1 See Institute Memorandum to Tax Members No. 52-90, Accounting/Treasurers Members No. 26-
90 and International Funds Task Force No. 29-90, dated November 30, 1990.
2 As you may know, over a year ago France suspended its payment of refund claims to pension
funds, RICs and others while it reviewed the application of its reclaim process.
February 22, 1994
TO: INTERNATIONAL COMMITTEE NO. 2-94
TAX COMMITTEE NO. 7-94
RE: INSTITUTE COMMENTS ON MODEL INCOME TAX TREATY
__________________________________________________________
In recent years, both the United Kingdom and France have questioned
whether some or all regulated investment companies ("RICs") are entitled to
benefits generally provided to U.S. corporations pursuant to income tax
treaties with the United States. In 1990, the Institute negotiated an
understanding with the United Kingdom's Inland Revenue that resulted in RICs
organized as Massachusetts Business Trusts receiving the same tax treaty
benefits afforded to other U.S. corporations (including RICs organized in
corporate form).1 Currently, the Institute is urging France to process
promptly those tax refund claims filed by RICs.2
The Institute is also seeking to ensure that RICs receive appropriate
treaty benefits by urging clarification of the specific treaty language that
provides such benefits. As part of this effort, the Institute has prepared
the attached comments on the United States Model Income Tax Treaty, which is
currently being redrafted. The comments are presented in two parts, with the
first addressing issues relating to a RIC's eligibility for treaty benefits
and the second addressing application of tax treaties to master-feeder
structures where the master fund is an entity, such as a U.S. partnership,
that is not taxed in its country of residence.
The Institute's memorandum makes three recommendations regarding the
eligibility of RICs for treaty benefits. First, a RIC should be expressly
classified as a corporation for all treaty purposes and should be treated as
the beneficial owner of its income regardless of its form of organization
under state law. Second, the "publicly-traded" exception in the model's
limitation on benefits article should be expanded/clarified to include all
RICs and not just those closed-end funds that trade on a "recognized stock
exchange." Third, U.S. treaty negotiators should confirm that treaty
procedures, including processing of refund claims and establishing eligibility
for withholding and other reliefs, will be implemented by RICs at the entity
level.
With respect to master-feeder structures, the Institute urges
clarification of treaty applicability where (1) a master fund is established
as a partnership or other flow-through entity, (2) income from the source
country is not taxed at the master fund level (i.e., the master fund is
treated as "tax transparent" in its country of organization) and (3) the
feeder fund's portion of the master fund's income is currently subject to tax
in the feeder fund's country of residence (e.g., the United States, in the
case of a RIC feeder). If these conditions are met, income paid to the master
fund should be eligible for treaty benefits, under the treaty between the
source country (i.e., the country in which the portfolio investment is made)
and the country in which the feeder fund is located, to the extent that the
master fund's income is subject to tax in the hands of the feeder fund or its
shareholders.
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Attachment