Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
A person is an arbitrator during the course of a procedure, but acting as an arbitrator is not his professional activity, even though certain arbitrators of renown are appointed frequently. Indeed anyone may act as an arbitrator: business people, engineers, financiers and others will act as arbitrators each in their own specialist field. However, for obvious reasons, lawyers are called upon most often. Hence, taxation applicable to the arbitrator is first and foremost the taxation of an isolated task.
This task is carried out in a wide variety of circumstances. Often the arbitrator holds a permanent professional post which is the reason for his appointment. He may be a magistrate, a barrister, a law professor, company executive, etc. And in this profession he may either be self-employed or an employee. Sometimes indeed the arbitrator forms part of the corporate structure of an entity appointed as arbitrator, in countries such as Belgium, Italy or Great Britain, for example, where moral entities may act as arbitrators. The taxation applicable to the arbitrator is also taxation of an ancillary task.
The object of the task itself is ambivalent. The arbitrator "judges" because he is settling a dispute by his award. However, he is not a judge by profession, and for this very reason, this award - although it has res judicata authority - will not be enforceable. Nonetheless the fact remains that the award will be rendered enforceable as soon as it has been presented to the relevant court, and supervision of arbitral awards by the Court of Appeal only occurs in exceptional circumstances. Thus, lastly taxation applicable to the arbitrator is taxation of a task that is judicial in character.
From the standpoint of income tax, does the act of arbitration have to be linked to the principal profession exercised by the arbitrator and be taxed accordingly, or should it be viewed as a specific activity giving rise to a separate income? Indeed do arbitrators' fees have to be taxed at all, despite the fact that the task may be isolated and that at the end of the day it presents a marked judicial nature which separates it from the activities or income of commercial life? The French tax authorities claim that they do, on the ground that Article 92 of the General Tax Code taxes the income of self-employed professional people and all other income that does not fall under any other category of the law. This being the case, the authorities tax any income, be it only occasional or even unique, as miscellaneous income. It is possible that other theories may prevail in foreign countries, and indeed in Europe.
From the standpoint of VAT, French tax legislation makes any service rendered in the course of exercising an economic activity subject to this tax. Accordingly it comes as no surprise to find that the arbitrator's task falls within the field of VAT and that the arbitrator is liable for this duty in respect of the fees he receives. But yet again, one might ask: does the arbitration really stem from an economic activity, or is it not rather merely ancillary when it is an extension of a person's professional activity, which would lead for example to the arbitration fees of a barrister being subject to VAT, but not those of a judge or a professor? Should only the fees of arbitrators who are often called upon to act, or repeatedly so called, be subject to VAT? Once again, numerous questions arise as a result of the variety or even the divergence of interpretations applied by different states, even within Europe.
Once again it is not merely a matter of answering the basic questions governing the [Page101:] taxation of domestic arbitration procedures. The whole issue becomes complicated when the arbitrator is international. For the tax specialist, an arbitrator is "international" if he is resident in a foreign state or established in a foreign state, but carries out his task in relation to interests localised in the state of reference, or for parties resident in the said state or established in that state. The arbitrator is also international in the converse situation: resident or established in the state of reference, he carries out his task in relation to interests localised in a foreign state or for parties resident or established in that foreign state.
Naturally, any definition of the international arbitrator's tax status must be based on the domestic arbitrator's tax status. For example, if the domestic arbitrator would not be liable for tax, why should the international arbitrator be? But new questions arise, stemming from the territorial application of the tax or duty in question and hence on the criteria of attachment used by the state of reference: whether it is a matter of the place of exercise of the arbitrator's task, the place where the interests the subject of arbitration are situated, or where the parties are? Once again, wherever two or more legislations overlap one another without being harmonised, differences - in other words discrepancies - are to be expected, and this time with risks of double taxation, or even hopes of non-taxation.
Bilateral conventions aimed at avoiding double taxation have been concluded between most European states and in the main the VAT tax base is unified within the European Union. However, although the harmonisation of international taxation is placed at the centre, these concentric circles do not coincide. Certain states have no tax convention with other states. Moreover, if a text that provides for harmonisation is only built onto the national laws, such as double taxation conventions, it leaves intact the heterogeneous provisions of domestic law - including those relating to the arbitrator's tax status. Lastly, where the various domestic rules are unified, an aim which the so-called "European VAT" aspires to, the application of these rules remains within the jurisdiction of the domestic authorities. While it is true that this falls under the supervision of the Court of Justice of the European Communities, experience has shown that many disparities of assessment or definition remain.
This has been confirmed by a more systematic study of the tax status of international arbitrators in Europe. We intend to restrict the present study to two taxes - income tax and VAT. As the administration of each type of tax is extremely different, each will he dealt with separately for purposes of clarity.
I. Arbitrator's liability for indirect tax
The question can be stated in very simple terms: are arbitrator's fees subject to VAT or not? If the arbitrator is international, is VAT due from him in the state where he is resident? Is it due from the parties in the state where they are resident?
The way that arbitration operates creates considerable difficulties of application, which we shall content ourselves with touching on here.1
The first set of problems stems from the frequent involvement of arbitration institutions which will either invoice the parties on their own account - in order to ensure that their administrative costs (including the arbitrator's fees) are paid - or will invoice them both on their own account and on behalf of the arbitrators, and will then pass the reimbursements of expenses and fees on to the arbitrators.
The second set of difficulties arises from the practice of the payment of advances. These may be classed as an advance on the price of the services rendered by the arbitrators (the fees) plus, where applicable, any charges due to the [Page102:] arbitration institutions. Each party contributes to the payment of such advances. If finally one of them is wholly or in partly exempted from payment, any reimbursement to which it is entitled will stem from the other party being ordered to pay the costs. Advances may also be classed as deposits of guarantee, theoretically reimbursable by the arbitrators and by the arbitration institution, if any, to the party who is not liable for the costs, in the absence of assignment of payment by the party ordered to pay the costs. The latter will in fact owe the arbitrators, and possibly the arbitration institution, the share of the costs and fees in excess of the fraction already paid by means of the deposit of guarantee: it will pay its debt to the other party in place and stead of the arbitrators and the arbitration institution.
Hence these various elements must always be taken into account when VAT is applied on the arbitration fees in respect of both domestic and international arbitrations.
If, for the sake of brevity, we confine ourselves to the question of liability for VAT and the conditions that make it payable, a particular place must be given over to the European Union Member States, which harmonised the main part of the VAT tax regime by the 6th Directive on 17 May 1977. This led to the creation of a vast community VAT area, with attachment being dependent on the places where the arbitrator or the parties are established.
The VAT regime applicable to arbitrators in the European states that are not yet members of the Union is accordingly only of limited interest unless it is based - like the Austrian New VAT Code applicable in 1995 - on Community principles. All the more so since Switzerland, on the one hand, will not introduce VAT into its tax system until 1995, and the Nordic States (Finland, Sweden and Norway) generally exclude arbitration from the field of application of the tax. This is still the case in Finland and in Norway since the arbitrator is treated as an employee of the parties (see A below). This is the case in Sweden where the same analysis prevails. On the other hand, when, in view of the profession he exercises in other respects, the arbitrator's fees are treated as professional income, VAT is due at the rate of 25%. The only exception to this rule is in the case where the parties are established outside Sweden and the service rendered by the arbitrator is considered to be extra-territorial.
A. The common VAT regime in the EU Member States
Although it is accepted that the arbitrator is deemed to exercise an economic activity in an independent manner, his intervention is analysed in community VAT terms as a provision of services, and more specifically, as a "provision of intangibles". The aim of the rules of territoriality that apply to such services is to ensure that, on the one hand, they are taxed in one state of the European Union and one state alone, and on the other, that the mechanisms for deduction of tax find a way of operating naturally.
The VAT of a given State A - the state where the arbitrator is established - will be due in respect of the amount of fees the arbitrator receives, if the party that he bills is established in State A, or if although that party is established in State B, it is not subject to VAT there (and hence has no right of deduction).
On the other hand, if the party invoiced is subject to VAT in State B, where the party is established, the arbitrator will not invoice State A's VAT. The invoice he sends will be completed by the parties, who will enter on the invoice the amount of State B's VAT that is due for this type of service - and the party concerned will be able to recover this VAT. The same rule will apply if the arbitrator is established outside the European Union and the service he renders to the parties established in one or two Member States is deemed to be used by them in the said state or states.
Naturally, if the arbitrator carries out his task from a fixed base that is situated in another European Union Member State, or if, as an employee of a moral entity that is an arbitrator, he carries it out from a permanent establishment that that entity has in another state, the fixed base or the permanent establishment will be treated as liable for the VAT of that other state.
[Page103:]
If the parties are residents of the same state, only national VAT will be payable. Failing this, the rules described above will apply mutatis mutandis.
B. Differences in the application of the common VAT regime in the European Union Member States
Differing interpretations result in various imbalances in the application of VAT. France, for example, applies the community rules strictly2 - except that it accords special exemptions or abatements to people who act as arbitrators occasionally, provided their fees do not exceed a certain minimum; a similar system also applies in Spain and Germany (Art. 19 of the VAT law). However, in Germany, as well as in Italy and Luxemburg, academic lawyers have raised the issue of whether occasional arbitrators are subject to VAT, taking the view that their activity is not economic in character, for want of repetition. In Denmark, the question is settled differently: the arbitrator is deemed to receive a salary as if he were the parties' employee and in consequence is not subject to VAT, even - as we have said (supra A) - if he carries out his professional activity through the intermediary of a firm. In Belgium, arbitrators' services have been subject to VAT since 1993, but not barristers' services (Art. 44 para. 1, 10. VAT Code). Hence, if arbitrators are barristers, their fees are exempt from VAT. The same regime is applicable in Greece.
The contradiction between the Italian rules and the Community rules is more surprising.
For example, where the fees of an arbitrator established in another European Union state are invoiced to Italian residents who are not subject to VAT, the arbitrator must pay the Italian VAT through the intermediary of a tax representative. In this case, it will be recalled, the only VAT payable should be that of the state - assumed to be foreign - in which the arbitrator is established.
Thus, although the international arbitrator's tax status seemed to be harmonised in Europe, discrepancies remain. These discrepancies are not peculiar to the arbitrator's liability for indirect taxation. But they are aggravated, it would seem, by different national concepts of the function of the arbitrator.
II. Arbitrator's liability for direct tax
The basic aim of international tax conventions, where these exist, is to define the place where the international arbitrator is liable for tax (A). Its method of taxation depends on the legislation of the state vested with the right to levy the tax (B).
A. In what state is the arbitrator liable for tax?
Generally, states that are not linked by an international tax convention, like Greece and Ireland or Portugal, apply a principle of universality, by levying tax on arbitrators resident within their territory - if they levy tax on them - on the basis of the fees received for any arbitration, irrespective of the state where the arbitration takes place.
If the fees have been taxed in the state where the parties are resident - which would be the case in Portugal and theoretically (since they have concluded conventions with the states of the European Union) in Italy or in Spain. In the latter countries, in the absence of conventions, the fees paid by one party to a non-resident arbitrator may be subject to 20% withholding tax in Italy, or 25% in Spain. Depending on the provisions of the domestic law of the state where the arbitrator is resident, the tax thus collected will either be deductible from his taxable income as a whole or may be used as a tax credit against the national tax for which he is liable. Sometimes, it will simply be ignored.
Tax conventions treat the self-employed non-commercial professions differently from the [Page104:] salaried or dependent professions. The criterion is whether or not there is a link of subordination. It must be concluded from this that an arbitrator generally acts in an independent capacity, whatever the category of domestic law he is classed in for tax purposes.
This exception concerns those states where moral entities may be appointed as arbitrators. In Belgium, for example, a moral entity appointed as an arbitrator will carry out its task through the intermediary of one of its corporate structures. The company will be subject to corporation tax in the state of its registered office - Belgium in principle - unless it has a permanent establishment in another state from which the arbitration is provided which is linked by a tax convention. An individual acting as an arbitrator will usually be taxed in respect of the remuneration received (Art. 30 CIR (Income Tax Code)), at his place of residence for tax purposes. Likewise, in Great Britain, an employee arbitrator will be taxed in the said capacity. If the arbitration takes place in another state, and it there is a tax convention with the state where the arbitrator carries out his task, the arbitrator will nonetheless be taxable in that other state provided that his salary was paid by the permanent establishment which the company that employs him owns in that other state. In any case this is the solution traditionally followed by international tax conventions.
Subject to this reservation, the OECD model convention, which is the reference for most tax conventions concluded between European states, provides in substance that a professional person who is self-employed is liable for tax in the state where he is resident, unless he possesses a fixed base or point of attachment in another state, from which he exercises the whole or part of his activity. This is the solution followed in domestic law by certain states such as Germany (Art. 49, para. 1, no. 3 of the income tax law). Remuneration resulting from activity linked to the fixed base is taxable in the other state. The concept of a fixed base or point of attachment is not defined in the tax conventions. International tax lawyers take the view that the same criteria apply to it as to the permanent establishment which plays an identical function in the field of commercial activity. Hence, the fixed base presupposes the existence of permanent facilities used on a regular and ongoing basis. Such would be the case where a barrister or a doctor habitually uses a secondary office for practising his profession. Moreover, it is not necessary that this office - and more generally these permanent facilities - should belong legally to the professional person concerned, whether as owner or tenant. If, for example, a lawyer regularly uses the office of a colleague in the other state for receiving his clients, he would still have a fixed base there.
In other words, an arbitrator resident in a European state will most generally be taxable in that state on the fees that he receives in respect of his task. The fact that the interests the subject of arbitration are situated abroad or that the parties to the arbitration reside in another state is of little importance. Provided the arbitrator does not operate from a fixed base established in the other state, only his state of residence has the right to tax his remuneration. Yet it is not very likely that the arbitration would be carried out from a fixed base abroad, in view of the occasional, and presumably non-recurrent, nature of this activity.
In fact, the question only appears to arise in two very limited cases. Where a whole succession of arbitrations arise in the context of a generalised dispute such as the disputes between the United States and Iran, and these arbitrations were held in a state other than the state where the arbitrator has his residence, one might imagine that the tax authorities of that state would claim that a fixed base exists and use this as a ground for levying tax on the arbitration fees. A similar claim might be raised against a professional person, such as a barrister, who has a permanent fixed base in another state, which he uses for carrying out an arbitration entrusted to him. He alone would remain concerned if several arbitrators were involved, as in theory the others would have no fixed base because they use their co-arbitrator's premises only from time to time.
All in all, the place where an arbitrator is taxed on his income (consisting of the fees paid to [Page105:] him by the parties, directly or through the intermediary of an arbitration institution) will not give rise to serious difficulty as a general rule. The arbitrator is taxable in his state of residence, whatever the identity of the parties and the circumstances of his task. Only in very exceptional circumstances will the existence of a fixed base in another state, from which the arbitration was rendered, confer on that state the right to tax him. This solution, which stems from the classic tax conventions concluded between the European states, brings international arbitration into the domestic system for tax purposes. The arbitrator will generally be taxed as if he rendered a domestic arbitral award.
B. How is the arbitrator taxable?
As this situation is exceptional, we will simply draw attention to a number of basic rules relating to the taxation of income from a fixed base. The only earnings taxable in the state where the said base is located are earnings linked to that state, less the expenditure incurred in carrying out the activity which gave rise to the earnings in question. Further, by application of the rule of non-discrimination, the state where the fixed base is located cannot tax that activity differently or at a higher rate than would apply to one of its residents.
If one looks generally at the systems applied in Western Europe, a certain number of main themes immediately come into view.
First of all it is noteworthy to observe that the states of northern Europe - Sweden, Norway, Finland and Denmark - treat arbitrators' fees in the same manner as wages or salaries. Everything is treated for tax purposes, as if the arbitrator was employed by the parties paying him. As a consequence, the parties, in their capacity as "employers" have to pay the corresponding social security contributions (Norway). The arbitrator for his part is taxed at the income tax rate applicable to employees (maximum rate 49.5% in Norway, approximately 51% in Sweden, 63 to 68% in Finland or 66.5% in Denmark).
In contrast, the other states regard the arbitrator's activity as the activity of a self-employed professional. This is the analysis applied in Switzerland, Belgium and Italy (unless a moral entity is appointed as arbitrator, as we have seen above), as well as in Austria, in Germany, France, Spain or Portugal. In some of the latter states, since arbitration is not deemed to form an integral part of a professional activity - case that will be examined below - the arbitrator's fees are taxed in the same way as income from other independent activities (Italy) or other sources (Germany, in application of Article 22, no. 3 of the Income Tax Law, and France, in application of Article 92 of the General Tax Code), or as miscellaneous income (Belgium, in accordance with Article 90.1 CIR). In Italy and in Germany, such classifications entail certain consequences. In Italy, the arbitrator may only deduct a flat rate 5% from his gross fees, in Germany fees are not subject to any tax if, for a given year, they amount to less than DM 500. In France, on the other hand, the regime of non-commercial profits is applied with all its special features, in particular the flat rate deduction. Moreover, since 1992, all arbitrators may benefit from a regime whereby only 75% of their earnings are taxed provided their fees do not exceed FF 70,000 in the course of the calendar year of reference and they benefit from exemption or are exempted from VAT.
This particular feature of French tax law which treats the arbitrator's income in this uniform fashion - a system which is also encountered in Luxemburg (Art. 91 LIR) or Portugal for example - makes another distinction inapplicable, which is fundamental in most of the other European states.
The tax regime applied to arbitrators will in fact be different depending whether the arbitrator [Page106:] acts on an occasional basis - and in any case outside his ordinary professional activity - or whether there is a link between his professional activity and his task as an arbitrator. In the latter case, the arbitrator's remuneration is treated as income derived from the exercise of that professional activity. This is the case in Germany (in application of Article 15, para. 1 of the Income Tax Law with the consequence that municipal tax is also collected on the arbitrator's fees), and in Norway (with the consequence that the social security contribution is no longer paid by the parties in their capacity as "employers" [supra], but deducted from the arbitrator himself, whose maximum rate of imposition goes up to 52.5%). The same regime applies in Sweden - where the fact of acting repeatedly as an arbitrator may result in its being treated as a profession itself - as well as in Italy. As a result of this, in the latter state, the taxable income is calculated as the difference between the fees and the expenses, rather than by the application of a flat rate deduction (see above). In Belgium, earnings, defined as the income from a profit-making occupation, are distinguished from miscellaneous revenues (see above). The latter are taxed separately at the rate of 33.33% (Art. 171 C.I.R.), while the former are grouped and subjected to tax at the graduated rate (Art. 130 C.I.R.). An arbitrator's fees will constitute miscellaneous revenues, unless they are closely linked to his professional activity. Even if such is not the case, they may also be classed as earnings from a profit-making occupation, in the case where the arbitrator is appointed repeatedly. It seems that there is no established case law in the latter situation.
Hence, in Europe the direct tax regime applicable to arbitrators is clearly based on two major distinctions: the fees are taxed either in the same way as a salary or as the income from self-employed activities, unless the activity of arbitration merges into a wider professional activity, in which case the fees become professional income and treated as such for tax purposes. Naturally, these are merely of trends. In France, as we have pointed out, the regime applicable to profits from non-commercial activities applies to all arbitrators indiscriminately. On the other hand, in Denmark, arbitration fees are never treated as being professional in character unless the arbitrator is operating through a private limited company - a practice that is common in both that country and the Netherlands. The fees are then taxed as corporate revenues, at the rate of 34 %. In the case of VAT, on the other hand, the company is deemed to be transparent and the fee as directly paid to the individual member of the company in question. In fact, VAT is a profoundly different tax, whose application to arbitrators, calls for developments of its own, for this very reason.
The variations in direct and even indirect taxation of arbitrators cannot fail to give pause for thought. However, taxation is none other than a reflection of a wider reality, the lack of a uniform status applicable not only to international arbitrators, but to arbitrators in general. This is a translation - even if sometimes an imperfect one - of a legal reality, and is accordingly a valuable revelation.
1 For further details, see our study "Fiscalité et arbitrage", Rev. arb., 1994, pp. 14 et seq.
2 See e.g. instruction of 18 December 1985, BODGI, 3 A-22-85.