Double Taxation Treaties (“DTT“) are treaties between two or more countries to avoid international double taxation of income and property of individuals or legal entities. The main purpose of DTT is to divide the right taxation between the involved countries, to avoid differences in taxation and to ensure taxpayers’ equal rights and security. International tax planning has become a serious concern and companies started to shift their income to low-taxed jurisdictions. Therefore, states with a higher taxation fear for their tax revenues. That is the reason why the prevention of abusive use of tax treaty benefits became a central aspect in the tax treaty policy of most industrialized countries.
Table of Contents
1. Introduction
2. Purpose and basic operation of the LOB
3. Structure of the Article
3.1 Individuals and Contracting States
3.2 Publicly-Traded-Corporations
3.3 Tax-Exempt Organizations and Pension Funds
3.4 Other legal entities
4. National anti-abuse rules
5. Summary
Objectives and Topics
The paper aims to provide a comprehensive overview of the national and international anti-abuse regulations in the USA, with a specific focus on the Limitation-on-Benefits (LOB) clause in double taxation treaties and various national anti-abuse doctrines.
- The functionality and complex criteria of the Limitation-on-Benefits (LOB) clause.
- Analysis of specific qualification tests: Base-Erosion-Test, Derivative-Benefit-Test, and Active-Business-Test.
- The application of the Economic Substance Doctrine in U.S. tax law.
- Examination of Conduit Principles regarding multiple-party financing transactions.
- The interplay between bilateral treaty provisions and national U.S. tax abuse regulations.
Excerpt from the Book
3.2 Publicly-Traded-Corporations
Subparagraph 2(a) and 2(b) appear to be very clear and straightforward, whereas subparagraph 2(c) provides for more complicated rules regarding publicly-traded corporations (subparagraph 2(c) (aa)) and their subsidiaries (subparagraph 2(c) (bb)).
A corporation is generally entitled to all benefits of the DTT, if their principal class of shares are regularly traded on one or more stock exchanges. Additionally, the resident corporation has to the satisfy at least one of the following tests. Thus it is ensured, that the benefits of the DTT are not solely granted by the fulfillment of formal regulations. Firstly, the company’s principal class of shares is primarily and regularly traded on a recognized stock exchange located in in a Contracting State (public trading test), where the corporations is defined to be resident according to Art. 4 of the DTT. The term regularly indicates that a mere listing on the stock exchange is not regarded as sufficient. Secondly, the corporations primary place management and control is located in its state of residency. It should be emphasized, that the primary place of management and control does not correspond to the concept of the effective place of management as defined under art. 4 paragraph 3. Whereas the effective place of management is determined by the decisions of day-to-day business, the primary place of management and control is defined by the place where long term management policy decisions are made and controlled. The last mentioned test was introduced to include potential cases, in which too less public trading takes place (perhaps) due to the size of the stock exchange. Nevertheless, this test is of only minor importance, since there is generally sufficient regular trade on stock exchanges regarding German publicly traded corporations.
Summary of Chapters
1. Introduction: This chapter provides an introduction to Double Taxation Treaties and explains the motivation behind the implementation of anti-abuse regulations by industrialized countries.
2. Purpose and basic operation of the LOB: This section details the function of the LOB as a complex, mechanical anti-treaty shopping provision that relies on objective tests rather than taxpayer intent.
3. Structure of the Article: This chapter outlines the structural requirements for a resident to be considered a "qualified person" and benefit from the DTT.
3.1 Individuals and Contracting States: This section explains the entitlement of resident individuals and the Contracting States themselves to treaty benefits.
3.2 Publicly-Traded-Corporations: This chapter covers the criteria for publicly traded corporations, including the public trading test and the primary place of management and control test.
3.3 Tax-Exempt Organizations and Pension Funds: This part examines the requirements for tax-exempt entities and pension funds to qualify as entitled persons under the LOB.
3.4 Other legal entities: This chapter discusses complex tests, such as the ownership-test, base-erosion-test, and active-business-test, for entities that do not fall under previous categories.
4. National anti-abuse rules: This section provides an overview of internal U.S. regulations like the Economic Substance Doctrine and Conduit Principles.
5. Summary: The concluding chapter recaps the mechanical nature of the LOB and the discretionary power of tax authorities in cases not strictly covered by the treaty tests.
Keywords
Limitation-on-Benefits, LOB, Double Taxation Treaty, Tax avoidance, Tax evasion, Economic Substance Doctrine, Conduit Principles, Base-Erosion-Test, Derivative-Benefit-Test, Active-Business-Test, Treaty shopping, Tax abuse, Internal Revenue Code, Contracting States, Qualified person.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the Limitation-on-Benefits (LOB) clause found in U.S. double taxation treaties and analyzes how this interacts with U.S. national anti-abuse regulations to prevent treaty shopping.
What are the central thematic fields addressed?
The central themes include international tax law, the prevention of tax avoidance, the qualification criteria for treaty benefits, and U.S.-specific legislative doctrines.
What is the primary goal of the research?
The aim is to provide an overview of both the specific tests within the LOB and the broader U.S. national anti-abuse rules that corporations must satisfy to obtain tax relief.
Which scientific method is utilized in the paper?
The author employs a legal analysis method, focusing on the interpretation of treaty provisions, technical explanations, and relevant legal literature and court decisions.
What subjects are covered in the main body?
The main body treats the structure of the LOB (including individual, corporate, and entity-specific tests), as well as national doctrines like the Economic Substance Doctrine and Conduit Principles.
Which keywords best characterize this work?
Key terms include LOB, Tax Treaty, Anti-Abuse Rules, Economic Substance, Conduit Principles, and Base-Erosion.
How is the "primary place of management and control" defined in this context?
It is defined as the place where long-term management policy decisions are made and controlled, distinct from the concept of the "effective place of management" used in general tax practice.
What happens if a company does not meet the specific criteria of the LOB?
If an entity does not meet the criteria under paragraph 2, it may still be granted benefits if it satisfies alternative tests, such as the derivative-benefit-test or the active-business-test.
Why was the Economic Substance Doctrine codified in the U.S. Internal Revenue Code?
It was codified to provide a clearer framework for disregarding artificial transactions designed solely for tax avoidance, requiring a meaningful change in the taxpayer's economic position.
- Citar trabajo
- Anonym (Autor), 2020, US Tax law. The Limitation-on-Benefits-Clause and US national anti abuse rules, Múnich, GRIN Verlag, https://www.grin.com/document/955813
