- QUESTION POSTED BY: Student
- PROGRAMME: Postgraduate Diploma in International Taxation
- TOPIC: Jurisdiction of Tax Extended (WEEKS 23 & 24)
- LECTURER: Renier van Rensburg
FULL QUESTION
Article 13 (1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State, or from the alienation of shares in a company the assets of which consist principally of such property, may be taxed in that other State.
The above is extracted from DTAA of most African Countries.
Holding Company A holds shares in a property rich company through its subsidiary not tax resident in the Contracting state and this is there only assets. That is the shares in the property rich company is the only assets that the group own.
In the event that the ultimate holding company of the group sells its shares in the holding company A, in which country are the gains subject to CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price....? My thought process has been that no matter the layers of shareholding, the fact that the underlying assets is property, CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... is payable in the other state.
ADDITIONAL WRITTEN ANSWER
Your thought process aligns with the common interpretation of Article 13(1) in many Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Avoidance Agreements (DTAAs). Here’s a more detailed breakdown:
General Interpretation of Article 13(1)
Article 13(1) generally allows the country where the immovable property is located (referred to as the “other Contracting State”) to tax gains derived from the alienation of immovable property or shares in a company whose assets consist principally of such immovable property.
This provision is designed to prevent tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... through the interposition of holding companies or subsidiaries in different jurisdictions to escape taxation on gains derived from the sale of immovable property. The immovable property is the key factor for determining the source of the gain.
Application to Your Scenario
In your case:
- Company A (the holding company) holds shares in a subsidiary that owns immovable property in the other Contracting State.
- The ultimate holding company sells its shares in Company A.
- The only asset of the group is the immovable property held by the subsidiary.
Despite the fact that the sale is a transaction involving shares of Company A (a holding company), the provision in Article 13(1) targets situations where the assets of the company consist principally of immovable property located in the other state. The intention is to ensure that gains on the sale of shares of such property-rich companies are taxed in the country where the immovable property is situated.
Capital GainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... Taxation
In this context, it does not matter that there are layers of companies between the immovable property and the ultimate holding company. The taxation of the gain is “looked through” the corporate structure to the underlying immovable property in the other Contracting State.
Thus, capital gains taxCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... (CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price....) is likely payable in the country where the immovable property is located, irrespective of whether the shares being sold are in the immediate subsidiary or a higher-level holding company. This is the purpose of Article 13(1): to prevent avoidance of tax by selling shares rather than directly alienating the property.
In Closing
Based on the structure of the DTAA, the gain from the sale of shares in Holding Company A (whose subsidiary owns immovable property in the other Contracting State) would be subject to CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... in the country where the immovable property is situated. The layers of shareholding do not change the fact that the underlying asset is immovable property, which triggers taxation in the property’s location.
If there are specific details in the DTAA between the relevant countries that deviate from this typical interpretation, it could affect the final outcome, but based on the general principles of Article 13(1), your understanding is correct.