DEPARTMENT OF THE TREASURY 

TECHNICAL EXPLANATION OF THE PROTOCOL 

SIGNED AT HELSINKI ON MAY 31, 2006 

AMENDING THE CONVENTION BETWEEN 

THE GOVERNMENT OF THE UNITED STATES OF AMERICA 

AND 

THE GOVERNMENT OF FINLAND 

FOR THE AVOIDANCE OF DOUBLE TAXATION AND 

THE PREVENTION OF FISCAL EVASION 

WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL, 

SIGNED AT HELSINKI ON SEPTEMBER 21, 1989 

This is a technical explanation of the Protocol signed at Washington on May 31, 

2006 (the “Protocol”), amending the Convention between the United States of America 

and the Government of Finland for the avoidance of double taxation and the prevention 

of fiscal evasion with respect to taxes on income, signed at Helsinki on September 21, 

1989 (the “Convention”). 

Negotiations took into account the U.S. Department of the Treasury’s current tax 

treaty policy and Treasury’s Model Income Tax Convention, published on September 20, 

1996 (the “U.S. Model”). Negotiations also took into account the Model Tax Convention 

on Income and on Capital, published by the Organization for Economic Cooperation and 

Development (the “OECD Model”), and recent tax treaties concluded by both countries. 

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

behind particular provisions, as well as understandings reached during the negotiations 

with respect to the interpretation and application of the Protocol. This technical 

explanation is not intended to provide a complete guide to the Convention as amended by 

the Protocol. To the extent that the Convention has not been amended by the Protocol, the 

Technical Explanation of the Convention remains the official explanation. References in 

this technical explanation to “he” or “his” should be read to mean “he or she” or “his or 

her.” 

Article I 

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

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies to residents of the 

United States or Finland except where the terms of the Convention provide otherwise. 

Under Article 4 (Residence) of the Convention a person is generally treated as a resident 

of a Contracting State if that person is, under the laws of that State, liable to tax therein 

by reason of his domicile, residence, or other similar criteria. However, if a person is 

considered a resident of both Contracting States, Article 4 provides rules for determining 

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

purposes of the Convention. 

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Certain provisions are applicable to persons who may not be residents of either 

Contracting State. For example, paragraph 1 of Article 24 (Non-Discrimination) applies 

to nationals of the Contracting States. Under Article 26 (Exchange of Information), 

information may be exchanged with respect to residents of third states. 

Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the 

Convention and domestic law and between the Convention and other agreements between 

the Contracting States. That is, no provision in the Convention may restrict any 

exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of the 

Contracting States, or by any other agreement between the Contracting States. The 

relationship between the non-discrimination provisions of the Convention and other 

agreements is addressed not in paragraph 2 but in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed under the U.S. 

Internal Revenue Code (the "Code") in computing the U.S. taxable income of a resident 

of Finland, the deduction also is allowed to that person in computing taxable income 

under the Convention. Paragraph 2 also means that the Convention may not increase the 

tax burden on a resident of a Contracting States beyond the burden determined under 

domestic law. Thus, a right to tax given by the Convention cannot be exercised unless 

that right also exists under internal law. 

It follows that under the principle of paragraph 2 a taxpayer's U.S. tax liability 

need not be determined under the Convention if the Code would produce a more 

favorable result. A taxpayer may not, however, choose among the provisions of the Code 

and the Convention in an inconsistent manner in order to minimize tax. For example, 

assume that a resident of Finland has three separate businesses in the United States. One 

is a profitable permanent establishment and the other two are trades or businesses that 

would earn taxable income under the Code but that do not meet the permanent 

establishment threshold tests of the Convention. One is profitable and the other incurs a 

loss. Under the Convention, the income of the permanent establishment is taxable in the 

United States, and both the profit and loss of the other two businesses are ignored. Under 

the Code, all three would be subject to tax, but the loss would offset the profits of the two 

profitable ventures. The taxpayer may not invoke the Convention to exclude the profits 

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

or business against the profit of the permanent establishment. (See Rev. Rul. 84-17, 

1984-1 C.B. 308.) If, however, the taxpayer invokes the Code for the taxation of all three 

ventures, he would not be precluded from invoking the Convention with respect, for 

example, to any dividend income he may receive from the United States that is not 

effectively connected with any of his business activities in the United States. 

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

any other agreement between the United States and Finland. 

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Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations of the 

Contracting States under the General Agreement on Trade in Services (the “GATS”). 

The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of this 

Article under which the Convention shall not restrict in any manner any benefit now or 

hereafter accorded by any other agreement between the Contracting States. 

Subparagraph (a) of paragraph 3 provides that, unless the competent authorities 

determine that a taxation measure is not within the scope of the Convention, the national 

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

any question arising as to the interpretation of the Convention, including in particular 

whether a measure is within the scope of the Convention shall be considered only by the 

competent authorities of the Contracting States, and the procedures under the Convention 

exclusively shall apply to the dispute. Thus, paragraph 3 of Article XXII (Consultation) 

of the GATS may not be used to bring a dispute before the World Trade Organization 

unless the competent authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 24 (Non-Discrimination) of 

the Convention. 

The term "measure" for these purposes is defined broadly in subparagraph (b) of 

paragraph 3. It would include, for example, a law, regulation, rule, procedure, decision, 

administrative action or guidance, or any other form of measure. 

Paragraph 4 

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

treaties. The Contracting States reserve their rights, except as provided in paragraph 5, to 

tax their residents and citizens as provided in their internal laws, notwithstanding any 

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

performs professional services in the United States and the income from the services is 

not attributable to a permanent establishment in the United States, Article 7 (Business 

Profits) would by its terms prevent the United States from taxing the income. If, however, 

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

United States to include the remuneration in the worldwide income of the citizen and 

subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)). 

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

credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident 

in Finland. 

For purposes of the saving clause, "residence" is determined under Article 4 

(Residence). Thus, an individual who is a resident of the United States under the Code 

(but not a U.S. citizen) but who is determined to be a resident of Finland under the 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. 

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

other than determining the individual’s U.S. tax liability. For example, in determining 

under Code section 957 whether a foreign corporation is a controlled foreign corporation, 

shares in that corporation held by the individual would be considered to be held by a U.S. 

resident. As a result, other U.S. citizens or residents might be deemed to be United States 

shareholders of a controlled foreign corporation subject to current inclusion of Subpart F 

income recognized by the corporation. See, Treas. Reg. section 301.7701(b)-7(a)(3). 

Under paragraph 4, each Contracting State also reserves its right to tax former 

citizens and former long-term residents for a period of ten years following the loss of 

such status. Thus, paragraph 4 allows the United States to tax former U.S. citizens and 

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

generally applies to a former citizen or long-term resident of the United States who 

relinquishes citizenship or terminates long-term residency if either of the following 

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

individual for the period of 5 taxable years ending before the date of the loss of status, or 

(b) the net worth of such individual as of the date of the loss of status. The average 

annual net income tax threshold is adjusted annually for inflation. The United States 

defines “long-term resident” as an individual (other than a U.S. citizen) who is a lawful 

permanent resident of the United States in at least 8 of the prior 15 taxable years. An 

individual is not treated as a lawful permanent resident for any taxable year if such 

individual is treated as a resident of a foreign country under the provisions of a tax treaty 

between the United States and the foreign country and the individual does not waive the 

benefits of such treaty applicable to residents of the foreign country. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the application of the saving clause. 

The referenced provisions are intended to provide benefits to citizens and residents even 

if such benefits do not exist under internal law. Paragraph 5 thus preserves these benefits 

for citizens and residents of the Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that are applicable to 

all citizens and residents of a Contracting State, despite the general saving clause rule of 

paragraph 4: 

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a 

correlative adjustment with respect to income tax due on profits reallocated 

under Article 9. 

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

Support) provide exemptions from source or residence State taxation for 

certain pension distributions, social security payments and child support. 

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(3) Article 23 (Elimination of Double Taxation) confirms to citizens and residents 

of one Contracting State the benefit of a credit for income taxes paid to the 

other or an exemption for income earned in the other State. 

(4) Article 24 (Non-Discrimination) protects residents and nationals of one 

Contracting State against the adoption of certain discriminatory practices in 

the other Contracting State. 

(5) Article 25 (Mutual Agreement Procedure) confers certain benefits on citizens 

and residents of the Contracting States in order to reach and implement 

solutions to disputes between the two Contracting States. For example, the 

competent authorities are permitted to use a definition of a term that differs 

from an internal law definition. The statute of limitations may be waived for 

refunds, so that the benefits of an agreement may be implemented. 

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the 

saving clause. The benefits referred to are all intended to be granted to temporary 

residents of a Contracting State (for example, in the case of the United States, holders of 

non-immigrant visas), but not to citizens or to persons who have acquired permanent 

residence in that State. If beneficiaries of these provisions travel from one of the 

Contracting States to the other, and remain in the other long enough to become residents 

under its internal law, but do not acquire permanent residence status (i.e., in the U.S. 

context, they do not become "green card" holders) and are not citizens of that State, the 

host State will continue to grant these benefits even if they conflict with the statutory 

rules. The benefits preserved by this paragraph are the host country exemptions for 

government service salaries and pensions under Article 19 (Government Service), certain 

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

income of diplomatic agents and consular officers under Article 27 (Members of 

Diplomatic Missions and Consular Posts). 

Paragraph 6 

Paragraph 6 addresses special issues presented by fiscally transparent entities such 

as partnerships and certain estates and trusts. Because different countries frequently take 

different views as to when an entity is fiscally transparent, the risk of both double 

taxation and double non-taxation are relatively high. The intention of paragraph 6 is to 

eliminate a number of technical problems that arguably would have prevented investors 

using such entities from claiming treaty benefits, even though such investors would be 

subject to tax on the income derived through such entities. The provision also prevents 

the use of such entities to claim treaty benefits in circumstances where the person 

investing through such an entity is not subject to tax on the income in its State of 

residence. The provision, and the corresponding requirements of the substantive rules of 

Articles 6 through 21, should be read with those two goals in mind. 

In general, paragraph 6 relates to entities that are not subject to tax at the entity 

level, as distinct from entities that are subject to tax, but with respect to which tax may be 

relieved under an integrated system. This paragraph applies to any resident of a 

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Contracting State who is entitled to income derived through an entity that is treated as 

fiscally transparent under the laws of either Contracting State. Entities falling under this 

description in the United States include partnerships, common investment trusts under 

section 584 and grantor trusts. This paragraph also applies to U.S. limited liability 

companies (“LLCs”) that are treated as partnerships or as disregarded entities for U.S. tax 

purposes. 

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

will be considered to be derived by a resident of a Contracting State if a resident is 

treated under the taxation laws of that State as deriving the item of income. For example, 

if a Finnish company pays interest to an entity that is treated as fiscally transparent for 

U.S. tax purposes, the interest will be considered derived by a resident of the U.S. only to 

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

(whose status as U.S. residents is determined, for this purpose, under U.S. tax law) as 

deriving the interest for U.S. tax purposes. In the case of a partnership, the persons who 

are, under U.S. tax laws, treated as partners of the entity would normally be the persons 

whom the U.S. tax laws would treat as deriving the interest income through the 

partnership. Also, it follows that persons whom the United States treats as partners but 

who are not U.S. residents for U.S. tax purposes may not claim a benefit for the interest 

paid to the entity under the Convention, because they are not residents of the United 

States for purposes of claiming this treaty benefit. (If, however, the country in which they 

are treated as resident for tax purposes, as determined under the laws of that country, has 

an income tax convention with Finland, they may be entitled to claim a benefit under that 

convention.) In contrast, if, for example, an entity is organized under U.S. laws and is 

classified as a corporation for U.S. tax purposes, interest paid by a Finnish company to 

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

corporation is treated under U.S. taxation laws as a resident of the United States and as 

deriving the income. 

The same result obtains even if the entity were viewed differently under the tax 

laws of the other Contracting State (e.g., as not fiscally transparent in Finland in the first 

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

Similarly, the characterization of the entity in a third country is also irrelevant, even if the 

entity is organized in that third country. The results follow regardless of whether the 

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

other, such as a single owner entity that is viewed as a branch for U.S. tax purposes and 

as a corporation for Finnish tax purposes. These results also obtain regardless of where 

the entity is organized (i.e., in the United States, in Finland, or, as noted above, in a third 

country). 

For example, income from U.S. sources received by an entity organized under the 

laws of the United States, which is treated for Finnish tax purposes as a corporation and 

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

considered derived by the shareholder of that corporation even if, under the tax laws of 

the United States, the entity is treated as fiscally transparent. Rather, for purposes of the 

treaty, the income is treated as derived by the U.S. entity. 

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

in either Contracting State. For example, if X, a resident of Finland, creates a revocable 

trust in the United States and names persons resident in a third country as the 

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

resident of Finland only to the extent that the laws of Finland treat X as deriving the 

income for tax purposes, perhaps through application of rules similar to the U.S. “grantor 

trust” rules. 

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

paragraph 6 does not prevent a Contracting State from taxing an entity that is treated as a 

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

are residents of Finland elects to be taxed as a corporation for U.S. tax purposes, the 

United States will tax that LLC on its worldwide income on a net basis, without regard to 

whether Finland views the LLC as fiscally transparent. 

Article II 

Paragraph a) of Article II of the Protocol replaces paragraph 1 of Article 4 

(Residence) of the Convention. The term "resident of a Contracting State" is defined in 

subparagraph a) of paragraph 1. In general, this definition incorporates the definitions of 

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

laws of a Contracting State, is subject to tax therein by reason of his domicile, residence, 

place of management, place of incorporation or any other similar criterion. Thus, 

residents of the United States include aliens who are considered U.S. residents under 

Code section 7701(b). Subparagraph a) of paragraph 1 also specifically includes the two 

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

two States, as residents for purposes of the Convention. 

Certain entities that are nominally subject to tax but that in practice are rarely 

required to pay tax also would generally be treated as residents and therefore accorded 

treaty benefits. For example, a U.S. Regulated Investment Company (RIC) and a U.S. 

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

treaty. Although the income earned by these entities normally is not subject to U.S. tax in 

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

their profits, and therefore may be regarded as "liable to tax." They also must satisfy a 

number of requirements under the Code in order to be entitled to special tax treatment. 

A person who is liable to tax in a Contracting State only in respect of income 

from sources within that State or capital situated therein or of profits attributable to a 

permanent establishment in that State will not be treated as a resident of that 

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

who is posted in the United States, who may be subject to U.S. tax on U.S. source 

investment income, but is not taxable in the United States on non-U.S. source income 

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

States for purposes of the Convention. Similarly, an enterprise of Finland with a 

permanent establishment in the United States is not, by virtue of that permanent 

establishment, a resident of the United States. The enterprise generally is subject to 

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U.S. tax only with respect to its income that is attributable to the U.S. permanent 

establishment, not with respect to its worldwide income, as it would be if it were a U.S. 

resident. 

Subparagraph b) of paragraph 1 contains an exception to the general rule of 

paragraph 1 a) that residence under internal law also determines residence under the 

Convention. The exception applies with respect to a U.S. citizen or alien lawfully 

admitted for permanent residence (i.e., a "green card" holder). Under paragraph 1 a), a 

person is considered a resident of the United States for purposes of the Convention if he 

is liable to tax in the United States by reason of citizenship. In addition, aliens admitted 

to the United States for permanent residence (“green card” holders) qualify as U.S. 

residents under the first sentence of paragraph 1 because they are taxed by the United 

States as residents, regardless of where they physically reside. 

Paragraph 1 b) provides that a U.S. citizen or green card holder will be treated as 

a resident of the United States for purposes of the Convention, and, thereby entitled to 

treaty benefits, only if he has a substantial presence (see section 7701(b)(3)), permanent 

home or habitual abode in the United States. This rule requires that the U.S. citizen or 

green card holder have a reasonably strong nexus with the United States. 

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

birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, 

has never lived in the United States, would not be entitled to benefits under the 

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

entitled to benefits under the Convention if he maintains a permanent home or habitual 

abode in the United States. 

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

not be treated as a U.S. resident under the Convention does not alter the application of the 

saving clause of paragraph 4 of Article 1 (Personal Scope) to that citizen. For example, a 

U.S. citizen who pursuant to the "citizen/green card holder" rule is not considered to be a 

resident of the United States still is taxable on his worldwide income under the generally 

applicable rules of the Code. 

Subparagraph c) of paragraph 1 of Article 4 of the Convention provides that 

certain tax-exempt entities such as pension funds and charitable organizations will be 

regarded as residents of a Contracting State regardless of whether they are generally 

liable to income tax in the State where they are established. Subparagraph c) applies to 

legal persons organized under the laws of a Contracting State and established and 

maintained in that State to provide pensions or other similar benefits pursuant to a plan, 

or exclusively for religious, charitable, scientific, artistic, cultural, or educational 

purposes. Thus, a section 501(c) organization (such as a U.S. charity) that is generally 

exempt from tax under U.S. law is a resident of the United States for all purposes of the 

Convention. 

Paragraph b) of Article II of the Protocol, which replaces paragraph 3 of Article 4 

(Residence) of the Convention, addresses dual-residence issues for persons other than 

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

such a person is, under paragraph 1 of Article 4 of the Convention, resident in both 

Contracting States, the competent authorities shall seek to determine a single State of 

residence for such person for purposes of the Convention. 

If the competent authorities do not reach an agreement on a single State of 

residence, that person may not claim any benefit accorded to residents of a Contracting 

State by the Convention. The person may, however, claim any benefits that are not 

limited to residents, such as those provided by paragraph 1 of Article 24 (NonDiscrimination). Thus, for example, a State cannot discriminate against a dual-resident 

company. 

Dual resident persons also may be treated as a resident of a Contracting State for 

purposes other than that of obtaining benefits under the Convention. For example, if a 

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

U.S. paying agent would withhold on that dividend at the appropriate treaty rate because 

reduced withholding is a benefit enjoyed by the resident of the other Contracting State, 

not by the dual resident company. The dual resident company that paid the dividend 

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

Convention. In addition, information relating to dual resident companies can be 

exchanged under the Convention because, by its terms, Article 26 (Exchange of 

Information) is not limited to residents of the Contracting States. 

Article III 

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

Article 10 provides rules for the taxation of dividends paid by a company that is a 

resident of one Contracting State to a beneficial owner that is a resident of the other 

Contracting State. The Article provides for full residence country taxation of such 

dividends and a limited source-State right to tax. Article 10 also provides rules for 

the imposition of a tax on branch profits by the State of source. 

Paragraph 1 

The right of a shareholder's country of residence to tax dividends arising in the 

source country is preserved by paragraph 1, which permits a Contracting State to tax its 

residents on dividends paid to them by a company that is a resident of the other 

Contracting State. For dividends from any other source paid to a resident, Article 21 

(Other Income) grants the residence country exclusive taxing jurisdiction (other than 

for dividends attributable to a permanent establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by a resident of the 

other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits 

the rate of withholding tax in the State of source on dividends paid by a company resident 

in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial 

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owner of the dividend is a company resident in the other State and owns directly shares 

representing at least 10 percent of the voting power of the company paying the dividend, 

then the rate of withholding tax in the State of source is limited to 5 percent of the gross 

amount of the dividend. Shares are considered voting shares if they provide the power to 

elect, appoint or replace any person vested with the powers ordinarily exercised by the 

board of directors of a U.S. corporation. 

The benefits of paragraph 2 may be granted at the time of payment by means of 

a reduced rate of withholding tax at source. It also is consistent with the paragraph for 

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

to be granted by means of a subsequent refund so long as such procedures are applied 

in a reasonable manner. 

The determination of whether the ownership threshold for subparagraph a) of 

paragraph 2 is met for purposes of the 5 percent maximum rate of withholding tax is 

made on the date on which entitlement to the dividend is determined. Thus, in the 

case of a dividend from a U.S. company, the determination of whether the ownership 

threshold is met generally would be made on the dividend record date. 

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

are paid. The taxation by a Contracting State of the income of its resident companies is 

governed by the internal law of the Contracting State, subject to the provisions of 

paragraph 4 of Article 24 (Non-Discrimination). 

The term "beneficial owner" is not defined in the Convention, and is, therefore, 

defined as under the internal law of the country imposing tax (i.e., the source country). 

The beneficial owner of the dividend for purposes of Article 10 is the person to which the 

dividend income is attributable for tax purposes under the laws of the source State. Thus, 

if a dividend paid by a corporation that is a resident of one of the States (as determined 

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

other State on behalf of a person that is not a resident of that other State, the dividend is 

not entitled to the benefits of this Article. However, a dividend received by a nominee on 

behalf of a resident of that other State would be entitled to benefits. These interpretations 

are confirmed by paragraph 12 of the Commentary to Article 10 of the OECD Model. 

Companies holding shares through fiscally transparent entities such as 

partnerships are considered for purposes of this paragraph to hold their proportionate 

interest in the shares held by the intermediate entity. As a result, companies holding 

shares through such entities may be able to claim the benefits of subparagraph (a) under 

certain circumstances. The lower rate applies when the company’s proportionate share of 

the shares held by the intermediate entity meets the 10 percent threshold, and the 

company meets the requirements of Article 1(6) (i.e., the company’s country of residence 

treats the intermediate entity as fiscally transparent) with respect to the dividend. 

Whether this ownership threshold is satisfied may be difficult to determine and often will 

require an analysis of the partnership or trust agreement. 

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Paragraph 3 

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

withholding tax) with respect to certain dividends distributed by a company that is a 

resident of one Contracting State to a resident of the other Contracting State. As 

described further below, this elimination of withholding tax is available with respect to 

certain inter-company dividends and with respect to pension funds. 

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

on dividends beneficially owned by a company that has owned 80 percent or more of the 

voting power of the company paying the dividend for the 12-month period ending on the 

date entitlement to the dividend is determined. The determination of whether the 

beneficial owner of the dividends owns at least 80 percent of the voting power of the 

paying company is made by taking into account both stock owned directly and stock 

owned indirectly through one or more residents of either Contracting State. 

Eligibility for the elimination of withholding tax provided by subparagraph (a) is 

subject to additional restrictions based on, but supplementing, the rules of Article 16 

(Limitation on Benefits). Accordingly, a company that meets the holding requirements 

described above will qualify for the benefits of paragraph 3 only if it also: (1) meets the 

“publicly traded” test of subparagraph 2(c) of Article 16 (Limitation on Benefits), (2) 

meets the “ownership-base erosion” and “active trade or business” tests described in 

subparagraph 2(f) and paragraph 4 of Article 16 (Limitation on Benefits), (3) meets the 

“derivative benefits” test of paragraph 3 of Article 16 (Limitation on Benefits), or (4) is 

granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of the 

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

These restrictions are necessary because of the increased pressure on the 

Limitation on Benefits tests resulting from the fact that the United States has relatively 

few treaties that provide for such elimination of withholding tax on inter-company 

dividends. The additional restrictions are intended to prevent companies from reorganizing in order to become eligible for the elimination of withholding tax in 

circumstances where the Limitation on Benefits provision does not provide sufficient 

protection against treaty-shopping. 

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

does not have a tax treaty with the United States providing for the elimination of 

withholding tax on inter-company dividends. ThirdCo owns directly 100 percent of the 

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

company. FCo is a substantial company that manufactures widgets; USCo distributes 

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

dividends paid by USCo to FCo would qualify for treaty benefits under the active trade or 

business test of paragraph 4 of Article 16. However, allowing ThirdCo to qualify for the 

elimination of withholding tax, which is not available to it under the third state’s treaty 

with the United States (if any), would encourage treaty-shopping. 

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In order to prevent this type of treaty-shopping, paragraph 3 requires FCo to meet 

the ownership-base erosion requirements of subparagraph 2(f) of Article 16 in addition to 

the active trade or business test of paragraph 4 of Article 16. Thus, FCo would not qualify 

for the exemption from withholding tax unless (i) on at least half the days of the taxable 

year, at least 50 percent of each class of its shares was owned by persons that are 

residents of Finland and eligible for treaty benefits under certain specified tests and (ii) 

less than 50 percent of FCo’s gross income is paid in deductible payments to persons that 

are not residents of either Contracting State eligible for benefits under those specified 

tests. Because FCo is wholly owned by a third country resident, FCo could not qualify for 

the elimination of withholding tax on dividends from USCo under the ownership-base 

erosion test and the active trade or business test. Consequently, FCo would need to 

qualify under another test or obtain discretionary relief from the competent authority 

under Article 16(6). For purposes of Article 10(3)(a)(ii), it is not sufficient for a company 

to qualify for treaty benefits generally under the active trade or business test or the 

ownership-base erosion test unless it qualifies for treaty benefits under both. 

Alternatively, companies that are publicly traded or subsidiaries of publiclytraded companies will generally qualify for the elimination of withholding tax. Thus, a 

company that is a resident of Finland and that meets the requirements of Article 

16(2)(c)(i) or (ii) will be entitled to the elimination of withholding tax, subject to the 12-

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

In addition, under Article 10(3)(a)(iii), a company that is a resident of a 

Contracting State may also qualify for the elimination of withholding tax on dividends if 

it satisfies the derivative benefits test of paragraph 3 of Article 16. Thus, a Finnish 

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

of withholding tax if it is wholly-owned, for example, by a U.K., Dutch, Swedish, or 

Mexican publicly-traded company and the other requirements of the derivative benefits 

test are met. At this time, ownership by companies that are residents of other European 

Union, European Economic Area or North American Free Trade Agreement countries 

would not qualify the Finnish company for benefits under this provision, as the United 

States does not have treaties that eliminate the withholding tax on inter-company 

dividends with any other of those countries. If the United States were to enter into such 

treaties with more of those countries, residents of those countries could then qualify as 

equivalent beneficiaries for purposes of this provision. 

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

dividends from Finnish subsidiaries, because of the effect of the Parent-Subsidiary 

Directive in the European Union. Under that directive, inter-company dividends paid 

within the European Union are free of withholding tax. Under subparagraph (h) of 

paragraph 7 of Article 16, that directive will also be taken into account in determining 

whether the owner of a U.S. company receiving dividends from a Finnish company is an 

“equivalent beneficiary.” Thus, a company that is a resident of a member state of the 

European Union will, by definition, meet the requirements regarding equivalent benefits 

with respect to any dividends received by its U.S. subsidiary from a Finnish company. 

For example, assume USCo is a wholly-owned subsidiary of ICo, an Italian publiclytraded company. USCo owns all of the shares of FCo, a Finnish company. If FCo were to 

12
pay dividends directly to ICo, those dividends would be exempt from withholding tax in 

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

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

of subparagraph 7(h) of that article. 

A company also may qualify for the elimination of withholding tax pursuant to 

Article 10(3)(a)(iii) if it is owned by seven or fewer U.S. or Finnish residents who 

qualify as an “equivalent beneficiary” and meet the other requirements of the derivative 

benefits provision. This rule may apply, for example, to certain Finnish corporate joint 

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

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

application intended to ensure that for purposes of applying Article 10(3) certain joint 

ventures, not just wholly-owned subsidiaries, can qualify for benefits. For example, 

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

European Union, that includes a provision identical to Article 10(3). USCo is 100 percent 

owned by FCo, a Finnish company, which in turn is owned 49 percent by PCo, a Finnish 

publicly-traded company, and 51 percent by XCo, a publicly-traded company that is 

resident in Country X. In the absence of a special rule for interpreting the derivative 

benefits provision, each of the shareholders would be treated as owning only its 

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

neither shareholder would be an equivalent beneficiary, because neither would meet the 

80 percent ownership test with respect to USCo. However, since both PCo and XCo are 

residents of countries that have treaties with the United States that provide for elimination 

of withholding tax on inter-company dividends, it is appropriate to provide benefits to 

FCo in this case. 

Consequently, when determining whether a person is an equivalent beneficiary 

under paragraph 7 of Article 16, each of the shareholders is treated as owning shares with 

the same percentage of voting power as the shares held by FCo for purposes of 

determining whether it would be entitled to an equivalent rate of withholding tax. This 

rule is necessary because of the high ownership threshold for qualification for the 

elimination of withholding tax on inter-company dividends. 

If a company does not qualify for the elimination of withholding tax under any of 

the foregoing objective tests, it may request a determination from the relevant competent 

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

an item of income if the competent authority of the Contracting State in which the 

income arises determines that the establishment, acquisition or maintenance of such 

resident and the conduct of its operations did not have as one of its principal purposes the 

obtaining of benefits under the Convention. 

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

dividends beneficially owned by a pension fund (as defined in subparagraph (j) of 

paragraph 7 of Article 16) may not be taxed in the Contracting State of which the 

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

13
carrying on of a business, directly by the pension fund or indirectly through an 

associated enterprise. 

This rule is necessary because pension funds normally do not pay tax (either 

through a general exemption or because reserves for future pension liabilities effectively 

offset all of the fund’s income), and therefore cannot benefit from a foreign tax credit. 

Moreover, distributions from a pension fund generally do not maintain the character of 

the underlying income, so the beneficiaries of the pension are not in a position to claim a 

foreign tax credit when they finally receive the pension, in many cases years after the 

withholding tax has been paid. Accordingly, in the absence of this rule, the dividends 

would almost certainly be subject to unrelieved double taxation. 

Paragraph 4 

Article 10 generally applies to distributions made by a RIC or a REIT. However, 

distributions made by a REIT or certain RICs that are attributable to gains derived from 

the alienation of U.S. real property interests and treated as gain recognized under section 

897(h)(1) are taxable under paragraph 1 of Article 13 instead of Article 10. In the case of 

RIC or REIT distributions to which Article 10 applies, paragraph 4 imposes limitations 

on the rate reductions provided by paragraphs 2 and 3 in the case of dividends paid by a 

RIC or a REIT. 

The first sentence of subparagraph 4(a) provides that dividends paid by a RIC or 

REIT are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a) or the 

elimination of source-country withholding tax of subparagraph 3(a). 

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

rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that 

the elimination of source-country withholding tax of subparagraph 3(b) applies to 

dividends paid by RICs and beneficially owned by a pension fund. 

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

withholding tax also applies to dividends paid by a REIT and that the elimination of 

source-country withholding tax of subparagraph 3(b) applies to dividends paid by REITs 

and beneficially owned by a pension fund, provided that one of the three following 

conditions is met. First, the beneficial owner of the dividend is an individual or a pension 

fund, in either case holding an interest of not more than 10 percent in the REIT. Second, 

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

beneficial owner of the dividend is a person holding an interest of not more than 5 

percent of any class of the REIT’s shares. Third, the beneficial owner of the dividend 

holds an interest in the REIT of not more than 10 percent and the REIT is “diversified.” 

Subparagraph (b) provides a definition of the term “diversified,” which is 

necessary because the term is not defined in the Code. A REIT is diversified if the gross 

value of no single interest in real property held by the REIT exceeds 10 percent of the 

gross value of the REIT’s total interest in real property. Foreclosure property is not 

considered an interest in real property, and a REIT holding a partnership interest is 

14
treated as owning its proportionate share of any interest in real property held by the 

partnership. 

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

gain inappropriate U.S. tax benefits. For example, a company resident in Finland that 

wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio 

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

it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10 

percent or more of the interests in a RIC. If the RIC is a pure conduit, there may be no 

U.S. tax cost to interposing the RIC in the chain of ownership. Absent the special rule in 

paragraph 4, such use of the RIC could transform portfolio dividends, taxable in the 

United States under the Convention at a 15 percent maximum rate of withholding tax, 

into direct investment dividends taxable at a 5 percent maximum rate of withholding tax 

or eligible for the elimination of source-country withholding tax. 

Similarly, a resident of Finland directly holding U.S. real property would pay 

U.S. tax on rental income either at a 30 percent rate of withholding tax on the gross 

income or at graduated rates on the net income. As in the preceding example, by placing 

the real property in a REIT, the investor could, absent a special rule, transform rental 

income into dividend income from the REIT, taxable at the rates provided in Article 10, 

significantly reducing the U.S. tax that otherwise would be imposed. Paragraph 4 

prevents this result and thereby avoids a disparity between the taxation of direct real 

estate investments and real estate investments made through REIT conduits. In the cases 

in which paragraph 4 allows a dividend from a REIT to be eligible for the 15 percent rate 

of withholding tax, the holding in the REIT is not considered the equivalent of a direct 

holding in the underlying real property. 

Paragraph 5 

Paragraph 5 defines the term “dividends” broadly and flexibly. The definition is 

intended to cover all arrangements that yield a return on an equity investment in a 

corporation as determined under the tax law of the state of source, including types of 

arrangements that might be developed in the future. 

The term includes income from shares, or other corporate rights that are not 

treated as debt under the law of the source State, that participate in the profits of the 

company. The term also includes income that is subjected to the same tax treatment as 

income from shares by the law of the State of source. Thus, a constructive dividend that 

results from a non-arm's length transaction between a corporation and a related party is a 

dividend. In the case of the United States, the term dividends includes amounts treated as 

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

shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 (sale of foreign 

subsidiary's stock to U.S. sister company is a deemed dividend to extent of subsidiary's 

and sister's earnings and profits). Further, a distribution from a U.S. publicly traded 

limited partnership, which is taxed as a corporation under U.S. law, is a dividend for 

purposes of Article 10. However, a distribution by a limited liability company is not 

15
taxable by the United States under Article 10, provided the limited liability company is 

not characterized as an association taxable as a corporation under U.S. law. 

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

corporation may be treated as a dividend to the extent that the debt is recharacterized as 

equity under the laws of the source State. 

Paragraph 6 

Paragraph 6 provides that the general source country limitations under paragraph 

2 and 3 on dividends do not apply if the beneficial owner of the dividends carries on 

business through a permanent establishment situated in the source country, or performs in 

the source country independent personal services from a fixed base situated therein, and 

the dividends are attributable to such permanent establishment or fixed base. In such 

case, the rules of Article 7 (Business Profits) or Article 14 (Independent Personal 

Services) shall apply, as the case may be. Accordingly, such dividends will be taxed on a 

net basis using the rates and rules of taxation generally applicable to residents of the 

Contracting State in which the permanent establishment or fixed base is located, as such 

rules may be modified by the Convention. An example of dividends attributable to a 

permanent establishment would be dividends derived by a dealer in stock or securities 

from stock or securities that the dealer held for sale to customers. 

Paragraph 7 

The right of a Contracting State to tax dividends paid by a company that is a 

resident of the other Contracting State is restricted by paragraph 7 to cases in which the 

dividends are paid to a resident of that Contracting State or are attributable to a 

permanent establishment or fixed base in that Contracting State. Thus, a Contracting 

State may not impose a “secondary” withholding tax on dividends paid by a nonresident 

company out of earnings and profits from that Contracting State. In the case of the 

United States, the secondary withholding tax was eliminated for payments made after 

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

Paragraphs 8 and 9 

Paragraph 8 permits a Contracting State to impose a branch profits tax on a 

company resident in the other Contracting State. The tax is in addition to other taxes 

permitted by the Convention. The term “company” is defined in subparagraph 1(d) of 

Article 3 (General Definitions). 

A Contracting State may impose a branch profits tax on a company if the 

company has income attributable to a permanent establishment in that Contracting State, 

derives income from real property in that Contracting State that is taxed on a net basis 

under Article 6 (Income from Immovable (Real) Property), or realizes gains taxable in 

that State under paragraph 1 of Article 13 (Gains). In the case of the United States, the 

imposition of such tax is limited, however, to the portion of the aforementioned items of 

income that represents the amount of such income that is the “dividend equivalent 

amount.” This is consistent with the relevant rules under the U.S. branch profits tax, and 

16
the term dividend equivalent amount is defined under U.S. law. Section 884 defines the 

dividend equivalent amount as an amount for a particular year that is equivalent to the 

income described above that is included in the corporation's effectively connected 

earnings and profits for that year, after payment of the corporate tax under Articles 6 

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

for any increase in the branch's U.S. net equity during the year or increased for any 

reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. 

liabilities. See Treas. Reg. section 1.884-1. The dividend equivalent amount for any year 

approximates the dividend that a U.S. branch office would have paid during the year if 

the branch had been operated as a separate U.S. subsidiary company. 

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

attributable to a permanent establishment in Finland, as well as income that is subject to 

tax under Article 6 (Income from Immovable (Real) Property) or paragraph 1 of Article 

13, is limited to amounts, as defined under the laws of Finland, that would be distributed 

as a dividend if the operation were carried on by a Finnish subsidiary. Although Finland 

currently does not have statutory provisions for imposition of a branch tax, subparagraph 

b) of paragraph 8 preserves Finland’s right to impose such a tax if one is subsequently 

enacted, provided that the base of that tax is limited to an amount that is analogous to the 

dividend equivalent amount. 

Paragraph 9 limits the rate of the branch profits tax allowed under paragraph 8 to 

5 percent. Paragraph 9 also provides, however, that the branch profits tax will not be 

imposed if certain requirements are met. In general, these requirements provide rules for 

a branch that parallel the rules for when a dividend paid by a subsidiary will be subject to 

exclusive residence-country taxation (i.e., the elimination of source-country withholding 

tax). Accordingly, the branch profits tax may not be imposed in the case of a company 

that: (1) meets the “publicly traded” test of subparagraph 2(c) of Article 16 (Limitation of 

Benefits), (2) meets the “ownership-base erosion” and “active trade or business” tests 

described in subparagraph 2(f) and subparagraph 4 of Article 16, (3) meets the 

“derivative benefits” test of paragraph 3 of Article 16, or (4) is granted benefits with 

respect to the elimination of the branch profits tax by the competent authority pursuant to 

paragraph 6 of Article 16. 

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

tax with respect to profits attributable to a U.S. branch and not reinvested in that branch, 

paragraph 9 may apply to eliminate the branch profits tax if the company either met the 

“publicly traded” test, met the combined “ownership-base erosion” and “active trade or 

business” test, or met the derivative benefits test. If, by contrast, a Finnish company did 

not meet those tests, but met the ownership-base erosion test (and thus qualified for treaty 

benefits under subparagraph 2(a)), then the branch profits tax would apply at a rate of 5 

percent, unless the Finnish company is granted benefits with respect to the elimination of 

the branch profits tax by the competent authority pursuant to paragraph 6 of Article 16. 

17
Relation to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of 

dividends, the saving clause of paragraph 4 of Article 1 (Personal Scope) permits the 

United States to tax dividends received by its residents and citizens as if the Convention 

had not come into effect. 

The benefits of this Article are also subject to the provisions of Article 16 

(Limitation on Benefits). Thus, if a resident of Finland is the beneficial owner of 

dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits 

under at least one of the tests of Article 16 in order to receive the benefits of this Article. 

Paragraph 2 of Article III of the Protocol makes a conforming change to the crossreference in paragraph 5 of Article 24 (Non-Discrimination) of the Convention. 

Article IV 

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

adding a new paragraph 6, providing anti-abuse exceptions to the source-country 

exemption in paragraph 1 for two classes of interest payments. 

The first class of interest, dealt with in subparagraph (a) of paragraph 6, is socalled “contingent interest.” Such interest is defined in subparagraph (a) as any interest 

paid by a resident of a Contracting State that is determined by reference to the receipts, 

sales, income, profits or other cash flow of the debtor or a related person, to any change 

in the value of any property of the debtor or a related person or to any dividend, 

partnership distribution or similar payment made by the debtor or a related person and 

paid to a resident of the other Contracting State. Any such interest may be taxed in the 

Contracting State in which it arises according to the laws of that State. If the beneficial 

owner is a resident of the other Contracting State, however, the gross amount of the 

interest may be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph (b) of paragraph 6. This 

exception is consistent with the policy of Code sections 860E(e) and 860G(b) that excess 

inclusions with respect to a real estate mortgage investment conduit (REMIC) should 

bear full U.S. tax in all cases. Without a full tax at source, foreign purchasers of residual 

interests would have a competitive advantage over U.S. purchasers at the time these 

interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue 

loss with respect to mortgages held in a REMIC because of opportunities for tax 

avoidance created by differences in the timing of taxable and economic income produced 

by these interests. 

Article V 

Article V of the Protocol deletes paragraph 2 of Article 12 (Royalties) of the 

Convention, which allowed taxation in the Contracting State in which they arise of 

royalties beneficially owned by a resident of the other Contracting State, in the case of 

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

18
eliminates withholding on cross-border royalty payments regardless of the type of 

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

Article VI 

Article VI of the Protocol replaces Article 16 (Limitation on Benefits) of 

the Convention. Article 16 contains anti-treaty-shopping provisions that are 

intended to prevent residents of third countries from benefiting from what is 

intended to be a reciprocal agreement between two countries. In general, the 

provision does not rely on a determination of purpose or intention but instead sets 

forth a series of objective tests. A resident of a Contracting State that satisfies one 

of the tests will receive benefits regardless of its motivations in choosing its 

particular business structure. 

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

rule that residents are entitled to benefits otherwise accorded to residents only to 

the extent provided in the Article. Paragraph 2 lists a series of attributes of a 

resident of a Contracting State, the presence of any one of which will entitle that 

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

"derivative benefits" test under which certain categories of income may qualify for 

benefits. Paragraph 4 provides that regardless of whether a person qualifies for 

benefits under paragraph 2 or 3, benefits may be granted to that person with regard 

to certain income earned in the conduct of an active trade or business. Paragraph 5 

provides special rules for so-called “triangular cases” notwithstanding paragraphs 

1 through 4 of Article 16. Paragraph 6 provides that benefits may also be granted 

if the competent authority of the State from which benefits are claimed determines 

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

terms used in the Article. 

Paragraph 1 

Paragraph 1 provides that a resident of a Contracting State will be entitled to the 

benefits of the Convention otherwise accorded to residents of a Contracting State only to 

the extent provided in this Article. The benefits otherwise accorded to residents under 

the Convention include all limitations on source-based taxation under Articles 6 through 

22, the treaty-based relief from double taxation provided by Article 23 (Elimination of 

Double Taxation), and the protection afforded to residents of a Contracting State under 

Article 24 (Non-Discrimination). Some provisions do not require that a person be a 

resident in order to enjoy the benefits of those provisions. For example, Article 25 

(Mutual Agreement Procedure) is not limited to residents of the Contracting States, and 

Article 27 (Members of Diplomatic Missions and Consular Posts) applies to diplomatic 

agents or consular officials regardless of residence. Article 16 accordingly does not limit 

the availability of treaty benefits under such provisions. 

Article 16 and the anti-abuse provisions of domestic law complement each other, 

as Article 16 effectively determines whether an entity has a sufficient nexus to a 

19
Contracting State to be treated as a resident for treaty purposes, while domestic antiabuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit 

principles) determine whether a particular transaction should be recast in accordance with 

its substance. Thus, internal law principles of the source Contracting State may be 

applied to identify the beneficial owner of an item of income, and Article 16 then will be 

applied to the beneficial owner to determine if that person is entitled to the benefits of the 

Convention with respect to such income. 

Paragraph 2 

Paragraph 2 has six subparagraphs, each of which describes a category of 

residents that are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self-executing. 

Unlike the provisions of paragraph 6, discussed below, claiming benefits under 

paragraph 2 does not require an advance competent authority ruling or approval. 

The tax authorities may, of course, on review, determine that the taxpayer has 

improperly interpreted the paragraph and is not entitled to the benefits claimed. 

Individuals -- Subparagraph 2(a) 

Subparagraph (a) provides that individual residents of a Contracting State will be 

entitled to all treaty benefits. If such an individual receives income as a nominee on 

behalf of a third country resident, benefits may be denied under the applicable articles of 

the Convention by the requirement that the beneficial owner of the income be a resident 

of a Contracting State. 

Governments -- Subparagraph 2(b) 

Subparagraph (b) provides that the Contracting States and any political 

subdivision, statutory body or local authority thereof will be entitled to all the benefits of 

the Convention. Subparagraph i) of paragraph 7 defines the term “statutory body” to 

mean any legal entity of a public character created by the laws of a Contracting State in 

which no person other than the State itself, or a political subdivision or local authority 

thereof, has an interest. The term “statutory body” was added at Finland’s request 

because under Finnish laws there exist governmental bodies that cannot be properly 

described as political subdivisions or local authorities. These include, among others, the 

National Social Insurance Institution, the Bank of Finland (Finland’s central bank), and 

the University of Helsinki. 

Publicly-Traded Corporations -- Subparagraph 2(c)(i) 

Subparagraph (c) applies to two categories of companies: publicly traded 

companies and subsidiaries of publicly traded companies. A company resident in a 

Contracting State is entitled to all the benefits of the Convention under clause (i) of 

subparagraph (c) if the principal class of its shares, and any disproportionate class of 

shares, is regularly traded on one or more recognized stock exchanges and the company 

satisfies at least one of the following additional requirements: first, the company’s 

20
principal class of shares is primarily traded on a recognized stock exchange located in the 

Contracting State of which the company is a resident, or, in the case of a company 

resident in Finland, on a recognized stock exchange located within the European Union, 

any other European Economic Area country, or, in the case of a company resident in the 

United States, on a recognized stock exchange located in another state that is a party to 

the North American Free Trade Agreement; or, second, the company’s primary place of 

management and control is in its State of residence. 

The term “recognized stock exchange” is defined in subparagraph (d) of 

paragraph 7. It includes the NASDAQ System and any stock exchange registered with the 

Securities and Exchange Commission as a national securities exchange for purposes of 

the Securities Exchange Act of 1934 and the Helsinki Stock Exchange. The term also 

includes the Irish Stock Exchange and the stock exchanges of Amsterdam, Brussels, 

Copenhagen, Frankfurt, London, Oslo, Paris, Reykjavik, Riga, Stockholm, Tallinn, 

Vilnius, Vienna and Zurich, and any other stock exchange agreed upon by the competent 

authorities of the Contracting States. 

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

the shares of that class meet the relevant trading requirements. If the company has more 

than one class of shares, it is necessary as an initial matter to determine which class or 

classes constitute the “principal class of shares.” The term “principal class of shares” is 

defined in subparagraph (a) of paragraph 7 to mean the ordinary or common shares of the 

company representing the majority of the aggregate voting power and value of the 

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

representing the majority of the aggregate voting power and value of the company, then 

the “principal class of shares” is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and value of the company. 

Subparagraph (c) of paragraph 7 defines the term “shares” to include depository receipts 

for shares. Although in a particular case involving a company with several classes of 

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

account for more than 50 percent of the shares, it is only necessary for one such group to 

satisfy the requirements of this subparagraph in order for the company to be entitled to 

benefits. Benefits would not be denied to the company even if a second, non-qualifying 

group of shares with more than half of the company’s voting power and value could be 

identified. 

A company whose principal class of shares is regularly traded on a recognized 

stock exchange will nevertheless not qualify for benefits under subparagraph (c) of 

paragraph 2 if it has a disproportionate class of shares that is not regularly traded on a 

recognized stock exchange. The term “disproportionate class of shares” is defined in 

subparagraph (b) of paragraph 7. A company has a disproportionate class of shares if it 

has outstanding a class of shares that is subject to terms or other arrangements that entitle 

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

Contracting State than that to which the holder would be entitled in the absence of such 

terms or arrangements. Thus, for example, a company resident in Finland meets the test 

of subparagraph (b) of paragraph 7 if it has outstanding a class of “tracking stock” that 

21
pays dividends based upon a formula that approximates the company’s return on its 

assets employed in the United States. 

The following example illustrates this result. 

Example. FCo is a corporation resident in Finland. FCo has two classes of shares: 

Common and Preferred. The Common shares are listed and regularly traded on the 

Helsinki Stock Exchange. The Preferred shares have no voting rights and are entitled to 

receive dividends equal in amount to interest payments that FCo receives from unrelated 

borrowers in the United States. The Preferred shares are owned entirely by a single 

investor that is a resident of a country with which the United States does not have a tax 

treaty. The Common shares account for more than 50 percent of the value of FCo and for 

100 percent of the voting power. Because the owner of the Preferred shares is entitled to 

receive payments corresponding to the U.S. source interest income earned by FCo, the 

Preferred shares are a disproportionate class of shares. Because the Preferred shares are 

not regularly traded on a recognized stock exchange, FCo will not qualify for benefits 

under subparagraph (c) of paragraph 2. 

A class of shares will be “regularly traded” in a taxable year, under subparagraph 

(e) of paragraph 7, if the aggregate number of shares of that class traded on one or more 

recognized exchanges during the twelve months ending on the day before the beginning 

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

that class during that twelve-month period. For this purpose, if a class of shares was not 

listed on a recognized stock exchange during this twelve-month period, the class of 

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

requirements for the taxable period in which the income arises. Trading on one or more 

recognized stock exchanges may be aggregated for purposes of meeting the “regularly 

traded” standard of subparagraph (e). For example, a U.S. company could satisfy the 

definition of “regularly traded” through trading, in whole or in part, on a recognized 

stock exchange located in Finland or certain third countries. Authorized but unissued 

shares are not considered for purposes of subparagraph (e). 

The term “primarily traded” is not defined in the Convention. In accordance with 

paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has 

under the laws of the State concerning the taxes to which the Convention applies, 

generally the source State. In the case of the United States, this term is understood to 

have the meaning it has under Treas. Reg. section 1.884-5(d)(3), relating to the branch 

tax provisions of the Code. Accordingly, stock of a corporation is “primarily traded” if 

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

taxable year on all recognized stock exchanges in the Contracting State of which the 

company is a resident exceeds the number of shares in the company’s principal class of 

shares that are traded during that year on established securities markets in any other 

single foreign country. 

A company whose principal class of shares is regularly traded on a recognized 

exchange but cannot meet the primarily traded test may claim treaty benefits if its 

primary place of management and control is in its country of residence. This test should 

22
be distinguished from the “place of effective management” test which is used in the 

OECD Model and by many other countries to establish residence. In some cases, the 

place of effective management test has been interpreted to mean the place where the 

board of directors meets. By contrast, the primary place of management and control test 

looks to where day-to-day responsibility for the management of the company (and its 

subsidiaries) is exercised. The company’s primary place of management and control will 

be located in the State in which the company is a resident only if the executive officers 

and senior management employees exercise day-to-day responsibility for more of the 

strategic, financial and operational policy decision making for the company (including 

direct and indirect subsidiaries) in that State than in the other State or any third state, and 

the staffs that support the management in making those decisions are also based in that 

State. Thus, the test looks to the overall activities of the relevant persons to see where 

those activities are conducted. In most cases, it will be a necessary, but not a sufficient, 

condition that the headquarters of the company (that is, the place at which the CEO and 

other top executives normally are based) be located in the Contracting State of which the 

company is a resident. 

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

considered “executive officers and senior management employees.” In most cases, it will 

not be necessary to look beyond the executives who are members of the Board of 

Directors (the “inside directors”) in the case of a U.S. company. That will not always be 

the case, however; in fact, the relevant persons may be employees of subsidiaries if those 

persons make the strategic, financial and operational policy decisions. Moreover, it 

would be necessary to take into account any special voting arrangements that result in 

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

members. 

Subsidiaries of Publicly-Traded Corporations – Subparagraph 2(c)(ii) 

A company resident in a Contracting State is entitled to all the benefits of the 

Convention under clause (ii) of subparagraph (c) of paragraph 2 if five or fewer publicly 

traded companies described in clause (i) are the direct or indirect owners of at least 50 

percent of the aggregate vote and value of the company’s shares (and at least 50 percent 

of any disproportionate class of shares). If the publicly-traded companies are indirect 

owners, however, each of the intermediate companies must be a resident of one of the 

Contracting States. 

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

another Finnish company, would qualify for benefits under the Convention if the 

principal class of shares (and any disproportionate classes of shares) of the Finnish 

parent company are regularly and primarily traded on the London stock exchange. 

However, a Finnish subsidiary would not qualify for benefits under clause (ii) if the 

publicly traded parent company were a resident of Ireland, for example, and not a 

resident of the United States or Finland. Furthermore, if a Finnish parent company 

indirectly owned a Finnish company through a chain of subsidiaries, each such 

subsidiary in the chain, as an intermediate owner, must be a resident of the United States 

or Finland for the Finnish subsidiary to meet the test in clause (ii). 

23
Tax-Exempt Organizations -- Subparagraph 2(d) 

Subparagraphs 2(d) and 2(e) provide rules by which tax-exempt organizations 

described in Article 4(1)(c)(i) and pension funds described in paragraph 7(j) of Article 16 

will be entitled to all of the benefits of the Convention. A tax-exempt organization other 

than a tax-exempt pension fund automatically qualifies for benefits, without regard to the 

residence of its beneficiaries or members. Entities qualifying under this subparagraph are 

those that are generally exempt from tax in their Contracting State of residence and that 

are established and maintained exclusively to fulfill religious, charitable, scientific, 

artistic, cultural, or educational purposes. 

Pension Funds -- Subparagraph 2(e) 

A pension fund will qualify for benefits if, as of the close of the end of the prior 

taxable year, more than 50 percent of the beneficiaries, members or participants of the 

pension are individuals resident in either Contracting State. For purposes of this 

provision, the term “beneficiaries” should be understood to refer to the persons receiving 

benefits from the pension fund. “Pension fund” is defined in subparagraph (j) of 

paragraph 7 to include, in the case of the United States, a tax-exempt pension fund. In 

the case of Finland, the term “pension fund” includes a pension institution, but if such an 

institution is organized as a company, only a mutual pension insurance company. 

Ownership/Base Erosion -- Subparagraph 2(f) 

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

that applies to any form of legal entity that is a resident of a Contracting State. The test 

provided in subparagraph (f), the so-called ownership and base erosion test, is a two-part 

test. Both prongs of the test must be satisfied for the resident to be entitled to treaty 

benefits under subparagraph 2(f). 

The ownership prong of the test, under clause (i), requires that 50 percent or more 

of each class of shares or other beneficial interests in the person is owned, directly or 

indirectly, on at least half the days of the person’s taxable year by persons who are 

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

themselves entitled to treaty benefits under subparagraphs (a), (b), (d), (e) or clause (i) of 

subparagraph (c) of paragraph 2. In the case of indirect owners, however, each of the 

intermediate owners must be a resident of that Contracting State. 

Trusts may be entitled to benefits under this provision if they are treated as 

residents under Article 4 (Residence) and they otherwise satisfy the requirements of this 

subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be 

considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial 

interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent 

less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a 

trust will not be considered to be owned by a person entitled to benefits under the other 

provisions of paragraph 2 if it is not possible to determine the beneficiary's actuarial 

interest. Consequently, if it is not possible to determine the actuarial interest of the 

24
beneficiaries in a trust, the ownership test under clause i) cannot be satisfied, unless all 

possible beneficiaries are persons entitled to benefits under the other subparagraphs of 

paragraph 2. 

The base erosion prong of clause (ii) of subparagraph (f) is satisfied with respect 

to a person if less than 50 percent of the person’s gross income for the taxable year, as 

determined under the tax law in the person’s State of residence, is paid or accrued, 

directly or indirectly, to persons who are not residents of either Contracting State entitled 

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

paragraph 2, in the form of payments deductible for tax purposes in the payer’s State of 

residence. These amounts do not include arm’s-length payments in the ordinary course of 

business for services or tangible property or payments in respect of financial obligations 

to a bank that is not related to the payor. To the extent they are deductible from the 

taxable base, trust distributions are deductible payments. However, depreciation and 

amortization deductions, which do not represent payments or accruals to other persons, 

are disregarded for this purpose. 

Paragraph 3 

Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all 

treaty benefits, although the test is applied to individual items of income. In general, a 

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

owner of the resident would have been entitled to the same benefit had the income in 

question flowed directly to that owner. To qualify under this paragraph, the company 

must meet an ownership test and a base erosion test. 

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

equivalent beneficiaries must own shares representing at least 95 percent of the aggregate 

voting power and value of the company and at least 50 percent of any disproportionate 

class of shares. Ownership may be direct or indirect. The term “equivalent beneficiary” is 

defined in subparagraph (g) of paragraph 7. This definition may be met in two alternative 

ways, the first of which has two requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is 

entitled to equivalent benefits under a treaty between the country of source and the 

country in which the person is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of a member state of the 

European Union, a European Economic Area state, a party to the North American Free 

Trade Agreement, or Switzerland (collectively, “qualifying States”). 

The second requirement of the definition of “equivalent beneficiary” is that the 

person must be entitled to equivalent benefits under an applicable treaty. To satisfy the 

second requirement, the person must be entitled to all the benefits of a comprehensive 

treaty between the Contracting State from which benefits of the Convention are claimed 

and a qualifying State under provisions that are analogous to the rules in paragraph 2 of 

this Article regarding individuals, governmental entities, publicly-traded companies, and 

25
tax-exempt organizations and pensions. If the treaty in question does not have a 

comprehensive limitation on benefits article, this requirement is met only if the person 

would be entitled to treaty benefits under the tests in paragraph 2 of this Article 

applicable to individuals, governmental entities, publicly-traded companies, and taxexempt organizations and pensions if the person were a resident of one of the Contracting 

States. 

In order to satisfy the second requirement necessary to qualify as an “equivalent 

beneficiary” under paragraph 7(g)(i)(B) with respect to insurance premiums, dividends, 

interest, royalties or branch tax, the person must be entitled to a rate of excise, 

withholding or branch tax that is at least as low as the excise, withholding or branch 

tax rate that would apply under the Convention to such income. Thus, the rates to be 

compared are: (1) the rate of tax that the source State would have imposed if a 

qualified resident of the other Contracting State was the beneficial owner of the 

income; and (2) the rate of tax that the source State would have imposed if the third 

State resident received the income directly from the source State. For example, USCo 

is a wholly owned subsidiary of FCo, a company resident in Finland. FCo is wholly 

owned by ICo, a corporation resident in Italy. Assuming FCo satisfies the requirements 

of paragraph 3 of Article 10 (Dividends), FCo would be eligible for the elimination of 

dividend withholding tax. The dividend withholding tax rate in the treaty between the 

United States and Italy is 5 percent. Thus, if ICo received the dividend directly from 

USCo, ICo would have been subject to a 5 percent rate of withholding tax on the 

dividend. Because ICo would not be entitled to a rate of withholding tax that is at least 

as low as the rate that would apply under the Convention to such income (i.e., zero), 

ICo is not an equivalent beneficiary within the meaning of paragraph 7(g)(i) of Article 

16 with respect to the elimination of withholding tax on dividends. 

Subparagraph 7(h) provides a special rule to take account of the fact that 

withholding taxes on many inter-company dividends, interest and royalties are exempt 

within the European Union by reason of various EU directives, rather than by tax treaty. 

If a U.S. company receives such payments from a Finnish company, and that U.S. 

company is owned by a company resident in a member state of the European Union that 

would have qualified for an exemption from withholding tax if it had received the income 

directly, the parent company will be treated as an equivalent beneficiary. This rule is 

necessary because many European Union member countries have not re-negotiated their 

tax treaties to reflect the exemptions available under the directives. 

The requirement that a person be entitled to "all the benefits" of a comprehensive 

tax treaty eliminates those persons that qualify for benefits with respect to only certain 

types of income. Accordingly, the fact that a French parent of a Finnish company is 

engaged in the active conduct of a trade or business in France and therefore would be 

entitled to the benefits of the U.S.-France treaty if it received dividends directly from a 

U.S. subsidiary of the Finnish company is not sufficient for purposes of this paragraph. 

Further, the French company cannot be an equivalent beneficiary if it qualifies for 

benefits only with respect to certain income as a result of a "derivative benefits" 

provision in the U.S.-France treaty. However, it would be possible to look through the 

26
French company to its parent company to determine whether the parent company is an 

equivalent beneficiary. 

The second alternative for satisfying the "equivalent beneficiary" test is available 

only to residents of one of the two Contracting States. U.S. or Finnish residents who are 

eligible for treaty benefits by reason of subparagraphs (a), (b), (c)(i), (d), or (e) of 

paragraph 2 are equivalent beneficiaries under the second alternative. Thus, a Finnish 

individual will be an equivalent beneficiary without regard to whether the individual 

would have been entitled to receive the same benefits if it received the income directly. A 

resident of a third country cannot qualify for treaty benefits under any of those 

subparagraphs or any other rule of the treaty, and therefore does not qualify as an 

equivalent beneficiary under this alternative. Thus, a resident of a third country can be an 

equivalent beneficiary only if it would have been entitled to equivalent benefits had it 

received the income directly. 

The second alternative was included in order to clarify that ownership by certain 

residents of a Contracting State would not disqualify a U.S. or Finnish company under 

this paragraph. Thus, for example, if 90 percent of a Finnish company is owned by five 

companies that are resident in member states of the European Union who satisfy the 

requirements of clause (i), and 10 percent of the Finnish company is owned by a U.S. or 

Finnish individual, then the Finnish company still can satisfy the requirements of 

subparagraph (a) of paragraph 3. 

Subparagraph (b) of paragraph 3 sets forth the base erosion test. A company 

meets this base erosion test if less than 50 percent of its gross income (as determined in 

the company’s State of residence) for the taxable period is paid or accrued, directly or 

indirectly, to a person or persons who are not equivalent beneficiaries in the form of 

payments deductible for tax purposes in company’s State of residence. These amounts do 

not include arm’s-length payments in the ordinary course of business for services or 

tangible property and payments in respect of financial obligations to a bank that is not 

related to the payor. This test is the same as the base erosion test in clause (ii) of 

subparagraph (f) of paragraph 2, except that the test in subparagraph 3(b) focuses on 

base-eroding payments to persons who are not equivalent beneficiaries. 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident of a 

Contracting State may receive treaty benefits with respect to certain items of income 

that are connected to an active trade or business conducted in its State of residence. A 

resident of a Contracting State may qualify for benefits under paragraph 4 whether or 

not it also qualifies under paragraphs 2 or 3. 

Subparagraph (a) sets forth the general rule that a resident of a Contracting State 

engaged in the active conduct of a trade or business in that State may obtain the benefits 

of the Convention with respect to an item of income derived from the other Contracting 

State. The item of income, however, must be derived in connection with or incidental to 

that trade or business. 

27
The term “trade or business” is not defined in the Convention. Pursuant to 

paragraph 2 of Article 3 (General Definitions), when determining whether a resident of 

Finland is entitled to the benefits of the Convention under paragraph 4 of this Article 

with respect to an item of income derived from sources within the United States, the 

United States will ascribe to this term the meaning that it has under the law of the 

United States. Accordingly, the U.S. competent authority will refer to the regulations 

issued under section 367(a) for the definition of the term “trade or business.” In 

general, therefore, a trade or business will be considered to be a specific unified group 

of activities that constitute or could constitute an independent economic enterprise 

carried on for profit. Furthermore, a corporation generally will be considered to carry 

on a trade or business only if the officers and employees of the corporation conduct 

substantial managerial and operational activities. 

The business of making or managing investments for the resident’s own account 

will be considered to be a trade or business only when part of banking, insurance or 

securities activities conducted by a bank, an insurance company, or a registered securities 

dealer. Such activities conducted by a person other than a bank, insurance company or 

registered securities dealer will not be considered to be the conduct of an active trade or 

business, nor would they be considered to be the conduct of an active trade or business if 

conducted by a bank, insurance company or registered securities dealer but not as part of 

the company’s banking, insurance or dealer business. Because a headquarters operation 

is in the business of managing investments, a company that functions solely as a 

headquarters company will not be considered to be engaged in an active trade or business 

for purposes of paragraph 4. 

An item of income is derived in connection with a trade or business if the incomeproducing activity in the State of source is a line of business that “forms a part of” or is 

“complementary” to the trade or business conducted in the State of residence by the 

income recipient. 

A business activity generally will be considered to form part of a business activity 

conducted in the State of source if the two activities involve the design, manufacture or 

sale of the same products or type of products, or the provision of similar services. The 

line of business in the State of residence may be upstream, downstream, or parallel to the 

activity conducted in the State of source. Thus, the line of business may provide inputs 

for a manufacturing process that occurs in the State of source, may sell the output of that 

manufacturing process, or simply may sell the same sorts of products that are being sold 

by the trade or business carried on in the State of source. 

Example 1. USCo is a corporation resident in the United States. USCo is engaged 

in an active manufacturing business in the United States. USCo owns 100 percent of the 

shares of FCo, a company resident in Finland. FCo distributes USCo products in 

Finland. Because the business activities conducted by the two corporations involve the 

same products, FCo’s distribution business is considered to form a part of USCo’s 

manufacturing business. 

28
Example 2. The facts are the same as in Example 1, except that USCo does not 

manufacture. Rather, USCo operates a large research and development facility in the 

United States that licenses intellectual property to affiliates worldwide, including FCo. 

FCo and other USCo affiliates then manufacture and market the USCo-designed products 

in their respective markets. Because the activities conducted by FCo and USCo involve 

the same product lines, these activities are considered to form a part of the same trade or 

business. 

For two activities to be considered to be “complementary,” the activities need not 

relate to the same types of products or services, but they should be part of the same 

overall industry and be related in the sense that the success or failure of one activity will 

tend to result in success or failure for the other. Where more than one trade or business is 

conducted in the State of source and only one of the trades or businesses forms a part of 

or is complementary to a trade or business conducted in the State of residence, it is 

necessary to identify the trade or business to which an item of income is attributable. 

Royalties generally will be considered to be derived in connection with the trade or 

business to which the underlying intangible property is attributable. Dividends will be 

deemed to be derived first out of earnings and profits of the treaty-benefited trade or 

business, and then out of other earnings and profits. Interest income may be allocated 

under any reasonable method consistently applied. A method that conforms to U.S. 

principles for expense allocation will be considered a reasonable method. 

Example 3. Americair is a corporation resident in the United States that operates 

an international airline. FSub is a wholly-owned subsidiary of Americair resident in 

Finland. FSub operates a chain of hotels in Finland that are located near airports served 

by Americair flights. Americair frequently sells tour packages that include air travel to 

Finland and lodging at FSub hotels. Although both companies are engaged in the active 

conduct of a trade or business, the businesses of operating a chain of hotels and operating 

an airline are distinct trades or businesses. Therefore FSub’s business does not form a 

part of Americair’s business. However, FSub’s business is considered to be 

complementary to Americair’s business because they are part of the same overall industry 

(travel), and the links between their operations tend to make them interdependent. 

Example 4. The facts are the same as in Example 3, except that FSub owns an 

office building in Finland instead of a hotel chain. No part of Americair’s business is 

conducted through the office building. FSub’s business is not considered to form a part of 

or to be complementary to Americair’s business. They are engaged in distinct trades or 

businesses in separate industries, and there is no economic dependence between the two 

operations. 

Example 5. USFlower is a company resident in the United States. USFlower 

produces and sells flowers in the United States and other countries. USFlower owns all 

the shares of FHolding, a corporation resident in Finland. FHolding is a holding 

company that is not engaged in a trade or business. FHolding owns all the shares of three 

corporations that are resident in Finland: FFlower, FLawn, and FFish. FFlower distributes 

USFlower flowers under the USFlower trademark in Finland. FLawn markets a line of 

lawn care products in Finland under the USFlower trademark. In addition to being sold 

29
under the same trademark, FLawn and FFlower products are sold in the same stores and 

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

FFish imports fish from the United States and distributes it to fish wholesalers in Finland. 

For purposes of paragraph 4, the business of FFlower forms a part of the business of 

USFlower, the business of FLawn is complementary to the business of USFlower, and 

the business of FFish is neither part of nor complementary to that of USFlower. 

An item of income derived from the State of source is “incidental to” the trade or 

business carried on in the State of residence if production of the item facilitates the 

conduct of the trade or business in the State of residence. An example of incidental 

income is the temporary investment of working capital of a person in the State of 

residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 4 states a further condition to the general rule in 

subparagraph (a) in cases where the trade or business generating the item of income in 

question is carried on either by the person deriving the income or by any associated 

enterprises. Subparagraph (b) states that the trade or business carried on in the State of 

residence, under these circumstances, must be substantial in relation to the activity in the 

State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for benefits by engaging 

in de minimis connected business activities in the treaty country in which it is resident 

(i.e., activities that have little economic cost or effect with respect to the company 

business as a whole). 

The determination of substantiality is made based upon all the facts and 

circumstances and takes into account the comparative sizes of the trades or businesses in 

each Contracting State, the nature of the activities performed in each Contracting State, 

and the relative contributions made to that trade or business in each Contracting State. In 

any case, in making each determination or comparison, due regard will be given to the 

relative sizes of the U.S. and Finnish economies. 

The determination in subparagraph (b) also is made separately for each item of 

income derived from the State of source. It therefore is possible that a person would be 

entitled to the benefits of the Convention with respect to one item of income but not with 

respect to another. If a resident of a Contracting State is entitled to treaty benefits with 

respect to a particular item of income under paragraph 4, the resident is entitled to all 

benefits of the Convention insofar as they affect the taxation of that item of income in the 

State of source. 

The application of the substantiality requirement only to income from related 

parties focuses only on potential abuse cases, and does not hamper certain other kinds of 

non-abusive activities, even though the income recipient resident in a Contracting State 

may be very small in relation to the entity generating income in the other Contracting 

State. For example, if a small U.S. research firm develops a process that it licenses to a 

very large, unrelated, Finnish pharmaceutical manufacturer, the size of the U.S. research 

firm would not have to be tested against the size of the Finnish manufacturer. Similarly, a 

30
small U.S. bank that makes a loan to a very large unrelated Finnish business would not 

have to pass a substantiality test to receive treaty benefits under Paragraph 4. 

Subparagraph (c) of paragraph 4 provides special attribution rules for purposes of 

applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for 

purposes of determining whether a person meets the requirement in subparagraph (a) 

that it be engaged in the active conduct of a trade or business and that the item of income 

is derived in connection with that active trade or business, and for making the 

comparison required by the “substantiality” requirement in subparagraph (b). 

Subparagraph (c) attributes to a person activities conducted by persons “connected” to 

such person. A person (“X”) is connected to another person (“Y”) if X possesses 50 

percent or more of the beneficial interest in Y (or if Y possesses 50 percent or more of 

the beneficial interest in X). For this purpose, X is connected to a company if X owns 

shares representing fifty percent or more of the aggregate voting power and value of the 

company or fifty percent or more of the beneficial equity interest in the company. X also 

is connected to Y if a third person possesses fifty percent or more of the beneficial 

interest in both X and Y. For this purpose, if X or Y is a company, the threshold 

relationship with respect to such company or companies is fifty percent or more of the 

aggregate voting power and value or fifty percent or more of the beneficial equity 

interest. Finally, X is connected to Y if, based upon all the facts and circumstances, X 

controls Y, Y controls X, or X and Y are controlled by the same person or persons. 

Paragraph 5 

Paragraph 5 deals with the treatment of insurance premiums, royalties and interest 

in the context of a so-called "triangular case." 

The term "triangular case" refers to the use of the following structure by a resident 

of Finland to earn, in this case, interest income from the United States. The resident of 

Finland, who is assumed to qualify for benefits under one or more of the provisions of 

Article 16 (Limitation on Benefits), sets up a permanent establishment in a third 

jurisdiction that imposes only a low rate of tax on the income of the permanent 

establishment. The Finnish resident lends funds into the United States through the 

permanent establishment. The permanent establishment, despite its third-jurisdiction 

location, is an integral part of a Finnish resident. Therefore the income that it earns on 

those loans, absent the provisions of paragraph 5, is entitled to exemption from U.S. 

withholding tax under the Convention. Under a current Finnish income tax treaty with the 

host jurisdiction of the permanent establishment, the income of the permanent 

establishment is exempt from Finnish tax. Thus, the interest income is exempt from U.S. 

tax, is subject to little tax in the host jurisdiction of the permanent establishment, and is 

exempt from Finnish tax. 

Because the United States does not exempt the profits of a third-jurisdiction 

permanent establishment of a U.S. resident from U.S. tax, either by statute or by treaty, 

the paragraph only applies with respect to U.S. source insurance premiums, interest, or 

royalties that are attributable to a third-jurisdiction permanent establishment of a Finnish 

resident. 

31
Paragraph 5 replaces the otherwise applicable rules in the Convention for 

insurance premiums, interest and royalties with a 15 percent withholding tax 

for interest and royalties and U.S. domestic law rules for insurance premiums if the 

actual tax paid on the income in the third state is less than 60 percent of the tax that 

would have been payable in Finland if the income were earned in Finland by the 

enterprise and were not attributable to the permanent establishment in the third state. 

In general, the principles employed under Code section 954(b)(4) will be 

employed to determine whether the profits are subject to an effective rate of taxation that 

is above the specified threshold. 

Notwithstanding the level of tax on interest and royalty income of the permanent 

establishment, paragraph 5 will not apply under certain circumstances. In the case of 

interest (as defined in Article 11 (Interest)), paragraph 5 will not apply if the interest is 

derived in connection with, or is incidental to, the active conduct of a trade or business 

carried on by the permanent establishment in the third state. The business of making, 

managing or simply holding investments is not considered to be an active trade or 

business, unless these are banking or securities activities carried on by a bank or 

registered securities dealer. In the case of royalties, paragraph 5 will not apply if the 

royalties are received as compensation for the use of, or the right to use, intangible 

property produced or developed by the permanent establishment itself. 

Paragraph 6 

Paragraph 6 provides that a resident of one of the States that is not entitled to the 

benefits of the Convention as a result of paragraphs 1 through 5 still may be granted 

benefits under the Convention at the discretion of the competent authority of the State 

from which benefits are claimed. In making determinations under paragraph 6, that 

competent authority will take into account as its guideline whether the establishment, 

acquisition, or maintenance of the person seeking benefits under the Convention, or the 

conduct of such person’s operations, has or had as one of its principal purposes the 

obtaining of benefits under the Convention. Benefits will not be granted, however, solely 

because a company was established prior to the effective date of the Convention or the 

Protocol. In that case, a company would still be required to establish to the satisfaction of 

the Competent Authority clear non-tax business reasons for its formation in a Contracting 

State, or that the allowance of benefits would not otherwise be contrary to the purposes of 

the Convention. Thus, persons that establish operations in one of the States with a 

principal purpose of obtaining the benefits of the Convention ordinarily will not be 

granted relief under paragraph 6. 

The competent authority’s discretion is quite broad. It may grant all of the 

benefits of the Convention to the taxpayer making the request, or it may grant only 

certain benefits. For instance, it may grant benefits only with respect to a particular item 

of income in a manner similar to paragraph 4. Further, the competent authority may 

establish conditions, such as setting time limits on the duration of any relief granted. 

32
For purposes of implementing paragraph 6, a taxpayer will be permitted to present 

his case to the relevant competent authority for an advance determination based on the 

facts. In these circumstances, it is also expected that if the competent authority 

determines that benefits are to be allowed, they will be allowed retroactively to the time 

of entry into force of the relevant treaty provision or the establishment of the structure in 

question, whichever is later. 

A competent authority is required by paragraph 6 to consult the other competent 

authority before denying benefits under this paragraph. 

Paragraph 7 

Paragraph 7 defines several key terms for purposes of Article 16. Each of the 

defined terms is discussed above in the context in which it is used. 

Article VII 

Paragraph a) amends Article 23 of the convention by deleting paragraph 1) c), 

which provided that, regardless of any other provision of the Treaty, Finland could tax an 

individual Finnish national who is a resident of the United States, and who, under Finnish 

taxation laws, is also a resident of Finland. Due to changes in Finland’s domestic tax 

laws, such a provision is no longer required. 

Paragraph b) makes conforming changes to Article 23 to reflect the amendments 

made to the saving clause of paragraph 4 Article 1 (Personal Scope) and to reflect 

amendments to section 877 of the Code in 1996. 

Paragraph c) amends paragraph 4, which sets forth the source of income rules 

applicable for purposes of allowing relief under Article 23. Prior to amendment, the 

source rules of paragraph 4 were subject to such source rules in the domestic laws of the 

Contracting States as applied for the purpose of limiting the foreign tax credit. Paragraph 

c) of Article VII of the Protocol removes this limitation in order to ensure that the source 

rules set out in paragraph 4 of Article 23 have their intended effect. 

Article VIII 

Article VIII replaces Article 26 (Exchange of Information) of the Convention. 

This Article provides for the exchange of information and administrative assistance 

between the competent authorities of the Contracting States. 

Paragraph 1 

The obligation to obtain and provide information to the other Contracting State is 

set out in Paragraph 1. The information to be exchanged is that which may be relevant for 

carrying out the provisions of the Convention or the domestic laws of the United States or 

Finland concerning taxes of every kind applied at the national level. This language 

incorporates the standard in 26 U.S.C. section 7602, which authorizes the IRS to examine 

33
“any books, papers, records, or other data which may be relevant or material.” In United 

States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that 

the language “may be” reflects Congress’s express intention to allow the IRS to obtain 

“items of even potential relevance to an ongoing investigation, without reference to 

admissibility.” However, the language “may be” would not support a request in which a 

Contracting State simply asked for information regarding all bank accounts maintained 

by residents of that Contracting State in the other Contracting State, or even all accounts 

maintained by its residents with respect to a particular bank. 

Exchange of information with respect to each State’s domestic tax law is 

authorized to the extent that taxation under domestic tax law is not contrary to the 

Convention. Thus, for example, information may be exchanged with respect to a covered 

tax, even if the transaction to which the information relates is a purely domestic 

transaction in the requesting Contracting State and, therefore, the exchange is not made to 

carry out the Convention. An example of such a case is provided in the OECD 

Commentary: a company resident in the United States and a company resident in Finland 

transact business between themselves through a third-country resident company. Neither 

Contracting State has a treaty with the third state. To enforce their internal laws with 

respect to transactions of their residents with the third-country company (since there is no 

relevant treaty in force), the Contracting States may exchange information regarding the 

prices that their residents paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the 

assessment or collection of, the enforcement or prosecution in respect of, or the 

determination of appeals in relation to, the taxes covered by the Convention. Thus, the 

competent authorities may request and provide information for cases under examination 

or criminal investigation, in collection, on appeals, or under prosecution. 

The taxes covered by the Convention for purposes of this Article constitute a 

broader category of taxes than those referred to in Article 2 (Taxes Covered). Exchange 

of information is authorized with respect to taxes of every kind imposed by a Contracting 

State at the national level. Accordingly, information may be exchanged with respect to 

U.S. estate and gift taxes, excise taxes or, with respect to Finland, value added taxes. 

Information exchange is not restricted by Article 1 (Personal Scope). 

Accordingly, information may be requested and provided under this article with respect 

to persons who are not residents of either Contracting State. For example, if a thirdcountry resident has a permanent establishment in Finland, which engages in transactions 

with a U.S. enterprise, the United States could request information with respect to that 

permanent establishment, even though the third-country resident is not a resident of either 

Contracting State. Similarly, if a third-country resident maintains a bank account in 

Finland, and the Internal Revenue Service has reason to believe that funds in that account 

should have been reported for U.S. tax purposes but have not been so reported, 

information can be requested from Finland with respect to that person’s account, even 

though that person is not the taxpayer under examination. 

34
Although the term “United States” does not encompass U.S. possessions for most 

purposes of the Convention, Section 7651 of the Code authorizes the Internal Revenue 

Service to utilize the provisions of the Internal Revenue Code to obtain information from 

the U.S. possessions pursuant to a proper request made under Article 26. If necessary to 

obtain requested information, the Internal Revenue Service could issue and enforce an 

administrative summons to the taxpayer, a tax authority (or a government agency in a 

U.S. possession), or a third party located in a U.S. possession. 

Paragraph 2 

Paragraph 2 provides that the requesting State may specify the form in which 

information is to be provided (e.g., depositions of witnesses and authenticated copies of 

unedited original documents). The intention is to ensure that the information may be 

introduced as evidence in the judicial proceedings of the requesting State. The requested 

State should, if possible, provide the information in the form requested to the same extent 

that it can obtain information in that form under its own laws and administrative practices 

with respect to its own taxes. 

Paragraph 3 

Paragraph 3 provides assurances that any information exchanged will be treated 

as secret, subject to the same disclosure constraints as information obtained under the 

laws of the requesting Contracting State. Information received may be disclosed only to 

persons, including courts and administrative bodies, involved in the assessment, 

collection, or administration of, the enforcement or prosecution in respect of, or the 

determination of the of appeals in relation to, the taxes covered by the Convention. The 

information must be used by these persons in connection with the specified functions. 

Information may also be disclosed to legislative bodies, such as the tax-writing 

committees of Congress and the Government Accountability Office, engaged in the 

oversight of the preceding activities. Information received by these bodies must be for 

use in the performance of their role in overseeing the administration of U.S. tax laws. 

Information received may be disclosed in public court proceedings or in judicial 

decisions. 

Paragraph 4 

Paragraph 4 provides that the obligations undertaken in paragraphs 1 and 3 to 

exchange information do not require a Contracting State to carry out administrative 

measures that are at variance with the laws or administrative practice of either 

Contracting State. Nor is a Contracting State required to supply information not 

obtainable under the laws or administrative practice of either Contracting State, or to 

disclose trade secrets or other information, the disclosure of which would be contrary to 

public policy. 

Thus, a requesting Contracting State may be denied information from the other 

Contracting State if the information would be obtained pursuant to procedures or 

measures that are broader than those available in the requesting Contracting State. 

35
However, the statute of limitations of the Contracting State making the request for 

information should govern a request for information. Thus, the Contracting State of 

which the request is made should attempt to obtain the information even if its own statute 

of limitations has passed. In many cases, relevant information will still exist in the 

business records of the taxpayer or a third party, even though it is no longer required to 

be kept for domestic tax purposes. 

While paragraph 4 states conditions under which a Contracting State is not 

obligated to comply with a request from the other Contracting State for information, the 

requested State is not precluded from providing such information, and may, at its 

discretion, do so subject to the limitations of its internal law. 

Paragraph 5 

Paragraph 5 provides that when information is requested by a Contracting State in 

accordance with this Article, the other Contracting State is obligated to obtain the 

requested information as if the tax in question were the tax of the requested State, even if 

that other State has no direct tax interest in the case to which the request relates. In the 

absence of such a paragraph, some taxpayers have argued that paragraph 4(a) prevents 

the requested State from obtaining information from a bank or fiduciary that the 

requested State does not need for its own tax purposes. This paragraph clarifies that 

paragraph 4 does not impose such a restriction and that a Contracting State is not limited 

to providing only the information that it already has in its own files. 

Paragraph 6 

Paragraph 6 provides that a Contracting State may not decline to provide 

information because that information is held by financial institutions, nominees or 

persons acting in an agency or fiduciary capacity. Thus, paragraph 6 would effectively 

prevent a Contracting State from relying on paragraph 4 to argue that its domestic bank 

secrecy laws (or similar legislation relating to disclosure of financial information by 

financial institutions or intermediaries) override its obligation to provide information 

under paragraph 1. This exception does not include information that would reveal 

confidential communications between a client and an attorney, solicitor, or other legal 

representative, where the client seeks legal advice. In the case of the United States, the 

scope of the privilege for such confidential communications is coextensive with the 

attorney-client privilege under U.S. law. Paragraph 6 also requires the disclosure of 

information regarding the beneficial owner of an interest in a person, such as the identity 

of a beneficial owner of bearer shares. 

Paragraph 7 

Paragraph 7 provides for assistance in collection of taxes to the extent necessary 

to ensure that treaty benefits are enjoyed only by persons entitled to those benefits under 

the terms of the Convention. Under paragraph 7, a Contracting State will endeavor to 

collect on behalf of the other State only those amounts necessary to ensure that any 

exemption or reduced rate of tax at source granted under the Convention by that other 

36
State is not enjoyed by persons not entitled to those benefits. For example, if the payer of 

a U.S.-source portfolio dividend receives a Form W-8BEN or other appropriate 

documentation from the payee, the withholding agent is permitted to withhold at the 

portfolio dividend rate of 15 percent. If, however, the addressee is merely acting as a 

nominee on behalf of a third country resident, paragraph 7 would obligate Finland to 

withhold and remit to the United States the additional tax that should have been collected 

by the U.S. withholding agent. 

This paragraph also makes clear that the Contracting State asked to collect the tax 

is not obligated, in the process of providing collection assistance, to carry out 

administrative measures that are different from those used in the collection of its own 

taxes, or that would be contrary to its sovereignty, security or public policy. 

Effective dates and termination in relation to exchange of information 

Once the Protocol is in force, the competent authority may seek information under 

Article 26 as amended by the Protocol with respect to a year prior to the entry into force 

of the Protocol, even if Article 26 of the Convention prior to its amendment by the 

Protocol was in effect during the years in which the transaction at issue occurred. 

A tax administration may also seek information with respect to a year for which a 

treaty was in force after the treaty has been terminated. In such a case the ability of the 

other tax administration to act is limited. The treaty no longer provides authority for the 

tax administrations to exchange confidential information. They may only exchange 

information pursuant to domestic law or other international agreement or arrangement. 

Article VIII 

Article VIII of the Protocol contains the rules for bringing the Protocol into force and 

giving effect to its provisions. 

Paragraph 1 provides for the ratification of the Convention by both Contracting 

States and the exchange of instruments of ratification as soon as possible thereafter. The 

Protocol shall enter into force upon the exchange of instruments of ratification. 

In the United States, the process leading to ratification and entry into force is as 

follows: Once a protocol or treaty has been signed by authorized representatives of the 

two Contracting States, the Department of State sends the protocol or treaty to the 

President who formally transmits it to the Senate for its advice and consent to ratification, 

which requires approval by two-thirds of the Senators present and voting. Prior to this 

vote, however, it generally has been the practice of the Senate Committee on Foreign 

Relations to hold hearings on the protocol or treaty and make a recommendation 

regarding its approval to the full Senate. Both Government and private sector witnesses 

may testify at these hearings. After the Senate gives its advice and consent to ratification 

of the protocol or treaty, an instrument of ratification is drafted for the President's 

signature. The President's signature completes the process in the United States. 

37
The date on which a treaty enters into force is not necessarily the date on which 

its provisions take effect. Paragraph 2 contains rules that determine when the provisions 

of the treaty will have effect. 

Under subparagraphs (a)(i) and (b)(i), the provisions of the Protocol relating to 

taxes withheld at source will have effect with respect to amounts paid or credited (or in 

the case of Finland, income derived) on or after the first day of the second month next 

following the date on which the Protocol enters into force. For example, if instruments of 

ratification are exchanged on April 25 of a given year, the withholding rates specified in 

paragraph 2 of Article 10 (Dividends) would be applicable to any dividends paid or 

credited on or after June 1 of that year. Similarly, the revised Limitation on Benefits 

provisions of Article VI of the Protocol would apply with respect to any payments of 

interest, royalties or other amounts on which withholding would apply under the Code if 

those amounts are paid or credited on or after June 1. 

This rule allows the benefits of the withholding reductions to be put into effect as 

soon as possible, without waiting until the following year. The delay of one to two 

months is required to allow sufficient time for withholding agents to be informed about 

the change in withholding rates. If for some reason a withholding agent withholds at a 

higher rate than that provided by the Convention (perhaps because it was not able to reprogram its computers before the payment is made), a beneficial owner of the income 

that is a resident of Finland may make a claim for refund pursuant to section 1464 of the 

Code. 

For all other taxes, subparagraphs (a)(ii) and (b)(ii) specify that the Protocol will 

have effect for any taxable period beginning on or after January 1 of the year next 

following entry into force. 

In both Contracting States, provisions of the Protocol relating to taxes withheld at 

source covered by paragraph 3 of Article 10 (Dividends) will have effect with respect to 

income derived on or after January 1, 2007, provided that the Protocol enters into force 

before December 31, 2007. The relevant date for this purpose is the date on which 

income from the dividend is derived by the beneficial owner, rather than to the date on 

which the income was originally derived by the company paying the dividend. The 

phrase “income derived” was used because it is compatible with the standard for 

inclusion of income under Finnish tax law. It is intended to have a meaning similar to the 

phrase “income paid or credited,” a standard more commonly used in U.S. tax treaties. 

Thus, provided the Protocol enters into force prior to December 31, 2007, the provisions 

of the Protocol eliminating withholding on companies and pension funds meeting the 

requirement of paragraph 3 of Article 10 (Dividends) will have effect with respect to 

income derived from dividends paid or accrued on or after January 1, 2007. 

38