Brief Remarks About The Austria-Italy DTC

di Stefano Di Maria , Roberto Scalia

1. The relationship between the Austria-Italy DTC (1981) and the Germany-Italy DTC (1925) - 2. The Interpretation of the 1981 DTC in the light of the Italian and Austrian practice - 3. The Structure of the Austria-Italy DTC - 3.1. Foreword on Article 2 and 4 - 3.2. Article 3(1)(b) and Article 28(4) - 3.3. Observations on Article 11(5) DTC - 3.4. Articles 5 and 7(8)

 

  1. The relationship between the Austria-Italy DTC (1981) and the Germany-Italy DTC (1925)

The Double Taxation Convention which liken Austria and Italy was entered into on 29th June, 1981.[ 1]
However, Article 29(2) of the Double Taxation Convention (hereinafter, the “relevant DTC”) holds that its provisions shall produce effect retroactively as of January 1st, 1974[ 2] and, for specific cases, from January 1st, 1964.[ 3]
The reason of this retroactivity could be found in the particular situation which involved the two contracting States which had never drawn up any DTC before then. In fact, on 26th August, 1950, by virtue of an exchange of notes, Austria and Italy agreed to extend the ambit of the Germany-Italy DTC entered into on 31st October, 1925 (not in force at the time of the agreement itself) to Austrian-Italian transnational cases.
The effects of the exchange of notes had to apply retroactively as of 1945.[ 4] [ 5]
In respect of this (uncommon) practice, one could ask whether or not:
a.) the 1925 DTC – relying upon two tax systems (the German one and the Italian one) which could have had different features in respect of the Austrian one – was compatible with the Austrian tax system;
b.) the generally agreed principles of interpretation could be upheld in that case since one State (Austria) was not part of the negotiations.
In order to answer the above questions, for the sake of clarity, we highlight that, standing on some historical events, one can easily understand why Austria and Italy referred to the 1925 German-Italian DTC.
In 1922 Italy entered into a DTC with Austria (jointly with Poland, the Serb-Croat Kingdom, Romania and Hungary, on the other side).[ 6] The Treaty aimed at eliminating double taxations that, in the period following the end of the World-War I, could arise between Italy, on one side, and the successor States of the Austrian-Hungarian Empire, on the other side.
The negotiation was carried out[ 7] in the light of the tax systems’ structure of the negotiating States (and upholding the approaches which granted easier solutions and equitable effects). The DTC, as for the structure, grounded on a scientific bipartition between the two major forms of taxation: personal and patrimonial taxation.[ 8]
The above mentioned 1925 German-Italian DTC relied upon on this assumptions, as well.
The structure of the DTCs in hand[ 9] is exactly the same, dividing the DTCs’ rules between patrimonial and personal income taxes double taxation.
The last statement is proved by comparing what the two DTCs, in fact, say: (1.) as for the taxation of permanent establishments, it is very easy to notice that, in wide terms, the scopes of Article 4, DTC (1922) and of Article 3, DTC (1925) were fairly close;[ 10] (2.) as for the patrimonial taxation, and particularly as regards interests (incomes from capital investments), which had to be taxed according to the residence principle, unless whether secured by mortgage;[ 11] (3.) again as for the patrimonial taxation, but referring to employment income, which should be taxed in the State where the activity was carried out.[ 12] At the end of the day, we consider that the rationale behind the two DTCs is, roughly, the same.[ 13] Moreover, the stance that Italian Personal Income Tax (the “imposta sul reddito delle persone fisiche”)[ 14] had the same very nature of the “… German and Austrian [emphasis added] "Einkommensteuer" or of the French "impôt sur le revenu" …” shows that the theoretical pre-assumptions, underlying the DTCs in hand, were roughly the same.[ 5]
To this extent, interpretation of the 1925 DTC, as well as of the 1981 DTC, shall gain another important element.
The Austrian and the German tax system cannot be seen as two independent and separate whole of norms, in fact, starting from 1938, the German law entered into force in Austria[ 16] and therefore the German tax law (although indirectly) had a great influence on the negotiations carried out by Austria and Italy.[ 17]
Hence, answering the above questions, in our opinion,
a.) the pre-assumptions underlying the German Italian DTC of 1925 fitted to the Austrian and the Italian tax systems and,
b.) the fact that Austria was not a negotiating party of the 1925 DTC is not key in approaching the usual means of interpretation in the concrete fact of the case.[ 18]
We complete our introduction with the diagram of the Austrian-Italian DTCs’ approach stemming from the early 20s of the XIX Century (see “DIAGRAM I”).


      LEGENDA:
aa(April, 1921 – April 1922)  Negotiation of the Italy-Austria DTC(1922)
a(April, 1926 – March, 1938)  Validity of Italy-Austria DTC(1922)
a(             – October, 1925)  Negotiation of the Germany-Italy DTC(1925)
aa(May, 1945 – January, 1974)  Validity of the Germany-Italy DTC(1925) for all the cases except “taxation of shipping and air transport enterprises” [relevant docs: DTC(1925); Exch. of Notes(1950); Article 29(2) of the DTC(1981)]
aa(May, 1945 – January, 1964)  Validity of the Germany-Italy DTC(1925) as for the “taxation of shipping and air transport enterprises” [relevant docs: DTC(1925); Exch. of Notes(1950); Art. 29(2) of the DTC(1981); Protocol(1981), let. e)]
a(January, 1974 – December, 1985)  Validity of the Germany-Italy DTC(1925) as for more favorable rules for all cases but “taxation of shipping and air transport enterprises” [relevant docs: DTC(1925); Exch. of Notes(1950); Article 29(2) of the DTC(1981); Protocol(1986)]
aa(January, 1964 – December, 1985)  Validity of the Germany-Italy DTC(1925) as for the “taxation of shipping and air transport enterprises” [relevant docs: DTC(1925); Exch. of Notes(1950); Art. 29(2) of the DTC(1981); Protocol(1981), let. e)]
a(January, 1986 in then)  Validity of the Austria-Italy DTC(1981) for all kind of income [relevant docs: DTC(1925); Exch. of Notes(1950); Article 29(2) of the DTC(1981); Protocol(1986)]
aaDate of signature of International agreements (October 1925; August, 1950; June, 1981 and November, 1987)
At the ending of these preliminary observations, we hold that, in analyzing the concrete facts of the case,[ 19] the interpret could gain some important suggestion from all of these elements which work as “sources of interpretation”.
We will address the interpretative issue in par. 2.

 

  1. The Interpretation of the 1981 DTC in the light of the Italian and Austrian practice.

The obvious point of departure in DTCs’ interpretation is the DTC text itself.[ 20]
Art. 3(2) relevant DTC, consistently with OECD DTC practice, holds that, as regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has in that State for the purposes of the taxes to which the Convention applies.[ 21]
We highlight that the Convention in hand fits to the 1977 Model and, in this respect, it doesn’t mirror the 1995 changes. The modification undergone in 1995 were aimed at including in Art. 3(2) the specifications that the rule applies to “interpretation” made “at any time” and that the “meaning” of the terms (not defined in the DTC) is that of the relevant legislation “at that time” (id est, at the time interpretation is carried out). The latter aspect is of great relevance since allows the interpretation of the 1981 DTC in the light of the meaning of the terms consistently with the actual stage of the Austrian and Italian internal legislation.[ 22]  
There is no doubt, in this respect, that both Italy and Austria interpret the relevant DTC according with OECD recommendations and, hence, interpret the terms in the light of their actual meaning (consistently with an ambulatory interpretation).
 It is an undisputed principle of DTC interpretation that Article 3(2) provides for an extrema ratio rule in respect of terms not elsewhere defined or definable in the light of the context.[ 23] Austrian scholars highlight that the Austrian administration (namely, the Ministry of Finance practice) approach is that of upholding a strict textual interpretation giving to “wording and legal definitions” of the Treaty a primary role.[ 24] To this extent, the above quoted scholars, hold that the Austrian tax administration neglect the object and purpose of the Treaty, as leading element in finding out the one true meaning of terms.[ 25]
One stance taken both in Austrian and Italian case law is that of considering mutual agreements not as a valid mean for integrating DTC.[ 26]
It is worth observing that interpretation as for the meaning of “context” shall be carried out according with Article 31(1) of the “Vienna Convention on Law of Treaties” of May 23rd, 1969 (shortly, the “Vienna Convention”).[ 27] The “context” is defined by Article 31(2) and par. 3 lists the acts to be considered “together with the context”. Article 33, further, deals with the s. c. “supplementary means of interpretation”.
The peculiarities of the Austria-Italy DTC lead to a brief analysis of the cited rules.
Firstly, one could ask whether the 1925 Germany-Italy DTC can be addressed as a mean of interpretation of the Austria-Italy DTC.
In this respect, it is worth mentioning that the relationship between the 1981 DTC and the 1925 one was outlined in a “subsequent protocol”[ 28] which, according to Article 31(3)(a) Vienna Convention, shall be considered one of the primary means of interpretation of the 1981 DTC.[ 29] To this extent, we underline that the quoted Protocol provides for a co-existence of  the two DTCs rules and, hence, the interpretation of the (1981)DTC implied the interpretation of the  (1925)DTC.[ 30]
Secondly, we shall address the issue of the OECD Commentaries in DTCs´ interpretation.
Authors share different perspectives as for the relevance of the OECD Commentaries in DTC interpretation. In wide terms, somebody deems that Commentaries could be considered part of the context, according with Article 31(2)(b) Vienna Convention;[ 31] someone else believes Commentaries shall be considered together with the context, according with Art. 31(3)[ 32] or as a primary mean of interpretation under Art. 31(4).[ 33] Some scholars, further, consider that Commentaries could fall under the supplementary means of interpretation as for Art. 32.[ 34]
In the Italian perspective, we shall stress that the role of the OECD Commentaries has been devaluated in some recent judgment of the Corte di Cassazione upholding the Italian Courts’ stance.[ 35]
A particular aspect involves the s. c. static or ambulatory interpretation of Commentaries.[ 36]
As for the relevant DTC, it is worth observing that the 1977 Commentary was adopted in the period between the beginning of negotiations[ 37] and the conclusion of the DTC (1981).
This means that negotiators gained the 1977 Commentaries and, hence, were allowed to choose between the old (1963) and new (1977) approach. This is key in saying that almost all of the provisions of the 1981 DTC which fit to the 1963 Model provisions (the ones modified afterwards by the 1977 Model and Commentary), had been adopted disregarding the 1977 approach.[ 38]
Therefore, in interpreting the relevant DTC we shall pay particular attention to highlight which of the two Models (and Commentaries) was followed by the contracting States.[ 39]

 

  1. The Structure of the Austria-Italy DTC.

Even if the Austrian Italian DTC was negotiated while the 1977 OECD Model was already in force, it is easy to point out how often it fits, more or less, to the 1963 Model. In reading the DTC, one can notice some important departures in respect of both the OECD Models. Some of them (say, Article 2) do not have great implications in international tax planning, while others (see Article 28) could ground tax planning opportunities.

    1. Foreword on Articles 2 and 4.

One of the peculiarities of the relevant DTC, in respect of the OECD general agreed practice, stands in its Article 2 which deals with the “taxes covered by the Convention”.
Article 2(1) relevant DTC reads: “This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied”.[ 40]
In comparing Article 2(1) of the relevant DTC with the 1963 Model, one can observe that the DTC provision does not reproduce Article 2(2)[ 41] of the Model, which provides for a wide (and general) definition of taxes on income and capital. It follows that the structure of Article 2 does not carry out the illustration of a general rule[ 42] and, as a consequence, the only taxes covered by the Convention are exclusively those listed in paragraph 2 of the relevant DTC.[ 43]
At the end of the day, we believe that, in dealing with the practical consequences stemming from the application of the relevant DTC to concrete facts of the case, one should not pay particular attention to the feature in hand.
Some further observation should be made in respect of Article 4.
Art. 4 is substantially patterned on the OECD Model definition. Two differences, however, should be remarked.
As for individuals, in cases of “dual residence”, Art. 4(2) provides for the usual tie-breaker rules and, accordingly, holds that, should the conflict not be resolved, States should enter into negotiations in order to reach a mutual agreement.[ 44]
The case shall be presented within three years, according with Article 25(1).[ 45] Unlike the 1977 OECD Model, however, the relevant DTC does not provide for a mandatory application (notwithstanding the national time limits) of the agreement reached.[ 46]
As for entities’ residence[ 47], the relevant DTC is patterned upon the OECD Model and Article 4(3) upholds the s. c. “place of effective management” criterion. The above criterion (in wide terms, disregarding the s. c. place of incorporation theory) minds at the “… place where key management and commercial decision … are in substance made …”.[ 48]
In respect of the OECD approach, Italy considers the “… place where the main and substantial activity[emphasis added] of the entity is carried on” key in determining whether or not the place of effective management does exist.[ 49]
The Italian approach should be further analyzed in the light of the recent rules on the s. c. “esterovestizione”. These rules aim at contrasting the abusive schemes creating corporate chains in order to gain DTCs’ benefits.[ 50]
Rules on esterovestizione, provided for in Article 73, paragraphs 5-bis, 5-ter and 5-quater,[ 51] Tuir, hold that a nonresident company controlling (and, in turn, being controlled from) a resident company shall be deemed residing in Italy. The same holds true if the majority of managers are Italian residents.
Hence, according with the Italian tax system, an Austrian company held by Italian shareholders and, in turn, controlling one (or more) Italian company could be deemed being Italian resident.
Although the Italian rule seem to be at the odds of the DTC’s rules (and, therefore, could be contrasted relying upon the DTC rules) we hold that the very nature of the presumption – which is rebuttable – avoid this risk.[ 52] Further, in the author’s view, the Italian rules shall not be deemed contrasting with the EC Treaty freedoms, namely with Article 43 and 48.[ 53]

3.2.  Article 3(1)(b) and Article 28(4)
As for the subjective scope of the DTC, we deal with Article 3.
According with the OECD Models, Article 3 (General definitions) of the Italy-Austria DTC (hereinafter “the relevant DTC”) reads:
“For the purposes of this Convention, unless the context otherwise requires:  … (b) the term "person" includes an individual, a company and any other body of persons; (c) the term "company" means any body corporate or any entity which is treated as a body corporate for tax purposes”.
This norm is patterned upon the OECD Model,[ 54] hence, no particular issues should be addressed.[ 55]
However, in analyzing the relevant DTC, one particular aspect do arise. As a matter of fact, Art. 28(4) provides for the allowance of the DTC’s benefit to “flow-through partnerships”.
It is worth reminding that the pre-requisite for claiming the DTC’s benefits is that of being “person” and, in the meanwhile, “being resident” of a contracting State (for DTC’s purposes).[ 56]
We shall remind, also, that “persons” are “resident” in a contracting State, for DTC purposes, if they are “… liable to tax therein …”.
The requisite of the “liability to tax” is generally intended as an “actual liability to taxation”, which means effectively being “subject to tax”.[ 57]
A benchmark case, which creates for uncertainties and difficulties in qualifications, is the partnerships’ liability to tax.[ 58]
The OECD approach, upheld in the s. c. Partnership Report,[ 59] is that of considering partnerships as “resident” to the extent that they are treated as “opaque” entities, for tax purposes, in the State where they are located.
In the relevant DTC, as a general rule, the above principle is equally adopted.
Article 28(4), however, introduces a dramatic derogation.
Paragraph 4 of Article 28 reads “Partnerships organized under the laws of a Contracting State, which have their seat in that State, may apply for the tax reliefs referred to in Articles 10, 11 and 12 of this Convention, provided that at least three quarters of the partnership's profits are attributable to persons that are resident in the first-mentioned State”.
The wording of the quoted provision is quite fair and unambiguous.
Should there be a “partnership”,[ 60] which can be deemed “being organized” under the laws of Italy or Austria, and should – at least – three quarters of its partners be resident of the same State (i.e. Italy or Austria), the partnership itself will gain the DTC benefits (under the rules of Articles 10 to 12).
The derogation stands in the fact that the provision allows a “person” (the “partnership”) which, however, is (assumed) not (being a) “resident”[ 61 ] to claim the DTC’s benefits.

From a theoretical perspective this is an evident derogation from the OECD practice and, in a “tax planning perspective”, the effects of such a provision are quite easy to be inferred.
In fact, the provision could create for an international under taxation effect.
The case is expressed in “DIAGRAM II”.


As already mentioned, the DTC’s rule in hand – Art. 28(4) – could create for a physiological international “under taxation” of the income flow.
Namely, it (could) allow for a “25% untaxed income flow through” from Italy to Austria (or vice versa).
In fact, while the 75% of the income flow (dividends, interests or royalties) from X to Y is integrally taxed in Italy in the hands of the Italian partners (A, B, and C),[ 62] the remaining 25% flows in the hand of a person that is not a person/resident in Italy (for DTC purposes).[ 63]
Hence, upholding the above perspective, one shall verify if, in the national tax systems, there is an appropriate norm which allows for the taxation of dividends, interests and royalties[ 64] flowing from Italy (or Austria) to Austria (or Italy) in the hands of a "offene Handelsgesellschaft",[ 65] or a "Kommanditgesellschaft" or a "Gesellschaft nach bürgerlichem Recht", hereinafter “oHG”, “KG” and “GesBR”(or, in the opposite case, to a "società semplice", or a “società in nome collettivo", or a "società in accomandita semplice", shortly, “s.s.”, “s.n.c.” and “s.a.s.”).[ 66]
The Italian tax system provides for the taxation of such income.
Namely, Article 23(1)(g) of the Presidential Decree n. 917/86 (Consolidated Income Tax Act, the s.c. “Tuir”) provides for a deeming rule which holds that income from entities listed in Article 5 Tuir shall be considered as “produced” and hence “taxable” in Italy.[ 67]
However, the Italian internal rule appears not to be a … “so high wall”.
In fact, holding that a s. c. “socio accomandante” (the limited partner) can be deemed being a permanent establishment in Italy is contradictory and slightly in contrast with the positive rules provided for in the Italian Civil Code (shortly, the “c.c.”).[ 68]
The question is whether under DTCs a partnership with no activity (and, in specific facts of the case, with no commercial purposes) can be deemed being a permanent establishment of its partner.[ 69] Further, it is not immaterial considering whether or not it makes sense speaking of permanent establishments in the case of a s.s. (since under Italian c.c. the s.s. is a partnership whose objective is not a commercial purpose and according with Italian Tuir, its income is not a business income). [ 70] [ 71]
The same holds true, in our perspective, from the Austrian perspective. In fact, holding that partnership income shall be deemed having its source in Austria cannot avoid the exam about whether or not the internal rule does comply with the DTC’s scope.
The Austrian tax system provides that oHG and KG are flow-through entities, since income is taxed in the hand of the partners (being them individuals or entities). Under § 98 of the Einkommensteuergesetz (the individual income tax, hereinafter, the “EStG”), non residents are taxed in Austria on income sourced therein.
Well, in a “three country situation”, we hold that the foreign partner (the one which is not resident in one of the two contracting States) could lay down on the DTC entered into with Italy (or Austria)[ 72] in order to claim that income shall not be taxed[ 73] unless a p.e. does exist.[ 74]
It is worth observing that the objective of contrasting “three-countries abusive schemes” involving tax havens has been addressed by the Austrian Tax Administration and the Italian one and it should be reached relying upon Article II(4) of the Agreement entered into on 21st October, 1987.[ 75]
However, notwithstanding all the observation laid down in the precedent paragraphs, we briefly address an interpretation which Tax Authorities could rely upon in order to effectively counteract tax schemes aiming at gaining the “25% tax lowering effect”.
One could argue that the scope of Article 28(4) cannot be exactly defined unless one does not consider the overall “fiscal discipline” applying to partnerships’ income. This imply that both the substantive rule (Article 5 Tuir which provides for flow-through taxation) and the “formal rule” (provided for in Art. 23(1)(g) Tuir) shall be considered. This imply that the comparison shall be made both in respect of the fiscal treatment of the flow-through entity and the “allocation” of the income flow within the same State.[ 76]
This stance, in the authors’ opinion, could be deemed having solid grounding in counteracting avoidance schemes which rely upon Austria-Italy DTC’s rules.
Another aspect we aim at addressing is the potential abusive involvement of Austrian Stiftungen in tax schemes.[ 77]
In fact, a Stiftung (widely speaking a “Private foundation”) could be a partner in a Kommantigesellschaft. Hence, the above example (in Diagram I) could be further developed considering that the profit of the Austrian partnership flows to the Stiftung.
Should this be the case, we highlight that one important issue could arise.
Should the beneficiary[ 78] of the Stiftung be resident in another State (other than Italy or Austria)[ 79], the item of income distributed to the beneficiary could remain untaxed, if regarded as “other income” for DTC purposes.[ 80]
Until now we have accepted that Article 28(4) could create for tax planning opportunities involving Austrian Stiftungen.
However, we wonder if such approach could be upheld, also, in “trust cases”.
We can start observing that the exact wording of Article 28(4) in the official languages of the DTC – German and Italian – does not deal with “partnership” but it deals with “associazioni di persone” (in wide terms, “body of persons”) and with “Personengesellschaften”, hence it seems narrowing the subjective scope of the rule. However, we take the stance that this amount to a mere lack of wording co-ordination and, therefore, the scope of the Italian and the Austrian rules do coincide since the meaning of “sowie alle anderen Personenvereinigungen” and “ogni altra associazione di persone” (laid down in order to outline the exact ambit of the definition)  is exactly the same.[ 81
One important issue could arise.
The expression adopted in Article 28(4), is wider than “partnership” since it represents, according with Article 3(1)(b) of the relevant DTC, the residual class within the definition of “person”.[ 82]
Should the expression in Article 28(4) be wider that the one in Article 3, the question is: is there room for considering that expanding the scope of Article 28(4) to trusts was the duorum in idem placitum consensus?[ 83]
Should one agree with the above interpretation, the rule provided for in Article 28(4) shall apply to all the entities generally falling under the scope of the “other body of persons” (including trusts).
We stress that, under Article 28(4), the pre-requisite for claiming the DTCs benefits is that of being subject to the same taxing rules which apply to partnerships. In other words, entities (referred to in Article 28(4) are those which are taxed by way of (the mechanism addressed as) flow-through taxation.[ 84]
This is the case for trusts, in the Italian perspective.[ 85]
We briefly note that, as of January 2007, theoretical approaches in trusts’ taxation in Italy shall be reconsidered.[ 86] Under Finance Act 2007 trusts were included among the taxable persons (in Article 73 Tuir), hence they are to be taxed as “opaque” entities unless one or more beneficiaries are entitled. In such a case, income shall be taxable by way of flow-through taxation in the hand of beneficiaries and up to the percentage of “beneficiary interest” provided for in the trust deed.
The Italian tax systems as for trusts’ taxation creates for some important issues.
Firstly, we underline that trusts can be, in the meanwhile, opaque and transparent.[ 87] Hence, a certain percentage of its overall income can be taxed in the hand of the trust while the other in the hand of the appointed beneficiaries. Further, trusts income could be divided between income taxed by way of flow-through taxation and income attributed to the trust itself (as may be in the case, say, where trust deed provides that income from a certain source shall be attributed to beneficiaries while others shall be retained).
Secondly, trusts can be deemed opaque in a taxable year and transparent in the subsequent.[ 88]
These two issues recall for notorious themes of international tax law that could create for tax planning opportunities.

3.3. Observations on Article 11(5) DTC.
The issues dealt with in paragraph 3.2. make further observation arise in respect of specific Articles.
Namely, Article 11 (Interests) comes into consideration.
Article 11(5) reads “The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business on the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the interest shall be taxed in the other Contracting State according to its domestic law”.
To this extent we can see that the subjective scope of Article 28(4) creates for a fact of the case other but the one which is pre-supposed in the OECD approach.
Article 11(5) provides that Article 11(1) and (2) do not apply where:  (a) the beneficial owner (which is a), (b) resident of a contracting State, (c) carries out an activity in the other contracting State through a p.e.
The question is: does this limitation apply to cases falling under Article 28(4)?
In the authors’ opinion, limitation provided for in par. 5, Art. 11 shall apply to the cases quoted above. The reason of such approach is that the derogation provided for in Article 28(4) aims at allowing DTC benefits to persons who, as a general rule, should not gain DTC benefit and limitation in Article 11(5) shall be considered as an integral part of the DTC tax treatment of interests and, therefore, concur in determining the objective scope of the allocation rule provided for in paragraphs 1 and 2 of Article 11.
If one shares the authors’ opinion, another question shall be answered.
Which persons should such limitation apply to?
Namely, the partnership or the partner? And, in the latter case, should it apply to all the partners or should it be limited only to the resident partners?
In our view, Article 11(5) shall apply exclusively to resident partners who, both in Austrian and in Italian perspective, are the beneficiary owner of income.[ 89] In this perspective, our conclusion appear to be coherent with the scope of the DTC.[ 90]
However, in “three country situations” the problem still remains.
In fact, the non resident partner of a, say, an Austrian partnership could have a p.e. in Italy but no restrictions, under Article 11(5), could apply, since the partner does not fulfill the requirement of being resident in one of the two contracting States (see let. (b) above).
In such cases, we believe that avoidance tax schemes could be counteracted, firstly, looking at the objective and purpose of the Treaty[ 91] and, secondly, grounding upon internal anti-avoidance rules.[ 92]
Article 11 makes one further observation arise.
Since the norm is shaped on the 1963 OECD Model, it does not provide that “penalty charges for late payment” shall be considered as interests for DTC purposes.[ 93]
This would amount to a situation in which these payment shall not be taxable in the source State, unless a p.e. does exist. We hold that the recent modification in Article 37-bis could be a strong instrument in the hand of the Italian tax administration in order to counteract avoidance schemes which use this kind of clauses in intercompany transactions.[ 94]
However, we hold that trust cases could fall outside the scope of the provision.[ 95]

3.4 Articles 5 and 7(8)

The Article dealing with the permanent establishment criterion is closely shaped upon Article 5 of the OECD Model.
Some differences should be highlighted, however.
Firstly, the relevant DTC (unlike the 1963 Model) does provide for a construction clause in a separate paragraph.[ 96]
Secondly, the same DTC does not provide for the exception laid down in Article 5(4)(f) OECD Model.[ 97] Namely, the combination of activities listed in letters from (a) to (e)[ 98] could be considered a permanent establishment.[ 99]
Thirdly, Article 5(4) of the relevant DTC follows the 1963 Model and, therefore, does provide that the “dependent agent” could create for a permanent establishment, unless “… his activities are limited to the purchase of goods or merchandise for the enterprise”.
The difference between the relevant DTC and the 1977 (and seq.) OECD Model implies that contracting States decided to narrow the scope of the exception.[ 100]
The “business profit” Article is, in general terms, closely shaped upon the OECD Model, as well.
Also in this case, however, one relevant difference shall be underlined.
Article 7(8) holds that the provision of itself “… are also applicable to income: (a) which a person receives from his participation in a "silent partnership" constituted under Austrian law; (b) which a person receives from his participation in a "silent partnership" constituted under Italian law”.[ 101]
The official versions of the DTC address (not “silent partnerships”) but the legal institutions of the Austrian “stille  Gesellshaft” and the Italian “associazione in partecipazione”.[ 102]
As for individuals, in an Austrian stille Gesellshaft, the stiller Gesellshafter (silent partner) doesn’t hold a participation in the capital of the company and the item of income is qualified as “capital income”.[ 103] The same holds true for the item of income held from the associato (partner) of an Italian associazione in partecipazione[ 104], in fact the income from a silent partnership is taxed according with the “dividend” taxation rules.[ 105/a>]
Income from a participation in a commercial business as a non resident “silent partner”, in the Austrian perspective, is qualified as “investment income” and is considered sourced in Austria.[
106] From a DTC perspective, income from a stille Gesellshaft is treated as business income (Art. 7) or interest (Art. 11), depending on whether or not it arises from a echte stille Gesellschaft or a unechte stille Gesellschaft.[ 107] However, under Article 7(8) of the relevant DTC, income from stille Gesellshaften (be it typical or non-typical) fall exclusively under Article 7 and, hence, shall be ruled as business profit.[ 108]
This circumstance implies that in cases involving silent partnerships agreements, income shall be taxable in Austria to the extent a permanent establishment in Italy does exist.
This situation could lead to tax planning schemes aiming at gaining the difference between the Italian and the Austrian CIT rates. Further, there could be cases in which the payment made by an Italian associazione in partecipazione to a non-resident associate could be deductible for the Italian entity[ 109] but, according with Article 7(8), income cannot be taxed in Italy unless a p.e. does exist.
This circumstance could create a room for tax planning schemes since income from associazione in partecipazione (the remunerazione of contribution) shall not be taxed in Italy, until a p.e. does not exist.[ 110] On the Austrian side, in turn, the item of income could remain untaxed.
The last issue we aim at highlighting is the case of an Austrian stille Gesellschaft with Italians stiller Gesellschefteren (associates).
In such a case, income derived from the Italian associati shall be qualified as “capital income”[ 111] and taxed accordingly,[ 112] subject to the condition that such an income “… is totally non-deductible in determining income in the State in which the associating person is resident”.
The norm aims at allowing the dividend exemption (as for Articles 44 and 89, Tuir) only in cases in which the related remuneration is not deductible for the foreign associating Gesellshaft.[ 113]
However we stress that the rule could be quite ineffective since it does address the deductibility of the item of income in the residence State of the foreign associating enterprise.
This circumstance implies that in three countries situations, tax planning opportunities could arise. 
Consider the case in which the remuneration is paid, on behalf of the Austrian company,[ 114] by a controlled company resident in a third State in which such remuneration is deductible. The Italian stiller Gesellschafter could hold such an income has not be deducted in Austria and, as a consequence, shall be entitled to claim the application of Article 7(8) of the DTC in hand since the latter rule disregard the place in which income do arise.[ 115]

 

 


[1] The English version, is available at: http://untreaty.un.org/unts/60001_120000/25/36/00049793.pdf.

[2] Departing from the general stance that Treaties should produce effects only for facts which occurred after the entry into force of the Treaty itself (on this issue, see Article 28 of the Vienna Convention on Law of Treaties).

[3] See Protocol to the relevant DTC, letter e) which provides “… that, irrespective of Article 29, paragraph 2, the provisions of Article 8 and of Article 22, paragraph 3 shall apply to income arising to, and movable property owned by, shipping and air transport enterprises in tax periods commencing on or after 1 January 1964”.

[4] We cannot avoid in saying that the above – hugely intricate – situation is someway complicated further on by the fact that, since the German Republic did not recognize the DTCs entered into by the Reich, Italy and Germany entered into an exchange of notes in 2nd November, 1951 in order to widen the temporal scope of the Italy-Germany DTC(1925) as of January 1951 (see R. KORN, G. DIETS, Doppelbesteuerung, 1954, Munich, at 1).

[5] Therefore, as of May 9th, 1945 the transnational cases involving Austria and Italy were ruled under the Germany-Italy DTC provisions.
We highlight – although briefly – that international agreements, in order to produce effects in both States need to fulfill some specific requirements and particular procedure should be adopted. Namely, in Austria, the procedure stems from the application of the Ministry of Finance (Sec. 67(1) of the Constitution), with consent of the Parliament (§ 50 Const.), and is concluded by the President whose signature works as a ratification of the DTC (see, §§ 65 and 67). In Italy, Article 80 of the Constitution provides that the ratification of the President (according with Article 87, VIII, of the Constitution) shall be authorized, with law, from the Parliament.
In the case of the Austria-Italy exchange of notes of 1950, it is worth observing that this international act was not ratified in Italy and, notwithstanding the lack of this essential feature, the Italian Inland Revenue held it was legally binding in Italy (see Min. Fin., n. 351.230 of July, 3, 1952; n. 12/50878 of December, 21, 1975 and n. 77 of July, 16, 1977).

[6] As for remarks on the historical evolution of the DTC practice, we refer to L. E. SCHOUERI, Tratados e convenções internacionais sobre tributação, Dir. Prat. Trib. Int., 2, 2006, at 432 and seq.; A.A. SKAAR, Permanent Establishment – Erosion of a Tax Treaty Principle, Deventer, 1990, at 77 and seq. and H. SCHAMBURG, Internationales Steuerrecht, Köln, 1998, at 757 and seq.

[7] In the period starting from April, 1921 to June, 1921 (on 21st June, 1921 the final Protocol was approved and the final signature happened during the second session of the working of the Conference on 6th April, 1922).

[8] On this issue, see the Italian Delegate (D’aroma) report at the Economic and Financial Commission session held on 13th April, 1921. The distinction between personal taxation and other forms of taxation was at the basis of the theoretical approach to the study of States’ taxing power (for a wide perspective on the issue in hand, in a International Public Law perspective, see the pre-eminent contribution by P. FIORE, Trattato di diritto internazionale pubblico, 3rd, vol. II, Turin, 1888, at 94). This perspective is evident, also, in the ambit of the DTCs entered into by Italy with Germany and Hungary in 1925 where a basic bipartition between real and personal taxes was made (on this issue, we refer to M. UDINA, Il diritto internazionale tributario, in P. Fedozzi, S. Romano eds., Trattato di diritto internazionale, vol. X, Padua, 1949, at 288).
On the Italian side, see the contributions by B. GRIZIOTTI, Imposte reali o personali e oggettive o soggettive, Riv. dir. fin., 1937, I, at 148 and seq.).  

[9] The 1922 Austrian-Italian and the 1925 German-Italian.

[10] The productivity of the p.e. appears to be an essential element of both the DTCs.

[11] See Article 2 DTC(1922) and Article 8 DTC (1925)

[12] Compare Article 3 DTC(1922) and Article 7 DTC(1925).

[13] Our conclusion is held in wide and general terms, since many differences between the two DTCs can be highlighted at the same time (see, for instance the patrimonial tax treatment of “rendite vitalizie” in Article 2 DTC(1922) and in Article 10 DTC(1925)).

[14] At that time “imposta complementare sul reddito complessivo” (which was adopted in 1923 and begun operative in 1925).

[15] See the Italian delegate D’Aroma speech quoted in footnote 10. To this extent, it is worth observing that the German personal income tax has its grounding in the Prussian Klassensteuer of 1851 (followed by a tax on global income in 1891).

[16] Being the Austrian income tax law of 1st January, 1954 strictly similar to the prior applicable law.

[17] Lastly, in order to draw a fair picture, we shall remark that the Protocol to the 1981 DTC (entered into on 25th November, 1987) held that, should the provisions of the 1925 DTC provide for more favorable treatment in respect of the 1981 DTC’s ones, the former one shall apply. The period during which the 1925 DTC had been still producing effects lasted from 1st January, 1974 to 31st December, 1985. This unusual co-existence will be addressed in par. 2. On the relationship between the 1981 DTC and the one formerly applying, we refer, in Italian case law, to Corte di Cassazione, sez. V, July 1st, 2003, case n. 10348, in Giust. Civ. Mass., 7-8 and Comm. Trib. Centr., Sez. V, April 17th, 2000, case n. 2439.

[18] The latter issue calls, further, for the s.c. “parallel treaty” approach in interpreting the both DTCs (the issue will be dealt with in forthcoming paragraphs).

[19] What is referred to as Tatbetsand, in German, and fattispecie, in Italian.

[20] The above stance is shared by A.A. SKAAR, Permanent Establishment – Erosion of a Tax Treaty Principle, Deventer, 1990, at 40.

[21] Article 3(2) OECD Model 1977 remained substantially unchanged in respect of the 1963 version.

[22] The line of reasoning is expressed in par. 13 OECD MC (2008) on Art. 3(2).

[23] Among Austrian scholars, see M. LANG, Verfassungsrechtliche Bedenken gegen die Verweisungsnormen in DBA, ÖStZ, 1989, at 12. In international tax law, see the pre-eminent contribution by K. VAN RAAD, Non Discrimination in International Tax Law, Deventer, 1986, at 51.

[24] See, J. HEINRICH, H. MORITZ, Austria – Interpretation of Tax Treaties, in European Taxation, 2000, at 148 and 149.

[25] The Authors (Heinrich and Moritz) create for a strong connection between the position of Loukota and the Ministry’s stance (see, op. cit., at 149, footnote, 68). The authors focus on a number of case brought before the Supreme Administrative Court that would show such “… supposed general relevance of the domestic law for the interpretation of tax treaty terms” (op. cit., at 151).

[26] As for the Italian approach, see Corte di Cassazione, May 24th, 1988, n. 3610 and the comment thereof in C. SACCHETTO, Le fonti del diritto internazionale tributario, in Materiali di diritto tributario internazionale, Milan, 2002, at 22 and 23, further, see the comment on the mutual agreement entered into by Italy and the USA on March, 31, 1988 as for the “Irap”). As for the Austrian case law, see the Supreme Administrative Court n. 92/13/0172,90, of July 31st, 1996.

[27] The text is available at www.untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf. Rules on interpretation are contained in Section III (Articles from 31 to 33).

[28] The DTC was entered into in October, 1981, the Protocol was signed in 1987.

[29] Namely, one of the interpretative means outside from the context (which is outlined in paragraph 2, Art. 31).

[30] Saying that the German-Italian DTC’s rules provide for a more favorable treatment in respect of the Austrian Italian DTC, calls for comparing the two DTCs in fact the “… subsequent agreement … [regards] the application of its [of the 1981 DTC’s] provisions …”. 

[31] See F. ENGELEN, Interpretation of Tax Treaties under International Law, Devener—Boston, 2004, at. 463 and seq.

[32] Commentaries could, further, be included in the ambit of Article 32 (supplementary means of interpretation). The issue is analyzed in M. LANG, Later Commentaries of the OECD Committee on Fiscal Affairs, Not to Affect the Interpretation of Previously Concluded Tax Treaties, Intertax, 1997, at 7; F.M. GIULIANI, La interpretazione delle convenzioni internazionali (in V. Uckmar ed.), Corso di diritto tributario internazionale, Padua, 2002, at 138 and seq.

[33] See H.J. AULT, The Role of the OECD Commentaries in the Interpretation of Tax Treaties, Intertax, 1994, at 148 and D.A. WARD, The Role of the OECD Model in the Tax Treaty Interpretation, Bullettin for Int. Fisc. Doc., 2006, at. 98.

[34] J.M. MOSSNER, Zur Auslegung von Doppelbesteuerungs Abkommen, in Liber Amicorum I. Seidl-Hohenveldern, 1988, at. 412.

[35] Also, in the light of the Italian Observation on the MC on Art. 5 which reads “Italy wishes to clarify that, with respect to paragraphs 33, 41, 41.1 and 42, its jurisprudence is not to be ignored in the interpretation of cases falling in the above paragraphs”. On this issue, we refer to the following judgments: Corte di Cassazione, October 17th, 2008, case n° 25374 and Corte di Cassazione, February 15th, 2008, case n° 3889 (in Riv. dir. trib., 2009, V, at 1 and the comment thereof in M. CERRATO, La rilevanza del Commentario OCSE ai fini interpretativi: analisi critica dei più recenti indirizzi giurisprudenziali, at. 11 and seq.). Both the judgments highlight the (non-normative) nature of the OECD Model Commentaries. On the Austrian side, see M. LANG, Die Besonderheiten der Auslegung des DBA Österreich-USA, (in W. Gassner, M. Lang, E. Lechner eds.) Das neue Doppelbesteuerungsabkommen Österreich-USA, 1997, at 38.

[36] In the Austrian practice, see Austrian Ministry of Finance decree October 27th, 1995 (in Amtsblatt der Finanzverwaltung, 284/1995) and VwGH of May 21st, 1997, n. 96/14/0084.

[37] P. ANGELUCCI, Italia-Austria, in C. Garbarino ed., Le Convenzioni dell’Italia in materia di imposte sul reddito e patrimonio, Milan, 2002, at 56, holds it was around January, 1974.

[38] On this issue, see the leading case VwGH, July 31st, 1996, n. 92/13/0172 (see J. HEINRICH, H. MORITZ, Austria – Interpretation of Tax Treaties, European Taxation, 4, 2000).

[39] The 1963 or the 1977 one.

[40] It is worth observing that the objective scope of the DTCs patterned upon the OECD Model is fairly expressed in par. 2 of the Model Commentary (1963) on Art. 3 which holds that it is immaterial “… on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constituent States, regions, provinces, "départements", Cantons, districts, "arrondissements", circles ["Kreise"], municipalities or groups of municipalities, etc.)”. In this respect, we shift the attention to the German-Austrian DTC (entered into in 2000 and actually in force) which specify that “Gebietskörperschaften" is refered to the German “Länder und Gemeinden”  and to the Austrian “Bundesländer und Gemeinden” (see the Protocol to the German-Austrian DTC 2000). Under Article 116(2) of the Österreichische Bundesverfassungsgesetze (Federal Austrian Constitution Law) “Die Gemeinde … has Recht … zu führen und Abgaben auszuschreiben”.

[41] Whose scope is illustrated by par. 2, OECD Model Commentary (shortly the “OECD MC”) 1977 on Art. 2(2) which holds “This Article is intended to make the terminology and nomenclature relating to the taxes covered by the Convention more acceptable and precise, to ensure identification of the Contracting States' taxes covered by the Convention ...”.
It is worth mentioning that, under Art. 4 of the former Austria-Italy DTC(1925), taxes covered by the convention were addressed by way of wide “economic” criteria and no exhaustive list was provided for (the issue arose before the Comm. Trib. Centr., case n. 34283,March 17th, 1952, in Giur. Imp., 1954, at 354).

[42] See par. 6 of the Commentary to the 1963 OECD Model which reads that “… The list is not exhaustive. It serves to illustrate the preceding paragraphs of the Article. In principle, however, it will be a complete list of the taxes imposed in each State at the time of signature and covered by the Convention.” The relationship between par. 2 and par. 3 of Article 2 is investigated in M. LANG, “Taxes Covered” – What is a “Tax” according to Article 2 of the OECD Model?, Bulletin, Tax Treaty Monitor, 6, 2005, at 220.

[43] Accordingly, leading Italian scholar holds that the mere consequence of the feature in hand shall be that the DTC applies exclusively to the taxes mentioned in Article 2(2). See C. GARBARINO, Introduzione, in “Le Convenzioni dell’Italia in materia di imposte sul reddito e sul patrimonio”, C. Garbarino ed., Milan, 2002, at 5.
In a nutshell, we shall outline, further, that the scope of Article 2(3), above mentioned, has to be completed with Letters (a) and (b) of the Protocol to the relevant DTC which provide specific provisions as for the introduction of new taxes on capital in Italy [see Letter (a) of the quoted Protocol] or in Austria [see Letter (b) Protocol]. See the Protocol entered into by the Italian and the Austrian Governments on 29th June, 1981, which reads: “It is agreed: (a) that, with reference to Article 2, in case of a future introduction of a tax on capital in Italy the Convention will also be applicable to this tax; (b) that in case of a future introduction of a tax on capital in Italy, the Austrian tax on capital which may be levied in accordance with the Convention will be credited against the above-mentioned Italian tax under the provisions mentioned in Article 23, paragraph 2;”. The scope of the relevant DTC, consistently with the OECD approach, is widened by the subsequent par. 3 of Article 2 since any subsequent tax imposed by any of the contracting parties shall fall under the scope of the DTC. Article 3(2) holds that “The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. At the end of each year, the competent authorities of the Contracting States shall notify each other of changes which have been made in their respective taxation laws”.

[44] On this issue, the nexus between Article 2 and Article 25 is fairly expressed in par. 20 of the OECD MC (2003) on Art. 4(2). See, also, par. 8 of the Commentary on Article 25(1) and (2).

[45] To this extent, the Italy-Austria DTC patterns upon the 1977 OECD Model, since the 1963 did not provide for an explicit deadline.

[46] To this extent, the Ita-Aut DTC follows the 1963 OECD Model and not the 1977 version. For a comparative analysis of the OECD Models, in the Italian versions, see Convenzioni internazionali per evitare le doppie imposizioni, (G. Maisto ed.), Milan, 2003, at 52.

[47] Persons “other than individuals”, according with Article 4(3) Ita-Aut DTC.

[48] Par. 24 on Art. 4(3), OECD MC(2008). We refer to the latter text, amended as of July 11th, 2008 (see OECD document, July 18th, 2008, The 2008 update to the OECD Model Tax Convention).

[49] See par. 25 OECD MC on Art. 4, Italian Observation on par. 24 of the MC (amended as of July 2008).

[50] The main purpose of these tax planning schemes is addressed in G. MELIS, La residenza fiscale dei soggetti IRES e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter del Tuir, in Dir prat. trib. int., 3, 2007, at 785 and A. FERRARO, Elusione, evasione e riciclaggio nei rapporti internazionali, in Riv. dott. comm. 2006, 1, at 3.

[51] Introduced by Article 82(22), Legislative Decree, June 25th, 2008, n° 112.

[52] However, many scholars hold that the rule could be deemed contrasting with the DTC’s scope.

[53] We refer to the leading case brought before the ECJ, C-196/04 Cadbury Schweppes [2006].

[54] The above definition, in fact, is strictly identical to the 1977 OECD Model and we find there is no substantial difference between it and the one in Article 3 of the 1963 OECD Model. See, also, par. 2 of the OECD MC (1963) to Art. 3(1).

[55] As for cases following under the 1925 DTC involving partnerships, see the Italian Circular letter n. 77 of July, 16, 1977, let. f).

[56] See, Articles 1, 3 and 4, Austria-Italy DTC.

[57] In this respect, we refer to par. 3 and 4 of the OECD MC (2003) to Art. 1.  and par. 3 and 8 of the MC to Article 4. However, see par. 8.2., OECD MC (2003) to Art. 4, which draws a fair discrimen between the “liability to tax” and the “subjectivity to the tax laws” which could ground different approaches. In this respect, it is worth observing that, grounding upon par. 8.2. of the OECD MC to Art. 4, recently, the Italian Tax Authorities (see, Ris. n. 167 of April, 28, 2008) held that a Dutch pension fund can be considered resident for the Italian-Dutch DTC purposes (a short comment in Dir. e prat. trib. internaz., 2, 2008, at 936 and seq.).
It is worth highlighting that the OECD – according with the OECD discussion draft of October 30th, 2007 “Tax treaty issues related to REITs” – has amended the Model Commentary in 2008 introducing paragraphs from 61.1 to 61.7 to the Commentary on Art. 10 (dividends) of the Model which provide for an explicit discipline on REITs taxation (see par. IV. Distributions by Real Estate Investment Trusts). The most interesting issue is related to the qualification of the REITs as a “resident”. See, namely, Tax Treaty issues related to trusts, OECD Public discussion draft October 30th, 2007, par. 9 which reads “… Since the income of a REIT is typically distributed, the REIT is not, in a purely domestic context, taxed on that distributed income. As already mentioned, the tax mechanisms that ensure that result vary from country to country and can include, for example, rules that allow the deduction of REIT dividends or distributions, the tax exemption of a REIT that meets certain conditions, the tax exemption of the income of a REIT that meets certain conditions, the tax exemption of all the REIT’s income, the tax exemption of only the part of the REIT’s income that is distributed within a specified period of time or rules that allocate the income to the investors rather than to the REIT itself. It seems, however, that in most cases, the REIT would meet the condition of being liable to tax for purposes of the treaty definition of “resident of a Contracting State”, subject to the particular problems arising from the application of tax treaties to trusts [emphasize added]”.

[58] Brief remarks of international tax treatment of partnerships in G. FROTSCHER, Internationales Steuerrecht, Munchen, 2001, at 159 and seq.; M. LANG, Einführung in das Recht der Dopplesteuerungsabkommen, Wien, 2002, § 442 and seq. and E. BACHLE, T. RUPP, Internationales Steuerrecht, Stuttgart, 2002, at 167.  A recent contribution in M. LANG, M. REICH, C. SCHMIDT, Personengesellshaften im Verhältnis Deutschland-Österreich-Schweiz, IStR, 1, 2007 at 1 and seq.

[59] “The application of the OECD Model Tax Convention to Partnerships”, January 20th, 1999.

[60] Article 28(4) Italia-Austria DTC’s official version (according with Art. 30(4) of the relevant DTC) reads “associazioni di persone”, in the Italian version, and “Personengesellschaften” in German. We observe that the wording of Article 28(4) does not reproduce exactly the wording of Article (3)(1)(b) which includes “associazioni di persone” and “alle anderen Personenvereinigungen” within the concept of “person” for DTC purposes. To this extent, seen that the definition laid down in Article 28(4) is intended exclusively “for the purposes of this paragraph”, we hold that the latter definition cannot be relied upon in order to outline which entities are included in the general definition provided for in Article 3(1)(b).

[61] For the purposes of Article 4, Italy-Austria DTC.


[] Taxation is ensured grounding on the assumption that A,B and C are “residents” for DTC purposes in Italy (and, hence, therein, taxed on their portion of income).

[] We briefly observe that Article 28(4), Italy-Austria DTC could fit into the rationale expressed in par. 11 of the OECD MC (2008)  Article 10(2) which holds that “… If a partnership is treated as a body corporate under the domestic laws applying to it, the two Contracting States may agree to modify subparagraph a) of paragraph 2 in a way to give the benefits of the reduced rate provided for parent companies also to such partnership”. Hence, should the partnership be “taxed as” a body corporate, contracting States could allow it the DTC benefits. This stance is fully consistent with par. 27 of the OECD MC (1963) which provided for the above derogation. 
However, notwithstanding the same rationale, Article 28(4) chooses not to prevent under taxation phenomena. In fact, saying that 3/4 of the partners must be resident in the State of the partnership implies that 1/4 of the partners could not and, hence, 1/4  of the total income could remain untaxed.

[] In the case expressed in TABLE I, the 25% flows from Y to D.

[] As of January, 1, 2007: offene Gesellshaft (shortly, “oG”).

[] We address, firstly, the situations which involve those entities expressly listed under Article 28(4)(a) and (b), where it is said that “in this paragraph the term "partnership" means …”. Secondly, we will deal with the “all other entities” treated for tax purposes in the same way under Italian/Austrian law.

[] Article 5 Tuir, in fact, provides for the taxation of income produced from "società semplice", or “società in nome collettivo", or "società in accomandita semplice" are attributed, by way of flow-through taxation, to partners (see G. FALSITTA, Manuale di diritto tributario, 5th ed., Padua, 2008, pag. 66).
The same holds true for income attributed (by way of flow-through taxation) from “flow-through” joint stock, limited liability companies and other entities (the sc. “optional flow-through entities”) to their shareholders, in cases provided for in Articles 115 and 116 Tuir. Articles 115 and 116 Tuir provide for an optional “flow-through” taxation regime according to which entities, generally taxed as “opaque” entities, may opt to be taxed as partnerships. According with the observation laid down by leading scholars, the deeming rule provided for in Article 23(1)(g) Tuir has been expanded in order to comprise such an income (see A. FANTOZZI - A. SPOTO, Prime osservazioni in materia di trasparenza fiscale delle società di capitali, in Riv. dir. trib., I, 2003). See, also, Ris. Min. 171 of January, 27, 2006 and the comment thereof in P. FLORA, M. MESSI, Tax Treatment of Dividends Distributed to Non-Resident Tax-Transparent Entities, Derivatives and Financial Instruments, 3, 2007, at 7 and seq. and in N. SACCARDO, Recenti sviluppi a livello OCSE, in Riv. dir. trib., 2008, V, at 40.

[] Namely, Article 2320 c.c. holds that a “socio accomandante” shall not manage and carry out businesses unless he has been specifically appointed and authorized for (it is worth observing that under Article 1320 c.c. a socio accomandante could be authorized to carry out negotiation and conclude contracts under the control and the authorization of a socio accomandatario). According with Art. 6(3) Tuir, income from s.a.s. is business income, whatever the source is.

[] Further (in the Italian perspective) we hold it is not immaterial comparing the scope of the DTC´s definition with the internal definition of permanent establishment. Under Article 5 DTC, permanent establishment is the place “in which” (“in cui”, “in der”) – and not through which – activity is carried out. This difference is given to the fact that, almost, all the Italian DTC network fits to the 1963 Model while the internal definition (Article 162 Tuir) is patterned upon the 1977 Model definition (some brief observations in S. GIORGI, La stabile organizzazione e la residenza fiscale, (C. Garbarino ed.), Aspetti internazionali della riforma fiscale, Milan, 2004, at 2 and 3). We highlight, however, that an Austrian DTC entered into in the same period provided that a p.e. is the fixed place of business “through which” (“durch die”) the business is carried out (cf. Article 5(1) Austria-Philippines DTC signed on April, 9, 1981).
The meaning of the term “through which” is explained in par. 4.6. OECD MC on Article 5, “The words “through which” must be given a wide meaning so as to apply to any situation where business activities are carried on at a [emphasis added] particular location that is at the disposal of the enterprise for that purpose.”

[] On this issue, see M. CERRATO, R. MICHELUTTI, La tassazione dei residenti francesi in Italia, at 3, speech delivered at the Conference “Quinto incontro franco-italiano tra gli Ordini degli avvocati di Nizza e Milano”, held in Milan, 14 May, 2008.

[] For the sake of clarity, we underline that the topic we are dealing with involves other general issues of international tax law, such as whether or not the partnership should be considered as a permanent establishment of the partner (or vice versa) and subject to which condition a partner creates for a s. c. agency p.e. On this issue, we refer to the authoritative contribution by A.A. SKAAR, Permanent Establishment op. cit., at 163 and seq. who highlight the partners’ ability to establish a p.e. of the non-resident partners.
In this respect, we cannot avoid in quoting the relevant DTC entered into by Germany and Austria after the World War I whose Article 3(2) specifically mentioned “partners” as a p.e. constituting element.  The DTC Germany-Austria of 1924 shall be fitted into the wider context of the DTCs entered into by Germany with the successor States of the Austria-Hungary Empire.

[] In the case expressed in TABLE I, we refer to the Italy-Third State DTC.

[] In Italy, following the above example (see previous footnote and TABLE I).

[] This is valid in general terms and following a consistent interpretation of the DTCs´ according with the OECD practice. However, this is not the Italian Revenue authority perspective. The stance taken into account by the Italian Tax Authorities addressed a case in which the Italian partner of a Danish partnership was deemed gaining a business profit in Denmark and hence was taxable in Italy (the double taxation had to be eliminated by way of the tax credit provided for in Article 24 Italy-Denmark DTC). However this stance neglects that business profit cannot be taxed unless a p.e. does exist (see, Ris. 16/643 of June, 24, 1986; in Dir. Prat. Trib., 1987, I, at 1051). On this issue it is not immaterial considering that “A permanent establishment begins to exist as soon as the enterprise commences to carry on its business through a fixed place of business [emphasis added](cf. par. 11 OECD MC on Article 5).
The above issue arose, more recently, in an Italian tax ruling involving a non resident (Cypriot) shareholder of a “flow-through” corporation (namely a Limited Liability Company, “s.r.l.”) resident in Italy (see Ris. Ag. E., n. 171 of December, 19, 2005). In the latter case, the Italian Tax authorities (the “Ag. E.”) held that income attributed by way of flow-through taxation to the Cypriot shareholder have to be taxed in Italy, being immaterial whether or not the non resident shareholder have a permanent establishment in Italy. The line of reasoning of the Italian Ag.E. seems to us not having a so solid grounding given two important issues. Firstly, the Ruling reads that income of the Italian flow-through company shall be taxable in Italy unless produced in Cyprus through a permanent establishment, but the case in hand seems to be exactly the reverse one! Secondly, the Ag.E. holds that, should Italy not tax income from the Italian corporation, it would renounce to use its taxing powers, but it is worth observing that the intimate aim (objective and purpose) of the DTC is that of limiting taxing powers and, as a natural corollary, cannot be considered as a distortion of the DTC use.
The issue of p.e. as for partnership is addressed, also, in D. J. PILTZ, Inlandsaktivitäten ausländischer Unternehmen, (J. M. Mössner ed.), Steuerrecht international tätiger Unternehmen, Köln, 1998, at 812.

[] See the Italian Circular Letter, n. 15 of October, 19, 1989.

[] This interpretation seems to be coherent with the 3/4 partners requirement. In fact, 3/4 of the partners shall be taxed since they are “resident” while 1/4 partners (not “resident”), however, taxed therein, this time since income is sourced in that State.

[] Stiftung is an attractive entity and its appeal could slightly increase after the abolition of the inheritance tax (see Austrian Constitutional Court decision of 7th March, 2007) and the abolition of the gift tax (see decision of June 15th, 2007 of the Austrian Constitutional Court) as of August 2008 (on this issue, see C. KERRES, F. PROELL, The Austrian Donations Tax Act 2008 for Foundations and Comparable Entities, in Trusts & Trustees, 14(8), at 599 and seq).
Stiftungen tax regime can be summarized as follows. The normal regime does apply, unless specific item of income are addressed. Dividends are exempted in the hands of the Stiftung (and taxed upon distribution to beneficiaries at a 25% rate), interests are taxed at a 12,5% rate.

[78] Beneficiaries (Begünstigte) may be individuals or any type of legal entity.

[79] The issue is widely addressed in G. KOFLER, Conflicts in the attribution of income to a person, Austria – Branch Report, IFA, 2007, § 3.2., at 105.

[80] Article 21 of OECD DTC (rubricated “other income”) provides that income not dealt with in other Article of the DTC shall be taxable exclusively in the resident State of the recipient (unless a p.e. in the other State does exist). To this extent, and considering the particular tax regime applicable to Stiftungen, these entities could be regarded as “flow-through” entities, in the Italian perspective.
However, see the example in M. LANG, “Taxation of Income in the Hands of Different Taxpayers from the Viewpoint of Tax Treaty Law, Bulletin, Tax Treaty Monitor, 12, 2001, at 600 (as for the entitlement to Austrian-German DTC’s benefit for the German beneficiaries of an Austrian private foundation in respect of royalties received by the Austrian private foundation).

[81] The scope of the definition “body of persons” is in J. F. AVERY JONES et. al., The Origins of Concepts and Expressions Used in the OECD Model and their Adoption by States, in Bulletin, Tax Treaty Monitor, 6, 2006, at 222 where it is specified “An OECD document shows that when preparing this provision, the OECD divided “body of persons” into three categories: (a) those not treated as taxable persons, (b) those treated as taxable persons and taxed in the same way as legal persons, and (c) those treated as taxable persons but not taxed in the same way as legal persons [PC/WP14(61)2, 18 September 1961]. The treatment of certain partnerships under the German and Austrian Gewerbesteuer was given as an example of category (c).” 

[82] Article 3(2)(b) reads: “b) il termine "persona" comprende le persone fisiche, le societa' ed[emphasize added] ogni altra associazione di persone …”.

[]83 P. FIORE, Trattato di diritto internazionale pubblico, 3rd ed., vol. II, Turin, 1888, § 1076, at 341.

[84] In fact, the definition of body of person stands on the internal tax treatment of “flow-through entities”. It is not immaterial reminding that, differently from the natural regime (only persons which are resident can gain the DTC benefit), according with Art. 28(4), DTC benefits could be gained fulfilling the only prerequisite of being a body of person.

[85] M. LANG, “Taxation of Income in the Hands of Different Taxpayers from the Viewpoint of Tax Treaty Law, Bulletin, Tax Treaty Monitor, 12, 2001, at 597 holds that “A “body of persons” can also mean a structure that is not regarded as a taxable entity. There must, however, be some rights or obligations that are assigned to such structures by the jurisdiction for other purposes in order for them to make an appearance in legal life at all”

[86] Until 2007, according with Italian authors trusts could gain DTCs benefit as “other body of persons”. As for the residence, two major options could be highlighted dividing between those who held that trustees residence should be investigated separately and others, on the opposite, who believed residence was likened to the body of trustees’ residence, as a whole (on this issue, see C. GARBARINO, Trust “trasparenti” ed “opachi” nell’ambito dei Tax treaties, in Trusts e att. fid., 2001, pag. 519. As for the scope of this article, we take the stance that Article 28 provides for a conventional definition of body of person that shall be interpreted in the light of the “tax treatment” of the società di persone (in the Italian perspective) or of the Personengesellschaften (in the Austrian perspective).

[87] See Ris. Min. n. 81/2008.

[88] Depending upon whether or not beneficiaries have been appointed.

[89] Partnership are not “residents” (since Article 28 does not influence the DTC classification – whose scope is defined in Article 3) while non resident partner cannot be considered “resident of one of the two contracting States”.

[90] Since coherence should be evaluated in the light of the scope of the rule, we stress that the scope of Article 11(5) is that of providing for “… that in the State of source the interest is taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident [emphasis added] in the other State …” (cf. par. 24, OECD MC on Article 11(4)).

[91] The scope of the “beneficial ownership” clause in Article 11 is fairly expressed in the OECD MC which reads “The term “beneficial owner” is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance” (cf. par. 9, Commentary(2008) on Article 11)

[92] H. LOUKOTA, W. SEITZ, G. TOIFL, Austria’s Tax Treaty Policy, Bulletin, 8/9, 2004, at 368, hold that a “… reason for Austria’s reluctance to insert anti-abuse clauses into its treaties is that, for the most part, such clauses are not capable of “catching” all abusive transactions …” in fact “If tax planners succeed in using particular techniques outside the scope of a specific anti-abuse provision, it is hard to claim that the schemes “invented” by them are abusive”. In this respect see VwGH, decisions of August 10th, 2005, numbers 2001/13/0018 and 2001/13/0019.

[93] This provision was introduced in 1977 (see Convenzioni internazionali, op. cit., at 28).

[94] The exam of the scope of the newly adopted rules is dealt with in R. FRANZE’, C. ROTONDARO, Penalty Clauses, Earnest Agreements and Earnest Payments as Compensation for Withdrawal in Intra-Group Transactions – An Analysis under Italian Tax Law, in Derivatives and Financial Instruments, 4, 2007, at 108 and seq.

[95] The objective scope of the anti-avoidance rule is investigated in M. POGGIOLI, L’estensione del sindacato antielusivo a penali, multe e caparre infragruppo, in Corr. trib., 2007, at 1116 seq. who held that “… Tramite l’enunciato …, lo spettro di situazioni suscettibili di legittimare il sindacato antielusivo viene in primis ristretto alle sole pattuizioni tra «società», con ciò automaticamente espungendosi dall’ambito di rilevanza ogni accordo bensì rispondente al modello tipico sopra …, ma coinvolgente soggetti anche uno solo dei quali non organizzato in forma «societaria»”.


[96] A brief analysis of the evolution of the concept of “construction clause”, is carried out in R. SCALIA, The Concept of Permanent Establishment In the Hungarian Corporate Income Tax Law With Particular Regard of the Real Estate Market, available at http://www.diritto.it/archivio/1/26043.pdf, at 8 and 9.

[97] The Italian Austrian DTC is close to the 1977 Model, not to the Model of 1963.

[98] Article 5(3)(a) to (e) reads “The term "permanent establishment" shall be deemed not to include:(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific or for similar activities which have a preparatory or auxiliary character, for the enterprise”.

[99] The relevant criteria to be applied are expressed in par. 27, OECD MC (2003) on Article 5.

[100] Further, we highlight that recently the Corte di Cassazione has confirmed the approach of interpreting the OECD Commentary and, namely, the concept of permanent establishment consistently with Italian practice neglecting the OECD approach because “… nessuna decisiva rilevanza può essere riconosciuta alla modifica apportata all'art. 5 del Commentario OCSE, … Infatti, a parte il valore non normativo del commentario - che costituisce, al più, una raccomandazione diretta ai Paesi aderenti all' OCSE - è significativo rilevare che nei confronti di tale modifica è stata espressa dal Governo Italiano la riserva, secondo la quale - nell'interpretazione del modello di convenzione - l'Italia non può disattendere quella data dai propri giudici nazionali”, (C.Cass., February, 15, 2008, case n° 3890). On the role of the OECD Model Commentaries in interpreting the Italian p.e. concept – consistently with the Corte di Cassazione case law – see E. DELLA VALLE, Stabile organizzazione (Dir. Trib.), in Dir. prat. trib. internaz., 2, 2008, at 700.
The Austrian perspective should be different, according with H. LOUKOTA, W. SEITZ, G. TOIFL, Austria’s Tax Treaty Policy, Bulletin, 8/9, 2004, at 366,holding that “The concerns of Austria’s treaty negotiators are twofold: (a) to keep the definition of “permanent establishment” in line with the OECD principles and (b) to restrict the other country’s taxing rights to that part of the profit which is attributable to the PE in accordance with the OECD arm’s length principle”.

[101] The same provision is contained in Article 7 of the Austria-Poland DTC and in Article 7(8) of the DTC England-Austria which reads “The provisions of paragraphs 1 to 7 shall also apply to income derived by a sleeping partner in a sleeping partnership (Stille Gesellschaft) under Austrian law”. The same rule is provided for in the Austrian DTCs entered into with Argentina, Australia, Belgium, Brazil, Bulgaria, Canada, Croatia, Czech Republic, Egypt, Estonia, Finland, Indonesia, Ireland, Israel, Korea, Malta, Norway, Philippines, Portugal, Romania, Slovak Republic, Slovenia, South Africa Spain, Thailand, Ukraine, United Kingdom, Switzerland, USA and Uzbekistan. The same clause is provided for in the Protocols to the Austria, Azerbaijan, Belarus, China, India, Kyrgyzstan, Malaysia, Nepal DTCs.

[102] We observe that while the Italian version addresses the Austrian “stille Gesellshafte”, the Austrian version does not refer to the Italian “associazione in partecipazione” but it holds that “Die Bestimmungen dieses Artikels sind auch auf Einkünfte anzuwenden, … b) die einer Person aus ihrer Beteiligung an einer stillen Gesellschaft [emphasize added] des italienischen Rechts zufließen”. In our perspective this amount to a mere lack of textual coordination and cannot ground any interpretation aiming at “expanding” the scope of the provision to other institution but the one provided for in Article 2549 of the Italian Civil Code.
In German case law (see 27 January 1982, BStBl. 1982 II 374, at 377) the Germany–Switzerland DTC (1971) was interpreted in order to establish whether a “dividend” was defined to include a payment to a silent partner (stiller Gesellschafter), although a dividend was something paid by a company (Gesellschaft), whose definition did not include a silent partnership. The Bundesfinanzhof concluded that the definition of company was not applicable where silent partnerships were concerned.

[103] Should the silent partner be an individual, his income will be withheld a 25% tax which is not final.

[104] Unless the sole contribution consists of rendering personal services, income will fall under the rules of “professional income”.

[105] Dividends are subject to a 12,5% withholding tax and gain 50,28 exemption (as of January 2009. Formerly, 60%) if the value of the contribution (apporto) amounts to more than 20% of the equity of the company (5% in the case of listed companies) or more than 25% of the assets of the company. 

[106] See § 93(2)(2) EStG.

[107] The unechte stille Gesellschaft‘s (widely speaking an “atypical silent partnership”) feature lays in the circumstance that the silent partner is not only entitled to a share in the profits but also to a share in the goodwill and the hidden reserves of the enterprise while the typical silent partnership is very similar to a loan but it implies being involved in a business. 
The above features ground the assertions that income from an atypical silent partnership falls under Articles 10 and 7 while “… the shares of a profit from a typical silent partner generally fall under Article 11” (see V. E. METZLER, Austria, in (G. Maisto, A. Siegbert, R. M. Cadosch eds.), Multilingual Texts and Interpretation of Tax Treaties and EC Tax Law, 2005, at 160 and 161).   

[108] See M. LANG, Hybride Finanzierungen im Internationalen Steuerrecht, Wien, 1991, at 180.

[109] According with Article 109(9)(b) Tuir.

[110] Hence, the WHT as for Article 27(3) Presidential Decree n° 600/73 shall not be applied (on this issue, see G. FERRANTI, Redditi di natura finanziaria, Milan, 2008, at 382).

[111] According with Article 44(2), last ind., Tuir. The quoted Article addresses the taxation of the sc. redditi di capitale and par. 2, let. a. To this extent, it creates for the assimilation of financial instruments fulfilling some requirements to shares. See G. FERRANTI, V. RUSSO, Partecipazioni societarie dividendi e capital gains, Milan, 2008, at 217.

[112] Rules are provided for in Article 89(2) Tuir – as for stiller Gesellshafter subject to Ires – and in Article 44(2) and 47(2) Tuir – as for stille Gesellshafter subject to Irpef.

[113] The regime is analyzed in G. FERRANTI, op. cit., at 253 and seq.

[114] To this extent, we highlight that although we use the wide formula “on behalf of”, the same result could be achieved by creating derivatives and financial instruments whose underlying asset is the stille Gesellschaft right.

[115] Unlike Article 10 of the relevant DTC whose scope is fairly expressed in par. 8 of the Commentary on Article 10 OECD Model (2008) which reads “The Article deals only with dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State. It does not, therefore, apply to dividends paid by a  company which is a resident of a third State [emphasize added] or to dividends paid by a company which is a resident of a Contracting State which are attributable to a permanent establishment which an enterprise of that State has in the other Contracting State (for these cases, cf. paragraphs 4 to 6 of the Commentary on Article 21)”.
As for the taxation of non-resident associate in the light of Article 10 of Italian DTCs, see C. GARBARINO, Manuale di tassazione internazionale, Milan, 2005, at 1485.