In a noteworthy change of events from recent years, this Summer saw the U.S. Senate approve and the President ratify four income tax treaty amendments (protocols): Luxembourg, Japan, Spain, and Switzerland. These protocols were negotiated several years back but have been held up in the Senate Foreign Relations Committee by Senator Rand Paul from Kentucky for taxpayer privacy concerns since 2011.

There are still treaties pending in the Senate: Poland, Chile, and Hungary. Certain provisions of these treaties (which were negotiated in 2010 and 2013) raise concerns about how such provisions will interact with IRC section 59A, the Base Erosion Anti-Abuse Tax (“BEAT”). As a result, Senator Bob Menendez of New Jersey has stated that the treaties may need to be renegotiated.

The protocols will go into effect once each country submits and receives formal notification of the ratification.

Protocols

The following summarizes some of the key aspects of each protocol:

Luxembourg

• Broadens the Exchange of Information article.

Japan

• Broadens availability of 0% withholding on dividends.
• Broadens availability of 0% withholding on interest.
• Broadens the Exchange of Information article.
• Amends certain foreign tax credit provisions relating to dividends.
• Effective Date: The withholding provisions are effective for amounts paid or credited after the first day of the third month following the date on which the protocol enters into force.

Spain

• Reduces withholding on dividends from 15% to 0% for certain persons.
• Reduces withholding on interest from 10% to 0% for certain persons.
• Reduces withholding on royalties to 0% for certain persons.
• Limitation on Benefits provision has been updated in a manner generally consistent with the 2006 U.S. Model Treaty. Adds treaty benefits for entities satisfying a headquarter functions test and companies satisfying a derivative benefits and base erosion test.
• Broadens the Exchange of Information article.
• Effective Date: The withholding provisions are effective for amounts paid or credited three months following the later date each country provides formal notification of ratification.

Switzerland

• Broadens the Exchange of Information article.
• Revises the Dividends article regarding the exemption for dividends paid to pensions, retirement arrangement and individual retirement accounts from withholding (subject to certain limitations).
• Effective Date: The withholding exemption is expected to come into force on January 1 of the year following the amendment being entered into force. Thus, if the process is completed this year, the new withholding regime would be effective as of January 1, 2020.

Example

A Spanish corporation wholly owns a U.S. corporation. The tax treaty, prior to the protocols described herein, would reduce withholding on dividends from the U.S. corporation to the Spanish corporation to 10%. The new protocols amend the treaty such that the dividends would be subject to 0% withholding tax (assuming that the company satisfies the 12-month holding period).

Alvarez & Marsal Says:

If you have operations or investments involving any of these jurisdictions, now is the time to reach out and determine how these new provisions may impact your business. If the new withholding provisions apply, it may be a good idea to start preparing and collecting updated withholding certificates (Forms W-8). We can assist you in determining whether you qualify for reduced withholding and, if so, updating your Forms W-8.