Question

Louis, a French citizen, wants to loan money to a related US entity that will be purchasing real estate in Boca. If he sets up a French company, then the interest income will be taxed at a high rate. He hears that Switzerland taxes interest at a very low rate. So, he sets up a Swiss company which in turn loans the money to the Boca entity.

What is the withholding rate on interest and dividends under the US-Swiss treaty? What's the rate under the US-France income tax treaty?

Can Louis take advantage of the US-Swiss treaty?

You may want to take a look at the Treasury Technical explanation that can be accessed at the beginning of every article in the treaty.

Answer 1

The United States has income tax treaties (or conventions) with a number of foreign countries under which residents (but not always citizens) of those countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain income, profit or gain from sources within the United States.

Amounts subject to withholding tax under chapter 3 (generally fixed and determinable, annual or periodic income) may be exempt by reason of a treaty or subject to a reduced rate of tax.

These treaty tables provide a summary of many types of income that may be exempt or subject to a reduced rate of tax. For more details on the whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country, refer to Publication 901, U.S. Tax Treaties.

For more details for withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations, refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Note: The first three tax treaty tables referenced on this page have been removed from Publication 515 to allow for updates and revisions on a more current basis. The tables are not meant to be a complete guide to all provisions of every income tax treaty.

As a withholding agent, you should consult the actual provisions of the tax treaty that apply to the person to whom you are making payment if you have any reason to question the documentation you have received.

As a taxpayer filing Form W-8BEN or Form W-8BEN-E, these tables will assist you in determining the proper rate to claim, the article under which you are requesting treaty relief, and the Limitation on Benefits (LOB) article that applies to you.

To assist all users, Tables 1 and 2 each provide a citation to the relevant article in each treaty for that category of income. Table 4 is a new table that sets forth the major tests within the Limitation on Benefits article that are relevant for documenting any entity’s claim for treaty benefits. You can obtain the full text of these treaties at United States Income Tax Treaties - A to Z.

CAUTION: These tables may provide information about the rate of tax that the treaty partner could imposed on U.S. residents deriving that category of income from the treaty country. In some instances, however, the rates applied are not bilateral, and the other country could apply a different rate or impose different requirements to obtain the benefit. Foreign procedures for claiming reduced withholding are determined under the laws and practices of the treaty partner.

TABLE 1. Withholding Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties (PDF)

This table lists the income tax and withholding rates on income other than for personal service income, including rates for interest, dividends, royalties, pensions and annuities, and social security payments. You must meet all of the treaty requirements before the item of income can be exempt from U.S. income tax, including the requirement that the income be remitted to your country of residence, if that is a requirement under your treaty with the United States. The income code numbers shown in this table are the same as the income codes on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.

TABLE 2. Compensation for Personal Services Performed in United States Exempt from U.S. Income Tax Under Income Tax Treaties (PDF)

This table lists the different kinds of personal service income that may be fully or partly exempt from U.S. income tax. You must meet all of the treaty requirements before the item of income can be exempt from U.S. income tax, including the requirement that the income be remitted to your country of residence, if that is a requirement under your treaty with the United States. The income code numbers shown in this table are the same as the income codes on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.

TABLE 3. List of Tax Treaties (PDF)

Updated through October 31, 2015, this table lists the countries that have tax treaties with the United States. This table also shows the general effective date of each treaty and protocol. A protocol is an amendment to a treaty. It is important that you read both the treaty and the protocol(s) that would apply to the tax year in which the payment is made. You can obtain the full text of these treaties at United States Income Tax Treaties - A to Z.

TABLE 4. Limitation on Benefits (PDF)

The “Limitation on Benefits” (LOB) article is an anti-treaty shopping provision intended to prevent residents of third countries from obtaining benefits under a treaty that were not intended for them. Entities that are residents of a country whose income tax treaty with the United States contains a LOB article are eligible for the benefits provided in Table 1 only if they satisfy one of the objective tests under the LOB article or obtain a favorable discretionary determination from the U.S. competent authority with regard to the specific benefits.

The treaty or protocol article describing each of these tests is identified in this table. It will assist taxpayers in completing the Form W-8BEN-E and Form 8833, Treaty-Based Return Position Disclosure under Section 6114 or 7701(b), if required to be filed with the IRS. However, you must check the text of the relevant LOB article to determine the particular requirements of those tests to make a final determination that you meet an LOB test.

Entities that are residents of a country whose income tax treaty with the United States does not contain a LOB article do not need to use Table 4. However, new treaties are regularly negotiated that will include LOB provisions, so it is important to regularly check this table for updates.