handbook-tb

Preventing tax treaty abuse2.3.1.2 Active business incomeA second way in which a taxpayer will be able to enjoy (some) treatybenefits is if the taxpayer satisfies an active business income test. Again,this test can be satisfied regardless of the legal form of the taxpayer.While a “qualified person” will enjoy all of the benefits of thetreaty, satisfying the active business income test will entitle the taxpayerto enjoy treaty benefits for only “an item of income.” Subparagraph 3a) provides:A resident of a Contracting State will be entitled to benefits ofthis Convention with respect to an item of income derived fromthe other Contracting State, regardless of whether the residentis a qualified person…In order for the entity to be a “qualified person” for a particularitem of income, the taxpayer must meet two and sometimes three tests.It must be:engaged in the active conduct of a trade or business in [its State ofresidence] (other than the business of making or managing investmentsfor the resident’s own account, unless these activities arebanking, insurance or securities activities carried on by a bank,insurance company or registered securities dealer respectively),This test will clearly be satisfied for taxpayers that are exclusivelyengaged in manufacturing, assembly, extraction, productionactivities or the provision of professional services. It is not entirelyclear how a company which is a holding company should be regardedbut presumably holding shares in subsidiaries would not amount tothe “active conduct of a trade or business” and even if it did, this activitywould fall into the exclusion for an entity that exists for “making ormanaging investments.” The same analysis might apply to a companythat exists just to hold intellectual property assets and receive royaltypayments, or which is an in-house finance company for the corporategroup and exists just to receive interest payments. On the otherhand, a company which holds and manages a portfolio of investmentsfor external clients would likely be regarded as engaged in “the activeconduct of a trade or business” and this business is not one which iscarried on “for the resident’s own account.”305