ARTICLE 10 — U.S. Income Tax Treaty

Related Persons

This Article complements section 482 of the Code and confirms the right of the Contracting States to reallocate items of income in certain cases. Under paragraph 1, if conditions between related persons in their commercial or financial relations differ from those that would be made between independent persons, any profits that would, but for those conditions, have accrued to one of the persons, but by reason of those conditions have not so accrued, may be included in the profits of that person and taxed accordingly.

Paragraph 2 provides that persons are related for purposes of the Convention where one person participates directly or indirectly in the management, control, or capital of the other, or the same persons participate directly or indirectly in the management, control, or capital of both.

Paragraph 3 describes the consequences of an adjustment made by a Contracting State in accordance with paragraph 1. Where a Contracting State makes such an adjustment, the other Contracting State shall make a corresponding adjustment to the amount of tax which it charged the related enterprise, in order to avoid double taxation. It is implicit in the language of the paragraph that the other Contracting State agrees that the adjustment is appropriate and reflects the result which would occur under arm’s-length conditions. In determining the amount of such adjustments, other provisions of the Convention are to be taken into account. Thus if, as a result of the adjustment, one enterprise is determined to have made a distribution of profits to the other, the provisions of Article 11 (Dividends) may apply to the deemed distribution. If necessary, the competent authorities shall consult to resolve any differences in the application of these provisions, or to coordinate the application of interest and penalties.

This Article does not limit the application of any internal law provisions in either Contracting State designed to place transactions between related enterprises on an arm’s-length basis. Thus, it does not limit the right of the United States to apply Section 482 of the Code.