First New International Tax Treaties in 10 Years Ratified
BOSTON — On September 20, 2019, Treasury announced the entry into force of tax treaty protocols with Luxembourg and Switzerland. Additionally, on July 16 and 17, the Senate approved resolutions of ratification of protocols to amend income tax treaties with Spain and Japan; such protocols are likely to be entered into force soon. Tax treaties with Poland, Chile, and Hungary are still pending in the Senate.
The protocols with Luxembourg and Switzerland are the first new income tax treaties or protocols to be ratified since 2009. This marks significant movement, and finalization of the protocols and treaties may present (or foreclose) certain planning opportunities. In particular, some of the Spanish protocol provisions may affect Spain’s use as a holding company jurisdiction, a structure which is often utilized in conjunction with South American investment. In addition, the Japanese protocol will increase the number of interest payments and dividends that will qualify for beneficial reduced rates of withholding, which may increase opportunities to do business in Japan in a tax-efficient manner. Going forward, any prior treaty positions that have been claimed in any of the abovementioned countries should be checked to make sure that they are still valid, and other planning considerations should be reviewed.
A high-level summary of the sections of the treaties that have been changed or are subject to change should the protocols be entered into force, is set forth below.
Switzerland – generally in force as of September 20, 2019
• Dividends: exemption from source-country withholding for cross border dividends paid to certain pension funds or other retirement arrangements.
• Mandatory Arbitration: mandatory binding arbitration provided for unresolved competent authority cases.
• Exchange of Information updated to provide broad cooperation.
Luxembourg – in force as of September 9, 2019
• Exchange of Information updated to provide broad cooperation.
Spain – pending final ratification
• Fiscally transparent entities: a new provision addressing income earned through fiscally transparent entities, which is generally in line with the US Model Treaty, except that it allows fiscally transparent entities formed under the laws of either Spain, the U.S., or a mutual treaty partner, to be considered to be income of a U.S. or Spanish resident only if the income is subject to tax in one of those countries.
• Dividends: exemption from withholding taxes for dividends: (1) paid to certain pension funds, (2) to companies holding shares worth 80% or more of the voting power in a subsidiary (and additional requirements,) with a parallel exemption from branch profits tax.
• Interest, Royalties, and Capital Gains: exemption from withholding taxes for interest (subject to exceptions), royalties, and capital gains.
• Limitation on Benefits: new comprehensive limitation on benefits clause added.
• Mandatory Arbitration: mandatory binding arbitration provided for unresolved competent authority cases.
• Exchange of Information updated to provide broad cooperation.
Japan – pending final ratification
• Dividends: expansion of scope of withholding exemption for dividends to allow 50% owned companies to qualify and reducing holding period requirement from 12 to 6 months.
• Interest: exemption from withholding taxes on interest (subject to exceptions.)
• Definition of Real Property: revised to conform with the US Model Treaty language and FIRPTA.
• Mandatory Arbitration: mandatory binding arbitration provided for unresolved competent authority cases.
• Exchange of Information updated to provide broad cooperation.
For further information regarding tax treaties or other tax law issues, please contact Travis Blais or Ben Damsky:
Travis Blais
(617) 918-7081
TBlais@BlaisTaxLaw.com
Benjamin Damsky
(617) 918-7084
BDamsky@BlaisTaxLaw.com