The US Congress on Thursday repealed corporate tax breaks that had been ruled illegal by the WTO, averting the threat of billions of dollars in European sanctions.
The EU said it would now withdraw the sanctions, which would have taken effect next week if Congress had not acted.
The controversial windfall for US exporters was scrapped as part of a wider law that extended US President George W. Bush's tax cuts on dividends and capital gains for investors. The law was passed in the Senate by the narrow margin of 54 votes to 44, after already clearing the House of Representatives on Wednesday.
US Trade Representative Rob Portman thanked both houses of Congress for abolishing the so-called Foreign Sales Corporation (FSC) and Extra-Territorial Income provisions.
"It means the US has taken the steps necessary to comply with its WTO obligations in this matter," he said.
The provisions had yielded billions to US giants such as Boeing, General Electric, Motorola and Microsoft, triggering EU accusations that the tax breaks amounted to an illegal subsidy.
EU Trade Commissioner Peter Mandelson said in a statement he "warmly welcomed" the repeal, which he said set the stage for a "positive atmosphere" for an EU-US summit in Vienna next month.
"The EU, which had been authorized by the WTO to enforce retaliatory measures if the tax benefits were not removed, will now withdraw the reintroduction of sanctions foreseen for May 16," he said.
In May 2003, the WTO granted the EU the right to impose up to US$4 billion in punitive duties on US imports after ruling that the FSC and its successor arrangement violated trade rules. The EU applied the duties in March 2004, but put them on ice in January last year pending another WTO decision on whether newly revised US tax breaks complied with the original ruling. The Geneva-based club found that they did not.