1. Introduction

Some time ago, the UK First-Tier Tribunal (Tax Chamber) (hereafter referred to as the “Court” or the “UK Court”) released a decision involving applicability of Art. 8(2) of tax treaty between the United Kingdom and Ireland [that provision was similar to Art. 7(2) in a pre-2010 OECD Model Convention.]

In the above-mentioned decision, the Court concurred with the UK tax authorities that it was necessary to notionally attribute certain level of free capital to the UK permanent establishment of an Irish bank. The Court reached that conclusion on the basis of a specific provision in the UK tax law, and opined that it did not conflict with a tax treaty provision similar to Art. 7(2) in pre-2010 OECD Model Convention.

With due respect to the Court, the Court’s approach and conclusion seem difficult to reconcile with the scheme of ‘independent enterprise’ (or separate enterprise) hypothesis embodied in tax treaty provisions similar to Art. 7(2) of the OECD Model Convention....