Force of Attraction Rules
Share
Force of attraction rules, also known as force of attraction provisions, are provisions included in some double taxation conventions to prevent taxpayers from artificially diverting income from a country where it would be subject to taxation into another jurisdiction where it would be exempt or subject to lower tax rates. These rules are designed to counteract tax planning strategies that seek to avoid or minimise tax liabilities.
Under the force of attraction rules, certain types of income or transactions that are closely related to a permanent establishment (PE) in a particular jurisdiction are pulled or attracted into the tax net of that jurisdiction, even if they would not ordinarily be subject to tax there.
The Organisation for Economic Cooperation and Development Model Tax Convention does not explicitly include force of attraction rules. However, some countries have adopted such rules in their bilateral tax treaties as a means to combat tax avoidance and ensure that the profits associated with a PE are appropriately taxed.
The specific application of force of attraction rules can vary between countries and tax treaties, but they generally operate based on the following principles:
Expansion of taxable income: Force of attraction rules broaden the scope of taxable income by including income, activities, or transactions that are directly or indirectly connected to a PE in the jurisdiction.
Linkage to the PE: The rules typically require a sufficient nexus or connection between the income or transactions and the PE. This connection can be based on factors such as economic dependency, commercial or contractual arrangements, or the control or management of the PE.
Attribution of income: The rules attribute the income or profits generated from the relevant activities or transactions to the PE in the jurisdiction, regardless of the legal structure or formal ownership of the assets or operations involved.
By implementing force of attraction rules, countries aim to prevent taxpayers from artificially separating or diverting income from a PE to other entities or jurisdictions solely for the purpose of reducing or avoiding tax liabilities. These rules help ensure that the profits associated with a PE are appropriately taxed in the country where the PE is located, promoting fairness and preventing tax avoidance strategies.
Under the force of attraction rules, certain types of income or transactions that are closely related to a permanent establishment (PE) in a particular jurisdiction are pulled or attracted into the tax net of that jurisdiction, even if they would not ordinarily be subject to tax there.
The Organisation for Economic Cooperation and Development Model Tax Convention does not explicitly include force of attraction rules. However, some countries have adopted such rules in their bilateral tax treaties as a means to combat tax avoidance and ensure that the profits associated with a PE are appropriately taxed.
The specific application of force of attraction rules can vary between countries and tax treaties, but they generally operate based on the following principles:
Expansion of taxable income: Force of attraction rules broaden the scope of taxable income by including income, activities, or transactions that are directly or indirectly connected to a PE in the jurisdiction.
Linkage to the PE: The rules typically require a sufficient nexus or connection between the income or transactions and the PE. This connection can be based on factors such as economic dependency, commercial or contractual arrangements, or the control or management of the PE.
Attribution of income: The rules attribute the income or profits generated from the relevant activities or transactions to the PE in the jurisdiction, regardless of the legal structure or formal ownership of the assets or operations involved.
By implementing force of attraction rules, countries aim to prevent taxpayers from artificially separating or diverting income from a PE to other entities or jurisdictions solely for the purpose of reducing or avoiding tax liabilities. These rules help ensure that the profits associated with a PE are appropriately taxed in the country where the PE is located, promoting fairness and preventing tax avoidance strategies.
