U.S. income tax treaty with Lithuania

Treaty documents and protocols

The convention was signed at Washington on January 15, 1998. The IRS lists an Income Tax Treaty and a Technical Explanation, both labelled 1998, and neither a protocol nor an amending convention appears in the IRS list or in Table 3. The Technical Explanation is the Treasury's article-by-article explanation of the convention, including terms such as limitation on benefits.^[1][2][5]

Under Article 29 the convention applies to taxes withheld at source for amounts paid from January 1 of the year after it entered into force, and IRS Table 3 shows a general effective date of January 1, 2000. Article 29(3) also has the countries consult within five years of entry into force on income from new technologies, such as satellite and cable transmission payments, and on whether a protocol is needed. No protocol has been listed since.^[5][2]

Convention structure

The convention has 30 numbered articles, and their titles identify the subjects addressed by the text.

Dividends, interest and royalties

Article 10 permits taxation of covered dividends in the recipient's state of residence and also allows taxation in the state where the dividends arise, subject to stated limits. For a beneficial owner resident in the other contracting state, the source-state rate is capped at 5 percent of gross dividends when a company directly holds at least 10 percent of the payer's voting shares. The general cap in other cases is 15 percent.^[2]

The dividends provisions specify exceptions for U.S. regulated investment companies and real estate investment trusts. The 5 percent rate does not apply to dividends paid by either type of U.S. entity. For a regulated investment company, the 15 percent provision applies. For a U.S. real estate investment trust, that provision applies only when an individual beneficially owns the dividend and holds less than 10 percent of the trust; otherwise domestic-law withholding applies.^[2]

Article 11 caps source-country tax on interest at 10 percent of the gross amount when the beneficial owner resides in the other country. The source country does not tax interest paid to the other country's government, its central bank or a financial institution it wholly owns. The same exemption covers interest on loans that government guarantees or insures. Interest on a credit sale of merchandise or equipment from an enterprise of one country to an enterprise of the other is also exempt, except between related persons. The United States may tax an excess inclusion on a residual interest in a real estate mortgage investment conduit under its domestic law.^[2][6]

Interest tied to the debtor's receipts, income or property value falls under a separate rule in Article 11. The state where that interest arises can tax it under its own laws, subject to a cap tied to the dividend rate in Article 10. The article's rate limits do not apply when the beneficial owner has a permanent establishment or fixed base in the state where the interest arises and the interest is attributable to it.^[2]

Article 12 permits taxation of royalties in the beneficial owner's state of residence and also in the state where the royalties arise. The source-state cap is 5 percent of gross royalties paid for use of industrial, commercial or scientific equipment, and 10 percent for other royalties. The article's limits do not apply when the beneficial owner has a permanent establishment or fixed base in the state where the royalties arise and the royalties are attributable to that establishment or base.^[2]

Residence and dual residence

Article 4 generally defines a resident of a contracting state as a person liable to tax there because of residence, domicile, citizenship, place of management, place of incorporation or a similar criterion. The definition excludes a person liable to tax there only on income from sources in that state. For a partnership, estate or trust, the definition applies only to the extent its income is taxed as resident income in that state, either at the entity or partner or beneficiary level.^[2]

For an individual treated as a resident because of citizenship or permanent residence in one state, the other state treats the person as resident of the first state only if the person has substantial presence, a permanent home or a habitual abode there, provided the person is not also resident of the other state. If the individual is resident in both states under paragraph 1, the article applies tie-breaker steps.^[2]

For a dual-resident individual, the first step assigns residence to the state where a permanent home is available. If a home is available in both, the test is closer personal and economic relations. If that cannot determine residence, or there is no permanent home in either state, habitual abode is considered. If habitual abode exists in both or neither, nationality applies; if nationality is also inconclusive, the competent authorities settle the question by mutual agreement.^[2]

Exchange of information

Article 27 calls for the competent authorities of the two states to exchange information relevant to applying the convention or domestic tax laws concerning covered taxes, provided the taxation is consistent with the convention. It says the exchange is not limited by Article 1's general scope provision. Received information is subject to restrictions on disclosure and use described in the article.^[2]

A requested state is not required to take administrative measures that conflict with either state's laws or administrative practice. Article 27 also limits the obligation to supply information that is unavailable under the laws or normal administrative process of either state, or whose disclosure would conflict with public policy.^[2]

Limitation of benefits

Article 23 is titled Limitation of Benefits and sets out conditions for receiving convention benefits. It says a resident qualifies only if it meets one of the article's categories or other stated routes. The listed categories include individuals, governments, certain companies, trusts or estates, and specified entities meeting ownership or trading criteria. The article also addresses income connected with an active trade or business and a determination by the other state's competent authority.^[2]

Saving clause and U.S. citizens

Paragraph 4 of Article 1 says a contracting state may tax its residents, as determined under Article 4, and may tax its citizens by reason of citizenship as if the convention had not taken effect. Paragraph 5 lists provisions unaffected by paragraph 4, including specified provisions on associated enterprises and pensions, plus relief from double taxation, nondiscrimination and mutual agreement procedure.^[2]

Most U.S. income tax treaties have a saving clause that preserves U.S. taxation of its citizens and residents as if the treaty had not come into effect, subject to listed exceptions.

Questions and answers

Related resources

Related glossary terms

• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.
• Limitation on benefits: A limitation on benefits article sets conditions for entities in a treaty country to qualify for certain treaty benefits under the applicable U.S. tax treaty.

Related articles and guides

• U.S. income tax treaty with Georgia: For Georgia the IRS lists the 1973 convention with the Soviet Union, which exempts only specified items such as certain royalties and trade-financing interest.
• U.S. income tax treaty with France: The U.S. income tax convention with France is amended by two protocols, and the 2009 Protocol changed the dividend and royalty rules for qualifying holders.

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.