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[Senate Executive Report 110-4]
[From the U.S. Government Publishing Office]

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 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 source-country 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. 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 source-country 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 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.

                      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 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-treaty-shopping 
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).

                   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.

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.
    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).
    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 intended 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 
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.

                               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.
    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 dual-residence 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 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 ownership 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). Accordingly, 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 
inter-company 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.
    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 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 inter-company 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 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 source-country 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 
source-country 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, transform 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 
derived 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 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 ``ownership-
base 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 Contracting 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 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 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 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 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 (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), (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 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. 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.

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 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 USCo-designed 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 
wholly-owned 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 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 paragraph 4, the 
resident is entitled to all benefits of the Convention 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 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 
third-jurisdiction 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 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 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 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.
    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 attorney-client 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 persons entitled to those benefits under the 
terms of the Convention. 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 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.
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