Technical Explanation PDF

UNITED STATES MODEL
INCOME TAX CONVENTION OF
SEPTEMBER 20, 1996
TECHNICAL EXPLANATION
TITLE AND PREAMBLE
PURPOSE OF MODEL CONVENTION AND TECHNICAL EXPLANATION
Set forth below is an explanation of the purposes for publishing a Model Convention and
Technical Explanation.
The Model is drawn from a number of sources. Instrumental in its development was the
U.S. Treasury Department's draft Model Income Tax Convention, published on June 16, 1981
("the 1981 Model") and withdrawn as an official U.S. Model on July 17, 1992, the Model Double
Taxation Convention on Income and Capital, and its Commentaries, published by the OECD, as
updated in 1995 ("the OECD Model"), existing U.S. income tax treaties, recent U.S. negotiating
experience, current U.S. tax laws and policies and comments received from tax practitioners and
other interested parties.
For over thirty years the United States has actively participated in the development of the
OECD Model, and the United States continues its support of that process. Accordingly, the
publication of a U.S. Model does not represent a lack of support for the work of the OECD in
developing and refining its Model treaty. To the contrary, the strong identity between the
provisions of the OECD and U.S. Models reflects the fact that the United States drew heavily on
the work of the OECD in the development of the U.S. Model. References are made in the
Technical Explanation to the OECD commentaries, where appropriate, to note similarities and
differences.
Like the OECD Model, the Model is intended to be an ambulatory document that may be
updated from time to time to reflect further consideration of various provisions in light of
experience, subsequent treaty negotiations, economic, judicial, legislative or regulatory
developments in the United States, and changes in the nature or significance of transactions
between U.S. and foreign persons. The Technical Explanation is also intended to be ambulatory,
and may be expanded to deal with new issues that may arise in the future. The Model will be
more useful if it is understood which developments have given rise to alterations in the Model,
rather than leaving such judgements to be inferred from actual treaties concluded after the release
of the Model. The manner and timing of such updates will be subsequently determined.
The Model does not present alternative provisions that might be included in a particular
treaty under a particular set of circumstances. For example, a treaty with a country that has a
remittance basis or an integrated system of corporate taxation might have to depart significantly
in several respects from the Model.

For this reason and others, the Model is not intended to represent an ideal United States
income tax treaty. Rather, a principal function of the Model is to facilitate negotiations by
helping the negotiators identify differences between income tax policies in the two countries. In
this regard, the Model can be especially valuable with respect to the many countries that are
conversant with the OECD Model. Such countries can compare the Model with the OECD
Model and very quickly identify issues for discussion during tax treaty negotiations. By helping
to identify legal and policy differences between the two treaty partners, the Model will facilitate
the negotiations by enabling the negotiators to move more quickly to the most important issues
that must be resolved. Reconciling these differences will lead to an agreed text that will differ
from the Model in numerous respects. Another purpose of the Model and the Technical
Explanation is to provide a basic explanation of U.S. treaty policy for all interested parties,
regardless of whether they are prospective treaty partners.
Since the Model is intended to facilitate negotiations and not to provide a text that the
United States would propose that the treaty partner accept without variation, it should not be
assumed that a departure from the Model text in an actual treaty represents an undesirable
departure from U.S. treaty policy. The United States would not negotiate a treaty with a country
without thoroughly analyzing the tax laws and administrative practices of the other country. For
these reasons, it is unlikely that the United States ever will sign an income tax convention that is
identical to the Model.
Therefore, variations from the Model text in a particular case may represent a
modification that the United States views as necessary to address a particular aspect of the treaty
partner's tax law, or even represent a substantive concession by the treaty partner in favor of the
United States. Time is another relevant consideration, as treaty policies evolve in other countries
just as they do in the United States. Furthermore, language differences (even with English-
speaking countries) sometimes necessitate changes in Model language. Consequently, it would
not be appropriate to base an evaluation of an actual treaty simply on the number of differences
between the treaty and the Model. Rather, such an evaluation must be based on a firm
understanding of the treaty partner's tax laws and policies, how that law interacts with the treaty
and the provisions of U.S. tax law, precedents in the partner's other treaties, the relative
economic positions of the two treaty partners, the considerations that gave rise to the
negotiations, and the numerous other considerations that give rise to any agreement between two
sovereign nations.
TABLE OF ARTICLES
Article 1---------------------------------General Scope
Article 2---------------------------------Taxes Covered
Article 3---------------------------------General Definitions
Article 4---------------------------------Residence
Article 5---------------------------------Permanent Establishment
Article 6---------------------------------Income from Real Property (Immovable Property)
Article 7---------------------------------Business Profits

Article 8---------------------------------Shipping and Air Transport
Article 9---------------------------------Associated Enterprises
Article 10--------------------------------Dividends
Article 11--------------------------------Interest
Article 12--------------------------------Royalties
Article 13--------------------------------Gains
Article 14--------------------------------Independent Personal Services
Article 15--------------------------------Dependent Personal Services
Article 16--------------------------------Directors' Fees
Article 17--------------------------------Artistes and Sportsmen
Article 18--------------------------------Pensions, Social Security, Annuities,
Alimony, and Child Support
Article 19--------------------------------Government Service
Article 20--------------------------------Students and Trainees
Article 21--------------------------------Other Income
Article 22--------------------------------Limitation on Benefits
Article 23--------------------------------Relief from Double Taxation
Article 24--------------------------------Nondiscrimination
Article 25--------------------------------Mutual Agreement Procedure
Article 26--------------------------------Exchange of Information and Administrative Assistance
Article 27--------------------------------Diplomatic Agents and Consular Officers
Article 28--------------------------------Entry into Force
Article 29--------------------------------Termination
ARTICLE 1
General Scope
Paragraph 1 of Article 1 provides that the Convention applies to residents of the United
States or the other Contracting State except where the terms of the Convention provide
otherwise. Under Article 4 (Residence) a person is generally treated as a resident of a Contracting
State if that person is, under the laws of that State, liable to tax therein by reason of his domicile
or other similar criteria. If, however, a person is considered a resident of both Contracting States,
a single state of residence (or no state of residence) is assigned under Article 4. This definition
governs for all purposes of the Convention.
Certain provisions are applicable to persons who may not be residents of either
Contracting State. For example, Article 19 (Government Service) may apply to an employee of a
Contracting State who is resident in neither State. Paragraph 1 of Article 24 (Nondiscrimination)
applies to nationals of the Contracting States. Under Article 26 (Exchange of Information and
Administrative Assistance), information may be exchanged with respect to residents of third
states.
Paragraph 2 states the generally accepted relationship both between the Convention and
domestic law and between the Convention and other agreements between the Contracting States

(i.e., that no provision in the Convention may restrict any exclusion, exemption, deduction, credit
or other benefit accorded by the tax laws of the Contracting States, or by any other agreement
between the Contracting States). For example, if a deduction would be allowed under the U.S.
Internal Revenue Code (the "Code") in computing the U.S. taxable income of a resident of the
other Contracting State, the deduction also is allowed to that person in computing taxable income
under the Convention. Paragraph 2 also means that the Convention may not increase the tax
burden on a resident of a Contracting States beyond the burden determined under domestic law.
Thus, a right to tax given by the Convention cannot be exercised unless that right also exists
under internal law. The relationship between the nondiscrimination provisions of the Convention
and other agreements is not addressed in paragraph 2 but in paragraph 3.
It follows that under the principle of paragraph 2 a taxpayer's liability to U.S. tax need not
be determined under the Convention if the Code would produce a more favorable result. A
taxpayer may not, however, choose among the provisions of the Code and the Convention in an
inconsistent manner in order to minimize tax. For example, assume that a resident of the other
Contracting State has three separate businesses in the United States. One is a profitable
permanent establishment and the other two are trades or businesses that would earn taxable
income under the Code but that do not meet the permanent establishment threshold tests of the
Convention. One is profitable and the other incurs a loss. Under the Convention, the income of
the permanent establishment is taxable, and both the profit and loss of the other two businesses
are ignored. Under the Code, all three would be subject to tax, but the loss would be offset
against the profits of the two profitable ventures. The taxpayer may not invoke the Convention to
exclude the profits of the profitable trade or business and invoke the Code to claim the loss of the
loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84-17,
1984-1 C.B. 308.) If, however, the taxpayer invokes the Code for the taxation of all three
ventures, he would not be precluded from invoking the Convention with respect, for example, to
any dividend income he may receive from the United States that is not effectively connected with
any of his business activities in the United States.
Similarly, nothing in the Convention can be used to deny any benefit granted by any other
agreement between the United States and the other Contracting State. For example, if certain
benefits are provided for military personnel or military contractors under a Status of Forces
Agreement between the United States and the other Contracting State, those benefits or
protections will be available to residents of the Contracting States regardless of any provisions to
the contrary (or silence) in the Convention.
Paragraph 3 specifically relates to nondiscrimination obligations of the Contracting States
under other agreements. The provisions of paragraph 3 are an exception to the rule provided in
paragraph 2 of this Article under which the Convention shall not restrict in any manner any
benefit now or hereafter accorded by any other agreement between the Contracting States.
Subparagraph (a) of paragraph 3 provides that, notwithstanding any other agreement to
which the Contracting States may be parties, a dispute concerning whether a measure is within
the scope of this Convention shall be considered only by the competent authorities of the
Contracting States, and the procedures under this Convention exclusively shall apply to the

dispute. Thus, procedures for dealing with disputes that may be incorporated into trade,
investment, or other agreements between the Contracting States shall not apply for the purpose of
determining the scope of the Convention.
Subparagraph (b) of paragraph 3 provides that, unless the competent authorities
determine that a taxation measure is not within the scope of this Convention, the
nondiscrimination obligations of this Convention exclusively shall apply with respect to that
measure, except for such national treatment or most-favored-nation ("MFN") obligations as may
apply to trade in goods under the General Agreement on Tariffs and Trade ("GATT"). No
national treatment or MFN obligation under any other agreement shall apply with respect to that
measure. Thus, unless the competent authorities agree otherwise, any national treatment and
MFN obligations undertaken by the Contracting States under agreements other than the
Convention shall not apply to a taxation measure, with the exception of GATT as applicable to
trade in goods.
Subparagraph (c) of paragraph 3 defines a "measure" broadly. It would include, for
example, a law, regulation, rule, procedure, decision, administrative action or guidance, or any
other form of measure.
Paragraph 4 contains the traditional saving clause found in all U.S. treaties. The
Contracting States reserve their rights, except as provided in paragraph 5, to tax their residents
and citizens as provided in their internal laws, notwithstanding any provisions of the Convention
to the contrary. For example, if a resident of the other Contracting State performs independent
personal services in the United States and the income from the services is not attributable to a
fixed base in the United States, Article 14 (Independent Personal Services) would normally
prevent the United States from taxing the income. If, however, the resident of the other
Contracting State is also a citizen of the United States, the saving clause permits the United
States to include the remuneration in the worldwide income of the citizen and subject it to tax
under the normal Code rules (i.e., without regard to Code section 894(a)). For special foreign tax
credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in the
other Contracting State, see paragraph 3 of Article 23 (Relief from Double Taxation).
For purposes of the saving clause, "residence" is determined under Article 4 (Residence).
Thus, if an individual who is not a U.S. citizen is a resident of the United States under the Code,
and is also a resident of the other Contracting State under its law, and that individual has a
permanent home available to him in the other Contracting State and not in the United States, he
would be treated as a resident of the other Contracting State under Article 4 and for purposes of
the saving clause. The United States would not be permitted to apply its statutory rules to that
person if they are inconsistent with the treaty. Thus, an individual who is a U.S. resident under
the Internal Revenue Code but who is deemed to be a resident of the other Contracting State
under the tie-breaker rules of Article 4 (Residence) would be subject to U.S. tax only to the
extent permitted by the Convention. However, the person would be treated as a U.S. resident for
U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in
determining under Code section 957 whether a foreign corporation is a controlled foreign
corporation, shares in that corporation held by the individual would be considered to be held by a

U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States
shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income
recognized by the corporation. See Treas. Reg. section 301.7701(b)-7(a)(3).
Under paragraph 4 each Contracting State also reserves its right to tax former citizens and
long-term residents whose loss of citizenship or long-term residence had as one of its principal
purposes the avoidance of tax. The United States treats an individual as having a principal
purpose to avoid tax if
(a) the average annual net income tax of such individual for the period of 5
taxable years ending before the date of the loss of status is greater than $100,000, or
(b) the net worth of such individual as of such date is $500,000 or more.
The United States defines “long-term resident” as an individual (other than a U.S. citizen) who is
a lawful permanent resident of the United States in at least 8 of the prior 15 taxable years. An
individual shall not be treated as a lawful permanent resident for any taxable year if such
individual is treated as a resident of a foreign country under the provisions of a tax treaty between
the United States and the foreign country and the individual does not waive the benefits of such
treaty applicable to residents of the foreign country. In the United States, such a former citizen or
long-term resident is taxable in accordance with the provisions of section 877 of the Code.
Some provisions are intended to provide benefits to citizens and residents that do not
exist under internal law. Paragraph 5 sets forth certain exceptions to the saving clause that
preserve these benefits for citizens and residents of the Contracting States. Subparagraph (a) lists
certain provisions of the Convention that are applicable to all citizens and residents of a
Contracting State, despite the general saving clause rule of paragraph 3:
(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative
adjustment with respect to income tax due on profits reallocated under Article 9.
(2) Paragraphs 2 and 5 of Article 18 (Pensions, Social Security, Annuities, Alimony and
Child Support) deal with social security benefits and child support payments, respectively.
The inclusion of paragraph 2 in the exceptions to the saving clause means that the grant of
exclusive taxing right of social security benefits to the paying country applies to deny, for
example, to the United States the right to tax its citizens and residents on social security benefits
paid by the other Contracting State. The inclusion of paragraph 5, which exempts child support
payments from taxation by the State of residence of the recipient, means that if a resident of the
other Contracting State pays child support to a citizen or resident of the United States, the United
States may not tax the recipient.
(3) Article 23 (Relief from Double Taxation) confirms the benefit of a credit to citizens
and residents of one Contracting State for income taxes paid to the other.
(4) Article 24 (Nondiscrimination) requires one Contracting State to grant national
treatment to residents and citizens of the other Contracting State in certain circumstances.
Excepting this Article from the saving clause requires, for example, that the United States give
such benefits to a resident or citizen of the other Contracting State even if that person is a citizen
of the United States.
(5) Article 25 (Mutual Agreement Procedure) may confer benefits on citizens and
residents of the Contracting States. For example, the statute of limitations may be waived for

refunds and the competent authorities are permitted to use a definition of a term that differs from
the internal law definition. As with the foreign tax credit, these benefits are intended to be
granted by a Contracting State to its citizens and residents.
Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving
clause. The benefits referred to are all intended to be granted to temporary residents of a
Contracting State (for example, in the case of the United States, holders of non-immigrant visas),
but not to citizens or to persons who have acquired permanent residence in that State. If
beneficiaries of these provisions travel from one of the Contracting States to the other, and
remain in the other long enough to become residents under its internal law, but do not acquire
permanent residence status (i.e., in the U.S. context, they do not become "green card" holders)
and are not citizens of that State, the host State will continue to grant these benefits even if they
conflict with the statutory rules. The benefits preserved by this paragraph are the host country
exemptions for the following items of income: tax treatment of pension fund contributions under
paragraph 6 of Article 18 (Pensions, Social Security , Annuities, Alimony, and Child Support),
government service salaries and pensions under Article 19 (Government Service); certain income
of visiting students and trainees under Article 20 (Students and Trainees); and the income of
diplomatic agents and consular officers under Article 27 (Diplomatic Agents and Consular
Officers).
ARTICLE 2
Taxes Covered
This Article specifies the U.S. taxes and the taxes of the other Contracting State to which
the Convention applies. Unlike Article 2 in the OECD Model, this Article does not contain a
general description of the types of taxes that are covered (i.e., income taxes), but only a listing of
the specific taxes covered for both of the Contracting States. With two exceptions, the taxes
specified in Article 2 are the covered taxes for all purposes of the Convention. A broader
coverage applies, however, for purposes of Articles 24 (Nondiscrimination) and 26 (Exchange of
Information and Administrative Assistance). Article 24 (Nondiscrimination applies with respect
to all taxes, including those imposed by state and local governments. Article 26 (Exchange of
Information and Administrative Assistance) applies with respect to all taxes imposed at the
national level.
Subparagraph 1(a) provides that the United States covered taxes are the Federal income
taxes imposed by the Code, together with the excise taxes imposed with respect to private
foundations (Code sections 4940 through 4948). Although they may be regarded as income taxes,
social security taxes (Code sections 1401, 3101, 3111 and 3301) are specifically excluded from
coverage. It is expected that social security taxes will be dealt with in bilateral Social Security
Totalization Agreements, which are negotiated and administered by the Social Security
Administration. Except with respect to Article 24 (Nondiscrimination), state and local taxes in
the United States are not covered by the Convention.
In this Model, unlike some U.S. treaties, the Accumulated Earnings Tax and the Personal

Holding Companies Tax are covered taxes because they are income taxes and they are not
otherwise excluded from coverage. Under the Code, these taxes will not apply to most foreign
corporations because of a statutory exclusion or the corporation's failure to meet a statutory
requirement. In the few cases where the taxes may apply to a foreign corporation, the tax due is
likely to be insignificant. Treaty coverage therefore confers little if any benefit on such
corporations.
Subparagraph 1(b) specifies the existing taxes of the other Contracting State that are
covered by the Convention.
Under paragraph 2, the Convention will apply to any taxes that are identical, or
substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to,
or in place of, the existing taxes after the date of signature of the Convention. The paragraph also
provides that the competent authorities of the Contracting States will notify each other of
significant changes in their taxation laws or of other laws that affect their obligations under the
Convention. The use of the term "significant" means that changes must be reported that are of
significance to the operation of the Convention. Other laws that may affect a Contracting State's
obligations under the Convention may include, for example, laws affecting bank secrecy.
The competent authorities are also obligated to notify each other of official published
materials concerning the application of the Convention. This requirement encompasses materials
such as technical explanations, regulations, rulings and judicial decisions relating to the
Convention.
ARTICLE 3
General Definitions
Paragraph 1 defines a number of basic terms used in the Convention. Certain others are
defined in other articles of the Convention. For example, the term "resident of a Contracting
State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in
Article 5 (Permanent Establishment). The terms "dividends," "interest" and "royalties" are
defined in Articles 10, 11 and 12, respectively. The introduction to paragraph 1 makes clear that
these definitions apply for all purposes of the Convention, unless the context requires otherwise.
This latter condition allows flexibility in the interpretation of the treaty in order to avoid results
not intended by the treaty's negotiators. Terms that are not defined in the Convention are dealt
with in paragraph 2.
Subparagraph 1(a) defines the term "person" to include an individual, a trust, a
partnership, a company and any other body of persons. The definition is significant for a variety
of reasons. For example, under Article 4, only a "person" can be a "resident" and therefore
eligible for most benefits under the treaty. Also, all "persons" are eligible to claim relief under
Article 25 (Mutual Agreement Procedure).
This definition is more specific but not substantively different from the corresponding

provision in the OECD Model. Unlike the OECD Model, it specifically includes a trust, an
estate, and a partnership. Since, however, the OECD Model's definition also uses the phrase "and
any other body of persons," partnerships would be included, consistent with paragraph 2 of the
Article, to the extent that they are treated as "bodies of persons." Furthermore, because the
OECD Model uses the term "includes," trusts and estates would be persons. Under Article 3(2)
the meaning of the terms "partnership," "trust" and "estate" would be determined by reference to
the law of the Contracting State whose tax is being applied.
The term "company" is defined in subparagraph 1(b) as a body corporate or an entity
treated as a body corporate for tax purposes in the state where it is organized.
The terms "enterprise of a Contracting State" and "enterprise of the other Contracting
State" are defined in subparagraph 1(c) as an enterprise carried on by a resident of a Contracting
State and an enterprise carried on by a resident of the other Contracting State. The term
"enterprise" is not defined in the Convention, nor is it defined in the OECD Model or its
Commentaries. Despite the absence of a clear, generally accepted meaning for the term
"enterprise," the term is understood to refer to any activity or set of activities that constitute a
trade or business.
Unlike the OECD Model, subparagraph 1(c) also provides that these terms also
encompass an enterprise conducted through an entity (such as a partnership) that is treated as
fiscally transparent in the Contracting State where the entity’s owner is resident. This phrase has
been included in the Model in order to address more explicitly some of the problems presented
by fiscally transparent entities. In accordance with Article 4 (Residence), entities that are fiscally
transparent in the country in which their owners are resident are not considered to be residents of
a Contracting State (although income derived by such entities may be taxed as the income of a
resident, if taxed in the hands of resident partners or other owners). Given the approach taken in
Article 4, an enterprise conducted by such an entity arguably could not qualify as an enterprise of
a Contracting State under the OECD Model because the OECD definition of enterprise requires
that the enterprise be conducted by a resident, although most countries would attribute the
enterprise to the owners of the entity in such circumstances. The definition in the Model is
intended to make clear that an enterprise conducted by such an entity will be treated as carried on
by a resident of a Contracting State to the extent its partners or other owners are residents. This
approach is consistent with the Code, which under section 875 attributes a trade or business
conducted by a partnership to its partners and a trade or business conducted by an estate or trust
to its beneficiaries.
An enterprise of a Contracting State need not be carried on in that State. It may be carried
on in the other Contracting State or a third state (e.g., a U.S. corporation doing all of its business
in the other Contracting State would still be a U.S. enterprise).
Subparagraph 1(d) defines the term "international traffic." The term means any transport
by a ship or aircraft except when the vessel is operated solely between places within a
Contracting State. This definition is applicable principally in the context of Article 8 (Shipping
and Air Transport). The definition in the OECD Model refers to the operator of the ship or

aircraft having its place of effective management in a Contracting State (i.e., being a resident of
that State). The U.S. Model does not include this limitation. The broader definition combines
with paragraphs 2 and 3 of Article 8 to exempt from tax by the source State income from the
rental of ships, aircraft or containers that is earned both by lessors that are operators of ships and
aircraft and by those lessors that are not (e.g., a bank or a container leasing company).
The exclusion from international traffic of transport solely between places within a
Contracting State means, for example, that carriage of goods or passengers solely between New
York and Chicago would not be treated as international traffic, whether carried by a U.S. or a
foreign carrier. The substantive taxing rules of the Convention relating to the taxation of income
from transport, principally Article 8 (Shipping and Air Transport), therefore, would not apply to
income from such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of
the other Contracting State (assuming that were possible under U.S. law), the United States
would not be required to exempt the income from that transport under Article 8. The income
would, however, be treated as business profits under Article 7 (Business Profits), and therefore
would be taxable in the United States only if attributable to a U.S. permanent establishment of
the foreign carrier, and then only on a net basis. The gross basis U.S. tax imposed by section 887
would never apply under the circumstances described. If, however, goods or passengers are
carried by a carrier resident in the other Contracting State from a non-U.S. port to, for example,
New York, and some of the goods or passengers continue on to Chicago, the entire transport
would be international traffic. This would be true if the international carrier transferred the goods
at the U.S. port of entry from a ship to a land vehicle, from a ship to a lighter, or even if the
overland portion of the trip in the United States was handled by an independent carrier under
contract with the original international carrier, so long as both parts of the trip were reflected in
original bills of lading. For this reason, the U.S. Model refers, in the definition of "international
traffic," to "such transport" being solely between places in the other Contracting State, while the
OECD Model refers to the ship or aircraft being operated solely between such places. The U.S.
Model language is intended to make clear that, as in the above example, even if the goods are
carried on a different aircraft for the internal portion of the international voyage than is used for
the overseas portion of the trip, the definition applies to that internal portion as well as the
external portion.
Finally, a “cruise to nowhere,” i.e., a cruise beginning and ending in a port in the same
Contracting State with no stops in a foreign port, would not constitute international traffic.
Subparagraphs 1(e)(i) and (ii) define the term "competent authority" for the United States
and the other Contracting State, respectively. The U.S. competent authority is the Secretary of the
Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority
function to the Commissioner of Internal Revenue, who in turn has delegated the authority to the
Assistant Commissioner (International). With respect to interpretative issues, the Assistant
Commissioner acts with the concurrence of the Associate Chief Counsel (International) of the
Internal Revenue Service.
The term "United States" is defined in subparagraph 1(f) to mean the United States of
America, including the states, the District of Columbia and the territorial sea of the United States.

The term does not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or
territory. Unlike the 1981 Model, this Model explicitly includes certain areas under the sea
within the definition of the United States. For certain purposes, the definition is extended to
include the seabed and subsoil of undersea areas adjacent to the territorial sea of the United
States. This extension applies to the extent that the United States exercises sovereignty in
accordance with international law for the purpose of natural resource exploration and
exploitation of such areas. This extension of the definition applies, however, only if the person,
property or activity to which the Convention is being applied is connected with such natural
resource exploration or exploitation. Thus, it would not include any activity involving the sea
floor of an area over which the United States exercised sovereignty for natural resource purposes
if that activity was unrelated to the exploration and exploitation of natural resources. The other
Contracting State is defined in subparagraph 1(g).
This result is consistent with the result that would be obtained under the sometimes less
precise definitions in some U.S. treaties. In the absence of a precise definition incorporating the
continental shelf, the term "United States of America" would be interpreted by reference to the
U.S. internal law definition. Section 638 treats the continental shelf as part of the United States.
The term "national," as it relates to the United States and to the other Contracting State, is
defined in subparagraphs 1(h)(i) and (ii). This term is relevant for purposes of Articles 19
(Government Service) and 24 (Nondiscrimination). A national of one of the Contracting States is
(1) an individual who is a citizen or national of that State, and (2) any legal person, partnership or
association deriving its status, as such, from the law in force in the State where it is established.
This definition is closely analogous to that found in the OECD Model.
The definition differs in two substantive respects from that in the 1981 Model. First, in
the 1981 Model a U.S. national was defined as a citizen of the United States, and did not include
juridical persons. The addition of juridical persons to the definition may have significance in
relation to paragraph 1 of Article 24 (Nondiscrimination), which provides that nationals of one
Contracting State may not be subject in the other to any taxes or connected requirements that are
other or more burdensome than those applicable to nationals of that other State who are in the
same circumstances. Second, the 1981 Model (and the 1977 OECD Model) included the
definition of the term "national" in Article 24 (Nondiscrimination) rather than in Article 3. Since
the term has application in other articles as well (e.g., Article 19 (Government Service)), the
definition has been moved to Article 3 (as it has been in the current OECD Model).
This Model adds a definition that was not included in previous U.S. Models, or in the
OECD Model. This is the definition of "qualified governmental entity" in subparagraph 1(i). This
definition is relevant for purposes of Articles 4 (Residence) and 22 (Limitation on Benefits). A
portion of this definition (i.e., sub-subparagraph (iii) dealing with governmental pension funds)
also is relevant for purposes of Article 10 (Dividends). The term means:
(i) the Government of a Contracting State or of a political subdivision or
local authority of the Contracting State;
(ii) A person wholly owned by a governmental entity described in
subparagraph (i), that satisfies certain organizational and funding standards; and

(iii) a pension fund that meets the standards of subparagraphs (i) and (ii)
and that provides government service pension benefits, described in Article 19
(Government Service).
A qualified governmental entity described in subparagraphs (ii) and (iii) may not engage in any
commercial activity.
Paragraph 2 provides that in the application of the Convention, any term used but not
defined in the Convention will have the meaning that it has under the law of the Contracting
State whose tax is being applied, unless the context requires otherwise. The text of the paragraph
has been amended from previous Models to clarify that if the term is defined under both the tax
and non-tax laws of a Contracting State, the definition in the tax law will take precedence over
the definition in the non-tax laws. Finally, there also may be cases where the tax laws of a State
contain multiple definitions of the same term. In such a case, the definition used for purposes of
the particular provision at issue, if any, should be used.
If the meaning of a term cannot be readily determined under the law of a Contracting
State, or if there is a conflict in meaning under the laws of the two States that creates difficulties
in the application of the Convention, the competent authorities, as indicated in paragraph 3(f) of
Article 25 (Mutual Agreement Procedure), may establish a common meaning in order to prevent
double taxation or to further any other purpose of the Convention. This common meaning need
not conform to the meaning of the term under the laws of either Contracting State.
It has been understood implicitly in previous U.S. Models and in the OECD Model that
the reference in paragraph 2 to the internal law of a Contracting State means the law in effect at
the time the treaty is being applied, not the law as in effect at the time the treaty was signed. This
use of "ambulatory definitions" has been clarified in the text of this Model.
The use of an ambulatory definition, however, may lead to results that are at variance
with the intentions of the negotiators and of the Contracting States when the treaty was
negotiated and ratified. The reference in both paragraphs 1 and 2 to the "context otherwise
requiring" a definition different from the treaty definition, in paragraph 1, or from the internal
law definition of the Contracting State whose tax is being imposed, under paragraph 2, refers to a
circumstance where the result intended by the Contracting States is different from the result that
would obtain under either the paragraph 1 definition or the statutory definition. For example, the
Technical Explanation to paragraph 2(b) of Article 15 (Dependent Personal Services) suggests a
definition of the term "employer," which is not defined in the Article. This definition may or may
not conform to the statutory definitions in the Contracting States, but is consistent with the text
and the intent of the Article, and is intended to prevent a practice known as the "hiring out of
labor." (See the discussion of this issue on page __ of the Technical Explanation to Article 15
(Dependent Personal Services).) This case therefore may be one in which the context requires a
definition different from that of the internal law of one of the States. Thus, some flexibility is
permitted in defining terms.

ARTICLE 4
Residence
This Article sets forth rules for determining whether a person is a resident of a
Contracting State for purposes of the Convention. As a general matter only residents of the
Contracting States may claim the benefits of the Convention. The treaty definition of residence is
to be used only for purposes of the Convention. The fact that a person is determined to be a
resident of a Contracting State under Article 4 does not necessarily entitle that person to the
benefits of the Convention. In addition to being a resident, a person also must qualify for benefits
under Article 22 (Limitation on Benefits) in order to receive benefits conferred on residents of a
Contracting State.
The determination of residence for treaty purposes looks first to a person's liability to tax
as a resident under the respective taxation laws of the Contracting States. As a general matter, a
person who, under those laws, is a resident of one Contracting State and not of the other need
look no further. That person is a resident for purposes of the Convention of the State in which he
is resident under internal law. If, however, a person is resident in both Contracting States under
their respective taxation laws, the Article proceeds, where possible, to assign a single State of
residence to such a person for purposes of the Convention through the use of tie-breaker rules.
Paragraph 1
The term "resident of a Contracting State" is defined in paragraph 1. In general, this
definition incorporates the definitions of residence in U.S. law and that of the other Contracting
State by referring to a resident as a person who, under the laws of a Contracting State, is subject
to tax there by reason of his domicile, residence, citizenship, place of management, place of
incorporation or any other similar criterion. Thus, residents of the United States include aliens
who are considered U.S. residents under Code section 7701(b). Subparagraphs (a) through (d)
each address special cases that may arise in the context of Article 4.
Certain entities that are nominally subject to tax but that in practice rarely pay tax also
would generally be treated as residents and therefore accorded treaty benefits. For example,
RICs, REITs and REMICs are all residents of the United States for purposes of the treaty.
Although the income earned by these entities normally is not subject to U.S. tax in the hands of
the entity, they are taxable to the extent that they do not currently distribute their profits, and
therefore may be regarded as "liable to tax." They also must satisfy a number of requirements
under the Code in order to be entitled to special tax treatment.
Subparagraph (a) provides that a person who is liable to tax in a Contracting State only in
respect of income from sources within that State will not be treated as a resident of that
Contracting State for purposes of the Convention. Thus, a consular official of the other
Contracting State who is posted in the United States, who may be subject to U.S. tax on U.S.
source investment income, but is not taxable in the United States on non-U.S. source income,
would not be considered a resident of the United States for purposes of the Convention. (See
Code section 7701(b)(5)(B)). Similarly, an enterprise of the other Contracting State with a

permanent establishment in the United States is not, by virtue of that permanent establishment, a
resident of the United States. The enterprise generally is subject to U.S. tax only with respect to
its income that is attributable to the U.S. permanent establishment, not with respect to its
worldwide income, as is a U.S. resident.
Subparagraph (b) provides that certain tax-exempt entities such as pension funds and
charitable organizations will be regarded as residents regardless of whether they are generally
liable for income tax in the State where they are established. An entity will be described in this
subparagraph if it is generally exempt from tax by reason of the fact that it is organized and
operated exclusively to perform a charitable or similar purpose or to provide pension or similar
benefits to employees. The reference to “similar benefits” is intended to encompass employee
benefits such as health and disability benefits.
The inclusion of this provision is intended to clarify the generally accepted practice of
treating an entity that would be liable for tax as a resident under the internal law of a state but for
a specific exemption from tax (either complete or partial) as a resident of that state for purposes
of paragraph 1. The reference to a general exemption is intended to reflect the fact that under
U.S. law, certain organizations that generally are considered to be tax-exempt entities may be
subject to certain excise taxes or to income tax on their unrelated business income. Thus, a U.S.
pension trust, or an exempt section 501(c) organization (such as a U.S. charity) that is generally
exempt from tax under U.S. law is considered a resident of the United States for all purposes of
the treaty.
Subparagraph (c) specifies that a qualified governmental entity (as defined in Article 3) is
to be treated as a resident of that State. Although this provision is not contained in previous U.S.
Models, it is generally understood that such entities are to be treated as residents under all of
those Model treaties. The purpose of including the rule in the Model is to make this
understanding explicit. Article 4 of the OECD Model was amended in 1995 to adopt a similar
approach.
Subparagraph (d) addresses special problems presented by fiscally transparent entities
such as partnerships and certain estates and trusts that are not subject to tax at the entity level.
This subparagraph applies to any resident of a Contracting State who is entitled to income
derived through an entity that is treated as fiscally transparent under the laws of either
Contracting State. Entities falling under this description in the United States would include
partnerships, common investment trusts under section 584 and grantor trusts. This paragraph also
applies to U.S. limited liability companies (“LLC’s”) that are treated as partnerships for U.S. tax
purposes.
Subparagraph (d) provides that an item of income derived through such fiscally
transparent entities will be considered to be derived by a resident of a Contracting State if the
resident is treated under the taxation laws of the State where he is resident as deriving the item of
income. For example, if a U.S. corporation distributes a dividend to an entity that is treated as
fiscally transparent in the other State, the dividend will be considered to be derived by a resident
of that State to the extent that the taxation law of that State treats residents of that State as

deriving the income for tax purposes. In the case of a partnership, this normally would include
the partners of the entity that are residents of that other Contracting State.
The taxation laws of a Contracting State may treat an item of income, profit or gain as
income, profit or gain of a resident of that State even if the resident is not subject to tax on that
particular item of income, profit or gain. For example, if a Contracting State has a participation
exemption for certain foreign-source dividends and capital gains, such income or gains would be
regarded as income or gain of a resident of that State who otherwise derived the income or gain,
despite the fact that the resident could be exempt from tax in that State on the income or gain.
Income is “derived through” a fiscally transparent entity if the entity’s participation in the
transaction giving rise to the income, profit or gain in question is respected after application of
any source State anti-abuse principles based on substance over form and similar analyses. For
example, if a partnership with U.S. partners receives income arising in the other Contracting
State, that income will be considered to be derived through the partnership by its partners as long
as the partnership’s participation in the transaction is not disregarded for lack of economic
substance. In such a case, the partners would be considered to be the beneficial owners of the
income.
Where income is derived through an entity organized in a third state that has owners
resident in one of the Contracting States, the characterization of the entity in that third state is
irrelevant for purposes of determining whether the resident is entitled to treaty benefits with
respect to income derived by the entity.
This rule also applies to trusts to the extent that they are fiscally transparent in their
beneficial owner’s State of residence. For example, if X, a resident of the other Contracting State,
creates a revocable trust and names persons resident in a third country as the beneficiaries of the
trust, X would be treated as the beneficial owner of income derived from the United States under
the Code's rules. If the other State had no rules comparable to those in sections 671 through 679
then it is possible that under the laws of the other State neither X nor the trust would be taxed on
the income derived from the United States. In these cases subparagraph (d) provides that the
trust’s income would be regarded as being derived by a resident of the other State only to the
extent that the laws of that State treat residents of that State as deriving the income for tax
purposes.
Paragraph 2
If, under the laws of the two Contracting States, and, thus, under paragraph 1, an
individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are
provided in paragraph 3 to determine a single State of residence for that individual. These tests
are to be applied in the order in which they are stated. The first test is based on where the
individual has a permanent home. If that test is inconclusive because the individual has a
permanent home available to him in both States, he will be considered to be a resident of the
Contracting State where his personal and economic relations are closest (i.e., the location of his
"center of vital interests"). If that test is also inconclusive, or if he does not have a permanent

home available to him in either State, he will be treated as a resident of the Contracting State
where he maintains an habitual abode. If he has an habitual abode in both States or in neither of
them, he will be treated as a resident of his Contracting State of citizenship. If he is a citizen of
both States or of neither, the matter will be considered by the competent authorities, who will
attempt to agree to assign a single State of residence.
Paragraph 3
Paragraph 3 seeks to settle dual-residence issues for companies. A company is treated as
resident in the United States if it is created or organized under the laws of the United States or a
political subdivision. If the same test is used to determine corporate residence under the laws of
the other Contracting State, dual corporate residence will not occur. If, however, as is frequently
the case, a company is treated as a resident of the other Contracting State if it is either
incorporated or managed and controlled there, dual residence can arise in the case of a U.S.
company that is managed and controlled in the other Contracting State. Under paragraph 3, the
residence of such a company will be in the Contracting State under the laws of which it is created
or organized (i.e., the United States, in the example).
Paragraph 4
Dual residents other than individuals or companies (such as trusts or estates) are
addressed by paragraph 4. If such a person is, under the rules of paragraph 1, resident in both
Contracting States, the competent authorities shall seek to determine a single State of residence
for that person for purposes of the Convention.
ARTICLE 5
Permanent Establishment
This Article defines the term "permanent establishment," a term that is significant for
several articles of the Convention. The existence of a permanent establishment in a Contracting
State is necessary under Article 7 (Business Profits) for the taxation by that State of the business
profits of a resident of the other Contracting State. Since the term "fixed base" in Article 14
(Independent Personal Services) is understood by reference to the definition of "permanent
establishment," this Article is also relevant for purposes of Article 14. Articles 10, 11 and 12
(dealing with dividends, interest, and royalties, respectively) provide for reduced rates of tax at
source on payments of these items of income to a resident of the other State only when the
income is not attributable to a permanent establishment or fixed base that the recipient has in the
source State. The concept is also relevant in determining which Contracting State may tax certain
gains under Article 13 (Gains) and certain "other income" under Article 21 (Other Income).
The Article follows closely both the OECD Model and the 1981 U.S. Model provisions.
Paragraph 1

The basic definition of the term "permanent establishment" is contained in paragraph 1.
As used in the Convention, the term means a fixed place of business through which the business
of an enterprise is wholly or partly carried on.
Paragraph 2
Paragraph 2 lists a number of types of fixed places of business that constitute a permanent
establishment. This list is illustrative and non-exclusive. According to paragraph 2, the term
permanent establishment includes a place of management, a branch, an office, a factory, a
workshop, and a mine, oil or gas well, quarry or other place of extraction of natural resources. As
indicated in the OECD Commentaries (see paragraphs 4 through 8), a general principle to be
observed in determining whether a permanent establishment exists is that the place of business
must be “fixed” in the sense that a particular building or physical location is used by the
enterprise for the conduct of its business, and that it must be foreseeable that the enterprise’s use
of this building or other physical location will be more than temporary.
Paragraph 3
This paragraph provides rules to determine whether a building site or a construction,
assembly or installation project, or a drilling rig or ship used for the exploration of natural
resources constitutes a permanent establishment for the contractor, driller, etc. An activity is
merely preparatory and does not create a permanent establishment under paragraph 4(e) unless
the site, project, etc. lasts or continues for more than twelve months. It is only necessary to refer
to "exploration" and not "exploitation" in this context because exploitation activities are defined
to constitute a permanent establishment under subparagraph (f) of paragraph 2. Thus, a drilling
rig does not constitute a permanent establishment if a well is drilled in only six months, but if
production begins in the following month the well becomes a permanent establishment as of that
date.
The twelve-month test applies separately to each site or project. The twelve-month period
begins when work (including preparatory work carried on by the enterprise) physically begins in
a Contracting State. A series of contracts or projects by a contractor that are interdependent both
commercially and geographically are to be treated as a single project for purposes of applying the
twelve-month threshold test. For example, the construction of a housing development would be
considered as a single project even if each house were constructed for a different purchaser.
Several drilling rigs operated by a drilling contractor in the same sector of the continental shelf
also normally would be treated as a single project.
If the twelve-month threshold is exceeded, the site or project constitutes a permanent
establishment from the first day of activity. In applying this paragraph, time spent by a sub-
contractor on a building site is counted as time spent by the general contractor at the site for
purposes of determining whether the general contractor has a permanent establishment. However,
for the sub-contractor itself to be treated as having a permanent establishment, the sub-
contractor's activities at the site must last for more than 12 months. If a sub-contractor is on a site
intermittently time is measured from the first day the sub-contractor is on the site until the last

day (i.e., intervening days that the sub-contractor is not on the site are counted) for purposes of
applying the 12-month rule.
These interpretations of the Article are based on the Commentary to paragraph 3 of
Article 5 of the OECD Model, which contains language almost identical to that in the
Convention (except for the absence in the OECD Model of a rule for drilling rigs). These
interpretations are consistent with the generally accepted international interpretation of the
language in paragraph 3 of Article 5 of the Convention.
Paragraph 4
This paragraph contains exceptions to the general rule of paragraph 1, listing a number of
activities that may be carried on through a fixed place of business, but which nevertheless do not
create a permanent establishment. The use of facilities solely to store, display or deliver
merchandise belonging to an enterprise does not constitute a permanent establishment of that
enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the purpose
of storage, display or delivery, or solely for the purpose of processing by another enterprise does
not give rise to a permanent establishment of the first-mentioned enterprise. The maintenance of
a fixed place of business solely for the purpose of purchasing goods or merchandise, or for
collecting information, for the enterprise, or for other activities that have a preparatory or
auxiliary character for the enterprise, such as advertising, or the supply of information do not
constitute a permanent establishment of the enterprise. Thus, as explained in paragraph 22 of the
OECD Commentaries, an employee of a news organization engaged merely in gathering
information would not constitute a permanent establishment of the news organization.
Further, a combination of these activities will not give rise to a permanent establishment:
unlike the OECD Model, the Model provides that the maintenance of a fixed place of business
for a combination of the activities listed in subparagraphs (a) through (e) of the paragraph does
not give rise to a permanent establishment, without the OECD Model’s qualification that the
overall combination of activities must be of a preparatory or auxiliary character. The United
States position is that a combination of activities that are each preparatory or auxiliary always
will result in an overall activity that is also preparatory or auxiliary.
Paragraph 5
Paragraphs 5 and 6 specify when activities carried on by an agent on behalf of an
enterprise create a permanent establishment of that enterprise. Under paragraph 5, a dependent
agent of an enterprise is deemed to be a permanent establishment of the enterprise if the agent
has and habitually exercises an authority to conclude contracts that are binding on the enterprise.
If, however, for example, his activities are limited to those activities specified in paragraph 4
which would not constitute a permanent establishment if carried on by the enterprise through a
fixed place of business, the agent is not a permanent establishment of the enterprise.
The OECD Model uses the term “in the name of that enterprise” rather than “binding on
the enterprise.” This difference is intended to be a clarification rather than a substantive

difference. As indicated in paragraph 32 to the OECD Commentaries on Article 5, paragraph 5 of
the Article is intended to encompass persons who have “sufficient authority to bind the
enterprise’s participation in the business activity in the State concerned.”
The contracts referred to in paragraph 5 are those relating to the essential business
operations of the enterprise, rather than ancillary activities. For example, if the agent has no
authority to conclude contracts in the name of the enterprise with its customers for, say, the sale
of the goods produced by the enterprise, but it can enter into service contracts in the name of the
enterprise for the enterprise's business equipment used in the agent's office, this contracting
authority would not fall within the scope of the paragraph, even if exercised regularly.
Paragraph 6
Under paragraph 6, an enterprise is not deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through an independent
agent, including a broker or general commission agent, if the agent is acting in the ordinary
course of his business as an independent agent. Thus, there are two conditions that must be
satisfied: the agent must be both legally and economically independent of the enterprise, and the
agent must be acting in the ordinary course of its business in carrying out activities on behalf of
the enterprise
Whether the agent and the enterprise are independent is a factual determination. Among
the questions to be considered are the extent to which the agent operates on the basis of
instructions from the enterprise. An agent that is subject to detailed instructions regarding the
conduct of its operations or comprehensive control by the enterprise is not legally independent.
In determining whether the agent is economically independent, a relevant factor is the
extent to which the agent bears business risk. Business risk refers primarily to risk of loss. An
independent agent typically bears risk of loss from its own activities. In the absence of other
factors that would establish dependence, an agent that shares business risk with the enterprise, or
has its own business risk, is economically independent because its business activities are not
integrated with those of the principal. Conversely, an agent that bears little or no risk from that
activities it performs is not economically independent and therefore is not described in paragraph
6.
Another relevant factor in determining whether an agent is economically independent is
whether the agent has an exclusive or nearly exclusive relationship with the principal. Such a
relationship may indicate that the principal has economic control over the agent. A number of
principals acting in concert also may have economic control over an agent. The limited scope of
the agent’s activities and the agent’s dependence on a single source of income may indicate that
the agent lacks economic independence. It should be borne in mind, however, that exclusivity is
not in itself a conclusive test: an agent may be economically independent notwithstanding an
exclusive relationship with the principal if it has the capacity to diversify and acquire other
clients without substantial modifications to its current business and without substantial harm to
its business profits. Thus, exclusivity should be viewed merely as a pointer to further

investigation of the relationship between the principal and the agent. Each case must be
addressed on the basis of its own facts and circumstances.
Paragraph 7
This paragraph clarifies that a company that is a resident of a Contracting State is not
deemed to have a permanent establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of that other Contracting State, or that
carries on business in that other Contracting State. The determination whether a permanent
establishment exists is made solely on the basis of the factors described in paragraphs 1 through
6 of the Article. Whether a company is a permanent establishment of a related company,
therefore, is based solely on those factors and not on the ownership or control relationship
between the companies.
ARTICLE 6
Income from Real Property (Immovable Property)
Paragraph 1
The first paragraph of Article 6 states the general rule that income of a resident of a
Contracting State derived from real property situated in the other Contracting State may be taxed
in the Contracting State in which the property is situated. The paragraph specifies that income
from real property includes income from agriculture and forestry. Income from agriculture and
forestry are dealt with in Article 6 rather than in Article 7 (Business Profits) in order to conform
the U.S. Model to the OECD Model. Given the availability of the net election in paragraph 5,
taxpayers generally should be able to obtain the same tax treatment in the situs country regardless
of whether the income is treated as business profits or real property income. Paragraph 3 clarifies
that the income referred to in paragraph 1 also means income from any use of real property,
including, but not limited to, income from direct use by the owner (in which case income may be
imputed to the owner for tax purposes) and rental income from the letting of real property.
This Article does not grant an exclusive taxing right to the situs State; the situs State is
merely given the primary right to tax. The Article does not impose any limitation in terms of rate
or form of tax on the situs State, except that, as provided in paragraph 5, the situs State must
allow the taxpayer an election to be taxed on a net basis.
Paragraph 2
The term "real property" is defined in paragraph 2 by reference to the internal law
definition in the situs State. In the case of the United States, the term has the meaning given to it
by Reg. § 1.897-1(b). The OECD Model, and many other countries, use the term "immovable
property" instead. It is to be understood from the parenthetical use of the term "immovable
property" in the title to the Article and in paragraphs 1 and 2, that the two terms are synonymous.
Thus the statutory definition is to be used whether the statutory term is "real property" or

"immovable property".
Paragraph 3
Paragraph 3 makes clear that all forms of income derived from the exploitation of real
property are taxable in the Contracting State in which the property is situated. In the case of a net
lease of real property, if a net election has not been made, the gross rental payment (before
deductible expenses incurred by the lessee) is treated as income from the property. Income from
the disposition of an interest in real property, however, is not considered "derived" from real
property and is not dealt with in this article. The taxation of that income is addressed in Article
13 (Gains). Also, the interest paid on a mortgage on real property and distributions by a U.S.
Real Estate Investment Trust are not dealt with in Article 6. Such payments would fall under
Articles 10 (Dividends), 11 (Interest) or 13 (Gains). Finally, dividends paid by a United States
Real Property Holding Corporation are not considered to be income from the exploitation of real
property: such payments would fall under Article 10 (Dividends) or 13(Gains).
Paragraph 4
This paragraph specifies that the basic rule of paragraph 1 (as elaborated in paragraph 3)
applies to income from real property of an enterprise and to income from real property used for
the performance of independent personal services. This clarifies that the situs country may tax
the real property income (including rental income) of a resident of the other Contracting State in
the absence of attribution to a permanent establishment or fixed base in the situs State. This
provision represents an exception to the general rule under Articles 7 (Business Profits) and 14
(Independent Personal Services) that income must be attributable to a permanent establishment
or fixed base, respectively, in order to be taxable in the situs state.
Paragraph 5
The paragraph provides that a resident of one Contracting State that derives real property
income from the other may elect, for any taxable year, to be subject to tax in that other State on a
net basis, as though the income were attributable to a permanent establishment in that other State.
The election may be terminated with the consent of the competent authority of the situs State. In
the United States, revocation will be granted in accordance with the provisions of Treas. Reg.
section 1.871-10(d)(2).
ARTICLE 7
Business Profits
This Article provides rules for the taxation by a Contracting State of the business profits
of an enterprise of the other Contracting State.
Paragraph 1

Paragraph 1 states the general rule that business profits (as defined in paragraph 7) of an
enterprise of one Contracting State may not be taxed by the other Contracting State unless the
enterprise carries on business in that other Contracting State through a permanent establishment
(as defined in Article 5 (Permanent Establishment)) situated there. When that condition is met,
the State in which the permanent establishment is situated may tax the enterprise, but only on a
net basis and only on the income that is attributable to the permanent establishment. This
paragraph is identical to paragraph 1 of Article 7 of the OECD Model.
Paragraph 2
Paragraph 2 provides rules for the attribution of business profits to a permanent
establishment. The Contracting States will attribute to a permanent establishment the profits that
it would have earned had it been an independent enterprise engaged in the same or similar
activities under the same or similar circumstances. This language incorporates the arm’s length
standard for purposes of determining the profits attributable to a permanent establishment. The
computation of business profits attributable to a permanent establishment under this paragraph is
subject to the rules of paragraph 3 for the allowance of expenses incurred for the purposes of
earning the profits.
The “attributable to” concept of paragraph 2 is analogous but not entirely equivalent to
the “effectively connected” concept in Code section 864(c). The profits attributable to a
permanent establishment may be from sources within or without a Contracting State.
Paragraph 2 also provides that the business profits attributed to a permanent
establishment include only those derived from that permanent establishment’s assets or activities.
This rule is consistent with the “asset-use” and “business activities” test of Code section
864(c)(2). The OECD Model does not expressly provide such a limitation, although it generally
is understood to be implicit in paragraph 1 of Article 7 of the OECD Model. This provision was
included in the U.S. Model to make it clear that the limited force of attraction rule of Code
section 864(c)(3) is not incorporated into paragraph 2.
This Article does not contain a provision corresponding to paragraph 4 of Article 7 of the
OECD Model. That paragraph provides that a Contracting State in certain circumstances may
determine the profits attributable to a permanent establishment on the basis of an apportionment
of the total profits of the enterprise. This paragraph has not been included in the Model because it
is unnecessary. The OECD Commentaries to paragraphs 2 and 3 of Article 7 authorize the use of
such approaches independently of paragraph 4 of Article 7 of the OECD Model. Any such
approach, however, must be designed to approximate an arm’s length result.
Paragraph 3
This paragraph is in substance the same as paragraph 3 of Article 7 of the OECD Model,
although it is in some respects more detailed. Paragraph 3 provides that in determining the
business profits of a permanent establishment, deductions shall be allowed for the expenses
incurred for the purposes of the permanent establishment, ensuring that business profits will be

taxed on a net basis. This rule is not limited to expenses incurred exclusively for the purposes of
the permanent establishment, but includes a reasonable allocation of expenses incurred for the
purposes of the enterprise as a whole, or that part of the enterprise that includes the permanent
establishment. Deductions are to be allowed regardless of which accounting unit of the enterprise
books the expenses, so long as they are incurred for the purposes of the permanent establishment.
For example, a portion of the interest expense recorded on the books of the home office in one
State may be deducted by a permanent establishment in the other if properly allocable thereto.
The paragraph specifies that the expenses that may be considered to be incurred for the
purposes of the permanent establishment are expenses for research and development, interest and
other similar expenses, as well as a reasonable amount of executive and general administrative
expenses. This rule permits (but does not require) each Contracting State to apply the type of
expense allocation rules provided by U.S. law (such as in Treas. Reg. sections 1.861-8 and 1.882-
5).
Paragraph 3 does not permit a deduction for expenses charged to a permanent
establishment by another unit of the enterprise. Thus, a permanent establishment may not deduct
a royalty deemed paid to the head office. Similarly, a permanent establishment may not increase
its business profits by the amount of any notional fees for ancillary services performed for
another unit of the enterprise, but also should not receive a deduction for the expense of
providing such services, since those expenses would be incurred for purposes of a business unit
other than the permanent establishment.
Paragraph 4
Paragraph 4 provides that no business profits can be attributed to a permanent
establishment merely because it purchases goods or merchandise for the enterprise of which it is
a part. This paragraph is essentially identical to paragraph 5 of Article 7 of the OECD Model.
This rule applies only to an office that performs functions for the enterprise in addition to
purchasing. The income attribution issue does not arise if the sole activity of the permanent
establishment is the purchase of goods or merchandise because such activity dos not give rise to a
permanent establishment under Article 5 (Permanent Establishment). A common situation in
which paragraph 4 is relevant is one in which a permanent establishment purchases raw materials
for the enterprise's manufacturing operation conducted outside the United States and sells the
manufactured product. While business profits may be attributable to the permanent establishment
with respect to its sales activities, no profits are attributable to it with respect to its purchasing
activities.
Paragraph 5
This paragraph tracks paragraph 6 of Article 7 of the OECD Model, providing that profits
shall be determined by the same method of accounting each year, unless there is good reason to
change the method used. This rule assures consistent tax treatment over time for permanent
establishments. It limits the ability of both the Contracting State and the enterprise to change
accounting methods to be applied to the permanent establishment. It does not, however, restrict a

Contracting State from imposing additional requirements, such as the rules under Code section
481, to prevent amounts from being duplicated or omitted following a change in accounting
method.
Paragraph 6
Paragraph 6 coordinates the provisions of Article 7 and other provisions of the
Convention. Under this paragraph, when business profits include items of income that are dealt
with separately under other articles of the Convention, the provisions of those articles will,
except when they specifically provide to the contrary, take precedence over the provisions of
Article 7. For example, the taxation of dividends will be determined by the rules of Article 10
(Dividends), and not by Article 7, except where, as provided in paragraph 6 of Article 10, the
dividend is attributable to a permanent establishment or fixed base. In the latter case the
provisions of Articles 7 or 14 (Independent Personal Services) apply. Thus, an enterprise of one
State deriving dividends from the other State may not rely on Article 7 to exempt those dividends
from tax at source if they are not attributable to a permanent establishment of the enterprise in the
other State. By the same token, if the dividends are attributable to a permanent establishment in
the other State, the dividends may be taxed on a net income basis at the source State’s full
corporate tax rate, rather than on a gross basis under Article 10 (Dividends).
As provided in Article 8 (Shipping and Air Transport), income derived from shipping and
air transport activities in international traffic described in that Article is taxable only in the
country of residence of the enterprise regardless of whether it is attributable to a permanent
establishment situated in the source State.
Paragraph 7
The term "business profits" is defined generally in paragraph 7 to mean income derived
from any trade or business. In the absence of evidence to the contrary the lack of this definition in
a bilateral Convention should not be construed to indicate that any different meaning should be
attributed to the term.
In accordance with this broad definition, the term "business profits" includes income
attributable to notional principal contracts and other financial instruments to the extent that the
income is attributable to a trade or business of dealing in such instruments, or is otherwise related
to a trade or business (as in the case of a notional principal contract entered into for the purpose
of hedging currency risk arising from an active trade or business). Any other income derived
from such instruments is, unless specifically covered in another article, dealt with under Article
21 (Other Income).
The first sentence of the paragraph states the longstanding U.S. view that income earned
by an enterprise from the furnishing of personal services is business profits. Thus, a consulting
firm resident in one State whose employees perform services in the other State through a
permanent establishment may be taxed in that other State on a net basis under Article 7, and not
under Article 14 (Independent Personal Services), which applies only to individuals. The salaries

of the employees would be subject to the rules of Article 15 (Dependent Personal Services).
The paragraph also specifies that the term "business profits" includes income derived by
an enterprise from the rental of tangible personal property. In the 1977 OECD Model Convention
this class of income was treated as a royalty, subject to the rules of Article 12. This rule was
changed in the 1992 OECD Model, and the U.S. Model reflects this change in policy. The
inclusion of income derived by an enterprise from the rental of tangible personal property in
business profits means that such income earned by a resident of a Contracting State can be taxed
by the other Contracting State only if the income is attributable to a permanent establishment
maintained by the resident in that other State, and, if the income is taxable, it can be taxed only
on a net basis. Income from the rental of tangible personal property that is not derived in
connection with a trade or business is dealt with in Article 21 (Other Income).
Paragraph 8
Paragraph 8 incorporates into the Convention the rule of Code section 864(c)(6). Like the
Code section on which it is based, paragraph 8 provides that any income or gain attributable to a
permanent establishment or a fixed base during its existence is taxable in the Contracting State
where the permanent establishment or fixed base is situated, even if the payment of that income
or gain is deferred until after the permanent establishment or fixed base ceases to exist. This rule
applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 6 of Article
10 (Dividends), paragraph 3 of Articles 11 (Interest), 12 (Royalties) and 13 (Gains), Article 14
(Independent Personal Services) and paragraph 2 of Article 21 (Other Income).
The effect of this rule can be illustrated by the following example. Assume a company
that is a resident of the other Contracting State and that maintains a permanent establishment in
the United States winds up the permanent establishment's business and sells the permanent
establishment's inventory and assets to a U.S. buyer at the end of year 1 in exchange for an
interest-bearing installment obligation payable in full at the end of year 3. Despite the fact that
Article 13's threshold requirement for U.S. taxation is not met in year 3 because the company has
no permanent establishment in the United States, the United States may tax the deferred income
payment recognized by the company in year 3.
Relation to Other Articles
This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope) of
the Model. Thus, if a citizen of the United States who is a resident of the other Contracting State
under the treaty derives business profits from the United States that are not attributable to a
permanent establishment in the United States, the United States may, subject to the special
foreign tax credit rules of paragraph 3 of Article 23 (Relief from Double Taxation), tax those
profits, notwithstanding the provision of paragraph 1 of this Article which would exempt the
income from U.S. tax.
The benefits of this Article are also subject to Article 22 (Limitation on Benefits). Thus,
an enterprise of the other Contracting State and that derives income effectively connected with a

U.S. trade or business may not claim the benefits of Article 7 unless the resident carrying on the
enterprise qualifies for such benefits under Article 22.
ARTICLE 8
Shipping and Air Transport
This Article governs the taxation of profits from the operation of ships and aircraft in
international traffic. The term "international traffic" is defined in subparagraph 1(d) of Article 3
(General Definitions).
Paragraph 1
Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the
operation in international traffic of ships or aircraft are taxable only in that Contracting State.
Because paragraph 6 of Article 7 (Business Profits) defers to Article 8 with respect to shipping
income, such income derived by a resident of one of the Contracting States may not be taxed in
the other State even if the enterprise has a permanent establishment in that other State. Thus, if a
U.S. airline has a ticket office in the other State, that State may not tax the airline's profits
attributable to that office under Article 7. Since entities engaged in international transportation
activities normally will have many permanent establishments in a number of countries, the rule
avoids difficulties that would be encountered in attributing income to multiple permanent
establishments if the income were covered by Article 7 (Business Profits).
Paragraph 2
The income from the operation of ships or aircraft in international traffic that is exempt
from tax under paragraph 1 is defined in paragraph 2. This paragraph is not found in the OECD
Model, but the effect of the paragraph is generally consistent with the description of the scope of
Article 8 in the Commentary to Article 8 of the OECD Model. Most of the income items that are
described in paragraph 2 of the U.S. Model are described in the OECD Commentary as being
included within the scope of the exemption in paragraph 1. Unlike the OECD Model, however,
paragraph 2 also covers non-incidental bareboat leasing. See paragraph 5 of the OECD
Commentaries.
In addition to income derived directly from the operation of ships and aircraft in
international traffic, this definition also includes certain items of rental income that are closely
related to those activities. First, income of an enterprise of a Contracting State from the rental of
ships or aircraft on a full basis (i.e., with crew) when such ships or aircraft are used in
international traffic is income of the lessor from the operation of ships and aircraft in
international traffic and, therefore, is exempt from tax in the other Contracting State under
paragraph 1. Also, paragraph 2 encompasses income from the lease of ships or aircraft on a
bareboat basis (i.e., without crew), either when the ships or aircraft are operated in international
traffic by the lessee, or when the income is incidental to other income of the lessor from the
operation of ships or aircraft in international traffic. As discussed above, of these classes of rental

income, only non-incidental, bareboat lease income is not covered by Article 8 of the OECD
Model.
Paragraph 2 also clarifies, consistent with the Commentary to Article 8 of the OECD
Model, that income earned by an enterprise from the inland transport of property or passengers
within either Contracting State falls within Article 8 if the transport is undertaken as part of the
international transport of property or passengers by the enterprise. Thus, if a U.S. shipping
company contracts to carry property from the other State to a U.S. city and, as part of that
contract, it transports the property by truck from its point of origin to an airport in the other State
(or it contracts with a trucking company to carry the property to the airport) the income earned by
the U.S. shipping company from the overland leg of the journey would be taxable only in the
United States. Similarly, Article 8 also would apply to income from lighterage undertaken as part
of the international transport of goods.
Finally, certain non-transport activities that are an integral part of the services performed
by a transport company are understood to be covered in paragraph 1, though they are not
specified in paragraph 2. These include, for example, the performance of some maintenance or
catering services by one airline for another airline, if these services are incidental to the provision
of those services by the airline for itself. Income earned by concessionaires, however, is not
covered by Article 8. These interpretations of paragraph 1 also are consistent with the
Commentary to Article 8 of the OECD Model.
Paragraph 3
Under this paragraph, profits of an enterprise of a Contracting State from the use,
maintenance or rental of containers (including equipment for their transport) that are used for the
transport of goods in international traffic are exempt from tax in the other Contracting State. This
result obtains under paragraph 3 regardless of whether the recipient of the income is engaged in
the operation of ships or aircraft in international traffic, and regardless of whether the enterprise
has a permanent establishment in the other Contracting State. Only income from the use,
maintenance or rental of containers that is incidental to other income from international traffic is
covered by Article 8 of the OECD Model.
Paragraph 4
This paragraph clarifies that the provisions of paragraphs 1 and 3 also apply to profits
derived by an enterprise of a Contracting State from participation in a pool, joint business or
international operating agency. This refers to various arrangements for international cooperation
by carriers in shipping and air transport. For example, airlines from two countries may agree to
share the transport of passengers between the two countries. They each will fly the same number
of flights per week and share the revenues from that route equally, regardless of the number of
passengers that each airline actually transports. Paragraph 4 makes clear that with respect to each
carrier the income dealt with in the Article is that carrier's share of the total transport, not the
income derived from the passengers actually carried by the airline. This paragraph corresponds to
paragraph 4 of Article 8 of the OECD Model.

Relation to Other Articles
The taxation of gains from the alienation of ships, aircraft or containers is not dealt with
in this Article but in paragraph 4 of Article 13 (Gains).
As with other benefits of the Convention, the benefit of exclusive residence country
taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article
22 (Limitation on Benefits).
This Article also is subject to the saving clause of paragraph 4 of Article 1 (General
Scope) of the Model. Thus, if a citizen of the United States who is a resident of the other
Contracting State derives profits from the operation of ships or aircraft in international traffic,
notwithstanding the exclusive residence country taxation in paragraph 1 of Article 8, the United
States may, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief
from Double Taxation), tax those profits as part of the worldwide income of the citizen. (This is
an unlikely situation, however, because non-tax considerations (e.g., insurance) generally result
in shipping activities being carried on in corporate form.)
ARTICLE 9
Associated Enterprises
This Article incorporates in the Convention the arm’s length principle reflected in the
U.S. domestic transfer pricing provisions, particularly Code section 482. It provides that when
related enterprises engage in a transaction on terms that are not arm’s length, the Contracting
States may make appropriate adjustments to the taxable income and tax liability of such related
enterprises to reflect what the income and tax of these enterprises with respect to the transaction
would have been had there been an arm’s length relationship between them.
Paragraph 1
This paragraph is essentially the same as its counterpart in the OECD Model. It addresses
the situation where an enterprise of a Contracting State is related to an enterprise of the other
Contracting State, and there are arrangements or conditions imposed between the enterprises in
their commercial or financial relations that are different from those that would have existed in the
absence of the relationship. Under these circumstances, the Contracting States may adjust the
income (or loss) of the enterprise to reflect what it would have been in the absence of such a
relationship.
The paragraph identifies the relationships between enterprises that serve as a prerequisite
to application of the Article. As the Commentary to the OECD Model makes clear, the necessary
element in these relationships is effective control, which is also the standard for purposes of
section 482. Thus, the Article applies if an enterprise of one State participates directly or
indirectly in the management, control, or capital of the enterprise of the other State. Also, the

Article applies if any third person or persons participate directly or indirectly in the management,
control, or capital of enterprises of different States. For this purpose, all types of control are
included, i.e., whether or not legally enforceable and however exercised or exercisable.
The fact that a transaction is entered into between such related enterprises does not, in
and of itself, mean that a Contracting State may adjust the income (or loss) of one or both of the
enterprises under the provisions of this Article. If the conditions of the transaction are consistent
with those that would be made between independent persons, the income arising from that
transaction should not be subject to adjustment under this Article.
Similarly, the fact that associated enterprises may have concluded arrangements, such as
cost sharing arrangements or general services agreements, is not in itself an indication that the
two enterprises have entered into a non-arm’s length transaction that should give rise to an
adjustment under paragraph 1. Both related and unrelated parties enter into such arrangements
(e.g., joint venturers may share some development costs). As with any other kind of transaction,
when related parties enter into an arrangement, the specific arrangement must be examined to see
whether or not it meets the arm’s length standard. In the event that it does not, an appropriate
adjustment may be made, which may include modifying the terms of the agreement or
recharacterizing the transaction to reflect its substance.
It is understood that the "commensurate with income" standard for determining
appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform Act of
1986, was designed to operate consistently with the arm's-length standard. The implementation
of this standard in the section 482 regulations is in accordance with the general principles of
paragraph 1 of Article 9 of the Convention, as interpreted by the OECD Transfer Pricing
Guidelines.
Article 9 does not contain a version of paragraph 3 of Article 9 of the 1981 Model
providing that the adjustments to income provided for in paragraph 1 do not replace, but
complement, the adjustments provided for under the internal laws of the Contracting States. This
language was not included in Article 9 because it had proven to be confusing. The 1981 Model
language does not grant authority not otherwise present. Regardless of whether a particular
convention includes a version of paragraph 3, the Contracting States preserve their rights to apply
internal law provisions relating to adjustments between related parties. They also reserve the
right to make adjustments in cases involving tax evasion or fraud. Such adjustments -- the
distribution, apportionment, or allocation of income, deductions, credits or allowances -- are
permitted even if they are different from, or go beyond, those authorized by paragraph 1 of the
Article, as long as they accord with the general principles of paragraph 1, i.e., that the adjustment
reflects what would have transpired had the related parties been acting at arm's length. For
example, while paragraph 1 explicitly allows adjustments of deductions in computing taxable
income, it does not deal with adjustments to tax credits. It does not, however, preclude such
adjustments if they can be made under internal law. The OECD Model reaches the same result.
See paragraph 4 of the Commentaries to Article 9.
This Article also permits tax authorities to deal with thin capitalization issues. They may,

in the context of Article 9, scrutinize more than the rate of interest charged on a loan between
related persons. They also may examine the capital structure of an enterprise, whether a payment
in respect of that loan should be treated as interest, and, if it is treated as interest, under what
circumstances interest deductions should be allowed to the payor. Paragraph 2 of the
Commentaries to Article 9 of the OECD Model, together with the U.S. observation set forth in
paragraph 15, sets forth a similar understanding of the scope of Article 9 in the context of thin
capitalization.
Paragraph 2
When a Contracting State has made an adjustment that is consistent with the provisions
of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to
reflect arm's-length conditions, that other Contracting State is obligated to make a correlative
adjustment (sometimes referred to as a “corresponding adjustment”) to the tax liability of the
related person in that other Contracting State. Although the OECD Model does not specify that
the other Contracting State must agree with the initial adjustment before it is obligated to make
the correlative adjustment, the Commentary makes clear that the paragraph is to be read that way.
As explained in the OECD Commentaries, Article 9 leaves the treatment of "secondary
adjustments" to the laws of the Contracting States. When an adjustment under Article 9 has been
made, one of the parties will have in its possession funds that it would not have had at arm's
length. The question arises as to how to treat these funds. In the United States the general
practice is to treat such funds as a dividend or contribution to capital, depending on the
relationship between the parties. Under certain circumstances, the parties may be permitted to
restore the funds to the party that would have the funds at arm's length, and to establish an
account payable pending restoration of the funds. See Rev. Proc. 65-17, 1965-1 C.B. 833.
The Contracting State making a secondary adjustment will take the other provisions of
the Convention, where relevant, into account. For example, if the effect of a secondary
adjustment is to treat a U.S. corporation as having made a distribution of profits to its parent
corporation in the other Contracting State, the provisions of Article 10 (Dividends) will apply,
and the United States may impose a 5 percent withholding tax on the dividend. Also, if under
Article 23 the other State generally gives a credit for taxes paid with respect to such dividends, it
would also be required to do so in this case.
The competent authorities are authorized by paragraph 2 to consult, if necessary, to
resolve any differences in the application of these provisions. For example, there may be a
disagreement over whether an adjustment made by a Contracting State under paragraph 1 was
appropriate.
If a correlative adjustment is made under paragraph 2, it is to be implemented, pursuant to
paragraph 2 of Article 25 (Mutual Agreement Procedure), notwithstanding any time limits or
other procedural limitations in the law of the Contracting State making the adjustment. If a
taxpayer has entered a closing agreement (or other written settlement) with the United States
prior to bringing a case to the competent authorities, the U.S. competent authority will endeavor

only to obtain a correlative adjustment from the other Contracting State. See Rev. Proc. 96-13,
1996-13 I.R.B. 31, Section 7.05.
Relationship to Other Articles
The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to
paragraph 2 of Article 9 by virtue of the exceptions to the saving clause in paragraph 5(a) of
Article 1. Thus, even if the statute of limitations has run, a refund of tax can be made in order to
implement a correlative adjustment. Statutory or procedural limitations, however, cannot be
overridden to impose additional tax, because paragraph 2 of Article 1 provides that the
Convention cannot restrict any statutory benefit.
ARTICLE 10
Dividends
Article 10 provides rules for the taxation of dividends paid by a resident of one
Contracting State to a beneficial owner that is a resident of the other Contracting State. The
article provides for full residence country taxation of such dividends and a limited source-State
right to tax. Article 10 also provides rules for the imposition of a tax on branch profits by the
State of source. Finally, the article prohibits a State from imposing a tax on dividends paid by
companies resident in the other Contracting State and from imposing taxes, other than a branch
profits tax, on undistributed earnings.
Paragraph 1
The right of a shareholder's country of residence to tax dividends arising in the source
country is preserved by paragraph 1, which permits a Contracting State to tax its residents on
dividends paid to them by a resident of the other Contracting State. For dividends from any other
source paid to a resident, Article 21 (Other Income) grants the residence country exclusive taxing
jurisdiction (other than for dividends attributable to a permanent establishment or fixed base in
the other State).
Paragraph 2
The State of source may also tax dividends beneficially owned by a resident of the other
State, subject to the limitations in paragraph 2. Generally, the source State's tax is limited to 15
percent of the gross amount of the dividend paid. If, however, the beneficial owner of the
dividends is a company resident in the other State that holds at least 10 percent of the voting
shares of the company paying the dividend, then the source State's tax is limited to 5 percent of
the gross amount of the dividend. Indirect ownership of voting shares (through tiers of
corporations) and direct ownership of non-voting shares are not taken into account for purposes
of determining eligibility for the 5 percent direct dividend rate. Shares are considered voting
shares if they provide the power to elect, appoint or replace any person vested with the powers
ordinarily exercised by the board of directors of a U.S. corporation. The Convention does not

require that the 10-percent voting interest be held for a minimum period prior to the dividend
payment date.
The benefits of paragraph 2 may be granted at the time of payment by means of reduced
withholding at source. It also is consistent with the paragraph for tax to be withheld at the time of
payment at full statutory rates, and the treaty benefit to be granted by means of a subsequent
refund.
Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid.
The taxation by a Contracting State of the income of its resident companies is governed by the
internal law of the Contracting State, subject to the provisions of paragraph 4 of Article 24
(Nondiscrimination).
The “beneficial owner” of a dividend is understood generally to refer to any person
resident in Contracting State to whom that State attributes the dividend for purposes of its tax.
Paragraph 1(d) of Article 4 (Residence) makes this point explicitly with regard to income derived
by fiscally transparent persons. Further, in accordance with paragraph 12 of the OECD
Commentaries to Article 10, the source State may disregard as beneficial owner certain persons
that nominally may receive a dividend but in substance do not control it. See also, paragraph 24
of the OECD Commentaries to Article 1 (General Scope).
Companies holding shares through fiscally transparent entities such as partnerships are
considered for purposes of this paragraph to hold their proportionate interest in the shares held by
the intermediate entity. As a result, companies holding shares through such entities may be able
to claim the benefits of subparagraph (a) under certain circumstances. The lower rate applies
when the company's proportionate share of the shares held by the intermediate entity meets the
10 percent voting stock threshold. Whether this ownership threshold is satisfied may be difficult
to determine and often will require an analysis of the partnership or trust agreement.
Paragraph 3
Paragraph 3 provides rules that modify the maximum rates of tax at source provided in
paragraph 2 in particular cases. The first sentence of paragraph 3 denies the lower direct
investment withholding rate of paragraph 2(a) for dividends paid by a U.S. Regulated Investment
Company (RIC) or a U.S. Real Estate Investment Trust (REIT). The second sentence denies the
benefits of both subparagraphs (a) and (b) of paragraph 2 to dividends paid by REITs in certain
circumstances, allowing them to be taxed at the U.S. statutory rate (30 percent). The United
States limits the source tax on dividends paid by a REIT to the 15 percent rate when the
beneficial owner of the dividend is an individual resident of the other State that owns a less than
10 percent interest in the REIT. These exceptions to the general rules of paragraph 2 became part
of U.S. tax treaty policy subsequent to the publication of the 1981 Model.
The denial of the 5 percent withholding rate at source to all RIC and REIT shareholders,
and the denial of the 15 percent rate to all but small individual shareholders of REITs is intended
to prevent the use of these entities to gain unjustifiable source taxation benefits for certain

shareholders resident in the other Contracting State. For example, a corporation resident in the
partner that wishes to hold a diversified portfolio of U.S. corporate shares may hold the portfolio
directly and pay a U.S. withholding tax of 15 percent on all of the dividends that it receives.
Alternatively, it may acquire a diversified portfolio by purchasing shares in a RIC. Since the RIC
may be a pure conduit, there may be no U.S. tax costs to interposing the RIC in the chain of
ownership. Absent the special rule in paragraph 2, use of the RIC could transform portfolio
dividends, taxable in the United States under the Convention at 15 percent, into direct investment
dividends taxable only at 5 percent.
Similarly, a resident of the partner directly holding U.S. real property would pay U.S. tax
either at a 30 percent rate on the gross income or at graduated rates on the net income. As in the
preceding example, by placing the real property in a REIT, the investor could transform real
estate income into dividend income, taxable at the rates provided in Article 10, significantly
reducing the U.S. tax burden that otherwise would be imposed. To prevent this circumvention of
U.S. rules applicable to real property, most REIT shareholders are subject to 30 percent tax at
source. However, since a relatively small individual investor who might be subject to a U.S. tax
of 15 percent of the net income even if he earned the real estate income directly, individuals who
hold less than a 10 percent interest in the REIT remain taxable at source at a 15 percent rate.
Paragraph 4
Exemption from tax in the state of source is provided for dividends paid to qualified
governmental entities in paragraph 3. Although there is no analogous provision in the OECD
Model, the exemption of paragraph 4 is analogous to that provided to foreign governments under
section 892 of the Code. Paragraph 4 makes that exemption reciprocal. A qualified governmental
entity is defined in paragraph 1(j) of Article 3 (General Definitions), and it includes a
government pension plan. The definition does not include a governmental entity that carries on
commercial activity. Further, a dividend paid by a company engaged in commercial activity that
is controlled (within the meaning of Treas. Reg. section 1.892-5T) by a qualified governmental
entity that is the beneficial owner of the dividend is not exempt at source under paragraph 4
because ownership of a controlled company is viewed as a substitute for carrying on a business
directly.
Paragraph 5
Paragraph 5 defines the term dividends broadly and flexibly. The definition is intended to
cover all arrangements that yield a return on an equity investment in a corporation as determined
under the tax law of the state of source, as well as arrangements that might be developed in the
future.
The term dividends includes income from shares, or other corporate rights that are not
treated as debt under the law of the source State, that participate in the profits of the company.
The term also includes income that is subjected to the same tax treatment as income from shares
by the law of the State of source. Thus, a constructive dividend that results from a non-arm's
length transaction between a corporation and a related party is a dividend. In the case of the

United States the term dividend includes amounts treated as a dividend under U.S. law upon the
sale or redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul.
92-85, 1992-2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed
dividend to extent of subsidiary's and sister's earnings and profits). Further, a distribution from a
U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a
dividend for purposes of Article 10. However, a distribution by a limited liability company is not
taxable by the United States under Article 10, provided the limited liability company is not
characterized as an association taxable as a corporation under U.S. law. Finally, a payment
denominated as interest that is made by a thinly capitalized corporation may be treated as a
dividend to the extent that the debt is recharacterized as equity under the laws of the source State.
Paragraph 6
Paragraph 6 excludes from the general source country limitations under paragraph 2
dividends paid with respect to holdings that form part of the business property of a permanent
establishment or a fixed base. Such dividends will be taxed on a net basis using the rates and
rules of taxation generally applicable to residents of the State in which the permanent
establishment or fixed base is located, as modified by the Convention. An example of dividends
paid with respect to the business property of a permanent establishment would be dividends
derived by a dealer in stock or securities from stock or securities that the dealer held for sale to
customers.
Paragraph 7
A State's right to tax dividends paid by a company that is a resident of the other State is
restricted by paragraph 7 to cases in which the dividends are paid to a resident of that State or are
attributable to a permanent establishment or fixed base in that State. Thus, a State may not
impose a "secondary" withholding tax on dividends paid by a nonresident company out of
earnings and profits from that State. In the case of the United States, paragraph 7, therefore,
overrides the taxes imposed by sections 871 and 882(a) on dividends paid by foreign
corporations that have a U.S. source under section 861(a)(2)(B).
The paragraph also restricts a State's right to impose corporate level taxes on
undistributed profits, other than a branch profits tax. The accumulated earnings tax and the
personal holding company taxes are taxes covered in Article 2. Accordingly, under the provisions
of Article 7 (Business Profits), the United States may not impose those taxes on the income of a
resident of the other State except to the extent that income is attributable to a permanent
establishment in the United States. Paragraph 7 also confirms the denial of the U.S. authority to
impose those taxes. The paragraph does not restrict a State's right to tax its resident shareholders
on undistributed earnings of a corporation resident in the other State. Thus, the U.S. authority to
impose the foreign personal holding company tax, its taxes on subpart F income and on an
increase in earnings invested in U.S. property, and its tax on income of a Passive Foreign
Investment Company that is a Qualified Electing Fund is in no way restricted by this provision.
Paragraph 8

Paragraph 8 permits a State to impose a branch profits tax on a corporation resident in the
other State. The tax is in addition to other taxes permitted by the Convention. Since the term
“corporation” is not defined in the Convention, it will be defined for this purpose under the law
of the first-mentioned (i.e., source) State.
A State may impose a branch profits tax on a corporation if the corporation has income
attributable to a permanent establishment in that State, derives income from real property in that
State that is taxed on a net basis under Article 6, or realizes gains taxable in that State under
paragraph 1 of Article 13. The tax is limited, however, to the aforementioned items of income
that are included in the "dividend equivalent amount."
Paragraph 8 permits the United States generally to impose its branch profits tax on a
corporation resident in the other State to the extent of the corporation's
(i) business profits that are attributable to a permanent establishment in the
United States
(ii) income that is subject to taxation on a net basis because the
corporation has elected under section 882(d) of the Code to treat income from real
property not otherwise taxed on a net basis as effectively connected income and
(iii) gain from the disposition of a United States Real Property Interest,
other than an interest in a United States Real Property Holding Corporation.
The United States may not impose its branch profits tax on the business profits of a corporation
resident in the other State that are effectively connected with a U.S. trade or business but that are
not attributable to a permanent establishment and are not otherwise subject to U.S. taxation under
Article 6 or paragraph 1 of Article 13.
The term "dividend equivalent amount" used in paragraph 8 has the same meaning that it
has under section 884 of the Code, as amended from time to time, provided the amendments are
consistent with the purpose of the branch profits tax. Generally, the dividend equivalent amount
for a particular year is the income described above that is included in the corporation's effectively
connected earnings and profits for that year, after payment of the corporate tax under Articles 6, 7
or 13, reduced for any increase in the branch's U.S. net equity during the year and increased for
any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S.
liabilities. See Treas. Reg. section 1.884-1. The dividend equivalent amount for any year
approximates the dividend that a U.S. branch office would have paid during the year if the branch
had been operated as a separate U.S. subsidiary company. In the case that the other Contracting
State also imposes a branch profits tax, the base of its tax must be limited to an amount that is
analogous to the dividend equivalent amount.
Paragraph 9
Paragraph 9 provides that the branch profits tax permitted by paragraph 8 shall not be
imposed at a rate exceeding the direct investment dividend withholding rate of five percent.

Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of dividends, the
saving clause of paragraph 3 of Article 1 permits the United States to tax dividends received by
its residents and citizens, subject to the special foreign tax credit rules of paragraph 3 of Article
23 (Relief from Double Taxation), as if the Convention had not come into effect.
The benefits of this Article are also subject to the provisions of Article 22 (Limitation on
Benefits). Thus, if a resident of the other Contracting State is the beneficial owner of dividends
paid by a U.S. corporation, the shareholder must qualify for treaty benefits under at least one of
the tests of Article 22 in order to receive the benefits of this Article.
ARTICLE 11
Interest
Article 11 specifies the taxing jurisdictions over interest income of the States of source
and residence and defines the terms necessary to apply the article.
Paragraph 1
This paragraph grants to the State of residence the exclusive right, subject to exceptions
provided in paragraphs 3 and 5, to tax interest beneficially owned by its residents and arising in
the other Contracting State. The “beneficial owner” of a payment of interest is understood
generally to refer to any person resident in a Contracting State to whom that State attributes the
payment for purposes of its tax. Paragraph 1(d) of Article 4 (Residence) makes this point
explicitly with regard to income derived by fiscally transparent persons. Further, in accordance
with paragraph 8 of the OECD Commentaries to Article 11, the source State may disregard as
beneficial owner certain persons that nominally may receive an interest payment but in substance
do not control it. See also, paragraph 24 of the OECD Commentaries to Article 1 (General
Scope).
Paragraph 2
The term "interest" as used in Article 11 is defined in paragraph 2 to include, inter alia,
income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges
for late payment of taxes are excluded from the definition of interest. Interest that is paid or
accrued subject to a contingency is within the ambit of Article 11. This includes income from a
debt obligation carrying the right to participate in profits. The term does not, however, include
amounts, that are treated as dividends under Article 10 (Dividends).
The term interest also includes amounts subject to the same tax treatment as income from
money lent under the law of the State in which the income arises. Thus, for purposes of the
Convention amounts that the United States will treat as interest include
(i) the difference between the issue price and the stated redemption price at

maturity of a debt instrument, i.e., original issue discount (OID), which may be
wholly or partially realized on the disposition of a debt instrument (section 1273),
(ii) amounts that are imputed interest on a deferred sales contract (section
483),
(iii) amounts treated as OID under the stripped bond rules (section 1286),
(iv) amounts treated as original issue discount under the below-market
interest rate rules (section 7872),
(v) a partner's distributive share of a partnership's interest income (section
702),
(vi) the interest portion of periodic payments made under a "finance lease"
or similar contractual arrangement that in substance is a borrowing by the nominal
lessee to finance the acquisition of property,
(vii) amounts included in the income of a holder of a residual interest in a
REMIC (section 860E), because these amounts generally are subject to the same
taxation treatment as interest under U.S. tax law, and
(viii) imbedded interest with respect to notional principal contracts.
Paragraph 3
Paragraph 3 provides an exception to the exclusive residence taxation rule of paragraph 1
in cases where the beneficial owner of the interest carries on business through a permanent
establishment in the State of source or performs independent personal services from a fixed base
situated in that State and the interest is attributable to that permanent establishment or fixed base.
In such cases the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal
Services) will apply and the State of source will retain the right to impose tax on such interest
income.
In the case of a permanent establishment or fixed base that once existed in the State but
that no longer exists, the provisions of paragraph 3 also apply, by virtue of paragraph 8 of Article
7 (Business Profits), to interest that would be attributable to such a permanent establishment or
fixed base if it did exist in the year of payment or accrual. see the Technical Explanation of
paragraph 8 of Article 7.
Paragraph 4
Paragraph 4 provides that in cases involving special relationships between persons,
Article 11 applies only to that portion of the total interest payments that would have been made
absent such special relationships (i.e., an arm’s length interest payment). Any excess amount of
interest paid remains taxable according to the laws of the United States and the other Contracting
State, respectively, with due regard to the other provisions of the Convention. Thus, if the excess
amount would be treated under the source country's law as a distribution of profits by a
corporation, such amount could be taxed as a dividend rather than as interest, but the tax would
be subject, if appropriate, to the rate limitations of paragraph 2 of Article 10 (Dividends).
The term "special relationship" is not defined in the Convention. In applying this

paragraph the United States considers the term to include the relationships described in Article 9,
which in turn corresponds to the definition of "control" for purposes of section 482 of the Code.
This paragraph does not address cases where, owing to a special relationship between the
payer and the beneficial owner or between both of them and some other person, the amount of
the interest is less than an arm’s length amount. In those cases a transaction may be characterized
to reflect its substance and interest may be imputed consistent with the definition of interest in
paragraph 2. The United States would apply section 482 or 7872 of the Code to determine the
amount of imputed interest in those cases.
Paragraph 5
Paragraph 5 provides anti-abuse exceptions to the source-country exemption in paragraph
1 for two classes of interest payments.
The first exception, in subparagraph (a) of paragraph 5, deals with so-called "contingent
interest." Under this provision interest arising in one of the Contracting States that is determined
by reference to the receipts, sales, income, profits or other cash flow of the debtor or a related
person, to any change in the value of any property of the debtor or a related person or to any
dividend, partnership distribution or similar payment made by the debtor to a related person, and
paid to a resident of the other State also may be taxed in the Contracting State in which it arises,
and according to the laws of that State, but if the beneficial owner is a resident of the other
Contracting State, the gross amount of the interest may be taxed at a rate not exceeding the rate
prescribed in subparagraph (b) of paragraph 2 of Article 10 (Dividends).
The second exception, in subparagraph (b) of paragraph 5, is consistent with the policy of
Code sections 860E(e) and 860G(b) that excess inclusions with respect to a real estate mortgage
investment conduit (REMIC) should bear full U.S. tax in all cases. Without a full tax at source
foreign purchasers of residual interests would have a competitive advantage over U.S. purchasers
at the time these interests are initially offered. Also, absent this rule the U.S. FISC would suffer a
revenue loss with respect to mortgages held in a REMIC because of opportunities for tax
avoidance created by differences in the timing of taxable and economic income produced by
these interests.
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of interest, the
saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from
Double Taxation), as if the Convention had not come into force.
As with other benefits of the Convention, the benefits of exclusive residence State
taxation of interest under paragraph 1 of Article 11, or limited source taxation under paragraph
5(b), are available to a resident of the other State only if that resident is entitled to those benefits

under the provisions of Article 22 (Limitation on Benefits).
ARTICLE 12
Royalties
Article 12 specifies the taxing jurisdiction over royalties of the States of residence and
source and defines the terms necessary to apply the article.
Paragraph 1
Paragraph 1 grants to the state of residence of the beneficial owner of royalties the
exclusive right to tax royalties arising in the other Contracting State, subject to exceptions
provided in paragraph 3 (for royalties taxable as business profits and independent personal
services).
The “beneficial owner” of a royalty payment is understood generally to refer to any
person resident in a Contracting State to whom that State attributes the payment for purposes of
its tax. Paragraph 1(d) of Article 4 (Residence) makes this point explicitly with regard to income
derived by fiscally transparent persons. Further, in accordance with paragraph 4 of the OECD
Commentaries to Article 12, the source State may disregard as beneficial owner certain persons
that nominally may receive a royalty payment but in substance do not control it. See also,
paragraph 24 of the OECD Commentaries to Article 1 (General Scope).
Paragraph 2
The term "royalties" as used in Article 12 is defined in paragraph 2 to include payments
of any kind received as a consideration for the use of, or the right to use, any copyright of a
literary, artistic, scientific or other work; for the use of, or the right to use, any patent, trademark,
design or model, plan, secret formula or process, or other like right or property; or for
information concerning industrial, commercial, or scientific experience. It does not include
income from leasing personal property. Unlike the OECD Model, paragraph 1 does not refer to
an amount “paid” to a resident of the other Contracting State. The deletion of this term is
intended to eliminate any inference that an amount must actually be paid to the resident before it
is subject to the provisions of Article 12. Under paragraph 1, an amount that is accrued but not
paid also would fall within Article 12.
The term royalties is defined in the Convention and therefore is generally independent of
domestic law. Certain terms used in the definition are not defined in the Convention, but these
may be defined under domestic tax law. For example, the term "secret process or formulas" is
found in the Code, and its meaning has been elaborated in the context of sections 351 and 367.
See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 69-19,
1969-2 C.B. 301.
Consideration for the use or right to use cinematographic films, or works on film, tape, or

other means of reproduction in radio or television broadcasting is specifically included in the
definition of royalties. It is intended that subsequent technological advances in the field of radio
and television broadcasting will not affect the inclusion of payments relating to the use of such
means of reproduction in the definition of royalties.
If an artist who is resident in one Contracting State records a performance in the other
Contracting State, retains a copyrighted interest in a recording, and receives payments for the
right to use the recording based on the sale or public playing of the recording, then the right of
such other Contracting State to tax those payments is governed by Article 12. See Boulez v.
Commissioner, 83 T.C. 584 (1984), aff'd, 810 F.2d 209 (D.C. Cir. 1986).
Computer software generally is protected by copyright laws around the world. Under the
Convention consideration received for the use or the right to use computer software is treated
either as royalties or as income from the alienation of tangible personal property, depending on
the facts and circumstances of the transaction giving rise to the payment. It is also understood
that payments received in connection with the transfer of so-called “shrink-wrap” computer
software are treated as business profits.
The term "royalties" also includes gain derived from the alienation of any right or
property that would give rise to royalties, to the extent the gain is contingent on the productivity,
use, or further alienation thereof. Gains that are not so contingent are dealt with under Article 13
(Gains).
The term "industrial, commercial, or scientific experience" (sometimes referred to as
"know-how") has the meaning ascribed to it in paragraph 11 of the Commentary to Article 12 of
the OECD Model Convention. Consistent with that meaning, the term may include information
that is ancillary to a right otherwise giving rise to royalties, such as a patent or secret process.
Know-how also may include, in limited cases, technical information that is conveyed
through technical or consultancy services. It does not include general educational training of the
user's employees, nor does it include information developed especially for the user, for example,
a technical plan or design developed according to the user's specifications. Thus, as provided in
paragraph 11 of the Commentaries to Article 12 of the OECD Model, the term “royalties” does
not include payments received as consideration for after-sales service, for services rendered by a
seller to a purchaser under a guarantee, or for pure technical assistance.
The term “royalties” also does not include payments for professional services (such as
architectural, engineering, legal, managerial, medical, software development services). For
example, income from the design of a refinery by an engineer (even if the engineer employed
know-how in the process of rendering the design) or the production of a legal brief by a lawyer is
not income from the transfer of know-how taxable under Article 12, but is income from services
taxable under either Article 14 (Independent Personal Services) or Article 15 (Dependent
Personal Services). Professional services may be embodied in property that gives rise to royalties,
however. Thus, if a professional contracts to develop patentable property and retains rights in the
resulting property under the development contract, subsequent license payments made for those

rights would be royalties.
Paragraph 3
This paragraph provides an exception to the rule of paragraph 1 that gives the state of
residence exclusive taxing jurisdiction in cases where the beneficial owner of the royalties carries
business through a permanent establishment in the state of source or performs independent
personal services from a fixed base situated in that state and the royalties are attributable to that
permanent establishment or fixed base. In such cases the provisions of Article 7 (Business
Profits) or Article 14 (Independent Personal Services) will apply.
The provisions of paragraph 8 of Article 7 (Business Profits) apply to this paragraph. For
example, royalty income that is attributable to a permanent establishment or a fixed base and that
accrues during the existence of the permanent establishment or fixed base, but is received after
the permanent establishment or fixed base no longer exists, remains taxable under the provisions
of Articles 7 (Business Profits) or 14 (Independent Personal Services), respectively, and not
under this Article.
Paragraph 4
Paragraph 4 provides that in cases involving special relationships between the payor and
beneficial owner of royalties, Article 12 applies only to the extent the royalties would have been
paid absent such special relationships (i.e., an arm’s length royalty). Any excess amount of
royalties paid remains taxable according to the laws of the two Contracting States with due
regard to the other provisions of the Convention. If, for example, the excess amount is treated as
a distribution of corporate profits under domestic law, such excess amount will be taxed as a
dividend rather than as royalties, but the tax imposed on the dividend payment will be subject to
the rate limitations of paragraph 2 of Article 10 (Dividends).
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of royalties, the
saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its
residents and citizens, subject to the special foreign tax credit rules of paragraph 3 of Article 23
(Relief from Double Taxation), as if the Convention had not come into force.
As with other benefits of the Convention, the benefits of exclusive residence State
taxation of royalties under paragraph 1 of Article 12 are available to a resident of the other State
only if that resident is entitled to those benefits under Article 22 (Limitation on Benefits).
ARTICLE 13
Gains
Article 13 assigns either primary or exclusive taxing jurisdiction over gains from the

alienation of property to the State of residence or the State of source and defines the terms
necessary to apply the Article.
Paragraph 1
Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax
gains attributable to the alienation of real property situated in that State. The paragraph therefore
permits the United States to apply section 897 of the Code to tax gains derived by a resident of
the other Contracting State that are attributable to the alienation of real property situated in the
United States (as defined in paragraph 2). Gains attributable to the alienation of real property
include gain from any other property that is treated as a real property interest within the meaning
of paragraph 2.
Paragraph 2
This paragraph defines the term "real property situated in the other Contracting State."
The term includes real property referred to in Article 6 (i.e., an interest in the real property itself),
a "United States real property interest" (when the United States is the other Contracting State
under paragraph 1), and an equivalent interest in real property situated in the other Contracting
State. The OECD Model does not refer to real property interests other than the real property
itself, and the United States has entered a reservation on this point with respect to the OECD
Model, reserving the right to apply its tax under FIRPTA to all real estate gains encompassed by
that provision.
Under section 897(c) of the Code the term "United States real property interest" includes
shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an asset-
ratio test on certain testing dates. The term also includes certain foreign corporations that have
elected to be treated as US corporations for this purpose. Section 897(i). In applying paragraph 1
the United States will look through distributions made by a REIT. Accordingly, distributions
made by a REIT are taxable under paragraph 1 of Article 13 (not under Article 10 (Dividends))
when they are attributable to gains derived from the alienation of real property.
Paragraph 3
Paragraph 3 of Article 13 deals with the taxation of certain gains from the alienation of
movable property forming part of the business property of a permanent establishment that an
enterprise of a Contracting State has in the other Contracting State or of movable property
pertaining to a fixed base available to a resident of a Contracting State in the other Contracting
State for the purpose of performing independent personal services. This also includes gains from
the alienation of such a permanent establishment (alone or with the whole enterprise) or of such
fixed base. Such gains may be taxed in the State in which the permanent establishment or fixed
base is located.
A resident of the other Contracting State that is a partner in a partnership doing business
in the United States generally will have a permanent establishment in the United States as a result

of the activities of the partnership, assuming that the activities of the partnership rise to the level
of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 3,
the United States generally may tax a partner's distributive share of income realized by a
partnership on the disposition of movable property forming part of the business property of the
partnership in the United States.
Paragraph 4
This paragraph limits the taxing jurisdiction of the state of source with respect to gains
from the alienation of ships, aircraft, or containers operated in international traffic or movable
property pertaining to the operation of such ships, aircraft, or containers. Under paragraph 4
when such income is derived by an enterprise of a Contracting State it is taxable only in that
Contracting State. Notwithstanding paragraph 3, the rules of this paragraph apply even if the
income is attributable to a permanent establishment maintained by the enterprise in the other
Contracting State. This result is consistent with the general rule under Article 8 (Shipping and
Air Transport) that confers exclusive taxing rights over international shipping and air transport
income on the state of residence of the enterprise deriving such income.
Paragraph 5
Paragraph 5 grants to the State of residence of the alienator the exclusive right to tax
gains from the alienation of property other than property referred to in paragraphs 1 through 4.
For example, gain derived from shares, other than shares described in paragraphs 2 or 3, debt
instruments and various financial instruments, may be taxed only in the State of residence, to the
extent such income is not otherwise characterized as income taxable under another article (e.g.,
Article 10 (Dividends) or Article 11 (Interest)). Similarly gain derived from the alienation of
tangible personal property, other than tangible personal property described in paragraph 3, may
be taxed only in the State of residence of the alienator. Gain derived from the alienation of any
property, such as a patent or copyright, that produces income taxable under Article 12 (Royalties)
is taxable under Article 12 and not under this article, provided that such gain is of the type
described in paragraph 2(b) of Article 12 (i.e., it is contingent on the productivity, use, or
disposition of the property). Thus, under either article such gain is taxable only in the State of
residence of the alienator. Sales by a resident of a Contracting State of real property located in a
third state are not taxable in the other Contracting State, even if the sale is attributable to a
permanent establishment located in the other Contracting State.
Relation to Other Articles
Notwithstanding the foregoing limitations on taxation of certain gains by the State of
source, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to
tax its citizens and residents as if the Convention had not come into effect. Thus, any limitation
in this Article on the right of the United States to tax gains does not apply to gains of a U.S.
citizens or resident. The benefits of this Article are also subject to the provisions of Article 22
(Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the
conditions in Article 22 is entitled to the benefits of this Article.

ARTICLE 14
Independent Personal Services
The Convention deals in separate articles with different classes of income from personal
services. Article 14 deals with the general class of income from independent personal services
and Article 15 deals with the general class of income from dependent personal services. Articles
16 through 20 provide exceptions and additions to these general rules for directors' fees (Article
16); performance income of artistes and sportsmen (Article 17); pensions in respect of personal
service income, social security benefits, annuities, alimony, and child support payments (Article
18); government service salaries and pensions (Article 19); and certain income of students and
trainees (Article 20).
Paragraph 1
Paragraph 1 of Article 14 provides the general rule that an individual who is a resident of
a Contracting State and who derives income from performing personal services in an independent
capacity will be exempt from tax in respect of that income by the other Contracting State. The
income may be taxed in the other Contracting State only if the services are performed there and
the income is attributable to a fixed base that is regularly available to the individual in that other
State for the purpose of performing his services.
Income derived by persons other than individuals or groups of individuals from the
performance of independent personal services is not covered by Article 14. Such income
generally would be business profits taxable in accordance with Article 7 (Business Profits).
Income derived by employees of such persons generally would be taxable in accordance with
Article 15 (Dependent Personal Services).
The term "fixed base" is not defined in the Convention, but its meaning is understood to
be similar, but not identical, to that of the term "permanent establishment," as defined in Article
5 (Permanent Establishment). The term "regularly available" also is not defined in the
Convention. Whether a fixed base is regularly available to a person will be determined based on
all the facts and circumstances. In general, the term encompasses situations where a fixed base is
at the disposal of the individual whenever he performs services in that State. It is not necessary
that the individual regularly use the fixed base, only that the fixed base be regularly available to
him. For example, a U.S. resident partner in a law firm that has offices in the other Contracting
State would be considered to have a fixed base regularly available to him in the other State if the
law firm had an office in the other State that was available to him whenever he wished to conduct
business in the other State, regardless of how frequently he conducted business in the other State.
On the other hand, an individual who had no office in the other State and occasionally rented a
hotel room to serve as a temporary office would not be considered to have a fixed base regularly
available to him.
It is not necessary that the individual actually use the fixed base. It is only necessary that

the fixed base be regularly available to him. For example, if an individual has an office in the
other State that he can use if he chooses when he is present in the other State, that fixed base will
be considered to be regularly available to him regardless of whether he conducts his activities
there.
The taxing right conferred by this Article with respect to income from independent
personal services can be more limited than that provided in Article 7 for the taxation of business
profits. In both articles the income of a resident of one Contracting State must be attributable to a
permanent establishment or fixed base in the other State in order for that other State to have a
taxing right. In Article 14 the income also must be attributable to services performed in that other
State, while Article 7 does not require that all of the income generating activities be performed in
the State where the permanent establishment is located.
The term "personal services of an independent character" is not defined. It clearly
includes those activities listed in paragraph 2 of Article 14 of the OECD Model, such as
independent scientific, literary, artistic, educational or teaching activities, as well as the
independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.
That list, however, is not exhaustive. The term includes all personal services performed by an
individual for his own account, whether as a sole proprietor or a partner, where he receives the
income and bears the risk of loss arising from the services. The taxation of income of an
individual from those types of independent services which are covered by Articles 16 through 20
is governed by the provisions of those articles. For example, taxation of the income of a
professional musician would be governed by Article 17 (Artistes and Athletes) rather than Article
14.
This Article applies to income derived by a partner in a partnership that provides
independent personal services to the extent that the income received by such partner is
attributable to personal services performed by the partner. For example, if a partnership
agreement provides that each partner will receive a share of the partnership's income in exchange
for performing independent personal services, taxation of the partner's share of that income will
be governed by Article 14. In such a case, the partner would be taxable solely in his state of
residence if he performed all his activities there. On the other hand, if he traveled to the other
State and the partnership made an office available to him for the purpose of conducting his
activities, that portion of his income attributable to the services performed in the other State
would be taxable in that other State. If the partner received income in addition to that paid as
remuneration for his services, the taxation of that income would not be governed by Article 14.
For example, if the partner has the right to an annual payment from the partnership with respect
to profits generated by employees of the firm, or with respect to his capital account in the
partnership, the taxation of such payments would not be governed by Article 14.
Paragraph 8 of Article 7 (Business Profits) refers to Article 14. That rule clarifies that
income that is attributable to a permanent establishment or a fixed base, but that is deferred and
received after the permanent establishment or fixed base no longer exists, may nevertheless be
taxed by the State in which the permanent establishment or fixed base was located. Thus, under
Article 14, income derived by an individual resident of a Contracting State from services

performed in the other Contracting State and attributable to a fixed base there may be taxed by
that other State even if the income is deferred and received after there is no longer a fixed base
available to the resident in that other State.
If an individual resident of the other Contracting State who is also a U.S. citizen performs
independent personal services in the United States, the United States may, by virtue of the saving
clause of paragraph 4 of Article 1 (General Scope) tax his income without regard to the
restrictions of this Article, subject to the special foreign tax credit rules of paragraph 3 of Article
23 (Relief from Double Taxation).
Paragraph 2
This paragraph incorporates the principles of paragraph 3 of Article 7 into Article 14.
Thus, all relevant expenses, including expenses not incurred in the Contracting State where the
fixed base is located, must be allowed as deductions in computing the net income from services
subject to tax in the Contracting State where the fixed base is located.
ARTICLE 15
Dependent Personal Services
Article 15 apportions taxing jurisdiction over remuneration derived by a resident of a
Contracting State as an employee between the States of source and residence.
Paragraph 1
The general rule of Article 15 is contained in paragraph 1. Remuneration derived by a
resident of a Contracting State as an employee may be taxed by the State of residence, and the
remuneration also may be taxed by that other Contracting State to the extent derived from
employment exercised (i.e., services performed) in the other Contracting State. Paragraph 1 also
provides that the more specific rules of Articles 16 (Directors' Fees), 18 (Pensions, Social
Security, Annuities, Alimony and Child Support), and 19 (Government Service) apply in the case
of employment income described in one of these articles. Thus, even though the State of source
has a right to tax employment income under Article 15, it may not have the right to tax that
income under the Convention if the income is described, e.g., in Article 18 (Pensions, Social
Security, Annuities, Alimony and Child Support) and is not taxable in the State of source under
the provisions of that article.
Article 15 of the OECD Model applies to "salaries, wages and other similar
remuneration." The U.S. Model applies to "salaries, wages and other remuneration." The deletion
of "similar" is intended to make it clear that Article 15 applies to any form of compensation for
employment, including payments in kind, regardless of whether the remuneration is "similar" to
salaries and wages.
Consistently with section 864(c)(6), Article 15 also applies regardless of the timing of

actual payment for services. Thus, a bonus paid to a resident of a Contracting State with respect
to services performed in the other Contracting State with respect to a particular taxable year
would be subject to Article 15 for that year even if it was paid after the close of the year.
Similarly, an annuity received for services performed in a taxable year would be subject to
Article 15 despite the fact that it was paid in subsequent years. In either case, whether such
payments were taxable in the State where the employment was exercised would depend on
whether the tests of paragraph 2 were satisfied. Consequently, a person who receives the right to
a future payment in consideration for services rendered in a Contracting State would be taxable
in that State even if the payment is received at a time when the recipient is a resident of the other
Contracting State.
Paragraph 2
Paragraph 2 sets forth an exception to the general rule that employment income may be
taxed in the State where it is exercised. Under paragraph 2, the State where the employment is
exercised may not tax the income from the employment if three conditions are satisfied:
(a) the individual is present in the other Contracting State for a period or periods
not exceeding 183 days in any 12-month period that begins or ends during the relevant
(i.e., the year in which the services are performed) calendar year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident
of that other Contracting State; and
(c) the remuneration is not borne as a deductible expense by a permanent
establishment or fixed base that the employer has in that other State.
In order for the remuneration to be exempt from tax in the source State, all three conditions must
be satisfied. This exception is identical to that set forth in the OECD Model.
The 183-day period in condition (a) is to be measured using the "days of physical
presence" method. Under this method, the days that are counted include any day in which a part
of the day is spent in the host country. (Rev. Rul. 56-24, 1956-1 C.B. 851.) Thus, days that are
counted include the days of arrival and departure; weekends and holidays on which the employee
does not work but is present within the country; vacation days spent in the country before, during
or after the employment period, unless the individual's presence before or after the employment
can be shown to be independent of his presence there for employment purposes; and time during
periods of sickness, training periods, strikes, etc., when the individual is present but not working.
If illness prevented the individual from leaving the country in sufficient time to qualify for the
benefit, those days will not count. Also, any part of a day spent in the host country while in
transit between two points outside the host country is not counted. These rules are consistent with
the description of the 183-day period in paragraph 5 of the Commentary to Article 15 in the
OECD Model.
Conditions (b) and (c) are intended to ensure that a Contracting State will not be required
to allow a deduction to the payor for compensation paid and at the same time to exempt the
employee on the amount received. Accordingly, if a foreign person pays the salary of an
employee who is employed in the host State, but a host State corporation or permanent

establishment reimburses the payor with a payment that can be identified as a reimbursement,
neither condition (b) nor (c), as the case may be, will be considered to have been fulfilled.
The reference to remuneration "borne by" a permanent establishment or fixed base is
understood to encompass all expenses that economically are incurred and not merely expenses
that are currently deductible for tax purposes. Accordingly, the expenses referred to include
expenses that are capitalizable as well as those that are currently deductible. Further, salaries paid
by residents that are exempt from income taxation may be considered to be borne by a permanent
establishment or fixed base notwithstanding the fact that the expenses will be neither deductible
nor capitalizable since the payor is exempt from tax.
Paragraph 3
Paragraph 3 contains a special rule applicable to remuneration for services performed by a
resident of a Contracting State as an employee aboard a ship or aircraft operated in international
traffic. Such remuneration may be taxed only in the State of residence of the employee if the
services are performed as a member of the regular complement of the ship or aircraft. The
"regular complement" includes the crew. In the case of a cruise ship, for example, it may also
include others, such as entertainers, lecturers, etc., employed by the shipping company to serve
on the ship throughout its voyage. The use of the term "regular complement" is intended to
clarify that a person who exercises his employment as, for example, an insurance salesman while
aboard a ship or aircraft is not covered by this paragraph. This paragraph is inapplicable to
persons dealt with in Article 14 (Independent Personal Services).
The comparable paragraph in the OECD Model provides that such income may be taxed
(on a non-exclusive basis) in the Contracting State in which the place of effective management of
the employing enterprise is situated. This rule has not been adopted by the United States because
the United States exercises its taxing jurisdiction over an employee only if the employee is a U.S.
citizen or resident, or the services are performed by the employee in the United States. Tax
cannot be imposed simply because an employee works for an enterprise that is a resident of the
United States. The U.S. Model ensures that, given U.S. law, each employee will be subject to one
level of tax.
If a U.S. citizen who is resident in the other Contracting State performs services as an
employee in the United States and meets the conditions of paragraph 2 for source country
exemption, he nevertheless is taxable in the United States by virtue of the saving clause of
paragraph 4 of Article 1 (General Scope), subject to the special foreign tax credit rule of
paragraph 3 of Article 23 (Relief from Double Taxation).
ARTICLE 16
Directors' Fees
This Article provides that a Contracting State may tax the fees and other compensation
paid by a company that is a resident of that State for services performed in that State by a resident

of the other Contracting State in his capacity as a director of the company. This rule is an
exception to the more general rules of Article 14 (Independent Personal Services) and Article 15
(Dependent Personal Services). Thus, for example, in determining whether a director's fee paid to
a non-employee director is subject to tax in the country of residence of the corporation, it is not
relevant to establish whether the fee is attributable to a fixed base in that State.
The analogous OECD and U.S. provisions reach different results in certain cases. Under
the OECD Model provision, a resident of one Contracting State who is a director of a corporation
that is resident in the other Contracting State is subject to tax in that other State in respect of his
directors' fees regardless of where the services are performed. The United States has entered a
reservation with respect to the OECD provision. The provision in Article 16 of the U.S. Model
represents a compromise between the U.S. position reflected in the 1981 Model and the OECD
Model. Under this Model provision, the State of residence of the corporation may tax nonresident
directors with no time or dollar threshold, but only with respect to remuneration for services
performed in that State.
This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, if a U.S. citizen who is a resident of the other Contracting State is a director of a U.S.
corporation, the United States may tax his full remuneration regardless of where he performs his
services.
ARTICLE 17
Artistes and Sportsmen
This Article deals with the taxation in a Contracting State of artistes (i.e., performing
artists and entertainers) and sportsmen resident in the other Contracting State from the
performance of their services as such. The Article applies both to the income of an entertainer or
sportsman who performs services on his own behalf and one who performs services on behalf of
another person, either as an employee of that person, or pursuant to any other arrangement. The
rules of this Article take precedence, in some circumstances, over those of Articles 14
(Independent Personal Services) and 15 (Dependent Personal Services).
This Article applies only with respect to the income of performing artists and sportsmen.
Others involved in a performance or athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of Articles 14 and 15. In addition,
except as provided in paragraph 2, income earned by legal persons is not covered by Article 17.
Paragraph 1
Paragraph 1 describes the circumstances in which a Contracting State may tax the
performance income of an entertainer or sportsman who is a resident of the other Contracting
State. Under the paragraph, income derived by an individual resident of a Contracting State from
activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in
that other State if the amount of the gross receipts derived by the performer exceeds $20,000 (or

its equivalent in the currency of the other Contracting State) for the taxable year. The $20,000
includes expenses reimbursed to the individual or borne on his behalf. If the gross receipts
exceed $20,000, the full amount, not just the excess, may be taxed in the State of performance.
The OECD Model provides for taxation by the country of performance of the
remuneration of entertainers or sportsmen with no dollar or time threshold. The United States
introduces the dollar threshold test in its treaties to distinguish between two groups of
entertainers and athletes -- those who are paid very large sums of money for very short periods of
service, and who would, therefore, normally be exempt from host country tax under the standard
personal services income rules, and those who earn relatively modest amounts and are, therefore,
not easily distinguishable from those who earn other types of personal service income. The
United States has entered a reservation to the OECD Model on this point.
Tax may be imposed under paragraph 1 even if the performer would have been exempt
from tax under Articles 14 (Independent Personal Services) or 15 (Dependent Personal Services).
On the other hand, if the performer would be exempt from host-country tax under Article 17, but
would be taxable under either Article 14 or 15, tax may be imposed under either of those
Articles. Thus, for example, if a performer derives remuneration from his activities in an
independent capacity, and the remuneration is not attributable to a fixed base, he may be taxed by
the host State in accordance with Article 17 if his remuneration exceeds $20,000 annually,
despite the fact that he generally would be exempt from host State taxation under Article 14.
However, a performer who receives less than the $20,000 threshold amount and therefore is not
taxable under Article 17, nevertheless may be subject to tax in the host country under Articles 14
or 15 if the tests for host-country taxability under those Articles are met. For example, if an
entertainer who is an independent contractor earns $19,000 of income in a State for the calendar
year, but the income is attributable to a fixed base regularly available to him in the State of
performance, that State may tax his income under Article 14. This interpretation is consistent
with the prevailing understanding under Article 17 of the 1981 Model, but has been clarified by
amendments to the text of paragraph 1 in this Model.
Since it frequently is not possible to know until year-end whether the income an
entertainer or sportsman derived from a performance in a Contracting State will exceed $20,000,
nothing in the Convention precludes that Contracting State from withholding tax during the year
and refunding after the close of the year if the taxability threshold has not been met.
As explained in paragraph 9 of the OECD Commentaries to Article 17, Article 17 applies
to all income connected with a performance by the entertainer, such as appearance fees, award or
prize money, and a share of the gate receipts. Income derived from a Contracting State by a
performer who is a resident of the other Contracting State from other than actual performance,
such as royalties from record sales and payments for product endorsements, is not covered by this
Article, but by other articles of the Convention, such as Article 12 (Royalties) or Article 14
(Independent Personal Services). For example, if an entertainer receives royalty income from the
sale of live recordings, the royalty income would be exempt from source country tax under
Article 12, even if the performance was conducted in the source country, although he could be
taxed in the source country with respect to income from the performance itself under this Article

if the dollar threshold is exceeded.
In determining whether income falls under Article 17 or another article, the controlling
factor will be whether the income in question is predominantly attributable to the performance
itself or other activities or property rights. For instance, a fee paid to a performer for endorsement
of a performance in which the performer will participate would be considered to be so closely
associated with the performance itself that it normally would fall within Article 17. Similarly, a
sponsorship fee paid by a business in return for the right to attach its name to the performance
would be so closely associated with the performance that it would fall under Article 17 as well.
As indicated in paragraph 9 of the Commentaries to Article 17 of the OECD Model, a
cancellation fee would not be considered to fall within Article 17 but would be dealt with under
Article 7, 14 or 15.
As indicated in paragraph 4 of the Commentaries to Article 17 of the OECD Model,
where an individual fulfills a dual role as performer and non-performer (such as a player-coach or
an actor-director), but his role in one of the two capacities is negligible, the predominant
character of the individual's activities should control the characterization of those activities. In
other cases there should be an apportionment between the performance-related compensation and
other compensation.
Consistently with Article 15 (Dependent Personal Services), Article 17 also applies
regardless of the timing of actual payment for services. Thus, a bonus paid to a resident of a
Contracting State with respect to a performance in the other Contracting State with respect to a
particular taxable year would be subject to Article 17 for that year even if it was paid after the
close of the year.
Paragraph 2
Paragraph 2 is intended to deal with the potential for abuse when a performer's income
does not accrue directly to the performer himself, but to another person. Foreign performers
commonly perform in the United States as employees of, or under contract with, a company or
other person.
The relationship may truly be one of employee and employer, with no abuse of the tax
system either intended or realized. On the other hand, the "employer" may, for example, be a
company established and owned by the performer, which is merely acting as the nominal income
recipient in respect of the remuneration for the performance (a “star company”). The performer
may act as an "employee," receive a modest salary, and arrange to receive the remainder of the
income from his performance in another form or at a later time. In such case, absent the
provisions of paragraph 2, the income arguably could escape host-country tax because it earns
business profits but has no permanent establishment in that country. The performer may largely
or entirely escape host-country tax by receiving only a small salary in the year the services are
performed, perhaps small enough to place him below the dollar threshold in paragraph 1. The
performer might arrange to receive further payments in a later year, when he is not subject to
host-country tax, perhaps as deferred salary payments, dividends or liquidating distributions.

Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the
taxpayers' rights to the benefits of the Convention when there is a legitimate employee-employer
relationship between the performer and the person providing his services. Under paragraph 2,
when the income accrues to a person other than the performer, and the performer or related
persons participate, directly or indirectly, in the receipts or profits of that other person, the
income may be taxed in the Contracting State where the performer's services are exercised,
without regard to the provisions of the Convention concerning business profits (Article 7) or
independent personal services (Article 14). Thus, even if the "employer" has no permanent
establishment or fixed base in the host country, its income may be subject to tax there under the
provisions of paragraph 2. Taxation under paragraph 2 is on the person providing the services of
the performer. This paragraph does not affect the rules of paragraph 1, which apply to the
performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary
payments to the performer, which fall under paragraph 1.
For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the
person providing the services of the performer) if that other person has control over, or the right
to receive, gross income in respect of the services of the performer. Direct or indirect
participation in the profits of a person may include, but is not limited to, the accrual or receipt of
deferred remuneration, bonuses, fees, dividends, partnership income or other income or
distributions.
Paragraph 2 does not apply if it is established that neither the performer nor any persons
related to the performer participate directly or indirectly in the receipts or profits of the person
providing the services of the performer. Assume, for example, that a circus owned by a U.S.
corporation performs in the other Contracting State, and promoters of the performance in the
other State pay the circus, which, in turn, pays salaries to the circus performers. The circus is
determined to have no permanent establishment in that State. Since the circus performers do not
participate in the profits of the circus, but merely receive their salaries out of the circus' gross
receipts, the circus is protected by Article 7 and its income is not subject to host-country tax.
Whether the salaries of the circus performers are subject to host-country tax under this Article
depends on whether they exceed the $20,000 threshold in paragraph 1.
Since pursuant to Article 1 (General Scope) the Convention only applies to persons who
are residents of one of the Contracting States, if the star company is not a resident of one of the
Contracting States then taxation of the income is not affected by Article 17 or any other provision
of the Convention.
This exception from paragraph 2 for non-abusive cases is not found in the OECD Model.
The United States has entered a reservation to the OECD Model on this point.
Relationship to Other Articles
This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1
(General Scope). Thus, if an entertainer or a sportsman who is resident in the other Contracting

State is a citizen of the United States, the United States may tax all of his income from
performances in the United States without regard to the provisions of this Article, subject,
however, to the special foreign tax credit provisions of paragraph 3 of Article 23 (Relief from
Double Taxation). In addition, benefits of this Article are subject to the provisions of Article 22
(Limitation on Benefits).
ARTICLE 18
Pensions, Social Security, Annuities, Alimony, and Child Support
This Article deals with the taxation of private (i.e., non-government service) pensions and
annuities, social security benefits, alimony and child support payments and with the tax treatment
of contributions to pension plans.
Paragraph 1
Paragraph 1 provides that distributions from pensions and other similar remuneration
beneficially owned by a resident of a Contracting State in consideration of past employment are
taxable only in the State of residence of the beneficiary. This Model, unlike the OECD Model
and the 1981 Model, makes explicit the fact that the term "pension distributions and other similar
remuneration" includes both periodic and single sum payments. The same result is understood to
apply in U.S. treaties that do not make this point explicitly.
The phrase “pension distributions and other similar remuneration” is intended to
encompass payments made by private retirement plans and arrangements in consideration of past
employment. In the United States, the plans encompassed by Paragraph 1 include: qualified plans
under section 401(a), individual retirement plans (including individual retirement plans that are
part of a simplified employee pension plan that satisfies section 408(k), individual retirement
accounts and section 408(p) accounts), nondiscriminatory section 457 plans, section 403(a)
qualified annuity plans, and section 403(b) plans. The Competent Authorities may agree that
distributions from other plans that generally meet similar criteria to those applicable to other
plans established under their respective laws also qualify for the benefits of Paragraph 1. In the
United States, these criteria are as follows:
(a) The plan must be written;
(b) In the case of an employer-maintained plan, the plan must be
nondiscriminatory insofar as it (alone or in combination with other comparable plans)
must cover a wide range of employees. including rank and file employees, and actually
provide significant benefits for the entire range of covered employees;
(c) In the case of an employer-maintained plan the plan must contain provisions
that severely limit the employees’ ability to use plan assets for purposes other than
retirement, and in all cases be subject to tax provisions that discourage participants from
using the assets for purposes other than retirement; and
(d) The plan must provide for payment of a reasonable level of benefits at death, a
stated age, or an event related to work status, and otherwise require minimum
distributions under rules designed to ensure that any death benefits provided to the

participants’ survivors are merely incidental to the retirement benefits provided to the
participants.
In addition, certain distribution requirements must be met before distributions from these
plans would fall under paragraph 1. To qualify as a pension distribution or similar remuneration
from a U.S. plan the employee must have been either employed by the same employer for five
years or be at least 62 years old at the time of the distribution. In addition, the distribution must
be made either
(A) on account of death or disability,
(B) as part of a series of substantially equal payments over the
employee’s life expectancy (or over the joint life expectancy of the
employee and a beneficiary), or
(C) after the employee attained the age of 55.
Finally, the distribution must be made either after separation from service or on or after
attainment of age 65. A distribution from a pension plan solely due to termination of the pension
plan is not a distribution falling under paragraph 1.
Pensions in respect of government service are not covered by this paragraph. They are
covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or
by paragraph 2 of Article 19 (Government Service). Thus, Article 19 covers section 457, 401(a)
and 403(b) plans established for government employees. If a pension in respect of government
service is not covered by Article 19 solely because the service is not “in the discharge of
functions of a governmental nature,” the pension is covered by this article.
The exclusive residence-based taxation provided under this paragraph is limited to
taxation of amounts that were not previously included in taxable income in the other Contracting
State. For example, if a Contracting State had imposed tax on the resident with respect to some
portion of a pension plan’s earnings, subsequent distributions to a resident of the other State
would not be taxable in that State to the extent the distributions were attributable to such
amounts. In determining the amount of a distribution that is attributable to previously taxed
amounts, the ordering rules of the residence State will be applied. The United States will treat
any amount that has increased the recipient’s “investment in the contract” (as defined in section
72) as having been previously included in taxable income.
Paragraph 2
The treatment of social security benefits is dealt with in paragraph 2. This paragraph
provides that, notwithstanding the provision of paragraph 1 under which private pensions are
taxable exclusively in the State of residence of the beneficial owner, payments made by one of
the Contracting States under the provisions of its social security or similar legislation to a
resident of the other Contracting State or to a citizen of the United States will be taxable only in
the Contracting State making the payment. This paragraph applies to social security beneficiaries
whether they have contributed to the system as private sector or Government employees.

The phrase "similar legislation" is intended to refer to United States tier 1 Railroad
Retirement benefits. The reference to U.S. citizens is necessary to insure that a social security
payment by the other Contracting State to a U.S. citizen who is not resident in the United States
will not be taxable by the United States.
Paragraph 3
Under paragraph 3, annuities that are derived and beneficially owned by a resident of a
Contracting State are taxable only in that State. An annuity, as the term is used in this paragraph,
means a stated sum paid periodically at stated times during a specified number of years, under an
obligation to make the payment in return for adequate and full consideration (other than for
services rendered). An annuity received in consideration for services rendered would be treated
as deferred compensation and generally taxable in accordance with Article 15 (Dependent
Personal Services).
Paragraphs 4 and 5
Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under
paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments
made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or
compulsory support. Paragraph 4, however, deals only with payments of that type that are
deductible to the payor and taxable to the payee. Under that paragraph, alimony (i.e., a deductible
payment that is taxable in the hands of the recipient) paid by a resident of a Contracting State to a
resident of the other Contracting State is taxable under the Convention only in the State of
residence of the recipient. Paragraph 5 deals with those periodic payments that are for the support
of a child and that are not covered by paragraph 4 (i.e., those payments that either are not
deductible to the payor or not taxable to the payee). These types of payments by a resident of a
Contracting State to a resident of the other Contracting State are taxable in neither Contracting
State.
Paragraph 6
Paragraph 6 deals with various aspects of cross-border pension contributions. There is no
such rule in the OECD or U.N. Models, nor was there one in any of the previous U.S. Models.
The 1992 OECD Model, however, deals extensively in the Commentary with this matter,
providing both a model text and a discussion of the issues. Paragraph 6 has been included in this
Model to ensure that certain differences between the two Contracting States' laws regarding
pension contributions and pension plans will not inhibit the flow of personal services between
the Contracting States.
Paragraph 6 essentially provides three types of benefits: deductions (or exclusions) at the
employee and employer level for contributions to a pension plan (subparagraph (a)), exemption
from tax on undistributed earnings realized by the plan (subparagraph (b)), and exemption from
tax on rollovers from one plan to another (subparagraph (c)).

Subparagraph 6(a) allows for the deductibility (or excludability) in one State of
contributions to a plan in the other State if certain conditions are satisfied. Subparagraph 6(a)
also provides that contributions to the plan will be deductible for purposes of computing the
employer's taxable income in the State where the individual renders services to the extent
allowable in that State for contributions to plans established and recognized under that State's
laws.
Where the United States is the host country, the exclusion of employee contributions
from the employee’s income under this paragraph is limited to elective contributions not in
excess of the amount specified in section 402(g). Deduction of employer contributions is subject
to the limitations of sections 415 and 404. The section 404 limitation on deductions would be
calculated as if the individual were the only employee covered by the plan.
Subparagraph 6(b) provides that income earned by the plan will not be taxable in the
other State until the earnings are distributed.
Subparagraph 6(c) permits the individual to withdraw funds from the plan in the first-
mentioned (home) State for the purpose of rolling over the amounts to a plan established in the
other (host) Contracting State without being subjected to tax in the other State with respect to
such amounts. This benefit is subject to any restrictions on rollovers under the laws of the other
State. For instance, in the United States a rollover ordinarily must be made within 60 days of the
withdrawal from the first plan under section 408(d)(3)(A)(i) and section 402(c). Rollovers from
plans covered by Article 19 (Government Service) would not be covered by this provision. It is
understood that, for the purposes of maintaining the tax-exempt status of a pension arrangement
receiving rolled-over amounts, the assets received will be treated as assets rolled over from a
qualified plan.
The benefits of this paragraph are allowed to an individual who is present in one of the
Contracting States to perform either dependent or independent personal services. The individual,
however, must be a visitor to the host country. Subparagraph 6(d) provides that the individual
can receive the benefits of this paragraph only if he was contributing to the plan in his home
country, or to a plan that was replaced by the plan to which he is contributing, before coming to
the host country. The allowance of a successor plan would apply if, for example, the employer
has been taken over by another corporation that replaces the existing plan with its own plan,
rolling membership in the old plan over into the new plan.
In addition, the host-country competent authority must determine that the recognized plan
to which a contribution is made in the home country of the individual generally corresponds to
the plan in the host country. It is understood that United States plans eligible for the benefits of
paragraph 6 include qualified plans under section 403(a), individual retirement plans (including
individual retirement plans that are part of a simplified employee pension plan that satisfies
section 408(k), IRAs and section 408(p) accounts), section 403(a) qualified annuity plans,
individual retirement accounts, and section 403(b) plans. Finally, the benefits under this
paragraph are limited to the benefits that the host country accords under its law, to the host
country plan most similar to the home country plan, even if the home country would have

afforded greater benefits under its law. Thus, for example, if the host country has a cap on
contributions equal to, say, five percent of the remuneration, and the home country has a seven
percent cap, the deduction is limited to five percent, even though if the individual had remained
in his home country he would have been allowed to take the larger deduction.
Relationship to Other Articles
Paragraphs 1, 3 and 4 of Article 18 are subject to the saving clause of paragraph 4 of
Article 1 (General Scope). Thus, a U.S. citizen who is resident in the other Contracting State, and
receives either a pension, annuity or alimony payment from the United States, may be subject to
U.S. tax on the payment, notwithstanding the rules in those three paragraphs that give the State of
residence of the recipient the exclusive taxing right. Paragraphs 2 and 5 are excepted from the
saving clause by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow U.S.
citizens and residents the benefits of paragraph 5. Paragraph 6 is excepted from the saving clause
with respect to permanent residents and citizens by virtue of paragraph 5(b) of Article 1.
ARTICLE 19
Government Service
Paragraph 1
Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government
compensation (other than a pension addressed in paragraph 2). Subparagraph (a) provides that
remuneration paid from the public funds of one of the States or its political subdivisions or local
authorities to any individual who is rendering services to that State, political subdivision or local
authority, which are in the discharge of governmental functions, is exempt from tax by the other
State. Under subparagraph (b), such payments are, however, taxable exclusively in the other State
(i.e., the host State) if the services are rendered in that other State and the individual is a resident
of that State who is either a national of that State or a person who did not become resident of that
State solely for purposes of rendering the services. The paragraph applies both to government
employees and to independent contractors engaged by governments to perform services for them.
The remuneration described in paragraph 1 is subject to the provisions of this paragraph
and not to those of Articles 14 (Independent Personal Services), 15 (Dependent Personal
Services), 16 (Director's Fees) or 17 (Artistes and Sportsmen). If, however, the conditions of
paragraph 1 are not satisfied, those other Articles will apply. Thus, if a local government
sponsors a basketball team in an international tournament, and pays the athletes from public
funds, the compensation of the players is covered by Article 17 and not Article 19, because the
athletes are not engaging in a governmental function when they play basketball.
Paragraph 2
Paragraph 2 deals with the taxation of a pension paid from the public funds of one of the
States or a political subdivision or a local authority thereof to an individual in respect of services

rendered to that State or subdivision or authority in the discharge of governmental functions.
Subparagraph (a) provides that such a pension is taxable only in that State. Subparagraph (b)
provides an exception under which such a pension is taxable only in the other State if the
individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and
military employees of a Government of either State are intended to be covered under paragraph 2.
When benefits paid by a State in respect of services rendered to that State or a subdivision or
authority are in the form of social security benefits, however, those payments are covered by
paragraph 2 of Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support). As
a general matter, the result will be the same whether Article 18 or 19 applies, since social
security benefits are taxable exclusively by the source country and so are government pensions.
The result will differ only when the payment is made to a citizen and resident of the other
Contracting State, who is not also a citizen of the paying State. In such a case, social security
benefits continue to be taxable at source while government pensions become taxable only in the
residence country.
The phrase "functions of a governmental nature" is not defined. In general it is understood
to encompass functions traditionally carried on by a government. It would not include functions
that commonly are found in the private sector (e.g., education, health care, utilities). Rather, it is
limited to functions that generally are carried on solely by the government (e.g., military,
diplomatic service, tax administrators) and activities that directly support the carrying out of
those functions.
The use of the phrase "paid from the public funds of a Contracting State" is intended to
clarify that remuneration and pensions paid by such entities as government-owned corporations
are covered by the Article, as long as the other conditions of the Article are satisfied.
Relation to Other Articles
Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of
Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the
recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for
permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of a
Contracting State who in the course of performing functions of a governmental nature becomes a
resident of the other State (but not a permanent resident), would be entitled to the benefits of this
Article. However, an individual who receives a pension paid by the Government of the other
Contracting State in respect of services rendered to that Government shall be taxable on this
pension only in the other Contracting State unless the individual is a U.S. citizen or acquires a
U.S. green card.
ARTICLE 20
Student and Trainees
This Article provides rules for host-country taxation of visiting students, apprentices or
business trainees. Persons who meet the tests of the Article will be exempt from tax in the State

that they are visiting with respect to designated classes of income. Several conditions must be
satisfied in order for an individual to be entitled to the benefits of this Article.
First, the visitor must have been, either at the time of his arrival in the host State or
immediately before, a resident of the other Contracting State.
Second, the purpose of the visit must be the full-time education or training of the visitor.
Thus, if the visitor comes principally to work in the host State but also is a part-time student, he
would not be entitled to the benefits of this Article, even with respect to any payments he may
receive from abroad for his maintenance or education, and regardless of whether or not he is in a
degree program. Whether a student is to be considered full-time will be determined by the rules
of the educational institution at which he is studying. Similarly, a person who visits the host State
for the purpose of obtaining business training and who also receives a salary from his employer
for providing services would not be considered a trainee and would not be entitled to the benefits
of this Article.
Third, a student must be studying at an accredited educational institution. (This
requirement does not apply to business trainees or apprentices.) An educational institution is
understood to be an institution that normally maintains a regular faculty and normally has a
regular body of students in attendance at the place where the educational activities are carried on.
An educational institution will be considered to be accredited if it is accredited by an authority
that generally is responsible for accreditation of institutions in the particular field of study.
The host-country exemption in the Article applies only to payments received by the
student, apprentice or business trainee for the purpose of his maintenance, education or training
that arise outside the host State. A payment will be considered to arise outside the host State if
the payor is located outside the host State. Thus, if an employer from one of the Contracting
States sends an employee to the other Contracting State for training, the payments the trainee
receives from abroad from his employer for his maintenance or training while he is present in the
host State will be exempt from host-country tax. In all cases substance over form should prevail
in determining the identity of the payor. Consequently, payments made directly or indirectly by
the U.S. person with whom the visitor is training, but which have been routed through a non-
host-country source, such as, for example, a foreign bank account, should not be treated as
arising outside the United States for this purpose.
In the case of an apprentice or business trainee, the benefits of the Article will extend
only for a period of one year from the time that the visitor first arrives in the host country. If,
however, an apprentice or trainee remains in the host country for a second year, thus losing the
benefits of the Article, he would not retroactively lose the benefits of the Article for the first year.
The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this
Article with respect to an individual who is neither a citizen of the host State nor has been
admitted for permanent residence there. The saving clause, however, does apply with respect to
citizens and permanent residents of the host State. Thus, a U.S. citizen who is a resident of the
other Contracting State and who visits the United States as a full-time student at an accredited

university will not be exempt from U.S. tax on remittances from abroad that otherwise constitute
U.S. taxable income. A person, however, who is not a U.S. citizen, and who visits the United
States as a student and remains long enough to become a resident under U.S. law, but does not
become a permanent resident (i.e., does not acquire a green card), will be entitled to the full
benefits of the Article.
ARTICLE 21
Other Income
Article 21 generally assigns taxing jurisdiction over income not dealt with in the other
articles (Articles 6 through 20) of the Convention to the State of residence of the beneficial
owner of the income and defines the terms necessary to apply the article. An item of income is
"dealt with" in another article if it is the type of income described in the article and it has its
source in a Contracting State. For example, all royalty income that arises in a Contracting State
and that is beneficially owned by a resident of the other Contracting State is "dealt with" in
Article 12 (Royalties).
Examples of items of income covered by Article 21 include income from gambling,
punitive (but not compensatory) damages, covenants not to compete, and income from certain
financial instruments to the extent derived by persons not engaged in the trade or business of
dealing in such instruments (unless the transaction giving rise to the income is related to a trade
or business, in which case it is dealt with under Article 7 (Business Profits)). The article also
applies to items of income that are not dealt with in the other articles because of their source or
some other characteristic. For example, Article 11 (Interest) addresses only the taxation of
interest arising in a Contracting State. Interest arising in a third State that is not attributable to a
permanent establishment, therefore, is subject to Article 21.
Distributions from partnerships and distributions from trusts are not generally dealt with
under Article 21 because partnership and trust distributions generally do not constitute income.
Under the Code, partners include in income their distributive share of partnership income
annually, and partnership distributions themselves generally do not give rise to income. Also,
under the Code, trust income and distributions have the character of the associated distributable
net income and therefore would generally be covered by another article of the Convention. See
Code section 641 et seq.
Paragraph 1
The general rule of Article 21 is contained in paragraph 1. Items of income not dealt with
in other articles and beneficially owned by a resident of a Contracting State will be taxable only
in the State of residence. This exclusive right of taxation applies whether or not the residence
State exercises its right to tax the income covered by the Article.
This paragraph differs in one respect from paragraph 1 in the 1981 Model and the OECD
Model, by referring to "items of income beneficially owned by a resident of a Contracting State"

rather than simply "items of income of a resident of a Contracting State." This is not a
substantive change. It is intended merely to make explicit the implicit understanding in other
treaties that the exclusive residence taxation provided by paragraph 1 applies only when a
resident of a Contracting State is the beneficial owner of the income. This should also be
understood from the phrase "income of a resident of a Contracting State." The addition of a
reference to beneficial ownership merely removes any possible ambiguity. Thus, source taxation
of income not dealt with in other articles of the Convention is not limited by paragraph 1 if it is
nominally paid to a resident of the other Contracting State, but is beneficially owned by a
resident of a third State.
Paragraph 2
This paragraph provides an exception to the general rule of paragraph 1 for income, other
than income from real property, that is attributable to a permanent establishment or fixed base
maintained in a Contracting State by a resident of the other Contracting State. The taxation of
such income is governed by the provisions of Articles 7 (Business Profits) and 14 (Independent
Personal Services). Therefore, income arising outside the United States that is attributable to a
permanent establishment maintained in the United States by a resident of the other Contracting
State generally would be taxable by the United States under the provisions of Article 7. This
would be true even if the income is sourced in a third State.
There is an exception to this general rule with respect to income a resident of a
Contracting State derives from real property located outside the other Contracting State (whether
in the first-mentioned Contracting State or in a third State) that is attributable to the resident's
permanent establishment or fixed base in the other Contracting State. In such a case, only the
first-mentioned Contracting State (i.e., the State of residence of the person deriving the income)
and not the host State of the permanent establishment or fixed base may tax that income. This
special rule for foreign-situs property is consistent with the general rule, also reflected in Article
6 (Income from Real Property (Immovable Property)), that only the situs and residence States
may tax real property and real property income. Even if such property is part of the property of a
permanent establishment or fixed base in a Contracting State, that State may not tax if neither the
situs of the property nor the residence of the owner is in that State.
Relation to Other Articles
This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, the United States may tax the income of a resident of the other Contracting State that is not
dealt with elsewhere in the Convention, if that resident is a citizen of the United States. The
Article is also subject to the provisions of Article 22 (Limitation on Benefits). Thus, if a resident
of the other Contracting State earns income that falls within the scope of paragraph 1 of Article
21, but that is taxable by the United States under U.S. law, the income would be exempt from
U.S. tax under the provisions of Article 21 only if the resident satisfies one of the tests of Article
22 for entitlement to benefits.

ARTICLE 22
Limitation on Benefits
Purpose of Limitation on Benefits Provisions
The United States views an income tax treaty as a vehicle for providing treaty benefits to
residents of the two Contracting States. This statement begs the question of who is to be treated
as a resident of a Contracting State for the purpose of being granted treaty benefits. The
Commentaries to the OECD Model authorize a tax authority to deny benefits, under substance-
over-form principles, to a nominee in one State deriving income from the other on behalf of a
third-country resident. In addition, although the text of the OECD Model does not contain
express anti-abuse provisions, the Commentaries to Article 1 contain an extensive discussion
approving the use of such provisions in tax treaties in order to limit the ability of third state
residents to obtain treaty benefits. The United States holds strongly to the view that tax treaties
should include provisions that specifically prevent misuse of treaties by residents of third
countries. Consequently, all recent U.S. income tax treaties contain comprehensive Limitation on
Benefits provisions.
A treaty that provides treaty benefits to any resident of a Contracting State permits "treaty
shopping": the use, by residents of third states, of legal entities established in a Contracting State
with a principal purpose to obtain the benefits of a tax treaty between the United States and the
other Contracting State. It is important to note that this definition of treaty shopping does not
encompass every case in which a third state resident establishes an entity in a U.S. treaty partner,
and that entity enjoys treaty benefits to which the third state resident would not itself be entitled.
If the third country resident had substantial reasons for establishing the structure that were
unrelated to obtaining treaty benefits, the structure would not fall within the definition of treaty
shopping set forth above.
Of course, the fundamental problem presented by this approach is that it is based on the
taxpayer's intent, which a tax administration is normally ill-equipped to identify. In order to avoid
the necessity of making this subjective determination, Article 22 sets forth a series of objective
tests. The assumption underlying each of these tests is that a taxpayer that satisfies the
requirements of any of the tests probably has a real business purpose for the structure it has
adopted, or has a sufficiently strong nexus to the other Contracting State (e.g., a resident
individual) to warrant benefits even in the absence of a business connection, and that this
business purpose or connection outweighs any purpose to obtain the benefits of the Treaty.
For instance, the assumption underlying the active trade or business test under paragraph
3 is that a third country resident that establishes a "substantial" operation in the other State and
that derives income from a similar activity in the United States would not do so primarily to avail
itself of the benefits of the Treaty; it is presumed in such a case that the investor had a valid
business purpose for investing in the other State, and that the link between that trade or business
and the U.S. activity that generates the treaty-benefited income manifests a business purpose for
placing the U.S. investments in the entity in the other State. It is considered unlikely that the
investor would incur the expense of establishing a substantial trade or business in the other State

simply to obtain the benefits of the Convention. A similar rationale underlies the other tests in
Article 22.
While these tests provide useful surrogates for identifying actual intent, these mechanical
tests cannot account for every case in which the taxpayer was not treaty shopping. Accordingly,
Article 22 also includes a provision (paragraph 4) authorizing the competent authority of a
Contracting State to grant benefits. While an analysis under paragraph 4 may well differ from
that under one of the other tests of Article 22, its objective is the same: to identify investors
whose residence in the other State can be justified by factors other than a purpose to derive treaty
benefits.
Article 22 and the anti-abuse provisions of domestic law complement each other, as
Article 22 effectively determines whether an entity has a sufficient nexus to the Contracting State
to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g.,
business purpose, substance-over-form, step transaction or conduit principles) determine whether
a particular transaction should be recast in accordance with its substance. Thus, internal law
principles of the source State may be applied to identify the beneficial owner of an item of
income, and Article 22 then will be applied to the beneficial owner to determine if that person is
entitled to the benefits of the Convention with respect to such income.
Structure of the Article
Article 22 follows the form used in other recent U.S. income tax treaties. (See, e.g., the
Convention between the United State of America and the Federal Republic of Germany for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income and Capital and to Certain Other Taxes.) The structure of the Article is as follows:
Paragraph 1 states the general rule that residents are entitled to benefits otherwise accorded to
residents only to the extent provided in the Article. Paragraph 2 lists a series of attributes of a
resident of a Contracting State, the presence of any one of which will entitle that person to all the
benefits of the Convention. Paragraph 3 provides that, with respect to a person not entitled to
benefits under paragraph 2, benefits nonetheless may be granted to that person with regard to
certain types of income. Paragraph 4 provides that benefits also may be granted if the competent
authority of the State from which benefits are claimed determines that it is appropriate to provide
benefits in that case. Paragraph 5 defines the term "recognized stock exchange" as used in
paragraph 2(c).
Paragraph 1
Paragraph 1 provides that a resident of a Contracting State will be entitled to the benefits
otherwise accorded to residents of a Contracting State under the Convention only to the extent
provided in the Article. The benefits otherwise accorded to residents under the Convention
include all limitations on source-based taxation under Articles 6 through 21, the treaty-based
relief from double taxation provided by Article 23 (Relief from Double Taxation), and the
protection afforded to residents of a Contracting State under Article 24 (Nondiscrimination).
Some provisions do not require that a person be a resident in order to enjoy the benefits of those

provisions. These include paragraph 1 of Article 24 (Nondiscrimination), Article 25 (Mutual
Agreement Procedure), and Article 27 (Diplomatic Agents and Consular Officers). Article 22
accordingly does not limit the availability of the benefits of these provisions.
Paragraph 2
Paragraph 2 has six subparagraphs, each of which describes a category of residents that
are entitled to all benefits of the Convention.
Individuals -- Subparagraph 2(a)
Subparagraph (a) provides that individual residents of a Contracting State will be entitled
to all treaty benefits. If such an individual receives income as a nominee on behalf of a third
country resident, benefits may be denied under the respective articles of the Convention by the
requirement that the beneficial owner of the income be a resident of a Contracting State.
Qualified Governmental Entities -- Subparagraph 2(b)
Subparagraph b) provides that qualified governmental entities, as defined in subparagraph
3(i) of Article 3 (Definitions), also will be entitled to all benefits of the Convention. As described
in Article 3, in addition to federal, state and local governments, the term "qualified governmental
entity" encompasses certain government-owned corporations and other entities, and certain
pension trusts or funds that administer pension benefits described in Article 19 (Government
Service).
Publicly-Traded Corporations -- Subparagraph 2(c)(i)
Subparagraph (c) applies to two categories of corporations: publicly-traded corporations
and subsidiaries of publicly-traded corporations. Clause (i) of subparagraph 2(c) provides that a
company will be entitled to all the benefits of the Convention if all the shares in the class or
classes of shares that represent more than 50 percent of the voting power and value of the
company are regularly traded on a "recognized stock exchange" located in either State. The term
"recognized stock exchange" is defined in paragraph 5. This provision differs from corresponding
provisions in earlier treaties in that it states that “all of the shares” in the principal class of shares
must be regularly traded on a recognized stock exchange. This language was added to make it
clear that all shares in the principal class or classes of shares (as opposed to only a portion of
such shares) must satisfy the requirements of this subparagraph.
If a company has only one class of shares, it is only necessary to consider whether the
shares of that class are regularly traded on a recognized stock exchange. If the company has more
than one class of shares, it is necessary as an initial matter to determine whether one of the
classes accounts for more than half of the voting power and value of the company. If so, then
only those shares are considered for purposes of the regular trading requirement. If no single
class of shares accounts for more than half of the company's voting power and value, it is
necessary to identify a group of two or more classes of the company's shares that account for

more than half of the company's voting power and value, and then to determine whether each
class of shares in this group satisfies the regular trading requirement. Although in a particular
case involving a company with several classes of shares it is conceivable that more than one
group of classes could be identified that account for more than 50% of the shares, it is only
necessary for one such group to satisfy the requirements of this subparagraph in order for the
company to be entitled to benefits. Benefits would not be denied to the company even if a
second, non-qualifying, group of shares with more than half of the company's voting power and
value could be identified.
The term "regularly traded" is not defined in the Convention. In accordance with
paragraph 2 of Article 3 (General Definitions), this term will be defined by reference to the
domestic tax laws of the State from which treaty benefits are sought (i.e., the source State). In the
case of the United States, this term is understood to have the meaning it has under Treas. Reg.
section 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code. Under these
regulations, a class of shares is considered to be "regularly traded" if two requirements are met:
trades in the class of shares are made in more than de minimis quantities on at least 60 days
during the taxable year, and the aggregate number of shares in the class traded during the year is
at least 10 percent of the average number of shares outstanding during the year. Sections 1.884-
5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining the term
"regularly traded" under the Convention.
The regular trading requirement can be met by trading on any recognized exchange or
exchanges located in either State. Trading on one or more recognized stock exchanges may be
aggregated for purposes of this requirement. Thus, a U.S. company could satisfy the regularly
traded requirement through trading, in whole or in part, on a recognized stock exchange located
in the other Contracting State. Authorized but unissued shares are not considered for purposes of
this test.
Subsidiaries of Publicly-Traded Corporations -- Subparagraph 2(c)(ii)
Clause (ii) of subparagraph 2(c) provides a test under which certain companies that are
directly or indirectly controlled by companies satisfying the publicly-traded test of subparagraph
2(c)(i) may be entitled to the benefits of the Convention. Under this test, a company will be
entitled to the benefits of the Convention if 50 percent or more of each class of shares in the
company is directly or indirectly owned by companies that are described in subparagraph 2(c)(i).
This test differs from that under subparagraph 2(c)(i) in that 50 percent of each class of
the company's shares, not merely the class or classes accounting for more than 50 percent of the
company's votes and value, must be held by publicly-traded companies described in
subparagraph 2(c)(i). Thus, the test under subparagraph 2(c)(i) considers the ownership of every
class of shares outstanding, while the test under subparagraph 2(c)(ii) only considers those
classes that account for a majority of the company's voting power and value.
Clause (ii) permits indirect ownership. Consequently, the ownership by publicly-traded
companies described in clause (i) need not be direct. However, any intermediate owners in the

chain of ownership must themselves be entitled to benefits under paragraph 2.
Tax Exempt Organizations -- Subparagraph 2(d)
Subparagraph 2(d) provides that the tax exempt organizations described in subparagraph
1(b)(i) of Article 4 (Residence) will be entitled to all the benefits of the Convention. These
entities are entities that generally are exempt from tax in their State of residence and that are
organized and operated exclusively to fulfill religious, educational, scientific and other charitable
purposes. Unlike some recent U.S. treaties, there is no requirement that specified percentages of
the beneficiaries of these organizations be residents of one of the Contracting States.
Pension Funds -- Subparagraph 2(e)
Subparagraph 2(e) provides that organizations described in subparagraph 1(b)(ii) of
Article 4 (Residence) will be entitled to all the benefits of the Convention, as long as more than
half of the beneficiaries, members or participants of the organization are individual residents of
either Contracting State. The organizations referred to in this provision are tax-exempt entities
that provide pension and other benefits to employees pursuant to a plan. For purposes of this
provision, the term "beneficiaries" should be understood to refer to the persons receiving benefits
from the organization.
Ownership/Base Erosion -- Subparagraph 2(f)
Subparagraph 2(f) provides a two part test, the so-called ownership and base erosion test.
This test applies to any form of legal entity that is a resident of a Contracting State. Both prongs
of the test must be satisfied for the resident to be entitled to benefits under subparagraph 2(f).
The ownership prong of the test, under clause (i), requires that 50 percent or more of each
class of beneficial interests in the person (in the case of a corporation, 50 percent or more of each
class of its shares) be owned on at least half the days of the person's taxable year by persons who
are themselves entitled to benefits under the other tests of paragraph 2 (i.e., subparagraphs (a),
(b), (c), (d), or (e)). The ownership may be indirect through other persons themselves entitled to
benefits under paragraph 2.
Trusts may be entitled to benefits under this provision if they are treated as residents
under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For
purposes of this subparagraph, the beneficial interests in a trust will be considered to be owned
by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The interest
of a remainder beneficiary will be equal to 100 percent less the aggregate percentages held by
income beneficiaries. A beneficiary's interest in a trust will not be considered to be owned by a
person entitled to benefits under the other provisions of paragraph 2 if it is not possible to
determine the beneficiary's actuarial interest. Consequently, if it is not possible to determine the
actuarial interest of any beneficiaries in a trust, the ownership test under clause (i) cannot be
satisfied, unless all beneficiaries are persons entitled to benefits under the other subparagraphs of
paragraph 2.

The base erosion prong of the test under subparagraph 2(f) requires that less than 50
percent of the person's gross income for the taxable year be paid or accrued, directly or indirectly,
to non-residents of either State (unless income is attributable to a permanent establishment
located in either Contracting State), in the form of payments that are deductible for tax purposes
in the entity's State of residence. To the extent they are deductible from the taxable base, trust
distributions would be considered deductible payments. Depreciation and amortization
deductions, which are not "payments," are disregarded for this purpose. This provision differs in
some respects from analogous provisions in other treaties. Its purpose is to determine whether the
income derived from the source State is in fact subject to the tax regime of that other State.
Consequently, payments to any resident of either State, as well as payments that are attributable
to permanent establishments in either State, are not considered base eroding payments for this
purpose (to the extent that these recipients do not themselves base erode to non-residents).
The term "gross income" is not defined in the Convention. Thus, in accordance with
paragraph 2 of Article 3 (General Definitions), in determining whether a person deriving income
from United States sources is entitled to the benefits of the Convention, the United States will
ascribe the meaning to the term that it has in the United States. In such cases, "gross income" will
be defined as gross receipts less cost of goods sold.
It is intended that the provisions of paragraph 2 will be self executing. Unlike the
provisions of paragraph 4, discussed below, claiming benefits under paragraph 2 does not require
advance competent authority ruling or approval. The tax authorities may, of course, on review,
determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the
benefits claimed.
Paragraph 3
Paragraph 3 sets forth a test under which a resident of a Contracting State that is not
generally entitled to benefits of the Convention under paragraph 2 may receive treaty benefits
with respect to certain items of income that are connected to an active trade or business
conducted in its State of residence.
Subparagraph 3(a) sets forth a three-pronged test that must be satisfied in order for a
resident of a Contracting State to be entitled to the benefits of the Convention with respect to a
particular item of income. First, the resident must be engaged in the active conduct of a trade of
business in its State of residence. Second, the income derived from the other State must be
derived in connection with, or be incidental to, that trade or business. Third, the trade or business
must be substantial in relation to the activity in the other State that generated the item of income.
These determinations are made separately for each item of income derived from the other State.
It therefore is possible that a person would be entitled to the benefits of the Convention with
respect to one item of income but not with respect to another. If a resident of a Contracting State
is entitled to treaty benefits with respect to a particular item of income under paragraph 3, the
resident is entitled to all benefits of the Convention insofar as they affect the taxation of that item
of income in the other State. Set forth below is a discussion of each of the three prongs of the test

under paragraph 3.
Trade or Business -- Subparagraphs 3(a)(i) and (b)
The term "trade or business" is not defined in the Convention. Pursuant to paragraph 2 of
Article 3 (General Definitions), when determining whether a resident of the other State is entitled
to the benefits of the Convention under paragraph 3 with respect to income derived from U.S.
sources, the United States will ascribe to this term the meaning that it has under the law of the
United States. Accordingly, the United States competent authority will refer to the regulations
issued under section 367(a) for the definition of the term "trade or business." In general,
therefore, a trade or business will be considered to be a specific unified group of activities that
constitute or could constitute an independent economic enterprise carried on for profit.
Furthermore, a corporation generally will be considered to carry on a trade or business only if the
officers and employees of the corporation conduct substantial managerial and operational
activities. See Code section 367(a)(3) and the regulations thereunder.
Notwithstanding this general definition of trade or business, subparagraph 3(b) provides
that the business of making or managing investments, when part of banking, insurance or
securities activities conducted by a bank, insurance company, or registered securities dealer, will
be considered to be a trade or business. Conversely, such activities conducted by a person other
than a bank, insurance company or registered securities dealer will not be considered to be the
conduct of an active trade or business, nor would they be considered to be the conduct of an
active trade or business if conducted by a banking or insurance company but not as part of the
company's banking or insurance business.
Because a headquarters operation is in the business of managing investments, a company
that functions solely as a headquarter company will not be considered to be engaged in an active
trade or business for purposes of paragraph 3.
Derived in Connection With Requirement - Subparagraphs 3(a)(ii) and (d)
Subparagraph 3(d) provides that income is derived in connection with a trade or business
if the income-producing activity in the other State is a line of business that forms a part of or is
complementary to the trade or business conducted in the State of residence by the income
recipient. Although no definition of the terms "forms a part of" or "complementary" is set forth in
the Convention, it is intended that a business activity generally will be considered to "form a part
of" a business activity conducted in the other State if the two activities involve the design,
manufacture or sale of the same products or type of products, or the provision of similar services.
In order for two activities to be considered to be "complementary," the activities need not relate
to the same types of products or services, but they should be part of the same overall industry and
be related in the sense that the success or failure of one activity will tend to result in success or
failure for the other. In cases in which more than one trade or business is conducted in the other
State and only one of the trades or businesses forms a part of or is complementary to a trade or
business conducted in the State of residence, it is necessary to identify the trade or business to
which an item of income is attributable. Royalties generally will be considered to be derived in

connection with the trade or business to which the underlying intangible property is attributable.
Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefited
trade or business, and then out of other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that conforms to U.S. principles for
expense allocation will be considered a reasonable method. The following examples illustrate the
application of subparagraph 3(d).
Example 1.USCo is a corporation resident in the United States. USCo is engaged in an active
manufacturing business in the United States. USCo owns 100 percent of the
shares of FCo, a corporation resident in the other Contracting State. FCo
distributes USCo products in the other Contracting State. Since the business
activities conducted by the two corporations involve the same products, FCo's
distribution business is considered to form a part of USCo's manufacturing
business within the meaning of subparagraph 3(d).
Example 2.The facts are the same as in Example 1, except that USCo does not manufacture.
Rather, USCo operates a large research and development facility in the United
States that licenses intellectual property to affiliates worldwide, including FCo.
FCo and other USCo affiliates then manufacture and market the USCo-designed
products in their respective markets. Since the activities conducted by FCo and
USCo involve the same product lines, these activities are considered to form a
part of the same trade or business.
Example 3.Americair is a corporation resident in the United States that operates an
international airline. FSub is a wholly-owned subsidiary of Americair resident in
the other Contracting State. FSub operates a chain of hotels in the other
Contracting State that are located near airports served by Americair flights.
Americair frequently sells tour packages that include air travel to the other
Contracting State and lodging at FSub hotels. Although both companies are
engaged in the active conduct of a trade or business, the businesses of operating a
chain of hotels and operating an airline are distinct trades or businesses. Therefore
FSub's business does not form a part of Americair's business. However, FSub's
business is considered to be complementary to Americair's business because they
are part of the same overall industry (travel) and the links between their operations
tend to make them interdependent.
Example 4.The facts are the same as in Example 3, except that FSub owns an office building
in the other Contracting State instead of a hotel chain. No part of Americair's
business is conducted through the office building. FSub's business is not
considered to form a part of or to be complementary to Americair's business. They
are engaged in distinct trades or businesses in separate industries, and there is no
economic dependence between the two operations.
Example 5.USFlower is a corporation resident in the United States. USFlower produces and
sells flowers in the United States and other countries. USFlower owns all the

shares of ForHolding, a corporation resident in the other Contracting State.
ForHolding is a holding company that is not engaged in a trade or business.
ForHolding owns all the shares of three corporations that are resident in the other
Contracting State: ForFlower, ForLawn, and ForFish. ForFlower distributes
USFlower flowers under the USFlower trademark in the other State. ForLawn
markets a line of lawn care products in the other State under the USFlower
trademark. In addition to being sold under the same trademark, ForLawn and
ForFlower products are sold in the same stores and sales of each company's
products tend to generate increased sales of the other's products. ForFish imports
fish from the United States and distributes it to fish wholesalers in the other State.
For purposes of paragraph 3, the business of ForFlower forms a part of the
business of USFlower, the business of ForLawn is complementary to the business
of USFlower, and the business of ForFish is neither part of nor complementary to
that of USFlower.
Finally, a resident in one of the States also will be entitled to the benefits of the
Convention with respect to income derived from the other State if the income is "incidental" to
the trade or business conducted in the recipient's State of residence. Subparagraph 3(d) provides
that income derived from a State will be incidental to a trade or business conducted in the other
State if the production of such income facilitates the conduct of the trade or business in the other
State. An example of incidental income is the temporary investment of working capital derived
from a trade or business.
Substantiality -- Subparagraphs 3(a)(iii) and (c)
As indicated above, subparagraph 3(a)(iii) provides that income that a resident of a State
derives from the other State will be entitled to the benefits of the Convention under paragraph 3
only if the income is derived in connection with a trade or business conducted in the recipient's
State of residence and that trade or business is "substantial" in relation to the income-producing
activity in the other State. Subparagraph 3(c) provides that whether the trade or business of the
income recipient is substantial will be determined based on all the facts and circumstances. These
circumstances generally would include the relative scale of the activities conducted in the two
States and the relative contributions made to the conduct of the trade or businesses in the two
States.
In addition to this subjective rule, subparagraph 3(c) provides a safe harbor under which
the trade or business of the income recipient may be deemed to be substantial based on three
ratios that compare the size of the recipient's activities to those conducted in the other State. The
three ratios compare: (i) the value of the assets in the recipient's State to the assets used in the
other State; (ii) the gross income derived in the recipient's State to the gross income derived in
the other State; and (iii) the payroll expense in the recipient's State to the payroll expense in the
other State. The average of the three ratios with respect to the preceding taxable year must exceed
10 percent, and each individual ratio must exceed 7.5 percent. If any individual ratio does not
exceed 7.5 percent for the preceding taxable year, the average for the three preceding taxable
years may be used instead. Thus, if the taxable year is 1998, the preceding year is 1997. If one of

the ratios for 1997 is not greater than 7.5 percent, the average ratio for 1995, 1996, and 1997 with
respect to that item may be used.
The term "value" also is not defined in the Convention. Therefore, this term also will be
defined under U.S. law for purposes of determining whether a person deriving income from
United States sources is entitled to the benefits of the Convention. In such cases, "value"
generally will be defined using the method used by the taxpayer in keeping its books for purposes
of financial reporting in its country of residence. See Treas. Reg. §1.884-5(e)(3)(ii)(A).
Only items actually located or incurred in the two Contracting States are included in the
computation of the ratios. If the person from whom the income in the other State is derived is not
wholly-owned by the recipient (and parties related thereto) then the items included in the
computation with respect to such person must be reduced by a percentage equal to the percentage
control held by persons not related to the recipient. For instance, if a United States corporation
derives income from a corporation in the other State in which it holds 80 percent of the shares,
and unrelated parties hold the remaining shares, for purposes of subparagraph 3(c) only 80
percent of the assets, payroll and gross income of the company in the other State would be taken
into account.
Consequently, if neither the recipient nor a person related to the recipient has an
ownership interest in the person from whom the income is derived, the substantiality test always
will be satisfied (the denominator in the computation of each ratio will be zero and the numerator
will be a positive number). Of course, the other two prongs of the test under paragraph 3 would
have to be satisfied in order for the recipient of the item of income to receive treaty benefits with
respect to that income. For example, assume that a resident of a Contracting State is in the
business of banking in that State. The bank loans money to unrelated residents of the United
States. The bank would satisfy the substantiality requirement of this subparagraph with respect to
interest paid on the loans because it has no ownership interest in the payors.
Paragraph 4
Paragraph 4 provides that a resident of one of the States that is not otherwise entitled to
the benefits of the Convention may be granted benefits under the Convention if the competent
authority of the State from which benefits are claimed so determines. This discretionary
provision is included in recognition of the fact that, with the increasing scope and diversity of
international economic relations, there may be cases where significant participation by third
country residents in an enterprise of a Contracting State is warranted by sound business practice
or long-standing business structures and does not necessarily indicate a motive of attempting to
derive unintended Convention benefits.
The competent authority of a State will base a determination under this paragraph on
whether the establishment, acquisition, or maintenance of the person seeking benefits under the
Convention, or the conduct of such person's operations, has or had as one of its principal
purposes the obtaining of benefits under the Convention. Thus, persons that establish operations
in one of the States with the principal purpose of obtaining the benefits of the Convention

ordinarily will not be granted relief under paragraph 4.
The competent authority may determine to grant all benefits of the Convention, or it may
determine to grant only certain benefits. For instance, it may determine to grant benefits only
with respect to a particular item of income in a manner similar to paragraph 3. Further, the
competent authority may set time limits on the duration of any relief granted.
It is assumed that, for purposes of implementing paragraph 4, a taxpayer will not be
required to wait until the tax authorities of one of the States have determined that benefits are
denied before he will be permitted to seek a determination under this paragraph. In these
circumstances, it is also expected that if the competent authority determines that benefits are to
be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty
provision or the establishment of the structure in question, whichever is later.
Finally, there may be cases in which a resident of a Contracting State may apply for
discretionary relief to the competent authority of his State of residence. For instance, a resident of
a State could apply to the competent authority of his State of residence in a case in which he had
been denied a treaty-based credit under Article 23 on the grounds that he was not entitled to
benefits of the article under Article 22.
Paragraph 5
Paragraph 5 provides that the term "recognized stock exchange" means
(i) the NASDAQ System owned by the National Association of Securities
Dealers, and any stock exchange registered with the Securities and Exchange
Commission as a national securities exchange for purposes of the Securities
Exchange Act of 1934; and
(ii) [certain exchanges located in the other Contracting State].
ARTICLE 23
Relief from Double Taxation
This Article describes the manner in which each Contracting State undertakes to relieve
double taxation. The United States uses the foreign tax credit method under its internal law, and
by treaty. The other Contracting State may also use a foreign tax credit, or a combination of
foreign tax credit and exemption methods, depending on the nature of the income involved. In
rare cases of treaties with countries employing pure territorial systems, the other Contracting
State will use only an exemption system for relieving double taxation.
Paragraph 1
The United States agrees, in paragraph 1, to allow to its citizens and residents a credit
against U.S. tax for income taxes paid or accrued to the other Contracting State. Paragraph 1 also
provides that the other Contracting State’s covered taxes are income taxes for U.S. purposes.

This provision is based on the Treasury Department’s review of the other Contracting State’s
laws.
The credit under the Convention is allowed in accordance with the provisions and subject
to the limitations of U.S. law, as that law may be amended over time, so long as the general
principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention
provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the
time a credit is given, of the U.S. statutory credit.
Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the
Code, to a U.S. corporation in respect of dividends received from a corporation resident in the
other Contracting State of which the U.S. corporation owns at least 10 percent of the voting
stock. This credit is for the tax paid by the corporation of the other Contracting State on the
profits out of which the dividends are considered paid.
As indicated, the U.S. credit under the Convention is subject to the various limitations of
U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is
limited to the amount of U.S. tax due with respect to net foreign source income within the
relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar
amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g.,
Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits
and other inter-year adjustments. When the alternative minimum tax is due, the alternative
minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of
alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation
of the U.S. credit from being applied on a per-country basis (should internal law be changed), an
overall basis, or to particular categories of income (see, e.g., Code section 865(h)).
Paragraph 2
Specific rules will be provided in paragraph 2 of each treaty under which the other
Contracting State, in imposing tax on its residents, provides relief for U.S. taxes paid by those
residents. Although the Model Article is drafted as though the other Contracting State uses a
credit system, in bilateral Conventions the relief may be in the form of a credit, exemption, or a
combination of the two.
Paragraph 3
The rules of paragraph 3 were not in the 1981 Model, but they are found in a number of
U.S. treaties entered into after publication of that Model. Paragraph 3 provides special rules for
the tax treatment in both States of certain types of income derived from U.S. sources by U.S.
citizens who are resident in the other Contracting State. Since U.S. citizens, regardless of
residence, are subject to United States tax at ordinary progressive rates on their worldwide
income, the U.S. tax on the U.S. source income of a U.S. citizen resident in the other Contracting
State may exceed the U.S. tax that may be imposed under the Convention on an item of U.S.
source income derived by a resident of the other Contracting State who is not a U.S. citizen.

Subparagraph (a) of paragraph 3 provides special credit rules for the other Contracting
State with respect to items of income that are either exempt from U.S. tax or subject to reduced
rates of U.S. tax under the provisions of the Convention when received by residents of the other
Contracting State who are not U.S. citizens. The tax credit of the other Contracting State allowed
by paragraph 3(a) under these circumstances, to the extent consistent with the law of that State,
need not exceed the U.S. tax that may be imposed under the provisions of the Convention, other
than tax imposed solely by reason of the U.S. citizenship of the taxpayer under the provisions of
the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a U.S. citizen resident in
the other Contracting State receives U.S. source portfolio dividends, the foreign tax credit
granted by that other State would be limited to 15 percent of the dividend -- the U.S. tax that may
be imposed under subparagraph 2(b) of Article 10 (Dividends) -- even if the shareholder is
subject to U.S. net income tax because of his U.S. citizenship. With respect to royalty or interest
income, the other Contracting State would allow no foreign tax credit, because its residents are
exempt from U.S. tax on these classes of income under the provisions of Articles 11 (Interest)
and 12 (Royalties).
Paragraph 3(b) eliminates the potential for double taxation that can arise because
subparagraph 3(a) provides that the other Contracting State need not provide full relief for the
U.S. tax imposed on its citizens resident in the other Contracting State. The subparagraph
provides that the United States will credit the income tax paid or accrued to the other Contracting
State, after the application of subparagraph 3(a). It further provides that in allowing the credit, the
United States will not reduce its tax below the amount that is taken into account in the other
Contracting State in applying subparagraph 3(a). Since the income described in paragraph 3 is
U.S. source income, special rules are required to resource some of the income to the other
Contracting State in order for the United States to be able to credit the other State’s tax. This
resourcing is provided for in subparagraph 3(c), which deems the items of income referred to in
subparagraph 3(a) to be from foreign sources to the extent necessary to avoid double taxation
under paragraph 3(b). The rules of paragraph 3(c) apply only for purposes of determining U.S.
foreign tax credits with respect to taxes referred to in paragraphs 2(b) and 3 of Article 2 (Taxes
Covered).
The following two examples illustrate the application of paragraph 3 in the case of a U.S.
source portfolio dividend received by a U.S. citizen resident in the other Contracting State. In
both examples, the U.S. rate of tax on residents of the other State under paragraph 2(b) of Article
10 (Dividends) of the Convention is 15 percent. In both examples the U.S. income tax rate on the
U.S. citizen is 36 percent. In example I, the income tax rate on its resident (the U.S. citizen) is 25
percent (below the U.S. rate), and in example II, the rate on its resident is 40 percent (above the
U.S. rate).
Example IExample II
Paragraph 3(a)
U.S. dividend declared$100.00$100.00

Notional U.S. withholding tax
per Article 10(2)(b) 15.00 15.00
Other State taxable income 100.00 100.00
Other State tax before credit 25.00 40.00
Other State foreign tax credit 15.00 15.00
Net post-credit other State tax 10.00 25.00
Paragraphs 3(b) and (c)
U.S. pre-tax income $100.00$100.00
U.S. pre-credit citizenship tax 36.00 36.00
Notional U.S. withholding tax 15.00 15.00
U.S. tax available for credit 21.00 21.00
Income resourced from U.S. to
the other State 27.77 58.33
U.S. tax on resourced income 10.00 21.00
U.S. credit for other State tax 10.00 21.00
Net post-credit U.S. tax 11.00 0.00
Total U.S. tax 26.00 15.00
In both examples, in the application of paragraph 3(a), the other Contracting State credits
a 15 percent U.S. tax against its residence tax on the U.S. citizen. In example I the net other State
tax after foreign tax credit is $10.00; in the second example it is $25.00. In the application of
paragraphs 3(b) and (c), from the U.S. tax due before credit of $36.00, the United States subtracts
the amount of the U.S. source tax of $15.00, against which no U.S. foreign tax credit is to be
allowed. This provision assures that the United States will collect the tax that it is due under the
Convention as the source country. In both examples, the maximum amount of U.S. tax against
which credit for other State tax may be claimed is $21.00. Initially, all of the income in these
examples was U.S. source. In order for a U.S. credit to be allowed for the full amount of the
other State tax, an appropriate amount of the income must be resourced. The amount that must be
resourced depends on the amount of other State tax for which the U.S. citizen is claiming a U.S.
foreign tax credit. In example I, the other State tax was $10.00. In order for this amount to be
creditable against U.S. tax, $27.77 ($10 divided by .36) must be resourced as foreign source.
When the other State tax is credited against the U.S. tax on the resourced income, there is a net
U.S. tax of $11.00 due after credit. In example II, other State tax was $25 but, because the
amount available for credit is reduced under subparagraph 3(c) by the amount of the U.S. source
tax, only $21.00 is eligible for credit. Accordingly, the amount that must be resourced is limited
to the amount necessary to ensure a foreign tax credit for $21 of other State tax, or $58.33 ($21
divided by .36). Thus, even though other State tax was $25.00 and the U.S. tax available for
credit was $21.00, there is no excess credit available for carryover.
Relation to Other Articles
By virtue of the exceptions in subparagraph 5(a) of Article 1 this Article is not subject to
the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States will allow

a credit to its citizens and residents in accordance with the Article, even if such credit were to
provide a benefit not available under the Code.
ARTICLE 24
Nondiscrimination
This Article assures that nationals of a Contracting State, in the case of paragraph 1, and
residents of a Contracting State, in the case of paragraphs 2 through 4, will not be subject,
directly or indirectly, to discriminatory taxation in the other Contracting State. For this purpose,
nondiscrimination means providing national treatment. Not all differences in tax treatment, either
as between nationals of the two States, or between residents of the two States, are violations of
this national treatment standard. Rather, the national treatment obligation of this Article applies
only if the nationals or residents of the two States are comparably situated.
Each of the relevant paragraphs of the Article provides that two persons that are
comparably situated must be treated similarly. Although the actual words differ from paragraph
to paragraph (e.g., paragraph 1 refers to two nationals "in the same circumstances," paragraph 2
refers to two enterprises "carrying on the same activities" and paragraph 4 refers to two
enterprises that are "similar"), the common underlying premise is that if the difference in
treatment is directly related to a tax-relevant difference in the situations of the domestic and
foreign persons being compared, that difference is not to be treated as discriminatory (e.g., if one
person is taxable in a Contracting State on worldwide income and the other is not, or tax may be
collectible from one person at a later stage, but not from the other, distinctions in treatment
would be justified under paragraph 1). Other examples of such factors that can lead to
nondiscriminatory differences in treatment will be noted in the discussions of each paragraph.
The operative paragraphs of the Article also use different language to identify the kinds of
differences in taxation treatment that will be considered discriminatory. For example, paragraphs
1 and 4 speak of "any taxation or any requirement connected therewith that is other or more
burdensome," while paragraph 2 specifies that a tax "shall not be less favorably levied."
Regardless of these differences in language, only differences in tax treatment that materially
disadvantage the foreign person relative to the domestic person are properly the subject of the
Article.
Paragraph 1
Paragraph 1 provides that a national of one Contracting State may not be subject to
taxation or connected requirements in the other Contracting State that are more burdensome than
the taxes and connected requirements imposed upon a national of that other State in the same
circumstances. The OECD Model prohibits taxation that is “other than or more burdensome”
than that imposed on U.S. persons. The U.S. Model omits the reference to taxation that is “other
than” U.S. persons because the only relevant question under this provision should be whether the
requirement imposed on a national of the other State is more burdensome. A requirement may be
different from the requirements imposed on U.S. nationals without being more burdensome.

As noted above, whether or not the two persons are both taxable on worldwide income is
a significant circumstance for this purpose. The 1992 revision of the OECD Model added after
the words "in the same circumstances, the phrase "in particular with respect to residence,"
reflecting the fact that under most countries' laws residents are taxable on worldwide income and
nonresidents are not. Since in the United States nonresident citizens are also taxable on
worldwide income, this Model expands the phrase to refer, not to residence, but to taxation on
worldwide income. The underlying concept, however, is essentially the same in the two Models.
A national of a Contracting State is afforded protection under this paragraph even if the
national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a
third country is entitled, under this paragraph, to the same treatment in the other Contracting
State as a national of the other Contracting State who is in similar circumstances (i.e.,
presumably one who is resident in a third State). The term "national" in relation to a Contracting
State is defined in subparagraph 1(h) of Article 3 (General Definitions).
Because the relevant circumstances referred to in the paragraph relate, among other
things, to taxation on worldwide income, paragraph 1 does not obligate the United States to apply
the same taxing regime to a national of the other Contracting State who is not resident in the
United States and a U.S. national who is not resident in the United States. United States citizens
who are not residents of the United States but who are, nevertheless, subject to United States tax
on their worldwide income are not in the same circumstances with respect to United States
taxation as citizens of the other Contracting State who are not United States residents. Thus, for
example, Article 24 would not entitle a national of the other Contracting State resident in a third
country to taxation at graduated rates of U.S. source dividends or other investment income that
applies to a U.S. citizen resident in the same third country.
The scope of paragraph 1 is broader than that in the 1981 Model, because of the expanded
definition of the term "national" in Article 3 (General Definitions). In order to conform the U.S.
Model definition to that in the OECD Model, the definition of "national" extends beyond citizens
to cover juridical persons that are nationals of a Contracting State as well. This expanded
definition, however, generally may add little as a practical matter to the scope of the Article. A
corporation that is a national of the other Contracting State and is doing business in the United
States is already protected, vis-a-vis a U.S. corporation, by paragraph 2. If a foreign corporation
is not doing business in the United States it is, in relevant respect, in different circumstances
from a U.S. corporation, and is, therefore, not entitled to national treatment in the United States.
With respect to U.S. nationals claiming nondiscrimination protection from the treaty partner,
U.S. juridical persons that are "nationals" of the United States are also U.S. residents (e.g., U.S.
corporations but not partnerships), and are, therefore, protected by paragraphs 2 and 4 in any
event.
Paragraph 2
Paragraph 2 of the Article, like the comparable paragraphs in the OECD and 1981
Models, provides that a Contracting State may not tax a permanent establishment or fixed base of

an enterprise of the other Contracting State less favorably than an enterprise of that
first-mentioned State that is carrying on the same activities. This provision, however, does not
obligate a Contracting State to grant to a resident of the other Contracting State any tax
allowances, reliefs, etc., that it grants to its own residents on account of their civil status or
family responsibilities. Thus, if a sole proprietor who is a resident of the other Contracting State
has a permanent establishment in the United States, in assessing income tax on the profits
attributable to the permanent establishment, the United States is not obligated to allow to the
resident of the other Contracting State the personal allowances for himself and his family that he
would be permitted to take if the permanent establishment were a sole proprietorship owned and
operated by a U.S. resident, despite the fact that the individual income tax rates would apply.
The fact that a U.S. permanent establishment of an enterprise of the other Contracting
State is subject to U.S. tax only on income that is attributable to the permanent establishment,
while a U.S. corporation engaged in the same activities is taxable on its worldwide income is not,
in itself, a sufficient difference to deny national treatment to the permanent establishment. There
are cases, however, where the two enterprises would not be similarly situated and differences in
treatment may be warranted. For instance, it would not be a violation of the nondiscrimination
protection of paragraph 2 to require the foreign enterprise to provide information in a reasonable
manner that may be different from the information requirements imposed on a resident
enterprise, because information may not be as readily available to the Internal Revenue Service
from a foreign as from a domestic enterprise. Similarly, it would not be a violation of paragraph
2 to impose penalties on persons who fail to comply with such a requirement (see, e.g., sections
874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed or
allocated to a permanent establishment in conformity with the principles of Article 7 (Business
Profits) implies that the attribution or allocation was not discriminatory.
Section 1446 of the Code imposes on any partnership with income that is effectively
connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a
foreign partner. In the context of the Model Convention, this obligation applies with respect to a
share of the partnership income of a partner resident in the other Contracting State, and
attributable to a U.S. permanent establishment. There is no similar obligation with respect to the
distributive shares of U.S. resident partners. It is understood, however, that this distinction is not
a form of discrimination within the meaning of paragraph 2 of the Article. No distinction is made
between U.S. and non-U.S. partnerships, since the law requires that partnerships of both U.S. and
non-U.S. domicile withhold tax in respect of the partnership shares of non-U.S. partners.
Furthermore, in distinguishing between U.S. and non-U.S. partners, the requirement to withhold
on the non-U.S. but not the U.S. partner's share is not discriminatory taxation, but, like other
withholding on nonresident aliens, is merely a reasonable method for the collection of tax from
persons who are not continually present in the United States, and as to whom it otherwise may be
difficult for the United States to enforce its tax jurisdiction. If tax has been over-withheld, the
partner can, as in other cases of over- withholding, file for a refund. (The relationship between
paragraph 2 and the imposition of the branch tax is dealt with below in the discussion of
paragraph 5.)
Paragraph 2 in this Model goes beyond the comparable paragraphs in other Models. It

obligates the host State to provide national treatment not only to permanent establishments of an
enterprise of the partner, but also to other residents of the partner that are taxable in the host State
on a net basis because they derive income from independent personal services performed in the
host State that is attributable to a fixed base in that State. Thus, an individual resident of the other
Contracting State who performs independent personal services in the U.S., and who is subject to
U.S. income tax on the income from those services that is attributable to a fixed base in the
United States, is entitled to no less favorable tax treatment in the United States than a U.S.
resident engaged in the same kinds of activities. With such a rule in a treaty, the host State cannot
tax its own residents on a net basis, but disallow deductions (other than personal allowances,
etc.) with respect to the income attributable to the fixed base. Similarly, in accordance with
paragraph 5 of Article 6 (Income from Real Property (Immovable Property)), the situs State
would be required to allow deductions to a resident of the other State with respect to income
derived from real property located in the situs State to the same extent that deductions are
allowed to residents of the situs State with respect to income derived from real property located
in the situs State.
Paragraph 3
Paragraph 3 prohibits discrimination in the allowance of deductions. When an enterprise
of a Contracting State pays interest, royalties or other disbursements to a resident of the other
Contracting State, the first-mentioned Contracting State must allow a deduction for those
payments in computing the taxable profits of the enterprise as if the payment had been made
under the same conditions to a resident of the first-mentioned Contracting State. An exception to
this rule is provided for cases where the provisions of paragraph 1 of Article 9 (Associated
Enterprises), paragraph 4 of Article 11 (Interest) or paragraph 4 of Article 12 (Royalties) apply,
because all of these provisions permit the denial of deductions in certain circumstances in respect
of transactions between related persons. This exception would include the denial or deferral of
certain interest deductions under Code section 163(j).
The term "other disbursements" is understood to include a reasonable allocation of
executive and general administrative expenses, research and development expenses and other
expenses incurred for the benefit of a group of related persons that includes the person incurring
the expense.
Paragraph 3 also provides that any debts of an enterprise of a Contracting State to a
resident of the other Contracting State are deductible in the first-mentioned Contracting State for
computing the capital tax of the enterprise under the same conditions as if the debt had been
contracted to a resident of the first-mentioned Contracting State. Even though, for general
purposes, the Convention covers only income taxes, under paragraph 6 of this Article, the
nondiscrimination provisions apply to all taxes levied in both Contracting States, at all levels of
government. Thus, this provision may be relevant for both States. The other Contracting State
may have capital taxes and in the United States such taxes are imposed by local governments.
Paragraph 4

Paragraph 4 requires that a Contracting State not impose more burdensome taxation or
connected requirements on an enterprise of that State that is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State, than the
taxation or connected requirements that it imposes on other similar enterprises of that
first-mentioned Contracting State. For this purpose it is understood that “similar” refers to
similar activities or ownership of the enterprise. As in paragraph 1, the OECD Model’s reference
to requirements “other” than those imposed with respect to enterprises owned by domestic
persons has not been included.
The Tax Reform Act of 1986 changed the rules for taxing corporations on certain
distributions they make in liquidation. Prior to 1986, corporations were not taxed on distributions
of appreciated property in complete liquidation, although nonliquidating distributions of the same
property, with several exceptions, resulted in corporate-level tax. In part to eliminate this
disparity, the law now generally taxes corporations on the liquidating distribution of appreciated
property. The Code provides an exception in the case of distributions by 80 percent or more
controlled subsidiaries to their parent corporations, on the theory that the built-in gain in the asset
will be recognized when the parent sells or distributes the asset. This exception does not apply to
distributions to parent corporations that are tax-exempt organizations or, except to the extent
provided in regulations, foreign corporations. The policy of the legislation is to collect one
corporate-level tax on the liquidating distribution of appreciated property. If, and only if, that tax
can be collected on a subsequent sale or distribution does the legislation defer the tax. It is
understood that the inapplicability of the exception to the tax on distributions to foreign parent
corporations under section 367(e)(2) does not conflict with paragraph 4 of the Article. While a
liquidating distribution to a U.S. parent will not be taxed, and, except to the extent provided in
regulations, a liquidating distribution to a foreign parent will, paragraph 4 merely prohibits
discrimination among corporate taxpayers on the basis of U.S. or foreign stock ownership.
Eligibility for the exception to the tax on liquidating distributions for distributions to
non-exempt, U.S. corporate parents is not based upon the nationality of the owners of the
distributing corporation, but rather is based upon whether such owners would be subject to
corporate tax if they subsequently sold or distributed the same property. Thus, the exception does
not apply to distributions to persons that would not be so subject -- not only foreign corporations,
but also tax-exempt organizations. A similar analysis applies to the treatment of section 355
distributions subject to section 367(e)(1).
For the reasons given above in connection with the discussion of paragraph 2 of the
Article, it is also understood that the provision in section 1446 of the Code for withholding of tax
on non-U.S. partners does not violate paragraph 4 of the Article.
It is further understood that the ineligibility of a U.S. corporation with nonresident alien
shareholders to make an election to be an "S" corporation does not violate paragraph 4 of the
Article. If a corporation elects to be an S corporation (requiring 35 or fewer shareholders), it is
generally not subject to income tax and the shareholders take into account their pro rata shares of
the corporation's items of income, loss, deduction or credit. (The purpose of the provision is to
allow an individual or small group of individuals to conduct business in corporate form while
paying taxes at individual rates as if the business were conducted directly.) A nonresident alien

does not pay U.S. tax on a net basis, and, thus, does not generally take into account items of loss,
deduction or credit. Thus, the S corporation provisions do not exclude corporations with
nonresident alien shareholders because such shareholders are foreign, but only because they are
not net-basis taxpayers. Similarly, the provisions exclude corporations with other types of
shareholders where the purpose of the provisions cannot be fulfilled or their mechanics
implemented. For example, corporations with corporate shareholders are excluded because the
purpose of the provisions to permit individuals to conduct a business in corporate form at
individual tax rates would not be furthered by their inclusion.
Paragraph 5
Paragraph 5 of the Article confirms that no provision of the Article will prevent either
Contracting State from imposing the branch tax described in paragraph 8 of Article 10
(Dividends). Since imposition of the branch tax under the Model Convention is specifically
sanctioned by paragraph 8 of Article 10 (Dividends), its imposition could not be precluded by
Article 24, even without paragraph 5. Under the generally accepted rule of construction that the
specific takes precedence over the more general, the specific branch tax provision of Article 10
would take precedence over the more general national treatment provision of Article 24.
Paragraph 6
As noted above, notwithstanding the specification of taxes covered by the Convention in
Article 2 (Taxes Covered) for general purposes, for purposes of providing nondiscrimination
protection this Article applies to taxes of every kind and description imposed by a Contracting
State or a political subdivision or local authority thereof. Customs duties are not considered to be
taxes for this purpose.
Relation to Other Articles
The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this
Article, by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, a U.S.
citizen who is a resident of the other Contracting State may claim benefits in the United States
under this Article.
Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of
whether they are entitled to benefits under Article 22 (Limitation on Benefits), because that
paragraph applies to nationals and not residents. They may not claim the benefits of the other
paragraphs of this Article with respect to an item of income unless they are generally entitled to
treaty benefits with respect to that income under a provision of Article 22.
ARTICLE 25
Mutual Agreement Procedure
This Article provides the mechanism for taxpayers to bring to the attention of competent

authorities issues and problems that may arise under the Convention. It also provides a
mechanism for cooperation between the competent authorities of the Contracting States to
resolve disputes and clarify issues that may arise under the Convention and to resolve cases of
double taxation not provided for in the Convention. In addition, the Article authorizes the
competent authorities to consult to deny the benefit of the Convention where affording such a
benefit would lead to avoidance of tax in a manner inconsistent with the Convention. The
competent authorities of the two Contracting States are identified in paragraph 1(e) of Article 3
(General Definitions).
Paragraph 1
This paragraph provides that where a resident of a Contracting State considers that the
actions of one or both Contracting States will result in taxation that is not in accordance with the
Convention he may present his case to the competent authority of either Contracting State. All
standard Models and nearly all current U.S. treaties allow taxpayers to bring competent authority
cases only to the competent authority of their country of residence, or citizenship/nationality.
Paragraph 16 of the OECD Commentary to Article 25 suggests, however, that countries
may agree to allow a case to be brought to either competent authority. Because there seems to be
no apparent reason why a resident of a Contracting State must take its case to the competent
authority of its State of residence and not to that of the partner, the Model adopts the approach
suggested in the OECD Commentary. Under this approach, a U.S. permanent establishment of a
corporation resident in the treaty partner that faces inconsistent treatment in the two countries
would be able to bring its complaint to the competent authority in either Contracting State.
Although the typical cases brought under this paragraph will involve economic double
taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to
such cases. For example, if a Contracting State treats income derived by a company resident in
the other Contracting State as attributable to a permanent establishment in the first-mentioned
Contracting State, and the resident believes that the income is not attributable to a permanent
establishment, or that no permanent establishment exists, the resident may bring a complaint
under paragraph 1 to the competent authority of either Contracting State.
It is not necessary for a person bringing a complaint first to have exhausted the remedies
provided under the national laws of the Contracting States before presenting a case to the
competent authorities, nor does the fact that the statute of limitations may have passed for
seeking a refund preclude bringing a case to the competent authority. Like previous U.S. Models,
but unlike the OECD Model, no time limit is provided within which a case must be brought.
Paragraph 2
This paragraph instructs the competent authorities in dealing with cases brought by
taxpayers under paragraph 1. It provides that if the competent authority of the Contracting State
to which the case is presented judges the case to have merit, and cannot reach a unilateral
solution, it shall seek an agreement with the competent authority of the other Contracting State

pursuant to which taxation not in accordance with the Convention will be avoided. During the
period that a proceeding under this Article is pending, any assessment and collection procedures
shall be suspended. Any agreement is to be implemented even if such implementation otherwise
would be barred by the statute of limitations or by some other procedural limitation, such as a
closing agreement. In a case where the taxpayer has entered a closing agreement (or other written
settlement) with the United States prior to bringing a case to the competent authorities, the U.S.
competent authority will endeavor only to obtain a correlative adjustment from the other
Contracting State. See Rev. Proc. 96-13, 1996-3 I.R.B. 31, section 7.05. Because, as specified in
paragraph 2 of Article 1 (General Scope), the Convention cannot operate to increase a taxpayer's
liability, time or other procedural limitations can be overridden only for the purpose of making
refunds and not to impose additional tax.
Paragraph 3
Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may
arise as to the application or interpretation of the Convention. The paragraph includes a
non-exhaustive list of examples of the kinds of matters about which the competent authorities
may reach agreement. This list is purely illustrative; it does not grant any authority that is not
implicitly present as a result of the introductory sentence of paragraph 3. The competent
authorities may, for example, agree to the same attribution of income, deductions, credits or
allowances between an enterprise in one Contracting State and its permanent establishment in the
other (subparagraph (a)) or between related persons (subparagraph (b)). These allocations are to
be made in accordance with the arm's length principle underlying Article 7 (Business Profits) and
Article 9 (Associated Enterprises). Agreements reached under these subparagraphs may include
agreement on a methodology for determining an appropriate transfer price, common treatment of
a taxpayer's cost sharing arrangement, or upon an acceptable range of results under that
methodology. Subparagraph (g) makes clear that they may also agree to apply this methodology
and range of results prospectively to future transactions and time periods pursuant to advance
pricing agreements.
As indicated in subparagraphs (c), (d), (e) and (f), the competent authorities also may
agree to settle a variety of conflicting applications of the Convention. They may agree to
characterize particular items of income in the same way (subparagraph (c)), to characterize
entities in a particular way (subparagraph (d)), to apply the same source rules to particular items
of income (subparagraph (e)), and to adopt a common meaning of a term (subparagraph f)).
Subparagraph (h) makes clear that the competent authorities can agree to the common
application, consistent with the objective of avoiding double taxation, of procedural provisions of
the internal laws of the Contracting States, including those regarding penalties, fines and interest.
Since the list under paragraph 3 is not exhaustive, the competent authorities may reach
agreement on issues not enumerated in paragraph 3 if necessary to avoid double taxation. For
example, the competent authorities may seek agreement on a uniform set of standards for the use
of exchange rates, or agree on consistent timing of gain recognition with respect to a transaction
to the extent necessary to avoid double taxation.

Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of
eliminating double taxation in cases not provided for in the Convention and to resolve any
difficulties or doubts arising as to the interpretation or application of the Convention. This
provision is intended to permit the competent authorities to implement the treaty in particular
cases in a manner that is consistent with its expressed general purposes. It permits the competent
authorities to deal with cases that are within the spirit of the provisions but that are not
specifically covered. An example of such a case might be double taxation arising from a transfer
pricing adjustment between two permanent establishments of a third-country resident, one in the
United States and one in the other Contracting State. Since no resident of a Contracting State is
involved in the case, the Convention does not apply, but the competent authorities nevertheless
may use the authority of the Convention to prevent the double taxation.
Agreements reached by the competent authorities under paragraph 3 need not conform to
the internal law provisions of either Contracting State. Paragraph 3 is not, however, intended to
authorize the competent authorities to resolve problems of major policy significance that
normally would be the subject of negotiations between the Contracting States themselves. For
example, this provision would not authorize the competent authorities to agree to allow a U.S.
foreign tax credit under the treaty for a tax imposed by the other country where that tax is not
otherwise a covered tax and is not an identical or substantially similar tax imposed after the date
of signature of the treaty. Whether or not the tax is creditable under the Code is a separate matter.
Paragraph 4
Paragraph 4 authorizes the competent authorities to increase any dollar amounts referred
to in the Convention to reflect economic and monetary developments. Under the Model, this
refers only to Article 17 (Artistes and Sportsmen). The rule under paragraph 4 is intended to
operate as follows: if, for example, after the Convention has been in force for some time,
inflation rates have been such as to make the $20,000 exemption threshold for entertainers
unrealistically low in terms of the original objectives intended in setting the threshold, the
competent authorities may agree to a higher threshold without the need for formal amendment to
the treaty and ratification by the Contracting States. This authority can be exercised, however,
only to the extent necessary to restore those original objectives. Because of paragraph 2 of Article
1 (General Scope), it is clear that this provision can be applied only to the benefit of taxpayers,
i.e., only to increase thresholds, not to reduce them.
Paragraph 5
Paragraph 5 provides that the competent authorities may communicate with each other for
the purpose of reaching an agreement. This makes clear that the competent authorities of the two
Contracting States may communicate without going through diplomatic channels. Such
communication may be in various forms, including, where appropriate, through face-to-face
meetings of representatives of the competent authorities.
Other Issues

Treaty effective dates and termination in relation to competent authority dispute
resolution
A case may be raised by a taxpayer under a treaty with respect to a year for which a treaty
was in force after the treaty has been terminated. In such a case the ability of the competent
authorities to act is limited. They may not exchange confidential information, nor may they reach
a solution that varies from that specified in its law.
A case also may be brought to a competent authority under a treaty that is in force, but
with respect to a year prior to the entry into force of the treaty. The scope of the competent
authorities to address such a case is not constrained by the fact that the treaty was not in force
when the transactions at issue occurred, and the competent authorities have available to them the
full range of remedies afforded under this Article.
Triangular competent authority solutions
International tax cases may involve more than two taxing jurisdictions (e.g., transactions
among a parent corporation resident in country A and its subsidiaries resident in countries B and
C). As long as there is a complete network of treaties among the three countries, it should be
possible, under the full combination of bilateral authorities, for the competent authorities of the
three States to work together on a three-sided solution. Although country A may not be able to
give information received under Article 26 (Exchange of Information) from country B to the
authorities of country C, if the competent authorities of the three countries are working together,
it should not be a problem for them to arrange for the authorities of country B to give the
necessary information directly to the tax authorities of country C, as well as to those of country
A. Each bilateral part of the trilateral solution must, of course, not exceed the scope of the
authority of the competent authorities under the relevant bilateral treaty.
Relation to Other Articles
This Article is not subject to the saving clause of paragraph 4 of Article 1 (General
Scope) by virtue of the exceptions in paragraph 5(a) of that Article. Thus, rules, definitions,
procedures, etc. that are agreed upon by the competent authorities under this Article may be
applied by the United States with respect to its citizens and residents even if they differ from the
comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to
provide refunds of tax to a U.S. citizen or resident under this Article. A person may seek relief
under Article 25 regardless of whether he is generally entitled to benefits under Article 22
(Limitation on Benefits). As in all other cases, the competent authority is vested with the
discretion to decide whether the claim for relief is justified.
ARTICLE 26
Exchange of Information and Administrative Assistance

Paragraph 1
This Article provides for the exchange of information between the competent authorities
of the Contracting States. The information to be exchanged is that which is relevant for carrying
out the provisions of the Convention or the domestic laws of the United States or of the other
Contracting State concerning the taxes covered by the Convention. Previous U.S. Models, and
the OECD Model, refer to information that is "necessary" for carrying out the provisions of the
Convention, etc. This term consistently has been interpreted as being equivalent to "relevant,"
and as not requiring a requesting State to demonstrate that it would be disabled from enforcing its
tax laws unless it obtained a particular item of information. To remove any potential
misimpression that the term "necessary" created a higher threshold than relevance, the Model
adopts the term "relevant."
The taxes covered by the Convention for purposes of this Article constitute a broader
category of taxes than those referred to in Article 2 (Taxes Covered). As provided in paragraph 5,
for purposes of exchange of information, covered taxes include all taxes imposed by the
Contracting States. Exchange of information with respect to domestic law is authorized insofar as
the taxation under those domestic laws is not contrary to the Convention. Thus, for example,
information may be exchanged with respect to a covered tax, even if the transaction to which the
information relates is a purely domestic transaction in the requesting State and, therefore, the
exchange is not made for the purpose of carrying out the Convention.
An example of such a case is provided in the OECD Commentary: A company resident in
the United States and a company resident in the partner transact business between themselves
through a third-country resident company. Neither Contracting State has a treaty with the third
State. In order to enforce their internal laws with respect to transactions of their residents with the
third-country company (since there is no relevant treaty in force), the Contracting State may
exchange information regarding the prices that their residents paid in their transactions with the
third-country resident.
Paragraph 1 states that information exchange is not restricted by Article 1 (General
Scope). Accordingly, information may be requested and provided under this Article with respect
to persons who are not residents of either Contracting State. For example, if a third-country
resident has a permanent establishment in the other Contracting State which engages in
transactions with a U.S. enterprise, the United States could request information with respect to
that permanent establishment, even though it is not a resident of either Contracting State.
Similarly, if a third-country resident maintains a bank account in the other Contracting State, and
the Internal Revenue Service has reason to believe that funds in that account should have been
reported for U.S. tax purposes but have not been so reported, information can be requested from
the other Contracting State with respect to that person's account.
Paragraph 1 also provides assurances that any information exchanged will be treated as
secret, subject to the same disclosure constraints as information obtained under the laws of the
requesting State. Information received may be disclosed only to persons, including courts and
administrative bodies, concerned with the assessment, collection, enforcement or prosecution in

respect of the taxes to which the information relates, or to persons concerned with the
administration of these taxes. The information must be used by these persons in connection with
these designated functions. Persons in the United States concerned with the administration of
taxes include legislative bodies, such as the tax-writing committees of Congress and the General
Accounting Office. Information received by these bodies must be for use in the performance of
their role in overseeing the administration of U.S. tax laws. Information received may be
disclosed in public court proceedings or in judicial decisions.
The Article authorizes the competent authorities to exchange information on a routine
basis, on request in relation to a specific case, or spontaneously. It is contemplated that the
Contracting States will utilize this authority to engage in all of these forms of information
exchange, as appropriate.
Paragraph 2
Paragraph 2 is identical to paragraph 2 of Article 26 of the OECD Model. It provides that
the obligations undertaken in paragraph 1 to exchange information do not require a Contracting
State to carry out administrative measures that are at variance with the laws or administrative
practice of either State. Nor is a Contracting State required to supply information not obtainable
under the laws or administrative practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to public policy. Thus, a requesting State
cannot obtain information from the other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in the requesting State.
While paragraph 2 states conditions under which a Contracting State is not obligated to
comply with a request from the other Contracting State for information, the requested State is not
precluded from providing such information, and may, at its discretion, do so subject to the
limitations of its internal law.
Paragraph 3
Paragraph 3 does not have an analog in the OECD Model. It sets forth two exceptions
from the dispensations described in paragraph 2. First, the first sentence of the paragraph
provides that information must be provided to the requesting State notwithstanding the fact that
disclosure of the information is precluded by bank secrecy or similar legislation relating to
disclosure of financial information by financial institutions or intermediaries. This includes the
disclosure of information regarding the beneficial owner of an interest in a person, such as the
identity of a beneficial owner of bearer shares.
Second, paragraph 3 provides that when information is requested by a Contracting State
in accordance with this Article, the other Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the requested State, even if that State has no
direct tax interest in the case to which the request relates. The OECD Model does not state
explicitly in the Article that the requested State is obligated to respond to a request even if it does
not have a direct tax interest in the information. The OECD Commentary, however, makes clear

that this is to be understood as implicit in the OECD Model. (See paragraph 16 of the OECD
Commentary to Article 26.)
Paragraph 3 further provides that the requesting State may specify the form in which
information is to be provided (e.g., depositions of witnesses and authenticated copies of original
documents) so that the information can be usable in the judicial proceedings of the requesting
State. The requested State should, if possible, provide the information in the form requested to
the same extent that it can obtain information in that form under its own laws and administrative
practices with respect to its own taxes.
Paragraph 4
Paragraph 4 provides for assistance in collection of taxes to the extent necessary to ensure
that treaty benefits are enjoyed only by persons entitled to those benefits under the terms of the
Convention. Under paragraph 4, a Contracting State will endeavor to collect on behalf of the
other State only those amounts necessary to ensure that any exemption or reduced rate of tax at
source granted under the Convention by that other State is not enjoyed by persons not entitled to
those benefits. For example, if a U.S. source dividend is paid to an addressee in a treaty partner,
the withholding agent probably will withhold at the treaty's portfolio dividend rate of 15 percent.
If, however, the addressee is merely acting as a nominee on behalf of a third-country resident,
paragraph 4 would obligate the other Contracting State to withhold and remit to the United States
the additional tax that should have been collected by the U.S. withholding agent.
This paragraph also makes clear that the Contracting State asked to collect the tax is not
obligated, in the process of providing collection assistance, to carry out administrative measures
that are different from those used in the collection of its own taxes, or that would be contrary to
its sovereignty, security or public policy.
Paragraph 5
As noted above in the discussion of paragraph 1, the exchange of information provisions
of the Convention apply to all taxes imposed by a Contracting State, not just to those taxes
designated as covered taxes under Article 2 (Taxes Covered). The U.S. competent authority may,
therefore, request information for purposes of, for example, estate and gift taxes or federal excise
taxes.
Paragraph 6
Finally, paragraph 6 provides that the competent authority of the requested State shall
allow representatives of the applicant State to enter the requested State to interview individuals
and examine books and records with the consent of the persons subject to examination.
Treaty effective dates and termination in relation to competent authority dispute resolution
A tax administration may seek information with respect to a year for which a treaty was

in force after the treaty has been terminated. In such a case the ability of the other tax
administration to act is limited. The treaty no longer provides authority for the tax
administrations to exchange confidential information. They may only exchange information
pursuant to domestic law.
The competent authority also may seek information under a treaty that is in force, but
with respect to a year prior to the entry into force of the treaty. The scope of the competent
authorities to address such a case is not constrained by the fact that a treaty was not in force when
the transactions at issue occurred, and the competent authorities have available to them the full
range of information exchange provisions afforded under this Article. Where a prior treaty was in
effect during the years in which the transaction at issue occurred, the exchange of information
provisions of the current treaty apply.
ARTICLE 27
Diplomatic Agents and Consular Officers
This Article confirms that any fiscal privileges to which diplomatic or consular officials
are entitled under general provisions of international law or under special agreements will apply
notwithstanding any provisions to the contrary in the Convention. The text of this Article is
identical to the corresponding provision of the OECD Model. The agreements referred to include
any bilateral agreements, such as consular conventions, that affect the taxation of diplomats and
consular officials and any multilateral agreements dealing with these issues, such as the Vienna
Convention on Diplomatic Relations and the Vienna Convention on Consular Relations. The
U.S. generally adheres to the latter because its terms are consistent with customary international
law.
The Article does not independently provide any benefits to diplomatic agents and
consular officers. Article 19 (Government Service) does so, as do Code section 893 and a number
of bilateral and multilateral agreements. Rather, the Article specifically reconfirms in this context
the statement in paragraph 2 of Article 1 (General Scope) that nothing in the tax treaty will
operate to restrict any benefit accorded by the general rules of international law or with any of the
other agreements referred to above. In the event that there is a conflict between the tax treaty and
international law or such other treaties, under which the diplomatic agent or consular official is
entitled to greater benefits under the latter, the latter laws or agreements shall have precedence.
Conversely, if the tax treaty confers a greater benefit than another agreement, the affected person
could claim the benefit of the tax treaty.
Pursuant to subparagraph 5(b) of Article 1, the saving clause of paragraph 4 of Article 1
(General Scope) does not apply to override any benefits of this Article available to an individual
who is neither a citizen of the United States nor has immigrant status there.
ARTICLE 28
Entry into Force

This Article contains the rules for bringing the Convention into force and giving effect to
its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Convention by both Contracting States
according to their constitutional and statutory requirements. Each State must notify the other as
soon as its requirements for ratification have been complied with.
In the United States, the process leading to ratification and entry into force is as follows:
Once a treaty has been signed by authorized representatives of the two Contracting States, the
Department of State sends the treaty to the President who formally transmits it to the Senate for
its advice and consent to ratification, which requires approval by two-thirds of the Senators
present and voting. Prior to this vote, however, it generally has been the practice for the Senate
Committee on Foreign Relations to hold hearings on the treaty and make a recommendation
regarding its approval to the full Senate. Both Government and private sector witnesses may
testify at these hearings. After receiving the advice and consent of the Senate to ratification, the
treaty is returned to the President for his signature on the ratification document. The President's
signature on the document completes the process in the United States.
Paragraph 2
Paragraph 2 provides that the Convention will enter into force on the date on which the
second of the two notifications of the completion of ratification requirements has been received.
The date on which a treaty enters into force is not necessarily the date on which its provisions
take effect. Paragraph 2, therefore, also contains rules that determine when the provisions of the
treaty will have effect. Under paragraph 2(a), the Convention will have effect with respect to
taxes withheld at source (principally dividends, interest and royalties) for amounts paid or
credited on or after the first day of the second month following the date on which the Convention
enters into force. For example, if instruments of ratification are exchanged on April 25 of a given
year, the withholding rates specified in paragraph 2 of Article 10 (Dividends) would be
applicable to any dividends paid or credited on or after June 1 of that year. This rule allows the
benefits of the withholding reductions to be put into effect as soon as possible, without waiting
until the following year. The delay of one to two months is required to allow sufficient time for
withholding agents to be informed about the change in withholding rates.
For all other taxes, paragraph 2(b) specifies that the Convention will have effect for any
taxable year or assessment period beginning on or after January 1 of the year following entry into
force.
As discussed under Articles 25 (Mutual Agreement Procedure) and 26 (Exchange of
Information), the powers afforded the competent authority under these articles apply retroactively
to taxable periods preceding entry into force.

ARTICLE 29
Termination
This provision generally corresponds to its counterpart in the OECD Model. The
Convention is to remain in effect indefinitely, unless terminated by one of the Contracting States
in accordance with the provisions of Article 29. The Convention may be terminated at any time
after the year in which the Convention enters into force. If notice of termination is given, the
provisions of the Convention with respect to withholding at source will cease to have effect after
the expiration of a period of 6 months beginning with the delivery of notice of termination. For
other taxes, the Convention will cease to have effect as of taxable periods beginning after the
expiration of this 6 month period.
A treaty performs certain specific and necessary functions regarding information
exchange and mutual agreement. In the case of information exchange the treaty's function is to
override confidentiality rules relating to taxpayer information. In the case of mutual agreement its
function is to allow competent authorities to modify internal law in order to prevent double
taxation and tax avoidance. With respect to the effective termination dates for these aspects of
the treaty, therefore, if a treaty is terminated as of January 1 of a given year, no otherwise
confidential information can be exchanged after that date, regardless of whether the treaty was in
force for the taxable year to which the request relates. Similarly, no mutual agreement departing
from internal law can be implemented after that date, regardless of the taxable year to which the
agreement relates. Therefore, for the competent authorities to be allowed to exchange otherwise
confidential information or to reach a mutual agreement that departs from internal law, a treaty
must be in force at the time those actions are taken and any existing competent authority
agreement ceases to apply.
Article 29 relates only to unilateral termination of the Convention by a Contracting State.
Nothing in that Article should be construed as preventing the Contracting States from concluding
a new bilateral agreement, subject to ratification, that supersedes, amends or terminates
provisions of the Convention without the six-month notification period.
Customary international law observed by the United States and other countries, as
reflected in the Vienna Convention on Treaties, allows termination by one Contracting State at
any time in the event of a "material breach" of the agreement by the other Contracting State.