Treaty Shopping
Treaty shopping is a strategy that involves leveraging the benefits of tax treaties for entities that wouldn't typically be eligible for them. This often involves setting up an entity in a specific country by an individual or business that isn't a resident of that country. The primary goal is to gain the advantages offered by a treaty that the chosen country has with another nation. These benefits would not be available to the individual or business if they had directly invested in the third country, which is usually the source country. The interposed entity is commonly referred to as the "conduit company." This company typically isn't taxed in the intermediary state due to specific legal provisions or special agreements. As a result, the benefits between the two countries can be extended to residents of a third country.
Examples of Treaty Shopping:
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Investment via Luxembourg: A company located in a low-tax jurisdiction plans to invest funds as debt capital in a company in Japan. The funds are channeled through a specially established company in Luxembourg. This Luxembourg-based company receives interest from Japan and pays almost the same amount of interest to the company in the low-tax jurisdiction. The withholding tax applied in Japan is thus reduced from 20% to 10% based on the treaty between Luxembourg and Japan. Meanwhile, Luxembourg doesn't apply any withholding tax on outgoing interests as per its internal regulations.
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Channeling through the Netherlands: The Netherlands is known for its extensive network of tax treaties and favorable tax regime, especially concerning withholding taxes on dividends, interest, and royalties. The U.S.-Netherlands tax treaty, for instance, provides for reduced withholding tax rates on dividends under certain conditions. However, the specific benefits would depend on the nature of the investment and the structure of the entities involved.
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Investment Strategy via Singapore: Singapore has a comprehensive network of tax treaties, including one with Thailand. Singapore generally does not impose withholding tax on outbound dividends. However, the specific benefits concerning royalties or other income types would depend on the provisions of the Singapore-Thailand tax treaty and the nature of the transactions.
Disclaimer: Always speak directly to an attorney; blog posts are not a sufficient source of information to make decisions, may not be appropriate for your situation, may not be well researched, and may not be current at the time you read them, always speak directly with an attorney.
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