The U.S. Treasury Department Technical Explanations for 26 treaties include 5 examples to illustrate the “derived in connection with” requirement under the active trade or business test regarding the limitation on benefits (“LOB”) provisions. The 130 charts are the 5 examples for each of the 26 treaties.
Derived In Connection With
An item of income is derived in connection with a trade or business if the income-producing activity in the country of source is a line of business that:
- “forms a part of” or
- is “complementary to”
the trade or business conducted in the country of residence by the income recipient.
Form a Part of
A business activity generally will be considered to form part of a business activity conducted in the country of source if the two activities involve the design, manufacture or sale of the same products or type of products, or the provision of similar services. The line of business in the country of residence may be upstream, downstream, or parallel to the activity conducted in the country of source. Thus, the line of business may provide inputs for a manufacturing process that occurs in the country of source, may sell the output of that manufacturing process, or simply may sell the same sorts of products that are being sold by the trade or business carried on in the country of source.
For two activities to be considered to be “complementary,” the activities need not relate to the same types of products or services, but they should be part of the same overall industry and be related in the sense that the success or failure of one activity will tend to result in success or failure for the other.
Allocation of Income for Multiple Businesses, With Not All Qualifying
Where more than one trade or business is conducted in the country of source and only one of the trades or businesses forms a part of or is complementary to a trade or business conducted in the country of residence, it is necessary to identify the trade or business to which an item of income is attributable. Royalties generally will be considered to be derived in connection with the trade or business to which the underlying intangible property is attributable. Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefited trade or business, and then out of other earnings and profits. Interest income may be allocated under any reasonable method consistently applied. A method that conforms to U.S. principles for expense allocation will be considered a reasonable method.