n-15-35.pdf

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Part III - Administrative, Procedural, and Miscellaneous

IRC Section 5000C - Qualified Income Tax Treaty Countries

Notice 2015-35

SECTION 1. OVERVIEW

Section 5000C, added to the Internal Revenue Code by section 301 of the James
Zadroga 9/11 Health and Compensation Act of 2010, Public Law 111-347 (124 Stat.
3623) (the “Act”), imposes on any foreign person that receives a specified Federal
procurement payment a tax equal to 2 percent of the amount of the payment. Section
5000C(b) defines a specified Federal procurement payment as any payment made to a
foreign person pursuant to a procurement contract with the Government of the United
States (U.S. government) entered into on and after January 2, 2011, to provide goods
or services if the goods are manufactured or produced in, or the services are provided
in, any country that is not a party to an international procurement agreement with the
United States.
Section 301(c) of the Act requires that section 5000C be applied in a manner
consistent with the United States’ obligations under international agreements.
Accordingly, section 5000C will not be applied if the payment is made to a foreign
person entitled to relief from the tax imposed under section 5000C pursuant to an

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international agreement with the United States, including relief pursuant to a
nondiscrimination provision of a qualified income tax treaty when the foreign person is
entitled to the benefit of that provision.
A “qualified income tax treaty” means a U.S. income tax treaty in force that
contains a nondiscrimination article that applies to the tax imposed by section 5000C
and prohibits taxation that is more burdensome on a foreign national than on a U.S.
national (or in the case of certain income tax treaties, taxation that is more burdensome
on a foreign citizen than a U.S. citizen), regardless of residence. A foreign person that
is entitled to relief from tax under section 5000C pursuant to a qualified income tax
treaty is exempt from the tax under section 5000C, regardless of whether the payment it
receives is for goods manufactured or produced, or for services provided, in a country
that is not a party to an international procurement agreement with the United States.
To assist both the U.S. government and foreign persons in determining whether
the tax shall be imposed under section 5000C and the regulations thereunder, the
Appendices to this notice identify all “qualified income tax treaties” as of the date of
publication of this notice.
SECTION 2. EXPLANATION OF TREATY LISTS IN APPENDIX A AND B
U.S. income tax treaties are bilateral agreements that eliminate double taxation
on cross-border investments and activities of residents of the two contracting states.
These agreements also generally prevent discriminatory taxation. In general,
nondiscrimination articles include a provision that prevents taxation that is more

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burdensome on foreign nationals than U.S. nationals, where nationality is the sole basis
for the more burdensome treatment (“the nationality provision”). The tax imposed under
section 5000C applies only to specified Federal procurement payments made to foreign
persons, regardless of their residence, and not U.S. persons. Therefore, in general, the
tax imposed under section 5000C constitutes taxation more burdensome on foreign
nationals than U.S. nationals. Thus, depending on the particular terms of the
nondiscrimination provision in an income tax treaty, the tax may not be imposed on
nationals who benefit from this protection.
Scope of persons covered by the nationality provision
The definition of national in U.S. income tax treaties generally includes citizens or
nationals of a contracting state as well as legal persons, such as corporations, whose
status as such is derived from the laws of that country. See Article 3(1)(j) of the 2006
U.S. Model Tax Treaty (U.S. Model). There is no requirement that the legal person be a
taxable entity or that the national be treated as a resident of that country under its treaty
with the United States. In addition, there is no requirement that the national satisfy the
limitation on benefits article, if any, in the treaty between the national’s country and the
United States. Some treaties apply only to nationals who are natural persons (that is,
individuals) and not entities. Other treaties apply only to natural persons who are also
residents of the United States. The tax imposed by section 5000C would not apply to
payments to nationals resident in the United States.
Scope of taxes covered

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Not all treaty nondiscrimination articles cover taxes of every kind and description,
such as the tax imposed by section 5000C. Some apply only to federal income taxes, in
which case, the article would not cover the tax imposed under section 5000C.
Appendix A provides a list of qualified income tax treaties that exempt all
nationals of that country from the tax imposed under section 5000C. Appendix B
provides a list of qualified income tax treaties that exempt only individual nationals of
that treaty country.
SECTION 3. EFFECTIVE DATE

This notice is effective for all payments received pursuant to specified Federal
procurement contracts entered into on and after January 2, 2011. The list of qualified
income tax treaties will be updated as necessary in subsequent IRS Forms,
Instructions, Publications or other media (including electronic media).
SECTION 4. CONTACT INFORMATION

The principal author of this notice is Rosy Lor of the Office of Associate Chief
Counsel (International). For further information regarding this notice contact Rosy Lor
at (202) 317-6933 (not a toll-free call).

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APPENDIX A (Complete exemption for all nationals)
The following qualified income tax treaties cover all nationals of the treaty country
and exempt all such nationals from the tax imposed by section 5000C:
Austria Bangladesh Belgium Bulgaria Canada
Czech Republic Denmark Estonia Finland Germany
Hungary Iceland Italy Jamaica Japan
Latvia Lithuania Luxembourg Malta Mexico
Netherlands Portugal Slovak
Republic
Slovenia South Africa
Spain Sri Lanka Sweden Switzerland Turkey
United
Kingdom
Venezuela

APPENDIX B (Exemption only for individual nationals)
The following qualified income tax treaties cover only individual nationals of the
treaty country and exempt all such individual nationals from the tax imposed by section
5000C:
Cyprus Israel Kazakhstan Russia Ukraine