(Archived Content)
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
Secretary Robert E. Rubin today signed income tax conventions with Estonia,Latvia and Lithuania. These first tax treaties between the United States and the three BalticRepublics represent an important step in Treasury's goal of expanding the U.S. tax treaty networkwith emerging economies.
Estonian President Lennart Meri, Latvian Minister of Foreign Affairs Valdis Birkavs andLithuanian Minister of Foreign Affairs Algirdas Saudargas were the signatories for theirrespective countries. Latvian President Guntis Ulmanis and Lithuanian President AlgirdasBrazauskas were also in attendance.
The proposed conventions generally follow the pattern of the U.S. model income taxconvention. As with all bilateral tax agreements, however, there are some variations. Thesedifferences reflect particular aspects of the laws and treaty policies of the signatory countries, theinteractions of U.S. law with the laws of the Baltic Republics, and U.S. economic relations withthe three nations.
The three treaties establish maximum rates of withholding at source on dividends that are thesame as those in the U.S. model. Dividends are subject to a maximum rate of tax at source of 15percent, except that the rate is limited to five percent for dividends paid by a 10-percent or moresubsidiary in one country to its parent in the other. Unlike the U.S. model, but like a number ofU.S. treaties, interest and royalties are subject to limited tax at source. The proposed conventionsprovide for a maximum 10-percent rate of tax at source on most interest payments. Interestearned on trade credits and on government debt, including debt guaranteed by governmentagencies, however, is exempt from tax at source. Royalties for the use of industrial, commercialor scientific equipment are subject to a five-percent tax at source. All other royalties are taxed ata maximum rate of 10 percent.
The taxation of capital gains under the proposed conventions follows the pattern of the U.S.model. They provide that gains from real property (including a U.S. real property interest) are taxable in the situs state. Gains from the alienation of personal property that is part of apermanent establishment or fixed base may be taxed in the state where the permanentestablishment or fixed base is located. All other gains are taxable exclusively in the state ofresidence of the alienator.
Consistent with the U.S. model, the three agreements provide generally for the taxation byone state of the business profits of a resident of the other only when such profits are attributableto a permanent establishment located in that other state. The proposed conventions, however,include an anti-abuse rule that would allow the source state to tax sales or activities carried out bya resident of the other state as if they were performed by a permanent establishment, if it isascertained that such activities were structured with the intention to avoid taxation in the statewhere the permanent establishment is situated.
The treatment of profits from international carriage by aircraft and ships generally follows theU.S. model. However, income from the international rental of ships and aircraft that is notincidental to operation of ships and aircrafts is taxed at a five-percent rate as a royalty paid for therental of equipment and income from the use or rental of containers that is non-incidental to theoperation of ships or aircraft in international traffic is taxed only in the residence country unlessthe income is attributable to a permanent establishment in the other State.
The proposed conventions with Latvia and Lithuania, but not Estonia, contain specialprovisions relating to exploration or exploitation of the seabed and sub-soil. These rules aresimilar to those found in our treaties with North Sea countries.
The taxation of income from the performance of personal services is generally similar to thatunder the U.S. model, but, like some U.S. treaties with developing countries, the proposedconventions grant a taxing right to the host country with respect to certain categories of personalservices income that is somewhat broader than in the U.S. model.
The proposed conventions contain rules, similar to those in all recent U.S. treaties, designedto restrict the benefits of the convention to persons that are not engaged in treaty shop-ping. Also included are rules to prevent discriminatory taxation, as well as rules necessaryfor administering the conventions, including rules for the resolution of disputes under theconventions, and for the exchange of information.
Unique to these three conventions is an agreement that there will be a five-year period withinwhich the appropriate authorities of the two states will meet to discuss the application of theconvention to income derived from new technologies, such as payments received for transmissionby satellite, cable, optic fibre or similar technology. The meeting may result in a protocol thatspecifically addresses the convention's application to income from new technologies. It isunderstood that, until and unless an agreement is reached to the contrary, no source country taxwill be imposed on such income, unless the income is attributable to a permanent establishment inthe source country.
The proposed conventions are subject to ratification. Each convention will enter into forceafter each state has notified the other that it has completed its ratification requirements. Eachconvention will have effect, with respect to taxes withheld at the source, for amounts paid orcredited on or after the first day of January of the calendar year next following the year in whichthe convention enters into force. In other cases the convention will have effect with respect totaxable years beginning on or after the first day of January of the calendar year next following theyear in which the convention enters into force. Each convention will remain in force indefinitelyunless terminated by one of the contracting states. Either state will be able to terminate theconvention at the end of any calendar year by giving written notice at least six months before theend of that calendar year.
Copies of the new conventions are available on the Internet at www.treas.gov/press or from the Office of PublicAffairs, Treasury Department, Room 2321, Washington, D.C. 20220.
Link to Estonian treaty in .pdf format.
Link to Latvian treaty in .pdf format.
Link to Lithuanian treaty in .pdf format.