|Posted on July 29, 2021 at 5:40 PM|
The Treaty previously was amended by the Protocol, signed on September 23, 2009 (“Protocol”), which deleted and replaced paragraph 3 of Article 10 (Dividends) of the Treaty (“Article 10(3)”). The Protocol expanded the scope of pension or retirement benefits eligible for Treaty relief under Article 10(3). The revised Article 10(3) added individual retirement accounts (“IRAs”) to the list of programs resident in a Contracting State, distributions of dividends to which by a company resident in the other Contracting State would be exempt from source-country taxation. The CAA is effective retroactively for dividends paid on or after January 1, 2020.
Article 10(3) Generally. There are two requirements for Article 10(3) to apply. First, the pension or retirement arrangement must satisfy the limitation on benefits clause in Article 22(2) of the Treaty. Article 22(2) states that an entity described in Article 4(1)(c), which includes a retirement plan, may be entitled to Treaty benefits if more than half of its beneficiaries, members or participants, as the case may be, are entitled to Treaty benefits. Article 4(1)(c)(i) refers generally to a qualified retirement plan which is a tax-exempt employees’ trust established in a Contracting State, and which is established or sponsored by a person resident in such Contracting State within the meaning of Article 4.
The second requirement under Article 10(3) is that the pension or retirement arrangement resident in the other Contracting State must not control the company resident in the first Contracting State and making the contributions to the foreign plan or arrangement. The benefits under Article 10(3) with respect to dividends paid by a treaty country resident corporation to a qualified plan or individual retirement arrangement in the other treaty country are distinguished from benefits under Article 18 of the Treaty with respect to distributions from qualified plans.
Article 10(3) Benefits for IRAs. Article 10(3) may provide Treaty relief in a scenario, in which an IRA invests assets in stock of a corporation domiciled in the Treaty country. For example, an individual may direct his IRA custodian to invest IRA assets in Swiss corporation stock. In that case, the Swiss corporation may distribute dividends to its stockholders, including the IRA. Generally, such dividend distribution would be subject to a withholding at source under Swiss tax law. However, under Article 10(3), the distribution of dividends would be entitled to the zero percent tax rate. Thus, the IRA as an investor in Swiss corporation stock would not be subject to Swiss withholding tax on the periodic dividend distribution by the Swiss corporation.
Conversely, under Article 10(3), Swiss individual retirement solutions, known commonly as Pillar 3a arrangements, would not be subject to withholding at source by the U.S. on dividend distributions from investments in U.S. corporation stock. Thus, for example, a Swiss retiree residing in the U.S. and investing in U.S. corporation stock through a Pillar 3a arrangement would not be subject to U.S. withholding tax on periodic dividend distributions from the U.S. company.