Technical Explanation of Protocol amending the Convention… US and Denmark… Taxes on Income, May 2, 2006

DEPARTMENT OF THE TREASURY
TECHNICAL EXPLANATION OF THE PROTOCOL
SIGNED AT COPENHAGEN ON MAY 2, 2006
AMENDING THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND
THE GOVERNMENT OF THE KINGDOM OF DENMARK
FOR THE AVOIDANCE OF DOUBLE TAXATION AND
THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME
SIGNED AT WASHINGTON ON AUGUST 19, 1999
This is a technical explanation of the Protocol signed at Copenhagen on May 2,
2006 (the “Protocol”), amending the Convention between the United States of America
and the Government of Denmark for the avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income, signed at Washington on August 19,
1999 (the “Convention”).
Negotiations took into account the U.S. Department of the Treasury’s current tax
treaty policy and Treasury’s Model Income Tax Convention, published on September 20,
1996 (the “U.S. Model”). Negotiations also took into account the Model Tax Convention
on Income and on Capital, published by the Organization for Economic Cooperation and
Development (the “OECD Model”), and recent tax treaties concluded by both countries.
This Technical Explanation is an official guide to the Protocol. It explains policies
behind particular provisions, as well as understandings reached during the negotiations
with respect to the interpretation and application of the Protocol. This technical
explanation is not intended to provide a complete guide to the Convention as amended by
the Protocol. To the extent that the Convention has not been amended by the Protocol, the
Technical Explanation of the Convention remains the official explanation. References in
this technical explanation to “he” or “his” should be read to mean “he or she” or “his or
her.”
Article I
Article I of the Protocol replaces paragraph 4 of Article 1 (General Scope) of the
Convention, which contains the traditional saving clause found in U.S. tax treaties. The
Contracting States reserve their rights, except as provided in paragraph 5, to tax their
residents and citizens as provided in their internal laws, notwithstanding any provisions
of the Convention to the contrary. For example, if a resident of Denmark performs
professional services in the United States and the income from the services is not
attributable to a permanent establishment in the United States, Article 7 (Business
Profits) would by its terms prevent the United States from taxing the income. If, however,
the resident of Denmark is also a citizen of the United States, the saving clause permits
the United States to include the remuneration in the worldwide income of the citizen and
subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)).
1

However, subparagraph 5(a) of Article 1 preserves the benefits of special foreign tax
credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident
in Denmark.
For purposes of the saving clause, "residence" is determined under Article 4
(Residence). Thus, an individual who is a resident of the United States under the Code
(but not a U.S. citizen) but who is determined to be a resident of Denmark under the tie­
breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the
Convention. The United States would not be permitted to apply its statutory rules to that
person to the extent the rules are inconsistent with the treaty.
However, the person would be treated as a U.S. resident for U.S. tax purposes
other than determining the individual’s U.S. tax liability. For example, in determining
under Code section 957 whether a foreign corporation is a controlled foreign corporation,
shares in that corporation held by the individual would be considered to be held by a U.S.
resident. As a result, other U.S. citizens or residents might be deemed to be United States
shareholders of a controlled foreign corporation subject to current inclusion of Subpart F
income recognized by the corporation. See
, Treas. Reg. section 301.7701(b)-7(a)(3).
Under paragraph 4, each Contracting State also reserves its right to tax former
citizens and former long-term residents for a period of ten years following the loss of
such status. Thus, paragraph 4 allows the United States to tax former U.S. citizens and
former U.S. long-term residents in accordance with Section 877 of the Code. Section 877
generally applies to a former citizen or long-term resident of the United States who
relinquishes citizenship or terminates long-term residency if either of the following
criteria exceed established thresholds: (a) the average annual net income tax of such
individual for the period of 5 taxable years ending before the date of the loss of status, or
(b) the net worth of such individual as of the date of the loss of status. The average
annual net income tax threshold is adjusted annually for inflation. The United States
defines “long-term resident” as an individual (other than a U.S. citizen) who is a lawful
permanent resident of the United States in at least 8 of the prior 15 taxable years. An
individual is not treated as a lawful permanent resident for any taxable year if such
individual is treated as a resident of a foreign country under the provisions of a tax treaty
between the United States and the foreign country and the individual does not waive the
benefits of such treaty applicable to residents of the foreign country.
Article II
Article II of the Protocol replaces Article 10 (Dividends) of the Convention.
Article 10 provides rules for the taxation of dividends paid by a company that is a
resident of one Contracting State to a beneficial owner that is a resident of the other
Contracting State. The Article provides for full residence country taxation of such
dividends and a limited source-State right to tax. Article 10 also provides rules for the
imposition of a tax on branch profits by the State of source.
2

Paragraph 1
The right of a shareholder's country of residence to tax dividends arising in the
source country is preserved by paragraph 1, which permits a Contracting State to tax its
residents on dividends paid to them by a company that is a resident of the other
Contracting State. For dividends from any other source paid to a resident, Article 21
(Other Income) grants the residence country exclusive taxing jurisdiction (other than for
dividends attributable to a permanent establishment in the other State).
Paragraph 2
The State of source also may tax dividends beneficially owned by a resident of the
other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits
the rate of withholding tax in the State of source on dividends paid by a company resident
in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial
owner of the dividend is a company resident in the other State and owns directly shares
representing at least 10 percent of the voting shares of the company paying the dividend,
then the rate of withholding tax in the State of source is limited to 5 percent of the gross
amount of the dividend. Shares are considered voting shares if they provide the power to
elect, appoint, or replace any person vested with the powers ordinarily exercised by the
board of directors of a U.S. corporation.
The benefits of paragraph 2 may be granted at the time of payment by means of a
reduced rate of withholding at source. It also is consistent with the paragraph for tax to be
withheld at the time of payment at full statutory rates, and the treaty benefit to be granted
by means of a subsequent refund so long as such procedures are applied in a reasonable
manner.
The determination of whether the ownership threshold for subparagraph a) of
paragraph 2 is met for purposes of the 5 percent maximum rate of withholding tax is
made on the date on which entitlement to the dividend is determined. Thus, in the case of
a dividend from a U.S. company, the determination of whether the ownership threshold is
met generally would be made on the dividend record date.
Paragraph 2 does not affect the taxation of the profits out of which the dividends
are paid. The taxation by a Contracting State of the income of its resident companies is
governed by the internal law of the Contracting State, subject to the provisions of
paragraph 4 of Article 24 (Non-Discrimination).
The term "beneficial owner" is not defined in the Convention, and is, therefore,
defined as under the internal law of the country imposing tax (i.e., the source country).
The beneficial owner of the dividend for purposes of Article 10 is the person to which the
dividend income is attributable for tax purposes under the laws of the source State. Thus,
if a dividend paid by a corporation that is a resident of one of the States (as determined
under Article 4 (Residence)) is received by a nominee or agent that is a resident of the
other State on behalf of a person that is not a resident of that other State, the dividend is
not entitled to the benefits of this Article. However, a dividend received by a nominee on
3

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 4(1)(d) (i.e., the company’s country of
residence treats the intermediate entity as fiscally transparent) with respect to the
dividend. Whether this ownership threshold is satisfied may be difficult to determine and
often will require an analysis of the partnership or trust agreement.
Paragraph 3
Paragraph 3 provides exclusive residence-country taxation (i.e., an elimination of
withholding tax) with respect to certain dividends distributed by a company that is a
resident of one Contracting State to a resident of the other Contracting State. As
described further below, this elimination of withholding tax is available with respect to
certain inter-company dividends, with respect to qualified governmental entities, and with
respect to pension funds.
Subparagraph (a) of paragraph 3 provides for the elimination of withholding tax
on dividends beneficially owned by a company that has owned 80 percent or more of the
voting power of the company paying the dividend for the 12-month period ending on the
date entitlement to the dividend is determined. The determination of whether the
beneficial owner of the dividends owns at least 80 percent of the voting power of the
paying company is made by taking into account stock owned both directly and stock
owned indirectly through one or more residents of either Contracting State.
Eligibility for the elimination of withholding tax provided by subparagraph (a) is
subject to additional restrictions based on, but supplementing, the rules of Article 22
(Limitation of Benefits). Accordingly, a company that meets the holding requirements
described above will qualify for the benefits of paragraph 3 only if it also: (1) meets the
“publicly traded” test of subparagraph 2(c) of Article 22 (Limitation of Benefits), (2)
meets the “ownership-base erosion” and “active trade or business” tests described in
subparagraph 2(f) and paragraph 4 of Article 22 (Limitation of Benefits), (3) meets the
“derivative benefits” test of paragraph 3 of Article 22 (Limitation of Benefits), or (4) is
granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of the
source State pursuant to paragraph 7 of Article 22 (Limitation of Benefits).
These restrictions are necessary because of the increased pressure on the
Limitation of Benefits tests resulting from the fact that the United States has relatively
few treaties that provide for such elimination of withholding tax on inter-company
dividends. The additional restrictions are intended to prevent companies from re­
organizing in order to become eligible for the elimination of withholding tax in
4

circumstances where the Limitation of Benefits provision does not provide sufficient
protection against treaty-shopping.
For example, assume that ThirdCo is a company resident in a third country that
does not have a tax treaty with the United States providing for the elimination of
withholding tax on inter-company dividends. ThirdCo owns directly 100 percent of the
issued and outstanding voting stock of USCo, a U.S. company, and of DCo, a Danish
company. DCo is a substantial company that manufactures widgets; USCo distributes
those widgets in the United States. If ThirdCo contributes to DCo all the stock of USCo,
dividends paid by USCo to DCo would qualify for treaty benefits under the active trade
or business test of paragraph 4 of Article 22. However, allowing ThirdCo to qualify for
the elimination of withholding tax, which is not available to it under the third state’s
treaty with the United States (if any), would encourage treaty-shopping.
In order to prevent this type of treaty-shopping, paragraph 3 requires DCo to meet
the ownership-base erosion requirements of subparagraph 2(f) of Article 22 in addition to
the active trade or business test of paragraph 4 of Article 22. Thus, DCo would not
qualify for the exemption from withholding tax unless (i) on at least half the days of the
taxable year, at least 50 percent of each class of its shares was owned by persons that are
residents of Denmark and eligible for treaty benefits under certain specified tests and (ii)
less than 50 percent of DCo’s gross income is paid in deductible payments to persons that
are not residents of either Contracting State eligible for benefits under those specified
tests. Because DCo is wholly owned by a third country resident, DCo could not qualify
for the elimination of withholding tax on dividends from USCo under the ownership-base
erosion test and the active trade or business test. Consequently, DCo would need to
qualify under another test or obtain discretionary relief from the competent authority
under Article 22(7). For purposes of Article 10(3)(a)(ii), it is not sufficient for a company
to qualify for treaty benefits generally under the active trade or business test or the
ownership-base erosion test unless it qualifies for treaty benefits under both.
Alternatively, companies that are publicly traded or subsidiaries of publicly-
traded companies will generally qualify for the elimination of withholding tax. In the
case of companies resident in Denmark, this includes companies that are more than 50
percent owned by one or more taxable nonstock corporations entitled to benefits under
Article 22(2)(g). Thus, a company that is a resident of Denmark and that meets the
requirements of Article 22(2)(i), (ii) or (iii) will be entitled to the elimination of
withholding tax, subject to the 12-month holding period requirement of Article 10(3)(a).
In addition, under Article 10(3)(a)(iii), a company that is a resident of a
Contracting State may also qualify for the elimination of withholding tax on dividends if
it satisfies the derivative benefits test of paragraph 3 of Article 22. Thus, a Danish
company that owns all of the stock of a U.S. corporation may qualify for the elimination
of withholding tax if it is wholly-owned, for example, by a U.K., Dutch, Swedish, or
Mexican publicly-traded company and the other requirements of the derivative benefits
test are met. At this time, ownership by companies that are residents of other European
Union, European Economic Area or North American Free Trade Agreement countries
would not qualify the Danish company for benefits under this provision, as the United
5

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 Danish subsidiaries, because of the effect of the Parent-Subsidiary
Directive in the European Union. Under that directive, inter-company dividends paid
within the European Union are free of withholding tax. Under subparagraph (i) of
paragraph 8 of Article 22, that directive will also be taken into account in determining
whether the owner of a U.S. company receiving dividends from a Danish company is an
“equivalent beneficiary.” Thus, a company that is a resident of a member state of the
European Union will, by definition, meet the requirements regarding equivalent benefits
with respect to any dividends received by its U.S. subsidiary from a Danish company. For
example, assume USCo is a wholly-owned subsidiary of ICo, an Italian publicly-traded
company. USCo owns all of the shares of DCo, a Danish company. If DCo were to pay
dividends directly to ICo, those dividends would be exempt from withholding tax in
Denmark by reason of the Parent-Subsidiary Directive. If ICo meets the other conditions
of subparagraph 8(h) of Article 22, it will be treated as an equivalent beneficiary by
reason of subparagraph 8(i) of that article.
A company also may qualify for the elimination of withholding tax pursuant to
Article 10(3)(a)(iii) if it is owned by seven or fewer U.S. or Danish residents who qualify
as an “equivalent beneficiary” and meet the other requirements of the derivative benefits
provision. This rule may apply, for example, to certain Danish corporate joint venture
vehicles that are closely-held by a few Danish resident individuals.
Subparagraph h) of paragraph 8 of Article 22 contains a specific rule of
application intended to ensure that for purposes of applying Article 10(3) certain joint
ventures, not just wholly-owned subsidiaries, can qualify for benefits. For example,
assume that the United States were to enter into a treaty with Country X, a member of the
European Union, that includes a provision identical to Article 10(3). USCo is 100 percent
owned by DCo, a Danish company, which in turn is owned 49 percent by PCo, a Danish
publicly-traded company, and 51 percent by XCo, a publicly-traded company that is
resident in Country X. In the absence of a special rule for interpreting the derivative
benefits provision, each of the shareholders would be treated as owning only its
proportionate share of the shares held by DCo. If that rule were applied in this situation,
neither shareholder would be an equivalent beneficiary, because neither would meet the
80 percent ownership test with respect to USCo. However, since both PCo and XCo are
residents of countries that have treaties with the United States that provide for elimination
of withholding tax on inter-company dividends, it is appropriate to provide benefits to
DCo in this case.
Consequently, when determining whether a person is an equivalent beneficiary
under paragraph 8 of Article 22, each of the shareholders is treated as owning shares with
the same percentage of voting power as the shares held by DCo for purposes of
determining whether it would be entitled to an equivalent rate of withholding tax. This
6

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 7 of Article 22. Benefits will be granted with respect to
an item of income if the competent authority of the Contracting State in which the
income arises determines that the establishment, acquisition or maintenance of such
resident and the conduct of its operations did not have as one of its principal purposes the
obtaining of benefits under the Convention. The Notes provide that the U.S. competent
authority generally will exercise its discretion to grant benefits under this paragraph to a
company that is a resident of Denmark if (1) the company meets the requirements of
paragraph 4 of Article 22 (Limitation of Benefits) regarding the active conduct of a trade
or business in Denmark, (2) the company meets the base erosion test of clause f)(ii) of
paragraph 2 of Article 22, and (3) more than 80 percent of the voting power and the value
of the shares in the company is owned by one or more taxable nonstock corporations that
meet the requirements of subparagraph g) of paragraph 2 of Article 22. However, the
competent authority may choose not to grant benefits under this paragraph if it
determines that a significant percentage or amount of the income qualifying for benefits
under this paragraph will inure to the benefit of a private person who is not a resident of
Denmark.
Subparagraph (b) of paragraph 3 of Article 10 of the Convention provides for
exemption from tax in the state of source for dividends paid to qualified governmental
entities. This exemption is analogous to that provided to foreign governments under
section 892 of the Code. Subparagraph (b) of paragraph 3 makes that exemption
reciprocal. A qualified governmental entity is defined in paragraph 1(i) of Article 3
(General Definitions) of the Convention. The definition does not include a governmental
entity that carries on commercial activity. Further, a dividend paid by a company
engaged in commercial activity that is controlled (within the meaning of Treas. Reg.
section 1.892-5T) by a qualified governmental entity that is the beneficial owner of the
dividend is not exempt at source under paragraph 4 because ownership of a controlled
company is viewed as a substitute for carrying on a business activity.
Subparagraph (c) of paragraph 3 of Article 10 of the Convention provides that
dividends beneficially owned by a pension fund described in subparagraph e) of
paragraph 2 of Article 22 (Limitation of Benefits) may not be taxed in the Contracting
State of which the company paying the dividends is a resident, unless such dividends are
derived from the carrying on of a business, directly by the pension fund or indirectly,
through an associated enterprise.
This rule is necessary because pension funds normally do not pay tax (either
through a general exemption or because reserves for future pension liabilities effectively
offset all of the fund’s income), and therefore cannot benefit from a foreign tax credit.
Moreover, distributions from a pension fund generally do not maintain the character of
the underlying income, so the beneficiaries of the pension are not in a position to claim a
foreign tax credit when they finally receive the pension, in many cases years after the
7

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 subparagraphs 3(b) and (c) applies
to dividends paid by RICs and beneficially owned by a qualified governmental entity or a
pension fund.
The third sentence of subparagraph 4(a) provides that the 15 percent rate of
withholding tax also applies to dividends paid by a REIT and that the elimination of
source-country withholding tax of subparagraphs 3(b) and (c) applies to dividends paid
by REITs and beneficially owned by a qualified governmental entity or a pension fund,
provided that one of the three following conditions is met. First, the beneficial owner of
the dividend is an individual or a pension fund, in either case holding an interest of not
more than 10 percent in the REIT. Second, the dividend is paid with respect to a class of
stock that is publicly traded and the beneficial owner of the dividend is a person holding
an interest of not more than 5 percent of any class of the REIT’s shares. Third, the
beneficial owner of the dividend holds an interest in the REIT of not more than 10
percent and the REIT is “diversified.”
Subparagraph (b) provides a definition of the term “diversified,” which is
necessary because the term is not defined in the Code. A REIT is diversified if the gross
value of no single interest in real property held by the REIT exceeds 10 percent of the
gross value of the REIT’s total interest in real property.
Foreclosure property is not considered an interest in real property, and a REIT
holding a partnership interest is treated as owning its proportionate share of any interest
in real property held by the partnership.
The restrictions set out above are intended to prevent the use of these entities to
gain inappropriate U.S. tax benefits. For example, a company resident in Denmark that
wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio
8

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 Denmark directly holding U.S. real property would pay
U.S. tax on rental income either at a 30 percent rate of withholding tax on the gross
income or at graduated rates on the net income. As in the preceding example, by placing
the real property in a REIT, the investor could, absent a special rule, transform rental
income into dividend income from the REIT, taxable at the rates provided in Article 10,
significantly reducing the U.S. tax that otherwise would be imposed. Paragraph 4
prevents this result and thereby avoids a disparity between the taxation of direct real
estate investments and real estate investments made through REIT conduits. In the cases
in which paragraph 4 allows a dividend from a REIT to be eligible for the 15 percent rate
of withholding tax, the holding in the REIT is not considered the equivalent of a direct
holding in the underlying real property.
The final sentence of paragraph 4(a) provides that the rules of paragraph 4 apply
also to dividends paid by companies resident in Denmark that are similar to U.S. RICs
and REITs. Whether a Danish company is similar to a U.S. RIC or REIT will be
determined by mutual agreement of the competent authorities. The Notes provide that for
purposes of paragraph 4, a Danish undertaking for collective investment in transferable
securities that is required to currently distribute its income will be treated as a company
similar to a U.S. RIC, while such an undertaking that is permitted to accumulate its
income will not be so treated.
Paragraph 5
Paragraph 5 defines the term “dividends” broadly and flexibly. The definition is
intended to cover all arrangements that yield a return on an equity investment in a
corporation as determined under the tax law of the state of source, including types of
arrangements that might be developed in the future.
The term includes income from shares, or other corporate rights that are not
treated as debt under the law of the source State, that participate in the profits of the
company. The term also includes income that is subjected to the same tax treatment as
income from shares by the law of the State of source. Thus, a constructive dividend that
results from a non-arm's length transaction between a corporation and a related party is a
dividend. In the case of the United States, the term dividends includes amounts treated as
a dividend under U.S. law upon the sale or redemption of shares or upon a transfer of
shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 (sale of foreign
subsidiary's stock to U.S. sister company is a deemed dividend to extent of subsidiary's
and sister's earnings and profits). Further, a distribution from a U.S. publicly traded
9

limited partnership, which is taxed as a corporation under U.S. law, is a dividend for
purposes of Article 10. However, a distribution by a limited liability company is not
taxable by the United States under, provided the limited liability company is not
characterized as an association taxable as a corporation under U.S. law.
Finally, a payment denominated as interest that is made by a thinly capitalized
corporation may be treated as a dividend to the extent that the debt is recharacterized as
equity under the laws of the source State.
Paragraph 6
Paragraph 6 provides that the general source country limitations under paragraph
2 and 3 on dividends do not apply if the beneficial owner of the dividends carries on
business through a permanent establishment situated in the source country, or performs in
the source country independent personal services from a fixed base situated therein, and
the dividends are attributable to such permanent establishment or fixed base. In such
case, the rules of Article 7 (Business Profits) or Article 14 (Independent Personal
Services) shall apply, as the case may be. Accordingly, such dividends will be taxed on a
net basis using the rates and rules of taxation generally applicable to residents of the
Contracting State in which the permanent establishment or fixed base is located, as such
rules may be modified by the Convention. An example of dividends attributable to a
permanent establishment would be dividends derived by a dealer in stock or securities
from stock or securities that the dealer held for sale to customers.
Paragraph 7
The right of a Contracting State to tax dividends paid by a company that is a
resident of the other Contracting State is restricted by paragraph 7 to cases in which the
dividends are paid to a resident of that Contracting State or are attributable to a
permanent establishment or fixed base in that Contracting State. Thus, a Contracting
State may not impose a “secondary” withholding tax on dividends paid by a nonresident
company out of earnings and profits from that Contracting State. In the case of the United
States, the secondary withholding tax was eliminated for payments made after December
31, 2004 in the American Jobs Creation Act of 2004.
The paragraph also restricts the right of a Contracting State to impose corporate
level taxes on undistributed profits, other than a branch profits tax. The paragraph does
not restrict a State’s right to tax its resident shareholders on undistributed earnings of a
corporation resident in the other State. Thus, the authority of the United States to impose
taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax
on income of a passive foreign investment company that is a qualified electing fund is in
no way restricted by this provision.
Paragraphs 8 and 9
Paragraph 8 permits a Contracting State to impose a branch profits tax on a
company resident in the other Contracting State. The tax is in addition to other taxes
10

permitted by the Convention. The term “company” is defined in subparagraph 1(b) of
Article 3 (General Definitions).
A Contracting State may impose a branch profits tax on a company if the
company has income attributable to a permanent 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 Real Property), or realizes gains taxable in that State under
paragraph 1 of Article 13 (Capital Gains). In the case of the United States, the imposition
of such tax is limited, however, to the portion of the aforementioned items of income that
represents the amount of such income that is the “dividend equivalent amount.” This is
consistent with the relevant rules under the U.S. branch profits tax, and the term dividend
equivalent amount is defined under U.S. law. Section 884 defines the dividend equivalent
amount as an amount for a particular year that is equivalent to the income described
above that is included in the corporation's effectively connected earnings and profits for
that year, after payment of the corporate tax under Articles 6 (Income from Real
Property), 7 (Business Profits) or 13 (Capital Gains), reduced for any increase in the
branch's U.S. net equity during the year or increased for any reduction in its U.S. net
equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg.
section 1.884-1.
The dividend equivalent amount for any year approximates the dividend that a
U.S. branch office would have paid during the year if the branch had been operated as a
separate U.S. subsidiary company. Denmark currently does not impose a branch profits
tax. If in the future Denmark were to impose a branch profits tax, paragraph 8 provides
that the base of its tax must be limited to an amount that is analogous to the dividend
equivalent amount.
Paragraph 9 limits the rate of the branch profits tax allowed under paragraph 8 to
5 percent. Paragraph 9 also provides, however, that the branch profits tax will not be
imposed if certain requirements are met. In general, these requirements provide rules for
a branch that parallel the rules for when a dividend paid by a subsidiary will be subject to
exclusive residence-country taxation (i.e., the elimination of source-country withholding
tax). Accordingly, the branch profits tax may not be imposed in the case of a company
that: (1) meets the “publicly traded” test of subparagraph 2(c) of Article 22 (Limitation of
Benefits), (2) meets the “ownership-base erosion” and “active trade or business” tests
described subparagraph 2(f) and subparagraph 4 of Article 22, (3) meets the “derivative
benefits” test of paragraph 3 of Article 22, or (4) is granted benefits with respect to the
elimination of the branch profits tax by the competent authority pursuant to paragraph 7
of Article 22.
Thus, for example, if a Danish company would be subject to the branch profits tax
with respect to profits attributable to a U.S. branch and not reinvested in that branch,
paragraph 9 may apply to eliminate the branch profits tax if the company either met the
“publicly traded” test, met the combined “ownership-base erosion” and “active trade or
business” test, or met the derivative benefits test. If, by contrast, a Danish company did
not meet those tests, but met the ownership-base erosion test (and thus qualified for treaty
benefits under subparagraph 2(a)), then the branch profits tax would apply at a rate of 5
11

percent, unless the Danish company is granted benefits with respect to the elimination of
the branch profits tax by the competent authority pursuant to paragraph 7 of Article 22.
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of
dividends, the saving clause of paragraph 4 of Article 1 (General Scope) permits the
United States to tax dividends received by its residents and citizens, subject to the special
foreign tax credit rules of paragraph 2 of Article 23 (Relief From Double Taxation), as if
the Convention had not come into effect.
The benefits of this Article are also subject to the provisions of Article 22
(Limitation of Benefits). Thus, if a resident of Denmark is the beneficial owner of
dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits
under at least one of the tests of Article 22 in order to receive the benefits of this Article.
Article III
Article III of the Protocol amends subparagraph b) of paragraph 2 of Article 19
(Government Service) of the Convention to correct a drafting error. Paragraph 2 (a)
provides a general rule that a pension paid from public funds of a Contracting State or a
political subdivision or local authority thereof to an individual in respect of services
rendered to that State or subdivision or authority in the discharge of governmental
functions is taxable only in that State. Paragraph 2(b) provides an exception under which
the pension is taxable only in the other State if the individual is a resident of and a
national of that other State. Before this amendment, paragraph 2(b) incorrectly referred
to pensions paid to “a resident or a national” rather than pensions paid to “a resident and
a national.”
Article IV
Article IV of the Protocol replaces Article 22 (Limitation of Benefits) of the
Convention. Article 22 contains anti-treaty-shopping provisions that are intended to
prevent residents of third countries from benefiting from what is intended to be a
reciprocal agreement between two countries. In general, the provision does not rely on a
determination of purpose or intention, but instead sets forth a series of objective tests. A
resident of a Contracting State that satisfies one of the tests will receive benefits
regardless of its motivations in choosing its particular business structure.
The structure of the Article is as follows: Paragraph 1 states the general rule that
residents are entitled to benefits otherwise accorded to residents only to the extent
provided in the Article. Paragraph 2 lists a series of attributes of a resident of a
Contracting State, the presence of any one of which will entitle that person to all the
benefits of the Convention. Paragraph 3 provides a so-called "derivative benefits" test
under which certain categories of income may qualify for benefits. Paragraph 4 provides
that regardless of whether a person qualifies for benefits under paragraph 2 or 3, benefits
may be granted to that person with regard to certain income earned in the conduct of an
12

active trade or business. Paragraph 5 provides for limited derivative benefits for shipping
and air transport income. Paragraph 6 provides special rules for so-called “triangular
cases” notwithstanding paragraphs 1 through 5 of Article 22. Paragraph 7 provides that
benefits may also be granted if the competent authority of the State from which the
benefits are claimed determines that it is appropriate to grant benefits in that case.
Paragraph 8 defines certain terms used in the Article.
Paragraph 1
Paragraph 1 provides that a resident of a Contracting State will be entitled to
benefits of the Convention otherwise accorded to residents of a Contracting State only to
the extent provided in this Article. The benefits otherwise accorded to residents under
the Convention include all limitations on source-based taxation under Articles 6 through
21, the treaty-based relief from double taxation provided by Article 23 (Relief From
Double Taxation), and the protection afforded to residents of a Contracting State under
Article 24 (Non-Discrimination). Some provisions do not require that a person be a
resident in order to enjoy the benefits of those provisions. For example, Article 25
(Mutual Agreement Procedure) is not limited to residents of the Contracting States, and
Article 27 (Diplomatic Agents and Consular Officers) applies to diplomatic agents or
consular officials regardless of residence. Article 22 accordingly does not limit the
availability of treaty benefits under such provisions.
Article 22 and the anti-abuse provisions of domestic law complement each other,
as Article 22 effectively determines whether an entity has a sufficient nexus to a
Contracting State to be treated as a resident for treaty purposes, while domestic anti-
abuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit
principles) determine whether a particular transaction should be recast in accordance with
its substance. Thus, internal law principles of the source Contracting State may be
applied to identify the beneficial owner of an item of income, and Article 22 then will be
applied to the beneficial owner to determine if that person is entitled to the benefits of the
Convention with respect to such income.
Paragraph 2
Paragraph 2 has seven subparagraphs, each of which describes a category of
residents that are entitled to all benefits of the Convention.
It is intended that the provisions of paragraph 2 will be self-executing. Unlike the
provisions of paragraph 7, discussed below, claiming benefits under paragraph 2 does not
require an advance competent authority ruling or approval. The tax authorities may, of
course, on review, determine that the taxpayer has improperly interpreted the paragraph
and is not entitled to the benefits claimed.
Individuals -- Subparagraph 2(a)
Subparagraph (a) provides that individual residents of a Contracting State will be
entitled to all treaty benefits. If such an individual receives income as a nominee on
behalf of a third country resident, benefits may be denied under the applicable articles of
13

the Convention by the requirement that the beneficial owner of the income be a resident
of a Contracting State.
Governments -- Subparagraph 2(b)
Subparagraph (b) provides that the Contracting States and any political
subdivision or local authority thereof, or an agency or instrumentality of that State,
subdivision, or authority will be entitled to all the benefits of the Convention.
Publicly-Traded Corporations -- Subparagraph 2(c)(i)
Subparagraph (c) applies to two categories of companies: publicly traded
companies and subsidiaries of publicly traded companies. A company resident in a
Contracting State is entitled to all the benefits of the Convention under clause (i) of
subparagraph (c) if the principal class of its shares, and any disproportionate class of
shares, is regularly traded on one or more recognized stock exchanges and the company
satisfies at least one of the following additional requirements: first, the company’s
principal class of shares is primarily traded on a recognized stock exchange located in the
Contracting State of which the company is a resident, or, in the case of a company
resident in Denmark, on a recognized stock exchange located within the European Union,
any other European Economic Area country, or, in the case of a company resident in the
United States, on a recognized stock exchange located in another state that is a party to
the North American Free Trade Agreement; or, second, the company’s primary place of
management and control is in its State of residence.
The term “recognized stock exchange” is defined in subparagraph (d) of
paragraph 8. It includes the NASDAQ System, any stock exchange registered with the
Securities and Exchange Commission as a national securities exchange for purposes of
the Securities Exchange Act of 1934, and the Copenhagen Stock Exchange. The term
also includes the stock exchanges of Amsterdam, Brussels, Frankfurt, Hamburg,
Helsinki, London, Oslo, Paris, Stockholm, Sydney, Tokyo, and Toronto, and any other
stock exchange agreed upon by the competent authorities of the Contracting States.
If a company has only one class of shares, it is only necessary to consider whether
the shares of that class meet the relevant trading requirements. If the company has more
than one class of shares, it is necessary as an initial matter to determine which class or
classes constitute the “principal class of shares.” The term “principal class of shares” is
defined in subparagraph (a) of paragraph 8 to mean the ordinary or common shares of the
company representing the majority of the aggregate voting power and value of the
company. If the company does not have a class of ordinary or common shares
representing the majority of the aggregate voting power and value of the company, then
the “principal class of shares” is that class or any combination of classes of shares that
represents, in the aggregate, a majority of the voting power and value of the company.
Subparagraph (c) of paragraph 8 defines the term “shares” to include depository receipts
for shares. Although in a particular case involving a company with several classes of
shares it is conceivable that more than one group of classes could be identified that
account for more than 50 percent of the shares, it is only necessary for one such group to
14

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 8. A company has a disproportionate class of shares if it
has outstanding a class of shares that is subject to terms or other arrangements that entitle
the holder to a larger portion of the company’s income, profit, or gain in the other
Contracting State than that to which the holder would be entitled in the absence of such
terms or arrangements. Thus, for example, a company resident in Denmark meets the test
of subparagraph (b) of paragraph 8 if it has outstanding a class of “tracking stock” that
pays dividends based upon a formula that approximates the company’s return on its
assets employed in the United States.
The following example illustrates this result.
Example
. DCo is a corporation resident in Denmark. DCo has two classes of
shares: Common and Preferred. The Common shares are listed and regularly traded on
the Stockholm Stock Exchange. The Preferred shares have no voting rights and are
entitled to receive dividends equal in amount to interest payments that DCo receives from
unrelated borrowers in the United States. The Preferred shares are owned entirely by a
single investor that is a resident of a country with which the United States does not have a
tax treaty. The Common shares account for more than 50 percent of the value of DCo and
for 100 percent of the voting power. Because the owner of the Preferred shares is entitled
to receive payments corresponding to the U.S. source interest income earned by DCo, the
Preferred shares are a disproportionate class of shares. Because the Preferred shares are
not regularly traded on a recognized stock exchange, DCo will not qualify for benefits
under subparagraph (c) of paragraph 2.
A class of shares will be “regularly traded” on one or more recognized stock
exchanges in a taxable year, under subparagraph (f)(i) of paragraph 8, if two
requirements are met: (1) trades in the class of shares are effected on one or more such
exchanges in other than de minimis quantities during every quarter, and (2) the aggregate
number of shares of that class traded on one or more such exchanges during the twelve
months ending on the day before the beginning of that taxable year is at least six percent
of the average number of shares outstanding in that class (including shares held by
taxable nonstock corporations) during that twelve-month period. For this purpose, if a
class of shares was not listed on a recognized stock exchange during this twelve-month
period, the class of shares will be treated as regularly traded only if the class meets the
aggregate trading requirements for the taxable period in which the income arises. Trading
on one or more recognized stock exchanges may be aggregated for purposes of meeting
the “regularly traded” standard of subparagraph (f). For example, a U.S. company could
satisfy the definition of “regularly traded” through trading, in whole or in part, on a
15

recognized stock exchange located in Denmark or certain third countries. Authorized but
unissued shares are not considered for purposes of subparagraph (f).
The term “primarily traded” is not defined in the Convention. In accordance with
paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has
under the laws of the State concerning the taxes to which the Convention applies,
generally the source State. In the case of the United States, this term is understood to
have the meaning it has under Treas. Reg. section 1.884-5(d)(3), relating to the branch
tax provisions of the Code. Accordingly, stock of a corporation is “primarily traded” if
the number of shares in the company’s principal class of shares that are traded during the
taxable year on all recognized stock exchanges in the Contracting State of which the
company is a resident exceeds the number of shares in the company’s principal class of
shares that are traded during that year on established securities markets in any other
single foreign country.
A company whose principal class of shares is regularly traded on a recognized
exchange but cannot meet the primarily traded test may claim treaty benefits if its
primary place of management and control is in its country of residence. This test should
be distinguished from the “place of effective management” test which is used in the
OECD Model and by many other countries to establish residence. In some cases, the
place of effective management test has been interpreted to mean the place where the
board of directors meets. By contrast, the primary place of management and control test
looks to where day-to-day responsibility for the management of the company (and its
subsidiaries) is exercised. The company’s primary place of management and control will
be located in the State in which the company is a resident only if the executive officers
and senior management employees exercise day-to-day responsibility for more of the
strategic, financial and operational policy decision making for the company (including
direct and indirect subsidiaries) in that State than in the other State or any third state, and
the staffs that support the management in making those decisions are also based in that
State. Thus, the test looks to the overall activities of the relevant persons to see where
those activities are conducted. In most cases, it will be a necessary, but not a sufficient,
condition that the headquarters of the company (that is, the place at which the CEO and
other top executives normally are based) be located in the Contracting State of which the
company is a resident.
To apply the test, it will be necessary to determine which persons are to be
considered “executive officers and senior management employees.” In most cases, it will
not be necessary to look beyond the executives who are members of the Board of
Directors (the “inside directors”) in the case of a U.S. company. That will not always be
the case, however; in fact, the relevant persons may be employees of subsidiaries if those
persons make the strategic, financial, and operational policy decisions. Moreover, it
would be necessary to take into account any special voting arrangements that result in
certain board members making certain decisions without the participation of other board
members.
16

Subsidiaries of Danish Taxable Nonstock Corporations – Subparagraph 2(c)(ii)
Clause (ii) of subparagraph 2(c) provides a test under which certain companies
that are controlled by one or more taxable nonstock corporations (“TNCs”) entitled to
benefits under subparagraph g) may meet the publicly-traded test. This test is necessary
because it is common for a TNC to hold 100% of the “Class A” shares of another
company. The Class A shares have a disproportionate amount of the voting power but
have little or no rights to dividends. The subsidiary company also issues “Class B”
shares, which have preferential treatment as to dividends. Class A shares held by TNCs
are listed but not traded on the Copenhagen stock exchange. Any class A shares that are
not held by TNCs and all Class B shares are both listed and traded on the Copenhagen
stock exchange. This rule is included to ensure that a corporation whose voting shares
are substantially owned by a Danish TNC is not precluded from qualifying as a publicly-
traded company, so long as the rest of its shares satisfy a public trading test.
A company will qualify under this test if one or more such TNCs own shares
representing more than 50 percent of the voting power of the company and all other
shares are listed on a recognized stock exchange and are primarily traded on a recognized
stock exchange located within the European Union or in any other European Economic
Area state. Thus, all shares not owned by TNCs, taken as a single class, must be traded
more on a recognized stock exchange located in a state within the European Union or in
any other European Economic Area state than on established securities markets in any
other single foreign state.
Subsidiaries of Publicly-Traded Corporations – Subparagraph 2(c)(iii)
A company resident in a Contracting State is entitled to all the benefits of the
Convention under clause (iii) of subparagraph (c) of paragraph 2 if five or fewer
companies entitled to benefits under clause (i) or (ii) (or any combination thereof) are the
direct or indirect owners of at least 50 percent of the aggregate vote and value of the
company’s shares (and at least 50 percent of any disproportionate class of shares). If the
companies are indirect owners, however, each of the intermediate companies must be a
resident of one of the Contracting States.
Thus, for example, a Danish company, all the shares of which are owned by
another Danish company, would qualify for benefits under the Convention if the principal
class of shares (and any disproportionate classes of shares) of the Danish parent company
are regularly and primarily traded on the London stock exchange. However, a Danish
subsidiary would not qualify for benefits under clause (iii) if the publicly traded parent
company were a resident of Ireland, for example, and not a resident of the United States
or Denmark. Furthermore, if a Danish parent company indirectly owned a Danish
company through a chain of subsidiaries, each such subsidiary in the chain, as an
intermediate owner, must be a resident of the United States or Denmark for the Danish
subsidiary to meet the test in clause (iii).
17

Tax-Exempt Organizations -- Subparagraph 2(d)
Subparagraphs 2(d) and 2(e) provide rules by which tax-exempt organizations
described in Article 4(1)(b)(i) and pension funds will be entitled to all of the benefits of
the Convention. A tax-exempt organization other than a pension fund automatically
qualifies for benefits, without regard to the residence of its beneficiaries or members.
Entities qualifying under this subparagraph are those that are generally exempt from tax
in their Contracting State of residence and that are established and maintained exclusively
to fulfill religious, charitable, educational, scientific, or other similar purposes.
Pensions – Subparagraph 2(e)
A legal person, whether tax-exempt or not, that is organized under the laws of
either Contracting State to provide pension or similar benefits to employees (including
self-employed individuals) pursuant to a plan will qualify for benefits if, as of the close of
the end of the prior taxable year, more than 50 percent of the pension’s beneficiaries,
members or participants are individuals resident in either Contracting State. For purposes
of this provision, the term “beneficiaries” should be understood to refer to the persons
receiving benefits from the pension fund.
Ownership/Base Erosion -- Subparagraph 2(f)
Subparagraph 2(f) provides an additional method to qualify for treaty benefits that
applies to any form of legal entity that is a resident of a Contracting State. The test
provided in subparagraph (f), the so-called ownership and base erosion test, is a two-part
test. Both prongs of the test must be satisfied for the resident to be entitled to treaty
benefits under subparagraph 2(f).
The ownership prong of the test, under clause (i), requires that 50 percent or more
of each class of shares or other beneficial interests in the person is owned, directly or
indirectly, on at least half the days of the person’s taxable year by persons who are
residents of the Contracting State of which that person is a resident and that are
themselves entitled to treaty benefits under subparagraphs (a), (b), (d), (e), or clause (i) of
subparagraph (c) of paragraph 2. In the case of indirect owners, however, each of the
intermediate owners must be a resident of that Contracting State.
Trusts may be entitled to benefits under this provision if they are treated as
residents under Article 4 (Residence) and they otherwise satisfy the requirements of this
subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be
considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial
interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent
less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a
trust will not be considered to be owned by a person entitled to benefits under the other
provisions of paragraph 2 if it is not possible to determine the beneficiary's actuarial
interest. Consequently, if it is not possible to determine the actuarial interest of the
beneficiaries in a trust, the ownership test under clause i) cannot be satisfied, unless all
18

possible beneficiaries are persons entitled to benefits under the other subparagraphs of
paragraph 2.
The base erosion prong of clause (ii) of subparagraph (f) is satisfied with respect
to a person if less than 50 percent of the person’s gross income for the taxable year, as
determined under the tax law in the person’s State of residence, is paid or accrued,
directly or indirectly, to persons who are not residents of either Contracting State entitled
to benefits under subparagraphs (a), (b), (d), (e), or clause (i) of subparagraph (c) of
paragraph 2, in the form of payments deductible for tax purposes in the payer’s State of
residence. These amounts do not include arm’s-length payments in the ordinary course of
business for services or tangible property or payments in respect of financial obligations
to a bank that is not related to the payor. To the extent they are deductible from the
taxable base, trust distributions are deductible payments. However, depreciation and
amortization deductions, which do not represent payments or accruals to other persons,
are disregarded for this purpose.
Danish Taxable Nonstock Corporations – Subparagraph 2(g)
Paragraph 2(g) provides a special rule for a Danish Taxable Nonstock
Corporation (“TNC”), which is a vehicle to preserve control of operating companies by
the TNC through its control of voting shares, with public shareholders receiving most
rights to dividends of the operating company. A TNC may qualify for the benefits of the
Convention if it meets specific requirements under a two-part test.
Under subparagraph 8(e), the term “taxable nonstock corporation” as used in
paragraph 2 means a foundation that is taxable in accordance with paragraph 1 of Article
1 of the Danish Act on Taxable Nonstock Corporations (fonde der beskattes efter
fondsbeskatningsloven). A TNC is a legal person that is controlled by a professional
board of directors, the majority of which must be unrelated to the persons that founded
the TNC. As a foundation, a TNC must have a charter governing the corporation’s
operations and identifying any TNC beneficiaries and their entitlement to distributions
from the TNC. One TNC cannot own another. A TNC’s capital is irrevocably separated
from the control of any person (“founder”) contributing assets to the TNC at the time the
TNC is established. A TNC’s assets can never be inherited nor can such assets be paid
out in liquidation except to creditors. TNCs are subject to income tax at the same rate
(32%) and in exactly the same way as Danish corporations, except that a TNC can deduct
charitable contributions, whereas a regular Danish corporation cannot deduct them, and a
TNC, like any other foundation, can deduct distributions to members of the founder’s
family provided that these family members are resident in Denmark and are taxable in
Denmark at the full rate, which is from 45% to 59%. Distributions to other persons, e.g.,
Danish nonresidents, are not deductible.
The two-part test in subparagraph (g) is a modification of the ownership-base
erosion test that is necessary because TNCs do not have owners and thus cannot be
subject to any ownership test. This test was included for TNCs in order to treat them as
similarly as possible to other Danish corporations.
19

The first part of the test under subparagraph (g)(i) is satisfied if no more than 50
percent of the amount of the TNC’s gross income (excluding its tax-exempt income) is
paid or accrued in the form of deductible payments (but not including arms-length
payments in the ordinary course of its activities of a charitable nature and authorized by
the Danish laws on taxable non-stock companies for services or tangible property) in the
taxable year and in each of the preceding three taxable years, directly or indirectly, to
persons who are not entitled to benefits under subparagraphs a), b), d), e), or clause (i) of
subparagraph c). This means that no more than 50 percent of the amount of the TNC’s
gross income (excluding its tax-exempt income) can be paid to persons other than
residents of either Contracting State that qualify for treaty benefits as an individual
(subparagraph (a)), a Contracting State, etc. (subparagraph (b)), a company that is
publicly traded (subparagraph (c)(i)), a charitable organization, etc. (subparagraph (d)), or
a pension plan (subparagraph e).
The second part of the test under subparagraph g)(ii) is satisfied if no more than
50% of the amount of the total income of the TNC (including its tax-exempt income) is
paid or accrued, in the form of deductible payments (but not including arm’s length
payments in the ordinary course of its activities of a charitable nature and authorized by
the Danish laws on taxable non-stock companies for services or tangible properties) and
non-deductible distributions, in the taxable year and in each of the preceding three
taxable years, directly or indirectly, to persons who are not entitled to benefits under
subparagraphs a), b), d), e), or clause (i) of subparagraph (c).
Paragraph 3
Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all
treaty benefits, although the test is applied to individual items of income. In general, a
derivative benefits test entitles the resident of a Contracting State to treaty benefits if the
owner of the resident would have been entitled to the same benefit had the income in
question flowed directly to that owner. To qualify under this paragraph, the company
must meet an ownership test and a base erosion test.
Subparagraph (a) sets forth the ownership test. Under this test, seven or fewer
equivalent beneficiaries must own shares representing at least 95 percent of the aggregate
voting power and value of the company and at least 50 percent of any disproportionate
class of shares. Ownership may be direct or indirect. The term “equivalent beneficiary” is
defined in subparagraph (h) of paragraph 8. This definition may be met in two alternative
ways, the first of which has two requirements.
Under the first alternative, a person may be an equivalent beneficiary because it is
entitled to equivalent benefits under a treaty between the country of source and the
country in which the person is a resident. This alternative has two requirements.
The first requirement is that the person must be a resident of a member state of the
European Union, a European Economic Area state, a party to the North American Free
Trade Agreement, or Switzerland (collectively, “qualifying States”).
20

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, 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, tax-exempt
organizations, and pensions if the person were a resident of one of the Contracting States.
In order to satisfy the second requirement to qualify as an “equivalent
beneficiary” under paragraph 8(h)(i)(B) with respect to dividends, interest, royalties, or
branch tax, the person must also be entitled to a rate of withholding or branch tax that is
at least as low as the withholding or branch tax rate that would apply under the
Convention to such income. Thus, the rates to be compared are: (1) the rate of tax that the
source State would have imposed if a qualified resident of the other Contracting State
was the beneficial owner of the income; and (2) the rate of tax that the source State would
have imposed if the third State resident received the income directly from the source
State. For example, USCo is a wholly owned subsidiary of DCo, a company resident in
Denmark. DCo is wholly owned by ICo, a corporation resident in Italy. Assuming DCo
satisfies the requirements of paragraph 3 of Article 10 (Dividends), DCo would be
eligible for the elimination of dividend withholding tax. The dividend withholding tax
rate in the treaty between the United States and Italy is 5 percent. Thus, if ICo received
the dividend directly from USCo, ICo would have been subject to a 5 percent rate of
withholding tax on the dividend. Because ICo would not be entitled to a rate of
withholding tax that is at least as low as the rate that would apply under the Convention
to such income (i.e., zero), ICo is not an equivalent beneficiary within the meaning of
paragraph 8(h)(i) of Article 22 with respect to the elimination of withholding tax on
dividends.
Subparagraph 8(i) provides a special rule to take account of the fact that
withholding taxes on many inter-company dividends, interest and royalties are exempt
within the European Union by reason of various EU directives, rather than by tax treaty.
If a U.S. company receives such payments from a Danish company, and that U.S.
company is owned by a company resident in a member state of the European Union that
would have qualified for an exemption from withholding tax if it had received the income
directly, the parent company will be treated as an equivalent beneficiary. This rule is
necessary because many European Union member countries have not re-negotiated their
tax treaties to reflect the exemptions available under the directives.
The requirement that a person be entitled to "all the benefits" of a comprehensive
tax treaty eliminates those persons that qualify for benefits with respect to only certain
types of income. Accordingly, the fact that a French parent of a Danish company is
engaged in the active conduct of a trade or business in France and therefore would be
entitled to the benefits of the U.S.-France treaty if it received dividends directly from a
21

U.S. subsidiary of the Danish company is not sufficient for purposes of this paragraph.
Further, the French company cannot be an equivalent beneficiary if it qualifies for
benefits only with respect to certain income as a result of a "derivative benefits"
provision in the U.S.-France treaty. However, it would be possible to look through the
French company to its parent company to determine whether the parent company is an
equivalent beneficiary.
The second alternative for satisfying the "equivalent beneficiary" test is available
only to residents of one of the two Contracting States. U.S. or Danish residents who are
eligible for treaty benefits by reason of subparagraphs (a), (b), (c)(i), (d), or (e) of
paragraph 2 are equivalent beneficiaries under the second alternative. Thus, a Danish
individual will be an equivalent beneficiary without regard to whether the individual
would have been entitled to receive the same benefits if it received the income directly. A
resident of a third country cannot qualify for treaty benefits under any of those
subparagraphs or any other rule of the treaty, and therefore does not qualify as an
equivalent beneficiary under this alternative. Thus, a resident of a third country can be an
equivalent beneficiary only if it would have been entitled to equivalent benefits had it
received the income directly.
The second alternative was included in order to clarify that ownership by certain
residents of a Contracting State would not disqualify a U.S. or Danish company under
this paragraph. Thus, for example, if 90 percent of a Danish company is owned by five
companies that are resident in member states of the European Union who satisfy the
requirements of clause (i), and 10 percent of the Danish company is owned by a U.S. or
Danish individual, then the Danish company still can satisfy the requirements of
subparagraph (a) of paragraph 3.
Subparagraph (b) of paragraph 3 sets forth the base erosion test. A company
meets this base erosion test if less than 50 percent of its gross income (as determined in
the company’s State of residence) for the taxable period is paid or accrued, directly or
indirectly, to a person or persons who are not equivalent beneficiaries in the form of
payments deductible for tax purposes in company’s State of residence. These amounts do
not include arm’s-length payments in the ordinary course of business for services or
tangible property and payments in respect of financial obligations to a bank that is not
related to the payor. This test is the same as the base erosion test in clause (ii) of
subparagraph (f) of paragraph 2, except that the test in subparagraph 3(b) focuses on
base-eroding payments to persons who are not equivalent beneficiaries.
Paragraph 4
Paragraph 4 sets forth an alternative test under which a resident of a Contracting
State may receive treaty benefits with respect to certain items of income that are
connected to an active trade or business conducted in its State of residence. A resident of
a Contracting State may qualify for benefits under paragraph 4 whether or not it also
qualifies under paragraphs 2 or 3.
22

Subparagraph (a) sets forth the general rule that a resident of a Contracting State
engaged in the active conduct of a trade or business in that State may obtain the benefits
of the Convention with respect to an item of income derived from the other Contracting
State. The item of income, however, must be derived in connection with or incidental to
that trade or business.
The term “trade or business” is not defined in the Convention. Pursuant to
paragraph 2 of Article 3 (General Definitions), when determining whether a resident of
Denmark is entitled to the benefits of the Convention under paragraph 4 of this Article
with respect to an item of income derived from sources within the United States, the
United States will ascribe to this term the meaning that it has under the law of the United
States. Accordingly, the U.S. competent authority will refer to the regulations issued
under section 367(a) for the definition of the term “trade or business.” In general,
therefore, a trade or business will be considered to be a specific unified group of activities
that constitute or could constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered to carry on a trade or
business only if the officers and employees of the corporation conduct substantial
managerial and operational activities.
The business of making or managing investments for the resident’s own account
will be considered to be a trade or business only when part of banking, insurance or
securities activities conducted by a bank, an insurance company, or a registered securities
dealer. Such activities conducted by a person other than a bank, insurance company or
registered securities dealer will not be considered to be 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
23

shares of DCo, a company resident in Denmark. DCo distributes USCo products in
Denmark. Because the business activities conducted by the two corporations involve the
same products, DCo’s distribution business is considered to form a part of USCo’s
manufacturing business.
Example 2
. The facts are the same as in Example 1, except that USCo does not
manufacture. Rather, USCo operates a large research and development facility in the
United States that licenses intellectual property to affiliates worldwide, including DCo.
DCo and other USCo affiliates then manufacture and market the USCo-designed
products in their respective markets. Because the activities conducted by DCo and USCo
involve the same product lines, these activities are considered to form a part of the same
trade or business.
For two activities to be considered to be “complementary,” the activities need not
relate to the same types of products or services, but they should be part of the same
overall industry and be related in the sense that the success or failure of one activity will
tend to result in success or failure for the other. Where more than one trade or business is
conducted in the State of source and only one of the trades or businesses forms a part of
or is complementary to a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of income is attributable.
Royalties generally will be considered to be derived in connection with the trade or
business to which the underlying intangible property is attributable. Dividends will be
deemed to be derived first out of earnings and profits of the treaty-benefited trade or
business, and then out of other earnings and profits. Interest income may be allocated
under any reasonable method 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. DSub is a wholly-owned subsidiary of Americair resident in
Denmark. DSub operates a chain of hotels in Denmark that are located near airports
served by Americair flights. Americair frequently sells tour packages that include air
travel to Denmark and lodging at DSub hotels. Although both companies are engaged in
the active conduct of a trade or business, the businesses of operating a chain of hotels and
operating an airline are distinct trades or businesses. Therefore DSub’s business does not
form a part of Americair’s business. However, DSub’s business is considered to be
complementary to Americair’s business because they are part of the same overall industry
(travel), and the links between their operations tend to make them interdependent.
Example 4
. The facts are the same as in Example 3, except that DSub owns an
office building in Denmark instead of a hotel chain. No part of Americair’s business is
conducted through the office building. DSub’s business is not considered to form a part
of or to be complementary to Americair’s business. They are engaged in distinct trades or
businesses in separate industries, and there is no economic dependence between the two
operations.
Example 5
. USFlower is a company resident in the United States. USFlower
produces and sells flowers in the United States and other countries. USFlower owns all
24

the shares of DHolding, a corporation resident in Denmark. DHolding is a holding
company that is not engaged in a trade or business. DHolding owns all the shares of three
corporations that are resident in Denmark: DFlower, DLawn, and DFish. DFlower
distributes USFlower flowers under the USFlower trademark in Denmark. DLawn
markets a line of lawn care products in Denmark under the USFlower trademark. In
addition to being sold under the same trademark, DLawn and DFlower products are sold
in the same stores and sales of each company’s products tend to generate increased sales
of the other’s products. DFish imports fish from the United States and distributes it to fish
wholesalers in Denmark. For purposes of paragraph 4, the business of DFlower forms a
part of the business of USFlower, the business of DLawn is complementary to the
business of USFlower, and the business of DFish is neither part of nor complementary to
that of USFlower.
An item of income derived from the State of source is “incidental to” the trade or
business carried on in the State of residence if production of the item facilitates the
conduct of the trade or business in the State of residence. An example of incidental
income is the temporary investment of working capital of a person in the State of
residence in securities issued by persons in the State of source.
Subparagraph (b) of paragraph 4 states a further condition to the general rule in
subparagraph (a) in cases where the trade or business generating the item of income in
question is carried on either by the person deriving the income or by any associated
enterprises. Subparagraph (b) states that the trade or business carried on in the State of
residence, under these circumstances, must be substantial in relation to the activity in the
State of source. The substantiality requirement is intended to prevent a narrow case of
treaty-shopping abuses in which a company attempts to qualify for benefits by engaging
in de minimis connected business activities in the treaty country in which it is resident
(i.e., activities that have little economic cost or effect with respect to the company
business as a whole).
The determination of substantiality is made based upon all the facts and
circumstances and takes into account the comparative sizes of the trades or businesses in
each Contracting State, the nature of the activities performed in each Contracting State,
and the relative contributions made to that trade or business in each Contracting State. In
any case, in making each determination or comparison, due regard will be given to the
relative sizes of the U.S. and Danish economies.
The determination in subparagraph (b) also is made separately for each item of
income derived from the State of source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one item of income but not with
respect to another. If a resident of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 4, the resident is entitled to all
benefits of the Convention insofar as they affect the taxation of that item of income in the
State of source.
The application of the substantiality requirement only to income from related
parties focuses only on potential abuse cases, and does not hamper certain other kinds of
25

non-abusive activities, even though the income recipient resident in a Contracting State
may be very small in relation to the entity generating income in the other Contracting
State. For example, if a small U.S. research firm develops a process that it licenses to a
very large, unrelated, Danish pharmaceutical manufacturer, the size of the U.S. research
firm would not have to be tested against the size of the Danish manufacturer. Similarly, a
small U.S. bank that makes a loan to a very large unrelated Danish business would not
have to pass a substantiality test to receive treaty benefits under Paragraph 4.
Subparagraph (c) of paragraph 4 provides special attribution rules for purposes of
applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for
purposes of determining whether a person meets the requirement in subparagraph (a) that
it be engaged in the active conduct of a trade or business and that the item of income is
derived in connection with that active trade or business, and for making the comparison
required by the “substantiality” requirement in subparagraph (b). Subparagraph (c)
attributes to a person activities conducted by persons “connected” to such person. A
person (“X”) is connected to another person (“Y”) if X possesses 50 percent or more of
the beneficial interest in Y (or if Y possesses 50 percent or more of the beneficial interest
in X). For this purpose, X is connected to a company if X owns shares representing fifty
percent or more of the aggregate voting power and value of the company or fifty percent
or more of the beneficial equity interest in the company. X also is connected to Y if a
third person possesses fifty percent or more of the beneficial interest in both X and Y. For
this purpose, if X or Y is a company, the threshold relationship with respect to such
company or companies is fifty percent or more of the aggregate voting power and value
or fifty percent or more of the beneficial equity interest. Finally, X is connected to Y if,
based upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are
controlled by the same person or persons.
Paragraph 5
Paragraph 5 provides that a resident of one of the States that derives income from
the other State described in Article 8 (Shipping and Air Transport) and that is not entitled
to the benefits of the Convention under paragraphs 1 through 4, shall nonetheless be
entitled to the benefits of the Convention with respect to income described in Article 8 if
it meets one of two tests. These tests in substance duplicate the rules set forth under
Code section 883 and therefore afford little additional benefit beyond those provided by
the Code. These tests are described below.
First, a resident of one of the States that derives income from the other State will
be entitled to the benefits of the Convention with respect to income described in Article 8
if at least 50 percent of the beneficial interest in the person (in the case of a company, at
least 50 percent of the aggregate vote and value of the stock of the company) is owned,
directly or indirectly, by persons entitled to benefits under subparagraphs a), b), c)(i), d),
or e), paragraph 2, citizens of the United States or individuals who are residents of a third
state that grants by law, common agreement, or convention an exemption under similar
terms for profits as mentioned in Article 8 to citizens and corporations of the other State.
This provision is analogous to the relief provided under Code section 883(c)(1).
26

Alternatively, a resident of one of the States that derives income from the other
State will be entitled to the benefits of the Convention with respect to income described
in Article 8 if at least 50 percent of the beneficial interest in the person (in the case of a
company, at least 50 percent of the aggregate vote and value of the stock of the company)
is owned directly or indirectly by a company or combination of companies the stock of
which is primarily and regularly traded on an established securities market in a third
state, provided that the third state grants by law, common agreement or convention an
exemption under similar terms for profits as mentioned in Article 8 to citizens and
corporations of the other State. This provision is analogous to the relief provided under
Code section 883(c)(3).
The provisions of paragraph 5 are intended to be self executing. Unlike the
provisions of paragraph 7, discussed below, claiming benefits under paragraph 5 does not
require an advance competent authority ruling or approval. The tax authorities may, of
course, on review, determine that the taxpayer has improperly interpreted the paragraph
and is not entitled to the benefits claimed.
Paragraph 6
Paragraph 6 deals with the treatment of royalties and interest in the context of a
so-called "triangular case."
The term "triangular case" refers to the use of the following structure by a resident
of Denmark to earn, in this case, interest income from the United States. The resident of
Denmark, who is assumed to qualify for benefits under one or more of the provisions of
Article 22 (Limitation of Benefits), sets up a permanent establishment in a third
jurisdiction that imposes only a low rate of tax on the income of the permanent
establishment. The Danish resident lends funds into the United States through the
permanent establishment. The permanent establishment, despite its third-jurisdiction
location, is an integral part of a Danish resident. Therefore the income that it earns on
those loans, absent the provisions of paragraph 6, is entitled to exemption from U.S.
withholding tax under the Convention. Under a current Danish income tax treaty with the
host jurisdiction of the permanent establishment, the income of the permanent
establishment is exempt from Danish tax. Thus, the interest income is exempt from U.S.
tax, is subject to little tax in the host jurisdiction of the permanent establishment, and is
exempt from Danish tax.
Because the United States does not exempt the profits of a 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 interest or royalties that are
attributable to a third-jurisdiction permanent establishment of a Danish resident.
Paragraph 6 replaces the otherwise applicable rules in the Convention for interest
and royalties with a 15 percent withholding tax for interest and royalties if the actual tax
paid on the income in the third state is less than 60 percent of the tax that would have
27

been payable in Denmark if the income were earned in Denmark by the enterprise and
were not attributable to the permanent establishment in the third state.
In general, the principles employed under Code section 954(b)(4) will be
employed to determine whether the profits are subject to an effective rate of taxation that
is above the specified threshold.
Notwithstanding the level of tax on interest and royalty income of the permanent
establishment, paragraph 6 will not apply under certain circumstances. In the case of
interest (as defined in Article 11 (Interest)), paragraph 6 will not apply if the interest is
derived in connection with, or is incidental to, the active conduct of a trade or business
carried on by the permanent establishment in the third state. The business of making,
managing or simply holding investments is not considered to be an active trade or
business, unless these are banking or securities activities carried on by a bank or
registered securities dealer. In the case of royalties, paragraph 6 will not apply if the
royalties are received as compensation for the use of, or the right to use, intangible
property produced or developed by the permanent establishment itself.
Paragraph 7
Paragraph 7 provides that a resident of one of the States that is not entitled to the
benefits of the Convention as a result of paragraphs 1 through 6 still may be granted
benefits under the Convention at the discretion of the competent authority of the State
from which benefits are claimed. In making determinations under paragraph 7, that
competent authority will take into account as its guideline whether the establishment,
acquisition, or maintenance of the person seeking benefits under the Convention, or the
conduct of such person’s operations, has or had as one of its principal purposes the
obtaining of benefits under the Convention. Benefits will not be granted, however, solely
because a company was established prior to the effective date of the Convention or the
Protocol. In that case, a company would still be required to establish to the 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 7.
The competent authority’s discretion is quite broad. It may grant all of the
benefits of the Convention to the taxpayer making the request, or it may grant only
certain benefits. For instance, it may grant benefits only with respect to a particular item
of income in a manner similar to paragraph 4. Further, the competent authority may
establish conditions, such as setting time limits on the duration of any relief granted.
For purposes of implementing paragraph 7, a taxpayer will be permitted to present
his case to the relevant competent authority for an advance determination based on the
facts. In these circumstances, it is also expected that if the competent authority
determines that benefits are to be allowed, they will be allowed retroactively to the time
28

of entry into force of the relevant treaty provision or the establishment of the structure in
question, whichever is later.
A competent authority is required by paragraph 7 to consult the other competent
authority before denying benefits under this paragraph.
Paragraph 8
Paragraph 8 defines several key terms for purposes of Article 22. Each of the
defined terms is discussed in the context in which it is used.
Article V
Article V of the Protocol contains the rules for bringing the Protocol into force
and giving effect to its provisions.
Paragraph 1 provides that each State must notify the other as soon as its
requirements for ratification have been complied with. The Protocol will enter into force
upon the date of receipt of the later of such notifications.
In the United States, the process leading to ratification and entry into force is as
follows: Once a protocol or treaty has been signed by authorized representatives of the
two Contracting States, the Department of State sends the protocol or treaty to the
President who formally transmits it to the Senate for its advice and consent to ratification,
which requires approval by two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice of the Senate Committee on Foreign
Relations to hold hearings on the protocol or treaty and make a recommendation
regarding its approval to the full Senate. Both Government and private sector witnesses
may testify at these hearings. After the Senate gives its advice and consent to ratification
of the protocol or treaty, an instrument of ratification is drafted for the President's
signature. The President's signature completes the process in the United States.
The date on which a treaty enters into force is not necessarily the date on which
its provisions take effect. Paragraph 2 contains rules that determine when the provisions
of the treaty will have effect.
Under subparagraphs (a), the provisions of the Protocol relating to taxes withheld
at source will have effect with respect to income derived on or after the first day of the
second month next following the date on which the Protocol enters into force. For
example, if instruments of ratification are exchanged on April 25 of a given year, the
withholding rates specified in paragraphs 2 and 3 of Article 10 (Dividends) would be
applicable to any dividends paid or credited on or after June 1 of that year. Similarly, the
revised Limitation of Benefits provisions of Article 5 of the Protocol would apply with
respect to any payments of interest, royalties or other amounts on which withholding
would apply under the Code if those amounts are paid or credited on or after June 1.
This rule allows the benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following year. The delay of one to two
29

months is required to allow sufficient time for withholding agents to be informed about
the change in withholding rates. If for some reason a withholding agent withholds at a
higher rate than that provided by the Convention (perhaps because it was not able to re­
program its computers before the payment is made), a beneficial owner of the income
that is a resident of Denmark may make a claim for refund pursuant to section 1464 of
the Code.
For all other taxes, subparagraph (b) specifies that the Protocol will have effect
for any taxable period beginning on or after January 1 of the year next following entry
into force.
30