Preventing Treaty Abuse

I. S. 254The issue

Collective investment vehicles (CIVs) are recognized economic players, which, according to the OECD, make investments worth trillions of dollars. The value of the assets in the case of an open-end fund and mutual funds is often deemed to be the net asset value (NAV), which is built up by the entity’s assets minus the value of its liabilities. As taxes are part of the liabilities, it is crucial to know the amount of taxes that are owed in order to calculate an accurate price (NAV). In an international context the amount of taxes to be paid will vary depending on whether or not treaty entitlement is given to this entities.

In 2010, bearing in mind the importance of tax certainty for CIVs and the goal of neutrality, the OECD in its CIV Report reached a consensus about the treaty entitlement of the CIVs, provided they satisfied the requirements of “person” and “resident” status.

However, the introduction of the Article X by Action 6 of the BEPS project imposes a new requirement: the CIV – which had passed the person and the residence test under the CIV Report – must now also satisfy a limitation of benefits (LOB) test.

If the CIV fails to pass the LOB test, then the private in...