NEW TAX TREATIES – or protocols to existing treaties – between the US and the United Kingdom, Mexico and Australia reduce withholding taxes on repatriated earnings.
The new income tax agreements were ratified by the US Senate in March. Anyone with projects in these countries should probably take another look at the ownership structure to make sure it still makes sense given the reduction in withholding rates.
The new treaty with the United Kingdom waives withholding taxes altogether on dividends paid by a UK subsidiary to its US parent – or vice versa – in cases where the parent owned 80% or more of the voting stock of the subsidiary for the 12 months before the dividend was declared. The parent must also have owned at least 80% of the voting stock before October 1998. It could have done so indirectly.
The United States agreed to the same 0% withholding rate for dividends between US and Mexican companies as in the UK treaty. In other words, the parent company must have owned 80% of the voting stock in the subsidiary before October 1998 and also in the 12 months leading up to the dividend. (The US promised Mexico earlier that if it adopted a withholding rate below 5% in a treaty with another country, it would extend the same benefit to Mexico.)
The Senate also ratified a protocol to the US tax treaty with Australia. The protocol eliminates withholding taxes on dividends between US and Australian companies. The only requirement is the parent company must own at least 80% of the voting stock of the subsidiary paying the dividend in the 12 months before the dividend is declared. There is no requirement that it must also have owned shares before October 1998. The new Australian protocol also eliminates withholding taxes on interest paid to any financial institution that is unrelated to the borrower.
The Australian protocol also removes rents paid under cross-border equipment leases from the definition of “royalties.” This has the effect of eliminating withholding taxes on rents and rendering them taxable to the lessor in the country where the lessee is located only if the lessor has a “permanent establishment” in that country.