Capital Gains
Capital Gains
Article 13 of the OECD Model governs the taxation of capital gains from the alienation of property. The rules determine which state may tax gains on different categories of assets, with specific provisions for immovable property, business assets, shares, and other property.
Art. 13 Overview
Article 13 allocates taxing rights over capital gains based on the type of property alienated. The article follows a structured hierarchy — specific rules for immovable property, PE assets, and ships/aircraft take precedence, with a residual rule covering all other property. Each paragraph addresses a distinct asset category with different allocation rules.
Immovable Property — Art. 13(1)
Gains from the alienation of immovable property (real estate) may be taxed in the state where the property is situated. This rule applies regardless of the seller's residence — the situs state always retains taxing rights over gains on immovable property located within its territory.
The definition of immovable property follows Art. 6(2), which defers to the domestic law of the situs state and includes rights to variable or fixed payments for the exploitation of mineral deposits, sources, and other natural resources.
Property-Rich Companies — Art. 13(4)
Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in a contracting state may be taxed in that state. This provision prevents taxpayers from converting gains on immovable property into share gains to avoid source state taxation.
Key variables that differ between treaties include:
Value Threshold
The percentage of value derived from immovable property — typically 50%, but some treaties use different thresholds.
Look-Back Period
Some treaties apply the test over a look-back period (e.g., 365 days preceding alienation), not just at the time of sale.
Indirect Holdings
Whether the test applies through chains of entities (indirect shareholdings) varies by treaty.
PE Assets — Art. 13(2)
Gains from the alienation of movable property forming part of the business property of a permanent establishment may be taxed in the state where the PE is situated. This includes gains from the alienation of the PE itself (including as part of a sale of the whole enterprise).
The rule ensures that the state where business is conducted through a PE retains taxing rights over gains on the business assets used in that PE, consistent with the principles underlying the PE concept.
Share Disposals
Share disposals that do not fall under the property-rich company rule (Art. 13(4)) are generally taxable only in the state of residence of the seller under the residual rule. However, several domestic law regimes may still apply:
Participation Exemption
Many jurisdictions exempt capital gains on qualifying shareholdings (e.g., Netherlands participation exemption for 5%+ holdings) — potentially eliminating tax entirely.
Substantial Shareholding Rules
Some countries tax non-residents on gains from the sale of substantial shareholdings (e.g., 25%+) in domestic companies under domestic law.
Exit Taxation
Jurisdictions may impose exit taxes when a shareholder emigrates, deeming a disposal at fair market value on departure.
Residual Rule — Art. 13(5)
Gains from the alienation of any property other than that referred to in the preceding paragraphs are taxable only in the state of residence of the alienator. This residual rule provides exclusive residence state taxation for gains on all property not specifically addressed — including portfolio shares, bonds, and other financial instruments.
Best practice
The property-rich company test (Art. 13(4)) varies significantly between treaties — always verify the specific threshold and look-back period.