Supreme Court: Use of the principle of dynamic interpretation for tax treaties has limits
The Spanish Supreme Court has concluded that tax treaties cannot be interpreted on the basis of later model conventions or of the commentaries on those models.
As we discussed in our alert dated May 26, 2020 (view here), in the case giving rise to the supreme court judgment of March 3, 2020 (cassation appeal 5448/2018), it had been concluded that the Swiss branch of a Spanish resident company could not be characterized as a permanent establishment. In the view taken by the tax authorities, and later, the National Appellate Court, the activity carried on by the branch was simply ancillary, which rules out the existence of a permanent establishment.
It was not taken into account in these conclusions that the branch was being treated as a permanent establishment for direct taxation purposes in Switzerland or that this conclusion gave rise to double taxation, because it rejected the Spanish company’s right to claim the international double taxation credit under the Spain-Switzerland tax treaty.
This interpretation by the tax authorities and by the National Appellate Court was not founded on the definition of permanent establishment in the Spain-Switzerland tax treaty, instead on the definition in a later model convention and on the commentaries accompanying that model convention; even though these definitions were clearly different.
The Supreme Court concluded categorically that the commentaries on the model convention are not sources of law, especially since the definition of the term permanent establishment they contain is substantially different from that provided in the applicable model convention.
For these purposes, the court continues to allow the use of “dynamic interpretation” for tax treaties; as long as it does not involve ignoring the system of sources of Spanish law, or applying, as occurred in the examined case, a different definition of permanent establishment from that covenanted between the two contracting states.