Press Room

2 Oct 2021

Equivalent Beneficiary – Competent Authority Agreement – Miles Dean

Head of International Tax Miles Dean examines the UK/US double tax agreement, and in particular the Competent Authority Agreement extending the equivalent beneficiaries test post-Brexit.

Competent Authority Arrangements (CAA) have been agreed between the US and the UK, confirming that notwithstanding the UK is no longer a member state of the EU, it is so for the purposes of applying paragraph 7(d) of Article 23 of the UK/US DTA.

The CAA apparently “reflects the shared understanding of the competent authorities that residents of either contracting state should be eligible to qualify as equivalent beneficiaries for purposes of applying the derivative benefits test.”

In the absence of the CAA there was concern that post Brexit UK residents would no longer be “equivalent beneficiaries” under the “derivative benefits” test in the treaty, thus adversely impacting certain cross-border structures. However, the agreement only covers the UK/US DTA. We will have to await CAA’s between the US and the Competent Authorities of the other 13 countries where this is an issue.

As many readers will know, the UK/US treaty contains a now standard US-inspired Limitation on Benefits article, the aim of which is to, wait for it, limit those that can benefit from the treaty to only those persons with sufficient nexus with the UK (for example).  Very simplistically, a company incorporated in England might be resident in the UK for tax purposes by virtue of being incorporated here, but that does not entitle it to benefit from the UK/US treaty. The derivatives benefits test essentially “waters down” the LOB by allowing, for example, an English company to treaty benefits if the ultimate owners thereof would have been entitled to the same benefit had the income in question flowed directly to them. Under the UK/US treaty, a resident company must meet an ownership test (95% of the UBO’s must be EU residents) and a base erosion test (no more than 50% of gross income is paid or accrued to a person or persons who are not equivalent beneficiaries in the form of tax deductible payments).

By way of example, assume an English holding company had been set up by UK, Luxembourg, Spanish and Irish investors (as to 25% each) to make a US acquisition. Two years have passed and the US subsidiary now wants to pay a dividend to its UK holding company. This means it has to work out what rate of US withholding tax is due on the dividend. The UK/US DTA gives a rate of 5% or 0% if the UK company qualifies for the benefits of the DTA because it is owned by equivalent beneficiaries.

Under the terms of the UK/US DTA before the CAA agreement, the Lux, Spanish and Irish investors were all potential equivalent beneficiaries as they were residents of a country within the EU, whereas, if the UK investor was a company it was not an equivalent beneficiary as it is not resident in an EU country and the UK holding company may not qualify for the UK/US DTA and US WHT would be due at 30%. A mad result.

However, now we have the CAA, the UK investor can qualify as an equivalent beneficiary as, for these purposes, it is as if Brexit never happened and the US subsidiary may be able to pay the dividend with a reduced rate of WHT.

You’ll note that the example above is all if’s and maybe’s. This is because whether a person is an equivalent beneficiary relies on more than simple residence in the EU, but that is what we wanted to cover today.  Also, the dividend may qualify for treaty relief another way, but to cover all of the possibilities would require one if not more newsletters all of their own.

Miles Dean

Miles is Head of International Tax at Andersen Tax in the United Kingdom. He advises privately held multinational companies, entrepreneurs and high net worth individuals on a wide range of cross border tax issues.

Email: Miles Dean