Interpreting U.S. Tax Treaties
Caplin & Drysdale
Interpreting U.S. Tax Treaties
The large and growing U.S. tax treaty network makes it likely that your company is entitled to benefits under one or more of the 50-plus U.S. tax treaties. Understanding and working with these treaties requires experience, because notwithstanding efforts to conform to a model, U.S. treaties differ from each other in important, often subtle, respects. And even seemingly simple questions common to all treaties -- such as who is entitled to treaty benefits -- can give rise to contentious and potentially costly disagreements with the IRS.

Caplin & Drysdale's tax treaty practice covers both substantive legal issues and the administrative aspects of securing treaty benefits by filing appropriate forms or working with U.S. and foreign government officials. Our attorneys are thoroughly familiar with most of the U.S. tax treaties currently in effect, and in some instances helped negotiate them. We regularly provide input to the Treasury on treaty negotiations, and we work to ensure that our clients' concerns are brought to the government's attention during the treaty negotiation and re-negotiation processes.

Representative Engagements

  1. The IRS sought to collect more than $50 million in withholding taxes and penalties from our client, a U.S. subsidiary of a foreign bank that acted as custodian for several foreign mutual funds, on the ground that the funds were not entitled to benefits under the applicable U.S. treaty.

    Result: Caplin & Drysdale orchestrated a referral of the treaty qualification issue to the IRS National Office, which agreed with our attorneys that the international examiner had misinterpreted the treaty, resulting in a complete IRS concession.

  2. A foreign bank that engaged in substantial U.S. securities trading operations through its New York branch sought advice on how to structure its operations to secure treaty benefits to minimize its U.S. tax liability. 

    Result: Caplin & Drysdale advised the company how best to structure its operations to maximize the value of its treaty benefits and, in addition, pointed out a little-known quirk in the applicable U.S. treaty that allowed the foreign bank to treat its securities income as U.S. source income while subjecting only a fraction of that income to U.S. tax.

  3. A U.S. financial institution investing in certain assets through its foreign branch asked how the applicable treaty would affect U.S. taxation of income from those assets.

    Result: Caplin & Drysdale analyzed the language of the treaty, the treaty legislative history, and all available authorities and concluded that the client could treat the income in question as foreign source income under the relevant treaty provision but would be required to disclose this position on its U.S. income tax return under section 6114.

  4. A foreign corporation engaged in business in the United States was concerned about potential withholding requirements on U.S. source income it received from customers.

    Result: Caplin & Drysdale analyzed the facts and concluded that the income was not subject to withholding because the corporation did not have a U.S. permanent establishment to which the income was attributable. We told the client which form to file to prevent withholding and to establish entitlement to treaty benefits. We also advised on the desirability of filing a protective U.S. income tax return to avoid denial of deductions in case it was ultimately determined that the client had a U.S. permanent establishment.

  5. A U.S. financial institution needed to know the rate at which withholding would be required on payments of U.S. source dividend income to a foreign corporation owned jointly by the client and a tax haven entity.

    Result: Caplin & Drysdale analyzed the unique ownership structure of the foreign corporation and concluded that it was not entitled to treaty benefits under the relevant limitation on benefits provision. We then advised the client that the dividend income was subject to full 30 percent withholding.

Our Services

If you are operating in a foreign jurisdiction within the U.S. tax treaty network, Caplin & Drysdale can help:

  • Ensure your eligibility for treaty benefits;
  • Structure your operations to maximize the value of treaty benefits;
  • Advise on treaty interpretation and the applicability of treaty provisions to your transaction;
  • Ensure that you satisfy any filing or information reporting requirements necessary to take advantage of treaty benefits;
  • Invoke the Competent Authority process under a treaty; and
  • Make your concerns or the concerns of your industry known to the government officials who are negotiating or renegotiating a particular treaty.
View our non-mobile site Menu