date | theme

26. October 2020 | Overview of the OECD Model Agreement – OECD-MA as the basis for DTA

02. January 2021 | Double Taxation Agreement USA (this contribution)

08. January 2021 | Overview of the most important articles of the OECD-MA

08. January 2021 | Double taxation without DTA: Business relations with countries without DTA

08. January 2021 | Double Taxation and Double Taxation Agreement

In this article we would like to examine what differences arise from the OECD Model Agreement (OECD-MA) compared to the Double Taxation Agreement (DTA) with the USA. In principle, the States Parties use the OECD-MA as a basis for negotiations and amend individual paragraphs and articles in the context of the negotiations. However, the US has set its own standards for this. Nevertheless, there are naturally many parallels to the OECD-MA. These also apply with regard to the DBA USA with Germany.

Double Taxation Agreement

1st Introduction to the DBA USA

In 2006, the US Treasury released a new model agreement. In contrast to the OECD-MA, the USA has written its own thoughts and principles. Therefore, the USA will enforce these more in international transport. On this basis, the new DTA USA with Germany from 2008 was also negotiated and processed accordingly. Key points here are the regulations on REIT (Real Estate Investment Trusts), Limitations on Benefits clause (LOB clause) and dividend income.

In order to work out the differences between the OECD-MA as a basis for negotiations and the real DTA USA, we put the two documents side by side. In this article you will find the most important regulations in short. In practice, we recommended that each issue be re-examined and evaluated.

This contribution is based on the 2008 DBA USA and the 2014 OECD MA.

2. The DBA USA in detail

2.1 Articles 1 to 5 DTA USA – Terms, Terms and Scope

In Articles 1 to 5 of the DTA USA, paragraphs 4 to 7 have been newly inserted in Article 1, thus describing the application of the DTA in much more detail. This is partly due to the fact that the US makes its tax liability not only dependent on residence and habitual residence, but also on citizenship. Article 2 was also subject to an adjustment, listing only the taxes affected by the DTA here. Article 3 and Article 4 have remained almost unaffected. In addition, paragraph 8 is now missing in Article 5 DTA USA.

Articles 1 to 5 DBA USA regulate terms and the scope of the DBA USA, which is why a review for your own facts is always recommended.

2.2. Article 10 DBA USA – Dividends

In the DBA USA, Article 10 for dividend income has been significantly expanded in contrast to the OECD-MA. Instead of five paragraphs, there are now eleven paragraphs that determine the international emoluments of dividends – In particular, provisions on investment assets and REITs were made here.

The basic withholding taxation of 5% for a share of 10% or more or 15% in all other cases still exists. However, Article 10(3) DTA USA provides for a special arrangement: The dividends are not taxed in the State of source if the shareholder is a company that holds the shares with at least 80 % over a 12-month period and fulfils other requirements under Article 28 DBA USA (so-called qualified persons such as natural persons). The other requirements for so-called “qualified persons” are also called the LOB clause. In principle, although the dividend income is no longer taxed in the source state, a withholding tax deduction is nevertheless made.

In addition, special regulations apply to investment funds and investment stock companies (investment assets) and REITs: For both types, the withholding tax deduction of 5 % is not applicable. In principle, therefore, a source tax deduction of 15% takes place here. In the case of a dividend distribution of a REIT, however, the withholding tax deduction of 15 % can also be omitted if, for example, the recipient of the dividend is a legal person with a participation ratio of more than 10 %.

Further provisions, such as on pension funds as dividend recipients, on diversified REITs or on premises reservation, can also be found here. Whether and how high the withholding tax deduction is in an individual case must therefore be checked precisely according to the individual case.

2.3. Article 11 DBA USA – Interest

Interest is taxed only in the country of residence, since Article 11 paragraph 2 OECD-MA has not been incorporated into the DTA USA. There is no withholding tax deduction. However, so-called excess inclusion with respect to a residual interest can also (only) be taxed by the United States – i.e. a fixed allocation of taxation.

2.4.Article 13 DBA USA – Capital gains

Here it is important to note that there is a separate regulation for exit taxation. In accordance with Article 13(6) of the DTA USA, persons whose property is subject to a fictitious sale by departure are entitled to be treated for tax purposes as if they had sold the property at market price and acquired it back immediately before their departure in the other Contracting State.

The fact that there has been a new, revised DTA with the United States since 2008 is mainly due to the fact that the United States wanted to enforce its own principles. In contrast to the conventional OECD MA, we found that regulations on REITs and other investment assets were implemented here in particular. The tightening up of the LOB clause and the fact that there is still no zero withholding tax, however, is by no means in line with the standard practice of agreeing such agreements. Rather, this results from the demands of the US. After all, these principles are already laid down in their own model agreement in this way.