Tax Treaty Series

ITQ T-

117

22 May, 2026

Question

ACo, a company resident in jurisdiction A, has issued a bond to BCo, a company resident in jurisdiction B. The bond carries arm’s length interest coupons. ACo and BCo are unrelated.

Jurisdiction A imposes a 20% withholding tax on outbound interest payments. There is no double tax treaty between jurisdictions A and B.

BCo sells the next interest coupon to CCo for a price equal to 92% of the coupon’s face value. CCo is a company resident in jurisdiction C. CCo is unrelated to both ACo and BCo. The sale of the coupon does not trigger the withholding tax, under jurisdiction A law.

There is a double tax treaty between jurisdictions A and C. The interest article (Art. 11) includes these 2 paragraphs:

Art. 11(1): “Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.”

Art. 11(2): “The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”

The A / C treaty does not contain a principal purpose test.

Based on this limited information, what amount of withholding tax (if any) will apply when ACo pays the interest to CCo?

Answer

The question is based on the recent UK Supreme Court decision in the Burlington Loan Management case.

Adopting the Supreme Court’s analysis here …

Prima facie, Art. 11(1) would provide an exemption from A tax. Based on the facts, it appears that CCo is the beneficial owner of the interest coupon.

In regard to Art. 11(2), it can be assumed that one of CCo’s main purposes in acquiring the coupon was to benefit from Art. 11(1) of the A / C treaty. However, the key issue is whether one of CCo’s main purposes was to “take advantage” of Art. 11(1), as opposed to merely benefiting from it. CCo is unrelated to both ACo and BCo. Therefore, it can be assumed that the price agreed between CCo and BCo (i.e., 92% of face value) is an arm’s length price. In this situation, there are no facts which suggest that CCo would obtain the benefit in a manner contrary to the treaty’s object and purpose.

Accordingly, none of CCo’s main purposes was to “take advantage” of Art. 11(1).

Final answer: zero withholding tax.

Do you agree?

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