Two U.S. corporations that were “qualifying persons” for purposes of the Canada-U.S. Treaty (USCo1 and USCo2) held 58% and 42%, respectively, of LLC1 (which, for U.S. purposes, in Scenario 1 chose not to be fiscally transparent, or choose to be treated as a partnership), which held LLC2 which in turn, held LLC3. LLC3 (which, like LLC2, was fiscally transparent) operated a Canadian branch business.
In finding that Art. X(6) of the Treaty would apply to grant treaty benefits to LLC3 in respect of its Canadian branch earnings by virtue of the application of Art. IV(6), Headquarters stated:
[T]he fact that there may be more than one fiscally transparent entity in the corporate chain does not alter the fact that the condition of there being an entity that is fiscally transparent and through which a U.S. resident person derives income is already met. …
[F]or U.S. income tax purposes, the Canadian Branch profits of LLC3 are considered to be derived by the first entity in the corporate chain which is not treated as a fiscally transparent entity for U.S. income tax purposes. In Scenario 1, this entity would be LLC1 and in Scenario 2, it would be USCo1 and USCo2. ...
Therefore, as LLC1 (in Scenario 1) and USCo1 and USCo2 (in Scenario 2) are deriving income through LLC3, an entity that is fiscally transparent, and the same tax treatment condition is met, Article IV(6) would apply.