Internal Revenue Service (I.R.S.)

 

Miscellaneous

 

UNITED STATES-UNITED KINGDOM ESTATE AND GIFT TAX CONVENTION [FN1]

 

1980

 

Convention signed at London October 19, 1978;

 

Ratification advised by the Senate of the United States of America July 9, 1979;

 

Ratified by the President of the United States of America August 24, 1979;

 

Ratified by the United Kingdom of Great Britain and Northern Ireland June 14, 1979;

 

Ratifications exchanged at Washington October 11, 1979;

 

Proclaimed by the President of the United States of America December 6, 1979;

 

Entered into force November 11, 1979.

 

BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

 

A PROCLAMATION

 

CONSIDERING THAT:

 

The Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts was signed at London on October 19, 1978, the text of which is hereto annexed;

 

The Senate of the United States of America by its resolution of July 9, 1979, two-thirds of the Senators present concurring therein, gave its advice and consent to ratification of the Convention;

 

The Convention was ratified by the President of the United States of America on August 24, 1979, in pursuance of the advice and consent of the Senate, and was ratified on the part of the United Kingdom of Great Britain and Northern Ireland on June 14, 1979;

 

It is provided in Article 14 of the Convention that the Convention shall enter into force immediately after the expiration of thirty days following the date on which the instruments of ratification are exchanged;

 

The instruments of ratification of the Convention were exchanged at Washington on October 11, 1979, and accordingly the Convention entered into force on November 11, 1979;

 

NOW, THEREFORE, I, Jimmy Carter, President of the United States of America, proclaim and make public the Convention to the end that it be observed and fulfilled with good faith on and after November 11, 1979, by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof.

 

IN TESTIMONY WHEREOF, I have signed this proclamation and caused the Seal of the United States of America to be affixed.

 

DONE at the city of Washington this sixth day of December in the year of our Lord one thousand nine hundred seventy-nine and of the Independence of the United States of America the two hundred fourth.

 

By the President:

JIMMY CARTER

 

CYRUS VANCE,

Secretary of State

 

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES OF DECEASED PERSONS AND ON GIFTS

 

The Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland;

 

Desiring to conclude a new Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates of deceased persons and on gifts;

 

Have agreed as follows:

 

ARTICLE 1 SCOPE

 

This Convention shall apply to any person who is within the scope of a tax which is the subject of this Convention.

 

ARTICLE 2 TAXES COVERED

 

(1) The existing taxes to which this Convention shall apply are:

 

(a) in the United States: the Federal gift tax and the Federal estate tax, including the tax on generation-skipping transfers; and

 

(b) in the United Kingdom: the capital transfer tax.

 

(2) This Convention shall also apply to any identical or substantially similar taxes which are imposed by a Contracting State after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any changes which have been made in their respective taxation laws.

 

ARTICLE 3 GENERAL DEFINITIONS

 

(1) In this Convention:

 

(a) the term "United States" means the United States of America, but does not include Puerto Rico, the Virgin Islands, Guam or any other United States possession or territory;

 

(b) the term "United Kingdom" means Great Britain and Northern Ireland;

 

(c) the term "enterprise" means an industrial or commercial undertaking;

 

(d) the term "competent authority" means:

 

(i) in the United States: the Secretary of the Treasury or his delegate, and

 

(ii) in the United Kingdom: the Commissioners of Inland Revenue or their authorised representative;

 

(e) the term "nationals" means:

 

(i) in relation to the United States, United States citizens, and

 

(ii) in relation to the United Kingdom, any citizen of the United Kingdom and Colonies, or any British subject not possessing that citizenship or the citizenship of any other Commonwealth country or territory, provided in either case he had the right of abode in the United Kingdom at the time of the death or a transfer;

 

(f) the term "tax" means:

 

(i) the Federal gift tax or the Federal estate tax, including the tax on generation-skipping transfers, imposed in the United States, or

 

(ii) the capital transfer tax imposed in the United Kingdom, or

 

(iii) any other tax imposed by a Contracting State to which this Convention applies by virtue of the provisions of paragraph (2) of Article 2, as the context requires; and

 

(g) the term "Contracting State" means the United States or the United Kingdom as the context requires.

 

(2) As regards the application of the Convention by a Contracting State, any term not otherwise defined shall, unless the context otherwise requires and subject to the provisions of Article 11 (Mutual Agreement Procedure), have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of the Convention.

 

ARTICLE 4 FISCAL DOMICILE

 

(1) For the purposes of this Convention an individual was domiciled:

 

(a) in the United States: if he was a resident (domiciliary) thereof or if he was a national thereof and had been a resident (domiciliary) thereof at any time during the preceding three years; and

 

(b) in the United Kingdom: if he was domiciled in the United Kingdom in accordance with the law of the United Kingdom or is treated as so domiciled for the purpose of a tax which is the subject of this Convention.

 

(2) Where by reason of the provisions of paragraph (1) an individual was at any time domiciled in both Contracting States, and

 

(a) was a national of the United Kingdom but not of the United States, and

 

(b) had not been resident in the United States for Federal income tax purposes in seven or more of the ten taxable years ending with the year in which that time falls, he shall be deemed to be domiciled in the United Kingdom at that time.

 

(3) Where by reason of the provisions of paragraph (1) an individual was at any time domiciled in both Contracting States, and

 

(a) was a national of the United States but not of the United Kingdom, and

 

(b) had not been resident in the United Kingdom in seven or more of the ten income tax years of assessment ending with the year in which that time falls, he shall be deemed to be domiciled in the United States at that time. For the purposes of this paragraph, the question of whether a person was so resident shall be determined as for income tax purposes but without regard to any dwelling-house available to him in the United Kingdom for his use.

 

(4) Where by reason of the provisions of paragraph (1) an individual was domiciled in both Contracting States, then, subject to the provisions of paragraphs (2) and (3), his status shall be determined as follows:

 

(a) the individual shall be deemed to be domiciled in the Contracting State in which he had a permanent home available to him. If he had a permanent home available to him in both Contracting States, or in neither Contracting State, he shall be deemed to be domiciled in the Contracting State with which his personal and economic relations were closest (centre of vital interests);

 

(b) if the Contracting State in which the individual's centre of vital interests was located cannot be determined, he shall be deemed to be domiciled in the Contracting State in which he had an habitual abode;

 

(c) if the individual had an habitual abode in both Contracting States or in neither of them, he shall be deemed to be domiciled in the Contracting State of which he was a national; and

 

(d) if the individual was a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

 

(5) An individual who was a resident (domiciliary) of a possession of the United States and who became a citizen of the United States solely by reason of his

 

(a) being a citizen of such possession, or

 

(b) birth or residence within such possession, shall be considered as neither domiciled in nor a national of the United States for the purposes of this Convention.

 

ARTICLE 5 TAXING RIGHTS

 

(1)(a) Subject to the provisions of Articles 6 (Immovable Property (Real Property)) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) and the following paragraphs of this Article, if the decedent or transferor was domiciled in one of the Contracting States at the time of the death or transfer, property shall not be taxable in the other State.

 

(b) Sub-paragraph (a) shall not apply if at the time of the death or transfer the decedent or transferor was a national of that other State.

 

(2) Subject to the provisions of the said Articles 6 and 7, if at the time of the death or transfer the decedent or transferor was domiciled in neither Contracting State and was a national of one Contracting State (but not of both), property which is taxable in the Contracting State of which he was a national shall not be taxable in the other Contracting State.

 

(3) Paragraphs (1) and (2) shall not apply in the United States to property held in a generation-skipping trust or trust equivalent on the occasion of a generation-skipping transfer; but, subject to the provisions of the said Articles 6 and 7, tax shall not be imposed in the United States on such property if at the time when the transfer was made the deemed transferor was domiciled in the United Kingdom and was not a national of the United States.

 

(4) Paragraphs (1) and (2) shall not apply in the United Kingdom to property comprised in a settlement; but, subject to the provisions of the said Articles 6 and 7, tax shall not be imposed in the United Kingdom on such property if at the time when the settlement was made the settlor was domiciled in the United States and was not a national of the United Kingdom.

 

(5) If by reason of the preceding paragraphs of this Article any property would be taxable only in one Contracting State and tax, though chargeable, is not paid (otherwise than as a result of a specific exemption, deduction, exclusion, credit or allowance) in that State, tax may be imposed by reference to that property in the other Contracting State notwithstanding those paragraphs.

 

(6) If at the time of the death or transfer the decedent or transferor was domiciled in neither Contracting State and each State would regard any property as situated in its territory and in consequence tax would be imposed in both States, the competent authorities of the Contracting States shall determine the situs of the property by mutual agreement.

 

ARTICLE 6 IMMOVABLE PROPERTY (REAL PROPERTY)

 

(1) Immovable property (real property) may be taxed in the Contracting State in which such property is situated.

 

(2) The term "immovable property" shall be defined in accordance with the law of the Contracting State in which the property in question is situated, provided always that debts secured by mortgage or otherwise shall not be regarded as immovable property. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats, and aircraft shall not be regarded as immovable property.

 

(3) The provisions of paragraphs (1) and (2) shall also apply to immovable property of an enterprise and to immovable property used for the performance of independent personal services.

 

ARTICLE 7 BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT AND ASSETS PERTAINING

 

TO A FIXED BASE USED FOR THE PERFORMANCE OF INDEPENDENT PERSONAL SERVICES

 

(1) Except for assets referred to in Article 6 (Immovable Property (Real Property)) assets forming part of the business property of a permanent establishment of an enterprise may be taxed in the Contracting State in which the permanent establishment is situated.

 

(2)(a) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

 

(b) The term "permanent establishment" includes especially:

 

(i) a branch;

 

(ii) an office;

 

(iii) a factory;

 

(iv) a workshop; and

 

(v) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.

 

(c) A building site or construction or installation project constitutes a permanent establishment only if it lasts for more than twelve months.

 

(d) Notwithstanding the preceding provisions of this paragraph, the term "permanent establishment" shall be deemed not to include:

 

(i) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

 

(ii) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

 

(iii) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

 

(iv) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;

 

(v) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; or

 

(vi) the maintenance of a fixed place of business solely for any combination of activities mentioned in paragraphs (i)--(v) of this sub-paragraph.

 

(e) Notwithstanding the provisions of sub-paragraphs (a) and (b) where a person--other than an agent of an independent status to whom sub-paragraph (f) applies--is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in subparagraph (d) which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that sub-paragraph.

 

(f) An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

 

(g) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other.

 

(3) Except for assets described in Article 6 (Immovable Property (Real Property)), assets pertaining to a fixed base used for the performance of independent personal services may be taxed in the Contracting State in which the fixed base is situated.

 

ARTICLE 8 DEDUCTIONS, EXEMPTIONS, ETC.

 

(1) In determining the amount on which tax is to be computed, permitted deductions shall be allowed in accordance with the law in force in the Contracting State in which tax is imposed.

 

(2) Property which passes to the spouse from a decedent or transferor who was domiciled in or a national of the United Kingdom and which may be taxed in the United States shall qualify for a marital deduction there to the extent that a marital deduction would have been allowable if the decedent or transferor had been domiciled in the United States and if the gross estate of the decedent had been limited to property which may be taxed in the United States or the transfers of the transferor had been limited to transfers of property which may be so taxed.

 

(3) Property which passes to the spouse from a decedent or transferor who was domiciled in or a national of the United States and which may be taxed in the United Kingdom shall, where

 

(a) the transferor's spouse was not domiciled in the United Kingdom but the transfer would have been wholly exempt had the spouse been so domiciled, and

 

(b) a greater exemption for transfers between spouses would not have been given under the law of the United Kingdom apart from this Convention, be exempt from tax in the United Kingdom to the extent of 50 per cent of the value transferred, calculated as a value on which no tax is payable and after taking account of all exemptions except those for transfers between spouses.

 

(4)(a) Property which on the death of a decedent domiciled in the United Kingdom became comprised in a settlement shall, if the personal representatives and the trustees of every settlement in which the decedent had an interest in possession immediately before death so elect and subject to sub-paragraph (b), be exempt from tax in the United Kingdom to the extent of 50 per cent of the value transferred (calculated as in paragraph (3)) on the death of the decedent if:

 

(i) under the settlement, the spouse of the decedent was entitled to an immediate interest in possession,

 

(ii) the spouse was domiciled in or a national of the United States,

 

(iii) the transfer would have been wholly exempt had the spouse been domiciled in the United Kingdom, and

 

(iv) a greater exemption for transfers between spouses would not have been given under the law of the United Kingdom apart from this Convention.

 

(b) Where the spouse of the decedent becomes absolutely and indefeasibly entitled to any of the settled property at any time after the decedent's death, the election shall, as regards that property, be deemed never to have been made and tax shall be payable as if on the death such property had been given to the spouse absolutely and indefeasibly.

 

(5) Where property may be taxed in the United States on the death of a United Kingdom national who was neither domiciled in nor a national of the United States and a claim is made under this paragraph, the tax imposed in the United States shall be limited to the amount of tax which would have been imposed had the decedent become domiciled in the United States immediately before his death, on the property which would in that event have been taxable.

 

ARTICLE 9 CREDITS

 

(1) Where under this Convention the United States may impose tax with respect to any property other than property which the United States is entitled to tax in accordance with Article 6 (Immovable Property (Real Property)) or 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) (that is, where the decedent or transferor was domiciled in or a national of the United States), then, except in cases to which paragraph (3) applies, double taxation shall be avoided in the following manner:

 

(a) Where the United Kingdom imposes tax with respect to property in accordance with the said Article 6 or 7, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

 

(b) Where the United Kingdom imposes tax with respect to property not referred to in sub-paragraph (a) and the decedent or transferor was a national of the United States and was domiciled in the United Kingdom at the time of the death or transfer, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

 

(2) Where under this Convention the United Kingdom may impose tax with respect to any property other than property which the United Kingdom is entitled to tax in accordance with the said Article 6 or 7 (that is, where the decedent or transferor was domiciled in or a national of the United Kingdom), then, except in the cases to which paragraph (3) applies, double taxation shall be avoided in the following manner:

 

(a) Where the United States imposes tax with respect to property in accordance with the said Article 6 or 7, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

 

(b) Where the United States imposes tax with respect to property not referred to in sub-paragraph (a) and the decedent or transferor was a national of the United Kingdom and was domiciled in the United States at the time of the death or transfer, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

 

(3) Where both Contracting States impose tax on the same event with respect to property which under the law of the United States would be regarded as property held in a trust or trust equivalent and under the law of the United Kingdom would be regarded as property comprised in a settlement, double taxation shall be avoided in the following manner:

 

(a) Where a Contracting State imposes tax with respect to property in accordance with the said Article 6 or 7, the other Contracting State shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the first-mentioned Contracting State with respect to that property.

 

(b) Where the United States imposes tax with respect to property which is not taxable in accordance with the said Article 6 or 7 then

 

(i) where the event giving rise to a liability to tax was a generation-skipping transfer and the deemed transferor was domiciled in the United States at the time of that event,

 

(ii) where the event giving rise to a liability to tax was the exercise or lapse of a power of appointment and the holder of the power was domiciled in the United States at the time of that event, or

 

(iii) where (i) or (ii) does not apply and the settlor or grantor was domiciled in the United States at the time when the tax is imposed, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

 

(c) Where the United States imposes tax with respect to property which is not taxable in accordance with the said Article 6 or 7 and subparagraph (b) does not apply, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

 

(4) The credits allowed by a Contracting State according to the provisions of paragraphs (1), (2) and (3) shall not take into account amounts of such taxes not levied by reason of a credit otherwise allowed by the other Contracting State. No credit shall be finally allowed under those paragraphs until the tax (reduced by any credit allowable with respect thereto) for which the credit is allowable has been paid. Any credit allowed under those paragraphs shall not, however, exceed the part of the tax paid in a Contracting State (as computed before the credit is given but reduced by any credit for other tax) which is attributable to the property with respect to which the credit is given.

 

(5) Any claim for a credit or for a refund of tax founded on the provisions of the present Convention shall be made within six years from the date of the event giving rise to a liability to tax or, where later, within one year from the last date on which tax for which credit is given is due. The competent authority may, in appropriate circumstances, extend this time where the final determination of the taxes which are the subject of the claim for credit is delayed.

 

ARTICLE 10 NON-DISCRIMINATION

 

(1)(a) Subject to the provisions of sub-paragraph (b), nationals of a Contracting State shall not be subjected in the other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.

 

(b) Sub-paragraph (a) shall not prevent the United States from taxing a national of the United Kingdom, who is not domiciled in the United States, as a non-resident alien under its law, subject to the provisions of paragraph (5) of Article 8 (Deductions, Exemptions, Etc).

 

(2) The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.

 

(3) Nothing contained in this Article shall be construed as obliging either Contracting State to grant to individuals not domiciled in that Contracting State any personal allowances, reliefs and reductions for taxation purposes which are granted to individuals so domiciled.

 

(4) Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

 

(5) The provisions of this Article shall apply to taxes which are the subject of this Convention.

 

ARTICLE 11 MUTUAL AGREEMENT PROCEDURE

 

(1) Where a person considers that the actions of one or both of the Contracting States result or will result in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic laws of those States, present his case to the competent authority of either Contracting State.

 

(2) The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation not in accordance with the Convention. Where an agreement has been reached, a refund as appropriate shall be made to give effect to the agreement.

 

(3) The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. In particular the competent authorities of the Contracting States may reach agreement on the meaning of the terms not otherwise defined in this Convention.

 

(4) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement as contemplated by this Convention.

 

ARTICLE 12 EXCHANGE OF INFORMATION

 

The competent authorities of the Contracting States shall exchange such information (being information available under the respective taxation laws of the Contracting States) as is necessary for the carrying out of the provisions of this Convention or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of this Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than persons (including a court or administrative body) concerned with the assessment, enforcement, collection, or prosecution in respect of the taxes which are the subject of the Convention. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or any trade process.

 

ARTICLE 13 EFFECT ON DIPLOMATIC AND CONSULAR OFFICIALS AND DOMESTIC LAW

 

(1) Nothing in this Convention shall affect the fiscal privileges of diplomatic or consular officials under the general rules of international law or under the provisions of special agreements.

 

(2) This Convention shall not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded by the laws of either Contracting State.

 

ARTICLE 14 ENTRY INTO FORCE

 

(1) This Convention shall be subject to ratification in accordance with the applicable procedures of each Contracting State and instruments of ratification shall be exchanged at Washington as soon as possible.

 

(2) This Convention shall enter into force immediately after the expiration of thirty days following the date on which the instruments of ratification are exchanged, and shall thereupon have effect:

 

(a) in the United States in respect of estates of individuals dying and transfers taking effect after that date; and

 

(b) in the United Kingdom in respect of property by reference to which there is a charge to tax which arises after that date.

 

(3) Subject to the provisions of paragraph (4) of this Article, the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on the Estates of Deceased Persons signed at Washington on 16 April 1945 (hereinafter referred to as "the 1945 Convention") [T.D. 5565, 1947- 1 C.B. 125] shall cease to have effect in respect of property to which this Convention in accordance with the provisions of paragraph (2) of this Article applies.

 

(4) Where on a death before 27 March 1981 any provision of the 1945 Convention would have afforded any greater relief from tax than this Convention in respect of

 

(a) any gift inter vivos made by the decedent before 27 March 1974, or

 

(b) any settled property in which the decedent had a beneficial interest in possession before 27 March 1974 but not at any time thereafter, that provision shall continue to have effect in the United Kingdom in relation to that gift or settled property.

 

(5) The 1945 Convention shall terminate on the last date on which it has effect in accordance with the foregoing provisions of this Article.

 

ARTICLE 15 TERMINATION

 

(1) This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate this Convention, at any time after five years from the date on which the Convention enters into force provided that at least six months' prior notice has been given through the diplomatic channel. In such event the Convention shall cease to have effect at the end of the period specified in the notice, but shall continue to apply in respect of the estate of any individual dying before the end of that period and in respect of any event (other than death) occurring before the end of that period and giving rise to liability to tax under the laws of either Contracting State.

 

(2) The termination of the present Convention shall not have the effect of reviving any treaty or arrangement abrogated by the present Convention or by treaties previously concluded between the Contracting States.

 

In witness whereof the undersigned, duly authorised thereto by their respective Governments, have signed this Convention.

 

Done in duplicate at London this 19th day of October 1978. For the Government of the United States of America:

 

EDWARD J. STREATOR.

 

For the Government of the United Kingdom of Great Britain and Northern Ireland:

 

FRANK A. JUDD.

 

Senate Executive Report No. 96-6

 

[Bracketed numerals indicate official report page numbers]

 

ESTATE AND GIFT TAX TREATY WITH THE UNITED KINGDOM OF GREAT BRITAIN AND

 

NORTHERN IRELAND

 

JUNE 15, 1979

 

Mr. CHURCH, from the Committee on Foreign Relations, submitted the following report to accompany Ex. R, 96th Cong., 1st sess.

 

The Committee on Foreign Relations, to which was referred the Estate and Gift Tax Treaty with the United Kingdom of Great Britain and Northern Ireland [FN1] for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates of deceased persons and on gifts ("the proposed treaty"), having considered the same, reports favorably thereon without reservation and recommends that the Senate give its advice and consent to ratification thereof.

 

I. PURPOSE

 

The purpose of the proposed estate and gift tax treaty between the United States and the United Kingdom is to alleviate double taxation on the estates and gifts of citizens and domiciliaries of both countries by modifying the jurisdictional rules of estate and gift taxation with respect to these individuals.

 

II. BACKGROUND

 

The proposed treaty was signed by the United States and the United Kingdom on October 19, 1978 and has been submitted to the Senate for advice and consent to its ratification. The treaty was transmitted to the Senate on May 2, 1979.

 

The portion of the proposed treaty dealing with estate taxation will replace the existing estate tax treaty between the United States and the United Kingdom [T.D. 5565, 1947-1 C.B. 125], which has been in force since July 25, 1946. There is no existing gift tax treaty between the two countries.

 

[2] III. SUMMARY OF TREATY

 

The proposed treaty will alleviate double taxation on gifts and estates of U.S. citizens and domiciliaries and U.K. domiciliaries by permitting each asset held by an estate or each gift to be subject to primary tax jurisdiction in only one of the two countries. This is accomplished in the treaty by allowing both countries to impose their tax but requiring one of the countries to allow a credit against its tax for the taxes paid to the other country. In most situations, the treaty allows the country of domicile to assert primary tax jurisdiction. However, the situs country is given a priority of taxation in the case of real property and business property (i.e., assets of a permanent establishment or a fixed base) which are located in that country.

 

The treaty provides that the domicile of an individual will be determined separately under the laws of each country. If only one of the two countries treats the individual as a domiciliary under its domestic laws, then that is the country of domicile for purposes of the treaty. However, if both countries treat the individual as a domiciliary under their domestic laws, then the treaty sets forth an extensive set of rules to select one of the countries as the individual's domicile for purposes of establishing primary tax jurisdiction under the treaty. The approach used in this set of rules is to recognize that where an individual domiciled in both countries is a national of one of the two countries and has been resident for only a limited period of time in the other country, his ties with the country of residence are not sufficient to justify the assertion of primary tax jurisdiction by that country. However, where an individual has been domiciled in both countries for a substantial period of time, the country with which he has his closest ties (such as the place of his permanent home) has the greater claim to domicile and, thus, primary tax jurisdiction will generally be allowed to that country.

 

[3] IV. DATE OF ENTRY INTO FORCE AND TERMINATION

 

Entry into force

 

The proposed treaty will enter into force on the 31st day following the date on which the instruments of ratification are exchanged. With certain limited exceptions, the existing treaty will terminate on the date this treaty enters into force. Where an individual dies before March 27, 1981, and the existing treaty would afford a greater relief from taxes than the proposed treaty for certain gifts or transfers in trust made before March 27, 1974, the provisions of the existing treaty will apply in the United Kingdom.

 

Termination

 

The proposed treaty will continue in force indefinitely but either country may terminate it as of the close of any calendar year which ends at least 5 years after the convention enters into force. The treaty will terminate on the date specified in the notice but not earlier than 6 months after the notice was given. However, the treaty will continue to apply to any estates or gifts which come under the jurisdiction of this treaty before it was terminated.

 

[4] V. COMMITTEE ACTION

 

The Committee on Foreign Relations held a public hearing on the proposed U.K. estate and gift tax treaty and on other proposed tax treaties on June 6, 1979. The Committee considered the proposed treaty on June 12, 1979, and ordered it favorably reported by a vote of 13 yeas, no nays, with the recommendations that the Senate give its advice and consent to ratification of the treaty.

 

VI. BUDGET IMPACT

 

The Committee estimates that the effect of the proposed treaty on budget receipts will be negligible.

 

In accordance with the objectives of section 403 of the Budget Act the Committee advises that the Director of the Congressional Budget Office has examined the Committee's budget estimate and agrees that the effect on budget receipts will be negligible. In keeping with the spirit of section 308(a) of the Budget Act, and after consultation with the Director of the Congressional Budget Office, the Committee states that the treaty does not provide any new budget authority or any new or increased tax expenditures.

 

[5] VII. EXPLANATION OF TREATY PROVISIONS

 

A comprehensive article-by-article explanation of the proposed U.S.-U.K. estate and gift tax treaty is set forth below.

 

Article 1. Estates and gifts covered

 

The proposed treaty will apply to any person who is subject to the U.S. gift or estate tax, including the tax on generation-skipping transfers, or the U.K. capital transfer tax. Thus, the proposed treaty will apply, in general, to estates of decedents who were domiciled in the United Kingdom at the time of their death and to estates that are subject to tax in the United States because the decedent was a citizen or domiciliary of the United States at the time of his death. The treaty will also apply to estates of decedents who had property situated in the United States or the United Kingdom at the time of their death.

 

With respect to gifts, the treaty applies to gifts made while the donor was a domiciliary of the United Kingdom and to gifts which are subject to tax in the United States because the donor was a citizen or domiciliary of the United States when the gift was made. The treaty also applies to gifts of property where the property was situated in the United States or the United Kingdom at the time of the gift.

 

Article 2. Taxes covered

 

The proposed treaty applies to the U.S. estate tax, gift tax, and the tax on generation-skipping transfers.

 

The United States imposes its estate tax on the worldwide assets of estates of persons who were citizens or domiciliaries of the United States at the time of their death, and on property belonging to nondomiciliaries of the United States which is located in the United States at the time of their death. The U.S. gift tax is imposed on all gifts made by U.S. citizens and domiciliaries, and on gifts of property made by nondomiciliaries where the property is located in the United States at the time of the gift.

 

The U.S. tax on generation-skipping transfers was enacted in 1976 to prevent the transfer of the use of property among generations of the transferor's descendants without the payment of gift or estate taxes. In general, the tax on generation-skipping transfers is imposed when property passes through a trust from persons of one generation to persons of another generation and the transfer is not otherwise subject to estate or gift tax.

 

The proposed treaty applies to the U.K. capital transfer tax. The capital transfer tax is imposed on the worldwide assets of persons domiciled in the United Kingdom at the time of their death, and on property of nondomiciliaries of the United Kingdom where the property is located in the United Kingdom at the time of such person's death. The capital transfer tax applies to all gifts made by per-[6]sons domiciled in the United Kingdom, and to property of nondomiciliaries that is located in the United Kingdom at the time of the gift.

 

As is generally true in the case of other U.S. estate tax treaties, the proposed treaty does not apply to death or gift taxes imposed by state or local governments. In addition, the proposed treaty does not apply to death or gift taxes imposed by state or local governments. In addition, the proposed treaty provides that it will apply to any substantially similar taxes on estates, inheritances and gifts that either country may subsequently impose. The competent authorities of both countries are required to notify each other in the case of any substantial changes in their estate, inheritance or gift tax laws.

 

Article 3. General definitions

 

The standard definitions generally found in most existing U.S. estate tax treaties are contained in the proposed treaty.

 

The United States is defined to mean the United States of America and specifically excludes U.S. possessions or territories. The United Kingdom means Great Britain and Northern Ireland.

 

Several provisions of the treaty are discussed in terms of "nationals." U.S. nationals are defined to be U.S. citizens. A U.K. national is any citizen of the United Kingdom and Colonies, or any British subject not possessing that citizenship or the citizenship of any other Commonwealth country or territory, provided that in either case he had the right of abode in the United Kingdom at the time of death or the time of the gift.

 

The proposed treaty also contains the standard provision that undefined terms are to have the meaning which they have under the applicable tax laws of the country applying the treaty. In addition, it is further provided (Article 11) that where a term is defined in a different manner by the two countries, then the competent authorities of the two countries may establish a common meaning of the term in order to prevent double taxation or to further any other purposes of the proposed treaty.

 

Article 4. Fiscal domicile

 

The concept of domicile is important under the proposed treaty because the country of domicile has, under the treaty, primary tax jurisdiction on all property other than the property subject to situs taxation. The country of domicile is initially determined by the domestic laws of each country. However, in those situations where both countries would treat an individual as a domiciliary, the treaty sets forth rules for establishing the country of domicile for purposes of the taxes covered by this treaty.

 

The proposed treaty provides that a person will be a domiciliary of the United States if he is a "resident (domiciliary)" of the United States. Article 3(2) of the treaty states that terms not defined in the treaty generally are defined by the domestic law of the country to which the term applies. Since the term "resident," as it applies to U.S. persons, is not defined in the treaty, it will be defined under the U.S. estate and gift tax law. Under the estate and gift tax regulations (sections 20.0-1(b)(1) and 25.2501-1(b) respectively) a resident of the United States is defined as a person who had his domicile in the United States at the time of his death or at the time of the gift. The regulations go on to state that, "a person acquires a domicile in a [7] place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accomplished by actual removal." Domicile for the U.S. estate and gift tax law is a matter of Federal law and it is not determined with reference to state law and it does not incorporate any presumption that the domicile of one spouse controls the domicile of the other spouse.

 

The treaty also states that a U.S. citizen who was domiciled in the United States at any time within the preceding three years will also be considered a U.S. domiciliary.

 

The treaty provides that a person will be treated as a domiciliary of the United Kingdom if he was a U.K. domiciliary under general U.K. law or if he was treated as a U.K. domiciliary for purposes of the capital transfer tax. Under the capital transfer tax, a person is treated as a U.K. domiciliary if:

 

1. He was domiciled in the United Kingdom within three years preceding the date of death or the date the gift was made;

 

2. He was resident in the United Kingdom in not less than seventeen of the twenty income tax years which end with the income tax year in which the person died or in which the gift was made; or

 

3. He became, and has remained, a domiciliary of the Channel Islands or the Isle of Man, and he was a United Kingdom domiciliary immediately prior to that.

 

To provide relief from double taxation where the individual is considered domiciled in both countries under the general rules described above, the proposed treaty provides a series of rules designed to establish a single country of domicile for the individual for purposes of the taxes covered by the treaty. The country so selected will then have the primary tax jurisdiction with respect to the worldwide estate of the decedent or with respect to his worldwide gifts, other than real property and assets of a permanent establishment or a fixed base situated in the other country. As described below, these rules are based on the concept that primary tax jurisdiction should be exercised either by the country of nationality, if the dual domicile individual has not been resident in the other country for a substantial period of time prior to his death or the making of the gift, or by the country in which he has his most significant contacts if that nationality test is not determinative.

 

Under the first of these rules, if the individual is a national of the United Kingdom and not the United States, and has been a resident of the United States for Federal income tax purposes in less than 7 years during the 10-year period ending with the year of death or the gift, he will be considered a United Kingdom domiciliary. Conversely, if the individual is a U.S. national only and has been resident in the United Kingdom for less than 7 of the 10 income tax years of assessment which end with the year of death or the gift, he will be considered a U.S. domiciliary.

 

It is contemplated that this rule will resolve the great majority of dual domicile situations. However, if a dual domicile problem still [8] remains after application of these rules, the proposed treaty provides four additional rules to determine domicile. The rules (applied in the order presented) provide that the individual will be considered domiciled in the country (1) in which he had a permanent home available to him, (2) in which his personal and economic relations were the closest (center of vital interests), (3) in which he had a habitual abode, or (4) in which he was a national. In cases where an individual's domicile cannot be determined by these tests, then the competent authorities of the countries are to settle the question by mutual agreement.

 

The proposed treaty does not treat certain residents of U.S. possessions as U.S. nationals or domiciliaries. These are individuals who acquired U.S. citizenship solely because they were citizens of a possession or because they were born in a possession or were residents of a possession. Under U.S. tax law (Code sec. 2209 and sec. 2501(c)), these individuals are not taxed by the United States on their worldwide estates and gifts, so protection against double taxation is generally unnecessary. Accordingly, the proposed treaty will not apply to estates or gifts of these individuals, unless it is applicable by reason of their being domiciled in the United Kingdom.

 

Article 5. Taxing rights

 

This article sets forth the general treaty rule that the country of domicile, as determined under the treaty, has the primary tax jurisdiction over the estates or gifts of its domiciliaries, other than the property specifically reserved for situs taxation. The proposed treaty generally provides that property, other than real property and assets of a permanent establishment or a fixed base in the other country, may only be subject to tax in the country of domicile of the decedent or donor.

 

However, this rule does not apply if the domiciliary was a national of the other country. Since the United States imposes its tax on the basis of citizenship (the United Kingdom does not) as well as domicile, there is still the possibility of double taxation if an individual is a U.S. citizen and a U.K. domiciliary. The possibility of double taxation in this situation is alleviated under the tax credit structure discussed in Article 9.

 

The treaty provides a special rule for a person who is a national of only one of the countries but who is not a domiciliary of either country. Property, other than property subject to situs country taxation under the treaty, which belongs to such a person and which is subject to tax in the country of which he is a national will not be subject to tax in the other country. Thus, property situated in the United Kingdom of a U.S. citizen, who is not domiciled in the United States or in the United Kingdom, which is subject to tax in the United States will not be subject to tax in the United Kingdom unless it is real property or assets of a permanent establishment or fixed base located in the United Kingdom.

 

This article also provides special rules regarding trusts. The United States agrees not to impose a tax on generation-skipping transfers where the deemed transferor was a U.K. domiciliary and is not a U.S. national. Conversely, the United Kingdom will not impose a [9] tax on property placed in a trust if the settlor was a U.S. domiciliary and was not a U.K. national. These rules do not limit the rules of situs country taxation under this treaty.

 

If the above rules of this article result in only one country's having the right to impose a tax but that tax is not paid, the other country may impose its tax on property within that country. However, if the tax is not paid because of a specific exemption, deduction, exclusion, credit or allowance, this rule will not apply.

 

This article provides that the competent authorities will determine the situs of property by mutual agreement in the case of property belonging to a person who was not domiciled in either country where the property was regarded by both countries as situated within its boundaries and thus subject to its tax.

 

Article 6. Immovable property (real property)

 

Under the proposed treaty, immovable property (real property) is one of two types of property over which the situs country, rather than the country of domicile, has primary tax jurisdiction. The other type is assets of a permanent establishment or fixed base (Article 7).

 

The determination of whether an item of property is immovable property (real property) is to be made under the laws of the country in which the property is located. Although U.S. law does not define "immovable property (real property)," that term for U.S. purposes is considered to mean real property. It is further provided that immovable property (real property) does not include claims secured by real property (such as mortgages).

 

Immovable property (real property) is specifically defined to include:

 

1. Property accessory to immovable property;

 

2. Livestock and equipment used in agriculture and forestry;

 

3. Rights to which the provisions of general law respecting landed property apply;

 

4. Usufruct of immovable property; and

 

5. Rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources.

 

This article also applies to the immovable property held by an enterprise or used for the performance of independent personal services.

 

Article 7. Business property of a permanent establishment and assets pertaining to a fixed base used for the performance of independent personal services

 

Under the proposed treaty, the second type of property owned by a nondomiciliary over which the situs country has primary tax jurisdiction is the business assets of a permanent establishment which is located in the situs country and the assets of a fixed base which is situated in that country and is used for the performance of independent personal services. The real property of a permanent establishment or fixed base is to be taxed by the country in which the property is situated, as provided in Article 6.

 

The proposed treaty contains a definition of the term "permanent establishment" which is similar to the definition found in recent U.S. income tax treaties. Generally, any fixed place of business through which [10] a person engages in a trade or business is considered a permanent establishment. A fixed place of business generally includes an office, branch, factory, workshop, place of extraction of natural resources, and any building site or construction or installation project which exists for more than 12 months. This general rule is modified by providing that a fixed place of business which is used for certain activities specified in the treaty will not be considered a permanent establishment. These activities include, for example, the warehousing of goods for purposes of storage, display, or delivery. They also include the maintenance of a fixed place of business solely for the purpose of purchasing merchandise or collecting information.

 

The proposed treaty also provides that a person will generally be deemed to have a permanent establishment in a country if he had an agent in that country who had and habitually exercised a general contracting authority (other than for the purchase of goods or merchandise) in that country. This agency rule does not apply, however, if the agent is a broker, general commission agent, or any other agent of an independent status, provided the agent is acting in the ordinary course of his business.

 

A company will not be held to have a permanent establishment in one of the countries solely because it controls or is controlled by a company which is a resident of that country.

 

Article 8. Deductions, exemptions, etc.

 

This article provides that in computing the tax imposed by either country, deductions will be allowed in keeping with the law in force in that country at the time.

 

Under this article, if property is passed to a spouse by a donor or decedent who is a U.K. national or domiciliary and if such property is subject to tax in the United States, then the spouse will be entitled to a marital deduction in computing the U.S. tax. The marital deduction is limited to the amount that would have been allowed as a marital deduction if the decedent or donor had been domiciled in the United States and the U.S. gross estate was limited to the amount of property which is subject to tax in the United States.

 

Under the treaty, the United Kingdom allows a similar benefit to spouses of U.S. nationals or domiciliaries. In this case, the United Kingdom allows an exemption equal to 50 percent of the value of the property where a decedent or donor is a U.S. national or domiciliary and transfers property to his spouse, provided that his spouse is not domiciled in the United Kingdom and that the transfer would have been wholly exempt under U.K. domestic law if the spouse had been domiciled in the United Kingdom.

 

The United Kingdom also allows an exemption for transfers to a trust, upon the death of the decedent, in which the spouse who is a U.S. national or domiciliary has a life estate. If the decedent is a U.K. domiciliary and the spouse is entitled to an immediate interest in possession of property that would have been wholly exempt if such spouse had been a U.K. domiciliary then 50 percent of the value transferred to the spouse will be exempt from taxation in the United Kingdom. Two further conditions to this exemption are that the trustees of all trusts in which the decedent had an interest must elect to be included in this provision and if the spouse subsequently becomes in-[11]defeasibly entitled to any of the trust property the exemptions will be revoked as to that property.

 

This article also provides that where property of a U.K. national, who was not a U.S. national or domiciliary, is subject to U.S. estate taxation, the U.S. tax on that property will not be greater than the U.S. tax which would have been imposed on the decedent's worldwide assets if he had been a U.S. domiciliary at his death.

 

Article 9. Credits

 

The proposed treaty provides a series of rules to determine the amount of tax credits which will be allowed by each country in cases where a person's property is subject to tax by both countries. These rules determine the priority of the countries' rights to tax property in the sense that the country which grants a credit for the other country's tax, in effect, is exercising a secondary, rather than a primary, taxing jurisdiction. These credit rules, in conjunction with the limitations imposed by the proposed treaty on situs country taxation and on the ability of a country to tax the worldwide estate of a decedent, constitute the approach employed in the proposed treaty to avoid double taxation.

 

In general, the proposed treaty provides for two credit rules to alleviate double taxation. The first credit rule provides that the country in which a person was domiciled, or of which he was a citizen, will allow a credit for the taxes imposed by the other country on that person's real property and business property of a permanent establishment or fixed base which is situated in that other country.

 

In cases where both countries tax the estate of an individual on a worldwide basis because he was a citizen of one country and a domiciliary of the other country, the second credit rule of the proposed treaty generally provides for the allowance of an additional tax credit by the country in which the decedent was not domiciled. Thus, the non-domiciliary country, which is the country of citizenship, yields primary taxing jurisdiction to the country of domicile. However, if the tax of the country of citizenship exceeds the tax of the country of domicile the excess will be collected by the country of citizenship.

 

In resolving double taxation on trusts, the two countries use a credit mechanism almost identical to the one used for nontrust transfers. Where both countries impose a tax on a trust's real property and assets of a permanent establishment or fixed base which is located in one of the countries, the non-situs country will allow a credit for taxes paid to the situs country on that property. On all other property, where the transferor was a U.S. domiciliary, the United States will have the right of primary tax jurisdiction over the property, and the United Kingdom will allow a credit against its tax for the U.S. taxes paid on such property. In situations where the transferor was a U.K. domiciliary, the United Kingdom will have the right of primary tax jurisdiction over such other property and the United States will allow a credit for the U.K. taxes paid on such property.

 

The total amount of credits which one country will allow under the treaty is limited to that portion of its tax which is attributable to the property for which a credit is allowable under the treaty. As is the case under existing U.S. estate tax treaties, the proposed treaty further provides that credits allowed by a country under its domestic law [12] against its tax are to be subtracted from the gross tax imposed by that country in order to determine the tax imposed by it which is creditable against the other country's tax or against which the other country's tax may be credited.

 

A credit will not be finally allowed under the proposed treaty until the tax for which the credit is claimed has been paid. The proposed treaty allows a taxpayer to file a claim for credit or refund within 6 years from the date of death or the date of the gift, or within one year from the last day a tax (for which a credit is given) was due, whichever comes later. The competent authorities of the two countries may extend this time limit where the final determination of taxes (for which a credit is claimed) has been delayed.

 

Article 10. Non-discrimination

 

This article provides that one country will not impose more burdensome taxation on certain specified persons and entities of the other country than it would impose on its own similarly situated persons and entities. The parties covered are nationals of the other country, permanent establishments of enterprises of the other country, and enterprises owned or controlled in whole or in part by residents of the other country.

 

This article generally does not restrict the right of the United States to tax a United Kingdom national who is not domiciled in the United States as a nonresident alien under its law. It also does not require either country to grant to nondomiciliaries personal allowances, reliefs, and reductions that such country grants to its domiciliaries.

 

Articles 11 and 12. Administrative provisions

 

The proposed treaty contains various administrative provisions which are generally found in other U.S. tax treaties. In general, the proposed treaty provides--

 

(1) For consultation and negotiation between the competent authorities of the two countries to resolve differences arising in the interpretation or application of the proposed treaty and also to resolve claims by taxpayers that they are being subjected to taxation contrary to the proposed treaty;

 

(2) For the exchange between the countries of legal information and information necessary to carry out the provisions of the proposed treaty or the tax laws of one of the countries, insofar as its taxation is in accordance with the proposed treaty, or to prevent fraud or fiscal evasion with respect to the taxes covered by the proposed treaty.

 

Any information which is exchanged shall be treated as secret and shall not be disclosed to anyone other than persons involved in assessment, enforcement, collection or prosecution in respect of the taxes which are the subject of this treaty. Also, no information will be exchanged which would disclose any trade, business, industrial or professional secret or any trade process.

 

Article 13. Effect on diplomatic and consular officials and domestic law

 

The proposed treaty provides that its provisions are not to affect the fiscal privileges which diplomatic and consular officials enjoy under the general rules of international law or the provisions of special agreements.

 

[13] The proposed treaty specifically provides that it will not restrict in any manner any exclusion, exemption, deduction, credit or other allowance which is, or will be, enacted under the laws of either country. Therefore, the treaty will not be imposed to the detriment of any taxpayer.

 

Article 14. Entry into force

 

The proposed treaty will enter into force on the 31st day following the date on which the instruments of ratification are exchanged. With certain limited exceptions, the existing treaty will terminate on the date this treaty enters into force. Where an individual dies before March 27, 1981, and the existing treaty would afford a greater relief from taxes than the proposed treaty for certain gifts or transfers in trust made before March 27, 1974, the provisions of the existing treaty will apply in the United Kingdom.

 

Article 15. Termination

 

The proposed treaty will continue in force indefinitely but either country may terminate it as of the close of any calendar year which ends at least 5 years after the convention enters into force. The treaty will terminate on the date specified in the notice but not earlier than 6 months after the notice was given. However, the treaty will continue to apply to any estates or gifts which come under the jurisdiction of this treaty before it was terminated.

 

[14] VIII. TEXT OF RESOLUTION OF RATIFICATION

 

* * * * *

 

RESOLUTION OF RATIFICATION

 

Resolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts, done at London on October 19, 1978 (Ex. R, Ninety-sixth Congress, first session).

 

* * * * *

 

[17] LETTER OF TRANSMITTAL

 

THE WHITE HOUSE,

 

May 2, 1979.

 

To the Senate of the United States:

 

I transmit herewith, for Senate advice and consent to ratification, the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts, signed at London on October 19, 1978. For the information of the Senate, I also transmit the report of the Department of State with respect to the Convention.

 

The Convention would replace the estate tax convention with the United Kingdom which was signed at Washington on April 16, 1945 [T.D. 5565, 1947-1 C.B. 125], and has been in force since 1946. It would apply in the United States to the federal gift tax, the federal estate tax, and the federal tax on generation-skipping transfers. In the United Kingdom it would apply to the capital transfer tax. The Convention is similar in principle to the United States estate tax convention with the Netherlands [1976-1 C.B. 471], which was signed at Washington on July 15, 1969, and entered into force in 1971, and to the United States model estate and gift tax convention published by the Department of the Treasury in 1977.

 

The general principle underlying the Convention is to grant to the country of domicile the right to tax estates and transfers on a worldwide basis. The Convention also permits a credit for tax paid to the other country in which certain property was taxed on the basis of its location. The Convention would provide rules for resolving the issue of domicile.

 

The Convention would enter into force on the thirty-first day after instruments of ratification are exchanged and would have effect in the United States with respect to estates of individuals dying and transfers taking effect after that date.

 

I recommend that the Senate give early and favorable consideration to the Convention and give advice and consent to its ratification.

 

JIMMY CARTER.

 

LETTER OF SUBMITTAL

 

DEPARTMENT OF STATE,

 

Washington, April 25, 1979.

 

THE PRESIDENT,

 

The White House.

 

THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts, signed at London on October 19, 1978.

 

This Convention would replace the estate tax convention with the United Kingdom which was signed at Washington on April 16, 1945, and has been in force since 1946. It would apply, in the United States, to the federal gift tax and the federal estate tax, including the tax on generation-skipping transfers. In the United Kingdom, it would apply to the capital transfer tax.

 

The Convention is similar to the estate tax convention with the Netherlands, which was signed at Washington on July 15, 1969, and entered into force in 1971, and to the United States model estate and gift tax convention, published by the Department of the Treasury in 1977.

 

The general principle underlying the proposed convention is to grant to the country of domicile the right to tax the estate or transfers of a decedent or transferor on a worldwide basis with a credit for tax paid to the other country with respect to certain types of property located therein. Specifically, immovable property and certain business assets are taxable in the Contracting State where situated. The Convention also allows the country of citizenship the right to tax the estate or transfers of a decedent or transferor, with a credit for tax paid to the other State on either a domiciliary or situs basis.

 

A significant feature of the convention adopted from the estate convention with the Netherlands, provides that a citizen of one country who is domiciled in that country may live up to seven years in the other country without becoming taxed as a domiciliary under the Convention. This provision will be of help in cases where an American dies or makes gifts after living in the United Kingdom for less than seven years.

 

The Convention also provides reciprocal rules for determining which State has the right to tax on a worldwide basis in the case of a decedent or transferor who is domiciled in both Contracting States at the time of death or transfer.

 

The Convention would enter into force on the thirty-first day after the date of the exchange of instruments of ratification and would become effective, in the United States, with respect to individuals dying and transfers taking effect on or after that date. The Convention would remain in force unless terminated by one of the Contracting States by giving six months prior notice through diplomatic channels. It may not, however, be terminated for five years after it enters into force.

 

A technical memorandum explaining the provisions in detail has been prepared by the Department of the Treasury and is being submitted to the Senate Foreign Relations Committee.

 

The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of the Convention. It has the approval of both Departments.

 

Respectfully submitted,

 

CYRUS VANCE.

 

* * * * *

 

[55] APPENDIX C WRITTEN RESPONSES BY TREASURY TO QUESTIONS BY THE COMMITTEE

 

STAFF

 

DEPARTMENT OF THE TREASURY,

 

Washington, D.C., June 8, 1979.

 

Hon. FRANK CHURCH,

 

Chairman,

 

Committee on Foreign Relations,

 

U.S. Senate, Washington, D.C.

 

Dear Mr. CHAIRMAN: To follow up my testimony at the June 6 hearings concerning the six tax conventions or protocols involving the United Kingdom, France, Hungary and Korea, I want to assure you that Article I of the Third Protocol of the proposed US-UK Income Tax Treaty gives full effect to the Senate's reservation on Article 9(4) of that treaty. Let me also assure you that there is no similar state tax issue in any of the other five treaties which were considered by the Committee yesterday.

 

Again let me emphasize our view that each of these treaties is important to the United States and that their prompt approval is desirable.

 

I am also enclosing answers to the written questions submitted to me by your staff at the hearings as well as copies of my answers to questions from Senator Helms and Senator Javits.

 

Sincerely,

 

DONALD C. LUBICK,

 

Assistant Secretary (Tax Policy).

 

Enclosures.

 

QUESTIONS FOR ASSISTANT SECRETARY FOR TAX POLICY DONALD C. LUBICK

 

GENERAL QUESTIONS [FNa1]

 

Question 1. On page three of your testimony, you mentioned that the public was able to make presentations to the Treasury concerning particular private sector concerns in the area of international taxation, could you explain how the notice of such public meetings is made, what the participation level has been and any changes in tax treaties or negotiations that have been affected by this public participation?

 

Answer. The public meetings, referred to in the testimony, are announced by Treasury Press Releases and notices in the Federal Register. These announcements are reported in publications which are widely read in the international tax community. Public participation [56] in these meetings varies, depending on the degree of interest in the particular country being discussed. The meeting to discuss the Canadian treaty was attended by well in excess of 100 individuals; a recent meeting to discuss a proposed treaty with Norway was attended by about 20 people. All of the reports we have received from the public regarding these meetings have been favorable.

 

It is difficult to point to particular changes in treaties under negotiations as a result of these meetings. In most cases, there has not yet been a further round of negotiations following the meeting. The meetings have clearly served to sharpen the negotiators' awareness and understanding of some of the complex issues involved.

 

Questions 2 and 3. The group of six tax treaties or protocols the Committee is conducting hearings on today, will they result in a net loss or gain for the U.S. from tax revenues? If a loss, how much and why; if a gain, how much and why?

 

Answer. In general, these treaties and protocols tend to balance out revenue losses and gains, leaving the overall revenue effect roughly neutral. For example, where the treaty partner is required to reduce or eliminate its tax on U.S. taxpayers, this results in a reduction in the U.S. foreign tax credit and an increase in U.S. revenue. These increases are roughly offset by reductions in U.S. revenues resulting from reductions in U.S. tax on taxpayers resident in the other country.

 

In most cases, data on international flows and transactions are not available in sufficient detail to permit precise estimation of the revenue effects of particular treaty provisions.

 

Question 4. Please describe the personnel from the Department of the Treasury and other agencies of the U.S. Government involved in negotiating tax treaties or protocols. Please detail the prospective relationships between the IRS, Department of the Treasury and the Department of State.

 

Answer. The Office of the Assistant Secretary for Tax Policy in the Treasury has the principal responsibility for the negotiation of tax treaties. The actual negotiations are normally conducted by members of the Office of International Tax Affairs, which combines the Office of International Tax Counsel (Attorneys) and the International Tax Staff of the Office of Tax Analysis (Economists). The delegations are headed either by the Assistant Secretary for Tax Policy or by a senior member of the Office of International Tax Affairs.

 

The Internal Revenue Service is often represented on delegations. The nature and extent of this representation depends on the specific issues that are likely to arise. For example, if there are problems regarding the exchange of information, representatives of the IRS Office of International Operations, which is responsible for these exchanges, will participate in the discussions. In many cases, when negotiations are held abroad, the Revenue Service Representative assigned to that country will participate.

 

The State Department is invited to participate in all discussions. Country desk officers will sometimes attend a part or all of the discussions held in Washington. When negotiations are held abroad, the economic or commercial officers in the U.S. Embassy frequently participate. The State Department generally handles correspondence between the U.S. and foreign negotiators and is often called upon to [57] follow up with representatives of the other country on issues which arise in the negotiations.

 

There is close coordination between Treasury, IRS and the State Department throughout the negotiating process. The State Department advises the Treasury on political issues and IRS advises on administrative matters. The State Department is responsible for the arrangement for signing treaties and their transmittal to the Senate.

 

Question 5. The U.S. Treasury, in 1977, finalized a "model convention" for international tax treaties, could you please explain the status of this model and in particular, any changes that have been made to it?

 

Answer. For many years, the Treasury had used an informal "model" as a basis for negotiations. This model evolved and changed as the negotiators gained experience with it. In 1976 a decision was made to publish the U.S. model. Following the 1977 publication of the revised OECD Model Convention, the Treasury revised its model to conform it to the OECD Model, where possible, and the revised model was published in May of 1977.

 

The model is sent to potential treaty partners prior to the commencement of negotiations, and it normally serves as the discussion draft during the first round of negotiations. Many changes are made in the model during negotiations to reflect particular problems which arise in attempting to mesh two tax systems. Changes may be made to reflect the needs of the other country. For example, where negotiations are with a developing country, many of the model provisions (designed for treaties between two developed countries) are inappropriate. The U.S. negotiators are generally quite flexible in modifying the model for treaties with developing countries. These changes occur most frequently in the provisions dealing with permanent establishments or the taxation of personal service income, in which cases a somewhat lesser degree of economic contact or penetration is required for the host country to be able to tax the income of a resident of the other country. Similarly, with the taxation of dividends, interest, and royalties, less of a reduction in withholding tax rates is generally required of developing countries. The U.S. interest in these cases is to avoid rates which are so high as to generate excess foreign tax credits for U.S. income recipients.

 

Questions 6 and 7. In the third protocol proposed to the U.S.-U.K. Income Tax Treaty, the definition of permanent establishment has been changed. Please explain the basis of this change. Were the affected U.S. drilling companies contacted concerning the proposed change? If they were contacted, please give the details of when, by whom, and what resulted from such contact. Why was the permanent establishment definition selected as the item to be changed in the tax area?

 

Answer. In our discussions with the British subsequent to the Senate reservation on Article 9(4) of the proposed treaty, the United Kingdom specifically requested the inclusion in the protocol of a provision clarifying their taxing rights with respect to exploration and exploitation connected activities. This requested clarification was not unusual in light of the original negotiations in 1975 over the permanent establishment definition. In those negotiations, the United States agreed to delete from the twelve month permanent establishment exclusion contained in subparagraph (2)(f) of the proposed treaty any reference to [58] "an installation or drilling rig or ship used for the exploration or development of natural resources" as a result of the British insistence that there be no limitation on their right to tax such activities. This deletion left the application of the permanent establishment definition to these activities somewhat uncertain, although as the United Kingdom authorities believe, a strong argument exists that these activities could be taxed even without the clarification of the new protocol.

 

We agreed to the inclusion of this provision in the Third Protocol because it was reasonable to expect the British to request some additional concession for the loss of the benefits of Article 9(4) ; because the terms of the provision were reasonable in light of our own statutory tax policy (we would generally tax these kinds of activities conducted in the United States, even if they were of a shorter duration than 30 days); and because it could be viewed as little more than a clarification of a reasonable interpretation taken by the British of their taxing rights under the proposed treaty without the protocol provision.

 

The drilling industry was clearly aware of the precise terms of the protocol at least one month prior to the signing of the Protocol on March 15, 1979. On February 16, 1979, Mr. Arnold W. Bramlett, Chairman of the Accounting and Taxation Committee of the International Association of Drilling Contractors (IADC), wrote to the International Tax Counsel, Mr. H. David Rosenbloom, expressing general concern over the provision. Subsequently, there were telephone conversations between Mr. Rosenbloom and Mr. Bramlett in which the Treasury sought specific information as to the nature of the activities and the harm which was alleged would occur. These requests were confirmed in a letter from Mr. Rosenbloom to Mr. Bramlett on March 5, 1979, still 10 days before the Protocol was signed. To date, the Treasury has not received from the IADC, or any of its members, specific information detailing any specific adverse effects of the protocol provision.

 

QUESTIONS ON THE UNITED KINGDOM ESTATE AND GIFT TAX TREATY

 

Question 1. Explain the origin and development of the model estate and gift tax convention published by the Department of Treasury in 1977.

 

Answer. The U.S. Treasury Department released its "model" estate and gift tax treaty on March 16, 1977. The model serves as a statement of the Treasury's basic treaty negotiating position. It was developed over several months by Office of Tax Policy staff members conversant with estate and gift tax treaty issues. The general principle underlying the model is to grant to the country of domicile the right to tax the worldwide estate or gifts of a decedent or donor, with a credit for tax paid to the other State with respect to real property and business assets located therein.

 

The emphasis on domiciliary-basis taxation also explains the origin of the model. All U.S. estate and gift tax treaties negotiated between 1946 and 1956 contain a comprehensive set of situs rules. Double taxation is eliminated by awarding the situs state the primary right to tax a given type of property. In 1966, however, the Organization for Economic Cooperation and Development (OECD) published a model es-[59]state tax convention (Draft Double Taxation Convention on Estates and Inheritances). The OECD model, which the United States helped develop, provides for domiciliary-basis taxation. This is also the approach of our only estate tax treaty which has come into force since 1956, the United States-Netherlands treaty of 1971. Thus, the U.S. model estate and gift tax treaty reflects both the internationally-accepted concepts in the OECD model and our current treaty position.

 

Question 2. Does the U.S.-U.K. Estate and Gift Tax Treaty differ from the U.S. model treaty, and if so, please explain the policy reasons for the difference.

 

Answer. The U.S.-U.K. Estate and Gift Tax Treaty is similar, but not identical, to the model. It is similar in that both follow the principle of domiciliary-basis taxation. That is, the country of domicile may tax the worldwide estate or gifts of a decedent or donor. Immovable property and certain business assets are taxable in the Contracting State where situated.

 

The U.S.-U.K. treaty is different from the model in that it includes the tax on generation-skipping transfers, imposed by the Tax Reform Act of 1976 [Pub. L. 94-455, 1976-3 C.B. (Vol. 1) 1]. This is purely a matter of timing. Although the model was not published until 1977, it was developed early in 1976. Consequently, it does not include the estate and gift tax modifications in the Tax Reform Act of 1976, which was signed in October of that year. Unlike the model, the U.S.-U.K. treaty does not provide for a reciprocal exemption of $30,000 for property that is taxable under the treaty on a situs basis. This part of the model refers to pre-Reform Act of 1976 law; the $30,000 exemption was converted to a $3,600 credit by the 1976 changes. This provision is not in the treaty because the U.K.'s capital transfer tax does not apply to the first 25,000 (roughly $50,000) of property transferred.

 

Question 3. How does the U.S.-U.K. treaty define domicile and how, or why, was this definition selected?

 

Answer. The determination of a single treaty domicile is very important, since the country of domicile has the primary right to tax the worldwide estate and gifts of a decedent or donor, with the exception of property taxable under the situs articles. Domicile is determined initially under the law of each Contracting State. Under the treaty, an individual is domiciled in the United States (a) if he was a U.S. resident or (b) if he was a U.S. national, and had been a resident in the United States at any time during the preceding three years. The Convention uses the term "resident (domiciliary)" because U.S. domestic law equates the term "resident" with the term "domiciliary." The three-year rule simply parallels a provision in the U.K. capital transfer tax that a U.K. domiciliary will be deemed to be domiciled in the United Kingdom for a period of three years after a change of domicile is actually made. An individual is domiciled in the United Kingdom if he is (a) a U.K. domiciliary under general principles of U.K. law, or (b) treated as a U.K. domiciliary for purposes of the capital transfer tax.

 

The Convention provides rules for determining a single treaty domicile when a decedent or transferor is domiciled, under the laws of the respective countries, in both States. Particularly important in this regard is the provision that a U.S. citizen, who is considered under the Convention to be domiciled in both the United Kingdom and the [60] United States, shall be deemed to be domiciled in the United States if he had not been resident in the United Kingdom for at least 7 of the 10 years. This rule is based on the concept that a Contracting State should not tax the estate or other transfers of an individual on a domiciliary basis if the individual has not been present in that State for a significant period of time. If the 7 out of 10 year rule does not apply, the single treaty domicile is determined by a set of tie-breaking rules based on: permanent home, center of vital interests, habitual abode, state of nationality, or mutual agreement. These tie-breaking rules are similar to those in both the OECD and U.S. model treaties and in our existing estate tax treaty with the Netherlands [1976-1 C.B. 471].

 

Question 4. By using a worldwide basis to determine the domiciliary States' right to tax estates and transfers, will the United States increase or decrease its tax revenues from estate and gift taxes? By what amount? Please give policy reasons for any projected increase or decrease.

 

Answer. Generally, the United States taxes the estates and property transfers of its citizens and residents (domiciliaries) on a worldwide basis under its statutory law. Thus, use of a worldwide basis under the treaty does not represent a material departure from our normal estate and gift tax base.

 

This treaty, like others, is a balanced package of mutual concessions where there may be revenue gains from some provisions and revenue losses on others but, where the net revenue effect is nil.

 

Question 5. Why was the 7 out of 10 year rule used for the determination of domicile under the treaty?

 

Answer. A basic concept of United States tax policy in this field is that a Contracting State should not tax the estate of other transfers of an individual on a domiciliary basis if the individual has not been present in that State for a significant period of time. Conversely, where an individual has been present for a significant period of time we believe that it is reasonable to permit the State to tax the individual's accumulation of wealth. The 7 out of 10 year rule represents, in our judgment, a sufficiently long period of presence to justify taxation and has been our treaty policy for a long time. The rule is incorporated in the existing estate tax treaty with the Netherlands which entered into force in 1971.

 

It is also important to point out that a U.S. citizen will not automatically be deemed to be domiciled in the United Kingdom if he has been resident there for, say, 8 out of 10 years. In that case the determination of a single treaty domicile is settled by the tie-breaking rules. These are based on the concepts of permanent home, center of vital interests, habitual abode, nationality, and mutual agreement. Thus, it is possible that an individual could be resident in the United Kingdom for more than 7 years and still be treated as a U.S. domiciliary, if, for example, he maintained a permanent home in the United States.

 

* * * * *

 

TECHNICAL EXPLANATION [FN1] OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES OF DECEASED PERSONS AND ON GIFTS SIGNED AT LONDON ON OCTOBER 19, 1978 [FN2]

 

Introduction

 

The proposed Estate and Gift Tax Convention with the United Kingdom is the first Convention negotiated since the United States modified its estate and gift tax law in the Tax Reform Act of 1976. The 1976 modifications include combining the separate estate and gift tax rates into a single cumulative rate schedule, substituting a unified credit for the previously separate estate and gift tax exemptions, and imposing a tax on generation-skipping transfers. The Convention will replace the existing estate tax convention between the two countries which has been in effect since July 25, 1946.

 

The Convention is similar in principle to the U.S. Estate Tax Convention with the Netherlands [1976-1 C.B. 471], which entered into force in 1971, and to the U.S. Model Estate and Gift Tax Convention, published by the Treasury Department on March 16, 1977. The Convention also is based, in part, on the provisions of the Model Estate Tax Convention (Draft Double Taxation Convention on Estates and Inheritances), published in 1966 by the Organization for Economic Cooperation and Development (OECD).

 

The general principle underlying the proposed Convention is that the country of domicile may tax an individual's estate or other transfers on a worldwide basis with a credit for tax paid to the other State with respect to certain types of property located therein. Specifically, immovable property and certain business assets are taxable in the Contracting State where situated. The Convention also allows the country of citizenship the right to tax an individual's worldwide estate or other transfers, with a credit for tax paid to the other State on either a domiciliary or a situs basis.

 

The Convention provides rules for determining which State has the right to tax on a domiciliary basis when a decedent or transferor is domiciled, under the laws of the respective countries, in both States at the time of death or transfer. It provides that a U.S. citizen, who at the time of death or transfer is considered under the Convention to be domiciled in both the United Kingdom and the United States, shall be deemed to be domiciled in the United States if he had not been resident in the United Kingdom in 7 or more of the 10 income tax years of assessment ending with the year in which the death or transfer occurs. The effect of this rule is that the United Kingdom may not subject the estate or other transfers of a U.S. citizen and domiciliary to tax on a worldwide basis if he has been resident in the United Kingdom for less than 7 out of the 10 years ending with the year in which the death or transfer occurs. The Convention also provides that a U.S. citizen shall be deemed to have a domicile in the United States if he had been domiciled in the United States at any time during the three years preceding the time of death or transfer. This rule enables the United States to consider a citizen and former resident as a domiciliary for treaty purposes for a three year period. Thus, except for property taxable on a situs basis under the treaty, the United States generally retains primary taxing jurisdiction for three years after a U.S. citizen abandons his U.S. domicile. These rules for determining domicile are reciprocal.

 

The Convention is subject to ratification by the two Governments. Once ratified, it will enter into force on the thirty-first day after instruments of ratification are exchanged and will have effect in the United States with respect to estates of individuals dying and transfers taking effect after that date.

 

The Convention shall remain in force until terminated by one of the Contracting States. It may not be terminated for five years after it enters into force.

 

Federal Estate, Gift, and Generation-Skipping Transfer Taxes

 

The Federal estate, gift, and generation-skipping transfer taxes are excise taxes imposed on the transfer of property by death, gift, and generation-skipping transfer, respectively. Citizens and residents of the United States are subject to taxation on the transfers of all their property, wherever located. For these purposes, a resident of the United States is a domiciliary thereof, i.e., an individual living in the United States who has the intention to remain in the United States indefinitely or an individual who has lived in the United States with such an intention and who subsequently left the United States without having the intention to remain indefinitely in the country of his new residence.

 

Nonresidents who are not citizens of the United States (referred to hereafter as nonresident aliens) are taxable only on transfers of property situated within the United States. Tangible personal property and real estate, for example, are situated within the United States if located in the United States. Corporate stock has a U.S. situs only if issued by a corporation organized in the United States. Nonresident aliens are, however, exempt from Federal gift tax on all transfers of intangible property, including corporate stock.

 

U.S. statutory taxation rules for transfers of citizens and residents allow: (a) a tax credit of $38,000 at present, but which is scheduled to increase to $47,000 by 1981; (b) a marital deduction for gift tax purposes equal to the first $100,000 of gifts and 50 percent of the value of gifts in excess of $200,000; (c) a marital deduction for estate tax purposes equal to the greater of $250,000 or one-half the value of the adjusted gross estate, but reduced by any post-1976 gift tax marital deduction in excess of 50 percent of the value of the lifetime gifts to the spouse after 1976; and (d) deductions for charitable contributions, debts, funerals, and administrative expenses, and claims against, and losses of, the estate. Taxable transfers are taxed at rates ranging from 18 to 70 percent. Credits are allowed for foreign death taxes paid with respect to property which is considered under U.S. situs rules to be situated in the taxing foreign country and which is included in the gross estate for Federal estate tax purposes.

 

Nonresident aliens are allowed a $3,600 credit against the estate tax liability plus deductions for a portion of the debts, funeral and administrative expenses, claims, and losses, based on the proportion of the decedent's worldwide estate which is located in the United States. Taxable estates are taxed at rates ranging from 6 to 30 percent. Gifts and generation-skipping transfers by nonresident aliens, however, are taxed at the normal citizen or resident rates of 18 to 70 percent.

 

United Kingdom Capital Transfer Tax

 

The U.K. capital transfer tax applies to transfers of property by gift and death, as well as to transfers of settled or trust property. Individuals domiciled in the United Kingdom are subject to taxation on transfers of all their property, wherever situated. Individuals not domiciled in the United Kingdom are taxable only on property having a U.K. situs. All inter-spousal transfers are exempt from taxation, except that only the first 25,000 is exempt if the transferor is domiciled in the United Kingdom but the recipient is not. The tax base is the amount of "loss" to the transferor, but deductions are allowed for debts, expenses, and liabilities chargeable against the property transferred.

 

The rate of tax depends on the cumulative total of chargeable transfers during life and at death. There are two rate schedules: one for transfers on death or within 3 years of death and another for lifetime transfers. Where the cumulative total is less than 110,000 the rate of tax on lifetime gifts is one-half that imposed on a transfer by death; the schedules then converge and above 310,000 the rates are the same. A married couple's transfers are taxed separately. Nondomiciliaries are taxed according to the same rate schedule as domiciliaries. To lessen international double taxation, a credit against the capital transfer tax may be taken for similar taxes paid to another country on the same property.

 

Article 1. SCOPE

 

This Article states that the Convention applies to any person who is subject to a tax covered by the Convention. As set forth in Article 2 (Taxes Covered), the Convention applies in the United States to the Federal gift tax and the Federal estate tax, including the tax on generation-skipping transfers and to the capital transfer tax in the United Kingdom.

 

Existing U.S. estate tax treaties, as well as the U.S. Model Estate and Gifts Tax Convention, apply to domiciliaries of one or both of the Contracting States. This Convention has a broader application; its scope is not limited to domiciliaries of the two Contracting States.

 

Article 2. TAXES COVERED

 

Paragraph (1) identifies the taxes covered by the Convention. The Convention does not apply to any state or local taxes imposed by either Contracting State.

 

Paragraph (2) provides that the Convention also applies to any substantially similar taxes which are subsequently enacted in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States are to notify each other of any changes which have been made in their respective laws relating to the taxation of estates, gifts, and other transfers.

 

Article 3. GENERAL DEFINITIONS

 

Paragraph (1) defines the terms "United States," "United Kingdom," "enterprise," "competent authority," "nationals," "tax," and "Contracting State."

 

The term "United States" does not include Puerto Rico, the Virgin Islands, Guam, or any other U.S. possession or territory. The term "nationals" means, in relation to the United States, U.S. citizens. According to paragraph 5 of Article 4 (Fiscal Domicile), however, an individual who was at the time of death or other transfer, a resident of a U.S. possession and who became a U.S. citizen solely by reason of (a) being a citizen of such a possession or (b) birth or residence within such possession, will not be considered a national of the U.S. under the Convention. This exclusion conforms with Sections 2209 and 2501(c) of the Internal Revenue Code. In relation to the United Kingdom, "nationals" refers to (a) any citizen of the United Kingdom and Colonies, or (b) any British subject not possessing such citizenship or the citizenship of any other Commonwealth country or territory, if the individual in either case had the right of abode in the United Kingdom at the time of death or transfer.

 

Paragraph (2) provides that any term which is not otherwise defined in the Convention is, unless the Convention otherwise requires and subject to the provisions of Article 11 (Mutual Agreement Procedure), to have the meaning which it has under the tax laws of the Contracting State whose tax is being determined.

 

Article 4. FISCAL DOMICILE

 

This Article sets forth rules for resolving cases of double domicile. The determination of a single treaty domicile is important, since the country of domicile has the primary right to tax the worldwide estate and other transfers, with the exception of property covered by Articles 6 (Immovable Property (Real Property) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services).

 

Under paragraph (1), domicile is determined initially under the law of each Contracting State. An individual is domiciled in the United States (a) if he was a U.S. resident or (b) if he was a U.S. national, and had been a resident in the United States at any time during the preceding 3 years. The Convention uses the term "resident (domiciliary)" because U.S. domestic law equates the term "resident" with the term "domiciliary." The 3 year rule parallels a provision in the U.K. capital transfer tax that a U.K. domiciliary will be deemed to be domiciled in the United Kingdom for a period of 3 years after a change of domicile is actually made.

 

Paragraph (1) also provides that an individual is domiciled in the United Kingdom if he is (a) a U.K. domiciliary under general principles of U.K. law, or (b) treated as a U.K. domiciliary for purposes of the capital transfer tax. An individual who is not considered domiciled in the United Kingdom under general law is nevertheless deemed to be domiciled there for purposes of the capital transfer tax if he:

 

(1) was domiciled in the United Kingdom on or after December 10, 1974 and within 3 years immediately preceding the taxable event; or

 

(2) was resident in the United Kingdom on or after December 10, 1974, in at least 17 of the 20 income tax years of assessment ending with the income tax year in which the taxable event occurs; or

 

(3) has, since December 10, 1974, become and remained domiciled in the Channel Islands or the Isle of Man and, immediately before becoming domiciled there, was domiciled in the United Kingdom.

 

For condition (2), "resident" is defined as for income tax purposes except that the availability of a dwelling-house in the United Kingdom is disregarded. An individual is a U.K. resident for income tax purposes for the entire year if he has been present in the United Kingdom for a single day in that year, provided he also has a dwelling-house in the United Kingdom. Thus, the dwelling-house limitation means that an individual whose principal home is not in the United Kingdom, but who comes to the United Kingdom on occasional visits and maintains a flat or house there, will not be subject to capital transfer tax under this deemed domicile provision. By virtue of these "deemed domicile" provisions, an individual who is a foreign domiciliary under general law may be treated as a U.K. domiciliary and subject to capital transfer tax on all his assets wherever situated.

 

Paragraphs (2), (3), and (4) of the Convention set forth rules for resolving cases where, under the definitions in paragraph (1), there is a double domicile. Paragraph (2) provides that a U.K. national domiciled in both Contracting States shall be deemed to be domiciled in the United Kingdom for purposes of the Convention if he had not been resident in the United States for Federal income tax purposes in 7 or more of the 10 taxable years ending with the year in which the death or transfer occurs. The effect of this rule is to restrict the right of the United States to tax the estate and other transfers of a U.K. national and domiciliary who has been resident in the United States for less than 7 out of 10 years to certain situs property. The rule is based upon the concept that a Contracting State should not tax the estate or other transfers of an individual on a domiciliary basis if the individual has not been present in that State for a significant period of time.

 

Paragraph (3) is the reciprocal of paragraph (2). It provides that a U.S. national domiciled in both Contracting States shall be deemed to be domiciled in the United States for purposes of the Convention if he had not been resident in the United Kingdom in 7 or more of the 10 income tax years of assessment ending with the year in which the death or transfer occurs. For these purposes, residence in the United Kingdom is determined under the income tax rules, but the fact that a person maintains a dwelling-house in the United Kingdom is disregarded. The dwelling-house limitation has the same effect as in the "deemed domicile" provisions of U.K. internal law; thus a casual visitor who maintains a dwelling-house in the United Kingdom will not be considered a U.K. resident.

 

Paragraph (4) is subordinate to paragraphs (2) and (3). It provides rules for resolving cases of dual domicile where the 7 of 10 year rules do not apply. Under paragraph (4), an individual's domicile is determined as follows: (a) he will be deemed to be domiciled in the Contracting State in which he maintained his permanent home; if he had a permanent home in both Contracting States or in neither, his domicile will be deemed to be in the Contracting State with which his personal and economic relations were closest (in other words, the State in which his center of vital interests was located); (b) if the Contracting State in which the individual's center of vital interests was located cannot be determined, his domicile will be deemed to be in the Contracting State in which he had an habitual abode; (c) if he had an habitual abode in both Contracting States or in neither, his domicile will be deemed to be in the Contracting State of which he was a national; and (d) if he was a national of both Contracting States or neither, the competent authorities of the Contracting States will settle the issue by mutual agreement. These rules are similar to the rules in the OECD Model Convention on Estates and Inheritances.

 

Paragraph (5), as previously described, provides that an individual who was a resident of a U.S. possession and, who became a U.S. citizen solely by reason of citizenship, birth, or residence in that possession shall not be considered domiciled in or a national of the United States for purposes of this Convention.

 

Article 5. TAXING RIGHTS

 

This Article establishes taxing rights for property taxable other than on a situs basis. Paragraph (1)(a) provides that property of a decedent or transferor domiciled in one of the Contracting States shall not be taxable in the other Contracting State unless it is property covered in Articles 6 (Immovable Property (Real Property)) or 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services). The effect of this provision is to give exclusive taxing rights to the country of domicile with respect to all property except that covered by Articles 6 and 7.

 

Paragraph (1)(b), however, provides that paragraph (1)(a) does not apply if the decedent or transferor was a national of the State in which he was not domiciled. In effect, this paragraph preserves residual taxation based on nationality.

 

Paragraph (2) provides that where the decedent or transferor was domiciled in neither Contracting State, but was a national of one, (but not both) of the Contracting States, property taxable in the Contracting State of nationality shall not be taxable in the other Contracting State. Thus, property owned by a third-country domiciliary that is taxable in the Contracting State of nationality is not taxable in the other Contracting State, even if it has a situs in that State, with the exception of property covered by Articles 6 (Immovable Property (Real Property)) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for Independent Personal Services).

 

The rules of paragraphs (1) and (2) do not apply to property which is subject to the U.S. tax on generation-skipping transfers or which is comprised in a U.K. settlement. Paragraph (3), however, provides that property held in a generation-skipping trust or trust equivalent shall not be taxable by the United States on the occasion of a generation-skipping transfer if, at the time of the transfer, the deemed transferor was domiciled in the United Kingdom and was not a national of the United States. Paragraph (4) similarly precludes the United Kingdom from taxing property comprised in a settlement if at the time of settlement the settlor was domiciled in the United States and was not a national of the United Kingdom. Settled property includes property held in trust for successive beneficiaries or for anyone contingent on the occurrence of some event. The rules in paragraphs (3) and (4) do not apply to property covered by Articles 6 (Immovable Property (Real Property)) or 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services), which is taxable in the country of situs.

 

Paragraph (5) provides that the preceding paragraphs of Article 5 (Taxing Rights) shall not prevent a Contracting State from imposing tax where property, under the rules of paragraphs (1) through (4), is taxable only in the other Contracting State but tax, though chargeable, is not paid. A tax, however, shall be deemed paid where tax liability is reduced or eliminated by means of a specific exemption, deduction, exclusion, credit, or allowance.

 

Paragraph (6) allows the competent authorities to determine by mutual agreement the situs of property if, at the time of death or transfer, the decedent or transferor was not domiciled in either Contracting State and each State would regard the property as situated in its territory and therefore taxable under its laws. An example would be bearer bonds issued by a U.S. corporation held in a safe deposit box in a U.K. bank by a decedent domiciled in France. The United States would generally consider the bonds to be U.S. situs property because they are issued by a domestic corporation. The United Kingdom would consider the bonds to have a U.K. situs, since bearer bonds are situated where located.

 

Article 6. IMMOVABLE PROPERTY (REAL PROPERTY)

 

This Article, which is similar to the immovable property article in the OECD Model Convention on Estates and Inheritances, and the United States-Netherlands Estate Tax Convention, provides that immovable property may be taxed in the Contracting State in which the property is situated. The term "immovable property" is defined in accordance with the law of the Contracting State in which the property is situated. The term generally includes, for example, property accessory to immovable property, livestock and equipment used in agriculture and forestry, and rights to payment for the working of mineral deposits and other natural resources. Debts secured by mortgage or otherwise are not considered immovable property, nor are ships, boats, and aircraft.

 

Article 7. BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT AND ASSETS PERTAINING TO A FIXED BASE USED FOR THE PERFORMANCE OF INDEPENDENT PERSONAL SERVICES

 

Paragraph (1) establishes the general rule that, with the exception of assets referred to in Article 6 (Immovable Property (Real Property)), assets forming part of the business property of a permanent establishment of an enterprise may be taxed in the Contracting State in which the permament establishment is situated.

 

Paragraph (2) defines the term "permanent establishment" as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Illustrations of a permanent establishment are set forth in paragraph (2)(b). Paragraph (2)(c) states that a building site or construction or installation project constitutes a permanent establishment only if it lasts for more than twelve months. This twelve month period begins when work physically commences in the other Contracting State. A series of contracts or projects which are interdependent both commercially and geographically is to be treated as a single project for the purpose of applying the twelve months test.

 

Paragraph (2)(d) provides that a permanent establishment does not include: the use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to an enterprise; the maintenance of a stock of goods or merchandise belonging to an enterprise solely for the purpose of storage, display or delivery; the maintenance of a stock of goods or merchandise belonging to an enterprise solely for the purpose of processing by another enterprise; the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for an enterprise; or the maintenance of a fixed place of business solely for the purpose of carrying on, for an enterprise, any other activity of a preparatory or auxiliary character. A fixed place of business used solely for one or more of these purposes will not be considered a permanent establishment under the Convention.

 

Under paragraph (2)(e), a person (other than an agent of an independent status to whom paragraph (2)(f) applies) will be deemed to constitute a permanent establishment if such person is acting in a Contracting State on behalf of an enterprise and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless that person's activities are limited to the activities described in paragraph (2)(d).

 

On the other hand, paragraph (2)(f) provides that an enterprise of one Contracting State will not be deemed to have a permanent establishment in the other Contracting State merely because such enterprise carries on business in the other Contracting State through a broker, general commission agent, or any other agent of an independent status, where the broker or agent is acting in the ordinary course of his business.

 

Under paragraph (2)(g), the fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State shall not of itself constitute either company a permanent establishment of the other.

 

Paragraph (3) provides that, except for assets described in Article 6 (Immovable Property (Real Property)), assets pertaining to a fixed base used for the performance of independent personal services may be taxed by a Contracting State if the fixed base is situated in that State. The concept of a "fixed base" is analogous to that of a "permanent establishment."

 

Article 8. DEDUCTIONS, EXEMPTIONS, ETC.

 

Paragraph (1) states that deductions shall be allowed in accordance with the law in force in the Contracting State in which the tax is imposed. Section 2106(a)(1) of the Internal Revenue Code accords the estate of a nonresident alien a deduction for allowable expenses in the proportion which the value of the decedent's gross estate situated in the United States bears to the value of his entire gross estate, wherever situated. The Code does not provide for any deductions, other than charitable or marital, for gift tax purposes. Since gifts are valued at their market value, however, any debt of the donor assumed by the donee constitutes a diminution in the total value of the transfer subject to tax. Deductions for generation-skipping tax purposes follow the relevant estate or gift tax rule.

 

The U.K. capital transfer tax provides that a liability secured by a particular property is deducted from the value of that property. Moreover, a liability to a person resident outside the United Kingdom which is neither payable in the United Kingdom nor an encumbrance on U.K. property is deductible from property outside the United Kingdom. In either case, if the debt exceeds the value of the property against which it is deductible, it may be deducted from the rest of the decedent's or transferor's property.

 

Paragraph (2) provides the benefits of the U.S. marital deduction for property which may be taxed in the United States and which passes to a spouse from a decedent or transferor who was domiciled in or a national of the United Kingdom. The benefit is given to the same extent as if (a) the decedent or transferor had been domiciled in the United States and (b) the decedent's gross estate or the transferor's transfers were limited to property which may be taxed by the United States.

 

The estate of a nonresident alien, who was domiciled in or a national of the United Kingdom, would thus be entitled to the full marital deduction provided by Section 2056 of the Code to the extent that the estate has property subject to estate tax in the United States. Thus, the deduction is limited to the greater of $250,000 or 50 percent of the value of the adjusted gross estate taxable in the United States. The marital deduction for gifts would be aggregated under the Convention in the same manner provided in Section 2523 of the Code: the first $100,000 of inter-spousal gifts taxable in the United States would be exempt, the second $100,000 would be fully taxable, and 50 percent of the amount of subsequent inter-spousal gifts would be taxable. All gifts by a transferor are cumulative regardless of whether the deduction has been made available by the Code or the Convention. Thus, if a transferor uses the full $100,000 deductions under the Code while domiciled in the United States and then becomes domiciled in the United Kingdom, the next $100,000 of gifts would be fully taxable under the Convention.

 

Paragraphs (3) and (4) provide for special marital exemptions for purposes of the U.K. capital transfer tax. In the absence of the Convention, transfers between husband and wife are wholly exempt from such tax, whether they are lifetime gifts or transfers on death and whether the property is settled or not. But where the spouse making the transfer is domiciled in the United Kingdom for purposes of the tax and the other spouse is domiciled outside the United Kingdom, the exemption is limited to a cumulative total of 25,000.

 

Paragraph (3) provides for exemption to the extent of 50 percent of the value of property which passes to the spouse from a decedent or transferor who was domiciled in or a national of the United States and which may be taxed in the United Kingdom. The exemption is computed after taking into account all exemptions except those for transfers between spouses. The exemption is only available where the transfer would have been wholly exempt had the recipient spouse been domiciled in the United Kingdom and where no larger marital deduction is available under U.K. law, apart from the Convention. Property passing to a spouse domiciled in the United States from a decedent or transferor domiciled in the United States would be wholly exempt under the U.K. capital transfer tax. Thus, in this case, U.K. law provides greater relief than the treaty. On the other hand, the Convention would provide greater relief if the decedent or transferor was domiciled in the United Kingdom.

 

Paragraph (4)(a) provides for a marital deduction in the United Kingdom for qualifying transfers into a settlement or trust in which the recipient spouse has a life interest. The paragraph applies where property is comprised in a settlement on the death of a U.K. domiciliary and the surviving spouse was domiciled in or a national of the United States. The exemption is only available if: (i) the spouse is entitled to an immediate interest in possession under the settlement, (ii) the transfer would have been wholly exempt if the recipient spouse had been domiciled in the United Kingdom, and (iii) U.K. law apart from the Convention would not provide a larger marital exemption. The exemption consists of 50 percent of the value of the property transferred, calculated in the same manner as the exemption provided for in paragraph (3).

 

The exemption provided for in paragraph (4)(a) is only available if it is elected by the personal representatives and trustees of every settlement in which the deceased person had an interest in possession immediately before the decedent's death. The personal representatives and trustees may be subsequently liable for capital transfer tax if, for example, the nondomiciled spouse eventually acquires the property outright. Paragraph (4)(b) provides, for example, that the election will be nullified and the settled property taxable as though given outright to the spouse if the spouse becomes absolutely and indefeasibly entitled to such property at any time after the decedent's death. Accordingly, the purpose of the election is to protect the interests of the personal representatives and trustees.

 

Paragraph (5) provides that U.S. tax imposed on the estate of a national of the United Kingdom, who was neither domiciled in nor a national of the United States, will not be greater than the tax which would have been imposed if the decedent had been domiciled in the United States and taxed by the United States on his worldwide property. Paragraph (5) does not require a formal election; the appropriate information need only be included in an estate tax return, which is filed or amended within the applicable time period.

 

Article 9. CREDITS

 

This Article establishes rules for determining which Contracting State will credit the taxes of the other Contracting State where both States tax the same property.

 

Paragraph (1) applies where the United States imposes tax on the basis of the decedent's or transferor's domicile or nationality. Under paragraph (1)(a), the United States will credit tax paid to the United Kingdom with respect to property covered by Articles 6 (Immovable Property (Real Property)) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services). Paragraph (1)(b) requires the United States to credit taxes imposed in the United Kingdom on the basis of the decedent's or transferor's domicile against U.S. taxes imposed on the basis of nationality. This enables the United States to retain the residual right to tax the estate and other transfers of its citizens domiciled in the United Kingdom.

 

Paragraph (2) establishes reciprocal credit rules for the United Kingdom. Paragraphs (1) and (2) taken together thus grant the Contracting State where the decedent or transferor was domiciled the right to tax the estate or transfers on a worldwide basis, with a credit for tax paid to the other State with respect to property taxed in that State on the basis of situs. The Contracting State of nationality may tax the estate or transfers of its nationals, but must credit the tax paid to the other State on a domiciliary or situs basis. Unlike the United States, the United Kingdom does not tax the estates or transfers of its citizens on a worldwide basis. Under the Convention, however, it can apply its statutory source rules to its non-U.K. domiciled nationals. Thus, the United Kingdom could impose tax, with a credit for U.S. taxes, on registered shares in a U.K. corporation held by a U.K. national domiciled in the United States.

 

Paragraph (3) prescribes credit rules where the same event gives rise to tax on property held under the trust laws of the two countries. Paragraph (3)(a) requires a Contracting State to credit tax imposed in the other Contracting State on property covered under Articles 6 (Immovable Property (Real Property)) or 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services). Paragraph (3)(b) provides that the United Kingdom will credit the U.S. tax on other property where:

 

(i) the taxable event was a generation-skipping transfer and the deemed transferor was domiciled in the United States at the time of the deemed transfer;

 

(ii) the taxable event was the exercise or lapse of a power of appointment and the holder of the power was domiciled in the United States at the time of the exercise or lapse; or

 

(iii) in situations not covered by (i) or (ii), the settlor or grantor was domiciled in the United States at the time when the tax is imposed.

 

Paragraph (3)(c) provides that in all situations not covered by paragraph (3)(b), or where the United States may not tax on the basis of situs, the United States will credit the U.K. tax. Although paragraph (3)(c) is worded broadly, paragraph 3(b) preserves primary U.S. taxing jurisdiction in those situations where U.S. domiciliaries, as determined under the treaty, are taxable under the Federal estate, gift, and generation-skipping transfer tax laws of the United States.

 

Paragraph (4) establishes several general rules for computing the credit allowed under the Article. The credits allowed by a Contracting State shall not include taxes not levied in the other Contracting State because of a credit allowed by that other State. A tax is not creditable unless and until it is paid. In addition, the credit allowed by a Contracting State with respect to any property cannot exceed the portion of the tax paid in that State which is attributable to that property. In making this calculation, the tax paid shall be determined before the credit is given, but shall be reduced by any credit given for another tax.

 

Consider the estate of a decedent who was a U.S. national domiciled in the United Kingdom, which consisted of assets in the United Kingdom with a fair market value of $100 and U.S. real property with a fair market value of $20. The entire $120 estate would be taxable both in the United States and the United Kingdom. The United States would retain primary taxing jurisdiction over the U.S. real property and the United Kingdom over the other assets. If the U.K. capital transfer tax on the $120 estate were $24 and the U.S. estate tax were $30 before the allowance for any credits, the credits would be computed as follows. The United Kingdom would credit $4 of U.S. tax. Although $5 represents the portion of the U.S. tax of $30 attributable to U.S. real property, ($20/ $120) x ($30), the credit would be limited to $4, which is the portion the U.K. tax of $24 attributable to the U.S. real property. The United States would credit $20 of the U.K. tax, which represents the portion of the U.K. tax of $24 attributable to U.K. property, ($100/$120) x ($24). The net U.K. tax liability would be $20 ($24 less $4) and the U.S. tax liability would be $10 ($30--$20).

 

Paragraph (5) provides that a claim for credit or refund under the Convention generally must be made within six years from the date of the event giving rise to the tax, or, where later, within one year from the last date on which the tax which is to be credited is due. The competent authority may, in appropriate circumstances, extend this time limit where the final determination of the taxes which are the subject of the claim is delayed.

 

Article 10. NON-DISCRIMINATION

 

Paragraph (1)(a) states that nationals of a Contracting State shall not be subjected in the other State to taxation or any other requirement connected therewith which is other or more burdensome than the taxation or requirements connected therewith to which nationals of the other Contracting State in the same circumstances are or may be subjected. Paragraph (1)(b), however, recognizes that a nonresident alien is not in the same circumstances as a U.S. national, who is taxed by the United States on a worldwide basis regardless of his domicile. Paragraph (1)(b) provides that paragraph (1)(a) shall not prevent the United States from taxing a national of the United Kingdom who is not domiciled in the United States as a nonresident alien in accordance with U.S. internal law. Paragraph (3) further points out that this Article does not require either Contracting State to grant to individuals not domiciled in that Contracting State any personal allowances, reliefs, or tax reductions which are granted to its domiciliaries. Paragraphs (1) and (3), however, must be read in conjunction with paragraph (5) of Article 8 (Deductions, Exemptions, Etc.) which specifically limits the U.S. tax imposed on the property of a U.K. national not domiciled in the United States to the tax that would have been imposed had the decedent been domiciled in the United States at the time of death.

 

Paragraph (2) provides that a permanent establishment which an enterprise of one Contracting State has in the other Contracting State will not be subject in that other Contracting State to less favorable taxation than an enterprise of the other Contracting State carrying on the same activities. Paragraph (4) extends similar protection to an enterprise of a Contracting State, the capital of which is wholly or partly owned or controlled by one or more residents of the other Contracting State.

 

Paragraph (5) limits the application of this Article to the taxes which are the subject of the Convention, i.e., the Federal gift tax and the Federal estate tax, including the tax on generation-skipping transfers in the United States and the capital transfer tax in the United Kingdom.

 

Article 11. MUTUAL AGREEMENT PROCEDURE

 

Under paragraph (1), if a person believes that the actions of one or both of the Contracting States result or will result in taxation which is not in accordance with the Convention, he may present his case to the competent authority of either Contracting State. Although a person need not exhaust any other administrative or judicial remedies prior to resorting to the mutual agreement procedure, it is anticipated that a person usually will do so.

 

Paragraph (2) provides that, if the competent authority considers the objection justified and cannot by itself arrive at an appropriate solution, it shall attempt to resolve the case by agreement with the competent authority of the other Contracting State. In cases in which the competent authorities reach an agreement, taxes will be imposed and refunds of taxes will be allowed, as appropriate, by the Contracting States. In the case of the United States, where an agreement is reached between the competent authorities which requires the United States to make a refund of tax or to extend any similar credit, the refund or credit will be made, assuming presentation of the case to the competent authority within a reasonable time, notwithstanding any procedural barriers existing under U.S. law, including any statute of limitations. In cases where an agreement cannot be reached between the competent authorities, the United States will not be required to provide any relief from double taxation on a unilateral basis.

 

Paragraph (3) permits the competent authorities of the Contracting States to endeavor to resolve any difficulties or doubts arising as to the application of the Convention, such as the meaning of terms not otherwise defined in the Convention.

 

Under paragraph (4), the competent authorities may communicate with each other directly and, when advisable, meet together for an oral exchange of opinions, for the purpose of reaching an agreement.

 

Article 12. EXCHANGE OF INFORMATION

 

This Article provides for a system of administrative cooperation between the competent authorities of the two Contracting States. It requires the exchange of available information necessary for carrying out the Convention and the domestic laws of the Contracting States concerning the taxes covered by the Convention. The competent authorities may exchange information in connection with tax compliance generally, not merely illegal acts or crimes.

 

The information exchanged must be treated as secret. However, the information may be disclosed to persons or authorities (including a court or administrative body) concerned with the assessment, collection, or enforcement of, or prosecution with respect to, the taxes which are the subject of the Convention. No information may be exchanged which would disclose any trade, business, industrial or professional secret or any trade process.

 

Article 13. EFFECT ON DIPLOMATIC AND CONSULAR OFFICIALS AND DOMESTIC LAW

 

Paragraph (1) provides that nothing in the Convention shall affect the fiscal privileges of diplomatic and consular officials under the general rules of international law or under the provisions of special agreements.

 

Paragraph (2) provides that the Convention will not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded by the laws of either Contracting State. This rule reflects the principle that a double taxation Convention should not increase the tax burden imposed by a Contracting State.

 

Article 14. ENTRY INTO FORCE

 

Paragraph (1) provides that the Convention shall be ratified and that instruments of ratification shall be exchanged at Washington, D.C. as soon as possible after both States have ratified the Convention.

 

Paragraph (2) provides that the Convention will become effective on the thirty-first day following the date of exchange of instruments of ratification. The Convention shall apply in the United States with respect to the estates of individuals dying and transfers taking effect after the effective date. The Convention shall apply in the United Kingdom with respect to property by reference to which a tax liability arises after the effective date.

 

Paragraphs (3), (4), and (5) set forth transition rules for determining when the 1945 Estate Tax Convention will cease to have effect. These rules are important because of the transition rules contained in the U.K. capital transfer tax. Paragraph (3) states the general rule that the 1945 Convention shall cease to have effect for property to which the new Convention will apply under paragraph (2). Paragraph (4), however, provides that any provision of the 1945 Convention which would afford greater relief than the new Convention will continue to apply in the United Kingdom with respect to:

 

(a) any inter vivos gift made by a decedent before March 27, 1974, or

 

(b) any settled property in which the decedent had a beneficial interest in possession before March 27, 1974 but not at any time thereafter.

 

These exceptions relate to transition rules in the U.K. capital transfer tax which will cease to have effect with respect to deaths occurring on or after March 27, 1981. Paragraph (5) provides that the 1945 Convention will terminate on the last date on which, under the foregoing rules, it has effect.

 

Article 15. TERMINATION

 

Paragraph (1) provides that the Convention shall remain in force until it is terminated by one of the Contracting States. A Contracting State may not terminate the Convention until after it has been in force at least 5 years. After the initial 5 year period, a Contracting State may terminate the Convention by providing the other State at least 6 months' prior notice through diplomaitc channels. If the Convention is terminated in accordance with these procedures, it will continue to apply to taxable events occurring between the time notice is given and the termination date specified in the notice.

 

Paragraph (2) provides that the termination of the Convention will not have the effect of reviving the 1945 Convention or other treaties previously abrogated.

 

FN1. Treaties and Other International Act Series (TIAS 9580). Pertinent excerpts from Senate Report No. 96-6, page 375; Treasury Department Technical Explanation, page 385; Senate Executive R is not published.

 

FN1. Page 369; Technical Explanation, page 385; Senate Executive R is not published.

 

FNa1. The questions and answers relating specifically to the other protocols and treaties considered at the June 6, 1979 hearings are set forth in the committee reports relating to those treaties.

 

FN1. It is the practice of the Treasury Department to prepare for the use of the Senate and other interested persons a Technical Explanation of the tax conventions that are submitted to the Senate for its advice and consent to ratification.

 

An Estate and Gift Tax Convention with the United Kingdom of Great Britain and Northern Ireland was signed October 19, 1978, and submitted by the President to the Senate on May 2, 1979. On June 6, 1979, the Senate Committee on Foreign Relations held hearings, and this Technical Explanation was presented. The Senate voted its advice and consent on July 19, 1979, and instruments of ratification were exchanged on October 11, 1979.

 

FN2. Page 369; pertinent excerpts from Senate Executive Report No. 96-6, page 375; Senate Executive R is not published.