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Topic Fiscally Transparent Entities

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Fiscally Transparent Entities

Fiscally Transparent Entities (FTEs) are entities wherein the owners and investors are taxed for the income earned by the entities and not the entities
themselves. The income flows through to the investors and owners of the entities. These entities are considered as non-entities for tax purposes because
all the burden of taxation is borne by its owners and investors. Common forms of FTEs are partnerships, Limited Partnerships and LLPs.
One of the issue that arise out of structure of these entities is the entitlement of tax treaty (Double taxation avoidance Agreements/ DTAA)
benefits. Most of the tax treaties around the world are formulated in such a way that the definition of person in it doesnt recognize the existence of
FTEs i.e. they fall outside the ambit of the definition of a person. Therefore, these entities try to fit themselves in the words any other entity which is treated
as taxable.
Article 1 of the OECD Model Tax Convention reads as The benefits provided under a treaty are limited to persons who are residents in at least one
of the contracting States. The term person includes an individual, a company and any other body of persons and any other entity which is treated as
a taxable unit for tax purposes.
Under Article 4 of the Tax Treaties the term resident of a Contracting State is defined to mean 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 sub-division or local authority thereof.
The issue is such fiscally transparent entities need to be treated as taxable as per the laws of its residence State or as per the domestic laws of State
for taking the benefit of the tax treaty. However, these entities being pass through entities are not taxable entities which bring their eligibility to benefits
of treaty in question.
The issue was discussed in the case A .P. Moller TS-555-ITAT-2013 briefly discussed below:
A.P.Moller (the Taxpayer) a partnership firm resident under the laws of Denmark. As per the Memorandum of Articles of Association of Danish
companies namely, Svendborg and Dampskibsselskbet 1912 (the Companies), which were public limited companies incorporated and registered
under Danish law. The Taxpayer was appointed as the managing owner of these two companies (Managing Owner). In accordance with Danish
laws, the Companies appointed the Taxpayer as their Managing Owner for managing their shipping operations globally and represented them in all their
matters of business over the world.
The benefits of the Tax Treaty were denied to the Taxpayer by the Indian authorities on the ground that the Taxpayer was set up under Danish laws as
a partnership, which as such, is a fiscally transparent entity treated as non-taxable under Danish laws.
However, Tribunal observed that the tax payer is eligible for the benefits of the DTAA as long as its income is fully taxed in Denmark irrespective of
the fact that it is being taxed from the partners. It reiterated that even though a partnership firm may be a fiscally transparent entity, as long as its profits
were taxed in the hands of its partners in the resident country, benefits of the Tax Treaty could not be denied to the Partnership.
Most of the tax treaties in India do not contain specific provisions to deal with foreign entities which are fiscally transparent. A fiscally transparent
foreign partnership may be considered as a separate entity in one country whereas it may be viewed as fiscally transparent by the other country. In such
cases conflict is bound to arise. However, the practice upheld by this tribunal has been practiced by countries like USA and UK and it is also evident in
the commentaries of OECD
Clearly, the tax treatment of an entity in its country of organization is key to determine whether the entity, or its shareholders, partners or members, are
entitled to the benefits of a treaty. The residence and beneficial owner requirements, whose meaning is not entirely free from doubt, and depends on
the facts and circumstances of the particular case, call for extensive analysis of the tax classification and treatment of the entity and its owners, under
the laws of their country. Under that scenario, the payer of the income must make sure that the documentation provided by the payee always establishes
with sufficient certainty the payees eligibility for treaty benefit.
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About CA. Sudha G. Bhushan :

Sudha is qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange Management Act, RBI,
Transfer pricing and International taxation matters. She is a noted speaker and author.
Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books:
Practical aspects of FDI in India published by Institute of Company secretaries of India
Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH.
Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company.
Handbook on FEMA, Publication of Institute of Chartered Accountants of India
A scholar throughout her life she has been awarded many awards and recognitions including Women Empowerment through CA
Profession by Northern India Regional Council (NIRC) of Institute of Chartered Accountants of India (ICAI). Backed by experience in
International firms she has extensive experience of handling international transactions. She advises corporate as well as government
authorities in lot of intricate transactions. Rendering tax and regulatory advisory services, she has overseen and played a crucial role in the
execution of complex international transactions involving issues revolving around tax, repatriation, minimization of tax exposure, Foreign
Investment (Inbound and outbound) etc.
She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation
of WIRC, ICAI, Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI.
She can be contacted at sudha@taxpertpro.com || 09769033172