On July 29, 2021 the Swiss Federal Council and the Government of the Federal Democratic Republic of Ethiopia signed a Convention for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (Hereafter: the Convention).
Although the Convention has been signed, it has not entered into force yet. For the Convention to enter into force, the respective ratification procedures have to have been finalized in both jurisdictions.
Below we will discuss a selection of provisions included in the Convention of which we think they might interest our readers.
The Pre-amble to the Convention reads as follows:
“The Swiss Federal Council
the Government of the Federal Democratic Republic of Ethiopia,
Desiring to further develop their economic relationship and to enhance their cooperation in tax matters,
Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States)
Have agreed as follows:”
Based on Article 2, Paragraph 2 of the Convention (“Taxes covered”), the existing taxes to which the Convention shall apply are in particular:
a) In the case of Ethiopia:
(i) the tax on income and profit; and
(ii) the tax on income from mining, petroleum and agricultural activities;
(hereinafter referred to as ''Ethiopian tax");
b) In the case of Switzerland:
the federal, cantonal and communal taxes on income (total income, earned income, income from capital, industrial and commercial profits, capital gains, and other items of income)
(hereinafter referred to as ''Swiss tax").
Article 2, Paragraph 3 subsequently arranges that the Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their respective taxation laws.
Article 4, Paragraph 3 of the Convention (“Resident”) arranges that Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Article 5, Paragraph 3 of the Convention (“Permanent establishment”) arranges that building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.
Article 6, Paragraph 1 of the Convention (“Income from immovable property”) arranges that derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the Convention (“Capital gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State..
Article 13, Paragraph 4 of the Convention subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State .
Article 9, Paragraph 2 of the Convention (“Associated enterprises”) contains a so-called appropriate adjustment clause.
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the Convention (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividend (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a merger or divisive reorganisation or change of legal form of the company that holds the shares or that pays the dividend);
b) 5 per cent of the gross amount of the dividends if the beneficial owner is a pension fund or the central bank of the other Contracting State;
c) 15 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 5 of the Convention subsequently arranges that where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 11, Paragraph 2 of the Convention (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over interest to 5 per cent of the gross amount of the interest.
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the Convention (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over the royalties to 5 per cent of the gross amount of the royalties.
Entitlement to benefits
Article 27 of the Convention (“Entitlement to benefits”) contains a.o. a so-called Principal Purpose Test.
Furthermore the Convention contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25).
Click here to be download the text of the Convention from the website of the Swiss State Secretariat for International Finance SIF.
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