The U.S. Estate & Gift Tax Treaties Taxation Rules Explained

Contents

1 What are US Estate & Gift Tax Treaties?
2 Gift Tax Treaty Provision Example
3 Claiming Gift Tax Credits
4 Estate Tax Treaty Benefits
5 Claiming Estate Tax Benefits
6 Golding & Golding: About Our International Tax Law Firm

What are US Estate & Gift Tax Treaties

What are US Estate & Gift Tax Treaties?

What are US Estate & Gift Tax Treaties: Oftentimes, when US Taxpayers are considering the various income tax rules of each different country in which they may have international income — it comes as a (pleasant) surprise to learn that aside from income tax treaties, the United States has also entered into several international estate and gift tax treaties as well. The number of gifts and estate tax treaties pales in comparison to income tax treaties (~60) and FATCA Agreements (~115) — but for Taxpayers who qualify to use the benefited estate and gift tax treaty, it can significantly reduce their tax consequences. It is important to note, that while the US has entered into around 15 estate and gift tax treaties — not each treaty contains both estate and gift tax provisions. While each of the treaties accounts for the estate tax, only seven (7) of the treaties include both estate and gift taxes. Sometimes, the estate and gift tax treaty can be a part of the income tax treaty — such as with Canada. Let’s go through the basics of how an estate end or gift tax treaty works, using Australia as an example:

Gift Tax Treaty Provision Example

When it comes to determining the tax provisions for gift tax, the key issue is determining whether the asset will be based on the location or a different factor. And, there are various factors to consider such as:

- - location
  - destination
  - registered corporation location
  - where payable
  - where exercisable

Provision Example:

- - (1) Where a donor at the time of the gift was a citizen of the United States or domiciled in any part of the territory of either Contracting State, the situs at the time of the gift of rights and interests, legal or equitable, in or over the classes of property specified in this paragraph shall, for the purposes of the imposition of tax in respect of the gift by reason only of the situs of property being within the taxing State and for the purposes of the credit to be allowed under Article V of this Convention, be determined exclusively in accordance with the following rules:
    - - (a) Immovable property (otherwise than by way of security) shall be deemed to be situated at the place where the land concerned is located;
      - (b) Tangible movable property (otherwise than by way of security and other than property for which specific provision is hereinafter made) and bank or currency notes and other forms of currency recognized as legal tender at the place of issue shall be deemed to be situated at the place where that property or currency is located, or, if in transitu, at the place of destination;
      - (c) Debts (including bonds other than bonds referred to in subparagraph (d) hereof, bills of exchange and promissory notes, whether negotiable or not), secured or unsecured and whether under seal or not, excluding the forms of indebtedness for which specific provision is made elsewhere in this paragraph, shall be deemed to be situated at the place where the debtor is resident, but if the debtor, at the time of the gift, has an established place of business in the State in which the donor is domiciled and debts were incurred in carrying on the business of that establishment, the debts so incurred shall be deemed to be situated in that State;
      - (d) Bonds, stocks, debentures, and other debts being securities, issued by any government, municipality or public authority shall be deemed to be situated at the place where that government, municipality or public authority is located;
      - (e) Bank accounts shall be deemed to be situated at the place where the bank or branch thereof, at which the account was kept, is located;
      - (f) Moneys, payable under a policy of assurance or insurance or under an annuity contract, whether under seal or not, shall be deemed to be situated where the policy or annuity contract provides that the moneys shall be payable or, if the policy or annuity contract does not provide where the moneys shall be payable-
        
        (i) in the case of a company (corporation) – at the place where it is incorporated;
        
        (ii) in any other case – at the place of residence of the person by whom the moneys are payable;
      - (g) A partnership shall be deemed to be situated at the place where the business of the partnership is carried on but only to the extent of the partnership business at that place;
      - (h) Ships and aircraft and shares thereof shall be deemed to be situated at the place of registration of the ship or aircraft;
      - (i) Goodwill as a trade, business or professional asset shall be deemed to be situated at the place where the trade, business or profession to which it pertains is carried on;
      - (j) Patents, trade marks and designs shall be deemed to be situated at the place where they are registered;
      - (k) Copyright, franchises, and rights or licenses to use any copyrighted material, patent, trade mark or design shall be deemed to be situated at the place where the rights arising therefrom are exercisable.
  - (2) The situs of rights or interests, legal or equitable, in or over property not specified in paragraph (1) of this Article, shall be determined in accordance with the law in force in the Contracting State imposing the tax or allowing the credit.

Claiming Gift Tax Credits

- - (1) In determining the amount on which tax is to be computed, permitted deductions shall be allowed in accordance with the law in force in the Contracting State imposing the tax.
  - (2) Where tax is imposed by one Contracting State in respect of a gift by a donor who, at the time of the gift, was not domiciled in any part of the territory of that State, but was a citizen, or was domiciled in some part of the territory, of the other Contracting State, the State so imposing that tax-
    - (a) shall allow as an exemption an amount not less than an amount which bears the same proportion to any specific exemption that would have been allowed under the laws of that State if that person had been domiciled therein as the value of the property subjected to that tax bears to the value of the property which would have been subjected to that tax if that person had been so domiciled; and
    - (b) shall (except for the purposes of subparagraph (a) of this paragraph and except for the purposes of any proportional allowance provided for in the laws of the Contracting State imposing that tax) take no account, in determining the amount or rate of that tax, of property situated outside its territory.

Estate Tax Treaty Benefits

Similar to the tax treaty rules for gift tax, estate tax typically has the same type of rules in that depending on the location or other factors of the specific item a property or asset, etc. — will determine its impact for estate tax purposes.

Provision Example:

- - (1) Where a person dies a citizen of the United States or domiciled in any part of the territory of either Contracting State, the situs of rights and interests, legal or equitable, in or over the classes of property specified in this paragraph shall, for the purposes of the imposition of tax upon the estate of that person by reason only of the situs of property being within the taxing State and for the purposes of the credit allowable under Article V of this Convention, be determined exclusively in accordance with the following rules:
    - - (a) Immovable property (otherwise than by way of security) shall be deemed to be situated at the place where the land concerned is located;
      - (b) Tangible movable property (otherwise than by way of security and other than property for which specific provision is hereinafter made) and bank or currency notes and other forms of currency recognized as legal tender at the place of issue shall be deemed to be situated at the place where that property or currency is located, or, if in transitu, at the place of destination;
      - (c) Debts (including bonds other than bonds referred to in subparagraph (d) hereof, bills of exchange and promissory notes, whether negotiable or not), secured or unsecured and whether under seal or not, excluding the forms of indebtedness for which specific provision is made elsewhere in this paragraph, shall be deemed to be situated at the place where the debtor is resident, but if the debtor, at the time of the decedent’s death, has an established place of business in the State in which the decedent was domiciled and debts were incurred in carrying on the business of that establishment, the debts so incurred shall be deemed to be situated in that State;
      - (d) Bonds, stocks, debentures, and other debts being securities, issued by any government, municipality or public authority shall be deemed to be situated at the place where that government, municipality or public authority is located;
      - (e) Bank accounts shall be deemed to be situated at the place where the bank or branch thereof, at which the account was kept, is located;
      - (f) Moneys, payable under a policy of assurance or insurance or under an annuity contract, whether under seal or not, shall be deemed to be situated where the policy or annuity contract provides that the moneys shall be payable, or, if the policy or annuity contract does not provide where the moneys shall be payable-
      - (i) in the case of a company (corporation) – at the place where it is incorporated;
      - (ii) in any other case – at the place of residence of the person by whom the moneys are payable;
      - (g) A partnership shall be deemed to be situated at the place where the business of the partnership is carried on, but only to the extent of the partnership business at that place;
      - (h) Ships and aircraft and shares thereof shall be deemed to be situated at the place of registration of the ship or aircraft;
      - (i) Goodwill as a trade, business or professional asset shall be deemed to be situated at the place where the trade, business or profession to which it pertains is carried on;
      - (j) Patents, trade marks and designs shall be deemed to be situated at the place where they are registered;
      - (k) Copyright, franchises, and rights or licenses to use any copyrighted material, patent, trade mark or design shall be deemed to be situated at the place where the rights arising therefrom are exercisable;
      - (l) Rights or causes of action ex delicto surviving for the benefit of an estate of a deceased person shall be deemed to be situated at the place where such rights or causes of action arose;
      - (m) Judgment debts shall be deemed to be situated at the place where the judgment is originally obtained.
  - (2) The situs of rights or interests, legal or equitable, in or over property not specified in paragraph (1) of this Article, shall be determined in accordance with the law in force in the Contracting State imposing the tax or allowing the credit.

Claiming Estate Tax Benefits

- - (1) In determining the amount on which tax is to be computed, permitted deductions shall be allowed in accordance with the law in force in the Contracting State imposing the tax.
  - (2) Where, upon the death of a person, tax is imposed by one Contracting State and that person, at the time of his death, was not domiciled in any part of the territory of that State, but was a citizen, or was domiciled in some part of the territory, of the other Contracting State, the State so imposing that tax-
    - (a) shall allow as an exemption an amount not less than an amount which bears the same proportion to any specific exemption that would have been allowed under the laws of that State if that person had been domiciled therein as the value of the property subjected to that tax bears to the value of the property which would have been subjected to that tax if that person had been so domiciled; and
    - (b) shall (except for the purposes of subparagraph (a) of this paragraph and except for the purposes of any proportional allowance provided for in the laws of the Contracting State imposing that tax) take no account, in determining the amount or rate of that tax, of property situated outside its territory.

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