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Protocol to the Tax Treaty between Estonia and Switzerland has entered into Force

The protocol to the 2002 income and capital tax treaty between Estonia and Switzerland entered into force on 16 October 2015. The protocol, signed 25 August 2014, is the first to amend the treaty. The main amendments to the treaty are summarized as follows.

Withholding Tax Rates

Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) are replaced, and include the following rates:

  • Dividends - 0% if the beneficial owner is a company directly holding at least 10% of the paying company's capital for at least one year prior to payment; otherwise 10%
  • Interest - 0%
  • Royalties - 0%

In addition, a provision is added to the original protocol signed with the treaty that if the holding period for the dividends tax exemption is subsequently met after the payment is made, the beneficial owner will be entitled to a refund of the tax withheld.

Capital Gains

Paragraph 4 under Article 13 (Capital Gains) is replaced. Under the new paragraph, gains derived by a resident of a Contracting State from the alienation of share deriving more than 50% of their value directly or indirectly from immovable property situated in the other State will be taxable in that other State. An exemption is provided for the alienation of shares listed on a stock exchange established in either State.

Double Taxation Relief

Article 13 (Avoidance of Double Taxation) is replaced. The main changes include:

  • The double taxation relief method applied by Estonia is changed from the credit method to the exemption method. However, in the case of dividends subject to 10% withholding tax, Estonia will apply the credit method.
  • The provisions for a credit, lump sum reduction, or partial exemption provided by Switzerland for income covered by Articles 11 (Interest) and 12 (Royalties) under the original treaty is removed.

Exchange of Information

Article 26 (Exchange of Information) is replaced, brining it in line with the OECD standard for information exchange.

Limitation on Benefits

A limitation on benefits provision is added to the original protocol signed with the treaty.

The provision states that the benefits of the treaty under Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) will not apply if the income is paid under or as part of a conduit arrangement. A conduit arrangement is defined as one in which a resident of a Contracting State normally entitled to the benefits of the treaty receives an item of income from the other State, and directly or indirectly pays all or substantially all of the income to a person not resident in either Contracting State, and the main purpose was to obtain the benefits of the treaty.

Other Changes

The protocol also amends Articles 3 (General Definitions), 4 (Resident), 5 (Permanent Establishment), 6 (Income from Immovable Property), 9 (Associated Enterprises) and 25 (Mutual Agreement Procedure).

Effective Date

The provisions of the protocol generally apply from 1 January 2016.

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