14 06-19 u.s. treaties - how to understand and plan with them

1

U.S. Treaties With Other Countries:

How To Understand

And

Plan With Them

Givner & Kaye, A Professional [email protected]

2Givner & Kaye,

A Professional [email protected]

What We Will Cover:

1. Treaties In General. P. 5

2. What Have Estate Tax Treaties. P. 8

3. Situs-Type Estate Tax Treaty. P. 20

4. Domicile-Type Estate Tax Treaty. P. 27

5. U.S. – Germany Estate Tax Treaty. P. 30

6. Treaty vs. Code. P. 46

7. Income Tax Treaties. P. 49

8. Apple, Google, Microsoft. P. 91

2

U.S. Treaties: How To Understand And Plan With Them

3Givner & Kaye,

A Professional [email protected]

Upcoming Sessions Of Our

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Givner & Kaye, A Professional [email protected] 4


5

Treaties In General


Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them

6

Treaties In General

Over 2,000 bilateral income tax treaties are currently in effect, andthe number is growing.

Overwhelming majority are based on the OECD Model Treaty.

Most tax treaties apply to all income taxes imposed by theContracting States, including taxes imposed by local governments.However, that is not true in Canada and the U.S. For example,California imposes a tax on multinational enterprises on a unitarybasis despite the U.S.’s treaty commitment to use the arm’s lengthapproach.



7Givner & Kaye,

A Professional [email protected] 7


8Givner & Kaye,



9

Used to requestForm 6166

15 pages of instructions



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Form 6166 For An“S” Corporation



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One page of Instructions. Doesnot apply to a re-duced rate of with-holding tax on ECI (dividends, interest,rents or royalties) or to a reduced rateof tax on pay for em-ployee services in-cluding pensions and Social Security.

Failure to file: $1,000(corporations $10,000).



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Income Tax TreatiesArmenia Georgia Malta SwedenAustralia Germany Mexico SwitzerlandAustria Greece Moldova TajikistanAzerbaijan Hungary Morocco ThailandBangladesh Iceland Netherlands TrinidadBarbados India New Zealand TunisiaBelarus Indonesia Norway TurkeyBelgium Ireland Pakistan TurkmenistanBulgaria Israel Philippines UkraineCanada Italy Poland USSRChina Jamaica Portugal United KingdomCyprus Japan Romania UzbekistanCzech Republic Kazakhstan Russia VenezuelaDenmark Korea Slovak RepublicEgypt Kyrgystan SloveniaEstonia Latvia South AfricaFinland Lithuania SpainFrance Luxembourg Sri Lanka



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Estate Tax Treaties



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26 U.S. Code § 6114 - Treaty-based return positions



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26 U.S. Code § 6712 - Failure to disclose treaty-based return positions



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2013 Wayne State University – Part 2 – U.S. Taxation of Foreigners



17Givner & Kaye,



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Why Have

Estate Tax Treaties?



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Estate Tax Treaties



20

Situs – Type

Estate Tax Treaty



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Situs-Type Treaties

The last one was entered into in 1956: Italy. The first domicile-type, with theNetherlands, was entered into force more than a decade later.

Example: Joe dies a citizen and domiciliary of the U.S. He owned a farm in treatycountry X. The United States must afford a credit against its own tax for the taximposed by country X as to the farm.

The actual credit need not be on an exact dollar-for-dollar basis.

Situs-type treaties primarily apply to death taxes. Except for Japan, they do notapply to gift taxes. (The potential for double taxation of a gift exists.) There is littlerisk of double GST because most countries do not impose it, but the treaties do notaddress it.

They do not apply to political subdivisions, e.g., states in the U.S. So there is noguarantee against double taxation. Example on next page.



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Situs-Type Treaties – Problem With Local Taxes



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Situs-Type Treaties – Affiliation You Must Have For Treaty To Apply



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Situs-Type Treaties – Resolving Conflicting Definitions Of Situs



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Situs-Type Treaties – Deductions

No rules regarding a marital deduction. As a result, domestic rulesunder the Code control.

No reference to a deduction for charitable transfers. Thus, domestictax rules of treaty countries would apply, including restrictions onthe deductibility of transfers by nonresident aliens to a foreigncharity.



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Situs-Type Treaties – Credits



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Domicile– Type

Estate Tax Treaty



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Domicile-Type Treaties

Because treaty countries may differ as to domicile, these

treaties prescribe “tie-breaker” rules to settle on a single domicile,

known as the fiscal domicile.

Example: Jose dies a U.S. citizen and domiciliary. He owned

tangible personal property in treaty country X, which has a domicile-type

treaty with the U.S. Generally, only the U.S. can tax, even though X is

the situs country.Givner & Kaye,



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Domicile-Type TreatiesApply to gift and probably GST taxes.

Example: Heinrich, a German citizen and fiscal domiciliary under the U.S.-Germany Treaty,makes a gift of paintings he owns and hangs in his Florida beachhouse. While the Codewould tax the gift transfer, Article 9 of the U.S.-Germany Treaty overrides the Code andassigns exclusive taxing jurisdiction to Germany. If Germany did not impose any tax, theU.S. could still not impose tax despite a transfer of paintings situated in the U.S. If Heinrichmade the transfer of paintings situated in a third country, the treaty would not apply at all,because there would be no jurisdiction for U.S. taxation; German tax would, presumably,still apply.

No application to state a local taxes.Example: Alicia is a citizen and fiscal domiciliary of treaty country R. She dies owning realproperty in U.S. state C, which taxes the real property at death. Because state C also taxesU.S. citizens the same way, there is no discrimination. If a province of treaty country R alsotaxes the real property, there will be double taxation at the political-subdivision levelassuming no unilateral credit. In many instances there will be no treaty credit.



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U.S.– Germany

Estate Tax Treaty



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German Estate Tax Treaty

Type - Domicile

U.S. estate, gift and GST taxes. German inheritance and gift taxes.

U.S. citizens and domiciliaries; transfers in which the decedent, donor, beneficiary ordonee had a domicile or habitual abode in Germany.

Fiscal domicile: A person has a fiscal domicile in the U.S. if he or she is a residentor citizen.

A German fiscal domicile exists if the relevant person has a domicile (Wohnsitz)or habitual abode (gewonlicher Aufenthalt) in Germany. A German fiscal domicilealso exists if the person is otherwise subject to unlimited tax liability (e.g., in thecase of a German citizen who has been out of the country for no more than fiveyears).



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German Estate Tax Treaty - Continued

If there are findings that the person had a fiscal domicile in both countries, fiscal domicileis then determined in the following order:

(a) where the relevant person maintained a “permanent home”;

(b) if the relevant person had a permanent home in both countries or neither country,then the treaty looks to the country “with which his personal and economic relations wereclosest (center of vital interests)”;

(c) if the person's center of vital interests cannot be determined, then “habitualabode” is referred to;

(d) if the person had an habitual abode in both countries or neither country, then thetreaty refers to the country of citizenship;

(e) if he or she was a citizen of both countries or neither country, then the relevantperson's domicile is to be determined by mutual agreement.



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Situs of categories of property: Generally, a treaty country may tax if an individual was acitizen or a domiciliary (or, in the case of Germany, had an habitual abode). This means thateven when the person's fiscal domicile is fixed in one of the countries, the other may beable to tax on the basis of citizenship. Special rules also apply to the following types ofproperty, permitting a treaty country that is neither the country of citizenship nor of domicileto tax:

• Immovable property — such property can also be taxed by the country in which it issituated. Whether property is immovable is to be determined by the country in which theproperty is situated.

• Business property of a permanent establishment and assets pertaining to a fixed baseused for performance of personal services — such property is taxed by the country inwhich situated. A permanent establishment is, generally, a place of management,branch, office, store, factory, workshop, mine, quarry, or other place of extraction ofnatural resources, or a building, construction, or assembly site existing for more than 12months.



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Deductions of debts: A number of special rules apply:

• With regard to immovables being taxed on the basis of situs, debts foracquisition, repair, or upkeep are deductible in full in computing the property'svalue.

• With regard to permanent-establishment or fixed-base property taxed onthe basis of situs, debts relating to the operation of the enterprise are deductiblein full in computing the property's value.

• With regard to a partnership interest in property, debts which would havebeen allowed had the property interest been owned outright will be allowed.Presumably, the deductions must be prorated to reflect the limited interest in thepartnership, although this is not specified in the treaty.



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Exemptions for charitable transfers:

Transfers are exempt if made to a corporation or organizationorganized and operated exclusively for religious, charitable, scientific,educational, or public purposes, or to a public body when property is tobe used for such purposes. The exemption is available even though thecharitable entity is in the other treaty country. While the competentauthorities are to work out application of this provision, the exemption islimited to the amount that is allowed by the country in which thecharitable entity is organized and operated and the amount that wouldhave been allowed if organized and operating in the country imposing thetax. Note, however, the use of the term “exempt.” Is this intended toapply to the U.S. charitable “deduction”?



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Exemption for pension and similar benefits:

Pension, annuity, social security, and similar benefits are exemptin the taxing country, including at all political subdivision levels, to theextent they would have been exempt in the paying country had thedecedent been a domiciliary. Exempt amounts, however, may have to beoffset in accordance with German tax law.



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Marital deduction:

If non-community property passes to a spouse, the transferor was or is(in the case of a gift) a domiciliary or citizen of one treaty country, and the othertreaty country is taxing under the treaty's situs rules, there must be a maritalreduction/exclusion allowed by the situs against its tax. The reduction/exclusionwill apply to the extent property passing to a spouse exceeds 50% of all propertyincluded in the taxable base that may be taxed by the country of situs of theproperty passing to the spouse. However, in the case of the U.S., the reductionmay not yield a lesser tax liability than had the person had been a U.S.domiciliary. In the case of Germany, the provision may not yield an exclusion inexcess of the marital exemption available under German law of a transfer to aspouse subject to unlimited inheritance or gift tax liability (e.g., a spouse who is aGerman domiciliary).



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Credits in relief of double taxation:

• The U.S. will credit tax on the property assigned a situs by the treaty, whereGermany taxes such property on the basis of its situs there. A similar credit applies whenthe U.S. taxes on the basis of citizenship and Germany taxes on the basis of domicile.

• Where the property is being taxed by the U.S. on a treaty situs basis, Germanymust credit any tax it imposes on the basis of the domicile of the decedent, donor, heir,beneficiary, or donee. If the U.S. is taxing on the basis of domicile and Germany is, too,but with reference to the domicile of a beneficiary, heir, or donee (not on a treaty situsbasis), Germany must allow a credit. The rationale here is presumably that the U.S., asdomicile of the transferor, has a stronger claim to primary taxing authority. But there are nocredit provisions at all when the U.S. taxes on the basis that the transferor was a citizen ofthe U.S. and Germany taxes on the basis of the domicile of the beneficiary or donee.



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Estates and trusts: Internal rules regarding taxation of transfers to and from a trust orestate are generally not affected by the treaty. If the countries tax such transfers at differenttimes, but within 5 years of each other, the competent authorities can discuss the matter inan effort to avoid hardship. If the transfer is not taxable under German law at the time oftransfer, an election can be made within 5 years to have it taxed as if a taxable transfer hadbeen made at the time under German law. By so doing, the German beneficiary will be ableto avail himself of the relief that can be provided by the competent authorities in the case ofundue hardship where transfers are taxed by the two countries within 5 years of each other.

This provision may not be especially helpful in light of a 1999 German law relating totaxation of trusts. That law treats the trust as a distinct legal entity, much like a Stiftung. Atax is imposed at the time of the transfer into trust under §3(2)(1) of the German InheritanceAct (Erbschaft-steuergesetz) and again at its distribution from the trust pursuant to §7(1)(8)and (9) of the Inheritance Act. Much, therefore, will be left in the hands of the competentauthorities, who “may” discuss the matter with a “view” to avoiding hardship, but with norequirement to do so.



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Mutual agreement procedure:

If a person considers that the actions of one or both of the countries is in violationof the treaty, despite any domestic remedies, he may present the case to the competentauthority of either country. The case must be presented within a year of the time a claimunder the treaty for exemption, credit, or refund has been finally settled or rejected. If thecompetent authority believes the claim is justified and cannot solve it, then the authority is totry to resolve it by mutual agreement “with a view to the avoidance of taxation not inaccordance with the Convention.”



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German Estate Tax Treaty - Example

Joe was born and raised in the U.S. His wife was born and raised in Bonn, Germany.His wife had a family home left by her parents back in Germany. Assume, for purposes of thisexample, that his wife was able under German law to leave the German home to Joe. (She is notable to do so due to the Pflichtteil, the German form of forced heirship.) After she passed away in2010, Joe retired and decided to move to the home in Germany. He left behind in the UnitedStates his U.S. residence, stocks and bonds and some investment real property. He also receivesa pension from his profession. On his death, his estate provides for a small charitable bequestwith the balance going to his children. How is it treated?

Article 1. It applies to estates of deceased persons whose domicile at death was inone or both of the Contracting States.

Article 2. It applies to the U.S. estate tax and the German inheritance tax.

Article 3. Definitions. We know what the U.S. is and what Germany is.

Article 4. Fiscal domicile for the U.S. is a resident or citizen. For Germany it issomeone with domicile or habitual abode or unlimited tax liability.



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German Estate Tax Treaty – Example (Continued)

If domiciled in both countries:

a) he shall be deemed to have been domiciled in the Contracting State in which hehad a permanent home available to him. If he had a permanent home available to him inboth Contracting States, or in neither Contracting State, the domicile shall be deemed to bein the Contracting State with which his personal and economic relations were closest(center of vital interests);

b) if the Contracting State in which he had his center of vital interests cannot bedetermined, the domicile shall be deemed to be in the Contracting State in which he had anhabitual abode;

c) if he had an habitual abode in both Contracting States or in neither of them, thedomicile shall be deemed to be in the Contracting State of which he was a citizen;

d) if he was a citizen of both Contracting States or of neither of them, the competentauthorities of the Contracting States shall settle the question by mutual agreement.



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Article 5 Immovable Property

1. Immovable property which forms part of the estate of or of a gift made by aperson domiciled in a Contracting State and which is situated in the other Contracting Statemay be taxed in that other State.

2. The term "immovable property" shall have the meaning which it has under the lawof the Contracting State in which the property in question is situated. The term shall in anycase include property accessory to immovable property, livestock and equipment used inagriculture and forestry, rights to which the provisions of general law respecting landedproperty apply, usufruct of immovable property, and rights to variable or fixed payments asconsideration for the working of, or the right to work, mineral deposits, sources, and othernatural resources; ships, boats, and aircraft shall not be regarded as immovable property.

3. The provisions of paragraphs 1 and 2 shall also apply to immovable property ofan enterprise and to immovable property used for the performance of independent personalservices.



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Article 9 Property Not Expressly Mentioned

Property which forms part of the estate of or of a gift made by a person domiciled

in a Contracting State, wherever situated, and not dealt with in Article 5, 6, 7, or 8 shall,

subject to paragraph 1 of Article 11, be taxable only in that State.



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Article 10 Deductions and Exemptions

1. In the case of property which forms part of an estate of or of a gift subject to taxation by a Contracting State solely in accordance with Article 5, 6, or 8, debts shall be allowed as reductions of, or deductions from, the value of such property in an amount no less than:

a) in the case of property referred to in Article 5, debts incurred for purposes of the acquisition, repair, or upkeep of that property;

2. Property transferred to or for the use of a corporation or organization of a Contracting Stateorganized and operated exclusively for religious, charitable, scientific, educational, or public purposes, orto a public body of a Contracting State to be used for such purposes, shall be exempt from tax by theother Contracting State, if and to the extent that such transfer of property to such corporation,organization or public body

a) is exempt from tax in the first-mentioned Contracting State, and

b) would be exempt from tax in the other Contracting State if it were made to asimilar corporation, organization, or public body of that other State.



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Treaty vs. The Code



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Treaties vs. Internal Revenue Code

Section 7852(d) Treaty Obligations.

(1) In General. For purposes of determining the relationship between a provision of a treaty and any law of the United States affecting revenue, neither the treaty nor the law shall have preferential status by reason of its being a treaty or law.

(2)Savings Clause For 1954 Treaties. No provision of this title (as in effect without regard to any amendment thereto enacted after August 16, 1954) shall apply in any case where its application would be contrary to any treaty obligation of the United States in effect on August 16, 1954.



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Treaties vs. Internal Revenue Code (Continued)

The premise that a treaty can be overridden by a later-enacted statute isaccepted without serious question in the U.S. Since they are on aconstitutionally equal footing, a later-ratified treaty can also override a statute.

Although the last-in-time principle is a mainstay of treaty interpretation, it is onlyinvoked when the effort to harmonize the treaty and statute has failed.

The present U.S. position needs to be contrasted with the international position,especially as a treaty partner may approach the matter in a different way. TheU.S. interpretive position should thus not be assumed to be controlling. Article 27of the Vienna Convention on the Law of Treaties, for example, provides thattreaties are binding, and that internal enactments cannot serve as a basis forfailing to comply in good faith with a treaty. This is considered to reflect thecustomary law and is supported by the Committee on Fiscal Affairs of the OECD.



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Income Tax Treaties



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Goals Of Income Tax TreatiesIn General: Facilitate cross-border trade and investment by eliminating tax impediments.

Tie-breaker rules to make a taxpayer who is resident in both countries a resident of one.

Limit or eliminate the source country tax on certain types of income.

Require residence countries to provide relief for source country taxes either by foreign taxcredit or an exemption for the foreign source income.



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Income Tax Treaties –

Provisions Relating

Only To Individuals



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Income Tax Treaties – Provisions Relating Only To IndividualsTie-Breaker Rules.

Most of the income tax treaties to which the U.S. is a party providetie-breaker rules for an individual who otherwise would be taxed as aresident by both countries. Because the operation of so many treatyprovisions depends on where an individual is deemed resident, the tie-breaker rules are among the most important provisions. Under U.S. incometax regulations, an individual who is classified under U.S. internal law as aU.S. resident for U.S. income tax purposes but who is classified as a non-U.S. resident under treaty tie-breaker rules is treated as a nonresident forpurposes of computing his or her U.S. income tax liability but not forpurposes of other provisions of the Code, such as whether a foreigncorporation is a controlled foreign corporation (“CFC”).



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Income Tax Treaties – Provisions Relating Only To Individuals

Savings Clause.A common provision in income tax treaties allows the U.S. to tax its

citizens and residents (and certain former citizens and residents) as if thetreaty had not gone into effect (known as “the saving clause”). In general,the purpose of a saving clause is to prevent a U.S. citizen or resident frominvoking treaty benefits to reduce his or her U.S. income tax. However, likemost legal rules, treaty saving clauses are subject to exceptions, pursuant towhich a particular provision of a treaty may be invoked by a U.S. citizen orresident (or in some cases, only a U.S. resident who is not a citizen and nota green card holder) to reduce his or her U.S. tax.



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Tie-Breaker v. Savings Clause.The residency tie-breaker rules are applied first, and the

result is then taken into account in applying the saving clause. Thus,an individual who is not considered a resident of the United Statesby virtue of the tie-breaker rules, and who is not a U.S. citizen, is notsubject to the saving clause. Accordingly, when any type of treatyprovision or problem is considered, the residency tie-breaker rulesand the saving clause should always be examined first beforeturning to the more specific applicable provisions.



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Independent Workers and Employees.Generally the “host country” (i.e., the country where the services are

performed) may tax the worker on income from personal services performed there butcertain benefits and exemptions intended to facilitate trade and commerce betweenthe two countries are provided. Depending on tax rates and the internal tax law ineach country, these treaty provisions may result in an actual reduction of overall taxfor the worker, or they may merely simplify the worker's foreign tax reporting andpayment obligations (i.e., the worker may pay the same overall tax but pay more taxin his or her home country and less tax in the host country). In general, most treatiesprovide different rules for “independent workers” (i.e., self-employed persons,independent contractors, and other non-employee workers) than for employees(“dependent workers” in most treaties). These general rules for independent workersand employees are subject to special rules for government workers, directors, artistsand athletes, and students, business apprentices, teachers, and researchers.



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Independent Workers and Employees.Generally the “host country” (i.e., the country where the services are

performed) may tax the worker on income from personal services performed there butcertain benefits and exemptions intended to facilitate trade and commerce betweenthe two countries are provided. Depending on tax rates and the internal tax law ineach country, these treaty provisions may result in an actual reduction of overall taxfor the worker, or they may merely simplify the worker's foreign tax reporting andpayment obligations (i.e., the worker may pay the same overall tax but pay more taxin his or her home country and less tax in the host country). In general, most treatiesprovide different rules for “independent workers” (i.e., self-employed persons,independent contractors, and other non-employee workers) than for employees(“dependent workers” in most treaties). These general rules for independent workersand employees are subject to special rules for government workers, directors, artistsand athletes, and students, business apprentices, teachers, and researchers.



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Independent Workers and Employees Rules Compared.Typically, treaty rules for employees (referred to as “dependent workers” in most

U.S. treaties) have some similarities to the rules for independent workers. Treaty rules forindependent workers typically provide that the worker is either subject to tax only in thecountry of residence, or is subject to tax in both countries (i.e., if a fixed base is available),with appropriate credits as provided in the treaty. The treaty rules for employees typicallyfollow the same pattern —the worker will be subject to tax either in the home country onlyor in both countries with appropriate credits. However, the treaty rules for employeestypically use different tests to determine whether the host country can tax the worker. Forexample, whereas the host country's right to tax an independent worker may depend (inwhole or in part) on whether the worker has a fixed base in the host country, the hostcountry's right to tax an employee may depend on a number of factors, such as: (1) howmany days the worker spends in the host country; (2) whether the worker is employed byan employer that is a resident of the host country; and (3) whether the worker'sremuneration is borne by a permanent establishment or fixed base of the employer in thehost country.



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Government Workers.Individuals who work for foreign governments are usually treated more

favorably than other kinds of independent workers or employees. An employee of abusiness enterprise may be subject to tax in the host country if he spends more thana certain number of days per year there. By contrast, diplomats, consular officers,and other government workers may be completely exempt from host country tax iftheir only reason for being there is to discharge their governmental duties. Thisbenefit is important because it encourages each country to send government workersto the other country, thereby fostering goodwill. Treaty benefits for governmentworkers are often excepted from treaty saving clauses (at least for residents whohave not acquired citizenship or green cards) because many of the workers for whomthe benefits are intended will have become residents of the host country under itsinternal law by reason of being posted there on a year-round basis — and this may bethe case even when the treaty's tie-breaker rules are taken into account.



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Directors.A common situation involves a resident of one country (or citizen of

the U.S.) who serves as a director of a company located in another country.The company may be resident in that other country, or have a permanentestablishment or other basis for taxation there. Also, the director may travelto that other country in connection with the performance of his duties, andmay travel to other countries, some of which may have treaties with the U.S.and some of which may not. For example, consider a U.S. citizen andresident who serves as a director of a U.K. company with global operationsand who in the course of a taxable year travels to London, Paris, and a non-treaty country to perform services for the company. Which jurisdictionsshould have the right to tax the fees the director receives from thecompany?



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Directors (continued).In the 2006 U.S. Model Treaty, this issue is addressed by Article 15:

Directors' fees and other compensation derived by a resident of aContracting State for services rendered in the other Contracting State in hiscapacity as a member of the board of directors of a company that is aresident of the other Contracting State may be taxed in that otherContracting State.

The treaties with France and the U.K. follow this approach. Many treatdirectors the same as independent workers.



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Artists and Athletes.Many treaties include special rules regarding artists and athletes (sometimes

referred to as “entertainers” and “sportsmen”). These rules usually provide that if a residentof one country works in the other as an artist or athlete, some of the income earned may beprotected from tax in that other country, but usually not to the same degree as otherworkers who are not artists or athletes. These rules also frequently address the situationwhere the income in respect of these activities accrues to someone other than the artist orathlete (including so-called “star companies”). The basic idea is that artists and athletes, likeother workers, should be exempt from host country tax on income earned in the hostcountry to some degree, but not to the same degree as other kinds of workers due to thepossibility that an artist or athlete may have the opportunity to earn a large amount ofincome in a short period of time. Many treaties also provide more favorable treatment forartists and athletes participating in activities the two countries desire to promote, such ascultural exchange programs.



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Students, Business Apprentices, Teaches And Researchers.

Many foreign individuals who come to the U.S. do so to pursue part-timeor full-time education, to receive on-the-job business training throughapprenticeships or similar programs, to teach, or to do research. While in theU.S., these individuals may have income connected with their educational orresearch activities (such as stipends, scholarships, fellowships, assistantships,apprentice pay, or teaching salaries) and they may have other forms of incomefrom sources outside the U.S. which they use to support their educational orresearch activities here. Many of these individuals will qualify for treaty taxbenefits.



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Pensions, Social Security Benefits and Annuities.

The taxation of pensions and social security benefits is complex.Treaties typically deal with these items when they are received. For socialsecurity, the question of how an international worker pays social security taxesand accrues social security benefits as services are performed is addressed bysocial security totalization agreements. Even after the application of totalizationagreement provisions, however, it is possible for a retired individual taxpayer tobe collecting social security benefits in his home country, social security benefitsfrom one or more foreign countries in which the taxpayer accrued benefits whileworking there, and pensions from an employer in the home country and one ormore foreign employers. Absent applicable treaty provisions, the possibility thatsuch an individual will be subject to unfair double taxation by two or morecountries is very high.



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Income Not Attributable To A

Permanent Establishment



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Interest

Most U.S. tax treaties contain an article dealing with interest, the

main purpose of which is to limit, on a reciprocal basis, each Contracting

State's right to tax interest income arising in its jurisdiction and not

attributable to a permanent establishment in the source state. For U.S.-

source interest, the effect is to reduce the general 30% tax rate typically to

zero, but only if paid to a person who resides in the other Contracting State

and beneficially owns the interest income. Treaties generally do not address

interest paid or received by a non-resident.



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DividendsMost treaties contain an article dealing with dividends, the main

purpose of which is to limit, on a reciprocal basis, each Contracting State'sright to tax dividend income arising in its jurisdiction if it is not attributable toa permanent establishment in that jurisdiction. For U.S.-source dividends,the effect is to lower the general 30% tax rate, typically, to 15% on portfoliodividends and 5% on direct dividends, but only if paid to a person whoresides in the other Contracting State and beneficially owns the dividendincome. Starting in 2001 a number of treaties have included an exemptionfrom source state tax for dividends paid from a subsidiary to its parent ifcertain criteria are met. With the exception of provisions dealing with the“second-level” tax on dividends, treaties generally do not address dividendspaid or received by a person who does not reside in one of the twoContracting States.



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RoyaltiesMost treaties address royalties, the main purpose of which is

to limit, on a reciprocal basis, each Contracting State's right to taxroyalty income arising in its jurisdiction and not attributable to apermanent establishment. For U.S.-source royalties, the effect is toreduce the general 30% tax rate, but only if the beneficial owner ofthe royalties is a resident of the other Contracting State. Themaximum rate of source state taxation of royalties variesconsiderably. The U.S. Model Treaty sets forth the preferred U.S.negotiating position of exemption from source state taxation but themaximum rate can vary from zero to 15%, depending on the treaty.Many treaties provide differing rates depending on the nature of theroyalty income.



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Real Property IncomeAlmost all treaties have specific articles addressing the taxation of income

derived from real property. In contrast to the dividends, interest, and royalties articles,the income from real property articles operate to preserve, rather than limit, thesource state's right to tax income derived from real property. Accordingly, theirprimary purpose is to establish the boundaries of other potentially applicable articlesof the treaty, such as the business profits article.

In addition to specific articles that address the taxation of income from realproperty, U.S. tax treaties have specific articles that address the taxation of gainsattributable to the alienation of real property (including shares in U.S. Real PropertyHolding Corporations), which generally preserve the taxing right of the ContractingState in which the real property is located. So foreign persons that own U.S. realproperty remain subject to specific U.S. income tax rules upon the disposition of suchproperty, including the rules under Section 897 and its corresponding withholding andreporting rules (“FIRPTA Rules”).



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Real Property Income (Continued)Article 6 – Income From Real Property.

The general rule that income of a resident of a Contracting State derived from real property(including income from agriculture and forestry property) situated in the other Contracting State may betaxed in the Contracting State in which the property is situated (the “situs state”). All forms of incomederived from the direct use, letting, or use in any form of the real property are taxable in the situs state.

The article applies to income from real property of an enterprise, which clarifies that theContracting State in which the property is situated may tax the real property income (including rentalincome) of a resident of the other Contracting State regardless of the absence of attribution to apermanent establishment in the situs state.

Residents of a Contracting State that derive income from real property situated in the otherContracting State may elect, for any taxable year, to be subject to tax on the real property income on anet basis as though the income were attributable to a permanent establishment in the situs state (thisbeing an exception to the general rule set forth in the business profits article). The election is binding onthe taxpayer for all later years (unless the Competent Authority of the situs state terminates the election).



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Real Property Income (Continued)Article 13 – Gains.

Gains derived by a resident of a Contracting State that are attributable to thealienation of real property in the other Contracting State may be taxed in that other State. “Realproperty situated in the other Contracting State” includes:

(1) “real property” referred to in the Income from Real Property article;

(2) where that other state is the U.S., a U.S. real property interest;843 and

(3) where that other state refers to the treaty partner of the U.S.,

(i) shares, including rights to acquire shares, other than shares in which there is regulartrading on a stock exchange, deriving their value or the greater part of their value directly orindirectly from real property referred to in the Income from Real Property article situated in suchother state; and

(ii) an interest in a partnership or trust to the extent that the assets of the partnership ortrust consist of real property situated in such other state.



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Capital GainsMost treaties address capital gains, the purpose of which is to

assign primary or exclusive taxing jurisdiction over gains from thealienation of property to either Contracting State. There are severalexceptions based on the type of property involved in the alienation thatproduces the gain. Otherwise, these articles generally cede taxingjurisdiction of the gains to the residence state.

Gain realized by a foreign person ordinarily is not subject to U.S.tax unless the gain is effectively connected with the conduct of a trade orbusiness in the U.S. by the foreign person or the property disposed of isa U.S. real property interest. “Gain” is generally not defined in U.S. taxtreaties. Its meaning is determined by reference to U.S. tax law unlessthe context requires otherwise.



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Capital Gains (Continued)

Gains that are considered to be effectively connected with anon-U.S. person's conduct of a U.S. trade or business are subject to taxin the U.S. A NRA individual who is present in the U.S. for 183 days ormore during the taxable year in which the disposition occurs is subject toU.S. tax on U.S.-source gains. Certain U.S.-source gains realized by aU.S. expatriate (former U.S. citizen or long-term resident) are subject totaxation in the U.S. Finally, gains generated by a foreign person fromthe disposition of U.S. real property, or an interest in it, are subject toU.S. tax.



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Other Income Article

Typically, the “other income” article begins by ceding taxingjurisdiction of these items of income to which it applies to the residencestate, such that the item of income is exempt from taxation by theContracting State in which it is sourced (the “source state”) unless theincome is attributable to a permanent establishment of the taxpayermaintained in the source state.

For example, the taxation of lottery and gambling winnings,insurance income, substitute payments made pursuant to securitieslending transactions, and payments on derivative financial instrumentsmay be determined under a treaty's other income article.



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Income Tax Treaties –

Anti-Treaty Shopping

Provisions



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U.S. – Germany TreatyARTICLE 28 Limitation on Benefits

1. A person that is a resident of a Contracting State and derives income from the other ContractingState shall be entitled, in that other Contracting State, to all the benefits of this Convention onlyif such person is:

a) an individual;

b) a Contracting State, or a political subdivision or local authority thereof;

c) engaged in the active conduct of a trade or business in the first-mentioned ContractingState (other than the business of making or managing investments, unless these activities arebanking or insurance activities carried on by a bank or insurance company), and the income derivedfrom the other Contracting State is derived in connection with, or is incidental to, that trade orbusiness;

d ) a company in whose principal class of shares there is substantial and regular tradingon a recognized stock exchange;



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U.S. – Germany TreatyARTICLE 28 Limitation on Benefits (continued)

e) aa) a person, more than 50% of the beneficial interest in which (or in thecase of a company, more than 50% of the number of shares of each class of whoseshares) is owned, directly or indirectly, by persons entitled to benefits of this Conventionunder subparagraphs a), b), d), or f) or who are citizens of the U.S.; and

bb) a person, more than 50% of the gross income of which is not used,directly or indirectly, to meet liabilities (including liabilities for interest or royalties) topersons not entitled to benefits of this Convention under subparagraphs a), b), d), or f)or who are not citizens of the U.S.; or

f) a not-for-profit organization that, by virtue of that status, is generally exemptfrom income taxation in its Contracting State of residence, provided that more than halfof the beneficiaries, members, or participants, if any, in such organization are personsthat are entitled, under this Article, to the benefits of this Convention.



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Personal Services Income



78Givner & Kaye,



79Givner & Kaye,



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Note: the “no more than 182” or “183”day period in these treaties is reduced to89 days in the treaties with Mexico andthe Philippines. See anything incommon? (Also Thailand.)



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Professors, Teaches and Researchers



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Students and Apprentices



83Givner & Kaye,



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Wages and Pensions Paid By A Foreign Government



85

Publication 901



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Publication 901



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U.S.– Germany

Income Tax Treaty



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U.S.– Germany Income Tax Treaty

Germany has treaties with more than 90 countries.

Bases its position on the OECD Model Tax Treaty.

Signed the EU convention for the elimination of double taxation.

Between 2005 – 2007 it solved 417 cases using the MutualAgreement Procedure and had 521 still pending.

The Federal Central Tax Office is the most important for MAP andAPAs. Binding arbitration with the U.S.



89Givner & Kaye,



90Givner & Kaye,



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Tax structuring – How Google, Microsoft Apple and other major US tech giants save billions



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Tax structuring – How Google, Microsoft Apple and other major US tech giants save billions (continued)



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Ireland on left – Bermuda on right – Netherlands (Dutch sub) on the bottom



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14 06-19 u.s. treaties - how to understand and plan with them

Law

estate tax treaties

situstype treaties

bilateral income tax

general givnerkaye

germany estate tax treaty

situstype estate tax

s corporation givnerkaye

reduced rate of tax