14 06-19 U.S. Treaties - How To Understand And Plan With Them

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 Corporation Bruce@GivnerKaye.com
2 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 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
3 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com Upcoming Sessions Of Our “Thursday Insights” Series 3 U.S. Treaties: How To Understand And Plan With Them
Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 4 U.S. Treaties: How To Understand And Plan With Them
5 Treaties In General Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 5 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, and the number is growing. Overwhelming majority are based on the OECD Model Treaty. Most tax treaties apply to all income taxes imposed by the Contracting 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 unitary basis despite the U.S.’s treaty commitment to use the arm’s length approach. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 6 U.S. Treaties: How To Understand And Plan With Them
7 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 7 U.S. Treaties: How To Understand And Plan With Them
9 Used to request Form 6166 15 pages of instructions Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 9 U.S. Treaties: How To Understand And Plan With Them
10 Form 6166 For An “S” Corporation Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 10 U.S. Treaties: How To Understand And Plan With Them
11 One page of Instructions. Does not apply to a reduced rate of withholding tax on ECI (dividends, interest, rents or royalties) or to a reduced rate of tax on pay for employee services including pensions and Social Security. Failure to file: $1,000 (corporations $10,000). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 11 U.S. Treaties: How To Understand And Plan With Them
12 Income Tax Treaties Armenia Georgia Malta Sweden Australia Germany Mexico Switzerland Austria Greece Moldova Tajikistan Azerbaijan Hungary Morocco Thailand Bangladesh Iceland Netherlands Trinidad Barbados India New Zealand Tunisia Belarus Indonesia Norway Turkey Belgium Ireland Pakistan Turkmenistan Bulgaria Israel Philippines Ukraine Canada Italy Poland USSR China Jamaica Portugal United Kingdom Cyprus Japan Romania Uzbekistan Czech Republic Kazakhstan Russia Venezuela Denmark Korea Slovak Republic Egypt Kyrgystan Slovenia Estonia Latvia South Africa Finland Lithuania Spain France Luxembourg Sri Lanka Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 12 U.S. Treaties: How To Understand And Plan With Them
13 Estate Tax Treaties Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 13 U.S. Treaties: How To Understand And Plan With Them
14 26 U.S. Code § 6114 - Treaty-based return positions Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 14 U.S. Treaties: How To Understand And Plan With Them
15 26 U.S. Code § 6712 - Failure to disclose treaty-based return positions Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 15 U.S. Treaties: How To Understand And Plan With Them
16 2013 Wayne State University – Part 2 – U.S. Taxation of Foreigners Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 16 U.S. Treaties: How To Understand And Plan With Them
18 Why Have Estate Tax Treaties? Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 18 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
19 Estate Tax Treaties Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 19 U.S. Treaties: How To Understand And Plan With Them
20 Situs – Type Estate Tax Treaty Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 20 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
21 Situs-Type Treaties The last one was entered into in 1956: Italy. The first domicile-type, with the Netherlands, 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 treaty country X. The United States must afford a credit against its own tax for the tax imposed 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 not apply to gift taxes. (The potential for double taxation of a gift exists.) There is little risk of double GST because most countries do not impose it, but the treaties do not address it. They do not apply to political subdivisions, e.g., states in the U.S. So there is no guarantee against double taxation. Example on next page. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 21 U.S. Treaties: How To Understand And Plan With Them
22 Situs-Type Treaties – Problem With Local Taxes Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 22 U.S. Treaties: How To Understand And Plan With Them
23 Situs-Type Treaties – Affiliation You Must Have For Treaty To Apply Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 23 U.S. Treaties: How To Understand And Plan With Them
24 Situs-Type Treaties – Resolving Conflicting Definitions Of Situs Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 24 U.S. Treaties: How To Understand And Plan With Them
25 Situs-Type Treaties – Deductions No rules regarding a marital deduction. As a result, domestic rules under the Code control. No reference to a deduction for charitable transfers. Thus, domestic tax rules of treaty countries would apply, including restrictions on the deductibility of transfers by nonresident aliens to a foreign charity. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 25 U.S. Treaties: How To Understand And Plan With Them
26 Situs-Type Treaties – Credits Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 26 U.S. Treaties: How To Understand And Plan With Them
27 Domicile– Type Estate Tax Treaty Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 27 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
28 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, A Professional Corporation Bruce@GivnerKaye.com 28 U.S. Treaties: How To Understand And Plan With Them
29 Domicile-Type Treaties Apply 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 Code would tax the gift transfer, Article 9 of the U.S.-Germany Treaty overrides the Code and assigns exclusive taxing jurisdiction to Germany. If Germany did not impose any tax, the U.S. could still not impose tax despite a transfer of paintings situated in the U.S. If Heinrich made 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 real property in U.S. state C, which taxes the real property at death. Because state C also taxes U.S. citizens the same way, there is no discrimination. If a province of treaty country R also taxes the real property, there will be double taxation at the political-subdivision level assuming no unilateral credit. In many instances there will be no treaty credit. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 29 U.S. Treaties: How To Understand And Plan With Them
30 U.S.– Germany Estate Tax Treaty Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 30 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
31 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 or donee 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 resident or citizen. A German fiscal domicile exists if the relevant person has a domicile (Wohnsitz) or habitual abode (gewonlicher Aufenthalt) in Germany. A German fiscal domicile also exists if the person is otherwise subject to unlimited tax liability (e.g., in the case of a German citizen who has been out of the country for no more than five years). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 31 U.S. Treaties: How To Understand And Plan With Them
32 German Estate Tax Treaty - Continued If there are findings that the person had a fiscal domicile in both countries, fiscal domicile is 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 were closest (center of vital interests)”; (c) if the person's center of vital interests cannot be determined, then “habitual abode” is referred to; (d) if the person had an habitual abode in both countries or neither country, then the treaty refers to the country of citizenship; (e) if he or she was a citizen of both countries or neither country, then the relevant person's domicile is to be determined by mutual agreement. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 32 U.S. Treaties: How To Understand And Plan With Them
33 German Estate Tax Treaty - Continued Situs of categories of property: Generally, a treaty country may tax if an individual was a citizen or a domiciliary (or, in the case of Germany, had an habitual abode). This means that even when the person's fiscal domicile is fixed in one of the countries, the other may be able to tax on the basis of citizenship. Special rules also apply to the following types of property, permitting a treaty country that is neither the country of citizenship nor of domicile to tax: • Immovable property — such property can also be taxed by the country in which it is situated. Whether property is immovable is to be determined by the country in which the property is situated. • Business property of a permanent establishment and assets pertaining to a fixed base used for performance of personal services — such property is taxed by the country in which situated. A permanent establishment is, generally, a place of management, branch, office, store, factory, workshop, mine, quarry, or other place of extraction of natural resources, or a building, construction, or assembly site existing for more than 12 months. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 33 U.S. Treaties: How To Understand And Plan With Them
34 German Estate Tax Treaty - Continued Deductions of debts: A number of special rules apply: • With regard to immovables being taxed on the basis of situs, debts for acquisition, repair, or upkeep are deductible in full in computing the property's value. • With regard to permanent-establishment or fixed-base property taxed on the basis of situs, debts relating to the operation of the enterprise are deductible in full in computing the property's value. • With regard to a partnership interest in property, debts which would have been allowed had the property interest been owned outright will be allowed. Presumably, the deductions must be prorated to reflect the limited interest in the partnership, although this is not specified in the treaty. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 34 U.S. Treaties: How To Understand And Plan With Them
35 German Estate Tax Treaty - Continued Exemptions for charitable transfers: Transfers are exempt if made to a corporation or organization organized and operated exclusively for religious, charitable, scientific, educational, or public purposes, or to a public body when property is to be used for such purposes. The exemption is available even though the charitable entity is in the other treaty country. While the competent authorities are to work out application of this provision, the exemption is limited to the amount that is allowed by the country in which the charitable entity is organized and operated and the amount that would have been allowed if organized and operating in the country imposing the tax. Note, however, the use of the term “exempt.” Is this intended to apply to the U.S. charitable “deduction”? Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 35 U.S. Treaties: How To Understand And Plan With Them
36 German Estate Tax Treaty - Continued Exemption for pension and similar benefits: Pension, annuity, social security, and similar benefits are exempt in the taxing country, including at all political subdivision levels, to the extent they would have been exempt in the paying country had the decedent been a domiciliary. Exempt amounts, however, may have to be offset in accordance with German tax law. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 36 U.S. Treaties: How To Understand And Plan With Them
37 German Estate Tax Treaty - Continued 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 other treaty country is taxing under the treaty's situs rules, there must be a marital reduction/exclusion allowed by the situs against its tax. The reduction/exclusion will apply to the extent property passing to a spouse exceeds 50% of all property included in the taxable base that may be taxed by the country of situs of the property passing to the spouse. However, in the case of the U.S., the reduction may 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 in excess of the marital exemption available under German law of a transfer to a spouse subject to unlimited inheritance or gift tax liability (e.g., a spouse who is a German domiciliary). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 37 U.S. Treaties: How To Understand And Plan With Them
38 German Estate Tax Treaty - Continued Credits in relief of double taxation: • The U.S. will credit tax on the property assigned a situs by the treaty, where Germany taxes such property on the basis of its situs there. A similar credit applies when the 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, Germany must 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 situs basis), Germany must allow a credit. The rationale here is presumably that the U.S., as domicile of the transferor, has a stronger claim to primary taxing authority. But there are no credit provisions at all when the U.S. taxes on the basis that the transferor was a citizen of the U.S. and Germany taxes on the basis of the domicile of the beneficiary or donee. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 38 U.S. Treaties: How To Understand And Plan With Them
39 German Estate Tax Treaty - Continued Estates and trusts: Internal rules regarding taxation of transfers to and from a trust or estate are generally not affected by the treaty. If the countries tax such transfers at different times, but within 5 years of each other, the competent authorities can discuss the matter in an effort to avoid hardship. If the transfer is not taxable under German law at the time of transfer, an election can be made within 5 years to have it taxed as if a taxable transfer had been made at the time under German law. By so doing, the German beneficiary will be able to avail himself of the relief that can be provided by the competent authorities in the case of undue 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 to taxation of trusts. That law treats the trust as a distinct legal entity, much like a Stiftung. A tax is imposed at the time of the transfer into trust under §3(2)(1) of the German Inheritance Act (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 competent authorities, who “may” discuss the matter with a “view” to avoiding hardship, but with no requirement to do so. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 39 U.S. Treaties: How To Understand And Plan With Them
40 German Estate Tax Treaty - Continued Mutual agreement procedure: If a person considers that the actions of one or both of the countries is in violation of the treaty, despite any domestic remedies, he may present the case to the competent authority of either country. The case must be presented within a year of the time a claim under the treaty for exemption, credit, or refund has been finally settled or rejected. If the competent authority believes the claim is justified and cannot solve it, then the authority is to try to resolve it by mutual agreement “with a view to the avoidance of taxation not in accordance with the Convention.” Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 40 U.S. Treaties: How To Understand And Plan With Them
41 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 this example, that his wife was able under German law to leave the German home to Joe. (She is not able to do so due to the Pflichtteil, the German form of forced heirship.) After she passed away in 2010, Joe retired and decided to move to the home in Germany. He left behind in the United States his U.S. residence, stocks and bonds and some investment real property. He also receives a pension from his profession. On his death, his estate provides for a small charitable bequest with the balance going to his children. How is it treated? Article 1. It applies to estates of deceased persons whose domicile at death was in one 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 is someone with domicile or habitual abode or unlimited tax liability. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 41 U.S. Treaties: How To Understand And Plan With Them
42 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 he had a permanent home available to him. If he had a permanent home available to him in both Contracting States, or in neither Contracting State, the domicile shall be deemed to be in 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 be determined, the domicile shall be deemed to be in the Contracting State in which he had an habitual abode; c) if he had an habitual abode in both Contracting States or in neither of them, the domicile 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 competent authorities of the Contracting States shall settle the question by mutual agreement. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 42 U.S. Treaties: How To Understand And Plan With Them
43 German Estate Tax Treaty – Example (Continued) Article 5 Immovable Property 1. Immovable property which forms part of the estate of or of a gift made by a person domiciled in a Contracting State and which is situated in the other Contracting State may be taxed in that other State. 2. The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property, and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources, and other natural 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 of an enterprise and to immovable property used for the performance of independent personal services. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 43 U.S. Treaties: How To Understand And Plan With Them
44 German Estate Tax Treaty – Example (Continued) 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. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 44 U.S. Treaties: How To Understand And Plan With Them
45 German Estate Tax Treaty – Example (Continued) 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 State organized and operated exclusively for religious, charitable, scientific, educational, or public purposes, or to a public body of a Contracting State to be used for such purposes, shall be exempt from tax by the other 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 a similar corporation, organization, or public body of that other State. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 45 U.S. Treaties: How To Understand And Plan With Them
46 Treaty vs. The Code Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 46 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
47 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. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 47 U.S. Treaties: How To Understand And Plan With Them
48 Treaties vs. Internal Revenue Code (Continued) The premise that a treaty can be overridden by a later-enacted statute is accepted without serious question in the U.S. Since they are on a constitutionally 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 only invoked 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. The U.S. interpretive position should thus not be assumed to be controlling. Article 27 of the Vienna Convention on the Law of Treaties, for example, provides that treaties are binding, and that internal enactments cannot serve as a basis for failing to comply in good faith with a treaty. This is considered to reflect the customary law and is supported by the Committee on Fiscal Affairs of the OECD. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 48 U.S. Treaties: How To Understand And Plan With Them
49 Income Tax Treaties Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 49 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
50 Goals Of Income Tax Treaties In 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 tax credit or an exemption for the foreign source income. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 50 U.S. Treaties: How To Understand And Plan With Them
51 Income Tax Treaties – Provisions Relating Only To Individuals Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 51 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
52 Income Tax Treaties – Provisions Relating Only To Individuals Tie-Breaker Rules. Most of the income tax treaties to which the U.S. is a party provide tie-breaker rules for an individual who otherwise would be taxed as a resident by both countries. Because the operation of so many treaty provisions depends on where an individual is deemed resident, the tie- breaker rules are among the most important provisions. Under U.S. income tax regulations, an individual who is classified under U.S. internal law as a U.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 for purposes of computing his or her U.S. income tax liability but not for purposes of other provisions of the Code, such as whether a foreign corporation is a controlled foreign corporation (“CFC”). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 52 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
53 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 the treaty 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 from invoking treaty benefits to reduce his or her U.S. income tax. However, like most legal rules, treaty saving clauses are subject to exceptions, pursuant to which a particular provision of a treaty may be invoked by a U.S. citizen or resident (or in some cases, only a U.S. resident who is not a citizen and not a green card holder) to reduce his or her U.S. tax. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 53 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
54 Income Tax Treaties – Provisions Relating Only To Individuals 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 States by virtue of the tie-breaker rules, and who is not a U.S. citizen, is not subject to the saving clause. Accordingly, when any type of treaty provision or problem is considered, the residency tie-breaker rules and the saving clause should always be examined first before turning to the more specific applicable provisions. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 54 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
55 Income Tax Treaties – Provisions Relating Only To Individuals 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 but certain benefits and exemptions intended to facilitate trade and commerce between the two countries are provided. Depending on tax rates and the internal tax law in each country, these treaty provisions may result in an actual reduction of overall tax for the worker, or they may merely simplify the worker's foreign tax reporting and payment obligations (i.e., the worker may pay the same overall tax but pay more tax in his or her home country and less tax in the host country). In general, most treaties provide 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 workers and employees are subject to special rules for government workers, directors, artists and athletes, and students, business apprentices, teachers, and researchers. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 55 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
56 Income Tax Treaties – Provisions Relating Only To Individuals 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 but certain benefits and exemptions intended to facilitate trade and commerce between the two countries are provided. Depending on tax rates and the internal tax law in each country, these treaty provisions may result in an actual reduction of overall tax for the worker, or they may merely simplify the worker's foreign tax reporting and payment obligations (i.e., the worker may pay the same overall tax but pay more tax in his or her home country and less tax in the host country). In general, most treaties provide 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 workers and employees are subject to special rules for government workers, directors, artists and athletes, and students, business apprentices, teachers, and researchers. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 56 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
57 Income Tax Treaties – Provisions Relating Only To Individuals 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 for independent workers typically provide that the worker is either subject to tax only in the country 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 typically follow the same pattern —the worker will be subject to tax either in the home country only or in both countries with appropriate credits. However, the treaty rules for employees typically use different tests to determine whether the host country can tax the worker. For example, whereas the host country's right to tax an independent worker may depend (in whole or in part) on whether the worker has a fixed base in the host country, the host country's right to tax an employee may depend on a number of factors, such as: (1) how many days the worker spends in the host country; (2) whether the worker is employed by an employer that is a resident of the host country; and (3) whether the worker's remuneration is borne by a permanent establishment or fixed base of the employer in the host country. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 57 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
58 Income Tax Treaties – Provisions Relating Only To Individuals Government Workers. Individuals who work for foreign governments are usually treated more favorably than other kinds of independent workers or employees. An employee of a business enterprise may be subject to tax in the host country if he spends more than a certain number of days per year there. By contrast, diplomats, consular officers, and other government workers may be completely exempt from host country tax if their only reason for being there is to discharge their governmental duties. This benefit is important because it encourages each country to send government workers to the other country, thereby fostering goodwill. Treaty benefits for government workers are often excepted from treaty saving clauses (at least for residents who have not acquired citizenship or green cards) because many of the workers for whom the benefits are intended will have become residents of the host country under its internal law by reason of being posted there on a year-round basis — and this may be the case even when the treaty's tie-breaker rules are taken into account. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 58 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
59 Income Tax Treaties – Provisions Relating Only To Individuals 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 permanent establishment or other basis for taxation there. Also, the director may travel to that other country in connection with the performance of his duties, and may 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 and resident who serves as a director of a U.K. company with global operations and who in the course of a taxable year travels to London, Paris, and a non- treaty country to perform services for the company. Which jurisdictions should have the right to tax the fees the director receives from the company? Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 59 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
60 Income Tax Treaties – Provisions Relating Only To Individuals 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 a Contracting State for services rendered in the other Contracting State in his capacity as a member of the board of directors of a company that is a resident of the other Contracting State may be taxed in that other Contracting State. The treaties with France and the U.K. follow this approach. Many treat directors the same as independent workers. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 60 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
61 Income Tax Treaties – Provisions Relating Only To Individuals 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 resident of one country works in the other as an artist or athlete, some of the income earned may be protected from tax in that other country, but usually not to the same degree as other workers who are not artists or athletes. These rules also frequently address the situation where the income in respect of these activities accrues to someone other than the artist or athlete (including so-called “star companies”). The basic idea is that artists and athletes, like other workers, should be exempt from host country tax on income earned in the host country to some degree, but not to the same degree as other kinds of workers due to the possibility that an artist or athlete may have the opportunity to earn a large amount of income in a short period of time. Many treaties also provide more favorable treatment for artists and athletes participating in activities the two countries desire to promote, such as cultural exchange programs. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 61 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
62 Income Tax Treaties – Provisions Relating Only To Individuals Students, Business Apprentices, Teaches And Researchers. Many foreign individuals who come to the U.S. do so to pursue part-time or full-time education, to receive on-the-job business training through apprenticeships or similar programs, to teach, or to do research. While in the U.S., these individuals may have income connected with their educational or research activities (such as stipends, scholarships, fellowships, assistantships, apprentice pay, or teaching salaries) and they may have other forms of income from sources outside the U.S. which they use to support their educational or research activities here. Many of these individuals will qualify for treaty tax benefits. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 62 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
63 Income Tax Treaties – Provisions Relating Only To Individuals 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 social security, the question of how an international worker pays social security taxes and accrues social security benefits as services are performed is addressed by social security totalization agreements. Even after the application of totalization agreement provisions, however, it is possible for a retired individual taxpayer to be collecting social security benefits in his home country, social security benefits from one or more foreign countries in which the taxpayer accrued benefits while working there, and pensions from an employer in the home country and one or more foreign employers. Absent applicable treaty provisions, the possibility that such an individual will be subject to unfair double taxation by two or more countries is very high. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 63 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
64 Income Not Attributable To A Permanent Establishment Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 64 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
65 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. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 65 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
66 Dividends Most treaties contain an article dealing with dividends, the main purpose of which is to limit, on a reciprocal basis, each Contracting State's right to tax dividend income arising in its jurisdiction if it is not attributable to a permanent establishment in that jurisdiction. For U.S.-source dividends, the effect is to lower the general 30% tax rate, typically, to 15% on portfolio dividends and 5% on direct dividends, but only if paid to a person who resides in the other Contracting State and beneficially owns the dividend income. Starting in 2001 a number of treaties have included an exemption from source state tax for dividends paid from a subsidiary to its parent if certain criteria are met. With the exception of provisions dealing with the “second-level” tax on dividends, treaties generally do not address dividends paid or received by a person who does not reside in one of the two Contracting States. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 66 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
67 Royalties Most treaties address royalties, the main purpose of which is to limit, on a reciprocal basis, each Contracting State's right to tax royalty income arising in its jurisdiction and not attributable to a permanent establishment. For U.S.-source royalties, the effect is to reduce the general 30% tax rate, but only if the beneficial owner of the royalties is a resident of the other Contracting State. The maximum rate of source state taxation of royalties varies considerably. The U.S. Model Treaty sets forth the preferred U.S. negotiating position of exemption from source state taxation but the maximum rate can vary from zero to 15%, depending on the treaty. Many treaties provide differing rates depending on the nature of the royalty income. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 67 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
68 Real Property Income Almost 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, the source state's right to tax income derived from real property. Accordingly, their primary purpose is to establish the boundaries of other potentially applicable articles of the treaty, such as the business profits article. In addition to specific articles that address the taxation of income from real property, U.S. tax treaties have specific articles that address the taxation of gains attributable to the alienation of real property (including shares in U.S. Real Property Holding Corporations), which generally preserve the taxing right of the Contracting State in which the real property is located. So foreign persons that own U.S. real property remain subject to specific U.S. income tax rules upon the disposition of such property, including the rules under Section 897 and its corresponding withholding and reporting rules (“FIRPTA Rules”). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 68 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
69 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 be taxed in the Contracting State in which the property is situated (the “situs state”). All forms of income derived 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 the Contracting State in which the property is situated may tax the real property income (including rental income) of a resident of the other Contracting State regardless of the absence of attribution to a permanent establishment in the situs state. Residents of a Contracting State that derive income from real property situated in the other Contracting State may elect, for any taxable year, to be subject to tax on the real property income on a net basis as though the income were attributable to a permanent establishment in the situs state (this being an exception to the general rule set forth in the business profits article). The election is binding on the taxpayer for all later years (unless the Competent Authority of the situs state terminates the election). Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 69 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
70 Real Property Income (Continued) Article 13 – Gains. Gains derived by a resident of a Contracting State that are attributable to the alienation of real property in the other Contracting State may be taxed in that other State. “Real property 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 regular trading on a stock exchange, deriving their value or the greater part of their value directly or indirectly from real property referred to in the Income from Real Property article situated in such other state; and (ii) an interest in a partnership or trust to the extent that the assets of the partnership or trust consist of real property situated in such other state. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 70 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
71 Capital Gains Most treaties address capital gains, the purpose of which is to assign primary or exclusive taxing jurisdiction over gains from the alienation of property to either Contracting State. There are several exceptions based on the type of property involved in the alienation that produces the gain. Otherwise, these articles generally cede taxing jurisdiction 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 or business in the U.S. by the foreign person or the property disposed of is a U.S. real property interest. “Gain” is generally not defined in U.S. tax treaties. Its meaning is determined by reference to U.S. tax law unless the context requires otherwise. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 71 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
72 Capital Gains (Continued) Gains that are considered to be effectively connected with a non-U.S. person's conduct of a U.S. trade or business are subject to tax in the U.S. A NRA individual who is present in the U.S. for 183 days or more during the taxable year in which the disposition occurs is subject to U.S. tax on U.S.-source gains. Certain U.S.-source gains realized by a U.S. expatriate (former U.S. citizen or long-term resident) are subject to taxation in the U.S. Finally, gains generated by a foreign person from the disposition of U.S. real property, or an interest in it, are subject to U.S. tax. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 72 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
73 Other Income Article Typically, the “other income” article begins by ceding taxing jurisdiction of these items of income to which it applies to the residence state, such that the item of income is exempt from taxation by the Contracting State in which it is sourced (the “source state”) unless the income is attributable to a permanent establishment of the taxpayer maintained in the source state. For example, the taxation of lottery and gambling winnings, insurance income, substitute payments made pursuant to securities lending transactions, and payments on derivative financial instruments may be determined under a treaty's other income article. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 73 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
74 Income Tax Treaties – Anti-Treaty Shopping Provisions Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 74 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
75 U.S. – Germany Treaty ARTICLE 28 Limitation on Benefits 1. A person that is a resident of a Contracting State and derives income from the other Contracting State shall be entitled, in that other Contracting State, to all the benefits of this Convention only if 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 Contracting State (other than the business of making or managing investments, unless these activities are banking or insurance activities carried on by a bank or insurance company), and the income derived from the other Contracting State is derived in connection with, or is incidental to, that trade or business; d ) a company in whose principal class of shares there is substantial and regular trading on a recognized stock exchange; Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 75 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
76 U.S. – Germany Treaty ARTICLE 28 Limitation on Benefits (continued) e) aa) a person, more than 50% of the beneficial interest in which (or in the case of a company, more than 50% of the number of shares of each class of whose shares) is owned, directly or indirectly, by persons entitled to benefits of this Convention under 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) to persons 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 exempt from income taxation in its Contracting State of residence, provided that more than half of the beneficiaries, members, or participants, if any, in such organization are persons that are entitled, under this Article, to the benefits of this Convention. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 76 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
77 Personal Services Income Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 77 U.S. Treaties: How To Understand And Plan With Them
80 Note: the “no more than 182” or “183” day period in these treaties is reduced to 89 days in the treaties with Mexico and the Philippines. See anything in common? (Also Thailand.) Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 80 U.S. Treaties: How To Understand And Plan With Them
81 Professors, Teaches and Researchers Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 81 U.S. Treaties: How To Understand And Plan With Them
82 Students and Apprentices Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 82 U.S. Treaties: How To Understand And Plan With Them
84 Wages and Pensions Paid By A Foreign Government Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 84 U.S. Treaties: How To Understand And Plan With Them
85 Publication 901 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 85 U.S. Treaties: How To Understand And Plan With Them
86 Publication 901 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 86 U.S. Treaties: How To Understand And Plan With Them
87 U.S.– Germany Income Tax Treaty Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 87 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
88 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 Mutual Agreement Procedure and had 521 still pending. The Federal Central Tax Office is the most important for MAP and APAs. Binding arbitration with the U.S. Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 88 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
89 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 89 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
90 Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 90 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
91 Tax structuring – How Google, Microsoft Apple and other major US tech giants save billions Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 91 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
92 Tax structuring – How Google, Microsoft Apple and other major US tech giants save billions (continued) Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 92 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
96 Tax structuring – How Google, Microsoft Apple and other major US tech giants save billions (continued) Ireland on left – Bermuda on right – Netherlands (Dutch sub) on the bottom Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 96 Everything You Always Wanted To Know About Family TrustsU.S. Treaties: How To Understand And Plan With Them
99 Questions and Answers Send us e-mail: Bruce@GivnerKaye.com Owen@GivnerKaye.com Kathy@GivnerKaye.com Neda@GivnerKaye.com Givner & Kaye, A Professional Corporation Bruce@GivnerKaye.com 99 U.S. Treaties: How To Understand And Plan With Them

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