Tax Treaty - Limitations of Benefits

Limitations of Benefits

Recent treaties of certain countries have contained an article intended to prevent "treaty shopping," which is the inappropriate use of tax treaties by residents of third states. These Limitation of Benefits articles deny the benefits of the tax treaty to residents that do not meet additional tests. Limitation of Benefits articles vary widely from treaty to treaty, and are often quite complex. The treaties of some countries, such as the United Kingdom and Italy, focus on subjective purpose for a particular transaction, denying benefits where the transaction was entered into in order to obtain benefits under the treaty. Other countries, such as the United States, focus on the objective characteristics of the party seeking benefits. Generally, individuals and publicly traded companies and their subsidiaries are not adversely impacted by the provisions of a typical limitation of benefits provision in a U.S. tax treaty. With respect to other entities, the provisions tend to deny benefits where an entity seeking benefits is not sufficiently owned by residents of one of the treaty countries (or, in the case of treaties with members of a unified economic bloc such as the European Union or NAFTA, by "equivalent beneficiaries" in the same group of countries). Even where entities are not owned by qualified residents, however, benefits are often available for income earned from the active conduct of a trade or business.