TaxNewsFlash-United States

December 15, 2008
No. 2008-576

PRINTABLE VERSION

Protocol to United States-Canada Income Tax Treaty, and Income Tax Treaties with Iceland and Bulgaria Enter into Force Today

The U.S. Treasury Department announced today that the Protocol to the United States-Canada income tax treaty and two new tax treaties with Iceland and Bulgaria have entered into force.

New tax treaties (and accompanying Protocols) with Bulgaria and Iceland and a Protocol amending the existing tax treaty with Canada entered into force December 15, 2008.

Treasury reported that these agreements generally are effective for tax years beginning on or after January 1, 2009. However, certain provisions of the treaties and protocols have different effective dates.

Background

The treaty and first Protocol with Bulgaria was signed in Washington on February 23, 2007, and the second Protocol with Bulgaria was signed in Sofia on February 26, 2008.

The Protocol with Canada was signed on September 21, 2007.

The treaty and Protocol with Iceland was signed in Washington on October 23, 2007.

The Senate approved the new treaties and Protocols on September 23, 2008.

Protocol Amending Income Tax Treaty with Canada

Treasury reported that provisions of the fifth Protocol amend the existing United States-Canada income tax treaty (signed in 1980 and previously amended), include measures that provide for the:

Phased-in elimination of source-country withholding taxes on interest
Mandatory binding arbitration of certain cases that cannot be resolved by the competent authorities within a specific period

Text of the first through fourth Protocols and the income tax treaty is available on IRS Web site: http://www.irs.gov/businesses/international/article/0,,id=169503,00.html

For an electronic version of the text of the fifth Protocol to the United States-Canada income tax treaty, click here.

The provisions of the Protocol are effective on various dates in accordance with Article 27 of the Protocol. The provisions of the Protocol relating to taxes withheld at source are generally effective for amounts paid or credited on or after February 1, 2009. However, the provision providing for the reduction of the tax rate on related-party interest from 10% to 7% is effective retroactively for interest derived on or after January 1, 2008. Prudent taxpayers will review Article 27 for other applicable effective dates.

Income Tax Treaty with Iceland

Provisions of the new United States-Iceland income tax treaty and Protocol which replace the existing treaty (signed in 1975), include measures that provide for:

Reductions of source-country withholding taxes on certain dividends
Modern limitation on benefits provisions

For an electronic version of the text of the new income tax treaty with Iceland, click here.

Income Tax Treaty with Bulgaria

Provisions of the new treaty and Protocols with Bulgaria include:

Reductions of source-country withholding taxes on dividends, interest, and royalties
Elimination of source-country withholding taxes on interest paid to financial institutions and on interest and dividends paid to pension funds
Modern limitation of benefits provisions

For an electronic version of the new income tax treaty with Bulgaria, click here. For text of the related Protocols, click here.

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