US Inbound: US revises treaty model

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Inbound: US revises treaty model

Fuller-James
Forst-David

Jim Fuller

David Forst

The US Treasury has released its revised 2016 Model Income Tax Treaty, which is the baseline text Treasury will use when it negotiates future tax treaties.

The US model income tax convention was last updated in 2006. A draft version of these new model treaty provisions was released for public comment in May 2015 (draft treaty). As a result of comments and feedback from stakeholders and interested parties, Treasury made a number of significant revisions to the proposed model treaty provisions. We will address different portions of the treaty over the next few months.

In a new provision, the Model Treaty addresses preferential regimes that some countries have implemented to attract highly mobile income by allowing resident companies to pay no or very little tax on their net income. These are called 'special tax regimes' (STRs) in the Model Treaty. When the provision applies, reduced US withholding tax under the treaty will not be permitted.

The scope of when the STR provisions in the Model Treaty can apply was narrowed from the 2015 draft treaty to cases in which the resident benefits from an STR with respect to a particular related-party interest payment, royalty payment, or guarantee fee that is within the scope of Article 21 (addressing 'Other Income'). An exception applies if the preferential regime will result in a rate reduction that is at least 15%, or 60% of the statutory company rate in the source country – whichever is lower.

The definition of STR was tightened to provide an exclusive list of the circumstances in which a statute, regulation, or administrative practice will be treated as an STR. This preferential treatment must be in the form of either a preferential rate for the income, a permanent reduction in the tax base with respect to the income (as opposed to preferences that merely defer the taxation of income for a reasonable period of time), or a preferential regime for companies that do not engage in an active business in the residence state.

Regimes that provide notional interest deductions (NIDs) with respect to equity are no longer treated as STRs. Instead, Article 11 (Interest) includes a new rule that would allow a treaty partner to tax interest in accordance with its domestic law if the interest is beneficially owned by a related person that benefits from an NID.

A country seeking to invoke the STR provisions must consult with the other country first and then notify the other country of its intention through a diplomatic note and issue a written public notification.

In response to comments on how to determine when a payee that benefits from an STR is "related to the payor" of an item of income, the 2016 Model provides that the STR provisions will only apply when the payee is a 'connected person' with respect to the payor of the income and provides a definition of that term, which generally means at least 50% relation.

The exceptions from the STR provisions for collective investment vehicles such as US regulated investment companies and US real estate investment trusts that are designed to achieve a single level of current tax (at either the entity level or the shareholder level) were clarified.

In next month's update, we will discuss other new provisions in the Model Treaty.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

Website: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

The Singapore boutique tax law firm’s chief told ITR of the ex-Baker McKenzie lawyers playing a role in the initiative as well as its desire to expand geographically
The new tax regime is a significant reform that will bolster India's semiconductor and electronics manufacturing ecosystem, says Khaitan & Co
Gavin Kliger, a DOGE software engineer, is reportedly set to work at the IRS for 120 days
The Royal Bank of Canada’s success over HMRC represents a milestone in the interpretation of double tax treaties, Norton Rose Fulbright partner Dominic Stuttaford said
Experts from African law firm Bowmans outline the challenges that companies operating across the continent face to stay tax compliant amid legislative upheaval and US pressure
The OECD said the EU nation relies too heavily on corporate tax from multinationals; in other news, Squire Patton Boggs, Skadden and KPMG all made senior tax appointments
An OECD webinar on amount B also heard that a distributor’s compliance certifications could potentially move them out of scope
The appointment of ex-PwC partner Abhijit Ghosh follows that of ex-EY partner James Badenach as head of A&M Tax for APAC last year
Tax controversy specialist Matthew Sharp’s switch to Brown Rudnick follows hot on the heels of US counterpart Skadden’s appointment of a new London tax disputes head
Led by international law firm Hughes Hubbard, SKAT was awarded $500 million in damages after several defendants were convicted of fraud, negligence and unjust enrichment
Gift this article