The Canadian Parliament has approved the United States-Mexico-Canada Agreement (USMCA), which is to replace NAFTA. The USMCA is expected to enter into force in the coming months. Once the agreement enters into force, certain subsidiaries of some US, Canadian, and Mexican-parented companies may no longer be eligible for treaty benefits. The USMCA replacing NAFTA may have broad implications for companies claiming US tax treaty benefits under the derivative benefits test of a treaty’s Limitation on Benefits article.
Taxpayers relying on a US, Mexican, or Canadian tax resident being an equivalent beneficiary under the derivative benefits test of a US tax treaty’s LOB article should review their structures and evaluate the need for further analysis and possible alternative ways to satisfy treaty eligibility requirements.