OECD Model Tax Convention covers the taxation of income and capital. As mentioned in our previous post on understanding the structure of the OECD Model tax treaty, we explained that Article 6 to Article 21 deals with the taxation of income, and Article 22 covers the taxation of capital.
In today’s post, we will explain the taxation of capital as dictated by Article 22. Taxation of capital is complementary to the taxation of income, hence in general, the rights to tax the capital is with the State having the right to tax the income from this capital. But we cannot purely rely on this principle, as sometimes, the taxing powers on income are with both countries.
Let’s first understand the structure of Article 22.
Capital represented by Immovable Property: Article 22(1)
Capital representing the immovable property (mentioned under Article 6), may be taxed in the State where the property is situated.
Capital represented by Movable Property: Article 22(2)
Capital represented by the movable property forming part of the business property of the permanent establishment will be taxable in the State where the permanent establishment is based.
Capital represented by ships, aircraft and movable property: Article 22(3)
For an enterprise operating ships and aircraft in the international traffic (as mentioned under Article 8), the capital represented by ships, planes, and other such movable property connected to the operation of vessels and aircraft is taxable in the State where the enterprise is resident.
All other elements of capital: Article 22(4)
For all the other elements of capital not covered from Article 22(1) to Article 22(3), the capital will be taxable in the State of Residence of the owner.