US And New Zealand Agree To Clarify Double Tax Avoidance Convention

by Mike Godfrey, Tax-News.com, Washington

15 February 2005

The United States and New Zealand have entered into a mutual agreement to clarify the entitlement of members of certain fiscally transparent entities to benefits under their bilateral double taxation avoidance convention.

The move comes after it emerged that entities may be treated as fiscally transparent by the competent authorities in one country, but not in the other.

In a statement, the Internal Revenue Service explained that:

“Consistent with the approach taken in Article 4 (Residence) of the Convention, and pursuant to the authority of Article 24 (Mutual Agreement Procedure) of the Convention, the Competent Authorities agree that, in applying the Convention, income paid to and through such an entity is considered to be derived by a resident of the Contracting State to the extent of the share the resident has in the income.”

The IRS went on to add that:

“If a resident of the United States is a partner or member of an entity created or organized in the United States…and the entity is treated for United States federal tax purposes as a partnership or is disregarded as an entity separate from its owner (e.g., a limited partnership; or a Limited Liability Company, including one owned by a single member), the resident of the United States would be afforded the benefits of the treaty on the income that the resident derives from New Zealand through the entity, even if under its domestic law New Zealand does not treat the entity as fiscally transparent.”

“Consistent with the New Zealand/US treaty, the benefits extend to the income received by the fiscally transparent entity only to the extent of the resident’s share of that income.”

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