69–119 

110TH CONGRESS EXEC. REPT. " ! SENATE 1st Session 110–3 

PROTOCOL AMENDING TAX CONVENTION 

WITH DENMARK 

NOVEMBER 14, 2007.—Ordered to be printed 

Mr. BIDEN, from the Committee on Foreign Relations, 

submitted the following 

REPORT

[To accompany Treaty Doc. 109–19] 

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 Kingdom of 

Denmark for the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with Respect to Taxes on Income, signed at Copenhagen on May 2, 2006 (the ‘‘Protocol’’) (Treaty Doc. 109-19), 

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 ................................................................. 3 

V. Implementing Legislation ............................................................................. 4 

VI. Committee Action .......................................................................................... 4 

VII. Committee Reccommendation and Comments ............................................ 4 

VIII. Resolution of Advice and Consent to Ratification ....................................... 4 

IX. Annex.—Technical Explanation .................................................................... 5 

I. PURPOSE

The proposed Protocol to the existing income tax treaty between 

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

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

to eliminate the withholding tax on dividends arising from certain 

direct investments and on certain dividends paid to pension funds; 

strengthen the treaty’s provisions that prevent the inappropriate 

2 

use of the treaty by third-country residents; and generally modernize the existing tax treaty with Denmark to bring it into closer 

conformity with U.S. tax treaty law and policy. 

II. BACKGROUND

The Protocol was signed on May 2, 2006. On the same day, the 

United States and the Kingdom of Denmark exchanged notes to 

confirm certain understandings with respect to the application of 

the Protocol. The Protocol, accompanied by an exchange of notes, 

amends the Convention between the Government of the United 

States of America and the Government of the Kingdom of Denmark 

for the Avoidance of Double Taxation and the Prevention of Fiscal 

Evasion with Respect to Taxes on Income, signed at Washington on 

August 19, 1999, together with a Protocol (the ‘‘1999 Convention’’) 

(Treaty Doc. 106-12; Exec. Rept. 106-9). The 1999 Convention replaced an older income tax treaty concluded in 1948 between the 

United States and Denmark. 

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–46–07 (July 17, 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 1999 Convention, which 

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

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

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

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

The Protocol retains both the generally applicable maximum rate 

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

maximum withholding rate for dividends received by a company 

owning at least 10 percent of share capital 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 of the 

subsidiary for the 12-month period ending on the date entitlement 

to the dividend is determined. By contrast, the 1999 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 22(2)(e) 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 

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

As in the 1999 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. These 

rules will also apply with respect to dividends from Danish corporations determined by agreement of the competent authorities to be 

similar to U.S. RICs and REITs. 

2. Limitation on Benefits 

The 1999 Convention already contains a ‘‘Limitation on Benefits’’ 

provision (Article 22), 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 includes a requirement to determine whether a company’s public trading or management constitutes an adequate connection to its country of residence in either 

the United States or Denmark, in order to prevent certain companies that are not adequately connected from qualifying for treaty 

benefits. 

3. Scope 

The Protocol updates Article 1 of the 1999 Convention (General 

Scope) in order to reflect subsequent changes in U.S. tax law. Paragraph 4 of Article 1 of the 1999 Convention provides that, with the 

exception of certain benefits listed under paragraph 5 of Article 1, 

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. 

IV. ENTRY INTO FORCE; EFFECTIVE DATES

The United States and Denmark shall notify each other when 

the requirements for entry into force have been complied with and 

in accordance with Article V, the Protocol will enter into force upon 

the date of the receipt of the later of such notifications. The Protocol’s provisions shall have effect with respect to taxes withheld at 

source, on 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 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. 

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V. IMPLEMENTING LEGISLATION

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

self-executing and thus does not require implementing legislation 

for the United States. 

VI. COMMITTEE ACTION

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

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

Counsel, Office of the International Tax Counsel at the Department 

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

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

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

Lucchesi, Chairwoman of the Board, Organization for International 

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

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

quorum present and without objection. 

VII. COMMITTEE RECOMMENDATION AND COMMENTS

The Committee on Foreign Relations believes that the Protocol 

will stimulate increased investment, further strengthen the provision in the 1999 Convention that prevents treaty shopping, and 

promote closer cooperation and facilitate trade and investment between the United States and Denmark. 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 Protocol was considered by the committee on October 31, 

2007, along with three other tax treaties: (1) The Protocol Amending Tax Convention with Finland (Treaty Doc. 109–18); (2) The 

Protocol Amending Tax Convention with Germany (Treaty Doc. 

109–20); and (3) The Tax Convention with Belgium (Treaty Doc. 

110–3). In the committee’s report regarding the Protocol Amending 

Tax Convention with Finland, also filed this day, the committee set 

forth comments on two issues, which are also relevant here. 

First, the committee suggested that the Treasury Department 

consider sharing the Technical Explanation it develops with its 

treaty partners, prior to its public release. Second, the committee 

encouraged the Treasury Department to further strengthen antitreaty-shopping provisions in tax treaties whenever possible, with 

a particular focus on closing the loophole created by those U.S. tax 

treaties currently in force that do not have an anti-treaty-shopping 

provision. A detailed discussion regarding these issues can be found 

in Section VII of the committee’s report regarding the Protocol 

Amending Tax Convention with Finland (Exec. Rept. 110–4). 

VIII. TEXT OF 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 Kingdom of Denmark 

for the Avoidance of Double Taxation and the Prevention of Fiscal 

5 

Evasion with Respect to Taxes on Income, signed at Copenhagen 

on May 2, 2006 (Treaty Doc. 109–19). 

IX. ANNEX.—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE

PROTOCOL SIGNED AT COPENHAGEN ON MAY 2, 2006 AMENDING THE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES

OF AMERICA AND THE GOVERNMENT OF THE KINGDOM OF DENMARK

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION

OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT

WASHINGTON ON AUGUST 19, 1999

This is a technical explanation of the Protocol signed at Copenhagen on May 2, 2006 (the ‘‘Protocol’’), amending the Convention 

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

on August 19, 1999 (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 paragraph 4 of Article 1 (General Scope) of the Convention, which 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 Denmark 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 Denmark 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 Denmark. 

6 

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 Denmark under the tiebreaker 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. 

ARTICLE II

Article II 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 

7 

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 shares 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 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 interVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
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mediate 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 4(1)(d) (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, with respect to qualified 

governmental entities, 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 stock owned both 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 22 (Limitation of 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 22 (Limitation of Benefits), (2) meets the ‘‘ownership-base erosion’’ and ‘‘active trade or business’’ tests described in subparagraph 2(f) and paragraph 4 of Article 22 (Limitation of Benefits), 

(3) meets the ‘‘derivative benefits’’ test of paragraph 3 of Article 22 

(Limitation of 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 7 of Article 22 (Limitation of Benefits). 

These restrictions are necessary because of the increased pressure on the Limitation of 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 of Benefits provision does not provide sufficient protection against treaty-shopping. 

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

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

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

9 

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

of DCo, a Danish company. DCo is a substantial company that 

manufactures widgets; USCo distributes those widgets in the 

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

dividends paid by USCo to DCo would qualify for treaty benefits 

under the active trade or business test of paragraph 4 of Article 22. 

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 DCo to meet the ownership-base erosion requirements of 

subparagraph 2(f) of Article 22 in addition to the active trade or 

business test of paragraph 4 of Article 22. Thus, DCo 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 Denmark and eligible for treaty benefits under certain specified tests 

and (ii) less than 50 percent of DCo’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 DCo is wholly owned by a third country resident, DCo 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, DCo would need to qualify under 

another test or obtain discretionary relief from the competent authority under Article 22(7). 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. In the case of companies resident in 

Denmark, this includes companies that are more than 50 percent 

owned by one or more taxable nonstock corporations entitled to 

benefits under Article 22(2)(g). Thus, a company that is a resident 

of Denmark and that meets the requirements of Article 22(2) (i), 

(ii) or (iii) 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 22. Thus, a Danish 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 Danish 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, resiVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
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dents 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 Danish 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 (i) of paragraph 8 of Article 22, that directive will also be 

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

company receiving dividends from a Danish 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 Danish company. For example, assume USCo is a wholly-owned subsidiary of ICo, an Italian 

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

Danish company. If DCo were to pay dividends directly to ICo, 

those dividends would be exempt from withholding tax in Denmark 

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

other conditions of subparagraph 8(h) of Article 22, it will be treated as an equivalent beneficiary by reason of subparagraph 8(i) 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 Danish 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 Danish corporate 

joint venture vehicles that are closely-held by a few Danish resident individuals. 

Subparagraph (h) of paragraph 8 of Article 22 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 DCo, a Danish company, 

which in turn is owned 49 percent by PCo, a Danish 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 DCo. 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 DCo in this case. 

Consequently, when determining whether a person is an equivalent beneficiary under paragraph 8 of Article 22, each of the shareholders is treated as owning shares with the same percentage of 

voting power as the shares held by DCo 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 

11 

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 7 of Article 22. 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. The Notes provide that 

the U.S. competent authority generally will exercise its discretion 

to grant benefits under this paragraph to a company that is a resident of Denmark if (1) the company meets the requirements of 

paragraph 4 of Article 22 (Limitation of Benefits) regarding the active conduct of a trade or business in Denmark, (2) the company 

meets the base erosion test of clause (f)(ii) of paragraph 2 of Article 

22, and (3) more than 80 percent of the voting power and the value 

of the shares in the company is owned by one or more taxable 

nonstock corporations that meet the requirements of subparagraph 

(g) of paragraph 2 of Article 22. However, the competent authority 

may choose not to grant benefits under this paragraph if it determines that a significant percentage or amount of the income qualifying for benefits under this paragraph will inure to the benefit of 

a private person who is not a resident of Denmark. 

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

provides for exemption from tax in the state of source for dividends 

paid to qualified governmental entities. This exemption is analogous to that provided to foreign governments under section 892 of 

the Code. Subparagraph (b) of paragraph 3 makes that exemption 

reciprocal. A qualified governmental entity is defined in paragraph 

1(i) of Article 3 (General Definitions) of the Convention. The definition does not include a governmental entity that carries on commercial activity. Further, a dividend paid by a company engaged in 

commercial activity that is controlled (within the meaning of Treas. 

Reg. section 1.892–5T) by a qualified governmental entity that is 

the beneficial owner of the dividend is not exempt at source under 

paragraph 4 because ownership of a controlled company is viewed 

as a substitute for carrying on a business activity. 

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

provides that dividends beneficially owned by a pension fund described in subparagraph (e) of paragraph 2 of Article 22 (Limitation 

of Benefits) 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, 

12 

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 sourcecountry withholding tax of subparagraph 3(a). 

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

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

dividends paid by RICs and beneficially owned by a qualified governmental entity or 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 

subparagraphs 3 (b) and (c) applies to dividends paid by REITs and 

beneficially owned by a qualified governmental entity or 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 Denmark 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 

13 

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 Denmark 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. 

The final sentence of paragraph 4(a) provides that the rules of 

paragraph 4 apply also to dividends paid by companies resident in 

Denmark that are similar to U.S. RICs and REITs. Whether a 

Danish company is similar to a U.S. RIC or REIT will be determined by mutual agreement of the competent authorities. The 

Notes provide that for purposes of paragraph 4, a Danish undertaking for collective investment in transferable securities that is required to currently distribute its income will be treated as a company similar to a U.S. RIC, while such an undertaking that is permitted to accumulate its income will not be so treated. 

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, provided the limited liability company is not 

14 

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. 

The paragraph also restricts the right of a Contracting State to 

impose corporate level taxes on undistributed profits, other than a 

branch profits tax. The paragraph does not restrict a State’s right 

to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, the authority of the 

United States to impose taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax on income of a 

passive foreign investment company that is a qualified electing 

fund is in no way restricted by this provision. 

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(b) 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 estabVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
15 

lishment 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 Real Property), or realizes gains taxable in 

that State under paragraph 1 of Article 13 (Capital 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 Real Property), 7 (Business Profits) or 13 (Capital 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. Denmark currently does not impose a branch profits tax. If 

in the future Denmark were to impose a branch profits tax, paragraph 8 provides that the base of its tax must be 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 22 (Limitation of Benefits), (2) meets the ‘‘ownershipbase erosion’’ and ‘‘active trade or business’’ tests described subparagraph 2(f) and subparagraph 4 of Article 22, (3) meets the ‘‘derivative benefits’’ test of paragraph 3 of Article 22, or (4) is granted 

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

the competent authority pursuant to paragraph 7 of Article 22. 

Thus, for example, if a Danish 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 Danish 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 Danish company 

is granted benefits with respect to the elimination of the branch 

profits tax by the competent authority pursuant to paragraph 7 of 

Article 22. 

16 

Relation to Other Articles 

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

(General Scope) permits the United States to tax dividends received by its residents and citizens, subject to the special foreign 

tax credit rules of paragraph 2 of Article 23 (Relief From Double 

Taxation), as if the Convention had not come into effect. 

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

Article 22 (Limitation of Benefits). Thus, if a resident of Denmark 

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 22 in order to receive the benefits of this Article. 

ARTICLE III

Article III of the Protocol amends subparagraph (b) of paragraph 

2 of Article 19 (Government Service) of the Convention to correct 

a drafting error. Paragraph 2(a) provides a general rule that a pension paid from public funds of a Contracting State or a political 

subdivision or local authority thereof to an individual in respect of 

services rendered to that State or subdivision or authority in the 

discharge of governmental functions is taxable only in that State. 

Paragraph 2(b) provides an exception under which the pension is 

taxable only in the other State if the individual is a resident of and 

a national of that other State. Before this amendment, paragraph 

2(b) incorrectly referred to pensions paid to ‘‘a resident or a national’’ rather than pensions paid to ‘‘a resident and a national.’’ 

ARTICLE IV

Article IV of the Protocol replaces Article 22 (Limitation of Benefits) of the Convention. Article 22 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 for limited derivative benefits for shipping and air 

transport income. Paragraph 6 provides special rules for so-called 

‘‘triangular cases’’ notwithstanding paragraphs 1 through 5 of Article 22. Paragraph 7 provides that benefits may also be granted if 

the competent authority of the State from which the benefits are 

17 

claimed determines that it is appropriate to grant benefits in that 

case. Paragraph 8 defines certain terms used in the Article. 

Paragraph 1 

Paragraph 1 provides that a resident of a Contracting State will 

be entitled to 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 21, the treaty-based relief from double taxation provided by Article 23 (Relief From 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 (Diplomatic 

Agents and Consular Officers) applies to diplomatic agents or consular officials regardless of residence. Article 22 accordingly does 

not limit the availability of treaty benefits under such provisions. 

Article 22 and the anti-abuse provisions of domestic law complement each other, as Article 22 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 22 

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 seven 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 7, 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 or local 

authority thereof, or an agency or instrumentality of that State, 

subdivision, or authority will be entitled to all the benefits of the 

Convention. 

18 

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 Denmark, 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 8. It includes the NASDAQ System, 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 Copenhagen Stock Exchange. The term 

also includes the stock exchanges of Amsterdam, Brussels, Frankfurt, Hamburg, Helsinki, London, Oslo, Paris, Stockholm, Sydney, 

Tokyo, and Toronto, 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 

8 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 8 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 deVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00018 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
19 

fined in subparagraph (b) of paragraph 8. 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 Denmark meets the test of subparagraph (b) of paragraph 8 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.—DCo is a corporation resident in Denmark. DCo has 

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

are listed and regularly traded on the Stockholm Stock Exchange. 

The Preferred shares have no voting rights and are entitled to receive dividends equal in amount to interest payments that DCo 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 DCo 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 DCo, 

the Preferred shares are a disproportionate class of shares. Because 

the Preferred shares are not regularly traded on a recognized stock 

exchange, DCo will not qualify for benefits under subparagraph (c) 

of paragraph 2. 

A class of shares will be ‘‘regularly traded’’ on one or more recognized stock exchanges in a taxable year, under subparagraph (f)(i) 

of paragraph 8, if two requirements are met: (1) trades in the class 

of shares are effected on one or more such exchanges in other than 

de minimis quantities during every quarter, and (2) the aggregate 

number of shares of that class traded on one or more such 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 (including shares held 

by taxable nonstock corporations) 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 (f). 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 Denmark or certain third countries. Authorized but unissued shares 

are not considered for purposes of subparagraph (f). 

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– 

20 

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 Danish Taxable Nonstock Corporations—Subparagraph 2(c)(ii).—Clause (ii) of subparagraph 2(c) provides a test 

under which certain companies that are controlled by one or more 

taxable nonstock corporations (‘‘TNCs’’) entitled to benefits under 

subparagraph (g) may meet the publicly-traded test. This test is 

necessary because it is common for a TNC to hold 100% of the 

‘‘Class A’’ shares of another company. The Class A shares have a 

disproportionate amount of the voting power but have little or no 

rights to dividends. The subsidiary company also issues ‘‘Class B’’ 

shares, which have preferential treatment as to dividends. Class A 

shares held by TNCs are listed but not traded on the Copenhagen 

21 

stock exchange. Any class A shares that are not held by TNCs and 

all Class B shares are both listed and traded on the Copenhagen 

stock exchange. This rule is included to ensure that a corporation 

whose voting shares are substantially owned by a Danish TNC is 

not precluded from qualifying as a publicly-traded company, so long 

as the rest of its shares satisfy a public trading test. 

A company will qualify under this test if one or more such TNCs 

own shares representing more than 50 percent of the voting power 

of the company and all other shares are listed on a recognized 

stock exchange and are primarily traded on a recognized stock exchange located within the European Union or in any other European Economic Area state. Thus, all shares not owned by TNCs, 

taken as a single class, must be traded more on a recognized stock 

exchange located in a state within the European Union or in any 

other European Economic Area state than on established securities 

markets in any other single foreign state. 

Subsidiaries of Publicly-Traded Corporations—Subparagraph 

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

all the benefits of the Convention under clause (iii) of subparagraph (c) of paragraph 2 if five or fewer companies entitled to benefits under clause (i) or (ii) (or any combination thereof) 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 companies are indirect owners, however, each of the intermediate companies must be a resident of one of the Contracting States. 

Thus, for example, a Danish company, all the shares of which are 

owned by another Danish company, would qualify for benefits 

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

regularly and primarily traded on the London stock exchange. 

However, a Danish subsidiary would not qualify for benefits under 

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

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

Denmark. Furthermore, if a Danish parent company indirectly 

owned a Danish 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 Denmark for the Danish subsidiary to meet the test in clause (iii). 

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

2(d) and 2(e) provide rules by which tax-exempt organizations described in Article 4(1)(b)(i) and pension funds will be entitled to all 

of the benefits of the Convention. A tax-exempt organization other 

than a 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, educational, scientific, or other similar purposes. 

Pensions—Subparagraph 2(e).—A legal person, whether tax-exempt or not, that is organized under the laws of either Contracting 

State to provide pension or similar benefits to employees (including 

self-employed individuals) pursuant to a plan will qualify for benefits if, as of the close of the end of the prior taxable year, more than 

50 percent of the pension’s beneficiaries, members or participants 

22 

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. 

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. 

Danish Taxable Nonstock Corporations—Subparagraph 2(g).— 

Paragraph 2(g) provides a special rule for a Danish Taxable 

Nonstock Corporation (‘‘TNC’’), which is a vehicle to preserve control of operating companies by the TNC through its control of voting shares, with public shareholders receiving most rights to diviVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00022 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
23 

dends of the operating company. A TNC may qualify for the benefits of the Convention if it meets specific requirements under a twopart test. 

Under subparagraph 8(e), the term ‘‘taxable nonstock corporation’’ as used in paragraph 2 means a foundation that is taxable 

in accordance with paragraph 1 of Article 1 of the Danish Act on 

Taxable Nonstock Corporations (fonde der beskattes efter 

fondsbeskatningsloven). A TNC is a legal person that is controlled 

by a professional board of directors, the majority of which must be 

unrelated to the persons that founded the TNC. As a foundation, 

a TNC must have a charter governing the corporation’s operations 

and identifying any TNC beneficiaries and their entitlement to distributions from the TNC. One TNC cannot own another. A TNC’s 

capital is irrevocably separated from the control of any person 

(‘‘founder’’) contributing assets to the TNC at the time the TNC is 

established. A TNC’s assets can never be inherited nor can such assets be paid out in liquidation except to creditors. TNCs are subject 

to income tax at the same rate (32%) and in exactly the same way 

as Danish corporations, except that a TNC can deduct charitable 

contributions, whereas a regular Danish corporation cannot deduct 

them, and a TNC, like any other foundation, can deduct distributions to members of the founder’s family provided that these family 

members are resident in Denmark and are taxable in Denmark at 

the full rate, which is from 45% to 59%. Distributions to other persons, e.g., Danish nonresidents, are not deductible. 

The two-part test in subparagraph (g) is a modification of the 

ownership-base erosion test that is necessary because TNCs do not 

have owners and thus cannot be subject to any ownership test. 

This test was included for TNCs in order to treat them as similarly 

as possible to other Danish corporations. 

The first part of the test under subparagraph (g)(i) is satisfied if 

no more than 50 percent of the amount of the TNC’s gross income 

(excluding its tax-exempt income) is paid or accrued in the form of 

deductible payments (but not including arms-length payments in 

the ordinary course of its activities of a charitable nature and authorized by the Danish laws on taxable non-stock companies for 

services or tangible property) in the taxable year and in each of the 

preceding three taxable years, directly or indirectly, to persons who 

are not entitled to benefits under subparagraphs (a), (b), (d), (e), or 

clause (i) of subparagraph (c). This means that no more than 50 

percent of the amount of the TNC’s gross income (excluding its taxexempt income) can be paid to persons other than residents of either Contracting State that qualify for treaty benefits as an individual (subparagraph (a)), a Contracting State, etc. (subparagraph 

(b)), a company that is publicly traded (subparagraph (c)(i)), a charitable organization, etc. (subparagraph (d)), or a pension plan (subparagraph e). 

The second part of the test under subparagraph (g)(ii) is satisfied 

if no more than 50% of the amount of the total income of the TNC 

(including its tax-exempt income) is paid or accrued, in the form of 

deductible payments (but not including arm’s length payments in 

the ordinary course of its activities of a charitable nature and authorized by the Danish laws on taxable non-stock companies for 

services or tangible properties) and non-deductible distributions, in 

the taxable year and in each of the preceding three taxable years, 

24 

directly or indirectly, to persons who are not entitled to benefits 

under subparagraphs (a), (b), (d), (e), or clause (i) of subparagraph 

(c). 

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 (h) of 

paragraph 8. 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, taxexempt 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, tax-exempt organizations, and pensions if the person were a resident of 

one of the Contracting States. 

In order to satisfy the second requirement to qualify as an 

‘‘equivalent beneficiary’’ under paragraph 8(h)(i)(B) with respect to 

dividends, interest, royalties, or branch tax, the person must also 

be entitled to a rate of withholding or branch tax that is at least 

as low as the 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, 

25 

USCo is a wholly owned subsidiary of DCo, a company resident in 

Denmark. DCo is wholly owned by ICo, a corporation resident in 

Italy. Assuming DCo satisfies the requirements of paragraph 3 of 

Article 10 (Dividends), DCo 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 8(h)(i) of Article 22 with respect 

to the elimination of withholding tax on dividends. 

Subparagraph 8(i) 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 Danish 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 Danish 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 Danish 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 Danish 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 Danish 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 disVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00025 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
26 

qualify a U.S. or Danish company under this paragraph. Thus, for 

example, if 90 percent of a Danish 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 

Danish company is owned by a U.S. or Danish individual, then the 

Danish 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 Denmark 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 

27 

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 DCo, a company resident in Denmark. DCo distributes USCo products in Denmark. Because the business activities conducted by the two corporations involve the same products, DCo’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 DCo. DCo 

and other USCo affiliates then manufacture and market the USCodesigned products in their respective markets. Because the activities conducted by DCo 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 consistVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00027 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
28 

ently 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. DSub is a whollyowned subsidiary of Americair resident in Denmark. DSub operates 

a chain of hotels in Denmark that are located near airports served 

by Americair flights. Americair frequently sells tour packages that 

include air travel to Denmark and lodging at DSub 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 DSub’s 

business does not form a part of Americair’s business. However, 

DSub’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 

DSub owns an office building in Denmark instead of a hotel chain. 

No part of Americair’s business is conducted through the office 

building. DSub’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 DHolding, a 

corporation resident in Denmark. DHolding is a holding company 

that is not engaged in a trade or business. DHolding owns all the 

shares of three corporations that are resident in Denmark: 

DFlower, DLawn, and DFish. DFlower distributes USFlower flowers under the USFlower trademark in Denmark. DLawn markets 

a line of lawn care products in Denmark under the USFlower 

trademark. In addition to being sold under the same trademark, 

DLawn and DFlower products are sold in the same stores and sales 

of each company’s products tend to generate increased sales of the 

other’s products. DFish imports fish from the United States and 

distributes it to fish wholesalers in Denmark. For purposes of paragraph 4, the business of DFlower forms a part of the business of 

USFlower, the business of DLawn is complementary to the business of USFlower, and the business of DFish 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 

29 

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 Danish 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, Danish 

pharmaceutical manufacturer, the size of the U.S. research firm 

would not have to be tested against the size of the Danish manufacturer. Similarly, a small U.S. bank that makes a loan to a very 

large unrelated Danish 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. 

30 

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 provides that a resident of one of the States that derives income from the other State described in Article 8 (Shipping 

and Air Transport) and that is not entitled to the benefits of the 

Convention under paragraphs 1 through 4, shall nonetheless be entitled to the benefits of the Convention with respect to income described in Article 8 if it meets one of two tests. These tests in substance duplicate the rules set forth under Code section 883 and 

therefore afford little additional benefit beyond those provided by 

the Code. These tests are described below. 

First, a resident of one of the States that derives income from the 

other State will be entitled to the benefits of the Convention with 

respect to income described in Article 8 if at least 50 percent of the 

beneficial interest in the person (in the case of a company, at least 

50 percent of the aggregate vote and value of the stock of the company) is owned, directly or indirectly, by persons entitled to benefits under subparagraphs (a), (b), (c)(i), (d), or (e), paragraph 2, citizens of the United States or individuals who are residents of a 

third state that grants by law, common agreement, or convention 

an exemption under similar terms for profits as mentioned in Article 8 to citizens and corporations of the other State. This provision 

is analogous to the relief provided under Code section 883(c)(1). 

Alternatively, a resident of one of the States that derives income 

from the other State will be entitled to the benefits of the Convention with respect to income described in Article 8 if at least 50 percent of the beneficial interest in the person (in the case of a company, at least 50 percent of the aggregate vote and value of the 

stock of the company) is owned directly or indirectly by a company 

or combination of companies the stock of which is primarily and 

regularly traded on an established securities market in a third 

state, provided that the third state grants by law, common agreement or convention an exemption under similar terms for profits as 

mentioned in Article 8 to citizens and corporations of the other 

State. This provision is analogous to the relief provided under Code 

section 883(c)(3). 

The provisions of paragraph 5 are intended to be self executing. 

Unlike the provisions of paragraph 7, discussed below, claiming 

benefits under paragraph 5 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. 

Paragraph 6 

Paragraph 6 deals with the treatment of 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 Denmark to earn, in this case, interest 

income from the United States. The resident of Denmark, who is 

assumed to qualify for benefits under one or more of the provisions 

of Article 22 (Limitation of Benefits), sets up a permanent establishment in a third jurisdiction that imposes only a low rate of tax 

31 

on the income of the permanent establishment. The Danish 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 Danish resident. Therefore 

the income that it earns on those loans, absent the provisions of 

paragraph 6, is entitled to exemption from U.S. withholding tax 

under the Convention. Under a current Danish income tax treaty 

with the host jurisdiction of the permanent establishment, the income of the permanent establishment is exempt from Danish 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 Danish tax. 

Because the United States does not exempt the profits of a thirdjurisdiction permanent establishment of a U.S. resident from U.S. 

tax, either by statute or by treaty, the paragraph only applies with 

respect to U.S. source interest or royalties that are attributable to 

a third-jurisdiction permanent establishment of a Danish resident. 

Paragraph 6 replaces the otherwise applicable rules in the Convention for interest and royalties with a 15 percent withholding tax 

for interest and royalties 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 Denmark if the income were earned in Denmark 

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 6 will not apply under 

certain circumstances. In the case of interest (as defined in Article 

11 (Interest)), paragraph 6 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 6 

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 7 

Paragraph 7 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 6 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 7, 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 satisfacVerDate Aug 31 2005 15:55 Nov 14, 2007 Jkt 000000 PO 00000 Frm 00031 Fmt 6659 Sfmt 6602 H:\DOCS\110-3.TXT sfrela2 PsN: MIKEB
32 

tion 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 7. 

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 7, 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 7 to consult the 

other competent authority before denying benefits under this paragraph. 

Paragraph 8 

Paragraph 8 defines several key terms for purposes of Article 22. 

Each of the defined terms is discussed in the context in which it 

is used. 

ARTICLE V

Article V of the Protocol contains the rules for bringing the Protocol into force and giving effect to its provisions. 

Paragraph 1 provides that each State must notify the other as 

soon as its requirements for ratification have been complied with. 

The Protocol will enter into force upon the date of receipt of the 

later of such notifications. 

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 

33 

rules that determine when the provisions of the treaty will have effect. 

Under subparagraphs (a), the provisions of the Protocol relating 

to taxes withheld at source will have effect with respect to 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 paragraphs 2 and 3 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 

of Benefits provisions of Article 5 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 Denmark may make a claim for refund pursuant 

to section 1464 of the Code. 

For all other taxes, subparagraph (b) specifies that the Protocol 

will have effect for any taxable period beginning on or after January 1 of the year next following entry into force.