Wednesday, December 9, 2009

Protocol to the Income and Capital Tax Treaty Between the United States and France

On December 3, 2009, the U.S. Senate ratified the protocol, originally signed on January 13, 2009 (the “Protocol”), to the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Treaty”). That same day, French Law Number 2009-1471 was published in the French official journal, approving the Protocol. The Protocol has not entered into force.

The Protocol makes several significant changes to the Treaty. First, it eliminates source country withholding tax on royalty payments and certain dividends. In particular, the Protocol provides for an exemption from withholding tax on dividends received by a French company if it has owned for a 12-month period shares representing 80 percent or more of the voting power of its U.S. subsidiary, or, in the case of a U.S. company, 80 percent or more of the capital of its French subsidiary. The Protocol does not change the general 15 percent withholding tax rate and the reduced 5 percent withholding tax rate for dividends received from a 10 percent owned subsidiary in either case. Second, the Protocol clarifies the application of the Treaty to French qualified partnerships and fiscally transparent entities and replaces the current limitation of benefits provision. Third, the Protocol contains a mandatory arbitration procedure, similar to those contained in recent tax treaties between the United States and Belgium, Germany and Canada.

If the Protocol enters into force before the end of the 2009, it would become effective in three different stages: (1) provisions relating to withholding taxes would be effective as of January 1, 2009 and apply retroactively for payments made in 2009; (2) provisions relating to the mutual agreement and arbitration procedures would be effective on the date of entry into force; and (3) other provisions would be effective beginning on January 1, 2010.

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Thursday, December 3, 2009

House Passes Estate Tax Bill and Sends It to the Senate

On December 3, the House passed H.R. 4154 by a vote of 225-200, sending the Bill to the Senate for consideration. H.R. 4154 would make permanent the current marginal estate tax rate of 45% and provide that the applicable exclusion amount would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. However, House Ways and Means Committee member Rep. Kevin Brady (R-TX) stated that it is unlikely that the Senate will break from the health care debate and other issues already on its agenda to take up the Bill.

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Wednesday, December 2, 2009

House and Senate Prepare Proposals for Estate Tax Reform

On November 25, House Majority Leader Steny Hoyer (D-Md.) announced plans to bring H.R. 4154 (the Bill) to the House floor during the week of November 30, 2009. The Bill, introduced by House Ways and Means Committee member Rep. Earl Pomeroy (D-N.D.) would make the 2009 estate tax rates permanent, extending the current marginal tax rate of 45% rather than allowing the estate tax rate to sunset in 2010 and return to the marginal rate of 55% in 2011, as provided in the current law. It also repeals the carryover basis rules that were introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001 and scheduled to go into effect on January 1, 2010, thereby retaining the step-up in basis at death.

The Bill further provides that the applicable exclusion amount (that amount which is exempt from the federal estate tax) would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. The Bill does not address portability of the applicable exclusion amount between married couples. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. The Bill could be brought to the House floor by December 3, but it appears that there may be enough opponents of the House bill to block action in the Senate, including Republicans and several Democrats who favor lowering or abolishing the estate tax. The text of the Bill can be found here.

In the Senate, Senators Carper (D-DE) and Voinovich (R-OH) introduced bipartisan legislation (S.2784) on November 17, 2009 that would freeze the estate tax at 2009 levels, providing for a 45% marginal tax rate, which would remain constant, and a $3.5 million applicable exclusion amount, which would be indexed for inflation. The Senate bill would unify the gift and estate tax exemptions and would also provide for portability of any unused applicable exclusion amounts between spouses. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. There is no timetable for bringing the bill to the Senate floor. The text of the Senate bill can be found here.

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