large extent, the income tax treaties determine the amount of tax to be paid to the
country where the income is produced and the amount to be paid to the taxpayer’s
country of residence. It does this by providing for reduced rates of tax or complete
exemptions from tax for certain specified items of income. For example, under inter-
nal law, interest paid by a U.S. payor to a foreign recipient is subject to a 30% U.S.
withholding tax. Under the U.K.–U.S. income tax treaty, this tax is eliminated.
Treaties often contain limitation on, or expansion of, benefits if certain conditions
are met. Consequently, tables comparing tax rates contain numerous footnotes. Ac-
cordingly, the following table, without footnotes, is illustrative only and should not
be relied on.
Withholding Rate on Interest Payment
Nontreaty 30%
Australia 10%
Belgium 15%
Canada 15%
France 0
Germany 0
Japan 10%
The Netherlands 0
Switzerland 5%
United Kingdom 0Each treaty is slightly different from others and is a result of binational negotia-
tion between the United States and the treaty partner. In order to prevent a resident
of a non-treaty country from using, for example, the United Kingdom treaty to invest
in the United States, anti-conduit provisions were enacted. If a Saudi Arabia investor
were to lend money to a United Kingdom corporation that lent it to the United States
subsidiary, the anti-conduit provisions treat the loan as coming directly from Saudi
Arabia.
30.8 INCOME TAX TREATIES 30 • 21