US And Swiss Competent Authorities Provide Treaty Benefits Guidance

by Mike Godfrey, Tax-News.com, Washington

27 August 2003

The competent authorities of the United States and Switzerland concluded an agreement last week concerning the Limitation on Benefits Article of the 1996 Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income and accompanying Revised Memorandum of Understanding.

The agreement provides guidance on the application of 'derivative benefits' provisions of Article 22(3) of the treaty and paragraph 7 of the Revised MOU whereby a Swiss firm may be entitled to treaty benefits partly based on the residence of the ultimate beneficial owners. One of the ways in which a company can meet the test under subparagraph 3(a)(ii) is if greater than 70 percent of the aggregate vote and value of its shares are ultimately owned by persons that are residents of a party to the North American Free Trade Agreement ("NAFTA"), and that are also described in Article 22(3)(b); but there is a condition that there should be a double tax treaty in place between the country concerned and the US, which is palpably not the case for a US resident.

In a statement announcing the agreement, the IRS said:

"The agreement provides that certain categories of U.S. residents will be taken into account for purposes of the derivative benefits ownership tests of Article 22(3) and paragraph 7.

"The qualifying categories of U.S. residents are: individuals who are residents of the United States (as determined under Article 4 of the Treaty); the United States; political subdivisions of the United States; instrumentalities of the United States or a political subdivision thereof; and companies incorporated in the United States whose principal class of shares is primarily and regularly traded on a recognized stock exchange."

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