handbook-tb

Hugh J. Ault and Brian J. ArnoldGAAR in some treaties, but not others, can make the application ofother techniques in treaties lacking a GAAR more difficult.7.3.3 Limitation on benefits rulesA number of existing treaties contain a so-called Limitation on Benefits(LOB) article, which restricts treaty benefits where the person claimingthe treaty benefit is technically a treaty resident but lacks substantialconnections with the residence jurisdiction. The structure of thesearticles varies greatly, and a number of tests are used to determine ifthere is an appropriate connection with the treaty partner. Some of thetests turn on the share ownership of the resident entity and the extentto which the otherwise taxable income of the entity is reduced by baseerodingpayments. Thus, for instance, if a closely held corporation residentin State B is owned by residents of State C and paid out most ofits income to State C residents in the form of deductible payments, thecorporation would be denied the benefits of the treaty between StateA and State B on income arising in State A. In other cases, the focusis on the nature of the business operations in the two countries. Stillother rules focus on whether the shares of the resident entity (or itsparent in the case of subsidiaries) are publicly traded, since in thosecircumstances it is viewed as unlikely that the resident entity was setup primarily to obtain treaty benefits.7.4 Limiting treaty abuse through treaty interpretationArtificial arrangements that have been structured to attempt to takeadvantage of treaty benefits can sometimes be dealt with through anappropriate approach to treaty interpretation. Under Article 31 of theVienna Convention on the Law of Treaties, 26 treaties are to be interpretedin good faith and in the light of the object and purpose of thetreaty. Viewed from this perspective, structures without a businesspurpose or lacking in substance can be ignored in applying the treatyeven where the treaty does not have a GAAR. The effectiveness of thisapproach depends on the general approach of the courts in the relevantcountry to statutory and treaty interpretation.26Convention on the Law of Treaties, Vienna, 23 May 1969.30