Aqua Hotels Corp is a company resident in State A and wholly owned by Beta Holding Corp, a

company resident in State B$.$ Aqua Hotels Corp operates hotels in State A and derives more than

$50\%$ of its value from its immovable property through which it operates its hotel business. Beta

Holding Corp does not conduct any business and does not hold any other investments.

Aqua Hotels Corp was previously owned by Centaurus Corp, a company resident in State C$.$ As

part of a restructuring in $2020,$ Centaurus Corp incorporated Beta Holding Corp in State B and sold

all of its shares of Aqua Hotels Corp to Beta Holding Corp at an arm$$s length price.

In $2023,$ Beta Holding Corp agreed to sell all of its shares of Aqua Hotel Corp to a third party. It

therefore realized a capital gain of $400\mathrm{.}000\mathrm{.}000.$ Under the domestic tax law of State B$,$ Beta

Holding Corp is subject to the regular corporate income tax regime. Under that regime, capital

gains from the sale of domestic and international shareholdings are exempt from tax.

The tax treaty between State A and State B was concluded in $1994$ and follows the OECD Model

Tax Convention $1994.$ It uses the exemption method of Art. $23$A of the OECD Model. However, in

deviation to the OECD Model, Art. $13(4)$ adds that $$for the purposes of this paragraph, the term

$$immovable property$$ does not include property $($other than rental property$)$ in which the business

of the company, partnership or trust was carried on$.$ Art. $29$ further includes a provision that

states that $$the Convention shall not apply to holding companies that are not subject to the

regular corporate income tax regime but to an international tax haven regime in State B$($i$.$e$.$ they

are exempted from all taxes provided the company has no direct presence in State B$).$ Through

the MLI, the tax treaty includes a new preamble and the principal purposes test $($PPT$)$ rule.

The tax treaty between State A and State C was concluded in $2017$ and follows the OECD Model

Tax Convention $2017.$ It uses the exemption method of Art. $23$A of the OECD Model.

Beta Holding Corp argues that Art. $13(4)$ is not applicable due to the business property exemption.

Consequently, Art. $13(5)$ does not allow State A to tax the capital gains. When the Contracting

States concluded the tax treaty at issue, they knew the other country$$s tax system. State A

nevertheless waived its taxing rights for business property located in its territory to stimulate

investments such as that at hand. It did so knowing that State B might not tax the capitals gains

from the sale of shares and that situations of double non$-$taxation may arise. In fact, tax treaty

benefits were excluded only for holding companies that are subject to an international tax haven

regime in State B$.$ Conversely, benefits must be granted to holding companies that are subject to

the regular corporate income tax regime in State B$,$ even if they do not pursue any business and

even if they were established for the sole purpose of claiming tax treaty benefits.

According to the tax authorities of State A$,$ State A has the right to tax the capital gains under its

domestic tax law with a regular rate of $25\%.$ Although the business property exemption applies,

treaty benefits may be denied under the PPT rule which was introduced through the MLI. Beta

Holding Corp was interposed in $2020$ for the principal purpose of obtaining tax treaty benefits. In

addition, granting these benefits would not be in accordance with the object and purpose of

Art. $4(1)$ and Art. $13(5).$ Only companies that have substantive economic connections to State A

should be considered a resident and be able to obtain tax treaty benefits, while mere holding

companies without any business purpose that are interposed to claim treaty benefits for the

indirect benefit of a residents of State C should not receive those benefits. This is confirmed by the

new preamble of the tax treaty which explicitly addresses treaty$-$shopping arrangements. The task is to give arguments as a defendant and$/$or applicant, and eventually give a final vote as a judge.