Ruth Mason (Connecticut) has posted When Tax Treaty Derivative Benefits Provisions Don’t Apply on SSRN.  Here is the abstract:

The U.S.-U.K tax treaty¸ like several other recent treaties, has a limitations on benefits (LOB) clause that contains a derivative benefits provision. Under derivative benefits, a company that qualifies as a resident under Article 4 of the Treaty – but fails to qualify under the LOB clause due to its foreign ownership – may nevertheless be entitled to treaty benefits if the foreign owner is an “equivalent beneficiary.”

An equivalent beneficiary is a beneficial owner that is resident in a third country with which the United States also has a tax treaty. However, for certain items of income, a beneficial owner does not automatically qualify as an equivalent beneficiary simply because its country has a tax treaty with the United States. For those items of income (dividends, interest and royalties), the third country’s treaty must offer withholding rates “at least as low” as the rate available under the claimed treaty.

What happens when the equivalent beneficiary’s treaty with the United States provides higher withholding rates than does the claimed treaty? What withholding rate applies? There are two choices. The United States could apply: (1) the higher of the two treaty withholding rates or (2) the statutory withholding rate. This article describes the derivative benefits problem in detail and considers, from a tax policy perspective, which rate should apply.