[Senate Treaty Document 109-20]
[From the U.S. Government Publishing Office]



109th Congress 
 2d Session                      SENATE                     Treaty Doc.
                                                                 109-20
_______________________________________________________________________

 
             PROTOCOL AMENDING TAX CONVENTION WITH GERMANY

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

 PROTOCOL AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA 
    AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE 
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON 
  INCOME AND CAPITAL AND TO CERTAIN OTHER TAXES, SIGNED ON AUGUST 29, 
 1989, SIGNED AT BERLIN JUNE 1, 2006 (THE ``PROTOCOL''), ALONG WITH A 
                       RELATED JOINT DECLARATION

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  September 29, 2006.--Protocol was read the first time, and together 
  with the accompanying papers, referred to the Committee on Foreign 
      Relations and order to be printed for the use of the Senate

                                  -------

                        U.S. GOVERNMENT PRINTING OFFICE

49-112 *(Star Print)          WASHINGTON : 2006








                         LETTER OF TRANSMITTAL

                              ----------                              

                               The White House, September 29, 2006.
To the Senate of the United States:
    I transmit herewith, for Senate advice and consent to 
ratification, a Protocol Amending the Convention Between the 
United States of America and the Federal Republic of Germany 
for the Avoidance of Double Taxation and the Prevention of 
Fiscal Evasion with Respect to Taxes on Income and Capital and 
to Certain Other Taxes, Signed on August 29, 1989, signed at 
Berlin June 1, 2006 (the ``Protocol''), along with a related 
Joint Declaration. Also transmitted for the information of the 
Senate is the report of the Department of State with respect to 
the Protocol.
    The Protocol eliminates the withholding tax on certain 
cross-border dividend payments. Like a number of recent U.S. 
tax agreements, the proposed Protocol provides for the 
elimination of the withholding tax on dividends arising from 
certain direct investments and cross-border dividend payments 
to pension funds. The Protocol also provides for mandatory 
arbitration of certain cases before the competent authorities. 
This provision is the first of its kind in a U.S. tax treaty. 
In addition, the Protocol also modernizes the Convention to 
bring it into closer conformity with current U.S. tax-treaty 
policy, including strengthening the treaty's provisons 
preventing so-called treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to the Protocol, along with the Joint Declaration 
and give it advice and consent to ratification.

                                                    George W. Bush.
















                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                        Washington, August 2, 2006.
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, a Protocol Amending the Convention Between the 
United States of America and the Federal Republic of Germany 
for the avoidance of Double Taxation and the Prevention of 
Fiscal Evasion with Respect to Taxes on Income and Capital and 
to Certain Other Taxes, Signed on 29th August 1989, signed at 
Berlin June 1, 2006 (the ``Protocol''), along with a related 
Joint Declaration.
    The Protocol eliminates the withholding tax on certain 
cross-border dividend payments. Like a number of recent U.S. 
tax agreements, the Protocol provides for the elimination of 
the withholding tax on dividends arising from certain direct 
investments and cross-border dividend payments to pension 
funds.
    The Protocol also provides for mandatory arbitration of 
certain cases before the competent authorities. This provision 
is the first of its kind in a U.S. tax treaty. In addition, the 
Protocol modernizes the Convention to bring into closer 
conformity with current U.S. tax-treaty policy, including 
strengthening the treaty's provisions preventing so-called 
treaty shopping.
    The Protocol was concluded in recognition of the importance 
of the United States' economic relations with Germany. The 
Department of the Treasury and the Department of State 
cooperated in the negotiation of the Protocol. It has the full 
approval of both Departments.
    Respectfully submitted.
                                                  Condoleezza Rice.
    Enclosures.

         Key Provisions of the U.S.-Germany Income Tax Protocol

    The Protocol to the income tax Convention with Germany was 
negotiated to bring the current Convention, concluded in 1989, 
into closer conformity with current U.S. tax treaty policy. 
There are, as with all bilateral tax conventions, some 
variations from these norms. In the Protocol, these differences 
reflect particular aspects of German law and treaty policy, the 
interaction of U.S. and German law, and U.S.-German economic 
relations.
    The most important aspect of the Protocol relates to the 
taxation of cross-border dividend payments. Under the Protocol, 
most dividends paid by a subsidiary in one country to its 
parent in the other country will be exempt from withholding tax 
in the subsidiary's home country, rather than being subject to 
the current treaty's maximum withholding tax rate for direct 
dividends of five percent. The proposed Protocol also provides 
for a withholding rate of zero on cross-border dividend 
payments to pension funds. Eliminating withholding taxes on 
cross-border direct dividends and cross-border dividend 
payments to pension funds is consistent with an overall view 
that investment income should be taxed by the country of 
residence, not the country of source.
    The Protocol also provides for mandatory arbitration of 
certain cases before the competent authorities. The arbitration 
provided for in the Protocol is at the taxpayer's election with 
respect to competent authority cases that cannot be resolved 
within a specified period, generally two years from the 
commencement of the case. The determination of an arbitration 
board constitutes a resolution by mutual agreement under the 
Convention and is binding on both countries, unless the 
taxpayer does not accept the determination. This provision is 
the first of its kind in a U.S. tax treaty and will be well 
received by the business community.
    In addition, the Protocol also updates the current treaty's 
treatment of pensions. It removes barriers to the flow of 
personal services between the United States and Germany that 
could otherwise result from discontinuities in the laws of the 
two countries regarding the deductibility of pension 
contributions.
    The Protocol also strengthens the treaty's provisions 
preventing so-called treaty shopping, which is the 
inappropriate use of a tax treaty by third-country residents.
    Moreover, the Protocol updates the current treaty to 
reflect U.S. and German legislative changes since 1989. For 
example, the Protocol updates the ``saving clause'' to provide 
that former citizens or long-term residents of the United 
States may, for the period of ten years following the loss of 
such status, be taxed in accordance with the laws of the United 
States.
    The Protocol also modernizes our treaty relationship and 
brings it into closer conformity with current U.S. tax treaty 
policy by making technical changes to the article dealing with 
the elimination of double taxation and by eliminating the 
article dealing with the taxation of independent personal 
services.
    The proposed Protocol will enter into force upon the 
exchange of instruments of ratification. It will have effect, 
with respect to taxes withheld at source, for amounts paid or 
credited on or after the first day of January of the year upon 
which the Protocol enters into force and, with respect to other 
taxes, for taxable years beginning on or after the first day of 
January next following the date upon which the Protocol enters 
into force. However, where any person would be entitled to 
greater benefits under the Convention as unmodified by the 
Protocol, the Convention as unmodified, at the election of the 
person, continues to have effect in its entirety with respect 
to such person for a period of twelve-months from the date the 
provisions of the Protocol are effective.



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