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  • Tag Archive: double tax treaty

    1. The US-Chile Double Tax Treaty

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      US-Chile double tax treaty – Introduction

      A significant development occurred on 19 December  2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.

      This Convention, formally known as the Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! –  marks a milestone as the first new U.S. tax treaty in over a decade.

      The Journey to Ratification

      Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.

      Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.

      This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.

      Decoding the Treaty’s Key Provisions

      The Treaty introduces significant reductions in withholding taxes across various domains:

      Dividends:

      For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.

      It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.

      Interest:

      Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.

      Royalties:

      The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.

      Capital Gains:

      Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.

      Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.

      Reconciling with TCJA

      The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:

      • The Treaty does not obstruct the imposition of the Base Erosion and Anti-Abuse Tax (BEAT) under Section 59A of the Internal Revenue Code.
      • Modifications to Article 23, aligning it with the TCJA’s alterations to the foreign tax credit mechanism, particularly reflecting the shift from Section 902 credit to Section 245A’s dividends-received deduction.

      Effective Date and Beyond

      The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.

      Other tax provisions will be effective for tax years starting 1 January 2024.

      Additionally, the provisions for information exchange are effective immediately.

      US-Chile double tax treatyConclusion

      The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.

      For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.

       

      Final thoughts

      If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.

    2. New UK Luxembourg Tax Treaty: A Game Changer for Real Estate Investors?

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      New UK Luxembourg Tax Treaty – Introduction

      Last year, the UK and Luxembourg signed a new double tax treaty, which officially came into force on 22 November 2023.

      This development brings significant changes, particularly in how capital gains are treated.

      For Luxembourg-based investors in UK real estate, the clock is ticking to adapt to these changes.

      Capital Gains : a twist in the plot?

      Previously, Luxembourg residents could sell stakes in UK property-rich entities without worrying about the UK’s tax net.

      But, the updated treaty has flipped that particular script.

      Now, if you’re a Luxembourg resident and you dispose of shares (or interests in partnerships or trusts) that derive more than half of their value from UK real estate, the UK will have a say in your tax bill.

      This change primarily affects entities where at least 75% of their value comes from UK real estate, as UK tax laws have targeted such gains since 2019.

      So, if your investment structure falls into this category, it’s time to pay attention.

      Key Dates for Implementation

      Mark your calendars!

      The treaty’s provisions will be implemented as follows:

      • From 1 January 2024: for taxes withheld at source.
      • From 6 April 2024: for income tax and capital gains tax.
      • From 1 April 2024: for corporation tax.

      Implications & strategies

      This isn’t just a minor lick of paint.

      The lack of ‘grandfathering’ for existing structures means that Luxembourg investors in UK real estate could face significant tax implications.

      It’s a key time to review your investment structures and consider strategies to navigate these changes.

      One trend is a shift to using Real Estate Investment Trust (REIT) status prior to 1 April 2024.

      This move aims to capitaliae on the current rules for conversion and then leverage the REIT regime moving forward.

      New UK Luxembourg Tax Treaty: Conclusion

      Change is often challenging, but it also brings opportunities for adaptation and growth.

      If you’re a Luxembourg investor in UK real estate, now is the time to review your portfolio and strategies. As always, professional advice tailored to your specific circumstances is key in making the most of these changes.

       

      New UK Luxembourg Tax Treaty: Final Call

      If you have any queries about the New UK-Luxembourg Tax Treaty, or are a property investor in the UK and looking at options, then please get in touch.

    3. United States / Croatia double tax treaty – first agreement signed

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      The United States and Croatia signed their first double tax treaty (“treaty”) on 8 December 2022.

      This means that all member states of the European Union (“EU”) now has a tax treaty with the US, as Croatia was the ‘last man standing’ in terms of not having such a treaty.

      So, what does the treaty say?

      The treaty

      ItemDescription
      DividendsThe treaty reduces withholding taxes (“WHT”) on dividends. The treaty rate is capped at 15%. One exception is where the beneficial owner of the dividend is a company which has held a direct interest of at least 10% of the company paying the dividends for the preceding twelve-month period. Here, the maximum rate under the Treaty is reduced to 5%. In addition, dividends generally paid to certain pension funds qualify for a full exemption from WHT in the source company.
      InterestThe treaty seeks to eliminate WHT on most interest payments. However, WHT is payable and capped at 15% in some circumstances. Those circumstances include: interest arising in Croatia that is determined with reference to receipts, sales, income, profits or other cash flow of the debtor, to any change in the value of any property of the debtor or to any dividend, partnership distribution or similar payment made by the debtor interest arising in the United States that is contingent interest of a type that does not qualify as portfolio interest under the law of the United States.
      RoyaltiesThe treaty limits WHT on royalties to 5%.
      ReservationIn the treaty, the US reserves the right to impose what is known as the “BEAT” tax under US Internal Revenue Code section 59A (“Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts”). This applies to relevant profits of a company resident in Croatia and attributable to a US permanent establishment.  
      Limitation on benefits (“LoB”)Those familiar with double tax treaties where one of the contracting parties is the US will be familiar with the LoB article. Broadly, such a clause has applied since the introduction of the 2016 US model tax convention. It is a complex limitation on benefits clause. The result of the LoB in this case means that the application of the treaty is generally limited to “qualified persons” as defined in Article 22 of the Treaty. In general, Article 22(2) requires a resident to be a qualified person at the relevant time that treaty benefits are sought. For the ownership-base erosion test under Article 22(2)(f), the resident must also satisfy the ownership threshold on at least half of the days of any 12-month period that includes the date when the treaty benefit would be accorded. Alternatively, a resident that is not a qualified person under paragraph 2 may still be eligible for treaty benefits for an item of income if it meets one of the other tests under the LOB provision, namely the active trade or business test (ATB test), derivative benefits test or headquarters company test under Articles 22(3), (4) and (5) respectively.  
        

      Conclusion on United States / Croatia double tax treaty

      The signing of the treaty by the US and Croatia is a welcome development. It will clearly be of great application to businesses and individuals operating across the two jurisdictions.

      The Treaty will enter into force after both contracting parties have approved it in accordance with their internal legislative procedures.

      If you have any queries about the United States / Croatia double tax treaty, or US or Croatia tax matters more generally, then please do not hesitate to get in touch.

      The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article