Article 22 assures that source basis tax benefits granted by a Contracting State pursuant

to the Convention go to the intended beneficiaries-the residents of the other Contracting Stateand not to residents of third States not having a substantial business and tax nexus with the other Contracting State. In the absence of Article 22, residents of a third State might organize a company in a Contracting State for the purpose of, for example, claiming preferential source basis tax rates in the other Contracting State.

Paragraph 1 provides the general rule, subject to the exceptions in paragraphs 2 and 3, that a resident of a Contracting State which derives income from the other Contracting State is not entitled to the relief from taxation in the source State provided by Articles 6 through 23 of the Convention if either of two conditions are present:

(1) Treaty benefits will not be granted if 50 percent or less of the beneficial interest in the

resident is owned, directly or indirectly, by any combination of individual residents of the United States or Barbados or U.S. citizens. In the case of a company, fifty percent

or less of the beneficial interest in a company means 50 percent or less of the number of shares in each class of the company's shares. (2) Treaty benefits will also not be granted if the income of the resident is used in substantial part, directly or indirectly, to meet liabilities to persons who are residents of third States who are not citizens of the United States. The term “liabilities” refers to deductible payments, which includes liabilities for interest (including accrued interest on original issue discount obligations if deductible under Barbados law) and royalties. The term "substantial" is not defined. Deductible payments which are less than 50 percent of the relevant income, however, will not generally be considered substantial, although in appropriate circumstances a lower percent of income will be considered substantial.

Paragraph 2 contains the first of two general exceptions to the denial of benefits under paragraph 1. Even if either of the conditions in paragraph 1 are present, treaty benefits will be granted by the source State if the income in respect of which benefits are claimed is derived in connection with, or is incidental to, the active conduct by the person deriving the income of a trade or business in the other State. However, this exception does not apply (and, thus, benefits will be denied) under certain circumstances. It does not apply if the business conducted in that other States is the business of making or managing investments. It also does not apply, in general, if the business is one of banking or insurance, and the income is subject to tax in the State of residence of the person deriving it at a rate substantially below the rate generally applicable to business income in that State (such as the rate applicable to Barbadian offshore banks and insurance companies). If, however, such a bank derives income from activities which are other than ''traditional'' banking activities, treaty benefits may be claimed (if the test of paragraph 2 is satisfied) with respect to income from the "non-traditional" activities, regardless of the provisions of paragraph 1. Traditional banking activities include taking deposits, making loans, managing investments and performing trust or other services as a fiduciary.

The effect of paragraph 2 on the right to U.S. treaty benefits of entities in the "off-shore" sector in Barbados is as follows: International Business Companies which are investment companies that are denied treaty benefits under paragraphs 1 and 3 may not claim treaty benefits. If an International Business Company is engaged in other commercial activities it may receive benefits if it meets the tests of the first sentence of paragraph 2. Off-shore banks that are denied treaty benefits under paragraphs 1 and 3 may not receive benefits with respect to income from traditional banking activities, but they may be entitled to treaty benefits with respect to income from other types of activities, such as non-banking commercial services. Off-shore insurance companies that are denied treaty benefits under paragraphs 1 and 3 are not entitled to treaty benefits.

Paragraph 3 contains a second exception to the general denial of benefits rules of paragraph 1. A company which is a resident of a Contracting State and which would not be entitled to benefits under paragraph 1, would, under paragraph 3, be entitled to benefits, if there is substantial and regular trading in its principal class of shares on a recognized stock exchange. A recognized stock exchange is defined to mean:

(1) the NASDAQ System, owned by the National Association of Securities Dealers, Inc.; (2) any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934; and

(3) any other stock exchange which the competent authorities may agree is a recognized exchange.

Paragraph 4 provides for competent authority consultation with respect to the denial of benefits in any particular case if the competent authority of the State of residence of the person which has been denied benefits so requests. This paragraph does not require prior agreement of the competent authorities before benefits may be denied.

This Article is not intended to impose any added burden on United States withholding agents, and withholding agents will not be required to verify a person's ownership or purposes. In applying this Article, the normal burden of proof rules apply. In claiming U.S. benefits, a resident of Barbados would follow the normal U.S. procedures, in effect at the time, for claiming reduced rates of tax or exemption under U.S. tax treaties. The Internal Revenue Service, of course, retains the right to consider, on audit, whether any particular grant of benefits was appropriate.