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IRS Memorandum Clarifies Non-Residents May Not Claim Treaty Benefits with Respect to DISC Distributions — Orbitax Tax News & Alerts

The U.S. IRS has published a memorandum dated 4 November 2022 from the Office of Chief Counsel concerning treaty benefits for distributions and gains with respect to the stock of a Domestic International Sales Corporation (DISC). The main issue and conclusion are as follows:

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ISSUE

Are foreign taxpayers permitted to claim a reduced rate of U.S. tax on their DISC distributions under Article 101 (Dividends) of an applicable U.S. income tax treaty by taking the position that, pursuant to Article 5 (Permanent Establishment), their DISC distributions are not attributable to a permanent establishment within the United States?

CONCLUSION

No. Claims for treaty benefits alleging that DISC distributions are not attributable to a permanent establishment within the United States should be denied because:

(1) Section 996(g) requires foreign shareholders to treat DISC distributions as attributable to a permanent establishment even though they are not so attributable under an applicable U.S. income tax treaty; and

(2) The well-established principle of U.S. tax treaties that the Code and treaty must be applied consistently prohibits foreign shareholders of DISCs from claiming treaty benefits applicable to income that is not attributable to a permanent establishment.

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) does not apply. Foreign taxpayers are therefore ineligible to claim treaty benefits with respect to their DISC distributions and gains, regardless of when the treaty at issue entered into force, and their treaty claims should be disallowed.