Spanish Supreme Court to Settle on Dynamic Interpretation of Tax Treaties

Written by Antonio Barba and Diego Arribas

The classic issue of dynamic versus static interpretation of tax treaties arises again. Not only is this a hot topic in the international tax arena, but it is also a permanent pain in the Spanish Supreme Court’s neck since its judgment on the Julio Iglesias case of June 11, 2008 (available here).

In that case, the Supreme Court confirmed the application of article 17.2 of the OECD Model Convention (taxation at source of income for personal activities carried out by an entertainer but accrued by a different person controlled by the artist), even when the Double Tax Treaty between Spain and the Netherlands, which lacked a similar provision, applied. This DTT only confers taxing rights to the source state when income is accrued by the entertainer.

At law school we were taught that, in the field of taxes, judges are inclined to decide based on fairness and equity, even when the wording of the law should result in a different outcome. The Supreme Court disliked the fact that the old Dutch tax treaty had a loophole for tax abuse, because it did not consider the taxation of companies controlled by entertainers. Therefore, it decided to follow a more than doubtful dynamic interpretation of tax treaties to include in the 1972 Dutch tax treaty the specific rules for companies that the OECD recommended to include in the 1992 amendment to the Model Convention.

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