TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION 

BEFORE THE SENATE COMMITTEE ON FOREIGN RELATIONS HEARING ON 

THE PROPOSED TAX PROTOCOLS WITH SWEDEN AND FRANCE AND THE 

PROPOSED TAX TREATY WITH BANGLADESH1

FEBRUARY 2, 2006 

My name is Tom Barthold. I am the Acting Chief of Staff of the Joint Committee on 

Taxation. It is my pleasure to present the testimony of the staff of the Joint Committee today 

concerning the proposed income tax protocol with Sweden, the proposed income and estate and 

gift tax protocols with France, and the proposed income tax treaty with Bangladesh. 

Overview

As in the past, the Joint Committee staff has prepared pamphlets covering the proposed 

treaty and protocols. The pamphlets provide detailed descriptions of the proposed treaty and 

protocols, including comparisons with the 1996 U.S. model income tax treaty (the “U.S. 

model”), which generally reflects preferred U.S. tax treaty policy, and with other recent U.S. tax 

treaties. The pamphlets also provide detailed discussions of issues raised by the proposed treaty 

and protocols. We consulted with the Treasury Department and with the staff of your committee 

in analyzing the proposed treaty and protocols and in preparing the pamphlets. 

The proposed income tax protocol with Sweden would amend an existing treaty signed in 

1994. The proposed income tax protocol with France would amend an existing tax treaty that 

was signed in 1994. The proposed estate tax protocol with France would amend an existing 

treaty that was signed in 1978. The proposed income tax treaty with Bangladesh represents a 

new tax treaty relationship for the United States. A proposed treaty with Bangladesh was signed 

in 1980 but never went into force. My testimony today will highlight some of the key features of 

the proposed protocols and treaty and certain issues that they raise. 

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 This document may be cited as follows: Joint Committee on Taxation, Testimony of the Staff of 

the Joint Committee on Taxation Before the Senate Committee on Foreign Relations Hearing on the 

Proposed Tax Protocols with Sweden and France and the Proposed Tax Treaty with Bangladesh (JCX08-06), February 2, 2006. 

JOINT COMMITTEE ON TAXATION 

February 2, 2006 

JCX-8-06 
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Sweden

Updates to existing treaty

The proposed protocol modifies several provisions in the existing treaty to conform it to 

new U.S. domestic tax laws, and to make it similar to more recent U.S. income tax treaties and 

the U.S. model. For example, the proposed protocol expands the “saving clause” provision of 

the existing treaty to allow the United States to tax certain former citizens and long-term 

residents under the special expatriation tax regime of U.S. internal law, as amended in 1996 and 

2004. The proposed protocol also updates the existing treaty to include the rules in recent U.S. 

treaties related to fiscally transparent entities. 

New “zero-rate” dividend provision

The proposed protocol also would eliminate withholding tax on dividends paid by one 

corporation to another corporation that owns at least 80 percent of the stock of the dividendpaying corporation (often referred to as “direct dividends”), provided that certain conditions are 

met. The elimination of withholding tax under these circumstances is intended to reduce further 

the tax barriers to direct investment between the two countries. 

Under the present treaty, these dividends may be taxed by the source country at a 

maximum rate of five percent, a tax that the United States, but not Sweden, imposes as a matter 

of internal law. Thus, the principal immediate effect of this provision would be to exempt 

dividends that U.S. subsidiaries pay to Swedish parent companies from U.S. withholding tax. 

With respect to dividends paid by Swedish subsidiaries to U.S. parent companies, the effect of 

this provision would be to provide greater certainty as to the continued availability of a zero rate 

of Swedish withholding tax, regardless of how Swedish domestic law might change in this 

regard. 

Until 2003, no U.S. treaty provided for a complete exemption from withholding tax under 

these circumstances, and the U.S. and OECD models currently do not provide for such an 

exemption. However, many bilateral tax treaties to which the United States is not a party 

eliminate withholding taxes under similar circumstances, and the same result has been achieved 

within the European Union under its “Parent-Subsidiary Directive.” Moreover, in 2003 and 

2004, the Senate ratified U.S. treaties and protocols containing zero-rate provisions with the 

United Kingdom, Australia, Mexico, Japan, and the Netherlands. These provisions are similar to 

the provision in the proposed protocol, although the treaty with Japan allows a lower ownership 

threshold (i.e., more than 50 percent, as opposed to at least 80 percent) than do the other 

provisions, among other differences. 

Because zero-rate provisions have become a trend in U.S. tax treaty practice, the 

Committee may wish to examine the Treasury Department’s criteria for determining the 

circumstances under which a zero-rate provision may be appropriate. In previous testimony 

before the Committee, the Treasury Department has indicated that zero-rate provisions should be 

limited to treaties that have the strongest limitation-on-benefits and information-exchange 

provisions, where appropriate in light of the overall balance of the treaty. The Committee may 

wish to ask what “overall balance” considerations might prompt the Treasury Department not to 
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seek a zero-rate provision in a treaty that has limitation-on-benefits and information-exchange 

provisions meeting the highest standards. The Committee also may wish to examine some of the 

specific design features of the provisions, such as ownership thresholds, holding period 

requirements, the treatment of indirect ownership, and heightened limitation-on-benefits 

requirements, as discussed in detail in our pamphlet. 

It is also worth noting that a zero rate generally would apply with respect to dividends 

received by tax-exempt pension funds, similar to provisions in other recent treaties. 

Anti-treaty-shopping provision

The proposed protocol replaces the limitation-on-benefits article of the current treaty with 

a new article that reflects the anti-treaty-shopping provisions included in the U.S. model and 

most of the more recent U.S. income tax treaties. For example, the proposed protocol provides 

for tests for publicly traded companies, ownership and base erosion, derivative benefits, and 

active business. 

 The proposed protocol also provides a new, special anti-abuse rule to address the use of 

certain triangular branch structures to earn certain types of U.S. income. Under this rule, certain 

payments of interest, royalties, or insurance premiums from a U.S. payor to a permanent 

establishment of a Swedish resident in a third country may be subject to U.S. withholding tax if 

Sweden does not tax such income and the third country only taxes it lightly. The proposed 

protocol limits such U.S. withholding tax to 15 percent in the case of interest or royalties. 

Unlike the U.S. model, but like the recent protocol amending the Netherlands income tax 

treaty, the publicly traded company test in the proposed protocol includes a set of requirements, 

referred to in the Netherlands protocol as the “substantial presence” test, to determine whether a 

company’s public trading or management is adequately connected to its residence in a treaty 

country. Under the proposed protocol, a company that is a resident of Sweden or the United 

States is entitled to all treaty benefits if the principal class of its shares, and any disproportionate 

class of shares, is regularly traded on one or more recognized stock exchanges, and, in addition, 

the company meets either a public trading connection test or a management and control test. The 

public trading connection test is met if the company's principal class of shares is primarily traded 

(1) on a recognized stock exchange in the treaty country in which the company is resident, (2) in 

the case of a company resident in the United States, on a recognized stock exchange located in a 

third country that is a party to the North American Free Trade Agreement (“NAFTA”), or (3) in 

the case of a company resident in Sweden, on a recognized stock exchange located in the 

European Economic Area (“EEA”), the EU, or in Switzerland. The management and control test 

is met if the company’s primary place of management and control is in the treaty country where 

it is a resident. 

The intent of this provision generally is to prevent certain companies from qualifying for 

treaty benefits if their nexus to their residence country is not sufficiently strong. The provision 

reflects a significant tightening of the public trading test in this regard. The Committee may 

wish to ask whether this tighter public trading test is likely to be included in future treaties, as 

opposed to the traditional, looser test. 
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It is also worth noting that, unlike most recent treaty instruments, including the 

Netherlands protocol, the proposed protocol does not require that the public company be listed in 

a treaty country. Consequently, the test under the proposed treaty is based primarily upon 

regional nexus. The Committee may wish to ask whether this regional focus is appropriate in the 

light of the anti-treaty-shopping purpose of this provision, and whether such a focus would 

remain viable if the political climate in Europe were to shift in favor of decreasing the scope of 

European integration. 

Taxation of certain U.S. government pensions

The proposed protocol amends the existing treaty to include a special new rule related to 

Swedish tax on U.S. government pensions paid to certain Swedish citizens and residents. The 

provision bars Sweden from imposing tax on such pensions paid to former employees who were 

hired prior to 1978 to work for the U.S. Embassy in Stockholm or the U.S. consulate general in 

Gothenberg. These employees’ salaries, and, therefore, their future pensions, were reduced 

because the U.S.-Sweden treaty in force at that time exempted their salaries from Swedish tax. 

When the treaty was renegotiated in 1994, Sweden was permitted to tax such pensions, which 

were not increased by the United States, notwithstanding the previous decrease. The Committee 

may wish to satisfy itself regarding the necessity of a treaty provision solely affecting the 

Swedish taxation of Swedish individuals. 

France

Income Tax Protocol

The proposed income tax protocol with France would make several modifications and 

updates to the existing treaty. The proposed protocol would amend the dividends provision of 

the existing treaty by expanding the class of shareholders eligible for the treaty's 15-percent rate 

of U.S. withholding tax on dividends from real estate investment trusts (“REITs”). The 

provisions of the proposed protocol in this regard are similar to those included in other recent 

U.S. income tax treaties and protocols. 

The proposed protocol replaces the pension rules of the current treaty and provides new 

rules for the taxation of pensions and social security benefits. The new pension rules are similar 

to those in recent U.S. tax treaties with both the United Kingdom and the Netherlands. 

The proposed protocol amends the residence rules of the current treaty in a manner 

intended to address certain ambiguities in the tax treatment of cross-border investments through 

partnerships and similar entities. Ambiguities have arisen in particular circumstances in part 

because of the different rules governing the taxation of partnerships under French and U.S. 

internal law. 

The proposed protocol expands the “saving clause” provision of the existing treaty to 

allow the United States to tax former long-term residents whose termination of residency has as 

one of its principal purposes the avoidance of tax. The existing treaty only applies to former 

citizens. The extension of this provision to long-term residents allows the United States to apply 

amendments made in 1996 to the special tax regime for expatriates under section 877 of the 

Code. The proposed protocol does not, however, update the saving clause provision to reflect 
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more recent changes made to the special expatriation rules by the American Jobs Creation Act of 

2004 (“AJCA”). AJCA eliminated subjective determinations of tax-avoidance purpose and 

replaced them with objective rules for determining the applicability of the special tax regime for 

expatriates. 

In three of the four treaty instruments before the Committee today (the two proposed 

French protocols and the proposed Bangladesh treaty), the saving clause uses the obsolete 

“principal purposes of tax avoidance” formulation in determining whether the special tax regime 

may apply to individuals who expatriate, even though the subjective determinations of taxavoidance purpose under prior law were recently eliminated. Treasury Department technical 

explanations note that under these instruments, the determination of whether there was a 

principal purpose of tax avoidance is made under the laws of the United States. The technical 

explanations further state that this language would include “the irrebuttable presumptions based 

on average annual net income tax liability and net worth under section 877,” and that the new 

objective tests “represent the administrative means by which the United States determines 

whether a taxpayer has a tax avoidance purpose.” Thus, although the provisions employ the 

now-obsolete concept of a tax-avoidance purpose, the Treasury Department maintains that this 

language should be understood as fully preserving U.S. taxing jurisdiction under the expatriation 

tax rules in their current form. The Committee may wish to satisfy itself that the language 

included in the proposed protocol allows the United States to exercise its full taxing jurisdiction 

with respect to former citizens and long-term residents. 

Estate Tax Protocol

The proposed estate, inheritance, and gift tax protocol with France would make several 

updates and other modifications to the existing treaty. The principal purpose of the treaty is to 

reduce or eliminate double taxation in connection with estate, inheritance, and gift taxes. One of 

the general principles of the treaty is that the country in which a donor or decedent was 

domiciled may tax the estate or gifts of that individual on a worldwide basis, but must credit tax 

paid to the other country with respect to certain types of property located in such other country. 

Among other updates to the treaty, the proposed protocol would add a saving clause, 

which would protect the right of the United States to apply its estate and gift tax rules to U.S. 

citizens, as well as to certain former U.S. citizens and long-term residents. (As noted above, this 

saving clause was not updated to reflect changes made to the special expatriation tax regime 

under U.S. law in 2004.) The proposed protocol also would provide a pro rata unified credit to 

the estate of an individual domiciled in France (other than a U.S. citizen) for purposes of 

computing the U.S. estate tax due. An estate eligible for this provision would be entitled to a 

portion of the full, generally applicable credit, based on the ratio of the value of the estate’s U.S.-

situated assets to the value of its worldwide assets. 

In addition, the proposed protocol would provide a limited U.S. estate tax marital 

deduction in cases in which the surviving spouse is not a U.S. citizen. This provision would 

apply in the case of certain small estates. The proposed protocol also would add new limits to 

the situs-based taxation of certain interspousal transfers of noncommunity property. These 

changes are generally consistent with those made in other recent U.S. treaties in this area (e.g., in 

treaties with Canada and Germany). 
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Bangladesh

The proposed income tax treaty with Bangladesh represents a new treaty relationship for 

the United States. A proposed income tax treaty was signed in 1980 but never entered into force. 

The proposed treaty with Bangladesh is similar to the U.S. model treaty in many ways, 

but it also includes certain departures from the U.S. model. In particular, the proposed treaty 

permits higher rates of source-country withholding tax on interest, royalties, and certain 

dividends than are provided for in the U.S. model. The proposed treaty also is broader than the 

U.S. model in its circumstances in which the activities of a resident of one treaty country give 

rise to a permanent establishment in the other country. In giving wider scope to permitted 

source-country taxation, the proposed treaty is similar to other treaties negotiated with 

developing countries. The Committee may wish to consider whether this concession is 

appropriate in the case of Bangladesh. 

Updating the U.S. model treaty

As a general matter, U.S. model tax treaties provide a framework for U.S. tax treaty 

policy. These models provide helpful information to taxpayers, the Congress, and foreign 

governments as to U.S. policies on tax treaty matters. Periodically updating the U.S. model tax 

treaties to reflect changes, revisions, developments, and the viewpoints of Congress with regard 

to U.S. tax treaty policy ensures that the model treaties remain meaningful and relevant. The 

current U.S. model income tax treaty was last updated in 1996. As we mentioned in the treaty 

hearings in 2003 and 2004, the Joint Committee staff believes that this model is becoming 

obsolete and is in need of an update. The Treasury Department stated at a hearing in 2004 that it 

was updating the model. The Committee may wish to inquire as to the current status of this 

project. 

I would be happy to answer any questions that the Committee may have at this time or in 

the future.