Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-56

1979-1 C.B. 459

Section 894

IRS Headnote

Swiss; dividends; Swiss corporation engaged in business in U.S. Dividends received from a domestic corporation by a Swiss corporation that are not effectively connected with the Swiss corporation's conduct of a manufacturing business through a permanent establishment in the U.S. are subject to tax at the rate of 15 percent provided in Article VI(1) of the U.S.-Swiss Confederation Income Tax Convention.

Full Text

Rev. Rul. 79-56

ISSUE

What rate of tax are the dividends received by a Swiss corporation from a domestic corporation in which it owns stock subject to?

FACTS

X, a corporation organized under the laws of Switzerland, carries on an industrial or commercial enterprise or undertaking in Switzerland and is engaged in the conduct of a manufacturing business in the United States. X owns 10 percent of the outstanding stock of Y, a United States corporation. During the taxable year, X received dividends from Y, which were not effectively connected with the conduct of X's manufacturing business in the United States. On its tax return for the taxable year in which the dividends were paid, X claimed the reduced rate of tax of 15 percent on these dividends under Article VI(1) of the United States--Swiss Confederation Income Tax Convention (Convention), 1955-2 C.B. 814, 817. LAW AND ANALYSIS

Article VI(1) of the Convention provides for a rate of tax not to exceed 15 percent on dividends derived from sources within the United States by a Swiss corporation not having a permanent establishment in the United States.

Article II(1)(c) of the Convention provides that a subsidiary corporation shall not of itself constitute a permanent establishment of its parent corporation. Y is not otherwise a permanent establishment of X. However, X is itself engaged in the conduct of a trade or business in the United States through a permanent establishment. X's manufacturing operations located in the United States constitute a permanent establishment within the meaning of Article II(1)(c) of the Convention.

Section 894(b) of the Internal Revenue Code of 1954 provides that foreign corporations shall be deemed not to have a permanent establishment in the United States with respect to a reduction of tax pursuant to an applicable tax convention on income not effectively connected with the conduct of a United States trade or business.

Section 1.894-1(b) of the Income Tax Regulations extends the benefits accorded under section 894(b) of the Code to all conventions of the United States, whether ratified prior or subsequent to the Foreign Investors Tax Act of 1966 (the Act), Pub. L. 89-809, 1966-2 C.B. 656.

Section 110 of the Act provides that, although no amendment made by the Act shall apply in any case where its application would be contrary to any treaty obligation of the United States, the extension of a benefit provided by any amendment made by the Act shall not be deemed to be contrary to a treaty obligation of the United States.

The Convention was ratified prior to the enactment of the Act in 1966. Article VI(1), as well as other articles of the Convention, reflects pre-1966 tax law, that is, that all United States source income of a nonresident alien or a foreign corporation engaged in a trade or business within the United States was considered attributable to that trade or business under the "force of attraction" principle. Section 894(b) of the Code reflects the adoption of the principle of income "effectively connected with the conduct of a trade or business" embodied in section 864(c) for taxable years beginning after December 31, 1966. Section 110 of the Act operates to apply the benefits of this amendment to situations falling under the provisions of a treaty in existence before the Act.

Thus, if the dividends paid by Y to X are not effectively connected with the manufacturing operations carried on by X in the United States, X cannot be considered to have a permanent establishment in the United States pursuant to section 1.894-1(b) of the regulations for purposes of Article VI(1) of the Convention and the dividends will be taxed at the reduced rate of 15 percent.

HOLDING

The dividends received by X from Y are subject to the reduced rate of 15 percent provided in Article VI(1) of the Convention. See Rev. Rul. 74-63, 1974-1 C.B. 374, which holds that dividend income from sources within the United States received by a nonresident alien individual, a resident of Switzerland engaged in the conduct of a trade or business in the United States, that was not effectively connected with the conduct of such trade or business, is taxable at the rate of 15 percent under Article VI(1) of the Convention.