On July 12, 2024 the Swiss Federal Council and the Government of Hungary signed a Protocol to amend the Convention between the Swiss Confederation and Hungary for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital signed at Budapest on 12 September 2013 (hereinafter: “the Convention”). Considering the ongoing discussions on whether or not the implementation of Pillar 2 is compatible with international law this Protocol a.o. contains a very interesting Article regarding the implementation of Pillar 2.

Mutual Agreement Procedure – Article 25 of the Convention

Article II of the Protocol arranges that Article 25 of the Convention (The Article regarding Mutual Agreement Procedures) will be amended as follows:

“The following new paragraphs 5 and 6 shall be added to Article 25 (Mutual agreement procedure):

“5.   Where,

a)    under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and

b)    the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within three years from the date when all the information required by the competent authorities in order to address the case has been provided to both competent authorities, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests in writing. These unresolved issues shall not, however, be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision or the competent authorities and the persons directly affected by the case agree on a different solution within six months after the decision has been communicated to them, the arbitration decision shall be binding on both States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.

6.    The Contracting States may release to the arbitration board, established under the provisions of paragraph 5, such information as is necessary for carrying out the arbitration procedure. The members of the arbitration board shall be subject to the limitations of disclosure described in paragraph 2 of Article 26 with respect to the information so released.””

Introduction of a Principal Purpose Test

Article III of the Protocol arranges that a new Article 27A (“Entitlement to benefits”) will be inserted in the Convention. This new Article 27A introduces the so-called Principal Purpose Test in the Convention. The newly to be added Article 27A reads as follows:

“1.   Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.

2.    Where a benefit under this Convention is denied to a person under paragraph 1, the competent authority of the Contracting State that would otherwise have granted this benefit shall nevertheless treat that person as being entitled to this benefit, or to different benefits with respect to a specific item of income or capital, if such competent authority, upon request from that person and after consideration of the relevant facts and circumstances, determines that such benefits would have been granted to that person or to another person in the absence of the transaction or arrangement referred to in paragraph 1. The competent authority of the Contracting State to which the request has been made will consult with the competent authority of the other State before rejecting a request made under this paragraph by a resident of that other State.”

The Article furthermore arranges that Paragraph 3 of the Protocol to the Convention shall be deleted and that the existing paragraphs 4, 5 and 6 of the Protocol to the Convention shall be renumbered as paragraphs 3, 4 and 5.”

Paragraph 3 of the existing Protocol that shall be deleted already contained a Principal Purpose Test that applies to a limited number of Articles of the Convention and reads as follows:

“3. ad Articles 10, 11, 12 and subparagraph b of paragraph 4 of Article 13

The provisions of Articles 10, 11, 12 and subparagraph b of paragraph 4 of Article 13 shall not apply if the main reason of the person or persons concerned with a transaction or a series of transactions related to the shares or other rights, the debt-claims or the rights in respect of which the dividend, interest or royalty is paid or in respect of which the alienation referred to in subparagraph b of paragraph 4 of Article 13 takes place is to obtain a tax advantage under Article 10, 11, 12 or subparagraph b of paragraph 4 of Article 13 by means of those transactions.”

Implementation of a minimum taxation of large multinational groups

Article IV of the Protocol arranges that a Paragraph is added to the new Protocol that explicitly arranged that the Convention does not prevent Contracting States from implementing the provisions of domestic law relating to the minimum taxation of large multinational groups. Although such arrangements might already have been made in other DTAs or recently concluded Protocols, this is the first time we have seen a Paragraph that explicitly arranges this. Article IV of the Protocol that was signed on July 12, 2024 reads as follows:

“The following new paragraph 6 shall be added to the Protocol to the Convention:

“6. It is understood that the provisions of the Convention do not prevent Contracting States from implementing the provisions of domestic law relating to the minimum taxation of large multinational groups, which have been enacted on the basis of the Global Anti-Base Erosion Model rules (Pillar Two) developed by the Inclusive Framework of the Organization for Economic Cooperation and Development.””

Entry into force

Although the Protocol has been signed on July 12, 2024 it has not yet entered into force. Article V of the Protocol arranges the following with respect to the entering into force of the Protocol:

“1.   Each of the Contracting States shall notify to the other via diplomatic channels the completion of the procedures required by its law for the bringing into force of this Protocol.

2.    The Protocol shall enter into force 30 days after the date of the receipt of the later of these notifications and shall thereupon have effect:

(a)   in respect of taxes withheld at source, for amounts paid or credited on or after the first day of January of the year next following the date on which the Protocol enters into force;

(b)   in respect of other taxes, for taxation years beginning on or after the first day of January of the year next following the date on which the Protocol enters into force.

3.    Notwithstanding the provisions of paragraph 2, the amendments made by Article II and IV of this Protocol shall have effect from the date of entry into force of this Protocol, without regard to the taxable period to which the matter relates.”

The full text of the Protocol that was signed on July 12, 2024 can be found here. The Protocol is also available in the German language.

The full text of the Convention as signed on September 12, 2013 and the existing Protocol can be found here.

Copyright – internationaltaxplaza.info

Follow International Tax Plaza on Twitter (@IntTaxPlaza)