U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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29–112

" ! SENATE 104TH CONGRESS

2d Session

TREATY DOC.

1996

104–31

TAXATION CONVENTION WITH AUSTRIA

MESSAGE

FROM

THE PRESIDENT OF THE UNITED STATES

TRANSMITTING

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND

THE REPUBLIC OF AUSTRIA FOR THE AVOIDANCE OF DOUBLE

TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT VIENNA ON MAY 31,

1996.

SEPTEMBER 4, 1996.—Convention was read the first time and, together

with the accompanying papers, referred to the Committee on Foreign

Relations and ordered to be printed for the use of the Senate.

(III)

LETTER OF TRANSMITTAL

THE WHITE HOUSE, September 4, 1996.

To the Senate of the United States:

I transmit herewith for Senate advice and consent to ratification

the Convention Between the United States of America and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed

at Vienna May 31, 1996. Enclosed is an exchange of notes with an

attached Memorandum of Understanding, which provides clarification with respect to the application of the Convention in specified

cases. Also transmitted for the information of the Senate is the report of the Department of State with respect to the Convention.

This Convention, which is similar to tax treaties between the

United States and other OECD nations, provides maximum rates

of tax to be applied to various types of income and protection from

double taxation of income. The Convention also provides for exchange of information to prevent fiscal evasion and sets forth

standard rules to limit the benefits of the Convention to persons

that are not engaged in treaty shopping.

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

WILLIAM J. CLINTON.

(V)

LETTER OF SUBMITTAL

DEPARTMENT OF STATE, Washington, August 30, 1996.

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 United States of America and the

Republic of Austria for the Avoidance of Double Taxation and the

Prevention of Fiscal Evasion with Respect to Taxes on Income,

signed at Vienna on May 31, 1996 (‘‘the Convention’’). Also enclosed

for the information of the Senate is an exchange of notes with an

attached Memorandum of Understanding, which provides clarification with respect to the application of the Convention in specified

cases.

This Convention will replace the existing Convention Between

the United States of America and the Republic of Austria for the

Avoidance of Double Taxation with Respect to Taxes on Income

signed on October 25, 1956. The new Convention maintains many

provisions of the existing convention, but it also provides certain

additional benefits and updates the text to reflect current tax treaty policies.

This Convention is similar to the tax treaties between the United

States and other OECD nations. It provides maximum rates of tax

to be applied to various types of income, protection from double

taxation of income, exchange of information to prevent fiscal evasion, and standard rules to limit the benefits of the Convention to

persons that are not engaged in treaty-shopping. Like other U.S.

tax conventions, this Convention provides rules specifying when income that arises in one of the countries and is derived by residents

of the other country may be taxed by the country in which the income arises (the ‘‘source’’ country).

The Convention establishes maximum rates of tax that may be

imposed by the source country on specified categories of income, including dividends, interest, and royalties, to residents of the other

country. The withholding rates on investment income are generally

the same as in the present U.S.-Austrian treaty. Dividends from direct investments (holdings by a corporation of at least ten percent

of the equity of a firm) are subject to tax by the source country at

a rate of five percent. All other dividends are taxable at 15 percent.

These rates are the same as in many recent U.S. treaties with

OECD countries. In general, interest derived and beneficially

owned by a resident of a Contracting State is taxable only in that

State.
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Royalties derived and beneficially owned by a resident of a Contracting State are generally taxable only in that State. However,

royalties constituting consideration for the use of, or right to use,

cinematographic films, or films, tapes, or other means of reproduction used for radio or television broadcasting may also be taxed in

the Contracting State in which they arise, but the tax so charged

may not exceed ten percent of the gross amount of the royalties.

These tax withholdings do not apply, however, if the beneficial

owner of the income is a resident of one Contracting State who carries on business in the other Contracting State in which the income

arises. In that situation, the income is to be considered either business profit or income from independent personal services.

The taxation of capital gains under the Convention is a variation

on the rule in the treaty currently in force with Austria and most

recent U.S. tax treaties. In most other U.S. income tax treaties,

gains from the sale of personal property are taxed only in the seller’s State of residence unless they are attributable to a permanent

establishment or fixed base in the other State. Under the proposed

Convention, the other State may also tax gains from the sale of

personal property that is removed from a permanent establishment

or fixed base, to the extent that the gains accrued while the asset

formed part of a permanent establishment or fixed base. Double

taxation is prevented because the residence State must exclude

from its tax base any gain taxed in the other State.

The proposed Convention generally follows the standard rules for

taxation by one country of the business profits of a resident of the

other. The non-residence country’s right to tax such profits is limited to cases in which the profits are attributable to a permanent

establishment located in that country.

As do all recent U.S. treaties, this Convention preserves the right

of the United States to impose its branch profits tax in addition to

the basic corporate tax on a branch’s business. This tax is not imposed under the present treaty. The proposed Convention also accommodates a provision of the 1986 Tax Reform Act that attributes

to a permanent establishment income that is earned during the life

of the permanent establishment but is deferred and not received

until after the permanent establishment no longer exists.

Consistent with U.S. treaty policy, the proposed Convention permits only the country of residence to tax profits from international

carriage by ships or airplanes and income from the use or rental

of ships, aircraft, or containers. Under the present treaty, such

rental income is treated as royalty income, which may be taxed by

the source country if the enterprise that earns the income has a

permanent establishment in that country.

The taxation of income from the performance of personal services

under the proposed Convention is essentially the same as that

under other recent U.S. treaties with OECD countries. Unlike

many U.S. treaties, however, the proposed Convention provides for

the deductibility of cross-border contributions by temporary residents of one State to pension plans registered in the other State

under limited circumstances.

Like other U.S. tax treaties and agreements, this Convention

provides the standard anti-abuse rules for certain classes of investment income. In addition, the proposed Convention provides for the
VII

elimination of another potential abuse relating to the granting of

U.S. treaty benefits in the so-called ‘‘triangular cases,’’ to thirdcountry permanent establishments of Austrian corporations that

are exempt from tax in Austria by operation of Austrian law.

Under the proposed rule, full U.S. treaty benefits will be granted

in these ‘‘triangular cases’’ only when the U.S.-source income is

subject to a significant level of tax in Austria and in the country

in which the permanent establishment is located. This anti-abuse

rule does not apply in certain circumstances, including situations

in which the United States taxes the profits of the Austrian enterprise under subpart F of the Internal Revenue Code.

The proposed Convention contains standard rules making its

benefits unavailable to persons engaged in treaty-shopping. The

current treaty contains no such anti-treaty-shopping rules. The proposed Convention also contains the standard rules necessary for

administering the Convention, including rules for the resolution of

disputes under the Convention and for exchange of information.

The proposed Convention significantly expands the scope of the exchange of information between the United States and Austria. For

example, U.S. tax authorities will be given access to Austrian bank

information in connection with any ‘‘penal investigation.’’

The Convention authorizes the General Accounting Office and

the Tax-Writing Committees of Congress to obtain access to certain

tax information exchanged under the Convention for use in their

oversight of the administration of U.S. tax laws and treaties.

This Convention is subject to ratification. It will enter into force

on the first day of the second month following the exchange of instruments of ratification and will have effect with respect to taxes

withheld by the source country for payments made or credited on

or after the first day of the second month following entry into force

and in other cases for taxable years beginning on or after the first

day of January following the date on which the Convention enters

into force. When the present convention affords a more favorable

result for a taxpayer than the proposed Convention, the taxpayer

may elect to continue to apply the provisions of the present convention, in its entirety, for one additional year.

This Convention will remain in force indefinitely unless terminated by one of the Contracting States. Either State may terminate

the Convention after five years from its entry into force by giving

at least six months of prior notice through diplomatic channels.

An exchange of notes with an attached Memorandum of Understanding accompanies the Convention and provides clarification

with respect to the application of the Convention in specified cases.

For example, the Memorandum specifies that the term ‘‘penal investigation,’’ in connection with which U.S. tax authorities will be

given access to Austrian bank information, applies to proceedings

carried out by either judicial or administrative bodies. Of particular

importance in expanding the exchange of tax information with Austria is the provision in the Memorandum that commencement of a

criminal investigation by the Criminal Investigation Division of the

Internal Revenue Service constitutes a ‘‘penal investigation.’’

A technical memorandum explaining in detail the provisions of

the Convention will be prepared by the Department of the Treas-
VIII

ury and will be submitted separately to the Senate Committee on

Foreign Relations.

The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention. It has the full approval of both Departments.

Respectfully submitted,

LYNN E. DAVIS.
(1)
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