1. Introduction

In case of applicability of a bilateral tax treaty, the tax treatment of business profits is governed by Art. 7 (Business profits) of the tax treaty. Conversely, the tax treatment of income that cannot be characterized as ‘business profit’ is subject to the other tax treaty articles. Therefore, income characterization is one of the most important tax treaty aspects. The tax treaties, however, do not include specific provisions in respect of income characterization. As evident from the ensuing discussion in this two-part article, the process of income characterization for tax treaty purposes involves many aspects. Even rather seemingly straight forward capital gains can pose many intricacies.

 

The first part of this article analyses an Australian decision, wherein the Court was required to adjudicate as to whether capital gains from a merger transaction could be characterized as ‘business profits’ and, hence, escape the source state taxation in absence of attribution to a permanent establishment.