ARTICLE 12. DIVIDENDS

The proposed Convention provides for unilateral reduction on the part of Trinidad and Tobago with respect to dividends which are derived from sources within Trinidad and Tobago by a resident of the United States. Thus, the United States withholding tax which is imposed at a 30-percent rate on non-effectively connected dividends paid by United States corporations to nonresidents of the United States is not affected by the proposed Convention. In the absence of a convention, Trinidad and Tobago imposes a 30-percent withholding tax on divi­ dends and branch profits remitted to nonresidents of Trinidad and Tobago. To determine the source of a dividend for the purposes of this Article, the rules con­ tained in paragraph (1) of Article 5 (Source of Income) are used.

Under the proposed Convention Trinidad and Tobago may impose a with­ holding tax of 25 percent on the gross amount actually distributed with respect to portfolio investment dividends. The proposed Convention further provides that Trinidad and Tobago may impose a maximum rate of 10 percent with respect to

Intercorporate dividends if the recipient owns 10 percent or more of the stock of the paying corporation and generally if not more than 25 percent of the gross income of the paying corporation consists of dividends and interest. The rate of withholding which Is imposed by Trinidad and Tobago on profits of a branch of a United States corporation located in Trinidad and Tobago is also limited to 10 percent. The proposed Convention abandons the "force of attraction" concept by pro­ viding that the reduced rate of tax on dividends is denied only if the shares with

respect to which the dividends are paid are effectively connected with a perma­ nent establishment which the recipient United States resident has in Trinidad

and Tobago. In such a case the dividends may be taxed as business profits in accordance with Article 8 (Business Profits) of the proposed Convention.

The proposed Convention also provides specific definitions of the term "divi­ dends" in the case of the United States and Trinidad and Tobago. These terms allow each State to treat those payments which, under their internal law are treated as dividends, to be so treated for purposes of the proposed Convention. This rule is directly related to the position adopted in the.proposed Convention with respect to remittances of a branch of a United States corporation, located in Trinidad and Tobago, to such corporation.

The proposed Convention also provides that dividends paid by a corporation of one of the States to a person other than a resident of the other State (in the case of dividends paid by a Trinidad and Tobago corporation, other than to a citizen of the United States) shall be exempt from tax by that other State unless such dividends are treated as income from sources within that other State under Article 5 (Source of Income). Thus, for example, If dividends are paid by a Trinidad and Tobago corporation to av individual who is a resident of a third country and who is not a citizen of the United States, and such dividends are not effectively connected with a permanent establishment located in the United States, the United States will not be able to subject this dividend to tax unless the Trinidad and Tobago corporation had a permanent establishment in the United States for a 3-year period and derived at least 50 percent of its gross income from industrial and commercial profits which are effectively connected with such permanent establishment. In such a case, the only amount subject to

tax would be the pro rata portion of the permanent establishment's Income which is effectively connected with the United States trade or business. In no case will the amount of the dividend which was treated as income from sources within the United States exceed the net amount of money or money's worth transferred from such permanent establishment during the 3-year period.

The proposed Convention also provides that where a corporation of one State has a permanent establishment in the other State and derives profits or income

which are effectively connected with that permanent establishment, any remit­ tance of such profits or income by that permanent establishment may ^{be taxed} as a distribution in accordance with the law of the other State at a ^{rate which} will not exceed 10 percent. This 10-percent rate corresponds to the reduced rate which is applied to Intercorporate dividends under paragraph (1) (b) ^of this Article. This provision has been included to take into account the taxation ^of such remittances under the tax laws of Trinidad and Tobago. ^{This provision} only applies to remittances that are attributable to gains, profits, ^{or income} which is effectively connected with the permanent ^{establishment in Trinidad} and Tobago. Thus, if there Is a permanent establishment in Trinidad and Tobago

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and no income Is earned which is treated as effectively connected with that permanent establishment, no portion of any remittance from that permanent establishment to the United States home office would be subject to this 10­ percent tax.

It should be noted that this provision in no way affects the United States taxa­ tion of such. remittances. Thus, since the United States would not treat such remittances as a dividend, the 10-percent tax which Is imposed would not be treated as a tax imposed on the operations of the corporation in Trinidad and Tobago through a permanent establishment.

It should also be noted that the proposed Convention does not contain an Article dealing with capital gains. Both Trinidad and Tobago and the United States have domestic rules which provide a large measure of exemption for foreigners deriving capital gains. In the case of the United States, a nonresident alien is exempt from tax on capital gains unless he Is present in the United States for a period or periods aggregating 183 days or more during the taxable year. In the case of Trinidad and Tobago, capital gains are taxed at normal rates. How­

ever, if the holding period of the asset is longer than 12 months, -the gain is not regarded as income and is exempt from taxation. Since the proposed Convention does not provide a special rule for capital gains, paragraph (2) of Article 3

(General Rules of Taxation) ^applies.

ARTIOLE 18. INTEREST

The proposed Convention provides for a unilateral reduction by Trinidad and Tobago of the rate of withholding tax which is imposed on interest which Is re­ ceived from sources within Trinidad and Tobago by a resident of the United

States which is either a bank or other financial institution not having a perm­ anent establishment in Trinidad and Tobago. In the case of such residents of the United States the rate of tax imposed by Trinidad and Tobago shall not exceed 15 percent of the gross amount paid. For purposes of determining the source of an interest payment, the rule provided in paragraph (2) of Article 5 (Source of Income) shall be used. It should be noted that if the recipient of an interest pay­ ment from sources within Trinidad and Tobago is a resident of the United

States, other than a bank or financial institution which does not have a perma­ nent establishment in Trinidad and Tobago, the reduced rate of tax which is provided in the proposed Convention will not apply. The proposed Convention also provides that interest received by one of the States or any wholly owned instru­ mentality of that State is exempt from tax by the other State. Thus, for example, interest which Is received from sources within Trinidad and Tobago by the Ex­

port-Import Bank of the United States would not be subject to Trinidad and Tobago tax under this Article.

As in the case of dividends, the United States has not reduced Its rate of withholding on interest under the proposed Convention. Thus, the United States may impose its withholding tax at the statutory rate of 80 percent on noneffec­ tively connected interest which is derived by residents or corporations of Trinidad and Tobago from sources within the United States, except that interest derived by

the Government of Trinidad and Tobago or any of its wholly owned agencies is exempt from such tax.

Under Trinidad and Tobago income tax law any interest payment paid by a subsidiary to its nonresident parent or brother company is deemed to be a non­

deductible distribution of profits. Paragraph (5) has been added so as to limit the application of this rule to situations where the taxpayer cannot demonstrate the absence of tax avoidance as the motive for making the interest payment. Under the proposed Convention where excess interest payments are

made because the payor and the recipient are related, the provisions of this Arti­ cle apply only to so much of the Interest as would have been paid to an unrelated person. The excess payment may be taxed by each State according to its own law

including the provisions of the proposed Convention where applicable.

This Article contains a provision which is comparable to that found In Article 12 (Dividends) which states that interest paid by a corporation of one of the States to a person other than a resident of the other State (and, in the case of in­ terest paid by a Trinidad and Tobago corporation, other than a citizen of the United States) shall be exempt from tax by the other State, unless such interest is treated as Income from sources within that other State under paragraph (2) (b) or (8) of Article 5 (Source of Income).

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