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WORLD TAX UPDATE

Treaty Update

 

Belgium: Treaty treatment regarding taxation of sportsmen clarified. In a Circular (AFZ 2012-0288) of 27 April 2012, the Belgian tax administration clarified the taxation of sportsmen resident in Belgium, who perform part of their sporting activities in a foreign country, under an applicable treaty.

Belgian tax treaties generally follow the OECD Model Art. 17(1) (Artistes and Sportsmen). Thus, income derived by sportsmen, who are resident in Belgium, from sporting activities carried out in a foreign country is taxed in that foreign country. The portion of the employment income allocated to the foreign countries is based on the days that the sportsman spends in that foreign country to participate in games, and to train and prepare for those games.

For training days and preparatory activities which are not related to a particular game that are carried out in a foreign country, Belgium applies the treaty article based on Art. 15 (Income from employment) of the OECD Model.  Consequently, the employment income allocated to those days is taxable in Belgium, unless the sportsman stays for more than 183 days in that foreign country.

The Circular clarifies that Belgium, on a reciprocal basis, wishes to apply Art. 17 of a tax treaty to income derived in a foreign country from training days and preparatory activities carried out, which are not related to a particular game, regardless of the number of days that the sportsman has stayed in that foreign country.

The sportsman has to provide proof with respect to the days that he has stayed in that foreign country. Otherwise, the tax administration will make a reasonable estimation concerning those days. For this estimation, a sportsman is deemed to carry out his activities for at least 220 days per year.

Canada; Luxembourg: A protocol to treaty between Canada and Luxembourg was signed on 8 May 2012.

Canada; New Zealand: A new treaty between Canada and New Zealand was signed on 3 May 2012. Once in force and effective, the new treaty will replace the Canada - New Zealand Income Tax Treaty (1980). 

The new treaty provides for the following rates of withholding tax:

• 5% for dividends paid between affiliated companies; 15% for dividends paid in all other cases;
• 5% for copyright royalties;
• 10% for payments of interest and all other royalties.

Czech Republic; Russia:  A social security treaty between Czech Republic and Russia was signed on 8 December 2011.

Germany; British Virgin Islands:  An exchange of information agreement between Germany and British Virgin Islands entered into force and generally applies from 4 December 2011.

Germany; Turks and Caicos Islands:   An exchange of information agreement between Germany and British Virgin Islands entered into force and generally applies from 4 December 2011.

Germany; Luxembourg: Details regarding the treaty between Germany and Luxembourg, signed on 23 April 2012, have become available. This treaty will replace the previous tax treaty which had been entered into in 1958. The revised provisions will apply beginning on or after 1 January 2013. The treaty applies until termination by a contracting state, but for a minimum period of 5 years (article 31).

Much of the revised treaty follows the OECD model convention, with the following exceptions:

• The term "profits from the operation ships or aircraft in international traffic" includes the occasional lease of empty ships or aircraft and use or lease of containers (including trailers and related equipment, used for the transport of containers).
• This rule applies if these activities are part of the operation of ships and aircraft in international traffic. The same rule applies for ships operated in inland waterways transport (article 8(3));
• The treaty contains a provision similar to article 12(5) of the UN Model (2001) on royalties born by a PE (article 12(5));
• Capital gains from shares realized by a resident after emigration to the other contracting state remain taxable in the previous residence state to the extent that the gains relate to the period that the individual was a resident of that state if he was a resident there for a period of at least 5 years. The new residence state will grant a step-up to avoid double taxation with respect to those gains (article 13(6));
• The 183-days rule does not apply to employees seconded by an employment agency (article 14(3));
• Pensions, annuities and other similar remuneration are as a general rule only taxable in the residence state (article 17(1)). However, if such payments are received from Germany, they are only taxable there if the corresponding contributions for a period of more than 12 years were not included in taxable profits, were tax deductible or enjoyed another tax privilege.
• This rule does not apply if (i) the payments are not taxed in Germany, (ii) the deductions are reclaimed or (iii) the 12-years criterion is met in both contracting states (article 17(3));
• Social security payments are taxable in the source state (article 17(2));
• Pensions, and other similar remunerations derived by a German resident from a Luxembourg supplementary pension are only taxable in Luxembourg if those payments result from contributions, provisions or insurance premiums paid to a supplementary pension scheme by the recipient or on his behalf, or contributions by the employer to a business pension scheme. This rule only applies if the contributions, provisions and insurance premiums were taxable in Luxembourg (article 17(4));
• A provision on the application of the treaty withholding tax rate and the refund of excess withholding tax withheld. Such refund request must be made within 4 years (article 26); and
• The contracting states are allowed to apply their domestic anti-abuse provisions; however, they will consult each other if this results in double taxation (article 27).

Maximum rates of withholding tax are:

• 15% on dividends generally. However, the rate is 5% on dividends if the receiving company, not being a partnership, owns directly at least 10% of the capital of the company paying the dividends. Furthermore, the rate is 15% if the distributing company is a company investing in real estate, whose profits are fully or partially exempt or which can deduct the distributions from its taxable profits (article 10(2)(a)-(c));
• 0% on interest (article 11(1));
• 5% on royalties (article 12(2)).

Germany applies the exemption-with-progression method for the avoidance of double taxation. This method also applies to dividends if the receiving company, not being a partnership, owns directly at least 10% of the capital of the company paying the dividends if those dividends were not deducted from the profits of the paying company (article 22(1)(a) and (d)). The credit method applies to certain business profits, dividends, royalties, capital gains, employment income derived from an employment agency, directors' fees and fees derived by a member of the control board and income derived by artists and sportsmen (article 22(1)(b) and (c)).

In addition, the credit method applies to article 22(1)(e)(aa)-(bb):

• income which is differently classified by the contracting states or allocated to different persons, resulting in a double non-taxation or a lower taxation if this problem cannot be solved by mutual agreement; or
• Germany notifies types of income to which it wants to apply the credit method. The credit method will than apply from 1 January following the year of notification.

Luxembourg applies the exemption with progression method (article 22(2)(a)). However, the credit method applies with respect to dividends, certain interests, royalties, directors' fees and fees derived by members of the control board (article 22(2)(b)).

Guernsey: Exchange of information agreements between Guernsey and several countries (listed below) initialed on 3 April 2012.

 

Austria	Botswana	Brazil	British Virgin Islands	Chile	Gibraltar
Italy	Kenya	Korea (Rep.)	Latvia	Lesotho	Lithuania
Malawi	Slovak Republic	Spain	Swaziland	Zambia

 India; Malaysia: Treaty between India and Malaysia signed 9 May 2012.  Once in force and effective, the new treaty will replace the India - Malaysia Income Tax Treaty (2001).

 Lithuania; United Arab Emirates: According to a press release published by the Lithuanian Ministry of Foreign Affairs on 8 May 2012, a tax treaty and investment promotion and protection agreement between Lithuania and United Arab Emirates will be signed.

Mexico; Saudi Arabia: Treaty between Mexico and Saudi Arabia initialed on 3 May 2012

Switzerland; Italy:  First round of negotiations to revise treaty.  According to information published by the Swiss Federal Council on 9 May 2012, a first round of negotiations to revise the, Italy - Switzerland Income and Capital Tax Treaty (1976) , as amended by the 1978 protocol is scheduled to start on 24 May 2012. One of the purposes of this revision is to update the exchange of information provision. Further details will be reported subsequently.

United States:  IRS releases a Chief Counsel Advice Memorandum AM2012-002 dated 18 April, 2012 regarding the application of income tax treaties to the compensation paid to foreign government employees who are lawful permanent residents of the United States.

The issue addressed in the Memorandum is whether an applicable U.S. Income Tax Treaty exempts from U.S. income tax the compensation paid to employees of a foreign government in the United States who are lawful permanent residents of the United States (i.e. green card holders).  The Memorandum stated that with few exceptions, U.S. Income Tax Treaties do not exempt the compensation paid to employees of a foreign government in the United States who are lawful permanent residents of the United States. 

The Memorandum notes that, as exceptions to the general rule, the United States cannot tax the compensation paid to foreign government employees who are US lawful permanent residents under the income tax treaties with Canada (1980), China (1984), and the Union of Soviet Socialist Republics (USSR) (1973) due to the particular provisions of those treaties. The 1973 USSR treaty is applicable to residents of Armenia, Azerbaijan, Belarus, Georgia , Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.

The Memorandum clarifies that IRS Revenue Ruling 75-425, which provided that the Belgium-U.S. Treaty exempted such compensation, was issued before the current treaty entered into force, and that Revenue Ruling 75-425 was rendered obsolete. The Memorandum concluded the U.S.-Belgium Income Tax Treaty signed in 2006 is applicable and does not exempt the compensation paid to employees of Belgium who are lawful permanent residents of the United States.

 

Carola Knoll, CPA, International Tax Manager