© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Double tax treaties
GENERAL PRINCIPLES​
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Purpose
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- No presumption as to which state should be entitled to tax (not choosing between tax and no tax)
"[92] I accept [the taxpayer's] submission that it is important to bear in mind that the UK/Canada Convention is not determining whether a particular stream of revenue should be taxed or tax free. Instead, it is identifying where the boundary lies between on the one hand Canada's power to tax the profits attributable to the Canadian business of a Canadian-resident company and on the other hand HMRC's power to tax profits which derive from the exploitation of the UK's natural resources. The requirement in Article 21 of the UK/Canada Convention that the Contracting States eliminate double taxation means that the application of its terms is intended, generally speaking, to be a zero-sum game, even where the Convention does not confer an exclusive right to tax on one of the Contracting States. I agree that there is no underlying presumption as to where that boundary should fall - it depends on the proper construction of the Convention.
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[98]...The policy behind the inclusion of Article 6(2) in the UK/Canada Convention (as well as Article 13 and Article 27A) is undoubtedly to shift some of the taxing rights that would otherwise belong to the jurisdiction where the company is resident to the jurisdiction where the oil is located. That has no doubt been achieved by those Articles to a very considerable extent even giving them the interpretation favoured by the Court of Appeal. Whether they go even further as HMRC contend depends on the meaning of the words and is not helped by appeals to the economic link between the UK and the North Sea, or to the purpose of the provisions or to the parent/subsidiary relationship between Sulpetro and Sulpetro (UK)." (HMRC v. Royal Bank of Canada [2025] UKSC 2)
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- Dual purpose: eliminate double taxation and prevent avoidance of taxation
"[34] Secondly, DTAs respect the principle of taxation by the State of residence. They aim to avoid the taxation of residents twice over on the same income. What DTAs do not aim to do is to facilitate the avoidance of tax, or its reduction below the level of tax ordinarily paid by residents. In those circumstances it is a legitimate aim of the public policy of the State in fiscal matters to ensure that DTAs relieve double taxation of residents rather than serve as an instrument used by taxpayers who choose to participate in artificial arrangements to avoid or reduce their level of taxation. In principle retrospective legislation may be justified for the purpose of implementing that policy." (R (oao Huitson) v. HMRC [2011] EWCA Civ 893, Mummery LJ)
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"[54] The correct approach to the construction of a double taxation treaty was also considered in Bayfine UK v HMRC [2011] EWCA Civ 304. The double taxation treaty in that case contained the same preamble as the Treaty in this case. At [17], Arden LJ said, in relation to that preamble:
“17. These words, however, make it clear that the primary purposes of the Treaty are, on the one hand, to eliminate double taxation and, on the other hand, to prevent the avoidance of taxation. In seeking a purposive interpretation, both these principles have to be borne in mind. Moreover, the latter principle, in my judgment, means that the Treaty should be interpreted to avoid the grant of double relief as well as to confer relief against double taxation.” (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
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Taxing rights
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- Source state has primary taxing rights over active income and residence state has primary rights over passive income
"[77] The function of double tax conventions in apportioning taxing rights between the State of residence and the State of source, and a distinction that is generally drawn between "active" and "passive" income in making that apportionment, was considered in an illuminating passage in Alta Energy in the context of the Canada/Luxembourg treaty (from the judgment of Côté J with whom the majority agreed):
"[73] Broadly speaking, the apportionment of taxing rights between the residence and source states under the OECD Model Treaty, which serves as a model for the Treaty, is centred on the distinction between active and passive income (Li and Cockfield, at p. 12; Avi-Yonah, Sartori and Marian, at p. 155). The source state has the primary right to tax active income (e.g. business profits and employment income), and the residence state has only residual rights. Pursuant to the theory of economic allegiance, the source state has a greater claim to tax active income because its economic environment has the closest connection with the origin of wealth (Malherbe, at p. 56; Li and Cockfield, at pp. 66 and 151). Non-residents owe allegiance to the source state as a result, and they are expected to pay tax for the public services from which they benefit in carrying on their active economic activities in the source state.
[74] Conversely, the residence state has the primary right to tax passive income (e.g. interest, dividends, and capital gains), and the source state has only residual rights. The source state's claim to tax passive income is considered weaker in comparison to that of the residence state because generating such income is assumed to require few public services from the source state. Moreover, the economic environment of the source state is considered less material to the earning prospect of passive investments, as such passive activities may be conducted in various jurisdictions without either improving or negatively affecting their earning prospect. Therefore, non-residents earning passive income owe little allegiance to the source state."
[78] The provisions of the Convention illustrate both the significance of residence and the distinction noted in Alta Energy between active and passive income."(HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
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- Benefits to residents indicates substantive connection with territory required
"[79] The starting point is Article 1(1), which makes clear that (unless specifically provided otherwise) the Convention applies to residents of one or both States. That is important. The Convention confers material benefits on taxpayers to whom it applies, and the Contracting States have agreed that those benefits should be available only to their respective residents. I pause here to note that, if GEFI's argument were right, an entity based anywhere in the world the shares in which were stapled to a US entity would have to be granted the benefits of the Convention.
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[81] The importance of the residence concept means that both States have a clear interest in delineating the scope of the other State's ability to determine who falls within the concept of Treaty residence, because where a person is resident in that other State the source State may well have to cede or at least restrict domestic taxing rights. (Indeed, in the particular context of the Convention the United Kingdom's interest is arguably heightened for corporate entities because of the fact that the tie-breaker in Article 4(5) depends on mutual agreement, and if agreement cannot be reached it must allow a credit for US tax paid on US source income against UK tax on the same income: [22] above.)" (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
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Income v. gains​​
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- If treaty renders sum eligible for taxation as gain, cannot be taxed as income
"[140] At this point it is convenient to deal with an additional argument of Mr Bremner QC that the Revenue could still tax the Payments as income, even if they only became eligible for taxation in the UK as a gain within the meaning of Article 13. We reject this argument. It seems wrong that a sum of money which becomes eligible for taxation within the UK as a gain within the meaning of Article 13 can then be taxed in the UK in whatever way the Revenue wishes, regardless of the status of the relevant sum of money. Such an analysis seems to extend too far the flexibility given to the contracting parties, when it comes to the taxation of sums which are rendered eligible for taxation in one contracting state by a particular Article of the Treaty." (Royal Bank of Canada v. HMRC [2022] UKUT 45 (TCC), Edwin Johnson J and Judge Rupert Jones)
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Definitions​​
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- References to domestic law definitions may still need to take account of treaty context
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"[129] However, it is worth noting two points. First, it is not obvious to me that UK tax law principles should be applied without any reference to the broader principles that apply in interpreting the Convention, and in particular the need to consider the meaning of words in their context. The context here includes a clear distinction between interest attributable to a business carried on in a Contracting State and interest derived in other circumstances: essentially the difference between active and passive income discussed in Alta Energy (see [77] above). However, I will not develop this point further given the common ground between the parties in this case." (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
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PROCEDURE​​
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- Relief under double tax treaty not automatic - must be claimed
Apply normal time limit rules
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"[84] We have reached the conclusion that [HMRC] is right that if the Appellants were able to rely on Article 7, then they were required, in their self-assessment tax returns, to return the deemed income in accordance with the transfer of assets abroad provisions and then to claim relief in reliance on Article 7. Such a claim would come within section 788(3)(a) and had to be made by reason of section 788(6) and, further, had to be made within the time limit imposed by section 43 TMA 1970. Further, in response to the discovery assessments which were based on section 739 ICTA 1988 and sections 720 and 721 ITA 2007, the Appellants had to claim relief in reliance on Article 7 pursuant to section 788(3)(a) and (6) within the time limit imposed by section 43(2) TMA 1970. Such a claim would naturally come within the wording of section 788(3)(a)." (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
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See further: time limits for claims
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PARTICULAR ARTICLES​​
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ARTICLE 4 (RESIDENCE)​
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"(1) For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein." (Model Article 4)
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- Liability to worldwide taxation must be the result of one of the connecting factors
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"[63]...The critical point is that GEFI is in fact UK incorporated. It is liable to tax in the United States "by reason of" the application of s.269B, which provides that what it explicitly recognises to be a foreign corporation (that is, one not created or organised under US law) "shall be treated" as if it were a domestic corporation. It is not liable to tax by reason of actual incorporation in the United States or by virtue of any of the other enumerated criteria listed in Article 4(1). Although at one point the UT appeared to suggest that GEFI should effectively be assumed to be incorporated in the United States by virtue of s.269B, I did not understand Mr Baker to rely on such an analysis and I cannot see that it would have any evidential support.
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[67] In my view that is not the natural meaning of the words used. Article 4(1) defines a resident of a Contracting State as a person "liable to tax… by reason of" having a particular status (domicile, residence etc.). The words "by reason of" make clear that liability to tax is the consequence of having the requisite status. It does not say that residence status is the result of, or equates to, being liable to tax. Further, the status in question comprises a list of specific connecting factors following by an express ejusdem generis provision. The fact that a list is included suggests that the individual items referred to in it were regarded as having significance. The choice of the words "of a similar nature", meaning (broadly) of the same kind or genus, is also relevant. Each of the listed factors is a type of substantive factual or legal connection between the person concerned and the State in question, strongly indicating that for another factor to be something of a similar nature it would also need to be a connection that has a similar character or quality.
[68] I agree with [HMRC] that if all that was intended to be covered was anything that resulted in worldwide taxation under domestic law then there would be no need for any specific list. The underlined text would much more straightforwardly have referred simply to unrestricted or worldwide taxation. If a list was nonetheless included then the words "of a similar nature" would have read something like "to the same effect" or "having the same consequence"." (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)​​
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- Factual connection not a deemed legal connection
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"[122]...The US connections required by s.269B are limited to a) stapling of more than 50% by value of the foreign corporation's shares to those of a domestic corporation, and b) direct or indirect ownership as to 50% or more by US persons. Both of these requirements relate to the ownership and control of the relevant company. Neither requires any form of link between the company itself and the United States, whether a formal legal one (such as incorporation, the location of its registered office or similar) or a factual one (such as place of management). The facts that the entity to which the company is stapled is itself US incorporated and that both entities are ultimately US owned cannot suffice. In contrast, the criteria specified in Article 4(1) all describe legal or factual connections between the entity itself and the relevant Contracting State of a kind that may justify worldwide taxation." (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
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Individuals tie breaker
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"(2) Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement." (Model Article 4)
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Non-individuals tie breaker
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(3) Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States." (Model Article 4)
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ARTICLE 10: DIVIDENDS
(1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
(2) However, dividends paid by a company which is a resident of a Contracting State may also be taxed in that State according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividend (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividend); b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term “dividends” as used in this Article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply. 5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a
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- "Subject to tax" requires actual taxation
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"[119] The OECD Commentary on Article 21 of both the MTC and the OECD Draft Model make it clear that the purpose of including the additional condition of being "subject to tax" is to "avoid non-taxation".
[120] In our view avoiding non-taxation, requires there to be actual and effective taxation. It is not sufficient that the SIPP Withdrawals would be taken into account under Portuguese tax law to determine the rate of PIT that applied to any other income of Mr Masters. To conclude otherwise would in our view defeat the purpose of including this condition in Article 20.
[121] If it was necessary for us to consider the application of Article 20 to the facts of this case therefore, we would find that because the SIPP Withdrawals were not actually taxed in Portugal, the UK would not be prevented from taxing them by the application of Article 20." (Masters v. HMRC [2025] UKFTT 967 (TC), Judge Snelders)
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