handbook-tb

Hugh J. Ault and Brian J. Arnoldcompany were sold. Thus, the accrued gain attributable to the underlyingassets which has accrued in the source country would escapetaxation by the source country on the transfer. This gain may representappreciation in the underlying assets or retained earnings that wouldhave been taxed to the shareholder had they been distributed to theshareholder as a dividend. These elements of gain will escape taxationby the source country if the shares are sold unless the domestic law ofthe source country has a special provision to reach such gains. Even ifthe domestic law has the appropriate provisions, tax treaty provisionsmay in some circumstances prevent taxation of the gain.8.2 Domestic law provisions8.2.1 Shares in domestic companiesThe structure of the capital gains provisions as they apply to the saleof shares of domestic companies differs substantially from country tocountry. Some do not apply to any sales of domestic shares by nonresidents,some tax the sale if the corporation holds certain assets(for example, real or immovable property located in the country) andothers may assert a source-based claim if the non-resident owns a specifiedpercentage of shares in the domestic corporation regardless of thecomposition of its assets. Additionally, some countries tax the sale ofshares only if the transaction is viewed as a matter of tax avoidance; if,for example, property the sale of which would be taxable is transferredto a corporation, then followed closely in time by the sale of the sharesof the corporation. There is no clear pattern in the rules of domesticlaw applicable in this area. The basic decision of how far to extendsource-based taxation to the sale of shares of domestic corporationsinvolves a balancing of the desire to attract foreign investment and theimportance of the taxation of the gains for the domestic tax base.8.2.2 Administrative issuesIf the decision is made to tax the sale of shares in domestic corporationsby non-residents in some cases, there are a number of administrativeissues to consider. There are several ways to enforce the tax. Theseller may be required to report the gain and pay the tax in the same34