Doing business in the United States: Summary of tax treaty benefits

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Appendix A

Summary of US tax treaty benefits

Under US domestic tax laws, a foreign person generally is subject to 30% US tax on a gross basis on certain types of US-source income. US persons making payments ('withholding agents') to foreign persons generally must withhold 30% of payments, such as dividends, interest, and royalties, made to foreign persons. In other situations, withholding agents may apply reduced rates or be exempted from the requirement to withhold tax at source either under domestic law exceptions or when there is a tax treaty between the foreign person's country of residence and the United States that provides for such reduction or exemption.

The United States has entered into income tax treaties with more than 60 countries to avoid double taxation of income and to prevent tax evasion. The table below, taken from the IRS website, summarizes the benefits resulting from these treaties. Taxpayers should check the IRS website for updates and changes.

         
 
Recipient
Dividends paid by US corporations
in general (%) (1)
Dividends qualifying for direct dividend
rate (%) (1, 2)
Interest paid by US obligors in general
(%)
 
Royalties* (%)
Non-treaty 30 30 30 30/30/30
Treaty rates:        
Australia (3) 15 (23) 5 (23, 24) 10 (5, 21) 5/5/5
Austria (3)

15 (9)

5 (9)

0 (19)

0/10/0

Bangladesh (3)

15 (22)

10 (22)

10 (11, 19)

10/10/10

Barbados (3)

15 (9)

5 (9)

5

5/5/5

Belgium (3)

15 (27, 28)

5 (24, 27, 28)

0 (19)

0/0/0

Bulgaria (3)

10 (2P7, 28)

5 (27, 28)

5 (19, 21, 27)

5/5/5

Canada (3)

15 (22)

5 (22)

0 (19)

0/10/0

China, People's Republic
of (3)

10

10

10

10/10/10

Commonwealth of Independent
States (CIS) (8)

30

30

0 (7)

0/0/0

Cyprus (3)

15

5

10

0/0/0

Czech Republic (3)

15 (9)

5 (9)

0

10/0/0

Denmark (3)

15 (27, 28)

5 (24, 27, 28)

0 (20)

0/0/0

Egypt

15 (4)

5 (4)

15 (4)

30/0/15 (3)

Estonia (3)

15 (9)

5 (9)

10 (20)

10/10/10

Finland (3)

15 (27, 28)

5 (24, 27, 28)

0 (20)

0/0/0

France (3)

15 (22)

5 (22, 24)

0

0/0/0

Germany (3)

15 (27, 28)

5 (24, 27, 28)

0 (19)

0/0/0

Greece (4)

30

30

0

0/30/0

Hungary (3)

15

5

0

0/0/0

Iceland (3)

15 (15, 22)

5 (15, 22)

0 (20)

5/5/0

India (3)

25 (9)

15 (9)

15 (12)

15/15/15

Indonesia (3)

15

10

10

10/10/10

Ireland (3)

15 (22)

5 (22)

0

0/0/0

Israel (3)

25 (9)

12.5 (9)

17.5 (12, 17)

15/10/10

Italy (3)

15 (22)

5 (22)

10 (23)

8/8/0

Jamaica (3)

15

10

12.5

10/10/10

Japan (3, 25)

10 (27, 28)

5 (24, 27, 28)

10 (26, 27)

0/0/0

Kazakhstan (3)

15 (16)

5 (16)

10

10/10/10

Korea, South (3)

15

10

12

15/10/10

Latvia (3)

15 (9)

5 (9)

10 (20)

10/10/10

Lithuania (3)

15 (9)

5 (9)

10 (20)

10/10/10

Luxembourg (3)

15 (29)

5 (9)

0 (4)

0/0/0

Malta (3)

15 (27, 28)

5 (27, 28)

10 (19)

10/10/10

Mexico (3)

10 (22)

5 (22, 24)

15 (18)

10/10/10

Morocco

15 (3)

10 (3)

15 (3)

10/10/10

Netherlands (3)

15 (24)

5

0

0/0/0

New Zealand (3)

15

5 (22, 24)

10

5/5/5

Norway (3)

15

15

10

0/0/0

Pakistan (4)

30

15

30

0/30/0

Philippines (3)

25

20

15

15/15/15

Poland (3)

15

5

0

10/10/10

Portugal (3)

15 (9)

5 (9)

10

10/10/10

Romania (3)

10

10

10

15/10/10

Russia (3)

10 (16)

5 (16)

0

0/0/0

Slovak Republic (3)

15 (9)

5 (9)

0

10/0/0

Slovenia (3)

15 (22)

5 (22)

5

5/5/5

South Africa (3)

15 (9)

5 (9)

0 (19)

0/0/0

Spain (3)

15 (9)

10 (9)

10

10/8/5 (10)

Sri Lanka (3)

15 (30)

15 (30)

10 (19)

10/10/10

Sweden (3)

15 (27, 28)

5 (24, 27, 28)

0

0/0/0

Switzerland (3)

15 (9)

5 (9)

0 (19)

0/30/0

Thailand (3)

15 (9)

10 (9)

15 (12)

15/5/5

Trinidad & Tobago (3)

30

30

30

15/30/0 (14)

Tunisia (3)

20 (9)

14 (9)

15

15/15/15

Turkey (3)

20 (9)

15 (9)

15 (6, 12)

10/10/10

Ukraine (3)

15 (16)

5 (16)

0

10/10/10

United Kingdom (3, 25)

15 (22)

5 (22, 24)

0 (20)

0/0/0

Venezuela (3)

15 (22)

5 (22)

10 (20, 21)

10/10/10

Notes

* Please note the tax rates and associated footnotes appearing in the 'Royalties' column in the table address three types of royalties, as denoted in the most recent IRS publication: industrial royalties; motion picture and television copyright royalties; and 'other' copyright royalties. The slashes '/' between each figure and associated footnote(s) are meant to demarcate these three types of royalties, respectively.

1. No US tax is imposed on a dividend paid by a US corporation that received at least 80% of its gross income from an active foreign business for the three-year period before the dividend is declared.

2. The reduced rate applies to dividends paid by a subsidiary to a foreign parent corporation that has the required percentage of stock ownership. In some cases, the income of the subsidiary must meet certain requirements (e.g., a certain percentage of its total income must consist of income other than dividends and interest). For Italy, the reduced rate is 10% if the foreign corporation owns 10% to 50% of the voting stock (for a 12-month period) of the company paying the dividends. For Japan, dividends received from a more-than-50-percent-owned corporate subsidiary are exempt if certain conditions are met.

3. The exemption or reduction in rate does not apply if the recipient has a PE in the United States and the property giving rise to the income is effectively connected with this PE. Under certain treaties, the exemption or reduction in rate also does not apply if the property producing the income is effectively connected with a fixed base in the United States from which the recipient performs independent personal services. Even with the treaty, if the income is not effectively connected with a trade or business in the United States by the recipient, the recipient will be considered as not having a PE in the United States under Section 894(b).

4. The exemption or reduction in rate does not apply if the recipient is engaged in a trade or business in the United States through a PE that is in the United States. However, if the income is not effectively connected with a trade or business in the United States by the recipient, the recipient will be considered as not having a PE in the United States to apply the reduced treaty rate to that item of income.

5. Interest determined with reference to the profits of the issuer or one of its associated enterprises is taxed at 15%.

6. Contingent interest that does not qualify as portfolio interest is treated as a dividend and is subject to the rates under those columns, as appropriate.

7. The exemption applies only to interest on credits, loans, and other indebtedness connected with the financing of trade between the US and the CIS member. It does not include interest from the conduct of a general banking business.

8. The tax rates in the US treaty with the former USSR still apply to the following countries: Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.

9. The rate in column 2 applies to dividends paid by a RIC or a real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is an individual holding less than a 10% interest (25% in the case of Portugal, Spain, and Tunisia) in the REIT.

10. The rate is 8% for copyrights of scientific work.

11. The rate is 5% for interest (i) beneficially owned by a bank or other financial institution (including an insurance company) or (ii) paid due to a sale on credit of any industrial, commercial, or scientific equipment, or of any merchandise to an enterprise.

12. The rate is 10% if the interest is paid on a loan granted by a bank or similar financial institution. For Thailand, the 10% rate also applies to interest from an arm's-length sale on credit of equipment, merchandise, or services.

13. This is the rate for royalties for the use of, or the right to use, industrial, commercial, and scientific equipment. The rate for royalties for information concerning industrial, commercial, and scientific know-how is subject to the rate in column 5 ('other royalties').

14. The rate is 15% for copyrights of scientific work.

15. Amounts paid to a pension fund or employee benefit organization that are not derived from the carrying on of a business, directly or indirectly, by the fund or organization are exempt.

16. The rate in column 2 applies to dividends paid by a RIC. Dividends paid by a REIT are subject to a 30% rate.

17. An election can be made to treat this interest income as if it were industrial and commercial profits taxable under article 8 of this treaty.

18. The rate is 4.9% for interest derived from (i) loans granted by banks and insurance companies and (ii) bonds or securities that are regularly and substantially traded on a recognized securities market. The rate is 10% for interest not described in the preceding sentence and paid (i) by banks or (ii) by the buyer of machinery and equipment to the seller due to a sale on credit.

19. The rate is 15% (10% for Bulgaria; 30% for Germany and Switzerland) for contingent interest that does not qualify as portfolio interest.

20. The rate is 15% for interest determined with reference to (i) receipts, sales, income, profits, or other cash flow of the debtor or a related person, (ii) any change in the value of any property of the debtor or a related person, or (iii) any dividend, partnership distribution, or similar payment made by the debtor to a related person.

21. Interest received by a financial institution is tax exempt. For Venezuela, the rate is 4.95% if the interest is beneficially owned by a financial institution (including an insurance company).

22. The rate in column 2 applies to dividends paid by a RIC or REIT. However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (i) an individual (or pension fund, in the case of France or New Zealand) holding not more than a 10% interest in the REIT, (ii) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (iii) a person holding not more than a 10% interest in the REIT and the REIT is diversified.

23. Interest paid or accrued on the sale of goods, merchandise, or services between enterprises is exempt. Interest paid or accrued on the sale on credit of industrial, commercial, or scientific equipment is exempt.

24. Dividends received from an 80-percent-owned corporate subsidiary are exempt if certain conditions are met.

25. Exemption does not apply to amount paid under, or as part of, a conduit arrangement. Under domestic law rules, even where the treaty does not contain a specific rule related to conduits, the IRS may recharacterize financing transactions that form a conduit financing arrangement to deny treaty benefits.

26. Interest is exempt if (i) paid to certain financial institutions, or (ii) paid on indebtedness from the sale on credit of equipment or merchandise.

27. Amounts paid to a pension fund that are not derived from the carrying on of a business, directly or indirectly, by the fund are exempt. This includes amounts paid by a REIT only if the conditions in footnote 30 are met. For Sweden, to be entitled to the exemption, the pension fund must not sell or make a contract to sell the holding from which the dividend is derived within two months of the date the pension fund acquired the holding.

28. The rate in column 2 applies to dividends paid by a RIC or REIT. However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (i) an individual or a pension fund holding not more than a 10% interest in the REIT, (ii) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (iii) a person holding not more than a 10% interest in the REIT and the REIT is diversified. Dividends paid to a pension fund from a RIC, or a REIT that meets the above conditions, are exempt. For Sweden, the pension fund must also satisfy the requirements in footnote 30.

29. The exemption does not apply if the recipient of the gain is an individual who is present in the United States for more than 119 days during the year.

30. The rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (i) an individual holding less than a 10% interest in the REIT, (ii) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (iii) a person holding not more than a 10% interest in the REIT and the REIT is diversified.

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Christopher Kong

Leader, US Inbound Tax

Tel: +1 (416) 402 3132

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