US estate tax treaty as a treaty national but not resident

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wachtwoord
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US estate tax treaty as a treaty national but not resident

Post by wachtwoord » Fri Jul 31, 2020 4:23 pm

Having read the US estate tax minefield described here: https://www.bogleheads.org/wiki/Non-US_ ... _tax_traps

I'm wondering whether it's citizenship or residency which applies for these treaties.

If you are a citizen of Netherlands but not a resident of the Netherlands does the US-Dutch treaty apply (and shield you from US estate taxes for your heirs upon your death)?

Or would the treaty of your country of receidence (if any) apply?
Or would both apply? Which one would have precedent?

TedSwippet
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Re: US estate tax treaty as a treaty national but not resident

Post by TedSwippet » Fri Jul 31, 2020 5:39 pm

Welcome.
wachtwoord wrote:
Fri Jul 31, 2020 4:23 pm
I'm wondering whether it's citizenship or residency which applies for these treaties.
Most US estate tax treaties are controlled by 'domicile', of which residency is just one part. A few treaties also cover citizens, wherever resident, and the US/Netherlands estate tax treaty may be one of them (see Article 1). From a rather ancient analysis of US estate tax treaty coverage (although less ancient than the actual treaty itself, which is at least somewhat promising):

https://core.ac.uk/download/pdf/147634389.pdf
The final approach to restricting situs is to protect taxpayers who are citizens of or domiciled in either of the contracting states when the taxable transfer occurs.

Example: Jan Willem, a citizen of the Netherlands, dies domiciled in Spain. He owned property that is treated as having a United States situs under the Internal Revenue Code. Because Mr. Willem was a citizen of the Netherlands, the Netherlands treaty applies even though he was domiciled in Spain (a noncontracting state) at death.
If the sum at issue is large though, you'd want proper professional advice here. I'm just some random bloke on the internet.

Topic Author
wachtwoord
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Re: US estate tax treaty as a treaty national but not resident

Post by wachtwoord » Fri Jul 31, 2020 6:13 pm

Hello and thanks for the information you provided. Especially the (very old) textbook example is interesting. (And I fully understand you are not a lawyer).

I saw article 1 in the treaty but " which are subject to the taxing jurisdiction of one or both States by reason of the decedent's domicile therein or citizenship thereof at death" seems to imply that the Dutch person needs to "fall under the taxing jurisdiction" of the Netherlands at death (either due to domicile or due to his citizenship) for the treaty to apply to him.

When does one fall under the taxing jurisdiction of the Netherlands?
If Jan Willem from the example permanently moved to Spain more than 10 years before he died and does not own any property in the Netherlands does he fall under the taxing jurisdiction of the Netherlands because of his citizenship? Even though he does not have any tax-liability toward the Netherlands (neither on the inheritance, nor anything else)?

For any Dutch speakers here, here's another link with both official versions (Dutch and English): https://wetten.overheid.nl/BWBV0004614/1971-02-03

TedSwippet
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Re: US estate tax treaty as a treaty national but not resident

Post by TedSwippet » Sat Aug 01, 2020 3:16 am

wachtwoord wrote:
Fri Jul 31, 2020 6:13 pm
I saw article 1 in the treaty but " which are subject to the taxing jurisdiction of one or both States by reason of the decedent's domicile therein or citizenship thereof at death" seems to imply that the Dutch person needs to "fall under the taxing jurisdiction" of the Netherlands at death (either due to domicile or due to his citizenship) for the treaty to apply to him.
I read this clause differently. The full clause is: "This Convention shall apply to estates of decedents which are subject to the taxing jurisdiction of one or both States by reason of the decedent's domicile therein or citizenship thereof at death.". Parsing it suggests to me that the "subject to the taxing jurisdiction" is referring here to estates and not decedents.

That is, "... estates of decedents which {referring back to estates} are ...", and not "... estates of decedents which {meaning, 'who'; that is, the decedents} are ...".

So on my reading the treaty applies to the estate because it is subject to US taxing jurisdiction, and the investor may use it by reason of holding Netherlands citizenship. And this seems to match the example given in the paper cited above.

As with so many of these treaties though, it looks to be pretty poorly worded and frustratingly imprecise. The fact that it takes a dense 39 page academic paper to unravel some of these treaty details is testament to their complexity. Also, that nobody seems to have attempted this again in the intervening 27 years; at least, none that I could find. Fortunately, most treaties are older, so it may remain accurate. (Although, the US has a track record of unilaterally reneging on treaties, so there's that too.)

Anyway, that's my amateur reading. I assume you're a Netherlands citizen living in a country without a US estate tax treaty. Does your residence country have a US income tax treaty, and if so is the rate on dividends below the 15% US/Ireland dividend treaty rate?

If not, then in most cases you may be better off entirely avoiding all US assets, US domiciled funds and ETFs anyway, and using UCITS or other non-US domiciled ETFs to hold any US stocks or bonds. That way, whether or not you have estate tax coverage from this treaty doesn't matter. The remaining problem case is if you hold immovable US assets, such as real estate or an IRA or 401k; here you do have to consider US estate tax coverage.

Topic Author
wachtwoord
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Re: US estate tax treaty as a treaty national but not resident

Post by wachtwoord » Sat Aug 01, 2020 10:47 am

My interest is merely academic at this stage as I live in a country with also an estate tax treaty with the US (Switzerland). However the Dutch treaty is theoretically superior, but only if you go over the US exemption which is currently historically high (Trump) but this could change in the future (politics), making the Dutch treaty superior in practice too.

Now back to the sentence in question: "This Convention shall apply to estates of decedents which are subject to the taxing jurisdiction of one or both States by reason of the decedent's domicile therein or citizenship thereof at death."

Doesn't that sentence imply that the treaty only applies to:

1) Estates
2) Which are subject to the taxing jurisdiction of US, NL or both
3) But ONLY IF it's subject to that taxing jurisdiction BECAUSE of the descendant's (?) domicile or citizenship

So if the estate has nothing to do with Dutch or US estate tax except for the fact that the estate encompasses US in situ property (e.g. US domiciled ETFs) does the treaty apply? As in that case the estate falls under the US taxing jurisdiction for a reason OTHER than "the decedent's domicile therein or citizenship thereof at death" but rather the domicile of something owned by the estate?

Do I understand you correctly that you believe the treaty DOES apply because part of the assets in the estate are domiciled in the US?
If that is the case, boy did they choose some convoluted wording as why is the word "descendant" in the clause at all (rather than to complicate things)? Also, how did this never come up in the past 27 years? Very odd.

The Dutch version reads:
"Deze Overeenkomst is van toepassing op nalatenschappen van overledenen welke onder het bereik van de belastingheffing van een van de Staten of van beide Staten vallen, doordat de overledene bij zijn overlijden aldaar zijn woonplaats had of daarvan staatsburger was."

Which word for word translates as follows:

"This agreement applies to estates of decedents which fall under the reach of the taxation of one or both states because the decedent at the time of his death was resident there or citizen"

So yes, the clause "which falls" does seem to refer to estates rather than decedents as you write.

However, according to the (current) Dutch tax system you are only liable for estate tax through residency (or residency within the last 10 years). So if you're not a Dutch resident (and haven't been for 10 years) your estate will not fall under the jurisdiction of the Dutch tax authority. And my estate wouldn't fall under US estate tax through citizenship or residency (but rather through the domicile of an asset that I would own).

TedSwippet
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Re: US estate tax treaty as a treaty national but not resident

Post by TedSwippet » Sat Aug 01, 2020 11:32 am

wachtwoord wrote:
Sat Aug 01, 2020 10:47 am
The Dutch version reads:
"Deze Overeenkomst is van toepassing op nalatenschappen van overledenen welke onder het bereik van de belastingheffing van een van de Staten of van beide Staten vallen, doordat de overledene bij zijn overlijden aldaar zijn woonplaats had of daarvan staatsburger was."

Which word for word translates as follows:

"This agreement applies to estates of decedents which fall under the reach of the taxation of one or both states because the decedent at the time of his death was resident there or citizen"
Hm. I see what you mean. Assuming your translation is full, correct, and accurate -- and I'll bet it is -- this seems to differ from the English version. The problem case is an estate that is in scope for US estate tax even when the decedent is not (at time of death) a US citizen or resident but is a Dutch citizen. It is the "by reason of" in the English version (and "doordat" in the Dutch one) that is the headache.

In addition, the Dutch version appears to use residency as the controlling factor, whereas the English version uses domicile. These are not the same. You can be domiciled in a place but not reside there.
wachtwoord wrote:
Sat Aug 01, 2020 10:47 am
However, according to the (current) Dutch tax system you are only liable for estate tax through residency (or residency within the last 10 years). So if you're not a Dutch resident (and haven't been for 10 years) your estate will not fall under the jurisdiction of the Dutch tax authority. And my estate wouldn't fall under US estate tax through citizenship or residency (but rather through the domicile of an asset that I would own).
Indeed. But taking this interpretation will I think entirely invalidate the 'Jan Willem' example from the paper cited above. So ... either that paper is wrong (or correct when written but now somehow out of date), or our assorted interpretations are. And I don't see any easy way to resolve that. Hard information on this is very thin on the ground. :-(

As for your own situation, coverage from the Swiss(-cheese) US estate tax treaty is probably okay for now, assuming you are domiciled in Switzerland, I guess. If that treaty ever fails, or if US estate tax exemptions suddenly drop precipitously (politics), at least you will be in good company when moving your investments away from US domiciled funds and ETFs, as many of your countrymen will be doing the precise same.

Topic Author
wachtwoord
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Re: US estate tax treaty as a treaty national but not resident

Post by wachtwoord » Sat Aug 01, 2020 12:57 pm

Indeed my interpretation would invalidate the Jan Willem example, unless Jan Willem moved to Spain less than 10 years before his demise (as he would fall under the Dutch estate tax reach then). Or perhaps Dutch estate tax was different in 1983?

The domicile and residency discrepancy is because the US is based on Anglo-Saxon law (Great Britain and former territories and colonies) and the Netherlands is not. You can, for example, move residency to great Britain without moving domicile. The non Anglo-Saxon countries in Europe (and the world?) don't recognize that notion. (Although they do use the term domicile, but with a different meaning, to confuse everyone a bit further).

I think your right that we won't get any further than this. Thank you at least for the example from the text book (although unfortunately not a legal precedent), very interesting. Perhaps I'll revisit this in several decades time (or perhaps someone very knowledgeable will find this topic).

Interesting how this is so complicated ...

TedSwippet
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Re: US estate tax treaty as a treaty national but not resident

Post by TedSwippet » Sun Aug 02, 2020 3:28 am

wachtwoord wrote:
Sat Aug 01, 2020 12:57 pm
The domicile and residency discrepancy is because the US is based on Anglo-Saxon law (Great Britain and former territories and colonies) and the Netherlands is not. You can, for example, move residency to great Britain without moving domicile. The non Anglo-Saxon countries in Europe (and the world?) don't recognize that notion. (Although they do use the term domicile, but with a different meaning, to confuse everyone a bit further).
While the two countries might have differing definitions of domicile/residency, I think there's a not-unreasonable expectation that the wording of the single treaty phrased in two languages would agree. Otherwise, you in effect have two treaties -- the English language one, and the Dutch language one (so perhaps you could then pick the most advantageous to you...!). Maybe the tie-breaker clauses, if any, sort this out.

But really, this shouldn't be all that hard.

Anyway, for avoidance of ambiguity -- rife within the treaty itself, apparently -- here's my full parsing of Article 1 to get it to match with 'Jan Willem'. I have no way of knowing if this is the correct one, or not.
  • Original: This Convention shall apply to estates of decedents which are subject to the taxing jurisdiction of one or both States by reason of the decedent's domicile therein or citizenship thereof at death.
  • Parsed: This Convention shall apply {to estates of decedents {which are subject to the taxing jurisdiction of one or both States}} by reason of {the decedent's domicile therein} or {citizenship thereof at death.}
  • Reordered for clarity: This Convention shall apply, {by reason of {the decedent's domicile therein} or {citizenship thereof at death,}} to {{estates of decedents} which are subject to the taxing jurisdiction of one or both States}.
That is, the "by reason of" here refers to the convention applying, not to the decedent's domicile (or residency!) or citizenship. And "which are subject to" refers to the estates, not the decendents. So, as clear as mud, then. A couple of well-placed commas in the original would have sorted this out nicely. (Maybe the treaty was drafted during a severe and worldwide punctuation shortage. :-) )

Fortunately for me, the US/UK estate tax treaty is much less ambiguous in its coverage of 'nationals'. Or at least it appears so on the surface. But then, if this experience has taught me anything, it's that US treaties can be even more vague, porous and malleable than I thought.

Topic Author
wachtwoord
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Re: US estate tax treaty as a treaty national but not resident

Post by wachtwoord » Sun Aug 02, 2020 3:16 pm

Of course I agree that the treaty in two languages should have equivalent meaning.
It also should be unambiguous but here we are.
Perhaps it also doesn't help these treaties are old (but then again, I do believe competent people existed in 1969).
Perhaps it's time to rewrite these treaties (but I think the US has been unwilling, without receiving political bargaining chips).

Thanks for you your very clear parsing of the treaty.
I hope the consensus will be that your parsing is correct.
(At least William H. Newton III seems to agree with you)
Hopefully they can hire you in the future to draft these things.
Will be a blessing to everyone involved (except perhaps you).

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