (2013), case n. 197117.

Spain

Case 4085/2005, 28 February 2008, JurisprudenciaTributaria (2008), Tribunal Económico

Administrativo Central.

The Netherlands

Hoge Raad (1978) 11 October, BNB 1978/300.

Hoge Raad, (1992), 2 September, BNB 1992/379.

Hoge Raad (2003) 21 Februari, ECLI:NL:HR:2003:AF2699.

Hoge Raad, (2015), ECLI:NL:PHR:2015:399.

Hoge Raad, (2016), case n. 14/03647.

United Kingdom

First-tier Tribunal, (2007), Lee and Bunter v. HMRC, case n. TC05757.

United States

United States United States Tax Court 12 December 1996, The North West Life Assurance

Company of Canada v. Commissioner of Internal Revenue, no. 4694-94.

United States Court of Federal Claims 7 July 1999, National Westminister Bank, Plc., v. United

States of America, nr. 95-758 T.

Tax Court 2 May 1995, The Taisei Fire and Marine Insurance Co., Ltd, et. al. v. Commissioner of

Internal Revenue, no. 14296-92, 14297-92, 14298-92, 14299-92.

OECD DOCUMENTS

OECD (1963) Draft Double Taxation Convention on Income and Capital.

11

OECD Model Tax Convention on Income and Capital, Paris, 1977 and 1992-2000.

OECD, The Impact of the Communications Revolution on the Application of “Place of Effective

Management” as a Tie Breaker Rule.

OECD, Clarification on the Application of the Permanent Establishment Definition in E-commerce:

Changes to the Commentary on the Model Tax Convention on Article 5.

OECD (2017) Discussion Draft on Additional Guidance on the Attribution of Profits to Permanent

Establishments.

OECD (2001) Tax Treaty Characterisation Issues Arising from E-Commerce

INTERNATIONAL DOCUMENTS

Agreement on Trade-Related Aspects of Intellectual Property Rights.

Berne Convention.

United Nations Model Double Taxation Convention.

VCLT, Vienna Convention on the Law of Treaties (1980).

American Law Institute (1992) Federal Income Tax Project, International Aspects of United States

Income Taxation 11, Proposals on United States Income Tax Treaties, p. 44-45.

ONLINE SOURCES

Kang, J. (2016) Samsung Will Be Apple’s Top Supplier For iPhones Again In 2017, available at:

https://www.forbes.com/sites/johnkang/2016/12/16/samsung-will-be-apples-top-supplier-for-

iphones-again-in-2017/#356d4c041fb0

http://www-new.redbullracing.com/article/red-bull-racing-and-renault-announce-new-agreement

German Federal Ministry of Finance, Final guidance on classification of cross-border software and

database use payments for withholding tax purposes (27 Oct. 2017), available at

https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Ein

kommensteuer/2017-10-27-beschraenkte-steuerpflicht-und-steuerabzug-bei-

grenzueberschreitender-ueberlassung-von-software-und-datenbanken.pdf

Case GECF Asia Limited vs. DIT, ITA no. 8922/Mum/2010, available at: www.taxsutra.com

https://www.investopedia.com/terms/i/intangibleasset.asp

https://www.forbes.com/sites/johnkang/2016/12/16/samsung-will-be-apples-top-supplier-for-iphones-again-in-2017/#356d4c041fb0





https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Einkommensteuer/2017-10-27-beschraenkte-steuerpflicht-und-steuerabzug-bei-grenzueberschreitender-ueberlassung-von-software-und-datenbanken.pdf



http://www.taxsutra.com/

https://www.investopedia.com/terms/i/intangibleasset.asp

12

III STATEMENT OF FACTS

1. ENTITIES AND PERSONS INVOLVED

1 Ladar is a company incorporated in the Companies House of the city of Diesela in the State

of Terrabrake in 2010. It is specialized in producing car-boats, which are popular in

Terrabrake. The Board of Directors of Ladar is made up of three members who live in

Terrabrake. Board of Directors decides the long-term commercial strategy, analyses the

overall performance of the company and compares the results with those published in the

industry. Meetings of the Board of Directors are always held at the premises of Ladar in

Terrabrake. Directors' contracts are yearly-renewable. They are being assessed by the

shareholders of Ladar in the Annual General Assembly, usually held in December in

Terrabrake. The General Assembly has the power to remove the directors and appoint new

ones at any time. Ladar has two shareholders, Mr. Pepponen and his niece Mrs. Hamilton.

Mrs. Hamilton has 40% shareholding and Mr. Pepponen has 60% of the shareholding. In 2018,

Mr. Pepponen moved his tax residence to Crocodile Islands.

2 Renolo is a company incorporated city of Petroldam in the State of Tyreland in 1975.

Corporate object of Renolo is the following: automotive research and development,

improvement of the vehicles production process and training for the automotive industry.

Apart from the research activities, Renolo does specialized training and courses to vehicle

engineers. The Ministry of Industry of Tyreland has acknowledged the important research and

training activities carried out by Renolo to the automotive industry. From 2015 onwards,

Renolo is entitled to issue to the recipient of the courses an “Official Certificate of Expert in

Motors”.

3 Mr. Adam Fixer is the Chief Engineer of his employer Renolo. He works for 20 years for

Renolo and is a prestigious engineer.

4 RenoloApps is an entire subsidiary of Renolo incorporated in the Company House of the

Crocodile Islands since 2015. RenoloApps is specialized in application software for

automotive companies. Almost all employees and directors of RenoloApps are residents in

Crocodile Island.

13

2. ECONOMIC ACTIVITIES OF THE ENTITIES INVOLVED

5 On 21 January 2021, Ladar entered into a service agreement with Renolo. Engineers of Renolo

have developed a crankshaft, which increases the speed of the car-boats and the same time

decreases the consumption of gas.

6 There is a 5-year commercial agreement concluded in 2021 between Ladar and Renolo by

which Renolo transfers to Ladar all the information and technical documents regarding the

production of the crankshaft. In the agreement, Renolo authorises Ladar to conduct research

in order to improve it during the duration of the contract.

7 Ladar is authorized to entrust a third party to carry out this research but has the duty to

communicate to Renolo any activity of research carried out over the crankshaft. An

authorisation has to be granted by Renolo. Each year of duration of the agreement, Ladar has

to pay 7% of the net selling price of the Salamanders. In 2021, the payment made by Ladar to

Renolo was $300,000.

8 In addition, Renolo grants in 2021 to Ladar access to the database BYC “Building Your Car”

for the five year period of the contract. In February, two employees of Renolo did a two-day

training for several employees of Ladar in the State of Terrabrake. The course was mainly

focused on the functioning of the database. Several sessions were devoted to explain the most

common problems in the production of car-boats. Ladar paid a lump sum of $100,000 for the

subscription to the Renolo’s database and the two-day training. For the remaining years of the

contract, the subscription fees amount to $50,000 per year. Training was provided by Renolo

only once.

9 Moreover, Renolo provided to Ladar an application software for mobile platforms –

Salamander's App – and provides access to the server in Crocodile Islands on which the

application is running during the period of the contract. Ladar may distribute the application

to Salamander owners but is prohibited from copying, de-compiling, de-assembling, or

reverse engineering the software.

10 The mobile application was developed by Renolo's subsidiary RenoloApps. Prior to the

agreement between Ladar and Renolo, in 2017, RenoloApps entered into a general agreement

with Renolo allowing Renolo to negotiate, license and sell its products. For these activities,

Renolo was granted a fee of 10% on all revenues received.

11 Upon connecting a mobile phone to the car boat, the application sends relevant information to

the RenoloApps server located in the Crocodile Islands. After that, all information about each

14

crankshaft is forwarded to the engineers of Renolo, who elaborate a descriptive report and a

technical opinion about it on a monthly basis. Reports and technical opinions are stored at the

server located in the Crocodile Islands, and Ladar can access them.

12 Commercial agreement between Ladar and Renolo allows Ladar to transfer the data received

to a third party in order to carry out research to improve the crankshaft. Ladar has the duty to

communicate it to Renolo in advance; however, Renolo does not have to give authorization.

In 2021, Ladar made a payment of a lump sum of $50,000 to Renolo for the Salamander’s

App. It also agreed to make 60 monthly payments of $1,000 to Renolo for the use of the server

located in Crocodile Islands.

13 On 15 September 2021, one of the crankshafts in a car-boat went on fire. The Salamander’s

App did not help in diagnosing the problem. Renolo sent Mr. Adam Fixer, a prestigious

engineer of Renolo, to the production plant of Salamanders to provide Ladar with an

explanation. After being a week in Terrabrake, Mr. Fixer sent Ladar an extensive report

outlining that the fire was likely caused by a chain reaction. Ladar didn't pay for the report

elaborated by Mr. Fixer, but it reimbursed his full expenses in Terrabrake. Mr. Fixed provided

invoices corresponding to the amount which was reimbursed.

15

IV ISSUES

1. TAX AUTHORITIES – DEFENDANT

14 The tax authorities of Terrabrake noticed that Ladar did not levy any withholding taxes on the

payments made to Renolo during 2021. Tax authorities consider that all payments should be

subjected to withholding tax.

15 From the first viewpoint of the TA is that the DTC between Tyreland and Terrabrake should

not apply following the statement that Ladar is a company resident in the Crocodile Islands.

16 Thereafter, even if the DTC between Tyreland and Terrabrake would apply, all payments,

including the expense reimbursement to Mr. Fixer, would be subjected to withholding tax in

accordance to the DTC between Tyreland and Terrabrake.

17 The remuneration for the transfer of information and technical documents regarding

production of the crankshaft falls under Art. 12. of the Treaty between Terrabrake and

Tyreland. The payment is taxable in accordance with Art. 12(2) of the Convention.

18 Furthermore, the remuneration for the use of the database and the two-days training should

both be considered as a royalty. If the payments are not classified as royalty, it should be

considered as a fee for technical service.

19 Mr. Fixer’s reimbursement is a fee for technical service. Also, there is a fixed base in

Terrabrake under the scope of the art. 12 A of the Double Tax Treaty.

2. LADAR – APPLICANT

20 First, the theoretical framework shall be demonstrated in order to provide the grounds for a

correct interpretation of the case and treaty for the assessment of this case.

21 Second, it will be demonstrated that Ladar is resident of Terrabrake under Art. 4(3), since its

place of effective management is situated therein.

22 Third, it will be shown that Ladar and Renolo entered into a R&D partnership. The payments

made in relations to this partnership are a matter of sharing resources and shall be qualified as

business profits under Art. 7 DTC Terrabrake-Tyreland.

23 Fourth, it will be proven that the payment made for the application 'Salamander's App' is not

a royalty payment. Considering the application shall not be regarded specialized software

made and customized on behalf of Ladar, it shall not be seen as FTS. By doing so, the payment

shall be seen as business profit and shall not be subjected to WHT according to art. 7 DTC

Terrabrake-Tyreland.

16

24 Fifth, it will be established that the payment made for server usage cannot be seen as a royalty

following that there is no payment for any technical information or copyright or use or right

to use industrials, commercial and scientific equipment. Then, it will be proven that the

payment is made for routine work and not for a specialized database customized to the use of

Ladar. By doing so, the payments shall not be subjected to any WHT as they are business

profits in accordance with Art. 7 DTC Terrabrake-Tyreland.

25 Sixth, it will be proven that, in line with the framework set out for the server usage, the

database ‘build your own car’ and the instruction training for the use of the database shall not

constitute a royalty or FTS and shall not be subjected to withholding tax. Even if it would be

claimed that the training should be assessed separately, it shall be demonstrated that Renolo

is an educational institution. By doing so, the exemption of FTS under Art. 12A shall be

invoked and the payment shall not be subjected to WHT.

26 Seventh, it will be shown that the reimbursement made to Renolo for the expenses made by

Mr. Fixer are not subjected to WHT following the R&D partnership. In addition, the payment

is not made for any service provided as the report will be paid for by Renolo via the salary

that Mr. Fixer receives. Hence, the payment shall not be subjected to WHT according to Art.

7 DTC Terrabrake-Tyreland.

17

V ARGUMENTS

1. THEORETICAL FRAMEWORK

In order to assess the case and to come to the appropriate outcome, the relevant applicable law and

guidelines should be determined as a theoretical framework.

1.1 APPLICABILITY OF DOMESTIC LAW AND INTERNATIONAL LAW

27 For Terrabrake being a monist state, tax treaties act as a restriction of taxing rights, pursuant

to the legal unacceptability of tax treaty override.1 The DTC Terrabrake-Tyreland,

therefore, presents the maximum taxing right of the state of Terrabrake. Consequently,

little value can be derived from the domestic laws of Terrabrake.

28 Domestic law would only gain relevance when Art. 29 DTC Terrabrake-Tyreland could be

invoked following an abusive arrangement, or when the domestic law would lead to a more

favourable outcome resulting from the lesser taxing right in domestic law.

29 Regarding international law, Terrabrake and Tyreland concluded an investment treaty (BIT)

that enables provisions of the TRIPS Agreement.2

30 Pursuant to BIT Terrabrake-Tyreland and the TRIPS Agreement, the articles of the Berne

Convention regarding the protection of copyright become applicable for computer

programs.3

31 In addition, both Terrabrake and Tyreland are signatories of the Vienna Convention on the

Law of Treaties (VCLT). The VCLT entails the codification of the proper usage of

international law. The treaties should be applied in good faith and the interpretation should be

in accordance with the VCLT.

1 Sachdeva, S. (2013) Tax Treaties Overrides: A Comparative Study of the Monist and the Dualist Approaches, Intertax,

41(4), p.207. 2 Art. 8 (3) (b) BIT Terrabrake-Tyreland. 3 Art. 10 (1) TRIPS Agreement. Although the TRIPS arranges specifically the same protection of copyright for computer

programs as the Berne Convention, there is, pursuant the WIPO Copyright Treaty (more than 50 signatures), the general

notion that computer programs qualify as artistic and/or literary work under the Berne Convention. Copyright Protection

on Software.

18

1.2 APPLICABILITY OF OECD AND UN COMMENTARIES AND THEIR

RELEVANCE

32 The DTC Terrabrake-Tyreland is based on the OECD MC with deviations in articles 4 (3),

12, 12A, 14, 21 and 29. These deviated articles are an exact copy of the articles presented in

the UN MC 2017.4

33 In order to establish an appropriate outcome, it is therefore essential to assess the legal status

of both the OECD MC and UN MC and their respective commentaries.5

1.2.1 LEGAL STATUS OECD COMMENTARIES

34 Pursuant the VCLT, “a treaty shall 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."6

35 The literature argues that the OECD commentaries give meaning to this ‘ordinary meaning’.7

However, the context in the light of the object and purpose influence the ordinary meaning.

The ordinary meaning should therefore not be determined in the abstract, but according to the

context of the treaty in question and pursuant to its object and purpose.8

36 The OECD commentaries are an internationally accepted medium to provide important

guidance to defining the context or object and purpose9, irrespective10 under which article of

the VCLT the legal status of the commentaries would be confirmed.11

4 DTC Terrabrake-Tyreland 2019. 5 NL: Hoge Raad 31 March 2015, ECLI:NL:PHR:2015:399. 6 Art. 31 (1) VCLT. 7 Vogel, K, (2000) The Influence of the OECD commentaries on Treaty Interpretation, IBFD Bulletin, p. 614-615;

Prokisch, R. (1994) Fragen der Auslegung von Doppelbesteuerungsabkommen, SWI. 8 OECD (1963) Draft Double Taxation Convention on Income and Capital, OECD, Paris; Model Tax Convention on

Income and Capital, OECD, Parijs, 1977 and 1992-2000. 9 See e.g. Vogel, K. (1991) On Double Taxation Conventions, Kluwer; Pötgens, F. P. G. (2016) Independent Professional

Diver Residing in the Netherlands Did Not Have a Fixed Base in India, In: European Taxation, 56(10) p. 436; Roberts,

S. I., Glicklich, P. A. (1986) U.S. Interprets Netherlands-U.S. Treaty by Reference to Later Treaties with Other Nations,'

34 Can. Tax J., p. 228; Baker, P. (2001) Double Taxation Conventions, A manual on the OECD Model Tax Convention

on income and on capital, London; Lang, M. (1997) Later commentaries of the OECD Committee on Fiscal Affairs, Not

to Affect the Interpretation of Previously Concluded Tax Treaties, Intertax, 25(1), p. 7. 10 Consensus is internationally missing regarding which article of the VCLT provides legal status to the OECD

commentaries, but there seems to be a de facto judgement to the applicability of the OECD commentaries under the

VCLT. Ault, H. J. (1994) The role of the OECD commentaries in the Interpretation of tax Treaties, Intertax 4, p. 145. 11Some courts and authors define the applicability of OECD commentaries under the context following Art. 31 (2) VCLT.

See Young, R. (1999) The Use of Extrinsic Aids in the Interpretation of Tax Treaties, Tax Management International

Journal, p. 811., NL: HR 2 September 1992, BNB 1992/379, HR 11 October 1978, BNB 1978/300. Others are of the

opinion the applicability follows from Art. 31 (4) as it would give ‘special meaning’. See for instance Ault, H. J., op. cit.,

p. 146-7; Vogel, K. (2000) op. cit., p. 614; Avery Jones, J. F. (2002) The Effect of Changes in the OECD commentaries

after a Treaty is Concluded, Bulletin for International Fiscal Documentation, p. 102. There is also support to place it under

19

37 Courts do, however, not always follow this notion. An important reason to either dissent or

adopt this notion is whether commentaries are representing the intent of the contracting

states when negotiating and concluding this treaty.12 Depending on the facts and

circumstances, the commentaries can be of some assistance13, useful extrinsic aid14 or helpful

guidance15 for the interpretation of a tax treaty.16

38 Another factor is whether the states in question took a position on the commentaries or made

any reservations or observations regarding the commentaries.17 In this respect Besides, the

commentaries are deemed to represent the default setting for the interpretation of tax

treaty provisions based on the OECD MC, unless a contracting state made their position,

reservations or observations known or the contracting states have agreed to deviate from

(parts) of the OECD MC and/or the commentary.18

1.2.2 LEGAL STATUS UN COMMENTARIES

39 The commentaries of the UN MC have no legal status and are therefore not legally binding.19

40 However, the commentaries can provide guidance in interpreting tax treaties in the instance

that countries decided to base their DTC on the UN MC or specific provisions thereof. 20

41 Nevertheless, when the articles, provisions or the relevant parts of provisions in question have

the same wording as the OECD MC, then the OECD commentaries have to be taken into

account too.21

art. 32 VCLT as supplementary means of interpretation. Here the scope does not have to be limited by ambiguous and

obscure outcomes having absurd or unreasonable outcomes as result. See Lang, M. (1997) op. cit., p. 7; Van Raad, K.

(1978) Interpretatie van belastingverdragen, MBB 1978/49, Ault, H. J., op.cit., p. 145; Van Raad, K. (1984) Het

nationalerechtbij de uitlegging van belastingverdragen, in: Van wet naarrecht (Scheltensbundel), p. 163; Van Raad, K.

(1996) Interpretation and Application of Tax Treaties by Tax Courts, European Taxation, 36(1), p. 4; AU: High Court

of Australia, Thiel v. Federal Commissioner of Taxation, (1990) 171 CLR 338, F.C. 90/034. 12 See Young, R. R. op.cit., p. 809-810; Avery Jones, J. F., op. cit., p. 103; CA: Federal Court of Appeal 19 October 1998,

Cudd Pressure Control Inc. v. The Queen, FCA-369-95; USA: United States Tax Court 2 May 1995, The Taisei Fire and

Marine Insurance Co., Ltd, et. al. v. Commissioner of Internal Revenue, nr. 14296-92, 14297-92, 14298-92, 14299-92.. 13 CA: Federal Court of Appeal 19 October 1998, Cudd Pressure Control Inc. v. The Queen, FCA-369-95. 14 CA: Tax Court of Canada 7 December 2000, Gordon Sumner v. The Queen, TCC 98-1222-IT-G; 98-1410-IT-G. 15 USA: United States Tax Court 12 December 1996, The North West Life Assurance Company of Canada v.

Commissioner of Internal Revenue, nrs. 4694-94. 16 USA: United States Court of Federal Claims 7 July 1999, National Westminister Bank, Plc., v. United States of

America, nr. 95-758 T; Cf. American Law Institute, 'Federal Income Tax Project, International Aspects of United States

Income Taxation 11, Proposals on United States Income Tax Treaties, p. 44-45 (1992): 17 NL: Hoge Raad 21 Februari 2003, ECLI:NL:HR:2003:AF2699. 18 Hugh J. Ault, op.cit., p. 146-7. 19 Lang, M., Pistone, P., Rust, A., Schuch, S., Staringer, C. (2017) The UN Model Convention and Its Relevance for the

Global Tax Treaty Network, IBFD, Amsterdam, p. 1. 20 NL: Hoge Raad 21 Februari 2003, ECLI:NL:HR:2003:AF2699. 21 M. Lang et. al., op. cit., p. 1.

20

42 Furthermore, the OECD commentaries shall prevail when it cannot be proven that the treaty

partners intended to follow interpretation given by the UN commentaries to certain provisions

of the concluded tax treaty.22

1.2.3 APPLICABILITY COMMENTARIES ON DTC TERRABRAKE-TYRELAND

43 Both Contracting States are OECD and UN member and have not taken a position or

provided observations or reservations in the process of developing these model conventions

and their respective commentaries.

44 Neither did the Contracting States provide – apart from the deviations – any dissenting views

during the negotiations of DTC that would suggest a different interpretation than the

commentaries.

45 Thus, considering the wording of the DTC Terrabrake-Tyreland is in full accordance with the

OECD MC – with deviations in before mentioned articles – the OECD commentaries should

be applied for the interpretation the DTC Terrabrake-Tyreland.

46 The UN commentaries can provide guidance till the extent that the OECD commentaries do

not prevail. In this respect, Art. 12 DTC Terrabrake-Tyreland is similar in wording to both

UN MC 2017, as OECD MC prior to 1992.23

47 With the absence of a statement made by the treaty partners to follow the UN

commentaries for the interpretation of Art. 12 DTC Terrabrake-Tyrland, it shall be

concluded that the intent to follow the UN commentaries is not proven following the earlier

mentioned Dutch ruling.

48 Hence, the OECD commentaries and guidance provided on OECD MC 1977 shall take

precedence over the UN commentaries 2017 for the interpretation of Art. 12 DTC

Terrabrake-Tyreland.

1.3 CONCLUSION

49 Due to the fact that Terrabrake is a monist state, the DTC Terrabrake-Tyreland presents the

maximum taxing right. Consequently, little value can be derived from the domestic laws of

Terrabrake.

22 NL: Hoge Raad 21 Februari 2003, ECLI:NL:HR:2003:AF2699. 23 Art. 12 OECD MC 1977.

21

50 Regarding international law, the Berne Convention can be used as a basis to establish relevant

copyrights, artistic or literary work.

51 In addition, the OECD commentaries should be used to interpret the DTC Terrabrake-

Tyreland in accordance with the VCLT.

52 UN commentaries can only provide assistance to the interpretation where the wording

would be followed of the UN MC. Nonetheless, articles, provisions or parts involving the

same wording as the OECD MC requires the OECD commentaries to prevail, unless the

contracting states would have made their intentions known to follow the UN MC and its

respective commentaries.

53 Consequently, for the interpretation of Art. 12 DTC Terrabrake-Tyreland the OECD

commentaries in relation to the OECD MC shall prevail.

2. LADAR IS ENTITLED TO THE TREATY BENEFITS AS LADAR IS RESIDENT IN

TERRABRAKE

2.1 REQUIREMENTS TO CONSTITUTE PLACE OF EFFECTIVE MANAGEMENT

54 In contrast to the claim made by the TA, it shall be proven that Ladar is resident of Terrabrake

in accordance with Art. 4 DTC Terrabrake-Tyreland.

55 By doing so, Ladar will be granted treaty access and will be entitled to treaty benefits pursuant

Art. 1 (1) DTC Terrabrake-Tyreland.

56 According to the national laws of Terrabrake, companies that have place of effective

management (hereinafter: POEM) situated there are considered tax residents. For tax treaty

purposes POEM as referred to in Art. 4(1) of the Model Tax Convention is located where the

company is actually managed.24

57 POEM is the place where key management and commercial decisions which are necessary for

the conduct of the business are in substance made. That will ordinarily be the place where the

most senior person or group of persons makes its decisions, the place where the actions to

be taken by the entity as a whole are determined. No definitive rule can be given and all

relevant facts and circumstances must be examined to determine the place of effective

management.25

24 Art. 4(1) OECD M, see: Conseil d'Etat, (2012.), Mr Paupardin v.Ministre du budget, des comptes publics et de la

réforme de l’État, case n. 323592. 25 OECD Commentary 2017 Art. 4 (24).

22

58 The factors to be examined include the following:26

● Place where directors meet to make decisions relating to the management of the

company

● Place where the centre of top-level management is located

● Place where the business operations are actually conducted

● Place where controlling shareholders make key management and commercial

decisions

59 In addition, legal factors such as, for example, the place of incorporation, the location of

the registered office and the place of residence of the directors must be taken into

account.27 It is necessary to consider all the relevant facts and circumstances of the case,

including the nature and object of activities performed by the company.28

2.2 LADAR ITS PLACE OF EFFECTIVE MANAGEMENT IS SITUATED IN

TERRABRAKE

60 In the case at hand, POEM is situated in Terrabrake for several reasons.

61 First of all, the Board of Directors makes key management and commercial decisions in that

country. All of the members of Board live in Terrabrake, where they also hold the meetings

and make business decisions.

62 Directors are very knowledgeable about management and therefore not likely to follow

somebody else’s advice on strategic decisions related to the company. An example of their

involvement is seen in the situation where “Building Your Car” database was purchased from

Renolo. The opinion of the directors was crucial, as they had the authority to assess whether

the solutions of the database could be applicable to Ladar’s production process.

63 According to recent case law Board of Directors has unsubstantial power if it only decides in

the day-to-day management of the company.29 This is not the case in Ladar as activities of the

Board include deciding the long-term commercial strategy, analyzing the overall

performance of Ladar and comparing its results with the results published in the

industry.

26 OECD, The Impact of the Communications Revolution on the Application of “Place of Effective Management” as a

Tie Breaker Rule, par. 31. 27 Id. 28 Beretta, G. (2017) The Notions of “Beneficial Ownership” and “Place of Effective Management” in Respect of a Passive

Holding Company, European Taxation, 57(6), p. 254. 29 United Kingdom First-tier Tribunal, (2007), Lee and Bunter v. HMRC, case n. TC05757.

23

64 These activities determine the conduct of the business as a whole and are vital for its future

development. The abovementioned decisions are made exclusively by the Board of Directors.

Therefore, the place where the persons exercising the highest functions in the enterprise make

the strategic decisions that determine the conduct of the business as a whole is Terrabrake.30

2.3 MR. PEPPONEN IS NOT EFFECTIVELY MANAGING LADAR

65 Mr. Pepponen cannot be considered to form POEM himself. He is not attending the

boardmeetings, nor approving decisions of the Board of Directors.

66 Mr. Pepponen is not sufficiently involved in the decision-making process and does not have

enough information to make strategic decisions. The mere receiving of the information at the

end of the meeting or in form of scanned documents cannot be regarded as management

function. At the time Mr. Pepponen is notified, the decisions are already made in Terrabrake.

67 Even though Mr. Pepponen holds meetings with final clients, by the time those meetings take

place all the negotiations and important details of the agreement are done by the Board of

Directors.

68 Mr Peponnen’s involvement in the business is of purely formalistic nature. Formalities like

these should be disregarded, since the place of effective management requires a substance

over form approach.31

69 The general assembly of Ladar, in which he is the majority shareholder, takes place in

Terrabrake.

70 Furthermore, although Mr. Pepponen is an engineer, his questionable skills in business

administration make him unable to run the business by himself. Persons running the company

need adequate education to be efficient and keep track of developments in the industry.

Education and managerial ability in most cases go hand by hand and Ladar is not an exception.

71 An outsider such as Mr. Pepponen, who might merely influence directors who have a legal

power to control and direct a company is not the relevant decision maker and does not

exercise management of the company.32 Even if we would consider that Mr. Pepponen might

30 Conseil d'Etat, op. cit. 31 Wassermeyer, F., Doppelbesteuerung OECD-Musterabkommen 3rd ed., 2015 p. 100. 32 Meli, J. (2017) Central Management and Control and the Bywater Case: A Quantum Leap or Clarification of the Status

Quo? Asia-Pacific Tax Bulletin, 23(4), p. 4.

24

be supervising activities of the Board of Directors, it is indicated that a place from which a

business is merely supervised would not qualify as POEM.33

72 Based on the fact that there is a tradition of relax weekends taking place several times during

the year, it is possible to conclude that Mr. Pepponen is satisfied with the management

activities exercised by the directors.

73 This implies that their relationship is more than just business-related. It is based on trust and

mutual respect.

74 There are no indications that the directors might be removed from their function and

easily replaced. Therefore, the clause stating that the contract is yearly renewable is nothing

more than a hollow phrase.

75 Since Mr. Pepponen personally is covering all the expenses for the relax weekends, it is not

likely that business is discussed during the stay of the directors.

76 Another argument in the favor of Terrabrake as the POEM is the fact that directors of Ladar

signed the agreements with Renolo on the transfer of information and technical documents,

access to the database and the agreement on application software. This point proves that

directors have the key role in managing the company. They have the authority to conclude the

contracts and exercise that authority. All the agreements were signed in Terrabrake, where

the directors always meet.

2.4 CONCLUSION

77 Based on the above, it can conclude that Ladar is effectively managed from Terrabrake by

the Board of Directors, as all management activities are in substance made by the Board of

Directors and not by Mr. Pepponen. Therefore, Ladar and is a resident of Terrabrake and thus

has treaty access and is entitled to treaty benefits.

3. INTERPRETATION OF THE AGREEMENT: R&D PARTNERSHIP LADAR – RENOLO

78 The five-year commercial agreement between Ladar and Renolo is partly a so called ‘non-

equity’ R&D partnership, bound by the contractual form as described in parts of this

agreement.

33 Vogel, K, Double Taxation Conventions, 3rd edition, Kluwer Law International, p. 262; OECD, The Impact of the

Communications Revolution on the Application of “Place of Effective Management” as a Tie Breaker Rule, para. 28.

25

79 R&D partnerships are bound by contractual forms, they do not require equity, nor do they

require a separate entity controlled by two or more partners via shares.34 These partnerships

result in “the sharing of resources, usually through project-based groups of engineers and

scientists from each parent-company”.35

80 An R&D partnership results in a corporation on the level of a specific project, which has a

much lower organizational dependency than joint-ventures have.36 Unlike joint-ventures, an

R&D partnership will therefore not be under the risk of ‘the appetite for control’ or different

and/or deviant strategic objectives between the partners.37

81 In other words: the partnership is limited to what is agreed upon in the contract. No further

control – strategically or by management – is possible.

82 The parts of the agreement forming the R&D partnership are all activities described in relation

to the 7% net selling price of the Salamanders payment made from Ladar to Renolo and all

the reports provided by Renolo, including the $10.000 reimbursement of the expenses made

by Mr. Fixer.

83 The agreement highlights the shared objective of the partnership: the prevention of the

obsolescence of the crankshaft.

84 Hereby it must be stated that this agreement does not exclude Renolo from conducting

research to improve and update the crankshaft.

85 In addition, the agreement must be interpreted as such that Renolo continues to produce

crankshafts, as the production of crankshafts in general is their main business objective, and

Ladar continues to produce the car-boats.

86 It should be visualised that building anything in the high-tech industries is a complex business.

This have led to specialization and consequently resulted in the situation where other

businesses produce parts which are used for the end product.

34 Loc. cit. 35 J. Hagedoorn, ‘Inter-firm R&D partnerships: an overview of major trends and patterns since 1960’, Research Policy

31, 2002, p. 479; J. Hagedoorn, ‘Understanding the rationale of strategic technology partnering: inter-organizational

modes of cooperation and sectoral differences’, Strategic Management Journal 14, 1993, p. 371–385. 36 Loc. cit. 37 Dussauge, P., Garette, B. (1999) Cooperative Strategy—Competing Successfully Through Strategic Alliances,

Chichester: Wiley; Harrigan, K. R. (1985) Strategies for Joint Ventures, Lexington MA: Lexington Books; Harrigan, K.

R. (1988) Joint ventures and competitive strategy, Strategic Management Journal, 9(2), p. 141–158;

26

87 For example, Samsung was in 2017 Apple’s biggest supplier of hardware parts for their

iPhones.38

88 For the automotive industry it is not uncommon that certain partnerships exist, whereby both

parties profit from their contributions to the project.

89 For example, in Formula 1, an official joint-venture was set up between Red Bull Racing and

Renault Sport F1, where: “Red Bull Technology and Renault Sport F1 will contribute their

respective know-how, experience and specialist personnel to the project to achieve a

competitive and reliable power train to be used by Red Bull Racing and other customer

teams”.39 In the press statement where they announced their (extended) collaboration, they

also highlighted that the resources and expertise of Red Bull Technology would help with the

design and improvements of the engine that would be delivered by Renault.40

3.1 NO WITHHOLDING TAX ON CONTRIBUTIONS MADE TO THE R&D

PARTNERSHIP

90 In the light of the examples and intentions mentioned above, it can be stated that the transfers

and making available of all technical information documents and monthly reports are not a

transfer as such but are merely the contributions of Renolo to the partnership by sharing its

expertise.

91 In addition, the authorisation necessary to commission a third party for the research to update

the crankshaft, follows from the fact that de facto does not own the produced crankshafts.

92 Also, by doing sharing the resources, Renolo enables Ladar to contribute to the R&D with

their expertise in car-boats.

93 Namely, the Salamanders need to function in total and not just have a separately working

crankshaft and other technology on the chassis.

94 Regarding the remuneration of expenses towards the fieldwork of Mr. Fixer, Ladar only takes

its respective share of the costs. Renolo provides on the other hand resources – they pay salary

– by having their employee Mr. Fixer to develop the report on the fire.

38 Kang, J. (2016) Samsung Will Be Apple’s Top Supplier For iPhones Again In 2017, available at:

https://www.forbes.com/sites/johnkang/2016/12/16/samsung-will-be-apples-top-supplier-for-iphones-again-in-

2017/#356d4c041fb0 39 http://www-new.redbullracing.com/article/red-bull-racing-and-renault-announce-new-agreement (par. 3). 40 http://www-new.redbullracing.com/article/red-bull-racing-and-renault-announce-new-agreement (par. 5).





27

95 It can, therefore, be concluded that all remunerations and reimbursements for the R&D

partnership fall under the scope of business profits and should be taxed accordingly.

96 Based on art. 7 (1) DTC Terrabrake-Tyreland 2019, the sole taxing right is granted to

Tyreland.

97 Hence, the payments are not subjected to any withholding tax.

3.2 LADAR AND REONOLO ARE NOT ASSOCIATED ENTITIES AND PRICE IS A

THIRD-PARTY PRICE

98 Ladar and Renolo are based on Art. 9 of the DTC Terrabrake-Tyreland 2019 not associated

enterprises.

99 The companies namely do not participate directly or indirectly in each other’s management,

control or capital, nor are there persons participating directly or indirectly in the management,

control or capital of one another.41

100 Hence, Ladar and Renolo are fully independent and third parties in relation to each other and

only share a project-based cooperation.

101 Therefore, any price set is a third-party price and would not establish any discussion on

whether it is at arm’s length and whether the payment includes profit shifting.

3.3 CONCLUSION

102 There is no subjection to withholding tax on the $300.000 payment (7% net selling price of

the Salamanders) and $10.000 payment (expenses made by Mr. Fixer) made to Renolo.

103 Namely, the prices are independent third party prices and following from the R&D partnership

between Ladar and Renolo, these payments are qualified as business income under the DTC,

granting Tyreland the sole taxing right.

4. NO WITHHOLDING TAX ON $300,000 PAYMENT OF 7% NET SELLING PRICE

SALAMANDERS

104 Even if the notion of the R&D partnership would not be adopted, the payments would still not

be subjected to any WHT.

41 Art. 9 (1) (a) and (b) OECD MC.

28

4.1 PAYMENT IS NOT A ROYALTY SO NO WITHHOLDING TAX APPLIES

4.1.1 PAYMENT IS NOT MADE AS CONSIDERATION FOR INDUSTRIAL, COMMERCIAL

OR SCIENTIFIC EQUIPMENT

105 The information and documents transferred would be qualify as a transfer of ‘know-how’.

‘Know-how’ namely “denotes undivulged information of an industrial, commercial or

scientific nature arising from previous experiences that have not been patented and do not

generally fall within other categories of intellectual property rights, but which have practical

application, so that the disclosure of such information creates an economic benefit”.42

106 When something is qualified as ‘know-how’, then it cannot be qualified as industrial,

commercial or scientific equipment under art. 12 (3) DTC.43

107 Hence, the technical documents are not equipment and do not give rise to a royalty payment

under the latter.

4.1.2 PAYMENT NOT MADE FOR ANY COPYRIGHT

108 Although all information and technical documents were transferred, no copyright was actually

being transferred. Namely, the insight provided with the technical documents does not lead to

any copyright infringement.

109 In general, the constitution of copyright infringement without a licence or remuneration would

be a requirement for the qualification of royalty under the right to use copyright.44

110 The documents, however, are not being used for distribution matters or for reproducing the

crankshaft.

111 With the documents, Ladar can provide R&D on the interaction of the crankshaft with the

other (technological) parts of the car-boat. Consequently, Ladar can create a better harmonised

Salamander. while contributing at the same time to the prevention of the crankshaft becoming

obsolescence.

112 Therefore, insight provided with the technical documents does not lead to any copyright

infringement as the documents are not being used for reproducing or distributing the

crankshaft.

42 Palma, R. (2004) Income Taxation of Intellectual Property and Know-How: Conundrums in The Interpretation of

Domestic and Tax Treaty Law’, Eur. Tax. 44, p. 480; Garbarino, C. (2018) The Tax Treaty Implications of the

Remuneration as Royalties of Intellectual Property and Intangibles, European Business Law Review, p. 359. 43 OECD commentary 2017 Art. 12 (11); UN commentary 2017 Art. 12 (13.2). 44 OECD commentary 2017 Art.12 (13.1); UN commentary 2017 Art. 12 (8).

29

113 Hence, the payment does not constitute a royalty payment under the latter.

4.1.3 PAYMENT NOT MADE FOR THE USE OR RIGHT TO USE INFORMATION

CONCERNING INDUSTRIAL OR SCIENTIFIC EXPERIENCE

114 The transfer of the documents also does not qualify as the ‘use of’ or ‘the right to use’

information concerning industrial or scientific experience.

115 Regarding the information concerning industrial and scientific experience, the criteria to

qualify the payment as royalty under this latter follows from whether the confidentiality of the

‘know-how’ is protected contractually.45

116 In the agreement, the confidentiality provision is lacking. Hence the payment cannot be

qualified as royalty payment for the use or right to use information concerning industrial or

scientific experience.

4.1.4 INTERIM CONCLUSION

117 Based on above, the payment does not constitute a royalty. Hence, there is no subjection to

any WHT under the latter.

4.2 PAYMENT IS NOT MADE FOR TECHNICAL SERVICES SO NO WITHHOLDING

TAX APPLIES

118 All provisions in the agreement regarding the $300,000 paid from Ladar to Renolo cannot be

qualified as FTS.

119 In order to qualify a performance as FTS:

● the service provider has to use special knowledge, skill or expertise.46

● In addition, costs has to incur at the service provider.47

● Moreover, a service provider has to fulfil the needs of the service receiver by utilizing

technologies and resources.48

● Finally, services of routine nature are not being considered technical services.49

45 OECD commentary 2017 Art. 12 (11.3). 46 Garbarino, C., op. cit., p. 359 2018; UN commentary 2017 Art. 12A (62). 47 OECD commentary 2017 Art. 12 (11.4). 48 Lan, S. (2018) China (People’s Rep.)/OECD/United Nations - A Comparative Study of the “Royalties” Provisions in

the Tax Treaties Concluded by China, Bulletin for International Taxation 72(3); Long, Y. (2005) Re-considering the

PanAmSat Case, 1 Intl. Taxn. China, p. 77. See also OECD commentary 2017 Art. 12 (11.2). 49UN commentary 2017 Art. 12A (62).

30

120 These main characteristics are, however, not met.

121 Firstly, the transfer of technical documents and information does not require any special

knowledge, skills or expertise. It is a matter of sharing documents. Herewith also no

(substantial) costs would incur.

122 Secondly, the authorisation to let Ladar conduct its own research and communicate this to

Renolo would not require any special knowledge, skills or expertise. Also, no costs incurred

by this authorisation to perform research by Ladar. It is the opposite: Ladar uses special

knowledge, skills, expertise and resources to perform R&D activities on the crankshaft of

Renolo. It is, therefore, Ladar fulfilling the needs of Renolo.

123 Thirdly, acquiring authorisation to commission a third party to perform R&D activities would

also not constitute a service. Namely, granting the authorisation would not require the use of

special knowledge, skills or expertise while performing an actual activity. Considering the

crankshaft, the product of Renolo, it is more a limitation till what extent Ladar is free to

perform R&D activities in the shared-project, rather than that Renolo is giving a performance

towards Ladar. Hence, the resources - if any - are not significant enough and not being spent

according to the needs of Ladar.

124 Hence, the $300,000 payment is not a FTS under the latter.


125 In conclusion, it can be stated that all activities described do not fulfil the requirement of a

technical service. Therefore, there is no subjection to WHT under this latter.

4.3 $300,000 PAYMENT LADAR – RENOLO IS A BUSINESS PROFIT

126 The $300,000 payment shall be a business profit considering there is no indication that the

performances constitute a professional service, dividends distribution, or interest payment.

127 Hence, the payment shall not be subjected to any WHT, considering the art. 7(1) DTC

Terrabrake-Tyreland grants Tyreland the sole taxing right.

4.4 CONCLUSION

128 The $300,000 payment made by Ladar to Renolo does not constitute a royalty payment or

FTS and does not lead to any WHT under the latter.

31

129 The payment is considered a business and grants Tyreland the sole taxingright based on art. 7

(1) DTC Terrabrake-Tyreland.

130 Hence, Terrabrake cannot levy any WHT.

5. NO WITHHOLDING TAX ON $50,000 LUMP SUM PAYMENT FOR THE

SALAMANDER’S APP FROM LADAR TO RENOLO

5.1 PAYMENT IS NOT A ROYALTY PAYMENT SO NO WITHHOLDING TAX

APPLIES

131 The payment for the application software ‘Salamander’s App’ cannot be qualified as a royalty.

132 As elaborated under 1.2.2, royalties are payments of any kind for the use of or right to use any

copyright – including literary and scientific work, any design or model – or for the use of, or

the right to use industrial, commercial or scientific equipment or for information concerning

industrial, commercial or scientific experience.50

133 Even though distribution is protected under copyright51, the App does not qualify for the use

or right to use any copyright. Namely, payments made for the (exclusive) distribution

rights are not qualified for the use or right to use any copyright as these payments52 “are not

made for the use or right to use an element of property”.53 Namely, they are not made to

exploit any right in the software copyrights.54 Here Ladar is only an intermediary and does

not acquire a licence to use the underlying copyright of the software in the Salamander’s App.

Hence, no royalty arises on the basis of a copyright payment.

134 Moreover, payment for the App does not qualify as royalty for the use or right to use

information, considering there’s no transfer of information as such as software itself does

not qualify as information.55 For the transfer of information or the right to use information, it

would be necessary that the ideas and principles underlying the software - such as the

technology used, logic and way of coding are supplied too.56

50 Art. 12 (3) DTC Terrabrake – Tyreland 2019. 51 Art. 14 (1) Berne Convention. 52 Canada, Federal Court of Appeal, Farmparts Distributing Ltd. v. Her Majesty the Queen, [1980].

C.T.C. 205, 28 February 1980; Canada, Federal Court of Appeal, Vauban Productions v. The Queen [1979] CTC 262. 53 OECD commentary 2017 Art. 12 (10.1). 54 OECD commentary 2017 Art. 12 (13.1); UN commentary 2017 Art. 12 (14.4). 55 M. Lang et al., op. cit., p. 136. 56 OECD commentary 2017 Art 12 (11.5); UN commentary 2017 Art. 12 (14.3).

32

135 This requirement is, however, not met. This view is also confirmed by the Indian court where

the use of skill and experience by the provider is not the same as imparting the information to

have the performance qualified under the royalty provision.57

136 In this case, there is no use of or right to use any equipment. as the software does not qualify

as equipment. The general notion regarding equipment is that it is both tangible and

movable.58 Hence, it cannot be an intangible asset.5960 Following this accepted notion,

software – as intangible – would not qualify as equipment.

137 In addition, software is being qualified as a form of intellectual property.61 This excludes

the possibility for classification as equipment. Hence, the payment for the application cannot

be qualified as a royalty for the use of equipment, even if the interpretation would be broader

than the general notion of equipment.

138 On top of that, even though Ladar will use the application itself in service-providing activities

to its customers and R&D activities, Germany for instance provides extra guidance that WHT

can arise under the royalty provision if the payment is made for the simple granting of rights

to use the software for the purposes of which the software was typically created”.62 The

rationale behind here is that payments are made for the service for creating the application and

not as such for the use or right to use the application (and it’s underlying copyright).63

139 Therefore, ultimately, the payment cannot be considered as royalty for the use of or the right

to use any copyright, information or equipment and we would urge the court to rule in such

way.


140 Hence, considering the payment cannot be qualified as royalty, the payment is not subject to

withholding tax under Art. 12 DTC Terrabrake-Tyreland.

57 GECF Asia Limited vs. DIT, ITA no. 8922/Mum/2010 (Taxsutra.com). 58 Lang, M. et. al., op. cit., p. 136. 59 OECD, Tax Treaty Characterisation Issues Arising from E-Commerce, OECD 2001, p. 12. 60 https://www.investopedia.com/terms/i/intangibleasset.asp. 61 OECD commentary 2017 Art. 12 (12.2); UN commentary 2017 Art. 12 (12.2). 62 See German Federal Ministry of Finance, Final guidance on classification of cross-border software and database use

payments for withholding tax purposes (27 Oct. 2017), available at

https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Einkommensteuer/2017

-10-27-beschraenkte-steuerpflicht-und-steuerabzug-bei-grenzueberschreitender-ueberlassung-von-software-und-

datenbanken.pdf 63Garbarino, C., op. cit., p. 359 2018

33

5.2 PAYMENT IS NOT MADE FOR TECHNICAL SERVICES FEE SO NO WHT

APPLIES

141 Although it sounds persuasive that software applications are developed with technical skills

and expertise, we strongly argue that the providing of Salamander’s App by Renolo did not

constitute a technical service under the following two main and standalone arguments:

142 Renolo provided the software application and did not develop it - hence the payment is made

for making the software available; and

143 Even if the development would be attributed to Renolo, the software in question follows from

routine work, lacking customization by tailormade programming.

144 As elaborated under 1.2.3, Art. 12A DTC defines fees for technical services as “any payment

in consideration for any service of (…) technical (…) nature”.64

145 Not every payment, however, where any skill is used results in a technical service. If the

service is of a routine nature, then the transfer of specialized knowledge, skills or expertise or

the usage of specialized knowledge, skills or expertise on behalf of the client would be deemed

to not have incurred or applied.65 The payment would then not be covered by Art. 12A DTC

Terrabrake-Tyreland.66

146 Besides, the use of technology is not indicative whether a service can be qualified as technical

service.67

5.2.1 MAKING SOFTWARE AVAILABLE IS NOT A TECHNICAL SERVICE

147 Renolo is not the developer of the software application ‘Salamander’s App’. As the

commercial agreement clearly states, Renolo provides the software to Ladar and Ladar pays

$50.000 for making this software available.

148 Making software available, does not constitute a technical service if the provider of software

is not the one who developed the software68 and if this software is not created and customized

on behalf of the client, resulting in specialized software.69

64 Art. 12A (2) DTC Terrabrake – Tyreland 2019. 65 UN Commentary 2017 Art. 12A (62). 66 Sixdorf F., Leitsch, S. (2017) International - Taxation of Technical Services under the New Article 12A of the UN

Model – Improved Taxation or a Step in the Wrong Direction?’, European Taxation 57(6), par 2. 67 OECD, Tax Treaty Characterisation Issues Arising from E-Commerce, OECD 2001, par. 41, p. 14. 68 OECD (2001), op. cit., par. 42, p. 14. 69 UN Commentary 2017 Art. 12A (90) (91).

34

149 Considering Renolo only makes the software available and does not develop (specialized)

software, the payment cannot be seen as a fee for technical services.

150 Hence, the payment is not subject to withholding tax under Art. 12A DTC Terrabrake-

Tyreland.

5.2.2 ROUTINE SERVICES DO NOT CONSTITUTE TECHNICAL SERVICES

151 Even if our position under 2.2.1 would not be adopted, the payment must still not be

considered a fee for technical services.

152 The development of Salamander’s App is not specialized software created and customized

on behalf of Ladar and cannot be considered more than routine work.

153 RenoloApps is a company specialized in making applications for the automotive industry and

makes applications for multiple clients. The performances and software architecture

required of all these applications for automotive vehicles are the same. It is irrelevant

that vehicles differ in form (car, motor, car-boat, etc.).

154 Regarding the Salamander’s App, the standard software would be customized to the

preferences of Ladar. This customization would be for instance: colours the App contains,

functionalities Ladar wants to enable – for instance the communication link between

customers and Ladar, the social media hub and the displaying of the crankshaft performances

to the owners of the Salamandars – and what template Ladar would like to be used. This

customization should be seen as choosing between different standard packages or

modules and not as a development of specialized software which is tailormade for a single

user.70

155 This argument can also be confirmed by the characteristics of the performances regarding the

App as described in the commercial agreement between Ladar and Renolo.

156 The commercial agreement was signed on 21st of January and the application was operative

since the agreement entered into force, considering payments start per 1 January 2021 for the

use of the server to host the application and store data from and for the application.

157 It is, however, unrealistic that without or in advance of a contractual agreements a tailormade

software application would be built considering the high degree of effort and costs to develop

an application or this size.

70 UN Commentary 2001 Art 12 (3.12) and (3.13).

35

158 Besides, based on the estimation and valuation method Function Point analysis for software

development and quantitative IT portfolio management, it is highly implausible that the

product offered by the service provider was a technical service. Based on this method, the

smallest projects to create new, customized and specialized client/server models71 would

require a minimum of 12 months for it to be developed, tested, implemented, trained and

distributed.72 Based on the limited amount of time that would have been available to develop

the software, it is implausible that Salamander’s app is a newly created, customized and

specialized software resulting from a technical service.

159 Another solid argument is that the price for projects similar in size like the Salamander’s

App would amount over $1,000,000.73 Therefore, the $50,000 does not come close to the

price of a newly created, customized and specialized software application.

160 Following from the fact that Ladar and Renolo are, as discussed in 1.2.1, not associated

enterprises, the price is set between third parties and therefore the price encompasses the

economic value of the activity performed. The price can therefore be taken as solid indicator

for the effort, costs and technical skills and expertise used in relation to the payment made

by Ladar to Renolo.

161 The assembling of the modules and providing the modules with template fitting the customer

(company colors, logo’s etc.) therefore is and should be regarded as providing general

products, services or practices on routinely base.74

162 These modules are not specially created for Ladar and the underlying software and

programming code is not created on behalf of Ladar. There is no research, analysis or

advice provided that relates to Ladar’s particular circumstances. Because of this, there is no

technical knowledge, skill and expertise used in the essence of Art. 12A DTC Terrabrake-

Tyreland. Therefore, the payment cannot be considered a fee for technical services.75


163 Hence, considering the payment cannot be qualified as a fee for technical services, the

payment is not subject to withholding tax under art. 12A DTC Terrabrake-Tyreland.

71 Client/server models is system where machines (clients) connect to a server via requests and communicate via this

server or via an interface to this server and backwards. Applications like the Salamander’s App are a client/server model. 72 Verhoef, C. (2002) Quantitative IT portfolio management, Science of Computer Programming, Elsevier, 45(1), p. 17. 73 Ibid., p. 23. 74 UN commentary 2017 Art. 12A (95). 75 UN commentary 2017 Art. 12A (96); OECD (2001), par. 42, p. 14.

36

5.3 $50,000 PAYMENT FOR SALAMANDER’S APP QUALIFIES AS BUSINESS

PROFIT

164 There is no indication that making the software available constitute a scientific, literary or

artistic activity, following that the database is not newly created. Besides, the activity is not

performed by the qualifying professions.

165 Therefore, payment does not qualify as payment for professional services under Art. 14 DTC

Terrabrake-Tyreland.76

166 Therefore, based on the rationale that the payment from Ladar to Renolo for the software

provided is a remuneration for making the software available or is a payment for routine

services, the remuneration should be regarded a business profit and shall only be taxable by

Tyreland in accordance with Art. 7 (1) DTC Terrabrake-Tryeland.

5.4 CONCLUSION

167 Based on the aforementioned arguments, the payment shall be qualified as business profits,

following that the payment does not qualify as royalty payment, FTS or professional service

payment.

168 Pursuant Art. 7 (1) Terrabrake-Tyreland, Tyreland shall be granted the sole taxing right.

169 Consequently, no WHT shall apply.

6. NO WITHHOLDING TAX ON MONTHLY $1,000 PAYMENTS FOR SERVER USAGE

FROM LADAR TO RENOLO

6.1 PAYMENTS FOR SERVER USAGE ARE NOT ROYALTY PAYMENTS SO NO

WITHHOLDING TAX APPLIES

6.1.1 THE PAYMENTS FOR SERVER USAGE DO NOT QUALIFY AS PAYMENTS FOR

THE USAGE OF SCIENTIFIC EQUIPMENT

170 For the qualification of equipment under the latter, it is necessary to rely on interpretation

outside the UN commentaries as the commentaries do not provide a definition.77

76 Art. 14 (1) and (3) DTC Terrabrake-Tryeland. 77 UN commentary 2017 Art. 12 (13.2).

37

171 Notwithstanding the lack of definition, The UN MC commentary does not specifically exclude

rental payments – including operational lease – from the scope “for the use of or the right to

use scientific equipment”.78

172 However, as proven under 1.2.3, the OECD prior to 1992 commentaries prevail, including the

guidance provided later on them, and therefore a rental scheme cannot be qualified as using

industrial, commercial or scientific equipment if it would be solely based on following UN

commentary.

173 However, even though the UN commentaries could be disregarded, the payment would not

constitute a royalty payment under both the OECD and UN rationale.

174 Namely, the UN commentaries give guidance – in accordance with the OECD commentaries

2017 – in the only available example where remuneration is paid by a customer for the use of

a part or whole the capacity of the satellite. The costumer, however, does not acquire the

possession or control of the satellite, nor does it has access to the transponder.79 Therefore

the UN commentaries conclude that this is a transmission service, which cannot be a

considered a royalty under the notion of the use of, or the right to use industrial, commercial

or scientific equipment.80

175 In addition to what can qualify as royalty, depends on a non-exclusive list of factors and the

relevance of those factors in each individual case, based on the work on e-commerce of the

OECD.81

176 According to a Spanish case in 2008, it is decisive that the server used for hosting a webpage

is under control of the company who paid for this performance.82 Whether the company

actually had physical possession of the server or whether it was the sole client using the server

was weighted, but not leading in the case.83

177 In light of the above, Ladar only uses a part of the capacity of a server for the hosting

data and reports.

178 Ladar has no physical access, nor does Ladar have access to the ‘equipment’ as such. It can

only access the by provider made available user domain and not the underlying programs.

78 UN commentary 2017 Art. 12 (13.3). 79 Garbarino, C., op. cit., p. 359. 80 OECD commentary 2017 Art. 12 (9.3) and (9.2); UN MC commentary 2017 Art. 12 (13.4) 81 OECD (2001), par. 42, p. 14. 82 Spain – Case 4085/2005, 28 February 2008, Jurisprudencia Tributaria (2008), Tribunal Económico Administrativo

Central. 83 Spain – Case 4085/2005, 28 February 2008, Jurisprudencia Tributaria (2008), Tribunal Económico Administrativo

Central; Tax Treaty Characterisation Issues Arising from E-Commerce, OECD 2001, par. 42, p. 14.

38

179 Hence, the payment for server access shall not constitute a royalty payment.

180 In addition, pursuant to the court cases and the OECD rationale, apart from the access to the

contents made available on the user domain of Ladar, it has no control whatsoever over the

server.

181 Firstly, Ladar does not determine how and for how long the data and report are stored on

the server and how or when the maintenance is performed.

182 Secondly, Ladar has no right to update or replace the software or equipment at will.

183 Lastly, considering that Renolo offers similar services to other clients, there are more users

of the server and Ladar does not control this.

184 Therefore, this combined application service provider and data warehousing transaction

constitutes remuneration for rendering services - and not for renting out the server – and

which cannot be qualified as a royalty payment.84

6.1.2 THE PAYMENTS ARE NOT MADE FOR COPYRIGHT OR INFORMATION

CONCERNING SCIENTIFIC EXPERIENCE

185 The payment for the server usage does not cover the payment for copyrighted work and can

therefore under this latter not be qualified as royalty.

186 The payment is solely made for the service of providing access and not for the service of

providing information. Therefore, the payment for the server does not cover any information

concerning scientific experience.

187 Even if this notion would not be adopted, the data and reports available are – and will be – the

result of future emerging data. It can therefore not be qualified as information concerning

any experience. Hence the hypothetical payment for such information cannot qualify as

royalty.


188 Based on the above, it can be concluded that the payment by Ladar made to Renolo for the

usage of the server is cannot be considered a royalty on the base that it the payment follows

from rendering services rather than renting industrial, commercial or scientific equipment.

84 OECD (2001), par. 30 and 31, p. 13.

39

189 In addition, the payment is not made for copyrighted work or information concerning

scientific experience forthcoming.

190 Hence, the payment is not subjected to WHT under Art. 12 DTC Terrabrake-Tyreland.

6.2 PAYMENTS FOR SERVER USAGE ARE NOT TECHNICAL SERVICE FEES SO

NO WITHHOLDING TAX APPLIES

6.2.1 PROVIDING SERVER ACCESS IS NOT A TECHNICAL SERVICE

191 Providing access to a server does not require any service of technical nature.85

192 Making data available for a fee by means of providing access to a server is also not considered

technical of nature.86

193 It is hereby irrelevant that setting up the server and developing the digital software might

require itself substantial technical skills, as the development is not the service provided to

Ladar, but rather the service of providing access and making data available.87

194 Consequently, providing access is of routine nature given no specialized knowledge, skill or

expertise was used on behalf of the client or transferred to the client.88

6.2.2 THE SERVER DOES NOT CONTAIN A SPECIALIZED DATABASE CUSTOMIZED

FOR THE USE OF LADAR

195 As exemption, the notion that providing access to a server is deemed to not give rise to the

usage of specialized knowledge, skill or expertise, the UN commentaries conclude the

opposite in the case where the access is given to a specialized database which is customized

to the needs of the access recipient.89

196 A database in the spirit of this article is the whole database system where the raw data is being

cleaned and transformed with the use of software – so called database-management system

(DbMS) – into a comprehensive, logically structured collection of data that can be used for

data analysis.90 The DbMS utilizes database schemas which serve as a classification of the

data collected and managed.91

85 UN commentary 2017 Art. 12A (90); OECD (2001), op. cit., par. 40, p. 15. 86 UN commentary 2017 Art. 12A (90); OECD (2001), op. cit., par. 41, p. 15. 87 OECD (2001), op. cit., par. 41, p. 15 88 UN commentary 2017 Art. 12A (62). 89 UN Commentary 2017 Art. 12A (91). 90 Connolly, T., Begg C. (2014) Database Systems – A Practical Approach to Design, Implementation and Management,

p. 52, 98. 91 Connolly, T., Begg C., op. cit., p. 244.

40

197 The technical nature here is the building of the software that automates inter alia the

collection, cleaning, transforming, ordering and structuring of the raw data.

198 In order to build this, high-level input regarding the working of crankshafts is necessary to

adopt a fitting DbMS.

199 It is therefore not the collected data what makes a database a ‘specialized database’, but the

design and development of the DbMS.92

200 Merely, the collection of data for Ladar is employed by the design of a database schema. This

database schema is being used by the DbMS to identify and order the data coming from Ladar.

The design and development of a database schema is trivial compared to the design and

development of the overall database system.93 Therefore, the database does not constitute a

specialized database for the particular use of Ladar in the spirit of the article.

201 Namely, following the same rhetoric as used in 2.2.2 for the application software, the DbMS

is not newly created and customized on behalf of Ladar.

202 More clients of Renolo uses similar applications and it is likely they use the server in similar

way. Hence, the development of the DbMS was done for a general cause for the R&D

activities of Renolo and not tailormade to any of the clients.

203 Furthermore, the commercial agreement does not indicate any (substantial) input of Ladar to

qualify the design or architecture of the database for the use of Ladar. The directions are solely

given by Renolo and therefore rely on the R&D needs of Renolo. Hence, the database,

specialized or not, can therefore not be regarded made for the use of Ladar.

204 Lastly, the remuneration is considered way too low to be a payment for a specialized database

customized for a client.94

205 Hence, the monthly payments are not made for the access to a specialized database customized

to the use of Ladar and can therefore not qualify as technical service fee.


206 It can be concluded from the above statements and explanations that Ladar was not provided

access to a server that includes a specialized database customized to Ladar’s use.

92 Connolly, T., Begg C., op. cit., p. 125. 93 Connolly, T., Begg C., op. cit., p. 245. 94 Verhoef, C., op. cit., p. 23.

41

207 Therefore, the position should be taken as under 3.3.1 that Renolo only provided access to a

server, which is service is of routine nature. Consequently, the service does not qualify as

technical service.

208 Hence, the payment is not subjected to WHT under Art. 12A DTC Terrabrake-Tyreland.

6.3 MONTHLY $1,000 PAYMENTS FOR SERVER USAGE ARE BUSINESS PROFITS

209 There is no indication that providing access to a server constitute a scientific, literary or artistic

activity, nor is the activity performed from the profession as physicians, lawyers, engineers,

architects, dentists or accountants.

210 The payment should therefore be qualified as business profit rather than as professional

service.95

211 Hence, no the payment is not subjected to tax as business profits can only be taxed by the

Contracting State of which the recipient is resident.96

212 Hence, the payments cannot be subjected to WHT, as Tyreland is granted the sole taxing

rights.97

6.4 CONCLUSION

213 Based on the above it can be concluded that the remuneration for the usage of the server does

not constitute a royalty payment as there is no copyrighted work or information concerning

scientific experience forthcoming.

214 In addition, Ladar was not provided access to a server that includes a specialized database

customized to Ladar’s use. Consequently, no the payment does not qualify as a FTS.

215 Furthermore, there’s no indication that providing access to a server constitute a scientific,

literary or artistic activity, nor is the activity performed from the profession as physicians,

lawyers, engineers, architects, dentists or accountants.

216 Thus, the payment should therefore be qualified as business profit rather as professional

service.

217 Hence, the $1.000 monthly payments are not subjected to WHT pursuant Art. 7 (1) DTC

Terrabrake-Tyreland that grants Tyreland the sole taxing rights.

95 Art. 14 DTC Terrabrake-Tryeland. 96 Art. 7 (1) DTC Terrabrake-Tyreland. 97 Art. 7 (1) DTC Terrabrake-Tryeland

42

7. NO WITHHOLDING TAX ON THE $100,000 LUMP SUM AND ANNUAL $50,000

PAYMENTS FOR THE USE OF “BUILDING YOUR CAR” DATABASE

218 As shown by the facts of the case, the database is not made specifically for Ladar. It is a

standardized product providing information about problems regarding the production

process of cars in general. It will, therefore, follow the same notion as set out for the usage of

the server under 6.

7.1 NO WITHHOLDING TAX ON PAYMENT FOR ACCESS TO DATABASE

7.1.1 THE PAYMENT FOR ACCESS TO THE “BUILDING YOUR CAR” DATABASE DOES

NOT CONSTITUTE A ROYALTY PAYMENT

219 Taking into account abovementioned facts and legal qualifications, it is possible to conclude

that relationship between Renolo and Ladar constitutes an end-user contract. Acquired rights

are limited to those necessary to enable Ladar to access and operate the program. These

rights allow Ladar only to copy the database onto its computer hard drive and does not

constitute a royalty payment.98

220 Right to use copyright of any literary, artistic, or scientific work related to the database is not

transferred. The subscriber is permitted to use the only insubstantial amount of the licensed

materials in the normal conduct of their businesses.99

221 Pursuant the arguments under 6.1.1, the database cannot be seen as equipment, considering

the database is an intangible. Besides, it lacks substantial impact to the business to be of

importance to be considered a tool for conducting their business.100 Moreover, no control

whatsoever over the database is provided by Renolo to Ladar to constitute the use of

equipment.

222 Hence, the payment does not constitute a royalty, so no WHT shall apply under the latter.

7.1.2 THE PAYMENT FOR ACCESS TO THE “BUILDING YOUR CAR” DATABASE DOES

NOT CONSTITUTE A FEE FOR TECHNICAL SERVICES

223 The database shall be seen as a standardized database that is used by a variety of clients of

Renolo.

98 Butani, M. H., Chawla, A., (2005), Income Characterization of Software Payments – A Contemporary Tax Perspective,

Asia-Pacific Tax Bulletin, 11(4), p. 300. 99 AAR, (2009), Factset Research Systems Inc. v. Director of Income Tax, case n. 787. 100 UN Commentary 2017 Art. 12 (13.1).

43

224 In addition, it can be inferred that Ladar could have obtained right to use similar database from

another party, as standardized database provides only general information about car

production process.101

225 The payments that Renolo receives from Ladar for access to its database cannot be considered

fees for technical services within the meaning of Art. 12A (3) DTC Terrabrake-Tyreland as

making access available is not technical of nature.102

226 Hence, the payment does not constitute FTS and, so no WHT shall apply under the latter.

7.1.3 PAYMENT FOR DATABASE ACCESS QUALIFIES AS BUSINESS PROFIT SO NO

WITHHOLDING TAX APPLIES

227 Considering there is no indication that Art. 14 DTC Terrabrake-Tyreland applies, the payment

made for the database access shall be qualified as business profit.

228 Such business profit shall be taxable only in the state of Tyreland.103

229 In this contract Ladar is merely a consumer within an end-user contract with access to the

general database, provided by Renolo is the same manner to Ladar, as to all its other clients.

Rights acquired with regard to the contract are limited to those necessary to enable Ladar

enhance the production process. It is possible to conclude that contract between Ladar and

Renolo has typical characteristics of an end user license agreement.


230 The arguments above show that the access provided to the database does not constitute a

royalty payment and is routine of nature and can therefore not be qualified as technical service.

231 There is no indication the payment qualifies as professional service and thus the payment

qualifies as business profit.

232 Under Art. 7 (1) DTC Terrabrake-Tyreland the sole taxing right is granted to Tyreland, so no

WHT shall apply.

101 AAR, (2003), Dun and Bradstreet Espana S.A. v. N/, case n. 615. 102 OECD (2001), op. cit., par. 40, p. 15. 103 Art. 7 (1) DTC Terrabrake-Tyreland.

44

7.2 NO WITHHOLDING TAX ON PAYMENT FOR TRAINING

7.2.1 TRAINING ACTIVITIES FOLLOW QUALIFICATION OF PRINCIPAL PAYMENT

FOR THE DATABASE

233 Based on the facts of the case, there is a mixed contract consisting of granting access to the

database and providing training to Ladar’s employees.

234 Since payment for the database covers the larger part of the consideration and refers to the

main point of the contract, it should be regarded as the principal payment.104

235 In addition, the training is inextricably linked to the access provided to the database. Namely,

the training explains the usage of the database in order to make clients proficient with the use

of the database. Without the database, the training would not be provided.

236 Hence, the database payment is the primary payment in the mixed contract and therefore the

payment for the training shall follow the qualification of the payment for the access to the

database.

237 Thus, the training is a business profit and shall only be taxed by Tyreland in accordance with

Art. 7 DTC Terrabrake-Tyreland.

7.2.2 PAYMENT FOR TRAINING ALONE DOES NOT CONSTITUTE ROYALTY

238 Even when the notion to follow the database payment would not be adopted, the payment for

the training would not be subjected to any withholding tax.

239 It is namely not viable to argue that a transfer of know-how was made during the training in

order to qualify the payment and royalty payment under Art. 12 DTC Terrabrake-Tyreland.

240 There was no transfer of information concerning industrial, commercial or scientific

experience, as the training only provides information on how to use the database.

241 The fact that participants practice with the database on examples relating to the production

process of crankshafts is an effort done by the participants themselves.

242 The teachers of the training therefore do not impart105 themselves any information

concerning industrial, commercial or scientific experience with the training on how to use

the database.

104 OECD Commentary 2017 Art. 12 (11.6); UN commentary 2017 Art. 12 (11.6). 105 GECF Asia Limited vs. DIT, ITA no. 8922/Mum/2010 (Taxsutra.com)

45

243 Besides, the training is given for all-round use of the database and is open to any personal –

with or without being a crankshaft engineer – causing the argument of imparting knowledge

to not uphold in general.

244 Moreover, realistically the training does not provide enough space and time to actually impart

any know-how so that Ladar would be equipped to use the know-how themselves.

245 Therefore, the payment would not constitute a royalty payment and thus no WHT shall apply

under the latter.

7.2.3 NO WITHHOLDING TAX APPLIES AS THE TRAINING IS OF ROUTINE NATURE

246 The training activities are routine in nature and can therefore not be qualified as a service of

technical nature106 and cannot constitute FTS under Art. 12A DTC Terrabrake-Tyreland.

247 Namely, they provide these trainings on regular basis to the clients who pay for the database

subscription. The trainings are therefore not tailor-made for the customers.

248 The fact that they include parts about how to use the database in relation to car-boats is merely

to activate the customer and does not lead to the setting up of a special training. The

technicalities of the database being explained is the same as when the training would be given

in the area of a regular car.

249 Hence, the training is routine of nature and there no WHT applies under the latter.

7.2.4 RENOLO IS AN EDUCATIONAL INSTITUTION SO EXEMPTION SHALL APPLY

250 Even if the two before mentioned notions would not be adopted, the payment made for the

training would be exempted from Art. 12A for FTS so that no WHT shall apply.

251 According to Art. 12A, the term “fees for technical services” shall mean any payment in

consideration for any service of a managerial, technical or consultancy nature, unless the

payment is made (…) for teaching in an educational institution or for teaching by an

educational institution.

252 The UN commentaries clarifies that this definition is intended to provide a treaty ordinary

meaning for fees for technical services that is not dependent on domestic law.

253 Consequently, the qualification of whether Renolo can be qualified as educational institution

does not rely on domestic accreditation of Terrabrake.

106 UN commentary 2017 Art. 12A (62).

46

254 The meaning of the term “teaching” is not limited by the UN commentaries. It therefore may

include – besides classroom teaching – practical demonstrations and workshops on location.

255 In the case at hand, training refers to practical demonstrations and workshops necessary to

understand functioning of the database and to become proficient in the use of the database.

256 Documents of incorporation of Renolo clearly indicate that it is in fact an educational

institution. In the corporate object of Renolo stands the following: automotive research and

development, improvement of the vehicles production process and training for the

automotive industry. The Ministry of Industry of Tyreland has acknowledged Renolo's

research and training activities and entitled it to issue to the recipient of the courses an Official

Certificate of Expert in Motors.

257 Hence, Renolo qualifies as educational institute following the authority it has obtained to

provide official acknowledged certificates for participants in their courses and trainings.

258 Pursuant the above, if Art. 12A Terrabrake-Tyreland would be invoked, the payment is

ultimately not subjected to WHT following paragraph 3 exempts teaching activities from

educational institutions from FTS.

7.2.5 PAYMENT FOR TRAINING QUALIFIES AS BUSINESS PROFIT OR IS EXEMPTED

UNDER 12A DTC TERRABRAKE-TYRELAND SO NO WHT APPLIES

259 As aforementioned arguments show, the training should follow the principle qualification of

the database. Consequently, the payment shall be seen as business profit and shall only be

taxable by Tyreland following Art. 7 (1) Terrabrake-Tyreland.

260 If this notion would not be adopted, the training does not constitute a royalty and cannot be

seen as technical service as the training is of routine nature.

261 If it would be concluded to not be of routine nature, the payment shall be exempt from FTS

pursuant the qualification that Renolo is an educational institution.

262 Hence, not WHT shall apply under this latter with both notions for FTS.

263 Consequently, the training would be considered a professional service in both instances and

shall only be taxable by Tyreland following Art. 14 DTC Terrabrake-Tyreland.


264 Based on the above, it can be concluded that with all three provided notions for the training

the outcome would be that Tyreland is granted the sole taxing right.

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265 Hence, no WHT shall be applied.

7.3 CONCLUSION

266 Pursuant the aforementioned arguments, all provided notions on the payments for both the

database access and training received shall not lead to any subjection to WHT.

8. NO WITHHOLDING TAX ON $10,000 REIMBURSEMENT PAYMENT TO RENOLO

FOR EXPENSES MADE BY MR. FIXER

8.1. PAYMENT SHALL NOT BE SUBJECTED TO WITHHOLDING TAX

267 Expenses arisen in Terrabrake during Mr. Fixer’s stay were covered by Ladar. The payment

of his expenses presents a reimbursement and corresponds with invoices provided.

268 This is a payment to facilitate the collection of evidence in relation to the cause of the fire and

should follow the notion of sharing resources under the R&D partnership as set out under 3.

269 Consequently, the payment and shall not be subjected to WHT following the qualification of

business profits under art. 7 (1) DTC Terrabrake-Tyreland.

270 In addition, pursuant to case law, transportation, subsistence and lodging expenses, should not

be subject to withholding tax if they are reimbursement for actual expenses of the company.107

The withholding tax requirement in the case of foreign payments arises on the sum chargeable

to tax. Thus, the income element in the payments is a pre-requisite for taxes to be withheld,

not fulfilled in the case at hand.108

271 Reimbursement of expenses is characterized by the fact that person must account for the actual

expenses incurred. Expenses are incurred by Mr. Fixer on behalf of Ladar. There is no

markup on the payment, and no income at level of Renolo. Consequently, there should be

no WHT on the remittance being only a reimbursement of expenses.109

272 It is a fact of the case that Ladar did not pay for the report elaborated by Mr. Fixer. If

there would be any technical service under Art. 12A DTC Terrabrake-Tyreland, it would be

Mr. Fixer providing it to Renolo, considering Renolo bears the costs of the developing of the

report by paying the salary of Mr. Fixer.

107 Supreme Court of Philippines, (2013), case n. 197117. 108 Income Tax Appellate Tribunal, (2013), C. U. Inspections Pvt Ltd vs DCIT, case n. 142 ITD 761. 109 Income Tax Appellate Tribunal, (2009), Mahindra & Mahindra v. DCIT, case n. TS-5212-ITAT-2009.

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273 Furthermore, it is not viable to argue that Terrabrake can apply WHT on the basis that the

reimbursement qualifies as professional service.

274 Under Art. 14 (2) DTC Terrabrake-Tyreland, payment for professional services for a person

who is a resident of a Contracting State shall only be taxable by the other Contracting State if

the service is performed through a fixed base in the other Contracting State that is regularly

available to the person.

275 Determination of a fixed base requires a certain degree of permanency. Activities of a

temporary nature are insufficient to constitute a fixed base. Besides, it may also depend on

whether the activities are performed only once or rather on a recurrent basis.110

276 Mr. Fixer stayed at a hotel room, which was booked only once for the occasion of his stay and

is by no means a long-lasting base. Hence, Mr. Fixer did not provide the service through a

fixed base which shows a certain permanency.

277 In addition, Mr. Fixer did not fulfil the duration requirement of 183 days in order to grant

Terrabrake taxing rights under the latter.

278 Consequently, under both notions, the reimbursement shall not be subjected to WHT, as both

Art. 7 (1) and Art. 14 (1) grants the sole taxing right to Tyreland.

8.3 CONCLUSION

279 It can be concluded that the payment to Renolo for the reimbursement of the expenses made

by Mr. Fixer shall not be subjected to WHT.

9. SUMMARY CONCLUSION

280 Ladar tax residence is Terrabrake and therefore has treaty access.

281 Namely, all management activities are in substance made by the Board of Directors in

Terrabrake, whereas the role of Mr. Pepponen is only of a formal nature.

282 Thus, Ladar effective place of management lies in Terrabrake.

283 All payments resulting from the R&D partnership are business profits and shall not be

subjected to any WHT.

284 With a R&D partnership resources are merely shared through a project-based group of

engineers and scientists from each company.

110 Hoge Raad, (2016), case n. 14/03647.

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285 Ergo, the payments made constitute the effective share in the costs or revenues made regarding

the R&D partnership and are not made for any information, right or service provided. They

can therefore not result in any royalties, technical or professional services and hence, qualify

as business profits.

286 $50,000 payment for the application software (Salamander’s App) is a professional

service fee and shall not subjected to any WHT.

287 The payment for the Salamandar’s App cannot be qualified as royalty payment. Namely, there

is no information imparted or right provided about the underlying copyright in the software

and software is a form of intellectual and thus cannot be qualified as equipment.

288 The payment cannot be considered a technical service following the notion that Renolo merely

made the software available and the performance would qualify as routine work. The

remuneration would then constitute business profits.

289 $1,000 monthly payments for server usage are business profits and shall not be subjected

to any WHT

290 The remuneration for the usage of the server does not constitute a royalty payment as there is

no copyrighted work or information concerning scientific experience forthcoming.

291 Ladar was not provided access to a server that includes a specialized database customized to

Ladar’s use. Consequently, no the payment does not qualify as FTS.

292 Hence, the payment should be qualified as business profit.

293 $100,000 lump sum payment for the use of “building your car” database and $50,000

payments for the training provided on the database shall not be subjected to any WHT

294 The payments for the database and training, dealt with separately or united, do not constitute

royalty payments or FTS and shall be seen as either business profits or professional service.

295 $10,000 payment to Renolo for reimbursement expenses Mr. Fixer cannot be subjected

to WHT as the payment does not constitute income or technical service fee.

296 The payment covers the exact expenses made by Mr. Fixer in Terrabrake while collecting

information and data on behalf of Renolo. Therefore, the income element in the payment is a

pre-requisite for taxes to be withheld, not fulfilled.

297 It can therefore be concluded that all payments shall not be subjected to WHT following

that their qualifications shall grant the sole taxing rights to Tyreland.

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10. REQUESTS TO THE COURT

298 In consideration of the theoretical framework and all outlined arguments, we request the court

to rule that:

299 1. Ladar is resident of Terrabrake; and

300 2. all payments made to Renolo pursuant the commercial agreement are not subjected to any

withholding tax.

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VI LIST OF ABBREVIATIONS

AAR Authority for Advance Rulings

Art. Article

AU Australia

BIT bilateral investment treaty

CA Canada

DbMS database management system

DTC double taxation convention

ECLI European case law identifier

e.g. exempli gratia (for example)

FTS fees for technical services

ibid. ibidem, in the same place

loc. cit. loco citato, in the place cited

MC model tax convention

NL Netherlands

no. number

OECD Organisation for Economic Co-operation and Development

op. cit. opus citatum, the work cited

para. paragraph

PE permanent establishment

POEM place of effective management

R&D research and development

SWI Steuer- und Wirtschaft International

TA Tax Authorities

TRIPS The Agreement on Trade-Related Aspects of Intellectual Property

Rights

UN United Nations

USA United States

VCLT Vienna Convention on the Law of Treaties

WHT withholding tax

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