A Corp, a company resident in State A$,$ acquired certificates $($nominal value $10\mathrm{.}000\mathrm{.}000)$ from B

Corp, a company resident in State B$.$ According to the terms of issue of those certificates:

$$ the certificates confer entitlement to an annual payment at a fixed percentage of $8\%$ of

their nominal value;

$$ if the annual payment is likely to give rise to an accounting loss, its amount is reduced

accordingly;

$$ however, the certificates confer entitlement, during the period of their existence, to

payment of arrears over the course of subsequent years, provided that that adjustment

does not give rise to an accounting loss;

$$ the payment of interest and the payment of arrears have priority over allocation to

reserves and payments to guarantors;

$$ the amount of capital made available to the issuer in return for the certificates is

reimbursed at the nominal value of those certificates;

$$ however, if the balance sheet shows a loss, the amount of the claim for reimbursement is

reduced accordingly. In that case, too, the difference as compared with the nominal value

of the certificate is made up over the course of subsequent years, provided that this does

not entail a loss;

$$ the certificates confer no right to participation in the proceeds from the winding up of the

issuing company; and

$$ the issuing company has a right to cancel if the certificates no longer give rise to tax

deductibility.

In X$1,$ A Corp received a payment of $750\mathrm{.}000$ from the certificates issued by B Corp.

According to the domestic laws of both State A and State B$,$ an equity instrument $($leading to nondeductible dividends$)$ requires participation in the profits and liquidation proceeds. If this is not the

case, the financial instrument is treated as a debt instrument $($leading to tax$-$deductible interest$).$ The tax treaty between State A and State B was concluded in $2020$ and follows the OECD Model

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

to the OECD Model, Art. $10(3)$ of the tax treaty includes the following sentence: $$The term

$$dividends$$ includes also income derived by a silent partner $($stiller Gesellschafter$)$ from the

partner's participation as such, income from participating profit sharing loans $($partiarisches

Darlehen$)$ or profit sharing bonds $($Gewinnobligationen$)$ and similar remuneration provided it is

not deductible in determining the taxable income of the borrower under the laws of the

Contracting State in which it arise$.$ Art. $11$ also deviates from the OECD Model:

$1.$ Interest arising in a Contracting State and paid to a resident of the other Contracting

State shall be taxed only in that other State if the recipient is the beneficial owner thereof.

$2.$ However, income from rights or debt$-$claims carrying a right to participate in the

debtor$$s profits, including income derived by a silent partner $($stiller Gesellschafter$)$ from

the partner's participation as such, income from participating profit sharing loans

$($partiarisches Darlehen$)$ or profit sharing bonds $($Gewinnobligationen$)$ may also be taxed

in the Contracting State in which they arise and according to the laws of that State.$$

Finally, the definition of interest in Art. $11(3)$ includes the following sentence: $$The term $$interest$$

does not include items of income dealt with in Article $10.$

According to the tax authorities of State A$,$ the certificates grant no right to participate in the

debtor$$s profits. Consequently, Art. $11(1)$ grants State A the sole taxing right.

According to the tax authorities of State B$,$ the certificates grant a right to participate in the

debtor$$s profits. Thus, Art. $11(2)$ grants State B the right to tax the payments pursuant to its

domestic tax law, while State A is required to credit the tax under Art. $23$A$(2)$ of the treaty.

A Corp has initiated a mutual agreement procedure which has not resolved the issues arising from

the case. Thus, the unresolved issues have been submitted to arbitration. The task is to provide arguments on this case $($as a defendant and$/$or applicant$).$ And eventually, as a judge to have a final vote.