Reorganization Clauses in Tax Treaties

Reorganization Clauses in Tax Treaties analyses the tax consequences of corporate reorganizations in the context of tax treaty models and the solutions adopted in the global tax treaties network. The book also proposes solutions to be implemented in the model tax treaties in order to deal with cross-border reorganizations.

Taxation of mergers and corporate reorganizations is often regarded as one of the most complex aspects of developed tax systems. Contrary to the general realization principle, transfers of assets and liabilities in the course of corporate reorganizations are not taxed when they occur. Instead, recognition of the capital gains arising from such transfers is deferred through different mechanisms under preferential tax regimes with the objective of granting corporate reorganizations a tax neutral treatment.

However, this tax neutrality might be jeopardized when the effects of corporate reorganizations cross borders. So long as tax treaties do not cater for any special provisions dealing with the effects of corporate reorganizations, cross-border reorganizations will be hampered with the risks of overtaxation, while at the same time global tax neutrality will be compromised due to the inconsistent tax treatment of these transactions from a cross-border perspective.

Only a few countries have dealt with issues originating from cross-border reorganizations in their tax treaty network. Nonetheless, the solutions adopted in the current situation do not provide satisfactory results when analysing the tax consequences of corporate reorganizations from a global perspective.