Tax treaty developments.

There were many tax treaty developments in 1995.

Treaties and Protocols That Became Effective During 1995

* Israel First ever treaty signed Nov. 20, 1975; first Protocol signed May 30, 1980; second Protocol signed jan. 26, 1993; approved by the Senate Sept. 23,1994; instruments of ratification exchanged Nov. 30, 1994; entered into force Dec. 30, 1994. Reduced withholding rates effective for payments on or after Feb. 1, 1995; otherwise effective for tax years beginning on or after Jan. 1, 1995.

Treaties and Protocols Ratified During 1995

* Canada Protocol to 1980 treaty signed Mar. 17, 1995 and approved by the Senate Aug. 11, 1995; entered into force Nov. 9, 1995; generally effective Jan. 1, 1996.

* France New treaty replacing 1967 treaty signed Aug. 31, 1994 and approved by the Senate Aug. 11, 1995; entered in force Dec. 30, 1995. Reduced with holding rates effective for payments on or after Feb. 1, 1996 (existing treaty continues to apply to payments made prior to that date); otherwise effective for tax years beginning on or after Jan. 1, 1996 (existing treaty continues to apply for tax years beginning before that date).

* Mexico Protocol to 1992 treaty signed Sept. 8, 1994 and approved by the Senate Aug. 11, 1995; entered into force and became effective Oct. 26, 1995.

* Portugal First ever treaty and protocol signed Sept. 15, 1994 and approved by the Senate Aug. 11, 1995; entered into force Dec. 18, 1995, and effective Jan. 1, 1996.

* Sweden New treaty replacing 1939 agreement signed Sept. 1, 1994 and approved by the Senate Aug. 11, 1995; entered into force Oct. 26, 1995; effective Jan. 1, 1996 (for the Swedish capital tax, the effective date is Jan. 1, 1997).

Treaties Approved by the Senate in 1995, But Not Yet in Force

* Ukraine First ever treaty and protocol signed Mar. 4,1994 and approved by the Senate Aug. 11, 1995. Bank secrecy problems are delaying entry into force; according to Treasury officials this agreement is on hold.

Treaties and Protocols Signed, But Not Yet Considered by the Senate

* Kazakhstan First ever treaty and protocol signed Oct. 24, 1993, but not considered by the Senate Foreign Relations Committee at its hearing on June 13, 1995. Bank secrecy and translation problems continue to delay the ratification process.

* Netherlands Protocol to 1948 treaty as applicable to the Netherlands Antilles signed Oct. 10, 1995, and awaiting Senate consideration.

Agreements Initialed in 1995, But Not Yet Signed

* Austria A new treaty to replace the 1956 agreement was initialed June 26, 1995.

* Luxembourg A new treaty to replace the 1962 agreement was initialed Sept. 21, 1995.

* Turkey First ever treaty was initialed May 11, 1995.

Agreements Terminated or Notice of Termination During 1995

* Aruba U.S. notified the Netherlands on Sept. 15, 1995 of its intent to terminate the 1948 treaty as extended to Aruba effective Jan. 1, 1997.

* Azerbaijan According to Treasury officials, notice has been provided to the Department of State that the treaties entered into by the U.S.S.R. have not been approved by the Azerbaijan Republic and therefore are not effective.

* Kazakhstan Announced in December 1994 that it would no longer recognize treaties entered into by the U.S.S.R. effective jan. 1, 1995. However, the Department of State was never notified of termination. Treasury officials decided to honor the U.S.-U.S.S.R. treaty for 1995, until the new U.S.-Kazakhstan treaty enters into force. At this time, it is not clear what will happen in 1996.

* Malta U.S. notified Malta on Nov. 16,1995 of its intent to terminate the 1980 treaty, effective Jan. 1, 1997.

Treaty Descriptions

* Canada

Withholding rates:

[] Dividends Reduced from 10% to 5% on dividends paid to a corporation owning at least 10% or more of the voting stock of the payer, unless the payer is a Canadian nonresident-owned investment corporation, a regulated investment company (RIC) or a real estate investment trust (REIT). Also applies for branch profits tax. New reduced rate phased in: for payments in 1996, the rate is 6%, and for payments in 1997 and thereafter, the rate is 5%. Rate remains 15% in other cases (including dividends paid by a RIC or a REIT).

When a REIT pays dividends to an individual who beneficially owns 10% or more, the dividends are taxed at the nontreaty rate.

[] Interest: Rate is reduced from 15% to 10%. Expands existing exemption for interest received by a seller of equipment, merchandise or services on credit, to include a person who buys the receivable from the seller and receives interest thereon, provided that both the seller and the buyer of the receivable are residents of the same country.

[] Royalties: Rate remains 10%; however, classes of royalties that qualify for exemption have been greatly expanded and include royalties paid for using any patent, any information concerning industrial, commercial or scientific experience (except rental or franchise agreement information), any broadcasting (to the extent provided in a future exchange of notes) and any right to use computer software, even if the license does not include the right to produce or reproduce that software.

Payment for a bundle of rights in a mixed contract or similar arrangement, some that would be exempt from source-country taxation and others that would be taxable, must be bifurcated into its component tax-exempt and taxable parts.

Royalties sourced by reference to the country in which the payer resides (or in which the payer has a permanent establishment (PE) or fixed base, if the royalty was incurred and borne by the PE or fixed base), except that when the payer is not a resident of the U.S. or Canada, royalty sourced on the basis of the place of use of the property.

Other provisions:

[] Residence. Adds citizenship in a treaty country to the list of factors that would qualify an individual for treaty benefits as a resident of that country, and adds language to confirm interpretations of the existing treaty that organizations such as governments, pension plans and nonprofits are treated as residents of the U.S. or Canada.

[] Dual resident company: Company created in one country and continued into the other country will be treated as a resident only of the country into which it is continued.

[] Foreign tax credit: Requires Canada to give a foreign tax credit for U.S. Social Security taxes paid by individuals (other than taxes relating to unemployment insurance benefits).

[] Nondiscrimination: Expanded to cover any tax imposed by either country (including excise and goods and services taxes)

[] Limitation on benefits: 50% ownership and base erosion tests; active trade or business test; applies only for the U.S. (Canada cannot block benefits using this provision).

[] Pensions: Clarifies that the definition of pension includes payments from a U.S. IRA and payments from a Canadian RRSP or RRIF and expands the class of pension, retirement or other benefit arrangements that qualify for deferral.

[] Exempt organizations: Clarifies that IRAs, RRSPs and RRIFs are intended to be included in the provision that exempts dividends and interest from source-country income taxation.

[] Taxes imposed by reason of death: Significantly reduces the double taxation that results from the U.S. estate tax and Canadian income tax due on transfers by reason of death. 1. U.S. will allow Canadian resident (non-U.S. citizen) a prorated unified credit. 2. U.S. will allow marital deduction for Canadian citizen spouse (but limited to the amount of the unified credit). 3. U.S. will allow credit for Canadian income tax. 4. U.S. will exclude small (i.e., worldwide gross estate less than U.S. $1.2 million) estates. 5. Canada will allow marital exception for U.S. resident spouse. 6. Canada will allow credit for U.S. estate tax paid. 7. Retroactive for deaths occurring after Nov. 10, 1988, and a one-year window for filing refund claims.

France

Withholding rates:

[] Dividends: Rate on direct investment dividends remains 5%; however, such rate will now be available when the beneficial owner is a company that owns 10% of the voting stock of the company paying the dividend and the payer is not a RIC, REIT or French SICAV. Rate remains 15% in other cases (including dividends paid by a RIC, REIT or SICAV).

If a REIT pays dividends to an individual who beneficially owns 10% or more, the dividends are taxed at the nontreaty rate. The definition of dividends includes income from arrangements, such as equity-kickers, that carry the right to participate in profits to the extent so characterized under the laws of the source country.

Allows U.S. shareholders to receive the benefit of all or a portion of the dividend tax credit ("avoir fiscal") that French resident shareholders receive on dividends from French corporations.

1. The full avoir fiscal is available to a U.S. resident that is an individual, another person that is not a company, a company (other than a RIC) that does not own 10% or more of the stock of the payer, or a RIC that does not own 10% or more of the stock of the payer, but only if non-U.S. persons own less than 20% of the RIC's shares. 2. Available only to shareholders subject to U.S. income taxation on the dividend and the avoir fiscal payment (passthrough entities would be eligible to the extent of the eligibility of their partners or beneficiaries). 3. A reduced avoir fiscal, in the amount of 30/85 of the full amount (less applicable withholding tax) is available to certain investments by certain U.S. pension plans (but not including plans that own 10% or more of the stock of the payer). (This provision is effective for distributions paid after Dec. 31, 1990.) 4. If the dividend paid to a U.S. recipient is not eligible to receive the avoir fiscal, a refund of the French corporate tax prepayment imposed on distributions of earnings that have not borne full French corporate tax will be allowed and will be treated as a dividend for purposes of the withholding taxes allowed in the treaty.

Expressly permits the imposition of the U.S. branch profits tax, however, only to the extent that business profits of a French company are attributable to a permanent establishment or to certain income from real property.

[] Interest: The general exemption for interest is maintained. Interest determined with reference to the profits of the issuer or of one of its associated enterprises will be subject to source-country taxation at a maximum rate of 15%.

[] Royalties: The 5% rate for royalties is generally maintained.

The exemption for royalties is expanded to include payments for the use of, or the right to use, any copyright of literary, artistic or scientific work or any neighboring right (including reproduction rights and performing rights), any cinematographic film, and any sound or picture recording or any software. The special source rules for royalties in the old treaty continue to apply.

Other provisions:

[] Income from real property: Allows the situs country to tax corporate shareholders on the imputed rental value of real property owned by the corporation that they, as shareholders, are entitled to use.

[] Limitation on benefits: Similar to provision in U.S.-Netherlands treaty.

1. 50% ownership test qualifying shareholders include entities and individuals resident in either country and U.S. citizens and, for some purposes, residents of member countries in the European Union (EU) with which the U.S. and France each has a bilateral income tax treaty. (With the entry into force of the U.S.-Portugal treaty, the U.S. now has a treaty with all of the members of the EU.)

2. 50% base erosion test (does not count the use of income to meet liabilities, contracted at arm's length, to obtain tangible property in the ordinary course of business, or services performed in the payer's residence; in some cases, payments to residents of EU member countries are also afforded favorable treatment). 3. Active conduct of a trade or business in the residence country that is substantial in relation to the income-producing activity, or derived incidentally to that trade or business (attributes to the treaty resident active trades or business conducted by other entities, including third-country businesses). 4. Publicly traded entities (does not require that, if benefits are to be afforded a company resident in a treaty country on the basis of public trading in the stock of the company's shareholder or shareholders, the company seeking treaty benefits also meets an anti-conduit test that measures base erosion) 5. Headquarters company (currently, a French headquarters company does not meet the requirement that it be subject to tax in France on the same basis as a company conducting an active trade or business there; therefore, no French headquarters company will be able to qualify as a headquarters company). 6. Triangular transactions subject to 15% tax (unless the income is in connection with or incidental to an active business in the third country or taxable under controlled foreign corporation (CFC) rules of either country. If the combined French and third-country taxation of third-country income earned by a French enterprise with a permanent establishment in the third country is less than 60% of the tax that would be imposed if the French enterprise earned the income in France, the U.S. is permitted to tax dividends, interest and royalties paid to the third-country permanent establishment at the rate of 15 7. Competent authority relief (a resident not otherwise entitled to benefits may be granted benefits if the competent authority of the other state so determines).

Portugal

Withholding rates:

[] Dividends: For period after 1996 and before 2000, rate is 10% if the beneficial owner is a company that owns at least 25% of the voting stock of the payer company (and has owned at least 25% for an uninterrupted period of two years prior to the year the dividend is paid) and the payer is not a RIC or a REIT.

Rate may be reduced, on a bilateral basis, to conform with the rate that applies to dividends paid after 1999 by Portuguese companies to residents of other EU member countries (but not less than 5%). (See understanding in Senate Foreign Relations Committee Resolution of Ratification.

Rate is 15% in other cases (including dividends paid before 1997 or paid by a RIC or a REIT).

If a REIT pays dividends to an individual who beneficially owns 25% or more, the dividends are taxed at the nontreaty rate. The definition of dividends includes income from arrangements, such as equity-kickers, that carry the right to participate in profits to the extent so characterized under the laws of the source country.

Portugal may impose its 5% substitute gift and inheritance tax on dividends paid by Portuguese SAs. (See declaration in Senate Foreign Relations Committee Resolution of Ratification.)

[] Interest. Rate is generally 10%.

Rate is 0% on interest derived by either the government or its wholly owned entity, derived by financial institutions on certain long-term loans, or paid in connection with the sale on credit of industrial, scientific or commercial equipment.

Rate is 0% on interest paid by the government of the source country state or its political subdivisions and local authorities.

These provisions do not apply to REMICs.

Branch-level interest tax permitted, but the rate is limited to 10% (5% for a bank interest).

U.S. excess interest tax may be imposed at a rate of 5% for a Portuguese bank, and 10% in all other cases. [] Royalties: Rate is 10% on payment of any kind in consideration for the use of, or the right to use, industrial, commercial or scientific equipment.

Rate is 0% on royalties paid for the use of, or right to use, containers in international traffic.

Special source rules (applicable for determining source country taxation only, not for purposes of computing the foreign tax credit): 1. If the payer is the government of one country (including a political subdivision or local authority thereof) the royalty is sourced in that country. 2. If the royalty is paid by a person, whether or not a resident of one of the states, who has a PE or fixed base in one of the countries in connection with which the liability to pay the royalty arose, and if the royalty is actually borne by that PE or fixed base, the royalty is sourced in the country in which the PE or fixed base is located. 3. If the royalty is not borne by a PE or fixed base located in one of the countries, it is sourced in the country of the payer's residence. 4. If the person paying the royalty neither is a resident of, nor has a PE or fixed base in, one of the countries, but the royalty relates to the use of property in one of the countries, the royalty is sourced in the country in which such property is used.

Other provisions:

[] Residence: A dual resident company will not automatically be treated as a resident of the country under whose laws it was created; if the competent authorities are unable to mutually agree on its residence, the company will be treated as a resident of neither country.

[] Permanent establishment: A building site, construction or assembly project, supervisory activity connected therewith and conducted within the state where the site or project is located, or the maintenance of substantial equipment or machinery within a state for a period of more than six months will constitute a PE in that state.

For the first five years the treaty is in effect, an enterprise will be deemed to have a PE in a country if its employees or other personnel carry on business of a permanent nature (activities other than that of a preparatory or auxiliary character) in the other country for an aggregate period of nine months in any 12-month period beginning or ending during the tax year.

[] Shipping income: Source country taxation for income from the operation of ships or aircraft in international traffic does not apply to bareboat leasing income (such as income from container leasing) which, unless occasional and incidental to the lessor's international shipping operations, will be treated as royalties (subject to a zero source country rate unless attributable to a PE).

[] Limitation on benefits: 50% ownership and base erosion tests; active trade or business test; persons entitled to the tax benefits relating to the tax-free zones of Madeira and Santa Maria Island are not entitled to benefits.

Sweden

Withholding rates:

[] Dividends: Rate on direct investment dividends remains 5%; however, such rate will now be available if the beneficial owner is a company that owns 10% of the voting stock of the company paying the dividend and the payer is not a RIC or a REIT. (The old treaty required 50% ownership during the entire year of the dividend up to the date of the dividend and during the entire year preceding.

Rate remains 15% in other cases (including dividends paid by a RIC or a REIT).

If a REIT pays dividends to an individual who beneficially owns 10% or more, the dividends are taxed at the nontreaty rate. The definition of dividends includes income from arrangements, such as equity-kickers, that carry the right to participate in profits to the extent so characterized under the laws of the source country.

A special provision is included to ensure that the Nobel Foundation, and other Swedish charitable organizations substantially supported by non-U.S. persons, will not be subject to U.S. excise tax.

Expressly permits the imposition of the U.S. branch profits tax; however, only to the extent that business profits of a Swedish company are attributable to a PE or to certain income from real property.

[] Interest: The exemption for interest is maintained.

[] Royalties: The exemption for royalties is maintained and is expanded to include royalties for the use of, or the right to use, any motion pictures and works on film, tape or other means of reproduction used for radio or television broadcasting.

Other provisions:

[] Taxes covered: Scope of treaty is expanded to include the U.S. excise tax on insurance premiums paid to a foreign insurer, but only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this treaty or another treaty that exempts these taxes.

[] Residence: Generally follows the U.S. model except with respect to U.S. green card holders, who will not be treated as U.S. residents unless they have a substantial presence, permanent home or habitual abode in the U.S.

[] Associated enterprises: Incorporates the general principles of Sec. 482 and conforms more closely than the old treaty to the U.S. model.

[] Limitation on benefits: 50% ownership and base erosion tests; active trade or business test.

Israel

Withholding rates:

[] Dividends: Rate is 12.5% if the payer is not a RIC or a REIT and both the beneficial owner is a company that owns at least 10% of the voting stock of the payer company, and not more than 25% of the gross income of the payer company for the prior tax year consists of interest or dividends (other than interest derived in the conduct of a banking, insurance or financing business and dividends or interest received from its 50%-owned subsidiary companies).

Rate is 25% in other cases (including dividends paid by a RIC or a REIT).

If a REIT pays dividends to an individual who beneficially owns 10% or more, the dividends are taxed at the nontreaty rate.

[] Interest: The primary rate is 17.5

Rate is 10% for interest paid on loans granted by a bank, savings institution, insurance company or other similar financial institution.

Rate is 0% on interest paid to the government or its tax-exempt instrumentality on debt obligations guaranteed or insured by the other state or its instrumentality.

These provisions do not apply to REMICs.

An election may be made to tax interest received on a net basis as if the interest were industrial or commercial profits attributable to a PE.

[] Royalties: Rate is 10% for the use of or the right to use copyrights of literary, artistic or scientific works (including copyrights of film, radio and television).

Rate is 15% in other cases.

Other provisions:

[] Limitation on benefits: 50% ownership and base erosion tests; active trade or business test; prevents use of alphabet stock.

[] Permanent establishment: A building site, construction or assembly project, supervisory activity connected therewith and conducted within the state where the site or project is located, or the maintenance of substantial equipment or machinery within a state for a period of more than six months, will constitute a PE in that state.

[] Charitable contributions: A citizen or resident of one state may treat as a charitable contribution certain amounts contributed to certain organizations organized under the laws of the other states, up to 25% of the donor's taxable income for the year from sources within that state.

Other Countries With Which Negotiations Were Reported During 1995

[] Bangladesh [] Singapore [] Bulgaria [] South Africa [] Chile [] Sri Lanka [] Ireland [] Switzerland [] Malaysia [] Thailand [] Pakistan [] Venezuela