2010 marks a time of considerable change in the income tax treaty network of the United States (US). During 2010, new income tax agreements with Italy and France have become effective, protocols to six other treaties were signed, and negotiations to revise several treaties are either commencing or expected to begin.
The common threads running through these treaty developments are (i) reduction of withholding rates, (ii) strengthening of limitation on benefit provisions to limit treaty shopping, (iii) increased exchange of information, and (iv) tax classification of fiscally transparent entities for purposes of determining whether income is derived by a resident. In addition, several agreements contain either less common or unique provisions such as the mandatory arbitration clause found in the US-France Protocol and the withholding tax rate reset, services permanent establishment, and capital gain tax provisions set forth in the US-Chile Treaty.
NEW TREATIES IN FORCE EFFECTIVE 2010
US-Italy Income Tax Treaty
On December 16, 2009, the US and Italy exchanged instruments, thereby bringing into force (with effect as of January 2010) an income tax treaty signed by the US and Italy in 1999.
The US-Italy Treaty lowers withholding on interest (reduced to 10% from 15%) and royalties (generally reduced to 8%, with a special 0% rate and a 5% rate for certain types of royalties). It also lowers the ownership percentage to 25% to qualify for 5% withholding on intercompany dividends. In addition, the Treaty includes specific withholding provisions for registered investment companies ("RICs") and real estate investment trusts ("REITs") providing generally a 15% withholding rate. Finally, the Treaty includes a comprehensive limitation on benefits provision that generally is based on the 1996 US model tax treaty.
Another major change is that the Treaty allows for a branch profits tax of 5%. This equalizes the treatment of branches and subsidiaries of Italian corporations doing business in the US.
Though the Treaty generally took effect as of the beginning of 2010, it also contains grandfathering provisions that enable taxpayers to elect to apply the prior treaty for one year (i.e., generally until December 31, 2010).
For a comprehensive discussion of the significant changes in the US-Italy Treaty, please refer to our USItaly Tax Treaty Alert published in July 2009.
US-France Protocol Amending 1994 Income Tax Treaty
On December 23, 2009, a Protocol to the 1994 US-France income tax treaty, as amended in 2004, entered into force.
The US-France Protocol lowers withholding tax rates and includes a 0% rate on qualifying intercompany dividends paid by 80%-owned subsidiaries (on stock held for at least 12 months) as well as on all royalties and a 15% rate for certain qualifying REIT dividends. In addition, the Protocol includes new provisions allowing treaty benefits with regard to income of fiscally-transparent entities to the extent the income is treated under the tax law of the other country where the entity is formed (or if formed under the laws of a third country if such country has an exchange of information agreement with the source country) as realized by the entity's beneficial owners provided the latter qualify as tax residents under the treaty. The Protocol further contains...