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HMRC internal manual

Double Taxation Relief Manual

From
HM Revenue & Customs
Updated
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USA: Double taxation agreement, Exchange of Notes: Article 23

With reference to Article 23 (Limitation on Benefits):

it is understood that the term “gross income” means the total revenues derived by a resident of a Contracting State from its principal operations, less the direct costs of obtaining such revenues.

With reference to paragraph 4 of Article 23 (Limitation on Benefits):

it is understood that an item of income, profit or gain is to be considered as derived “in connection” with an active trade or business in a Contracting State if the activity generating the item in the other Contracting State is a line of business which forms a part of, or is complementary to, the trade or business conducted in the first-mentioned State. The line of business in the first-mentioned State may be ‘upstream’ to that going on in the other State (e.g., providing inputs to a manufacturing process that occurs in that other State), ‘downstream’ (e.g., selling the output of a manufacturer which is a resident of the other State) or ‘parallel’ (e.g., selling in one Contracting State the same sorts of products that are being sold by the trade or business carried on in the other Contracting State).

It is understood that an item of income, profit or gain derived from a Contracting State would be considered “incidental” to the trade or business carried on in the other Contracting State if the item is not produced by a line of business which forms a part of, or is complementary to, the trade or business conducted in that other Contracting State by the recipient of the item, but the production of such item facilitates the conduct of the trade or business in that other Contracting State. An example of such “incidental” item of income, profit or gain is interest income earned from the short-term investment of working capital of a resident of a Contracting State in securities issued by persons in the other Contracting State.

With reference to paragraph 6 of Article 23 (Limitation on Benefits):

it is understood that in applying paragraph 6 of Article 23, the competent authorities will consider the obligations imposed upon the United Kingdom by its membership of the European Community and by its being a party to the European Economic Area Agreement, and on the United States by its being a party to the North American Free Trade Agreement. In particular, they will have regard to any legal requirements for the facilitation of the free movement of capital and persons, the differing internal tax systems, tax incentive regimes and existing tax treaty policies among Member States of the European Community or European Economic Area states, or, as the case may be, parties to the North American Free Trade Agreement.

Paragraph 6 of Article 23 requires the competent authority of the State from which benefits are claimed to consider whether the establishment, acquisition or maintenance of a resident and the conduct of its operations had as one of its principal purposes the obtaining of benefits under the Convention. That competent authority may determine under a given set of facts that a change in circumstances that would cause a qualified person to cease to qualify for treaty benefits under paragraph 2 of Article 23 need not result in a denial of benefits. Such changes in circumstances may include:

(a) a change in the state of residence of a major participator in a company;

(b) the sale of part of the ownership interests in a company to a resident of another Member State of the European Community or another European Economic Area state or, as the case may be, another party to the North American Free Trade Agreement; or

(c) an expansion of a company’s activities in other Member States of the European Community or other European Economic Area states or, as the case may be, other parties to the North American Free Trade Agreement,

all under ordinary business conditions.

If the competent authority is satisfied that these changed circumstances are not attributable to tax avoidance motives, this will be a factor weighing in favour of granting benefits in accordance with paragraph 6 of Article 23.

With reference to sub-paragraph (e) of paragraph 7 of Article 23 (Limitation on Benefits):

it is understood that, if a class of shares was not listed on a recognised stock exchange in the twelve months referred to in the sub-paragraph, that class of shares will be treated as regularly traded only if that class meets the aggregate trading requirements of the sub-paragraph for the taxable or chargeable period in which the income arises.