The IRS recently released a generic legal advice memorandum (AM 2022-005) concluding that foreign shareholders are ineligible to claim a reduced U.S. tax rate under an applicable U.S. income tax treaty with respect to their domestic international sales corporation (DISC) distributions under Article 10 (Dividends) of an applicable U.S. income tax treaty. The IRS took the position that, pursuant to Article 5 (Permanent Establishment), their DISC distributions are not attributable to a permanent establishment within the U.S.
Section 996(g) requires foreign shareholders to treat DISC distributions as though they are effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholders within the U.S. and that are derived from sources within the U.S.
In the memorandum, the IRS disagreed with the position that Article 5 of U.S. income tax treaties ratified after section 996(g) directly conflicts with, and thus overrides, Section 996(g). Instead, the IRS views Section 996(g) as a coordination rule governing the interaction between the Code — and specifically the DISC regime — with the overall U.S. income tax treaty network.
The memorandum concludes that because both the Code and U.S. income tax treaties prevent foreign shareholders of DISCs from claiming treaty benefits on DISC distributions, the “later-in-time” rule codified in Section 7852(d) is not applicable. Thus, foreign taxpayers are ineligible to claim treaty benefits regarding their DISC distributions and gains, regardless of when the treaty at issue entered into force.
Contacts:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.