Tax Exemptions in Status of Forces Agreements

Abstract

When a country stations military and associated personnel, including contractors, in another country, the question arises whether these activities and related income attract tax in the so-called host country. Typically, the sending and host countries will conclude a so-called status of forces agreement (SOFA) to address a number of practical and legal issues associated with the presence of foreign personnel in the host country, including entry and departure rules, postal services, and taxation. SOFAs may relate to military or law enforcement purposes, or serve in the context of foreign aid programmes. After a stage-setting section, explaining the background, purpose, and scope of SOFAs in general, this article focuses on the tax provisions typically found in SOFAs. A small number of SOFAs has been selected to show similarities and differences in tax provisions and explain the associated legal issues: the multilateral NATO-SOFA and EU-SOFA as well as a number of bilateral SOFAs concluded by the United States in the areas of security, foreign assistance and counter-narcotics operations. The tax provisions vary significantly in scope, the categories of persons covered and the extent to which they are protected from taxation in the host country. Determining the correct allocation of taxing rights is further complicated due to the concurrence of multiple sets of tax rules in SOFA, bilateral tax treaties and domestic law of the host country.