Technical Explanation PDF

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 tie­
breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the
Convention. The United States would not be permitted to apply its statutory rules to that
person to the extent the rules are inconsistent with the treaty.
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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 (Non-
Discrimination). Thus, for example, a State cannot discriminate against a dual-resident
company.
Dual resident persons also may be treated as a resident of a Contracting State for
purposes other than that of obtaining benefits under the Convention. For example, if a
dual resident company pays a dividend to a resident of the other Contracting State, the
U.S. paying agent would withhold on that dividend at the appropriate treaty rate because
reduced withholding is a benefit enjoyed by the resident of the other Contracting State,
not by the dual resident company. The dual resident company that paid the dividend
would, for this purpose, be treated as a resident of the United States under the
Convention. In addition, information relating to dual resident companies can be
exchanged under the Convention because, by its terms, Article 26 (Exchange of
Information) is not limited to residents of the Contracting States.
Article III
Article III of the Protocol replaces Article 10 (Dividends) of the Convention.
Article 10 provides rules for the taxation of dividends paid by a company that is a
resident of one Contracting State to a beneficial owner that is a resident of the other
Contracting State. The Article provides for full residence country taxation of such
dividends and a limited source-State right to tax. Article 10 also provides rules for
the imposition of a tax on branch profits by the State of source.
Paragraph 1
The right of a shareholder's country of residence to tax dividends arising in the
source country is preserved by paragraph 1, which permits a Contracting State to tax its
residents on dividends paid to them by a company that is a resident of the other
Contracting State. For dividends from any other source paid to a resident, Article 21
(Other Income) grants the residence country exclusive taxing jurisdiction (other than
for dividends attributable to a permanent establishment in the other State).
Paragraph 2
The State of source also may tax dividends beneficially owned by a resident of the
other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits
the rate of withholding tax in the State of source on dividends paid by a company resident
in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial
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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 re­
organizing in order to become eligible for the elimination of withholding tax in
circumstances where the Limitation on Benefits provision does not provide sufficient
protection against treaty-shopping.
For example, assume that ThirdCo is a company resident in a third country that
does not have a tax treaty with the United States providing for the elimination of
withholding tax on inter-company dividends. ThirdCo owns directly 100 percent of the
issued and outstanding voting stock of USCo, a U.S. company, and of FCo, a Finnish
company. FCo is a substantial company that manufactures widgets; USCo distributes
those widgets in the United States. If ThirdCo contributes to FCo all the stock of USCo,
dividends paid by USCo to FCo would qualify for treaty benefits under the active trade or
business test of paragraph 4 of Article 16. However, allowing ThirdCo to qualify for the
elimination of withholding tax, which is not available to it under the third state’s treaty
with the United States (if any), would encourage treaty-shopping.
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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 publicly-
traded companies will generally qualify for the elimination of withholding tax. Thus, a
company that is a resident of Finland and that meets the requirements of Article
16(2)(c)(i) or (ii) will be entitled to the elimination of withholding tax, subject to the 12­
month holding period requirement of Article 10(3)(a).
In addition, under Article 10(3)(a)(iii), a company that is a resident of a
Contracting State may also qualify for the elimination of withholding tax on dividends if
it satisfies the derivative benefits test of paragraph 3 of Article 16. Thus, a Finnish
company that owns all of the stock of a U.S. corporation may qualify for the elimination
of withholding tax if it is wholly-owned, for example, by a U.K., Dutch, Swedish, or
Mexican publicly-traded company and the other requirements of the derivative benefits
test are met. At this time, ownership by companies that are residents of other European
Union, European Economic Area or North American Free Trade Agreement countries
would not qualify the Finnish company for benefits under this provision, as the United
States does not have treaties that eliminate the withholding tax on inter-company
dividends with any other of those countries. If the United States were to enter into such
treaties with more of those countries, residents of those countries could then qualify as
equivalent beneficiaries for purposes of this provision.
The derivative benefits test may also provide benefits to U.S. companies receiving
dividends from Finnish subsidiaries, because of the effect of the Parent-Subsidiary
Directive in the European Union. Under that directive, inter-company dividends paid
within the European Union are free of withholding tax. Under subparagraph (h) of
paragraph 7 of Article 16, that directive will also be taken into account in determining
whether the owner of a U.S. company receiving dividends from a Finnish company is an
“equivalent beneficiary.” Thus, a company that is a resident of a member state of the
European Union will, by definition, meet the requirements regarding equivalent benefits
with respect to any dividends received by its U.S. subsidiary from a Finnish company.
For example, assume USCo is a wholly-owned subsidiary of ICo, an Italian publicly-
traded company. USCo owns all of the shares of FCo, a Finnish company. If FCo were to
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 cross-
reference in paragraph 5 of Article 24 (Non-Discrimination) of the Convention.
Article IV
Article IV of the Protocol modifies Article 11 (Interest) of the Convention by
adding a new paragraph 6, providing anti-abuse exceptions to the source-country
exemption in paragraph 1 for two classes of interest payments.
The first class of interest, dealt with in subparagraph (a) of paragraph 6, is so-
called “contingent interest.” Such interest is defined in subparagraph (a) as any interest
paid by a resident of a Contracting State that is determined by reference to the receipts,
sales, income, profits or other cash flow of the debtor or a related person, to any change
in the value of any property of the debtor or a related person or to any dividend,
partnership distribution or similar payment made by the debtor or a related person and
paid to a resident of the other Contracting State. Any such interest may be taxed in the
Contracting State in which it arises according to the laws of that State. If the beneficial
owner is a resident of the other Contracting State, however, the gross amount of the
interest may be taxed at a rate not exceeding 15 percent.
The second class of interest is dealt with in subparagraph (b) of paragraph 6. This
exception is consistent with the policy of Code sections 860E(e) and 860G(b) that excess
inclusions with respect to a real estate mortgage investment conduit (REMIC) should
bear full U.S. tax in all cases. Without a full tax at source, foreign purchasers of residual
interests would have a competitive advantage over U.S. purchasers at the time these
interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue
loss with respect to mortgages held in a REMIC because of opportunities for tax
avoidance created by differences in the timing of taxable and economic income produced
by these interests.
Article V
Article V of the Protocol deletes paragraph 2 of Article 12 (Royalties) of the
Convention, which allowed taxation in the Contracting State in which they arise of
royalties beneficially owned by a resident of the other Contracting State, in the case of
payments with respect to certain types of intellectual property. Thus, the change
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 anti-
abuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit
principles) determine whether a particular transaction should be recast in accordance with
its substance. Thus, internal law principles of the source Contracting State may be
applied to identify the beneficial owner of an item of income, and Article 16 then will be
applied to the beneficial owner to determine if that person is entitled to the benefits of the
Convention with respect to such income.
Paragraph 2
Paragraph 2 has six subparagraphs, each of which describes a category of
residents that are entitled to all benefits of the Convention.
It is intended that the provisions of paragraph 2 will be self-executing.
Unlike the provisions of paragraph 6, discussed below, claiming benefits under
paragraph 2 does not require an advance competent authority ruling or approval.
The tax authorities may, of course, on review, determine that the taxpayer has
improperly interpreted the paragraph and is not entitled to the benefits claimed.
Individuals -- Subparagraph 2(a)
Subparagraph (a) provides that individual residents of a Contracting State will be
entitled to all treaty benefits. If such an individual receives income as a nominee on
behalf of a third country resident, benefits may be denied under the applicable articles of
the Convention by the requirement that the beneficial owner of the income be a resident
of a Contracting State.
Governments -- Subparagraph 2(b)
Subparagraph (b) provides that the Contracting States and any political
subdivision, statutory body or local authority thereof will be entitled to all the benefits of
the Convention. Subparagraph i) of paragraph 7 defines the term “statutory body” to
mean any legal entity of a public character created by the laws of a Contracting State in
which no person other than the State itself, or a political subdivision or local authority
thereof, has an interest. The term “statutory body” was added at Finland’s request
because under Finnish laws there exist governmental bodies that cannot be properly
described as political subdivisions or local authorities. These include, among others, the
National Social Insurance Institution, the Bank of Finland (Finland’s central bank), and
the University of Helsinki.
Publicly-Traded Corporations -- Subparagraph 2(c)(i)
Subparagraph (c) applies to two categories of companies: publicly traded
companies and subsidiaries of publicly traded companies. A company resident in a
Contracting State is entitled to all the benefits of the Convention under clause (i) of
subparagraph (c) if the principal class of its shares, and any disproportionate class of
shares, is regularly traded on one or more recognized stock exchanges and the company
satisfies at least one of the following additional requirements: first, the company’s
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).
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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
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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
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tax-exempt organizations and pensions. If the treaty in question does not have a
comprehensive limitation on benefits article, this requirement is met only if the person
would be entitled to treaty benefits under the tests in paragraph 2 of this Article
applicable to individuals, governmental entities, publicly-traded companies, and tax-
exempt organizations and pensions if the person were a resident of one of the Contracting
States.
In order to satisfy the second requirement necessary to qualify as an “equivalent
beneficiary” under paragraph 7(g)(i)(B) with respect to insurance premiums, dividends,
interest, royalties or branch tax, the person must be entitled to a rate of excise,
withholding or branch tax that is at least as low as the excise, withholding or branch
tax rate that would apply under the Convention to such income. Thus, the rates to be
compared are: (1) the rate of tax that the source State would have imposed if a
qualified resident of the other Contracting State was the beneficial owner of the
income; and (2) the rate of tax that the source State would have imposed if the third
State resident received the income directly from the source State. For example, USCo
is a wholly owned subsidiary of FCo, a company resident in Finland. FCo is wholly
owned by ICo, a corporation resident in Italy. Assuming FCo satisfies the requirements
of paragraph 3 of Article 10 (Dividends), FCo would be eligible for the elimination of
dividend withholding tax. The dividend withholding tax rate in the treaty between the
United States and Italy is 5 percent. Thus, if ICo received the dividend directly from
USCo, ICo would have been subject to a 5 percent rate of withholding tax on the
dividend. Because ICo would not be entitled to a rate of withholding tax that is at least
as low as the rate that would apply under the Convention to such income (i.e., zero),
ICo is not an equivalent beneficiary within the meaning of paragraph 7(g)(i) of Article
16 with respect to the elimination of withholding tax on dividends.
Subparagraph 7(h) provides a special rule to take account of the fact that
withholding taxes on many inter-company dividends, interest and royalties are exempt
within the European Union by reason of various EU directives, rather than by tax treaty.
If a U.S. company receives such payments from a Finnish company, and that U.S.
company is owned by a company resident in a member state of the European Union that
would have qualified for an exemption from withholding tax if it had received the income
directly, the parent company will be treated as an equivalent beneficiary. This rule is
necessary because many European Union member countries have not re-negotiated their
tax treaties to reflect the exemptions available under the directives.
The requirement that a person be entitled to "all the benefits" of a comprehensive
tax treaty eliminates those persons that qualify for benefits with respect to only certain
types of income. Accordingly, the fact that a French parent of a Finnish company is
engaged in the active conduct of a trade or business in France and therefore would be
entitled to the benefits of the U.S.-France treaty if it received dividends directly from a
U.S. subsidiary of the Finnish company is not sufficient for purposes of this paragraph.
Further, the French company cannot be an equivalent beneficiary if it qualifies for
benefits only with respect to certain income as a result of a "derivative benefits"
provision in the U.S.-France treaty. However, it would be possible to look through the
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.
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The term “trade or business” is not defined in the Convention. Pursuant to
paragraph 2 of Article 3 (General Definitions), when determining whether a resident of
Finland is entitled to the benefits of the Convention under paragraph 4 of this Article
with respect to an item of income derived from sources within the United States, the
United States will ascribe to this term the meaning that it has under the law of the
United States. Accordingly, the U.S. competent authority will refer to the regulations
issued under section 367(a) for the definition of the term “trade or business.” In
general, therefore, a trade or business will be considered to be a specific unified group
of activities that constitute or could constitute an independent economic enterprise
carried on for profit. Furthermore, a corporation generally will be considered to carry
on a trade or business only if the officers and employees of the corporation conduct
substantial managerial and operational activities.
The business of making or managing investments for the resident’s own account
will be considered to be a trade or business only when part of banking, insurance or
securities activities conducted by a bank, an insurance company, or a registered securities
dealer. Such activities conducted by a person other than a bank, insurance company or
registered securities dealer will not be considered to be the conduct of an active trade or
business, nor would they be considered to be the conduct of an active trade or business if
conducted by a bank, insurance company or registered securities dealer but not as part of
the company’s banking, insurance or dealer business. Because a headquarters operation
is in the business of managing investments, a company that functions solely as a
headquarters company will not be considered to be engaged in an active trade or business
for purposes of paragraph 4.
An item of income is derived in connection with a trade or business if the income-
producing activity in the State of source is a line of business that “forms a part of” or is
“complementary” to the trade or business conducted in the State of residence by the
income recipient.
A business activity generally will be considered to form part of a business activity
conducted in the State of source if the two activities involve the design, manufacture or
sale of the same products or type of products, or the provision of similar services. The
line of business in the State of residence may be upstream, downstream, or parallel to the
activity conducted in the State of source. Thus, the line of business may provide inputs
for a manufacturing process that occurs in the State of source, may sell the output of that
manufacturing process, or simply may sell the same sorts of products that are being sold
by the trade or business carried on in the State of source.
Example 1
. USCo is a corporation resident in the United States. USCo is engaged
in an active manufacturing business in the United States. USCo owns 100 percent of the
shares of FCo, a company resident in Finland. FCo distributes USCo products in
Finland. Because the business activities conducted by the two corporations involve the
same products, FCo’s distribution business is considered to form a part of USCo’s
manufacturing business.
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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.
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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 third-
country resident has a permanent establishment in Finland, which engages in transactions
with a U.S. enterprise, the United States could request information with respect to that
permanent establishment, even though the third-country resident is not a resident of either
Contracting State. Similarly, if a third-country resident maintains a bank account in
Finland, and the Internal Revenue Service has reason to believe that funds in that account
should have been reported for U.S. tax purposes but have not been so reported,
information can be requested from Finland with respect to that person’s account, even
though that person is not the taxpayer under examination.
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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.
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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
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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.
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The date on which a treaty enters into force is not necessarily the date on which
its provisions take effect. Paragraph 2 contains rules that determine when the provisions
of the treaty will have effect.
Under subparagraphs (a)(i) and (b)(i), the provisions of the Protocol relating to
taxes withheld at source will have effect with respect to amounts paid or credited (or in
the case of Finland, income derived) on or after the first day of the second month next
following the date on which the Protocol enters into force. For example, if instruments of
ratification are exchanged on April 25 of a given year, the withholding rates specified in
paragraph 2 of Article 10 (Dividends) would be applicable to any dividends paid or
credited on or after June 1 of that year. Similarly, the revised Limitation on Benefits
provisions of Article VI of the Protocol would apply with respect to any payments of
interest, royalties or other amounts on which withholding would apply under the Code if
those amounts are paid or credited on or after June 1.
This rule allows the benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following year. The delay of one to two
months is required to allow sufficient time for withholding agents to be informed about
the change in withholding rates. If for some reason a withholding agent withholds at a
higher rate than that provided by the Convention (perhaps because it was not able to re­
program its computers before the payment is made), a beneficial owner of the income
that is a resident of Finland may make a claim for refund pursuant to section 1464 of the
Code.
For all other taxes, subparagraphs (a)(ii) and (b)(ii) specify that the Protocol will
have effect for any taxable period beginning on or after January 1 of the year next
following entry into force.
In both Contracting States, provisions of the Protocol relating to taxes withheld at
source covered by paragraph 3 of Article 10 (Dividends) will have effect with respect to
income derived on or after January 1, 2007, provided that the Protocol enters into force
before December 31, 2007. The relevant date for this purpose is the date on which
income from the dividend is derived by the beneficial owner, rather than to the date on
which the income was originally derived by the company paying the dividend. The
phrase “income derived” was used because it is compatible with the standard for
inclusion of income under Finnish tax law. It is intended to have a meaning similar to the
phrase “income paid or credited,” a standard more commonly used in U.S. tax treaties.
Thus, provided the Protocol enters into force prior to December 31, 2007, the provisions
of the Protocol eliminating withholding on companies and pension funds meeting the
requirement of paragraph 3 of Article 10 (Dividends) will have effect with respect to
income derived from dividends paid or accrued on or after January 1, 2007.
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