handbook-tb

Preventing tax treaty abuseby seven or fewer persons that are equivalent beneficiaries,provided that in the case of indirect ownership, eachintermediate owner is itself an equivalent beneficiary, andb) less than 50 percent of the company’s gross income, asdetermined in the company’s State of residence, for thetaxable period that includes that time, is paid or accrued,directly or indirectly, to persons who are not equivalentbeneficiaries, in the form of payments (but not includingarm’s length payments in the ordinary course of businessfor services or tangible property) that are deductible forthe purposes of the taxes covered by this Convention inthe company’s State of residence.Both the ownership test and the base erosion test are framedaround the term “equivalent beneficiary.” The notion of “equivalentbeneficiary” relies upon the “qualified person” tests discussed aboveand the rates prescribed in the treaty with the third State.The first option for being an “equivalent beneficiary” is for entitiesthat are resident in a third State and again consists of two elements.The first element is that the company resident in the third State mustbe entitled to full benefits under that treaty, including being a “qualifiedperson” under that treaty where it contains an LOB clause. If thereis no comprehensive LOB clause, the entity must qualify as “qualifiedperson” under the current treaty according to the following proposeddefinition:f) the term “equivalent beneficiary” means a resident of anyother State, but only if that resident:i) A) would be entitled to all the benefits of a comprehensiveconvention for the avoidance of doubletaxation between that other State and the Statefrom which the benefits of this Convention areclaimed under provisions analogous to subparagraphsa), b), or d), or subdivision i) of subparagraphc), of paragraph 2 of this Article,provided that if such convention does not containa comprehensive limitation on benefits article, theperson would be entitled to the benefits of thisConvention by reason of subparagraphs a), b) or d),309