New U.S. - U.K. Tax Treaty Eliminates Dividends Withholding

This week, Treasury Secretary John Snow and Tony Brenton, the United Kingdom’s Acting Ambassador to the United States, announced that a new income tax treaty between the two countries would go into effect starting April 1. Mr. Brenton commented that the agreement’s start date coincided with the start of the tax year in the United Kingdom.

According to Mr. Snow, the purpose of the treaty is to eliminate tax barriers and promote cross-border trade and investment. The treaty includes features to reach that goal, such as the elimination of withholding taxes on dividends paid by subsidiaries to parent companies. It also coordinates the tax treatment of pension plans in the two countries. Mr. Snow explained that the coordination of the pension rules "will allow individuals the freedom to move between our two countries for employment and advancement opportunities without fear that such moves will mean adverse tax consequences for their pension benefits."

When the treaty was originally signed in 2001, then-Treasury Secretary Paul O’Neill said that the agreement reflected the fact that the two countries have similar tax systems and high levels of investment in both directions. The treaty also deals with a number of other issues, including capital gains tax, dual resident companies, hybrid entities, and conduit arrangements.

The new treaty replaces an existing one, which dates back to 1980. Although the revised treaty was signed in July 2001 it couldn’t go into effect until legislators in both countries ratified it. The events of September 11, 2001, delayed ratification by the Senate until earlier this year.

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