Constraint of Benefits Provisions in Tax Treaties ABA Tax Section Meeting October 17, 2002

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2. Review. IntroductionContextEvolution of

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Impediment of Benefits Provisions in Tax Treaties ABA Tax Section Meeting October 17, 2002 Mark Doets – Loyens & Loeff Rick Reinhold – Willkie Farr & Gallagher Phil West – Steptoe & Johnson

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Overview Introduction Context Evolution of "Throw" Description of at present appropriate guidelines Practical cases Conclusion

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Introduction An assessment of LOB Other settlement arrangements that utmost bargain benefits Purpose condition Subject-to-duty Transparent substances Dual inhabitants Special expense administrations Beneficial possession Anti-lead rules Anti-profit stripping arrangements Repos Methods of disposal of twofold tax collection Regulations/settlement frames

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Introduction Secondary sources to counsel: OECD Model Income Tax Commentaries OECD Revision to Model Income Tax Commentaries Klaus Vogel on Double Taxation Conventions Improper utilization of Tax Treaties (S. van Weeghel) Article 26-Limitation on Benefits in the new US-NL Tax Treaty (Loyens § Volkmaars)

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Context What is it that nations hope to escape bargains? Bargain hostile to manhandle arrangements versus household against mishandle arrangements Purpose of restriction on advantages arrangements.

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Evolution in Treaty Policy Case law

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AIKEN INDUSTRIES V. Magistrate ECL Bahamas MPI Note MPI Note 9 Notes AIKEN U.S. CCN Ecuador $ MPI U.S. Businesses Honduras Facts: MPI obtained cash from ECL as an end-result of a 4% financing cost note ECL alloted the MPI note to ventures for 9 littler 4% loan cost notes Industries did not make a benefit on the securing of the MPI note – it was resolved to pay out precisely what it gathered

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Aiken Industries v. Official Applicable Tax Treaty – No withholding on intrigue installments between U.S. what's more, Honduras Issue – ought to Industries be overlooked? Holding – U.S./Honduras Treaty did not matter to absolved intrigue paid by MPI since Industries was an "accumulation operator", a minor "course for the section of intrigue installments from MPI to ECL"

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Del Commercial Properties v. Chief DL Shekels Holdings Canada Loan Guarantee Canadian Bank Indirect Sub Delcom Financial Canada $18 million Del Commercial Properties Inc. "DCPI" U.S. $14 million Loan Delcom Holdings Canada Delcom Cayman Islands $14 million advance $14 million Contribution Delcom Antilles Netherlands Antilles Del BV Netherlands

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Del Commercial Properties v. Magistrate Facts: Delcom Financial obtained $18 million from a Canadian Bank $14 million of which was contributed down the fasten to Del BV Del BV Lent $14 million to DCPI ensured the advance from the Canadian Bank

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Del Commercial Properties v. Magistrate Applicable Tax Treaty – No withholding on intrigue installments made by a U.S. organization to a Dutch company Issue – Should the exchange be dealt with as a credit from Delcom Financial to DCPI? Holding – U.S. Netherlands arrangement did not have any significant bearing since the installments from DCPI to Del BV were in substance installments to Delcom Financial. Del BV did not serve any part with an "adequate business or financial reason to conquer the course way of the exchange"

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Northern Indiana Public Service Company v. Chief Finance issued notes in the Eurobond market and loaned the returns to NIPSCO at a little benefit. NIPSCO ensured the Euronotes NIPSCO U.S. Obligation Obligations $ Notes Finance Netherlands Antilles Eurobond Market $ Facts:

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Northern Indian Public Service Company v. Commisioner Applicable Tax Treaty – No withholding on intrigue installments by a U.S. partnership to a Netherlands Antilles enterprise Issue – ought to the enthusiasm on the Eurobonds be dealt with as paid straightforwardly by NIPSCO U.S.? Holding – Since Finance directed unmistakable business movement and inferred a benefit, the type of the exchange was regarded

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Bass v. Magistrate Taxpayer framed Stantus A.G. Stantus A.G. obtained a % enthusiasm for oil and gas leases from Taxpayer Stantus A.G. gotten generous pay from its share of the oil and gas delivered Taxpayer % enthusiasm for oil and gas leases Stantus A.G. Switzerland $ % enthusiasm for oil and gas leases Facts:

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Bass v. Chief Applicable Tax Treaty – Stantus A.G. was not subject to U.S. government salary tax assessment on its pay Issue – Should Stantus A.G. be slighted and its wage constitute wage of the Taxpayer? Holding – Stantus A.G. carried on adequate business movement to require its acknowledgment as a different element. It was "oversaw as a suitable concern and not as just an inert exterior"

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Evolution in arrangement strategy Subjective standard Cyprus Modern adaptation Dutch settlement U.S. show arrangement Variations Rejected varieties (Italy, Slovenia) New variety (U.K.) Future? Codification of LOB?

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U.K. Confinement on advantages To get bargain benefits, citizen must Satisfy all prerequisites particular to the specific regale included, Be a "settlement occupant" and Meet no less than one of the LOB tests

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U.K. Impediment on advantages Two courses to capability under LOB (Article 23) Qualification of the citizen by and large Qualification as for a specific thing of salary Qualification of the citizen for the most part (organizations) Public exchanging test, or Ownership/base disintegration test Qualification w/r/t a specific thing of wage (organizations) Derivative advantages test Active exchange or business test, or Discretionary assurance from the Competent Authority

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U.K. Restriction on advantages: open exchanging Test can be met by Publicly exchanged organizations or Their auxiliaries Publicly exchanged organizations The "main class of shares" is Listed on a US or UK "perceived stock trade" and Regularly exchanged on a "perceived stock trade" Subsidiaries of traded on an open market organizations At minimum half of vote and esteem is possessed By five or less traded on an open market organizations (as characterized above) Ownership might be roundabout, the length of middle of the road proprietors are inhabitants of it is possible that US or UK

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U.K. Confinement on advantages: proprietorship/base disintegration test "Possession" bit of test: On at any rate a large portion of the times of the assessable period At minimum half of the tried party is claimed by Persons meeting one of a few LOB tests Test for open exchanging (however not backup open exchanging) or Certain different tests: (annuity reserves, charge exempts, qualified legislative elements or people) Ownership can be immediate or backhanded, yet both vote and esteem are tried "Base disintegration" bit of test: Less than half of the individual's gross pay for the assessable period Is paid or collected, straightforwardly or in a roundabout way, to out-of-state people of US or UK And is deductible in the tried party's locale Certain a safe distance installments are rejected

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U.K. Impediment on advantages: subsidiary advantages test Ownership bit of test: > 95% of organization is claimed by < 7 "equal recipients" Both vote and esteem are tried Ownership can be immediate or backhanded Base disintegration bit of test: Less than half of the individual's gross salary for the assessable period Is paid or accumulated, straightforwardly or by implication, to people who are not "EBs" And is deductible in the tried party's purview Certain a safe distance installments are rejected

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U.K. Impediment on advantages: subordinate advantages test, meaning of proportionate recipient To be an "equal recipient" A man must be an inhabitant of A part condition of EC An EEA state (EU in addition to Iceland, Liechtenstein, Norway), or A gathering to NAFTA The individual additionally Must be an organization, occupant in EC, entitled under an EC Directive to get free of w/h charge "the specific class" of salary for which bargain advantages are guaranteed or Would be Entitled to all advantages of a full twofold expense settlement between any individual from EC or EEA and the nation from which advantages are asserted (but if that arrangement does not have full LOB article, the individual would have qualified, on the off chance that they were an "occupant" of the U.S. on the other hand U.K., under the new bargain's LOB tests for open exchanging, possession/base disintegration, or certain others) and W/R/T profits, premium or eminences, qualified under that arrangement for in any event as ideal a w/h impose rate as under the new US/UK settlement

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An occupant of one of the states can qualify as for a thing of wage if the inhabitant is occupied with the dynamic direct of an exchange or business in that state and the wage from the other state is either "determined regarding" or "accidental to" that exchange or business Exception for the matter of making or overseeing ventures for the inhabitant's own record, unless the exercises are sure exercises of a bank, insurance agency or reg'd securities merchant The general control for dynamic exchanges or organizations won't give benefits regard to a thing: got from an exchange or business that an inhabitant of the U.S. then again U.K. (the "living arrangement" state), or a related endeavor, carries on in the other express (the "source" state), unless the exchange or business in the habitation state is considerable in connection to the exchange or business action in the source state. U.K. Confinement on advantages: dynamic exchange or business test

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U.K. Restriction on advantages: optional assurance "An occupant of a Contracting State that [does not qualify under whatever other LOB paragraph] might, in any case, be conceded advantages of this Convention concerning [an thing of salary, benefit or gain] if the Competent Authority of the other Contracting State discovers that the foundation, procurement or upkeep of such inhabitant and the lead of its operations did not have as one of its essential purposes the acquiring of advantages under this tradition."

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Related standards U.K. settlement course test U.S. conductor controls I.R.C. § 7701(l) Treas. Reg.