Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-21

1972-1 C.B. 441

Sec. 894

IRS Headnote

Dividends and interest paid after 1965 to a United Kingdom parent by its wholly-owned U.K. holding company owning a United States subsidiary and having its principal office in the U.S. are exempt from U.S. taxes under the U.S.-U.K. Income Tax Convention, as amended.

Full Text

Rev. Rul. 72-21

Advice has been requested whether, under the circumstances described below, dividends and interest paid to a United Kingdom parent corporation by a United Kingdom holding company owning all of the stock of a United States subsidiary is subject to United States taxes (including withholding taxes).

X is a United Kingdom corporation not engaged in a trade or business through a permanent establishment in the United States. Y, a wholly owned subsidiary of X, is a holding company incorporated in the United Kingdom but having its main office in the United States. Y owns all of the stock of a United States subsidiary engaged in the same type of business as X. The question is whether dividends and interest paid by Y to X, its United Kingdom parent, are exempt from United States tax, including the withholding of United States tax at source, under the provisions of Article XV of the Income Tax Convention between the United States and the United Kingdom as amended by a Supplementary Protocol effective September 9, 1966.

Section 894(a) of the Internal Revenue Code of 1954 provides that income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle.

Article XV of the Income Tax Convention between the United States and the United Kingdom (hereinafter called the "Convention") as amended by the Supplementary Protocol of September 9, 1966, provides that dividends and interest paid by a corporation of one contracting party shall be exempt from tax by the other contracting party except where the recipient is a citizen, resident, or corporation of that other contracting party. The last sentence of Article XV of the Convention further provides that this exemption shall not apply if the corporation paying such dividend or interest is a resident of the other contracting party.

Article II(1)(h) of the Convention provides as follows:

The term 'resident of the United States' means * * * any United States corporation and any partnership created or organized in or under the laws of the United States, being a corporation or partnership which is not resident in the United Kingdom for the purposes of United Kingdom tax.

The Technical Memorandum of the United States Treasury Department regarding the Supplementary Protocol of September 9, 1966, provides in part, as follows:

The existing treaty [prior to amendment by this supplemental protocol] will not tax dividends or interest paid by a United Kingdom corporation except where the recipient is a citizen, resident, or corporation of the United States.

The Technical Memorandum further explains that the additional exception added by the Supplemental Protocol denying the benefits of the exemption of Article XV of the Convention in the case of dividends or interest paid by a corporation resident in the country levying the tax, while reciprocal in form, does not have effect in the case of United States taxes. This is because of the Convention's definition of "resident of the United States".

Sections 507.22 and 507.24 of the withholding regulations under the Convention, relating to articles of the Convention amended by the Supplementary Protocol, provide, in effect, that dividends and interest paid after December 31, 1965, by a United Kingdom corporation are exempt from United States tax and are not subject to withholding of United States tax at source if the recipient is not a citizen, resident, or corporation of the United States.

Thus, under the foregoing withholding regulations, the exception (based on residency of the paying corporation) to the exemption set forth in the last sentence of the Convention is not applicable to United States taxes.

Accordingly, it is held that dividends and interest paid by Y to X after December 31, 1965, are exempt from United States taxes, including withholding taxes, under Article XV of the Convention as amended by the Supplemental Protocol of September 9, 1966.