Treaty Shopping A Canadian and International Perspective

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Treaty Shopping A Canadian and International Perspective

    Treaty Shopping: A Canadian Case Study and the

    International Scene

    1Sophie Chatel


    With the globalization of markets and the increasing mobility of capital, tax administrations around the world are responding to a sophisticated array of tax planning structures designed to ―jump‖ international borders and ―mine‖ benefits set forth in bilateral tax treaties. Historically, national tax systems emerged to meet intrinsic social values, unique national priorities, and specific local conditions. Today, multinationals and other sophisticated taxpayers have become increasingly adept using discrepancies between different national tax systems in order to lower their tax burden where they cannot escape tax liability all together. The consequences of treaty shopping remain subtle, yet they are increasingly being felt and are potentially far reaching. In the developed world, certain countries are noticing a steady erosion of their tax base, a harrowing prospect given that many are running hefty deficits while floating welfare states are facing an imminent demographic bomb. In the developing world, on the other hand, countries have become more aggressive not only in terms of luring foreign capital but also in developing marketing niches to facilitate various kinds of investment and capital flows.

    Lacking a united international effort to address fiscal erosion, many countries have embarked upon the proverbial ―race to the bottom‖ constantly nudging corporate tax rates lower with the hope of capturing more revenue. In Canada, for instance, the Mintz Report proposed reforming Canada‘s tax system by, ―lowering corporate income tax rates 2for business toward international norms and correspondingly broadening the tax base.‖

    History, however, suggests that such a strategy is unlikely to succeed over the longer term. On a global scale, the market remains a closed system so that individual countries 3square off in what amounts to a zero sum game. Over the longer run, the inherent

    discrepancy between the benefits reaped from predatory tax policies versus their collective cost makes taxes an ―open resource‖ subject to the classical Tragedy of the 4Commons scenario.

     1 Canada Revenue Agency, Senior Advisor Tax Treaties. The opinions expressed in this article are the

    author‘s and do not represent the position of the Canada Revenue Agency. The author wishes to acknowledge the assistance of Thomas A. Boogaart II, Ph.D., in reviewing the English and the philosophical theory underpinning this article. 2 Canada, Report of the Technical Committee on Business Taxation (Ottawa: Department of Finance, April

    1998), 1.7. 3 In game theory, zero sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participants. 4 The Tragedy of the Commons scenario describes a situation where competition drives a rapid diminution of a resource, in this case the corporate tax base. The metaphor was originally coined by Garret Hardin in a seminal article, "The Tragedy of the Commons," Science, Vol. 162, No. 3859 (December 13, 1968), pp.

    1243-1248. Hardin sought to explain resource degradation in a community switching over to market


    In an ideal world, national governments would unite in a concerted effort to level the playing field; ironing out idiosyncratic wrinkles embedded in national tax systems and nudging them towards a common standard. In reality, the international political scene is highly fractured, rife with irresolvable divisions and polemics: a conflict of interest between the North and South, competition among super economic blocs, and various manifestations of a revanchist national sovereignty that make a solution for taxation of multinationals unlikely.

    Given such barriers, even seemingly minor progress must be applauded. Currently, the European Union is moving to adopt a measure that would introduce a level playing field among member countries and this is mirrored by discussions around the OECD project on Harmful Tax Practices. The United Nations has also conducted preliminary discussions regarding the creation of an international tax body that ―could take a lead role in restraining the tax competition designed to attract multinationals—competition that […]

    often results in the lion‘s share of the benefits of FDI [foreign direct investment] accruing

    to the foreign investor‖ and, ―[p]erhaps most ambitious of all, it might in due course seek to develop and secure international agreement on a formula for the unitary taxation of 5 multinationals.‖

    In the meantime, Canada is just one of many nations struggling with the new global reality that treaty shopping has become normal tax planning. Throughout the world, bilateral tax treaties, initially negotiated to avoid double taxation of taxpayers with cross-border dealings, are now, quite ironically, being exploited by some of them to secure unexpected double non-taxation.

This paper addresses the problem of treaty shopping on the Canadian scene in the wake 6of the recent The Queen v Mil (Investments) S.A decision (the ―MIL decision‖). It is the

    author‘s position that the significance of this decision can be brought into sharper relief by putting it inside a broader global context. In particular, the author will compare it with 7the French decision Bank of Scotland. The parallels and divergence between these two

    cases provides a fertile ground for considering how treaty shopping is evolving on the international scene, while also pointing towards remedies for dealing with this problem.

    production. The metaphor has since enjoyed wide diffusion inside both the social sciences and the policy fields, proving particularly useful in explaining market failures on the international scene where nations have competing economic interests or where there is a poor correlation between the benefit and costs incurred by a policy such as with carbon emissions. Applied to this example, any revenue reaped by a country over the short term by decreasing the effective corporate tax rate would be quickly off set as competitors lowered their tax rate in response, ensuring an overall erosion of the global tax base. Hardin‘s model points to the necessity of reaching a collective solution that recalibrates costs and benefits among community members. 5 United Nations: Report of the High Level Panel on Financing for Development, p. 28. Available at 6 The Queen v Mil (Investments) S.A., 2007 FCA 23. 7 Bank of Scotland (CE Dec. 20, 2006, No. 283314).


Interpreting a Tax Convention

It seems obvious that any treaty must be interpreted in terms of both its object and

    purpose. The text of any treaty is never the exclusive source for its interpretation, and therefore jurists must be prepared to make exceptions to the ordinary meaning of terms, especially in cases where they produce unintended outcomes. Having said that, this article sadly concludes that Canadian Courts have so far proven reluctant to assess whether a specific outcome was intended by a particular piece of tax legislation. The complexity of tax rules for international transactions further deters our Courts from entering what they apparently view as treacherous waters, seeking safe haven instead in a strict literal approach that often put the original intent of a tax treaty on its head.

As the philosopher Ludwig Wittgenstein pointed out in Philosophical Investigations

    (1959), there is no such thing as a literal meaning apart from the context that makes it meaningful. Wittgenstein gives the following example: ―Someone says to me: ‗Shew the children a game.‘ I teach them gaming with dice [gambling], and the other says ‗I didn't mean that sort of game.‘ Must the exclusion of the game with dice have come before his 8mind when he gave me the order?‖ Gambling is one of a variety of things properly

    considered a game using its ordinary meaning. However, it was clearly not the intent to be introduced to children. What Wittgenstein‘s example succinctly points out is that the type of game the speaker had in mind was determined by the context.

Wittgenstein‘s example has important implications for treaty interpretation. It shows that

    sometimes the literal meaning of a text may include something that the treaty negotiator may not have had in mind during the actual negotiation, and would even be shocked to discover in a later application. Obviously far more than just the act of reading is involved when interpreting any treaty and it is essential to return any text to its ―context‖ so as to read it in terms of the intent of its negotiators.

Some of Wittgenstein‘s principles are reflected in the Vienna Convention on the Law of

    Treaties, which states that ―context‖ for the purpose of treaty interpretation shall comprise, in addition to the text, any agreement between the parties, any subsequent agreement between the parties, or any subsequent practice in their application. Also, when an interpretation leaves the treaty‘s meaning ambiguous or obscure, or when it produces a result that is manifestly absurd or unreasonable, Article 32 of the Vienna

    Convention states that we must examine ―supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion‖.

    The OECD commentary is widely accepted as an external resource for interpreting tax treaties. It is reasonable and prudent therefore, to consult the OECD Commentary even 9when the literal meaning of a text appears unambiguous. For example, the Supreme

     8 Ludwig Wittgenstein, Philosophical Investigations, 2nd ed. (Oxford: Basil Blackwell, 1958) at 33,

    footnote. 9 See National Corn Growers Assn. v. Canada (Import Tribunal) [1990] 2 S.C.R. 1324.


Court of Canada in the Crown Forest case referred to the OECD Model Convention and

    the Commentary as being ―of high persuasive value‖.

    Currently within the international tax community there is a debate as to whether or not amendments to the OECD Commentary that extend beyond a mere clarification of existing Commentary are relevant when interpreting existing treaties. This is especially true for treaties signed with countries that are not members of the OECD. Most experts, however, agree that the current version of the OECD Commentary is relevant to the 10interpretation of all tax treaties. It simply becomes a matter of how much weight a

    particular commentary has on a given issue.

    The Vienna Convention says that treaties are to be interpreted in accordance with subsequent agreements and subsequent practices among the signatory parties. In the author‘s opinion, the application of a treaty provision based on the OECD Model Convention may evolve over time, and if there is sufficient consensus for the OECD member countries to agree to an amendment, the new Commentary would serve as both a ―subsequent agreement‖ and evidence of a "subsequent practice". The fact that the OECD members are going through the very laborious OECD process of agreement indicates that this is now an internationally accepted practice and that it should be given weight in subsequent treaty interpretation.

    Also paragraph 3 of the Introduction to the OECD Model Convention states that ―Member countries […] should conform to this Model Convention as interpreted by the Commentaries thereon and having regard to the reservations contained therein and their tax authorities should follow these Commentaries, as modified from time to time and

    subject to their observations thereon, when applying and interpreting the provisions of their bilateral tax conventions that are based on the Model Convention.‖ [Emphasis added]

    Canada then, has a commitment to interpret its tax treaties in light of these commentaries and our commitment is part of the context of each of our treaties. Obviously it would cause great inconsistency if taxpayers used different commentaries.

     10 Cudd Pressure Control Inc v The Queen (FCA 98 DTC 6630) where the Federal Court of Appeal used

    and relied on the 1994 OECD Commentary to interpret the provisions of the 1942 Canada - US tax treaty. The Federal Court of Appeal ruled that subsequent OECD Commentaries can provide assistance in discerning the "legal context" surrounding previous conventions. See also paragraph 3 of the Introduction to the OECD Model Convention, which represents the view of OECD Countries members. See also the Introduction in Brian Arnold and Jacques Sasseville eds., Special Seminar on Canadian Tax Treaties:

    Policy and Practice (Kingston, ON: International Fiscal Association (Canadian branch), 2001), 1:6-12. A different approach is preferred in Klaus Vogel on Double Taxation Conventions: A Commentary to the

    OECD-, UN- and US Model Conventions for the Avoidance of Double Taxation of Income and Capital, 3d

    ed. (London: Kluwer Law International, 1997), p.46, where it is viewed that OECD Commentaries are binding only to subsequent treaties, unless they are truly clarifying.


    11The Science and Art of Treaty Shopping

Treaty shopping refers to any intentional effort to structure a transaction so that it can 12harvest the benefits of a particular tax treaty that would otherwise not be applicable.

    Such a transaction usually results in a person becoming a resident in one of the contracting states in order to achieve that purpose. Requirement to qualify as a resident under a treaty typically revolves around the concept of ―liable to tax‖ and an additional

    condition to be the ―beneficial owner‖ is required under Article 10, 11 and 12 of the OECD Model in order to access certain treaty benefits. Treaty shopping structures are usually designed to meet the legal requirement of residence. Therefore, when combating treaty shopping, a country must rely on a broad interpretation of the treaty, based on its purpose and object. Some countries, like Canada, may also rely on a domestic provision aimed at combating tax avoidance in general, while countries such as Germany or Korea use domestic legislation specifically designed for this purpose. Other measures, such as general or specific limitation of benefit clauses embedded inside a particular treaty represent a third avenue for deterring treaty shopping.

    To put Wittgenstein‘s example into the context of treaty shopping, if a person enters into a transaction in order to benefit from a particular provision of a treaty, it must be ascertained whether or not the negotiator‘s intent was to award treaty benefits under such

    circumstances, even if nothing in the text, except for its context, suggests that such person should be excluded from them. For example, in the author‘s view, the negotiators of the Canada-Luxembourg treaty certainly did not anticipate, and would probably be shocked to discover now, that the treaty benefit exempting gain on Canadian resource property could be siphoned off by a company resident in a tax haven country that continued into a Luxembourg company solely to access the treaty exemption.

More Recent Canadian Experience

     13The MIL Decision

The Facts

    Briefly, the MIL decision involved the disposition of shares of a Canadian public company, Diamond Fields Resources Ltd. ("DFR") by MIL Investments S.A. ("MIL"), a

     11 The improper use of tax treaties is discussed in paragraphs 7 to 26 of the OECD Commentary on Article 1 of the Model Convention and in greater details in two OECD reports issued in 1987 entitled ―Double

    Taxation Convention and the Use of Base Companies‖ and ―Double Taxation Conventions and the Use of

    Conduit Companies‖. 12 According to the OECD Glossary of Tax Terms, ―Treaty Shopping‖ refers to an analysis of tax treaty

    provisions to structure an international transaction or operation so as to take advantage of a particular tax treaty. The term is normally applied to a situation where a person not resident of either the treaty countries establishes an entity in one of the treaty countries in order to obtain treaty benefits. See also Larking, IBFD International Tax Glossary, 5th ed. (2005), p. 276. 13 The Queen v Mil (Investments) S.A., 2007 FCA 23.


    company incorporated in Cayman Islands and wholly owned by Mr. Boulle, a resident of Monaco. MIL owned a stake in DFR large enough to qualify the shares as "taxable Canadian property" pursuant to paragraph (f) of the definition of that term in subsection 248(1) of the Income Tax Act (the ―Act‖).

    In 1994, DFR discovered a major mineral deposit that increased the value of MIL shareholding in DFR by more than $500 million, the disposition of which would trigger taxation in Canada.

    In 1995, MIL engaged the services of tax professionals to furnish a tax planning memorandum. Interestingly, the memorandum states that MIL should be moved to a jurisdiction where a treaty applies, and specifically identifies Luxembourg as one of a few suitable countries, but also noted that the exemption in the Canada-Luxembourg treaty was available only if MIL does not own 10% or more of the shares of any class in the Canadian company. The fully developed tax plan recommended the exchange, under section 85.1 of the Act, of shares of DFR for shares of Inco (the future buyer) to reduce MIL and Mr. Boulle‘s aggregate shareholding in DFR below the 10% threshold and recommended the continuation of MIL into a Luxembourg company, which would trigger the application of the Canada-Luxembourg Convention.

    After acting on all of these proposals, MIL disposed of its shares of Inco acquired in the 85.1 exchange resulting in a capital gain of about $65 million and, eventually disposed of 50,000 shares of DFR resulting in a capital gain of about $4.5 million.

    In 1996, after negotiations with two different bidders spanning approximately eight months, MIL sold its remaining shares in DFR realizing a capital gain of about $426 million on which MIL claimed a treaty exemption under the Canada-Luxembourg Convention. Shortly after, most of the value of MIL returned to newly incorporated Cayman Island companies wholly owned by Mr. Boulle.

    The CRA reassessed MIL to deny the treaty exemption in respect of the gain on the final sale in 1996 pursuant to subsection 245(2) of the Act.

The Tax Court’s decision

    The Tax Court of Canada concluded that subsection 245(2) of the Act was inapplicable because neither had there been an "avoidance transaction" within the meaning thereof in subsection 245(3) of the Act, nor did the claim of the tax exemption by MIL constitute an abuse of the Convention for the purposes of subsection 245(4) of the Act. Furthermore, the court found that there was no ambiguity in the Convention permitting it to be construed as containing an inherent anti-abuse rule.

    To reach such a conclusion, that none of the transactions were an avoidance transaction, the Tax Court considered that the overall purpose of the series of transaction was the purpose of all transactions in the series, and that the final sale in 1996 was not part of the series of transactions because, at the time of the series, it was only a possibility.


    In respect to subsection 245(4), the Tax Court observed that what MIL‘s actions did not result in a misuse or abuse of the Convention because (1) the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive; it is the use of the selected treaty that must be examined; and (2) the provisions of Article 13(4) of the Convention cannot be viewed as having been abused by MIL, because in drafting the exemptions therein, it must be presumed that Canada had a valid reason to allow Luxembourg to retain the exclusive right to tax capital gains in those specific circumstances, for example, the desire to encourage foreign investment in Canadian property.

The Tax Court ruled that the subsequent OECD Commentary could not be ―consulted‖ to

    interpret existing treaties. Such a conclusion seems to be based on an incomplete reading of the Cudd Pressure decision, which the Tax Court cited as its authority in footnote 15 14 However, the Cudd Pressure case clearly invokes the opposite of the MIL decision.

    principle that the subsequent OECD Commentary should always be considered as part of the context of existing treaties, even when they do not determine per se the intent of the 15drafters at the time a Convention was signed.

    The Crown subsequently appealed the decision to the Federal Court of Appeal (the ―FCA‖).

The Federal Court of Appeal’s decision

    In dismissing the Crown‘s appeal, the FCA first refused to challenge the Tax Court‘s narrow interpretation of ―series of transactions‖ and ruled that, even if the final sale was part of a series of transactions, there was no abuse of misuse of any specific provision of the Income Tax Act or the Canada-Luxembourg Convention.

    In its analysis of the Canada-Luxembourg Convention, the FCA only considered Article 13(4) and concluded that, if the object of this exempting provision was to be limited to portfolio investments or non-controlling interest, the treaty should have specified this.

    Significantly, the FCA remained silent on Tax Court‘s comment that ―the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive‖.

     14 Cudd Pressure Control Inc v The Queen (FCA 98 DTC 6630). 15 In Cudd Pressure, the Federal Court of Appeal consulted, used and relied on the 1994 OECD

    Commentary to interpret the provisions of the 1942 Canada - US tax treaty. In footnote 15 of paragraph 83 of the MIL decision, Justice Bell quotes only the first two sentences of the relevant passage of the Cudd

    Pressure decision. The complete paragraph 23 of Cudd Pressure reads as follows: ―The relevant

    commentaries on the OECD Convention were drafted after the 1942 Convention and therefore their relevance becomes somewhat suspect. In particular, they cannot be used to determine the intent of the drafters of the 1942 Convention. However, although the wording and arrangement of the provisions are

    significantly different in the two conventions, the 1942 Convention follows the same general principles as the OECD model. The OECD Commentaries, therefore, can provide some assistance in discerning the "legal context" surrounding double taxation conventions at international law, and in particular in ascertaining when it is appropriate to allow a deduction for a notional expense.‖[Emphasis added]



    In the author‘s view, treaty shopping is contrary to the object and purpose of tax treaties. This view is shared by the Supreme Court of Canada as expressed in the Crown Forest

    decision, and echoed by the OECD Commentary to the Model Convention.

    The author takes solace in what the Supreme Court wrote about treaty shopping under the pen of now retired Justice Iacobucci in the Crown Forest decision:

    "Treaty shopping" might be encouraged in which enterprises could route their

    income through particular states in order to avail themselves of benefits that were

    designed to be given only to residents of the contracting states. This result would

    be patently contrary to the basis on which Canada ceded its jurisdiction to tax as

    the source country, namely that the U.S. as the resident country would tax the


That is exactly what has occurred in the MIL decision: MIL (and Mr. Boulle) routed its

    income via Luxembourg to avail itself of benefits under the Canada-Luxembourg treaty, that were explicitly designed to be limited to residents of Luxembourg, rather than being harvested by residents of the Caymans (or Monaco) that intentionally became, by way of an admitted avoidance transaction, a ―resident‖ mainly, if not solely, for the purpose of claiming benefit of the Canada-Luxembourg treaty.

    Considering that this is an evident case of treaty shopping, it is rather surprising that the courts in their analysis failed to explain why the avoidance transaction designed to trigger the application of the tax treaty was not an abuse of the treaty itself. While the Tax Court simply accepted treaty shopping as a legitimate practice, the FCA limited its abuse analysis to Article 13(4) of the treaty, as opposed to tackling the more fundamental question: the application of the treaty itself. Their findings were all the more troubling given that a similar pattern of facts is explicitly cited in the OECD Commentary since 16 1977 as an example of what constitutes an ―improper use of the Convention‖.According to subsection 245(4), the FCA should have at least tried to determine whether or not the avoidance transaction (the continuation) constituted an abuse of the tax treaty and its provisions, especially Articles 1 and 4 establishing the scope of the treaty. Otherwise, arguing an abuse under subsection 245(4) in any treaty shopping case would become virtually impossible.

    As explained later, the fact that the Crown admitted that MIL was a resident under Article 4 of the treaty may have confused the argument.

    Even when following a contextual line of interpretation, the Court may have still viewed the avoidance transaction as not being abusive. After all, the negotiator knew that capital gains may not be taxed in Luxembourg and nevertheless ceded an exemption of source taxation on capital gains to residents of Luxembourg. As the Tax Court correctly pointed

     16 Paragraph 9 of the OECD Commentary on Article 1.


    out, ―[p]rior to negotiating the Treaty, Canada undoubtedly had knowledge of Luxembourg‘s treatment of capital gain‖. But in the author‘s view, the real issue is to whom such concession was designed to be given, and it was surely not intended to be bestowed to a resident in a tax haven that changed residence solely to shelter a gain. The lack of clarity and consistency surrounding the intent of Parliament in taxing gains from the disposition of Canadian resource properties may have also contributed to the Court‘s failure to examine the intent of the negotiator in this case.

    In respect to Article 13(4), the FCA concluded that, if the object of this exempting provision was to be limited to portfolio investments or non-controlling interests, the treaty should have specified that. It is surprising, however, that the FCA did not address the more fundamental question of whether, when a person undertakes a transaction solely, or mainly, for the purpose of meeting a threshold necessary to access a tax benefit, this respects the object of the exempting provision or whether this contravenes the clear intent of the negotiators.

Impact of the MIL Decision

    The impact of the MIL decision is important and far reaching. Canada has one of the largest treaty networks in the world, encompassing nearly ninety tax treaties in all. If treaty shopping becomes legitimate tax planning in Canada, we can reasonably anticipate opening a Pandora‘s Box to a whole new generation of tax planning structures

    deliberately designed to leverage unanticipated treaty outcomes.

    Nevertheless, the Crown decided not to appeal the case to the Supreme Court. Several reasons appear to be behind the decision. One of them must certainly be that the Tax Court‘s interpretation of the law had become so entangled in the Court‘s subjective appreciation of some facts that it made any appeal extremely difficult. For example, it could reasonably be anticipated that the Supreme Court would be as reluctant as the FCA to overturn the Tax Court Judge‘s appreciation of the evidence in respect to a ―series of transactions‖.

    Also, the real interpretative challenge of the case was whether the negotiator intended the treaty to also apply to a person such as MIL that became a ―resident‖ mainly, if not solely, to benefit from the treaty. However, the Crown conceded that MIL satisfied all the legal requirements to be considered a ―resident‖ under Article 4. The Court may have found it difficult thereafter to ascertain the intent of the negotiator and whether, in light of its purpose and object, Article 4 was intended to apply to such a ―resident‖ that became so only via an avoidance transaction. According to the Income Tax Technical News No. 35,

    the CRA generally accept that the person is a resident when the legal requirements under Article 4 are satisfied ―unless the arrangement is abusive (e.g. treaty shopping where the person is in fact only a ‗resident of convenience‘)‖.

    In essence, the Crown may have simply postponed the date where the Supreme Court of Canada would be enlisted to lend clarity and guidance on this important and controversial


    area of treaty shopping. In the meantime, if the CRA wishes to continue to challenge cases of alleged treaty shopping, it must go forward on an uncertain legal footing

The International Scene

    Canada is certainly not the only country to struggle with treaty shopping in recent years. The highest commercial Court of the United Kingdom ruled on the appropriateness of treaty shopping through a broad and purposeful interpretation of the notion of ―beneficial 17ownership.‖ Similarly, the Swiss Supreme Court has denied treaty benefits in a treaty shopping case, applying an anti-abuse rule inherent to tax treaties and based on the 18Vienna Convention on the Law of Treaties. Germany has legislated a domestic anti-19treaty shopping rule and tested it in Court. Finally, France won in a major treaty

    shopping case at the highest Court (le Conseil d‘État) based on the notion of ―fraude à la 20loi‖.

    Although all of these experiences are extremely interesting in their own right, a detailed discussion of each lies outside the scope of this paper. In the context of the current forum, the author will compare France and Canada‘s experience in dealing with treaty shopping.

    France: The Bank of Scotland Decision

    21In Bank of Scotland, the French Supreme Court (le Conseil d‘État) had to apply the

    concept of fraude à la loi (or legal fraud) in the context of treaty shopping. Fraude à la

    loi refers to any action undertaken with the sole purpose of avoiding tax in a way not previously envisaged by the legislator.

Briefly, in the Bank of Scotland decision, an American pharmaceutical company, Merrell

    Dow Inc, entered into an arrangement with a resident of the United Kingdom (Bank of Scotland) in order to take advantage of the France-United Kingdom Convention (the ―France-UK treaty‖). The American company ceded to the Bank of Scotland, for a period of three years, non-voting preferred shares of its French subsidiary under a usufruct agreement. The Bank of Scotland received preferential and pre-determined dividends from the French subsidiary and, in return, paid interest under a loan agreement to the American company of an equivalent amount. Several clauses under this back-to-back arrangement exempted the Bank of Scotland from any risk associated with this arrangement.

     17 Indofood International Finance Ltd v JP Morgan Chase Bank NA, [2006] EWCA Civ 158. 18 Swiss Supreme Court decision 2A.239/2005. 19 The so called ―Hilversum jurisprudence‖, concluded by the German Federal Tax Court's Hilversum II

    decision (May 31, 2005), and followed by a legislative amendment in 2007 to tightened the anti-treaty shopping rule. 20 Decision of the Conseil d‘État Bank of Scotland (CE Dec. 20, 2006, No. 283314). 21 Idem.


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