Limitation of Benefits, future clause for international tax conventions

Tax conventions are agreements between two or more countries to regulate the taxation of their financial transactions to avoid double taxation. Originally, it was a mechanism to facilitate commercial transactions between countries.

For the application of these agreements it is enough to be a natural or a legal person in one of the signatory States and having executed economic transactions in the other signatory state and you only have to prove your tax residency in one of those signatory states.

In some countries, like in the UK, it is difficult to obtain the tax residence certificate if the Company has no local economic activity.  

In some others, certain type of companies is not considered taxpayer and, therefore, those companies are not entitled to receive a tax residence certificate (as in the case of LLC US).

Beyond these restrictions, implementing this type of agreements for the use of a merely incorporated Company is easy.

However, the United States included the ‘Limitation of Benefits’ clause in their tax conventions. According to this term, it is essential for any foreign Company that wants to engage commercial transactions with the US and to benefit from the application of a tax convention, to prove its residence not only with a certificate but also with a full economic activity. 

In order to limit the application of tax conventions, The OECD has included that clause in its reform plans. Therefore, in a few years we will see a comprehensive re-negotiation of all tax conventions so that they include the ‘Limitation of Benefits’ clause.

It is just a matter of time!