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.

In the first part of this article, we analysed 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, could escape the source state taxation in absence of attribution to a permanent establishment.

In this second (and final) part of the article, we would look at some interesting judicial precedents, from Canada, France and Germany, dealing with certain other intricate income characterization issues concerning ‘business profits versus capital gains’.