[Senate Treaty Document 105-55]
[From the U.S. Government Publishing Office]



105th Congress                                              Treaty Doc.
                                SENATE

 2d Session                                                      105-55
_______________________________________________________________________


 
                      TAX CONVENTION WITH ESTONIA

                               __________

                                MESSAGE

                                  FROM

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

 CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND 
 THE REPUBLIC OF ESTONIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE 
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT 
                     WASHINGTON ON JANUARY 15, 1998





 June 26, 1998.--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


                         LETTER OF TRANSMITTAL

                              ----------                              

                                    The White House, June 26, 1998.
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 Estonia for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Washington on January 15, 1998. Also 
transmitted is the report of the Department of State concerning 
the Convention.
    This Convention, which is similar to tax treaties between 
the United States and 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 resolution of disputes and sets forth rules making its 
benefits unavailable to residents that are engaged in treaty 
shopping.
    I recommend that the Senate give early and favorable 
consideration to this Convention and that the Senate give its 
advice and consent to ratification.

                                                William J. Clinton.


                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                          Washington, May 15, 1998.
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 Estonia for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Washington on January 15, 1998 
(``the Convention'').
    This Convention will be the first such Convention between 
the United States of America and the Republic of Estonia. This 
Convention is similar to the tax treaties between the United 
States and OECD nations. It provides for maximum rates of tax 
to be applied to various types of income, protection from 
double taxation of income, exchange of information, and 
contains rules making its benefits unavailable to persons that 
are engaged in treaty shopping. The proposed withholding rates, 
while in some respects higher than those in the U.S. model, are 
the same as those in many other Estonian tax treaties. Like 
other U.S. tax conventions, this Convention provides rules 
specifying when income that arises in one of the countries and 
is attributable to residents of the other country may be taxed 
by the country in which the income arises (the ``source'' 
country).
    In many respects, the rates under the new Convention are 
the same as those in many recent U.S. tax treaties,including 
some with OECD countries. Pursuant to Article 10, dividends from direct 
investments are subject to tax by the source country at a rate of five 
percent. The threshold criterion for direct investment is ten percent, 
consistent with other modern U.S. treaties, in order to facilitate 
direct investment. Other dividends are generally taxable at 15 percent. 
Under Article 12, royalties for the use of industrial, commercial, or 
scientific equipment derived and beneficially owned by a resident of a 
Contracting State are subject to a five-percent tax by the source 
country; all other royalties are subject to tax at a maximum rate of 
ten percent.
    Under Article 11 of the proposed Convention, interest 
arising in one Contracting State and owned by a resident of the 
other Contracting State is subject to taxation by the source 
country at a maximum rate of ten percent. However, interest 
earned on trade credits and on government debt, including debt 
guaranteed by government agencies, is exempt from taxation by 
the source country.
    The reduced withholding rates described above do not apply 
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 and the income is 
attributable to a permanent establishment or fixed base. If the 
income is attributable to a permanent establishment, it will be 
taxed as business profits, and, if the income is attributable 
to a fixed base, it will be taxed as independent personal 
services.
    The maximum rates of withholding tax described in the 
preceding paragraphs are subject to the standard anti-abuse 
rules for certain classes of investment income found in other 
U.S. tax treaties and agreements.
    The taxation of capital gains, described in Article 13 of 
the Convention, generally follows the rule of recent U.S. tax 
treaties, the U.S. model and the OECD model. Gains on real 
property are taxable in the country in which the property is 
located, and gains from the sale of personal property are taxed 
only in the State of residence of the seller, unless 
attributable to a permanent establishment or fixed base in the 
other State.
    Article 7 of 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 generally limited to cases in 
which the profits are attributable to a permanent establishment 
located in that country. The source country may, however, tax 
sales or activities as though they were performed by a 
permanent establishment if it is ascertained that such 
activities were structured with the intent to avoid taxation in 
the State in which the permanent establishment is situated. As 
do all recent U.S. treaties, this Convention preserves the 
right of the United States to impose its branch taxes in 
addition to the basic corporate tax on a branch's business.
    Consistent with U.S. treaty policy, Article 8 of the 
proposed Convention permits only the country of residence to 
tax profits from international carriage by ships or aircraft 
and income from the use, maintenance, or rental of containers 
used in international traffic. This reciprocal exemption also 
extends to income from the rental of ships and aircraft if the 
rental income is incidental to income from the operation of 
ships and aircraft in international traffic. However, income 
from the international rental of ships and aircraft that isnon-
incidental to operation of ships and aircraft is taxed at the rate of 
five percent as a royalty paid for the use of the equipment.
    The taxation of income from the performance of personal 
services under Articles 14 through 17 of the new Convention is 
essentially the same as that under recent U.S. treaties with 
OECD countries.
    Article 22 of the proposed Convention contains significant 
anti-treaty-shopping rules making its benefits unavailable to 
persons engaged in treaty-shopping.
    The proposed Convention also contains rules necessary for 
its administration, including rules for the resolution of 
disputes under the Convention and for exchange of information 
(Article 26).
    The Convention would permit 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.
    This Convention is subject to ratification. In accordance 
with the provisions of Article 28, it will enter into force 
when the Governments notify each other through diplomatic 
channels that their constitutional requirements for entry into 
force have been met. They will have effect for payments made or 
credited on or after the first day of January following entry 
into force with respect to taxes withheld by the source 
country; with respect to other taxes, the Convention will take 
effect for taxable periods beginning on or after the first day 
of January following the date on which the Convention enters 
into force.
    The proposed Convention (like those with Latvia and 
Lithuania) provides at Article 28 that the appropriate 
authorities of the two Contracting States will meet within five 
years to discuss the application of the proposed Convention to 
income derived from new technologies.
    The proposed Convention will remain in force indefinitely 
unless terminated by one of the Contracting States, pursuant to 
Article 29. That Article provides that either State may 
terminate the Convention by giving prior notice through 
diplomatic channels at least six months before the end of any 
calendar year.
    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.
                                                Madeleine Albright.




                                
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