On March 21, 2017 the Swiss Confederation and the Islamic Republic of Pakistan signed a Convention for the Avoidance of Double Taxation with respect to Taxes on Income (Hereafter: the new DTA).
Although the new DTA has been signed, it has not entered into force yet. For the new DTA to enter into force, the respective ratification procedures have to have been finalized in both countries. When entering into force the new DTA will replace the Convention between the Islamic Republic of Pakistan and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income which was signed on July 19, 2005.
Below we will discuss a selection of provisions included in the new DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes covered”), the existing taxes to which the new DTA shall apply are in particular:
a) in Pakistan:
the income tax,
the super tax, and
the surcharge;
b) in Switzerland:
the federal, cantonal and communal taxes on income (total income, earned income, income from capital, industrial and commercial profits, capital gains, and other items of income).
Article 2, Paragraph 4 subsequently arranges that the new DTA shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes by either Contracting State.
Residency
Article 4, Paragraph 3 of the new DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.
Permanent establishment
Article 5, Paragraph 3 of the new DTA (“Permanent establishment”) arranges that the term "permanent establishment" is deemed to include:
a) a building site, a construction, assembly, installation or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months;
b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by an enterprise for such purposes, but only where activities of that nature continue (for the same or a connected project) within the Contracting State for a period or periods exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned;
c) an installation or structure used for the extraction or exploitation of natural resources for a period of more than 90 days.
Article 5, Paragraph 6 arranges that notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom Article 5, Paragraph 7 applies.
Immovable property
Article 6, Paragraph 1 of the new DTA (“Income from immovable property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 14, Paragraph 1 of the new DTA (“Capital gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 14, Paragraph 4 of the new DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State. The provisions of the preceding sentence shall not apply to gains:
a) from the alienation of shares quoted on a stock exchange established in either Contracting State or on a stock exchange as may be agreed by the competent authorities of the Contracting States; or
b) from the alienation of shares in a company the value of which consist of more than 50 per cent of immovable property, in which the company carries on its business.
Dividends
If the recipient of the dividends is the beneficial owner of the dividends and a resident of the other Contracting State, Article 10, Paragraph 2 of the new DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 20 per cent of the capital of the company paying the dividends; and
b) 20 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 5 arranges that where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other Contracting State.
Interest
If the recipient of the interest is the beneficial owner of the interest and a resident of the other Contracting State, Article 11, Paragraph 2 of the new DTA (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Article 11, Paragraph 3 subsequently arranges that notwithstanding the provisions of Article 11, Paragraph 2, interest arising in Pakistan and paid to a resident of Switzerland shall be exempt from Pakistan tax if the loan or other indebtedness in respect of which the interest is paid is an approved loan. The term "approved loan" means any loan or other indebtedness approved by the Government of Pakistan.
Royalties
If the recipient of the royalties is the beneficial owner of the royalties and a resident of the other Contracting State, Article 12, Paragraph 2 of the new DTA (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over such royalties to 10 per cent of the gross amount of the royalties.
Fees for technical services
Article 13, Paragraph 3 (“Fees for technical services”) of the new DTA defines fees for technical services as used in Article 13 of the new DTA as any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services (including the provision by the enterprise of the services of technical or other personnel) but does not include consideration for any construction, assembly or like project undertaken by the recipient or consideration which would be income failing under Article 15 of the new DTA (“Independent personal services”).
If the recipient of the fees for technical services is the beneficial owner of the fees and a resident of the other Contracting State, Article 13, Paragraph 2 maximizes the withholding tax a Source State is allowed to withhold over such fees to 10 per cent of the gross amount of the fees.
Article 13, Paragraph 5 subsequently arranges that payments for the furnishing of services shall be deemed to arise in a Contracting State when the payer is a resident of that Contracting State. Where, however, the person paying for the furnishing of services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the services are rendered, and the payment is borne by such permanent establishment or fixed base, then such payment shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
Anti-abuse clause
Article 26 of the DTA (“Entitlement to benefits”) contains a.o. a so-called Principal Purpose Test.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25).
Click on the language of your choice to be forwarded to the text of the DTA as available on the website of the Swiss Government in that language. (English, German or French)
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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