Following the protocols – US Senate approves tax treaty protocols with Luxembourg, Switzerland, Japan and Spain

Eversheds Sutherland (US) LLPAfter numerous years in treaty limbo, the US Senate recently provided its advice and consent for ratification of four protocols with Luxembourg, Switzerland, Japan and Spain, setting the stage for the protocols to enter into force after an exchange of ratification instruments with the relevant jurisdictions. Each of the protocols had been “held” in the Senate Foreign Relations Committee for several years because of objections by Senator Rand Paul, a Republican Senator from Kentucky, over questions about the privacy of taxpayer information.

The Senate Foreign Relations Committee still has not acted on new income tax treaties with Hungary, Chile and Poland. Action is delayed on these treaties due to concerns about the interaction of these treaties with the recently enacted § 59A of the Internal Revenue Code, “base erosion anti-abuse tax.” Legislators want to ensure that the treaties will not override the application of § 59A.

The material provisions of each of the protocols is summarized below:

LUXEMBOURG

The Protocol Amending the Convention between the Government of the United States of America and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the Luxembourg Protocol) was signed on May 20, 2009. For the full text of the protocol, please see the following link: Luxembourg Protocol.

The Luxembourg Protocol makes various changes to the convention, but particularly broadens the scope of the information sharing provisions. The specific provisions are discussed more fully below.

Exchange of Information (Article 28)

The Luxembourg Protocol replaces Article 28 with a new exchange of information article that allows for easier exchange of information by the United States and Luxembourg for purposes of carrying out the convention or each of such country’s domestic law.

Under the new Article 28, the tax authorities of each country are allowed to exchange information that is foreseeably relevant in carrying out the provisions of the convention or the domestic tax laws of either country, including information that would otherwise be protected by bank secrecy laws. Specifically, each of the United States and Luxembourg commits to providing information to the other, regardless of whether the non-requesting state needs or wants the information, and explicitly states that information requests cannot be denied solely because a bank, other financial institution, agent, nominee or fiduciary holds the requested information. Moreover, the exchange of information provision is not restricted to taxes covered under the convention.

Significantly, the information exchange provision in the protocol also covers non-US or non-Luxembourg persons if there is a connection to the applicable jurisdiction (e.g., a bank account, permanent establishment).

Eversheds Sutherland Observation

The Luxembourg Protocol continues what has been over a decade-long push by the United States, and more recently the Organization for Economic Cooperation and Development (OECD), to increase information sharing among treaty partners. The change to the information exchange provision is a response to private banking scandals, where US taxpayers were shielded by domestic bank secrecy laws that may have helped certain US taxpayers evade US tax obligations. The updated provisions reflect the United States’ attempt to ensure that the exchange of information is not hindered due to domestic bank secrecy laws and to expand the US exchange of information network.

In years since the 2009 signature date of the Luxembourg Protocol, information sharing has become a common fact-of-life for many multinational taxpayers, meaning that transactions involving multiple jurisdictions are likely to be scrutinized by several taxing authorities. The new Article 28 incorporates the standard OECD language, which in turn is substantially similar to Article 26 of the 2006 Model Treaty. The language is also consistent with the standard codified in § 7602 of the Internal Revenue Code.

The Luxembourg Protocol also provides the legal basis of the Intergovernmental Agreement (IGA) between the United States and Luxembourg for purposes of the Foreign Account Tax Compliance Act (FATCA). The IGA specifically referenced the Luxembourg Protocol, but since the Luxembourg Protocol was not in force, the Luxembourg tax authorities have been providing information to the Internal Revenue Service based on the OECD multilateral convention on mutual administrative assistance, which raised legal questions due to bank secrecy rules. Thus, even though exchange of information in light of FATCA was already occurring, the Luxembourg Protocol clarifies the legal basis for this exchange of information.

Effective Date

The Luxembourg Protocol will enter into force once there is formal notification by each of the United States and Luxembourg of ratification. After entry into force, requests can be made for tax years beginning on or after January 1, 2009.

Eversheds Sutherland Observation

The effective date of the information exchange provision is retroactive and may be used by authorities to obtain information, including bank information, from as far back as tax years beginning on or after January 1, 2009.

SWITZERLAND

The Protocol Amending the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (the Switzerland Protocol) was signed on September 23, 2009. For the full text of the protocol, please see the following link: Switzerland Protocol.

The Switzerland Protocol makes various changes to the convention:

  • Broadens the scope of the information sharing provisions;
  • Implements mandatory arbitration procedures for certain cases; and
  • Provides a 0% withholding rate for dividends paid to certain individual retirement accounts.

These and other items are discussed more fully below.

Mutual Agreement Procedure (Article 25)

The Switzerland Protocol incorporates a mutual agreement procedure under Article 25.

The mandatory arbitration procedure under the Switzerland Protocol applies to certain cases that the US and Swiss competent authorities have been unable to resolve after a reasonable period of time. The arbitration panel’s determination for a case is binding on both the United States and Switzerland, unless any concerned person does not accept the determination. Unresolved cases are not eligible for arbitration if the decision has been rendered by a US or Swiss court or administrative tribunal. This arbitration procedure is similar to the procedures outlined in the US income tax conventions with Belgium, Canada, France and Germany, as well as the Japan Protocol and the Spain Protocol.

Eversheds Sutherland Observation

The new mutual agreement procedure provisions are generally helpful to taxpayers. Oftentimes, taxpayers that submit disputes to competent authority are left in a state of limbo waiting for the competent authorities of the contracting states to reach a resolution. Under the arbitration procedures, if the competent authorities are unable to reach a conclusion within two years or other such time period agreed upon by the competent authorities, the new mutual agreement procedure provisions require the competent authorities to allow taxpayers to submit such disputes to an arbitration panel that will then reach a resolution with respect to the taxpayer’s issue. Additionally, the arbitration procedures are binding on the contracting states only if the taxpayer accepts the decision of the arbitration panel. A taxpayer continues to have other avenues to resolve the dispute should the arbitration panel reach a result that is unfavorable to the taxpayer.

Exchange of Information (Article 26)                                   

The Switzerland Protocol modifies the exchange of information provisions of Article 26 and the 1996 protocol that was executed and ratified with the current version of the convention. Conforming with the standard codified in § 7602 of the Internal Revenue Code, the Switzerland Protocol allows the tax authorities of each country to exchange information that may be relevant in carrying out the provisions of the convention or the domestic tax laws of either country, including information that would otherwise be protected by bank secrecy laws. The exchange of information is not restricted by the taxes covered under the convention. The information exchange provisions also cover certain non-US or non-Switzerland residents to the extent there is a connection to either jurisdiction (e.g., a bank account, permanent establishment). The Switzerland Protocol expands the current convention exchange of information provisions. Absent the provisions in the Switzerland Protocol, only information that is necessary to prevent tax fraud or related fraudulent activities with respect to taxes covered under the convention is permitted to be exchanged.

Eversheds Sutherland Observation

The Switzerland Protocol continues what has been over a decade-long push by the United States, and more recently the OECD, to increase information sharing among treaty partners. The change to the information exchange provision is a response to private banking scandals, where US taxpayers were shielded by domestic bank secrecy laws that may have helped certain US taxpayers evade US tax obligations. The updated provisions reflect the United States’ attempt to ensure that the exchange of information is not hindered due to domestic bank secrecy laws and to expand the US exchange of information network. Also, the Switzerland Protocol provides a lower threshold as information can be exchanged if such information may be relevant to carrying out the domestic tax laws and it does not require fraud. As noted above, the lower threshold for information exchange was the stated reason that this and the other protocols were being held up in the Senate Foreign Relations Committee.

Since the 2009 signature date of the Switzerland Protocol, information sharing has become common for many multinational taxpayers, meaning that transactions involving multiple jurisdictions are likely to be scrutinized by multiple taxing authorities.

Dividends (Article 10)

The Switzerland Protocol revises Article 10 to exempt dividends paid to pensions, retirement arrangements and individual retirement accounts from withholding unless the payor is a company that is controlled by the payee. Previously, individual retirement accounts did not qualify for the exemption. However, this provision is not self-executing. To qualify for the exemption, the Swiss and US competent authorities are required to agree that such payee’s classification generally corresponds to a pension, retirement arrangement or individual retirement account that is respected for tax purposes in the other country. Also, the payee must satisfy the limitation of benefits provision in paragraph 2 of Article 22.

Eversheds Sutherland Observation

As this provision is not self-executing with respect to the status of the payee, a memorandum of understanding is required to be entered by the Swiss and US competent authorities for this provision to be effective and to allow payees to obtain these benefits.

Effective Dates

The Switzerland Protocol will enter into force once the United States and Switzerland exchange instruments of ratification.

Specific provisions have different effective dates once the Switzerland Protocol is entered into force. Amounts paid or credited are eligible for the withholding exemption under the Switzerland Protocol if such amounts are paid or credited on or after January 1 of the year following the date the Switzerland Protocol is entered into force. The arbitration provisions apply to cases that are under consideration by the competent authorities starting on the date the Switzerland Protocol is entered into force.

The exchange of information provisions apply to requests made on or after the date the Switzerland Protocol is entered into force. However, information obtained under these provisions may relate to prior years. The exchange of information provisions regarding information held by banks and financial institutions applies to information relating to any date beginning on or after the Switzerland Protocol’s September 23, 2009, signature date. The other exchange of information provisions are effective with respect to information that relates to taxable periods beginning on or after January 1, 2010.

Eversheds Sutherland Observation

The effective date of the information exchange provisions are retroactive and may be used by authorities to obtain information, including bank information, from as far back as September 23, 2009.

JAPAN

The Protocol Amending the Convention between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Protocol (the Japan Protocol) was signed on January 24, 2013. For the full text of the protocol, please see the following link: Japan Protocol.

The Japan Protocol makes various changes to the convention:

  • Broadens availability of 0% withholding rates on interest and dividends;
  • Implements mandatory arbitration procedures for certain cases; and
  • Incorporates provisions that require the contracting states to assist each other in the collection of certain revenue claims.

These and other items are discussed more fully below.

Interest (Article 11) and Dividends (Article 10)

The Japan Protocol generally liberalizes who can claim 0% withholding on interest under Article 11. As described below, 0% withholding on interest was previously reserved for a set group of persons, with all others eligible for (in a best-case scenario) 10% withholding on interest paid by a resident of one jurisdiction to a resident in the other jurisdiction. The Japan Protocol retains 10% withholding for “contingent” interest and excess inclusions with respect to residual interests from real estate mortgage investment conduits, consistent with the 2006 US Model Treaty.

Eversheds Sutherland Observation

The Japan Protocol dramatically expands the payees eligible to claim withholding exemptions with respect to interest payments, bringing the convention in line with most of the United States’ major trading partners. The existing provisions of Article 11 essentially limit the available interest withholding exemption to the US or Japanese governments (and instruments guaranteed insured, or financed by such governments), banks, insurance companies, registered securities dealers, enterprises primarily engaged in lending or deposit activities, certain pension funds, and certain trade receivables. All other payees are eligible for a reduced 10% withholding rate on interest, but not an exemption.

The Japan Protocol reduces the ownership and holding requirements to claim an exemption from withholding on dividends. Specifically, the current treaty requires ownership of “more than 50% of the voting stock of the corporation paying the dividend.” The Japan Protocol changes this threshold to “at least 50%.” The Japan Protocol also reduces the stock holding period to be eligible for the exemption from 12 months to 6 months.

Eversheds Sutherland Observation

The existing provision of the Japanese treaty was already very favorable with respect to the requirements of 0% withholding for dividends, and the Japan Protocol is even more so. Most US income tax treaties with a dividend withholding exemption, in addition to other specific requirements, require a holding of at least 80% of the stock of the payor for 12 months before the applicable dividend.

Mutual Agreement Procedure (Article 25)

The Japan Protocol adds new paragraphs 5 through 7 to Article 25. These paragraphs implement a mutual agreement procedure.

The mandatory Japanese procedure under the Japan Protocol applies to certain cases that the US and Japanese competent authorities have been unable to resolve. The arbitration panel will deliver its determination in writing. Notably, a person presenting the case is not required to accept the resolution of the arbitration panel. However, if the presenter does accept the resolution, such resolution is treated as constituting a resolution by mutual agreement under Article 25, which has the effect of binding the contracting states.

This arbitration procedure is similar to the procedures outlined in the US income tax conventions with Belgium, Canada, France and Germany, as well as the Switzerland Protocol and the Spain Protocol.

Eversheds Sutherland Observation

The new mutual agreement procedure provisions are generally helpful to taxpayers. Oftentimes, taxpayers that submit disputes to competent authority are left in a state of limbo waiting for the competent authorities of the contracting states to reach a resolution. Under the arbitration procedures, if the competent authorities are unable to reach a conclusion within two years or other such time period agreed upon by the competent authorities, the new mutual agreement procedure provisions require the competent authorities to allow taxpayers to submit such disputes to an arbitration panel that will then reach a resolution with respect to the taxpayer’s issue. Additionally, the arbitration procedures are binding on the contracting states only if the taxpayer accepts the decision of the arbitration panel. A taxpayer continues to have other avenues to resolve the dispute should the arbitration panel reach a result that is unfavorable to the taxpayer.

Because the arbitration panel’s decision must be one of the resolutions proposed by the contracting states, these changes put pressure on competent authorities to settle claims, as the panel has no ability to reach a decision that lies between those competing resolutions.

Assistance in the Collection of Certain Revenue Claims (Article 27)

The Japan Protocol amends Article 27 to require the contracting states to assist each other in collecting taxes, interest, costs of collection, and related penalties with respect to taxes covered by the convention and certain listed taxes upon request. The request for information must be withdrawn if the requesting contracting state loses its right under domestic law to collect the revenue or suspends collection of the revenue according to its domestic law.

However, this assistance is limited. With respect to a company, the assistance is available only where: (1) a claim is not eligible to be resolved through mutual agreement procedure; (2) a claim has been agreed to through mutual agreement procedure; or (3) a claim involves a company that has terminated the mutual agreement procedure.

Exchange of Information (Article 26)

The Japan Protocol expands the information that a contracting state is required to exchange with the other contracting state. Article 26 of the Japan Protocol requires disclosure of information that is “foreseeably relevant” for certain administrative or enforcement purposes, including information from a bank. Before this amendment, the Article had only required disclosure of “relevant” information. The language is also consistent with the standard codified in § 7602 of the Internal Revenue Code. The exchange of information is not restricted by the taxes covered under the convention. However, under the amended provision, a contracting state is not required to reveal certain confidential communications between a client and an attorney.

Japanese Foreign Tax Credit and Dividend Provisions (Article 23)

The Japan Protocol amends Article 23(1)(a) to include a re-sourcing rule, which is intended to ensure that a Japanese resident can obtain Japanese foreign tax credits for US taxes paid in cases where the United States has the primary taxing rights over an item of income. Specifically under the re-sourcing rule, if the United States can tax an item of income beneficially owned by a resident of Japan, that income will be deemed to arise from sources within the United States for Japanese foreign tax credit purposes.

Eversheds Sutherland Observation

If, but for the resourcing provision, a payment to a Japanese person would be considered US source income, the income is treated as Japan source income under the resourcing provision, and foreign tax credits are available with respect to such income. However, the resourced income is treated as arising from a separate category of income (the treaty category), meaning that a separate foreign tax credit limitation applies to the resourced income.

The Japan Protocol also amends Article 23(b). Under the amended provision, dividends paid by a US company to a Japanese company are excluded from the basis upon which Japanese tax is imposed, so long as the Japanese company that received the dividend owned at least 10% of the shares of the US company paying the dividend for a period of six months before the date the obligation to pay the dividend arose.

Teachers and Researchers (Article 20)

The Japan Protocol deletes Article 20 in its entirety, which had previously allowed for individuals who were a resident of either country immediately before coming to the other country for the purpose of teaching or performing research at an educational institution to be exempt on the income from that teaching or researching for two years. Persons who currently enjoy this benefit will be “grandfathered” after the Japan Protocol goes into force for the period that they otherwise would be entitled, had the Japan Protocol not entered into force. The provision was deleted to bring the Japanese treaty into “conformity” with the current treaty policies of the United States and Japan.

Eversheds Sutherland Observation

This provision provided a benefit for US and Japanese academics, but was not limited to teachers in colleges and universities. Although the US treaty policy does not include a special teachers/researchers article because the Dependent Personal Services article would apply, similar provisions are included in many US treaties when the treaty partner requests such a provision. Since there is a grandfather provision, it may be advisable for taxpayers to claim this benefit before the Japan Protocol is entered into force.

Effective Dates

The Japan Protocol enters into force on the date that instruments of ratification are exchanged. With respect to withholding taxes, the Japan Protocol is effective for amounts that are paid or credited after the first day of the third month following the date on which the protocol enters into force. With respect to other taxes, the Japan Protocol is effective on the first day of January following the date on which the protocol enters into force. Additionally, the information exchange and collection provisions are effective with respect to outstanding claims from the date the Japan Protocol enters into force.

SPAIN

The Protocol Amending the Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Spain Protocol) was signed on January 14, 2013. For the full text of the protocol, please see the following link: Spain Protocol.

The Spain Protocol makes various changes to the convention:

  • Modifies withholding rates on certain dividends, royalties and interest;
  • Updates the limitation on benefits and exchange of information provisions; and
  • Implements mandatory arbitration procedures for certain cases.

These and other items are discussed more fully below.

Dividends (Article 10), Interest (Article 11) and Royalties (Article 12)

The Spain Protocol reduces withholding taxes on dividends to 0% and 15% depending on the applicable payee. The 15% rate applies in most cases. However, withholding taxes on dividends are reduced to 5% if the dividend’s beneficial owner is a company that owns 10% (previously 25%) of the voting stock of the company paying the dividends. Moreover, if the dividend’s beneficial owner is a company that owns at least 80% of the voting stock (directly or indirectly) of the company paying the dividends for at least 12 months and meets certain tests of Article 17’s Limitation on Benefits provision, a 0% rate applies. In addition, pension funds that are exempt from tax or subject to a 0% rate of tax are also eligible for 0% withholding on dividends to the extent that the applicable dividends are not derived from the carrying on of a trade or business by the pension fund or an associated enterprise.

Eversheds Sutherland Observation

The dividends article of the Spain Protocol is a substantial modernization and brings that provision in line with most of the European Union (EU) treaties. Before the Spain Protocol’s effective date of this provision, the convention reduces dividend withholding taxes to at best 10%, while the new provision under the Spain Protocol allows for 0% or 5% withholding to the extent that additional requirements are met.

Generally, under the Spain Protocol, most beneficial owners of interest of the United States or Spain are eligible for 0% withholding taxes. Previously, a 10% rate applied except in certain limited instances. The Spain Protocol retains only 10% withholding for “contingent” interest and excess inclusions with respect to residual interests from real estate mortgage investment conduits that are similarly carved out of 0% withholding under the 2006 US Model Treaty.

Eversheds Sutherland Observation

The new interest article of the Spain Protocol is also a substantial modernization and likewise brings that provision in line with most of the EU treaties. The 0% withholding tax rate was previously available only to the US or Spanish governments (and instruments guaranteed insured, or financed by governments), banks, or financing companies providing loans of five years or more and interest paid in connection with the sale on credit of industrial, commercial or scientific equipment.

Like the new interest provisions, United States and Spanish beneficial owners of royalties are also generally eligible for 0% withholding under the Spain Protocol.

Eversheds Sutherland Observation

Again, the 0% rate for royalties is a significant modification and is consistent with the 2006 Model Treaty and most of the US income tax treaties with EU members. This change has particular benefits for media companies, most significantly for the licensees of sporting rights and broadcasts. Before the date the Spain Protocol is entered into force and the effective date of this provision, rates of 5%, 8% and 10% are applicable based upon the rights granted. A 5% rate is applicable for royalties received for copyrights of literacy, dramatic, musical or artistic works. The 8% rate is applicable for royalties paid with respect to cinematographic, films, tapes or other means of transmission of image or sound; royalties for the right to use industrial commercial or scientific equipment; and royalties for the copyright of scientific work. The 10% rate is applicable for all other cases.

Limitation on Benefits Provision (Article 17)

The Spain Protocol replaces the limitation of benefits article with provisions that generally align with the 2006 Model Treaty, but also includes several additional tests. The Spain Protocol adopts most of the “qualified persons” identified by the 2006 Model Treaty (i.e., individuals, government entities, publicly traded companies and certain of their subsidiaries, tax-exempt entities, companies that meet the ownership and base erosion tests, companies that meet the active trade or business test, and competent authority relief). However, the Spain Protocol also extends treaty benefits to entities that perform headquarter functions and companies that can satisfy a derivative benefits and base erosion test.

The more novel headquarters test, which is substantially similar to the test in the 2016 Model US tax treaty (the 2016 Model Treaty), allows for a company that is a resident of a contracting state to qualify for treaty benefits if it is the headquarters company of a multinational corporate group that supervises other members of the group. Supervisory activities are the material consideration, and ownership of the group is not required. In addition, such headquarters company and/or its group must also meet the following requirements and threshold: (1) provide substantial portion of the overall supervision of the group (which cannot be principally group financing); (2) the corporate group consists of corporations resident and actively engaged in a business in at least five countries (or five groupings of companies) that generate 10% of the gross income of the group; (3) business activities in any one country (other than the headquarters company’s residence state) is less than 50% of the group’s gross income; (4) no more than 25% of the headquarters company’s gross income is derived from the other contracting state; (5) such headquarters company has and exercises independent discretionary authority to carry out its supervisory and administrative functions; (6) the headquarters company must be subject to tax in its residency state like any other company engaged in an active trade or business (i.e., it cannot benefit from a special tax rate or artificially low tax base because it is a headquarters company); and (7) the income in the other contracting state is derived in connection with, or incidental to, the larger corporate group’s active trade or business described in (2) above.

As indicated above, a taxpayer that fails to qualify for full treaty benefits may still be entitled to treaty benefits for certain items of income under the active trade of business test. Moreover, competent authorities can also grant treaty benefits where other tests cannot be met.

The Spain Protocol also contains an anti-abuse rule for certain triangular structures. If an entity derives income from the non-resident country, and that income is attributable to a permanent establishment the entity has in a third state, the non-resident country may impose a withholding tax of up to 15% on payments. However, to impose the withholding tax, the combined tax actually paid on the income in resident country and the third state must be less than 60% of the general rate of company tax applicable in the resident country.

Eversheds Sutherland Observation

The Spain Protocol’s limitation on benefits provision is modernization of the prior article and is consistent with many of the US treaties with other EU countries. Nonetheless, there are several interesting features of the above tests:

  • The publicly traded test allows in certain circumstances for a company to be traded on an established exchange in Toronto, Mexico City and Buenos Aires.
  • Consistent with the 2006 Model Treaty but inconsistent with some other treaties with close trading partners (g., the United Kingdom), the ownership base erosion test requires that a resident of a contracting state be owned at least 50%, directly or indirectly, by residents of that same contracting state and that each applicable intermediate owner be that same state. By way of example, for a Spanish company claiming benefits for royalties paid by its US Subsidiary, that Spanish company would need to be owned at least 50% by Spanish individuals, the Spanish government (and its political subdivisions and instrumentalities), Spanish tax-exempt entities or Spanish publicly traded entities to meet the ownership prong of the ownership base erosion test. Any intermediate entities between such beneficial owners and the Spanish company would also need to be Spanish. The Spain Protocol includes a similar rule for intermediate entities with respect to the ownership prong of the derivative benefits test (i.e., each intermediate owner has to be an EU or NAFTA entity).
  • Also with respect to the derivative benefits test, the Spain Protocol takes into account 0% withholding on dividends, interest and royalties under the EU’s applicable directives regardless of whether the applicable income tax treaties between EU members have been updated to reflect a 0% withholding rate on such income.
  • The addition of the headquarters provision is interesting as this provision was not in the 2006 Model Treaty and its inclusion hints at Spain’s efforts to be a holding company jurisdiction. As indicated above, it is substantially similar to a comparable provision in the 2016 Model Treaty and provides that treaty benefits are available for companies resident in the United States or Spain that administer or supervise a larger multinational group. With respect to the applicable numerical ratios found in the headquarters test and like the 2016 Model Treaty, the Spain Protocol makes clear that such ratios can be met by averaging the applicable gross income of the preceding four years.

Exchange of Information (Article 27)

The Spain Protocol also replaces the exchange of information article with one similar to the 2006 Model Treaty. Article 27 of the Spain Protocol requires disclosure of information that is “foreseeably relevant” for certain administrative or enforcement purposes. Before this amendment, the Article had required disclosure only of “necessary” information. The language is also consistent with the standard codified in § 7602 of the Internal Revenue Code. The exchange of information is not restricted by the taxes covered under the convention. The information exchange provisions also cover certain non-US or non-Spain residents to the extent there is a connection to jurisdiction (e.g., a bank account, permanent establishment).

Mutual Agreement Procedure (Article 26)

The Spain Protocol adds rules for arbitration when the competent authorities cannot reach a negotiated agreement. The arbitration panel’s determination for a case is binding on both the United States and Spain, unless the presenter of the case does not accept the determination. The panel is required to select one of the proposed resolutions provided by the competent authorities. The procedure is similar to the procedures outlined in the US income tax conventions with Belgium, Canada, France and Germany, as well as the Japan Protocol and the Switzerland Protocol.

Eversheds Sutherland Observation

The new mutual agreement procedure provisions are generally helpful to taxpayers. Oftentimes, taxpayers that submit disputes to competent authority are left in a state of limbo waiting for the competent authorities of the contracting states to reach a resolution. Under the arbitration procedures, if the competent authorities are unable to reach a conclusion within two years or other such time period agreed upon by the competent authorities, the new mutual agreement procedure provisions require the competent authorities to allow taxpayers to submit such disputes to an arbitration panel that will then reach a resolution with respect to the taxpayer’s issue. Additionally, the arbitration procedures are binding on the contracting states only if the taxpayer accepts the decision of the arbitration panel. A taxpayer continues to have other avenues to resolve the dispute should the arbitration panel reach a result that is unfavorable to the taxpayer.

Because the arbitration panel’s decision must be one of the resolutions proposed by the contracting states, these changes put pressure on competent authorities to settle claims, as the panel has no ability to reach a decision that lies between those competing resolutions.

Fiscally Transparent Entities (Article 3)

The Spain Protocol adds a new provision on the treatment of an item of income derived through a fiscally transparent entity organized either in: (1) Spain or the United States; or (2) another country that has an agreement with the source state containing an exchange of information on tax matters provision when the item of income is derived by a resident of a Contracting State and is treated as the income item of that resident by that Contracting State. Consistent with many treaties, the US 2006 Model Income Tax Treaty and US income tax policy, a resident may claim treaty benefits for an item of income paid to a fiscally transparent entity only if either the United States or Spain treats the entity as fiscally transparent. The characterization by the third-party country is irrelevant for purposes of this provision. In addition, to be eligible for the benefits of the treaty, such resident must still satisfy the other requirements of the convention.

Eversheds Sutherland Observation

Before the addition of this provision, the regulations under § 894(c) of the Internal Revenue Code applied and potentially limited the availability of treaty benefits in the case of transactions with fiscally transparent entities. Those regulations can be a trap for the unwary, so the addition of this provision is positive for taxpayers. For this provision to apply, an entity must be treated as fiscally transparent under the laws of either the United States or Spain, even if the entity is not organized in either country. The characterization of an entity by a third country is irrelevant even if the entity is organized in that third country. Third-party residents may claim a benefit under a third-party treaty with either the United States or Spain if either the United States or Spain characterizes an entity as fiscally transparent.

Effective Dates

The Spain Protocol will enter into force three months after the later date each country provides notification to the other country through diplomatic channels. The Spain Protocol withholding rates will apply to income paid or credited on or after the date the Spain Protocol is entered into force. The Spain Protocol will have effect with respect to taxes determined with reference to a taxable period beginning on or after the date on which the protocol enters into force.

With respect to certain provisions of the Spain Protocol’s arbitration article, certain procedures are not effective for cases that are under consideration by the competent authorities as of the date on which the Spain Protocol enters into force. For existing cases, certain provisions shall have effect only on the date on which the competent authorities agree in writing on their applicability. Similarly, the commencement date for cases that are under consideration by the competent authorities as of the date on or after entry into force, but before such provisions have effect, is the date on which the competent authorities have agreed in writing on their applicability.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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