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HMRC internal manual

Double Taxation Relief Manual

Double Taxation Relief Manual: Guidance by country: United States of America: Limitation on Benefits: from 2003

The new Agreement applies for the purposes of US withholding tax from 1st May 2003 and for other US taxes from 1st January 2004.

It contains, for the first time, a limitation on benefits article in a UK double taxation treaty, though such articles are a common feature of US treaties. The following sets out how the UK will apply the Article in general terms but any case in which it is thought that the Article applies to claims made by UK residents should be immediately referred to CT & VAT, International CT and, in particular, claims under Article 23(6) - Competent Authority discretion.

The purpose of the article

The purpose of the article is to ensure that UK and US residents benefit from the treaty, whilst ensuring that residents of third countries who establish legal entities in either the UK or the US, not for legitimate commercial and economic reasons, but with the principal purpose of obtaining benefits under the treaty, do not benefit.

To achieve this, the article poses a number of tests for UK and US residents, one of which must be satisfied if entitlement to treaty benefits is to be established.

The assumption underlying each of these tests is that a taxpayer that satisfies the requirements of any of the tests probably has a real business purpose for the structure it has adopted, or has a sufficiently strong nexus to the other contracting state (e.g. a resident individual) to warrant benefits even in the absence of a business connection, and that this business purpose or connection outweighs any purpose to obtain the benefits of the treaty.” In other words, the assumption is that a taxpayer who satisfies one of the tests is not “treaty shopping”.

As such, any UK or US resident who satisfies one of the tests in the article will, provided they satisfy any other specified conditions for obtaining the relevant benefit, be entitled to treaty benefits.

How it works

The article provides that residents of the UK and the US are entitled to all the benefits of the treaty only if they are a “qualified person” (paragraph 2). If a resident is not a “qualified person” they may be entitled to benefits in respect of specific items of income, profits or gains under the “derivative benefits test” (paragraph 3), the “active conduct of a trade or business” test (paragraph 4) or at the discretion of the competent authority of the country that is giving up its taxing right under the treaty (paragraph 6).

For the majority of UK residents, the article will provide clear rules and certainty of treatment about entitlement to treaty benefits without recourse to either the Inland Revenue or the US Internal Revenue Service.

DT19883 contains more detail on the various criteria in doubtful cases.