Recent tax treaty developments.
Canada: The U.S.-Canada Treaty protocol decreased the withholding tax rates on royalties from 10% to 0%, on intracorporate dividends from 10% to 5% and on interest payments from 15% to 10%. The branch tax was lowered from 10% to 5%. Reductions in the dividend withholding and branch tax rates now are subject to a phase-in of 7% from the effective date through the end of 1995, 6% in 1996 and 5% thereafter.
The protocol includes a revised article on limitations on benefits designed to prevent treaty shopping, which occurs when an entity forms a corporation in a country with a favorable tax treaty with the United States to take advantage of that treaty. The article adds objective qualification tests for the eligibility of treaty benefits for Canadian companies. A company must be publicly traded, substantially held by certain qualified shareholders or have income derived from the United States in connection with a business in Canada substantially related to U.S. activity. Canadian residents who fail objective qualification tests may request the U.S. Competent Authority to determine whether benefits should otherwise be granted.
The new treaty also revised estate tax provisions. Canadian residents may claim a unified credit for their portion of gross assets in the United States in proportion to those of their entire estates. A nonrefundable credit may be allowed when a marital deduction would have been received had the surviving spouse been a U.S. citizen. Credit for U.S. estate tax is allowed against Canadian income tax on non-U.S. property in the case of the individual's death or against Canadian income tax imposed on U.S. source income in a given year.
France: The revised U.S.-France Tax Treaty generally maintains both the current withholding and the current branch tax rates. However, the list of payments classified as royalties qualifying for a 5% rate now includes payment for information concerning industrial, commercial or scientific experience. Further, the list of payments qualifying for exemption from royalty withholding includes payments for reproduction and performing rights as well as for the use of cinematographic film, sound or picture recordings and software products.
A limitation-on-benefits article sets forth objective tests similar to those of the U.S.-Canada treaty. Another article, previously covered under independent or dependent personal services, says director's fees can be taxed in the other contracting state when services are preformed there.
Sweden: Withholding rates under the new U.S.-Sweden Treaty generally are unchanged. However, the voting stock ownership threshold for corporations to qualify for the lower 5% dividend withholding tax rate was reduced from 50% to 10%. Other significant provisions allow for the imposition of a branch profits tax of 5% and provide tiebreaker rules for residency determinations and rules for the taxation of real property, capital gains, transportation and other types of income. Rules providing relief from double taxation and discriminatory taxation also were added.
Observation: The flurry of treaty activity is consistent with the Clinton administration's efforts to remove intentional trade barriers. Also, the treaties address the Treasury Department's concerns over treaty shopping.
--Kenneth Kral, CPA, international tax partner, Jack Serota, Esq., international tax manager, and Elizabeth Alek, CPA, international tax consultant, at Price Waterhouse, New York City.