100 deductible royalty payment facts same as example

$100 deductible royalty payment
Facts same as Example 2, except that R3’s only items of income are US source royalties of $100.
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Analysis Example 4 (Subsidiary of
Publicly Traded Company)
• Ownership prong is satisfied because R1 is a publicly
traded company that indirectly owns at least 50 percent of
R1 and R2 is a QIO.
• Base Erosion (Tested Subsidiary) Not Met. R3’s Gross
Income is $100 (the royalty payment). R3’s base eroding
payments must be less than $50 (50% x $100). R3 made a
deductible payment of $100 to an ineligible person, R1. R1
is an ineligible person because R1 and R3 are “connected
persons” (R1 indirectly owns at least 50% of the vote and
value of R3) and R1 benefits from a special tax regime.
Because the base eroding payment ($100) exceeds R3’s
allowable limit of base eroding payments (less than $50),
R3 does not meet subsidiary of publicly trade test.
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Example 5: Subsidiary of a Public Company – Indirect Base
Erosion
Issue: Will P2 be a Qualified Person?
P1
Public Company
(Resident State R)
P2
(Resident State R)
USCo
(US Resident)
100%
US Source Interest
$100
Interest $100
$100 deductible payment
Third Country
(Resident State Y)
Ownership Test : Met. 100% owned by P1, a publicly traded company resident in State R.
Base Erosion Tested Subsidiary : Not Met. While P1 meets the publicly traded company test, P2
(through P1) has indirectly made a base eroding payment of $100 to Third Company (an ineligible
person because it is a resident of State Y). Because this base eroding payment is not less than $50
(the maximum base eroding payment that P2 can make ($100*50%)) the base erosion test is not
met.
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Ownership/Base Erosion
• Basic Rule: The ownership base erosion test
provides an additional method to become a
qualified person for any form of legal person
that is a resident of a Contracting State (a
“tested person”) if it satisfies both an
ownership test and the base erosion test.
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Ownership/Base Erosion Continued
• Ownership Test: 50 percent or more of the aggregate vote
and value of the outstanding shares or other beneficial
interests (and at least 50 percent of the aggregate vote and
value of any disproportionate class of shares) in the tested
person must be owned, directly or indirectly, on at least
half the days of any twelve-month period that includes the
date when the benefit in question otherwise would be
accorded by persons who are residents of the Contracting
State of which the tested person is a resident and are
themselves entitled to treaty benefits as an individual,
government, publicly traded company (but not subsidiary
of a publicly traded company) or a pension fund or
charitable organization. In the case of indirect owners, each
intermediate owner must be a QIO.
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Example 6: Ownership/Base Erosion
Issue: Can R2 claim the benefits of Article 11 (Interest)?