In a case involving unique tax treaty benefit issues, Starr International Co. is challenging the application of a reduced withholding rate under the Switzerland – U.S. income tax treaty. The company is a Swiss-domiciled company that received dividends from a United States company for which withholding tax applied.

The U.S District Court for the District of Columbia heard this case of first impression as Starr International claimed the withholding under the treaty on dividends paid with respect to its 2007 tax year should have been $38 million less than the $57 million amount withheld and subsequently allowed by the IRS.

Under many U.S. income tax treaties in force, taxpayers may only be allowed the benefits of the treaty if the Limitation on Benefits (LOB) criteria is met. Some treaties, including the Swiss-U.S. treaty in question, provide that even if the LOB requirements are not fully satisfied, the IRS may still allow a taxpayer treaty benefits under the “Discretionary Benefits” provision. In this case, Starr International applied for discretionary relief with the IRS. This was denied by the Service, and Starr International decided to file suit claiming the IRS determination was arbitrary, capricious, an abuse of discretion and otherwise not in accordance with the law on the grounds the taxpayer was not treaty shopping; the U.S. Competent Authority did not consult with the Swiss Competent Authority; and a $21.2 million refund was allowed by the IRS to the company for its 2008 dividends from the same payor corporation.

The district court had initially dismissed the company’s refund claim. However, in interesting subsequent developments, including the company’s filing an amended complaint, the court is now reconsidering this decision. The court initially determined that Starr International is not entitled to a specific monetary remedy, but may pursue this claim under the Administrative Procedure Act (APA). The company asserts that it is entitled to monetary remedies under the law, and in its amended complaint reserved its right to appeal the court’s initial dismissal, pending the outcome of the APA issue. alliantNational is closely monitoring the outcome of this case. 

When attempting to qualify for benefits under an income tax treaty, the option of applying for discretionary benefits should not be overlooked. The result in the Starr International case will shed more light on possible remedies if discretionary relief is denied. Our international tax experts can of course assist with all treaty interpretation issues.

alliantNational, alliantgroup’s national practice, provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help businesses receive timely and precise guidance on all their tax matters. Contact us today to learn how your business can benefit from alliantgroup’s  tax consulting services.