- This is, of course, a rather self-explanatory term, though it is true that the meaning of government can be very subjective and country-specific. The IRS understands government to mean “the Contracting State, political subdivision, or local authority” – a relatively straightforward and restrictive definition.
Tax-exempt pension trust or pension fund
- For the IRS, you qualify as such if “more than half the beneficiaries or participants in the trust or fund are residents of the country of residence of the trust or fund itself.” The definition is thus quite specific.
Other tax-exempt organization
- To qualify as such, generally “more than half the beneficiaries, members, or participants of religious, charitable, scientific, artistic, cultural, or educational organizations must be residents of the country of residence of the organization.”
- Again, there is the “more than half” threshold or rule here, though it could be argued that the types of organisation are somewhat subjective, as opinions can vary on what constitutes an “artistic” or “cultural” organisation, for example.
Publicly traded corporation
- IRS definition: “this test generally requires the corporation’s principal class of shares to be primarily and regularly traded on a recognized stock exchange in its country of residence, while other treaties may permit trading in either the United States or the treaty country, or in certain third countries if the primary place of management is the country of residence.”
- What is notable here is the “primarily and regularly” part. Both these tests generally need to be met.
Subsidiary of a publicly traded corporation
- IRS definition: “this test generally requires that more than 50% of the vote and value of the company’s shares be owned, directly or indirectly, by five or fewer companies that are publicly-traded corporations and that themselves meet the publicly-traded corporation test, as long as all companies in the chain of ownership are resident in either the United States or the same country of residence as the subsidiary.”
- There seems to be strict requirements here in terms of the 50% threshold, the number of companies with ownership and the country of residence.
Company that meets the ownership and base erosion test
- IRS definition: “this test generally requires that more than 50% of the vote and value of the company’s shares be owned, directly or indirectly, by individuals, governments, tax-exempt entities, and publicly-traded corporations resident in the same country as the company, as long as all companies in the chain of ownership are resident in the same country of residence, and less than 50% of the company’s gross income is accrued or paid, directly or indirectly, to persons who would not be good shareholders for purposes of the ownership test.”
- The ownership test here seems similar to the one in the point above, though different types of entities may have ownership.
Company that meets the derivative benefits test
- IRS definition: “this test is generally limited to USMCA, EU, and EEA country treaties, and may apply to all benefits or only to certain items of income (interest, dividends, and royalties). It generally requires that more than 95% of the aggregate vote and value of the company’s shares be owned, directly or indirectly, by seven or fewer equivalent beneficiaries (ultimate owners who are resident in an EU, EEA, or USMCA country and are entitled to identical benefits under their own treaty with the United States under one of the ownership tests included within the LOB article (other than the stock ownership and base erosion test)). In addition, this test requires that less than 50% of the company’s gross income be paid or accrued, directly or indirectly, to persons who would not be equivalent beneficiaries.”
- This is a strict test with several criteria needing to be met.
Company with an item of income that meets the active trade or business test
- IRS definition: “this test generally requires that the company be engaged in an active trade or business in its country of residence, that its activities in that country be substantial in relation to its U.S. activities, if the payer is a related party, and the income be derived in connection to or incidental to that trade or business.”
- This test seems fairly self-explanatory, though perhaps there could be some subjectivity regarding the definition of “substantial”.
Favorable discretionary determination by the U.S. competent authority received
- IRS definition: “this test requires that the company obtain a favorable determination granting benefits from the U.S. competent authority that, despite the company’s failure to meet a specific objective LOB test in the applicable treaty, it may nonetheless claim the requested benefits. Unless a treaty or technical explanation specifically provides otherwise, you may not claim discretionary benefits while your claim for discretionary benefits is pending.”
- It therefore seems that even if a company does not meet the LOB (limitation on benefits) test, it may still be eligible for certain benefits if it can prove that it meets the requirements to claim them.
No LOB article in treaty
- IRS definition: “this generally requires that the entity is a resident in a foreign country that has entered into an income tax treaty with the United States that does not contain an LOB (limitation on benefits) article.”
- “The “Limitation on Benefits” (LOB) article is an anti-treaty shopping provision intended to prevent residents of third countries from obtaining benefits under a treaty that were not intended for them. Entities that are residents of a country whose income tax treaty with the United States contains a LOB article are eligible for the benefits provided in Table 1 only if they satisfy one of the objective tests under the LOB article or obtain a favorable discretionary determination from the U.S. competent authority with regard to the specific benefits.”
- “Genossenschaft” is a German-language term that carries a particular meaning in Switzerland and may not have an exact equivalent in English-speaking countries. The German word is sometimes translated as “cooperative” and sometimes as “collective”. The Swiss Federal Council translates it as a “cooperative company”. It states that “Cooperatives prioritize development and mutual economic assistance above all, for example in the construction or purchase of housing.”
- Wide definition of a co-op: “A co-op is a business or organisation that’s owned and controlled by its members, to meet their shared needs. The members can be its customers, employees, residents or suppliers, who have a say in how the co-op is run.”
- Thus, the general principle of a cooperative is present in many countries, though the specifics may vary.
- This is a similarly loose term that can be used to describe a number of things in different contexts. A wide definition is “an association dedicated to a particular interest or activity.” Clubs can vary greatly with regard to size, structure, etc., making it difficult to make blanket statements.
- A non-profit organisation can be described as a “a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that operates as a business aiming to generate a profit for its owners.”
- The key terms here seem to be “collective, public or social benefit”, which may, of course, be somewhat subjective.
- Again, it is hard to find a “definitive” definition, as opinions can vary on what constitutes a “small business”. However, it may be defined as “a privately owned corporation, partnership, or sole proprietorship that has fewer employees and less annual revenue than a corporation or regular-sized business.” This is quite vague, which emphasises the difficulty of providing a specific definition based on, for example, turnover or number of employees.
- A sole trader, also known as a sole proprietor, is someone who runs and owns an unincorporated business on their own. As there is no legal distinction between the owner and the business entity, sole traders may keep all profits after taxes. However, on the flip side, the individual is also liable for all losses incurred by the business (what is known as “unlimited responsibility”, as opposed to “limited liability”).