69–119 

110TH CONGRESS EXEC. REPT. " ! SENATE 1st Session 110–4 

PROTOCOL AMENDING TAX CONVENTION 

WITH FINLAND 

NOVEMBER 14, 2007.—Ordered to be printed 

Mr. BIDEN, from the Committee on Foreign Relations, 

submitted the following 

REPORT

[To accompany Treaty Doc. 109–18] 

The Committee on Foreign Relations, to which was referred the 

Protocol Amending the Convention Between the Government of the 

United States of America and the Government of the Republic of 

Finland for the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with Respect to Taxes on Income and on Capital, 

signed at Helsinki on May 31, 2006 (the ‘‘Protocol’’) (Treaty Doc. 

109–18), having considered the same, reports favorably thereon 

and recommends that the Senate give its advice and consent to 

ratification thereof, as set forth in this report and the accompanying resolution of advice and consent. 

CONTENTS 

Page 

I. Purpose ........................................................................................................... 1 

II. Background .................................................................................................... 2 

III. Major Provisions ............................................................................................ 2 

IV. Entry Into Force; Effective Dates ................................................................. 4 

V. Implementing Legislation ............................................................................. 5 

VI. Committee Action .......................................................................................... 5 

VII. Committee Reccommendation and Comments ............................................ 5 

VIII. Resolution of Advice and Consent to Ratification ....................................... 6 

IX. Annex.—Technical Explanation .................................................................... 7 

I. PURPOSE

The proposed Protocol to the existing tax treaty between the 

United States and Finland is intended to promote closer cooperation and further facilitate trade and investment between the 

United States and Finland. The Protocol’s principal objectives are 

to eliminate the withholding tax on cross-border royalty payments, 

dividends arising from certain direct investments, and on certain 

dividends paid to pension funds; strengthen the treaty’s provisions 

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that prevent the inappropriate use of the treaty by third-country 

residents; and generally modernize the existing tax treaty with 

Finland to bring it into closer conformity with U.S. tax treaty law 

and policy. 

II. BACKGROUND

The Protocol amends the Convention between the Government of 

the United States of America and the Government of the Republic 

of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on 

Capital, signed at Helsinki on September 21, 1989 (the ‘‘1989 Convention’’) (Treaty Doc. 101–11; Exec. Rept. 101–28). The 1989 Convention replaced an older tax treaty concluded in 1970 between the 

United States and Finland. 

III. MAJOR PROVISIONS

A detailed article-by-article analysis of the Protocol may be found 

in the Technical Explanation published by the Department of the 

Treasury on July 17, 2007, which is reprinted in the Annex. In addition, the staff of the Joint Committee on Taxation prepared an 

analysis of the Protocol, Document JCX–48–07 (July 13, 2007), 

which has been of great assistance to the committee in reviewing 

the Protocol. A summary of the key provisions of the Protocol is set 

forth below. 

1. Taxation of Cross-border Dividend Payments 

The Protocol replaces Article 10 of the 1989 Convention, which 

provides rules for the taxation of dividends paid by a company that 

is a resident of one treaty country to a beneficial owner that is a 

resident of the other treaty country. The new version of Article 10 

generally allows full residence-country taxation and limited sourcecountry taxation of dividends. 

The Protocol retains both the generally applicable maximum rate 

of withholding at source of 15 percent and the reduced five-percent 

maximum withholding rate for dividends received by a company 

owning at least 10 percent of the voting stock of the dividend-paying company. Additionally, with some restrictions intended to prevent treaty shopping, dividends paid by a subsidiary in one treaty 

country to its parent company in the other treaty country will be 

exempt from withholding tax in the subsidiary’s home country if 

the parent company owns (directly or indirectly through residents 

of the treaty countries) at least 80 percent of the voting power in 

the subsidiary for the 12-month period ending on the date entitlement to the dividend is determined. By contrast, the 1989 Convention provides for a maximum withholding tax rate of five percent 

for such dividends. 

The Protocol provides that dividends beneficially owned by a pension fund described in Article 16(7)(j) of the treaty may not be 

taxed by the country in which the company paying the dividends 

is a resident, unless such dividends are derived from the carrying 

on of a business by the pension fund or through an associated enterprise. 

As in the 1989 Convention, special rules apply to dividends received from U.S. Regulated Investment Companies (RICs) and U.S. 

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Real Estate Investment Trusts (REITs), with some new modifications applicable to dividends from REITs, which are similar to provisions included in other recently concluded tax treaties. 

2. Interest 

The Protocol amends Article 11 (Interest) of the 1989 Convention 

and adds two new exceptions to the general prohibition on sourcecountry taxation of interest income. One exception is for contingent 

interest and the second exception is for interest that is an excess 

inclusion with respect to a residual interest in a real estate mortgage investment conduit. These changes are consistent with U.S. 

tax policy and in the case of the second exception, the change is 

consistent with sections 860E(e) and 860G(b) of the Internal Revenue Code (the ‘‘Code’’). 

3. Royalties 

The Protocol amends Article 12 (Royalties) of the 1989 Convention to eliminate the source-country withholding tax on cross-border royalty payments. The 1989 Convention provided for a maximum withholding tax rate of five percent for royalty payments received as consideration for the use of patents and trademarks or 

for information concerning industrial, commercial, or scientific experience. 

4. Limitation on Benefits 

The 1989 Convention already contains a ‘‘Limitation on Benefits’’ 

provision (Article 16), which is designed to avoid treaty-shopping. 

The Protocol amends the Convention’s Limitation on Benefits provision so as to strengthen it against abuse by third-country residents and bring it into line with the 2006 U.S. Model Tax Treaty 

(the ‘‘U.S. Model’’) and other more recent U.S. tax treaties. Among 

other changes, the new provision provides that a treaty-country 

company whose shares are regularly traded on a recognized stock 

exchange may qualify for treaty benefits if the company satisfies 

one of two tests: either the company’s principal class of shares 

must be primarily traded on a recognized stock exchange in a specified region or the company’s primary place of management and 

control must be in the country of residence. This new requirement 

is intended to ensure an adequate connection to the company’s 

country of residence. 

5. Scope 

The Protocol replaces Article 1 (Personal Scope) of the 1989 Convention with a new provision that brings it into closer conformity 

with the U.S. Model and reflects subsequent changes in U.S. tax 

law. 

The 1989 Convention generally provides that, with the exception 

of certain benefits, either treaty country may continue to tax its 

own citizens and residents as if the treaty were not in force. The 

Protocol adds to this provision to make it clear that, notwithstanding any other provision in the treaty, either treaty country 

may also tax, in accordance with its law, certain former citizens 

and long-term residents for ten years following the loss of such status. This change is consistent with section 877 of the Code, which 

provides special rules for the imposition of U.S. income tax on 

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former U.S. citizens and long-term residents for a period of ten 

years following the loss of citizenship or long-term resident status. 

The Protocol also adds an additional paragraph (Paragraph 6) to 

Article 1, which addresses special issues presented by fiscally 

transparent entities such as partnerships and certain estates and 

trusts. When there is a difference of views between the United 

States and Finland on whether an entity is fiscally transparent, 

the entity in question may be subject to double taxation or double 

non-taxation. Paragraph 6 addresses this problem by providing 

that income derived through an entity that is fiscally transparent 

under the laws of either treaty country is considered to be the income of a resident of one of the treaty countries only to the extent 

that the income is subject to tax in that country as the income of 

a resident. 

6. Exchange of Information 

The Protocol replaces Article 26 (Exchange of Information) of the 

1989 Convention to bring the provision into closer conformity with 

the exchange of information provision contained in the current U.S. 

Model. Among other things, the Protocol clarifies that when information is requested by a treaty country in accordance with this Article, the other treaty country is obligated to obtain the requested 

information as if the tax in question were the tax of the requested 

country, even if that other country has no direct interest in the 

case to which the request relates. 

IV. ENTRY INTO FORCE; EFFECTIVE DATES

In accordance with Article IX, the Protocol will enter into force 

upon an exchange of instruments of ratification between the United 

States and Finland. 

The Protocol’s provisions shall have effect in Finland with respect to taxes withheld at source for income derived on or after the 

first day of the second month next following the date on which the 

Protocol enters into force. The Protocol’s provisions shall have effect in Finland with respect to other covered taxes for taxable periods beginning on or after the first day of January next following 

the date on which the Protocol enters into force. 

The Protocol’s provisions shall have effect in the United States 

with respect to taxes withheld at source for amounts paid or credited on or after the first day of the second month next following the 

date on which the Protocol enters into force. The Protocol’s provisions shall have effect in the United States with respect to other 

covered taxes for taxable years beginning on or after the first day 

of January next following the date on which the Protocol enters 

into force. 

The Protocol’s provisions shall have effect in both the United 

States and Finland with respect to taxes withheld at source covered by paragraph 3 of Article 10 (Dividends), on income derived 

on or after the first day of January 2007, provided that the Protocol 

enters into force before December 31, 2007. 

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V. IMPLEMENTING LEGISLATION

As is the case generally with income tax treaties, the Protocol is 

self-executing and thus does not require implementing legislation 

for the United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Protocol on July 17, 

2007 (a hearing print of this session will be forthcoming). Testimony was received by Mr. John Harrington, International Tax 

Counsel, Office of the International Tax Counsel at the Department 

of the Treasury; Thomas A. Barthold, Acting Chief of Staff of the 

Joint Committee on Taxation; the Honorable William A. Reinsch, 

President of the National Foreign Trade Council; and Ms. Janice 

Lucchesi, Chairwoman of the Board, Organization for International 

Development. On October 31, 2007, the committee considered the 

Protocol, and ordered it favorably reported by voice vote, with a 

quorum present and without objection. 

VII. COMMITTEE RECOMENDATION AND COMMENTS

The Committee on Foreign Relations believes that the Protocol 

will stimulate increased investment, further strengthen the provision in the 1989 Convention that prevents treaty shopping, and 

promote closer cooperation and facilitate trade and investment between the United States and Finland. The committee therefore 

urges the Senate to act promptly to give advice and consent to ratification of the Protocol, as set forth in this report and the accompanying resolution of advice and consent. The committee has taken 

note, however, of two issues and has the following comments to 

offer the Executive Branch on these matters. 

A. TECHNICAL EXPLANATIONS

The Treasury Department traditionally prepares a Technical Explanation for each bilateral tax treaty, as was done for the Protocol. 

The Technical Explanation serves as an official guide to the treaty 

from a domestic legal perspective and purportedly includes understandings reached during the negotiations with respect to the interpretation and application of the Protocol. The Treasury Department has explained in response to a question for the record that 

it does not currently have a practice of sharing the Department’s 

technical explanation with the other relevant treaty partner at the 

end of a negotiation and before its public release, although there 

have been periods in the past when the Treasury Department’s 

practice was to do so as a matter of courtesy. 

In the committee’s view, sharing the Technical Explanation developed by the Treasury Department with the relevant treaty partner would be a prudent step to again include in its regular practice, with possible exceptions made under unusual circumstances. 

It should be understood that the committee is not suggesting that 

the Executive Branch attempt to elicit agreement with the relevant 

treaty partner on the content of the Technical Explanation. The 

purpose of sharing the document would be to improve its international legal status, to confirm and cement common understandings regarding the application and implementation of the 

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treaty, and to identify, before the treaty enters into force, any misunderstandings that might otherwise arise unexpectedly after 

entry into force of the treaty between the two countries. 

B. TREATY SHOPPING

The Protocol, like a number of U.S. tax treaties, generally limits 

treaty benefits for treaty country residents so that only those residents with a sufficient nexus to a treaty country will receive benefits. Although the Protocol, and the 1989 Convention it would 

amend, is intended to benefit residents of Finland and the United 

States, residents of third countries sometimes attempt to use a 

treaty to obtain beneficial tax rates to which they would not otherwise be entitled. This is known as ‘‘treaty shopping.’’ 

The anti-treaty-shopping provision in the Protocol, otherwise 

known as the ‘‘Limitation on Benefits’’ provision, improves upon 

the Limitation on Benefits provision currently in force under the 

1989 Convention (Article 16). In general though, as in the case of 

the 1989 Convention, the new provision does not rely on a determination of purpose or intention but instead sets forth a series of 

objective tests intended to ensure that there is a sufficient nexus 

between the resident seeking benefits under the treaty and the 

treaty country in question. 

The committee views the anti-treaty-shopping provision in the 

Protocol as an improvement and continues to believe that the 

United States should maintain its policy of limiting treaty-shopping 

opportunities whenever possible. Of course, as the United States 

negotiates stronger anti-treaty-shopping provisions with additional 

countries, treaty-shopping through countries with which the United 

States has tax treaties without such provisions may become more 

of a problem. The committee therefore urges the Treasury Department to further strengthen anti-treaty-shopping provisions in tax 

treaties whenever possible, but particularly to focus on those countries with which we have treaties that do not contain anti-treatyshopping provisions and attempt to close this loophole. This could 

be achieved either through an update of the entire treaty or, if a 

full update does not appear achievable, through a Limitation on 

Benefits Protocol that addresses this issue specifically. 

VIII. RESOLUTION OF ADVICE AND CONSENT TO RATIFICATION

Resolved (two-thirds of the Senators present concurring therein),The Senate advises and consents to the ratification of the Protocol Amending the Convention between the Government of the 

United States of America and the Government of the Republic of 

Finland for the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with Respect to Taxes on Income and on Capital, 

signed at Helsinki on May 31, 2006 (Treaty Doc. 109–18). 

7 

IX. ANNEX.—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE

PROTOCOL SIGNED AT HELSINKI ON MAY 31, 2006 AMENDING THE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES

OF AMERICA AND THE GOVERNMENT OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL, SIGNED

AT HELSINKI ON SEPTEMBER 21, 1989

This is a technical explanation of the Protocol signed at Washington on May 31, 2006 (the ‘‘Protocol’’), amending the Convention 

between the United States of America and the Government of Finland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Helsinki on 

September 21, 1989 (the ‘‘Convention’’). 

Negotiations took into account the U.S. Department of the Treasury’s current tax treaty policy and Treasury’s Model Income Tax 

Convention, published on September 20, 1996 (the ‘‘U.S. Model’’). 

Negotiations also took into account the Model Tax Convention on 

Income and on Capital, published by the Organization for Economic 

Cooperation and Development (the ‘‘OECD Model’’), and recent tax 

treaties concluded by both countries. 

This Technical Explanation is an official guide to the Protocol. It 

explains policies behind particular provisions, as well as understandings reached during the negotiations with respect to the interpretation and application of the Protocol. This technical explanation is not intended to provide a complete guide to the Convention as amended by the Protocol. To the extent that the Convention 

has not been amended by the Protocol, the Technical Explanation 

of the Convention remains the official explanation. References in 

this technical explanation to ‘‘he’’ or ‘‘his’’ should be read to mean 

‘‘he or she’’ or ‘‘his or her.’’ 

ARTICLE I

Article I of the Protocol replaces Article 1 (Personal Scope) of the 

Convention. 

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies to 

residents of the United States or Finland except where the terms 

of the Convention provide otherwise. Under Article 4 (Residence) of 

the Convention a person is generally treated as a resident of a Contracting State if that person is, under the laws of that State, liable 

to tax therein by reason of his domicile, residence, or other similar 

criteria. However, if a person is considered a resident of both Contracting States, Article 4 provides rules for determining a State of 

residence (or no State of residence). This determination governs for 

all purposes of the Convention. 

Certain provisions are applicable to persons who may not be residents of either Contracting State. For example, paragraph 1 of Article 24 (Non-Discrimination) applies to nationals of the Contracting States. Under Article 26 (Exchange of Information), information may be exchanged with respect to residents of third states. 

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Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the Convention and domestic law and between the Convention and other agreements between the Contracting States. That is, 

no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of 

the Contracting States, or by any other agreement between the 

Contracting States. The relationship between the non-discrimination provisions of the Convention and other agreements is addressed not in paragraph 2 but in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed 

under the U.S. Internal Revenue Code (the ‘‘Code’’) in computing 

the U.S. taxable income of a resident of Finland, the deduction also 

is allowed to that person in computing taxable income under the 

Convention. Paragraph 2 also means that the Convention may not 

increase the tax burden on a resident of a Contracting States beyond the burden determined under domestic law. Thus, a right to 

tax given by the Convention cannot be exercised unless that right 

also exists under internal law. 

It follows that under the principle of paragraph 2 a taxpayer’s 

U.S. tax liability need not be determined under the Convention if 

the Code would produce a more favorable result. A taxpayer may 

not, however, choose among the provisions of the Code and the 

Convention in an inconsistent manner in order to minimize tax. 

For example, assume that a resident of Finland has three separate 

businesses in the United States. One is a profitable permanent establishment and the other two are trades or businesses that would 

earn taxable income under the Code but that do not meet the permanent establishment threshold tests of the Convention. One is 

profitable and the other incurs a loss. Under the Convention, the 

income of the permanent establishment is taxable in the United 

States, and both the profit and loss of the other two businesses are 

ignored. Under the Code, all three would be subject to tax, but the 

loss would offset the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the 

profitable trade or business and invoke the Code to claim the loss 

of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84–17, 1984–1 C.B. 308.) If, however, 

the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention 

with respect, for example, to any dividend income he may receive 

from the United States that is not effectively connected with any 

of his business activities in the United States. 

Similarly, nothing in the Convention can be used to deny any 

benefit granted by any other agreement between the United States 

and Finland. 

Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations 

of the Contracting States under the General Agreement on Trade 

in Services (the ‘‘GATS’’). The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of this Article under 

which the Convention shall not restrict in any manner any benefit 

now or hereafter accorded by any other agreement between the 

Contracting States. 

9 

Subparagraph (a) of paragraph 3 provides that, unless the competent authorities determine that a taxation measure is not within 

the scope of the Convention, the national treatment obligations of 

the GATS shall not apply with respect to that measure. Further, 

any question arising as to the interpretation of the Convention, including in particular whether a measure is within the scope of the 

Convention shall be considered only by the competent authorities 

of the Contracting States, and the procedures under the Convention exclusively shall apply to the dispute. Thus, paragraph 3 of Article XXII (Consultation) of the GATS may not be used to bring a 

dispute before the World Trade Organization unless the competent 

authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 24 

(Non-Discrimination) of the Convention. 

The term ‘‘measure’’ for these purposes is defined broadly in subparagraph (b) of paragraph 3. It would include, for example, a law, 

regulation, rule, procedure, decision, administrative action or guidance, or any other form of measure. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in U.S. 

tax treaties. The Contracting States reserve their rights, except as 

provided in paragraph 5, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the 

Convention to the contrary. For example, if a resident of Finland 

performs professional services in the United States and the income 

from the services is not attributable to a permanent establishment 

in the United States, Article 7 (Business Profits) would by its terms 

prevent the United States from taxing the income. If, however, the 

resident of Finland is also a citizen of the United States, the saving 

clause permits the United States to include the remuneration in 

the worldwide income of the citizen and subject it to tax under the 

normal Code rules (i.e., without regard to Code section 894(a)). 

However, subparagraph 5(a) of Article 1 preserves the benefits of 

special foreign tax credit rules applicable to the U.S. taxation of 

certain U.S. income of its citizens resident in Finland. 

For purposes of the saving clause, ‘‘residence’’ is determined 

under Article 4 (Residence). Thus, an individual who is a resident 

of the United States under the Code (but not a U.S. citizen) but 

who is determined to be a resident of Finland under the tie-breaker 

rules of Article 4 would be subject to U.S. tax only to the extent 

permitted by the Convention. The United States would not be permitted to apply its statutory rules to that person to the extent the 

rules are inconsistent with the treaty. 

However, the person would be treated as a U.S. resident for U.S. 

tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares 

in that corporation held by the individual would be considered to 

be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart 

F income recognized by the corporation. See, Treas. Reg. section 

301.7701(b)–7(a)(3). 

10 

Under paragraph 4, each Contracting State also reserves its 

right to tax former citizens and former long-term residents for a period of ten years following the loss of such status. Thus, paragraph 

4 allows the United States to tax former U.S. citizens and former 

U.S. long-term residents in accordance with Section 877 of the 

Code. Section 877 generally applies to a former citizen or long-term 

resident of the United States who relinquishes citizenship or terminates long-term residency if either of the following criteria exceed 

established thresholds: (a) the average annual net income tax of 

such individual for the period of 5 taxable years ending before the 

date of the loss of status, or (b) the net worth of such individual 

as of the date of the loss of status. The average annual net income 

tax threshold is adjusted annually for inflation. The United States 

defines ‘‘long-term resident’’ as an individual (other than a U.S. citizen) who is a lawful permanent resident of the United States in 

at least 8 of the prior 15 taxable years. An individual is not treated 

as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign 

country and the individual does not waive the benefits of such treaty applicable to residents of the foreign country. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the application of 

the saving clause. The referenced provisions are intended to provide benefits to citizens and residents even if such benefits do not 

exist under internal law. Paragraph 5 thus preserves these benefits 

for citizens and residents of the Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that 

are applicable to all citizens and residents of a Contracting State, 

despite the general saving clause rule of paragraph 4: 

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants 

the right to a correlative adjustment with respect to income tax 

due on profits reallocated under Article 9. 

(2) Paragraphs 1(b) and 4 of Article 18 (Pensions, Annuities, 

Alimony, and Child Support) provide exemptions from source 

or residence State taxation for certain pension distributions, 

social security payments and child support. 

(3) Article 23 (Elimination of Double Taxation) confirms to 

citizens and residents of one Contracting State the benefit of 

a credit for income taxes paid to the other or an exemption for 

income earned in the other State. 

(4) Article 24 (Non-Discrimination) protects residents and 

nationals of one Contracting State against the adoption of certain discriminatory practices in the other Contracting State. 

(5) Article 25 (Mutual Agreement Procedure) confers certain 

benefits on citizens and residents of the Contracting States in 

order to reach and implement solutions to disputes between 

the two Contracting States. For example, the competent authorities are permitted to use a definition of a term that differs 

from an internal law definition. The statute of limitations may 

be waived for refunds, so that the benefits of an agreement 

may be implemented. 

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving clause. The benefits referred to are all inVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
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tended to be granted to temporary residents of a Contracting State 

(for example, in the case of the United States, holders of non-immigrant visas), but not to citizens or to persons who have acquired 

permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and 

remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in 

the U.S. context, they do not become ‘‘green card’’ holders) and are 

not citizens of that State, the host State will continue to grant 

these benefits even if they conflict with the statutory rules. The 

benefits preserved by this paragraph are the host country exemptions for government service salaries and pensions under Article 19 

(Government Service), certain income of visiting students and 

trainees under Article 20 (Students and Trainees), and the income 

of diplomatic agents and consular officers under Article 27 (Members of Diplomatic Missions and Consular Posts). 

Paragraph 6 

Paragraph 6 addresses special issues presented by fiscally transparent entities such as partnerships and certain estates and trusts. 

Because different countries frequently take different views as to 

when an entity is fiscally transparent, the risk of both double taxation and double non-taxation are relatively high. The intention of 

paragraph 6 is to eliminate a number of technical problems that arguably would have prevented investors using such entities from 

claiming treaty benefits, even though such investors would be subject to tax on the income derived through such entities. The provision also prevents the use of such entities to claim treaty benefits 

in circumstances where the person investing through such an entity is not subject to tax on the income in its State of residence. The 

provision, and the corresponding requirements of the substantive 

rules of Articles 6 through 21, should be read with those two goals 

in mind. 

In general, paragraph 6 relates to entities that are not subject 

to tax at the entity level, as distinct from entities that are subject 

to tax, but with respect to which tax may be relieved under an integrated system. This paragraph applies to any resident of a Contracting State who is entitled to income derived through an entity 

that is treated as fiscally transparent under the laws of either Contracting State. Entities falling under this description in the United 

States include partnerships, common investment trusts under section 584 and grantor trusts. This paragraph also applies to U.S. 

limited liability companies (‘‘LLCs’’) that are treated as partnerships or as disregarded entities for U.S. tax purposes. 

Under paragraph 6, an item of income derived by such a fiscally 

transparent entity will be considered to be derived by a resident of 

a Contracting State if a resident is treated under the taxation laws 

of that State as deriving the item of income. For example, if a 

Finnish company pays interest to an entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be considered derived by a resident of the U.S. only to the extent that the 

taxation laws of the United States treat one or more U.S. residents 

(whose status as U.S. residents is determined, for this purpose, 

under U.S. tax law) as deriving the interest for U.S. tax purposes. 

In the case of a partnership, the persons who are, under U.S. tax 

12 

laws, treated as partners of the entity would normally be the persons whom the U.S. tax laws would treat as deriving the interest 

income through the partnership. Also, it follows that persons whom 

the United States treats as partners but who are not U.S. residents 

for U.S. tax purposes may not claim a benefit for the interest paid 

to the entity under the Convention, because they are not residents 

of the United States for purposes of claiming this treaty benefit. (If, 

however, the country in which they are treated as resident for tax 

purposes, as determined under the laws of that country, has an income tax convention with Finland, they may be entitled to claim 

a benefit under that convention.) In contrast, if, for example, an entity is organized under U.S. laws and is classified as a corporation 

for U.S. tax purposes, interest paid by a Finnish company to the 

U.S. entity will be considered derived by a resident of the United 

States since the U.S. corporation is treated under U.S. taxation 

laws as a resident of the United States and as deriving the income. 

The same result obtains even if the entity were viewed differently under the tax laws of the other Contracting State (e.g., as 

not fiscally transparent in Finland in the first example above 

where the entity is treated as a partnership for U.S. tax purposes). 

Similarly, the characterization of the entity in a third country is 

also irrelevant, even if the entity is organized in that third country. 

The results follow regardless of whether the entity is disregarded 

as a separate entity under the laws of one jurisdiction but not the 

other, such as a single owner entity that is viewed as a branch for 

U.S. tax purposes and as a corporation for Finnish tax purposes. 

These results also obtain regardless of where the entity is organized (i.e., in the United States, in Finland, or, as noted above, in 

a third country). 

For example, income from U.S. sources received by an entity organized under the laws of the United States, which is treated for 

Finnish tax purposes as a corporation and is owned by a shareholder who is a resident of Finland for Finnish tax purposes, is not 

considered derived by the shareholder of that corporation even if, 

under the tax laws of the United States, the entity is treated as 

fiscally transparent. Rather, for purposes of the treaty, the income 

is treated as derived by the U.S. entity. 

These principles also apply to trusts to the extent that they are 

fiscally transparent in either Contracting State. For example, if X, 

a resident of Finland, creates a revocable trust in the United States 

and names persons resident in a third country as the beneficiaries 

of the trust, the trust’s income would be regarded as being derived 

by a resident of Finland only to the extent that the laws of Finland 

treat X as deriving the income for tax purposes, perhaps through 

application of rules similar to the U.S. ‘‘grantor trust’’ rules. 

Paragraph 6 is not an exception to the saving clause of paragraph 4. Accordingly, paragraph 6 does not prevent a Contracting 

State from taxing an entity that is treated as a resident of that 

State under its tax law. For example, if a U.S. LLC with members 

who are residents of Finland elects to be taxed as a corporation for 

U.S. tax purposes, the United States will tax that LLC on its 

worldwide income on a net basis, without regard to whether Finland views the LLC as fiscally transparent. 

13 

ARTICLE II

Paragraph (a) of Article II of the Protocol replaces paragraph 1 

of Article 4 (Residence) of the Convention. The term ‘‘resident of a 

Contracting State’’ is defined in subparagraph (a) of paragraph 1. 

In general, this definition incorporates the definitions of residence 

in U.S. and Finnish law by referring to a resident as a person who, 

under the laws of a Contracting State, is subject to tax therein by 

reason of his domicile, residence, place of management, place of incorporation or any other similar criterion. Thus, residents of the 

United States include aliens who are considered U.S. residents 

under Code section 7701(b). Subparagraph (a) of paragraph 1 also 

specifically includes the two Contracting States, and political subdivisions, statutory bodies and local authorities of the two States, 

as residents for purposes of the Convention. 

Certain entities that are nominally subject to tax but that in 

practice are rarely required to pay tax also would generally be 

treated as residents and therefore accorded treaty benefits. For example, a U.S. Regulated Investment Company (RIC) and a U.S. 

Real Estate Investment Trust (REIT) are residents of the United 

States for purposes of the treaty. Although the income earned by 

these entities normally is not subject to U.S. tax in the hands of 

the entity, they are taxable to the extent that they do not currently 

distribute their profits, and therefore may be regarded as ‘‘liable to 

tax.’’ They also must satisfy a number of requirements under the 

Code in order to be entitled to special tax treatment. 

A person who is liable to tax in a Contracting State only in respect of income from sources within that State or capital situated 

therein or of profits attributable to a permanent establishment in 

that State will not be treated as a resident of that Contracting 

State for purposes of the Convention. Thus, a consular official of 

Finland who is posted in the United States, who may be subject to 

U.S. tax on U.S. source investment income, but is not taxable in 

the United States on non-U.S. source income (see Code section 

7701(b)(5)(B)), would not be considered a resident of the United 

States for purposes of the Convention. Similarly, an enterprise of 

Finland with a permanent establishment in the United States is 

not, by virtue of that permanent establishment, a resident of the 

United States. The enterprise generally is subject to U.S. tax only 

with respect to its income that is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as it 

would be if it were a U.S. resident. 

Subparagraph (b) of paragraph 1 contains an exception to the 

general rule of paragraph 1(a) that residence under internal law 

also determines residence under the Convention. The exception applies with respect to a U.S. citizen or alien lawfully admitted for 

permanent residence (i.e., a ‘‘green card’’ holder). Under paragraph 

1(a), a person is considered a resident of the United States for purposes of the Convention if he is liable to tax in the United States 

by reason of citizenship. In addition, aliens admitted to the United 

States for permanent residence (‘‘green card’’ holders) qualify as 

U.S. residents under the first sentence of paragraph 1 because they 

are taxed by the United States as residents, regardless of where 

they physically reside. 

14 

Paragraph 1(b) provides that a U.S. citizen or green card holder 

will be treated as a resident of the United States for purposes of 

the Convention, and, thereby entitled to treaty benefits, only if he 

has a substantial presence (see section 770 1(b)(3)), permanent 

home or habitual abode in the United States. This rule requires 

that the U.S. citizen or green card holder have a reasonably strong 

nexus with the United States. 

Thus, for example, an individual resident of Mexico who is a U.S. 

citizen by birth, or who is a Mexican citizen and holds a U.S. green 

card, but who, in either case, has never lived in the United States, 

would not be entitled to benefits under the Convention. However, 

a U.S. citizen who is transferred to Mexico for two years would be 

entitled to benefits under the Convention if he maintains a permanent home or habitual abode in the United States. 

The fact that a U.S. citizen who does not have close ties to the 

United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (Personal Scope) to that citizen. For example, 

a U.S. citizen who pursuant to the ‘‘citizen/green card holder’’ rule 

is not considered to be a resident of the United States still is taxable on his worldwide income under the generally applicable rules 

of the Code. 

Subparagraph (c) of paragraph 1 of Article 4 of the Convention 

provides that certain tax-exempt entities such as pension funds 

and charitable organizations will be regarded as residents of a Contracting State regardless of whether they are generally liable to income tax in the State where they are established. Subparagraph (c) 

applies to legal persons organized under the laws of a Contracting 

State and established and maintained in that State to provide pensions or other similar benefits pursuant to a plan, or exclusively for 

religious, charitable, scientific, artistic, cultural, or educational purposes. Thus, a section 501(c) organization (such as a U.S. charity) 

that is generally exempt from tax under U.S. law is a resident of 

the United States for all purposes of the Convention. 

Paragraph (b) of Article II of the Protocol, which replaces paragraph 3 of Article 4 (Residence) of the Convention, addresses dualresidence issues for persons other than individuals. This provision 

applies to persons such as trusts, estates, and corporations. If such 

a person is, under paragraph 1 of Article 4 of the Convention, resident in both Contracting States, the competent authorities shall 

seek to determine a single State of residence for such person for 

purposes of the Convention. 

If the competent authorities do not reach an agreement on a single State of residence, that person may not claim any benefit accorded to residents of a Contracting State by the Convention. The 

person may, however, claim any benefits that are not limited to 

residents, such as those provided by paragraph 1 of Article 24 

(Non-Discrimination). Thus, for example, a State cannot discriminate against a dual-resident company. 

Dual resident persons also may be treated as a resident of a Contracting State for purposes other than that of obtaining benefits 

under the Convention. For example, if a dual resident company 

pays a dividend to a resident of the other Contracting State, the 

U.S. paying agent would withhold on that dividend at the appropriate treaty rate because reduced withholding is a benefit enjoyed 

15 

by the resident of the other Contracting State, not by the dual resident company. The dual resident company that paid the dividend 

would, for this purpose, be treated as a resident of the United 

States under the Convention. In addition, information relating to 

dual resident companies can be exchanged under the Convention 

because, by its terms, Article 26 (Exchange of Information) is not 

limited to residents of the Contracting States. 

ARTICLE III

Article III of the Protocol replaces Article 10 (Dividends) of the 

Convention. Article 10 provides rules for the taxation of dividends 

paid by a company that is a resident of one Contracting State to 

a beneficial owner that is a resident of the other Contracting State. 

The Article provides for full residence country taxation of such dividends and a limited source-State right to tax. Article 10 also provides rules for the imposition of a tax on branch profits by the 

State of source. 

Paragraph 1 

The right of a shareholder’s country of residence to tax dividends 

arising in the source country is preserved by paragraph 1, which 

permits a Contracting State to tax its residents on dividends paid 

to them by a company that is a resident of the other Contracting 

State. For dividends from any other source paid to a resident, Article 21 (Other Income) grants the residence country exclusive taxing 

jurisdiction (other than for dividends attributable to a permanent 

establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by 

a resident of the other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits the rate of withholding tax in the State of source on dividends paid by a company 

resident in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial owner of the dividend is a company resident in the other State and owns directly shares representing at least 10 percent of the voting power of the company 

paying the dividend, then the rate of withholding tax in the State 

of source is limited to 5 percent of the gross amount of the dividend. Shares are considered voting shares if they provide the 

power to elect, appoint or replace any person vested with the powers ordinarily exercised by the board of directors of a U.S. corporation. 

The benefits of paragraph 2 may be granted at the time of payment by means of a reduced rate of withholding tax at source. It 

also is consistent with the paragraph for tax to be withheld at the 

time of payment at full statutory rates, and the treaty benefit to 

be granted by means of a subsequent refund so long as such procedures are applied in a reasonable manner. 

The determination of whether the ownership threshold for subparagraph (a) of paragraph 2 is met for purposes of the 5 percent 

maximum rate of withholding tax is made on the date on which entitlement to the dividend is determined. Thus, in the case of a dividend from a U.S. company, the determination of whether the ownVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00015 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
16 

ership threshold is met generally would be made on the dividend 

record date. 

Paragraph 2 does not affect the taxation of the profits out of 

which the dividends are paid. The taxation by a Contracting State 

of the income of its resident companies is governed by the internal 

law of the Contracting State, subject to the provisions of paragraph 

4 of Article 24 (Non-Discrimination). 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined as under the internal law of the country 

imposing tax (i.e., the source country). The beneficial owner of the 

dividend for purposes of Article 10 is the person to which the dividend income is attributable for tax purposes under the laws of the 

source State. Thus, if a dividend paid by a corporation that is a 

resident of one of the States (as determined under Article 4 (Residence)) is received by a nominee or agent that is a resident of the 

other State on behalf of a person that is not a resident of that other 

State, the dividend is not entitled to the benefits of this Article. 

However, a dividend received by a nominee on behalf of a resident 

of that other State would be entitled to benefits. These interpretations are confirmed by paragraph 12 of the Commentary to Article 

10 of the OECD Model. 

Companies holding shares through fiscally transparent entities 

such as partnerships are considered for purposes of this paragraph 

to hold their proportionate interest in the shares held by the intermediate entity. As a result, companies holding shares through such 

entities may be able to claim the benefits of subparagraph (a) 

under certain circumstances. The lower rate applies when the company’s proportionate share of the shares held by the intermediate 

entity meets the 10 percent threshold, and the company meets the 

requirements of Article 1(6) (i.e., the company’s country of residence treats the intermediate entity as fiscally transparent) with 

respect to the dividend. Whether this ownership threshold is satisfied may be difficult to determine and often will require an analysis 

of the partnership or trust agreement. 

Paragraph 3 

Paragraph 3 provides exclusive residence-country taxation (i.e., 

an elimination of withholding tax) with respect to certain dividends 

distributed by a company that is a resident of one Contracting 

State to a resident of the other Contracting State. As described further below, this elimination of withholding tax is available with respect to certain inter-company dividends and with respect to pension funds. 

Subparagraph (a) of paragraph 3 provides for the elimination of 

withholding tax on dividends beneficially owned by a company that 

has owned 80 percent or more of the voting power of the company 

paying the dividend for the 12-month period ending on the date entitlement to the dividend is determined. The determination of 

whether the beneficial owner of the dividends owns at least 80 percent of the voting power of the paying company is made by taking 

into account both stock owned directly and stock owned indirectly 

through one or more residents of either Contracting State. 

Eligibility for the elimination of withholding tax provided by subparagraph (a) is subject to additional restrictions based on, but 

supplementing, the rules of Article 16 (Limitation on Benefits). AcVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
17 

cordingly, a company that meets the holding requirements described above will qualify for the benefits of paragraph 3 only if it 

also: (1) meets the ‘‘publicly traded’’ test of subparagraph 2(c) of Article 16 (Limitation on Benefits), (2) meets the ‘‘ownership-base erosion’’ and ‘‘active trade or business’’ tests described in subparagraph 2(f) and paragraph 4 of Article 16 (Limitation on Benefits), 

(3) meets the ‘‘derivative benefits’’ test of paragraph 3 of Article 16 

(Limitation on Benefits), or (4) is granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of the source 

State pursuant to paragraph 6 of Article 16 (Limitation on Benefits). 

These restrictions are necessary because of the increased pressure on the Limitation on Benefits tests resulting from the fact 

that the United States has relatively few treaties that provide for 

such elimination of withholding tax on inter-company dividends. 

The additional restrictions are intended to prevent companies from 

re-organizing in order to become eligible for the elimination of 

withholding tax in circumstances where the Limitation on Benefits 

provision does not provide sufficient protection against treaty-shopping. 

For example, assume that ThirdCo is a company resident in a 

third country that does not have a tax treaty with the United 

States providing for the elimination of withholding tax on intercompany dividends. ThirdCo owns directly 100 percent of the 

issued and outstanding voting stock of USCo, a U.S. company, and 

of FCo, a Finnish company. FCo is a substantial company that 

manufactures widgets; USCo distributes those widgets in the 

United States. If ThirdCo contributes to FCo all the stock of USCo, 

dividends paid by USCo to FCo would qualify for treaty benefits 

under the active trade or business test of paragraph 4 of Article 16. 

However, allowing ThirdCo to qualify for the elimination of withholding tax, which is not available to it under the third state’s treaty with the United States (if any), would encourage treaty-shopping. 

In order to prevent this type of treaty-shopping, paragraph 3 requires FCo to meet the ownership-base erosion requirements of 

subparagraph 2(f) of Article 16 in addition to the active trade or 

business test of paragraph 4 of Article 16. Thus, FCo would not 

qualify for the exemption from withholding tax unless (i) on at 

least half the days of the taxable year, at least 50 percent of each 

class of its shares was owned by persons that are residents of Finland and eligible for treaty benefits under certain specified tests 

and (ii) less than 50 percent of FCo’s gross income is paid in deductible payments to persons that are not residents of either Contracting State eligible for benefits under those specified tests. Because FCo is wholly owned by a third country resident, FCo could 

not qualify for the elimination of withholding tax on dividends from 

USCo under the ownership-base erosion test and the active trade 

or business test. Consequently, FCo would need to qualify under 

another test or obtain discretionary relief from the competent authority under Article 16(6). For purposes of Article 10(3)(a)(ii), it is 

not sufficient for a company to qualify for treaty benefits generally 

under the active trade or business test or the ownership-base erosion test unless it qualifies for treaty benefits under both. 

18 

Alternatively, companies that are publicly traded or subsidiaries 

of publicly-traded companies will generally qualify for the elimination of withholding tax. Thus, a company that is a resident of 

Finland and that meets the requirements of Article 16(2)(c) (i) or 

(ii) will be entitled to the elimination of withholding tax, subject to 

the 12-month holding period requirement of Article 10(3)(a). 

In addition, under Article 10(3)(a)(iii), a company that is a resident of a Contracting State may also qualify for the elimination of 

withholding tax on dividends if it satisfies the derivative benefits 

test of paragraph 3 of Article 16. Thus, a Finnish company that 

owns all of the stock of a U.S. corporation may qualify for the 

elimination of withholding tax if it is wholly-owned, for example, 

by a U.K., Dutch, Swedish, or Mexican publicly-traded company 

and the other requirements of the derivative benefits test are met. 

At this time, ownership by companies that are residents of other 

European Union, European Economic Area or North American Free 

Trade Agreement countries would not qualify the Finnish company 

for benefits under this provision, as the United States does not 

have treaties that eliminate the withholding tax on inter-company 

dividends with any other of those countries. If the United States 

were to enter into such treaties with more of those countries, residents of those countries could then qualify as equivalent beneficiaries for purposes of this provision. 

The derivative benefits test may also provide benefits to U.S. 

companies receiving dividends from Finnish subsidiaries, because 

of the effect of the Parent-Subsidiary Directive in the European 

Union. Under that directive, inter-company dividends paid within 

the European Union are free of withholding tax. Under subparagraph (h) of paragraph 7 of Article 16, that directive will also be 

taken into account in determining whether the owner of a U.S. 

company receiving dividends from a Finnish company is an ‘‘equivalent beneficiary.’’ Thus, a company that is a resident of a member 

state of the European Union will, by definition, meet the requirements regarding equivalent benefits with respect to any dividends 

received by its U.S. subsidiary from a Finnish company. For example, assume USCo is a wholly-owned subsidiary of ICo, an Italian 

publicly-traded company. USCo owns all of the shares of FCo, a 

Finnish company. If FCo were to pay dividends directly to ICo, 

those dividends would be exempt from withholding tax in Finland 

by reason of the Parent-Subsidiary Directive. If ICo meets the 

other conditions of subparagraph 7(g) of Article 16, it will be treated as an equivalent beneficiary by reason of subparagraph 7(h) of 

that article. 

A company also may qualify for the elimination of withholding 

tax pursuant to Article 10(3)(a)(iii) if it is owned by seven or fewer 

U.S. or Finnish residents who qualify as an ‘‘equivalent beneficiary’’ and meet the other requirements of the derivative benefits 

provision. This rule may apply, for example, to certain Finnish corporate joint venture vehicles that are closely-held by a few Finnish 

resident individuals. 

Subparagraph (g) of paragraph 7 of Article 16 contains a specific 

rule of application intended to ensure that for purposes of applying 

Article 10(3) certain joint ventures, not just wholly-owned subsidiaries, can qualify for benefits. For example, assume that the United 

States were to enter into a treaty with Country X, a member of the 

19 

European Union, that includes a provision identical to Article 

10(3). USCo is 100 percent owned by FCo, a Finnish company, 

which in turn is owned 49 percent by PCo, a Finnish publicly-traded company, and 51 percent by XCo, a publicly-traded company 

that is resident in Country X. In the absence of a special rule for 

interpreting the derivative benefits provision, each of the shareholders would be treated as owning only its proportionate share of 

the shares held by FCo. If that rule were applied in this situation, 

neither shareholder would be an equivalent beneficiary, because 

neither would meet the 80 percent ownership test with respect to 

USCo. However, since both PCo and XCo are residents of countries 

that have treaties with the United States that provide for elimination of withholding tax on inter-company dividends, it is appropriate to provide benefits to FCo in this case. 

Consequently, when determining whether a person is an equivalent beneficiary under paragraph 7 of Article 16, each of the shareholders is treated as owning shares with the same percentage of 

voting power as the shares held by FCo for purposes of determining 

whether it would be entitled to an equivalent rate of withholding 

tax. This rule is necessary because of the high ownership threshold 

for qualification for the elimination of withholding tax on intercompany dividends. 

If a company does not qualify for the elimination of withholding 

tax under any of the foregoing objective tests, it may request a determination from the relevant competent authority pursuant to 

paragraph 6 of Article 16. Benefits will be granted with respect to 

an item of income if the competent authority of the Contracting 

State in which the income arises determines that the establishment, acquisition or maintenance of such resident and the conduct 

of its operations did not have as one of its principal purposes the 

obtaining of benefits under the Convention. 

Subparagraph (b) of paragraph 3 of Article 10 of the Convention 

provides that dividends beneficially owned by a pension fund (as 

defined in subparagraph (j) of paragraph 7 of Article 16) may not 

be taxed in the Contracting State of which the company paying the 

dividends is a resident, unless such dividends are derived from the 

carrying on of a business, directly by the pension fund or indirectly 

through an associated enterprise. 

This rule is necessary because pension funds normally do not pay 

tax (either through a general exemption or because reserves for future pension liabilities effectively offset all of the fund’s income), 

and therefore cannot benefit from a foreign tax credit. Moreover, 

distributions from a pension fund generally do not maintain the 

character of the underlying income, so the beneficiaries of the pension are not in a position to claim a foreign tax credit when they 

finally receive the pension, in many cases years after the withholding tax has been paid. Accordingly, in the absence of this rule, 

the dividends would almost certainly be subject to unrelieved double taxation. 

Paragraph 4 

Article 10 generally applies to distributions made by a RIC or a 

REIT. However, distributions made by a REIT or certain RICs that 

are attributable to gains derived from the alienation of U.S. real 

property interests and treated as gain recognized under section 

20 

897(h)(1) are taxable under paragraph 1 of Article 13 instead of Article 10. In the case of RIC or REIT distributions to which Article 

10 applies, paragraph 4 imposes limitations on the rate reductions 

provided by paragraphs 2 and 3 in the case of dividends paid by 

a RIC or a REIT. 

The first sentence of subparagraph 4(a) provides that dividends 

paid by a RIC or REIT are not eligible for the 5 percent rate of 

withholding tax of subparagraph 2(a) or the elimination of sourcecountry withholding tax of subparagraph 3(a). 

The second sentence of subparagraph 4(a) provides that the 15 

percent maximum rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that the elimination of sourcecountry withholding tax of subparagraph 3(b) applies to dividends 

paid by RICs and beneficially owned by a pension fund. 

The third sentence of subparagraph 4(a) provides that the 15 

percent rate of withholding tax also applies to dividends paid by a 

REIT and that the elimination of source-country withholding tax of 

subparagraph 3(b) applies to dividends paid by REITs and beneficially owned by a pension fund, provided that one of the three following conditions is met. First, the beneficial owner of the dividend 

is an individual or a pension fund, in either case holding an interest of not more than 10 percent in the REIT. Second, the dividend 

is paid with respect to a class of stock that is publicly traded and 

the beneficial owner of the dividend is a person holding an interest 

of not more than 5 percent of any class of the REIT’s shares. Third, 

the beneficial owner of the dividend holds an interest in the REIT 

of not more than 10 percent and the REIT is ‘‘diversified.’’ 

Subparagraph (b) provides a definition of the term ‘‘diversified,’’ 

which is necessary because the term is not defined in the Code. A 

REIT is diversified if the gross value of no single interest in real 

property held by the REIT exceeds 10 percent of the gross value 

of the REIT’s total interest in real property. Foreclosure property 

is not considered an interest in real property, and a REIT holding 

a partnership interest is treated as owning its proportionate share 

of any interest in real property held by the partnership. 

The restrictions set out above are intended to prevent the use of 

these entities to gain inappropriate U.S. tax benefits. For example, 

a company resident in Finland that wishes to hold a diversified 

portfolio of U.S. corporate shares could hold the portfolio directly 

and would bear a U.S. withholding tax of 15 percent on all of the 

dividends that it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10 percent or more of the interests 

in a RIC. If the RIC is a pure conduit, there may be no U.S. tax 

cost to interposing the RIC in the chain of ownership. Absent the 

special rule in paragraph 4, such use of the RIC could transform 

portfolio dividends, taxable in the United States under the Convention at a 15 percent maximum rate of withholding tax, into direct 

investment dividends taxable at a 5 percent maximum rate of withholding tax or eligible for the elimination of source-country withholding tax. 

Similarly, a resident of Finland directly holding U.S. real property would pay U.S. tax on rental income either at a 30 percent 

rate of withholding tax on the gross income or at graduated rates 

on the net income. As in the preceding example, by placing the real 

property in a REIT, the investor could, absent a special rule, transVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
21 

form rental income into dividend income from the REIT, taxable at 

the rates provided in Article 10, significantly reducing the U.S. tax 

that otherwise would be imposed. Paragraph 4 prevents this result 

and thereby avoids a disparity between the taxation of direct real 

estate investments and real estate investments made through 

REIT conduits. In the cases in which paragraph 4 allows a dividend from a REIT to be eligible for the 15 percent rate of withholding tax, the holding in the REIT is not considered the equivalent of a direct holding in the underlying real property. 

Paragraph 5 

Paragraph 5 defines the term ‘‘dividends’’ broadly and flexibly. 

The definition is intended to cover all arrangements that yield a return on an equity investment in a corporation as determined under 

the tax law of the state of source, including types of arrangements 

that might be developed in the future. 

The term includes income from shares, or other corporate rights 

that are not treated as debt under the law of the source State, that 

participate in the profits of the company. The term also includes 

income that is subjected to the same tax treatment as income from 

shares by the law of the State of source. Thus, a constructive dividend that results from a non-arm’s length transaction between a 

corporation and a related party is a dividend. In the case of the 

United States, the term dividends includes amounts treated as a 

dividend under U.S. law upon the sale or redemption of shares or 

upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 

92–85, 1992–2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend to extent of subsidiary’s and sister’s earnings and profits). Further, a distribution from a U.S. publicly traded limited partnership, which is taxed as a corporation 

under U.S. law, is a dividend for purposes of Article 10. However, 

a distribution by a limited liability company is not taxable by the 

United States under Article 10, provided the limited liability company is not characterized as an association taxable as a corporation 

under U.S. law. 

Finally, a payment denominated as interest that is made by a 

thinly capitalized corporation may be treated as a dividend to the 

extent that the debt is recharacterized as equity under the laws of 

the source State. 

Paragraph 6 

Paragraph 6 provides that the general source country limitations 

under paragraph 2 and 3 on dividends do not apply if the beneficial 

owner of the dividends carries on business through a permanent 

establishment situated in the source country, or performs in the 

source country independent personal services from a fixed base situated therein, and the dividends are attributable to such permanent establishment or fixed base. In such case, the rules of Article 

7 (Business Profits) or Article 14 (Independent Personal Services) 

shall apply, as the case may be. Accordingly, such dividends will 

be taxed on a net basis using the rates and rules of taxation generally applicable to residents of the Contracting State in which the 

permanent establishment or fixed base is located, as such rules 

may be modified by the Convention. An example of dividends attributable to a permanent establishment would be dividends deVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
22 

rived by a dealer in stock or securities from stock or securities that 

the dealer held for sale to customers. 

Paragraph 7 

The right of a Contracting State to tax dividends paid by a company that is a resident of the other Contracting State is restricted 

by paragraph 7 to cases in which the dividends are paid to a resident of that Contracting State or are attributable to a permanent 

establishment or fixed base in that Contracting State. Thus, a Contracting State may not impose a ‘‘secondary’’ withholding tax on 

dividends paid by a nonresident company out of earnings and profits from that Contracting State. In the case of the United States, 

the secondary withholding tax was eliminated for payments made 

after December 31, 2004 in the American Jobs Creation Act of 

2004. 

Paragraphs 8 and 9 

Paragraph 8 permits a Contracting State to impose a branch 

profits tax on a company resident in the other Contracting State. 

The tax is in addition to other taxes permitted by the Convention. 

The term ‘‘company’’ is defined in subparagraph 1(d) of Article 3 

(General Definitions). 

A Contracting State may impose a branch profits tax on a company if the company has income attributable to a permanent establishment in that Contracting State, derives income from real property in that Contracting State that is taxed on a net basis under 

Article 6 (Income from Immovable (Real) Property), or realizes 

gains taxable in that State under paragraph 1 of Article 13 (Gains). 

In the case of the United States, the imposition of such tax is limited, however, to the portion of the aforementioned items of income 

that represents the amount of such income that is the ‘‘dividend 

equivalent amount.’’ This is consistent with the relevant rules 

under the U.S. branch profits tax, and the term dividend equivalent amount is defined under U.S. law. Section 884 defines the dividend equivalent amount as an amount for a particular year that 

is equivalent to the income described above that is included in the 

corporation’s effectively connected earnings and profits for that 

year, after payment of the corporate tax under Articles 6 (Income 

from Immovable (Real) Property), 7 (Business Profits) or 13 

(Gains), reduced for any increase in the branch’s U.S. net equity 

during the year or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884–1. The dividend equivalent 

amount for any year approximates the dividend that a U.S. branch 

office would have paid during the year if the branch had been operated as a separate U.S. subsidiary company. 

In Finland, similarly, the imposition of a branch profits tax on 

business profits attributable to a permanent establishment in Finland, as well as income that is subject to tax under Article 6 (Income from Immovable (Real) Property) or paragraph 1 of Article 13, 

is limited to amounts, as defined under the laws of Finland, that 

would be distributed as a dividend if the operation were carried on 

by a Finnish subsidiary. Although Finland currently does not have 

statutory provisions for imposition of a branch tax, subparagraph 

(b) of paragraph 8 preserves Finland’s right to impose such a tax 

23 

if one is subsequently enacted, provided that the base of that tax 

is limited to an amount that is analogous to the dividend equivalent amount. 

Paragraph 9 limits the rate of the branch profits tax allowed 

under paragraph 8 to 5 percent. Paragraph 9 also provides, however, that the branch profits tax will not be imposed if certain requirements are met. In general, these requirements provide rules 

for a branch that parallel the rules for when a dividend paid by a 

subsidiary will be subject to exclusive residence-country taxation 

(i.e., the elimination of source-country withholding tax). Accordingly, the branch profits tax may not be imposed in the case of a 

company that: (1) meets the ‘‘publicly traded’’ test of subparagraph 

2(c) of Article 16 (Limitation of Benefits), (2) meets the ‘‘ownershipbase erosion’’ and ‘‘active trade or business’’ tests described in subparagraph 2(f) and subparagraph 4 of Article 16, (3) meets the ‘‘derivative benefits’’ test of paragraph 3 of Article 16, or (4) is granted 

benefits with respect to the elimination of the branch profits tax by 

the competent authority pursuant to paragraph 6 of Article 16. 

Thus, for example, if a Finnish company would be subject to the 

branch profits tax with respect to profits attributable to a U.S. 

branch and not reinvested in that branch, paragraph 9 may apply 

to eliminate the branch profits tax if the company either met the 

‘‘publicly traded’’ test, met the combined ‘‘ownership-base erosion’’ 

and ‘‘active trade or business’’ test, or met the derivative benefits 

test. If, by contrast, a Finnish company did not meet those tests, 

but met the ownership-base erosion test (and thus qualified for 

treaty benefits under subparagraph 2(a)), then the branch profits 

tax would apply at a rate of 5 percent, unless the Finnish company 

is granted benefits with respect to the elimination of the branch 

profits tax by the competent authority pursuant to paragraph 6 of 

Article 16. 

Relation to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 

(Personal Scope) permits the United States to tax dividends received by its residents and citizens as if the Convention had not 

come into effect. 

The benefits of this Article are also subject to the provisions of 

Article 16 (Limitation on Benefits). Thus, if a resident of Finland 

is the beneficial owner of dividends paid by a U.S. corporation, the 

shareholder must qualify for treaty benefits under at least one of 

the tests of Article 16 in order to receive the benefits of this Article. 

Paragraph 2 of Article III of the Protocol makes a conforming 

change to the cross-reference in paragraph 5 of Article 24 (Non-Discrimination) of the Convention. 

ARTICLE IV

Article IV of the Protocol modifies Article 11 (Interest) of the 

Convention by adding a new paragraph 6, providing anti-abuse exceptions to the source-country exemption in paragraph 1 for two 

classes of interest payments. 

The first class of interest, dealt with in subparagraph (a) of paragraph 6, is so-called ‘‘contingent interest.’’ Such interest is defined 

in subparagraph (a) as any interest paid by a resident of a ConVerDate Aug 31 2005 16:17 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00023 Fmt 6659 Sfmt 6602 H:\DOCS\110-4.TXT sfrela2 PsN: MIKEB
24 

tracting State that is determined by reference to the receipts, sales, 

income, profits or other cash flow of the debtor or a related person, 

to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar 

payment made by the debtor or a related person and paid to a resident of the other Contracting State. Any such interest may be 

taxed in the Contracting State in which it arises according to the 

laws of that State. If the beneficial owner is a resident of the other 

Contracting State, however, the gross amount of the interest may 

be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph (b) of 

paragraph 6. This exception is consistent with the policy of Code 

sections 860E(e) and 860G(b) that excess inclusions with respect to 

a real estate mortgage investment conduit (REMIC) should bear 

full U.S. tax in all cases. Without a full tax at source, foreign purchasers of residual interests would have a competitive advantage 

over U.S. purchasers at the time these interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue 

loss with respect to mortgages held in a REMIC because of opportunities for tax avoidance created by differences in the timing of 

taxable and economic income produced by these interests. 

ARTICLE V

Article V of the Protocol deletes paragraph 2 of Article 12 (Royalties) of the Convention, which allowed taxation in the Contracting 

State in which they arise of royalties beneficially owned by a resident of the other Contracting State, in the case of payments with 

respect to certain types of intellectual property. Thus, the change 

eliminates withholding on cross-border royalty payments regardless 

of the type of intellectual property involved, bringing the Convention in line with the U.S. Model. 

ARTICLE VI

Article VI of the Protocol replaces Article 16 (Limitation on Benefits) of the Convention. Article 16 contains anti-treaty-shopping 

provisions that are intended to prevent residents of third countries 

from benefiting from what is intended to be a reciprocal agreement 

between two countries. In general, the provision does not rely on 

a determination of purpose or intention but instead sets forth a series of objective tests. A resident of a Contracting State that satisfies one of the tests will receive benefits regardless of its motivations in choosing its particular business structure. 

The structure of the Article is as follows: Paragraph 1 states the 

general rule that residents are entitled to benefits otherwise accorded to residents only to the extent provided in the Article. Paragraph 2 lists a series of attributes of a resident of a Contracting 

State, the presence of any one of which will entitle that person to 

all the benefits of the Convention. Paragraph 3 provides a so-called 

‘‘derivative benefits’’ test under which certain categories of income 

may qualify for benefits. Paragraph 4 provides that regardless of 

whether a person qualifies for benefits under paragraph 2 or 3, 

benefits may be granted to that person with regard to certain income earned in the conduct of an active trade or business. Paragraph 5 provides special rules for so-called ‘‘triangular cases’’ notwithstanding paragraphs 1 through 4 of Article 16. Paragraph 6 

25 

provides that benefits may also be granted if the competent authority of the State from which benefits are claimed determines that it 

is appropriate to grant benefits in that case. Paragraph 7 defines 

certain terms used in the Article. 

Paragraph 1 

Paragraph 1 provides that a resident of a Contracting State will 

be entitled to the benefits of the Convention otherwise accorded to 

residents of a Contracting State only to the extent provided in this 

Article. The benefits otherwise accorded to residents under the 

Convention include all limitations on source-based taxation under 

Articles 6 through 22, the treaty-based relief from double taxation 

provided by Article 23 (Elimination of Double Taxation), and the 

protection afforded to residents of a Contracting State under Article 24 (Non-Discrimination). Some provisions do not require that a 

person be a resident in order to enjoy the benefits of those provisions. For example, Article 25 (Mutual Agreement Procedure) is not 

limited to residents of the Contracting States, and Article 27 (Members of Diplomatic Missions and Consular Posts) applies to diplomatic agents or consular officials regardless of residence. Article 16 

accordingly does not limit the availability of treaty benefits under 

such provisions. 

Article 16 and the anti-abuse provisions of domestic law complement each other, as Article 16 effectively determines whether an 

entity has a sufficient nexus to a Contracting State to be treated 

as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business purpose, substance-over-form, step transaction 

or conduit principles) determine whether a particular transaction 

should be recast in accordance with its substance. Thus, internal 

law principles of the source Contracting State may be applied to 

identify the beneficial owner of an item of income, and Article 16 

then will be applied to the beneficial owner to determine if that 

person is entitled to the benefits of the Convention with respect to 

such income. 

Paragraph 2 

Paragraph 2 has six subparagraphs, each of which describes a 

category of residents that are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self-executing. Unlike the provisions of paragraph 6, discussed below, 

claiming benefits under paragraph 2 does not require an advance 

competent authority ruling or approval. The tax authorities may, 

of course, on review, determine that the taxpayer has improperly 

interpreted the paragraph and is not entitled to the benefits 

claimed. 

Individuals—Subparagraph 2(a).—Subparagraph (a) provides 

that individual residents of a Contracting State will be entitled to 

all treaty benefits. If such an individual receives income as a nominee on behalf of a third country resident, benefits may be denied 

under the applicable articles of the Convention by the requirement 

that the beneficial owner of the income be a resident of a Contracting State. 

Governments—Subparagraph 2(b).—Subparagraph (b) provides 

that the Contracting States and any political subdivision, statutory 

26 

body or local authority thereof will be entitled to all the benefits 

of the Convention. Subparagraph (i) of paragraph 7 defines the 

term ‘‘statutory body’’ to mean any legal entity of a public character created by the laws of a Contracting State in which no person 

other than the State itself, or a political subdivision or local authority thereof, has an interest. The term ‘‘statutory body’’ was added 

at Finland’s request because under Finnish laws there exist governmental bodies that cannot be properly described as political subdivisions or local authorities. These include, among others, the National Social Insurance Institution, the Bank of Finland (Finland’s 

central bank), and the University of Helsinki. 

Publicly-Traded Corporations—Subparagraph 2(c)(i).—Subparagraph (c) applies to two categories of companies: publicly traded 

companies and subsidiaries of publicly traded companies. A company resident in a Contracting State is entitled to all the benefits 

of the Convention under clause (i) of subparagraph (c) if the principal class of its shares, and any disproportionate class of shares, 

is regularly traded on one or more recognized stock exchanges and 

the company satisfies at least one of the following additional requirements: first, the company’s principal class of shares is primarily traded on a recognized stock exchange located in the Contracting State of which the company is a resident, or, in the case 

of a company resident in Finland, on a recognized stock exchange 

located within the European Union, any other European Economic 

Area country, or, in the case of a company resident in the United 

States, on a recognized stock exchange located in another state 

that is a party to the North American Free Trade Agreement; or, 

second, the company’s primary place of management and control is 

in its State of residence. 

The term ‘‘recognized stock exchange’’ is defined in subparagraph 

(d) of paragraph 7. It includes the NASDAQ System and any stock 

exchange registered with the Securities and Exchange Commission 

as a national securities exchange for purposes of the Securities Exchange Act of 1934 and the Helsinki Stock Exchange. The term 

also includes the Irish Stock Exchange and the stock exchanges of 

Amsterdam, Brussels, Copenhagen, Frankfurt, London, Oslo, Paris, 

Reykjavik, Riga, Stockholm, Tallinn, Vilnius, Vienna and Zurich, 

and any other stock exchange agreed upon by the competent authorities of the Contracting States. 

If a company has only one class of shares, it is only necessary 

to consider whether the shares of that class meet the relevant trading requirements. If the company has more than one class of 

shares, it is necessary as an initial matter to determine which class 

or classes constitute the ‘‘principal class of shares.’’ The term ‘‘principal class of shares’’ is defined in subparagraph (a) of paragraph 

7 to mean the ordinary or common shares of the company representing the majority of the aggregate voting power and value of 

the company. If the company does not have a class of ordinary or 

common shares representing the majority of the aggregate voting 

power and value of the company, then the ‘‘principal class of 

shares’’ is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and 

value of the company. Subparagraph (c) of paragraph 7 defines the 

term ‘‘shares’’ to include depository receipts for shares. Although in 

a particular case involving a company with several classes of 

27 

shares it is conceivable that more than one group of classes could 

be identified that account for more than 50 percent of the shares, 

it is only necessary for one such group to satisfy the requirements 

of this subparagraph in order for the company to be entitled to benefits. Benefits would not be denied to the company even if a second, 

non-qualifying group of shares with more than half of the company’s voting power and value could be identified. 

A company whose principal class of shares is regularly traded on 

a recognized stock exchange will nevertheless not qualify for benefits under subparagraph (c) of paragraph 2 if it has a disproportionate class of shares that is not regularly traded on a recognized 

stock exchange. The term ‘‘disproportionate class of shares’’ is defined in subparagraph (b) of paragraph 7. A company has a disproportionate class of shares if it has outstanding a class of shares 

that is subject to terms or other arrangements that entitle the 

holder to a larger portion of the company’s income, profit, or gain 

in the other Contracting State than that to which the holder would 

be entitled in the absence of such terms or arrangements. Thus, for 

example, a company resident in Finland meets the test of subparagraph (b) of paragraph 7 if it has outstanding a class of ‘‘tracking 

stock’’ that pays dividends based upon a formula that approximates 

the company’s return on its assets employed in the United States. 

The following example illustrates this result. 

Example.—FCo is a corporation resident in Finland. FCo has two 

classes of shares: Common and Preferred. The Common shares are 

listed and regularly traded on the Helsinki Stock Exchange. The 

Preferred shares have no voting rights and are entitled to receive 

dividends equal in amount to interest payments that FCo receives 

from unrelated borrowers in the United States. The Preferred 

shares are owned entirely by a single investor that is a resident of 

a country with which the United States does not have a tax treaty. 

The Common shares account for more than 50 percent of the value 

of FCo and for 100 percent of the voting power. Because the owner 

of the Preferred shares is entitled to receive payments corresponding to the U.S. source interest income earned by FCo, the 

Preferred shares are a disproportionate class of shares. Because the 

Preferred shares are not regularly traded on a recognized stock exchange, FCo will not qualify for benefits under subparagraph (c) of 

paragraph 2. 

A class of shares will be ‘‘regularly traded’’ in a taxable year, 

under subparagraph (e) of paragraph 7, if the aggregate number of 

shares of that class traded on one or more recognized exchanges 

during the twelve months ending on the day before the beginning 

of that taxable year is at least six percent of the average number 

of shares outstanding in that class during that twelve-month period. For this purpose, if a class of shares was not listed on a recognized stock exchange during this twelve-month period, the class of 

shares will be treated as regularly traded only if the class meets 

the aggregate trading requirements for the taxable period in which 

the income arises. Trading on one or more recognized stock exchanges may be aggregated for purposes of meeting the ‘‘regularly 

traded’’ standard of subparagraph (e). For example, a U.S. company 

could satisfy the definition of ‘‘regularly traded’’ through trading, in 

whole or in part, on a recognized stock exchange located in Finland 

28 

or certain third countries. Authorized but unissued shares are not 

considered for purposes of subparagraph (e). 

The term ‘‘primarily traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article 3 (General Definitions), this 

term will have the meaning it has under the laws of the State concerning the taxes to which the Convention applies, generally the 

source State. In the case of the United States, this term is understood to have the meaning it has under Treas. Reg. section 1.884– 

5(d)(3), relating to the branch tax provisions of the Code. Accordingly, stock of a corporation is ‘‘primarily traded’’ if the number of 

shares in the company’s principal class of shares that are traded 

during the taxable year on all recognized stock exchanges in the 

Contracting State of which the company is a resident exceeds the 

number of shares in the company’s principal class of shares that 

are traded during that year on established securities markets in 

any other single foreign country. 

A company whose principal class of shares is regularly traded on 

a recognized exchange but cannot meet the primarily traded test 

may claim treaty benefits if its primary place of management and 

control is in its country of residence. This test should be distinguished from the ‘‘place of effective management’’ test which is 

used in the OECD Model and by many other countries to establish 

residence. In some cases, the place of effective management test 

has been interpreted to mean the place where the board of directors meets. By contrast, the primary place of management and control test looks to where day-to-day responsibility for the management of the company (and its subsidiaries) is exercised. The company’s primary place of management and control will be located in 

the State in which the company is a resident only if the executive 

officers and senior management employees exercise day-to-day responsibility for more of the strategic, financial and operational policy decision making for the company (including direct and indirect 

subsidiaries) in that State than in the other State or any third 

state, and the staffs that support the management in making those 

decisions are also based in that State. Thus, the test looks to the 

overall activities of the relevant persons to see where those activities are conducted. In most cases, it will be a necessary, but not 

a sufficient, condition that the headquarters of the company (that 

is, the place at which the CEO and other top executives normally 

are based) be located in the Contracting State of which the company is a resident. 

To apply the test, it will be necessary to determine which persons 

are to be considered ‘‘executive officers and senior management employees.’’ In most cases, it will not be necessary to look beyond the 

executives who are members of the Board of Directors (the ‘‘inside 

directors’’) in the case of a U.S. company. That will not always be 

the case, however; in fact, the relevant persons may be employees 

of subsidiaries if those persons make the strategic, financial and 

operational policy decisions. Moreover, it would be necessary to 

take into account any special voting arrangements that result in 

certain board members making certain decisions without the participation of other board members. 

Subsidiaries of Publicly-Traded Corporations—Subparagraph 

2(c)(ii).—A company resident in a Contracting State is entitled to 

all the benefits of the Convention under clause (ii) of subparagraph 

29 

(c) of paragraph 2 if five or fewer publicly traded companies described in clause (i) are the direct or indirect owners of at least 50 

percent of the aggregate vote and value of the company’s shares 

(and at least 50 percent of any disproportionate class of shares). If 

the publicly-traded companies are indirect owners, however, each of 

the intermediate companies must be a resident of one of the Contracting States. 

Thus, for example, a Finnish company, all the shares of which 

are owned by another Finnish company, would qualify for benefits 

under the Convention if the principal class of shares (and any disproportionate classes of shares) of the Finnish parent company are 

regularly and primarily traded on the London stock exchange. 

However, a Finnish subsidiary would not qualify for benefits under 

clause (ii) if the publicly traded parent company were a resident of 

Ireland, for example, and not a resident of the United States or 

Finland. Furthermore, if a Finnish parent company indirectly 

owned a Finnish company through a chain of subsidiaries, each 

such subsidiary in the chain, as an intermediate owner, must be 

a resident of the United States or Finland for the Finnish subsidiary to meet the test in clause (ii). 

Tax-Exempt Organizations—Subparagraph 2(d).—Subparagraphs 

2(d) and 2(e) provide rules by which tax-exempt organizations described in Article 4(1)(c)(i) and pension funds described in paragraph 7(j) of Article 16 will be entitled to all of the benefits of the 

Convention. A tax-exempt organization other than a tax-exempt 

pension fund automatically qualifies for benefits, without regard to 

the residence of its beneficiaries or members. Entities qualifying 

under this subparagraph are those that are generally exempt from 

tax in their Contracting State of residence and that are established 

and maintained exclusively to fulfill religious, charitable, scientific, 

artistic, cultural, or educational purposes. 

Pension Funds—Subparagraph 2(e).—A pension fund will qualify 

for benefits if, as of the close of the end of the prior taxable year, 

more than 50 percent of the beneficiaries, members or participants 

of the pension are individuals resident in either Contracting State. 

For purposes of this provision, the term ‘‘beneficiaries’’ should be 

understood to refer to the persons receiving benefits from the pension fund. ‘‘Pension fund’’ is defined in subparagraph (j) of paragraph 7 to include, in the case of the United States, a tax-exempt 

pension fund. In the case of Finland, the term ‘‘pension fund’’ includes a pension institution, but if such an institution is organized 

as a company, only a mutual pension insurance company. 

Ownership/Base Erosion—Subparagraph 2(f).—Subparagraph 

2(f) provides an additional method to qualify for treaty benefits 

that applies to any form of legal entity that is a resident of a Contracting State. The test provided in subparagraph (f), the so-called 

ownership and base erosion test, is a two-part test. Both prongs of 

the test must be satisfied for the resident to be entitled to treaty 

benefits under subparagraph 2(f). 

The ownership prong of the test, under clause (i), requires that 

50 percent or more of each class of shares or other beneficial interests in the person is owned, directly or indirectly, on at least half 

the days of the person’s taxable year by persons who are residents 

of the Contracting State of which that person is a resident and that 

are themselves entitled to treaty benefits under subparagraphs (a), 

30 

(b), (d), (e) or clause (i) of subparagraph (c) of paragraph 2. In the 

case of indirect owners, however, each of the intermediate owners 

must be a resident of that Contracting State. 

Trusts may be entitled to benefits under this provision if they 

are treated as residents under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For purposes 

of this subparagraph, the beneficial interests in a trust will be considered to be owned by its beneficiaries in proportion to each beneficiary’s actuarial interest in the trust. The interest of a remainder 

beneficiary will be equal to 100 percent less the aggregate percentages held by income beneficiaries. A beneficiary’s interest in a trust 

will not be considered to be owned by a person entitled to benefits 

under the other provisions of paragraph 2 if it is not possible to determine the beneficiary’s actuarial interest. Consequently, if it is 

not possible to determine the actuarial interest of the beneficiaries 

in a trust, the ownership test under clause (i) cannot be satisfied, 

unless all possible beneficiaries are persons entitled to benefits 

under the other subparagraphs of paragraph 2. 

The base erosion prong of clause (ii) of subparagraph (f) is satisfied with respect to a person if less than 50 percent of the person’s 

gross income for the taxable year, as determined under the tax law 

in the person’s State of residence, is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting 

State entitled to benefits under subparagraphs (a), (b), (d), (e) or 

clause (i) of subparagraph (c) of paragraph 2, in the form of payments deductible for tax purposes in the payer’s State of residence. 

These amounts do not include arm’s-length payments in the ordinary course of business for services or tangible property or payments in respect of financial obligations to a bank that is not related to the payor. To the extent they are deductible from the taxable base, trust distributions are deductible payments. However, 

depreciation and amortization deductions, which do not represent 

payments or accruals to other persons, are disregarded for this purpose. 

Paragraph 3 

Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all treaty benefits, although the test is applied 

to individual items of income. In general, a derivative benefits test 

entitles the resident of a Contracting State to treaty benefits if the 

owner of the resident would have been entitled to the same benefit 

had the income in question flowed directly to that owner. To qualify under this paragraph, the company must meet an ownership 

test and a base erosion test. 

Subparagraph (a) sets forth the ownership test. Under this test, 

seven or fewer equivalent beneficiaries must own shares representing at least 95 percent of the aggregate voting power and 

value of the company and at least 50 percent of any disproportionate class of shares. Ownership may be direct or indirect. The 

term ‘‘equivalent beneficiary’’ is defined in subparagraph (g) of 

paragraph 7. This definition may be met in two alternative ways, 

the first of which has two requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is entitled to equivalent benefits under a treaty 

31 

between the country of source and the country in which the person 

is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of 

a member state of the European Union, a European Economic Area 

state, a party to the North American Free Trade Agreement, or 

Switzerland (collectively, ‘‘qualifying States’’). 

The second requirement of the definition of ‘‘equivalent beneficiary’’ is that the person must be entitled to equivalent benefits 

under an applicable treaty. To satisfy the second requirement, the 

person must be entitled to all the benefits of a comprehensive treaty between the Contracting State from which benefits of the Convention are claimed and a qualifying State under provisions that 

are analogous to the rules in paragraph 2 of this Article regarding 

individuals, governmental entities, publicly-traded companies, and 

tax-exempt organizations and pensions. If the treaty in question 

does not have a comprehensive limitation on benefits article, this 

requirement is met only if the person would be entitled to treaty 

benefits under the tests in paragraph 2 of this Article applicable 

to individuals, governmental entities, publicly-traded companies, 

and tax-exempt organizations and pensions if the person were a 

resident of one of the Contracting States. 

In order to satisfy the second requirement necessary to qualify 

as an ‘‘equivalent beneficiary’’ under paragraph 7(g)(i)(B) with respect to insurance premiums, dividends, interest, royalties or 

branch tax, the person must be entitled to a rate of excise, withholding or branch tax that is at least as low as the excise, withholding or branch tax rate that would apply under the Convention 

to such income. Thus, the rates to be compared are: (1) the rate of 

tax that the source State would have imposed if a qualified resident of the other Contracting State was the beneficial owner of the 

income; and (2) the rate of tax that the source State would have 

imposed if the third State resident received the income directly 

from the source State. For example, USCo is a wholly owned subsidiary of FCo, a company resident in Finland. FCo is wholly 

owned by ICo, a corporation resident in Italy. Assuming FCo satisfies the requirements of paragraph 3 of Article 10 (Dividends), FCo 

would be eligible for the elimination of dividend withholding tax. 

The dividend withholding tax rate in the treaty between the United 

States and Italy is 5 percent. Thus, if ICo received the dividend directly from USCo, ICo would have been subject to a 5 percent rate 

of withholding tax on the dividend. Because ICo would not be entitled to a rate of withholding tax that is at least as low as the rate 

that would apply under the Convention to such income (i.e., zero), 

ICo is not an equivalent beneficiary within the meaning of paragraph 7(g)(i) of Article 16 with respect to the elimination of withholding tax on dividends. 

Subparagraph 7(h) provides a special rule to take account of the 

fact that withholding taxes on many inter-company dividends, interest and royalties are exempt within the European Union by reason of various EU directives, rather than by tax treaty. If a U.S. 

company receives such payments from a Finnish company, and 

that U.S. company is owned by a company resident in a member 

state of the European Union that would have qualified for an exemption from withholding tax if it had received the income directly, 

the parent company will be treated as an equivalent beneficiary. 

32 

This rule is necessary because many European Union member 

countries have not re-negotiated their tax treaties to reflect the exemptions available under the directives. 

The requirement that a person be entitled to ‘‘all the benefits’’ of 

a comprehensive tax treaty eliminates those persons that qualify 

for benefits with respect to only certain types of income. Accordingly, the fact that a French parent of a Finnish company is engaged in the active conduct of a trade or business in France and 

therefore would be entitled to the benefits of the U.S.-France treaty 

if it received dividends directly from a U.S. subsidiary of the Finnish company is not sufficient for purposes of this paragraph. Further, the French company cannot be an equivalent beneficiary if it 

qualifies for benefits only with respect to certain income as a result 

of a ‘‘derivative benefits’’ provision in the U.S.-France treaty. However, it would be possible to look through the French company to 

its parent company to determine whether the parent company is an 

equivalent beneficiary. 

The second alternative for satisfying the ‘‘equivalent beneficiary’’ 

test is available only to residents of one of the two Contracting 

States. U.S. or Finnish residents who are eligible for treaty benefits 

by reason of subparagraphs (a), (b), (c)(i), (d), or (e) of paragraph 

2 are equivalent beneficiaries under the second alternative. Thus, 

a Finnish individual will be an equivalent beneficiary without regard to whether the individual would have been entitled to receive 

the same benefits if it received the income directly. A resident of 

a third country cannot qualify for treaty benefits under any of 

those subparagraphs or any other rule of the treaty, and therefore 

does not qualify as an equivalent beneficiary under this alternative. Thus, a resident of a third country can be an equivalent 

beneficiary only if it would have been entitled to equivalent benefits had it received the income directly. 

The second alternative was included in order to clarify that ownership by certain residents of a Contracting State would not disqualify a U.S. or Finnish company under this paragraph. Thus, for 

example, if 90 percent of a Finnish company is owned by five companies that are resident in member states of the European Union 

who satisfy the requirements of clause (i), and 10 percent of the 

Finnish company is owned by a U.S. or Finnish individual, then 

the Finnish company still can satisfy the requirements of subparagraph (a) of paragraph 3. 

Subparagraph (b) of paragraph 3 sets forth the base erosion test. 

A company meets this base erosion test if less than 50 percent of 

its gross income (as determined in the company’s State of residence) for the taxable period is paid or accrued, directly or indirectly, to a person or persons who are not equivalent beneficiaries 

in the form of payments deductible for tax purposes in company’s 

State of residence. These amounts do not include arm’s-length payments in the ordinary course of business for services or tangible 

property and payments in respect of financial obligations to a bank 

that is not related to the payor. This test is the same as the base 

erosion test in clause (ii) of subparagraph (f) of paragraph 2, except 

that the test in subparagraph 3(b) focuses on base-eroding payments to persons who are not equivalent beneficiaries. 

33 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident 

of a Contracting State may receive treaty benefits with respect to 

certain items of income that are connected to an active trade or 

business conducted in its State of residence. A resident of a Contracting State may qualify for benefits under paragraph 4 whether 

or not it also qualifies under paragraphs 2 or 3. 

Subparagraph (a) sets forth the general rule that a resident of 

a Contracting State engaged in the active conduct of a trade or 

business in that State may obtain the benefits of the Convention 

with respect to an item of income derived from the other Contracting State. The item of income, however, must be derived in 

connection with or incidental to that trade or business. 

The term ‘‘trade or business’’ is not defined in the Convention. 

Pursuant to paragraph 2 of Article 3 (General Definitions), when 

determining whether a resident of Finland is entitled to the benefits of the Convention under paragraph 4 of this Article with respect to an item of income derived from sources within the United 

States, the United States will ascribe to this term the meaning 

that it has under the law of the United States. Accordingly, the 

U.S. competent authority will refer to the regulations issued under 

section 367(a) for the definition of the term ‘‘trade or business.’’ In 

general, therefore, a trade or business will be considered to be a 

specific unified group of activities that constitute or could constitute an independent economic enterprise carried on for profit. 

Furthermore, a corporation generally will be considered to carry on 

a trade or business only if the officers and employees of the corporation conduct substantial managerial and operational activities. 

The business of making or managing investments for the resident’s own account will be considered to be a trade or business only 

when part of banking, insurance or securities activities conducted 

by a bank, an insurance company, or a registered securities dealer. 

Such activities conducted by a person other than a bank, insurance 

company or registered securities dealer will not be considered to be 

the conduct of an active trade or business, nor would they be considered to be the conduct of an active trade or business if conducted 

by a bank, insurance company or registered securities dealer but 

not as part of the company’s banking, insurance or dealer business. 

Because a headquarters operation is in the business of managing 

investments, a company that functions solely as a headquarters 

company will not be considered to be engaged in an active trade or 

business for purposes of paragraph 4. 

An item of income is derived in connection with a trade or business if the income-producing activity in the State of source is a line 

of business that ‘‘forms a part of’’ or is ‘‘complementary’’ to the 

trade or business conducted in the State of residence by the income 

recipient. 

A business activity generally will be considered to form part of 

a business activity conducted in the State of source if the two activities involve the design, manufacture or sale of the same products or type of products, or the provision of similar services. The 

line of business in the State of residence may be upstream, downstream, or parallel to the activity conducted in the State of source. 

Thus, the line of business may provide inputs for a manufacturing 

process that occurs in the State of source, may sell the output of 

34 

that manufacturing process, or simply may sell the same sorts of 

products that are being sold by the trade or business carried on in 

the State of source. 

Example 1.—USCo is a corporation resident in the United States. 

USCo is engaged in an active manufacturing business in the 

United States. USCo owns 100 percent of the shares of FCo, a company resident in Finland. FCo distributes USCo products in Finland. Because the business activities conducted by the two corporations involve the same products, FCo’s distribution business is considered to form a part of USCo’s manufacturing business. 

Example 2.—The facts are the same as in Example 1, except that 

USCo does not manufacture. Rather, USCo operates a large research and development facility in the United States that licenses 

intellectual property to affiliates worldwide, including FCo. FCo 

and other USCo affiliates then manufacture and market the USCodesigned products in their respective markets. Because the activities conducted by FCo and USCo involve the same product lines, 

these activities are considered to form a part of the same trade or 

business. 

For two activities to be considered to be ‘‘complementary,’’ the activities need not relate to the same types of products or services, 

but they should be part of the same overall industry and be related 

in the sense that the success or failure of one activity will tend to 

result in success or failure for the other. Where more than one 

trade or business is conducted in the State of source and only one 

of the trades or businesses forms a part of or is complementary to 

a trade or business conducted in the State of residence, it is necessary to identify the trade or business to which an item of income 

is attributable. Royalties generally will be considered to be derived 

in connection with the trade or business to which the underlying 

intangible property is attributable. Dividends will be deemed to be 

derived first out of earnings and profits of the treaty-benefited 

trade or business, and then out of other earnings and profits. Interest income may be allocated under any reasonable method consistently applied. A method that conforms to U.S. principles for expense allocation will be considered a reasonable method. 

Example 3.—Americair is a corporation resident in the United 

States that operates an international airline. FSub is a whollyowned subsidiary of Americair resident in Finland. FSub operates 

a chain of hotels in Finland that are located near airports served 

by Americair flights. Americair frequently sells tour packages that 

include air travel to Finland and lodging at FSub hotels. Although 

both companies are engaged in the active conduct of a trade or 

business, the businesses of operating a chain of hotels and operating an airline are distinct trades or businesses. Therefore FSub’s 

business does not form a part of Americair’s business. However, 

FSub’s business is considered to be complementary to Americair’s 

business because they are part of the same overall industry (travel), and the links between their operations tend to make them 

interdependent. 

Example 4.—The facts are the same as in Example 3, except that 

FSub owns an office building in Finland instead of a hotel chain. 

No part of Americair’s business is conducted through the office 

building. FSub’s business is not considered to form a part of or to 

be complementary to Americair’s business. They are engaged in 

35 

distinct trades or businesses in separate industries, and there is no 

economic dependence between the two operations. 

Example 5.—USFlower is a company resident in the United 

States. USFlower produces and sells flowers in the United States 

and other countries. USFlower owns all the shares of FHolding, a 

corporation resident in Finland. FHolding is a holding company 

that is not engaged in a trade or business. FHolding owns all the 

shares of three corporations that are resident in Finland: FFlower, 

FLawn, and FFish. FFlower distributes USFlower flowers under 

the USFlower trademark in Finland. FLawn markets a line of lawn 

care products in Finland under the USFlower trademark. In addition to being sold under the same trademark, FLawn and FFlower 

products are sold in the same stores and sales of each company’s 

products tend to generate increased sales of the other’s products. 

FFish imports fish from the United States and distributes it to fish 

wholesalers in Finland. For purposes of paragraph 4, the business 

of FFlower forms a part of the business of USFlower, the business 

of FLawn is complementary to the business of USFlower, and the 

business of FFish is neither part of nor complementary to that of 

USFlower. 

An item of income derived from the State of source is ‘‘incidental 

to’’ the trade or business carried on in the State of residence if production of the item facilitates the conduct of the trade or business 

in the State of residence. An example of incidental income is the 

temporary investment of working capital of a person in the State 

of residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 4 states a further condition to the 

general rule in subparagraph (a) in cases where the trade or business generating the item of income in question is carried on either 

by the person deriving the income or by any associated enterprises. 

Subparagraph (b) states that the trade or business carried on in 

the State of residence, under these circumstances, must be substantial in relation to the activity in the State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for 

benefits by engaging in de minimis connected business activities in 

the treaty country in which it is resident (i.e., activities that have 

little economic cost or effect with respect to the company business 

as a whole). 

The determination of substantiality is made based upon all the 

facts and circumstances and takes into account the comparative 

sizes of the trades or businesses in each Contracting State, the nature of the activities performed in each Contracting State, and the 

relative contributions made to that trade or business in each Contracting State. In any case, in making each determination or comparison, due regard will be given to the relative sizes of the U.S. 

and Finnish economies. 

The determination in subparagraph (b) also is made separately 

for each item of income derived from the State of source. It therefore is possible that a person would be entitled to the benefits of 

the Convention with respect to one item of income but not with respect to another. If a resident of a Contracting State is entitled to 

treaty benefits with respect to a particular item of income under 

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tion insofar as they affect the taxation of that item of income in 

the State of source. 

The application of the substantiality requirement only to income 

from related parties focuses only on potential abuse cases, and does 

not hamper certain other kinds of non-abusive activities, even 

though the income recipient resident in a Contracting State may be 

very small in relation to the entity generating income in the other 

Contracting State. For example, if a small U.S. research firm develops a process that it licenses to a very large, unrelated, Finnish 

pharmaceutical manufacturer, the size of the U.S. research firm 

would not have to be tested against the size of the Finnish manufacturer. Similarly, a small U.S. bank that makes a loan to a very 

large unrelated Finnish business would not have to pass a substantiality test to receive treaty benefits under Paragraph 4. 

Subparagraph (c) of paragraph 4 provides special attribution 

rules for purposes of applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for purposes of determining whether a person meets the requirement in subparagraph 

(a) that it be engaged in the active conduct of a trade or business 

and that the item of income is derived in connection with that active trade or business, and for making the comparison required by 

the ‘‘substantiality’’ requirement in subparagraph (b). Subparagraph (c) attributes to a person activities conducted by persons 

‘‘connected’’ to such person. A person (‘‘X’’) is connected to another 

person (‘‘Y’’) if X possesses 50 percent or more of the beneficial interest in Y (or if Y possesses 50 percent or more of the beneficial 

interest in X). For this purpose, X is connected to a company if X 

owns shares representing fifty percent or more of the aggregate 

voting power and value of the company or fifty percent or more of 

the beneficial equity interest in the company. X also is connected 

to Y if a third person possesses fifty percent or more of the beneficial interest in both X and Y. For this purpose, if X or Y is a company, the threshold relationship with respect to such company or 

companies is fifty percent or more of the aggregate voting power 

and value or fifty percent or more of the beneficial equity interest. 

Finally, X is connected to Y if, based upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are controlled 

by the same person or persons. 

Paragraph 5 

Paragraph 5 deals with the treatment of insurance premiums, 

royalties and interest in the context of a so-called ‘‘triangular case.’’ 

The term ‘‘triangular case’’ refers to the use of the following 

structure by a resident of Finland to earn, in this case, interest income from the United States. The resident of Finland, who is assumed to qualify for benefits under one or more of the provisions 

of Article 16 (Limitation on Benefits), sets up a permanent establishment in a third jurisdiction that imposes only a low rate of tax 

on the income of the permanent establishment. The Finnish resident lends funds into the United States through the permanent establishment. The permanent establishment, despite its third-jurisdiction location, is an integral part of a Finnish resident. Therefore 

the income that it earns on those loans, absent the provisions of 

paragraph 5, is entitled to exemption from U.S. withholding tax 

under the Convention. Under a current Finnish income tax treaty 

37 

with the host jurisdiction of the permanent establishment, the income of the permanent establishment is exempt from Finnish tax. 

Thus, the interest income is exempt from U.S. tax, is subject to little tax in the host jurisdiction of the permanent establishment, and 

is exempt from Finnish tax. 

Because the United States does not exempt the profits of a thirdjurisdiction permanent establishment of a U.S. resident from U.S. 

tax, either by statute or by treaty, the paragraph only applies with 

respect to U.S. source insurance premiums, interest, or royalties 

that are attributable to a third-jurisdiction permanent establishment of a Finnish resident. 

Paragraph 5 replaces the otherwise applicable rules in the Convention for insurance premiums, interest and royalties with a 15 

percent withholding taxfor interest and royalties and U.S. domestic 

law rules for insurance premiums if the actual tax paid on the income in the third state is less than 60 percent of the tax that would 

have been payable in Finland if the income were earned in Finland 

by the enterprise and were not attributable to the permanent establishment in the third state. 

In general, the principles employed under Code section 954(b)(4) 

will be employed to determine whether the profits are subject to an 

effective rate of taxation that is above the specified threshold. 

Notwithstanding the level of tax on interest and royalty income 

of the permanent establishment, paragraph 5 will not apply under 

certain circumstances. In the case of interest (as defined in Article 

11 (Interest)), paragraph 5 will not apply if the interest is derived 

in connection with, or is incidental to, the active conduct of a trade 

or business carried on by the permanent establishment in the third 

state. The business of making, managing or simply holding investments is not considered to be an active trade or business, unless 

these are banking or securities activities carried on by a bank or 

registered securities dealer. In the case of royalties, paragraph 5 

will not apply if the royalties are received as compensation for the 

use of, or the right to use, intangible property produced or developed by the permanent establishment itself. 

Paragraph 6 

Paragraph 6 provides that a resident of one of the States that is 

not entitled to the benefits of the Convention as a result of paragraphs 1 through 5 still may be granted benefits under the Convention at the discretion of the competent authority of the State from 

which benefits are claimed. In making determinations under paragraph 6, that competent authority will take into account as its 

guideline whether the establishment, acquisition, or maintenance 

of the person seeking benefits under the Convention, or the conduct 

of such person’s operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Benefits will 

not be granted, however, solely because a company was established 

prior to the effective date of the Convention or the Protocol. In that 

case, a company would still be required to establish to the satisfaction of the Competent Authority clear non-tax business reasons for 

its formation in a Contracting State, or that the allowance of benefits would not otherwise be contrary to the purposes of the Convention. Thus, persons that establish operations in one of the States 

38 

with a principal purpose of obtaining the benefits of the Convention 

ordinarily will not be granted relief under paragraph 6. 

The competent authority’s discretion is quite broad. It may grant 

all of the benefits of the Convention to the taxpayer making the request, or it may grant only certain benefits. For instance, it may 

grant benefits only with respect to a particular item of income in 

a manner similar to paragraph 4. Further, the competent authority 

may establish conditions, such as setting time limits on the duration of any relief granted. 

For purposes of implementing paragraph 6, a taxpayer will be 

permitted to present his case to the relevant competent authority 

for an advance determination based on the facts. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever 

is later. 

A competent authority is required by paragraph 6 to consult the 

other competent authority before denying benefits under this paragraph. 

Paragraph 7 

Paragraph 7 defines several key terms for purposes of Article 16. 

Each of the defined terms is discussed above in the context in 

which it is used. 

ARTICLE VII

Paragraph (a) amends Article 23 of the convention by deleting 

paragraph (1)(c), which provided that, regardless of any other provision of the Treaty, Finland could tax an individual Finnish national who is a resident of the United States, and who, under Finnish taxation laws, is also a resident of Finland. Due to changes in 

Finland’s domestic tax laws, such a provision is no longer required. 

Paragraph (b) makes conforming changes to Article 23 to reflect 

the amendments made to the saving clause of paragraph 4 Article 

1 (Personal Scope) and to reflect amendments to section 877 of the 

Code in 1996. 

Paragraph (c) amends paragraph 4, which sets forth the source 

of income rules applicable for purposes of allowing relief under Article 23. Prior to amendment, the source rules of paragraph 4 were 

subject to such source rules in the domestic laws of the Contracting 

States as applied for the purpose of limiting the foreign tax credit. 

Paragraph (c) of Article VII of the Protocol removes this limitation 

in order to ensure that the source rules set out in paragraph 4 of 

Article 23 have their intended effect. 

ARTICLE VIII

Article VIII replaces Article 26 (Exchange of Information) of the 

Convention. This Article provides for the exchange of information 

and administrative assistance between the competent authorities of 

the Contracting States. 

Paragraph 1 

The obligation to obtain and provide information to the other 

Contracting State is set out in Paragraph 1. The information to be 

39 

exchanged is that which may be relevant for carrying out the provisions of the Convention or the domestic laws of the United States 

or Finland concerning taxes of every kind applied at the national 

level. This language incorporates the standard in 26 U.S.C. section 

7602, which authorizes the IRS to examine ‘‘any books, papers, 

records, or other data which may be relevant or material.’’ In 

United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the 

Supreme Court stated that the language ‘‘may be’’ reflects 

Congress’s express intention to allow the IRS to obtain ‘‘items of 

even potential relevance to an ongoing investigation, without reference to admissibility.’’ However, the language ‘‘may be’’ would not 

support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by residents of 

that Contracting State in the other Contracting State, or even all 

accounts maintained by its residents with respect to a particular 

bank. 

Exchange of information with respect to each State’s domestic 

tax law is authorized to the extent that taxation under domestic 

tax law is not contrary to the Convention. Thus, for example, information may be exchanged with respect to a covered tax, even if the 

transaction to which the information relates is a purely domestic 

transaction in the requesting Contracting State and, therefore, the 

exchange is not made to carry out the Convention. An example of 

such a case is provided in the OECD Commentary: a company resident in the United States and a company resident in Finland 

transact business between themselves through a third-country resident company. Neither Contracting State has a treaty with the 

third state. To enforce their internal laws with respect to transactions of their residents with the third-country company (since 

there is no relevant treaty in force), the Contracting States may exchange information regarding the prices that their residents paid 

in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the 

taxes covered by the Convention. Thus, the competent authorities 

may request and provide information for cases under examination 

or criminal investigation, in collection, on appeals, or under prosecution. 

The taxes covered by the Convention for purposes of this Article 

constitute a broader category of taxes than those referred to in Article 2 (Taxes Covered). Exchange of information is authorized with 

respect to taxes of every kind imposed by a Contracting State at 

the national level. Accordingly, information may be exchanged with 

respect to U.S. estate and gift taxes, excise taxes or, with respect 

to Finland, value added taxes. 

Information exchange is not restricted by Article 1 (Personal 

Scope). Accordingly, information may be requested and provided 

under this article with respect to persons who are not residents of 

either Contracting State. For example, if a third-country resident 

has a permanent establishment in Finland, which engages in 

transactions with a U.S. enterprise, the United States could request information with respect to that permanent establishment, 

even though the third-country resident is not a resident of either 

Contracting State. Similarly, if a third-country resident maintains 

40 

a bank account in Finland, and the Internal Revenue Service has 

reason to believe that funds in that account should have been reported for U.S. tax purposes but have not been so reported, information can be requested from Finland with respect to that person’s 

account, even though that person is not the taxpayer under examination. 

Although the term ‘‘United States’’ does not encompass U.S. possessions for most purposes of the Convention, Section 7651 of the 

Code authorizes the Internal Revenue Service to utilize the provisions of the Internal Revenue Code to obtain information from the 

U.S. possessions pursuant to a proper request made under Article 

26. If necessary to obtain requested information, the Internal Revenue Service could issue and enforce an administrative summons 

to the taxpayer, a tax authority (or a government agency in a U.S. 

possession), or a third party located in a U.S. possession. 

Paragraph 2 

Paragraph 2 provides that the requesting State may specify the 

form in which information is to be provided (e.g., depositions of witnesses and authenticated copies of unedited original documents). 

The intention is to ensure that the information may be introduced 

as evidence in the judicial proceedings of the requesting State. The 

requested State should, if possible, provide the information in the 

form requested to the same extent that it can obtain information 

in that form under its own laws and administrative practices with 

respect to its own taxes. 

Paragraph 3 

Paragraph 3 provides assurances that any information exchanged will be treated as secret, subject to the same disclosure 

constraints as information obtained under the laws of the requesting Contracting State. Information received may be disclosed only 

to persons, including courts and administrative bodies, involved in 

the assessment, collection, or administration of, the enforcement or 

prosecution in respect of, or the determination of the of appeals in 

relation to, the taxes covered by the Convention. The information 

must be used by these persons in connection with the specified 

functions. Information may also be disclosed to legislative bodies, 

such as the tax-writing committees of Congress and the Government Accountability Office, engaged in the oversight of the preceding activities. Information received by these bodies must be for 

use in the performance of their role in overseeing the administration of U.S. tax laws. Information received may be disclosed in public court proceedings or in judicial decisions. 

Paragraph 4 

Paragraph 4 provides that the obligations undertaken in paragraphs 1 and 3 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either Contracting State. Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of 

either Contracting State, or to disclose trade secrets or other information, the disclosure of which would be contrary to public policy. 

41 

Thus, a requesting Contracting State may be denied information 

from the other Contracting State if the information would be obtained pursuant to procedures or measures that are broader than 

those available in the requesting Contracting State. 

However, the statute of limitations of the Contracting State making the request for information should govern a request for information. Thus, the Contracting State of which the request is made 

should attempt to obtain the information even if its own statute of 

limitations has passed. In many cases, relevant information will 

still exist in the business records of the taxpayer or a third party, 

even though it is no longer required to be kept for domestic tax 

purposes. 

While paragraph 4 states conditions under which a Contracting 

State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded 

from providing such information, and may, at its discretion, do so 

subject to the limitations of its internal law. 

Paragraph 5 

Paragraph 5 provides that when information is requested by a 

Contracting State in accordance with this Article, the other Contracting State is obligated to obtain the requested information as 

if the tax in question were the tax of the requested State, even if 

that other State has no direct tax interest in the case to which the 

request relates. In the absence of such a paragraph, some taxpayers have argued that paragraph 4(a) prevents the requested 

State from obtaining information from a bank or fiduciary that the 

requested State does not need for its own tax purposes. This paragraph clarifies that paragraph 4 does not impose such a restriction 

and that a Contracting State is not limited to providing only the 

information that it already has in its own files. 

Paragraph 6 

Paragraph 6 provides that a Contracting State may not decline 

to provide information because that information is held by financial 

institutions, nominees or persons acting in an agency or fiduciary 

capacity. Thus, paragraph 6 would effectively prevent a Contracting State from relying on paragraph 4 to argue that its domestic bank secrecy laws (or similar legislation relating to disclosure 

of financial information by financial institutions or intermediaries) 

override its obligation to provide information under paragraph 1. 

This exception does not include information that would reveal confidential communications between a client and an attorney, solicitor, or other legal representative, where the client seeks legal advice. In the case of the United States, the scope of the privilege for 

such confidential communications is coextensive with the attorneyclient privilege under U.S. law. Paragraph 6 also requires the disclosure of information regarding the beneficial owner of an interest 

in a person, such as the identity of a beneficial owner of bearer 

shares. 

Paragraph 7 

Paragraph 7 provides for assistance in collection of taxes to the 

extent necessary to ensure that treaty benefits are enjoyed only by 

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tion. Under paragraph 7, a Contracting State will endeavor to collect on behalf of the other State only those amounts necessary to 

ensure that any exemption or reduced rate of tax at source granted 

under the Convention by that other State is not enjoyed by persons 

not entitled to those benefits. For example, if the payer of a U.S.- 

source portfolio dividend receives a Form W–8BEN or other appropriate documentation from the payee, the withholding agent is permitted to withhold at the portfolio dividend rate of 15 percent. If, 

however, the addressee is merely acting as a nominee on behalf of 

a third country resident, paragraph 7 would obligate Finland to 

withhold and remit to the United States the additional tax that 

should have been collected by the U.S. withholding agent. 

This paragraph also makes clear that the Contracting State 

asked to collect the tax is not obligated, in the process of providing 

collection assistance, to carry out administrative measures that are 

different from those used in the collection of its own taxes, or that 

would be contrary to its sovereignty, security or public policy. 

Efective dates and termination in relation to exchange of information 

Once the Protocol is in force, the competent authority may seek 

information under Article 26 as amended by the Protocol with respect to a year prior to the entry into force of the Protocol, even 

if Article 26 of the Convention prior to its amendment by the Protocol was in effect during the years in which the transaction at 

issue occurred. 

A tax administration may also seek information with respect to 

a year for which a treaty was in force after the treaty has been terminated. In such a case the ability of the other tax administration 

to act is limited. The treaty no longer provides authority for the tax 

administrations to exchange confidential information. They may 

only exchange information pursuant to domestic law or other international agreement or arrangement. 

ARTICLE VIII

Article VIII of the Protocol contains the rules for bringing the 

Protocol into force and giving effect to its provisions. 

Paragraph 1 provides for the ratification of the Convention by 

both Contracting States and the exchange of instruments of ratification as soon as possible thereafter. The Protocol shall enter into 

force upon the exchange of instruments of ratification. 

In the United States, the process leading to ratification and entry 

into force is as follows: Once a protocol or treaty has been signed 

by authorized representatives of the two Contracting States, the 

Department of State sends the protocol or treaty to the President 

who formally transmits it to the Senate for its advice and consent 

to ratification, which requires approval by two-thirds of the Senators present and voting. Prior to this vote, however, it generally 

has been the practice of the Senate Committee on Foreign Relations to hold hearings on the protocol or treaty and make a recommendation regarding its approval to the full Senate. Both Government and private sector witnesses may testify at these hearings. After the Senate gives its advice and consent to ratification 

of the protocol or treaty, an instrument of ratification is drafted for 

43 

the President’s signature. The President’s signature completes the 

process in the United States. 

The date on which a treaty enters into force is not necessarily 

the date on which its provisions take effect. Paragraph 2 contains 

rules that determine when the provisions of the treaty will have effect. 

Under subparagraphs (a)(i) and (b)(i), the provisions of the Protocol relating to taxes withheld at source will have effect with respect to amounts paid or credited (or in the case of Finland, income 

derived) on or after the first day of the second month next following 

the date on which the Protocol enters into force. For example, if instruments of ratification are exchanged on April 25 of a given year, 

the withholding rates specified in paragraph 2 of Article 10 (Dividends) would be applicable to any dividends paid or credited on or 

after June 1 of that year. Similarly, the revised Limitation on Benefits provisions of Article VI of the Protocol would apply with respect to any payments of interest, royalties or other amounts on 

which withholding would apply under the Code if those amounts 

are paid or credited on or after June 1. 

This rule allows the benefits of the withholding reductions to be 

put into effect as soon as possible, without waiting until the following year. The delay of one to two months is required to allow 

sufficient time for withholding agents to be informed about the 

change in withholding rates. If for some reason a withholding 

agent withholds at a higher rate than that provided by the Convention (perhaps because it was not able to re-program its computers 

before the payment is made), a beneficial owner of the income that 

is a resident of Finland may make a claim for refund pursuant to 

section 1464 of the Code. 

For all other taxes, subparagraphs (a)(ii) and (b)(ii) specify that 

the Protocol will have effect for any taxable period beginning on or 

after January 1 of the year next following entry into force. 

In both Contracting States, provisions of the Protocol relating to 

taxes withheld at source covered by paragraph 3 of Article 10 (Dividends) will have effect with respect to income derived on or after 

January 1, 2007, provided that the Protocol enters into force before 

December 31, 2007. The relevant date for this purpose is the date 

on which income from the dividend is derived by the beneficial 

owner, rather than to the date on which the income was originally 

derived by the company paying the dividend. The phrase ‘‘income 

derived’’ was used because it is compatible with the standard for 

inclusion of income under Finnish tax law. It is intended to have 

a meaning similar to the phrase ‘‘income paid or credited,’’ a standard more commonly used in U.S. tax treaties. Thus, provided the 

Protocol enters into force prior to December 31, 2007, the provisions of the Protocol eliminating withholding on companies and 

pension funds meeting the requirement of paragraph 3 of Article 

10 (Dividends) will have effect with respect to income derived from 

dividends paid or accrued on or after January 1, 2007.