While the United Kingdom left the European Union (EU) last year, the competent authorities of United States and United Kingdom have agreed that the United Kingdom will remain in the EU for purposes of the US-UK Income Tax Treaty.
The treaty contains a derivative benefits provision under which residents that do not meet the definition of a “qualified resident” under the limitation on benefits provision may nonetheless qualify for treaty benefits if at least 95% of the voting power and value of the company are owned by seven or fewer “equivalent beneficiaries,” among other requirements. “Equivalent beneficiaries” include a resident of a member state of the EU or a country that is a party to NAFTA that meets certain requirements.
As a result of Brexit, companies relying on ownership by residents of the UK to qualify under this derivative benefits test faced uncertainty, as their UK owners were no longer resident in a member state of the EU. Helpfully, a recent competent authority arrangement between the US and the UK clarifies that the competent authorities of each state understand that references to a resident of a member state of the EU include a resident of the UK for purposes of the US-U.K Income Tax Treaty, notwithstanding the fact that the UK is no longer a member state of the EU.
In a related competent authority arrangement, the competent authorities of the US and the UK agreed that references to “NAFTA” in the US-UK Income Tax Treaty are understood as references to the USMCA, once the USMCA enters into force.
Eversheds Sutherland Observation: While the competent authority arrangement is helpful with respect to the interpretation of the US-UK Income Tax Treaty, that treaty is one of many US income tax treaties with European countries that provide benefits to certain entities owned by residents of a member state of the EU. It remains to be seen whether the US competent authority will enter into arrangements with other jurisdictions to similarly interpret such a derivative benefits provision to include owners resident in the UK.