Academic journal article Journal of Accountancy

U.S.-Dutch Agreement Impedes Treaty Shopping

Academic journal article Journal of Accountancy

U.S.-Dutch Agreement Impedes Treaty Shopping

Article excerpt

Last December the United States and the Netherlands signed a new income tax treaty, effective for taxable years beginning (or for payments made, in the case of amounts subject to withholding tax) on or after January 1 of the year following ratification by both countries. Taxpayers, however, may elect to extend the benefits of the current treaty for an additional 12 months.

Significantly, the new treaty's "limitations on benefits" provision is intended to prevent "treaty shopping" (which occurs when a resident in a country that does not have a treaty with the United States forms a corporation in a country with a favorable U.S. treaty in order to obtain the benefits of that treaty).

The limitations-on-benefits provision generally allows a company resident in either the United States or the Netherlands to obtain the treaty's benefits if it satisfies one of four objective tests. The first applies when a corporation is regularly traded on a recognized stock exchange in either the Netherlands or the United States. The second focuses on whether the company shareholders are qualified residents of either country. The third applies where the company is engaged in active trade or business in its country of residence. The fourth allows a company to qualify for treaty benefits if it functions as a headquarters for a multinational group.

With regard to these tests, the new treaty broadens the typical anti-treaty-shopping provision by allowing Dutch companies to take into account certain activities in European Community countries. …

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