Getting to grips with the controversial interpretative value of the Commentaries to the OECD Model Convention

The Nacional Court (NC) analyses whether, in light of the Commentaries to the OECD Model Convention, capital gains not linked to a disposal can be interpreted as falling within the scope of capital gains of article 13.1 of the Spanish-Swiss Double Tax Treaty (Spanish-Swiss DTT).

The NC, in its ruling of 23 February 2023 (appeal number 466/2019), upheld the contentious-administrative appeal brought by a taxpayer against the decision of the Central Economic Administrative Court in relation to the taxation in the Non-Resident Income Tax (NRIT) of capital gains not linked to a disposal.

In the case analysed by the NC, a Swiss foundation inherits some plots of land located in Mallorca from an individual, also tax resident in Switzerland. The Swiss foundation filed a self-assessment tax return declaring the capital gain derived from the "mortis causa" acquisition of the plots of land and paid the corresponding NRIT amount. Subsequently, the foundation requests a refund of undue income for the amount paid as it understands that article 21 of the Spanish-Swiss DTT (dedicated to "any other income not expressly mentioned”) is applicable, which does not subject the capital gain obtained from the "mortis causa" acquisition of the plots of land to taxation in Spain instead of article 13 of the Spanish-Swiss DTT(dedicated to "capital gains"), which subjects the aforementioned gain to taxation in Spain.

However, the tax authorities considered that article 13 of the Spanish-Swiss DTT is applicable, considering that, in accordance with the Commentaries to the OECD Model Convention, the concept of capital gain can also be extended to income derived from the acquisition on death and not only to income derived from a disposal. Consequently, it rejected the taxpayer's application for a refund of undue income.

In the aforementioned ruling, the NC understands that, contrary to the tax authorities interpretation, capital gains that are not linked to a disposal cannot be included within the definition of capital gains set out in article 13 of the Spanish-Swiss DTT, but rather involve the incorporation of goods or rights into the taxpayer's assets. Therefore, such capital gains are taxable under article 21 of the Spanish-Swiss DTT and they are not subject to Spanish NRIT taxation, confirming the interpretation made by the taxpayer.

What is relevant in this judgment is that the NC once again questions the interpretative value of the Commentaries to the OECD Model Convention. In this regard, the NC considers that they are not a source of the Spanish legal system, but mere interpretative guidelines, which cannot be superimposed on the grammatical application of the legal rules or depart from the interpretation criteria set out in the Spanish Civil Code, as established by the Spanish Supreme Court (SC) in its ruling of 23 September 2020, among others, which we commented on previously in the following link.

In this regard, the NC goes further and states that, if the legislative purpose had been to include in article 13 of the Spanish-Swiss DTT the capital gain derived from the acquisition on death of real estate in Spain, it should have done so by means of the appropriate amendment to the DTT. The NS concludes that, not being so, its scope of application cannot be extended by way of interpretation on the basis of the Commentaries to the OECD Model Convention.

Comment by Osborne Clarke

This judgement follows the path already taken by the Spanish SC, which has already ruled that the Commentaries to the OCDE Model Convention do not have interpretative value when analysing the provisions of a given tax treaty. However, this restrictive view of the interpretative value of the Commentaries to the OCDE Model Convention is not uniform among the Spanish courts or the tax authorities.

By way of conclusion, it can be affirmed that, although it is peaceful to consider that the "soft law" - where the Commentaries to the OCDE Model Convention fit in - does not form part of the Spanish legal system, there is no doubt that they help, to a large extent, to clarify many legal terms that are difficult to apply in practice. Let us hope that future case law interpretations will resolve this complex issue so that the provisions of the tax treaties can be applied homogeneously.