DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS（十） Paragraph 4 　　Paragraph 4 provides that a resident of one of the States that derives income from the other State described in Article 8 (Shipping and Air Transport) and that is not entitled to the benefits of the Convention under paragraphs 1 through 3, shall nonetheless be entitled to the benefits of the Convention with respect to income described in Article 8 if it meets one of two tests. These tests in substance duplicate the rules set forth under Code section 883 and therefore afford little additional benefit beyond those provided by the Code. These tests are described below. 　　First, a resident of one of the States will be entitled to the benefits of the Convention with respect to income described in Article 8 if at least 50 percent of the beneficial interest in the person (in the case of a company, at least 50 percent of the aggregate vote and value of the stock of the company) is owned, directly or indirectly, by qualified persons or citizens of the United States or individuals who are residents of a third state that grants by law, common agreement, or convention an exemption under similar terms for profits as mentioned in Article 8 to citizens and corporations of the other State. This provision is analogous to the relief provided under Code section 883(c)(1). 　　Alternatively, a resident of one of the States will be entitled to the benefits of the Convention with respect to income described in Article 8 if at least 50 percent of the beneficial of the person (in the case of a company, at least 50 percent of the aggregate vote and value of the stock of the company) is owned directly or indirectly by a company or combination of companies the principal class of shares in which is substantially and regularly traded on an established securities market in a third state, provided that the third state grants by law, common agreement or convention an exemption under similar terms for profits as mentioned in Article 8 to citizens and corporations of the other State. This provision is analogous to the relief provided under Code section 883(c)(3). The term "substantially and regularly traded on an established securities market" is not defined in the Convention. In determining whether a resident of Ireland is entitled to the benefits of the Convention under this paragraph, the United States will refer to the principles of Code section 883(c)(3)(A) for guidance as to the definition of this term. 　　The provisions of paragraph 4 are intended to be self-executing. Unlike the provisions of paragraph 6, discussed below, claiming benefits under paragraph 4 does not require advance competent authority ruling or approval. The tax authorities may, of course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. Paragraph 5 　　Paragraph 5 sets forth a limited derivative benefits test that applies to all treaty benefits. In general, a derivative benefits test entitles the resident of a state to treaty benefits if the beneficial owner of the resident would have been entitled to the same benefit had the income in question flowed directly to that owner. Paragraph 5 provides a derivative benefits test under which a company that is a resident of a Contracting State may be entitled to some or all of the benefits of the Convention. In order to be entitled to all the benefits of the Convention under this paragraph, the company must meet an ownership test, a base reduction test, and a derivative benefits test. These tests are described below. 　　Subparagraph 5(a)(i) sets forth the ownership test. Under this test, at least 95 percent of the aggregate vote and value of the company's shares must be owned by any combination of seven or fewer persons that are entitled to all of the benefits of the Convention under paragraph 2 or are residents of member states of the European Union or of parties to NAFTA. Ownership may be direct or indirect. 　　Pursuant to subparagraphs 8(e) and (f) of this Article, a person will be considered a resident of a member state of the European Union or of a party to NAFTA for purposes of this paragraph only if the person would be entitled to the benefits of the income tax treaty between its state of residence and the Contracting State from which treaty benefits are claimed. However, if that treaty does not contain a comprehensive limitation on benefits provision, then that person must be a person who would still have qualified for the benefits of that treaty under provisions analogous to the provisions of paragraph 2 of this Article had that treaty contained a limitation on benefits provision with those provisions. 　　Subparagraph 5(a)(ii) sets forth the base reduction test. This test is the same as the base reduction test in subparagraph 2(c)(ii), except that for purposes of this test amounts paid or accrued to persons that are residents of a member state of the European Union or of a party to NAFTA are excluded from deductible payments. 　　Notwithstanding subparagraph 5(a), subparagraph 5(b) sets forth an additional requirement that must be satisfied in order for a company that is a resident of a Contracting State to be entitled to the benefits of the Convention accorded under Articles 10 (Dividends), 11 (Interest) or 12 (Royalties). This provision requires a comparison of the rate of tax imposed on a particular payment under the Convention to the rate of tax that would be imposed under the income tax convention between the source state and any European Union member state or party to NAFTA whose residents account for some of the ownership interest described in subparagraph 5(a)(i). Benefits will be extended with respect to such a payment under this provision only if at least 95 percent of the company's shares are owned by persons resident in a European Union member state or a party to NAFTA for which the rate (or rates) of withholding tax provided in the income tax convention between the source state and such state is less than or equal to the rate or rates imposed under the Convention. This rate comparison is by definition satisfied for persons owning shares that are also qualified persons under paragraph 2 of this Article. If for a particular payment less than 95 percent of the ownership interest is accounted for by persons that satisfy the rate comparison, then paragraph 5 does not apply to that payment (although it may apply to other payments and would apply to items of income, profit or gain other than those referred to in subparagraph 5(b)). 　　The rates of tax to be compared under this paragraph are the rate of withholding tax that the source State would impose had the European Union or NAFTA resident directly received its proportionate share of the dividend, interest or royalty payment and the rate of withholding tax that the source State would have imposed had that person been a resident of the other State and the person's proportionate share of the dividend, interest or royalty payment had been paid directly to that person. For example, assume that a U.S. company pays a dividend to EIRECo, a company resident in Ireland. EIRECo has two equal shareholders, a corporation resident in the United Kingdom and an individual resident in the United Kingdom. Both are residents of a member state of the European Union within the meaning of paragraph 5. Each person's proportionate share of the dividend payment is 50 percent of the dividend. If the UK corporation had received this portion of the dividend directly, it would be subject to a withholding tax of 5 percent under the income tax treaty between the United States and the United Kingdom. If the individual had received his portion of the dividend directly, it would be subject to a withholding tax of 15 percent under the same treaty. These rates are the same rates that would have applied if the corporation and the individual had been residents of Ireland. Therefore, the test under subparagraph 5(b) is satisfied with respect to this dividend payment. 　　The provisions of paragraph 5 are intended to be self-executing. Unlike the provisions of paragraph 6, discussed below, claiming benefits under paragraph 5 does not require advance competent authority ruling or approval. The tax authorities may, of course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. Paragraph 6 　　Paragraph 6 provides that a resident of one of the States that is not otherwise entitled to the benefits of the Convention may be granted benefits under the Convention if the competent authority of the State from which benefits are claimed so determines. This discretionary provision is included in recognition of the fact that, with the increasing scope and diversity of international economic relations, there may be cases where significant participation by third country residents in an enterprise of a Contracting State is warranted by sound business practice or long-standing business structures and does not necessarily indicate a motive of attempting to derive unintended Convention benefits. 　　Paragraph 6 provides that the competent authority of a State will base a determination under this paragraph on whether the establishment, acquisition, or maintenance of the person seeking benefits under the Convention, or the conduct of such person's operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Thus, persons that establish operations in one of the States with the principal purpose of obtaining the benefits of the Convention ordinarily will not be granted relief under paragraph 6. 　　The competent authority may determine to grant all benefits of the Convention, or it may determine to grant only certain benefits. For instance, it may determine to grant benefits only with respect to a particular item of income in a manner similar to paragraph 3. Further, the competent authority may set time limits on the duration of any relief granted. 　　It is assumed that, for purposes of implementing paragraph 6, a taxpayer will not be required to wait until the tax authorities of one of the States have determined that benefits are denied before he will be permitted to seek a determination under this paragraph. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever is later. 　　The competent authority of a Contracting State will consult with the competent authority of the other Contracting State before denying the benefits of the Convention under paragraph 6. Finally, there may be cases in which a resident of a Contracting State may apply for discretionary relief to the competent authority of his State of residence. For instance, a resident of a State could apply to the competent authority of his State of residence in a case in which he had been denied a treaty-based credit under Article 24 on the grounds that he was not entitled to benefits of the article under Article 23. Paragraph 7 　　Paragraph 7 addresses the so-called "triangular case" in which an Irish enterprise derives income from the United States and that income is attributable to a permanent establishment located in a third jurisdiction that imposes little or no income tax on those profits. This provision is necessary to prevent triangular case abuse since Ireland may in particular circumstances exempt from tax profits attributable to a permanent establishment of its residents located in certain countries, although it would tax the income, subject to a foreign tax credit, if the income were earned directly by the Irish entity. 　　The Contracting States agreed that it would be inappropriate to grant treaty benefits with respect to such income. Therefore, paragraph 7 generally denies any treaty benefit with respect to any item of income derived by an Irish resident enterprise and attributable to a permanent establishment in a third state if the combined tax in Ireland and the third state is less than 50 percent of the tax that normally would be imposed in Ireland if the income were earned there and were not attributable to the permanent establishment in the third state. Paragraph 7 further provides that any dividends, interest or royalties to which this paragraph applies shall be subject to tax at source under domestic law, but at a rate not exceeding 15 percent of the gross amount. 　　Paragraph 7 provides an exception that grants treaty benefits for income that is connected with or incidental to the active conduct of a trade or business carried on by the permanent establishment in the third state. The business of making or managing investments is not an active trade or business for this purpose unless the activities are banking or insurance activities carried on by a bank or insurance company. Paragraph 8 　　Paragraph 8 defines key terms used in this Article, which are discussed above in connection with the relevant paragraphs. Paragraph 9 　　Paragraph 9 provides additional authority to the competent authorities (in addition to that of Article 26 (Mutual Agreement Procedure)) to consult together to develop a common application of the provisions of this Article, including the publication of regulations or other public guidance. The competent authorities shall, in accordance with the provisions of Article 27 (Exchange of Information and Administrative Assistance) exchange such information as is necessary to carry out the provisions of this Article. ARTICLE 24 Relief from Double Taxation 　　This Article describes the manner in which each Contracting State undertakes to relieve double taxation. The United States uses the foreign tax credit method under its internal law, and by treaty. Ireland uses a foreign tax credit when provided by a treaty and in certain circumstances under its domestic law. In other cases, it provides for a deduction of the tax against the relevant income. Paragraph 1 　　The United States agrees, in paragraph 1, to allow to its citizens and residents a credit against U.S. tax for income taxes paid or accrued to Ireland. This provision is based on the Treasury Department's review of Ireland's laws. 　　The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of U.S. law, as that law may be amended over time, so long as the general principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the time a credit is given, of the U.S. statutory credit. 　　Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the Code, to a U.S. corporation in respect of dividends received from a corporation resident in Ireland of which the U.S. corporation owns at least 10 percent of the voting stock. This credit is for the tax paid by the corporation of Ireland on the profits out of which the dividends are considered paid. 　　As indicated, the U.S. credit under the Convention is subject to the various limitations of U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is limited to the amount of U.S. tax due with respect to net foreign source income within the relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. When the alternative minimum tax is due, the alternative minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation of the U.S. credit from being applied on a per-country basis (should internal law be changed), an overall basis, or to particular categories of income (see, e.g., Code section 865(h)). Paragraph 2 　　Under subparagraph 3(b) of Article 10 (Dividends), Ireland allows individual residents of the United States certain tax credits or refunds in respect of dividends paid by a corporation which is a resident of Ireland, subject to taxes withheld of 15 percent on the aggregate amounts received as dividends and tax credits. Paragraph 2 provides that the amounts withheld by Ireland pursuant to paragraph 3(b) shall be regarded as an income tax imposed on the recipient of the dividend. Thus, the U.S. foreign tax credit with respect to those amounts shall be computed in accordance with Code section 901. Paragraph 3 　　Paragraph 3 provides special rules for the tax treatment in both States of certain types of income derived from U.S. sources by U.S. citizens who are resident in Ireland. Since U.S. citizens, regardless of residence, are subject to United States tax at ordinary progressive rates on their worldwide income, the U.S. tax on the U.S. source income of a U.S. citizen resident in Ireland may exceed the U.S. tax that may be imposed under the Convention on an item of U.S. source income derived by a resident of Ireland who is not a U.S. citizen. 　　Subparagraph (a) of paragraph 3 provides special credit rules for Ireland with respect to items of income that are either exempt from U.S. tax or subject to reduced rates of U.S. tax under the provisions of the Convention when received by residents of Ireland who are not U.S. citizens. The tax credit of Ireland allowed by paragraph 3(a) under these circumstances, to the extent consistent with the law of that State, need not exceed the U.S. tax that may be imposed under the provisions of the Convention, other than tax imposed solely by reason of the U.S. citizenship of the taxpayer under the provisions of the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a U.S. citizen resident in Ireland receives U.S. source portfolio dividends, the foreign tax credit granted by that other State would be limited to 15 percent of the dividend -- the U.S. tax that may be imposed under subparagraph 2(b) of Article 10 (Dividends) -- even if the shareholder is subject to U.S. net income tax because of his U.S. citizenship. With respect to royalty or interest income, Ireland would allow no foreign tax credit, because its residents are exempt from U.S. tax on these classes of income under the provisions of Articles 11 (Interest) and 12 (Royalties). 　　Paragraph 3(b) eliminates the potential for double taxation that can arise because subparagraph 3(a) provides that Ireland need not provide full relief for the U.S. tax imposed on its citizens resident in Ireland. The subparagraph provides that the United States will credit the income tax paid or accrued to Ireland, after the application of subparagraph 3(a). It further provides that in allowing the credit, the United States will not reduce its tax below the amount that is taken into account in Ireland in applying subparagraph 3(a). Since the income described in paragraph 3 is U.S. source income, special rules are required to resource some of the income to Ireland in order for the United States to be able to credit the other State's tax. This resourcing is provided for in subparagraph 3(c), which deems the items of income referred to in subparagraph 3(a) to be from foreign sources to the extent necessary to avoid double taxation under paragraph 3(b). The rules of paragraph 3(c) apply only for purposes of determining U.S. foreign tax credits with respect to taxes referred to in paragraphs 1(b) and 2 of Article 2 (Taxes Covered). 　　The following two examples illustrate the application of paragraph 3 in the case of a U.S. source portfolio dividend received by a U.S. citizen resident in Ireland. In both examples, the U.S. rate of tax on residents of the other State under paragraph 2(b) of Article 10 (Dividends) of the Convention is 15 percent. In both examples the U.S. income tax rate on the U.S. citizen is 36 percent. In example I, Ireland's income tax rate on its resident (the U.S. citizen) is 25 percent (below the U.S. rate), and in example II, Ireland's income tax rate on its resident is 40 percent (above the U.S. rate). Example I Example II Paragraph 3(a) U.S. dividend declared $100.00 $100.00 Notional U.S. withholding tax per Article 10(2)(b) 15.00 15.00 Irish taxable income 100.00 100.00 Irish tax before credit 25.00 40.00 Irish foreign tax credit 15.00 15.00 Net post-credit Irish tax 10.00 25.00 Paragraphs 3(b) and (c) Example I Example II U.S. pre-tax income $100.00 $100.00 U.S. pre-credit citizenship tax 36.00 36.00 Notional U.S. withholding tax 15.00 15.00 U.S. tax available for credit 21.00 21.00 Income resourced from U.S. to Ireland 27.77 58.33 U.S. tax on resourced income 10.00 21.00 U.S. credit for Irish tax 10.00 21.00 Net post-credit U.S. tax 11.00 0.00 Total U.S. tax 26.00 15.00 　　In both examples, in the application of paragraph 3(a), Ireland credits a 15 percent U.S. tax against its residence tax on the U.S. citizen. In example I the net Irish tax after foreign tax credit is $10.00; in the second example it is $25.00. In the application of paragraphs 3(b) and (c), from the U.S. tax due before credit of $36.00, the United States subtracts the amount of the U.S. source tax of $15.00, against which no U.S. foreign tax credit is to be allowed. This provision assures that the United States will collect the tax that it is due under the Convention as the source country. In both examples, the maximum amount of U.S. tax against which credit for Irish tax may be claimed is $21.00. Initially, all of the income in these examples was U.S. source. In order for a U.S. credit to be allowed for the full amount of the Irish tax, an appropriate amount of the income must be resourced. The amount that must be resourced depends on the amount of Irish tax for which the U.S. citizen is claiming a U.S. foreign tax credit. In example I, the Irish tax was $10.00. In order for this amount to be creditable against U.S. tax, $27.77 ($10 divided by .36) must be resourced as foreign source. When the Irish tax is credited against the U.S. tax on the resourced income, there is a net U.S. tax of $11.00 due after credit. In example II, Irish tax was $25 but, because the amount available for credit is reduced under subparagraph 3(c) by the amount of the U.S. source tax, only $21.00 is eligible for credit. Accordingly, the amount that must be resourced is limited to the amount necessary to ensure a foreign tax credit for $21 of Irish tax, or $58.33 ($21 divided by .36). Thus, even though Irish tax was $25.00 and the U.S. tax available for credit was $21.00, there is no excess credit available for carryover. Paragraph 4 　　Ireland agrees, in paragraph 4, to allow a credit against Irish tax for United States taxes paid with respect to profits, income or chargeable gains from U.S. sources, to the extent the tax is imposed in accordance with the Convention. The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of Irish law, as that law may be amended over time, so long as the general principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the time a credit is given, of the Irish statutory credit. 　　Subparagraph (b) provides for a deemed-paid credit to an Irish corporation in respect of dividends received from a corporation resident in the United States of which the Irish corporation owns at least 10 percent of the voting stock. This credit is for the tax paid by the corporation of Ireland on the profits out of which the dividends are considered paid. Paragraph 5 　　Paragraph 5 provides that, for purposes of this Article, income which may be taxed in a Contracting State under the terms of this Convention will be considered to have its source in that State. However, domestic law source rules that apply for purposes of limiting the foreign tax credit will govern if they differ from the results under this paragraph. This permits the United States to apply the anti-abuse rules of Code section 904(g), for example. Paragraph 6 　　Paragraph 6 is included in the Convention because Ireland continues to maintain a remittance system of taxation for individuals who are resident but not domiciled in Ireland. Such persons are subject to tax in Ireland on non-Irish source income only to the extent the income or chargeable gains are remitted to the Irish resident. Under paragraph 6, such persons are entitled to the benefits of the Convention in order to reduce or eliminate tax only to the extent that the relevant income is remitted or received. For example, if an Irish resident individual who is not domiciled in Ireland maintains a brokerage account in the United Kingdom into which is paid $100 in U.S.-source dividend income, the United States may impose withholding tax at the statutory rate of 30%. If the dividend income instead is paid into a brokerage account in Dublin, the Irish resident will be subject to tax in Ireland and the United States will reduce the withholding tax to 15%. 　　Domicile is a legal concept that is not necessarily related to residence. An individual receives a domicile of origin at birth. The individual may change that domicile by physically relocating with the intention of changing his domicile. Relation to Other Articles 　　By virtue of the exceptions in subparagraph 5(a) of Article 1 this Article is not subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States will allow a credit to its citizens and residents in accordance with the Article, even if such credit were to provide a benefit not available under the Code.